BAIDU.COM, INC.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 20-F
(Mark One)
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o |
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Registration statement pursuant to Section 12(b) or 12(g) of the Securities Exchange Act of 1934 |
or
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þ |
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Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the fiscal year ended December 31, 2007.
or
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o |
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Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the transition period from to
or
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o |
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Shell company report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
Date of event requiring this shell company report
Commission file number: 000-51469
BAIDU.COM, INC.
(Exact name of Registrant as specified in its charter)
N/A
(Translation of Registrants name into English)
Cayman Islands
(Jurisdiction of incorporation or organization)
12/F, Ideal International Plaza
No. 58 West-North 4th Ring,
Beijing, 100080, Peoples Republic of China
(Address of principal executive offices)
Jennifer Li, Chief Financial Officer
Telephone: +(86 10) 8262-1188
Email: jenniferli@baidu.com
Facsimile: +(86 10) 8260-7007
12/F, Ideal International Plaza
No. 58 West-North 4th Ring,
Beijing, 100080, Peoples Republic of China
(Name, Telephone, Email and/or Facsimile number and Address of Company Contact Person)
Securities registered or to be registered pursuant to Section 12(b) of the Act:
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Title of Each Class |
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Name of Each Exchange on Which Registered |
Class A ordinary shares, par value
US$0.00005 per share
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The NASDAQ Stock Market LLC*
(The NASDAQ Global Select Market) |
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* |
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Not for trading, but only in connection with the listing on The NASDAQ Global Select Market of
American depositary shares, each representing one Class A ordinary share. |
Securities registered or to be registered pursuant to Section 12(g) of the Act:
None
(Title of Class)
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:
None
(Title of Class)
Indicate the number of outstanding shares of each of the Issuers classes of capital or common
stock as of the close of the period covered by the annual report.
25,136,147 Class A ordinary shares and 8,996,842 Class B ordinary shares, par value US$0.00005 per share, as of December 31, 2007.
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes þ No o
If this report is an annual or transition report, indicate by check mark if the registrant is
not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934. Yes o No þ
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated
filer in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer þ Accelerated filer o Non-accelerated filer o
Indicate by check mark which basis of accounting the registrant has used to prepare the
financial statements included in this filing:
U.S. GAAP þ
International Financial Reporting Standards as issued by the International Accounting
Standards
If Other has been checked in response to the previous question, indicate by check mark which
financial statement item the registrant has elected to follow.
Item 17 o
Item 18 o
If this is an annual report, indicate by check mark whether the registrant is a shell company
(as defined in Rule 12b-2 of the Exchange Act). Yes o No þ
(APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE YEARS)
Indicate by check mark whether the registrant has filed all documents and reports required to
be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the
distribution of securities under a plan confirmed by a court. Yes o No o
INTRODUCTION
In this annual report, except where the context otherwise requires and for purposes of this
annual report only:
we, us, our company, our, and Baidu refer to Baidu.com, Inc., its
subsidiaries, and, in the context of describing our operations and consolidated financial
information, also include Baidu Netcom and Beijing Perusal;
Baidu Holdings refers to Baidu Holdings Limited, our wholly-owned subsidiary in the
British Virgin Islands;
Baidu Online refers to Baidu Online Network Technology (Beijing) Co., Ltd., our
wholly-owned subsidiary in China;
Baidu China refers to Baidu (China) Co., Ltd., our wholly-owned subsidiary in China;
Baidu Times refers to Baidu.com Times Technology (Beijing) Co., Ltd., our
wholly-owned subsidiary in China;
Baidu Japan refers to Baidu, Inc., our wholly-owned subsidiary in Japan;
Baidu Hong Kong refers to Baidu (Hong Kong) Limited, our wholly-owned subsidiary in
Hong Kong;
Baidu Netcom refers to Baidu Netcom Science Technology Co., Ltd., our consolidated
affiliated entity in China;
Beijing Perusal refers to Beijing Perusal Technology Co., Ltd., our consolidated
affiliated entity in China;
BaiduPay refers to Beijing BaiduPay Science and Technology Co., Ltd., our
consolidated affiliated entity in China established in February 2008, which is not included in the
consolidated financial information included in this annual report;
user traffic or traffic refers generally to page views and the reach of a website;
when used in the context of Alexa.com website traffic rankings, user traffic refers to the
geometric mean of the page views and the reach of a website averaged over a specified period of
time; page views measure the number of web pages viewed by Internet users over a specified period
of time except that multiple page views of the same page viewed by the same user on the same day
are counted only once; reach measures the number of Internet users and is typically expressed as
the percentage of all Internet users who visit a given website over a specified period of time;
China or PRC refers to the Peoples Republic of China, and solely for the purpose
of this annual report, excluding Taiwan, Hong Kong and Macau;
shares or ordinary shares refers to our ordinary shares, which include both Class
A ordinary shares and Class B ordinary shares; convertible preferred shares refers to and
includes our Series A, Series B and Series C redeemable convertible preferred shares, all of which
were converted into the same number of Class B ordinary shares upon the completion of our initial
public offering on August 10, 2005; preferred shares refers to our preferred shares, none of
which is issued and outstanding;
3
ADSs refers to our American depositary shares, each of which represents one Class A
ordinary share;
U.S. GAAP refers to generally accepted accounting principles in the United States;
all references to RMB or Renminbi are to the legal currency of China and all
references to $, dollars, US$ and U.S. dollars are to the legal currency of the United
States; and
all discrepancies in any table between the amounts identified as total amounts and the
sum of the amounts listed therein are due to rounding.
This annual report contains translations of certain RMB amounts into U.S. dollars at specified
rates solely for the convenience of the readers. Unless otherwise noted, all translations from RMB
to U.S. dollars in this annual report were made at a rate of RMB7.2946 to US$1.00, the noon buying
rate in effect as of December 31, 2007 in The City of New York for cable transfers of RMB as
certified for customs purposes by the Federal Reserve Bank of New York. We make no representation
that RMB or U.S. dollar amounts referred to in this annual report could have been or could be
converted into U.S. dollars or RMB, as the case may be, at any particular rate or at all.
This annual report on Form 20-F includes our audited consolidated statements of income data
for the years ended December 31, 2005, 2006 and 2007, and audited consolidated balance sheet data
as of December 31, 2006 and 2007.
On August 5, 2005, we listed our ADSs on The Nasdaq National Market, which was renamed The
Nasdaq Global Market on July 1, 2006, or Nasdaq, under the symbol BIDU. We and certain selling
shareholders of our company completed the initial public offering of 4,604,224 ADSs, each
representing one Class A ordinary share, par value US$0.00005 per share, on August 10, 2005. Our
ADSs currently trade on The Nasdaq Global Select Market, a segment of The Nasdaq Global Market.
FORWARD-LOOKING INFORMATION
This annual report on Form 20-F contains statements of a forward-looking nature. These
statements are made under the safe harbor provisions of the U.S. Private Securities Litigation
Reform Act of 1995. You can identify these forward-looking statements by words or phrases such as
may, will, expect, anticipate, aim, estimate, intend, plan, believe, is/are
likely to or other similar expressions. We
have based these forward-looking statements largely on our current expectations and
projections about future events and financial trends that we believe may affect our financial
condition, results of operations, business strategy and financial needs. These forward-looking
statements include, but are not limited to:
our anticipated growth strategies;
4
our future business development, results of operations and financial condition;
our ability to attract and retain users and customers;
the outcome of ongoing or any future litigation, including those relating to copyright
or other intellectual property rights;
competition in the Chinese language and Japanese language Internet search markets;
the expected growth of the Chinese language Internet search market and the number of
Internet and broadband users in China;
PRC governmental policies relating to the Internet and Internet search providers; and
development of PRC tax law reforms that may have uncertain implications on high and
new technology companies.
We would like to caution you not to place undue reliance on forward-looking statements and you
should read these statements in conjunction with the risk factors disclosed in Item 3D. of this
annual report, Key Information Risk Factors. Those risks are not exhaustive. We operate in an
emerging and evolving environment. New risk factors emerge from time to time and it is impossible
for our management to predict all risk factors, nor can we assess the impact of all factors on our
business or the extent to which any factor, or combination of factors, may cause actual results to
differ materially from those contained in any forward-looking statement. We do not undertake any
obligation to update or revise the forward-looking statements except as required under applicable
law.
PART I
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Item 1. |
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Identity of Directors, Senior Management and Advisers |
Not Applicable.
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Item 2. |
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Offer Statistics and Expected Timetable |
Not Applicable.
A. Selected Financial Data
The following table presents the selected consolidated financial information for our company.
The selected consolidated statements of income data for the three years ended December 31, 2005,
2006 and 2007 and the consolidated balance sheet data as of December 31, 2006 and 2007 have been
derived from our audited consolidated financial statements, which are included in this annual
report beginning on page F-1. The selected consolidated balance sheet data for the year ended
December 31, 2005 have been derived from our audited consolidated balance sheet as of December 31,
2005, which is not included in this annual report. The selected consolidated statements of income
data for the years ended December 31, 2003 and 2004 and the selected consolidated balance sheet
data as of December 31, 2003 and 2004 have been derived from our audited consolidated financial
statements for the years ended December 31, 2003 and 2004, which are not included in this annual
report. Our historical results do not necessarily indicate results expected for any future periods.
The selected consolidated financial data should be read in conjunction with, and are qualified in
their entirety by reference to, our audited consolidated financial statements and related notes and
Item 5. Operating and Financial Review and Prospects below. Our audited consolidated financial
statements are prepared and presented in accordance with U.S. GAAP.
5
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For the Year Ended December 31, |
(in thousands except per share and per ADS data) |
|
2003 |
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2004 |
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2005 |
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2006 |
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2007 |
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RMB |
|
RMB |
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RMB |
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RMB |
|
RMB |
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US$ |
Consolidated Statements of
Income Data: |
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Revenues: |
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Online marketing services |
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31,775 |
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106,854 |
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307,363 |
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828,484 |
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1,741,021 |
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238,673 |
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Other services |
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8,796 |
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10,597 |
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11,852 |
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9,354 |
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3,404 |
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467 |
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Total revenues |
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40,571 |
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117,451 |
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319,215 |
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837,838 |
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1,744,425 |
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239,140 |
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Operating costs and expenses: |
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Cost of revenues |
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(23,284 |
) |
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(41,192 |
) |
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(104,401 |
) |
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(245,489 |
) |
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(645,406 |
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(88,477 |
) |
Selling, general and
administrative |
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(19,599 |
) |
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(50,724 |
) |
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(134,771 |
) |
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(250,240 |
) |
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(411,163 |
) |
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(56,366 |
) |
Research and development |
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(6,983 |
) |
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(14,531 |
) |
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(44,200 |
) |
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(79,231 |
) |
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(140,702 |
) |
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(19,289 |
) |
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Total operating costs and expenses |
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(49,866 |
) |
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(106,447 |
) |
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(283,372 |
) |
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(574,960 |
) |
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(1,197,271 |
) |
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(164,132 |
) |
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Operating (loss)/profit |
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(9,295 |
) |
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11,004 |
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35,843 |
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262,878 |
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547,154 |
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75,008 |
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Interest income |
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325 |
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1,135 |
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13,580 |
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42,443 |
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49,009 |
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6,719 |
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Other income, net |
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85 |
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347 |
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93 |
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4,098 |
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20,053 |
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2,749 |
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Income before tax and cumulative
effect of change in accounting
principle |
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(8,885 |
) |
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12,486 |
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49,516 |
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309,419 |
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616,216 |
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84,476 |
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Taxation |
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(481 |
) |
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(1,911 |
) |
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(12,256 |
) |
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12,752 |
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1,748 |
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Cumulative effect of change in
accounting principle |
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4,603 |
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Net (loss)/income |
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(8,885 |
) |
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12,005 |
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47,605 |
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301,766 |
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628,968 |
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86,224 |
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Net (loss)/income per share of
Class A ordinary shares, per
share of Class B ordinary shares
and per ADS(1): |
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Basic: |
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Basic (prior to cumulative
effect of change in
accounting principle) |
|
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(0.87 |
) |
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1.09 |
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2.40 |
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8.92 |
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18.57 |
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2.55 |
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Cumulative effect of change
in accounting principle |
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0.14 |
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Basic (after cumulative
effect of change in
accounting principle) |
|
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(0.87 |
) |
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1.09 |
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2.40 |
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9.06 |
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18.57 |
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2.55 |
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Diluted: |
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Diluted (prior to cumulative
effect of change in
accounting principle) |
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(0.87 |
) |
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0.43 |
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1.49 |
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8.62 |
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18.11 |
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2.48 |
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Cumulative effect of change
in accounting principle |
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0.13 |
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6
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For the Year Ended December 31, |
(in thousands except per share and per ADS data) |
|
2003 |
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2004 |
|
2005 |
|
2006 |
|
2007 |
|
|
RMB |
|
RMB |
|
RMB |
|
RMB |
|
RMB |
|
US$ |
Diluted (after
cumulative effect of change
in accounting principle) |
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(0.87 |
) |
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0.43 |
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1.49 |
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8.75 |
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18.11 |
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2.48 |
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Pro forma net earnings per share
on an as converted basis for
Class A and Class B ordinary
shares (unaudited)(2): |
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Basic |
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0.45 |
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1.58 |
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9.06 |
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18.57 |
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2.55 |
|
Diluted |
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0.43 |
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1.49 |
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8.75 |
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18.11 |
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|
2.48 |
|
Pro forma weighted average
aggregate number of ordinary
shares on an as converted basis
used in per share calculations
for Class A ordinary shares
(unaudited)(2): |
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Basic |
|
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|
26,696 |
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|
|
30,214 |
|
|
|
33,291 |
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|
|
33,873 |
|
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|
33,873 |
|
Diluted |
|
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|
28,124 |
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|
32,044 |
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|
34,507 |
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|
34,724 |
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|
34,724 |
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(1) |
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As holders of Class A and Class B ordinary shares have the same dividend right and the same
participation right in our undistributed earnings, the basic and diluted net (loss) income per
share of Class A and Class B ordinary shares are the same for all the periods presented during
which there were two classes of ordinary shares. Prior to the creation of the two classes of
ordinary shares in May 2005, we only had one class of ordinary shares. For the periods during
which there were two classes of ordinary shares, the weighted average number of ordinary
shares represents the sum of the weighted average number of Class A and Class B ordinary
shares. Please see Note 15 to our audited consolidated financial statements included in this
annual report for additional information regarding
the computation of the per share amount and the weighted average numbers of Class A and Class B
ordinary shares. |
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(2) |
|
As holders of Class A and Class B ordinary shares have the same dividend right and the same
participation right in our undistributed earnings, the basic and diluted pro forma earnings
per share of Class A and Class B ordinary shares are the same for all the periods presented. |
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(in thousands) |
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As of December 31, |
|
|
2003 |
|
2004 |
|
2005 |
|
2006 |
|
2007 |
|
|
RMB |
|
RMB |
|
RMB |
|
RMB |
|
RMB |
|
US$ |
Consolidated Balance Sheets Data: |
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Cash and cash equivalents |
|
|
62,825 |
|
|
|
200,196 |
|
|
|
900,593 |
|
|
|
1,136,274 |
|
|
|
1,350,600 |
|
|
|
185,151 |
|
Total assets |
|
|
76,703 |
|
|
|
262,206 |
|
|
|
1,136,423 |
|
|
|
1,668,077 |
|
|
|
2,655,908 |
|
|
|
364,092 |
|
Total liabilities |
|
|
19,639 |
|
|
|
54,192 |
|
|
|
131,370 |
|
|
|
310,816 |
|
|
|
634,536 |
|
|
|
86,987 |
|
Redeemable convertible preferred
shares |
|
|
91,622 |
|
|
|
211,352 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total shareholders (deficit) / equity |
|
|
(34,558 |
) |
|
|
(3,338 |
) |
|
|
1,005,053 |
|
|
|
1,357,261 |
|
|
|
2,021,372 |
|
|
|
277,105 |
|
Total liabilities, redeemable
convertible preferred shares and
shareholders equity |
|
|
76,703 |
|
|
|
262,206 |
|
|
|
1,136,423 |
|
|
|
1,668,077 |
|
|
|
2,655,908 |
|
|
|
364,092 |
|
7
Exchange Rate Information
Our business is primarily conducted in China and all of our revenues are denominated in RMB.
However, periodic reports made to shareholders will include current period amounts translated into
U.S. dollars using the then current exchange rates, for the convenience of the readers. The
conversion of RMB into U.S. dollars in this annual report is based on the noon buying rate in The
City of New York for cable transfers of RMB as certified for customs purposes by the Federal
Reserve Bank of New York. Unless otherwise noted, all translations from RMB to U.S. dollars and
from U.S. dollars to RMB in this annual report were made at a rate of RMB7.2946 to
US$1.00, the noon buying rate in effect as of December 31, 2007. We make no representation that
any RMB or U.S. dollar amounts could have been, or could be, converted into U.S. dollars or RMB, as
the case may be, at any particular rate, or at all. The PRC government imposes control over its
foreign currency reserves in part through direct regulation of the conversion of RMB into foreign
exchange and through restrictions on foreign trade. On June 4, 2008, the noon buying rate was
RMB 6.9633 to US$1.00.
The following table sets forth information concerning exchange rates between the RMB and the
U.S. dollar for the periods indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period |
|
Noon Buying Rate |
|
|
Period-End |
|
Average(1) |
|
Low |
|
High |
|
|
(RMB per U.S. Dollar) |
2003 |
|
|
8.2767 |
|
|
|
8.2771 |
|
|
|
8.2800 |
|
|
|
8.2765 |
|
2004 |
|
|
8.2765 |
|
|
|
8.2768 |
|
|
|
8.2774 |
|
|
|
8.2764 |
|
2005 |
|
|
8.0702 |
|
|
|
8.1826 |
|
|
|
8.2765 |
|
|
|
8.0702 |
|
2006 |
|
|
7.8041 |
|
|
|
7.9579 |
|
|
|
8.0702 |
|
|
|
7.8041 |
|
2007 |
|
|
7.2946 |
|
|
|
7.5806 |
|
|
|
7.8127 |
|
|
|
7.2946 |
|
December |
|
|
7.2946 |
|
|
|
7.3682 |
|
|
|
7.4120 |
|
|
|
7.2946 |
|
2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January |
|
|
7.1818 |
|
|
|
7.2405 |
|
|
|
7.2946 |
|
|
|
7.1818 |
|
February |
|
|
7.1115 |
|
|
|
7.1644 |
|
|
|
7.1973 |
|
|
|
7.1100 |
|
March |
|
|
7.0120 |
|
|
|
7.0722 |
|
|
|
7.1110 |
|
|
|
7.0105 |
|
April |
|
|
6.9870 |
|
|
|
6.9997 |
|
|
|
7.0185 |
|
|
|
6.9840 |
|
May |
|
|
6.9400 |
|
|
|
6.9725 |
|
|
|
7.0000 |
|
|
|
6.9377 |
|
June (through June 4, 2008) |
|
|
6.9633 |
|
|
|
6.9433 |
|
|
|
6.9633 |
|
|
|
6.9325 |
|
|
|
|
(1) |
|
Annual averages are calculated using the average of month-end rates of the relevant year.
Monthly averages are calculated using the average of the daily rates during the relevant
period. |
B. Capitalization and Indebtedness
Not
Applicable.
C.
Reasons for the Offer and Use of Proceeds
Not
Applicable.
8
D. Risk Factors
Risks Related to Our Business
Our limited operating history makes it difficult to evaluate our future prospects and results of
operations.
We have a limited operating history. We commenced operations in 2000 and first achieved
profitability in the quarter ended March 31, 2004. Accordingly, you should consider our future
prospects in light of the risks and uncertainties experienced by early stage companies in evolving
industries such as the Internet industry in China. Some of these risks and uncertainties relate to
our ability to:
|
|
|
maintain our leading position in the Internet search market in China; |
|
|
|
|
offer new and innovative products and services to attract and retain a larger user
base; |
|
|
|
|
attract additional customers and increase spending per customer; |
|
|
|
|
increase awareness of our brand and continue to develop user and customer loyalty; |
|
|
|
|
respond to competitive market conditions; |
|
|
|
|
respond to changes in the regulatory environment; |
|
|
|
|
manage risks associated with intellectual property rights; |
|
|
|
|
maintain effective control of our costs and expenses; |
|
|
|
|
attract, retain and motivate qualified personnel; |
|
|
|
|
build profitable operations in new markets such as the Japanese Internet search
market; and |
|
|
|
|
upgrade our technology to support increased traffic and expanded services. |
If we are unsuccessful in addressing any of these risks and uncertainties, our business may be
materially and adversely affected.
We sustained losses in the past and our historical financial information may not be representative
of our future results of operations.
We began achieving profitability in the quarter ended March 31, 2004. We have experienced
growth in recent periods in part due to the growth in Chinas online marketing industry, which may
not be representative of future growth or be sustainable. We cannot assure you that our historical
financial information is indicative of our future operating results or future financial
performance, or that our profitability will be sustained.
9
If the Internet and, in particular, online marketing are not broadly adopted in China, our ability
to increase revenue and sustain profitability could be materially and adversely affected.
The use of the Internet as a marketing channel is at an early stage in China. Internet and
broadband penetration rates in China are both relatively low as compared to those in most developed
countries. Many of our current and potential customers have limited experience with the Internet
as a marketing channel, and historically have not devoted a significant portion of their marketing
budgets to online marketing and promotion. As a result, they may not consider the Internet an
effective channel to promote their products and services as compared to traditional print and
broadcast media. Our ability to generate significant revenues may be negatively impacted by a
number of factors, many of which are beyond our control, including:
|
|
|
difficulties associated with developing a larger user base with demographic
characteristics attractive to customers; |
|
|
|
|
increased competition and potential downward pressure on online marketing prices; |
|
|
|
|
higher customer acquisition costs due in part to the limited experience of small to
medium-sized enterprises, or SMEs, with the Internet as a marketing channel; |
|
|
|
|
failure to develop an independent and reliable means of verifying online traffic; |
|
|
|
|
ineffectiveness of our online marketing delivery, tracking and reporting systems;
and |
|
|
|
|
lack of increase in Internet usage in China. |
We face significant competition and may suffer from a loss of users and customers as a result.
We face significant competition in almost every aspect of our business, particularly from
other companies that seek to provide Internet search services to users and provide online marketing
services to customers. Our main competitors include U.S.-based Internet search providers providing
Chinese language Internet search services such as Google and Yahoo! and Chinese Internet companies.
These Chinese competitors include Internet portals such as Netease, Sina, Sohu and Tencent, other
Internet search service providers such as Sougou, Yisou, Sousou, Zhongsou and Youdao, and
business-to-business, or B2B, service providers such as Alibaba. We compete with these entities for
both users and customers on the basis of user traffic, quality (relevance) and quantity (index
size) of the search results, availability and ease of use of products and services, the number of
customers, distribution channels and the number of associated third-party websites. In addition,
we may face greater competition from our U.S.-based competitors as a result of, among other things,
a relaxation on the foreign ownership restrictions of PRC Internet content and advertising
companies, improvements in online payment systems and Internet infrastructure in China and our
U.S.-based competitors increased business activities in China.
10
Many of our competitors have significantly greater financial resources than we do. They also
have longer operating histories and more experience in attracting and retaining users and managing
customers than we do. They may use their experience and resources to compete with us in a variety
of ways, including by competing more heavily for users, customers, distributors and networks of
third-party websites, investing more heavily in research and development and making acquisitions.
If any of our competitors provides comparable or better Chinese language search experience, our
user traffic could decline significantly. Any such decline in traffic could weaken our brand,
result in loss of customers and users and have a material adverse effect on our results of
operations.
We also face competition from other types of advertising media, such as newspapers, magazines,
yellow pages, billboards and other forms of outdoor media, television and radio. Most large
companies in China allocate, and will likely continue to allocate, most of their marketing budgets
to traditional advertising media and only a small portion of their budgets to online marketing and
other forms of advertising media. If these companies do not devote a larger portion of their
marketing budgets to online marketing services provided by us, or if our existing customers reduce
the amount they spend on online marketing, our results of operations and future growth prospects
could be adversely affected.
Additionally, we have announced plan to offer consumer-to-consumer, or C2C, services and
instant messaging, or IM, services in China. As we launch these and other new products and
services, we will face competition from the existing leading providers of those services, which
have longer histories and more established relationships with customers and users. If we cannot
compete effectively against the existing leading providers of C2C, IM and other products and
services that we launch in the future, we may not be able to develop a sufficiently large customer
and user base for our services and eventually achieve profitability from those services, and as a
result, our future results of operations and growth prospect could be materially and adversely
affected.
Our business depends on a strong brand, and if we are not able to maintain and enhance our brand,
our business and operating results may be harmed.
We believe that our brand Baidu has contributed significantly to the success of our
business. We also believe that maintaining and enhancing the Baidu brand is critical to
increasing the numbers of our users, customers and Baidu Union members. As our market becomes
increasingly competitive, maintaining and enhancing our brand will depend largely on our ability to
remain as an Internet search leader in China, which may be increasingly difficult and expensive.
Historically, we developed our user base primarily by word-of-mouth and incurred limited brand
promotion expenses. Our initial public offering in 2005 has significantly enhanced our brand
recognition. We are also continuing our brand promotion efforts which we started approximately
three years ago, but we cannot assure you that our marketing efforts will be successful in further
promoting our brand. If we fail to promote and maintain the Baidu brand, or if we incur
excessive expenses in this effort, our business and results of operations could be materially and
adversely affected.
11
If we fail to continue to innovate and provide products and services to attract and retain users,
we may not be able to generate sufficient user traffic levels to remain competitive.
Our success depends on providing products and services that enable users to have a
high-quality Internet experience. We must continue to invest significant resources in research and
development to enhance our Internet search technology and our existing products and services and
introduce additional high-quality products and services to attract and retain users and compete
against our competitors. If we are unable to anticipate user preferences or industry changes, or
if we are unable to modify our products and services on a timely basis, we may lose users and
customers. Our operating results may also suffer if our innovations do not respond to the needs of
our users and customers, are not appropriately timed with market opportunities or are not
effectively brought to market. As search technology continues to develop, our competitors may be
able to offer search results that are, or that are perceived to be, substantially similar to or
better than those generated by our search services. This may force us to expend significant
resources in order to remain competitive.
If we fail to keep up with rapid technological changes, our future success may be adversely
affected.
The online marketing industry is subject to rapid technological changes. Our future success
will depend on our ability to respond to rapidly changing technologies, adapt our services to
evolving industry standards and improve the performance and reliability of our services. Our
failure to adapt to such changes could harm our business. New marketing media could also adversely
affect us. For example, the number of people accessing the Internet through devices other than
personal computers, including mobile telephones and hand-held devices, has increased in recent
years. If we are slow to develop products and technologies that are more compatible with non-PC
communications devices, or if the products and services we develop for people accessing the
Internet through non-PC communications devices do not meet their needs, we may not be successful in
capturing a significant share of this increasingly important market for media and other services.
In addition, the widespread adoption of new Internet, networking or telecommunications technologies
or other technological changes could require substantial expenditures to modify or adapt our
products, services or infrastructure. If we fail to keep up with rapid technological changes to
remain competitive in our rapidly evolving industry, our future success may be adversely affected.
We may face intellectual property infringement claims and other related claims that could be
time-consuming and costly to defend and may result in our inability to continue providing certain
of our existing services.
Internet, technology and media companies are frequently involved in litigation based on
allegations of infringement of intellectual property rights, unfair competition, invasion of
privacy, defamation and other violations of other parties rights. The validity, enforceability
and scope of protection of intellectual property in Internet-related industries, particularly in
China, are uncertain and still evolving. In addition, many parties are actively developing and
seeking protection for Internet-related technologies, including seeking patent protection. There
may be patents issued or pending that are held by others that cover significant aspects of our
technologies, products, business methods or services. As we face increasing competition and as
litigation becomes more common in China in resolving commercial disputes, we face a higher risk
of being the subject of intellectual property infringement
claims.
12
Our products and services link to materials in which third parties may claim ownership of
trademarks, copyrights or other rights. From time to time, we may be subject to trademark or
copyright infringement or related claims, in China and internationally. For example, we provide
search engine facilities capable of finding and accessing links to downloadable MP3 music, videos,
images and other multimedia files and other items hosted on third-party websites, including search
facilities enabling our users to search for MP3 music files in various ways such as by artist,
title, or via lists of most-searched-for titles and artists. Some of these contents found using
our search engine facilities may be protected by copyright.
In China, uncertainties still exist with respect to the legal standards as well as the
judicial interpretation of such standards for determining liabilities of Internet search providers
for providing links to content on third-party websites that infringe upon others copyrights. In
December 2007, the Peoples High Court of Beijing upheld a lower courts ruling in our favor in a
case originally filed against us by seven music record companies in 2005 alleging that our MP3
search services had infringed upon their copyrights. The court ruled that our service, which only
provides links to online music hosted on third parties websites, does not constitute infringement.
In the same month, however, the Peoples High Court of Beijing upheld the decision by another
lower court in favor of the record companies in a suit originally filed by 11 record companies
against Yahoo! China, one of our competitors, in July 2006. In the Yahoo! China case, the court
held that Yahoo! China was negligent in failing to remove all links to the infringing content after
receiving notice from copyright holders, including those links that it should have known to have
infringing content. Although prior court rulings in China have only limited precedential value,
the ruling of the Peoples High Court of Beijing in the Yahoo! China case seems to suggest that
that the courts in future cases may place the burden on Internet search providers to remove not
only links that have been specifically mentioned in notices of infringement from right holders, but
also links they should have known to contain infringing content. Such an interpretation of the
applicable law could subject Internet search providers like us to significant administrative
burdens and litigation risks.
In the United States, the legal standards for determining indirect liability for copyright
infringement have been strengthened by the United States Supreme Court in the decision
Metro-Goldwyn-Mayer Studios Inc. v. Grokster, Ltd., et al., 125 S. Ct. 2764 (2005), or Grokster.
The implications of the Grokster decision for search engine services, such as our MP3 search
service, are uncertain and may increase the risk of legal liability. Although we conduct our
business operations outside the United States, we may be subject to U.S. copyright laws, including
the legal standards established by Grokster, by virtue of our listing on the Nasdaq, the ownership
of our ADSs or ordinary shares by U.S. investors, the extraterritorial application of U.S. law by
U.S. courts or otherwise. Moreover, we cannot assure you that Grokster will not influence the
legal standards for determining indirect copyright infringement in other jurisdictions, including
China.
In light of the above cases and the associated publicity, copyright owners may monitor their
copyrighted materials more closely worldwide and in China and may seek to enforce their rights
under theories of indirect liability, constructive knowledge of infringing content or otherwise.
As a result, we may face increased risks of being subject to copyright infringement claims relating
to our MP3 search service. Furthermore, this same consideration may also lead to decreased availability of third-party MP3 websites. A
significant portion of our traffic is generated by users of our MP3 search service. According to
Alexa.com, approximately 6% of our traffic went to mp3.baidu.com, our MP3 search platform, as of
June 2, 2008. Should we face (as a result of the foregoing considerations or otherwise) a need or
decision to substantially modify, limit, or terminate our MP3 search service, our business,
financial condition or results of operations could be materially and adversely affected.
13
Like many other Internet websites, we provide links to and host certain song lyrics on our
websites which may be protected by copyright. As a result, we may be subject to copyright
infringement claims. We have received notice letters from parties asserting trademark and copyright
infringement claims against us. Moreover, we may be subject to administrative actions brought by
the PRC State Copyright Bureau for alleged copyright infringement, and as a result may be subject
to fines and other penalties and be required to discontinue infringing activities. In addition, we
provide links to images of celebrities and other persons, and may face claims for misappropriation
of publicity rights. To address these and other risks relating to intellectual property
infringement, we may be required to change our business model and service offerings to minimize
this risk, which could adversely affect our business prospects.
Intellectual property litigation is expensive and time-consuming and could divert resources
and management attention from the operations of our business. We are currently named as a
defendant in a number of copyright infringement suits in China in connection with our MP3 and movie
and other search services, including new suits filed by three record companies and the Music
Copyright Society of China, in the wake of the decision by the Peoples High Court of Beijing in
the Yahoo! China case. See Item 8A. Financial InformationConsolidated Statements and Other
Financial InformationLegal Proceedings. If there is a successful claim of infringement, we may
be required to pay substantial fines and damages or enter into royalty or license agreements that
may not be available on commercially acceptable terms, if at all. Our failure to obtain a license
of the rights on a timely basis could harm our business. Any intellectual property litigation and/or any negative publicity by third parties alleging our intellectual property infringement
could have a material adverse effect on our business, reputation, financial condition or results of
operations.
We may be subject to patent infringement claims with respect to our P4P platform.
Our technologies and business methods, including those relating to our pay-for-performance, or
P4P, platform, may be subject to third-party claims or rights that limit or prevent their use. In
June 2005, we applied for a patent in China for our P4P platform, but our application was rejected
on the ground that it is not patentable. Overture Services Inc., or Overture, a subsidiary of
Yahoo!, had applied for a patent in China relating to a P4P platform prior to our patent
application in China covering a P4P platform. Based on a search conducted by an intellectual
property agency in China, as of April 30, 2008, no patents relating to a P4P platform had been
issued in China. The application and interpretation of Chinas patent laws and the procedures and
standards for granting patents in China are still evolving and involve a certain degree of
uncertainty. We cannot assure you that Overture or any other party will not obtain a patent
covering a P4P platform in China. If Overture obtains a patent covering a P4P platform in China,
it may seek to bring a claim against us alleging our infringement of its patent rights in China.
We cannot assure you that we will be successful in defending against any such claims relating to
the P4P platform used by us because Overtures patent application in China was filed prior to ours and there may be
similarities between certain claims covered by the two patent applications.
14
Moreover, certain U.S.-based companies, including Overture, have been granted patents in the
United States relating to P4P platforms or technologies and similar business methods and related
technologies. Based on publicly available information, we are aware that Overture has brought
patent infringement claims in the United States against third parties, and while we believe that we
are not subject to U.S. patent laws since we conduct our business operations outside of the United
States, we cannot assure you that U.S. patent laws would not be applicable to our business
operations, or that holders of patents relating to a P4P platform would not seek to enforce such
patents against us in the United States or China. Any patent infringement claims, regardless of
their merits, could be time-consuming and costly to us. If we were sued for patent infringement
claims in the United States or China relating to our P4P platform, and we were found to infringe
such patents and were not able to adopt non-infringing technologies, we may be severely limited in
our ability to operate our P4P business, which would have a material adverse effect on our results
of operations and business prospects.
We may be subject to claims based on the content found on our websites.
We have been and may continue to be subject to claims for defamation, negligence or other
legal theories based on the content found on our websites. In addition to the content developed by
ourselves and posted on our websites, our users are free to post information on Baidu Post Bar,
Baidu Knows, Baidu Encyclopedia and other sections of our websites, and our P4P customers may
create text-based descriptions and other phrases to be used as text or keywords in our search
listings. Claims for defamation, negligence or other legal theories based on the content found on
our websites, with or without merit, may result in diversion of the attention of our management
personnel and our financial resources and negative publicity on our brand and reputation.
Furthermore, if the content posted on our websites contains information that government authorities
find objectionable, our websites may be shut down and we may be subject to other penalties. See
Risks Related to Doing Business in ChinaRegulation and censorship of information disseminated
over the Internet in China may adversely affect our business and subject us to liability for
information linked to our websites.
PRC advertising laws and regulations require advertisers, advertising operators and
advertising distributors, including online advertising publishers such as us, to ensure that the
content of the advertisements they prepare or distribute are fair and accurate and are in full
compliance with applicable law. Violation of these laws or regulations may result in penalties,
including fines, confiscation of advertising fees, orders to cease dissemination of the
advertisements and orders to publish an advertisement correcting the misleading information. In
circumstances involving serious violations, the PRC government may revoke a violators license for
advertising business operations.
Under PRC advertising laws and regulations, we are obligated to monitor the advertising
content posted on our websites. In addition, where a special government review is required for
specific categories of advertisements before posting, we are obligated to confirm that such review
has been performed and approval has been obtained. Our reputation could be hurt and our results of
operations could be adversely affected if advertisements shown on our websites are provided to us
by our advertising clients in violation of relevant PRC advertising laws and regulations, or if the
supporting documentation and government approvals provided to us by our advertising clients in connection with such advertising
content are not complete.
15
We may not be able to prevent others from unauthorized use of our intellectual property, which
could harm our business and competitive position.
We rely on a combination of copyright, trademark and trade secret laws, as well as
nondisclosure agreements and other methods to protect our intellectual property rights. The
protection of intellectual property rights in China may not be as effective as those in the United
States or other countries. The steps we have taken may be inadequate to prevent the
misappropriation of our technology. Reverse engineering, unauthorized copying or other
misappropriation of our technologies could enable third parties to benefit from our technologies
without paying us. Moreover, unauthorized use of our technology could enable our competitors to
offer products and services that are comparable to or better than ours, which could harm our
business and competitive position. From time to time, we may have to enforce our intellectual
property rights through litigation. Such litigation may result in substantial costs and diversion
of resources and management attention.
If we fail to retain existing customers or attract new customers for our online marketing services,
our business and growth prospects could be seriously harmed.
In 2006 and 2007, we generated approximately 98.9% and 99.8% of our total revenues from online
marketing services, respectively, a substantial majority of which was generated from our P4P
services. Our online marketing customers will not continue to do business with us if their
investment does not generate sales leads and ultimately consumers, or if we do not deliver their
web pages in an appropriate and effective manner. Our P4P customers may discontinue their business
with us at any time and for any reason as they are not subject to fixed-term contracts. Failure to
retain our existing online marketing customers or attract new customers for our online marketing
services could seriously harm our business and growth prospects. In addition, technologies may be
developed that can block the display of our marketing products. We may not be able to retain
existing customers or attract new customers whose advertisings are blocked by such technologies
from display in front of the Internet users. As a result, any blocking technology could, in the
future, adversely affect our operating results.
Because we rely to a large extent on distributors in providing our P4P services, our failure to
retain key distributors or attract additional distributors could materially and adversely affect
our business. Moreover, there is no assurance that our direct sales model in some key geographic
markets will continue to be successful.
Online marketing is at an early stage of development in China and is not as widely accepted by
or available to businesses in China as in the United States. As a result, we rely to a large
extent on a nationwide distribution network of third-party distributors for our sales to, and
collection of payment from, our P4P customers. If our distributors do not provide quality services
to our P4P customers or otherwise breach their contracts with our P4P customers, we may lose
customers and our results of operations may be materially and adversely affected. We do not have
long-term agreements with any of our distributors, including our key distributors, and cannot
assure you that we will continue to maintain favorable relationships with them. If we fail to
retain our key distributors or attract additional distributors on terms that are commercially
reasonable, our business and results of operations could be materially and adversely affected.
16
Starting in 2005, we began to transition to using our direct sales force to serve our P4P
customers in some key geographic markets, including Shanghai, Beijing and selected cities in
Guangdong Province. There is no assurance that our direct sales model in those markets will
continue to be successful. If we fail to maintain an adequate direct sales force, retain existing
customers and continue to attract new customers in those markets, our business, results of
operations and prospects could be materially and adversely affected.
We rely on our Baidu Union members for a significant portion of our revenues. If we fail to retain
existing Baidu Union members or attract additional members, our revenue growth and profitability
may be adversely affected.
We pay our Baidu Union members a portion of our revenues generated from click-throughs by
users of our Baidu Union members property. We consider our Baidu Union critical to the future
growth of our revenues. Some of our Baidu Union members, however, may compete with us in one or
more areas of our business. Therefore, they may decide in the future to terminate their
relationships with us. If our Baidu Union members decide to use a competitors or their own
Internet search services, our user traffic may decline, which may adversely affect our revenues.
If we fail to attract additional Baidu Union members, our revenue growth may be adversely affected.
In addition, if we have to share a larger portion of our revenues to retain existing Baidu Union
members or attract additional members, our profitability may be adversely affected.
Our strategy of acquiring complementary businesses, assets and technologies may fail.
As part of our business strategy, we have pursued, and intend to continue to pursue, selective
strategic acquisitions of businesses, assets and technologies that complement our existing
business. For example, we acquired then one of the largest distributors of our P4P services in
February 2005 and certain online application platform businesses and customer lists from
distributors in 2006 and 2007. We may make other acquisitions in the future if suitable
opportunities arise. Acquisitions involve uncertainties and risks, including:
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potential ongoing financial obligations and unforeseen or hidden liabilities; |
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failure to achieve the intended objectives, benefits or revenue-enhancing
opportunities; |
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costs and difficulties of integrating acquired businesses and managing a larger
business; and |
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diversion of resources and management attention. |
Our failure to address these risks successfully may have a material adverse effect on our
financial condition and results of operations. Any such acquisition may require a significant
amount of capital investment, which would decrease the amount of cash available for working capital
or capital expenditures. In addition, if we use our equity securities to pay for acquisitions, we
may dilute the value of our ADSs and the underlying ordinary shares. If we borrow funds to finance
acquisitions, such debt instruments may contain restrictive covenants that could, among other
things, restrict us from distributing dividends. Such acquisitions may also generate significant
amortization expenses related to intangible assets.
17
We may not be able to manage our expanding operations effectively.
We commenced operations in 2000 and have significantly expanded our operations since then. We
anticipate significant continued expansion of our business as we address growth in our user and
customer base and market opportunities. To manage the expansion of our business and potential
growth of our operations and personnel, we will be required to improve operational and financial
systems, procedures and controls, and expand, train and manage our growing employee base. In
addition, our management will be required to maintain and expand our relationships with other
websites, Internet companies and other third parties. We cannot assure you that our current and
planned personnel, systems, procedures and controls will be adequate to support our expanding
operations.
In addition to continuing to expand our core Chinese language search and online marketing
operations, we also intend to launch new services such as C2C and IM services. Expansion into new
markets and adopting new business models may present operating and marketing challenges that are
different from those that we currently encounter in our existing markets and operations. If we
cannot successfully address these new challenges, we may not be able to recover costs we have
incurred or will incur from developing and marketing new products and services, and our results of
operations and growth prospect could be materially and adversely affected.
Our recent expansion into the Japanese market may not be successful.
We formally launched our Japanese search service in January 2008, after completing a 10-month
Beta test for the service. Therefore, we only have limited experience operating in the Japanese
market. Moreover, our Japan operation has incurred operating losses since its inception in
December 2006, and there is no assurance when it will become profitable, if at all. Additional
future losses in our Japan operation could have a material adverse effect on our overall results of
operations.
The Japanese search market is highly competitive and currently is dominated by two companies,
Yahoo! and Google. These companies have significantly greater financial resources, longer
operating history and more experience in the Japanese search market than we do. Moreover, other
local providers of competing search services may also have a substantial advantage over us in
attracting users due to more established branding in Japan, greater knowledge with respect to the
tastes and preferences of Japanese users and their focus on the Japanese market. If we cannot
compete successfully with these competitors in the Japanese language search market, our business in
Japan could be adversely affected.
In addition to uncertainty about our ability to compete successfully in Japan, there are
certain risks inherent in doing business internationally, including:
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trade barriers and changes in trade regulations; |
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difficulties in developing, staffing and simultaneously managing a foreign operation
as a result of distance, language and cultural differences; |
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stringent local labor laws and regulations; |
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longer customer payment cycles;
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currency exchange rate fluctuations; |
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political or social unrest or economic instability; |
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import or export restrictions; |
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seasonal volatility in business activity; |
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risks related to government regulations or required compliance with local laws and
changes in such laws and regulations; and |
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potentially adverse tax consequences. |
One or more of these factors could harm our Japanese operations and consequently, could harm
our overall operating results.
Our operating results may fluctuate, which makes our results difficult to predict and could cause
our results to fall short of expectations.
Our operating results may fluctuate as a result of a number of factors, many of which are
outside of our control. For these reasons, comparing our operating results on a period-to-period
basis may not be meaningful, and you should not rely on our past results as an indication of our
future performance. Our quarterly and annual revenues and costs and expenses as a percentage of
our revenues may be significantly different from our historical or projected rates. Our operating
results in future quarters may fall below expectations. Any of these events could cause the price
of our ADSs to fall. Any of the risk factors listed in this Risk Factors section and, in
particular, the following risk factors, could cause our operating results to fluctuate from quarter
to quarter:
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general economic conditions in China and economic conditions specific to the
Internet, Internet search and online marketing; |
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our ability to continue to attract users to our website; |
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our ability to attract additional customers and increase spending per customer; |
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the announcement or introduction of new or enhanced products and services by us or
our competitors; |
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the amount and timing of operating costs and capital expenditures related to the
maintenance and expansion of our businesses, operations and infrastructure; |
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the results of our acquisitions of, or investments in, other businesses or assets; |
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PRC regulations or actions pertaining to activities on the Internet, including MP3
music, news, gambling, online games and other forms of entertainment; and |
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geopolitical events, natural disasters or epidemics such as war, threat of war,
avian influenza, Severe Acute Respiratory Syndrome, or SARS, or other public health
epidemics. |
19
Because of our limited operating history and our rapidly growing business, our historical
operating results may not be useful to you in predicting our future operating results. Our user
traffic tends to be seasonal. For example, we generally experience less user traffic during public
holidays and other special event periods in China. In addition, advertising and other marketing
spending in China has historically been cyclical, reflecting overall economic conditions as well as
budgeting and buying patterns. Our rapid growth has lessened the impact of the cyclicality and
seasonality of our business. As we continue to grow, we expect that the cyclicality and
seasonality in our business may cause our operating results to fluctuate.
Our business may be adversely affected by third-party software applications that interfere with our
receipt of information from, and provision of information to, our users, which may impair our
users experience.
Our business may be adversely affected by third-party malicious or unintentional software
applications that make changes to our users computers and interfere with our products and
services. These software applications may change our users Internet experience by hijacking
queries to our websites, altering or replacing our search results, or otherwise interfering with
our ability to connect with our users. The interference often occurs without disclosure to or
consent from users, resulting in a negative experience that users may associate with Baidu.com.
These software applications may be difficult or impossible to remove or disable, may reinstall
themselves and may circumvent other applications efforts to block or remove them. The ability to
provide a superior user experience is critical to our success. If our efforts to combat these
software applications are unsuccessful, our reputation may be harmed. This could result in a
decline in user traffic and, consequently, our revenues.
Our success depends on the continuing and collaborative efforts of our senior management team and
other key personnel, and our business may be harmed if we lose their services.
Our future success depends heavily upon the continuing services of the members of our senior
management team, in particular our chairman and chief executive officer, Robin Yanhong Li. If one
or more of our senior executives or other key personnel are unable or unwilling to continue in
their present positions, we may not be able to replace them easily or at all, and our business may
be disrupted and our financial condition and results of operations may be materially and adversely
affected. Competition for senior management and key personnel is intense, the pool of qualified
candidates is very limited, and we may not be able to retain the services of our senior executives
or key personnel, or attract and retain high-quality senior executives or key personnel in the
future. In addition, most of our current senior executives joined us recently and have worked
together only for a short period of time. As a result, it may be difficult for you to evaluate how
well our senior executives will work together as a team.
If any member of our senior management team or any of our other key personnel joins a
competitor or forms a competing company, we may lose customers, distributors, know-how and key
professionals and staff members. Each of our executive officers and key employees has entered into
an employment agreement with us, containing confidentiality and non-competition provisions. If any
disputes arise between any of our senior executives or key personnel and us, we cannot assure you
the extent to which any of these agreements may be enforced.
20
The initial option grants to many of our key personnel are fully vested. Therefore, these employees
may not have sufficient financial incentive to continue to work for our company, and our ability to
execute our business model could be impaired if we cannot replace departing key personnel in a
timely manner.
