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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 000-30698
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SINA.COM
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
----------------
CAYMAN ISLANDS 52-2236363
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
VICWOOD PLAZA
ROOMS 1801-4
18TH FLOOR
199 DES VOEUX ROAD
CENTRAL, HONG KONG
(852) 2155-8800
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
----------------
CHARLES CHAO
1313 GENEVA DRIVE
SUNNYVALE, CA 94089
(408) 548-0000
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
----------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [x] No [ ]
The number of shares outstanding of the registrant's ordinary shares as of
April 30, 2001 was 41,336,495.
2
SINA.COM
INDEX
PART I. FINANCIAL INFORMATION Page no.
--------
Item 1. Condensed Consolidated Financial Statements (unaudited)
Condensed Consolidated Balance Sheet at March 31, 2001 and
June 30, 2000 3
Condensed Consolidated Statement of Operations for the three and nine
months ended March 31, 2001 and 2000 4
Condensed Consolidated Statement of Cash Flows for the nine months
ended March 31, 2001 and 2000 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 9
Item 3. Quantitative and Qualitative Disclosure About Market Risk 21
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 21
Item 2. Changes in Securities and Use of Proceeds 21
Item 3. Defaults Upon Senior Securities 21
Item 4. Submission of Matters to a Vote of Security Holders 21
Item 5. Other Information 22
Item 6. Exhibits and Reports on Form 8-K 22
SIGNATURE 22
2
3
PART I FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
SINA.COM
CONDENSED CONSOLIDATED BALANCE SHEET
(IN U.S. DOLLARS)
(UNAUDITED, IN THOUSANDS)
MARCH 31, JUNE 30,
2001 2000
-------- --------
ASSETS
Current assets:
Cash and cash equivalents............................. $ 55,792 $ 99,149
Short-term investments................................ 59,972 30,484
Accounts receivable, net.............................. 4,649 3,921
Inventories........................................... -- 156
Prepaid expenses and other current assets............. 1,684 1,378
-------- --------
Total current assets........................... 122,097 135,088
Property and equipment, net............................. 10,292 7,737
Intangible assets, net.................................. 6,751 11,828
Investment in joint venture............................. - 894
Receivables from related parties........................ 725 268
Other assets............................................ 192 223
-------- --------
$140,057 $156,038
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable...................................... $ 1,890 $ 1,203
Accrued liabilities................................... 11,502 8,018
-------- --------
Total current liabilities...................... 13,392 9,221
-------- ---------
Commitments and contingencies (Note 5)
Shareholders' equity:
Ordinary shares....................................... 5,501 5,425
Additional paid-in capital............................ 221,743 221,399
Notes receivable from shareholders.................... (1,617) (2,067)
Deferred stock compensation........................... (7,915) (15,057)
Accumulated deficit................................... (91,083) (62,950)
Accumulated other comprehensive income:
Cumulative translation adjustment................... 36 67
-------- --------
Total shareholders' equity..................... 126,665 146,817
-------- --------
$140,057 $156,038
======== ========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
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SINA.COM
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(IN U.S. DOLLARS)
(UNAUDITED, IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED NINE MONTHS ENDED
---------------------- ----------------------
MARCH 31, MARCH 31, MARCH 31, MARCH 31,
2001 2000 2001 2000
--------- --------- --------- ---------
Net revenues:
Advertising ..................................... $ 5,429 $ 3,076 $ 18,385 $ 6,104
Software products ............................... 425 525 1,815 2,192
E-commerce ...................................... 275 44 704 118
-------- -------- -------- --------
6,129 3,645 20,904 8,414
-------- -------- -------- --------
Cost of revenues:
Advertising ..................................... 3,377 2,463 10,704 5,733
Software products ............................... 69 250 624 1,285
E-commerce ...................................... 115 116 384 199
Stock-based compensation ........................ 96 168 334 437
-------- -------- -------- --------
3,657 2,997 12,046 7,654
-------- -------- -------- --------
Gross profit ...................................... 2,472 648 8,858 760
-------- -------- -------- --------
Operating expenses:
Sales and marketing ............................. 5,634 4,589 17,657 11,447
Product development ............................. 2,364 2,029 7,372 5,004
General and administrative ...................... 2,063 1,667 6,074 4,971
Stock-based compensation* ....................... 1,583 3,537 5,767 15,069
Amortization of intangible assets ............... 1,688 1,702 5,077 5,106
-------- -------- -------- --------
Total operating expenses ................ 13,332 13,524 41,947 41,597
-------- -------- -------- --------
Loss from operations .............................. (10,860) (12,876) (33,089) (40,837)
Interest income, net .............................. 1,850 975 5,850 2,103
-------- -------- -------- --------
Loss before minority interest and loss on
investment in joint venture ..................... (9,010) (11,901) (27,239) (38,734)
Minority interest ................................. -- 27 -- 119
Loss on investment in joint venture ............... -- (245) (894) (245)
-------- -------- -------- --------
Net loss .......................................... (9,010) (12,119) (28,133) (38,860)
Accretion on mandatorily redeemable convertible
preference shares ............................... -- (27) -- (81)
-------- -------- -------- --------
Net loss attributable to ordinary shareholders .... $ (9,010) $(12,146) $(28,133) $(38,941)
======== ======== ======== ========
Basic and diluted net loss per share attributable
to ordinary shareholders ........................ $ (0.22) $ (1.41) $ (0.70) $ (4.77)
======== ======== ======== ========
Shares used in computing basic and diluted net
loss per share .................................. 40,300 8,586 39,996 8,162
======== ======== ======== ========
------------
* Stock-based compensation was allocated among the
associated expense categories as follows:
Sales and marketing...................... $49 $109 $178 $463
Product development...................... 512 1,144 1,865 4,876
General and administrative............... 1,022 2,284 3,724 9,730
-------- -------- -------- --------
$ 1,583 $ 3,537 $ 5,767 $ 15,069
======== ======== ======== ========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
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5
SINA.COM
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(IN U.S. DOLLARS)
(UNAUDITED, IN THOUSANDS)
NINE MONTHS ENDED
----------------------
MARCH 31, MARCH 31,
2001 2000
--------- ---------
Cash flows from operating activities:
Net loss attributable to ordinary
shareholders ....................................... $(28,133) $(38,941)
Adjustments to reconcile net loss to net cash
used in operating activities:
Minority interests ................................. -- (119)
Loss on investment in joint venture ................ 894 245
Depreciation and amortization ...................... 2,469 787
Stock-based compensation ........................... 6,101 15,506
Amortization of intangible assets .................. 5,077 5,106
Accretion on mandatorily redeemable
convertible preference shares .................... -- 81
Changes in assets and liabilities
Accounts receivable, net ......................... (728) (2,801)
Inventories ...................................... 156 (42)
Prepaid expenses and other current assets ........ (306) (3,439)
Other assets ..................................... (426) 124
Accounts payable ................................. 687 1,067
Accrued liabilities .............................. 3,453 5,061
-------- --------
Net cash used in operating activities ......... (10,756) (17,365)
-------- --------
Cash flows from investing activities:
Purchase of property and equipment .................... (5,024) (4,948)
Investment in joint venture ........................... -- (1,396)
Purchase of short-term investments .................... (29,488) (20,640)
-------- --------
Net cash used in investing activities ......... (34,512) (26,984)
-------- --------
Cash flows from financing activities:
Proceeds from issuance of preference shares, net ...... -- 63,889
Proceeds from issuance of ordinary shares under ESPP .. 667 --
Proceeds from exercise of stock options ............... 794 136
Proceeds from repayments of promissory notes .......... 450 562
-------- --------
Net cash provided by financing activities ..... 1,911 64,587
-------- --------
Net increase (decrease) in cash and cash equivalents .... (43,357) 20,238
Cash and cash equivalents at beginning of period ........ 99,149 20,571
-------- --------
Cash and cash equivalents at end of period .............. $ 55,792 $ 40,809
======== ========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
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SINA.COM
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN U.S. DOLLARS, UNAUDITED)
1. THE COMPANY AND BASIS OF PRESENTATION
SINA.com ("SINA" or the "Company") is a leading Internet media and services
company for Chinese communities worldwide offering a full array of
Chinese-language news, entertainment, e-commerce platforms, financial
information, and lifestyle tips. With separate Web sites in China, Hong Kong,
Taiwan and North America, SINA provides global content and services that speak
directly to the audience of each region, enriching the online experience of its
users.
