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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JUNE 30, 2000
COMMISSION FILE NUMBER 000-30698
SINA.COM
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
CAYMAN ISLANDS 52-2236363
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
VICWOOD PLAZA
ROOMS 1801-4
18TH FLOOR
199 DES VOEUX ROAD
CENTRAL, HONG KONG
(852) 2155-8800
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
VICTOR LEE
1313 GENEVA DRIVE
SUNNYVALE, CA 94089
(408) 548-0000
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
ORDINARY SHARE, $0.133 PAR VALUE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicated by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of
the Registrant was approximately $468,972,674 as of September 15, 2000, based
upon the closing sale price on computed by reference to the closing price for
the Common Stock as quoted by the Nasdaq National Stock Market reported for such
date. Shares of Ordinary Shares held by each officer and director and by each
person who owns 5% or more of the outstanding Ordinary Shares have been excluded
in that such persons may be deemed to be affiliates. This determination of
affiliate status is not necessarily a conclusive determination for other
purposes.
As of September 15, 2000, there were 40,933,557 shares of the Registrant's
Ordinary Shares, $0.133 par value.
DOCUMENTS INCORPORATED BY REFERENCE
Items 11-13 incorporate information by reference from the definitive proxy
statement for the Annual Meeting of Shareholders to be held on November 21,
2000.
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PART 1
ITEM 1. BUSINESS
OVERVIEW
SINA.com is a leading Internet media and services company for Chinese
communities worldwide. We offer a portal network of four localized Web sites
targeting China, Taiwan, Hong Kong and overseas Chinese in North America. Our
users enjoy a full array of Chinese-language news, entertainment, e-commerce
platforms, financial information and lifestyle tips covering both global events
and issues and specific topics of interest to the Chinese community. Users can
also shop in our online stores located on our China and North America Web sites
from the convenience of their homes. In addition, we offer proprietary software
products that simplify access to Chinese Internet content.
One of our subsidiaries, Beijing Stone Rich Sight Information Technology
Co. Ltd., or BSRS, a Sino-Foreign joint venture company based in Beijing, China,
began operations in December 1993 as a computer software company focused on
providing solutions to computer users wishing to communicate in Chinese. In May
1996, we launched our online network, then called SRSnet.com, offering
Chinese-language news, information and community features such as bulletin
boards and chat services targeted at online users in China. In March 1999, we
expanded our online network by acquiring Sinanet.com, a leading Chinese-
language Internet content company with offices in California and Taiwan and two
distinct Web sites targeting Chinese users in North America and Taiwan. In July
1999, we continued our network expansion by launching our Hong Kong destination
Web site targeting Chinese users in Hong Kong.
We make our portal network available without charge to users. Our total
average daily page views have grown from approximately 5 million in June 1999 to
approximately 34 million in June 2000. China Internet users voted our China Web
site as their favorite Web site in various surveys conducted by independent
institutions during the past fiscal year. Because of the popularity and growth
in usage of our Web sites, we attract advertisers and merchants who wish to
target the Chinese market.
We generate revenue primarily through the sale of advertisements,
promotions and sponsorships to advertisers and merchants. The majority of
advertising on our portal network is sold through the Company's internal
advertising sales force. We also derive a portion of revenues from sales of
software products and related licenses to OEM PC manufacturers and corporate PC
users.
INDUSTRY BACKGROUND
Internet Use in Greater China and Other Chinese-Speaking Regions
The adoption and development of the Internet differs among China, Taiwan,
Hong Kong and North America, and these markets present a range of significant
near-term and long-term market opportunities. These opportunities have led a
number of companies to provide portal, content and e-commerce services to
address these markets. Accordingly, the market for online content and services
targeted at these markets is competitive, and we expect competition to increase
in the future.
China. China is expected to experience among the largest growth in the
number of PC Internet users in Asia, growing from approximately 4.5 million in
1999 to 51.2 million in 2004, as projected by International Data Corporation
("IDC"). The Internet user penetration rate was approximately 0.3% in 1999 and,
as access costs decline and PC penetration rates increase, we expect that
Internet usage will grow rapidly in China.
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The following table shows China Internet growth statistics as reported by
CNNIC for the period from June 1999 to June 2000, which may not be indicative of
future growth rates:
NO. OF
NO. OF WEB SITES
DEVICES INTERNET BASED IN
CHINA INTERNET GROWTH STATISTICS ONLINE USERS CHINA
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June 1999......................................... 1,460,000 4,000,000 9,906
December 1999..................................... 3,500,000 8,900,000 15,153
June 2000......................................... 6,500,000 16,900,000 27,289
Percentage Growth from June 1999 to June 2000..... 345% 323% 175%
In addition to the personal computer access to the Internet, alternative
accesses, such as wireless access and television based devices access using
telephone lines, cable, or satellite, could together enhance internet
penetrations in the future. According to The Gartner Group, there were
approximately 51.7 million mobile phone users in China in the first quarter of
2000, representing a 81.0% increase compared to the same quarter in 1999. The
growing number of wireless users presents an attractive opportunity for us to
increase our internet user base. According to Kagan World Media, there were 73.3
million cable television households in China at August 2000. Projects to develop
television set-top Internet access devices for the Greater China market, if
successful, could potentially further increase the Internet user base.
The market in China for online advertising and e-commerce is in an early
stage of development. According to Forrester Research, Inc., online advertising
is projected to grow from $8.0 million in 1999 to $440.0 million by 2004. IDC
estimates that e-commerce revenue in China will reach $26,152.7 million by 2004
from $76.7 million in 1999.
Taiwan. The Internet has received relatively widespread attention and
usage in Taiwan. According to IDC, Taiwan had approximately 2.0 million Internet
users in 1999 and is expected to have approximately 6.3 million users by 2004.
We believe Taiwan, with a gross domestic product per capita of $12,700 in 1999
according to International Monetary Fund ("IMF"), represents a relatively
affluent market that will readily adopt the Internet as a means of entertainment
and commerce. Moreover, according to Kagan World Media, Taiwan has one of the
world's highest cable television penetration rates at 77.6% of all Taiwanese
households. In addition, Taiwan's Government Information Office announced in
October 1999 that it had approved five operator licenses for providing pay
television satellite services in Taiwan. We expect that both cable and these
satellite services will have Internet access capabilities that will have the
potential to contribute to the growth in Internet usage in Taiwan. As Internet
usage increases in Taiwan, Forrester Research projects that Taiwan online
advertising will grow from $4.0 million in 1999 to $116.0 million by 2004, and
IDC projects that e-commerce revenue in Taiwan will reach $12,285.9 million by
2004 from $193.0 million in 1999.
Hong Kong. According to IDC, the number of Internet users in Hong Kong is
expected to increase approximately 3.4 million by 2004 from 1.0 million in 1999.
Hong Kong has high Internet connectivity compared to many of its Asian neighbors
with a 15.2% Internet penetration rate in 1999. In addition, Hong Kong was one
of the first major population centers to have a fully-digitized
telecommunications network and is expanding its broadband Internet access
capability through cable television access. We expect Internet usage to increase
significantly in the next few years, especially as more Hong Kong-focused
content, commerce and services become available. According to IMF, Hong Kong had
one of the highest Asian per capita gross domestic products in 1999 at $23,640,
and IDC projects that e-commerce revenue in Hong Kong will reach $7,528.9
million by 2004 from $191.9 million in 1999.
North America and Other Markets. North America enjoys much higher Internet
penetration than Greater China. According to Jupiter Consumer Survey, the number
of Internet users in the U.S. in 1999 was 104.0 million, representing an
Internet penetration rate of approximately 38%. We believe, based on this
Internet penetration rate and the stage of development of the Internet in the
U.S., that the substantial Chinese population resident in the U.S. and Canada
has easier access to the Internet than their counterparts in the Greater China
region. However, there is a significant lack of Chinese Internet content that
caters to this
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population. We believe that many Chinese students and professionals living
abroad, as well as recent immigrants, will benefit from Internet services that
enable them to obtain news about their home countries, maintain ties to their
former communities and communicate in their native language.
THE SINA.COM SOLUTION
We have achieved our leading market position by integrating our proprietary
software platform, our portal network and our e-commerce initiatives to offer
Chinese users and advertisers a comprehensive Internet solution.
Our array of proprietary software products is designed to drive traffic to
our portal network. RichWin, our popular operating system overlay that we have
sold since 1994, enables users to move easily between English and Chinese
operating systems and offers a link to our portal network. In March 2000, we
introduced SinaPlus, our new generation language translation software which
incorporates Internet access capability to help attract users to our Web sites.
Our portal network consists of four Web sites targeting Internet users in
China, Taiwan and Hong Kong and overseas Chinese in North America, each of which
offers an extensive range of local, regional and international Chinese language
content, Web-based community and communication services, sophisticated search,
directory services and free email services. By addressing a global Chinese
audience, we offer advertisers and merchants an attractive market for
advertisements and e-commerce offerings.
Our e-commerce initiatives include SinaMall, an online shopping mall
currently offered on our China and North America Web sites, online airline
ticketing on our Taiwan Web site.
We have achieved our leading market position as a result of the following
key factors:
Extensive, Localized Content and a Broad Range of Community Features for
the Global Chinese Community. Our portal network brings together Chinese
Internet users across national and geographic boundaries, while providing
content and services tailored to each local market. We have extensive
relationships with international, regional and local content providers,
including Central News Agency, CBS MarketWatch, Dow Jones, AFP, Reuters and
Xinhua News Agency. Local content is made available to all of our Web site
production teams so that they can create the desired mix of local, regional and
international content. Although content may vary across Web sites, our brand
identity and look and feel are consistent across our network. In addition to
extensive and customized global, regional and local content, we provide a broad
range of community features like chat, email and instant messaging that allow
Chinese Internet users worldwide to interact. We distinguish ourselves from our
competition by offering a customized Web site for each of the China, Taiwan,
Hong Kong and North America markets.
