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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------
FORM 10-K
(Mark one)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For The Fiscal Year Ended December 31, 2003
or
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
for the transition period from to .
Commission File Number: 001-15713
ASIAINFO HOLDINGS, INC.
(Exact name of Registrant as specified in its charter)
Delaware 752506390
(State of incorporation) (I.R.S. Employer
Identification No.)
4th Floor, Zhongdian Information Tower
6 Zhongguancun South Street, Haidian District
Beijing 100086, China
(Address of principal executive offices, including zip code)
Registrant's telephone number, including area code +8610 6250 1658
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.01 Par Value
(Title of Class)
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 [_]
Indicate 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 the 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. [_]
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [X] No [_]
Based on the closing sale price of the common stock on the Nasdaq National
Market System on June 30, 2003, the aggregate market value of the voting stock
held by non-affiliates of the Registrant was $269,771,109.60.
The number of shares outstanding of the Registrant's common stock, $0.01 par
value, was 45,416,754 at March 9, 2004.
DOCUMENTS INCORPORATED BY REFERENCE
Certain information is incorporated by reference to the Proxy Statement for the
Registrant's 2004 Annual Meeting of Stockholders to be filed with the
Securities and Exchange Commission pursuant to Regulation 14A not later than
120 days after the end of the fiscal year covered by this Form 10-K.
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ASIAINFO HOLDINGS, INC.
FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2003
TABLE OF CONTENTS
PART I
ITEM 1. Business............................................................................ 3
ITEM 2. Properties.......................................................................... 16
ITEM 3. Legal Proceedings................................................................... 16
ITEM 4. Submission of Matters to a Vote of Security Holders................................. 17
PART II
ITEM 5. Market for Registrant's Common Equity and Related Stockholder Matters............... 18
ITEM 6. Selected Financial Data............................................................. 19
ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operation 20
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk.......................... 37
ITEM 8. Financial Statements and Supplementary Data......................................... 38
ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 38
ITEM 9A. Controls and Procedures............................................................. 38
PART III
ITEM 10. Directors and Executive Officers of the Registrant.................................. 38
ITEM 11. Executive Compensation.............................................................. 38
ITEM 12. Security Ownership of Certain Beneficial Owners and Management...................... 38
ITEM 13. Certain Relationships and Related Transactions...................................... 38
ITEM 14. Principal Accountant Fees and Services.............................................. 39
ITEM 15. Exhibits, Financial Statement Schedule, and Reports on Form 8-K..................... 39
SIGNATURES................................................................................... 41
Except for historical information, the statements contained in this Annual
Report on Form 10-K are 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. The Private Securities Litigation Reform Act of 1995 (the
"Reform Act") contains certain safe harbors regarding forward-looking
statements. Certain of the forward-looking statements include management's
expectations, intentions and beliefs with respect to our growth, our future
operating results, the nature of the industry in which we are engaged, our
business strategies and plans for future operations, our needs for capital
expenditures, capital resources and liquidity, and similar expressions
concerning matters that are not historical facts. Such forward-looking
statements are subject to risks and uncertainties that could cause actual
results to differ materially from those expressed in the statements. All
forward-looking statements included in this document are based on information
available to us on the date hereof, and we assume no obligation to update any
such forward-looking statements. These cautionary statements are being made
pursuant to the provisions of the Reform Act with the intention of obtaining
the benefits of the safe harbor provisions of the Reform Act. Among the factors
that could cause actual results to differ materially are the factors discussed
below under the heading "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operation--Factors Affecting Our Operating
Results and Our Common Stock."
In this report, "AsiaInfo," the "Company," "we," "us," and "our" refer to
AsiaInfo Holdings, Inc. and its subsidiaries.
PART I
ITEM 1. Business
Overview
We are a leading provider of high-quality software and network solutions in
China. We provide total customer solutions to some of China's largest
companies, helping our customers to increase their business value in
fast-growing and evolving markets. In the telecommunications market, our
software products and network services enable our customers to build, maintain,
operate, manage and continuously improve their communications infrastructure.
Our largest customers are the major telecommunications carriers in China and
their provincial subsidiaries, such as China Telecommunications Corporation, or
China Telecom, China Network Communications Group Corporation, or China Netcom
Group, China Mobile Communications Corporation, or China Mobile, and China
United Telecommunications Corporation, or China Unicom. Recently, through our
acquisition of a human resources management, or HRM, and business intelligence,
or BI, software business, we have gained exposure to new customers in
industries such as transportation, power and iron and steel.
We commenced our operations in the United States in 1993 and moved our major
operations from the United States to China in 1995. We began generating
significant network solutions revenues in 1996 and significant software
revenues in 1998. We conduct the bulk of our business through our wholly-owned
operating subsidiaries, AsiaInfo Technologies (China) Inc., or AsiaInfo
Technologies, and AsiaInfo Management Software, Inc., or AsiaInfo Management,
which are both Chinese companies.
In China, we have designed and implemented most of the nation's major
commercial Internet backbone projects, including ChinaNET for China Telecom,
UniNET for China Unicom and CMCCNET for China Mobile. Each of those projects
included the carrier-class, meaning high performance, highly fault tolerant,
software components that we develop and sell. Our software products can support
millions of users, are designed with open architecture to facilitate
customization, and are tailored for the specific needs of the China market.
Because those software products, along with our network integration services,
have a broad range of applications for our customers' businesses, including
their fixed-line, wireless and Internet services, our business has grown from a
pure Internet infrastructure developer to a total communications infrastructure
software and services provider.
We believe that there are opportunities for us to expand into new business
areas and to continue to grow our business both organically and through
acquisitions. On December 4, 2003, we completed our acquisition of
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certain HRM and BI assets valued at approximately $9 million from Pacific
Software (China) Limited, a privately held, medium-sized software solutions
company based in Hong Kong, and from its affiliate, New Century Pacific
Software (Beijing) Limited, a wholly-foreign-owned enterprise based in Beijing,
China. We expect that this acquisition will help us to expand into the HRM and
BI software markets, and will expose us to customers in other industries,
outside of our traditional telecommunications customer base.
Industry Background
According to China's Ministry of Information Industry, or MII, in 2003 China's
fixed-line phone subscribers increased by 23% to 263 million and wireless phone
users increased by approximately 30% to 268 million. During that period, total
revenue generated by the telecommunications sector reached approximately $55.54
billion, up 13.9% from the previous year. China's telecommunications sector
continues to serve as a growth engine for the country's overall economy, in
which GDP grew at a rate of 9.1% in 2003, according to the Ministry of Finance
of China. The following table sets forth certain information relating to
China's economic growth and the telecommunications industry in China as of the
dates indicated:
Compound Annual
As of December 31, Growth Rate
-------------------------- ---------------
2000 2001 2002 2003 (2000-2003)
----- ----- ----- ----- ---------------
China's population (in millions)......... 1,267 1,276 1,286 1,303 1.3%
China's GDP per capita (RMB)............. 7,081 7,543 7,930 8,300 4.7%
Fixed-line Telephone
Access lines in service (in millions). 144.8 180.4 214.4 263.3 22.1%
Penetration rate /(1)/................ 11.4% 14.1% 16.7% 21.2% 23.0%
Wireless Telephone
Subscribers (in millions)............. 84.5 144.8 206.6 268.7 47.1%
Penetration rate /(1)/................ 6.7% 11.3% 16.1% 20.9% 46.1%
Internet
Users (in millions)................... 22.5 33.7 59.1 79.5 52.3%
Penetration rate /(1)/................ 1.8% 2.6% 4.6% 6.2% 51.0%
- --------
(1) Determined by dividing the number of subscribers or users by the total
population of China.
Sources: Data in respect of China's population and GDP per capita are derived
from information published by the National Statistical Bureau of
China; data in respect of mobile subscribers are derived from
information published by the Ministry of Information Industry; data in
respect of Internet users are derived from information published by
China Internet Network Information Center.
China's government has set aggressive goals for the future growth of China's
telecommunications industry. According to the MII's Tenth Five-Year Plan, the
industry will continue to grow three times as fast as China's GDP during the
period from 2001 through 2005. By 2005, the MII expects telecommunications
service revenues to reach approximately $110 billion, which is triple the
figure in 2000. The capacity of fixed switching equipment is expected to reach
300 million lines, while mobile switching capacity is expected to reach 360
million lines. There will be approximately 200 million subscribers of data,
multimedia and Internet services with a penetration rate of 15%. Based on
preliminary calculations, a total of approximately $150 billion will be
invested in the telecommunications industry, which is 20-30% higher than the
total investment under China's Ninth Five-Year Plan.
Over the past several years, the telecommunications industry in China has gone
through several restructurings. These restructurings have been accompanied by
industry deregulation and rapid growth in the market for telecommunications
services. Prior to a major industry restructuring in 1999, the
telecommunications market in China was dominated by the predecessor company of
China Telecom. In 1999, the predecessor company of China Telecom was divided
into the four companies, focusing on fixed line, mobile telephony, satellite
communications and paging, respectively. In May 2002, the telecommunications
industry was further restructured with the split of China Telecom into two
independent companies. China Netcom Group was formed by merging the
telecommunications assets of China Telecom in ten northern provinces of China
with China
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Netcom Corporation Ltd., or China Netcom, and Jitong Communication Co., Ltd.
The southern division of the original China Telecom continues to operate under
the China Telecom name.
At the end of 2003, there were five major licensed telecommunications operators
in China. China Telecom, China Netcom Group, China Unicom and China Railway
Communications Corporation, or China Railcom, provide fixed-line services,
while China Mobile and China Unicom are licensed to provide wireless services.
China Satellite Communications Corporation, or China Satcom, the sixth licensed
telecommunications operator in China, has smaller operations and specializes in
satellite communications. All six operators are Internet service providers. In
terms of total income in 2003, China Mobile held 37.4% of the market in China,
followed by China Telecom with 31.1% and China Netcom Group with 16.6%. China
Unicom ranked fourth with a market share of 13.4% while remaining operators
together held the remaining 1.5%, according to MII.
With the introduction of more competition, telecommunications service providers
are becoming more conscious of the return on their infrastructure investments.
With the rapidly increasing number of subscribers and the restructuring of
China's telecommunications industry, the competitive focus of carriers is
moving from pricing to quality and product differentiation, while their
investment focus is moving from network construction to operation support
systems that help increase service quality and customer satisfaction, and
reduce response time to market demands and trends.