Many of our key personnel have become substantially vested in their initial share option
grants under our 2000 Option Plan. While we often grant additional share incentives to management
personnel and other key personnel after their hire dates, the initial grants are usually much
larger than subsequent grants. Employees may be more likely to leave us after their initial option
grant fully vests, especially if the shares underlying the options have significantly appreciated
in value relative to the option exercise price. If any member of our key personnel leaves our
company, our ability to successfully operate our business and execute our business strategy could
be adversely affected. We may also have to incur significant costs in identifying, hiring,
training and retaining replacements of departing employees.
We rely on highly skilled personnel and, if we are unable to retain or motivate them or hire
qualified personnel, we may not be able to grow effectively.
Our performance and future success depends on the talents and efforts of highly skilled
individuals. We will need to continue to identify, hire, develop, motivate and retain highly
skilled personnel for all areas of our organization. Competition in our industry for qualified
employees is intense. Our continued ability to compete effectively depends on our ability to
attract new employees and to retain and motivate our existing employees.
As competition in our industry intensifies, it may be more difficult for us to hire, motivate
and retain highly skilled personnel. If we do not succeed in attracting additional highly skilled
personnel or retaining or motivating our existing personnel, we may be unable to grow effectively.
If we are unable to adapt or expand our existing technology infrastructure to accommodate greater
traffic or additional customer requirements, our business may be harmed.
Our Baidu.com website regularly serves a large number of users and customers and delivers a
large number of daily page views. Our technology infrastructure is highly complex and may not
provide satisfactory service in the future, especially as the number of customers using our P4P
services increases. We may be required to upgrade our technology infrastructure to keep up with
the increasing traffic on our websites, such as increasing the capacity of our hardware servers and
the sophistication of our software. If we fail to adapt our technology infrastructure to
accommodate greater traffic or customer requirements, our users and customers may become
dissatisfied with our services and switch to our competitors websites, which could harm our
business.
If we fail to detect fraudulent click-through, we could lose the confidence of our customers and
our revenues could decline.
We are exposed to the risk of click-through fraud on our paid search results. Click-through
fraud occurs when a person clicks paid search results for a reason other than to view the
underlying content of search results. If we find evidence of past fraudulent clicks, we may have
to issue refunds to our customers. If we fail to detect fraudulent clicks or otherwise are unable
to prevent this fraudulent activity, the affected customers may experience a reduced return on their investment in our online marketing services and lose confidence in the
integrity of our systems. If this happens, we may be unable to retain existing customers and
attract new customers for our online marketing services and our online marketing revenues could
decline. In addition, affected customers may also file legal actions against us claiming that we
have over-charged or failed to refund them. Any such claims or similar claims, regardless of their
merits, could be time-consuming and costly to us and could also adversely affect our brand image
and our customers confidence in the integrity of our systems.
21
The successful operation of our business depends upon the performance and reliability of the
Internet infrastructure and fixed telecommunications networks in China.
Our business depends on the performance and reliability of the Internet infrastructure in
China. Almost all access to the Internet is maintained through state-owned telecommunication
operators under the administrative control and regulatory supervision of the Ministry of
Information Industry of China, or the MII, which will be merged into the new Ministry of Industry
and Information according to a reform plan approved by the National Peoples Congress on March 15,
2008. In addition, the national networks in China are connected to the Internet through
international gateways controlled by the PRC government. These international gateways are the only
channels through which a domestic user can connect to the Internet. We cannot assure you that a
more sophisticated Internet infrastructure will be developed in China. We may not have access to
alternative networks in the event of disruptions, failures or other problems with Chinas Internet
infrastructure. In addition, the Internet infrastructure in China may not support the demands
associated with continued growth in Internet usage.
We also rely on China Telecommunications Corporation, or China Telecom, China Network
Communications Group Corporation, or China Netcom, and China Tietong Communications Corporation, or
China Tietong, to provide us with data communications capacity primarily through local
telecommunications lines and Internet data centers to host our servers. We do not have access to
alternative services in the event of disruptions, failures or other problems with the fixed
telecommunications networks of China Telecom, China Netcom and China Tietong, or if these companies
otherwise fail to provide such services. In July 2007, due to router failures at China Netcoms
Internet data center that hosted our servers, we were unable to provide Internet search service for
approximately two hours. Any unscheduled service interruption could damage our reputation and
result in a decrease in our revenues. Furthermore, we have no control over the costs of the
services provided by China Telecom, China Netcom and China Tietong. If the prices that we pay for
telecommunications and Internet services rise significantly, our gross margins could be adversely
affected. In addition, if Internet access fees or other charges to Internet users increase, our
user traffic may decrease, which in turn may harm our revenues.
Interruption or failure of our information technology and communications systems could impair our
ability to effectively provide our products and services, which could damage our reputation and
harm our operating results.
Our ability to provide our products and services depends on the continuing operation of our
information technology and communications systems. Any damage to or failure of our systems could
interrupt our service. Service interruptions could reduce our revenues and profits, and damage our
brand if our system is perceived to be unreliable. Our systems are vulnerable to damage or
interruption as a result of terrorist attacks, war, earthquakes, floods, fires, power loss,
telecommunications failures, computer viruses, interruptions in access to our websites through the use of denial of service or similar attacks, hacking or other
attempts to harm our systems, and similar events. Our servers, which are hosted at third-party
Internet data centers, are also vulnerable to break-ins, sabotage and vandalism. Some of our
systems are not fully redundant, and our disaster recovery planning does not account for all
possible scenarios. The occurrence of a natural disaster or a closure of an Internet data center
by a third-party provider without adequate notice could result in lengthy service interruptions.
22
In September 2006, our Internet search services were disrupted for approximately half an hour
as a result of attacks to our Baidu.com website from unknown hackers. If we experience frequent or
persistent system failures on our websites, our reputation and brand could be permanently harmed.
The steps we plan to take to increase the reliability and redundancy of our systems are expensive,
reduce our operating margin and may not be successful in reducing the frequency or duration of
service interruptions.
Our business could be adversely affected if our software contains bugs.
Our online systems, including our websites, our enterprise search software and other software
applications and products, could contain undetected errors or bugs that could adversely affect
their performance. We regularly update and enhance our website and our other online systems and
introduce new versions of our software products and applications. The occurrence of errors in any
of these may cause us to lose market share, damage our reputation and brand name, and materially
and adversely affect our business.
Concerns about the security of electronic commerce transactions and confidentiality of information
on the Internet may reduce use of our network and impede our growth.
A significant barrier to electronic commerce and communications over the Internet in general
has been a public concern over security and privacy, including the transmission of confidential
information. If these concerns are not adequately addressed, they may inhibit the growth of the
Internet and other online services generally, especially as a means of conducting commercial
transactions. If a well-publicized Internet breach of security were to occur, general Internet
usage could decline, which could reduce traffic to our destination websites and impede our growth.
If we fail to maintain an effective system of internal control over financial reporting, we may
lose investor confidence in the reliability of our financial statements.
We are subject to reporting obligations under the U.S. securities laws. The SEC, as required
by Section 404 of the Sarbanes-Oxley Act of 2002, adopted rules requiring every public company to
include a management report on such companys internal control over financial reporting in its
annual report, which contains managements assessment of the effectiveness of the companys
internal control over financial reporting. In addition, an independent registered public
accounting firm must attest to and report on the effectiveness of the companys internal control
over financial reporting. We have been subject to these requirements since the fiscal year ended
December 31, 2006.
Our management has concluded that our internal control over financial reporting is effective
as of December 31, 2007. See Item 15. Control and Procedures. Our independent registered
public accounting firm has issued an attestation report, which has concluded that our internal
control over financial reporting is effective in all material
aspects. However, if we fail to maintain effective internal control over financial reporting in the
future, our management and our independent registered public accounting firm may not be able to
conclude that we have effective internal control over financial reporting at a reasonable assurance
level. This could in turn result in the loss of investor confidence in the reliability of our
financial statements and negatively impact the trading price of our ADSs. Furthermore, we have
incurred and anticipate that we will continue to incur considerable costs, management time and
other resources in an effort to comply with Section 404 and other requirements of the
Sarbanes-Oxley Act.
23
We have limited business insurance coverage.
The insurance industry in China is still at an early stage of development. Insurance
companies in China offer limited business insurance products. We do not have any business
liability or disruption insurance coverage for our operations in China. Any business disruption,
litigation or natural disaster may result in our incurring substantial costs and the diversion of
our resources.
Risks Related to Our Corporate Structure
PRC laws and regulations governing our businesses and the validity of certain of our contractual
arrangements are uncertain. If we are found to be in violation, we could be subject to sanctions.
In addition, changes in such PRC laws and regulations or changes in interpretations thereof may
materially and adversely affect our business.
There are substantial uncertainties regarding the interpretation and application of PRC laws
and regulations, including, but not limited to, the laws and regulations governing our business, or
the enforcement and performance of our contractual arrangements with our affiliated Chinese
entities, Baidu Netcom, Beijing Perusal and BaiduPay, and their shareholders. We and our PRC
subsidiaries, Baidu Online, Baidu China and Baidu Times, are considered foreign persons or
foreign-invested enterprises under PRC law. As a result, we and our PRC subsidiaries are subject
to PRC legal restrictions on foreign ownership of Internet and online advertising companies. These
laws and regulations are relatively new and may be subject to change, and their official
interpretation and enforcement may involve substantial uncertainty. New laws and regulations that
affect existing and proposed future businesses may also be applied retroactively.
PRC laws and regulations currently provide limited guidance as to whether an Internet search
provider that provides search result links to domestic news websites is required to obtain an
approval from the State Council News Office. In December 2006, Baidu Netcom was granted a license
to provide Internet news services by the State Council News Office. If the interpretation of
existing laws and regulations changes or new regulations come into effect expressly requiring
Internet search providers that provide search result links to domestic news websites to obtain the
Internet news license, and we fail to renew such license, we may have to remove links to news on
our websites until we renew the requisite license, which could adversely affect our user traffic.
PRC laws and regulations require Internet content providers, or ICPs, engaging in Internet
culture activities, including, among other things, online dissemination of audio/video products,
to obtain an Internet culture business permit from the Ministry of Culture. Baidu Netcom was
granted an Internet culture business permit in April 2007. Beijing Perusal is in the process of
applying for this Internet culture business permit, but we cannot assure you that Beijing Perusal may successfully obtain it. If Baidu Netcom fails to
renew, or Beijing Perusal fails to obtain, the Internet culture business permit, we may have to
stop hosting audio/video programs on our websites and remove links to audio/video products until we
renew or obtain the requisite permits, which could adversely affect our user traffic and operating
results.
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According to the Rules for the Administration of Broadcasting of Audio/Video Programs through
the Internet and Other Information Networks, effective on October 11, 2004, and the Rules for the
Administration of Internet Audio/Video Programming Services, commonly known as Document 56,
effective January 31, 2008, all online audio/video service providers must obtain an audio/video
program transmission license issued by the State Administration of Radio, Film and Television, or
the SARFT. Document 56 further requires all online audio/video service providers to be either
wholly state-owned or state-controlled. At a press conference held on February 3, 2008, officials
from the SARFT and the MII clarified that online audio/video service providers that already had
been operating lawfully prior to the issuance of Document 56 may re-register and continue to
operate without becoming state-owned or controlled, provided that such providers have not engaged
in any unlawful activities. We have hosted certain audio/video programs on the Baidu Movie channel
since 2006. Shortly after the issuance of Document 56, we started preparing for the application of
an audio/video program transmission license. We cannot assure you that we will obtain this license
in a timely manner, or at all. If we cannot obtain such license, we would have to stop hosting
audio/video programs on our website, which could adversely affect our user traffic and operating
results.
The PRC government has broad discretion in dealing with violations of laws and regulations,
including levying fines, revoking business and other licenses and requiring actions necessary for
compliance. We cannot predict the effect of the interpretation of existing or new PRC laws or
regulations on our businesses. We cannot assure you that our current ownership and operating
structure would not be found in violation of any current or future PRC laws or regulations. As a
result, we may be subject to sanctions, including fines, and could be required to restructure our
operations or cease to provide certain services. Any of these or similar actions could
significantly disrupt our business operations or restrict us from conducting a substantial portion
of our business operations, which could materially and adversely affect our business, financial
condition and results of operations.
If the PRC government were to classify P4P services as a form of online advertising or as part of
Internet content provider services, we may have to conduct our P4P business through Baidu Netcom,
which would increase our effective tax rate, and we might be subject to sanctions and required to
pay delinquent taxes.
PRC laws and regulations do not currently classify P4P as a form of online advertising or as
part of ICP services requiring an ICP license. We conduct our P4P business through our
subsidiaries in the PRC, none of which has the qualification to operate online advertising business
or holds an ICP license. However, we cannot assure you that the PRC government will not classify
P4P as a form of online advertising or as part of ICP services in the future. If new regulations
characterize P4P as a form of online advertising or as part of ICP services, we may have to conduct
our P4P business through Baidu Netcom, which is qualified to operate online advertising business
and holds an ICP license. This would increase our consolidated effective tax rate for two reasons.
First, advertising revenues generated by Baidu Netcom are subject to a 3% construction fee for
culture undertakings in addition to the 5% business tax. Second, Baidu Netcom is currently subject
to a 25% enterprise income tax rate, as compared to the lower preferential enterprise income tax rates
that our PRC subsidiaries are subject to as of the date of this annual report. See Item 5A.
Operating and Financial Review and ProspectsOperating ResultsTaxation for more information on
PRC business and enterprise income tax as applicable to our subsidiaries and affiliated entities in
the PRC. Moreover, if the change in classification of P4P were to be retroactively applied, we
might be subject to sanctions, including payment of delinquent taxes and fines. In addition, the
classification of P4P as a form of online advertising could subject us to an obligation to monitor
the content of listings of our P4P customers on our websites and the associated risks. See
Risks Related to Our BusinessesWe may be subject to claims based on the content found on our
websites. Any change in the classification of P4P by the PRC government may significantly disrupt
our operations and materially and adversely affect our business, results of operations and
financial conditions.
25
We may be adversely affected by complexity, uncertainties and changes in PRC regulation of Internet
business and companies, including limitations on our ability to own key assets such as our website.
The PRC government extensively regulates the Internet industry, including foreign ownership
of, and the licensing and permit requirements pertaining to, companies in the Internet industry.
These Internet-related laws and regulations are relatively new and evolving, and their
interpretation and enforcement involve significant uncertainty. As a result, in certain
circumstances it may be difficult to determine what actions or omissions may be deemed to be
violations of applicable laws and regulations. Issues, risks and uncertainties relating to PRC
government regulation of the Internet industry include, but are not limited to, the following:
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We only have contractual control over our websites. We do not own the websites due
to the restriction of foreign investment in businesses providing value-added
telecommunication services in China, including online information services. |
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There are uncertainties relating to the regulation of the Internet business in
China, including evolving licensing practices. This means that permits, licenses or
operations at some of our companies may be subject to challenge. This may disrupt our
business, or subject us to sanctions, requirements to increase capital or other
conditions or enforcement, or compromise enforceability of related contractual
arrangements, or have other harmful effects on us. |
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Certain PRC government authorities have stated publicly that they are in the process
of promulgating new laws and regulations that will regulate Internet activities. The
areas of regulation may include online advertising, online news displaying online
audio-video program broadcasting and the provision of culture-related information over
the Internet. Other aspects of our online operations may be regulated in the future.
If our operations do not comply with these new regulations at the time they become
effective, we could be subject to penalties. |
In July 2006, the MII issued the Notice of the Ministry of Information Industry on
Intensifying the Administration of Foreign Investment in Value-added Telecommunications Services,
or the July 2006 Notice. The July 2006 Notice prohibits domestic telecommunication services providers from leasing, transferring or selling telecommunications
business operating licenses to any foreign investor in any form, or providing any resources, sites
or facilities to any foreign investor for their illegal operation of a telecommunications business
in China. According to the July 2006 Notice, either the holder of a value-added telecommunication
service license or its shareholders must directly own the domain names and trademarks used by such
license holders in their provision of value-added telecommunication services. The July 2006 Notice
also requires each license holder to have the necessary facilities, including servers, for its
approved business operations and to maintain such facilities in the regions covered by its license.
26
In October 2006, the Telecommunication Management Bureau of the MII issued a notice
reiterating its requirements as described in the July 2006 Notice. In particular, this notice
requires MII local authorities in charge of value-added telecommunications services to ensure that
existing ICP license holders conduct a self-assessment of their compliance with the July 2006
Notice and submit status reports to the MII before November 1, 2006. This notice further requires
that any ICP license holder which has identified any non-compliance with the July 2006 Notice
during its self-assessment must report its self-correction plan to the Telecommunication Management
Bureau of the MII before November 20, 2006.
Baidu Netcom, our PRC affiliated entity that holds the ICP license necessary to conduct our
business in China, received a letter from the MII requiring self-assessment and responded timely.
In order to comply with the July 2006 Notice, we have transferred certain domain names primarily
used in our business to Baidu Netcom and Beijing Perusal, respectively. In addition, we are in the
process of transferring certain trademarks, including pending trademark applications made by Baidu
Online, to Baidu Netcom, Beijing Perusal and BaiduPay, respectively.
The interpretation and application of existing PRC laws, regulations and policies and possible
new laws, regulations or policies, including the July 2006 Notice issued by the MII, have created
substantial uncertainties regarding the legality of existing and future foreign investments in, and
the businesses and activities of, Internet businesses in China, including our business.
In order to comply with PRC laws and regulations limiting foreign ownership of Internet and online
advertising businesses, we conduct our ICP and online advertising businesses through our
consolidated affiliated entities in China by means of contractual arrangements. If the PRC
government determines that these contractual arrangements do not comply with applicable
regulations, our business could be adversely affected.
The PRC government restricts foreign investment in Internet and online advertising businesses.
Accordingly, we operate our websites and our online advertising business in China through Baidu
Netcom, a company wholly-owned by our chairman, chief executive officer and co-founder Robin
Yanhong Li and our co-founder Eric Yong Xu, Beijing Perusal, a company wholly-owned by two
individuals designated by our company. In February 2008, we assisted in establishing BaiduPay, a
company wholly-owned by Baidu Netcom and an individual designated by our company, which will
operate an online payment platform. All of the individual shareholders of Baidu Netcom, Beijing
Perusal and BaiduPay are PRC citizens. Baidu Netcom, Beijing Perusal and BaiduPay hold the
licenses and approvals necessary to operate our websites and our online advertising business in
China. We have contractual arrangements with Baidu Netcom, Beijing Perusal, BaiduPay and their
individual shareholders that allow us to substantially control Baidu Netcom, Beijing Perusal and
BaiduPay. We cannot assure you, however, that we will be able to enforce these contracts.
27
Although we believe we comply with current PRC regulations, we cannot assure you that the PRC
government would agree that these operating arrangements comply with PRC licensing, registration or
other regulatory requirements, with existing policies or with requirements or policies that may be
adopted in the future. If the PRC government determines that we do not comply with applicable law,
it could revoke our business and operating licenses, require us to discontinue or restrict our
operations, restrict our right to collect revenues, block our websites, require us to restructure
our operations, impose additional conditions or requirements with which we may not be able to
comply, impose restrictions on our business operations or on our customers, or take other
regulatory or enforcement actions against us that could be harmful to our business.
Our contractual arrangements with our consolidated affiliated entities in China and their
individual shareholders may not be as effective in providing control over these entities as direct
ownership.
Since PRC law restricts foreign equity ownership in Internet and online advertising companies
in China, we operate our ICP and online advertising businesses through our consolidated affiliated
entities in China, Baidu Netcom, Beijing Perusal and BaiduPay. We have no equity ownership
interest in any of these entities and must rely on contractual arrangements to control and operate
such businesses. These contractual arrangements may not be as effective in providing control over
these entities as direct ownership. For example, Baidu Netcom, Beijing Perusal or BaiduPay could
fail to take actions required for our business or fail to maintain our websites despite its
contractual obligation to do so. If they fail to perform under their respective agreements with
us, we may have to rely on legal remedies under PRC law, which may not be effective. In addition,
we cannot assure you that any of their respective individual shareholders would always act in our
best interests.
The new PRC Property Rights Law may affect the perfection of the pledge in our equity pledge
agreements with our consolidated affiliated entities and their individual shareholders.
Under the equity pledge agreements among Baidu Online and our consolidated affiliated
entities, Baidu Netcom, Beijing Perusal and BaiduPay, and their respective individual shareholders,
the individual shareholders of Baidu Netcom, Beijing Perusal and BaiduPay have pledged all of their
equity interests therein to Baidu Online by recording the pledge on the shareholder registers of
the respective entities. However, according to the PRC Property Rights Law, which became effective
as of October 1, 2007, a pledge is not effective without being registered with the relevant local
administration for industry and commerce. It remains unclear whether under the PRC Property Rights
Law, Baidu Netcom and Beijing Perusal are required to register the pledge created before October 1,
2007. To our knowledge, no application for registration of share pledge has been processed by the
local administration for industry and commerce in Beijing, due to a lack of registration
procedures. Baidu Netcom, Beijing Perusal and BaiduPay will make efforts to register the equity
pledge when the local administration for industry and commerce implements registration procedures.
We cannot assure you that they will be able to register the pledge. If they are unable to do so,
the pledges may be deemed ineffective under the PRC Property Rights Law. If any individual
shareholder of Baidu Netcom, Beijing Perusal or BaiduPay breaches his or her obligations under the
agreement with Baidu Online, there is a risk that Baidu Online may not be able to
successfully enforce the pledge and would need to resort to legal proceedings to enforce its
contractual rights.
28
Our contractual arrangements with our consolidated affiliated entities in China may result in
adverse tax consequences to us.
As a result of our corporate structure and the contractual arrangements between Baidu Online
and each of our consolidated affiliated entities in China, we are effectively subject to the 5% PRC
business tax on both revenues generated by Baidu Netcoms, Beijing Perusals and BaiduPays
operations in China and revenues derived from Baidu Onlines contractual arrangements with these
entities. Moreover, we would be subject to adverse tax consequences if the PRC tax authorities
were to determine that the contracts between Baidu Online and these entities were not on an arms
length basis and therefore constitute a favorable transfer pricing. As a result, the PRC tax
authorities could request that Baidu Netcom, Beijing Perusal and BaiduPay adjust their taxable
income upward for PRC tax purposes. Such a pricing adjustment could adversely affect us by:
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increasing Baidu Netcoms, Beijing Perusals and BaiduPays tax expenses without
reducing Baidu Onlines tax expenses, which could subject Baidu Netcom, Beijing Perusal
and BaiduPay to late payment fees and other penalties for under-payment of taxes; and |
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resulting in Baidu Onlines loss of its preferential tax treatment. |
The new PRC Enterprise Income Tax Law became effective on January 1, 2008. This new tax law
specifies special adjustments to taxation. In particular, an enterprise must submit its annual tax
return together with a report on transactions with its affiliates to the tax authorities. The tax
authorities may impose reasonable adjustments on taxation if they have identified any related party
transactions that are inconsistent with arms-length principles.
We may have exposure to greater than anticipated tax liabilities.
We are subject to income tax, business tax and other taxes in many provinces and cities in
China and our tax structure is subject to review by various local tax authorities. The
determination of our provision for income tax and other tax liabilities requires significant
judgment and in the ordinary course of our business, there are many transactions and calculations
where the ultimate tax determination is uncertain. Although we believe our estimates are
reasonable, the ultimate decisions by the relevant tax authorities may differ from the amounts
recorded in our financial statements and may materially affect our financial results in the period
or periods for which such determination is made.
The principal shareholder of Baidu Netcom has potential conflicts of interest with us, which may
adversely affect our business.
Robin Yanhong Li, our chairman and chief executive officer, is also the principal shareholder
of Baidu Netcom. Conflicts of interests between his duties to our company and Baidu Netcom may
arise. As Mr. Li is a director and executive officer of our company, he has a duty of loyalty and
care to us under Cayman Islands law when there are any potential conflicts of interests between our
company and Baidu Netcom. Additionally, Mr. Li has executed an irrevocable power of attorney to
appoint the individual designated by us to be his attorney-in-fact to vote on his behalf on all
Baidu Netcom matters requiring shareholder approval. We cannot assure you, however, that when conflicts of interest arise, Mr. Li will
act completely in our interests or that conflicts of interests will be resolved in our favor. In
addition, Mr. Li could violate his employment agreement with us or his legal duties by diverting
business opportunities from us to others. If we cannot resolve any conflicts of interest between
us and Mr. Li, we would have to rely on legal proceedings, which could be expensive, time-consuming
and result in the disruption of our business.
29
Our corporate actions are substantially controlled by our principal shareholders and affiliated
entities.
Our principal shareholders and their affiliated entities own more than a majority of our
voting power due to our dual-class ordinary share structure. These shareholders, acting
individually or as a group, could exert substantial influence over matters such as electing
directors and approving mergers or other business combination transactions. This concentration of
voting power may also discourage, delay or prevent a change in control of our company, which could
deprive our shareholders of an opportunity to receive a premium for their shares as part of a sale
of our company and might reduce the price of our ADSs.
We may be unable to collect long-term loans to the shareholders of our consolidated affiliated
entities in China.
As of March 31, 2008, we had made long-term loans in an aggregate principal amount of RMB100.0
million (US$13.7 million), RMB1.0 million (US$0.1 million) and RMB9.0 million (US$1.2 million) to
the individual shareholders of Baidu Netcom, Beijing Perusal and BaiduPay, respectively. We
extended these loans to enable the shareholders to fund the initial capitalization of Baidu Netcom,
Beijing Perusal and BaiduPay, respectively, and in the case of Baidu Netcom, a subsequent increase
in its registered capital. As of the date of this annual report, all of the registered capital of
our consolidated affiliated entities in China has been fully funded. We may in the future provide
additional loans to the individual shareholders of our consolidated affiliated entities in China in
connection with any increase in their capitalization to the extent necessary and permissible under
applicable law. Our ability to ultimately collect these loans will depend on the profitability of
these consolidated affiliated entities and their operational needs, which are uncertain.
Risks Related to Doing Business in China
Adverse changes in economic and political policies of the PRC government could have a material
adverse effect on the overall economic growth of China, which could adversely affect our business.
Most of our business operations are conducted in China. Accordingly, our results of
operations, financial condition and prospects are subject to a significant degree to economic,
political and legal developments in China. Chinas economy differs from the economies of most
developed countries in many respects, including with respect to the amount of government
involvement, level of development, growth rate, control of foreign exchange and allocation of
resources. While the PRC economy has experienced significant growth in the past 30 years, growth
has been uneven across different regions and among various economic sectors of China. The PRC
government has implemented various measures to encourage economic development and guide the
allocation of resources. Some of these measures benefit the overall PRC economy, but may also have
a negative effect on us. For example, our financial condition and results of operations may be
adversely affected by government control over capital investments or changes in tax regulations that are applicable to us.
Since early 2004, the PRC government has implemented certain measures to control the pace of
economic growth. Such measures may cause a decrease in the level of economic activity in China,
which in turn could adversely affect our results of operations and financial condition.
30
Regulation and censorship of information disseminated over the Internet in China may adversely
affect our business and subject us to liability for information linked to our website.
The PRC government has adopted regulations governing Internet access and the distribution of
news and other information over the Internet. Under these regulations, Internet content providers
and Internet publishers are prohibited from posting or displaying over the Internet content that,
among other things, violates PRC laws and regulations, impairs the national dignity of China, or is
reactionary, obscene, superstitious, fraudulent or defamatory. Failure to comply with these
requirements may result in the revocation of licenses to provide Internet content and other
licenses and the closure of the concerned websites. In the past, failure to comply with such
requirements has resulted in the closure of certain websites. The website operator may also be held
liable for such censored information displayed on or linked to the website.
In addition, the MII has published regulations that subject website operators to potential
liability for content displayed on their websites and the actions of users and others using their
systems, including liability for violations of PRC laws and regulations prohibiting the
dissemination of content deemed to be socially destabilizing. The Ministry of Public Security has
the authority to order any local Internet service provider to block any Internet website at its
sole discretion. From time to time, the Ministry of Public Security has stopped the dissemination
over the Internet of information which it believes to be socially destabilizing. The State Secrecy
Bureau is also authorized to block any website it deems to be leaking State secrets or failing to
meet the relevant regulations relating to the protection of State secrets in the dissemination of
online information. Furthermore, we are required to report any suspicious content to relevant
governmental authorities, and to undergo computer security inspections. If we fail to implement
the relevant safeguards against security breaches, our websites may be shut down and our business
and ICP licenses may be revoked. In addition, Internet companies which provide bulletin board
systems, chat rooms or similar services must apply for specific approval from relevant authorities.
In June 2002, we were required to shut down our server for one week and pay an RMB10,000 fine
because our search results contained certain content that the public security authorities
considered socially harmful. Although we attempt to monitor the content in our search results and
on our online communities such as Baidu Post Bar, we are not able to control or restrict the
content of other Internet content providers linked to or accessible through our websites, or
content generated or placed on our Baidu Post Bar message boards or our other online communities by
our users. To the extent that PRC regulatory authorities find any content displayed on our
websites objectionable, they may require us to limit or eliminate the dissemination of such
information on our websites, which may reduce our user traffic and have an adverse effect on our
business. In addition, we may be subject to penalties for violations of those regulations arising
from information displayed on or linked to our websites, including a suspension or shutdown of our
online operations.
31
PRC government authorities may deem certain third-party websites unlawful and could require us
to remove links to such websites, which may reduce our user traffic and have a material adverse
effect on our business.
The Internet industry in China, including the operation of online activities, is extensively
regulated by the PRC government. Various PRC government authorities such as the State Council, the
MII, the State Administration for Industry and Commerce, or the SAIC, the General Administration of
Press and Publication and the Ministry of Public Security are empowered to issue and implement
regulations governing various aspects of the Internet and online activities. Substantial
uncertainties exist regarding the potential impact of current and future PRC laws and regulations
on Internet search providers. We are not able to control or restrict the operation of third-party
websites linked to or accessible through our websites. If third-party websites linked to or
accessible through our websites operate unlawful activities such as online gambling on their
websites, PRC regulatory authorities may require us to report such unlawful activities to relevant
authorities and to remove the links to such websites, or they may suspend or shut down the
operation of such websites. PRC regulatory authorities may also temporarily block access to
certain websites for a period of time for reasons beyond our control. Any of these actions may
reduce our user traffic and adversely affect our business. In addition, we may be subject to
potential liabilities for providing links to third-party websites that operate unlawful activities.
Intensified government regulation of Internet cafes could restrict our ability to maintain or
increase user traffic to our website.
In April 2001, the PRC government began tightening its regulation of Internet cafes. In
particular, a large number of unlicensed Internet cafes have been closed. In addition, the PRC
government has imposed higher capital and facility requirements for the establishment of Internet
cafes. Furthermore, the PRC governments policy, which encourages the development of a limited
number of national and regional Internet cafe chains and discourages the establishment of
independent Internet cafes, may slow down the growth of Internet cafes. In June 2002, the Ministry
of Culture, together with other government authorities, issued a joint notice, and in February
2004, the SAIC issued another notice, suspending the issuance of new Internet cafe licenses. In
May 2007, the SAIC reiterated its position not to register any new Internet cafe in 2007. So long
as Internet cafes are one of the primary venues for our users to access our websites, any reduction
in the number, or any slowdown in the growth, of Internet cafes in China could limit our ability to
maintain or increase user traffic to our websites.
The newly enacted PRC Enterprise Income Tax Law could increase the enterprise income tax rate
applicable to Baidu Online, Baidu Times and Baidu China or impose PRC withholding tax on dividends
from such PRC operating subsidiaries, which would have a material adverse effect on our result of
operations.
Pursuant to the applicable PRC tax laws and regulations effective before January 1, 2008,
foreign-invested enterprises established in China were generally subject to a state and local
enterprise income tax, or EIT, at statutory rates of 30% and 3%, respectively. An enterprise
qualified as a high and new technology enterprise and located in a national high-tech
development zone was entitled to a preferential EIT rate of 15% and an exemption from the EIT for
two years starting from its first profitable year. In addition, an enterprise qualified as a high
and new technology enterprise located in the Beijing New Technology Industry Development Zone was
entitled to a preferential EIT rate of 15% and would enjoy an exemption from the EIT for the first
three years of its establishment and a 50% reduction of the EIT for the succeeding three years.
32
Under the applicable PRC tax laws and regulations effective before January 1, 2008, Baidu
Online was qualified as a high and new technology enterprise. It was thus entitled to a
preferential EIT rate of 15%. In 2006, Baidu Online obtained an advanced technology enterprise
certificate from the Beijing Municipal Bureau of Commerce, which qualified Baidu Online for a 10%
EIT rate from 2006 to 2008. Similarly, Baidu Times, which was also a certified foreign-invested
high and new technology enterprise located in Beijing Zhongguancun Science Park (part of the
Beijing New Technology Industry Development Zone), was entitled to a three-year exemption from EIT
from 2006 to 2008 and a 7.5% EIT rate for another three years from 2009 to 2011, followed by a 15%
tax rate so long as it continued to qualify as a high and new technology enterprise. Baidu China
was registered in the Shanghai Pudong New Area and thus was subject to a 15% EIT rate. Moreover,
Baidu China was granted software enterprise status by the Shanghai Municipal Information
Commission in 2006 and thus was entitled to a full exemption from EIT from 2006 to 2007 and a 50%
tax reduction from 2008 to 2010.
On March 16, 2007, the National Peoples Congress of China enacted the Enterprise Income Tax
Law, or the EIT Law, which became effective on January 1, 2008. On December 6, 2007, the State
Council issued the Implementation Rules of the Enterprise Income Tax Law, or the Implementation
Rules, which also became effective on January 1, 2008. On December 26, 2007, the State Council
issued the Notice on Implementation of Enterprise Income Tax Transition Preferential Policy under
the EIT Law, or the Transition Preferential Policy Circular, which became effective simultaneously
with the EIT Law.
According to the EIT Law, as further clarified by the Implementation Rules and the Transition
Preferential Policy Circular, FIEs and domestic enterprises are subject to EIT at a uniform rate of
25%. The EIT rate of enterprises established before March 16, 2007 that were eligible for
preferential tax treatment according to then effective tax laws and regulations will gradually
transition to the uniform 25% EIT rate by January 1, 2013. In addition, certain enterprises may
still benefit from a preferential tax rate of 15% under the EIT Law if they qualify as high and
new technology enterprises strongly supported by the State, subject to certain general factors
described therein.
Under the Notice on Several Preferential Policies in Respect of Enterprise Income Tax
promulgated jointly by the Ministry of Finance and the State Administration of Taxation on February
22, 2008, or the Caishui No. 1 Notice, other than the preferential EIT treatments specified under
the EIT Law, the Implementation Rules and certain other tax regulations, all preferential EIT
treatments granted prior to January 1, 2008 are eliminated. Accordingly, the preferential tax
treatments granted to Baidu Online as an advanced technology enterprise have been eliminated as
of January 1, 2008. However, there is still uncertainty as to how software enterprises established
before January 1, 2008 will be treated under the EIT Law and related regulations. We are waiting
for further official clarifications to determine Baidu Chinas tax status.
On April 14, 2008, the Ministry of Science and Technology, the Ministry of Finance and the
State Administration of Taxation jointly issued the Administrative Measures on the Recognition of
High and New Technology Enterprises, or the Recognition Rules, effective on January 1, 2008.
According to the Recognition Rules, the provincial counterparts of the Ministry of Science and
Technology, the Ministry of Finance and the State Administration of Taxation shall jointly
determine whether an enterprise is qualified as a high and new
technology enterprise under the EIT Law. In making such determination, these government agencies
shall consider, among other factors, ownership of core technology, whether the products or services
fall within the scope of high and new technology strongly supported by the state as specified in
the Recognition Rules, the ratios of technical personnel and research and development (R&D)
personnel to total personnel, the ratio of R&D expenditures to annual sales revenues, the ratio of
revenues attributed to high and new technology products or services to total revenues, and other
measures that will be set forth in a guidance to be issued later. We are waiting for additional
official guidance to determine whether Baidu Online and Baidu Times will continue to be qualified
as a high and new technology enterprise under the EIT Law and therefore entitled to the
preferential tax rate and, in the case of Baidu Times, the remaining tax holidays granted under the
previously effective tax laws and regulations. Meanwhile, in accordance with the Notice on
Prepayment of the Enterprise Income Tax issued by the State Administration of Taxation on January
30, 2008, Baidu Online has started making prepayment of the EIT at the rate of 25%.
33
In addition, under the EIT Law and the Implementation Rules, dividends, interests, rent or
royalties payable by an FIE, such as our PRC subsidiaries, to any of its foreign non-resident
enterprise investors, and proceeds of the disposition of assets (subsequent to deduction of the net
value of such assets) by such foreign enterprise investor, shall be subject to a 10% withholding
tax unless such foreign enterprise investors jurisdiction of incorporation has a tax treaty with
China that provides for a reduced rate of withholding. The Caishui No. 1 Notice issued on February
22, 2008 further clarifies that undistributed profits earned by FIEs prior to January 1, 2008 will
be exempted from any withholding tax. The British Virgin Islands, where our wholly-owned
subsidiary Baidu Holdings, which is the sole shareholder of our PRC subsidiary Baidu Online, is
incorporated, does not have such a tax treaty with China. Baidu Hong Kong, our wholly-owned
subsidiary and the sole shareholder of our PRC subsidiaries Baidu China and Baidu Times, was
incorporated in Hong Kong, which has a tax treaty with China that provides for a lower withholding
tax rate of 5%.
An increase in Baidu Onlines, Baidu Times or Baidu Chinas EIT rate pursuant to the new PRC
tax law or the imposition of PRC withholding tax on dividends from such PRC operating subsidiaries
would have a material adverse effect on our results of operations.
We may be deemed a PRC resident enterprise under the EIT Law, which could subject us to PRC
taxation on our global income, and which may have a material adverse effect on our results of
operations.
Under the EIT Law and the Implementation Rules, an enterprise established outside of the PRC
with de facto management bodies within the PRC is considered a PRC resident enterprise and is
subject to the EIT at the rate of 25% on its worldwide income. The Implementation Rules define the
term de facto management bodies as establishments that carry out substantial and overall
management and control over the manufacturing and business operations, personnel, accounting,
properties, etc. of an enterprise. If we are deemed a PRC resident enterprise, we may be subject
to the EIT at 25% on our global income, except that the dividends we receive from our PRC
subsidiaries may be exempt from the EIT to the extent such dividends are deemed as dividends among
qualified PRC resident enterprises. If we are considered a resident enterprise and earn income
other than dividends from our PRC subsidiaries, a 25% EIT on our global income could significantly
increase our tax burden and materially and adversely affect our cash flow and profitability.
34
Under the EIT Law, dividends payable by us and gains on the disposition of our shares or ADSs may
be subject to PRC taxation.
If we were considered a PRC resident enterprise under the EIT Law, our shareholders and ADS
holders who are deemed non-resident enterprises may be subject to the EIT at the rate of 10% upon
the dividends payable by us or upon any gains realized from the transfer of our shares or ADSs, if
such income is deemed derived from China, provided that (i) such foreign enterprise investor has no
establishment or premises in China, or (ii) it has establishment or premises in China but its
income derived from China has no real connection with such establishment or premises. If we were
required under the EIT Law to withhold PRC income tax on our dividends payable to our non-PRC
enterprise shareholders and ADS holders, or if any gains realized from the transfer of our shares
or ADSs by our non-PRC enterprise shareholders and ADS holders were subject to the EIT, your
investment in our shares or ADSs would be materially and adversely affected.
Our subsidiaries and affiliated entities are subject to restrictions on paying dividends and making
other payments to us.
We are a holding company incorporated in the Cayman Islands and do not have any assets or
conduct any business operations other than our investments in our subsidiaries and affiliated
entities. As a result of our holding company structure, we currently rely entirely on dividends
payments from our subsidiaries in China after they receive payments from our consolidated
affiliated entities, Baidu Netcom, Beijing Perusal and BaiduPay, under various service and other
contractual arrangements. However, PRC regulations currently permit payment of dividends only out
of accumulated profits, as determined in accordance with PRC accounting standards and regulations.
Our subsidiaries and consolidated affiliated entities in China are also required to set aside a
portion of their after-tax profits according to PRC accounting standards and regulations to fund
certain reserve funds. The PRC government also imposes controls on the conversion of RMB into
foreign currencies and the remittance of currencies out of China. We may experience difficulties
in completing the administrative procedures necessary to obtain and remit foreign currency. See
Government control of currency conversion may affect the value of your investment.
Furthermore, if our subsidiaries or consolidated affiliated entities in China incur debt on their
own in the future, the instruments governing the debt may restrict their ability to pay dividends
or make other payments. If we or any of our subsidiaries in China is unable to receive all of the
revenues from our operations through these contractual or dividend arrangements, we may be unable
to pay dividends on our ordinary shares and ADSs.
Uncertainties with respect to the PRC legal system could adversely affect us.
We conduct our business primarily through our subsidiaries and affiliated entities in the PRC.
Our operations in China are governed by PRC laws and regulations. Our subsidiaries are generally
subject to laws and regulations applicable to foreign investments in China and, in particular, laws
applicable to wholly foreign owned enterprises. The PRC legal system is based on written statutes.
Prior court decisions may be cited for reference but have limited precedential value.
Since 1979, PRC legislation and regulations have significantly enhanced the protections
afforded to various forms of foreign investments in China. However, China has not developed a
fully integrated legal system and recently-enacted laws and regulations may not sufficiently cover
all aspects of economic activities in China. In particular, because these laws and regulations
are relatively new, and because of the limited volume of published
decisions and their nonbinding nature, the interpretation and enforcement of these laws and
regulations involve uncertainties. Furthermore, the PRC legal system is based in part on
government policies and internal rules (some of which are not published on a timely basis or at
all) that may have a retroactive effect. As a result, we may not be aware of our violation of
these policies and rules until some time after the violation. In addition, any litigation in China
may be protracted and result in substantial costs and diversion of resources and management
attention.
35
You may experience difficulties in effecting service of legal process upon, enforcing foreign
judgments or bringing original actions in China based on United States or other foreign laws
against, us or our management.
We conduct most of our operations in China and most of our assets are located in China. In
addition, all of our senior executive officers reside within China. As a result, it may not be
possible to effect service of process within the United States or elsewhere outside China upon our
senior executive officers, including with respect to matters arising under U.S. federal securities
laws or applicable state securities laws. Moreover, our PRC counsel has advised us that the PRC
does not have treaties with the United States or many other countries providing for the reciprocal
recognition and enforcement of judgment of courts.
Governmental control of currency conversion may affect the value of your investment.
The PRC government imposes controls on the convertibility of RMB into foreign currencies and,
in certain cases, the remittance of currency out of China. We receive substantially all of our
revenues in RMB. Under our current structure, our income is primarily derived from dividend
payments from our PRC subsidiaries. Shortages in the availability of foreign currency may restrict
the ability of our PRC subsidiaries and affiliated entities to remit sufficient foreign currency to
pay dividends or other payments to us, or otherwise satisfy their foreign currency denominated
obligations. Under existing PRC foreign exchange regulations, payments of current account items,
including profit distributions, interest payments and expenditures from trade-related transactions,
can be made in foreign currencies without prior approval from the PRC State Administration of
Foreign Exchange, or SAFE, by complying with certain procedural requirements. However, approval
from appropriate government authorities is required where RMB is to be converted into foreign
currency and remitted out of China to pay capital expenses such as the repayment of bank loans
denominated in foreign currencies. The PRC government may also at its discretion restrict access
in the future to foreign currencies for current account transactions. If the foreign exchange
control system prevents us from obtaining sufficient foreign currency to satisfy our currency
demands, we may not be able to pay dividends in foreign currencies to our shareholders, including
holders of our ADSs.
PRC regulations relating to the establishment of offshore special purpose companies by PRC
residents and registration requirements for employee stock ownership plans or share option plans
may subject our PRC resident beneficial owners or the plan participants to personal liability,
limit our ability to inject capital into our PRC subsidiaries, limit our subsidiaries ability to
increase their registered capital or distribute profits to us, or may otherwise adversely affect
us.
SAFE has promulgated several regulations, including SAFE Circular No. 75 issued in November
2005 and its implementation rule issued in May 2007, that require PRC residents and PRC
corporate entities to register with local branches of SAFE in connection with their
direct or indirect offshore investment in an overseas special purpose vehicles, or SPV, for the
purposes of overseas equity financing activities. These regulations apply to our shareholders who
are PRC residents and may apply to any offshore acquisitions that we make in the future.
36
Under these SAFE regulations, PRC residents who make, or have previously made, direct or
indirect investments in an SPV are required to register those investments. In addition, any PRC
resident who is a direct or indirect shareholder of an SPV is required to update the previously
filed registration with the local branch of SAFE, with respect to that SPV, to reflect any material
change involving its round-trip investment, capital variation, such as an increase or decrease in
capital, transfer or swap of shares, merger, division, long-term equity or debt investment or
creation of any security interest. Moreover, the PRC subsidiaries of that SPV are required to urge
the PRC resident shareholders to update their SAFE registration with the local branch of SAFE when
such updates are required under applicable SAFE regulations. If any PRC shareholder fails to make
the required SAFE registration or file or update the registration, the PRC subsidiaries of that SPV
may be prohibited from distributing their profits and the proceeds from any reduction in capital,
share transfer or liquidation, to their SPV, and the SPV may also be prohibited from injecting
additional capital into their PRC subsidiaries. Moreover, failure to comply with the various SAFE
registration requirements described above could result in liability under PRC laws for evasion of
applicable foreign exchange restrictions.
We have notified shareholders of our company whom we know are PRC residents to register with
the local SAFE branch as required under the SAFE regulations described above. We are aware that
our major shareholders who are PRC residents have registered with the relevant local SAFE branch.
We, however, cannot provide any assurances that all of our shareholders who are PRC residents will
make or obtain any applicable registrations or approvals required by these SAFE regulations. The
failure or inability of our PRC resident shareholders to comply with the registration procedures
set forth therein may subject us to fines and legal sanctions, restrict our cross-border investment
activities, or limit our PRC subsidiaries ability to distribute dividends or obtain foreign
exchange-dominated loans to our company.
As it is uncertain how the SAFE regulations described above will be interpreted or
implemented, we cannot predict how these regulations will affect our business operations or future
strategy. For example, we may be subject to more stringent review and approval process with respect
to our foreign exchange activities, such as remittance of dividends and foreign
currency-denominated borrowings, which may adversely affect our results of operations and financial
condition. In addition, if we decide to acquire a PRC domestic company, we cannot assure you that
we or the owners of such company, as the case may be, will be able to obtain the necessary
approvals or complete the necessary filings and registrations required by the SAFE regulations.
This may restrict our ability to implement our acquisition strategy and could adversely affect our
business and prospects.
In December 2006, the Peoples Bank of China promulgated the Administrative Measures of
Foreign Exchange Matters for Individuals, setting forth the respective requirements for foreign
exchange transactions by PRC individuals under either the current account or the capital account.
In January 2007, SAFE issued implementing rules for the Administrative Measures of Foreign Exchange
Matters for Individuals, which, among other things, specified approval requirements for certain
capital account transactions such as a PRC citizens participation in the employee stock ownership
plans or stock option plans of an overseas publicly listed company. On March 28, 2007, SAFE promulgated the Application
Procedure of Foreign Exchange Administration for Domestic Individuals Participating in Employee
Stock Holding Plan or Stock Option Plan of Overseas-Listed Company, or the Stock Option Rule. Under
this Stock Option Rule, PRC citizens who are granted stock options by an overseas publicly listed
company are required, through a PRC agent or PRC subsidiary of such overseas publicly-listed
company, to register with SAFE and complete certain other procedures. We and our PRC employees who
have been granted stock options are subject to these regulations. We have designated our PRC
subsidiary Baidu Online to handle the registration and other procedures required by the Stock
Option Rule. If we or our PRC optionees fail to comply with these regulations in the future, we or
our PRC optionees and their local employers may be subject to fines and legal sanctions.
