FORM 10-Q
| x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the quarterly period ended September 30, 2004
OR
| o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the transition period from to
Commission File Number 000-30698
| Cayman Islands (State or other jurisdiction of incorporation or organization) |
52-2236363 (I.R.S. Employer Identification Number) |
Room 1802, United Plaza
1468 Nan Jing Road West
Shanghai 200040, China
(86-21) 6289 5678
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 o
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes x No o
The number of shares outstanding of the registrant’s ordinary shares as of October 30, 2004 was 50,477,694.
SINA CORPORATION
INDEX
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| EXHIBIT 10.1 | ||||||||
| EXHIBIT 31.1 | ||||||||
| EXHIBIT 31.2 | ||||||||
| EXHIBIT 32.1 | ||||||||
| EXHIBIT 32.2 | ||||||||
2
PART I UNAUDITED FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
SINA CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEET
| September 30, | December 31, | |||||||
| 2004 |
2003 |
|||||||
| (unaudited) | (audited) | |||||||
| (in U.S. dollars, in thousands) | ||||||||
ASSETS |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 115,247 | $ | 158,148 | ||||
Short-term investments |
128,316 | 69,016 | ||||||
Accounts receivable, net of allowances for doubtful accounts of
$1,670,000 and $1,577,000, respectively |
42,879 | 17,606 | ||||||
Deferred tax assets |
907 | 907 | ||||||
Prepaid expenses and other current assets |
10,625 | 4,579 | ||||||
Total current assets |
297,974 | 250,256 | ||||||
Investment in Sun Media Group |
3,948 | 6,793 | ||||||
Property and equipment, net of accumulated depreciation of
$17,789,000 and $13,719,000, respectively |
14,539 | 8,646 | ||||||
Long-term investments |
4,511 | 2,085 | ||||||
Intangible assets, net of accumulated amortization of
$8,638,000 and $6,187,000 , respectively |
14,259 | 569 | ||||||
Goodwill |
33,085 | 18,091 | ||||||
Other assets |
2,936 | 3,457 | ||||||
Total assets |
$ | 371,252 | $ | 289,897 | ||||
LIABILITIES AND SHAREHOLDERS’ EQUITY |
||||||||
Current liabilities: |
||||||||
Accounts payable |
$ | 2,704 | $ | 1,147 | ||||
Accrued liabilities |
34,644 | 27,442 | ||||||
Income taxes payable |
3,566 | 1,801 | ||||||
Total current liabilities |
40,914 | 30,390 | ||||||
Convertible Debt |
100,000 | 100,000 | ||||||
Other long-term liabilities |
2,315 | — | ||||||
Total liabilities |
143,229 | 130,390 | ||||||
Commitments and contingencies (Note 14) |
||||||||
Shareholders’ equity: |
||||||||
Ordinary Shares: $0.133 par value; 150,000,000 shares
authorized; 50,412,000 and 48,627,000 shares issued
and outstanding |
6,708 | 6,471 | ||||||
Additional paid-in capital |
255,326 | 236,222 | ||||||
Ordinary shares subject to subsequent issuance: 63,828 and
177,000 shares |
2,400 | 1,349 | ||||||
Accumulated deficit |
(34,491 | ) | (83,054 | ) | ||||
Accumulated other comprehensive loss: |
||||||||
Unrealized loss on investment in marketable securities |
(1,931 | ) | (1,510 | ) | ||||
Cumulative translation adjustments |
11 | 29 | ||||||
Total shareholders’ equity |
228,023 | 159,507 | ||||||
Total liabilities and shareholders’ equity |
$ | 371,252 | $ | 289,897 | ||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
3
SINA CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
| Three months ended | Nine months ended | |||||||||||||||
| September 30 |
September 30 |
|||||||||||||||
| 2004 |
2003 |
2004 |
2003 |
|||||||||||||
Net revenues: |
||||||||||||||||
Advertising |
$ | 18,516 | $ | 11,441 | $ | 47,146 | $ | 28,234 | ||||||||
Non-advertising |
33,989 | 20,473 | 95,942 | 47,781 | ||||||||||||
| 52,505 | 31,914 | 143,088 | 76,015 | |||||||||||||
Cost of revenues: |
||||||||||||||||
Advertising |
7,144 | 3,772 | 16,437 | 9,863 | ||||||||||||
Non-advertising |
9,711 | 5,790 | 27,241 | 13,912 | ||||||||||||
| 16,855 | 9,562 | 43,678 | 23,775 | |||||||||||||
Gross profit |
35,650 | 22,352 | 99,410 | 52,240 | ||||||||||||
Operating expenses: |
||||||||||||||||
Sales and marketing |