According to MII, overall capital expenditure in the telecommunications sector
increased by 8.6% to $26.8 billion in 2003. We anticipate the expenditure level
in 2004 to be at the same level as 2003, while the focus of the expenditure
will be on data, value-added service platforms and support networks such as
BOSS, CRM and billing, which are all solutions we offer.
Market Opportunities
China's telecommunications industry is expected to grow at a rate of 14% in
2004, according to MII. The number of fixed-line users is expected to reach 290
million, and the number of mobile phone users is expected to reach 320 million
in 2004, according to MII. In the services area, China is expected to have
approximately 60 million users of Personal Handy-Phone System, or PHS, 16.7
million subscribers of code division multiple access, or CDMA, mobile services,
10 million users of broadband and 100 million users of the Internet in 2004. At
the same time, China's large state-owned enterprises are expected to increase
their investment in human resources management and business intelligence
software and solutions, according to the China Center for Information Industry
Development, or CCID.
We believe that the principal market opportunities for us include the following:
Telecommunications business and operation support systems (BSS/OSS). With
increased competition in China's telecommunications industry, China's
telecommunications carriers are shifting their focus from capacity expansion to
operation efficiency. As a result, we believe a well-developed BSS/OSS system
for customer relations management will be the core competence and investment
focus for carriers. We expect China's major telecommunications carriers to
restructure their existing technology-oriented and network-based operational
support systems and increase their investments in their customer-oriented and
service-based BSS/OSS systems.
Value-added telecommunications services. Gartner Group, an independent
research firm, predicts that revenues from traditional voice service will
maintain a growth rate of 7% from 2004 to 2006. In the next two years,
value-added telecommunications services are expected to be the main driving
force in the development of China's telecommunications industry. Mobile data
services are expected to grow at an annual rate of 96%, while Internet services
are expected to maintain an annual growth rate of 38%. Investment in
value-added services of the four largest telecommunications operators in China
are expected to reach an annual growth rate of 78% in the next two years.
Because of the diversity of services and technologies, investment in
value-added services is expected to focus on interconnection among the
operators and billing mechanisms for various services.
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Network construction, network optimization and network maintenance. Although
network construction for the major telecommunications operators in China has
largely been completed, the restructurings of China Telecom and China Netcom
and the development of value-added services have brought new requirements for
sophisticated functions on those networks. In particular, the increasing use of
broadband presents opportunities for network optimization. In addition,
outsourcing of network maintenance has become another growing market as
telecommunications operators shift their investment focus from networks to
services.
Human Resources Management (HRM) and Business Intelligence (BI). HRM and BI
software is a developing market globally. According to a recent IDC research
report on HRM systems, global enterprise expenditure on human resources
services is expected to reach $103.3 billion by 2007 and the global market for
BI software solutions is expected to grow at an average annual rate of 27% to
2005. CCID predicts that more than 60% of Chinese enterprises will invest in
HRM systems in the next two years, and 16% of Chinese enterprises will
implement HRM programs in 2004. According to IDC, China's HRM market will reach
a scale of $100-150 million by 2005. Facing more and more market competition,
many enterprises in China have adopted the strategy of utilizing thorough
analysis of data regarding customers, markets and products to reduce
operational costs and to increase profits, making BI a promising and growing
market.
Our Strategy
Our vision is to be the leading company providing world-class software and
solutions to high profile customers in telecommunications and enterprise
solutions markets.
Through the implementation of our business strategies since 2000, we have
successfully transformed ourselves from a systems integrator of Internet
networks to a total customer solutions provider of software and network
services. Our strategy is to provide high quality software products and IT
service for our customers to help them achieve sustainable development. The key
aspects of our strategy include the following:
The escorting plan. We hold the leading positions in the markets for
construction of BSS/OSS systems and Internet networks in China, which we
believe are two of the most important areas for the future development of
telecommunications operators. To further strengthen our leading position, and
to better support telecommunications operators, in 2003 we announced what we
refer to as our "escorting plan" for telecommunications operators. Through our
escorting plan, we aim to build strong partnerships with telecommunications
operators so as to better understand their requirements and to provide them
with their most valued products and services. This, in turn, will bring us
better opportunities to market our products and services.
New Service Provider (SP). Based on our software products and professional
services, and our close relationships with telecommunications operators, we
plan to establish a new business model with telecommunications operators to
develop the market for value-added telecommunications services in China. Since
the end of 2003, we have undertaken experimental programs with
telecommunications operators, and have established a new business unit, called
New Services, to address this market.
Enterprise market strategy. In December 2003, AsiaInfo acquired the HRM and BI
software businesses of Pacific Software and integrated the acquired assets into
a new business unit, Enterprise Information Solutions, or EIS. The current
strategy of EIS is to develop and expand its HRM and BI businesses in the
market for large enterprises in China, and to promote our strength in software,
technology and services in that market.
Focus on high value information technology professional services. We focus on
providing our customers with high value IT professional services, such as
network planning, design and optimization, while gradually outsourcing lower
end services, such as hardware installation. We believe the service components
of our telecommunications solutions will become increasingly important as
telecommunications networks become more complex and more customized. As such,
we intend to continue to develop our services business to include provision of
professional maintenance and support services to our existing customers.
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Attract and retain highly qualified personnel. We intend to continue our
strategy to attract and retain the best and most qualified personnel in China's
IT industry. In view of the specific needs of the China market, we target our
recruitment effort on Chinese citizens who have information technology and
professional competence and international exposure. We believe that we have
been able to attract and retain qualified personnel by offering attractive
compensation packages, a challenging and rewarding work environment, and the
opportunity to work for a leading company in China.
Our Competitive Strengths
Through ten years of development, we have become the largest telecommunications
software and solutions provider in China. The key factors that contribute to
our strong competitive position are:
The leading provider of telecom BSS/OSS solutions. We are the leading provider
for China Mobile's operation support systems. We developed one of the largest
telecommunications customer management systems in the world for Zhejiang
Mobile, a subsidiary of China Mobile. Our successful work for China Mobile
provides us with a solid position to support other telecommunications operators
in their BSS/OSS systems construction.
The leader in Internet related markets. We are a leader in designing and
implementing China's Internet infrastructure. We built first-class Internet
backbones and provincial access networks, as well as user management systems
and email systems, for China Mobile, China Telecom, China Netcom and China
Unicom. As development of IP based value-added telecommunications services are
becoming telecommunications operators' most important business strategy, we
anticipate that the systems we constructed will help us to gain an advantageous
market position.
Large-scale software development. Our software products, such as those for
online billing solutions, e-mail solutions, business operation support systems
solutions and CRM solutions, are capable of handling more than ten million
telecommunications services users. Our large-scale software development
capabilities will further help us to ensure efficiency and profitability in
future development.
Customer-centric and cost-effective project management capability. Our project
delivery time with key customers usually lasts between three to six months, and
at times may last over a year. We believe customer satisfaction is essential to
preserve customer loyalty. As such, we remain in close contact with our
customers to meet their needs and demands during the course of these projects.
Through experience and time, we have developed a unique project management
system to achieve maximum customer satisfaction in a cost-effective manner. We
believe our effective project management system distinguishes us from our
competitors in China.
Established customer relationships. We have close relationships with all
leading telecommunications service providers in China and have provided our
services and products to most of them. Our in-depth understanding of their
requirements allows us to successfully deliver customized solutions and
maximize the opportunities created by investment in communications
infrastructure in China. Moreover, we have strong customer service and research
and development teams based in China, which allows us to respond quickly and
efficiently to the needs of our customers.
Products and Solutions
We leverage our core strengths in information technology software and services
into product and solution offerings to leading telecommunications service
providers, as well as major enterprises in the power and transportation markets
in China. Our offerings include seven categories of software products, each of
which is given the name "Open" because the software installed is designed with
open architecture to facilitate further development and customization for
specific purposes. We integrate a combination of these products, together with
our services, into solutions according to individual customer needs.
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AIOpenBOSS
AIOpenBOSS provides a flexible, expandable operation support platform for
convergent billing solutions for mobile operators. AIOpenBOSS supports the
business of mobile operators by providing a full line of integrated solutions
including billing, account processing, operations management, customer
services, settlements, as well as system monitoring and disaster recovery
management. AIOpenBoss is capable of being developed into a full-service
operations support system based on its core convergent billing function.
Software products under this category include AsiaInfo Online Billing System,
AsiaInfo Convergent Billing System, AI-BS Mobile Business Operating Support
System and AsiaInfo Integrated Settlement System.
AIOpenCRM
AIOpenCRM is a leading customer relationship management solutions suite we
launched for Chinese telecommunications operators. AIOpenCRM is an efficient
system for operators to improve customer service quality and customer
satisfaction. Our suite of customer relationship management solutions allows
wireless and fixed-line telecommunications operators to improve customer
service and establish strong customer relationships. Our AIOpenCRM products
include solutions for AsiaInfo Customer Care and Relationship Management System
and AsiaInfo Order Management System.
AIOpenBI
The core of the AIOpenBI solution is a carrier-class operating analysis &
decision support system platform. With embedded technology such as data
warehousing, online analytical process and data mining, AIOpenBI enables
carriers to make management decisions based on analysis of customer behavior,
competitive environment, business profitability and other parameters. The
system is able to proactively generate business operation reports, which serve
as a basis for top management decisions. Our main product under AIOpenBI is
called AIOmniVision.
AIOpenXpert
AIOpenXpert, AsiaInfo's network management product suite, includes network
access and backbone infrastructure design and implementation for
telecommunications and Internet service providers. Our main product under
AIOpenXpert is call AINetXpert. AIOpenXpert supports a wide array of network
technologies and generally involves one or more of the following services:
.. Network planning. We provide our customers with strategic and tactical
reviews of their current network operations and future network
requirements. We do much of this work before the customer awards a contract
in order to assist them in developing an appropriate request for proposal
and to improve our chances in winning the contract. The planning includes
defining client business requirements, developing appropriate information
architectures and selecting preferred technology.
.. Network design. We detail the network specifications and implementation
tactics necessary to achieve our customers' objectives. We also consider
how the new technology will integrate with the customer's existing hardware
and software and how it will be managed on an ongoing basis.
.. Network implementation. We install recommended systems to meet our
customers' network requirements. Key activities include project management,
hardware and software procurement, configuration and field installation and
testing, building network management centers and developing customized
network and services management applications. We believe that our expertise
in integrating new systems without disrupting our customers' ongoing
business operations adds significant value and reduces risks.
.. Network performance optimization. We maximize the efficiency of
communications networks by improving network utilization. Examples of these
services include network traffic analysis and identification of
bottlenecks, recommendations for efficient allocation of bandwidth, fault
detection and isolation, and performance audit and tuning.
