SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 6-K
REPORT OF FOREIGN ISSUER
PURSUANT TO RULE 13a-16 OR 15d-16 OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE MONTH OF JULY 2005
SHANDA INTERACTIVE ENTERTAINMENT LIMITED
NO. 1 OFFICE BUILDING, NO. 690 BIBO ROAD
PUDONG NEW AREA, SHANGHAI, CHINA 201203
(Address of principal executive offices)
--------------------------
(Indicate by check mark whether the registrant files or will file annual
reports under cover of Form 20-F or Form 40-F.)
Form 20-F [X] Form 40-F [ ]
(Indicate by check mark whether the registrant by furnishing the
information contained in this Form is also thereby furnishing the information to
the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of
1934.)
Yes [ ] No [X]
(If "Yes" is marked, indicate below the file number assigned to the
registrant in connection with Rule 12g3-2(b):82- ___ .)
INCORPORATION BY REFERENCE
THIS CURRENT REPORT ON FORM 6-K IS HEREBY INCORPORATED BY REFERENCE INTO OUR
ANNUAL REPORT ON FORM 20-F (FILE NO. 000-50705) FILED WITH THE SECURITIES AND
EXCHANGE COMMISSION ON MAY 31, 2005.
SHANDA INTERACTIVE ENTERTAINMENT LIMITED
Form 6-K
Table of Contents
PAGE
-------
Signature ............................................................................ Page 2
Financial Statements of Actoz Soft Co., Ltd. for the year ended December 31, 2004..... Page 3
Unaudited Pro Forma Consolidated Statement of Operations of Shanda Interactive
Entertainment Limited for the year ended December 31, 2004............................ Page 26
Information about Shanda Interactive Entertainment Limited............................ Page 32
Statement Regarding Forward Looking Statements........................................ Page 32
1
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
SHANDA INTERACTIVE ENTERTAINMENT LIMITED
By: /s/ JUN TANG
---------------
Name: Jun Tang
Title: President
Date: July 8, 2005
2
ACTOZ SOFT CO., LTD.
FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2004 AND 2003
AND
INDEPENDENT AUDITORS' REPORT
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of
Actoz Soft Co., Ltd.
We have audited the accompanying balance sheet of Actoz Soft Co., Ltd., or
Actoz, as of December 31, 2004, and the related statements of income,
appropriation of retained earnings and cash flows for the year then ended (all
expressed in Korean won). These financial statements are the responsibility of
Actoz's management. Our responsibility is to express an opinion on these
financial statements based on our audit. We did not examine investments in
equity securities of Wemade Entertainment Co., Ltd., or Wemade, accounted for
under the equity method. The carrying value for Wemade was W 12,043,171
thousand, or 21% of Actoz's total assets, as of December 31, 2004 and Actoz'z
equity in earnings of Wemade was W 4,051,446 thousand, or 37% of income before
income taxes, for 2004. Those investment accounts were examined by other
auditors whose report thereon has been furnished to us, and our opinion
expressed herein, insofar as it relates to the amounts included for those
investment accounts, is based solely upon the report of the other auditors.
3
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Actoz as of December 31, 2004
and the results of its operations, the changes in its retained earnings and its
cash flows for the year then ended in accordance with the Financial Accounting
Standards, as established by the Financial Supervisory Commission of the
Republic of Korea.
Actoz's financial statements for the year ended December 31, 2003, presented
herein for comparative purposes, were audited by other auditors whose report
dated February 7, 2004 expressed an unqualified opinion thereon.
Without qualifying our opinion, we draw attention to the following:
As discussed in Note 8 to the accompanying financial statements, Actoz has
transactions with Wemade Entertainment Co., Ltd. and other related parties in
its normal course of business. Sales to its related parties were W2,019 million
for the year ended December 31, 2004 . Service fees paid to its related parties
were W 23,205 million for the year ended December 31, 2004. The related trade
receivables were W 405 million, and the related trade payables were W 6,142
million as of December 31, 2004. In addition, the short-term loans to
shareholders, officers and employees were W 364 million as of December 31, 2004,
and the related interest income included in other income were W 46 million for
the year ended December 31, 2004 .
As discussed in Note 21 to the accompanying financial statements, in February
2005, Shanda Interactive Entertainment Limited, or Shanda, purchased an
approximately 29% stake in Actoz from certain shareholders of Actoz. Completion
of this purchase followed Shanda's purchase of an amount of Actoz shares on the
KOSDAQ market equal to approximately 9% of the Actoz's issued and outstanding
shares.
Accounting principles and their application in practice vary among countries.
The accompanying financial statements are not intended to present the financial
position, results of operations and cash flows in accordance with accounting
principles and practices generally accepted in countries other than the Republic
of Korea.
/s/ Woori Accounting Corporation
June 14, 2005
4
ACTOZ SOFT CO., LTD.
BALANCE SHEETS
DECEMBER 31, 2004 and 2003
Thousands of Korean won
---------------------------
2004 2003
------------ ------------
ASSETS
CURRENT ASSETS :
Cash and cash equivalents(Notes 2 and 3) W 810,448 W 20,557,955
Short-term financial instruments(Notes 2 and 3) 16,500,000 20,000,000
Accounts receivable - trade, net of allowance for
doubtful accounts of W640,964 thousand
in 2004 and W244,330 thousand in 2003 7,683,088 7,899,993
(Notes 2 and 10) Accounts receivable - other, net
of allowance for doubtful accounts of W16,851
thousand in 2004 and nil in 2003 2,569,225 89,201
Short-term loans, net of allowance for doubtful
accounts of W123,479 thousand in 2004 and
W65,000 thousand in 2003(Note 8) 584,451 444,322
Prepayments 224,026 14,044
Prepaid value added taxes 497,416 137,788
Prepaid income taxes - 120,736
Accrued income and other current assets 94,753 85,958
------------ ------------
Total Current Assets 28,963,407 49,349,997
------------ ------------
NON-CURRENT ASSETS :
Marketable securities(Notes 2 and 4) 356,023 150,000
Investment securities(Notes 2 and 5) 15,577,657 12,233,608
Rental deposits 2,083,050 2,682,650
Deferred income tax asset(Notes 2 and 15) 521,582 -
Property and equipment, net(Notes 2, 6 and 9) 5,375,873 1,110,739
Intangible assets(Notes 2 and 7) 4,325,345 3,836,348
------------ ------------
Total Non-Current Assets 28,239,530 20,013,345
------------ ------------
TOTAL ASSETS W 57,202,937 W 69,363,342
============ ============
(Continued)
5
ACTOZ SOFT CO., LTD.
BALANCE SHEETS (CONTINUED)
DECEMBER 31, 2004 AND 2003
Thousands of Korean won
-----------------------------
2004 2003
----------- ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES :
Accrued expenses(Notes 8 and 10) W 6,758,656 W 27,443,374
Income taxes payable 182,442 -
Withholdings 71,229 67,776
Advance receipts 28,284 46,725
----------- ------------
Total Current Liabilities 7,040,611 27,557,875
LONG-TERM LIABILITIES :
Deferred income tax liability(Notes 2 and 15) - 9,326
----------- ------------
Total Liabilities 7,040,611 27,567,201
----------- ------------
COMMITMENTS AND CONTINGENCIES(Note 20)
SHAREHOLDERS' EQUITY :
Common stock, par value W500(Note 11)
Authorized: 50,000,000 shares
Issued: 8,914,500 shares 4,457,250 4,457,250
Capital surplus(Note 11):
Paid-in capital in excess of par 19,169,186 19,169,186
Retained earnings(Note 12)
Reserve for business rationalization(Note 12) 170,000 170,000
Reserve for technology development(Note 12) 16,667 33,334
Unappropriated retained earnings 25,468,789 17,603,959
Capital adjustments(Note 13) 880,434 362,412
----------- ------------
Total Shareholders' Equity 50,162,326 41,796,141
----------- ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY W57,202,937 W 69,363,342
=========== ============
See accompanying Notes to Financial Statements.
