e20vf
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 20-F
|
|
|
o |
|
REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF
THE SECURITIES EXCHANGE ACT OF 1934 |
OR
|
|
|
þ |
|
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2007
OR
|
|
|
o |
|
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
OR
|
|
|
o |
|
SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 |
Date of event requiring this shell company report
Commission file number 000-30698
SINA CORPORATION
(Exact name of Registrant as specified in its charter)
Cayman Islands
(Jurisdiction of incorporation or organization)
Room 1802, United Plaza
1468 Nan Jing Road West
Shanghai 200040, China
(Address of principal executive offices)
Contact Person: Corporate Secretary
Phone: +8610 8262 8888
Facsimile: +8610 8260 7166
Address: 20/F Beijing Ideal International Plaza
No. 58 Northwest 4th Ring Road
Haidian District, Beijing, 100080, Peoples Republic of China
(name, telephone, e-mail and/or facsimile number and address of company contact person)
Securities registered or to be registered pursuant to Section 12(b) of the Act.
|
|
|
Title of each class |
|
Name of each exchange on which registered |
Ordinary Shares, $0.133 par value
Ordinary Shares Purchase Rights
|
|
NASDAQ Global Market |
Securities registered or to be registered pursuant to Section 12(g) of the Act.
Not Applicable
(Title of Class)
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act.
Not Applicable
(Title of Class)
As of December 31, 2007, there were 55,521,039 shares of the registrants ordinary shares
outstanding, $0.133 par value.
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule
405 of the Securities Act. þ Yes o No
If this report is an annual or transition report, indicate by check mark if the registrant is
not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934. o Yes þ No
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. þ Yes ¨ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer or a non-accelerated filer. See definition of accelerated filer and large accelerated
filer in Rule 12b-2 of the Exchange Act (check one):
þ Large accelerated filer o Accelerated filer o Non-accelerated filer
Indicate by check mark which basis for accounting the registrant has used to prepare the
financing statements included in this filing:
U.S. GAAP þ
International Financial Reporting Standards as issued by the International Accounting Standards
Board o
Other o
Indicate by check mark which financial statement item the registrant has elected to follow.
o Item 17 þ Item 18
If this is an annual report, indicate by check mark whether the registrant is a shell company
(as defined in Rule 12b-2 of the Exchange Act). o Yes þ No
INTRODUCTION
In this annual report, except where the context otherwise requires and for purposes of this annual report only:
|
|
we, us, our company, the Company, our and SINA refer to
SINA Corporation, its subsidiaries, and, in the context of describing
our operations and consolidated financial information, include our
consolidated variable interest entities (VIEs) in China; |
|
|
|
China or PRC refers to the Peoples Republic of China solely for
the purpose of this annual report, and do not include the Hong Kong
Special Administrative Region, the Macau Special Administrative Region
or Taiwan; |
|
|
|
GAAP refers to general accepted accounting principles in the United
States; PRC GAAP refers to general accepted accounting principles in
the PRC; |
|
|
|
shares or common shares refer to our ordinary shares; |
|
|
|
all references to RMB or renminbi are to the legal currency of
China, and all references to $, dollars, US$ and U.S. dollars
are to the legal currency of the United States; and |
|
|
|
all discrepancies in any table between the amounts identified as total
amounts and the sum of the amounts listed therein are due to rounding. |
INFORMATION REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 20-F contains forward-looking statements. These statements relate
to future events or our future financial performance. In some cases, you can identify
forward-looking statements by terminology such as may, will, should, expect, plan,
anticipate, believe, estimate, predict, potential or continue, the negative of such
terms or other comparable terminology. These statements are only predictions. Actual events or
results may differ materially.
Although we believe that the expectations reflected in the forward-looking statements are
reasonable, we cannot guarantee future results, levels of activity, performance or achievements.
Moreover, neither we nor any other person assumes responsibility for the accuracy and completeness
of the forward-looking statements. We undertake no duty to update any of the forward-looking
statements after the date of this report to conform such statements to actual results or to changes
in our expectations.
Readers are also urged to carefully review and consider the various disclosures made by us
which attempt to advise interested parties of the factors which affect our business, including
without limitation the disclosures made under the caption Risk Factors included herein.
PART I
Item 1. Identity of Directors, Senior Management and Advisers
Not applicable.
Item 2. Offer Statistics and Expected Timetable
Not applicable.
Item 3. Key Information
A. Selected Financial Data
The selected consolidated statements of operation data presents the results for the five years
ended December 31, 2007, 2006, 2005, 2004 and 2003. The Companys historical results do not
necessarily indicate results expected for any future periods. The selected consolidated financial
data below should be read in conjunction with our consolidated financial statements and notes
thereto, Item 5. Operating and Financial Review and Prospects below, and the other information
contained in this Form 20-F.
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31, |
|
|
2007 |
|
2006 |
|
2005 |
|
2004 |
|
2003 |
|
|
(In thousands, except per share data) |
Operations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues |
|
$ |
246,127 |
|
|
$ |
212,854 |
|
|
$ |
193,552 |
|
|
$ |
199,987 |
|
|
$ |
114,285 |
|
Gross profit* |
|
|
151,425 |
|
|
|
133,444 |
|
|
|
130,445 |
|
|
|
138,376 |
|
|
|
79,848 |
|
Income from operations |
|
|
51,014 |
|
|
|
34,907 |
|
|
|
41,508 |
|
|
|
69,325 |
|
|
|
37,041 |
|
Income before income taxes |
|
|
64,233 |
|
|
|
43,967 |
|
|
|
45,525 |
|
|
|
69,224 |
|
|
|
32,318 |
|
Net income * |
|
|
57,729 |
|
|
|
39,916 |
|
|
|
43,115 |
|
|
|
65,996 |
|
|
|
31,423 |
|
Net income per share* |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
1.05 |
|
|
$ |
0.74 |
|
|
$ |
0.82 |
|
|
$ |
1.33 |
|
|
$ |
0.66 |
|
Diluted |
|
$ |
0.97 |
|
|
$ |
0.69 |
|
|
$ |
0.75 |
|
|
$ |
1.15 |
|
|
$ |
0.58 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
2007 |
|
2006 |
|
2005 |
|
2004 |
|
2003 |
|
|
(In thousands) |
Financial position: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash, cash equivalents
and short-term
investments |
|
$ |
477,999 |
|
|
$ |
362,751 |
|
|
$ |
300,689 |
|
|
$ |
275,635 |
|
|
$ |
227,164 |
|
Working capital |
|
|
377,608 |
|
|
|
267,116 |
|
|
|
297,910 |
|
|
|
252,027 |
|
|
|
219,866 |
|
Total assets |
|
|
662,263 |
|
|
|
538,809 |
|
|
|
468,721 |
|
|
|
430,425 |
|
|
|
289,897 |
|
Long-term liabilities |
|
|
1,337 |
|
|
|
|
|
|
|
100,000 |
|
|
|
102,142 |
|
|
|
100,000 |
|
Total liabilities |
|
|
167,287 |
|
|
|
150,996 |
|
|
|
149,099 |
|
|
|
177,080 |
|
|
|
130,390 |
|
Total shareholders equity |
|
|
494,976 |
|
|
|
387,813 |
|
|
|
319,622 |
|
|
|
253,345 |
|
|
|
159,507 |
|
|
|
|
* |
|
The Company began to include stock-based compensation charges in its costs of revenues and
operating expenses starting January 1, 2006 in accordance with the Statement of Financial
Accounting Standards (SFAS) No. 123 (revised 2004), Share-Based Payment. Stock-based
compensation charges for fiscal 2007 and 2006 were $8.7 million and $9.5 million, or $0.15
diluted net income per share and $0.16 diluted net income per share, respectively. |
B. Capitalization and Indebtedness
Not applicable.
C. Reasons for the Offer and Use of Proceeds
Not applicable.
D. Risk Factors
Due to our limited operating history and the relatively new and evolving market that we
operate in, 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 operations, of which we have a limited history. Furthermore, our primary market is in
China, where the Internet industry is relatively new and fast evolving. Accordingly, our prospects
must be considered in light of the risks, expenses and difficulties frequently encountered by
companies with a limited operating history and in a relatively new and fast changing market. These
risks include our ability to:
|
|
|
offer new and innovative products; |
|
|
|
|
attract buyers for our mobile value-added services (MVAS); |
|
|
|
|
attract advertisers; |
|
|
|
|
attract a larger audience to our network; |
|
|
|
|
derive revenue from our users from fee-based Internet services; |
|
|
|
|
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; |
3
|
|
|
increase awareness of our 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 or secure premium content. |
Due to our limited operating history and the relatively new and evolving market that we
operate in, our historical year-over-year and quarter-over-quarter trends may not provide a good
indication of our future performance. For certain business lines, we have experienced high growth
rates in the past and there may be expectations that these growth rates will continue. For other
business lines, we have experienced a recent turnaround of declining trends and there may be
expectations that the turnaround will last. Our operating results have in the past fallen below the
expectations of industry analysts and investors and may do so again in the future. Our stock price
may decline significantly as a result of not meeting internal or external expectations of future
performance.
You should not place undue reliance on our financial guidance, nor should you 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 of our control. Significant fluctuations in our quarterly
operating results could be caused by any of the factors identified in this section, including but
not limited to 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; significant news events that increase traffic to our web
sites; technical difficulties, system downtime or Internet failures; demand for advertising space
from advertisers; seasonality of the advertising market; the amount and timing of operating costs
and capital expenditures relating to expansion of our business, operations and infrastructure;
operators policies; 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, wireless, electronic commerce and the Greater China market. As a result of these and
other factors, you should not place undue reliance on our financial guidance, nor should you rely
on quarter-to-quarter comparisons of our operating results as indicators of likely future
performance. Our quarterly revenue and earnings per share guidance is our best estimate at the time
we provide guidance. Our operating results may be below our expectations or 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.
We are relying on advertising sales as a significant part of our future revenues, but the
online advertising market is subject to many uncertainties, which could cause our advertising
revenues to decline.
The online advertising market is new and evolving rapidly in China. As a result, 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. If the
Internet does not become more widely accepted as a medium for advertising, our ability to generate
increased revenue could be negatively affected. Our ability to generate and maintain significant
advertising revenues will depend on a number of factors, many of which are beyond our control,
including but not limited to:
|
|
|
the development and retention of a large base of users possessing demographic
characteristics attractive to advertisers; |
|
|
|
|
the maintenance and enhancement of our brands in a cost effective manner; |
|
|
|
|
increased competition and potential downward pressure on online advertising prices and
limitations on web page space; |
|
|
|
|
changes in government policy that curtail or restrict our online advertising services; |
|
|
|
|
the acceptance of online advertising as an effective way for advertisers to market their
businesses; |
4
|
|
|
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. |
Our current and potential advertising clients have limited experience using the Internet for
advertising purposes and historically have not devoted a significant portion of their advertising
budget to online advertising. We may not be successful in getting our current and potential
advertisers to increase their budget for online advertising.
In 2007, approximately 62% of our advertising revenues were derived from automobile, real
estate, information technology and financial sectors. If there is a downturn in the advertising
spending in such sectors, our results of operations, cash flows and financial condition and our
share price could suffer.
Our growth in advertising revenues, to a certain extent, will also depend on our ability to
increase the advertising space on our network. If we fail to increase our advertising space at a
sufficient rate, our growth in advertising revenues could be hampered. Further, the increasing
usage of Internet advertising blocking software may result in a decrease of our advertising
revenues as the advertisers may choose not to advertise on the Internet if Internet advertising
blocking software is widely used.
The consolidation of advertising agencies in China could increase the bargaining power of
larger advertising agencies, which may adversely impact our revenue growth.
In 2007, approximately 92% of our advertising revenues came through advertising agencies. Some
advertising agencies have been seeking consolidation in the market. If such trend continues, the
bigger agencies could have more bargaining power against us. As the larger agencies increase their
bargaining power, they may demand larger sales rebates, which could reduce our revenue growth. For
2007, our 10 largest advertising agencies in China contributed to 60% of our advertising revenues.
Focus Media Holding Limited and affiliates as an advertising agency group accounted for 24% of our
advertising revenues in 2007.
We are relying on MVAS for a significant portion of our future revenue. Our MVAS revenues have
declined in the past and may decrease further in the future.
For 2007 and 2006, MVAS revenues accounted for 29% and 41% of our total net revenues,
respectively. Short messaging service (SMS) and interactive voice response system (IVR)
revenues accounted for approximately 51% and 22%, respectively, of our MVAS revenues for fiscal
2007. If users do not adopt our MVAS at a sufficient rate, or if our SMS or IVR revenues fail to
grow, our MVAS revenue growth could be negatively affected. Our MVAS revenues have been declining
since 2005 and may continue to decline in the future. Factors that may prevent us from maintaining
or growing our MVAS revenues include:
|
|
|
our ability to develop new services that become accepted by the market; |
|
|
|
|
our ability to retain existing customers of our subscription services; |
|
|
|
|
our ability to attract new subscribers in a cost-effective manner; |
|
|
|
|
our ability to provide satisfactory services to our customers; |
|
|
|
|
competitors, including operators, may launch competing or better products than ours; |
|
|
|
|
changes in policy, process and/or system by China Mobile Communication Corporation
(China Mobile), China Unicom Co., Ltd. (China Unicom) or other operators, on whom we
rely for service delivery, billing and payment collection, and who in the past have made
sudden changes that have significantly impacted our revenues and may continue to do so in
the future; and |
|
|
|
|
changes in government regulations, which could restrict our MVAS offerings, curtail our
ability to market our services or change user adoption or usage patterns in a negative way.
For example, in August 2007, the Ministry of Information Industry (MII) tightened the
regulations over direct advertising in China, which reduced the effectiveness of our direct
advertising on MVAS and increased the difficulties of new user recruitment. In December
2007, MII unified the dialing codes of each service provider (SP), which increased the
number of digits a user must input to subscribe to an SPs |
5
|
|
|
MVAS, thereby, making the purchasing process more complicated. MII has proposed to require
mobile users, including pre-paid card subscribers, to register their real identity.
Implementation of these changes has led to in the past and may lead to in the future fewer
subscriptions of MVAS and a decrease in new customers. |
In addition to the above, we are relying on new MVAS such as multimedia messaging service
(MMS), color ring back tone (CRBT), KJAVA/BREW and wireless application protocol (WAP) being
a significant part of our future revenue growth for MVAS. However, the current market size for
these new MVAS is relatively small and adoption rates are still relatively low for these services
compared to SMS and IVR services. We cannot assure you that our new MVAS offerings will be accepted
by the market or, in light of evolving and/or unclear policies and regulations, will meet the
requirements of operator policies and government regulations upon release. If revenues from these
services do not grow significantly, our financial position, results of operations and cash flows
could be materially and adversely affected, the price of our ordinary shares could decline and you
could lose part or all of your investment.
With respect to MVAS, we rely on China Mobile, China Unicom and other operators for marketing,
service delivery, billing and payment collection, and we may be negatively affected by changes
which they may make suddenly and unilaterally.
Our MVAS offerings depend mainly on the cooperation arrangements with China Mobile and China
Unicom. In addition, we have arrangements with China Telecommunications Corporation (China
Telecom) and China Network Communications Group Corporation (China Netcom). We rely on the
operators in the following ways: utilizing their network and gateway to recruit and provide MVAS to
subscribers; utilizing their billing systems to charge the fees to our subscribers through the
subscribers mobile phone bill; utilizing their collection services to collect payments from
subscribers; and relying on their infrastructure development to further develop new products and
services. As of December 31, 2007, we offered our MVAS pursuant to relationships with 31 provincial
and local subsidiaries of China Mobile and 24 provincial subsidiaries of China Unicom. As we have
limited bargaining power against the operators, we may enter into cooperation agreements on terms
that are unfavorable to us. The operators may also unilaterally terminate or amend the agreement at
any time. If China Mobile, China Unicom or other operators choose not to continue the cooperation
arrangements with us or if they unilaterally amend the cooperation arrangements with terms
significantly unfavorable to us, our MVAS revenues and operating profitability could be materially
and negatively affected.
In the past, operators have made sudden and unexpected changes in their policies, processes
and systems, which have harmed, and may continue to harm, our business. For example:
|
|
|
In mid 2004, operators began transitioning SMS to new billing platforms, which has
resulted in added operational controls and procedures in areas such as customer subscription
and customer billing. Such change has increased the difficulties for new user recruitment
and the failure rate for fee collection from our SMS users. |
|
|
|
|
In January 2005, China Mobile stopped its MMS Album service, which allowed users to
retrieve their subscribed MMS messages from China Mobiles web site when the subscribed MMS
messages could not be successfully delivered to their mobile phones. With the termination of
MMS Album, we are no longer able to collect fees from users when the MMS messages could not
be delivered to such users mobile phones. |
|
|
|
|
In March 2005, China Mobile began migrating MMS onto a new billing platform, which has
resulted in added operational controls and procedures and, correspondingly, increased
difficulties for new user recruitment and increased the failure rate for fee collection from
our users. |
|
|
|
|
In April 2006, China Unicom issued a new policy that sets price ceilings for usage-based
and monthly subscription SMS. Such change may require us to lower our current prices on
certain SMS services or discontinue offering these services completely. |
|
|
|
|
In July 2006, China Mobile made significant changes to its policy on subscription-based
MVAS, which included requiring double confirmations on new MVAS subscriptions as well as
sending SMS reminders to existing monthly subscribers of SMS, MMS and WAP to inform them of
their MVAS subscription and fee information. In addition, China Mobiles provincial
subsidiaries have been canceling existing WAP subscriptions that have been inactive for the
prior four months and existing SMS subscriptions of users who have not successfully received
more than three SMS messages during the month. These policy changes from China Mobile have
reduced our ability to acquire new monthly MVAS subscribers and increased the churn rate of
existing monthly MVAS subscribers. |
6
|
|
|
In September 2006, China Unicom began enforcing a policy of double confirmation on new
MVAS subscriptions. Such change has significantly reduced our ability to acquire new monthly
MVAS subscribers. |
|
|
|
|
In April 2007, China Unicom changed its service fee settlement method with service
providers from estimated collection to actual collection. As a result of the switch, fee
settlement, based on the receipt of billing statement, with China Unicom has taken up to
four months, which has negatively impacted our cash flow. In addition, if we are unable to
rely on historical confirmation rates from China Unicom as a result of the change in fee
settlement method, we may need to defer recognition of such revenues until the billing
statements are received. |
|
|
|
|
In July 2007, China Mobile began implementing a score and ranking system that attempts to
reward larger, higher growth service providers with lesser user complaints. Receiving a low
score or ranking, e.g., as a result of too many complaints filed by our MVAS customers,
would result in a negative impact to our results of operations, cash flows and financial
condition. |
Our operators could make further changes at any time, including, but not limited to, requiring
SPs to use the operators customer service and/or marketing service and charging for these
services; requiring SPs to migrate their MVAS to an operators platform and increase the fees
charged for using the operators platform; changing their fee structure or billing method in a way
that would require us to delay the recognition of MVAS revenues from an accrual basis to when
actual billing is received; implementing new billing rules, such as reducing MVAS fees that can be
charged to users; disallowing SPs to bill certain inactive users and limiting the amount of MVAS
fees that can be billed; requiring SPs to absorb end customer bad debts; issuing new rules on how
WAP SPs are placed on their browsers, which significantly determines WAP revenues; refusing to pay
SPs for services delivered; and limiting the product offerings of SPs by working directly with
content providers to launch competing services or giving exclusive rights to certain SPs to offer
certain MVAS. Any change in policy, process or system by the operators could result in a material
reduction of our MVAS revenues.
China Mobile, China Unicom and other operators have in the past increased the fees charged for
providing their services and may do so again in the future. If they choose to increase such fees,
our gross margin for MVAS and our operating profitability may be negatively impacted. Those
operators have generally retained certain percentage of the fees for value-added services we
provided to our users via their platform for fee collection. In addition, they charge transmission
fees for some products such as SMS and MMS on a per message basis, and the rates of such
transmission fees vary for different products and message volume. For fiscal year 2007, we received
on average 81% and 68% of the amount we charged to our users via the China Mobile platform and the
China Unicom platform, respectively, after they deducted the fees for collection and transmission.
If China Mobile, China Unicom or other operators restrict or disallow some or all MVAS to be
charged on a monthly subscription basis, our revenues from MVAS could be severely impacted. We
currently charge our users who have registered to be billed on a monthly basis even if they do not
use the service in a particular month. If China Mobile, China Unicom or other operators do not
allow us to charge monthly fees for users who do not use our service in a particular month, our
MVAS revenues could be negatively impacted. For 2007, approximately 37% of our MVAS revenues were
derived from monthly subscription products, which mainly consist of SMS, MMS and WAP.
In the past, China Mobile and China Unicom have imposed penalties on MVAS providers for
violating certain operating policies relating to MVAS. In some cases, they stopped making payments
to certain SPs for severe violations. To date, the accrued penalties we have received have been
insignificant in dollar amounts, but it is difficult to determine the specific conduct that might
be interpreted as violating such operating policies. Additionally, operators may unilaterally
revise their arrangements with us at any time, which could result in us breaching the new terms and
being subject to fines. In the future, if China Mobile, China Unicom or other operators impose more
severe penalties on us for policy violations, our revenues from MVAS and operating results may be
negatively impacted.
We are subject to potential liability and penalty for delivering inappropriate content through
our MVAS. One of the violations cited in the notice for temporary termination of our IVR service at
the end of July 2004 was that we had provided inappropriate content to our mobile subscribers
through our IVR service. The definition and interpretation of inappropriate content in many cases
are vague and subjective. We are not sure whether operators including China Mobile and China Unicom
or the Chinese government will find our other mobile content inappropriate and therefore prevent us
from operating the MVAS relating to such content in the future. If they prevent us from offering
such services, our revenues from MVAS may suffer significantly.
7
A portion of our MVAS revenues is currently estimated based on our internal records of
billings and transmissions for the month, adjusted for prior period confirmation rates from
operators and prior period discrepancies between internal estimates and confirmed amounts from
operators. Historically, there have been no significant true up adjustments to our estimates. If
there was no consistent confirmation rates trend or if there were continuous significant true up
adjustments to our estimates under the new billing platforms, we will need to rely on the billing
statements from the operators to record revenues. Due to the time lag of receiving the billing
statements, our MVAS revenues may fluctuate with the collection of billing statements if we were to
record our MVAS revenues when we receive the billing statements. For example, if an operator
switches payment to SPs from estimated collection from users to actual collection, such policy
change may cause us to delay the recognition of these revenues until we receive the actual billings
and/or until we have reliable information to make such revenue estimates. For the fourth quarter of
2007, approximately 25% of our MVAS revenues were estimated at period end.
In the past, China Mobile has requested for resettlement of billings that were settled in
previous periods and on which payments have been made to us. We have accrued for such credits to
revenue based on a rolling history and the true ups between the accrued amounts and actual credit
memos issued have not been significant. However, there is no guarantee that China Mobile or other
operators will not request for resettlement of a previously received payment in the future. If
China Mobile or other operators request for a resettlement of billings for a previous period at an
amount significantly larger than our credit memo accrual based on historical patterns, our
operating results, financial position and cash flow may be severely impacted.
If China Mobiles, China Unicoms or other operators systems encounter technical problems, if
they refuse to cooperate with us or if they do not provide adequate service, our MVAS offerings may
cease or be severely disrupted, which could have a significant and adverse impact on our operating
results.
The markets for MVAS and Internet services are highly competitive, and we may be unable to
compete successfully against new entrants and established industry competitors, which could reduce
our market share and adversely affect our financial performance.
There is significant competition among MVAS providers. A large number of independent MVAS
providers, such as TOM Online, Inc. (TOM Online), Kongzhong Corporation (Kongzhong), Tencent
Holdings Limited (Tencent), Hurray! Holding Co., Ltd. (Hurray) and Linktone Ltd. (Linktone),
compete against us. We may be unable to continue to grow our revenues from these services in this
competitive environment. In addition, the major operators in China, including China Mobile and
China Unicom, have entered the business of content development. Any of our present or future
competitors may offer MVAS that provide significant technology, performance, price, creativity or
other advantages over those offered by us, and therefore achieve greater market acceptance than
ours.
The Chinese market for Internet content and services is competitive and rapidly changing.
Barriers to entry are relatively low, and current and new competitors can launch new web sites or
services at a relatively low cost. Many companies offer Chinese language content and services,
including informational and community features, fee-based services, email and electronic commerce
services in the Greater China market that may be competitive with our offerings. 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. We also face competition from providers of software and other
Internet products and services. In addition, we compete with entities that sponsor or maintain
high-traffic web sites or provide an initial point of entry for Internet users, such as portals and
search sites. Our competitors include existing or emerging PRC Internet portals as well as vertical
websites competing in a specific niche such as automobile, real estate, IT information, finance and
video streaming. Our competitors in these areas include Baidu.com, Inc. (Baidu), Tencent,
Netease.com, Inc. (Netease), Tom Online, Sohu.com Inc. (Sohu), SouFun, East Money, Auto Home,
PC Online, China Finance Online Co. Limited (China Finance Online), Alibaba.com, Alibaba/Yahoo!
China, Kingsoft Corporation and Hexun. Many of these companies are large, well-capitalized entities
that currently offer, and could further develop or acquire, content and services that compete with
those that we offer. Companies such as these may have greater financial and technical resources,
better brand recognition, more developed sales and marketing networks, more customers, stronger
government relationships and more extensive operating histories. As a result, such companies may be
able to quickly provide competitive services and obtain a significant number of customers. 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, such as
Microsoft Corporation (Microsoft) (MSN), Yahoo! Inc. (Yahoo!), eBay Inc. (eBay), Google, Inc.
(Google) and America Online Inc. (AOL), may increasingly focus their resources on the Greater
China market. Some of these global Internet companies may partner with domestic organizations to
penetrate PRC 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
8
advertisers. Although new media companies, such as those in outdoor media, more directly
compete with traditional media, such as television, they ultimately compete with us to convert
advertisers from traditional media to new media. These competitors include Focus Media Holding
Limited (Focus Media), Air Media Group Inc., Vision China Media Inc. and other China-based
private or public new media advertising companies.
Our other areas of focus for future growth include WAP portal, search and Web 2.0 services.
These areas also face intense competition from domestic and international companies. The main
competitors for our WAP portal include Tencent, Shanghai 3G Electronic Engineering Company Ltd.
(Shanghai 3G), Kongzhong and WAP portals operated by mobile telecom operators such as China
Mobiles Monternet. The main competitors for our search service include Baidu, Yahoo!/Alibaba and
Google; and the main competitors for our instant messaging service include Tencent (QQ), Microsoft
(MSN Messenger) and Alibaba/Yahoo! China (Yahoo Messenger). Web 2.0 companies are defined as those
that offer tools to: (1) generate traffic through user-generated contents, such as blogs, video
podcasting and album; (2) allow users to communicate, such as instant messaging and email and/or
(3) allow users to personalize individual sites and virtual communities, such as space and group.
Competition in the Web 2.0 space include public companies such as Baidu, Tencent, Netease and Sohu
and private companies such as Tudou, Youku, 56.com, Ku6, 6rooms,
Bokee, PP Live, PP Stream and 51.com in China and
international players such as My Space. Many of our competitors have a longer history of providing
these online services and currently offer a greater breadth of products which may be more popular
than our online offerings. Many of these companies are focused solely on one area of our business
and are able to devote all of their resources to that business area and to more quickly adapt to
changing technology or market conditions. These companies may therefore have a competitive
advantage over us with respect to these business areas. A number of our current and potential
future competitors may have greater financial and other resources than we have, may be able to more
quickly react to changing consumer requirements and demands, may deliver competitive services at
lower prices or with more desirable features and functionalities and may market more effectively to
certain user audience. Increased competition could result in reduced page views and unique
visitors, loss of market share and revenues and lower profit margins.
Our business is highly sensitive to the strength of our brands in the marketplace, and we may
not be able to maintain current or attract new users, customers and strategic partners for our
products and offerings if we do not continue to increase the strength of our brands and develop new
brands successfully in the marketplace.
Our operational and financial performances are highly dependent on strong brands in the
marketplace. Such dependency will increase further as the number of Internet and mobile users as
well as the number of market entrants in China grow. In order to retain existing and attract new
Internet users, advertisers, mobile customers and strategic partners, we may need to substantially
increase our expenditures for creating and maintaining brand awareness and brand loyalty.
Consequently, we will need to grow our revenues at least in the same proportion as any increase in
brand spending to maintain current levels of profitability. There have been negative press coverage
about the Company based on untrue or unsubstantiated rumors in the past, and the Company has taken
affirmative steps to address these coverage. However, we cannot assure you that we will always be
able to diffuse negative press coverage about the Company to the satisfaction of our investors,
users, advertisers, customers and strategic partners. If we are unable to diffuse negative press
coverage about the Company, our brands may suffer in the marketplace and our operational and
financial performances may be negatively impacted as a result.
Our investment in Web 2.0 services, search and WAP portal may not be successful.
Web 2.0 services, such as blog, video podcasting and online communities, search and WAP portal
are currently some of the fastest growing online services in the PRC. We have invested and intend
to expand in these areas. For example, we developed our own search engine, we acquired Davidhill
Capital Inc. (Davidhill) and its instant messaging platform and we have invested heavily in these
and other Web 2.0 services, such as blog and video podcasting. Some of our competitors have entered
these markets ahead of us and have achieved significant market positions. Our main competitors in
Web 2.0 services, search and WAP portal include Baidu, Tencent, Netease, Sohu, Tudou, Youku,
51.com, PP Live, PP Stream, Yahoo!/Alibaba, Microsoft (MSN), Shanghai 3G and Kongzhong. We have
also invested and plan to continue to invest in other technological products and tools, such as
building game and music platforms to complement our existing Internet service offerings. Our
competitors in these areas tend to be more specialized in their specific markets and may have
access to greater resources, which may give them a competitive advantage over us. We cannot assure
you that we will succeed in these markets despite our investments of time and funds to address
these markets. If we fail to achieve a significant position in these markets, we could fail to
realize our intended returns in these investments. Moreover, our competitors who succeed may enjoy
increased revenues and profits from an increase in market share in any of these specific markets,
and our results and share price could suffer as a result.
9
If we fail to successfully develop and introduce new products and services, our competitive
position and ability to generate revenues could 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. If our efforts to develop, market and sell new products and services
to the market are not successful, our financial position, results of operations and cash flows
could be materially adversely affected, the price of our ordinary shares could decline and you
could lose part or all of your investment.
If we are unable to keep up with the rapid technological changes of the Internet industry, our
business may suffer.
The Internet industry is experiencing rapid technological changes. For example, with the
advances of search engines, Internet users may choose to access information through search engines
instead of web portals. With the advent of Web 2.0, the interests and preferences of Internet users
may shift to user-generated content, such as blogs and video podcasting. As broadband becomes more
accessible, Internet users may demand contents in pictorial, audio-rich and video-rich format. With
the development of 2.5G (such as GPRS) and soon 3G (such as Universal Mobile Telecommunication
Service) in China, mobile users may shift from the current predominant text messaging services to
newer applications, such as multimedia messaging services, mobile commerce, music and video
downloads and mobile games. Our future success will depend on our ability to anticipate, adapt and
support new technologies and industry standards. If we fail to anticipate and adapt to these and
other technological changes, our market share and our profitability could suffer.
We may be adversely affected by complexity, uncertainties and changes in PRC regulation of
Internet business and companies, including limitations on our ability to own key assets such as our
web site.
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 evolving, their interpretation and enforcement involve significant
uncertainties. In addition, the Chinese legal system is based on written statutes and prior court
decisions can only be cited for reference but have little precedential value. 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 Chinas government regulation of the Chinese Internet sector include
the following:
We only have contractual control over our web site in China; we do not own it due to the
restriction of foreign investment in businesses providing value-added telecommunication
services, including computer information services, MVAS or electronic mail box services.
Uncertainties relating to the regulation of the Internet business in China, including
evolving licensing practices, give rise to the risk that permits, licenses or operations at
some of our companies may be subject to challenge, which may be disruptive to our business, or
subject us to sanctions, requirements to increase capital or other conditions or enforcement,
or compromise enforceability of related contractual arrangements, or have other harmful
effects on us. For example, on July 13, 2006, MII issued The Circular of the Ministry of
Information Industry on Intensifying the Administration of Foreign Investment in Value-added
Telecommunication Services (the MII Circular 2006). According to the MII Circular 2006,
since the FITE Regulation went into effect, some foreign investors have, by means of
delegation of domain names and license of trademarks, conspired with domestic value-added
telecom enterprises to circumvent the requirements of FITE Regulations and been engaged in
value-added telecom services illegally. In order to further intensify the administration of
FITEs, the MII Circular 2006 provides that (i) any domain name used by a value-added telecom
carrier shall be legally owned by such carrier or its shareholder(s); (ii) any trademark used
by a value-added telecom carrier shall be legally owned by the carrier or its shareholder(s);
(iii) the operation site and facilities of a value-added telecom carrier shall be installed
within the scope as prescribed by operating licenses obtained by the carrier and shall
correspond to the value-added telecom services that the carrier has been approved to provide;
and (iv) a value-added telecom carrier shall establish or improve the measures of ensuring
safety of network information. As to the companies which have obtained the operating licenses
for value-added telecom services, they are required to conduct self-examination and
self-correction according to the said requirements and report the result of such
self-examination and self-correction to MII.
10
|
|
Accordingly, Beijing SINA Internet Information Service Co., Ltd., a Chinese company controlled by
the Company through contractual arrangement (the ICP Company) submitted the Self-Correction
Scheme of the ICP Companys Multi-regional Value-added Telecommunication Business (the
Self-Correction Scheme) to MII on November 17, 2006. Under the Self-Correction Scheme, (i) the
domain name www.sina.com.cn mainly used by the ICP Company shall be transferred from
Beijing SINA Information Technology Co., Ltd. (formerly known as Beijing Stone Rich Sight
Information Technology Co., Ltd.), one of the Companys wholly owned subsidiaries (BSIT) to the
ICP Company, and (ii) the trademark SINA
() used by the ICP Company shall be transferred from
BSIT to the ICP Company. According to the Notice of Acceptance of Transfer Application issued by
the Trademark Office of the State Administration for Industry and Commerce (SAIC) to the ICP
Company on December 26, 2006, the application for transfer of trademark is currently in the
process of substantial review. The domain name
www.sina.com.cn has been transferred to the ICP
Company. |
The numerous and often vague restrictions on acceptable content in China subject 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.
Because the definition and interpretation of prohibited content are in many cases vague and
subjective, it is not always possible to determine or predict what and how content might be
prohibited under existing restrictions or restrictions that might be imposed in the future.
For example, in January 2005, the State Administration of Radio, Film and Television, which
regulates radio and television stations in China (SARFT), issued a notice prohibiting
commercials for MVAS related to fortune-telling from airing on radio and television
stations, effective February 2005. This notice could also lead to further actions by other
Chinese government authorities to prohibit the sale of such fortune-telling related SMS, which
could have a material adverse effect on our financial position, results of operations, or cash
flows. SARFT or other Chinese governmental authorities may prohibit the marketing of other
MVAS via a channel we depend on to generate revenues, which could also have a material adverse
effect on our financial position, results of operations or cash flows.
Certain Chinese governmental authorities have stated publicly that they are in the process of
preparing new laws and regulations that will govern Internet activities. The areas of
regulation currently include, without limitation, online advertising, online news reporting,
online publishing, online education, online gaming, online transmission of audio-visual
programs, online health diagnosis and treatment, and the provision of industry-specific (e.g.,
drug-related) information over the Internet. Other aspects of our online operations, such as
video podcasting or blog services may be subject to regulations in the future. Our operations
may not be consistent with these new regulations when they are put into effect. As a result,
we could be subject to severe penalties as discussed above, which could have a material
adverse effect on our financial position and results of operations and cash flow. A recently
promulgated regulation that governs the online transmission of audio-visual programs is the
Administrative Provisions on Internet Audio-Visual Program Service jointly promulgated by
SARFT and MII on December 20, 2007 (the Audio-Visual Program Provisions). Effective as of
January 31, 2008, the Audio-Visual Program Provisions stipulate, among others, that any entity
engaged in Internet audio-visual program service must obtain a License for Online Transmission
of Audio-Visual Programs issued by SARFT or register with SARFT; an applicant for engaging in
Internet audio-visual program service must be a state-owned entity or a state-controlled
entity with full corporate capacity; and the business to be carried out by the applicant must
satisfy the overall planning and guidance catalogue for Internet audio-visual program service
determined by SARFT. Although SARFT and MII clarified in a press conference later that the
existing websites may continue operating its audio-visual services so long as certain
conditions are satisfied (including that such websites shall be registered with SARFT), it is
unclear based on the Audio-Visual Program Provisions whether such requirements only apply to
the new market entrants for operating the Internet audio-visual program service or such
requirements apply to both the new applicants and the entities that have already obtained the
License for Online Transmission of Audio-Visual Programs.
The Companys VIEs in China are not state-owned or state-controlled companies, and without the
clarification of SARFT and MII made in the above mentioned press conference they may not be
qualified applicants for carrying out Internet audio-visual program service under the
Audio-Visual Program Provisions. However, the ICP Company has already obtained a License for
Online Transmission of Audio-Visual Programs issued by SARFT valid as of March 22, 2007 through
March 22, 2009, showing that the ICP Company has been approved to carry out online transmission
service of audio-visual program within such validity term. According to the above-mentioned press
conference, the ICP Company is entitled to continue operating its online transmission service of
audio-visual program. Notwithstanding the foregoing, considering the requirements set out in the
Audio-Visual Program Provisions, it is uncertain whether the ICP Company can successfully procure
the renewal of the
11
|
|
License for Online Transmission of Audio-Visual Programs after its expiration. Should any
official explanations or implementation rules of the Audio-Visual Program Provisions be
promulgated by SARFT or MII explicitly forbidding any non-state-controlled entities from engaging
in Internet audio-visual program service, SINA may be disqualified from operating online
transmission of audio-visual programs after the License for Online Transmission of Audio-Visual
Programs currently held by the ICP Company expires. |
The governing bodies of Chinas mobile industry from time to time issue policies that
regulate the business practices relating to MVAS. We cannot predict the timing or substance of
such new regulations, which may have a negative impact on our business.
The interpretation and application of existing Chinese laws, regulations and policies, the
stated positions of MII and possible new laws, regulations or policies have created substantial
uncertainties regarding the legality of existing and future foreign investments in, and the
businesses and activities of, Internet businesses in China, including our business. See Government
Regulation and Legal Uncertainties below for more details.
In order to comply with PRC regulatory requirements, we operate our main businesses through
companies with which we have contractual relationships but in which we do not have controlling
ownership. If the PRC government determines that our agreements with these companies are not in
compliance with applicable regulations, our business in the PRC could be adversely affected.
The Chinese government restricts foreign investment in Internet-related, MVAS and advertising
businesses, including Internet access, distribution of content over the Internet and MVAS, and
advertising via the Internet. Accordingly, we operate our Internet-related and MVAS businesses in
China through several VIEs that are PRC domestic companies owned principally or completely by
certain of our PRC employees or PRC employees of our directly-owned subsidiaries. We control these
companies and operate these businesses through contractual arrangements with the respective
companies and their individual owners, but we have no equity control over these companies. Such
restrictions and arrangements are prevalent in other PRC companies we have acquired. See Item 4.C.
Organizational Structure.
We cannot be sure that the PRC government would view our operating arrangements to be in
compliance with PRC licensing, registration or other regulatory requirements, including without
limitation the requirements described in the MII Circular 2006, with existing policies or with
requirements or policies that may be adopted in the future. If we are determined not to be in
compliance, the PRC government could levy fines, revoke our business and operating licenses,
require us to discontinue or restrict our operations, restrict our right to collect revenues, block
our web site, require us to restructure our business, corporate structure or operations, impose
additional conditions or requirements with which we may not be able to comply, impose restrictions
on our business operations or on our customers, or take other regulatory or enforcement actions
against us that could be harmful to our business. We may also encounter difficulties in obtaining
performance under or enforcement of related contracts.
We rely on contractual arrangements with our VIEs for our China operations, which may not be
as effective in providing control over these entities as direct ownership.
Because PRC regulations restrict our ability to provide Internet content, MVAS and advertising
services directly in China, we are dependent on our VIEs in which we have little or no equity
ownership interest and must rely on contractual arrangements to control and operate these
businesses. These contractual arrangements may not be as effective in providing control over these
entities as direct ownership. For example, the VIEs could fail to take actions required for our
business or fail to maintain our China web sites despite their contractual obligation to do so.
These companies are able to transact business with parties not affiliated with us. If these
companies fail to perform under their agreements with us, we may have to rely on legal remedies
under Chinese law, which we cannot be sure would be available. In addition, we cannot be certain
that the individual equity owners of the VIEs would always act in the best interests of SINA,
especially if they leave SINA.
Substantially all profits generated from our VIEs are paid to our subsidiaries in China
through related party transactions under contractual agreements. We believe that the terms of these
contractual agreements are in compliance with the laws in China. Due to the uncertainties
surrounding the interpretation of the transfer pricing rules relating to related party transactions
in China, it is possible that in the future tax authorities in China may challenge the prices that
we have used for related party transactions among our entities in China. In the event the tax
authorities challenge our VIE structure, we may be forced to restructure our business operation,
which could have a material adverse effect on our business.
12
If tax benefits available to us in China are reduced or repealed, our results of operations
could suffer significantly and your investment in our shares may be adversely affected.
We
are incorporated in the Cayman Islands where no income taxes are
imposed for business operated outside of the Cayman Islands. We have operations in four
tax jurisdictions including China, the U.S., Hong Kong and Taiwan. For the U.S., Hong Kong and
Taiwan, we have incurred net accumulated operating losses for income tax purposes. We believe that
it is more likely than not that these net accumulated operating losses will not be utilized to
offset taxable income in the future and hence we have not recognized income tax benefits for these
locations. We do not expect that we will record any income tax provisions for our operations in the
U.S., Hong Kong and Taiwan in the foreseeable future.
We generated substantially all our net income from our China operations. Our China operations
are conducted through various subsidiaries and VIEs.
Due to our operation and tax structures in the PRC, we have entered into technical and other
service agreements between our directly-owned subsidiaries and our VIEs in the PRC. We incur a 5%
business tax when our directly-owned subsidiaries receive the fees from the VIEs pursuant to such
service agreements, which we include in our operating expenses as the cost of transferring economic
benefit generated from these VIEs. Due to the uncertainties surrounding the interpretation of the
tax transfer pricing rules relating to related party transactions in the PRC, it is possible that
tax authorities in the PRC might in the future challenge the transfer prices that we used for the
related party transactions among our entities in the PRC.
Beginning January 1, 2008, the new Enterprise Income Tax Law (the EIT Law) and the
Implementing Rules of the EIT Law (the Implementing Rules) approved by the State Council became
effective in China, which require, among other things, enterprises in China to submit their annual
enterprise income tax returns together with a report on transactions with their affiliates to the
relevant tax authorities. The EIT law and the Implementing Rules emphasize the arms length basis
for transactions between related entities. If PRC tax authorities were to determine that our
transfer pricing structure were not on an arms length basis and therefore constitute a favorable
transfer pricing, they could request that our VIEs adjust their taxable income upward for PRC tax
purposes. Such a pricing adjustment may not reduce the tax expenses of our subsidiaries but could
adversely affect us by increasing our VIEs tax expenses, which could subject our VIEs to late
payment fees and other penalties for underpayment of taxes, and/or could result in the loss of tax
benefits available to our subsidiaries in China.
The EIT Law supplemented by the Implementing Rules supersedes the previous Income Tax Law (the
Previous IT Law) and unifies the enterprise income tax rate for foreign-invested enterprises
(FIEs) and domestic enterprises at 25%. New and high technology enterprises will continue to
enjoy a preferential tax rate of 15%, but must meet the criteria defined under the EIT Law and
related regulations. The EIT Law provides for a five-year transitional period for certain entities
that had enjoyed a favorable income tax rate of less than 25% under the Previous IT Law and was
established before March 16, 2007, during which period the applicable enterprises income tax rate
shall gradually increase to 25%. In addition, the EIT Law provides grandfather treatment for new
and high technology enterprises that received special tax holidays under the Previous IT Law, which
allows them to continue to enjoy their tax holidays until expiration. Most of our FIEs operations
in China would enjoy an effective income tax rate of 7.5% in 2008 under the Previous IT Law and
some of our VIEs would enjoy a favorable income tax rate of less than 25% under the Previous IT
Law. The Companys ultimate effective tax rate starting in 2008 will depend on many factors,
including but not limited to, whether certain of the Companys FIEs in China will receive the new
and high technology enterprise status under the EIT Law. If the Companys FIEs fail to receive the
new and high technology enterprise status, the Companys PRC consolidated effective tax rate may
increase significantly to as high as 27%.
The EIT Law also provides that enterprises established under the laws of foreign countries or
regions but whose de facto management body is located in the PRC be treated as a resident
enterprise for PRC tax purposes and consequently be subject to the PRC income tax at the rate of
25% for its global income. The Implementing Rules of the EIT Law merely defines the location of
the de facto management body as the place where the exercising, in substance, of the overall
management and control of the production and business operation, personnel, accounting, properties,
etc., of a non-PRC company is located. The determination of tax residency requires a review of
surrounding facts and circumstances of each case. If SINA is treated as a resident enterprise for
PRC tax purposes, SINA will be subject to PRC tax on worldwide income at a uniform tax rate of 25%
starting from January 1, 2008.
The
EIT Law also imposes a 10% withholding income tax on dividends
generated on or after January 1,
2008 and distributed by a resident enterprise to its foreign investors, if such foreign investors
are considered as non-resident enterprise without any establishment or place within China or if the
received dividends have no connection with such foreign investors establishment or
13
place within China, unless such foreign investors jurisdiction of incorporation has a tax
treaty with China that provides for a different withholding arrangement. Such withholding income
tax was exempted under the Previous IT Law. The Cayman Islands, where we are incorporated, does not
have such a tax treaty with China. According to the arrangement between Mainland China and Hong
Kong Special Administrative Region on the Avoidance of Double Taxation and Prevention of Fiscal
Evasion in August 2006, dividends paid by an FIE to its foreign investors in Hong Kong will be
subject to withholding tax at a rate of no more than 5% (if the foreign investor owns directly at
least 25% of the shares of the FIE). A majority of our subsidiaries in China are directly invested
and held by Hong Kong registered entities. If we are regarded as a non-resident enterprise and our
Hong Kong entities are regarded as resident enterprises, then our Hong Kong entities may be
required to pay a 10% withholding tax on any dividends payable to us. If our Hong Kong entities are
regarded as non-resident enterprises, then our subsidiaries in China will be required to pay a 5%
withholding tax for any dividends payable to our Hong Kong entities. In either case, the amount of
funds available to us, including the payment of dividends to our shareholders, could be materially
reduced. In addition, because there remains uncertainty regarding the interpretation and
implementation of the EIT Law and its Implementing Rules, if we are regarded as a PRC resident
enterprise, we cannot guarantee that any dividends to be distributed by us to our non-PRC
shareholders will not be subject to a withholding tax, nor can we guarantee that any gains realized
by such non-PRC shareholders from the transfer of our shares will not be subject to a withholding
tax. If we are required under the EIT Law to withhold PRC income tax on our dividends payable to
our non-PRC shareholders or any gains realized by our non-PRC shareholders from transfer of the
shares, their investment in our shares may be materially and adversely affected. Accordingly, the
Company may decide not to distribute its retained earnings and maintain such cash onshore to
reinvest in its PRC operations.
Restrictions on paying dividends or making other payments to us bind our subsidiaries and VIEs
in China.
We are a holding company and do not have any assets or conduct any business operations in
China other than our investments in our entities in China, including , SINA.com Technology (China)
Co., Ltd. (STC), Beijing New Media Information Technology Co. Ltd., Fayco Network Technology
Development (Shenzhen) Co. Ltd., Beijing SINA Internet Technology Service Co. Ltd. and our VIEs. As
a result, if our non-China operations require cash from China, we would depend on dividend payments
from our subsidiaries in China for our revenues after they receive payments from our VIEs in China
under various services and other arrangements. We cannot make any assurance that our subsidiaries
in China can continue to receive the payments as arranged under our contracts with those VIEs. To
the extent that these VIEs have undistributed after-tax net income, we have to pay tax on behalf of
the employees when we try to distribute the dividend from these local entities in the future. Such
dividend tax rate is 20%. In addition, under Chinese law, our subsidiaries are only allowed to pay
dividends to us out of their distributable earnings, if any, as determined in accordance with
Chinese accounting standards and regulations. Moreover, our Chinese subsidiaries are required to
set aside at least 10% of their respective after-tax profit each year, if any, to fund certain
mandated reserve funds, unless these reserves have reached 50% of their registered capital. These
reverse funds are not payable or distributable as cash dividends.
The Chinese government also imposes controls on the convertibility of renminbi into foreign
currencies and, in certain cases, the remittance of currency out of China. We had experienced and
may continue to experience difficulties in completing the administrative procedures necessary to
obtain and remit foreign currency. See 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 and profits in
U.S. dollar terms. If we or any of our subsidiaries are unable to receive all of the revenues from
our operations through these contractual or dividend arrangements, we may be unable to effectively
finance our operations or pay dividends on our ordinary shares.
Even if we are in compliance with Chinese governmental regulations relating to licensing and
foreign investment prohibitions, the Chinese government may prevent us from advertising or
distributing content that it believes is inappropriate and we may be liable for such content or we
may have to stop profiting from such content.
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 or through MVAS 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 via our MVAS, or to limit or regulate any current or future content or services
available to users on our network, our business could be significantly harmed.
14
Because the definition and interpretation of prohibited content is in many cases vague and
subjective, it is not always possible to determine or predict what and how content might be
prohibited under existing restrictions or restrictions that might be imposed in the future. At the
end of July 2004, our IVR service was temporarily terminated by China Mobile for violating certain
operating procedures. One of the violations cited in the notice for temporary termination was that
we had provided inappropriate content to our mobile subscribers through our IVR service. We are not
sure whether operators including China Mobile and China Unicom or the Chinese government will find
our other mobile content inappropriate and therefore prevent us from operating the MVAS relating to
such content in the future. If they prevent us from offering such services, our profit from MVAS
will suffer.
In January 2005, SARFT, which regulates radio and television stations in China, issued a
notice prohibiting commercials for MVAS related to fortune-telling from airing on radio and
television stations effective in February 2005. SARFT or other Chinese government authorities may
prohibit the marketing of other MVAS via a channel we depend on to generate revenues, which could
have a material adverse effect on our financial position, results of operations or cash flows.
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.
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.
The Chinese legal system has inherent uncertainties that could limit the legal protections
available to you.
Our contractual arrangements with our VIEs in China are governed by the laws of the PRC.
Chinas legal system is based upon written statutes. Prior court decisions may be cited for
reference but are not binding on subsequent cases and have limited value as precedents. Since 1979,
the Chinese legislative bodies have promulgated laws and regulations dealing with economic matters
such as foreign investment, corporate organization and governance, commerce, taxation and trade.
However, because these laws and regulations are relatively new, and because of the limited volume
of published decisions and their non-binding nature, the interpretation and enforcement of these
laws and regulations involve uncertainties, and therefore you may not have legal protections for
certain matters in China.
Increases in labor costs and the new labor law in the PRC may adversely affect our business
and our profitability.
A new labor contract law became effective on January 1, 2008. The new labor contract law
imposes stricter requirements in terms of signing labor contracts, paying remuneration, stipulating
probation and penalties and dissolving labor contracts. As a result, our labor costs and future
disputes with our employees are expected to increase, which could adversely affect our
profitability, business or results of operations.
Our strategy of acquiring complementary assets, technologies and businesses may fail and may
result in equity or earnings dilution.
As part of our business strategy, we have acquired and intend to continue to identify and
acquire assets, technologies and businesses that are complementary to our existing business. In
January 2003 we acquired Memestar Limited, an MVAS company, in March 2004 we acquired Crillion
Corporation, an MVAS company, and in October 2004, we acquired Davidhill, an instant messaging
technology platform. Acquired businesses or assets may not yield the results we expected. In
addition, acquisitions could result in the use of substantial amounts of cash, potentially dilutive
issuances of equity securities, significant amortization expenses related to goodwill and other
intangible assets and exposure to potential unknown liabilities of the acquired business. Moreover,
the cost of identifying and consummating acquisitions, and integrating the acquired businesses into
ours, may be significant, and the integration of acquired business may be disruptive to our
business operations. In addition, we may have to obtain approval from the relevant PRC governmental
authorities for the acquisitions and comply with any applicable PRC rules and regulations, which
may be costly. In the event our acquisitions are not successful, our financial conditions and
results of operation may be materially adversely affected.
