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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 DECEMBER 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 January 31, 2002 was 45,885,056.
SINA.COM
INDEX
PART I. UNAUDITED FINANCIAL INFORMATION Page no.
--------
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheet at December 31, 2001 and
June 30, 2001 3
Condensed Consolidated Statement of Operations for the three and six
months ended December 31, 2001 and 2000 4
Condensed Consolidated Statement of Cash Flows for the six months
ended December 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 8
Item 3. Quantitative and Qualitative Disclosure About Market Risk 19
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 20
Item 2. Changes in Securities and Use of Proceeds 20
Item 3. Defaults Upon Senior Securities 20
Item 4. Submission of Matters to a Vote of Security Holders 20
Item 5. Other Information 20
Item 6. Exhibits and Reports on Form 8-K 21
SIGNATURES 21
2
PART I UNAUDITED FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SINA.COM
CONDENSED CONSOLIDATED BALANCE SHEET
(IN U.S. DOLLARS)
(UNAUDITED, IN THOUSANDS)
DECEMBER 31, JUNE 30,
2001 2001
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents .............................. $ 23,187 $ 52,505
Short-term investments ................................. 72,785 57,284
Accounts receivable, net ............................... 3,592 4,262
Prepaid expenses and other current assets .............. 1,298 1,350
------------ ------------
Total current assets ............................ 100,862 115,401
Property and equipment, net .............................. 10,416 11,911
Intangible assets, net ................................... 1,687 5,063
Long-term investment ..................................... 17,309 --
Other assets ............................................. 158 747
------------ ------------
Total assets ............................... $130,432 $133,122
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable ....................................... $ 1,213 $ 1,613
Accrued liabilities .................................... 8,772 11,542
------------ ------------
Total current liabilities ....................... 9,985 13,155
Loan from a shareholder .................................. 4,000 --
------------ ------------
Total liabilities .......................... 13,985 13,155
------------ ------------
Commitments and contingencies (Note 6)
Shareholders' equity:
Ordinary shares ........................................ 6,105 5,504
Additional paid-in capital ............................. 223,311 220,671
Notes receivables from shareholders .................... (1,050) (1,479)
Deferred stock compensation ............................ (2,366) (5,423)
Accumulated deficit .................................... (109,528) (99,301)
Accumulated other comprehensive loss:
Cumulative translation adjustments ................... (25) (5)
------------ ------------
Total shareholders' equity ...................... 116,447 119,967
------------ ------------
Total liabilities and shareholders' equity .. $ 130,432 $133,122
============ ============
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
SINA.COM
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(IN U.S. DOLLARS)
(UNAUDITED, IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED SIX MONTHS ENDED
---------------------------- ----------------------------
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
2001 2000 2001 2000
------------ ------------ ------------ ------------
Net revenues:
Advertising ....................................... $5,127 $6,691 $10,271 $12,956
Software products ................................. 296 681 605 1,390
E-commerce and other .............................. 1,346 250 1,954 429
------------ ------------ ------------ ------------
6,769 7,622 12,830 14,775
------------ ------------ ------------ ------------
Cost of revenues:
Advertising ....................................... 3,068 3,714 6,094 7,326
Software products ................................. 9 279 34 555
E-commerce and other .............................. 388 141 440 269
Stock-based compensation .......................... 32 110 73 238
------------ ------------ ------------ ------------
3,497 4,244 6,641 8,388
------------ ------------ ------------ ------------
Gross profit ........................................ 3,272 3,378 6,189 6,387
------------ ------------ ------------ ------------
Operating expenses:
Sales and marketing ............................... 3,178 5,797 6,506 12,023
Product development ............................... 1,583 2,540 3,505 5,008
General and administrative ........................ 1,926 2,063 3,821 4,012
Stock-based compensation* ......................... 533 1,722 1,215 4,184
Amortization of intangible assets ................. 1,688 1,688 3,376 3,390