The accompanying unaudited condensed consolidated financial statements
reflect all adjustments which, in the opinion of management, are necessary to a
fair statement of the results for the interim periods presented. Results for the
three and nine months ended March 31, 2001 are not necessarily indicative of
results for the entire fiscal year ending June 30, 2001 or future periods. These
financial statements should be read in conjunction with the consolidated
financial statements and the accompanying notes included in the Company's Annual
Report on Form 10-K for the fiscal year ended June 30, 2000.
2. RECENT ACCOUNTING PRONOUNCEMENT
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 ("SFAS No. 133"), "Accounting for
Derivative Instruments and Hedging Activities". SFAS 133 establishes methods of
accounting for derivative financial instruments and hedging activities related
to those instruments as well as other hedging activities. The adoption of this
pronouncement did not have a material impact on the Company's financial
statements.
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial
Statements," which provides guidance on the recognition, presentation, and
disclosure of revenue in financial statements filed with the SEC. SAB 101
outlines the basic criteria that must be met to recognize revenue and provides
guidance for disclosures related to revenue recognition policies. The adoption
of SAB 101 did not have a material impact on the Company's financial statements.
In March 2000, the Financial Accounting Standards Board issued
Interpretation No. 44 ("FIN 44") "Accounting for Certain Transactions Involving
Stock Compensation, an Interpretation of APB Opinion No. 25." FIN 44 clarifies
the application of Opinion No. 25 for (a) the definition of employee for
purposes of applying Opinion No. 25, (b) the criteria for determining whether a
plan qualifies as noncompensatory plan, (c) the accounting consequences of
various modifications to the terms of a previously fixed stock option or award,
and (d) the accounting for an exchange of stock compensation awards in a
business combination. FIN 44 is effective July 1, 2000, but certain conclusions
cover specific events that occur either after December 15, 1998, or January 12,
2000. The adoption of the provisions of FIN 44 did not have a material impact on
the Company's financial statements.
3. NET LOSS PER SHARE
Net loss per share is computed using the weighted average number of the
ordinary shares outstanding during the period. Since the Company has a net loss
for all periods presented, net loss per share on a diluted basis is equivalent
to basic net loss per share because the effect of converting stock options,
warrants and mandatorily redeemable convertible preference shares would be
anti-dilutive. Ordinary shares that are subject to the Company's right to
repurchase are excluded from the basic and diluted net loss per share
calculations.
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7
The following table sets forth the computation of basic and diluted net loss
per share for the periods indicated:
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
------------------- --------------------
(IN THOUSANDS, EXCEPT FOR PER SHARE DATA) 2001 2000 2001 2000
------- -------- -------- --------
Net loss......................................... $(9,010) $(12,119) $(28,133) $(38,860)
Accretion of mandatorily redeemable
convertible preference redemption value....... -- (27) -- (81)
------- -------- -------- --------
Net loss attributable to ordinary
shareholders.................................. $(9,010) $(12,146) $(28,133) $(38,941)
======= ======== ======== ========
Basic and diluted:
Weighted average shares used in
computing basic and diluted net loss
per ordinary shares ........................ 40,300 8,586 39,996 8,162
======= ======== ======== ========
Basic and diluted net loss per share
attributable to ordinary shareholders ...... $ (0.22) $ (1.41) $ (0.70) $ (4.77)
======= ======== ======== ========
Antidilutive securities including options,
warrants, preference shares and restricted
ordinary shares not included in net
loss per share calculation ................. 6,195 31,724 6,195 31,724
======= ======== ======== ========
4. SEGMENT INFORMATION
The Company operates in two principal business segments globally. The
Internet segment develops, designs and markets content and services through a
network of SINA.com Web sites hosted in the U.S., China, Hong Kong and Taiwan.
The Software segment develops, produces and markets software products and
related services in China. The accounting policies of the segments are the same
as those described in the summary of significant accounting policies. The
Company evaluates performance based on income or loss from operations before
stock compensation, amortization of intangible assets, interest, nonrecurring
gains and losses, foreign exchange gains and losses, and income taxes.
Facilities costs are allocated to the segment's cost of revenues based on usage.
Long-lived assets comprise property and equipment.
The following is a summary of operations by segment for the nine months
ended March 31, 2001 and 2000:
NINE MONTHS ENDED MARCH 31,
2001 2000
------------------ -------------------
(IN THOUSANDS) INTERNET SOFTWARE INTERNET SOFTWARE
-------- -------- -------- --------
Revenues ......................... $ 19,089 $1,815 $ 6,222 $2,192
Segment operating income (loss) .. (22,097) 186 (19,558) (137)
The following is a summary of total assets by segment as of March 31, 2001
and June 30, 2000:
MARCH 31, 2001 JUNE 30, 2000
------------------ -------------------
(IN THOUSANDS) INTERNET SOFTWARE INTERNET SOFTWARE
-------- -------- -------- --------
Total assets ..................... $23,894 $1,753 $20,983 $1,911
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8
Reconciliation of segment information to financial statements:
NINE MONTHS ENDED MARCH 31,
---------------------------
2001 2000
-------- --------
LOSS FROM OPERATIONS:
Total loss for reportable segments $(21,911) $(19,695)
Unallocated amounts:
Stock-based compensation (6,101) (15,506)
Amortization of intangible assets (5,077) (5,106)
Other corporate expenses, net -- (530)
-------- --------
Loss from operations before interest, minority
interest and loss on investment in joint venture $(33,089) $(40,837)
======== ========
MARCH 31, JUNE 30,
2001 2000
--------- --------
ASSETS:
Total assets for reportable segments $ 25,647 $ 22,894
Cash and short-term investments not allocated to
reportable segments 107,659 121,316
Intangible assets 6,751 11,828
-------- --------
$140,057 $156,038
======== ========
5. COMMITMENTS AND CONTINGENCIES
There are uncertainties regarding the legal basis of the Company's ability
to operate an Internet business and to advertise in China. The
telecommunication, information and media industries in China remain highly
regulated. Although the Company believes its business in China is in compliance
with existing Chinese laws and regulations, the Company cannot be sure that the
Chinese regulatory authorities will view such business as in compliance with
Chinese laws and regulations. Further, the Company cannot be sure that it will
be in compliance with Chinese laws and regulations that may be adopted in the
future. Therefore, the Company might be required to limit the scope of its
operations in China, and this could have a material adverse effect on the
Company's financial position and results of operations.
8
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This report contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934, including, without limitation, statements regarding our
expectations, beliefs, intentions or future strategies that are signified by the
words "expect", "anticipate", "intend", "believe", or similar language. All
forward-looking statements included in this documents are based on information
available to us on the date hereof, and we assume no obligation to update any
such forward-looking statements. Actual results could differ materially from
those projected in the forward-looking statements. In evaluating our business,
you should carefully consider the information set forth below under the caption
"Certain Business Risks" set forth herein. We caution you that our businesses
and financial performance are subject to substantial risks and uncertainties.
OVERVIEW
We are a leading Internet media and services company for Chinese communities
worldwide, offering a full array of Chinese-language news, entertainment,
e-commerce platforms, financial information, and lifestyle tips. One of our
subsidiaries, Beijing Stone Rich Sight Information Technology Co. Ltd., or BSRS,
a Sino-Foreign joint venture company based in Beijing, China, began operations
in December 1993 as a computer software company focused on providing solutions
to computer users wishing to communicate in Chinese. In May 1996, we launched
our online network, then called SRSnet.com, offering Chinese-language news,
information and community features such as bulletin boards and chat services
targeted at online users in China. In March 1999, we expanded our online network
by acquiring Sinanet.com, a leading Chinese-language Internet content company
with offices in California and Taiwan and two distinct Web sites targeting
Chinese users in North America and Taiwan. In July 1999, we continued our
network expansion by launching our Hong Kong destination Web site targeting
Chinese users in Hong Kong. Today, we operate separate Web sites in China, Hong
Kong, Taiwan, and North America to provide global content and services that
speak directly to the audience of each region, enriching the online experience
of their users.