We may not be able to manage our expanding operations effectively, which could harm our
business.
We have expanded rapidly by acquiring companies, entering into joint ventures and forming
strategic partnerships. These new businesses, joint ventures and strategic partnerships provide
various services such as MVAS, instant messaging and worldwide
15
web search. We anticipate continuous expansion in our business, both through further
acquisitions and internal growth, as we address growth in our customer base and market
opportunities. In addition, the geographic dispersion of our operations as a result of acquisitions
and overall internal growth 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 and implement operational and
financial systems, procedures and controls, and 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. If we are not successful in
establishing, maintaining and managing our personnel, systems, procedures and controls, our
business will be materially and adversely affected.
Our business and growth could 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 personnel could harm our business. We have experienced recent changes to our directors
and officers. Our future success will also depend on our ability to attract and retain highly
skilled technical, managerial, editorial, finance, marketing, sales and customer service employees.
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 be subject to litigation for user generated content provided on our websites, which may
be time-consuming to defend.
User-generated content (UGC) has become an important source of content to draw traffic to our
website. Our UGC platforms, including blog, video podcasting and album, are open to the public for
posting. Although we have required our users to post only decent and unobtrusive materials and have
set up screening procedures, a third party may still find UGC postings on our website offensive and
take action against us for losses incurred in connection with the posting of such information. As
with other companies who provide UGC on their websites, we have had to deal with such claims in the
past and anticipate that such claims will increase as UGC becomes more popular in China. Any such
claims, with or without merit, could be time consuming and costly to defend, and may result in
litigation and divert managements attention and resources.
You may experience difficulties in effecting service of legal process, enforcing foreign
judgments or bringing original actions in China based on United States or other foreign laws
against us.
We conduct our operations in China and a significant portion of our assets is located in
China. In addition, some of our directors and executive officers reside within China, and
substantially all of the assets of these persons are located within China. As a result, it may not
be possible to effect service of process within the United States or elsewhere outside China upon
those directors or executive officers, including with respect to matters arising under U.S. federal
securities laws or applicable state securities laws. Moreover, our Chinese counsel has advised us
that China does not have treaties with the U.S. and many other countries that provide for the
reciprocal recognition and enforcement of judgment of courts. As a result, recognition and
enforcement in China of judgments of a court of the U.S. or any other jurisdiction in relation to
any matter may be difficult or impossible.
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 could 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 seek
approval from the Office of the State for Cipher Code Administration (OSCCA), i.e., the Chinese
encryption regulatory authority, for the commercial encryption products they use; companies
operating in China are allowed to use commercial cipher code products being approved by OSCCA only
and are prohibited to use self-developed or imported cipher code products without approval. In
addition, all cipher code products shall be produced by those producers appointed and approved by
OSCCA. In December 2005, OSCCA further released a series of rules regulating many aspects of
commercial cipher code products in detail, including development, production and sales, which all
came into effect on January 1, 2006.
Because these regulations do not specify what constitutes cipher code 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 OSCCA for, our current or future encryption software. If
Chinese regulatory authorities request that we register our encryption software or change our
16
current encryption software to an approved cipher code product produced by an appointed
producer, it could disrupt our business operations.
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 better understand 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 users interests and sell or transmit the profiles to third
parties for direct marketing purposes without the users 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 could suffer.
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.
Our significant amount of deposits in certain banks in China may be at risk if these banks go
bankrupt or otherwise not have the liquidity to pay us during our deposit period.
As of December 31, 2007, we have approximately $324.7 million in cash and other bank deposits,
such as time deposits and bank notes, with large domestic banks in China. These cash and bank
deposits constitute about 68% of our total cash, cash equivalent and short-term investments as of
December 31, 2007. The terms of these deposits are, in general, up to twelve months. Historically,
deposits in Chinese banks are secure due to the state policy on protecting depositors interests.
However, China promulgated a new Bankruptcy Law in August 2006, which came into effect on June 1,
2007, which contains a separate article expressly stating that the State Council may promulgate
implementation measures for the bankruptcy of Chinese banks based on the Bankruptcy Law. Under the
new Bankruptcy Law, a Chinese bank may go bankrupt. In addition, since Chinas concession to the
World Trade Organization (WTO), foreign banks have been gradually permitted to operate in China
and have been severe competitors against Chinese banks in many aspects, especially since the
opening of renminbi business to foreign banks in late 2006. Therefore, the risk of bankruptcy of
those Chinese banks in which we have deposits has increased. In the event of bankruptcy of one of
the banks which holds our deposits, we are unlikely to claim our deposits back in full since we are
unlikely to be classified as a secured creditor based on PRC laws.
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
17
technology on a 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 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, chat
room services, blog, video blog and other areas on our web site; 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 e-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 and may not be adequate to indemnify us against all
potential liabilities.
We have contracted with third parties to provide content and services for our portal network
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. 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
increases from some of our content providers. If this trend continues, our gross profit from online
advertising may be adversely affected. In addition, the Chinese government has the ability to
restrict or prevent state-owned media from cooperating with us in providing certain content to us,
which will result in a significant decrease of the amount of content we can publish on our web
site. We may lose users if the Chinese government chooses to restrict or prevent state-owned media
from cooperating with us, in which case our revenues will be impacted negatively.
In the area of web-based services, we have contracted with third party content providers for
integrated web search technology to complement our directory and navigational guide, and with
various 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.
A substantial part of our non-advertising revenues is generated through MVAS where we depend
on mobile network operators for services delivery and payment collection. If we were unable to
continue these arrangements, our MVAS could be severely disrupted or discontinued. Furthermore, we
are highly dependent on these mobile service providers for our profitability in that they can
choose to increase their service fees at will.
We depend on a third partys 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 revenues could decline.
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
18
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, new tax regulations may
subject us or our customers to additional 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 or subject us to penalties.
The high cost of Internet access could hinder the growth of Internet users in China and thus
hamper the expansion of our user base.
The cost of Internet access might prevent some of the users from accessing Internet and thus
cause the growth of Internet users to decelerate. Such deceleration may adversely affect our
ability to continue to expand our user base and increase our attractiveness to online advertisers.
If we failed to scale our systems proportionally with the growing Internet population in
China, our website traffic growth would be adversely affected.
The website traffic in China has experienced significant growth during the past few years. If
we were unable to increase our online content and service delivering capacity accordingly, we might
not be able to continuously grow our website traffic.
We must rely on the Chinese government to develop Chinas Internet infrastructure and, if it
does not develop this infrastructure, our ability to grow our business could be hindered.
The telecommunications infrastructure in China is not well developed. Although private sector
ISPs exists in China, almost all access to the Internet is accomplished through ChinaNet, Chinas
primary commercial network, which is owned and operated by China Telecom and China Netcom under the
administrative control and regulatory supervision of MII. Although the Chinese government has
announced plans to aggressively develop the national information infrastructure, we cannot assure
you that this infrastructure will be timely developed. We have experienced slower response time and
suffered outages in the past due to equipment and software downtime as well as bandwidth issues
with operators. Although these instances have not had a material adverse effect on the Companys
business, such instances could have a material impact on its business in the future. 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 timely developed by the Chinese government, the growth of
our business could be hindered.
Our operations could be disrupted by unexpected network interruptions caused by system
failures, natural disasters or unauthorized tampering 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. In the past, 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.
19
We have limited business insurance coverage.
The insurance industry in China is still young and the business insurance products offered in
China are limited. We do not have any business liability or disruption insurance coverage for our
operations. Any business disruption, litigation or natural disaster may cause us to incur
substantial costs and divert our resources.
Future outbreaks of Severe Acute Respiratory Syndrome (SARS), Avian flu or other widespread
public health problems could adversely affect our business.
Future outbreaks of SARS, Avian flu or other widespread public health problems in China and
surrounding areas, where most of our employees work, could negatively impact our business in ways
that are hard to predict. Prior experience with the SARS virus suggests that a future outbreak of
SARS, Avian flu or other widespread public health problems may lead public health authorities to
enforce quarantines, which could result in closures of some of our offices and other disruptions of
our operations. A future outbreak of SARS, Avian flu or other widespread public health problems
could result in reduction of our advertising and fee-based revenues.
Political and economic conditions in Greater China and the rest of Asia 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 will be able to
effectively maintain 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 GDP growth for the entire region as a result of higher interest rates and
currency fluctuations. If declining economic growth rates persist in these countries, expenditures
for Internet access, infrastructure improvements and advertising could decrease, which could
negatively affect our business and our profitability over time.
Economic reforms in the region could also 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 have $99 million of zero-coupon, convertible, subordinated notes due 2023, or possibly
earlier upon a change of control, which we may not be able to repay in cash and could result in
dilution of our basic earnings per share.
In July 2003, we issued $100 million of zero coupon convertible subordinated notes due July
15, 2023, first putable to us on July 15, 2007. The outstanding balance of our convertible notes as
of December 31, 2007 was $99 million. Each $1,000 principal amount of the notes is convertible into
38.7741 shares of our ordinary shares prior to July 15, 2023 if the sale price of our ordinary
shares issuable upon conversion of the notes reaches a specified threshold or specified corporate
transactions have occurred. One of the conditions for conversion of the notes to SINA ordinary
shares is that the market price of SINA ordinary shares reaches a specified threshold for a defined
period of time. The specified thresholds are (i) during the period from issuance to July 15, 2022,
if the sale price of SINA ordinary shares, for each of any five consecutive trading days in the
immediately preceding fiscal quarter, exceeds 115% of the conversion price per ordinary share, and
(ii) during the period from July 15, 2022 to July 15, 2023, if the sale price of SINA ordinary
shares on the previous trading day is more than 115% of the conversion price per ordinary share. On
July 15 annually from 2007 to 2013, and on July 15, 2018, or upon a change of control, holders of
the notes may require us to repurchase all or a portion of the notes for cash. For the three months
ended March 31, 2008, the sale price of SINA ordinary shares exceeded the threshold set forth in
Item (i) above for the required period of time. Therefore, the notes are convertible into SINA
ordinary shares during the three months ending June 30, 2008. Upon a conversion, we may choose to
pay the purchase price of the notes in cash, ordinary shares, or a combination of cash and ordinary
shares. We may not have enough cash on hand or have the ability to access cash to pay the notes if
holders ask for repayment on the various put dates, or upon a change of control, or at maturity. In
addition, the purchase of our notes with our ordinary shares or the conversion of the notes into
our ordinary shares could result in dilution of our basic earnings per share.
20
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 Chinese
renminbi were to decline in value, reducing our revenues and profits in U.S. dollar terms.
Our reporting currency is the U.S. dollar and our operations in China, Hong Kong, Taiwan use
their respective local currencies as their functional currencies. The majority of our revenues
derived and expenses incurred are in Chinese renminbi with a relatively small amount in New Taiwan
dollars, Hong Kong dollars and U.S. dollars. 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 Chinese government policies and Chinas domestic and international
economic and political developments, as well as supply and demand in the local market. Starting
July 2005, the Chinese government changed its policy of pegging the value of Chinese renminbi to
the U.S. dollar. Under the new policy, Chinese renminbi has fluctuated within a narrow and managed
band against a basket of certain foreign currencies. As a result of this policy change, Chinese
renminbi appreciated approximately 3.4% and 6.5% against the U.S. dollar in 2006 and 2007,
respectively. It is possible that the Chinese government could adopt a more flexible currency
policy, which could result in more significant fluctuation of Chinese renminbi against the U.S.
dollar. We can offer no assurance that Chinese renminbi or any other foreign currency will be
stable against the U.S. dollar.
The income statements of our China, Hong Kong and Taiwan operations are translated into U.S.
dollars at the average exchange rates in each applicable period. To the extent the U.S. dollar
strengthens against foreign currencies, the translation of these foreign currency denominated
transactions results in reduced revenues, operating expenses and net income for our international
operations. Similarly, to the extent the U.S. dollar weakens against foreign currencies, the
translation of RMB, Hong Kong Dollar and New Taiwan Dollar denominated transactions results in
increased revenues, operating expenses and net income for our international operations. We are also
exposed to foreign exchange rate fluctuations as we convert the financial statements of our foreign
subsidiaries into U.S. dollars in consolidation. If there is a change in foreign currency exchange
rates, the conversion of the foreign subsidiaries financial statements into U.S. dollars will lead
to a translation gain or loss which is recorded as a component of other comprehensive income. In
addition, we have certain assets and liabilities that are denominated in currencies other than the
relevant entitys functional currency. Changes in the functional currency value of these assets and
liabilities create fluctuations that will lead to a transaction gain or loss. We have not entered
into agreements or purchased instruments to hedge our exchange rate risks, although we may do so in
the future. The availability and effectiveness of any hedging transactions may be limited and we
may not be able to successfully hedge our exchange rate risks.
Although Chinese governmental policies were introduced in 1996 to allow the convertibility of
Chinese renminbi into foreign currency for current account items, conversion of Chinese renminbi
into foreign exchange for capital items, such as foreign direct investment, loans or securities,
requires the approval of the State Administration of Foreign Exchange, or SAFE, which is under the
authority of the Peoples 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 Chinese renminbi in the future. Because a significant
amount of our future revenues may be in the form of Chinese renminbi, our inability to obtain the
requisite approvals or any future restrictions on currency exchanges could limit our ability to
utilize revenue generated in Chinese renminbi to fund our business activities outside China, or to
repay non-renminbi-denominated obligations, including our debt obligations, which would have a
material adverse effect on our financial conditions and results of operation.
Changes to existing accounting pronouncements, including SFAS 123R, or taxation rules or
practices, including FIN 48, may adversely affect our reported results of operations or how we
conduct our business.
A change in accounting pronouncements or taxation rules or practices can have a significant
effect on our reported results and may even affect our reporting of transactions completed before
the change is effective. Pursuant to SEC rules, we adopted the Statement of Financial Accounting
Standards No. 123 (revised 2004), Share-Based Payment (SFAS 123R) starting January 1, 2006.
SFAS 123R requires us to measure compensation costs for all share-based compensation at fair value
and take compensation charges equal to that value. The method that we use to determine the fair
value of share options is based upon, among other things, the volatility of our ordinary shares.
The method that we use to determine the fair value of restricted share units is based upon the
market price of our ordinary shares on the date of the grant. The price of our ordinary shares has
historically been volatile. Therefore, the requirement to measure compensation costs for all
share-based compensation under SFAS 123R could negatively affect our profitability and the trading
price of our ordinary shares. SFAS 123R and the impact of expensing on our reported results could
also limit our ability to continue to use share options or use other share-based instruments as an
incentive and retention tool, which could, in turn, hurt our ability to recruit employees and
retain existing employees. Other new accounting pronouncements or taxation rules, such as FIN 48,
the EIT Law in China which was effective January 1, 2008,
21
and various interpretations of accounting pronouncement or taxation practice have occurred and
may occur in the future. These accounting standard and tax regulation changes, future changes and
the uncertainties surrounding current practices and implementation procedures may adversely affect
our reported financial results or the way we conduct our business.
We may be required to record a significant charge to earnings
if we are required to reassess our
goodwill or other amortizable intangible assets arising from acquisitions.
We are required under GAAP to review our amortizable intangible assets for impairment when
events or changes in circumstances indicate the carrying value may not be recoverable. Goodwill is
required to be tested for impairment annually, or more frequently, if facts and circumstances
warrant a review. Factors that may be considered a change in circumstances indicating that the
carrying value of our amortizable intangible assets may not be recoverable include a decline in
stock price and market capitalization and slower or declining growth rates in our industry. We may
be required to record a significant charge to earnings in our financial statements during the
period in which any impairment of our goodwill or amortizable intangible assets is determined.
During
fiscal 2007, we assessed the goodwill related to our MVAS operation for
impairment as a result of continuously declining revenues and gross margins. We used both the
income approach and market approach for the assessment of mobile goodwill and the assumptions used
were based on the information available to us at the time. Further decline in the performance of
our mobile operations, in the price over earnings multiples of our peers in the MVAS industry and
other factors may require us to record a significant charge to earnings if an impairment is
determined at a future date. As of December 31, 2007, goodwill related to our MVAS operation was
approximately $68.9 million and goodwill and intangible assets not related to our mobile business
were approximately $20.5 million.
We may be required to record a significant charge to earnings from the declines in fair value
of our marketable securities if such declines become other than temporary or if we are unable to
hold such investments until maturity.
Our marketable securities are classified as available-for-sale in short term investments and
are reported at fair value with net unrealized losses recorded as accumulated other comprehensive
income in shareholders equity. The losses incurred on these investments are primarily related to
changes in interest rates. We consider these declines to be temporary in nature. If factors arise
that would require us to account for the declines as other than temporary or if we are unable to
hold the investments until the carrying value is recovered, we may need to recognize the declines
as realized losses with a charge to income.
While we believe that we currently have adequate internal control procedures in place, we are
still exposed to potential risks from legislation requiring companies to evaluate controls under
Section 404 of the Sarbanes-Oxley Act of 2002.
While we believe that we currently have adequate internal control procedures in place, we are
still exposed to potential risks from legislation requiring companies to evaluate controls under
Section 404 of the Sarbanes-Oxley Act of 2002. Under the supervision and with the participation of
our management, we have evaluated our internal controls systems in order to allow management to
report on, and our registered independent public accounting firm to attest to, our internal
controls, as required by Section 404 of the Sarbanes-Oxley Act. We have performed the system and
process evaluation and testing required in an effort to comply with the management certification
and auditor attestation requirements of Section 404. As a result, we have incurred additional
expenses and a diversion of managements time. If we are not able to continue to meet the
requirements of Section 404 in a timely manner or with adequate compliance, we might be subject to
sanctions or investigation by regulatory authorities, such as the SEC or the NASDAQ. Any such
action could adversely affect our financial results and the market price of our ordinary shares.
Our stock price has been historically volatile and may continue to be volatile, which may make
it more difficult for you to resell shares when you want at prices you find attractive.
The trading price of our ordinary shares has been and may continue to be subject to
considerable daily fluctuations. During the twelve months ended December 31, 2007, the closing sale
prices of our ordinary shares on the NASDAQ Global Select Market ranged from $29.87 to $58.42 per
share. 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, new governmental restrictions or regulations and news
reports relating to trends in our markets. In addition, the stock market in general, and the market
prices for China-related and
22
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 ordinary shares, regardless of our operating
performance.
We may be classified as a passive foreign investment company, which could result in adverse
U.S. tax consequences to U.S. investors.
Based upon the nature of our income and assets, we may be classified as a passive foreign
investment company, or PFIC, 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. The determination of whether or not we are a PFIC is made on an annual basis, and
those determinations depend on the composition of our income and assets, including goodwill, 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 treatment, you should be aware that certain
factors that could affect our classification as PFIC 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. In addition, the
relevant authorities in this area are not clear and so we operate with less than clear guidance in
our effort to minimize the risk of PFIC treatment. Therefore, we cannot be sure whether we are not
and will not be a PFIC for the current or any future taxable year. In the event we are determined
to be a PFIC, our stock may become less attractive to U.S. investors, thus negatively impacting the
price of our stock.
Anti-takeover provisions in our charter documents and SINAs shareholder rights plan may
discourage our acquisition by a third party, which could limit our shareholders opportunity to
sell their shares at a premium.
Our Amended and Restated Memorandum and Articles of Association include provisions that could
limit the ability of others to acquire control of us, modify our structure or cause us to engage in
change in control transactions. These provisions could have the effect of depriving shareholders of
an opportunity to sell their shares at a premium over prevailing market prices by discouraging
third parties from seeking to obtain control of us in a tender offer or from otherwise engaging in
a merger or similar transaction with us.
For example, our Board of Directors has the authority, without further action by our
shareholders, to issue up to 3,750,000 preference shares in one or more series and to fix the
powers and rights of these shares, including dividend rights, conversion rights, voting rights,
terms of redemption and liquidation preferences, any or all of which may be greater than the rights
associated with our ordinary shares. Preference shares could thus be issued quickly with terms
calculated to delay or prevent a change in control or make removal of management more difficult. In
addition, if the Board of Directors issues preference shares, the market price of our ordinary
shares may fall and the voting and other rights of the holders of our ordinary shares may be
adversely affected. Similarly, the Board of Directors may approve the issuance of debentures
convertible into voting shares, which may limit the ability of others to acquire control of us.
In addition, we have adopted a shareholder rights plan pursuant to which our existing
shareholders would have the right to purchase ordinary shares from the Company at half the market
price then prevailing in the event a person or group acquires more than 10% of our outstanding
ordinary shares, or an additional 0.5% in the case of certain shareholders holding more than 10% at
the time of the plan adoption, including Shanda and its affiliates, on terms our Board of Directors
does not approve. As a result, such rights could cause substantial dilution to the holdings of the
person or group which acquires more than 10%, or an additional 0.5%, as the case may be.
Accordingly, the shareholder rights plan may inhibit a change in control or acquisition and could
adversely affect a shareholders ability to realize a premium over the then prevailing market price
for the ordinary shares in connection with such a transaction.
Item 4. Information on the Company
A. History and Development of the Company
SINA Corporation was founded in March 1999 through the merger of Beijing SINA Information
Technology Co. Ltd. and California-based SINANET.com. In April 2000, the Company completed its
initial public offering and was listed on the
23
NASDAQ market. Incorporated in the Cayman Islands, SINA is headquartered in Shanghai, China
and has offices in seven cities and a network of four web sites around the world.
The primary focus of our operations is in China, where we derive the majority of our revenues.
From 1999 to 2001, our growth was mainly driven by our online advertising business, which generated
the majority of our total revenues. We began offering MVAS under arrangements with third-party
operators in the PRC in late 2001 and have up until 2004 experienced significant growth in MVAS
revenues.
Our business operations in China are conducted primarily through significant wholly-owned
subsidiaries, including Sina.com Technology (China) Co. Ltd., Beijing New Media Information
Technology Co. Ltd., Fayco Network Technology Development (Shenzhen) Co. Ltd., Beijing SINA
Internet Technology Service Co. Ltd. and significant VIEs, including Beijing SINA Internet
Information Service Co., Ltd., Guangzhou Media Message Technologies, Inc., Beijing Star-Village
Online Cultural Development Co., Ltd., Shenzhen Wang Xing Technology Co., Ltd. and Beijing SINA
Infinity Advertising Co., Ltd.
We have completed a number of acquisitions over the past few years, including the acquisition
of Memestar Limited in 2003, Crillion Corporation in 2004 and Davidhill Capital Inc. in 2004.
B. Business Overview
Overview
We are an online media company and value-added information service provider in the Peoples
Republic of China and the global Chinese communities. With a branded network of localized web sites
targeting Greater China and overseas Chinese, the Company provides services through five major
business lines including SINA.com (online news and content), SINA Mobile (MVAS), SINA Community
(Web 2.0-based services and games), SINA.net (search and enterprise services) and SINA E-Commerce
(online shopping). Together these business lines provide an array of services including
region-focused online portals, MVAS, search and directory, interest-based and community-building
channels, free and premium email, blog services, audio and video streaming, game community
services, classified listings, fee-based services, e-commerce and enterprise e-solutions. The
Company generates the majority of its revenues from online advertising and MVAS offerings, and, to
a lesser extent, from search and other fee-based services.
SINA offers distinct and targeted content on each of its region-specific web sites and a range
of complementary offerings designed to broaden its user base and increase user traffic. The Company
aims to become the media platform of choice for Internet users to research and retrieve information
and for businesses to market and promote their products. SINA offers a range of complementary
offerings, all centered on its core content business that are intended to enhance the
attractiveness of its portal business and strengthen its reach in the community.
In 2007, SINA continued to focus on strengthening its multimedia and community-based product
offerings. One area of focus has been integrating user generated contents, such as blog and video
podcasting into traditional website verticals. In addition, upgrades to email and instant messages
were launched to strengthen the communication aspect of SINA Community product offerings. By
integrating newly launched products with our existing resources, SINA has built up several
interactive platforms including SINA Music and SINA Game. Through these integrated platforms,
Internet users may not only obtain information and updates but also interactively communicate with
other community members with similar interests. In the video space, the Company continued to invest
in the acquisition of quality contents and optimization of content distribution infrastructure in
an effort to transform SINA from a text-based media platform to a multimedia and community-based
media platform.
In 2007, SINA also expanded its strategic relationships in various areas including content,
service and distribution. In May 2007, the Company formed strategic alliance with China Telecom to
provide a co-branded video sharing platform. With this partnership, SINA is able to offer a
scalable solution for video sharing with the support of the largest network operator in China. In
June 2007, SINA entered into a partnership agreement with Google, whereby the two parties agreed to
cooperate on search, advertising and branding.
With China gearing up for the 2008 Beijing Olympics, SINA has taken several initiatives to
enhance our leadership in the online media space, particular in the area of sports. In 2007, the
Company obtained a series of new media rights to broadcast some of the most popular sporting events
in China, many of which are on an exclusive basis, such as matches from the English Premier League
and the European Championship. In addition, we launched an integrated marketing campaign named My
2008: The
24
World Opens Its Eyes. This year-long campaign leading up to the 2008 Beijing Olympics is
designed to encourage Internet users to share their views, thoughts and feelings about the 2008
Beijing Olympics and its impact on China and the Chinese people via SINA Blog, SINA Podcast or SINA
Album.
Market Opportunities
SINAs primary focus is on the China market. The success of its business is tied to the size
and vitality of Chinas economy. In a preliminary study published by the Chinese National Bureau of
Statistics, Chinas gross domestic product (GDP) reached $3.2 trillion in 2007, representing an
11.4% year-on-year growth rate. The latest survey by China Internet Network Information Center
(CNNIC) shows that Internet users in China have grown 53.3% from last year to 210 million as of
the end of 2007. The large user base makes China an attractive market for the Company to expand
its product offerings and to grow its revenue streams. According to the latest survey by CNNIC, 78%
of the users in China have access to the Internet via broadband. The large broadband adoption
creates opportunity for the online industry, particularly in the areas of audio and video-based
products and services, such as rich media and video advertising. In addition, based on a February
2008 Report issued by Chinas Ministry of Information Industry, the number of mobile phone users
has increased 19% from 2006 to 547 million as of the end of 2007. With the Chinese government
expecting to issue 3G wireless licenses in the near future, the issuance of multiple 3G licenses
would level the playing field among the operators, improve the performance of Internet access via
mobile phones and significantly broaden the reach of the Internet in China. We believe this will
create additional business opportunities for SINA.
Properties and Product Offerings
SINA provides services through five major business lines, including SINA.com, SINA Community,
SINA Mobile, SINA.net and SINA E-Commerce, which are categorized into two revenue
streams-advertising and non-advertising. The following table presents an overview of the Companys
revenue reporting structure as well as its vertical properties and services:
|
|
|
Revenue |
|
Advertising (online advertising)
|
Classification |
|
Non-advertising (MVAS, search, and other fee-based services) |
|
|
|
|
|
|
|
|
|
|
|
Properties |
|
|
|
|
|
|
|
|
|
|
and |
|
|
|
|
|
|
|
|
|
|
Services |
|
SINA.com |
|
SINA Community |
|
SINA Mobile |
|
SINA.net |
|
SINA E-Commerce |
|
|
§ News and
online vertical
content
§ Online
advertising
|
|
§ Blog
§ Podcasting
§ Album
§ Bar
§ Notepad
|
|
§ SMS
§ IVR
§ MMS
§ WAP
§ CRBT
|
|
§ Search
§ Enterprise
solutions
|
|
§ Online
Shopping
|
|
|
|
|
§ Instant Messanging
|
|
§ KJAVA |
|
|
|
|
|
|
|
|
§ Group |
|
|
|
|
|
|
|
|
|
|
§ BBS |
|
|
|
|
|
|
|
|
|
|
§ eMail |
|
|
|
|
|
|
|
|
|
|
§ Post |
|
|
|
|
|
|
SINA.com
SINA is an online brand advertising property in China. SINA employs a multi-pronged sales
strategy that targets both short-term revenue opportunities such as banner advertising campaigns,
as well as longer-term, higher-value contracts that include integrated marketing packages. The
Companys advertising product offerings consist of banner, button, text-link advertisements that
appear on pages within the SINA network, channel and promotional sponsorships, and advertising
campaign design and management services.
The Companys primary target client base for advertising and sponsorships consists of global
corporations doing business in Greater China and domestic companies in each of the regions SINA
operates in, to which the Company sells from both its corporate and regional headquarters. Global
corporations are typically Fortune 500 and Fortune 1000 companies that employ a global approach to
their branding, marketing and communications programs. Regional companies consist of medium to
large companies that are focused on specific geographic and demographic markets, such as Chinese
Americans or Taiwanese, and smaller companies whose markets are within a local territory, such as
Beijing or Hong Kong. A partial list of advertising clients include: China Mobile, Intel, Lenovo,
Meng Niu Dairy, Microsoft, Nike, Samsung and Toyota. For the fourth calendar quarter of
25
2007, SINA had approximately 740 advertisers worldwide. Advertisers from the automobile, real
estate and information technology sectors contributed to over half of the total online advertising
dollars in 2007.
SINAs portal network consists of four destination web sites dedicated to its users across the
globe: Mainland China (www.sina.com.cn), Taiwan (www.sina.com.tw), Hong Kong (www.sina.com.hk), and
overseas Chinese in North America (www.sina.com). Each destination site consists of
Chinese-language news and content organized into interest-based channels. The sites offer extensive
community and communication services and sophisticated web navigation capability through SINA
search and directory services.
SINA.com offers a variety of free interest-based channels that provide region-focused format
and content. The most popular channels include:
SINA News. SINA News aggregates feeds from news providers, bringing together content from
media companies such as , China News, Agence France-Presse (AFP), Associated Press, Reuters,
Getty Images, China Daily, Nanfang Daily Group, Beijing News, Xinhua Net and Xinhua News Agency.
Through SINA News, users have easy access to breaking news coverage from multiple sources and
points of view.
SINA Sports. SINA Sports offers multimedia news and information on a wide range of sporting
events from home and abroad. SINA Sports features domestic and international soccer matches, NBA
games, general sports as well as exciting coverage of famous sports stars and teams in the world.
SINA Entertainment. SINA Entertainment contains extensive coverage of local and international
entertainment news and events, including dining, movies, television programs, plays, operas, as
well as popular and classical music.
SINA Auto. SINA Auto offers the latest automobile-related news and service information to
provide car buyers and automobile enthusiasts with the most current information on automotive
pricing, reviews and featured guides.
SINA Finance. SINA Finance provides business news coverage and personal finance columns. SINA
Finance also offers stock quotes from the U.S., Shanghai, Shenzhen, Hong Kong and Taiwan stock
exchanges, as well as breaking news from individual listed companies and market trend analysis.
SINA Real Estate. SINA Real Estate provides the latest news, pricing and availability of new,
used and rental housing. It also features interactive electronic maps, discussion forums and how-to
guides for buyers, sellers and owners of properties on topics ranging from home buying, selling,
furnishing and repairs.
SINA Technology. SINA Technology provides updates on recent activities of high-tech
corporations and technology trends, while offering product reviews and software downloads.
SINA Game. Built on the integration of our existing gaming community resources and multimedia
product offerings, SINA Game serves as an interactive platform that provides users with downloads
and gateway access to popular online games, information and updates on popular online and PC games
and value-added application tools, aiming at enhancing the overall multimedia community experiences
of the game players.
SINA Music. SINA Music is an integrated music community platform that is built on our license
agreements with some of the largest global and domestic music labels such as Warner, Sony BMG, Emi,
Universal and Rock Music. The platform provides music lovers with free on-demand streaming of the
licensed songs and music videos, information and updates from the music industry, themed-based
community services and off-line music concerts.
SINA Eladies. SINA Eladies serves as an interactive platform for fashion-conscious users to
share comments and ideas on a range of topics, such as health, cosmetics and beauty. SINA Eladies
also provides real-time coverage of major world fashion events, bringing users the latest on styles
and trends.
SINA Luxury. Launched in 2007, SINA Luxury caters to the increasing demand for luxury goods
and high-end services in China. SINA Luxury covers a variety of luxurious topics including wines,
cigars, top-brand apparels and accessories as well as services aiming at the high net worth
populations.
26
SINA Video. SINA Video is an interactive online video platform that provides the latest,
high-quality and easy-to-use interactive video products. SINA Video is divided into branded
sections, including Broadband Sports Live Broadcast, VIP Chat, SINA TV, DV Craze, Entertainment
Shows, Movie Premieres and Best Original Creations.
SINA WAP. As a Chinese wireless application protocol portal, SINA WAP offers a world of free
information and entertainment. Users can access the very latest information around the world via
their mobile phones.
SINA Community
SINA Community aims at providing a user-generated platform for information and entertainment
and promoting the social networking experience for SINA netizens.
SINA Bar. Launched in December 2007, SINA Bar offers a community-based platform for users to
exchange views and share comments on common interest areas. SINA Bar is unique from SINA BBS in
that it allows users to initiate topics on their own.
SINA Album. Launched in July 2007, SINA Album is a photo sharing platform where users can
upload, store, download and share their photos. It also supports social networking functions such
as commenting on the photos and tagging friends.
SINA Notepad. SINA Notepad was created in April 2007 as an inner-community messaging tool that
allows users to send private messages to other community members.
SINA Circle. SINA Circle allows users to form communities on the web. Launched in November
2006, SINA Circle builds on existing SINA Community services, such as SINA Blog, to create
user-maintained and supported online communities.
SINA UC. UC is SINAs proprietary instant messaging system. Apart from the traditional
text-based instant messaging, SINA UC also provides our users with audio and video based instant
messaging tools enabling multimedia social experiences.
SINA Blog. Launched in 2005, SINA Blog has quickly become a popular platform for Chinese
bloggers to read and publish original writings. Building on SINAs brand prestige and large user
traffic, SINA Blog represents a destination for celebrities to maintain a direct dialog with their
fans.
SINA Podcast. SINA Podcast, launched in December 2006, allows users to upload, publish and
manage their audio-visual information in addition to the basic text and image transfer provided by
SINA Blog. SINA Podcast serves as a personal multimedia platform for users to create their
individual online portals.
SINA Mail. Established in 1999, SINA Mail services include Free Email, VIP Mail and Corporate
Email for enterprise users. SINA Mail supports both POP3 and SMTP access and provides users with
year-round anti-spam and anti-virus protection.
SINA BBS. SINA BBS hosts topic-specific discussion forums in Chinese language.
SINA Post. As part of SINAs classified ad service, SINA Post was launched in 2005 to
allow free posting of advertisements for individual and enterprise users. SINAs proprietary
classified search technology allows users to find data and information.
SINA Mobile
SINAs MVAS, launched in April 2002, allows users to receive news and information, download
ring tones and pictures, and participate in dating and friendship communities. Users can order
these services through the SINA web site or through their mobile phones on a monthly subscription
or pay per-message basis. SINA offers MVAS through a wide range of products from content
downloading, subscription to dating services and mobile games, on multiple platforms such as SMS,
MMS, WAP, IVR, CRBT and KJAVA/BREW.
SINAs competitive advantage in MVAS comes from its online and offline marketing channels. As
a leading online media company in China, SINA leverages its large number of unique users and online
content portfolio. Offline, SINA has a large local sales team that covers the majority of the
provinces and municipalities in China as well as a significant presence in local TV, radio and
print advertising. SINA has established content partnerships with certain international record
label companies to provide
27
image and music downloads. SINA Mobile provides MVAS mainly through operator platforms,
including the Monternet platform of China Mobile and the UNI-Info platform of China Unicom. SINA
also works closely with provincial operators to jointly promote its MVAS offerings.
SINAs MVAS can be categorized into three main categories: news and information, community,
and multimedia downloads:
|
|
|
|
|
News and Information |
|
Community |
|
Multimedia Downloads |
|
|
Games and quizzes
|
|
Ring tones |
|
|
Educational products
|
|
Logos and pictures |
|
|
|
|
Screen savers |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SINA provides its MVAS mainly through the following product lines:
SINA SMS. As many mobile phones are able to display and send text in Chinese, SINA developed a
suite of short messaging services that includes user-customized information subscription, personal
greetings, customized mobile phone screen decoration, personalized ring tones and mobile games.
SINA MMS. Using general packet radio service (GPRS) technology, MMS enables users to
download color pictures and sophisticated ring tones, as well as to transmit more data per message.
SINA MMS multimedia functionalities enable content and information exchanges in the form of text,
graphics, audio and data.
SINA IVR. IVR (Interactive Voice Response) refers to all voice activated information retrieval
services. Users can obtain information via their mobile phones by dialing a list of fixed numbers
and following a set of pre-recorded messages. Sample services include weather forecasting and data
searching. IVR offers applications in the areas of interactive games and professional products.
SINA WAP. SINAs WAP services use GPRS technology to provide users with news and other topical
information, multimedia downloads, dating and community services and mobile search services.
SINA CRBT. CRBT refers to the ring tone heard by the callers prior to the call being answered.
SINAs CRBT service gives mobile phone users the option to customize their ring back tone based on
popular songs and special sound effects.
SINA KJAVA/BREW. SINA KJAVA/BREW provides graphic and animated MVAS products on China Mobiles
K-Java mobile platform. SINA KJAVA/BREW covers a full range of services including mobile phone
games, animation and videos, portable tools and news updates.
SINA.net
SINA.net serves as an enterprise solutions platform to assist businesses and government bodies
to more effectively engage, communicate and transact with their target audiences via the Internet.
SINA.net provides businesses and government bodies with e-marketing and e-government solutions
including search, corporate email, classified information, e-commerce and city portals.
Search and Listings. SINAs listing properties include a search engine, a directory and
classified information. SINAs search engine and directory provide an online guide to web
navigation and a gateway to the vertical offerings on the SINA network. Users can either browse the
directory listings by subject matter or use SINA Search, a keyword search function that scans the
contents of the entire directory. For browser-driven inquiries, SINAs directory results include
Sponsored Sites, a SINA-created fee-based program that allows commercial sites to receive enhanced
placement in the directory. For keyword-search-driven inquiries, its search results also include
SINA Sponsor matches, site listings with enhanced placement in search results that are bought by
businesses or organizations.
SINA iAsk. SINA iAsk offers knowledge-based search, community-based search and niche search
covering a variety of topical areas. As an intelligent interactive search engine with natural
language processing technology, SINA iAsk categorizes search subjects into areas of news, pictures,
music, knowledge, and video. SINA iAsk offers an interactive Q&A platform and
28
personalized features such as search by local content (maps, entertainment and travel). iAsk
also powers SINAs mobile search engine.
Google Adwords. Starting June 2007, SINA replaced its web page search powered by iAsk with
Googles Adwords service.
SINA E-Commerce
SINA currently offers SINAMall (http://mall.sina.com.cn), an online shopping web site, on its
Chinese Mainland and North America web sites. Based on SINAs proprietary technology platform,
SINAMall enables both international and local companies to transact business.
Additional
information on segment reporting is incorporated herein by reference
to Note 14 Segment Information of the Notes to the Consolidated Financial Statements, which appears in Item
8 of this Annual Report on Form 20-F.
Strategic Relationships
SINA has developed strategic relationships with a range of content, service, application and
distribution partners in order to serve users more effectively and to extend its brand and services
to a broader audience.
Content Partnerships
The goal of SINAs content partnerships is to provide its users with a large offering of
Chinese-language content. SINA contracts with content partners to display their content on one or
more of its web sites free of charge or in exchange for a share of revenue, a licensing fee, and
access to SINA-generated content or a combination of these arrangements. Some of SINAs leading
content providers include Xinhua News Agency, China News, AFP, Associated Press, Reuters, Getty
Images, China Daily, Nanfang Daily Group, Xinhua Net and Beijing News. For its mobile content, SINA
has established content partnerships with certain international record label companies to provide
image and music downloads.
Application and Service Partnership
The goal of SINAs application and service partnerships is to ensure that its users have
access to user-friendly, reliable and scalable communication and search tools. Because many of the
Companys prospective partners have traditionally focused on non-Chinese speaking markets, SINAs
internal engineering and development teams often work closely with them to localize their solutions
for the Chinese-language market.
Technology Infrastructure
SINAs operating infrastructure is designed to deliver hundreds of millions of page views per
day to its users. SINAs infrastructure allows users to access its products and services,
regardless of their geographical location. SINAs infrastructure is also designed to provide
high-speed access by forwarding queries to its web hosting sites with greater resources or lower
loads. The Companys web pages are generated, served and cached by servers hosted at various
co-location web hosting sites in China, U.S., Taiwan and Hong Kong. SINAs servers run on Linux,
FreeBSD, Solaris and Windows platforms using Apache and IIS servers. These servers are primarily
maintained at China Telecommunications Corporation and China Network Communications Group
Corporation in Beijing, Shanghai, Guangzhou, Tianjin, Jinan and Xian, China, TNN in Taipei, Taiwan,
X.O. Communication in Fremont, California, as well as iAdvantage in Hong Kong.
The Company believes that these hosting partners provide operating advantages, including an
enhanced ability to protect their systems from power loss, break-ins and other potential external
causes of service interruption. They provide continuous customer service, multiple connections to
the Internet and a continuous power supply to their systems. In addition, SINA conducts online
monitoring of its systems for accessibility, load, system resources, network-server intrusion and
timeliness of content. SINAs mobile applications in China leverage the aforementioned web
operation resources by utilizing the wireless infrastructure of China Mobile and China Unicom to
provide MVAS to SINAs users. Nevertheless, the Company has experienced slower response time and
suffered outages in the past due to equipment and software downtime as well as bandwidth issues
with operators. Although these instances have not had a material adverse effect on the Companys
business, such instances could have a material impact on its business in the future.
29
Seasonality
The Company experiences seasonality in its online advertising business. Traditionally, in the
China market, the fourth calendar quarter represents the best season for general advertising
markets. This is followed by the third and second calendar quarters. The first calendar quarter is
usually the worst season in China due to the Chinese New Year. There is little seasonality in the
Companys MVAS and other offerings.
Competition
SINA operates in the market of online content and services for the global Chinese community.
The industry can be classified as highly competitive and rapidly changing due to the fast growing
market.
As SINA expands its product offerings into areas such as video, search, instant messaging,
blog and WAP portal, it faces increasing competition from companies that are focused in the same
spaces. In the video area, SINA competes with private companies such as Youku, 56.com, Tudou,
6rooms, Ku6, PP Live and PP Stream as well as the video offerings of large established portal companies such as Tencents
QQ Live. In instant messaging, SINA faces competition from the likes of Tencent (QQ), Microsoft
(MSN Messenger) and Alibaba/Yahoo! China (Yahoo Messenger). In Blog, SINAs key competitors
include public companies such as Baidu, Tencent, Netease, Sohu and Microsoft (MSN) as well as
private companies, such as Bokee and 51.com in China. Similarly, Yahoo!/Alibaba, Baidu, Google and
others are competitors in the growing online search market in China. In the WAP portal space, key
competitors include Tencent, Kongzhong, Shanghai 3G and WAP portals operated by mobile telecom
operators such as China Mobiles Monternet. SINA also faces competition from vertical websites,
who may have more resources dedicated to a particular topical area, such as Hexun, East Money,
China Finance Online, PC Online, Auto Home and Sofun. On the mobile side, the Company competes
with other service providers such as Kongzhong, Linktone, Hurray, Tencent and TOM Online that
specialize in MVAS. As SINA continues to broaden its range of product offerings, it expects
increasing competition from these established players and possibly less well-known players in the
coming years. Many of these competitors have greater financial resources and better brand
recognition in their respective verticals. In addition, certain companies, especially early-stage
venture-backed start-ups may be willing to compete for market share at the expense of generating
revenues.
Other online content/services companies, such as Baidu, Tencent, Netease, Sohu and TOM Online,
compete with SINA for user traffic, advertising revenue, e-commerce transactions, MVAS and other
fee-based services. Industry consolidation may occur as the market for the Internet in China
matures, which could result in increased competition. The Company also faces competition from
international Internet companies such as Yahoo, Microsoft, eBay, Google and AOL. With the gradual
opening of the telecommunication sector resulting from Chinas entry into the World Trade
Organization, the Company expects an increasing number of international portals and Internet
companies to enter the Chinese online media industry. These companies may have greater brand
recognition, financial resources and longer operating histories than we have. SINA also competes
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.
SINAs ability to compete successfully depends on many factors, including the quality of its
content, the breadth, depth and ease of use of its services, its sales and marketing efforts, and
the performance of its technology. See also The markets for MVAS and Internet services are highly
competitive, and we may be unable to compete successfully against new entrants and established
industry competitors, some of which have greater financial resources than we do or currently enjoy
a superior market position than we do under the Risk Factors section.
Intellectual Property and Proprietary Rights
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.
30
In addition, 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 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. See We may not be able to adequately protect our intellectual property, which could
cause us to be less competitive and We may be exposed to infringement claims by third parties,
which, if successful, could cause us to pay significant damage awards under the Risk Factors
section.
Government Regulation and Legal Uncertainties
The following description of PRC laws and regulations is based upon the opinions of Lawyers
from Jun He Law Offices, our PRC counsel. For a description of legal risks relating to our
ownership structure and business, see Risk Factors.
Overview
The Chinese government has enacted an extensive regulatory scheme governing the operation of
business with respect to the Internet, such as telecommunications, Internet information services,
international connections to computer information networks, information security and censorship and
administrative protection of copyright. Besides MII and SARFT, the various services of the PRC
Internet industry are also regulated by various other governmental authorities, such as SAIC, the
State Council Information Office (SCIO), the General Administration for Press and Publication
(GAPP) (formerly the State Press and Publications Administration (SPPA), the Ministry of
Education (MOE), the Ministry of Culture (MCPRC), the Ministry of Health (MOH), and the
Ministry of Public Security.
Among all the regulations, the Telecommunications Regulations of the Peoples Republic of
China, or Telecom Regulations, promulgated on September 25, 2000, is the primary governing law.
Telecom Regulations set out the general framework under which domestic Chinese companies such as
SINAs subsidiaries may engage in various types of telecommunications services in the PRC. They
reiterate the long-standing principle that telecommunications service providers need to obtain
operating licenses as a mandatory precondition to begin operation. The Telecom Regulations
differentiate the telecommunications services into basic telecommunications services and
value-added telecommunications services. Value-added telecommunications services are defined as
telecommunications and information services provided through public networks. The Catalogue of
Telecommunications Business, an attachment to the Telecom Regulations and updated by MIIs Notice
on Adjusting the Catalogue of Telecommunications Business of April 1, 2003, categorizes various
types of telecommunications and telecommunications-related activities into basic or value-added
services.
On December 20, 2001, after Chinas formal entry into the WTO, the PRC State Council
promulgated the Regulations for the Administration of Foreign-Invested Telecommunications
Enterprises, or the FITE Regulations, which became effective on January 1, 2002. The FITE
Regulations stipulate that foreign-invested telecommunications enterprises, or FITEs, may undertake
operations in basic telecom services and value-added telecom services. Currently, the foreign party
to a value-added FITE may hold up to 50% of the equity, with no geographic restrictions on its
operations. Before that, foreign investors were prohibited from investing in Internet content
services. The PRC government has not made any further commitment to loosen the regulation on FITEs.
According to the Measures for the Administration of Internet Information Services described
below, an enterprise must obtain a Value-added Telecommunication Services Operating License in the
first place to conduct Internet content service businesses. When the Internet content involves
areas of news, education, medicine, health, pharmaceuticals and medical equipment, which are
regulated by MCPRC, MOE, MOH and other governmental authorities, respectively, the enterprise must
also obtain permission from responsible national authorities.
PRC Corporate Structure
The Chinese government restricts foreign investment in Internet-related, MVAS and advertising
businesses. Accordingly, we operate our Internet-related and MVAS businesses in China through our
VIEs that are PRC domestic companies owned principally or completely by certain of our PRC
employees or PRC employees of our directly-owned subsidiaries. For a list of our material
directly-owned subsidiaries and VIEs in China, please see Item 4.C. Organizational Structure
below.
31
Classified Regulations
Foreign Investment in Value-added Telecom Services
The MII Circular 2006 was promulgated by MII on July 13, 2006. According to the MII Circular
2006, since the FITE Regulation went into effect, some foreign investors have, by means of
delegation of domain names and license of trademarks, conspired with domestic value-added telecom
enterprises to circumvent the requirements of FITE Regulations and been engaged in value-added
telecom services illegally.
In order to further intensify the administration of FITEs, the MII Circular 2006 provides that
(i) any domain name used by a value-added telecom carrier shall be legally owned by such carrier or
its shareholder(s); (ii) any trademark used by a value-added telecom carrier shall be legally owned
by the carrier or its shareholder(s); (iii) the operation site and facilities of a value-added
telecom carrier shall be installed within the scope as prescribed by operating licenses obtained by
the carrier and shall correspond to the value-added telecom services that the carrier has been
approved to provide; and (iv) a value-added telecom carrier shall establish or improve the measures
of ensuring safety of network information. As to the companies which have obtained the operating
licenses for value-added telecom services, they are required to conduct self-examination and
self-correction according to the said requirements and report the result of such self-examination
and self-correction to MII.
Accordingly, the ICP Company submitted the
Self-Correction Scheme of the ICP Companys
Multi-regional Value-added Telecommunication Business (the Self-Correction Scheme) to MII on
November 17, 2006. Under the Self-Correction Scheme, (i) the domain name
www.sina.com.cn
mainly used by the ICP Company shall be transferred from BSIT to the ICP Company, and (ii) the
trademark SINA
(
) used by the ICP Company shall be transferred from BSIT to the ICP Company.
According to the
Notice of Acceptance of Transfer Application issued by the Trademark Office of
SAIC to the ICP Company on December 26, 2006, the application for transfer of trademark is
currently in the process of substantial review. The domain name
www.sina.com.cnhas been
transferred to the ICP Company.
Internet Information Services
The Measures for the Administration of Internet Information Services, or the ICP Measures,
went into effect on September 25, 2000. Under the ICP Measures, any entity that provides
information to online Internet users must obtain an operating license from MII or its local branch
at the provincial level in accordance with the Telecom Regulations described above. The ICP
Measures further stipulate that entities providing online information services in areas of news,
publishing, education, medicine, health, pharmaceuticals and medical equipment must obtain
permission from responsible national authorities prior to applying for an operating license from
MII or its local branch at the provincial or municipal level. Moreover, ICPs must display their
operating license numbers in a conspicuous location on their web sites. ICPs must police their web
sites to remove categories of harmful content that are broadly defined. This obligation reiterates
Internet content restrictions set by other ministries over the past few years.
Currently, the ICP Company holds a Value-Added Telecommunication Services Operating License
which was issued on June 15, 2005 by MII with a validity term up to June 2, 2009 subject to annual
inspection, authorizing the provision of nationwide business of information services (excluding
fixed line phone call information services). It also obtained a permit to operate its bulletin
board systems on July 16, 2001 pursuant to additional ICP Measure regulations issued on October 8,
2000, which requires all companies that operate bulletin board systems, or BBS, to obtain official
permits.
Beijing Star-Village Online Cultural Development Co., Ltd. (StarVI) currently holds a
Value-Added Telecommunications Services Operating License issued on March 20, 2007 by MII with a
validity term up to January 17, 2010 subject to annual inspection, authorizing the provision of
nationwide business of information services (excluding fixed line phone call information services).
Guangzhou Media Message Technologies, Inc. (Xunlong) currently holds a Value-Added
Telecommunication Services Operating License issued on January 17, 2005 by MII with a validity term
up to January 17, 2010 subject to annual inspection, authorizing the provision of nationwide
business of information services (excluding fixed line phone call information services).
Shenzhen Wang Xing Technology Co., Ltd. (Wangxing) currently holds a Value-Added
Telecommunication Services Operating License issued on February 28, 2007 by MII with a validity
term up to January 17, 2010 subject to annual inspection, authorizing the provision of nationwide
business of information services (excluding fixed line phone call information services).
