20-F
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 20-F
|
|
|
(Mark One)
|
|
|
|
o
|
|
REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR
12(g) OF THE SECURITIES EXCHANGE ACT OF 1934
|
or
|
þ
|
|
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
|
|
|
For the fiscal
year ended December 31, 2009.
|
or
|
o
|
|
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
|
|
|
For the transition period
from to
|
or
|
o
|
|
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, 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)
Baidu Campus
No. 10 Shangdi 10th
Street
Haidian District, Beijing
100085
The Peoples Republic of
China
(Address of principal executive
offices)
Jennifer Li, Chief Financial
Officer
Telephone: +(86
10) 5992-8888
Email:
jenniferli@baidu.com
Facsimile: +(86
10) 5992-0000
Baidu Campus
No. 10 Shangdi 10th
Street,
Haidian District, Beijing
100085
The 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:
|
|
|
Title of Each Class
|
|
Name of Each Exchange on Which Registered
|
|
Class A ordinary shares, par value US$0.00005
per share
|
|
The NASDAQ Stock Market LLC*
(The NASDAQ Global Select Market)
|
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.
26,298,960 Class A ordinary shares and 8,454,332
Class B ordinary shares, par value US$0.00005 per share, as
of December 31, 2009.
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 has submitted
electronically and posted on its corporate Web site, if any,
every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of
Regulation S-T
(§ 232.405 of this chapter) during the preceding
12 months (or for such shorter period that the registrant
was required to submit and post such
files). 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 Board o Other o
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
|
|
|
*
|
|
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.
|
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, Inc., its
subsidiaries, and, in the context of describing our operations
and consolidated financial information, also include Baidu
Netcom Science Technology Co., Ltd., Beijing Perusal Technology
Co., Ltd. and BaiduPay Science and Technology Co., Ltd., our
consolidated affiliated entities in China;
|
|
|
|
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 a combined measure of the page
views and the reach of a website averaged over
a specified period of time, according to Alexa.com. 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;
|
|
|
|
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; preferred shares
refers to our preferred shares, none of which is issued and
outstanding;
|
|
|
|
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.
|
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 growth strategies;
|
|
|
|
our future business development, results of operations and
financial condition;
|
|
|
|
our ability to attract and retain users and customers;
|
|
|
|
our ability to successfully expand into and generate profits
from our planned new Internet businesses;
|
|
|
|
our ability to retain key personnel and attract new talents;
|
|
|
|
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;
|
2
|
|
|
|
|
PRC governmental regulations and 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 3.D. 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
|
|
Item 1.
|
Identity
of Directors, Senior Management and Advisers
|
Not applicable.
|
|
Item 2.
|
Offer
Statistics and Expected Timetable
|
Not applicable.
3
|
|
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, 2007, 2008 and 2009 and the consolidated
balance sheet data as of December 31, 2008 and 2009 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, 2007 have been derived from our audited
consolidated balance sheet as of December 31, 2007, which
is not included in this annual report. The selected consolidated
statements of income data for the years ended December 31,
2005 and 2006 and the selected consolidated balance sheet data
as of December 31, 2005 and 2006 have been derived from our
audited consolidated financial statements for the years ended
December 31, 2005 and 2006, 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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
US$
|
|
|
|
(In thousands except per share and per ADS data)
|
|
|
Consolidated Statements of Income Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Online marketing services
|
|
|
307,363
|
|
|
|
828,484
|
|
|
|
1,741,021
|
|
|
|
3,194,461
|
|
|
|
4,445,310
|
|
|
|
651,242
|
|
Other services
|
|
|
11,852
|
|
|
|
9,354
|
|
|
|
3,404
|
|
|
|
3,791
|
|
|
|
2,466
|
|
|
|
361
|
|
Total revenues
|
|
|
319,215
|
|
|
|
837,838
|
|
|
|
1,744,425
|
|
|
|
3,198,252
|
|
|
|
4,447,776
|
|
|
|
651,603
|
|
Operating costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues
|
|
|
(104,401
|
)
|
|
|
(245,489
|
)
|
|
|
(645,406
|
)
|
|
|
(1,155,457
|
)
|
|
|
(1,616,236
|
)
|
|
|
(236,780
|
)
|
Selling, general and administrative
|
|
|
(134,771
|
)
|
|
|
(250,240
|
)
|
|
|
(411,163
|
)
|
|
|
(659,804
|
)
|
|
|
(803,988
|
)
|
|
|
(117,785
|
)
|
Research and development
|
|
|
(44,200
|
)
|
|
|
(79,231
|
)
|
|
|
(140,702
|
)
|
|
|
(286,256
|
)
|
|
|
(422,615
|
)
|
|
|
(61,913
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating costs and expenses
|
|
|
(283,372
|
)
|
|
|
(574,960
|
)
|
|
|
(1,197,271
|
)
|
|
|
(2,101,517
|
)
|
|
|
(2,842,839
|
)
|
|
|
(416,478
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating profit
|
|
|
35,843
|
|
|
|
262,878
|
|
|
|
547,154
|
|
|
|
1,096,735
|
|
|
|
1,604,937
|
|
|
|
235,125
|
|
Interest income
|
|
|
13,580
|
|
|
|
42,443
|
|
|
|
49,009
|
|
|
|
47,677
|
|
|
|
32,661
|
|
|
|
4,785
|
|
Loss from equity method investment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(229
|
)
|
|
|
(34
|
)
|
Other income, net
|
|
|
93
|
|
|
|
4,098
|
|
|
|
20,053
|
|
|
|
19,767
|
|
|
|
45,752
|
|
|
|
6,703
|
|
Income before tax and cumulative effect of change in accounting
principle
|
|
|
49,516
|
|
|
|
309,419
|
|
|
|
616,216
|
|
|
|
1,164,179
|
|
|
|
1,683,121
|
|
|
|
246,579
|
|
Taxation
|
|
|
(1,911
|
)
|
|
|
(12,256
|
)
|
|
|
12,752
|
|
|
|
(116,071
|
)
|
|
|
(198,017
|
)
|
|
|
(29,010
|
)
|
Cumulative effect of change in accounting principle
|
|
|
|
|
|
|
4,603
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
47,605
|
|
|
|
301,766
|
|
|
|
628,968
|
|
|
|
1,048,108
|
|
|
|
1,485,104
|
|
|
|
217,569
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
US$
|
|
|
|
(In thousands except per share and per ADS data)
|
|
|
Net income per Class A ordinary share, per Class B
ordinary share and per
ADS(1):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic (prior to cumulative effect of change in accounting
principle)
|
|
|
2.40
|
|
|
|
8.92
|
|
|
|
18.57
|
|
|
|
30.63
|
|
|
|
42.96
|
|
|
|
6.29
|
|
Cumulative effect of change in accounting principle
|
|
|
|
|
|
|
0.14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic (after cumulative effect of change in accounting principle)
|
|
|
2.40
|
|
|
|
9.06
|
|
|
|
18.57
|
|
|
|
30.63
|
|
|
|
42.96
|
|
|
|
6.29
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted (prior to cumulative effect of change in accounting
principle)
|
|
|
1.49
|
|
|
|
8.62
|
|
|
|
18.11
|
|
|
|
30.19
|
|
|
|
42.70
|
|
|
|
6.26
|
|
Cumulative effect of change in accounting principle
|
|
|
|
|
|
|
0.13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted (after cumulative effect of change in accounting
principle)
|
|
|
1.49
|
|
|
|
8.75
|
|
|
|
18.11
|
|
|
|
30.19
|
|
|
|
42.70
|
|
|
|
6.26
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
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 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 Earnings per Share under Note 2 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. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
US$
|
|
|
|
(In thousands)
|
|
|
Consolidated Balance Sheets Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
900,593
|
|
|
|
1,136,274
|
|
|
|
1,350,600
|
|
|
|
2,362,171
|
|
|
|
4,199,889
|
|
|
|
615,287
|
|
Total assets
|
|
|
1,136,423
|
|
|
|
1,668,077
|
|
|
|
2,655,908
|
|
|
|
3,937,991
|
|
|
|
6,156,975
|
|
|
|
902,002
|
|
Total liabilities
|
|
|
131,370
|
|
|
|
310,816
|
|
|
|
634,536
|
|
|
|
849,328
|
|
|
|
1,403,874
|
|
|
|
205,668
|
|
Total shareholders equity
|
|
|
1,005,053
|
|
|
|
1,357,261
|
|
|
|
2,021,372
|
|
|
|
3,088,663
|
|
|
|
4,753,101
|
|
|
|
696,334
|
|
Total liabilities and shareholders equity
|
|
|
1,136,423
|
|
|
|
1,668,077
|
|
|
|
2,655,908
|
|
|
|
3,937,991
|
|
|
|
6,156,975
|
|
|
|
902,002
|
|
Exchange
Rate Information
Our business is primarily conducted in China and almost 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 New York City for cable
transfers in 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 RMB6.8259 to US$1.00, the
5
noon buying rate in effect as of December 31, 2009. 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
March 19, 2010, the noon buying rate was RMB6.8265 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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noon Buying Rate
|
|
Period
|
|
Period-End
|
|
|
Average(1)
|
|
|
Low
|
|
|
High
|
|
|
|
(RMB per U.S. Dollar)
|
|
|
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
|
|
2008
|
|
|
6.8225
|
|
|
|
6.9193
|
|
|
|
7.2946
|
|
|
|
6.7800
|
|
2009
|
|
|
6.8259
|
|
|
|
6.8295
|
|
|
|
6.8470
|
|
|
|
6.8176
|
|
September
|
|
|
6.8262
|
|
|
|
6.8277
|
|
|
|
6.8303
|
|
|
|
6.8247
|
|
October
|
|
|
6.8264
|
|
|
|
6.8267
|
|
|
|
6.8292
|
|
|
|
6.8248
|
|
November
|
|
|
6.8265
|
|
|
|
6.8271
|
|
|
|
6.8300
|
|
|
|
6.8255
|
|
December
|
|
|
6.8259
|
|
|
|
6.8275
|
|
|
|
6.8299
|
|
|
|
6.8244
|
|
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January
|
|
|
6.8268
|
|
|
|
6.8269
|
|
|
|
6.8295
|
|
|
|
6.8258
|
|
February
|
|
|
6.8258
|
|
|
|
6.8285
|
|
|
|
6.8330
|
|
|
|
6.8258
|
|
March (through March 19, 2010)
|
|
|
6.8265
|
|
|
|
6.8261
|
|
|
|
6.8266
|
|
|
|
6.8254
|
|
|
|
Source: Federal Reserve Statistical Release
|
|
|
(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.
Risks
Related to Our Business
If we
fail to retain existing customers or attract new customers for
our online marketing services, our business, results of
operations and growth prospects could be seriously
harmed.
In 2007, 2008 and 2009, we generated almost all of our total
revenues from online marketing services, a substantial majority
of which were derived from our
pay-for-performance,
or 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. In April 2009, we officially launched Online
Marketing Professional Edition, which we also refer to as
Phoenix Nest, our new auction-based online marketing system
designed to improve relevance in paid search and increase value
for customers. In December 2009, we completed the switch from
our previous online marketing system, which we refer to as the
Online Marketing Classic Edition, to Phoenix Nest. If Phoenix
Nest is perceived to be a less effective marketing tool than the
Online Marketing Classic Edition, we may lose existing customers
or encounter difficulty
6
attracting new customers. In addition, we have in the past
removed, and may in the future again remove, questionable paid
search listings of some customers to ensure the quality and
reliability of our search results. Such removal, whether
temporary or permanent, may cause the affected customers to
discontinue their business with us. Moreover, third parties may
develop and use certain technologies to block the display of our
customers advertisements and other marketing products on
our Baidu.com website, which may in turn cause us to lose
customers and adversely affect our operating results. Failure to
retain our existing customers or attract new customers for our
online marketing services could seriously harm our business,
results of operations and growth prospects.
If
online marketing does not further grow in China, our ability to
increase revenue and profitability could be materially and
adversely affected.
The use of the Internet as a marketing channel is at a
developing stage in China. Internet penetration rate in China is
relatively low as compared to that 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 increase
revenue and profitability from online marketing may be adversely
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
|
|
|
|
decrease in Internet usage in China.
|
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 the Internet search leader
in China, which may become more expensive and challenging.
Historically, we developed our user base primarily by
word-of-mouth
and incurred limited brand promotion expenses. Our initial
public offering in 2005 and positive media coverage in
subsequent years have significantly enhanced our brand
recognition. We have also conducted marketing and brand
promotion activities in recent years, but we cannot assure you
that these activities will achieve the brand promotion effect
expected by us. If we fail to maintain and further promote the
Baidu brand, or if we incur excessive expenses in
this effort, our business and results of operations may be
materially and adversely affected. In addition, any negative
publicity about our company or our products and services,
regardless of its veracity, could harm our brand image and in
turn adversely affect our business and operating results.
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. In the Chinese Internet search market,
our main competitors include
U.S.-based
Internet search providers providing Chinese language Internet
search services, such as Google and Microsoft, and China-based
Internet companies, such as
7
Netease, Sohu, Tencent and 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, our
instant messaging and
e-commerce
services face competition from the existing leading providers of
these services in China.
Some of our competitors have significantly greater financial
resources, 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, strategic partners 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 and result in
loss of customers, which would 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. Large
companies in China generally 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 growth prospects could
be adversely affected.
If our
expansions into new Internet businesses are not successful, our
future results of operations and growth prospects may be
materially and adversely affected.
As part of our growth strategy, we enter into new Internet
businesses from time to time by leveraging our large Internet
search user base to generate additional revenue streams.
Expansions into new businesses may present operating and
marketing challenges that are different from those that we
currently encounter. For each new business we enter into, we
face competition from existing leading providers in that
business. If we cannot successfully address the new challenges
and compete effectively against the existing leading players in
the new businesses, we may not be able to develop a sufficiently
large customer and user base, recover costs incurred for
developing and marketing new businesses, and eventually achieve
profitability from these businesses, and our future results of
operations and growth prospects may be materially and adversely
affected.
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. In
order to attract and retain users and compete against our
competitors, 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. 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. Our operating results may also suffer if our
innovations do not respond to the needs of our users, 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 changes in technologies and user
behavior, 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. In addition, changes in user
behavior resulting from technological changes may also adversely
affect us. For example,
8
the number of people accessing the Internet through devices
other than personal computers, including mobile phones and other
hand-held devices, has increased in recent years. With the
introduction of 3G mobile services by all three mobile carriers
in China in 2009, we expect this trend to continue. If we are
slow to develop products and technologies that are compatible
with non-PC communications devices, or if the products and
services we develop are not widely accepted and used by users of
non-PC communications devices, we may not be able to capture a
significant share of this increasingly important market. 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, our future
success may be adversely affected.
Interruption
or failure of our own information technology and communications
systems or those of
third-party
service providers we rely upon 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, wars,
earthquakes, floods, fires, power loss, telecommunications
failures, undetected errors or bugs in our software,
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. Some of our systems are not fully redundant, and
our disaster recovery planning does not account for all possible
scenarios.
Our servers, which are hosted at third-party Internet data
centers, are vulnerable to break-ins, sabotage and vandalism.
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. In addition, our
domain names are resolved into Internet protocol (IP) addresses
by systems of third-party domain name registrars and registries.
Any interruptions or failures of those service providers
systems, which are beyond our control, could significantly
disrupt our own services. In January 2010, the name server
records of our main domain name, Baidu.com, which are recorded
on the systems of a domain name registrar in the U.S., were
modified by hackers who gained access to such records. As a
result, our Internet search services were interrupted for
approximately five hours.
If we experience frequent or persistent system failures on our
websites, whether due to interruptions and failures of our own
information technology and communications systems or those of
third-party service providers we rely upon, our reputation and
brand could be permanently harmed. The steps we 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.
We may
not be able to manage our expanding operations
effectively.
We have significantly expanded our operations in recent years.
We expect this expansion trend to continue as we grow our user
and customer base and explore new opportunities. To manage the
further expansion of our business and growth of our operations
and personnel, we need to continuously improve our operational
and financial systems, procedures and controls, and expand,
train, manage and maintain good relations with our growing
employee base. We have experienced labor disputes in the past.
Although these disputes were resolved promptly, we cannot assure
you that there wont be any new labor dispute in the
future. In addition, we must maintain and expand our
relationships with other websites, Internet companies and other
third parties. Our current and future personnel, systems,
procedures and controls may not be adequate to support our
expanding operations.
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
9
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. 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. 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.
Our products and services link to materials in which third
parties may claim ownership of trademarks, copyrights or other
rights. For example, we provide search engine facilities capable
of finding and accessing links to downloadable audio, video,
image and other multimedia files and other items hosted on
third-party websites, including search functions that enable our
users to search for 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 or other intellectual property
rights. Like many other Internet websites, we host on our
websites certain song lyrics which may be protected by
copyright. As a result, we may be subject to copyright or
trademark infringement and other related claims from time to
time, in China and internationally.
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 contents on third-party
websites that infringe others copyrights. In December
2007, the High Peoples Court of Beijing upheld a lower
courts ruling in our favor in a case originally filed
against us in 2005 by seven music record companies alleging that
our MP3 search services had infringed 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 High
Peoples 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 High Peoples Court
of Beijing in the Yahoo! China case seems to suggest 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.
We conduct our business operations outside the United States.
However, we may be subject to U.S. copyright laws,
including the legal standards for determining indirect liability
for copyright infringement, by virtue of our listing on the
NASDAQ, the ownership of our ADSs or ordinary shares by
U.S. residents, the extraterritorial application of
U.S. law by U.S. courts or otherwise. In June 2009, a
plaintiff filed a copyright infringement lawsuit against us in
the U.S. District Court for the Southern District of New
York. In December 2009, the court granted our motion to dismiss
the complaint on the grounds of insufficient service of process
and lack of personal jurisdiction. The plaintiff did not appeal
the courts ruling. Despite the above ruling in our favor,
we cannot assure you that other companies will not sue us in the
U.S. or elsewhere in the future.
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
connection with our MP3 and other search services. See
Item 8A. Financial Information
Consolidated Statements and Other Financial
Information Legal Proceedings. If there is a
successful claim of infringement, we may be required to
discontinue the infringing activities, pay substantial fines and
damages
and/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. To address the risks relating to intellectual
property infringement, we may have to substantially modify,
limit or terminate some of our search
10
services. Any of such changes could materially affect user
experience and in turn have a material adverse impact on our
business.
We
have been and may again be subject to claims based on the
content found on our websites or the results in our paid search
listings.
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. 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. 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 management attention and 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
China Regulation and censorship of information
disseminated over the Internet in China may adversely affect our
business and subject us to liability for information displayed
on or linked to our websites.
Under PRC advertising laws and regulations, we, as an online
advertising publisher, are obligated to monitor the advertising
content posted on our websites to ensure that such content is
fair and accurate and in full compliance of applicable law. 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. See Item 4.B. Information
on the Company Business Overview
Regulation Regulations on Advertisements. Our
reputation could be hurt and our results of operations could be
adversely affected due to penalties imposed on us 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.
Our P4P services are not subject to PRC advertising laws and
regulations because PRC laws and regulations and administrative
authorities currently do not classify P4P services as a form of
online advertising. However, if P4P services are classified as a
form of online advertising in the future, we would be obligated
to examine the content of our P4P customers listings on
our websites, as required by PRC advertising laws, and such
examination could be very burdensome.
Moreover, we have been and in the future may again be subject to
claims or negative publicity based on the results in our paid
search listings. Claims have been filed against us after we
allowed certain customers to purchase keywords containing
trademarks, trade names or brand names owned by others and
displayed links to such customers websites in our paid
search listings. While we maintain a database of certain
well-known trademarks and would not allow a customer to submit a
keyword containing the well-known trademarks that we know are
owned by others, it is not possible for us to completely prevent
our customers from bidding on keywords that contain trademarks,
trade names or brand names owned by others. Claims and negative
publicity based on the results in our paid search listings,
regardless of their merit, may divert management attention,
severely disrupt our operations, adversely affect our results of
operations and harm our reputation.
We may
be subject to patent infringement claims with respect to our P4P
platform.
Our technologies and business methods, including those relating
to our 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. Certain
U.S.-based
companies, including Overture Services Inc., have been granted
patents in the United States relating to P4P platforms and
similar business methods and related technologies. 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.
11
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 relate to certain aspects of our
technologies, products, business methods or services. For
example, we are aware that a patent has been issued in China
relating to a method used by a database search system that
determines the optimal bidding price for keywords based on an
advertisers desired place in a search listing. Based on
our own analysis and the analysis conducted by a third-party
intellectual property agency, we do not believe that our P4P
platform infringes this patent because, among other things, our
system ranks customers links according to a comprehensive
ranking index calculated based on both the quality factor of a
keyword and the price bid on the keyword. However, the
application and interpretation of Chinas patent laws and
the procedures and standards for granting patents in China are
still evolving and involve uncertainty. We cannot assure you
that PRC courts or regulatory authorities would agree with the
above analysis. Any patent infringement claims, regardless of
their merits, could be time-consuming and costly to us. If we
were sued for patent infringement claims with respect to our P4P
platform and 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 platform, which would
have a material adverse effect on our results of operations and
prospects.
Our
business may be adversely affected by third-party software
applications or practices that interfere with our receipt of
information from, or 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 our websites. 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. In addition, our business may be
adversely affected by the practices of third-party website
owners which interfere with our ability to crawl and index their
web pages. The ability to provide a superior user experience is
critical to our success. If we are unable to successfully combat
third-party software applications that interfere with our
products and services, our reputation may be harmed. If a
significant number of website owners prevent us from indexing
and including their web pages in our search results, the quality
of our search results may be impaired.
Our
success depends on the continuing and collaborative efforts of
our 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 our management team, in particular our chairman and chief
executive officer, Robin Yanhong Li. If one or more of our
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. We approved the resignations
for personal reasons of our former chief operating officer and
chief technology officer in January 2010, and are in the process
of searching for their replacements. Competition for management
and key personnel is intense, the pool of qualified candidates
is limited, and we may not be able to retain the services of our
executives or key personnel, or attract and retain experienced
executives or key personnel in the future.
If any of our executives or other key personnel joins a
competitor or forms a competing company, we may lose customers,
distributors, know-how and key personnel. 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 executives or key personnel and us, we cannot assure you the
extent to which any of these agreements may be enforced.
12
We
rely on highly skilled personnel. If we are unable to retain or
motivate them or hire additional qualified personnel, we may not
be able to grow effectively.
Our performance and future success depend 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 the
Internet 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 the Internet 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.
We are
subject to risks and uncertainties faced by companies with
limited operating history in a rapidly evolving
industry.
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 companies with limited operating
history 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 Chinese language Internet
search market;
|
|
|
|
offer new, innovative products and services to attract and
retain a large user base;
|
|
|
|
attract additional customers and increase spending per customer;
|
|
|
|
further enhance our brand;
|
|
|
|
maintain the quality of our products and services and continue
to develop user and customer loyalty;
|
|
|
|
respond to competitive market conditions;
|
|
|
|
respond to changes in the regulatory environment;
|
|
|
|
manage legal risks, including those associated with intellectual
property rights;
|
|
|
|
maintain effective control of our costs and expenses;
|
|
|
|
attract, retain and motivate qualified personnel and maintain
good relations with a young and growing work force;
|
|
|
|
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.
Our
historical growth rate may not be indicative of our future
growth rate.
We have experienced substantial growth in recent years. Our
total revenues and net income grew at a compound annual growth
rate, or CAGR, of 93.2% and 136.3%, respectively, from 2005 to
2009. Our growth was driven in part by the growth in
Chinas Internet and online marketing industries, which may
not be indicative of future growth or be sustainable. We cannot
assure you that our past growth rate is indicative of our future
growth rate.
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
13
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
figures. 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:
|
|
|
|
|
general economic conditions in China and economic conditions
specific to the Internet, Internet search and online marketing;
|
|
|
|
our ability to continue to attract users to our websites;
|
|
|
|
our ability to attract additional customers and increase
spending per customer;
|
|
|
|
the announcement or introduction of new or enhanced products and
services by us or our competitors;
|
|
|
|
the amount and timing of operating costs and capital
expenditures related to the maintenance and expansion of our
businesses, operations and infrastructure;
|
|
|
|
the results of our acquisitions of, or investments in, other
businesses or assets;
|
|
|
|
PRC regulations or government actions pertaining to activities
on the Internet, including MP3 music, news, gambling, online
games and other forms of entertainment, or otherwise affecting
our online marketing customers;
|
|
|
|
unforeseen events, such as negative publicity arising from
reports by influential media outlets and other sources and labor
disputes; and
|
|
|
|
geopolitical events, natural disasters or epidemics.
|
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.
A
severe and prolonged global economic recession and the
corresponding slowdown in the Chinese economy may adversely
affect our business, results of operations and financial
condition.
The effect of the recent global financial crisis has persisted,
with most of the worlds major economies remaining in
recession in 2009. The Chinese economy also faces challenges.
The stimulus plans and other measures implemented by the Chinese
government may not avert an economic downturn amid a severe and
prolonged global economic recession. Since we derive most of our
revenues from online marketing customers in China, any prolonged
slowdown in the Chinese economy may have a negative impact on
our business, operating results and financial condition in a
number of ways. For example, our customers may reduce or delay
spending with us, while we may have difficulty expanding our
customer base fast enough, or at all, to offset the impact of
decreased spending by our existing customers. In addition, to
the extent we offer credit to any customer and such customer
experiences financial difficulties due to the economic slowdown,
we could have difficulty collecting payment from such customer.
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.
14
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.
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
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.
We have transitioned to using our direct sales force to serve
our P4P customers in some key geographic markets. 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 certain intangible assets,
including domain name, software, trademark and non-competition
agreements, in 2009. We may make other acquisitions in the
future if suitable opportunities arise. Acquisitions involve
uncertainties and risks, including:
|
|
|
|
|
potential ongoing financial obligations and unforeseen or hidden
liabilities;
|
|
|
|
failure to achieve the intended objectives, benefits or
revenue-enhancing opportunities;
|
|
|
|
costs and difficulties of integrating acquired businesses and
managing a larger business; and
|
|
|
|
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
15
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.
Our
Japan operations 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
operations have incurred operating losses since the inception in
December 2006, and it is uncertain when the business will become
profitable, if at all. Additional future losses in our Japan
operations 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! Japan 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 their more established brands 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, there are certain risks inherent in doing business
internationally, including:
|
|
|
|
|
difficulties in developing, staffing and simultaneously managing
a foreign operation as a result of distance, language and
cultural differences;
|
|
|
|
longer customer payment cycles;
|
|
|
|
currency exchange rate fluctuations;
|
|
|
|
political or social unrest or economic instability;
|
|
|
|
unanticipated changes in laws or regulations; and
|
|
|
|
potentially adverse tax consequences.
|
One or more of these factors could harm our Japan operations and
consequently, could harm our overall operating results.
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-throughs, 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
16
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 for us to
defend against and could also adversely affect our brand image
and our customers confidence in the integrity of our
systems.
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 Industry and Information
Technology (or its predecessor, the Ministry of Information
Industry, before its formal establishment in 2008), or the MIIT.
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 primarily on China Telecommunications Corporation,
or China Telecom, and China United Network Communications Group
Company Limited, or China Unicom, to provide us with data
communications capacity primarily through local
telecommunications lines and Internet data centers to host our
servers. We have limited access to alternative services in the
event of disruptions, failures or other problems with the fixed
telecommunications networks of China Telecom and China Unicom,
or if these companies otherwise fail to provide such services.
In 2009, due to connection failures at a China Telecom Internet
data center that hosted our servers, we were unable to provide
service for a total of approximately eight 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
and China Unicom. 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.
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 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, 2009.
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,
17
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.
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 may result in our incurring substantial
costs and the diversion of our resources.
We
face risks related to health epidemics and other
outbreaks.
Our business could be adversely affected by the effects of avian
influenza, severe acute respiratory syndrome, or SARS, or
another epidemic or outbreak. In April 2009, a new strain of
influenza A virus subtype H1N1, commonly referred to as
swine flu, was first discovered in North America and
quickly spread to other parts of the world, including China. In
early June 2009, the World Health Organization declared the
outbreak to be a pandemic, while noting that most of the
illnesses were of moderate severity. The PRC Ministry of Health
has reported several hundred deaths caused by the influenza A
(H1N1). Any outbreaks of avian influenza, SARS, the influenza A
(H1N1) 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, 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.
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 Science
Technology Co., Ltd., or Baidu Netcom, Beijing Perusal
Technology Co., Ltd., or Beijing Perusal, Beijing BaiduPay
Science and Technology Co., Ltd., or BaiduPay, and their
respective shareholders. We and our PRC subsidiaries, Baidu
Online Network Technology (Beijing) Co., Ltd., or Baidu Online,
Baidu (China) Co., Ltd., or Baidu China, and Baidu.com Times
Technology (Beijing) Co. Ltd., or Baidu Times, are considered
foreign persons or foreign-invested enterprises under PRC
foreign investment related laws. 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.
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 occurrences 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.
18
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 and administrative authorities
currently do not classify P4P services 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
services as a form of online advertising or as part of ICP
services in the future. If new regulations characterize P4P
services 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 5.A. Operating and Financial Review
and Prospects Operating Results
Taxation 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 services were to be retroactively applied,
we might be subject to sanctions, including payment of
delinquent taxes and fines. In addition, the classification of
P4P services as a form of online advertising could subject us to
an obligation to examine the content of listings of our P4P
customers on our websites and the associated risks. See
Risks Related to Our Businesses We
may be subject to claims based on the content found on our
websites or the results in our paid search listings. Such
examinations could be burdensome and increase our operating
costs and expenses. 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.
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
three consolidated affiliated entities in China. Two of these
entities, Baidu Netcom and Beijing Perusal, are each owned by
individuals designated by us. The other consolidated affiliated
entity, BaiduPay, is owned by Baidu Netcom and an individual
designated by us. All of the individual shareholders of these
entities are PRC citizens. We have contractual arrangements with
our consolidated affiliated entities and their individual
shareholders that allow us to substantially control these
entities. We cannot assure you, however, that we will be able to
enforce these contracts.
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 consolidated
affiliated 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. We have no
19
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 consolidated
affiliated entities as direct ownership. For example, these
entities could fail to take actions required for our business or
fail to maintain our websites despite their contractual
obligations to do so. If they fail to perform their obligations
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 and their respective individual
shareholders, the individual shareholders of our consolidated
affiliated entities have pledged all of their equity interests
in those entities to Baidu Online by recording the pledges on
the shareholder registers of the respective entities. However,
according to the PRC Property Rights Law, which became effective
on October 1, 2007, a pledge is not effective without being
registered with the relevant local administration for industry
and commerce. The State Administration for Industry and Commerce
and the Beijing Administration for Industry and Commerce have
adopted registration procedures with respect to the registration
of equity interest pledge according to the Property Rights Law.
BaiduPay has completed the registration of the pledges of its
equity interests, and Baidu Netcom and Beijing Perusal are in
the process of registering the pledges of their respective
equity interests, with the Beijing Administration for Industry
and Commerce. We cannot assure you that they will be able to
register the pledges. 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 or Beijing Perusal
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.
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 our
consolidated affiliated entities operations in China and
revenues derived from Baidu Onlines contractual
arrangements with these consolidated affiliated 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 consolidated affiliated entities were not
on an arms-length basis and therefore constituted a
favorable transfer pricing. Under the new PRC Enterprise Income
Tax Law, which became effective on January 1, 2008, an
enterprise must submit its annual tax return together with
information on related party transactions 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. For example, the PRC tax authorities could request
that our consolidated affiliated entities adjust their taxable
income upward for PRC tax purposes. Such a pricing adjustment
could adversely affect us by increasing our consolidated
affiliated entities tax expenses without reducing Baidu
Onlines tax expenses, which could subject our consolidated
affiliated entities to interest due on late payments and other
penalties for under-payment of taxes.
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. 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.
20
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.
We may
be unable to collect long-term loans to the shareholders of our
consolidated affiliated entities in China.
As of the date of this annual report, we have made long-term
loans in an aggregate principal amount of RMB110.0 million
(US$16.1 million) to the individual shareholders of our
consolidated affiliated entities. We extended these loans to
enable the shareholders to fund the initial capitalization of
these entities and, in the case of Baidu Netcom, subsequent
increases 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 affected by 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 three decades, 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. In addition, future measures to control the pace of economic
growth 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.
Uncertainties
with respect to the PRC legal system could adversely affect
us.
We conduct our business primarily through our subsidiaries and
consolidated affiliated entities in China. 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.
PRC legislation and regulations have significantly enhanced the
protections afforded to various forms of foreign investments in
China for the past three decades. However, China has not
developed a fully integrated legal
21
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. For
example, China enacted a new Anti-Monopoly Law, which became
effective on August 1, 2008. Because the Anti-Monopoly Law
and the related regulations are still new, and there have been
very few court rulings and no judicial or administrative
interpretations on certain key concepts used in the law, it is
uncertain how the implementation and enforcement of the
Anti-Monopoly Law and the related regulations would affect our
business. 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. 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.
We may
be adversely affected by the complexity, uncertainties and
changes in PRC regulation of Internet business and
companies.
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:
|
|
|
|
|
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.
|
|
|
|
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, or we may not
be able to obtain or renew certain permits or licenses,
including without limitation an Internet news license, which is
issued by the State Council News Office, an Internet culture
business permit, which is issued by the Ministry of Culture, an
audio/video program transmission license, which is issued by the
State Administration of Radio, Film and Television, an Internet
publication business license, which is issued by the General
Administration of Press and Publication, an online game virtual
currency issuance or trading license, which is issued by the
Ministry of Culture, and a surveying and mapping qualification
certificate for Internet map services, which is issued by the
State Bureau of Surveying and Mapping. This may significantly
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.
|
|
|
|
New laws and regulations may be promulgated that will regulate
Internet activities, including online advertising and online
payment. Other aspects of our online operations may be regulated
in the future. If these new laws and regulations are
promulgated, additional licenses may be required for our online
operations. If our operations do not comply with these new
regulations at the time they become effective, or if we fail to
obtain any licenses required under these new laws and
regulations, we could be subject to penalties.
|
In July 2006, the MIIT issued the Notice of the Ministry of
Information Industry on Intensifying the Administration of
Foreign Investment in Value-added Telecommunications Services.
This 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 this
notice, either the holder of a value-added telecommunication
business operating 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
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.
22
Baidu Netcom, our PRC affiliated entity that holds the ICP
license necessary to conduct our business in China, received a
letter from the MIIT requiring self-assessment and responded
timely to the letter. In order to comply with the notice
described above, 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 and Beijing
Perusal, respectively.
As we enter into new businesses, we may encounter additional
regulatory uncertainties. For example, it remains unclear
whether the provision of online payment services by BaiduPay
will require BaiduPay to apply for a value-added
telecommunications business operating license for online
data processing and transaction processing businesses as
provided in the Catalog of Telecommunications Businesses
promulgated by the MIIT.
There are currently no regulations requiring a non-financial
institution that provides third-party online payment services,
such as BaiduPay, to apply for licensing from the Peoples
Bank of China, Chinas central bank. However, in 2005, the
Peoples Bank of China published Draft Measures Concerning
the Administration of Payment and Settlement Organizations, or
the Draft Payment and Settlement Measures, for public comment.
According to the Draft Payment and Settlement Measures,
non-financial institutions engaging in activities related to
payment and settlement services, including services such as
providing electronic instructions and calculations to financial
institutions, individuals and other entities, shall be required
to obtain a license from the Peoples Bank of China or its
relevant branches in order to provide payment and settlement
services. The Draft Payment and Settlement Measures have not yet
taken effect. If the Draft Payment and Settlement Measures are
officially adopted by the Peoples Bank of China and become
applicable to BaiduPay, it may be necessary for us to obtain
approvals or licenses to engage in our online payment business.
We cannot assure you that we will be able to obtain these
approvals or licenses.
On April 16, 2009, the Peoples Bank of China issued a
notice regarding the payment and settlement business carried out
by non-financial institutions, or the 2009 PBOC Notice. The 2009
PBOC Notice requires non-financial institutions established
before April 16, 2009 engaging in payment and settlement
business to register with the Peoples Bank of China before
July 31, 2009. According to the 2009 PBOC Notice, such
registration shall not be interpreted as a permit
granted by the Peoples Bank of China. Rather, such
registration serves the purposes of providing a basis for future
policy making by the authorities.
