FORM 6-K
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
REPORT OF FOREIGN ISSUER
PURSUANT TO RULE 13a-16 OR 15d-16 OF THE
SECURITIES EXCHANGE ACT OF 1934
For the month of May 2003
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Commission File Number: 333-100069
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NETEASE.COM, INC.
Suite 1901, Tower E3
The Towers, Oriental Plaza
Dong Cheng District
Beijing, People's Republic of China 100738
(Address of principal executive offices)
Indicate by check mark whether the registrant files or will file annual
reports under cover Form 20-F or Form 40-F.
Form 20-F X Form 40-F
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Indicate by check mark if the registrant is submitting the Form 6-K in
paper as permitted by Regulation S-T Rule 101(b)(1):__________
Indicate by check mark if the registrant is submitting the Form 6-K in
paper as permitted by Regulation S-T Rule 101(b)(7):__________
Indicate by check mark whether by furnishing the information contained in
this Form, the registrant is also thereby furnishing the information to the
Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of
1934.
Yes No X
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If "Yes" is marked, indicate below the file number assigned to the
registrant in connection with Rule 12g3-2(b): 82- __N.A.__
The index of exhibits may be found at Page 2
NETEASE.COM, INC.
Form 6-K
TABLE OF CONTENTS
Notice of Annual General Meeting of Shareholders and Proxy Statement for 2003 Annual General Exhibit 99.1
Meeting
Form of Proxy Card for Holders of Ordinary Shares Exhibit 99.2
Form of Voting Instruction Card to The Bank of New York for Holders of American Depositary Exhibit 99.3
Shares
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
NETEASE.COM, INC.
By: /s/ Ted Sun
-------------------------
Name: Mr. Ted Sun
Title: Acting Chief Executive Officer
and Director
Date: May 6, 2003
Exhibit 99.1
NetEase.com, Inc.
Suite 1901, Tower E3, The Towers
Oriental Plaza, Dong Cheng District, Beijing
People's Republic of China 100738
NOTICE OF ANNUAL GENERAL MEETING OF SHAREHOLDERS
To Be Held on June 5, 2003
NOTICE IS HEREBY GIVEN that the annual general meeting of shareholders of
NetEase.com, Inc. will be held on June 5, 2003 at 10:00 a.m., Beijing time, at
our principal executive offices, Suite 1901, Tower E3, The Towers, Oriental
Plaza, Dong Cheng District, Beijing, People's Republic of China, for the
following purposes:
1. To re-elect seven directors to serve for the ensuing year and until
their successors are elected and duly qualified.
2. To appoint PricewaterhouseCoopers as independent auditors of
NetEase.com, Inc. for the fiscal year ending December 31, 2003.
3. To approve AS A SPECIAL RESOLUTION the proposal "THAT the articles
numbered 114 to 117 (inclusive) in NetEase.com, Inc.'s Articles of
Association be and are hereby deleted in their entirety." This would
remove the provisions related to the composition, duties and operations
of the audit committee of the board of directors, which provisions will
be replaced by a new audit committee charter that has been adopted by
the board of directors and will become effective upon shareholder
approval of this proposal as a special resolution.
4. To authorize NetEase.com, Inc.'s board of directors, in its discretion,
to cause NetEase.com to repurchase ordinary shares or American
Depositary Receipts representing ordinary shares of NetEase.com from
time to time and at any time through open-market transactions, block
purchases or privately negotiated transactions at such prices and terms
as determined by the board of directors, out of funds legally available
therefore and subject to applicable law; provided that no such share
repurchase shall be implemented for the purpose of materially reducing
the liquidity of NetEase.com's securities on the Nasdaq National Market
or of engaging in a "going private" transaction.
5. To transact such other business as may properly come before the meeting
or any adjournment or postponement thereof.
The foregoing items of business are more fully described in the proxy
statement which is attached and made a part of this notice. Holders of record
of our ordinary shares or American Depositary Shares representing those shares
at the close of business on April 22, 2003 are entitled to vote at the annual
general meeting.
FOR THE BOARD OF DIRECTORS
/s/ Ted Sun
-----------------------------
Ted Sun
Member of the Board of Directors and
Acting Chief Executive Officer
Beijing, China
May 5, 2003
YOUR VOTE IS IMPORTANT
To ensure your representation at the annual meeting, you are urged to mark,
sign, date and return the enclosed proxy as promptly as possible in the
accompanying envelope. If you attend the meeting, you may vote in person even
if you returned a proxy.
NETEASE.COM, INC.
PROXY STATEMENT
General
We are soliciting the enclosed proxy on behalf of our board of directors for
use at the annual general meeting of shareholders to be held on June 5, 2003 at
10:00 a.m., Beijing time, or at any adjournment or postponement thereof. The
annual general meeting will be held at our principal executive offices, Suite
1901, Tower E3, The Towers, Oriental Plaza, Dong Cheng District, Beijing,
People's Republic of China 100738.
This proxy statement and the form of proxy are first being mailed to
shareholders on or about May 5, 2003.
Revocability of Proxies
Any proxy given pursuant to this solicitation may be revoked by the person
giving it at any time before its use by delivering a written notice of
revocation or a duly executed proxy bearing a later date or, if you hold
ordinary shares, by attending the meeting and voting in person. A written
notice of revocation must be delivered to the attention of Mr. Denny Lee, our
Chief Financial Officer and a director, if you hold our ordinary shares, or to
The Bank of New York if you hold American Depositary Shares, known as ADSs,
representing our ordinary shares.
Record Date, Share Ownership and Quorum
Shareholders of record at the close of business on April 22, 2003 are
entitled to vote at the annual general meeting. Our ordinary shares underlying
ADSs are included for purposes of this determination. At the record date,
3,126,654,089 of our ordinary shares, par value US$0.0001 per share, were
issued and outstanding, of which approximately 1,335,402,800 were represented
by ADSs. The presence of at least two ordinary shareholders in person or by
proxy will constitute a quorum for the transaction of business at the annual
general meeting; provided, however, that in no case shall such quorum represent
less than 33 1/3% of our outstanding ordinary shares.
Voting and Solicitation
Each share outstanding on the record date is entitled to one vote. Voting at
the annual general meeting will be by a show of hands unless the chairman of
the meeting or any shareholder present in person or by proxy demands that a
poll be taken.
The costs of soliciting proxies will be borne by our company. Proxies may be
solicited by certain of our directors, officers and regular employees, without
additional compensation, in person or by telephone or electronic mail. Copies
of solicitation materials will be furnished to banks, brokerage houses,
fiduciaries and custodians holding in their names shares of our common stock or
ADSs beneficially owned by others to forward to those beneficial owners. We may
reimburse persons representing beneficial owners of shares of common stock and
ADSs for their costs of forwarding solicitation materials to those beneficial
owners.
Voting by Holders of Ordinary Shares
When proxies are properly dated, executed and returned by holders of
ordinary shares, the shares they represent will be voted at the annual general
meeting in accordance with the instructions of the shareholder. If no specific
instructions are given by such holders, the shares will be voted FOR proposals
1, 2, 3 and 4 and in the proxy holder's discretion as to other matters that may
properly come before the annual general meeting. Abstentions by holders of
ordinary shares are included in the determination of the number of shares
present and voting but are not counted as votes for or against a proposal.
Broker non-votes will not be counted towards a quorum or for any purpose in
determining whether the proposal is approved.
Voting by Holders of American Depositary Shares
The Bank of New York, as depositary of the ADSs, has advised us that it
intends to mail to all owners of ADSs this proxy statement, the accompanying
notice of annual general meeting and an ADR Voting Instruction Card. Upon the
written request of an owner of record of ADSs, The Bank of New York will
endeavor, to the extent practicable, to vote or cause to be voted the amount of
shares represented by the ADSs, evidenced by American Depositary Receipts
related to those ADSs, in accordance with the instructions set forth in such
request. The Bank of New York has advised us that it will not vote or attempt
to exercise the right to vote other than in accordance with those instructions.
As the holder of record for all the shares represented by the ADSs, only The
Bank of New York may vote those shares at the annual general meeting.
The Bank of New York and its agents are not responsible if they fail to
carry out your voting instructions or for the manner in which they carry out
your voting instructions. This means that if the ordinary shares underlying
your ADSs are not able to be voted at the annual general meeting, there may be
nothing you can do.
If (i) the enclosed ADR Voting Instruction Card is signed but is missing
voting instructions, (ii) the enclosed ADR Voting Instruction Card is
improperly completed or (iii) no ADR Voting Instruction Card is received by The
Bank of New York from a holder of ADSs prior to the annual general meeting, The
Bank of New York will deem such holder of ADSs to have instructed it to give a
proxy to the chairman of the annual general meeting to vote in favor of each
proposal recommended by our board of directors and against each proposal
opposed by our board of directors.
Deadline for Shareholder Proposals
Proposals which our shareholders wish to be considered for inclusion in our
proxy statement and proxy card for the 2004 annual general meeting must be
received by January 5, 2004 at Suite 1901, Tower E3, The Towers, Oriental
Plaza, Dong Cheng District, Beijing, People's Republic of China 100738 and must
comply with the requirements of Rule 14a-8 under the Securities Exchange Act of
1934, as amended. The submission of a proposal does not assure that it will be
included in the proxy statement or the proxy card. If Denny Lee, our Chief
Financial Officer and a director, is not notified of a shareholder proposal by
March 21, 2004, then the proxies held by our management provide discretionary
authority to vote against such shareholder proposal at the 2004 annual general
meeting, even though such shareholder proposal is not discussed in the proxy
statement.
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PROPOSAL 1
ELECTION OF DIRECTORS
The board of directors has nominated all of our seven current directors for
re-election at the 2003 annual general meeting. Each director to be elected
will hold office until the next annual general meeting of shareholders and
until such director's successor is elected and is duly qualified, or until such
director's earlier death, bankruptcy, insanity, resignation or removal. All of
the nominees, other than Ronald Lee, Michael Leung and Joseph Tong, have been
previously elected by our shareholders. Our Articles of Association presently
authorize up to ten board positions. Proxies cannot, however, be voted for a
greater number of persons than the number of nominees named in this proxy
statement.
Shares represented by executed proxies will be voted, if authority to do so
is not withheld, for the election of the seven nominees named below. The board
has no reason to believe that each of the nominees named below will be unable
or unwilling to serve as a director if elected. In the event that any nominee
should be unavailable for election as a result of an unexpected occurrence,
such shares will be voted for the election of such substitute nominee as
management may propose.
The names of the nominees, their ages as of April 22, 2003 and the principal
positions with NetEase held by them are as follows:
Name Age Position
---- --- --------
William Ding..... 31 Director and Chief Architect
Ted Sun.......... 35 Director and Acting Chief Executive Officer
Denny Lee........ 35 Director and Chief Financial Officer
Ronald Lee....... 38 Director
Michael Leung (1) 49 Director
Joseph Tong (1).. 40 Director
Michael Tong (1). 31 Director
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(1) Member of the audit committee. Mary Nee was a member of our audit committee
until May 15, 2002 when she stepped down from that committee, and our board
appointed John Lau to fill the vacancy. Ms. Nee later resigned from our
board in July 2002. In addition, on June 5, 2002, Kathy Xu resigned from
our board and the audit committee, and Ronald Lee was appointed on that day
to fill both vacancies. Michael Leung replaced Mr. Lee on the audit
committee on July 11, 2002 when he was appointed to our board. On March 14,
2003, Mr. Lau resigned from our board and the audit committee, and on
March 25, 2003, Joseph Tong was appointed to fill both vacancies.
