Filed Pursuant to Rule 424(b)(2)
Registration No. 333-184757
CALCULATION OF REGISTRATION FEE
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Title of Each Class of Securities To Be Registered |
Amount To Be Registered |
Proposed Offering Price |
Proposed Maximum Aggregate Offering Price |
Amount of Registration Fee(1) | ||||
3.250% Notes due 2018 |
US$1,000,000,000 | 99.835% | US$998,350,000 | US$136,175 | ||||
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(1) | Calculated in accordance with Rule 457(r) of the Securities Act of 1933, as amended. |
Prospectus Supplement
(To Prospectus dated November 5, 2012)
Baidu, Inc.
US$1,000,000,000 3.250% Notes due 2018
We are offering US$1,000,000,000 of our 3.250% notes due 2018 (the Notes). The Notes will mature on August 6, 2018. Interest on the Notes will accrue from August 6, 2013 and be payable on February 6 and August 6 of each year, beginning on February 6, 2014.
We may at our option redeem the Notes at any time, in whole or in part, at a price equal to the greater of 100% of the principal amount of such Notes and the make whole amount plus accrued and unpaid interest, if any, to (but not including) the redemption date. We may also redeem the Notes at any time upon the occurrence of certain tax events. Upon the occurrence of a change of control, we must make an offer to repurchase all Notes outstanding at a purchase price equal to 101% of their principal amount, plus accrued and unpaid interest, if any, to (but not including) the date of repurchase. For a more detailed description of the Notes, see Description of the Notes in this prospectus supplement.
The Notes are our senior unsecured obligations and will rank senior in right of payment to all of our existing and future obligations expressly subordinated in right of payment to the Notes; rank at least equal in right of payment with all of our existing and future unsecured unsubordinated obligations (subject to any priority rights pursuant to applicable law); be effectively subordinated to all of our existing and future secured obligations, to the extent of the value of the assets serving as security therefor; and be structurally subordinated to all existing and future obligations and other liabilities of our subsidiaries and consolidated affiliated entities.
See Risk Factors beginning on page S-11 for a discussion of certain risks that should be considered in connection with an investment in the Notes.
Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of the Notes or determined that this prospectus supplement or the accompanying prospectus is accurate or complete. Any representation to the contrary is a criminal offense.
Per Note | Total | |||||||
Public Offering Price(1) |
99.835 | % | US$ | 998,350,000 | ||||
Underwriting Discount |
0.300 | % | US$ | 3,000,000 | ||||
Proceeds to Baidu(1) |
99.535 | % | US$ | 995,350,000 |
(1) | Plus accrued interest, if any, from August 6, 2013. |
Approval-in-principle has been obtained for the listing and quotation of the Notes on the Singapore Exchange Securities Trading Limited, or the SGX-ST. The SGX-ST assumes no responsibility for the correctness of any of the statements made, opinions expressed or reports contained herein. Admission to the SGX-ST or quotation of any Notes on the SGX-ST is not to be taken as an indication of the merits of us, or any of our subsidiaries or consolidated affiliated entities, or of the Notes. Currently, there is no public trading market for the Notes.
We expect to deliver the Notes to investors through the book-entry delivery system of The Depository Trust Company and its direct participants, including Euroclear Bank S.A./N.V., or Euroclear, and Clearstream Banking, société anonyme, or Clearstream, on or about August 6, 2013, which is the fifth business day following the date of this prospectus supplement. Purchasers of the Notes should note that trading of the Notes may be affected by this settlement date.
Joint Bookrunners
J.P. Morgan | Goldman Sachs (Asia) L.L.C. |
Co-managers
ANZ | Bank of China | Morgan Stanley |
The date of this prospectus supplement is July 30, 2013.
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UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
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You should rely only on the information contained or incorporated by reference in this prospectus supplement and the accompanying prospectus. We have not, and the underwriters have not, authorized any other person to provide you with different information. If anyone provides you with different or inconsistent information, you should not rely on it. We are not, and the underwriters are not, making an offer to sell these notes in any jurisdiction where the offer or sale is not permitted. You should assume that the information appearing in this prospectus supplement, the accompanying prospectus and the documents incorporated by reference is accurate only as of each of their respective dates. Our business, financial condition, results of operations and prospects may have changed since those dates.
ABOUT THIS PROSPECTUS SUPPLEMENT
This document consists of two parts. The first part is this prospectus supplement, which describes the specific terms of this offering of Notes by us. The second part, the base prospectus, presents more general information about this offering. The base prospectus was included in the registration statement on Form F-3 (File No. 333-184757) that we filed with the SEC on November 5, 2012, and has been updated since that time with additional information that is incorporated by reference. Generally, when we refer only to the prospectus, we are referring to both parts combined, and when we refer to the accompanying prospectus, we are referring to the base prospectus as updated through incorporation by reference.
If the description of the offering of the Notes varies between this prospectus supplement and the accompanying prospectus, you should rely on the information in this prospectus supplement.
You should not consider any information in this prospectus supplement or the accompanying prospectus to be investment, legal or tax advice. You should consult your own counsel, accountants and other advisers for legal, tax, business, financial and related advice regarding the purchase of any of the Notes offered by this prospectus supplement.
In this prospectus supplement, unless otherwise indicated or unless the context otherwise requires, the terms we, us, our company, our Baidu, and issuer refer to Baidu, Inc., its subsidiaries and, in the context of describing our operations and consolidated financial information, our consolidated affiliated entities in China; China and PRC refer to the Peoples Republic of China and, solely for the purpose of this prospectus, exclude Taiwan, Hong Kong and Macau; and all references to RMB and Renminbi are to the legal currency of China and all references to U.S. dollars, US$, dollars and $ are to the legal currency of the United States.
All discrepancies in any table between the amounts identified as total amounts and the sum of the amounts listed therein are due to rounding.
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WHERE YOU CAN FIND MORE INFORMATION
We are subject to the reporting requirements of the Securities Exchange Act of 1934, as amended, or the Exchange Act, and, in accordance with the Exchange Act, we file annual reports and other information with the SEC. Information we file with the SEC can be obtained over the internet at the SECs website at www.sec.gov or inspected and copied at the public reference facilities maintained by the SEC at 100 F Street, N.E., Washington, D.C. 20549. You can request copies of these documents, upon payment of a duplicating fee, by writing to the SEC. Please call the SEC at 1-800-SEC-0330 or visit the SEC website for further information on the operation of the public reference rooms.
This prospectus supplement is part of a registration statement that we filed with the SEC, using a shelf registration process under the Securities Act of 1933, as amended, or the Securities Act, relating to the securities to be offered. This prospectus supplement does not contain all of the information set forth in the registration statement, certain parts of which are omitted in accordance with the rules and regulations of the SEC. For further information with respect to Baidu, Inc. and the Notes, reference is hereby made to the registration statement and the prospectus contained therein. The registration statement, including the exhibits thereto, may be inspected on the SECs website or at the Public Reference Room maintained by the SEC.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The SEC allows us to incorporate by reference the information we file with or submit to the SEC, which means that we can disclose important information to you by referring you to those documents that are considered part of the accompanying prospectus. Information that we file with or submit to the SEC in the future and incorporate by reference will automatically update and supersede the previously filed information. See Incorporation of Certain Documents by Reference in the accompanying prospectus for more information. All of the documents incorporated by reference are available at www.sec.gov under Baidu, Inc., CIK number 0001329099.
Our annual report on Form 20-F for the fiscal year ended December 31, 2012 originally filed with the SEC on March 27, 2013 (File No. 000-51469), or our 2012 Form 20-F, is incorporated by reference into the accompanying prospectus.
As you read the documents incorporated by reference, you may find inconsistencies in information from one document to another. If you find inconsistencies, you should rely on the statements made in the most recent document.
We will provide a copy of any or all of the information that has been incorporated by reference into the accompanying prospectus, upon written or oral request, to any person, including any beneficial owner of the Notes, to whom a copy of this prospectus supplement is delivered, at no cost to such person. You may make such a request by writing or telephoning us at the following mailing address or telephone number:
IR Department
Baidu, Inc.
Baidu Campus
No. 10 Shangdi 10th Street
Haidian District, Beijing 100085
Peoples Republic of China
Telephone: +86 (10) 5992-8888
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This prospectus supplement, the accompanying prospectus and the documents incorporated by reference contain forward-looking statements that reflect our current expectations and views of future events. These statements are made under the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. You can identify these forward-looking statements by terminology such as may, will, expect, anticipate, future, intend, plan, believe, estimate, is/are likely to or other similar expressions. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our financial condition, results of operations, business strategy and financial needs. These forward-looking statements include, among other things:
| our growth strategies; |
| our future business development, results of operations and financial condition; |
| our proposed use of proceeds from the sale of debt securities; |
| our ability to attract and retain users and customers and generate revenue and profit from our customers; |
| our ability to retain key personnel and attract new talent; |
| competition in the internet search, online marketing and other businesses in which we engage; |
| the outcome of ongoing or any future litigation, including those relating to intellectual property rights; and |
| PRC governmental regulations and policies relating to the internet and internet search providers and to the implementation of a corporate structure involving variable interest entities in China. |
The forward-looking statements included in this prospectus supplement and the accompanying prospectus and the documents incorporated by reference are subject to risks, uncertainties and assumptions about our company. Our actual results of operations may differ materially from the forward-looking statements as a result of the risk factors disclosed in this prospectus supplement and the accompanying prospectus and the documents incorporated by reference.
We would like to caution you not to place undue reliance on these forward-looking statements and you should read these statements in conjunction with the risk factors disclosed herein, in the accompanying prospectus and in the documents incorporated by reference for a more complete discussion of the risks of an investment in our securities. We operate in a rapidly evolving environment. New risks emerge from time to time and it is impossible for our management to predict all risk factors, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ from those contained in any forward-looking statement. We do not undertake any obligation to update or revise the forward-looking statements except as required under applicable law.
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This summary highlights information presented in greater detail elsewhere. This summary is not complete and does not contain all the information you should consider before investing in the Notes. You should carefully read the entire prospectus before investing, including Risk Factors, and including the documents incorporated by reference. See Incorporation of Certain Documents by Reference. Our 2012 Form 20-F, which contains our audited consolidated financial statements as of December 31, 2011 and 2012 and for each of the three years ended December 31, 2012, is incorporated by reference.
Baidu, Inc.
Overview
We are the leading Chinese language internet search provider. As a technology-based media company, we aim to provide the best way for people to find information. In addition to serving users, we provide an effective platform for businesses to reach potential customers.
Our Baidu.com website is the largest website in China and the fifth largest website globally, as measured by average daily visitors and page views over the month preceding the date of this prospectus, according to Alexa.com, an internet analytics firm. We are the most used internet search provider in China, capturing 82% of internet search traffic in China in the first quarter of 2013, according to iResearch Consulting Group, a market research firm. Our Baidu brand received the highest ranking for an internet brand in China in BrandZ Top 50 Most Valuable Chinese Brands 2013, a study published by Millward Brown Optimor, a brand strategy research firm.
We serve three types of online participants and have achieved significant scale and diversity in our business:
Users. We offer a Chinese language search platform on our Baidu.com website that enables users to find relevant information online, including web pages, news, images, documents and multimedia files, through links provided on our website. We also provide a broad range of products and services to enrich user experience and facilitate easy and quick search, including search products, social-networking products, user-generated-content-based knowledge products, location-based products and services, music products, PC client software, mobile related products and services and other products and services. Our products and services can be accessed through PCs and mobile devices. We aspire to provide the best search experience to our users. To this end, we have invested in advanced technology such as deep learning and semantic intelligence.
We also offer a broad range of mobile products, with Baidu Mobile Search and Baidu Mobile Maps as our flagship products. Additional products include Baidu Mobile Browser, Baidu Mobile Assistant, Baidu Voice Assistant, Baidu Photo Wonder, Baidu Personal Cloud Storage and Baidu Security Manager. Baidu Mobile Search enables users to access our products and services and to perform search on mobile devices via text, voice or image. The number of daily active users of Baidu Mobile Search, defined as users who used the service at least once on a given day, exceeded 100 million for the first time in April 2013 and continues to grow, which we believe makes us a clear leader in the mobile search market in China. Baidu Mobile Maps increasingly serves as a gateway for users to conduct local searches. It has an open application programming interface and integrates services and information from numerous partners. The number of monthly active users of our mobile map service, defined as users who used the service at least once in a given month, exceeded 100 million for the first time in May 2013. According to the China Mobile Internet Development Statistical Report by CNNIC released this April, we have the most popular mobile map, with over 40% of users surveyed choosing Baidus mobile map.
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Customers. We deliver online marketing services to a diverse customer base operating in a variety of industries. In 2012, we had approximately 596,000 active online marketing customers, as compared to 488,000 in 2011 and 412,000 in 2010. In the six months ended June 30, 2013, we had approximately 548,000 active online marketing customers, compared to 415,000 in the six months ended June 30, 2012. Our online marketing customers consist of small and medium enterprises, or SMEs, throughout China, large domestic companies and Chinese divisions and subsidiaries of large, multinational companies. We reach and serve our customers through our direct sales force as well as a network of third-party distributors across China. As many of our customers are SMEs, we use distributors to help us identify potential SME customers, collect payments and assist SMEs in setting up accounts with us and using our online marketing services. To better enable our customers to adopt the mobile opportunity, we provide free tools to customers to help them build and modify mobile landing pages and proactively educate customers about mobile marketing. In May 2013, we introduced an integrated bidding system to better streamline the bidding experience for PC and mobile channels for our customers.
Baidu Union Members. Baidu Union consists of a large number of third-party web content and software providers. Baidu Union members can display on their properties our customers promotional links that match the content of such members properties. We allow Baidu Union members to provide high-quality and relevant search results to their users without the cost of building and maintaining advanced search capabilities in-house and to monetize their traffic through revenue sharing arrangements with us.
Technology and people are critical to our long-term success:
Technology. We focus on research and development and innovation. To stay at the forefront of the internet industry and to achieve long term growth and success, we expanded the number of our research and development employees from approximately 3,600 as of December 31, 2010 to approximately 6,000 as of December 31, 2011 and approximately 9,300 as of December 31, 2012. We have developed a proprietary technological infrastructure consisting of technologies for web search, mobile, pay-for-performance, or P4P, targetizement and large-scale systems. We believe our established infrastructure, which serves as the backbone for both our PC and mobile platforms, creates a significant competitive advantage for us.
In 2013, we established the Baidu Institute of Deep Learning. Deep learning is an emerging computer science field that seeks to mimic the human brain with hardware and software. This technology will help us enhance the search experience we provide to users and improve our ad targeting technology and monetization capability. Today, we believe we are the market leader in China in terms of Mandarin Chinese voice recognition capabilities and image matching technology.
People. We have a visionary and experienced management team. Under their leadership, we have developed a strong company culture that encourages individual thinking and creativity, continuous self-improvement and strong commitment to providing the best experience to our users and customers. We value our employees and provide abundant opportunities for training, responsibility and career advancement in our organization.
We have a robust business model:
Online Marketing Services. We generate almost all of our revenues from online marketing services, a substantial majority of which are derived from services based on search queries on our P4P platform for PC and mobile. Our P4P platform enables customers to bid for priority placement of their links in keyword search results, and provides customers with wide reach, precise targeting capabilities, highly measurable results and superior returns on marketing spending. We generally require our P4P SME customers to pay deposits before using our services and remind them to replenish their accounts when needed. We also provide other forms of online marketing services, including contextual ads, display placements and online video ads.
Revenue, Profit and Cash Flow. We have grown substantially by focusing on the organic growth of our core business, complemented by strategic investments and acquisitions. Our total revenues in 2012 were
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RMB22.3 billion (US$3.6 billion), a 53.8% increase over 2011. Our operating profit in 2012 was RMB11.1 billion (US$1.8 billion), a 45.9% increase over 2011. Our net income attributable to Baidu, Inc. in 2012 was RMB10.5 billion (US$1.7 billion), a 57.5% increase over 2011. Our total revenues, operating profit and net income attributable to Baidu, Inc. in the six months ended June 30, 2013 were RMB13.5 billion (US$2.2 billion), RMB5.1 billion (US$0.8 billion) and RMB4.7 billion (US$0.8 billion), representing 39.2%, 4.2% and 0.7% increases from the corresponding period in 2012, respectively. For the six months ended June 30, 2013, we generated RMB5.4 billion (US$0.9 billion) net cash from operating activities. As of June 30, 2013, we held a total of RMB34.1 billion (US$5.6 billion) in cash and cash equivalents and short-term investments.
Recent Developments
On July 15, 2013, we signed a memorandum of understanding with NetDragon Websoft Inc., which owns 57.4% of the outstanding shares of 91 Wireless Websoft Limited, or 91 Wireless. 91 Wireless is a leading app distribution platform in China. It develops and operates two smartphone app distribution platforms in China, namely 91 Assistant and HiMarket, as well as community websites, 91 Launcher, 91 Panda Reader and other popular products for smartphone users. Pursuant to this memorandum of understanding, we will purchase 100% of the outstanding shares of 91 Wireless at an aggregate purchase price of US$1.9 billion, or a lesser percentage at a proportionately reduced price if not all the minority shareholders of 91 Wireless are willing to sell to us on the same terms as the majority shareholder. We are negotiating with NetDragon Websoft Inc. and the other shareholders of 91 Wireless with the goal of entering into a definitive agreement by August 14, 2013, but we are not obligated to consummate the acquisition unless it would result in our acquiring at least 90% of the outstanding shares of 91 Wireless by that date.
We acquired the online video business of PPStream Inc. for US$370 million in May 2013. We are operating this business as part of iQiyi.
Ratio of Earnings to Fixed Charges
The following table sets forth our unaudited consolidated ratio of earnings to fixed charges for each of the periods indicated using financial information extracted, where applicable, from our audited consolidated financial statements or unaudited interim condensed consolidated financial statements. Our audited consolidated financial statements and unaudited interim condensed consolidated financial statements are prepared in accordance with U.S. GAAP.
Year Ended December 31, | Six Months Ended June 30, |
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2008 | 2009 | 2010 | 2011 | 2012 | 2013 | |||||||||||||||||||
(unaudited) | ||||||||||||||||||||||||
Ratio of earnings to fixed charges |
97.5 | 76.8 | 94.7 | 77.6 | 59.1 | 27.7 |
The ratio of earnings to fixed charges is calculated by dividing earnings by fixed charges. The term earnings means the sum of (a) pre-tax income from continuing operations before adjustment for income or loss from equity investees and (b) fixed charges, less the accretion of the carrying value of the redeemable equity interests of the consolidated subsidiaries. The term fixed charges means the sum of the following: (a) interest expense, (b) amortized discounts related to indebtedness, (c) an estimate of the interest within rental expense, and (d) the accretion of the carrying value of redeemable equity interests attributable to the subsidiaries unaffiliated holders of those equity interests.
Corporate Information
We were incorporated in the Cayman Islands in January 2000. We conduct our operations in China principally through our wholly owned subsidiaries in China. We also conduct part of our operations in China through our consolidated affiliated entities in China, which hold the licenses and permits necessary to operate our
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websites and provide certain services. Our American depositary shares, ten of which represent one Class A ordinary share, par value US$0.00005 per share, of our company, currently trade on The NASDAQ Global Select Market under the symbol BIDU.
Our principal executive offices are located at Baidu Campus, No. 10 Shangdi 10th Street, Haidian District, Beijing 100085, the Peoples Republic of China. Our telephone number at this address is +86 (10) 5992-8888. We have appointed CT Corporation System, which is located at 111 Eighth Avenue, 13th Floor, New York, NY 10011, as our agent upon whom process may be served in any action brought against us under the securities laws of the United States.
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The Offering
The summary below describes the principal terms of the Notes. Certain of the terms described below are subject to important limitations and exceptions. The Description of the Notes section of this prospectus supplement and the Description of Debt Securities section of the accompanying prospectus contain a more detailed description of the terms of the Notes.
Issuer |
Baidu, Inc. |
Notes Offered |
US$1,000,000,000 aggregate principal amount of 3.250% notes due 2018 (the Notes). |
Maturity Date |
August 6, 2018. |
Interest Rate |
The Notes will bear interest at a rate of 3.250% per year. |
Interest Payment Dates |
February 6 and August 6, beginning on February 6, 2014. Interest will accrue from August 6, 2013. |
Optional Redemption |
We may at our option redeem the Notes at any time, in whole or in part, at a price equal to the greater of 100% of the principal amount of the Notes to be redeemed and the make whole amount plus, in each case, accrued and unpaid interest, if any, on the Notes repurchased to (but not including) the redemption date. See Description of the NotesOptional Redemption. |
Repurchase Upon Change of Control |
Upon the occurrence of a Change of Control (as defined in Description of the Notes), we must make an offer to repurchase all Notes outstanding at a purchase price equal to 101% of their principal amount, plus accrued and unpaid interest, if any, to (but not including) the date of repurchase. See Description of the NotesRepurchase Upon Change of Control. |
Ranking |
The Notes will be our senior unsecured obligations and will: |
| rank senior in right of payment to all of our existing and future obligations expressly subordinated in right of payment to the Notes; |
| rank at least equal in right of payment with all of our existing and future unsecured unsubordinated obligations (subject to any priority rights pursuant to applicable law); |
| be effectively subordinated to all of our existing and future secured obligations, to the extent of the value of the assets serving as security therefor; and |
| be structurally subordinated to all existing and future obligations and other liabilities of our subsidiaries and consolidated affiliated entities. |
Covenants |
We will issue the Notes under an indenture with The Bank of New York Mellon, as trustee. The indenture will, among other things, limit our ability to incur liens and consolidate, merge or sell all or substantially all of our assets. |
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These covenants will be subject to a number of important exceptions and qualifications and the Notes and the indenture do not otherwise restrict or limit our ability to incur additional indebtedness or enter into transactions with, or to pay dividends or make other payments to, affiliates. For more details, see Description of the Notes. |
Payment of Additional Amounts |
All payments of principal, premium and interest made by us in respect of the Notes will be made without withholding or deduction for, or on account of, any present or future Taxes (as defined in Description of Debt Securities in the accompanying prospectus) imposed or levied by or within the British Virgin Islands, the Cayman Islands, the PRC or any jurisdiction where we are otherwise considered by a taxing authority to be a resident for tax purposes (in each case, including any political subdivision or any authority therein or thereof having power to tax), unless such withholding or deduction of such Taxes is required by law. If we are required to make such withholding or deduction, we will pay such additional amounts as will result in receipt by each holder of any Note of such amounts as would have been received by such holder had no such withholding or deduction of such Taxes been required, subject to certain exceptions. See Description of Debt SecuritiesPayment of Additional Amounts in the accompanying prospectus. |
Tax Redemption |
The Notes may be redeemed at any time, at our option, in whole but not in part, at a redemption price equal to 100% of the principal amount thereof, plus accrued and unpaid interest, if any, to (but not including) the redemption date in the event we become obligated to pay additional amounts in respect of such Notes as a result of certain changes in tax law. See Description of Debt SecuritiesTax Redemption in the accompanying prospectus. |
Use of Proceeds |
We intend to use the net proceeds from this offering for general corporate purposes, including merger and acquisition activities. See Use of Proceeds. |
Denominations |
The Notes will be issued in minimum denominations of US$200,000 and multiples of US$1,000 in excess thereof. |
Form of Notes |
We will issue the Notes in the form of one or more fully registered global Notes registered in the name of the nominee of The Depository Trust Company, or DTC. Investors may elect to hold the interests in the global notes through any of DTC, Clearstream or Euroclear, as described under the heading Description of the NotesBook-Entry; Delivery and Form. |
Further Issuances |
We may, from time to time, without the consent of the holders of the Notes, create and issue further securities having the same terms and conditions as the Notes in all respects (or in all respects except for the issue date, the issue price and the first payment of interest). Additional Notes issued in this manner will be consolidated with the previously outstanding Notes of the relevant series to constitute a single series of Notes. We will not issue any additional Notes with the |
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same CUSIP, ISIN or other identifying number as the Notes of that series issued hereunder unless the additional Notes are fungible with the Notes for U.S. federal income tax purposes. |
Risk Factors |
You should consider carefully all the information set forth or incorporated by reference in this prospectus supplement and the accompanying prospectus, in particular the risk factors set forth under the heading Risk Factors beginning on page S-10 of this prospectus supplement and the risk factors set forth in our 2012 Form 20-F, which is incorporated by reference in the accompanying prospectus, before investing in any of the Notes offered hereby. |
Listing |
Approval-in-principle has been obtained for the listing and quotation of the Notes on the SGX-ST. The Notes will be traded on the SGX-ST in a minimum board lot size of US$200,000 for so long as the Notes are listed on the SGX-ST. |
So long as the Notes are listed on the SGX-ST and the rules of the SGX-ST so require, our company is required to appoint and maintain a paying agent in Singapore, where the Notes may be presented or surrendered for payment or redemption, in the event that the global notes are exchanged for Notes in definitive form. In addition, in the event that the global notes are exchanged for Notes in definitive form, announcement of such exchange will be made by or on behalf of our company through the SGX-ST. Such announcement will include all material information with respect to the delivery of the Notes in definitive form, including details of the paying agent in Singapore. |
Governing Law |
New York. |
Trustee, Registrar and Paying Agent |
The Bank of New York Mellon. |
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Prospective purchasers of the Notes should carefully consider the risks described below in this prospectus supplement, in the accompanying prospectus and in the documents incorporated by reference before deciding to purchase any Notes. If any of these risks actually occurs, our business, financial condition and results of operations could suffer, and you may lose all or part of your investment.
