UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2000
[_] 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 or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
4TH FLOOR, ZHONGDIAN INFORMATION TOWER
18 BAISHIQIAO ROAD, HAIDIAN DISTRICT
BEIJING 100086, CHINA
(Address of principal executive office, including zip code)
+(8610) 6846-7058
Registrant's telephone number, including area code
4/th/ Floor, Ligong Science & Technology Tower
11 Baishiqiao Road, Haidian District
Beijing 100081, China
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last
Report)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [_]
The number of shares outstanding of the Registrant's common stock as of August
August 14, 2000 was 39,771,980
ASIAINFO HOLDINGS, INC.
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 2000
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION Page
Item 1. Financial Statements (unaudited)................................................... 3
a) Condensed Consolidated Statements of Operations for the three and six months
ended June 30, 2000............................................................ 3
b) Condensed Consolidated Balance Sheets As of December 31, 1999 and June 30,
2000........................................................................... 4
c) Condensed Consolidated Statements of Cash Flows For the three and six months
ended June 30, 1999 and 2000................................................... 5
d) Notes to Condensed Consolidated Financial Statements For the six months
ended June 30, 1999 and 2000................................................... 7
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations......................................................................... 14
Item 3. Quantitative and Qualitative Disclosure About Market Risk.......................... 27
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds.......................................... 29
Item 6. Exhibits and Reports on Form 8-K................................................... 30
SIGNATURE.............................................................................................. 31
-2-
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ASIAINFO HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In US dollars)
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
1999 2000 1999 2000
------------ ----------- ----------- -----------
(unaudited) (unaudited)
Revenues:
Network solutions........................... $17,920,812 $46,648,504 $21,820,432 $67,747,783
Software license............................ 1,625,400 4,442,288 2,973,213 6,235,314
----------- ----------- ----------- -----------
Total revenues................................... 19,546,212 51,090,792 24,793,645 73,983,097
----------- ----------- ----------- -----------
Cost of revenues:
Network solutions........................... 13,868,214 43,098,765 17,312,053 63,313,490
Software license............................ 437 1,037 1,434 2,835
----------- ----------- ----------- -----------
Total cost of revenues...................... 13,868,651 43,099,802 17,313,487 63,316,325
----------- ----------- ----------- -----------
Gross profit..................................... 5,677,561 7,990,990 7,480,158 10,666,772
----------- ----------- ----------- -----------
Operating expenses:
Sales and marketing......................... 1,425,800 4,137,879 2,521,126 7,588,551
General and administrative.................. 1,841,833 3,402,614 3,592,875 5,774,058
Research and development.................... 679,302 1,594,039 1,098,479 2,689,793
Amortization of deferred stock
compensation.............................. 372,699 585,515 961,236 1,284,606
----------- ----------- ----------- -----------
Total operating expenses.................... 4,319,634 9,720,047 8,173,716 17,337,008
----------- ----------- ----------- -----------
Income (loss) from operations............... 1,357,927 (1,729,057) (693,558) (6,670,236)
----------- ----------- ----------- -----------
Other income (expense):
Interest income............................... 137,580 2,686,818 295,019 3,220,559
Interest expense.............................. (159,446) (340,636) (269,112) (609,565)
Other income, net............................. (8,633) (288,457) 174,330 (206,875)
----------- ----------- ----------- -----------
Total other (expense) income, net............. (30,499) 2,057,725 200,237 2,404,119
----------- ----------- ----------- -----------
Income (loss) before income taxes
and minority interests.................... 1,327,428 328,668 (493,321) (4,266,117)
Income tax expense (benefit).................. 106,183 (105,039) 175,754 (61,329)
----------- ----------- ----------- -----------
Income (loss) before minority
interests................................. 1,221,245 433,707 (669,075) (4,204,788)
Minority interests in loss of
consolidated subsidiaries................. 31,549 -- 63,098 --
----------- ----------- ----------- -----------
Net income (loss)................................ $ 1,252,794 $ 433,707 $ (605,977) $(4,204,788)
=========== =========== =========== ===========
Net income (loss) per shares:
Basic....................................... $0.09 $0.01 $(0.04) $(0.12)
=========== =========== =========== ===========
Diluted..................................... $0.04 $0.01 $(0.04) $(0.12)
=========== =========== =========== ===========
Shares used in computation:
Basic....................................... 14,096,435 39,738,567 13,889,839 34,279,990
=========== =========== =========== ===========
Diluted..................................... 33,446,190 47,020,308 13,889,839 34,279,990
=========== =========== =========== ===========
See notes to condensed financial statements
-3-
ASIAINFO HOLDINGS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In US dollars)
December 31, June 30,
------------ ------------
1999 2000
------------ ------------
(unaudited)
ASSETS
Current Assets:
Cash and cash equivalents.................................................. $25,403,884 $ 30,323,579
Short-term investment...................................................... -- 98,691,500
Restricted cash............................................................ 12,189,794 26,169,421
Accounts receivable, trade - net........................................... 21,928,036 60,342,488
Inventories................................................................ 2,908,426 14,492,631
Advance to suppliers....................................................... 228,323 338,696
Other receivables.......................................................... 1,346,884 2,473,694
Deferred income taxes...................................................... 25,117 41,976
Deferred offering costs.................................................... 401,607 --
Prepaid expenses and other current assets.................................. 340,502 356,413
------------ ------------
Total current assets.................................................... 64,772,573 233,230,398
Property, plant, and equipment - net............................................ 2,183,545 4,030,959
Goodwill, at cost less accumulated amortization................................. 4,302,633 3,773,971
Deferred income taxes........................................................... 168,228 212,698
------------ ------------
Total Assets............................................................ $71,426,979 $241,248,026
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Short-term bank loans...................................................... $ 9,698,882 $ 17,625,030
Accounts payable........................................................... 11,867,188 43,418,120
Deferred revenue........................................................... 495,470 3,061,655
Other payables............................................................. 360,968 637,925
Accrued employee benefit................................................... 4,810,650 8,075,218
Accrued expenses........................................................... 1,930,145 2,258,269
Other taxes payable........................................................ 2,295,030 1,861,654
Income taxes payable....................................................... 180,475 --
------------ ------------
Total current liabilities............................................... 31,638,808 76,937,871
------------ ------------
Commitments and contingencies (Note 7)
Stockholders' Equity:
Convertible preferred stock................................................ 47,913 --
Common stock, 50,000,000 shares authorised, $0.01 par value,
shares issued and outstanding: December 31, 1999, 25,532,144;
June 30, 2000, 39,812,780................................................ 255,321 398,128
Additional paid-in capital................................................. 46,118,424 173,444,303
Deferred stock compensation................................................ (3,865,373) (2,580,767)
Accumulated deficit........................................................ (2,764,854) (6,969,642)
Accumulated other comprehensive (loss) income.............................. (3,260) 18,133
------------ ------------
Total stockholders' equity.............................................. 39,788,171 164,310,155
------------ ------------
Total Liabilities and Stockholders' Equity.............................. $71,426,979 $241,248,026
============ ============
See notes to condensed consolidated financial statements
-4-
ASIAINFO HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In US dollars)
Six Months Ended June 30,
---------------------------------
1999 2000
----------- -------------
(unaudited)
Cash flows from operating activities:
Net loss.......................................................................... $ (605,977) $ (4,204,788)
Adjustments to reconcile net loss to net cash (used in) provided
by operating activities:
Depreciation....................................................................... 335,223 500,506
Amortization of goodwill........................................................... 287,743 528,662
Amortization of deferred stock compensation........................................ 961,236 1,284,606
Deferred income taxes.............................................................. 105,080 (61,329)
Minority interest in loss of consolidated subsidiaries............................. (63,098) --
Gain on disposal of property, plant, and equipment................................. 25,619 54,037
Provision for doubtful accounts.................................................... 181,791 13,546
Changes in operating assets and liabilities:
Short-term investments............................................................ -- (98,691,500)
Restricted cash................................................................... (2,690,000) (13,950,000)
Accounts receivable............................................................... 1,679,773 (38,427,998)
Inventories....................................................................... (4,115,632) (11,584,205)
Advance to suppliers.............................................................. 32,540 (110,373)
Amount due from a related party................................................... 57,048 --
Other receivables................................................................. (660,179) (1,214,310)
Prepaid expenses and other current assets......................................... (317,479) (113,938)
Accounts payable.................................................................. (1,866,145) 31,550,932
Deferred revenue.................................................................. (1,638,924) 2,566,185
Other payables.................................................................... 10,751 (459,390)
Accrued employee benefit.......................................................... 1,552,960 3,264,568
Accrued expenses.................................................................. (597,109) 328,124
Other taxes payable............................................................... 165,754 (433,376)
Income taxes payable.............................................................. (221,792) (180,475)
----------- -------------
Net cash used in operating activities.............................................. (7,380,817) (129,340,516)
----------- -------------
Cash flows from investing activities:
Purchases of property, plant, and equipment....................................... $ (545,828) $ (2,400,429)
Purchase of subsidiary-AI Zhejiang................................................ (1,297,276) --
----------- -------------
Net cash used in investing activities:............................................. (1,843,104) (2,400,429)
----------- -------------
Cash flows from financing activities:
Increase in short-term bank loans................................................. $11,647,796 $ 23,705,449
Repayment of short-term bank loans................................................ (4,498,793) (15,781,198)
Net proceeds on issuance of Common stock in
initial public offering.......................................................... -- 127,851,874
Proceeds on exercise of stock options............................................. 41,666 892,182
Warrants exercised................................................................ -- 200
----------- -------------
Net cash provided by financing activities.......................................... 7,190,669 136,668,507
----------- -------------
Net increase in cash and cash equivalent:
Cash and cash equivalents at beginning of year..................................... 9,749,374 25,403,884
Effect of exchange rate changes on cash and cash equivalents....................... 35,041 (7,867)
----------- -------------
Cash and cash equivalents at end of year........................................... $ 7,751,163 $ 30,323,579
=========== =============
-5-
ASIAINFO HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(In US dollars)
Six Months Ended June 30,
-------------------------------
1999 2000
---------- ---------
(unaudited)
Supplemental cash flow information:
Cash paid during the year:
Interest..................................................................... $ 268,120 $446,302
Income taxes................................................................. 276,000 188,475
========== =========
Noncash investing and financing activities:
Deferred stock compensation.................................................. $1,307,467 $ --
========== =========
See notes to condensed consolidated financial statements.