32
Online News Publishing
On November 7, 2000 and September 25, 2005, the Provisional Regulations for the Administration
of Web site Operation of News Publication Services and the Provisions for the Administration of
Internet News Information Services, respectively, were jointly promulgated by SCIO and MII. The
regulations stipulate that general web sites set up by non-news organizations may list news
released by certain governmental news agencies, if they satisfy the requirements set forth in the
foregoing two regulations, but may not publish news items produced by themselves or news sources
from elsewhere.
Before commencing news-publishing services, the above regulations also require the general web
sites of non-news organizations to be approved by SCIO after securing permission from SCIO at the
provincial level. In addition, the general web sites intending to publish the news released by the
aforementioned news agencies must enter into agreements with the respective organizations, and file
copies of such agreements with the relevant administration department.
On December 27, 2000, SCIO approved the ICP Company to develop online news publishing
services. The online news publishing service of the ICP Company has passed the annual inspection
for year 2005, and the Internet News Information Service License issued by SCIO was renewed on June
6, 2006 subject to annual inspection.
Online Transmission of Audio-Visual Programs
On July 6, 2004, SARFT promulgated the Measures for the Administration of Publication of
Audio-Visual Programs through Internet or Other Information Network, which apply to the opening,
broadcasting, integration, transmission or download of audio-visual programs via Internet. An
applicant who is engaged in the business of transmitting audio-visual programs shall apply for a
license, which is to be issued by SARFT in accordance with the categories of business, receiving
terminals, transmission networks, and other items. Validity term of the license is two years.
Foreign invested enterprises are not allowed to engage in the above business. Moreover, the
audio-visual programs of the news category published to the public through information network
shall be limited to the programs produced and broadcasted by radio stations, television stations,
radio television stations and approved news web sites within the territory of China.
According to the Reply on Approvals for Beijing SINA Internet Information Service Co., Ltd.
Engaging in the Business of Information Services Relating to Online Transmission of Audio-Visual
Programs issued by SARFT on October 17, 2004, the ICP Company has been approved to carry out the
online transmission of audio-visual programs. The ICP Company currently holds a License for Online
Transmission of Audio-Visual Programs issued by SARFT on March 22, 2007 with a validity term up to
March 22, 2009 subject to annual inspection.
On December 20, 2007, SARFT and MII jointly promulgated the Administrative Provisions on
Internet Audio-Visual Program Service (the Audio-Visual Program Provisions), which went effective
on January 31, 2008. The Audio-Visual Program Provisions stipulates, among others, that any entity
engaged in Internet audio-visual program service must obtain a License for Online Transmission of
Audio-Visual Programs issued by SARFT or register with SARFT. An applicant for engaging in
Internet audio-visual program service must be a state-owned entity or a state-controlled entity
with full corporate capacity, and the business to be carried out by the applicant must satisfy the
overall planning and guidance catalogue for Internet audio-visual program service determined by
SARFT. It is unclear based on the implement rules of the Audio-Visual Program Provisions whether
such requirements only apply to the new market entrants for operating Internet audio-visual program
services or such requirements apply to both the new applicants and the entities that have already
obtained the License for Online Transmission of Audio-Visual Programs.
SARFT and MII later jointly held a press conference in February 2008 to answer questions with
respect to the Audio-Visual Program Provisions. In that press conference, SARFT and MII clarified
that the websites that existed before the promulgation of the Audio-Visual Program Provisions may,
once they are registered with SARFT, continue operating the audio-visual services so long as those
websites have not been in violation of the laws and regulations.
The VIEs held by SINA in China are not state-owned or state-controlled companies, and without
the clarification of SARFT and MII made in the above-mentioned press conference, they may not be
qualified applicants for carrying out Internet audio-visual program service under the Audio-Visual
Program Provisions. As mentioned above, however, the ICP Company has already obtained a License
for Online Transmission of Audio-Visual Programs issued by SARFT effective as of March 22, 2007
with a validity term up to March 22, 2009, showing that the ICP Company has been approved to carry
out online transmission service of audio-visual program within such validity term. According to
the above-mentioned press conference, the ICP
33
Company is entitled to continue operating its online transmission service of audio-visual
program. Notwithstanding the foregoing, considering the requirements set out in the Audio-Visual
Program Provisions, it is uncertain whether the ICP Company can successfully procure the renewal of
the License for Online Transmission of Audio-Visual Programs after its expiration. Should any
official explanations or implementation rules of the Audio-Visual Program Provisions be promulgated
by SARFT or MII explicitly forbidding any non-state-controlled entity from engaging in Internet
audio-visual program service, SINA may be disqualified from operating online transmission of
audio-visual programs after the License for Online Transmission of Audio-Visual Programs currently
held by the ICP Company expires.
MVAS
On December 26, 2001, MII published the Administrative Measures for Telecommunication Business
Operating Licenses, or the Telecom License Measures to supplement the FITE Regulations. The Telecom
License Measures confirm that MII is the competent approval authority for foreign-invested telecom
enterprises. There are two types of telecom operating licenses in China (including FITEs): license
for basic telecom services and license for value-added telecom services. Furthermore, a distinction
is made as to whether a license is granted for intra-provincial or trans-regional
(inter-provincial) activities. An appendix to the license will detail the permitted activities to
be conducted by the enterprise. An approved telecom service operator must conduct its business
(basic or value-added) in accordance with the specifications recorded on its Telecom Service
Operating License. However, there are still ambiguities regarding the interpretation and
application of the FITE Regulations.
The ICP Company currently holds a Value-Added Telecommunication Services Operating License
which was issued on June 15, 2005 by MII with a validity term up to June 2, 2009 subject to annual
inspection, authorizing nationwide provision of information service in value-added
telecommunications services (excluding fixed line phone call information services) .
Xunlong currently holds a Value-Added Telecommunication Services Operating Licenses issued on
January 17, 2005 by MII with a validity term up to January 17, 2010 subject to annual inspection,
authorizing the provision of nationwide mobile value-added telecom services (excluding fixed line
phone call information services).
Star VI currently holds a Value-Added Telecommunications Services Operating License issued on
issued on March 20, 2007 with a validity term up to January 17, 2010 subject to annual inspection,
authorizing the provision of nationwide business of information services (excluding fixed line
phone call information services).
Wangxing currently holds a Value-Added Telecommunication Services Operating License issued on
February 28, 2007 by MII with a validity term up to January 17, 2010 subject to annual inspection,
authorizing the provision of nationwide business of information services (excluding fixed line
phone call information services).
Short Message Services
On April 29, 2004, MII issued the Notice on Certain Issues Regarding the Regulation of Short
Message Services (the SMS Notice). The SMS Notice confirms that all mobile communication
companies shall provide SMS in cooperation with information service providers who have obtained
relevant operating license for SMS. In addition, all mobile communication companies and information
service providers shall highlight the fee standards, payment methods and ways of withdrawal in
their advertisements for SMS services. For services based on monthly payment and subscription
services, providers shall confirm with the users in advance. Without such confirmation, it should
be assumed that the user has withdrawn such requirement for services. The mobile communication
companies and information service providers shall strictly comply with the service items as agreed
upon with the users. And, the information service providers shall examine the contents of short
messages. No short message may contain contents forbidden by law.
Internet Publishing
On June 27, 2002, SPPA and MII jointly released the Provisional Rules for the Administration
of Internet Publishing, or Internet Publishing Rules, which define Internet publications as works
that are either selected or edited to be published on the Internet or transmitted to end-users
through the Internet for the purposes of browsing, reading, using or downloading by the general
public. Such works mainly include content or articles formally published by press media such as:
(i) books, newspapers, periodicals, audio-visual products and electronic publications; and (ii)
literature, art and articles on natural science, social science, engineering and other topics that
have been edited.
34
According to the Internet Publishing Rules, web portals like SINA are required to apply to and
register with GAPP before distributing Internet publications. In accordance with these rules, the
ICP Company obtained a license from GAPP to distribute Internet publications on October 30, 2003
with a ten-year validity term subject to annual inspection.
Online Games
On December 30, 1997, the Rules for the Administration of Electronic Publications, or
Electronic Publication Rules, were published by SPPA, and went into effect as of January 1, 1998.
The Electronic Publication Rules outline a licensing system for business operations involving
electronic publications, which has been interpreted by GAPP to include online games. Under the
Electronic Publication Rules, if a PRC company is contractually authorized to publish foreign
electronic publications, it must obtain the approval of and register the copyright licensing
contract with GAPP.
On May 10, 2003, the Provisional Regulations for the Administration of Online Culture were
issued by MCPRC and went into effect on July 1, 2003 (these regulations were revised by MCPRC on
July 1, 2004). According to these regulations, commercial entities are required to apply to the
relevant local branch of MCPRC for an Online Culture Operating Permit to engage in online games
services.
As to imported online games, GAPP and the State Copyright Bureau jointly promulgated the
Notice on Carrying out the Decision from the State Council Regarding the Approval of Electronic and
Online Games Publications (the Games Notice) on July 27, 2004. Imported online games publication
is defined as the online games publication published and issued within the territory of China by a
Chinese publishing institute via copyright trade with foreign copyright owner of the said online
games publication. Publishing institutes shall apply to local publication authority for the import
of such online games. After pre-approval by the provincial publication authority, GAPP will examine
contents of the online games and issue a final approval. Pursuant to the Games Notice and Copyright
Law, the applicant, after duly establishment, shall file for record and register the copyright
licensing contract with GAPP.
According to the Circular of the Ministry of Culture on Strengthening the Examination of
Content of Online Games Products issued by MCPARC on May 14, 2004, the contents of any foreign
online game products should be examined and approved by MCPRC before they are operated within
China; and entities engaged in developing and operating domestic online games products should
register with the Ministry of Culture.
On
September 5, 2003, MCPRC issued an Online Culture Operating Permit subject to annual
inspection to the ICP Company, which authorizes the ICP Company to provide online games service.
The Online Culture Operating Permit has been renewed on March 4, 2007. The ICP Company was required by MCPRC to submit the application for the renewal of the Online Culture Operating Permit in March 2008 and a renewed Online Culture Operating Permit may be obtained in August 2008 or earlier. According to the Circular on Review and Renewal of Online Culture
Operating Permit issued by MCPRC on March 24, 2008, during the period in which the application is being reviewed, the ICP Company is allowed to proceed with its online culture business. SINA has duly conducted all relevant examination and record procedures for
online games under its operation, including Lineage, Lineage II (both are imported online games)
and iGame.
Internet Medical, Health and Drug Information Services
Pursuant to the Measures for the Administration of Internet Medical and Health Information
Services issued on January 8, 2001, MOH, is responsible for reviewing the qualifications of web
sites and approving their publication of health-related information. According to the Measures for
the Administration of Internet Drug Information Services, issued by the State Drug Administration
(SDA), on July 8, 2004, web sites publishing drug-related information must obtain a license from
SDA or its provincial departments.
The ICP Company obtained the approval for web site publishing of drug-related information from
Beijing Drug Administration (BDA) and SDA on December 20, 2001 and January 10, 2002,
respectively, and has obtained the Qualification Certificate for Internet Drug Information Services
issued by the BDA with a validity term up to November 17, 2009.
On September 25, 2006, MOH issued the Notice concerning the Passage of Re-examination of
Health-related Information Service to the ICP Company, according to which the ICP Company has
obtained the approval for web site publishing of health-related information. The valid term of this
re-examination is two years.
Online Cultural Products
The Provisional Regulations for the Administration of Online Culture described above apply to
entities engaged in activities related to online cultural products. Online cultural products are
classified as: (i) online cultural products particularly developed
35
for publishing via Internet, which include online music and video files (including video on
demand and digital video broadcasting etc.), network games, online performing arts, online
artworks, and online animation features and cartoons (including Flash animation); and (ii) online
cultural products converted from audio and visual products, games, performing arts, artworks and
animation features and cartoons, and published via Internet. Pursuant to this legislation,
commercial entities are required to apply to the relevant local branch of MCPRC for an Online
Culture Operating Permit if they intend to engage in any of the following types of activities:
|
|
|
production, duplication, import, wholesale, retail, leasing or broadcasting of online
cultural products; |
|
|
|
|
publishing of online cultural products on the Internet or transmission thereof to
computers, fixed-line or mobile phones, radios, television sets or gaming consoles for the
purpose of browsing, reading, using or downloading such products; or |
|
|
|
|
exhibitions or contests related to online cultural products. |
On September 5, 2003, MCPRC issued to the ICP Company an Online Culture
Operating Permit which has been renewed on March 4, 2007. The ICP Company was required by MCPRC to submit the application for the
renewal of the Online Culture Operating Permit in March 2008 and a renewed Online Culture Operating Permit may be obtained in August 2008
or earlier. According to the Circular on Review and Renewal of Online Culture Operating Permit issued by MCPRC on March 24, 2008, during the period
in which the application is being reviewed, the ICP Company is allowed to proceed with its online culture business.
Online Advertising
SAIC promulgated the Notice on Registration Issues for Enterprises Specialized in Advertising
Business (the Ad Notice) on July 19, 2004. Upon the issuance of the Ad Notice, an enterprise
specialized in advertising business as specified in its business scope need not apply for the
Advertising Operation License. As to placing advertisements on Internet, such enterprise should
apply for a business scope of Placing Online Advertisements on the name of the web site. SAIC and
its local departments will not issue an Advertising Operation License to enterprises specialized in
online advertising business.
Beijing SINA Infinity Advertising Co., Ltd., a China company controlled by us through a series
of contractual arrangements (the IAD Company), has an approved business scope to carry out the
design, production, agency and issuance of advertisements. According to the Ad Notice, the IAD
Company is allowed to carry out advertising business.
The ICP Company has an approved business scope to issue Internet advertisements on the web
site www.sina.com.cn. According to the Ad Notice, the ICP Company is allowed to carry out the
business of placing advertisements on the web site www.sina.com.cn.
International Connections for Computer Information Networks
Regulations governing international connections for PRC computer networks include:
|
|
|
Measures for the Administration of International Connections to Chinas Public Computer
Interconnected Networks (1996); |
|
|
|
|
Provisional Regulations of the Peoples Republic of China for the Administration of
International Connections to Computer Information Networks (1997) and their Implementing
Measures (1998); |
|
|
|
|
Reply Concerning the Verification and Issuance of Operating Permits for Business Relating
to International Connections for Computer Information Networks and for Public Multimedia
Telecommunications Business (1998); and |
|
|
|
|
Administrative Measures for International Communications Gateways (2002). |
According to the above regulations, any entity wishing to access international network
connections for their computer information networks in the PRC must comply with the following
requirements:
|
|
|
be a PRC legal person; |
|
|
|
|
have the appropriate equipment, facilities and technical and administrative personnel; |
|
|
|
|
have implemented and registered a system of information security and censorship; and |
36
|
|
|
effect all international connections through an international communications gateway
established with the approval of MII. |
We believe that the companies described in PRC corporate structure are in proper compliance
with these requirements.
Information Security and Censorship
Regulations governing information security and censorship include:
|
|
|
The Law of the Peoples Republic of China on the Preservation of State Secrets (1988) and
its Implementing Rules (1990); |
|
|
|
|
The Law of the Peoples Republic of China Regarding State Security (1993) and its
Implementing Rules (1994); |
|
|
|
|
Rules of the Peoples Republic of China for Protecting the Security of Computer
Information Systems (1994); |
|
|
|
|
Notice Concerning Work Relating to the Filing of Computer Information Systems with
International Connections (1996); |
|
|
|
|
Administrative Regulations for the Protection of Secrecy on Computer Information Systems
Connected to International Networks (1997); |
|
|
|
|
Regulations for the Protection of State Secrets for Computer Information Systems on the
Internet (2000); |
|
|
|
|
Notice issued by the Ministry of Public Security of the Peoples Republic of China
Regarding Issues Relating to the Implementation of the Administrative Measure for the
Security Protection of International Connections to Computer Information Networks (2000); |
|
|
|
|
Decision of the Standing Committee of the National Peoples Congress Regarding the
Safeguarding of Internet Security (2000); |
|
|
|
|
Measures for the Administration of Commercial Web site Filings for the Record (2002)
their Implementing Rules (2002); |
|
|
|
|
Measures for the Administration of IP Address Archiving (2005); and |
|
|
|
|
Provision on Technical Measures for Internet Security Protection (2005). |
These legislations specifically prohibit the use of Internet infrastructure where it may
breach public security, provide content harmful to the stability of the society or disclose state
secrets. According to these legislations, it is mandatory for Internet companies in the PRC to
complete security-filing procedures and regularly update information security and censorship
systems for their web sites with the local public security bureau.
According to the Detailed Implementing Rules for the Measures for the Administration of
Commercial Web site Filings for the Record, promulgated by the BAIC in July 2002, web sites must
comply with the following requirements:
|
|
|
file with the BAIC and obtain electronic registration marks; |
|
|
|
|
place the registration marks on their web sites homepages; and |
|
|
|
|
register their web site names with the BAIC. |
The ICP Company successfully registered its web sites with the BAIC on December 23, 2003.
Afterwards, SINAs electronic registration mark is prominently placed on its homepage.
In addition, the State Security Bureau (SSB) has issued regulations authorizing the blocking
of access to any site it deems to be leaking State secrets or failing to comply with the relevant
legislation regarding the protection of State secrets during online information distribution.
Specifically, Internet companies in China with bulletin boards, chat rooms or similar services must
apply
37
for the approval of the SSB prior to operating such services. The ICP Company has established
an internal security committee, adopted security maintenance measures, employed full-time BBS
supervisors and has been exchanging information on a regular basis with the local public security
bureau with regard to sensitive or censored information and web sites. Thus, it is in full
compliance with the governing legislation.
Encryption Software
On October 7, 1999, the State Encryption Administration Commission published the Regulations
for the Administration of Commercial Encryption, followed by the first Notice of the General Office
of the State Encryption Administration Commission on November 8, 1999. Both of these regulations
address the use of software in China with encryption functions. According to these regulations,
purchase of encryption products must be reported. Violation of the encryption regulations may
result in warning, penalty, confiscation of the encryption product, or criminal liabilities.
On March 18, 2000, the Office of the State Commission for the Administration of Cryptography
issued a public announcement regarding the implementation of those regulations. The announcement
clarifies the encryption regulations as below:
|
|
|
Only specialized hardware and software, the core functions of which are encryption and
decoding, fall within the administrative scope of the regulations as encryption products
and equipment containing encryption technology. Other products such as wireless telephone,
Windows software and browsers do not fall within this scope. |
|
|
|
|
The PRC government has already begun to study the laws in question in accordance with WTO
rules and Chinas external commitments, and will make revisions wherever necessary. The
Administrative Regulations on Commercial Encryption will also be subject to such scrutiny
and revision. |
In late 2005, the Administration Bureau of Cryptography further issued a series of regulations
to regulate the development, production and sales of commercial encryption products, which all came
into effect on January 1, 2006.
We believe that the companies described in PRC corporate structure are in proper compliance
with these requirements. For the legal uncertainties associated with encryption software, please
see Risk Factors 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
could be disrupted as we develop or license replacement software.
Online Education
According to the Measures for the Administration of Educational web sites and Online Education
School released on July 5, 2000, to open educational web sites and online education schools,
application must be made to the administrative department overseeing education. Operation may begin
only when it is inspected and approved by the administrative department. Educational web sites and
online education schools shall not operate without the approval of the administrative department
overseeing education.
In compliance with the above regulation, the ICP Company obtained the aforementioned approvals
from Beijing Education Committee on March 26, 2002.
Administrative Protection of Internet Copyright
According to the Measures for the Administrative Protection of Internet Copyright implemented
on May 30, 2005, acts of automatically providing such functions as uploading, storing, linking or
searching works, audio or video products, or other contents through Internet based on the
instruction of an Internet content provider, without editing, amending or selecting any stored or
transmitted content, and other acts of providing Internet information services shall be governed by
the Copyright Law. A copyright administration department shall, when imposing administrative
penalties upon the act infringing upon the right of communication through information network,
apply the Measures for Imposing Copyright Administrative Penalties.
Where a copyright holder (individual or entity) finds any content communicated through
Internet infringes upon its copyright and sends a notice of claim to the Internet information
service provider, the Internet information service provider shall immediately take measures to
remove the relevant contents, and preserve the copyright holders notice of claim for six months.
38
An Internet information service provider shall, after receipt of the copyright holders
notice, record the contents of the provided information, the publishing time, and the Internet
address or domain name. Where an Internet information service provider removes relevant content of
an Internet content provider according to the notice of a copyright holder, the Internet content
provider may deliver a counter-notice to both the Internet information service provider and the
copyright holder, stating that the removed contents do not infringe upon the copyright. After the
delivery of such counter-notice, the Internet information service provider may immediately
reinstate the removed contents and shall not bear legal liability for such reinstatement
Where an Internet information service provider clearly knows an Internet content provider
infringes others copyright through Internet, or, although it does not clearly know such activity
but fails to take measures to remove relevant contents upon receipt of the copyright owners
notice, as a result, it damages public interests, the copyright administration department may, in
accordance with the Copyright Law, order it to stop the tortious act, and impose administrative
penalties. Where there is no evidence to indicate that an Internet information service provider
clearly knows the facts of tort, or the Internet information service provider has taken measures to
remove relevant contents upon receipt of the copyright owners notice, the Internet information
service provider shall not bear the relevant liabilities.
The companies described in PRC Corporate Structure have taken measures to protect Internet
copyright in pursuance of the specified procedures and in compliance with relevant laws and
regulations mentioned above.
Foreign Exchange
Foreign exchange regulation in China is primarily governed by the following rules:
|
|
|
Foreign Currency Administration Rules (the Exchange Rules) promulgated by the State
Council on January 29, 1996, which was amended on January 14, 1997; and |
|
|
|
|
Administration Rules of the Settlement, Sale and Payment of Foreign Exchange (the
Administration Rules) promulgated by China Peoples Bank on June 20, 1996. |
Under the Exchange Rules, renminbi is convertible for current account items, including the
distribution of dividends, interest payments, trade and service-related foreign exchange
transactions. Conversion of renminbi for capital account items, such as direct investments, loans,
security investments and the repatriation of investment returns, however, is still subject to the
approval of SAFE or its competent local branches.
Under the Administration Rules, enterprises may only buy, sell or remit foreign currencies at
banks that are authorized to conduct foreign exchange business after the enterprise provides valid
commercial documents and relevant supporting documents and, in the case of capital account
transactions, after obtaining approval from SAFE or its competent local branches. Capital
investments by enterprises outside of China are also subject to limitations, which include
approvals by the MOC, SAFE and the National Development and Reform Commission, or their respective
competent local branches.
On October 21, 2005, SAFE issued the Circular on Several Issues concerning Foreign Exchange
Administration for Domestic Residents to Engage in Financing and in Return Investments via Overseas
Special Purpose Companies, or Circular No. 75, which went into effect on November 1, 2005. Circular
No. 75 provides that if PRC residents use assets or equity interests in their PRC entities to
establish offshore companies or inject assets or equity interests of their PRC entities into
offshore companies for the purpose of overseas capital financing, they must register with local
SAFE branches with respect to their investments in offshore companies. Circular No. 75 also
requires PRC residents to file changes to their registration if their special purpose companies
undergo material events such as capital increase or decrease, share transfer or exchange, merger or
division, long-term equity or debt investments, provision of guaranty to a foreign party, etc. SAFE
further promulgated the Implementing Rules for Circular No. 75, or Circular No. 106, clarifying and
supplementing the concrete operating rules that shall be followed during the implementation and
application of Circular No. 75.
Income Tax
On March 16, 2007, the National Peoples Congress approved and promulgated the EIT Law, which
went into effect starting January 1, 2008. On December 6, 2007, the State Council approved the
Implementing Rules, which went into effect starting January 1, 2008. Under the EIT Law and the
Implementing Rules, which superseded the Previous IT Law, the enterprise income tax rate for both
domestic companies and FIEs is unified at 25%. The EIT Law provides a five-year transitional
period for certain
39
entities that had enjoyed a favorable income tax rate of less than 25% under the Previous IT
Law and was established before March 16, 2007, during which period the applicable enterprises
income tax rate shall gradually increase to 25%. In addition, the EIT Law provides grandfather
treatment for new and high technology enterprises that received special tax holidays under the
Previous IT Law, which allows them to continue to enjoy their tax holidays until expiration.
On April 14, 2008, the Administration Measures for Recognition of New and High Technology
Enterprises (the Recognition Measures) was jointly promulgated by the Ministry of Science and
Technology, the Ministry of Finance, and the State Administration of Taxation, which sets out the
standards and process for granting new and high technology enterprises status. However, there
remain uncertainties regarding the interpretation and implementation of the EIT Law and the
Recognition Measures. Most of our operations in China are either on tax holidays and would enjoy
an effective income tax rate of 7.5% in 2008 under the Previous IT Law or would enjoy a favorable
income tax rate of less than 25% under the Previous IT Law. The Companys ultimate effective tax
rate starting in 2008 will depend on many factors, including but not limited to, whether certain of
the Companys FIEs in China will receive the new and high technology enterprise status under the
EIT Law. If the Companys FIEs fail to receive the new and high technology enterprise status, the
Companys PRC consolidated effective tax rate may increase significantly to as high as 27%.
The EIT Law and the Implementing Rules also require that enterprises in China submit their
annual enterprise income tax returns together with a report on transactions with their affiliates
to the relevant tax authorities. If PRC tax authorities were to determine that our transfer pricing
structure were not on an arms length basis and therefore constitute a favorable transfer pricing,
they could request that our VIEs adjust their taxable income upward for PRC tax purposes. Such a
pricing adjustment may not reduce the tax expenses of our subsidiaries but could adversely affect
us by increasing our VIEs tax expenses, which could subject our VIEs to late payment fees and
other penalties for underpayment of taxes, and/or could result in the loss of tax benefits
available to our subsidiaries in China.
The EIT Law also provides that enterprises established under the laws of foreign countries or
regions but whose de facto management body is located in the PRC be treated as a resident
enterprise for PRC tax purposes and consequently be subject to the PRC income tax at the rate of
25% for its global income. The Implementing Rules of the EIT Law merely defines the location of
the de facto management body as the place where the exercising, in substance, of the overall
management and control of the production and business operation, personnel, accounting, properties,
etc., of a non-PRC company is located. The determination of tax residency requires a review of
surrounding facts and circumstances of each case. If SINA is treated as a resident enterprise for
PRC tax purposes, SINA will be subject to PRC tax on worldwide income at a uniform tax rate of 25%
starting from January 1, 2008.
The EIT Law
also imposes a 10% withholding income tax on dividends of earnings
generated on or after January 1,
2008 and distributed by a resident enterprise to its foreign investors, if such foreign investors
are considered as non-resident enterprise without any establishment or place within China or if the
received dividends have no connection with such foreign investors establishment or place within
China, unless such foreign investors jurisdiction of incorporation has a tax treaty with China
that provides for a different withholding arrangement. Such withholding income tax was exempted
under the Previous IT Law. The Cayman Islands, where we are incorporated, does not have such a tax
treaty with China. According to the arrangement between Mainland China and Hong Kong Special
Administrative Region on the Avoidance of Double Taxation and Prevention of Fiscal Evasion in
August 2006, dividends paid by an FIE to its foreign investors in Hong Kong will be subject to
withholding tax at a rate of no more than 5% (if the foreign investor owns directly at least 25% of
the shares of the FIE). A majority of our subsidiaries in China are directly invested and held by
Hong Kong registered entities. If we are regarded as a non-resident enterprise and our Hong Kong
entities are regarded as resident enterprises, then our Hong Kong entities may be required to pay a
10% withholding tax on any dividends payable to us. If our Hong Kong entities are regarded as
non-resident enterprises, then our subsidiaries in China will be required to pay a 5% withholding
tax for any dividends payable to our Hong Kong entities. In either case, the amount of funds
available to us, including the payment of dividends to our shareholders, could be materially
reduced. In addition, because there remains uncertainty regarding the interpretation and
implementation of the EIT Law and its Implementing Rules, if we are regarded as a PRC resident
enterprise, we cannot guarantee that any dividends to be distributed by us to our non-PRC
shareholders will not be subject to a withholding tax, nor can we guarantee that any gains realized
by such non-PRC shareholders from the transfer of our shares will not be subject to a withholding
tax. If we are required under the EIT Law to withhold PRC income tax on our dividends payable to
our non-PRC shareholders, or any gains realized by our non-PRC shareholders from transfer of the
shares, their investment in our shares may be materially and adversely affected. Accordingly, the
Company may decide not to distribute its retained earnings and maintain such cash onshore to
reinvest in its PRC operations.
40
Labor Law
The
Labor Law of the PRC (the Labor Law), which was effective on January 1, 1995, provides
basic protections for employees, e.g. employment contracts shall be concluded if labor
relationships are to be established between employers and employees; employers cannot compel
employees to work exceed the time limit and shall provide wages which are not lower than local
standards on minimum wages to the employees punctually; employers shall establish and improve their
systems for labor safety and sanitation and strictly abide by applicable PRC rules and standards on
labor safety and sanitation; and female employees and juvenile employees are given special
protection.
On June 29, 2007, the National Peoples Congress of China enacted a new Labor Contract Law,
which became effective on January 1, 2008. Compared to the Labor Law, the new Labor Contract Law
imposes more restrictions on employers and has been deemed to potentially increase labor costs for
employers to terminate employment relationship with employees. Such restrictions include specific provisions related to fixed term
employment contracts, temporary employment, probation, consultation with the labor union and
employee assembly, employment without a contract, dismissal of employees, compensation upon
termination and overtime work, and collective bargaining. According to the new Labor Contract Law,
an employer is obliged to sign an unlimited term employment contract with an employee if the
employer intends to renew employment relationship with such employee after two consecutive fixed
term employment contracts. The employer also has to pay a compensation fee to the employee if the
employer terminates the unlimited term labor contract. Unless an employee refuses to extend an
expired employment contract, such compensation is also required when the labor contract expires.
Further, under the Regulations on Paid Annual Leave for Employees, which became effective on
January 1, 2008, employees who have served more than one year for an employer are entitled to a
paid vacation ranging from 5 to 15 days, depending on their length of service. Employees who waive
such vacation time at the request of employers shall be compensated for three times their normal
salaries for each waived vacation day. As a result of these new protective labor measures, our
labor costs are expected to increase, which may adversely affect our business and our results of
operations.
For a description of how the unsettled nature of Chinese regulations may affect our business,
please see Risk Factors 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 content that it deems as inappropriate and we may be liable for such content.
C. Organizational Structure
SINA is the parent company of our group and does not have any assets or conduct any business
operations in China other than our investments in our entities in China, which include our
wholly-owned subsidiaries and our VIEs. Below are the significant wholly-owned subsidiaries held
by SINA:
|
|
|
|
|
|
|
|
|
|
|
|
|
Jurisdiction |
|
|
|
|
|
|
Subsidiary |
|
of Organization |
|
|
|
|
|
Ownership |
SINA.com Online |
|
United States of America |
|
|
|
|
|
|
100 |
% |
Rich Sight Investment Limited |
|
Hong Kong |
|
|
|
|
|
|
100 |
% |
SINA Hong Kong Limited |
|
Hong Kong |
|
|
|
|
|
|
100 |
% |
Memestar Limited |
|
British Virgin Islands |
|
|
|
|
|
|
100 |
% |
Crillion Corporation |
|
British Virgin Islands |
|
|
|
|
|
|
100 |
% |
Davidhill Capital Inc. |
|
British Virgin Islands |
|
|
|
|
|
|
100 |
% |
Beijing SINA Internet Technology Service Co., Ltd. |
|
Peoples Republic of China |
|
|
|
|
|
|
100 |
% |
Beijing New Media Information Technology Co., Ltd. |
|
Peoples Republic of China |
|
|
|
|
|
|
100 |
% |
SINA.com Technology (China) Co. Ltd. |
|
Peoples Republic of China |
|
|
|
|
|
|
100 |
% |
Fayco Network Technology Development (Shenzhen) Co. Ltd. |
|
Peoples Republic of China |
|
|
|
|
|
|
100 |
% |
In compliance with PRCs foreign investment restrictions on Internet information services and
other laws and regulations, we conduct all our Internet information services, advertising and MVAS
in China via the following significant domestic VIEs:
|
|
|
Beijing SINA Internet Information Service Co., Ltd., a China company controlled by us
through a series of contractual arrangements. The ICP Company is responsible for operating
www.sina.com.cn in connection with its Internet content company license, selling the
advertisements to advertisers and providing MVAS with its Value-Added |
41
|
|
|
Telecommunication Services Operating License in China via third party operators to the users.
It is 1.5% owned by Yan Wang, the Companys Chairman of the Board, 22.50% owned by the
Companys executive officer Tong Chen, 26.75% owned by the Companys executive officer Hong
Du, and 49.25% owned by two other non-executive PRC employees of the Company. The registered
capital of the ICP Company is $2.5 million. |
|
|
|
Guangzhou Media Message Technologies, Inc., a China company controlled by us through a
series of contractual arrangements. Xunlong is responsible for providing MVAS in China via
third party operators to the users under its Value-Added Telecommunication Services
Operating License. It is owned by three non-executive PRC employees of the Company. The
registered capital of the Xunlong is $1.2 million. |
|
|
|
|
Beijing Star-Village Online Cultural Development Co., Ltd., a China company controlled by
us through a series of contractual arrangements. StarVI is responsible for providing MVAS in
China via third party operators to the users under its Value-Added Telecommunication
Services Operating License. It is owned by three non-executive PRC employees of the Company.
The registered capital of the StarVI is $1.2 million. |
|
|
|
|
Shenzhen Wang Xing Technology Co., Ltd., a China company controlled by us through a
series of contractual arrangements. Wangxing is responsible for providing MVAS in China via
third party operators to the users under its Value-Added Telecommunication Services
Operating License. It is owned by three non-executive PRC employees of the Company. The
registered capital of Wangxing is $1.2 million. |
|
|
|
|
Beijing SINA Infinity Advertising Co., Ltd. (the IAD Company), a China company
controlled by us through a series of contractual arrangements. The IAD Company is an
advertising agency. It is 20% owned by the Companys executive officer Tong Chen and 80%
owned by four non-executive PRC employees of the Company. This entity has an approved
business scope including design, production, agency and issuance of advertisements. The
registered capital of the IAD Company is $0.1 million. |
The capital investment in these VIEs is funded by SINA through SINAs wholly owned
subsidiaries and recorded as interest-free loans to the employees. As of December 31, 2007, the
total amount of interest-free loans to the employee shareholders of the VIEs listed above and the
other inactive VIEs was $8.0 million. Under various contractual agreements, employee shareholders
of the VIEs are required to transfer their ownership in these entities to our subsidiaries in China
when permitted by PRC laws and regulations or to our designees at any time for the amount of
outstanding loans, and all voting rights of the VIEs are assigned to our wholly owned subsidiaries
in China. Our wholly owned subsidiaries in China have the power to appoint all directors and senior
management personnel of the VIEs. Through our wholly-owned subsidiaries in China, we have also
entered into exclusive technical agreements and other service agreements with the VIEs, under which
these subsidiaries provide technical services and other services to the VIEs in exchange for
substantially all net income of the VIEs. In addition, our employee shareholders of the VIEs have
pledged their shares in the VIEs as collateral for non-payment of loans or for fees on technical
and other services due to us.
Although we
have been advised by our PRC counsel, Jun He Law Offices, that our arrangements
with the VIEs are valid under current PRC laws and regulations, we cannot assure you that we will
not be required to restructure our organization structure and operations in China to comply with
changing and new PRC laws and regulations. Restructuring of our operations may result in disruption
of our business. If PRC tax authorities were to determine that our
transfer pricing structure was
not done on an arms length basis and therefore constitutes a favorable transfer pricing, they could
request that our VIEs adjust their taxable income upward for PRC tax purposes. Such a pricing
adjustment may not reduce the tax expenses of our subsidiaries but could adversely affect us by
increasing our VIEs tax expenses, which could subject our VIEs to late payment fees and other
penalties for underpayment of taxes and/or could result in the loss of tax benefits available to
our subsidiaries in China. Any of these measures may result in adverse tax consequences to us and adversely affect our
results of operation.
D. Property, Plants and Equipment
The majority of our operations are in China, where we have offices in Beijing, Shanghai,
Guangzhou and Shenzhen. Our principal sales, marketing and development facilities are located on
premises comprising approximately 17,000 square meters in Beijing, China. We also have sales and
marketing operations at satellite offices in certain provinces of China. We lease these office
facilities under non-cancelable operating leases with various expiration dates through 2009. Our
servers are primarily maintained at China Telecommunications Corporation and China Network
Communications Group Corporation in Beijing, Shanghai and Guangzhou as well as in other cities
throughout China. We also have servers located at various Internet Data Centers in Taipei, Fremont
(California) and Hong Kong.
42
Item 4A. Unresolved Staff Comments
None.
Item 5. Operating and Financial Review and Prospects
This report contains forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Exchange Act, including, without limitation,
statements regarding our expectations, beliefs, intentions or future strategies that are signified
by the words expect, anticipate, intend, believe, the negative of such terms or other
comparable terminology. All forward-looking statements included in this document are based on
information available to us on the date hereof, and we undertake 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 above in Item 3. Key Information D. Risk Factors. We caution you that our
businesses and financial performance are subject to substantial risks and uncertainties, including
the factors identified in Item 3. Key Information D. Risk Factors, that could cause actual
results to differ materially from those in the forward-looking statements.
Overview
We are an online media company and value-added information services provider in China and the
global Chinese communities. With a branded network of localized web sites targeting Greater China
and overseas Chinese, we provide services through five major business lines including SINA.com
(online news and content), SINA Mobile (mobile value-added services MVAS), SINA Community (Web
2.0-based services and games), SINA.net (search and enterprise solutions) and SINA E-Commerce
(online shopping). Together these provide an array of services including region-focused online
content channels, communication and community-based tools, audio and video streaming, casual games,
search and directory, classified listings, MVAS, e-commerce and enterprise e-solutions. In turn, we
generate revenues through advertising, MVAS and other fee-based services. Advertising and MVAS are
currently the major sources of our revenues and we expect this trend to continue in the near term.
The primary focus of our operations is in China, where we derive the majority of our revenues.
Our operations in China are conducted primarily through significant wholly-owned subsidiaries,
including Sina.com Technology (China) Co., Ltd., Beijing New Media Information Technology Co. Ltd.,
Fayco Network Technology Development (Shenzhen) Co. Ltd. and Beijing SINA Internet Technology
Service Co. Ltd. and significant VIEs, including the ICP Company, Xunlong, Star VI, Wangxing and
the IAD Company.
As of December 31, 2007 and 2006, we have accumulated earnings of $123.7 million and $66.0
million, respectively. We have funded our operations and capital expenditures primarily using the
net proceeds raised through the sale of preference shares prior to our initial public offering and
the sale through our ordinary shares in the initial public offering and cash generated from
operations. We raised additional capital through the issuance of zero-coupon, convertible,
subordinated notes in July 2003. We intend to continue our investment in the development and
enhancement of our products, content and services, as well as investment in sales and marketing. If
we are unable to generate sufficient net income from our operations in the future, we may have to
finance our operations from the current funds available or seek equity or debt financing.
Critical Accounting Policies, Judgments and Estimates
Our discussion and analysis of our financial condition and results of operations are based
upon our consolidated financial statements, which have been prepared in accordance with GAAP. The
preparation of these financial statements requires us to make estimates, judgments and assumptions
that affect the reported amounts of assets, liabilities, revenues and expenses, and related
disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates,
including those related to customer programs and incentives, bad debts, investments, intangible
assets, stock-based compensation, income taxes, financing operations, employee benefits,
contingencies and litigation. We base our estimates on historical experience and on various other
assumptions that are believed to be reasonable under the circumstances, the results of which form
the basis for making judgments about the carrying values of assets and liabilities that are not
readily apparent from other sources. Actual results may differ from these estimates under different
assumptions or conditions. For further information on our critical accounting policies, see the
discussion in the section titled Recent Accounting Pronouncements below and Note 1 to the
Consolidated Financial Statements.
43
We believe the following critical accounting policies affect the more significant judgments
and estimates used in the preparation of our consolidated financial statements:
Revenue recognition
Advertising
Our advertising revenues are derived principally from online advertising and, to a lesser
extent, sponsorship arrangements. Online advertising arrangements allow advertisers to place
advertisements on particular areas of our web sites, in particular formats and over particular
periods of time. Sponsorship arrangements allow advertisers to sponsor a particular area on our web
sites in exchange for a fixed payment over the contract period. While the majority of our revenue
transactions contain standard business terms and conditions, there are certain transactions that
contain non-standard business terms and conditions. In addition, we have certain sales transactions
that involve multiple element arrangements (arrangements with more than one deliverable) that may
include placement on specific properties. As a result, significant contract interpretation is
sometimes required to determine the appropriate accounting for these transactions including: 1) how
the arrangement consideration should be allocated among potential multiple elements; 2) when to
recognize revenue on the deliverables; and 3) whether all elements of the arrangement have been
delivered. Changes in judgments on these assumptions and estimates could materially impact the
timing or amount of revenue recognition.
MVAS
We mainly rely on third-party operators for billing and transmission of our MVAS to our users.
The determination of whether we are the primary obligor for a particular type of service is
subjective in nature and is based on an evaluation of the terms of the arrangement. If the terms of
the arrangement with operators were to change and cause us to no longer be the primary obligor to
the users, we would have to record our MVAS revenues on a net basis. Consequently, this would cause
a significant decline in our net revenues, but should not have a significant impact on our gross
margin. During fiscal 2007, approximately 85% of our MVAS revenues were recorded on a gross basis.
Due to the time lag between when the services are rendered and when the operator billing
statements are received, MVAS revenues are estimated based on our internal records of billings and
transmissions for the month, adjusting for prior periods confirmation rates with operators and
prior periods discrepancies between internally estimated revenues and actual revenues confirmed by
operators. The confirmation rate applied to the estimation of revenue is determined at the lower of
the latest confirmation rate available and the average of six months historical rates available,
provided that we have obtained confirmation rates for six months. If we have not yet received
confirmation rates for six months, revenues would be deferred until billing statements are received
from the operators. If subsequent billing statements from the operators differ significantly from
managements estimates, our revenues could be materially impacted.
In the past, one of the operators has requested resettlement of billings that were settled in
previous periods and on which payments have been received. We have accrued for such credits to
revenue based on a historical rolling average and the true-ups between accrued amounts and actual
credit memos issued have not been significant. If operators request for a resettlement of billings
for previous periods at an amount significantly higher than historical average, our revenues could
be materially impacted.
In addition, our revenue recognition policy requires an assessment as to whether collection is
reasonably assured, which requires us to evaluate the creditworthiness of our customers. Changes in
judgments on these assumptions and estimates could materially impact the timing or amount of
revenue recognition.
Income taxes
We use the asset and liability method of accounting for income taxes. Under this method,
income tax expense is recognized for the amount of taxes payable or refundable for the current
year. In addition, deferred tax assets and liabilities are recognized for the expected future tax
consequences of temporary differences between the financial reporting and tax bases of assets and
liabilities and for operating losses and tax credit carryforwards. Management must make
assumptions, judgments and estimates to determine our current provision for income taxes and our
deferred tax assets and liabilities and any valuation allowance to be recorded against a deferred
tax asset. Our judgments, assumptions and estimates relative to the current provision for income
tax take into account current tax laws, our interpretation of current tax laws and possible
outcomes of current and future audits conducted by foreign and domestic tax authorities. Changes in
tax law or our interpretation of tax laws and the resolution of
44
current and future tax audits could significantly impact the amounts provided for income taxes
in our consolidated financial statements. Our assumptions, judgments and estimates relative to the
value of a deferred tax asset take into account predictions of the amount and category of future
taxable income, such as income from operations. Actual operating results and the underlying amount
and category of income in future years could render our current assumptions, judgments and
estimates of recoverable net deferred taxes inaccurate. Any of the assumptions, judgments and
estimates mentioned above could cause our actual income tax obligations to differ from our
estimates, and thus materially impact our financial position and results of operations.
We adopted FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes an
Interpretation of FASB Statement No. 109 (FIN 48), on January 1, 2007. We make assumptions,
judgments and estimates in the recognition and measurement of a tax position taken or expected to
be taken in a tax return. These judgments, assumptions and estimates take into account current tax
laws, our interpretation of current tax laws and possible outcomes of current and future audits
conducted by foreign and domestic tax authorities. Changes in tax law or our interpretation of tax
laws and the resolution of current and future tax audits could significantly impact the amounts of
unrecognized, uncertain tax positions, if any, provided or to be provided for in our consolidated
financial statements.
Foreign currency
Our
reporting currency and functional currency are the U.S. dollar and our subsidiaries and VIEs in China, Hong Kong
and Taiwan use their respective local currencies as their functional currencies. An entitys
functional currency is the currency of the primary economic environment in which the entity
operates. Management must use judgment in determining an entitys functional currency, assessing
economic factors including cash flow, sales price, sales market, expense, financing and
inter-company transactions and arrangements. Impact from exchange rate changes related to
transactions denominated in currencies other than the functional currency is recorded as a gain and
loss in our consolidated statements of operations, while impact from exchange rate changes related
to translating a foreign entitys financial statements from the functional currency to our
reporting currency, the U.S. dollar, is disclosed and accumulated in a separate component under the
equity section of our consolidated balance sheets. Different judgments or assumptions resulting in
a change of functional currency may materially impact our financial position and results of
operations. For fiscal 2007, our translation adjustment was $19.2 million and our transactional
gain was approximately $1.1 million.
Impairment of goodwill and long-lived assets
We test goodwill for impairment at the reporting unit level (operating segment or one level
below an operating segment) on an annual basis, or more frequently, if facts and circumstances
warrant a review. We make judgments about goodwill whenever events or changes in circumstances
indicate that an impairment in the value of goodwill recorded on our balance sheet may exist. The
timing of an impairment test may result in charges to our statements of operations in our current
reporting period that could not have been reasonably foreseen in prior periods. Application of
goodwill impairment test requires judgment, including the identification of reporting units,
assigning assets and liabilities to the reporting units, assigning goodwill to reporting units and
estimating the fair value of each reporting unit. Changes in these estimates and assumptions could
materially affect the determination of fair value of each reporting unit which could trigger
impairment. More conservative assumptions of the anticipated future benefits from these reporting
units could result in impairment charges, which would decrease net income and result in lower asset
values on our balance sheet. Conversely, less conservative assumptions could result in smaller or
no impairment charges, higher net income and higher asset values. See Note 2 Goodwill and
intangible assets in the consolidated financial statements for additional information on goodwill.
Long-lived assets and certain identifiable intangible assets to be held and used are reviewed
for impairment whenever events or changes in circumstances indicate that the carrying amount of
such assets may not be recoverable. Determination of recoverability is based on an estimate of
undiscounted future cash flows resulting from the use of the asset and its eventual disposition.
Measurement of any impairment loss for long-lived assets and certain identifiable intangible assets
that management expects to hold or use is based on the amount by which the carrying value exceeds
the fair value of the asset. Changes in these estimates and assumptions could materially impact our
financial position and results of operations.
Property and Equipment
Property and equipment are stated at historical cost less accumulated depreciation and
amortization. Depreciation is computed using the straight-line method over the estimated useful
lives of the assets, generally from three to five years. Judgment is required to determine the
estimated useful lives of assets, especially for computer equipment, including determining how long
45
existing equipment can function and when new technologies will be introduced at cost-effective
price points to replace existing equipment. Changes in these estimates and assumptions could
materially impact our financial position and results of operations.
Stock-based compensation
We account for stock-based compensation in accordance with, SFAS No. 123 (revised 2004),
Share-Based Payment (SFAS 123R),
since January 1, 2006. We elected modified-prospective method, under which prior periods are not revisited for comparative purpose.
Under the fair value recognition provisions of SFAS 123R,
stock-based compensation cost is measured at the grant date based on the fair value of the award
and is recognized as an expense on a straight-line basis, net of estimated forfeitures, over the
requisite service period, which is generally the vesting period. We use the Black-Scholes option
pricing model to determine the fair value of share options. The determination of the fair value of
stock-based compensation awards on the date of grant using an option-pricing model is affected by
our stock price as well as assumptions regarding a number of complex and subjective variables,
including our expected stock price volatility over the term of the awards, actual and projected
employee share option exercise behaviors, risk-free interest rate and expected dividends. If we
use different assumptions for estimating stock-based compensation expense in future periods or if
we decide to use a different valuation model, the change in our stock-based compensation expense
could materially affect our operating income, net income and net income per share.
Furthermore, we are required to estimate forfeitures at the time of grant and record
stock-based compensation expense only for those awards that are expected to vest. If actual
forfeitures differ materially from our estimated forfeitures, we may need to revise those estimates
used in subsequent periods.
See Note 13 Stock-based Compensation under Notes to Consolidated Financial Statements for
information regarding the SFAS 123R disclosures.
Marketable securities
Our marketable securities are held as available for sale and are reported at fair value. The
treatment of a decline in the fair value of an individual security is based on whether the decline
is other-than-temporary. Significant judgment is required to assess whether the impairment is
other-than-temporary. Our judgment of whether an impairment is other-than-temporary is based on an
assessment of factors including our ability and intent to hold the individual security, severity of
the impairment, expected duration of the impairment and forecasted recovery of fair value. Changes
in the estimates and assumptions could affect our judgment of whether an identified impairment
should be recorded as an unrealized loss in the equity section of our consolidated balance sheets
or as a realized loss in the consolidated statements of operations.
Allowance for doubtful accounts
The Company maintains an allowance for doubtful accounts which reflects its best estimate of
amounts that potentially will not be collected. The Company determines the allowance for doubtful
accounts based on factors such as historical experience, credit-worthiness and age of receivable
balances. If the financial condition of the Companys customers were to deteriorate, resulting in
an impairment of their ability to make payments, or if the operators decide not to pay the Company,
additional allowances may be required which could materially impact our financial position and
results of operations. Allowances for doubtful accounts charged to income were $5.3 million, $5.0
million and $2.3 million for the years ended December 31, 2007, 2006 and 2005, respectively.
Equity investments
Our equity investments are comprised of joint ventures and other privately held companies. We
account for equity investments in entities in which we exercise significant influence but do not
own a majority equity interest or otherwise control using the equity method. For equity investments
over which we do not have significant influence, the cost method of accounting is used. We evaluate
our equity investments for impairment whenever events and changes in business circumstances
indicate the carrying amount of the equity investment may not be fully recoverable. The impairment
evaluation requires significant judgment to identify events or circumstances that would likely have
a significant adverse effect on the fair value of the equity investments. Equity investments
identified as having an indication of impairment are subject to further analysis to determine if
the impairment is other-than-temporary and this analysis requires estimating the fair value of the
equity investments. The determination of fair value of the equity investments involves considering
factors such as current economic and market conditions, the operating performance of the companies
including current earnings trends and undiscounted cash flows and other company-specific
information including recent financing rounds. The evaluation process is based on information that
we request from these
46
privately-held companies. This information is not subject to the same disclosure regulations
as U.S. publicly traded companies, and as such, the basis for these evaluations is subject to the
timing and the accuracy of the data received from these companies. Fair value determination,
particularly for equity investments in privately-held companies, requires significant judgment to
determine appropriate estimates and assumptions. Changes in these estimates and assumptions could
affect the calculation of the fair value of the equity investments and the determination of whether
any identified impairment is other-than-temporary.
Advertising expenses
We expense all advertising costs as incurred and classify these costs under sales and
marketing expenses. Advertising expenses include costs related to direct advertising that are
intended to acquire subscribers for monthly subscription based and usage based MVAS. Assessing
whether costs related to direct advertising should be expensed as incurred or capitalized and
amortized over a longer period requires judgment, including determining whether the direct
advertising activity has a primary purpose to elicit sales from customers who could be shown to
have responded specifically to the advertising and whether the activities would result in probable
future economic benefits. Changes in assumptions could materially affect the manner in which direct
advertising costs are expensed.
Recent accounting pronouncements
In May 2008, the FASB issued FASB Staff Position No. APB14-1 Accounting for Convertible Debt
Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement) (FSP
APB14-1), which requires issuers of convertible debt that may be settled wholly or partly in cash
when converted to account for the debt and equity components separately. This statement is
effective for fiscal years beginning after December 15, 2008 and must be applied retrospectively to
all periods. The Company is currently evaluating the impact of adopting FSP APB14-1 on its
consolidated financial position, cash flows and results of operations.