37
A regulation adopted in August 2006 establishes more complex procedures for acquisitions conducted
by foreign investors, which could make it more difficult for us to pursue growth through
acquisitions.
On August 8, 2006, six PRC regulatory agencies, namely, the PRC Ministry of Commerce, or the
MOC, the State Assets Supervision and Administration Commission, the State Administration for
Taxation, the SAIC, the China Securities Regulatory Commission and SAFE, jointly adopted the
Regulations on Mergers and Acquisitions of Domestic Enterprises by Foreign Investors, which became
effective on September 8, 2006. Among other things, the new regulations established additional
procedures and requirements that could make merger and acquisition activities by foreign investors
more time-consuming and complex, including requirements in some instances that the MOC be notified
in advance of any change-of-control transaction in which a foreign investor takes control of a PRC
domestic enterprise. We may grow our business in part by directly acquiring complementary
businesses in the PRC. Complying with the requirements of the new regulations to complete such
transactions could be time-consuming, and any required approval processes, including obtaining
approval from the MOC, may delay or inhibit our ability to complete such transactions, which could
affect our ability to expand our business or maintain our market share.
Fluctuation in the value of the RMB may have a material adverse effect on your investment.
The value of the RMB against the U.S. dollar and other currencies may fluctuate and is
affected by, among other things, changes in political and economic conditions. On July 21, 2005,
the PRC government changed its decade-old policy of pegging the value of the RMB to the U.S.
dollar. Under the current policy, the RMB is permitted to fluctuate within a narrow and managed
band against a basket of certain foreign currencies. This change in policy has resulted in an
approximately 15.9% appreciation of the RMB against the U.S. dollar between July 21, 2005 and
June 4, 2008. On May 19, 2007, the Peoples Bank of China announced a policy to expand the maximum
daily floating range of the RMB trading prices against the U.S. dollar in the inter-bank spot
foreign exchange market from 0.3% to 0.5%. With this increased floating range, the RMBs value may
appreciate or depreciate significantly against the U.S. dollar in the long term.
While the international reaction to the RMB revaluation has generally been positive, there
remains significant international pressure on the PRC government to adopt an even more flexible
currency policy, which could result in a further and more significant appreciation of the RMB
against the U.S. dollar. Our revenues and costs are mostly denominated in RMB, while a significant portion of our financial assets are denominated in
U.S. dollars. We currently rely entirely on dividends and other fees paid to us by our
subsidiaries and consolidated affiliated entities in China. Any significant revaluation of RMB may
materially and adversely affect our cash flows, revenues, earnings and financial position, and the
value of, and any dividends payable on, our ADSs in U.S. dollars. For example, an appreciation of
RMB against the U.S. dollar would make any new RMB denominated investments or expenditures more
costly to us, to the extent that we need to convert U.S. dollars into RMB for such purposes. An
appreciation of RMB against the U.S. dollar would also result in foreign currency translation
losses for financial reporting purposes when we translate our U.S. dollar denominated financial
assets into RMB, as RMB is our reporting currency. Conversely, a significant depreciation of the
RMB against the U.S. dollar may significantly reduce the U.S. dollar equivalent of our earnings,
which in turn could adversely affect the price of our ADSs.
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We face risks related to health epidemics and other outbreaks.
Our business could be adversely affected by the effects of avian influenza, SARS or another
epidemic or outbreak. In recent years, there have been reports on the occurrences of avian
influenza in various parts of China, including a few confirmed human cases. Any prolonged
recurrence of avian influenza, SARS or other adverse public health developments in China may have a
material adverse effect on our business operations. For instance, health or other government
regulations adopted in response to an epidemic or outbreak may require temporary closure of
Internet cafes, which is where many users access our websites, or of our offices. Such closures
would severely disrupt our business operations and adversely affect our results of operations. We
have not adopted any written preventive measures or contingency plans to combat any future outbreak
of avian influenza, SARS or any other epidemic.
We may incur substantial administrative and staffing cost due to the promulgation of the new labor
contract law.
On June 29, 2007, the Standing Committee of the National Peoples Congress of China enacted
the Labor Contract Law, which became effective on January 1, 2008. The Labor Contract Law contains
substantial provisions with a view to improve job security and to protect the rights and interests
of employees. In order to fully comply with the legal requirements under the Labor Contract Law,
we may incur substantial administrative and staffing cost.
Risks Related to Our ADSs
The trading price of our ADSs has been volatile and may continue to be volatile regardless of our
operating performance.
The trading price of our ADSs has been and may continue to be subject to wide fluctuations.
During the period from August 5, 2005, the first day on which our ADSs were listed on the Nasdaq,
until June 4, 2008, the trading prices of our ADSs ranged from
$44.44 to $429.19 per ADS and the
closing sale price on June 4, 2008 was $344.52 per ADS. The market price for our ADSs may continue to
be volatile and subject to wide fluctuations in response to factors including the following:
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actual or anticipated fluctuations in our quarterly operating results; |
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changes in financial estimates by securities research analysts; |
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conditions in Internet search and online marketing markets; |
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changes in the economic performance or market valuations of other Internet search or
Internet companies that are perceived to be comparable to us; |
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announcements by us or our competitors of new products, acquisitions, strategic
partnerships, joint ventures or capital commitments; |
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addition or departure of key personnel; |
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fluctuations of exchange rates between RMB and the U.S. dollar; |
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intellectual property litigation; and |
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general economic or political conditions in China. |
In addition, the stock market in general, and the market prices for Internet-related companies
and companies with operation in China in particular, have experienced volatility that often has
been unrelated to the operating performance of such companies. These broad market and industry
fluctuations may adversely affect the price of our ADSs, regardless of our operating performance.
Volatility or a lack of positive performance in our stock price may also adversely affect our
ability to retain key employees, most of whom have been granted options or other equity incentives.
Substantial future sales or the perception of sales of our ADSs in the public market could cause
the price of our ADSs to decline.
Sales of our ADSs in the public market, or the perception that these sales could occur, could
cause the market price of our ADSs to decline. 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. If any existing shareholder or shareholders sell a substantial amount of ADSs, the
prevailing market price for our ADSs could be adversely affected.
In addition, we may issue additional ordinary shares for future acquisitions. If we pay for
our future acquisitions in whole or in part with additionally issued ordinary shares, your
ownership interests in our company would be diluted and this, in turn, could have a material
adverse effect on the price of our ADSs.
You may not have the same voting rights as the holders of our ordinary shares and may not receive
voting materials in time to be able to exercise your right to vote.
Except as described in this annual report and in the deposit agreement, holders of our ADSs
will not be able to exercise voting rights attaching to the shares evidenced by our ADSs on an
individual basis. Holders of our ADSs will appoint the depositary or its nominee as their
representative to exercise the voting rights attaching to the shares represented by the ADSs. You
may not receive voting materials in time to instruct the depositary to vote, and it is possible
that you, or persons who hold their ADSs through brokers, dealers or other third parties, will not
have the opportunity to exercise a right to vote. Upon our written request, the depositary will
mail to you a shareholder meeting notice which contains, among other things, a statement as to the
manner in which your voting instructions may be given, including an express indication that such instructions may be given or deemed given to the
depositary to give a discretionary proxy to a person designated by us if no instructions are
received by the depositary from you on or before the response date established by the depositary.
However, no voting instruction shall be deemed given and no such discretionary proxy shall be given
with respect to any matter as to which we inform the depositary that (i) we do not wish such proxy
given, (ii) substantial opposition exists, or (iii) such matter materially and adversely affects
the rights of shareholders.
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You may not be able to participate in rights offerings and may experience dilution of your holdings
as a result.
We may from time to time distribute rights to our shareholders, including rights to acquire
our securities. Under the deposit agreement for the ADSs, the depositary will not offer those
rights to ADS holders unless both the rights and the underlying securities to be distributed to ADS
holders are either registered under the Securities Act, or exempt from registration under the
Securities Act with respect to all holders of ADSs. We are under no obligation to file a
registration statement with respect to any such rights or underlying securities or to endeavor to
cause such a registration statement to be declared effective. In addition, we may not be able to
take advantage of any exemptions from registration under the Securities Act. Accordingly, holders
of our ADSs may be unable to participate in our rights offerings and may experience dilution in
their holdings as a result.
You may be subject to limitations on transfer of your ADSs.
Your ADSs are transferable on the books of the depositary. However, the depositary may close
its transfer books at any time or from time to time when it deems expedient in connection with the
performance of its duties. In addition, the depositary may refuse to deliver, transfer or register
transfers of ADSs generally when our books or the books of the depositary are closed, or at any
time if we or the depositary deems it advisable to do so because of any requirement of law or of
any government or governmental body, or under any provision of the deposit agreement, or for any
other reason.
You may face difficulties in protecting your interests, and your ability to protect your rights
through the U.S. federal courts may be limited, because we are incorporated under Cayman Islands
law, conduct most of our operations in China and all of our officers reside outside the United
States.
We are incorporated in the Cayman Islands, and conduct most of our operations in China through our
wholly-owned subsidiaries in China. All of our officers reside outside the United States and some
or all of the assets of those persons are located outside of the United States. As a result, it may
be difficult or impossible for you to bring an action against us or against these individuals in
the Cayman Islands or in China in the event that you believe that your rights have been infringed
under the securities laws or otherwise. Even if you are successful in bringing an action of this
kind, the laws of the Cayman Islands and of China may render you unable to enforce a judgment
against our assets or the assets of our directors and officers. There is no statutory recognition
in the Cayman Islands of judgments obtained in the United States, although the courts of the Cayman
Islands will generally recognize and enforce a non-penal judgment of a foreign court of competent
jurisdiction without retrial on the merits.
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Our corporate affairs are governed by our memorandum and articles of association and by
the Companies Law (2007 Revision) and common law of the Cayman Islands. The rights of shareholders
to take legal action against our directors and us, actions by minority shareholders and the
fiduciary responsibilities of our directors to us under Cayman Islands law are to a large extent
governed by the common law of the Cayman Islands. The common law of the Cayman Islands is derived
in part from comparatively limited judicial precedent in the Cayman Islands as well as from English
common law, which has persuasive, but not binding, authority on a court in the Cayman Islands. The
rights of our shareholders and the fiduciary responsibilities of our directors under Cayman Islands
law are not as clearly established as they would be under statutes or judicial precedents in the
United States. In particular, the Cayman Islands has a less developed body of securities laws as
compared to the United States, and provides significantly less protection to investors. In
addition, Cayman Islands companies may not have standing to initiate a shareholder derivative
action before the federal courts of the United States.
As a result of all of the above, our public shareholders may have more difficulty in
protecting their interests through actions against our management, directors or major shareholders
than would shareholders of a corporation incorporated in a jurisdiction in the United States.
Our dual-class ordinary share structure with different voting rights could discourage others from
pursuing any change of control transactions that holders of our Class A ordinary shares and ADSs
may view as beneficial.
Our ordinary shares are divided into Class A ordinary shares and Class B ordinary shares.
Holders of Class A ordinary shares are entitled to one vote per share, while holders of Class B
ordinary shares are entitled to 10 votes per share. We issued Class A ordinary shares represented
by our ADSs in our initial public offering. Certain of our major shareholders, including our
co-founder, chairman and chief executive officer, Robin Yanhong Li, who acquired our shares prior
to our initial public offering, hold our Class B ordinary shares. Each Class B ordinary share is
convertible into one Class A ordinary share at any time by the holder thereof. Class A ordinary
shares are not convertible into Class B ordinary shares under any circumstances. Upon any transfer
of Class B ordinary shares by a holder thereof to any person or entity which is not an affiliate of
such holder, such Class B ordinary shares shall be automatically and immediately converted into the
equal number of Class A ordinary shares. In addition, if at any time Robin Yanhong Li and his
affiliates collectively own less than 5% of the total number of the issued and outstanding Class B
ordinary shares, each issued and outstanding Class B ordinary share shall be automatically and
immediately converted into one share of Class A ordinary share, and we shall not issue any Class B
ordinary shares thereafter.
Due to the disparate voting powers attached to these two classes, certain shareholders have
significant voting power over matters requiring shareholder approval, including election of
directors and significant corporate transactions, such as a merger or sale of our company or our
assets. This concentrated control could discourage others from pursuing any potential merger,
takeover or other change of control transactions that holders of Class A ordinary shares and ADSs
may view as beneficial.
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Our articles of association contain anti-takeover provisions that could adversely affect the rights
of holders of our ordinary shares and ADSs.
Our articles of association include certain provisions that could limit the ability of others
to acquire control of our company, and deprive our shareholders of the opportunity to sell their
shares at a premium over the prevailing market price by discouraging third parties from seeking to
obtain control of our company in a tender offer or similar transactions, including the following
provisions:
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A dual-class ordinary share structure. |
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Our board of directors has the authority, without approval by the shareholders, to
issue up to a total of 10,000,000 preferred shares in one or more series. Our board of
directors may establish the number of shares to be included in each such series and may
fix the designations, preferences, powers and other rights of the shares of a series of
preferred shares. |
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Our board of directors has the right to elect directors to fill a vacancy created by
the increase of the board of directors or the resignation, death or removal of a
director, which prevents shareholders from having the sole right to fill vacancies on
our board of directors. |
We may be classified as a passive foreign investment company, which could result in adverse U.S.
federal income tax consequence to U.S. Holders.
Based on the price of the ADSs and our ordinary shares, the composition of our income and
assets and our operations, we believe that we were not a passive foreign investment company, or
PFIC, for United States federal income tax purposes for our taxable year ended December 31, 2007.
However, we must make a separate determination each year as to whether we are a PFIC (after the
close of each taxable year) and we cannot assure you that we will not be a PFIC for our current
taxable year ending December 31, 2008 or any future taxable year. A non-U.S. corporation will be
considered a PFIC for any taxable year if either (1) at least 75% of its gross income is passive
income or (2) at least 50% of the value of its assets (based on an average of the quarterly values
of the assets during a taxable year) is attributable to assets that produce or are held for the
production of passive income. The future value of our assets is generally determined by reference
to the market price of our ADSs and ordinary shares, which may fluctuate considerably. If we were
treated as a PFIC for any taxable year during which a U.S. Holder held an ADS or an ordinary share,
certain adverse U.S. federal income tax consequences could apply to the U.S. Holder. See Item 10.E
Additional InformationTaxationUnited States Federal Income TaxationPassive Foreign Investment
Company.
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Item 4. |
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Information on the Company |
A. History and Development of the Company
We were incorporated in the Cayman Islands in January 2000. Since our inception, we have
conducted our operations principally through Baidu Online, our wholly-owned subsidiary in Beijing,
China. In addition, we have conducted part of our operations through Baidu Netcom, a limited liability company in Beijing, China, which holds the licenses and
approvals necessary to operate our websites and provide online advertising services. In June 2005,
we established Baidu China, a wholly-owned subsidiary in Shanghai, China, to manage our business
and operations in the southern part of China. In April 2006, we established Baidu Times, a
wholly-owned subsidiary in Beijing, China. In June 2006, we assisted in establishing Beijing
Perusal, a limited liability company in Beijing, China, which became our consolidated affiliated
entity through a series of agreements among Baidu Online, Beijing Perusal and the shareholders of
Beijing Perusal. In December 2006, we set up Baidu Japan, a wholly-owned subsidiary in Tokyo,
Japan, to operate our Japanese language search services. In November 2007, we established Baidu
Hong Kong, a wholly-owned subsidiary in Hong Kong, which became the sole shareholder of Baidu China
and Baidu Times. In February 2008, we assisted in establishing BaiduPay, a limited liability
company in Beijing, China jointly owned by Baidu Netcom and an individual designated by our
company, which became our consolidated affiliated entity through a series of agreements among Baidu
Online, BaiduPay and the individual shareholder of BaiduPay. BaiduPay will operate an online
payment platform. We have a British Virgin Islands intermediate holding company, Baidu Holdings,
which does not own any assets or conduct any operations other than holding the equity interests in
Baidu Online, Baidu Japan and Baidu Hong Kong.
In August 2005, we completed the initial public offering of our ADSs, each of which
representing one Class A ordinary share, and listed our ADSs on Nasdaq.
Our principal executive offices are located at 12/F, Ideal International Plaza, No. 58
West-North 4th Ring, Beijing 100080, Peoples Republic of China. Our telephone number at this
address is +86 (10) 8262-1188.
B. Business Overview
We are the leading Chinese language Internet search provider. Our search engine was the most
frequently used search engine in China in 2007, according to a survey conducted by iResearch. Our
Baidu.com website was the largest website in China, as measured by user traffic during the
three-month period ended March 31, 2008, according to Alexa.com.
We primarily offer a Chinese language search platform, which consists of our websites and
certain online application software, as well as Baidu Union, which is our network of third-party
websites and software applications. We provide Chinese language Internet search services to enable
users to find relevant information online, including web pages, news, images and multimedia files,
through links provided on our websites. We also offer online community-based products and
entertainment platforms, such as Baidu Post Bar, Baidu Knows and Baidu Space.
We design and deliver our online marketing services to our P4P customers and other customers
who require our tailored online marketing solutions. Our auction-based P4P services enable our
customers to bid for priority placement of their links in keyword search results. We believe we
were the first auction-based P4P service provider in China. Our online advertising services allow
customers to use both query sensitive and non-query sensitive advertising services, including text
links, graphical advertisements and other forms of online advertising. Our P4P customers are those
who primarily use our auction-based P4P services, and our tailored solutions customers are those to
whom we provide marketing solutions, which may consist of one or more forms of our online
advertising services as well as P4P services. In the fourth quarter of 2007, we had over 155,000 active online marketing
customers.
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We established our Japanese subsidiary Baidu Japan in December 2006 and offered a trial
version of our Japanese search services beginning in March 2007. In January 2008, we formally
launched our Japanese search services at www.baidu.jp, run by Baidu Japan. Our Japanese search
services enable users to find relevant information online, including web pages, images, multimedia
files and blogs, through links provided on our websites.
Products and Services for Users
We focus on offering products and services that enable our users to find relevant information
quickly and easily. We offer the following services at Baidu.com to users free of charge:
Baidu Web Search. Baidus web search allows users to locate information, products and
services using Chinese language search terms. Through our search software, we build and
continuously refine a large database of Chinese synonyms and closely associated phrases, which is
essential for accurate and efficient execution of Chinese language searches. The Baidu.com home
page prominently features a search box that is designed to load quickly. After entering a search
query, users are generally presented with a list of search results, which may include our
customers links. Users can then access the desired websites by clicking on the hypertext links
displayed in the search results.
In addition to providing access to billions of indexed Chinese language web pages, we have
integrated additional features into our web search that help users find information more easily.
The Baidu web search includes the following features:
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Related Search provides alternative search terms based on the original queries to
help users find relevant web pages quickly; |
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Search in Results enables users to conduct additional searches within the initial
search results; |
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Search by Chinese Phonetics (Pinyin) enables users to conduct quick searches by
entering Chinese phonetics with letters of the English alphabet instead of Chinese
characters; |
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Advanced Search enables users to create more focused queries by employing
techniques such as narrowing results to specified words or phrases, document formats,
geographic regions, time frames or websites; |
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Snapshots provides snapshots of web pages taken when the pages were indexed,
allowing users to view web pages that cannot be quickly or easily opened; |
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Translation provides instant translations of words and phrases from English to
Chinese or vice versa; |
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Spell Checker suggests alternate search terms when a search appears to contain
misspellings or typing errors; |
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Stock Quotes provides links to stock information of companies listed on the stock
exchanges in China; |
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News, Knows, Postbar, Maps, Video, and Blog Information displays results from
other Baidu products including Baidu News, Baidu Knows, Baidu Postbar, Baidu Maps,
Baidu Video Search and Baidu Blog Search; |
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Weather, Train and Flight Schedules and Other Local Information enables users to
check weather, domestic train and flight schedules as well as schedules of
international flights departing from or arriving in China; |
Baidu Post Bar. Baidu Post Bar provides users with a query-based searchable community to
exchange views and share knowledge and experiences. The community can be further expanded by users
posting new topics that have not been covered in the community before. In Baidu Post Bar, users
can search, read and browse Internet message boards and post messages to other members of the
community. Baidu Post Bar covers a broad range of topics and interest areas, such as society,
technology, sports, entertainment and fashion. Users also can access Baidu Post Bar using wireless
application protocol, or WAP, -enabled mobile phones. In December 2007, we added video-sharing
capabilities to Baidu Post Bar, which allow users to post and share video clips in approximately
40,000 online communities within Baidu Post Bar. We typically provide 20GB of storage capacity for
each community.
Baidu News. Baidu News provides links to an extensive selection of local, national and
international news and presents news stories in a searchable format, typically within minutes of
their publication on the web. Baidu News uses an automated process to display links to related
headlines, which enables people to see many different viewpoints on the same story. Baidu News is
typically updated every three to six minutes throughout the day. Users also can choose to have
links of specific types of news articles (e.g., financial news) or news articles containing
specific key words delivered to their email accounts. In December 2006, we obtained a license to
provide Internet news services issued by the State Council News Office.
Baidu Knows. Baidu Knows provides users with a query-based searchable community to share
knowledge and experience. Through Baidu Knows, registered members of Baidu Knows can post specific
questions for other members to respond and also answer questions of other members. Any users of
our websites can also search, read and browse questions and answers by registered members of Baidu
Knows. Baidu Knows contains a broad range of subjects. Users also can access Baidu Knows through
WAP-enabled mobile phones.
Baidu MP3 Search. Baidu MP3 Search provides algorithm-generated links to songs and other
multimedia files provided by Internet content providers. The user can also sort Baidu MP3 Search
links by various categories, including lists of top songs and artists, which are updated
automatically, generally every week, based on the number of clicks.
Baidu Image Search. Baidu Image Search enables users to search millions of images on the
Internet. Baidu Image Search offers advanced features, such as search by image size and by image
file type. Image listings are organized by various categories which are updated automatically
through algorithms.
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Baidu Space. Baidu Space allows registered users to create personalized homepages in a
query-based searchable community. Registered users can post their Web logs, or blogs, photo album
and certain personal information on their homepages and establish their own communities of friends
who are also registered users. Registered users also can set limit on the access to certain
content on their homepages.
Baidu Encyclopedia. Baidu Encyclopedia is an evolving encyclopedia compiled by registered
Internet users. Registered users can share their knowledge by adding new terms and new content in
Baidu Encyclopedia. Any users of our Baidu.com website can also search, read and browse all terms
and content contributed by registered users of Baidu Encyclopedia.
Other Search and Community Products. We are continuously developing and introducing new
products to make Baidu.com more attractive to our users. We currently offer a variety of online
search products, including the following:
Baidu Movie. Baidu Movie allows users to search, watch and download free movies, television
series, cartoons, variety shows and certain other programs hosted on our servers. The programs
have been provided to us by content providers, which have represented to us that they have valid
copyrights to those programs.
Baidu Search Ranking and Search Index. Baidu Search Ranking provides listings of top search
terms based on daily search queries entered on Baidu.com. The listings are organized by categories
and allow users to easily locate popular search terms on topics of interest. We also offer a trial
version of Baidu Search Index, which provides indexes in various categories calculated based on
searches conducted using Baidu Web Search and searches conducted in Baidu News.
Baidu Web Directory. Baidu Web Directory enables users to browse and search through websites
that have been organized into categories. We also operate Hao123.com, a popular Chinese web
directory navigation site in China.
Baidu Map Search. We offer a trial version of Baidu Map Search, which enables users to search
online maps of over 90 major cities in China. Users have the option to type search terms into a
single search box to find a particular place, points of interest, such as restaurants, hotels,
schools, banks, etc., near a particular place, or get driving directions and public transportation
routes.
Baidu Yellow Page Search. We offer a trial version of Baidu Yellow Page Search jointly
developed with China Telecom. Baidu Yellow Page Search allows users to conduct online searches for
local business information in specific localities in China. The information is derived from yellow
page phone books published by China Telecom.
Baidu Ancient Chinese Literature Search. Jointed developed by us and Beijing Guoxue Times
Culture Transmission Co., Ltd., Baidu Ancient Chinese Literature Search allows users to search and
peruse ancient Chinese masterpieces covering literature, history, religion, philosophy, arts and
other essential components of the traditional Chinese culture within our online database. We have
created the first online database of ancient Chinese literature in the world to serve and benefit
users who appreciate the profound Chinese culture.
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Baidu Government Information Search. Our Baidu Government Information Search allows users to
search various regulations, rules, notices and other information announced by PRC government
entities.
Baidu Postal Code Search. Our Baidu Postal Code Search enables our users to search postal
codes in 354 cities in China.
Baidu Educational Website Search and University Search. Baidu Educational Website Search
allows users to limit their searches to the websites of educational institutions. Baidu University
Search allows users to search information on or browse through the websites of specific
universities in China.
Baidu Legal Search. Baidu Legal Search, which was jointly developed by Chinalawinfo.com and
us, enables users to search a database that contains national and local laws and regulations,
cases, legal decisions, and law dictionaries.
Baidu Frequently Used Information Search. Baidu Frequently Used Information Search enables
users to quickly search certain frequently used information, e.g., weather, map, train and flight
schedules, television schedules, stock prices, etc.
Baidu Local Search. Baidu Local Search allows users to limit their searches to specific
provinces in China.
Baidu Mobile Search. Baidu Mobile Search enables users to access our search services using
WAP-enabled mobile phones and personal digital assistants.
Baidu Blog Search. We offer a trial version of Baidu Blog Search, which allows users to
confine their searches to Chinese language blogs on the Internet.
Baidu Search and Store. We offer a trial version of Baidu Search and Store, which is a free
online bookmarking service that allows registered users to bookmark, store and organize website
links in an online space and conduct searches within the bookmarked websites.
Baidu Online Video Search. Baidu Video Search enables users to search for and access through
hyperlinks of online video clips that are hosted on third parties websites.
Baidu Love. Baidu Love is a query-based searchable community where registered users can write
and post messages to loved ones.
Baidu Patent Search. We recently introduced our patent search, Baidu Patent Search, which is
operated in cooperation with the China Patent Information Center under the State Intellectual
Property Office of the PRC. Baidu Patent Search enables users to search for specific Chinese
patents and provides basic patent information in the search results, including the patents name,
application number, filing date, issue date, inventor information and brief description of the
patent.
Baidu Voice Search. We started public testing of a new voice-based search service in March
2008, which is available to both fixed-line and mobile phone users. By calling a designated phone
number, users can request our customer service personnel to conduct searches for them. Our
customer service representatives will convey the search results to the caller over the phone or
send the results to the caller via short messaging service, or SMS.
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Baidu 2008 Olympics. In September 2007, we introduced Baidu 2008 Olympics, an interactive
online platform devoted exclusively to the 2008 Beijing Olympics. On this platform, users can read
not only the latest Olympics-related news, but also user-generated, Olympics-related content we
have selected from our other online communities such as Baidu Post Bar, Baidu Knows and Baidu
Encyclopedia.
Baidu Games. In September 2007, we introduced a trial version of Baidu Games, a query-based
searchable community designed specifically for online game players. Users can search or browse
through game-specific information posted by other users.
Baidu Finance. In November 2007, we launched Baidu Finance, an online channel focusing on
economic and financial news, information relating to personal wealth management and related market
statistics.
Baidu Statistics Search. In November 2007, we launched Baidu Statistics Search, which enables
users to search statistics that have been published by the PRC government since 1949. The
statistics are provided to us by Special Link Data Co., Ltd., a Beijing-based company.
Baidu Entertainment. We began offering a trial version of Baidu Entertainment, an online
channel devoted exclusively to entertainment-related news and content, in January 2008. Users can
search or browse through news and other information relating to specific stars, movies, television
series and music.
Other Products offered at Baidu.com. We offer certain free, downloadable software tools,
namely, Baidu Desktop Search, which enables users to search all files saved on their computer
without launching a web browser, and Baidu Sobar, which, once installed, shows up on a computers
tool bar and makes our search function readily available on every web page that a user browses.
Through Baidu Anti-Virus, an online marketplace, we collaborate with major Chinese and
international anti-virus software companies to offer our users the latest anti-virus software
products and computer virus-related news.
Baidu Japanese Language Search. In January 2008, after completing a Beta test that last
nearly a year, we formally launched our Japanese search services at www.baidu.jp, run by our
Japanese subsidiary, Baidu Japan. Our Japanese search services currently offer web search, image
search, video search and blog search capabilities.
New Products and Services Announced.
In October 2007, we announced our strategic plan to enter the Chinese e-commerce market in
2008 by leveraging our high user traffic and large online communities to build our
consumer-to-consumer service, or C2C service. We have created a new department dedicated to the
research and development of innovative e-commerce technologies and intend to launch the C2C service
in 2008.
In February 2008, we announced our intention to launch an IM service to be called Baidu Hi.
Research and development for Baidu Hi has been underway for almost one year. We are in the process
of recruiting additional personnel for the team dedicated to developing the product. All elements
of Baidu Hi, including product design, research and testing, will be handled independently by us.
We are currently conducting internal testing for this product.
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Products and Services for Customers
We focus on providing customers with cost-effective and targeted marketing solutions. We
generate revenues primarily from online marketing services.
Online Marketing Services
P4P. Our P4P platform enables our customers to reach users who search for information related
to their products or services. Customers may use our automated online tools to create text-based
descriptions of their web pages and bid on keywords that trigger the display of their web page
information and link. Our P4P platform features an automated online sign-up process that allows
customers to activate their accounts at any time.
Our P4P platform is an online marketplace that introduces Internet search users to customers
who bid for priority placement in the search results. We engage third-party distributors to sell
some of our online marketing services to end customers and offer discounts to distributors as
consideration for their services. Prior to September 2006, links to customers websites were
listed in descending order of customers bids, with the highest bidder appearing as the first
search result. In September 2006, we implemented an intelligent ranking system, which takes into
consideration the quality factor of a keyword in addition to the price bid on the keyword. The
quality factor of a keyword is determined based on the relevance of a keyword and certain other
factors. The relevance of a keyword is determined based on our analysis of past search and
click-through results. Links to customers websites now are ranked according to a comprehensive
ranking index, calculated based on both the quality factor of a keyword and the price bid on that
keyword.
Our P4P online marketing customers may choose to set a daily limit on the amount spent and may
also choose to target only users accessing our website from specified regions in China. In
addition, they can see the competing bids on the same keywords. This transparent bidding process
creates competition among customers.
We offer certain customers value-added consultative services that help to maximize their
return on investment, or ROIs, including:
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Keyword Suggestions We suggest synonyms and associated phrases to use as keywords
or text in search listings. These suggestions can improve click-through rates of the
customers listing and increase the likelihood that a user will enter into a
transaction with the customer; |
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Account Management We help manage customers P4P accounts by, among other things,
adjusting keywords from time to time at their request to help increase the
click-through rate for their listings; and |
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Performance Reporting We provide our customers online daily reports of the number
of click-throughs, clicked keywords and the total costs incurred, as well as
statistical reports organized by geographic region. |
ProTheme. We offer ProTheme services to some of our Baidu Union members. Our services enable
these Baidu Union members to display on their properties our customers promotional links that are
relevant to the subject and content of such members properties. We generate revenues from our
ProTheme services based on the number of clicks on our customers links and share the revenues with our Baidu Union members in accordance with
pre-agreed terms.
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Fixed Ranking. Our fixed ranking services allow our customers to display query sensitive text
links at a designated location on our search results pages. Our customers pay us an amount based
primarily on the location of their text links on our web pages.
Targetizement. Our Targetizement services enable our customers to reach their targeted
Internet users by displaying their advertisements only when their targeted Internet users browse
Baidus certain web pages. The customers pay us a fee based on the number of clicks on their
advertisements.
Baidu TV. In September, 2007, we launched a new advertising service, Baidu TV, in
partnership with Ads it! Media Corporation, an online advertising agency and technology company.
Baidu TV provides advertisers access to the websites of our Baidu Union members, allowing
advertisers to choose websites on which they post their video advertisements with the aid of our
advertisement targeting and matching system. The customers pay us a fee based on the number of
effective views on their advertisements. An effective view is counted when a video advertisement
runs at least five seconds before a viewer closes it.
Brand-Link. In November 2007, we announced that we would offer a new brand advertising
service, Brand-Link. When Internet users conduct a key word search using brand names of our
customers who subscribe to our Brand-Link services, the search will generate a wide range of
brand-specific content, including news reports, promotional announcements, product information and
marketing campaigns. The customers pay us a fee based on the duration of the placement of the
brand-specific content.
Other Forms of Online Advertising. Other forms of our online advertising services allow
customers to display query sensitive and non-query sensitive advertisements on our websites,
including graphical advertisements. On our Baidu Movie channel, customers can display a short
commercial before a program is shown or downloaded. Our advertising contracts are generally
short-term. Standard rates for online advertisements vary depending on several factors, including
the term of the contract, channel and traffic reach and the size and position of the advertisement
on our web pages.
Other Services
Prior to July 2006, our other services primarily included enterprise search software and
related services to companies and government agencies in China. We developed, marketed and sold
software that employed our search technology to search and manage information on our customers
intranet and on the Internet. In July 2006, we decided to phase out the enterprise search software
business as part of a strategic shift to focus on our core online marketing services.
We provided our search engine to selected Chinese Internet portals that offered search results
to their own users without displaying our brand during the early stage of our development. We
discontinued our portal search services in 2006.
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Baidu Union
Our Baidu Union consists of a large number of third-party websites and software applications.
Our Baidu Union members typically incorporate a Baidu search box or toolbar and match our sponsored
links with the content on their properties. Their users can conduct search via the Baidu search
box or toolbar and can click the sponsored links located on their properties. Our relationships
with Baidu Union members allow them to provide high-quality and relevant search results to their
users without the costs associated with building and maintaining advanced search capabilities
in-house. In addition, our Baidu Union members can monetize their traffic and content through
revenue sharing arrangement with us, which is based on the number of click-throughs from their
users. We intend to recruit additional Baidu Union members to further increase traffic to our
Baidu.com website.
Our Customers
Online Marketing. We serve a broad range of online marketing customers consisting of SMEs
throughout China, large domestic corporations and Chinese divisions or subsidiaries of large,
multinational corporations. We have a diverse customer base in terms of industries and
geographical locations. The industries in which our customers operate include e-commerce,
information technology services, consumer products, manufacturing, health care, entertainment,
education, financial services, real estate and other industries. Although we have customers
located throughout China, we have a more active and larger customer base in coastal regions,
reflecting the current general economic demographics in China.
Our online marketing customers are increasingly seeking marketing solutions with measurable
results in order to maximize their ROI. In response to this trend, we manage our sales activities
for our online marketing services around two key customer categories: P4P customers and tailored
solutions customers.
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P4P Customers Our P4P customers are those who primarily use our auction-based P4P
services. They are generally SMEs with modest marketing budgets and, as a result,
require cost-effective online marketing solutions to reach their potential customers.
Our P4P platform allows them, directly or through our distributors, to easily manage
their online marketing spending on a prepaid basis. |
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Tailored Solutions Customers Our tailored solutions customers generally seek
solutions to meet certain pre-determined performance metrics, such as number of
click-throughs, duration of placement, number of converted users and number of
telephone calls. They are generally medium and large enterprises with dedicated online
marketing budgets. Depending on their objectives and desired end results, we design
customized performance-based solutions comprising of P4P, fixed ranking and other query
and non-query sensitive marketing services. |
Sales and Distribution
We sell our online marketing services directly and through our distribution network. We have
historically acquired our P4P customers primarily through our nationwide network of distributors
and, to a lesser extent, through our direct sales force. In early 2005, we started to establish
direct sales offices in a number of major cities in China. Currently we have
direct sales presence in Shanghai, Beijing and Guangdong Province.
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Our distributors provide numerous services, including identifying customers, collecting
payments, assisting customers in setting up accounts with us, suggesting keywords to maximize ROI
and engaging in other marketing and educational services aimed at acquiring customers. We have
relied on distributors for several reasons. Our P4P customer base in China is geographically
diverse and fragmented as most of our P4P customers are SMEs located in different regions in China.
Moreover, SMEs are generally less experienced with online marketing as compared to large companies
and therefore benefit from the extensive services provided by distributors. Finally, secure online
payment and credit card systems are at early stages of development in China. Distributors serve as
an efficient and effective channel to reach SME customers throughout China and collect payments
from them.
We offer our tailored marketing solutions to medium and large corporate customers primarily
through our direct sales force. We have local sales staff in Beijing, Shanghai and major cities in
Guangdong Province, including Guangzhou and Shenzhen, covering the largest regional markets for our
online advertising services.
Marketing
Historically, our user base grew primarily through word-of-mouth. We focus on continuously
improving the quality of our products and services as we believe satisfied users and customers are
more likely to recommend our products and services to others. Through these efforts and the
increased use of the Internet in China, we have built our brand with modest marketing expenditures.
Our initial public offering in 2005 has significantly enhanced our brand recognition. In
addition, we have implemented a number of marketing initiatives designed to promote our brand
awareness among potential users and customers. We have also conducted cross-marketing activities
with a number of leading consumer brands.
In addition, with the assistance from our distributors, we conduct localized marketing
activities tailored to potential customers in various regions. We also organize and sponsor
seminars and discussion forums targeted at existing and potential customers.
Strategic Relationships
In 2007 and early 2008, we entered into several strategic relationships to further expand our
user base and cooperate with more leading global companies.
In June 2007, we established a strategic partnership arrangement with a subsidiary of Rock
Music Group, or RMG, a leading independent Chinese language music label, to provide
advertising-supported online music streaming service. Pursuant to this arrangement, selected music
owned by RMG is made available for streaming at no charge to all users of Baidu.com, and Internet
advertising may be displayed while users listen to the music. We and RMG have agreed to share
revenues generated from the advertising and also intend to continue to work together to explore new
opportunities in advertising-supported online music distribution.
In February 2008, we entered into a cooperation agreement with China Netcom (Group) Company
Limited. Pursuant to this agreement, users of China Netcoms Internet connection services will
be directed to a search page featuring a Baidu search box after they input an incorrect or
nonexistent Internet address.
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In March 2008, we entered into a cooperation agreement with Nokia to strengthen our existing
collaboration with Nokia. Under this agreement, users of certain Nokia mobile phone models will be
able to access Baidu search services via Widsets, Nokias wireless Internet platform.
Competition
The Internet search industry in China is rapidly evolving and highly competitive. Our primary
competitors include U.S.-based Internet search providers providing Chinese language Internet search
services and Chinese Internet companies. We compete with these entities for both users and
customers on the basis of user traffic, quality (relevance) and quantity (index size) of search
results, availability and ease of use of our products and services, the number of customers,
distribution channels and the number of associated third-party websites. We also face competition
from traditional advertising media.
U.S.-based Internet Search Providers. U.S.-based Internet search providers such as Google and
Yahoo! have a strong global presence, well-established brand names, more users and customers and
significantly greater financial resources than we do. Googles Chinese website google.cn is our
major competitor in Chinese language search. We may face more intense competition from our
U.S.-based competitors as the regulatory environment in China evolves, online payment systems and
Internet infrastructure in China mature, and our U.S.-based competitors increase their business
activities in China.
Chinese Internet Companies. Chinese Internet portals such as Sina, Sohu, Netease and Tencent
offer a broad range of online services, including news, wireless value-added services, email,
online shopping, blogs, chat rooms and community networks. Sina has its own search engine, iAsk,
and Sohu also has its own search engine, Sogou. Each of our Chinese Internet portal competitors
has generated significant traffic, a loyal user base and a large and broad customer base. These
portals have widely recognized brand names in China and some have greater financial resources than
we do. We compete with these portals primarily for user traffic and online advertising. We also
face growing competition from other Internet search service providers such as Yisou, Sousou,
Zhongsou and Youdao. In addition, we compete with B2B service providers such as Alibaba.
Other Advertising Media. Other advertising media, such as newspapers, yellow pages, magazines,
billboards and other forms of outdoor media, television and radio, compete for a share of our
customers marketing budgets. Large enterprises currently spend a relatively small percentage of
their marketing budgets on online marketing as compared to the percentage they spend on other
advertising media.
Technology
We provide our web search and P4P technology using our network of computers running customized
software developed in-house. Our key technologies include:
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Web Search Technology
Our web search technology applies a combination of techniques to determine the importance of a
web page independent of a particular search query and the relevance of that page to a particular
search query.
Link Analysis Techniques. Link analysis is a technique that determines the relevance between a
user query and a web page by evaluating the combination of the anchor texts and the number of web
pages linked to that web page. We treat a link from web page A to web page B as a vote by page A
in favor of page B. The subject of the vote is described in the anchor texts of that link. The
more votes a web page gets, the higher the relevance. We compare search queries with the content
of web pages to help determine relevance. Our text-based scoring techniques do more than count the
number of times a search term appears on a web page. For example, our technology determines the
proximity of individual search terms to each other on a given web page, and prioritizes results
that have the search terms near each other. Other aspects of a pages content are also considered.
By combining link analysis with our information extraction techniques, we are able to deliver
relevant search results.
Information Extraction Techniques. We extract information from a web page using high
performance algorithms and information extraction techniques. Our techniques enable us to
understand web page content, delete extraneous data, build link structures, identify duplicate and
junk pages and decide whether to include or exclude a web page based on its quality. Our
techniques can process millions of web pages quickly. In addition, our anti-spamming algorithms
and tools can identify and respond to spamming web pages quickly and effectively.
Web Crawling Techniques. Our powerful computer clusters and intelligent scheduling algorithms
allow us to crawl Chinese web pages efficiently. We can easily scale up our system to collect
billions of Chinese web pages. Our spider technology enables us to refresh web indices at
intervals ranging from every few minutes to every few weeks. We set the index refresh frequency
rate based on our knowledge of Internet search users needs and the nature of the information. For
example, our news index is typically updated every three to six minutes throughout the day given
the importance of timely information for news. We also mine multimedia and other forms of files
from web page repositories.
Chinese Language Processing Techniques. We analyze and understand Chinese web pages by
processing word-segmentation and utilizing an encoding method based on Chinese language
characteristics. For example, we can identify Chinese names on a web page. When a user searches
for a person based on the persons Chinese name, we can display the web pages that are specifically
related to that person. We also mine user behavior and search interests from our large search
query logs. We provide additional web search features such as advanced search, spell check and
search by Chinese phonetics (Pinyin).
P4P Technology
Our P4P platform serves millions of relevant, targeted sponsored links each day based on
search terms users enter or content they view on the web page. Our key P4P technology includes:
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P4P Auction System. We use a web-based auction system to enable customers to bid for positions
and automatically deliver relevant, targeted promotional links on Baidus properties and Baidu
Union members properties. The system starts by screening the relevance
between the sponsored links and a particular query. Prior to September 2006, the system
automatically determined the ranking of the sponsored links based on the amounts the bidders were
willing to pay. In September 2006, we implemented an intelligent ranking system, which takes into
consideration the quality factor of a keyword in addition to the price bid on the keyword. The
quality factor of a keyword is determined based on the relevance of the keyword and certain other
factors. The relevance of a keyword is determined based on the analysis of past search and
click-through results. Links to customers websites now are ranked according to a comprehensive
ranking index, calculated based on both the quality factor of a keyword and the price bid or that
keyword. In June 2006, we introduced a dynamic mechanism for the determination of the minimum
bidding price for each keyword to replace the previous system, which assigned the same fixed
minimum bidding price for every keyword. For determination of cost per click, or CPC, the system
allows customers to set fixed CPCs or choose an automatic price reducing mechanism which
automatically lowers the CPC to the minimum needed to maintain the desired position.
P4P Billing System. We record every click and charge customers a fee by multiplying the number
of clicks by the CPC. Our system is designed to detect fraudulent clicks based on factors such as
click patterns and timestamps. This system also computes the amount a Baidu Union member or a
distributor should be paid. The billing information is integrated with our internal Oracle ERP
financial system.
P4P Customer Service System. This system manages customer information such as targeted
keywords, costs per click and performance analysis. We suggest to customers the keywords they
should target based on their website content, spelling variants and competitors bids.
ProTheme Contextual Promotion Technology. Our ProTheme technology employs techniques that
consider factors such as theme finding, keyword analysis, word frequency and the overall link
structure of the web to analyze the content of individual web pages and to match sponsored links in
our P4P platform to the web pages almost instantaneously. With this targeting technology, we can
automatically provide contextually relevant promotional links. For example, our technology can
provide links offering tickets to fans of a specific sports team or a news story about that team.
Branded Advertising Technology
Targetizement Technology. Our Targetizement technology matches our customers advertisements
with their targeted Internet users. Our automatic algorithm can analyze a users interests based
on his or her past search experience and display advertisements that the user may be interested in
viewing.
Large-Scale Systems Technology
We currently use a combination of off-the-shelf and custom software running on clusters of
low-cost computers. Our investment in our large-scale system infrastructure has several key
benefits: simplification of the storage and processing of large amounts of data, facilitation of
the deployment and operation of large-scale products and services, and automation of much of the
administration of large-scale clusters of computers. Moreover, this large infrastructure is easily
scalable to increases in traffic and dataset volume.
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Our large-scale system infrastructure uses distributed software and high performance parallel
computing technologies to provide high-quality web search services and web page collection with low
cost computer clusters on a Linux operating system. We also have management information systems
that enable us to perform tasks such as service operations, administration, trouble-shootings and
filtering with relative ease and efficiency. In addition, we have software systems that can test
new ideas with real search queries to evaluate the actual effects without affecting live services.
Our infrastructure significantly improves the relevance of our search and advertising results
by allowing us to apply superior search and retrieval algorithms that are computationally
intensive. We believe this infrastructure also shortens our product development cycle and allows
us to innovate more cost-effectively. We also constantly evaluate new hardware alternatives and
software techniques to help further reduce our computational costs.
Intellectual Property
We rely on a combination of trademark, copyright and trade secret protection laws in China and
other jurisdictions, as well as confidentiality procedures and contractual provisions to protect
our intellectual property and our brand. We have two issued patents in China and intend to apply
for more patents to protect our core technologies. We also enter into confidentiality, non-compete
and invention assignment agreements with our employees and consultants and nondisclosure agreements
with selected third parties.
, which is our companys name Baidu in Chinese, has been
recognized as a well-known trademark in China by the Trademark Office under the SAIC. We have
applied to register additional trademarks and logos, including
and
, in China.
We also have registered certain trademarks in Hong Kong, including
and our company logo.
In addition, we have registered our domain name Baidu.com with register.com, Baidu.jp with
humeia.co.jp and Baidu.cn, Baidu.com.cn and hao123.com and certain other websites with China
National Network Information Center, or CNNIC.
Internet, technology and media companies are frequently involved in litigation based on
allegations of infringement or other violations of intellectual property rights. Furthermore, the
application of laws governing intellectual property rights in China and abroad is uncertain and
evolving and could involve substantial risks to us. See Item 3D. Key InformationRisk
FactorsRisks Related to Our BusinessWe may face intellectual property infringement claims and
other related claims that could be time-consuming and costly to defend and may result in our
inability to continue providing certain of our existing services and We may be subject to
patent infringement claims with respect to our P4P platform.
Regulation
The PRC government extensively regulates the telecommunications industry, including the
Internet sector. The State Council, the MII and other relevant government authorities have
promulgated an extensive regulatory scheme governing Internet-related services. This section
summarizes the principal PRC laws and regulations relating to our business.
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In the opinion of Hawkhigh Law Firm, our PRC legal counsel: (1) the ownership structure of our
company, Baidu Online, Baidu China, Baidu Times, Baidu Netcom, Beijing Perusal and BaiduPay
complies with current PRC laws and regulations; (2) our contractual arrangements with Baidu
Netcom, Beijing Perusal, BaiduPay and their shareholders are valid and
binding on all parties to these arrangements and do not violate existing PRC laws or regulations;
and (3) subject to the completion of the transfers of certain trademarks from Baidu Online to Baidu
Netcom, Beijing Perusal and BaiduPay, the business operations of our company, Baidu Online, Baidu
China, Baidu Times, Baidu Netcom, Beijing Perusal and BaiduPay comply with current PRC laws and
regulations.