10,646 | 5,616 | 26,816 | 15,169 | ||||||||||||
Product development |
3,034 | 1,761 | 7,151 | 4,727 | ||||||||||||
General and administrative |
4,065 | 2,980 | 11,220 | 8,464 | ||||||||||||
Amortization of intangible assets |
1,041 | 415 | 2,451 | 1,334 | ||||||||||||
Write-off of intangible assets |
— | — | — | 903 | ||||||||||||
Total operating expenses |
18,786 | 10,772 | 47,638 | 30,597 | ||||||||||||
Income from operations |
16,864 | 11,580 | 51,772 | 21,643 | ||||||||||||
Interest income |
1,296 | 845 | 3,596 | 1,901 | ||||||||||||
Amortization of convertible debt issuance cost |
(172 | ) | (170 | ) | (514 | ) | (170 | ) | ||||||||
Net loss on investments |
(1,675 | ) | — | (1,616 | ) | — | ||||||||||
Loss on equity investments |
(1,082 | ) | (175 | ) | (2,171 | ) | (797 | ) | ||||||||
Income before income taxes |
15,231 | 12,080 | 51,067 | 22,577 | ||||||||||||
Provision for income taxes |
(728 | ) | (423 | ) | (2,504 | ) | (423 | ) | ||||||||
Net income |
$ | 14,503 | $ | 11,657 | $ | 48,563 | $ | 22,154 | ||||||||
Basic net income per share |
$ | 0.29 | $ | 0.24 | $ | 0.98 | $ | 0.47 | ||||||||
Diluted net income per share |
$ | 0.27 | $ | 0.21 | $ | 0.86 | $ | 0.42 | ||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
4
SINA CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY
| Ordinary | ||||||||||||||||||||||||||||||||
| Shares | Accumulated | |||||||||||||||||||||||||||||||
| Ordinary Shares |
Additional Paid-in |
Subject to Subsequent |
Accumulated | Other Comprehensive |
Total Shareholders’ |
Comprehensive | ||||||||||||||||||||||||||
| Shares |
Amount |
Capital |
Issuance |
Deficit |
Loss |
Equity |
Income |
|||||||||||||||||||||||||
Balances at December 31, 2003 |
48,627 | $ | 6,471 | $ | 236,222 | $ | 1,349 | $ | (83,054 | ) | $ | (1,481 | ) | $ | 159,507 | |||||||||||||||||
Issuance of ordinary shares pursuant to
stock plans |
1,413 | 188 | 9,269 | — | — | — | 9,457 | |||||||||||||||||||||||||
Business acquisition |
372 | 49 | 9,835 | 1,051 | — | — | 10,935 | |||||||||||||||||||||||||
Comprehensive income: |
||||||||||||||||||||||||||||||||
Net income |
— | — | — | — | 48,563 | — | 48,563 | $ | 48,563 | |||||||||||||||||||||||
Unrealized loss on investments in
marketable securities |
— | — | — | — | — | (421 | ) | (421 | ) | (421 | ) | |||||||||||||||||||||
Currency translation adjustments |
— | — | — | — | — | (18 | ) | (18 | ) | (18 | ) | |||||||||||||||||||||
Comprehensive income |
$ | 48,124 | ||||||||||||||||||||||||||||||
Balances at September 30, 2004 |
50,412 | $ | 6,708 | $ | 255,326 | $ | 2,400 | $ | (34,491 | ) | $ | (1,920 | ) | $ | 228,023 | |||||||||||||||||
| Ordinary | ||||||||||||||||||||||||||||
| Shares | Notes | |||||||||||||||||||||||||||
| Ordinary Shares |
Additional Paid-in |
Subject to Subsequent |
Receivable from |
Deferred Stock | Accumulated | |||||||||||||||||||||||
| Shares |
Amount |
Capital |
Issuance |
Shareholders |
Compensation |
Deficit |
||||||||||||||||||||||
Balances at December 31, 2002 |
45,946 | $ | 6,114 | $ | 223,358 | $ | — | $ | (1,050 | ) | $ | (554 | ) | $ | (114,477 | ) | ||||||||||||
Issuance of Ordinary Shares pursuant to
stock plans |
1,397 | 186 | 4,223 | — | — | — | — | |||||||||||||||||||||
Repayments of notes
receivable from shareholders |
— | — | — | — | 1,050 | — | — | |||||||||||||||||||||
Amortization of deferred
stock-based compensation |
— | — | — | — | — | 547 | — | |||||||||||||||||||||
Business acquisition |
944 | 126 | 7,087 | 1,349 | — | — | — | |||||||||||||||||||||
Comprehensive income: |
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Net income |
— | — | — | — | — | — | 22,154 | |||||||||||||||||||||
Unrealized loss on investments in
marketable securities |
— | — | — | — | — | — | — | |||||||||||||||||||||
Currency translation adjustments |
— | — | — | — | — | — | — | |||||||||||||||||||||
Comprehensive income |
||||||||||||||||||||||||||||
Balances at September 30, 2003 |
48,287 | $ | 6,426 | $ | 234,668 | $ | 1,349 | $ | — | $ | (7 | ) | $ | (92,323 | ) | |||||||||||||
[Continued from above table, first column(s) repeated]