We derive our revenues from several sources, including online Internet
advertising, software sales, and e-commerce. Advertising revenues are derived
principally from advertising arrangements under which we receive revenues on a
cost-per-thousand impression basis, fixed payment sponsorship from advertisers,
and design of advertising campaigns to be placed on our network. We derive our
software revenues from sales of our software products primarily in China and
Hong Kong through our network of OEM partners, value-added resellers,
distributors, retail merchants, and our direct sales force. Our e-commerce
revenues are mainly derived from transaction and "slotting fees" paid by
merchants for selective positioning and promoting their goods or services within
our online mall, SinaMall.
Our overall revenues for the three and nine months ended March 31, 2001 were
$6.1 million and $20.9 million, respectively, which represent increases of 68.1%
and 148.4% when compared with the corresponding periods in fiscal 2000. The
increase in revenues was primarily driven by higher growth of our Internet
advertising business.
We have incurred significant net losses and negative cash flows from
operations since our inception. As of March 31, 2001, we had an accumulated
deficit of $91.1 million. These losses have been funded primarily through the
issuance of our equity securities in the private and public market. We
anticipate net losses and negative cash flows from operations in the foreseeable
future.
We recorded cumulative deferred stock compensation of approximately $36.3
million through March 31, 2001, which represents the difference between the
exercise price of options granted through March 31, 2001 and the fair market
value of the underlying stock at the date of grant. Deferred stock compensation
is amortized on an accelerated basis over the vesting period of the applicable
options, which is generally four years. The amortization of deferred
compensation was $19.1 million and $3.4 million in fiscal 2000 and 1999,
respectively. We expect the amortization of deferred compensation to be
approximately $7.7 million for fiscal 2001, $4.1 million for fiscal 2002, $1.8
million for fiscal 2003 and $0.2 million for fiscal 2004.
In April 2000, we sold 4,600,000 ordinary shares in an underwritten initial
public offering, inclusive of 600,000 ordinary shares through the exercise of
the underwriter's over-allotment option for net proceeds of approximately $68.8
million.
RESULTS OF OPERATIONS
THREE AND NINE MONTHS ENDED MARCH 31, 2001 AND 2000
REVENUES
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10
Advertising. We generated $5.4 million and $18.4 million in advertising
revenues for the three and nine months ended March 31, 2001, respectively, which
represent increases of 76.5% and 201.2% when compared with the corresponding
periods in fiscal 2000. The increases were primarily due to the increase in
number of advertisers and amount of advertising contracts. For the three and
nine months ended March 31, 2001, advertising revenues accounted for 88.6% and
87.9% of our total revenues, respectively. For the three and nine months ended
March 31, 2000, advertising revenues accounted for 84.4% and 72.5% of our total
revenues, respectively.
Software. Our software revenues were $0.4 million and $1.8 million for the
three and nine months ended March 31, 2001, respectively, which represent
decreases of 19.0% and 17.2% when compared with the corresponding periods in
fiscal 2000. The decreases were mainly due to the fact that, as part our
strategy to draw increased traffic to out portal networks, we began to provide
more free downloads of some our software products on our Web sites. We expect
our revenues from software sales to remain relatively flat or to decrease in the
future.
E-commerce. Our e-commerce revenues were $0.3 million and $0.7 million for
the three and nine months ended March 31, 2001, respectively, as compared to
$44,000 and $0.1 million for the same periods in fiscal 2000, respectively. The
increases in e-commerce revenues were primarily due to the increased e-commerce
activities in SinaMall on our China and North America sites.
COST OF REVENUES
Advertising. Our cost of advertising revenues increased by 37.1% and 86.7%
from $2.5 million and $5.7 million for the three and nine months ended March 31,
2000, respectively, to $3.4 million and $10.7 million for the three and nine
months ended March 31, 2001, respectively. Our cost of advertising revenues
consists of costs associated with the production of our Web site. These costs
primarily consist of fees paid to third parties for Internet connection, content
and services, and compensation related costs and equipment depreciation expense
associated with our Web site production. Compared to the same periods in the
prior year, the increase in cost of advertising revenues to support our rapidly
growing Internet user traffic was primarily due to an increase in Internet
connection costs, such as bandwidth expansion and server co-location cost to
support increased Internet traffic on our Web sites, and an increase in content
and service provider fees to expand our Web site contents and to support the
increased advertisement impressions.
Software. Our cost of software revenues decreased by 72.4% and 51.4% from
$0.3 million and $1.3 million for the three and nine months ended March 31,
2000, respectively, to $69,000 and $0.6 million for the three and nine months
ended March 31, 2001, respectively. The decreases were primarily due to
decreased software revenues as well as a higher percentage of the software
revenues attributable to licensing arrangements which involved minimal costs.
E-commerce. Our cost of e-commerce remained the same at $0.1 million for the
three months ended March 31, 2000 and 2001. Our cost of e-commerce increased by
93.0% from $199,000 for the nine months ended March 31, 2000 to $384,000 for the
nine months ended March 31, 2001. The increase in cost of e-commerce was
primarily due to an increase in compensation related costs associated with
personnel working directly in e-commerce activities.
SALES AND MARKETING EXPENSES
Our sales and marketing expenses as a percentage of net sales decreased from
125.9% and 136.0% for the three and nine months ended March 31, 2000,
respectively, to 91.9% and 84.5% for the three and nine months ended March 31,
2001. In absolute dollars, our sales and marketing expenses increased from $4.6
million and $11.4 million for the three and nine months ended March 31, 2000,
respectively, to $5.6 million and $17.7 million for the three and nine months
ended March 31, 2001, respectively. Sales and marketing expenses consist
primarily of compensation expenses, sales commissions, advertising and promotion
expenditures and travel expenses. The absolute dollar increase was mainly
attributable to an increase in advertising expenses associated with our
brand-building strategy, an increase in compensation expense associated with the
growth in our direct sales force and marketing personnel, and an increase in
sales commissions associated with the increased revenues.
PRODUCT DEVELOPMENT EXPENSES
Our product development expenses as a percentage of net sales decreased from
55.7% and 59.5% for the three and nine months ended March 31, 2000,
respectively, to 38.6% and 35.3% for the three and nine months ended March 31,
2001, respectively. In absolute dollars, our product development expenses
increased from $2.0 million and $5.0 million for the three and nine months ended
March 31, 2000, respectively, to $2.4 million and $7.4 million for the three and
nine months ended March 31, 2001, respectively.
10
11
Product development expenses consist primarily of payroll and related expenses
incurred for enhancement to and maintenance of our Web sites as well as
engineering costs related to develop our software products. The absolute dollar
increase was attributable to increased staffing and associated support for
engineers for developing and enhancing our online network.
GENERAL AND ADMINISTRATIVE EXPENSES
Our general and administrative expenses as a percentage of net sales
decreased from 45.7% and 59.1% for the three and nine months ended March 31,
2000, respectively, to 33.7% and 29.1% for the three and nine months ended March
31, 2001, respectively. In absolute dollars, our general and administrative
expenses increased from $1.7 million and $5.0 million for the three and nine
months ended March 31, 2000, respectively, to $2.1 million and $6.1 million for
the three and nine months ended March 31, 2001, respectively. The absolute
dollar increase was mainly due to the increase in general business activities as
a result of business expansion and building our administrative infrastructure.
STOCK-BASED COMPENSATION EXPENSE
In connection with the grant of certain stock options, we recorded unearned
compensation of approximately $36.3 million through March 31, 2001, which is
being amortized on an accelerated basis over the vesting period of the
applicable options, which is generally four years. Of the total unearned
compensation, approximately $1.7 million and $6.1 million was amortized in the
three and nine months ended March 31, 2001, respectively, as compared to $3.7
million and $15.5 million in the three and nine months ended March 31, 2000,
respectively.
AMORTIZATION OF INTANGIBLE ASSETS
As a result of the acquisition of Sinanet.com in March 1999, we recorded
goodwill and other intangible assets of approximately $20.3 million, which are
being amortized over three years. The amortization expense was $1.7 million for
both quarters ended March 31, 2001 and 2000, and was $5.1 million for both nine
months ended March 31, 2001 and 2000.