Directors Nominated for Election at the Annual General Meeting
William Ding, our founder, has served as a director since July 1999 and as
our Chief Architect since March 2001. From June 2001 until September 2001,
Mr. Ding served as our acting Chief Executive Officer and acting Chief
Operating Officer. Mr. Ding also stepped down as Chairman of the Board of
Directors in September 2001 (the company currently has no permanently appointed
Chairman). From July 1999 until March 2001, Mr. Ding served as Co-Chief
Technology Officer, and from July 1999 until April 2000, he also served as our
interim Chief Executive Officer. Mr. Ding established Guangzhou Netease, our
affiliate, in May 1997. Prior to establishing Guangzhou Netease, Mr. Ding spent
one year at Guangzhou Feijie Co. as a systems analyst, from June 1996 to April
1997, one year at Sybase (China) as a project manager, from May 1995 to May
1996, and two years at China Telecom Ningbo Branch as a
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technical engineer, from June 1993 to May 1995. Mr. Ding holds a Bachelor of
Science degree in Communication Technology from the University of Electronic
Science and Technology of China.
Ted Sun has served as a director since December 1999 and as our acting Chief
Executive Officer from September 2001 following William Ding's resignation from
that position. Mr. Sun also worked as our consultant from July 2001 until
September 2001. From July 2000 until September 2001, he served as Chief
Financial Officer of Infoserve Technology. Prior to that, Mr. Sun held various
positions with Bear Stearns Asia Limited from November 1996 to May 2000,
culminating in the position of Managing Director. Prior to November 1996,
Mr. Sun was an assistant director with Peregrine Capital Limited. Mr. Sun
received a Bachelor of Science degree in Economics from the Wharton School of
Business, University of Pennsylvania in 1988.
Denny Lee has served as a director and as our Chief Financial Officer since
April 2002. Previously, he was our Financial Controller from November 2001
until that time. Prior to joining our company, Mr. Lee worked in the Hong Kong
office of KPMG for more than ten years, culminating in the position of Senior
Manager in one of the audit departments where he specialized in auditing
international clients. During his employment with KPMG, he also worked with a
number of Chinese companies with respect to accounting and other aspects of
their initial public offerings on the Hong Kong Stock Exchange, due diligence
work in relation to potential investments in Chinese companies and financial
and operational reviews of Chinese companies in connection with proposed
investments in such companies by foreign investors. Mr. Lee graduated from the
Hong Kong Polytechnic University majoring in accounting and is a member of The
Hong Kong Society of Accountants and The Chartered Association of Certified
Accountants.
Ronald Lee was appointed to our board on June 5, 2002. He is the managing
director and co-founder of BEENET, an Internet consulting and solutions
services provider established in November 1999. Prior to that, he was a
corporate finance senior manager at Cable & Wireless HKT, where he worked from
1995 to 1999. Mr. Lee also worked for Royal Trust in Toronto and Hong Kong and
Peregrine Capital Limited and Peregrine Direct Investment Limited in Hong Kong.
Mr. Lee received his Master of Business Administration degree with
specialization in accounting and finance from the University of Western Ontario
in 1992 and his Bachelor of Science degree in Accounting and Finance from
Georgetown University in 1987.
Michael Leung has been one of our directors since July 11, 2002. Since April
2002, he has been a consultant with Koffman Securities, a brokerage firm in
Hong Kong. From February 1999 to September 2001, he was a director at Emerging
Markets Partnership (Hong Kong) Limited, which is the principal adviser to the
AIG Asian Infrastructure Fund L.P. Prior to that, from November 1997 to October
1998, he was a Director of Warburg Dillon Read where he was involved in
corporate finance activities in China. From January 1994 to August 1997, he was
a Director of Crosby Securities heading the Corporate Finance Division covering
the Hong Kong and China markets. He was also a Director of Peregrine Capital
Limited from January 1992 to December 1993 where he was responsible for
marketing Peregrine's corporate finance services in Hong Kong and China.
Mr. Leung received a Bachelor's Degree in Social Sciences from the University
of Hong Kong with a major in accounting, management and statistics.
Joseph Tong is a director and co-founder of TLM Apparel Co., Ltd., a garment
trading company operating in Hong Kong and China which was established in
December 2002. At TLM Apparel, Mr. Tong is engaged in establishing offices and
operations in Hong Kong and China, setting up accounting and internal control
policies and overseeing the company's overall operations. Prior to that, from
September 2000 to September 2002, he was the e-Commerce Director of the Asia
Region for Universal
4
Music Limited where he was responsible for forming e-business development
strategies and overseeing new promotional opportunities. He was also an
Associate Director of Softbank China Venture Investments Limited from August
1999 to September 2000 and of Nomura China Investments Limited from October
1996 to July 1999. In those positions, he was primarily involved in identifying
and evaluating potential venture capital investments, negotiating investment
terms and structure and overseeing the businesses of portfolio companies.
Mr. Tong has also worked at Prosberg Limited, a management consulting company,
Wharf Cable Limited and Ernst & Young. Mr. Tong has a Bachelor of Science
degree and Second Honour Degree in Accounting and Statistics from the
University of Southampton, England. He is a member of the American Institute of
Certified Public Accountants and has served as a director since March 25, 2003.
Michael Tong is currently an Executive Director with techpacific.com Venture
Capital Limited. In that capacity, he is primarily responsible for portfolio
management of the funds managed by techpacific.com and its subsidiaries. Prior
to coming to techpacific.com in December 2000, Mr. Tong worked at Softbank
China Venture Investments Limited in Hong Kong, where he was responsible for
the evaluation, financial modeling, due diligence review and structuring of
Softbank's investments. He also worked at Nomura China Venture Investments
Limited, Jardine Fleming Securities Limited and Ernst & Young, all in Hong
Kong. Mr. Tong graduated with a Bachelor of Business Administration from the
University of Wisconsin, Madison with a major in Accounting and an extra
concentration in Computer Science in 1993. He is a member of the American
Institute of Certified Public Accountants and has passed all three levels of
the Chartered Financial Analyst Examination. Mr. Tong has served as a director
since December 1999.
The directors will be elected by a majority of the votes present in person
or represented by proxy and entitled to vote.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR
THE ELECTION OF EACH OF THE NOMINEES NAMED ABOVE.
Relationships Among Directors or Executive Officers; Right to Nominate Directors
There are no family relationships among any of the directors or executive
officers of our company.
The News Corporation Limited had the right to nominate one director to our
board, and, upon nomination, certain of our shareholders holding a majority of
our outstanding shares were obligated to vote their shares in favor of such
nominated director. Two of our prior directors, Lawrence J. Smith and John Lau,
were nominated and elected to our board in this manner. However, this right
terminated in March 2003 when The News Corporation Limited sold a portion of
its shares in our company. See "Related Party Transactions" in this proxy
statement.
Meetings and Committees of the Board of Directors
During the year 2002, our board met in person or passed resolutions by
unanimous written consent 17 times. No director attended fewer than 75% of all
the meetings of our board and its committees on which he or she served after
becoming a member of our board.
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Our board has one active committee, the audit committee. Our board has also
maintained a compensation committee, but as discussed below, that committee
currently does not have the requisite number of members as required by its
charter and has, therefore, been inactive. Our board does not have a nominating
committee or a committee performing the functions of a nominating committee.
At the beginning of 2002, our audit committee consisted of Mary Nee, Kathy
Xu and Michael Tong. Ms. Nee and Ms. Xu stepped down from that committee on
May 15 and June 5, 2002, respectively (Ms. Nee later resigned from our board in
July 2002 and Ms. Xu resigned from our board at the same time she resigned from
the audit committee). John Lau filled the vacancy on the audit committee
created by Ms. Nee's resignation, and Ronald Lee initially replaced Ms. Xu on
the audit committee until Michael Leung was appointed to our board and audit
committee on July 11, 2002. Mr. Lau subsequently resigned from our board and
audit committee on March 14, 2003, and Joseph Tong was appointed to fill both
vacancies. Our audit committee is currently comprised of Michael Tong, Joseph
Tong and Michael Leung. In 2002, our audit committee held six formal meetings.
Each member of our audit committee satisfies the "independence" requirements
of the National Association of Securities Dealers' listing standards. The audit
committee reports to our board regarding the appointment of our independent
public accountants, the scope and results of our annual audits, compliance with
our accounting and financial policies and management's procedures and policies
relative to the adequacy of our internal accounting controls.
Compensation Committee Interlocks and Insider Participation
At the beginning of 2002, our compensation committee was comprised of
Michael Tong, Mary Nee and Kathy Xu. Ms. Nee and Ms. Xu resigned from this
committee on May 15, 2002 and June 5, 2002, respectively, and to date, the
vacancies have not been filled. The charter for the compensation committee
requires that it have at least two members, and accordingly, the compensation
committee has been inactive and held no meetings in 2002.
Prior to it becoming inactive, the compensation committee's functions were
to review and make recommendations to our board regarding our compensation
policies and all forms of compensation to be provided to our executive officers
and directors. In addition, the compensation committee reviewed bonus and stock
compensation arrangements for all of our other employees. These duties have
been performed by our full board of directors since the compensation committee
became inactive.
No interlocking relationships have existed between our board of directors or
compensation committee and the board of directors or compensation committee of
any other company.
Compensation of Directors
In 2002, we paid each of Michael Tong, Michael Leung and Ronald Lee US$1,000
per month for their services as non-executive directors for a total of
US$12,000, US$5,652 and US$6,000, respectively. Other than Messrs. Tong, Leung
and Lee, we did not pay any other compensation in any form to our non-executive
directors in 2002. In 2002, we also granted stock options under our 2000 Stock
Incentive Plan to our two executive directors, Ted Sun and Denny Lee, as set
forth in the table entitled "Option Grants in Last Fiscal Year" below.
All of our current directors have entered into indemnification agreements in
which we agree to indemnify, to the fullest extent allowed by Cayman law, our
charter documents or other applicable law, those directors from any liability
or expenses, unless the liability or expense arises from the director's
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own willful negligence or willful default. The indemnification agreements also
specify the procedures to be followed with respect to indemnification.
Legal Proceedings
Beginning in October 2001, four substantially identical purported class
action complaints alleging violations of the federal securities laws were filed
in the United States District Court for the Southern District of New York
naming the Company, certain of its current and former officers and directors,
and the underwriters of the Company's initial public offering (Merrill Lynch,
Pierce, Fenner & Smith, Inc., Deutsche Bank Securities, Inc., Chase Securities,
Inc., Salomon Smith Barney, Inc. and UBS Warburg LLC) as defendants. These
complaints were subsequently consolidated into a single action. In general, the
complaints allege, among other things, that (i) the Company's initial public
offering violated the securities laws because the financial statements
accompanying the offering's registration statement misstated the Company's
revenue; and (ii) the Company committed securities fraud by materially
misstating the Company's revenue in its 2000 financial statements.
On August 29, 2002, the parties to the above-referenced litigation entered
into a Memorandum of Understanding for the settlement of this litigation.
Subsequently, the plaintiffs in this litigation conducted confirmatory
discovery to determine if the settlement is fair, reasonable and adequate. The
discovery has been completed, and on January 31, 2003, the parties entered into
a Stipulation and Agreement of Settlement. The court preliminarily approved
this settlement on February 25, 2003, and all persons who purchased the
Company's American Depositary Shares during the period from July 3, 2000 to
August 31, 2001 were certified as a single class. Subsequently, notice was sent
to the class, and the court will hold a hearing before it gives final approval
to the settlement. The aggregate settlement amount for all claims in this
litigation is US$4.35 million, which amount has been paid by the Company into
an escrow account pending such final court approval. If the settlement is not
approved by the court or is otherwise terminated by its terms, then, among
other consequences, the parties shall revert to their litigation positions as
of August 29, 2002. Potential members of the class no longer have the right to
opt out of this settlement and pursue their own claims.