6
ACTOZ SOFT CO., LTD.
STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 2004 AND 2003
Thousands of Korean won
--------------------------------
2004 2003
------------ -------------
Sales W 39,219,123 W 46,417,119
Cost of sales 23,237,951 30,854,217
------------ -------------
Gross profit 15,981,172 15,562,902
Selling and administrative expenses(Note 14) 7,904,070 8,688,035
------------ -------------
Operating income 8,077,102 6,874,867
------------ -------------
Other income(expenses):
Interest income 734,959 824,948
Gain on disposal of investment securities(Note 5) 21,855 -
Reversal of allowance for doubtful accounts 109,052 1,253,618
Refund of income taxes(Note 15) 180,424 42,708
Loss on foreign exchange transactions and translation, net (388,137) (226,981)
Equity in earnings of investees, net(Note 5) 4,027,505 7,082,090
Impairment loss on investments - (55,292)
Impairment loss on intangible assets(Note 7) (1,482,083) (115,463)
Other bad debt (147,265) -
Loss on contract termination (241,000) -
Contribution(Note 18) (55,000) -
Other, net (24,899) 31,999
------------ -------------
2,735,411 8,837,627
------------ -------------
Income before income taxes 10,812,513 15,712,494
Income taxes(Note 15) 2,692,850 3,844,507
------------ -------------
Net income(Note 16) W 8,119,663 W 11,867,987
============ =============
Income per share in Korean won(Note 16) W 911 W 1,331
============ =============
See accompanying Notes to Financial Statements.
7
ACTOZ SOFT CO., LTD.
STATEMENTS OF APPROPRIATIONS OF RETAINED EARNINGS
YEARS ENDED DECEMBER 31, 2004 AND 2003
Thousands of Korean won
--------------------------
2004 2003
------------ -----------
RETAINED EARNINGS BEFORE APPROPRIATIONS
Unappropriated retained earnings carried over
from prior year W17,620,626 W 5,735,972
Loss on prior period adjustments(Note 5) (271,500) -
Net income for the year 8,119,663 11,867,987
----------- -----------
25,468,789 17,603,959
----------- -----------
TRANSFER OF VOLUNTARY RESERVES
Reserve for technology development(Note 12) 16,667 16,667
----------- -----------
25,485,456 17,620,626
----------- -----------
UNAPPROPRIATED RETAINED EARNINGS
TO BE CARRIED FORWARD TO
NEXT YEAR W25,485,456 W17,620,626
=========== ===========
See accompanying Notes to Financial Statements.
8
ACTOZ SOFT CO., LTD.
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2004 AND 2003
Thousands of Korean won
-------------------------------
2004 2003
-------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income W 8,119,663 W 11,867,987
Addition of expenses not involving cash outflows :
Depreciation 670,980 943,031
Amortization of intangible assets 540,173 533,075
Loss on disposal of property and equipment 201 -
Bad debts 652,952 129,144
Loss on impairment of investment - 55,292
Loss on impairment of intangible assets 1,482,083 115,463
Equity in losses of investees 1,197,652 314,104
------------- -------------
4,544,041 2,090,109
------------- -------------
Deduction of revenues not involving cash inflows :
Reversal of allowance for doubtful accounts 109,052 1,253,618
Gain on disposal of investment securities 21,855 -
Equity in earningss of investees 5,225,157 7,396,194
------------- -------------
5,356,064 8,649,812
------------- -------------
Changes in assets and liabilities resulting from operations:
Increase in trade accounts receivable (179,730) (2,840,890)
Decrease(increase) in prepayments (209,981) 13,486
Decrease(increase) in prepaid value added taxes (359,628) 404,953
Decrease(increase) in accrued income (5,649) 15,178
Decrease in prepaid income taxes 120,736 603,108
Decrease(increase) in prepaid expenses (3,145) -
Decrease(increase) in deferred income tax asset (418,599) -
Increase in withholdings 3,452 19,671
Increase(decrease) in accrued expenses (20,684,718) 22,364,252
Increase in income taxes payable 182,442 -
Decrease in advance income - (19)
Increase(decrease) in advance receipts (18,441) 13,286
Decrease in deferred income tax liability (9,327) (127,358)
------------- -------------
(21,582,588) 20,465,667
------------- -------------
Net cash provided by(used in) operating activities (W 14,274,948) W 25,773,951
------------- -------------
(Continued)
9
ACTOZ SOFT CO., LTD.
STATEMENTS OF CASH FLOWS(CONTINUED)
YEARS ENDED DECEMBER 31, 2004 AND 2003
Thousands of Korean won
------------------------------
2004 2003
-------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES
Cash inflows from investing activities :
Decrease in short-term financial instruments W 61,000,000 W151,408,710
Decrease in short-term loans 550,392 275,678
Decrease in other accounts receivable 2,602,025 81,065
Disposal of equity method valued investment securities 650,000 100,000
Dividend income from equity method valuation of
investment securities 2,400,000 -
Decrease in rental deposits 8,916,000 514,200
Disposal of property and equipment 2,272 767
------------- ------------
76,120,689 152,380,420
------------- ------------
Cash outflows from investing activities :
Acquisition of short-term financial instruments 57,500,000 153,208,691
Acquisition of available-for-sale securities 206,023 150,000
Increase in short-term loans 814,000 376,000
Increase in other accounts receivable 5,105,834 144,197
Acquisition of equity method valued investment securities 2,201,150 100,000
Increase in rental deposits 8,316,400 808,750
Acquisition of property and equipment 4,938,587 876,455
Disbursement of development cost 2,363,241 2,459,423
Acquisition of other intangible assets 148,013 189,367
------------- ------------
81,593,248 158,312,883
------------- ------------
Net cash used in investing activities (5,472,559) (5,932,463)
------------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES :
Cash inflows from financing activities :
Increase in short-term borrowings 1,167,227 -
Cash outflows from financing activities :
Repayment of short-term borrowings 1,167,227 -
Increase in stock issuance cost - 9,802
Acquisition of treasury stock - 10,848
------------- ------------
1,167,227 20,650
------------- ------------
Net cash used in financing activities - (20,650)
------------- ------------
NET INCREASE(DECREASE) IN CASH AND CASH EQUIVALENTS (19,747,507) 19,820,838
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 20,557,955 737,117
------------- ------------
CASH AND CASH EQUIVALENTS AT END OF YEAR W 810,448 W 20,557,955
============= ============
See accompanying Notes to Financial Statements.
10
ACTOZ SOFT CO., LTD.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2004 AND 2003
1. General
Actoz Soft Co., Ltd., or Actoz, was incorporated on October 29, 1996 under
the laws of the Republic of Korea. Actoz is engaged in developing and
distributing the online game software products. Actoz is registered as a venture
business in the Korean Small and Medium Enterprise Service in accordance with
the special law for the promotion of venture businesses. Actoz's capital stock
as of December 31, 2004 amounts to W4,457,250 thousand. Actoz's shares
have been registered on the Korea Securities Dealers Automated Quotation
(KOSDAQ) market since August 14, 2001.
2. Summary of Significant Accounting Policies
a. Basis of Presentation of Financial Statements
Actoz maintains its official accounting records in Korean won and
prepares financial statements in the Korean language (Hangul) in
conformity with the accounting principles generally accepted in the
Republic of Korea including the statements of Korean financial
accounting standards No. 1 through No. 13. Certain accounting
principles applied by Actoz that conform with financial accounting
standards and accounting principles in the Republic of Korea may not
conform with generally accepted accounting principles in other
countries. Accordingly, these financial statements are intended for
use by those who are informed about Korean accounting principles and
practices.