User-Friendly Software Platform that Supports Our Portal Network. We have
used the brand recognition and large installed base that we have achieved
through our RichWin product to draw traffic to our Web sites. In addition to
providing a link to our destination sites, our RichWin software also allows
users to easily view Chinese content without regard to the underlying operating
system. We sell the latest version of our RichWin software product to businesses
and consumers and, often at lower margin, to original equipment manufacturers
and provide free downloads of older versions of RichWin on our network to
increase our brand recognition and help drive traffic to our Web sites. Our
software development team, which successfully developed the popular RichWin
product, is now being employed to develop products to support our portal
network. In March 2000, we introduced SinaPlus, our new generation language
translation engine to consumers to further increase user recognition of our Web
sites.
E-commerce Initiatives. We currently offer online shopping on our China
and North America Web sites. We also anticipate releasing in the second half of
2000 our software, which will provide merchants with an easy way to begin
presenting goods and services on our Web sites.
Business Models, Strategic Relationships and Technology Leveraged Across
Multiple Web Sites. We deploy across our network successful business models and
strategic relationships that we establish in each of our local markets, thereby
allowing us to grow rapidly and effectively. We also manage a majority of our
core
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technology and applications centrally, which we believe has enabled us to derive
cost savings and enhanced our ability to grow our network and business quickly
and effectively.
PRODUCTS AND SERVICES
Our portal network, e-commerce initiatives and software platform are
closely related and we believe that each of these components will benefit from
the growth of the other two.
Portal Network
Destination Sites. Our portal network consists of four destination Web
sites dedicated to users in China, Taiwan, Hong Kong and overseas Chinese in
North America. In June 2000, our total average daily page views were
approximately 34 million. Each of our destination sites consists of
Chinese-language content organized into interest-specific channels, extensive
community and communication services and sophisticated search capabilities:
www.sina.com.cn Our China destination site was launched in May
1996 and was voted the favorite Web site of
users according to various surveys conducted by
independent parties. The goal of the China Web
site is to be the first and only Web site
Chinese users need to visit in order to satisfy
their news, information, service and product
needs.
www.sina.com.tw Our Taiwan destination Web site was launched in
October 1998 and has grown rapidly to become
one of the leading Web sites in Taiwan. The
Taiwan Web site has launched innovative
communications and community services such as
Web2Pager, a service that allows for email
messages to be delivered to pagers, and
SinaBaby, an interactive virtual parenting
game.
www.sina.com.hk Our Hong Kong destination Web site was launched
in July 1999. As a beneficiary of content and
service offerings leveraged from our other Web
sites, our Hong Kong Web site was launched
after less than three months of preparation.
www.sina.com We believe our North American destination Web
site, launched in May 1995, is a leading
Chinese-language Web site among ethnic Chinese
Internet users in North America. Our North
America Web site caters to a diverse audience
of first and second-generation Chinese
immigrants as well as Chinese students and
professionals studying, working and living
abroad in the U.S. and Canada.
Content. We make available on all of our Web sites our four or five most
popular content channels. We also create for each individual site two localized
channels specifically tailored for the local market. Although content varies
across our Web sites, we are careful to preserve a consistent brand identity and
look and feel throughout our network. We believe we satisfy the demand of
Chinese users for timely, in-depth coverage of current events, sports, finance
and arts with the following channels:
SinaNews Comprehensive selection of international,
regional and local news. Content for our
SinaNews channel is provided by local and
syndicated wire services such as Xinhua News
Agency and Central News Agency, television
stations such as China Central Television and
Beijing Television, newspapers such as China
Economic Times, and by our team of editors,
producers, writers and translators.
SinaSports Broad international, regional and local sports
news and information, including events such as
the Asian Games, the World Cup
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and the Olympic Games. SinaSports also provides
up to the minute sports scores for China's
professional sports teams.
SinaLiving Coverage of the arts and living scene,
including entertainment news, popular
magazines, travel, games, horoscopes, a Feng
Shui Center, information on education and
studying abroad and up-to-date weather reports.
SinaLiving also hosts global live chat forums
featuring diverse entertainment personalities
such as world-famous film director Zhang Yi
Mou, "canto-pop" singer Gigi Leung and film
star Zhao Wei.
SinaFinance Financial information, news, company
information and stock quotes from major U.S.
and European stock markets and the Shanghai,
Shenzhen, Taipei and Hong Kong stock exchanges.
Users can also individualize their online stock
portfolios.
SinaTechnology Free software downloads, technology news,
product information, and introductory
information on how to use the Internet.
SinaA/V Center Streaming audio and video content from Chinese
language television and radio stations.
Community. We believe the establishment of cohesive online communities
will enrich the experience of Internet users. Consequently, we offer the
following array of community features designed to encourage users to become
active and loyal registered users, or SINA Netizens:
SinaMail
(email) Free Web-based email service with over 5
million registered users as of June 30, 2000.
Our users can send and receive messages in both
Chinese and English.
SinaPager
(instant messaging) Instant-messaging service, currently offered on
our China Web site, which enables SINA Netizens
to know whether their SINA.com friends are
online and to send messages to them instantly.
SinaSearch
(search) Directory and keyword search in both
traditional and simplified Chinese character
text modes. We offer search technology by two
of the leading search engines for locating
desired Chinese content on the Internet, Alta
Vista and OpenFind. We categorize information
in over ten thousand categories.
SinaChat
(online chat) Chat service that creates a virtual meeting
place where participants can interact in group
or one-on-one discussions. Chat rooms are
organized around topics of interest such as
sports, entertainment, games and romance. VIP
Chat is a special event version of SinaChat
where participants from around the globe
through any of our four Web sites can interact
with famous personalities such as movie stars
and musicians.
Club Yuan
(romance and matchmaking) Our interactive dating service with
approximately 0.4 million active members as of
June 30, 2000. Club Yuan exists as a "community
within a community" for users in search of new
friends and relationships. Members who sign up
for Club Yuan are asked to create a new user
profile and are assigned a special message box
where they can send and receive messages and
create "buddy" lists. Club Yuan also provides
user profile search, real-time chat, bulletin
board services and Dr. Love, an online
consultant who answers questions about romance.
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e-Card
(electronic greeting card) Electronic greeting cards organized into
categories such as Chinese New Year, Christmas,
Birthday, Thank-You and Lovers. A user can
customize the card with his or her own personal
message. The receiver of the card is notified
by an email message with a link to our Web site
where the card can be viewed, which introduces
other users to our Web site.
SinaWeb2Pager
(online paging) Communication tool on our Taiwan Web site that
allows users to send email messages in Chinese
or English directly to the recipient's pager.
SinaBaby
(virtualparenting) Popular virtual parenting game offered on our
China and Taiwan Web sites that allows users to
adopt and raise a virtual baby. The child is
given a name and immediately begins demanding
love and attention. If the parents neglect to
care for the child, they will receive angry
emails from their child. Good parents, however,
are amply rewarded with successful and adoring
progeny.
SinaForum
(bulletin board) Bulletin board service where users can pose and
respond to comments on a wide array of topics.
MySina
(home page personalization) Home page personalization service whereby users
can customize the layout of their home page.
E-commerce Initiatives
Our e-commerce initiatives consist of:
Online Shopping Mall. Online shopping is a natural extension of our portal
network. We have successfully launched SinaMall, a virtual shopping mall that
has been designed to offer users an intuitive and fun shopping experience, on
our China and North American Web sites. Our China SinaMall, launched in November
1999, has online stores that offer beauty products, books, clothing, computer
hardware, electronics, event ticketing and food. We sell goods on-line under
arrangements with both department stores and various suppliers. Our North
American SinaMall is organized around nine "floors", each of which specializes
in a particular product category, such as Food Plaza, Computer Hardware and
Electronics, Health and Beauty Products and Travel and Leisure. Users in each
case "push" around a virtual shopping cart, "fill" the cart up with items they
choose to purchase and "checkout" by paying with a credit card or debit card.
Participating merchants pay us a fee to host their site and an additional
commission for sales that we generate.
Online Ticketing. We are one of the first few Chinese-language portal Web
sites in Taiwan that offers airline tickets over the Internet. We have
contracted with several Taiwan travel agencies to sell discounted tickets on our
Taiwan site in exchange for a commission. We intend to seek strategic joint
ventures to expand our e-ticketing model to our other Web sites.
Co-branded Debit Card. In September 1999, we signed an agreement with
China Merchants Bank to set up online payment systems and online banking
services and in November 1999 launched a co-branded debit card. Users of our
China Web site are able to use this debit card to make online purchases from our
China SinaMall. We believe by being a leader in creating mechanisms for secure
transactions on the Internet in China, we will help foster the acceptance and
growth of e-commerce in China and gain the trust of e-commerce customers and
merchants.
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Software Platform
We have designed an array of proprietary software products, most of which
will be available for free download from our Web sites, in order to drive
increased traffic to our portal network. Our family of software offerings
includes:
RichWin. RichWin, first launched in April 1994, is an operating system
overlay that allows users to move easily between a Chinese and an English
operating environment. Without RichWin or a similar software overlay, a user
using an English operating system cannot view Chinese content because the
English operating system cannot recognize Chinese characters. By installing
RichWin, a user can simply click on a button to switch from an English to a
Chinese operating environment to view Chinese content, and then click again to
return to an English operating environment.
SinaPlus. SinaPlus is our new-generation language translation engine
launched in March 2000. Within SinaPlus we have bundled tools and services such
as SinaMail and SinaPager, dictionary utilities and a feature that changes the
user's default home page to the SINA.com Web site closest to the user's
geographic location. SinaPlus will be available for free download from our
sites.
SinaXpress. We use our SinaXpress software on our servers to automatically
convert Chinese content into image files viewable online without a
Chinese-language operating system or a translation overlay.
We believe our software products provide the value-added functionalities in
introducing users to our portal network, enabling communication between global
Chinese communities and facilitating e-commerce.
STRATEGIC PARTNERSHIPS
We have developed strategic relationships with a range of content, service,
application and distribution partners in order to serve users more effectively
and to extend our brand and services to a broad internet network.