Further, in January 2003, our affiliate, Guangzhou NetEase Computer System
Co. Ltd., was named in a copyright infringement lawsuit in China, and the
plaintiffs have claimed damages of US$1 million. We intend to vigorously defend
our position and believe the ultimate resolution of the matter will not have a
material financial impact on our company.
7
PROPOSAL 2
RATIFICATION OF INDEPENDENT AUDITORS
Our board recommends that PricewaterhouseCoopers be appointed as our
independent auditors for the year ending December 31, 2003. Arthur Andersen .
Hua Qiang audited our financial statements from our formation in July 1999
through fiscal year 2002. Following their dissolution, our board of directors
appointed PricewaterhouseCoopers as our independent auditors in July 2002.
In the event our shareholders fail to ratify the appointment, our board of
directors will reconsider its selection. Even if the selection is ratified, our
board of directors or, if proposal 3 is approved by our shareholders, our audit
committee in its discretion may direct the appointment of a different
independent auditing firm at any time during the year if the directors or audit
committee, as the case may be, believe that such a change would be in the best
interests of our company and shareholders.
A representative of PricewaterhouseCoopers is expected to be present at the
annual general meeting, will have the opportunity to make a statement if he or
she desires to do so, and will be available to respond to appropriate questions.
The affirmative vote of the holders of a majority of the shares present in
person or represented by proxy and voting at the annual general meeting will be
required to approve this proposal 2.
THE BOARD RECOMMENDS A VOTE FOR RATIFICATION OF THE APPOINTMENT OF
PRICEWATERHOUSECOOPERS AS OUR INDEPENDENT AUDITORS FOR THE YEAR ENDING
DECEMBER 31, 2003.
8
PROPOSAL 3
AMENDMENT OF OUR ARTICLES OF ASSOCIATION
Introduction
You are being asked to amend our Articles of Association to remove the
provisions related to the composition, duties and operations of the audit
committee of our board of directors, which provisions are attached to this
proxy statement as Exhibit A (articles numbered 114 to 117 (inclusive)). If
this proposal is approved by SPECIAL RESOLUTION of our shareholders, our audit
committee will operate in accordance with the charter which is attached to this
proxy statement as Exhibit B (unless it is amended or replaced by the board,
following shareholder approval of this proposal). The new charter has already
been approved by our board. As a result, the audit committee would continue to
exist, but the committee's governing provisions would be taken out of our
Articles of Association and, in effect, moved (with certain amendments
discussed below) to a separate board-approved charter.
Purpose of the Proposal; Background
The purpose of this amendment is to two-fold:
(1) to ensure that the audit committee is operating in accordance with the
requirements of new U.S. laws and the listing requirements of the Nasdaq
National Market, and
(2) to provide our board with the flexibility on an ongoing basis to amend
the provisions governing the audit committee in order to address future
changes in applicable law and in the financial reporting processes and
management needs of our company.
In July 2002, the U.S. Congress passed the Sarbanes-Oxley Act of 2002 which
resulted in numerous changes to the U.S. securities laws. In particular,
pursuant to that act the U.S. Securities and Exchange Commission (referred to
as the SEC) has adopted rules that mandate that the audit committees of U.S.
listed companies such as NetEase be responsible for the appointment,
compensation, retention and oversight of the work of our independent auditors.
Under these new rules, the audit committee must also have the authority to
engage independent counsel and other advisers, as it deems necessary to carry
out it duties, and preapprove all auditing services and non-audit services
provided by our independent auditors. Further, the new rules change the
definition of who constitutes an "independent director" (see below). Certain of
these rules have already come into effect with the remainder becoming effective
at various points over the course of the next several months and years. Failure
to comply with certain of these rules will result in our company being delisted
from the Nasdaq National Market pursuant to new listing requirements Nasdaq
will be adopting at the instruction of the SEC. In addition, the Nasdaq
National Market may adopt additional restrictions or requirements in this
regard to the extent they are not inconsistent with the Sarbanes-Oxley Act and
the SEC's new rules.
Currently, the provisions which govern our audit committee, which, as noted
above, appear in our Articles of Association, provide the committee with
significant flexibility in the performance of its duties. However, they do not
specifically authorize or direct the audit committee to perform all of the
functions described above and the existing provisions regarding eligibility for
membership on the committee conflict with the SEC's new independence
requirements. Accordingly, our board of directors has concluded that the
provisions governing the audit committee should be updated.
9
Our Articles of Association provide that its provisions, including those
related to the audit committee, may be amended only upon the affirmative vote
of two-thirds of the shares present in person or represented by proxy and
voting at a shareholder meeting. Obtaining this approval is necessarily a
time-consuming and expensive process, and in this era of rapid regulatory and
market changes, our board of directors has determined that the interests of our
company and shareholders would be best served if it were given the flexibility
to amend the audit committee's governing provisions from time to time without
seeking shareholder approval. As a result, the board is asking that you approve
the removal of these provisions from our Articles of Association. Following
approval of this proposal, our audit committee will operate in accordance with
the charter attached as Exhibit B. This charter has been approved by our board
and, because it would not be a part of our Articles of Association, could be
amended or replaced by our directors in the future as they deem appropriate in
the exercise of their fiduciary duties.
The board believes that approval of this proposal will not only bring our
audit committee into compliance with the new U.S. securities regulations and
listing requirements of the Nasdaq National Market, but will also allow our
audit committee to quickly and efficiently adapt to future changes in
applicable law and the needs of our company, thereby creating a highly flexible
and responsive audit committee that can work effectively with our management
and board. To achieve this goal, the new charter states that the audit
committee is expected to review and assess the adequacy of the charter annually.
Summary of the Existing Audit Committee Provisions and New Charter
Please note that the following is only a summary of the provisions of our
Articles of Association regarding the audit committee and the new audit
committee charter and is qualified in its entirety by the text of those
documents which are attached to this proxy statement.
The existing audit committee provisions in our Articles of Association and
the new audit committee charter set out the same basic purpose for the
committee: to oversee the accounting and financial reporting processes of our
company and the audits of our financial statements. Although the new charter
elaborates more on the specific activities this oversight must or may entail
than is contained in our Articles, both focus on, among other things, the audit
committee's interaction with and supervision of management and our independent
auditors in connection with our accounting and financial reporting, the
integrity of our internal controls and procedures and the independence of our
independent auditors.
The new charter also contains a number of provisions that do not appear in
our Articles of Association, principally to comply with the various new SEC
rules which either are effective currently or will become effective at
specified dates in the future, as discussed above. These include the following:
. Committee Member Independence. The new charter provides that each member
of the audit committee must be independent, which is defined as a person:
1. who accepts no consulting, advisory or other compensatory fee from
our company other than in his or her capacity as a member of the
committee, our board or any other committee of our board or is not
otherwise an affiliated person of our company,
2. who is free from any relationship that, in the opinion of our board,
would interfere with the exercise of his or her independent judgment
in carrying out the responsibilities of a director, and
10
3. who otherwise satisfies the then current laws applicable to members
of the audit committee and the listing rules of any securities
exchange or securities quotation system on which any of our
securities are listed.
This contrasts with the existing provisions which allows a director to
serve as long as, among other requirements, he or she did not receive
compensation from our company in excess of US$60,000 during the previous
year, other than compensation for board service, benefits under a
tax-qualified plan or non-discretionary compensation. The existing
provisions were based on Nasdaq regulations that will soon be superseded
by the new Nasdaq regulations which have been mandated by the SEC.
. Financial Expert. The new charter states that our board shall use its
best efforts to ensure that at least one member of the audit committee
qualifies as a "financial expert," which is a defined term in the
Sarbanes-Oxley Act.
. Independent Counsel and Other Advisors. The new charter empowers the
audit committee to engage independent counsel and other advisers, as it
deems appropriate to carry out its duties, as will be required under the
Sarbanes-Oxley Act.
. Responsibility to Preapprove all Audit and Non-Audit Services. The new
charter directs that the audit committee shall preapprove all auditing
services and non-audit services provided by our independent auditors and
consider whether such services are permissible under applicable law (also
a Sarbanes-Oxley Act requirement). The committee may also delegate to one
or more of its members the authority to grant such preapprovals.
. Internal Disclosure Control Task Force. The new charter directs the audit
committee, in consultation with management, to cooperate with and, if
deemed appropriate by the committee, oversee any internal disclosure
control task force or other group within our company which is charged
with gathering information for our public reports and filings,
considering the materiality of such information, determining disclosure
obligations and related activities.
. Procedures for Complaints. In accordance with the Sarbanes-Oxley Act, the
audit committee is instructed in the new charter to establish procedures
for the receipt, retention and treatment of complaints received by us
regarding accounting, internal accounting controls or auditing matters
and the confidential, anonymous submission by our employees of concerns
regarding questionable accounting or auditing matters.
Required Vote; Recommendation
The affirmative vote of the holders of two-thirds of the shares present in
person or represented by proxy and voting at the annual general meeting will be
required to approve this proposal 3.
THE BOARD RECOMMENDS A VOTE FOR THE AMENDMENT OF OUR
ARTICLES OF ASSOCIATION.
11
PROPOSAL 4
AUTHORIZATION OF THE BOARD OF DIRECTORS TO CAUSE OUR COMPANY
TO REPURCHASE OUR SHARES
At the annual general meeting, shareholders are requested to authorize our
board of directors, in its discretion, to cause us to repurchase our ordinary
shares or American Depositary Receipts representing ordinary shares from time
to time and at any time through open-market transactions, block purchases or
privately negotiated transactions at such prices and terms as determined by the
board of directors, out of funds legally available therefore and subject to
applicable law. No such share repurchase shall be implemented, however, for the
purpose of materially reducing the liquidity of our securities on the Nasdaq
National Market or of engaging in a "going private" transaction.
If this proposal is approved, our board of directors would not be required
to implement any share repurchase program and would only do so if it determined
that such program would be in the best interests of our company and
shareholders. At this time, our board of directors believes that the most
likely purposes for implementing a share repurchase program would be to take
advantage of what it considers to be undervaluation of our shares in the
financial marketplace and to use excess cash balances. However, such a program
may be implemented for any other purpose deemed appropriate by our board,
including, without limitation, to provide consideration in the context of an
acquisition or an exchange of our shares.
Our board of directors would have sole responsibility for determining the
price and terms of any repurchase, the amount of the repurchase and its timing.
We may employ brokers and other parties from time to time to assist us in
effecting any share repurchases. Any of our ordinary shares or American
Depositary Receipts which are repurchased would be cancelled and would be
returned to the pool of authorized but unissued shares. To date, we have never
repurchased any of our ordinary shares or American Depositary Receipts.
We and our board of directors fully intend to comply with all applicable
U.S., PRC and other laws in connection with any repurchases we may make. If
this proposal is approved, the shareholders' authorization will remain valid
until our shareholders adopt a new resolution which expressly modifies or
terminates the effect of this authorization.
Required Vote; Recommendation
The affirmative vote of the holders of a majority of the shares present in
person or represented by proxy and voting at the annual general meeting will be
required to approve this proposal 4.
THE BOARD RECOMMENDS A VOTE FOR THE
AUTHORIZATION OF THE BOARD OF DIRECTORS TO CAUSE OUR COMPANY TO REPURCHASE OUR
SHARES.