Certain information attached to the Korean language financial
statements, but not required for a fair presentation of Actoz's
financial position, results of operations or cash flows, is not
presented in the accompanying financial statements.
The accounts of Onlineworks Co., Ltd., a wholly owned subsidiary,
were not consolidated into the accounts of Actoz as allowed under
Financial Accounting Standards, as established by the Financial
Supervisory Commission of the Republic of Korea. The investment in
the subsidiary was accounted under the equity method (see note 5)
b. Cash and Cash Equivalents
Actoz records in cash and cash equivalents account, currencies,
currency substituting securities such as third party issued checks,
current deposits, ordinary deposits, and marketable securities and
short-term financial instruments which maturities or repayments are
due within three months when acquired and easily convertible into
cash without incurring material transaction costs and which have no
material risks of the value changes due to the change of interest
rates.
c. Financial Instruments
11
Short-term financial instruments are time deposits and installment
deposits of financial institutes which are held for the purpose of
short-term operations of the funds and which maturities are due
within one year. Long-term financial instruments are financial
instruments not classified as current assets.
d. Allowance for Doubtful Accounts
Actoz provides an allowance for doubtful accounts to cover estimated
losses on receivables, based on collection experience and analysis
of the collectibility of individual outstanding receivables.
e. Marketable Securities
Marketable securities bought and held for the purpose of selling
them in the near term are classified as short-term trading
securities and debt securities which repayment amounts are fixed or
can be fixed and which Actoz has the intent and ability to hold to
maturity are classified as held-to-maturity securities and
marketable securities not classified as either short-term trading
securities or held-to-maturity securities are classified as
available- for- sale securities.
Marketable securities are initially carried at cost, using the
moving average method. The following paragraphs describe the
subsequent accounting for securities by the type of security.
Held-to-maturity securities are carried at cost, adjusted for the
amortization or accretion of premiums or discounts. Short-term
trading securities and available- for-sale securities are reported
at fair value. Available-for-sale equity securities that do not have
readily determinable market or fair values are reported at cost.
Unrealized gains or losses arising from the differences between the
fair value and the acquisition cost are recorded in current
operations for short-term trading securities, and are reported as a
capital adjustment in shareholders' equity for available-for-sale
securities which accumulated amounts in shareholders' equity are
reflected in current operations when disposing the securities or
recognizing impairment losses.
When estimated recoverable values from marketable securities are
less than acquisition costs of equity securities or debt securities
adjusted for the amortization or accretion of premiums or discounts,
impairment losses are recorded in current operation Subsequent
recoveries are also recorded in current operations up to the
original cost of the securities.
f. Investment Securities Valued Using the Equity Method of Accounting
Investments in equity securities of companies, over which Actoz
exercises significant influence, are reported using the equity
method of accounting. Under the equity method of accounting, Actoz
records changes in its proportionate equity of the book value of the
investee as current operations, capital adjustments or adjustments
to retained earnings, depending on the nature of the underlying
change in book value of the investee.
Differences between the purchase cost and Actoz's proportionate
equity in net asset value of the investee are amortized over five
years using the straight-line method. Unrealized profits arising
from sales by Actoz to equity-method investees are fully eliminated.
Actoz's proportionate unrealized profits arising from sales by
equity-method investees to Actoz or transactions between
equity-method investees are also eliminated.
For overseas affiliates whose financial statements are prepared in
foreign currency, assets and liabilities are translated at the
exchange rate on the balance sheet date,
12
shareholders' equity is translated at the historical exchange rate,
and statement of income items are recorded at the weighted average
exchange rate of the reporting period. Net translation adjustments
are recorded as a component of shareholders' equity.
g. Property and Equipment
Property and equipment are stated at acquisition cost. Major
renewals and betterments, which prolong the useful life or enhance
the value of assets, are capitalized; expenditure for maintenance
and repairs are charged to expense as incurred. Depreciation is
computed using the declining balance method over the following
useful lives:
Description Useful lives (years)
----------------------- --------------------
Machinery and equipment 4
Furniture and fixtures 4
Vehicles 4
Depreciation expenses on the long-term idle facilities are recorded
in other expenses. When the recoverable amount is significantly less
than the carrying value of property and equipment due to
obsolescence, physical damage, decline in market value or other
causes, an impairment loss in the amount of the difference between
the recoverable amount and the carrying value is recorded in the
current operations with the carrying amount of the asset adjusted
reflecting the impairment.
h. Intangible Assets
Development costs for development of new products that satisfy
certain specific conditions and future economic benefits related to
such costs can be reliably determined, are capitalized and amortized
over a five year period beginning in the year the related products
are first saleable or usable. When the recoverable amount is
significantly less than the carrying value of development costs due
to the uncertainty of their future economic benefits, an impairment
loss in the amount of the difference between the recoverable amount
and the carrying value is recorded in the current operations with
the carrying amount of the asset adjusted reflecting the impairment.
Other intangible assets, including industrial property rights, are
stated at cost and amortized on a straight-line basis over a five
year period.
i. Deferred Income Taxes
Deferred tax assets and liabilities are recorded for future tax
consequences of operating loss carryforwards, tax credits and
temporary differences between the financial statement carrying
amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets are recognized to the extent that they
are expected to be realizable. Deferred tax assets and liabilities
are presented on the balance sheet as a single non-current net
number.
j. Severance Indemnity
In accordance with Actoz's policy, all employees with more than one
year of service with Actoz are entitled to severance indemnity.
Actoz pays severance indemnity on a yearly basis.
k. Foreign Currency Transactions and Translation
Transactions denominated in foreign currencies are recorded in
Korean won translated at the exchange rate prevailing on the
transaction date. Monetary assets and liabilities denominated in
foreign currency are translated into Korean won at the
13
Base Rates announced by Seoul Money Brokerage Services Limited on
the balance sheet date. Gains or losses arising from the settlement
of foreign currency transactions and the translation of foreign
currency assets and liabilities are charged or credited to current
operations.
l. Revenue Recognition
Service revenue is recognized by reference to the stage of
completion of the transaction at the balance sheet date. The
percentage of completion method for the service revenue can be
employed when the following conditions are met: (a) the amount of
revenue can be measured reliably; (b) it is probable that the
economic benefits will flow to Actoz; (c) the stage of completion of
the transaction at the balance sheet date can be measured reliably;
and (d) the costs incurred for the transaction and the costs to
complete the transactions can be measured reliably. Revenues for
up-front license fees are recognized if such up-front license fees
are non-refundable and Actoz does not have any obligation to provide
further services after the cash has been received. For sales of
merchandises and finished goods, revenue is recognized based on the
delivery of goods for domestic sales and on the shipping dates for
export.
m. Contingent Liabilities
Contingent losses are recorded in liabilities if it is certain that
net assets have decreased as of the balance sheet date and the loss
amount can be reasonably estimated.
n. Reclassification of Certain Accounts
Certain amounts in 2003 financial statements have been reclassified
to conform with the 2004 financial statement presentation. These
reclassifications did not have an effect on the financial position
of Actoz as of December 31, 2003, or the results of its operations
for the year then ended.