Chinas Internet industry and online advertising market are at an early stage of development.
There are substantial uncertainties regarding the interpretation and application of existing or
proposed PRC laws and regulations. We cannot assure you that the PRC regulatory authorities would
find that our corporate structure and our business operations comply with PRC laws and regulations.
If the PRC government finds us to be in violation of PRC laws and regulations, we may be required
to pay fines and penalties, obtain certain licenses or permits and change, suspend or discontinue
our business operations until we comply with applicable PRC laws and regulations.
Regulations on Value-Added Telecommunications Services and Internet Content Services
In September 2000, the State Council promulgated the Telecommunications Regulations, or the
Telecom Regulations. The Telecom Regulations categorize all telecommunications businesses in the
PRC as either basic or value-added. Internet content services, or ICP services, are classified as
value-added telecommunications businesses. Under the Telecom Regulations, commercial operators of
value-added telecommunications services must first obtain an operating license from the MII or its
provincial level counterparts.
In September 2000, the State Council issued the Administrative Measures on Internet
Information Services, or the Internet Measures. According to the Internet Measures, commercial ICP
service operators must obtain an ICP license from the relevant government authorities before
engaging in any commercial ICP operations within the PRC. In November 2000, the MII promulgated
the Internet Electronic Messaging Service Administrative Measures, or the BBS Measures. BBS
services include electronic bulletin boards, electronic forums, message boards and chat rooms. The
BBS Measures require ICP operators to obtain specific approvals before providing BBS services.
In December 2001, the MII promulgated the Administrative Measures for Telecommunications
Business Operating Licenses, or the Telecom License Measures. The Telecom License Measures set
forth the types of licenses required to operate value-added telecommunications services and the
qualifications and procedures for obtaining such licenses. For example, an ICP operator providing
value-added services in multiple provinces is required to obtain an inter-regional license, whereas
an ICP operator providing the same services in one province is required to obtain a local license.
National security considerations are an important factor in the regulation of Internet content
in China. The National Peoples Congress, the PRCs national legislature, has enacted laws that
subject violators to penalties, including criminal sanctions, for Internet content that:
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opposes the fundamental principles stated in the PRC constitution; |
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compromises national security, divulges state secrets, subverts state power or
damages national unity; |
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harms the dignity or interests of the state; |
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incites ethnic hatred or racial discrimination or damages inter-ethnic unity; |
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undermines the PRCs religious policy or propagates heretical teachings or feudal
superstitions; |
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disseminates rumors, disturbs social order or disrupts social stability; |
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disseminates obscenity or pornography, encourages gambling, violence, murder or fear
or incites the commission of a crime; |
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insults or slanders a third party or infringes upon the lawful rights and interests
of a third party; or |
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is otherwise prohibited by law or administrative regulations. |
ICP operators are required to monitor their websites, including electronic bulletin boards.
They may not post or disseminate any content that falls within these prohibited categories and must
remove any such content from their websites.
The PRC government may shut down the websites of ICP license holders that violate any of the
above-mentioned content restrictions and revoke their ICP licenses.
Restrictions on Foreign Ownership in Value-Added Telecommunications Services
To comply with Chinas commitments for its entry into the World Trade Organization, or WTO,
the State Council promulgated the Provisions on Administration of Foreign Invested
Telecommunications Enterprises, or the FITE Provisions, in December 2001. The FITE Provisions set
forth detailed requirements for capitalization, investor qualifications and application and
approval procedures in connection with the establishment of a foreign invested telecommunications
enterprise. Under the FITE Provisions, the ultimate foreign equity ownership in a value-added
telecommunications services provider must not exceed 50%. Pursuant to the latest Industry Guidance
Catalogue for Foreign Investment, or the Guidance Catalogue, jointly issued by the National
Development and Reform Commission and the MOC on October 31, 2007 and effective as of December 1,
2007, foreign investors may own up to 50% of the equity interest in a company that operates a
value-added telecommunications business listed in Chinas WTO commitments, including ICP services.
However, for a foreign investor to acquire any equity interest (up to 50% as permitted under the
Guidance Catalogue) in a value-added telecommunication business in China, it must satisfy a number
of stringent performance and operational experience requirements, including demonstrating track
record and experience in operating value-added telecommunication business overseas. Moreover,
foreign investors that meet these requirements must obtain approvals from the MII and the MOC or
their authorized local counterparts, which retain considerable discretion in granting approvals.
According to publicly available information, the PRC government has issued an ICP license to only a
limited number of foreign invested companies, all of which are Sino-foreign joint ventures engaging
in the value-added telecommunication business. We believe that it would be impracticable for us to
acquire any equity interest in Baidu Netcom, Beijing Perusal or BaiduPay without diverting management
attention and resources. In addition, we believe that our contractual arrangements with Baidu
Netcom, Beijing Perusal, BaiduPay and their individual shareholders provide us with sufficient and
effective control over Baidu Netcom, Beijing Perusal and BaiduPay. Accordingly, we currently do
not plan to acquire any equity interest in Baidu Netcom, Beijing Perusal or BaiduPay.
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In July 2006, the MII issued the Notice of the MII on Intensifying the Administration of
Foreign Investment in Value-added Telecommunications Services, or the July 2006 Notice. The July
2006 Notice prohibits domestic telecommunication services providers from leasing, transferring or
selling telecommunications business operating licenses to any foreign investor in any form, or
providing any resources, sites or facilities to any foreign investor for their illegal operation of
a telecommunications business in China. According to the July 2006 Notice, either the holder of a
value-added telecommunication service license or its shareholders must directly own the domain
names and trademarks used by such license holders in their provision of value-added
telecommunication services. The July 2006 Notice further requires each license holder to have the
necessary facilities, including servers, for its approved business operations and to maintain such
facilities in the regions covered by its license.
In October 2006, the Telecommunication Management Bureau of the MII issued a notice
reiterating its requirements as described in the July 2006 Notice. In particular, this notice
requires MII local authorities in charge of value-added telecommunications services to ensure that
existing ICP license holders conduct a self-assessment of their compliance with the July 2006
Notice and submit status reports to the MII before November 1, 2006. This notice further requires
that any ICP license holder which has identified any non-compliance with the July 2006 Notice
during its self-assessment must report its self-correction plan to the Telecommunication Management
Bureau of the MII before November 20, 2006.
To comply with these PRC regulations, we operate our websites through Baidu Netcom and Beijing
Perusal, our PRC affiliated entities. In February 2008, we assisted in establishing a new
consolidated affiliated entity, BaiduPay, which will operate an online payment platform. Baidu
Netcom is wholly owned by our chairman, chief executive officer and co-founder Robin Yanhong Li and
our co-founder Eric Yong Xu, both of whom are PRC citizens. Beijing Perusal is wholly owned by two
PRC citizens designated by our company. BaiduPay is wholly owned by Baidu Netcom and a PRC citizen
designated by our company. Baidu Netcom, Beijing Perusal and BaiduPay hold the licenses and
permits necessary to operate our business in China. In addition, to comply with the July 2006
Notice, we have transferred certain domain names primarily used in our business to Baidu Netcom and
Beijing Perusal, respectively. We are also in the process of transferring certain trademarks,
including pending trademark applications made by Baidu Online, to Baidu Netcom, Beijing Perusal and
BaiduPay, respectively. See Item 3D. Key InformationRisk FactorsRisks Related to Our
Corporate StructurePRC laws and regulations governing our businesses and the validity of certain
of our contractual arrangements are uncertain. If we are found to be in violation, we could be
subject to sanctions. In addition, changes in such PRC laws and regulations or changes in
interpretations thereof may materially and adversely affect our business.
On August 8, 2006, six PRC regulatory agencies, namely, the MOC, the State Assets Supervision
and Administration Commission, the State Administration for Taxation, the SAIC, the China
Securities Regulatory Commission and SAFE, jointly adopted the Regulations on the Mergers
and Acquisitions of Domestic Enterprises by Foreign Investors, or
the Merger Regulation, which became effective on September 8, 2006. Among other things, the Merger
Regulation established additional procedures and requirements that could make merger and
acquisition activities by foreign investors more time-consuming and complex, including requirements
in some instances that the MOC be notified in advance of any change-of-control transaction in which
a foreign investor takes control of a PRC domestic enterprise.
60
Regulations on News Display
Displaying news on a website and disseminating news through the Internet are highly regulated
in the PRC. In November 2000, the State Council News Office and the MII promulgated the
Provisional Measures for Administrating Internet Websites Carrying on the News Displaying Business.
These measures require an ICP operator (other than a government authorized news unit) to obtain
State Council News Office approval to post news on its website or disseminate news through the
Internet. Furthermore, the disseminated news must come from government-approved sources pursuant
to contracts between the ICP operator and these sources, copies of which must be filed with the
relevant government authorities.
On September 25, 2005, the State Council News Office and the MII jointly issued the Provisions
on the Administration of Internet News Information Services, requiring Internet news information
service organizations to provide services as approved by the State Council News Office, subject to
annual inspection under the new provisions. These Provisions also provide that no Internet news
information service organizations may take the form of a foreign invested enterprise, whether a
joint venture or a wholly foreign owned enterprise and no cooperation between Internet news
information service organizations and foreign invested enterprise is allowed prior to the security
evaluation by the State Council News Office.
In December 2006, Baidu Netcom obtained the Internet news license, which permits it to publish
Internet news pursuant to the relevant PRC laws and regulations. The Internet news license is
subject to annual inspection by relevant government authorities.
Regulation on Internet Culture Activities
On May 10, 2003, the Ministry of Culture promulgated the Internet Culture Administration
Tentative Measures, or the Internet Culture Measures. The Internet Culture Measures require ICP
operators engaging in Internet culture activities to obtain a permit from the Ministry of
Culture. The term Internet culture activities includes, among other things, online dissemination
of Internet cultural products (such as audio-video products, gaming products, performances of plays
or programs, works of art and cartoons) and the production, reproduction, importation, sale
(wholesale or retail), leasing and broadcasting of Internet cultural products. We have hosted
certain audio/video programs on the Baidu Movie channel since 2006. Baidu Netcom was granted an
Internet culture business permit in April 2007.
On March 24, 2006, the Ministry of Culture promulgated the Cultural Market Administrative and
Regulatory Measures, or the Cultural Market Measures. The Cultural Market Measures provided
detailed rules for local cultural administrative authorities to regulate, among other things,
Internet cultural operational activities.
61
On November 20, 2006, the Ministry of Culture issued Several Suggestions of the Ministry
of Culture on the Development and Administration of the Internet Music, or the Suggestions, which
became effective on November 20, 2006. The Suggestions require the Internet service provider to
obtain the Internet culture business permit to carry on any business of Internet music products.
Foreign investors are prohibited from engaging in the Internet culture business operation.
Regulation on Broadcasting Audio/Video Programs through the Internet
On July 6, 2004, the SARFT promulgated the Rules for the Administration of Broadcasting of
Audio/Video Programs through the Internet and Other Information Networks, or the AV Broadcasting
Rules. The AV Broadcasting Rules apply to the opening, broadcasting, integration, transmission or
download of audio/video programs via the Internet. Anyone who wishes to engage in Internet
broadcasting activities must first obtain an audio/video program transmission license, with a term
of two years, issued by the SARFT and operate pursuant to the scope as provided in such license.
Foreign invested enterprises are not allowed to engage in the above business.
On April 13, 2005, the State Council announced Several Decisions on Investment by
Non-state-owned Companies in Culture-related Business in China. These decisions encourage and
support non-state-owned companies to enter certain culture-related business in China, subject to
restrictions and prohibitions for investment in audio/video broadcasting business or website news
business by non-state-owned companies. These decisions authorize the Ministry of Culture, the
SARFT and the General Administration of Press and Publication to adopt detailed implementation
rules according to these decisions.
On December 20 2007, the SARFT and the MII jointly issued the Rules for the Administration of
Internet Audio and Video Program Services, commonly known as Document 56, which came into effect as
of January 31, 2008. Document 56 reiterates the requirement set forth in the AV Broadcasting Rules
that online audio/video service providers must obtain a license from the SARFT. Furthermore,
Document 56 requires all online audio/video service providers to be either wholly state-owned or
state-controlled. At a press conference held on February 3, 2008, officials from the SARFT and the
MII clarified that online audio/video service providers that already had been operating lawfully
prior to the issuance of Document 56 may re-register and continue to operate without becoming
state-owned or controlled, provided that such providers have not engaged in any unlawful
activities. This exemption will not be granted to online audio/video service providers established
after Document 56 was issued. We have hosted on the Baidu Movie channel on our website certain
audio/video programs since 2006. Shortly after the issuance of Document 56, we started preparing
for the application of an audio/video program transmission license. We cannot assure you that we
will obtain this license in a timely manner, or at all. See Item 3D. Key InformationRisk
FactorsRisks Related to Our Corporate StructureWe may be adversely affected by complexity,
uncertainties and changes in PRC regulation of Internet business and companies, including
limitations on our ability to own key assets such as our website.
62
Regulations on Advertisements
The PRC government regulates online advertising, principally through the SAIC. Under the Rules
for Administration of Foreign Invested Advertising Enterprise, promulgated by the SAIC and the MOC
on March 2, 2004, and the then effective Guidance Catalogue, foreign investors were permitted
to own up to 70% of the equity interest, individually or
collectively, in a PRC advertising company. After December 10, 2005, there has been no limit on
the percentage of equity ownership. However, according to the Provisions on the Administration of
Foreign-funded Advertising Enterprises promulgated by the State Administration for Industry and
Commerce and the Ministry of Commerce, effective on March 2, 2004, foreign investors in wholly
foreign-owned and joint venture Chinese advertising companies are required to have at least three
years and two years, respectively, of direct operations in the advertising industry outside of
China. Since we have not been involved in advertising outside of China for the required number of
years, we cannot hold direct equity interests in PRC companies engaged in advertising business. We
conduct our online advertising business through our consolidated affiliated entities in China,
Baidu Netcom and Beijing Perusal.
On July 19, 2004, the SAIC promulgated the Notice on Registration Issues for Enterprises
Specialized in Advertising Business, permitting an enterprise specialized in advertising business
as specified in its business scope to operate advertising business without an advertising operation
license. For ICP operators that publish advertisement on the Internet, the SAIC or its local
counterpart no longer issues Advertising Operation License. Instead, the ICP operators may apply
for expansion of their business scope to cover online advertisement on their websites.
On November 30, 2004, the SAIC issued the Administrative Regulations for Advertising Licenses
and Implementation Rules for the Administrative Regulations for Advertising, both taking effect as
of January 1, 2005, granting a general exemption to enterprises (other than radio stations,
television stations, newspapers and magazines, non-corporate entities and other entities specified
in laws or administrative regulations) from the previous requirement to obtain an advertising
operation license. We conduct our online advertising business through Baidu Netcom and Beijing
Perusal, each of which holds a business license that includes online advertising in its business
scope.
On November 28, 2005, the National Development and Reform Commission and the SAIC jointly
promulgated the Regulation on Marked Prices of Advertising Services, which requires all advertising
service providers to make public their charges.
Regulation on Software Products
On October 27, 2000, the MII issued the Administrative Measures on Software Products, or the
Software Measures, to strengthen the regulation of software products and to encourage the
development of the PRC software industry. Under the Software Measures, a software developer must
have all software products imported into or sold in the PRC tested by a testing organization
approved by the MII. The software products must be registered with the MII or with its provincial
branch. The sale of unregistered software products in the PRC is forbidden. Software products can
be registered for five years, and the registration is renewable upon expiration.
In order to further implement the Computer Software Protection Regulations promulgated by the
State Council on December 20, 2001, the State Copyright Bureau issued the Computer Software
Copyright Registration Procedures on February 20, 2002, which apply to software copyright
registration, license contract registration and transfer contract registration.
63
Regulations on Intellectual Property Rights
China has adopted legislation governing intellectual property rights, including trademarks,
patents and copyrights. China is a signatory to the main international conventions on intellectual
property rights and became a member of the Agreement on Trade Related Aspects of Intellectual
Property Rights upon its accession to the WTO in December 2001.
Patent. The National Peoples Congress adopted the Patent Law in 1984, and amended it in 1992
and 2000. The purpose of the Patent Law is to protect and encourage invention, foster applications
of invention and promote the development of science and technology. To be patentable, invention or
utility models must meet three conditions: novelty, inventiveness and practical applicability.
Patents cannot be granted for scientific discoveries, rules and methods for intellectual
activities, methods used to diagnose or treat diseases, animal and plant breeds or substances
obtained by means of nuclear transformation. The Patent Office under the State Council is
responsible for receiving, examining and approving patent applications. A patent is valid for a
term of twenty years in the case of an invention and a term of ten years in the case of utility
models and designs. A third-party user must obtain consent or a proper license from the patent
owner to use the patent. Otherwise, the use constitutes an infringement of patent rights.
Copyright. The National Peoples Congress adopted the Copyright Law in 1990 and amended it in
2001 to widen the scope of works and rights that are eligible for copyright protection. The
amended Copyright Law extends copyright protection to Internet activities, products disseminated
over the Internet and software products. In addition, there is a voluntary registration system
administered by the China Copyright Protection Center.
To address copyright issues relating to the Internet, the PRC Supreme Peoples Court on
November 22, 2000 issued the Interpretations on Some Issues Concerning Applicable Laws for Trial of
Disputes over Internet Copyright, or the Interpretations, which were subsequently amended on
December 23, 2003 and November 20, 2006. The Interpretations establish joint liability for ICP
operators if they knowingly participate in, assist in or incite infringing activities or fail to
remove infringing content from their websites after receiving notice from the rights holder. In
addition, any act intended to bypass circumvention technologies designed to protect copyrights
constitutes copyright infringement. Upon request, the ICP operators must provide the rights holder
with registration information of the alleged violator, provided that such rights holder has
produced relevant identification, copyright certificate and evidence of infringement. An ICP
operator is exempted from any liabilities as long as it removes the alleged infringing content
after receiving the rights holders notice accompanied with proper evidence.
To address the problem of copyright infringement related to the content posted or transmitted
over the Internet, the PRC National Copyright Administration and the MII jointly promulgated the
Administrative Measures for Copyright Protection Related to the Internet on April 30, 2005. This
measure became effective on May 30, 2005.
64
This measure applies to situations where an ICP operator (i) allows another person to post or
store any works, recordings, audio or video programs on the websites operated by such ICP operator
or (ii) provides links to, or search results for, the works, recordings, audio or video programs
posted or transmitted by such person, without editing, revising or selecting the content of such
material. Upon receipt of an infringement notice from a legitimate copyright holder, an ICP
operator must take remedial actions immediately by removing or
disabling access to the infringing content. If an ICP operator knowingly transmits infringing
content or fails to take remedial actions after receipt of a notice of infringement, the ICP
operator could be subject to administrative penalties, including: cessation of infringement
activities; confiscation by the authorities of all income derived from the infringement activities;
and payment of a fine of up to three times the unlawful income or, in cases where the amount of
unlawful income cannot be determined, a fine of up to RMB100,000. An ICP operator is also required
to retain all infringement notices for a minimum of six months and to record the content, display
time and IP addresses or the domain names related to the infringement for a minimum of 60 days.
Failure to comply with this requirement could result in an administrative warning and a fine of up
to RMB30,000.
On May 18, 2006, the State Council promulgated the Protection of the Right of Communication
through Information Network, which became effective on July 1, 2006. Under this regulation, an
Internet service provider may be exempted from liabilities for providing links to infringing or
illegal content if it does not know that such content is infringing upon other parties rights or
is illegal. However, if the legitimate owner of the content notifies the Internet service provider
and requests removal of the links to the infringing content, the Internet service provider would be
deemed to have constructive knowledge upon receipt of such notification but would be exempted from
liabilities if it removes or disconnects the links to the infringing content at the request of the
legitimate owner. At the request of the alleged violator, the Internet service provider should
immediately restore links to content previously disconnected upon receipt of initial non-infringing
evidence.
We have adopted measures to mitigate copyright infringement risks. For example, our
policy is to remove links to web pages if we know these web pages contain materials that infringe
third-party rights or if we are notified by the legitimate copyright holder of the infringement
with proper evidence.
Trademark. The PRC Trademark Law, adopted in 1982 and revised in 2001, protects registered
trademarks. The Trademark Office under the SAIC handles trademark registrations and grants a term
of ten years to registered trademarks. Trademark license agreements must be filed with the
Trademark Office for record.
is recognized as a well-known trademark in China by the
Trademark Office under the SAIC. We have also applied for registration of additional trademarks
and logos with the Trademark Office, including
and
.
In September 2002, the CNNIC issued the Implementing Rules for Domain Name Registration
setting forth detailed rules for registration of domain names. On November 5, 2004, the MII
promulgated the Measures for Administration of Domain Names for the Chinese Internet, or Domain
Name Measures. The Domain Name Measures regulate the registration of domain names, such as the
first tier domain name .cn. In February 2006, CNNIC issued the Measures on Domain Name Disputes
Resolution and its implementing rules, pursuant to which CNNIC can authorize a domain name dispute
resolution institution to decide disputes. We have registered Baidu.cn, Baidu.com.cn, hao123.com
and certain other domain names with CNNIC.
65
Regulation on Information Security
The National Peoples Congress has enacted legislation that prohibits use of the Internet that
breaches the public security, disseminates socially destabilizing content or leaks state secrets.
Breach of public security includes breach of national security and infringement on legal rights and
interests of the state, society or citizens. Socially destabilizing content includes any content
that incites defiance or violations of PRC laws or regulations or subversion of the PRC government
or its political system, spreads socially disruptive rumors or involves cult activities,
superstition, obscenities, pornography, gambling or violence. State secrets are defined broadly to
include information concerning PRC national defense, state affairs and other matters as determined
by the PRC authorities.
According to other relevant regulations, ICP operators must complete mandatory security filing
procedures and regularly update information security and censorship systems for their websites with
local public security authorities, and must also report any public dissemination of prohibited
content.
In addition, the State Secrecy Bureau has issued provisions authorizing the blocking of access
to any website it deems to be leaking state secrets or failing to comply with the relevant
legislation regarding the protection of state secrets during online information distribution.
Specifically, Internet companies in China with bulletin boards, chat rooms or similar services must
apply for specific approval prior to operating such services.
On November 23, 2005, the Ministry of Public Security promulgated Provisions on Technological
Measures for Internet Security Protection, or Internet Protection Measures. The Internet Protection
Measures require all ICP operators to keep records of certain information about its users
(including user registration information, log-in and log-out time, IP address, content and time of
posts by users) for at least 60 days and submit the above information as required by laws and
regulations.
As Baidu Netcom and Beijing Perusal are ICP operators, they are subject to the regulations
relating to information security. They have taken measures to comply with such regulations. They
are registered with the relevant government authority in accordance with the mandatory registration
requirement. Baidu Netcoms policy is to remove links to web pages which to its knowledge contain
information that would be in violation of PRC laws or regulations. In addition, we monitor our
websites to ensure our compliance with such laws and regulations.
Regulations on Internet Privacy
The PRC Constitution states that PRC law protects the freedom and privacy of communications of
citizens and prohibits infringement of such rights. In recent years, PRC government authorities
have enacted legislation on Internet use to protect personal information from any unauthorized
disclosure. The Internet Measures prohibit an ICP operator from insulting or slandering a third
party or infringing upon the lawful rights and interests of a third party. Pursuant to the BBS
Measures, ICP operators that provide electronic messaging services must keep users personal
information confidential and must not disclose such personal information to any third party without
the users consent or unless required by law. The regulations further authorize the relevant
telecommunications authorities to order ICP operators to rectify unauthorized disclosure. ICP
operators are subject to legal liability if the unauthorized disclosure results in damages or
losses to users. The PRC government, however, has the power and authority to order ICP operators to turn over
personal information if an Internet user posts any prohibited content or engages in illegal
activities on the Internet.
66
Regulations on Foreign Exchange
Foreign Currency Exchange
Pursuant to the Foreign Currency Administration Rules promulgated in 1996 and amended in 1997
and various regulations issued by SAFE and other relevant PRC government authorities, RMB is freely
convertible only to the extent of current account items, such as trade related receipts and
payments, interest and dividends. Capital account items, such as direct equity investments, loans
and repatriation of investment, require prior approval from SAFE or its provincial branch for
conversion of RMB into a foreign currency, such as U.S. dollars, and remittance of the foreign
currency outside the PRC.
Payments for transactions that take place within the PRC must be made in RMB. Unless otherwise
approved, PRC companies must repatriate foreign currency payments received from abroad. Foreign
invested enterprises may retain foreign exchange in accounts with designated foreign exchange banks
subject to a cap set by SAFE or its local counterpart. Unless otherwise approved, domestic
enterprises must convert all of their foreign currency received into RMB.
Dividend Distribution
The principal regulations governing dividend distributions by wholly foreign owned enterprises
and Sino-foreign equity joint ventures include:
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Wholly Foreign Owned Enterprise Law (1986), as amended; |
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Wholly Foreign Owned Enterprise Law Implementing Rules (1990), as amended; |
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Sino-foreign Equity Joint Venture Enterprise Law (1979), as amended; |
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Sino-foreign Equity Joint Venture Enterprise Law Implementing Rules (1983), as
amended; |
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PRC Enterprise Income Tax Law (2007); and |
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Implementation Rules of the PRC Enterprise Income Tax Law (2007). |
Under these regulations, wholly foreign owned enterprises and Sino-foreign equity joint
ventures in the PRC may pay dividends only out of their accumulated profits, if any, as determined
in accordance with PRC accounting standards and regulations. Additionally, these foreign-invested
enterprises are required to set aside certain amounts of their accumulated profits each year, if
any, to fund certain reserve funds. These reserves are not distributable as cash dividends.
67
Foreign Exchange Registration of Offshore Investment by PRC Residents
Pursuant to SAFEs Notice on Relevant Issues Concerning Foreign Exchange Administration for
PRC Residents to Engage in Financing and Inbound Investment via Overseas
Special Purpose Vehicles, or Circular No. 75, issued on October 21, 2005, and its implementation
rules issued in May 2007, (i) a PRC resident, including a PRC resident natural person or a PRC
company, is required to register with the local branch of SAFE before it establishes or controls an
overseas SPV, or SPV, for the purpose of overseas equity financing (including convertible debt
financing); (ii) when a PRC resident contributes the assets of or its equity interests in a
domestic enterprise into an SPV, or engages in overseas financing after contributing assets or
equity interests into an SPV, such PRC resident shall register his or her interest in the SPV and
the change thereof with the local branch of SAFE; and (iii) when the SPV undergoes a material event
outside of China, such as change in share capital or merger and acquisition, the PRC resident must,
within 30 days from the occurrence of such event, register such change with the local branch of
SAFE. PRC residents who are shareholders of SPVs established before November 1, 2005 were required
to register with the local SAFE branch before March 31, 2006.
Under Circular No. 75, failure to comply with the registration procedures set forth above may
result in penalties, including restrictions on a PRC subsidiarys foreign exchange activities and
its ability to distribute dividends to the SPV.
On
December 25, 2006, the Peoples Bank of China promulgated
the Measures for the
Administration of Individual Foreign Exchange, and on January 5, 2007 SAFE further promulgated
the implementation rules on those measures. Both became effective on February 1, 2007. According
to the implementation rules, if individuals in the PRC participate in any employee stock ownership
plan or stock option plan of an overseas listed company, those individuals must apply as a group
through the company or a domestic agency to SAFE or the appropriate local branch for approval for
any foreign exchange-related transactions concerning that plan.
On March 28, 2007, SAFE promulgated the Application Procedure of Foreign Exchange
Administration for Domestic Individuals Participating in Employee Stock Holding Plan or Stock
Option Plan of Overseas-Listed Company. Under this rule, PRC citizens who are granted stock
options by an overseas publicly listed company are required, through a PRC agent or PRC subsidiary
of such overseas publicly-listed company, to register with SAFE and complete certain other
procedures.
Regulations on Properties
On March 16, 2007, the National Peoples Congress enacted the Property Law of the Peoples
Republic of China, or the Property Law, which became effective on October 1, 2007. The Property Law
encourages the protection of the development of non-state-owned economy and sets forth the
principles of equally protecting the legal property rights of collectives and individuals. Under
the Property Law, a construction land user may obtain such land use right through transfer or
allocation and is entitled to all of the property rights with respect to the buildings and its
accessory facilities on such land.
68
Regulations on Labor
On June 29, 2007, the Standing Committee of the National Peoples Congress of China enacted
the Labor Contract Law, which became effective on January 1, 2008. Compared to the Labor Law, the
Labor Contract Law establishes more restrictions and increases costs for employers, including
specific provisions related to fixed-term employment contracts, temporary employment, probation,
consultation with the labor union and employee
assembly, employment without a contract, dismissal of employees, compensation upon termination and
overtime work, and collective bargaining. According to the Labor Contract Law, an employer is
obliged to sign labor contract with unlimited term with an employee if the employer continues to
hire the employee after the expiration of two consecutive fixed-term labor contracts. The employer
has to compensate the employee upon the expiration of a fixed-term labor contract, unless the
employee refuses to renew such contract on terms the same as or better than those contained in the
expired contract. The employer also has to indemnify an employee if the employer terminates an
unlimited-term labor contract. In addition, under the Regulations on Paid Annual Leave for
Employees, which became effective on January 1, 2008, employees who have served more than one year
for an employer are entitled to a paid vacation ranging from 5 to 15 days, depending on their
length of service. Employees who waive such vacation time at the request of employers shall be
compensated for three times their regular salaries for each waived vacation day.
Regulations on Taxation
For a discussion of applicable PRC tax regulations, see Item 5.AOperating and Financial
Review and ProspectsOperating ResultsTaxation.
Regulations in Japan
Although current Japanese law and regulations contain no provisions expressly directed toward
legal control of Internet search services such as those operated by our Japanese subsidiary in
Japan, certain existing Japanese law and regulations may nonetheless affect such services. The
application to our Japanese subsidiary of existing Japanese law and regulations relating to issues
such as intellectual property ownership and infringement, obscenity and other content regulation,
user privacy and data protection, defamation, consumer protection and quality of services in many
instances is unclear or unsettled. In all such cases, there is a possibility that providing,
editing and processing by an Internet search service of links to web pages which contain material
in violation of applicable Japanese law could result in civil or criminal legal liability on the
part of such Internet search service. In addition to the foregoing, there is political and social
support within Japan for the adoption of legislation expressly directed to the legal control of
harmful information on the Internet. With this support, regulations concerning harmful information
on the Internet are being introduced gradually, and it is difficult to predict how much impact such
regulations will have on the operation of our Internet search services in Japan.
69
C. Organizational Structure
The following table sets out the details of our subsidiaries:
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Name |
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Country of Incorporation |
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Ownership Interest |
Baidu Online Network Technology (Beijing) Co. Ltd.
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China
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100% indirect |
Baidu (China) Co., Ltd.
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China
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100% indirect |
Baidu.com Times Technology (Beijing) Co., Ltd.
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China
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100% indirect |
Baidu, Inc.
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Japan
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100% indirect |
Baidu Holdings Limited
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British Virgin Islands
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100% direct |
Baidu (Hong Kong) Limited
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Hong Kong
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100% indirect |
PRC laws and regulations restrict foreign ownership of ICP and advertising businesses.
To comply with PRC laws, Baidu Netcom was formed by Robin Yanhong Li and Eric Yong Xu on June 5,
2001. Baidu Netcom holds the licenses and permits necessary to operate our websites and provide
our online advertising services in China. Our relationships with Baidu Netcom and its shareholders
are governed by a series of contractual arrangements. We are able to substantially control Baidu
Netcom through these contractual arrangements.
In June 2006, we assisted in establishing Beijing Perusal, which is directly owned by two
individuals designated by our company. We extended an interest-free loan in an aggregate amount of
RMB1.0 million to the shareholders of Beijing Perusal solely in connection with the initial
capitalization of Beijing Perusal. We entered into a series of agreement with Beijing Perusal and
its shareholders in order to substantially control Beijing Perusal. Beijing Perusal became our
consolidated affiliated entity as a result of these contractual arrangements. Beijing Perusal
holds the necessary permits to conduct online advertising services in China.
In February 2008, we assisted in establishing BaiduPay, which is directly owned by Baidu
Netcom and an individual designated by our company. We extended an interest-free loan in an
aggregate amount of RMB9.0 million to the individual shareholder solely in connection with the
initial capitalization of BaiduPay. We entered into a series of agreement with BaiduPay and the
individual shareholder in order to substantially control BaiduPay. BaiduPay became our
consolidated affiliated entity as a result of these contractual arrangements. BaiduPay will
operate an online payment platform.
In the opinion of Hawkhigh Law Firm, our PRC legal counsel: (1) the ownership structure of our
company, Baidu Online, Baidu China, Baidu Times, Baidu Netcom, Beijing Perusal and BaiduPay
complies with current PRC laws and regulations; (2) our contractual arrangements with Baidu Netcom,
Beijing Perusal, BaiduPay and their shareholders are valid and binding on all parties to these
arrangements and do not violate existing PRC laws or regulations; and (3) subject to the completion
of the transfers of certain trademarks from Baidu Online to Baidu Netcom, Beijing Perusal and
BaiduPay, the business operations of our company, Baidu Online, Baidu China, Baidu Times, Baidu
Netcom, Beijing Perusal and BaiduPay comply with current PRC laws and regulations.
70
D. Property, Plant and Equipment
Our principal executive offices are located on premises comprising approximately 29,600 square
meters in Beijing, China. We have regional offices in Shanghai and selected cities in Guangdong Province. In December 2006, we established an office in
Tokyo, Japan. We lease our premises from unrelated third parties. Our servers in China are hosted
at the Internet data centers of China Telecom, China Netcom and China Tietong in Beijing, Tianjin
and Shenzhen. In March 2007, we established servers at an Internet data center of Asia Network
Company in Tokyo, Japan.
In late 2005, we made an initial payment for the land use right in Beijing to build our new
corporate headquarters with total floor area of approximately 44,000 square meters. The floor area
was increased to 59,000 square meters in 2006. In anticipation of the continuing growth trend, we
plan to build a new information and technology center on the premises and move our principal
executive offices, information and technology center, online marketing services center and
administrative and support facilities to the new premises. We have obtained the necessary
governmental approvals for the proposed development and use of the land, and our new office
building is currently under construction.
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Item 4A. |
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Unresolved Staff Comments |
None.
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Item 5. |
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Operating and Financial Review and Prospects |
The following discussion of our financial condition and results of operations is based upon
and should be read in conjunction with our consolidated financial statements and their related
notes included in this annual report on Form 20-F. This report contains forward-looking
statements. See Forward-Looking Information. In evaluating our business, you should carefully
consider the information provided under the caption Item 3D. Key InformationRisk Factors in
this annual report on Form 20-F. We caution you that our businesses and financial performance are
subject to substantial risks and uncertainties.
A. Operating Results
The major factors affecting our results of operations and financial condition are discussed
below.
Revenue Composition
We derive revenues primarily from two sources:
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online marketing services, which accounted for 96.3%, 98.9% and 99.8% of our total
revenues in 2005, 2006 and 2007, respectively; and |
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other services, which accounted for 3.7%, 1.1% and 0.2% of our total revenues in
2005, 2006 and 2007, respectively. |
Online Marketing Services. We provide online marketing services to our P4P customers and tailored
solutions customers. We generated approximately 99.8% of our total revenues in 2007 from online
marketing services, a substantial majority of which was derived from our P4P services.
71
Our P4P platform is an online marketplace that introduces Internet search users to
customers who bid or pay a fixed fee based on click-throughs for priority placement of their links
in the search results. We recognize P4P revenues when a user clicks on a customers link in the
search results, based on the amount that the customer has agreed to pay for each click-through or,
in some cases, other pre-determined performance measures.
We provide tailored solutions customers with marketing solutions which may include one or more
forms of online advertising services such as text links and graphical advertisements, as well as
P4P services. Our agreements with these customers generally have a term of no more than one year.
Our tailored solutions customers generally pay us based on pre-determined performance metrics, such
as number of click-throughs, duration of placement, number of converted users and number of
telephone calls. Some of our large tailored solutions customers have increasingly used our
auction-based P4P services as one of the means to meet their online marketing needs. We expect to
continue to experience such trend in the near future.
The most significant factors that directly or indirectly affect our online marketing revenues
are:
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the number of users visiting our websites and our Baidu Union members properties; |
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the number of searches initiated on our websites and our Baidu Union members
properties; |
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the rate at which users click on paid search results; |
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the number of online marketing customers; |
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the competitiveness of bidding for keywords by P4P customers; |
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the total online marketing budgets of our customers; and |
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the total number of sponsored links and advertisements displayed on our websites and
the bidding price for click-through. |
Our P4P services revenues have primarily been driven by the increase in the number of page
views, the increase in the number of P4P customers, and by our success in optimizing the display of
sponsored links. We believe that an increase in the number of active P4P customers generally leads
to an increase in the number of sponsored links and a higher average price per click-through for
selected keywords. Our P4P customer growth has primarily been driven by the adoption of our P4P
services by SMEs and, to a lesser extent, large enterprises. Our online advertising services have
historically been driven by the general increase in our customers online marketing budgets. Most
of our tailored solutions customers are medium and large enterprises. We expect the number of our
online marketing customers to grow and, as a result, our customer mix may change. However, we
expect our online marketing customer base to remain diverse for the foreseeable future. Our online
marketing customers are increasingly seeking marketing solutions with measurable results in order
to maximize their ROI. To meet our customers needs, we will continue to evaluate the
effectiveness of our various products and services and adjust the mix of our service offerings to
optimize our customers ROI. We expect that we will continue to earn a substantial
majority of our revenues from our online marketing services. As a result, we plan to continue
focusing most of our resources on expanding our online marketing services.
72
Other Services. Prior to July 2006, our other services primarily included enterprise search
software and related services. We were subject to a PRC value added tax, or VAT, on sales of our
enterprise search software, and were eligible to receive rebates for a portion of the VAT paid by
us pursuant to applicable PRC tax regulations. We recorded revenues from our enterprise search
software and related services net of the VAT payable by us but included the amount of VAT rebates
received or receivable from the PRC tax authorities. We decided to phase out our enterprise search
software business in July 2006.
Revenue Collection
We collect payments for our P4P services both from our customers directly and through our
distributors. We have expanded our direct sales effort in several major cities in China, including
Beijing, Shanghai, Guangzhou and Shenzhen, since 2005 and, as a result, an increasing portion of
P4P payments is being collected through our direct sales. We require our P4P distributors or
direct customers to pay a deposit before using our P4P services, to maintain a minimum balance in
their accounts, and to replenish the accounts immediately or in some cases, within certain grace
periods after their account balance falls below the designated amount. We deduct the amount due to
us from the deposit paid by a distributor or a customer when a user clicks on the customers link
in the search results.
We offer payment terms to our tailored solutions and online-marketing services customers and
longer payment terms to certain qualified agents, consistent with industry practice.
We generally require two installment payments from customers of our other services within 30
days of the signing of a contract and the delivery of our products or services, respectively.
As of December 31, 2007, we had accounts receivable of RMB64.3 million (US$8.8 million), net
of provisions of RMB3.6 million (US$0.5 million), mainly due from customers of our online
advertising services.
Operating Costs and Expenses
Our operating costs and expenses consist of cost of revenues, selling, general and
administrative expenses, and research and development expenses. Share-based compensation expenses
are allocated among the above three categories of operating costs and expenses, based on the nature
of the work of the employees who have received share-based compensation. Costs and expenses
related to our Japan operations, which started in December 2006, are included in our cost of
revenues and selling, general and administrative expenses. If we excluded the costs and expenses
related to our Japan operations, our total operating costs and expenses have declined as a
percentage of our total revenues from 2005 to 2007 largely due to economies of scale and the
revenue growth we have achieved.
Cost of Revenues
The following table sets forth the components of our cost of revenues both in absolute amount
and as a percentage of total revenues for the periods indicated.
73
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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For the Year Ended December 31, |
(in thousands, except percentages) |
|
2005 |
|
2006 |
|
2007 |
|
|
RMB |
|
% |
|
RMB |
|
% |
|
RMB |
|
US$ |
|
% |
Total revenues |
|
|
319,215 |
|
|
|
100.0 |
|
|
|
837,838 |
|
|
|
100.0 |
|
|
|
1,744,425 |
|
|
|
239,140 |
|
|
|
100.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Business tax and surcharges |
|
|
(20,770 |
) |
|
|
6.5 |
|
|
|
(51,833 |
) |
|
|
6.2 |
|
|
|
(108,783 |
) |
|
|
(14,913 |
) |
|
|
6.2 |
|
Traffic acquisition costs |
|
|
(21,212 |
) |
|
|
6.6 |
|
|
|
(75,180 |
) |
|
|
9.0 |
|
|
|
(204,693 |
) |
|
|
(28,061 |
) |
|
|
11.7 |
|
Bandwidth costs |
|
|
(21,274 |
) |
|
|
6.7 |
|
|
|
(40,005 |
) |
|
|
4.8 |
|
|
|
(117,554 |
) |
|
|
(16,115 |
) |
|
|
6.8 |
|
Depreciation of servers and other
equipment |
|
|
(25,259 |
) |
|
|
7.9 |
|
|
|
(51,574 |
) |
|
|
6.1 |
|
|
|
(147,115 |
) |
|
|
(20,168 |
) |
|
|
8.4 |
|
Operational expenses |
|
|
(14,912 |
) |
|
|
4.7 |
|
|
|
(25,481 |
) |
|
|
3.0 |
|
|
|
(65,544 |
) |
|
|
(8,985 |
) |
|
|
3.8 |
|
Share-based compensation expenses |
|
|
(974 |
) |
|
|
0.3 |
|
|
|
(1,416 |
) |
|
|
0.2 |
|
|
|
(1,717 |
) |
|
|
(235 |
) |
|
|
0.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenues |
|
|
(104,401 |
) |
|
|
32.7 |
|
|
|
(245,489 |
) |
|
|
29.3 |
|
|
|
(645,406 |
) |
|
|
(88,477 |
) |
|
|
37.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Traffic Acquisition Costs. Traffic acquisition costs represent the portion of our online
marketing revenues that we share with our Baidu Union members. We typically pay a Baidu Union
member, based on a pre-agreed arrangement, a portion of the online marketing revenues generated
from click-throughs by users of that members properties. We expect our traffic acquisition costs
to increase as we further expand our Baidu Union network.
Bandwidth Costs. Bandwidth costs are the fees we pay to China Telecom and China Netcom for
telecommunications services and for hosting our servers at their Internet data centers. We expect
our bandwidth costs, as variable costs, to increase with the traffic on our websites. Our
bandwidth costs could also increase if China Telecom and China Netcom were to raise their service
charges.
Depreciation of Servers and Other Equipment. We include depreciation expenses within our cost
of revenues for servers and other computer hardware that are directly related to our business
operations and technical support. We expect our depreciation expenses to increase as we purchase
additional servers and other computer hardware to meet the needs of our users and customers.
Operational Expenses. Operational expenses include primarily salary and benefits expenses and
travel and other expenses incurred by our operating and technical support personnel. Salary and
benefits expenses include wages, bonuses, and medical insurance, unemployment insurance and pension
benefits.
Operating Expenses
The following table sets forth the components of our operating expenses both in absolute
amount and as a percentage of total revenues for the periods indicated.
74
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|
|
|
|
|
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|
For the Year Ended December 31, |
(in thousands, except percentages) |
|
2005 |
|
2006 |
|
2007 |
|
|
RMB |
|
% |
|
RMB |
|
% |
|
RMB |
|
US$ |
|
% |
Total revenues |
|
|
319,215 |
|
|
|
100.0 |
|
|
|
837,838 |
|
|
|
100.0 |
|
|
|
1,744,425 |
|
|
|
239,140 |
|
|
|
100.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues |
|
|
(104,401 |
) |
|
|
32.7 |
|
|
|
(245,489 |
) |
|
|
29.3 |
|
|
|
(645,406 |
) |
|
|
(88,477 |
) |
|
|
37.0 |
|
Selling, general and administrative |
|
|
(134,771 |
) |
|
|
42.3 |
|
|
|
(250,240 |
) |
|
|
29.9 |
|
|
|
(411,163 |
) |
|
|
(56,366 |
) |
|
|
23.6 |
|
Selling and marketing |
|
|
(76,173 |
) |
|
|
23.9 |
|
|
|
(149,856 |
) |
|
|
17.9 |
|
|
|
(275,283 |
) |
|
|
(37,738 |
) |
|
|
15.8 |
|
General and administrative |
|
|
(58,598 |
) |
|
|
18.4 |
|
|
|
(100,384 |
) |
|
|
12.0 |
|
|
|
(135,880 |
) |
|
|
(18,628 |
) |
|
|
7.8 |
|
Research and development |
|
|
(44,200 |
) |
|
|
13.8 |
|
|
|
(79,231 |
) |
|
|
9.4 |
|
|
|
(140,702 |
) |
|
|
(19,289 |
) |
|
|
8.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and operating expenses |
|
|
(283,372 |
) |
|
|
88.8 |
|
|
|
(574,960 |
) |
|
|
68.6 |
|
|
|
(1,197,271 |
) |
|
|
(164,132 |
) |
|
|
68.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, General and Administrative Expenses
(1) Selling and Marketing Expenses. Our selling and marketing expenses primarily consist of
salaries and benefits and commissions for our sales and marketing personnel and promotional and
marketing expenses. We expect to incur higher selling and marketing expenses as we intensify our
brand-promotion efforts and hire additional sales and marketing personnel. To the extent that our
direct sales force sells a greater proportion of our online marketing services, we expect that our
selling expense will increase as a result of increased sales commissions. We expect that our
selling and marketing expenses will increase in absolute amount and may increase as a percentage of
our total revenues in the near term.
(2) General and Administrative Expenses. Our general and administrative expenses primarily
consist of salaries and benefits for our general and administrative personnel and fees and expenses
for legal, accounting and other professional services. We expect to incur additional general and
administrative expenses as we expand our operations.
Research and Development Expenses
Research and development expenses primarily consist of salaries and benefits for research and
development personnel. We expense research and development costs as they are incurred, except for
capitalized software development costs that fulfill the capitalization criteria under SOP 98-1,
Accounting for the Costs of Computer Software Developed or Obtained for Internal Use. We
anticipate that research and development expenses will increase as we hire additional research and
development personnel to further enhance our technology platform and meet the expected growth of
our operations.
Share-based Compensation Expenses
Effective from January 1, 2006, we have adopted Statement of Financial Accounting Standards
123 (revised 2004), Share-Based Payment, or SFAS 123R, using the modified prospective transition
approach. Prior to January 1, 2006, we accounted for share-based compensation arrangements with
employees in accordance with the provisions of Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees, or APB 25, and related interpretations thereof. Pursuant
to SFAS 123R, we recognized share-based compensation over the requisite service periods for any
share-based awards granted after December 31, 2005 based on the fair values of all share-based
awards on the dates of grant. We continue to account for share options that were granted prior to the initial public filing
of our registration statement on Form F-1 with the SEC on July 12, 2005 but that remained unvested
at December 31, 2005 under APB 25. For share-based awards granted after the initial public filing
of our registration statement on Form F-1 but prior to January 1, 2006, the compensation cost
related to the unvested portion is recognized based on the fair value of those awards on their
respective date of grant. Such costs are recognized upon the adoption of SFAS 123R on January 1,
2006.
75
In addition to options, we started to use restricted shares as another type of share-based
awards to employees in 2006. As of December 31, 2007, there was RMB51.4 million (US$7.1
million) unrecognized share-based compensation cost related to restricted shares. That deferred
cost is expected to be recognized over a weighted-average vesting period of 1.35 years. To the
extent the actual forfeiture rate is different from our original estimate, actual share-based
compensation cost related to these awards may be different from our expectation.