In December 2007, the Standing Committee of Beijing Municipal
Peoples Congress adopted Beijing Municipal Regulations on
Promotion of Informatization, which provide that any individual
or enterprise that conducts business operations through the
Internet shall obtain a business license
and/or other
necessary licenses prior to operation. The operator of an online
marketplace shall be responsible for checking such individual or
enterprises licenses. In July 2008, the Beijing
Administration for Industry and Commerce promulgated certain
rules for implementing the above-mentioned regulation. According
to these rules, any individual or enterprise failing to obtain a
business license may be prohibited from doing business on an
e-commerce
marketplace operating in Beijing, such as Baidu Youa, and
violation of these rules may lead to penalties on either the
individual/enterprise or the operator of the
e-commerce
marketplace. Substantial uncertainties exist in terms of the
implementation of these rules, and there are very few public
reports regarding actions taken by the Beijing Administration
for Industry and Commerce against any violators in this regard.
We cannot predict to what extent these rules will affect our
business operations or future strategy.
The interpretation and application of existing PRC laws,
regulations and policies and possible new laws, regulations or
policies relating to the Internet industry 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.
A
notice recently issued by the PRC Ministry of Culture may
significantly affect our MP3 search services.
On August 26, 2009, the PRC Ministry of Culture promulgated
the Notice on Strengthening and Improving the Content Review of
Online Music, which is dated August 18, 2009. Among other
things, this notice provides that only Internet culture
operating entities approved by the Ministry of Culture may
engage in the production,
23
release, dissemination (including providing direct links to
music products) and importation of online music products. We
hold an Internet culture business permit granted by the Ministry
of Culture, which allows us to engage in Internet culture
activities as defined in the relevant regulations
promulgated by the Ministry of Culture. See Item 4.B.
Information on the Company Business
Overview Regulation Regulations on
Internet Culture Activities. However, we cannot assure you
that the third-party music websites that our MP3 search services
link to are operated by Internet culture operating entities
approved by the Ministry of Culture. If the enforcement of this
new rule leads to the closure of a large number of music
websites in China, the experience of the users of our MP3 search
services could be adversely affected, which could in turn
negatively affect our traffic. According to an interpretation of
the new notice subsequently posted on the Ministry of
Cultures website, entities that provide direct links to
online music products must ensure that music products
disseminated by them in such manner have passed the content
review by the Ministry of Culture. Since the new notice was
issued recently, it remains unclear how certain aspects of the
new notice will be implemented. If we are deemed by the Ministry
of Culture to have failed to fully comply with the requirements
of the new notice, we could be subject to administrative
penalties, including an order to stop providing links to certain
music products, fines, or confiscation of income derived from
activities deemed in violation of the new notice. Any of these
occurrences could materially and adversely affect our business
and results of operations.
Regulation
and censorship of information disseminated over the Internet in
China may adversely affect our business and subject us to
liability for information displayed on or linked to our
websites.
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 MIIT 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.
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. 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
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.
24
Intensified
government regulation of Internet cafes could restrict our
ability to maintain or increase user traffic to our
websites.
The PRC government has tightened its regulation of Internet
cafes in recent years. 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 State
Administration for Industry and Commerce issued another notice,
suspending the issuance of new Internet cafe licenses. In May
2007, the State Administration for Industry and Commerce
reiterated its position not to register any new Internet cafes
in 2007. In 2008 and 2009, the Ministry of Culture, the State
Administration for Industry and Commerce and other relevant
government authorities, individually or jointly, issued several
notices that provide various ways to strengthen the regulation
of Internet cafes, including investigating and punishing
Internet cafes that accept minors, cracking down on Internet
cafes without sufficient and valid licenses, limiting the total
number of Internet cafes and approving Internet cafes within the
planning made by relevant authorities, screening unlawful and
adverse games and websites, and improving the coordination of
regulation over Internet cafes and online games. 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.
If our
PRC subsidiaries Baidu Online and Baidu Times fail to maintain
qualification as high and new technology enterprise
under the PRC Enterprise Income Tax Law, or if our PRC
subsidiary Baidu China fails to retain its 50% reduced rate tax
holiday, or if our PRC subsidiaries declare and distribute
dividends to their respective offshore parent companies, we will
be required to pay more taxes, which could have a material
adverse effect on our result of operations.
According to the PRC Enterprise Income Tax Law, or the EIT Law,
which became effective on January 1, 2008, as further
clarified by subsequent tax regulations implementing the EIT
Law, foreign-invested enterprises and domestic enterprises are
subject to enterprise income tax, or EIT, at a uniform rate of
25%. The EIT rate of enterprises established before
March 16, 2007 that were eligible for preferential tax
rates 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 in the EIT Law and the related
regulations.
In December 2008, our PRC subsidiaries Baidu Online and Baidu
Times were designated by the Beijing Municipal Science and
Technology Commission as high and new technology
enterprise under the EIT Law. In February 2009, Baidu
Online and Baidu Times received the high and new technology
enterprise certificates jointly issued by the Beijing Municipal
Science and Technology Commission, Beijing Finance Bureau, and
Beijing State and Local Tax Bureaus. Therefore, Baidu Online and
Baidu Times are entitled to enjoy a preferential tax rate of 15%
as long as they maintain their qualification as high and
new technology enterprise. If either or both of them fail
to maintain the high and new technology enterprise
qualification, their applicable EIT rate may increase to up to
25%, which could have a material adverse effect on our results
of operations. We cannot assure you that we will be able to
maintain our current effective tax rate in the future.
In 2006, our PRC subsidiary Baidu China was designated as a
software enterprise by the Shanghai Municipal
Information Commission and was entitled to a full exemption from
the EIT from 2006 to 2007 and a 50% reduced rate from 2008 to
2010 based on then-effective tax laws and regulations. On
April 24, 2009, the Ministry of Finance and the State
Administration of Taxation jointly promulgated Circular on
Issues concerning the Implementation of Preferential Policies
for Enterprise Income Tax, or Caishui Circular 69. According to
Caishui Circular 69, subject to verification, a qualified
software enterprise established prior to January 1,
2008 may continue to enjoy the tax holidays previously
granted to it as a software enterprise. Where the
software enterprise had already started to enjoy its tax
holidays before 2008, it may continue to enjoy the remaining tax
holidays from 2008 until the expiration of such tax holidays.
Therefore, Baidu China may continue to enjoy a 50% reduced EIT
rate from 2008 to
25
2010. If Baidu China fails to maintain the qualification as a
software enterprise, its effective EIT rate will be
increased, which could adversely affect our results of
operations.
In addition, under the EIT Law and related regulations,
dividends, interests, rent or royalties payable by a
foreign-invested enterprise, such as our PRC subsidiaries, to
any of its foreign non-resident enterprise investors, and
proceeds from the disposition of assets (after deducting 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 tax. Undistributed profits earned by
foreign-invested enterprises prior to January 1, 2008 are
exempted from any withholding tax. The British Virgin Islands,
where Baidu Holdings Limited, the direct parent company of our
PRC subsidiary Baidu Online, is incorporated, does not have such
a tax treaty with China. Baidu (Hong Kong) Limited, which
directly owns our PRC subsidiaries Baidu China and Baidu Times,
was incorporated in Hong Kong. Hong Kong has a tax treaty with
China that provides for a 5% withholding tax. However, if Baidu
(Hong Kong) Limited is not considered to be the beneficial owner
of dividends paid to it by Baidu China and Baidu Times under a
tax notice promulgated on October 27, 2009, such dividends
would be subject to withholding tax at a rate of 10%. See
Item 5.A. Operating and Financial review and
Prospects Operating Results
Taxation PRC Enterprise Income Tax.
Our PRC subsidiaries historically have not paid dividends to us.
If they declare and distribute dividends in the future, such
dividend payments will be subject to withholding tax, which will
increase our tax liability and reduce the amount of cash
available to our company.
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 related regulations, 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 related regulations 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. The State
Administration of Taxation issued the Notice Regarding the
Determination of Chinese-Controlled Overseas Incorporated
Enterprises as PRC Tax Resident Enterprises on the Basis of De
Facto Management Bodies, or SAT Circular 82, on April 22,
2009. SAT Circular 82 provides certain specific criteria for
determining whether the de facto management body of
a Chinese-controlled overseas-incorporated enterprise is located
in China. See Item 5.A. Operating and Financial
review and Prospects Operating Results
Taxation PRC Enterprise Income Tax. Although
SAT Circular 82 applies only to overseas registered enterprises
controlled by PRC enterprises, not to those controlled by PRC
individuals, the determining criteria set forth in Circular
82 may reflect the State Administration of Taxations
general position on how the de facto management body
test should be applied in determining the tax resident status of
offshore enterprises, regardless of whether they are controlled
by PRC enterprises or individuals. 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.
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
26
shares or ADSs by our non-PRC enterprise shareholders and ADS
holders were subject to the EIT, your investment in our shares
or ADSs could be materially and adversely affected.
Our
subsidiaries and consolidated affiliated entities in China 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 conduct any business operations other than investing in
our subsidiaries and affiliated entities. As a result of our
holding company structure, we currently rely primarily on
dividend payments from our subsidiaries in China. 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 are 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.
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 almost all of our revenues in
RMB. Under our current structure, our income at the Cayman
Islands holding company level will primarily be derived from
dividend payments from our PRC subsidiaries. Shortages in the
availability of foreign currency may restrict the ability of our
PRC subsidiaries and consolidated 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 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
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, effective from 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 vehicle, 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.
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
27
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 update the previously
filed 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 parent, 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 holders of ordinary shares of our company whom
we know are PRC residents to register with the local SAFE branch
and update their registrations as required under the SAFE
regulations described above. We are aware that Mr. Robin
Yanhong Li, our chairman and chief executive officer and
principal shareholder, who is a PRC resident, has registered
with the relevant local SAFE branch. We, however, cannot provide
any assurances that all of our shareholders who are PRC
residents will file all applicable registrations or update
previously filed registrations as 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 such PRC resident shareholders to
fines and legal sanctions, restrict our cross-border investment
activities, or limit our PRC subsidiaries ability to
distribute dividends to or obtain foreign exchange-dominated
loans from 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 the
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.
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, the State Assets Supervision and
Administration Commission, the State Administration of Taxation,
the State Administration for Industry and Commerce, 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, this regulation
established additional procedures and requirements that could
make merger and acquisition activities by foreign investors more
time-consuming and complex. We may grow our business in part by
directly acquiring complementary businesses in China. Complying
with the requirements of this regulation to complete such
transactions could be time-consuming, and any required approval
processes, including
28
obtaining approval from the Ministry of Commerce, 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 Chinas political and economic conditions and
foreign exchange policies. 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 revised policy, the
RMB is permitted to fluctuate within a narrow and managed band
against a basket of certain foreign currencies. Following the
removal of the U.S. dollar peg, the RMB appreciated more
than 20% against the U.S. dollar over the following three
years. Since July 2008, however, the RMB has traded within a
narrow range against the U.S. dollar. It is difficult to
predict how long the current situation may last and when and how
the RMB exchange rates may change going forward.
Our revenues and costs are mostly denominated in RMB, while a
significant portion of our financial assets are denominated in
U.S. dollars. At the Cayman Islands holding company level,
we 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.
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 March 25, 2010, the trading prices of
our ADSs ranged from $44.44 to $628.50 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:
|
|
|
|
|
actual or anticipated fluctuations in our quarterly operating
results;
|
|
|
|
changes in financial estimates by securities research analysts;
|
|
|
|
conditions in Internet search and online marketing markets;
|
|
|
|
changes in the operating performance or market valuations of
other Internet search or Internet companies that are perceived
to be comparable to us;
|
|
|
|
announcements by us or our competitors of new products,
acquisitions, strategic partnerships, joint ventures or capital
commitments;
|
|
|
|
addition or departure of key personnel;
|
29
|
|
|
|
|
fluctuations of exchange rates between RMB and the
U.S. dollar;
|
|
|
|
intellectual property litigation; and
|
|
|
|
general economic or political conditions in China or elsewhere
in the world.
|
In addition, the stock market in general, and the market prices
for Internet-related companies and companies with operations in
China in particular, have experienced volatility that often has
been unrelated to the operating performance of such companies.
In particular, the global financial crisis and the ensuing
economic recessions in many countries have contributed and may
continue to contribute to extreme volatility in the global stock
markets. 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 ADS 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, 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 attached 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 attached 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.
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 of 1933, 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.
30
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
and consolidated affiliated entities in China. All of our
officers and a majority of our directors 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 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.
It may also be difficult or impossible for you to bring an
action against us or against our directors and officers 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. 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.
Our corporate affairs are governed by our memorandum and
articles of association and by the Companies Law (2009 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
31
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 or prevent others from pursuing any
potential merger, takeover or other change of control
transactions with our company, which could deprive our
shareholders and ADS holders of an opportunity to receive a
premium for their shares or ADSs as part of a sale of our
company and might reduce the price of our ADSs.
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 therefore may deprive the holders of our ordinary
shares and ADSs of the opportunity to sell their shares or ADSs
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. These provisions include
the following:
|
|
|
|
|
A dual-class ordinary share structure.
|
|
|
|
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.
|
|
|
|
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 market 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, 2009.
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, 2010 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
Information Taxation United States
Federal Income Taxation Passive Foreign Investment
Company.
32
|
|
Item 4.
|
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 in China
principally through Baidu Online, our wholly owned subsidiary in
Beijing, China. Since June 2001, we also have conducted part of
our operations in China through Baidu Netcom, a consolidated
affiliated entity in Beijing, China, which holds the licenses
and approvals necessary to operate our websites and provide
online advertising services. In more recent years, we have
established additional PRC subsidiaries and assisted in
establishing additional PRC consolidated affiliated entities to
conduct part of our operations. We formally launched a Japanese
search service in January 2008 and now have three subsidiaries
in Japan.
On August 5, 2005, we listed our ADSs on The Nasdaq
National Market (later renamed The Nasdaq Global Market) 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, on August 10, 2005. Our ADSs currently trade on The
Nasdaq Global Select Market, a segment of The Nasdaq Global
Market.
In December 2008, our shareholders approved our name change from
Baidu.com, Inc. to Baidu, Inc. In November 2009, we moved into
our new corporate headquarters, which we name as Baidu Campus.
Our principal executive offices are located at Baidu Campus,
No. 10 Shangdi 10th Street, Haidian District, Beijing
100085, the Peoples Republic of China. Our telephone
number at this address is +86
(10) 5992-8888.
We are the leading Chinese language Internet search provider. As
a technology-based media company, we aim to provide the best way
for people to find information. In addition to serving Internet
search users, we provide an effective platform for businesses to
reach potential customers. According to a market survey
announced by iResearch Consulting Group, a third-party market
research firm, our search engine Baidu.com accounted for 76.0%
of the total Chinese language web search market in China in
2009, as measured by the number of Chinese language web search
requests handled. According to Alexa.com, our Baidu.com website
was the largest website in China, as measured by user traffic
during the three-month period ended December 31, 2009.
We established our 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.
We serve three types of online participants:
Users. We primarily offer a Chinese
language search platform on our website Baidu.com. 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. In addition, we offer Baidu Hi, an instant
messaging service, and Baidu Youa, a consumer-oriented
e-commerce
platform.
Customers. We design and deliver our
online marketing services on our website Baidu.com 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 2009, we had
approximately 223,000 active online marketing customers.
Baidu Union Members. Baidu Union
includes a large number of third-party web content and software
providers. Baidu Union members can display on their properties
our customers promotional links that match
33
the content of such members properties. Some Baidu Union
members also incorporate a Baidu search box or toolbar into
their websites. We provide high-quality and relevant search to
their users, and in return gain the benefit of increased
traffic. When our customers promotional links are
displayed on Baidu Union members websites, we share the
fees generated by clicks on these links with the owners of these
Baidu Union 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 products and services at Baidu.com to users free of
charge. Some of these products and services are also available
at m.baidu.com and wap.baidu.com, our websites for users who
access our services through mobile Internet devices, including
wireless application protocol (WAP) enabled mobile phones.
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
marked as sponsored 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 features such as:
|
|
|
|
|
Related Search provides alternative search terms
based on the original queries to help users find relevant web
pages quickly.
|
|
|
|
Search in Results enables users to conduct
additional searches within the initial search results.
|
|
|
|
Search Term Suggestion Displays a list of suggested
search terms as the user inputs words into the search box.
|
|
|
|
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.
|
|
|
|
Spell Checker suggests alternate search terms when a
search appears to contain misspellings or typing errors.
|
|
|
|
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.
|
|
|
|
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.
|
|
|
|
Stock Quotes provides links to stock information of
companies listed on the stock exchanges in China.
|
|
|
|
Weather, Train and Flight Schedules enables users to
check weather, domestic train and flight schedules as well as
schedules of international flights departing from or arriving in
China.
|
|
|
|
News, Knows, Post Bar, MP3, Images, Video, and Space
Information displays search results from other Baidu
products including Baidu News, Baidu Knows, Baidu Post Bar,
Baidu MP3 Search, Baidu Image Search and Baidu Video Search.
|
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. It also
provides video-sharing capabilities, which allow users to post
and share video clips in approximately 88,000 online communities.
34
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 users to see many different viewpoints on the same
story. Baidu News is typically updated every three to five
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 keywords delivered to their
email accounts. We hold 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
experiences. 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.
Baidu MP3 Search. Baidu MP3 Search
provides algorithm-generated links to songs and other multimedia
files provided by Internet content providers. Users 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. On the
Baidu MP3 Search site, we and more than 160 content providers,
including some record labels, jointly offer Baidu New Song
Debut, a channel that offers users the newest content from some
artists of these labels in streaming format. Another channel of
the Baidu MP3 Search site is Baidu Online Radio Alliance, which
provides users with radio programs from around 90 national and
regional broadcast stations.
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, color or image file type. Image listings are
organized by various categories which are updated automatically
through algorithms.
Baidu Video Search. Baidu Video Search
enables users to search for and access through hyperlinks online
video clips that are hosted on third parties websites.
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.
Other Search and Community Products. We
are continuously developing and introducing new products and
services to make Baidu.com more attractive to our users. In
addition to the products described above, we currently offer a
variety of online search and community products, including but
not limited to the following (arranged by alphabetical orders):
Baidu Ancient Chinese Literature
Search. Jointly 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.
Baidu Blind Search. Baidu Blind Search is
designed to assist visually impaired users to conduct a more
effective search by removing certain advertisement, images and
other content that may interrupt with the functioning of viewing
software used by visually impaired users.
Baidu Blog Search. We offer a trial version of
Baidu Blog Search, which allows users to search Chinese language
blogs on the Internet.
Baidu Book Search. Through collaboration with
a number of partners in book publishing and distribution, we
offer a trial version of Baidu Book Search, which allows users
to search for and view information relating to specific books,
such as title, author, publisher, price, brief introduction and
table of contents. Due to copyright reasons, Baidu Book Search
does not provide the full text of books.
35
Baidu Culture Sharing Search. We offer a trial
version of Baidu Culture Sharing Search, which allows users to
search information specifically relating to the Chinese culture
from billions of indexed Chinese web pages.
Baidu Data Center. Baidu Data Center is an
online channel providing research reports, news and other
content relating to more than 10 industry sectors such as
cosmetics, IT training, automobiles, online games and real
estate. These industry-specific research reports are developed
primarily by mining search queries data generated on our
websites. Users registered with Baidu Data Center can download
these reports for market research purpose.
Baidu Dictionary. Baidu Dictionary provides
users with lookup and text translation services between Chinese
and English.
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 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.
Baidu Entertainment. Baidu Entertainment is an
online channel devoted exclusively to entertainment-related news
and content. Users can search or browse through news and other
information relating to specific stars, movies, television
series and music.
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 Games Related Channels. Baidu Games is a
channel where registered users can play games provided by our
online game operator partners. In November 2009, we launched
Baidu Games Hall, which allows registered users play certain
casual online games after downloading a client-end
application.
Baidu Government Information Search. Baidu
Government Information Search allows users to search various
regulations, rules, notices and other information announced by
PRC government entities.
Baidu-Hexun Finance. We operate a financial
information website, Baidu-Hexun Finance, in collaboration with
Hexun.com, a financial information service provider in China
with news reporting and securities consulting licenses. Users
can search or browse through economic and financial news,
information relating to personal wealth management and related
market statistics.
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 Local Search. Baidu Local Search allows
users to limit their searches to specific provinces in China.
Baidu Map Search. We offer a trial version of
Baidu Map Search using our self-developed geographic information
system (GIS) platform, aiming at enriching our users
navigation experience. Baidu Map Search enables users to search
online maps of over 380 large and medium sized 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 Mobile Search and Related
Products. Baidu Mobile Search enables users to
access our search and community-based products and services such
as Baidu News, Baidu Post Bar, Baidu Knows and Baidu Map Search
using mobile Internet devices, including WAP-enabled mobile
phones. In May and October 2009, we entered into partnership
arrangements with China Telecom and China Unicom, two mobile
carriers in China, respectively, to provide mobile search for
their 3G mobile service subscribers. Under these arrangements,
our mobile search service will be embedded in the mobile
carriers selected 3G phone modules. Their
36
mobile subscribers will be able to use the pre-installed
applications to access various Baidu products and services
available to mobile phone users.
In November 2009, we launched trial versions of Baidu Palm and
Baidu Mobile Phone Input Method, two user-end software products
designed specifically for mobile phone users. By downloading and
installing Baidu Palm, mobile phone users can access various
Baidu products including Baidu Web Search, Baidu News, Baidu Map
Search, Baidu Post Bar and Baidu Knows without the need to make
multiple registrations. Baidu Mobile Phone Input Method supports
multiple methods of inputting Chinese characters on mobile
phones and is designed to allow mobile phone users to conduct
searches more efficiently.
Baidu Patent Search. Baidu Patent Search 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 Personalized Web Page. We offer Baidu
Personalized Web Page, which allows users to choose from certain
pre-set options of Baidu products and arrange the options based
on their own preference to create their personalized Baidu
search page.
Baidu Postal Code Search. Baidu Postal Code
Search enables our users to search postal codes in
354 cities in China.
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 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 Baidu Search
Index, which shows how frequently a given search term is entered
into Baidu sites, together with other relevant information such
as its historical trend, geographic distribution and demographic
distribution.
Baidu Senior Citizen Search. In October 2009,
we launched a new version of web search specifically designed
for senior users. Supported by Hanvon, Senior Citizen Search
allows users to handwrite search terms in Chinese by moving
around the mouse and produce search results more tailored to
senior users interests and experiences. It also selects
websites that may be of interest to senior users and organizes
these into categories and subjects.
Baidu Statistics Search. Baidu Statistics
Search enables users to search statistics that have been
published by the PRC government since 1949. The statistics are
provided to us by a third party in Beijing.
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 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.
Other
Products and Services
Baidu Hi. In June 2008, we launched a trial
version of our instant messaging service Baidu Hi. In addition
to the major instant messaging functions of chat, grouping, and
personalization, Baidu Hi also integrates the search services,
online communities and various other features that we provide.
Baidu
E-Commerce. In
October 2008, we launched a trial version of Baidu Youa, a
consumer-oriented
e-commerce
platform. Through Baidu Youa, merchants can sell their products
and services at Baidu-registered stores. Customers can use a
Baidu-branded online payment system, BaiduPay, to make
purchases. In addition to possessing the features and functions
of traditional
consumer-to-consumer
(C2C) online trading platforms, Baidu Youa also focuses on
providing consumers with large amount of rich, useful
information about the products or
37
services that they are interested in purchasing, such as
detailed product or service features, similar products or
services, user-generated comments and news or reviews about the
products or services available on the Internet. Baidu
Youas services are supported by a constantly updated
database of merchandise information, which also includes
user-generated comments.
In January 2010, we entered into an agreement with Rakuten,
Inc., the largest
e-commerce
website in Japan, to form a joint venture to build a
business-to-business-to-consumer
(B2B2C) online shopping mall for Chinese Internet users. We
expect to work with Rakuten, Inc. to build the online shopping
mall to provide customers with high-quality merchandise from
well-known Chinese and foreign brands as well as SMEs at
competitive prices. Rakuten owns 51% and we own 49% of the new
joint venture.
Baidu Desktop Search. Baidu Desktop Search is
a free, downloadable software which enables users to search all
files saved on their computer without launching a web browser.
Baidu Toolbar. Baidu Toolbar is a free,
downloadable software which, once installed, shows up on a
browsers tool bar and makes our search function readily
available on every web page that a user browses.
Baidu Safety Center. Baidu Safety Center
provides users with free virus scanning, system repair and
online security evaluations.
Baidu Anti-Virus. Baidu Anti-Virus is an
online marketplace where 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 Internet TV. Baidu Internet TV (also
known as Baidu Movies and Televisions) 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.
In February 2010, we and Providence Equity Partners, a private
equity firm, signed an agreement, pursuant to which Providence
Equity Partners invested $50.0 million in March 2010 into
Ding Xin, Inc., a Cayman Islands company newly established by
us. Ding Xin, Inc. and entities under its control will operate
the Baidu Internet TV channel and develop an advertising
supported online video business.
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. In
September 2009, we launched a trial version of mobile search
service in Japan. In December 2009, we launched Baidu Type, a
Japanese input method for PC users.
Products
and Services for Customers
We focus on providing customers with cost-effective and targeted
marketing solutions. We generate almost all of our revenues 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. Our intelligent ranking system
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 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
38
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
and/or
during specific time period of the day.
We offer certain customers value-added consultative services
that help to maximize their return on investment, or ROIs,
including:
|
|
|
|
|
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.
|
|
|
|
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.
|
|
|
|
Performance Reporting We provide our
customers online daily reports that contain a variety of data,
such as the number of click-throughs, clicked keywords, total
costs incurred, and statistics organized by geographic region.
|
In April 2009, we officially launched Online Marketing
Professional Edition, also known as Phoenix Nest, a new online
marketing system. In December 2009, we completed the switch from
our previous auction-based online marketing system, which we
refer to as Online Marketing Classic Edition, to Phoenix Nest.
Through an enhanced algorithm that generates more relevant
advertisements and provides customers with additional tools and
information to help them better manage their spending and
achieve higher ROI, Phoenix Nest is designed to improve
relevance in paid search and increase value for customers, thus
driving monetization efficiency. Because Phoenix Nest is still
relatively new, there is no assurance that we will be able to
retain existing customers or attract new customers to use it.
See Item 3.D. Risk Factors Risks Related
to Our Business 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.
Network Marketing. Using our ProTheme
contextual promotion technology, we offer Network Marketing, a
service that enables our customers textual or graphical
promotional links to be displayed on the properties of Baidu
Union members where the customers links are relevant to
the subject and content of such Baidu Union members
websites. We generate revenues from our Network Marketing
service 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.
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. We offer services, branded
Targetizement, that enable our customers to reach
their targeted Internet users by displaying their advertisements
only when their targeted Internet users browse certain Baidu web
pages. The customers pay us a fee based on the number of clicks
on their advertisements.
Baidu TV. We operate our 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. We offer a brand advertising
service, Brand-Link. When Internet users conduct a keyword
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. Our advertising
contracts are generally of short term. Standard rates for online
advertisements vary
39
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.
In addition to the marketing services described above, from
which we generate our online marketing revenues, we also offer a
variety of value-added services and platforms designed to aid
our online marketing customers in determining their best
marketing solutions and better managing their marketing
spending. Baidu Compass is a platform that helps our online
marketing customers, primarily medium and large enterprises, to
determine their best marketing solutions based on our analysis
of search user behaviors. Baidu Holmes is a platform that helps
our online marketing customers to evaluate the effect of our
online marketing solutions by providing various data and
analyses that could be used to monitor ROIs. Baidu Union members
can also benefit from Baidu Holmes in better managing their
websites through the data and analyses provided by this
platform. My Marketing Center is a customized platform
integrating industry information, market trends and business and
industry news and reports to assist existing customers in their
sales and marketing efforts. The platform combines our vast
resources in online information search and aggregation to help
customers make better use of search marketing tools to improve
customer targeting, increase sales and enhance brand impact.
Baidu
Union
Baidu Union consists of a large number of third-party web
content and software providers. Baidu Union members can display
on their properties our customers promotional links that
match the content on such members properties. Some Baidu
Union members also incorporate a Baidu search box or toolbar
into their websites. Their users can conduct search via the
Baidu search box or toolbar and can click on our customers
promotional 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. Moreover, our Baidu Union members can
monetize their traffic and content through revenue sharing
arrangements with us, which are based on the number of
click-throughs from their users on our customers
promotional links. The click-throughs can be either on our
customers promotional links reached through the Baidu
search box or toolbar located on the Baidu Union members
websites or directly on our customers promotional links
located on the Baidu Union Members properties. 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
medical, machinery, education, franchising, electronic products,
e-commerce,
ticketing, tourism, information technology services, consumer
products, real estate, entertainment, financial services, and
other industries. Customers in the top five industries
contributed approximate 50% of our total online marketing
revenues in 2009. 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.
|
|
|
|
|
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.
|
|
|
|
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
|
40
|
|
|
|
|
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. Historically, we have acquired our P4P
customers primarily through our nationwide network of
third-party 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 major cities in Guangdong Province.
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 offer discounts to distributors
as consideration for their services. 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 in early
stages of development in China. Distributors serve as an
important channel to reach SME customers throughout China and
collect payments from them.
We offer our tailored marketing solutions to medium and large
corporate customers through third-party agencies and our direct
sales force. We have local sales staff in Beijing, Shanghai and
major cities in Guangdong Province, including Shenzhen,
Guangzhou, and Dongguan, 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 and subsequent positive
media coverage have 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. For example, we purchased
advertisements shown during CCTVs 2009 Spring Festival
Gala, the most watched show on Chinas largest nationwide
television network. 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.
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. Furthermore, our
instant messaging and
e-commerce
services face competition from leading providers of these
services in China.
U.S.-based
Internet Search
Providers. U.S.-based
Internet search providers such as Google and Microsoft 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
41
search. We may also continue to face competition from other
existing competitors and new entrants in the Chinese language
search market.
Chinese Internet Companies. Chinese Internet
portals such as Sohu, Netease and Tencent offer a broad range of
online services, including search service. Sohu has its own
search engine, Sogou, and Tencent also has its own
search engine, SOSO. Each of our Chinese 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. In addition, we compete with B2B
service providers such as Alibaba, which also offers search
services on its websites.
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.
Instant Messaging and
E-commerce
Service Providers. Baidu Hi, our instant
messaging service, competes primarily with Tencents QQ and
MSN Messenger. Baidu Youa, our
e-commerce
platform, faces competition primarily from
e-commerce
service providers such as Alibabas Taobao, Tencents
Paipai and Eachnet, a joint venture of eBay and Tom Online.
Technology
We provide our web search and P4P technology using our network
of computers running customized software developed in-house. Our
key technologies include:
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 where the search terms
are 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 five
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.
In December 2008, we announced Project Aladdin, an ongoing
research and development effort aimed at uncovering useful parts
of the Hidden Web, the part of the Internet that
existing search engine technology may not be able to index, in
order to enrich search results for our users.
42
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:
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. Our intelligent
ranking system 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 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. We employ a dynamic mechanism for the
determination of the minimum bidding price for each keyword. For
determination of cost per click, or CPC, the system uses an
automatic price reducing mechanism which automatically lowers
the CPC to the minimum needed to maintain the desired position.
In December 2009, we completed the switch from Online Marketing
Classic Edition, our previous auction-based online marketing
system, to Phoenix Nest, our new online marketing system.
Compared with the previous auction system, Phoenix Nest, which
is designed to generate more relevant advertisements, can help
customers to more easily find users favorite search terms
to bid on, and provides customers with more tools for budget
management and more data for the effective measurement of ROI.
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.
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
43
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.
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 eight
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 State Administration for Industry and Commerce.
In addition to owning the trademark
and the related logo,
we have applied for registration of additional trademarks and
logos, including
,
, and
. We also have
registered certain trademarks in Hong Kong, including
and our company logo,
and the United States, including Baidu. 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,
hao123.com, youa.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 3.D. Key
Information Risk Factors Risks Related
to Our Business 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 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
MIIT 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.
In the opinion of Haiwen & Partners, 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) subject to the disclosure and risks disclosed under
Item 3.D. Key Information Risk
Factors Risks Related to Our Corporate
Structure and Risks Related to Doing
Business in China, our contractual arrangements with Baidu
Netcom, Beijing Perusal and 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 disclosure and risks disclosed under
Item 3.D. Key Information Risk
Factors Risks Related to Our Corporate
Structure and Risks Related to Doing
Business in China, 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 in all material respects.
44
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 MIIT 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 MIIT
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 MIIT promulgated the Administrative
Measures for Telecommunications Business Operating License, or
the Telecom License Measures. In March 2009, the MIIT issued a
revised Telecom License Measures, which took effect on
April 10, 2009. 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 with respect to maintaining the security of
Internet operation and Internet content. According to these
laws, as well as the Internet Measures, violators may be subject
to penalties, including criminal sanctions, for Internet content
that:
|
|
|
|
|
opposes the fundamental principles stated in the PRC
constitution;
|
|
|
|
compromises national security, divulges state secrets, subverts
state power or damages national unity;
|
|
|
|
harms the dignity or interests of the state;
|
|
|
|
incites ethnic hatred or racial discrimination or damages
inter-ethnic unity;
|
|
|
|
undermines the PRCs religious policy or propagates
heretical teachings or feudal superstitions;
|
|
|
|
disseminates rumors, disturbs social order or disrupts social
stability;
|
|
|
|
disseminates obscenity or pornography, encourages gambling,
violence, murder or fear or incites the commission of a crime;
|
|
|
|
insults or slanders a third party or infringes upon the lawful
rights and interests of a third party; or
|
|
|
|
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.
45
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
According to the Provisions on Administration of Foreign
Invested Telecommunications Enterprises, or the FITE Provisions,
promulgated by the State Council in December 2001 and amended in
September 2008, the ultimate foreign equity ownership in a
value-added telecommunications services provider must not exceed
50%. Moreover, for a foreign investor to acquire any equity
interest in a value-added telecommunication business in China,
it must satisfy a number of stringent performance and
operational experience requirements, including demonstrating
good track records and experience in operating value-added
telecommunication business overseas. Foreign investors that meet
these requirements must obtain approvals from the MIIT and the
Ministry of Commerce (or the Ministry of Commerces
authorized local counterparts), which retain considerable
discretion in granting approvals. According to publicly
available information, the PRC government has issued
telecommunications business operating licenses 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 these entities and their
respective individual shareholders provide us with sufficient
and effective control over these entities. Accordingly, we
currently do not plan to acquire any equity interest in any of
these entities.
In July 2006, the MIIT issued the Notice of the MIIT on
Intensifying the Administration of Foreign Investment in
Value-added Telecommunications Services. This 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 this notice, either the holder of a value-added
telecommunication business operating 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 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
addition, all value-added telecommunication service providers
are required to maintain network and Internet security in
accordance with the standards set forth in relevant PRC
regulations. If a license holder fails to comply with the
requirements in the notice and cure such non-compliance, the
MIIT or its local counterparts have the discretion to take
measures against such license holders, including revoking their
valued-added telecommunication business operating licenses.
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 another
consolidated affiliated entity, BaiduPay, which 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. Each of
Baidu Netcom and Beijing Perusal holds a value-added
telecommunications business operating license. It remains
unclear whether the provision of online payment services by
BaiduPay will require BaiduPay to apply for a value-added
telecommunications business operating license for online
data processing and transaction processing businesses as
provided in the Catalog of Telecommunications Businesses
promulgated by the MIIT.
To comply with the Notice of the MIIT on Intensifying the
Administration of Foreign Investment in Value-added
Telecommunications Services, we have transferred certain domain
names primarily used in our business to Baidu Netcom and Beijing
Perusal, respectively, and have transferred certain trademarks
to BaiduPay. We are also in the process of transferring certain
trademarks, including pending trademark applications made by
Baidu Online, to Baidu Netcom and Beijing Perusal, respectively.
See Item 3.D. Key Information Risk
Factors Risks Related to Doing Business in
China We may be adversely affected by the
complexity, uncertainties and changes in PRC regulation of
Internet business and companies.
46
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 MIIT 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 MIIT 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.
Regulations
on Internet Culture Activities
On May 10, 2003, the Ministry of Culture promulgated the
Internet Culture Administration Tentative Measures, or the
Internet Culture Measures, which was revised in July 2004. 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 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, among other things, reiterate the requirement
for the Internet service provider to obtain the Internet culture
business permit to carry on any business of Internet music
products. In addition, foreign investors are prohibited from
engaging in the Internet culture business operation.