3. Cash and Cash Equivalents and Short-term Financial Instruments
Details of cash and cash equivalents and short-term financial instruments
as of December 31, 2004 and 2003 are as follows:
Thousands of Korean won
-----------------------
Annual
interest
rate(%) 2004 2003
-------- ------------- ----------------
Cash - - -
Ordinary deposit 1.0 W 101,141 W 20,285,900
Money Market Deposit Account("MMDA") 4.0 - 272,055
Cash Management Account("CMA") 4.2 709,307 -
------------- ----------------
Total W 810,448 W 20,557,955
============= ================
Time deposits 3.8-4.2 W 16,500,000 W 20,000,000
------------- ----------------
Total W 16,500,000 W 20,000,000
============= ================
4. Marketable Securities
Marketable securities of Actoz at December 31, 2004 and 2003 are
classified as available-for-sale
14
securities according to its purpose of acquisition and intent of holding and
consist of the following:
<2004>
Thousands of Korean won
--------------------------------------------
Ownership Acquisition Fair value or
Investee percentage cost net asset value Book value
----------------------------- ---------- ----------- --------------- ----------
Joyspell Co., Ltd. 5.08% W 206,023 W 33,258 W 206,023
Vivabox Co., Ltd.-convertible
debenture(1st series
non-guaranteed privately
placed) - 150,000 150,000 150,000
----------- --------------- ----------
Total W 356,023 W 183,258 W 356,023
=========== =============== ==========
<2003>
Thousands of Korean won
--------------------------------------------
Fair value
Ownership Acquisition or net asset
Investee percentage cost value Book value
----------------------------- ---------- ----------- --------------- ----------
Vivabox Co., Ltd.-convertible
debenture(1st series
non-guaranteed privately
placed) - W 150,000 W 150,000 W 150,000
----------- --------------- ----------
Total W 150,000 W 150,000 W 150,000
=========== =============== ==========
5. Investment Securities
Investment securities stated by the equity method of accounting at
December 31, 2004 and 2003 are as follows:
(1) Detail of investment securities
Thousands of Korean won
------------------------------------------------------------
Book value
No. of Percentage of Acquisition ----------------------------
Investee shares ownership cost Net Asset value 2004 2003
----------------------- ------- ------------- ----------- --------------- ------------ ------------
Wemade Entertainment
Co., Ltd. 56,000 40.0% W 280,000 W 12,040,002 W 12,043,171 W 10,378,114
Anipark Co., Ltd. 900,000 24.8% 563,850 989,244 989,244 859,244
Actoznet Co., Ltd. 65,000 100.0% 750,000 - - 631,536
Onlineworks Co., Ltd. 60,000 100.0% 300,000 1,430,972 1,437,841 364,714
Beijing Oriental
Interactive Science and
Technology Development
Co., Ltd. - 50.0% 2,201,150 1,107,401 1,107,401 -
----------- --------------- ------------ ------------
Total W 4,095,000 W 15,567,619 W 15,577,657 W 12,233,608
=========== =============== ============ ============
In 2004, Actoz disposed of all the shares(65,000 shares) of equity
investments in Actoznet Co., Ltd. and W21,855 thousand of gain on
disposal was recognized in 2004.
15
In 2004, Actoz invested W2,201,150 thousand to establish a joint
venture company in China, Beijing Oriental Interactive Science and Technology
Development Co., Ltd. which is a limited company not issuing capital stocks.
(2) Detail of valuation by the equity method in 2004
Thousands of Korean won
---------------------------------------------------------------------------------------
Capital Other
Beginning adjustments Earnings increase Balance at
Investee balance of valuation (loss) P/L Disposal (decrease) end of 2004
----------------------- ------------ ------------ ----------- --------- ----------- ------------
Wemade Entertainment
Co., Ltd. W 10,378,114 W 13,611 W 4,051,446 - (W2,400,000) W 12,043,171
Anipark Co., Ltd. 859,244 331,380 173,104 - (374,484) 989,244
Actoznet Co., Ltd. 631,536 - (3,391) (628,145) - -
Onlineworks Co., Ltd. 364,714 407,663 665,464 - - 1,437,841
Beijing Oriental
Interactive Science and
Technology Development
Co., Ltd. 2,201,150 (234,631) (859,118) - - 1,107,401
------------ ------------ ----------- --------- ----------- ------------
Total W 14,434,758 W 518,023 W 4,027,505 (W628,145) (W2,774,484) W 15,577,657
============ ============ =========== ========= =========== ============
For Wemade Entertainment Co., Ltd. other decrease was a result of
dividends receipts.
For Anipark Co., Ltd., a valuation gain was recorded as capital
adjustments for the change in the equity interest arising from the capital
increases. Other decrease of W374,484 thousand is a loss on prior period
adjustments. The amount of net income effect is W271,500 thousand after
deducting related deferred income tax of W102,984 thousand.
For Onlineworks Co., Ltd.("Onlineworks"), a valuation gain was recorded as
capital adjustments for Actoz's proportionate share of the changes arising from
application of the equity method of accounting by Onlineworks to its equity
securities.
For Beijing Oriental Interactive Science and Technology Development Co.,
Ltd., a foreign currency translation loss was recorded as capital adjustments.
6. Property and Equipment
Property and equipment as of December 31, 2004 and 2003 are as follows:
Thousands of Korean won
-----------------------------
2004 2003
---- ----
Land W 4,733,497 W -
Machinery 2,316,528 2,189,876
Furniture and fixture 1,193,200 1,213,291
Vehicles 31,349 31,349
------------ ------------
Total acquisition cost 8,274,574 3,434,516
Less accumulated depreciation (2,898,701) (2,323,777)
------------ ------------
Property and equipment, net W 5,375,873 W 1,110,739
============ ============
16
7. Intangible Assets
Details of development cost and other intangible assets for the years
ended December 31, 2004 and 2003 are as follows:
<2004>
Thousands of Korean won
----------------------------------------------------------------------------------------
Industrial
Description Development cost property right Others Total
-------------------- ---------------- -------------- ----------- --------------
Beginning balance W 3,431,757 W 4,664 W 399,927 W 3,836,348
Increase in the year 2,363,241 2,465 145,547 2,511,253
Amortization (383,108) (1,855) (155,210) (540,173)
Other decrease (1,482,083) - - (1,482,083)*
---------------- -------------- ----------- --------------
Ending balance W 3,929,807 W 5,274 W 390,264 W 4,325,345
================ ============== =========== ==============
* W1,482,083 thousand of impairment loss for development costs was recognized
in 2004. Such impairment loss relate development costs for games that were
determined to be unsuccessful in 2004.
<2003>
Thousands of Korean won
----------------------------------------------------------------------------------------
Industrial
Description Development cost property right Others Total
-------------------- ---------------- -------------- ----------- --------------
Beginning balance W 1,499,704 W 2,200 W 334,191 W 1,836,095
Increase in the year 2,655,354 3,853 185,515 2,844,722
Amortization (411,907) (1,389) (119,779) (533,075)
Other decreases (311,394) - - (311,394)*
---------------- -------------- ----------- --------------
Ending balance W 3,431,757 W 4,664 W 399,927 W 3,836,348
================ ============== =========== ==============
* Other decreases in development costs consist of W195,931 thousand of
transfer to manufacturing costs and W115,463 thousand of impairment losses
recognized in 2003.
8. Transactions with Related Parties
Major transactions and account balances with related parties as of and for
the years ended December 31, 2004 and 2003 are as follows:
<2004>
Thousands of Korean won
--------------------------------------------------------------------------------------
Cost of Royalty fees Commission Related Related
Company Sales sales paid paid receivables payables
---------------------- ----------- ------- ------------ ---------- ----------- ----------
Wemade Entertainment W 1,910,150 W89,384 W 20,286,948 - W 403,363 W5,490,491
Co., Ltd.
