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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 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
(State or other jurisdiction of 752506390
incorporation or organization) (I.R.S. Employer Identification No.)
4TH FLOOR, LIGONG SCIENCE & TECHNOLOGY TOWER
11 BAISHIQIAO ROAD, HAIDIAN DISTRICT
BEIJING 100081, CHINA
(Address of principal executive office, including zip code)
Registrant's telephone number, including area code: (8610) 6846-7058
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 |_| No |X|
The number of shares outstanding of the Registrant's common stock as of May 10,
2000 was 38,902,609.
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<PAGE>
ASIAINFO HOLDINGS, INC.
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 2000
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited) Page
a) Condensed Consolidated Statements of Operations
For the three months ended March 31, 2000 and 1999 ....1
b) Condensed Consolidated Balance Sheets
As of March 31, 2000 and December 31, 1999.............2
c) Condensed Consolidated Statements of Cash Flows
For the three months ended March 31, 2000 and 1999.....3
d) Notes to Condensed Consolidated Financial Statements
For the three months ended March 31, 1999..............5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations........................10
Item 3. Quantitative and Qualitative Disclosure About Market Risk....15
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds....................16
Item 6. Exhibits and Reports on Form 8-K.............................17
SIGNATURE.....................................................................18
<PAGE>
Part I. Financial Information
ITEM 1. FINANCIAL STATEMENTS
ASIAINFO HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In US dollars)
Three Months Ended March 31,
-------------------------------
1999 2000
------------ ------------
(unaudited)
Revenues:
Network solutions ....................... $ 3,899,620 $ 21,099,279
Software license ........................ 1,347,813 1,793,026
------------ ------------
Total revenues .......................... 5,247,433 22,892,305
------------ ------------
Cost of revenues:
Network solutions ....................... 3,443,839 20,214,725
Software license ........................ 997 1,798
------------ ------------
Total cost of revenues .................. 3,444,836 20,216,523
------------ ------------
Gross profit ............................. 1,802,597 2,675,782
------------ ------------
Operating expenses:
Sales and marketing ..................... 1,095,326 3,450,672
General and administrative .............. 1,751,042 2,371,444
Research and development ................ 419,177 1,095,754
Amortization of deferred stock
compensation ........................... 588,537 699,091
------------ ------------
Total operating expenses ................ 3,854,082 7,616,961
------------ ------------
Loss from operations .................... (2,051,485) (4,941,179)
------------ ------------
Other income (expense):
Interest income ......................... 157,439 533,741
Interest expense ........................ (109,666) (268,929)
Other income, net ....................... 182,963 81,582
------------ ------------
Total other income, net ................. 230,736 346,394
------------ ------------
Loss before income taxes and
minority interests ...................... (1,820,749) (4,594,785)
Income tax expense ...................... 69,571 43,710
------------ ------------
Loss before minority
interests .............................. (1,890,320) (4,638,495)
Minority interests in loss of
consolidated subsidiaries .............. 31,549 --
------------ ------------
Net loss ................................. $ (1,858,771) $ (4,638,495)
============ ============
Net loss per share:
Basic ................................... $ (0.14) $ (0.16)
============ ============
Diluted ................................. $ (0.14) $ (0.16)
============ ============
Shares used in computation:
Basic ................................... 13,683,242 28,821,413
============ ============
Diluted ................................. 13,683,242 28,821,413
============ ============
See notes to condensed consolidated financial statements.