Content Partnerships
The goal of our content partnerships is to provide our users with the
broadest offering of Chinese-language content available. We contract with our
content partners to display their content on one or more of our Web sites free
of charge or in exchange for a share of revenue, a licensing fee, access to our
content or a combination of these arrangements. The following table shows some
of our existing content partnerships in key content areas for our China, Taiwan,
Hong Kong and North America destination sites:
CHANNEL CHINA TAIWAN NORTH AMERICA HONG KONG
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SINANEWS.............. Xinhua News Agency Central News Agency China Press Metro
China News Agency China Times Interactive Kwong Wah Ri Bao Broadcast
China Central TV Formosa Television Singtao Daily Corporation
HuaSheng News UDN News Zhong Guo Daily Limited
China Youth Daily Power News Hwa Sheng Mingpao.com
Beijing Youth Daily Central News Limited
Reuters Agency Wisers
AFP Information
Limited
SINASPORTS............ Ballsweekly Min Sheng Bao China Press
China Football News
Sportsyouth
SINALIVING............ Life Week Chinese Television Hwa Sheng Easy Group
Neweekly System Togo Travel Holdings
AV World Crown Magazine Crown Magazine Limited
DaZhong Movie Journalist
China Entertainment Magazine
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CHANNEL CHINA TAIWAN NORTH AMERICA HONG KONG
- ------- -------------------- ----------------------- ---------------- --------------
SINAFINANCE........... CITIC Securities Business Weekly CBS MarketWatch Core Pacific-
Shanghai Securities Taiwan Economics News Dow Jones Yamaichi
News Reuters International
Stock 247 (HK) Limited
SINATECHNOLOGY........ ZDNet China Openfind Search Isnet PaceMaker
Science & Technology ZDNet Zdnet Technologies
Daily Openfind Search
The content partnerships are usually one to two years' duration with one
year automatic renewal.
Application and Service Partnerships
The goal of our application and service partnerships is to ensure that our
users have access to user-friendly, reliable and scalable communication and
search tools. Because most of our prospective partners have traditionally
focused on non-Chinese speaking markets, our internal engineering and
development teams often work closely with them to adapt their solutions to the
Chinese-language market. The following are our most critical application and
service partnerships:
Critical Path. In June 1999, we signed an outsourcing agreement with
Critical Path, under which Critical Path provides our Web-based email service.
Critical Path has agreed to service not only our branded Web emails, but also
any co-branded Web email services launched by us and our partners.
Alta Vista. We entered into a relationship with Alta Vista in June 1999,
under which Alta Vista agreed to provide Chinese full-text search services to
our Web sites, while we agreed to promote Alta Vista as our strategic partner in
our public relations campaign and in search pages where Alta Vista's technology
is employed.
OpenFind. In July 1999, we signed an agreement with OpenFind to provide
additional Chinese search functionality to our Web sites. We believe that Alta
Vista and OpenFind are two of the leading search engines for locating desired
Chinese content on the Internet and wanted one or both to be available for our
users.
ADVERTISING SALES
Sales Organization
We believe that the global Chinese Internet community is an attractive
demographic target for advertisers because it represents an affluent, educated
and technically sophisticated market. To capitalize on this advertising
opportunity, we employ a multi-pronged sales strategy that targets both
short-term revenue opportunities such as banner advertising campaigns, as well
as longer-term, high-value contracts such as integrated marketing and
communications packages.
Our primary target client base for advertisers and sponsors consists of
global corporations and Asia-focused regional companies, to which we sell from
both our corporate and regional headquarters. Global corporations are typically
Fortune 500 and 1000 companies with significant operations worldwide and 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 as well as demographic markets, such as Asian-Americans or
Taiwanese, and smaller companies whose markets are within a local territory,
such as Beijing or Hong Kong. A partial list of our advertising clients include:
Acer, AT&T, Alibaba, Asia Online, Charles Schwab, Compaq, Creative Technologies,
Dell, E*Trade, Firstrade, General Motor, HungryForWords.com, IBM, Intel, Kodak,
Legend, MindShare Communications, Motorola, Nestle, Nokia, President Enterprise,
Scottstrade Securities, TD Waterhouse, 3Com, Tianhe Network Union and Trend
Micro, Inc. In order to leverage our global resources, we have established
advertising sales centers in Hong Kong, New York and California. Salespeople in
each of these sales centers may sell a global promotions campaign to customers
for delivery on any of our Web sites.
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We have built a global sales and marketing organization of approximately
120 professionals as of June 2000.
Marketing and Brand Awareness
Our global marketing strategy is to make our brand synonymous with the
Internet for the global Chinese community of users, advertisers and merchants.
We employ a variety of methods to promote our brand, grow our membership base
and increase user loyalty, including
- a comprehensive, aggressive branding campaign through extensive
traditional media and Internet advertising;
- comprehensive global public relations program, including special event
and movie sponsorships and online VIP Chats with local and global
celebrities;
- distribution relationships; and
- strategic alliances.
We have launched a series of user loyalty programs, such as member referral
and frequent visitor rewards, with the goal of attracting new users, increasing
the frequency of visits and expanding our network's overall traffic.
SINA.COM TECHNOLOGY INFRASTRUCTURE
Our operating infrastructure is designed to serve and deliver tens of
millions of page views a day to our users. This scalable infrastructure allows
our users to access our products and services quickly and efficiently,
regardless of their geographical location. Our infrastructure is also designed
to provide high-speed access by forwarding queries to our Web hosting sites with
greater resources or lower loads. Our 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.
Our servers run on RedHat Linux, FreeBSD, and Solaris platforms using
Apache, Netscape and Weblogic servers. These servers are maintained at Cable and
Wireless in Santa Clara, California, Abovenet, Inc. in San Jose, California,
Beijing Telecommunications Authority in Beijing, China, China Netcom Corporation
and Shanghai Telecommunications Authority in Shanghai, China, Seednet, Hinet in
Taipei, Taiwan, HkNet, AsiaOnline and iAdvantage in Hong Kong. We believe that
these hosting partners provide significant operating advantages, including an
enhanced ability to protect our 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 our systems. In addition, we conduct online monitoring of all our
systems for accessibility, load, system resources, network-server intrusion and
timeliness of content.
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COMPETITION
The market for Web sites offering online content and services targeting the
global Chinese community is competitive and we expect competition to increase in
the future. Many of the companies attempting to address this market offer
portal, content and e-commerce services to distinct local markets within Greater
China. The following table lists the Chinese-language Web sites that we believe
are currently our primary competitors:
CHINA TAIWAN HONG KONG NORTH AMERICA
-------------- ---------------------- ----------------------- --------------
PORTALS.............. Netease Hinet HongKong.com Yahoo! Chinese
Sohu Kimo Netvigator
Capital Online Seednet PacificConvergence
Yahoo! China Yahoo! Taiwan Tom.com
Chinadotcom YAM Yahoo! Hong Kong
CONTENT.............. ChinaByte PCHome South China Morning
ChinaTimes Interactive Post Interactive
TVBS/ERA Apple Daily Interactive
United Daily Network
E-COMMERCE........... 8848.com AcerMall Boom.com
Eachnet.com
We also face competition from providers of software and other Internet
products and services that incorporate search and retrieval features into their
offerings. In addition, entities that sponsor or maintain high-traffic Web sites
or that provide an initial point of entry for Internet users, such as ISPs,
including large, well-capitalized entities such as Microsoft (MSN), Yahoo!,
Cable & Wireless HKT (Netvigator) and AOL, currently offer and could further
develop or acquire content and services that compete with those that we offer.
We expect that as Internet usage in Greater China increases and the Greater
China market becomes more attractive to advertisers and for conducting
electronic commerce, large global competitors may increasingly focus their
resources on the Greater China market. We also compete for advertisers with
traditional media companies, such as newspapers, television networks and radio
stations, that have a longer history of use and greater acceptance among
advertisers. In addition, providers of Chinese language Internet tools and
services may be acquired by, receive investments from, or enter into other
commercial relationships with, large, well-established and well-financed
Internet, media or other companies. For example, America Online Inc. and Xinhua
News Agency, one of our content suppliers, are major shareholders of
Chinadotcom, News Corp Ltd. is a major shareholder of Netease.com and Intel
Corporation is a major shareholder of Sohu.com.
Our ability to compete successfully depends on many factors, including the
quality of our content, the breadth, depth and ease of use of our services, our
sales and marketing efforts and the performance of our technology. See also
"Risk Factors -- The markets in which we operate are highly competitive, and we
may be unable to compete successfully against new entrants and established
industry competitors, many of which have greater financial resources than we do
or currently enjoy a superior market position than we do."
GOVERNMENT REGULATION AND LEGAL UNCERTAINTIES
The Chinese government restricts foreign investment in Internet-related
businesses. In an effort to comply with this restriction, we have restructured
our China Internet operations by forming two Chinese entities to acquire
appropriate government licenses to conduct our business there. For a description
of the contractual arrangements we have with these entities, please see "Related
Party Transactions -- Transactions with ICP Company and Ad Company."
In the opinion of our Chinese counsel, the ownership of BSRS and its
businesses comply with existing Chinese laws and regulations. We cannot be sure
that these and other corporate activities carried out by us will be viewed by
Chinese regulatory authorities as in compliance with applicable licensing
requirements. Our business in China will be adversely affected if our business
license is revoked as a result of non-compliance.
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Non-compliance with a business license can also result in the imposition of a
fine up to RMB100,000. In addition, we cannot be sure that we will be able to
obtain all of the licenses we may need in the future or that future changes in
Chinese government policies affecting the provision of information services,
including the provision of online services and Internet access, will not impose
additional regulatory requirements on us or our service providers or otherwise
harm our business. If we are not viewed as complying with these policies or any
regulations that may be created relating to foreign ownership of
Internet-related businesses, the Chinese government could require us to
discontinue our operations in China or take other actions that could harm our
business.