Anipark Co., Ltd. W 109,300 - W 2,402,886 - W 1,980 W 651,909
Onlineworks Co., Ltd. - - - W 108,561 - -
Actozinworld Co., Ltd. - - - W 317,582 - -
----------- ------- ------------ ---------- ----------- ----------
Total W 2,019,450 W89,384 W 22,689,834 W 426,143 W 405,343 W6,142,400
=========== ======= ============ ========== =========== ==========
<2003>
17
Thousands of Korean won
---------------------------------------------------------------------------------
Transfer of
investment
Cost of equity Royalty fees Commission Related
Company Sales sales securities paid Paid payables
------------------------- ----- ------- ----------- ------------ ---------- -----------
Wemade Entertainment Co., - - - W 27,185,501 - W25,516,576
Ltd.
Actoznet Co., Ltd. - - - - W 18,375 W 128
Anipark Co., Ltd. - - - W 2,187,095 - W 1,119,182
Onlineworks Co., Ltd. - - W 100,000 - W 141,631 -
Actozinworld Co., Ltd. - - - - W 825,129 W 477,850
----- ------- ----------- ------------ ---------- -----------
Total - - W 100,000 W 29,372,596 W 985,135 W27,113,736
===== ======= =========== ============ ========== ===========
Short-term housing loan to shareholders, officers and employees at
December 31, 2004 and 2003 amounted to W363,930 thousand and
W444,322 thousand, respectively, and the related interest income
recognized in 2004 and 2003 amounted to W46,256 thousand and 34,633
thousand, respectively.
There is no collateral or guarantee provided by Actoz or received from the
related parties as of December 31, 2004.
9. Insurance
As of December 31, 2004 Actoz has fire insurance for its machinery with
Samsung Fire Insurance Co., Ltd. with the coverage amount totaling
W2,316,528 thousand.
In addition, Actoz's vehicles are insured for comprehensive coverage.
10. Assets and Liabilities Denominated in Foreign Currencies
Details of assets and liabilities denominated in foreign currencies before
deducting allowance for doubtful accounts as of December 31, 2004 and 2003 are
as follows:
(In U.S. dollars, JPY, EUR, GBP and thousands of Korean won)
Foreign currency Korean won equivalent
Account 2004 2003 2004 2003
------------------------- -------------- -------------- ----------- ------------
Assets:
Cash and cash equivalents USD - USD 16,908,952 W - W 20,253,543
Accounts receivable USD 7,482,139 USD 6,517,344 7,809,856 7,806,474
JPY 18,802,658 JPY - 190,296 -
EUR 5,322 EUR 17,799 7,573 26,744
GBP 1,545 GBP - 3,104 -
----------- ------------
W 8,010,829 W 28,086,761
=========== ============
Liabilities:
Accrued expenses USD 4,250,217 USD 21,137,932 W 4,436,377 W 25,319,015
EUR 3,725 EUR 12,459 5,301 18,721
JPY 1,521,063 JPY - 15,394 -
----------- ------------
W 4,457,072 W 25,337,736
=========== ============
18
11. Capital Stock
Capital stock of Actoz as of December 31, 2004 and 2003 is as follows;
2004 2003
----------- -----------
Number of shares authorized 50,000,000 50,000,000
Number of shares issued:
Common stock 8,914,500 8,914,500
Par value W 500 W 500
There was no change in capital stock or capital surplus in 2004 and the
changes in the capital in 2003 are summarized as follows:
(Thousands of Korean won)
Stock issuance Paid-in capital in
Date Description Common stock cost excess of par
------------- ------------------- ------------ -------------- -------------------
Jan. 1, 2003 Beginning balance W 2,971,500 W 20,664,738
Nov. 12, 2003 Issuance of free 1,485,750 9,802 * (1,495,552)
share out of capital
surplus
Dec. 31, 2003 Ending balance W 4,457,250 W 19,169,186
* W9,802 thousand of stock issuance costs was offset against paid-in capital
in excess of par.
12. Retained Earnings
(1) Reserve for business rationalization
Until end of 2002, in accordance with the Tax Exemption and
Reduction Control Law, the amount of tax benefit associated with
certain tax deductions and tax credits must be appropriated as a
reserve for business rationalization. The reserve for business
rationalization might not be utilized for cash dividends, but might
be used to offset a future deficit, if any, or might be transferred
to capital stock. However, in December 2002, this law was revised
and the clauses relevant to the above reserve was rescinded.
Accordingly, at December 31, 2004 a reserve of W170,000 thousand for
business rationalization was transferred to voluntary reserve.
(2) Other reserve
Reserve for technology development was appropriated in accordance
with the relevant tax laws, and may be transferred to voluntary
reserve and be utilized for dividends. Reserve for technology
development as of December 31, 2004 is W16,667 thousand.
13. Capital Adjustments
Capital adjustments at December 31, 2004 and 2003 consist of the
following:
Thousands of Korean won
---------------------------
2004 2003
---------- ---------
Treasury stock (W 10,848) (W 10,848)
Capital adjustments of investment securities, net 891,282 373,260
--------- ---------
W880,434 W362,412
========= =========
Actoz has 480 shares of treasury stock (common stock) as of December 31,
2004 and 2003 purchased in the process of issuing additional shares in 2003 and
plans to resell the stock.
19
14. Selling and Administrative Expenses
Selling and administrative expenses in 2004 and 2003 consist of the
following:
Thousands of Korean won
---------------------------------------
2004 2003
---------- ----------
Salaries and wages W2,399,194 W2,402,048
Severance benefits 184,943 163,110
Employee benefits 281,826 258,769
Travel 230,920 211,104
Entertainment 82,051 75,975
Communications 33,417 54,363
Utilities 49,762 41,203
Taxes and dues 42,957 37,344
Depreciation 390,465 512,355
Rent 169,931 161,430
Repairs 22,923 9,961
Vehicles 14,364 12,209
Books and printing 5,936 12,293
Supplies 9,200 20,838
Education and training 4,549 68,453
Bad debt 505,687 64,144
Commissions 2,402,412 2,164,572
Advertising 525,755 1,879,826
Insurance 545 741
Amortization 540,173 533,075
Others 7,060 4,222
---------- ----------
Total W7,904,070 W8,688,035
========== ==========
15. Income Taxes
(1) Components of income tax expense for the year ended December 31,
2004 are as follows;
Thousands of Korean won
-----------------------
Description 2004
----------------------------------------------- ----------------
Current W 3,120,776
Deferred:
Change in cumulative temporary differences 125,313
Change in tax credit carryforwards (553,239)
--------------
Income tax expense W 2,692,850
==============
Effective tax rates 24.90%
20
(2) Reconciliations of accounting income and taxable income for the year
ended December 31, 2004 are as follows;
Thousands of Korean won
--------------------------------------------------
Temporary differences Permanent differences
--------------------- ---------------------
Additions:
Accrued income recorded in prior year W 92,676
Allowance for doubtful accounts 664,394
Bad debt 71,935
Development cost 1,160,403 W 68,536
Reserve for technology development 16,667
Investment securities 1,196,992
Entertainment expense in excess of limit 18,076
Income tax expense 2,561,577
Contribution 55,000
Investment securities 783,646
Gain from revaluation of investment securities 486,872
------------ ------------
Total W 3,203,067 W 3,973,707
============ ============
Deductions:
Accrued income in current year W 91,608
Allowance for doubtful accounts 222,793
Depreciation 122,302
Investment securities 3,092,387
Development cost 217,386 W 43,272
Income tax refunds 180,425
------------ ------------
Total W 3,746,476 W 223,697
============ ============
(3) Changes in temporary differences during the year ended December 31,
2004 and deferred tax assets as of December 31, 2004 are as follows;
Thousands of Korean won
-----------------------
Description January 1, 2004 Increase Decrease December 31, 2004
-------------------------------------------- --------------- ------------- ----------- -----------------
Depreciation W 122,302 - W 122,302 -
Allowance for doubtful accounts 222,793 664,394 222,793 664,394
Bad debt - 71,935 - 71,935
Development cost 540,797 1,160,403 217,386 1,483,814
Available-for-sale securities 200,000 - - 200,000
Accrued income (92,676) (91,608) (92,676) (91,608)
Investment securities (9,556,112) (1,895,395) - (11,451,507)
Reserve for technology development (16,667) - (16,667) -
------------- ----------- ---------- ------------
Sub-total (8,579,563) (90,271) 453,138 (9,122,972)
============= =========== ========== ============
Deferred taxes from tax credit carryforwards 3,030,399
------------
Tax effect of temporary differences: (2,508,817)
============
DEFERRED INCOME TAXES, NET W 521,582
============
21
The future income tax rate of 27.5% has been used in computing deferred
income taxes.