On August 26, 2009, the PRC Ministry of Culture promulgated
the Notice on Strengthening and Improving the Content Review of
Online Music dated August 18, 2009. According to this
notice, only Internet culture operating entities
approved by the Ministry of Culture may engage in the
production, release, dissemination (including providing direct
links to music products) and importation of online music
products. Internet culture operating entities should establish
strict self-monitoring system of online music content and set up
special department in charge of such monitoring.
Regulation
on Broadcasting Audio/Video Programs through the
Internet
On July 6, 2004, the State Administration of Radio Film and
Television promulgated the Rules for the Administration of
Broadcasting of Audio/Video Programs through the Internet and
Other Information Networks, or the A/V Broadcasting Rules. The
A/V Broadcasting Rules apply to the opening, broadcasting,
integration, transmission or download of audio/video programs
via the Internet and other information networks. 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 State Administration of Radio Film
and Television and operate pursuant to the scope as provided in
such license. Foreign invested enterprises are not allowed to
engage in the above business.
47
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, website
news and certain other businesses by non-state-owned companies.
These decisions authorize the Ministry of Culture, the State
Administration of Radio Film and Television and the General
Administration of Press and Publication to adopt detailed
implementation rules according to these decisions.
On December 20, 2007, the State Administration of Radio
Film and Television and the MIIT 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 A/V Broadcasting Rules that online audio/video
service providers must obtain a license from the State
Administration of Radio Film and Television. Furthermore,
Document 56 requires all online audio/video service providers to
be either wholly state-owned or state-controlled. According to
relevant official answers to press questions published on the
State Administration of Radio Film and Televisions website
dated February 3, 2008, officials from the State
Administration of Radio Film and Television and the MIIT
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. Baidu Netcom has obtained an
audio/video program transmission license, which is valid from
January 2010 to January 2013.
Regulations
on Advertisements
The PRC government regulates advertising, including online
advertising, principally through the State Administration for
Industry and Commerce, although there are no national PRC laws
or regulations specifically regulating online advertising
business. Under the Rules for Administration of Foreign Invested
Advertising Enterprise, promulgated by the State Administration
for Industry and Commerce and the Ministry of Commerce in March
2004 and amended in October 2008, foreign investors are
permitted to own equity interests in PRC advertising companies.
However, 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 November 30, 2004, the State Administration for Industry
and Commerce issued the Administrative Regulations for
Advertising Operation Licenses, 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 in addition to a business 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.
Advertisers, advertising operators and advertising distributors
are required by PRC advertising laws and regulations to ensure
that the contents of the advertisements they prepare or
distribute are true and in full compliance with applicable laws
and regulations. In addition, where a special government review
is required for certain categories of advertisements before
publishing, the advertisers, advertising operators and
advertising distributors are obligated to confirm that such
review has been performed and that relevant approval has been
obtained. Violation of these regulations may result in
penalties, including fines, confiscation of advertising income,
orders to cease dissemination of the advertisements and orders
to publish an advertisement correcting the misleading
information. In circumstances involving serious violations, the
State Administration for Industry and Commerce or its local
branches may force the violator to terminate its advertising
operation or even revoke its business license. Furthermore,
advertisers, advertising operators or advertising distributors
may be subject to civil liability if they infringe on the legal
rights and interests of third parties.
48
Regulations
on Software Products
On October 27, 2000, the MIIT 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. On March 1,
2009, the MIIT issued an amended Software Measures, which will
become effective on April 10, 2009. The Software Measures
provide a registration and filing system with respect to
software products made in or imported into China. These software
products may be registered with the competent local authorities
in charge of software industry administration. Registered
software products may enjoy preferential treatment status
granted by relevant software industry regulations. 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.
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, 2000 and
2008. The purpose of the Patent Law is to protect lawful
interests of patent holders, encourage invention, foster
applications of invention, enhance innovative capabilities 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, substances obtained by
means of nuclear transformation or a design which has major
marking effect on the patterns or colors of graphic print
products or a combination of both patterns and colors. 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 adopted
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 MIIT jointly
promulgated the Measures for Administrative Protection of
Copyright Related to Internet on April 29, 2005. This
measure became effective on May 30, 2005.
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
49
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
harming public interest, 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 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 respectively in 1993 and 2001, protects
registered trademarks. The Trademark Office under the State
Administration for Industry and Commerce 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
State Administration for Industry and Commerce. In addition to
owning the trademark
and the related logo, we have applied for registration of
additional trademarks and logos, 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 MIIT
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.
Regulations
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.
50
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 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.
Regulations
on Foreign Exchange
Foreign
Currency Exchange
Pursuant to the Foreign Currency Administration Rules
promulgated in 1996 and amended in 1997 and 2008 and various
regulations issued by SAFE and other relevant PRC government
authorities, RMB is freely convertible 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, unless
expressly exempted by laws and regulations, still 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 or permitted, PRC
companies must repatriate foreign currency payments received
from abroad. The foreign exchange received by PRC companies,
including foreign invested enterprises, may be retained in their
foreign exchange accounts without being exchanged into RMB to
the extent permitted by relevant laws and regulations.
Dividend
Distribution
The principal laws and regulations governing dividend
distributions by wholly foreign owned enterprises and
Sino-foreign equity joint ventures include:
|
|
|
|
|
Wholly Foreign Owned Enterprise Law (1986), as amended;
|
|
|
|
Wholly Foreign Owned Enterprise Law Implementing Rules (1990),
as amended;
|
|
|
|
Sino-foreign Equity Joint Venture Enterprise Law (1979), as
amended;
|
51
|
|
|
|
|
Sino-foreign Equity Joint Venture Enterprise Law Implementing
Rules (1983), as amended;
|
|
|
|
PRC Enterprise Income Tax Law (2007); and
|
|
|
|
Implementation Rules of the PRC Enterprise Income Tax Law (2007).
|
Under these laws and 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.
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 that
were established and which have completed their inbound
investment 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 Labor
On June 29, 2007, 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 a labor
contract without a cause permitted by law. In addition, under
the Regulations on Paid Annual Leave for Employees, which became
effective on
52
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.A. Operating and Financial Review and
Prospects Operating Results
Taxation.
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
subsidiaries in Japan, certain existing Japanese law and
regulations may nonetheless affect such services. The
application to our Japanese subsidiaries 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, a law which aims to protect
juveniles from harmful information on the Internet is being
introduced, and it is difficult to predict how much impact such
a law will have on the operation of our Internet search services
in Japan.
|
|
C.
|
Organizational
Structure
|
The following is a list of our subsidiaries and consolidated
affiliated entities as of the date of this annual report on
Form 20-F:
|
|
|
|
|
|
|
Name
|
|
Time of Formation
|
|
Place of Formation
|
|
Relationship
|
|
Baidu Online Network Technology (Beijing) Co., Ltd.
|
|
January 2000
|
|
China
|
|
Wholly owned subsidiary
|
Baidu Holdings Limited
|
|
February 2000
|
|
British Virgin Islands
|
|
Wholly owned subsidiary
|
Baidu Netcom Science Technology Co., Ltd.
|
|
June 2001
|
|
China
|
|
Consolidated affiliated entity
|
Baidu (China) Co., Ltd.
|
|
June 2005
|
|
China
|
|
Wholly owned subsidiary
|
Baidu.com Times Technology (Beijing) Co., Ltd.
|
|
April 2006
|
|
China
|
|
Wholly owned subsidiary
|
Beijing Perusal Technology Co., Ltd.
|
|
June 2006
|
|
China
|
|
Consolidated affiliated entity
|
Baidu, Inc.
|
|
December 2006
|
|
Japan
|
|
Wholly owned subsidiary
|
Baidu (Hong Kong) Limited
|
|
November 2007
|
|
Hong Kong
|
|
Wholly owned subsidiary
|
Beijing BaiduPay Science and Technology Co., Ltd.
|
|
February 2008
|
|
China
|
|
Consolidated affiliated entity
|
Baido, Inc.
|
|
April 2008
|
|
Japan
|
|
Wholly owned subsidiary
|
Hyakudo, Inc.
|
|
April 2008
|
|
Japan
|
|
Wholly owned subsidiary
|
Baidu Interaction (Shenzhen) Network Technology Co., Ltd.
|
|
February 2009
|
|
China
|
|
Wholly owned subsidiary
|
In addition to the subsidiaries and consolidated affiliated
entities listed above, we also own a 49% equity interest in
RakuBai Limited, a company incorporated in Hong Kong. Rakuten,
Inc., the largest
e-commerce
website in Japan, owns the remaining 51% equity interest in
RakuBai Limited.
PRC laws and regulations restrict foreign investment in Internet
and online advertising businesses. Accordingly, we operate our
websites and our online advertising business in China through
contractual arrangements with Baidu Netcom, Beijing Perusal,
BaiduPay and their respective individual shareholders, which
allow us to substantially control these entities. See
Item 7.B. Major Shareholders and Related Party
Transactions Related Party Transactions for a
summary of these contractual arrangements.
53
|
|
D.
|
Property,
Plant and Equipment
|
In November 2009, we moved into Baidu Campus, our new corporate
headquarters located in Shangdi, an area designated by the
Beijing municipal government as the center of the citys
information technology industry. The new facility occupies
91,500 square meters of gross floor area and currently
houses our principal executive offices, information and
technology center, online marketing services center and
administrative and support departments, and approximately 3,300
of our employees. We own the land use right to the land on which
Baidu Campus was built. We have branch offices in Beijing,
Shanghai and selected cities in Guangdong Province, where we
lease premises from unrelated third parties. Our servers in
China are hosted at the Internet data centers of China Telecom
and China Unicom in Beijing, Tianjin, Jinan, Zhengzhou,
Shijiazhuang, Foshan, Suzhou, Chengdu and Shenzhen. Our servers
in Japan are hosted at the Internet data center of Computer
Engineering & Consulting, Ltd.
|
|
Item 4A.
|
Unresolved
Staff Comments
|
None.
|
|
Item 5.
|
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 the 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 3.D. Key
Information Risk 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.
Overview
Our operations are primarily based in China, where we derive
almost all of our revenues. Total revenues in 2009 were
RMB4.4 billion (US$651.6 million), a 39.1% increase
over 2008. Operating profit in 2009 was RMB1.6 billion
(US$235.1 million), a 46.3% increase over 2008. Net income
in 2009 was RMB1.5 billion (US$217.6 million), a 41.7%
increase over 2008.
Our total assets as of December 31, 2009 were
RMB6.2 billion (US$902.0 million), of which cash and
cash equivalent amounted to RMB4.2 billion
(US$615.3 million). Our total liabilities were
RMB1.4 billion (US$205.7 million), accounting for
22.8% of total liabilities and shareholders equity. As of
December 31, 2009, our retained earnings accumulated to
RMB3.4 billion (US$504.0 million).
The major factors affecting our results of operations and
financial condition are discussed below.
Revenues
Revenue
Generation
We derive almost all of our revenues from online marketing
services, which accounted for 99.8%, 99.9% and 99.9% of our
total revenues in 2007, 2008 and 2009, respectively. We provide
online marketing services to our P4P customers and tailored
solutions customers. A substantial majority of our revenues from
online marketing services were derived from our P4P services.
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
54
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:
|
|
|
|
|
the number of our users and online marketing customers;
|
|
|
|
the number of searches initiated on our websites and our Baidu
Union members properties;
|
|
|
|
the rate at which users click on paid search results;
|
|
|
|
the competitiveness of bidding for keywords by P4P customers;
|
|
|
|
the total online marketing budgets of our customers; and
|
|
|
|
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. A prolonged economic
slowdown in China may cause our customers to decrease or delay
their online marketing spending, hamper our efforts to grow our
customer base, or result in fewer clicks by our users on
sponsored links or advertisements displayed on our or Baidu
Union members websites. Any of these consequences could
negatively affect our online marketing revenues.
In April 2009, we officially launched Phoenix Nest, our new
auction-based online marketing system designed to improve
relevance in paid search and increase value for customers. In
December 2009, we completed the switch from our previous online
marketing system, the Online Marketing Classic Edition, to
Phoenix Nest. If Phoenix Nest is perceived to be a less
effective marketing tool than the Online Marketing Classic
Edition, we may lose existing customers or encounter difficulty
attracting new customers and, as a result, our future revenues
could be materially and adversely affected.
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.
Prior to July 2006, we had provided enterprise search software
and related services. We decided to phase out our enterprise
search software business in July 2006. This phase-out was
completed in 2008.
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 cities in China, including
Beijing, Shanghai, Guangzhou, Shenzhen and Dongguan, and as a
result, an increasing portion of P4P payments have been
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.
55
We offer payment terms to our tailored solutions customers and
longer payment terms to certain qualified distributors,
consistent with industry practice.
As of December 31, 2009, we had accounts receivable of
RMB161.6 million (US$23.7 million), net of allowance
of RMB9.0 million (US$1.3 million), mainly due from
tailored solutions customers.
Operating
Costs and Expenses
Our operating costs and expenses consist of cost of revenues,
selling, general and administrative expenses, and research and
development expenses. Share-based compensation expenses are
allocated among the above three categories of operating costs
and expenses, based on the nature of the work of the employees
who have received share-based compensation. Costs and expenses
related to our Japan operations, which started in December 2006,
are included in our cost of revenues, selling, general and
administrative expenses and research and development expenses.
Our total operating costs and expenses increased significantly
from 2007 to 2009 due to the growth of our business.
Cost
of Revenues
The following table sets forth the components of our cost of
revenues both in absolute amount and as a percentage of total
revenues for the periods indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
|
RMB
|
|
|
%
|
|
|
RMB
|
|
|
%
|
|
|
RMB
|
|
|
US$
|
|
|
%
|
|
|
|
(In thousands, except percentages)
|
|
|
Total revenues
|
|
|
1,744,425
|
|
|
|
100.0
|
|
|
|
3,198,252
|
|
|
|
100.0
|
|
|
|
4,447,776
|
|
|
|
651,603
|
|
|
|
100.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Business tax and surcharges
|
|
|
(108,783
|
)
|
|
|
6.2
|
|
|
|
(200,085
|
)
|
|
|
6.2
|
|
|
|
(275,924
|
)
|
|
|
(40,423
|
)
|
|
|
6.2
|
|
Traffic acquisition costs
|
|
|
(204,693
|
)
|
|
|
11.7
|
|
|
|
(418,474
|
)
|
|
|
13.1
|
|
|
|
(697,673
|
)
|
|
|
(102,210
|
)
|
|
|
15.7
|
|
Bandwidth costs
|
|
|
(117,554
|
)
|
|
|
6.8
|
|
|
|
(178,651
|
)
|
|
|
5.6
|
|
|
|
(203,927
|
)
|
|
|
(29,875
|
)
|
|
|
4.6
|
|
Depreciation of servers and other equipment
|
|
|
(147,115
|
)
|
|
|
8.4
|
|
|
|
(225,799
|
)
|
|
|
7.1
|
|
|
|
(250,969
|
)
|
|
|
(36,767
|
)
|
|
|
5.6
|
|
Operational costs
|
|
|
(65,544
|
)
|
|
|
3.8
|
|
|
|
(127,906
|
)
|
|
|
4.0
|
|
|
|
(181,369
|
)
|
|
|
(26,571
|
)
|
|
|
4.1
|
|
Share-based compensation expenses
|
|
|
(1,717
|
)
|
|
|
0.1
|
|
|
|
(4,542
|
)
|
|
|
0.1
|
|
|
|
(6,374
|
)
|
|
|
(934
|
)
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenues
|
|
|
(645,406
|
)
|
|
|
37.0
|
|
|
|
(1,155,457
|
)
|
|
|
36.1
|
|
|
|
(1,616,236
|
)
|
|
|
(236,780
|
)
|
|
|
36.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 valid
click-throughs by users of that members properties.
Bandwidth Costs. Bandwidth costs are the fees
we pay to telecommunications carriers such as China Telecom and
China Unicom 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 the
telecommunications carriers increase 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.
Operational Costs. Operational costs include
primarily salary and benefit expenses and travel and other
expenses incurred by our operating and technical support
personnel. Salary and benefit expenses include wages, bonuses,
medical insurance, unemployment insurance, pension benefits,
employee housing fund and other welfare benefits.
56
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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
|
RMB
|
|
|
%
|
|
|
RMB
|
|
|
%
|
|
|
RMB
|
|
|
US$
|
|
|
%
|
|
|
|
(In thousands, except percentages)
|
|
|
Total revenues
|
|
|
1,744,425
|
|
|
|
100.0
|
|
|
|
3,198,252
|
|
|
|
100.0
|
|
|
|
4,447,776
|
|
|
|
651,603
|
|
|
|
100.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues
|
|
|
(645,406
|
)
|
|
|
37.0
|
|
|
|
(1,155,457
|
)
|
|
|
36.1
|
|
|
|
(1,616,236
|
)
|
|
|
(236,780
|
)
|
|
|
36.3
|
|
Selling, general and administrative
|
|
|
(411,163
|
)
|
|
|
23.6
|
|
|
|
(659,804
|
)
|
|
|
20.6
|
|
|
|
(803,988
|
)
|
|
|
(117,785
|
)
|
|
|
18.1
|
|
Selling and marketing
|
|
|
(275,283
|
)
|
|
|
15.8
|
|
|
|
(452,245
|
)
|
|
|
14.1
|
|
|
|
(573,088
|
)
|
|
|
(83,958
|
)
|
|
|
12.9
|
|
General and administrative
|
|
|
(135,880
|
)
|
|
|
7.8
|
|
|
|
(207,559
|
)
|
|
|
6.5
|
|
|
|
(230,900
|
)
|
|
|
(33,827
|
)
|
|
|
5.2
|
|
Research and development
|
|
|
(140,702
|
)
|
|
|
8.1
|
|
|
|
(286,256
|
)
|
|
|
9.0
|
|
|
|
(422,615
|
)
|
|
|
(61,913
|
)
|
|
|
9.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and operating expenses
|
|
|
(1,197,271
|
)
|
|
|
68.7
|
|
|
|
(2,101,517
|
)
|
|
|
65.7
|
|
|
|
(2,842,839
|
)
|
|
|
(416,478
|
)
|
|
|
63.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling,
General and Administrative 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. To the extent that our direct sales
force sells a greater proportion of our online marketing
services, we expect that our selling expenses will increase as a
result of increased sales commissions.
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.
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 Accounting Standards Codification,
or ASC, subtopic
350-40,
Intangibles-Goodwill and Other: Internal-Use Software
(Pre-Codification: Statement of Position
98-1,
Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use).
Share-based
Compensation Expenses
We grant options to our employees as a type of share-based
compensation award. As of December 31, 2009, there was
RMB36.5 million (US$5.3 million) unrecognized
share-based compensation cost related to options, which is
expected to be recognized over a weighted-average vesting period
of 2.6 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.
In addition to options, we started awarding restricted shares to
employees in 2006. As of December 31, 2009, there was
RMB53.8 million (US$7.9 million) unrecognized
share-based compensation cost related to restricted shares,
which is expected to be recognized over a weighted-average
vesting period of 1.2 years. To the extent the actual
forfeiture rate is different from our original estimate, actual
share-based compensation cost related to these awards may be
different from our expectation.
57
The following table sets forth the allocation of our share-based
compensation expenses both in absolute amount and as a
percentage of total share-based compensation expenses among our
employees based on the nature of work which they were assigned
to perform.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
|
RMB
|
|
|
%
|
|
|
RMB
|
|
|
%
|
|
|
RMB
|
|
|
US$
|
|
|
%
|
|
|
|
(In thousands, except percentages)
|
|
|
Allocation of Share-based Compensation Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues
|
|
|
1,717
|
|
|
|
4.3
|
|
|
|
4,542
|
|
|
|
5.4
|
|
|
|
6,374
|
|
|
|
934
|
|
|
|
7.4
|
|
Selling, general and administrative
|
|
|
17,371
|
|
|
|
43.6
|
|
|
|
41,651
|
|
|
|
49.6
|
|
|
|
38,681
|
|
|
|
5,667
|
|
|
|
44.8
|
|
Research and development
|
|
|
20,760
|
|
|
|
52.1
|
|
|
|
37,784
|
|
|
|
45.0
|
|
|
|
41,263
|
|
|
|
6,045
|
|
|
|
47.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total share-based compensation expenses
|
|
|
39,848
|
|
|
|
100.0
|
|
|
|
83,977
|
|
|
|
100.0
|
|
|
|
86,318
|
|
|
|
12,646
|
|
|
|
100.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
Expenses of Baidu Campus
Depreciation expenses of Baidu Campus are allocated into cost of
revenues and operating expenses based on the function of the
operating units benefiting from the use of the premises. With
our recent move into Baidu Campus and the termination of certain
prior leasing contracts, our leasing expenses are expected to
decrease in the future.
Taxation
Under the current laws of the Cayman Islands and the British
Virgin Islands, we and our direct subsidiary Baidu Holdings
Limited are not subject to income or capital gains tax. Under
the current laws of Hong Kong, Baidu (Hong Kong) Limited is
exempted from income tax on its foreign-derived income.
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%. 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, upon approval, a 50% reduction of the EIT for
the succeeding three years.
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 2007, followed by a 15% tax rate so long as it
continued to qualify as a high and new technology enterprise.
Baidu Times, which was 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
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.
58
According to the EIT Law, as further clarified by the
Implementation Rules and the Transition Preferential Policy
Circular, foreign-invested enterprises 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 rate 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. On April 24, 2009, the Ministry of
Finance and the State Administration of Taxation jointly
promulgated Caishui Circular 69. According to Caishui Circular
69, subject to verification, a qualified software enterprise
established prior to January 1, 2008 may continue to
enjoy the tax holidays previously granted to it as a
software enterprise. Where the software enterprise
had already started to enjoy its tax holidays before 2008, it
may continue to enjoy the remaining tax holidays from 2008 until
the expiration of such tax holidays. Therefore, Baidu China may
continue to enjoy a 50% reduced EIT rate from 2008 to 2010 as a
software enterprise.
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 set forth in relevant
guidance.
In December 2008, our PRC subsidiaries Baidu Online and Baidu
Times were designated by relevant government authorities as
high and new technology enterprise under the EIT
Law. In February 2009, Baidu Online and Baidu Times received the
high and new technology enterprise certificates jointly issued
by the Beijing Municipal Science and Technology Commission, the
Beijing Finance Bureau, and the Beijing State and Local Tax
Bureaus. Therefore, Baidu Online and Baidu Times are entitled to
enjoy a preferential tax rate of 15% as long as they maintain
their qualification as high and new technology
enterprises under the EIT Law. In addition, Baidu Times
will continue to benefit from the remaining tax holidays granted
to it under the applicable PRC tax laws and regulations
effective before January 1, 2008.
If Baidu Online or Baidu Times fails to maintain the high
and new technology enterprise qualification under the EIT
Law, or if Baidu China fails to maintain the qualification as a
software enterprise, their tax rates will be
increased, which could have a material adverse effect on our
results of operations.
Under the EIT Law and the Implementation Rules, dividends,
interests, rent or royalties payable by a foreign-invested
enterprise, such as our PRC subsidiaries, to any of its foreign
non-resident enterprise investors, and proceeds from the
disposition of assets (after deducting 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
foreign-invested enterprises prior to January 1, 2008 will
be exempted from any withholding tax.
The British Virgin Islands, where Baidu Holdings Limited, the
sole shareholder of our PRC subsidiary Baidu Online, was
incorporated, does not have such a tax treaty with China. Baidu
(Hong Kong) Limited, 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%. However,
the
59
State Administration of Taxation promulgated Notice on How to
Understand and Determine the Beneficial Owners in Tax
Conventions on October 27, 2009, or SAT Circular 601, which
provides guidance for determining whether a resident of a
contracting state is the beneficial owner with
respect to dividend, interest and royalty income under
Chinas tax treaties and tax arrangements. According to SAT
Circular 601, a beneficial owner shall have ownership and right
to dispose of the income or the rights and properties giving
rise to such income. A beneficial owner generally engages in
substantive business activities. An agent or conduit company
will not be regarded as a beneficial owner and, therefore, will
not qualify for treaty benefits. The conduit company normally
refers to a company that is set up primarily for the purpose of
evading or reducing taxes or transferring or accumulating
profits.
Our PRC subsidiaries historically have not paid dividends to us.
If they declare and distribute dividends to us in the future,
such dividend payments will be subject to withholding tax, which
will increase our tax liability and reduce the amount of cash
available to our company.
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.
The State Administration of Taxation issued the Notice Regarding
the Determination of Chinese-Controlled Overseas Incorporated
Enterprises as PRC Tax Resident Enterprises on the Basis of De
Facto Management Bodies, or SAT Circular 82, on April 22,
2009. SAT Circular 82 provides that an overseas registered
enterprise controlled by a PRC company or a PRC company group
will be classified as a resident enterprise with its
de facto management bodies located within China if
the following requirements are satisfied: (i) the senior
management and core management departments in charge of its
daily operations function are mainly located in the PRC;
(ii) its financial and human resources decisions are
subject to determination or approval by persons or bodies
located in the PRC; (iii) its major assets, accounting
books, company seals, and minutes and files of its board and
shareholders meetings are located or kept in the PRC; and
(iv) no less than half of the enterprises directors
or senior management with voting rights reside in the PRC.
Although SAT Circular 82 only applies to overseas registered
enterprises controlled by PRC enterprises and not those
controlled by PRC individuals or foreigners, the determining
criteria set forth in the circular may reflect the State
Administration of Taxations general position on how the
de facto management body test should be applied in
determining the tax resident status of offshore enterprises,
regardless of whether they are controlled by PRC enterprises,
individuals or foreigners.
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 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.
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. On January 8, 2009, the State
Administration of Taxation issued the Implementation Measures
for Special Tax Adjustments (Trial). The measures set forth
tax-filing disclosure and documentation requirements, clarify
the definition of related party, guide the selection
and application of transfer pricing methods, and outline the due
process procedures for transfer pricing investigation and
assessment.
If our PRC subsidiaries no longer qualify for 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 our PRC subsidiaries 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
60
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 2007, 2008 and 2009, our consolidated
effective tax rate was -2.1%, 9.97% and 11.76%, 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 our P4P services are subject to a 5% PRC business
tax. Revenues from our online advertising services are subject
to business taxes, surcharges and cultural business construction
fees totaling approximately 8.5% of the online advertising
revenues. Revenues from our other services are also subject to a
5% business tax.
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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
US$
|
|
|
|
(In thousands)
|
|
|
Consolidated Statements of Income Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Online marketing services
|
|
|
1,741,021
|
|
|
|
3,194,461
|
|
|
|
4,445,310
|
|
|
|
651,242
|
|
Other services
|
|
|
3,404
|
|
|
|
3,791
|
|
|
|
2,466
|
|
|
|
361
|
|
Total revenues
|
|
|
1,744,425
|
|
|
|
3,198,252
|
|
|
|
4,447,776
|
|
|
|
651,603
|
|
Operating costs and
expenses(1)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues
|
|
|
(645,406
|
)
|
|
|
(1,155,457
|
)
|
|
|
(1,616,236
|
)
|
|
|
(236,780
|
)
|
Selling, general and administrative
|
|
|
(411,163
|
)
|
|
|
(659,804
|
)
|
|
|
(803,988
|
)
|
|
|
(117,785
|
)
|
Research and development
|
|
|
(140,702
|
)
|
|
|
(286,256
|
)
|
|
|
(422,615
|
)
|
|
|
(61,913
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating costs and expenses
|
|
|
(1,197,271
|
)
|
|
|
(2,101,517
|
)
|
|
|
(2,842,839
|
)
|
|
|
(416,478
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating profit
|
|
|
547,154
|
|
|
|
1,096,735
|
|
|
|
1,604,937
|
|
|
|
235,125
|
|
Interest income
|
|
|
49,009
|
|
|
|
47,677
|
|
|
|
32,661
|
|
|
|
4,785
|
|
Other income, net, including exchange gains or losses
|
|
|
20,053
|
|
|
|
19,767
|
|
|
|
45,752
|
|
|
|
6,703
|
|
Loss from equity method investments
|
|
|
|
|
|
|
|
|
|
|
(229
|
)
|
|
|
(34
|
)
|
Taxation
|
|
|
12,752
|
|
|
|
(116,071
|
)
|
|
|
(198,017
|
)
|
|
|
(29,010
|
)
|
Net income
|
|
|
628,968
|
|
|
|
1,048,108
|
|
|
|
1,485,104
|
|
|
|
217,569
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Share-based compensation expenses are allocated as
follows: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues
|
|
|
(1,717
|
)
|
|
|
(4,542
|
)
|
|
|
(6,374
|
)
|
|
|
(934
|
)
|
Selling, general and administrative
|
|
|
(17,371
|
)
|
|
|
(41,651
|
)
|
|
|
(38,681
|
)
|
|
|
(5,667
|
)
|
Research and development
|
|
|
(20,760
|
)
|
|
|
(37,784
|
)
|
|
|
(41,263
|
)
|
|
|
(6,045
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(39,848
|
)
|
|
|
(83,977
|
)
|
|
|
(86,318
|
)
|
|
|
(12,646
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
61
Year
Ended December 31, 2009 Compared to Year Ended
December 31, 2008
Revenues. Our total revenues increased by
39.1% from RMB3.2 billion in 2008 to RMB4.4 billion
(US$651.6 million) in 2009. This increase was primarily due
to a substantial increase in our revenues from online marketing
services. Our online marketing revenues increased by 39.2% from
RMB3.2 billion in 2008 to RMB4.4 billion
(US$651.2 million) in 2009. This increase was mainly
attributable to the increase in the number of our online
marketing customers from approximately 284,000 in 2008 to over
317,000 in 2009, and the increase in the average revenue per
customer from approximately RMB11,200 in 2008 to approximately
RMB14,000 (US$2,054) in 2009. 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, Shenzhen and Dongguan. 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 approximately
16.9% from 2008 to 2009.
Operating Costs and Expenses. Our total
operating costs and expenses increased by 35.3% from
RMB2.1 billion in 2008 to RMB2.8 billion
(US$416.5 million) in 2009. This increase was primarily due
to the expansion of our business.
|
|
|
|
|
Cost of Revenues. Our cost of revenues
increased by 39.9% from RMB1.2 billion in 2008 to
RMB1.6 billion (US$236.8 million) in 2009. This
increase was primarily due to the following factors:
|
|
|
|
|
|
Traffic Acquisition Costs. Our traffic
acquisition costs increased by 66.7% from RMB418.5 million
in 2008 to RMB697.7 million (US$102.2 million) in
2009. This was primarily due to the growth of revenue
contribution from our Baidu Union members;
|
|
|
|
Bandwidth Costs and Depreciation Expenses. Our
bandwidth costs increased by 14.1% from RMB178.7 million in
2008 to RMB203.9 million (US$29.9 million) in 2009.
Our depreciation expenses of servers and other equipment
increased by 11.1% from RMB225.8 million in 2008 to
RMB251.0 million (US$36.8 million) in 2009. The
absolute increases in these costs were due to the expansion of
our business. However, these costs in 2009 accounted for a lower
percentage of total revenues than in 2008. The decreases in
bandwidth costs and depreciation expenses as percentages of
total revenues reflect our improved efficiency as well as the
scalability of our Internet-based business model;
|
|
|
|
Business Tax and Surcharges. Our business tax
and surcharges increased by 37.9% from RMB200.1 million in
2008 to RMB275.9 million (US$40.4 million) in 2009,
primarily as a result of increase in our online marketing
revenues; and
|
|
|
|
Operational Costs. Our operational costs
increased by 41.8% from RMB127.9 million in 2008 to
RMB181.4 million (US$26.6 million) in 2009, 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 21.9% from RMB659.8 million in 2008
to RMB804.0 million (US$117.8 million) in 2009. This
increase was primarily due to the following factors:
|
|
|
|
|
|
total salaries and benefits and staff-related expenses increased
by 13.1% from RMB353.8 million in 2008 to
RMB400.3 million (US$58.6 million) in 2009, primarily
due to the increased direct sales headcount to support our
expanded online marketing services;
|
|
|
|
total office operating expenses increased by 10.8% from
RMB77.2 million in 2008 to RMB85.5 million
(US$12.5 million) in 2009, primarily as a result of
increase and expansion of our direct sales offices;
|
|
|
|
total traveling, communication and business development expenses
increased by 28.9% from RMB23.9 million in 2008 to
RMB30.8 million (US$4.5 million) in 2009, primarily
due to the increased direct sales headcount and activities to
support our expanded online marketing services; and
|
|
|
|
marketing and promotion expenses increased by 75.3% from
RMB90.7 million in 2008 to RMB159.0 million
(US$23.3 million) in 2009 primarily due to the increased
marketing and promotion activities.
|
62
The above increases were partially offset by a 7.2% decrease in
share-based compensation expenses allocated to selling, general
and administrative expenses from RMB41.7 million in 2008 to
RMB38.7 million (US$5.7 million) in 2009, primarily
due to the maturity of some share-based awards granted in prior
years.
|
|
|
|
|
Research and Development Expenses. Our
research and development expenses increased by 47.6% from
RMB286.3 million in 2008 to RMB422.6 million
(US$61.9 million) in 2009, primarily due to an increase in
the number and compensation levels of research and development
staff.
|
Operating Profit. As a result of the
foregoing, we generated an operating profit of
RMB1.6 billion (US$235.1 million) in 2009, a 46.3%
increase from 2008.
Taxation. Our income tax expenses increased by
70.6% from RMB116.1 million in 2008 to
RMB198.0 million (US$29.0 million) in 2009, primarily
due to the expiration of tax holiday of our subsidiary Baidu
Times.
Other income, net, including exchange gains or
losses. Our other income, net, including exchange
gains or losses was RMB45.8 million (US$6.7 million)
in 2009, compared to RMB19.8 million in 2008. The increase
was primarily due to more government subsidies received in 2009.
Net Income. As a result of the foregoing, we
had net income of RMB1.5 billion (US$217.6 million) in
2009, a 41.7% increase from RMB1.0 billion in 2008.
Year
Ended December 31, 2008 Compared to Year Ended
December 31, 2007
Revenues. Our total revenues increased by
83.3% from RMB1.7 billion in 2007 to RMB3.2 billion in
2008. This increase was primarily due to a substantial increase
in our revenues from online marketing services. Our online
marketing revenues increased by 83.5% from RMB1.7 billion
in 2007 to RMB3.2 billion in 2008. This increase was mainly
attributable to the increase in the number of our online
marketing customers from approximately 214,000 in 2007 to over
284,000 in 2008, and the increase in the average revenue per
customer from approximately RMB8,100 in 2007 to approximately
RMB11,200 in 2008. 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, Shenzhen and Dongguan. 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 approximately 48% from 2007
to 2008.
Operating Costs and Expenses. Our total
operating costs and expenses increased by 75.5% from
RMB1.2 billion in 2007 to RMB2.1 billion in 2008. This
increase was primarily due to the expansion of our business.
|
|
|
|
|
Cost of Revenues. Our cost of revenues
increased by 79.0% from RMB645.4 million in 2007 to
RMB1.2 billion in 2008. This increase was primarily due to
the following factors:
|
|
|
|
|
|
Traffic Acquisition Costs. Our traffic
acquisition costs increased by 104.4% from RMB204.7 million
in 2007 to RMB418.5 million in 2008. This was primarily due
to the growth of revenue contribution from our Baidu Union
members;
|
|
|
|
Bandwidth Costs and Depreciation Expenses. Our
bandwidth costs increased by 52.0% from RMB117.6 million in
2007 to RMB178.7 million in 2008. Our depreciation expenses
of servers and other computer hardware increased by 53.5% from
RMB147.1 million in 2007 to RMB225.8 million in 2008.