| Accumulated | ||||||||||||
| Other | Total | |||||||||||
| Comprehensive | Shareholders’ | Comprehensive | ||||||||||
| Loss |
Equity |
Income |
||||||||||
Balances at December 31, 2002 |
$ | 3,996 | $ | 117,387 | — | |||||||
Issuance of Ordinary Shares pursuant to
stock plans |
— | 4,409 | — | |||||||||
Repayments of notes
receivable from shareholders |
— | 1,050 | — | |||||||||
Amortization of deferred
stock-based compensation |
— | 547 | — | |||||||||
Business acquisition |
— | 8,562 | — | |||||||||
Comprehensive income: |
||||||||||||
Net income |
— | 22,154 | $ | 22,154 | ||||||||
Unrealized loss on investments in
marketable securities |
(9,881 | ) | (9,881 | ) | (9,881 | ) | ||||||
Currency translation adjustments |
43 | 43 | 43 | |||||||||
Comprehensive income |
$ | 12,316 | ||||||||||
Balances at September 30, 2003 |
$ | (5,842 | ) | $ | 144,271 | |||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
5
SINA CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
| Nine months ended September 30, |
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| 2004 |
2003 |
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Cash flows from operating activities: |
||||||||
Net income |
$ | 48,563 | $ | 22,154 | ||||
Adjustments to reconcile net income to net cash provided by
operating activities: |
||||||||
Loss on equity investments |
2,171 | 797 | ||||||
Loss on disposal of fixed assets |
24 | 5 | ||||||
Net loss on investments |
1,616 | — | ||||||
Depreciation |
4,128 | 3,715 | ||||||
Stock-based compensation |
— | 547 | ||||||
Amortization of convertible debt issuance cost |
514 | 170 | ||||||
Amortization of intangible assets |
2,451 | 1,334 | ||||||
Write-off of intangible assets |
— | 903 | ||||||
Changes in assets and liabilities (net of effect of acquisition): |
||||||||
Accounts receivable, net |
(21,346 | ) | (7,817 | ) | ||||
Prepaid expenses and other current assets |
(2,715 | ) | (2,413 | ) | ||||
Other assets |
24 | 60 | ||||||
Accounts payable |
1,324 | (1,012 | ) | |||||
Income taxes payable |
555 | 423 | ||||||
Accrued liabilities |
7,144 | 7,578 | ||||||
Net cash provided by operating activities |
44,453 | 26,444 | ||||||
Cash flows from investing activities: |
||||||||
Acquisition of property and equipment |
(9,678 | ) | (4,271 | ) | ||||
Cash paid for business acquisition, net of cash acquired |
(27,233 | ) | (9,235 | ) | ||||
Investments in joint ventures |
(1,435 | ) | (2,818 | ) | ||||
Deposit for business acquisition |
(241 | ) | — | |||||
Purchase of short-term investments |
(58,865 | ) | (6,348 | ) | ||||
Proceeds from sale of investment in Sun Media Group |
295 | — | ||||||
Proceeds from sale of long-term investment |
347 | — | ||||||
Net cash used in investing activities |
(96,810 | ) | (22,672 | ) | ||||
Cash flows from financing activities: |
||||||||
Proceeds from issuance of convertible debt, net |
— | 97,282 | ||||||
Proceeds from issuance of ordinary shares, net |
9,456 | 4,409 | ||||||
Repayments of notes receivable from shareholders |
— | 1,050 | ||||||
Net cash provided by financing activities |
9,456 | 102,741 | ||||||
Net increase (decrease) in cash and cash equivalents |
(42,901 | ) | 106,513 | |||||
Cash and cash equivalents at the beginning of the period |
158,148 | 53,262 | ||||||
Cash and cash equivalents at the end of the period |
$ | 115,247 | $ | 159,775 | ||||
Supplemental disclosure of investing activities: |
||||||||
Cash paid for business acquisition |
$ | (28,760 | ) | $ | (11,591 | ) | ||
Cash acquired |
1,527 | 2,356 | ||||||
Cash paid for business acquisition, net |
$ | (27,233 | ) | $ | (9,235 | ) | ||
6
SINA CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (continued)
(unaudited, in U.S. dollars, in thousands)
| Nine months ended September 30, |
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| 2004 |
2003 |
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Supplemental disclosure of noncash significant activities: |
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Ordinary shares issued for business acquisition |
$ | 9,884 | $ | 7,213 | ||||