We believe Chinese governmental regulation of our China operations and of
Internet content would not significantly impede our ability to compete against
other Internet companies in the Taiwan, Hong Kong or North America market
because we offer a separate and customized Web site for each of these different
markets. Within each market, we have established a local presence and entered
into arrangements with local content providers to obtain localized content, in
many cases, on a exclusive basis. As a result, users in each individual market
have access to local, regional and international news content from a variety of
sources, and are not wholly dependent on Chinese content.
In addition to business licensing and registration requirements, China is
in the process of enacting additional regulations governing Internet access and
the distribution of news and other information over Internet. In the past, the
Chinese government stopped the distribution of information through the Internet
that it believed to be inappropriate pursuant to relevant governing regulations.
If the Chinese government were to take any action to limit or prohibit the
distribution of information through our network or to limit or regulate any
current or future content or services available to users on our network, our
business would be adversely affected.
We cannot predict the effect of further developments in the Chinese legal
system, particularly with regard to the Internet, including the promulgation of
new laws, changes to existing laws or the interpretation or enforcement of laws.
For a description of how the unsettled nature of Chinese regulations may affect
our business, please see "Risk Factors -- We may not be in compliance with
Chinese government regulations relating to foreign investment prohibitions and,
if so determined, the Chinese government could cause us to discontinue our
operations in China" and "-- Even if we are in compliance with Chinese
governmental regulations relating to licensing and foreign investment
prohibitions, the Chinese government may prevent us from distributing, and we
may be subject to liability for, content that it believes is inappropriate."
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.
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 "Risk Factors -- 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."
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CORPORATE STRUCTURE
SINA.com is a holding company owning a 100% interest in four subsidiaries:
- Rich Sight Investment Limited, or RSIL, a Hong Kong company,
- SINA.com (Hong Kong) Limited, a Hong Kong company,
- SINA.com Online, a California corporation, and
- SINA.com (B.V.I.) Ltd., a British Virgin Islands company.
RSIL was formed in March 1993 to hold an interest in Beijing Stone Rich
Sight Information Technology Co. Ltd., or BSRS. BSRS was formed as a
Sino-Foreign joint venture company based in Beijing, China between RSIL and a
third party, Beijing Stone Electronic Technology Co., Ltd., a China company.
BSRS began operations in December 1993 as a computer software company focused on
providing solutions to computer users wishing to communicate in Chinese. In May
1996, BSRS launched our online network, then called SRSnet.com, offering Chinese
language news, information and community features such as bulletin boards and
chat services targeted at online users in China. In July 1997, SRS International
Limited, a Cayman Island company, was formed to become the holding company for
RSIL.
In March 1999, we expanded our online network by acquiring Sinanet.com, a
leading Chinese language Internet content company with offices in California and
Taiwan and two distinct Web sites targeting Chinese users in North America and
Taiwan. In connection with the acquisition, we changed the name of Sinanet.com
to SINA.com Online and the name of the holding company from SRS International
Limited to SINA.com. In July 1999, we continued our network expansion by
launching our Hong Kong destination Web site targeting Chinese users in Hong
Kong.
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The diagram below illustrates our current operating structure:
[Sina.Com Flow Chart]
To comply with Chinese regulations, BSRS has entered into agreements with
two Chinese entities: Beijing SINA Interactive Advertising Co., Ltd., a Chinese
advertising company that is 75% owned by Yan Wang, our general manager of China
operations, and 25% owned by BSRS, and which we refer to as the Ad Company, and
Beijing SINA Internet Information Services Co., Ltd., a Chinese Internet content
provider that is 70% owned by Zhidong Wang, our president and chief executive
officer, and 30% owned by Yan Wang, and which we refer to as the ICP Company. We
have amended our employment agreements with Zhidong Wang and Yan Wang to require
that they transfer their interest in the Ad Company or ICP Company at the net
book value to us when allowed under Chinese law or to an employee or group of
employees specified by us upon termination of their employment with us. Both
entities are limited liability companies incorporated in China. In the opinion
of our Chinese counsel, the ownership of BSRS and its businesses comply with
existing Chinese laws and regulations.
Pursuant to these agreements, the ICP Company is responsible for operating
www.sina.com.cn in connection with its Internet content company license and
sells advertising space on the China Web site to the Ad Company. The Ad Company,
in turn, places advertisements in this space for third parties under its
advertising license. In addition, BSRS has licensed intellectual property and
transferred equipment to the ICP Company, and acts as the ICP Company's provider
of technical services, all in exchange for fees or other payments. BSRS also
serves as a consultant and service provider to the Ad Company for its domestic
Chinese customers. Substantially all of the income received from advertising
sales by the Ad Company and ICP Company is paid to BSRS.
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EMPLOYEES
As of June 30, 2000, we had 624 full-time employees, of whom 523 were
employed outside the United States. We sometimes need to transfer some of these
international employees to the United States on temporary or extended
assignments, which typically require a visa. 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.
We have never experienced a work stoppage or a labor dispute that has interfered
with our operations.
RISK FACTORS
Because our operating history is limited and the revenue and income potential
of our business and markets are unproven, we cannot predict whether we will
meet internal or external expectations of future performance.
From our inception through September 1998, our revenues consisted entirely
of sales of our RichWin software products and licenses to copy and use these
products. We continued our software sales during fiscal 1999, but with the
launch of our online network in May 1996 and our acquisition of Sinanet.com in
March 1999, we began to devote our resources primarily to developing our online
Chinese-language network. We believe that our future success depends on our
ability to significantly increase revenue from our Internet advertising and
electronic commerce operations, for which we have a limited operating history.
Accordingly, our prospects must be considered in light of the risks, expenses
and difficulties frequently encountered by companies in an early stage of
development. These risks include our ability to: attract advertisers; attract a
larger audience to our network; respond effectively to competitive pressures and
address the effects of strategic relationships or corporate combinations among
our competitors; maintain our current, and develop new, strategic relationships;
increase awareness of the SINA.com brand and continue to build user loyalty;
attract and retain qualified management and employees; upgrade our technology to
support increased traffic and expanded services; and expand the content and
services on our network.
We have a history of losses and we anticipate future losses.
We have never been profitable. As of June 30, 2000, we had an accumulated
deficit of approximately $63.0 million. We anticipate that we will continue to
incur operating losses for the foreseeable future due to increased sales and
marketing costs, additional personnel hires and our continuing branding
campaign. As a result, we cannot be certain when or if we will achieve
profitability. If we do not achieve or sustain profitability, the market price
of our ordinary shares may decline.
We are relying on advertising sales as a significant part of our future
revenue, but the Internet has not been proven as a source of significant
advertising revenue in Greater China.
Our revenue growth is dependent on increased revenue from the sale of
advertising space on our network and the acceptance and use of electronic
commerce. Online advertising in Greater China is an unproven business and many
of our current and potential advertisers have limited experience with the
Internet as an advertising medium, have not traditionally devoted a significant
portion of their advertising expenditures or other available funds to Web-based
advertising, and may not find the Internet to be effective for promoting their
products and services relative to traditional print and broadcast media.
According to Forrester Research, the dollar amount of the online advertising
market in China in 1999 was approximately $8.0 million. Our ability to generate
and maintain significant advertising revenue will therefore depend on a number
of factors, many of which are beyond our control, including: the development of
a large base of users possessing demographic characteristics attractive to
advertisers; downward pressure on online advertising prices; the development of
independent and reliable means of verifying levels of online advertising and
traffic; and the effectiveness of our advertising delivery, tracking and
reporting systems.
If the Internet does not become more widely accepted as a medium for
advertising, our ability to generate increased revenue will be negatively
affected.
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We are relying on electronic commerce as a significant part of our future
revenue, but the Internet has not yet been proven as an effective commerce
medium in Greater China.
Our revenue growth depends on the increasing acceptance and use of
electronic commerce in Greater China. The Internet may not become a viable
commercial marketplace in Asia for various reasons, many of which are beyond our
control, including: inexperience with the Internet as a sales and distribution
channel; inadequate development of the necessary infrastructure to facilitate
electronic commerce; concerns about security, reliability, cost, ease of
deployment, administration and quality of service associated with conducting
business over the Internet; and inexperience with credit card usage or with
other means of electronic payment in China.
If the Internet does not become more widely accepted as a medium for
electronic commerce, our ability to generate increased revenue will be
negatively affected.
Underdeveloped telecommunications infrastructure has limited and may continue
to limit the growth of the Internet market in China which, in turn, could
limit our ability to grow our business.
The telecommunications infrastructure in China is not well developed.
Although private sector ISPs exist in China, almost all access to the Internet
is accomplished through ChinaNet, China's primary commercial network, which is
owned and operated by China Telecom, a state-owned enterprise directly
controlled by China's Ministry of Information Industry. The underdeveloped
Internet infrastructure in China has limited the growth of Internet usage in
China. If the necessary Internet infrastructure is not developed, or is not
developed on a timely basis, future growth of the Internet in China will be
limited and our business could be harmed.
We must rely on the Chinese government to develop China's Internet
infrastructure and if it does not develop this infrastructure our ability to
grow our business will be hindered.
The Chinese government's interconnecting, national networks connect to the
Internet through government-owned international gateways, which are the only
channels through which a domestic Chinese user can connect to the international
Internet network. We rely on this backbone and China Telecom to provide data
communications capacity primarily through local telecommunications lines.
Although the Chinese government has announced plans to develop aggressively the
national information infrastructure, we cannot assure you that this
infrastructure will be developed. In addition, we have no guarantee that we will
have access to alternative networks and services in the event of any disruption
or failure. If the necessary infrastructure standards or protocols or
complementary products, services or facilities are not developed by the Chinese
government, the growth of our business will be hindered.
You should not rely on our quarterly operating results as an indication of our
future performance because our results of operations are subject to
significant fluctuations.
We may experience significant fluctuations in our quarterly operating
results due to a variety of factors, many of which are outside our control.