The absolute increases in these costs were due to the expansion
of our business. However, these costs in 2008 accounted for a
lower percentage of total revenues than in 2007. The decreases
in bandwidth costs and depreciation expenses as percentages of
total revenues reflect our improved efficiency as well as the
scalability of our Internet-based business model;
|
|
|
|
Business Tax and Surcharges. Our business tax
and surcharges increased by 83.9% from RMB108.8 million in
2007 to RMB200.1 million in 2008, primarily as a result of
increase in our online marketing revenues; and
|
|
|
|
Operational Costs. Our operational costs
increased by 95.1% from RMB65.5 million in 2007 to
RMB127.9 million in 2008, 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.
|
63
|
|
|
|
|
Selling, General and Administrative
Expenses. Our selling, general and administrative
expenses increased by 60.5% from RMB411.2 million in 2007
to RMB659.8 million in 2008. This increase was primarily
due to the following factors:
|
|
|
|
|
|
total salaries and benefits and staff-related expenses increased
by 61.8% from RMB218.7 million in 2007 to
RMB353.8 million in 2008, primarily due to the increased
direct sales and administrative headcount to support our
expanded online marketing services;
|
|
|
|
share-based compensation expenses allocated to selling, general
and administrative expenses increased by 139.8% from
RMB17.4 million in 2007 to RMB41.7 million in 2008
primarily due to share-based awards granted to the new senior
management personnel hired in 2008;
|
|
|
|
total office operating expenses increased by 37.6% from
RMB56.1 million in 2007 to RMB77.2 million in 2008, as
a result of increase and expansion of our direct sales
offices; and
|
|
|
|
total traveling, communication and business development expenses
increased by 46.6% from RMB16.3 million in 2007 to
RMB23.9 million in 2008, primarily due to the increased
administrative and direct sales headcount and activities to
support our expanded online marketing services.
|
|
|
|
|
|
Research and Development Expenses. Our
research and development expenses increased by 103.4% from
RMB140.7 million in 2007 to RMB286.3 million in 2008,
primarily due to an increase in the number and compensation
levels of research and development staff.
|
Operating Profit. As a result of the
foregoing, we generated an operating profit of
RMB1.1 billion in 2008, a 100.4% increase from 2007.
Taxation. Our income tax expenses were
RMB116.1 million in 2008, compared to an income tax benefit
of RMB12.8 million in 2007. The income tax expenses in 2008
were primarily due to one of our PRC subsidiaries being subject
to an EIT rate of 12.5% in 2008, after the expiration of its
full exemption from the EIT. Our income tax benefit in 2007 was
primarily due to receipt of an incentive tax refund of
RMB21.2 million arising from capital reinvestment in one of
our PRC subsidiaries.
Other income, net, including exchange gains or
losses. Our other income, net, including exchange
gains or losses was RMB19.8 million in 2008, compared to
RMB20.1 million in 2007.
Net Income. As a result of the foregoing, we
had net income of RMB1.0 billion in 2008, a 66.6% increase
from RMB629.0 million in 2007.
Inflation
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 4.8%,
5.9% and -0.7% in 2007, 2008 and 2009, respectively. Although we
were not materially affected by inflation in the past, we can
provide no assurance that we will not be affected in the future
by potentially 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 exposure to higher inflation in China.
Foreign
Currency
The average exchange rate between U.S. dollar and RMB has
declined from RMB8.2264 per U.S. dollar in July 2005 to
RMB6.8275 per U.S. dollar in December 2009. The functional
currency of our subsidiaries in Japan is the Japanese yen, and
their reporting currency is RMB. During 2009, the Japanese yen
depreciated by approximately 2.4% against RMB. As of
December 31, 2009, we recorded RMB113.5 million
(US$16.6 million) of net foreign currency translation loss
in accumulated other comprehensive loss as a component of
shareholders equity. We have not hedged exposures to
exchange fluctuations using any hedging instruments. See also
Item 3.D. Key Information Risk
Factors Risks Related to Doing Business in
China Fluctuation in the value of the RMB
64
may have a material adverse effect on your investment. and
Item 11. Quantitative and Qualitative Disclosures
About Market Risk Foreign Exchange Risk.
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. For further information on our
significant accounting policies, see Note 2 to our
consolidated 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 on keywords based on how much they are
willing to pay for each click to their listings in the search
results listed on our website and the relevance between the
keywords and the customers businesses. Internet
users search of the keyword will trigger the display of
the listings. The ranking of the customers listings
depends on both the bidding price and the listings
relevance to the keyword searched. 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, as there is persuasive evidence of an
arrangement, the fee is fixed or determinable and collection is
reasonably assured, as prescribed by ASC subtopic
605-10, or
ASC 605-10,
Revenue Recognition: Overall (Pre-Codification: Staff
Accounting Bulletin No. 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 ASC
605-10.
|
|
(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 ASC
605-10, on a
pro-rata basis over the contractual term commencing on the date
the customers advertisement is displayed on a specified
web page. For certain time-based contractual agreements, 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.
65
|
|
(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.
We may engage in barter transactions from time to time and in
such situations follow the provisions of ASC subtopic
845-10,
Nonmonetary Transactions: Overall (Pre-Codification:
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.
We recognized revenues for barter transactions involving
advertising in accordance with ASC subtopic
605-20,
Revenue recognition: Services (Pre-Codification: Emerging
Issues Task Force, or EITF, Issue
No. 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 ASC subtopic
505-50,
Equity: Equity-based Payments to Non-Employees
(Pre-Codification:
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) above, and the services
are considered as multiple accounting units in accordance with
ASC subtopic
605-25, or
ASC 605-25,
Revenue recognition: Multiple-Element Arrangements
(Pre-Codification:
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.
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 ASC
subtopic
605-50,
Revenue recognition: Customer Payments and Incentives
(Pre-Codification:
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 the
applicable revenue recognition criteria set forth in ASC
605-10 are
fulfilled.
66
Share-based
Compensation
We account for share-based compensation in accordance with ASC
subtopic
718-10, or
ASC 718-10,
Compensation-Stock Compensation: Overall
(Pre-Codification: Statement of Financial Accounting
Standards, or SFAS, No. 123R, Share-Based Payment).
Under the provisions of ASC
718-10,
share-based compensation cost is estimated at the grant date
based on the awards fair value as calculated by the
Black-Scholes-Merton (BSM) option-pricing model and is
recognized as expense over the requisite service period. The BSM
model requires various highly judgmental assumptions including
volatility and expected option life. Volatility is measured
using historical daily price changes of our ADSs over the
respective expected life of the option. Expected option life is
the number of years that we estimate, based on the vesting and
contractual terms and employee demographics. If any of the
assumptions used in the BSM model change significantly,
share-based compensation expenses may differ materially in the
future from that recorded in the current period.
In addition, we are required to estimate the expected forfeiture
rate and only recognize expense for those shares expected to
vest. We estimate the forfeiture rate based on historical
experience. Further, to the extent our actual forfeiture rate is
different from our estimate, stock-based compensation expense is
adjusted accordingly.
Income
Taxes
We are subject to income taxes in the PRC and Japan. Significant
judgment is required in evaluating our uncertain tax positions
and determining our provision for income taxes.
ASC subtopic
740-10, or
ASC 740-10,
Income Taxes: Overall (Pre-Codification: Financial
Accounting Standard Board Interpretation No. 48,
Accounting for Uncertainty in Income Taxes an
interpretation of FASB Statement No. 109), contains a
two-step approach to recognizing and measuring uncertain tax
positions accounted for in accordance with ASC
740-10
(Pre-Codification: 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.
We make assumptions, judgments and estimates in the recognition
and measurement of a tax position taken or expected to be taken
in a tax return. These judgments, assumptions and estimates take
into account current tax laws, our interpretation of current tax
laws and possible outcomes of current and future audits
conducted by foreign and domestic tax authorities. Changes in
tax law or our interpretation of tax laws and the resolution of
current and future tax audits could significantly impact the
amounts of unrecognized, uncertain tax positions, if any,
provided or to be provided for in our consolidated financial
statements. Although we believe we have adequately reserved for
our uncertain tax positions, no assurance can be given that the
final tax outcome of these matters will not be different. In
general, PRC and Japanese tax authorities have up to five and
seven years, respectively, to conduct examination on our tax
filings. Accordingly, our PRC subsidiaries and affiliated
entities tax filings for the tax years 2006 to 2009 and
our Japanese subsidiarys tax filings for the tax years
2006 to 2009 remain open to examination by the respective taxing
jurisdictions.
Our assumptions, judgments and estimates relative to the value
of a deferred tax asset take into account predictions of the
amount and category of future taxable income, such as income
from operations. Actual operating results and the underlying
amount and category of income in future years could render our
current assumptions, judgments and estimates of recoverable net
deferred taxes inaccurate. Any of the assumptions, judgments and
estimates mentioned above could cause our actual income tax
obligations to differ from our estimates, and thus materially
impact our financial position and results of operations. We do
not believe that net deferred tax assets related with our Japan
and Hong Kong operations are more likely than not to be
realized. Consequently, we have provided full valuation
allowances on the related net deferred tax assets.
67
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. If the financial
condition of our customers were to deteriorate, resulting in an
impairment of their ability to make payments, or if the
operators decide not to pay us, additional allowances may be
required which could materially impact our financial position
and results of operations.
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 ASC subtopic
360-10,
Property, Plant and Equipment: Overall (Pre-Codification:
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.
Impairment
of Goodwill and Intangible Assets with Indefinite
Life
We assess goodwill and
non-amortized
intangible assets for impairment in accordance with ASC subtopic
350-20, or
ASC 350-20,
Intangibles Goodwill and Other: Goodwill
(Pre-Codification: SFAS No. 142, Goodwill and
Other Intangible Assets), which requires that goodwill and
non-amortized
intangible assets be tested for impairment at the
reporting unit level at least annually and more
frequently upon the occurrence of certain events, as defined by
ASC 350-20.
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, and the
Baidu trademark are not subject to amortization, as
the remaining useful life is indefinite. Based on our business
activities and operational management perspective, we have
determined that there is only one reporting unit. Goodwill and
non-amortized
intangible assets were tested for impairment in the annual
impairment tests on December 31 in each of the years 2007, 2008,
and 2009 using the two-step process required by ASC
350-20.
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. Cash flow
assumptions include estimating future cash flows, determining
appropriate discount rates and making other assumptions. Changes
in these estimates and assumptions could materially affect the
determination of fair value for the reporting unit. 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
ASC 350-20,
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.
68
Recent
Accounting Pronouncements
In October 2009, the FASB issued Accounting Standards Update, or
ASU,
No. 2009-13,
Multiple-Deliverable Revenue Arrangements. ASU
2009-13
amends ASC
605-25,
Revenue Recognition: Multiple-Element Arrangements,
regarding revenue arrangements with multiple deliverables. These
updates addresses how to determine whether an arrangement
involving multiple deliverables contains more than one unit of
accounting, and how the arrangement consideration should be
allocated among the separate units of accounting. These updates
are effective for fiscal years beginning after June 15,
2010 and may be applied retrospectively or prospectively for new
or materially modified arrangements. In addition, early adoption
is permitted. We do not expect that the adoption of ASU
2009-13 will
have a material impact on our consolidated financial statements.
In October 2009, the FASB issued ASU
No. 2009-14,
Certain Revenue Arrangements That Include Software
Elements. ASU
2009-14
amends the scope of ASC
sub-topic
985-605,
Software: Revenue Recognition, to exclude all tangible
products containing both software and non-software components
that function together to deliver the products essential
functionality. ASU
2009-14 is
effective for revenue arrangements entered into or materially
modified in fiscal years beginning on or after June 15,
2010 and shall be applied on a prospective basis. Early
application is permitted as of the beginning of an entitys
fiscal year. We do not expect that the adoption of ASU
2009-14 will
have a material impact on our consolidated financial statements.
In June 2009, the Financial Accounting Standard Board, or FASB,
issued SFAS 167 (subsequently codified as ASU
No. 2009-17),
Amendments to FASB Interpretation No. 46(R), which
amends guidance regarding consolidation of variable interest
entities to address the elimination of the concept of a
qualifying special purpose entity. ASU
2009-17 also
replaces the quantitative-based risks and rewards calculation
for determining which enterprise has a controlling financial
interest in a variable interest entity with an approach focused
on identifying which enterprise has the power to direct the
activities of the variable interest entity, and the obligation
to absorb losses of the entity or the right to receive benefits
from the entity. Additionally, ASU
2009-17
requires any enterprise that holds a variable interest in a
variable interest entity to provide enhanced disclosures that
will provide users of financial statements with more transparent
information about an enterprises involvement in a variable
interest entity. ASU
2009-17 is
effective for interim and annual reporting periods beginning
after November 30, 2009. ASU
2009-17 may
be applied retrospectively in previously issued financial
statements for one or more years with a cumulative-effect
adjustment to retained earnings as of the beginning of the first
year restated. We do not expect that the adoption of ASU
2009-17 will
have a material impact on our consolidated financial statements.
In January 2010, the FASB issued ASU
No. 2010-06,
Fair Value Measurements and Disclosures: Improving
Disclosures about Fair Value Measurements. ASU
2010-06
amends ASC 820 to require a number of additional disclosures
regarding (1) the different classes of assets and
liabilities measured at fair value, (2) the valuation
techniques and inputs used, (3) the activity in
Level 3 fair value measurements, and (4) the transfers
between Levels 1, 2, and 3. The new disclosures and
clarifications of existing disclosures are effective for interim
and annual reporting periods beginning after December 15,
2009, except for the disclosures about purchases, sales,
issuances, and settlements in the roll forward of activity in
Level 3 fair value measurements. Those disclosures are
effective for fiscal years beginning after December 15,
2010, and for interim periods within those fiscal years. We do
not expect that the adoption of ASU
2010-06 will
have a material impact on our consolidated financial statements.
|
|
B.
|
Liquidity
and Capital Resources
|
Our principal sources of liquidity are our cash, cash
equivalents and short-term investments, which comprise primarily
of fixed rate investments maturing within one year, as well as
the cash flow generated from our operations. We believe that our
current cash, cash equivalents, short-term investments 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.
69
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,
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
US$
|
|
|
|
(In thousands)
|
|
|
Net cash generated from operating activities
|
|
|
935,152
|
|
|
|
1,746,199
|
|
|
|
2,279,435
|
|
|
|
333,939
|
|
Net cash used in investing activities
|
|
|
(713,216
|
)
|
|
|
(661,102
|
)
|
|
|
(536,069
|
)
|
|
|
(78,535
|
)
|
Net cash generated from (used in) financing activities
|
|
|
40,698
|
|
|
|
(35,637
|
)
|
|
|
95,093
|
|
|
|
13,931
|
|
Effect of exchange rate changes on cash
|
|
|
(48,308
|
)
|
|
|
(37,889
|
)
|
|
|
(741
|
)
|
|
|
(108
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash and cash equivalents
|
|
|
214,326
|
|
|
|
1,011,571
|
|
|
|
1,837,718
|
|
|
|
269,227
|
|
Cash and cash equivalents at beginning of the period
|
|
|
1,136,274
|
|
|
|
1,350,600
|
|
|
|
2,362,171
|
|
|
|
346,060
|
|
Cash and cash equivalents at end of the period
|
|
|
1,350,600
|
|
|
|
2,362,171
|
|
|
|
4,199,889
|
|
|
|
615,287
|
|
Operating
Activities
Net cash generated from operating activities increased to
RMB2.3 billion (US$333.9 million) in 2009 from
RMB1.7 billion in 2008. This increase was mainly
attributable to several factors, including (i) the
substantial increase in net income to RMB1.5 billion
(US$217.6 million) in 2009 compared to net income of
RMB1.0 billion in 2008; (ii) the increase in add-back
of non-cash expenses, mainly consisting of share-based
compensation and depreciation expenses; and (iii) the
increases in customer advance, deferred revenues and accounts
payable.
Net cash generated from operating activities increased to
RMB1.7 billion in 2008 from RMB935.2 million in 2007.
This increase was mainly attributable to several factors,
including (i) the substantial increase in net income to
RMB1.0 billion in 2008 compared to net income of
RMB629.0 million in 2007; (ii) the increase in
add-back of non-cash expenses, mainly consisting of share-based
compensation and depreciation expenses; (iii) the increase
in customer advances and 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 RMB47.8 million in other non-current assets primarily
due to deposits for new offices we rent.
Investing
Activities
Net cash used in investing activities decreased from
RMB661.1 million in 2008 to RMB536.1 million
(US$78.5 million) in 2009, primarily due to less spending
on acquisition of fixed assets and construction of Baidu Campus.
Net cash used in investing activities decreased from
RMB713.2 million in 2007 to RMB661.1 million in 2008,
primarily due to less spending on acquisition of fixed assets
and no further spending on land use right for our new corporate
headquarters in 2008.
Financing
Activities
Net cash flow generated from financing activities was
RMB95.1 million (US$13.9 million) in 2009, compared to
a net cash flow of RMB35.6 million used in financing
activities in 2008, primarily due to the receipt of cash
payments previously made by us, plus pre-determined premiums, in
two structured share repurchase transactions in 2009.
Net cash outflow in financing activities was
RMB35.6 million in 2008, compared to a net cash inflow of
RMB40.7 million from financing activities in 2007,
primarily due to an upfront cash payment of US$10 million
made under a structured share repurchase transaction entered
into in December 2008, partially offset by the proceeds received
from exercise of our share options in 2008.
70
We are a holding company with no operations of our own. We
conduct our operations in China primarily through our indirect
wholly owned subsidiaries and our consolidated affiliated
entities in China. As a result, our ability to pay dividends and
to finance any debt we may incur depends upon dividends paid by
our PRC subsidiaries and license and service fees paid by our
PRC consolidated affiliated entities. If any of our subsidiaries
incurs debt on its own behalf in the future, the instruments
governing such debt may restrict its 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 consolidated
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 13 to our consolidated financial statements.
Capital
Expenditures
We made capital expenditures of RMB569.1 million,
RMB417.9 million and RMB399.3 million
(US$58.5 million) in 2007, 2008 and 2009, respectively,
representing 32.6%, 13.1% and 9.0% of our total revenues,
respectively. In January 2010, we entered into an agreement with
Rakuten, Inc., the largest
e-commerce
website in Japan, to form a joint venture to build a
business-to-business-to-consumer
(B2B2C) online shopping mall for Chinese Internet users. Under
the agreement, we will invest RMB64.5 million into the
joint venture in 2010. 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, Baidu Campus. We funded our capital expenditures
primarily with net cash flow from operating activities.
In late 2005, we entered into an agreement to acquire the land
use right in Beijing to build our new corporate headquarters. We
made a total payment of RMB97.6 million for the land use
right. The construction and renovation of our new corporate
headquarters were completed in 2009, and we moved into the new
building in November 2009. Our capital expenditures in
connection with the construction of our new office building were
RMB102.1 million in 2007, RMB172.3 million in 2008 and
RMB209.2 million (US$30.6 million) in 2009, excluding
the above-mentioned payment for land use right. 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, 2007, 2008 and 2009, our research
and development expenditures, including share-based compensation
expenses for research and development staff, were
RMB140.7 million, RMB286.3 million and
RMB422.6 million (US$61.9 million), representing 8.1%,
9.0% and 9.5% of our total revenues for 2007, 2008 and 2009,
respectively.
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, 2009 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 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 off-balance sheet
derivative instruments. Furthermore, we do not
71
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
|
The following table sets forth our contractual obligations by
specified categories as of December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payment Due by Period
|
|
|
|
|
|
|
Less Than
|
|
|
|
|
|
|
|
|
More Than
|
|
|
|
Total
|
|
|
1 Year
|
|
|
1-3 Years
|
|
|
3-5 Years
|
|
|
5 Years
|
|
|
|
(In RMB thousands)
|
|
|
Operating lease
obligations(1)
|
|
|
256,640
|
|
|
|
216,606
|
|
|
|
26,318
|
|
|
|
13,716
|
|
|
|
|
|
Capital
commitments(2)
|
|
|
40,294
|
|
|
|
40,294
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
296,934
|
|
|
|
256,900
|
|
|
|
26,318
|
|
|
|
13,716
|
|
|
|
|
|
|
|
|
(1) |
|
Operating lease obligations represent the lease obligations for
our premises and bandwidth obligations. |
|
(2) |
|
Capital commitments relate primarily to expenditures in
connection with Baidu Campus. |
Other than the contractual obligations set forth above and a
contingent consideration of RMB4.2 million that may be paid
pursuant to a business acquisition, we do not have any
contractual obligations that are long-term debt obligations,
capital (finance) lease obligations, purchase obligations or
other long-term liabilities reflected on our balance sheet under
U.S. GAAP.
|
|
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
|
|
|
41
|
|
|
Chairman and Chief Executive Officer
|
Jennifer Li
|
|
|
42
|
|
|
Chief Financial Officer
|
William I. Chang
|
|
|
46
|
|
|
Chief Scientist
|
William Decker
|
|
|
63
|
|
|
Independent Director
|
James Ding
|
|
|
45
|
|
|
Independent Director
|
Nobuyuki Idei
|
|
|
72
|
|
|
Independent Director
|
Greg Penner
|
|
|
40
|
|
|
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
currently serves as an independent director, chairman of the
compensation committee and member of the audit and nominating
and corporate governance committees of the board of directors of
New Oriental Education & Technology Group Inc., the
largest private educational services provider in China that is
listed on the New York Stock Exchange. Mr. Li received a
bachelors degree in information science from Peking
University in China and a masters degree in computer
science from the State University of New York at Buffalo.
Jennifer Li has served as our chief financial officer
since March 2008. 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
72
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 degree from the University of British Columbia in Vancouver,
B.C., Canada and a bachelor of arts degree from Tsinghua
University 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 currently serves as an
independent director and the chairman of the audit committee of
VisionChina Media Inc., a Nasdaq-listed company that operates an
out-of-home
advertising network in China. He 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 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 and a bachelors degree in chemistry from Peking
University in China.
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, Mr. Penner also serves as a director of Wal-Mart
Stores, Inc., the Hyatt Hotels Corporation, where he is a member
of the finance committee, Cuil, Inc., a privately held Internet
search engine developer and 99Bill Corporation, based in
Shanghai, China. Mr. Penner received a bachelors
degree in
73
international economics from the School of Foreign Service at
Georgetown University and an M.B.A. degree from the Stanford
Graduate School of Business.
In 2009, we paid an aggregate of approximately
RMB9.9 million (US$1.5 million) in cash compensation
and granted options to purchase an aggregate of 51,706
Class A ordinary shares to our executive officers as a
group (including our former chief operating officer and former
chief technology officer, who resigned separately in January
2010 and are not listed under A. Directors and
Senior Management). We also paid an aggregate of
approximately RMB0.8 million (US$0.1 million) in cash
compensation to our non-executive directors as a group. We did
not grant any new share-based awards to our non-executive
directors in 2009. Our PRC subsidiaries and consolidated
affiliated entities are required by law to make contributions
equal to certain percentages of each employees salary for
his or her pension insurance, medical insurance, housing fund,
unemployment and other statutory benefits. Other than the
above-mentioned pension insurance mandated by applicable PRC
law, we have not set aside or accrued any amount to provide
pension, retirement or other similar benefits to our executive
officers and directors. No executive officer is entitled to any
severance benefits upon termination of his or her employment
with our company except as required under applicable PRC law.
Our board of directors and shareholders approved the issuance of
up to 5,040,000 ordinary shares upon exercise of awards granted
under our 2000 option plan. As of December 31, 2009, an
aggregate of 202,368 Class A ordinary shares were issuable
upon exercise of outstanding awards granted under our 2000
option plan. At the annual general meeting held on
December 16, 2008, our shareholders approved a new
2008 share incentive plan, which has reserved an additional
3,428,777 Class A ordinary shares for awards to be granted
pursuant to its terms. As of December 31, 2009, no awards
had been granted under the 2008 share incentive plan.
The following table summarizes, as of December 31, 2009,
the outstanding options and restricted shares that we granted to
our current directors and executive officers and to other
individuals as a group under our 2000 option plan.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ordinary Shares
|
|
|
|
|
|
|
|
|
|
|
Underlying
|
|
|
|
|
|
|
|
|
|
|
Outstanding
|
|
|
Exercise Price
|
|
|
|
|
|
Name
|
|
Options
|
|
|
(US$/Share)
|
|
|
Grant Date
|
|
Expiration Date
|
|
Robin Yanhong Li
|
|
|
22,050
|
|
|
|
49.25
|
|
|
February 15, 2006
|
|
February 15, 2011
|
|
|
|
15,000
|
|
|
|
124.90
|
|
|
January 24, 2007
|
|
January 24, 2012
|
|
|
|
20,000
|
|
|
|
133.86
|
|
|
February 11, 2009
|
|
February 11, 2014
|
Jennifer Li
|
|
|
*
|
(1)
|
|
|
|
|
|
April 16, 2008
|
|
N/A
|
|
|
|
*
|
|
|
|
133.86
|
|
|
February 11, 2009
|
|
February 11, 2014
|
William I. Chang
|
|
|
*
|
|
|
|
124.90
|
|
|
January 24, 2007
|
|
January 24, 2012
|
William Decker
|
|
|
*
|
(1)
|
|
|
|
|
|
January 11, 2008
|
|
N/A
|
James Ding
|
|
|
*
|
(1)
|
|
|
|
|
|
January 11, 2008
|
|
N/A
|
Nobuyuki Idei
|
|
|
*
|
|
|
|
183.23
|
|
|
January 10, 2008
|
|
July 25, 2012
|
Greg Penner
|
|
|
*
|
(1)
|
|
|
|
|
|
January 11, 2008
|
|
N/A
|
Other individuals as a
group(2)
|
|
|
109,356
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
The options and restricted shares in aggregate held by each of
these directors and officers represent less than 1% of our total
outstanding shares. |
|
(1) |
|
Restricted shares. |
|
(2) |
|
Includes our former chief operating officer and former chief
technology officer, who resigned separately in January 2010. |
74
The following paragraphs summarize the key terms of our 2000
option plan, which was amended and restated on December 16,
2008, and our 2008 share incentive plan.
2000
Option Plan
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.
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. To the extent not prohibited by applicable
law or exchange rules, a downward adjustment of the exercise
price per share subject to an outstanding option may be made in
the absolute discretion of the plan administrator without the
approval of our shareholders or the affected grantees.
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. The award
agreements may provide that grantees may elect at any time
during their employment or service to exercise 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 the plan administrator. 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. If an award agreement
provides for repurchase rights upon termination of a
grantees employment or service, it must (or may, with
respect to awards granted to officers, directors or consultants)
provide that (i) such repurchase right must be exercised
within 90 days of termination of the grantees
employment or
75
service (or, in the case of exercise of awards after termination
of the grantees employment or service, within 90 days
following such exercise), (ii) the repurchase price must be
equal to the original purchase price paid by the grantee for
each such share, and (iii) the right to repurchase will
lapse at the rate of at least 20% of the shares subject to the
award per year over five years from the date the award 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.
2008 Share
Incentive Plan
Types of Awards. We may grant the following
types of awards under our 2008 share incentive plan:
|
|
|
|
|
options;
|
|
|
|
restricted shares;
|
|
|
|
restricted share units; and
|
|
|
|
any other form of award granted to a participant pursuant to the
2008 plan.
|
Plan Administration. The compensation
committee of our board of directors administers our
2008 share incentive plan, but may delegate to a committee
of one or more members of our board of directors the authority
to grant or amend awards to participants other than independent
directors and executive officers. The compensation committee
will determine the provisions and terms and conditions of each
award grant, including, but not limited to, the exercise price,
the grant price or purchase price, any restrictions or
limitations on the award, any schedule for lapse of forfeiture
restrictions or restrictions on the exercisability of an award,
and accelerations or waivers thereof, any provisions related to
non-competition and recapture of gain on an award, based in each
case on such considerations as the committee in its sole
discretion determines. The compensation committee has the sole
power and discretion to cancel, forfeit or surrender an
outstanding award (whether or not in exchange for another award
or combination or awards).
Award Agreement. Awards granted under our
2008 share incentive plan are evidenced by an award
agreement that sets forth the terms, conditions and limitations
for each award which may include the term of an award, the
provisions applicable in the event the participants
employment or service ends, and our authority to unilaterally or
bilaterally amend, modify, suspend, cancel or rescind an award.
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 2008 share
incentive plan, provided that the plan participant remains an
employee, consultant or member of our board of directors on the
effective date of the corporate transaction. In such event, each
outstanding award will become fully exercisable and all
forfeiture restrictions on such award will lapse immediately
prior to the specified effective date of the corporate
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 reason
within 12 months of the corporate transaction, the
outstanding awards automatically will become fully vested and
exercisable. The compensation committee may also, in its sole
discretion, upon or in anticipation of a corporate transaction,
accelerate awards, purchase the awards from the plan
participants, replace the awards, or provide for the payment of
the awards in cash.
Exercise Price and Term of Awards. The
exercise price per share subject to an option may be amended or
adjusted in the absolute discretion of the compensation
committee, the determination of which shall be final,
76
binding and conclusive. To the extent not prohibited by
applicable laws or exchange rules, a downward adjustment of the
exercise prices of options mentioned in the preceding sentence
shall be effective without the approval of our shareholders or
the approval of the affected grantees. 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 compensation committee will determine the time
or times at which an option may be exercised in whole or in
part, including exercise prior to vesting. 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.
Restricted Shares and Restricted Share
Unites. The compensation committee is also
authorized to make awards of restricted shares and restricted
share units. Except as otherwise determined by the compensation
committee at the time of the grant of an award or thereafter,
upon termination of employment or service during the applicable
restriction period, restricted shares that are at the time
subject to restrictions shall be forfeited or repurchased in
accordance with the respective award agreements. At the time of
grant for restricted share units, the compensation committee
shall specify the date on which the restricted share units shall
become fully vested and nonforfeitable, and may specify such
conditions to vesting as it deems appropriate.
Amendment and Termination. With the approval
of our board of directors, the compensation committee may at any
time amend, suspend or terminate our 2008 share incentive
plan. Amendments to our 2008 share incentive 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 2008 share incentive plan
must not adversely affect in any material way awards already
granted without written consent of the recipient of such awards.
Unless terminated earlier, our 2008 share incentive plan
shall continue in effect for a term of ten years from the date
of adoption.
Board of
Directors
Our board of directors 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 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. The remuneration to be paid
to the directors are determined by the board of directors. There
is no age limit requirement for directors.
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 5605(a)(2) of
the NASDAQ Stock Market 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;
|
77
|
|
|
|
|
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
|
|
|
|
attending to such other matters that are specifically delegated
to our audit committee by our board of directors from time to
time.
|
In 2009, our audit committee held meetings or 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 5605(a)(2) of
the NASDAQ Stock Market 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 2009, our compensation committee passed resolutions by
unanimous written consent once.
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 5605(a)(2) of the NASDAQ Stock Market 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.
|
In 2009, our corporate governance and nominating committee
passed resolutions by unanimous written consent once.
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
78
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.
We had 6,252, 6,387 and 7,353 employees as of
December 31, 2007, 2008 and 2009, respectively. As of
December 31, 2009, we had 471 employees in management
and administration, 1,726 employees in research and
development, 700 employees in operation and service, and
4,456 employees 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
generally good. However, as our operations and employee base
further expand, we cannot assure you that we will always be able
to maintain good relations with all of our employees. See
Item 3.D. Key Information Risk
Factors Risks Related to Our Business We
may not be able to manage our expanding operations
effectively.
The following table sets forth information with respect to the
beneficial ownership of our shares as of December 31, 2009
by:
|
|
|
|
|
each of our current directors and executive officers; and
|
|
|
|
each person known to us to own beneficially more than 5% of our
shares.
|
See B. Compensation for more details on
options and restricted shares granted to our directors and
executive officers.
|
|
|
|
|
|
|
|
|
|
|
Shares Beneficially Owned
|
|
Directors and Executive Officers:
|
|
Number(1)
|
|
|
%(2)
|
|
|
Robin Yanhong
Li(3)
|
|
|
5,601,527
|
|
|
|
16.1
|
%
|
Jennifer
Li(4)
|
|
|
*
|
|
|
|
*
|
|
William
Chang(5)
|
|
|
*
|
|
|
|
*
|
|
William
Decker(6)
|
|
|
*
|
|
|
|
*
|
|
James
Ding(7)
|
|
|
*
|
|
|
|
*
|
|
Nobuyuki
Idei(8)
|
|
|
*
|
|
|
|
*
|
|
Greg
Penner(9)
|
|
|
878,333
|
|
|
|
2.5
|
%
|
All Directors and Executive Officers as a
Group(10)
|
|
|
6,503,163
|
|
|
|
18.7
|
%
|
Principal Shareholders:
|
|
|
|
|
|
|
|
|
Handsome Reward
Limited(11)
|
|
|
5,490,000
|
|
|
|
15.8
|
%
|
Marsico Capital Management,
LLC(12)
|
|
|
2,435,495
|
|
|
|
7.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Less than 1% of our total outstanding shares. |
|
(1) |
|
The number of shares beneficially owned by each named director
and executive officer includes the shares beneficially owned by
such person, the shares underlying all options held by such
person that have vested or will vest within 60 days after
December 31, 2009, and restricted shares held by such
person that will vest within 60 days after
December 31, 2009. The options and restricted shares were
granted under our 2000 option plan. |
|
(2) |
|
Percentage of beneficial ownership of each named director and
executive officer is based on 34,753,292 ordinary shares
(consisting of 26,298,960 Class A ordinary shares and
8,454,332 Class B ordinary shares) of our company
outstanding as of December 31, 2009, the number of ordinary
shares underlying options that have vested or will vest within
60 days after December 31, 2009, and the number of
restricted shares that will vest within 60 days after
December 31, 2009, each as held by such person as of that
date. |
79
|
|
|
(3) |
|
Includes (i) 37,665 Class A ordinary shares held by
Mr. Li, (ii) 35,249 Class A Ordinary Shares in
the form of ADSs held in the brokerage account of the
administrator of our employee stock option program,
(iii) 38,613 Class A ordinary shares issuable upon
exercise of options 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,
Inc., Baidu Campus, No. 10 Shangdi 10th Street, Haidian
District, Beijing 100085, PRC. |
|
(4) |
|
The business address for Ms. Li is
c/o Baidu,
Inc., Baidu Campus, No. 10 Shangdi 10th Street, Haidian
District, Beijing 100085, PRC. |
|
(5) |
|
The business address for Mr. Chang is
c/o Baidu,
Inc., Baidu Campus, No. 10 Shangdi 10th Street, Haidian
District, Beijing 100085, PRC. |
|
(6) |
|
The address of Mr. Decker is 24 Nordic Way, Saranac Lake,
NY, 12983, USA. |
|
(7) |
|
The business address of Mr. Ding is 4/F, Zhongdian
Information Tower No. 6 Zhongguancun South Street, Haidian
District, Beijing 100086, PRC. |
|
(8) |
|
The business address of Mr. Ideis address is Tokyo
Ginko Kyoukai Building 16F,1-3-1, Marunouchi, Chiyoda-ku, Tokyo,
100-0005,
Japan. |
|
(9) |
|
Includes (i) 27,683 Class A ordinary 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 Madrone Partners, LP, a fund for which
Mr. Penner serves as a managing member of the sole manager;
and (iv) 700,000 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 the shares held by Madrone Partners, LP
and Peninsula Capital Fund I, LLC, 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. |
|
(10) |
|
Includes ordinary shares, ordinary shares issuable upon exercise
of options and restricted shares, held by all of our directors
and executive officers as a group. |
|
(11) |
|
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, Inc., Baidu Campus, No. 10 Shangdi 10th
Street, Haidian District, Beijing 100085, PRC. |
|
(12) |
|
Represents 2,435,495 Class A ordinary shares in the form of
ADSs held by Marsico Capital Management, LLC, as reported on
Schedule 13G filed by Marsico Capital Management, LLC on
February 10, 2010. The percentage of beneficial ownership
was calculated based on the total number of our ordinary shares
outstanding as of December 31, 2009. The address of Marsico
Capital Management, LLC is 1200 17th Street, Suite 1600,
Denver, Colorado 80202. |
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 3.D. Key
Information Risk Factors Risks Related
to Our ADSs 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.
As of December 31, 2009, 34,753,292 of our ordinary shares
were issued and outstanding. To our knowledge, approximately 79%
of our total outstanding ordinary shares were held by five
record shareholders in the United States, including
approximately 76% held by The Bank of New York Mellon, the
depositary of our ADS program. The number of beneficial owners
of our ADSs in the United States is likely to be much larger
than the number of record holders of our ordinary shares in the
United States.
80
|
|
Item 7.
|
Major
Shareholders and Related Party Transactions
|
Please refer to Item 6.E. 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 online 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. The
following is a summary of these contractual arrangements as
currently in effect.
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 RMB1.293. 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 initial term of the license agreement was five
years from the date thereof and has been extended for another
five years.