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AIOpenAPP
We design and provide applications for Internet access, Internet protocol
telephony and virtual private networks and allow our clients to provide
commercial services to their customers. We also provide high volume messaging
software and services, and Web-based as well as other Internet applications.
Software products within our AIOpenAPP solutions include AsiaInfo Mail Center
(AIMC), AsiaInfo Unified Messaging System (AIUM), AsiaInfo Internet Short
Messaging Gateway (AIISMG) and AsiaInfo VisionXpert (AIVX).
AsiaInfo Mail Center (AIMC). Our flagship online messaging software, AIMC, is
an integral part of our service application offerings. AIMC is carrier-scale
messaging software designed to support electronic mail systems for the full
range of email service providers, from small Internet service providers to
large-scale mail hosting providers with millions of mailboxes and thousands of
domains. Its flexible design allows service providers to offer Web-based free
e-mail, basic e-mail service and premium business secure e-mail to end-users.
The ability to scale both horizontally and vertically allows rapid expansion
when more capacity is needed. The system is built to accommodate clustering
technology and is highly fault tolerant. In addition to major
telecommunications and Internet service providers, top Internet content
providers in China are among the key customers for AIMC. To meet the demand for
more efficient and secure electronic message exchanges, AIMC provides
innovative functions and anti-spam control. The wireless application protocol,
or WAP, and short messaging system, or SMS, functions allow the end user to
access email at any time with a mobile connection. AIMC also enhances user
experience with its stream-based video mail function.
AsiaInfo Unified Messaging System (AIUM). AIUM is an information-exchanging
platform for wire, wireless and Internet networks providing customers complete
access to message transmission and retrieval. AIUM gives the user freedom to
choose among various media, such as e-mail, telephone, facsimile and mobile
telephone, to send and retrieve messages.
AsiaInfo Internet Short Messaging Gateway (AIISMG). AIISMG is a business
support platform for value-added short messaging services. AIISMG is the only
one-layer short messaging gateway used by China Mobile (which facilitated more
than 80 billion short messages in 2002) to achieve single-point access and
provincial roaming within China. Furthermore, AIISMG supports multi-protocols
to enable short messages transported between different carriers and different
mobile networks, including digital mobile (global system for mobile
communications, or GSM), CDMA, personal handy phone system, or PHS, and third
generation, or 3G networks.
AsiaInfo VisionXpert (AIVX). AIVX is a support system for video-conferencing
operations, providing the following functions:
.. Conference management--scheduling user participation in conferences and
booking meeting times and venues;
.. Resource management--carrying out deployment strategies over system
resources, supporting products of different manufactures and providing
inter-operator development and redundancy design;
.. User management--managing users data and user' rights, and matching users
and terminals;
.. Billing management--collecting billing records, generating billing
messages, answering billing inquiries and performing bill payment function.
AIOpenEIS
EIS refers to Enterprise Information Solutions, and the main product under
AIOpenEIS is Human Resources Management (HRM) Systems, which provides
enterprises with a highly functional and efficient computerized system that
enables the accurate, timely and standardized capturing, storage, analysis and
maintenance of all HR-related information. Our HRM solution is also capable of
facilitating all key HR management functions, from basic data collection,
filing, analysis and reporting, to performance review and salary/incentives
management, to
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organization development management. In particular, the HRM solution allows
China's large enterprises, especially those former or existing state-owned
enterprises, to comply with governmental requirements on human resources
management and requirements of domestic labor laws on pension, housing and
insurance. It also supports the management of career promotion systems for
skilled workers based on numerous state-administered tests.
AIOpenPRM
AIOpenPRM is a system we recently developed that calculates, manages and
reconciles payment for intercarrier network access, including settlement of
roaming charges between mobile operators, as well as management of agreements
and settlements between operators and their business partners. "PRM" refers to
"partnership relationship management". AIOpenPRM solution also provides support
to telecommunications operators in their services to large enterprise customers
and high-end individual customers, as well as their relationship management
with third-party sales channels. Our main product under AIOpenPRM is called
AIBCBS. As of the date of this report, AIOpenPRM has recently become available
for sale and we have not yet entered into any customer agreements for AIOpenPRM.
Services
An integral part of our total customer solutions business is providing
customers with professional IT services including network planning, design and
optimization, as well as technical training, while gradually outsourcing lower
end services, such as hardware installation. In direct response to our
customers' needs, we have recently expanded our services business to include
the provision of professional maintenance and support services. This service
component of our business will become increasingly important, particularly as
telecom networks become more complex and Chinese carriers pay more attention to
improving their efficiency.
Strategic Acquisitions and Alliances
From time to time we enter into strategic acquisitions and alliances in order
to further our business objectives, including:
.. expanding our product and service offerings;
.. entering vertical markets and obtaining complementary technology; and
.. increasing our distribution channels and co-marketing opportunities.
Our strategic investments have included our acquisition of Bonson Information
Technology Holdings Limited, or Bonson, a leading provider of operation support
system solutions to China's wireless telecommunications carriers. We acquired
Bonson in February of 2002 for a combination of cash and shares of our common
stock valued at a total of approximately $51.4 million.
In December 2003, we acquired certain human resources management and business
intelligence assets valued at approximately $9 million from Pacific Software
(China) Limited, a privately held, medium-sized software solutions company
based in Hong Kong, and from its affiliate New Century Pacific Software
(Beijing) Limited, a wholly-foreign-owned enterprises based in Beijing, China.
The acquisition has expanded our business into the fast-growing human resources
management and business intelligence market, allowing significant
cross-marketing of our expertise in software management and development outside
our traditional telecommunications industry client base.
Pricing
We currently price our projects on the following basis:
.. Third party hardware procurement. We sell hardware as part of our total
solutions and price hardware together with the total contract price as a
fixed-fee. To minimize exposure to hardware risk, we source equipment from
hardware vendors against letters of credit from our customers.
.. Software sales. We price our software products (except for AIOmniVision
and AINetXpert) based on the number of user licenses which our customers
purchase from us. We price AIOmniVision based on modules, functions and
requirements for follow-on services, and price AINetXpert based on the
number of networks we monitor using the software. In addition to these
license fees, our customers purchase technology support services for which
they pay a service fee comprised of a fixed percentage of the total
contract amount. The pricing of our messaging software, AIMC, is based on
the total number of mail boxes purchased by our
10
customers. However, the unit price for each mail box differs among free
Web-based e-mail service, basic ISP-provided Internet e-mail and business
secure e-mail offerings.
.. Services. We price our services internally on an estimated time and
material basis. Services included in a solution offering are charged to
customers as a percentage of the total contract amount while professional
maintenance and support services are charged separately, usually on an
annual basis.
Contracts for our projects are generally subject to competitive bidding
processes.
Technology
We have developed core competencies in various advanced technologies that are
used in our products and solutions. By utilizing technologies such as
multi-tier architecture, object-oriented techniques, data mining and open
application program interfaces, we are able to provide our customers with the
flexibility required in a highly competitive, dynamic environment.
Our business and operation support system solution (AIOpenBOSS) is a flexible,
expandable, and scalable operation support platform with multi-tier
architecture. As a modularized software product, it has the following technical
features:
.. an architecture adaptable to various compatible commercial middleware.
.. a unified rating engine providing flexible pricing mechanisms.
.. dynamic component modules that can be modified separately when a new
product is introduced and updated without any system down time.
.. memory database technologies allowing high performance for rating and
billing activities.
.. a real-time accounting system satisfying more sophisticated business
requirements.
Our analytical customer relationship management software (AIOpenCRM), solution
uses data-warehousing technology, offering decision support and execution
services. It has the following technical features:
.. data mining and online application and processing analysis capabilities
enhanced by the flexibility of data-warehouse modelling technologies.
.. flexible and reliable scripting technologies independent of operating
system and database.
.. dynamic component modules that can be modified separately when a new
product is introduced and updated without any system down time.
.. proprietary extract, transfer and load (ETS) technologies.
The architecture of our partnership relations management software (AIOpenPRM)
has three layers: the access layer, service layer, and data layer. The
multi-tier design technology provides flexibility, scalability, and high
performance. To facilitate the flexible configuration and integration with
other systems, the following technologies are adopted:
.. The Workflow Management System (WFMS) performs execution and monitoring by
breaking down work activities into well-defined tasks, roles, rules and
processes to improve the production organization and working efficiency.
This technology allows operators to reconfigure the business process to
improve service quality and flexibility.
.. Bus-oriented architecture and implementation of communications crossing
application systems allow centralized and integrated connection among
various modules.
Research and Development
We are committed to researching, designing and developing information
technology solutions and software products that will meet the future needs of
our customers. We upgrade our existing software products to enhance scalability
and performance and provide added features and functions.
11
The focus of our network services research is on new network technology
development and the evaluation of solutions based on multi-vendor products. The
focus of our software research is on architecture study, software development
platforms, commonly used libraries and other software management tools.
Customers
Our customers currently consist primarily of Chinese telecommunications service
providers, including China Mobile, China Unicom, China Netcom Group and China
Telecom. For the year ended December 31, 2003, China Mobile accounted for
approximately 45% of our revenues net of hardware costs, while China Unicom
accounted for approximately 25%, China Telecom and China Netcom Group each
accounted for approximately 12% and other customers accounted for 6%. Our
customer base is changing and diversifying as the overall China
telecommunications market deregulates. For more information on restructurings
and regulatory changes affecting our customers, please see the discussion above
under the heading "Industry Background" and the discussion below under the
heading "Government Regulation."
China Mobile. China Mobile was established in July 1999 to operate mobile
telecommunications networks nationwide that had previously been operated by
China Telecom. China Mobile is the largest telephony service provider in China,
with over 176 million wireless voice service subscribers, and has various
provincial subsidiaries throughout China which are responsible for local
networks. China Mobile's digital mobile (GSM) network covers all of China's
cities and 99% of its rural areas.
China Unicom. China Unicom was established in 1994 and is China's second
largest mobile operator, providing services to over 92 million mobile customers
through its digital mobile (GSM) network and since January 2002, its second
generation, or 2G, CDMA network. In 2003, China Unicom had 90.6 million
subscribers and is targeting to achieve 107 million subscribers by the end of
2004. China Unicom also provides a wide array of services, including long
distance telephone services, local telephone services, Internet and data
communications services, paging services, communications value-added services
and other communications services. In 2003, China Unicom established joint
ventures with Qualcomm and SK Telecom to promote its CDMA business. In the same
year, its CDMA-IX system formally began operation. By the end of 2003, China
Unicom's CDMA users had reached 19 million.