Ordinary shares subject to subsequent issuance for business acquisition |
$ | 2,400 | $ | 1,349 | ||||
Deferred advertising services exchanged for equity interest in joint
venture |
$ | 3,430 | $ | — | ||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
7
SINA CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in U.S. dollars, unaudited)
1. The Company and basis of presentation
SINA CORPORATION (“SINA” or the “Company”), a Cayman Islands corporation, is a leading online media company and value-added information service provider in the People’s Republic of China (the “PRC” or “China”) and the global Chinese communities. With a branded network of localized web sites targeting Greater China and overseas Chinese, SINA provides services through five major business lines including SINA.com (online news and content), SINA Mobile (mobile value-added services), SINA Online (community-based services and games), SINA.net (search and enterprise services) and SINA E-Commerce (online shopping and travel). Together these provide an array of services including region-focused online portals, mobile value-added services, search and directory, interest-based and community-building channels, free and premium email, online games, virtual ISP, classified listings, fee-based services, e-commerce and enterprise e-solutions.
The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates, and such differences may be material to the financial statements. Certain reclassifications have been made in prior year’s financial statements to conform to classifications used in the current year.
The accompanying unaudited condensed consolidated financial statements reflect all adjustments which, in the opinion of management, are necessary to a fair statement of the results for the interim periods presented. Results for the three and nine months ended September 30, 2004 are not necessarily indicative of results for the entire fiscal year ending December 31, 2004 or future periods. These financial statements should be read in conjunction with the consolidated financial statements and the accompanying notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2003.
2. Recent accounting pronouncements
In September 2004, the EITF Issue No. 04-08, “The Effect of Contingently Convertible Debt on Diluted Earnings per Share.” (“EITF 04-08”) was issued stating that contingently convertible debt should be included in diluted earnings per share computations regardless of whether the market price trigger has been met. This Issue is effective for reporting periods ending after December 15, 2004. As a result of adopting EITF 04-08, the Company will need to include the dilution effect of its outstanding contingent convertible debt in its diluted earnings per share calculations regardless of whether the market price trigger has been met going forward. In addition, this change will be applied retroactively to all prior periods. The retroactive application of EITF 04-08 will result in a reduction of $0.02 to the diluted earnings per share for the quarter ended September 30, 2004 and will have no impact to the diluted earnings per share for all other prior periods.
In September 2004, the EITF delayed the effective date for the recognition and measurement guidance previously discussed under EITF Issue No. 03-01, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments” (“EITF 03-01”) as included in paragraphs 10-20 of the proposed statement. The proposed statement will clarify the meaning of other-than-temporary impairment and its application to investments in debt and equity securities, in particular investments within the scope of FASB Statement No. 115, “Accounting for Certain Investments in Debt and Equity Securities,” and investments accounted for under the cost method. The Company is currently evaluating the effect of this proposed statement on its financial position and results of operations. If the proposed EITF 03-01 becomes effective and is adopted, the Company may have to record additional impairment charges for certain of its investments in marketable debt securities.