Risks Related to Our Business
Our strategy of investments and acquiring complementary businesses and assets may fail.
As part of our business strategy, we have pursued, and intend to continue to pursue, selective strategic investments and acquisitions of businesses and assets that complement our existing business. In the past three years, we acquired certain businesses and intangible assets, including software, trademarks, customer relationships, user list and other assets, through several strategic investments and acquisitions, such as our investments in Qunar Cayman Islands Limited and Qiyi.com, Inc. and our acquisition of the online video business of PPStream Inc. On July 15, 2013, we signed a memorandum of understanding with the majority shareholder of 91 Wireless whereby we have agreed to acquire 100% of the outstanding shares at an aggregate purchase price of US$1.9 billion, or a lesser percentage at a proportionately reduced price if not all the minority shareholders of 91 Wireless are willing to sell to us on the same terms as the majority shareholder, subject to our being able to acquire at least 90% of the outstanding shares. See Prospectus Supplement SummaryRecent Developments. We intend to make other strategic investments and acquisitions in the future if suitable opportunities arise. Investments and acquisitions involve uncertainties and risks, including:
| potential ongoing financial obligations and unforeseen or hidden liabilities, including liability for infringement of third-party copyrights or other intellectual property; |
| failure to achieve the intended objectives, benefits or revenue-enhancing opportunities; |
| costs and difficulties of integrating acquired businesses and managing a larger business; |
| potentially significant goodwill impairment charges; |
| high acquisition and financing costs; |
| possible loss of key employees of a target business; |
| potential claims or litigation regarding our boards exercise of its duty of care and other duties required under applicable law in connection with any of our significant acquisitions or investments approved by the board; and |
| diversion of resources and management attention. |
Any failure to address these risks successfully may have a material and adverse effect on our financial condition and results of operations. Investments and acquisitions may require a significant amount of capital investment, which would decrease the amount of cash available for working capital or capital expenditures. In addition, if we use our equity securities to pay for investments and acquisitions, we may dilute the value of our ADSs and the underlying ordinary shares. If we borrow funds to finance investments and acquisitions, such debt instruments may contain restrictive covenants that could, among other things, restrict us from distributing dividends. Moreover, acquisitions may also generate significant amortization expenses related to intangible assets. We may also incur impairment charges to earnings for investments and acquired businesses and assets which are determined to be impaired, and recognize the proportional share of the net losses of the investees to the extent of the amount of the investments for the equity method investments.
Risks Related to the Notes
The Notes will be structurally subordinated to all obligations of our existing and future subsidiaries and consolidated affiliated entities.
The Notes will not be guaranteed by any of our existing or future subsidiaries and consolidated affiliated entities, who together hold substantially all of our operating assets and conduct substantially all of our business.
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Our subsidiaries and consolidated affiliated entities will have no obligation, contingent or otherwise, to pay amounts due under the Notes or to make any funds available to pay those amounts, whether by dividend, distribution, loan or other payment. The Notes will be structurally subordinated to all indebtedness and other obligations of our subsidiaries and consolidated affiliated entities such that in the event of insolvency, liquidation, reorganization, dissolution or other winding up of any of our subsidiaries or consolidated affiliated entities, all of that subsidiarys or consolidated affiliated entitys creditors (including trade creditors) and any holders of preferred stock or shares would be entitled to payment in full out of that subsidiarys or consolidated affiliated entitys assets before any remaining assets would be available to Baidu, Inc. to make payments due on the Notes.
In addition, the indenture governing the Notes will, subject to some limitations, permit these subsidiaries and consolidated affiliated entities to incur additional obligations and will not contain any limitation on the amount of indebtedness or other liabilities, such as trade payables, that may be incurred by these subsidiaries and consolidated affiliated entities.
The indenture does not restrict the amount of additional debt that we may incur.
The Notes and the indenture under which the Notes will be issued do not limit the amount of unsecured debt that may be incurred by us or our subsidiaries or consolidated affiliated entities, and they permit us and certain of our subsidiaries and consolidated affiliated entities to incur secured debt without equally and rateably securing the Notes under specified circumstances. As of June 30, 2013, our total debt was US$1.9 billion, primarily consisting of US$0.4 billion in long-term loans and US$1.5 billion of our 2.250% Notes due 2017 and our 3.500% Notes due 2022. Our and our subsidiaries and consolidated affiliated entities incurrence of additional debt may have important consequences for you as a holder of the Notes, including making it more difficult for us to satisfy our obligations with respect to the Notes, a loss in the market value of your Notes and a risk that the credit rating of the Notes is lowered or withdrawn.
The Notes will be effectively subordinated to any of our secured obligations to the extent of the value of the property securing those obligations.
The Notes will not be secured by any of our assets. As a result, the Notes will be effectively subordinated to our existing and future secured obligations with respect to the assets that secure those obligations. The effect of this subordination is that upon a default in payment on, or the acceleration of, any of our secured obligations, or in the event of our bankruptcy, insolvency, liquidation, dissolution or reorganization, the proceeds from the sale of assets securing our secured obligations will be available to pay obligations on the Notes only after all such secured obligations have been paid in full. As a result, the holders of the Notes may receive less, ratably, than the holders of secured debt in the event of our bankruptcy, insolvency, liquidation, dissolution or reorganization.
We may not be able to repurchase the Notes upon a Change of Control.
Upon the occurrence of a Change of Control described in Description of the NotesRepurchase Upon Change of Control, we will be required to offer to repurchase all outstanding Notes at 101% of their principal amount, plus accrued and unpaid interest, if any, to (but not including) the date of repurchase. The source of funds for any purchase of the Notes would be our available cash or cash generated from our subsidiaries or consolidated affiliated entities operations or other sources, including borrowings, sales of assets or sales of equity. We may not be able to repurchase the Notes upon a Change of Control because we may not have sufficient financial resources to purchase all of the debt securities that are tendered upon a Change of Control and repay our other indebtedness that may become due. We may require additional financing from third parties to fund any such purchases, and we may be unable to obtain financing on satisfactory terms or at all. Further, our ability to repurchase the Notes may be limited by law. In order to avoid the obligations to repurchase the Notes, we may have to avoid certain Change of Control transactions that would otherwise be beneficial to us.
S-12
Holders of the Notes may not be able to determine when a Change of Control giving rise to their right to have the Notes repurchased has occurred following a sale of substantially all of our assets.
The definition of Change of Control in the indenture that will govern the Notes includes a phrase relating to the sale of all or substantially all of our assets. There is no precise established definition of the phrase substantially all under New York law. Accordingly, the ability of a holder of the Notes to require us to repurchase its Notes as a result of a sale of less than all our assets to another person may be uncertain.
The terms of the indenture and the Notes provide only limited protection against significant corporate events that could adversely impact your investment in the Notes.
While the indenture and the Notes contain terms intended to provide protection to holders of the Notes upon the occurrence of certain events involving significant corporate transactions, these terms are limited and may not be sufficient to protect your investment in the Notes. For example, some important corporate events, such as leveraged recapitalizations, may not, under the indenture that will govern the Notes, constitute a Change of Control that would require us to repurchase the Notes, even though those corporate events could increase the level of our indebtedness or otherwise adversely affect our capital structure, credit ratings or the value of the Notes. See Description of the NotesRepurchase Upon Change of Control.
The indenture for the Notes also does not:
| require us to maintain any financial ratios or specific levels of net worth, revenue, income, cash flows or liquidity; |
| limit our ability to incur obligations that are equal in right of payment to the Notes; |
| restrict our subsidiaries or consolidated affiliated entities ability to issue unsecured securities or otherwise incur unsecured obligations that would be senior to our equity interests in our subsidiaries or consolidated affiliated entities and therefore rank effectively senior to the Notes; |
| limit the ability of our subsidiaries or consolidated affiliated entities to service indebtedness; |
| restrict our ability to repurchase or prepay any other of our securities or other obligations; |
| restrict our ability to make investments or to repurchase or pay dividends or make other payments in respect of our shares or other securities ranking junior to the Notes; or |
| limit our ability to sell, merge or consolidate any of our subsidiaries or consolidated affiliated entities. |
As a result of the foregoing, when evaluating the terms of the Notes, you should be aware that the terms of the indenture and the Notes do not restrict our ability to engage in, or to otherwise be a party to, a variety of corporate transactions, circumstances and events that could have an adverse impact on your investment in the Notes.
An active trading market for the Notes may not develop, and the trading price of the Notes could be materially and adversely affected.
The Notes are a new issue of securities for which there is currently no trading market. Approval-in-principle has been obtained for the listing and quotation of the Notes on the SGX-ST. However, there can be no assurance that we will be able to obtain or maintain such listing or that an active trading market will develop. If no active trading market develops, you may not be able to resell your Notes at their fair market value, or at all. Future trading prices of the Notes will depend on many factors, including prevailing interest rates, our operating results and the market for similar securities. We have been advised that the underwriters intend to make a market in the Notes, but the underwriters are not obligated to do so and may discontinue such market making activity at any time without notice. Therefore there can be no assurance that an active trading market for the Notes will develop or be sustained. If an active trading market for the Notes does not develop or is not maintained, the market price
S-13
and liquidity of the Notes may be adversely affected. In addition, the Notes may trade at prices that are higher or lower than the price at which the Notes have been issued. The price at which the Notes trade depends on many factors, including:
| prevailing interest rates and interest rate volatility, |
| our results of operations, financial condition and future prospects, |
| changes in our industry and competition, |
| the market conditions for similar securities and |
| general economic conditions, |
almost all of which are beyond our control. As a result, there can be no assurance that you will be able to resell the Notes at attractive prices or at all.
We may be deemed a PRC resident enterprise under PRC tax laws, which could subject interest on the Notes to PRC withholding tax and gains on the transfer of the Notes to PRC income tax and could, under certain circumstances, permit us to redeem the Notes.
If we are considered a PRC resident enterprise under the PRC Enterprise Income Tax Law, holders of Notes who are non-resident enterprises may be subject to PRC withholding tax on interest payable by us and PRC income tax on any gains realized from the transfer of Notes, if such income is considered to be derived from sources within the PRC, at a rate of 10% (or lower rate if available under an applicable tax treaty), provided that such non-resident enterprise investor (i) has no establishment or premises in the PRC, or (ii) has an establishment or premises in the PRC but its income derived from the PRC has no real connection with such establishment or premises. Furthermore, if we are considered a PRC resident enterprise and relevant PRC tax authorities consider interest we pay with respect to the Notes and any gains realized from the transfer of Notes to be income derived from sources within the PRC, such interest earned by non-resident individuals may be subject to PRC withholding tax and such gain realized by non-resident individuals may be subject to PRC individual income tax, in each case at a rate of 20% (or lower rate if available under an applicable tax treaty).
If we were deemed a PRC resident enterprise under the PRC Enterprise Income Tax Law and required to withhold tax on interest on the Notes, we would be required to pay additional amounts as described under Description of Debt SecuritiesPayment of Additional Amounts in the accompanying prospectus. As described under Description of Debt SecuritiesTax Redemption in the accompanying prospectus, we may redeem the Notes in whole at a redemption price equal to 100% of the principal amount plus accrued and unpaid interest if such requirement to pay additional amounts results from a change in law (or a change in the official application or interpretation of law).
Redemption may adversely affect your return on the Notes.
We have the right to redeem some or all of the Notes prior to maturity. We may redeem the Notes at times when prevailing interest rates are relatively low. Accordingly, you may not be able to reinvest the amount received upon redemption in a comparable security at an effective interest rate as high as that of the Notes.
Our credit ratings may not reflect all risks of your investments in the Notes.
Our credit ratings are an assessment by rating agencies of our ability to pay our debts when due. Consequently, real or anticipated changes in our credit ratings will generally affect the market value of the Notes. These credit ratings may not reflect the potential impact of risks relating to the structure or marketing of the Notes. Agency ratings are not a recommendation to buy, sell or hold any security, and may be revised or withdrawn at any time by the issuing organization. Each agencys rating should be evaluated independently of any other agencys rating.
S-14
Set forth below are certain consolidated statements of comprehensive income data and cash flow data for the years ended December 31, 2008, 2009, 2010, 2011 and 2012 and certain consolidated balance sheet data as of December 31, 2008, 2009, 2010, 2011 and 2012. The consolidated statements of comprehensive income data and cash flow data presented below for the years ended December 31, 2010, 2011 and 2012 and the consolidated balance sheet data as of December 31, 2011 and 2012 have been derived from our audited consolidated financial statements that are included in our 2012 Form 20-F and are incorporated into the accompanying prospectus by reference. The consolidated statements of comprehensive income data and cash flow data presented below for the years ended December 31, 2008 and 2009 and the consolidated balance sheet data as of December 31, 2008, 2009 and 2010 have been derived from our audited consolidated financial statements that are not included in our 2012 Form 20-F. Our audited consolidated financial statements are prepared in accordance with generally accepted accounting principles in the United States, or U.S. GAAP, and have been audited by Ernst & Young Hua Ming LLP, an independent registered public accounting firm.
The consolidated statements of comprehensive income data and cash flow data presented below for the six months ended June 30, 2012 and 2013 and the consolidated balance sheet data as of June 30, 2013 have been derived from our unaudited interim condensed consolidated financial statements for the six months ended June 30, 2012 and 2013 and as of June 30, 2013 included in this prospectus supplement. The unaudited interim financial information has been prepared on the same basis as our audited consolidated financial data and includes all adjustments, consisting only of normal and recurring adjustments that we consider necessary for a fair presentation of our financial position and results of operations for the periods presented.
The consolidated financial information should be read in conjunction with, and is qualified in its entirety by reference to, our audited consolidated financial statements for the three years ended December 31, 2012 and as of December 31, 2011 and 2012 and related notes and Item 5. Operating and Financial Review and Prospects in our 2012 Form 20-F and our unaudited interim condensed consolidated financial statements for the six months ended June 30, 2012 and 2013 and as of June 30, 2013 and related notes included in this prospectus supplement. Our historical results do not necessarily indicate results expected for any future periods, and the results of operations for the six month period ended June 30, 2013 are not necessarily indicative of the results to be expected for the full fiscal year ending December 31, 2013.
For the Years Ended December 31, | For the Six Months Ended June 30, |
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2008 | 2009 | 2010 | 2011 | 2012 | 2012 | 2013 | ||||||||||||||||||||||||||||||
RMB | RMB | RMB | RMB | RMB | US$ | RMB | RMB | US$ | ||||||||||||||||||||||||||||
(In thousands) | ||||||||||||||||||||||||||||||||||||
Consolidated Statements of Comprehensive Income Data: |
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Revenues: |
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Online marketing services |
3,194,461 | 4,445,310 | 7,912,869 | 14,489,767 | 22,245,643 | 3,570,672 | 9,712,085 | 13,492,031 | 2,198,330 | |||||||||||||||||||||||||||
Other services |
3,791 | 2,466 | 2,205 | 11,019 | 60,383 | 9,692 | 7,874 | 37,322 | 6,081 | |||||||||||||||||||||||||||
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Total revenues |
3,198,252 | 4,447,776 | 7,915,074 | 14,500,786 | 22,306,026 | 3,580,364 | 9,719,959 | 13,529,353 | 2,204,411 | |||||||||||||||||||||||||||
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Operating costs and expenses: |
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Cost of revenues |
(1,155,457 | ) | (1,616,236 | ) | (2,149,288 | ) | (3,896,883 | ) | (6,448,545 | ) | (1,035,063 | ) | (2,758,718 | ) | (4,736,382 | ) | (771,725 | ) | ||||||||||||||||||
Selling, general and administrative |
(659,804 | ) | (803,988 | ) | (1,088,980 | ) | (1,692,810 | ) | (2,501,336 | ) | (401,492 | ) | (1,066,175 | ) | (1,926,168 | ) | (313,841 | ) | ||||||||||||||||||
Research and development |
(286,256 | ) | (422,615 | ) | (718,038 | ) | (1,334,434 | ) | (2,304,825 | ) | (369,950 | ) | (988,711 | ) | (1,752,448 | ) | (285,536 | ) | ||||||||||||||||||
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Total operating costs and expenses |
(2,101,517 | ) | (2,842,839 | ) | (3,956,306 | ) | (6,924,127 | ) | (11,254,706 | ) | (1,806,505 | ) | (4,813,604 | ) | (8,414,998 | ) | (1,371,102 | ) | ||||||||||||||||||
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Operating profit |
1,096,735 | 1,604,937 | 3,958,768 | 7,576,659 | 11,051,320 | 1,773,859 | 4,906,355 | 5,114,355 | 833,309 | |||||||||||||||||||||||||||
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S-15
For the Years Ended December 31, | For the Six Months Ended June 30, |
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2008 | 2009 | 2010 | 2011 | 2012 | 2012 | 2013 | ||||||||||||||||||||||||||||||
RMB | RMB | RMB | RMB | RMB | US$ | RMB | RMB | US$ | ||||||||||||||||||||||||||||
(In thousands) | ||||||||||||||||||||||||||||||||||||
Interest income |
48,573 | 44,818 | 103,096 | 418,201 | 866,465 | 139,077 | 385,578 | 591,798 | 96,425 | |||||||||||||||||||||||||||
Interest expense |
(896 | ) | (12,157 | ) | (35,975 | ) | (82,551 | ) | (107,857 | ) | (17,312 | ) | (50,842 | ) | (180,495 | ) | (29,409 | ) | ||||||||||||||||||
Loss from equity method investments |
| (229 | ) | (8,965 | ) | (179,408 | ) | (294,229 | ) | (47,227 | ) | (103,199 | ) | (5,369 | ) | (875 | ) | |||||||||||||||||||
Other income, net, including exchange gains or losses |
19,767 | 45,752 | 44,239 | 76,278 | 449,738 | 72,188 | 44,925 | 26,966 | 4,394 | |||||||||||||||||||||||||||
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Income before income taxes |
1,164,179 | 1,683,121 | 4,061,163 | 7,809,179 | 11,965,437 | 1,920,585 | 5,182,817 | 5,547,255 | 903,844 | |||||||||||||||||||||||||||
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Taxation |
(116,071 | ) | (198,017 | ) | (535,995 | ) | (1,188,861 | ) | (1,574,159 | ) | (252,670 | ) | (566,551 | ) | (902,031 | ) | (146,973 | ) | ||||||||||||||||||
Net income |
1,048,108 | 1,485,104 | 3,525,168 | 6,620,318 | 10,391,278 | 1,667,915 | 4,616,266 | 4,645,224 | 756,871 | |||||||||||||||||||||||||||
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Less: Net loss attributable to noncontrolling interests |
| | | (18,319 | ) | (64,750 | ) | (10,393 | ) | (36,579 | ) | (41,497 | ) | (6,761 | ) | |||||||||||||||||||||
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Net income attributable to Baidu, Inc. |
1,048,108 | 1,485,104 | 3,525,168 | 6,638,637 | 10,456,028 | 1,678,308 | 4,652,845 | 4,686,721 | 763,632 | |||||||||||||||||||||||||||
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As of December 31, | As of June 30, | |||||||||||||||||||||||||||||||
2008 | 2009 | 2010 | 2011 | 2012 | 2013 | |||||||||||||||||||||||||||
RMB | RMB | RMB | RMB | RMB | US$ | RMB | US$ | |||||||||||||||||||||||||
(In thousands) | ||||||||||||||||||||||||||||||||
Consolidated Balance Sheets Data: |
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Cash and cash equivalents |
2,357,609 | 4,180,376 | 7,781,976 | 4,127,482 | 11,880,632 | 1,906,973 | 9,028,999 | 1,471,144 | ||||||||||||||||||||||||
Restricted cash |
4,562 | 19,513 | 38,278 | 483,387 | 395,029 | 63,407 | 330,754 | 53,891 | ||||||||||||||||||||||||
Short-term investments |
301,244 | 381,149 | 376,492 | 10,051,578 | 20,604,223 | 3,307,206 | 25,040,393 | 4,079,968 | ||||||||||||||||||||||||
Total assets |
3,937,991 | 6,156,975 | 11,048,439 | 23,340,541 | 45,668,890 | 7,330,360 | 52,400,459 | 8,537,890 | ||||||||||||||||||||||||
Short-term loans |
| | | 125,878 | | | 47,200 | 7,691 | ||||||||||||||||||||||||
Long-term loans, current portion |
| | | 46,000 | 2,170,978 | 348,466 | 2,147,544 | 349,911 | ||||||||||||||||||||||||
Long-term loans |
| | 86,000 | 2,277,925 | 356,589 | 57,236 | 348,359 | 56,760 | ||||||||||||||||||||||||
Capital lease obligations, current |
| | | 17,773 | 32,502 | 5,217 | 33,578 | 5,471 | ||||||||||||||||||||||||
Capital lease obligations, non-current |
| | | 30,112 | 44,479 | 7,139 | 27,418 | 4,467 | ||||||||||||||||||||||||
Notes payable |
| | | | 9,336,686 | 1,498,641 | 9,196,593 | 1,498,451 | ||||||||||||||||||||||||
Total liabilities |
849,328 | 1,403,874 | 2,642,847 | 7,015,028 | 18,453,765 | 2,962,031 | 19,875,788 | 3,238,469 | ||||||||||||||||||||||||
Total Baidu, Inc. shareholders equity |
3,088,663 | 4,753,101 | 8,405,592 | 15,291,716 | 26,055,229 | 4,182,153 | 31,244,577 | 5,090,848 |
For the Years Ended December 31, | For the Six Months Ended June 30, |
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Consolidated Cash Flow Data: |
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Net cash generated from operating activities |
1,741,637 | 2,264,484 | 4,700,481 | 8,178,819 | 11,995,994 | 1,925,492 | 5,407,156 | 5,390,589 | 878,318 | |||||||||||||||||||||||||||
Net cash used in investing activities |
(661,102 | ) | (536,069 | ) | (1,217,522 | ) | (14,250,529 | ) | (13,750,100 | ) | (2,207,045 | ) | (6,478,233 | ) | (8,381,346 | ) | (1,365,619 | ) | ||||||||||||||||||
Net cash generated from (used in) financing activities |
(35,637 | ) | 95,093 | 124,751 | 2,425,810 | 9,518,885 | 1,527,886 | (137,622 | ) | 275,591 | 44,904 | |||||||||||||||||||||||||
Net increase (decrease) in cash and cash equivalents |
1,007,009 | 1,822,767 | 3,601,600 | (3,654,494 | ) | 7,753,150 | 1,244,466 | (1,208,616 | ) | (2,851,633 | ) | (464,632 | ) | |||||||||||||||||||||||
Non-GAAP Measure: |
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Adjusted EBITDA(1) |
1,461,425 | 2,008,266 | 4,500,935 | 8,613,599 | 12,697,605 | 2,038,106 | 5,649,234 | 6,257,991 | 1,019,648 |
(1) | To supplement our consolidated financial results presented in accordance with U.S. GAAP, we use adjusted EBITDA, a non-GAAP financial measure, in evaluating our performance and liquidity. We define adjusted EBITDA as earnings before interest, taxes, depreciation, amortization, other non-operating income and share-based compensation expenses. The presentation of this non-GAAP financial measure is not intended to be considered in isolation or as a substitute for the financial information prepared and presented in |
S-16
accordance with U.S. GAAP. In addition, our adjusted EBITDA may not be comparable to EBITDA, adjusted EBITDA or similarly titled measures utilized by other companies since such other companies may not calculate this non-GAAP financial measure in the same manner as we do. |
We believe that adjusted EBITDA provides meaningful supplemental information regarding our performance and liquidity by excluding certain expenses, particularly share-based compensation expenses, that may not be indicative of our operating performance or financial condition from a cash perspective. We believe that both our management and investors benefit from referring to this non-GAAP financial measure in assessing our performance and when planning and forecasting future periods. This non-GAAP financial measure also facilitates our managements internal comparisons to our historical performance and liquidity. We have computed adjusted EBITDA using the same consistent method from quarter to quarter since April 1, 2006. We believe that this non-GAAP financial measure is useful to investors in allowing for greater transparency with respect to supplemental information used by our management in its financial and operational decision making. A limitation of using adjusted EBITDA is that this non-GAAP measure excludes interest, taxes, depreciation, amortization and share-based compensation charges that have been and will continue to be for the foreseeable future significant expense items in our results of operations. Another limitation of using adjusted EBITDA is that it does not include all items that impact our net cash provided by operating activities for the period. Our management compensates for these limitations by providing specific information regarding the GAAP amounts excluded from adjusted EBITDA.