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ASIAINFO HOLDINGS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In US dollars)
<TABLE>
<CAPTION>
December 31, March 31,
------------- -------------
1999 2000
------------- -------------
(unaudited)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents ......................... $ 25,403,884 $ 145,246,466
Restricted cash ................................... 12,189,794 14,222,153
Accounts receivable, trade - net .................. 21,928,036 31,965,822
Inventories ....................................... 2,908,426 5,887,755
Advance to suppliers .............................. 228,323 1,141,388
Other receivables ................................. 1,346,884 1,256,433
Deferred income taxes ............................. 25,117 22,348
Deferred offering costs ........................... 401,607 --
Prepaid expenses and other current assets ......... 340,502 445,063
------------- -------------
Total current assets ............................ 64,772,573 200,187,428
Property, plant, and equipment--net ................. 2,183,545 2,232,824
Goodwill, at cost less accumulated amortization ..... 4,302,633 4,038,302
Deferred income taxes ............................... 168,228 127,287
------------- -------------
Total Assets .................................... $ 71,426,979 206,585,841
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Short-term bank loans ............................. $ 9,698,882 $ 13,516,452
Accounts payable .................................. 11,867,188 16,556,442
Deferred revenue .................................. 495,470 2,523,457
Other payables .................................... 360,968 1,244,330
Accrued employee benefit .......................... 4,810,650 6,166,078
Accrued expenses .................................. 1,930,145 1,774,458
Other taxes payable ............................... 2,295,030 1,488,948
Income taxes payable .............................. 180,475 164,524
------------- -------------
Total current liabilities ....................... 31,638,808 43,434,689
------------- -------------
Commitments and contingencies (Note 7)
Stockholders' Equity:
Convertible preferred stock ....................... 47,913 --
Common stock, 50,000,000 shares authorized, $0.01
par value, shares issued and outstanding: December
31, 1999, 25,532,144; March 31, 2000, 38,902,309 . 255,321 389,023
Additional paid-in capital ........................ 46,118,424 173,307,540
Deferred stock compensation ....................... (3,865,373) (3,166,282)
Accumulated deficit ............................... (2,764,854) (7,403,349)
Accumulated other comprehensive (loss) income ..... (3,260) 24,220
------------- -------------
Total stockholders' equity ...................... 39,788,171 163,151,152
------------- -------------
Total Liabilities and Stockholders' Equity ...... $ 71,426,979 $ 206,585,841
============= =============
</TABLE>
See notes to condensed consolidated financial statements.
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ASIAINFO HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In US dollars)
Three Months Ended March 31,
-----------------------------
1999 2000
------------ ------------
(unaudited)
Cash flows from operating activities:
Net loss .................................... $ (1,858,771) $ (4,638,495)
Adjustments to reconcile net loss to
net cash (used in) provided
by operating activities:
Depreciation ................................ 214,353 243,923
Amortization of goodwill .................... 23,412 264,331
Amortization of deferred stock
compensation ............................... 588,537 699,091
Deferred income taxes ....................... 52,540 43,710
Minority interest in loss of consolidated
subsidiaries ............................... (31,549) --
Gain on disposal of property, plant,
and equipment .............................. 25,619 5,162
Bad debt expense ............................ 101,470 (76,470)
Changes in operating assets and
liabilities:
Restricted cash ............................ -- (2,000,000)
Accounts receivable ........................ 9,777,025 (9,961,317)
Inventories ................................ 296,550 (2,979,329)
Advance to suppliers ...................... (255,306) (913,065)
Amount due from a related party ............ 781,686 --
Other receivables .......................... (1,467,963) 2,951
Prepaid expenses and other current
assets .................................... (275,586) (202,588)
Accounts payable ........................... (7,132,568) 4,689,254
Deferred revenue ........................... (2,326,186) 2,027,987
Other payables ............................. 3,525,487 147,015
Accrued employee benefit ................... (2,118,412) 1,355,428
Accrued expenses ........................... (621,119) (155,687)
Other taxes payable ........................ 373,365 (806,082)
Income taxes payable ....................... (275,436) (15,951)
------------ ------------
Net cash used in operating activities ........ (602,852) (12,270,132)
------------ ------------
Cash flows from investing activities:
Purchases of property, plant, and
equipment .................................. (75,970) (298,164)
------------ ------------
Net cash used in investing activities ........ (75,970) (298,164)
------------ ------------
See notes to condensed consolidated financial statements.
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ASIAINFO HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS--(Continued)
(In US dollars)
Three Months Ended March 31,
------------------------------
1999 2000
------------- -------------
(unaudited)
Cash flows from financing activities:
Increase in short-term bank loans ........... -- $ 12,495,011
Repayment of short-term bank loans .......... -- (8,678,033)
Net proceeds on issuance of Common
stock in initial public offering .......... -- 127,851,874
Proceeds on exercise of stock options ....... -- 746,313
Warrants exercised .......................... -- 200
------------- -------------
Net cash provided by financing activities .... -- 132,415,365
------------- -------------
Net (decrease) increase in cash and cash
equivalents: ................................ (678,822) 119,847,069
Cash and cash equivalents at beginning
of year ..................................... 9,749,374 25,403,884
Effect of exchange rate changes on cash
and cash equivalents ........................ 34,694 (4,487)
------------- -------------
Cash and cash equivalents at end of
year ........................................ $ 9,105,246 145,246,466
============= =============
Supplemental cash flow information:
Cash paid during the period:
Interest .................................... $ 111,013 203,569
Income taxes ................................ 150,000 --
============= =============
Noncash investing and financing activities:
Deferred stock compensation ................. $ 1,030,018 --
============= =============
See notes to condensed consolidated financial statements.