Factors that may cause our quarterly operating results to fluctuate include: our
ability to retain existing users, attract new users at a steady rate and
maintain user satisfaction; the announcement or introduction of new or enhanced
services, content and products by us or our competitors; dependence on a limited
number of advertisers, the majority of which have agreements with us that are
cancelable upon a specified notice period, and the loss of any major advertiser;
significant news events that increase traffic to our Web sites; technical
difficulties, system downtime or Internet failures; demand for advertising space
from advertisers; the amount and timing of operating costs and capital
expenditures relating to expansion of our business, operations and
infrastructure; governmental regulation; seasonal trends in Internet use; a
shortfall in our revenues relative to our forecasts and a decline in our
operating results due to our inability to adjust our spending quickly; and
general economic conditions and economic conditions specific to the Internet,
electronic commerce and the Greater China market.
As a result of these and other factors, you should not rely on
quarter-to-quarter comparisons of our operating results as indicators of likely
future performance. Our operating results may be below the
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expectations of public market analysts and investors in one or more future
quarters. If that occurs, the price of our ordinary shares could decline and you
could lose part or all of your investment.
Political and economic conditions in Greater China are unpredictable and may
disrupt our operations if these conditions become unfavorable to our business.
We expect to derive a substantial percentage of our revenues from the
Greater China market. Changes in political or economic conditions in the region
are difficult to predict and could adversely affect our operations or cause the
Greater China market to become less attractive to advertisers, which could
reduce our revenues. We maintain a strong local identity and presence in each of
the regions in the Greater China market and we cannot be sure that we would be
able to maintain effectively this local identity if political conditions were to
change. Furthermore, many countries in Asia have experienced significant
economic downturns since the middle of 1997, resulting in slower real gross
domestic product growth for the entire region as a result of higher interest
rates and currency fluctuations. If declining economic growth rates persist,
expenditures for Internet access, infrastructure improvements and advertising
could decrease, which would negatively affect our business and our profitability
over time. In addition, the economic downturn in Asia could also lead to a
devaluation of the currency of China, Taiwan or Hong Kong, which would decrease
our revenues for the Greater China region in U.S. dollar terms.
In addition, economic reforms in the region could affect our business in
ways that are difficult to predict. For example, since the late 1970s, the
Chinese government has been reforming the Chinese economic system to emphasize
enterprise autonomy and the utilization of market mechanisms. Although we
believe that these reforms measures have had a positive effect on the economic
development in China, we cannot be sure that they will be effective or that they
will benefit our business.
We may be adversely affected by Chinese government regulation of Internet
companies.
China has recently begun to regulate its Internet sector by making
pronouncements or enacting regulations regarding the legality of foreign
investment in the Chinese Internet sector, the existence and enforcement of
content restrictions on the Internet and the availability of securities
offerings by companies operating in the Chinese Internet sector. In the opinion
of our Chinese counsel, the ownership of BSRS and its businesses comply with
existing Chinese laws and regulations. There are, however, substantial
uncertainties regarding the proper interpretation of current and future Chinese
Internet laws and regulations.
Issues, risks and uncertainties relating to China government regulation of
the Chinese Internet sector include the following:
A prohibition of foreign investment in businesses providing value-added
telecommunication services, including computer information services or
electronic mail box services, may be applied to Internet businesses such as
ours. Some officials of the Chinese Ministry of Information, or MII, have taken
the position that foreign investment in the Internet sector is prohibited.
The MII has also stated recently that it intends to adopt new laws or
regulations governing foreign investment in the Chinese Internet sector in the
near future. If these new laws or regulations forbid foreign investment in the
Internet sector, our business will be severely impaired.
According to press reports, under the agreement reached in November 1999
between China and the United States concerning the United States' support of
China's entry into the World Trade Organization, or WTO, foreign investment in
Chinese Internet services will be liberalized to allow for 49% foreign ownership
in key telecommunication services, including Chinese Internet ventures, for the
first two years after China's entry into the WTO and 50% thereafter. Even if the
terms of this agreement are as reported, the agreement is still subject to
approval by the U.S. President and faces domestic opposition from trade unions,
environmentalists and human rights organizations.
The MII has also stated recently that the activities of Internet content
providers are also subject to regulation by various Chinese government
authorities, depending on the specific activities conducted by the Internet
content provider. According to press reports, various government authorities are
in the process of
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preparing new laws and regulations that will govern these activities. The areas
of regulation may include online advertising and online news reporting. In
addition, the new laws and regulations may require various Chinese government
approvals for securities offerings by companies engaged in the Internet sector
in China.
The interpretation and application of existing Chinese laws and
regulations, the stated positions of the MII and the possible new laws or
regulations have created substantial uncertainties regarding the legality of
existing and future foreign investments in, and the businesses and activities
of, Chinese Internet businesses, including our business.
Accordingly, it is possible that the relevant Chinese authorities could, at
any time, assert that any portion or all of our existing or future ownership
structure and businesses, or this offering, violates existing or future Chinese
laws and regulations. It is also possible that the new laws or regulations
governing the Chinese Internet sector that may be adopted in the future will
prohibit or restrict foreign investment in, or other aspects of, any of our
current or proposed businesses and operations or require governmental approvals
for this offering. In addition, these new laws and regulations may be
retroactively applied to us.
If we are found to be in violation of any existing or future Chinese laws
or regulations, the relevant Chinese authorities would have broad discretion in
dealing with such a violation, including, without limitation, the following:
levying fines; revoking our business license; requiring us to restructure our
ownership structure or operations; and requiring us to discontinue any portion
or all of our Internet business. Any of these actions could cause our business
to suffer and the price of our ordinary share to decline.
We have attempted to comply with the strict licensing and registration
requirements of the PRC government by entering into agreements with two
Chinese entities majority owned by our employees; if the PRC government finds
that these agreements do not comply with the licensing requirements, our
business in the PRC will be adversely affected.
Because the Chinese government restricts foreign investment in
Internet-related businesses, we have restructured our China Internet operations
by forming two Chinese entities to acquire appropriate government licenses to
conduct our business there. The legal uncertainties associated with the Chinese
government regulation may be summarized as follows: whether the Chinese
government may view our restructuring as being in compliance with their
regulations; whether the Chinese government may revoke such business licenses;
whether the Chinese government may impose additional regulatory requirements
with which we may not be in compliance; whether the Chinese government will
permit the Chinese entities to acquire future licenses necessary in order to
conduct operations in China; and whether the Chinese government will restrict or
prohibit the distribution of content over the Internet.
The Chinese government regulates Internet access and the distribution of
news and other information through strict business licensing and registration
requirements and other governmental regulation. With respect to licensing, our
subsidiary Beijing Stone Rich Sight Information Technology Co. Ltd., or BSRS, is
currently licensed to operate as a software company. BSRS has entered into
agreements with two Chinese entities: Beijing SINA Interactive Advertising Co.,
Ltd., a Chinese advertising company that is 75% owned by Yan Wang, our general
manager of China operation, and 25% owned by BSRS, and which we refer to as the
Ad Company, and Beijing SINA Internet Information Services Co., Ltd., a Chinese
Internet content provider that is 70% owned by Zhidong Wang, our president and
chief executive officer and 30% owned by Yan Wang and which we refer to as the
ICP Company.
Pursuant to these agreements, the ICP Company is responsible for operating
www.sina.com.cn in connection with its Internet content company license and will
sell advertising space on www.sina.com.cn to the Ad Company. The Ad Company, in
turn, will sell advertisements in this space to third parties under its
advertising license. In addition, BSRS has licensed intellectual property and
transferred equipment to the ICP Company, and acts as the ICP Company's provider
of technical services, all in exchange for fees or other payments. BSRS will
also be a consultant and service provider to the Ad Company for its domestic
Chinese customers.
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We cannot be sure that these and other corporate activities carried out by
us will be viewed by Chinese regulatory authorities as in compliance with
applicable licensing requirements. Our business in China will be adversely
affected if our business license is revoked as a result of non-compliance. In
addition, we cannot be sure that we will be able to obtain all of the licenses
we may need in the future or that future changes in Chinese government policies
affecting the provision of information services, including the provision of
online services and Internet access, will not impose additional regulatory
requirements on us or our service providers or otherwise harm our business.
We depend upon contractual arrangements with the Ad Company and the ICP
Company for the success of our operations in China and these arrangements may
not be as effective in providing operational control as direct ownership of
these businesses.
Because we are restricted by the Chinese government from providing Internet
and advertising services directly in China, we are dependent on the Ad Company,
of which we own 25% and the ICP Company, of which we have no ownership interest,
to provide such services through contractual agreements between the parties.
This arrangement may not be as effective in providing control over advertising
and Internet content operations in China as direct ownership of these
businesses. For example, the Ad Company or ICP Company could fail to take
actions required for our business, such as entering into advertising contracts
with potential customers or failing to maintain our China Web site. The ICP
Company will also be able to transact business with third parties not affiliated
with BSRS. If the Ad Company or ICP fails to perform its obligations under these
agreements, we would potentially have to rely on legal remedies under Chinese
law, which we cannot be sure would be effective.
The ICP Company is controlled by Zhidong Wang, our president and chief
executive officer. As a result, our contractual relationships with the ICP
Company would be viewed as entrenching his management position or transferring
certain value to him, especially if any conflict arose with him.
We may not be in compliance with Chinese government regulations relating to
foreign investment prohibitions and, if so determined, the Chinese government
could cause us to discontinue our operations in China.
Chinese government policy prohibits foreign investment in the
telecommunications services industry, which he has defined to include
Internet-related businesses. While we believe that we are in compliance with
current Chinese government policies, we cannot be sure that the government will
view our business as in compliance with these policies or any policies that may
be made in the future. If we are not viewed as complying with these policies or
any regulations that may be created relating to foreign ownership of Internet-
related businesses, the Chinese government could require us to discontinue our
operations in China or take other actions that could harm our business.