The accompanying table sets out our adjusted EBITDA for each period shown, together with a reconciliation between adjusted EBITDA and the most directly comparable U.S. GAAP financial measure, net cash provided by operating activities. The U.S. dollar figures for 2012 are calculated using the same convenience translation rate of RMB6.2301 to US$1.00 that is used in our audited consolidated financial statements as of and for the year ended December 31, 2012.
For the Years Ended December 31, | For the Six Months Ended June 30, |
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2008 | 2009 | 2010 | 2011 | 2012 | 2012 | 2013 | ||||||||||||||||||||||||||||||
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Net cash provided by operating activities |
1,741,637 | 2,264,484 | 4,700,481 | 8,178,819 | 11,995,994 | 1,925,492 | 5,407,156 | 5,390,589 | 878,318 | |||||||||||||||||||||||||||
Changes in assets and liabilities, net of effects of acquisitions |
(328,839 | ) | (376,051 | ) | (633,146 | ) | (521,561 | ) | 41,569 | 6,670 | (48,011 | ) | 398,271 | 64,892 | ||||||||||||||||||||||
Income tax expenses |
116,071 | 198,017 | 535,995 | 1,188,861 | 1,574,159 | 252,670 | 566,551 | 902,031 | 146,973 | |||||||||||||||||||||||||||
Interest income and other, net |
(67,444 | ) | (78,184 | ) | (102,395 | ) | (232,520 | ) | (914,117 | ) | (146,726 | ) | (276,462 | ) | (432,900 | ) | (70,535 | ) | ||||||||||||||||||
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Adjusted EBITDA (non-GAAP) |
1,461,425 | 2,008,266 | 4,500,935 | 8,613,599 | 12,697,605 | 2,038,106 | 5,649,234 | 6,257,991 | 1,019,648 | |||||||||||||||||||||||||||
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Set forth below is a discussion of our unaudited statements of comprehensive income data for the six months ended June 30, 2012 and 2013. The discussion of our audited financial information for the three years ended December 31, 2012 and as of December 31, 2011 and 2012 is set forth in Item 5. Operating and Financial Review and Prospectus in our 2012 Form 20-F, which is incorporated by reference.
Six Months Ended June 30, 2013 Compared to Six Months Ended June 30, 2012
Revenues. Our total revenues increased by 39.2% from RMB9.7 billion in the six months ended June 30, 2012 to RMB13.5 billion (US$2.2 billion) in the six months ended June 30, 2013. This increase was due to a substantial increase in our revenues from online marketing services. Our online marketing revenues increased by 38.9% from RMB9.7 billion in the six months ended June 30, 2012 to RMB13.5 billion (US$2.2 billion) in the six months ended June 30, 2013. This increase was mainly attributable to the increase in the number of our online marketing customers from approximately 415,000 in the six months ended June 30, 2012 to approximately 548,000 in the six months ended June 30, 2013, and the increase in the average revenue per customer from approximately RMB23 thousand in the six months ended June 30, 2012 to approximately RMB25 thousand (US$4 thousand) in the six months ended June 30, 2013. The increase in our online marketing customers was mainly due to our effective distribution network and our expanded direct sales. The increase in the average revenue per customer was primarily attributable to the increase in the number of paid clicks and the higher price per click as more customers participated in our P4P auction platform. The number of paid clicks increased by approximately 21.9% from the six months ended June 30, 2012 to the six months ended June 30, 2013.
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Operating Costs and Expenses. Our total operating costs and expenses increased by 74.8% from RMB4.8 billion in the six months ended June 30, 2012 to RMB8.4 billion (US$1.4 billion) in the six months ended June 30, 2013. This increase was primarily due to the expansion of our business, and in particular the expansion of our mobile platform.
| Cost of Revenues. Our cost of revenues increased by 71.7% from RMB2.8 billion in the six months ended June 30, 2012 to RMB4.7 billion (US$771.7 million) in the six months ended June 30, 2013. This increase was primarily due to the following factors: |
| Traffic Acquisition Costs. Our traffic acquisition costs increased by 89.8% from RMB785.0 million in the six months ended June 30, 2012 to RMB1.5 billion (US$242.7 million) in the six months ended June 30, 2013. Traffic acquisition costs represent 11.0% of total revenues in the six months ended June 30, 2013, compared to 8.1% in the six months ended June 30, 2012. The increase in our traffic acquisition costs mainly reflected the increased contribution of contextual ads and Hao123 promotions through our network. |
| Bandwidth Costs and Depreciation Expenses. Our bandwidth costs increased by 85.3% from RMB465.2 million in the six months ended June 30, 2012 to RMB862.2 million (US$140.5 million) in the six months ended June 30, 2013. Our depreciation expenses of servers and other equipment increased by 45.5% from RMB474.4 million in the six months ended June 30, 2012 to RMB690.1 million (US$112.4 million) in the six months ended June 30, 2013. The absolute increases in these costs were due to the expansion of our business as we continued to invest in servers and network infrastructure. |
| Sales Tax and Surcharges. Our sales tax and surcharges increased by 39.2% from RMB702.6 million in the six months ended June 30, 2012 to RMB977.7 million (US$159.3 million) in the six months ended June 30, 2013, in line with the increase in revenues. |
| Operational Costs. Our operational costs increased by 73.8% from RMB265.8 million in the six months ended June 30, 2012 to RMB461.9 million (US$75.3 million) in the six months ended June 30, 2013, primarily due to the increase of staff-related costs and the amortization of acquired intangible assets. |
| Content Costs. Our content costs increased by 294% from RMB62.5 million in the six months ended June 30, 2012 to RMB246.4 million (US$40.2 million) in the six months ended June 30, 2013. We started to consolidate Qiyi.com, Inc. in November 2012, and the increased content costs in the six months ended June 30, 2013 primarily relate to the amortization of licensed copyrights for video content for iQiyi. |
| Selling, General and Administrative Expenses. Our selling, general and administrative expenses increased by 80.7% from RMB1.1 billion in the six months ended June 30, 2012 to RMB1.9 billion (US$313.8 million) in the six months ended June 30, 2013. This increase was primarily due to the following factors: |
| Total salaries and benefits and staff-related expenses increased by 42.1% from RMB558.9 million in the six months ended June 30, 2012 to RMB794.1 million (US$129.4 million) in the six months ended June 30, 2013, primarily due to the increased direct sales commission associated with increased sales and to increased headcount to support our expanded online marketing services. |
| Marketing and promotion expenses increased by 236% from RMB204.9 million in the six months ended June 30, 2012 to RMB689.0 million (US$112.3 million) in the six months ended June 30, 2013. This increase was primarily due to increased marketing and promotion activities relating to our mobile products. |
| Total office operating expenses increased by 20.1% from RMB95.8 million in the six months ended June 30, 2012 to RMB115.1 million (US$18.7 million) in the six months ended June 30, 2013, primarily as a result of increase and expansion of our offices. |
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| Total traveling, communication and business development expenses increased by 53.7% from RMB42.7 million in the six months ended June 30, 2012 to RMB65.7 million (US$10.7 million) in the six months ended June 30, 2013, primarily due to the increased headcount and activities to support our expanded online marketing services. |
| Share-based compensation expenses allocated to selling, general and administrative expenses increased by 62.5% from RMB31.8 million in the six months ended June 30, 2012 to RMB51.7 million (US$8.4 million) in the six months ended June 30, 2013. |
| Research and Development Expenses. Our research and development expenses increased by 77.2% from RMB988.7 million in the six months ended June 30, 2012 to RMB1.8 billion (US$285.5 million) in the six months ended June 30, 2013, primarily due to an increase in the number of research and development staff. |
Operating Profit. As a result of the foregoing, we generated an operating profit of RMB5.1 billion (US$0.8 billion) in the six months ended June 30, 2013, a 4.2% increase from RMB4.9 billion in the six months ended June 30, 2012.
Other Income, Net, Including Exchange Gains or Losses. Our other income, net, including exchange gains or losses was RMB27.0 million (US$4.4 million) in the six months ended June 30, 2013, compared to RMB44.9 million in the six months ended June 30, 2012.
Loss From Equity Method Investments. Our loss from equity method investments decreased from RMB103.2 million in the six months ended June 30, 2012 to RMB5.4 million (US$0.9 million) in the six months ended June 30, 2013 mainly due to the acquisition of Qiyi.com, Inc. in November 2012, at which time it became our subsidiary and ceased to be an equity method investee.
Taxation. Our income tax expenses increased by 59.2% from RMB566.6 million in the six months ended June 30, 2012 to RMB0.9 billion (US$147.0 million) in the six months ended June 30, 2013, primarily due to the accrual of dividend withholding tax net off by the income tax reversal recorded in the six months ended June 30, 2013, in connection with Baidu Online Network Technology (Beijing) Co., Ltd. obtaining Key Software Enterprise status retrospectively effective from 2011.
Net Income Attributable to Baidu, Inc. As a result of the foregoing, net income attributable to Baidu, Inc. increased by 0.7% from RMB4.7 billion in the six months ended June 30, 2012 to RMB4.7 billion (US$0.8 billion) in the six months ended June 30, 2013.
Cash Flows and Working Capital
As of June 30, 2013, we had RMB34.1 billion (US$5.6 billion) in cash, cash equivalents and short-term investments.
The following table sets forth a summary of our cash flows for the periods indicated.
For the Six Months Ended June 30, |
||||||||||||
2012 | 2013 | |||||||||||
RMB | RMB | US$ | ||||||||||
(In thousands) | ||||||||||||
Net cash generated from operating activities |
5,407,156 | 5,390,589 | 878,318 | |||||||||
Net cash used in investing activities |
(6,478,233 | ) | (8,381,346 | ) | (1,365,619 | ) | ||||||
Net cash (used in) generated from financing activities |
(137,622 | ) | 275,591 | 44,904 | ||||||||
Net decrease in cash and cash equivalents |
(1,208,616 | ) | (2,851,633 | ) | (464,632 | ) | ||||||
Cash and cash equivalents at beginning of the period |
4,127,482 | 11,880,632 | 1,935,776 | |||||||||
Cash and cash equivalents at end of the period |
2,918,866 | 9,028,999 | 1,471,144 |
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Net cash generated from operating activities was RMB5.4 billion (US$0.9 billion) in the six months ended June 30, 2013, remaining stable from RMB5.4 billion in the six months ended June 30, 2012. The principal factors contributing to decreases in net cash generated were increases in accounts receivables, due to the growth in our revenue and our acquisition of the online video business of PPStream Inc., and increases in other receivables. The principal factors contributing to increases in net cash generated were increases in depreciation and amortization expenses, deferred income tax, accounts payable and accrued liabilities.
Net cash used in investing activities increased to RMB8.4 billion (US$1.4 billion) in the six months ended June 30, 2013 from RMB6.5 billion in the six months ended June 30, 2012. This increase was primarily due to the acquisition of the online video business of PPStream Inc. for US$370 million in May 2013.
Net cash generated from financing activities was RMB275.6 million (US$44.9 million) in the six months ended June 30, 2013, compared to net cash used of RMB137.6 million in the six months ended June 30, 2012. This was primarily due to proceeds received from issuance of shares by one of our subsidiaries, Qunar Cayman Islands Limited, in the six months ended June 30, 2013.
Capital Expenditures
We made capital expenditures, consisting of acquisitions of fixed assets, of RMB1.0 billion (US$165.6 million) in the six months ended June 30, 2013, representing 7.5% of our total revenues, as compared to RMB1.0 billion in the six months ended June 30, 2012, representing 10.5% of our total revenues. Our capital expenditures in this period were primarily due to the purchase of servers, network equipment and other computer hardware to increase our network infrastructure capacity. We funded our capital expenditures primarily with net cash flow generated from operating activities.
Our capital expenditures may increase in the future as our business continues to grow, in connection with the expansion and improvement of our network infrastructure and further expenditures on the construction of office buildings and cloud computing based data centers. We currently plan to fund these expenditures with cash flow generated from our operating activities.
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We estimate that the net proceeds (after underwriting discounts and commissions and estimated net offering expenses) from the sale of the Notes will be approximately US$994.4 million. We plan to use the net proceeds from the sale of the Notes for general corporate purposes, including merger and acquisition activities.
We may use the net proceeds from our issuance and sale of the Notes to fund the operations of our PRC subsidiaries by making additional capital contributions to our existing PRC subsidiaries, injecting capital to establish new PRC subsidiaries or providing loans to our PRC subsidiaries. Transfer of funds from Baidu, Inc. or any of our offshore subsidiaries to our PRC subsidiaries is subject to PRC regulatory restrictions and procedures: (i) capital contributions to existing PRC subsidiaries and establishment of new PRC subsidiaries must be approved by the PRC Ministry of Commerce or its local counterpart and registered with SAFE or its local counterpart; and (ii) loans to any of our PRC subsidiaries must not exceed the statutory limit, which is the difference between the amount of total investment as approved by the PRC Ministry of Commerce or its local counterpart for that PRC subsidiary and the amount of registered capital of that PRC subsidiary, and must be registered with the local counterpart of SAFE. See Item 3.D. Key InformationRisk FactorsRisks Related to Doing Business in ChinaPRC regulation of loans to and direct investment in PRC entities by offshore holding companies and governmental control of currency conversion may delay or prevent us from making loans or additional capital contributions to our PRC subsidiaries, which could adversely affect our ability to fund and expand our business in our 2012 Form 20-F, which is incorporated by reference.
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Our business is primarily conducted in China and almost all of our revenues are denominated in RMB. The conversion of RMB into U.S. dollars in this prospectus supplement is based on the noon buying rate in New York City for cable transfers in RMB as certified for customs purposes by the Federal Reserve Board. Except as otherwise stated in this prospectus supplement, all amounts in this prospectus supplement that are not recorded in our audited consolidated financial statements have been translated from RMB to U.S. dollars and from U.S. dollars to RMB at a rate of RMB6.1374 to US$1.00, the noon buying rate in effect as of June 28, 2013. All amounts in this prospectus supplement that are recorded in our audited consolidated financial statements have been translated from RMB to U.S. dollars and from U.S. dollars to RMB at a rate of RMB6.2301 to US$1.00, the noon buying rate in effect as of December 31, 2012. We make no representation that any RMB or U.S. dollar amounts could have been, or could be, converted into U.S. dollars or RMB, as the case may be, at any particular rate, or at all. The PRC government imposes control over its foreign currency reserves in part through direct regulation of the conversion of RMB into foreign exchange and through restrictions on foreign trade. On July 26, 2013, the noon buying rate was RMB6.1316 to US$1.00.
The following table sets forth information concerning exchange rates between the RMB and the U.S. dollar for the periods indicated.
Noon Buying Rate | ||||||||||||||||
Period |
Period-End | Average(1) | Low | High | ||||||||||||
(RMB per U.S. Dollar) | ||||||||||||||||
2008 |
6.8225 | 6.9193 | 7.2946 | 6.7800 | ||||||||||||
2009 |
6.8259 | 6.8295 | 6.8470 | 6.8176 | ||||||||||||
2010 |
6.6000 | 6.7603 | 6.8330 | 6.6000 | ||||||||||||
2011 |
6.2939 | 6.4475 | 6.6364 | 6.2939 | ||||||||||||
2012 |
6.2301 | 6.2990 | 6.3879 | 6.2221 | ||||||||||||
2013 |
||||||||||||||||
First six months |
6.1374 | 6.1811 | 6.2438 | 6.1213 | ||||||||||||
January |
6.2186 | 6.2215 | 6.2303 | 6.2134 | ||||||||||||
February |
6.2213 | 6.2323 | 6.2438 | 6.2213 | ||||||||||||
March |
6.2108 | 6.2154 | 6.2246 | 6.2105 | ||||||||||||
April |
6.1647 | 6.1861 | 6.2078 | 6.1647 | ||||||||||||
May |
6.1340 | 6.1416 | 6.1665 | 6.1213 | ||||||||||||
June |
6.1374 | 6.1342 | 6.1488 | 6.1248 | ||||||||||||
July (through July 26) |
6.1316 | 6.1348 | 6.1408 | 6.1293 |
Source: Federal Reserve Statistical Release
(1) | Annual and interim period averages are calculated using the average of the exchange rates on the last day of each month during the relevant year or interim period. Monthly averages are calculated using the average of the daily rates during the relevant month. |
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The following table sets forth our consolidated total capitalization as of June 30, 2013 on an actual basis and on an as adjusted basis to give effect to the issuance of Notes in this offering, the repayment of amounts outstanding under our credit facility dated July 14, 2011 and the repayment of certain short-term loans amounting to RMB12.2 million, as well as giving effect to a loan of US$150.0 million that we incurred in July 2013. This table should be read in conjunction with, and is qualified in its entirety by reference to, our consolidated financial statements and the notes thereto included in this prospectus supplement.
As of June 30, 2013 | ||||||||||||||||
Actual | As Adjusted | |||||||||||||||
RMB | US$ | RMB | US$ | |||||||||||||
(in thousands) | ||||||||||||||||
Short-term loans(1) |
47,200 | 7,691 | 35,000 | 5,703 | ||||||||||||
Long-term loans(2) |
2,495,903 | 406,671 | 1,268,969 | 206,760 | ||||||||||||
Long-term notes payable(3) |
9,196,593 | 1,498,451 | 9,196,593 | 1,498,451 | ||||||||||||
Notes offered hereby |
| | 6,137,400 | 1,000,000 | ||||||||||||
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Total debt |
11,739,696 | 1,912,813 | 16,637,962 | 2,710,914 | ||||||||||||
Total shareholders equity(4) |
31,600,263 | 5,148,802 | 31,600,263 | 5,148,802 | ||||||||||||
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Total capitalization(5) |
43,339,959 | 7,061,615 | 48,238,225 | 7,859,716 | ||||||||||||
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(1) | Represents loans provided by banks with original maturities of less than one year. |
(2) | Represents loans provided by banks with original maturities of greater than one year, including current and non-current portions. |
(3) | Represents our 2.250% Notes due 2017 and 3.500% Notes due 2022. |
(4) | Total shareholders equity includes shareholders equity pertaining to our shareholders plus shareholders equity pertaining to the non-controlling interests in our subsidiaries. |
(5) | Total capitalization is the sum of total debt and total shareholders equity. After the completion of this offering, we may incur additional debt in the regular course of our business which may materially affect our total indebtedness as provided in this table. |
As of June 30, 2013, on a consolidated basis, all of our debt outstanding was unsecured. In addition, at June 30, 2013, we did not have any off-balance sheet guarantees.
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The following description is only a summary of the material terms of the Notes and does not purport to be complete. The Notes will be issued under and governed by the indenture dated as of November 28, 2012, as supplemented by the second supplemental indenture to be dated as of August 6, 2013 (as so supplemented, the indenture), between us and The Bank of New York Mellon, as trustee (the trustee). The following description of certain material terms of the Notes is subject to, and is qualified in its entirety by reference to, the indenture, including definitions of specified terms used in the indenture, and to the Trust Indenture Act of 1939, as amended. We urge you to read the indenture because it, and not this description, defines your rights as a beneficial holder of the Notes. A form of the indenture has been filed as an exhibit to the registration statement of which this prospectus supplement and the accompanying prospectus form a part. You may also request copies of the indenture from us at our address set forth under Where You Can Find More Information in the accompanying prospectus. This summary supplements the description of the debt securities in the accompanying prospectus and, to the extent it is inconsistent, replaces the description in the accompanying prospectus.
In this description, references to the Company, we, us or our mean Baidu, Inc. only and do not include any of our Subsidiaries or Consolidated Affiliated Entities, unless the context otherwise requires.
General
The Notes will constitute a series of securities under the indenture. The Notes will initially be issued in an aggregate principal amount of US$1,000,000,000 and will mature on August 6, 2018 unless the Notes are redeemed prior to their maturity pursuant to the indenture and the terms thereof. The Notes will bear interest at the rate of 3.250% per annum. Interest on the Notes will accrue from August 6, 2013 and will be payable semi-annually in arrears on February 6 and August 6 of each year, beginning on February 6, 2014, to the persons in whose names the Notes are registered at the close of business on the preceding January 22 and July 22, respectively, which we refer to as the record dates. At maturity, the Notes are payable at their principal amount plus accrued and unpaid interest thereon. In any case where the payment of principal of, premium (if any) or interest on the Notes is due on a date that is not a Business Day (as defined under the heading Optional Redemption below), then payment of principal of, premium (if any) or interest on the Notes, as the case may be, shall be made on the next succeeding Business Day and no interest shall accrue with respect to such payment for the period from and after such date that is not a Business Day to such next succeeding Business Day. Interest shall be calculated on the basis of a 360-day year consisting of twelve 30-day months.
The Notes shall be denominated in minimum principal amounts of US$200,000 and in integral multiples of US$1,000 in excess thereof. The Notes will be issued in global registered form.
Ranking
The Notes will be our senior unsecured obligations issued under the indenture. The Notes will rank senior in right of payment to all of our existing and future obligations expressly subordinated in right of payment to the Notes and rank at least equal in right of payment with all of our existing and future unsecured and unsubordinated obligations (subject to any priority rights pursuant to applicable law). However, the Notes will be effectively subordinated to all of our existing and future secured obligations, to the extent of the value of the assets serving as security therefor, and be structurally subordinated to all existing and future obligations and other liabilities of our Controlled Entities.