12
OTHER INFORMATION
Security Ownership of Certain Beneficial Owners and Management
The following table sets forth certain information known to us with respect
to the beneficial ownership as of March 31, 2003 by:
. all persons who are beneficial owners of five percent or more of our
ordinary shares,
. each director and nominee,
. our current Acting Chief Executive Officer, our Chief Financial Officer
and our former Chief Technology Officer (referred to in this proxy
statement as the "Named Executive Officers"), and
. all current directors and executive officers as a group.
As of March 31, 2003, 3,117,037,889 shares of our ordinary shares were
outstanding. The amounts and percentages of ordinary shares beneficially owned
are reported on the basis of regulations of the Securities and Exchange
Commission (SEC) governing the determination of beneficial ownership of
securities. Under the rules of the SEC, a person is deemed to be a "beneficial
owner" of a security if that person has or shares "voting power," which
includes the power to vote or to direct the voting of such security, or
"investment power," which includes the power to dispose of or to direct the
disposition of such security. A person is also deemed to be a beneficial owner
of any securities of which that person has a right to acquire beneficial
ownership within 60 days. Under these rules, more than one person may be deemed
a beneficial owner of securities as to which such person has no economic
interest.
Number of Shares
-----------------------
Beneficially Owned
-----------------------
Name Number Percentage
--------------------------------------------------------------------------------- ------------- ----------
5% Shareholders
Shining Globe International Limited/William Ding (1)............................... 1,731,201,900 55.5%
Suite 1901, Tower E3, The Towers, Oriental Plaza, Dong Cheng District, Beijing,
People's Republic of China
Yongping Duan and Xin Liu.......................................................... 205,000,000 6.6%
1706 Rada Road
City of Industry, CA 91745
Named Executive Officers and Directors (2)
Jack Xu (3)........................................................................ 32,136,900 1.0%
Denny Lee (4)...................................................................... 3,000,000 *
Ted Sun (5)........................................................................ 27,700,000 *
Ronald Lee......................................................................... -- *
Michael Leung...................................................................... -- *
Michael Tong....................................................................... -- *
Joseph Tong........................................................................ -- *
All current directors and executive officers as a group (7 persons) (6)............ 1,761,901,900 56.5%
13
--------
* Less than 1%
(1) Shining Globe International Limited is 100% owned by William Ding, our
founder, Chief Architect and a director.
(2) The address of our current Named Executive Officers and directors is c/o
NetEase.com, Inc., Suite 1901, Tower E3, The Towers, Oriental Plaza, Dong
Cheng District, Beijing, People's Republic of China 100738.
(3) Mr. Xu resigned from our company in June 2002. The shares listed represent
all shares that were issued to Mr. Xu pursuant to his exercise of certain
stock options following his resignation. Based on a review of public
filings with the SEC, we cannot determine whether Mr. Xu still holds such
shares or has acquired any additional shares in our company.
(4) Represents shares subject to stock options exercisable within 60 days of
March 31, 2003.
(5) Includes 600,000 shares subject to stock options exercisable within 60 days
of March 31, 2003.
(6) Shares owned by all of our current directors and executive officers as a
group includes shares beneficially owned by William Ding. This amount also
includes 3,600,000 shares subject to stock options currently exercisable or
exercisable within 60 days of March 31, 2003.
Disclosure of Fees Charged by Independent Accountants
The following information summarizes the fees charged by Arthur Andersen .
Hua Qiang (our independent accountants until June 2002) and
PricewaterhouseCoopers (our independent accountants from June 2002 until the
present time) for certain services rendered to our company during 2001 and 2002:
Audit Fees. Fees for our calendar year audit and reviews of the quarterly
financial statements for the years ended December 31, 2001 and December 31,
2002 totaled approximately US$681,209 and US$368,000, respectively. We also
incurred fees in the year ended December 31, 2001 relating to the audit work
for the year 2000 which was performed in 2001, totaling approximately
US$200,296.
Audit Related Fees. None.
Tax Fees. The aggregate fees incurred by our company for certain tax
compliance and advisory services for the years ended December 31, 2001 and
December 31, 2002 totaled approximately US$25,790 and US$37,000, respectively.
Fees for Financial Information Systems Design and Implementation. None.
All Other Fees. All other fees incurred by our company for the year ended
December 31, 2001 totaled approximately US$833,486. These fees were related to
Arthur Andersen . Hua Qiang's investigation into the circumstances which
necessitated the restatement of our financial statements for the year ended
December 31, 2000 as mentioned above. There were no other auditor fees incurred
during the year ended December 31, 2002.
14
Summary Compensation Table
The following table sets forth certain information concerning compensation
paid during 2002, 2001 and 2000 to our company's Named Executive Officers:
Annual Long-Term
Compensation Compensation
--------------- -----------------------
Restricted
Stock Securities All Other
Fiscal Salary Bonus Awards Underlying Compensation
Name and Principal Position Year (US$) (US$)(1) (US$) Options (#) (US$)
--------------------------- ------ ------- -------- ---------- ----------- ------------
Ted Sun (2)....................... 2002 226,000 200,000 346,625(3) 15,000,000 333,072(4)
Acting Chief Executive Officer 2001 73,000 165,000(5) 73,035(3) -- 12,400(6)
and a Director 2000 -- -- -- 1,200,000 --
Denny Lee (7)..................... 2002 158,000 80,000 -- 10,000,000 137,507(8)
Chief Financial Officer and a 2001 12,273 3,800 -- -- 3,138(9)
Director 2000 -- -- -- -- --
Jack Xu (10)...................... 2002 116,000 -- -- -- 154,978(11)
Chief Technology Officer 2001 211,750 60,000 -- 35,050,000 94,545(12)
2000 119,736 30,000 -- 33,605,500 12,300(13)
--------
(1) Includes bonus amounts in the year earned, rather than in the year in which
such bonus amount was paid or is to be paid.
(2) Mr. Sun, one of our directors, became our acting Chief Executive Officer on
September 11, 2001 following Mr. Ding's resignation from that position.
(3) Pursuant to the terms of his employment agreement, Mr. Sun received cash
payments sufficient for him to purchase an aggregate of 25,000,000 of our
ordinary shares from us at a price of US$0.006492 per share (equivalent to
US$0.6492 per American Depositary Share) over an 18-month period. Our board
of directors set the per share purchase price at the fair market value of
the shares, which was deemed to be the last closing price on Nasdaq prior
to the grant of these subscription rights. In each of 2001 and 2002, we
paid Mr. Sun US$73,035 to purchase 11,250,000 of such shares in accordance
with his subscription schedule. The dollar amounts listed in this column
were calculated by multiplying the amount of shares purchased in each year
by the closing price of our American Depositary Shares (divided by 100 to
determine the per ordinary share price) on the date of each such purchase
or the last closing price in the case of shares purchased while trading in
our American Depositary Shares was suspended on Nasdaq in 2001.
(4) Represents a housing allowance of US$35,100 paid by our company on behalf
of Mr. Sun and US$297,972 for Chinese individual income taxes which accrued
in the year 2002 with respect to Mr. Sun's compensation in that year and
which our company will pay in 2003 on his behalf.
(5) This amount constituted a sign-on bonus which was paid in two installments:
one of US$75,000 upon Mr. Sun's commencement of employment and the second
of US$60,000 on January 2, 2002. It also included a year-end performance
bonus of US$30,000.
15
(6) Represents a housing allowance paid by our company on behalf of Mr. Sun.
(7) Mr. Lee joined our company as Financial Controller in November 2001 and
became our Chief Financial Officer in April 2002.
(8) Represents a housing allowance of US$23,349 paid by our company on behalf
of Mr. Lee and a cash living allowance of US$19,800 paid to Mr. Lee. This
amount also includes US$94,358 for Chinese individual income taxes which
accrued in the year 2002 with respect to Mr. Lee's compensation in that
year and which our company will pay in 2003 on his behalf.
(9) Represents a housing allowance of US$1,166 paid by our company on behalf of
Mr. Lee and a cash living allowance of US$1,972 paid to Mr. Lee.
(10) Mr. Xu joined our company as Co-Chief Technology Officer in May 2000 and
became our Chief Technology Officer in March 2001. Mr. Xu resigned from
our company in June 2002.
(11) Represents miscellaneous payments totaling US$141,778 to Mr. Xu upon his
resignation from our company in June 2002 and a housing allowance of
US$13,200 paid by our company on behalf of Mr. Xu prior to his resignation.
(12) Represents US$24,665 for a housing allowance paid by our company on behalf
of Mr. Xu and a US$69,880 payment towards Mr. Xu's taxes.
(13) Represents a housing allowance paid by our company on behalf of Mr. Xu.
We have entered into an employment agreement and a non-competition agreement
with Ted Sun, as described below. We have also entered into a new employment
agreement with Denny Lee who was named our Chief Financial Officer in April
2002 after having served as our Financial Controller since November 2001.
Ted Sun. In September 2001, we entered into an employment agreement with Ted
Sun which originally provided for an annual salary of US$240,000. His annual
salary was subsequently lowered to US$216,000 in June 2002. In addition, Mr.
Sun received a sign-on bonus of US$135,000 which was paid in two installments
in September 2001 and January 2002 and year-end performance bonuses of
US$30,000 and US$200,000 in 2001 and 2002, respectively. Further, he received
cash payments sufficient for him to purchase from us an aggregate of 25,000,000
of our ordinary shares at a price of US$0.006492 per share over an 18-month
period ending in March 2003. Mr. Sun is also entitled to receive a housing
allowance.
In addition, we also entered into a non-competition agreement with Mr. Sun
which obligates Mr. Sun to keep all proprietary information regarding our
company confidential, except in limited circumstances. This agreement also
prohibits Mr. Sun from obtaining an ownership interest in (unless the total
investment represents less than 5% of the total equity of the competitor and
the competitor is a listed company), or employment with, any of our competitors
during his employment with us and for one year thereafter. During that same
period, he may not solicit or encourage any of our officers or employees to
terminate their employment with us, except when done in the course of his job
with NetEase.
Denny Lee. In April 2002, we entered into a new employment agreement with
Denny Lee in connection with his promotion to the position of Chief Financial
Officer. This agreement provides for an annual salary of US$158,000, plus a
discretionary bonus to be determined by our company. Mr. Lee's discretionary
bonus in 2002 was US$80,000. He is also entitled to receive a housing allowance
and tax equalization benefits. If Mr. Lee's employment is terminated for any
reason other than his death, disability or pursuant to one of the statutory
bases for terminating employees without notice under Hong Kong law, he shall be
entitled to severance pay in the amount of six months of his then current base
salary.
16
This agreement also prohibits Mr. Lee, during his employment with us and for
six months thereafter, from obtaining an ownership interest in (unless the
total investment represents less than 5% of any single class of shares of the
competitor and the competitor is a listed company), or employment with, any
company which carries on a business in Hong Kong or China which competes with
our company and in which Mr. Lee was involved at any time during the last two
years of his employment or in relation to which he acquired any confidential
information during the course of his employment. During that same period, he
may not solicit, entice or hire any of our employees or customers. Mr. Lee has
also entered into a proprietary information agreement which obligates him to
keep all proprietary information regarding our company confidential, except in
limited circumstances.
Option Grants in Last Fiscal Year
The following table sets forth information regarding stock options granted
to the Named Executive Officers during 2002:
Potential Realizable
Value at Assumed Annual
Rate of Stock Price
Appreciation for Option
Individual Grants Term (3)
--------------------------------------------- -----------------------
% of Total
Options
Number of Granted
Securities to
Underlying Employees Exercise
Options in Fiscal Price per Expiration
Name Granted Year (1) Share (2) Date 5% 10%
---- ---------- ---------- --------- ------------- --------- ---------
Ted Sun.. 15,000,000 14.31% US$0.007 July 6, 2005 US$16,551 US$34,755
Denny Lee 10,000,000 9.54% US$0.007 April 4, 2007 US$19,340 US$42,736
Jack Xu.. -- -- -- -- -- --
--------
(1) Based on a total of 104,811,000 options granted to employees of NetEase in
2002, including options granted to the Named Executive Officers but
excluding all options which were granted and terminated in that same year.