-6-
ASIAINFO HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
Six Months Ended June 30, 1999 and 2000
(In US dollars)
1. GENERAL AND BASIS OF PREPARATION
AsiaInfo Holdings, Inc. (the "Company") was incorporated in the State of
Texas, United States ("US"), on June 17, 1993 and was subsequently
reincorporated in the State of Delaware in June 1998. The Company currently
operates through two subsidiaries, AsiaInfo Technologies (China), Inc. ("AI
Technology") and Zhejiang AsiaInfo Telecommunication Technology Co., Ltd.
("AI Zhejiang"). Both subsidiaries are incorporated in the People's
Republic of China ("China" or the "PRC"), are wholly-owned by the Company
and are consolidated with the Company for financial reporting purposes.
Previously, the Company had two other consolidated subsidiaries: AsiaInfo
Services Inc., which was dissolved in May 1999, and AsiaInfo-CTC Network
Systems Inc., which was in the process of liquidation as of June 30, 2000.
In addition, the Company previously held a 55% interest in Beijing AsiaInfo
Data Communications Technology Co., Ltd., now renamed General Data System
Co., Ltd., ("AI Data"). AI Data was consolidated with the Company from 1996
until the Company's sale of a 16.5% interest in AI Data in August 1999. The
remaining interest in AI Data was subsequently accounted for using the
equity method until December 1999, when the Company sold its remaining
interest in AI Data.
The consolidated financial statements of the Company include the accounts
of the Company and its subsidiaries. Investments in 50% or less owned
affiliates over which the Company exercises significant influence, but not
control, are accounted for using the equity method. Intercompany
transactions and balances have been eliminated.
In the Company's opinion, all adjustment necessary for a fair presentation
of the unaudited results of operations for the three months and six months
ended June 30, 1999 and 2000 are included. All such adjustments are
accruals of a normal an recurring nature. The results of operations for the
periods are not necessarily indicative of the results of operations for the
full year. The financial statements are unaudited.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at December 31, 1999 and
June 30, 2000 and the reported amounts of revenues and expenses during the
three months and six months ended June 30, 1999 and 2000. Actual results
could differ from those estimates. Revenues in excess of billings on
services contracts is recorded as unbilled receivables and included in
trade accounts receivable, and amounted to $11,945,082 at December 31, 1999
and $33,328,570 at June 30, 2000. Billings in excess of revenues recognized
on service contracts are recorded as deferred income until the above
revenue recognition criteria are met. At December 31, 1999 and June 30,
2000 the balance of trade account receivables of $9,982,954 and
$27,013,918, respectively, represented amounts billed but not yet
collected. All billed and unbilled amounts are expected to be collected
within 1 year.
-7-
The financial records of the Company's PRC subsidiaries are maintained in
Renminbi. The Renminbi is not fully convertible into United States dollars
or other foreign currencies. The rate of exchange quoted by the People's
Bank of China on June 30, 2000 was US$1.00=RMB8.278. No representation is
made that the Renminbi amounts could have been, or could be, converted into
United States dollars at that rate or at any other rate.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities". This
statement requires companies to record all derivatives on the balance sheet
as assets and liabilities measured at fair value. Gains and losses
resulting from changes in fair market values of those derivative
instruments would be accounted for depending on the use of the instrument
and whether it qualifies for hedge accounting. SFAS No. 133 will be
effective for the Company's year ending December 31, 2001. The Company has
not yet determined the impact, if any, on its financial position, results
of operations or cash flows.
Information concerning the organization and business of the Company,
accounting policies followed by the Company and other information is
contained in the notes to the Company's financial statements for the year
ended December 31, 1999 prepared as part of the Company's final prospectus
filed with the Securities and Exchange Commission on March 2, 2000. The
report should be read in conjunction with such financial statements.
2. CASH AND CASH EQUIVALENTS, SHORT-TERM INVESTMENTS
The Company considers all highly liquid, low-risk debt instruments with an
original maturity at the date of purchase of three months or less to be
cash equivalent. The Company maintained cash and cash equivalents in
deposit accounts with major banks. Upon the completion of the initial
public offering in March 2000 (see Note 6), the Company received additional
cash which is available for investment. As of June 30, 2000, cash
equivalents and short-term investments consist primarily of time deposits
with original maturities less than twelve months and money market funds
with a major financial institution.
December 31, 1999 June 30, 2000
--------------------- ----------------
(unaudited)
Cash and cash equivalent:
Cash.......................................................... $25,403,884 $22,823,579
Money market funds............................................ -- 7,500,000
----------- -----------
Total......................................................... $25,403,884 $30,323,579
=========== ===========
Short-term investments:
Time deposits with original maturities less than twelve
months....................................................... $ -- $98,691,500
=========== ===========
3. COMPREHENSIVE INCOME (LOSS)
The components of comprehensive loss for the periods presented are as
follows:
Six Months Ended June 30,
-------------------------------
1999 2000
---------- ---------
(unaudited)
Net Loss........................................................... $(605,977) $(4,204,788)
Change in cumulative transaction adjustment........................ (21,764) 21,393
--------- -----------
Comprehensive loss................................................. $(627,741) $(4,183,395)
========= ===========
-8-
4. SHORT-TERM BANK LOANS
As of June 30, 2000, the Company had total short-term credit facilities
totaling $27.6 million expiring in July 2000 and March 2001 for working
capital purposes. At June 30, 2000 funds available under unused short-term
credit facilities were $15.8 million. The loans carry interest ranging from
approximately 5.58% to 6.435% per annum and are repayable within one year.
The secured bank loans and short-term credit facilities were secured by
bank deposits of $12.2 million as of December 31, 1999 and $26.2 million as
of June 30, 2000, which are presented as restricted cash in the condensed
consolidated balance sheets.
5. INCOME TAXES
The Company is subject to US federal and state income taxes. The Company's
subsidiaries incorporated in the PRC are subject to PRC income taxes. The
tax provisions (benefit) of $175,754 and $(61,329) for the six month ended
June 30, 1999 and 2000, respectively, represent deferred income taxes.
6. CAPITAL STOCK
Initial public offering
On March 2, 2000, the Company completed an initial public offering of its
common stock. All 5.75 million shares covered by the Company's Registration
statement on Form S-1, including shares covered by an over allotment option
that was exercised, were sold by the Company at a price of $24.00 per
share, less than an underwriting discount of $1.68 per share. Net proceeds
to the Company from all shares sold were approximately $127 million. Upon
the consummation of the Company's initial public offering on March 3, 2000,
all of the outstanding preferred stock automatically converted into Common
Stock.