In April 2008, the FASB issued FASB Staff Position No. FAS142-3 Determination of the Useful
Life of Intangible Assets (FSP FAS142-3), which amends the factors to be considered in
determining the useful life of intangible assets. Its intent is to improve the consistency between
the useful life of an intangible asset and the period of expected cash flows used to measure its
fair value. This statement is effective for fiscal years beginning after December 15, 2008. The
Company is currently evaluating the impact of adopting FSP FAS142-3 on its consolidated financial
position, cash flows and results of operations.
In March 2008, the FASB released Statement of Financial Accounting Standards No. 161
Disclosures about Derivative Instruments and Hedging Activities an amendment of FASB Statement
No. 133 (SFAS 161), which requires enhanced disclosures about an entitys derivative and hedging
activities and thereby improves the transparency of financial reporting. This statement is
effective for financial statements issued for fiscal years and interim periods beginning after
November 15, 2008. The Company is currently evaluating the impact of adopting SFAS 161 on its
consolidated financial position, cash flows and results of operations.
In December 2007, the FASB issued SFAS No. 141 (revised 2007) Business Combinations (SFAS
141R). SFAS 141R will change how business acquisitions are accounted for and will impact financial
statements both on the acquisition date and in subsequent periods. SFAS 141R applies prospectively
to business combinations for which the acquisition date is on or after the beginning of the first
annual reporting period beginning on or after December 15, 2008. The Company is currently
evaluating the impact of adopting SFAS 141R on its consolidated financial position, cash flows and
results of operations.
In December 2007, the Securities and Exchange Commission (SEC) issued Staff Accounting
Bulletin 110 (SAB 110). Under SAB 110, the Staff will continue to allow companies to use the
simplified method for estimating the expected terms of plain vanilla share options beyond
December 31, 2007, assuming certain circumstances are met. The adoption of SAB 110 is not expected
to have a material impact on the Companys consolidated financial position, cash flows and results
of operations.
In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated
Financial Statementsan amendment of ARB No. 51 (SFAS 160). SFAS 160 amends ARB No. 51 to
establish accounting and reporting standards for the noncontrolling interest in a subsidiary and
for the deconsolidation of a subsidiary. This Statement is effective for fiscal years and interim
periods within those fiscal years, beginning on or after December 15, 2008. The Company is
currently evaluating the impact of adopting SFAS 160 on its consolidated financial position, cash
flows and results of operations.
47
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets
and Financial Liabilities
(SFAS 159). Under SFAS 159, companies may elect to measure certain financial instruments and
certain other items at fair value. The standard requires that unrealized gains and losses on items
for which the fair value option has been elected be reported in earnings. SFAS 159 is effective for
the Company beginning fiscal 2008. The adoption of SFAS 159 is not expected to have a material impact on the Companys consolidated financial position, cash flows and results of operations.
In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, Fair
Value Measurements (SFAS 157), which defines fair value, establishes guidelines for measuring
fair value and expands disclosures regarding fair value measurements. SFAS 157 does not require any
new fair value measurements but rather eliminates inconsistencies in guidance found in various
prior accounting pronouncements. SFAS 157 is effective for fiscal years beginning after November
15, 2007. However, on February 12, 2008, the FASB issued FASB Staff Position FAS 157-2,
Effective Date of FASB Statement No.157 (FSP FAS
157-2),
which delays the effective date of SFAS 157 for all nonfinancial assets and nonfinancial
liabilities, except those that are recognized or disclosed at fair value in the financial
statements on a recurring basis (at least annually). FSP FAS 157-2 partially defers the effective date
of Statement 157 to fiscal years beginning after November 15, 2008, and interim periods within
those fiscal years for items within the scope of this FSP. The Company will adopt SFAS 157 in
2008, except as it applies to those nonfinancial assets and nonfinancial liabilities as noted in
FSP FAS 157-2. The partial adoption of SFAS 157 in 2008 is not expected to have a material impact on the
Companys consolidated financial position, cash flows and
results of operations. The Company is still evaluating the impact of the remaining SFAS 157
on its consolidated financial position, cash flows and results of
operations.
A. Operating Results
Net revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31, |
|
|
|
2007 |
|
|
2006 |
|
|
2005 |
|
|
% of Change |
|
|
|
(in thousands, except percentages) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
YOY |
|
|
YOY |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
07 & 06 |
|
|
06 & 05 |
|
Net Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Advertising |
|
$ |
168,926 |
|
|
|
69 |
% |
|
$ |
120,067 |
|
|
|
56 |
% |
|
$ |
84,999 |
|
|
|
44 |
% |
|
|
41 |
% |
|
|
41 |
% |
Non-advertising: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MVAS |
|
|
70,489 |
|
|
|
29 |
% |
|
|
86,257 |
|
|
|
41 |
% |
|
|
98,070 |
|
|
|
51 |
% |
|
|
-18 |
% |
|
|
-12 |
% |
Others |
|
|
6,712 |
|
|
|
2 |
% |
|
|
6,530 |
|
|
|
3 |
% |
|
|
10,483 |
|
|
|
5 |
% |
|
|
3 |
% |
|
|
-38 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal |
|
|
77,201 |
|
|
|
31 |
% |
|
|
92,787 |
|
|
|
44 |
% |
|
|
108,553 |
|
|
|
56 |
% |
|
|
-17 |
% |
|
|
-15 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenues |
|
$ |
246,127 |
|
|
|
100 |
% |
|
$ |
212,854 |
|
|
|
100 |
% |
|
$ |
193,552 |
|
|
|
100 |
% |
|
|
16 |
% |
|
|
10 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The year-over-year increase in total net revenues for 2007 and 2006 was 16% and 10%,
respectively. This was primarily due to the year-over-year increase in advertising revenues,
partially offset by the year-over-year decrease in MVAS revenues. Advertising revenues as a
percentage of total net revenues grew to 69% in 2007 from 56% in 2006 and 44% in 2005 while MVAS
revenues declined to 29% in 2007 from 41% in 2006 and 51% in 2005.
Advertising. Advertising revenues grew 41% year-over-year in 2007 and in 2006. These increases
were primarily due to the increase in the number of advertisers, price and overall average spending
per advertiser in China.
For 2007,
advertising revenues from China accounted for 98% of our total advertising revenues,
compared to 97% and 96% of our total advertising revenues for 2006 and 2005, respectively. Total
number of advertisers in China was approximately 1,080 in 2007, compared to approximately 980 and
790 in 2006 and 2005, respectively. Average revenue per advertising customer in China was
approximately $150K in 2007, as compared to approximately $120K and $100K in 2006 and 2005,
respectively. Our top ten customers in aggregate generated approximately 16%, 16% and 15% of our
advertising revenues in the PRC in 2007, 2006 and 2005, respectively.
Automobile, real estate and information technology were our top three advertising sectors, accounting in
aggregate for approximately 52%, 53% and 47% of our advertising revenues for 2007, 2006 and 2005,
respectively. The key sectors contributing to our advertising growth in 2007 included automobile,
financial and fast moving consumption goods.
Non-advertising. Non-advertising revenues consist of MVAS and, to a lesser extent, fee-based
revenues. MVAS revenues declined 18% and 12% year-over-year in 2007 and 2006, respectively, which
was the primary reason for the declines of non-advertising revenues in 2007 and 2006.
48
MVAS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31, |
|
|
|
2007 |
|
|
2006 |
|
|
2005 |
|
|
% of Change |
|
|
|
(in thousands, except percentages) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
YOY |
|
|
YOY |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
07 & 06 |
|
|
06 & 05 |
|
2.0G products |
|
$ |
55,404 |
|
|
|
79 |
% |
|
$ |
73,665 |
|
|
|
85 |
% |
|
$ |
83,745 |
|
|
|
85 |
% |
|
|
-25 |
% |
|
|
-12 |
% |
2.5G products |
|
|
15,085 |
|
|
|
21 |
% |
|
|
12,592 |
|
|
|
15 |
% |
|
|
14,325 |
|
|
|
15 |
% |
|
|
20 |
% |
|
|
-12 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total MVAS revenues |
|
$ |
70,489 |
|
|
|
100 |
% |
|
$ |
86,257 |
|
|
|
100 |
% |
|
$ |
98,070 |
|
|
|
100 |
% |
|
|
-18 |
% |
|
|
-12 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from 2.0G products, mostly SMS, IVR, CRBT, decreased 25% and 12% year-over-year in
2007 and 2006, respectively. SMS is the largest component of our MVAS and is the primarily factor
for the year-over-year declines in MVAS revenues. Revenues from SMS were $35.8 million, $55.4
million and $71.5 million or 51%, 64% and 73% of total MVAS revenues in 2007, 2006 and 2005,
respectively. The declines in SMS revenues in 2007 and 2006 were largely due to higher churn rates
by our monthly subscription users, less effective means to recruit new users and, in general,
tightening operator policies and regulatory environment in China. IVR revenues were $15.5 million,
$15.0 million and $7.4 million or 22%, 17% and 7% of total MVAS revenues in 2007, 2006 and 2005,
respectively. The year-over-year growth of IVR revenues in 2006 was primarily due to increased
promotion and the addition of IVR service with China Telecom. Revenues from CRBT increased 32% to
$4.1 million in 2007 as a result of increased marketing efforts. It declined 35% in 2006 due to
less marketing efforts.
Revenues from 2.5G products, including MMS, WAP and Kjava, increased 20% year-over-year in
2007 while declining 12% year-over-year in 2006. MMS increased 7% in 2007 to $4.0 million but
declined 41% in 2006. The year-over-year decrease in 2006 was mainly due to certain changes by
China Mobile, including the switch to a new billing platform as well as policy changes on monthly
subscription service. WAP revenues increased 10% year-over-year to $6.4 million in 2007, compared
to a decline of 1% year-over-year in 2006. The increase in WAP revenues in 2007 was mainly due to
higher ranking of the Company on the China Mobile Monternet portal. Kjava grew 55% year-over-year
to $4.7 million in 2007, compared to a 41% increase in 2006. The increases in Kjava revenues were
mainly due to increased game offerings, sales channel and general market demand.
In the past, operators have made significant changes to their policies on mobile value-added
services in accordance with policy derivatives from MII. The policy changes by the operators have
significantly reduced our ability to acquire new MVAS subscribers and increased churn rate of our
existing monthly MVAS subscribers. In addition, our MVAS business has been impacted by other
regulatory arms in China, such as SARFT. The key policy changes made by operators in 2006 and 2007
included the following:
In July 2006, China Mobile made significant changes to their policy on subscription-based
MVAS, which were intended to address a number of issues, including reducing subscriber complaints,
increasing customer satisfaction and promoting healthy development of MVAS industry in China. The
key changes include requiring double confirmations on new MVAS subscriptions as well as sending SMS
reminders to existing monthly subscribers of SMS, MMS and WAP to inform them of their MVAS
subscriptions and fee information. In September 2006, China Unicom began enforcing double
confirmations on new subscription services. We have not been able to estimate the impact of these
policy changes on our results of operations, cash flows and financial conditions, but believe it
has reduced and will continue to significantly reduce our ability to acquire new monthly MVAS
subscribers and increase the churn rate of our existing monthly MVAS subscribers. Revenues from
subscription-based MVAS in 2007 accounted for approximately 37 % of our total MVAS revenues.
In August 2007, the MII tightened the regulations over direct advertising in China. This
change reduced the effectiveness of our direct advertising on MVAS and increased the difficulties
of new user recruitment. We have not been able to estimate the impact of such changes on our
results of operations, cash flows and financial condition, but believe it has had and will continue
to have a significant negative impact to our MVAS business. Revenues from direct-advertising-based
MVAS in 2007 accounted for approximately 24 % of our total MVAS revenues.
In April 2007, China Unicom changed its service fee settlement method with service providers
from estimated collection to actual collection. As a result of the switch, fee settlement, based
on the receipt of billing statement, with China Unicom has taken up to four months, which has
negatively impacted our cash flow. In addition, if we are unable to rely on historical confirmation
rates from China Unicom as a result of the change in fee settlement method, we may need to defer
recognition of such revenues until the billing statements are received. Revenues billed via China
Unicom in 2007 were $16.7 million.
In July 2007, China Mobile began implementing a score and ranking system that attempts to
reward service providers based on certain factors, such as revenue size, revenue growth rate and
user complaint volume. A low score or ranking by any of our
49
mobile entities would significantly result in a negative impact to our results of operations,
cash flows and financial condition. Revenues billed via China Mobile in 2007 were $51.6 million.
In December 2007, the MII unified the dialing codes of each service provider by adding a
four-digit code to each service providers product. This complicates the purchasing process of
MVAS and may reduce the effectiveness of our direct advertising and increase the difficulties of
new user recruitment. We are unable to estimate the impact of such changes on our results of
operations, cash flows and financial condition at this time.
Operators, such as China Mobile and China Unicom, and governmental bodies, such as the MII and
SARFT, may announce additional measures or regulations in the future, which may adversely impact on
our results of operations, cash flows and financial condition. We are in the process of developing
and promoting new products that we believe are not subject to recent policy and regulations changes
made by operators and governmental bodies. However, there is no guarantee that we will be able to
develop any such new products, that any such products will achieve market acceptance or that such
products will not be affected by future changes in rules and regulations.
Other non-advertising revenues
Other non-advertising revenues include enterprise services such as paid search and directory
listings, e-commerce and other fee-based services, such as paid email services and causal games.
Other non-advertising revenues increased 3% in 2007 and decreased 38% in 2006. The year-over-year
decrease in other non-advertising revenues in 2006 was mainly due to revenue declines from paid
search and directory listings, loss of revenues from the sale of our online hotel-booking business
in the third quarter of 2005 and the sale of our interest in an online auction joint venture in the
fourth quarter of 2005. Revenues from paid search and directory listings accounted for 41%, 55% and
58% of our other non-advertising revenues in 2007, 2006 and 2005, respectively.
Costs of revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31, |
|
|
|
2007 |
|
|
2006 |
|
|
2005 |
|
|
% of Change |
|
|
% of Change |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
YOY 07 & 06 |
|
|
YOY 06 & 05 |
|
|
|
(In thousands, except percentages) |
|
Costs of revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Advertising |
|
$ |
63,466 |
|
|
$ |
42,529 |
|
|
$ |
27,627 |
|
|
|
49 |
% |
|
|
54 |
% |
Non-advertising: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MVAS |
|
|
29,339 |
|
|
|
34,255 |
|
|
|
33,814 |
|
|
|
-14 |
% |
|
|
1 |
% |
Other |
|
|
1,897 |
|
|
|
2,626 |
|
|
|
1,666 |
|
|
|
-28 |
% |
|
|
58 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal |
|
|
31,236 |
|
|
|
36,881 |
|
|
|
35,480 |
|
|
|
-15 |
% |
|
|
4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs of revenues |
|
$ |
94,702 |
|
|
$ |
79,410 |
|
|
$ |
63,107 |
|
|
|
19 |
% |
|
|
26 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs of revenues increased 19% and 26% year-over-year in 2007 and 2006, respectively. The
increases were mainly contributed by higher costs of advertising revenues.
Advertising.
Costs of advertising revenues primarily consist of expenses associated with the
production of our web sites, which include fees paid to third parties for Internet connection,
content and services, personnel-related costs and equipment depreciation expenses associated with
our web site production. Costs of advertising revenues also include the business taxes on
advertising sales in the PRC. Business taxes, surcharges and cultural business construction fees
levied on advertising sales account for approximately 8.5% of the advertising revenues in China.
Costs of advertising revenues increased 49% and 54% year-over-year in 2007 and 2006,
respectively. The increases were due to higher content fees, Internet connection costs associated
with the additional bandwidth and web production costs driven by an increase in web production
personnel, as well as the increase in business taxes associated with higher advertising revenues.
These increases were driven by the need to provide additional resources to support our web traffic
and advertising revenue growth. Costs of advertising revenues for 2007 and 2006 included
stock-based compensation of $1.8 million and $1.7 million, respectively, as a result of the
adoption of SFAS 123R on January 1, 2006.
Non-advertising. Costs of non-advertising revenues consist mainly of fees paid to third-party
operators for their services relating to the collection of our MVAS revenues and for using their
transmission gateways and fees or royalties paid to third-party content providers for services and
contents associated with our MVAS. Costs of non-advertising revenues also include business
50
taxes and surcharges levied on non-advertising sales in the PRC. Business taxes and surcharges
levied on non-advertising revenues are approximately 3.3% for mobile related revenues and 5.5% for
other non-advertising revenues.
Costs of MVAS revenues decreased 14% year-over-year in 2007 and increased 1% year-over-year in
2006. Fees retained by or paid to operators for 2007, 2006 and 2005 were $16.5 million, $24.7
million and $24.7 million, respectively, or 23%, 29% and 25%, respectively, of our MVAS revenues.
Fees paid to third party content providers and channel distributors for 2007, 2006 and 2005 were
$11.4 million, $7.6 million and $6.3 million, respectively, or 16%, 9% and 6%, respectively, of our
MVAS revenues.
Historical cost of MVAS revenue trends may not be indicative of future results, as the
operators in China have made changes to the way service fees are charged. For example, starting in
January 2007, we were required to switch from using our own platform for the delivery of IVR
services to that of China Mobile. Consequently, China Mobiles service fees for IVR increased from
15% to 30%. China Mobile, China Unicom and other operators may further change their fee policies,
which may have a material and adverse impact to our results of operation, financial position and
cash flow.
Costs of other non-advertising revenue also include costs for providing our enterprise
services and other fee-based services. For 2006, costs of other non-advertising revenues include a
$1.1 million write-off of prepaid royalty related to our iGame based on managements assessment of
the game business.
Gross profit margins
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31, |
|
|
2007 |
|
2006 |
|
2005 |
Gross profit margins: |
|
|
|
|
|
|
|
|
|
|
|
|
Advertising |
|
|
62 |
% |
|
|
65 |
% |
|
|
67 |
% |
Non-advertising: |
|
|
|
|
|
|
|
|
|
|
|
|
MVAS |
|
|
58 |
% |
|
|
60 |
% |
|
|
66 |
% |
Other |
|
|
72 |
% |
|
|
60 |
% |
|
|
84 |
% |
Subtotal |
|
|
60 |
% |
|
|
60 |
% |
|
|
67 |
% |
Overall |
|
|
62 |
% |
|
|
63 |
% |
|
|
67 |
% |
Overall gross margin decreased one percentage point year-over-year to 62% for 2007 and dropped
four percentage points year-over-year to 63% for 2006.
Advertising. The year-over-year decrease in advertising gross profit margin in 2007 and 2006
was primarily due to the increased investment in our web site production and Internet connection.
In addition, starting January 1, 2006, we began to expense stock-based compensation pursuant to
SFAS 123R. Stock-based compensation for 2007 and 2006 both accounted for approximately 1% of our
advertising revenues. We expect to continue to increase our investments in the production of web
content and Internet connection in absolute dollars to maintain our competitiveness.
Non-advertising. The majority of the costs associated with non-advertising revenues are
variable costs. Gross margin for non-advertising revenues remained flat at 60% in 2007 but
decreased seven percentage points year-over-year to 60% for 2006. Gross margin for MVAS decreased
two percentage points and six percentage points, respectively, year-over-year in 2007 and 2006.
These decreases were mainly driven by the increased transmission and content provision and channel
distribution costs as a percentage of our MVAS revenues. We expect further increases in fees paid
to operators and content providers as a percentage of MVAS revenues, which will result in
continuing decline in MVAS gross margin in the future.
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31, |
|
|
2007 |
|
2006 |
|
2005 |
|
% of change |
|
|
(In thousands, except percentages) |
|
|
|
|
|
|
% of net |
|
|
|
|
|
% of net |
|
|
|
|
|
% of net |
|
YOY |
|
YOY |
|
|
|
|
|
|
revenues |
|
|
|
|
|
revenues |
|
|
|
|
|
revenues |
|
07 & 06 |
|
06 & 05 |
Sales and marketing expenses |
|
$ |
50,555 |
|
|
|
21 |
% |
|
$ |
49,972 |
|
|
|
23 |
% |
|
$ |
51,690 |
|
|
|
27 |
% |
|
|
1 |
% |
|
|
-3 |
% |
Product development expenses |
|
$ |
21,942 |
|
|
|
9 |
% |
|
$ |
19,573 |
|
|
|
9 |
% |
|
$ |
15,268 |
|
|
|
8 |
% |
|
|
12 |
% |
|
|
28 |
% |
General and administrative expenses |
|
$ |
26,738 |
|
|
|
11 |
% |
|
$ |
27,172 |
|
|
|
13 |
% |
|
$ |
18,820 |
|
|
|
10 |
% |
|
|
-2 |
% |
|
|
44 |
% |
51
Sales and marketing expenses. Sales and marketing expenses consist primarily of compensation
expenses, sales commissions, advertising and promotional expenditures and travel expenses. The
year-over-year increase in sales and marketing expenses in 2007 was primarily due to higher sales
commissions and corporate branding spending, which was partially offset by lower promotional
expenditures from the MVAS business. The year-over-year decrease in sales and marketing expenses in
2006 was primarily due to lower promotional expenditures from the MVAS business, partially offset
by higher payroll-related expenses, such as sales commissions from the advertising business,
bonuses, and stock-based compensation expenses. Marketing expenses related to MVAS were $12.5
million, $13.7 million and $21.2 million for 2007, 2006 and 2005, respectively. Stock-based
compensation expenses were $1.2 million and $1.5 million for 2007 and 2006, respectively, as a
result of the adoption of SFAS 123R on January 1, 2006.
Product development expenses. Product development expenses consist primarily of
personnel-related expenses incurred for the enhancement to and maintenance of our web sites as well
as costs associated with new product development and enhancement for products such as blog, video
podcasting, email and search engine. The year-over-year increases for 2007 and 2006 were primarily
due to increases in headcount and higher depreciation expenses, resulting from additional purchases
of capital equipment. Product development expenses in 2007 and 2006 also included stock-based
compensation of $1.6 million and $1.8 million, respectively. We expect our product development
expenses to continue to increase in absolute dollars in the near future.
General and administrative expenses. General and administrative expenses consist primarily of
personnel compensation costs, professional service fees, and provisions for doubtful accounts. Our
general and administrative expenses also include expenses relating to the transfer of the economic
benefits generated from our VIEs in the PRC to our subsidiaries, which were $6.7 million, $5.9
million and $5.0 million for 2007, 2006 and 2005, respectively.
The year-over-year decrease in 2007 was mainly due to the decrease in bonus expenses and
professional fees, partially offset by the increase in expenses relating to the transfer of the
economic benefits generated from our VIEs in the PRC to our subsidiaries. The year-over-year
increase in 2006 was mainly due to the increase in provision for doubtful accounts, as a result of
the increase in advertising revenues, increase in expenses relating to the transfer of the economic
benefits generated from our VIEs in the PRC to our subsidiaries, increase in personnel compensation
and the addition of stock-based compensation. Stock-based compensation expenses were $4.1 million
and $4.4 million for 2007 and 2006, respectively.
Amortization of intangible assets. Amortization of intangibles was approximately $1.2 million,
or less than 1% of total net revenues, in 2007, compared with $1.8 million, or 1%, in 2006 and $3.2
million, or 2%, in 2005. As of December 31, 2007, the net carrying amount of our intangible assets
represents purchased technology, which is being amortized over its useful life through 2014. See
Note 2 to the Consolidated Financial Statements for further information on intangible assets,
including estimates of amortization expenses for future periods.
Interest and other income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31, |
|
|
|
2007 |
|
|
2006 |
|
|
2005 |
|
|
|
(In thousands) |
|
Interest Income |
|
$ |
11,522 |
|
|
$ |
8,510 |
|
|
$ |
6,551 |
|
Other Income |
|
|
1,209 |
|
|
|
39 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
12,731 |
|
|
$ |
8,549 |
|
|
$ |
6,551 |
|
|
|
|
|
|
|
|
|
|
|
The year-over-year increases on interest income in 2007 and 2006 were due to higher balances
of cash, cash equivalent and short-term investments as well as higher interest rates overall in
2007 and 2006. Other income mainly represents net transaction gain or loss on our foreign currency
transactions.
Amortization of convertible debt issuance cost
As a result of our issuance of zero-coupon, convertible, subordinated notes in July 2003, we
recorded convertible debt issuance cost of approximately $2.7 million. This amount was amortized
on a straight-line basis over four years ending in June 2007. The amortization expense for 2007,
2006 and 2005 was $0.3 million, $0.7 million and $0.7 million, respectively.
52
Gain on sale of business and equity investments, net
The following summarizes the gain and (loss) on the sale of business and investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31, |
|
|
|
2007 |
|
|
2006 |
|
|
2005 |
|
|
|
(In thousands) |
|
Bravado |
|
$ |
|
|
|
$ |
161 |
|
|
$ |
1,487 |
|
COAL |
|
|
|
|
|
|
|
|
|
|
2,649 |
|
Shanghai NC Soft |
|
|
|
|
|
|
2,006 |
|
|
|
|
|
Others |
|
|
830 |
|
|
|
(134 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
830 |
|
|
$ |
2,033 |
|
|
$ |
4,136 |
|
|
|
|
|
|
|
|
|
|
|
% of total net revenues |
|
|
|
* |
|
|
1 |
% |
|
|
2 |
% |
During the third quarter of 2005, we sold our online hotel business Bravado Investments
Limited Bravado to Elong Inc. Total gain from the sale was $1.6 million. During the fourth
quarter of 2005, we sold our 33% interest in COAL (a.k.a. 1Pai.com), an online auction joint
venture with Yahoo!, to Alibaba.com, and recorded a gain of $2.6 million from the sale. During
second quarter of 2006, we sold our 51% interest in Shanghai NC SINA, a game joint venture with NC
Soft, to NC Soft, and recorded a gain of $2.0 million from the sale. During the second quarter of
2007, we sold our equity investment in a private company and recorded a gain of $0.8 million from
the sale.
Loss on equity investments, net
The following summarizes our share of income (loss) from our equity investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31, |
|
|
|
2007 |
|
|
2006 |
|
|
2005 |
|
|
|
(In thousands) |
|
COAL |
|
$ |
|
|
|
$ |
|
|
|
$ |
(2,187 |
) |
Shanghai NC Soft |
|
|
|
|
|
|
(108 |
) |
|
|
33 |
|
Others |
|
|
|
|
|
|
(582 |
) |
|
|
(656 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
|
|
|
$ |
(690 |
) |
|
$ |
(2,810 |
) |
|
|
|
|
|
|
|
|
|
|
% of total net revenues |
|
|
|
* |
|
|
|
* |
|
|
(1 |
%) |
Provision for income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31, |
|
|
|
2007 |
|
|
2006 |
|
|
2005 |
|
|
|
(In thousands) |
|
Current income tax provision |
|
$ |
6,030 |
|
|
$ |
4,401 |
|
|
$ |
2,671 |
|
Deferred income tax |
|
|
474 |
|
|
|
(350 |
) |
|
|
(261 |
) |
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
6,504 |
|
|
$ |
4,051 |
|
|
$ |
2,410 |
|
|
|
|
|
|
|
|
|
|
|
Income subject to China operation |
|
$ |
70,167 |
|
|
$ |
56,128 |
|
|
$ |
51,874 |
|
Effective tax rate for China operation |
|
|
9 |
% |
|
|
7 |
% |
|
|
5 |
% |
Based on our current operating structure and preferential tax treatments available to us in
China, the effective income tax rate for our China operation in 2007 was 9%. The increase in
effective income tax rate from 5% in 2005 to 7% in 2006 was due to the phasing out of tax holidays
of certain of our legal entities, while the increase to 9% in 2007 was primarily due to higher
taxable income generated by higher tax rate entities. The EIT Law and the Implementing Rules became
effective as of January 1, 2008. Although many implementation issues of the EIT Law remain unclear,
based on our current understanding of the EIT Law, we expect significantly higher effective tax
rate in the future.
Prior to the EIT Law, our subsidiaries and VIEs were governed by the Previous IT Law and were
generally subject to enterprise income tax at a statutory rate of 33% (30% state income tax plus 3%
local income tax). The EIT Law supplemented by the Implementing Rules supersedes the Previous IT
Law and unifies the enterprise income tax rate for FIEs and domestic enterprises at 25%. New and
high technology enterprises will continue to enjoy a preferential tax rate of 15%, but must meet
the criteria defined under the EIT Law and related regulations. The EIT Law provides a five-year
transitional period for certain
53
entities that had enjoyed a favorable income tax rate of less than 25% under the Previous IT
Law and was established before March 16, 2007, during which period the applicable enterprises
income tax rate shall gradually increase to 25%. In addition, the EIT Law provides grandfather
treatment for new and high technology enterprises that received special tax holidays under the
Previous IT Law, which allows them to continue to enjoy their tax holidays until expiration. Most
of our FIEs operations in China would enjoy an effective income tax rate of 7.5% in 2008 under the
Previous IT Law and some of our VIEs would enjoy a favorable income tax rate of less than 25% under
the Previous IT Law. The Companys ultimate effective tax rate starting in 2008 will depend on many
factors, including but not limited to, whether certain of the Companys FIEs in China will receive
the new and high technology enterprise status under the EIT Law. If the Companys FIEs fail to
receive the new and high technology enterprise status, the Companys PRC consolidated effective tax
rate may increase significantly to as high as 27%.
The EIT Law also provides that enterprises established under the laws of foreign countries or
regions but whose de facto management body is located in the PRC be treated as a resident
enterprise for PRC tax purposes and consequently be subject to the PRC income tax at the rate of
25% for its global income. The Implementing Rules of the EIT Law merely defines the location of
the de facto management body as the place where the exercising, in substance, of the overall
management and control of the production and business operation, personnel, accounting, properties,
etc., of a non-PRC company is located. The determination of tax residency requires a review of
surrounding facts and circumstances of each case. If SINA is treated as a resident enterprise for
PRC tax purposes, SINA will be subject to PRC tax on worldwide income at a uniform tax rate of 25%
starting from January 1, 2008.
The
EIT Law also imposes a 10% withholding income tax on dividends
generated on or after January 1,
2008 and distributed by a resident enterprise to its foreign investors, if such foreign investors
are considered as non-resident enterprise without any establishment or place within China or if the
received dividends have no connection with such foreign investors establishment or place within
China, unless such foreign investors jurisdiction of incorporation has a tax treaty with China
that provides for a different withholding arrangement. Such withholding income tax was exempted
under the Previous IT Law. The Cayman Islands, where we are incorporated, does not have such a tax
treaty with China. According to the arrangement between Mainland China and Hong Kong Special
Administrative Region on the Avoidance of Double Taxation and Prevention of Fiscal Evasion in
August 2006, dividends paid by an FIE to its foreign investors in Hong Kong will be subject to
withholding tax at a rate of no more than 5% (if the foreign investor owns directly at least 25% of
the shares of the FIE). A majority of our subsidiaries in China are directly invested and held by
Hong Kong registered entities. If we are regarded as a non-resident enterprise and our Hong Kong
entities are regarded as resident enterprises, then our Hong Kong entities may be required to pay a
10% withholding tax on any dividends payable to us. If our Hong Kong entities are regarded as
non-resident enterprises, then our subsidiaries in China will be required to pay a 5% withholding
tax for any dividends payable to our Hong Kong entities. In either case, the amount of funds
available to us, including the payment of dividends to our shareholders, could be materially
reduced. In addition, because there remains uncertainty regarding the interpretation and
implementation of the EIT Law and its Implementing Rules, if we are regarded as a PRC resident
enterprise, we cannot guarantee that any dividends to be distributed by us to our non-PRC
shareholders will not be subject to a withholding tax, nor can we guarantee that any gains realized
by such non-PRC shareholders from the transfer of our shares will not be subject to a withholding
tax. If we are required under the EIT Law to withhold PRC income tax on our dividends payable to
our non-PRC shareholders or any gains realized by our non-PRC shareholders from transfer of the
shares, their investment in our shares may be materially and adversely affected. Accordingly, the
Company may decide not to distribute its retained earnings and maintain such cash onshore to
reinvest in its PRC operations.
During 2007, we reassessed our deferred tax assets assuming the 25% effective tax rate under
the EIT Law. Historically, deferred tax assets were calculated using old statutory rate 33% or
applicable preferential rates of 7.5% or 15% of the respective legal entities. As a result of the
reassessment, we wrote down $0.4 million in deferred tax assets in the first quarter of 2007.
Our VIEs are wholly owned by our employees and controlled by us through various contractual
arrangements. To the extent that these VIEs have undistributed after-tax net income, we have to pay
taxes on behalf of its employees when dividends are distributed from these local entities in the
future. Such dividend tax rate is 20%.
For further information on our tax structures and inherent risks see If tax benefits
available to us in China are reduced or repealed, our results of operations could suffer
significantly and your investment in our shares may be adversely affected. under Risk Factors in
Part I Item 1A. See also Note 8 Income Taxes to the Consolidated Financial Statements for
further discussion on income taxes.
54
B. Liquidity and Capital Resources
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31 |
|
|
2007 |
|
2006 |
|
2005 |
|
|
(In thousands) |
Cash and cash equivalents and short-term investments |
|
$ |
477,999 |
|
|
$ |
362,751 |
|
|
$ |
300,689 |
|
Working capital |
|
$ |
377,608 |
|
|
$ |
267,116 |
|
|
$ |
297,910 |
|
Shareholders equity |
|
$ |
494,976 |
|
|
$ |
387,813 |
|
|
$ |
319,622 |
|
We have funded our operations and capital expenditures primarily using the $97.5 million
raised through the sale of preference shares, the $68.8 million raised from the sale of ordinary
shares in the initial public offering and the $97.3 million raised from the sale of zero-coupon,
convertible, subordinated notes in July 2003, as well as cash generated from operations.
On July 7, 2003, we issued $100 million aggregate amount of zero-coupon, convertible,
subordinated notes (the Notes) due 2023 in a private offering, which resulted in net proceeds to
us of approximately $97.3 million. The Notes were issued at par and bear no interest. The Notes are
convertible into our ordinary shares, upon satisfaction of certain conditions, at an initial
conversion price of $25.79 per share, subject to adjustments for certain events. Upon conversion,
we have the right to deliver cash in lieu of ordinary shares, or a combination of cash and ordinary
shares. During 2007, one million dollars of the Notes were converted as SINA ordinary shares,
resulting in a balance of $99.0 million in outstanding Notes as of December 31, 2007. We may redeem
for cash all or part of the Notes on or after July 15, 2012, at a price equal to 100% of the
principal amount of the Notes. The purchasers may require us to repurchase all or part of the Notes
for cash on July 15 annually from 2007 through 2013, and on July 15, 2018, and upon a change of
control, at a price equal to 100% of the principal amount of the Notes. Based on the circumstances
and information provided to us as of December 31, 2007, we do not believe that it is likely the
purchasers will require us to repurchase the Notes in 2008. We filed a Registration Statement on
Form S-3 for the resale of the Notes and the ordinary shares issuable upon conversion of the Notes,
which Registration Statement is no longer effective.
One of the conditions for conversion of the Notes to SINA ordinary shares is that the sale
price (defined as closing per share sales price) of SINA ordinary shares reaches a specified
threshold for a defined period of time. The specified thresholds are i) during the period from
issuance to July 15, 2022, if the sale price of SINA ordinary shares, for each of any five
consecutive trading days in the immediately preceding quarter, exceeds 115% of the conversion price
per ordinary share, and ii) during the period from July 15, 2022 to July 15, 2023, if the sale
price of SINA ordinary shares on the previous trading day is more than 115% of the conversion price
per ordinary share. The closing price of our ordinary shares on December 31, 2007, the last trading
day of 2007, was $44.31. For the quarter ended December 31, 2007, the sale price of SINA ordinary
shares exceed 115% of the conversion price per ordinary share for five consecutive trading days.
The Notes are therefore convertible into SINA ordinary shares for the quarter ending March 31, 2008
in accordance with threshold (i) described above. Upon a purchasers election to convert the Notes
in the future periods, we have the right to deliver cash in lieu of ordinary shares, or a
combination of cash and ordinary shares.
As of December 31, 2007, we had $478.0 million in cash and cash equivalents and short-term
investments to meet the future requirements of our operating activities. 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 or to increase our cash reserve for future acquisitions. The sale of additional equity
would 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.
The following tables set forth the movements of our cash and cash equivalents for the periods
presented.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31, |
|
|
|
2007 |
|
|
2006 |
|
|
2005 |
|
|
|
(In thousands) |
|
Net cash provided by operating activities |
|
$ |
89,065 |
|
|
$ |
63,097 |
|
|
$ |
58,273 |
|
Net cash used in investing activities |
|
|
(5,857 |
) |
|
|
(850 |
) |
|
|
(133,810 |
) |
Net cash provided by financing activities |
|
|
19,037 |
|
|
|
9,979 |
|
|
|
7,015 |
|
Effect of exchange rate changes on cash and cash equivalents |
|
|
6,244 |
|
|
|
2,541 |
|
|
|
3,164 |
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents |
|
|
108,489 |
|
|
|
74,767 |
|
|
|
(65,358 |
) |
Cash and cash equivalents at beginning of period |
|
|
163,177 |
|
|
|
88,410 |
|
|
|
153,768 |
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
271,666 |
|
|
$ |
163,177 |
|
|
$ |
88,410 |
|
|
|
|
|
|
|
|
|
|
|
55
Operating activities
Net cash provided by operating activities for 2007 was $89.1 million. This was primarily
attributable to our net income of $57.7 million, adjusted by non-cash related expenses including
depreciation of $13.4 million, stock-based compensation of $8.7 million, amortization of intangible
assets of $1.2 million, allowance for doubtful accounts of $5.3 million, amortization of
convertible debt issuance cost of $0.3 million, and a net
increase in cash from working capital items of $2.7
million, offset by gains from the sale of investments of $0.8 million. The net increase in working
capital items was mainly due to increase in account receivables which resulted from the significant
increase in our advertising revenues during 2007, partially offset by the increase in income tax
payable and accrued liabilities for items such as ad agency rebates, content fees, bandwidth costs,
sales commissions, bonuses, and marketing expenses.
Net cash provided by operating activities for 2006 was $63.1 million. This was primarily
attributable to our net income of $39.9 million, adjusted by non-cash related expenses including
depreciation of $9.9 million, stock-based compensation of $9.5 million, amortization of intangible
assets of $1.8 million, allowance for doubtful accounts of $5.0 million, amortization of
convertible debt issuance cost of $0.7 million, and net losses from equity investments of $0.7
million, offset by gains from the sale of businesses and investments of $2.0 million and a net
decrease in cash from working capital items of $2.2 million. The net decrease in working capital items was
mainly due to increase in account receivables which resulted from the significant increase in our
advertising revenues during 2006, partially offset by the increase in income tax payable and
accrued liabilities such as sales rebates, content fees, bandwidth costs, sales commission,
bonuses, and overall marketing expenses.
Net cash provided by operating activities for 2005 was $58.3 million. This was primarily
attributable to our net income of $43.1 million, adjusted by non-cash related expenses including
depreciation of $9.6 million, amortization of intangible assets of $3.2 million, an impairment
charge on investment in Tidetime Sun of $3.2 million, allowance for doubtful accounts of $2.3
million, amortization of convertible debt issuance cost of $0.7 million, and net losses from equity
investments of $2.8 million, offset by a gain from the sale of business of $4.1 million and a net
decrease in cash from working capital items of $2.3 million. The decrease in working capital items was mainly
due to decrease in accrued liabilities such as customer advance, withholding tax from employees and
sales rebates offset by decreased accounts receivable and prepaid expenses and other current
assets. The decrease in account receivables resulted from better collection.
Investing activities
Net cash used in investing activities for 2007 was $5.9 million. This was primarily due to
equipment purchases of $12.2 million and investment in a private company of $1.3 million. This was
partly offset by the net proceeds from the maturities of short-term investments of $5.6 million and
the sales of equity investment of $2.0 million.
Net cash used in investing activities for 2006 was $0.9 million. This was primarily due to
equipment purchases of $14.1 million and additional consideration related to Crillion acquisition
of $11.3 million. This was partly offset by the net proceeds from the maturities of short-term
investments of $18.0 million, the sales of equity investments of $5.3 million, Bravado of $0.6
million and Tidetime Sun of $0.6 million.
Net cash used in investing activities for 2005 was $133.8 million. This was primarily due to
the net purchase of short-term investments of $90.5 million, additional considerations related to
acquisitions of Bravado, Crillion and Davilhill totaling $26.1 million, equipment purchases of
$15.4 million and additional equity investments of $3.0 million. This was partly offset by the
proceeds of $1.7 million from the sale of Bravado.
Financing activities
Net cash provided by financing activities for 2007, 2006 and 2005 was $19.0 million, $10.0
million and $7.0 million, respectively, and was primarily related to the proceeds from the exercise
of share options.
56
C. Research and Development, Patents and Licenses, etc.
Not applicable.
D. Trend Information
Other than as disclosed elsewhere in this annual report, we are not aware of any trends,
uncertainties, demands, commitments or events for the period from January 1, 2007 to December 31,
2007 that are reasonably likely to have a material adverse effect on our net revenues, income,
profitability, liquidity or capital resources, or that caused the disclosed financial information
to be not necessarily indicative of future operating results or financial conditions.
E. Off-Balance Sheet Arrangements
We have not entered into any financial guarantees or other commitments to guarantee the
payment obligations of any unconsolidated third parties. In addition, we have not entered into any
derivative contracts that are indexed to our shares and classified as shareholders equity, or that
are not reflected in our consolidated financial statements. Furthermore, we do not have any
retained or contingent interest in assets transferred to an unconsolidated entity that serves as
credit, liquidity or market risk support to such entity. Moreover, we do not have any variable
interest in any unconsolidated entity that provides financing, liquidity, market risk or credit
support to us or engages in leasing, hedging or research and development services with us.
F. Contractual Obligations
The following table sets forth our contractual obligations as of December 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments due by period |
|
|
|
|
|
|
|
|
|
|
Less than one |
|
|
One to |
|
|
Three to |
|
|
More than |
|
|
|
Total |
|
|
year |
|
|
three years |
|
|
five years |
|
|
five years |
|
|
|
( In thousands) |
|
Operating lease obligations |
|
$ |
7,333 |
|
|
$ |
4,691 |
|
|
$ |
2,642 |
|
|
$ |
|
|
|
$ |
|
|
Purchase commitments |
|
|
43,232 |
|
|
|
34,029 |
|
|
|
8,724 |
|
|
|
434 |
|
|
|
45 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contractual obligations |
|
$ |
50,565 |
|
|
$ |
38,720 |
|
|
$ |
11,366 |
|
|
$ |
434 |
|
|
$ |
45 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating lease obligations include the commitments under the lease agreements for our office
premises. We lease office facilities under non-cancelable operating leases with various expiration
dates beginning 2005 through 2010. Rental expenses for the years ended December 31, 2007, 2006 and
2005 were $4.9 million, $3.6 million and $3.1 million, respectively. Based on the current rental
lease agreements, future minimum rental payments required as of December 31, 2007 are $4.7 million,
$2.6 million and $77,000 for the years ending December 31, 2008, 2009 and 2010, respectively. The
majority of the commitments are from our office lease agreements in the PRC.
Purchase commitments mainly include minimum commitments for Internet connection fees
associated with web site production, content fees associated with web site production and MVAS,
advertising serving services and marketing activities.
There are uncertainties regarding the legal basis of our ability to operate an Internet
business and telecom value-added services 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 such restrictions currently in place, but in addition
regulations are unclear as to in which specific segments of these industries companies with foreign
investors, including us, may operate. Therefore, we might be required to limit the scope of our
operations in China, and this could have a material adverse effect on our financial position,
results of operations and cash flows.
For a discussion
of lawsuits, please refer to Item 8. Financial Information A. Consolidated
Statements and Other Financial Information Legal
Proceedings.
57
Item 6. Directors, Senior Management and Employees
A. Directors and Senior Management
The following table provides information with respect to our executive officers and directors
as of the date of June 6, 2008:
|
|
|
|
|
Name |
|
Age |
|
Position |
Charles Chao |
|
42 |
|
President, Chief Executive Officer
and Director (Principal Executive Officer) |
Herman Yu |
|
37 |
|
Chief Financial Officer (Principal Financial and Accounting Officer) |
Hong Du |
|
36 |
|
Chief Operating Officer |
Tong Chen |
|
41 |
|
Executive Vice President & Chief Editor |
Bin Wang |
|
42 |
|
Senior Vice President, SINA Mobile |
Yan Wang |
|
35 |
|
Chairman of the Board |
Pehong Chen |
|
50 |
|
Independent Director |
Lip-Bu Tan |
|
48 |
|
Independent Director |
Ter Fung Tsao |
|
62 |
|
Independent Director |
Yichen Zhang |
|
44 |
|
Independent Director |
Song-Yi Zhang |
|
52 |
|
Independent Director |
Hurst Lin |
|
43 |
|
Director |
Charles Chao has served as a director and Chief Executive Officer since May 2006. Mr. Chao has
served as our President since September 2005 and as our Chief Financial Officer from February 2001
to May 2006. Mr. Chao served as our Co-Chief Operating Officer from July 2004 to September 2005.
Mr. Chao served as our Executive Vice President from April 2002 to June 2003. From September 1999
to January 2001, Mr. Chao served as our Vice President, Finance. Prior to joining us, Mr. Chao
served as an experienced audit manager at PricewaterhouseCoopers, LLP, an accounting firm. Mr. Chao
is currently a director of Focus Media, an out-of-home media and advertising network company,
NetDragon Websoft Inc., a company providing technology for online gaming, and E-House (China)
Holdings Limited, a company providing real estate services and information in China. Mr. Chao holds
a Master of Professional Accounting degree from University of Texas at Austin, an M.A. in
Journalism from University of Oklahoma and a B.A. in Journalism from Fudan University in Shanghai,
China.
Herman Yu has served as the Companys Chief Financial Officer since August 2007. Mr. Yu has
served as our Acting Chief Financial Officer from May 2006 to August 2007 and Vice President and
Corporate Controller from September 2004 to May 2006. Prior to joining SINA, Mr. Yu worked at Adobe
Systems, as the Corporate Marketing Controller from June 2001 to September 2004 and as the Chief
Auditor from January 1999 to May 2001. Mr. Yu also held various finance and accounting management
positions at Cadence Design Systems, Inc. and VeriFone, Inc. Mr. Yu began his career with Arthur
Andersen and is a California Certified Public Accountant. Mr. Yu holds a Masters of Accountancy
from the University of Southern California and a Bachelor of Arts in Economics from the University
of California. He is a member of the American Institute of Certified Public Accountants (AICPA) and
Financial Executive Institute (FEI).
Hong Du has served as the Companys Chief Operating Officer since February 2008. Ms. Du joined
the Company in November 1999 and worked in the Business Development department until April 2004.
From May 2004 to January 2005, Ms. Du served as Deputy General Manager of 1Pai.com, a joint venture
between SINA and Yahoo! Ms. Du rejoined the Company in January 2005 and served as our General
Manager of Sales Strategy from January 2005 to March 2005, General Manager of Sales from April 2005
to August 2005, Vice President of Sales from September 2005 to February 2007 and Senior Vice
President of Sales and Marketing from February 2007 to February 2008. Ms. Du holds a B.S. in
Applied Chemistry from Harbin Institute of Technology and an M.S. in MIS from San Francisco State
University.
Tong Chen has served as the Companys Executive Vice President and Chief Editor since February
2007. In 1997, Mr. Chen took part in the founding of SRSnet.com, a division of Beijing Stone Rich
Sight Information Technology Co., Ltd. (currently known as Beijing SINA Information Technology Co.
Ltd.), one of our subsidiaries, and he formally joined the Company in March 1998. Mr. Chen served
as host of our SRSnet.com Sports Salon from April 1997 to August 1998, Chief Editor of our News
Center from September 1998 to June 1999, our Content Director from June 1999 to June 2000,
Executive Deputy General Manager of our China Operation from June 2000 to May 2002, our Vice
President and Chief Editor from May 2002 to November 2003 and our Senior Vice President and Chief
Editor from November 2003 to February 2007. Mr. Chen holds an M.B.A. from China-Europe
International Business School, an M.A. in Journalism from Renmin University of China, an M.A. in
Communications from Beijing Institute of Technology and a B.S. in electronic engineering from
Beijing University of Technology.
58
Bin Wang has served as the Companys Senior Vice President, SINA Mobile since February 2007.
Mr. Wang founded Crillion Corporation in May 2001 and served as its Chairman of the Board and
General Manager until it was acquired by the Company in March 2004. He served as our Deputy General
Manager of SINA Mobile from March 2004 to October 2005 and our Vice President and General Manager
of SINA Mobile from November 2005 to February 2007. Mr. Wang graduated from Sichuan Police Academy
with a B.S. degree.
Yan Wang has served as a director since May 2003 and is currently serving as our Chairman of
the Board. Mr. Wang served as our Vice Chairman of the Board from May 2006 to May 2008. Previously,
he served as our Chief Executive Officer from May 2003 to May 2006, our President from June 2001 to
May 2003, our General Manager of China Operations from September 1999 to May 2001 and as our
Executive Deputy General Manager for Production and Business Development in China from April 1999
to August 1999. In April 1996, Mr. Wang founded the SRSnet.com division of Beijing Stone Rich Sight
Limited (currently known as Beijing SINA Information Technology Co. Ltd.), one of our subsidiaries.
From April 1996 to April 1999, Mr. Wang served as the head of our SRS Internet Group. Mr. Wang
holds a B.A. in Law from the University of Paris.
Pehong Chen has served as a director since March 1999. Mr. Chen has been the Chief Executive
Officer, President and Chairman of the Board of Broadvision, Inc., a software applications company,
since May 1993. Prior to founding Broadvision, Mr. Chen was Vice President of Multimedia Technology
at Sybase, Inc., an enterprise software company, from 1992 to 1993. From 1989 to 1992, Mr. Chen
founded and was president of Gain Technology, a multimedia software tools company, which was
acquired by Sybase. He received a B.S. in Computer Science from National Taiwan University, an M.S.
in Computer Science from Indiana University and a Ph.D. in Computer Science from the University of
California at Berkeley.
Lip-Bu Tan has served as a director since March 1999. Mr. Tan is the Founder and Chairman of
Walden International, an international venture capital firm founded in 1984. Mr. Tan is currently a
director of Creative Technology Ltd., a multimedia technology company, Flextronics International
Ltd., an electronics manufacturing services company, Cadence Design Systems Inc., an EDA company,
Semiconductor Manufacturing International Corp., a foundry in China, MindTree Consulting, an IT and
R&D Services Company, and several other private companies. He holds an M.S. in Nuclear Engineering
from the Massachusetts Institute of Technology, an M.B.A. from the University of San Francisco and
a B.S. from Nanyang University, Singapore.
Ter Fung Tsao has served as a director since March 1999. Mr. Tsao has served as Chairman of
Standard Foods Corporation (formerly known as Standard Foods Taiwan Ltd.), a packaged food company,
since 1986. Before joining Standard Foods Taiwan Ltd., Mr. Tsao worked in several positions within
The Quaker Oats Company, a packaged food company, in the United States and Taiwan. Mr. Tsao
received a B.S. in Civil Engineering from Cheng Kung University in Taiwan, an M.S. in Sanitary
Engineering from Colorado State University, and a Ph.D. in Food and Chemical Engineering from
Colorado State University.
Yichen Zhang has served as a director since May 2002. Since August 2003, Mr. Zhang has been
the Chief Executive Officer of CITIC Capital Holdings Limited (CCHL, formerly known as CITIC
Capital Markets Holdings Ltd.), a China-focused investment management and advisory firm. Mr. Zhang
served as the Deputy Chief Executive Officer of CCHL from June 2002 to July 2003, and served as an
Executive Director of CITIC Pacific Limited and President of CITIC Pacific Communications Limited
from March 2000 to May 2002. From September 1996 to February 2000, he served as Managing Director
Debt Capital Markets for Merrill Lynch (Asia Pacific), Ltd., an investment banking firm. Mr. Zhang
holds a B.S. in Computer Science and Engineering from the Massachusetts Institute of Technology.
Song-Yi Zhang has served as a director since April 2004. Mr. Zhang has been an Advisory
Director of Morgan Stanley based in Hong Kong since December 2000. From November 1997 to November
2000, Mr. Zhang was a Managing Director of Morgan Stanley and served separately as a Managing
Director in its Asia Mergers, Acquisitions, Restructuring and Divestiture Group and Co-head of its
Asia Utilities/ Infrastructure Group.