INTEREST INCOME, NET
Interest income, net increased from $1.0 million and $2.1 million for the
three and nine months ended March 31, 2000, respectively, to $1.9 million and
$5.9 million for the three and nine months ended March 31, 2001, respectively.
The increases in interest income was primarily due to higher cash and short-term
investment balances as a result of the proceeds from our sale of Series C
preference shares in October and November 1999 and the initial public offering
in April 2000.
LOSS ON EQUITY INVESTMENT
In December 1999, we contributed $1.4 million in cash for a 35.4% interest
in a joint venture with Adforce, Inc. and Compuserve Consultants, Ltd. We
accounted for our investment in the joint venture using the equity method of
accounting. We recorded $0.9 million losses from our investment in the joint
venture during the nine months ended March 31, 2001. The investment was fully
written-off during the quarter ended December 31, 2000.
LIQUIDITY AND CAPITAL RESOURCES
We have financed our operations principally through private sales of our
preference shares and the initial public offering. From inception through March
31, 2001, we have raised net proceeds of $97.5 million through the sale of
preference shares and $68.8 million from the sale of ordinary shares in the
initial public offering. As of March 31, 2001, we had $115.8 million in cash and
cash equivalents and short-term investments.
Net cash used in operating activities was $10.8 million for the nine months
ended March 31, 2001 and was primarily attributable to our net loss of $28.1
million and an increase in accounts receivable of $0.7 million, largely offset
by the non-cash stock-based compensation expense of $6.1 million, an increase in
accrued liability of $3.5 million, depreciation expense of $2.5 million and
amortization expense of $5.1 million related to goodwill and other intangible
assets resulting from the acquisition of Sinanet.com. Net cash used in operating
activities was $17.4 million for the nine months ended March 31, 2000 and was
primarily attributable to our net loss of $38.9 million, an increase in accounts
receivable of $2.8 million, and an increase in prepaid expenses and other
current assets
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of $3.4 million, offset by non-cash stock-based compensation of $15.5 million,
an increase in accrued liabilities of $5.1 million, an increase in accounts
payable of $1.1 million, and amortization expense of $5.1 million related to
goodwill and other intangible assets.
Net cash used in investing activities was $34.5 million for the nine months
ended March 31, 2001, primarily due to the purchase of short-term investments of
$29.5 million and the purchase of capital equipment of $5.0 million. Net cash
used in investing activities was $27.0 million for the nine months ended March
31, 2000, primarily due to the purchase of short-term investments of $20.6
million, the purchase of capital equipment of $4.9 million and investment in a
joint venture of $1.4 million.
Net cash provided by financing activities was $1.9 million for the nine
months ended March 31, 2001, primarily related to the proceeds from the exercise
of stock options of $0.8 million and the issuance of Ordinary Shares of $0.7
million pursuant to Employee Stock Purchase Plan. Net cash provided by financing
activities was $64.6 million for the nine months ended March 31, 2000, primarily
related to the proceeds from issuance of preference share of $63.9 million and
the proceeds from repayment of promissory notes and from exercise of stock
options.
Our principal commitments consist of obligations outstanding under various
operating leases for our facilities. We have experienced an increase in our
capital expenditures and operating lease arrangements, consistent with the
growth in our operations and staffing. We anticipate that this will continue for
the foreseeable future.
We anticipate operating expenses and purchases of equipment will continue to
constitute the majority of the future use of our cash resources. In addition, we
may use our cash resources to acquire or make investments in complementary
products, technologies or businesses. We believe that our existing cash, cash
equivalents and short-term investments will be sufficient to fund our operating
activities, capital expenditures and other obligations for at least the next
twelve months. However, we may sell additional equities or obtain credit
facilities to enhance our liquidity position. The sale of additional equity will
result in further dilution to our shareholders. The incurrence of indebtedness
would result in increased fixed obligations and could result in operating
covenants that would restrict our operations. We cannot assure that financing
will be available in amounts or on terms acceptable to us, if at all.
RISK FACTORS
Because our operating history is limited and the revenue and income potential of
our business and markets are unproven, we cannot predict whether we will meet
internal or external expectations of future performance.
From our inception through September 1998, our revenues consisted entirely
of sales of our RichWin software products and licenses to copy and use these
products. We continued our software sales during fiscal 1999, but with the
launch of our online network in May 1996 and our acquisition of Sinanet.com in
March 1999, we began to devote our resources primarily to developing our online
Chinese-language network. We believe that our future success depends on our
ability to significantly increase revenue from our Internet advertising and
electronic commerce operations, for which we have a limited operating history.
Accordingly, our prospects must be considered in light of the risks, expenses
and difficulties frequently encountered by companies in an early stage of
development. These risks include our ability to: attract advertisers; attract a
larger audience to our network; respond effectively to competitive pressures and
address the effects of strategic relationships or corporate combinations among
our competitors; maintain our current, and develop new, strategic relationships;
increase awareness of the SINA.com brand and continue to build user loyalty;
attract and retain qualified management and employees; upgrade our technology to
support increased traffic and expanded services; and expand the content and
services on our network.
We derive the majority of our revenues from the sale of advertisements under
short-term contracts, which are difficult to forecast accurately.
Most of our revenues are currently derived from advertising agreements or
sponsorship arrangements. These agreements generally have terms no longer than
two years and, in many cases, the terms are much shorter. Some of our
advertisers are Internet companies which, in certain cases, may lack financial
resources to fulfill their commitments. Accordingly, it is difficult to
accurately forecast these revenues. However, our expense levels are based in
part on expectations of future revenues and are fixed over the short term with
respect to certain categories. We may be unable to adjust spending quickly
enough to compensate for any unexpected revenue shortfall. Accordingly, the
cancellation or deferral of advertising or sponsorship contracts could have a
material adverse effect on our financial results. Because our operating expenses
are likely to increase over the near term, to the extent that our expenses
increase but our revenues do not, our business, operating results, and financial
condition may be materially and adversely affected.
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We have a history of losses and we anticipate future losses.
We have never been profitable. As of March 31, 2001, we had an accumulated
deficit of approximately $91.1 million. We anticipate that we will continue to
incur operating losses for the foreseeable future due to increased sales and
marketing costs, additional personnel hires and our continuing branding
campaign. As a result, we cannot be certain when or if we will achieve
profitability. If we do not achieve or sustain profitability, the market price
of our ordinary shares may decline.
We are relying on advertising sales as a significant part of our future revenue,
but the Internet has not been proven as a source of significant advertising
revenue in Greater China.
Our revenue growth is dependent on increased revenue from the sale of
advertising space on our network and the acceptance and use of electronic
commerce. Online advertising in Greater China is an unproven business and many
of our current and potential advertisers have limited experience with the
Internet as an advertising medium, have not traditionally devoted a significant
portion of their advertising expenditures or other available funds to Web-based
advertising, and may not find the Internet to be effective for promoting their
products and services relative to traditional print and broadcast media. Our
ability to generate and maintain significant advertising revenue will therefore
depend on a number of factors, many of which are beyond our control, including:
the development of a large base of users possessing demographic characteristics
attractive to advertisers; downward pressure on online advertising prices; the
development of independent and reliable means of verifying levels of online
advertising and traffic; and the effectiveness of our advertising delivery,
tracking and reporting systems.
If the Internet does not become more widely accepted as a medium for
advertising, our ability to generate increased revenue will be negatively
affected.
We are relying on electronic commerce as a significant part of our future
revenue, but the Internet has not yet been proven as an effective commerce
medium in Greater China.
Our revenue growth depends on the increasing acceptance and use of
electronic commerce in Greater China. The Internet may not become a viable
commercial marketplace in Asia for various reasons, many of which are beyond our
control, including: inexperience with the Internet as a sales and distribution
channel; inadequate development of the necessary infrastructure to facilitate
electronic commerce; concerns about security, reliability, cost, ease of
deployment, administration and quality of service associated with conducting
business over the Internet; and inexperience with credit card usage or with
other means of electronic payment in China.