Warrants to purchase common stock
During the six months ended June 30, 2000 warrants to purchase 20,000
shares of common stock at $0.01 per share were exercised and at June 30,
2000, warrants to purchase 20,000 shares of common stock were outstanding.
Stock options
Option activity of the Company's stock option plans is summarized as
follows:
Outstanding options
-----------------------------------------------------
Weighted average
Number of Shares exercise price per share
-------------------- ---------------------------
Outstanding, January 1, 2000.............................. 8,891,811 $ 2.99
Granted................................................... 2,254,800 23.97
Cancelled................................................. (468,676) 3.79
Exercised................................................. (1,592,550) 1.77
------------- -------
Outstanding, June 20, 2000................................ 9,085,385 $ 8.37
============= =======
-9-
7. NET INCOME (LOSS) PER SHARE
The following is a reconciliation of the numerators and denominators of the
basic and diluted net loss per share computations:
Three Months Ended June 30, Six Months Ended June 30,
----------------------------- ---------------------------
1999 2000 1999 2000
--------------- ---------- ------------ -----------
(unaudited) (unaudited)
Net income (loss) (numerator):
Net income (loss)
Basic and diluted....................... $ 1,252,794 $ 433,707 $ (605,977) $(4,204,788)
----------- ----------- ----------- -----------
Shares (denominator):
Weighted average
Common Stock Outstanding................ 15,389,304 39,738,567 15,029,154 34,279,990
Outstanding subject to
repurchase............................ 1,292,869 -- 1,139,315 --
----------- ----------- ----------- -----------
Basic................................... 14,096,435 39,738,567 13,889,839 34,279,990
=========== =========== =========== ===========
Diluted..................................... 33,446,190 47,020,308 13,889,839 34,279,990
Net income (loss) per share:
Basic....................................... $ 0.09 $ 0.01 $ (0.04) $ (0.12)
Diluted..................................... $ 0.04 $ 0.01 $ (0.04) $ (0.12)
For the three months and six months ended June 30, 1999 and 2000, the
Company had securities outstanding which could potentially dilute basic
earnings per share ("EPS") in the future, but were excluded in the
computation of diluted EPS in such periods, as their effect would have been
antidilutive due to the net loss reported in these periods. Such
outstanding securities consist of the following:
Six Months Ended June 30,
-----------------------------
1999 2000
----------- ---------
(unaudited)
Convertible preferred stock................................... 2,160,864 --
Shares of common stock subject to repurchase.................. 1,498,060 --
Outstanding options........................................... 7,775,400 9,085,385
Warrants...................................................... 9,489,226 20,000
---------- ----------
20,923,550 9,105,385
========== ==========
8. COMMITMENTS
Performance options: In connection with the acquisition of AI Zhejiang, the
Company has granted management and employees of AI Zhejiang performance
options if, in the year 2000, AI Zhejiang's earnings before interest and
taxes ("EBIT") exceeds AI Zhejiang's EBIT for 1999 and AI Zhejiang's
combined EBIT for 1999 and 2000 exceeds $3,000,000. The total number of
performance options granted will equal the amount by which AI Zheijiang's
EBIT for 1999 and 2000 exceeds $3,000,000, expressed as a percentage and
multiplied by 187,500. Each performance option will represent the right to
purchase one share of the Company's common stock at the weighted average
exercise price for stock options granted at such time. The performance
options will be granted within 30 days of the determination of AI
Zhejinag's EBIT for 2000.
-10-
9. SEGMENT AND GEOGRAPHIC OPERATING INFORMATION
Information on the Company's operating segments is set out in the following
page.
-11-
Annex 1 to Segment and Geographic Operating Information
Three Months Ended June 30,
----------------------------------------------------------
1999 2000
----------------------------------------------------------
Company
Excluding
AI Zhejiang AI Zhejiang Total
Revenues net of hardware cost:
Network solutions net of hardware cost........... $6,037,199 $ 7,155,398 $ 138,137 $ 7,293,535
Software license................................. 1,625,400 4,105,827 336,461 4,442,288
---------- ----------- --------- -----------
Consolidated revenues net of
hardware cost............................. 7,662,599 11,261,225 474,598 11,735,823
Consolidated cost of sales net of
hardware cost................................. 1,985,038 3,315,329 429,504 3,744,833
========== =========== ========= ===========
Consolidated gross profit........................ $5,677,561 $ 7,945,896 $ 45,094 $ 7,990,990
========== =========== ========= ===========
Gross profit:
Network Solutions................................ $4,052,598 $ 3,841,106 $(291,367) $ 3,549,739
Software license................................. 1,624,963 4,104,790 336,461 4,441,251
---------- ----------- --------- -----------
Consolidated gross profit........................ $5,677,561 $ 7,945,896 $ 45,094 $ 7,990,990
========== =========== ========= ===========
Income (loss) from operation:
Network Solutions................................ $ 714,984 $(1,054,495) $(413,982) $(1,468,477)
Software license................................. 642,943 (9,985) (250,595) (260,580)
---------- ----------- --------- -----------
Consolidated net income (loss) from
operations.................................... $1,357,927 $(1,064,480) $(664,577) $(1,729,057)
========== =========== ========= ===========
Three Months Ended June 30,
----------------------------------------------------------
1999 2000
----------------------------------------------------------
Company
Excluding
AI Zhejiang AI Zhejiang Total
Revenues net of hardware cost:
Network solutions net of hardware cost........... $ 7,763,126 $10,713,532 $ 258,186 $10,971,718
Software license................................. 2,973,213 5,505,522 729,792 6,235,314
----------- ----------- ----------- -----------
Consolidated revenues net of
hardware cost............................. 10,736,339 16,219,054 987,978 17,207,032
Consolidated cost of sales net of
hardware cost................................. 3,256,181 5,793,183 747,077 6,540,260
----------- ----------- ----------- -----------
Consolidated gross profit........................ $ 7,480,158 $10,425,871 $ 240,901 $10,666,772
=========== =========== =========== ===========
Gross profit:
Network Solutions................................ $ 4,508,379 $ 4,921,405 $ (487,112) $ 4,434,293
Software license................................. 2,971,779 5,504,466 728,013 6,232,479
----------- ----------- ----------- -----------
Consolidated gross profit........................ $ 7,480,158 $10,425,871 $ 240,901 $10,666,772
=========== =========== =========== ===========
Income (loss) from operation:
Network Solutions................................ $(1,718,407) $(4,203,102) $ (704,997) $(4,908,099)
Software license................................. 1,024,849 (1,361,289) (400,848) (1,762,137)
----------- ----------- ----------- -----------
Consolidated net income (loss) from
operations.................................... $ (693,558) $(5,564,391) $(1,105,845) $(6,670,236)
=========== =========== =========== ===========
-12-
For the three months and six months ended June 30, 1999 and 2000, all of
the Company's revenues have been derived from sales to customers in the
People's Republic of China. Revenues are attributed to the country based on
the country of installation of hardware and performance of system
integration work. Also, as of December 31, 1999 and June 30, 2000, 99% of
the Company's long-lived assets are located in the People's Republic of
China.
-13-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Except for historical information, the statements contained in this Quarterly
Report on Form 10-Q 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 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 herein under the heading "Factors Affecting our Business Condition."
OVERVIEW
We are a leading provider of Internet-related, IT professional services and
software products in China. We offer total network solutions and proprietary
software to meet our customers' Internet and telecommunications infrastructure
and operating needs. We offer these services in the context of total solutions,
which include systems integration and customization of our proprietary and third
party software. We have historically sold our software products as a part of our
network solutions projects, but we are increasingly selling these products on a
stand-alone basis.
We commenced our operations in 1993 as an Internet content provider. We moved
our operations from Texas to China in 1995 and began generating significant
network solutions revenues in 1996 and significant software product revenues in
1998. While we source hardware for our customers through our U.S. parent
company, AsiaInfo Holdings, Inc., we conduct the bulk of our business through
our two wholly-owned operating subsidiaries, each of which is a Chinese company.
We expect our business to continue to evolve as the Internet and
telecommunications markets in China change and expand. In particular, we are
investing substantial personnel and financial resources to expand our software
business, which we expect will account for a significantly greater portion of
our revenues and operating expenses in the future. For these reasons, our
historical financial data may not be a meaningful basis upon which to evaluate
us and our prospects.