81
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 initial term of each license
agreement was five years from the date thereof and has been
extended for another five years. The domain name license
agreement was terminated upon the completion of the transfers of
certain domain names primarily used in our business from our
company 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 amended or 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 exclusive
technology consulting and service 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 expiration of the term for
fulfillment by Baidu Netcom and its shareholders of their
respective obligations under the exclusive technology consulting
and 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
RMB2.0 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.
In February 2006 and March 2008, we extended two additional
interest-free loans of RMB8.0 million and
RMB90.0 million, respectively, to Robin Yanhong Li for the
sole purpose of increasing the registered capital of Baidu
Netcom. In connection with each loan, we entered into the
following agreements with Mr. Li:
|
|
|
|
|
a loan agreement;
|
|
|
|
an equity pledge agreement between Robin Yanhong Li and Baidu
Online; and
|
|
|
|
an exclusive equity purchase option agreement among Robin
Yanhong Li, Baidu Netcom 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
82
power he acquired as a result of his additional investment in
the registered capital of Baidu Netcom to the person(s)
appointed by Baidu Online.
Contractual
Arrangements with Beijing Perusal and Its Shareholders
In June 2006, we assisted in establishing Beijing Perusal, which
is directly owned by two individuals designated by us. 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 agreements with Beijing
Perusal and its shareholders in order to be the primary
beneficiary of, and 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.
Our agreements with Beijing Perusal and its shareholders include:
|
|
|
|
|
loan agreements for interest-free loans in an aggregate amount
of RMB1.0 million to the shareholders of Beijing Perusal;
|
|
|
|
equity pledge agreements between the shareholders of Beijing
Perusal and Baidu Online;
|
|
|
|
exclusive equity purchase option agreements among Beijing
Perusal, Baidu Online and the shareholders of Beijing Perusal;
|
|
|
|
a proxy agreement between the shareholders of Beijing Perusal
and Baidu Online;
|
|
|
|
an exclusive technology consulting and services agreement
between Beijing Perusal and Baidu Online;
|
|
|
|
an operating agreement among Beijing Perusal, Baidu Online, and
the shareholders of Beijing Perusal; and
|
|
|
|
various license agreements between Beijing Perusal and Baidu
Online, including domain name license agreements, trademark
license agreements and web page 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.
|
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
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 agreements with BaiduPay
and the individual shareholder in order to be the primary
beneficiary of, and substantially control, BaiduPay. BaiduPay
became our consolidated affiliated entity as a result of these
contractual arrangements. BaiduPay operates an online payment
platform.
Our agreements with BaiduPay and its individual shareholder
include:
|
|
|
|
|
a loan agreement for interest-free loan in an aggregate amount
of RMB9.0 million to the individual shareholder of BaiduPay;
|
|
|
|
an equity pledge agreement between the individual shareholder of
BaiduPay and Baidu Online;
|
|
|
|
an exclusive equity purchase option agreement among BaiduPay,
Baidu Online and the individual shareholder of BaiduPay;
|
|
|
|
a proxy agreement between the individual shareholder of BaiduPay
and Baidu Online;
|
|
|
|
an exclusive technology consulting and services agreement
between BaiduPay and Baidu Online;
|
|
|
|
operating agreement among BaiduPay, Baidu Online and the
shareholders of BaiduPay; and
|
83
|
|
|
|
|
a trademark license agreement and a web page 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.
Share
Options and Restricted Shares Grants
Please refer to Item 6.B. Directors, Senior
Management and Employees Compensation.
Transaction
with UiTV
In September 2008, we entered into agreements with UiTV,
operator of an Internet television platform in China. Under
these agreements, we would contribute assets related to the
operation of Baidu Internet TV channel to UiTV in exchange for
an 8.3% stake in UiTV and US$15 million. James Ding, one of
our independent directors, is the chairman of UiTV and owns
approximately 17.6% of the equity interests in UiTV. The
agreements with UiTV were terminated in December 2009.
|
|
C.
|
Interests
of Experts and Counsel
|
Not applicable.
|
|
Item 8
|
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 have been 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.
As of December 31, 2009, we were involved in 37 cases
pending in various PRC courts, including the cases summarized
below. The aggregate amount of compensation sought under these
cases is approximately RMB77.2 million
(US$11.3 million).
In March 2008, we received complaints filed by three record
companies against us, alleging, among other things, that we have
aided illegal online copying of music by providing links to
pirated music. In January 2010, the First Intermediate
Peoples Court of Beijing, in separately issued rulings,
dismissed the complaints filed by the three record companies.
Applying the Protection of the Right of Communication through
Information Network, which was promulgated by the State Council
and became effective on July 1, 2006, the court held that
the record companies claims lacked factual and legal
basis. The plaintiffs have filed appeals with the High
Peoples Court of Beijing. In December 2009, the Haidian
District Peoples Court in Beijing issued a ruling against
us in a lawsuit filed by the Music Copyright Society of China.
In the ruling, the court held that our display of certain song
lyrics in response to users search requests constituted
infringement of the plaintiffs rights of communication
through information network, and ordered us to pay for the
plaintiffs damages and litigation related expenses
totaling RMB60,000. We have appealed the courts ruling
with the First Intermediate Peoples Court of Beijing. See
Item 3.D. Key Information Risk
Factors Risks Related to Our Business We
may face intellectual
84
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.
In January 2009, we received a complaint filed by a medical
company alleging that we had violated the new PRC Anti-Monopoly
Law by abusing our dominant market position to screen out the
website of the medical company. In December 2009, the First
Intermediate Peoples Court of Beijing issued a ruling
dismissing all the claims made by the plaintiff. In the ruling,
the court held, among other things, that the plaintiffs
allegation that we have abused dominant market position as
defined in the Anti-Monopoly Law lacks factual and legal
support. The plaintiff has filed an appeal with the High
Peoples Court of Beijing. Because the Anti-Monopoly Law is
still new, and there have been very few court rulings and no
judicial or administrative interpretations on certain key
concepts used in the law, there is no assurance that a court
would reach the same conclusion in a similar case against us in
the future. See Item 3.D. Key Information
Risk Factors Risks Related to Doing Business in
China Uncertainties with respect to the PRC legal
system could adversely affect us.
In June 2009, a plaintiff filed a lawsuit against us in the
U.S. District Court for the Southern District of New York,
alleging that we had infringed its copyrights to certain music
works. In December 2009, the court granted our motion to dismiss
the complaint on the grounds of insufficient service of process
and lack of personal jurisdiction. The plaintiff did not appeal
the courts ruling.
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.
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.
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.
|
|
Item 9.
|
The
Offer and Listing
|
|
|
A.
|
Offering
and Listing
Details.
|
Our ADSs, each representing one Class A ordinary share,
have been listed on The NASDAQ Global Market since
August 5, 2005. Our ADSs currently trade on The NASDAQ
Global Select Market under the symbol BIDU.
85
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, 2007, 2008 and 2009, (2) each
of the four quarters of 2008 and 2009 and (3) each of the
past six months.
|
|
|
|
|
|
|
|
|
|
|
Sales Price
|
|
|
|
High
|
|
|
Low
|
|
|
Annual High and Low
|
|
|
|
|
|
|
|
|
2005 (from August 5, 2005)
|
|
|
153.98
|
|
|
|
60.00
|
|
2006
|
|
|
128.68
|
|
|
|
44.44
|
|
2007
|
|
|
429.19
|
|
|
|
92.80
|
|
2008
|
|
|
397.70
|
|
|
|
100.50
|
|
2009
|
|
|
443.25
|
|
|
|
105.00
|
|
Quarterly Highs and Lows
|
|
|
|
|
|
|
|
|
First Quarter 2008
|
|
|
397.70
|
|
|
|
201.15
|
|
Second Quarter 2008
|
|
|
382.90
|
|
|
|
243.00
|
|
Third Quarter 2008
|
|
|
353.37
|
|
|
|
227.00
|
|
Fourth Quarter 2008
|
|
|
274.83
|
|
|
|
100.50
|
|
First Quarter 2009
|
|
|
197.69
|
|
|
|
105.00
|
|
Second Quarter 2009
|
|
|
310.25
|
|
|
|
171.02
|
|
Third Quarter 2009
|
|
|
408.00
|
|
|
|
268.03
|
|
Fourth Quarter 2009
|
|
|
443.25
|
|
|
|
353.03
|
|
Monthly Highs and Lows
|
|
|
|
|
|
|
|
|
September 2009
|
|
|
408.00
|
|
|
|
316.49
|
|
October 2009
|
|
|
439.90
|
|
|
|
353.03
|
|
November 2009
|
|
|
443.25
|
|
|
|
369.12
|
|
December 2009
|
|
|
441.00
|
|
|
|
394.56
|
|
January 2010
|
|
|
470.25
|
|
|
|
384.66
|
|
February 2010
|
|
|
518.69
|
|
|
|
416.81
|
|
March 2010 (through March 25, 2010)
|
|
|
628.50
|
|
|
|
512.51
|
|
Not applicable.
Our ADSs, each representing one Class A ordinary share,
have been listed on the NASDAQ since August 5, 2005 under
the symbol BIDU.
Not applicable.
Not applicable.
Not applicable.
86
|
|
Item 10.
|
Additional
Information
|
Not applicable.
|
|
B.
|
Memorandum
and Articles of Association
|
The following are summaries of material provisions of our third
amended and restated memorandum and articles of association, as
well as the Companies Law (2009 Revision) insofar as they relate
to the material terms of our ordinary shares.
Registered
Office and Objects
The Registered Office of our company is at the offices of Maples
Corporate Services Limited, PO Box 309, Ugland House,
Grand Cayman, KY1-1104, Cayman Islands or at such other place as
our board of directors may from time to time decide. The objects
for which our company is established are unrestricted and we
have full power and authority to carry out any object not
prohibited by the Companies Law (2009 Revision), as amended from
time to time, or any other law of the Cayman Islands.
Board of
Directors
See Item 6.C. Board Practices Board of
Directors.
Ordinary
Shares
General. Our ordinary shares are
divided into Class A ordinary shares and Class B
ordinary shares. Holders of Class A ordinary shares and
Class B ordinary shares have the same rights except for
voting and conversion rights. All of our outstanding ordinary
shares are fully paid and non-assessable. Certificates
representing the ordinary shares are issued in registered form.
Our shareholders who are nonresidents of the Cayman Islands may
freely hold and vote their shares.
Dividends. The holders of our ordinary
shares are entitled to such dividends as may be declared by our
board of directors subject to the Companies Law.
Conversion. 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 (as defined in our articles of
incorporation), 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 our
chairman and chief executive officer, 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.
Voting Rights. All of our shareholders
have the right to receive notice of shareholders meetings
and to attend, speak and vote at such meetings. In respect of
matters requiring shareholders vote, each Class A
ordinary share is entitled to one vote, and each Class B
ordinary share is entitled to 10 votes. A shareholder may
participate at a shareholders meeting in person, by proxy
or by telephone conference or other communications equipment by
means of which all the shareholders participating in the meeting
can communicate with each other. At any shareholders
meeting, a resolution put to the vote of the meeting shall be
decided on a poll conducted by the chairman of the meeting.
A quorum for a shareholders meeting consists of one or
more shareholders holding at least one third of the paid up
voting share capital present in person or by proxy or, if a
corporation or other non-natural person, by its duly authorized
representative. We shall, if required by the Companies Law, hold
a general meeting of shareholders as our annual general meeting
and shall specify the meeting as such in the notices calling it.
Our board of directors may call extraordinary general meetings,
and they must on shareholders requisition convene an
extraordinary general
87
meeting. A shareholder requisition is a requisition of
shareholders holding at the date of deposit of the requisition
not less than a majority of the voting power represented by the
issued shares of our company as at that date carries the right
of voting at general meetings of our company. Advance notice of
at least five days is required for the convening of our annual
general meeting and other shareholders meetings.
An ordinary resolution to be passed by the shareholders requires
the affirmative vote of a simple majority of the votes attaching
to the ordinary shares cast in a general meeting, while a
special resolution requires the affirmative vote of no less than
two-thirds of the votes cast attaching to the ordinary shares
cast in a general meeting. A special resolution is required for
matters such as a change of name. Holders of the ordinary shares
may effect certain changes by ordinary resolution, including
consolidating and dividing all or any of our share capital into
shares of larger amount than our existing share capital and
canceling any shares.
Transfer of Shares. Subject to the
restrictions of our memorandum and articles of association, as
applicable, any of our shareholders may transfer any or all of
his or her ordinary shares by an instrument of transfer in the
usual or common form or any other form approved by our board of
directors.
Our board of directors may, in their absolute discretion (except
with respect to a transfer from a shareholder to its
affiliate(s)), decline to register any transfer of shares
without assigning any reason therefor. If our board of directors
refuses to register a transfer they shall notify the transferee
within two months of such refusal. Notwithstanding the
foregoing, if a transfer complies with the holders
transfer obligations and restrictions set forth under applicable
law (including but not limited to U.S. securities law
provisions related to insider trading) and our articles of
association, our board of directors shall promptly register such
transfer. Further, any director is authorized to confirm in
writing addressed to the registered office to authorize a share
transfer and to instruct that the register of members be updated
accordingly, provided that the transfer complies with the
holders transfer obligations and restrictions set forth
under applicable law and our articles of association and such
holder is not the director who authorizes the transfer or an
entity affiliated with such director. Any director is authorized
to execute a share certificate in respect of such shares for and
on behalf of our company.
The registration of transfers may be suspended at such time and
for such periods as our board of directors may from time to time
determine, provided, however, that the registration of transfers
shall not be suspended for more than 45 days in any year.
Liquidation. On a return of capital on
winding up or otherwise (other than on conversion, redemption or
purchase of shares), assets available for distribution among the
holders of ordinary shares may be distributed among the holders
of the ordinary shares as determined by the liquidator, subject
to sanction of a special resolution of our company. If our
assets available for distribution are insufficient to repay all
of the
paid-up
capital, the assets will be distributed so that the losses are
borne by our shareholders proportionately to the capital paid
up, or which ought to have been paid up, at the commencement of
the winding up on the shares held by such shareholders
respectively.
Calls on Shares and Forfeiture of
Shares. Our board of directors may from time
to time make calls upon shareholders for any amounts unpaid on
their shares in a notice served to such shareholders at least
14 days prior to the specified time and place of payment.
The shares that have been called upon and remain unpaid on the
specified time are subject to forfeiture.
Redemption of Shares. Subject to the
provisions of the Companies Law and our articles of association,
we may issue shares on terms that are subject to redemption, at
our option or at the option of the holders, on such terms and in
such manner as our board of directors may determine.
Repurchase of Shares. Subject to the
provisions of the Companies Law and our articles of association,
our board of directors may authorize repurchase of our shares in
accordance with the manner of purchase specified in our articles
of association without seeking shareholder approval.
Variations of Rights of Shares. All or
any of the special rights attached to any class of shares may,
subject to the provisions of the Companies Law, be varied either
with the written consent of the holders of a majority of the
issued shares of that class or with the sanction of a special
resolution passed at a general meeting of the holders of the
shares of that class.
88
Inspection of Books and Records. No
holders of our ordinary shares who is not a director shall have
any right of inspecting any of our accounts, books or documents
except as conferred by the Companies Law or authorized by the
directors or by us in general meeting. However, we will make
this annual report, which contains our audited financial
statements, available to shareholders and ADS holders. See
Item 10.H. Additional Information
Documents on Display.
Preferred
Shares
Our board of directors have the authority, without shareholder
approval, to issue up to a total of 10,000,000 shares of
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 set the designations, preferences, powers and
other rights of the shares of a series of preferred shares.
While the issuance of preferred shares provides us with
flexibility in connection with possible acquisitions or other
corporate purposes, it could, among other things, have the
effect of delaying, deferring or preventing a change of control
transaction and could adversely affect the market price of our
ADSs. We have no current plan to issue any preferred shares.
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.
See Item 4.B. Information on the Company
Business Overview Regulation Regulations
on Foreign Exchange.
The following summary of the material Cayman Islands,
Peoples Republic of China 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.
Peoples
Republic of China 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 could be
materially and adversely affected.
89
United
States Federal Income Taxation
The following discussion describes certain material United
States federal income tax considerations under present law of
the purchase, ownership and disposition of 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 considerations 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:
|
|
|
|
|
banks;
|
|
|
|
financial institutions;
|
|
|
|
insurance companies;
|
|
|
|
broker dealers;
|
|
|
|
traders that elect to mark to market;
|
|
|
|
tax-exempt entities;
|
|
|
|
persons liable for alternative minimum tax;
|
|
|
|
regulated investment companies;
|
|
|
|
certain expatriates or former long-term residents of the United
States;
|
|
|
|
governments or agencies or instrumentalities thereof;
|
|
|
|
persons holding an ADS or ordinary share as part of a straddle,
hedging, conversion or integrated transaction;
|
|
|
|
persons that actually or constructively own 10% or more of our
voting shares;
|
|
|
|
persons holding ADSs or ordinary shares through partnerships or
other pass-through entities; or
|
|
|
|
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,
|
|
|
|
|
a citizen or individual resident of the United States;
|
|
|
|
a corporation (or other entity subject to tax as a corporation
for United States federal income tax purposes) that is created
or organized in or under the laws of the United States, any
State or the District of Columbia;
|
|
|
|
an estate whose income is subject to United States federal
income taxation regardless of its source; or
|
|
|
|
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.
|
This discussion does not consider the tax treatment of
partnerships or other pass-through entities that hold the ADSs
or ordinary shares, or of persons who hold the ADSs or ordinary
shares through such entities. If a partnership
90
(or other entity classified as a partnership for
U.S. federal income tax purposes) is the beneficial owner
of the ADSs or ordinary shares, the U.S. federal income tax
treatment of a partner in the partnership will generally depend
on the status of the partner and the activities of the
partnership.
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.
This discussion does not address any aspect of U.S. federal
non-income tax laws, such as gift or estate tax laws, or state,
local or
non-U.S. tax
laws. We have not sought, and will not seek, a ruling from the
Internal Revenue Service, or the IRS, or an opinion as to any
U.S. federal income tax consequence described herein. The
IRS may disagree with the discussion herein, and its
determination may be upheld by a court.
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 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 or we are eligible for the benefit of the income
tax treaty between the United States and the PRC, (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, (3) certain holding
period requirements are met, and (4) such non-corporate
U.S. Holders are not under an obligation to make related
payments with respect to positions in substantially similar or
related property. For this purpose, ADSs listed on the Nasdaq
Global Market will generally 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 PRC withholding taxes apply to
dividends paid to you with respect to the ADSs or ordinary
shares, you may be able to obtain a reduced rate of PRC
withholding taxes under the income tax treaty between the United
States and the PRC if certain requirements are met. In addition,
subject to certain conditions and limitations, PRC withholding
taxes on dividends may be treated as foreign taxes eligible for
credit against your U.S. federal income tax liability.
U.S. Holders should consult their own tax advisors
regarding the creditability of any PRC tax. 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 will generally constitute passive category
income but could, in the case of certain
U.S. Holders, constitute general category
income.
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
91
ordinary share. The gain or loss will generally 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 generally be eligible for
reduced tax rates. The deductibility of capital losses is
subject to limitations. Any such gain or loss that you recognize
will generally be treated as United States source income or loss
(in the case of losses, subject to certain limitations).
However, in the event we are deemed to be a Chinese
resident enterprise under PRC tax law, we may be
eligible for the benefits of the income tax treaty between the
United States and the PRC. In such event, if PRC tax were to be
imposed on any gain from the disposition of the ADSs or ordinary
shares, a U.S. Holder that is eligible for the benefits of
the income tax treaty between the United States and the PRC may
elect to treat such gain as PRC source income. U.S. Holders
should consult their own tax advisors regarding the
creditability of any PRC tax.
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, 2009,
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, 2010 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:
|
|
|
|
|
at least 75% of its gross income is passive income (the
income test), or
|
|
|
|
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 will generally 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 generally 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.
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:
|
|
|
|
|
the excess distribution or gain will be allocated ratably over
your holding period for the ADSs or ordinary shares,
|
|
|
|
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
|
|
|
|
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.
|
92
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.
Such deductions, however, 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.
Alternatively, a U.S. Holder may avoid the PFIC tax
consequences described above in respect to its ADSs and ordinary
shares by making a timely qualified electing fund,
or QEF, election. In order to comply with the requirements of a
QEF election, a U.S. Holder must receive certain
information from us. We, however, do not intend to provide such
information.
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.
|
|
F.
|
Dividends
and Paying Agents
|
Not applicable.
Not applicable.
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:
(1) within six months after the end of each fiscal year,
which is December 31, for fiscal years ending before
December 15, 2011; and (2) within four
93
months after the end of each fiscal year for fiscal years ending
on or after December 15, 2011. 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 website 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.
We will furnish The Bank of New York Mellon, 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.
In accordance with NASDAQ Stock Market Rule 5250(d), 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
|
Not applicable.
|
|
Item 11.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
Interest
Rate Risk
Our exposure to interest rate risk primarily relates to excess
cash invested in short-term fixed income instruments with
original maturities of less than a year. Investments in both
fixed rate and floating rate interest earning instruments carry
a degree of interest rate risk. Fixed rate securities may have
their fair market value adversely impacted due to a rise in
interest rates, while floating rate securities may produce less
income than expected if interest rates fall. Due in part to
these factors, our future investment income may fall short of
expectations due to changes in interest rates, or we may suffer
losses in principal if we have to sell securities which have
declined in market value due to changes in interest rates. We
have not been, and do not expect to be, exposed to material
interest rate risks, and therefore have not used any derivative
financial instruments to manage our interest risk exposure.
We had RMB381.1 million (US$55.8 million) short-term
investments as of December 31, 2009, with a weighted
average duration of approximately 0.27 year. A hypothetical
one percentage point (100 basis-point) increase in interest
rates would have resulted in a decrease of approximately
RMB1.0 million (US$0.1 million) in the fair value of
our fixed-income investments at December 31, 2009.
Foreign
Exchange Risk
Most of our revenues and costs are denominated in RMB, while a
significant portion of our cash and cash equivalents and
short-term financial assets are denominated in U.S. dollars
and held by the Cayman holding company. Our exposure to foreign
exchange risk primarily relates to those financial assets
denominated in U.S. dollars. Any significant revaluation of
RMB against the U.S. dollar may materially affect our
revenues, earnings and financial position, and the value of, and
any dividends payable on, our ADS in U.S. dollars. See
Item 3D. Key Information Risk
Factors Risks Related to Doing Business in
China Fluctuation in the value of the RMB may have a
material adverse effect on your investment. In addition,
we commenced operation in Japan in late 2007. To the extent we
need to make capital injections into our Japan operation by
converting U.S. dollars into Japanese Yen, we will be
exposed to the fluctuations in the exchange rate between the
U.S. dollar
94
and the Japanese Yen. We have not hedged exposures denominated
in foreign currencies using any derivative financial instruments.
The exchange rate between the RMB and the U.S. dollar was
relatively stable in 2009. A hypothetical 10% decrease in the
exchange rate of the U.S. dollar against the RMB would have
resulted in a decrease of RMB42.9 million
(US$6.3 million) in the value of our
U.S. dollar-denominated financial assets at
December 31, 2009.
|
|
Item 12.
|
Description
of Securities Other than Equity Securities
|
Not applicable.
Not applicable.
Not applicable.
|
|
D.
|
American
Depositary Shares
|
Fees and
Charges Our ADS holders May Have to Pay
The Bank of New York Mellon, the depositary of our ADS program,
collects its fees for delivery and surrender of ADSs directly
from investors depositing shares or surrendering ADSs for the
purpose of withdrawal or from intermediaries acting for them.
The depositary collects fees for making distributions to
investors by deducting those fees from the amounts distributed
or by selling a portion of distributable property to pay the
fees. The depositary may collect its annual fee for depositary
services by deductions from cash distributions or by directly
billing investors or by charging the book-entry system accounts
of participants acting for them. The depositary may generally
refuse to provide fee-attracting services until its fees for
those services are paid.
95
|
|
|
Persons depositing or
|
|
|
withdrawing shares must pay:
|
|
For:
|
|
US$5.00 (or less) per 100 ADSs (or portion of 100 ADSs)
|
|
Issuance of ADSs, including issuances
resulting from a distribution of shares or rights or other
property
Cancellation of ADSs for the purpose of
withdrawal, including if the deposit agreement terminates
|
US$0.02 (or less) per ADS
|
|
Any cash distribution to registered ADS
holders
|
A fee equivalent to the fee that would be payable if securities
distributed had been shares and the shares had been deposited
for issuance of ADSs
|
|
Distribution of securities distributed
to holders of deposited securities which are distributed by the
depositary to registered ADS holders
|
US$0.02 (or less) per ADS per calendar year (if the depositary
has not collected any cash distribution fee during that year)
|
|
Depositary services
|
Expenses of the depositary
|
|
Cable, telex and facsimile transmissions
(when expressly provided in the deposit agreement)
Converting foreign currency to U.S.
dollars
|
Registration or transfer fees
|
|
Transfer and registration of shares on
our share register to or from the name of the depositary or its
agent when you deposit or withdraw shares
|
Taxes and other governmental charges the depositary or the
custodian have to pay on any ADS or share underlying an ADS, for
example, stock transfer taxes, stamp duty or withholding taxes
|
|
As necessary
|
Any charges incurred by the depositary or its agents for
servicing the deposited securities
|
|
As necessary
|
Fees and
Other Payments Made by the Depositary to Us
The depositary has agreed to reimburse us annually for our
expenses incurred in connection with investor relationship
programs and any other program related to our ADS facility and
the travel expense of our key personnel in connection with such
programs. The depositary has also agreed to provide additional
payments to us based on the applicable performance indicators
relating to our ADS facility. There are limits on the amount of
expenses for which the depositary will reimburse us, but the
amount of reimbursement available to us is not necessarily tied
to the amount of fees the depositary collects from investors.
For the year ended December 31, 2009, we were entitled to
receive US$500,000 (subject to applicable withholding tax) from
the depositary as reimbursement for our expenses incurred in
connection with investor relationship programs related to the
ADS facility and the travel expense of our key personnel in
connection with such programs. This amount has not been paid as
of the date of this annual report.
PART II
|
|
Item 13.
|
Defaults,
Dividend Arrearages and Delinquencies
|
None.
|
|
Item 14.
|
Material
Modifications to the Rights of Security Holders and Use of
Proceeds
|
None.
96
|
|
Item 15.
|
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, 2009, 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, 2009.
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, 2009, as stated in its report, which appears
on
page F-2
of this annual report on
Form 20-F.
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.
|
|
Item 16A.
|
Audit
Committee Financial Expert
|
Our board of directors has determined that Mr. William
Decker, an independent director (under the standards set forth
in NASDAQ Stock Market Rule 5605(a)(2) 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.
97
|
|
Item 16C.
|
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.
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2009
|
|
|
Audit
fees(1)
|
|
US$
|
870,000
|
|
|
US$
|
917,066
|
|
Audit-related fees
|
|
|
|
|
|
|
|
|
Tax
fees(2)
|
|
US$
|
21,866
|
|
|
US$
|
9,523
|
|
All other fees
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
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 2008 and 2009, the audit refers to integrated
audit, including financial audit and audit pursuant to
Section 404 of the Sarbanes-Oxley Act of 2002. |
|
(2) |
|
Tax fees means the aggregate fees billed in each of
the fiscal years listed for professional services rendered by
our principal auditors for tax compliance, tax advice, and tax
planning. In 2008 and 2009, the tax fees refer to fees paid to
our principal auditors to review the compliance of our tax
documentation. |
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.
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.
|
|
Item 16D.
|
Exemptions
from the Listing Standards for Audit Committees
|
Not applicable.
98
|
|
Item 16E.
|
Purchases
of Equity Securities by the Issuer and Affiliated
Purchasers
|
In 2008, we received authorizations and approvals from our board
of directors and shareholders to repurchase up to
US$200 million of our ordinary shares represented by ADSs
by the end of 2009. This share repurchase plan expired on
December 31, 2009. The following tables set forth some
additional information about our repurchases made in the year
ended December 31, 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maximum Number (or
|
|
|
|
|
|
|
|
|
|
Total Number of
|
|
|
Approximate Dollar
|
|
|
|
|
|
|
|
|
|
ADSs Purchased as
|
|
|
Value) of ADSs that
|
|
|
|
|
|
|
Average
|
|
|
Part of Publicly
|
|
|
May Yet be
|
|
|
|
(a) Total Number of
|
|
|
Price Paid
|
|
|
Announced Plans or
|
|
|
Purchased Under the
|
|
Period
|
|
ADSs Purchased
|
|
|
per ADS
|
|
|
Programs
|
|
|
Plans or Programs
|
|
|
Month #1 (January 2009)
|
|
|
32,740
|
|
|
$
|
109.04
|
|
|
|
32,740
|
|
|
$
|
196,430,030
|
|
Month #2 (February 2009)
|
|
|
0
|
|
|
|
N/A
|
|
|
|
0
|
|
|
$
|
196,430,030
|
|
Month #3 (March 2009)
|
|
|
0
|
|
|
|
N/A
|
|
|
|
0
|
|
|
$
|
196,430,030
|
|
Month #4 (April 2009)
|
|
|
0
|
|
|
|
N/A
|
|
|
|
0
|
|
|
$
|
196,430,030
|
|
Month #5 (May 2009)
|
|
|
0
|
|
|
|
N/A
|
|
|
|
0
|
|
|
$
|
196,430,030
|
|
Month #6 (June 2009
|
|
|
0
|
|
|
|
N/A
|
|
|
|
0
|
|
|
$
|
196,430,030
|
|
Month #7 (July 2009)
|
|
|
0
|
|
|
|
N/A
|
|
|
|
0
|
|
|
$
|
196,430,030
|
|
Month #8 (August 2009)
|
|
|
0
|
|
|
|
N/A
|
|
|
|
0
|
|
|
$
|
196,430,030
|
|
Month #9 (September 2009)
|
|
|
0
|
|
|
|
N/A
|
|
|
|
0
|
|
|
$
|
196,430,030
|
|
Month #10 (October 2009)
|
|
|
0
|
|
|
|
N/A
|
|
|
|
0
|
|
|
$
|
196,430,030
|
|
Month #11 (November 2009)
|
|
|
0
|
|
|
|
N/A
|
|
|
|
0
|
|
|
$
|
196,430,030
|
|
Month #12 (December 2009)
|
|
|
0
|
|
|
|
N/A
|
|
|
|
0
|
|
|
|
0
|
|
Total
|
|
|
32,740
|
|
|
$
|
109.04
|
|
|
|
32,740
|
|
|
|
0
|
|
As part of our share repurchase plan, in late December 2008, we
entered into a structured share repurchase transaction with a
major financial institution. Under this transaction, we made an
upfront cash payment of US$10 million in exchange for the
right to receive either a number of our ADSs or a cash
settlement amount (which is equal to our upfront cash payment
plus a pre-determined premium) upon the expiration of the
three-month term of the transaction, depending on the volume
weighted average price (VWAP) of our ADSs at such expiration
date. On the settlement date for this transaction in March 2009,
we received US$10.84 million in cash, including a
pre-determined premium of US$0.84 million. In March 2009,
we entered into a similar transaction with the same financial
institution with an upfront payment of US$20 million. On
the settlement date for this transaction in June 2009, we
received US$20.73 million in cash, including a
pre-determined premium of US$0.73 million.
|
|
Item 16F.
|
Change
in Registrants Certifying Accountant
|
Not applicable.
|
|
Item 16G.
|
Corporate
Governance
|
NASDAQ Stock Market Rule 5620 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
Stock Market Rule 5615(a)(3) 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
Stock Market certifying that under Cayman Islands law, we are
not required to hold annual shareholder meetings every year. We
follow home country practice with respect to annual meetings and
did not hold an annual meeting of shareholders in 2009. We may,
however, hold annual shareholder meetings in the future if there
are significant issues that require shareholders approvals.
Other than the annual meeting practice described above, there
are no significant differences between our corporate governance
practices and those followed by U.S. domestic companies
under NASDAQ Stock Market Rules.
99
PART III
|
|
Item 17.
|
Financial
Statements
|
We have elected to provide financial statements pursuant to
Item 18.
|
|
Item 18.
|
Financial
Statements
|
The consolidated financial statements of Baidu, Inc. and its
subsidiaries are included at the end of this annual report.
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description of Document
|
|
|
1
|
.1
|
|
Third Amended and Restated Memorandum and Articles of
Association of the Registrant (incorporated by reference to
Exhibit 99.2 of
Form 6-K
furnished with the Securities and Exchange Commission on
December 17, 2008)
|
|
2
|
.1
|
|
Registrants Specimen American Depositary Receipt
(incorporated by reference to Exhibit 1 of the prospectus
filed with the Securities and Exchange Commission on
January 5, 2009 pursuant to Rule 424(b)(3) under the
Securities Act)
|
|
2
|
.2
|
|
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 F-1
(file
no. 333-126534)
filed with the Securities and Exchange Commission on
August 2, 2005)
|
|
2
|
.3
|
|
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)
|
|
4
|
.1
|
|
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)
|
|
4
|
.2
|
|
2000 Option Plan (amended and restated effective
December 16, 2008) (incorporated by reference to
Exhibit 99.3 of
Form 6-K
furnished with the Securities and Exchange Commission on
December 17, 2008)
|
|
4
|
.3
|
|
2008 Share Incentive Plan (incorporated by reference to
Exhibit 99.4 of
Form 6-K
furnished with the Securities and Exchange Commission on
December 17, 2008)
|
|
4
|
.4
|
|
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)
|
|
4
|
.5
|
|
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)
|
|
4
|
.6
|
|
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)
|
|
4
|
.7
|
|
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)
|
|
4
|
.8
|
|
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)
|
100
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description of Document
|
|
|
4
|
.9
|
|
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)
|
|
4
|
.10
|
|
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)
|
|
4
|
.11
|
|
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 F-1
(file
no. 333-126534)
filed with the Securities and Exchange Commission on
July 12, 2005)
|
|
4
|
.12
|
|
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)
|
|
4
|
.13
|
|
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)
|
|
4
|
.14
|
|
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)
|
|
4
|
.15
|
|
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)
|
|
4
|
.16
|
|
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)
|
|
4
|
.17
|
|
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)
|
|
4
|
.18
|
|
Translation of the form of Technology Consulting and Services
Agreement between Baidu Online and a consolidated affiliated PRC
entity (incorporated by reference to Exhibit 4.19 of our
Annual Report on
Form 20-F
filed with the Securities and Exchange Commission on
June 5, 2008)
|
|
4
|
.19
|
|
Translation of the form of Operating Agreement between Baidu
Online and a consolidated affiliated PRC entity (incorporated by
reference to Exhibit 4.20 of our Annual Report on
Form 20-F
filed with the Securities and Exchange Commission on
June 5, 2008)
|
|
4
|
.20
|
|
Translation of the form of Web Layout Copyright License
Agreement between Baidu Online and a consolidated affiliated PRC
entity (incorporated by reference to Exhibit 4.21 of our
Annual Report on
Form 20-F
filed with the Securities and Exchange Commission on
June 5, 2008)
|
|
4
|
.21
|
|
Translation of the form of Proxy Agreement among Baidu Online, a
consolidated affiliated PRC entity and the shareholders of the
consolidated affiliated PRC entity (incorporated by reference to
Exhibit 4.22 of our Annual Report on
Form 20-F
filed with the Securities and Exchange Commission on
June 5, 2008)
|
|
4
|
.22
|
|
Translation of the form of Equity Pledge Agreement between Baidu
Online and the shareholder of a consolidated affiliated PRC
entity (incorporated by reference to Exhibit 4.23 of our
Annual Report on
Form 20-F
filed with the Securities and Exchange Commission on
June 5, 2008)
|
101
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description of Document
|
|
|
4
|
.23
|
|
Translation of the form of Exclusive Equity Purchase Option
Agreement between Baidu Online and the shareholder of a
consolidated affiliated PRC entity (incorporated by reference to
Exhibit 4.24 of our Annual Report on
Form 20-F
filed with the Securities and Exchange Commission on
June 5, 2008)
|
|
4
|
.24
|
|
Translation of the form of Loan Agreement between Baidu Online
and the shareholder of a consolidated affiliated PRC entity
(incorporated by reference to Exhibit 4.25 of our Annual
Report on
Form 20-F
filed with the Securities and Exchange Commission on
June 5, 2008)
|
|
8
|
.1*
|
|
List of Subsidiaries and Consolidated Affiliated Entities
|
|
11
|
.1
|
|
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)
|
|
12
|
.1*
|
|
Certification by Principal Executive Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
|
|
12
|
.2*
|
|
Certification by Principal Financial Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
|
|
13
|
.1**
|
|
Certification by Principal Executive Officer Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
|
|
13
|
.2**
|
|
Certification by Principal Financial Officer Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
|
|
15
|
.1*
|
|
Consent of Maples and Calder
|
|
15
|
.2*
|
|
Consent of Haiwen & Partners
|
|
15
|
.3*
|
|
Consent of Ernst & Young Hua Ming
|
|
101
|
.INS***
|
|
XBRL Instance Document
|
|
101
|
.SCH***
|
|
XBRL Taxonomy Extension Schema Document
|
|
101
|
.CAL***
|
|
XBRL Taxonomy Extension Calculation Linkbase Document
|
|
101
|
.DEF***
|
|
XBRL Taxonomy Extension Definition Linkbase Document
|
|
101
|
.LAB***
|
|
XBRL Taxonomy Extension Label Linkbase Document
|
|
101
|
.PRE***
|
|
XBRL Taxonomy Extension Presentation Linkbase Document
|
|
|
|
* |
|
Filed herewith |
|
** |
|
Furnished herewith |
|
*** |
|
XBRL (Extensible Business Reporting Language) information is
furnished and not filed or a part of a registration statement or
prospectus for purposes of Sections 11 or 12 of the
Securities Act of 1933, is deemed not filed for purposes of
Section 18 of the Securities Exchange Act of 1934, and
otherwise is not subject to liability under these sections. |
102
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.