Issuance of Additional Notes
We may, from time to time, without the consent of the holders of the Notes, create and issue additional Notes having the same terms and conditions as the Notes in all respects (or in all respects except for the issue date, the issue price and the first payment of interest). Additional Notes issued in this manner will be
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consolidated with the previously outstanding Notes to constitute a single series of Notes. We will not issue any additional Notes with the same CUSIP, ISIN or other identifying number as the Notes offered hereby unless the additional Notes are fungible with the outstanding Notes for U.S. federal income tax purposes.
Optional Redemption
We may, at any time upon giving not less than 30 nor more than 60 days notice to holders of the Notes (which notice shall be irrevocable), redeem the Notes, in whole or in part, at a redemption amount equal to the greater of:
| 100% of the principal amount of the Notes to be redeemed; and |
| the make whole amount, which means the amount determined on the fifth Business Day before the redemption date equal to the sum of (i) the present value of the principal amount of the Notes to be redeemed, assuming a scheduled repayment thereof on the stated maturity date, plus (ii) the present value of the remaining scheduled payments of interest to and including the stated maturity date, in each case discounted to the redemption date on a semi-annual basis (assuming a 360-day year consisting of twelve 30-day months and, in the case of an incomplete month, the actual number of days elapsed) at the Treasury Yield plus 20 basis points, |
plus, in each case, accrued and unpaid interest, if any, to, but not including, the redemption date; provided that the principal amount of a Note remaining outstanding after redemption in part shall be US$200,000 or an integral multiple of US$1,000 in excess thereof.
Business Day means a day other than a Saturday, Sunday or a day on which banking institutions or trust companies in The City of New York, Hong Kong or Beijing are authorized or obligated by law, regulation or executive order to remain closed.
Comparable Treasury Issue means the United States Treasury security selected by an Independent Investment Banker that would be utilized, at the time of selection and in accordance with customary financial practice, in pricing new issues of corporate debt securities of comparable maturity to the remaining term of the Notes to be redeemed.
Comparable Treasury Price means, with respect to any redemption date, (1) the average of the Reference Treasury Dealer Quotations for such redemption date, after excluding the highest and lowest of such Reference Treasury Dealer Quotations, or (2) if we obtain fewer than three such Reference Treasury Dealer Quotations, the average of all quotations obtained.
Independent Investment Banker means one of the Reference Treasury Dealers appointed by us.
Reference Treasury Dealer means each of any three investment banks of recognized standing that is a primary U.S. government securities dealer in the United States, selected by us in good faith.
Reference Treasury Dealer Quotation means, with respect to each Reference Treasury Dealer and any redemption date, the average, as determined by us, of the bid and asked prices for the Comparable Treasury Issue (expressed in each case as a percentage of its principal amount) quoted in writing to us by such Reference Treasury Dealer as of 5:00 p.m., New York City time, on the fifth Business Day before such redemption date.
Treasury Yield means, with respect to any redemption date, the rate per annum equal to the semi-annual equivalent yield to maturity (computed as of the fifth Business Day before such redemption date) of the Comparable Treasury Issue, calculated using a price for the Comparable Treasury Issue (expressed as a percentage of its principal amount) equal to the Comparable Treasury Price for such redemption date.
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The notice of redemption will be mailed at least 30 but not more than 60 days before the redemption date to each holder of record of the Notes to be redeemed at its registered address. The notice of redemption for the Notes will state, among other things, the amount of Notes to be redeemed, the redemption date, the manner in which the redemption price will be calculated and the place or places that payment will be made upon presentation and surrender of Notes to be redeemed. Unless we default in the payment of the redemption price, interest will cease to accrue on any Notes that have been called for redemption at the redemption date. If less than all of the Notes are to be redeemed, the trustee will select the Notes to be redeemed either pro rata, by lot or in such other manner as the trustee deems appropriate, subject to the procedures of DTC.
Repurchase Upon Change of Control
If a Change of Control occurs, unless we have exercised our right to redeem the Notes as described under the heading Description of Debt SecuritiesTax Redemption in the accompanying prospectus or under the heading Optional Redemption above, we will be required to make an offer to repurchase all or, at the holders option, any part (equal to US$200,000 or multiples of US$1,000 in excess thereof), of each holders Notes pursuant to the offer described below (the Change of Control Offer) on the terms set forth in the indenture and the Notes. In the Change of Control Offer, we will be required to offer payment in cash equal to 101% of the aggregate principal amount of Notes repurchased plus accrued and unpaid interest, if any, on the Notes repurchased to, but not including, the date of purchase (the Change of Control Payment).
Within 30 days following any Change of Control, we will be required to mail a notice to holders of the Notes, with a copy to the trustee, describing the transaction or transactions that constitute the Change of Control and offering to repurchase the Notes on the date specified in the notice, which date will be no earlier than 30 days and no later than 60 days from the date such notice is mailed (the Change of Control Payment Date), pursuant to the procedures required by the Notes and described in such notice.
On the Change of Control Payment Date, we will be required, to the extent lawful, to:
| accept for payment all Notes or portions of Notes properly tendered pursuant to the Change of Control Offer; |
| deposit with the paying agent one Business Day prior to the Change of Control Payment Date an amount equal to the Change of Control Payment in respect of all Notes or portions of Notes properly tendered; and |
| deliver or cause to be delivered to the trustee the Notes properly accepted together with an officers certificate stating the aggregate principal amount of Notes or portions of Notes being purchased by us. |
The paying agent will be required to promptly mail, to each holder who properly tendered Notes, the purchase price for such Notes properly tendered, and the trustee will be required to promptly authenticate and mail (or cause to be transferred by book-entry) to each such holder a new Note equal in principal amount to any unpurchased portion of the Notes surrendered, if any; provided that each new Note will be in a principal amount of US$200,000 or a multiple of US$1,000 in excess thereof.
We will not be required to make a Change of Control Offer upon a Change of Control if a third party makes such an offer in the manner, at the times and otherwise in compliance with the requirements for an offer made by us and such third party purchases all Notes properly tendered and not withdrawn under its offer. In the event that such third party terminates or defaults its offer, we will be required to make a Change of Control Offer treating the date of such termination or default as though it were the date of the Change of Control.
We will comply with the requirements of Rule 14e-1 under the Exchange Act, to the extent applicable, and any other securities laws and regulations thereunder to the extent those laws and regulations are applicable in connection with the repurchase of the Notes as a result of a Change of Control. To the extent that the provision of any such securities laws or regulations conflicts with the Change of Control Offer provisions of the Notes, we will comply with those securities laws and regulations and will not be deemed to have breached our obligations under the Change of Control Offer provisions of the Notes by virtue of any such conflict.
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There can be no assurance that we will have sufficient funds available at the time of any Change of Control to consummate a Change of Control Offer for all Notes then outstanding (or all Notes properly tendered by the holders of such Notes) and pay the Change of Control Payment. We may also be prohibited by terms of other indebtedness or agreements from repurchasing the Notes upon a Change of Control, which would require us to repay the relevant indebtedness or terminate the relevant agreement before we can proceed with a Change of Control Offer, and there can be no assurance that we will be able to effect such repayment or termination.
Affiliate means, with respect to any Person, any other Person directly or indirectly controlling, controlled by, or under direct or indirect common control with, such Person. For the purposes of this definition, control when used with respect to any Person means the power to direct the management and policies of such Person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise; and the terms controlling and controlled have meanings correlative to the foregoing.
Board of Directors means the board of directors elected or appointed by our shareholders to manage our business or any committee of such board duly authorized to take the action purported to be taken by such committee.
Capital Stock of any Person means any and all shares, interests, rights to purchase, warrants, options, participations or other equivalents of or interests in (however designated) equity of such Person, including any Preferred Shares and limited liability or partnership interests (whether general or limited), but excluding any debt securities convertible or exchangeable into such equity.
Change of Control means:
(i) | any person or group of related persons (as such terms are used in Sections 13(d) and 14(d) of the Exchange Act), other than one or more Permitted Holders, becomes the beneficial owner (as defined in Rules 13d-3 and 13d-5 under the Exchange Act, except that such person or group shall be deemed to have beneficial ownership of all shares that any such person or group has the right to acquire, whether such right is exercisable immediately or only after the passage of time), directly or indirectly, of more of the total voting power of our Voting Stock or any of our direct or indirect parent entities (or their successors by merger, consolidation or purchase of all or substantially all of their assets) than the Permitted Holders; |
(ii) | the merger or consolidation of us with or into another Person or the merger of another Person with or into us, unless the holders of a majority of the aggregate voting power of our Voting Stock, immediately prior to such transaction, hold securities of the surviving or transferee Person that represent, immediately after such transaction, at least a majority of the aggregate voting power of the Voting Stock of the surviving or transferee Person; |
(iii) | the sale, assignment, conveyance, transfer, lease or other disposition (other than by way of merger or consolidation), in one or a series of related transactions, of all or substantially all of our assets and our Controlled Entities, taken together as a whole, to any person (as such term is used in Sections 13(d) and 14(d) of the Exchange Act), other than transactions with one or more Permitted Holders; |
(iv) | the Permitted Holders in the aggregate cease to own more than 30% of the total voting power of our Voting Stock; |
(v) | the adoption by our shareholders of a plan or proposal for our liquidation or dissolution; or |
(vi) | (A) any change in or amendment to the laws, regulations and rules of the PRC or the official interpretation or official application thereof (Change in Law) that results in (x) the Group (as in existence immediately subsequent to such Change in Law), as a whole, being legally prohibited from operating substantially all of the business operations conducted by the Group (as in existence immediately prior to such Change in Law) as of the last date of the period described in our consolidated financial statements for the most recent fiscal quarter and (y) we being unable to continue |
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to derive substantially all of the economic benefits from the business operations conducted by the Group (as in existence immediately prior to such Change in Law) in the same manner as reflected in our consolidated financial statements for the most recent fiscal quarter and (B) we have not furnished to the trustee, prior to the date that is twelve months after the date of the Change in Law, an opinion from an independent financial advisor or an independent legal counsel stating either (1) we are able to continue to derive substantially all of the economic benefits from the business operations conducted by the Group (as in existence immediately prior to such Change in Law), taken as a whole, as reflected in our consolidated financial statements for the most recent fiscal quarter (including after giving effect to any corporate restructuring or reorganization plan of ours) or (2) such Change in Law would not materially adversely affect our ability to make principal and interest payments on the Notes when due. |
The definition of Change of Control includes a phrase relating to the sale, assignment, conveyance, transfer, lease or other disposition of all or substantially all of our and our Controlled Entities assets, taken together as a whole. Although there is a limited body of case law interpreting the phrase substantially all, there is no precise established definition of the phrase under applicable law. Accordingly, the applicability of the requirement that we offer to repurchase the Notes as a result of a sale, assignment, conveyance, transfer, lease or other disposition of less than all of our and our Controlled Entities assets, taken together as a whole, may be uncertain.
Consolidated Affiliated Entity of any Person means any corporation, association or other entity which is or is required to be consolidated with such Person under Accounting Standards Codification subtopic 810-10, Consolidation: Overall (including any changes, amendments or supplements thereto) or, if such Person prepares its financial statements in accordance with accounting principles other than U.S. GAAP, the equivalent of Accounting Standards Codification subtopic 810-10, Consolidation: Overall under such accounting principles. Unless otherwise specified herein, each reference to a Consolidated Affiliated Entity will refer to a Consolidated Affiliated Entity of ours.
Controlled Entity of any Person means a Subsidiary or a Consolidated Affiliated Entity of such Person.
Group means the Company and our Controlled Entities.
Person means any individual, corporation, firm, limited liability company, partnership, joint venture, undertaking, association, joint stock company, trust, unincorporated organization, trust, state, government or any agency or political subdivision thereof or any other entity (in each case whether or not being a separate legal entity).
Permitted Holders means Mr. Robin Yanhong Li and any Affiliate of Mr. Robin Yanhong Li; in the event we merge into a Controlled Entity of ours (Merger Sub) that (i) is a shell corporation, (ii) is incorporated specifically for the purpose of a merger with us and (iii) is a Controlled Entity directly owned by another Controlled Entity of ours that is directly owned by us (Topco), with Topco owning no assets other than holding the Capital Stock of Merger Sub, then, upon completion of such merger, Topco will be a Permitted Holder so long as our ultimate beneficial ownership has not been modified by such transaction. Any Person or group whose acquisition of beneficial ownership constitutes a Change of Control in respect of which a Change of Control Offer is made in accordance with the requirements of the indenture (or would result in a Change of Control Offer in the absence of the waiver of such requirement by holders in accordance with the indenture) will thereafter constitute additional Permitted Holders.
Preferred Shares, as applied to the Capital Stock of any corporation, means Capital Stock of any class or classes (however designated) that is preferred as to the payment of dividends upon liquidation, dissolution or winding up.
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Subsidiary of any Person means (a) any corporation, association or other business entity (other than a partnership, joint venture, limited liability company or similar entity) of which more than 50% of the total ordinary voting power of shares of Capital Stock entitled (without regard to the occurrence of any contingency) to vote in the election of directors, managers or trustees thereof (or Persons performing similar functions) or (b) any partnership, joint venture limited liability company or similar entity of which more than 50% of the capital accounts, distribution rights, total equity and voting interests or general or limited partnership interests, as applicable, is, in the case of clauses (a) and (b), voting at the time owned or controlled, directly or indirectly, by (1) such Person, (2) such Person and one or more Subsidiaries of such Person or (3) one or more Subsidiaries of such Person. Unless otherwise specified herein, each reference to a Subsidiary will refer to a Subsidiary of the Company.
Voting Stock of a Person means all classes of Capital Stock of such Person then outstanding and normally entitled to vote in the election of directors, managers or trustees, as applicable, of such Person.
Modification and Waiver
The provisions of the indenture relating to modification and waiver, which are described under the heading Description of Debt SecuritiesModification and Waiver in the accompanying prospectus, will apply to the Notes, with the additional provisions that:
(i) | we and the trustee may not, without the consent of each holder of the Notes affected thereby, reduce the amount of the premium payable upon the redemption or repurchase of the Notes or change the time at which the Notes may be redeemed or repurchased as described above under Optional Redemption or Repurchase Upon Change of Control whether through an amendment or waiver of provisions in the covenants, definitions or otherwise (except through amendments to the definition of Change of Control); and |
(ii) | we and the trustee may, without the consent of any holder of the Notes, amend the indenture and the Notes to conform the text of the indenture or the Notes to any provision of this Description of the Notes to the extent that such provision in this Description of the Notes was intended to be a verbatim recitation of a provision of the indenture or the Notes as evidenced by an officers certificate. |
Limitation on Liens
So long as any Note remains outstanding, we will not create or have outstanding, and we will ensure that none of our Principal Controlled Entities will create or have outstanding, any Lien upon the whole or any part of their respective present or future undertaking, assets or revenues (including any uncalled capital) securing any Relevant Indebtedness, or any guarantee or indemnity in respect of any Relevant Indebtedness either of us or of any of our Principal Controlled Entities, without (i) at the same time or prior thereto securing the Notes equally and ratably therewith or (ii) providing such other security for the Notes as shall be approved by an act of the holders of the Notes holding at least a majority of the principal amount of the Notes then outstanding.
The foregoing restriction will not apply to:
(i) | any Lien arising or already arisen automatically by operation of law which is timely discharged or disputed in good faith by appropriate proceedings; |
(ii) | any Lien in respect of the obligations of any Person which becomes a Principal Controlled Entity or which merges with or into us or a Principal Controlled Entity after the date of the indenture which is in existence at the date on which it becomes a Principal Controlled Entity or merges with or into us or a Principal Controlled Entity; provided that any such Lien was not incurred in anticipation of such acquisition or of such Person becoming a Principal Controlled Entity or being merged with or into us or a Principal Controlled Entity; |
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(iii) | any Lien created or outstanding in favor of us; |
(iv) | any Lien in respect of Relevant Indebtedness of us or any Principal Controlled Entity with respect to which we or such Principal Controlled Entity has paid money or deposited money or securities with a fiscal agent, trustee or depository to pay or discharge in full the obligations of us or such Principal Controlled Entity in respect thereof (other than the obligation that such money or securities so paid or deposited, and the proceeds therefrom, be sufficient to pay or discharge such obligations in full); or |
(v) | any Lien arising out of the refinancing, extension, renewal or refunding of any Relevant Indebtedness secured by any Lien permitted by the foregoing clause (ii); provided that such Relevant Indebtedness is not increased beyond the principal amount thereof (together with the costs of such refinancing, extension, renewal or refunding) and is not secured by any additional property or assets. |
Lien means any mortgage, charge, pledge, lien or other form of encumbrance or security interest.
Principal Controlled Entities at any time shall mean one of our Controlled Entities
(i) | as to which one or more of the following conditions is/are satisfied: |
(a) | its total revenue or (in the case of one of our Controlled Entities which has one or more Controlled Entities) consolidated total revenue attributable to us is at least 5% of our consolidated total revenue; |
(b) | its net profit or (in the case of one of our Controlled Entities which has one or more Controlled Entities) consolidated net profit attributable to us (in each case before taxation and exceptional items) is at least 5% of our consolidated net profit (before taxation and exceptional items); or |
(c) | its net assets or (in the case of one of our Controlled Entities which has one or more Controlled Entities) consolidated net assets attributable to us (in each case after deducting minority interests in Subsidiaries) are at least 10% of our consolidated net assets (after deducting minority interests in Subsidiaries); |
all as calculated by reference to the then latest audited financial statements (consolidated or, as the case may be, unconsolidated) of our Controlled Entity and our then latest audited consolidated financial statements;
provided that, in relation to paragraphs (a), (b) and (c) above:
(1) | in the case of a corporation or other business entity becoming a Controlled Entity after the end of the financial period to which our latest consolidated audited accounts relate, the reference to our then latest consolidated audited accounts and our Controlled Entities for the purposes of the calculation above shall, until our consolidated audited accounts for the financial period in which the relevant corporation or other business entity becomes a Controlled Entity are issued, be deemed to be a reference to the then latest consolidated audited accounts of us and our Controlled Entities adjusted to consolidate the latest audited accounts (consolidated in the case of a Controlled Entity which itself has Controlled Entities) of such Controlled Entity in such accounts; |
(2) | if at any relevant time in relation to us or any Controlled Entity which itself has Controlled Entities, no consolidated accounts are prepared and audited, total revenue, net profit or net assets of us and/or any such Controlled Entity shall be determined on the basis of pro forma consolidated accounts prepared for this purpose by or on behalf of us; |
(3) | if at any relevant time in relation to any Controlled Entity, no accounts are audited, its net assets (consolidated, if appropriate) shall be determined on the basis of pro forma accounts (consolidated, if appropriate) of the relevant Controlled Entity prepared for this purpose by or on behalf of us; and |
(4) | if the accounts of any Controlled Entity (not being a Controlled Entity referred to in proviso (1) above) are not consolidated with our accounts, then the determination of whether or not such |
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Controlled Entity is a Principal Controlled Entity shall be based on a pro forma consolidation of its accounts (consolidated, if appropriate) with our consolidated accounts (determined on the basis of the foregoing); or |
(ii) | to which is transferred all or substantially all of the assets of a Controlled Entity which immediately prior to the transfer was a Principal Controlled Entity; provided that, with effect from such transfer, the Controlled Entity which so transfers its assets and undertakings shall cease to be a Principal Controlled Entity (but without prejudice to paragraph (i) above) and the Controlled Entity to which the assets are so transferred shall become a Principal Controlled Entity. |
An officers certificate delivered to the trustee certifying in good faith as to whether or not a Controlled Entity is a Principal Controlled Entity shall be conclusive in the absence of manifest error.
Relevant Indebtedness means any indebtedness which is in the form of, or represented or evidenced by, bonds, notes, debentures, loan stock or other securities which for the time being are, or are intended to be or are commonly, quoted, listed or dealt in or traded on any stock exchange or over-the-counter or other securities market.
Legal Defeasance and Covenant Defeasance
The provisions of the indenture relating to legal defeasance and covenant defeasance, which are described under the heading Description of Debt SecuritiesLegal Defeasance and Covenant Defeasance in the accompanying prospectus, will apply to the Notes, and in addition, we may also exercise Covenant Defeasance with respect to our obligations under the indenture and the Notes that are described under the headings Repurchase Upon Change of Control and Limitation on Liens above.
No Sinking Fund
The Notes will not be subject to, nor entitled to the benefit of, any sinking fund.
Book-Entry; Delivery and Form
The Notes will be represented by one or more global notes that will be deposited with and registered in the name of DTC or its nominee for the accounts of its participants, including Euroclear Bank S.A./N.V. (Euroclear) as operator of the Euroclear System, and Clearstream Banking, S.A. (Clearstream). We will not issue certificated Notes, except in the limited circumstances described below. Transfers of ownership interests in the global notes will be effected only through entries made on the books of DTC participants acting on behalf of beneficial owners. You will not receive written confirmation from DTC of your purchase. The direct or indirect participants through whom you purchased the Notes should send you written confirmations providing details of your transactions, as well as periodic statements of your holdings. The direct and indirect participants are responsible for keeping accurate account of the holdings of their customers like you. The laws of some states require that certain purchasers of securities take physical delivery of such securities in definitive form. Such limits and such laws may impair the ability to own, transfer or pledge beneficial interests in the global notes.
You, as the beneficial owner of Notes, will not receive certificates representing ownership interests in the global notes, except in the following limited circumstances: (1) DTC notifies us that it is unwilling or unable to continue as depositary or if DTC ceases to be eligible under the indenture and we do not appoint a successor depositary within 90 days; (2) we determine that the Notes will no longer be represented by global notes and execute and deliver to the trustee an officers certificate to such effect; or (3) an event of default with respect to the Notes will have occurred and be continuing. These certificated Notes will be registered in such name or names as DTC will instruct the trustee. It is expected that such instructions may be based upon directions received by DTC from participants with respect to ownership of beneficial interests in global notes.
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So long as DTC or its nominee is the registered owner and holder of the global notes, DTC or its nominee, as the case may be, will be considered the sole owner or holder of the Notes represented by the global notes for all purposes under the indenture relating to the Notes. Except as provided above, you, as the beneficial owner of interests in the global notes, will not be entitled to have Notes registered in your name, will not receive or be entitled to receive physical delivery of Notes in definitive form and will not be considered the owner or holder thereof under the indenture. Accordingly, you, as the beneficial owner, must rely on the procedures of DTC and, if you are not a DTC participant, on the procedures of the DTC participants through which you own your interest, to exercise any rights of a holder under the indenture.
Neither we, the trustee, nor any other agent of ours or agent of the trustee will have any responsibility or liability for any aspect of the records relating to, or payments made on account of, beneficial ownership interests in global notes or for maintaining, supervising or reviewing any records relating to the beneficial ownership interests. DTCs practice is to credit the accounts of DTCs direct participants with payment in amounts proportionate to their respective holdings in principal amount of beneficial interest in a security as shown on the records of DTC, unless DTC has reason to believe that it will not receive payment on the payment date. The underwriters will initially designate the accounts to be credited. Beneficial owners may experience delays in receiving distributions on their Notes because distributions will initially be made to DTC and they must be transferred through the chain of intermediaries to the beneficial owners account. Payments by DTC participants to you will be the responsibility of the DTC participant and not of DTC, the trustee or us. Accordingly, we and any paying agent will have no responsibility or liability for: any aspect of DTCs records relating to, or payments made on account of, beneficial ownership interests in the Notes represented by a global securities certificate; any other aspect of the relationship between DTC and its participants or the relationship between those participants and the owners of beneficial interests in a global securities certificate held through those participants; or the maintenance, supervision or review of any of DTCs records relating to those beneficial ownership interests.