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<PAGE>
ASIAINFO HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
Three Months Ended March 31, 1999 and 2000
(In US dollars)
1. GENERAL AND BASIS OF PREPARATIONS
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 March 31, 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 ended March 31, 1999
and 2000 are included. All such adjustments are accruals of a normal and
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 March 31, 2000 and
the reported amounts of revenues and expenses during the three months ended
March 31, 1999 and 2000. Actual results could differ from those estimates.
Revenue in excess of billings on service contracts is recorded as unbilled
receivables and included in trade accounts receivable, and amounted to
$11,945,082 at December 31, 1999 and $12,981,541 at March 31, 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 2000 the
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balance of trade account receivables of $9,982,954 and $18,984,281,
respectively, represented amounts billed but not yet collected. All billed and
unbilled amounts are expected to be collected within 1 year.
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 March 31, 2000 was US$1.00=RMB8.2788. 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 or
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. This report should be read in conjunction
with such financial statements.
2. COMPREHENSIVE INCOME
The Components of Comprehensive loss for the periods presented are as follows:
Three Months Ended March 31,
----------------------------
1999 2000
----------- -----------
(unaudited)
Net loss .................................. $(1,858,771) $(4,638,495)
Change in cumulative translation adjustment 2,893 27,480
----------- -----------
Comprehensive loss ........................ $(1,855,878) $(4,611,015)
=========== ===========
3. SHORT-TERM BANK LOANS
As of March 31, 2000, the Company had total short-term credit facilities
totalling $19.2 million expiring in April, 2000 and March, 2001, for working
capital purposes. At March 31, 2000 funds available under unused short-term
credit facilities were $10 million. The loans carry interest ranging from
approximately 5.85% 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
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31, 1999 and $14.2 million of March 31, 2000, which are presented as restricted
cash in the condensed consolidated balance sheets.
4. 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 of $69,571 and $43,710 for the three months ended March 31, 1999 and
2000, respectively, represent deferred income taxes.
5. 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 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 Company's
outstanding preferred stock automatically converted into common stock.
WARRANTS TO PURCHASE COMMON STOCK
During the three months ended March 31, 2000 warrants to purchase 20,000 shares
of common stock at $0.01 per share were exercised and at March 31, 2000,
warrants to purchase 20,000 shares of common stock were outstanding.
STOCK OPTIONS
Option activity to 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....................... 1,991,400 23.22
Cancelled..................... (217,476) 2.58
Exercised..................... (647,720) 1.09
---------- -----
Outstanding, March 31, 2000... 10,018,015 $7.14
========== =====
6. NET LOSS PER SHARE
The following is a reconciliation of the numerators and denominators of the
basic and diluted net loss per share computations:
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Three Months Ended March 31,
------------------------------
1999 2000
------------ ------------
(unaudited)
Net loss (numerator):
Net loss
Basic and diluted ........................ $ (1,858,771) $ (4,638,495)
============ ============
Shares (denominator):
Weighted average
common stock Outstanding ................. 14,669,002 28,821,413
Outstanding subject to repurchase ........ 985,760 --
------------ ------------
Basic .................................... 13,683,242 28,821,413
============ ============
Diluted .................................... 13,683,242 28,821,413
============ ============
Net loss per share:
Basic .................................... $ (0.14) $ (0.16)
Diluted .................................. $ (0.14) $ (0.16)
For the three months ended March 31, 1999 and 2000, the Company had securities
outstanding which could potentially dilute basic 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:
Three Months Ended
March 31,
-----------------------
1999 2000
---------- ----------
(unaudited)
Convertible preferred stock ................ 2,160,864 --
Shares of common stock subject to repurchase 1,076,760 --
Outstanding options ........................ 7,798,000 10,018,015
Warrants ................................... 9,489,224 20,000
---------- ----------
20,524,848 10,038,015
========== ==========
7. COMMITMENTS
PERFORMANCE OPTIONS
In connection with the acquisition of AI Zhejiang, the Company has agreed to
grant 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 Zhejiang'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
Zhejiang's EBIT for 2000.