We also granted options to consultants and accounted for such options under the fair value
method. We amortize share-based compensation expenses over the vesting periods of the related
options, which are generally four years long.
The following table sets forth the allocation of our share-based compensation expenses both in
absolute amount and as a percentage of total share-based compensation expenses among our employees
based on the nature of work which they were assigned to perform.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31, |
(in thousand) |
|
2005 |
|
2006 |
|
2007 |
|
|
RMB |
|
% |
|
RMB |
|
% |
|
RMB |
|
US$ |
|
% |
Allocation of Share-based
Compensation Expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues |
|
|
974 |
|
|
|
2.9 |
|
|
|
1,416 |
|
|
|
2.9 |
|
|
|
1,717 |
|
|
|
235 |
|
|
|
4.3 |
|
Selling, general and administrative |
|
|
22,804 |
|
|
|
67.9 |
|
|
|
32,970 |
|
|
|
68.3 |
|
|
|
17,371 |
|
|
|
2,382 |
|
|
|
43.6 |
|
Research and development |
|
|
9,793 |
|
|
|
29.2 |
|
|
|
13,894 |
|
|
|
28.8 |
|
|
|
20,760 |
|
|
|
2,846 |
|
|
|
52.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total share-based compensation expenses |
|
|
33,571 |
|
|
|
100.0 |
|
|
|
48,280 |
|
|
|
100.0 |
|
|
|
39,848 |
|
|
|
5,463 |
|
|
|
100.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxation
Because we, our subsidiaries and affiliated entities are incorporated in different
jurisdictions, we file separate income tax returns.
Under the current laws of the Cayman Islands and the British Virgin Islands, we and Baidu
Holdings Limited are not subject to income or capital gains tax. Additionally, dividend payments
made by any of these companies are not subject to withholding tax in those jurisdictions.
PRC Enterprise Income Tax
Pursuant to the applicable PRC tax laws and regulations effective before January 1, 2008,
foreign-invested enterprises established in China were generally subject to a state and local
enterprise income tax, or EIT, at statutory rates of 30% and 3%, respectively. An
enterprise qualified as a high and new technology enterprise and located in a national
high-tech development zone was entitled to a preferential EIT rate of 15% and an exemption from
the EIT for two years starting from its first profitable year. In addition, an enterprise
qualified as a high and new technology enterprise located in the Beijing New Technology Industry
Development Zone was entitled to a preferential EIT rate of 15% and would enjoy an exemption from
the EIT for the first three years of its establishment and a 50% reduction of the EIT for the
succeeding three years.
76
Under the applicable PRC tax laws and regulations effective before January 1, 2008, Baidu
Online was qualified as a high and new technology enterprise. It was thus entitled to a
preferential EIT rate of 15%. In 2006, Baidu Online obtained an advanced technology enterprise
certificate from the Beijing Municipal Bureau of Commerce, which qualified Baidu Online for a 10%
EIT rate from 2006 to 2008. Similarly, Baidu Times, which was also a certified foreign-invested
high and new technology enterprise located in Beijing Zhongguancun Science Park (part of the
Beijing New Technology Industry Development Zone), was entitled to a three-year exemption from EIT
from 2006 to 2008 and a 7.5% EIT rate for another three years from 2009 to 2011, followed by a 15%
tax rate so long as it continued to qualify as a high and new technology enterprise. Baidu China
was registered in the Shanghai Pudong New Area and thus was subject to a 15% EIT rate. Moreover,
Baidu China was granted software enterprise status by the Shanghai Municipal Information
Commission in 2006 and thus was entitled to a full exemption from EIT from 2006 to 2007 and a 50%
tax reduction from 2008 to 2010.
On March 16, 2007, the National Peoples Congress of China enacted the Enterprise Income Tax
Law, or the EIT Law, which became effective on January 1, 2008. On December 6, 2007, the State
Council issued the Implementation Rules of the Enterprise Income Tax Law, or the Implementation
Rules, which also became effective on January 1, 2008. On December 26, 2007, the State Council
issued the Notice on Implementation of Enterprise Income Tax Transition Preferential Policy under
the EIT Law, or the Transition Preferential Policy Circular, which became effective simultaneously
with the EIT Law.
According to the EIT Law, as further clarified by the Implementation Rules and the Transition
Preferential Policy Circular, FIEs and domestic enterprises are subject to EIT at a uniform rate of
25%. The EIT rate of enterprises established before March 16, 2007 that were eligible for
preferential tax treatment according to then effective tax laws and regulations will gradually
transition to the uniform 25% EIT rate by January 1, 2013. In addition, certain enterprises may
still benefit from a preferential tax rate of 15% under the EIT Law if they qualify as high and
new technology enterprises strongly supported by the State, subject to certain general factors
described therein.
Under the Notice on Several Preferential Policies in Respect of Enterprise Income Tax
promulgated jointly by the Ministry of Finance and the State Administration of Taxation on February
22, 2008, or the Caishui No. 1 Notice, other than the preferential EIT treatments specified under
the EIT Law, the Implementation Rules and certain other tax regulations, all preferential EIT
treatments granted prior to January 1, 2008 are eliminated. Accordingly, the preferential tax
treatments granted to Baidu Online as an advanced technology enterprise have been eliminated as
of January 1, 2008. However, there is still uncertainty as to how software enterprises established
before January 1, 2008 will be treated under the EIT Law and related regulations. We are waiting
for further official clarifications to determine Baidu Chinas tax status.
77
On April 14, 2008, the Ministry of Science and Technology, the Ministry of Finance and the
State Administration of Taxation jointly issued the Administrative Measures on the Recognition of
High and New Technology Enterprises, or the Recognition Rules, effective on January 1, 2008.
According to the Recognition Rules, the provincial counterparts of the Ministry of Science and
Technology, the Ministry of Finance and the State Administration of Taxation shall jointly
determine whether an enterprise is qualified as a high and new technology enterprise under the EIT
Law. In making such determination, these government agencies shall consider, among other factors,
ownership of core technology, whether the products or services fall within the scope of high and
new technology strongly supported by the state as specified in the Recognition Rules, the ratios of
technical personnel and research and development (R&D) personnel to total personnel, the ratio of
R&D expenditures to annual sales revenues, the ratio of revenues attributed to high and new
technology products or services to total revenues, and other measures that will be set forth in a
guidance to be issued later. We are waiting for additional official guidance to determine whether
Baidu Online and Baidu Times will continue to be qualified as a high and new technology enterprise
under the EIT Law and therefore entitled to the preferential tax rate and, in the case of Baidu
Times, the remaining tax holidays granted under the previously effective tax laws and regulations.
Meanwhile, in accordance with the Notice on Prepayment of the Enterprise Income Tax issued by the
State Administration of Taxation on January 30, 2008, Baidu Online has started making prepayment of
the EIT at the rate of 25%.
In addition, under the EIT Law and the Implementation Rules, dividends, interests, rent or
royalties payable by an FIE, such as our PRC subsidiaries, to any of its foreign non-resident
enterprise investors, and proceeds of the disposition of assets (subsequent to deduction of the net
value of such assets) by such foreign enterprise investor, shall be subject to a 10% withholding
tax unless such foreign enterprise investors jurisdiction of incorporation has a tax treaty with
China that provides for a reduced rate of withholding. The Caishui No. 1 Notice issued on February
22, 2008 further clarifies that undistributed profits earned by FIEs prior to January 1, 2008 will
be exempted from any withholding tax. The British Virgin Islands, where our wholly-owned
subsidiary Baidu Holdings, which is the sole shareholder of our PRC subsidiary Baidu Online, is
incorporated, does not have such a tax treaty with China. Baidu Hong Kong, our wholly-owned
subsidiary and the sole shareholder of our PRC subsidiaries Baidu China and Baidu Times, was
incorporated in Hong Kong, which has a tax treaty with China that provides for a lower withholding
tax rate of 5%.
An increase in Baidu Onlines, Baidu Times or Baidu Chinas EIT rate pursuant to the new PRC
tax law or the imposition of PRC withholding tax on dividends from such PRC operating subsidiaries
would have a material adverse effect on our results of operations.
Under the EIT Law and the Implementation Rules, an enterprise established outside of the PRC
with de facto management bodies within the PRC is considered a resident enterprise and will be
subject to the EIT at the rate of 25% on its worldwide income payable to the tax authority where
such de facto management bodies locate. The Implementation Rules define the term de facto
management bodies as establishments that carry out substantial and overall management and control
over the manufacturing and business operations, personnel, accounting, properties, etc. of an
enterprise. If we are deemed a resident enterprise, we may be subject to the EIT at 25% on our
global income, except that the dividends we receive from our PRC subsidiary may be exempt from the
EIT to the extent such dividends are deemed dividends among qualified resident enterprises. If
we are considered a resident enterprise and earn income other than dividends from our PRC
subsidiaries, a 25% EIT on our global income could significantly increase our tax burden and
materially and adversely affect our cash flow and profitability.
78
The EIT Law and the Implementation Rules have made an effort to scrutinize transactions
between related parties. Pursuant to the EIT Law and the Implementation Rules, the tax authorities
may impose mandatory adjustment on tax due to the extent a related party transaction is not in line
with arms-length principle or was entered into with a purpose to reduce, exempt or delay the
payment of tax. We expect more detailed rules applicable to transactions between related parties
will be issued by PRC tax authorities in the future. Accordingly, we will assess the impact of
such rules after its issuance.
If Baidu Online, Baidu Times or Baidu China no longer qualifies for the preferential tax
treatment, we will consider available options under applicable law that would enable us to qualify
for further preferential tax treatment. To the extent we are unable to offset the impact of the
expiration of Baidu Onlines, Baidu Times or Baidu Chinas preferential tax treatment with new tax
exemptions, tax incentives or other tax benefits, the expiration of their preferential tax
treatment may cause our effective tax rate to increase. The amount of income tax payable by our
PRC subsidiaries in the future will depend on various factors, including, among other things, the
results of operations and taxable income of, and the statutory tax rate applicable to, each of the
subsidiaries. Our effective tax rate depends partially on the extent of the relative contribution
of each of our subsidiaries to our consolidated taxable income. In 2006 and 2007, our consolidated
effective tax rate was 4.0% and -2.1%, respectively.
If P4P were classified as a form of advertising in the future, we may have to conduct our P4P
business through Baidu Netcom in order to comply with PRC laws and regulations that limit foreign
ownership of online advertising companies. As a result, our consolidated effective tax rate would
increase, as Baidu Netcom is subject to a 25% statutory enterprise income tax rate as of the date
of this annual report.
PRC Business Tax
Revenues from services provided by Baidu Online, Baidu China, Baidu Times, Baidu Netcom and
Beijing Perusal are subject to a 5% PRC business tax. We pay business tax on the revenues
generated from our online marketing services and other taxable services.
PRC VAT
Other than providing online marketing services, Baidu Online sold proprietary software before
July 2006, which was subject to PRC VAT at a rate of 17% of sales price. Baidu Online obtained an
approval from the relevant tax authority to receive VAT refund at a rate of 14% of sales price from
May 2001 to April 2006 and obtained a renewed approval in June 2006. Accordingly, the effective
VAT rate on software sales was 3% during the period. In July 2006, we decided to phase out the
enterprise search software business. When the phase-out of this business is completed, Baidu
Online will no longer be subject to the VAT relating to software sales.
79
Critical Accounting Policies
We prepare financial statements in accordance with U.S. GAAP, which requires us to make
judgments, estimates and assumptions that affect the reported amounts of our assets and liabilities
and the disclosure of our contingent assets and liabilities at the end of each fiscal
period and the reported amounts of revenues and expenses during each fiscal period. We
continually evaluate these judgments and estimates based on our own historical experience,
knowledge and assessment of current business and other conditions, our expectations regarding the
future based on available information and assumptions that we believe to be reasonable, which
together form our basis for making judgments about matters that are not readily apparent from other
sources. Since the use of estimates is an integral component of the financial reporting process,
our actual results could differ from those estimates. Some of our accounting policies require a
higher degree of judgment than others in their application.
The selection of critical accounting policies, the judgments and other uncertainties affecting
application of those policies and the sensitivity of reported results to changes in conditions and
assumptions are factors that should be considered when reviewing our financial statements. We
believe the following accounting policies involve the most significant judgments and estimates used
in the preparation of our financial statements.
Revenue Recognition
We recognize revenues based on the following principles:
Online Marketing Services
(1) Auction-based P4P Services
Our auction-based P4P platform enables a customer to place its website link and related
description on our search result list. The customers make bids to determine how much they are
willing to pay for each click to their listings in the search results listed on our website. The
amount of the customers bid will influence the ranking of the customers listing in the search
results. The customer pays us only when a user clicks on one of its website links. Revenue is
recognized when a user clicks on one of the customer-sponsored website links, there is persuasive
evidence of an arrangement, the fee is fixed or determinable and collection is reasonably assured,
as prescribed by SEC Staff Accounting Bulletin No. 104, or SAB 104.
For certain P4P customers engaged through direct sales, we may provide certain value-added
consultative services to help our customers better utilize its P4P online marketing system. Fees
for such services are recognized as revenue on a pro-rata basis over the contracted service period.
(2) Other Performance-based Online Marketing Services
To the extent we provide online marketing services based on performance criteria other than
click-throughs, such as the number of telephone calls brought to our customers, the number of users
registered with our customers, or the minimum number of click-throughs, revenue is recognized when
the specified performance criteria are met together with satisfaction of other applicable revenue
recognition criteria as prescribed by SAB 104.
(3) Time-based Online Advertising Services
For time-based online advertising services such as text links, banners or other forms of
graphical advertisements, we recognize revenue, in accordance with SAB 104, on a pro-rata basis
over the contractual term commencing on the date the customers advertisement is displayed in a
specified webpage. For certain time-based contractual arrangements, we may
also provide certain performance guarantees, in which cases revenue is recognized at the later
of the completion of the time commitment or performance guarantee.
80
(4) Online Marketing Services Involving Baidu Union
Baidu Union is the program through which we expand distribution of our customers sponsored
links or advertisements by leveraging traffic of the Baidu Union members Internet properties. We
make payments to Baidu Union members for acquisition of traffic. We recognize gross revenue for
the amount of fees we receive from our customers. Payments made to Baidu Union members are
included in cost of revenues as traffic acquisition costs.
(5) Barter Transactions
We may engage in barter transactions from time to time and adopted the provisions of
Accounting Principles Board No. 29, Accounting for Nonmonetary Transactions. While nonmonetary
transactions are generally recorded at fair value, if such value is not determinable within
reasonable limits, we recognize the transaction based on the carrying value of the product or
services we provide. The amount of revenues recognized for barter transactions was insignificant
for each of the periods presented.
In addition, we recognized revenues for barter transactions involving advertising in
accordance with Emerging Issues Task Force, or EITF 99-17, Accounting for Advertising Barter
Transactions. However, neither the amount recognized nor the volume of such transactions not
qualified for income recognition was material.
According to EITF 00-8, Accounting by a Grantee for an Equity Instrument to Be Received in
Conjunction with Providing Goods or Services, if we provide services in exchange for equity
instruments, we are required to measure the fair value of those equity instruments for revenue
recognition purposes as of the earlier of either of the following dates:
|
|
|
The date the parties come to a mutual understanding of the terms of the equity-based
compensation arrangement and a commitment for performance by us to earn the equity
instruments is reached; or |
|
|
|
|
The date at which our performance necessary to earn the equity instruments is
completed. |
If as of the measurement date, the fair value of the equity instruments received is not
determinable within reasonable limits, the transaction is recognized based on the fair value of the
services provided. If the fair value of both the equity instruments received and the services
provided cannot be determined, no revenue is to be recognized for the services provided and the
equity instrument received is to be recorded at zero carrying value. The amount of revenues
recognized for such transactions was not material for any of the years presented.
(6) Other Revenue Recognition Related Policies
If a sales contract stipulates more than one of the services described in (1), (2) and (3),
and the services are considered as multiple accounting units in accordance with EITF 00-21, Revenue
Arrangements with Multiple Deliverables, the total revenue on such arrangements is allocated to the
individual deliverables based on their relative fair values. If sufficient vendor-specific
objective evidence of fair value does not exist for the allocation of revenue,
the fee for the entire arrangement is recognized ratably over the term of the arrangement.
81
We engage third party distributors to deliver some of our online marketing services to end
customers. In this context, we may provide cash incentives to distributors. The cash incentives are
accounted for as a reduction of revenue in accordance with EITF 01-9, Accounting for Consideration
Given by a Vendor to a Customer (Including a Reseller of the Vendors Products).
Cash received in advance from customers is recorded as customer deposits. The unused cash
balances remaining in customers accounts are included as a liability of our company. Deferred
revenue is recorded when the services are provided before obtaining persuasive evidence.
Other Services
We generate fees from the sale and license of our enterprise search products, which includes
software and post-sale support. We recognize revenue in accordance with Statement of Position
97-2, Software Revenue Recognition, as amended. For transactions in which the elements are not
sold separately, sufficient vendor-specific objective evidence of fair value does not exist for the
allocation of revenue. As a result, commencing with the delivery of the hardware and software, the
fee for the entire arrangement is recognized ratably over the term of the post-contract support
arrangement.
Revenue is recognized net of VAT payable to, but includes the benefit of the rebate of VAT on
sale of enterprise search software received or receivable from, the relevant PRC tax authorities as
part of the PRC governments policy of encouraging software development in the PRC. Sales of
products in the PRC are subject to a 17% VAT. Companies that fulfill certain criteria set by the
relevant authorities are entitled to a refund of VAT equivalent to the excess over 3% of contracted
amount paid in the month when output VAT (which is the amount of VAT a company collects for sale of
its products) exceeds input VAT (which is the amount of VAT a company pays in connection with its
purchases). Such VAT rebates are recorded on an accrual basis.
Cost of Revenues
Cost of revenues consists primarily of business taxes and surcharges, traffic acquisition
costs, bandwidth costs, depreciation, payroll and related costs of operations.
We incur business taxes and surcharges in connection with the provision of online marketing
services, technical and consulting services by Baidu Online to our consolidated affiliated
entities, and other taxable services in China. According to EITF 06-3, How Taxes Collected from
Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement, we
included the business tax and surcharges incurred on our online marketing revenues in our cost of
revenues. Traffic acquisition costs represent the amounts paid or payable to Baidu Union members
from which we generate revenues. These payments are primarily based on revenue sharing
arrangements under which we pay our Baidu Union members a percentage of the fees we earn from our
online marketing customers, primarily generated by click-throughs by users of our Baidu Union
members properties.
82
Share-based Compensation Expenses
Our share-based compensation plan is described in more detail under Item 6B. Directors,
Senior Management and EmployeesCompensation of Directors and Executive Officers. We adopted
SFAS 123R using the modified prospective transition approach from January 1, 2006. Prior to
January 1, 2006, we accounted for share-based compensation arrangements with employees in
accordance with the provisions of APB 25 and related interpretations thereof. Pursuant to SFAS
123R, we recognized share-based compensation over the requisite service periods for any share
option and restricted share granted after December 31, 2005 based on the fair value of the share
option and restricted share on the date of grant. We continue to account for share options that
had been granted prior to the initial public filing of our registration statement on Form F-1 with
the SEC on July 12, 2005 and that remained unvested at December 31, 2005 under APB 25. For
share-based awards granted after the initial public filing of our registration statement on Form
F-1 but prior to January 1, 2006, the unvested compensation cost at the effective date of adoption
of SFAS 123R is computed based on the grant date fair values of those awards.
We recognize share-based compensation after the date of adoption of SFAS 123R using the
accelerated method for all share-based awards issued prior to January 1, 2006, other than those
options accounted for under APB 25. We have elected to recognize share-based compensation after
the date of adoption of SFAS 123R using the straight-line method for all share-based awards issued
after January 1, 2006, which results in the recognition of less share-based compensation in the
first several years during the vesting period compared to that which would have been recognized had
we used the accelerated method. Forfeitures were estimated based on historical experience and are
periodically reviewed.
We account for share awards issued to non-employees in accordance with the provisions of SFAS
123R and EITF 96-18, Accounting for Equity Instruments That Are Issued to Other Than Employees for
Acquiring, or in Conjunction with Selling, Goods or Services. Under SFAS 123R and EITF 96-18, we
use the Black-Scholes option pricing model method to measure the value of options granted to
non-employees at each vesting date to determine the appropriate charge to share-based compensation.
Income Taxes
We recognize income taxes under the liability method. Deferred income taxes are recognized for
differences between the financial reporting and tax bases of assets and liabilities at enacted tax
rates in effect for the years in which the differences are expected to reverse. We record a
valuation allowance against the amount of deferred tax assets that it determines is not more likely
than not of being realized. The effect on deferred taxes of a change in tax rates is recognized in
income in the period that includes the enactment date.
We adopted the provisions of Financial Accounting Standard Board, or FASB, Interpretation No.
48, Accounting for Uncertainty in Income Taxes an interpretation of
FASB Statement No. 109, or FIN 48, on January 1, 2007. FIN 48 clarified the accounting for
uncertainty for treatment of income taxes by prescribing the recognition threshold a tax position
is required to meet before being recognized in the financial statements. FIN 48 contains a
two-step approach to recognizing and measuring uncertain tax positions accounted for in accordance
with SFAS No. 109, Accounting for Income Taxes. The first step is to evaluate the tax position for
recognition by determining if the weight of available evidence indicates that it is more likely
than not that the position will be sustained on audit, including resolution of related appeals or
litigation processes, if any. The second step is to measure the tax benefit as the largest amount
that is more than 50% likely of being realized upon settlement. The cumulative effects of applying
FIN 48 is recorded as an adjustment to retained earnings as of the beginning of the period of
adoption. We did not incur a cumulative effect adjustment upon adoption, nor did the standard have
any impact on our financial statements for the year ended December 31, 2007. We have elected to
classify interest and penalties related to an uncertain tax position, if and when required, as part
of income tax expense in the consolidated statements of operations.
83
In general, tax filings within the last five years are subject to examination by the PRC and
Japanese tax authorities. Accordingly, our PRC subsidiaries and affiliated entities tax filings
for the tax years 2003 to 2007 and our Japanese subsidiarys tax filings for the tax years 2006 to
2007 remain open to examination by the respective taxing jurisdictions.
Consolidation of Variable Interest Entities
PRC law currently limits foreign ownership of companies that provide Internet content and
advertising services. To comply with these foreign ownership restrictions, we operate our websites
and provide online advertising services in China through affiliated PRC companies wholly-owned by
PRC citizens. These affiliated PRC companies hold the licenses and approvals necessary to operate
our websites and to provide online advertising services in China. We have contractual arrangements
with these companies and their shareholders pursuant to which we provide technology consulting
services and license certain software products and registered trademarks to them. Through these
contractual arrangements, we also have the ability to substantially influence their daily
operations and financial affairs, appoint their senior executives and approve all matters requiring
shareholder approval. As a result of these contractual arrangements, which enable us to control
these affiliated PRC companies, we are considered the primary beneficiary of these companies.
Accordingly, we regard each of these affiliated PRC companies as a Variable Interest Entity under
FASB Interpretation No. 46R, Consolidation of Variable Interest Entities, an Interpretation of ARB
No. 51, or FIN 46R, and we consolidate the results, assets and liabilities of these companies in
our consolidated financial statements.
Goodwill and Intangible Assets
Goodwill represents the excess of the purchase price over the fair value of the identifiable
net assets acquired. Goodwill is tested for impairment annually or more
frequently if events or changes in circumstances indicate that it might be impaired. We
assess goodwill for impairment at the reporting unit level.
We carry intangible assets at cost less accumulated amortization. Intangible assets with a
finite useful life are amortized using the straight-line method over the estimated economic life of
the intangible assets, as follows:
|
|
|
Domain name |
|
5 years |
Customer relationships |
|
4.9 years |
Non-competition agreement |
|
4 years |
Software |
|
9.8 years |
Contract-based assets |
|
2.4 years |
84
Intangible assets with an indefinite useful life are not amortized. In accordance with this
policy, one of the domain name assets, which was acquired in July 2006, is not subject to
amortization, as the remaining useful life is indefinite. If the intangible asset that is not
being amortized is subsequently determined to have a finite useful life, the asset will be tested
for impairment and then amortized prospectively over its estimated remaining useful life and
accounted for in the same manner as other intangible assets that are subject to amortization.
Intangible assets with indefinite useful lives are tested for impairment annually or more
frequently if events or changes in circumstances indicate that they might be impaired.
We review and adjust the carrying value of the intangible assets if the facts and
circumstances suggest the intangible assets may be impaired. We assessed and concluded that there
was no impairment for goodwill and intangible assets in any of the years presented in this annual
report.
Allowance for Doubtful Accounts
Accounts receivable are recognized and carried at original invoiced amount less an allowance
for any potential uncollectible amounts. An estimate for doubtful debts is made when collection of
the full amount is no longer probable. Bad debts are written off as incurred. We generally do not
require collateral from our customers.
We maintain allowances for doubtful accounts for estimated losses resulting from the failure
of customers to make payments on time. We review the accounts receivable on a periodic basis and
make general and specific allowances when there is doubt as to the collectibility of individual
balances. In evaluating the collectibility of individual receivable balances, we consider many
factors, including the age of the balance, the customers past payment history, its current
credit-worthiness and current economic trends.
Impairment of Long-Lived Assets
We evaluate long-lived assets, such as property and equipment and purchased or internally
developed intangible assets with finite lives, for impairment whenever events or changes in
circumstances indicate the carrying value of an asset may not be
recoverable in accordance with SFAS No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets. We assess the recoverability of an asset group based on the undiscounted future
cash flows the asset group is expected to generate and recognize an impairment loss when the
estimated undiscounted future cash flows expected to result from the use of the asset group plus
net proceeds expected from the disposition of the asset group, if any, are less than the carrying
value of the asset group. If we identify an impairment, we reduce the carrying amount of the asset
group to its estimated fair value based on a discounted cash flow approach or, when available and
appropriate, to comparable market values. We use estimates and judgments in our impairment tests
and if different estimates or judgments had been utilized, the timing or the amount of any
impairment charges could be different. Asset groups to be disposed of would be reported at the
lower of the carrying amount or fair value less costs to sell, and would no longer be depreciated.
The assets and liabilities of a disposal group classified as held for sale would be presented
separately in the appropriate asset and liability sections of the balance sheet. There has been no
impairment charges of our long-lived assets in any of the years presented.
85
Impairment of Goodwill
We assess goodwill for impairment in accordance with SFAS No. 142, Goodwill and Other
Intangible Assets, which requires that goodwill be tested for impairment at the reporting unit
level (Reporting Unit) at least annually and more frequently upon the occurrence of certain
events, as defined by SFAS No. 142. Consistent with our determination that we have only one
reporting segment, we have determined that there is only one reporting unit. Goodwill was tested
for impairment in the annual impairment tests on December 31 in each of the years 2005, 2006, and
2007 using the two-step process required by SFAS No. 142. First, we reviewed the carrying amount
of the Reporting Unit compared to the fair value of the Reporting Unit based on quoted market
prices of our ordinary shares. If such comparison reflected potential impairment, we would then
prepare the discounted cash flow analyses. Such analyses are based on cash flow assumptions that
are consistent with the plans and estimates being used to manage the business. An excess of the
carrying value of the goodwill over the fair value of the goodwill would indicate that the goodwill
may be impaired. Finally, if we determined that goodwill may be impaired, the implied fair value
of the goodwill, as defined by SFAS No. 142, would be compared to its carrying amount to determine
the impairment loss, if any. There has been no impairment of goodwill in any of the years
presented.
Cash, Cash Equivalents and Short-term Investments
Cash and cash equivalents stated at cost, which approximates fair value, primarily consist of
cash and investments in interest bearing demand deposit accounts, liquidity funds and money market
funds. All highly liquid investments with stated maturities of three months or less from the date
of purchase are classified as cash equivalents; all highly liquid investments with stated
maturities of greater than three months, but less than 12 months, are classified as short-term
investments which are stated at approximately fair value.
We classify the short-term investments in debt and equity securities as held-to-maturity,
trading or available-for-sale. These classifications determine the respective accounting
methods stipulated by the accounting standard for financial instruments. The securities that are
bought and held principally for the purpose of selling them in the near term are classified as
trading securities. The securities that we have a positive intent and ability to hold to maturity
are classified as held-to-maturity securities and stated at amortized cost. We do not have
available-for-sale securities. Unrealized holding gains and losses for trading securities are
included in our earnings. Dividend and interest income, including amortization of the premium and
discount arising at acquisition, for all categories of investments in securities, are also included
in our earnings. Any realized gains or losses on the sale of the short term investments are
determined on a specific identification method, and such gains and losses are reflected as a
component of our interest income.
For individual securities classified as held-to-maturity securities, we evaluate whether a
decline in fair value below the amortized cost basis is other than temporary. If the decline in
fair value is judged to be other than temporary, the cost basis of the individual security is
written down to fair value as a new cost basis and the amount of the write-down is included in our
earnings.
86
Investments
The investments for which we do not have the ability to exercise significant influence
(generally, when we have an investment of less than 20% ownership and no representation on the
companys board of directors) and for which there is not a readily determinable fair value, are
accounted for using the cost method. Dividends and other distributions of earnings from investees,
if any, are included in income when declared. We periodically evaluate the carrying value of our
investments accounted for under the cost method of accounting and any impairment is included in our
consolidated statements of income.
Recent Accounting Pronouncements
On September 15, 2006, the FASB issued SFAS No. 157, Fair Value Measurement, or SFAS 157.
This statement provides guidance for using fair value to measure assets and liabilities. This
statement also responds to investors requests for expanded information about the extent to which
companies measure assets and liabilities at fair value, the information used to measure fair value,
and the effect of fair value measurements on earnings. The statement does not expand the use of
fair value in any new circumstances. SFAS 157 is effective for financial statements issued for
fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The
adoption of this statement has no material impact on our financial statements.
In February 2007, the FASB issued FASB Statement No. 159, The Fair Value Option for Financial
Assets and Financial LiabilitiesIncluding an amendment of FASB Statement No. 115, (SFAS 159).
This statement permits entities to choose to measure many financial instruments and certain other
items at fair value that are not currently
required to be measured at fair value. SFAS 159 is effective for financial statements issued
for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years.
The adoption of this statement has no material impact on our financial statements.
In December 2007, the FASB issued FASB Statement No. 141 (revised 2007), Business
Combinations, or SFAS 141R. This statement establishes principles and requirements for how an
acquirer recognizes and measures in its financial statements the identifiable assets acquired, the
liabilities assumed, any noncontrolling interest in the acquiree and the goodwill acquired. SFAS
141R also establishes disclosure requirements to enable the evaluation of the nature and financial
effects of the business combination. This statement is effective for us beginning January 1, 2009.
We are currently evaluating the potential impact of the adoption of SFAS 141R on our financial
statements.
In December 2007, the FASB issued FASB Statement No. 160, Noncontrolling Interests in
Consolidated Financial Statements, or SFAS 160, an amendment of ARB No. 51. This statement affects
the entities that have an outstanding noncontrolling interest in one or more subsidiaries or that
deconsolidate a subsidiary. SFAS 160 is effective for fiscal years, and interim periods within
those fiscal years, beginning on or after December 15, 2008. We are currently assessing the impact
of this new statement on our financial statements.
Results of Operations
The following table sets forth a summary of our consolidated results of operations for the
periods indicated. Our business has evolved rapidly since we commenced operations in 2000. Our
limited operating history makes it difficult to predict future operating results. We believe that
period-to-period comparisons of operating results should not be relied upon as indicative of future
performance.
87
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31, |
(in thousands) |
|
2005 |
|
2006 |
|
2007 |
|
|
RMB |
|
RMB |
|
RMB |
|
US$ |
Consolidated Statements of Income Data |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Online marketing services |
|
|
307,363 |
|
|
|
828,484 |
|
|
|
1,741,021 |
|
|
|
238,673 |
|
Other services |
|
|
11,852 |
|
|
|
9,354 |
|
|
|
3,404 |
|
|
|
467 |
|
Total revenues |
|
|
319,215 |
|
|
|
837,838 |
|
|
|
1,744,425 |
|
|
|
239,140 |
|
Operating costs and expenses (1): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues |
|
|
(104,401 |
) |
|
|
(245,489 |
) |
|
|
(645,406 |
) |
|
|
(88,477 |
) |
Selling, general and administrative |
|
|
(134,771 |
) |
|
|
(250,240 |
) |
|
|
(411,163 |
) |
|
|
(56,366 |
) |
Research and development |
|
|
(44,200 |
) |
|
|
(79,231 |
) |
|
|
(140,702 |
) |
|
|
(19,289 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating costs and expenses |
|
|
(283,372 |
) |
|
|
(574,960 |
) |
|
|
(1,197,271 |
) |
|
|
(164,132 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating profit |
|
|
35,843 |
|
|
|
262,878 |
|
|
|
547,154 |
|
|
|
75,008 |
|
Interest income |
|
|
13,580 |
|
|
|
42,443 |
|
|
|
49,009 |
|
|
|
6,719 |
|
Other income, net, including exchange gains or losses |
|
|
93 |
|
|
|
4,098 |
|
|
|
20,053 |
|
|
|
2,749 |
|
Taxation |
|
|
(1,911 |
) |
|
|
(12,256 |
) |
|
|
12,752 |
|
|
|
1,748 |
|
Cumulative effect of change in accounting principle |
|
|
|
|
|
|
4,603 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
47,605 |
|
|
|
301,766 |
|
|
|
628,968 |
|
|
|
86,224 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Share-based compensation expenses are allocated as follows: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues |
|
|
(974 |
) |
|
|
(1,416 |
) |
|
|
(1,717 |
) |
|
|
(235 |
) |
Selling, general and administrative |
|
|
(22,804 |
) |
|
|
(32,970 |
) |
|
|
(17,371 |
) |
|
|
(2,382 |
) |
Research and development |
|
|
(9,793 |
) |
|
|
(13,894 |
) |
|
|
(20,760 |
) |
|
|
(2,846 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(33,571 |
) |
|
|
(48,280 |
) |
|
|
(39,848 |
) |
|
|
(5,463 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2007 Compared to Year Ended December 31, 2006
Revenues. Our total revenues increased by 108.2% from RMB837.8 million in 2006 to
RMB1.7 billion (US$239.1 million) in 2007. This increase was primarily due to
a substantial increase in our revenues from online marketing services. Our online marketing
revenues increased by 110.1% from RMB828.5 million in 2006 to RMB1.7 billion
(US$238.7 million) in 2007. This increase was mainly attributable to our customers
increased use of online marketing as a means to promote their products and services, as evidenced
by the increase in the number of our online marketing customers from approximately 143,000 in 2006
to over 214,000 in 2007, and the increase in the average revenue per customer from
approximately RMB5,800 in 2006 to approximately RMB8,100 (US$1,110) in 2007. The increase in our
online marketing customers was mainly due to our effective distribution network and our expanded
direct sales, especially in Beijing, Shanghai, Guangzhou and Shenzhen. The increase in the average
revenue per
customer was primarily attributable to the increase in the number of paid clicks, and the
higher price per click as more customers participated in our P4P auction platform. The number of
paid clicks increased by 77.6% from 2006 to 2007.
88
Operating Costs and Expenses. Our total operating costs and expenses increased by 108.2 % from
RMB575.0 million in 2006 to RMB 1.2 billion (US$164.1 million) in 2007. This increase
was primarily due to increases in our cost of revenues, and, to a lesser extent, an increase in our
selling, general and administrative expenses as well as research and development expenses.
|
|
|
Cost of Revenues. Our cost of revenues increased by 162.9 % from RMB245.5 million
in 2006 to RMB645.4 million (US$88.5 million) in 2007. This increase was primarily
due to the following factors: |
|
|
|
Business Tax and Surcharges. Our business tax and surcharges increased by
109.9 % from RMB51.8 million in 2006 to RMB108.8 million (US$14.9 million) in
2007, primarily as a result of increase in our online marketing revenues. |
|
|
|
|
Traffic Acquisition Costs. Our traffic acquisition costs increased by
172.3% from RMB75.2 million in 2006 to RMB204.7 million (US$28.1 million) in
2007. This was primarily due to the growth of revenue contribution from our
Baidu Union members. |
|
|
|
|
Bandwidth Costs. Our bandwidth costs increased by 193.8 % from RMB40.0
million in 2006 to RMB117.6 million (US$16.1 million) in 2007, as a result of
increased bandwidth to support increased traffic in our existing market in
China and the new Japan market. |
|
|
|
|
Depreciation Expenses of Servers and Other Equipment. Our depreciation
expenses of servers and other computer hardware increased by 185.3 % from
RMB51.6 million in 2006 to RMB147.1 million (US$20.2 million) in 2007, as we
acquired more servers, network equipment and computer hardware to meet
increased user traffic and accommodate growing online marketing services. |
|
|
|
|
Operational Expenses. Our operational expenses increased by 157.2 % from
RMB25.5 million in 2006 to RMB65.5 million (US$9.0 million) in 2007, primarily
due to the increase in the number and compensation levels of our operating and
technical support employees to meet the needs of our growing operations. |
|
|
|
Selling, General and Administrative Expenses. Our selling, general and
administrative expenses increased by 64.3% from RMB250.2 million in 2006 to
RMB411.2 million (US$56.4 million) in 2007. This increase was
primarily due to the following factors: |
|
|
|
total salaries and benefits and staff-related expense increased by 96.0%
from RMB111.6 million in 2006 to RMB218.7 million (US$30.0 million) in 2007,
primarily due to the increased direct sales and administrative headcount to
support our expanded online marketing services; |
89
|
|
|
total office operating expenses increased by 69.2% from RMB33.2 million in
2006 to RMB56.1 million (US$7.7 million) in 2007, as a result of increase and
expansion of our direct sales offices; and |
|
|
|
|
total traveling, communication and entertainment expenses increased by
58.1% from RMB10.3 million in 2006 to RMB16.3 million (US$2.2 million) in
2007, primarily due to the increased administrative and direct sales headcount
to support our expanded online marketing services. |
|
|
|
The above increases were offset by a 47.3% decrease in share-based compensation
expenses for staff performing selling, general and administrative functions from
RMB33.0 million in 2006 to RMB17.4 million (US$2.4 million) in 2007,
primarily due to a decrease in the amount of share-based awards granted. |
|
|
|
|
Research and Development Expenses. Our research and development expenses increased
by 77.6 % from RMB79.2 million in 2006 to RMB140.7 million (US$19.3 million) in 2007,
primarily as a result of the increased headcount and increased compensation levels. |
Operating Profit. As a result of the foregoing, we generated an operating profit of
RMB547.2 million (US$75.0 million) in 2007, a 108.1% increase from
2006.
Taxation. Our income tax benefit was RMB12.8 million (US$1.7 million) in 2007, which was
primarily due to our receipt of an incentive tax refund of RMB21.2 (US$2.9 million) arising from
capital reinvestment in one of our PRC subsidiaries in the fourth quarter of 2007.
Other income, net, including exchange gains or losses. The increase in 2007 was due primarily
to our receipt of RMB14.6 million (US$2.0 million) in government subsidies in 2007.
Cumulative effect of change in accounting principle. The cumulative benefit of RMB4.6 million
in 2006 was due to the adoption of SFAS 123R, which reflects the net cumulative impact of
estimating future forfeitures for the options granted in the third and fourth quarters of 2005.
There was no cumulative effect in adopting FIN 48.
Net Income. As a result of the foregoing, we had net income of RMB629.0 million
(US$86.2 million) in 2007, a 108.4% increase compared to net income of
RMB301.8 million in 2006.
Year Ended December 31, 2006 Compared to Year Ended December 31, 2005
Revenues. Our total revenues increased by 162.5% from RMB319.2 million in 2005 to RMB837.8
million in 2006. This increase was primarily due to a substantial increase in our revenues from
online marketing services, slightly offset by a decrease of RMB2.5 million in revenues from other
services. Our online marketing revenues increased by 169.5% from RMB307.4 million in 2005 to
RMB828.5 million in 2006. This increase was mainly attributable to our customers increased use of
online marketing as a means to promote their products and services, as evidenced by the increase in
the number of our online marketing customers from approximately 76,000 in 2005 to over 143,000 in
2006, and the increase in the average revenue per customer from approximately RMB4,044 in 2005 to
approximately RMB5,800 in 2006. The increase in our online marketing customers was mainly due to
our effective distribution network and our expanded direct sales, especially in Beijing, Shanghai
and Guangzhou. The increase in the average revenue per customer was primarily attributable to the
increase in the number of clicks, and the higher price per click as more customers participated in
our P4P auction platform. The number of paid clicks increased by 142.6% from 2005 to 2006.
90
Operating Costs and Expenses. Our total operating costs and expenses increased by 102.9% from
RMB283.4 million in 2005 to RMB575.0 million in 2006. This increase was primarily due to increases
in our cost of revenues and selling, general and administrative expenses, and, to a lesser extent,
an increase in our research and development expenses.
|
|
|
Cost of Revenues. Our cost of revenues increased by 135.1% from RMB104.4 million in
2005 to RMB245.5 million in 2006. This increase was primarily due to the following
factors: |
|
|
|
Business Tax and Surcharges. Our business tax and surcharges increased by
149.6% from RMB20.8 million in 2005 to RMB51.8 million in 2006, primarily as a
result of increase in our online marketing revenues. |
|
|
|
|
Traffic Acquisition Costs. Our traffic acquisition costs increased by
254.4% from RMB21.2 million in 2005 to RMB75.2 million in 2006. This was
primarily due to the growth of revenue contribution from our Baidu Union
members. |
|
|
|
|
Bandwidth Costs. Our bandwidth costs increased by 88.0% from RMB21.3
million in 2005 to RMB40.0 million in 2006, as a result of increased bandwidth
to support increased traffic. |
|
|
|
|
Depreciation Expenses of Servers and Other Equipment. Our depreciation
expenses of servers and other computer hardware increased by 104.0% from
RMB25.3 million in 2005 to RMB51.6 million in 2006, as we acquired more
servers, network equipment
and computer hardware to meet increased user traffic and accommodate
growing online marketing services. |
|
|
|
|
Operational Expenses. Our operational expenses increased by 70.9% from
RMB14.9 million in 2005 to RMB25.5 million in 2006, primarily due to the
increase in the number of our operating and technical support employees to
meet the needs of our growing operations. |
|
|
|
Selling, General and Administrative Expenses. Our selling, general and
administrative expenses increased by 85.7% from RMB134.8 million in 2005 to RMB250.2
million in 2006. This increase was primarily due to the following factors: |
|
|
|
total salaries and benefits increased by 136.2% from RMB47.2 million in
2005 to RMB111.6 million in 2006, primarily due to the increased
administrative and direct sales headcount along with our expanded online
marketing services; |
91
|
|
|
total office operating expenses increased by 158.4% from RMB12.8 million in
2005 to RMB33.2 million in 2006, as a result of increase and expansion of our
direct sales offices; |
|
|
|
|
professional expenses increased by 191.4% from RMB9.2 million in 2005 to
RMB26.9 million in 2006, primarily due to the increased expenditures
associated with being a public company, such as the compliance with the
requirements of Section 404 of the Sarbanes-Oxley Act; and |
|
|
|
|
share-based compensation expenses for staff performing selling, general and
administrative functions increased by 44.6% from RMB22.8 million to RMB33.0
million in 2006, primarily due to the adoption of the fair value measure of
our share-based awards under SFAS 123R since January 1, 2006. |
|
|
|
Research and Development Expenses. Our research and development expenses increased
by 79.3% from RMB44.2 million in 2005 to RMB79.2 million in 2006, primarily as a
result of the increased headcount. |
Operating Profit. As a result of the foregoing, we generated an operating profit of RMB262.9
million in 2006, a 633.4% increase from 2005.
Taxation. Our income tax expenses were RMB12.3 million in 2006, a 541.3% increase from 2005,
primarily due to the substantial increase in our operating profit.
Cumulative effect of change in accounting principle. The cumulative benefit of RMB4.6 million
was due to the adoption of SFAS 123R in 2006, which reflects the net
cumulative impact of estimating future forfeitures for the options granted in the third and
fourth quarters of 2005.
Net Income. As a result of the foregoing, we had net income of RMB301.8 million in 2006, a
533.9% increase compared to net income of RMB47.6 million in 2005.
Inflation
Since our inception, inflation in China has not materially impacted our results of operations.
According to the National Bureau of Statistics of China, the change of consumer price index in
China was 1.8%, 1.6% and 4.8% in 2005, 2006 and 2007, respectively. According to the National
Bureau of Statistics of China, Chinas general consumer price index increased 8.5% in April 2008
compared to April 2007. Although we have not in the past been materially affected by any such
inflation since our inception, we can provide no assurance that we will not be affected in the
future by higher rates of inflation in China. For example, certain operating costs and expenses,
such as employee compensation and office operating expenses may increase as a result of higher
inflation. Additionally, because a substantial portion of our assets consists of cash and cash
equivalents and short-term investments, high inflation could significantly reduce the value and
purchasing power of these assets. We are not able to hedge our exposures to higher inflation in
China.
92
Foreign Currency
The exchange rate between U.S. dollar and RMB was in a decline trend, from July 2005 when the
average exchange rate was 8.2264 to December 2007 when the average exchange rate was 7.3682, which
resulted in foreign currency translation losses when we translated our financial assets from U.S.
dollar into RMB.
B. Liquidity and Capital Resources
Cash Flows and Working Capital
The following table sets forth a summary of our cash flows for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31, |
(in thousands) |
|
2005 |
|
2006 |
|
2007 |
|
|
RMB |
|
RMB |
|
RMB |
|
US$ |
Net cash generated from operating activities |
|
|
162,352 |
|
|
|
526,144 |
|
|
|
935,152 |
|
|
|
128,199 |
|
Net cash used in investing activities |
|
|
(181,096 |
) |
|
|
(294,272 |
) |
|
|
(713,216 |
) |
|
|
(97,772 |
) |
Net cash generated from financing activities |
|
|
724,333 |
|
|
|
32,179 |
|
|
|
40,698 |
|
|
|
5,579 |
|
Effect of exchange rate changes on cash |
|
|
(5,192 |
) |
|
|
(28,370 |
) |
|
|
(48,308 |
) |
|
|
(6,624 |
) |
Net increase in cash and cash equivalents |
|
|
700,397 |
|
|
|
235,681 |
|
|
|
214,326 |
|
|
|
29,382 |
|
Cash and cash equivalents at beginning of the period |
|
|
200,196 |
|
|
|
900,593 |
|
|
|
1,136,274 |
|
|
|
155,769 |
|
Cash and cash equivalents at end of the period |
|
|
900,593 |
|
|
|
1,136,274 |
|
|
|
1,350,600 |
|
|
|
185,151 |
|
Operating Activities
Net cash generated from operating activities increased to RMB935.2 million (US$128.2 million)
in 2007 from RMB526.1 million in 2006. This increase was mainly attributable to several factors,
including (i) the substantial increase in net income to RMB629.0 million (US$86.2 million) in 2007
compared to net income of RMB301.8 million in 2006; (ii) the increase in add-back of non-cash
expenses, mainly consisting of share-based compensation and depreciation expenses; (iii) the
increase in customer deposits resulting from the increased number of P4P customers; and (iv) the
increase in accrued expenses and other liabilities, partially offset by an increase of RMB24.6
million (US$3.4 million) in other non-current assets primarily due to deposits for new offices we
rent.
Net cash generated from operating activities increased to RMB526.1 million in 2006 from
RMB162.4 million in 2005. This increase was mainly attributable to several factors, including (i)
the net income of RMB301.8 million in 2006 compared to net income of RMB47.6 million earned in
2005; (ii) the increase in add-back of non-cash expenses, mainly consisting of share-based
compensation and depreciation expenses; (iii) the increase in customer deposits resulting from the
increased number of P4P customers; and (iv) the increase in accrued expenses and other liabilities.