China Netcom Group. China Netcom was originally formed in 1999 to provide
nationwide Internet broadband access and integrated telecommunications
services. As part of the industry reorganization, China Netcom merged with the
northern division of China Telecom and Jitong Communication, and the combined
business now operates under the China Netcom Group name. In 2003, China Netcom
completed its organizational restructuring and established the China Netcom
Group, which consists of three main entities, CNC North (responsible for CNC's
operations in northern China), CNC South (responsible for CNC's operations in
southern China), and CNC International (responsible for CNC's toll switch
business with international operators).
China Telecom. China Telecom is the leading provider of fixed-line telephone,
data and Internet and leased line services in four of the most economically
developed regions in China. Before the restructurings of the telecommunications
industry in China that began in 1999, China Telecom, together with its various
provincial subsidiaries, constituted our largest customer, accounting for
almost all of our revenues in 1997 and 1998. As part of the industry
reorganization completed in May 2002, the northern division of China Telecom
(comprising ten provinces) merged with China Netcom and Jitong Communication to
form China Netcom Group. The southern division (comprising twenty-one
provinces) continues to operate under the China Telecom name.
Customers in the Enterprise Market
Through our acquisition of HRM and BI assets from Pacific Software, we have
recently gained exposure to customers outside of our traditional
telecommunications base. CCID predicts that more than 60% of Chinese
enterprises will invest in HRM systems during the next two years, and 16% of
Chinese enterprises will implement HRM programs in 2004. According to IDC,
China's HRM market will reach a scale of $100-150
12
million by 2005. Facing increased competition, many enterprises have adopted a
strategy of utilizing thorough analysis of data regarding customers, markets
and products to reduce operational costs and to increase profits. Large-scale
state-owned enterprises are the target customer base of our HRM and BI
solutions business. Our key customers in this market primarily include Air
China International Corporation, or Air China, and China Petrochemical
Corporation, or Sinopec.
Air China. On October 11th, 2002, under the guideline of the System Reform
Program for Chinese Civil Aviation Industry approved by the State Council,
China National Aviation Holding Company was formally founded, consisting of Air
China, China National Aviation Company and China Southwest Airlines. On October
28th, 2002, the new Air China was formed by consolidating the air
transportation assets of the three companies. According to Air China, it has
total asset of 50.89 billion RMB, total traffic volume of 5.17 ton kilometers
and 23,000 staff. It operates 386 routes including 64 international and 322
domestic routes and offers 3,300 scheduled services weekly. It has extensive
sales and operations networks throughout China and in major cities around the
world.
Sinopec. Sinopec is a leading energy and chemical company in China. Its scope
of business covers exploration, development, production and marketing of crude
oil and natural gas, oil refining and marketing, production and sales of
petrochemicals, chemical fibers, chemical fertilizers, and other chemicals,
storage and pipeline transportation of crude oil and natural gas, import and
export of its products, as well as research and development of related
technologies. With one million employees, Sinopec is China's largest producer
and seller of oil products, its largest supplier of major petrochemical
products, and its second largest crude oil producer.
Sales and Marketing
Sales
We classify market segments and target opportunities on national and regional
levels. This classification helps us determine our primary sales targets and
prepare monthly and quarterly sales forecasts. Sales quotas are assigned to all
sales personnel according to annual sales plans. We approve target projects,
develop detailed sales promotion strategies and prepare reports on order
forecast, technical evaluation, sales budgeting expense, schedules and
competition analysis. After a report has been approved, a sales team is
appointed consisting of sales personnel, system design engineers and a senior
system architect.
In July 2003, we restructured our business units to create one point of sales
contact for each major customer. Today our sales organizations are structured
into four strategic customer accounts, namely China Telecom, China Mobile,
China Netcom and China Unicom, to provide more integrated solutions and
services. These accounts sell our solutions and services to the respective
customers and manage our long-term relationship with them. We also have direct
sales personnel in regional offices in Beijing, Shanghai, Chengdu and
Guangzhou. As a result, we believe we have increased our organizational
efficiency and improved the quality of our services to our clients.
Marketing
Through our organizational restructuring in July 2003, we consolidated our
marketing personnel and established the department of Marketing and Strategy,
focusing on corporate strategy planning, strategic alliance development, market
analysis and software product development planning.
In addition to our department of Marketing and Strategy, we have a market
communications, or Marcom, department, which engages in a number of activities
aimed at increasing awareness of our products and services. These activities
include:
.. managing and maintaining our web site;
.. producing corporate and product brochures and monthly customer newsletters;
.. conducting seminars and media conferences;
.. conducting ongoing public relations programs; and
.. creating and placing advertisements.
13
Competition
Our main domestic competitors in China are Digital China, Linkage, Neusoft, and
Wholewise. Our international competitors include multinational companies such
as IBM Global Services, HP Services, Oracle, Sibel, Convergys and SAP, who are
establishing more active presences in the IT services market for China's
telecommunications industry. In addition, top international consulting
companies such as PricewaterhouseCoopers, Deloitte Touche Tohmatsu, Ernst &
Young, Accenture, and KPMG, have also entered China's IT services market.
In the human resources management and business intelligence software sector,
our competitors include large international information technology companies
such as SAP, Oracle, IBM and People Soft, as well as domestic players such as
UFSoft.
We believe that we have competitive advantages in our product and service
segments due to our technology leadership, combined international and China
expertise, high performance, scalable and flexible software, customer-centric
and cost effective project management capability, and established customer
relationships. Our competitors, some of whom have greater financial, technical
and human resources than we have, may be able to respond more quickly to new
and emerging technologies and changes in customer requirements or devote
greater resources to the development, promotion and sale of new products or
services. It is possible that competition in the form of new competitors or
alliances, joint ventures or consolidation among existing competitors may
decrease our market share. Increased competition could result in lower
personnel utilization rates, billing rate reductions, fewer customer
engagements, reduced gross margins and loss of market share, any one of which
could materially and adversely affect our profits and overall financial
condition.
Government Regulation
The Chinese government has generally encouraged the development of the IT
industry, and the products and services we offer are not currently subject to
extensive government regulations. The telecommunications industry in which most
of our customers operate, however, is subject to extensive government
regulation and control. Currently, all the major telecommunications and
Internet service providers in China are primarily state owned or state
controlled and their business decisions and strategies are affected by the
government's budgeting and spending plans. In addition, they are required to
comply with regulations and rules promulgated from time to time by MII, and
other ministries and government departments.
In September 2000, China published the Regulations of the People's Republic of
China on Telecommunications, also known as the Telecommunications Regulations.
The Telecommunications Regulations are the first comprehensive set of
regulations governing the conduct of telecommunications businesses in China. In
particular, the Telecommunications Regulations set out in clear terms the
framework for operational licensing, network interconnection, the setting of
telecommunications charges and standards of telecommunications services in
China.
The Circular on the Structural Adjustment of Telecommunication Charges, issued
in December of 2000, reduced telecommunications service and Internet service
fees in China, such as Internet access fees and leased line renting fees,
permitting Internet protocol telephony operators, paging business operators,
web hosting service providers and certain other value added service providers
to set their prices based on their own cost structure and competitive strategy.
We believe this Circular has positively impacted our business because, with the
decline in telecommunications and Internet services fees, China's Internet
population and tele-density have grown, which in turn has generated more demand
for our products and services. For example, the number of Internet users in
China increased to 79.5 million in 2003 due in part to the decrease in Internet
access fees. In addition, with declining leased line tariffs, more and more
enterprises will be able to afford to use the Internet as a business tool.
Under regulations introduced in December of 2001, foreign investors are now
permitted to invest in China's telecommunications industry through Sino-foreign
joint ventures. The new regulations, known as the Provisions on the
Administration of Foreign-Invested Telecommunications Enterprises, or the
Provisions, were the result of China's accession to the WTO. Under the
Provisions, foreign investors will ultimately be permitted to own up to
14
49% of basic telecommunications businesses (with the exception of wireless
paging businesses) in China, and up to 50% of value-added telecommunications
businesses (which include Internet service providers and Internet content
providers) and wireless paging businesses.
Notwithstanding the recent developments in China's telecommunications
regulations, many laws and regulations applicable to the telecommunications
industry in China are still evolving and unsettled. In September 2000, China's
State Council approved the Administrative Measures on Internet Information
Services. The Administrative Measures on Internet Information Services provide
for control and censoring of information on the Internet. A restrictive
regulatory environment for our customers could adversely affect our business.
For a further discussion of the changing regulatory environment in China,
please see the discussion below under "Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operation--Factors Affecting Our
Operating Results and Our Common Stock--Laws and regulations applicable to the
Internet in China remain unsettled and could have a material adverse affect on
the Internet's growth and thereby have a material adverse affect on our
business."
Intellectual Property
Our success and ability to compete depends in part upon our intellectual
property rights, which we protect through a combination of confidentiality
arrangements and copyright and trademark registrations. We have filed five
trademark applications with the United States Patent and Trademark Office,
three of which have been passed on to registration and two of which are
currently pending. Our trademark application covering AsiaInfo's logo and
design has been granted by the Trademark Bureau of the State Administration of
Industry and Commerce in China. In addition, we have filed three trademark
applications with the Hong Kong Trade Marks Registry for AsiaInfo's logo, all
of which have been passed to registration. We have also completed the
registration of the copyrights for 107 versions of our software products with
the State Copyright Bureau in China. However, although we may apply for such
protection in the future, we have not applied for copyright protection in other
jurisdictions (including the United States, which does not require registration
for protection of copyrights). We do not own any patents and have not filed any
patent applications.
We enter into confidentiality agreements with most of our employees and
consultants, and control access to and distribution of our documentation and
other licensed information. Despite these precautions, it may be possible for a
third party to copy or otherwise obtain and use our licensed services or
technology without authorization, or to develop similar technology
independently. Since the Chinese legal system in general, and the intellectual
property regime in particular, is relatively weak, it is often difficult to
enforce intellectual property rights in China. In addition, there are other
countries where effective copyright, trademark and trade secret protection may
be unavailable or limited. Policing unauthorized use of our licensed technology
is difficult and there can be no assurance that the steps we take will prevent
misappropriation or infringement of our proprietary technology. In addition,
litigation may be necessary in the future to enforce our intellectual property
rights, to protect our trade secrets or to determine the validity and scope of
the proprietary rights of others, which could result in substantial costs and
diversion of our resources and could have a material adverse effect on our
business, results of operations and financial condition.