Baidu, Inc.
Name: Robin Yanhong Li
|
|
|
|
Title:
|
Chairman and Chief Executive Officer
|
Date: March 26, 2010
103
BAIDU,
INC.
INDEX TO
CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
|
|
|
Page(s)
|
|
|
|
|
F-2
|
|
|
|
|
F-4
|
|
|
|
|
F-5
|
|
|
|
|
F-6
|
|
|
|
|
F-7
|
|
|
|
|
F-8
|
|
F-1
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders
Baidu, Inc.
We have audited the accompanying consolidated balance sheets of
Baidu, Inc. (the Company) as of December 31,
2009 and 2008, and the related consolidated statements of
income, shareholders equity, and cash flows for each of
the three years in the period ended December 31, 2009.
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, Inc. as of December 31, 2009
and 2008, and the consolidated results of its operations and its
cash flows for each of the three years in the period ended
December 31, 2009, in conformity with U.S. generally
accepted accounting principles.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States),
Baidu, Inc.s internal control over financial reporting as
of December 31, 2009, based on criteria established in
Internal Control-Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission and our
report dated March 26, 2010 expressed an unqualified
opinion thereon.
/s/ Ernst & Young Hua Ming
Beijing, The Peoples Republic of China
March 26, 2010
F-2
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders
Baidu, Inc.
We have audited Baidu, Inc.s internal control over
financial reporting as of December 31, 2009, based on
criteria established in Internal Control-Integrated Framework
issued by the Committee of Sponsoring Organizations of the
Treadway Commission (the COSO criteria). Baidu, 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, Inc. maintained, in all material
respects, effective internal control over financial reporting as
of December 31, 2009, 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, Inc. as of
December 31, 2009 and 2008, and the related consolidated
statements of income, shareholders equity, and cash flows
for each of the three years in the period ended
December 31, 2009 of Baidu, Inc., and our report dated
March 26, 2010, expressed an unqualified opinion thereon.
/s/ Ernst & Young Hua Ming
Beijing, The Peoples Republic of China
March 26, 2010
F-3
BAIDU,
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
|
|
|
2008
|
|
|
2009
|
|
|
2009
|
|
|
|
|
|
|
RMB
|
|
|
RMB
|
|
|
US$
|
|
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
|
|
|
|
2,362,171
|
|
|
|
4,199,889
|
|
|
|
615,287
|
|
Short-term investments
|
|
|
3
|
|
|
|
301,244
|
|
|
|
381,149
|
|
|
|
55,839
|
|
Accounts receivable, net of allowance of RMB8,561 for 2008 and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
RMB9,015 (US$1,321) for 2009
|
|
|
4
|
|
|
|
92,777
|
|
|
|
161,610
|
|
|
|
23,676
|
|
Other assets, current
|
|
|
5
|
|
|
|
80,007
|
|
|
|
91,067
|
|
|
|
13,341
|
|
Receivables from a shareholder
|
|
|
15
|
|
|
|
10,697
|
|
|
|
|
|
|
|
|
|
Deferred tax assets, net
|
|
|
9
|
|
|
|
5,580
|
|
|
|
9,157
|
|
|
|
1,342
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
|
|
|
|
2,852,476
|
|
|
|
4,842,872
|
|
|
|
709,485
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-current assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed assets, net
|
|
|
6
|
|
|
|
789,714
|
|
|
|
997,557
|
|
|
|
146,143
|
|
Intangible assets, net
|
|
|
7
|
|
|
|
125,783
|
|
|
|
122,595
|
|
|
|
17,960
|
|
Goodwill
|
|
|
7
|
|
|
|
51,082
|
|
|
|
63,691
|
|
|
|
9,331
|
|
Long-term investments, net
|
|
|
|
|
|
|
12,281
|
|
|
|
14,308
|
|
|
|
2,096
|
|
Deferred tax assets, net
|
|
|
9
|
|
|
|
26,537
|
|
|
|
33,799
|
|
|
|
4,952
|
|
Other assets, non-current
|
|
|
|
|
|
|
80,118
|
|
|
|
82,153
|
|
|
|
12,035
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-current assets
|
|
|
|
|
|
|
1,085,515
|
|
|
|
1,314,103
|
|
|
|
192,517
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL ASSETS
|
|
|
|
|
|
|
3,937,991
|
|
|
|
6,156,975
|
|
|
|
902,002
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS EQUITY
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable and accrued liabilities, current
|
|
|
8
|
|
|
|
423,029
|
|
|
|
749,861
|
|
|
|
109,855
|
|
Customer advances and deposits, current
|
|
|
|
|
|
|
422,526
|
|
|
|
607,828
|
|
|
|
89,047
|
|
Deferred revenue
|
|
|
|
|
|
|
3,441
|
|
|
|
42,035
|
|
|
|
6,158
|
|
Deferred income
|
|
|
|
|
|
|
332
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
|
|
|
|
849,328
|
|
|
|
1,399,724
|
|
|
|
205,060
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-current liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term payable for business acquisition
|
|
|
|
|
|
|
|
|
|
|
4,150
|
|
|
|
608
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-current liabilities
|
|
|
|
|
|
|
|
|
|
|
4,150
|
|
|
|
608
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
|
|
|
|
849,328
|
|
|
|
1,403,874
|
|
|
|
205,668
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class A Ordinary Shares, par value US$0.00005 per share,
825,000,000 shares authorized, and 25,641,847 shares
and 26,298,960 shares issued and outstanding as at
December 31, 2008 and 2009
|
|
|
12
|
|
|
|
11
|
|
|
|
11
|
|
|
|
2
|
|
Class B Ordinary Shares, par value US$0.00005 per share,
35,400,000 shares authorized, and 8,873,986 shares and
8,454,332 shares issued and outstanding as at
December 31, 2008 and 2009
|
|
|
12
|
|
|
|
4
|
|
|
|
4
|
|
|
|
1
|
|
Additional paid-in capital
|
|
|
|
|
|
|
1,218,356
|
|
|
|
1,426,070
|
|
|
|
208,920
|
|
Accumulated other comprehensive loss
|
|
|
|
|
|
|
(109,552
|
)
|
|
|
(113,513
|
)
|
|
|
(16,630
|
)
|
Retained earnings
|
|
|
13
|
|
|
|
1,979,844
|
|
|
|
3,440,529
|
|
|
|
504,041
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total shareholders equity
|
|
|
|
|
|
|
3,088,663
|
|
|
|
4,753,101
|
|
|
|
696,334
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND SHAREHOLDERS EQUITY
|
|
|
|
|
|
|
3,937,991
|
|
|
|
6,156,975
|
|
|
|
902,002
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the consolidated
financial statements.
F-4
BAIDU,
INC.
CONSOLIDATED STATEMENTS OF
INCOME
(Amounts in thousands of Renminbi (RMB), and in
thousands of U.S. Dollars (US$), except
for number of shares and per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
Notes
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2009
|
|
|
|
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
US$
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Online marketing services
|
|
|
|
|
|
|
1,741,021
|
|
|
|
3,194,461
|
|
|
|
4,445,310
|
|
|
|
651,242
|
|
Other services
|
|
|
|
|
|
|
3,404
|
|
|
|
3,791
|
|
|
|
2,466
|
|
|
|
361
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
|
|
|
|
1,744,425
|
|
|
|
3,198,252
|
|
|
|
4,447,776
|
|
|
|
651,603
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues
|
|
|
|
|
|
|
(645,406
|
)
|
|
|
(1,155,457
|
)
|
|
|
(1,616,236
|
)
|
|
|
(236,780
|
)
|
Selling, general and administrative
|
|
|
|
|
|
|
(411,163
|
)
|
|
|
(659,804
|
)
|
|
|
(803,988
|
)
|
|
|
(117,785
|
)
|
Research and development
|
|
|
|
|
|
|
(140,702
|
)
|
|
|
(286,256
|
)
|
|
|
(422,615
|
)
|
|
|
(61,913
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating costs and expenses
|
|
|
|
|
|
|
(1,197,271
|
)
|
|
|
(2,101,517
|
)
|
|
|
(2,842,839
|
)
|
|
|
(416,478
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating profit
|
|
|
|
|
|
|
547,154
|
|
|
|
1,096,735
|
|
|
|
1,604,937
|
|
|
|
235,125
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
|
|
|
|
49,009
|
|
|
|
47,677
|
|
|
|
32,661
|
|
|
|
4,785
|
|
Foreign exchange loss, net
|
|
|
|
|
|
|
(2,425
|
)
|
|
|
(1,920
|
)
|
|
|
(42
|
)
|
|
|
(6
|
)
|
Loss from equity method investment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(229
|
)
|
|
|
(34
|
)
|
Other income, net
|
|
|
|
|
|
|
22,478
|
|
|
|
21,687
|
|
|
|
45,794
|
|
|
|
6,709
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income
|
|
|
|
|
|
|
69,062
|
|
|
|
67,444
|
|
|
|
78,184
|
|
|
|
11,454
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
|
|
|
|
616,216
|
|
|
|
1,164,179
|
|
|
|
1,683,121
|
|
|
|
246,579
|
|
Income taxes
|
|
|
9
|
|
|
|
12,752
|
|
|
|
(116,071
|
)
|
|
|
(198,017
|
)
|
|
|
(29,010
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
628,968
|
|
|
|
1,048,108
|
|
|
|
1,485,104
|
|
|
|
217,569
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share for Class A and Class B ordinary
shares:
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
|
18.57
|
|
|
|
30.63
|
|
|
|
42.96
|
|
|
|
6.29
|
|
Diluted
|
|
|
|
|
|
|
18.11
|
|
|
|
30.19
|
|
|
|
42.70
|
|
|
|
6.26
|
|
Weighted average number of Class A and Class B
ordinary shares outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
|
33,872,611
|
|
|
|
34,217,443
|
|
|
|
34,570,790
|
|
|
|
34,570,790
|
|
Diluted
|
|
|
|
|
|
|
34,724,365
|
|
|
|
34,717,489
|
|
|
|
34,776,366
|
|
|
|
34,776,366
|
|
The accompanying notes are an integral part of the consolidated
financial statements.
F-5
BAIDU,
INC.
(Amounts
in thousands of Renminbi (RMB), and in thousands of
U.S. Dollars (US$))
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2009
|
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
US$
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
628,968
|
|
|
|
1,048,108
|
|
|
|
1,485,104
|
|
|
|
217,569
|
|
Adjustments to reconcile net income to net cash generated from
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation of fixed assets and others
|
|
|
170,731
|
|
|
|
268,593
|
|
|
|
306,281
|
|
|
|
44,870
|
|
Fixed assets written off
|
|
|
622
|
|
|
|
1,675
|
|
|
|
2,606
|
|
|
|
382
|
|
Amortization of intangible assets
|
|
|
10,204
|
|
|
|
12,121
|
|
|
|
10,729
|
|
|
|
1,572
|
|
Deferred tax assets, net
|
|
|
(10,767
|
)
|
|
|
(13,814
|
)
|
|
|
(10,839
|
)
|
|
|
(1,588
|
)
|
Share-based compensation
|
|
|
39,848
|
|
|
|
83,977
|
|
|
|
86,318
|
|
|
|
12,646
|
|
Provision for doubtful accounts
|
|
|
(703
|
)
|
|
|
4,980
|
|
|
|
493
|
|
|
|
72
|
|
Foreign exchange loss
|
|
|
1,313
|
|
|
|
1,157
|
|
|
|
|
|
|
|
|
|
Interest income from short-term investments
|
|
|
(4,914
|
)
|
|
|
(5,739
|
)
|
|
|
(8,181
|
)
|
|
|
(1,199
|
)
|
Impairment on long-term investments
|
|
|
|
|
|
|
7,986
|
|
|
|
|
|
|
|
|
|
Loss from equity method investments
|
|
|
|
|
|
|
|
|
|
|
229
|
|
|
|
34
|
|
Changes in operating assets and liabilities net of effects of
acquisition:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(40,685
|
)
|
|
|
(33,282
|
)
|
|
|
(69,331
|
)
|
|
|
(10,157
|
)
|
Other assets
|
|
|
(50,442
|
)
|
|
|
(27,349
|
)
|
|
|
5,752
|
|
|
|
843
|
|
Receivables from a shareholder
|
|
|
|
|
|
|
(10,697
|
)
|
|
|
10,697
|
|
|
|
1,567
|
|
Customer advances and deposits, current
|
|
|
116,391
|
|
|
|
164,949
|
|
|
|
185,302
|
|
|
|
27,147
|
|
Accounts payable and accrued liabilities, current
|
|
|
121,167
|
|
|
|
130,230
|
|
|
|
236,012
|
|
|
|
34,576
|
|
Deferred revenue
|
|
|
1,834
|
|
|
|
(13,876
|
)
|
|
|
38,595
|
|
|
|
5,654
|
|
Deferred income
|
|
|
(4,089
|
)
|
|
|
(2,485
|
)
|
|
|
(332
|
)
|
|
|
(49
|
)
|
Trading securities
|
|
|
(44,326
|
)
|
|
|
129,665
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash generated from operating activities
|
|
|
935,152
|
|
|
|
1,746,199
|
|
|
|
2,279,435
|
|
|
|
333,939
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition of fixed assets
|
|
|
(569,091
|
)
|
|
|
(417,898
|
)
|
|
|
(399,312
|
)
|
|
|
(58,500
|
)
|
Acquisition of business
|
|
|
(14,080
|
)
|
|
|
|
|
|
|
(12,000
|
)
|
|
|
(1,758
|
)
|
Acquisition of intangible assets
|
|
|
(9,211
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Capitalization of software costs
|
|
|
(4,041
|
)
|
|
|
(17,668
|
)
|
|
|
(11,392
|
)
|
|
|
(1,669
|
)
|
Acquisition of long-term investments
|
|
|
(8,024
|
)
|
|
|
|
|
|
|
(2,250
|
)
|
|
|
(330
|
)
|
Purchases of
held-to-maturity
securities
|
|
|
(228,896
|
)
|
|
|
(764,720
|
)
|
|
|
(779,676
|
)
|
|
|
(114,223
|
)
|
Maturities of
held-to-maturity
securities
|
|
|
120,127
|
|
|
|
580,430
|
|
|
|
707,929
|
|
|
|
103,712
|
|
Acquisition of long-term prepaid computer parts
|
|
|
|
|
|
|
(41,246
|
)
|
|
|
(39,368
|
)
|
|
|
(5,767
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(713,216
|
)
|
|
|
(661,102
|
)
|
|
|
(536,069
|
)
|
|
|
(78,535
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Structured share repurchase, net
|
|
|
|
|
|
|
(68,539
|
)
|
|
|
79,070
|
|
|
|
11,584
|
|
Repurchase of ordinary shares
|
|
|
|
|
|
|
|
|
|
|
(24,419
|
)
|
|
|
(3,577
|
)
|
Proceeds from exercise of share options
|
|
|
40,698
|
|
|
|
32,902
|
|
|
|
40,442
|
|
|
|
5,924
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash generated from (used in) financing activities
|
|
|
40,698
|
|
|
|
(35,637
|
)
|
|
|
95,093
|
|
|
|
13,931
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash and cash equivalents
|
|
|
(48,308
|
)
|
|
|
(37,889
|
)
|
|
|
(741
|
)
|
|
|
(108
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash and cash equivalents
|
|
|
214,326
|
|
|
|
1,011,571
|
|
|
|
1,837,718
|
|
|
|
269,227
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at beginning of the year
|
|
|
1,136,274
|
|
|
|
1,350,600
|
|
|
|
2,362,171
|
|
|
|
346,060
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of the year
|
|
|
1,350,600
|
|
|
|
2,362,171
|
|
|
|
4,199,889
|
|
|
|
615,287
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes (received) paid, net
|
|
|
(11,892
|
)
|
|
|
145,830
|
|
|
|
150,170
|
|
|
|
22,000
|
|
Fixed asset acquisitions included in accounts payable and
accrued liabilities
|
|
|
126,992
|
|
|
|
52,650
|
|
|
|
139,038
|
|
|
|
20,369
|
|
Other non-current assets acquisitions included in accounts
payable and accrued liabilities
|
|
|
|
|
|
|
4,764
|
|
|
|
5,176
|
|
|
|
758
|
|
Non-cash acquisitions of long-term investments
|
|
|
7,415
|
|
|
|
5,486
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the consolidated
financial statements.
F-6
BAIDU,
INC.
(Amounts
in thousands of Renminbi (RMB) and U.S. Dollars
(US$), except number of shares)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
Retained
|
|
|
|
|
|
|
Ordinary Shares
|
|
|
Additional
|
|
|
Other
|
|
|
Earnings
|
|
|
Total
|
|
|
|
Number of
|
|
|
|
|
|
Paid-in
|
|
|
Comprehensive
|
|
|
(Accumulated
|
|
|
Shareholders
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Loss
|
|
|
Losses)
|
|
|
Equity
|
|
|
|
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
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-based awards
|
|
|
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
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(27,599
|
)
|
|
|
|
|
|
|
(27,599
|
)
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,048,108
|
|
|
|
1,048,108
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,020,509
|
|
Exercise of share-based awards
|
|
|
382,844
|
|
|
|
1
|
|
|
|
28,637
|
|
|
|
|
|
|
|
|
|
|
|
28,638
|
|
Share-based compensation
|
|
|
|
|
|
|
|
|
|
|
86,683
|
|
|
|
|
|
|
|
|
|
|
|
86,683
|
|
Structured share repurchase
|
|
|
|
|
|
|
|
|
|
|
(68,539
|
)
|
|
|
|
|
|
|
|
|
|
|
(68,539
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at December 31, 2008
|
|
|
34,515,833
|
|
|
|
15
|
|
|
|
1,218,356
|
|
|
|
(109,552
|
)
|
|
|
1,979,844
|
|
|
|
3,088,663
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,961
|
)
|
|
|
|
|
|
|
(3,961
|
)
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,485,104
|
|
|
|
1,485,104
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,481,143
|
|
Exercise of share-based awards
|
|
|
270,199
|
|
|
|
|
|
|
|
41,121
|
|
|
|
|
|
|
|
|
|
|
|
41,121
|
|
Share-based compensation
|
|
|
|
|
|
|
|
|
|
|
87,523
|
|
|
|
|
|
|
|
|
|
|
|
87,523
|
|
Structured share repurchase
|
|
|
|
|
|
|
|
|
|
|
79,070
|
|
|
|
|
|
|
|
|
|
|
|
79,070
|
|
Repurchase of ordinary shares
|
|
|
(32,740
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(24,419
|
)
|
|
|
(24,419
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at December 31, 2009
|
|
|
34,753,292
|
|
|
|
15
|
|
|
|
1,426,070
|
|
|
|
(113,513
|
)
|
|
|
3,440,529
|
|
|
|
4,753,101
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at December 31, 2009, in US$
|
|
|
|
|
|
|
3
|
|
|
|
208,920
|
|
|
|
(16,630
|
)
|
|
|
504,041
|
|
|
|
696,334
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the consolidated
financial statements.
F-7
BAIDU,
INC.
FOR THE
YEARS ENDED DECEMBER 31, 2007, 2008 AND 2009
|
|
1.
|
ORGANIZATION,
CONSOLIDATION AND PRESENTATION OF FINANCIAL STATEMENTS
|
Baidu, Inc. (Baidu or the Company) was
incorporated under the laws of the Cayman Islands on
January 18, 2000. The Company was formerly known as
Baidu.com, Inc. and changed its name to Baidu, Inc. on
December 16, 2008. The Company is the 100% shareholder of
Baidu Holdings Ltd. (Baidu Holdings) incorporated in
the British Virgin Islands.
As of December 31, 2009, Baidu Holdings owns three
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, Inc. (Baidu Japan) incorporated in Tokyo
under the laws of Japan on December 13, 2006, and
|
|
|
|
Baidu (Hong Kong) Limited (Baidu HK) incorporated in
Hong Kong under the laws of Hong Kong on November 27, 2007.
|
Baidu HK owns three subsidiaries in the PRC, details of which
are as follows:
|
|
|
|
|
Baidu (China) Co., Ltd. (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 Interaction (Shenzhen) Network Technology Co., Ltd.
(Baidu Interaction), which obtained its business
license in March 2009, to be incorporated under the laws of the
PRC.
|
Baidu Japan has established two wholly-owned subsidiaries in
Japan, details of which are as follows:
|
|
|
|
|
Hyakudo Inc. (Hyakudo) incorporated in Tokyo under
the laws of Japan on April 14, 2008, and
|
|
|
|
Baido, Inc. (Baido) incorporated in Tokyo under the
laws of Japan on April 14, 2008
|
As of December 31, 2009, the Company also effectively
controls three variable interest entities (VIEs):
|
|
|
|
|
Beijing Baidu Netcom Science Technology Co., Ltd. (Baidu
Netcom) incorporated under the laws of the PRC on
June 5, 2001,
|
|
|
|
Beijing Perusal Technology Co., Ltd. (Beijing
Perusal) incorporated under the laws of the PRC on
June 6, 2006, and
|
|
|
|
Beijing BaiduPay Science and Technology Co., Ltd.
(BaiduPay) incorporated under the laws of the PRC on
February 27, 2008.
|
On July 13, 2009, Beijing Perusal, together with Paibo
Online (Beijing) Technology Co., Ltd. (Paibo), a
subsidiary of Beijing News, set up a joint venture, Beijing
Paibo Times Technology Co., Ltd. (Paibo Times), to
operate a community website and provide information of interest
to Beijing local residents. The registered capital of Paibo
Times is RMB5.00 million (US$0.73 million). Paibo and
Beijing Perusal hold 55% and 45% of the Paibo Times equity
interest, respectively. The Company accounts for its investment
in Paibo Times under the equity method.
The Company, its subsidiaries and VIEs are hereinafter
collectively referred to as the Group. The Group
offers Internet search solutions and online marketing solutions,
operates an
e-commerce
platform with an online payment tool which enables
e-commerce
merchants and customers to make payments online, develops and
markets scalable web application software and provides related
services. The Groups principal geographic market is in the
PRC and Japan. The Company does not conduct any substantive
operations of its own but conducts its primary business
operations through its wholly-owned subsidiaries and VIEs in the
PRC and Japan.
F-8
BAIDU,
INC.
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
PRC laws and regulations prohibit or restrict foreign ownership
of Internet content and advertising businesses. To comply with
these foreign ownership restrictions, the Group 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 Group. The paid-in capital of
the VIEs was funded by the Group through loans extended to the
authorized individuals. The Group has entered into certain
exclusive agreements with the VIEs through Baidu Online, which
obligate Baidu Online to absorb a majority of the risk of loss
from the VIEs activities and entitles Baidu Online to
receive a majority of their residual returns. In addition, the
Group has entered into certain agreements with the authorized
individuals through Baidu Online, 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 Accounting Standards
Codification (ASC) subtopic
810-10
(ASC
810-10),
Consolidation: Overall (Pre-Codification: Financial
Accounting Standards Board (FASB) Interpretation
No. 46R, Consolidation of Variable Interest Entities, an
Interpretation of ARB No. 51), because the Company
holds all the variable interests of VIEs through Baidu Online,
which is the primary beneficiary of the VIEs. Despite the lack
of technical majority ownership, there exists a
parent-subsidiary relationship between the Company and VIEs
through the aforementioned agreements, whereby the equity
holders of VIEs effectively assigned all of their voting rights
underlying their equity interest in VIEs to Baidu Online. In
addition, through the other aforementioned agreements, the
Company demonstrates its ability and intention to continue to
exercise the ability to absorb substantially all of the profits
and all of the expected losses of VIEs.
The carrying amount of the total assets of VIEs as of
December 31, 2009 was RMB611.55 million
(US$89.59 million) and there was no pledge or
collateralization of their assets. The amount of the net assets
of VIEs as of December 31, 2009 was RMB244.87 million
(US$35.87 million).
|
|
2.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
|
Principles
of Consolidation
The consolidated financial statements have been prepared in
accordance with United States generally accepted accounting
principles (U.S. GAAP). The consolidated
financial statements include the financial statements of the
Company, its subsidiaries and VIEs in which the Company holds
all the variable interests of VIEs through Baidu Online.
All inter-company transactions and balances between the Company,
its subsidiaries and VIEs are eliminated upon consolidation. The
Company has included the results of operations of acquired
businesses from the respective dates of acquisition.
Currency
Translation for Financial Statements Presentation
Translations of amounts from RMB into US$ for the convenience of
the reader have been calculated at the exchange rate of
RMB6.8259 per US$1.00 on December 31, 2009 as published on
the website of the Federal Reserve Bank of New York. No
representation is made that the RMB amounts could have been, or
could be, converted into U.S. dollars at such rate.
Foreign
Currency
The Companys functional currency is the US$. The
Companys subsidiaries and VIEs determine their functional
currencies based on the criteria of ASC subtopic
830-10
(ASC
830-10),
Foreign Currency Matters: Overall (Pre-Codification:
Statements of Financial Accounting Standards (SFAS)
No. 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
F-9
BAIDU,
INC.
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
gains (losses) are recorded in accumulated other comprehensive
income (loss) as a component of shareholders equity. The
Company recorded RMB48.26 million, RMB27.60 million
and RMB3.96 million (US$0.58 million) of net foreign
currency translation loss for the years ended December 31,
2007, 2008 and 2009, respectively. 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 as a
component of other income.
Guarantees
The Company accounts for guarantees in accordance with ASC
subtopic
460-10
(ASC
460-10),
Guarantees: Overall (Pre-Codification: Financial
Accounting Standards Board (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). Accordingly, the Company evaluates its
guarantees to determine whether (a) the guarantee is
specifically excluded from the scope of ASC
460-10,
(b) the guarantee is subject to ASC
460-10
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 sheets
as of December 31, 2008 and 2009.
The Company has no other guarantees for any of the years
presented.
Use of
Estimates
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States
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. Management evaluates estimates,
including those related to the accounts receivable allowances,
recoverability and useful lives of intangibles and long-lived
assets, fair values of options to purchase the Companys
ordinary shares, and deferred tax valuation allowance, among
others. Management bases the estimates on historical experience
and on various other assumptions that are believed to be
reasonable, the results of which form the basis for making
judgments about the carrying values of assets and liabilities.
Actual results could differ from these estimates.
Fair
Value Measurements of Financial Instruments
The carrying amounts of the financial instruments, including
cash and cash equivalents, short-term investments, accounts
receivable, accounts payable and accrued liabilities, customer
advances and deposits, deferred revenue and deferred income,
approximate fair value because of their generally short
maturities.
F-10
BAIDU,
INC.
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Cash,
Cash Equivalents and Short-Term Investments
Cash and cash equivalents are stated at cost, which approximates
fair value, and primarily consist of cash and investments in
interest bearing demand deposit accounts, time deposits, highly
liquid investments and money market funds. All highly liquid
investments with original maturities of three months or less
from the date of purchase are classified as cash equivalents.
All highly liquid investments with original 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. In 2008, the Company introduced an
e-commerce
platform and an online payment platform which enables
e-commerce
merchants and customers to send and receive payments online.
Cash balances deposited by the customers of the Companys
e-commerce
platform are included as cash and cash equivalents in the
consolidated balance sheets. The cash deposits of such nature
are considered restricted because they cannot be used for the
operations of the Group or any other purpose not designated by
customers. When customers fund their account in the
e-commerce
platform using their bank accounts, the deposited balance is
included in the Companys bank account until customers
either use the cash to settle their online transactions or
withdraw the cash.
As of December 31, 2008 and 2009, there was
RMB4.56 million and RMB19.51 million
(US$2.86 million), respectively, in the Companys cash
and cash equivalents balance which was related to the deposits
made by customers and designated for settlement of their online
transactions on the
e-commerce
platform.
The Company accounts for short-term investments in accordance
with ASC subtopic
320-10
(ASC
320-10),
Investments Debt and Equity Securities: Overall
(Pre-Codification: SFAS No. 115, Accounting for
Certain Investments in Debt and Equity Securities). 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 did not
have
available-for-sale
securities as of any of the balance sheet date presented.
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
in the consolidated statements of income 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 in
accordance with the Companys policy and ASC subtopic
320-10
(ASC
320-10),
Investments Debt and Equity Securities: Overall
(Pre-Codification: FASB Staff Position (FSP)
SFAS 115-1/SFAS 124-1,
The Meaning of
Other-Than-Temporary
Impairment and Its Application to Certain Investments). If
the Company concludes that it does not intend or is not required
to sell an impaired debt security before the recovery of its
amortized cost basis, the impairment is considered temporary and
the
held-to-maturity
securities continue to be recognized at the amortized costs.
When the Company intends to sell an impaired debt security or it
is more likely than not that it will be required to sell prior
to recovery of its amortized cost basis, an
other-than-temporary
impairment is deemed to have occurred. In these instances, the
other-than-temporary
impairment loss is recognized in the consolidated statements of
income equal to the entire excess of the debt securitys
amortized cost basis over its fair value at the balance sheet
date. When the Company does not intend to sell an impaired debt
security and it is more likely than not that it will not be
required to sell prior to recovery of its amortized cost basis,
the Company must determine whether or not it will recover its
amortized cost basis. If the Company concludes that it will not,
an
other-than-temporary
impairment exists and that portion of the credit loss is
recognized in the consolidated statements of income, while the
portion of loss related to all other factors is recognized in
other comprehensive income.
F-11
BAIDU,
INC.
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Long-term
Investments
Long-term investments include cost method investments and equity
method investments.
In accordance with ASC subtopic
325-20
(ASC
325-20),
Investments-Other: Cost Method Investments
(Pre-Codification:
Accounting Principles Board (APB) No. 18
(APB 18), The Equity Method of Accounting for
Investments in Common Stock), for investments in an investee
over which the Company does not have significant influence, the
Company carries the investment at cost and only adjusts for
other-than-temporary
declines in fair value and distributions of earnings. The
management regularly evaluates the impairment of the cost method
investments based on performance and financial position of the
investee as well as other evidence of market value. Such
evaluation includes, but is not limited to, reviewing the
investees cash position, recent financing, projected and
historical financial performance, cash flow forecasts and
financing needs. An impairment loss is recognized in the
consolidated statements of income equal to the excess of the
investments cost over its fair value at the balance sheet
date of the reporting period for which the assessment is made.
The fair value would then become the new cost basis of
investment. The impairment charge was nil, RMB7.99 million
and nil for the years ended December 31, 2007, 2008 and
2009, respectively.
Investments in entities in which the Company can exercise
significant influence but does not own a majority equity
interest or control are accounted for using the equity method of
accounting in accordance with ASC subtopic
323-10
(ASC
323-10),
Investments-Equity Method and Joint Ventures: Overall
(Pre-Codification: APB 18). Under the equity method, the
Company initially records its investment at cost and adjusts the
carrying amount of the investment to recognize the
Companys proportionate share of each equity
investees net income or loss into consolidated statements
of income after the date of acquisition. The difference between
the cost of the equity investee and the amount of the underlying
equity in the net assets of the equity investee is recognized as
equity method goodwill included in equity method investment on
the consolidated balance sheets. The Company evaluated the
equity method investments for impairment under ASC
323-10. An
impairment loss on the equity method investments is recognized
in the consolidated statements of income when the decline in
value is determined to be
other-than-temporary.
Capitalization
of Software Developed for Internal Use
The Company has capitalized certain internal use software
development costs in accordance with ASC subtopic
350-40
(ASC
350-40),
Intangibles-Goodwill and Other: Internal-Use Software
(Pre-Codification: Statement of Position (SOP)
98-1,
Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use), amounting to
RMB6.49 million, RMB19.49 million and
RMB12.59 million (US$1.84 million) for the years ended
December 31, 2007, 2008 and 2009, respectively. The Company
capitalizes certain costs relating to software acquired,
developed, or modified solely to meet the Companys
internal requirements and for which there are no substantive
plans to market the software. These costs mainly included
payroll and payroll-related costs for employees who are directly
associated with and who devote time to the internal use software
projects during the application development stage. The estimated
useful life of software development costs is determined to be
three years. The amortization expense for capitalized software
amounted to RMB1.26 million, RMB3.44 million and
RMB9.77 million (US$1.43 million) for the years ended
December 31, 2007, 2008 and 2009, respectively. Capitalized
internal use software costs are included in fixed assets, net.
The unamortized amount of capitalized internal use software
developed costs, which are included in fixed assets, net, is
RMB23.34 million and RMB26.16 million
(US$3.83 million) as of December 31, 2008 and 2009,
respectively.
F-12
BAIDU,
INC.
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Fixed
Assets
Fixed assets are stated at cost less accumulated depreciation.
Depreciation or amortization is recorded on a straight-line
basis over the shorter of the estimated useful lives of the
assets or the term of the related lease, as follows:
|
|
|
Office building
|
|
45 years
|
Office building related facility, machinery and equipment
|
|
15 years
|
Computer equipment
|
|
3 or 5 years
|
Internal use software development costs
|
|
3 years
|
Vehicles and office equipment
|
|
5 years
|
Leasehold improvements
|
|
over the shorter of lease terms or estimated useful lives
of the assets
|
Fixed assets have no estimated residual value except for the
office building and its related facility, machinery and
equipment, which have an estimated residual value of 4% of the
cost.
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 they are ready for their intended use.
Intangible
Assets
Intangible assets with finite lives are carried at cost less
accumulated amortization. The land use right is amortized using
a straight-line method over the shorter of its estimated
economic life or the term of related land use right contract.
All other intangible assets with definite lives are amortized
using the straight-line method over the estimated economic life.
As of December 31, 2009, intangible assets have weighted
average useful lives from the date of purchase as follows:
|
|
|
Domain names
|
|
5 years
|
Customer relationships
|
|
4.9 years
|
Non-competition agreements
|
|
3.9 years
|
Software
|
|
6.3 years
|
Contract-based assets
|
|
2.3 years
|
Trademark
|
|
9.6 years
|
Land use right
|
|
50 years
|
Intangible assets with an indefinite useful life are not
amortized. One of the domain name assets acquired in July 2006
is not subject to amortization, as the remaining useful life is
indefinite. The total amount assigned to this domain name is
RMB9.36 million (US$1.37 million) as of
December 31, 2009. In addition, in March 2008, the
Companys trademark of BAIDU was qualified as a
China well-known trademark by the State Trademark Office. The
registration costs amounted to RMB1.05 million as of
December 31, 2008 and were recorded as an intangible asset
not subject to amortization, as the remaining useful life is
indefinite. If the intangible assets that are not being
amortized are subsequently determined to have a finite useful
life, the assets will be tested for impairment in accordance
with ASC subtopic
350-30
(ASC
350-30),
Intangibles-Goodwill and Other: General Intangibles Other
than Goodwill (Pre-Codification: SFAS 142, Goodwill
and Other Intangible Assets), and then amortized
prospectively over their
F-13
BAIDU,
INC.
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
estimated remaining useful lives 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.
There have been no impairment charges of the Companys
intangible assets with indefinite useful lives in any of the
years presented.