(2) The exercise price per share of options granted represented the fair market
value of the underlying shares of ordinary shares on the date the options
were granted.
(3) The potential realizable value is calculated based upon the term of the
option at its time of grant. It is calculated assuming that the stock price
on the date of grant appreciates at the indicated annual rate, compounded
annually for the entire term of the option, and that the option is
exercised and sold on the last day of its term for the appreciated stock
price.
17
Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End Option
Values
The following table sets forth certain information with respect to stock
options exercised by the Named Executive Officers during 2002. In addition, the
table sets forth the number of shares covered by stock options as of December
31, 2002, and the value of "in-the-money" stock options, which represents the
difference between the exercise price of a stock option and the market price of
the shares subject to such option on December 31, 2002.
Number of Securities
Underlying Unexercised Value of Unexercised
Options at In-the-Money Options at
December 31, 2002 (#) December 31, 2002 (US$)
------------------------- -------------------------
Shares Value
Acquired on Realized
Name Exercise (US$)(1) Exercisable Unexercisable Exercisable Unexercisable
---- ----------- -------- ----------- ------------- ----------- -------------
Ted Sun -- -- -- -- 10,200,000 6,000,000 984,900 645,000
Denny Lee -- -- -- -- -- -- 10,000,000 -- -- 1,075,000
Jack Xu 32,136,900 752,616 -- -- -- -- -- -- -- --
--------
(1) The value realized upon the exercise of stock options represents the
positive spread between the exercise price of stock options and the fair
market of the shares subject to such options on the exercise date.
Related Party Transactions
Our business was founded in June 1997. In July 1999, we established a new
holding company, NetEase.com, Inc., in the Cayman Islands. In September 1999,
we restructured our operations in order to comply with increasing regulation of
the Internet industry in China. As part of this restructuring, substantially
all of Guangzhou Netease Computer System Co., Ltd.'s, or Guangzhou Netease,
fixed and intangible assets and existing Internet applications, services and
technologies were acquired by Netease Information Technology (Beijing) Co.,
Ltd., or Netease Beijing, a wholly owned subsidiary of NetEase formed in August
1999. Guangzhou Netease, which is 80% owned by our founder, Chief Architect,
majority shareholder and a director, William Ding, has received approval from
the Guangzhou telecommunications administrative authorities to provide Internet
content services, and its 80% owned subsidiary, Beijing Guangyitong Advertising
Co., Ltd., or Guangyitong Advertising, holds a license to operate an
advertising business.
NetEase and Netease Beijing entered into a series of agreements with
Guangzhou Netease, Guangyitong Advertising and the shareholders of Guangzhou
Netease and Guangyitong Advertising under which we provide our Internet and
e-commerce applications, services and technologies and advertising services to
Guangzhou Netease and Guangyitong Advertising, and Guangzhou Netease and
Guangyitong Advertising operate the NetEase Web sites and our online
advertising business. We do not believe NetEase and Netease Beijing could have
obtained these agreements, taken as a whole, from unrelated third parties. We
believe that the terms of each agreement are no less favorable than the terms
that we could obtain from disinterested third parties. Guangzhou Netease is one
of a limited number of companies in China to have secured approval from the
Guangzhou telecommunications administrative authorities to engage in the
Internet content provider business. Through our agreements, we have the
exclusive right to benefit from this approval. In addition, we have secured
significant rights over
18
Guangyitong Advertising and the ultimate shareholders of Guangyitong
Advertising and have obtained the commitment of the ultimate shareholders of
Guangyitong Advertising to allow it to direct the policies and management of
the ongoing activities of Guangyitong Advertising. We believe that the
shareholders of Guangzhou Netease and Guangyitong Advertising will not receive
material benefits from these agreements except as shareholders of NetEase.
Because of the uncertain and changing legal and regulatory environment in
China, most of these agreements have terms of one year, except for the Domain
Names License Agreement between NetEase and Guangzhou Netease which has a term
of five years, and the Operating Agreement among Netease Beijing, Guangyitong
Advertising and the ultimate shareholders of Guangyitong Advertising which has
a term of twenty years. In addition, the Voting Rights Trust Agreement among
Netease Beijing and William Ding and Bo Ding (William Ding's brother), as
ultimate shareholders of Guangyitong Advertising has a term of ten years. These
agreements are described below.
. Domain Name License Agreement between NetEase and Guangzhou Netease.
NetEase granted Guangzhou Netease the right to use the domain names
"netease.com," "163.com," "126.com," "yeah.net" and "nease.net" on the
NetEase Web sites in China for license fees of RMB10,000 per year.
NetEase may waive this fee in the future. By a Supplemental Agreement
entered into between the parties in May 2000, the term of this agreement
has been extended from one year to five years.
. Copyright License Agreement between Netease Beijing and Guangzhou
Netease. Netease Beijing granted Guangzhou Netease the right to use
Netease Beijing's Web page layout in China for a royalty of RMB10,000 per
year. Netease Beijing may waive this fee in the future.
. Trademark License Agreement between Netease Beijing and Guangzhou
Netease. Netease Beijing granted Guangzhou Netease a license to use
Netease Beijing's registered trademarks on the NetEase Web sites in China
for license fees of RMB10,000 per year. Netease Beijing may waive this
fee in the future.
. Exclusive Technical Services Master Agreement between Netease Beijing and
Guangzhou Netease. Netease Beijing provides Guangzhou Netease with
technical services for the operation of the NetEase Web sites, including:
- server maintenance;
- server application software development;
- Internet application software development;
- training; and
- e-commerce related services.
Guangzhou Netease pays monthly service fees to Netease Beijing based on
the actual operating circumstances of the parties. Netease Beijing may
unilaterally adjust such fees. Netease Beijing is Guangzhou Netease's
exclusive provider of these services.
Netease Beijing has the right to transfer and sell its interests in this
Exclusive Technical Services Master Agreement or any other agreements
between it and Guangzhou Netease.
19
. Exclusive Consulting and Services Agreement between Netease Beijing and
Guangyitong Advertising. Netease Beijing provides Guangyitong Advertising
with technical consulting and related services for all advertisements
published on the NetEase Web sites. Guangyitong Advertising submits
designs of advertisements to be published on the NetEase Web sites, and
Netease Beijing completes the related technical work and delivers the
completed advertisements to Guangyitong Advertising. Guangyitong
Advertising pays fees to Netease Beijing based on the actual operating
circumstances of the parties, which consist of substantially all of
Guangyitong Advertising's advertising revenue, net of the related
business tax and cultural development fee. Netease Beijing may
unilaterally adjust such fees. Netease Beijing will be Guangyitong
Advertising's exclusive provider of these services. The initial term of
this agreement is 10 years from February 3, 2000.
. Exclusive Advertising Agency Agreement between NetEase and Guangzhou
Netease. Guangzhou Netease appointed NetEase as its advertising agent to
solicit advertising customers on behalf of Guangzhou Netease in markets
outside of China. NetEase pays Guangzhou Netease 10% of the total
advertising revenue under this agreement per month.
. Online Advertising Agreement between Guangzhou Netease and Guangyitong
Advertising, as amended by a Supplemental Agreement entered into in May
2000. Guangzhou Netease sells all of the banner space on the NetEase Web
sites to Guangyitong Advertising and publishes the advertisements
provided by Guangyitong Advertising on the banner space purchased by
Guangyitong Advertising. Guangyitong Advertising pays Guangzhou Netease
RMB 10,000 per year. Guangzhou Netease may waive this fee in the future.
The initial term of this agreement is 10 years from February 3, 2000.
. Trademark Transfer Agreement between Guangzhou Netease and Netease
Beijing. Guangzhou Netease has agreed to transfer its registered
trademarks to Netease Beijing.
. Supplemental Agreement between Netease Beijing and Guangzhou Netease.
Netease Beijing may not grant the license to use its domain name,
copyright and trademark to any third party without Guangzhou Netease's
consent and may not provide technical service to any third party.
. Operating Agreement among Netease Beijing, Guangyitong and the ultimate
shareholders of Guangyitong Advertising. To ensure the successful
performance of the various agreements between the parties, Guangyitong
Advertising and its ultimate shareholders have agreed that they will not
enter into any transaction, or fail to take any action, that would
substantially affect the assets, liabilities, equity or operations of
Guangyitong Advertising without the prior written consent of Netease
Beijing.
The parties have agreed that upon Netease Beijing's determination and at
any time when Netease Beijing is able to obtain approval to invest in
and operate all or any part of Guangyitong Advertising, Netease Beijing
will acquire all of the assets or equity interests of Guangyitong
Advertising, to the extent permitted by Chinese law. The consideration
for such acquisitions will be based on the book value of Guangyitong
Advertising at the time of acquisition.
20
Netease Beijing has agreed that it will provide performance guarantees
and guarantee loans for working capital purposes to the extent required
by Guangyitong Advertising for its operations.
The ultimate shareholders of Guangyitong Advertising have agreed that
upon instruction from Netease Beijing, they will appoint or terminate
Guangyitong Advertising's board members, General Manager, Chief
Financial Officer and other senior officers.
Netease Beijing has the right to transfer and sell its interests in the
Operating Agreement or any other agreements between it and Guangyitong
Advertising. The term of this agreement is 20 years from February 3,
2000.
. Shareholder Voting Rights Trust Agreement among William Ding, Bo Ding
and Netease Beijing. Bo Ding irrevocably appoints Netease Beijing to
represent him to exercise all the voting rights to which he is entitled
as a shareholder of Guangyitong Advertising and William Ding and Bo Ding
agree to cause Guangzhou Netease to irrevocably appoint Netease Beijing
to represent Guangzhou Netease to exercise all the voting rights to
which Guangzhou Netease is entitled as a shareholder of Guangyitong
Advertising. The term of this agreement is ten years from May 12, 2000.
. Termination Agreements between Netease Beijing and Guangzhou Netease.
Netease Beijing and Guangzhou Netease terminated previously existing
contracts related to Netease Beijing's rights with respect to the
operation of Guangzhou Netease, the lease of equipment from Netease
Beijing to Guangzhou Netease and the sublease of leased lines from
Netease Beijing to Guangzhou Netease. Under the Termination Agreements,
Netease Beijing agrees to provide without charge to Guangzhou Netease
equipment related to the operation of Internet information services.
. Agreement between Netease Beijing and Guangzhou Netease. Netease Beijing
agrees to pay the operating costs of Guangzhou Netease.
. Letter of Agreement. Each of William Ding and Bo Ding have agreed that
any amendments to be made to the Exclusive Consulting and Services
Agreement, the Shareholder Voting Rights Trust Agreement, and the
Operating Agreement described above, as well as all other agreements to
which Guangzhou Netease, Guangyitong Advertising and/or William Ding and
Bo Ding are parties, shall be subject to the approval by the vote of a
majority of our board, excluding the vote of William Ding. Messrs. Ding
have also agreed that, if any amendments to the above mentioned
agreements require a vote of the shareholders of NetEase, Guangzhou
Netease or Guangyitong Advertising, as applicable, both of them will
vote in their capacity as direct or indirect shareholders of these
companies to act based upon the instructions of our board.