Hurst Lin has served as a director since January 6, 2006. Mr. Lin co-founded and served as the
Vice President of Business Development of Sinanet.com from May 1995 until we acquired it in March
1999. From March 1999 to April 2002, Mr. Lin served as our Vice President of Business Development.
Mr. Lin served as our General Manager of U.S. Operations from September 1999 until February 2003
and Executive Vice President of Global Business Development from April 2002 to June 2003. He served
as our Chief Operating Officer from June 2003 to July 2004 and from September 2005 to March 2006
and as our Co-Chief Operating Officer from July 2004 to September 2005. Mr. Lin has been a general
partner of Doll Capital Management since April 2006. Mr. Lin holds an M.B.A. from Stanford
University and a B.A. in Engineering from Dartmouth College.
59
There are no family relationships among any of the directors or executive officers of SINA Corporation.
Our Board of Directors has determined that the following directors, representing a majority of our directors,
are independent as defined under Nasdaq Marketplace Rule 4200(a)(15): Pehong Chen, Lip-Bu Tan, Ter Fung Tsao,
Yichen Zhang, and Song-Yi Zhang. We intend to maintain a majority of directors on the board that are independent.
Mr. Yan Wang resigned as an employee and as the CEO of the Company effective May 8, 2006, but he has remained as a
director of the Company and a member of the Compensation Committee of the Company until May 4, 2008. Mr. Hurst Lin
resigned as an employee and as the Chief Operating Officer of the Company effective March 31, 2006, but he has remained
as a director of the Company.
B. Amounts of Compensation Paid and Benefits Granted
Compensation
In 2007, we paid an aggregate of approximately $1.9 million in cash compensation to our
executive officers and non-employee directors as a group. Our executive officers are eligible to
receive cash bonuses which are paid on the basis of their success in achieving designated
individual goals and the Companys success in achieving specific company-wide goals. Specifically,
our executive officers were eligible to earn a cash bonus based on 2007 Company performance
pursuant to the 2007 Management Bonus Plan (the 2007 Bonus Plan). Under the 2007 Bonus Plan, a
total bonus pool of up to 1% of 2007 adjusted net income before taxes was established upon the
satisfaction of certain performance goals set up by the Compensation Committee. The aggregate
amount of such incentive cash bonuses awarded under the 2007 Bonus Plan has been included in the
above total amount of cash compensation to our executive officers and non-employee directors as a
group.
Effective as of June 23, 2006, each non-employee director receives an annual cash retainer of
$20,000, the Chair of the Audit Committee receives an additional annual cash retainer of $5,000 and
the Chair of the Compensation Committee receives an additional annual cash retainer of $3,000.
Currently, our employee directors are not entitled to any compensation in addition to their
employment compensation for serving on the Companys Board of Directors.
In November 2007, we granted an aggregate of 200,000 shares of restricted share units, half of
which were serviced-based and the other half were performance-based, to our executive officers as a
group. Our executive officers are not required to pay any consideration to the Company at the time
of grant of a restricted share unit. We will settle the award in our ordinary shares upon the
achievement by our executive officers of the vesting conditions prescribed by our Board of
Directors. Restricted share units that do not vest as prescribed will be forfeited. In December
2007, we granted options to purchase an aggregate of 84,000 of our ordinary shares to our
non-employee directors as a group. The expiration date of the options is December 6, 2013, and the
exercise price of the options is $49.95 per share, which is 100% of the fair market value of our
ordinary shares on the date of grant.
See Note 13 Stock-based Compensation for further discussion on stock-based compensation.
Share Incentive Plans
Our board of directors and shareholders approved the issuance of up to 5,000,000 common shares
upon exercise of awards granted under the 2007 Share Incentive Plan (the 2007 Plan). The 2007
Plan permits the granting of share options, share appreciation rights, restricted share units and
restricted shares. The 2007 Plan has a five-year term with a fixed number of shares authorized for
issuance. The maximum number of ordinary shares that may be granted subject to awards under the
2007 Plan during any given fiscal year will be limited to 3% of the total outstanding shares of the
Company as of the end of the immediately preceding fiscal year, plus any shares remaining available
under the share pool for the immediately preceding fiscal year. Share options and share
appreciation rights must be granted with an exercise price of at least 100% of the fair market
value on the date of grant.
Concurrently with the adoption of the 2007 Plan, all remaining shares available for grant
under the Companys existing 1999 Stock Plan, 1999 Executive Stock Option Plan and 1999 Director
Stock Option Plan were forfeited. For a brief description of the Companys 1999 Stock
Plan, 1999 Executive Stock Option Plan and 1999 Director Stock
Option Plan, see Note 13
Stock-based Compensation to the Consolidated Financial Statements.
As of June 6, 2008, options and restricted share units to purchase 919,000 common shares are
outstanding under the 2007 Plan, and options to purchase 2,438,000 common shares are outstanding
under the Companys existing 1999 Stock Plan, 1999 Executive Stock Option Plan and 1999 Director
Stock Option Plan.
60
The following table summarizes, as of June 6, 2008, the outstanding options and restricted
share units that the Company granted to our directors, executive officers and other optionees in
the aggregate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ordinary Shares |
|
|
|
|
|
|
|
|
|
|
|
|
Underlying |
|
|
|
|
|
Exercise Price |
|
|
|
|
Name |
|
Outstanding Options |
|
|
|
|
|
(US$/Share) |
|
Grant Date |
|
Expiration Date |
Chao, Charles |
|
|
* |
|
|
|
|
|
|
$ |
3.13 |
|
|
January 8, 2001 |
|
January 8, 2011 |
|
|
|
* |
|
|
|
|
|
|
$ |
1.50 |
|
|
March 29, 2001 |
|
March 29, 2011 |
|
|
|
* |
|
|
|
|
|
|
$ |
1.35 |
|
|
August 29, 2001 |
|
August 29, 2011 |
|
|
|
* |
|
|
|
|
|
|
$ |
17.50 |
|
|
June 16, 2003 |
|
June 16, 2013 |
|
|
|
* |
|
|
|
|
|
|
$ |
24.23 |
|
|
July 27, 2004 |
|
July 27, 2014 |
|
|
|
* |
|
|
|
|
|
|
$ |
24.73 |
|
|
June 7, 2006 |
|
June 7, 2012 |
|
|
|
* |
(1) |
|
|
|
|
|
|
|
|
|
November 16, 2007 |
|
|
|
|
|
Yu, Herman |
|
|
* |
|
|
|
|
|
|
$ |
20.86 |
|
|
September 7, 2004 |
|
September 7, 2014 |
|
|
|
* |
|
|
|
|
|
|
$ |
24.73 |
|
|
June 7, 2006 |
|
June 7, 2012 |
|
|
|
* |
(1) |
|
|
|
|
|
|
|
|
|
November 16, 2007 |
|
|
|
|
Du, Hong |
|
|
* |
|
|
|
|
|
|
$ |
12.98 |
|
|
May 21, 2003 |
|
May 21, 2013 |
|
|
|
* |
|
|
|
|
|
|
$ |
20.86 |
|
|
September 7, 2004 |
|
September 7, 2014 |
|
|
|
* |
|
|
|
|
|
|
$ |
26.43 |
|
|
April 25, 2005 |
|
April 25, 2015 |
|
|
|
* |
|
|
|
|
|
|
$ |
24.73 |
|
|
June 7, 2006 |
|
June 7, 2012 |
|
|
|
* |
(1) |
|
|
|
|
|
|
|
|
|
November 16, 2007 |
|
|
|
|
Chen, Tong |
|
|
* |
|
|
|
|
|
|
$ |
1.88 |
|
|
August 14, 2002 |
|
August 14, 2012 |
|
|
|
* |
|
|
|
|
|
|
$ |
15.47 |
|
|
May 29, 2003 |
|
May 29, 2013 |
|
|
|
* |
|
|
|
|
|
|
$ |
20.86 |
|
|
September 7, 2004 |
|
September 7, 2014 |
|
|
|
* |
|
|
|
|
|
|
$ |
24.73 |
|
|
June 7, 2006 |
|
June 7, 2012 |
|
|
|
* |
(1) |
|
|
|
|
|
|
|
|
|
November 16, 2007 |
|
|
|
|
Wang, Bin |
|
|
* |
|
|
|
|
|
|
$ |
24.73 |
|
|
June 7, 2006 |
|
June 7, 2012 |
|
Chen, Pehong |
|
|
* |
|
|
|
|
|
|
$ |
33.68 |
|
|
September 26, 2003 |
|
September 26, 2013 |
|
|
|
* |
|
|
|
|
|
|
$ |
36.40 |
|
|
June 28, 2004 |
|
June 28, 2014 |
|
|
|
* |
|
|
|
|
|
|
$ |
24.39 |
|
|
June 23, 2006 |
|
June 23, 2016 |
|
|
|
* |
|
|
|
|
|
|
$ |
49.95 |
|
|
December 6, 2007 |
|
December 6, 2013 |
|
Chen, Xiaotao (2) |
|
|
|
|
|
|
|
|
|
|
N/A |
|
|
|
N/A |
|
|
N/A |
|
Duan, Yongji (3) |
|
|
* |
|
|
|
|
|
|
$ |
49.95 |
|
|
December 6, 2007 |
|
December 6, 2013 |
|
Tan, Lip-Bu |
|
|
* |
|
|
|
|
|
|
$ |
17.00 |
|
|
April 12, 2000 |
|
April 12, 2010 |
|
|
|
* |
|
|
|
|
|
|
$ |
1.32 |
|
|
November 27, 2001 |
|
November 27, 2011 |
|
|
|
* |
|
|
|
|
|
|
$ |
4.94 |
|
|
December 16, 2002 |
|
December 16, 2012 |
|
|
|
* |
|
|
|
|
|
|
$ |
33.68 |
|
|
September 26, 2003 |
|
September 26, 2013 |
|
|
|
* |
|
|
|
|
|
|
$ |
36.40 |
|
|
June 28, 2004 |
|
June 28, 2014 |
|
|
|
* |
|
|
|
|
|
|
$ |
26.37 |
|
|
September 27, 2005 |
|
September 27, 2015 |
|
|
|
* |
|
|
|
|
|
|
$ |
24.39 |
|
|
June 23, 2006 |
|
June 23, 2016 |
|
|
|
* |
|
|
|
|
|
|
$ |
49.95 |
|
|
December 6, 2007 |
|
December 6, 2013 |
|
Tsao, Ter Fung |
|
|
* |
|
|
|
|
|
|
$ |
17.00 |
|
|
April 12, 2000 |
|
April 12, 2010 |
|
|
|
* |
|
|
|
|
|
|
$ |
33.68 |
|
|
September 26, 2003 |
|
September 26, 2013 |
|
|
|
* |
|
|
|
|
|
|
$ |
36.40 |
|
|
June 28, 2004 |
|
June 28, 2014 |
|
|
|
* |
|
|
|
|
|
|
$ |
26.37 |
|
|
September 27, 2005 |
|
September 27, 2015 |
|
|
|
* |
|
|
|
|
|
|
$ |
24.39 |
|
|
June 23, 2006 |
|
June 23, 2016 |
|
|
|
* |
|
|
|
|
|
|
$ |
49.95 |
|
|
December 6, 2007 |
|
December 6, 2013 |
|
Zhang, Song-Yi |
|
|
* |
|
|
|
|
|
|
$ |
30.35 |
|
|
April 28, 2004 |
|
April 28, 2014 |
|
|
|
* |
|
|
|
|
|
|
$ |
26.37 |
|
|
September 27, 2005 |
|
September 27, 2015 |
|
|
|
* |
|
|
|
|
|
|
$ |
24.39 |
|
|
June 23, 2006 |
|
June 23, 2016 |
|
|
|
* |
|
|
|
|
|
|
$ |
49.95 |
|
|
December 6, 2007 |
|
December 6, 2013 |
|
Zhang, Yi-Chen |
|
|
* |
|
|
|
|
|
|
$ |
33.68 |
|
|
September 26, 2003 |
|
September 26, 2013 |
|
|
|
* |
|
|
|
|
|
|
$ |
36.40 |
|
|
June 28, 2004 |
|
June 28, 2014 |
|
|
|
* |
|
|
|
|
|
|
$ |
26.37 |
|
|
September 27, 2005 |
|
September 27, 2015 |
|
|
|
* |
|
|
|
|
|
|
$ |
24.39 |
|
|
June 23, 2006 |
|
June 23, 2016 |
|
|
|
* |
|
|
|
|
|
|
$ |
49.95 |
|
|
December 6, 2007 |
|
December 6, 2013 |
|
Wang, Yan |
|
|
* |
|
|
|
|
|
|
$ |
24.23 |
|
|
July 27, 2004 |
|
July 27, 2014 |
|
Lin, Frank Hurst |
|
|
* |
|
|
|
|
|
|
$ |
17.50 |
|
|
June 16, 2003 |
|
June 16, 2013 |
|
|
|
* |
|
|
|
|
|
|
$ |
24.23 |
|
|
July 27, 2004 |
|
July 27, 2014 |
61
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ordinary Shares |
|
|
|
|
|
|
|
|
|
|
|
|
Underlying |
|
|
|
|
|
Exercise Price |
|
|
|
|
Name |
|
Outstanding Options |
|
|
|
|
|
(US$/Share) |
|
Grant Date |
|
Expiration Date |
Other employees |
|
|
1,667,000 |
|
|
|
|
|
|
From $0.5 to $33.29 |
|
From June 17, 1999 to March 20, 2008 |
|
From June 17, 2009 to September
7, 2014 |
|
|
|
73,000 |
(1) |
|
|
|
|
|
|
|
|
March 20, 2008 |
|
|
|
|
Total |
|
|
3,357,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Less than one percent of the outstanding ordinary shares. |
(1) |
|
Restricted share units. |
|
(2) |
|
Mr. Chen resigned from SINAs board of directors in April 2008. |
|
(3) |
|
Mr. Duan vacated his seat on SINAs board of directors in March 2008. |
The options granted to our executive officers generally have a term of 6 years, but are
subject to earlier termination in connection with termination of continuous service to the Company.
Optionees may pay the exercise price by cash, check, or delivery of already-owned ordinary shares
in the capital of the Company. Except for the option granted to Charles Chao, options granted to
our executive officers vest over a four-year vesting period with 12.5% of the shares covered by the
options vesting on the 6-month anniversary of the date of the grant and the remaining shares
vesting ratably on a monthly basis over the remaining vesting period of the options. The option
granted to Charles Chao vests over a three-year vesting period with 1/6th of the shares covered by
the option vesting on the 6-month anniversary of the date of the grant and the remaining shares
vesting ratably on a monthly basis over the remaining vesting period of the option.
The service-based restricted share units granted to our executives officers vest over a
four-year vesting period with 12.5% of the shares covered by the restricted stock units vesting on
each 6-month anniversary date. The performance-based restricted share units granted to our
executive officers vest only if specific company-wide goals and designated individual goals for
fiscal 2007 and 2008 are achieved. Vesting, if any, may range from 60-100% of the shares granted.
Change of Control and Severance Agreements
Certain of our executive officers are entitled to receive cash payments and other benefits
upon the occurrence of termination of employment or a change of control of the Company when certain
conditions are satisfied. See Board Practices Potential Payments upon Termination or Change of
Control below.
C. Board Practices
Terms of Directors and Executive Officers
Our Amended and Restated Articles of Association currently authorize a Board of not less than
two directors and the classification of the Board into three classes serving staggered terms. At
each annual general meeting, the terms of one class of directors will expire. The directors whose
terms expire each year will be those who have been in office the longest since their last election.
A director whose term is expiring will remain in office until the close of the meeting at which his
or her term expires, and will be eligible for re-election at that meeting. Our Amended and Restated
Articles of Association also provide that any newly appointed director shall hold office only until
the next annual general meeting at which time such director shall be eligible for re-election by
the shareholders.
We currently have eight members of the Board of Directors. All members of the Board serve a
three-year term. The Class III directors whose terms expire at our next annual general meeting are
Pehong Chen, Lip-Bu Tan and Yichen Zhang. Assuming that the size of our board remains between 7 and
10 members, the Class I directors whose terms expire at our 2009 Annual General Meeting are Charles
Chao and Yan Wang, and the Class II directors whose terms expire at our 2010 Annual General Meeting
are Hurst Lin, Ter Fung Tsao and Song-Yi Zhang. For the period during which each director has
served on the Board, please refer to Item 6.A. Directors and Senior Management.
62
Our officers are elected by and serve at the discretion of the board of directors. Our
Employment Agreement with our CEO, Charles Chao, dated July 31, 2006, has a term of three years and
may be extended for an additional one-year period after the end of the
original term. Our Employment Agreements with each of our other officers, Herman Yu, CFO,
Hong Du, COO, and Tong Chen, Executive Vice President & Chief Editor, all dated November 16, 2007,
have a term of three years and may be extended for an additional one-year period after the end of
the original term. For the period during which each officer has served in the office, please refer
to Item 6.A. Directors and Senior Management.
Board Committees
Our Audit Committee consists of Lip-Bu Tan, Ter Fung Tsao and Song-Yi Zhang. All members of
the Audit Committee are independent directors under the standards set forth in Nasdaq Marketplace
Rules 4350(d)(2)(A)(i) and (ii) and each of them is able to read and understand fundamental
financial statements. In addition, the Board has determined that Lip-Bu Tan qualifies as an audit
committee financial expert as defined in the instructions to Item 16A of the Form 20-F and has
designated Lip-Bu Tan to serve as the audit committee financial expert for the Company. Lip-Bu Tan
is independent under the standards set forth in Nasdaq Marketplace Rules 4350(d)(2)(A)(i) and
(ii). Lip-Bu Tan also serves on the audit committee of Integrated Silicon Solution, Inc. and is one
of its designated audit committee financial experts. Our Audit Committee is responsible for, among
other things:
Independent accountant
|
1. |
|
Appoint the independent accountant for ratification by the stockholders and approve the
compensation of and oversee the independent accountant. |
|
|
2. |
|
Confirm that the proposed audit engagement team for the independent accountant complies
with the applicable auditor rotation rules. |
|
|
3. |
|
Ensure the receipt of, and review, a written statement from the Companys independent
accountant delineating all relationships between the accountants and the Company,
consistent with Independence Standards Board Standard 1. |
|
|
4. |
|
Review with the Companys independent accountant any disclosed relationship or service
that may impact the objectivity and independence of the accountant. |
|
|
5. |
|
Pre-approve all audit services and permitted non-audit services to be provided by the
independent accountant as required by the Exchange Act. |
|
|
6. |
|
Review the plan for and the scope of the audit and related services at least annually. |
Financial Reporting
|
7. |
|
Review and discuss with finance management the Companys earnings press releases as
well as earnings guidance provided to analysts. |
|
|
8. |
|
Review the annual reports of the Company with finance management and the independent
accountant prior to filing of the reports with the SEC. |
|
|
9. |
|
Review with finance management and the independent accountant at the completion of the
annual audit: |
|
a. |
|
The Companys annual financial statements and related footnotes; |
|
|
b. |
|
The independent accountants audit of the financial statements; |
|
|
c. |
|
Any significant changes required in the independent accountants audit
plan; |
|
|
d. |
|
Any serious difficulties or disputes with management encountered during
the course of the audit; |
|
|
e. |
|
Other matters related to the conduct of the audit which are to be
communicated to the Committee under generally accepted auditing standards. |
Related Party and Relationship Disclosure
|
10. |
|
Ensure the receipt of, and review, a report from the independent accountant required by
Section 10A of the Exchange Act. |
|
|
11. |
|
Oversee the Companys compliance with SEC requirements for disclosure of accountants
services and Audit Committee members and activities. |
|
|
12. |
|
Review and approve all related party transactions other than compensation transactions.
|
63
Critical Accounting Policies & Principles and Key Transactions
|
13. |
|
Review with finance management and the independent accountant at least annually the
Companys application of critical accounting policies and its consistency from period to
period, and the compatibility of these accounting policies
with generally accepted accounting principles, and (where appropriate) the Companys
provisions for future occurrences which may have a material impact on the financial
statements of the Company. |
|
|
14. |
|
Oversee the Companys finance function, which may include the adoption from time to
time of a policy with regard to the investment of the Companys assets. |
|
|
15. |
|
Periodically discuss with the independent accountant, without Management being present,
(i) their judgments about the quality, appropriateness, and acceptability of the Companys
accounting principles and financial disclosure practices, as applied in its financial
reporting, and (ii) the completeness and accuracy of the Companys financial statements. |
|
|
16. |
|
Review and discuss with finance management all material off-balance sheet transactions,
arrangements, obligations (including contingent obligations) and other relationships of the
Company with unconsolidated entities or other persons, that may have a material current or
future effect on financial condition, changes in financial condition, results of
operations, liquidity, capital resources, capital reserves or significant components of
revenues or expenses. |
Internal Control and Related Matters
|
17. |
|
Oversee the adequacy of the Companys system of internal controls. Obtain from the
independent accountant management letters or summaries on such internal controls. Review
any related significant findings and recommendations of the independent accountant together
with managements responses thereto. |
|
|
18. |
|
Oversee the Companys Anti-Fraud and Whistleblower Program. |
|
|
19. |
|
Perform annual self assessment on Audit Committee effectiveness. |
In addition to the above responsibilities, the Audit Committee shall undertake such other
duties as the Board delegates to it or that are required by applicable laws, rules and regulations.
Finally, the Audit Committee shall ensure that the Companys independent accountant understand
both (i) their ultimate accountability to the Board and the Audit Committee, as representatives of
the Companys stockholders and (ii) the Boards and the Audit Committees ultimate authority and
responsibility to select, evaluate and, where appropriate, replace the Companys independent
accountant (or to nominate the outside accountant to be proposed for stockholder approval in any
proxy statement).
Our Compensation Committee consists of Mr. Pehong Chen and Mr. Lip-Bu Tan. The members of the
Compensation Committee are non-employee directors. Our Compensation Committee is responsible for
establishing and monitoring the general compensation policies and compensation plans of the
Company, as well as the specific compensation levels for executive officers. It also administers
the granting of options to executive employees under the Companys share incentive plans.
Potential Payments upon Termination or Change of Control
We have entered into contracts with our executive officers (with Mr. Charles Chao, our Chief
Executive Officer, also being a director of the Company), which provide for potential payments upon
termination or change of control.
Terms of Potential Payments Termination
We have entered into an employment agreement with our executive officers providing,
among other things, that in the event that employment of such executive officer is terminated
without cause or if a constructive termination occurs (either event, an Involuntary Termination),
such executive officer shall be entitled to receive payment of severance benefits equal to his or
her regular monthly salary for twelve months (or in the case of Mr. Chao, (i) eighteen months if
the remaining term of his employment agreement (the Remaining Term) is more than or equal to
eighteen months, (ii) the Remaining Term if the Remaining Term is less than eighteen months but
more than twelve months, or (iii) twelve months if the Remaining Term is equal to or less than 12
months (the Severance Period)), provided that the executive officer executes a release agreement
at the time of such termination. An amount equal to six months of such severance benefits shall be
paid on the six-month anniversary of the termination date, and the remaining severance benefits
shall be paid ratably over the following six-month period (or in the case of Mr. Chao, over the
remaining Severance Period) in accordance with the Companys standard payroll schedule.
Additionally, upon an Involuntary Termination, such executive officer will be entitled to receive
any bonus earned as of the date of such termination,
64
which amount shall be paid on the six-month
anniversary of such executive officers termination date. The Company will also reimburse such
executive officer over the twelve months following termination (or in the case of Mr. Chao, over
the Severance Period) for health insurance benefits with the same coverage provided to such
executive officer prior to his or her termination, provided that reimbursement for the first six
months shall be paid on the six-month anniversary of such executive officers termination date and
reimbursement for any remaining health insurance benefits shall be paid on the first day of each
month during which such executive officer receives such health insurance
benefits. Any unvested share options or shares of restricted stock held by such executive
officer as of the date of his or her Involuntary Termination will vest as to that number of shares
that such executive officer would have vested over the twelve-month period following his or her
termination (or in the case of Mr. Chao, during the Severance Period) if he or she had continued
employment with the Company through such period, and such executive officer shall be entitled to
exercise any such share options through the date that is the later of (x) the 15th day of the third
month following the date the share options would otherwise expire, or (y) the end of the calendar
year in which the share options would otherwise expire. Such executive officer is not eligible for
any severance benefits if his employment is terminated voluntarily or if he or she is terminated
for cause.
In the event that an executive officer voluntarily elects to terminate his or her employment,
he or she will receive payment(s) for all salary and unpaid vacation accrued as of the date of his
termination of employment and his or her benefits will be continued in accordance with our
then-existing benefits plans and policies in effect on the date of termination and in accordance
with applicable law. In the event that an executive officers employment is terminated for cause,
then he or she shall not be entitled to receive payment of any severance benefits, but he will
receive payment(s) for all salary and unpaid vacation accrued as of the date of such termination
and his or her benefits will be continued in accordance with our then-existing benefits plans and
policies in effect on the date of termination and in accordance with applicable law.
In the event that an executive officers employment with the Company terminates as a result of
his or her death or disability, such executive officers estate or representative will receive the
amount of such executive officers target bonus for the fiscal year in which the death or
disability occurs to the extent that the bonus has been earned as of the date of such death or
disability, as determined by the Board of Directors or the Compensation Committee based on the
specific corporate and individual performance targets established for such fiscal year. In
addition, the change of control agreement between the Company and the executive officers, as
further described below under Terms of Potential Payments Change of Control, provides that if
the termination is by reason of death or disability, such executive officer will be entitled to
continued payment of his or her full base salary at the rate then in effect on the date of
termination for a period of one year from the date of termination.
Terms of Potential Payments Change of Control
In addition to the employment agreements described above, the Company has also entered into a
change of control agreement with its executive officers. Under the change of control
agreements, in general, a change of control shall be deemed to occur if (i) any person or entity
acquires more than fifty percent or more of the combined voting power of the Companys outstanding
securities, (ii) during any period of two consecutive years there is an unwelcome change in a
majority of the members of our board of directors, (iii) we merge or consolidate with another
organization (other than a merger where our shareholders continue to own more than fifty percent of
the combined voting power and with the power to elect at least a majority of the board of
directors), (iv) our shareholders approve a complete liquidation or an agreement for the sale or
disposition of all or substantially all of the Companys assets, (v) there occurs any other event
of a nature that would be required to be reported in response to Item 6(e) of Schedule 14A of
Regulation 14A promulgated under the Exchange Act.
The change of control agreement provides for certain severance benefits in the event of a
change of control as well as in the event of an involuntary termination after a change of control.
Upon a change of control in which the successor corporation does not assume outstanding options,
all such options shall become fully vested and exercisable. In addition, if an executive officers
employment with the Company terminates without cause or if he or she resigns for good reason (as
such terms are defined in the change of control agreements) within 24 months following a change of
control, such executive officer will receive a pro-rata amount of the full value of any targeted
annual bonus for the year in which he terminates, 100% of his or her annual base salary and 100% of
his or her targeted annual bonus for the year in which he or she terminates, reimbursement in full
of the applicable insurance premiums for him or her and his or her eligible dependents for first
eighteen months that he or she and his or her dependents are eligible for health insurance coverage
if a continuance of health insurance benefits are elected, continued D&O insurance coverage for six
years after his or her termination, and an acceleration of all stock awards that are unvested as of
his or her termination date. The change of control agreement also provide for a payment of an
amount equal to the full value of the excise tax imposed by Section 4999 of the Internal Revenue
Code should the executive officer be subject to the excise tax on golden parachute payments under
the Internal Revenue Code.
Except as set forth above, we have no service contracts with any of our directors that provide
benefits to them upon termination.
D. Employees
As of December 31, 2007, we had approximately 2,080 full-time employees, approximately 2,030
of whom are employed in China with the remaining employed in the United States of America, Hong
Kong and Taiwan. From time to time we employ independent contractors to support our production,
engineering, marketing, and sales departments. Our Chinese employees are members of a labor
association that represents employees with respect to labor disputes and other employee matters. To
date, we have not experienced a work stoppage or a labor dispute that has interfered with our
operations.
65
E. Share Ownership
The following table sets forth certain information that has been provided to the Company with
respect to the beneficial ownership of our ordinary shares as of June 6, 2008 by:
|
|
|
each shareholder known to us to own beneficially more than 5% of the ordinary shares; |
|
|
|
|
each director; |
|
|
|
|
each of our executive officers listed in Directors and Senior Management above; and |
|
|
|
|
all of our current directors and executive officers as a group. |
Percentage of beneficial ownership is based on 56,957,624 ordinary shares outstanding as of
June 6, 2008 together with options that are exercisable within 60 days of June 6, 2008 for each
shareholder. Beneficial ownership is determined in accordance with the rules of the SEC.
|
|
|
|
|
|
|
|
|
|
|
Number of Shares |
|
Percent of |
Name and Address of Beneficial Owners |
|
Beneficially Owned (#) |
|
Shares Beneficially Owned (%)(1) |
Major Shareholders |
|
|
|
|
|
|
|
|
FMR LLC (2) |
|
|
5,361,092 |
|
|
|
9.41 |
|
82 Devonshire Street |
|
|
|
|
|
|
|
|
Boston, MA 02109 |
|
|
|
|
|
|
|
|
Davide Erro
and affiliates (3) |
|
|
3,319,125 |
|
|
|
5.83 |
|
6th Floor, 65 Curzon Street |
|
|
|
|
|
|
|
|
London W1J 8PE, England |
|
|
|
|
|
|
|
|
Gilder,
Gagnon, Howe & Co. LLC (4) |
|
|
3,130,847 |
|
|
|
5.50 |
|
1775 Broadway, 26th Floor |
|
|
|
|
|
|
|
|
New York, NY 10019 |
|
|
|
|
|
|
|
|
Bridger
Management, LLC (5) |
|
|
3,000,000 |
|
|
|
5.27 |
|
101 Park Avenue, 48th Floor |
|
|
|
|
|
|
|
|
New York, NY 10178 |
|
|
|
|
|
|
|
|
OppenheimerFunds, Inc. (6) |
|
|
2,898,202 |
|
|
|
5.09 |
|
Two World Financial Center, 225 Liberty Street |
|
|
|
|
|
|
|
|
New York, NY 10281 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Directors and Executive Officers |
|
|
|
|
|
|
|
|
Lip-Bu Tan (7) |
|
|
* |
|
|
|
* |
|
c/o Walden International |
|
|
|
|
|
|
|
|
One California Street, 28th Floor |
|
|
|
|
|
|
|
|
San Francisco, CA 94111 |
|
|
|
|
|
|
|
|
Ter Fung
Tsao (8) |
|
|
* |
|
|
|
* |
|
c/o Helen Hsiao, |
|
|
|
|
|
|
|
|
8F, Suite 801 |
|
|
|
|
|
|
|
|
136, Jean-Ai Road, SEC. 3 |
|
|
|
|
|
|
|
|
Taipei, Taiwan |
|
|
|
|
|
|
|
|
Hurst Lin (9) |
|
|
* |
|
|
|
* |
|
Pehong Chen
(10) |
|
|
* |
|
|
|
* |
|
333 Distel Circle |
|
|
|
|
|
|
|
|
Los Altos, CA 94022 |
|
|
|
|
|
|
|
|
Yan Wang (11) |
|
|
* |
|
|
|
* |
|
Yichen Zhang
(12) |
|
|
* |
|
|
|
* |
|
CITIC 26/F CITIC Tower |
|
|
|
|
|
|
|
|
1 Tim Mei Avenue, |
|
|
|
|
|
|
|
|
Central Hong Kong |
|
|
|
|
|
|
|
|
Song-Yi
Zhang (13) |
|
|
* |
|
|
|
* |
|
c/o Morgan Stanley |
|
|
|
|
|
|
|
|
27/F, Three Exchange Square, |
|
|
|
|
|
|
|
|
Central Hong Kong |
|
|
|
|
|
|
|
|
Charles Chao
(14) |
|
|
* |
|
|
|
* |
|
Herman Yu (15) |
|
|
* |
|
|
|
* |
|
Hong Du (16) |
|
|
* |
|
|
|
* |
|
Tong Chen (17) |
|
|
* |
|
|
|
* |
|
Bin Wang (18) |
|
|
* |
|
|
|
* |
|
|
|
|
|
|
|
|
|
|
All
directors and executive officers as a group (12 persons) (19) |
|
|
1,237,452 |
|
|
|
2.17 |
|
66
|
|
|
* |
|
Less than one percent of the outstanding ordinary shares. |
(1) |
|
For each named person, the percentage ownership includes ordinary shares which the person has
the right to acquire within 60 days after June 6, 2008. However, such shares shall not be
deemed outstanding with respect to the calculation of ownership percentage for any other
person. Beneficial ownership calculations for 5% shareholders are based solely on
publicly-filed Schedule 13Ds or 13Gs, which 5% shareholders are required to file with the
SEC. |
|
(2) |
|
Beneficial ownership calculation is based solely on a review of a Schedule 13G filing made
with the SEC on February 14, 2008. |
|
(3) |
|
Beneficial ownership calculation is based solely on a review of a Schedule 13G filing made
with the SEC on January 29, 2008 for Grandhara Advisors Europe LLP, Grandhara Master Fund
Limited and Davide Erro. |
|
(4) |
|
Beneficial ownership calculation is based solely on a review of a Schedule 13G/A filing made
with the SEC on February 6, 2008. |
|
(5) |
|
Beneficial ownership calculation is based solely on a review of a Schedule 13G and Schedule
13G/A filings made with the SEC on February 14, 2008. |
|
(6) |
|
Beneficial ownership calculation is based solely on a review of a Schedule 13G filing made
with the SEC on February 6, 2008. |
|
(7) |
|
Includes 3,000 shares held by a trust for which Mr. Tan and his wife serve as trustees and
127,750 shares issuable upon exercise of options exercisable within 60 days of June 6, 2008. |
|
(8) |
|
Includes 10,000 shares held by Mr. Tsao and 97,750 shares issuable upon exercise of options
exercisable within 60 days of June 6, 2008. |
|
(9) |
|
Includes 60,972 shares held by Mr. Lin and 16,668 shares issuable upon exercise of options
exercisable within 60 days of June 6, 2008. |
|
(10) |
|
Includes 6,882 shares held by a trust controlled by Mr. Chen and 45,250 shares issuable upon
exercise of options exercisable within 60 days of June 6, 2008. |
67
|
(11) |
|
Includes 200,000 shares issuable upon exercise of options exercisable within 60 days of June 6, 2008. |
|
(12) |
|
Includes 60,250 shares issuable upon exercise of options exercisable within 60 days of June 6, 2008. |
|
(13) |
|
Includes 67,750 shares issuable upon exercise of options exercisable within 60 days of June 6, 2008. |
|
(14) |
|
Consists of 428,637 shares issuable upon exercise of options exercisable within 60 days of June 6, 2008. |
|
(15) |
|
Includes 6,875 shares issuable upon exercise of options exercisable within 60 days of June 6, 2008. |
|
(16) |
|
Includes 34,209 shares issuable upon exercise of options exercisable within 60 days of June 6, 2008. |
|
(17) |
|
Includes 61,459 shares issuable upon exercise of options exercisable within 60 days of June 6, 2008. |
|
(18) |
|
Includes 10,000 shares issuable upon exercise of options exercisable within 60 days of June 6, 2008. |
|
(19) |
|
Includes 1,156,598 shares issuable upon exercise of options within 60 days of June 6, 2008
held by all our directors and officers as a group. |
Except as otherwise indicated, the address of each person listed in the table is SINA
Corporation, 20/F Beijing Ideal International Plaza, No. 58 Northwest 4th Ring Road, Haidian
District, Beijing 100080, Peoples Republic of China, Attention: Corporate Secretary. The persons
named in the table have sole voting and investment power with respect to all ordinary shares shown
as beneficially owned by them, subject to community property laws where applicable.
For
information regarding the options held by our directors and executive
officers as well as the arrangements involving the employees in the
capital of the Company, see Item 6.B. Compensation Share Incentive
Plans.
Item 7. Major Shareholders and Related Party Transactions
A. Major Shareholders
For information regarding major shareholders, please refer to Item 6E. Directors, Senior
Management and Employees Share Ownership.
Our major shareholders do not have voting rights that are different from other shareholders.
We are not directly or indirectly controlled by another corporation, any foreign government or any
other natural or legal person. We are not aware of any arrangement that may, at a subsequent date,
result in a change of control of our company.
B. Related Party Transactions
Except for the transactions disclosed below in this Item 7B and Note 7 of our Notes To
Consolidated Financial Statements, since the beginning of the fiscal year 2007, there has not been,
nor is there currently proposed, any transaction or series of similar transactions to which we were
or are a party in which any director, executive officer or beneficial holder of more than 10% of
any class of our voting securities or such persons immediate family members or controlled
enterprises had or will have a direct or indirect material interest other than as described below
and elsewhere in Part I hereof. It is our policy that future transactions between us and any of our
directors, executive officers or related parties will be subject to the review and approval of our
Audit Committee or other committee comprised of independent, disinterested directors.
Our Code of Ethics states that a conflict of interest may exist whenever a relationship of an
employee, officer or director, or one of their family members, is inconsistent with the Companys
best interests or could cause a conflict with job responsibilities. Under our Code of Ethics, if
our employees, officers and directors have any question regarding whether a conflict of interest
exists, they are required to consult with their immediate supervisor or the Compliance Officer of
the Company. If they become aware of a conflict or potential conflict, they are required to bring
it to the attention of their immediate supervisor or the Compliance Officer.
Our Insider Trading Policy applicable to all employees, officers and directors and their
family members prohibits trading based on material, non-public information regarding the Company or
disclosure of such information for trading in the Companys securities.
68
Potential criminal and civil liability and disciplinary actions
for insider trading are set forth in our Insider Trading Policy. Our Chief Financial Officer serves
as the Companys Insider Trading Compliance Officer for the implementation of our Insider Trading
Policy. Our Insider Trading Policy is delivered to all new employees and consultants upon the
commencement of their relationships with the Company and is circulated to all personnel at least
annually.
Commercial Contracts
In
February 2008, we moved our business and operations related to our
real-estate and home decoration channels into a new subsidiary. The
new subsidiary entered into a ten-year licensing agreement with E-House
(China) Holdings Limited (eHouse). Mr. Charles Chao, Chief Executive Officer and a director of
SINA, is a board member of eHouse. Under the agreement, eHouse will provide its CRIC database to
our new subsidiary to support its business-to-consumer website targeted at real estate and home decoration
consumers. Both SINA and eHouse will each contribute $2.5 million cash into the Companys new
subsidiary. In return, SINA and eHouse will receive 66% and 34% interest, respectively, in the
Companys subsidiary.
In April 2007, SINA.com Technology (China) Co. Ltd., one of our subsidiaries, entered into an
agreement with BroadVision Inc. (BroadVision). Mr. Pehong Chen, a director of SINA, is the
controlling stockholder of BroadVision and is currently serving as its Chairman, CEO and President.
As of March 23, 2007, Mr. Chen beneficially owned approximately 39% of common stock of BroadVision.
Under the agreement, BroadVision will provide customization and hosting service for our HR
information management system in China. We paid BroadVision a total of RMB1,000,000 or $0.12
million in 2007, including RMB500,000 or $0.06 million for system implementation service and
another RMB500,000 or $0.06 million for the software
subscription, and starting from 2008, we will pay a yearly
subscription fee of RMB500,000 or $0.06 million for the software subscription and system upgrade,
feature enhance and technical support. Under the agreement, we have an option to buy out the
software license from BroadVision on a non-exclusive basis by paying a lump-sum amount
(RMB2,000,000 or $0.24 million, RMB1,500,000 or $0.18 million, or RMB1,000,000 or $0.12 million for
buy-out in 2008, 2009 or 2010 or later, respectively) plus a 22% of the buy-out amount for
maintenance services.
During
the year 2007, a VIE of the Company entered into technical support
contracts with a 19%-owned, privately-held, equity-invested company. Technical support services fees charged by the
privately-held, equity-invested company to the VIE was
$0.4 million during the year and no amount was due
to it as of December 31, 2007.
Control Agreements
PRC law currently limits foreign equity ownership of companies that provide certain Internet
related, MVAS and advertising businesses. To comply with these PRC regulations, we operate our
websites and provide certain online services in China through a series of contractual arrangements
with our VIEs, which are PRC domestic companies, and their shareholders. Such contractual
arrangements are as follows:
|
|
|
Our subsidiary STC agreed to provide Yan Wang, our former Chief Executive Officer and
current Chairman of the Board, an interest-free loan of RMB300,000 for purposes of providing
capital to Beijing SINA Internet Information Services Co., Ltd. and RMB300,000 for purposes
of providing capital to Guangdong SINA Internet Information Service Co., Ltd. The entire
principal amount of each of these loans is currently outstanding. Each of these loans was
extended as replacement for loans previously extended to Mr. Wang by BSIT in the same
principal amounts disclosed above and on the same terms as described below, except where
noted, which loans were replaced by the STC loans due to BSIT being dissolved by the
Company. |
69
|
|
|
STC also agreed to provide Tong Chen, our Executive Vice President and Chief Editor,
interest-free loans totaling RMB300,000 for purposes of providing capital to Guangdong SINA
Internet Information Service Co., Ltd. In addition, STC has agreed to provide Tong Chen
interest-free loans totaling RMB4,500,000 for purposes of providing capital to Beijing SINA
Internet Information Service Co., Ltd. and an interest-free loan of RMB200,000 for purposes
of providing capital to Beijing SINA Infinity Advertising Co., Ltd. The entire principal
amount of each of these loans is currently outstanding. Each of these loans was extended as
replacement for loans previously extended to Mr. Chen by BSIT in the same principal amounts
disclosed above and on the same terms as described below, except where noted, which loans
were replaced by the STC loans due to BSIT being dissolved by the Company. |
|
|
|
|
STC agreed to provide Hong Du, our Chief Operating Officer, an interest-free loan of
RMB5,350,000 for purposes of providing capital to Beijing SINA Internet Information Service
Co., Ltd. The entire principal amount of the loan is currently outstanding. The loan was
extended as replacement for the loan previously extended to Ms. Du by BSIT in the same
principal
amount as disclosed above and on the same terms as described below, except where noted, which
loans were replaced by the STC loans due to BSIT being dissolved by the Company. |
|
|
|
|
The aforementioned capital investments in the VIEs are funded by SINA and recorded as
interest-free loans to the PRC officers and employees. Such interest-free loans are extended
solely for subscription of the shares of the VIEs, and the transfer of ownership of the
shares in the VIEs, as directed by SINA, is the requisite form of repayment of such
interest-free loans. These are not personal loans. Under various contractual agreements,
employee shareholders of the VIEs are required to transfer their ownership in these entities
to our subsidiaries in China when permitted by PRC laws and regulations or to our designees
at any time, and all shareholders of the VIEs are obligated to waive their right of first
refusal or any other rights that are restrictive on such requested transfer. In addition,
our employee shareholders of the VIEs have pledged their shares in the VIEs (and all rights
relating thereto) as collateral for non-payment of (i) the interest-free loans and (ii) fees
on technical and other services due to us. Except as set forth above, employee shareholders
of the VIEs are not otherwise permitted to transfer, pledge or otherwise encumber their
ownership of VIEs without STCs written approval. All voting rights with respect to the
shares of the VIEs are assigned to us. We have the power to appoint all directors and senior
management personnel of the VIEs. Through our wholly-owned subsidiaries in China, we have
also entered into exclusive technical agreements and other service agreements with the VIEs,
under which these subsidiaries provide technical services and other services to the VIEs in
exchange for substantially all net income of the VIEs. In addition to the terms described
above which were also applicable to the BSIT loans, STC has entered into a letter agreement
with the PRC officers and employees that provides for (i) the cancellation of such officers
and employees obligations under the contractual agreements upon the transfer or acquisition
of shares held by such officers and employees and (ii) the indemnification of such officers
and employees for any liability incurred in the course of discharging such officers and
employees obligations under any of the contractual agreements. |
Employment and Compensation Agreements
We have entered into employment and compensation arrangements with our directors and executive
officers as described in Item 6. Directors, Senior
Management and Employees above.
Indemnification Agreements
We have entered into indemnification agreements with our officers and directors containing
provisions which may require us, among other things, to indemnify our officers and directors
against certain liabilities that may arise by reason of their status or service as officers or
directors, other than liabilities arising from willful misconduct of a culpable nature, and to
advance their expenses incurred as a result of any proceeding against them as to which they could
be indemnified.
Registration Rights Agreements
Some of our shareholders are entitled to have their shares registered by us for resale.
C. Interests of Experts and Counsel
Not applicable.
70
Item 8. Financial Information
A. Consolidated Statements and Other Financial Information
We have appended consolidated financial statements at the end of this Annual Report filed as
part of this Annual Report.
Legal Proceedings
From time to time, the Company may be subject to legal proceedings and claims in the ordinary
course of business, including claims of alleged infringement of copyrights and other intellectual
property rights in connection with the content published on our web sites.
Dividend Policy
The Company has not declared nor paid any cash dividends on its common shares in the past and
has no plans to do so in the foreseeable future.
B. Significant Changes
In February, 2008, we moved our business and operations related to
our real-estate and home decoration channels into a new subsidiary of the Company. The new
subsidiary entered into a 10-year licensing agreement with eHouse, whereby eHouse will provide its
CRIC database to our new subsidiary to support its business-to-customer website targeted at
real estate and home decoration consumers. Both SINA and eHouse will each contribute $2.5 million
cash into the Companys new subsidiary. In return, SINA and eHouse will receive 66% and 34%
interest, respectively, in the Companys subsidiary.
Item 9. The Listing
A. Listing Details
Our ordinary shares have been quoted on the NASDAQ Global Select Market (formerly the NASDAQ
National Market) system under the symbol SINA since April 13, 2000. The following table sets
forth the high and low trading prices of our ordinary shares for (1) each year of the five most
recent full financial years, (2) each of the four quarters of the two most recent full financial
years and the subsequent period and (3) each of the most recent six months:
|
|
|
|
|
|
|
|
|
|
|
Trading Price |
|
|
High |
|
Low |
Annual Highs and Lows |
|
|
|
|
|
|
|
|
2003 |
|
|
46.27 |
|
|
|
5.22 |
|
2004 |
|
|
49.50 |
|
|
|
18.88 |
|
2005 |
|
|
34.25 |
|
|
|
20.18 |
|
2006 |
|
|
30.36 |
|
|
|
20.23 |
|
2007 |
|
|
59.27 |
|
|
|
29.16 |
|
|
|
|
|
|
|
|
|
|
Quarterly Highs and Lows |
|
|
|
|
|
|
|
|
First Quarter 2006 |
|
|
28.11 |
|
|
|
20.82 |
|
Second Quarter 2006 |
|
|
30.36 |
|
|
|
22.35 |
|
Third Quarter 2006 |
|
|
26.61 |
|
|
|
20.23 |
|
Fourth Quarter 2006 |
|
|
29.75 |
|
|
|
24.20 |
|
First Quarter 2007 |
|
|
37.73 |
|
|
|
29.16 |
|
Second Quarter 2007 |
|
|
43.27 |
|
|
|
31.53 |
|
Third Quarter 2007 |
|
|
50.45 |
|
|
|
34.65 |
|
Fourth Quarter 2007 |
|
|
59.27 |
|
|
|
43.50 |
|
First Quarter 2008 |
|
|
46.97 |
|
|
|
32.00 |
|
|
Monthly Highs and Lows |
|
|
|
|
|
|
|
|
December 2007 |
|
|
50.57 |
|
|
|
43.50 |
|
January 2008 |
|
|
46.97 |
|
|
|
34.65 |
|
February 2008 |
|
|
45.90 |
|
|
|
38.85 |
|
March 2008 |
|
|
41.22 |
|
|
|
32.00 |
|
April 2008 |
|
|
49.45 |
|
|
|
35.23 |
|
May 2008 |
|
|
58.60 |
|
|
|
45.30 |
|
71
B. Plan of Distribution
Not applicable.
C. Markets
Our ordinary shares have been quoted on the NASDAQ Global Select Market (formerly the NASDAQ
National Market) system under the symbol SINA since April 13, 2000.
D. Selling Shareholders
Not applicable.
E. Dilution
Not applicable.
F. Expenses of the Issue
Not applicable.
Item 10. Additional Information
A. Share Capital
Not applicable.
B. Memorandum and Articles of Association
We incorporate by reference into this Annual Report the description of our amended and
restated memorandum and articles of association contained in the Companys registration statement
on Form F-1, Registration No. 333-11718, filed on March 27, 2000, as amended. On December 16, 2002,
our shareholders adopted by a special resolution our amended and restated memorandum and articles
of association, which were filed as Exhibits 3.1 and 3.2 to our Annual Report on Form 10-K filed on
March 16, 2005.
C. Material Contracts
We have not entered into any material contracts other than in the ordinary course of business
and other than those described elsewhere in this annual report on Form 20-F.
D. Exchange Controls
See Item 4. Information on the CompanyB. Business Overview Government Regulation and
Legal Uncertainties Classified Regulations Foreign Exchange. and Item 3. Key Information Risk Factors -
Restrictions on paying dividends or making other payments to us bind our subsidiaries and VIEs in
China.
E. Taxation
The following summary of the material Cayman Islands and United States federal income tax
consequences of an investment in our ordinary shares is based upon laws and relevant
interpretations thereof in effect as of the date of this annual report, all of which are subject to
change. This summary does not deal with all possible tax consequences relating to an investment in
our ordinary shares, such as the tax consequences under state, local and other tax laws.
72
Cayman Islands Taxation
According to Maples and Calder, our Cayman Islands counsel, the Cayman Islands currently
levies no taxes on individuals or corporations based upon profits, income, gains or appreciation
and there is no taxation in the nature of inheritance tax or estate duty. There are no other taxes
likely to be material to us levied by the Government of the Cayman Islands except for stamp duties
which may be applicable on instruments executed in, or brought within, the jurisdiction of the
Cayman Islands. The Cayman Islands is not party to any double tax treaties. There are no exchange
control regulations or currency restrictions in the Cayman Islands.
United States Federal Income Taxation
The following discussion describes the material United States federal income tax consequences
to U.S. Holders (defined below) under present law of an investment in the ordinary shares. This
summary applies only to investors that hold the ordinary shares as capital assets and that have the
U.S. dollar as their functional currency. This discussion is based on the tax laws of the United
States as in effect on the date of this Form 20-F and on United States Treasury regulations in
effect or, in some cases, proposed, as of the date of this Form 20-F, as well as judicial and
administrative interpretations thereof available on or before such date. All of the foregoing
authorities are subject to change, which change could apply retroactively and could affect the tax
consequences described below.
The following discussion does not deal with the tax consequences to any particular investor or
to persons in special tax situations such as:
|
|
|
banks; |
|
|
|
|
financial institutions; |
|
|
|
|
insurance companies; |
|
|
|
|
broker dealers; |
|
|
|
|
traders that elect to mark to market; |
|
|
|
|
tax-exempt entities; |
|
|
|
|
persons liable for alternative minimum tax; |
|
|
|
|
persons holding common share as part of a straddle, hedging, conversion or integrated
transaction; |
|
|
|
|
persons that actually or constructively own 10% or more of our voting shares; |
|
|
|
|
persons holding ordinary shares through partnerships or other pass-through entities; or |
|
|
|
|
persons who acquired ordinary shares pursuant to the exercise of any employee share
option or otherwise as consideration. |
U.S. Holders are urged to consult their tax advisors about the application of the United
States federal tax rules to their particular circumstances as well as the state and local and
foreign tax consequences to them of the purchase, ownership and disposition of ordinary shares.
The discussion below of the United States federal income tax consequences to U.S. Holders
will apply if you are the beneficial owner of ordinary shares and you are, for United States
federal income tax purposes,
73
|
|
|
a citizen or individual resident of the United States; |
|
|
|
|
a corporation (or other entity taxable as a corporation for United States federal income
tax purposes) organized under the laws of the United States, any State or the District of
Columbia; |
|
|
|
|
an estate whose income is subject to United States federal income taxation regardless of
its source; or |
|
|
|
|
a trust that (1) is subject to the supervision of a court within the United States and
the control of one or more United States persons or (2) has a valid election in effect under
applicable United States Treasury regulations to be treated as a United States person. |
The discussion below assumes that the representations contained in the deposit agreement are
true and that the obligations in the deposit agreement and any related agreement will be complied
with in accordance with their terms. If you hold ADSs, you will be treated as the holder of the
underlying ordinary shares represented by those ADSs for United States federal income tax purposes.