Impairment
of Long-Lived Assets
The Company evaluates long-lived assets, such as fixed assets
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 ASC subtopic
360-10
(ASC
360-10),
Property, Plant and Equipment: Overall (Pre-Codification:
SFAS 144, Accounting for the Impairment or Disposal of
Long-Lived Assets). When such events occur, the Company
assesses the recoverability of the assets group based on the
undiscounted future cash flow the assets group is 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, is 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 have been no impairment charges
relating to the Companys long-lived assets in any of the
years presented.
Accounting
for Impairment of Goodwill
Goodwill represents the excess of the purchase price over the
fair value of the identifiable net assets acquired in a business
combination. The Company assesses goodwill for impairment in
accordance with ASC subtopic
350-20
(ASC
350-20),
Intangibles Goodwill and Other: Goodwill
(Pre-Codification: SFAS 142, Goodwill and Other
Intangible Assets), which requires that goodwill be tested
for impairment at the reporting unit level at least annually and
more frequently upon the occurrence of certain events, as
defined by ASC
350-20.
Consistent with the managements operational perspective,
the Company has determined that it has only one reporting unit
as Baidus chief operational decision maker only reviews
the Companys discrete financials at its consolidated
level. Goodwill was tested for impairment in the annual
impairment tests on December 31 in each year using the two-step
process required by ASC
350-20.
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 shares. If
the fair value of the reporting unit exceeds the carrying value
of the reporting unit, goodwill is not impaired and the Company
is not required to perform further testing. If the carrying
value of the reporting unit exceeds the fair value of the
reporting unit, then the Company must perform the second step of
the impairment test in order to determine the implied fair value
of the reporting units goodwill. That is, 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 ASC
350-20,
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.
F-14
BAIDU,
INC.
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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.
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 on keywords based on
how much they are willing to pay for each click to their
listings in the search results listed on the Companys
website and the relevance between the keywords and the
customers businesses. Internet users search of the
keyword will trigger the display of the listings. The ranking of
the customers listing depends on both the bidding price
and the listings relevance to the keyword searched.
Customer pays the Company only when a user clicks on one of its
website links. Revenue is generally recognized when a user
clicks on one of the customer-sponsored website links, as there
is persuasive evidence of an arrangement, the fee is fixed or
determinable and collection is reasonably assured, as prescribed
by ASC subtopic
605-10
(ASC
605-10),
Revenue Recognition: Overall (Pre-Codification:
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 consulting support
services to help its customers to better utilize its P4P online
marketing system. Fees for such services are generally
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
ASC 605-10.
(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 ASC
605-10, 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 or distributing the
Companys customers paid links through Union
members 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.
F-15
BAIDU,
INC.
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(5) Barter transactions
The Company engages in barter transactions occasionally and in
such situation follows the provisions of ASC subtopic
845-10
(ASC
845-10),
Nonmonetary Transactions: Overall (Pre-Codification: APB
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.
The Company recognizes revenues for barter transactions
involving advertising in accordance with ASC subtopic
605-20
(ASC
605-20),
Revenue recognition: Services (Pre-Codification: Emerging
Issues Task Force (EITF) Issue
No. 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 ASC subtopic
505-50
(ASC
505-50),
Equity: Equity-based Payments to Non-Employees
(Pre-Codification:
EITF 00-08,
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 is 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 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 recognized for the services provided
and the equity instrument received is recorded at zero carrying
value. The amount of revenues recognized for such transactions
was insignificant in each 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 multiple
accounting units in accordance with ASC subtopic
605-25
(ASC
605-25),
Revenue recognition: Multiple-Element Arrangements
(Pre-Codification: EITF Issue
No. 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 ASC subtopic
605-50
(ASC
605-50),
Revenue recognition: Customer Payments and Incentives
(Pre-Codification: EITF Issue
No. 01-09,
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
advances and 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
ASC 605-10
are fulfilled.
F-16
BAIDU,
INC.
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (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 the PRC. According to ASC subtopic
605-45
(ASC
605-45),
Revenue Recognition: Principal Agent Considerations
(Pre-Codification: EITF Issue
No. 06-03,
How Taxes Collected from Customers and Remitted to
Governmental Authorities Should Be Presented in the Income
Statement), the Company includes 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 the years ended December 31, 2007, 2008 and 2009 were
RMB108.78 million, RMB200.09 million and
RMB275.92 million (US$40.42 million), respectively.
Traffic acquisition costs represent the amounts paid or payable
to Baidu Union members who direct search queries to the
Companys websites or distribute the Companys
customers paid links through their properties. 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.
Advertising
Expenses
Advertising expenses, primarily advertisements through various
forms of media, are included in Selling, general and
administrative expense in the consolidated statements of
income and are expensed when incurred. Advertising expenses for
the years ended December 31, 2007, 2008 and 2009 were
RMB19.83 million, RMB29.22 million and
RMB77.80 million (US$11.40 million), respectively.
Research
and Development Expenses
Research and development expenses consist primarily of
personnel-related costs. The Company has 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.
Other
Income
Other income consists primarily of interest income, government
subsidies, impairment and non-operating expenses. Interest
income is generated from bank deposits and other
interest-earning financial assets and is recognized on an
accrual basis. Other income, net primarily consists of financial
subsidies received from provincial and local governments for
operating a business in their jurisdictions and compliance with
specific policies promoted by the local governments. During the
years ended December 31, 2007, 2008 and 2009, the Group
received financial subsidies of RMB18.99 million,
RMB22.72 million and RMB42.50 million
(US$6.23 million), respectively, from various local PRC
government authorities. There are no defined rules and
regulations to govern the criteria necessary for companies to
receive such benefits, and the amount of financial subsidy is
determined at the discretion of the relevant government
authorities. Such amounts are recorded as other income when
received.
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 had no capital leases for the
years ended December 31, 2007, 2008 and 2009.
F-17
BAIDU,
INC.
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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 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.
The Company adopted the provisions of ASC subtopic
740-10
(ASC
740-10),
Income Taxes: Overall
(Pre-Codification:
FIN 48, Accounting for Uncertainty in Income
Taxes an interpretation of FASB Statement
No. 109), on January 1, 2007. ASC
740-10
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. No
cumulative effect adjustment resulted from the adoption of ASC
740-10, nor
did the standard have any impact on the Companys financial
statements for the years ended December 31, 2008 and 2009.
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
income. As of and for the years ended December 31, 2007,
2008 and 2009, no unrecognized tax benefits or interest and
penalties associated with uncertainty in income taxes have been
recognized.
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 ASC subtopic
718-10
(ASC
718-10),
Compensation-Stock Compensation: Overall
(Pre-Codification: SFAS No. 123(R), Share-Based
Payment), using the modified prospective transition approach
from January 1, 2006. Pursuant to ASC
718-10, the
Company recognized share-based compensation expense over the
requisite service periods for any share-based awards granted
after January 1, 2006 based on the fair values of all
share-based awards on the dates of grant.
The Company has elected to recognize share-based compensation
after the date of adoption of ASC
718-10 using
the straight-line method for all share-based awards issued.
Forfeitures have been estimated based on historical experience
and periodically reviewed. Cancellation of an award accompanied
by the concurrent grant of a replacement award is accounted for
as a modification of the terms of the cancelled award
(modification awards). The compensation costs
associated with the modification awards will be recognized if
either the original vesting condition or the new vesting
condition is achieved and the compensation costs cannot be less
than the grant-date fair value of the original award. The
incremental compensation cost was measured as the excess of the
fair value of the replacement award over the fair value of the
cancelled award at the cancellation date. Therefore, in relation
to the modification awards, the Company recognizes share-based
compensation over the vesting periods of the new options, which
comprises, (1) the amortization of the incremental portion
of share-based compensation over the remaining vesting term and
(2) plus any unrecognized compensation cost of original
award, using either the original term or the new term, whichever
is higher for each reporting period.
The Company accounts for share awards issued to non-employees in
accordance with the provisions of ASC subtopic
505-50
(ASC
505-50),
Equity: Equity-based Payments to Non-Employees
(Pre-Codification: 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). Under ASC
505-50, the
Company uses the Black-Scholes option
F-18
BAIDU,
INC.
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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.
ASC 718-10
also requires share-based compensation to be presented in the
same manner as cash compensation rather than as a separate line
item.
Earnings
Per Share (EPS)
The Company computes earnings per Class A and Class B
ordinary shares in accordance with ASC subtopic
260-10
(ASC
260-10),
Earnings Per Share: Overall (Pre-Codification:
SFAS No. 128, Earnings per Share), using the
two class method. Under the provisions of ASC
260-10,
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. Potentially dilutive securities have been excluded
from the computation of diluted net income per share if their
inclusion is anti-dilutive. 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 ASC subtopic
260-10
(ASC
260-10),
Earnings Per Share: Overall (Pre-Codification: EITF Issue
No. 03-06,
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.
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-19
BAIDU,
INC.
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table sets forth the computation of basic and
diluted net income per Class A and Class B ordinary
shares.
(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,
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
|
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
|
|
|
428,128
|
|
|
|
200,840
|
|
|
|
772,330
|
|
|
|
275,778
|
|
|
|
1,107,191
|
|
|
|
162,204
|
|
|
|
377,913
|
|
|
|
55,365
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average of issued shares outstanding
|
|
|
23,056,501
|
|
|
|
10,816,110
|
|
|
|
25,214,154
|
|
|
|
9,003,290
|
|
|
|
25,773,593
|
|
|
|
25,773,593
|
|
|
|
8,797,198
|
|
|
|
8,797,198
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator used for basic earnings per Class A and
Class B ordinary shares
|
|
|
23,056,501
|
|
|
|
10,816,110
|
|
|
|
25,214,154
|
|
|
|
9,003,290
|
|
|
|
25,773,593
|
|
|
|
25,773,593
|
|
|
|
8,797,198
|
|
|
|
8,797,198
|
|
Basic earnings per Class A and Class B ordinary shares
|
|
|
18.57
|
|
|
|
18.57
|
|
|
|
30.63
|
|
|
|
30.63
|
|
|
|
42.96
|
|
|
|
6.29
|
|
|
|
42.96
|
|
|
|
6.29
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allocation of undistributed earnings for diluted computation
|
|
|
420,463
|
|
|
|
208,505
|
|
|
|
765,509
|
|
|
|
282,599
|
|
|
|
1,107,067
|
|
|
|
162,186
|
|
|
|
378,037
|
|
|
|
55,383
|
|
Reallocation of undistributed earnings as a result of conversion
of Class B to Class A shares
|
|
|
208,505
|
|
|
|
|
|
|
|
282,599
|
|
|
|
|
|
|
|
378,037
|
|
|
|
55,383
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allocation of undistributed earnings-diluted
|
|
|
628,968
|
|
|
|
208,505
|
|
|
|
1,048,108
|
|
|
|
282,599
|
|
|
|
1,485,104
|
|
|
|
217,569
|
|
|
|
378,037
|
|
|
|
55,383
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average ordinary shares outstanding-basic
|
|
|
23,056,501
|
|
|
|
10,816,110
|
|
|
|
25,214,154
|
|
|
|
9,003,290
|
|
|
|
25,773,593
|
|
|
|
25,773,593
|
|
|
|
8,797,198
|
|
|
|
8,797,198
|
|
Conversion of Class B to Class A ordinary shares
|
|
|
10,816,110
|
|
|
|
|
|
|
|
9,003,290
|
|
|
|
|
|
|
|
8,797,198
|
|
|
|
8,797,198
|
|
|
|
|
|
|
|
|
|
Share-based awards
|
|
|
851,754
|
|
|
|
695,130
|
|
|
|
500,046
|
|
|
|
357,512
|
|
|
|
205,576
|
|
|
|
205,576
|
|
|
|
55,210
|
|
|
|
55,210
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator used for diluted earnings per Class A and
Class B ordinary shares
|
|
|
34,724,365
|
|
|
|
11,511,240
|
|
|
|
34,717,490
|
|
|
|
9,360,802
|
|
|
|
34,776,366
|
|
|
|
34,776,366
|
|
|
|
8,852,408
|
|
|
|
8,852,408
|
|
Diluted earnings per Class A and Class B ordinary
shares
|
|
|
18.11
|
|
|
|
18.11
|
|
|
|
30.19
|
|
|
|
30.19
|
|
|
|
42.70
|
|
|
|
6.26
|
|
|
|
42.70
|
|
|
|
6.26
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recent
Accounting Pronouncements
In June 2009, the FASB issued SFAS 167, (subsequently
codified by Accounting Standards Update (ASU)
No. 2009-17
(ASU
2009-17)),
Amendments to FASB Interpretation No. 46(R), which
amends guidance regarding consolidation of variable interest
entities to address the elimination of the concept of a
qualifying special purpose entity. SFAS 167 also replaces
the quantitative-based risks and rewards calculation for
determining which enterprise has a controlling financial
interest in a variable interest entity with an approach focused
on identifying which enterprise has the power to direct the
activities of the variable interest entity, and the obligation
to absorb losses of the entity or the right to receive benefits
from the entity. Additionally, SFAS 167 requires any
enterprise that holds a variable interest in a variable interest
entity to provide enhanced disclosures that will provide users
of financial statements with more transparent information about
an enterprises involvement in a variable interest entity.
F-20
BAIDU,
INC.
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
SFAS 167 is effective for interim and annual reporting
periods beginning after November 30, 2009. The Company does
not expect the adoption of SFAS 167 will have a material
impact on its consolidated financial statements.
In October 2009, the FASB issued ASU
No. 2009-13
(ASU
2009-13),
Multiple-Deliverable Revenue Arrangements. ASU
2009-13
amends ASC
sub-topic
605-25
(ASC
605-25),
Revenue Recognition: Multiple-Element Arrangements,
regarding revenue arrangements with multiple deliverables. These
updates addresses how to determine whether an arrangement
involving multiple deliverables contains more than one unit of
accounting, and how the arrangement consideration should be
allocated among the separate units of accounting. These updates
are effective for fiscal years beginning after June 15,
2010 and to be applied retrospectively or prospectively for new
or materially modified arrangements. In addition, early adoption
is permitted. The Company does not expect the adoption of ASU
2009-13 will
have a material impact on its consolidated financial statements.
In October 2009, the FASB issued ASU
No. 2009-14
(ASU
2009-14),
Certain Revenue Arrangements That Include Software
Elements. ASU
2009-14
amends the scope of ASC
sub-topic
985-605
(ASC
985-605),
Software: Revenue Recognition, to exclude all tangible
products containing both software and non-software components
that function together to deliver the products essential
functionality. ASU
2009-14 is
effective for revenue arrangements entered into or materially
modified in fiscal years beginning on or after June 15,
2010 and is to be applied on a prospective basis. Early
application is permitted as of the beginning of an entitys
fiscal year. The Company does not expect the adoption of ASU
2009-14 will
have a material impact on its consolidated financial statements.
In January 2010, the FASB issued ASU
No. 2010-06
(ASU
2010-06),
Fair Value Measurements and Disclosures: Improving
Disclosures about Fair Value Measurements. ASU
2010-06
amends ASC 820 to require a number of additional disclosures
regarding (1) the different classes of assets and
liabilities measured at fair value, (2) the valuation
techniques and inputs used, (3) the activity in
Level 3 fair value measurements, and (4) the transfers
between Levels 1, 2, and 3. The new disclosures and
clarifications of existing disclosures are effective for interim
and annual reporting periods beginning after December 15,
2009, except for the disclosures about purchases, sales,
issuances, and settlements in the roll forward of activity in
Level 3 fair value measurements. Those disclosures are
effective for fiscal years beginning after December 15,
2010, and for interim periods within those fiscal years. The
Company does not expect that the adoption of ASU
2010-06 will
have a material impact on its consolidated financial statements.
Concentration
of Risks
Concentration
of credit risk
Financial instruments that potentially subject the Company to
significant concentration of credit risk primarily consist of
cash and cash equivalents, short-term investments and accounts
receivable. The Company has RMB4.58 billion
(US$671.13 million) in cash and cash equivalents, and
short-term investments. The Company has approximately RMB
4.18 billion (US$612.78 million) in cash, bank
deposits and money market funds in the PRC, which constitute
about 91% of total cash and cash equivalents and short-term
investments. Since the global financial crisis during the third
quarter of 2008, the risk of bankruptcy of those banks in which
the Company has deposits or investments has increased
significantly. In the event of bankruptcy of one of these
financial institutions, it may be unlikely to claim its deposits
or investments back in full. The Company continues to monitor
the financial strength of the financial institutions.
Accounts receivable are typically unsecured and derived from
revenue earned from customers and agents in China, which are
exposed to credit risk. The risk is mitigated by credit
evaluations the Company performs on its customers and its
ongoing monitoring process of outstanding balances. We maintain
reserves for estimated credit losses and these losses have
generally been within our expectations.
F-21
BAIDU,
INC.
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Business
and economic risks
The Company participates in a dynamic high technology industry
and believes that changes in any of the following areas could
have a material adverse effect on the Companys future
financial position, results of operations or cash flows: changes
in the overall demand for services and products; changes in
business offerings; competitive pressures due to new entrants;
advances and new trends in new technologies and industry
standards; changes in bandwidth suppliers; changes in certain
strategic relationships or customer relationships; regulatory
considerations; copyright regulations; and risks associated with
the Companys ability to attract and retain employees
necessary to support its growth.
No customer or any of Baidu Union member generated greater than
10% of total revenues in any of the periods presented.
The Companys operations could be adversely affected by
significant political, economic and social uncertainties in the
PRC.
Currency
convertibility risk
Substantially all of the Companys businesses are
transacted in RMB, which is not freely convertible into foreign
currencies. All foreign exchange transactions take place either
through the Peoples Bank of China or other banks
authorized to buy and sell foreign currencies at the exchange
rates quoted by the Peoples Bank of China. Approval of
foreign currency payments by the Peoples Bank of China or
other regulatory institutions requires submitting a payment
application form together with suppliers invoices,
shipping documents and signed contracts.
Foreign
currency exchange rate risk
The Companys exposure to foreign currency exchange rate
risk primarily relates to cash and cash equivalents and
short-term investments denominated in the U.S. dollar. The
functional currency of the Company is US$, and the reporting
currency is RMB. Since July 21, 2005, the RMB has been
permitted to fluctuate within a narrow and managed band against
a basket of certain foreign currencies. The appreciation of the
US$ against RMB was approximately 0.05% in 2009. Any significant
revaluation of RMB may materially and adversely affect the cash
flows, revenues, earnings and financial position, and the value
of, and any dividends payable on, the ADS in U.S. dollars.
As a result, an appreciation of RMB against the U.S. dollar
would result in foreign currency translation losses when
translating the net assets of the Company from the
U.S. dollar into RMB.
The functional currency of the subsidiaries in Japan is Japanese
Yen (JPY), and the reporting currency is RMB. During
2009, JPY depreciated by approximately 2.4% against RMB. The
depreciation of JPY against RMB results in foreign currency
translation loss when translating the net assets into RMB.
For the years ended December 31, 2007, 2008 and 2009, the
net foreign currency translation loss resulting from the
translation from the respective functional currencies to the RMB
reporting currency recorded in the Companys other
comprehensive loss was RMB48.26 million,
RMB27.60 million and RMB3.96 million
(US$0.58 million) respectively.
Comparative
Information
Certain items in prior years consolidated financial
statements have been reclassified to conform to the current
years presentation in accordance with the requirement
under eXtensible Business Reporting Language (XBRL)
to facilitate comparison.
F-22
BAIDU,
INC.
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
3.
|
SHORT-TERM
INVESTMENTS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2009
|
|
|
2009
|
|
|
|
RMB
|
|
|
RMB
|
|
|
US$
|
|
|
|
(In thousands)
|
|
|
Held-to-maturity
securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed rate investments
|
|
|
140,033
|
|
|
|
381,149
|
|
|
|
55,839
|
|
Adjustable rate investments
|
|
|
161,211
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
301,244
|
|
|
|
381,149
|
|
|
|
55,839
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the years ended December 31, 2007, 2008 and 2009,
the Company recorded short-term investment gains and interest
income of RMB5.25 million, RMB8.75 million and
RMB8.18 million (US$1.20 million) in the consolidated
statements of income, respectively.
As of December 31, 2008 and 2009, short-term investments of
RMB140.03 million and RMB381.15 million
(US$55.84 million), respectively, are fixed rate
investments with the original maturity of less than one year.
As of December 31, 2009, RMB346.71 million out of the
total fixed rate investments are six-month time deposits in
commercial banks and financial institutions. In addition, the
remaining RMB34.44 million of investment was initially
adjustable rate investments issued by a financial institution,
with the original maturity of less than one year. The adjustable
rate investment is structured notes in nature with an adjustable
interest rate depending on whether a reference equity-index is
within a predetermined range. During the year ended
December 31, 2009, the reference interest rate index was
outside of the predetermined range and thus the interest rate
became a fixed rate of 1% for the adjustable rate investment.
Therefore, as of December 31, 2009, such
RMB34.44 million of investment was recorded as fixed rate
investment.
As of December 31, 2008 and 2009, the fair value of
short-term investments is RMB304.25 million and
RMB381.50 million (US$55.89 million), respectively,
with respective gross unrecognized gain of RMB3.01 million
and RMB0.35 million (US$0.05 million).
The following table summarizes the estimated fair value of the
held-to-maturity
securities as of December 31, 2009 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
Gross
|
|
|
|
|
|
|
Carrying
|
|
Unrealized
|
|
Unrealized
|
|
Fair
|
|
Fair
|
|
|
Value
|
|
Gains
|
|
Losses
|
|
Value
|
|
Value
|
|
|
RMB
|
|
RMB
|
|
RMB
|
|
RMB
|
|
US$
|
|
Short-term investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed-rate investments
|
|
|
381,149
|
|
|
|
354
|
|
|
|
|
|
|
|
381,503
|
|
|
|
55,891
|
|
Total
|
|
|
381,149
|
|
|
|
354
|
|
|
|
|
|
|
|
381,503
|
|
|
|
55,891
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2009
|
|
|
2009
|
|
|
|
RMB
|
|
|
RMB
|
|
|
US$
|
|
|
|
(In thousands)
|
|
|
Accounts receivable
|
|
|
101,338
|
|
|
|
170,625
|
|
|
|
24,997
|
|
Less: Allowance for doubtful accounts
|
|
|
(8,561
|
)
|
|
|
(9,015
|
)
|
|
|
(1,321
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
92,777
|
|
|
|
161,610
|
|
|
|
23,676
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-23
BAIDU,
INC.
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2009
|
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
US$
|
|
|
Movements in allowance for doubtful accounts Balance at the
beginning of the year
|
|
|
4,211
|
|
|
|
3,581
|
|
|
|
8,561
|
|
|
|
1,254
|
|
Amounts (credited against) charged to costs and expenses
|
|
|
(243
|
)
|
|
|
7,390
|
|
|
|
454
|
|
|
|
67
|
|
Write-offs
|
|
|
(387
|
)
|
|
|
(2,410
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at the end of the year
|
|
|
3,581
|
|
|
|
8,561
|
|
|
|
9,015
|
|
|
|
1,321
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2009
|
|
|
2009
|
|
|
|
RMB
|
|
|
RMB
|
|
|
US$
|
|
|
|
(In thousands)
|
|
|
Deposits
|
|
|
10,777
|
|
|
|
13,736
|
|
|
|
2,012
|
|
Prepaid expenses
|
|
|
11,194
|
|
|
|
8,026
|
|
|
|
1,176
|
|
Advances to suppliers
|
|
|
9,080
|
|
|
|
8,965
|
|
|
|
1,314
|
|
Interest receivable
|
|
|
2,887
|
|
|
|
5,469
|
|
|
|
801
|
|
Receivables from employees
|
|
|
5,878
|
|
|
|
52,118
|
|
|
|
7,635
|
|
Receivables from service provider
|
|
|
1,836
|
|
|
|
2,614
|
|
|
|
383
|
|
Income taxes receivable
|
|
|
38,312
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
43
|
|
|
|
139
|
|
|
|
20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
80,007
|
|
|
|
91,067
|
|
|
|
13,341
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2009
|
|
|
2009
|
|
|
|
RMB
|
|
|
RMB
|
|
|
US$
|
|
|
|
(In thousands)
|
|
|
Office building
|
|
|
|
|
|
|
363,198
|
|
|
|
53,209
|
|
Office building related facility, machinery and equipment
|
|
|
|
|
|
|
118,844
|
|
|
|
17,411
|
|
Computer equipment
|
|
|
944,807
|
|
|
|
1,128,844
|
|
|
|
165,377
|
|
Internal use software development costs
|
|
|
26,811
|
|
|
|
44,925
|
|
|
|
6,581
|
|
Vehicles
|
|
|
4,019
|
|
|
|
4,020
|
|
|
|
589
|
|
Office equipment
|
|
|
17,134
|
|
|
|
57,687
|
|
|
|
8,451
|
|
Leasehold improvements
|
|
|
43,132
|
|
|
|
31,118
|
|
|
|
4,559
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,035,903
|
|
|
|
1,748,636
|
|
|
|
256,177
|
|
Less: Accumulated depreciation
|
|
|
(535,199
|
)
|
|
|
(766,716
|
)
|
|
|
(112,325
|
)
|
Construction in progress
|
|
|
289,010
|
|
|
|
15,637
|
|
|
|
2,291
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
789,714
|
|
|
|
997,557
|
|
|
|
146,143
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company started the construction of its new office building
in Beijing (Baidu Campus) in 2007 and completed the
construction in late 2009. Direct costs related to the
construction of Baidu Campus of RMB102.05 million,
RMB172.29 million and RMB209.20 million
(US$30.65 million) were capitalized as construction in
progress for the years ended December 31, 2007, 2008 and
2009, respectively. Construction in
F-24
BAIDU,
INC.
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
progress of RMB482.04 million (US$70.62 million) was
transferred to property, plant and equipment upon substantial
completion of the construction of Baidu Campus in November 2009.
The depreciation of Baidu Campus and its related facility,
machinery and equipment is calculated using the straight-line
method over their respective estimated useful life. In addition,
the remainder construction in progress of RMB8.73 million
(US$1.28 million) relating to Baidu Campus that has not yet
been placed in service for its intended use is anticipated to be
transferred to property, plant and equipment in 2010.
Depreciation expense was RMB170.13 million,
RMB259.64 million and RMB285.20 million
(US$41.78 million) for the years ended December 31,
2007, 2008 and 2009, respectively.
|
|
7.
|
GOODWILL
AND INTANGIBLE ASSETS
|
In 2009, Baidu Online completed acquisitions of certain
intangible assets, including domain name, software, trademark
and non-competition agreement, that met the definition of a
business acquisition in accordance with ASC subtopic
805-10
(ASC
805-10),
Business Combinations: Overall (Pre-Codification:
SFAS No. 141(R), Business Combinations). The
acquisitions resulted in the increase of intangible assets and
goodwill by RMB7.54 million (US$1.10 million) and
RMB12.61 million (US$1.85 million), respectively. The
acquisitions were insignificant either individually or in the
aggregate.
The changes in the carrying amount of goodwill are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2009
|
|
|
2009
|
|
|
|
RMB
|
|
|
RMB
|
|
|
US$
|
|
|
|
(In thousands)
|
|
|
Balance as of January 1
|
|
|
51,093
|
|
|
|
51,082
|
|
|
|
7,484
|
|
Goodwill acquired
|
|
|
|
|
|
|
12,609
|
|
|
|
1,847
|
|
Foreign currency translation adjustment
|
|
|
(11
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31
|
|
|
51,082
|
|
|
|
63,691
|
|
|
|
9,331
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible assets consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2008
|
|
|
|
Gross
|
|
|
|
|
|
Net
|
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
Carrying
|
|
|
|
Value
|
|
|
Amortization
|
|
|
Value
|
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
|
(In thousands)
|
|
|
Land use right
|
|
|
97,611
|
|
|
|
(3,091
|
)
|
|
|
94,520
|
|
Domain names
|
|
|
24,184
|
|
|
|
(12,724
|
)
|
|
|
11,460
|
|
Customer relationships
|
|
|
31,363
|
|
|
|
(15,234
|
)
|
|
|
16,129
|
|
Non-competition agreements
|
|
|
1,022
|
|
|
|
(703
|
)
|
|
|
319
|
|
Software
|
|
|
3,221
|
|
|
|
(916
|
)
|
|
|
2,305
|
|
Contract-based assets
|
|
|
210
|
|
|
|
(210
|
)
|
|
|
|
|
Trademark
|
|
|
1,050
|
|
|
|
|
|
|
|
1,050
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
158,661
|
|
|
|
(32,878
|
)
|
|
|
125,783
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-25
BAIDU,
INC.
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2009
|
|
|
|
Gross
|
|
|
|
|
|
Net
|
|
|
Net
|
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
Carrying
|
|
|
Carrying
|
|
|
|
Value
|
|
|
Amortization
|
|
|
Value
|
|
|
Value
|
|
|
|
|
|
|
RMB
|
|
|
RMB
|
|
|
US$
|
|
|
|
RMB
|
|
|
(In thousands)
|
|
|
|
|
|
Land use right
|
|
|
97,611
|
|
|
|
(5,043
|
)
|
|
|
92,568
|
|
|
|
13,561
|
|
Domain names
|
|
|
24,185
|
|
|
|
(14,567
|
)
|
|
|
9,618
|
|
|
|
1,409
|
|
Customer relationships
|
|
|
31,363
|
|
|
|
(21,165
|
)
|
|
|
10,198
|
|
|
|
1,494
|
|
Non-competition agreements
|
|
|
1,115
|
|
|
|
(936
|
)
|
|
|
179
|
|
|
|
26
|
|
Software
|
|
|
8,814
|
|
|
|
(1,616
|
)
|
|
|
7,198
|
|
|
|
1,055
|
|
Contract-based assets
|
|
|
338
|
|
|
|
(226
|
)
|
|
|
112
|
|
|
|
16
|
|
Trademark
|
|
|
2,777
|
|
|
|
(55
|
)
|
|
|
2,722
|
|
|
|
399
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
166,203
|
|
|
|
(43,608
|
)
|
|
|
122,595
|
|
|
|
17,960
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization expense for the years ended December 31, 2007,
2008 and 2009 was RMB10.29 million, RMB12.08 million
and RMB10.73 million (US$1.57 million), respectively.
Estimated amortization expense relating to the existing
intangible assets with definite lives for the each of next five
years is as follows:
|
|
|
|
|
|
|
|
|
|
|
RMB
|
|
|
US$
|
|
|
|
(In thousands)
|
|
|
For the year ending December 31,
|
|
|
|
|
|
|
|
|
2010
|
|
|
7,865
|
|
|
|
1,152
|
|
2011
|
|
|
5,313
|
|
|
|
778
|
|
2012
|
|
|
2,824
|
|
|
|
414
|
|
2013
|
|
|
1,857
|
|
|
|
272
|
|
2014
|
|
|
535
|
|
|
|
78
|
|
|
|
8.
|
ACCOUNTS
PAYABLE AND ACCRUED LIABILITIES, CURRENT
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2009
|
|
|
2009
|
|
|
|
RMB
|
|
|
RMB
|
|
|
US$
|
|
|
|
(In thousands)
|
|
|
Accrued payroll and welfare
|
|
|
61,854
|
|
|
|
95,412
|
|
|
|
13,978
|
|
Accrued operating expenses
|
|
|
102,843
|
|
|
|
162,963
|
|
|
|
23,874
|
|
Taxes payable
|
|
|
84,524
|
|
|
|
147,656
|
|
|
|
21,632
|
|
Distributors deposits
|
|
|
4,671
|
|
|
|
3,971
|
|
|
|
582
|
|
Purchase of fixed assets
|
|
|
57,414
|
|
|
|
144,214
|
|
|
|
21,127
|
|
Traffic acquisition costs
|
|
|
62,497
|
|
|
|
107,533
|
|
|
|
15,754
|
|
Bandwidth costs
|
|
|
15,680
|
|
|
|
16,417
|
|
|
|
2,405
|
|
Professional expenses
|
|
|
17,062
|
|
|
|
19,420
|
|
|
|
2,845
|
|
Other
|
|
|
16,484
|
|
|
|
52,275
|
|
|
|
7,658
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
423,029
|
|
|
|
749,861
|
|
|
|
109,855
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The increase in accrued operating expenses resulted primarily
from the incentives accrued for advertising agents.
F-26
BAIDU,
INC.
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The increase in purchase of fixed assets was mainly due to the
construction of Baidu Campus.
The increase in traffic acquisition costs was primarily due to
the growth of revenue contribution from Baidu Union members.
The Company is incorporated in the Cayman Islands and conducts
its primary business operations through the subsidiaries and
VIEs in the PRC and Japan. It also has intermediate holding
companies in the British Virgin Islands (BVI) and
Hong Kong. Under the current laws of the Cayman Islands and BVI,
the Company is not subject to tax on income or capital gains.
Additionally, upon payments of dividends by the Company to its
shareholders, no Cayman Islands and BVI withholding tax will be
imposed. Under the Hong Kong tax laws, Baidu Hong Kong is
exempted from income tax on its foreign-derived income and there
are no withholding taxes in Hong Kong on remittance of dividends.
China
Prior to January 1, 2008, the Companys subsidiaries
and VIEs were governed by the Income Tax Law of the
Peoples Republic of China concerning Foreign Investment
Enterprises (the FIE) and Foreign Enterprises, and
the Enterprise Income Tax (EIT) laws of the PRC
respectively (the Previous EIT Law). Under the
Previous EIT Law, the Companys PRC subsidiaries and
VIEs were generally subjected to enterprise income taxes at a
statutory rate of 33% (30% state income tax plus 3% local income
tax) while certain preferential tax treatments were granted for
qualified businesses. The Companys PRC subsidiaries were
entitled to preferential tax rates and special tax holidays.
|
|
|
|
|
Baidu Online, being a foreign invested enterprise, was
recognized as a Technologically Advanced Enterprise
by the Beijing Municipal Bureau of Commerce and thus entitled to
a preferential tax rate of 10% from 2006 to 2007.
|
|
|
|
Baidu China, being a foreign invested enterprise, has been
granted Software Enterprise status and thus entitled
to a tax holiday for a full exemption from EIT from
2006 to 2007, and a 50% tax reduction from 2008 to 2010.
|
|
|
|
Baidu Times, being a foreign invested enterprise, had been
recognized as a High and New Technology Enterprise
and thus entitled to a reduced EIT rate of 15% upon expiration
of the tax holiday, as well as exemption from local income tax.
The tax holiday granted to Baidu Times was for a full exemption
from EIT from 2006 to 2008, and a 50% tax reduction (at
7.5%) from 2009 to 2011.
|
On March 16, 2007, the National Peoples Congress
enacted the Enterprise Income Tax Law (the New
EIT Law), which became effective on January 1,
2008 and has replaced the previous separate income tax laws for
domestic enterprises and FIEs by adopting a unified 25%
enterprise income tax rate applicable to all resident
enterprises in China, including FIEs and foreign enterprises
operating in the PRC, except for certain entities that still
enjoyed the tax holidays which were grandfathered by the New EIT
Law or that are entitled to tax incentives under the New EIT
Law. In accordance with the implementation rules of the New EIT
Law, a qualified High and New Technology Enterprise
(HNTE) under the New EIT Law is granted the
preferential tax rate of 15%. Baidu Online and Baidu Times are
recognized as HNTE under the New EIT Law by the relevant
authorities and applied the preferential tax rate of 15% upon
receiving the HNTE certificates on February 23, 2009.
Therefore, Baidu Online enjoys the reduced EIT rate of 15% and
Baidu Times is entitled to its remaining tax holiday granted
prior to the effectiveness of the New EIT Law. Baidu China,
being a foreign invested enterprise located in Pudong, Shanghai,
has been granted the Software Enterprise status and
is thereby entitled to
2-year
exemption for years 2006 and 2007 and subsequent 50% tax rate
reduction for years 2008 to 2010. According to the relevant tax
regulations provided under the New EIT Law, Baidu China, which
has been approved as a software company, is
F-27
BAIDU,
INC.
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
entitled to the transitional arrangement in relation to tax rate
as stipulated in Guofa [2007] No. 39 and enjoys the gradual
increase in tax rate from 18% in 2008 to 25% in 2012.
Under the New EIT Law, dividends paid by a FIE to any of its
foreign non-resident enterprise investors are subject to a 10%
withholding tax, which were exempt under the Previous EIT Law.