Voting Arrangement. The News Corporation Limited had the right to nominate
one director to our board of directors, and certain of our shareholders holding
a majority of our outstanding shares, including our largest shareholder,
Shining Globe, were obligated to vote their shares in favor of the appointment
of its nominated director. However, The News Corporation's right to nominate
one director and certain of our shareholders', including Shining Globe's,
agreement to vote their shares in favor of the director nominated by The News
Corporation irrevocably terminated in March 2003 when its share ownership fell
below 4.25% of our total issued and outstanding share capital.
21
Co-Sale Rights. Under the terms of the investors' rights agreement among The
News Corporation, Shining Globe and certain other shareholders, The News
Corporation had the right, at its option, to sell its shares if Shining Globe
proposed to sell any of its shares, on the same terms and conditions as Shining
Globe. This right also irrevocably terminated in March 2003 because its share
ownership fell below 4.25% of our total issued and outstanding share capital.
Strategic Alliance with The News Corporation. In March 2000, we issued
2,560,556 of our Series B preference shares to Best Alliance Profits Limited, a
company controlled by The News Corporation Limited, in exchange for US$35
million in cash together with on-air advertising and promotional services. In
connection with this issuance, we entered into an agreement with News Digital
Ventures, an affiliate of The News Corporation Limited, which provides for
cooperation between us and The News Corporation. As part of the consideration
for the issuance of our Series B preference shares, The News Corporation and
its affiliates agreed to provide us with on-air advertising and promotional
inventory with a value of US$5 million on The News Corporation's media
properties, including Channel [V], ESPN Star Sports, Phoenix TV and STAR TV. We
agreed to use at least US$1 million of the inventory within one year, and at
least US$2 million in each of the next two years. As of March 31, 2003, we had
used US$3 million of the inventory and, pursuant to a supplemental agreement
with The News Corporation, we are now entitled to use the remaining US$2
million of the inventory by March 28, 2004. In addition, The News Corporation
and its affiliates agreed to spend US$5 million on on-line advertising on the
NetEase Web sites of which US$1 million had been spent as of March 31, 2003. In
accordance with our supplemental agreement, they are obligated to spend the
remaining amount by March 28, 2004.
All other aspects of our strategic cooperation agreement with The News
Corporation terminated in March 2003.
Share Transfers to Certain Senior Management Personnel and Key Employees. In
1999, Shining Globe International Limited, which is 100% owned by William Ding,
our founder, Chief Architect, majority shareholder and a director, agreed to
transfer an aggregate of 109,694,200 ordinary shares to certain senior
management personnel and key employees. These share transfers were effected in
January 2000. The share transfer commitments were made to provide incentives to
senior management personnel and key employees to join our company. The fair
market value of these shares as of the date of such agreement (RMB45.4 million
or US$5.5 million) was charged to our earnings in 1999 as share compensation
costs in accordance with U.S. GAAP, with a corresponding increase in additional
paid-in capital. Furthermore, in March 2000, January 2001, January 2002 and
January 2003, William Ding transferred 1,945,200, 8,757,100, 4,609,000 and
4,609,000 shares, respectively, to certain employees. The total estimated fair
value of these shares, valued at US$0.05 per share at the date of grant, is
recognized as deferred compensation, which are amortized over the related
vesting periods.
Except for the voting arrangements described above, our major shareholders
do not have different voting rights than any of our other shareholders.
Loans and Advances. We have entered into loan agreements with four related
parties, the proceeds of which were used to purchase our ADSs, in the aggregate
principal amount of approximately US$777,000. The loans bear an interest rate
of five percent and became due one year from the date of disbursement of the
loan proceeds. As of March 31, 2003, US$667,000 of the outstanding principal
amount had been repaid. Although we have attempted to recover the remaining
unpaid balance of these loans, we can provide no assurance that we will be able
to recover such amount. In addition, we loaned US$250,000 to a former employee
of our company pursuant to an oral arrangement, which was repaid in full in
January 2003. We previously made full provision for these loans in our audited
financial
22
statements for the year 2001, which impacted our statement of operations in
that period. The amounts repaid in 2003 discussed above will be reflected in
our statement of operations for the first quarter of 2003.
We also loaned US$235,000 to William Ding, our founder, Chief Architect,
majority shareholder and a director. This loan was repaid in full in March 2003.
Transactions with BEENET. Mr. Ronald Lee, who was appointed to our board of
directors on June 5, 2002, is the managing director and co-founder of BEENET,
an Internet consulting and solutions services provider. In 2000, 2001 and 2002,
BEENET entered into a series of transactions with our company whereby BEENET
provided Internet consulting services for our main Web site and our corporate
Web site and assisted in the design and production of a television commercial
for us, in exchange for an aggregate amount of approximately US$550,000. BEENET
also placed advertisements on the NetEase Web sites in 2001.
COMPENSATION REPORT FROM THE BOARD OF DIRECTORS
Following the resignations of Mary Nee and Kathy Xu from the compensation
committee in 2002, the compensation committee has been inactive because it did
not, and does not at this time, have at least two members as required by that
committee's charter. The full board of directors thereafter assumed the duties
of the compensation committee (with executive directors abstaining from any
decision that would affect them personally). These duties include reviewing and
making determinations regarding compensation policies and all forms of
compensation to be provided to NetEase's executive officers and directors and
administering the NetEase.com, Inc. 1999 Stock Incentive Plan and 2000 Stock
Incentive Plan. The power to award options under those plans for non-executive
officers has been delegated to NetEase's chief executive officer.
The fundamental policy of the board of directors is to provide NetEase's
chief executive officer and other executive officers with competitive
compensation opportunities based upon their contribution to the financial
success of the company and their personal performance. It is the board's
objective to have a substantial portion of each officer's compensation
contingent upon the company's performance as well as upon his or her own level
of performance. Accordingly, the compensation package for the chief executive
officer and other executive officers is comprised of three elements: (i) base
salary which reflects individual performance and is designed primarily to be
competitive with salary levels in the industry, (ii) annual variable
performance awards payable in cash, and (iii) long-term stock-based incentive
awards which strengthen the mutuality of interests between the executive
officers and the company's shareholders. As an executive officer's level of
responsibility increases, it is the intent of the board to have a greater
portion of his or her total compensation be dependent upon company performance
and stock price appreciation rather than base salary.
NetEase's executive compensation is intended to be consistent with leading
companies in the Internet and telecommunications industries while being
contingent upon achievement of near- and long-term corporate objectives. For
the calendar year 2002, the principal measures the board looked to in
evaluating the company's progress toward these objectives were growth in
revenue, net profits and usage of the NetEase Web sites and the increase in the
company's stock price on Nasdaq.
Executive compensation is based on three components, each of which is
intended to serve the overall compensation philosophy.
23
Base Salary. The base salary for each officer is determined on the basis of
the following factors: experience, personal performance, the average salary
levels in effect for comparable positions within and without the industry and
internal comparability considerations. The weight given to each of these
factors differs from individual to individual, as the board deems appropriate.
In selecting comparable companies for the purposes of maintaining competitive
compensation, the board considers many factors including geographic location,
growth rate, annual revenue and profitability, and market capitalization. The
board also considers companies outside the industry which may compete with
NetEase in recruiting executive talent.
Annual Incentive Compensation. Bonuses for executives are intended to be
used as an incentive to encourage management to perform at a high level or to
recognize a particular contribution by an employee. Generally, the higher the
employee's level of responsibility, the larger the portion of the individual's
compensation package that may be represented by a bonus. Annual bonuses are
earned by each executive officer primarily on the basis of the Company's
achievement of certain corporate financial performance goals established for
each fiscal year or designated individual goals. The actual bonus paid for the
year to each of the Named Executive Officers is indicated in the Bonus column
of the Summary Compensation Table.
Long-Term Compensation. The board believes that stock ownership by
management is beneficial in aligning management and shareholder interests with
respect to enhancing shareholder value. Stock options and stock subscription
arrangements (like the one provided to the company's Chief Executive Officer)
are also used to retain executives and motivate them to improve long-term stock
market performance. Factors considered in making an award of stock options or
stock subscription arrangements include the individual's position in the
company, his or her performance and responsibilities, and internal
comparability considerations.
Each option grant under the 2000 Stock Incentive Plan allows the employee to
acquire ordinary shares at a fixed price per share over a specified period of
time of not more than 10 years. The board determines the vesting schedule of
awards granted to executive officers under the plan.
The exercise price of incentive stock options must be at least equal to the
fair market value of the company's shares on the date of grant, and the term of
the option must not exceed ten years. The purchase price of non-qualified stock
options is typically at least 85% of the fair market value of the company's
shares on the date of grant. With respect to an employee who owns shares
possessing more than 10% of the voting power of all classes of outstanding
capital, the exercise price of any incentive stock option must equal at least
110% of the fair market value of the company's shares on the date of grant and
the term of the option must not exceed five years. The exercise or purchase
price of other awards will be such price as determined by the board. Employees
are responsible in all cases for any tax expense associated with the grant,
holding or exercise of these stock options.
As a result of these provisions, the option will provide a return to the
executive officer only if the executive officer remains employed by the company
during the vesting period, and then only if the market price of the underlying
shares appreciates over the option term. The board does not adhere to any
specific guidelines as to the relative option holdings of the company's
executive officers. The actual options granted to each of the Named Executive
Officers in the Summary Compensation Table is indicated in the Long-Term
Compensation column.
The board suspended the 1999 Stock Incentive Plan in February 2000, meaning
that no new awards will be granted under that plan unless the board makes it
effective again. All outstanding
24
awards already granted under the 1999 Stock Incentive Plan will remain in full
force and effect in accordance with the applicable award agreement and that
plan as if that plan had not been suspended.
Stock subscription arrangements, whereby the company issues a specified
number of shares over a period of time while the recipient is employed by the
company, are made outside of the company's stock incentive plans and the terms
are individually tailored for each recipient.
Compensation of the Chief Executive Officer. The compensation of the Chief
Executive Officer is reviewed annually on the same basis as discussed above for
all executive officers. Our current acting Chief Executive Officer, Ted Sun,
who assumed this position in September 2001 currently receives a base salary of
US$216,000. In determining his base salary, the board compared the base
salaries of chief executive officers at other companies of similar size. His
salary was also established in part by evaluating the company's ability to
recruit a suitable person for this position, either on a permanent or interim
basis.
The Board of Directors
William Ding Michael Tong
Ted Sun Joseph Tong
Denny Lee Michael Leung
Ronald Lee
AUDIT COMMITTEE REPORT
The audit committee has reviewed and discussed NetEase's audited financial
statements with management and has discussed certain required matters with its
independent auditors, in accordance with Statement of Auditing Standards
("SAS") No. 61, as amended by SAS No. 90. NetEase's independent auditors also
provided written documentation to the audit committee, describing all
relationships between the auditors and the company that might bear on the
auditors' independence consistent with Independence Standards Board Standard
No. 1, discussed with the auditors any relationships that may impact their
objectivity and independence and satisfied itself as to the auditors'
independence.
Based on the above-mentioned review and discussions with management and the
independent auditors, the audit committee recommended to the board that the
company's audited financial statements be included in its Annual Report on Form
20-F for the year ended December 31, 2002. The audit committee also recommended
the appointment of the independent auditors and the board concurred in such
recommendation.
Audit Committee
Michael Tong
Michael Leung
Note: Joseph Tong joined our board and audit committee on March 25, 2003, which
was after the principal discussions and determinations noted in the foregoing
audit committee report occurred. Accordingly, he did not participate in the
preparation of, and has not delivered, this report.