The beginning balances are based on the previous year's tax return and the
difference in amount between the tax return and audited financial report of the
previous year was recorded as income tax refunds in current year.
16. Income Per Share
Net income per share amounts for the years ended December 31, 2004 and
2003 are as follows:
(1) Basic income per share
Korean won(in thousands except for income per share)
----------------------------------------------------
2004 2003
------------ ------------
Net income W 8,119,663 W 11,867,987
Extraordinary gains - -
Extraordinary losses - -
Income taxes relating to extraordinary items - -
------------ ------------
Ordinary income 8,119,663 11,867,987
Weighted average number of shares outstanding 8,914,020 8,914,436
------------ ------------
Ordinary income per share in Korean won W 911 W 1,331
============ ============
Net income per share in Korean won W 911 W 1,331
============ ============
(2) Weighted average number of shares outstanding
<2004>
Numbers Weighted number of
of shares Days shares
--------- ---- ---------------------
Beginning balance 8,914,500
Treasury stock (480)
-------------
Total 8,914,020 366 3,262,531,320
/366
-------------
Weighted average number of shares 8,914,020
=============
<2003>
Numbers Weighted number of
of shares Days shares
---------- ---- ---------------------
Beginning balance 5,943,000
Issuance of common stock 2,971,500
Treasury stock (480)
-------------
Total 8,914,020 365 3,253,768,980
/365
-------------
Weighted average number of shares 8,914,436
=============
Diluted income per share is the same as the basic income per share amounts
as Actoz does not have any securities to be convertible to common stocks such as
convertible bonds or preferred stocks as of December 31, 2004.
22
17. Value Added Information
Details of value added information for the years ended December 31, 2004
and 2003 are as follows:
<2004>
Thousands of Korean won
-----------------------
Selling and Development cost
administrative and its impairment
Cost of sales expense loss Total
------------- --------------- ------------------- ------------
Salaries W 267,287 W 2,399,194 W 1,366,085 W 4,032,566
Provision for retirement 10,456 184,943 89,179 284,578
and severance benefits
Other benefits for employees 33,037 281,826 171,236 486,099
Rent 15,530 169,930 96,045 281,505
Depreciation 42,970 390,465 237,545 670,980
Taxes and dues - 42,957 - 42,957
--------- ----------- ------------ ------------
Total W 369,280 W 3,469,315 W 1,960,090 W 5,798,685
========= =========== ============ ============
<2003>
Thousands of Korean won
-----------------------
Selling and Development cost
administrative and its impairment
Cost of sales expense loss Total
------------- ---------------- ------------------- -------------
Salaries W 609,801 W 2,402,048 W 1,394,847 W 4,406,696
Provision for retirement 52,286 163,110 98,376 313,772
and severance benefits
Other benefits for employees 60,420 258,769 151,210 470,399
Rent 38,171 161,430 97,867 297,468
Depreciation 125,758 512,355 304,918 943,031
Taxes and dues - 37,344 - 37,344
---------- ------------ ------------ -------------
Total W 886,436 W 3,535,056 W 2,047,218 W 6,468,710
========== ============ ============ =============
18. Employees' Benefits and Contribution to Society
Actoz provides various employee benefits such as a national pension, a
medical insurance, workmen's accident compensation and a paid vacation. Actoz
paid W486,099 thousand for such employee benefits in 2004.
Actoz contributed W55,000 thousand to the Korea Game Industry
Association in 2004.
23
19. Supplementary Cash Flow Information
Major transactions not involving the inflow or outflow of cash for the
years ended December 31, 2004 and 2003 are as follows:
Thousands of Korean won
--------------------------------------
Description 2004 2003
------------------------------------------------- ---- ---------------
Transfer of paid-in capital in excess of par into
capital stock - W 1,485,750
20. Commitments and Contingencies
As of December 31, 2004, the Company was a party to two legal proceedings.
The first legal proceeding, which is pending before an arbitration tribunal
under the International Chamber of Commerce in Singapore, relates to a
contractual dispute with respect to the online game named the Legend of Mir II.
Shanghai Shanda Internet Development Co. Ltd., or Shanghai Shanda, initiated the
arbitration in July 2003 against the Company and Wemade Entertainment Co., Ltd.,
or Wemade, the co-licensor of The Legend of Mir II. Shanghai Shanda and the
Company settled the dispute in August 2003 and requested discontinuation of the
arbitration. Wemade, however, has objected to this settlement and request for
discontinuation, and has filed counterclaims against Shanghai Shanda and
cross-claims against the Company. The second legal proceeding, which is pending
before the First Intermediate People's Court of Beijing, relates to an alleged
copyright infringement by Shanghai Shanda. Wemade initiated the suite in October
2003 and Actoz joined the suit in April 2004. Neither of these two legal
proceedings have been resolved and their final outcomes cannot be predicted.
21. Subsequent Events
In February 2005, Shanda Interactive Entertainment Limited, or Shanda,
purchased an approximately 29% stake in Actoz from certain shareholders of
Actoz. Completion of this purchase followed Shanda's purchase of an amount of
Actoz shares on the KOSDAQ market equal to approximately 9% of Actoz's issued
and outstanding shares.
22. Interim Period Information
Interim financial informations of Actoz for the final(4th) quarter of 2004
and 2003 are summarized as follows:
Korean won(in thousands
except for income per share)
--------------------------------------------
2004 2003
---------- -------------
Sales W8,979,541 W 7,181,201
Gross profit(loss) 3,330,104 (775,806)
Operating income(loss) 1,730,552 (3,414,671)
Quarterly net income 1,745,411 3,756,091
Quarterly net income per
share in Korean won W 196 W 421
23. Economic Environment
In response to the overall unstable economic situations, the Korean
government and the private sector have been implementing structural reforms to
historical business practices. Actoz may be either directly or indirectly
affected by these economic situations and structural reforms.
24
The accompanying financial statements reflect management's current
assessment of the impact to date of the economic situation on the financial
position of Actoz. Actual results may differ materially from management's
current assessment.
25
SHANDA INTERACTIVE ENTERTAINMENT LIMITED
INTRODUCTION TO THE UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
The following unaudited pro forma consolidated statement of operations
gives effect to the acquisition by Shanda Interactive Entertainment Limited, or
Shanda, of Actoz Soft Co., Ltd., or Actoz, in a transaction to be accounted for
using the equity method of accounting. The unaudited pro forma consolidated
statement of operations is based on the historical consolidated statement of
operations of Shanda and its subsidiaries and the historical consolidated
statements of operations of Actoz.
The unaudited pro forma consolidated statement of operations for the year
ended December 31, 2004 presents the results of Shanda and its subsidiaries as
if (i) Shanda had obtained a RMB366 million loan on January 1, 2004 to finance a
portion of the purchase price in order to complete the acquisition on such date,
and (ii) the acquisition of approximately 38% of Actoz had occurred on January
1, 2004.