On April 5, 1999, we acquired AI Zhejiang, a leading Chinese producer of
wireless customer management and billing software. The acquisition reflects our
strategy of expanding the scope and size of our software operations. AI Zhejiang
was one of the earliest entrants in the market for wireless customer management
and billing software. We acquired AI Zhejiang for $2 million in cash and the
issuance of 437,500 shares of common stock to AI Zhejiang's senior management
for their past services. A wholly-owned subsidiary of AsiaInfo, AI Zhejiang's
financial results are consolidated in our financial statements for the year
ended December 31, 1999, and for the three- and six-month periods ended June 30,
2000. For historical financial information regarding AI Zhejiang, see its
separate financial statements as of and for the years ended
-14-
December 31, 1997 and 1998 included in our Registration Statement on Form S-1
(No.333-93199), previously filed with the Commission.
Most of our revenues are derived from customer's orders under separate binding
contracts for hardware and systems integration services. These contracts
constitute our backlog at any given time. Revenue for hardware, system
integration services and software products is recognized during the course of
the project. We have generated a significant portion of our historical revenues
from a limited number of customers, particularly various provincial entities of
the China Telecom system and China Unicom. At June 30, 2000, approximately 82%
of our backlog was attributable to orders placed by various entities of the
China Telecom system and China Unicom.
We generate revenues from our two principal business lines: network solutions
and proprietary software products. Software products have accounted for an
increasing portion of total revenues, increasing from 2.1% of total revenues in
1997 to 10.8% of total revenues in 1999 and 8.4% of total revenues for the six
months ended June 30, 2000. We expect that software products will account for a
growing portion of our revenues in the future. Network solutions revenues
consist of hardware sales for equipment procured by us on behalf of our
customers from hardware vendors and services for planning, design, systems
integration, training and customization of our proprietary and third party
software. Network solutions revenues also include fees that we earn under
service contracts to maintain and upgrade installed software. Software license
revenues consist of fees received from customers for licenses to use our
products in perpetuity up to a specified maximum number of users. Substantially
all of our software revenues are derived from our IP billing, wireless customer
management and billing, and messaging software products. Total revenue includes
the costs of hardware equipment for internet backbone construction projects, a
cost that is passed on to the customer. Our revenues from network solutions is
subject to significant fluctuation from quarter to quarter, depending on the
timing of hardware deliveries in large internet backbone projects.
Although we account for our network solutions revenues on a gross basis that
includes hardware sales, we manage our business internally based on total
revenues net of hardware costs, which is consistent with our strategy of
focusing on providing our customers with high value IT professional services,
while gradually outsourcing lower end services such as hardware installation.
This strategy may result in lower growth rates for total revenues as against
prior periods, but should not adversely impact revenues net of hardware costs.
The following table shows our revenue breakdown by business line on this basis:
Six Months
Year Ended December 31, Ended June 30,
--------------------------------- --------------
1995 1996 1997 1998 1999 2000
---- ---- ---- ---- ---- ----
Business Line
- -------------
Network solutions net of hardware costs..... 100% 89% 93% 88% 74% 62%
Software license............................ - 11% 7% 12% 26% 38%
---- ---- ---- ---- ---- ----
Total revenues net of hardware costs...... 100% 100% 100% 100% 100% 100%
==== ==== ==== ==== ==== ====
We believe that there are opportunities for us to expand into new business
areas. In particular, we plan to become an application service provider (ASP),
and expect to accelerate our investment in the ASP model in the third and fourth
quarters of this year. We are currently completing our market studies in this
area and entering the first phase of launch services. We expect to incur losses
for the latter half of 2000 because of new investment in this area.
-15-
RESULTS OF OPERATIONS
REVENUES
Total revenues were $51.1 million and $74 million, respectively, in the three-
and six-month periods ended June 30, 2000, representing increases of $31.5
million (or 161%) and $49.2 million (or 198%), respectively, over the comparable
periods in fiscal 1999. Network solutions revenues totaled $46.6 million and
$67.7 million, respectively, in the three- and six-month periods ended June 30,
2000, representing increases of $28.7 million (or 160%) and $45.9 million (or
210%), respectively, over the comparable periods in fiscal 1999. The increases
in total revenue and network revenue during these periods are largely
attributable to high hardware pass-through costs related to our backbone
construction project for China Unicom, and to other regional backbone
construction projects.
Software revenues were $4.4 million and $6.2 million, respectively, in the
three-and six-month periods ended June 30, 2000, representing increases of $2.8
million (or 173%) and $3.3 million (or 110%), respectively, over the comparable
periods in 1999. The growth in software revenues during these periods reflected
greater demand for our products and faster development and installation of those
products. We sold, in total, 1.13 million licenses for our customer care and
billing software and 5.5 million messaging software licenses during the quarter
ended June 30, 2000. In addition, AI Zhejiang, which we acquired in April 1999,
contributed revenues of $1,368,842 for the six months ended June 30, 2000, 153%
of which was software revenues.
COST OF REVENUES
Cost of revenues consist primarily of the hardware costs we pass through to our
customers. Our cost of revenues was $43.1 million and $63.3 million,
respectively, in the three- and six-month periods ended June 30, 2000,
representing increases of $29.2 million (or 211%) and $46 million (or 266%) over
the comparable periods in fiscal 1999. The increases were primarily due to our
overall business expansion.
OPERATING EXPENSES
Operating expenses were $9.7 million and $17.3 million, respectively, in the
three- and six-month periods ended June 30, 2000, representing increases of $5.4
million (or 125%) and $9.2 million (or 112%) over the comparable periods in
1999. The increases were primarily due to the overall expansion of our business,
increased investments in sales and marketing and personnel development
activities, and costs associated with the acquisition of AI Zhejiang. As
compared to the comparable periods in 1999, operating expenses as a percentage
of revenues decreased from 22% to 19% and from 33% to 23%, respectively, in the
three- and six-month periods ended June 30, 2000.
Sales and marketing expenses were $4.1 million and $7.6 million, respectively,
in the three- and six-month periods ended June 30, 2000, representing increases
of $2.7 million (or 190%) and $5.1 million (or 201%), respectively, over the
comparable periods in 1999. These increases were primarily attributable to the
implementation of new marketing activities, the hiring of additional personnel
and higher compensation levels.
-16-
Research and development expenses were $1.6 million and $2.7 million,
respectively, in the three- and six-month periods ended June 30, 2000,
representing increases of $0.9 million (or 135%) and $1.6 million (or 145%),
respectively, over the comparable periods in 1999. These increases were
primarily due to increased spending associated with the expansion of our
software business, the hiring of additional personnel, higher compensation
levels and the effect of the acquisition of AI Zhejiang. We expect that our
spending on research and development will continue to increase and, in the third
and fourth quarters of 2000, may increase by more than 100% as compared to the
comparable periods in 1999.
General and administrative expenses increased 85% to $3.4 million and 61% to
$5.8 million for the three- and six-month periods ended June 30, 2000, from $1.8
million for the quarter ended June 30, 1999 and $3.6 million from the six-month
period ended June 30, 1999, in part because of amortization charges resulting
from the acquisition of AI Zhejiang. The increase in general and administrative
expenses was lower than the increases in other operating expenses as a result of
our cost control efforts in this area.
OTHER INCOME AND EXPENSES
Other income and expenses (net), consisting primarily of net interest income and
expense, totaled $2.1 million and $2.4 million for the three- and six-month
periods ended June 30, 2000, as compared to net expenses of $30,499 and net
income of $200,237, respectively, for the corresponding periods in 1999. This
increase is primarily due to the investment of the funds we received upon
completion of our initial public offering in March. Interest income rose to $2.7
million and to $3.2 million for the three- and six-month periods ended June 30,
2000, compared to $137,580 and $295,019 for the comparable periods in 1999. Net
interest income was $2.3 million and $2.6 million, respectively, for the three-
and six-month periods ended June 30, 2000.
NET INCOME (LOSS)
We recorded net income of $433,707, or $0.01 per share, for the quarter ended
June 30, 2000 and a net loss of $4.2 million, or $0.12 per share for the six-
month period ended June 30, 2000. This is in comparison to net income of $1.3
million or $0.09 per share in the quarter ended June 30, 1999 and a net loss of
$605,977 or $0.04 per share for the six-month period ended June 30, 1999. Our
net income for the three months ended June 30, 2000 was primarily driven by the
growth of our software business and the interest income from our cash position.
LIQUIDITY AND CAPITAL RESOURCES
Our accounts receivable at June 30, 2000 were $60.3 million, consisting of $27
million in billed receivables and $33 million in unbilled receivables. Our
unbilled receivables are based on revenue we have booked through the percentage
completion method, but for which we have not yet billed the customer. Our billed
receivables are based on revenue we have booked and billed. The process of
billing receivables in China is somewhat different than in the United States, as
customers typically do not make full payment until complete satisfaction of the
project. Despite these longer receivable cycles, since our inception we have
written off less than 0.5% of our accounts receivable as bad debt. Of the $27
million in billed receivables for the quarter, 74% were under 30 days old.