25
STOCK PERFORMANCE GRAPH
The following graph compares the cumulative total shareholder return data
for our ADSs, each of which represents 100 of our ordinary shares, since July
6, 2000 (the date on which our ADSs were first publicly offered) against the
cumulative return over such period of:
. The Nasdaq National Market Composite Index, and
. the Goldman Sachs Internet Index.
The graph assumes that US$100 was invested on July 6, 2000 in our ADSs and
in each of the comparative indices. The graph further assumes that such amount
was initially invested in the ADSs at a per share price of US$15.50, the price
at which such ADSs were first offered to the public on the date of our initial
public offering. The stock price performance on the following graph is not
necessarily indicative of future stock price performance.
6 July 29 December 31 December 31 December
2000 2000 2001 2002
------ ----------- ----------- -----------
NetEase.com, Inc. 100 19.74 4.13 73.87
Nasdaq Composite Index 100 62.38 49.25 33.72
Goldman Sachs Internet Index 100 41.91 24.21 20.37
26
OTHER MATTERS
We know of no other matters to be submitted to the annual general meeting.
If any other matters properly come before the annual general meeting, it is the
intention of the persons named in the enclosed form of proxy to vote the shares
they represent as the board of directors may recommend.
By Order of the Board of Directors,
/s/ Ted Sun
-----------------------------
Ted Sun
Member of the Board of Directors and
Acting Chief Executive Officer
Dated: May 5, 2003
27
EXHIBIT A
EXCERPT FROM ARTICLES OF ASSOCIATION OF
NETEASE.COM, INC. ADOPTED BY SPECIAL RESOLUTION PASSED ON
MAY 12, 2000
AUDIT COMMITTEE
114. The Audit Committee shall provide assistance to the Directors in
fulfilling their responsibility to the shareholders, potential
shareholders, and investment community relating to corporate accounting,
reporting practices of the Company, and the quality and integrity of the
financial reports of the Company. The Audit Committee's primary duties and
responsibilities are to:
(a) Oversee that management has maintained the reliability and integrity
of the accounting policies and financial reporting and disclosure
practices of the Company.
(b) Oversee that management has established and maintained processes to
assure that an adequate system of internal control is functioning with
the Company.
(c) Oversee that management has established and maintained processes to
assure compliance by the Company with all applicable laws, regulations
and corporate policy.
The Audit Committee will fulfill these responsibility primarily by
carrying out the activities enumerated in Article 117 of these Articles.
115. The Audit Committee shall be comprised of three or more directors as
determined by the Directors. All members of practices, and at least one
member of the Audit Committee shall have accounting or related financial
management expertise. Audit Committee members may enhance their
familiarity with finance and accounting by participating in educational
programs conducted by the Company or an outside consultant. The members of
the Audit Committee shall be elected by the Directors at the annual
organisational qualified. Unless a Chairperson is elected by the
Directors, the members of the Audit Committee may designate a chairperson
by majority vote of the full Audit Committee membership. None of the
following person shall be eligible to serve on the Audit Committee:
(a) A Director who is employed by the Company or any of its affiliates for
the current year or any of the past three years.
(b) A Director who accepts any compensation from the Company or any of its
affiliates in excess of US$60,000 during the previous fiscal year,
other than compensation for board service, benefits under a
tax-qualified retirement plan, or non-discretionary compensation.
(c) A Director who is a member of the immediate family or an individual
who is, or has been in any of the past three years, employed by the
corporation or any of its affiliates as an executive officer.
"Immediate family" includes a person's spouse, parents, children,
siblings, mother-in-law, father-in-law, brother-in-law, sister-in-law
and anyone who resides in such person's home.
28
(d) A Director who is a partner in, or a controlling shareholder of an
executive officer of, any for-profit business organisation to which
the Company made, or from which the Company received, payments (other
than those arising solely from investments in the Company's
securities) that exceed 5% of the company's consolidated gross
revenues for that year, or US$200,000, wherever is more, in any of the
past three years.
(e) A Director who is employed as an executive of another entity where any
of the Company's executives serve on that entity's compensation
committee.
(f) A Director who would otherwise be disqualified form serving on the
Audit Committee under the listing rules of any securities exchange or
security quotation system on which any of the Company's securities are
listed.
116. The Audit Committee shall meet at least four times annually, or more
frequently as circumstances dictate. As part of its job to foster open
communication, the Audit Committee should meet at least annually with
management, the director of the internal auditing department and the
Auditors separately to discuss any matters that the Audit Committee or
each of these groups believe should be discussed privately. In addition,
the Audit Committee or at least its chairperson should met with the
Auditors and management quarterly to review the Company's accounts
consistent with Article 117(c) below.
117. To fulfill its responsibilities and duties the Audit Committee shall:
Documents/Reports Review
(a) Review and reassess, at least annually, the adequacy of these
Articles, an make recommendations to the Directors, as conditions
dictate, to update these Articles.
(b) Review with management and the Auditors the Company's annual financial
statements, including a discussion with the Auditors of the matters
required to be discussed by Statement of Auditing Standards No. 61.
Independent Auditors
(c) Review the performance of the Auditors and make recommendations to the
Directors regarding the appointment or termination of the Auditors.
The Audit Committee and the Directors have the ultimate authority and
responsibility to select, evaluate, and where appropriate, replace the
Auditors. The Auditors are ultimately accountable to the Audit
Committee and the Directors for such Auditors' review of the financial
statements and controls of the Company. On an annual basis, the Audit
Committee should review and discuss with the Auditors all significant
relationships the Auditors have with the Company to determine the
Auditors' independence.
(d) Oversee independence of the Auditors by:
(i) receiving from the Auditors, on a periodic basis, a formal written
statement delineating all relationships between the Auditors and
the Company consistent with Independence Standards Board Standard 1;
29
(ii) reviewing, and actively discussing with the Directors, if
necessary, and the Auditors, on a periodic basis, any disclosed
relationships or services between the Auditors and the Company or
any other disclosed relationships or services that may impact the
objectivity and independence of the Auditors; and
(iii) recommending, if necessary, that the Directors take certain action
to satisfy itself of the Auditors' independence.
Financial Reporting Process
(e) In consultation with the Auditors and the internal auditors, review
the integrity of the Company's financial reporting processes, both
internal and external.
(f) Consider and approve, if appropriate, major changes to the Company's
auditing and accounting principles and practices as suggested by the
Auditors, management, or the internal auditing department.
(g) Establish regular systems of reporting to the Audit Committee by each
of management, the Auditors and the internal auditors regarding any
significant judgements made in management's preparation of the
financial statements and any significant difficulties encountered
during the course of the review or audit, including any restrictions
on the scope of work or access to required information.
(h) Review any significant disagreement among management and the Auditors
or the internal auditing department in connection with the preparation
of the financial statements.
Legal Compliance/General
(i) Review, with the Company's counsel, any legal matter that could have a
significant impact on the Company's financial statements.
(j) Report through its chairperson to the Directors following meetings of
the Audit Committee.
(k) Maintain minutes or other records of meetings and activities of the
Audit Committee.
30
EXHIBIT B
CHARTER OF THE AUDIT COMMITTEE
NETEASE.COM, INC.
AUTHORITY AND PURPOSE
The Audit Committee of NetEase.com, Inc. (the "Corporation") is appointed by
the Corporation's Board of Directors (the "Board") to oversee the accounting
and financial reporting processes of the Corporation and audits of the
financial statements of the Corporation. The Audit Committee (the "Committee")
shall undertake those specific duties and responsibilities listed below and
such other duties as the Board shall from time to time prescribe. All powers of
the Committee are subject to the restrictions designated in the Corporation's
Memorandum and Articles of Association and applicable law.
STATEMENT OF POLICY
The Committee shall oversee the accounting and financial reporting processes
of the Corporation and audits of the financial statements of the Corporation.
In so doing, the Committee shall endeavor to maintain free and open means of
communication among the directors, the independent auditors and the financial
management of the Corporation. In addition, the Committee shall review the
policies and procedures adopted by the Corporation to fulfill its
responsibilities regarding the fair and accurate presentation of financial
statements in accordance with generally accepted accounting principles and
applicable rules and regulations of the Securities and Exchange Commission and
the National Association of Securities Dealers (the "NASD") applicable to a
Nasdaq listed issuer.
COMMITTEE STRUCTURE AND MEMBERSHIP
The Committee shall be comprised of three or more directors, as determined
by the Board. The Committee members shall be designated by the Board and shall
serve at the discretion of the Board.
Each member of the Committee shall be an independent director. For purposes
hereof, an "independent director" shall be one:
1. who accepts no consulting, advisory or other compensatory fee from the
Corporation other than in his or her capacity as a member of the
Committee, the Board or any other committee of the Board or is not
otherwise an affiliated person of the Corporation,
2. who is free from any relationship that, in the opinion of the Board,
would interfere with the exercise of his or her independent judgment in
carrying out the responsibilities of a director, and
3. who otherwise satisfies the then current laws applicable to members of
the audit committee of the Corporation and the listing rules of any
securities exchange or securities quotation system on which any of the
Corporation's securities are listed.
31
The Board shall use its best efforts to ensure that at least one member of
the Committee shall be a "financial expert," as defined by Section 407 of the
Sarbanes-Oxley Act of 2002, having an understanding of generally accepted
accounting principles and financial statements, experience in the preparation
or auditing of financial statements of companies generally comparable to the
Corporation, experience in the application of generally accepted accounting
principles in connection with the accounting for estimates, accruals and
reserves, experience with internal accounting controls and an understanding of
audit committee functions.
Each member of the Committee shall be able to read and understand
fundamental financial statements in accordance with the rules of the National
Association of Securities Dealers (the "NASD") applicable to Nasdaq listed
issuers. At least one member shall have past employment experience in finance
or accounting, a professional certification in accounting or other comparable
experience or background that results in the individual's possessing the
requisite financial sophistication, including a current or past position as a
chief executive or financial officer or other senior officer with financial
oversight responsibilities.
The quorum necessary for the transaction of business of the Committee shall
be two, and all matters arising at a Committee meeting shall be determined by a
majority of votes of the members present.
POWERS
The Committee shall have the power to conduct or authorize investigations
into any matters within the Committee's scope of responsibilities. The
Committee shall be empowered to engage independent counsel and other advisers,
as it determines necessary to carry out its duties. While the Committee has the
responsibilities and powers set forth in this Charter, it is not the duty of
the Committee to plan or conduct audits or to determine that the Corporation's
financial statements are complete and accurate and are in accordance with
generally accepted accounting principles. Those tasks are the responsibility of
management and the independent auditor. The audit committee shall meet at least
four times annually, or more frequently as circumstances dictate.
RESPONSIBILITIES
The Committee's policies and procedures should remain flexible, in order to
best react to changing conditions and to ensure to the Board and the
Corporation's stockholders that the corporate accounting and reporting
practices of the Corporation are in accordance with all requirements and are of
the highest quality.
In meeting its responsibilities, the Committee is expected to:
1. Review and reassess the adequacy of this Charter annually.
2. With respect to the Corporation's independent auditors:
a. Appoint the Corporation's independent auditors, determine its
compensation and oversee its work. The Committee shall preapprove all
auditing services (including the provision of comfort letters) and
non-audit services provided by the independent auditors to the
Corporation and consider whether such services
32
are permissible under applicable law. The Committee may delegate to
one or more designated Committee members the authority to grant
preapprovals required by the foregoing sentence. The decisions of any
Committee member to whom authority is delegated hereunder shall be
presented to the Committee at each of its scheduled meetings. The
independent auditors shall be ultimately accountable to the Board and
to the Committee as representatives of the Corporation's stockholders.
b. Review the independence of the independent auditors, including a
review of management consulting services provided by the independent
auditors and related fees. The Committee shall require the
independent auditors at least annually to provide a formal written
statement delineating all relationships between the independent
auditors and the Corporation consistent with the rules of the NASD
applicable to Nasdaq listed issuers and request information from the
independent auditors and management to determine the presence or
absence of a conflict of interest. The Committee shall actively
engage the auditors in a dialogue with respect to any disclosed
relationships or services that may impact the objectivity and
independence of the auditors. The Committee shall take, or recommend
that the full Board take, appropriate action to oversee the
independence of the auditors.