A portion of our business involves the development and customization of
software applications for customers. We generally retain significant ownership
or rights to use and market such software for other customer projects, where
possible. However, our customers sometimes retain co-ownership and rights to
use the applications, processes, and intellectual property so developed. In
some cases, we may have no right or only limited rights to reuse or provide
these developments in projects involving other customers. To the extent that we
are unable to negotiate contracts which permit us to reuse source-codes and
methodologies, or to the extent that we have conflicts with our customers
regarding our ability to do so, we may be unable to provide similar solutions
to our other customers.
Employees
We have over 800 employees. We devote significant resources to recruiting
professionals with relevant industry experience. Most of our senior management
and technical employees are western educated Chinese professionals
15
with substantial expertise in information technologies systems integration and
application software development. We believe that our success in attracting and
retaining highly skilled technical employees and sales and marketing personnel
is largely a product of our commitment to providing a motivating and
interactive work environment that features continuous and extensive
professional development opportunities, as well as frequent and open
communications at all levels of the organization. As an incentive, we have
created employee stock option plans that include vesting provisions designed to
encourage long-term employment.
Our Code of Ethics
In 1999 we adopted a code of ethics, or Code, which applies to all of our
employees. In 2003, we conducted a thorough review and updating of the Code in
connection with the implementation of rules relating to codes of ethics under
the U.S. Sarbanes-Oxley Act of 2002. A copy of the Code and a brief description
of any amendments to or waivers from the Code relating to any of our principal
executive officers or senior financial officers is posted on our website at
www.asiainfo.com.
SEC Reports Available on Website
Our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports
on Form 8-K and amendments to reports filed pursuant to Sections 13(a) and
15(d) of the Securities Exchange Act of 1934, as amended, are available on our
website at www.asiainfo.com, when such reports are available on the Securities
and Exchange Commission website.
ITEM 2. Properties
Our principal development facilities and administrative offices currently
occupy approximately 7,300 square meters in a building located in the Beijing
Zhongguancun Science Park. The lease has a term of five years, which expires in
February 2005, subject to termination in 2003 if an agreement on the adjustment
of rent cannot be reached at that time. Our sales and marketing offices occupy
approximately 1,800 square meters in a building located in the Beijing
financial street area. The lease has a term of three years, which expires in
February 2007. In addition, we have regional field support offices in various
cities in China, namely Shanghai, Guangzhou, Chengdu, Hangzhou, Nanjing and
Wuhan, as well as a regional office in Santa Clara, California.
ITEM 3. Legal Proceedings
On December 4, 2001, a securities class action case was filed in New York City
against us, certain of our officers and directors and the underwriters of our
initial public offering, or IPO. The lawsuit alleged violations of the federal
securities laws and was docketed in the United States District Court for the
Southern District of New York as Hassan v. AsiaInfo Holdings, Inc., et al. The
lawsuit alleged, among other things, that the underwriters of our IPO
improperly required their customers to pay the underwriters excessive
commissions and to agree to buy additional shares of our common stock in the
aftermarket as conditions to their purchasing shares in our IPO. The lawsuit
further claimed that these supposed practices of the underwriters should have
been disclosed in our IPO prospectus and registration statement. The suit seeks
rescission of the plaintiffs' alleged purchases of our common stock as well as
unspecified damages. In addition to the case against us, various other
plaintiffs have filed approximately 1,000 other, substantially similar class
action cases against approximately 300 other publicly traded companies and
their IPO underwriters in New York City, which along with the case against us
have all been transferred to a single federal district judge for purposes of
case management. On July 15, 2002, together with the other issuer defendants,
we filed a collective motion to dismiss the consolidated, amended complaints
against the issuers on various legal grounds common to all or most of the
issuer defendants. The underwriters also filed separate motions to dismiss the
claims against them. On October 9, 2002, the court dismissed without prejudice
all claims against the individual defendants in the litigation. The dismissals
were based on stipulations signed by those defendants and the plaintiffs'
representatives. On February 19, 2003, the court issued its ruling on the
motions to dismiss filed by the underwriter and issuer defendants. In that
ruling the court granted in part
16
and denied in part those motions. As to the claims brought against us under the
anti-fraud provisions of the securities laws, the court dismissed all such
claims without prejudice. As to the claims brought under the registration
provisions of the securities laws, which do not require that intent to defraud
be pleaded, the court denied the motion to dismiss such claims as to us and as
to substantially all of the other issuer defendants. The court also denied the
underwriter defendants' motion to dismiss in all respects.
In June 2003, based on a decision made by a special independent committee of
our board of directors, we elected to participate in a proposed settlement
agreement with the plaintiffs in this litigation. If ultimately approved by the
court, this proposed settlement would result in a dismissal, with prejudice, of
all claims in the litigation against us and against any of the other issuer
defendants who elect to participate in the proposed settlement, together with
the current or former officers and directors of participating issuers who were
named as individual defendants. The proposed settlement does not provide for
the resolution of any claims against the underwriter defendants, and the
litigation against those defendants is continuing. The proposed settlement
provides that the class members in the class action cases brought against the
participating issuer defendants will be guaranteed a recovery of $1 billion by
insurers of the participating issuer defendants. If recoveries totaling $1
billion or more are obtained by the class members from the underwriter
defendants, however, the monetary obligations to the class members under the
proposed settlement will be satisfied. In addition, all participating issuer
defendants will be required to assign to the class members certain claims that
we may have against the underwriters.
The proposed settlement contemplates that any amounts necessary to fund the
settlement or settlement-related expenses would come from participating
issuers' directors and officers liability insurance policy proceeds as opposed
to funds of the participating issuer defendants themselves. A participating
issuer defendant could be required to contribute to the costs of the settlement
if that issuer's insurance coverage were insufficient to pay that issuer's
allocable share of the settlement costs. We expect that our insurance proceeds
will be sufficient for these purposes and that we will not otherwise be
required to contribute to the proposed settlement. Consummation of the proposed
settlement is conditioned upon, among other things, negotiating, executing, and
filing with the court final settlement documents, and final approval by the
court. If the proposed settlement described above is not consummated, we intend
to continue to defend the litigation vigorously. Moreover, if the proposed
settlement is not consummated, we believe that the underwriters may have an
obligation to indemnify us for the legal fees and other costs of defending this
suit and that our directors' and officers' liability insurance policies would
also cover the defense and potential exposure in the suit. While we cannot
guarantee the outcome of these proceedings, we believe that the final result of
these actions will have no material effect on our consolidated financial
condition, results of operations or cash flows.
ITEM 4. Submission of Matters to a Vote of Security Holders
No matters were submitted during the fourth quarter of the fiscal year covered
by this report to a vote of our security holders.
17
PART II
ITEM 5. Market for Registrant's Common Equity and Related Stockholder Matters
Our common stock has been quoted on the Nasdaq National Market under the symbol
"ASIA" since our initial public offering on March 2, 2000. The following table
sets forth, for the periods indicated, the high and low sales prices per share
of the common stock as reported on the Nasdaq National Market.
High Low
----- -----
2003:
Fourth Quarter. 7.9 6.15
Third Quarter.. 12.12 6.01
Second Quarter. 8.69 4.00
First Quarter.. 8.23 3.00
2002:
Fourth Quarter. 8.90 2.04
Third Quarter.. 13.78 3.22
Second Quarter. 13.88 9.80
First Quarter.. 24.25 10.66
As of March 1, 2004, we had approximately 161 holders of record of our common
stock.
We have never declared or paid any dividends on our capital stock, and do not
intend to pay dividends on our shares of common stock in the foreseeable
future. Instead, we intend to retain all earnings for use in our business.
Future cash dividends, if any, will be at the discretion of our board of
directors and will depend upon our future operations and earnings, capital
requirements and surplus, general financial condition, contractual restrictions
and other factors as the board of directors may deem relevant. Any dividends we
declare will be paid in U.S. dollars.
As a holding company, our primary source of cash for the payment of dividends
are distributions, if any, from our subsidiaries. Our principal operating
subsidiaries were established in China and are able to make distributions of
profits to us only if they satisfy certain conditions under Chinese law,
including the satisfaction of tax liabilities, recovery of losses from previous
years and mandatory contributions to statutory reserves. In addition, loan
agreements and contractual arrangements we enter into in the future may also
restrict our ability to pay dividends.
18
ITEM 6. Selected Financial Data
The following table sets forth our selected consolidated financial data. You
should read this information together with our consolidated financial
statements and the notes to those statements included in this report, and "Item
7. Management's Discussion and Analysis of Financial Condition and Results of
Operation" beginning on page 20 of this report. The selected consolidated
balance sheet data and statements of operations data in the table below have
been derived from our audited consolidated financial statements. Historical
results are not necessarily indicative of results to be expected in the future.