The unaudited pro forma consolidated statement of operations should be
read in conjunction with the notes included herein as well as Shanda's
historical consolidated financial statements, the notes included therein, and
"Management's Discussion and Analysis of Financial Consolidated and Results of
Operations" included in our annual report on Form 20-F (File No. 000-50705) that
was filed with the U.S. Securities and Exchange Commission on May 31, 2005, and
other financial information included in such annual report on Form 20-F.
The information set out below does not form part of the audited financial
statements and is included here for reference purpose only.
PricewaterhouseCoopers Zhang Tian Certified Public Accountants Ltd. Co. express
no opinion or any other form of assurance on the following information.
26
SHANDA INTERACTIVE ENTERTAINMENT LIMITED
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2004
(IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
ACTUAL PRO FORMA PRO FORMA
FOR THE YEAR ENDED ADJUSTMENTS FOR THE YEAR ENDED
DECEMBER 31, 2004 NOTE DECEMBER 31, 2004
------------------ ----------- -----------------------------
RMB RMB RMB US$
(AUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
Net revenues
MMORPG 994,664 994,664 120,179
Casual game 214,513 214,513 25,918
Others 89,548 89,548 10,820
------------------ ---------- ----------
Total net revenues 1,298,725 1,298,725 156,917
------------------ ---------- ----------
Cost of services
Ongoing licensing fees for online games (249,289) (249,289) (30,120)
Amortization of upfront licensing fees (27,241) (27,241) (3,291)
Server leasing and maintenance fees (79,918) (79,918) (9,656)
Salary and benefits (23,802) (23,802) (2,876)
Depreciation of property, equipment and
software (28,403) (28,403) (3,432)
Others (62,531) (62,531) (7,555)
------------------ ---------- ----------
Total cost of services (471,184) (471,184) (56,930)
------------------ ---------- ----------
Gross profit 827,541 827,541 99,987
Operating expenses
Product development (70,829) (70,829) (8,558)
Sales and marketing (91,083) (91,083) (11,005)
General and administrative (130,655) (130,655) (15,786)
Share-based compensation (24,012) (24,012) (2,901)
------------------ ---------- ----------
Total operating expenses (316,579) (316,579) (38,250)
------------------ ---------- ----------
Income from operations 510,962 510,962 61,737
Interest income 19,677 (7,890) (a) 11,787 1,424
Amortization of convertible debt issuance cost (3,524) (3,524) (426)
Investment income 43,494 43,494 5,255
Other income 83,656 83,656 10,108
Interest expense - (3,334) (a) (3,334) (403)
------------------ ----------- ---------- ----------
Income before income tax expenses, equity
in loss of affiliated companies and
minority interests 654,265 (11,224) 643,041 77,695
Income tax expenses (38,941) (38,941) (4,705)
Equity in loss of affiliated companies (4,180) (30,433) (b), (c) (34,613) (4,182)
Minority interests (1,661) (1,661) (201)
------------------ ----------- ---------- ----------
Net income 609,483 (41,657) 567,826 68,607
================== =========== ========== ==========
Income attributable to Series A and Series
A-1 preferred shareholders (82,479) (79,059) (9,552)
------------------ =========== ---------- ----------
Net income attributable to ordinary
shareholders 527,004 (41,657) 488,767 59,055
================== =========== ========== ==========
Earnings per share:
Basic 4.32 4.00 0.48
Diluted 4.05 3.75 0.45
Earnings per ADS:
Basic 8.64 8.00 0.96
Diluted 8.10 7.50 0.90
See accompanying notes this Unaudited Pro Forma Consolidated
Statement of Operations.
27
SHANDA INTERACTIVE ENTERTAINMENT LIMITED
NOTES TO THE UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
1. BASIS OF PRO FORMA PRESENTATION
In November 2004, Shanda entered into a sale and purchase agreement with
certain shareholders of Actoz, a Korean developer, operator and publisher of
online games listed on the Korean KOSDAQ Market, to acquire approximately 29% of
the outstanding shares of Actoz for approximately US$91.7 million (RMB759
million). This acquisition was completed on February 2, 2005.
In December 2004 while this acquisition was pending, Shanda purchased
approximately 9% of the outstanding shares of Actoz for approximately US$14.4
million (RMB119 million) in the open market. Until the completion of the
additional acquisition in February 2005, Shanda was not able to exercise
significant influence over the operations of Actoz and, accordingly, the
investment was reported in Shanda's financial statements as marketable
securities and carried at the fair market value of such securities. Reported in
this manner, the 9% holding in Actoz experienced an unrealized depreciation of
approximately RMB9.1 million for the fiscal year ended December 31, 2004,
recorded as a component of other comprehensive income under shareholders'
equity.
Upon completion of the acquisition on February 2, 2005, Shanda and its
subsidiaries obtained significant influence over Actoz's operations. As a
result, in reports presented since that date, including with respect to certain
periods prior to February 2, 2005, Shanda's investment in Actoz is accounted for
using the equity method of accounting. This unaudited pro forma consolidated
statement of operations for the year ended December 31, 2004 gives effect to the
transaction as if the acquisition of the combined approximate 38% stake in Actoz
occurred on January 1, 2004.
The unaudited consolidated balance sheet as of March 31, 2005 includes and
reflects the actual impact of the Actoz acquisition. The unaudited pro forma
consolidated statement of operations for the three-month period ended March 31,
2005 is not included in this report on Form 6-K. In addition, Shanda's results
of operations for the first three-month period ended March 31, 2005 reflect the
impact of the acquisition of approximately 9% of Actoz for the entire period and
the acquisition of approximately 29% of Actoz from February 2, 2005. The pro
forma adjustments to give effect to the aggregate Actoz acquisition as if it
occurred on January 1, 2005 would not result in a material impact on Shanda's
financial results for the first quarter ended March 31, 2005.
2. PRO FORMA ADJUSTMENTS FOR THE ACQUISITION OF ACTOZ
The pro forma adjustments related to the acquisition included in the
unaudited pro forma consolidated statement of operations are as follows:
(a): Pro forma adjustments for assumed interest expense and foregone
interest income.
The unaudited pro forma consolidated statement of operations assumes
that the acquisition was effected on January 1, 2004. As of January 1,
2004, Shanda did not have sufficient cash to effect the transaction since
cash and cash equivalents of Shanda as of January 1, 2004 totaled
approximately RMB599 million, and Shanda estimated that it needed to
maintain approximately RMB87 million of cash for working capital purposes.
Under these conditions, Shanda would have had only RMB512 million of cash
or cash equivalents as of January 1, 2004 available for the acquisition of
Actoz, and Shanda would have had to borrow RMB366 million from third
parties to complete the acquisition at that time. In May 2004, Shanda
completed an initial public offering, or an IPO, of American Depository
Shares, or ADSs. The proceeds from the IPO, amounting to approximately
RMB896 million, were received in May 2004. Upon completion of the IPO, the
notional loan of RMB366 million to finance Shanda's acquisition of Actoz
is assumed have been paid off for purposes of this pro forma presentation.
The interest rate under this notional loan is deemed to be 2.5% per annum,
which is the London Interbank Offering Rate, plus an assumed borrowing
rate for Shanda, as of January 1, 2004, of 1.5%.
28
In addition to this borrowing rate, had Shanda completed the
acquisition of Actoz on January 1, 2004, Shanda would have foregone
certain interest income earned from its excess cash based on an interest
rate of 1.8% per annum, which was the average rate of returns on Shanda's
surplus cash for the year ended December 31, 2004.
Pro forma adjustments of RMB7.89 million and RMB3.33 million have
been recognized in this pro forma presentation in order to reflect the
interest expense that would have been incurred and the interest income
that would have been forgone during the year ended December 31, 2004 if
the acquisition had been effected on January 1, 2004.