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8. SEGMENT AND GEOGRAPHIC OPERATING INFORMATION
Information on the Company's operating segments is as follows:
Three Months Ended March 31,
----------- ---------------------------------------
1999 2000
----------- ---------------------------------------
Company
excluding
AI Zhejiang AI Zhejiang Total
Revenues net of hardware
cost:
Network solutions net of
hardware cost ......... $ 1,725,927 $ 3,558,135 $ 120,049 $ 3,678,184
Software license ....... 1,347,813 1,399,695 393,331 1,793,026
----------- ----------- ----------- -----------
Consolidated revenues
net of hardware cost .. 3,073,740 4,957,830 513,380 5,471,210
Consolidated cost of
sales net of hardware
cost .................. 1,271,143 2,477,855 317,573 2,795,428
----------- ----------- ----------- -----------
Consolidated gross
profit ................ $ 1,802,597 $ 2,479,975 $ 195,807 $ 2,675,782
=========== =========== =========== ===========
Gross profit:
Network Solutions ...... $ 455,781 $ 1,080,299 $ (195,745) $ 884,554
Software license ....... 1,346,816 1,399,676 391,552 1,791,228
----------- ----------- ----------- -----------
Consolidated gross
profit ................ $ 1,802,597 $ 2,479,975 $ 195,807 $ 2,675,782
=========== =========== =========== ===========
Income (loss) from
operations:
Network Solutions ...... $(2,096,862) $(3,333,275) $ (282,600) $(3,615,875)
Software license ....... $ 45,377 (1,207,699) (117,605) (1,325,304)
----------- ----------- ----------- -----------
Consolidated loss from
operations ............ $(2,051,485) $(4,540,974) $ (400,205) $(4,941,179)
=========== =========== =========== ===========
For the three months ended March 31, 1999 and 2000, all of the Company's
revenues have been derived from sales to customers in the PRC. Revenues are
attributed to the country based on the installation of hardware and performance
of system integration work. Also, as of December 31, 1999 and March 31, 2000,
99% of the Company's long-lived assets are located in the PRC.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
Except for historical information, the discussion in this report contains
forward-looking statements that involve risks and uncertainties. Such
forward-looking statements include, among others, those statements including the
words, "expects", "anticipates", "intends", "believes" and similar language. The
Company's actual results could differ materially from those discussed herein.
Factors that could cause or contribute to such differences include, but are not
limited to, the risk factors discussed below under the heading "Factors
Affecting Our Business Condition."
OVERVIEW
AsiaInfo Holdings, Inc. (together with its consolidated subsidiaries "AsiaInfo"
or the "Company") is a leading provider of Internet-related, IT professional
services and software products in China. The Company offers total network
solutions and proprietary software to meet its customers' Internet and
telecommunications infrastructure and operating needs. AsiaInfo offers these
services in the context of total solutions, which include systems integration
and customization of its proprietary and third party software. The Company has
historically sold its software products as a part of its network solutions
projects, but it is increasingly selling these products on a stand-alone basis.
AsiaInfo commenced operations in 1993 as an Internet content provider. The
Company moved its operations from Texas to China in 1995 and began generating
significant network solutions revenues in 1996 and significant software product
revenues in 1998. While the Company sources hardware for its customers through
its U.S. parent company, AsiaInfo Holdings, Inc., it conducts the bulk of its
business through its two wholly-owned operating subsidiaries, each of which is a
Chinese company. AsiaInfo expects its business to continue to evolve as the
Internet and telecommunications markets in China change and expand. In
particular, it is investing substantial personnel and financial resources to
expand its software business, which it expects will account for a significantly
greater portion of the Company's revenues and operating expenses in the future.
For these reasons, the Company's historical financial data may not be a
meaningful basis upon which to evaluate AsiaInfo and its prospects.