Conveyance of notices and other communications by DTC to direct participants, by direct participants to indirect participants, and by direct participants and indirect participants to beneficial owners will be governed by arrangements among them, subject to any statutory or regulatory requirements as may be in effect from time to time.
We have been informed that, under DTCs existing practices, if we request any action of holders of senior notes, or an owner of a beneficial interest in a global security such as you desires to take any action which a holder of the Notes is entitled to take under the indenture, DTC would authorize the direct participants holding the relevant beneficial interests to take such action, and those direct participants and any indirect participants would authorize beneficial owners owning through those direct and indirect participants to take such action or would otherwise act upon the instructions of beneficial owners owning through them.
Clearstream and Euroclear have provided us with the following information:
Clearstream
Clearstream is incorporated under the laws of Luxembourg as a professional depositary. Clearstream holds securities for its participating organizations and facilitates the clearance and settlement of securities transactions between Clearstream participants through electronic book-entry changes in accounts of Clearstream participants, thereby eliminating the need for physical movement of certificates. Clearstream provides to Clearstream participants, among other things, services for safekeeping, administration, clearance and settlement of internationally traded securities and securities lending and borrowing. Clearstream interfaces with domestic securities markets in several countries. As a professional depositary, Clearstream is subject to regulation by the Luxembourg Commission for the Supervision of the Financial Sector (Commission de Surveillance du Secteur Financier). Clearstream participants include underwriters, securities brokers and dealers, banks, trust companies, clearing corporations and certain other organizations and may include the underwriters. Clearstreams U.S.
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participants are limited to securities brokers and dealers and banks. Indirect access to Clearstream is also available to others, such as banks, brokers, dealers and trust companies that clear through or maintain a custodial relationship with a Clearstream participant either directly or indirectly.
Distributions with respect to the Notes held beneficially through Clearstream will be credited to cash accounts of Clearstream participants in accordance with its rules and procedures, to the extent received by the U.S. depositary for Clearstream.
Euroclear
Euroclear was created in 1968 to hold securities for participants of Euroclear and to clear and settle transactions between Euroclear participants through simultaneous electronic book-entry delivery against payment, thereby eliminating the need for physical movement of certificates and any risk from lack of simultaneous transfers of securities and cash. Euroclear performs various other services, including securities lending and borrowing and interacts with domestic markets in several countries. Euroclear is operated by Euroclear Bank S.A/N.V. under contract with Euroclear plc, a U.K. corporation. All operations are conducted by the Euroclear operator, and all Euroclear securities clearance accounts and Euroclear cash accounts are accounts with the Euroclear operator, not Euroclear plc. Euroclear plc establishes policy for Euroclear on behalf of Euroclear participants. Euroclear participants include banks, including central banks, securities brokers and dealers and other professional financial intermediaries and may include the underwriters. Indirect access to Euroclear is also available to other firms that clear through or maintain a custodial relationship with a Euroclear participant, either directly or indirectly.
The Euroclear operator is a Belgian bank. As such it is regulated by the Belgian Banking and Finance Commission.
Securities clearance accounts and cash accounts with the Euroclear operator are governed by the Terms and Conditions Governing Use of Euroclear and the related Operating Procedures of the Euroclear System, and applicable Belgian law (collectively, the Terms and Conditions). The Terms and Conditions govern transfers of securities and cash within Euroclear, withdrawals of securities and cash from Euroclear, and receipts of payments with respect to securities in Euroclear. All securities in Euroclear are held on a fungible basis without attribution of specific certificates to specific clearance accounts. The Euroclear operator acts under the Terms and Conditions only on behalf of Euroclear participants and has no record of or relationship with persons holding through Euroclear participants.
Distributions with respect to the Notes held beneficially through Euroclear will be credited to the cash accounts of Euroclear participants in accordance with the Terms and Conditions, to the extent received by the U.S. depositary for Euroclear.
Euroclear has further advised us that investors who acquire, hold and transfer interests in the Notes by book-entry through accounts with the Euroclear operator or any other securities intermediary are subject to the laws and contractual provisions governing their relationship with their intermediary, as well as the laws and contractual provisions governing the relationship between such an intermediary and each other intermediary, if any, standing between themselves and the global securities certificates.
Global Clearance and Settlement Procedures
Initial settlement for the Notes will be made in immediately available funds. Secondary market trading between DTC participants will occur in the ordinary way in accordance with DTC rules and will be settled in immediately available funds using DTCs Same Day Funds Settlement System. Secondary market trading between Clearstream participants and/or Euroclear participants will occur in the ordinary way in accordance with the applicable rules and operating procedures of Clearstream and Euroclear and will be settled using the procedures applicable to conventional eurobonds in immediately available funds.
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Cross market transfers between persons holding directly or indirectly through DTC, on the one hand, and directly or indirectly through Clearstream participants or Euroclear participants, on the other, will be effected through DTC in accordance with DTC rules on behalf of the relevant European international clearing system by its U.S. depositary; however, such cross market transactions will require delivery of instructions to the relevant European international clearing system by the counterparty in such system in accordance with its rules and procedures and within its established deadlines (European time). The relevant European international clearing system will, if the transaction meets its settlement requirements, deliver instructions to its U.S. depositary to take action to effect final settlement on its behalf by delivering or receiving Notes through DTC, and making or receiving payment in accordance with normal procedures for same day funds settlement applicable to DTC. Clearstream participants and Euroclear participants may not deliver instructions directly to their respective U.S. depositaries.
Because of time zone differences, credits of the Notes received through Clearstream or Euroclear as a result of a transaction with a DTC participant will be made during subsequent securities settlement processing and dated the business day following the DTC settlement date. Such credits or any transactions in such Notes settled during such processing will be reported to the relevant Euroclear participants or Clearstream participants on such business day. Cash received in Clearstream or Euroclear as a result of sales of the Notes by or through a Clearstream participant or a Euroclear participant to a DTC participant will be received with value on the DTC settlement date but will be available in the relevant Clearstream or Euroclear cash account only as of the business day following settlement in DTC.
Although DTC, Clearstream and Euroclear have agreed to the foregoing procedures in order to facilitate transfers of Notes among participants of DTC, Clearstream and Euroclear, they are under no obligation to perform or continue to perform such procedures and such procedures may be modified or discontinued at any time. Neither we nor the paying agent will have any responsibility for the performance by DTC, Euroclear or Clearstream or their respective direct or indirect participants of their obligations under the rules and procedures governing their operations.
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Prospective investors should consult their professional advisers regarding the possible tax consequences of buying, holding or selling any Notes under the laws of their country of citizenship, residence or domicile.
Cayman Islands Taxation
The following is a discussion on certain Cayman Islands income tax consequences of an investment in the Notes. The discussion is a general summary of present law, which is subject to prospective and retroactive change. It is not intended as tax advice, does not consider any investors particular circumstances, and does not consider tax consequences other than those arising under Cayman Islands law.
Under existing Cayman Islands law, payments of interest and principal on the Notes will not be subject to taxation in the Cayman Islands and no withholding will be required on the payment of interest and principal to any holder of the Notes, nor will gains derived from the disposal of the Notes be subject to Cayman Islands income or corporation tax. The Cayman Islands currently have no income, corporation or capital gains tax and no estate duty, inheritance tax or gift tax. No stamp duty is payable in respect of the issue of the Notes. An instrument of transfer in respect of a Note is stampable if executed in or brought into the Cayman Islands.
PRC Taxation
The following is a summary of certain PRC tax consequences of the purchase, ownership and disposition of Notes to non-resident enterprises and non-resident individuals. It is based upon applicable laws, rules and regulations in effect as of the date of this prospectus supplement, all of which are subject to change (possibly with retroactive effect). This discussion does not purport to be a comprehensive description of all the tax considerations that may be relevant to a decision to purchase, own or dispose of the Notes and does not purport to deal with consequences applicable to all categories of investors, some of which may be subject to special rules. Persons considering the purchase of Notes should consult their own tax advisors concerning the tax consequences of the purchase, ownership and disposition of Notes, including such possible consequences under the laws of their country of citizenship, residence or domicile.
If we are considered a PRC resident enterprise under the PRC Enterprise Income Tax Law, holders of Notes who are non-resident enterprises may be subject to PRC withholding tax on interest payable by us and PRC enterprise income tax on any gains realized from the transfer of Notes, if such income is considered to be derived from sources within the PRC, at a rate of 10% (or lower rate if available under an applicable tax treaty), provided that such non-resident enterprise investor (i) has no establishment or premises in the PRC, or (ii) has an establishment or premises in the PRC but its income derived from the PRC has no real connection with such establishment or premises. Furthermore, if we are considered a PRC resident enterprise and relevant PRC tax authorities consider interest we pay with respect to the Notes and any gains realized from the transfer of Notes to be income derived from sources within the PRC, such interest earned by non-resident individuals may be subject to PRC withholding tax and such gain realized by non-resident individuals may be subject to PRC individual income tax, in each case at a rate of 20% (or lower rate if available under an applicable tax treaty).
If we are not deemed a PRC resident enterprise, non-resident enterprise and non-resident individual holders of Notes will not be subject to PRC income tax on any payments of interest on, or gains from the transfer of, Notes.
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U.S. Federal Income Tax Considerations
This sub-section titled U.S. Federal Income Tax Considerations discusses U.S. federal income tax consequences of the ownership of the Notes as of the date of this prospectus supplement. This summary applies to you only if:
| You are, for U.S. federal income tax purposes, a beneficial owner of a Note and an individual U.S. citizen or resident, a U.S. corporation, or otherwise subject to U.S. federal income tax on a net income basis in respect of the Notes; and |
| You purchase the Notes in their original issuance at the issue price, which will equal the first price to the public (not including bond houses, brokers or similar persons or organizations acting in the capacity of underwriters, placement agents or wholesalers) at which a substantial amount of the Notes is sold for money, and you hold such Notes as capital assets for U.S. federal income tax purposes. |
This sub-section does not purport to be a comprehensive description of all of the tax considerations that may be relevant to any particular investor. In particular, the discussion does not address all of the tax consequences that may be applicable to investors that are subject to special rules, such as certain financial institutions, insurance companies, tax-exempt organizations, dealers in securities or currencies, persons that elect mark-to-market treatment, persons that hold the Notes as a position in a straddle, conversion transaction, synthetic security, or other integrated financial transaction for U.S. federal tax purposes, persons subject to the alternative minimum tax and persons whose functional currency is not the U.S. dollar.
THIS DISCUSSION OF U.S. FEDERAL INCOME TAX CONSIDERATIONS IS NOT INTENDED, AND SHOULD NOT BE CONSTRUED, TO BE TAX OR LEGAL ADVICE TO ANY PARTICULAR INVESTOR IN OR HOLDER OF THE NOTES. PROSPECTIVE INVESTORS ARE ADVISED TO CONSULT THEIR OWN TAX ADVISORS CONCERNING THE APPLICATION OF THE U.S. FEDERAL INCOME TAX LAWS TO THEIR PARTICULAR SITUATIONS AS WELL AS ANY TAX CONSEQUENCES ARISING UNDER THE LAWS OF ANY OTHER TAXING JURISDICTION OR ANY APPLICABLE TAX TREATIES, AND THE POSSIBLE EFFECT OF CHANGES IN APPLICABLE TAX LAW.
The discussion below regarding U.S. federal income tax consequences is based upon the Internal Revenue Code of 1986, as amended, final and proposed Treasury regulations promulgated thereunder and any relevant administrative rulings or pronouncements or judicial decisions, all as of the date hereof and as currently interpreted, and does not take into account possible changes in such tax laws or interpretations thereof, which may apply retroactively.
If a partnership holds the Notes, the tax treatment of a partner will generally depend upon the status of the partner and the activities of the partnership. If you are a partner of a partnership holding the Notes, you are urged to consult your tax advisor.
Interest Payments
Payments of stated interest on the Notes will be includible in your gross income as ordinary interest income at the time you receive or accrue such amounts (in accordance with your regular method of tax accounting).
Interest on the Notes constitutes foreign source income for U.S. federal income tax purposes. For foreign tax credit limitation purposes, interest on the Notes generally will constitute passive income.
As described in PRC Taxation, if we are deemed to be a PRC resident enterprise under the PRC Enterprise Income Tax Law, payments of interest in respect of the Notes may be subject to PRC withholding taxes. For U.S. federal income tax purposes, the amount of interest includible in taxable income would include any amounts withheld in respect of PRC taxes. Subject to applicable limitations, PRC taxes, if any, withheld
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from payments in respect of the Notes not in excess of any applicable U.S.-PRC income tax treaty rate (assuming you are eligible for such treaty) would be creditable against your U.S. federal income tax liability. The rules governing foreign tax credits are complex, and you are urged to consult your tax advisor regarding the creditability of foreign taxes in your particular circumstances. Instead of claiming a credit, you may, at your election, deduct such PRC taxes, if any, in computing taxable income. An election to deduct foreign taxes instead of claiming foreign tax credits is applicable to all foreign taxes paid or accrued in the taxable year.
Additional Amounts paid pursuant to the obligations described under Description of the NotesPayment of Additional Amounts would be treated as ordinary interest income.
Sale, Exchange, Redemption and Other Disposition of the Notes
Upon the sale, exchange, redemption or other disposition of the Notes, you will recognize taxable gain or loss equal to the difference, if any, between the amount realized on the sale, exchange, redemption or other disposition (other than accrued but unpaid interest which will be treated as ordinary interest income) and your adjusted tax basis in such Notes. Your adjusted tax basis in the Notes generally will equal the cost of such Notes. Any such gain or loss generally will be capital gain or loss and will be long-term capital gain or loss if at the time of sale, exchange, redemption or other disposition you held the Notes for more than one year. The deductibility of capital losses is subject to certain limitations.
As described in PRC Taxation if we are deemed to be a PRC resident enterprise under the PRC Enterprise Income Tax Law, gains from the disposition of Notes may be subject to PRC income taxes. You are entitled to use foreign tax credits to offset only the portion of your U.S. tax liability considered to be attributable to foreign source income. Generally, gain or loss from the disposition of Notes will be U.S.-source for purposes of the foreign tax credit rules. However, if you are eligible for the benefits of the U.S.-PRC income tax treaty, such gain may be treated as arising from PRC sources under the U.S.-PRC income tax treaty. You are urged to consult your tax advisor as to your eligibility for benefits under the U.S.-PRC income tax treaty and the creditability of any PRC tax on disposition gains in your particular circumstances if you are so eligible.
Foreign Financial Asset Reporting
Owners of certain foreign financial assets, including debt of foreign entities, may be required to file an information report with respect to such assets with their tax returns if the aggregate value of all of these assets exceeds $50,000 at the end of the taxable year or $75,000 at any time during the taxable year (or, in some circumstances, a higher threshold). The Notes are expected to constitute foreign financial assets subject to these requirements unless the Notes are held in an account at a financial institution (in which case the account may be reportable if maintained by a foreign financial institution). If you are a U.S. person acquiring our Notes, you are urged to consult your tax advisors regarding the application of this legislation.
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Subject to the terms and conditions contained in the underwriting agreement, dated as of the date of this prospectus supplement between us and the underwriters named below, for whom J.P. Morgan Securities LLC and Goldman Sachs (Asia) L.L.C. are acting as representatives, we have agreed to sell to each underwriter, and each underwriter has severally agreed to purchase from us, the principal amount of the Notes set forth opposite its name below:
Underwriters |
Principal Amount of the Notes |
|||
J.P. Morgan Securities LLC |
510,000,000 | |||
Goldman Sachs (Asia) L.L.C. |
475,000,000 | |||
Australia and New Zealand Banking Group Limited |
5,000,000 | |||
Bank of China Limited |
5,000,000 | |||
Morgan Stanley & Co. International plc |
5,000,000 | |||
|
|
|||
Total |
US$ | 1,000,000,000 |
The underwriters are offering the Notes subject to their acceptance of the Notes from us, and subject to prior sale. The underwriting agreement provides that the obligations of the underwriters to purchase the Notes are subject to approval of certain legal matters by counsel and to certain other conditions. The underwriters must purchase all the Notes if they purchase any of the Notes. The underwriters reserve the right to withdraw, cancel or modify offers to investors and to reject orders in whole or in part.
The underwriters initially propose to offer part of the Notes directly to the public at the offering prices described on the cover page of this prospectus supplement. After the initial offering of the Notes, the underwriters may from time to time vary the offering prices and other selling terms. The offering of the Notes by the underwriters is subject to receipt and acceptance and subject to the underwriters right to reject any order in whole or in part.
Certain of the underwriters are not broker-dealers registered with the SEC. Therefore, to the extent they intend to make any offers or sales of Notes in the United States, they will do so only through one or more registered broker-dealers in compliance with applicable securities laws and regulations, and FINRA rules. Goldman Sachs (Asia) L.L.C. will offer the Notes in the United States through its registered broker-dealer affiliate Goldman, Sachs & Co., Australia and New Zealand Banking Group Limited will offer the Notes in the United States through its registered broker-dealer affiliate ANZ Securities, Inc. and Morgan Stanley & Co. International plc will offer the Notes in the United States through its registered broker-dealer affiliate Morgan Stanley & Co. LLC.
The following table shows the underwriting discounts that we will pay to the underwriters in connection with this offering:
Paid By Us | ||||
Per Note |
0.300 | % | ||
Total |
US$ | 3,000,000 |
Expenses associated with this offering to be paid by us, other than underwriting commissions and discounts, are estimated to be US$0.9 million.
We have agreed that, for a period until 60 days after the date of closing (which is expected to be the fifth business day following the date of this prospectus supplement), we will not, without the prior written consent of the representatives, offer, sell, contract to sell or otherwise dispose of any securities issued or guaranteed by us
S-38
that are substantially similar to the Notes. The underwriters in their sole discretion may consent to the offering and sale of such securities by us at any time without notice. We have also agreed to indemnify the underwriters against certain liabilities, including liabilities under the Securities Act, or contribute to payments that the underwriters may be required to make in respect of those liabilities.
The Notes will constitute a new class of securities with no established trading market. Approval-in-principle has been obtained for the listing and quotation of the Notes on the SGX-ST. However, we cannot assure you that the prices at which the Notes will sell in the market after this offering will not be lower than the initial offering price or that an active trading market for the Notes will develop and continue after this offering. The underwriters have advised us that they currently intend to make a market in the Notes. However, they are not obligated to do so and they may discontinue any market-making activities with respect to the Notes at any time without notice. Accordingly, we cannot assure you as to the liquidity of, or the trading market for, the Notes.
The underwriters (or their affiliates) may engage in over-allotment, stabilizing transactions, syndicate covering transactions and penalty bids to the extent permitted by applicable laws and regulations. Over-allotment involves sales in excess of the offering size, which creates a short position. Stabilizing transactions permit bids to purchase the underlying security so long as the stabilizing bids do not exceed a specified maximum. Covering transactions involve purchase of the Notes in the open market after the distribution has been completed in order to cover short positions. Penalty bids permit the underwriters to reclaim a selling concession from a dealer when the Notes originally sold by such dealer are purchased in a stabilizing transaction or a covering transaction to cover short positions. Neither we nor the underwriters make any representation or prediction as to the direction or magnitude of any effect that the transactions described above may have on the price of the Notes. In addition, neither we nor the underwriters make any representation that the underwriters will engage in these transactions or that these transactions, once commenced, will not be discontinued without notice.
We expect to deliver the Notes against payment for the Notes on or about the date specified in the last paragraph of the cover page of this prospectus supplement, which will be the fifth business day following the date of the pricing of the Notes. Under Rule 15c6-1 of the Exchange Act, trades in the secondary market generally settle in three business days, and purchasers who wish to trade Notes on the date of pricing or the next succeeding business day will be required, by virtue of the fact that the Notes initially will settle in T+5, to specify alternative settlement arrangements to prevent a failed settlement. Purchasers of the Notes who wish to trade the Notes on the date of pricing or the next succeeding business day should consult their own advisor.
The address of J.P. Morgan Securities LLC is 383 Madison Avenue, New York, New York 10179, United States of America. The address of Goldman Sachs (Asia) L.L.C. is 68/F, Cheung Kong Center, 2 Queens Road Central, Hong Kong.
Sales Outside the United States
European Economic Area
In relation to each member state of the European Economic Area which has implemented the Prospectus Directive (each, a Relevant Member State), with effect from and including the date on which the Prospectus Directive is implemented in that Relevant Member State (Relevant Implementation Date), an offer of the Notes may not be made to the public in that Relevant Member State other than:
(a) | to any legal entity which is a qualified investor as defined in the Prospectus Directive or the 2010 PD Amending Directive if the Relevant Member State has implemented the relevant provision; |
(b) | to fewer than 100 or, if the Relevant Member State has implemented the relevant provision of the 2010 PD Amending Directive, 150, natural or legal persons (other than qualified investors as defined in the Prospectus Directive), as permitted under the Prospectus Directive, subject to obtaining the prior consent of the representatives for any such offer; or |
(c) | in any other circumstances falling within Article 3(2) of the Prospectus Directive, |
S-39
provided that no such offer of Notes shall require us or any underwriter to publish a prospectus pursuant to Article 3 of the Prospectus Directive.
For the purposes of the above paragraph, the expression an offer of Notes to the public in relation to any Notes in any Relevant Member State means the communication in any form and by any means of sufficient information on the terms of the offer and the Notes to be offered so as to enable an investor to decide to purchase or subscribe for the Notes, as the same may be varied in that Member State by any measure implementing the Prospectus Directive in that Member State, the expression Prospectus Directive means Directive 2003/71/EC (and amendments thereto, including the 2010 PD Amending Directive, to the extent implemented in the Relevant Member State) and includes any relevant implementing measure in the Relevant Member State, and the expression 2010 PD Amending Directive means Directive 2010/73/EU.
United Kingdom
No invitation or inducement to engage in investment activity (within the meaning of section 21 of the Financial Services and Markets Act 2000 (FSMA) received by the underwriters in connection with the issue or sale of the Notes may be communicated or caused to be communicated except in circumstances in which section 21(1) of FSMA does not apply to the underwriters. All applicable provisions of FSMA must be complied with respect to anything done or to be done by the underwriters in relation to any Notes in, from or otherwise involving the United Kingdom.
Hong Kong
This prospectus supplement and the accompanying prospectus have not been and will not be registered with the Registrar of Companies in Hong Kong. Accordingly, except as mentioned below, this prospectus supplement may not be issued, circulated or distributed in Hong Kong. A copy of this prospectus supplement and the accompanying prospectus may, however, be issued to prospective applicants for the Notes in Hong Kong in a manner which does not constitute an offer of the Notes to the public in Hong Kong or an issue, circulation or distribution in Hong Kong of this prospectus supplement and the accompanying prospectus for the purposes of the Companies Ordinance (Chapter 32 of the Laws of Hong Kong). No advertisement, invitation or document relating to the Notes may be issued or may be in the possession of any person other than with respect to the Notes which are or are intended to be disposed of only to persons outside Hong Kong or only to professional investors within the meaning as defined in the Securities and Futures Ordinance (Chapter 571 of the Laws of Hong Kong) and any rules made thereunder.
Japan
The Notes have not been and will not be registered under the Financial Instruments and Exchange Law of Japan (the Financial Instruments and Exchange Law) and each underwriter has agreed that it will not offer or sell any Notes, directly or indirectly, in Japan or to, or for the benefit of, any resident of Japan (which term as used herein means any person resident in Japan, including any corporation or other entity organized under the laws of Japan), or to others for re-offering or resale, directly or indirectly, in Japan or to a resident of Japan, except pursuant to an exemption from the registration requirements of, and otherwise in compliance with, the Financial Instruments and Exchange Law and any other applicable laws, regulations and ministerial guidelines of Japan.