During the quarter ended June 30, 2000, we reduced our billed receivables over
90 days old from 20% to 12% of total billed receivables by collecting on an
outstanding receivable that was over 360 days old. For the quarter ended June
30, 2000, we had significant hardware pass-through costs due to the China Unicom
contract, and collected $13 million of our billed
-17-
receivables the week after the quarter closed. Our inventory position at the end
of the quarter was $14.5 million, which was also primarily attributable to the
China Unicom project, where much of the hardware in-transit is counted as
inventory.
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 have historically
financed our working capital and other financing requirements through careful
management of our network solutions billing cycle, shareholder investments and,
to a limited extent, bank loans. However, we anticipate that our working capital
requirements will increase in the future.
In 1997, we raised working capital through the issuance of $14.0 million of
convertible preferred stock in a private placement. In August 1999, we raised an
additional $20.0 million through the issuance of additional shares of
convertible preferred stock. In March 2000, we completed an initial public
offering of our common stock, from which we derived net proceeds of
approximately $127 million. Total contributed shareholder capital at June 30,
2000 was $171.3 million.
We have a $10.0 million working capital line of credit with the Bank of China's
New York branch and lines of credit totalling $17.6 million with local Chinese
banks in the PRC, secured by bank deposits of $26.2 million. We have borrowed
$11.8 million under these lines of credit. As of June 30, 2000, we had available
a total of $15.8 million under these lines. In addition, as of June 30, 2000 we
had borrowings of $11.8 million, secured by bank deposits of an equal amount,
from local banks. The lines of credit and loans carry interest ranging from
5.58% to 6.435% per annum and are repayable within one year.
As our business continues to expand, we expect that our working capital
requirements will grow and that we will need to raise additional working
capital. We continue to anticipate that the net proceeds of our initial public
offering, together with available funds and cash flows generated from operations
and the proceeds of our private placements, will be sufficient to meet our
anticipated needs for working capital, capital expenditures and business
expansion through 2000. Thereafter, we may need to raise additional funds. We
may need to raise additional funds sooner, however, in order to fund more rapid
expansion and acquisitions, to develop new or enhanced services or products, to
respond to competitive pressures to compete successfully for larger projects
involving higher levels of hardware purchases, or if our business otherwise
grows more rapidly than we currently predict. We plan to raise additional funds,
if necessary, through new issuances of shares of our equity securities either
through one or more offerings to the general public, private placements to
accredited investors, or through credit facilities extended by lending
institutions.
In the event we decide to pay dividends to our shareholders, our ability to pay
dividends will depend in part on our ability to receive dividends from our
operating subsidiaries in China. Foreign exchange and other regulations in China
may restrict our ability to distribute retained earnings from our operating
subsidiaries in China or convert those payments from Renminbi into foreign
currencies.
FACTORS AFFECTING OUR BUSINESS CONDITION
In addition to the other information in this report, the following factors
should be considered in evaluating our business and our future prospects:
-18-
THE GROWTH OF OUR BUSINESS IS DEPENDENT ON GOVERNMENT BUDGETARY POLICY,
PARTICULARLY THE ALLOCATION OF FUNDS, TO SUSTAIN THE GROWTH OF THE
TELECOMMUNICATIONS INDUSTRY AND THE INTERNET IN CHINA.
Virtually all our large customers are directly or indirectly owned or controlled
by the PRC government. Accordingly, their business strategies and capital
expenditure budgets and spending plans are largely decided in accordance with
government policies, which, in turn, are determined on a centralized basis at
the highest level by the State Planning Commission. As a result, the growth of
our business is heavily dependent on government policies for telecommunications
and Internet infrastructure.
Despite the high priority currently accorded by the government to the
development of telecommunications industry and Internet infrastructure and a
high level of funding allocated by the government to these sectors in 1999, we
believe that our customers' capital spending for Internet infrastructure was
lower in 1999 than 1998 due to a variety of factors, particularly the current
restructuring of the telecommunications industry. While there is a possibility
that the unspent funds will be carried forward to 2000, we cannot make any
conclusions or predictions at this time regarding government funding plans for
the telecommunications industry and the Internet. Furthermore, we can give no
assurance as to the government's budget policies in future years. Insufficient
government allocation of funds to sustain the growth of the telecommunications
industry and the Internet in China could reduce the demand for our products and
services and thus have a material adverse effect on our ability to maintain the
current level of revenue and grow our business.
LAWS AND REGULATIONS APPLICABLE TO THE INTERNET IN CHINA REMAIN UNSETTLED AND
COULD HAVE A MATERIAL ADVERSE EFFECT ON THE INTERNET'S GROWTH AND THEREBY HAVE
MATERIAL ADVERSE EFFECT ON OUR BUSINESS.
Growth of the Internet in China could be materially adversely affected by
governmental regulation of the industry. Due to the increasing popularity and
use of the Internet and other online services, it is possible that regulations
may be adopted with respect to the Internet or other services covering issues
such as user privacy, pricing, content, copyrights, distribution, antitrust and
characteristics and quality of products and services. Furthermore, the growth
and development of the market for electronic commerce may prompt calls for more
stringent consumer protection laws that may impose additional burdens on
companies conducting business online. Although we are engaged in Internet
infrastructure development and Internet-related software business, the adoption
of additional laws or regulations may slow the growth of the Internet or other
services, which could in turn lead to reduced Internet traffic, decrease the
demand for our network solutions and Internet-related software products and
increase our cost of doing business.
The Ministry of Information Industries is currently reviewing its
telecommunications regulations, particularly as they relate to Internet content.
While we are not aware of any existing or proposed regulations that have a
significant direct adverse effect on our business, a restrictive regulatory
policy regarding the Chinese Internet industry would have a material direct
adverse effect on us by retarding the industry's growth in China.
OUR CUSTOMER BASE IS HIGHLY CONCENTRATED AND THE LOSS OF ONE OR MORE OF OUR
CUSTOMERS COULD CAUSE OUR BUSINESS TO SUFFER SIGNIFICANTLY.
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 the
China Telecom system and China Unicom. Although
-19-
various provincial and local entities of the China Telecom system are separate
legal entities and generally make purchasing decisions independent of the
Directorate General of Telecommunications, or DGT, their business decisions may
nonetheless be affected by the DGT. Entities of the China Telecom system
accounted for almost all of our revenues in 1997 and 1998. At December 31, 1999,
entities of the China Telecom system and China Unicom accounted for
approximately 87% of our backlog at June 20, 2000 that figure was 82%. In the
future, we expect to derive an increasing portion of our revenues from China
Unicom, China Mobile and China Netcom. The loss of the China Telecom system,
whose provincial and local entities have historically accounted for a major
portion of our business, or cancellation or deferral of any large contract by
any of our large customers would have a material adverse effect on our revenues,
and consequently our profits.
THE LONG AND VARIABLE SALES CYCLES FOR OUR PRODUCTS AND SERVICES CAN CAUSE OUR
REVENUES AND OPERATING RESULTS TO VARY SIGNIFICANTLY FROM PERIOD TO PERIOD AND
MAY ADVERSELY AFFECT THE TRADING PRICE OF OUR COMMON STOCK.
Our revenues and operating results will vary significantly from quarter to
quarter due to a number of factors, many of which are outside of our control and
any of which may cause our stock price to fluctuate. A customer's decision to
purchase our services and products involves a significant commitment of its
resources and an extended evaluation. As a result, our sales cycle tends to be
lengthy. We spend considerable time and expense educating and providing
information to prospective customers about features and applications of our
services and products. Because our major customers operate large and complex
networks, they usually expand their networks in large increments on a sporadic
basis. The combination of these factors can cause our revenues and results of
operations to vary significantly and unexpectedly. Other factors that may affect
us include the following:
. fluctuation in demand for our products and services as a result of
budgetary cycles of our large customers, particularly state-owned
enterprises;
. the reduction, delay, interruption or termination of one or more
infrastructure projects; and
. our ability to introduce, develop and deliver new software products that
meet customer requirements in a timely manner.
A large part of the contract amount of a network solutions project usually
relates to hardware procurement. Since we recognize most of the revenues
relating to hardware plus a portion of contract services revenues at the time of
hardware delivery, the timing of hardware delivery can cause our quarterly
revenues to fluctuate significantly.