3. Variable interest entities
The Company has adopted FASB Interpretation No. 46 (“FIN46”) “Consolidation of Variable Interest Entities (“VIEs”), an Interpretation of ARB No. 51”. FIN 46 requires a VIE to be consolidated by a company if that company is subject to a majority of the risk of loss for the variable interest entity’s activities or is entitled to receive a majority of the entity’s residual returns. The Company
8
conducts substantially all its Internet content provision, advertising and mobile value-added services in the PRC via its VIEs in order to comply with the PRC laws and regulations. As of September 30, 2004, the Company has nine VIEs and the aggregate accumulated losses of these VIEs were approximately $9.6 million and have been reflected in the consolidated financial statements.
4. Short-term investments
The Company’s short-term investment in marketable debt securities is classified as available for sale securities. The Company invests in these securities with the intent to make such funds readily available for operating purposes and accordingly, classifies them as short-term investments. The aggregate fair value of marketable debt securities was $128.3 million as of September 30, 2004 and was $69.0 million as of December 31, 2003. During the three and nine months ended September 30, 2004, respectively, the Company recorded $1.7 million of unrealized gain and $0.4 million of unrealized loss, respectively, on its marketable debt securities as a component of comprehensive income. During the three and nine months ended September 30, 2003, respectively, the Company recorded $1.1 million and $1.4 million of unrealized loss on its marketable debt securities as a component of comprehensive income.
5. Acquisitions
Bravado. In February, 2004, the Company completed the acquisition of Bravado Investments Limited, a British Virgin Islands limited liability corporation (“Bravado”), through a purchase of all of the outstanding shares of Bravado. As a result of such acquisition, Bravado became a wholly-owned subsidiary of SINA. Bravado, through its subsidiary in the PRC, is engaged in the business of providing online and offline hotel reservation services under the brand Fortune Trip in the PRC. The primary purpose of the acquisition was to enter the PRC online travel market.
The aggregate purchase price is comprised of an initial consideration and a contingent consideration on achieving specified earnings in future periods. The initial consideration of $1,836,414 is comprised of two elements: (a) $1,812,251 in cash; and (b) approximately $24,163 in legal and professional fees related to the acquisition. The contingent consideration is based on Bravado’s financial performance in 2004. The contingent consideration will be $303,000 or $606,000 in cash, provided that Bravado achieves certain earnings targets for 2004.
The initial purchase price of $1,836,414 was allocated as follows (in thousands):
Cash |
$ | 64 | ||
Accounts receivable |
82 | |||
Other assets |
109 | |||
Intangible assets |
895 | |||
Goodwill |
824 | |||
Current liabilities |
(138 | ) | ||
Purchase price |
$ | 1,836 | ||
Amortizable intangible assets acquired, including hotel reservation contracts and non-competition arrangements with certain Bravado executives, have estimated useful lives ranging from twenty-eight to thirty-six months. The amortization expense for the three and nine months ended September 30, 2004 was $93,000 and $248,000, respectively. Goodwill of $824,000 represents the excess of the initial purchase price over the fair value of the net tangible and identifiable intangible assets acquired, and is not deductible for tax purposes. The contingent consideration, if any, will be recorded as additional goodwill. In accordance with SFAS 142, goodwill is not amortized but is subject to periodic impairment assessment. The Company assesses the carrying value of intangible assets and goodwill on an annual basis and when factors are present that indicate an impairment may have occurred. As of September 30, 2004, there was no impairment for the intangible assets and goodwill. Immediately after the closing of the acquisition, the operating results of Bravado were consolidated with those of the Company starting February 1, 2004.
Crillion. In March, 2004, the Company completed the acquisition of Crillion Corporation, a British Virgin Islands limited liability corporation (“Crillion”), through a purchase of all of the outstanding shares of Crillion. As a result of such acquisition, Crillion became a wholly-owned subsidiary of SINA. Crillion, through its subsidiary and exclusive contractual arrangement with a local entity in the PRC, is engaged in the business of providing mobile