Singapore
Neither this prospectus supplement nor the accompanying prospectus has been registered as a prospectus with the Monetary Authority of Singapore. Accordingly, this prospectus supplement, the accompanying prospectus and any other document or material in connection with the offer or sale, or invitation for subscription or purchase, of the Notes may not be circulated or distributed, nor may the Notes be offered or sold, or be made the subject of an invitation for subscription or purchase, whether directly or indirectly, to persons in Singapore
S-40
other than (i) to an institutional investor under Section 274 of the Securities and Futures Act, Chapter 289 of Singapore (the SFA), (ii) to a relevant person pursuant to Section 275(1), or any person pursuant to Section 275(1A), and in accordance with the conditions specified in Section 275, of the SFA, or (iii) otherwise pursuant to, and in accordance with the conditions of, any other applicable provision of the SFA.
Where the Notes are subscribed or purchased under Section 275 of the SFA by a relevant person which is:
(a) | a corporation (which is not an accredited investor (as defined in Section 4A of the SFA)) the sole business of which is to hold investments and the entire share capital of which is owned by one or more individuals, each of whom is an accredited investor; or |
(b) | a trust (where the trustee is not an accredited investor) whose sole purpose is to hold investments and each beneficiary of the trust is an individual who is an accredited investor |
securities (as defined in Section 239(1) of the SFA) of that corporation or the beneficiaries rights and interest (howsoever described) in that trust shall not be transferred within six months after that corporation or that trust has acquired the Notes pursuant to an offer made under Section 275 of the SFA except:
(1) | to an institutional investor or to a relevant person defined in Section 275(2) of the SFA, or to any person arising from an offer referred to in Section 275(1A) or Section 276(4)(i)(B) of the SFA; |
(2) | where no consideration is or will be given for the transfer; |
(3) | where the transfer is by operation of law; |
(4) | as specified in Section 276(7) of the SFA; or |
(5) | as specified in Regulation 32 of the Securities and Futures (Offers of Investments) (Shares and Debentures) Regulations 2005 of Singapore. |
The PRC
This prospectus supplement and the accompanying prospectus may not be circulated or distributed in the PRC and the Notes may not be offered or sold, and will not be offered or sold to any person for re-offering or resale, directly or indirectly, to any resident of the PRC.
Cayman Islands
No Notes will be offered or sold to the public in the Cayman Islands.
British Virgin Islands
No invitation will be made directly or indirectly to any person resident in the BVI to subscribe for any of the Notes.
Other Relationships
The underwriters and their affiliates are full service financial institutions engaged in various activities, which may include securities trading, commercial and investment banking, financial advising, investment management, investment research, principal investment, hedging, financing and brokerage activities. Certain of the underwriters and their respective affiliates have in the past engaged, and may in the future engage, in transactions with and perform services, including financial advisory, commercial banking and investment banking services, for us and our affiliates in the ordinary course of business for which they received or will receive customary fees and expenses. We may enter into hedging or other derivative transactions as part of our risk management strategy with the underwriters and their affiliates, which may include transactions relating to
S-41
our obligations under the Notes. Our obligations under these transactions may be secured by cash or other collateral. In the ordinary course of their various business activities, the underwriters and their respective affiliates may make or hold a broad array of investments and actively trade debt and equity securities (or related derivative securities) and financial instruments (including bank loans) for their account and for the accounts of their customers, and such investment and securities activities may involve our securities and/or instruments, its direct or indirect subsidiaries and consolidated affiliated entities. The underwriters and their respective affiliates may also make investment recommendations and/or publish or express independent research views in respect of such securities or instruments and may at any time hold, or recommend to clients that they acquire, long and/or short positions in such securities and instruments. The underwriters or certain of their affiliates may purchase Notes and be allocated Notes for asset management and/or proprietary purposes and not with a view to distribution.
S-42
We are being represented by Skadden, Arps, Slate, Meagher & Flom LLP with respect to legal matters of United States federal securities and New York State law, by Maples and Calder with respect to legal matters of Cayman Islands law and by Han Kun Law Offices with respect to legal matters of PRC law. The underwriters are being represented by Davis Polk & Wardwell LLP with respect to legal matters of United States federal securities and New York State law and Jingtian & Gongcheng with respect to legal matters of PRC law. The validity of the debt securities will be passed upon for us by Skadden, Arps, Slate, Meagher & Flom LLP and for the underwriters by Davis Polk & Wardwell LLP. Skadden, Arps, Slate, Meagher & Flom LLP may rely upon Maples and Calder with respect to matters governed by Cayman Islands law and Han Kun Law Offices with respect to matters governed by PRC law, and Davis Polk & Wardwell LLP may rely upon Jingtian & Gongcheng with respect to matters governed by PRC law.
The consolidated financial statements of Baidu, Inc. in Baidu, Inc.s Annual Report on Form 20-F for the year ended December 31, 2012 and the effectiveness of Baidu, Inc.s internal control over financial reporting as of December 31, 2012 have been audited by Ernst & Young Hua Ming LLP, independent registered public accounting firm, as set forth in their reports thereon, included therein, and incorporated by reference in the accompanying prospectus. Such consolidated financial statements are incorporated by reference in the accompanying prospectus in reliance upon such reports given on the authority of such firm as experts in accounting and auditing. The offices of Ernst & Young Hua Ming LLP are located at Level 16, Ernst & Young Tower, Tower E3, Oriental Plaza, No. 1 East Chang An Avenue, Dong Cheng District, Beijing 100738, Peoples Republic of China.
S-43
UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
BAIDU, INC.
UNAUDITED INTERIM CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts in thousands of Renminbi (RMB), and in thousands of U.S. Dollars (US$), except for number of shares and per share data)
As of December 31, 2012 |
As of June 30, 2013 |
As of June 30, 2013 |
||||||||||
RMB | RMB | US$ | ||||||||||
ASSETS |
||||||||||||
Current assets: |
||||||||||||
Cash and cash equivalents |
11,880,632 | 9,028,999 | 1,471,144 | |||||||||
Restricted cash |
395,029 | 330,754 | 53,891 | |||||||||
Short-term investments |
20,604,223 | 25,040,393 | 4,079,968 | |||||||||
Accounts receivable, net of allowance of RMB5,768 and RMB21,248 (US$3,462) as of December 31, 2012 and June 30, 2013 |
1,253,483 | 1,786,638 | 291,107 | |||||||||
Deferred tax assets, net |
160,315 | 243,482 | 39,672 | |||||||||
Other assets, current |
380,407 | 996,244 | 162,322 | |||||||||
|
|
|
|
|
|
|||||||
Total current assets |
34,674,089 | 37,426,510 | 6,098,104 | |||||||||
|
|
|
|
|
|
|||||||
Non-current assets: |
||||||||||||
Fixed assets, net |
3,887,877 | 4,231,365 | 689,439 | |||||||||
Intangible assets, net |
1,587,665 | 2,315,459 | 377,270 | |||||||||
Goodwill |
3,877,564 | 5,983,192 | 974,874 | |||||||||
Long-term investments, net |
803,499 | 1,603,532 | 261,272 | |||||||||
Deferred tax assets, net |
53,303 | 48,575 | 7,915 | |||||||||
Other assets, non-current |
784,893 | 791,826 | 129,016 | |||||||||
|
|
|
|
|
|
|||||||
Total non-current assets |
10,994,801 | 14,973,949 | 2,439,786 | |||||||||
|
|
|
|
|
|
|||||||
TOTAL ASSETS |
45,668,890 | 52,400,459 | 8,537,890 | |||||||||
|
|
|
|
|
|
|||||||
LIABILITIES AND EQUITY |
||||||||||||
Current liabilities: |
||||||||||||
(including amounts of the consolidated VIEs without recourse to the primary beneficiaries of RMB1,914,531 and RMB2,783,428 (US$453,519) as of December 31, 2012 and June 30, 2013) |
||||||||||||
Accounts payable and accrued liabilities |
3,806,836 | 4,675,516 | 761,807 | |||||||||
Customer advances and deposits |
2,067,586 | 1,990,234 | 324,280 | |||||||||
Deferred revenue |
94,121 | 110,734 | 18,042 | |||||||||
Deferred income |
64,506 | 72,287 | 11,778 | |||||||||
Short-term loans |
| 47,200 | 7,691 | |||||||||
Long-term loans, current portion |
2,170,978 | 2,147,544 | 349,911 | |||||||||
Capital lease obligation, current |
32,502 | 33,578 | 5,471 | |||||||||
|
|
|
|
|
|
|||||||
Total current liabilities |
8,236,529 | 9,077,093 | 1,478,980 | |||||||||
|
|
|
|
|
|
|||||||
Non-current liabilities: |
||||||||||||
(including amounts of the consolidated VIEs without recourse to the primary beneficiaries of RMB258,319 and RMB408,466 (US$66,554) as of December 31, 2012 and June 30, 2013) |
||||||||||||
Deferred income |
190,000 | 340,800 | 55,528 | |||||||||
Long-term loans |
356,589 | 348,359 | 56,760 | |||||||||
Notes payable |
9,336,686 | 9,196,593 | 1,498,451 | |||||||||
Deferred tax liabilities |
289,482 | 885,525 | 144,283 | |||||||||
Capital lease obligation, non-current |
44,479 | 27,418 | 4,467 | |||||||||
|
|
|
|
|
|
|||||||
Total non-current liabilities |
10,217,236 | 10,798,695 | 1,759,489 | |||||||||
|
|
|
|
|
|
|||||||
Total liabilities |
18,453,765 | 19,875,788 | 3,238,469 | |||||||||
|
|
|
|
|
|
|||||||
Commitments and contingencies |
||||||||||||
Redeemable noncontrolling interests |
1,033,283 | 924,408 | 150,619 | |||||||||
Equity |
||||||||||||
Class A ordinary shares, par value US$0.00005 per share, 825,000,000 shares authorized, and 27,202,710 shares and 27,224,449 shares issued and outstanding as of December 31, 2012 and June 30, 2013 |
12 | 12 | 2 | |||||||||
Class B ordinary shares, par value US$0.00005 per share, 35,400,000 shares authorized, and 7,763,000 shares and 7,753,000 shares issued and outstanding as of December 31, 2012 and June 30, 2013 |
3 | 3 | | |||||||||
Additional paid-in capital |
2,095,273 | 2,284,601 | 372,242 | |||||||||
Retained earnings |
24,038,219 | 28,726,137 | 4,680,506 | |||||||||
Accumulated other comprehensive (loss) income |
(78,278 | ) | 233,824 | 38,098 | ||||||||
|
|
|
|
|
|
|||||||
Total Baidu, Inc. shareholders equity |
26,055,229 | 31,244,577 | 5,090,848 | |||||||||
Noncontrolling interests |
126,613 | 355,686 | 57,954 | |||||||||
|
|
|
|
|
|
|||||||
Total equity |
26,181,842 | 31,600,263 | 5,148,802 | |||||||||
|
|
|
|
|
|
|||||||
TOTAL LIABILITIES, REDEEMABLE NONCONTROLLING INTERESTS AND EQUITY |
45,668,890 | 52,400,459 | 8,537,890 | |||||||||
|
|
|
|
|
|
The accompanying notes are an integral part of the condensed consolidated financial statements.
F-1
BAIDU, INC.
UNAUDITED INTERIM CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Amounts in thousands of Renminbi (RMB), and in thousands of U.S. Dollars (US$), except for number of shares and per share (or ADS) data)
For the six months ended | ||||||||||||
June 30, 2012 |
June 30, 2013 |
June 30, 2013 |
||||||||||
RMB | RMB | US$ | ||||||||||
Revenues: |
||||||||||||
Online marketing services |
9,712,085 | 13,492,031 | 2,198,330 | |||||||||
Other services |
7,874 | 37,322 | 6,081 | |||||||||
|
|
|
|
|
|
|||||||
Total revenues |
9,719,959 | 13,529,353 | 2,204,411 | |||||||||
|
|
|
|
|
|
|||||||
Operating costs and expenses: |
||||||||||||
Cost of revenues |
(2,758,718 | ) | (4,736,382 | ) | (771,725 | ) | ||||||
Selling, general and administrative |
(1,066,175 | ) | (1,926,168 | ) | (313,841 | ) | ||||||
Research and development |
(988,711 | ) | (1,752,448 | ) | (285,536 | ) | ||||||
|
|
|
|
|
|
|||||||
Total operating costs and expenses |
(4,813,604 | ) | (8,414,998 | ) | (1,371,102 | ) | ||||||
|
|
|
|
|
|
|||||||
Operating profit |
4,906,355 | 5,114,355 | 833,309 | |||||||||
|
|
|
|
|
|
|||||||
Other income: |
||||||||||||
Interest income |
385,578 | 591,798 | 96,425 | |||||||||
Interest expense |
(50,842 | ) | (180,495 | ) | (29,409 | ) | ||||||
Foreign exchange gain (loss), net |
854 | (6,843 | ) | (1,115 | ) | |||||||
Loss from equity method investments |
(103,199 | ) | (5,369 | ) | (875 | ) | ||||||
Others, net |
44,071 | 33,809 | 5,509 | |||||||||
|
|
|
|
|
|
|||||||
Total other income |
276,462 | 432,900 | 70,535 | |||||||||
|
|
|
|
|
|
|||||||
Income before income taxes |
5,182,817 | 5,547,255 | 903,844 | |||||||||
|
|
|
|
|
|
|||||||
Income taxes |
(566,551 | ) | (902,031 | ) | (146,973 | ) | ||||||
Net income |
4,616,266 | 4,645,224 | 756,871 | |||||||||
|
|
|
|
|
|
|||||||
Less: Net loss attributable to noncontrolling interests |
(36,579 | ) | (41,497 | ) | (6,761 | ) | ||||||
|
|
|
|
|
|
|||||||
Net income attributable to Baidu, Inc. |
4,652,845 | 4,686,721 | 763,632 | |||||||||
|
|
|
|
|
|
|||||||
Earnings per share for Class A and Class B ordinary shares: |
||||||||||||
Basic |
132.64 | 134.05 | 21.84 | |||||||||
Diluted |
132.44 | 133.97 | 21.83 | |||||||||
Earnings per ADS (1 Class A ordinary share equals 10 ADSs): |
||||||||||||
Basic |
13.26 | 13.41 | 2.18 | |||||||||
Diluted |
13.24 | 13.40 | 2.18 | |||||||||
Weighted average number of Class A and Class B ordinary shares outstanding |
||||||||||||
Basic |
34,924,980 | 34,972,074 | 34,972,074 | |||||||||
Diluted |
34,977,496 | 34,992,156 | 34,992,156 | |||||||||
Other comprehensive (loss) income, net of tax |
||||||||||||
Foreign currency translation adjustment |
(22,918 | ) | 35,713 | 5,819 | ||||||||
Unrealized gains on available-for-sale securities |
12,307 | 227,315 | 37,038 | |||||||||
|
|
|
|
|
|
|||||||
Other comprehensive (loss) income, net of tax |
(10,611 | ) | 263,028 | 42,857 | ||||||||
|
|
|
|
|
|
|||||||
Comprehensive income |
4,605,655 | 4,908,252 | 799,728 | |||||||||
|
|
|
|
|
|
|||||||
Less: Comprehensive loss attributable to noncontrolling interests |
(36,423 | ) | (43,777 | ) | (7,133 | ) | ||||||
|
|
|
|
|
|
|||||||
Comprehensive income attributable to Baidu, Inc. |
4,642,078 | 4,952,029 | 806,861 | |||||||||
|
|
|
|
|
|
The accompanying notes are an integral part of the condensed consolidated financial statements.
F-2
BAIDU, INC.
UNAUDITED INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands of Renminbi (RMB), and in thousands of U.S. Dollars (US$))
For the six months ended | ||||||||||||
June 30, 2012 |
June 30, 2013 |
June 30, 2013 |
||||||||||
RMB | RMB | US$ | ||||||||||
Cash flows from operating activities: |
||||||||||||
Net income |
4,616,266 | 4,645,224 | 756,871 | |||||||||
Adjustments to reconcile net income to net cash generated from operating activities: |
||||||||||||
Depreciation of fixed assets and computer parts |
588,851 | 806,075 | 131,338 | |||||||||
Loss (gain) on disposal of fixed assets |
15,595 | (3,895 | ) | (634 | ) | |||||||
Amortization of intangible assets |
65,005 | 305,078 | 49,708 | |||||||||
Deferred income tax, net |
(41,983 | ) | 452,385 | 73,710 | ||||||||
Share-based compensation |
89,023 | 194,232 | 31,647 | |||||||||
(Reversal of) provision for doubtful accounts |
(744 | ) | 15,725 | 2,562 | ||||||||
Investment income |
(296,793 | ) | (543,248 | ) | (88,514 | ) | ||||||
Loss from equity method investments |
103,199 | 5,369 | 875 | |||||||||
Other noncash expenses |
5,927 | 11,553 | 1,882 | |||||||||
Gain on disposal of a subsidiary |
(15,238 | ) | | | ||||||||
Changes in assets and liabilities, net of effects of acquisition: |
||||||||||||
Restricted cash |
153,397 | 63,453 | 10,339 | |||||||||
Accounts receivable |
(150,102 | ) | (424,222 | ) | (69,121 | ) | ||||||
Other assets |
(57,725 | ) | (683,124 | ) | (111,305 | ) | ||||||
Amounts due from related parties |
(288,328 | ) | | | ||||||||
Customer advances and deposits |
(72,022 | ) | (79,253 | ) | (12,913 | ) | ||||||
Accounts payable and accrued liabilities |
160,882 | 447,031 | 72,837 | |||||||||
Deferred revenue |
(27,465 | ) | 19,625 | 3,198 | ||||||||
Deferred income |
212,716 | 158,581 | 25,838 | |||||||||
Amounts due to related parties |
346,695 | | | |||||||||
|
|
|
|
|
|
|||||||
Net cash generated from operating activities |
5,407,156 | 5,390,589 | 878,318 | |||||||||
|
|
|
|
|
|
|||||||
Cash flows from investing activities: |
||||||||||||
Acquisition of fixed assets |
(1,020,108 | ) | (1,016,072 | ) | (165,554 | ) | ||||||
Acquisition of computer parts |
(21,475 | ) | (733 | ) | (119 | ) | ||||||
Disposal of fixed assets |
3,532 | 7,343 | 1,196 | |||||||||
Acquisition of business, net of cash acquired |
(80,848 | ) | (2,390,429 | ) | (389,486 | ) | ||||||
Acquisition of intangible assets |
(43,702 | ) | (413,880 | ) | (67,436 | ) | ||||||
Capitalization of software costs |
(10,106 | ) | (2,488 | ) | (405 | ) | ||||||
Purchases of short-term held-to-maturity investments |
(11,458,562 | ) | (14,947,054 | ) | (2,435,405 | ) | ||||||
Sales and maturities of short-term held-to-maturity investments |
8,998,042 | 13,297,956 | 2,166,708 | |||||||||
Purchases of short-term available-for-sale investments |
(2,520,000 | ) | (9,325,600 | ) | (1,519,471 | ) | ||||||
Sales and maturities of short-term available-for-sale investments |
3,539 | 7,313,915 | 1,191,696 | |||||||||
Purchases of long-term available-for-sale investments |
| (672,737 | ) | (109,613 | ) | |||||||
Purchases of other long-term investments |
(25,000 | ) | (139,443 | ) | (22,720 | ) | ||||||
Cash distribution of long-term investments |
| 1,038 | 169 | |||||||||
Payments to fund long-term loans to related-parties |
(302,524 | ) | | | ||||||||
Payments to acquire a subsidiarys shares from noncontrolling interests |
(1,021 | ) | (93,162 | ) | (15,179 | ) | ||||||
|
|
|
|
|
|
|||||||
Net cash used in investing activities |
(6,478,233 | ) | (8,381,346 | ) | (1,365,619 | ) | ||||||
|
|
|
|
|
|
|||||||
Cash flows from financing activities: |
||||||||||||
Repayment of short-term loans |
(125,878 | ) | | | ||||||||
Repayment of long-term loans |
(31,600 | ) | | | ||||||||
Payment of capital lease obligation |
(10,823 | ) | (15,984 | ) | (2,604 | ) | ||||||
Payment of debt issuance costs |
| (1,220 | ) | (199 | ) | |||||||
Proceeds from issuance of subsidiarys shares |
| 292,378 | 47,639 | |||||||||
Proceeds from exercise of share options |
30,679 | 417 | 68 | |||||||||
|
|
|
|
|
|
|||||||
Net cash (used in) generated from financing activities |
(137,622 | ) | 275,591 | 44,904 | ||||||||
|
|
|
|
|
|
|||||||
Effect of exchange rate changes on cash and cash equivalents |
83 | (136,467 | ) | (22,235 | ) | |||||||
Net decrease in cash and cash equivalents |
(1,208,616 | ) | (2,851,633 | ) | (464,632 | ) | ||||||
|
|
|
|
|
|
|||||||
Cash and cash equivalents at beginning of the period |
4,127,482 | 11,880,632 | 1,935,776 | |||||||||
|
|
|
|
|
|
|||||||
Cash and cash equivalents at end of the period |
2,918,866 | 9,028,999 | 1,471,144 | |||||||||
|
|
|
|
|
|
The accompanying notes are an integral part of the condensed consolidated financial statements.
F-3
BAIDU, INC.
NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of Renminbi (RMB), and in thousands of U.S. Dollars (US$), except for number of shares and per share (or ADS) data)
1. BASIS OF PRESENTATION
Basis of Consolidation
The unaudited interim condensed consolidated financial statements include the accounts of Baidu, Inc. (Baidu or the Company), its wholly-owned subsidiaries, its majority-owned subsidiaries, its variable interest entities (VIEs) and the wholly-owned subsidiaries of the VIEs.
As of June 30, 2013, the Company has wholly-owned and majority-owned subsidiaries incorporated in countries and jurisdictions including the Peoples Republic of China (PRC), Hong Kong, Japan, the United States of America (USA), the Cayman Islands and the British Virgin Islands (BVI).
As of June 30, 2013, the Company also effectively controls a number of VIEs through the Primary Beneficiaries, as defined below. The VIEs include:
| Beijing Baidu Netcom Science Technology Co., Ltd. (Baidu Netcom), controlled through Baidu Online Network Technology (Beijing) Co., Ltd. (Baidu Online), one of the Companys wholly-owned subsidiaries; |
| Beijing Perusal Technology Co., Ltd. (Beijing Perusal), controlled through Baidu Online; |
| Beijing BaiduPay Science and Technology Co., Ltd. (BaiduPay), controlled through Baidu Online; |
| Baidu HR Consulting (Shanghai) Co., Ltd. (Baidu HR), controlled through Baidu Online; and |
| Other VIEs controlled through Primary Beneficiaries other than Baidu Online. |
The Company, its wholly-owned and majority-owned subsidiaries, VIEs and wholly-owned subsidiaries of the VIEs are hereinafter collectively referred to as the Group. The Group offers internet search solutions and online marketing solutions, operates an online payment platform which enables customers to make payments online, develops and markets scalable web application software and provides related services, conducts online advertising business in connection with online video contents broadcasting, as well as provides human resource related services including employment agency services. The Groups principal geographic market is in the PRC. The Company does not conduct any substantive operations of its own but conducts its primary business operations through its wholly-owned and majority-owned subsidiaries and VIEs in the PRC.
PRC laws and regulations prohibit or restrict foreign ownership of internet content, advertising, audio and video services and employment agency businesses. To comply with these foreign ownership restrictions, the Group operates its websites and primarily provides services subject to such restriction in the PRC through the VIEs, the PRC legal entities that were established by the individuals authorized by the Group. The paid-in capital of the VIEs was mainly funded by the Group through loans extended to the authorized individuals, who were the shareholders of the VIEs then. The Group has entered into certain exclusive agreements with the VIEs through Baidu Online and certain other subsidiaries (collectively the Primary Beneficiaries), which obligate the Primary Beneficiaries to absorb a majority of the risk of loss from the VIEs activities and entitle the Primary Beneficiaries to receive a majority of their residual returns. In addition, the Group has entered into certain agreements with the shareholders of the VIEs through the Primary Beneficiaries, including loan agreements for the paid-in capital of the VIEs, proxy agreements or power of attorney to direct the activities that most significantly affect the economic performance of the VIEs, option agreements to acquire the equity interests in the VIEs when permitted by the PRC laws, and share pledge agreements for the equity interests in the VIEs held by the shareholders of the VIEs.