------------ ------------ ------------ ------------
Total operating expenses .................. 8,908 13,810 18,423 28,617
------------ ------------ ------------ ------------
Loss from operations ................................ (5,636) (10,432) (12,234) (22,230)
Interest income, net ................................ 1,123 2,001 2,427 4,001
------------ ------------ ------------ ------------
Loss before loss on equity investments .............. (4,513) (8,431) (9,807) (18,229)
Loss on equity investments .......................... (420) (444) (420) (894)
------------ ------------ ------------ ------------
Net loss ............................................ $(4,933) $(8,875) $(10,227) $(19,123)
============ ============ ============ ============
Basic and diluted net loss per share ................ $(0.11) $(0.22) $(0.24) $(0.48)
============ ============ ============ ============
Shares used in computing basic and diluted net
loss per share .................................... 45,396 40,123 43,097 39,844
============ ============ ============ ============
------------
* Stock-based compensation was allocated among
the associated expense categories as follows:
Sales and marketing ......................... $16 $53 $36 $129
Product development ......................... 171 557 389 1,353
General and administrative .................. 346 1,112 790 2,702
------------ ------------ ------------ ------------
$533 $1,722 $1,215 $4,184
============ ============ ============ ============
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
SINA.COM
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(IN U.S. DOLLARS)
(UNAUDITED, IN THOUSANDS)
SIX MONTHS ENDED
----------------------------
DECEMBER 31, DECEMBER 31,
2001 2000
------------ ------------
Cash flows from operating activities:
Net loss .......................................................... $(10,227) $(19,123)
Adjustments to reconcile net loss to net cash
used in operating activities:
Loss on equity investments ..................................... 420 894
Depreciation and amortization .................................. 2,602 1,496
Stock-based compensation ....................................... 1,288 4,422
Amortization of intangible assets .............................. 3,376 3,390
Changes in assets and liabilities:
Accounts receivable, net ..................................... 670 (2,622)
Prepaid expenses and other current assets .................... 51 208
Other assets ................................................. 590 (559)
Accounts payable ............................................. (400) 683
Accrued liabilities .......................................... (2,980) 5,878
------------ ------------
Net cash used in operating activities ..................... (4,610) (5,333)
------------ ------------
Cash flows from investing activities:
Acquisition of property and equipment ............................. (1,107) (3,480)
Acquisition of long-term investment ............................... (8,441) --
Purchase of short-term investments ................................ (15,501) (20,641)
------------ ------------
Net cash used in investing activities ..................... (25,049) (24,121)
------------ ------------
Cash flows from financing activities:
Proceeds from issuance of ordinary shares ......................... 19 1,276
Repurchase of ordinary shares ..................................... (107) --
Proceeds from notes receivable from shareholders .................. 429 38
------------ ------------
Net cash provided by financing activities ................. 341 1,334
------------ ------------
Net decrease in cash and cash equivalents ........................... (29,318) (28,120)
Cash and cash equivalents at beginning of period .................... 52,505 99,149
------------ ------------
Cash and cash equivalents at end of period .......................... $23,187 $71,029
============ ============
Supplemental disclosure of noncash investing activities:
Ordinary shares issued for acquisition of long-term investment .... $5,098 $ --
============ ============
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
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 preparation of financial statements in conformity with generally
accepted accounting principles in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and the disclosure of contingent assets and liabilities
at the date of the financial statements as well as the reported amounts of
revenue and expenses during the reporting period. Actual results will differ
from those estimates, and such differences may be material to the financial
statements.
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 six months ended December 31, 2001 are not necessarily indicative of
results for the entire fiscal year ending June 30, 2002 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, 2001.