Even if we are in compliance with Chinese governmental regulations relating to
licensing and foreign investment prohibitions, the Chinese government may
prevent us from distributing, and we may be subject to liability for, content
that it believes is inappropriate.
China has enacted regulations governing Internet access and the
distribution of news and other information. In the past, the Chinese government
has stopped the distribution of information over the Internet that it believes
to violate Chinese law, including content that is obscene, incites violence,
endangers national security, is contrary to the national interest or is
defamatory. In addition, we may not publish certain news items, such as news
relating to national security, without permission from the Chinese government.
Furthermore, the Ministry of Public Security has the authority to cause any
local Internet service provider to block any Web site maintained outside China
at its sole discretion. Even if we comply with Chinese governmental regulations
relating to licensing and foreign investment prohibitions, if the Chinese
government were to take any action to limit or prohibit the distribution of
information through our network or to limit or regulate any current or future
content or services available to users on our network, our business would be
harmed.
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In addition, under recently adopted regulations, Internet companies which
provide bulletin board systems, chat rooms or similar services, such as our
company, must apply for the approval of the State Secrecy Bureau. As the
implementing rules of these new regulations have not been issued, however, we do
not know how or when we will be expected to comply. We cannot assure you that
our business, financial condition and results of operations will not be
materially and adversely affected by the application of these regulations.
We are also subject to potential liability for content on our Web sites
that is deemed inappropriate and for any unlawful actions of our subscribers and
other users of our systems under regulations promulgated by the Chinese Ministry
of Information and Industry. Furthermore, we are required to delete content that
clearly violates the laws of China and report content that we suspect may
violate Chinese law. It is difficult to determine the type of content that may
result in liability for us, and if we are wrong, we may be prevented from
operating our Web sites.
We may have to register our encryption software with Chinese regulatory
authorities, and if they request that we change our encryption software, our
business operations will be disrupted as we develop or license replacement
software.
Pursuant to the Regulations for the Administration of Commercial Encryption
promulgated at the end of 1999, foreign and domestic Chinese companies operating
in China are required to register and disclose to Chinese regulatory authorities
the commercial encryption products they use. Because these regulations have just
recently been adopted and because they do not specify what constitutes
encryption products, we are unsure as to whether or how they apply to us and the
encryption software we utilize. We may be required to register, or apply for
permits with the relevant Chinese regulatory authorities for, our current or
future encryption software. If Chinese regulatory authorities request that we
change our encryption software, we may have to develop or license replacement
software, which could disrupt our business operations.
The markets in which we operate are highly competitive, and we may be unable
to compete successfully against new entrants and established industry
competitors, many of which have greater financial resources than we do or
currently enjoy a superior market position than we do.
The Asian market for Internet content and services is competitive and
rapidly changing. Barriers to entry are minimal, and current and new competitors
can launch new Web sites at a relatively low cost. Many companies offer Chinese
language content and services, including informational and community features,
and email and electronic commerce services in the Greater China market that may
be competitive with our future offerings. We also face competition from
providers of software and other Internet products and services that incorporate
search and retrieval features into their offerings. In addition, entities that
sponsor or maintain high-traffic Web sites or that provide an initial point of
entry for Internet users, such as ISPs, including large, well-capitalized
entities such as Microsoft (MSN), Yahoo!, Cable & Wireless HKT (Netvigator) and
AOL, currently offer and could further develop or acquire content and services
that compete with those that we offer. We expect that as Internet usage in
Greater China increases and the Greater China market becomes more attractive to
advertisers and for conducting electronic commerce, large global competitors may
increasingly focus their resources on the Greater China market. We also compete
for advertisers with traditional media companies, such as newspapers, television
networks and radio stations, that have a longer history of use and greater
acceptance among advertisers. In addition, providers of Chinese language
Internet tools and services may be acquired by, receive investments from or
enter into other commercial relationships with large, well-established and
well-financed Internet, media or other companies. For example, America Online
Inc. and Xinhua News Agency, one of our content suppliers, are major
shareholders of Chinadotcom, Intel Corporation is a major shareholder of
Sohu.com, and News Corp Ltd. is a major shareholder of Netease.com.
A number of our current and potential future competitors have greater name
recognition, larger customer bases and greater financial and other resources
than we have, and may be able to more quickly react to changing consumer
requirements and demands, deliver competitive services at lower prices and more
effectively respond to new Internet technologies or technical standards.
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Increased competition could result in reduced page views, loss of market
share and lower profit margins from reduced pricing for Internet-based services.
If we fail to develop successfully and introduce new products and services,
our competitive position and ability to generate revenues will be harmed.
We are developing new products and services. The planned timing or
introduction of new products and services is subject to risks and uncertainties.
Actual timing may differ materially from original plans. Unexpected technical,
operational, distribution or other problems could delay or prevent the
introduction of one or more of our new products or services. Moreover, we cannot
be sure that any of our new products and services will achieve widespread market
acceptance or generate incremental revenue.
We have contracted with third parties to provide content and services for our
portal network and to distribute our software, and we may lose users and
revenue if these arrangements are terminated.
We have arrangements with a number of third parties to provide content and
services to our Web sites and to distribute our software. In the area of
content, we have relied and will continue to rely almost exclusively on third
parties for content that we publish under the SINA brand. Although no single
third party content provider is critical to our operations, if these parties
fail to develop and maintain high-quality and successful media properties, or if
a large number of our existing relationships are terminated, we could lose users
and advertisers and our brand could be harmed.
In the area of Web-based services, we have contracted with AltaVista and
OpenFind for integrated Web search technology to complement our directory and
navigational guide, and with Critical Path for our email services and
third-party providers for our principal Internet connections. If we experience
significant interruptions or delays in service, or if these agreements terminate
or expire, we may incur additional costs to develop or secure replacement
services and our relationship with our users could be harmed.
We depend on a third party's proprietary and licensed advertising serving
technology to deliver advertisements to our network. If the third party fails to
continue to support its technology or if its services fail to meet the
advertising needs of our customers and we cannot find an alternative solution on
a timely basis, our advertising revenue would decline.
In order to create traffic for our online properties and make them more
attractive to advertisers and consumers, we have entered into distribution
agreements and informal relationships with ISPs and personal computer
manufacturers for the distribution of our software. These distribution
arrangements typically are non-exclusive, and may be terminated upon little or
no notice. If our software distributors were to terminate or modify their
distribution arrangements, our ability to promote our network and generate
revenue could be harmed.
Our business and growth will suffer if we are unable to hire and retain key
personnel that are in high demand.
We depend upon the continued contributions of our senior management and
other key personnel, many of whom are difficult to replace. The loss of the
services of any of our executive officers or other key employees could harm our
business. We have experienced changes to our executive management team.
Following our acquisition of Sinanet.com, James Sha served as our chief
executive officer from March 1999 to August 1999. Mr. Sha resigned as chief
executive officer on August 31, 1999 and resigned as a member of our Board of
Directors on September 26, 1999. In August 1999, Zhidong Wang, who has served as
our president since October 1997, was promoted to the position of chief
executive officer. We had two chief financial officers resign in 1999. In
November 1999, Victor Lee joined us as chief financial officer. Our future
success will also depend on our ability to attract and retain highly skilled
technical, managerial, editorial, marketing and customer service personnel,
especially qualified personnel for our international operations in Greater
China. In particular, we have experienced difficulty in hiring and retaining
qualified personnel for our Hong Kong office and may experience similar problems
in our other regional offices. Qualified individuals are in high demand, and we
may not be able to successfully attract, assimilate or retain the personnel we
need to succeed.
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We may not be able to manage our expanding operations effectively, which could
harm our business.
We anticipate significant expansion of our business as we address growth in
our customer base and market opportunities. In addition, the geographic
dispersion of our operations requires significant management resources that our
locally-based competitors do not need to devote to their operations. In order to
manage the expected growth of our operations and personnel, we will be required
to improve existing and implement new operational and financial systems,
procedures and controls, and to expand, train and manage our growing employee
base. Further, our management will be required to maintain and expand our
relationships with various other Web sites, Internet and other online service
providers and other third parties necessary to our business. We cannot assure
you that our current and planned personnel, systems, procedures and controls
will be adequate to support our future operations.
Concerns about the security of electronic commerce transactions and
confidentiality of information on the Internet may reduce use of our network
and impede our growth.
A significant barrier to electronic commerce and communications over the
Internet in general has been public concern over security and privacy,
especially the transmission of confidential information. If these concerns are
not adequately addressed, they may inhibit the growth of the Internet and other
online services generally, especially as a means of conducting commercial
transactions. If a well-publicized Internet breach of security were to occur,
general Internet usage could decline, which could reduce traffic to our
destination sites and impede our growth.
Currency fluctuations and restrictions on currency exchange may adversely
affect our business, including limiting our ability to convert Chinese renminbi
into foreign currencies and, if renminbi were to decline in value, reducing our
revenues in U.S. dollar terms.
We generate revenues and incur expenses and liabilities in Chinese
renminbi, Taiwan dollars, Hong Kong dollars, and U.S. dollars. We generated most
of our revenues for fiscal 1999 in renminbi since all of our revenues were
derived from our China operations until our acquisition of Sinanet.com in March
1999. In the future, we may also conduct business in additional foreign
countries and generate revenues and incur expenses and liabilities in other
foreign currencies. As a result, we are subject to the effects of exchange rate
fluctuations with respect to any of these currencies. For example, the value of
the renminbi depends to a large extent on China's domestic and international
economic and political developments, as well as supply and demand in the local
market. Since 1994, the official exchange rate for the conversion of renminbi to
U.S. dollars has generally been stable and the renminbi has appreciated slightly
against the U.S. dollar. However, given recent economic instability and currency
fluctuations in Asia, we can offer no assurance that the renminbi will continue
to remain stable against the U.S. dollar or any other foreign currency. Our
results of operations and financial condition may be affected by changes in the
value of renminbi and other currencies in which our earnings and obligations are
denominated. We have not entered into agreements or purchased instruments to
hedge our exchange rate risks, although we may do so in the future.