If the Internet does not become more widely accepted as a medium for
electronic commerce, our ability to generate increased revenue will be
negatively affected.
Underdeveloped telecommunications infrastructure has limited and may continue to
limit the growth of the Internet market in China which, in turn, could limit our
ability to grow our business.
The telecommunications infrastructure in China is not well developed.
Although private sector ISPs exist in China, almost all access to the Internet
is accomplished through ChinaNet, China's primary commercial network, which is
owned and operated by China Telecom, a state-owned enterprise directly
controlled by China's Ministry of Information Industry. The underdeveloped
Internet infrastructure in China has limited the growth of Internet usage in
China. If the necessary Internet infrastructure is not developed, or is not
developed on a timely basis, future growth of the Internet in China will be
limited and our business could be harmed.
We must rely on the Chinese government to develop China's Internet
infrastructure and if it does not develop this infrastructure our ability to
grow our business will be hindered.
The Chinese government's interconnecting, national networks connect to the
Internet through government-owned international gateways, which are the only
channels through which a domestic Chinese user can connect to the international
Internet network. We rely on this backbone and China Telecom to provide data
communications capacity primarily through local telecommunications lines.
Although the Chinese government has announced plans to develop aggressively the
national information infrastructure, we cannot assure you that this
infrastructure will be developed. In addition, we have no guarantee that we will
have access to alternative networks and services in the event of any disruption
or failure. If the necessary infrastructure standards or protocols or
complementary products, services or facilities are not developed by the Chinese
government, the growth of our business will be hindered.
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You should not rely on our quarterly operating results as an indication of our
future performance because our results of operations are subject to significant
fluctuations.
We may experience significant fluctuations in our quarterly operating
results due to a variety of factors, many of which are outside our control.
Factors that may cause our quarterly operating results to fluctuate include: our
ability to retain existing users, attract new users at a steady rate and
maintain user satisfaction; the announcement or introduction of new or enhanced
services, content and products by us or our competitors; dependence on a limited
number of advertisers, the majority of which have agreements with us that are
cancelable upon a specified notice period, and the loss of any major advertiser;
significant news events that increase traffic to our Web sites; technical
difficulties, system downtime or Internet failures; demand for advertising space
from advertisers; the amount and timing of operating costs and capital
expenditures relating to expansion of our business, operations and
infrastructure; governmental regulation; seasonal trends in Internet use; a
shortfall in our revenues relative to our forecasts and a decline in our
operating results due to our inability to adjust our spending quickly; and
general economic conditions and economic conditions specific to the Internet,
electronic commerce and the Greater China market.
As a result of these and other factors, you should not rely on
quarter-to-quarter comparisons of our operating results as indicators of likely
future performance. Our operating results may be below the expectations of
public market analysts and investors in one or more future quarters. If that
occurs, the price of our ordinary shares could decline and you could lose part
or all of your investment.
Political and economic conditions in Greater China are unpredictable and may
disrupt our operations if these conditions become unfavorable to our business.
We derive a substantial percentage of our revenues from the Greater China
market. Changes in political or economic conditions in the region are difficult
to predict and could adversely affect our operations or cause the Greater China
market to become less attractive to advertisers, which could reduce our
revenues. We maintain a strong local identity and presence in each of the
regions in the Greater China market and we cannot be sure that we would be able
to maintain effectively this local identity if political conditions were to
change. Furthermore, many countries in Asia have experienced significant
economic downturns since the middle of 1997, resulting in slower real gross
domestic product growth for the entire region as a result of higher interest
rates and currency fluctuations. If declining economic growth rates persist,
expenditures for Internet access, infrastructure improvements and advertising
could decrease, which would negatively affect our business and our profitability
over time. In addition, the economic downturn in Asia could also lead to a
devaluation of the currency of China, Taiwan or Hong Kong, which would decrease
our revenues for the Greater China region in U.S. dollar terms.
In addition, economic reforms in the region could affect our business in
ways that are difficult to predict. For example, since the late 1970s, the
Chinese government has been reforming the Chinese economic system to emphasize
enterprise autonomy and the utilization of market mechanisms. Although we
believe that these reforms measures have had a positive effect on the economic
development in China, we cannot be sure that they will be effective or that they
will benefit our business.
We may be adversely affected by Chinese government regulation of Internet
companies.
China has begun to regulate its Internet sector by making pronouncements or
enacting regulations regarding the legality of foreign investment in the Chinese
Internet sector, the existence and enforcement of content restrictions on the
Internet and the availability of securities offerings by companies operating in
the Chinese Internet sector. In the opinion of our Chinese counsel, the
ownership of BSRS and its businesses comply with existing Chinese laws and
regulations. There are, however, substantial uncertainties regarding the proper
interpretation of current and future Chinese Internet laws and regulations.
Issues, risks and uncertainties relating to China government regulation of
the Chinese Internet sector include the following:
A prohibition of foreign investment in businesses providing value-added
telecommunication services, including computer information services or
electronic mail box services, may be applied to Internet businesses such as
ours. Some officials of the Chinese Ministry of Information Industry, or MII,
have taken the position that foreign investment in the Internet sector is
prohibited.
The MII has also stated recently that it intends to adopt new laws or
regulations governing foreign investment in the Chinese Internet sector in the
near future. If these new laws or regulations forbid foreign investment in the
Internet sector, our business will be severely impaired.
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In October 2000, the United States granted China permanent, normal trade
status facilitating China's ability to enter into the World Trade Organization,
or WTO. If China does join the WTO, foreign investment in Chinese Internet
services may be liberalized to allow for 49% foreign ownership in key
telecommunication services, including Chinese Internet ventures, for the first
two years after China's entry into the WTO and 50% thereafter.
In September 2000, the Chinese government issued a regulation concerning the
licensing requirements of Internet companies and the forms of content acceptable
on a Web site regulated by the Chinese government. In November 2000, the Chinese
government issued additional regulations requiring Chinese Internet sites to use
news from state-controlled media subject to certain limited exceptions. In
November 2000, the Chinese government also promulgated regulations governing the
use of chat room and bulletin-board systems requiring Chinese Internet companies
to obtain approval for each category of chat room, banning certain content from
chat rooms and holding Internet companies potentially liable for prohibited
information that may appear in chat rooms.
The interpretation and application of existing Chinese laws and regulations,
the stated positions of the MII and the possible new laws or regulations have
created substantial uncertainties regarding the legality of existing and future
foreign investments in, and the businesses and activities of, Chinese Internet
businesses, including our business.
Accordingly, it is possible that the relevant Chinese authorities could, at
any time, assert that any portion or all of our existing or future ownership
structure and businesses violates existing or future Chinese laws and
regulations. It is also possible that the new laws or regulations governing the
Chinese Internet sector that may be adopted in the future will prohibit or
restrict foreign investment in, or other aspects of, any of our current or
proposed businesses and operations or require governmental approvals for this
offering. In addition, these new laws and regulations may be retroactively
applied to us.
If we are found to be in violation of any existing or future Chinese laws or
regulations, the relevant Chinese authorities would have broad discretion in
dealing with such a violation, including, without limitation, the following:
levying fines; revoking our business license; requiring us to restructure our
ownership structure or operations; and requiring us to discontinue any portion
or all of our Internet business. Any of these actions could cause our business
to suffer and the price of our ordinary share to decline.
We have attempted to comply with the strict licensing and registration
requirements of the PRC government by entering into agreements with two Chinese
entities majority owned by our employees; if the PRC government finds that these
agreements do not comply with the licensing requirements, our business in the
PRC will be adversely affected.
Because the Chinese government restricts foreign investment in
Internet-related businesses, we have restructured our China Internet operations
by forming two Chinese entities to acquire appropriate government licenses to
conduct our business there. The legal uncertainties associated with the Chinese
government regulation may be summarized as follows: whether the Chinese
government may view our restructuring as being in compliance with their
regulations; whether the Chinese government may revoke such business licenses;
whether the Chinese government may impose additional regulatory requirements
with which we may not be in compliance; whether the Chinese government will
permit the Chinese entities to acquire future licenses necessary in order to
conduct operations in China; and whether the Chinese government will restrict or
prohibit the distribution of content over the Internet.