Due to the foregoing factors, we believe that quarter-to-quarter comparisons of
our operating results are not a good indication of our future performance and
should not be relied upon. It is likely that our operating results in some
periods may be below the expectations of public market analysts and investors.
In this event, the price of our common stock will probably decline, perhaps
significantly more in percentage terms than the decline in operating results.
OUR WORKING CAPITAL REQUIREMENTS MAY INCREASE SIGNIFICANTLY.
-20-
We typically purchase hardware for our customers as part of our turnkey total
solutions services. We generally require our customers to pay 90% of the invoice
value of the hardware upon delivery. We place orders for hardware only against a
back-to-back order from customers and seek favorable payment terms from hardware
vendors. This policy has historically minimized our working capital
requirements. However, for certain large and strategically important projects,
we have agreed to payment of less than 90% of the invoice value of the hardware
upon delivery in order to maintain competitiveness. Wider adoption of less
favorable payment terms or delays in hardware deliveries would require us to
increase our working capital needs.
Our working capital requirements may also increase significantly in order to
fund more rapid expansion and acquisitions, to develop new or enhanced services
or products, to respond to competitive pressure to compete successfully for
larger projects involving higher levels of hardware purchases or otherwise if
our business grows more rapidly than we currently predict. An increase in our
working capital needs may require that we raise additional funding sooner than
we presently expect.
WE HAVE SUSTAINED LOSSES IN PRIOR YEARS AND MAY INCUR SLOWER EARNINGS GROWTH,
EARNINGS DECLINES OR NET LOSSES IN THE FUTURE.
Although we made a net profit in 1996 and 1998, we have sustained losses in
prior years and in 1999 and for the six months ended June 30, 2000. There are no
assurances that we can regain or sustain profitability or avoid net losses in
the future. We continue to expect to increase our operating expenses as our
business grows. The level of these expenses will be largely based on anticipated
organizational growth and revenue trends and a high percentage will be fixed. As
a result, any delays in expanding sales volume and generating revenue could
result in substantial operating losses. Any such developments could cause the
market price of shares of our common stock to decline.
MANAGEMENT'S ABILITY TO IMPLEMENT ADEQUATE CONTROL SYSTEMS WILL BE CRITICAL TO
MANAGE SUCCESSFULLY OUR FUTURE GROWTH.
In recent years, we have been expanding our operations rapidly, both in size and
scope. Our growth places a significant strain on our management systems and
resources. Our ability to market our products successfully and implement our
business plan in a rapidly evolving market requires an effective planning and
management process. We will need to continue to improve our financial,
managerial and operational controls and reporting systems, and to expand, train
and manage our work force. We may not be able to implement adequate control
systems in an efficient and timely manner.
WE FACE A COMPETITIVE LABOR MARKET IN CHINA FOR SKILLED PERSONNEL AND THEREFORE
ARE HIGHLY DEPENDENT ON THE SKILLS AND SERVICES OF OUR EXISTING KEY SKILLED
PERSONNEL AND OUR ABILITY TO HIRE ADDITIONAL SKILLED EMPLOYEES.
Competition for highly skilled software design, engineering and sales and
marketing personnel is intense in China. Failure to attract, assimilate or
retain qualified personnel to fulfill our current or future needs could impair
our growth. Competition for skilled personnel comes primarily from a wide range
of foreign companies active in China, many of which have substantially greater
resources than us. Limitations on our ability to hire and train sufficient
number of personnel at all levels would limit our ability to undertake projects
in the future and could cause us to lose market share. We may need to increase
the levels of our
-21-
employee compensation more rapidly than in the past in order to remain
competitive. These additional costs could reduce our profitability and cause
losses.
SINCE OUR BUSINESS HAS BEEN EVOLVING, OUR HISTORICAL FINANCIAL INFORMATION MAY
NOT BE AN APPROPRIATE BASIS ON WHICH TO EVALUATE US OR OUR PROSPECTS.
We moved our operations from Texas to China in 1995, began generating
substantial network solutions revenue in 1996 and selling software products in
1996. We expect our business to continue to evolve as the Internet and
telecommunications markets in China change and expand. In particular, we are
currently investing substantial personnel and financial resources in expanding
our software business, which we expect to account for a significantly greater
portion of our operating expenses and revenues than in the past. As a result,
our historical financial data may not provide a meaningful basis upon which
investors may evaluate us and our prospects. You should consider the risks and
difficulties encountered by companies like ours in a new and rapidly evolving
market. Our ability to sell products and the level of success, if any, we
achieve depends, among other things, on the level of demand for Internet-
related, professional IT services and software products in China, which are
rapidly evolving.
WE EXTEND WARRANTIES TO OUR NETWORK SOLUTIONS CUSTOMERS THAT EXPOSE US TO
POTENTIAL LIABILITIES.
We customarily provide our customers with one to three year warranties, under
which we agree to maintain the installed systems at no additional cost to our
customers. The maintenance services cover both hardware and our proprietary and
third party software products. Although we seek to arrange back-to-back
warranties with hardware and software vendors, we have the primary
responsibility to maintain the installed hardware and software. Our contracts do
not have disclaimers or limitations on liability for special, consequential and
incidental damages nor do we cap the amounts recoverable for damages. In
addition, we do not currently maintain any insurance policy with respect to our
exposure to warranty claims. Although to date we have not incurred any liability
for special, consequential or incidental damages, failure of our installed
projects to operate properly could give rise to substantial claims against us
that in turn could materially and adversely affect us, particularly because our
customers are primarily large telecommunication service providers.
WE SELL OUR LARGE SYSTEMS INTEGRATION PROJECTS ON A FIXED PRICE, FIXED-TIME
BASIS WHICH EXPOSES US TO RISKS ASSOCIATED WITH COST OVERRUNS AND DELAYS.
We sell substantially all our systems integration projects on a fixed-price,
fixed-time basis. Failure to complete a fixed-price, fixed-time project within
budget and the required time frame would expose us to cost overruns and
penalties that could have a material adverse effect on our business, operating
results and financial condition. In contracts with our customers, we typically
agree to pay late completion fines up to 5% of the total contract value. In
large scale Internet infrastructure projects, there are many factors beyond our
control which could cause delays or cost overruns. In this event, we would be
exposed to cost overruns and liable for late completion fines. A part of our
network solutions business is installing Internet network hardware. If we are
unable to obtain access to such equipment in a timely manner or on acceptable
commercial terms, our business, particularly our relationships with our
customers, may be materially and adversely affected.
-22-
WE MAY BECOME LESS COMPETITIVE IF WE ARE UNABLE TO DEVELOP OR ACQUIRE NEW
PRODUCTS OR ENHANCEMENTS TO OUR SOFTWARE PRODUCTS THAT ARE MARKETABLE ON A
TIMELY AND COST-EFFECTIVE BASIS.
We continually develop new services and proprietary software products.
Unexpected technical, operational, distribution or other problems could delay or
prevent the introduction of one or more of these products or services or any
products or services that we may plan to introduce in the future. Moreover, we
cannot be sure that any of these products and services will achieve widespread
market acceptance or generate incremental revenue.
OUR PROPRIETARY RIGHTS MAY BE INADEQUATELY PROTECTED AND THERE IS A RISK OF WEAK
LAW ENFORCEMENT.
Our success and ability to compete depend substantially upon our intellectual
property rights, which we protect through a combination of copyright, trade
secret law and trademark law. We have filed trademark applications with the
United States Trademark Office and the Trademark Bureau of the State
Administration of Industry and Commerce in China. We have also been granted
copyrights by the State Copyright Bureau in China with respect to Internet-
related software products although we have not applied for copyright protection
elsewhere (including the United States). Despite these precautions, the legal
regime protecting intellectual property rights in China is weak. Because the
Chinese legal system in general and the intellectual property regime in
particular are 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,
and the global nature of the Internet makes it virtually impossible to control
the ultimate destination of our products.
We do not own any patents and have not filed any patent applications, as we do
not believe that the benefits of patent protection outweigh the costs of filing
and updating patents for our software products. We enter into confidentiality
agreements with 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. Policing unauthorized use of our licensed
technology is difficult and there can be no assurance that the steps taken by us
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.
WE ARE EXPOSED TO CERTAIN BUSINESS AND LITIGATION RISKS WITH RESPECT TO
TECHNOLOGY RIGHTS HELD BY THIRD PARTIES.
We currently license technology from third parties and intend to do so
increasingly in the future. As we introduce services that require new
technology, we will probably need to license additional third party technology.
We cannot assure you that these technology licenses will be available to us on
commercially reasonable terms, if at all. Our inability to obtain any of these
licenses could delay or compromise our ability to introduce new services. In
addition, we may or may allegedly breach the technology rights of others and
incur legal expenses and damages, which, in the aggregate, could be substantial.