93
Investing Activities
Net cash used in investing activities increased from RMB294.3 million in 2006 to RMB713.2
million (US$97.8 million) in 2007, primarily due to our purchase of additional servers in China and
Japan, cash used in acquisitions (including investments in several privately held entities for less
than 5% of equity interests in each of these entities), investment in marketable securities,
additional payment for the acquisition of the land use right for our new corporate headquarters,
and investment in connection with the construction of the corporate headquarters. Net cash used in
investing activities increased from RMB181.1 million in 2005 to RMB294.3 million in 2006 primarily
due to our purchase of additional servers and other computer hardware, as well as investment in
marketable securities.
We expect that net cash used in investing activities will increase in 2008 and 2009. The
expected increase is due to the building of our new corporate headquarters in Beijing and any
future investments or acquisitions we may pursue.
Financing Activities
Net cash provided by financing activities increased from RMB32.2 million in 2006 to RMB40.7
million (US$5.6 million) in 2007, due to the net proceeds received from the exercise of stock
options in 2007. Net cash provided by financing activities decreased substantially from RMB724.3
million in 2005 to RMB32.2 million in 2006, due to the net proceeds received from our initial
public offering in 2005.
We believe that our current cash and cash equivalents and anticipated cash flow from
operations will be sufficient to meet our anticipated cash needs, including our cash needs for
working capital and capital expenditures for at least the next 12 months. We may, however, require
additional cash due to changing business conditions or other future developments, including any
investments or acquisitions we may decide to pursue. If our existing cash is insufficient to meet
our requirements, we may seek to sell additional equity securities, debt securities or borrow from
banks.
We are a holding company with no operations of our own. We conduct our operations in China
primarily through our indirect wholly-owned subsidiaries, Baidu Online, Baidu China and Baidu
Times, and our variable interest entities, Baidu Netcom and Beijing Perusal. As a result, our
ability to pay dividends and to finance any debt we may incur depends upon dividends paid by Baidu
Online, Baidu China and Baidu Times and license and service fees paid by Baidu Netcom and Beijing
Perusal. If Baidu Online, Baidu China, Baidu Times or any newly formed subsidiaries incur debt on
their own behalf in the future, the instruments governing their debt may restrict their ability to
pay dividends to us. In addition, our PRC subsidiaries are permitted to pay dividends to us only
out of their retained earnings, if any, as determined in accordance with PRC accounting standards
and regulations. Under PRC law, our subsidiaries and affiliated entities in the PRC are required
to set aside at least 10% of their after-tax profit each year to fund a statutory reserve fund
until the amount of the reserve fund reaches 50% of such entitys registered capital. Although
these statutory reserve funds can be used, among
other ways, to increase the registered capital and eliminate future losses in excess of
retained earnings of the respective companies, these reserve funds are not distributable as cash
dividends except in the event of a solvent liquidation of the companies. See Note 14 to our
consolidated financial statements.
Capital Expenditures
We made capital expenditures of RMB88.7 million, RMB127.5 million and RMB569.1 million
(US$78.0 million) in 2005, 2006 and 2007, respectively, representing 27.8%, 15.2% and 32.6% of our
total revenues, respectively. Our capital expenditures were used primarily to purchase servers,
network equipment and other computer hardware for our business, the acquisition of the land use
right and the construction for our new corporate headquarters.
94
In late 2005, we entered into an agreement to acquire the land use right in Beijing to build
our new corporate headquarters with a floor space of approximately 44,000 square meters. The floor
space was increased to 59,000 square meters in 2006. The aggregate prepayment for acquiring the
land use right was approximately RMB97.6 million (US$13.4 million) as of December 31, 2007. We have obtained
necessary governmental approvals for the proposed development and use of the land, and our new
office building is currently under construction. Our capital expenditures may increase
substantially in the near term as our business continues to grow and as we expand and improve our
network infrastructure.
C. Research and Development
We have a team of experienced engineers who are mostly based at our headquarters in Beijing.
We recruit most of our engineers locally and have established various recruiting and training
programs with leading universities in China. We have also recruited experienced engineers from
overseas. We compete aggressively for engineering talent to help us address challenges such as
Chinese language processing, information retrieval and high performance computing. In each of the
three years ended December 31, 2005, 2006 and 2007, our research and development expenditures,
including share-based compensation expenses for research and development staff, were RMB44.2
million, RMB79.2 million and RMB140.7 million (US$19.3 million), representing 13.8%, 9.5% and 8.1%
of our total revenues for 2005, 2006 and 2007, respectively.
D. Trend Information
Other than as disclosed elsewhere in this annual report, we are not aware of any trends,
uncertainties, demands, commitments or events for the year ended December 31, 2007 that are
reasonably likely to have a material adverse effect on our net revenues, income, profitability,
liquidity or capital resources, or that would cause the disclosed financial information to be not
necessarily indicative of future operating results or financial conditions.
E. Off-Balance Sheet Commitments and Arrangements
We have not entered into any financial guarantees or other commitments to guarantee the
payment obligations of any third parties. We have not entered into any derivative contracts that
are indexed to our shares and classified as shareholders equity and are not reflected in our
consolidated financial statements. Furthermore, we do not have any retained or contingent interest
in assets transferred to an unconsolidated entity that serves as credit, liquidity or market risk
support to such entity. We do not have any variable interest in any unconsolidated entity that
provides financing, liquidity, market risk or credit support to us or engages in leasing, hedging
or research and development services with us.
F. Contractual Obligations and Commercial Commitments
The following table sets forth our contractual obligations as of December 31, 2007:
95
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payment Due by Period |
|
|
|
|
|
|
Less than 1 |
|
|
|
|
|
|
|
|
|
More than 5 |
(in RMB thousands) |
|
Total |
|
year |
|
1-3 years |
|
3-5 years |
|
years |
Operating lease obligations (1) |
|
|
179,643 |
|
|
|
128,556 |
|
|
|
51,087 |
|
|
|
|
|
|
|
|
|
Capital commitments (2) |
|
|
179,636 |
|
|
|
179,636 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Other long-term obligation reflected on
balance sheets under U.S. GAAP (3) |
|
|
3,000 |
|
|
|
3,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
362,279 |
|
|
|
311,192 |
|
|
|
51,087 |
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Operating lease obligations represent the lease obligations for our premises and bandwidth
obligations. |
|
(2) |
|
Capital commitments relate primarily to leasehold improvements and building construction. |
|
(3) |
|
Other long-term obligation represents the payment arrangement relating to an acquisition in
2006. |
We do not have any long-term debt obligations, capital (finance) lease obligations or
purchase obligations.
|
|
|
Item 6. |
|
Directors, Senior Management and Employees |
A. Directors and Senior Management
The following table sets forth information regarding our executive officers and directors as
of the date of this annual report.
|
|
|
|
|
|
|
Directors and Executive Officers |
|
Age |
|
Position/Title |
Robin Yanhong Li
|
|
|
39 |
|
|
Chairman and Chief Executive Officer |
Jennifer Li
|
|
|
40 |
|
|
Chief Financial Officer |
Peng Ye
|
|
|
47 |
|
|
Chief Operating Officer |
William I. Chang
|
|
|
44 |
|
|
Chief Scientist |
William Decker
|
|
|
61 |
|
|
Independent Director |
James Ding
|
|
|
43 |
|
|
Independent Director |
Nobuyuki Idei
|
|
|
70 |
|
|
Independent Director |
Greg Penner
|
|
|
38 |
|
|
Independent Director |
Robin Yanhong Li is a co-founder of our company. Mr. Li has served as our chairman of the
board since our inception in January 2000 and as our chief executive officer since January 2004.
Mr. Li served as our president from February 2000 to December 2003. Prior to founding our company,
Mr. Li worked as a staff engineer for Infoseek, a pioneer in the Internet search engine industry,
from July 1997 to December 1999. Mr. Li was a senior consultant for IDD Information Services from
May 1994 to June 1997. Mr. Li received a bachelors degree in information science from Peking
University and a masters degree in computer science from the State University of New York at
Buffalo.
Jennifer Li joined our company in March 2008 as our chief financial officer. Prior to joining
our company, Ms. Li served as controller of General Motors Acceptance Corporations North American
Operations from 2005 to 2008. Prior to GMAC, Ms. Li worked at General Motors China, where she was
responsible for overseeing finance functions of General Motors wholly-owned and joint venture
businesses in China from 2001 to 2004, with the last post as its chief financial officer. From
1994 to 2001, she held several other finance positions at General Motors in China, Singapore, the
United States and Canada. Ms. Li holds an MBA from the University of British Columbia in
Vancouver, B.C., Canada and a bachelor of arts from Tsinghua University in Beijing, China.
96
Peng Ye joined our company in April 2008 as our chief operating officer. From June 2006 to
March 2008, Mr. Ye served as country general manager of Apple China. Prior to that, Mr. Ye worked
at ND SatCom AG, a leading global supplier of innovative satellite-based communications solutions,
as global vice president and China managing director from November 2005 to May 2006, and for
Motorola Mobile Business North Asia as vice president of Asia Pacific and general manager of New
Wireless Carrier Operations from April 2003 to October 2005. Mr. Ye also served Nortel China and
Nortel Europe for seven years in several senior management and product development positions from
April 1996 to March 2003. Mr. Ye holds a Ph.D. in information and software engineering from the
University of Ulster in the UK, an EMBA from China Europe International Business School, a master
of information system engineering from the National University of Defense Technology in China and a
bachelor of computer communications from Nanjing University of Post and Telecommunications in
China.
William I. Chang has served as our chief scientist since January 2007. Dr. Chang is a
recognized expert in search technology, online community and advertising business models. From
2001 to January 2007, he served as chairman, president and chief executive officer of the Affini,
Inc., a search technology and software company he founded. Since January 2007, he has served as
chairman of Affini, Inc. From 2000 to 2001, Dr. Chang served as chief technology officer at
Sentius Corporation, a hypertext
software company, where he created a contextual advertising product. From 1998 to 1999, Dr.
Chang served as vice president of Go Network. From 1997 to 1998, he was the chief technology
officer of Infoseek, where he created the Infoseek natural language search engine for both the
Internet search and enterprise applications. From 1991 to 1995, Dr. Chang worked as a postdoctoral
fellow and associate staff researcher with the Cold Spring Harbor Laboratory, where he mapped a
genome and invented a protein sequence search methodology. Dr. Chang received a bachelors degree
in mathematics from Harvard University and a Ph.D. in computer science from the University of
California, Berkeley.
William Decker has served as our independent director since October 2005. Mr. Decker is a
retired partner of PricewaterhouseCoopers LLP. Prior to his retirement in July 2005, Mr. Decker
was the senior partner in charge of PricewaterhouseCoopers LLPs Global Capital Markets Group. He
led a team of more than 300 professionals in 25 countries to provide technical support to non-U.S.
companies on SEC regulations and U.S. GAAP reporting and assistance with the Sarbanes-Oxley Act
compliance work. He was also one of PricewaterhouseCoopers lead authorities on the Sarbanes-Oxley
Act . Mr. Decker received a bachelors degree in accounting from Fairleigh Dickinson
University in New Jersey.
James Ding has served as our independent director since our initial public offering in August
2005. Mr. Ding is a managing director of GSR Ventures, a venture capital fund focusing on early
stage technology companies in China. He also has served as the chairman of the board of directors
of AsiaInfo Holdings, Inc., a Nasdaq-listed company, since April 2003 and has served as a member of
the board of AsiaInfo since its inception. He served as AsiaInfos chief executive officer from
May 1999 to April 2003. He was also AsiaInfos senior vice president for business development and
chief technology officer from 1997 to 1999. Mr. Ding received a masters degree in information
science from the University of California, Los Angeles.
97
Nobuyuki Idei has served as our independent director since June 2007. An experienced
director, Mr. Idei also currently serves as chairman of the advisory board of Sony Corporation,
director of Accenture, director of Red Herring and chairman of the National Conference on Fostering
Beautiful Forests in Japan. Mr. Idei is founder and CEO of Quantum Leaps Corporation, a specialist
consultancy that advises private and public institutions on the changing role of technology in the
21st century. From 2000 to 2005, Mr. Idei was chairman and CEO of Sony Corporation. Prior to that,
he held a range of leadership positions at Sony including general manager of the audio division,
senior general manager of the home video group, and president and representative director. Mr. Idei
has also served in a number of other advisory positions including as counselor to the Bank of
Japan, member of Japans national IT Strategy Council, and as vice chairman of Nippon Keidanren.
Mr. Idei received a bachelor of science degree in economics and politics from Waseda University in
Tokyo.
Greg Penner has served as our director since July 2004. Mr. Penner is a general partner of
Madrone Capital Partners, an investment firm based in Menlo Park, California. From 2002 to 2004,
he was the senior vice president and chief financial officer of Wal-Mart Japan, and was a director
of The Seiyu, Ltd., a Japanese retailer from 2002 to 2008 when
the company was acquired by Wal-Mart Stores, Inc. From 2000 to 2002, Mr. Penner was responsible
for the business development, legal and finance affairs of Walmart.com, Wal-Marts Internet
business based in California. Prior to joining Wal-Mart, Mr. Penner was a general partner at
Peninsula Capital, an early stage venture capital fund. In addition to Baidu and Seiyu, Mr. Penner
also serves as a director of the Global Hyatt Corporation, Cuill, Inc., a privately-held Internet
search engine developer, and 99Bill Corporation (based in Shanghai, China). Mr. Penner received a
bachelors degree in international economics from the School of Foreign Service at Georgetown
University and an M.B.A. from the Stanford Graduate School of Business.
B. Compensation of Directors and Executive Officers
In 2007, we paid an aggregate of approximately RMB5.5 million (US$0.8 million) and
approximately RMB0.7 million (US$0.1 million) in cash compensation to our executive officers and
non-executive directors, respectively. No executive officer is entitled to any severance benefits
upon termination of his or her employment with our company.
Our board of directors and shareholders approved the issuance of up to 5,040,000 ordinary
shares upon exercise of awards granted under our 2000 option plan. As of March 31, 2008, options
to purchase 694,607 ordinary shares are outstanding. The following table summarizes, as of March
31, 2008, the outstanding options and restricted shares that we granted to our current directors
and executive officers and to other individuals as a group under our 2000 option plan.
98
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ordinary Shares |
|
|
|
|
|
|
|
|
Underlying |
|
|
|
|
|
|
|
|
Outstanding |
|
Exercise Price |
|
|
|
|
Name |
|
Options |
|
(US$/Share) |
|
Grant Date |
|
Expiration Date |
Robin Yanhong Li
|
|
|
50,000 |
|
|
|
2.50 |
|
|
April 1, 2004
|
|
April 1, 2009 |
|
|
|
22,050 |
|
|
|
49.25 |
|
|
February 15, 2006
|
|
February 15, 2011 |
|
|
|
393 |
(1)
|
|
|
|
|
|
February 15, 2006
|
|
N/A |
|
|
|
15,000 |
|
|
|
124.90 |
|
|
January 24, 2007
|
|
January 24, 2012 |
|
|
|
2,500 |
(1)
|
|
|
|
|
|
January 24, 2007
|
|
N/A |
Jennifer Li(2)
|
|
|
6,000 |
|
|
|
317.75 |
|
|
April 16, 2008
|
|
April 16, 2015 |
|
|
|
4,500 |
(1)
|
|
|
|
|
|
April 16, 2008
|
|
N/A |
Peng Ye(3)
|
|
|
8,500 |
|
|
|
342.00 |
|
|
April 25, 2008
|
|
April 25, 2015 |
|
|
|
2,000 |
(1)
|
|
|
|
|
|
April 25, 2008
|
|
N/A |
William I. Chang
|
|
|
30,000 |
|
|
|
124.90 |
|
|
January 24, 2007
|
|
January 24, 2012 |
|
|
|
3,000 |
(1)
|
|
|
|
|
|
January 24, 2007
|
|
N/A |
William Decker
|
|
|
800 |
(1)
|
|
|
|
|
|
January 11, 2008
|
|
N/A |
James Ding
|
|
|
650 |
(1)
|
|
|
|
|
|
January 11, 2008
|
|
N/A |
Nobuyuki Idei
|
|
|
15,000 |
|
|
|
183.23 |
|
|
January 10, 2008
|
|
July 25, 2012 |
Greg Penner
|
|
|
650 |
(1)
|
|
|
|
|
|
January 11, 2008
|
|
N/A |
Other individuals as a group
|
|
|
554,564 |
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Restricted shares. |
|
(2) |
|
Ms. Li joined us in March 2008 and her options and restricted shares were granted on April
16, 2008. The options will vest in batches over a period a time and generally will expire
three years after vesting. The expiration date disclosed in the table is the last expiration
date. |
|
(3) |
|
Mr. Ye joined us in April 2008 and his options and restricted shares were granted on April
25, 2008. The options will vest in batches over a period a time and generally will expire
three years after vesting. The expiration date disclosed in the table is the last expiration
date. |
Types of Awards. We may grant the following types of awards under our 2000 option plan:
|
|
|
our ordinary shares; |
|
|
|
|
options to purchase our ordinary shares; and |
|
|
|
|
any other securities with value derived from the value of our ordinary shares. |
Plan Administration. Our board of directors, or a committee designated by our board of
directors, administers our 2000 option plan. In each case, our board of directors or the
committee, will determine the provisions and terms and conditions of each award grant. These
include, among other things, the option vesting schedule, repurchase provisions, rights of first
refusal, forfeiture provisions, form of payment upon settlement of an award, payment contingencies
and satisfaction of any performance criteria.
Award Agreement. Awards granted under our 2000 option plan are evidenced by an award agreement
that sets forth the terms, conditions and limitations for each award. In addition, in the case of
options, the award agreement also specifies whether the option constitutes an incentive stock
option, or ISO, or a non-qualifying stock option.
99
Eligibility. We may grant awards to employees, directors and consultants of our company or any
of our related entities, which include our subsidiaries or any entities in which we hold a
substantial ownership interest. However, we may grant ISOs only to our employees and employees of
our majority-owned subsidiaries.
Acceleration of Awards upon Corporate Transactions. The outstanding awards will accelerate
upon occurrence of a change-of-control corporate transaction in which the successor entity does not
assume our outstanding awards under our 2000 option plan. In such event, each outstanding award
will become fully vested and immediately exercisable, the transfer restrictions on the awards will
be released (other than those
applicable to ISOs), and the repurchase or forfeiture rights will terminate immediately before
the date of the change-of-control transaction. If the successor entity assumes our outstanding
awards and later terminates the grantees employment or service without cause, or if the grantee
resigns voluntarily with good cause within 12 months of the change-of-control transaction, the
outstanding awards automatically become fully vested and exercisable.
Exercise Price and Term of Awards. If we grant an ISO to an employee, who, at the time of that
grant, owns shares representing more than 10% of the voting power of all classes of our share
capital, the exercise price cannot be less than 110% of the fair market value of our ordinary
shares on the date of that grant.
The term of each award is stated in the award agreement. The term may not exceed ten years
from the date of the grant, except that five years is the maximum term of an ISO granted to an
employee who holds more than 10% of the voting power of our share capital.
Vesting Schedule. In general, the plan administrator determines, or the award agreement
specifies, the vesting schedule. Options generally vest over a four-year period beginning from one
year after the grant date. Under our 2000 option plan, employees may elect at any time to exercise
their options any part or all of the awards prior to full vesting of the awards. But such early
exercise may be subject to a repurchase right as determined by our management. When an optionees
employment or service is terminated, the optionee may exercise his or her options that have vested
as of the termination date within three months of termination or as determined by our plan
administrator.
Repurchase Rights. Under our 2000 option plan, the aforementioned early exercise may be
subject to a right to repurchase such shares at the amount equal to the original purchase price
paid by grantee for each such Share. Before the closing date of our initial public offering on
August 5, 2005, such repurchase right was exercisable at any time (i) during the 90-day period
following employee termination date, or (ii) during the 90-day period following an exercise of the
option that occurs after employee termination date. Upon the closing date of our initial public
offering, the time limitation of exercising such repurchase rights have been changed to lapse at
the rate of at least twenty percentage (20%) of the shares subject to the share option per year
over five years from the date the share option is granted (without respect to the date the award
was exercised or became exercisable).
Amendment and Termination. Our board of directors may at any time amend, suspend or terminate
our 2000 option plan. Amendments to our 2000 option plan are subject to shareholder approval, to
the extent required by law, or by stock exchange rules or regulations. Any amendment, suspension or
termination of our 2000 option plan must not adversely affect awards already granted without
written consent of the recipient of such awards. Unless terminated earlier, our 2000 option plan
shall continue in effect for a term of ten years from the date of adoption.
100
C. Board Practices
Board of Directors
Our board of directors currently has five directors. A director is not required to hold any
shares in the company by way of qualification. A director may vote with respect to any contract,
proposed contract or arrangement in which he or she is materially interested. A director may
exercise all the powers of the company to borrow money, mortgage its undertakings, property and
uncalled capital, and issue debentures or other securities whenever money is borrowed or as
security for any obligation of the company or of any third party.
Committees of the Board of Directors
We have three committees under the board of directors: an audit committee, a compensation
committee and a corporate governance and nominating committee. We have adopted a charter for each
of the three committees.
Audit Committee
Our audit committee consists of Messrs. William Decker, James Ding and Greg Penner, all of
whom satisfy the independence requirements of Rule 4350 of the Nasdaq Stock Market Marketplace
Rules and Rule 10A-3 under the Securities Exchange Act of 1934, as amended. Our board of directors
has determined that Mr. Decker is an audit committee financial expert as defined in the
instructions to Item 16A of the Form 20-F. The audit committee oversees our accounting and
financial reporting processes and the audits of the financial statements of our company. The audit
committee is responsible for, among other things:
|
|
|
appointing, retaining and overseeing the work of the independent auditors,
including resolving disagreements between the management and the independent auditors
relating to financial reporting; |
|
|
|
|
pre-approving all auditing and non-auditing services permitted to be performed by
the independent auditors; |
|
|
|
|
reviewing annually the independence and quality control procedures of the
independent auditors; |
|
|
|
|
reviewing and approving all proposed related party transactions; |
|
|
|
|
discussing the annual audited financial statements with the management; |
|
|
|
|
meeting separately with the independent auditors to discuss critical accounting
policies, management letters, recommendations on internal controls, the auditors
engagement letter and independence letter and other material written communications
between the independent auditors and the management; and |
101
|
|
|
attending to such other matters that are specifically delegated to our audit
committee by our board of directors from time to time. |
In 2007, our audit committee held meetings and passed resolutions by unanimous written consent
five times.
Compensation Committee
Our compensation committee consists of Messrs. James Ding and Greg Penner, both of whom
satisfy the independence requirements of Rule 4350 of the Nasdaq Stock Market Marketplace Rules.
The compensation committee assists the board in reviewing and approving our compensation structure,
including all forms of compensation relating to our directors and executive officers. Our chief
executive officer may not be present at any committee meeting while his compensation is
deliberated. The compensation committee is responsible for, among other things:
|
|
|
reviewing and approving executive compensation; |
|
|
|
|
reviewing periodically and approving any long-term incentive compensation or equity
plans, programs or similar arrangements, annual bonuses, employee pension and welfare
benefit plans; |
|
|
|
|
determining our policy with respect to change of control or parachute payments;
and |
|
|
|
|
managing and reviewing director and executive officer indemnification and insurance
matters. |
In 2007, our compensation committee held meeting and passed resolutions by unanimous written
consent twice.
Corporate Governance and Nominating Committee
Our corporate governance and nominating committee consists of Messrs. James Ding and Greg
Penner, both of whom satisfy the independence requirements of Rule 4350 of the Nasdaq Stock
Market Marketplace Rules. The corporate governance and nominating committee assists the board of
directors in selecting individuals qualified to become our directors and in determining the
composition of the board and its committees. The corporate governance and nominating committee is
responsible for, among other things:
|
|
|
recommending to the board nominees for election or re-election to the board or for
appointments to fill any vacancies; |
|
|
|
|
reviewing annually the performance of each incumbent director in determining
whether to recommend such director for an additional term; |
|
|
|
|
overseeing the board in the boards annual review of its own performance and the
performance of the management; and |
|
|
|
|
considering, preparing and recommending to the board such policies and procedures
with respect to corporate governance matters as may be required or required to be
disclosed under the applicable laws or otherwise considered to be material. |
102
In 2007, our corporate governance and nominating committee passed resolutions by unanimous
written consent three times.
Terms of Directors and Executive Officers
All directors hold office until their successors have been duly elected and qualified.
Director nomination is subject to the approval of our corporate governance and nominating
committee. Our shareholders may remove any director by ordinary resolution and may in like manner
appoint another person in his stead. A valid ordinary resolution requires a majority of the votes
cast at a shareholder meeting that is duly constituted and meets the quorum requirement. Officers
are elected by and serve at the discretion of the board of directors.
D. Employees
We had 1,307, 3,113 and 6,252 employees as of December 31, 2005, 2006 and 2007, respectively. As
of December 31, 2007, we had 6,252 employees, including 460 in management and administration, 913
in research and development, 514 in operation and service, and 4,365 in sales and marketing. We
also hire temporary employees and contractors from time to time. Our employees are not covered by
any collective bargaining agreement. We consider our relations with our employees to be good.
E. Share Ownership
The following table sets forth information with respect to the beneficial ownership of our
shares as of March 31, 2008, assuming exercise of all outstanding options, by:
|
|
|
each of our current directors and executive officers; and |
|
|
|
|
each person known to us to own beneficially more than 5.0% of our shares. |
See B. Compensation of Directors and Executive Officers for more details on options and
restricted shares granted to our directors and executive officers.
103
|
|
|
|
|
|
|
|
|
|
|
Shares Beneficially Owned |
Directors and Executive Officers: |
|
Number (1) |
|
% (2) |
|
|
|
|
|
|
|
|
|
Robin Yanhong Li (3) |
|
|
5,617,608 |
|
|
|
16.4 |
% |
Jennifer Li(4) |
|
|
10,500 |
|
|
|
* |
|
Peng Ye(5) |
|
|
10,500 |
|
|
|
* |
|
William Chang (6) |
|
|
33,370 |
|
|
|
* |
|
William Decker (7) |
|
|
800 |
|
|
|
* |
|
James Ding (8) |
|
|
650 |
|
|
|
* |
|
Nobuyuki Idei (9) |
|
|
15,000 |
|
|
|
* |
|
Greg Penner (10) |
|
|
1,133,853 |
|
|
|
3.3 |
% |
All Directors and Executive Officers as a Group (11) |
|
|
6,822,281 |
|
|
|
19.9 |
% |
|
|
|
|
|
|
|
|
|
Principal Shareholders: |
|
|
|
|
|
|
|
|
Handsome Reward Limited (12) |
|
|
5,490,000 |
|
|
|
16.1 |
% |
|
|
|
* |
|
Less than 1%. |
|
(1) |
|
The number of shares beneficially owned by each listed person includes the shares
beneficially owned by such person, the shares underlying all options held by such person, and
restricted shares held by such persons. The options and restricted shares were granted under
our 2000 option plan. |
|
(2) |
|
Percentage of beneficial ownership of each listed person is based on 34,195,183 ordinary
shares (consisting of 25,300,772 Class A ordinary shares and 8,894,411 Class B ordinary
shares) of the company outstanding as of March 31, 2008, the number of ordinary shares
underlying options and the number of restricted shares held by such person as of that date. |
|
(3) |
|
Includes (i) 37,665 Class A ordinary shares held by Mr. Li, (ii) 87,050 Class A ordinary
shares issuable upon exercise of options held by Mr. Li, (iii) 2,893 restricted shares held by
Mr. Li, and (iv) 5,490,000 Class B ordinary shares held by Handsome Reward Limited, a company
wholly-owned and controlled by Mr. Li. Excludes 1,676,667 Class B ordinary shares held by
Melissa Ma, Mr. Lis wife, of which Mr. Li disclaims beneficial ownership. The business
address for Mr. Li is c/o Baidu.com, Inc., Ideal International Plaza, 12/F, No. 58 West-North
4th Ring, Beijing, 100080, PRC. |
|
(4) |
|
Includes (i) 6,000 Class A ordinary shares issuable upon exercise of options and (ii) 4,500
restricted shares, both granted on April 16, 2008. The business address for Ms. Li is c/o
Baidu.com, Inc., Ideal International Plaza, 12/F, No. 58 West-North 4th Ring, Beijing, 100080,
PRC. |
|
(5) |
|
Includes (i) 8,500 Class A ordinary shares issuable upon exercise of options and (ii) 2,000
restricted shares, both granted on April 25, 2008. The business address for Mr. Ye is c/o
Baidu.com, Inc., Ideal International Plaza, 12/F, No. 58 West-North 4th Ring, Beijing, 100080,
PRC. |
|
(6) |
|
Includes (i) 370 Class A ordinary shares in the form of ADSs beneficially owned by Mr. Chang,
(ii) 30,000 Class A ordinary shares issuable upon exercise of options held by Mr. Chang and
(iii) 3,000 restricted shares held by Mr. Chang. The business address for Mr. Chang is
Baidu.com, Inc., Ideal International Plaza, 12/F, No. 58 West-North 4th Ring, Beijing, 100080,
PRC. |
|
(7) |
|
Includes 800 restricted shares granted to Mr. Decker on January 11, 2008. The address of Mr.
Decker is 24 Nordic Way, Saranac Lake, NY, 12983, USA. |
|
(8) |
|
Includes 650 restricted shares granted to Mr. Ding on January 11, 2008. The business address
of Mr. Ding is 4/F, Zhongdian Information Tower No.6 Zhongguancun South Street, Haidian
District, Beijing 100086, PRC. |
|
(9) |
|
Includes 15,000 ordinary shares issuable upon exercise of options held by Mr. Idei. The
business address of Mr. Ideis address is Tokyo Ginko Kyoukai Building 16F,1-3-1, Marunouchi,
Chiyoda-ku, Tokyo, 100-0005, Japan. |
104
|
|
|
(10) |
|
Includes (i) 15,520 Class A shares in the form of ADSs held by Mr. Penner, (ii) 650
restricted shares, (iii) 150,000 Class A ordinary shares in the form of ADSs held by MCP Fund
I, LLC, a fund for which Mr. Penner serves as a managing member of the sole manager; and (iv)
967,683 Class B ordinary shares held by Peninsula Capital Fund I, LLC. Mr. Penner is the sole
manager of Peninsula Capital Fund I, LLC, and has sole voting and dispositive power over all
the shares held by Peninsula Capital Fund I, LLC. Mr. Penner disclaims beneficial ownership
of these shares except to the extent of his pecuniary interest therein. The business address
for Mr. Penner is 3000 Sand Hill Road, Building 1, Suite 150, Menlo Park, California 94025,
U.S.A. |
|
(11) |
|
Includes ordinary shares, ordinary shares issuable upon exercise of all options and
restricted shares held by all of our directors and executive officers as a group. |
|
(12) |
|
Represents 5,490,000 Class B ordinary shares held by Handsome Reward Limited, a British
Virgin Island company wholly-owned and controlled by Mr. Robin Yanhong Li. The business
address of Handsome Reward Limited is c/o Robin Yanhong Li, Baidu.com, Inc., Ideal
International Plaza, 12/F, No. 58 West-North 4th Ring, Beijing, 100080, PRC. |
Our ordinary shares are divided into Class A ordinary shares and Class B ordinary shares.
Holders of Class A ordinary shares are entitled to one vote per share, while holders of Class B
ordinary shares are entitled to 10 votes per share. We issued Class A ordinary shares represented
by our ADSs in our initial public offering in 2005. Holders of our Class B ordinary shares may
choose to convert their Class B ordinary shares into the same number of Class A ordinary shares at
any time. We are not aware of any arrangement that may, at a subsequent date, result in a change
of control of our company. See Item 3D. Key InformationRisk FactorsRisks Related to Our
ADSsOur dual-class ordinary share structure with different voting rights could discourage others
from pursuing any change of control transactions that holders of our Class A ordinary shares and
ADSs may view as beneficial.
As of March 31, 2008, 34,195,183 of our ordinary shares were issued and outstanding. To our
knowledge, approximately 26,719,889 ordinary shares, or 78.1% of our total outstanding ordinary
shares, were held by record shareholders in the United States, including 25,180,344 Class A
ordinary shares held of record by The Bank of New York, the depositary of our ADS program.
|
|
|
Item 7. |
|
Major Shareholders and Related Party Transactions |
A. Major Shareholders
Please refer to Item 6E. Directors, Senior Management and Employees Share Ownership.
B. Related Party Transactions
Contractual Arrangements with Baidu Netcom and Its Shareholders
PRC law currently limits foreign equity ownership of companies that provide Internet content
and advertising businesses. To comply with these foreign ownership restrictions, we operate our
websites and provide online advertising services in China through a series of contractual
arrangements with Baidu Netcom and its shareholders, Robin Yanhong Li and Eric Yong Xu. In March
2005, we restructured these contractual arrangements as follows:
105
Exclusive Technology Consulting and Services Agreement. Pursuant to the exclusive technology
consulting and services agreement between Baidu Online and Baidu Netcom, Baidu Online has the
exclusive right to provide to Baidu Netcom technology consulting and services related to the
maintenance of servers, software development and design of
advertisements. Baidu Online also seconds employees to Baidu Netcom for whom Baidu Netcom bears
the costs and expenses. Baidu Online owns the intellectual property rights related to the software
developed by Baidu Online for Baidu Netcom. Baidu Netcom pays monthly service fees to Baidu Online
based upon a pre-agreed formula, which takes into account the number of monthly page views and the
basic fee for every one thousand page views of advertisements displayed on our websites. The basic
fee for every one thousand page views is subject to periodic adjustment. The current rate of the
basic fee is RMB0.6. The term of this agreement is ten years from the date thereof.
Business Cooperation Agreement. Pursuant to the business cooperation agreement between Baidu
Netcom and Baidu Online, Baidu Netcom provides Internet information services, Internet advertising
services and related services to Baidu Online to enable Baidu Online to provide P4P services on the
websites owned and operated by Baidu Netcom, and Baidu Online provides search engine technology
services to Baidu Netcom. Baidu Online agrees to pay a monthly fee of RMB10,000 to Baidu Netcom.
The term of this agreement is ten years from the date thereof.
Operating Agreement. Pursuant to the operating agreement among Baidu Online, Baidu Netcom and
the shareholders of Baidu Netcom, Baidu Online provides guidance and instructions on Baidu Netcoms
daily operations and financial affairs. The shareholders of Baidu Netcom must designate the
candidates recommended by Baidu Online as their representatives on Baidu Netcoms board of
directors. Baidu Online has the right to appoint senior executives of Baidu Netcom. In addition,
Baidu Online agrees to guarantee Baidu Netcoms performance under any agreements or arrangements
relating to Baidu Netcoms business arrangements with any third party. Baidu Netcom, in return,
agrees to pledge its accounts receivable and all of its assets to Baidu Online. Moreover, Baidu
Netcom agrees that without the prior consent of Baidu Online, Baidu Netcom will not engage in any
transactions that could materially affect the assets, liabilities, rights or operations of Baidu
Netcom, including, without limitation, incurrence or assumption of any indebtedness, sale or
purchase of any assets or rights, incurrence of any encumbrance on any of its assets or
intellectual property rights in favor of a third party or transfer of any agreements relating to
its business operation to any third party. The term of this agreement is ten years from the date
thereof.
Software License Agreement. Under the software license agreement, Baidu Online granted Baidu
Netcom a non-exclusive, non-assignable and non-transferable right to use Baidu Chinese Search
Engine and Baidu Internet P4P System software. Baidu Netcom can only use the software on its
designated operating systems to process its internal data. The annual license fee for each software
is RMB5.0 million. When deciding the amount of the annual license fee, Baidu Online and Baidu
Netcom considered several factors, including functionality and quality of the software, past and
ongoing research and development costs incurred by Baidu Online in developing and upgrading the
software, license fees of other portal search software applications, Baidu Onlines enterprise
search application license fees, and Baidu Netcoms financial resources and projected operating
results. The term of the license agreement is five years from the date thereof.
106
Other License Agreements. Under these license agreements, Baidu Online granted Baidu Netcom
the exclusive right to use the registered domain names and trademarks owned by Baidu Online and the
web layout owned by Baidu Online for the websites operated by Baidu Netcom. The annual license fee
under each license agreement is RMB10,000, subject to certain adjustments. The term of each license agreement is five years from the date
thereof. The domain name license agreement was terminated upon the completion of the transfers of
certain domain names primarily used in our business from Baidu.com, Inc. or Baidu Online to Baidu
Netcom in May 2008. After the transfers of certain trademarks (including pending trademark
applications) from Baidu Online to Baidu Netcom are completed, the trademark license agreement will
be terminated. We do not expect the termination of these license agreements to have any material
effect on our operations.
Proxy Agreement. Pursuant to the proxy agreement among Baidu Online, Baidu Netcom and
the shareholders of Baidu Netcom, the shareholders of Baidu Netcom agree to entrust all the rights to
exercise their voting power to the person(s) appointed by Baidu Online. The term of the proxy
agreement is 10 years from the date thereof.
Equity Pledge Agreement. Under the equity pledge agreement between the shareholders of Baidu
Netcom and Baidu Online, the shareholders of Baidu Netcom pledged all of their equity interests in
Baidu Netcom to Baidu Online to guarantee their obligations under the loan agreement and Baidu
Netcoms performance of its obligations under the technology consulting agreement. If Baidu Netcom
or either of its shareholders breaches its respective contractual obligations, Baidu Online, as
pledgee, will be entitled to certain rights, including the right to sell the pledged equity
interests. The shareholders of Baidu Netcom agreed not to dispose of the pledged equity interests
or take any actions that would prejudice Baidu Onlines interest. The equity pledge agreement will
expire two years after Baidu Netcom and its shareholders fully perform their respective obligations
under the exclusive technology consulting service agreement and the loan agreement.
Exclusive Equity Purchase Option Agreement. Under the exclusive equity purchase option
agreement between the shareholders of Baidu Netcom and Baidu Online, the shareholders of Baidu
Netcom irrevocably granted Baidu Online or its designated person an exclusive option to purchase,
to the extent permitted under PRC law, all or part of the equity interests in Baidu Netcom for the
cost of the initial contributions to the registered capital or the minimum amount of consideration
permitted by applicable PRC law. Baidu Online or its designated person has sole discretion to
decide when to exercise the option, whether in part or in full. The term of this agreement is ten
years from the date thereof.
Loan Agreement. Under the loan agreement between the shareholders of Baidu Netcom and Baidu
Online, the parties confirmed that Baidu Online had made an RMB10.0 million interest-free loan to
the shareholders of Baidu Netcom solely for the latter to fund the capitalization of Baidu Netcom.
The loan can be repaid only with the proceeds from sale of the shareholders equity interest in
Baidu Netcom to Baidu Online. The term of the agreement is ten years from the date thereof.
Irrevocable Power of Attorney. The shareholders of Baidu Netcom have each executed an
irrevocable power of attorney to appoint Xuyang Ren as their attorney-in-fact to vote on their
behalf on all Baidu Netcom matters requiring shareholder approval. The appointment of Xuyang Ren
as attorney-in-fact will terminate if Xuyang Ren is no longer employed by Baidu Online. The term
of the power of attorney is ten years from the date thereof.
107
In March 2008, we extended a RMB90.0 million (US$12.3 million) loan to Robin Yanhong Li for
the sole purpose of increasing the registered capital of Baidu Netcom. In connection with this
loan, we entered into the following agreements with Mr. Li in March 2008:
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a loan agreement for an interest-free loan in an aggregate amount of RMB90.0
million; |
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an equity pledge agreement between Robin Yanhong Li and Baidu Online; and |
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an exclusive equity purchase option agreement between Robin Yanhong Li and Baidu
Online. |
The terms of these agreements are similar to the terms of the original agreements between
Baidu Online and the shareholders of Baidu Netcom entered into in March 2005. In addition, under
the terms of the original proxy agreement entered into in March 2005, Mr. Li is required to entrust
all the rights to exercise the additional voting power he acquired as a result of his RMB90.0
million investment in the registered capital of Baidu Netcom to the person(s) appointed by Baidu
Online.
Contractual Arrangements with Beijing Perusal and Its Shareholders
We entered into a series of contractual arrangements with Beijing Perusal and its shareholders
in 2006 and, with respect to the proxy agreements, 2008. These agreements include:
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loan agreements for interest-free loans in an aggregate amount of RMB1.0 million to
the shareholders of Beijing Perusal; |
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equity pledge agreements between the shareholders of Beijing Perusal and Baidu
Online; |
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exclusive equity purchase option agreements between the shareholders of Beijing
Perusal and Baidu Online; |
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a proxy agreement among the shareholders of Beijing Perusal, Baidu Online and
Beijing Perusal; |
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an exclusive technology consulting and services agreement between Beijing Perusal
and Baidu Online; |
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an operating agreement between Beijing Perusal and Baidu Online; and |
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various license agreements between Beijing Perusal and Baidu Online, including
domain name license agreements, trademark license agreements and webpage copyright
license agreements. The domain name license agreement was terminated in May 2008
because Beijing Perusal already owns the domain names primarily used in its business.
After the transfers of certain pending trademark applications from Baidu Online to
Beijing Perusal are completed, the trademark license agreement will be terminated. We
do not expect the termination of these license agreements to have any material effect
on our operations. |
108
The terms of these contractual arrangements are similar to the terms of our contractual
arrangements with Baidu Netcom and its shareholders.
Contractual Arrangements with BaiduPay and Its Individual Shareholder
We entered into a series of contractual arrangements with BaiduPay and its individual
shareholder in 2008. These agreements include:
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a loan agreement for interest-free loan in an aggregate amount of RMB9.0 million to
the individual shareholder of BaiduPay; |
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an equity pledge agreement between the individual shareholder of BaiduPay and Baidu
Online; |
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an exclusive option agreement between the individual shareholder of BaiduPay and
Baidu Online; |
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a proxy agreement among the individual shareholder of BaiduPay, Baidu Online and
BaiduPay; |
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an exclusive technology consulting and services agreement between BaiduPay and Baidu
Online; |
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operating agreement between BaiduPay and Baidu Online; and |
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a trademark license agreement and a webpage copyright license agreement between
BaiduPay and Baidu Online. After the transfer of a pending trademark application from
Baidu Online to BaiduPay is completed, the trademark license agreement will be
terminated. We do not expect the termination of this agreement to have any material
effect on our operations. |
The terms of these contractual arrangements are similar to the terms of our contractual
arrangements with Baidu Netcom and its shareholders.
Translations of the forms of the agreements that we have entered into with Robin Yanhong Li
for the additional RMB90.0 million loan and with Beijing Perusal, BaiduPay and their respective
individual shareholders are filed as exhibits to this annual report on Form 20-F. We intend to use
these forms, or ones substantially similar to these forms, for our future contractual arrangements with new consolidated affiliated entities and
their shareholders.
Share Options
Please refer to Item 6B. Directors, Senior Management and EmployeesCompensation of
Directors and Executive Officers.
C. Interests of Experts and Counsel
Not applicable.
109
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Item 8. |
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Financial Information |
A. Consolidated Statements and Other Financial Information
We have appended consolidated financial statements filed as part of this annual report.
Legal Proceedings
From time to time, we are involved in litigation or other disputes regarding, among other
things, copyright and trademark infringement, defamation, unfair
competition and labor disputes.
Our search results provide links to materials, and our Baidu Post Bar, Baidu Knows, Baidu Space and
other Baidu communities may contain materials, in which others may allege to own copyrights,
trademarks or image rights or which others may claim to be defamatory or objectionable. We have
received notice letters from third parties asserting copyright infringement, unfair competition,
defamation, breach of contract and labor-related claims against us.
We are currently involved in 27 cases pending in various PRC courts. The aggregate amount of
compensation sought under these cases is approximately RMB169.9 million (US$23.3 million).
In November 2006, the No. 1 Intermediate Peoples Court of Beijing issued its decision in our
favor in a case filed against us by seven record companies alleging copyright violations. The
court ruled that our service, which merely provides links to online music, does not constitute infringement as all the music is downloaded from web servers of third parties. On December 21,
2007, the Peoples High Court of Beijing affirmed the ruling of the No. 1 Intermediate Peoples
Court of Beijing.
In March, 2008, we received complaints filed by three record companies and the Music Copyright
Society of China against us, alleging, among other things, that we have aided illicit online
copying of music or song lyrics by providing links to pirated music or song lyrics. We expect that
the Protection of the Right of Communication through Information Network, which was promulgated by
the State Council and became effective on July 1, 2006, will be applied to these cases. Because
these cases are still at an early stage, we cannot predict their outcomes. See Item 3D. Key
InformationRisk FactorsRisks Related to Our BusinessWe may face intellectual property
infringement claims and other related claims that could be time-consuming and costly to defend and
may result in our inability to continue providing certain of our existing services.
Although we cannot predict with certainty the results of pending litigation and claims, we
believe that the final outcome of pending litigation and claims will not have a material adverse
effect on our business and results of operations. Regardless of the outcome, however, any
litigation can result in substantial costs and diversion of management resources and attention.
Dividend Policy
We have never declared or paid any dividends, nor do we have any present plan to pay any cash
dividends on our ordinary shares in the foreseeable future. We currently intend to retain most,
if not all, of our available funds and any future earnings to operate and
expand our business.
110
Our board of directors has complete discretion whether to distribute dividends. Even if our
board of directors decides to pay dividends, the form, frequency and amount of our dividends will
depend upon our future operations and earnings, capital requirements and surplus, financial
condition, contractual restrictions and other factors that our board of directors may deem
relevant. If we pay any dividends, we will pay our ADS holders to the same extent as holders of
our ordinary shares, subject to the terms of the deposit agreement, including the fees and expenses
payable thereunder. Cash dividends on our ordinary shares, if any, will be paid in U.S. dollars.
B. Significant Changes
Except as disclosed elsewhere in this annual report, we have not experienced any significant
changes since the date of our audited consolidated financial statements included in this annual
report.
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Item 9. |
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The Offer and Listing |
A. Offering and Listing Details.
Our ADSs, each representing one Class A ordinary share, have been listed on the Nasdaq since
August 5, 2005. Our ADSs are traded under the symbol BIDU.
The following table provides the high and low trading prices for our ADSs on the Nasdaq for
(1) the years 2005 (from August 5, 2005), 2006 and 2007, (2) each of the four quarters of 2006 and
2007 and the first quarter of 2008 and (3) each of the past six months.
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Sales Price |
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High |
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Low |
Annual High and Low |
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2005 (from August 5, 2005) |
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153.98 |
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60.00 |
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2006 |
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128.68 |
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44.44 |
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2007 |
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429.19 |
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92.80 |
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Quarterly Highs and Lows |
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First Quarter 2006 |
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69.90 |
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44.44 |
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Second Quarter 2006 |
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94.03 |
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54.25 |
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Third Quarter 2006 |
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96.67 |
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67.92 |
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Fourth Quarter 2006 |
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128.68 |
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82.24 |
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First Quarter 2007 |
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134.10 |
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93.44 |
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Second Quarter 2007 |
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172.00 |
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92.80 |
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Third Quarter 2007 |
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304.40 |
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161.00 |
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Fourth Quarter 2007 |
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429.19 |
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280.66 |
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First Quarter 2008 |
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397.70 |
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201.15 |
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Monthly Highs and Lows |
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December 2007 |
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418.22 |
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348.91 |
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January 2008 |
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397.70 |
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237.01 |
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February 2008 |
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285.74 |
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223.16 |
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March 2008 |
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279.85 |
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201.15 |
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April 2008 |
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378.20 |
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243.00 |
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May 2008 |
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382.90 |
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321.85 |
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June 2008 (through June 4, 2008) |
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348.89 |
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331.67 |
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B. Plan of Distribution
Not applicable.
C. Markets
Our ADSs, each representing one Class A ordinary share, have been listed on the Nasdaq since
August 5, 2005 under the symbol BIDU.