Although Chinese governmental policies were introduced in 1996 to allow the
convertibility of renminbi into foreign currency for current account items,
conversion of renminbi into foreign exchange for capital items, such as foreign
direct investment, loans or security, requires the approval of the State
Administration of Foreign Exchange, or SAFE, which is under the authority of the
People's Bank of China. These approvals, however, do not guarantee the
availability of foreign currency. We cannot be sure that we will be able to
obtain all required conversion approvals for our operations or that Chinese
regulatory authorities will not impose greater restrictions on the
convertibility of the renminbi in the future. Because a significant amount of
our future revenues may be in the form of renminbi, our inability to obtain the
requisite approvals or any future restrictions on currency exchanges will limit
our ability to utilize revenue generated in renminbi to fund our business
activities outside China.
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Our operations could be disrupted by unexpected network interruptions caused by
system failures, natural disasters or unauthorized tamperings with our systems.
The continual accessibility of our Web sites and the performance and
reliability of our network infrastructure are critical to our reputation and our
ability to attract and retain users, advertisers and merchants. Any system
failure or performance inadequacy that causes interruptions in the availability
of our services or increases the response time of our services could reduce our
appeal to advertisers and consumers. Factors that could significantly disrupt
our operations include: system failures and outages caused by fire, floods,
earthquakes, power loss, telecommunications failures and similar events;
software errors; computer viruses, break-ins and similar disruptions from
unauthorized tampering with our computer systems; and security breaches related
to the storage and transmission of proprietary information, such as credit card
numbers or other personal information.
We have limited backup systems and redundancy. Recently, we experienced an
unauthorized tampering of the mail server of our China Web site which briefly
disrupted our operations. Future disruptions or any of the foregoing factors
could damage our reputation, require us to expend significant capital and other
resources and expose us to a risk of loss or litigation and possible liability.
We do not carry sufficient business interruption insurance to compensate for
losses that may occur as a result of any of these events. Accordingly, our
revenues and results of operations may be adversely affected if any of the above
disruptions should occur.
The law of the Internet remains largely unsettled, which subjects our business
to legal uncertainties that could harm our business.
Due to the increasing popularity and use of the Internet and other online
services, it is possible that a number of laws and regulations may be adopted
with respect to the Internet or other online services covering issues such as
user privacy, pricing, content, copyrights, distribution, antitrust and
characteristics and quality of products and services. Furthermore, the growth
and development of the market for electronic commerce may prompt calls for more
stringent consumer protection laws that may impose additional burdens on
companies conducting business online. The adoption of any additional laws or
regulations may decrease the growth of the Internet or other online services,
which could, in turn, decrease the demand for our products and services and
increase our cost of doing business.
Moreover, the applicability to the Internet and other online services of
existing laws in various jurisdictions governing issues such as property
ownership, sales and other taxes, libel and personal privacy is uncertain and
may take years to resolve. For example, tax authorities in a number of states in
the U.S. are currently reviewing the appropriate tax treatment of companies
engaged in electronic commerce, and new state tax regulations may subject us to
additional state sales and income taxes. Any new legislation or regulation, the
application of laws and regulations from jurisdictions whose laws do not
currently apply to our business, or the application of existing laws and
regulations to the Internet and other online services could significantly
disrupt our operations.
We may be subject to claims based on the content we provide over our network
and the products and services sold on our network, which, if successful, could
cause us to pay significant damage awards.
As a publisher and distributor of content and a provider of services over
the Internet, we face potential liability for: defamation, negligence,
copyright, patent or trademark infringement and other claims based on the nature
and content of the materials that we publish or distribute; the selection of
listings that are accessible through our branded products and media properties,
or through content and materials that may be posted by users in our classifieds,
message board and chat room services; losses incurred in reliance on any
erroneous information published by us, such as stock quotes, analyst estimates
or other trading information; unsolicited email, lost or misdirected messages,
illegal or fraudulent use of email or interruptions or delays in email service;
and product liability, warranty and similar claims to be asserted against us by
end users who purchase goods and services through our SinaMall and any future
electronic commerce services we may offer.
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We may incur significant costs in investigating and defending any potential
claims, even if they do not result in liability. Although we carry general
liability insurance, our insurance may not cover potential claims of this type
or be adequate enough to indemnify us against all potential liabilities.
Privacy concerns may prevent us from selling demographically targeted
advertising in the future and make us less attractive to advertisers.
We collect personal data from our user base in order to understand better
our users and their needs and to help our advertisers target specific
demographic groups. If privacy concerns or regulatory restrictions prevent us
from selling demographically targeted advertising, we may become less attractive
to advertisers. For example, as part of our future advertisement delivery
system, we may integrate user information such as advertisement response rate,
name, address, age or email address, with third-party databases to generate
comprehensive demographic profiles for individual users. In Hong Kong, however,
we would be in violation of the Hong Kong Personal Data Ordinance unless
individual users expressly consented to this integration of their personal
information. The Ordinance provides that an Internet company may not collect
information on its users, analyze the information for a profile of the user's
interests and sell or transmit the profiles to third parties for direct
marketing purposes without the user's consent. If we are unable to construct
demographic profiles for Internet users because they refuse to give consent, we
will be less attractive to advertisers and our business will suffer.
We may not be able to adequately protect our intellectual property, which could
cause us to be less competitive.
We rely on a combination of copyright, trademark and trade secret laws and
restrictions on disclosure to protect our intellectual property rights. Despite
our efforts to protect our proprietary rights, unauthorized parties may attempt
to copy or otherwise obtain and use our technology. Monitoring unauthorized use
of our products is difficult and costly, and we cannot be certain that the steps
we have taken will prevent misappropriations of our technology, particularly in
foreign countries where the laws may not protect our proprietary rights as fully
as in the United States. From time to time, we may have to resort to litigation
to enforce our intellectual property rights, which could result in substantial
costs and diversion of our resources.
We may be exposed to infringement claims by third parties, which, if
successful, could cause us to pay significant damage awards.
Third parties may initiate litigation against us alleging infringement of
their proprietary rights. In the event of a successful claim of infringement and
our failure or inability to develop non-infringing technology or license the
infringed or similar technology on a timely basis, our business could be harmed.
In addition, even if we are able to license the infringed or similar technology,
license fees could be substantial and may adversely affect our results of
operations.
We may be classified as a passive foreign investment company or as a foreign
personal holding company, which could result in adverse U.S. tax consequences
to you.
Based upon the nature of our income and assets, we may be classified as a
passive foreign investment company, or PFIC, or as a foreign personal holding
company, or FPHC, by the United States Internal Revenue Service for U.S. federal
income tax purposes. This characterization could result in adverse U.S. tax
consequences to you. For example, if we are a PFIC, our U.S. investors will
become subject to increased tax liabilities under U.S. tax laws and regulations
and will become subject to more burdensome reporting requirements. We believe
that we were not a PFIC or an FPHC for 1999 or previous years, and we do not
expect to be either in the future. However, the determination of whether or not
we are a PFIC or an FPHC is made on an annual basis, and those determinations
depend on the composition of our income and assets, in the case of the PFIC
rules, and income and shareholders, in the case of the FPHC rules, from time to
time. Although in the past we have operated our business, and in the future we
intend to operate our business so as to minimize the risk of PFIC or FPHC
treatment, you should be aware that certain factors that could affect our
classification as PFIC or FPHC are out of our control. For example, the
calculation of assets for purposes
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of the PFIC rules depends in large part upon the amount of our goodwill, which
in turn is based, in part, on the then market value of our shares, which is
subject to change. Similarly, the composition of our income and assets is
affected by the extent to which we spend the cash we have raised on acquisitions
and capital expenditures. Therefore, we cannot be sure that we will not be a
PFIC or an FPHC for the current or any future taxable year.
The possible sale of a substantial number of shares in the public market could
adversely affect the price for our shares.
If our shareholders sell substantial amounts of our ordinary shares,
including shares issued upon the exercise of outstanding options and warrants,
in the public market, the market price of our ordinary shares could fall
dramatically. Currently, approximately 35,000,000 shares are held by our
existing shareholders which may be sold in the public market in the future
pursuant to, and subject to the restrictions of, Rule 144, 144(k), 145 or 701
under the Securities Act. Our directors, executive officers and our principal
shareholders have agreed with our underwriters not to offer, sell, contract to
sell, or otherwise dispose of, directly or indirectly, any ordinary shares, or
any securities convertible into or exercisable or exchangeable for ordinary
shares for a period of 180 days following our initial public offering. This
period expires on October 9, 2000.
ITEM 2: PROPERTIES
Our executive offices are located in Hong Kong. In Hong Kong, we have
entered into a three-year lease agreement that began in December 1999. We are
currently leasing our existing facility in Hong Kong on a monthly basis. In
Sunnyvale, California, we have entered into a sublease agreement that expires on
February 7, 2002. In Beijing, we have offices under three lease agreements and
are looking for additional facilities to accommodate our rapid expansion. We do
not believe that we will face difficulty in finding such additional facilities.
We have entered into a lease agreement for our Taipei office which we have
renewed through 2001.
ITEM 3: LEGAL PROCEEDINGS
There are no material legal proceedings pending or, to our knowledge,
threatened against us.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Company's Extraordinary General Meeting of Shareholders held on
April 10, 2000, the following proposals were presented to shareholders and
adopted by the margins indicated:
VOTED
VOTED FOR AGAINST ABSTAIN
---------- ------- ---------
1. To approve the Amended and Restated Memorandum and 21,688,808 3,810 1,409
Articles of Association to eliminate Series B
Ordinary Shares and to delete certain provisions
relating to Hong Kong stock exchange requirements,
effective the Company's initial public offering of
the Company's Ordinary Shares.
2. To adopt and approve the restructuring of Beijing 20,188,809 3,810 1,501,408
Stone Rich Sight Information Technology Co. Ltd.