The U.S. Treasury has expressed concerns that parties to whom ADSs are pre-released may be
taking actions that are inconsistent with the claiming, by U.S. Holders of ADSs, of foreign tax
credits for United States federal income tax purposes. Such actions would also be inconsistent with
the claiming of the reduced rate of tax applicable to dividends received by certain non-corporate
U.S. Holders, as described below. Accordingly, the availability of the reduced tax rate for
dividends received by certain non-corporate U.S. Holders could be affected by future actions that
may be taken by the U.S. Treasury or parties to whom ADSs are pre-released.
Taxation of Dividends and Other Distributions on the Ordinary Shares
Subject to the passive foreign investment company rules discussed below, the gross amount of
all our distributions to you with respect to the ordinary shares will be included in your gross
income as dividend income on the date of receipt by you, but only to the extent that the
distribution is paid out of our current or accumulated earnings and profits (computed under United
States federal income tax principles). The dividends will not be eligible for the
dividends-received deduction allowed to corporations in respect of dividends received from other
U.S. corporations.
With respect to non-corporate U.S. Holders (including individual U.S. Holders) for taxable
years beginning before January 1, 2011, dividends may be taxed at the lower applicable capital
gains rate (qualified dividend income) provided that (1) the ordinary shares are readily tradable
on an established securities market in the United States, (2) we are not a passive foreign
investment company (as discussed below) for either our taxable year in which the dividend was paid
or the preceding taxable year, and (3) certain holding period requirements are met. For this
purpose, our common shares, which are listed on the Nasdaq Global Select Market, will be considered
to be readily tradable on an established securities market in the United States. You should consult
your tax advisor regarding the availability of the lower rate for dividends paid with respect to
our ordinary shares.
Dividends will constitute foreign source income for foreign tax credit limitation purposes. If
the dividends are qualified dividend income (as discussed above), the amount of the dividend taken
into account for purposes of calculating the foreign tax credit limitation will be limited to the
gross amount of the dividend, multiplied by the reduced rate divided by the highest rate of tax
normally applicable to dividends. The limitation on foreign taxes eligible for credit is calculated
separately with respect to specific classes of income. For this purpose, dividends distributed by
us with respect to ordinary shares generally will constitute passive category income but could,
in the case of certain U.S. Holders, constitute general category income.
To the extent that the amount of the distribution exceeds our current and accumulated earnings
and profits, it will be treated first as a tax-free return of your tax basis in your ordinary
shares, and to the extent the amount of the distribution exceeds your tax basis, the excess will be
taxed as capital gain. We do not intend to calculate our earnings and profits for United States
federal income tax purposes. Therefore, a U.S. Holder should expect that a distribution will be
reported as a dividend.
Taxation of Disposition of Shares
Subject to the passive foreign investment company rules discussed below, you will recognize
taxable gain or loss on any sale, exchange or other taxable disposition of a common share equal to
the difference between the amount realized (in U.S.
74
dollars) for the common share and your tax
basis (in U.S. dollars) in the ADS or ordinary share. The gain or loss will be capital gain or
loss. If you are a non-corporate U.S. Holder, including an individual U.S. Holder, who has held the
common share for more than one year, you will be eligible for reduced tax rates. The deductibility
of capital losses is subject to limitations. Any such gain or loss that you recognize will be
treated as United States source income or loss (in the case of losses, subject to certain
limitations).
Passive Foreign Investment Company
Based on the market value of our common shares, the composition of our assets and income and
our operations, we believe that for our taxable year ended December 31, 2007, we were not a passive
foreign investment company (PFIC) for United States federal income tax purposes. However, our
PFIC status for the current taxable year ending December 31, 2008 will not be determinable until
its close, and, accordingly, there is no guarantee that we will not be a PFIC for the current
taxable year (or any future taxable year). A non-U.S. corporation is considered a PFIC for any
taxable year if either:
|
|
|
at least 75% of its gross income is passive income (the income test), or |
|
|
|
|
at least 50% of the value of its assets (based on an average of the quarterly values of
the assets during a taxable year) is attributable to assets that produce or are held for the
production of passive income (the asset test). |
We will be treated as owning our proportionate share of the assets and earning our
proportionate share of the income of any other corporation in which we own, directly or indirectly,
more than 25% (by value) of the shares.
We must make a separate determination each year as to whether we are a PFIC. As a result, our
PFIC status may change. In particular, because the total value of our assets for purposes of the
asset test generally will be calculated using the market price of our common shares, our PFIC
status will depend in large part on the market price of our common shares which may fluctuate
considerably. Accordingly, fluctuations in the market price of the common shares may result in our
being a PFIC for any year. If we are a PFIC for any year during which you hold common shares, we
will continue to be treated as a PFIC for all succeeding years during which you hold common shares.
However, if we cease to be a PFIC, provided that you have not made a mark-to-market election, as
described below, you may avoid some of the adverse effects of the PFIC regime by making a deemed
sale election with respect to the ordinary shares, as applicable.
If we are a PFIC for any taxable year during which you hold ordinary shares, you will be
subject to special tax rules with respect to any excess distribution that you receive and any
gain you realize from a sale or other disposition (including a pledge) of the ordinary shares,
unless you make a mark-to-market election as discussed below. Distributions you receive in a
taxable year that are greater than 125% of the average annual distributions you received during the
shorter of the three preceding taxable years or your holding period for the ordinary shares will be
treated as an excess distribution. Under these special tax rules:
|
|
|
the excess distribution or gain will be allocated ratably over your holding period for
the ordinary shares, |
|
|
|
|
the amount allocated to the current taxable year, and any taxable year prior to the first
taxable year in which we became a PFIC, will be treated as ordinary income, and |
|
|
|
|
the amount allocated to each other taxable year will be subject to the highest tax rate
in effect for that taxable year and the interest charge generally applicable to
underpayments of tax will be imposed on the resulting tax attributable to each such taxable
year. |
The tax liability for amounts allocated to years prior to the year of disposition or excess
distribution cannot be offset by any net operating losses for such years, and gains (but not
losses) realized on the sale of the ordinary shares cannot be treated as capital, even if you hold
the ordinary shares as capital assets.
Alternatively, a U.S. Holder of marketable stock (as defined below) in a PFIC may make a
mark-to-market election for such stock of a PFIC to elect out of the tax treatment discussed in the
two preceding paragraphs. If you make a valid mark-to-market election for the ordinary shares, you
will include in income each year an amount equal to the excess, if any, of the fair market value of
the ordinary shares as of the close of your taxable year over your adjusted basis in such ordinary
shares. You are allowed a deduction for the excess, if any, of the adjusted basis of the ordinary
shares over their fair market value as of the close of the taxable year. However, deductions are
allowable only to the extent of any net mark-to-market gains on the ordinary shares
75
included in
your income for prior taxable years. Amounts included in your income under a mark-to-market
election, as well as gain on the actual sale or other disposition of the ordinary shares, are
treated as ordinary income. Ordinary loss treatment also applies to the deductible portion of any
mark-to-market loss on the ordinary shares, as well as to any loss realized on the actual sale or
disposition of the ordinary shares, to the extent that the amount of such loss does not exceed the
net mark-to-market gains previously included for such ordinary shares. Your basis in the ordinary
shares will be adjusted to reflect any such income or loss amounts. If you make such a
mark-to-market election, tax rules that apply to distributions by corporations which are not PFICs
would apply to distributions by us (except that the lower applicable capital gains rate would not
apply).
The mark-to-market election is available only for marketable stock which is stock that is
traded in other than de minimis quantities on at least 15 days during each calendar quarter
(regularly traded) on a qualified exchange or other market, as defined in applicable Treasury
regulations. We expect that the common shares will continue to be listed on the Nasdaq Global
Select Market, which is a qualified exchange for these purposes, and, consequently, assuming that
the common shares are regularly traded, if you are a holder of common shares, it is expected that
the mark-to-market election would be available to you were we to become a PFIC.
If you hold ordinary shares in any year in which we are a PFIC, you will be required to file
Internal Revenue Service Form 8621 regarding distributions received on the ordinary shares and any
gain realized on the disposition of the ordinary shares.
You are urged to consult your tax advisor regarding the application of the PFIC rules to your
investment in ordinary shares.
Information Reporting and Backup Withholding
Dividend payments with respect to ordinary shares and proceeds from the sale, exchange or
redemption of ordinary shares may be subject to information reporting to the Internal Revenue
Service and possible United States backup withholding at a current rate of 28%. Backup withholding
will not apply, however, to a U.S. Holder who furnishes a correct taxpayer identification number
and makes any other required certification or who is otherwise exempt from backup withholding. U.S.
Holders who are required to establish their exempt status must provide such certification on
Internal Revenue Service Form W-9. U.S. Holders should consult their tax advisors regarding the
application of the United States information reporting and backup withholding rules.
Backup withholding is not an additional tax. Amounts withheld as backup withholding may be
credited against your United States federal income tax liability, and you may obtain a refund of
any excess amounts withheld under the backup withholding rules by filing the appropriate claim for
refund with the Internal Revenue Service and furnishing any required information.
F. Dividends and Paying Agents
Not applicable.
G. Statement by Experts
Not applicable.
H. Documents on Display
Our corporate Internet address is http://corp.sina.com. We make available free of
charge on or through our web site our annual reports, quarterly reports, current reports, and
amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act of 1934, as amended (the Exchange Act) as soon as reasonably practicable after we
electronically file such material with, or furnish it to, the SEC. We may from time to time provide
important disclosures to investors by posting them in the investor relations section of our web
site, as allowed by Securities and Exchange Commission (SEC) rules. Information contained on
SINAs web site is not part of this report or any other report filed with the SEC. You may read and
copy any public reports we filed with the SEC at the SECs Public Reference Room at 100F Street,
N.E., Washington, D.C. 20549. You may obtain information on the operation of the Public Reference
Room by calling the SEC at 1-800-SEC-0330. The SEC also maintains an Internet site
http://www.sec.gov that contains reports, proxy and information statements, and other
information that we filed electronically.
76
I. Subsidiary Information
For a listing of our subsidiaries, see Item 4. Information on the Company C.
Organizational Structure. and Exhibit 8.1.
Item 11. Quantitative and Qualitative Disclosures About Market Risk
Interest Rate and Security Market Risk
Our investment policy limits our investments of excess cash to government or quasi-government
securities, high-quality corporate securities and bank-guaranteed products. We protect and preserve
our invested funds by limiting default, market and reinvestment risk. Due to the fact that a
majority of our investments are in short-term instruments, we believe that the Company has the
ability to hold to maturity these investments. As of December 31, 2007, we had unrealized losses of
$0.9 million related to our short-term investments included in accumulated other comprehensive loss
in shareholders equity.
We have approximately $324.7 million in cash and bank deposits, such as time deposits and bank
notes, with large domestic banks in China, which constitute about 68% of our total cash, cash
equivalent and short-term investments as of December 31, 2007. The terms or these deposits are, in
general, up to twelve months. Historically, deposits in Chinese banks are secure due to the state
policy on protecting depositors interests. However, China promulgated a new Bankruptcy Law in
August 2006, which came into effect on June 1, 2007, which contains a separate article expressly
stating that the State Council may promulgate implementation measures for the bankruptcy of Chinese
banks based on the Bankruptcy Law. Under the new Bankruptcy Law, a Chinese bank may go bankrupt. In
addition, since Chinas concession to WTO, foreign banks have been gradually permitted to
operate in China and have been severe competitors against Chinese banks in many aspects, especially
since the opening of renminbi business to foreign banks in late 2006. Therefore, the risk of
bankruptcy of those banks in which we have deposits has increased. In the event of bankruptcy of
one of the banks which holds our deposits, we are unlikely to claim our deposits back in full since
we are unlikely to be classified as a secured creditor based on PRC laws.
Our $99 million, zero-coupon, convertible, subordinated notes due 2023 bear no interest and
are denominated in U.S. dollars. Therefore, there is no interest or foreign currency exchange risk
associated with the outstanding notes.
Foreign Currency Exchange Rate Risk
The majority of our revenues derived and expenses and liabilities incurred are in Chinese
renminbi with a relatively small amount in New Taiwan dollars, Hong Kong dollars and U.S. dollars.
Thus, our revenues and operating results may be impacted by exchange rate fluctuations in the
currencies of China, Taiwan and Hong Kong. See 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
and profits in U.S. dollar terms in the Risk Factors section. We have not reduced our exposure
to exchange rate fluctuations by using hedging transactions. While we may choose to do so in the
future, the availability and effectiveness of any hedging transactions may be limited and we may
not be able to successfully hedge our exchange rate risks. Accordingly, we may experience economic
losses and negative impacts on earnings and equity as a result of foreign exchange rate
fluctuations. During the twelve months ended December 31, 2007, the foreign currency translation
adjustments to our comprehensive income were $19.2 million and the currency transaction gains was
approximately $1.1 million, primarily as a result of the Chinese renminbi appreciating against the
U.S. dollar. Below is a sensitivity analysis on the impact of a change in the value of the Chinese
renminbi against the U.S. dollar assuming: 1) projected net income from operation in China equal to
fiscal 2007, 2) projected net assets of the operation in China equal to the balances in Chinese
renminbi and U.S. dollar as of December 31, 2007 and 3) currency fluctuation occurs proportionately
over the period:
|
|
|
|
|
|
|
|
|
|
|
Translation |
|
|
Change
in the value of |
|
adjustments to |
|
Transaction gain |
Chinese renminbi against the |
|
comprehensive income |
|
(loss) |
U.S.
dollar |
|
(in thousands) |
|
(in thousands) |
Appreciate 2%
|
|
$ |
7,690 |
|
|
$ |
(340 |
) |
Appreciate 5%
|
|
$ |
19,250 |
|
|
$ |
(850 |
) |
Depreciate 2%
|
|
$ |
(7,680 |
) |
|
$ |
340 |
|
Depreciate 5%
|
|
$ |
(19,160 |
) |
|
$ |
850 |
|
77
Investment Risk
Equity investment
We have direct equity investment in a privately held company, which is considered in the
start-up or development stages. This equity investment is inherently risky, as the technologies or
products this company has under development are typically in the early stages and may never
materialize, and we could lose a substantial part of our equity investment in this company. As of
December 31, 2007, our direct equity investment was $1.3 million. See also Note 4 in our Notes to
Consolidated Financial Statements.
Investment in marketable debt securities
We invest in marketable debt securities to preserve principal and maximize yield without
significantly increasing risks. As of December 31, 2007, our marketable debt securities totaled
$40.5 million. These marketable debt securities are accounted for as available-for-sale and are
reported at fair value, because our intent is to make them readily available for sale to meet
operating or acquisition needs. As of December 31, 2007, unrealized loss recorded in accumulated
other comprehensive income of shareholders equity was $0.9 million. See also Note 5 in our Notes
to Consolidated Financial Statements.
Item 12. Description of Securities Other than Equity Securities
Not applicable.
PART II
Item 13. Defaults, Dividend Arrearages and Delinquencies
None.
Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds
None.
Item 15. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this annual report, we carried out an evaluation, under
the supervision of, and with the participation of our management, including our Chief Executive
Officer and Chief Financial Officer, of the effectiveness of the Companys disclosure controls and
procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934,
as amended). Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have
concluded that, as of the end of the period covered by this report, our disclosure controls and
procedures were effective to enable us to record, process, summarize and report information
required to be included in our reports that we file or submit under the Exchange Act within the
time periods required.
Managements Annual Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over
financial reporting (as defined in Rules 13a-15(f) under the Securities Exchange Act of 1934, as
amended). Our management evaluated the effectiveness of our internal control over financial
reporting based on criteria established in the framework in Internal Control-Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this
evaluation, our management has concluded that our internal control over financial reporting was
effective as of December 31, 2007.
Because of its inherent limitations, internal control over financial reporting may not prevent
or detect misstatements. In addition, projections of any evaluation of effectiveness of our
internal control over financial reporting to future periods are subject to the risk that controls
may become inadequate because of changes in conditions, or that the degree of compliance with the
policies and procedures may deteriorate.
PricewaterhouseCoopers Zhong Tian CPAs Limited Company,
our independent registered public accounting firm, has audited the
effectiveness of our internal control over financial reporting as of
December 31, 2007, as stated in
its report, which appears on page F-2 of this Form 20-F.
78
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting (as defined in Rules
13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended) during the year
ended December 31, 2007 that have materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.
Item 16A. Audit Committee Financial Expert
The Board has determined that Lip-Bu Tan qualifies as an audit committee financial expert as
defined by the rules of the Securities and Exchange Commission and has designated Lip-Bu Tan to
serve as the audit committee financial expert for the Company. Lip-Bu Tan is independent as such
term is used in Item 7(d)(3)(iv) of Schedule 14A under the Exchange Act.
Item 16B. Code of Ethics
The Company has adopted a Code of Ethics which applies to the Companys directors, officers
and employees, including the Companys principal executive officer, principal financial officer and
principal accounting officer. We have posted the code on our corporate website at
www.corp.sina.com. We hereby undertake to provide to any person without charge, a copy of our code
of business conduct and ethics within ten working days after we receive such persons written
request.
Item 16C. Principal Accountant Fees and Services
The following table sets forth the aggregate fees billed by PricewaterhouseCoopers Zhong Tian
CPAs Limited Company (PwC), our independent auditor and principal accountant for fiscal 2006 and
2007.
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
2006 |
Audit Fees |
|
$ |
1,077,218 |
|
|
$ |
1,387,080 |
|
Audit-Related Fees (1) |
|
|
102,547 |
|
|
|
|
|
Tax Fees (2) |
|
|
36,900 |
|
|
|
30,425 |
|
All Other Fees (3) |
|
|
1,500 |
|
|
|
5,500 |
|
|
|
|
(1) |
|
Audit-Related Fees consist of fees billed for assurance and related services by our principal
auditors that are reasonably related to the performance of the audit or review of our
financial statements and are not reported under Audit fees. |
|
(2) |
|
Tax fees consist of fees billed for professional services related to tax advice and
assistance with tax reporting. |
|
(3) |
|
All Other Fees for 2007 includes $1,500 subscription fee for accounting rules and materials.
All Other Fees for 2006 includes $1,500 subscription fee for accounting rules and materials
and $4,000 training fee for FIN 48 Accounting for Uncertainty in Income Taxes. |
The Audit Committees policy is to approve all audit and audit-related services. Permissible
non-audit services are pre-approved according to fee amount threshold. Permissible non-audit
services may include tax services and other services. Pre-approval is generally provided for up to
one year and any pre-approval is detailed as to the particular service or category of services and
is generally subject to an initial estimated budget. PwC and management are required to
periodically report to the Audit Committee regarding the extent of services provided by PwC in
accordance with this pre-approval, and the fees performed to date. The Audit Committee may also
pre-approve particular services on a case-by-case basis.
Item 16D. Exemptions from the Listing Standards for Audit Committees
Not applicable.
Item 16E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers
None.
79
PART III
Item 17. Financial Statements
We have elected to provide financial statements pursuant to Item 18.
Item 18. Financial Statements
The consolidated financial statements of SINA Corporation and its subsidiaries are included at
the end of this Annual Report.
Item 19. Exhibits
|
|
|
Exhibit |
|
|
Number |
|
Description |
|
1.1
|
|
Amended and Restated Articles of Association of SINA Corporation (Filed as Exhibit 3.1 to the Companys
Annual Report on Form 10-K filed on March 16, 2005 and incorporated by reference herein). |
|
|
|
1.2
|
|
Amended and Restated Memorandum of Association of SINA.com (Filed as Exhibit 3.1 to the Companys Annual
Report on Form 10-K filed on March 16, 2005 and incorporated by reference herein). |
|
|
|
2.1
|
|
Form of Subordinated Note due July 15, 2023 (Filed as Exhibit 4.1 to the Companys Report on Form 10-Q for
the three month period ended June 30, 2003, and incorporated herein by reference). |
|
|
|
2.2
|
|
Indenture, dated as of July 7, 2003, by and between the Company and the Bank of New York (Filed as Exhibit
4.2 to the Companys Report on Form 10-Q for the three month period ended June 30, 2003, and incorporated
herein by reference). |
|
|
|
2.3
|
|
Registration Rights Agreement, dated as of July 7, 2003, by and between the Company and Credit Suisse
First Boston LLC (Filed as Exhibit 4.3 to the Companys Report on Form 10-Q for the three month period
ended June 30, 2003, and incorporated herein by reference). |
|
|
|
2.4
|
|
Rights Agreement dated as of February 22, 2005 between SINA Corporation and American Stock Transfer &
Trust Company, as Rights Agent (Filed as Exhibit 4.1 to the Companys Report on Form 8-K filed on February
24, 2005, and incorporated herein by reference). |
|
|
|
4.1
|
|
Form of Indemnification Agreement between SINA.com and each of its officers and directors (Filed as
Exhibit 10.1 to the Companys Registration Statement on Form F-1, Registration No. 333-11718, filed on
March 27, 2000, as amended, and incorporated herein by reference). |
|
|
|
4.2
|
|
SRS International Ltd. 1997 Stock Option Plan and form of incentive stock option agreement (Filed as
Exhibit 10.2 to the Companys Registration Statement on Form F-1, Registration No. 333-11718, filed on
March 27, 2000, as amended, and incorporated herein by reference). |
|
|
|
4.3
|
|
Sinanet.com 1997 Stock Plan and form of stock option agreement (Filed as Exhibit 10.3 to the Companys
Registration Statement on Form F-1, Registration No. 333-11718, filed on March 27, 2000, as amended, and
incorporated herein by reference). |
|
|
|
4.4
|
|
Amended SINA.com 1999 Stock Plan and form of share option agreement (Filed as Exhibit 10.4 to the
Companys Registration Statement on Form F-1, Registration No. 333-11718, filed on March 27, 2000, as
amended, and incorporated herein by reference). |
|
|
|
4.5
|
|
Form of share option agreement under the amended SINA.com 1999 Stock Plan (Filed as Exhibit 10.5 to the
Companys Annual Report on Form 10-K filed on March 16, 2005 and incorporated by reference herein). |
|
|
|
4.6
|
|
1999 Directors Stock Option Plan (Filed as Exhibit 10.6 to the Companys Registration Statement on Form
F-1, Registration No. 333-11718, filed on March 27, 2000, as amended, and incorporated herein by
reference). |
|
|
|
4.7
|
|
Form of nonstatutory stock option agreement under the 1999 Directors Stock Option Plan (Filed as Exhibit
10.6 to the Companys Registration Statement on Form F-1, Registration No. 333-11718, filed on March 27,
2000, as amended, and incorporated herein by reference). |
80
|
|
|
Exhibit |
|
|
Number |
|
Description |
|
4.8
|
|
SINA.com 1999 Executive Stock Plan (Filed as Exhibit 10.19 to the Companys Registration Statement on Form
F-1, Registration No. 333-11718, filed on March 27, 2000, as amended, and incorporated herein by
reference). |
|
|
|
4.9
|
|
Lease Agreement of Ideal International Plaza dated April 16, 2004 between SINA Information Technology
Company Limited and Beijing Zhongwu Ideal Real Estate Development Co., Ltd. for the office located in
Suite 01 12, Floor 20, Ideal International Plaza, 2 Zhongguancun High-Tech Square, Beijing, PRC (Filed
as Exhibit 10.1 to the Companys Report on Form 10-Q for the three month period ended June 30, 2004, and
incorporated herein by reference). |
|
|
|
4.10
|
|
Form Lease Agreement of Ideal International Plaza between the Registrants subsidiaries or VIEs and
Beijing Zhongwu Ideal Real Estate Development Co., Ltd. for the office located in Ideal International
Plaza, 2 Zhongguancun High-Tech Square, Beijing, PRC, and the list of the lease agreements (Filed as
Exhibit 10.1 to the Companys Report on Form 10-Q for the three month period ended September 30, 2004, and
incorporated herein by reference). |
|
|
|
4.11
|
|
Business Cooperation Agreement dated March 7, 2000 between Beijing SINA Internet Information Services Co.,
Ltd. and BSRS (Filed as Exhibit 10.23 to the Companys Registration Statement on Form F-1, Registration
No. 333-11718, filed on March 27, 2000, as amended, and incorporated herein by reference). |
|
|
|
4.12
|
|
Equipment and Leased Line Transfer Agreement dated March 7, 2000 between Beijing SINA Internet Information
Services Co., Ltd. and BSRS (Filed as Exhibit 10.23 to the Companys Registration Statement on Form F-1,
Registration No. 333-11718, filed on March 27, 2000, as amended, and incorporated herein by reference). |
|
|
|
4.13
|
|
Advertising Agency Agreement dated March 7, 2000 between Beijing SINA Internet Information Services Co.,
Ltd. and SINA.com (Filed as Exhibit 10.26 to the Companys Registration Statement on Form F-1,
Registration No. 333-11718, filed on March 27, 2000, as amended, and incorporated herein by reference). |
|
|
|
4.14
|
|
Advertisement Production and Technical Service Agreement dated March 7, 2000 between Beijing Stone Rich
Sight Information Technology Co., Ltd. and Beijing SINA Interactive Advertising Co. Ltd (Filed as Exhibit
10.27 to the Companys Registration Statement on Form F-1, Registration No. 333-11718, filed on March 27,
2000, as amended, and incorporated herein by reference). |
|
|
|
4.15
|
|
Advertising Publication and Cooperation Agreement dated March 7, 2000 between Beijing SINA Internet
Information Services Co., Ltd. and Beijing SINA Interactive Advertising Co., Ltd (Filed as Exhibit 10.28
to the Companys Registration Statement on Form F-1, Registration No. 333-11718, filed on March 27, 2000,
as amended, and incorporated herein by reference). |
|
|
|
4.16
|
|
Amendment to Advertising Agency Agreement dated April 1, 2000 between Beijing SINA Interactive Advertising
Co., Ltd. and SINA.com (Filed as Exhibit 10.37 to the Companys Registration Statement on Form F-1,
Registration No. 333-11718, filed on March 27, 2000, as amended, and incorporated herein by reference). |
|
|
|
4.17
|
|
Amendment to Advertisement Publication and Cooperation Agreement dated April 1, 2000 between Beijing SINA
Interactive Advertising Co., Ltd. and Beijing SINA Internet Information Services Co., Ltd (Filed as
Exhibit 10.38 to the Companys Registration Statement on Form F-1, Registration No. 333-11718, filed on
March 27, 2000, as amended, and incorporated herein by reference). |
|
|
|
4.18
|
|
Amendment to Advertising Production and Technical Service Agreement dated April 1, 2000 between Beijing
Stone Rich Sight Information Technology Co., Ltd. and Beijing SINA Interactive Advertising Co., Ltd (Filed
as Exhibit 10.39 to the Companys Registration Statement on Form F-1, Registration No. 333-11718, filed on
March 27, 2000, as amended, and incorporated herein by reference). |
|
|
|
4.19
|
|
E-Commerce Cooperation Agreement dated April 1, 2000 between Beijing Stone Rich Sight Information
Technology Co., Ltd. and Beijing SINA Internet Information Services Co., Ltd (Filed as Exhibit 10.40 to
the Companys Registration Statement on Form F-1, Registration No. 333-11718, filed on March 27, 2000, as
amended, and incorporated herein by reference). |
|
|
|
4.20
|
|
Agreement on Short Message Service Cooperation dated November 12, 2002 between Guangzhou Media Message
Technologies Inc. and Guangdong Mobile Communications Corporation (Filed as Exhibit 10.37 to the Companys
Report on Form 10-K for the year ended December 31, 2003, as amended, and incorporated herein by
reference). |
|
|
|
4.21
|
|
Monternet Short Message Cooperation Agreement dated April 28, 2003 between Beijing SINA Internet
Information Services Co., Ltd. and Beijing Mobile Communications Corporation (Filed as Exhibit 10.38 to
the Companys Report on Form 10-K for the year ended December 31, 2003, as amended, and incorporated
herein by reference). |
81
|
|
|
Exhibit |
|
|
Number |
|
Description |
|
4.22
|
|
Form of Loan Agreement between Beijing Sina Information Technology Co., Ltd (a subsidiary of the Company)
and the Companys employees for funding the Variable Interest Entities controlled by the Company (Filed as
Exhibit 10.39 to the Companys Report on Form 10-K for the year ended December 31, 2003, as amended, and
incorporated herein by reference). |
|
|
|
4.23
|
|
Form of Agreement on Authorization to Exercise Shareholders Voting Power between Beijing Sina Information
Technology Co., Ltd (a subsidiary of the Company) and the Companys employees in relation to Variable
Interest Entities controlled by the Company (Filed as Exhibit 10.40 to the Companys Report on Form 10-K
for the year ended December 31, 2003, as amended, and incorporated herein by reference). |
|
|
|
4.24
|
|
Technical Services Agreement dated September 1, 2003 between Beijing New Media Information Technology Co.,
Ltd. and Guangzhou Media Message Technologies Inc (Filed as Exhibit 10.41 to the Companys Report on Form
10-K for the year ended December 31, 2003, as amended, and incorporated herein by reference). |
|
|
|
4.25
|
|
Technical Cooperation Agreement dated September 28, 2003 between Beijing New Media Information Technology
Co., Ltd. and Guangzhou Media Message Technologies Inc (Filed as Exhibit 10.42 to the Companys Report on
Form 10-K for the year ended December 31, 2003, as amended, and incorporated herein by reference). |
|
|
|
4.26
|
|
Technical Services Agreement dated September 1, 2003 between Beijing New Media Information Technology Co.,
Ltd. and Guangdong SINA Internet Information Services Co., Ltd (Filed as Exhibit 10.43 to the Companys
Report on Form 10-K for the year ended December 31, 2003, as amended, and incorporated herein by
reference). |
|
|
|
4.27
|
|
Technical Services Agreement dated January 10, 2003 between Star-Village.com (Beijing) Internet Technology
Limited and Guangzhou Media Message Technologies Inc (Filed as Exhibit 10.44 to the Companys Report on
Form 10-K for the year ended December 31, 2003, as amended, and incorporated herein by reference). |
|
|
|
4.28
|
|
Technical Services Agreement dated January 1, 2003 between Beijing SINA Internet Technology Services Co.,
Ltd. and Beijing SINA Internet Information Services Co., Ltd (Filed as Exhibit 10.45 to the Companys
Report on Form 10-K for the year ended December 31, 2003, as amended, and incorporated herein by
reference). |
|
|
|
4.29
|
|
Technical Services Agreement dated February 24, 2004 between Beijing New Media Information Technology Co.,
Ltd. and Shenzhen Wang Xing Technology Co., Ltd (Filed as Exhibit 10.1 to the Companys Report on Form
10-Q for the three month period ended March 31, 2004, and incorporated herein by reference). |
|
|
|
4.30
|
|
Translation of Monternet Short Message Cooperation Agreement dated March 23, 2004 between Beijing SINA
Internet Information Services Co., Ltd. and Guangdong Mobile Communications Corporation (Filed as Exhibit
10.48 to the Companys Annual Report on Form 10-K filed on March 16, 2005 and incorporated by reference
herein). |
|
|
|
4.31
|
|
Translation of Technical Services Agreement dated January 1, 2005 between SINA.com Technology (China) Co.,
Ltd. and Beijing SINA Infinity Advertising Co., Ltd. (Filed as Exhibit 10.48 to the Companys Report on
Form 10-K for the year ended December 31, 2005, and incorporated herein by reference). |
|
|
|
4.32
|
|
Translation of Technical Services Agreement dated January 1, 2005 between SINA.com Technology (China) Co.,
Ltd. and Beijing SINA Internet Information Services Co., Ltd. (Filed as Exhibit 10.49 to the Companys
Report on Form 10-K for the year ended December 31, 2005, and incorporated herein by reference). |
|
|
|
4.33
|
|
Change of Control Agreement dated November 27, 2000 with Yan Wang (Filed as Exhibit 10.47 to the Companys
Report on Form 10-Q for the three month period ended December 31, 2000, and incorporated herein by
reference). |
|
|
|
4.34
|
|
Change of Control Agreement dated November 27, 2000 with Hurst Lin (Filed as Exhibit 10.46 to the
Companys Report on Form 10-Q for the three month period ended December 31, 2000, and incorporated herein
by reference). |
|
|
|
4.35
|
|
Change of Control Agreement dated February 1, 2001 with Charles Chao (Filed as Exhibit 10.48 to the
Companys Report on Form 10-Q for the three month period ended March 31, 2001, and incorporated herein by
reference). |
|
|
|
4.36
|
|
Employment Agreement dated July 31, 2006 between Charles Guowei Chao and SINA Corporation (Filed as
Exhibit 10.1 to the Companys Report on Form 10-Q for the three month period ended September 30, 2006, and
incorporated herein by reference). |
82
|
|
|
Exhibit |
|
|
Number |
|
Description |
|
4.37
|
|
Stock Purchase Agreement dated February 24, 2004, among SINA, Crillion, the shareholders of Crillion
listed on Part I of Exhibit A of the Stock Purchase Agreement and the individuals listed on Part II of
Exhibit A of the Stock Purchase Agreement (Filed as Exhibit 2.1 to the Companys Report on Form 8-K filed
on April 7, 2004, and incorporated herein by reference). |
|
|
|
4.38
|
|
Amendment Agreement dated March 23, 2004, among SINA, Crillion, the shareholders of Crillion listed on
Part I of Exhibit A of the Stock Purchase Agreement and the individuals listed on Part II of Exhibit A of
the Stock Purchase Agreement (Filed as Exhibit 2.2 to the Companys Report on Form 8-K filed on April 7,
2004, and incorporated herein by reference). |
|
|
|
4.39
|
|
Equity Transfer Agreement dated February 24, 2004, among the individuals listed on Schedule A attached to
the Equity Transfer Agreement, Shenzhen Wang Xing Technology Co., Ltd., a limited liability company
organized and existing under the laws of the Peoples Republic of China, and the individuals listed on
Schedule B attached to the Equity Transfer Agreement (Filed as Exhibit 2.3 to the Companys Report on Form
8-K filed on April 7, 2004, and incorporated herein by reference). |
|
|
|
4.40
|
|
Stock Purchase Agreement dated July 1, 2004 among SINA Corporation, Davidhill Capital Inc., the
shareholders of Davidhill Capital Inc. listed on Part I of Exhibit A to such agreement, and the company
and individuals listed on Part II of Exhibit A to such agreement. (Filed as Exhibit 2.1 to the Companys
Report on Form 8-K filed on October 22, 2004, and incorporated herein by reference). |
|
|
|
4.41
|
|
Amendment Agreement dated October 13, 2004 among SINA Corporation, Davidhill Capital Inc., the
shareholders of Davidhill Capital Inc. listed on Part I of Exhibit A to the Stock Purchase Agreement, and
the company and individuals listed on Part II of Exhibit A to the Stock Purchase Agreement. (Filed as
Exhibit 2.2 to the Companys Report on Form 8-K filed on October 22, 2004, and incorporated herein by
reference). |
|
|
|
4.42
|
|
Asset Purchase Agreement dated July 1, 2004 by and between Guiyang Longmaster Information Technology Co.,
Ltd. and Beijing Davidhill Internet Technology Service Co., Ltd. (Filed as Exhibit 2.3 to the Companys
Report on Form 8-K filed on October 22, 2004, and incorporated herein by reference). |
|
|
|
4.43
|
|
2007 Share Incentive Plan (Filed as Exhibit 4.2 to the Companys Report on Form
S-8 filed on July 26, 2007, and incorporated herein by reference). |
|
|
|
4.44*
|
|
Form of share option agreement for non-employee directors under the 2007 Share Incentive Plan |
|
|
|
4.45*
|
|
Form of restricted share unit agreement for existing service providers under the 2007 Share Incentive Plan. |
|
|
|
4.46*
|
|
Form of performance restricted share unit agreement under the 2007 Share Incentive Plan. |
|
|
|
4.47*
|
|
Form of share option agreement for
existing service providers under the 2007 Share Incentive Plan. |
|
|
|
8.1*
|
|
List of Subsidiaries. |
|
|
|
12.1*
|
|
Certificate of Chief Executive Officer pursuant to Securities Exchange Act Rules 13a-14(a) and 15d-14(a)
as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|
|
|
12.2*
|
|
Certificate of Chief Financial Officer pursuant to Securities Exchange Act Rules 13a-14(a) and 15d-14(a)
as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|
|
|
13.1*
|
|
Certificate of Chief Executive Officer pursuant to 18 U.S.C. section 1350. |
|
|
|
13.2*
|
|
Certificate of Chief Financial Officer pursuant to 18 U.S.C. section 1350. |
|
|
|
15.1*
|
|
Consent of Independent Registered Public Accounting Firm. |
|
|
|
15.2*
|
|
Consent of Jun He Law offices. |
83
SIGNATURES
The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F
and that it has duly caused and authorized the undersigned to sign this Annual Report on its
behalf.
|
|
|
|
|
|
|
|
|
SINA Corporation |
|
|
|
|
|
|
|
|
|
|
|
By:
|
|
/s/ CHARLES CHAO |
|
|
|
|
|
|
Charles Chao
|
|
|
Date:
June 30, 2008
|
|
|
|
President and Chief Executive Officer |
|
|
84
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
|
|
|
Page |
Consolidated Financial Statements: |
|
|
|
|
|
|
|
F-2 |
|
|
|
|
F-3 |
|
|
|
|
F-4 |
|
|
|
|
F-5 |
|
|
|
|
F-6 |
|
|
|
|
F-7 |
|
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of SINA Corporation:
In our opinion, the accompanying consolidated balance sheets, consolidated statements of
operations, consolidated statements of shareholders equity and consolidated statements of cash
flows present fairly, in all material respects, the financial position of SINA Corporation and its
subsidiaries at December 31, 2007 and 2006, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 2007 in conformity with
accounting principles generally accepted in the United States of America. Also in our opinion, the
Company maintained, in all material respects, effective internal control over financial reporting
as of
December 31, 2007, based on criteria established in Internal Control Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The
Companys management is responsible for these financial statements, for maintaining effective
internal control over financial reporting and for its assessment of the effectiveness of internal
control over financial reporting, included in Managements Report on Internal Control over
Financial Reporting appearing under Item 15. Our responsibility is to express opinions on these
financial statements and on the Companys internal control over financial reporting based on our
integrated audits. We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan and perform the
audits to obtain reasonable assurance about whether the financial statements are free of material
misstatement and whether effective internal control over financial reporting was maintained in all
material respects. Our audits of the financial statements included examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and evaluating the overall
financial statement presentation. Our audit of internal control over financial reporting included
obtaining an understanding of internal control over financial reporting, assessing the risk that a
material weakness exists, and testing and evaluating the design and operating effectiveness of
internal control based on the assessed risk. Our audits also included performing such other
procedures as we considered necessary in the circumstances. We believe that our audits provide a
reasonable basis for our opinions.
As discussed in Note 1 to the consolidated financial statements, the Company changed the
manner in which it accounts for share-based compensation in accordance with Statement of Financial
Accounting Standards No. 123 (revised 2004), Share-Based Payment since January 1, 2006. In
addition, as discussed in Note 1 to the consolidated financial statements, the Company adopted the
provisions of FASB Interpretation No. 48, Accounting for Uncertainty of Income Taxes since
January 1, 2007.
A companys internal control over financial reporting is a process designed to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting
principles. A companys internal control over financial reporting includes those policies and
procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately
and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide
reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with authorizations of management and
directors of the company; and (iii) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the companys assets that could have
a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent
or detect misstatements. Also, projections of any evaluation of effectiveness to future periods
are subject to the risk that controls may become inadequate because of changes in conditions, or
that the degree of compliance with the policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers Zhong Tian CPAs Limited Company
PricewaterhouseCoopers Zhong Tian CPAs Limited Company
Beijing, the Peoples Republic of China
Date: June 30, 2008
F-2
SINA CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2007 |
|
|
2006 |
|
ASSETS |
Current assets: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
271,666 |
|
|
$ |
163,177 |
|
Short-term investments |
|
|
206,333 |
|
|
|
199,574 |
|
Accounts receivable, net of allowances for doubtful accounts of $5,663 and $4,471, respectively |
|
|
56,719 |
|
|
|
45,031 |
|
Short-term deferred tax assets |
|
|
344 |
|
|
|
437 |
|
Prepaid expenses and other current assets |
|
|
8,496 |
|
|
|
9,893 |
|
|
|
|
|
|
|
|
Total current assets |
|
|
543,558 |
|
|
|
418,112 |
|
Property and equipment, net |
|
|
26,846 |
|
|
|
27,101 |
|
Equity investments |
|
|
1,300 |
|
|
|
1,170 |
|
Intangible assets, net |
|
|
6,695 |
|
|
|
7,871 |
|
Goodwill |
|
|
82,663 |
|
|
|
82,663 |
|
Other assets |
|
|
1,201 |
|
|
|
1,892 |
|
|
|
|
|
|
|
|
Total assets |
|
$ |
662,263 |
|
|
$ |
538,809 |
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS EQUITY |
Current liabilities: |
|
|
|
|
|
|
|
|
Accounts payable |
|
$ |
940 |
|
|
$ |
1,614 |
|
Accrued liabilities |
|
|
56,931 |
|
|
|
41,993 |
|
Income taxes payable |
|
|
9,079 |
|
|
|
7,389 |
|
Convertible debt |
|
|
99,000 |
|
|
|
100,000 |
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
165,950 |
|
|
|
150,996 |
|
Long-term liabilities: |
|
|
|
|
|
|
|
|
Other liabilities |
|
|
1,337 |
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
|
167,287 |
|
|
|
150,996 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies (Note 17) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders equity: |
|
|
|
|
|
|
|
|
Ordinary Shares: $0.133 par value; 150,000 shares authorized; 55,521 and 54,344 shares issued
and outstanding |
|
|
7,384 |
|
|
|
7,228 |
|
Additional paid-in capital |
|
|
332,461 |
|
|
|
303,868 |
|
Retained earnings |
|
|
123,702 |
|
|
|
65,973 |
|
Accumulated other comprehensive income (loss): |
|
|
|
|
|
|
|
|
Unrealized loss on investments in marketable securities |
|
|
(920 |
) |
|
|
(2,371 |
) |
Cumulative translation adjustments |
|
|
32,349 |
|
|
|
13,115 |
|
|
|
|
|
|
|
|
Total shareholders equity |
|
|
494,976 |
|
|
|
387,813 |
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity |
|
$ |
662,263 |
|
|
$ |
538,809 |
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
F-3
SINA CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31, |
|
|
|
2007 |
|
|
2006 |
|
|
2005 |
|
Net revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
Advertising |
|
$ |
168,926 |
|
|
$ |
120,067 |
|
|
$ |
84,999 |
|
Non-advertising |
|
|
77,201 |
|
|
|
92,787 |
|
|
|
108,553 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
246,127 |
|
|
|
212,854 |
|
|
|
193,552 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs of revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
Advertising (*) |
|
|
63,466 |
|
|
|
42,529 |
|
|
|
27,627 |
|
Non-advertising |
|
|
31,236 |
|
|
|
36,881 |
|
|
|
35,480 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
94,702 |
|
|
|
79,410 |
|
|
|
63,107 |
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
151,425 |
|
|
|
133,444 |
|
|
|
130,445 |
|
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing (*) |
|
|
50,555 |
|
|
|
49,972 |
|
|
|
51,690 |
|
Product development (*) |
|
|
21,942 |
|
|
|
19,573 |
|
|
|
15,268 |
|
General and administrative (*) |
|
|
26,738 |
|
|
|
27,172 |
|
|
|
18,820 |
|
Amortization of intangible assets |
|
|
1,176 |
|
|
|
1,820 |
|
|
|
3,159 |
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
100,411 |
|
|
|
98,537 |
|
|
|
88,937 |
|
|
|
|
|
|
|
|
|
|
|
Income from operations |
|
|
51,014 |
|
|
|
34,907 |
|
|
|
41,508 |
|
Interest and other income, net |
|
|
12,731 |
|
|
|
8,549 |
|
|
|
6,551 |
|
Amortization of convertible debt issuance cost |
|
|
(342 |
) |
|
|
(685 |
) |
|
|
(685 |
) |
Gain on sale of business and investment, net |
|
|
830 |
|
|
|
2,033 |
|
|
|
4,136 |
|
Loss on investment in Tidetime Sun |
|
|
|
|
|
|
(147 |
) |
|
|
(3,175 |
) |
Share of loss of equity investments, net |
|
|
|
|
|
|
(690 |
) |
|
|
(2,810 |
) |
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
64,233 |
|
|
|
43,967 |
|
|
|
45,525 |
|
Income tax expenses |
|
|
(6,504 |
) |
|
|
(4,051 |
) |
|
|
(2,410 |
) |
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
57,729 |
|
|
$ |
39,916 |
|
|
$ |
43,115 |
|
|
|
|
|
|
|
|
|
|
|
Basic net income per share |
|
$ |
1.05 |
|
|
$ |
0.74 |
|
|
$ |
0.82 |
|
|
|
|
|
|
|
|
|
|
|
Shares used in computing basic income per share |
|
|
55,038 |
|
|
|
53,696 |
|
|
|
52,485 |
|
|
|
|
|
|
|
|
|
|
|
Diluted net income per share |
|
$ |
0.97 |
|
|
$ |
0.69 |
|
|
$ |
0.75 |
|
|
|
|
|
|
|
|
|
|
|
Shares used in computing diluted income per share |
|
|
60,020 |
|
|
|
58,549 |
|
|
|
58,792 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(*) |
|
Costs of revenues and operating expenses for the years ended December 31, 2007 and 2006
include stock-based compensation expense in accordance with SFAS 123R, which the Company
adopted on January 1, 2006. See Note 13 Stock-based Compensation to the Consolidated
Financial Statements for additional information. |
The accompanying notes are an integral part of these consolidated financial statements.
F-4
SINA CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retained |
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional |
|
|
Earnings |
|
|
Other |
|
|
Total |
|
|
|
Ordinary Shares |
|
|
Paid-in |
|
|
(Accumulated |
|
|
Comprehensive |
|
|
Shareholders |
|
|
|
Shares |
|
|
Amount |
|
|
Capital |
|
|
Deficit) |
|
|
Income(Loss) |
|
|
Equity |
|
Balances at December 31, 2004 |
|
|
51,359 |
|
|
$ |
6,834 |
|
|
$ |
263,912 |
|
|
$ |
(17,058 |
) |
|
$ |
(343 |
) |
|
$ |
253,345 |
|
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
43,115 |
|
|
|
|
|
|
|
43,115 |
|
Unrealized loss on marketable securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,508 |
) |
|
|
(2,508 |
) |
Currency translation adjustments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,773 |
|
|
|
4,773 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
45,380 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of ordinary shares pursuant to stock plans |
|
|
1,589 |
|
|
|
208 |
|
|
|
6,807 |
|
|
|
|
|
|
|
|
|
|
|
7,015 |
|
Business acquisition |
|
|
317 |
|
|
|
42 |
|
|
|
13,840 |
|
|
|
|
|
|
|
|
|
|
|
13,882 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at December 31, 2005 |
|
|
53,265 |
|
|
|
7,084 |
|
|
|
284,559 |
|
|
|
26,057 |
|
|
|
1,922 |
|
|
|
319,622 |
|
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
39,916 |
|
|
|
|
|
|
|
39,916 |
|
Unrealized gain on marketable securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
532 |
|
|
|
532 |
|
Currency translation adjustments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,290 |
|
|
|
8,290 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
48,738 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of ordinary shares pursuant to stock plans |
|
|
895 |
|
|
|
119 |
|
|
|
9,860 |
|
|
|
|
|
|
|
|
|
|
|
9,979 |
|
Stock-based compensation expenses |
|
|
|
|
|
|
|
|
|
|
9,474 |
|
|
|
|
|
|
|
|
|
|
|
9,474 |
|
Business acquisition |
|
|
184 |
|
|
|
25 |
|
|
|
(25 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at December 31, 2006 |
|
|
54,344 |
|
|
|
7,228 |
|
|
|
303,868 |
|
|
|
65,973 |
|
|
|
10,744 |
|
|
|
387,813 |
|
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
57,729 |
|
|
|
|
|
|
|
57,729 |
|
Unrealized gain on marketable securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,451 |
|
|
|
1,451 |
|
Currency translation adjustments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19,234 |
|
|
|
19,234 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
78,414 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of ordinary shares pursuant to stock plans |
|
|
1,138 |
|
|
|
151 |
|
|
|
18,886 |
|
|
|
|
|
|
|
|
|
|
|
19,037 |
|
Stock-based compensation expenses |
|
|
|
|
|
|
|
|
|
|
8,712 |
|
|
|
|
|
|
|
|
|
|
|
8,712 |
|
Issuance of ordinary shares pursuant to
convertible bonds conversion |
|
|
39 |
|
|
|
5 |
|
|
|
995 |
|
|
|
|
|
|
|
|
|
|
|
1,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at December 31, 2007 |
|
|
55,521 |
|
|
$ |
7,384 |
|
|
$ |
332,461 |
|
|
$ |
123,702 |
|
|
$ |
31,429 |
|
|
$ |
494,976 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
F-5
SINA CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31, |
|
|
|
2007 |
|
|
2006 |
|
|
2005 |
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
57,729 |
|
|
$ |
39,916 |
|
|
$ |
43,115 |
|
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation |
|
|
13,374 |
|
|
|
9,892 |
|
|
|
9,593 |
|
Stock-based compensation expense |
|
|
8,712 |
|
|
|
9,474 |
|
|
|
|
|
Amortization of convertible debt issuance cost |
|
|
342 |
|
|
|
685 |
|
|
|
685 |
|
Amortization of intangible assets |
|
|
1,176 |
|
|
|
1,820 |
|
|
|
3,159 |
|
Provision for losses on receivables |
|
|
5,294 |
|
|
|
5,044 |
|
|
|
2,271 |
|
Deferred income taxes |
|
|
474 |
|
|
|
(350 |
) |
|
|
(261 |
) |
Gain on sale of business and investment, net |
|
|
(830 |
) |
|
|
(2,033 |
) |
|
|
(4,136 |
) |
Loss on investment in Tidetime Sun |
|
|
|
|
|
|
147 |
|
|
|
3,175 |
|
Share of loss of equity investments, net |
|
|
|
|
|
|
690 |
|
|
|
2,810 |
|
Loss on disposal of property and equipment |
|
|
83 |
|
|
|
17 |
|
|
|
156 |
|
Changes in assets and liabilities (net of effect from disposal): |
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
(14,241 |
) |
|
|
(14,791 |
) |
|
|
4,324 |
|
Prepaid expenses and other current assets |
|
|
2,003 |
|
|
|
(490 |
) |
|
|
3,227 |
|
Other assets |
|
|
77 |
|
|
|
1,429 |
|
|
|
(803 |
) |
Accounts payable |
|
|
(58 |
) |
|
|
(1 |
) |
|
|
(513 |
) |
Accrued liabilities |
|
|
12,426 |
|
|
|
8,726 |
|
|
|
(8,217 |
) |
Income taxes payable |
|
|
2,504 |
|
|
|
2,922 |
|
|
|
(312 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
89,065 |
|
|
|
63,097 |
|
|
|
58,273 |
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of short-term investments |
|
|
(98,792 |
) |
|
|
(102,135 |
) |
|
|
(212,532 |
) |
Maturities of short-term investments |
|
|
104,354 |
|
|
|
120,121 |
|
|
|
122,040 |
|
Purchases of property and equipment |
|
|
(12,158 |
) |
|
|
(14,090 |
) |
|
|
(15,369 |
) |
Cash paid for business acquisitions |
|
|
|
|
|
|
(11,266 |
) |
|
|
(26,141 |
) |
Cash paid for equity investments |
|
|
(1,261 |
) |
|
|
|
|
|
|
(3,024 |
) |
Deposits on equity investment and acquisition |
|
|
|
|
|
|
|
|
|
|
(800 |
) |
Proceeds from sale of business, net |
|
|
|
|
|
|
636 |
|
|
|
1,730 |
|
Proceeds from sale of investments |
|
|
2,000 |
|
|
|
5,315 |
|
|
|
286 |
|
Proceeds from sale of investment in Tidetime Sun |
|
|
|
|
|
|
569 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(5,857 |
) |
|
|
(850 |
) |
|
|
(133,810 |
) |
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of ordinary shares |
|
|
19,037 |
|
|
|
9,979 |
|
|
|
7,015 |
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities |
|
|
19,037 |
|
|
|
9,979 |
|
|
|
7,015 |
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate change on cash and cash equivalents |
|
|
6,244 |
|
|
|
2,541 |
|
|
|
3,164 |
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents |
|
|
108,489 |
|
|
|
74,767 |
|
|
|
(65,358 |
) |
Cash and cash equivalents at the beginning of the year |
|
|
163,177 |
|
|
|
88,410 |
|
|
|
153,768 |
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at the end of the year |
|
$ |
271,666 |
|
|
$ |
163,177 |
|
|
$ |
88,410 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow information: |
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for income taxes |
|
$ |
3,634 |
|
|
$ |
1,294 |
|
|
$ |
2,891 |
|
|
|
|
|
|
|
|
|
|
|
Cash paid for acquisitions |
|
$ |
|
|
|
$ |
(11,266 |
) |
|
$ |
(26,141 |
) |
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of noncash financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Increase in equity investment from deposit on equity investment |
|
$ |
|
|
|
$ |
800 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
Ordinary shares issued pursuance to convertible bond conversion |
|
$ |
1,000 |
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
Ordinary shares issued and subject to subsequent issuance for acquisitions |
|
$ |
|
|
|
$ |
|
|
|
$ |
13,882 |
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
F-6
SINA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Significant Accounting Policies
Business
SINA Corporation (SINA, we or the Company) is an online media company and value-added
information service provider in the Peoples Republic of China (the PRC or China) and the
global Chinese communities. With a branded network of localized web sites targeting Greater China
and overseas Chinese, the Company provides services through five major business lines including
SINA.com (online news and content), SINA Mobile (mobile value-added services or MVAS), SINA
Community (Web 2.0-based services and games), SINA.net (search and enterprise services) and SINA
E-Commerce (online shopping). Together these business lines provide an array of services including
region-focused online portals, MVAS, search and directory, interest-based and community-building
channels, free and premium email, blog services, audio and video streaming, game community
services, classified listings, fee-based services, e-commerce and
enterprise e-solutions. The
Company generates the majority of its revenues from online
advertising and MVAS offerings, and, to a lesser extent, from search and other
fee-based services.