Thus, the dividends, if and when payable by Baidu Online to
Baidu BVI, would be subject to 10% withholding tax. A lower tax
rate will be applied if such foreign non-resident enterprise
investors jurisdiction of incorporation has signed a tax
treaty or arrangement for the avoidance of double taxation and
the prevention of fiscal evasion with respect to taxes on income
with China. There is such a tax arrangement between PRC and Hong
Kong. Thus, the dividends, if and when payable by Baidu Times
and Baidu China to Baidu HK, would be subject to 5% withholding
tax rather than statutory rate of 10% provided that Baidu HK
meets the requirements stipulated by relevant PRC tax
regulations. Furthermore, pursuant to the applicable circular
and interpretations of the New EIT Law, dividends from earnings
created prior to 2008 but distributed after 2008 are not subject
to withholding income tax.
Moreover, the New EIT Law treats enterprises established outside
of China with effective management and control
located in China as PRC resident enterprises for tax purposes.
The term effective management and control is
generally defined as exercising overall management and control
over the business, personnel, accounting, properties, etc. of an
enterprise. The Company, if considered a PRC resident enterprise
for tax purposes, would be subject to the PRC Enterprise Income
Tax at the rate of 25% on its worldwide income for the period
after January 1, 2008. As of December 31, 2009, the
Company has not accrued for PRC tax on such basis. The Company
will continue to monitor its tax status.
Japan
Baidu Japan with a paid-in capital in excess of
JPY100.00 million is subject to national income tax of 30%.
Baidu Japan is also subject to inhabitants tax, assessed by both
prefectures and municipalities. Inhabitants tax is computed as a
percentage of national income tax. The per capita tax is based
on the companys capitalization and the number of
employees. In addition, Baidu Japan is subject to a corporate
enterprise tax on a pro forma basis based on the amount of
taxable profit subject to the corporate tax, added-value
components, (e.g. labor costs, net interest and rental payments,
income/loss for current year) and a capital component. Baidu
Japan has been in a cumulative loss position since its inception.
The Company had minimal operations in jurisdictions other than
the PRC and Japan. Income (loss) before income taxes consists of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2009
|
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
US$
|
|
|
|
(In thousands)
|
|
|
PRC
|
|
|
699,332
|
|
|
|
1,360,326
|
|
|
|
1,907,575
|
|
|
|
279,461
|
|
Non-PRC
|
|
|
(83,116
|
)
|
|
|
(196,147
|
)
|
|
|
(224,454
|
)
|
|
|
(32,882
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
616,216
|
|
|
|
1,164,179
|
|
|
|
1,683,121
|
|
|
|
246,579
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-28
BAIDU,
INC.
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The pre-tax losses from non-PRC operations consists primarily of
the operating costs, administration expenses, interest income
and charges for share-based compensation. Income taxes consist
of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2009
|
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
US$
|
|
|
|
(In thousands)
|
|
|
Current income tax
|
|
|
19,409
|
|
|
|
129,885
|
|
|
|
222,778
|
|
|
|
32,637
|
|
Income tax refund due to reduced transitional tax rate
|
|
|
|
|
|
|
|
|
|
|
(13,923
|
)
|
|
|
(2,040
|
)
|
Reinvestment tax refund
|
|
|
(21,198
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred income tax benefit
|
|
|
(39,691
|
)
|
|
|
(58,553
|
)
|
|
|
(62,308
|
)
|
|
|
(9,128
|
)
|
Valuation allowance
|
|
|
28,728
|
|
|
|
44,739
|
|
|
|
51,470
|
|
|
|
7,541
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(12,752
|
)
|
|
|
116,071
|
|
|
|
198,017
|
|
|
|
29,010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In 2009 the Company received a total tax refund of
RMB55.88 million for overpaid income tax of the year 2008,
out of which RMB34.40 million was the refund for overpaid
income tax attributed to Baidu Online before it obtained the
certificate of High and New Technology Enterprise, which
provides Baidu Online with the preferential tax rate of 15% from
2008 to 2010. The remaining refund of RMB21.48 million to
Baidu China was composed of RMB7.56 million for over-paid
income tax of the year 2008 and a tax refund of
RMB13.92 million resulting from the reduced transitional
tax rate granted to Baidu China, which was credited to income
tax expense upon receipt.
The reconciliation of tax computed by applying respective
statutory income tax rate to pre-tax income is as follows
(Amounts in thousands of Renminbi (RMB), and in
thousands of U.S. Dollars (US$), except for
number of shares and per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2009
|
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
US$
|
|
|
Expected taxation at PRC EIT statutory rate
|
|
|
203,352
|
|
|
|
291,045
|
|
|
|
420,780
|
|
|
|
61,645
|
|
Effect of differing tax rates in different jurisdictions
|
|
|
(1,486
|
)
|
|
|
3,533
|
|
|
|
5,101
|
|
|
|
747
|
|
Permanent differences non-taxable income
|
|
|
(1,325
|
)
|
|
|
(2,121
|
)
|
|
|
(6,640
|
)
|
|
|
(973
|
)
|
Permanent differences non-deductible expenses
|
|
|
2,410
|
|
|
|
2,703
|
|
|
|
9,001
|
|
|
|
1,319
|
|
Tax incentives relating to R&D expenditures
|
|
|
(8,791
|
)
|
|
|
(17,848
|
)
|
|
|
(9,125
|
)
|
|
|
(1,337
|
)
|
Effect of tax exemption and reduction inside PRC
|
|
|
(214,442
|
)
|
|
|
(205,980
|
)
|
|
|
(258,647
|
)
|
|
|
(37,892
|
)
|
Reinvestment tax refund
|
|
|
(21,198
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax refund due to reduced transitional tax rate
|
|
|
|
|
|
|
|
|
|
|
(13,923
|
)
|
|
|
(2,040
|
)
|
Addition to (reversal of) valuation allowance
|
|
|
28,728
|
|
|
|
44,739
|
|
|
|
51,470
|
|
|
|
7,541
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxation for the year
|
|
|
(12,752
|
)
|
|
|
116,071
|
|
|
|
198,017
|
|
|
|
29,010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective tax rate
|
|
|
(2.1
|
%)
|
|
|
9.97
|
%
|
|
|
11.76
|
%
|
|
|
11.76
|
%
|
Basic earnings per Class A and Class B ordinary shares
effect of tax exemptions and reductions inside PRC
|
|
|
6.33
|
|
|
|
6.02
|
|
|
|
7.48
|
|
|
|
1.10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The statutory EIT rate was 33% for the year ended
December 31, 2007, and 25% for the years ended
December 31, 2008 and 2009.
Baidu Online and Baidu China enjoyed an additional tax incentive
relating to its research and development expenses. The Company
has claimed an additional tax deduction amounting to 50% of the
current years research
F-29
BAIDU,
INC.
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
and development expenses. The amount that exceeds the current
years taxable profit would be carried forward for up to
the following five years in order to be utilized. In 2007, 2008
and 2009, the Company has no deductible research and development
expenses carried forward.
The Companys effective tax rate increased in fiscal year
2009 compared with 2008, primarily due to the fact that Baidu
Times had been entitled to tax exemption for year 2008 and was
subject to 7.5% tax rate for year 2009. The Companys
effective tax rate increased in fiscal year 2008 compared with
2007, primarily due to the fact that Baidu China had been
entitled to tax exemption for year 2007 and was subject to 9%
tax rate for year 2008. Another factor was due to the cessation
of reinvestment credit under the New EIT Law. Prior to the New
EIT Law, a foreign investor could apply for a tax refund when it
reinvested its share of accumulated profits from an existing FIE
to increase the registered capital of the existing FIE. In 2007,
Baidu Holdings obtained such a reinvestment tax refund, as it
increased the registered capital in Baidu Online by reinvesting
the retained earnings of Baidu Online. The preferential tax
refund was repealed under the New EIT Law.
The tax effects of temporary differences that give rise to the
deferred tax balance at December 31, 2008 and 2009 are as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31
|
|
|
|
2008
|
|
|
2009
|
|
|
2009
|
|
|
|
RMB
|
|
|
RMB
|
|
|
US$
|
|
|
|
(In thousands)
|
|
|
Provision for doubtful receivables
|
|
|
1,548
|
|
|
|
2,103
|
|
|
|
308
|
|
Fixed assets
|
|
|
24,984
|
|
|
|
37,800
|
|
|
|
5,538
|
|
Net operating loss carry-forward
|
|
|
73,357
|
|
|
|
117,964
|
|
|
|
17,282
|
|
Other
|
|
|
5,695
|
|
|
|
10,007
|
|
|
|
1,466
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax assets
|
|
|
105,584
|
|
|
|
167,874
|
|
|
|
24,594
|
|
Valuation allowance
|
|
|
(73,467
|
)
|
|
|
(124,918
|
)
|
|
|
(18,300
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax assets, net
|
|
|
32,117
|
|
|
|
42,956
|
|
|
|
6,294
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company does not believe that sufficient positive evidence
exists to conclude that the recoverability of Baidu Japan and
Baidu Hong Kongs net deferred tax assets is more likely
than not to be realized. Consequently, the Company has provided
full valuation allowances on the related net deferred tax assets.
As of December 31, 2009, the Company had net operating
losses of approximately RMB315.00 million
(US$46.00 million) from Baidu Japan, Baidu HK and BaiduPay,
which can be carried forward to offset future net profit for
income tax purposes. The Japan net operating loss will expire
beginning 2015; the PRC net operating loss will expire beginning
2014; and the HK net operating loss can be carried forward
without an expiration date.
The Company has evaluated its income tax uncertainty under ASC
740-10. ASC
740-10
clarifies 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
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 December 31, 2009, there is no significant tax
uncertainty impact on the Companys financial position and
result of operations.
The Company did not provide for deferred income taxes and
foreign withholding taxes on the undistributed earnings of
foreign subsidiaries and its VIEs as of December 31, 2008
and 2009 on the basis of its intent to permanently reinvest
foreign subsidiaries earnings. If these foreign earnings
were to be repatriated in the future, the related tax liability
may be reduced by any foreign income taxes previously paid on
these earnings. Determination of the amount of unrecognized
deferred tax liability related to these earnings is not
practicable. In the case of its VIEs, undistributed earnings
were insignificant as of each of the balance sheet dates.
F-30
BAIDU,
INC.
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
In general, the PRC and Japanese tax authorities have up to five
and seven years respectively to conduct examinations of the
Companys tax filings. Accordingly, the PRC
subsidiaries tax years
2006-2009
and the Japanese subsidiarys tax years
2006-2009
remain open to examination by the respective taxing
jurisdictions.
|
|
10.
|
EMPLOYEE
DEFINED CONTRIBUTION PLAN
|
Full time employees of the Group in the PRC participate in a
government mandated
multi-employer
defined contribution plan pursuant to which certain pension
benefits, medical care, unemployment insurance, employee housing
fund and other welfare benefits are provided to employees.
Chinese labor regulations require that the Group make
contributions to the government for these benefits based on
certain percentages of the employees salaries. The Group
has no legal obligation for the benefits beyond the required
contributions. The total amounts for such employee benefits,
which were expensed as incurred, were RMB55.12 million,
RMB98.18 million and RMB141.84 million
(US$20.78 million) for the years ended December 31,
2007, 2008 and 2009, respectively.
|
|
11.
|
COMMITMENTS
AND CONTINGENCIES
|
Capital
commitments
The Companys capital commitments relate primarily to
leasehold improvements. Total capital commitments contracted but
not yet reflected in the financial statements amounted to
RMB40.29 million (US$5.90 million) at
December 31, 2009. All of these capital commitments are to
be fulfilled within the next year.
Operating
lease commitments
The Company leases facilities in the PRC under non-cancelable
operating leases expiring on different dates. Payments under
operating leases are expensed on a straight-line basis over the
periods of the respective leases. Total rental expense under all
operating leases was RMB45.41 million,
RMB68.86 million and RMB84.43 million
(US$12.37 million) for the years ended December 31,
2007, 2008 and 2009, respectively.
Future minimum payments under non-cancelable operating leases
with initial terms of one-year or more consist of the following
at December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
RMB
|
|
|
US$
|
|
|
|
(In thousands)
|
|
|
2010
|
|
|
216,606
|
|
|
|
31,733
|
|
2011
|
|
|
18,395
|
|
|
|
2,695
|
|
2012
|
|
|
7,923
|
|
|
|
1,161
|
|
2013
|
|
|
7,923
|
|
|
|
1,161
|
|
2014
|
|
|
5,793
|
|
|
|
848
|
|
|
|
|
|
|
|
|
|
|
|
|
|
256,640
|
|
|
|
37,598
|
|
|
|
|
|
|
|
|
|
|
Litigation
Baidu Netcom, Baidu China and Baidu Online were involved in a
number of cases pending in various courts and arbitration as of
December 31, 2009. These cases include alleged copyright
infringement, unfair competition, and defamation, among others.
Adverse results in these lawsuits may include awards of damages
and may also result in, or even compel, a change in the
Companys business practices, which could result in a loss
of revenue or otherwise harm the business of the Company.
As of December 31, 2009, the plaintiffs associated with
various cases claimed an aggregate remedy of
RMB77.19 million (US$11.31 million). Although the
results of litigation and claims cannot be predicted with
F-31
BAIDU,
INC.
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
certainty, the Company does not expect that the outcome of the
matters referred to above will result in a material adverse
effect on its business, consolidated financial position, results
of operations or cash flow.
Upon completion of the companys initial public offering
(IPO) in August 2005, 16,648,877 Class B
Ordinary shares were issued upon conversion of all convertible
preferred shares. In addition, immediately following the closing
of the IPO, the Memorandum and Articles of Association were
amended and restated such that the authorized share capital
consisted of 870,400,000 ordinary shares at a par value of
US$0.00005 per share, of which 825,000,000 shares were
designated as Class A ordinary shares, 35,400,000 as
Class B ordinary shares, and 10,000,000 shares
designated as preferred shares. The rights of the holders of
Class A and Class B ordinary shares are identical, except
with respect to voting and conversion rights. Each share of
Class A ordinary shares is entitled to one vote per share
and is not convertible into Class B ordinary shares under
any circumstances. Each share of Class B ordinary shares is
entitled to ten votes per share and is convertible into one
Class A ordinary share at any time by the holder thereof.
Upon any transfer of Class B ordinary shares by the holder
thereof to any person or entity that is not an affiliate of such
holder, such Class B ordinary shares would be automatically
converted into an equal number of Class A ordinary shares.
There were 2,133,176, 122,856 and 419,654 Class B ordinary
shares transferred to Class A ordinary shares in 2007, 2008
and 2009, respectively.
As of December 31, 2009 there were 26,298,960 and 8,454,332
Class A and Class B ordinary shares outstanding,
respectively.
As of December 31, 2008 and 2009, there were no preferred
shares issued and outstanding.
On December 16, 2008, a resolution was passed during the
2008 annual general meeting of shareholders authorizing the
Company to repurchase its Class A ordinary shares
represented by American depositary shares (ADSs)
before the end of 2009. As part of its share repurchase program,
the Company entered into two types of share repurchase
arrangement with a financial institution as follows:
(a) In December 2008 and March 2009, the Company entered
into a structured share repurchase program which required the
Company to make an upfront cash payment in exchange for the
right to receive either the Companys own ordinary shares
or cash at the expiration of the agreement, depending on the
closing price of the Companys ordinary share at the
maturity date. Pursuant to the structured share repurchase
program, the Company made upfront payments of
US$10.00 million and US$20.00 million to the financial
institution in December 2008 and March 2009, respectively. The
upfront cash payments were recorded in shareholders equity
as a reduction to additional paid-in capital in accordance with
ASC subtopic
815-40
(ASC
815-40),
Derivatives and Hedging: Contracts in Entitys Own
Equity (Pre-Codification: EITF Issue
No. 00-19,
Accounting for Derivative Financial Instruments Indexed to,
and Potentially Settled in, a Companys Own Stock). At
the maturity dates in March and June 2009, the Company received
its upfront cash payments with premium of US$0.84 million
and US$0.73 million, respectively, from the financial
institution. The settlement amounts of US$10.84 million and
US$20.73 million received by the Company were treated as
equity transactions and were credited to additional paid-in
capital.
(b) In December 2008 and March 2009, the Company also
entered into a preset share repurchase program which engaged the
financial institution to act as a broker on behalf of the
Company to repurchase ADSs in the open market based on a
predetermined quantity and price range. Pursuant to the preset
share repurchase program, the Company made an upfront payment of
US$10.00 million and US$20.00 million to the financial
institution in December 2008 and March 2009, respectively, to
repurchase up to an aggregate of US$10.00 million and
US$20.00 million of ADSs during an agreed period. The
Company had the right to cancel the preset repurchase program
with the financial institution at any time so long as the
Company provided a
three-day
notice to the financial institution. The upfront
US$10 million cash had no restriction otherwise and could
have been withdrawn by the Company at any time. The Company
repurchased 32,740 ordinary shares from the open
F-32
BAIDU,
INC.
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
market during the agreed periods for an aggregate purchase price
of US$3.57 million, including transaction costs of
US$982.00. The repurchased shares were considered cancelled
under Cayman Islands law upon repurchase and the difference
between the par value and the repurchase price was debited to
retained earnings.
In accordance with the Regulations on Enterprises with Foreign
Investment of China and their articles of association, the
Companys PRC subsidiaries, being foreign invested
enterprises established in China, are required to provide for
certain statutory reserves, namely a general reserve fund, an
enterprise expansion fund, a staff welfare fund and a bonus
fund, all of which are appropriated from net profit as reported
in their PRC statutory accounts. Each of the Companys
subsidiaries is required to allocate at least 10% of its
after-tax profits to a general reserve fund until such fund has
reached 50% of its respective registered capital. Appropriations
to the enterprise expansion fund and staff welfare and bonus
funds are at the discretion of the board of directors of the
Companys subsidiaries.
In accordance with the China Company Laws, the Companys
VIEs must make appropriations from their after-tax profits as
reported in their PRC statutory accounts to non-distributable
reserve funds, namely a statutory surplus fund, a statutory
public welfare fund and a discretionary surplus fund. Each of
the Companys VIEs is required to allocate at least 10% of
its after-tax profits to the statutory surplus fund until such
fund has reached 50% of its respective registered capital.
Appropriation to the statutory public welfare fund is 5% to 10%
of the after-tax profits as reported in the PRC statutory
accounts. Effective from January 1, 2006, under the revised
China Company Laws, appropriation to the statutory public
welfare fund is no longer mandatory. Appropriations to the
discretionary surplus fund are made at the discretion of the
Companys VIEs.
General reserve and statutory surplus funds are restricted to
set-off against losses, expansion of production and operation
and increasing registered capital of the respective company.
Staff welfare and bonus fund and statutory public welfare funds
are restricted to capital expenditures for the collective
welfare of employees. The reserves are not allowed to be
transferred to the Company in terms of cash dividends, loans or
advances, nor are they allowed for distribution except under
liquidation.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2009
|
|
|
2009
|
|
|
|
RMB
|
|
|
RMB
|
|
|
US$
|
|
|
|
(In thousands)
|
|
|
PRC statutory reserve funds
|
|
|
136,034
|
|
|
|
187,675
|
|
|
|
27,495
|
|
Unreserved retained earnings
|
|
|
1,843,810
|
|
|
|
3,252,854
|
|
|
|
476,546
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,979,844
|
|
|
|
3,440,529
|
|
|
|
504,041
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Under PRC laws and regulations, there are restrictions on the
Companys PRC subsidiaries and VIEs with respect to
transferring certain of their net assets to the Company either
in the form of dividends, loans, or advances. Amounts restricted
include paid up capital and statutory reserve funds of the
Companys PRC subsidiaries and the net assets of VIEs in
which the Company has no legal ownership, totaling approximately
RMB803.77 million and RMB879.43 million
(US$128.84 million) as of December 31, 2008 and 2009,
respectively.
|
|
14.
|
SHARE-BASED
AWARDS PLAN
|
Incentive
Compensation Plans
In January 2000, the Company adopted the 2000 Option Plan (the
2000 Plan). The 2000 Plan provides for the granting
of share options and restricted ordinary shares to employees and
consultants of the Company. Options granted under the 2000 Plan
may be either incentive share options or nonqualified share
options. Incentive share options (ISO) may be
granted only to Company employees (including officers and
directors who are also employees). Nonqualified share options
(NSO) may be granted to Company employees and
consultants. The Company has reserved 5,040,000 ordinary shares
for issuance under the 2000 Plan. Under the 2000 Plan, which
F-33
BAIDU,
INC.
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
expires in ten years, options granted generally vest 25% after
the first year of service and ratably each month over the
remaining
36-month
period.
Under the 2000 Plan, the employees may exercise their options
immediately, if such provisions are set forth in the award
agreement, but the Company has a right to repurchase unvested
shares at the amount equal to the original purchase price paid
by the grantee for each such share. The right to repurchase
lapses at the rate of at least twenty percent of the shares
subject to the award per year over five years from the date the
award is granted (without respect to the date the award was
exercised or became exercisable). Such repurchase right is
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. The contractual term of options
granted is generally five years.
In December 2008, the Company amended the 2000 Plan by adding a
new section regarding adjustment of exercise price. The exercise
price per share subject to an option may be amended or adjusted
in the absolute discretion of the 2000 Plan administrator, which
is the Board of Directors, and the determination of which shall
be final, binding and conclusive. A downward adjustment of the
exercise prices shall be effective without the approval of the
Companys shareholders or the approval of the affected
grantees.
Starting from February 15, 2006, the Company has granted
restricted Class A ordinary shares (Restricted
Shares) of the Company under the 2000 Plan, which
generally vest 50% after the first year of service and ratably
each month over the remaining
12-month
period. Terms for Restricted Shares are the same as share
options except that Restricted Shares do not require exercise
and generally have a two-year vesting term. The contractual term
of Restricted Shares granted is generally five years.
In December 2008, the Company adopted a share incentive plan
(the 2008 Plan). The 2008 Plan provides for the
granting of share incentives, which include ISO, restricted
shares and any other form of award pursuant to the 2008 Plan, to
members of the board, employees and consultants of the Company.
However, the Company may grant ISOs only to its employees. The
Company has reserved 3,428,777 ordinary shares for issuance
under the 2008 Plan, which expires in ten years. The vesting
schedule, time and condition to exercise options will be
determined by the compensation committee. The term of the
options 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 the
Companys share capital.
Under the 2008 Plan, the exercise price per share subject to an
option may be amended or adjusted at the discretion of the
compensation committee, and the determination of which shall be
final, binding and conclusive. To the extent not prohibited by
applicable laws or exchange rules, a downward adjustment of the
exercise prices shall be effective without the approval of the
Companys shareholders or the approval of the affected
grantees. If the Company grants 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 the Companys share
capital, the exercise price cannot be less than 110% of the fair
market value of the Companys ordinary shares on the date
of that grant.
F-34
BAIDU,
INC.
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table summarizes the option activity for the year
ended December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Weighted-
|
|
Remaining
|
|
Aggregate
|
|
|
Number of
|
|
Average
|
|
Contractual
|
|
Intrinsic
|
Share Option
|
|
Shares
|
|
Exercise Price
|
|
Life (Years)
|
|
Value (US$)
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
Outstanding, December 31, 2008
|
|
|
328,093
|
|
|
US$72.06
|
|
|
1.95
|
|
|
|
24,681
|
|
Granted
|
|
|
57,739
|
|
|
US$133.86
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(198,296
|
)
|
|
US$30.39
|
|
|
|
|
|
|
|
|
Forfeited/Cancelled
|
|
|
(31,386
|
)
|
|
US$260.31
|
|
|
|
|
|
|
|
|
Expired
|
|
|
(1,476
|
)
|
|
US$25.64
|
|
|
|
|
|
|
|
|
Outstanding, December 31, 2009
|
|
|
154,674
|
|
|
US$110.80
|
|
|
2.56
|
|
|
|
46,469
|
|
Vested and expected to vest at December 31, 2009
|
|
|
149,441
|
|
|
US$110.11
|
|
|
2.53
|
|
|
|
45,000
|
|
Exercisable at December 31, 2009
|
|
|
74,996
|
|
|
US$88.07
|
|
|
1.50
|
|
|
|
24,236
|
|
The aggregate intrinsic value in the table above represents the
difference between the Companys closing stock price on the
last trading day in 2009 and the exercise price.
Total intrinsic value of options exercised for the three years
ended December 31, 2007, 2008 and 2009 was
RMB559.59 million, RMB465.25 million and
RMB340.13 million (US$49.83 million), respectively.
As of December 31, 2009, there was RMB36.45 million
(US$5.34 million) unrecognized share-based compensation
cost related to share options. That deferred cost is expected to
be recognized over a weighted-average vesting period of
2.60 years. To the extent the actual forfeiture rate is
different from original estimate, actual share-based
compensation costs related to these awards may be different from
the expectation.
On February 11 2009, the Company cancelled options previously
granted to certain executives with the exercise price
significantly higher than the fair market value at that time,
and concurrently re-granted the same number of options at the
then current fair market value. The vesting of the replacement
option starts from the date of grant, and all other terms remain
the same as the original option. The cancellation and re-grant
was intended to provide incentives for these executives. In
accordance with ASC
718-10, the
Company accounted for the cancellation of an award accompanied
by the concurrent grant of a replacement award as a modification
of the terms of the cancelled award. Therefore, incremental
compensation cost was measured as the excess of the fair value
of the replacement award over the fair value of the cancelled
award at the cancellation date. The total compensation cost
measured at the date of cancellation and replacement was
US$2.96 million, representing the portion of the grant-date
fair value of the original award for which the requisite service
is expected to be rendered (or has already been rendered) at
that date of US$2.36 million plus the incremental cost
resulting from the cancellation and replacement of
US$0.60 million. The cost is being amortized on a
straight-line basis over the vesting term of four years of the
replacement option.
Restricted
Shares
Restricted shares activity for the year ended December 31,
2009 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
Average
|
|
|
|
|
Grant Date
|
Restricted Shares
|
|
Number of Shares
|
|
Fair Value
|
|
Nonvested, December 31, 2008
|
|
|
82,382
|
|
|
US$
|
210.76
|
|
Granted
|
|
|
40,223
|
|
|
US$
|
214.55
|
|
Vested
|
|
|
(71,903
|
)
|
|
US$
|
199.69
|
|
Forfeited
|
|
|
(3,008
|
)
|
|
US$
|
211.19
|
|
Nonvested, December 31, 2009
|
|
|
47,694
|
|
|
US$
|
224.34
|
|
F-35
BAIDU,
INC.
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
As of December 31, 2009, there was RMB53.79 million
(US$7.88 million) unrecognized share-based compensation
cost related to restricted shares. That deferred cost will be
recognized over a weighted-average vesting period of
1.24 years. To the extent the actual forfeiture rate is
different from the original estimate, actual share-based
compensation costs related to these awards may be different from
the expectation.
The fair value of each option award was estimated on the date of
grant using the Black-Scholes Method valuation model. The
volatility assumption was estimated based on implied volatility
and historical volatility of the Companys share price
applying the guidance provided by ASC subtopic
718-10
(ASC
718-10),
Compensation-Stock Compensation: Overall
(Pre-Codification: SAB 107, Share-Based Payment).
Assumptions about the expected term were based on the vesting
and contractual terms and employee demographics. The Company
considered the comparable data in 2007 and 2008 because the
Company had limited relevant historical information to support
the expected exercise behavior of employees who had been granted
options as the Company has been a public company only since
August 2005. The Company begins to estimate the volatility
assumption solely based on its historical information since
2009. The risk-free rate for periods within the contractual life
of the option is based on the U.S. Treasury yield curve in
effect at the time of grant.
The following table presents the assumptions used to estimate
the fair values of the share options granted in the periods
presented:
|
|
|
|
|
|
|
|
|
2007
|
|
2008
|
|
2009
|
|
Risk-free interest rate
|
|
4.54%~5.03%
|
|
1.74%~2.60%
|
|
1.18%
|
Dividend yield
|
|
|
|
|
|
|
Expected volatility range
|
|
63.94%~72.90%
|
|
63.52%~70.82%
|
|
85.43%
|
Weighted average expected volatility
|
|
68.28%
|
|
66.54%
|
|
85.43%
|
Expected life (in years)
|
|
1~2.6
|
|
1.63~2.64
|
|
2.65
|
In addition, the Company applies an expected forfeiture rate in
determining the grant date fair value of the option grants. The
estimation of the forfeiture rate was based primarily upon
historical experience of employee turnover. To the extent the
Company revises this estimate in the future, the share-based
payments could be materially impacted in the quarter of
revision, as well as in following quarters. During the year
ended December 31, 2009, the Company decreased the
forfeiture rate for the employee group primarily due to changes
in historical employee turnover rates.
The table below summarizes the weighted average fair value and
exercise price of share options granted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
|
US$
|
|
|
US$
|
|
|
US$
|
|
|
Weighted average grant-date fair value of share options granted
during the year:
|
|
|
|
|
|
|
|
|
|
|
|
|
Where exercise price is lower than market price
|
|
|
|
|
|
|
|
|
|
|
|
|
Where exercise price is equal to market price
|
|
|
57.02
|
|
|
|
136.97
|
|
|
|
94.10
|
|
Weighted average exercise price of share options granted during
the year:
|
|
|
|
|
|
|
|
|
|
|
|
|
Where exercise price is lower than market price
|
|
|
|
|
|
|
|
|
|
|
|
|
Where exercise price is equal to market price
|
|
|
131.09
|
|
|
|
247.05
|
|
|
|
133.86
|
|
The total fair value of shares vested during the year ended
December 31, 2007, 2008 and 2009 was RMB14.86 million,
RMB37.57 million, RMB201.83 million
(US$29.57 million), respectively.
F-36
BAIDU,
INC.
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Total compensation cost recognized is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2009
|
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
US$
|
|
|
|
(In thousands)
|
|
|
Cost of revenues
|
|
|
1,717
|
|
|
|
4,542
|
|
|
|
6,374
|
|
|
|
934
|
|
Selling, general and administrative
|
|
|
17,371
|
|
|
|
41,651
|
|
|
|
38,681
|
|
|
|
5,667
|
|
Research and development
|
|
|
20,760
|
|
|
|
37,784
|
|
|
|
41,263
|
|
|
|
6,045
|
|
Share-based compensation cost capitalized as part of internally
used software in fixed assets
|
|
|
714
|
|
|
|
2,706
|
|
|
|
1,217
|
|
|
|
178
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
40,562
|
|
|
|
86,683
|
|
|
|
87,535
|
|
|
|
12,824
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15.
|
RELATED
PARTY TRANSACTIONS
|
Employees who exercise their options with cash will be required
to pay individual income tax (IIT) through the
Company. As of December 31, 2008, the Company accrued
withholding individual income tax for one employee, who is also
one of the major shareholders, of RMB10.70 million
(US$1.57 million). The balance was subsequently paid by the
employee to the tax authority through the Company in February
2009. No balances were due from any shareholders, officers or
directors as of December 31, 2009.
In accordance with ASC subtopic
280-10
(ASC
280-10),
Segment Reporting: Overall (Pre-Codification:
SFAS 131, Disclosures about segments of an Enterprise
and Related Information), the Companys chief operating
officer relies upon consolidated results of operations when
making decisions about allocating resources and assessing
performance of the Company; hence, the Company has only one
single operating segment. The Company does not distinguish
between markets or segments for the purpose of internal
reporting.
The Companys revenue and long-lived assets are primarily
derived from and located in the PRC and Japan.
|
|
17.
|
FAIR
VALUE MEASUREMENT
|
Effective January 1, 2008, the Group adopted ASC subtopic
820-10
(ASC
820-10),
Fair Value Measurements and Disclosures: Overall
(Pre-Codification: SFAS 157, Fair Value
Measurement). ASC
820-10
defines fair value, establishes a framework for measuring fair
value and expands disclosures about fair value measurements.
Although the adoption of ASC
820-10 did
not impact the Groups financial condition, results of
operations, or cash flow, ASC
820-10
requires additional disclosures to be provided on fair value
measurement.
ASC 820-10
establishes a three-tier fair value hierarchy, which prioritizes
the inputs used in measuring fair value as follows:
Level 1 Observable inputs that reflect
quoted prices (unadjusted) for identical assets or liabilities
in active markets
Level 2 Include other inputs that are
directly or indirectly observable in the marketplace
Level 3 Unobservable inputs which are
supported by little or no market activity
ASC 820-10
describes three main approaches to measuring the fair value of
assets and liabilities: (1) market approach;
(2) income approach and (3) cost approach. The market
approach uses prices and other relevant information generated
from market transactions involving identical or comparable
assets or liabilities. The income approach uses valuation
techniques to convert future amounts to a single present value
amount. The measurement is
F-37
BAIDU,
INC.
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
based on the value indicated by current market expectations
about those future amounts. The cost approach is based on the
amount that would currently be required to replace an asset.
In accordance with ASC
820-10, the
Company measures cash equivalents and short-term investments at
fair value. Cash equivalents are classified within Level 1
or Level 2. This is because cash equivalents are valued
using either quoted market prices or discounted cash flow model
with market interest rates as discount curve. The Companys
short-term investments were classified as
held-to-maturity
securities and stated at amortized cost. The fair value of
short-term investments was determined based on discounted cash
flow model with market interest rates as discount curve.
Assets measured at fair value on a recurring basis are
summarized below (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurement at Reporting Date Using
|
|
|
|
|
|
|
Quoted Prices in
|
|
|
Significant Other
|
|
|
Significant
|
|
|
|
|
|
|
Active Markets for
|
|
|
Observable
|
|
|
Unobservable
|
|
|
|
Total Fair Value at
|
|
|
Identical Assets
|
|
|
Inputs
|
|
|
Inputs
|
|
Description
|
|
December 31, 2009
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
|
(RMB)
|
|
|
(US$)
|
|
|
(RMB)
|
|
|
(RMB)
|
|
|
(RMB)
|
|
|
Cash equivalents
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Time deposits
|
|
|
1,658,678
|
|
|
|
242,998
|
|
|
|
1,658,678
|
|
|
|
|
|
|
|
|
|
Money market fund
|
|
|
234,782
|
|
|
|
34,396
|
|
|
|
234,782
|
|
|
|
|
|
|
|
|
|
Short-term Investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed-rate investments
|
|
|
381,503
|
|
|
|
55,890
|
|
|
|
|
|
|
|
381,503
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
2,274,963
|
|
|
|
333,284
|
|
|
|
1,893,460
|
|
|
|
381,503
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18.
|
SUBSEQUENT
EVENTS (UNAUDITED)
|
On September 28, 2008, the Company entered into agreements
with UiTV, a third-party operator of an Internet television
platform in China, pursuant to which UiTV would operate the
Baidu Internet TV Channel host on the Companys website at
movie.baidu.com. The agreements were terminated in December
2009. In February 2010, the Company and Providence Equity
Partners, a private equity firm, signed an agreement, pursuant
to which Providence Equity Partners invested
US$50.00 million in March 2010 to subscribe for convertible
redeemable preferred shares of Ding Xin, Inc., a Cayman
Islands company newly established by the Company. Ding Xin, Inc.
and entities under its control will operate the Baidu Internet
TV channel and develop an advertising supported online video
business.
On January 18, 2010, the Company entered into certain
agreements with Ku6 Holding Limited (Ku6) and
Hurray! Holding Co., Ltd. (Hurray!). Pursuant to the
agreements, Baidu agreed to exchange 8,641,975 series A
preferred shares of Ku6, which is all of Ku6 shares held by
the Company, into 12,561,924 ordinary shares of Hurray!. The
series A preferred shares of Ku6 were obtained on
December 12, 2006 by providing online market services and
the related investment had been fully impaired during 2008. The
acquired ordinary shares of Hurray! are subject to a
lock-up
period of 180 days during which the Company could not
offer, pledge, sell, contract to sell or enter into any swap or
other arrangement to transfer, in whole or in part of the shares
to others.
On January 27, 2010, the Company signed an agreement with
Rakuten, Inc. (Rakuten), the largest
e-commerce
website in Japan, to establish a joint venture to build a B2B2C
online shopping mall for Chinese Internet users. B2B2C refers to
an online marketplace that links and provides value-added
services to both business to business and business to consumer.
The online mall will provide customers with high-quality
merchandise from well-known Chinese and foreign brands as well
as small and medium sized enterprises at competitive prices.
According to the agreement, Rakuten will own 51% and Baidu will
own 49% of the new joint venture.
F-38