The Chinese government regulates Internet access and the distribution of
news and other information through strict business licensing and registration
requirements and other governmental regulation. With respect to licensing, our
subsidiary Beijing Stone Rich Sight Information Technology Co. Ltd., or BSRS, is
currently licensed to operate as a software company. BSRS has entered into
agreements with two Chinese entities: Beijing SINA Interactive Advertising Co.,
Ltd., a Chinese advertising company that is 75% owned by Yan Wang, our general
manager of China operation, and 25% owned by BSRS, and which we refer to as the
Ad Company, and Beijing SINA Internet Information Services Co., Ltd., a Chinese
Internet content provider that is 70% owned by Zhidong Wang, our president and
chief executive officer and 30% owned by Yan Wang and which we refer to as the
ICP Company.
Pursuant to these agreements, the ICP Company is responsible for operating
www.sina.com.cn in connection with its Internet content company license and will
sell advertising space on www.sina.com.cn to the Ad Company. The Ad Company, in
turn, will sell advertisements in this space to third parties under its
advertising license. In addition, BSRS has licensed intellectual property and
transferred equipment to the ICP Company, and acts as the ICP Company's provider
of technical services, all in exchange for fees or other payments. BSRS will
also be a consultant and service provider to the Ad Company for its domestic
Chinese customers.
We cannot be sure that these and other corporate activities carried out by
us will be viewed by Chinese regulatory authorities as in compliance with
applicable licensing requirements. Our business in China will be adversely
affected if our business license is revoked as a result of non-compliance. In
addition, we cannot be sure that we will be able to obtain all of the licenses
we may need in the
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future or that future changes in Chinese government policies affecting the
provision of information services, including the provision of online services
and Internet access, will not impose additional regulatory requirements on us or
our service providers or otherwise harm our business.
We depend upon contractual arrangements with the Ad Company and the ICP Company
for the success of our operations in China and these arrangements may not be as
effective in providing operational control as direct ownership of these
businesses.
Because we are restricted by the Chinese government from providing Internet
and advertising services directly in China, we are dependent on the Ad Company,
of which we own 25%, and the ICP Company, of which we have no ownership
interest, to provide such services through contractual agreements between the
parties. This arrangement may not be as effective in providing control over
advertising and Internet content operations in China as direct ownership of
these businesses. For example, the Ad Company or ICP Company could fail to take
actions required for our business, such as entering into advertising contracts
with potential customers or failing to maintain our China Web site. The ICP
Company will also be able to transact business with third parties not affiliated
with BSRS. If the Ad Company or ICP fails to perform its obligations under these
agreements, we would potentially have to rely on legal remedies under Chinese
law, which we cannot be sure would be effective.
The ICP Company is controlled by Zhidong Wang, our president and chief
executive officer. As a result, our contractual relationships with the ICP
Company would be viewed as entrenching his management position or transferring
certain value to him, especially if any conflict arose with him.
We may not be in compliance with Chinese government regulations relating to
foreign investment prohibitions and, if so determined, the Chinese government
could cause us to discontinue our operations in China.
Chinese government policy prohibits foreign investment in the
telecommunications services industry, which he has defined to include
Internet-related businesses. While we believe that we are in compliance with
current Chinese government policies, we cannot be sure that the government will
view our business as in compliance with these policies or any policies that may
be made in the future. If we are not viewed as complying with these policies or
any regulations that may be created relating to foreign ownership of Internet-
related businesses, the Chinese government could require us to discontinue our
operations in China or take other actions that could harm our business.
Even if we are in compliance with Chinese governmental regulations relating to
licensing and foreign investment prohibitions, the Chinese government may
prevent us from distributing, and we may be subject to liability for, content
that it believes is inappropriate.
China has enacted regulations governing Internet access and the distribution
of news and other information. In the past, the Chinese government has stopped
the distribution of information over the Internet that it believes to violate
Chinese law, including content that is obscene, incites violence, endangers
national security, is contrary to the national interest or is defamatory. In
addition, we may not publish certain news items, such as news relating to
national security, without permission from the Chinese government. Furthermore,
the Ministry of Public Security has the authority to cause any local Internet
service provider to block any Web site maintained outside China at its sole
discretion. Even if we comply with Chinese governmental regulations relating to
licensing and foreign investment prohibitions, if the Chinese government were to
take any action to limit or prohibit the distribution of information through our
network or to limit or regulate any current or future content or services
available to users on our network, our business would be harmed.
In November 2000, the Chinese government also promulgated regulations
governing the use of chat room and bulletin-board systems requiring Chinese
Internet companies to obtain approval for each category of chat room, banning
certain content from chat rooms and holding Internet companies potentially
liable for prohibited information that may appear in chat rooms. We have not
obtained all the requisite approvals set forth in these regulations and thus
cannot assure you that our business, financial condition and results of
operations will not be materially and adversely affected by the application of
these regulations.
We are also subject to potential liability for content on our Web sites that
is deemed inappropriate and for any unlawful actions of our subscribers and
other users of our systems under regulations promulgated by the Chinese Ministry
of Information Industry. Furthermore, we are required to delete content that
clearly violates the laws of China and report content that we suspect may
violate Chinese law. It is difficult to determine the type of content that may
result in liability for us, and if we are wrong, we may be prevented from
operating our Web sites.
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We may have to register our encryption software with Chinese regulatory
authorities, and if they request that we change our encryption software, our
business operations will be disrupted as we develop or license replacement
software.
Pursuant to the Regulations for the Administration of Commercial Encryption
promulgated at the end of 1999, foreign and domestic Chinese companies operating
in China are required to register and disclose to Chinese regulatory authorities
the commercial encryption products they use. Because these regulations have just
recently been adopted and because they do not specify what constitutes
encryption products, we are unsure as to whether or how they apply to us and the
encryption software we utilize. We may be required to register, or apply for
permits with the relevant Chinese regulatory authorities for, our current or
future encryption software. If Chinese regulatory authorities request that we
change our encryption software, we may have to develop or license replacement
software, which could disrupt our business operations.
The markets in which we operate are highly competitive, and we may be unable to
compete successfully against new entrants and established industry competitors,
many of which have greater financial resources than we do or currently enjoy a
superior market position than we do.
The Asian market for Internet content and services is competitive and
rapidly changing. Barriers to entry are minimal, and current and new competitors
can launch new Web sites at a relatively low cost. Many companies offer Chinese
language content and services, including informational and community features,
and email and electronic commerce services in the Greater China market that may
be competitive with our future offerings. We also face competition from
providers of software and other Internet products and services that incorporate
search and retrieval features into their offerings. In addition, entities that
sponsor or maintain high-traffic Web sites or that provide an initial point of
entry for Internet users, such as ISPs, including large, well-capitalized
entities such as Microsoft (MSN), Yahoo!, PCCW-HKT (Netvigator) and AOL,
currently offer and could further develop or acquire content and services that
compete with those that we offer. We expect that as Internet usage in Greater
China increases and the Greater China market becomes more attractive to
advertisers and for conducting electronic commerce, large global competitors may
increasingly focus their resources on the Greater China market. We also compete
for advertisers with traditional media companies, such as newspapers, television
networks and radio stations, that have a longer history of use and greater
acceptance among advertisers. In addition, providers of Chinese language
Internet tools and services may be acquired by, receive investments from or
enter into other commercial relationships with large, well-established and
well-financed Internet, media or other companies. For example, America Online
Inc. and Xinhua News Agency, one of our content suppliers, are major
shareholders of Chinadotcom, and News Corp Ltd. is a major shareholder of
Netease.com.
A number of our current and potential future competitors have greater name
recognition, larger customer bases and greater financial and other resources
than we have, and may be able to more quickly react to changing consumer
requirements and demands, deliver competitive services at lower prices and more
effectively respond to new Internet technologies or technical standards.
Increased competition could result in reduced page views, loss of market
share and lower profit margins from reduced pricing for Internet-based services.
If we fail to develop successfully and introduce new products and services, our
competitive position and ability to generate revenues will be harmed.
We are developing new products and services. The planned timing or
introduction of new products and services is subject to risks and uncertainties.