Principles of consolidation and basis of presentation
The consolidated financial statements include the accounts of the Company, its subsidiaries
and variable interest entities (VIEs) for which the Company is the primary beneficiary. All
significant intercompany accounts and transactions have been eliminated. The Company has adopted
FASB Interpretation No. 46R Consolidation of Variable Interest Entities (FIN 46R), an
Interpretation of Accounting Research Bulletin No. 51. FIN 46R requires a VIE to be consolidated by
a company if that company is subject to a majority of the risk of loss for the VIEs or is entitled
to receive a majority of the VIEs residual returns.
To comply with PRC laws and regulations, the Company provides substantially all its Internet
content, MVAS and advertising services in China via its VIEs. These VIEs are wholly or partially
owned by certain employees of the Company. The capital for the VIEs are funded by the Company and
recorded as interest-free loans to these PRC employees. These loans were eliminated with the
capital of the VIEs during consolidation. Under various contractual agreements, employee
shareholders of the VIEs are required to transfer their ownership in these entities to the
Companys subsidiaries in China when permitted by PRC laws and regulations or to designees of the
Company at any time for the amount of loans outstanding. All voting rights of the VIEs are assigned
to the Company and the Company has the right to appoint all directors and senior management
personnel of the VIEs. The Company has also entered into exclusive technical service agreements
with the VIEs under which the Company provides technical and other services to the VIEs in exchange
for substantially all net income of the VIEs. In addition, employee shareholders of the VIEs have
pledged their shares in the VIEs as collateral for the non-payment of loans or for the fees for
technical and other services due to the Company. As of December 31, 2007, the total amount of
interest-free loans to these PRC employees was $8.0 million and the aggregate accumulated losses of
all VIEs were approximately $2.3 million, which have been included in the consolidated financial
statements.
The following is a summary of the major VIEs of the Company:
|
|
|
Beijing SINA Internet Information Service Co., Ltd. (the ICP Company), a China company
controlled through business agreement. The ICP Company is responsible for operating
www.sina.com.cn in connection with its Internet content company license, selling the
advertisements to advertisers and providing MVAS with its Value-Added Telecommunication
Services Operating License in China via third party operators to the users. It is 1.5% owned
by Yan Wang, the Companys Chairman of the Board, 22.50% owned by the Companys executive
officer Tong Chen, 26.75% owned by the Companys executive officer Hong Du, and 49.25% owned
by two other non-executive PRC employees of the Company. The registered capital of the ICP
Company is $2.5 million. |
|
|
|
|
Guangzhou Media Message Technologies, Inc. (Xunlong), a China company controlled
through business agreement. Xunlong is responsible for providing MVAS in China via third
party operators to the users under its Value-Added Telecommunication Services Operating
License. It is owned by three non-executive PRC employees of the Company. The registered
capital of the Xunlong is $1.2 million. |
|
|
|
|
Beijing Star-Village Online Cultural Development Co., Ltd. (StarVI), previously
translated as Beijing Star-Village.com Cultural Development Co., Ltd, a China company
controlled through business agreement. StarVI is responsible for providing |
F-7
|
|
|
MVAS in China via third party operators to the users under its Value-Added Telecommunication
Services Operating License. It is owned by three non-executive PRC employees of the Company.
The registered capital of the StarVI is $1.2 million. |
|
|
|
|
Shenzhen Wang Xing Technology Co., Ltd. (Wangxing), a China company controlled through
business agreement. Wangxing is responsible for providing MVAS in China via third party
operators to the users under its Value-Added Telecommunication Services Operating License.
It is owned by three non-executive PRC employees of the Company. The registered capital of
Wangxing is $1.2 million. |
|
|
|
|
Beijing SINA Infinity Advertising Co., Ltd. (the IAD Company), a China company
controlled through business agreement. The IAD Company is an advertising agency. It is 20%
owned by the Companys executive officer Tong Chen and 80% owned by four non-executive PRC
employees of the Company. This entity has an approved business scope including design,
production, agency and issuance of advertisements. The registered capital of the IAD Company
is $0.1 million. |
The Company began to consolidate the ICP Company in October 2001. Xunlong and Star VI were
acquired from Memestar Limited in January 2003 and the operating results for these two companies
were consolidated by the Company since January 2003. Wangxing was acquired from Crillion
Corporation in March 2004 and the operating results for Wangxing were consolidated by the Company
since March 2004. The operating results of the IAD Company were consolidated since its
establishment in 2004.
Certain prior year amounts of cash flow statements have been reclassified to conform to the
current year presentation (see Note 5).
Use of estimates
The preparation of the consolidated financial statements in conformity with accounting
principles generally accepted in the United States of America requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and reported amounts of
revenues and expenses during the reporting period. Actual results could differ from those
estimates, such differences may be material to the financial statements. The Company believes
accounting for advertising and MVAS revenues, accounting for income taxes, determination of
functional currency, assessment of impairment of goodwill and long-lived assets, assessment of
impairment of marketable securities, allowance for doubtful accounts, assessment of impairment of
equity investments, determination of stock-based compensation expenses, determination of the
estimated useful lives of assets and accounting for advertising expenses represent critical
accounting policies that reflect the more significant judgments and estimate used in the
preparation of its consolidated financial statements.
Cash equivalents
The Company considers all highly liquid investments with original maturities of three months
or less to be cash equivalents. At December 31, 2007 and 2006, cash equivalents were comprised
primarily of investments in time deposits, commercial paper and money market funds stated at cost
plus accrued interest, which approximated fair value.
Available-for-sale securities
Investments classified as available-for-sale securities are reported at fair value with
unrealized gains (losses), if any, recorded as accumulated other comprehensive income in
shareholders equity. Realized gains or losses are charged to the income during the period in which
the gain or loss is realized. If the Company determines a decline in fair value is
other-than-temporary, the cost basis of the individual security is written down to fair value as a
new cost basis and the amount of the write-down is accounted for as a realized loss. The new cost
basis will not be changed for subsequent recoveries in fair value. Determination of whether
declines in value are other-than-temporary requires significant judgment. Subsequent increases and
decreases in the fair value of available-for-sale securities will be included in comprehensive
income through a credit or charge to shareholders equity except for an other-than-temporary
impairment, which will be charged to income.
Investments classified as available-for-sale securities include marketable debt securities.
The Company invests in marketable debt securities that are readily available for sale to meet
operating or acquisition needs and, accordingly, classifies them as short-term investments.
F-8
Allowances for doubtful accounts
The Company maintains an allowance for doubtful accounts which reflects its best estimate of
amounts that potentially will not be collected. The Company determines the allowance for doubtful
accounts based on a historical, rolling average, bad debt rate in the prior year and other factors
such as credit-worthiness and age of receivable balances. The Company also provides specific
provisions for bad debts when facts and circumstances indicate that the receivable is unlikely to
be collected. If the financial condition of the Companys customers were to deteriorate, resulting
in an impairment of their ability to make payments, or if the operators incur more bad debt than
their original estimates, more bad debt allowance may be required.
Long-lived assets
Property and equipment. Property and equipment are stated at cost less accumulated
depreciation and amortization. Depreciation is computed using the straight-line method over the
estimated useful lives of the assets, generally from three to five years for computers and
equipment and five years for furniture and fixtures. Leasehold improvements are amortized over the
shorter of the estimated useful lives of the assets or the remaining lease term. Depreciation
expenses were $13.4 million, $9.9 million and $9.6 million for fiscal 2007, 2006 and 2005,
respectively.
As a result of the Companys evaluation on its estimate of the useful life of its computer
equipment (e.g., servers and filers) during the first quarter of 2006, such life was changed from
three years to four years. This change in accounting estimate resulted in a reduction in
depreciation expenses of $0.6 million for the three months ended March 31, 2006, of which $0.2
million were in the costs of advertising revenue and $0.4 million were in operating expenses.
Goodwill. Goodwill is carried at cost. Under SFAS No. 142, Goodwill and Intangible Assets
(FAS 142), goodwill is no longer amortized but tested for impairment annually, or more
frequently, if facts and circumstances warrant a review. The provisions of FAS 142 require that a
two-step test be performed to assess goodwill for impairment. First, the fair value of each
reporting unit, defined as the operating segment or one level, is compared to its carrying value,
including goodwill. The Company generally determines the fair value of its reporting units using a
blended market approach and income approach. If the carrying value of a reporting unit exceeds its
fair value, the second step shall be performed and an impairment loss equal to the difference
between the implied fair value of reporting units goodwill and the carrying amount of the goodwill
will be recorded.
Intangible assets other than goodwill. Intangible assets arising from acquisitions are
recognized at fair value upon acquisition and amortized on a straight-line basis over their
estimated useful lives, generally from 18 months to ten years.
Impairment of long-lived assets. In accordance with SFAS No. 144, Accounting for the
Impairment or Disposal of Long-lived Assets, long-lived assets and certain identifiable intangible
assets to be held and used are reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of such assets may not be recoverable. Determination of
recoverability is based on an estimate of undiscounted future cash flows resulting from the use of
the asset and its eventual disposition. Measurement of any impairment loss for long-lived assets
and certain identifiable intangible assets that management expects to hold or use is based on the
amount by which the carrying value exceeds the fair value of the asset.
Equity investments
Equity investments are comprised of joint ventures and privately held companies. The Company
accounts for an equity investment over which it has significant influence but does not own a
majority equity interest or otherwise control using the equity method. For equity investments over
which the Company does not have significant influence, the cost method accounting is used.
The Company assesses its equity investments for other-than-temporary impairment by considering
factors including, but are not limited to, current economic and market conditions, the operating
performance of the companies, including current earnings trends and undiscounted cash flows, and
other company-specific information, including recent financing rounds. The evaluation process is
based on information that it receives from these privately-held companies. This information is not
subject to the same disclosure requirements as U.S. publicly traded companies, and as such, the
basis for these evaluations is subject to the timing and the accuracy of the data received from
these companies.
F-9
Convertible debt
The Company applies SFAS No. 78, Classification of Obligations That Are Callable by the
Creditor to determine the classification of its convertible debt. In accordance with SFAS 78,
obligations such as convertible notes are required to be classified as a current liability if they
are or will be callable within one year from the balance sheet date, even though liquidation may
not be expected within that period.
Revenue recognition
Advertising
Advertising revenues are derived principally from online advertising and, to a lesser extent,
sponsorship arrangements. Online advertising arrangements allow advertisers to place advertisements
on particular areas of the Companys web sites, in particular formats and over particular periods
of time. Advertising revenues from online advertising arrangements are recognized ratably over the
displayed period of the contract when the collectibility is reasonably assured. Sponsorship
arrangements allow advertisers to sponsor a particular area on its web sites in exchange for a
fixed payment over the contract period. Advertising revenues from sponsorship are recognized
ratably over the contract period. Advertising revenues derived from the design, coordination and
integration of online advertising and sponsorship arrangements to be placed on the Companys web
sites are recognized ratably over the term of such programs. In accordance with Emerging Issues
Task Force (EITF) No. 00-21, Accounting for Revenue Arrangements with Multiple Deliverables,
advertising arrangements involving multiple deliverables are broken down into single-element
arrangements based on their relative fair value for revenue recognition purposes, when possible.
The Company recognizes revenue on the elements delivered and defers the recognition of revenue for
the fair value of the undelivered elements until the remaining obligations have been satisfied. In
accordance with EITF No. 01-9, Accounting for Consideration Given by a Vendor to a Customer or a
Reseller of the Vendors Product, cash consideration given to customers or resellers, for which
the Company does not receive a separately identifiable benefit or cannot reasonably estimate fair
value, are accounted for as a reduction of revenue rather than as an expense.
Revenues from barter transactions are recognized during the period in which the advertisements
are displayed on the Companys properties. Barter transactions are recorded at the lower of the
fair value of the goods and services received or the fair value of the advertisement given,
provided the fair value of the transaction is reliably measurable. Revenues from barter
transactions were minimal for all periods presented.
Deferred revenue primarily comprises contractual billings in excess of recognized revenue and
payments received in advance of revenue recognition.
Non-advertising
MVAS. MVAS revenues are derived principally from providing mobile phone users with SMS, MMS,
CRBT, WAP, IVR and Kjava games. These services include news and other content subscriptions,
picture and logo download, ring tones, ring back tones, mobile games and access to music files.
Revenues from MVAS are charged on a monthly or per-usage basis. Such revenues are recognized in the
period in which the service is performed, provided that no significant Company obligations remain,
collection of the receivables is reasonably assured and the amounts can be accurately estimated.
The Company contracts with operators China Mobile and its subsidiaries, China Unicom and its
subsidiaries, and, to a lesser degree, other operators, for billing and transmission services
related to the MVAS transmitted to its users. In accordance with EITF No. 99-19, Reporting
Revenues Gross as a Principal Versus Net as an Agent, revenues are recorded on a gross basis when
the Company is considered the primary obligor to the MVAS users. Under the gross method, the
amounts billed to MVAS users are recognized as revenues and the fees charged or retained by the
third-party operators are recognized as costs of revenue. Revenues on
F-10
MVAS where the Company is not considered the primary obligor to the user are recorded on a net
basis. Under the net method, revenues are recorded net of fees charged or retained by the
third-party operators.
The Company purchases certain contents from third-party content providers for its MVAS. In
most of these arrangements, the fees payable to the third-party content providers are calculated
based on certain percentages of the revenue earned by their contents after deducting the fees paid
to the third-party operators. The Companys MVAS revenues are inclusive of such fees since the
Company acts as the principal in these arrangements by having the ability to determine the fees
charged to end users and being the primary obligor to the end users with respect to providing such
services.
Due to the time lag between when the services are rendered and when the operator billing
statements are received, MVAS revenues are estimated based on the Companys internal billing
records and transmissions for the month, adjusting for prior periods confirmation rates with
operators and prior periods discrepancies between internally estimated revenues and actual
revenues confirmed by operators. The confirmation rate applied to the estimation of revenue is
determined at the lower of the latest confirmation rate available and the average of six-months
historical rates available, provided that the Company has obtained confirmation rates for six
months. If the Company has not yet received confirmation rates for six months, revenues would be
deferred until billing statements are received from the operators. Historically, there have been no
significant adjustments to the revenue estimates.
Historically, due to the time lag of receiving billing statements from operators and the lack
of adequate information to make estimates, the Company has adopted a one-month lag reporting policy
for MVAS revenues. Such policy has been applied on a consistent basis and does not apply to MVAS
revenues from acquired entities Memestar Limited and Crillion Corporation as the acquired entities
were able to obtain timely and accurate information to support their revenue estimates through the
acquisition dates which has continued since our acquisition. For the years ended December 31, 2007,
2006 and 2005, the Company recorded MVAS revenues in the amount of $70.5 million, $86.3 million and
$98.1 million, respectively. If the Company had not used the one-month lag reporting policy, its
revenues from MVAS for the years ended December 31, 2007, 2006 and 2005 would have been $72.1
million, $87.1 million and $96.2 million, respectively.
Credit memos issued to operators on billings that were previously settled and for which
payments have been received are accounted for as a credit to revenue based on a historical rolling
average. Historically, the true ups between accrued amounts and actual credit memos issued have not
been significant.
Fee-based services. Fee-based services allow the Companys users to subscribe to services on
its web sites including online games, paid email services and etc. Revenues from these services are
recognized in the period in which the service is performed, provided that no significant Company
obligations remain, collection of the receivables is reasonably assured and the amounts can be
accurately estimated.
E-commerce. E-commerce revenues are derived principally from slotting fees charged to agencies
for selective positioning and promotion of their goods or services within the Companys online
mall, SinaMall, and from commissions calculated as a percentage of the online sales transaction
value of the merchants. Slotting fee revenue is recognized ratably over the period the products are
shown on the Companys web site while the commission revenue is recognized on a net basis after
both successful online verification of customers credit cards and shipment of products. Product
returns have not been significant and are assumed by vendors.
Enterprise services. Enterprise services mainly include paid search and directory listings,
corporate emails and classified listings. Revenues are recognized in the period in which the
service is performed, provided that no significant Company obligations remain, collection of the
receivables is reasonably assured and the amounts can be accurately estimated.
In accordance with GAAP, the recognition of these revenues is partly based on the Companys
assessment of the probability of collection of the resulting accounts receivable balance. As a
result, the timing or amount of revenue recognition may have been different if the Companys
assessment of the probability of collection of accounts receivable had been different.
Pursuant to Emerging Issues Task Force EITF Issue No. 06-3, How Taxes Collected from
Customers and Remitted to Governmental Authorities Should be Presented in the Income Statement,
the Company presents taxes assessed by a governmental authority that is both imposed on and
concurrent with a specific revenue-producing transaction on a gross basis in the financial
statements. These taxes include business taxes, surcharges and cultural business construction
fees. The total amount of such taxes for fiscal 2007, 2006 and 2005 were $17.5 million, $13.2
million and $10.4 million, respectively.
F-11
Costs of revenues
Advertising
Costs of advertising revenue consist mainly of costs associated with the production of web
sites, which includes fees paid to third parties for Internet connection, content and services,
personnel related costs, and equipment depreciation associated with the web site production. Costs
of advertising revenue also include business taxes, surcharges and cultural business construction
fees levied on advertising sales in China, which are approximately 8.5% of the advertising revenues
in China.
Non-advertising
Costs of non-advertising revenue consist mainly of fees paid to or retained by the third-party
operators for their services relating to the collection of the Companys MVAS revenues and for
using their transmission gateways. Costs of non-advertising revenue also consist of fees or
royalties paid to third-party content providers for services and content associated with the MVAS,
costs for providing the enterprise services and business taxes levied on non-advertising sales in
China. Business taxes and surcharges levied on non-advertising revenues are approximately 3.3% for
mobile related revenues and 5.5% for other non-advertising revenues.
Product development expenses
Product development expenses consist primarily of personnel-related expenses incurred for
enhancement to and maintenance of the Companys web sites as well as costs associated with new
product development and product enhancements. The Company recognizes web site development costs
in accordance with SOP 98-1, Accounting for the Costs of Computer Software Developed or Obtained
for Internal Use. As such, the Company expenses all costs incurred that relate to the planning and
post implementation phases of development and costs associated with repair or maintenance of the
existing site or the development of web site content. Costs incurred in the development phase are
capitalized and amortized on a straight-line basis over the estimated product life or on the ratio
of current revenues to total projected product revenue, whichever is greater. Since inception, the
amount of costs qualifying for capitalization has been immaterial and, as a result, all product
development costs have substantially been expensed as incurred.
Advertising expenses
Advertising expenses consist primarily of costs of promotion for corporate image and product
marketing and costs of direct advertising. The Company expenses all advertising costs as incurred
and classify these costs under sales and marketing expenses. The nature of the Companys direct
advertising activities is such that they are intended to acquire subscribers for subscription-based
and usage-based MVAS. The Company considered Statement of Position 93-7 Reporting on Advertising
Costs (SOP 93-7) issued by the American Institute of Certified Public Accountants (AICPA) and
concluded that the criteria specified for capitalizing the costs of direct response advertising for
subscription-based MVAS were not met. Advertising expenses for fiscal years 2007, 2006 and 2005
were $24.6 million, $23.3 million and $28.6 million, respectively.
Stock-based compensation
Effective January 1, 2006, the Company adopted the fair value recognition provisions of
Statement of Financial Accounting Standards No. 123 (revised 2004), Share-Based Payment (SFAS
123R). Under the fair value recognition provisions of this statement, all stock-based awards to
employees and directors, including stock options and restricted share units, are measured at the
grant date based on the fair value of the awards. Stock-based compensation, net of forfeitures, is
recognized as expense on a straight-line basis over the requisite service period, which is the
vesting period.
The Company elected the modified-prospective method, under which prior periods are not revised
for comparative purposes. The valuation provisions of SFAS 123R apply to new grants and to grants
that were outstanding prior to the effective date and are subsequently modified. Estimated
compensation for grants that were outstanding as of the effective date are recognized over the
remaining service period using the compensation cost estimated for Statement of Financial
Accounting Standards No. 123 Accounting for Stock-Based Compensation (SFAS 123) pro forma
disclosures.
In conjunction with the adoption of SFAS 123R, the Company changed its method of attributing
the value of stock compensation expense from accelerated basis to straight-line basis.
Compensation expense for share-based payment awards granted prior to 2006
F-12
will continue to be recognized using the accelerated basis while compensation expense for
awards granted after the effective date are recognized using the straight-line basis.
The Company uses the Black-Scholes option pricing model to determine the fair value of stock
options. The determination of fair value of stock-based payment awards on the date of grant using
an option pricing model is affected by the Companys stock price as well as assumptions regarding a
number of complex and subjective variables. These variables include the Companys expected stock
price volatility over the expected term of the awards, actual and projected employee stock option
exercise behaviors, a risk-free interest rate and any expected dividends.
The Company recognizes the estimated compensation cost of service-based restricted share units
based on the fair value of its common shares on the date of the grant. The Company recognizes the
compensation cost, net of estimated forfeitures, over a vesting term of four years.
The Company recognizes the estimated compensation cost of performance-based restricted shares
units based on the fair value of its common shares on the date of the grant. The awards are earned
upon attainment of identified performance goals. The Company recognizes the compensation cost, net
of estimated forfeitures, over the performance period. The Company also adjusts the compensation
cost based on the probability of performance goal achievement at the end of each reporting period.
Forfeitures are estimated at the time of grant and revised in subsequent periods if actual
forfeitures differ from those estimates. The Company uses historical data to estimate pre-vesting
option and restricted share units forfeitures and record stock-based compensation expense only for
those awards that are expected to vest. For pro forma disclosure under SFAS 123, the effect of
forfeitures was accounted for only as the forfeitures occurred.
See Note 13 Stock-based Compensation for further discussion on stock-based compensation.
Operating leases
The Company leases office space under operating lease agreements with original lease periods
up to three years. Rental expenses are recognized from the date of initial possession of the leased
property on a straight-line basis over the term of the lease. Certain lease agreements contain rent
holidays, which are recognized on a straight-line basis over the lease term. Lease renewal periods
are considered on a lease-by-lease basis and are generally not included in the initial lease term.
Income taxes
Income taxes are accounted for using the asset and liability approach. Under this approach,
income tax expense is recognized for the amount of taxes payable or refundable for the current
year. In addition, deferred tax assets and liabilities are recognized for expected future tax
consequences of temporary differences between the financial reporting and tax bases of assets and
liabilities, and for operating losses and tax credit carryforwards. The Company records a valuation
allowance to reduce deferred tax assets to an amount for which realization is more likely than not.
The Company adopted FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes -
an Interpretation of FASB Statement No. 109 (FIN 48), on January 1, 2007. FIN 48 prescribes a
more likely than not threshold for financial statement recognition and measurement of a tax
position taken or expected to be taken in a tax return. It also provides guidance on derecognition
of income tax assets and liabilities, classification of current and deferred income tax assets and
liabilities, accounting for interest and penalties associated with tax positions, accounting for
income taxes in interim periods, and income tax disclosures. The Company did not have any
adjustment to the opening balance of retained earnings as of January 1, 2007, as a result of the
implementation of FIN 48. For the year ended December 31, 2007, the Company did not have any
significant liabilities nor any interest or penalties associated with unrecognized tax
benefit. As of December 31, 2007, the Company did not have any significant unrecognized uncertain
tax positions.
Foreign currency
The Companys reporting currency
and functional currency are the U.S. dollar. The Companys operations in China, Hong
Kong and Taiwan use their respective currencies as their functional currencies. The financial
statements of these subsidiaries are translated into U.S. dollars using period-end rates of
exchange for assets and liabilities and average rates of exchange in the period for revenues and
expenses.
F-13
Translation gains and losses are recorded in accumulated other comprehensive income or loss as
a component of shareholders equity. Net gains and losses resulting from foreign exchange
transactions are included in interest and other income. During the
years ended
December 31, 2007,
2006 and 2005, the foreign currency translation adjustments to the Companys comprehensive income
were $19.2 million, $8.3 million and $4.8 million, respectively. The currency transaction gains
were approximately $1.1 million for the year ended December 31, 2007 and the currency transaction
losses were approximately $0.1 million and $0.2 million, for the years ended December 31, 2006 and
2005, respectively. Currency transactional gains recognized in fiscal 2007 were primarily as a
result of the Chinese renminbi appreciating against the U.S. dollar.
Net income per share
Basic net income per share is computed using the weighted average number of ordinary shares
outstanding during the period. Diluted net income per share is computed using the weighted average
number of ordinary share and ordinary share equivalents outstanding during the period. Ordinary
share equivalents include options to purchase ordinary shares and restricted share units, unless
they were anti-dilutive, and conversion of zero-coupon, convertible, subordinated notes.
Comprehensive income
Comprehensive income is defined as the change in equity of a company during a period from
transactions and other events and circumstances excluding transactions resulting from investments
from owners and distributions to owners. For the Company, comprehensive income for the periods
presented includes net income, foreign currency translation adjustments and unrealized gains
(losses) on marketable securities classified as available for sale.
Recent accounting pronouncements
In May 2008, the FASB issued FASB Staff Position No. APB14-1 Accounting for Convertible Debt
Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement) (FSP
APB14-1), which requires issuers of convertible debt that may be settled wholly or partly in cash
when converted to account for the debt and equity components separately. This statement is
effective for fiscal years beginning after December 15, 2008 and must be applied retrospectively to
all periods. The Company is currently evaluating the impact of adopting FSP APB14-1 on its
consolidated financial position, cash flows and results of operations.
In April 2008, the FASB issued FASB Staff Position No. FAS142-3 Determination of the Useful
Life of Intangible Assets (FSP FAS142-3), which amends the factors to be considered in
determining the useful life of intangible assets. Its intent is to improve the consistency between
the useful life of an intangible asset and the period of expected cash flows used to measure its
fair value. This statement is effective for fiscal years beginning after December 15, 2008. The
Company is currently evaluating the impact of adopting FSP FAS142-3 on its consolidated financial
position, cash flows and results of operations.
In March 2008, the FASB released Statement of Financial Accounting Standards No.161
Disclosures about Derivative Instruments and Hedging Activities an amendment of FASB Statement
No. 133(SFAS 161), which requires enhanced disclosures about an entitys derivative and hedging
activities and thereby improves the transparency of financial reporting. This statement is
effective for financial statements issued for fiscal years and interim periods beginning after
November 15, 2008. The Company is currently evaluating the impact of adopting SFAS
161 on its consolidated financial position, cash flows and results of operations.
In December 2007, the FASB issued SFAS No. 141 (revised 2007) Business Combinations (SFAS
141R). SFAS 141R will change how business acquisitions are accounted for and will impact financial
statements both on the acquisition date and in subsequent periods. SFAS 141R applies prospectively
to business combinations for which the acquisition date is on or after the beginning of the first
annual reporting period beginning on or after December 15, 2008. The Company is currently
evaluating the impact of adopting SFAS 141R on its consolidated financial position, cash flows and
results of operations.
In December 2007, the Securities and Exchange Commission (SEC) issued Staff Accounting
Bulletin 110 (SAB 110). Under SAB 110, the Staff will continue to allow companies to use the
simplified method for estimating the expected terms of plain vanilla share options beyond
December 31, 2007, assuming certain circumstances are met. The adoption of SAB 110 is not expected
to have a material impact on the Companys consolidated financial position, cash flows and results
of operations.
In
December 2007, the FASB issued SFAS No. 160. Noncontrolling Interests in Consolidated
Financial Statementsan amendment
F-14
of ARB No. 51 (SFAS 160). SFAS 160 amends ARB No. 51 to establish accounting and reporting
standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a
subsidiary. This Statement is effective for fiscal years and interim periods within those fiscal
years, beginning on or after December 15, 2008. The Company is currently evaluating the impact of
adopting SFAS 160 on its consolidated financial position, cash flows and results of operations.
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets
and Financial Liabilities (SFAS 159). Under SFAS 159, companies may elect to measure certain
financial instruments and certain other items at fair value. The standard requires that unrealized
gains and losses on items for which the fair value option has been elected be reported in earnings.
SFAS 159 is effective for the Company beginning fiscal 2008. The adoption of SFAS 159 is not expected to have a material impact on the Companys consolidated
financial position, cash flows and results of operations.
In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, Fair
Value Measurements (SFAS 157), which defines fair value, establishes guidelines for measuring
fair value and expands disclosures regarding fair value measurements. SFAS 157 does not require any
new fair value measurements but rather eliminates inconsistencies in guidance found in various
prior accounting pronouncements. SFAS 157 is effective for fiscal years beginning after November
15, 2007. However, on February 12, 2008, the FASB issued FASB Staff Position FAS 157-2, Effective Date of FASB
Statement No.157 (FSP FAS 157-2), which delays the effective date of SFAS 157 for all nonfinancial assets and
nonfinancial liabilities, except those that are recognized or disclosed at fair value in the
financial statements on a recurring basis (at least annually). FSP FAS 157-2 partially defers the
effective date of Statement 157 to fiscal years beginning after November 15, 2008, and interim
periods within those fiscal years for items within the scope of this FSP. The Company will adopt
SFAS 157 in 2008, except as it applies to those nonfinancial assets and nonfinancial liabilities as
noted in FSP FAS 157-2. The partial adoption of SFAS 157 in 2008 is not expected to have a material impact
on the Companys consolidated financial position, cash flows and results of operations. The Company is still evaluating the impact of the remaining SFAS 157 on its consolidated financial position, cash flows and results of operations.
2. Goodwill and Intangible Assets
The Company acquired Memestar Limited, a British Virgin Islands limited liability corporation
(Memestar) in 2003 and Crillion Corporation, a British Virgin Islands limited liability
corporation (Crillion) in 2004 to enhance its MVAS offerings as well as increase its market share
in the PRC MVAS market. The Company also acquired Davidhill Capital Inc., a British Virgin Islands
limited liability corporation (Davidhill), and its UC instant messaging technology platform in
2004. The following table summarizes goodwill from these acquisitions:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2007 |
|
|
2006 |
|
|
|
(In thousands) |
|
Crillion and Memestar (mobile-related) |
|
$ |
68,891 |
|
|
$ |
68,891 |
|
Davidhill |
|
|
13,772 |
|
|
|
13,772 |
|
|
|
|
|
|
|
|
Total |
|
$ |
82,663 |
|
|
$ |
82,663 |
|
|
|
|
|
|
|
|
The Company historically performs an impairment test relating to its goodwill on an annual basis or
when facts and circumstances warrant a review. The Company performed an impairment test relating
to goodwill arising from its acquisitions as of December 31, 2006 and 2007, and concluded that
there was no impairment as to the carrying value of the goodwill. The following table summarizes
intangible assets from these acquisitions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007 |
|
|
December 31, 2006 |
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
Cost |
|
|
amortization |
|
|
Net |
|
|
Cost |
|
|
amortization |
|
|
Net |
|
|
|
(In thousands) |
|
Crillion and Memestar (mobile-related) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-compete agreements |
|
$ |
3,147 |
|
|
$ |
(3,147 |
) |
|
$ |
|
|
|
$ |
3,147 |
|
|
$ |
(3,001 |
) |
|
$ |
146 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Davidhill |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Technology |
|
|
10,300 |
|
|
|
(3,605 |
) |
|
|
6,695 |
|
|
|
10,300 |
|
|
|
(2,575 |
) |
|
|
7,725 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
13,447 |
|
|
$ |
(6,752 |
) |
|
$ |
6,695 |
|
|
$ |
13,447 |
|
|
$ |
(5,576 |
) |
|
$ |
7,871 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All intangible assets are amortizable. Non-compete agreements have original estimated useful
lives of eighteen months to thirty-six months, and technology has original estimated useful lives
of ten years.
F-15
Amortization expense related to intangible assets was $1.2 million, $1.8 million and $3.2
million for the years ended December 31, 2007, 2006 and 2005, respectively. As of December 31,
2007, estimated amortization expenses for future periods are expected to be as follows:
|
|
|
|
|
Fiscal year |
|
(In thousands) |
|
2008 |
|
$ |
1,030 |
|
2009 |
|
|
1,030 |
|
2010 |
|
|
1,030 |
|
2011 |
|
|
1,030 |
|
2012 |
|
|
1,030 |
|
Thereafter |
|
|
1,545 |
|
|
|
|
|
Total expected amortization expense |
|
$ |
6,695 |
|
|
|
|
|
3. Investment in Tidetime Sun
Investment in Tidetime Sun was accounted for as an investment in marketable equity securities
under the provisions of SFAS No. 115, Accounting for Certain Investments in Debt and Equity
Securities, and classified as available for sale. In December 2006, the Company sold its
investment in Tidetime Sun for $0.6 million and recorded a gain of $0.1 million. Net loss on
investment for the year ended
December 31, 2006 was $0.1 million, after considering the other than
temporary loss of $0.2 million recorded during 2006. Net loss on investment for the year ended
December 31, 2005 was $3.2 million representing an other-than-temporary loss due to decline in fair
value.
4. Equity Investments
Equity investments comprised of joint ventures and other privately held companies. The
following sets forth the changes in the Companys equity investments.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COAL |
|
|
Shanghai NC-SINA |
|
|
Others |
|
|
Total |
|
|
|
(In thousands) |
|
Balances at December 31, 2004 |
|
$ |
1,932 |
|
|
$ |
1,384 |
|
|
$ |
1,225 |
|
|
$ |
4,541 |
|
Investments |
|
|
1,749 |
|
|
|
|
|
|
|
1,275 |
|
|
|
3,024 |
|
Sale of investments |
|
|
(1,494 |
) |
|
|
|
|
|
|
|
|
|
|
(1,494 |
) |
Share of gain (loss) of equity investments |
|
|
(2,187 |
) |
|
|
33 |
|
|
|
(656 |
) |
|
|
(2,810 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at December 31, 2005 |
|
|
|
|
|
|
1,417 |
|
|
|
1,844 |
|
|
|
3,261 |
|
Investments |
|
|
|
|
|
|
|
|
|
|
800 |
|
|
|
800 |
|
Share of loss of equity investments |
|
|
|
|
|
|
(108 |
) |
|
|
(582 |
) |
|
|
(690 |
) |
Sale of investments |
|
|
|
|
|
|
( 1,309 |
) |
|
|
(892 |
) |
|
|
(2,201 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at December 31, 2006 |
|
|
|
|
|
|
|
|
|
|
1,170 |
|
|
|
1,170 |
|
Investment |
|
|
|
|
|
|
|
|
|
|
1,300 |
|
|
|
1,300 |
|
Sale of investment |
|
|
|
|
|
|
|
|
|
|
(1,170 |
) |
|
|
(1,170 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2007 |
|
$ |
|
|
|
$ |
|
|
|
$ |
1,300 |
|
|
$ |
1,300 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In December 2005, the Company sold its 33% interest in China Online Auction Limited (COAL,
a.k.a. 1 Pai.com), a joint venture with Yahoo!, to Alibaba.com and recorded a gain of $2.7 million.
In May 2006, the Company sold its 51% interest in Shanghai-NC SINA, a joint venture with NC Soft, a
Korean online game company, to NC Soft and recorded a gain of $2.0 million.
F-16
5. Cash, Cash Equivalents and Short-term Investments
Cash, cash equivalents and short-term investments consisted of the following as of December
31, 2007 and 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2007 |
|
|
As of December 31, 2006 |
|
|
|
|
|
|
|
Unrealized |
|
|
Estimated fair |
|
|
|
|
|
|
Unrealized |
|
|
Estimated fair |
|
|
|
Carrying value |
|
|
losses |
|
|
value |
|
|
Carrying value |
|
|
losses |
|
|
value |
|
|
|
(In thousands) |
|
Cash and cash equivalents: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash |
|
$ |
147,724 |
|
|
$ |
|
|
|
$ |
147,724 |
|
|
$ |
86,876 |
|
|
$ |
|
|
|
$ |
86,876 |
|
Cash equivalents: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank time deposits |
|
|
30,433 |
|
|
|
|
|
|
|
30,433 |
|
|
|
22,167 |
|
|
|
|
|
|
|
22,167 |
|
Commercial paper |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
24,889 |
|
|
|
|
|
|
|
24,889 |
|
Investment in money market funds |
|
|
93,509 |
|
|
|
|
|
|
|
93,509 |
|
|
|
29,245 |
|
|
|
|
|
|
|
29,245 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
123,942 |
|
|
|
|
|
|
|
123,942 |
|
|
|
76,301 |
|
|
|
|
|
|
|
76,301 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
271,666 |
|
|
|
|
|
|
|
271,666 |
|
|
|
163,177 |
|
|
|
|
|
|
|
163,177 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term investments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank time deposits |
|
|
165,872 |
|
|
|
|
|
|
|
165,872 |
|
|
|
123,810 |
|
|
|
|
|
|
|
123,810 |
|
U.S. Treasury and federal agency bonds |
|
|
16,080 |
|
|
|
(397 |
) |
|
|
15,683 |
|
|
|
19,128 |
|
|
|
(1,146 |
) |
|
|
17,982 |
|
China bank notes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31,532 |
|
|
|
|
|
|
|
31,532 |
|
Corporate bonds and notes |
|
|
20,328 |
|
|
|
(138 |
) |
|
|
20,190 |
|
|
|
22,507 |
|
|
|
(357 |
) |
|
|
22,150 |
|
Floating rate notes |
|
|
4,973 |
|
|
|
(385 |
) |
|
|
4,588 |
|
|
|
4,968 |
|
|
|
(868 |
) |
|
|
4,100 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
207,253 |
|
|
|
(920 |
) |
|
|
206,333 |
|
|
|
201,945 |
|
|
|
(2,371 |
) |
|
|
199,574 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cash, cash equivalents and
short-term investments |
|
$ |
478,919 |
|
|
$ |
(920 |
) |
|
$ |
477,999 |
|
|
$ |
365,122 |
|
|
$ |
(2,371 |
) |
|
$ |
362,751 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income for the years ended December 31, 2007, 2006 and 2005 was $11.5 million, $8.5
million and $6.6 million, respectively.
In accordance with FASB Staff Position No. FAS 115-1 The Meaning of Other-Than-Temporary
Impairment and Its Application to Certain Investments, the following table summarizes the fair
value and gross unrealized losses related to available-for-sale debt securities, aggregated by
investment category and length of time that individual securities have been in a continuous
unrealized loss position at December 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than 12 months |
|
|
12 months or more |
|
|
Total |
|
|
|
|
|
|
|
Gross |
|
|
|
|
|
|
Gross |
|
|
|
|
|
|
Gross |
|
|
|
Estimated |
|
|
unrealized |
|
|
Estimated |
|
|
unrealized |
|
|
Estimated |
|
|
unrealized |
|
|
|
fair value |
|
|
losses |
|
|
fair value |
|
|
losses |
|
|
fair value |
|
|
losses |
|
|
|
(In thousands) |
|
U.S. Treasury and federal agency bonds |
|
$ |
|
|
|
$ |
|
|
|
$ |
15,683 |
|
|
$ |
(397 |
) |
|
$ |
15,683 |
|
|
$ |
(397 |
) |
Corporate bonds and notes |
|
|
9,949 |
|
|
|
(129 |
) |
|
|
10,241 |
|
|
|
(9 |
) |
|
|
20,190 |
|
|
|
(138 |
) |
Floating rate notes |
|
|
|
|
|
|
|
|
|
|
4,588 |
|
|
|
(385 |
) |
|
|
4,588 |
|
|
|
(385 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
9,949 |
|
|
$ |
(129 |
) |
|
$ |
30,512 |
|
|
$ |
(791 |
) |
|
$ |
40,461 |
|
|
$ |
(920 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Market values were determined for each individual security in the investment portfolio. The
declines in value of these investments are primarily related to changes in interest rates and are
considered to be temporary in nature. See Note 1 for the Companys policy on available-for-sale
securities. Realized gains or loss on short-term investments were immaterial for the periods
presented.
The following table summarizes the contractual maturities of available-for-sale debt
securities at December 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
|
Estimated |
|
|
unrealized |
|
|
|
fair value |
|
|
losses |
|
|
|
(In thousands) |
|
Short-term investments: |
|
|
|
|
|
|
|
|
Due within one year |
|
$ |
176,265 |
|
|
$ |
(15 |
) |
Due one to five years |
|
|
4,997 |
|
|
|
(3 |
) |
Due after five years |
|
|
25,071 |
|
|
|
(902 |
) |
|
|
|
|
|
|
|
|
|
$ |
206,333 |
|
|
$ |
(920 |
) |
|
|
|
|
|
|
|
In 2006, the Company changed its presentation in the statement of cash flows to disclose the
gross cash inflows and outflows from short-term investments. We had previously reported these
amounts net. The Company has revised its 2005 Consolidated Statements of Cash Flows accordingly.
F-17
6. Balance Sheet Components
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2007 |
|
|
2006 |
|
|
|
(In thousands) |
|
Accounts receivable, net: |
|
|
|
|
|
|
|
|
Accounts receivable |
|
$ |
62,382 |
|
|
$ |
49,502 |
|
Allowance for doubtful accounts: |
|
|
|
|
|
|
|
|
Balance at beginning of year |
|
|
(4,471 |
) |
|
|
(2,443 |
) |
Charge to expenses |
|
|
(5,294 |
) |
|
|
(5,044 |
) |
Write-off, net of recoveries |
|
|
4,102 |
|
|
|
3,016 |
|
|
|
|
|
|
|
|
Balance at end of year |
|
|
(5,663 |
) |
|
|
(4,471 |
) |
|
|
|
|
|
|
|
|
|
$ |
56,719 |
|
|
$ |
45,031 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net: |
|
|
|
|
|
|
|
|
Computers and equipment |
|
$ |
57,826 |
|
|
$ |
54,630 |
|
Leasehold improvements |
|
|
3,805 |
|
|
|
5,107 |
|
Furniture and fixtures |
|
|
2,663 |
|
|
|
2,995 |
|
Other |
|
|
1,637 |
|
|
|
1,313 |
|
|
|
|
|
|
|
|
|
|
|
65,931 |
|
|
|
64,045 |
|
Less: Accumulated depreciation and amortization |
|
|
(39,085 |
) |
|
|
(36,944 |
) |
|
|
|
|
|
|
|
|
|
$ |
26,846 |
|
|
$ |
27,101 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued liabilities: |
|
|
|
|
|
|
|
|
Payroll and related expenses |
|
$ |
7,990 |
|
|
$ |
7,478 |
|
Deferred revenue |
|
|
7,443 |
|
|
|
4,156 |
|
Business taxes |
|
|
5,961 |
|
|
|
4,231 |
|
Sales rebates |
|
|
11,777 |
|
|
|
8,454 |
|
Marketing expenses |
|
|
4,641 |
|
|
|
3,128 |
|
Professional fees |
|
|
2,185 |
|
|
|
1,616 |
|
Content fees |
|
|
8,403 |
|
|
|
6,243 |
|
Others |
|
|
8,531 |
|
|
|
6,687 |
|
|
|
|
|
|
|
|
|
|
$ |
56,931 |
|
|
$ |
41,993 |
|
|
|
|
|
|
|
|
7.
Related Party Transactions
In April 2007, SINA.com Technology (China) Co. Ltd., one of the Companys subsidiaries,
entered into an agreement with BroadVision Inc.
(BroadVision). One of the Company's directors is also the controlling stockholder of BroadVision and is currently serving as its Chairman, CEO
and President. As of March 23, 2007, the director beneficially owned approximately 39% of common stock
of BroadVision. Under the agreement, BroadVision will provide customization and hosting service for
the Companys HR information management system in China. SINA
paid BroadVision a total of
RMB1,000,000 or $0.12 million in 2007, including RMB500,000 or $0.06 million for system
implementation service and another RMB500,000 or $0.06 million for the software subscription, and
starting from 2008, SINA will pay a yearly subscription fee of RMB500,000 or $0.06 million for the software
subscription and system upgrade, feature enhance and technical support. Under the agreement, SINA
have an option to buy out the software license from BroadVision on a non-exclusive basis by paying
a lump-sum amount (RMB2,000,000 or $0.24 million, RMB1,500,000 or $0.18 million, or RMB1,000,000 or
$0.12 million for buy-out in 2008, 2009 or 2010 or later, respectively) plus a 22% of the buy-out
amount for maintenance services. During the year ended December 31, 2007, $0.12 million was charged
to the Companys general and administrative expenses. There was no amount outstanding as of December 31,
2007.
F-18
During
the year 2007, a VIE of the Company entered into technical support
contracts with a 19%-owned, privately-held, equity-invested company. Technical support services fees charged by the
privately-held, equity-invested company to the VIE was $0.4 million during the year and amount due
to it was nil as of December 31, 2007.
The Company sold advertising space to Shanghai NC-SINA to allow the joint venture to promote
its online game on the Companys web site. The contract terms are at rates and terms that are
comparable with those entered into with independent third parties. Revenues derived from the
advertising arrangements with Shanghai NC-SINA were nil and approximately $0.5 million for the
years ended December 31, 2006, and 2005, respectively. The Company sold its interest in Shanghai
NC-SINA in May 2006.
As part of the joint venture arrangement with COAL, the Company agreed to divert a certain
number of users to COALs auction site in exchange for an equity interest in COAL. Such obligation
was recorded as deferred revenue at the time the Company recorded the equity investment in COAL.
Non-advertising revenues from this arrangement were recognized on a pro-rated basis, based on the
number of users diverted to COALs auction site. Prior to the Companys sale of its interest in
COAL in December 2005, non-advertising revenue from this arrangement was $0.9 million for the year
ended December 31, 2005.
8. Income Taxes
The Company is registered in the Cayman Islands and has operations in four tax jurisdictions -
the PRC, the United States of America, Hong Kong and Taiwan. The operations in Taiwan represent a
branch office of the subsidiary in the United States. For operations in the United States of
America, Hong Kong and Taiwan, the Company has incurred net accumulated operating losses for income
tax purposes. The Company believes that it is more likely than not that these net accumulated
operating losses will not be utilized in the future. Therefore, the Company has provided full
valuation allowance for the deferred tax assets arising from the losses at these locations as of
December 31, 2007. The Company generated substantially all of its net income from its PRC
operations for the years ended December 31, 2007, 2006 and 2005, and the Company has recorded
income tax provisions for these years.
The components of income before income taxes are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31, |
|
|
|
2007 |
|
|
2006 |
|
|
2005 |
|
|
|
(In thousands, except percentage) |
|
Loss subject to non China operation |
|
$ |
(5,934 |
) |
|
$ |
(12,161 |
) |
|
$ |
(6,349 |
) |
Income subject to China operation |
|
|
70,167 |
|
|
|
56,128 |
|
|
|
51,874 |
|
|
|
|
|
|
|
|
|
|
|
Income before taxes |
|
$ |
64,233 |
|
|
$ |
43,967 |
|
|
$ |
45,525 |
|
|
|
|
|
|
|
|
|
|
|
Income tax expenses applicable to China operation |
|
$ |
6,504 |
|
|
$ |
4,051 |
|
|
$ |
2,410 |
|
Effective tax rate for China operation |
|
|
9 |
% |
|
|
7 |
% |
|
|
5 |
% |
Cayman Islands
Under the current tax laws of Cayman Islands, the Company is not subject to tax on income or
capital gain. In addition, upon payments of dividends by the Company to its shareholders, no Cayman
Islands withholding tax will be imposed.
United States of America
The components of income (loss) before income taxes separating U.S. and non U.S. operations
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31, |
|
|
|
2007 |
|
|
2006 |
|
|
2005 |
|
|
|
(In thousands) |
|
Loss subject to U.S. operation (including Taiwan branch) |
|
$ |
(485 |
) |
|
$ |
(798 |
) |
|
$ |
(446 |
) |
Loss subject to other operations |
|
|
(5,449 |
) |
|
|
(11,363 |
) |
|
|
(5,903 |
) |
Income subject to China operation |
|
|
70,167 |
|
|
|
56,128 |
|
|
|
51,874 |
|
|
|
|
|
|
|
|
|
|
|
Income before taxes |
|
$ |
64,233 |
|
|
$ |
43,967 |
|
|
$ |
45,525 |
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2007, the Companys subsidiary in the United States of America had
approximately $79.0 million of federal and $35.5 million of state net operating loss carryforwards
available to offset future taxable income. The federal net operating loss carryforwards will
expire, if unused, in the years ending June 30, 2011 through December 31, 2028, and the state net
operating loss carryforwards will expire, if unused, in the years ending June 30, 2010 through
December 31, 2018. Included in the net operating loss carryforwards were $33.8 million and $21.2
million of federal and state net operating loss carryforwards relating to employee stock options,
the benefit of which will be credited to equity when realized. The Tax Reform Act of 1986 limits
the use of net operating loss and tax credit carryforwards in certain situations when changes occur
in the stock ownership of a company. In the event the Company has a change in ownership,
utilization of carryforwards could be restricted. The deferred tax assets for the United States
subsidiary at December 31, 2007 consists mainly of net operating loss carryforwards for which a
full valuation allowance has been provided, as the management believes it is more likely than not
that these assets will not be realized in the future.
F-19
The following table sets forth the significant components of the net deferred tax assets for
operation in the United States of America as of December 31, 2007, 2006 and 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2007 |
|
|
2006 |
|
|
2005 |
|
|
|
(In thousands) |
|
Deferred tax assets: |
|
|
|
|
|
|
|
|
|
|
|
|
Net operating loss carryforwards |
|
$ |
29,282 |
|
|
$ |
28,461 |
|
|
$ |
27,848 |
|
Allowances for doubtful accounts, accruals and other liabilities |
|
|
95 |
|
|
|
99 |
|
|
|
117 |
|
Other tax credits |
|
|
346 |
|
|
|
346 |
|
|
|
346 |
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets |
|
|
29,723 |
|
|
|
28,906 |
|
|
|
28,311 |
|
Less: valuation allowance |
|
|
(29,723 |
) |
|
|
(28,906 |
) |
|
|
(28,311 |
) |
|
|
|
|
|
|
|
|
|
|
Deferred tax assets |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
Hong Kong
As of December 31, 2007, the Companys Hong Kong subsidiary had approximately $13.3 million of
net operating loss carryforwards which can be carried forward indefinitely to offset future taxable
income. The deferred tax assets for the Hong Kong subsidiary at December 31, 2007 consists mainly
of net operating loss carryforwards and for which a full valuation allowance has been provided, as
the management believes it is more likely than not that these assets will not be realized in the
future.