Years Ended December 31,
---------------------------------------------------------------------
2003 2002 2001 2000 1999
----------- ---------- ---------- ---------- ----------
(Amounts in thousands of U.S. dollars except share and per share data)
Consolidated Statements of Operations Data:
Revenues:
Network solutions....................... $ 84,686 88,253 161,131 158,696 53,786
Software revenue........................ 31,488 33,013 27,875 17,367 6,494
----------- ---------- ---------- ---------- ----------
Total revenues...................... 116,174 121,266 189,006 176,063 60,280
----------- ---------- ---------- ---------- ----------
Cost of revenues:
Network solutions....................... 67,675 67,839 129,712 141,668 41,959
Software revenue........................ 14,546 13,161 3,821 3,030 4
----------- ---------- ---------- ---------- ----------
Total cost of revenues.............. 82,221 81,000 133,533 144,698 41,963
----------- ---------- ---------- ---------- ----------
Gross profit............................... 33,953 40,266 55,473 31,365 18,317
----------- ---------- ---------- ---------- ----------
Operating expenses:
Sales and marketing..................... 11,340 14,680 21,768 19,734 8,768
General and administrative/(1)/......... 10,827 9,907 14,905 12,893 8,167
Research and development................ 9,130 8,503 7,304 5,974 2,838
Amortization of deferred stock
compensation.......................... 105 407 1,144 2,209 3,508
In-process research and development..... 169 350 -- -- --
Amortization of acquired intangible
assets................................ 209 1,749 -- -- --
Impairment of goodwill and acquired
intangible assets..................... 30,221 -- -- -- --
----------- ---------- ---------- ---------- ----------
Total operating expenses............ 62,001 35,596 45,121 40,810 23,281
----------- ---------- ---------- ---------- ----------
(Loss) income from operations.............. (28,048) 4,670 10,352 (9,445) (4,964)
Other income (expenses):
Interest income......................... 1,576 2,272 7,135 7,919 827
Interest expense........................ (3) (114) (969) (1,032) (618)
Other income (expense), net............. (133) (708) (59) (22) 143
Total other income, net.................... 1,440 1,450 6,107 6,865 352
(Loss) income before income taxes, minority
interests and equity in loss of affiliate (26,608) 6,120 16,459 (2,580) (4,612)
Income tax benefit expenses............. (978) 824 3,444 218 383
(Loss) income before minority interests. (25,630) 5,296 13,015 (2,798) (4,995)
Minority interests in (income) loss of
consolidated subsidiaries............. (12) 75 (396) 32 84
Equity in loss of affiliate............. (2,477) (2,465) (885) -- (35)
----------- ---------- ---------- ---------- ----------
Net (loss) income.......................... $ (28,119) 2,906 11,734 (2,766) (4,946)
=========== ========== ========== ========== ==========
Net (loss) income per share:
Basic................................... $ (0.63) 0.07 0.28 (0.07) (0.34)
=========== ========== ========== ========== ==========
Diluted/(2)/............................ $ (0.63) 0.06 0.26 (0.07) (0.34)
=========== ========== ========== ========== ==========
Shares used in computation
Basic................................... 44,459,010 43,583,420 41,525,159 37,239,649 14,630,145
=========== ========== ========== ========== ==========
Diluted/(2)/............................ 44,459,010 45,961,545 45,924,724 37,239,649 14,630,145
=========== ========== ========== ========== ==========
19
As of December 31,
---------------------------------------
2003 2002 2001 2000 1999
-------- ------- ------- ------- ------
(amounts in thousands of US$)
Consolidated Balance Sheet Data:
Cash and cash equivalents....................... $119,395 115,153 110,635 48,834 25,404
Total current assets............................ 219,480 215,094 232,836 254,190 64,773
Total assets.................................... 240,022 263,430 245,860 264,003 71,427
Total liabilities (excluding minority interests) 53,365 52,955 60,460 95,206 31,639
Total stockholders' equity...................... 186,657 210,158 184,790 168,609 39,788
- --------
(1) In 2002, we adopted Statement of Financial Accounting Standards No.142,
"Goodwill and Other Intangible Assets," and as a result we discontinued
amortization of goodwill on January 1, 2002 (see note 2 to our consolidated
financial statements included in this report).
(2) In 2003, 2000 and 1999 the diluted net loss per share computation excludes
shares of common stock issuable under stock option plans, upon the exercise
of warrants and upon the automatic conversion of our convertible preferred
stock which, if included, would have had an antidilutive effect on the net
loss reported in those periods. In 2002 and 2001, we had options
outstanding which could potentially dilute earnings per share in the
future, but were excluded from the computation of diluted earnings per
share in the year, as their exercise prices were above the average market
values in the year. See Note 12 to our consolidated financial statements
included in this report for a detailed explanation of the determination of
the shares used in computing basic and diluted net income (loss) per share.
ITEM 7. Management's Discussion and Analysis of Financial Condition and
Results of Operation
Overview
We are a leading provider of high-quality software and solutions in China. We
provide total customer solutions to some of China's largest companies, and help
our customers to increase their business value in fast-growing and evolving
markets. In the telecommunications market, our software products and network
services enable our customers to build, maintain, operate, manage and
continuously improve their communications infrastructure. Our largest customers
are the major telecommunications carriers in China and their provincial
subsidiaries, such as China Telecommunications Corporation, or China Telecom,
China Network Communications Group Corporation, or China Netcom Group, China
Mobile Communications Corporation, or China Mobile, and China United
Telecommunications Corporation, or China Unicom. Recently, through our
acquisition of a human resources management, or HRM, and business intelligence,
or BI, software business, we have gained exposure to new customers in
industries such as transportation, power and iron and steel.
We commenced our operations in the United States in 1993 and moved our major
operations from the United States to China in 1995. We began generating
significant network solutions revenues in 1996 and significant software
revenues in 1998. We conduct the bulk of our business through our wholly-owned
operating subsidiaries, AsiaInfo Technologies (China) Inc., or AsiaInfo
Technologies, and AsiaInfo Management Software, Inc., or AsiaInfo Management,
which are both Chinese companies.
We believe that there are opportunities for us to expand into new business
areas and to continue to grow our business both organically and through
acquisitions. On December 4, 2003, we completed our acquisition of certain HRM
and BI assets valued at approximately $9 million from Pacific Software (China)
Limited, a privately held, medium-sized software solutions company based in
Hong Kong, and from its affiliate, New Century Pacific Software (Beijing)
Limited, a wholly-foreign-owned enterprise based in Beijing, China. We expect
that the acquisition will help us to expand into the HRM and BI software
markets, and expose us to customers in other industries, outside of our
traditional telecommunications customer base.
Reliance on key customers. We have derived, and believe that we will continue
to derive, a significant portion of our revenues from a limited number of large
customers, such as China Telecom, China Unicom, China Mobile and China Netcom
Group. Sales to China Telecom and its subsidiaries amounted to approximately
9%, 21% and 31% of total revenues in 2003, 2002 and 2001, respectively. Sales
to China Unicom and its subsidiaries amounted to approximately 38%, 22% and 45%
of total revenues in 2003, 2002 and 2001, respectively. Sales to China Netcom
Group and its subsidiaries amounted to approximately 13%, 6% and 9% of total
revenues in 2003, 2002 and 2001, respectively. Sales to China Mobile and its
subsidiaries amounted to approximately 38%, 42%
20
and 10% of total revenues in 2003, 2002 and 2001, respectively. The sum of our
top five receivable balances represented 96% and 95% of the total receivable
balances for the years ended December 31, 2003 and 2002, respectively. We have
expanded our customer base recently through the acquisition of an HRM and BI
software business with customers in sectors such as transportation and energy.
However, our operating results are still dependent on our large customers in
the telecommunications sector, and the loss of any of those customers could
have a material adverse impact on us.
Impact of goodwill impairments. In connection with our acquisition of Bonson
Information Technology Holdings Limited, we paid the former shareholders of
that company $32.76 million (net of acquisition costs) in cash and 1,031,686
shares of our common stock (which were valued at approximately $18 million at
the time the acquisition was announced). During the first quarter of 2003, we
completed an annual impairment test as required by Statement of Financial
Accounting Standard ("SFAS") No.142 and recorded a non-cash impairment charge
of $29.84 million relating to the goodwill and acquired intangible assets
attributable to our acquisition of Bonson. In December 2003, we conducted an
impairment test in connection with our investment in Intrinsic Technology
Holdings, Inc., in which we hold a minority stake, and recorded a charge of
$2.2 million. Although we do not presently anticipate any further impairment
charges, any future deterioration of market conditions or other changes may
require us to record additional impairment charges in the future, which would
impact our net income (loss).
Impact of SARS outbreak. The outbreak of Severe Acute Respiratory Syndrome, or
SARS, is believed to have started in Guangdong Province, China in late 2002 and
to have later spread to Beijing. The SARS outbreak impacted our second quarter
2003 revenues by disrupting travel throughout China and causing delays in
service delivery to our customers. In addition, the outbreak of SARS
interrupted our collection efforts, causing our days sales outstanding to
increase to 219 days at the end of the second quarter of 2003. Although the
spread of SARS in China has been contained and our business activities resumed
normal operations during the third quarter of 2003, the medical community
worldwide has not fully understood the origin of SARS and has not found a
well-recognized effective treatment for SARS. As a consequence, the potential
long-term effects of SARS on economic growth in China are still unknown. Since
January 5, 2004, a small number of new SARS cases have been reported in China.
Any future worsening of the SARS epidemic could have an adverse impact on our
business.
Revenues
We report our revenues on the basis of the two principal types of revenues
derived from our business: network solutions revenues and software revenues.
Network solutions revenue. Network solutions revenue consists of hardware
sales for equipment procured by us on behalf of our customers from hardware
vendors, as well as services for network planning, design, systems integration
and training. We procure for and sell hardware to our customers as part of our
total solutions strategy. We minimize our exposure to hardware risks by
sourcing equipment from hardware vendors against letters of credit from our
customers. We believe that as the telecommunications-related market in China
develops our customers will increasingly purchase hardware directly from
hardware vendors and hire us for our professional services.
Software revenue. Software revenues include two types of revenues: software
license revenue and software services revenue. Software license revenue
consists of fees received from customers for licenses or sublicenses to use our
software products as well as third party software products in perpetuity,
typically up to a specified maximum number of users. In most cases, our
customers must purchase additional user licenses from us when the number of
users exceeds the specified maximum. Our software license revenue also includes
the benefit of value added tax rebates on software license sales, which are
part of the Chinese government's policy of encouraging China's software
industry. Software services revenue consists of revenue from software
installation, customization, training and other services.
21
Net revenues. Although we report our revenues on a gross basis, inclusive of
hardware acquisition costs that are passed through to our customers, we manage
our business internally based on revenues net of hardware costs, which is
consistent with our strategy of providing our customers with high value IT
professional services and, where efficient, outsourcing lower-end services such
as hardware acquisition and installation. This strategy may result in lower
growth rates for total revenues as against prior periods, but will not
adversely impact revenues net of hardware costs. The following table shows our
revenue breakdown on this basis and reconciles our net revenues to our total
revenues:
Years Ended December 31,
--------------------------------------
2003 2002 2001 2000 1999
------- ------- ------- ------- ------
(amount in thousands of US$)
Network solutions net of hardware costs. 25,982 31,720 43,516 27,211 18,727
Software revenue........................ 31,488 33,013 27,875 17,367 6,494
------- ------- ------- ------- ------
Total revenues net of hardware costs. 57,470 64,733 71,391 44,578 25,221
Total hardware costs.................... 58,704 56,533 117,615 131,485 35,059
------- ------- ------- ------- ------
Total revenues....................... 116,174 121,266 189,006 176,063 60,280
======= ======= ======= ======= ======
The information on revenues net of hardware costs in the above table is a
non-GAAP financial measures within the meaning of Item 10 of Regulation S-K
under the Securities Exchange Act of 1934, as amended. We have provided a
reconciliation of this non-GAAP financial measure to the most directly
comparable GAAP financial measure, total gross revenues. We believe that the
presentation of this non-GAAP measure provides useful information for investors
regarding our regular financial performance. Our management uses this measure
for the same purpose. The presentation of this additional information is not
meant to be considered in isolation or as a substitute for our financial
results prepared in accordance with GAAP.
Cost of Revenues
Network solutions costs. Network solutions costs consist primarily of third
party hardware costs, compensation and travel expenses for the professionals
involved in designing and implementing projects, and hardware warranty costs.