2. RECENT ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 141, "Business
Combinations" and No. 142, "Goodwill and Other Intangible Assets." These
standards change the accounting for business combinations by, among other
things, prohibiting the prospective use of pooling-of-interests accounting and
requiring companies to stop amortizing goodwill and indefinite lived intangible
assets created by business combinations accounted for using the purchase method
of accounting. Instead, goodwill and indefinite lived intangible assets will be
subject to an annual review for impairment and will be written down and charged
to results of operations only in the periods in which the recorded value of
goodwill and indefinite lived intangible assets exceed their fair values. The
adoption of these pronouncements is not expected to have a significant impact on
the Company's financial statements.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets", which is required to be applied
starting with years beginning after December 15, 2001. SFAS No. 144 requires,
amongst other things, the application model for long-lived assets that are
impaired or to be disposed of by sale. The adoption of SFAS No. 144 is not
expected to have a significant 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 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.
6
The following table sets forth the computation of basic and diluted net loss
per share for the periods indicated:
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
--------------------------- ---------------------------
(IN THOUSANDS, EXCEPT FOR PER SHARE DATA) 2001 2000 2001 2000
------------ ------------ ------------ ------------
Net loss ..................................................... $(4,933) $(8,875) $(10,227) $(19,123)
============ ============ ============ ============
Basic and diluted:
Weighted average shares used in computing basic and
diluted net loss per ordinary shares ..................... 45,396 40,123 43,097 39,844
============ ============ ============ ============
Basic and diluted net loss per share attributable to
ordinary shareholders ................................... $(0.11) $(0.22) $(0.24) $(0.48)
============ ============ ============ ============
Weighted average antidilutive securities including
options and restricted ordinary shares not included
in net loss per share calculation ....................... 4,297 5,521 4,297 5,521
============ ============ ============ ============
4. LONG-TERM INVESTMENT
On September 28, 2001, the Company completed the acquisition of an
approximately 27.6% equity interest in Sun Television Cybernetworks Holdings
Limited ("Sun TV"), a Hong Kong Stock Exchange listed company, from Sun TV's
major shareholder for a consideration of $7.9 million in cash and approximately
4.6 million in newly issued ordinary shares and transaction costs of $731,000
for a total purchase price of $13.7 million. In addition, the Company agreed to
issue 3.3 million ordinary shares if Sun TV meets certain performance targets
over the next 18 months. The investment is accounted for using the equity method
of accounting.
The purchase price was allocated as follows:
Net assets ........................ $ 8,935
Identifiable intangible assets .... 4,794
Goodwill .......................... 1,000
------------
Purchase price .................... $ 13,729
============
During the quarter ended December 31, 2001, the Company recorded a loss of
$420,000 on its investment in Sun TV, representing (i) a loss of $851,000 for
the Company's share of Sun TV's reported loss; (ii) amortization of intangible
assets of $190,000; and (iii) a gain of $621,000 related to the issuance of new
shares by Sun TV to other investors at a price higher than the Company's
investment cost. This new issuance of shares by Sun TV resulted in a dilution of
the Company's interest in Sun TV to 24.3% as of December 31, 2001.
In addition, on September 28, 2001, the Company entered into a loan
agreement with Sun TV in which the Company agreed to provide a loan facility of
$4.0 million to Sun TV for general working capital purpose. On the same date,
the Company entered into another loan agreement with a shareholder, Ms. Lan
Yang, the Chairperson and a shareholder of Sun TV, in which Ms. Yang agreed to
loan $4.0 million to the Company to finance the above $4.0 million loan facility
granted to Sun TV. Under this loan agreement, the Company shall be obliged to
repay the loan to Ms. Yang only if Sun TV has first complied with all its
payment obligations and the Company has received all monies due under the loan
agreement between the Company and Sun TV.
These two loan agreements have identical terms that both loan facilities are
unsecured, bear interest at LIBOR plus a margin of 1% per annum and are
repayable on September 28, 2004. The Company's $4.0 million loan facility to Sun
TV is included in the long-term investment and the $4.0 million loan from Ms.
Yang is recorded as a long-term liability as of December 31, 2001.