F-4
BAIDU, INC.
NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of Renminbi (RMB), and in thousands of U.S. Dollars (US$), except for number of shares and per share (or ADS) data)
Despite the lack of technical majority ownership, there exists a parent-subsidiary relationship between the Primary Beneficiaries and the VIEs through the aforementioned agreements with the shareholders of the VIEs. The shareholders of the VIEs effectively assigned all of their voting rights underlying their equity interest in the VIEs to the Primary Beneficiaries. In addition, through the other exclusive agreements, which consist of operating agreements, technology consulting and services agreements and license agreements, the Primary Beneficiaries demonstrate their ability and intention to continue to exercise the ability to absorb substantially all of the profits and all of the expected losses of the VIEs. The VIEs are subject to operating risks, which determine the variability of the Companys interest in those entities. Based on these contractual arrangements, the Company consolidates the VIEs as required by SEC Regulation SX-3A-02 and Accounting Standards Codification (ASC) subtopic 810-10 (ASC 810-10), Consolidation: Overall, because the Company holds all the variable interests of the VIEs through the Primary Beneficiaries.
In the opinion of the Companys legal counsel, (i) the ownership structure of the Company and its VIEs is in compliance with existing PRC laws and regulations; (ii) the contractual arrangements with the VIEs and their shareholders are valid, binding and enforceable, and will not result in any violation of PRC laws or regulations currently in effect; and (iii) the Groups business operations are in compliance with existing PRC laws and regulations in all material respects. However, uncertainties in the PRC legal system could cause the Companys current ownership structure to be found in violation of existing and/or future PRC laws or regulations and could limit the Companys ability, through the Primary Beneficiaries, to enforce its rights under these contractual arrangements. Furthermore, shareholders of the VIEs may have interests that are different than those of the Company, which could potentially increase the risk that they would seek to act contrary to the terms of the aforementioned agreements. In addition, if the current structure or any of the contractual arrangements were found to be in violation of any existing or future PRC law, the Company may be subject to penalties, which may include but not be limited to, the cancellation or revocation of the Companys business and operating licenses, being required to restructure the Companys operations or discontinue the Companys operating activities. The imposition of any of these or other penalties may result in a material and adverse effect on the Companys ability to conduct its operations. In such case, the Company may not be able to operate or control the VIEs, which may result in deconsolidation of the VIEs.
The following tables set forth the assets, liabilities and results of operations of the VIEs and their subsidiaries included in the Companys unaudited interim condensed consolidated balance sheets and unaudited interim condensed consolidated statements of comprehensive income:
As of December 31, 2012 |
As of June 30, 2013 |
|||||||||||
RMB | RMB | US$ | ||||||||||
Total assets |
2,785,190 | 4,012,038 | 653,703 | |||||||||
Current |
1,269,283 | 1,867,948 | 304,355 | |||||||||
Non-current |
1,515,907 | 2,144,090 | 349,348 | |||||||||
Total liabilities |
2,172,850 | 3,191,894 | 520,073 | |||||||||
Current |
1,914,531 | 2,783,428 | 453,519 | |||||||||
Non-current |
258,319 | 408,466 | 66,554 |
For the six months ended | ||||||||||||
June 30, 2012 | June 30, 2013 | |||||||||||
RMB | RMB | US$ | ||||||||||
Total revenues |
2,708,304 | 4,300,453 | 700,696 | |||||||||
Net income |
83,619 | 120,896 | 19,698 |
F-5
BAIDU, INC.
NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of Renminbi (RMB), and in thousands of U.S. Dollars (US$), except for number of shares and per share (or ADS) data)
As of June 30, 2013, there was no pledge or collateralization of the VIEs or their subsidiaries assets. The amount of the net assets of the VIEs, which are restricted under PRC laws and regulations, was RMB820,144 (US$133,630) as of June 30, 2013. The creditors of the VIEs liabilities do not have recourse to the general credit of the Primary Beneficiaries in the normal course of business.
The unaudited interim condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (U.S. GAAP). All inter-company transactions and balances among the Company, its wholly-owned and majority-owned subsidiaries, VIEs and subsidiaries of the VIEs are eliminated upon consolidation.
Unaudited Interim Condensed Consolidated Financial Statements
In the opinion of management, the unaudited interim condensed consolidated financial statements, which comprise the condensed consolidated balance sheet of the Company as of June 30, 2013, the condensed consolidated statements of comprehensive income and the condensed consolidated statements of cash flows for the six-month periods ended June 30, 2013 and 2012, reflect all adjustments, consisting of normal and recurring adjustments, necessary to present fairly the Companys consolidated financial position as of June 30, 2013, the Companys consolidated results of operations and consolidated cash flows for the six-month periods ended June 30, 2013 and 2012. Interim period results are not necessarily indicative of results of operations or cash flows for a full-year period. The consolidated balance sheet data as of December 31, 2012 was derived from the Companys audited financial statements, but does not include all disclosures required by U.S. GAAP for annual financial statements.
These financial statements and the notes thereto should be read in conjunction with the Companys audited consolidated financial statements for the year ended December 31, 2012.
Use of Estimates
The preparation of the unaudited interim condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the period. Management evaluates estimates, including those related to the accounts receivable allowances, fair values of options to purchase subsidiaries ordinary shares, fair values of certain equity investments, the purchase price allocation and fair value of noncontrolling interests with respect to business combinations, and deferred tax valuation allowance, among others. Management bases the estimates on historical experience and on various other assumptions that are believed to be reasonable, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results could differ from these estimates.
Currency Translation for Financial Statements Presentation
Translations of amounts from RMB into US$ for the convenience of the reader have been calculated at the exchange rate of RMB6.1374 per US$1.00 on June 30, 2013 as published on the website of the United States Federal Reserve Board. No representation is made that the RMB amounts could have been, or could be, converted into US$ at such rate.
F-6
BAIDU, INC.
NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of Renminbi (RMB), and in thousands of U.S. Dollars (US$), except for number of shares and per share (or ADS) data)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The following accounting policies do not include all of the significant accounting policies of the Company, which were included in, and should be read in conjunction with, the audited consolidated financial statements as of and for the year ended December 31, 2012.
Cash and Cash Equivalents
Cash and cash equivalents are stated at cost, which approximates fair value, and primarily consist of cash and investments in interest bearing demand deposit accounts, time deposits, highly liquid investments and money market funds. All time deposits, money market funds and other highly liquid investments with original maturities of three months or less from the date of purchase are classified as cash equivalents.
Investments
Short-term Investments
All highly liquid investments with original maturities of greater than three months, but less than 12 months, are classified as short-term investments. Investments that are expected to be realized in cash during the next 12 months are also included in short-term investments.
The Company accounts for short-term investments in accordance with ASC subtopic 320-10 (ASC 320-10), InvestmentsDebt and Equity Securities: Overall. The Company classifies the short-term investments in debt and equity securities as held-to-maturity, trading or available-for-sale, whose classification determines the respective accounting methods stipulated by ASC 320-10. Dividend and interest income, including amortization of the premium and discount arising at acquisition, for all categories of investments in securities, are included in earnings. Any realized gains or losses on the sale of the short-term investments are determined on a specific identification method, and such gains and losses are reflected in earnings during the period in which gains or losses are realized.
The securities that the Company has positive intent and ability to hold to maturity are classified as held-to-maturity securities and stated at amortized cost. For individual securities classified as held-to-maturity securities, the Company evaluates whether a decline in fair value below the amortized cost basis is other-than-temporary in accordance with the Companys policy and ASC 320-10. When the Company intends to sell an impaired debt security or it is more likely than not that it will be required to sell prior to recovery of its amortized cost basis, an other-than-temporary impairment is deemed to have occurred. In these instances, the other-than-temporary impairment loss is recognized in earnings equal to the entire excess of the debt securitys amortized cost basis over its fair value at the balance sheet date of the reporting period for which the assessment is made. When the Company does not intend to sell an impaired debt security and it is more-likely-than-not that it will not be required to sell prior to recovery of its amortized cost basis, the Company must determine whether or not it will recover its amortized cost basis. If the Company concludes that it will not, an other-than-temporary impairment exists and that portion of the credit loss is recognized in earnings, while the portion of loss related to all other factors is recognized in other comprehensive income.
The securities that are bought and held principally for the purpose of selling them in the near term are classified as trading securities. Unrealized holding gains and losses for trading securities are included in earnings.
F-7
BAIDU, INC.
NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of Renminbi (RMB), and in thousands of U.S. Dollars (US$), except for number of shares and per share (or ADS) data)
Investments not classified as trading or as held-to-maturity are classified as available-for-sale securities. Available-for-sale investment is reported at fair value, with unrealized gains and losses recorded in accumulated other comprehensive income (loss). Realized gains or losses are charged to earnings during the period in which the gain or loss is realized. An impairment loss on the available-for-sale securities would be recognized in earnings when the decline in value is determined to be other-than-temporary.
Long-term Investments
The Companys long-term investments consist of cost method investments, equity method investments, held-to-maturity investments with original and remaining maturities of greater than 12 months, and available-for-sale investments in equity securities.
In accordance with ASC subtopic 325-20 (ASC 325-20), Investments-Other: Cost Method Investments, for investments in an investee over which the Company does not have significant influence and which do not have readily determinable fair value, the Company carries the investment at cost and only adjusts for other-than-temporary declines in fair value and distributions of earnings that exceed the Companys share of earnings since its investment. Management regularly evaluates the impairment of the cost method investments based on performance and financial position of the investee as well as other evidence of market value. Such evaluation includes, but is not limited to, reviewing the investees cash position, recent financing, projected and historical financial performance, cash flow forecasts and financing needs. An impairment loss is recognized in earnings equal to the excess of the investments cost over its fair value at the balance sheet date of the reporting period for which the assessment is made. The fair value would then become the new cost basis of investment.
Investments in entities in which the Company can exercise significant influence but does not own a majority equity interest or control are accounted for using the equity method of accounting in accordance with ASC subtopic 323-10 (ASC 323-10), Investments-Equity Method and Joint Ventures: Overall. Under the equity method, the Company initially records its investment at cost and the difference between the cost of the equity investee and the fair value of the underlying equity in the net assets of the equity investee is recognized as equity method goodwill, which is included in the equity method investment on the consolidated balance sheets. The Company subsequently adjusts the carrying amount of the investment to recognize the Companys proportionate share of each equity investees net income or loss into earnings after the date of investment. The Company will discontinue applying the equity method if an investment (and additional financial supports to the investee, if any) has been reduced to zero. Under the conditions that the Company is not required to advance additional funds to an investee and the equity-method investment in ordinary shares is reduced to zero, if further investments are made that have a higher liquidation preference than ordinary shares, the Company would recognize the loss based on its percentage of the investment with the same liquidation preference, and the loss would be applied to those investments of a lower liquidation preference first before being further applied to the investments of a higher liquidation preference. The Company evaluates the equity method investments for impairment under ASC 323-10. An impairment loss on the equity method investments is recognized in earnings when the decline in value is determined to be other-than-temporary.
Long-term held-to-maturity investments and long-term available-for-sale investments are measured in the same manner as short-term held-to-maturity investments and short-term available-for-sale investments, respectively.
F-8
BAIDU, INC.
NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of Renminbi (RMB), and in thousands of U.S. Dollars (US$), except for number of shares and per share (or ADS) data)
Revenue Recognition
The Company recognizes revenue based on the following principles:
(1) Auction-based pay-for-performance service
The Companys auction-based pay-for-performance (P4P) platform enables a customer to place its website link and related description on the Companys search result list. Customers make bids on keywords based on how much they are willing to pay for each click to their listings in the search results listed on the Companys website and the relevance between the keywords and the customers businesses. Internet users search of the keyword will trigger the display of the listings. The ranking of the customers listing depends on both the bidding price and the listings relevance to the keyword searched. Customer pays the Company only when a user clicks on one of its website links. Other than the auction-based P4P platform, the Company has certain vertical P4P platforms from which it generates revenue through pre-determined prices per click. Revenue is recognized when a user clicks on one of the customer-sponsored website links, as there is persuasive evidence of an arrangement, the fee is fixed or determinable and collection is reasonably assured, as prescribed by ASC subtopic 605-10 (ASC 605-10), Revenue Recognition: Overall.
For certain P4P customers engaged through direct sales, the Company may provide certain value-added consultative support services to help its customers to better utilize its P4P online marketing system. Fees for such services are recognized as revenue on a pro-rata basis over the contracted service period.
(2) Other performance-based online marketing services
To the extent the Company provides online marketing services based on performance criteria other than click-throughs, such as the number of telephone calls brought to its customers, the number of users registered with its customers, the number of minimum click-throughs, and the number of successful reservation of hotels or issuance of air tickets, revenue is recognized when the specified performance criteria are met together with satisfaction of other applicable revenue recognition criteria as prescribed by ASC 605-10.
(3) Time-based online advertising services
For time-based online advertising services such as text links, banners, or other forms of graphical advertisements, the Company recognizes revenue, in accordance with ASC 605-10, on a pro-rata basis over the contractual term commencing on the date the customers advertisement is displayed on a specified webpage. For certain time-based contractual agreements, the Company may also provide certain performance guarantees, in which cases revenue is recognized at the later of the completion of the time commitment or performance guarantee.
(4) Online marketing services involving Baidu Union
Baidu Union is the program through which the Company expands distribution of its customers sponsored links or advertisements by leveraging traffic of the Baidu Union members internet properties. The Company makes payments to Baidu Union members for acquisition of traffic. The Company recognizes gross revenue for the amount of fees it receives from its customers. Payments made to Baidu Union members are included in cost of revenues as traffic acquisition costs.
F-9
BAIDU, INC.
NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of Renminbi (RMB), and in thousands of U.S. Dollars (US$), except for number of shares and per share (or ADS) data)
(5) Barter transactions
The Company engages in barter transactions from time to time and in such situations follows the guidance set forth in ASC subtopic 845-10 (ASC 845-10), Nonmonetary Transactions: Overall. While nonmonetary transactions are generally recorded at fair value, if such value is not determinable within reasonable limits, the transaction is recognized based on the carrying value of the product or services provided. The Company also engages in certain advertising barter transactions and follows the guidance set forth in ASC 605-20-25. The advertising barter transactions generally are recorded at fair value. If the fair value of the advertising surrendered in the barter transaction is not determinable within required limits, the barter transaction is recorded based on the carrying amount of the advertising surrendered, which likely to be zero. The amount of revenues recognized for barter transactions was insignificant for each of the periods presented.
In certain instances, the Company is granted equity instruments in exchange for services and accounts for such transactions in accordance with ASC 845, Nonmonetary Transactions. With respect to the measurement date, in accordance with ASC subtopic 505-50 (ASC 505-50), Equity: Equity-based Payments to Non-Employees, the Company measures the fair value of those equity instruments for revenue recognition purposes as of the earlier of either of the following dates:
| The date the parties come to a mutual understanding of the terms of the equity-based compensation arrangement and a commitment for performance by the Company to earn the equity instruments is reached; |
| The date at which the Companys performance necessary to earn the equity instruments is completed. |
If, as of the measurement date, the fair value of the equity instruments received is not determinable within reasonable limits, the transaction is recognized based on the fair value of the services provided. If the fair value of both the equity instruments received and the services provided cannot be determined, no revenue is recognized for the services provided and the equity instrument received is recorded at zero carrying value. The amount of revenues recognized for such transactions was insignificant for each of the periods presented.
(6) Other revenue recognition related policies
In accordance with ASC subtopic 605-25 (ASC 605-25), Multiple-Deliverable Revenue Arrangements, for deliverables in multiple-element arrangements, the total consideration of the arrangements is allocated based on their relative selling price, with the selling price of each deliverable determined using vendor-specific objective evidence of selling price (VSOE), third-party evidence (TPE) of selling price, or managements best estimate of the selling price (BESP). The Company considers all reasonably available information in determining the BESP, including both market and entity-specific factors.
The Company delivers some of its online marketing services to end customers through engaging third-party distributors. In this context, the Company may provide cash incentives to distributors. The cash incentives are accounted for as reduction of revenue in accordance with ASC subtopic 605-50 (ASC 605-50), Revenue Recognition: Customer Payments and Incentives.
The Company provides sales incentives to customers to entitle customers to receive reductions in the price of the online marketing services by meeting certain cumulative consumption requirements. The Company accounts for these award credits granted to members in conjunction with a current sale of products or services as a multiple-element arrangement by analogizing to ASC 605-25. The consideration allocated to the award credits as deferred
F-10
BAIDU, INC.
NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of Renminbi (RMB), and in thousands of U.S. Dollars (US$), except for number of shares and per share (or ADS) data)
revenue is based on an assumption that the customer will purchase the minimum amount of future service necessary to obtain the maximum award credits available. The deferred revenue is recognized as revenue proportionately as the future services are delivered to the customer or when the award credits expire.
Cash received in advance from customers is recorded as customer advances and deposits. The unused cash balances remaining in the customers accounts are included as liabilities of the Company. Deferred revenue is recorded when services are provided before the other revenue recognition criteria set forth in ASC 605-10 are fulfilled.
The Company operates an online game platform, on which registered users could access games provided by online game developers. The rights and obligations of each party to the arrangement indicate that the Company is acting as an agent whereas the online game developer is the principal as a result of being the primary obligor in the arrangement. The Company recognizes the shared revenue, on a net basis, based on the ratios pre-determined with the online game developers when all the revenue recognition criteria set forth in ASC 605-10 are met, which is generally when the user purchases virtual currencies issued by the game developers through the Companys payment channel. The amount of revenues recognized was insignificant for each of the periods presented.
Fair Value Measurements of Financial Instruments
Financial instruments are in the form of cash and cash equivalents, restricted cash, short-term investments, accounts receivable, long-term held-to-maturity investments, long-term available-for-sale investments, accounts payable and accrued liabilities, customer advances and deposits, notes payable, and long-term loans. The carrying amounts of these financial instruments except for long-term held-to-maturity investments, long-term available-for-sale investments, notes payable and long-term loans, approximate fair value because of their generally short maturities. The carrying amount of long-term held-to-maturity investments and long-term loans approximates their fair value due to the fact that the related interest rates approximate rates currently offered by financial institutions for similar debt instruments of comparable maturities. Based on the quoted market price on June 30, 2013, the fair value of the long-term available-for-sale investments is RMB915,506 (US$149,168) (Note 6) and the fair value of the notes payable is RMB8,599,004 (US$1,401,083) (Note 6).
Contingencies
The Company records accruals for certain of its outstanding legal proceedings or claims when it is probable that a liability will be incurred and the amount of loss can be reasonably estimated. The Company evaluates, on a quarterly basis, developments in legal proceedings or claims that could affect the amount of any accrual, as well as any developments that would make a loss contingency both probable and reasonably estimable. The Company discloses the amount of the accrual if it is material.
When a loss contingency is not both probable and estimable, the Company does not record an accrued liability but discloses the nature and the amount of the claim, if material. However, if the loss (or an additional loss in excess of the accrual) is at least reasonably possible, then the Company discloses an estimate of the loss or range of loss, if such estimate can be made and material, or states that such estimate is immaterial if it can be estimated but immaterial, or discloses that an estimate cannot be made. The assessments of whether a loss is probable or reasonably possible, and whether the loss or a range of loss is estimable, often involve complex judgments about future events. Management is often unable to estimate the loss or a range of loss, particularly where (i) the damages sought are indeterminate, (ii) the proceedings are in the early stages, or (iii) there is a lack of clear or
F-11
BAIDU, INC.
NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of Renminbi (RMB), and in thousands of U.S. Dollars (US$), except for number of shares and per share (or ADS) data)
consistent interpretation of laws specific to the industry-specific complaints among different jurisdictions. In such cases, there is considerable uncertainty regarding the timing or ultimate resolution of such matters, including eventual loss, fine, penalty or business impact, if any.
Recent Accounting Pronouncements
In March 2013, the Financial Accounting Standards Board issued Accounting Standards Update (ASU) No. 2013-05 (ASU 2013-05), Parents Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity, which specifies that a cumulative translation adjustment (CTA) should be released into earnings when an entity ceases to have a controlling financial interest in a subsidiary or group of assets within a consolidated foreign entity and the sale or transfer results in the complete or substantially complete liquidation of the foreign entity. For sales of an equity method investment that is a foreign entity, a pro rata portion of CTA attributable to the investment would be recognized in earnings when the investment is sold. When an entity sells either a part or all of its investment in a consolidated foreign entity, CTA would be recognized in earnings only if the sale results in the parent no longer having a controlling financial interest in the foreign entity. In addition, CTA should be recognized in earnings in a business combination achieved in stages. For public entities, ASU 2013-05 is effective for reporting periods beginning after December 15, 2013, with early adoption permitted. The Company will adopt ASU 2013-05 on January 1, 2014 and does not expect the adoption to have a material impact on its consolidated financial statements.
3. BUSINESS COMBINATIONS
On May 24, 2013, Qiyi.com, Inc., a majority-owned subsidiary of the Company, together with one of its wholly-owned subsidiaries (collectively the Qiyi Group), purchased a group of online video assets from PPStream Inc. and its subsidiary and consolidated affiliate (collectively the PPS Group). The acquired group of assets meets the definition of a business in accordance ASC subtopic 805-10, Business Combinations: Overall. Total purchase consideration is RMB2,175,668 (US$354,493), of which RMB10,622 (US$1,731) represents the effective settlement of pre-existing relationships with the PPS Group and the remaining is cash payment. This acquisition is insignificant to the Company from both the qualitative and quantitative perspectives.
The accounting for the business combination is incomplete as of the date when these unaudited interim condensed consolidated financial statements are issued, as the Company is currently unable to ascertain the acquisition date fair value of certain assets acquired and liabilities assumed and the associated adjustments necessary to complete the purchase price allocation and the pro forma disclosures. The financial statements reflected provisional amounts used to record the transaction. As information subsequently becomes available, such provisional amounts shall be retrospectively adjusted.
The amounts of revenue and net income of the acquired business included in the Companys unaudited interim condensed consolidated statement of comprehensive income from the acquisition date to June 30, 2013 were insignificant based on the provisional amounts recognized.
4. INVESTMENTS
Short-term investments
As of June 30, 2013, short-term held-to-maturity investments were time deposits in commercial banks with a maturity of less than one year. Short-term available-for-sale investments are debt securities purchased from commercial banks and other financial institutions with a maturity of less than one year.
F-12
BAIDU, INC.
NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of Renminbi (RMB), and in thousands of U.S. Dollars (US$), except for number of shares and per share (or ADS) data)
During the six-month periods ended June 30, 2012 and 2013, the Company recorded interest income, including short-term investment gains, of RMB296,794 and RMB528,827 (US$86,165) in earnings, respectively. No gross realized gain or loss from the sales of available-for-sale investments was recorded in each of the six-month periods presented.
Long-term investments
The carrying amount of the Companys cost method investments was RMB269,423 and RMB330,004 (US$53,769) as of December 31, 2012 and June 30, 2013, respectively. The carrying amount of the Companys equity method investments was RMB20,348 and RMB92,923 (US$15,140) as of December 31, 2012 and June 30, 2013, respectively.
Long-term available-for-sale investments represent an investment in the equity securities of a publicly listed company. As the Company does not have significant influence over the investee and plans to hold the investment on a long term basis, the investment was classified as available-for-sale and reported at fair value.