D. Selling Shareholders
Not applicable.
E. Dilution
Not applicable.
F. Expenses of the Issue
Not applicable.
112
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Item 10. |
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Additional Information |
A. Share Capital
Not applicable.
B. Memorandum and Articles of Association
We incorporate by reference into this annual report the description of our amended and
restated memorandum and articles of association contained in our F-1 registration statement (File No.
333-126534) originally filed with the SEC on July 12, 2005, as amended. Our shareholders adopted
our amended and restated memorandum and articles of association by a special resolution on August
1, 2005.
C. Material Contracts
We have not entered into any material contracts other than in the ordinary course of business
and other than those described in Item 4. Information on the Company or elsewhere in this annual
report on Form 20-F.
D. Exchange Controls
See Item 4.B Information on the CompanyBusiness OverviewRegulationRegulations on
Foreign Exchange.
E. Taxation
The following summary of the material Cayman Islands and United States federal income tax
consequences of an investment in our ADSs or ordinary shares is based upon laws and relevant
interpretations thereof in effect as of the date of this annual report, all of which are subject to
change. This summary does not deal with all possible tax consequences relating to an investment in
our ADSs or ordinary shares, such as the tax consequences under state, local and other tax laws.
Cayman Islands Taxation
According to Maples and Calder, our Cayman Islands counsel, the Cayman Islands currently
levies no taxes on individuals or corporations based upon profits, income, gains or appreciation
and there is no taxation in the nature of inheritance tax or estate duty. There are no other taxes
likely to be material to us levied by the Government of the Cayman Islands except for stamp duties
which may be applicable on instruments executed in, or brought within, the jurisdiction of the
Cayman Islands. The Cayman Islands is not party to any double tax treaties. There are no exchange
control regulations or currency restrictions in the Cayman Islands.
113
United States Federal Income Taxation
The following discussion describes the material United States federal income tax consequences
to U.S. Holders (defined below) under present law of an investment in the ADSs or ordinary shares.
This summary applies only to investors that hold the ADSs or
ordinary shares as capital assets and that have the U.S. dollar as their functional currency.
This discussion is based on the tax laws of the United States as in effect on the date of this Form
20-F and on United States Treasury regulations in effect or, in some cases, proposed, as of the
date of this Form 20-F, as well as judicial and administrative interpretations thereof available on
or before such date. All of the foregoing authorities are subject to change, which change could
apply retroactively and could affect the tax consequences described below.
The following discussion does not deal with the tax consequences to any particular investor or
to persons in special tax situations such as:
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banks; |
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financial institutions; |
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insurance companies; |
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broker dealers; |
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traders that elect to mark to market; |
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tax-exempt entities; |
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persons liable for alternative minimum tax; |
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persons holding an ADS or ordinary share as part of a straddle, hedging,
conversion or integrated transaction; |
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persons that actually or constructively own 10% or more of
our voting shares; |
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persons holding ADSs or ordinary shares through partnerships or other
pass-through entities; or |
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persons who acquired ADSs or ordinary shares pursuant to the exercise of
any employee share option or otherwise as consideration. |
U.S. Holders are urged to consult their tax advisors about the application of the United States
federal tax rules to their particular circumstances as well as the state and local and foreign tax
consequences to them of the purchase, ownership and disposition of ADSs or ordinary shares.
The discussion below of the United States federal income tax consequences to U.S. Holders
will apply if you are the beneficial owner of ADSs or ordinary shares and you are, for United
States federal income tax purposes,
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a citizen or individual resident of the United States; |
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a corporation (or other entity taxable as a corporation for United States
federal income tax purposes) organized under the laws of the United States, any State
or the District of Columbia; |
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an estate whose income is subject to United States federal income taxation
regardless of its source; or |
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a trust that (1) is subject to the supervision of a court within the
United States and the control of one or more United States persons or (2) has a valid
election in effect under applicable United States Treasury regulations to be treated as
a United States person. |
The discussion below assumes that the representations contained in the deposit agreement are
true and that the obligations in the deposit agreement and any related agreement will be complied
with in accordance with their terms. If you hold ADSs, you will be treated as the holder of the
underlying ordinary shares represented by those ADSs for United States federal income tax purposes.
The U.S. Treasury has expressed concerns that parties to whom ADSs are pre-released may be
taking actions that are inconsistent with the claiming, by U.S. Holders of ADSs, of foreign tax
credits for United States federal income tax purposes. Such actions would also be inconsistent with
the claiming of the reduced rate of tax applicable to dividends received by certain non-corporate
U.S. Holders, as described below. Accordingly, the availability of the reduced tax rate for
dividends received by certain non-corporate U.S. Holders could be affected by future actions that
may be taken by the U.S. Treasury or parties to whom ADSs are pre-released.
Taxation of Dividends and Other Distributions on the ADSs or Ordinary Shares
Subject to the passive foreign investment company rules discussed below, the gross amount of
all our distributions to you with respect to the ADSs or ordinary shares will be included in your
gross income as dividend income on the date of receipt by the depositary, in the case of ADSs, or
by you, in the case of ordinary shares, but only to the extent that the distribution is paid out of
our current or accumulated earnings and profits (computed under United States federal income tax
principles). The dividends will not be eligible for the dividends-received deduction allowed to
corporations in respect of dividends received from other U.S. corporations.
With respect to non-corporate U.S. Holders (including individual U.S. Holders) for taxable
years beginning before January 1, 2011, dividends may be taxed at the lower applicable capital
gains rate (qualified dividend income) provided that (1) the ADSs or ordinary shares are readily
tradable on an established securities market in the United States, (2) we are not a passive foreign
investment company (as discussed below) for either our taxable year in which the dividend was paid
or the preceding taxable year, and (3) certain holding period requirements are met. For this
purpose, ADSs listed on the Nasdaq National Market will be considered to be readily tradable on an
established securities market in the United States. You should consult your tax advisor regarding
the availability of the lower rate for dividends paid with respect to our ADSs or ordinary shares.
Dividends will constitute foreign source income for foreign tax credit limitation purposes. If
the dividends are qualified dividend income (as discussed above), the amount of the dividend taken
into account for purposes of calculating the foreign tax credit limitation will be limited to the
gross amount of the dividend, multiplied by the reduced rate divided by the highest rate of tax
normally applicable to dividends. The limitation on foreign taxes eligible for credit is calculated
separately with respect to specific classes of income. For this purpose, dividends distributed by
us with respect to ADSs or ordinary shares generally will constitute passive category income but
could, in the case of certain U.S. Holders, constitute general category income.
115
To the extent that the amount of the distribution exceeds our current and accumulated earnings
and profits, it will be treated first as a tax-free return of your tax basis in your ADSs or
ordinary shares, and to the extent the amount of the distribution exceeds your tax basis, the
excess will be taxed as capital gain. We do not intend to calculate our earnings and profits for
United States federal income tax purposes. Therefore, a U.S. Holder should expect that a
distribution will be reported as a dividend.
Taxation of Disposition of Shares
Subject to the passive foreign investment company rules discussed below, you will recognize
taxable gain or loss on any sale, exchange or other taxable disposition of an ADS or ordinary share
equal to the difference between the amount realized (in U.S. dollars) for the ADS or ordinary share
and your tax basis (in U.S. dollars) in the ADS or ordinary share. The gain or loss will be capital
gain or loss. If you are a non-corporate U.S. Holder, including an individual U.S. Holder, who has
held the ADS or ordinary share for more than one year, you will be eligible for reduced tax rates.
The deductibility of capital losses is subject to limitations. Any such gain or loss that you
recognize will be treated as United States source income or loss (in the case of losses, subject to
certain limitations).
Passive Foreign Investment Company
Based on the market value of our ADSs and ordinary shares, the composition of our assets and
income and our operations, we believe that for our taxable year ended December 31, 2007, we were
not a passive foreign investment company (PFIC) for United States federal income tax purposes.
However, our PFIC status for the current taxable year ending December 31, 2008 will not be
determinable until its close, and, accordingly, there is no guarantee that we will not be a PFIC
for the current taxable year (or any future taxable year). A non-U.S. corporation is considered a
PFIC for any taxable year if either:
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at least 75% of its gross income is passive income (the income test), or |
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at least 50% of the value of its assets (based on an average of the
quarterly values of the assets during a taxable year) is attributable to assets that
produce or are held for the production of passive income (the asset test). |
We will be treated as owning our proportionate share of the assets and earning our
proportionate share of the income of any other corporation in which we own, directly or indirectly,
more than 25% (by value) of the shares.
We must make a separate determination each year as to whether we are a PFIC. As a result, our
PFIC status may change. In particular, because the total value of our assets for purposes of the
asset test generally will be calculated using the market price of our ADSs and ordinary shares, our
PFIC status will depend in large part on the market price of our ADSs and ordinary shares which may
fluctuate considerably. Accordingly, fluctuations in the market price of the ADSs and ordinary
shares may result in our being a PFIC for any year. If we are a PFIC for any year during which you
hold ADS or ordinary shares, we will continue to be treated as a PFIC for all succeeding years
during which you hold ADS or ordinary shares. However, if we cease to be a PFIC, provided that you
have not made a mark-to-market election, as described below, you may avoid some of the adverse
effects of the PFIC regime by making a deemed sale election with respect to the ADSs or ordinary
shares, as applicable.
116
If we are a PFIC for any taxable year during which you hold ADSs or ordinary shares, you will
be subject to special tax rules with respect to any excess distribution that you receive and any
gain you realize from a sale or other disposition (including a pledge) of the ADSs or ordinary
shares, unless you make a mark-to-market election as discussed below. Distributions you receive
in a taxable year that are greater than 125% of the average annual distributions you received
during the shorter of the three preceding taxable years or your holding period for the ADSs or
ordinary shares will be treated as an excess distribution. Under these special tax rules:
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the excess distribution or gain will be allocated ratably over your
holding period for the ADSs or ordinary shares, |
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the amount allocated to the current taxable year, and any taxable year
prior to the first taxable year in which we became a PFIC, will be treated as ordinary
income, and |
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the amount allocated to each other taxable year will be subject to the
highest tax rate in effect for that taxable year and the interest charge generally
applicable to underpayments of tax will be imposed on the resulting tax attributable to
each such taxable year. |
The tax liability for amounts allocated to years prior to the year of disposition or excess
distribution cannot be offset by any net operating losses for such years, and gains (but not
losses) realized on the sale of the ADSs or ordinary shares cannot be treated as capital, even if
you hold the ADSs or ordinary shares as capital assets.
Alternatively, a U.S. Holder of marketable stock (as defined below) in a PFIC may make a
mark-to-market election for such stock of a PFIC to elect out of the tax treatment discussed in the
two preceding paragraphs. If you make a valid mark-to-market election for the ADSs or ordinary
shares, you will include in income each year an amount equal to the excess, if any, of the fair
market value of the ADSs or ordinary shares as of the close of your taxable year over your adjusted
basis in such ADSs or ordinary shares. You are allowed a deduction for the excess, if any, of the
adjusted basis of the ADSs or ordinary shares over their fair market value as of the close of the
taxable year. However, deductions are allowable only to the extent of any net mark-to-market gains
on the ADSs or ordinary shares included in your income for prior taxable years. Amounts included in
your income under a mark-to-market election, as well as gain on the actual sale or other
disposition of the ADSs or ordinary shares, are treated as ordinary income. Ordinary loss treatment
also applies to the deductible portion of any mark-to-market loss on the ADSs or ordinary shares,
as well as to any loss realized on the actual sale or disposition of the ADSs or ordinary shares,
to the extent that the amount of such loss does not exceed the net mark-to-market gains previously
included for such ADSs or ordinary shares. Your basis in the ADSs or ordinary shares will be
adjusted to reflect any such income or loss amounts. If you make such a mark-to-market election,
tax rules that apply to distributions by corporations which are not PFICs would apply to
distributions by us (except that the lower applicable capital gains rate would not apply).
The mark-to-market election is available only for marketable stock which is stock that is
traded in other than de minimis quantities on at least 15 days during each calendar quarter
(regularly traded) on a qualified exchange or other market, as defined in applicable Treasury
regulations. We expect that the ADSs will continue to be listed on the Nasdaq National Market, which is a qualified exchange for these purposes, and, consequently, assuming
that the ADSs are regularly traded, if you are a holder of ADSs, it is expected that the
mark-to-market election would be available to you were we to become a PFIC.
117
If you hold ADSs or ordinary shares in any year in which we are a PFIC, you will be required
to file Internal Revenue Service Form 8621 regarding distributions received on the ADSs or ordinary
shares and any gain realized on the disposition of the ADSs or ordinary shares.
You are urged to consult your tax advisor regarding the application of the PFIC rules to your
investment in ADSs or ordinary shares.
Information Reporting and Backup Withholding
Dividend payments with respect to ADSs or ordinary shares and proceeds from the sale, exchange
or redemption of ADSs or ordinary shares may be subject to information reporting to the Internal
Revenue Service and possible United States backup withholding at a current rate of 28%. Backup
withholding will not apply, however, to a U.S. Holder who furnishes a correct taxpayer
identification number and makes any other required certification or who is otherwise exempt from
backup withholding. U.S. Holders who are required to establish their exempt status must provide
such certification on Internal Revenue Service Form W-9. U.S. Holders should consult their tax
advisors regarding the application of the United States information reporting and backup
withholding rules.
Backup withholding is not an additional tax. Amounts withheld as backup withholding may be
credited against your United States federal income tax liability, and you may obtain a refund of
any excess amounts withheld under the backup withholding rules by filing the appropriate claim for
refund with the Internal Revenue Service and furnishing any required information.
F. Dividends and Paying Agents
Not applicable.
G. Statement by Experts
Not applicable.
H. Documents on Display
We previously filed with the SEC our registration statement on Form F-1, as amended and
prospectus under the Securities Act of 1933, with respect to our ordinary shares.
We are subject to the periodic reporting and other informational requirements of the
Securities Exchange Act of 1934, as amended, or the Exchange Act. Under the Exchange Act, we are
required to file reports and other information with the SEC. Specifically, we are required to file
annually a Form 20-F no later than six months after the close of each fiscal year, which is
December 31. Copies of reports and other information, when so filed, may be inspected without
charge and may be obtained at prescribed rates at the public reference facilities maintained by the
Securities and Exchange Commission at 100 F Street, N.E., Room 1580, Washington, D.C. 20549. The
public may obtain information regarding the Washington, D.C. Public Reference Room by calling the Commission at 1-800-SEC-0330. The SEC
also maintains a web site at www.sec.gov that contains reports, proxy and information statements,
and other information regarding registrants that make electronic filings with the SEC using its
EDGAR system. As a foreign private issuer, we are exempt from the rules under the Exchange Act
prescribing the furnishing and content of quarterly reports and 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.
118
We will furnish The Bank of New York, the depositary of our ADSs, with our annual reports,
which will include a review of operations and annual audited consolidated financial statements
prepared in conformity with U.S. GAAP, and all notices of shareholders meetings and other reports
and communications that are made generally available to our shareholders. The depositary will make
such notices, reports and communications available to holders of ADSs and, upon our request, will
mail to all record holders of ADSs the information contained in any notice of a shareholders
meeting received by the depositary from us.
Nasdaq Marketplace Rule 4350(e) requires each issuer to hold an annual meeting of shareholders
no later than one year after the end of the issuers fiscal year-end. However, Nasdaq Marketplace
Rule 4350(a)(1) permits foreign private issuers like us to follow home country practice in
certain corporate governance matters. Maples and Calder, our Cayman Islands counsel, has provided
a letter to the Nasdaq certifying that under Cayman Islands law, we are not required to hold annual
shareholder meetings every year.
We intend to follow home country practice with respect to annual meetings. We did not hold an
annual shareholder meeting in 2007. We may, however, hold annual shareholder meetings in the
future if there are significant issues that require shareholders approvals.
In accordance with Nasdaq Marketplace Rule 4350(b), we will post this annual report on Form
20-F on our website at http://ir.baidu.com. In addition, we will provide hardcopies of our annual
report free of charge to shareholders and ADS holders upon request.
I. Subsidiary Information
For a listing of our subsidiaries, see Item 4C. Information on the CompanyOrganizational
Structure.
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Item 11. |
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Quantitative and Qualitative Disclosures About Market Risk |
Interest Rate Risk
Our exposure to interest rate risk primarily relates to the interest income generated by
excess cash invested in demand deposits and liquid investments with original maturities of three
months or less. We have not used any derivative financial instruments to manage our interest risk
exposure. Interest-earning instruments carry a degree of interest rate risk. We have not been
exposed nor do we anticipate being exposed to material risks due to changes in interest rates.
However, our future interest income may be lower than expected due to changes in market interest
rates. If market interest rates for short-term demand deposits increase in the near future, such
increase may cause the amount of our interest income to rise. A hypothetical 10% increase in the average applicable interest rate for our short-term demand
deposits would result in an increase of approximately RMB4.4 million (US$0.6 million) in interest
income from the assumed average cash and cash equivalent balance in 2007.
119
Foreign Exchange Risk
Substantially all of our revenues and costs are denominated in RMB, while a significant
portion of our financial assets are denominated in U.S. dollars. We currently rely entirely on
dividends and other fees paid to us by our subsidiaries and affiliated entities. Our exposure to
foreign exchange risk primarily relates to cash and cash equivalent, denominated in U.S. dollars as
a result of our past issuances of convertible preferred shares through private placements and
proceeds from our initial public offering. We do not believe that we currently have any
significant direct foreign exchange risk and have not hedged exposures denominated in foreign
currencies or any other derivative financial instruments. On July 21, 2005, the PRC government
changed its decade-old policy of pegging the value of the RMB to the U.S. dollar. Under the
current policy, the RMB is permitted to fluctuate within a narrow and managed band against a basket
of certain foreign currencies. This change in policy has resulted in
an approximately 15.9%
appreciation of the RMB against the U.S. dollar between July 21, 2005 and June 4 2008. While the
international reaction to the RMB revaluation has generally been positive, there remains
significant international pressure on the PRC government to adopt an even more flexible currency
policy, which could result in a further and more significant appreciation of the RMB against the
U.S. dollar. Any significant revaluation of RMB may materially and adversely affect our cash
flows, revenues, earnings and financial position, and the value of, and any dividends payable on,
our ADS in U.S. dollars. For example, an appreciation of RMB against the U.S. dollar would make
any new RMB denominated investments or expenditures more costly to us, to the extent that we need
to convert U.S. dollars into RMB for such purposes. The functional currency of Baidu.com, Inc. is
the U.S. dollar and the functional currency of our PRC subsidiaries and affiliated entities is RMB,
and our reporting currency is RMB. As a result, an appreciation of RMB against the U.S. dollar
would result in foreign currency transaction losses when we translate our consolidated assets from
the U.S. dollar into RMB.
Net assets of Baidu.com, Inc. and Baidu Holdings Limited account for 61% of our consolidated
net assets as at December 31, 2007, which results in our exposure to foreign currency risk. Losses
arose from the translation of the net assets of Baidu.com, Inc. and Baidu Holdings Limited to RMB
during consolidation. We recognized translation losses of RMB48.3 million (US$6.6 million) in 2007
as a component of other comprehensive income, primarily as a result of the appreciation of the RMB
monthly average exchange rate against the U.S. dollar from 7.7876 in January 2007 to 7.3682 in
December 2007. If the exchange rate of the RMB against the U.S. dollar at December 31, 2007 had
decreased by 10% from 7.2946 to 6.5651, and the average exchange rate in 2007 had remained the
same, the translation losses in 2007 would have been approximately RMB170.4 million (US$23.4
million).
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Item 12. |
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Description of Securities Other than Equity Securities |
Not Applicable.
120
PART II
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Item 13. |
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Defaults, Dividend Arrearages and Delinquencies |
None.
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Item 14. |
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Material Modifications to the Rights of Security Holders and Use of Proceeds |
None.
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Item 15. |
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Controls and Procedures |
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our chief executive officer and chief financial
officer, has performed an evaluation of the effectiveness of our disclosure controls and procedures
(as defined in Rule 13a-15(e) under the Exchange Act) as of the end of the period covered by this
report, as required by Rule 13a-15(b) under the Exchange Act.
Based upon that evaluation, our management has concluded that, as of December 31, 2007, our
disclosure controls and procedures were effective in ensuring that the information required to be
disclosed by us in the reports that we file and furnish under the Exchange Act was recorded,
processed, summarized and reported, within the time periods specified in the SECs rules and forms,
and that the information required to be disclosed by us in the reports that we file or submit under
the Exchange Act is accumulated and communicated to our management, including our chief executive
officer and chief financial officer, to allow timely decisions regarding required disclosure.
Managements Annual Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over
financial reporting, as defined in Rule 13a-15(f) under the Exchange Act. Our management evaluated
the effectiveness of our internal control over financial reporting, as required by Rule 13a-15(c)
of the Exchange Act, based on criteria established in the framework in Internal Control-Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on
this evaluation, our management has concluded that our internal control over financial reporting
was effective as of December 31, 2007.
Because of its inherent limitations, internal control over financial reporting may not prevent
or detect misstatements. In addition, projections of any evaluation of effectiveness of our
internal control over financial reporting to future periods are subject
to the risk that controls may become inadequate because of changes in conditions, or that the
degree of compliance with the policies and procedures may deteriorate.
Our independent registered public accounting firm, Ernst & Young Hua Ming, has audited the
effectiveness of our internal control over financial reporting as of December 31, 2007, as stated
in its report, which appears on page F-2 of this annual report on Form 20-F.
121
Changes in Internal Control over Financial Reporting
There were no changes in our internal controls over financial reporting that occurred during
the period covered by this annual report on Form 20-F that have materially affected, or are
reasonably likely to materially affect, our internal control over financial reporting.
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Item 16A. |
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Audit Committee Financial Expert |
Our board of directors has determined that Mr. William Decker, an independent director (under
the standards set forth in Nasdaq Marketplace Rule 4350(d) and Rule 10A-3 under the Exchange Act)
and member of our audit committee, is an audit committee financial expert.
Our board of directors adopted a code of business conduct and ethics that applies to our
directors, officers, employees and advisors in July 2005. We have posted a copy of our code of
business conduct and ethics on our website at http://ir.baidu.com.
Item 16C. |
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Principal Accountant Fees and Services |
The following table sets forth the aggregate fees by categories specified below in connection
with certain professional services rendered by Ernst & Young Hua Ming, our principal external
auditors, for the periods indicated.
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2006 |
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2007 |
Audit fees (1) |
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US$1,050,000 |
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US$858,000 |
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Audit-related fees (2) |
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US$150,000 |
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Tax fees |
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All other fees |
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(1) |
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Audit fees means the aggregate fees billed in each of the fiscal years listed for
professional services rendered by our principal auditors for the audit of our annual financial
statements. In 2006 and 2007, the audit refers to integrated audit, including financial audit
and audit pursuant to Section 404 of the Sarbanes-Oxley Act of 2002. |
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(2) |
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Audit-related fees means the aggregate fees billed in each of the fiscal years listed for
assurance and related services by our principal auditors that are reasonably related to the
performance of the audit or review of our financial statements and are not reported under
Audit fees. |
All audit and non-audit services provided by our independent auditors must be
pre-approved by our audit committee. Our audit committee has adopted a combination of two
approaches in pre-approving proposed services: general pre-approval and specific pre-approval.
With general approval, proposed services are pre-approved without consideration of specific
case-by-case services; with specific approval, proposed services require the specific pre-approval
of the audit committee. Unless a type of service has received general pre-approval, it will
require specific pre-approval by our audit committee. Any proposed services exceeding pre-approved
cost levels or budgeted amounts will also require specific pre-approval by our audit committee.
122
All requests or applications for services to be provided by our independent auditors that do
not require specific approval by our audit committee will be submitted to our chief financial
officer and must include a detailed description of the services to be rendered. The chief
financial officer will determine whether such services are included within the list of services
that have received the general pre-approval of the audit committee. The audit committee will be
informed on a timely basis of any such services. Requests or applications to provide services that
require specific approval by our audit committee will be submitted to the audit committee by both
our independent auditors and our chief financial officer and must include a joint statement as to
whether, in their view, the request or application is consistent with the SECs rules on auditor
independence.
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Item 16D. |
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Exemptions from the Listing Standards for Audit Committees |
Not applicable.
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Item 16E. |
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Purchases of Equity Securities by the Issuer and Affiliated Purchasers |
None.
PART III
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Item 17. |
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Financial Statements |
We have elected to provide financial statements pursuant to Item 18.
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Item 18. |
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Financial Statements |
The consolidated financial statements of Baidu.com, Inc. and its subsidiaries are included at
the end of this annual report.
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Exhibit Number |
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Description of Document |
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1.1
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Amended and Restated Memorandum and Articles of Association of the Registrant (incorporated by reference to
Exhibit 3.2 of Amendment No. 4 to our Registration Statement on Form F-1 (file no. 333-126534) filed with the
Securities and Exchange Commission on August 1, 2005) |
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2.1
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Registrants Specimen American Depositary Receipt (incorporated by reference to Exhibit 4.3 (included as Exhibit
A thereof) of our Registration Statement on Form F-1 (file no. 333-126534) filed with the Securities and Exchange
Commission on July 12, 2005) |
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2.2
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Registrants Specimen Certificate for Class A Ordinary Shares (incorporated by reference to Exhibit 4.2 of
Amendment No. 5 to our Registration Statement on Form |
123
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Exhibit Number |
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Description of Document |
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F-1 (file no. 333-126534) filed with the Securities and
Exchange Commission on August 2, 2005) |
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2.3
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Form of Deposit Agreement among the Registrant, the depositary and holder of the American
Depositary Receipts (incorporated by reference to Exhibit 4.3 to our Registration Statement on
Form F-1 (file no. 333-126534) filed with the Securities and Exchange Commission on July 12,
2005) |
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4.1
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Second Amended and Restated Shareholders Agreement, dated as of June 9, 2004, among the
Registrant and other parties therein (incorporated by reference to Exhibit 4.4 of our
Registration Statement on Form F-1 (file no. 333-126534) filed with the Securities and
Exchange Commission on July 12, 2005) |
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4.2
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2000 Option Plan (incorporated by reference to Exhibit 10.1 of our Registration Statement on
Form F-1 (file no. 333-126534) filed with the Securities and Exchange Commission on July 12,
2005) |
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4.3
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Form of Indemnification Agreement with the Registrants directors (incorporated by reference
to Exhibit 10.3 of our Registration Statement on Form F-1 (file no. 333-126534) filed with the
Securities and Exchange Commission on July 12, 2005) |
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4.4
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Form of Employment Agreement between the Registrant and an Executive Officer of the Registrant
(incorporated by reference to Exhibit 10.4 of our Registration Statement on Form F-1 (file no.
333-126534) filed with the Securities and Exchange Commission on July 12, 2005) |
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4.5
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Translation of Acquisition Agreement dated as of August 9, 2004 between Baidu Online and the
owner of Hao123.com (incorporated by reference to Exhibit 10.5 of our Registration Statement
on Form F-1 (file no. 333-126534) filed with the Securities and Exchange Commission on July
12, 2005) |
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4.6
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Translation of Technology Consulting and Services Agreement dated as of
March 22, 2005 between Baidu Online and Baidu Netcom (incorporated by
reference to Exhibit 99.2 of our Registration Statement on Form F-1 (file
no. 333-126534) filed with the Securities and Exchange Commission on July
12, 2005) |
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4.7
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Translation of Business Cooperation Agreement dated as of March 22, 2005
between Baidu Online and Baidu Netcom (incorporated by reference to Exhibit
99.3 of our Registration Statement on Form F-1 (file no. 333-126534) filed
with the Securities and Exchange Commission on July 12, 2005) |
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4.8
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Translation of Operating Agreement dated as of March 22, 2005 between Baidu
Online and Baidu Netcom (incorporated by reference to Exhibit 99.4 of our
Registration Statement on Form F-1 (file no. 333-126534) filed with the
Securities and Exchange Commission on July 12, 2005) |
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4.9
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Translation of Software License Agreement dated as of March 22, 2005
between Baidu Online and Baidu Netcom (incorporated by reference to Exhibit
99.5 of our Registration Statement on Form F-1 (file no. 333-126534) filed
with the Securities and Exchange Commission on July 12, 2005) |
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4.10
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Translation of Trademark License Agreement dated as of March 1, 2004
between Baidu Online and Baidu Netcom and the supplementary agreement dated
as of January 18, 2005 (incorporated by reference to Exhibit 99.6 of our
Registration Statement on Form F-1 (file no. 333-126534) filed with the
Securities and Exchange Commission on July 12, 2005) |
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4.11
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Translation of Domain Name License Agreement dated as of March 1, 2004
between Baidu Online and Baidu Netcom and the supplementary agreement dated
August 9, 2004 (incorporated by reference to Exhibit 99.7 of our
Registration Statement on Form |
124
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Exhibit Number |
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Description of Document |
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F-1 (file no. 333-126534) filed with the
Securities and Exchange Commission on July 12, 2005) |
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4.12
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Translation of Web Layout Copyright License Agreement dated as of March 1,
2004 between Baidu Online and Baidu Netcom and the supplementary agreement
dated as of August 9, 2004 (incorporated by reference to Exhibit 99.8 of
our Registration Statement on Form F-1 (file no. 333-126534) filed with the
Securities and Exchange Commission on July 12, 2005) |
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4.13
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Translation of Proxy Agreement dated as of August 9, 2004 among Baidu
Online, Baidu Netcom, Robin Yanhong Li and Eric Yong Xu (incorporated by
reference to Exhibit 99.9 of our Registration Statement on Form F-1 (file
no. 333-126534) filed with the Securities and Exchange Commission on July
12, 2005) |
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4.14
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Translation of Equity Pledge Agreement dated as of March 22, 2005 among
Baidu Online, Robin Yanhong Li and Eric Yong Xu (incorporated by reference
to Exhibit 99.10 of our Registration Statement on Form F-1 (file no.
333-126534) filed with the Securities and Exchange Commission on July 12,
2005) |
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4.15
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Translation of Exclusive Equity Purchase Option Agreement dated as of March
22, 2005 among Baidu Online, Robin Yanhong Li and Eric Yong Xu
(incorporated by reference to Exhibit 99.11 of our Registration Statement
on Form F-1 (file no. 333-126534) filed with the Securities and Exchange
Commission on July 12, 2005) |
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4.16
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Translation of Loan Agreement dated as of March 22, 2005 among Baidu
Online, Robin Yanhong Li and Eric Yong Xu (incorporated by reference to
Exhibit 99.12 of our Registration Statement on Form F-1 (file no.
333-126534) filed with the Securities and Exchange Commission on July 12,
2005) |
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4.17
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Translation of Form of Irrevocable Powers of Attorney issued by the
shareholders of Baidu Netcom (incorporated by reference to Exhibit 99.13 of
our Registration Statement on Form F-1 (file no. 333-126534) filed with the
Securities and Exchange Commission on July 12, 2005) |
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4.18
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Translation of Land Development Contract dated December 30, 2005 between
Beijing Shichuang Science and Technology Park Development Co., Ltd. and
Baidu Online (incorporated by reference to Exhibit 4.18 of our Annual
Report on Form 20-F filed with the Securities and Exchange Commission on
June 21, 2006) |
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4.19*
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Translation of the form of Technology Consulting and Services Agreement
between Baidu Online and a consolidated affiliated PRC entity |
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4.20*
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Translation of the form of Operating Agreement between Baidu Online and a
consolidated affiliated PRC entity |
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4.21*
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Translation of the form of Web Layout Copyright License Agreement between
Baidu Online and a consolidated affiliated PRC entity |
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4.22*
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Translation of the form of Proxy Agreement among Baidu Online, a
consolidated affiliated PRC entity and the shareholders of the consolidated
affiliated PRC entity |
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4.23*
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Translation of the form of Equity Pledge Agreement between Baidu Online and
the shareholder of a consolidated affiliated PRC entity |
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4.24*
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Translation of the form of Exclusive Equity Purchase Option Agreement
between Baidu Online and the shareholder of a consolidated affiliated PRC
entity |
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4.25*
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Translation of the form of Loan Agreement between Baidu Online and the
shareholder of a consolidated affiliated PRC entity |
125
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Exhibit Number |
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Description of Document |
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8.1*
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List of Subsidiaries |
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11.1
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Code of Business Conduct and Ethics (incorporated by reference to Exhibit
99.14 of our Registration Statement on Form F-1 (file no. 333-126534) filed
with the Securities and Exchange Commission on July 12, 2005) |
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12.1*
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CEO Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
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12.2*
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CFO Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
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13.1*
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CEO Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
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13.2*
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CFO Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
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15.1*
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Consent of Maples and Calder |
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15.2*
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Consent of Hawkhigh Law Firm |
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15.3*
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Consent of Ernst & Young Hua Ming |
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* |
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Filed with this Annual Report on Form 20-F |
126
SIGNATURES
The registrant hereby certifies that it meets all of the requirements for filing its annual
report on Form 20-F and that it has duly caused and authorized the undersigned to sign this annual
report on its behalf.
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BAIDU.COM, INC.
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By: |
/s/
Robin Yanhong Li |
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Name: |
Robin Yanhong Li |
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Title: |
Chairman and Chief Executive Officer |
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Date: June 5, 2008
127
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
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Page(s) |
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F-2 |
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F-4 |
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F-5 |
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F-6 |
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F-7 |
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F-8 |
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders
Baidu.com, Inc.
We have audited the accompanying consolidated balance sheets of Baidu.com, Inc. (the Company) as
of December 31, 2006 and 2007, and the related consolidated statements of income, shareholders
equity, and cash flows for each of the three years in the period ended December 31, 2007. These
financial statements are the responsibility of the Companys management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material
respects, the consolidated financial position of Baidu.com, Inc. at December 31, 2006 and 2007, and
the consolidated results of its operations and its cash flows for each of the three years in the
period ended December 31, 2007, in conformity with U.S. generally accepted accounting principles.
As discussed in Note 2 to these consolidated financial statements, in 2006, Baidu.com, Inc. changed
its method of accounting for share-based payments in accordance with the guidance provided in the
Statement of Financial Accounting Standards No. 123(R), Share-Based Payment.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), Baidu.com, Inc.s internal control over financial reporting as of December
31, 2007, based on criteria established in Internal Control-Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission and our report dated April 23,
2008 expressed an unqualified opinion thereon.
/s/ Ernst & Young Hua Ming
Beijing, The Peoples Republic of China
April 23, 2008
F-2
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders
Baidu.com, Inc.
We have audited Baidu.com, Inc.s internal control over financial reporting as of December 31,
2007, based on criteria established in Internal ControlIntegrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Baidu.com,
Inc.s management is responsible for maintaining effective internal control over financial
reporting and for its assessment of the effectiveness of internal control over financial reporting
included in the accompanying Managements Report on Internal Control over Financial Reporting. Our
responsibility is to express an opinion on the companys internal control over financial reporting
based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control over financial reporting was
maintained in all material respects. Our audit included obtaining an understanding of internal
control over financial reporting, assessing the risk that a material weakness exists, testing and
evaluating the design and operating effectiveness of internal control based on the assessed risk,
and performing such other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A companys internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles. A
companys internal control over financial reporting includes those policies and procedures that (1)
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (2) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of management and directors of the company;
and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Baidu.com, Inc. maintained, in all material respects, effective internal control
over financial reporting as of December 31, 2007, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the accompanying consolidated balance sheets of Baidu.com, Inc. as of
December 31, 2006 and 2007, and the related consolidated statements of income, shareholders
equity, and cash flows for each of the three years in the period ended December 31, 2007, and our
report dated April 23, 2008, expressed an unqualified opinion thereon.
/s/ Ernst & Young Hua Ming
Beijing, The Peoples Republic of China
April 23, 2008
F-3
BAIDU.COM, INC.
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands of Renminbi (RMB), and in thousands of U.S. Dollars (US$), except for number of shares and per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
Notes |
|
2006 |
|
2007 |
|
2007 |
|
|
|
|
|
|
RMB |
|
RMB |
|
US$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
|
|
|
|
|
1,136,274 |
|
|
|
1,350,600 |
|
|
|
185,151 |
|
Short-term investments |
|
|
3 |
|
|
|
85,339 |
|
|
|
242,037 |
|
|
|
33,180 |
|
Accounts receivable, net of allowance of RMB4,211 for
2006 and RMB3,581 (US$491) for 2007 |
|
|
4 |
|
|
|
23,051 |
|
|
|
64,274 |
|
|
|
8,811 |
|
Prepaid expenses and other current assets |
|
|
5 |
|
|
|
32,339 |
|
|
|
65,996 |
|
|
|
9,047 |
|
Deferred tax assets, net |
|
|
10 |
|
|
|
1,734 |
|
|
|
2,587 |
|
|
|
355 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets |
|
|
|
|
|
|
1,278,737 |
|
|
|
1,725,494 |
|
|
|
236,544 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-current assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed assets, net |
|
|
6 |
|
|
|
191,734 |
|
|
|
678,886 |
|
|
|
93,067 |
|
Land use right, net |
|
|
|
|
|
|
92,400 |
|
|
|
96,472 |
|
|
|
13,225 |
|
Intangible assets, net |
|
|
7 |
|
|
|
44,386 |
|
|
|
40,460 |
|
|
|
5,547 |
|
Goodwill |
|
|
7 |
|
|
|
47,316 |
|
|
|
51,093 |
|
|
|
7,004 |
|
Investments, net |
|
|
|
|
|
|
|
|
|
|
15,439 |
|
|
|
2,116 |
|
Deferred tax assets, net |
|
|
10 |
|
|
|
5,802 |
|
|
|
15,716 |
|
|
|
2,154 |
|
Other non-current assets |
|
|
|
|
|
|
7,702 |
|
|
|
32,348 |
|
|
|
4,435 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-current assets |
|
|
|
|
|
|
389,340 |
|
|
|
930,414 |
|
|
|
127,548 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL ASSETS |
|
|
|
|
|
|
1,668,077 |
|
|
|
2,655,908 |
|
|
|
364,092 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued expenses and other liabilities |
|
|
8 |
|
|
|
153,141 |
|
|
|
359,310 |
|
|
|
49,257 |
|
Customers deposits |
|
|
|
|
|
|
141,185 |
|
|
|
257,577 |
|
|
|
35,310 |
|
Deferred revenue |
|
|
9 |
|
|
|
2,583 |
|
|
|
11,832 |
|
|
|
1,622 |
|
Deferred income |
|
|
|
|
|
|
4,090 |
|
|
|
2,485 |
|
|
|
341 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
|
|
|
|
300,999 |
|
|
|
631,204 |
|
|
|
86,530 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-current liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term payable for business acquisition |
|
|
|
|
|
|
7,000 |
|
|
|
3,000 |
|
|
|
411 |
|
Deferred income |
|
|
|
|
|
|
2,817 |
|
|
|
332 |
|
|
|
46 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-current liabilities |
|
|
|
|
|
|
9,817 |
|
|
|
3,332 |
|
|
|
457 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
|
|
|
|
|
310,816 |
|
|
|
634,536 |
|
|
|
86,987 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class A Ordinary Shares, par value US$0.00005 per share,
825,000,000 shares authorized, and 22,574,381 shares and
25,136,147 shares issued and outstanding as at December
31, 2006 and 2007 |
|
|
13 |
|
|
|
9 |
|
|
|
10 |
|
|
|
1 |
|
Class B Ordinary Shares, par value US$0.00005 per share,
35,400,000 shares authorized, and 11,130,018 shares and
8,996,842 shares issued and outstanding as at December
31, 2006 and 2007 |
|
|
13 |
|
|
|
5 |
|
|
|
4 |
|
|
|
1 |
|
Additional paid-in capital |
|
|
|
|
|
|
1,088,176 |
|
|
|
1,171,575 |
|
|
|
160,609 |
|
Accumulated other comprehensive loss |
|
|
|
|
|
|
(33,697 |
) |
|
|
(81,953 |
) |
|
|
(11,235 |
) |
Retained earnings |
|
|
15 |
|
|
|
302,768 |
|
|
|
931,736 |
|
|
|
127,729 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total shareholders equity |
|
|
|
|
|
|
1,357,261 |
|
|
|
2,021,372 |
|
|
|
277,105 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND SHAREHOLDERS EQUITY |
|
|
|
|
|
|
1,668,077 |
|
|
|
2,655,908 |
|
|
|
364,092 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the consolidated financial statements.
F-4
BAIDU.COM, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Amounts in thousands of Renminbi (RMB), and in thousands of U.S. Dollars (US$), except for number of shares and per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the years ended December 31, |
|
|
Notes |
|
2005 |
|
2006 |
|
2007 |
|
2007 |
|
|
|
|
|
|
RMB |
|
RMB |
|
RMB |
|
US$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Online marketing services |
|
|
|
|
|
|
307,363 |
|
|
|
828,484 |
|
|
|
1,741,021 |
|
|
|
238,673 |
|
Other services |
|
|
|
|
|
|
11,852 |
|
|
|
9,354 |
|
|
|
3,404 |
|
|
|
467 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
|
|
|
|
319,215 |
|
|
|
837,838 |
|
|
|
1,744,425 |
|
|
|
239,140 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating costs and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues |
|
|
|
|
|
|
(104,401 |
) |
|
|
(245,489 |
) |
|
|
(645,406 |
) |
|
|
(88,477 |
) |
Selling, general and administrative |
|
|
|
|
|
|
(134,771 |
) |
|
|
(250,240 |
) |
|
|
(411,163 |
) |
|
|
(56,366 |
) |
Research and development |
|
|
|
|
|
|
(44,200 |
) |
|
|
(79,231 |
) |
|
|
(140,702 |
) |
|
|
(19,289 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating costs and expenses |
|
|
|
|
|
|
(283,372 |
) |
|
|
(574,960 |
) |
|
|
(1,197,271 |
) |
|
|
(164,132 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating profit |
|
|
|
|
|
|
35,843 |
|
|
|
262,878 |
|
|
|
547,154 |
|
|
|
75,008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
|
|
|
|
|
13,580 |
|
|
|
42,443 |
|
|
|
49,009 |
|
|
|
6,719 |
|
Foreign exchange loss, net |
|
|
|
|
|
|
(659 |
) |
|
|
(89 |
) |
|
|
(2,425 |
) |
|
|
(332 |
) |
Other income, net |
|
|
|
|
|
|
752 |
|
|
|
4,187 |
|
|
|
22,478 |
|
|
|
3,081 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income |
|
|
|
|
|
|
13,673 |
|
|
|
46,541 |
|
|
|
69,062 |
|
|
|
9,468 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income before tax and cumulative effect of
change in accounting principle |
|
|
|
|
|
|
49,516 |
|
|
|
309,419 |
|
|
|
616,216 |
|
|
|
84,476 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes |
|
|
10 |
|
|
|
(1,911 |
) |
|
|
(12,256 |
) |
|
|
12,752 |
|
|
|
1,748 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income before cumulative effect of change in
accounting principle |
|
|
|
|
|
|
47,605 |
|
|
|
297,163 |
|
|
|
628,968 |
|
|
|
86,224 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative effect of change in accounting principle |
|
|
2 |
|
|
|
|
|
|
|
4,603 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
47,605 |
|
|
|
301,766 |
|
|
|
628,968 |
|
|
|
86,224 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share for Class A and Class B ordinary shares: |
|
|
15 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic EPS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic (prior to cumulative effect of change in
accounting principle) |
|
|
|
|
|
|
2.40 |
|
|
|
8.92 |
|
|
|
18.57 |
|
|
|
2.55 |
|
Cumulative effect of change in accounting principle |
|
|
|
|
|
|
|
|
|
|
0.14 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2.40 |
|
|
|
9.06 |
|
|
|
18.57 |
|
|
|
2.55 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted EPS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted (prior to cumulative effect of change in
accounting principle) |
|
|
|
|
|
|
1.49 |
|
|
|
8.62 |
|
|
|
18.11 |
|
|
|
2.48 |
|
Cumulative effect of change in accounting principle |
|
|
|
|
|
|
|
|
|
|
0.13 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.49 |
|
|
|
8.75 |
|
|
|
18.11 |
|
|
|
2.48 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average aggregate number of Class A and Class B
ordinary shares outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
|
|
|
|
19,808,058 |
|
|
|
33,290,696 |
|
|
|
33,872,611 |
|
|
|
33,872,611 |
|
Diluted |
|
|
|
|
|
|
32,043,888 |
|
|
|
34,506,594 |
|
|
|
34,724,365 |
|
|
|
34,724,365 |
|
The accompanying notes are an integral part of the consolidated financial statements.
F-5
BAIDU.COM, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands of Renminbi (RMB), and in thousands of U.S. Dollars (US$))
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the years ended December 31, |
|
|
2005 |
|
2006 |
|
2007 |
|
2007 |
|
|
RMB |
|
RMB |
|
RMB |
|
US$ |
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
47,605 |
|
|
|
301,766 |
|
|
|
628,968 |
|
|
|
86,224 |
|
Adjustments to reconcile net income to net cash generated from
operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation of fixed assets |
|
|
30,650 |
|
|
|
64,103 |
|
|
|
170,731 |
|
|
|
23,405 |
|
Fixed assets written off |
|
|
16 |
|
|
|
877 |
|
|
|
622 |
|
|
|
85 |
|
Amortization of intangible assets and land use right |
|
|
3,136 |
|
|
|
6,339 |
|
|
|
10,204 |
|
|
|
1,399 |
|
Deferred tax assets, net |
|
|
(4,292 |
) |
|
|
(3,244 |
) |
|
|
(10,767 |
) |
|
|
(1,476 |
) |
Share-based compensation |
|
|
33,571 |
|
|
|
48,280 |
|
|
|
39,848 |
|
|
|
5,463 |
|
Provision for doubtful accounts |
|
|
4,301 |
|
|
|
(310 |
) |
|
|
(703 |
) |
|
|
(96 |
) |
Foreign exchange loss |
|
|
587 |
|
|
|
89 |
|
|
|
1,313 |
|
|
|
180 |
|
Interest income from short term investments |
|
|
|
|
|
|
|
|
|
|
(4,914 |
) |
|
|
(674 |
) |
Impairment on long-term investment |
|
|
|
|
|
|
1,976 |
|
|
|
|
|
|
|
|
|
Cumulative effect of change in accounting principle |
|
|
|
|
|
|
(4,603 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in operating assets and liabilities net of effects of acquisition: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
(17,532 |
) |
|
|
(388 |
) |
|
|
(40,685 |
) |
|
|
(5,577 |
) |
Prepaid expenses and other current assets |
|
|
(8,529 |
) |
|
|
(23,455 |
) |
|
|
(50,442 |
) |
|
|
(6,915 |
) |
Customers deposits |
|
|
44,174 |
|
|
|
70,858 |
|
|
|
116,391 |
|
|
|
15,956 |
|
Accrued expenses and other liabilities |
|
|
27,060 |
|
|
|
62,272 |
|
|
|
121,167 |
|
|
|
16,611 |
|
Deferred revenue |
|
|
1,356 |
|
|
|
(5,075 |
) |
|
|
1,834 |
|
|
|
252 |
|
Deferred income |
|
|
249 |
|
|
|
6,659 |
|
|
|
(4,089 |
) |
|
|
(561 |
) |
Trading securities |
|
|
|
|
|
|
(85,339 |
) |
|
|
(44,326 |
) |
|
|
(6,077 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash generated from operating activities |
|
|
162,352 |
|
|
|
440,805 |
|
|
|
935,152 |
|
|
|
128,199 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition of fixed assets |
|
|
(88,660 |
) |
|
|
(127,534 |
) |
|
|
(569,091 |
) |
|
|
(78,015 |
) |
Acquisition of business |
|
|
(10,465 |
) |
|
|
(43,320 |
) |
|
|
(14,080 |
) |
|
|
(1,930 |
) |
Acquisition of intangible assets |
|
|
(2,144 |
) |
|
|
(21,897 |
) |
|
|
(4,000 |
) |
|
|
(548 |
) |
Capitalization of software costs |
|
|
(609 |
) |
|
|
(982 |
) |
|
|
(4,041 |
) |
|
|
(554 |
) |
Acquisition of long-term investments |
|
|
(2,018 |
) |
|
|
|
|
|
|
(8,024 |
) |
|
|
(1,100 |
) |
Acquisition of short-term investments |
|
|
|
|
|
|
|
|
|
|
(108,769 |
) |
|
|
(14,911 |
) |
Acquisition of land use right |
|
|
(77,200 |
) |
|
|
(15,200 |
) |
|
|
(5,211 |
) |
|
|
(714 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(181,096 |
) |
|
|
(208,933 |
) |
|
|
(713,216 |
) |
|
|
(97,772 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from initial public offering (IPO), net of expenses |
|
|
716,297 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Payment for expenses in connection with IPO |
|
|
|
|
|
|
(641 |
) |
|
|
|
|
|
|
|
|
Proceeds from exercise of share options |
|
|
8,036 |
|
|
|
32,820 |
|
|
|
40,698 |
|
|
|
5,579 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash generated from financing activities |
|
|
724,333 |
|
|
|
32,179 |
|
|
|
40,698 |
|
|
|
5,579 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash and cash equivalents |
|
|
(5,192 |
) |
|
|
(28,370 |
) |
|
|
(48,308 |
) |
|
|
(6,624 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash and cash equivalents |
|
|
700,397 |
|
|
|
235,681 |
|
|
|
214,326 |
|
|
|
29,382 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at beginning of the year |
|
|
200,196 |
|
|
|
900,593 |
|
|
|
1,136,274 |
|
|
|
155,769 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of the year |
|
|
900,593 |
|
|
|
1,136,274 |
|
|
|
1,350,600 |
|
|
|
185,151 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes paid/(received), net |
|
|
4,655 |
|
|
|
24,192 |
|
|
|
(11,892 |
) |
|
|
(1,630 |
) |
Fixed asset acquisitions included in accrued expense and other liabilities |
|
|
4,803 |
|
|
|
36,054 |
|
|
|
126,992 |
|
|
|
17,409 |
|
Non-cash acquisitions of long-term investments |
|
|
|
|
|
|
|
|
|
|
7,415 |
|
|
|
1,016 |
|
The accompanying notes are an integral part of the consolidated financial statements.