The following table sets forth the significant components of the net deferred tax assets for
Hong Kong operation as of December 31, 2007, 2006 and 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2007 |
|
|
2006 |
|
|
2005 |
|
|
|
(In thousands) |
|
Deferred tax assets: |
|
|
|
|
|
|
|
|
|
|
|
|
Net operating loss carryforwards |
|
$ |
2,130 |
|
|
$ |
2,290 |
|
|
$ |
2,013 |
|
Less: valuation allowance |
|
|
(2,130 |
) |
|
|
(2,290 |
) |
|
|
(2,013 |
) |
|
|
|
|
|
|
|
|
|
|
Deferred tax assets |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
China
Prior to January 1, 2008, the Companys subsidiaries and variable interest enterprises
(VIEs) were governed by the previous Income Tax Law (the Previous IT Law) of China. Under the
Previous IT Law, the Companys subsidiaries and VIEs were generally subjected to enterprise income
taxes at a statutory rate of 33% (30% state income tax plus 3% local income tax) or 15% for
qualified new and high technology enterprises. In addition to a preferential statutory rate, some
of the Companys new and high technology subsidiaries were entitled to special tax holidays of
three-year tax exemption followed by three years at a 50% reduction in the tax rate, commencing the
first operating year.
Effective January 1, 2008, the new Enterprise Income Tax Law (the EIT Law) in China
supersedes the Previous IT Law and unifies the enterprise income tax rate for VIEs and FIEs at
25%. New and high technology enterprises will continue to enjoy a preferential tax rate of 15% but
must meet the new set of criteria defined under the EIT Law and related regulations. The EIT Law
provides a five-year transitional period for certain entities that enjoyed a favorable income tax
rate of less than 25% under the Previous IT Law and were established
before
March 16, 2007, to
gradually increase their rates to 25%. In addition, the EIT Law provides grandfather treatment for
new and high technology enterprises that received special tax holidays or tax reductions under the
Previous IT Law to continue to enjoy their tax holidays until expiration.
The EIT Law also imposes a withholding income tax of 10% on dividends distributed by a
Foreign-invested Enterprises (FIEs) to its immediate holding company outside of China, if such
immediate holding company is considered as a non-resident enterprise without any establishment or
place within China or if the received dividends have no connection with the establishment or place
of such immediate holding company within China, unless such immediate holding companys
jurisdiction of incorporation has a tax treaty with China that provides for a different withholding
arrangement. Such withholding income tax was exempted under the Previous IT Law. The Cayman
Islands, where the Company incorporated, does not have such a tax treaty with China. According to
the arrangement between Mainland China and Hong Kong Special Administrative Region on the Avoidance
of Double Taxation and Prevention of Fiscal Evasion in August 2006, dividends paid by a
foreign-invested enterprise in China to its direct holding company in Hong Kong will be subject to
withholding tax at a rate of no more than 5% (if the foreign investor owns directly at least 25% of
the shares of the FIE). A majority of the Companys FIEs operations in China are invested and held
by Hong Kong registered entities. In accordance with APB Option No. 23, Accounting for Income
Taxes Special Area, all undistributed earnings are presumed to be transferred to the parent
company and are subject to the withholding taxes. The withholding tax imposed on the dividend
income will reduce the Companys net income. If a withholding tax were imposed to retained earnings
prior to January 1, 2008, the Company
F-20
would elect to reinvest these retained earnings in the PRC. Accordingly, as of December 31,
2007, the Company has not recorded any withholding tax on the retained earnings of its FIEs in
China. Based on the subsequently issued interpretation of the new EIT, Article 4 of Cai Shui
[2008] Circular No.1, dividends on earnings prior to 2008 but distributed after 2008 are not
subject to withholding income tax.
The
EIT Law also provides that an enterprise established under the laws of foreign countries or
regions but whose de facto management body is located in the PRC be treated as a resident
enterprise for PRC tax purposes and consequently be subject to the PRC income tax at the rate of
25% for its global income. The Implementing Rules of the EIT Law merely defines the location of
the de facto management body as the place where the exercising, in substance, of the overall
management and control of the production and business operation, personnel, accounting, properties,
etc., of a non-PRC company is located. The determination of tax residency requires a review of
surrounding facts and circumstances of each case. If SINA is treated as a resident enterprise for
PRC tax purposes, SINA will be subject to PRC tax on worldwide income at a uniform tax rate of 25%
starting from January 1, 2008.
Like its predecessor, the EIT Law mainly provides a framework for general income tax
provisions. There are currently divergent views on how the EIT Law will be implemented. Details
on the definition of numerous terms as well as the interpretation and specific application of
various provisions are left to the detailed implementing regulations and supplementary tax
circulars, which are still being issued. The Companys ultimate effective tax rate will depend on
many factors, including but not limited to, whether certain of the Companys FIEs in China will
receive the new and high technology enterprise status under the new criteria.
The Companys VIEs are wholly owned by the Companys employees and controlled by the Company
through various contractual agreements. To the extent that these VIEs
have undistributed earnings, the Company has to pay taxes on behalf of its employees when dividends are distributed
from these local entities in the future. Such dividend tax rate is 20%.
Composition of income tax expenses for China operation
The following table sets forth current and deferred portion of income tax expenses of the
Companys China subsidiaries and VIEs, which were included in the consolidated statements for the
periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31, |
|
|
|
2007 |
|
|
2006 |
|
|
2005 |
|
|
|
(In thousands) |
|
Income tax provision |
|
$ |
(6,030 |
) |
|
$ |
(4,401 |
) |
|
$ |
(2,671 |
) |
Deferred income tax provision |
|
|
1,458 |
|
|
|
2,948 |
|
|
|
2,492 |
|
Change in valuation allowance |
|
|
(1,932 |
) |
|
|
(2,598 |
) |
|
|
(2,231 |
) |
|
|
|
|
|
|
|
|
|
|
Income tax expenses |
|
$ |
(6,504 |
) |
|
$ |
(4,051 |
) |
|
$ |
(2,410 |
) |
|
|
|
|
|
|
|
|
|
|
Reconciliation of the differences between statutory tax rate and the effective tax rate for China
operation
The following table sets forth reconciliation between the statutory EIT rate and the effective
tax rate for China operation for the periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31, |
|
|
2007 |
|
2006 |
|
2005 |
Statutory EIT rate |
|
|
33 |
% |
|
|
33 |
% |
|
|
33 |
% |
Effect on
preferential tax rate and dividend tax on VIEss undistributed
earnings, net |
|
|
1 |
% |
|
|
|
|
|
|
(2 |
%) |
Effect on tax holiday |
|
|
(30 |
%) |
|
|
(32 |
%) |
|
|
(31 |
%) |
Permanent differences |
|
|
1 |
% |
|
|
1 |
% |
|
|
1 |
% |
Change in valuation allowance |
|
|
4 |
% |
|
|
5 |
% |
|
|
4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective tax rate for China operations |
|
|
9 |
% |
|
|
7 |
% |
|
|
5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
The provisions for income taxes for the years ended December 31, 2007, 2006 and 2005 differ
from the amounts computed by applying the EIT primarily due to the tax holidays and the
preferential tax rate enjoyed by certain of the Companys entities in the PRC. The effective tax
rates for the PRC operations for the year ended December 31, 2007 were higher than 2006 and 2005
primarily result from higher taxable income generated from entities with higher income tax rate. As
of December 31, 2007, the tax holidays available to many of the Companys legal entities in China
have expired.
F-21
The following table sets forth the effects of the tax holidays granted to the entities of the
Company for the periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31, |
|
|
2007 |
|
2006 |
|
2005 |
|
|
(In thousands, except per share amount) |
Tax holiday effect |
|
$ |
20,734 |
|
|
$ |
18,323 |
|
|
$ |
16,032 |
|
Basic net income per share effect |
|
$ |
0.38 |
|
|
$ |
0.34 |
|
|
$ |
0.31 |
|
The following table sets forth the significant components of the net deferred tax assets for
China operation as of December 31, 2007, 2006 and 2005.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2007 |
|
|
2006 |
|
|
2005 |
|
|
|
(In thousands) |
|
Deferred tax assets: |
|
|
|
|
|
|
|
|
|
|
|
|
Net operating loss carryforwards * |
|
$ |
1,021 |
|
|
$ |
1,774 |
|
|
$ |
964 |
|
Allowances for doubtful accounts, accruals and other liabilities |
|
|
4,168 |
|
|
|
3,165 |
|
|
|
1,358 |
|
Depreciation |
|
|
2,828 |
|
|
|
1,620 |
|
|
|
1,289 |
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets |
|
|
8,017 |
|
|
|
6,559 |
|
|
|
3,611 |
|
Less: valuation allowance |
|
|
(6,761 |
) |
|
|
(4,829 |
) |
|
|
(2,231 |
) |
|
|
|
|
|
|
|
|
|
|
Deferred tax assets |
|
$ |
1,256 |
|
|
$ |
1,730 |
|
|
$ |
1,380 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
The net operating loss carryforwards will expire, if unused, in the years ending December 31,
2009 through 2012. |
Historically, deferred tax assets were valued using the previous statutory rate of 33% or
applicable preferential rates of 7.5% or 15% of the respective legal entities. In March 2007, upon
the enactment of the EIT Law, the Company recalculated the carrying deferred tax assets based on
the new EIT rate of 25%. As a result of the recalculation, deferred tax assets in the amount of
$0.4 million was written down in the first quarter of 2007. During 2007, the valuation allowance
for deferred tax assets related to the allowances for doubtful accounts was increased by $1.6
million based on the Companys historical experience with the Chinese tax authorities.
Aggregate net deferred tax assets
The following table sets forth the significant components of the aggregate net deferred tax
assets of the Company as of December 31, 2007, 2006 and 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2007 |
|
|
2006 |
|
|
2005 |
|
|
|
(In thousands) |
|
Short-term deferred tax assets: |
|
|
|
|
|
|
|
|
|
|
|
|
Allowances for doubtful accounts, accruals and other liabilities |
|
|
145 |
|
|
|
|
|
|
|
549 |
|
Depreciation |
|
|
501 |
|
|
|
697 |
|
|
|
597 |
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets |
|
|
646 |
|
|
|
697 |
|
|
|
1,146 |
|
Less: valuation allowance |
|
|
(302 |
) |
|
|
(260 |
) |
|
|
(289 |
) |
|
|
|
|
|
|
|
|
|
|
Short-term deferred tax assets, net |
|
$ |
344 |
|
|
$ |
437 |
|
|
$ |
857 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term deferred tax assets included in other assets: |
|
|
|
|
|
|
|
|
|
|
|
|
Net operating loss carryforwards |
|
$ |
32,433 |
|
|
$ |
32,525 |
|
|
$ |
30,825 |
|
Allowances for doubtful accounts, accruals and other liabilities |
|
|
4,118 |
|
|
|
3,264 |
|
|
|
926 |
|
Depreciation |
|
|
2,327 |
|
|
|
923 |
|
|
|
692 |
|
Other tax credits |
|
|
346 |
|
|
|
346 |
|
|
|
346 |
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets |
|
|
39,224 |
|
|
|
37,058 |
|
|
|
32,789 |
|
Less: valuation allowance |
|
|
(38,312 |
) |
|
|
(35,765 |
) |
|
|
(32,266 |
) |
|
|
|
|
|
|
|
|
|
|
Long-term deferred tax assets, net |
|
$ |
912 |
|
|
$ |
1,293 |
|
|
$ |
523 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets |
|
$ |
1,256 |
|
|
$ |
1,730 |
|
|
$ |
1,380 |
|
|
|
|
|
|
|
|
|
|
|
F-22
Movement of valuation allowances for deferred tax assets
The following table sets forth the movement of the aggregate valuation allowances for deferred
assets for the periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31, |
|
|
|
2007 |
|
|
2006 |
|
|
2005 |
|
|
|
(In thousands) |
|
Balance at beginning of the year |
|
$ |
36,025 |
|
|
$ |
32,555 |
|
|
$ |
23,295 |
|
Provision for the year |
|
|
2,589 |
|
|
|
3,470 |
|
|
|
9,260 |
|
|
|
|
|
|
|
|
|
|
|
Balance at end of the year |
|
$ |
38,614 |
|
|
$ |
36,025 |
|
|
$ |
32,555 |
|
|
|
|
|
|
|
|
|
|
|
9. Net Income Per Share
Basic net income per share is computed using the weighted average number of the ordinary
shares outstanding during the period. Diluted net income per share is computed using the weighted
average number of ordinary shares and ordinary share equivalents outstanding during the period.
Options to purchase ordinary shares and restricted share units that were anti-dilutive and were
excluded from the calculation of diluted net income per share were approximately 31,000, 1.9
million and 0.2 million for years ended December 31, 2007, 2006 and 2005, respectively.
The following table sets forth the computation of basic and diluted net income per share for
the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31, |
|
|
|
2007 |
|
|
2006 |
|
|
2005 |
|
|
|
(In thousands, except per share amounts) |
|
Basic net income per share calculation: |
|
|
|
|
|
|
|
|
|
|
|
|
Numerator: |
|
|
|
|
|
|
|
|
|
|
|
|
Net income used in computing basic net income per share |
|
$ |
57,729 |
|
|
$ |
39,916 |
|
|
$ |
43,115 |
|
|
|
|
|
|
|
|
|
|
|
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average ordinary shares outstanding |
|
|
55,038 |
|
|
|
53,696 |
|
|
|
52,455 |
|
Ordinary shares to be issued for business acquisition |
|
|
|
|
|
|
|
|
|
|
30 |
|
|
|
|
|
|
|
|
|
|
|
Shares used in computing basic net income per share |
|
|
55,038 |
|
|
|
53,696 |
|
|
|
52,485 |
|
|
|
|
|
|
|
|
|
|
|
Basic net income per share |
|
$ |
1.05 |
|
|
$ |
0.74 |
|
|
$ |
0.82 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income per share calculation: |
|
|
|
|
|
|
|
|
|
|
|
|
Numerator: |
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
57,729 |
|
|
$ |
39,916 |
|
|
$ |
43,115 |
|
Amortization of convertible debt issuance cost |
|
|
342 |
|
|
|
685 |
|
|
|
685 |
|
|
|
|
|
|
|
|
|
|
|
Net income used in computing diluted net income per share |
|
$ |
58,071 |
|
|
$ |
40,601 |
|
|
$ |
43,800 |
|
|
|
|
|
|
|
|
|
|
|
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average ordinary shares outstanding |
|
|
55,038 |
|
|
|
53,696 |
|
|
|
52,455 |
|
Weighted average ordinary shares equivalents: |
|
|
|
|
|
|
|
|
|
|
|
|
Stock options |
|
|
1,114 |
|
|
|
967 |
|
|
|
2,335 |
|
Convertible debt |
|
|
3,868 |
|
|
|
3,877 |
|
|
|
3,877 |
|
Others |
|
|
|
|
|
|
9 |
|
|
|
125 |
|
|
|
|
|
|
|
|
|
|
|
Shares used in computing diluted net income per share |
|
|
60,020 |
|
|
|
58,549 |
|
|
|
58,792 |
|
|
|
|
|
|
|
|
|
|
|
Diluted net income per share |
|
$ |
0.97 |
|
|
$ |
0.69 |
|
|
$ |
0.75 |
|
|
|
|
|
|
|
|
|
|
|
10. Employee Benefit Plans
401(k) Savings Plan
The Companys U.S. subsidiary has a savings plan that qualifies as a deferred salary
arrangement under Section 401(k) of the Internal Revenue Code (the 401(k) Plan). Under the 401(k)
Plan, participating employees may defer 100% of their eligible pretax earnings up to the Internal
Revenue Services annual contribution limit. All employees on the United States payroll of the
Company age 21 years or older are eligible to participate in the 401(k) Plan. The Company has not
been required to contribute to the 401(k) Plan.
F-23
China Contribution Plan
The Companys subsidiaries and VIEs in China participate in a government-mandated
multi-employer defined contribution plan pursuant to which certain retirement, medical, housing and
other welfare benefits are provided to employees. Chinese labor regulations require the Companys
subsidiary to pay to the local labor bureau a monthly contribution at a stated contribution rate
based on the monthly basic compensation of qualified employees. The relevant local labor bureau is
responsible for meeting all retirement benefit obligations; the Company has no further commitments
beyond its monthly contribution. During the years ended December 31, 2007, 2006 and 2005, the
Company contributed a total of $6.5 million, $6.1 million, $5.1 million, respectively, to these
funds.
11. Profit Appropriation
The Companys subsidiaries and VIEs in China are required to make appropriations to certain
non-distributable reserve funds. In accordance with the laws applicable to Chinas FIEs, its
subsidiaries have to make appropriations from its after-tax profit (as determined under PRC GAAP)
to non-distributable reserve funds including (i) general reserve fund, (ii) enterprise expansion
fund and (iii) staff bonus and welfare fund. General reserve fund is at least 10% of the after-tax
profits calculated in accordance with the PRC GAAP. Appropriation is not required if the reserve
fund has reached 50% of the registered capital of the respective company. The appropriation of the
other two reserve funds is at the Companys discretion. At the same time, the Companys VIEs, in
accordance with the China Company Laws, must make appropriations from its after-tax profit (as
determined under PRC GAAP) to non-distributable reserve funds including (i) statutory surplus fund,
(ii) statutory public welfare fund and (iii) discretionary surplus fund. Statutory surplus fund is
at least 10% of the after-tax profits calculated in accordance with the PRC GAAP. Appropriation is
not required if the reserve fund has reached 50% of the registered capital of the respective
company. Appropriation to the statutory public welfare fund is 5% to 10% of the after-tax profits
calculated in accordance with the PRC GAAP. Effective January 1, 2006 under the revised China
Company Laws, appropriation to the statutory public welfare fund is no longer mandatory.
Appropriation to discretionary surplus fund is made at the discretion of the Company.
General reserve fund and statutory surplus fund are restricted for set off against losses,
expansion of production and operation or increase in register capital of the respective company.
Statutory public welfare fund is restricted to the capital expenditures for the collective welfare
of employees. These reserves are not transferable to the Company in the form of cash dividends,
loans or advances. These reserves are therefore not available for distribution except in
liquidation. As of December 31, 2007, the Company is subject to
a maximum appropriation of
$15.1
million to these non-distributable reserve funds.
12. Shareholders Equity
Stockholder Rights Plan
On February 18, 2005, Shanda Interactive Entertainment Limited (Shanda) and certain related
persons and entities filed a Schedule 13D with the U.S. Securities and Exchange Commission
indicating that they beneficially own 19.5% of SINAs outstanding ordinary shares. For this and
other reasons, the Company has put in place a Rights Plan to protect the best interests of all
shareholders. In general, the Plan vests stockholders of SINA with rights to purchase ordinary
common shares of the Company at a substantial discount from those securities fair market value
upon a person or group acquiring, without the approval of the Board of Directors, more than 10% of
the Companys ordinary shares (or, in the case of the members of the Shanda group, the acquisition
of an additional 0.5% or more of the Companys ordinary shares). Any person or group who triggers
the purchase right distribution becomes ineligible to participate in the Plan, causing substantial
dilution of such person or groups holdings. The rights will expire on February 22, 2015.
In addition, the Companys Board of Directors has the authority, without further action by its
shareholders, to issue up to 3,750,000 preference shares in one or more series and to fix the
powers and rights of these shares, including dividend rights, conversion rights, voting rights,
terms of redemption and liquidation preferences, any or all of which may be greater than the rights
associated with its ordinary shares. Preference shares could thus be issued quickly with terms
calculated to delay or prevent a change in control or make removal of management more difficult.
Similarly, the Board of Directors may approve the issuance of debentures convertible into voting
shares, which may limit the ability of others to acquire control of the Company.
F-24
13. Stock-based Compensation
2007 Share Incentive Plan
On June 29, 2007, the Company adopted the 2007 Share Incentive Plan (the 2007 Plan). The
2007 Plan permits the granting of share options, share appreciation rights, restricted share units
and restricted shares. The 2007 Plan has a 5-year term with a fixed number of shares authorized for
issuance. Under the plan, a total of 5,000,000 ordinary shares of the Company are available for
issuance. The maximum number of ordinary shares that may be granted subject to awards under the
2007 Plan during any given fiscal year will be limited to 3% of the total outstanding shares of the
Company as of the end of the immediately preceding fiscal year, plus any shares remaining available
under the share pool for the immediately preceding fiscal year. Share options and share
appreciation rights must be granted with an exercise price of at least 100% of the fair market
value on the date of grant. Repricing of share options and share appreciation rights are prohibited
unless shareholder approval is obtained.
The maximum number of ordinary shares available for issuance will be
reduced by 1 share for every 1 share issued pursuant to a share
option or share appreciation right and by 1.75 share for every 1
share issued as restricted shares or pursuant to a restricted unit.
As of December 31, 2007, there were 84,000 options and
198,000 restricted share units outstanding under the 2007 Plan. Concurrent with the adoption of the
2007 Plan, all remaining shares available for grant under the existing 1999 Stock Plan, 1999
Executive Plan and 1999 Director Stock Option Plan were forfeited.
1999 Stock Plan
In May 1999, the Company adopted the 1999 Stock Plan (the 1999 Plan). The 1999 Plan provides
for the granting of stock options to employees, consultants and directors of the Company. Options
granted under the Plan may be either incentive stock options or nonqualified stock options.
Incentive stock options (ISO) may be granted only to Company employees (including officers and
directors who are also employees). Nonqualified stock options (NSO) may be granted to Company
employees and consultants. As of December 31, 2006, the Company has cumulatively approved
14,358,000 ordinary shares for issuance under the 1999 Plan, including a previous plan carried over
from 1997 and options assumed in the Sinanet acquisition. As of December 31, 2007, there were a
total of 2,151,000 options outstanding under the 1999 Plan.
Options under the Companys 1999 Plan may be granted for a term of up to ten years and at
prices determined by the Board of Directors of the Company, provided, however, that the exercise
price of an ISO shall not be less than 100% of the fair value of the shares on the date of grant
or, if granted to a 10% shareholder, shall not be less than 110% of the fair value of the shares on
the date of grant. The exercise price of an NSO granted to an executive officer of the Company
shall not be less than 100% of the fair value of the shares on the date of grant if such option is
intended to qualify as performance-based compensation under Section 162(m) of the US Internal
Revenue Code of 1986, as amended. Options granted under the 1999 Plan generally vest over a four
year term. Certain grants are exercisable immediately under such terms and conditions as determined
by the Board of Directors. Ordinary Shares issued upon such early exercises are subject to rights
of repurchases by the Company until such shares become fully vested. Concurrent with the adoption
of the 2007 Plan, all remaining shares available for grant under the 1999 Plan were forfeited.
1999 Executive Stock Option Plan
In October 1999, the Board adopted the 1999 Executive Stock Option Plan (the Executive
Plan). An aggregate of 2,250,000 Ordinary Shares have been approved for issuance under the
Executive Plan. The Executive Plan provides for the granting of options to purchase Ordinary Shares
and Ordinary Share purchase rights to eligible employees and consultants. As of December 31, 2007,
there were a total of 141,000 options outstanding under the Executive Plan. Options under Executive
Plan may be granted for a term of up to ten years and at prices determined by the Board of
Directors of the Company, provided, however, that the exercise price of an ISO shall not be less
than 100% of the fair value of the shares on the date of grant or, if granted to a 10% shareholder,
shall not be less than 110% of the fair value of the shares on the date of grant. The exercise
price of an NSO granted to an executive officer of the Company shall not be less than 100% of the
fair value of the shares on the date of grant if such option is intended to qualify as
performance-based compensation under Section 162(m) of the US Internal Revenue Code of 1986, as
amended. Options granted under the Executive Plan generally vest over a four- year term. Certain
grants are exercisable immediately under such terms and conditions as determined by the Board of
Directors. Ordinary Shares issued upon such early exercises are subject to rights of repurchases by
the Company until such shares become fully vested. Concurrent with the adoption of the 2007 Plan,
all remaining shares available for grant under the Executive Plan were forfeited.
1999 Directors Stock Option Plan
In October 1999, the Board approved the 1999 Directors Stock Option Plan (the Directors
Plan) covering an aggregate of 750,000 ordinary shares. The Directors Plan became effective on
the effective date of the initial public offering and provides a non-employee director after the
completion of the offering (1) a non statutory stock option to purchase 37,500 ordinary shares on
the date on which he or she first becomes a member of the Board of Directors, and (2) an additional
non statutory stock option to purchase 15,000 shares on the date of each annual shareholders
meeting immediately thereafter, if on such date he or she has served on the
F-25
Board for at least six months. All options granted under the Directors Plan shall have an
exercise price equal to 100% of the fair value of the shares on the date of grant and shall have a
term of 10 years from the date of grant. All options granted under the Directors Plan vest in full
immediately upon grant. On September 27, 2005, the shareholders of the Company approved an increase
to the aggregate number of ordinary shares issuable under the Directors Plan from 750,000 ordinary
shares to 1,125,000 ordinary shares. As of December 31, 2007, 424,000 options were outstanding
under the Directors Plan. Concurrent with the adoption of the 2007 Plan, all remaining shares
available for grant under the Director Plan were forfeited.
Employee Stock Purchase Plan
In October 1999, the Board adopted the 1999 Employee Stock Purchase Plan (the Purchase
Plan). An aggregate of 3,750,000 ordinary shares have been reserved for issuance under the plan,
plus annual increases equal to the lesser of (1) 600,000 shares, (2) 0.5% of the ordinary shares
outstanding on the last day of the immediately preceding fiscal year, or (3) such lesser number of
shares as is determined by the Board. The Purchase Plan is implemented by a series of overlapping
periods of approximately 24 months duration, with new offering periods (other than the first
offering period which will be approximately 9 1/2 months) commencing on February 1 and August 1 of
each year. The price at which stock is purchased under the Purchase Plan is equal to the lower of
85% of the fair market value of the Ordinary Shares at the beginning of each offering period or at
the end of each purchase period. The eligible employees can have up to 20% of their earnings
withheld to be used to purchase the Companys ordinary shares under the Purchase Plan. The Purchase
Plan includes an automatic withdrawal and reenrollment provision under which the participant in the
ongoing offering period shall automatically be deemed to have withdrawn from the ongoing offering
period and enrolled in such new offering period under the same subscription agreement in effect for
such ongoing offering period if the fair market value of the shares on the new offering period is
lower than the in progress offering period. The plan became effective on the date of the Companys
initial public offering and was terminated as of August 1, 2005.
Compensation Costs
Effective January 1, 2006, the Company adopted SFAS 123R. See Note 1 for a description of the
Companys adoption of SFAS 123R. Stock-based compensation expenses recognized in the
Companys Consolidated Statement of Operations were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31, |
|
|
2007 |
|
2006 |
|
|
(In thousands) |
|
|
Options |
|
Restricted Share Units |
|
Options |
|
Restricted Share Units |
Costs of revenues |
|
$ |
1,605 |
|
|
$ |
183 |
|
|
$ |
1,743 |
|
|
|
N/A |
|
Sales and marketing |
|
$ |
1,091 |
|
|
$ |
143 |
|
|
$ |
1,511 |
|
|
|
N/A |
|
Product development |
|
$ |
1,593 |
|
|
$ |
|
|
|
$ |
1,808 |
|
|
|
N/A |
|
General and administrative |
|
$ |
3,455 |
|
|
$ |
642 |
|
|
$ |
4,412 |
|
|
|
N/A |
|
As
of December 31, 2007, there was $24.1 million of unrecognized compensation cost, adjusted
for estimated forfeitures, related to non-vested stock-based awards granted to the Companys
employees which will be recognized over a weighted-average period of 1.3 years. Total unrecognized
compensation cost may be adjusted for future changes in estimated forfeitures.
Prior to the first quarter of 2006, the Company accounted for stock-based compensation plans
under the recognition and measurement provisions of APB 25 as permitted by SFAS 123, amended by
SFAS No. 148 (SFAS 148) Accounting for Stock-based Compensation-Transition and Disclosure. As
required by SFAS 148, prior to the adoption of SFAS 123R, the Company have provided pro forma net
income and pro forma net income per share disclosures for stock-based awards, as if the fair
value-based method defined in SFAS 123 had been adopted.
F-26
The following table sets forth the pro forma amounts of net income and net income per share
for the year ended December 31, 2005 that would have resulted if the Company had accounted for
stock-based awards under the fair value recognition provisions of SFAS 123:
|
|
|
|
|
|
|
|
|
Year
ended December 31, 2005 |
|
|
(In thousands,
except per share amounts) |
Net income: |
|
|
|
|
|
|
As reported |
|
|
$ |
43,115 |
|
Deduct: Employee stock
purchase plan related
compensation expenses
determined under fair value
based method |
|
|
|
(73 |
) |
|
Deduct: Stock-based employee
compensation expenses
determined under fair value
based method |
|
|
|
(9,332 |
) |
|
|
|
|
Pro forma |
|
|
$ |
33,710 |
|
|
|
|
|
|
Basic net income per share: |
|
|
|
|
As reported |
|
|
$ |
0.82 |
|
|
|
|
|
|
Pro forma |
|
|
$ |
0.64 |
|
|
|
|
|
Diluted net income per share: |
|
|
|
|
|
|
As reported |
|
|
$ |
0.75 |
|
|
|
|
|
Pro forma |
|
|
$ |
0.59 |
|
|
|
|
|
|
Valuation of Stock Options
The assumptions used to value the Companys option grants were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31, |
|
|
2007 |
|
2006 |
|
2005 |
Stock options: |
|
|
|
|
|
|
|
|
|
|
|
|
Expected term (in years) |
|
|
4.0 |
|
|
|
3.8-5.0 |
|
|
|
1.0-4.0 |
|
Expected volatility |
|
|
50% |
|
|
|
68%-71% |
|
|
|
61%-87% |
|
Risk-free interest rate |
|
|
3.2% |
|
|
|
5.0%-5.2% |
|
|
|
2.93%-4.09% |
|
Expected dividend yield |
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
Expected term represents the weighted average period of time that stock-based awards granted
are expected to be outstanding giving consideration to historical exercise patterns. The simplified
method was used for fiscal 2006 and 2007. Expected volatilities are based on historical
volatilities of the Companys ordinary shares over the respective expected term of the stock-based
awards. Risk-free interest rate is based on US Treasury zero-coupon issues with maturity terms
similar to the expected term on the stock-based awards. The Company does not anticipate paying any
cash dividends in the foreseeable future.
The following table set forth the summary of number of shares available for issuance:
|
|
|
|
|
|
|
Shares Available |
December 31, 2004 |
|
|
1,317 |
|
Additional approved |
|
|
1,125 |
|
Granted |
|
|
(146 |
) |
Cancelled/expired/forfeited |
|
|
385 |
|
|
|
|
|
|
December 31, 2005 |
|
|
2,681 |
|
Granted |
|
|
(2,100 |
) |
Cancelled/expired/forfeited |
|
|
722 |
|
|
|
|
|
|
December 31, 2006 |
|
|
1,303 |
|
Increased authorization |
|
|
5,000 |
|
Granted * |
|
|
(434 |
) |
|
|
|
|
|
Cancelled/expired/forfeited |
|
|
(1,300 |
) |
December 31, 2007 |
|
|
4,569 |
|
|
|
|
|
|
|
|
|
* |
|
In 2007, 84,000
options and 200,000 restricted shares units, or 350,000 equivalent
shares, were granted. |
F-27
Summary of Stock Option
The following table sets forth the summary of option activity under the Company stock option
program:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average |
|
|
|
|
|
|
Options |
|
|
Weighted Average |
|
|
Remaining |
|
|
Aggregate |
|
|
|
Outstanding |
|
|
Exercise Price |
|
|
Contractual Life |
|
|
Intrinsic Value |
|
|
|
(in thousands) |
|
|
|
|
|
|
(in years) |
|
|
(in thousands) |
|
December 31, 2004 |
|
|
5,418 |
|
|
$ |
11.62 |
|
|
|
|
|
|
|
|
|
Granted |
|
|
146 |
|
|
$ |
26.38 |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(1,569 |
) |
|
$ |
4.30 |
|
|
|
|
|
|
|
|
|
Cancelled/expired/forfeited |
|
|
(385 |
) |
|
$ |
15.59 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2005 |
|
|
3,610 |
|
|
$ |
14.97 |
|
|
|
|
|
|
|
|
|
Granted |
|
|
2,100 |
|
|
$ |
23.90 |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(896 |
) |
|
$ |
11.14 |
|
|
|
|
|
|
|
|
|
Cancelled/expired/forfeited |
|
|
(722 |
) |
|
$ |
11.84 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2006 |
|
|
4,092 |
|
|
$ |
20.95 |
|
|
|
6.14 |
|
|
$ |
32,668 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted |
|
|
84 |
|
|
$ |
49.95 |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(1,138 |
) |
|
$ |
16.73 |
|
|
|
|
|
|
|
|
|
Cancelled/expired/forfeited |
|
|
(238 |
) |
|
$ |
22.31 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007 |
|
|
2,800 |
|
|
$ |
23.41 |
|
|
|
5.22 |
|
|
$ |
58,981 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and expected to vest as of
December 31, 2006 |
|
|
3,898 |
|
|
$ |
20.82 |
|
|
|
6.16 |
|
|
$ |
31,658 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable as of December 31, 2006 |
|
|
1,882 |
|
|
$ |
18.56 |
|
|
|
6.38 |
|
|
$ |
20,015 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and expected to vest as of
December 31, 2007 |
|
|
2,711 |
|
|
$ |
23.32 |
|
|
|
5.24 |
|
|
$ |
57,321 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable as of December 31, 2007 |
|
|
1,561 |
|
|
$ |
21.86 |
|
|
|
5.53 |
|
|
$ |
35,046 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The weighted average estimated fair value of options granted during 2007, 2006 and 2005 was
$20.84, $13.57 and $10.25, respectively. The total intrinsic value of options exercised during
2007, 2006 and 2005 was $25.6 million, $14.1 million and $39.1 million, respectively. The
intrinsic value is calculated as the difference between the market value on the date of exercise
and the exercise price of the shares.
As of December 31, 2007, there was $16.5 million of unrecognized compensation cost, adjusted
for estimated forfeitures, related to non-vested stock options granted to the Companys employees.
This cost is expected to be recognized over a weighted-average period of 1.3 years. Total
unrecognized compensation cost may be adjusted for future changes in estimated forfeitures.
The aggregate intrinsic value of options outstanding and options exercisable as of December
31, 2007 was $59.0 million and $35.0 million, respectively. The aggregate intrinsic value of
options outstanding and options exercisable as of December 31, 2006 was $32.7 million and $20.0
million, respectively. The intrinsic value is calculated as the difference between the market
value as of the last day of the fiscal year and the exercise price of the shares.
During the year ended December 31, 2007, total cash received from the exercises of stock
options was $19.0 million. Information regarding the stock options outstanding at December 31, 2007
is summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average |
|
|
Weighted |
|
|
|
|
|
|
Weighted |
|
|
|
Options |
|
|
Remaining |
|
|
Average |
|
|
Options |
|
|
Average |
|
Range of Exercise prices |
|
Outstanding |
|
|
Contractual Life |
|
|
Exercise Price |
|
|
Exercisable |
|
|
Exercise Price |
|
|
|
(in thousands) |
|
|
(in years) |
|
|
|
|
|
|
(in thousands) |
|
|
|
|
|
$0.5 $20.86 |
|
|
692 |
|
|
|
5.36 |
|
|
$ |
15.67 |
|
|
|
578 |
|
|
$ |
14.66 |
|
$23.17 $23.17 |
|
|
739 |
|
|
|
4.45 |
|
|
$ |
23.17 |
|
|
|
183 |
|
|
$ |
23.17 |
|
$24.23 $24.73 |
|
|
1,022 |
|
|
|
5.27 |
|
|
$ |
24.58 |
|
|
|
543 |
|
|
$ |
24.48 |
|
$25.57 $49.95 |
|
|
347 |
|
|
|
6.48 |
|
|
$ |
35.94 |
|
|
|
257 |
|
|
$ |
31.58 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,800 |
|
|
|
5.22 |
|
|
$ |
23.41 |
|
|
|
1,561 |
|
|
$ |
21.86 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-28
Summary
of Service-Based Restricted Share Units
Service-based restricted share units issued in 2007 were as follows:
|
|
|
|
|
|
|
|
|
|
|
Shares Granted |
|
Weighted-Average Grant-Date |
|
|
(in thousands) |
|
Fair Value |
January 1, 2007 |
|
|
|
|
|
|
|
|
Awarded |
|
|
100 |
|
|
$ |
46.83 |
|
Issued |
|
|
|
|
|
|
|
|
Forfeited |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007 |
|
|
100 |
|
|
$ |
46.83 |
|
|
|
|
|
|
|
|
|
|
There
were no service-based restricted share units granted in 2006 and 2005. Restricted share units are not
considered outstanding in the computation of basic earnings per share.
As
of December 31, 2007, there was $3.9 million of unrecognized compensation cost, adjusted
for estimated forfeitures, related to non-vested service-based restricted share units granted to
the Companys employees. This cost is expected to be recognized over a weighted-average period
of 2.1 years.
Summary
of Performance-Based Restricted Share Units
Performance-based restricted share units issued in 2007 were as follows:
|
|
|
|
|
|
|
|
|
|
|
Shares Granted |
|
Weighted-Average Grant-Date |
|
|
(in thousands) |
|
Fair Value |
January 1, 2007 |
|
|
|
|
|
|
|
|
Awarded |
|
|
100 |
|
|
$ |
46.83 |
|
Issued |
|
|
|
|
|
|
|
|
Forfeited |
|
|
(2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007 |
|
|
98 |
|
|
$ |
46.83 |
|
|
|
|
|
|
|
|
|
|
There
were no performance-based restricted share units granted in 2006 and 2005. Restricted share units are not
considered outstanding in the computation of basic earnings per share.
As
of December 31, 2007, there was $3.7 million of unrecognized compensation cost, adjusted
for estimated forfeitures, related to non-vested performance-based restricted share units granted
to the Companys employees. This cost is expected to be recognized over a weighted-average period
of 0.9 year.
14. Segment Information
Based on the criteria established by SFAS 131, Disclosures about Segments of an Enterprise
and Related Information, the Company currently operates in three principal business segments
globally-advertising, MVAS and other non-advertising. Information regarding the business segments
provided to the Companys chief operating decision maker (CODM) are usually at the revenue or
gross margin level. The Company currently does not allocate operating costs or assets to its
segments, as its CODM does not use this information to allocate resources to or evaluate the
performance of the operating segments.
The following is a summary of revenues, costs of revenues and gross profit margins:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Advertising |
|
MVAS |
|
Other |
|
Total |
|
|
|
|
|
|
(In thousands) |
|
|
|
|
Year ended and as of December 31, 2007: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues |
|
$ |
168,926 |
|
|
$ |
70,489 |
|
|
$ |
6,712 |
|
|
$ |
246,127 |
|
Costs of revenues |
|
|
63,466 |
|
|
|
29,339 |
|
|
|
1,897 |
|
|
|
94,702 |
|
Gross profit margins |
|
|
62 |
% |
|
|
58 |
% |
|
|
72 |
% |
|
|
62 |
% |
Year ended and as of December 31, 2006: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues |
|
$ |
120,067 |
|
|
$ |
86,257 |
|
|
$ |
6,530 |
|
|
$ |
212,854 |
|
Costs of revenues |
|
|
42,529 |
|
|
|
34,255 |
|
|
|
2,626 |
|
|
|
79,410 |
|
Gross profit margins |
|
|
65 |
% |
|
|
60 |
% |
|
|
60 |
% |
|
|
63 |
% |
Year ended and as of December 31, 2005: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues |
|
$ |
84,999 |
|
|
$ |
98,070 |
|
|
$ |
10,483 |
|
|
$ |
193,552 |
|
Costs of revenues |
|
|
27,627 |
|
|
|
33,814 |
|
|
|
1,666 |
|
|
|
63,107 |
|
Gross profit margins |
|
|
67 |
% |
|
|
66 |
% |
|
|
84 |
% |
|
|
67 |
% |
F-29
The following is a summary of the Companys geographic operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
China |
|
U.S. |
|
Hong Kong |
|
Taiwan |
|
Total |
|
|
(In thousands) |
Year ended and as of December 31, 2007: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
242,036 |
|
|
$ |
2,026 |
|
|
$ |
1,805 |
|
|
$ |
260 |
|
|
$ |
246,127 |
|
Long-lived assets |
|
|
25,481 |
|
|
|
174 |
|
|
|
924 |
|
|
|
267 |
|
|
|
26,846 |
|
Year ended and as of December 31, 2006: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
209,200 |
|
|
$ |
1,942 |
|
|
$ |
1,395 |
|
|
$ |
317 |
|
|
$ |
212,854 |
|
Long-lived assets |
|
|
25,726 |
|
|
|
157 |
|
|
|
1,147 |
|
|
|
71 |
|
|
|
27,101 |
|
Year ended and as of December 31, 2005: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
189,207 |
|
|
$ |
2,060 |
|
|
$ |
1,775 |
|
|
$ |
510 |
|
|
$ |
193,552 |
|
Long-lived assets |
|
|
21,746 |
|
|
|
143 |
|
|
|
175 |
|
|
|
143 |
|
|
|
22,207 |
|
Revenues are attributed to the countries in which the invoices are issued. Long-lived assets
comprise of the net book value of property and equipment.
15. Certain Risks and Concentrations
Financial instruments that potentially subject the Company to significant concentrations of
credit risk consist primarily of cash and cash equivalents, marketable debt securities and accounts
receivable. The Company limits its exposure to credit loss by depositing its cash and cash
equivalents with financial institutions in the U.S., the PRC, Hong Kong and Taiwan that management
believes are of high credit quality. The Company usually invests in marketable debt securities with
A ratings or above.
The Company has approximately $324.7 million in cash and bank deposits, such as time deposits
and bank notes, with large domestic banks in China, which constitute about 68% of its total cash,
cash equivalent and short-term investments as of December 31, 2007. The terms or these deposits
are, in general, up to twelve months. Historically, deposits in Chinese banks are secure due to the
state policy on protecting depositors interests. However, China promulgated a new Bankruptcy Law
in August 2006, which came into effect on June 1, 2007, which contains a separate article expressly
stating that the State Council may promulgate implementation measures for the bankruptcy of Chinese
banks based on the Bankruptcy Law. Under the new Bankruptcy Law, a Chinese bank may go bankrupt. In
addition, since Chinas concession to WTO, foreign banks have been gradually permitted to operate
in China and have been severe competitors against Chinese banks in many aspects, especially since
the opening of renminbi business to foreign banks in late 2006. Therefore, the risk of bankruptcy
of those banks in which that the Company has deposits has increased. In the event of bankruptcy of
one of the banks which holds the Companys deposits, it is unlikely to claim its deposits back in
full since it is unlikely to be classified as a secured creditor based on PRC laws.
Accounts receivable consist primarily of advertising agencies, direct advertising customers
and third-party operators. As of December 31, 2007 and 2006, approximately 98% of the net accounts
receivable were derived from the Companys operations in the
PRC. Regarding its advertising operations, no advertising customer
accounted for 10% or more of total
net revenues for the years ended December 31, 2007, 2006 and
2005. Focus Media Holding Limited (Focus Media) accounted for approximately 15% of total net revenues for the year ended December 31,
2007 and no advertising agency accounted for 10% or more of total net revenues for the years ended
December 31, 2006 and 2005. Focus Media and HYLink Advertising
(BJ) Co. accounted for approximately 24% and 10%, respectively, of accounts
receivables as of December 31, 2007. No advertising
agency accounted for 10% or more of accounts receivables as of
December 31, 2006.
With regard to the MVAS operations, the Company mainly contracts with China Mobile, China
Unicom and their subsidiaries, and, to a small degree, telecom operators, for utilizing their
transmission gateways for message delivery and billing systems to collect subscription or usage
fees from its subscribers. MVAS fees charged to users via these operators accounted for 29%, 41%
and 51% of the Companys net revenues for the years ended December 31, 2007, 2006 and 2005,
respectively. Below is a summary of the significant operators and product lines and accounts
receivables from significant operators:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31, |
As a percentage of total net revenues |
|
2007 |
|
2006 |
|
2005 |
MVAS revenues billed via China Mobile |
|
|
21 |
% |
|
|
30 |
% |
|
|
46 |
% |
Revenues from SMS product line |
|
|
15 |
% |
|
|
26 |
% |
|
|
37 |
% |
|
|
|
|
|
|
|
|
|
|
|
December 31, |
As a percentage of total accounts receivables |
|
2007 |
|
2006 |
Receivables from China Mobile |
|
|
* |
|
|
|
25 |
% |
F-30
Accounts receivable from third-party operators represent MVAS fees collected on behalf of the
Company after deducting their billing services and transmission charges. The Company maintains
allowances for potential credit losses. Historically, the Company has not had any significant
direct write off of bad debts.
The Company operates in business segments which are characterized by rapid technological
advances, changes in customer requirements and evolving regulatory requirements and industry
standards. Any failure by the Company to anticipate or to respond adequately to technological
changes in its industry segments, changes in customer requirements or changes in regulatory
requirements or industry standards, could have a material adverse effect on the Companys business
and operating results. The Company relies on a number of third-party suppliers for various other
services, including web server hosting, banner advertising delivery software, Internet traffic
measurement software and transmission and billing of MVAS. Any failure of these suppliers to
provide services to the Company or any termination of these services with the Company could have a
material adverse effect on the Companys business and operating results.
The majority of the Companys net income was derived from China. The operations in China are
carried out by the subsidiaries and VIEs. The Company depends on dividend payments from its
subsidiaries in China for its revenues after these subsidiaries receive payments from VIEs in China
under various services and other arrangements. In addition, under Chinese law, its subsidiaries are
only allowed to pay dividends to the Company out of their accumulated profits, if any, as
determined in accordance with Chinese accounting standards and regulations. Moreover, these Chinese
subsidiaries are required to set aside at least 10% of their respective accumulated profits, if
any, up to 50% of their registered capital to fund certain mandated reserve funds that are not
payable or distributable as cash dividends. The appropriation to mandated reserve funds are
assessed annually. As of December 31, 2007, the Company is subject to a maximum appropriation of
$15.1 million to these non-distributable reserve funds. The Companys subsidiaries and VIEs in
China are subject to different tax rates. See Note 8 Income Taxes.
The majority of the Companys revenues derived and expenses incurred were in Chinese renminbi
as of December 31, 2007. The Companys cash, cash equivalents and short-term investments balance
denominated in Chinese renminbi was approximately $307.6 million, which accounted for approximately
64% of its total cash, cash equivalents and short-term investments balance as of December 31, 2007.
The Companys accounts receivable balance denominated in Chinese renminbi was approximately $55.7
million, which accounted for approximately 98% of its total accounts receivable balance. The
Companys current liabilities balance denominated in Chinese renminbi was approximately $64.9
million, which accounted for approximately 39% of its total current liabilities balance as of
December 31, 2007. Accordingly, the Company may experience economic losses and negative impacts on
earnings and equity as a result of exchange rate fluctuations in the currency of the PRC. Moreover,
the Chinese government imposes controls on the convertibility of renminbi into foreign currencies
and, in certain cases, the remittance of currency out of the PRC. The Company may experience
difficulties in completing the administrative procedures necessary to obtain and remit foreign
currency.
The Company performed a test on the restricted net assets of consolidated subsidiaries and
VIEs (the restricted net assets) in accordance with Securities and Exchange Commission Regulation
S-X Rule 4-08 (e) (3), General Notes to Financial Statements and concluded that the restricted
net assets did not exceed 25% of the consolidated net assets of the Company as of December 31,
2007.
16. Convertible Debt
In 2003, the Company issued $100 million of zero-coupon, convertible, subordinated notes (the
Notes) due 2023. During 2007, $1 million of the Notes were converted to SINA ordinary shares upon
purchases request. The Notes were issued at par and bear no interest. The Notes will be
convertible into SINA ordinary shares, upon satisfaction of certain conditions, at an initial
conversion price of $25.79 per share, subject to adjustments for certain events. One of the
conditions for conversion of the Notes to SINA ordinary shares is conversion upon satisfaction of
market price condition, when the sale price (defined as closing per share sales price) of SINA
ordinary shares reaches a specified threshold for a defined period of time. The specified
thresholds are i) during the period from issuance to July 15, 2022, if the sale price of SINA
ordinary shares, for each of any five consecutive trading days in the immediately preceding fiscal
quarter, exceeds 115% of the conversion price per ordinary share, and ii) during the period from
July 15, 2022 to July 15, 2023, if the sale price of SINA ordinary shares on the previous trading
day is more than 115% of the conversion price per ordinary share. For the quarter ended December
31, 2007, the sale price of SINA ordinary shares exceeded the threshold set forth in item i) above
for the required period of time; therefore, the Notes are therefore convertible into SINA ordinary
shares pursuant to the threshold set forth in item i) above during the quarter ending March 31,
2008.
F-31
Upon a purchasers election to convert the Notes in the future, the Company has the right to
deliver cash in lieu of ordinary shares, or a combination of cash and ordinary shares. The Company
may redeem for cash all or part of the Notes on or after July 15, 2012, at a price equal to 100% of
the principal amount of the Notes being redeemed. The purchasers may require the Company to
repurchase all or part of the Notes for cash on July 15 annually from 2007 through 2013, and on
July 15, 2018, or upon a change of control, at a price equal to 100% of the principal amount of the
Notes. In accordance with SFAS 78 Classification of Obligations That Are Callable by the
Creditor, the Notes are classified as current liabilities as of December 31, 2007 and 2006. Under
SFAS 78, obligations such as the Notes are considered current liabilities if they are or will be
callable within one year from the balance sheet date, even though liquidation may not be expected
within that period.
17. Commitments and Contingencies
Operating lease commitments include the commitments under the lease agreements for the
Companys office premises. The Company leases office facilities under non-cancelable operating
leases with various expiration dates through 2010. For the years ended December 31, 2007, 2006 and
2005, rental expenses were $4.9 million, $3.6 million and $3.1 million, respectively. Based on the
current rental lease agreements, future minimum rental payments required as of December 31, 2007
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than one |
|
One to |
|
Three to |
|
More than |
|
|
Total |
|
year |
|
Three years |
|
five years |
|
five years |
|
|
(In thousands) |
Operating lease commitments |
|
$ |
7,333 |
|
|
$ |
4,691 |
|
|
$ |
2,642 |
|
|
$ |
|
|
|
$ |
|
|
Purchase commitments mainly include minimum commitments for Internet connection fees
associated with web sites production, content fees associated with web sites production and MVAS,
advertising serving services and marketing activities. Purchase commitments as of December 31, 2007
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than one |
|
One to |
|
Three to |
|
More than |
|
|
Total |
|
year |
|
Three years |
|
Five years |
|
five years |
|
|
|
|
|
|
|
|
|
|
(In thousands) |
|
|
|
|
|
|
|
|
Purchase commitments |
|
$ |
43,232 |
|
|
$ |
34,029 |
|
|
$ |
8,724 |
|
|
$ |
434 |
|
|
$ |
45 |
|
There are uncertainties regarding the legal basis of our ability to operate an Internet
business and telecom value-added services 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 such restrictions currently in place, but in addition
regulations are unclear as to in which specific segments of these industries companies with foreign
investors, including us, 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 its financial
position, results of operations and cash flows.
From time to time, the Company may also be subject to legal proceedings and claims in the
ordinary course of business, including claims of alleged infringement of copyrights and other
intellectual property rights in connection with the content published on its web sites.
18. Subsequent Events
In
February 2008, the Company moved its business and operations
related to our real-estate and home decoration channels into a new subsidiary of the Company. The
new subsidiary entered into a 10-year licensing agreement with eHouse (China) Holdings Limited
(eHouse), whereby eHouse will provide its CRIC database to the new
subsidiary to support its business-to-consumer website targeted at real estate and home decoration consumers. Both
SINA and eHouse will each contribute $2.5 million cash into the Companys new subsidiary. In
return, SINA and eHouse will receive 66% and 34% interest, respectively, in the Companys
subsidiary.
F-32