On April 5, 1999, AsiaInfo acquired AI Zhejiang, a leading Chinese producer of
wireless customer management and billing software. The acquisition reflects
AsiaInfo's strategy of expanding the scope and size of its software operations.
AI Zhejiang was one of the earliest entrants in the market for wireless customer
management and billing software. AsiaInfo 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 the Company's financial
statements for the year ended December 31, 1999. For historical financial
information regarding AI Zhejiang, see its separate financial statements as of
and for the years ended December 31, 1997 and 1998 included in the Company's
Registration Statement on Form S-1 (No.333-93199), previously filed with the
Commission.
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Most of the Company's revenues are derived from customers orders under separate
binding contracts for hardware and systems integration services. These contracts
constitute the Company's backlog at any given time. Revenue for hardware, system
integration services and software products is recognized during the course of
the project. The Company has generated a significant portion of its historical
revenues from a limited number of customers, particularly various provincial
entities of the China Telecom system and China Unicom. At December 31, 1999,
approximately 87% of the Company's backlog was attributable to orders placed by
various entities of the China Telecom system and China Unicom.
The Company generates revenues from its 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. The Company expects that
software products will account for a growing portion of its future revenues.
Network solutions revenues consist of hardware sales for equipment procured by
the Company on behalf of its customers from hardware vendors and services for
planning, design, systems integration, training and customization of the
Company's proprietary and third party software. Network solutions revenues also
include fees that AsiaInfo earns under service contracts to maintain and upgrade
installed software. Software license revenues consist of fees received from
customers for licenses to use AsiaInfo's products in perpetuity up to a
specified maximum number of users. Substantially all of the Company's software
revenues are derived from its IP billing, wireless customer management and
billing, and messaging software products.
RESULTS OF OPERATIONS
REVENUES
Total revenues increased 336% to $22.9 million for the quarter ended March 31,
2000, from $5.2 million for the quarter ended March 31, 1999. Network solutions
accounted for $17.2 million of this increase, primarily due to a greater number
of projects in progress. The Company's 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.
Software revenues increased 33% to $1.8 million for the quarter ended March 31,
2000, from $1.3 million for the same period in 1999. The growth in software
revenues reflected greater demand for the Company's products and faster
development and installation of those products. AI Zhejiang, which was acquired
by us in April 1999, contributed revenues of $530,000, 74% of which were
software revenues.
COST OF REVENUES
The Company's cost of revenues increased 487% to $20.2 million for the quarter
from $3.4 million for the quarter ended March 31, 1999, primarily due to the
overall expansion of the Company's business and
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increased costs for the Company's systems integration and design engineering
personnel.
OPERATING EXPENSES
Operating expenses increased 98% to $7.6 million for the quarter ended March 31,
2000, from $3.9 million for the quarter ended March 31, 1999, primarily due to
the overall expansion of the Company's business, enhanced investments in sales,
marketing and development personnel and activities, and costs associated with
the acquisition of AI Zhejiang. Of this amount, AI Zhejiang contributed
operating expenses of $596,000. Operating expenses as a percentage of revenues
decreased from 73% to 33% primarily because the Company's revenues have
increased at a faster rate than its operating expenses.
Sales and marketing expenses increased 215% to $3.5 million for the quarter
ended March 31, 2000, from $1.1 million for the quarter ended March 31, 1999,
primarily as a result of the implementation of new marketing activities, the
hiring of additional personnel, higher compensation levels and the effect of the
acquisition of AI Zhejiang.
Research and development expenses increased 161% to $1.1 million for the quarter
ended March 31, 2000, from $0.4 million for the quarter ended March 31, 1999,
primarily due to increased spending associated with the expansion of the
Company's software business, the hiring of additional personnel, higher
compensation levels and the effect of the acquisition of AI Zhejiang.
General and administrative expenses increased 35% to $2.4 million for the
quarter ended March 31, 2000, from $1.8 million for the quarter ended March 31,
1999, in part because of a $264,000 amortization charge resulting from the
acquisition of AI Zhejiang. The increase in general and administrative expenses
was lower than the increase in other operating expenses as a result of the
Company's cost control efforts in this area.