We recognize hardware costs in full upon delivery of the hardware to our
customers. In order to minimize our working capital requirements, we generally
obtain from our hardware vendors payment terms that are timed to permit us to
receive payment from our customers for the hardware before our payments to
hardware vendors are due. However, in large projects we sometimes obtain less
favorable payment terms from our customers, thereby increasing our working
capital requirements. We accrue hardware warranty costs upon final acceptance.
We obtain manufacturers' warranties for hardware we sell, which cover a portion
of the warranties that we give to our customers. We currently accrue 0.5% of
hardware sales to cover potential warranty expenses. This estimate of warranty
cost is based on our current experience with contracts for which the warranty
period has expired.
Software costs. Software costs consist primarily of three components:
.. packaging and written manual expenses for our proprietary software products;
.. compensation and travel expenses for the professionals involved in
modifying, customizing or installing our software products and in providing
consultation, training and support services; and
.. software license fees paid to third-party software providers for the right
to sublicense their products to our customers as part of our solutions
offerings.
The costs associated with designing and modifying the formulation of our
proprietary software are classified as research and development expenses as
incurred.
Operating Expenses
Operating expenses are comprised of sales and marketing expenses, research and
development expenses, general and administrative expenses, and amortization
expenses for intangible assets and deferred stock compensation
22
and impairment of goodwill and acquired intangible assets. Compensation
expenses consistently comprise a significant portion of our total operating
expenses.
Sales and marketing expenses include compensation expenses for employees in our
sales and marketing departments, third party advertising expenses, as well as
sales commissions and sales agency fees.
Research and development expenses relate to the development of new software and
the modification of the formulation existing software. We expense such costs as
they are incurred.
Taxes
Except for certain hardware procurement and resale transactions, we conduct
substantially all of our business through our Chinese subsidiaries, which are
generally subject to a 30% state corporate income tax and a 3% local income tax.
Under the income tax laws of China, foreign invested enterprises, or FIEs,
satisfying certain criteria can enjoy preferential tax treatment. Our
subsidiaries, AsiaInfo Technologies, AsiaInfo Management and AsiaInfo
Technologies (Chengdu), Inc., are FIEs and enjoy certain preferential tax
treatments in China. Please refer to Note 11 to our consolidated financial
statements included in this report for details of the respective preferential
treatments for each of these subsidiaries.
The unified Chinese corporate income tax laws for domestic enterprises and FIEs
will likely take effect in 2005. It is anticipated that these unified tax laws
will eliminate various preferential tax provisions in China. However, such
unified tax laws should not affect the preferential tax treatments granted to
FIEs in the previous years.
Sales of hardware procured in China are subject to a 17% value added tax. Most
of our sales of hardware procured outside China are made through our U.S.
parent company, AsiaInfo Holdings, Inc. and thus are not subject to the value
added tax. We effectively pass value-added taxes on hardware sales through to
our customers and do not include them in revenues reported in our financial
statements. In addition, companies that develop their own software and have the
software registered with the relevant authorities in China are generally
entitled to a value added tax refund. If the net amount of the value added tax
payable exceeds 3% of software sales, the excess portion of the value added tax
is refundable immediately. This policy is effective until 2010.
We are also subject to U.S. income taxes on revenues generated in the United
States, including revenues from our limited hardware procurement activities
through our U.S. parent company, AsiaInfo Holdings, Inc., and interest income
earned in the United States.
Foreign Exchange
A majority of our revenues and expenses relating to hardware sales are
denominated in U.S. dollars, and substantially all of our revenues and expenses
relating to the software and service components of our business are denominated
in Renminbi. The value of our shares will be affected by the foreign exchange
rate between U.S. dollars and Renminbi because the value of our business is
effectively denominated in Renminbi, while our shares are traded in U.S.
dollars. Furthermore, an increase in the value of the Renminbi may require us
to exchange more U.S. dollars into Renminbi to meet the working capital
requirements of our subsidiaries in China. Depreciation of the value of the
U.S. dollar will also reduce the value of the cash we hold in U.S. dollars,
which we may use for purposes of future acquisitions or other business
expansion. We actively monitor our exposure to these risks and adjust our cash
position in the Renminbi and the U.S. dollar when we believe such adjustments
will reduce risks. For example, in February 2004 we exchanged approximately $28
million cash in U.S. dollar into Renminbi.
Critical Accounting Policies
We prepare our consolidated financial statements in accordance with accounting
principles generally accepted in the United States of America. The preparation
of these financial statements requires us to make estimates and
23
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amount of revenues and expenses during the
reporting period. On an on-going basis, we evaluate our estimates and
judgments, including those related to revenues and cost of revenues under
customer contracts, warranty obligations, bad debts, income taxes, investment
in affiliate, goodwill and other intangible assets, and litigation. We base our
estimates and judgments on historical experience and on various other factors
that we believe are reasonable. Actual results may differ from these estimates
under different assumptions or conditions. We believe the following critical
accounting policies affect the more significant judgments and estimates used in
the preparation of our consolidated financial statements.
Revenue recognition. We generally charge a fixed price for all of our projects
and recognize revenue based on the percentage of completion of the project.
Software revenues from customer orders requiring significant production,
modifications, or customization of the software are recognized over the
installation and customization period. We use labor costs and direct project
expenses to determine the stage of completion, except for revenue associated
with the procurement of hardware, which we recognize upon delivery of the
hardware to the customer. Since a large part of the cost of certain projects,
particularly network solutions projects, often relates to hardware, the timing
of hardware delivery can cause our quarterly gross revenue and inventory level
to fluctuate significantly. However, those fluctuations do not significantly
affect our gross profits because hardware-related revenues generally
approximate the costs of the hardware. Recognized revenues and profit are
subject to adjustments in current periods as the contract progresses to
completion. Accordingly, any changes in our estimates would impact our future
operating results.
Income taxes. We record a valuation allowance to reduce our deferred tax
assets to the amount that we believe is more likely than not to be realized. In
the event we were to determine that we would be able to realize our deferred
tax assets in the future in excess of their recorded amount, an adjustment to
the deferred tax asset would increase income in the period such determination
was made. Likewise, should we determine that we would not be able to realize
all or part of our net deferred tax asset in the future, an adjustment to the
deferred tax asset would be charged to income in the period such determination
was made.
Goodwill and other intangible assets. We make assumptions regarding estimated
future cash flows and other factors to determine the fair value of goodwill and
other intangible assets. If these estimates or their related assumptions change
in the future, we may be required to record an impairment charge if the
estimated fair value of goodwill and other intangible assets is less than its
recorded amount. As required under SFAS No.142, during the first quarter of
2003 we completed an annual goodwill impairment test and recorded a non-cash
impairment charge of $30.2 million relating to the goodwill and acquired
intangible assets primarily attributable to our acquisition of Bonson in
February of 2002. The impairment resulted primarily from the industry-wide
equity devaluations of the past year. Continued deterioration of market
conditions may require us to record additional impairment charges in the future.
Consolidated Results Of Operations
Year Ended December 31, 2003 Compared to Year Ended December 31, 2002
Revenues. Total revenues, including hardware pass-through, decreased 4% to
$116.2 million in 2003, from $121.3 million in 2002. Revenues net of hardware
costs decreased approximately 11% to $57.5 million in 2003. Software revenue
was $31.5 million, representing a 5% decrease from $33 million in 2002. Network
solution revenue net of hardware cost was $26.0 million, representing an 18%
decrease from $31.7 million in 2002.
The decrease in our total revenues was primarily attributable to the business
slowdown caused by the SARS outbreak in 2003, as well as our continued focus on
providing software solutions (which effectively reduces our revenues from
hardware pass through). Looking forward, we anticipate that our net revenues
will increase 15 to 21% in 2004, driven by the growth we anticipate in revenues
from our software solutions, including revenues related to the HRM and BI
business we acquired in December 2003.
24
Cost of revenues. Our cost of revenues was $82.2 million in 2003, remaining at
approximately the same level as 2002 due to the fixed nature of our
compensation expenses.
Gross profit. Gross profit decreased 16% in 2003 to $34.0 million. Gross
profit as a percentage of gross revenues, or gross margin, decreased to 29% in
2003, as compared to 33% in 2002. Gross profit as a percentage of net revenues
decreased to 59% in 2003, as compared to 62% in 2002. These decreases in
margins were primarily attributable to the fixed nature of the compensation
expenses that form a significant aspect of our costs of revenues.
Operating expenses. Total operating expenses increased 74% to $62.0 million in
2003, from $35.6 million in 2002, primarily as a result of our recording the
impairment charges discussed below.
Sales and marketing expenses decreased 23% to $11.3 million in 2003, from $14.7
million in 2002. This decrease was partially attributable to our consolidation
of sales operations and our increased sales efficiency as a result of our
operations restructure effective July 1, 2003 that focuses our business
operation on specific customers rather than product lines. Instead of selling
our products and services through the two former strategic business units,
Communications Solutions and Operation Support Systems Solutions, we now have
one point of sales contact for each of our major customers, streamlining the
relationships and interactions with our customers.
General and administrative expenses increased 9% to $10.8 million in 2003, from
$9.9 million in 2002, largely as a result of increased bad debt expenses in the
amount of $1.6 million.
Research and development expenses increased 7% to $9.1 million in 2003, from
$8.5 million in 2002, due to our continued focus on developing new software
products and solutions for China's telecommunications carriers. We intend to
continue to increase our investment in research and development to introduce
new products and services in a timely manner to our customers.
In 2003, we conducted impairment tests regarding the goodwill recorded in our
acquisition of Bonson in 2002. Based on these tests, we recorded approximately
$29.84 million in impairment charges in connection with our acquisition of
Bonson.
Equity in loss of affiliates. Equity in loss of affiliate in 2003 of
approximately $2.5 million represented an impairment charge related to our
investment in, as well as our proportionate share of losses incurred by,
Intrinsic Holdings, in which we hold a minority stake. We recorded an
impairment charge of approximately $2.2 million in connection with our
investment in Intrinsic based on an impairment test conducted in the fourth
quarter of 2003.
Net income (loss). Our net loss was $28.1 million in 2003, or a loss of $0.63
per share on a fully-diluted basis, as compared to net income of $2.9 million
in 2002, or income of $0.06 per share on a fully diluted basis. The impairment
charges from our acquisition of Bonson and our investment in Intrinsic,
described above, reduced our earnings in 2003 by $0.72 per share. We expect net
income in 2004 to be between $5.0 million to $7.0 million or $0.12 to $0.16 per
basic share.