5. SEGMENT INFORMATION
Based on the criteria established by Statement of Financial Accounting
Standards No. 131, "Disclosures about Segments of an Enterprise and Related
Information," the Company currently operates in three principal business
segments globally. The Company does not allocate any operating costs or assets
to its advertising, software and e-commerce and other segments as management
does not use this information to measure the performance of these operating
segments. Management does not believe that allocating these expenses or assets
is material in evaluating these segments' performance.
7
6. 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. Although the country
has implemented a wide range of market-oriented economic reforms, the
telecommunication, information and media industries remain highly regulated. Not
only are restrictions currently in place, but also regulations are unclear
regarding in what specific segments of these industries companies with foreign
investors, including the Company, may operate. 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, results of
operations and cash flows.
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. We offer a portal network of four localized Web sites targeting
China, Taiwan, Hong Kong and overseas Chinese in North America. Our users enjoy
a full array of Chinese-language media, communications, business, enterprise and
commerce service offerings. In addition, we offer proprietary software products
that simplify access to Chinese Internet content.
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 and
other 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, and from fee-based premium services including short
message, subscription service and paid email services.
We have incurred significant net losses and negative cash flows from
operations since our inception. As of December 31, 2001, we had an accumulated
deficit of $109.5 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 $33.4
million, net through December 31, 2001, which represents the difference between
the exercise price of options granted through December 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 $7.5 million and $19.1 million in fiscal 2001 and 2000,
respectively. We expect the amortization of deferred compensation to be
approximately $2.3 million for fiscal 2002, $1.0 million for fiscal 2003 and
$0.1 million for fiscal 2004.
On September 28, 2001, we completed the acquisition of an approximately
27.6% equity interest in Sun Television Cybernetworks Holdings Limited ("Sun
TV"), a Hong Kong Stock Exchange listed company, from its major shareholder for
a total consideration of $7.9 million in cash and approximately 4.6 million in
newly issued ordinary shares, In addition, we agreed to issue 3.3 million
ordinary shares if Sun TV meets certain performance targets over the next 18
months. The investment is accounted for using the equity method of accounting.
8
RESULTS OF OPERATIONS
THREE AND SIX MONTHS ENDED DECEMBER 31, 2001 AND 2000
NET REVENUES
Advertising. Our advertising revenues were $5.1 million and $10.3 million
for the three and six months ended December 31, 2001, respectively, as compared
to $6.7 million and $13.0 million for the same periods in fiscal 2001. The
decrease was primarily due to a decrease in number of advertisers and amount of
advertising contracts. The decrease was mainly in response to softness in the
Internet advertising market in the U.S., Taiwan and Hong Kong. Approximately 382
and 592 customers advertised on our web sites during the three and six months
ended December 31, 2001, respectively, as compared to approximately 458 and 643
customers during the three and six months ended December 31, 2000, respectively.
For the three and six months ended December 31, 2001, advertising revenues
accounted for 75.7% and 80.1% of our total revenues, respectively. For the three
and six months ended December 31, 2000, advertising revenues accounted for 87.8%
and 87.7% of our total revenues, respectively.
Software. Our software revenues were $0.3 million and $0.6 million for the
three and six months ended December 31, 2001, respectively, as compared to $0.7
million and $1.4 million for the same periods in fiscal 2001. The decrease was
mainly due to the decline in demand for our software products and also due to
the fact that, as part of our strategy to draw increased traffic to our portal
networks, we provided more free downloads of some of our software products on
our Web sites.
E-commerce and other. Our e-commerce and other revenues were $1.3 million
and $2.0 million for the three and six months ended December 31, 2001,
respectively, as compared to $0.3 million and $0.4 million for the same periods
in fiscal 2001. The increase was primarily due to the increased revenues from
fee-based premium services including short message, subscription service and
paid email service.