OTHER INCOME AND EXPENSES
Other income and expenses, consisting primarily of net interest income and
expense, increased from income of $0.2 million for the quarter ended March 31,
1999, to income of $0.3 million for the quarter ended March 31, 2000. Interest
income rose 239% to $534,000, compared to $157,000 for the same period in 1999,
due to the increase in the Company's total U.S. dollar denominated deposits as a
result of its initial public offering. Interest expense rose 145% to $269,000,
compared to $110,000 for the same period in 1999, due to the Company's increased
Renminbi denominated bank borrowings.
OTHER
Income taxes decreased from a tax expense of approximately $70,000 for the
quarter ended March 31, 1999, to a tax expense of approximately $44,000 for the
quarter ended March 31, 2000 and represented deferred income taxes arising from
differences in the recognition of certain assets and liabilities for tax and
financial reporting purposes.
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<PAGE>
NET INCOME (LOSS)
The net loss for the quarter ended March 31, 2000 was $4.6 million, or $0.16 per
share, compared to $1.9 million, or $0.14 per share for the same period in 1999.
This increase in net loss is attributable to the Company's increased investments
in research and development and sales and marketing. These investments are part
of AsiaInfo's strategy to increase its opportunities in China's fast growing
internet market.
LIQUIDITY AND CAPITAL RESOURCES
AsiaInfo's capital requirements relate primarily to financing working capital
requirements for hardware sales and costs associated with the expansion of the
business, such as research and development and sales and marketing expenses.
The Company has historically financed its working capital and other financing
requirements through careful management of its network solutions billing cycle,
shareholder investments and, to a limited extent, bank loans. However, the
Company anticipates that its working capital requirements will increase in the
future.
In 1997, AsiaInfo raised working capital through the issuance of $14.0 million
of convertible preferred stock in a private placement. In August 1999, AsiaInfo
raised an additional $20.0 million through the issuance of additional shares of
convertible preferred stock. In March 2000, the Company completed an initial
public offering of its common stock, from which it derived net proceeds of
approximately $127 million. Total contributed shareholder capital at March 31,
2000 was $170.5 million.
The Company has a $10.0 million working capital line of credit with the Bank of
China's New York branch and lines of credit totalling $9.2 million with local
Chinese banks in the PRC, secured by bank deposits of $9.9 million. The Company
has borrowed $9.2 million under these lines of credit. As of March 31, 2000, the
Company had available a total of $10.0 million under these lines. In addition,
as of March 31, 2000 AsiaInfo had borrowings of $4.3 million, secured by bank
deposits of an equal amount, from local banks. The lines of credit and loans
carry interest ranging from 5.85% to 7.03% per annum and are repayable within
one year.
As the Company's business continues to expand, it expects that its working
capital requirements will grow and that it will need to raise additional working
capital. AsiaInfo currently anticipates that the net proceeds of its initial
public offering, together with available funds and cash flows generated from
operations and the proceeds of its private placements, will be sufficient to
meet its anticipated needs for working capital, capital expenditures and
business expansion through 2000. Thereafter, the Company may need to raise
additional funds. AsiaInfo 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 its business otherwise grows more rapidly than it currently predicts. The
Company plans to raise additional funds, if necessary, through new issuances of
shares of its equity securities,
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<PAGE>
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 AsiaInfo decides to pay dividends to its shareholders, its ability
to pay dividends will depend in part on its ability to receive dividends from
its operating subsidiaries in China. Foreign exchange and other regulations in
China may restrict the Company's ability to distribute retained earnings from
its operating subsidiaries in China or convert those payments from Renminbi into
foreign currencies.
RISK FACTOR
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:
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
<PAGE>
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 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. 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:
o fluctuation in demand for our products and services as a result of
budgetary cycles of our large customers, particularly state-owned
enterprises;
<PAGE>
o the reduction, delay, interruption or termination of one or more
significant infrastructure projects; and
o 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.
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 following
this offering 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. There are no assurances that we can regain or sustain
profitability or avoid net losses in the future. We expect to increase our
operating expenses as our business grows. For example, we intend to more than
double our software research and development budget and significantly increase
software related headcount over the next year. 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.
<PAGE>
MANAGEMENT'S ABILITY TO IMPLEMENT ADEQUATE CONTROL SYSTEMS WILL BE CRITICAL TO
MANAGE SUCCESSFULLY OUR FUTURE GROWTH.