Year Ended December 31, 2002 Compared to Year Ended December 31, 2001
Revenues. Total revenues, including hardware pass-through, decreased 36% to
$121.3 million in 2002, from $189 million in 2001. Revenues net of hardware
costs decreased approximately 9% to $64.7 million in 2002. Network solutions
revenues net of hardware costs were $33 million in 2002, a 24% decrease from
the previous year. Software solutions revenues were $31.7 million in 2002,
representing 49% of total revenues net of hardware costs and a 14% increase
over software solutions revenues from the previous year.
25
The decrease in total revenues was primarily attributable to a shift in our
customer's focus from increasing network capacity to increasing network
productivity through the provision of more advanced applications, as well as
our shift in focus to high-end systems integration projects involving less
hardware pass-through revenue. The decrease in net revenues was attributable to
the prolonged telecommunications industry restructuring in China resulting in
an estimated 20% decrease of total capital expenditure in 2002 on the part of
telecommunications carriers in China.
Cost of revenues. Our cost of revenues decreased 39% to $81 million in 2002,
partially as a result of more customers purchasing hardware directly from
hardware vendors. Our cost of revenues net of hardware costs increased 54% to
$24.5 million in 2002 while our revenues net of hardware cost decreased 9%.
This was primarily due to the increased number of employees in our (former)
BSS/OSS Solutions business unit and lower margins on hardware pass-through.
Gross profit. Gross profit decreased 27% in 2002 to $40.3 million. Gross
profit as a percentage of gross revenues, or gross margin, increased to 33% in
2002, as compared to 29% in 2001. The increase in gross margin is primarily
attributable to the smaller amount of low margin hardware pass-through revenue
recognized in 2002. Gross profit as a percentage of net revenues decreased to
62% in 2002, as compared to 78% in 2001, primarily due to the increased number
of employees in our (former) BSS/OSS Solutions business unit and lower margins
on hardware pass-through.
Operating expenses. Total operating expenses decreased 21% to $35.6 million in
2002, from $45.1 million in 2001. These decreases resulted from cost cutting
measures implemented during the year, including a 10% headcount decrease and a
10% salary cut for employees at the manager level and above.
Sales and marketing expenses decreased 33% to $14.7 million in 2002, from $21.8
million in 2001. This decrease was partially attributable to the integration of
our sales teams within our (former) Communications Solutions business unit, the
integration of Bonson's sales team into our (former) BSS/OSS Solutions business
unit, reductions in staff, reduced efforts in international and channel sales,
and tighter control of our marketing expenses.
General and administrative expenses decreased 34% to $9.9 million in 2002, from
$14.9 million in 2001.
Research and development expenses increased 16% to $8.5 million in 2002, from
$7.3 million in 2001, due to our continued focus on developing new software
products and solutions for China's telecommunications carriers.
We recognized a charge of $1.7 million for amortization of intangible assets in
2002 related to our acquisition of Bonson.
Other income (expenses). Other income (expenses), consisting primarily of net
interest income and expense, decreased from income of approximately $6.1
million in 2001 to income of $1.5 million in 2002, partially due to a decrease
in interest rates and our having less cash on our balance sheet as a result of
our acquisition of Bonson. The decrease was also due to our recording a
provision of $0.75 million against a promissory note receivable the collection
of which we determined to be not reasonably assured.
Minority interest. In 2002, minority interest of $0.08 million represented the
portion of our loss before minority interests attributable to the minority
shareholders of two of our subsidiaries, Marsec and Guangdong Wangying
Information Technology Co. Ltd., or Guangdong Wangying.
Equity in loss of affiliates. Equity in loss of affiliate in 2002 of
approximately $2.5 million included our proportionate share of the loss
incurred by Intrinsic, in which we held a 14.25% equity interest, as well as an
impairment charge of approximately $2.0 million we recorded in connection with
that investment.
Net income (loss). Net income decreased 75% to $2.9 million in 2002, or $0.06
per share on a fully diluted basis, from $11.7 million, or $0.26 per share on a
fully diluted basis in 2001. Bonson contributed 35% of total net income in 2002.
26
Selected Unaudited Quarterly Combined Results of Operations
The following table sets forth unaudited quarterly statements of operations
data for the four quarters ended December 31, 2003 and 2002. We believe this
unaudited information has been prepared substantially on the same basis as the
annual audited combined financial statements appearing elsewhere in this report.
We believe this data includes all necessary adjustments, consisting only of
normal recurring adjustments, necessary for a fair presentation. You should
read the quarterly data together with the consolidated financial statements and
the notes to those statements appearing elsewhere in this report. The
consolidated results of operations for any quarter are not necessarily
indicative of the operating results for any future period. We expect that our
quarterly revenues may fluctuate significantly.
Three Months Ended
-----------------------------------------------------------------------------------------
December 31, September 30, June 30, March 31, December 31, September 30, June 30,
2003 2003 2003 2003 2002 2002 2002
------------ ------------- ---------- ---------- ------------ ------------- ----------
(Amounts in thousands of U.S. dollars)
Consolidated Statements of
Operations Data:
Revenues:
Network solutions................ 21,081 19,543 20,562 23,500 16,353 23,171 27,486
Software revenue................. 9,531 8,441 6,342 7,174 7,246 9,400 9,073
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total revenues.................. 30,612 27,984 26,904 30,674 23,599 32,571 36,559
Total cost of revenues............. 21,362 17,988 19,702 23,169 16,158 24,071 23,522
---------- ---------- ---------- ---------- ---------- ---------- ----------
Gross profit....................... 9,250 9,996 7,202 7,505 7,441 8,500 13,037
---------- ---------- ---------- ---------- ---------- ---------- ----------
Operating expenses:
Sales and marketing.............. 3,075 2,820 2,930 2,515 3,220 3,082 4,809
General and administrative....... 2,428 3,116 2,966 2,317 2,171 2,719 1,472
Research and development......... 1,882 2,037 2,666 2,545 1,797 2,097 2,345
Amortization of deferred stock
compensation expense............ -- -- 37 68 76 82 97
In-process research and
development..................... 169 -- -- -- -- -- --
Amortization of acquired
intangible assets............... 81 41 40 47 477 477 477
Impairment of goodwill and
acquired intangible assets...... -- -- -- 30,221 -- -- --
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total operating expenses........... 7,635 8,014 8,639 37,713 7,741 8,457 9,200
---------- ---------- ---------- ---------- ---------- ---------- ----------
Income (loss) from operations...... 1,615 1,982 (1,437) (30,208) (300) 43 3,837
Other income (expenses):
Interest income.................. 394 362 366 454 515 523 500
Interest expense................. (1) -- (1) (1) (39) (1) (30)
Other (expense) income, net...... (100) (1) (31) (1) (752) 6 37
Total other income (expenses),
net............................... 293 361 334 452 (276) 528 507
Income (loss) before income taxes,
minority interests and equity in
loss of affiliate................. 1,908 2,343 (1,103) (29,756) (576) 571 4,344
Income tax (benefit) expense..... (20) -- (134) (824) (46) 74 529
Income (loss) before minority
interests......................... 1,928 2,343 (969) (28,932) (530) 497 3,815
Minority interests in (income) loss
of consolidated subsidiaries...... -- -- (12) -- 12 73 (45)
Equity in loss of affiliate........ (2,196) (94) (72) (115) (2,082) (102) (154)
Net (loss) income.................. (268) 2,249 (1,053) 29,047 2,600 468 3,616
Net (loss) income per share
Basic............................ (0.01) 0.05 (0.02) (0.66) (0.06) 0.01 0.08
Diluted.......................... (0.01) 0.05 (0.02) (0.66) (0.06) 0.01 0.08
Shares used in computing per
share amounts
Basic............................ 44,846,989 44,521,025 44,261,401 44,206,625 44,170,750 44,081,170 43,629,646
Diluted.......................... 44,846,989 46,971,126 44,261,401 44,206,625 44,170,750 44,835,907 44,554,057
Segment information
Network solutions net of
hardware costs.................. 6,624 7,399 6,414 5,545 6,114 5,287 10,539
Software revenue................. 9,531 8,441 6,342 7,174 7,246 9,400 9,073
Total revenues net of hardware
costs............................. 16,155 15,840 12,756 12,719 13,360 14,687 19,612
Total cost of sales net of hardware
costs............................. 6,905 5,844 5,554 5,214 5,919 6,187 6,575
Gross profit....................... 9,250 9,996 7,202 7,505 7,441 8,500 13,037
------------
March 31,
2002
-----------
Consolidated Statements of
Operations Data:
Revenues:
Network solutions................ 21,243
Software revenue................. 7,294
-----------
Total revenues.................. 28,537
Total cost of revenues............. 17,249
-----------
Gross profit....................... 11,288
-----------
Operating expenses:
Sales and marketing.............. 3,569
General and administrative....... 3,545
Research and development......... 2,264
Amortization of deferred stock
compensation expense............ 152
In-process research and
development..................... 350
Amortization of acquired
intangible assets............... 318
Impairment of goodwill and
acquired intangible assets...... --
-----------
Total operating expenses........... 10,198
-----------
Income (loss) from operations...... 1,090
Other income (expenses):
Interest income.................. 734
Interest expense................. (44)
Other (expense) income, net...... 1
Total other income (expenses),
net............................... 691
Income (loss) before income taxes,
minority interests and equity in
loss of affiliate................. 1,781
Income tax (benefit) expense..... 267
Income (loss) before minority
interests......................... 1,514
Minority interests in (income) loss
of consolidated subsidiaries...... 35
Equity in loss of affiliate........ (127)
Net (loss) income.................. 1,422
Net (loss) income per share
Basic............................ 0.03
Diluted.......................... 0.03
Shares used in computing per
share amounts
Basic............................ 44,430,509
Diluted.......................... 45,884,452
Segment information
Network solutions net of
hardware costs.................. 9,780
Software revenue................. 7,294
Total revenues net of hardware
costs............................. $ 17,074
Total cost of sales net of hardware
costs............................. $ 5,786
Gross profit....................... $ 11,288
27
Liquidity and Capital Resources
Our capital requirements are primarily working capital requirements related to
hardware sales and costs associated with the expansion of our business, such as
research and development and sales and marketing expenses. We recognize
hardware costs in full upon delivery of the hardware to our customers. In order
to minimize our working capital requirements, we generally obtain from our
hardware vendors payment terms that are timed to permit us to receive payment
from our customers for the hardware before our payments to hardware vendors are
due. However, we sometimes obt