Actual timing may differ materially from original plans. Unexpected technical,
operational, distribution or other problems could delay or prevent the
introduction of one or more of our new products or services. Moreover, we cannot
be sure that any of our new products and services will achieve widespread market
acceptance or generate incremental revenue.
We have contracted with third parties to provide content and services for our
portal network and to distribute our software, and we may lose users and revenue
if these arrangements are terminated.
We have arrangements with a number of third parties to provide content and
services to our Web sites and to distribute our software. In the area of
content, we have relied and will continue to rely almost exclusively on third
parties for content that we publish under the SINA brand. Although no single
third party content provider is critical to our operations, if these parties
fail to develop and maintain high-quality and successful media properties, or if
a large number of our existing relationships are terminated, we could lose users
and advertisers and our brand could be harmed.
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In the area of Web-based services, we have contracted with OpenFind for
integrated Web search technology to complement our directory and navigational
guide, and with Critical Path for our U.S. site email services and third-party
providers for our principal Internet connections. If we experience significant
interruptions or delays in service, or if these agreements terminate or expire,
we may incur additional costs to develop or secure replacement services and our
relationship with our users could be harmed.
We depend on a third party's proprietary and licensed advertising serving
technology to deliver advertisements to our network. If the third party fails to
continue to support its technology or if its services fail to meet the
advertising needs of our customers and we cannot find an alternative solution on
a timely basis, our advertising revenue would decline.
In order to create traffic for our online properties and make them more
attractive to advertisers and consumers, we have entered into distribution
agreements and informal relationships with ISPs and personal computer
manufacturers for the distribution of our software. These distribution
arrangements typically are non-exclusive, and may be terminated upon little or
no notice. If our software distributors were to terminate or modify their
distribution arrangements, our ability to promote our network and generate
revenue could be harmed.
Our business and growth will suffer if we are unable to hire and retain key
personnel that are in high demand.
We depend upon the continued contributions of our senior management and
other key personnel, many of whom are difficult to replace. The loss of the
services of any of our executive officers or other key employees could harm our
business. We have experienced changes to our executive management team. On
January 31, 2001, Victor Lee resigned as our Chief Financial Officer. We also
had two chief financial officers resign in 1999, as well as our chief executive
officer, James Sha. In August 1999, Zhidong Wang, who has served as our
president since October 1997, was promoted to the position of chief executive
officer. Our future success will also depend on our ability to attract and
retain highly skilled technical, managerial, editorial, marketing and customer
service personnel, especially qualified personnel for our international
operations in Greater China. In particular, we have experienced difficulty in
hiring and retaining qualified personnel for our Hong Kong office and may
experience similar problems in our other regional offices. Qualified individuals
are in high demand, and we may not be able to successfully attract, assimilate
or retain the personnel we need to succeed.
We may not be able to manage our expanding operations effectively, which could
harm our business.
We anticipate significant expansion of our business as we address growth in
our customer base and market opportunities. In addition, the geographic
dispersion of our operations requires significant management resources that our
locally-based competitors do not need to devote to their operations. In order to
manage the expected growth of our operations and personnel, we will be required
to improve existing and implement new operational and financial systems,
procedures and controls, and to expand, train and manage our growing employee
base. Further, our management will be required to maintain and expand our
relationships with various other Web sites, Internet and other online service
providers and other third parties necessary to our business. We cannot assure
you that our current and planned personnel, systems, procedures and controls
will be adequate to support our future operations.
Concerns about the security of electronic commerce transactions and
confidentiality of information on the Internet may reduce use of our network and
impede our growth.
A significant barrier to electronic commerce and communications over the
Internet in general has been public concern over security and privacy,
especially the transmission of confidential information. If these concerns are
not adequately addressed, they may inhibit the growth of the Internet and other
online services generally, especially as a means of conducting commercial
transactions. If a well-publicized Internet breach of security were to occur,
general Internet usage could decline, which could reduce traffic to our
destination sites and impede our growth.
Currency fluctuations and restrictions on currency exchange may adversely affect
our business, including limiting our ability to convert Chinese renminbi into
foreign currencies and, if renminbi were to decline in value, reducing our
revenues in U.S. dollar terms.
We generate revenues and incur expenses and liabilities in Chinese renminbi,
Taiwan dollars, Hong Kong dollars, and U.S. dollars. In the future, we may also
conduct business in additional foreign countries and generate revenues and incur
expenses and liabilities in other foreign currencies. As a result, we are
subject to the effects of exchange rate fluctuations with respect to any of
these currencies. For example, the value of the renminbi depends to a large
extent on China's domestic and international economic and political
developments, as well as supply and demand in the local market. Since 1994, the
official exchange rate for the conversion of renminbi
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to U.S. dollars has generally been stable and the renminbi has appreciated
slightly against the U.S. dollar. However, given recent economic instability and
currency fluctuations in Asia, we can offer no assurance that the renminbi will
continue to remain stable against the U.S. dollar or any other foreign currency.
Our results of operations and financial condition may be affected by changes in
the value of renminbi and other currencies in which our earnings and obligations
are denominated. We have not entered into agreements or purchased instruments to
hedge our exchange rate risks, although we may do so in the future.
Although Chinese governmental policies were introduced in 1996 to allow the
convertibility of renminbi into foreign currency for current account items,
conversion of renminbi into foreign exchange for capital items, such as foreign
direct investment, loans or security, requires the approval of the State
Administration of Foreign Exchange, or SAFE, which is under the authority of the
People's Bank of China. These approvals, however, do not guarantee the
availability of foreign currency. We cannot be sure that we will be able to
obtain all required conversion approvals for our operations or that Chinese
regulatory authorities will not impose greater restrictions on the
convertibility of the renminbi in the future. Because a significant amount of
our future revenues may be in the form of renminbi, our inability to obtain the
requisite approvals or any future restrictions on currency exchanges will limit
our ability to utilize revenue generated in renminbi to fund our business
activities outside China.
Our operations could be disrupted by unexpected network interruptions caused by
system failures, natural disasters or unauthorized tamperings with our systems.
The continual accessibility of our Web sites and the performance and
reliability of our network infrastructure are critical to our reputation and our
ability to attract and retain users, advertisers and merchants. Any system
failure or performance inadequacy that causes interruptions in the availability
of our services or increases the response time of our services could reduce our
appeal to advertisers and consumers. Factors that could significantly disrupt
our operations include: system failures and outages caused by fire, floods,
earthquakes, power loss, telecommunications failures and similar events;
software errors; computer viruses, break-ins and similar disruptions from
unauthorized tampering with our computer systems; and security breaches related
to the storage and transmission of proprietary information, such as credit card
numbers or other personal information.
We have limited backup systems and redundancy. Recently, we experienced an
unauthorized tampering of the mail server of our China Web site which briefly
disrupted our operations. Future disruptions or any of the foregoing factors
could damage our reputation, require us to expend significant capital and other
resources and expose us to a risk of loss or litigation and possible liability.
We do not carry sufficient business interruption insurance to compensate for
losses that may occur as a result of any of these events. Accordingly, our
revenues and results of operations may be adversely affected if any of the above
disruptions should occur.
The law of the Internet remains largely unsettled, which subjects our business
to legal uncertainties that could harm our business.
Due to the increasing popularity and use of the Internet and other online
services, it is possible that a number of laws and regulations may be adopted
with respect to the Internet or other online services covering issues such as
user privacy, pricing, content, copyrights, distribution, antitrust and
characteristics and quality of products and services. Furthermore, the growth
and development of the market for electronic commerce may prompt calls for more
stringent consumer protection laws that may impose additional burdens on
companies conducting business online. The adoption of any additional laws or
regulations may decrease the growth of the Internet or other online services,
which could, in turn, decrease the demand for our products and services and
increase our cost of doing business.
Moreover, the applicability to the Internet and other online services of
existing laws in various jurisdictions governing issues such as property
ownership, sales and other taxes, libel and personal privacy is uncertain and
may take years to resolve. For example, tax authorities in a number of states in
the U.S. are currently reviewing the appropriate tax treatment of companies
engaged in electronic commerce, and new state tax regulations may subject us to
additional state sales and income taxes. Any new legislation or regulation, the
application of laws and regulations from jurisdictions whose laws do not
currently apply to our business, or the application of existing laws and
regulations to the Internet and other online services could significantly
disrupt our operations.