We have been expanding our operations rapidly, both in size and scope, in recent
years. Our growth places a significant strain on our management systems and
resources. Our ability to successfully offer our products 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 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
<PAGE>
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.
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. Since
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
<PAGE>
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 and intend to increasingly license technology from third parties.
As we introduce services that require new technology, we will probably need to
license additional third party technology. We cannot provide assurance 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.
YEAR 2000 ISSUES PRESENT TECHNOLOGICAL RISKS WHICH COULD EXPOSE US TO
LIABILITIES AND CAUSE DISRUPTION TO OUR SOFTWARE OR INSTALLED SYSTEMS AND HURT
SALES OF OUR SOFTWARE PRODUCTS.
Year 2000 problems occur when computer systems and hardware and software
products cannot distinguish 21st century dates from 20th century dates. This may
result in software failures or the creation of erroneous results. In our network
solution business, we integrate hardware from third party vendors and sell
software products from third party licensors as well as our proprietary software
products. Our proprietary software products sold on a stand-alone basis interact
directly and indirectly with a number of other hardware and software systems.
Despite investigation and testing by us, the systems installed by us and our
proprietary software may contain errors or defects associated with Year 2000
date functions. We may not be able to identify all Year 2000 failures in
hardware and software products supplied by third party vendors or in our
proprietary software products because not all failures are within the scope of
these tests.
Any errors or defects relating to Year 2000 date functions that affect the
operation of our software could result in:
o delay or loss of revenue;
<PAGE>
o cancellation of customer contracts;
o diversion of development resources;
o damage to our reputation;
o increased service and warranty costs;
o and litigation costs.
In addition, we use multiple software systems for our internal business
purposes, including accounting, human resources, email, engineering development
and testing tools, customer service and support, professional services and sales
tracking applications. Any Year 2000 failures in our internal system could cause
business disruption and hurt our reputation.
While we have experienced no Year 2000 failures or errors to date since Year
2000 failures can be associated with any dates throughout year 2000, we expect
our Year 2000 risks to continue through the end of 2000.
INVESTORS MAY NOT BE ABLE TO ENFORCE JUDGMENTS BY UNITED STATES COURTS AGAINST
US.
AsiaInfo is incorporated in the State of Delaware. However, a majority of
AsiaInfo's 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:
o effect service of process upon us or these persons within the United
States, or
o 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
<PAGE>
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%. Since we report our financial
results in U.S. dollars, any future devaluation of the Renminbi against the U.S.
dollar may have an adverse effect upon our reported net income.
RISKS RELATING TO THE INDUSTRY
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.
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. ("Portal") 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, ECONOMIC AND REGULATORY RISKS
POLITICAL AND ECONOMIC POLICIES OF THE CHINESE GOVERNMENT COULD AFFECT OUR
INDUSTRY IN GENERAL AND OUR COMPETITIVE POSITION IN PARTICULAR.
<PAGE>
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 WTO 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.
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 of your investment
<PAGE>
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.
RISKS RELATING TO THE SHARES
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:
o investor perceptions of us and investments relating to China and Asia;
o developments in the Internet and telecommunications industries;
o variations in our operating results from period to period due to project
timing; and
o 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.
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 will be 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
of AsiaInfo.
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
<PAGE>
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.
AsiaInfo currently has authorized the size of its board 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.
-14-
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
AsiaInfo is exposed to interest-rate risk primarily associated with its
underlying liabilities. To date, the Company has not entered into any types of
derivatives to hedge against interest-rate changes, nor does it speculate in
foreign currency. However, the Company does maintain a significant portion of
its cash deposits in U.S. dollars in order 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 AsiaInfo's revenues and expenses relating to
hardware sales are denominated in U.S. dollars, and substantially all of
AsiaInfo's revenues and expenses relating to the service component of its
network solutions business and software business are denominated in Renminbi,
the Company does not have significant exposure to either U.S. dollar or
Renminbi. Thus, the Company does not believe that it is necessary to enter into
derivatives contracts to hedge its exposures to either currency.
AsiaInfo has historically been exposed to market risk related to changing
interest rates. The Company's primary exposure to interest-rate risk relates to
the lines of credit and short term loans described above under "Liquidity and
Capital Resources".