-23-
INVESTORS MAY NOT BE ABLE TO ENFORCE JUDGMENTS BY UNITED STATES COURTS AGAINST
US.
We are incorporated in the State of Delaware. However, a majority of our
directors, executive officers and shareholders live outside the United States,
principally in Beijing, China and Hong Kong. Also, all or most of our assets are
located outside the United States. As a result, you may not be able to:
. effect service of process upon us or these persons within the United
States, or
. enforce against us or these persons in United States courts judgments
obtained in United States courts, including judgments relating to the
federal securities laws of the United States.
WE DO NOT INTEND TO PAY AND MAY BE RESTRICTED FROM PAYING DIVIDENDS ON OUR
COMMON STOCK.
We have never declared or paid any dividends on our capital stock and we do not
intend to declare any dividends. We currently intend to retain future earnings
to fund growth. Furthermore, if we decide to pay dividends, foreign exchange and
other regulations in China may restrict our ability to distribute retained
earnings from China or convert these payments from Renminbi into foreign
currencies. In addition, loan agreements and contractual arrangements we enter
into in the future may also restrict our ability to pay dividends.
THE FACT THAT OUR BUSINESS IS CONDUCTED IN BOTH U.S. DOLLARS AND RENMINBI MAY
SUBJECT US TO CURRENCY EXCHANGE RATE RISK DUE TO FLUCTUATIONS IN THE EXCHANGE
RATE BETWEEN THESE TWO CURRENCIES.
Substantially all of our revenues, expenses and liabilities are denominated in
either U.S. dollars or Renminbi. As a result, we are subject to the effects of
exchange rate fluctuations between these currencies. The contracts we enter into
with our customers provide for price adjustments reflecting foreign exchange
fluctuations; however, we cannot guarantee that future contracts will contain
such provisions. As a result of the unitary exchange rate system introduced in
China on January 1, 1994, the official bank exchange rate for conversion of
Renminbi to U.S. dollars experienced a devaluation of approximately 50%. We
report our financial results in U.S. dollars, therefore, any future devaluation
of the Renminbi against the U.S. dollar may have an adverse effect upon our
reported net income.
THE MARKETS IN WHICH WE SELL OUR SERVICES AND PRODUCTS ARE HIGHLY COMPETITIVE
AND WE MAY NOT BE ABLE TO COMPETE EFFECTIVELY.
The information technology services market for Internet infrastructure in China
is new and rapidly changing. Our competitors in the market mainly include
domestic systems integrators such as Suntek and Aotian. Although we are a
leading player in this market, there are many large multinational companies with
substantial, existing information technology operations in other markets in
China, such as IBM and Hewlett-Packard, that have significantly greater
financial, technological, marketing and human resources. Should they decide to
enter the information technology services market for Internet infrastructure,
this could hurt our profitability and erode our market share.
-24-
In the customer management and billing market, we compete with both
international and local software providers. In the online billing segment, we
compete primarily with Portal Software Inc. and Suntek, and in the wireless
billing segment, we compete with more than ten local competitors. The messaging
software sector is highly competitive. Our principal competitors in this sector
are Software.com and Netease. Currently, due in part to a stringent approval
system for providers of wireless billing software in China and competitive
pricing offered by domestic companies, some multinational information technology
companies have been deterred from entering this market. In view of the gradual
deregulation of the Chinese telecommunications industry and China's pending
entry into the WTO, we anticipate the entrance of new competitors into the
customer management and billing software market.
Our competitors, some of whom have greater financial, technical and human
resources than us, 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.
POLITICAL AND ECONOMIC POLICIES OF THE CHINESE GOVERNMENT COULD AFFECT OUR
INDUSTRY IN GENERAL AND OUR COMPETITIVE POSITION IN PARTICULAR.
Since the establishment of the PRC in 1949, the Communist Party has been the
governing political party in China. The highest bodies of leadership are the
Politburo, the Central Committee and the National Party Congress. The State
Council, which is the highest institution of government administration, reports
to the National People's Congress and has under its supervision various
commissions, agencies and ministries, including The Ministry of Information
Industries, the telecommunications regulatory body of the Chinese government.
Since the late 1970s, the Chinese government has been reforming the Chinese
economic system. Although we believe that economic reform and the macroeconomic
measures adopted by the Chinese government have had and will continue to have a
positive effect on the economic development in China, there can be no assurance
that the economic reform strategy will not from time to time be modified or
revised. Such modifications or revisions, if any, could have a material adverse
effect on the overall economic growth of China and investment in the Internet
and the telecommunications industry in China. Such developments could reduce,
perhaps significantly, the demand for our products and services. There is no
guarantee that the Chinese government will not impose other economic or
regulatory controls that would have a material adverse effect on our business.
Furthermore, changes in political, economic and social conditions in China,
adjustments in policies of the Chinese government or changes in laws and
regulations could adversely affect our industry in general and our competitive
position in particular.
THE FAILURE OF CHINA TO GAIN ENTRY INTO THE WTO COULD NEGATIVELY IMPACT THE
CHINESE ECONOMY AND OUR GROWTH.
Failure by China to join the World Trade Organization, as expected, could slow
down China's economic growth and could result in lower than forecasted spending
in the telecommunications sector in China, which in turn could adversely affect
the demand for our products and services from our large customers.
-25-
UNCERTAINTIES WITH RESPECT TO THE CHINESE LEGAL SYSTEM COULD ADVERSELY AFFECT
US.
Our subsidiaries are wholly foreign owned enterprises, which are enterprises
incorporated in China and wholly-owned by foreign investors. They are subject to
laws and regulations applicable to foreign investment in China in general and
laws applicable to wholly foreign owned enterprises in particular. The
legislation and regulations over the past 20 years have significantly enhanced
the protections afforded to various forms of foreign investment in China.
However, since the Chinese legal system is still evolving, the interpretations
of many laws, regulations and rules are not always uniform and enforcement of
these laws, regulations and rules involve uncertainties, which may limit
remedies available to us.
FLUCTUATIONS IN EXCHANGE RATES COULD ADVERSELY AFFECT THE VALUE OF OUR SHARES.
Substantially all our revenues and expenses relating to hardware sales are
denominated in U.S. dollars, and substantially all our revenues and expenses
relating to the service component of our network solutions business and software
business are denominated in Renminbi. Although in general our exposure to
foreign exchange risks should be limited, the value in our shares will be
affected by the foreign exchange rate between the U.S. dollar and the Renminbi
because the value of our business is effectively denominated in Renminbi, while
the shares will be traded in U.S. dollars. Furthermore, a decline in the value
of the Renminbi could reduce the U.S. dollar value of earnings from and our
investment in our subsidiaries in China.
HIGH TECHNOLOGY AND EMERGING MARKET SHARES HAVE HISTORICALLY EXPERIENCED EXTREME
VOLATILITY AND MAY SUBJECT YOU TO LOSSES.
The trading price of our shares may be subject to significant market volatility
due to:
. investor perceptions of us and investments relating to China and Asia;
. developments in the Internet and telecommunications industries;
. variations in our operating results from period to period due to project
timing; and
. announcements of new products or services by us or by our competitors.
In addition, the high technology sector of the stock market frequently
experiences extreme price and volume fluctuations, which have particularly
affected the market prices of many Internet and computer software companies and
which have often been unrelated to the operating performance of these companies.
FUTURE SALES OF SHARES BY OUR COMPANY OR EXISTING SHAREHOLDERS COULD CAUSE THE
MARKET PRICE OF OUR COMMON STOCK TO FALL.
If our stockholders sell substantial amounts of our common stock, including
shares issued upon the exercise of outstanding options and warrants in the
public market, the market price of our common stock could fall. Such sales also
might make it more difficult for us to sell equity or equity-related securities
in the future at a time and price that we deem appropriate.
-26-
A SMALL NUMBER OF SHAREHOLDERS CONTROLS US.
Our seven largest shareholders, Warburg-Pincus Ventures, ChinaVest Group,
Fidelity International and Intel Pacific, Inc., and their affiliates, as well as
Edward Tian, one of our directors, James Ding, our Chief Executive Officer, and
Louis Lau, our Chairman, in the aggregate, control approximately 70% of our
voting stock. As a result, these shareholders are able to control all matters
requiring shareholder approval, including election of directors and approval of
significant corporate transactions, such as a sale of our assets and the terms
of future equity financings. The combined voting power of our large shareholders
could have the effect of delaying or preventing a change in control.