("BSRS") and the BSRS arrangements with Beijing SINA
Interactive Advertising Co., Ltd. and Beijing SINA
Internet Information Securities Co., Ltd. and to
empower the executives of the Company to make
necessary changes to the arrangements so long as
such changes are approved by an independent
committee of Directors.
No other matters were submitted to a vote of security holders during the fourth
quarter of fiscal 2000.
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PART II
ITEM 5: MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER
MATTERS
(a) Market Information
SINA.com Ordinary Share is quoted on the Nasdaq National Market System
under the symbol SINA since April 13, 2000. The following table sets forth the
high and low closing sales prices of the Company's Ordinary Share for the fiscal
year ended June 30, 2000 as reported on the Nasdaq Stock Market:
HIGH LOW
----- -----
Fourth Quarter (ended 6/30/00).............................. $54.5 $17.0
The Closing price of the Company's Ordinary Share on the Nasdaq Stock
Market on September 15, 2000 was $20.06.
(b) Holders
As of September 15, 2000, the Company had approximately 424 shareholders of
record.
(c) Dividends
The Company has not declared or paid any cash dividends on its Ordinary
Share at any time and has no present plans to do so in the future.
(d) Report of offering securities and use of proceeds therefrom
On April 13, 2000, in connection with the Company's initial public
offering, a Registration Statement on Form F-1 (No. 333-11718) was declared
effective by the Securities and Exchange Commission, pursuant to which 4,600,000
shares of the Company's Ordinary Share were offered and sold for the account of
the Company at a price of $17.00 per share, generating gross offering proceeds
of $78.2 million. The managing underwriters were Morgan Stanley Dean Witter,
China International Capital Corporation, Chase H&Q and Robertson Stephens.
The Company incurred the following expenses in connection with the
offering:
Underwriting discounts and commissions...................... $5,474,000
Other expenses.............................................. 3,907,000
----------
Total Expenses.............................................. $9,381,000
All of such expenses were direct or indirect payments to others.
The net offering proceeds to the Company after deducting the total expenses
above were approximately $68,819,000. Approximately $27,454,000 of the proceeds
was invested in short-term corporate notes and bonds and the remaining proceeds
are being used as working capital or are included within cash and cash
equivalents.
ITEM 6. SELECTED FINANCIAL DATA
The selected consolidated financial data below should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations," the consolidated financial statements and notes
thereto and the other information contained in this Form 10-K.
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YEAR ENDED JUNE 30,
----------------------------------------------
2000 1999 1998 1997 1996
-------- ------- ------ ------- ------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Revenues:
Advertising..................................... $ 11,013 $ 561 $ -- $ -- $ --
Software products............................... 2,943 2,248 2,499 942 430
E-commerce...................................... 214 18 -- -- --
-------- ------- ------ ------- ------
14,170 2,827 2,499 942 430
-------- ------- ------ ------- ------
Cost of revenues:
Advertising..................................... 8,950 1,156 -- -- --
Software products............................... 1,640 1,285 674 325 82
E-commerce...................................... 325 32 -- -- --
Stock-based compensation........................ 605 32 -- -- --
-------- ------- ------ ------- ------
11,520 2,505 674 325 82
-------- ------- ------ ------- ------
Gross profit...................................... 2,650 322 1,825 617 348
-------- ------- ------ ------- ------
Operating expenses:
Sales and marketing............................. 17,476 1,405 622 210 121
Product development............................. 7,358 1,512 452 155 120
General and administrative...................... 6,951 2,085 941 371 268
Stock-based compensation........................ 18,460 3,360 -- 1,737 --
Amortization of intangible assets............... 6,807 1,745 43 -- --
-------- ------- ------ ------- ------
57,052 10,107 2,058 2,473 509
-------- ------- ------ ------- ------
Loss from operations.............................. $(54,402) $(9,785) $ (233) $(1,856) $ (161)
======== ======= ====== ======= ======
Net loss attributable to ordinary shareholders.... $(51,067) $(9,394) $ (253) $(1,868) $ (113)
======== ======= ====== ======= ======
Basic and diluted net loss per share attributable
to ordinary shareholders........................ $ (3.44) $ (1.72) $ (.05) $ (4.42) $(10.8)
======== ======= ====== ======= ======
Shares used in computing basic and diluted net
loss per share.................................. 14,836 5,466 4,962 423 10.5
======== ======= ====== ======= ======
Pro forma for conversion of preference shares
basic and diluted net loss per share............ $ (1.58)
========
Shares used in computing pro forma basic and
diluted net loss per share...................... 32,281
========
AS OF JUNE 30,
----------------------------------------------
2000 1999 1998 1997 1996
-------- ------- ------ ------- ------
(IN THOUSANDS)
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents......................... $ 99,149 $20,571 $5,090 $ 239 $ 223
Working capital (deficit)......................... 125,867 24,057 5,268 133 (421)
Total assets...................................... 156,038 47,582 6,685 777 533
Mandatorily redeemable convertible preference
shares and warrants............................. -- 37,415 6,004 -- --
Total shareholders' equity (deficit).............. 146,817 7,703 (5) 203 (337)
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ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This report contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934, including, without limitation, statements regarding our
expectations, beliefs, intentions or future strategies that are signified by the
words "expect", "anticipate", "intend", "believe", or similar language. All
forward-looking statements included in this documents are based on information
available to us on the date hereof, and we assume no obligation to update any
such forward-looking statements. Actual results could differ materially from
those projected in the forward-looking statements. In evaluating our business,
you should carefully consider the information set forth below under the caption
"Risk Factors" set forth herein. We caution you that our businesses and
financial performance are subject to substantial risks and uncertainties.
OVERVIEW
We are a leading Internet media and services company for Chinese
communities worldwide, offering a full array of Chinese-language news,
entertainment, e-commerce platforms, financial information, and lifestyle tips.
One of our subsidiaries, Beijing Stone Rich Sight Information Technology Co.
Ltd., or BSRS, a Sino-Foreign joint venture company based in Beijing, China,
began operations in December 1993 as a computer software company focused on
providing solutions to computer users wishing to communicate in Chinese. In May
1996, we launched our online network, then called SRSnet.com, offering
Chinese-language news, information and community features such as bulletin
boards and chat services targeted at online users in China. In March 1999, we
expanded our online network by acquiring Sinanet.com, a leading Chinese-
language Internet content company with offices in California and Taiwan and two
distinct Web sites targeting Chinese users in North America and Taiwan. In July
1999, we continued our network expansion by launching our Hong Kong destination
Web site targeting Chinese users in Hong Kong. Today, we operate separate Web
sites in China, Hong Kong, Taiwan, and North America to provide global content
and services that speak directly to the audience of each region, enriching the
online experience of their users.
We derive our revenues from several sources, including online Internet
advertising, software sales, and e-commerce. Advertising revenues are derived
principally from advertising arrangements under which we receive revenues on a
cost-per-thousand impression basis, fixed payment sponsorship from advertisers,
and design of advertising campaigns to be placed on our network. We derive our
software revenues from sales of our software products primarily in China and
Hong Kong through our network of OEM partners, value-added resellers,
distributors, retail merchants, and our direct sales force. Our e-commerce
revenues are mainly derived from transaction and setup fees paid by merchants
for selling their goods at our online mall, SinaMall.
Our overall revenues were $14.2 million for the year ended June 30, 2000,
as compared to $2.8 million and $2.5 million for the years ended June 30, 1999
and 1998, respectively. The increase in revenues was primarily driven by high
growth of our Internet advertising business.
We have incurred significant net losses and negative cash flows from
operations since our inception. As of June 30, 2000, we had an accumulated
deficit of $63.0 million. These losses have been funded primarily through the
issuance of our equity securities in the private and public market. We intend to
continually increase our spending on marketing and brand development, content
enhancements and technology and infrastructure. We anticipate net losses and
negative cash flows from operations in the foreseeable future.
We recorded cumulative deferred stock compensation of approximately $37.5
million, net through June 30, 2000, which represents the difference between the
exercise price of options granted through June 30, 2000 and the fair market
value of the underlying stock at the date of grant. Deferred stock compensation
is amortized on an accelerated basis over the vesting period of the applicable
options, which is generally four years. The amortization of deferred
compensation was $19.1 million and $3.4 million in fiscal 2000 and 1999,
respectively. We expect the amortization of deferred compensation to approximate
$8.2 million for fiscal 2001, $4.4 million for fiscal 2002, $2.0 million for
fiscal 2003 and $0.2 million for fiscal 2004.
On March 29, 1999, we acquired Sinanet.com. The fair value of the total
consideration paid in the acquisition, including assumed liabilities of
approximately $4.3 million and acquisition costs of $0.1 million,
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was $21.7 million. The $4.3 million in liabilities that we assumed included $3.5
million of notes payable which were subsequently converted into our Series A4
preference shares. We accounted for the acquisition as a purchase. We recorded
goodwill and other intangible assets of approximately $20.3 million as a result
of this transaction, which are being amortized over a three-year period.
On August 31, 1999, we entered into an agreement with AdForce, Inc. and
Compuserve Consultants, Ltd. to form a joint venture to provide outsourced,
centralized advertising management and delivery services on the Internet for
customers primarily using the Chinese language in China, Hong Kong, Taiwan and
Singapore. In December 1999, we invested $1.4 million in cash for a 35.4%
interest in the joint venture. We account for our investment in the joint
venture using the equity method of accounting. During the year ended June 30,
2000, we recorded $501,000 loss from our investment in the joint venture.
In April 2000, the Company sold 4,600,000 ordinary shares in an
underwritten initial public offering, inclusive of 600,000 ordinary shares
through the exercise of the underwriter's over-allotment option for net proceeds
of approximately $72.7 million, before offering expenses.
RESULTS OF OPERATIONS
Net Revenues
Advertising. We began to generate revenues from Internet advertising in
the second quarter of fiscal 1999. We generated $11.0 million and $0.6 million
in advertising revenues for the years ended June 30, 2000 and 1999,
respectively. For the years ended June 30, 2000 and 1999, barter revenues
accounted for 1.3% and l