COST OF REVENUES
Advertising. Our cost of advertising revenues decreased from $3.7 million or
55.5% of net advertising revenue and $7.3 million or 56.5% of net advertising
revenue for the three and six months ended December 31, 2000, respectively, to
$3.1 million or 59.8% of net advertising revenue and $6.1 million or 59.3% of
net advertising revenue for the three and six months ended December 31, 2001,
respectively. Our cost of advertising revenues consists of costs associated with
the production of our Web site, which includes fees paid to third parties for
Internet connection, content and services, and personnel related costs and
equipment depreciation expense associated with our Web site production. Compared
to the same periods in the prior year, the decrease in cost of revenue in
absolute dollars was primarily due to a decrease in Internet connection costs.
We also lowered the personnel related costs by improving productivity and
reducing headcount.
Software. Our cost of software revenues decreased from $279,000 and $555,000
for the three and six months ended December 31, 2000, respectively, to $9,000
and $34,000 for the three and six months ended December 31, 2001, respectively.
The decreases were primarily due to the decrease in software revenues and to a
higher percentage of the software revenues being derived from licensing
arrangements, which involve minimal costs.
E-commerce and other. Our cost of e-commerce and other revenues increased
from $0.1 million and $0.3 million for the three and six months ended December
31, 2000, respectively, to $0.4 million and $0.5 million for the three and six
months ended December 31, 2001. Our cost of e-commerce and other revenues
consist mainly of personnel costs, related overhead expenses and fees paid to
third parties for service fees collection. The increase in cost of e-commerce
and other revenues was primarily due to the increase in these direct costs
associated with the higher e-commerce and other revenues.
SALES AND MARKETING
Our sales and marketing expenses as a percentage of net revenues decreased
from 76.1% and 81.4% for the three and six months ended December 31, 2000,
respectively, to 46.9% and 50.7% for the three and six months ended December 31,
2001. In absolute dollars, our sales and marketing expenses decreased from $5.8
million and $12.0 million for the three and six months ended December 31, 2000,
respectively, to $3.2 million and $6.5 million for the three and six months
ended December 31, 2001, respectively. Sales and marketing expenses consist
primarily of compensation expenses, sales commissions, advertising and promotion
expenditures and
9
travel expenses. The decreases were mainly attributable to the curtailment in
spending for marketing and promotion of our Web sites and cost savings realized
from workforce reductions.
PRODUCT DEVELOPMENT
Our product development expenses as a percentage of net revenues decreased
from 33.3% and 33.9% for the three and six months ended December 31, 2000,
respectively, to 23.4% and 27.3% for the three and six months ended December 31,
2001, respectively. In absolute dollars, our product development expenses
decreased from $2.5 million and $5.0 million for the three and six months ended
December 31, 2000, respectively, to $1.6 million and $3.5 million for the three
and six months ended December 31, 2001, respectively. Product development
expenses consist primarily of personnel related expenses incurred for
enhancement to and maintenance of our Web sites as well as engineering costs
related to developing our software products. The decrease was primarily
attributable to our strategy of focusing new research and development efforts in
China and reducing our engineering workforce in other locations.
GENERAL AND ADMINISTRATIVE
Our general and administrative expenses as a percentage of net revenues
increased from 27.1% and 27.2% for the three and six months ended December 31,
2000, respectively, to 28.5% and 29.8% for the three and six months ended
December 31, 2001, respectively. In absolute dollars, our general and
administrative expenses decreased from $2.1 million and $4.0 million for the
three and six months ended December 31, 2000, respectively, to $1.9 million and
$3.8 million for the three and six months ended December 31, 2001, respectively.
General and administrative expenses consist primarily of compensation for
personnel, fees for professional services and provisions for doubtful accounts.
The slight decrease in general and administrative expenses was a result of our
cost reduction measures.
STOCK-BASED COMPENSATION
In connection with the grant of certain stock options, we recorded net
unearned compensation of approximately $33.4 million, net, through December 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 $0.6 million and $1.3 million was amortized in the
three and six months ended December 31, 2001, respectively, as compared to $1.8
million and $4.4 million in the three and six months ended December 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 December 31, 2001 and 2000, and was $3.4 million for both
six months ended December 31, 2001 and 2000.