(b): Pro forma adjustments for the purchase price allocation.
Purchase price allocation of the initial purchase price of US$106.1
million (RMB878 million) is as follows:
IN THOUSANDS
(RMB)
Fair value of net tangible assets acquired 127,505
In process research & development costs ("IPR&D") 15,460
Intangible assets 185,115
Goodwill 549,916
-------
Purchase price 877,996
=======
In accordance with US GAAP, research and development costs, including in
process research & development costs, or IPR&D, acquired as part of a business
acquisition, should be recognized as expense when incurred. A pro forma
adjustment was recognized on the unaudited pro forma consolidated statement of
operations to give effect to the immediate write-off of the valuation of IPR&D
and the amortization of certain intangible assets of Actoz during the year ended
December 31, 2004 as follows:
USEFUL LIVES
(YEARS) IN THOUSANDS (RMB)
IPR&D N/A 15,460
Completed technology 3 to 7 10,155
Core technology 4 8,921
Customer database 2 11,591
Trademark Indefinite -
Non-compete agreement 2.5 2,719
------
Total 48,846
======
(c) Pro forma adjustments are recognized for Shanda and its subsidiaries'
share in equity results of Actoz:
For the year ended December 31, 2004, under a pro forma analysis,
Shanda recognizes RMB18.41 million of equity in earning based on 38.1% of
Actoz's operating results under United States' General Accepted Accounting
Principles, or US GAAP, which differs in certain material respects from
Actoz's operating results as reported under the Republic of Korea's
General Accepted Accounting Principles, or Korean GAAP. Actoz operating
results under US GAAP are summarized as follows:
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FOR THE YEAR ENDED
DECEMBER 31, 2004
IN THOUSANDS (RMB)
Net revenue 215,403
Gross profit 144,405
Total operating expenses (77,791)
Interest income (expense), net 5,734
Other income, net (3,617)
Income tax expense (20,403)
------------------
Net income 48,328
------------------
The net income of Actoz reported under Korean GAAP is reconciled to the US
GAAP is as follow:
FOR THE YEAR ENDED
DECEMBER 31, 2004
IN THOUSANDS (RMB) NOTE
Net income (reported under US GAAP) 48,328
Revenue on upfront license fee arrangement to be amortized under US GAAP (7,716) 1
Development costs written off under US GAAP 4,572 2
Consolidation differences under US GAAP 18,551 3
Others 1,196 4
------------------
Net income (reported under Korean GAAP) 64,931
------------------
(1) Under Korean GAAP, revenue for upfront license fees is recognized
upon receipt if such fees can be measured reliably and it is
probable that such benefits will flow into the entity. Under US
GAAP, such upfront license fees should be recognized over the term
of the license period.
(2) Under Korean GAAP, development costs are capitalized and subject to
future amortization if such development costs satisfy certain
conditions and future economic benefits can be reliably determined.
Under US GAAP, development costs should be expensed in accordance
with Statement of Financial Accounting Standards No. 86 "Accounting
for the Costs of Computer Software to Be Sold, Leased, or Otherwise
Marketed" and Statement of Financial Accounting Standards No. 2,
"Accounting for Research and Development Costs," as applicable.
(3) This adjustment reflects the aggregate effects of the following:
(i) Differences in US GAAP and Korean GAAP as applicable to
Onlineworks Co., Ltd., or Onlineworks, a company in which
Actoz holds an equity interest, mainly relating to recognition
of development costs as stated in (2) above. As allowed under
Korean GAAP, Onlineworks was accounted for under the equity
method, and Actoz's equity in earnings of Onlineworks was
based on Onlineworks' Korean GAAP results. Under US GAAP,
Onlineworks should be consolidated as it has a controlling
financial interest in such entity;
(ii) Differences in US GAAP and Korean GAAP as applicable to
Anipark Co., Ltd, or Anipark, mainly relating to recognition
of development costs as stated in (2) above and the
requirement to recognize interest expense for certain
redeemable preferred shares under US GAAP. Actoz owns 40%
interest in Anipark and accounts for Anipark under the equity
method;
(iii) Consolidation of loss making subsidiaries, Actoz-in-World Co.,
Ltd and
30
Beijing-in-World Co., Ltd. under US GAAP. Under Korean GAAP,
subsidiaries meeting certain specific criteria are not
required to be consolidated. Actoz-in-World Co., Ltd and
Beijing-in-World Co, Ltd. are exempted from consolidation
under Korean GAAP due to the insignificant size of these two
entities; and
(iv) Consolidation of a variable interest entity Vivabox Co., Ltd.,
or Vivabox, as required by accounting rule FIN 46(R)
"Consolidation of Variable Interest Entities" under US GAAP as
Actoz bears the risk and rewards of Vivabox. This Company is
not required to be consolidated under Korean GAAP.
(4) Relates to the aggregate effects of other adjustments such as
differences in depreciation policy adopted by Shanda and Actoz.
3. PRO FORMA EARNINGS PER SHARE
The unaudited pro forma earnings per share for the year ended December 31,
2004 as follows:
(IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE DATA) RMB US$
NUMERATOR:
Pro forma net income 567,826 68,607
Dividends to Series A and Series A-1 (48,213) (5,825)
Preferred Shareholders
Earnings allocated to participating Preferred Shareholders (30,846) (3,727)
----------- -----------
Numerator for basis earnings per share 488,767 59,055
Effect of dilutive securities - -
----------- -----------
Numerator for diluted earnings per share 488,767 59,055
----------- -----------
DENOMINATOR:
Denominator for basic earnings per share - weighted-average ordinary shares
outstanding 122,136,580 122,136,580
Dilutive effect of share options 8,031,076 8,031,076
----------- -----------
Denominator for diluted earnings per share 130,167,656 130,167,656
----------- -----------
Basic earnings per share 4.00 0.48
Diluted earnings per share 3.75 0.45
Basic earnings per ADS 8.00 0.96
Diluted earnings per ADS 7.50 0.90
31
ABOUT SHANDA INTERACTIVE ENTERTAINMENT LIMITED
Shanda Interactive Entertainment Limited (Nasdaq: SNDA) is a leading
interactive entertainment media company in China. Shanda offers a portfolio of
diversified entertainment content including some of the most popular massively
multi-player and casual online games in China, along with online chess and board
games, a network PC game platform and a variety of cartoons, literature works
and music. Shanda's interactive entertainment platform attracts a large and
loyal user base. Each user can interact with thousands of others and enjoy the
interactive entertainment content that Shanda provides. Interaction enriches
your life. For more information about Shanda, please visit http://www.snda.com.
SAFE HARBOR STATEMENT
This announcement contains forward-looking statements that are based on
Shanda's current expectations, assumptions, estimates and projections about the
company and the industry. All statements other than statements of historical
fact in this announcement are forward-looking statements. These forward-looking
statements involve various risks and uncertainties. Although Shanda believes
that its expectations expressed in these forward-looking statements are
reasonable, it cannot assure you that its expectations will turn out to be
correct. Shanda's actual results could be materially different from and worse
than its expectations. Important risks and uncertainties could cause Shanda's
actual results to be materially different from Shanda's expectations include but
not limited to risks set forth in Shanda's filings with the U.S. Securities and
Exchanges Commission, including Shanda's registration statement on Form F-1 and
annual report on Form 20-F.
CONTACT:
Donglei Zhou
Director of Business Development & Investor Relations
Shanda Interactive Entertainment Limited
Phone: 8621-50504740
E-mail: IR@shanda.com.cn
Todd St.Onge (investors): stonge@braincomm.com
Michael DiPaolo (media):dipaolo@braincomm.com
Brainerd Communicators, Inc.
212-986-6667
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