WE ARE SUBJECT TO ANTI-TAKEOVER PROVISIONS THAT COULD PREVENT A CHANGE OF
CONTROL OF ASIAINFO AND PREVENT YOU FROM REALIZING A PREMIUM ON YOUR INVESTMENT.
The board of directors has the authority to issue up to an additional 2,000,000
shares of preferred stock. Further, without any further vote or action on the
part of the stockholders, the board of directors has the authority to determine
the price, rights, preferences, privileges and restrictions of the preferred
stock. This preferred stock, if it is ever issued, may have preference over and
harm the rights of the holders of common stock. Although the issuance of this
preferred stock will provide us with flexibility in connection with possible
acquisitions and other corporate purposes, this issuance may make it more
difficult for a third party to acquire a majority of our outstanding voting
stock.
We currently have authorized the size of our board of directors to be not less
than three nor more than nine directors. The terms of the office of the seven-
member board of directors have been divided into three classes: Class I, whose
term will expire at the annual meeting of the stockholders to be held in 2000;
Class II, whose term will expire at the annual meeting of stockholders to be
held in 2001; and Class III, whose term will expire at the annual meeting of
stockholders to be held in 2002. This classification of the board of directors
may have the effect of delaying or preventing changes in control or management
of AsiaInfo.
We are subject to the provisions of Section 203 of the Delaware General
Corporation Law. In general, the statute prohibits a publicly-held Delaware
corporation from engaging in a "business combination" with an "interested
stockholder" for a period of three years after the date when the person became
an interested stockholder unless, subject to exceptions, the business
combination or the transaction in which the person became an interested
stockholder is approved in a prescribed manner. Generally, a "business
transaction" includes a merger, asset or stock sale, or other transaction
resulting in a financial benefit to the stockholder.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
We are exposed to interest-rate risk primarily associated with our underlying
liabilities. To date, we have not entered into any types of derivatives to
hedge against interest-rate changes, nor do we speculate in foreign currency.
However, we do maintain a significant portion of our cash deposits in U.S.
dollars to avoid currency risk related to Renminbi. A portion of these U.S.
dollar deposits are used to collateralize Renminbi-denominated loans to the
Company from Chinese banks.
Because substantially all 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 service component of its network solutions business and
software business are denominated in Renminbi, we do not have significant
exposure
-27-
to either U.S. dollar or Renminbi. Thus, we do not believe that it is necessary
to enter into derivatives contracts to hedge our exposures to either currency.
We have historically been exposed to market risk related to changing interest
rates. Our primary exposure to interest-rate risk relates to the lines of
credit and short term loans described above under "Liquidity and Capital
Resources."
-28-
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On March 2, 2000, the Company's Registration Statement on Form S-1 covering the
offering of 5,000,000 shares of the Company's common stock (No. 333-93199) was
declared effective. The offering was managed by Morgan Stanley Dean Witter,
Deutsche Banc Alex Brown and Donaldson, Lufkin & Jenrette as representatives of
the several underwriters named in the Registration Statement (the
"Underwriters").
The Underwriters exercised an over-allotment option to purchase an additional
750,000 shares of the Company's common stock. The total price to the public for
the shares offered and sold by the Company was $138,000,000.
The approximate amount of expenses incurred for the Company's account in
connection with the initial public offering are as follows:
Underwriting discounts and commissions $ 9,660,000
Finders' fees --
Expenses paid to or for the Underwriters --
Other Expenses $ 1,731,116
---------------
Total expenses $11,391,116
===============
All of the foregoing expenses were direct or indirect payments to persons other
than (i) directors, officers or their associates; (ii) persons owning ten
percent (10%) or more of the Company's common stock; or (iii) affiliates of the
Company.
The net proceeds of the offering to the Company (after deducting the foregoing
expenses) was approximately $126,608,884. From the effective dates of the
Registration Statement, the net proceeds have been used for the following
purposes:
Construction of plant, building and facilitates --
Purchase and installation of machinery and
equipment $ 2,048,075
Purchase of real estate --
Acquisition of other business (including
transaction costs) --
Repayment of indebtedness --
Working capital --
Temporary investments, including cash and
cash equivalents $124,560,809
Other purposes --
--------------
$126,608,884
==============
All of the foregoing payments were direct or indirect payments to persons other
than (i) directors, officers or their associates; (ii) persons owning ten
percent (10%) or more of the Company's common stock; or (iii) affiliates of the
Company.
-29-
From April 1, 2000 through June 15, 2000, we issued an aggregate of 944,830
unregistered shares of common stock pursuant to the exercise of options issued
under the Company's stock option plans. The weighted average exercise price per
share of these options was $2.23 and the aggregate consideration received by the
Company in connection with these exercises was $2,108,457.50. On June 15, 2000,
AsiaInfo filed a Registration Statement on Form S-8 in respect of its stock
option plans.
None of the foregoing transactions involved any underwriters, underwriting
discounts or commissions, or any public offering, and we believe that each
transaction was exempt from the registration requirements of the Securities Act
of 1933, as amended (the "Securities Act"), by virtue of Rule 701 under the
Securities Act.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
The following exhibits are filed as a part of this Report.
Exhibit Number Description of Exhibits
3.1 Certificate of Incorporation of AsiaInfo, dated June
8, 1998/*/
3.2 By-Laws of AsiaInfo, dated June 8, 1998/*/
3.3 Certificate of Amendment to Certificate of
Incorporation of AsiaInfo, dated August 27, 1999/*/
4.1 Specimen Share Certificate representing AsiaInfo
shares of common stock/*/
10.1 Certificate of Merger of AsiaInfo Holdings, Inc., a
Texas corporation with and into AsiaInfo, a Delaware
corporation, dated June 8, 1998/*/
10.2 Certificate of Merger of HTC Investments, Inc., a
Delaware corporation, with and into AsiaInfo, a
Delaware corporation, dated October 13, 1999/*/
10.3 Agreement and Plan of Merger dated as of June 8, 1998
by and among AsiaInfo, a Delaware corporation and
AsiaInfo Holdings, Inc., a Texas corporation/*/
10.4 1999 Incentive Stock Option Plan approved and adopted
as of June 1, 1999/*/
10.5 Lease of AsiaInfo's headquarters at 18 Baishiqiao
Road, Beijing, dated August 31, 1999/*/
11.1 Statement regarding computation of per share earnings
(included in Note 7 to AsiaInfo's Condensed
Consolidated Financial Statements)
27.1 Financial Data Schedules
/*/ Incorporated by reference to the same numbered exhibit previously
filed with our Registration Statement on Form S-1 (No. 333-93199).
-30-
(b) Reports on form 8-K
None.
Signature
Pursuant to the requirements of the Securities Exchange Act of 1934, AsiaInfo
Holdings, Inc. has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
AsiaInfo Holdings, Inc.
Date: August 14, 2000 By: /s/ Ying Han
--------------------------
Ying Han
Chief Financial Officer
(duly authorized officer
and principal financial officer)
-31-
INDEX TO EXHIBITS
The following exhibits are filed as a part of this Report.
Exhibit Number Description of Exhibits
3.1 Certificate of Incorporation of AsiaInfo, dated June 8,
1998/(*)/
3.2 By-Laws of AsiaInfo, dated June 8, 1998/*/
3.3 Certificate of Amendment to Certificate of Incorporation of
AsiaInfo, dated August 27, 1999/*/
4.1 Specimen Share Certificate representing AsiaInfo shares of
common stock/*/
10.1 Certificate of Merger of AsiaInfo Holdings, Inc., a Texas
corporation with and into AsiaInfo, a Delaware corporation,
dated June 8, 1998/*/
10.2 Certificate of Merger of HTC Investments, Inc., a Delaware
corporation, with and into AsiaInfo, a Delaware corporation,
dated October 13, 1999/*/
10.3 Agreement and Plan of Merger dated as of June 8, 1998 by and
among AsiaInfo, a Delaware corporation and AsiaInfo
Holdings, Inc., a Texas Corporation/*/
10.4 1999 Incentive Stock Option Plan approved and adopted as of
June 1, 1999/*/
10.5 Lease of AsiaInfo's headquarters at 18 Baishiqiao Road,
Beijing, as supplemented, dated August 31, 1999/*/
11.1 Statement regarding computation of per share earnings
(included in Note 7 to AsiaInfo's Condensed Consolidated
Financial Statements)
27.1 Financial Data Schedules
/*/ Incorporated by reference to the same numbered exhibit previously filed
with the Company's Registration Statement on Form S-1 (No. 333-93199).
-32-