F-6
BAIDU.COM, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
(Amounts in thousands of Renminbi (RMB) and U.S. Dollars (US$), except number of shares)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Redeemable convertible |
|
|
|
|
|
|
|
|
|
Additional |
|
Accumulated other |
|
|
|
|
|
Total |
|
|
preferred share |
|
Ordinary shares |
|
paid-in |
|
comprehensive |
|
Retained earnings |
|
shareholders |
|
|
Number of shares |
|
Amount |
|
Number of shares |
|
Amount |
|
capital |
|
loss |
|
(Accumulated losses) |
|
equity |
|
|
|
|
|
|
RMB |
|
|
|
|
|
RMB |
|
RMB |
|
RMB |
|
RMB |
|
RMB |
Balances at December 31, 2004 |
|
|
16,648,877 |
|
|
|
211,352 |
|
|
|
11,306,372 |
|
|
|
4 |
|
|
|
43,261 |
|
|
|
|
|
|
|
(46,603 |
) |
|
|
(3,338 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,451 |
) |
|
|
|
|
|
|
(5,451 |
) |
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
47,605 |
|
|
|
47,605 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
42,154 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Initial public offering of ordinary shares |
|
|
|
|
|
|
|
|
|
|
3,690,000 |
|
|
|
2 |
|
|
|
713,275 |
|
|
|
|
|
|
|
|
|
|
|
713,277 |
|
Conversion of redeemable preferred shares to ordinary shares |
|
|
(16,648,877 |
) |
|
|
(211,352 |
) |
|
|
16,648,877 |
|
|
|
7 |
|
|
|
211,345 |
|
|
|
|
|
|
|
|
|
|
|
211,352 |
|
Exercise of share options |
|
|
|
|
|
|
|
|
|
|
1,300,513 |
|
|
|
1 |
|
|
|
8,036 |
|
|
|
|
|
|
|
|
|
|
|
8,037 |
|
Share-based compensation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
33,571 |
|
|
|
|
|
|
|
|
|
|
|
33,571 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at December 31, 2005 |
|
|
|
|
|
|
|
|
|
|
32,945,762 |
|
|
|
14 |
|
|
|
1,009,488 |
|
|
|
(5,451 |
) |
|
|
1,002 |
|
|
|
1,005,053 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(28,246 |
) |
|
|
|
|
|
|
(28,246 |
) |
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
301,766 |
|
|
|
301,766 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
273,520 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative effect of change in accounting principle |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,603 |
) |
|
|
|
|
|
|
|
|
|
|
(4,603 |
) |
Exercise of share options |
|
|
|
|
|
|
|
|
|
|
758,637 |
|
|
|
|
|
|
|
34,417 |
|
|
|
|
|
|
|
|
|
|
|
34,417 |
|
Share-based compensation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
48,663 |
|
|
|
|
|
|
|
|
|
|
|
48,663 |
|
Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
211 |
|
|
|
|
|
|
|
|
|
|
|
211 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at December 31, 2006 |
|
|
|
|
|
|
|
|
|
|
33,704,399 |
|
|
|
14 |
|
|
|
1,088,176 |
|
|
|
(33,697 |
) |
|
|
302,768 |
|
|
|
1,357,261 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(48,256 |
) |
|
|
|
|
|
|
(48,256 |
) |
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
628,968 |
|
|
|
628,968 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
580,712 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of share options |
|
|
|
|
|
|
|
|
|
|
428,590 |
|
|
|
|
|
|
|
42,605 |
|
|
|
|
|
|
|
|
|
|
|
42,605 |
|
Share-based compensation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
40,794 |
|
|
|
|
|
|
|
|
|
|
|
40,794 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at December 31, 2007 |
|
|
|
|
|
|
|
|
|
|
34,132,989 |
|
|
|
14 |
|
|
|
1,171,575 |
|
|
|
(81,953 |
) |
|
|
931,736 |
|
|
|
2,021,372 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at December 31, 2007, in US$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2 |
|
|
|
160,609 |
|
|
|
(11,235 |
) |
|
|
127,729 |
|
|
|
277,105 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the consolidated financial statements.
F-7
BAIDU.COM, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2005, 2006, and 2007
(Amounts in thousands of Renminbi (RMB) and U.S. Dollars (US$), except for number of shares and
per share data or unless otherwise indicated)
|
|
|
1. |
|
ORGANIZATION AND BASIS OF PRESENTATION |
Baidu.com, Inc. (Baidu.com or the Company) was incorporated under the laws of the Cayman
Islands on January 18, 2000. The Company is the 100% shareholder of Baidu Holdings Ltd (Baidu
Holdings) incorporated in the British Virgin Islands. As of December 31, 2007, Baidu Holdings
owned four operational subsidiaries, details of which are as follows:
|
|
Baidu Online Network Technology (Beijing) Co., Ltd (Baidu Online) incorporated under the laws of the Peoples
Republic of China (PRC) on January 18, 2000, |
|
|
|
Baidu (China) Inc. (Baidu China) incorporated under the laws of the PRC on June 6, 2005, |
|
|
|
Baidu.com Times Technology (Beijing) Co., Ltd (Baidu Times) incorporated under the laws of the PRC on April
19, 2006, and |
|
|
|
Baidu Inc. (Baidu Inc.) incorporated in Tokyo under the laws of Japan on December 13, 2006. |
Baidu Holdings established a wholly owned subsidiary in Hong Kong, Baidu (Hong Kong) Limited
(Baidu HK), on November 27, 2007 and transferred all share equity in Baidu China and Baidu Times
to Baidu HK in December 2007.
As of December 31, 2007, the Company also effectively controls two variable interest entities (VIEs):
|
|
Beijing Baidu Netcom Science Technology Co., Ltd (Baidu Netcom)
incorporated under the laws of the PRC on June 5, 2001, and |
|
|
|
Beijing Perusal Technology Co., Ltd. (Beijing Perusal) incorporated
under the laws of the PRC on June 6, 2006. |
The Company, its subsidiaries and VIEs are hereinafter collectively referred to as the Group.
The Group offers Internet search solutions and online marketing solutions, develops and markets
scaleable web application software and provides related services. The Groups principal geographic
market is in the PRC. The Company does not conduct any substantive operations of its own and
conducts its primary business operations through its subsidiaries and VIEs in the PRC.
PRC laws and regulations prohibit or restrict foreign ownership of Internet content and advertising
businesses. To comply with these foreign ownership restrictions, the Company operates its websites
and provides online advertising services in the PRC through VIEs, the PRC legal entities that were
established by the individuals authorized by the Company. The paid-in capital of the VIEs was
funded by the Company through loans extended to the authorized individuals. The Company has entered
into certain exclusive agreements with the VIEs, which obligate the Company to absorb a majority of
the risk of loss from the VIEs activities and entitles the Company to receive a majority of their
residual returns. In addition, the Company has entered into certain agreements with the authorized
individuals, including loan agreements for the paid-in capital of the VIEs, option agreements to
acquire the equity interests in the VIEs when permitted by the PRC laws, and share pledge
agreements for the equity interests in the VIEs held by the authorized individuals.
Based on these contractual arrangements, the Company consolidates the VIEs as required by Financial
Accounting Standards Board (FASB) Interpretation No. 46R (FIN 46R), Consolidation of Variable
Interest Entities, an Interpretation of ARB No. 51 because the Company is the primary beneficiary
of the VIEs.
The Companys consolidated assets do not include any collateral for the obligations of the VIEs.
The carrying amount of the total assets of VIEs as of December 31, 2007 was RMB81,899 (US$11,227)
and there was no pledge or collateralization of their assets. The amount of the net assets of VIEs
as of December 31, 2007 was RMB8,240 (US $1,130). Furthermore, creditors of the VIEs have no
recourse to the general credit of Baidu Online, which is the primary beneficiary of the VIEs.
Principles of Consolidation
The consolidated financial statements were prepared in accordance with U.S. generally accepted
accounting principles (U.S. GAAP). The consolidated financial statements include the financial
statements of the Company, its subsidiaries and VIEs for which the Company is the primary
beneficiary. All inter-company transactions and balances between the Company, its subsidiaries and
VIEs are eliminated upon consolidation. The Company has included the results of operations of
acquired businesses from the respective date of acquisition.
F-8
BAIDU.COM, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2005, 2006, and 2007
(Amounts in thousands of Renminbi (RMB) and U.S. Dollars (US$), except for number of shares and
per share data or unless otherwise indicated)
|
|
|
2. |
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
Convenience Translation
Translations of amounts from RMB into US$ for the convenience of the reader were calculated at the
noon buying rate of US$1.00 to RMB7.2946 on December 31, 2007 in the city of New York for cable
transfers of RMB as certified for customs purposes by the Federal Reserve Bank of New York. No
representation is made that the RMB amounts could have been, or could be, converted into United
States dollars at such rate.
Foreign Currency
The Companys functional currency is the US$. The Companys subsidiaries and VIEs determine their
functional currencies based on the criteria of Statements of Financial Accounting Standards
(SFAS) 52, Foreign Currency Translation, and have determined their functional currencies to be
their respective local currency. The Company uses the RMB as its reporting currency. The Company
uses the average exchange rate for the year and the exchange rate at the balance sheet date to
translate its operating results and financial position respectively. Any translation gains (losses)
are recorded in accumulated other comprehensive income (loss) as a component of shareholders
equity. Transactions denominated in foreign currencies are translated into the functional currency
at the exchange rates prevailing on the transaction dates. Assets and liabilities denominated in
foreign currencies are translated into the functional currency at the exchange rates prevailing at
the balance sheet date. Exchange gains and losses are included in the consolidated statements of
income.
Guarantees
The Company accounts for guarantees in accordance with FASB Interpretation No. 45, Guarantors
Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees to Others, an
interpretation of FASB Statements No. 5, 57 and 107 and a rescission of FASB Interpretation No. 34
(FIN 45). Accordingly, the Company evaluates its guarantees to determine whether (a) the guarantee
is specifically excluded from the scope of FIN 45, (b) the guarantee is subject to FIN 45
disclosure requirements only, but not subject to the initial recognition and measurement
provisions, or (c) the guarantee is required to be recorded in the financial statements at fair
value.
The corporate by-laws require that the Company indemnify its officers and directors, as well as
those who act as directors and officers of other entities at the Companys request, against
expenses, judgments, fines, settlements and other amounts actually and reasonably incurred in
connection with any proceedings arising out of their services to the Company. In addition, the
Company has entered into separate indemnification agreements with each director and each executive
officer of the Company that provide for indemnification of these directors and officers under
similar circumstances and under additional circumstances. The indemnification obligations are more
fully described in the by-laws and the indemnification agreements. The Company purchases standard
directors and officers insurance to cover claims or a portion of the claims made against its
directors and officers. Since a maximum obligation is not explicitly stated in the Companys
by-laws or in the indemnification agreements and will depend on the facts and circumstances that
arise out of any future claims, the overall maximum amount of the obligations cannot be reasonably
estimated. Historically, the Company has not been required to make payments related to these
obligations, and the fair value for these obligations is zero in the consolidated balance sheet as
of December 31, 2007.
The Company has no other guarantees for any of the years presented.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make
estimates and assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the period. Actual results could differ from these
estimates.
F-9
BAIDU.COM, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2005, 2006, and 2007
(Amounts in thousands of Renminbi (RMB) and U.S. Dollars (US$), except for number of shares and
per share data or unless otherwise indicated)
|
|
|
2. |
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) |
Fair Value of Financial Instruments
The carrying amounts of financial instruments, including cash and cash equivalents, short-term
investment, accounts receivable, accounts payable and accrued liabilities, approximate their fair
values because of their generally short maturities.
Cash, Cash Equivalents and Short-Term Investments
Cash and cash equivalents stated at cost, which approximates fair value, primarily consist of cash
and investments in interest bearing demand deposit accounts, highly liquid investments and money
market funds. All highly liquid investments with stated maturities of three months or less from the
date of purchase are classified as cash equivalents; all highly liquid investments with stated
maturities of greater than three months, but less than 12 months, are classified as short-term
investments which are stated at their approximate fair value.
The Company classifies the short-term investments in debt and equity securities as
held-to-maturity, trading or available-for-sale, whose classification determines the
respective accounting methods stipulated by the accounting standard for financial instruments. The
securities that are bought and held principally for the purpose of selling them in the near term
are classified as trading securities. The securities that the Company has positive intent and
ability to hold to maturity are classified as held-to-maturity securities and stated at amortized
cost. The Company does not have available-for-sale securities. Unrealized holding gains and losses
for trading securities are included in earnings. Dividend and interest income, including
amortization of the premium and discount arising at acquisition, for all categories of investments
in securities are included in earnings. Any realized gains or losses on the sale of the short term
investments are determined on a specific identification method, and such gains and losses are
reflected as a component of interest income.
For individual securities classified as held-to-maturity securities, the Company evaluates whether
a decline in fair value below the amortized cost basis is other than temporary. If the decline in
fair value is judged to be other than temporary, the cost basis of the individual security would be
written down to fair value as a new cost basis and the amount of the write-down is included in
earnings.
Long-term Investments
The investments for which the Company does not have the ability to exercise significant influence
(generally, when the Company has an investment of less than 20% ownership and no representation on
the investees board of directors) and for which there is not a readily determinable fair value,
are accounted for using the cost method. Dividends and other distributions of earnings from
investees, if any, are included in income when declared. The Company periodically evaluates the
carrying value of its investments accounted for under the cost method of accounting and any
impairment is included in the Companys consolidated statements of income. The impairment charge
was nil, RMB 1,951 and nil for the year ended December 31, 2005, 2006 and 2007, respectively.
Capitalization of Software Developed for Internal Use
The Company has capitalized certain internal use software development costs in accordance with SOP
98-1 Accounting for the Costs of Computer Software Developed or Obtained for Internal Use, totaling
RMB609, RMB1,397 and RMB6,489 (US$890) in 2005, 2006 and 2007, respectively. These costs mainly
include payroll and payroll-related costs for employees who are directly associated with and who
devote time to the internal use software projects. The estimated useful life of software
development costs is determined to be three years. The amortization expense for capitalized costs
totaled RMB1,980, RMB1,659 and RMB1,263 (US$173) for the years ended December 31, 2005, 2006 and
2007. Capitalized internal use software costs are included in fixed assets, net.
F-10
BAIDU.COM, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2005, 2006, and 2007
(Amounts in thousands of Renminbi (RMB) and U.S. Dollars (US$), except for number of shares and
per share data or unless otherwise indicated)
|
|
|
2. |
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) |
Fixed Assets
Fixed assets are stated at cost and are depreciated or amortized using the straight-line method
over the shorter of the estimated useful lives of the assets or the term of the related lease, as
follows:
|
|
|
Leasehold improvements
|
|
over the shorter of lease terms or estimated useful lives of the assets |
Computer equipment
|
|
3 or 5 years |
Internal use software development costs
|
|
3 years |
Vehicles and office equipment
|
|
5 years |
Repair and maintenance costs are charged to expense as incurred, whereas the cost of renewals and
betterments that extend the useful life of fixed assets are capitalized as additions to the related
assets. Retirements, sales and disposals of assets are recorded by removing the cost and
accumulated depreciation from the asset and accumulated depreciation accounts with any resulting
gain or loss reflected in the consolidated statements of income.
All direct and indirect costs that are related to the construction of fixed assets and incurred
before the assets are ready for their intended use are capitalized as construction in progress.
Construction in progress is transferred to specific fixed assets items and depreciation of these
assets commences when ready for their intended use.
Goodwill and Intangible Assets
Goodwill represents the excess of the purchase price over the fair value of the identifiable net
assets acquired. Goodwill is tested for impairment annually or more frequently if events or changes
in circumstances indicate that it might be impaired. The Company assesses goodwill for impairment
at the reporting unit level.
Intangible assets are carried at cost less accumulated amortization. Intangible assets with a
finite useful life are amortized using the straight-line method over the estimated economic life of
the intangible assets, as follows:
|
|
|
Domain name
|
|
5 years |
Customer relationships
|
|
4.9 years |
Non-competition agreements
|
|
4 years |
Software
|
|
9.8 years |
Contract-based assets
|
|
2.4 years |
Intangible assets with an indefinite useful life are not amortized. In accordance with this policy,
one of the Domain Name assets, which was acquired in July 2006, is not subject to amortization, as
the remaining useful life is indefinite. The total amount assigned to the domain name is RMB9,360
(US$1,283) as of December 31, 2007. If the intangible asset that is not being amortized is
subsequently determined to have a finite useful life, the asset will be tested for impairment and
then amortized prospectively over its estimated remaining useful life and accounted for in the same
manner as other intangible assets that are subject to amortization. Intangible assets with
indefinite useful lives are tested for impairment annually or more frequently if events or changes
in circumstances indicate that they might be impaired.
The Company reviews and adjusts the carrying value of the intangible assets if the facts and
circumstances suggest the intangible assets may be impaired. The Company assessed and concluded
that there was no impairment of goodwill and intangible assets in any of the years presented.
F-11
BAIDU.COM, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2005, 2006, and 2007
(Amounts in thousands of Renminbi (RMB) and U.S. Dollars (US$), except for number of shares and
per share data or unless otherwise indicated)
|
|
|
2. |
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) |
Impairment of Long-Lived Assets
The Company evaluates long-lived assets, such as property and equipment and purchased or internally
developed intangible assets with finite lives, for impairment whenever events or changes in
circumstances indicate the carrying value of an asset may not be recoverable in accordance with
SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. The Company assesses
the recoverability of the assets group based on the undiscounted future cash flow the assets group
are expected to generate and recognizes an impairment loss when estimated undiscounted future cash
flow expected to result from the use of the assets group plus net proceeds expected from
disposition of the assets group, if any, are less than the carrying value of the assets group. If
the Company identifies an impairment, the Company reduces the carrying amount of the assets group
to its estimated fair value based on a discounted cash flow approach or, when available and
appropriate, to comparable market values. The Company uses estimates and judgments in its
impairment tests and if different estimates or judgments had been utilized, the timing or the
amount of any impairment charges could be different. Asset groups to be disposed of would be
reported at the lower of the carrying amount or fair value less costs to sell, and no longer
depreciated. The assets and liabilities of a disposal group classified as held for sale would be
presented separately in the appropriate asset and liability sections of the balance sheet. There
has been no impairment charges of the Companys long-lived assets in any of the years presented.
Accounting for Impairment of Goodwill
The Company assesses goodwill for impairment in accordance with SFAS No. 142, Goodwill and Other
Intangible Assets, which requires that goodwill be tested for impairment at the reporting unit
level (Reporting Unit) at least annually and more frequently upon the occurrence of certain
events, as defined by SFAS No. 142. Goodwill was tested for impairment in the annual impairment
tests on December 31 in each of the years 2005, 2006, and 2007 using the two-step process required
by SFAS No. 142. First, the Company reviewed the carrying amount of the Reporting Unit compared to
the fair value of the Reporting Unit based on quoted market prices of the ordinary share. If
such comparison reflected potential impairment, the Company would then prepare the discounted cash
flow analyses. Such analyses are based on cash flow assumptions that are consistent with the plans
and estimates being used to manage the business. An excess carrying value compared to fair value
would indicate that goodwill may be impaired. Finally, if the Company determined that goodwill may
be impaired, the implied fair value of the goodwill, as defined by SFAS No. 142, would be
compared to its carrying amount to determine the impairment loss, if any. There has been no
impairment of goodwill in any of the years presented.
Accounts Receivable and Other Receivables
Accounts receivable are recognized and carried at original invoiced amount less an allowance for
any potential uncollectible amounts. An estimate for doubtful debts is made when collection of the
full amount is no longer probable. Bad debts are written off as incurred. The Company generally
does not require collateral from its customers.
The Company maintains allowances for doubtful accounts for estimated losses resulting from the
failure of customers to make payments on time. The Company reviews the accounts receivable on a
periodic basis and makes general and specific allowances when there is doubt as to the
collectibility of individual balances. In evaluating the collectibility of individual receivable
balances, the Company considers many factors, including the age of the balance, the customers
historical payment history, its current credit-worthiness and current economic trends.
Deferred Income
Deferred income represents government subsidies relating to the purchased domestic equipment.
Deferred income is amortized over the estimated remaining useful lives of the related fixed assets
and credited as other income in the condensed consolidated statements of income.
F-12
BAIDU.COM, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2005, 2006, and 2007
(Amounts in thousands of Renminbi (RMB) and U.S. Dollars (US$), except for number of shares and
per share data or unless otherwise indicated)
|
|
|
2. |
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) |
Revenue Recognition
The Company recognizes revenue based on the following principles:
Online marketing services
(1) Auction-based pay-for-performance service
The Companys auction-based pay-for-performance (P4P) platform enables a customer to place its
website link and related description on the Companys search result list. The customers make bids
to determine how much they are willing to pay for each click to their listings in the search
results listed on the Companys website. The amount of the customers bid will influence the
ranking of the customers listing in the search results. The customer pays the Company only when a
user clicks on one of its website links. Revenue is recognized when a user clicks on one of the
customer-sponsored website links, there is persuasive evidence of an arrangement, the fee is fixed
or determinable and collection is reasonably assured, as prescribed by Securities and Exchange
Committee (SEC) Staff Accounting Bulletin (SAB) No. 104.
For certain P4P customers engaged through direct sales, the Company may provide certain value-added
consultative services to help its customers to better utilize its P4P online marketing system. Fees
for such services are recognized as revenue on a pro-rata basis over the contracted service period.
(2) Other performance-based online marketing services
To the extent the Company provides online marketing services based on performance criteria other
than click-throughs, such as the number of telephone calls brought to its customers, the number of
users registered with its customers, or the number of minimum click-throughs, revenue is recognized
when the specified performance criteria are met together with satisfaction of other applicable
revenue recognition criteria as prescribed by SAB 104.
(3) Time-based online advertising services
For time-based online advertising services such as text links, banners, or other forms of graphical
advertisements, the Company recognizes revenue, in accordance with SAB 104, on a pro-rata basis
over the contractual term commencing on the date the customers advertisement is displayed in a
specified webpage. For certain time-based contractual agreements, the Company may also provide
certain performance guarantees, in which cases revenue is recognized at the later of the completion
of the time commitment or performance guarantee.
(4) Online marketing services involving Baidu Union
Baidu Union is the program through which the Company expands distribution of its customers
sponsored links or advertisements by leveraging traffic of the Baidu Union members internet
properties. The Company makes payments to Baidu Union members for acquisition of traffic. The
Company recognizes gross revenue for the amount of fees it receives from its customers. Payments
made to Baidu Union members are included in cost of revenues as traffic acquisition costs.
(5) Barter transactions
The Company may engage in barter transactions from time to time and adopted the provisions of
Accounting Principles Board (APB) No. 29, Accounting for Nonmonetary Transactions. While
nonmonetary transactions are generally recorded at fair value, if such value is not determinable
within reasonable limits, the transaction is recognized based on the carrying value of the product
or services provided. The amount of revenues recognized for barter transactions was insignificant
for each of the periods presented.
F-13
BAIDU.COM, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2005, 2006, and 2007
(Amounts in thousands of Renminbi (RMB) and U.S. Dollars (US$), except for number of shares and
per share data or unless otherwise indicated)
|
|
|
2. |
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) |
Revenue Recognition (continued)
(5) Barter transactions (continued)
In addition, the Company recognized revenues for barter transactions involving advertising in
accordance with Emerging Issues Task Force (EITF) 99-17, Accounting for Advertising Barter
Transactions. However, neither the amount recognized nor the volume of such transactions qualified
for income recognition was material for any of the periods presented.
According to EITF 00-8, Accounting by a Grantee for an Equity Instrument to Be Received in
Conjunction with Providing Goods or Services, if the Company provides services in exchange for
equity instruments, the Company measures the fair value of those equity instruments for revenue
recognition purposes as of the earlier of either of the following dates:
|
|
The date the parties come to a mutual understanding of the terms of the equity-based compensation arrangement
and a commitment for performance by the Company to earn the equity instruments is reached; |
|
|
|
The date at which the Companys performance necessary to earn the equity instruments is completed. |
If as of the measurement date, the fair value of the equity instruments received is not
determinable within reasonable limits, the transaction is recognized based on the fair value of the
services provided. If the fair value of both the equity instruments received and the services
provided cannot be determined, no revenue is to be recognized for the services provided and the
equity instrument received is to be recorded at zero carrying value. The amount of revenues
recognized for such transactions were not material for any of the years presented.
(6) Other revenue recognition related policies
If a sales contract stipulates more than one of the services described in (1), (2) and (3) above
(collectively the Services), and the Services are considered as multiple accounting units in
accordance with EITF 00-21, Revenue Arrangements with Multiple Deliverables, the total revenue on
such arrangements is allocated to the individual deliverables based on their relative fair values.
If sufficient vendor-specific objective evidence of fair value does not exist for the allocation of
revenue, the fee for the entire arrangement is recognized ratably over the term of the arrangement.
The Company engages third party distributors to deliver some of its online marketing services to
end customers. In this context, the Company may provide cash incentives to distributors. The cash
incentives are accounted for as reduction of revenue in accordance with EITF 01-9, Accounting for
Consideration Given by a Vendor to a Customer (Including a Reseller of the Vendors Products).
Cash received in advance from customers is recorded as customer deposits. The unused cash balances
remaining in customers accounts are included as a liability of the Company. Deferred revenue is
recorded when services are provided before the applicable revenue recognition criteria set forth in
SAB104 are fulfilled.
Other services
The Company generates fees from the sale and license of its Search Appliance products, which
includes software and post-contract support. The Company recognizes revenue in accordance with
Statement of Position 97-2, Software Revenue Recognition, as amended. For transactions in which the
elements are not sold separately, sufficient vendor-specific objective evidence of fair value does
not exist for the allocation of revenue. As a result, commencing with the delivery of the software,
the fee for the entire arrangement is recognized ratably over the term of the post-contract support
arrangement.
Revenue is recognized net of value added tax (VAT) payable to, but includes the benefit of the
rebate of VAT on sale of enterprise search software received or receivable from, the Chinese tax
authorities as part of the PRC governments policy of encouraging software development in the PRC.
Sales of products in the PRC are subject to a 17% VAT. Companies that fulfill certain criteria set
by the relevant authorities are entitled to a refund of VAT equivalent to the excess over 3% of
contracted amount paid in the month when output VAT exceeds input VAT. Such VAT rebates are
recorded on an accrual basis. The VAT rebate was RMB1,418, RMB1,014 and RMB202 (US$28) for the
years ended December 31, 2005, 2006 and 2007, respectively.
F-14
BAIDU.COM, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2005, 2006, and 2007
(Amounts in thousands of Renminbi (RMB) and U.S. Dollars (US$), except for number of shares and
per share data or unless otherwise indicated)
|
|
|
2. |
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) |
Cost of Revenues
Cost of revenues consists primarily of business taxes and surcharges, traffic acquisition costs,
bandwidth costs, depreciation, payroll and related costs of operations.
The Company incurs business taxes and surcharges in connection with the provision of online
marketing services, technical and consulting service fees charged by Baidu Online to VIEs
and other taxable services in China. According to EITF 06-3, How Taxes Collected from Customers and
Remitted to Governmental Authorities Should Be Presented in the Income Statement, the Company
included the business tax and surcharges incurred on its online marketing revenues in cost of
revenues. The business tax and surcharges in cost of revenues for 2005, 2006 and 2007 were
RMB20,770, RMB51,833 and RMB108,783 (US$14,913), respectively. Traffic acquisition costs represent
the amounts paid or payable to Baidu Union members from which the Company generates revenues. These
payments are primarily based on revenue sharing arrangements under which the Company pays its Baidu
Union members a percentage of the fees it earns from its online marketing customers, primarily
generated by click-throughs as a result of users of that members properties.
Advertising Expenses
Advertising expenses, primarily advertisements through media publications, are included in
Selling, general and administrative expense and are expensed when incurred. Advertising expense
for the years ended December 31, 2005, 2006 and 2007 were RMB20,397, RMB19,686 and RMB19,833
(US$2,719).
Research and Development Expenses
Research and development expenses consisted primarily of personnel-related costs. The Company
expensed substantially all development costs included in the research and development of products
and new functionality added to the existing products as incurred, except for certain core
technologies with alternative future uses.
Leases
Leases have been classified as either capital or operating leases. Leases that transfer
substantially all the benefits and risks incidental to the ownership of assets are accounted for as
if there was an acquisition of an asset and incurrence of an obligation at the inception of the
lease. All other leases are accounted for as operating leases wherein rental payments are expensed
as incurred. The Company has no capital leases for the years ended December 31, 2005, 2006 and
2007.
Income Taxes
The Company recognizes income taxes under the liability method. Deferred income taxes are
recognized for differences between the financial reporting and tax bases of assets and liabilities
at enacted tax rates in effect for the years in which the differences are expected to reverse. The
Company records a valuation allowance against the amount of deferred tax assets that it determines
is not more likely than not of being realized. The effect on deferred taxes of a change in tax
rates is recognized in income in the period that includes the enactment date.
F-15
BAIDU.COM, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2005, 2006, and 2007
(Amounts in thousands of Renminbi (RMB) and U.S. Dollars (US$), except for number of shares and
per share data or unless otherwise indicated)
|
|
|
2. |
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) |
Income Taxes (Continued)
The Company adopted the provisions of FASB Interpretation No. 48 (FIN 48), Accounting for
Uncertainty in Income Taxes an interpretation of FASB Statement No. 109, on January 1, 2007. FIN
48 clarified the accounting for uncertainty in income taxes by prescribing the recognition
threshold a tax position is required to meet before being recognized in the financial statements.
The cumulative effects of applying FIN 48 is recorded as an adjustment to retained earnings as of
the beginning of the period of adoption. The Company did not incur a cumulative effect adjustment
upon adoption nor did the standard have any impact on the Companys financial statements for the
year ended December 31, 2007. The Company has elected to classify interest and penalties related to
an uncertain tax position, if and when required, as part of income tax expense in the consolidated
statements of operations. As of and for the twelve month period ended December 31, 2007, no
unrecognized tax benefits or interest and penalties have been recognized.
In general, the PRC and Japanese tax authorities have up to five years to conduct examinations of
the Companys tax filings. Accordingly, the PRC subsidiaries tax years 2003-2007 and the Japanese
subsidiarys tax years 2006-2007 remain open to examination by the respective taxing jurisdictions.
Comprehensive Income
Comprehensive income is defined as the change in equity of the Company during a period from
transactions and other events and circumstances excluding transactions resulting from investments
by owners and distributions to owners. Comprehensive income is reported in the consolidated
statements of shareholders equity. Accumulated other comprehensive loss of the Company consists of
the foreign currency translation adjustments.
Share-based Compensation
The Company adopted SFAS No. 123 (revised 2004) (SFAS 123R), Share-Based Payment, using the
modified prospective transition approach from January 1, 2006, prior to which the Company accounted
for share-based compensation arrangements with employees in accordance with the provisions of APB
Opinion No. 25 (APB 25), Accounting for Stock Issued to Employees, and related interpretations
thereof. Pursuant to SFAS 123R, the Company recognized share-based compensation over the requisite
service periods for any share-based awards granted after December 31, 2005 based on the fair values
of all share-based awards on the dates of grant. The Company continues to account for share options
that were granted prior to the initial public filing of the Companys F-1 registration statement
with the SEC on July 12, 2005 but that remained unvested at December 31, 2005 under APB 25. For
share-based awards granted after the initial public filing but prior to January 1, 2006, the
compensation cost related to unvested portion is recognized based on the grant date fair values of
those awards.
The adoption of SFAS 123R resulted in a cumulative benefit from accounting change of RMB4,603 in
2006, which reflects the net cumulative impact of estimating future forfeitures in the
determination of period expense. As a result of adopting SFAS 123R, income before income taxes and
net income for the year ended December 31, 2006, were RMB9,097 (US$1,166) and RMB4,494 (US$576)
less than that had the Company continued to account for share-based compensation under APB 25.
Furthermore, basic and diluted earnings per Class A and Class B ordinary shares for the year ended
December 31, 2006 were approximately RMB0.13 and RMB0.13 (US$0.02) less than that had the Company
continued to account for share-based compensation under APB 25.
F-16
BAIDU.COM, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2005, 2006, and 2007
(Amounts in thousands of Renminbi (RMB) and U.S. Dollars (US$), except for number of shares and
per share data or unless otherwise indicated)
|
|
|
2. |
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) |
Share-based Compensation (Continued)
The Company recognizes share-based compensation after the date of adoption of SFAS 123R using the
accelerated method for all share-based awards issued prior to January 1, 2006, other than those
options accounted for under APB 25. The Company has elected to recognize share-based compensation
after the date of adoption of SFAS 123R using the straight-line method for all share-based awards
issued after January 1, 2006, which results in the recognition of less share-based compensation in
the first several years during the vesting period compared to that which would have been recognized
had the Company used the accelerated method. Forfeitures have been estimated based on historical
experience and periodically reviewed.
The Company accounts for share awards issued to non-employees in accordance with the provisions of
SFAS 123R and EITF Issue No. 96-18, Accounting for Equity Instruments That Are Issued to Other Than
Employees for Acquiring, or in Conjunction with Selling, Goods or Services (EITF 96-18). Under
SFAS 123R and EITF 96-18, the Company uses the Black-Scholes option pricing model method to measure
the value of options granted to non-employees at each vesting date to determine the appropriate
charge to share-based compensation.
Prior to the adoption of SFAS 123R, the Company accounted for employee share-based compensation
using the intrinsic value method prescribed by APB 25. The Company applied below the disclosure
provisions of SFAS123, as amended by SFAS 148 as if the fair value method had been applied. If this
method had been used, the Companys net income and net income per Class A and Class B ordinary
shares for the year ended December 31, 2005 would have been adjusted to the pro forma amounts
below:
|
|
|
|
|
|
|
|
2005 |
|
|
|
|
RMB |
|
Net income, as reported |
|
|
47,605 |
|
Add: Share-based compensation expense for employees
included in reported net income |
|
|
11,085 |
|
Deduct: Share-based compensation expense for
employees determined under fair value method |
|
|
(18,995 |
) |
|
|
|
|
|
Pro forma net income |
|
|
39,695 |
|
|
|
|
|
|
Basic net income per Class A and Class B ordinary shares |
|
|
|
|
As reported |
|
|
2.40 |
|
Pro forma |
|
|
2.00 |
|
Diluted net income per Class A and Class B ordinary shares |
|
|
|
|
As reported |
|
|
1.49 |
|
Pro forma |
|
|
1.24 |
|
The Company adopted SEC Staff Accounting Bulletin No. 107 in 2006, which requires share-based
compensation to be presented in the same manner as cash compensation rather than as a separate line
item in prior periods. Share-based compensation recognized in prior periods has been reclassified
to conform to the presentation in the current period. This change in accounting policy has no
accounting impact on the Companys net income or retained earnings.
F-17
BAIDU.COM, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2005, 2006, and 2007
(Amounts in thousands of Renminbi (RMB) and U.S. Dollars (US$), except for number of shares and
per share data or unless otherwise indicated)
|
|
|
2. |
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) |
Earning Per Share (EPS)
The Company computes earnings per Class A and Class B ordinary shares in accordance with SFAS No.
128 (SFAS 128), Earnings per Share, using the two class method. Under the provisions of SFAS 128,
basic net income per share is computed using the weighted average number of ordinary shares
outstanding during the period except that it does not include unvested ordinary shares subject to
repurchase or cancellation. Diluted net income per share is computed using the weighted average
number of ordinary shares and, if dilutive, potential ordinary shares outstanding during the
period. Potential ordinary shares consist of the incremental ordinary shares issuable upon the
exercise of stock options and restricted shares subject to cancellation. The dilutive effect of
outstanding stock options and restricted shares is reflected in diluted earnings per share by
application of the treasury stock method. The computation of the diluted net income per share of
Class A ordinary shares assumes the conversion of Class B ordinary shares, while the diluted net
income per share of Class B ordinary shares does not assume the conversion of those shares.
The liquidation and dividend rights of the holders of the Companys Class A and Class B ordinary
shares are identical, except with respect to voting. As a result, and in accordance with EITF 03-6,
Participating Securities and the Two-Class Method under FASB Statement No. 128, the undistributed
earnings for each year are allocated based on the contractual participation rights of the Class A
and Class B ordinary shares as if the earnings for the year had been distributed. As the
liquidation and dividend rights are identical, the undistributed earnings are allocated on a
proportionate basis. Further, as the conversion of Class B ordinary shares is assumed in the
computation of the diluted net income per share of Class A ordinary shares, the undistributed
earnings are equal to net income for that computation.
As of December 31, 2005, 2006 and 2007, share options that were exercised, but where the underlying
ordinary shares were not yet issued amounted to 2,489, nil and nil, respectively. Proceeds received
upon exercise of these share options totaled RMB84, nil and nil for 2005, 2006 and 2007,
respectively, and have been recorded in the Companys additional paid-in capital. For the purposes
of calculating the Companys basic and diluted earnings per Class A and Class B ordinary shares,
the ordinary shares relating to the options that were exercised are assumed to have been
outstanding from the date of exercise of such options.
F-18
BAIDU.COM, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2005, 2006, and 2007
(Amounts in thousands of Renminbi (RMB) and U.S. Dollars (US$), except for number of shares and per share data or unless otherwise indicated)
|
|
|
2. |
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) |
Earning Per Share (EPS) (Continued)
The following table sets forth the computation of basic and diluted net income per Class A and
Class B ordinary shares.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the years ended December 31, |
|
|
|
2005 |
|
|
2006 |
|
|
2007 |
|
|
|
Class A |
|
|
Class B |
|
|
Class A |
|
|
Class B |
|
|
Class A |
|
|
Class A |
|
|
Class B |
|
|
Class B |
|
|
|
RMB |
|
|
RMB |
|
|
RMB |
|
|
RMB |
|
|
RMB |
|
|
US$ |
|
|
RMB |
|
|
US$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allocation of undistributed earnings |
|
|
5,791 |
|
|
|
41,814 |
|
|
|
137,874 |
|
|
|
163,892 |
|
|
|
428,128 |
|
|
|
58,691 |
|
|
|
200,840 |
|
|
|
27,533 |
|
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average of issued shares outstanding |
|
|
2,409,728 |
|
|
|
17,398,293 |
|
|
|
15,209,525 |
|
|
|
18,080,464 |
|
|
|
23,056,501 |
|
|
|
23,056,501 |
|
|
|
10,816,110 |
|
|
|
10,816,110 |
|
Weighted average of options exercised but related
shares not yet issued (as below) |
|
|
|
|
|
|
37 |
|
|
|
707 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator used for basic earnings per Class A and
Class B ordinary shares |
|
|
2,409,728 |
|
|
|
17,398,330 |
|
|
|
15,210,232 |
|
|
|
18,080,464 |
|
|
|
23,056,501 |
|
|
|
23,056,501 |
|
|
|
10,816,110 |
|
|
|
10,816,110 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per Class A and Class B ordinary shares |
|
|
2.40 |
|
|
|
2.40 |
|
|
|
9.06 |
|
|
|
9.06 |
|
|
|
18.57 |
|
|
|
2.55 |
|
|
|
18.57 |
|
|
|
2.55 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allocation of undistributed earnings for
diluted computation |
|
|
6,242 |
|
|
|
41,363 |
|
|
|
133,739 |
|
|
|
168,027 |
|
|
|
420,463 |
|
|
|
57,640 |
|
|
|
208,505 |
|
|
|
28,584 |
|
Reallocation of undistributed earnings as a result
of conversion of Class B to Class A shares |
|
|
41,363 |
|
|
|
|
|
|
|
168,027 |
|
|
|
|
|
|
|
208,505 |
|
|
|
28,584 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allocation of undistributed earnings-diluted |
|
|
47,605 |
|
|
|
41,363 |
|
|
|
301,766 |
|
|
|
168,027 |
|
|
|
628,968 |
|
|
|
86,224 |
|
|
|
208,505 |
|
|
|
28,584 |
|
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average ordinary shares outstanding-basic |
|
|
2,409,728 |
|
|
|
17,398,330 |
|
|
|
15,210,232 |
|
|
|
18,080,464 |
|
|
|
23,056,501 |
|
|
|
23,056,501 |
|
|
|
10,816,110 |
|
|
|
10,816,110 |
|
Conversion of Class B to Class A ordinary shares |
|
|
27,803,879 |
|
|
|
|
|
|
|
18,080,464 |
|
|
|
|
|
|
|
10,816,110 |
|
|
|
10,816,110 |
|
|
|
|
|
|
|
|
|
Employee stock options |
|
|
1,830,281 |
|
|
|
38,581 |
|
|
|
1,215,898 |
|
|
|
1,133,210 |
|
|
|
851,754 |
|
|
|
851,754 |
|
|
|
695,130 |
|
|
|
695,130 |
|
Redeemable convertible preferred share |
|
|
|
|
|
|
10,405,549 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator used for diluted earnings per Class A
and Class B ordinary shares |
|
|
32,043,888 |
|
|
|
27,842,460 |
|
|
|
34,506,594 |
|
|
|
19,213,674 |
|
|
|
34,724,365 |
|
|
|
34,724,365 |
|
|
|
11,511,240 |
|
|
|
11,511,240 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per Class A and Class B ordinary shares |
|
|
1.49 |
|
|
|
1.49 |
|
|
|
8.75 |
|
|
|
8.75 |
|
|
|
18.11 |
|
|
|
2.48 |
|
|
|
18.11 |
|
|
|
2.48 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
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F-19
BAIDU.COM, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2005, 2006, and 2007
(Amounts in thousands of Renminbi (RMB) and U.S. Dollars (US$), except for number of shares and per share data or unless otherwise indicated)
|
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2. |
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) |
Recent Accounting Pronouncements
On September 15, 2006 the FASB issued SFAS No. 157, Fair Value Measurement (SFAS 157). The
statement provides guidance for using fair value to measure assets and liabilities. The statement
also responds to investors requests for expanded information about the extent to which companies
measure assets and liabilities at fair value, the information used to measure fair value, and the
effect of fair value measurements on earnings. The statement does not expand the use of fair value
in any new circumstances. SFAS 157 is effective for financial statements issued for fiscal years
beginning after November 15, 2007, and interim periods within those fiscal years. The adoption of
the statement has no material impact on the Companys financial statements.
In February 2007, the FASB issued FASB Statement No. 159, The Fair Value Option for Financial
Assets and Financial LiabilitiesIncluding an amendment of FASB Statement No. 115, (SFAS 159).
This statement permits entities to choose to measure many financial instruments and certain other
items at fair value that are not currently required to be measured at fair value. SFAS 159 is
effective for financial statements issued for fiscal years beginning after November 15, 2007, and
interim periods within those fiscal years. The adoption of the statement has no material impact on
the Companys financial statements.
In December 2007, the FASB issued FASB Statement No. 141 (revised 2007), (SFAS 141R), Business
Combinations. This statement establishes principles and requirements for how an acquirer recognizes
and measures in its financial statements the identifiable assets acquired, the liabilities assumed,
any noncontrolling interest in the acquiree and the goodwill acquired. SFAS 141R also establishes
disclosure requirements to enable the evaluation of the nature and financial effects of the
business combination. This statement is effective for the Company beginning January 1, 2009. The
Company is currently evaluating the potential impact of the adoption of SFAS 141R on its financial
statements.
In December 2007, the FASB issued FASB Statement No. 160, (SFAS 160), Noncontrolling Interests in
Consolidated Financial Statementsan amendment of ARB No. 51. This statement affects the entities
that have an outstanding noncontrolling interest in one or more subsidiaries or that deconsolidate
a subsidiary. SFAS 160 is effective for fiscal years, and interim periods within those fiscal
years, beginning on or after December 15, 2008. The Company is currently assessing the impact of
this new statement on its financial statements.
Concentration of Risks
Concentration of credit risk
Financial instruments that potentially subject the Company to significant concentrations of credit
risk primarily consist of cash and cash equivalents, short-term investments and accounts
receivable. As of December 31, 2007, substantially all of the Companys cash and cash equivalents
and short-term investments were managed by financial institutions that the management believes are
of high credit quality. The Company has approximately RMB845,794 (US$115,948) in cash, bank
deposits and money market funds in the PRC, which constitute about 53% of total cash and cash
equivalents and short-term investments. Historically, deposits in Chinese banks are secure due to
the state policy on protecting depositors interests. However, China promulgated a new Bankruptcy
Law in August 2006, which came into effect on June 1, 2007, which contains a separate article
expressly stating that the State Council may promulgate implementation measures for the bankruptcy
of Chinese banks based on the Bankruptcy Law. Under the new Bankruptcy Law, a Chinese bank may go
into bankruptcy. In addition, since Chinas entry into the WTO, foreign banks have been gradually
permitted to operate in China and have been severe competitors against Chinese banks in many
aspects, especially since the opening of Renminbi business to foreign banks in late 2006.
Therefore, the risk of bankruptcy of those banks in which the Company has deposits has increased.
In the event of bankruptcy of one of the banks that holds the Companys deposits, it is unlikely to
claim its deposits back in full since it is unlikely to be classified as a secured creditor based
on PRC laws.
Accounts receivable are typically unsecured and are derived from revenue earned from customers in
China. The risk with respect to accounts receivables is mitigated by credit evaluations the Company
performs on its customers and its ongoing monitoring process of outstanding balances.
F-20
BAIDU.COM, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2005, 2006, and 2007
(Amounts in thousands of Renminbi (RMB) and U.S. Dollars (US$), except for number of shares and per share data or unless otherwise indicated)