3. Review with management the scope and responsibilities of an internal
audit department and on the appointment, replacement, reassignment or
dismissal of an internal audit department manager or director and work
with management to reach a consensus on the foregoing.
4. Review and discuss with management, before release, the audited
financial statements and the Management's Discussion and Analysis
proposed to be included in the Corporation's Annual Report on Form 20-F.
Make a recommendation to the Board whether or not the audited financial
statements should be included in the Corporation's Annual Report on Form
20-F.
5. In consultation with management, cooperate with, and to the extent
deemed appropriate by the members of the Committee, oversee, the members
of any internal disclosure control task force or other group within the
Corporation which is charged with gathering information for the
Corporation's public reports and filings, considering the materiality of
such information and determining disclosure obligations, and consider
and respond to any issues and deficiencies relating to the Corporation's
disclosure controls and procedures which are identified by management or
such internal group.
6. In consultation with the independent auditors, the internal audit
department, if any, and management, consider and review at the
completion of the annual examinations and such other times as the
Committee may deem appropriate:
a. The Corporation's annual financial statements and related notes.
b. The independent auditors' audit of the financial statements and their
report thereon.
33
c. The independent auditors' reports regarding critical accounting
policies, alternative treatments of financial information and other
material written communications between the independent auditors and
management.
d. Any deficiency in, or suggested improvement to, the procedures or
practices employed by the Corporation as reported by the independent
auditors in their annual management letter.
7. Periodically and to the extent appropriate under the circumstances, it
may be advisable for the Committee, with the assistance of the
independent auditors, the internal audit department, if any, and/or
management, to consider and review the following:
a. Any significant changes required in the independent auditors' audit
plan or auditing and accounting principles.
b. Any difficulties or disputes with management encountered during the
course of the audit.
c. The adequacy of the Corporation's system of internal financial
controls.
d. The effect or potential effect of any regulatory regime, accounting
initiatives or off-balance sheet structures on the Company's
financial statements.
e. Any correspondence with regulators or governmental agencies and any
employee complaints or published reports that raise material issues
regarding the Corporation's financial statements or accounting
policies.
f. Other matters related to the conduct of the audit, which are to be
communicated to the Committee under generally accepted auditing
standards.
8. Discuss with the independent auditors the matters required to be
discussed by Statement on Auditing Standards No. 61, as modified or
supplemented.
9. Obtain from the independent auditor assurance that it has complied with
Section 10A of the Securities Exchange Act of 1934.
10. Establish procedures for (a) the receipt, retention and treatment of
complaints received by the Corporation regarding accounting, internal
accounting controls or auditing matters and (b) the confidential,
anonymous submission by the Corporation's employees of concerns
regarding questionable accounting or auditing matters.
11. Cooperate with the Corporation in preparing any reports of the Committee
it intends to include in a proxy statement and any other reports
required by applicable securities laws.
12. Review, with the Corporation's counsel, any legal matter that could have
a significant impact on the Corporation's financial statements.
13. Report through its chairperson to the directors following meetings of
the Committee.
14. Maintain minutes or other records of meetings and activities of the
Committee.
34
15. Review the rationale for employing audit firms other than the principal
independent auditors; and, where an additional audit firm has been
employed, review the coordination of audit efforts to assure
completeness of coverage, reduction of redundant efforts and the
effective use of audit resources.
16. Periodically review, before release, the unaudited operating results in
the Corporation's quarterly earnings release and/or discuss the contents
the quarterly earnings release with management.
17. Meet periodically with or interview, in separate sessions, the chief
financial officer, the senior internal auditing executive and the
independent audit firm engagement partner.
35
Exhibit 99.2
THIS PROXY IS SOLICITED ON BEHALF OF
THE BOARD OF DIRECTORS OF NETEASE.COM, INC.
FOR THE ANNUAL GENERAL MEETING OF SHAREHOLDERS
TO BE HELD ON JUNE 5, 2003
The undersigned shareholder of NETEASE.COM, INC., a Cayman Islands company
(the "Company"), hereby acknowledges receipt of the notice of annual general
meeting of shareholders and proxy statement, each dated May 5, 2003, and hereby
appoints Ted Sun and Denny Lee or any one of them, proxies, with full power to
each of substitution, on behalf and in the name of the undersigned, to
represent the undersigned at the annual general meeting of shareholders of the
Company to be held on June 5, 2003 at 10:00 a.m., Beijing time, at the
Company's principal executive offices, Suite 1901, Tower E3, The Towers,
Oriental Plaza, Dong Cheng District, Beijing, People's Republic of China
100738, and at any adjournment or adjournments thereof, and to vote all
ordinary shares which the undersigned would be entitled to vote if then and
there personally present, on the matters set forth below (i) as specified by
the undersigned below and (ii) in the discretion of any proxy upon such other
business as may properly come before the meeting, all as set forth in the
notice of annual general meeting and in the proxy statement furnished herewith.
This proxy when properly executed will be voted in the manner directed herein
by the undersigned shareholder. If no direction is made, this proxy will be
voted FOR the following proposals:
PROPOSAL NO. 1: RE-ELECT THE FOLLOWING DIRECTORS TO SERVE FOR THE ENSUING YEAR
AND UNTIL THEIR SUCCESSORS ARE ELECTED AND DULY QUALIFIED:
1. WILLIAM DING 5. MICHAEL LEUNG
2. TED SUN 6. JOSEPH TONG
3. DENNY LEE 7. MICHAEL TONG
4. RONALD LEE
[ ] FOR ALL NOMINEES [ ] AGAINST ANY [ ] WITHHOLD AUTHORITY
INDIVIDUAL NOMINEE (WRITE TO VOTE FOR ANY
NUMBER(S) OF NOMINEE(S) INDIVIDUAL NOMINEE (WRITE
BELOW). NUMBER(S) OF NOMINEES(S)
BELOW).
----------------- -----------------
1
PROPOSAL NO. 2: Appoint PricewaterhouseCoopers as independent auditors of
NetEase.com, Inc. for the fiscal year ending December 31, 2003.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
PROPOSAL NO. 3: TO approve AS A SPECIAL RESOLUTION the proposal "THAT the
articles numbered 114 to 117 (inclusive) in NetEase.com, Inc.'s Articles of
Association be and are hereby deleted in their entirety. This would remove the
provisions related to the composition, duties and operations of the audit
committee of the board of directors, which provisions will be replaced by a new
audit committee charter that has been adopted by the board of directors and
will become effective upon shareholder approval of this proposal as a special
resolution.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
PROPOSAL NO. 4: To authorize NetEase.com, Inc.'s board of directors, in its
discretion, to cause NetEase.com to repurchase ordinary shares or American
Depositary Receipts representing ordinary shares of NetEase.com from time to
time and at any time through open-market transactions, block purchases or
privately negotiated transactions at such prices and terms as determined by the
board of directors, out of funds legally available therefore and subject to
applicable law; provided that no such share repurchase shall be implemented for
the purpose of materially reducing the liquidity of NetEase.com's securities on
the Nasdaq National Market or of engaging in a "going private" transaction.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
DATED: ______________, 2003
SHAREHOLDER NAME:
-----------------------------
-----------------------------
Signature
-----------------------------
Signature
2
This proxy should be marked, dated and signed by the shareholder(s) exactly as
his or her name appears on their stock certificate, and returned promptly in
the enclosed envelope. Persons signing in a fiduciary capacity should so
indicate. If shares are held by joint tenants or as community property, both
should sign.
Please date, sign and mail this
proxy card back as soon as possible!
3
Exhibit 99.3
1. To re-elect seven directors to serve for the ensuing year and until their
successors are elected and duly qualified.
William Ding
Ted Sun
Denny Lee
Ronald Lee
Michael Leung
Joseph Tong
Michael Tong
2. To appoint PricewaterhouseCoopers as independent auditors of NetEase.com,
Inc. for the fiscal year ending December 31, 2003.
3. To approve AS A SPECIAL RESOLUTION the proposal "THAT the articles numbered
114 to 117 (inclusive) in NetEase.com, Inc.'s Articles of Association be and
are hereby deleted in their entirety." This would remove the provisions
related to the composition, duties and operations of the audit committee of
the board of directors, which provision will be replaced by a new audit
committee charter that has been adopted by the board of directors and will
become effective upon shareholder approval of this proposal as a special
resolution.
4. To authorize NetEase.com, Inc.'s board of directors, in its discretion, to
cause NetEase.com to repurchase ordinary shares or American Depositary
Receipts representing ordinary shares of NetEase.com from time to time and
at any time through open-market transactions, block purchases or privately
negotiated transactions at such prices and terms as determined by the board
of directors, out of funds legally available therefore and subject to
applicable law; provided that no such share repurchase shall be implemented
for the purpose of materially reducing the liquidity of NetEase.com's
securities on the Nasdaq National Market or of engaging in a "going private"
transaction.
[_] Mark, Sign, Date and Return [X]
The Proxy Card Promptly Votes must be indicated
Using the Exclosed Envelope. (x) in Black or Blue Ink.
1. FOR AGAINST ABSTAIN FOR AGAINST ABSTAIN FOR AGAINST ABSTAIN
William Ding [_] [_] [_] Michael Leung [_] [_] [_] 3. [_] [_] [_]
Ted Sun [_] [_] [_] Joseph Tong [_] [_] [_] 4. [_] [_] [_]
Denny Lee [_] [_] [_] Michael Tong [_] [_] [_] In its discretion, the proxy is authorized to
vote upon such other business as mayu
properly come before the meeting or any
Ronald Lee [_] [_] [_] 2. [_] [_] [_] adjoumment or poswtponement thereof.
SCAN LINE
The Voting instruction must be signed by the
person in whose name the relevant Receipt is
registered on the books of the Depositary.
In the case of a Corporation, the Voting
Instruction must be executed by a duly
authorized Officer or Attorney.
Date Share Owner sign here Co-Owner
sign here
1
NETEASE.COM, INC.
Instructions to The Bank of New York, as Depositary
(Must be received prior to the close of business on June 3, 2003)
The undersigned registered holder of American depositary receipts hereby
requests and instructs The Bank of New York, as Depositary, to endeavor, in so
far as practicable, to vote or cause to be voted the amount of shares or other
deposited securities represented by such receipt(s) of NetEase.com, Inc.
registered in the name of the Undersigned on the books of the Depositary as of
the close of business on April 22, 2003 at the Annual General Meeting of
Shareholders of NetEase.com, Inc. to be held at 10:00 a.m. on June 5, 2003, at
the Towers, Oriental Plaza, Dong Cheng District, Beijing, in respect of the
resolutions specified on the reverse.
NOTE:
1. Please direct the Depositary how it is to vote by marking X in the
appropriate box opposite the resolution. It is understood that, if this form
is signed and returned but no instructions are indicated in the boxes, then
a discretionary proxy will be given to a person designated by the Company.
2. It is understood that, if this form is not signed and returned, the
Depositary will deem such holder to have instructed the Depositary to give a
discretionary proxy to a person designated by the Company.
To change your address, please mark this box. [_]
To include any comments, please mark this box. [_]
Please complete and date this proxy on the reverse side and return it
promptly in the accompanying envelope.