INTEREST INCOME, NET
Interest income, net, decreased from $2.0 million and $4.0 million for the
three and six months ended December 31, 2000, respectively, to $1.1 million and
$2.4 million for the three and six months ended December 31, 2001, respectively.
The decrease in interest income was primarily due to the lower averaged cash and
short-term investment balances for the three and six months ended December 31,
2001 as compared to the same periods in fiscal 2001.
LOSS ON EQUITY INVESTMENTS
In September 2001, we acquired an approximately 27.6% equity interest in Sun
TV and account for the investment using the equity method of accounting. We
recorded a $420,000 loss from the investment during the three and six months
ended December 31, 2001.
In December 2000, we contributed $1.4 million in cash for a 35.4% interest
in a joint venture with Adforce, Inc. and Compuserve Consultants, Ltd. We
account for our investment in the joint venture using the equity method of
accounting. We recorded a $0.4 million and $0.9 million loss from our investment
in the joint venture during the three and six months ended December 31, 2000,
respectively. The investment was fully written off in fiscal 2001 upon the
cessation of operations of this joint venture company.
10
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
December 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 December 31, 2001, we had $96.0 million in cash
and cash equivalents and short-term investments.
Net cash used in operating activities was $4.6 million for the six months
ended December 31, 2001 and was primarily attributable to our net loss of $10.2
million and a decrease in accrued liabilities of $3.0 million, largely offset by
the non-cash stock-based compensation expense of $1.3 million, a decrease in
other assets of $0.6 million, a decrease in accounts receivable of $0.7 million,
amortization expense of $3.4 million related to goodwill and other intangible
assets resulting from the acquisition of Sinanet.com, and depreciation expenses
of $2.6 million. Net cash used in operating activities was $5.3 million for the
six months ended December 31, 2000 and was primarily attributable to our net
loss of $19.1 million and an increase in accounts receivable of $2.6 million,
largely offset by the non-cash stock-based compensation expense of $4.4 million,
an increase in accrued liabilities of $5.9 million, amortization expense of $3.4
million related to goodwill and other intangible assets resulting from the
acquisition of Sinanet.com, and depreciation expenses of $1.5 million.
Net cash used in investing activities was $25.0 million for the six months
ended December 31, 2001, primarily due to the purchase of short-term investments
of $15.5 million, acquisition of Sun TV of $8.4 million and the purchase of
capital equipment of $1.1 million. Net cash used in investing activities was
$24.1 million for the six months ended December 31, 2000, primarily due to the
purchase of short-term investments of $20.6 million and the purchase of capital
equipment of $3.5 million.
Net cash provided by financing activities was $0.3 million for the six
months ended December 31, 2001, primarily related to the proceeds from the
repayment of promissory notes of $0.4 million offset by the repurchase of
ordinary shares $0.1 million. Net cash provided by financing activities was $1.3
million for the six months ended December 31, 2000, primarily related to the
proceeds from the exercise of stock options and issuance of ordinary shares
pursuant to Employee Stock Purchase Plan.
We currently have no material commitments other than those operating leases
for our facilities. 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 you 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.
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 HAVE A HISTORY OF LOSSES AND WE ANTICIPATE FUTURE LOSSES.
We have never been profitable. As of December 31, 2001, we had an
accumulated deficit of approximately $109.5 million. We anticipate that we will
continue to incur operating losses for the foreseeable future due to the
uncertainty of our ability to grow revenue. 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.
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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 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 also 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 Chinese MII. 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.
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, many 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
12
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 expect to 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 reform 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.
The Chinese government heavily regulates its Internet sector including the
legality of foreign investment in the Chinese Internet sector, the existence and
enforcement of content restrictions on the Internet and the licensing and permit
requirements for companies in the Internet industry. Because these laws,
regulations and legal requirements with regard to the Internet are relatively
new and untested, their interpretation and enforcement may involve significant
uncertainty. In addition, the Chinese legal system is a civil law system in
which decided legal cases have limited binding force as legal precedents. As a
result, in many cases it is difficult to determine what actions or omissions may
result in liability.