-15-
<PAGE>
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 --
Purchase of real estate --
Acquisition of other business (including
transaction costs) --
Repayment of indebtedness --
Working capital --
Temporary investments, including cash and cash
equivalents $126,608,884
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.
-16-
<PAGE>
Upon the closing of the Company's initial public offering in March 2000, all
outstanding shares of Series A Convertible Preferred Stock and Series B
Convertible Preferred Stock were automatically converted into approximately
6,952,153 shares of the Company's common stock.
From January 1, 2000 through March 31, 2000, the Company issued unregistered
securities to a limited number of persons as described below:
1. On February 16, 2000, the Company issued 20,000 shares of common stock
pursuant to the exercise of warrants, at an exercise price of $0.01 per
share.
2. On March 1, 2000, the Company issued 292 shares at a deemed issue price of
$23.97 per share in exchange for services rendered by a consultant.
3. From January 1, 2000 through March 31, 2000, the Company issued an
aggregate of 647,720 shares of common stock pursuant to the exercise of
options issued under the Company's 1995, 1996 and 1998 stock option plans.
The weighted average exercise price per share of these options was $1.09
and the aggregate consideration received by the Company in connection with
these exercises was $706,225.
None of the foregoing transactions involved any underwriters, underwriting
discounts or commissions, or any public offering, and the Company believes that
each transaction was exempt from the registration requirements of the Securities
Act of 1933, as amended, by virtue of Section 4(2) thereof, Regulation D or
Regulation S promulgated thereunder or Rule 701 pursuant to compensatory benefit
plans and contracts relating to compensation as provided under such Rule 701. In
certain circumstances, the recipients in such transactions represented their
intention to acquire the securities for investment only and not with a view to
or for sale in connection with any distribution thereof, and appropriate legends
were affixed to the share certificates and instruments issued in such
transactions. All recipients had adequate access, through their relationships
with the Company, to information about the Company.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
The following exhibits are filed as a part of this Report.
Exhibit Description
Number of Exhibits
3.1 Certificate of Incorporation of the Company, dated June
8, 1998*
3.2 By-Laws of the Company, dated June 8, 1998*
3.3 Certificate of Amendment to Certificate of Incorporation
of the Company, dated August 27, 1999*
4.1 Specimen Share Certificate representing the Company's
shares of common stock*
10.1 Certificate of Merger of AsiaInfo Holdings,
-17-
<PAGE>
Inc., a Texas corporation with and into the Company, a
Delaware corporation, dated June 8, 1998*
10.2 Certificate of Merger of HTC Investments, Inc., a
Delaware corporation, with and into the Company, a
Delaware corporation, dated October 13, 1999*
10.3 Agreement and Plan of Merger dated as of June 8, 1998 by
and among the Company, 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 the Company's headquarters at 11 Baishiqiao
Road, Beijing, as supplemented, dated August 31, 1999*
11.1 Statement regarding computation of per share earnings
(included in Note 6 to the Company'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).
(b) Reports on form 8-K
None.
Signature
Pursuant to the requirements of the Securities Exchange Act of 1934, the Company
has duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
AsiaInfo Holdings, Inc.
Date: May 15, 2000 By: /s/Ying Han
----------------------------------
Chief Financial Officer
(duly authorized officer
and principal financial officer)
-18-
<PAGE>
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 the Company, dated June 8,
1998*
3.2 By-Laws of the Company, dated June 8, 1998*
3.3 Certificate of Amendment to Certificate of Incorporation of
the Company, dated August 27, 1999*
4.1 Specimen Share Certificate representing the Company's shares
of common stock*
10.1 Certificate of Merger of AsiaInfo Holdings, Inc., a Texas
corporation, with and into the Company, a Delaware
corporation, dated June 8, 1998*
10.2 Certificate of Merger of HTC Investments, Inc., a Delaware
corporation, with and into the Company, a Delaware
corporation, dated October 13, 1999*
10.3 Agreement and Plan of Merger dated as of June 8, 1998 by and
among the Company, 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 the Company's headquarters at 11 Baishiqiao Road,
Beijing, as supplemented, dated August 31, 1999*
11.1 Statement regarding computation of per share earnings
(included in Note 6 to the Company'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).
-19-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF ASIAINFO HOLDINGS, INC. FOR THE
PERIOD ENDED MARCH 31, 2000 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
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