We may be subject to claims based on the content we provide over our network and
the products and services sold on our network, which, if successful, could cause
us to pay significant damage awards.
As a publisher and distributor of content and a provider of services over
the Internet, we face potential liability for: defamation, negligence,
copyright, patent or trademark infringement and other claims based on the nature
and content of the materials that we publish or distribute; the selection of
listings that are accessible through our branded products and media properties,
or through content and materials that may be posted by users in our classifieds,
message board and chat room services; losses incurred in reliance on any
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erroneous information published by us, such as stock quotes, analyst estimates
or other trading information; unsolicited email, lost or misdirected messages,
illegal or fraudulent use of email or interruptions or delays in email service;
and product liability, warranty and similar claims to be asserted against us by
end users who purchase goods and services through our SinaMall and any future
electronic commerce services we may offer.
We may incur significant costs in investigating and defending any potential
claims, even if they do not result in liability. Although we carry general
liability insurance, our insurance may not cover potential claims of this type
or be adequate enough to indemnify us against all potential liabilities.
Privacy concerns may prevent us from selling demographically targeted
advertising in the future and make us less attractive to advertisers.
We collect personal data from our user base in order to understand better
our users and their needs and to help our advertisers target specific
demographic groups. If privacy concerns or regulatory restrictions prevent us
from selling demographically targeted advertising, we may become less attractive
to advertisers. For example, as part of our future advertisement delivery
system, we may integrate user information such as advertisement response rate,
name, address, age or email address, with third-party databases to generate
comprehensive demographic profiles for individual users. In Hong Kong, however,
we would be in violation of the Hong Kong Personal Data Ordinance unless
individual users expressly consented to this integration of their personal
information. The Ordinance provides that an Internet company may not collect
information on its users, analyze the information for a profile of the user's
interests and sell or transmit the profiles to third parties for direct
marketing purposes without the user's consent. If we are unable to construct
demographic profiles for Internet users because they refuse to give consent, we
will be less attractive to advertisers and our business will suffer.
We may not be able to adequately protect our intellectual property, which could
cause us to be less competitive.
We rely on a combination of copyright, trademark and trade secret laws and
restrictions on disclosure to protect our intellectual property rights. Despite
our efforts to protect our proprietary rights, unauthorized parties may attempt
to copy or otherwise obtain and use our technology. Monitoring unauthorized use
of our products is difficult and costly, and we cannot be certain that the steps
we have taken will prevent misappropriations of our technology, particularly in
foreign countries where the laws may not protect our proprietary rights as fully
as in the United States. From time to time, we may have to resort to litigation
to enforce our intellectual property rights, which could result in substantial
costs and diversion of our resources.
We may be classified as a passive foreign investment company or as a foreign
personal holding company, which could result in adverse U.S. tax consequences to
you.
Based upon the nature of our income and assets, we may be classified as a
passive foreign investment company, or PFIC, or as a foreign personal holding
company, or FPHC, by the United States Internal Revenue Service for U.S. federal
income tax purposes. This characterization could result in adverse U.S. tax
consequences to you. For example, if we are a PFIC, our U.S. investors will
become subject to increased tax liabilities under U.S. tax laws and regulations
and will become subject to more burdensome reporting requirements. We believe
that we were not a PFIC or an FPHC for 2000 or previous years, and we do not
expect to be either in the future. However, the determination of whether or not
we are a PFIC or an FPHC is made on an annual basis, and those determinations
depend on the composition of our income and assets, in the case of the PFIC
rules, and income and shareholders, in the case of the FPHC rules, from time to
time. Although in the past we have operated our business, and in the future we
intend to operate our business so as to minimize the risk of PFIC or FPHC
treatment, you should be aware that certain factors that could affect our
classification as PFIC or FPHC are out of our control. For example, the
calculation of assets for purposes of the PFIC rules depends in large part upon
the amount of our goodwill, which in turn is based, in part, on the then market
value of our shares, which is subject to change. Similarly, the composition of
our income and assets is affected by the extent to which we spend the cash we
have raised on acquisitions and capital expenditures. Therefore, we cannot be
sure that we will not be a PFIC or an FPHC for the current or any future taxable
year.
Our stock price has been volatile historically, which may make it more difficult
for you to resell shares when you want at prices you find attractive.
The trading price of our common stock has been and may continue to be
subject to wide fluctuations. During 2000, the closing sale prices of our common
stock on the Nasdaq Stock Market ranged from $3.12 to $54.50 and the sale price
of our common stock closed at $1.74 on April 30, 2001. Our stock price may
fluctuate in response to a number of events and factors, such as quarterly
variations in
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operating results, announcements of technological innovations or new products
and media properties by us or our competitors, changes in financial estimates
and recommendations by securities analysts, the operating and stock price
performance of other companies that investors may deem comparable, and news
reports relating to trends in our markets. In addition, the stock market in
general, and the market prices for Internet-related companies in particular,
have experienced extreme volatility that often has been unrelated to the
operating performance of such companies. These broad market and industry
fluctuations may adversely affect the price of our stock, regardless of our
operating performance.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
INTEREST RATE RISK
The Company's investment policy requires the Company to invest its excess
cash in government or quasi-government securities and in high-quality corporate
securities and limits the amount of credit exposure to any one issuer. The
Company protects and preserves its invested funds by limiting default, market
and reinvestment risk. Due to the fact that majority of our investments are in
short-term instruments, we have concluded that there is no material market risk
exposure in this area.
FOREIGN CURRENCY EXCHANGE RATE RISK
The majority of the Company's revenues derived and expenses and liabilities
incurred were in Chinese renminbi, Taiwan dollars and Hong Kong dollars. Thus,
our revenues and operating results may be impacted by exchange rate fluctuations
in the currencies of China, Taiwan and Hong Kong. See "Risk Factors -- Currency
fluctuations and restrictions on currency exchange may adversely affect our
business, including limiting our ability to convert Chinese renminbi into
foreign currencies and, if renminbi were to decline in value, reducing our
revenue in U.S. dollar terms." We have not tried to reduce our exposure to
exchange rate fluctuations by using hedging transactions. However, we may choose
to do so in the future. We may not be able to do this successfully. Accordingly,
we may experience economic losses and negative impacts on earnings and equity as
a result of foreign exchange rate fluctuations.
PART II---OTHER INFORMATION
Item 1. Legal Proceedings
There are no material legal proceedings pending or, to our knowledge,
threatened against us.
Item 2. Changes in Securities and Use of Proceeds
The effective date of the Registration Statement for the Company's initial
public offering, filed on Form F-1 under the Securities Act of 1933 (File No.
333-11718), was April 12, 2000. The class of securities registered was Ordinary
Shares. The offering commenced on April 13, 2000. The managing underwriters for
the offering were Morgan Stanley Dean Witter, China International Capital
Corporation, Chase H&Q, and Robertson Stephens.
Pursuant to the Registration Statement, the Company sold 4,600,000 shares of
its Ordinary Shares for an aggregate offering price of $78.2 million. The
Company incurred expenses of approximately $9.4 million, of which $5.5 million
represented underwriting discounts and commissions and approximately $3.9
million represented other expenses related to the offering. The net offering
proceeds to the Company after total expenses were $68.8 million. We plan to use
the net proceeds for working capital and other general corporate purposes. A
portion of the net proceeds may be used for the acquisition of businesses,
products and technologies that are complementary to our own. The remaining net
proceeds have been invested in cash, cash equivalents and short-term
investments. The use of the proceeds from the offering does not represent a
material change in the use of proceeds described in the prospectus.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
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Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
10.48: Change of Control Agreement dated February 1, 2001 with Charles
Chao
(b) Reports on Form 8-K.
No reports on Form 8-K were filed by SINA.com during the quarter ended March
31, 2001.
SIGNATURE
In accordance with the requirements of the Exchange Act, the Registrant has
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
SINA.com
Dated: May 14, 2001 By: /s/ Charles Chao
-----------------------------------
Charles Chao
Chief Financial Officer (Principal
Financial and Accounting Officer)
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