Issues, risks and uncertainties relating to China government regulation of
the Chinese Internet sector include the following:
- SINA only has contractual control over its Web site in China, it does
not own it due to the prohibition of foreign investment in businesses
providing value-added telecommunication services, including computer
information services or electronic mail box services.
- Under the agreement reached in November 1999 between the PRC and the
United States, foreign ownership in PRC value-added telecommunication
services, including internet services, will be allowed for up to 30% in
the first year after China's entry into the World Trade Organization, or
WTO, and up to 49% in the second year and up to 50% thereafter.
Although, China was officially admitted to WTO in November 2001, it is
still not clear how this agreement will be implemented.
- The numerous and often vague restrictions on acceptable content in China
subjects us to potential civil and criminal liability, temporary
blockage of our Web site or complete cessation of our Web site. For
example, the State Secrecy Bureau, which is directly responsible for the
protection of state secrets of all Chinese government and Chinese
Communist Party organizations, is authorized to block any Web site it
deems to be leaking state secrets or failing to meet the relevant
regulations relating to the protection of state secrets in the
distribution of online information.
13
The interpretation and application of existing Chinese laws and regulations,
the stated positions of the MII and 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.
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
president, 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 which we refer to as the ICP Company. The ICP Company was 30% owned by
Daniel Mao, our chief executive officer, 30% owned by Yan Wang and 40% owned by
four other employees who each owns 10% of 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
sells advertising space on www.sina.com.cn to the Ad Company. The Ad Company, in
turn, sells 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 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.
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 it 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-
14
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 it believes 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.
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 MII.
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.
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.
15
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. We have recently experienced fee
increase from some of our content providers. If this trend continues, our gross
profit from online advertising may be adversely affected.
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 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 recent changes to our executive management team.
In January 2001, Charles Chao was appointed as chief financial officer,
replacing Victor Lee, and in June 2001, Daniel Mao was appointed as chief
executive officer and Yan Wang was appointed as president, replacing Zhidong
Wang. 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
16
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 a 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. 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 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, 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,
17
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
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 EXPOSED TO INFRINGEMENT CLAIMS BY THIRD PARTIES, WHICH, IF
SUCCESSFUL, COULD CAUSE US TO PAY SIGNIFICANT DAMAGE AWARDS.
Third parties may initiate litigation against us alleging infringement of
their proprietary rights. In the event of a successful claim of infringement and
our failure or inability to develop non-infringing technology or license the
infringed or similar technology on a
18
timely basis, our business could be harmed. In addition, even if we are able to
license the infringed or similar technology, license fees could be substantial
and may adversely affect our results of operations.
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 fiscal 2001 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. From January 1, 2001 to December 31, 2001, the
closing sale prices of our ordinary shares on the Nasdaq Stock Market ranged
from $1.06 to $4.3125 and the sale price of our ordinary shares closed at $1.50
on January 31, 2002. Our stock price may fluctuate in response to a number of
events and factors, such as quarterly variations in 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.
RECENT TERRORIST ACTIVITIES AND RESULTING MILITARY AND OTHER ACTIONS COULD
ADVERSELY AFFECT OUR BUSINESS.
The terrorist acts in New York, Washington, D.C. and Pennsylvania on
September 11, 2001 have created an uncertain economic environment and we are
unable to predict the impact these events, or the responses thereto, will have
on the Company's business. The continued threat of terrorism within the United
States and abroad and military action and heightened security measures in
response to such threat may cause significant economic disruptions throughout
the world. Our business, results of operations and financial condition could be
materially and adversely affected to the extent such disruptions result in our
inability to effectively market and sell our services and software.
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.
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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.
We performed a sensitivity analysis assuming a hypothetical 10% adverse
movement in foreign exchange rates to the foreign subsidiaries and the
underlying exposures described above. As of June 30, 2001 and 2000, the analysis
indicated that these hypothetical market movements would not have a material
effect on our consolidated financial position, results of operations or cash
flows.
INVESTMENT RISK
On September 28, 2001, we acquired an approximately 27.6% interest in the
equity of Sun TV, a satellite TV broadcaster and a cable TV program syndicator
listed on the Hong Kong Stock Exchange. We have invested in this company for
business and strategic purposes and have classified this investment as a
long-term investment, which is accounted for using the equity method.
Accordingly, the operations of Sun TV may have a material non-cash impact on our
operating results in future periods.
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
On September 28, 2001, we completed the acquisition of an approximately
27.6% equity interest in Sun TV, a Hong Kong Stock Exchange listed company, from
Ms. Lan Yang, a major shareholder of Sun TV, for a total consideration of
4,592,944 newly issued SINA ordinary shares and $7.9 million in cash. In
addition, we agreed to issue an additional 3,280,674 newly issued SINA ordinary
shares to Ms. Yang if Sun TV meets certain performance targets over the next 18
months. The ordinary shares issued to Ms. Yang or her designated entity were
issued in a private placement without registration under the Securities Act of
1933, as amended.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
On November 27, 2001, the Company held its Annual Meeting of Shareholders.
At the meeting, the shareholders elected as directors Daniel Chiang (with
28,603,901 shares voting for and 31,562 withheld), Ter Fung Tsao (with
28,604,832 shares voting for and 30,631 withheld), Daniel Mao (with 28,604,832
shares voting for and 30,631 withheld), and Bruno Wu (with 28,604,832 shares
voting for and 30,631 withheld). The terms of the following directors not
subject to reelection this year continued after the meeting: Pehong Chen, Yongji
Duan and Lip-Bu Tan. The shareholders also ratified the appointment of
PricewaterhouseCoopers LLP as the independent accountants for the Company for
the year ending June 30, 2002 (with 28,619,920 shares voting for, 7,448 against,
and 8,095 abstaining).
Item 5. Other Information
None
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Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
10.55: Agreement on Exercising Voting Right by Proxy dated October 1,
2001 among Beijing Stone Rich Sight Information Technology Co.,
Ltd., Daniel Mao, Yan Wang and Four Other Employees of BSRS.
(b) Reports on Form 8-K.
On October 12, 2001, we filed a Current Report on Form 8-K regarding the
acquisition of 2,028,122,000 ordinary shares of Sun Television
Cybernetworks Holdings Limited ("Sun TV") pursuant to a Share Purchase
Agreement dated September 12, 2001 among SINA, Lan Yang and Bruno Wu (the
"Purchase Agreement"). Under the terms of the Purchase Agreement, SINA
acquired the Sun TV shares from Lan Yang for $7,900,000 in cash (the
"Cash Consideration") and 4,592,944 newly issued SINA ordinary shares.
Ms. Yang is also entitled to receive up to 3,280,674 newly issued SINA
ordinary shares over the next 18 months if Sun TV meets certain
performance targets. In addition, as provided for in the Purchase
Agreement, $4,000,000 of the Cash Consideration has been retained by SINA
to satisfy Ms. Yang's commitment to lend such amount to SINA in
accordance with the terms of a loan agreement between SINA and Ms. Yang.
The consideration paid by SINA to Ms. Yang for the Sun TV shares was
determined by arms-length negotiations among the parties. The source of
the Cash Consideration was SINA's working capital.
SIGNATURES
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: February 13, 2002 By: /s/ Charles Chao
--------------------------------------
Charles Chao
Chief Financial Officer
(Principal Financial Officer and
Principal Accounting Officer)
21
EXHIBIT INDEX
10.55: Agreement on Exercising Voting Right by Proxy dated October 1,
2001 among Beijing Stone Rich Sight Information Technology Co.,
Ltd., Daniel Mao, Yan Wang and Four Other Employees of BSRS.