Investments classified as held-to-maturity investments and available-for-sale investments as of December 31, 2012 and June 30, 2013 were as follows:
As of December 31, 2012 | ||||||||||||||||||||||||
Amortized cost |
Gross unrecognized holding gains |
Gross unrecognized holding losses |
Gross unrealized gains |
Gross unrealized losses |
Fair value |
|||||||||||||||||||
RMB | RMB | RMB | RMB | RMB | RMB | |||||||||||||||||||
Short-term investments |
||||||||||||||||||||||||
Held-to-maturity investments |
||||||||||||||||||||||||
Fixed-rate investments |
17,072,751 | 30,886 | (17,385 | ) | 17,086,252 | |||||||||||||||||||
Available-for-sale investments |
||||||||||||||||||||||||
Fixed-rate investments |
3,500,945 | 13,454 | | 3,514,399 | ||||||||||||||||||||
Adjustable-rate investments |
17,073 | | | 17,073 | ||||||||||||||||||||
Long-term investments |
||||||||||||||||||||||||
Fixed-rate held-to-maturity investments |
513,728 | 886 | | 514,614 |
F-13
BAIDU, INC.
NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of Renminbi (RMB), and in thousands of U.S. Dollars (US$), except for number of shares and per share (or ADS) data)
As of June 30, 2013 | ||||||||||||||||||||||||||||
Amortized cost |
Gross unrecognized holding gains |
Gross unrecognized holding losses |
Gross unrealized gains |
Gross unrealized losses |
Fair value |
Fair value |
||||||||||||||||||||||
RMB | RMB | RMB | RMB | RMB | RMB | US$ | ||||||||||||||||||||||
Short-term investments |
||||||||||||||||||||||||||||
Held-to-maturity investments |
||||||||||||||||||||||||||||
Fixed-rate investments |
19,266,526 | 34,694 | (24,277 | ) | 19,276,943 | 3,140,897 | ||||||||||||||||||||||
Adjustable-rate investments |
150,233 | | (31 | ) | 150,202 | 24,473 | ||||||||||||||||||||||
Available-for-sale investments |
||||||||||||||||||||||||||||
Fixed-rate investments |
5,108,125 | | (2,141 | ) | 5,105,984 | 831,946 | ||||||||||||||||||||||
Adjustable-rate investments |
517,650 | | | 517,650 | 84,344 | |||||||||||||||||||||||
Long-term investments |
||||||||||||||||||||||||||||
Held-to-maturity investments |
||||||||||||||||||||||||||||
Fixed-rate investments |
265,099 | (355 | ) | 264,744 | 43,136 | |||||||||||||||||||||||
Available-for-sale investments |
||||||||||||||||||||||||||||
Equity securities of a publicly listed company |
672,737 | 242,769 | 915,506 | 149,168 |
Held-to-maturity investments are stated at amortized cost. The long-term held-to-maturity investment will mature in August 2014. The methodology used in the determination of fair values for held-to-maturity investments and available-for-sale investments was summarized in Note 6.
F-14
BAIDU, INC.
NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of Renminbi (RMB), and in thousands of U.S. Dollars (US$), except for number of shares and per share (or ADS) data)
5. CHANGES IN EQUITY AND REDEEMABLE NONCONTROLLING INTERESTS
Attributable to Baidu, Inc. | Noncontrolling interests |
Total equity | Redeemable noncontrolling interests |
|||||||||||||||||||||||||||||
Ordinary shares | Additional paid-in capital |
Retained earnings |
Accumulated other comprehensive (loss) income |
|||||||||||||||||||||||||||||
Number of shares |
Amount | |||||||||||||||||||||||||||||||
RMB | RMB | RMB | RMB | RMB | RMB | RMB | ||||||||||||||||||||||||||
Balance at December 31, 2012 |
34,965,710 | 15 | 2,095,273 | 24,038,219 | (78,278 | ) | 126,613 | 26,181,842 | 1,033,283 | |||||||||||||||||||||||
Net income |
4,686,721 | (13,570 | ) | 4,673,151 | (27,927 | ) | ||||||||||||||||||||||||||
Other comprehensive income |
265,308 | (648 | ) | 264,660 | (1,632 | ) | ||||||||||||||||||||||||||
Acquisition of a subsidiarys shares from noncontrolling interests |
(93,684 | ) | ||||||||||||||||||||||||||||||
Issuance of subsidiary shares |
9,372 | 228,150 | 237,522 | 54,745 | ||||||||||||||||||||||||||||
Accretion of redeemable noncontrolling interests |
1,197 | 46,794 | 47,991 | (47,991 | ) | |||||||||||||||||||||||||||
Additional investments in a subsidiary |
(6,964 | ) | 13,565 | 6,601 | (508 | ) | ||||||||||||||||||||||||||
Exercise of share-based awards |
11,739 | | 749 | 62 | 811 | 221 | ||||||||||||||||||||||||||
Share-based compensation |
186,171 | 1,514 | 187,685 | 7,901 | ||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Balance at June 30, 2013 |
34,977,449 | 15 | 2,284,601 | 28,726,137 | 233,824 | 355,686 | 31,600,263 | 924,408 | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Balance at June 30, 2013, in US$ |
2 | 372,242 | 4,680,506 | 38,098 | 57,954 | 5,148,802 | 150,619 | |||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-15
BAIDU, INC.
NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of Renminbi (RMB), and in thousands of U.S. Dollars (US$), except for number of shares and per share (or ADS) data)
6. FAIR VALUE MEASUREMENT
ASC subtopic 820-10 (ASC 820-10), Fair Value Measurements and Disclosures: Overall, establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:
Level 1Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets
Level 2Include other inputs that are directly or indirectly observable in the marketplace
Level 3Unobservable inputs which are supported by little or no market activity
ASC 820-10 describes three main approaches to measuring the fair value of assets and liabilities: (1) market approach; (2) income approach and (3) cost approach. The market approach uses prices and other relevant information generated from market transactions involving identical or comparable assets or liabilities. The income approach uses valuation techniques to convert future amounts to a single present value amount. The measurement is based on the value indicated by current market expectations about those future amounts. The cost approach is based on the amount that would currently be required to replace an asset.
Assets and liabilities measured or disclosed at fair value
In accordance with ASC 820-10, the Company measures available-for-sale investments at fair value on a recurring basis. The fair values of the Companys short-term available-for-sale investments as measured and held-to-maturity investments as disclosed are determined based on the discounted cash flow model using the discount curve of market interest rates. The fair value of the Companys long-term available-for-sale investments in the equity securities of a publicly listed company is measured using quoted market prices.
The Company measures certain financial assets, including equity method investments and cost method investments, at fair value on a nonrecurring basis only if an impairment charge were to be recognized. The Companys non-financial assets, such as intangible assets, goodwill and fixed assets, would be measured at fair value only if they were determined to be impaired on an other-than-temporary basis.
F-16
BAIDU, INC.
NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of Renminbi (RMB), and in thousands of U.S. Dollars (US$), except for number of shares and per share (or ADS) data)
Assets measured or disclosed at fair value are summarized below:
Fair value measurement or disclosure at December 31, 2012 using |
||||||||||||||||||||
Total fair value at December 31, 2012 |
Quoted prices in active markets for identical assets (Level 1) |
Significant other observable inputs (Level 2) |
Significant unobservable inputs (Level 3) |
Total losses | ||||||||||||||||
RMB | RMB | RMB | RMB | RMB | ||||||||||||||||
Fair value disclosure |
||||||||||||||||||||
Cash equivalents: |
||||||||||||||||||||
Time deposits |
3,034,443 | 3,034,443 | ||||||||||||||||||
Money market funds |
4,854,278 | 4,854,278 | ||||||||||||||||||
Short-term investments: |
||||||||||||||||||||
Held-to-maturity investments: |
||||||||||||||||||||
Fixed-rate investments |
17,086,252 | 17,086,252 | ||||||||||||||||||
Long-term investments: |
||||||||||||||||||||
Held-to-maturity investments: |
||||||||||||||||||||
Fixed-rate investments |
514,614 | 514,614 | ||||||||||||||||||
Notes payable |
9,420,285 | 9,420,285 | ||||||||||||||||||
Fair value measurement |
||||||||||||||||||||
Recurring |
||||||||||||||||||||
Short-term investments: |
||||||||||||||||||||
Available-for-sale investments: |
||||||||||||||||||||
Fixed-rate investments |
3,514,399 | 3,514,399 | ||||||||||||||||||
Adjustable-rate investments |
17,073 | 17,073 | ||||||||||||||||||
Non-recurring |
||||||||||||||||||||
Long-term cost method investments: |
| | (169,180 | ) | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total assets measured at fair value |
3,531,472 | | 3,531,472 | | (169,180 | ) | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
The Company has no assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) as of December 31, 2012.
As of December 31, 2012, certain cost method investments were measured using significant unobservable inputs (Level 3) and written down from their carrying value to fair value of nil, with impairment charges incurred and recorded in earnings.
F-17
BAIDU, INC.
NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of Renminbi (RMB), and in thousands of U.S. Dollars (US$), except for number of shares and per share (or ADS) data)
Fair value measurement or disclosure at June 30, 2013 using |
||||||||||||||||||||
Total fair value at June 30, 2013 |
Quoted prices in active markets for identical assets (Level 1) |
Significant other observable Inputs (Level 2) |
Significant unobservable inputs (Level 3) |
|||||||||||||||||
RMB | US$ | RMB | RMB | RMB | ||||||||||||||||
Fair value disclosure |
||||||||||||||||||||
Cash equivalents: |
||||||||||||||||||||
Time deposits |
3,384,811 | 551,506 | 3,384,811 | |||||||||||||||||
Money market funds |
491,691 | 80,114 | 491,691 | |||||||||||||||||
Short-term investments: |
||||||||||||||||||||
Held-to-maturity investments: |
||||||||||||||||||||
Fixed-rate investments |
19,276,943 | 3,140,897 | 19,276,943 | |||||||||||||||||
Adjustable-rate investments |
150,202 | 24,473 | 150,202 | |||||||||||||||||
Long-term investments: |
||||||||||||||||||||
Held-to-maturity investments: |
||||||||||||||||||||
Fixed-rate investment |
264,744 | 43,136 | 264,744 | |||||||||||||||||
Notes payable |
8,599,004 | 1,401,083 | 8,599,004 | |||||||||||||||||
Fair value measurement |
||||||||||||||||||||
Recurring |
||||||||||||||||||||
Short-term investments: |
||||||||||||||||||||
Available-for-sale investments: |
||||||||||||||||||||
Fixed-rate investments |
5,105,984 | 831,946 | 5,105,984 | |||||||||||||||||
Adjustable-rate investments |
517,650 | 84,344 | 517,650 | |||||||||||||||||
Long-term investments: |
||||||||||||||||||||
Equity securities in a publicly listed company: |
915,506 | 149,168 | 915,506 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total assets measured at fair value |
6,539,140 | 1,065,458 | 915,506 | 5,623,634 | | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
The Company has no assets measured at fair value on a recurring basis or a nonrecurring basis using significant unobservable inputs (Level 3) for the six-month period ended June 30, 2013.
F-18
BAIDU, INC.
NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of Renminbi (RMB), and in thousands of U.S. Dollars (US$), except for number of shares and per share (or ADS) data)
7. SHARE-BASED COMPENSATION EXPENSES
Total share-based compensation expenses recognized for the six-month periods ended June 30, 2012 and 2013 have been reported in the following accounts:
For the six months ended | ||||||||||||
June 30, 2012 |
June 30, 2013 |
June 30, 2013 |
||||||||||
RMB | RMB | US$ | ||||||||||
Cost of revenues |
3,338 | 8,448 | 1,376 | |||||||||
Selling, general and administrative expenses |
31,794 | 51,675 | 8,420 | |||||||||
Research and development expenses |
53,891 | 134,109 | 21,851 | |||||||||
|
|
|
|
|
|
|||||||
89,023 | 194,232 | 31,647 | ||||||||||
|
|
|
|
|
|
8. FIXED ASSETS
Fixed assets and the related accumulated depreciation as of December 31, 2012 and June 30, 2013 are as follows:
As of December 31, 2012 |
As of June 30, 2013 |
As of June 30, 2013 |
||||||||||
RMB | RMB | US$ | ||||||||||
Computer equipment |
4,973,104 | 5,591,347 | 911,028 | |||||||||
Office building |
911,482 | 911,482 | 148,513 | |||||||||
Office building related facility, machinery and equipment |
156,240 | 157,885 | 25,725 | |||||||||
Vehicles |
7,519 | 9,881 | 1,610 | |||||||||
Office equipment |
212,368 | 223,850 | 36,473 | |||||||||
Leasehold improvements |
193,751 | 214,370 | 34,928 | |||||||||
Construction in progress |
148,717 | 471,393 | 76,807 | |||||||||
|
|
|
|
|
|
|||||||
6,603,181 | 7,580,208 | 1,235,084 | ||||||||||
Less: Accumulated depreciation |
(2,715,304 | ) | (3,348,843 | ) | (545,645 | ) | ||||||
|
|
|
|
|
|
|||||||
3,887,877 | 4,231,365 | 689,439 | ||||||||||
|
|
|
|
|
|
9. LOANS PAYABLE
Long-term loans include the principal of the loans and accrued interests.
On July 19, 2011, the Company borrowed a two-year unsecured loan of RMB2,148,090 (US$350,000) from Goldman Sachs Lending Partners LLC at an annual interest rate of 1.30%. The loan was used to finance the acquisition of Qunar and was due on July 14, 2013. The Company repaid the loan and the accrued interests upon maturity in July 2013.
On September 18, 2012, the Company entered into a loan agreement with Australia and New Zealand Banking Group Limited (Hong Kong Branch), pursuant to which the Company is committed to borrow an unsecured Australian Dollars (AU$) denominated loan with a floating interest rate. The loan commitment amounting to RMB590,615 (AU$105,000) is intended for the general working capital of the Company and can be drawn down from time to time within two years. On October 17, 2012, the Company drew down RMB309,370 (AU$55,000)
F-19
BAIDU, INC.
NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of Renminbi (RMB), and in thousands of U.S. Dollars (US$), except for number of shares and per share (or ADS) data)
with a term of two years under the loan commitment. In connection with the drawn down of the loan commitment, the Company entered into a currency swap agreement, pursuant to which the loan will be settled in a fixed US$ amount of US$56,760 with a fixed annual interest rate of 2.75% during the term of the loan. The currency swap agreement met the definition of a derivative in accordance with ASC 815. The fair value of the derivative related to the currency swap agreement was insignificant for the six-month period ended June 30, 2013.
10. NOTES PAYABLE
On November 28, 2012, the Company issued and sold publicly two tranches of unsecured senior notes: (i) an aggregate principal amount of US$750,000 which will mature on November 28, 2017 (the 2017 Notes), and (ii) an aggregate principal amount of US$750,000 which will mature on November 28, 2022 (the 2022 Notes). The 2017 Notes and the 2022 Notes are collectively referred to as the Notes.
The 2017 Notes bear interest at the rate of 2.25% per annum and the 2022 Notes bear interest at the rate of 3.50% per annum. Interests are payable semi-annually in arrears on and of each year, beginning on May 28, 2013. At maturity, the Notes are payable at their principal amount plus accrued and unpaid interest thereon.
The net proceeds from the Notes, after deducting offering expenses, were RMB9,159,333 (US$1,492,380), which will be used for general corporate purposes.
The Notes do not contain any financial covenants or other significant restrictions. In addition, the Notes are unsecured and rank lower than any secured obligation of the Group and have the same liquidation priority as any other unsecured liabilities of the Group, but senior to those expressly subordinated obligations, if any. The Company may, at its discretion, redeem all or any portion of the Notes at any time, at the principal amount plus any unpaid interest. As of June 30, 2013, the Company does not intend to redeem any portion of the Notes prior to the stated maturity dates. The Company has the obligation to redeem the Notes if a change in control occurs as defined in the indenture of the Notes.
The Notes were issued at a discount amounting to RMB10,219 (US$1,665). The issuance costs of RMB49,437 (US$8,055) incurred at the time of the issuance of the Notes were capitalized. Both the discount and the issuance costs are amortized as interest expense using the effective interest rate method through the maturity dates of the Notes. The effective interest rate was 2.36% and 3.59% for the 2017 Notes and the 2022 Notes, respectively.
11. INCOME TAXES
The Company is incorporated in the Cayman Islands and conducts its primary business operations through the subsidiaries and VIEs in the PRC. The Company also has intermediate holding companies in the BVI and Hong Kong. Under the current laws of the Cayman Islands and BVI, the Company is not subject to tax on income or capital gains. Additionally, upon payments of dividends by the Company to its shareholders, no Cayman Islands and BVI withholding tax will be imposed. Under the Hong Kong tax laws, subsidiaries in Hong Kong are exempted from income tax on their foreign-derived income and there are no withholding taxes in Hong Kong on remittance of dividends.
Under the PRC Enterprise Income Tax (EIT) Law, which has been effective since January 1, 2008, domestic enterprises and Foreign Investment Enterprises (the FIEs) are subject to a unified 25% enterprise income tax rate, except for certain entities that enjoy the preferential tax rates.
F-20
BAIDU, INC.
NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of Renminbi (RMB), and in thousands of U.S. Dollars (US$), except for number of shares and per share (or ADS) data)
The effective tax rate was 10.9% and 16.3% for the six-month periods ended June 30, 2012 and 2013, respectively, which is less than the PRC statutory EIT rate of 25%, due to several factors, including: (i) additional deductions for research and development expenses; (ii) preferential tax rates associated with High and New Technology Enterprises granted to Baidu Netcom, Baidu.com Times Technology (Beijing) Co., Ltd (Baidu Times, a wholly-owned subsidiary of the Company) Baidu Online and Baidu (China) Co., Ltd (Baidu China, a wholly-owned subsidiary of the Company); (iii) Baidu Online obtained the certificate of Key Software Enterprise in 2013 and was entitled to the preferential EIT rate of 10% for 2011 and 2012, as a result of which Baidu Online recorded an income tax reversal in connection with the change in EIT rate from 15% to 10% for 2011 and 2012; and net of (iv) the foreign withholding taxes recorded for the undistributed earnings of foreign subsidiaries that are no longer expected to be permanently reinvested by the Company.
The effective tax rates are subject to change in subsequent quarters as the estimates of pretax income or loss for the year increase or decrease and certain subsidiaries of the Company may or may not continue to qualify for certain preferential tax rates.
The Company did not provide for deferred income taxes and foreign withholding taxes on the undistributed earnings of foreign subsidiaries as of December 31, 2012. For the six-month period ended June 30, 2013, the Company provided foreign withholding taxes on the portion of undistributed earnings of foreign subsidiaries that is no longer expected to be permanently reinvested by the Company. The Company did not provide for deferred income taxes and foreign withholding taxes on the remaining undistributed earnings of foreign subsidiaries on the basis of its intent to permanently reinvest these earnings. If these foreign earnings were to be repatriated in the future, the Company will be subject to withholding taxes in accordance with PRC regulations, and the related tax liability may be reduced by any foreign income taxes previously paid on these earnings. Determination of the amount of unrecognized deferred tax liability related to these earnings is not practicable. In the case of its VIEs, undistributed earnings were insignificant as of each of the balance sheet dates.
12. RESTRICTED NET ASSETS
Under PRC laws and regulations, there are certain restrictions on the Companys PRC subsidiaries and VIEs with respect to transferring certain of their net assets to the Company in the form of dividends, loans, or advances. Amounts restricted include paid-in capital and statutory reserve funds of the Companys PRC subsidiaries and the net assets of the VIEs in which the Company has no legal ownership, totaling RMB2,799,026 and RMB3,434,467 (US$559,596) as of December 31, 2012 and June 30, 2013, respectively.
13. ACCUMULATED OTHER COMPREHENSIVE (LOSS) INCOME
The components of accumulated other comprehensive (loss) income are as follows:
Foreign currency translation adjustment |
Unrealized gains on available-for- sale investments |
Accumulated other comprehensive (loss) income |
||||||||||||||
RMB | RMB | RMB | US$ | |||||||||||||
Balance at December 31, 2012 |
(89,714 | ) | 11,436 | (78,278 | ) | (12,754 | ) | |||||||||
Current-period other comprehensive income |
84,787 | 227,315 | 312,102 | 50,852 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Balance at June 30, 2013 |
(4,927 | ) | 238,751 | 233,824 | 38,098 | |||||||||||
|
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F-21
BAIDU, INC.
NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of Renminbi (RMB), and in thousands of U.S. Dollars (US$), except for number of shares and per share (or ADS) data)
14. CONTINGENCIES
Litigation
The Group was involved in certain cases pending in various PRC and U.S. courts and arbitration as of June 30, 2013. These cases include copyright infringement cases, unfair competition cases, and defamation cases, among others. Adverse results in these lawsuits may include awards of damages and may also result in, or even compel, a change in the Companys business practices, which could result in a loss of revenue or otherwise harm the business of the Company.
For many proceedings, the Company is currently unable to estimate the reasonably possible loss or a range of reasonably possible losses as the proceedings are in the early stages, and/or there is a lack of clear or consistent interpretation of laws specific to the industry-specific complaints among different jurisdictions. As a result, there is considerable uncertainty regarding the timing or ultimate resolution of such matters, which includes eventual loss, fine, penalty or business impact, if any, and therefore, an estimate for the reasonably possible loss or a range of reasonably possible losses cannot be made. However, the Company believes that such matters, individually and in the aggregate, when finally resolved, are not reasonably likely to have a material adverse effect on the Companys consolidated results of operations, financial position and cash flows. With respect to the limited number of proceedings for which the Company was able to estimate the reasonably possible losses or the range of reasonably possible losses, such estimated loss amounts were insignificant.
15. EARNINGS PER SHARE (EPS)
A reconciliation of net income attributable to Baidu, Inc. in the unaudited interim condensed consolidated statements of comprehensive income to the numerator for the computation of basic and diluted net income attributable to Baidu, Inc. per share for the six-month period ended June 30, 2012 and 2013 is as follows:
For the six months ended | ||||||||||||
June 30, 2012 |
June 30, 2013 |
June 30, 2013 |
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RMB | RMB | US$ | ||||||||||
Net income attributable to Baidu, Inc. |
4,652,845 | 4,686,721 | 763,632 | |||||||||
Adjustments to the carrying amount of redeemable noncontrolling interests |
(20,556 | ) | 1,197 | 196 | ||||||||
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Numerator for EPS computation |
4,632,289 | 4,687,918 | 763,828 | |||||||||
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F-22
BAIDU, INC.
NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of Renminbi (RMB), and in thousands of U.S. Dollars (US$), except for number of shares and per share (or ADS) data)
The following table sets forth the computation of basic and diluted net income attributable to Baidu, Inc. per share for Class A and Class B ordinary shares for the six-month period ended June 30, 2012 and 2013:
For the six months ended | ||||||||||||||||||||||||
June 30, 2012 | June 30, 2013 | |||||||||||||||||||||||
Class A | Class B | Class A | Class A | Class B | Class B | |||||||||||||||||||
RMB | RMB | RMB | US$ | RMB | US$ | |||||||||||||||||||
Earnings per sharebasic: |
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Numerator |
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Allocation of net income attributable to Baidu, Inc. |
3,597,335 | 1,034,954 | 3,648,514 | 594,472 | 1,039,404 | 169,356 | ||||||||||||||||||
Denominator |
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Weighted average ordinary shares outstanding |
27,121,980 | 7,803,000 | 27,218,074 | 27,218,074 | 7,754,000 | 7,754,000 | ||||||||||||||||||
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Denominator used for earnings per share |
27,121,980 | 7,803,000 | 27,218,074 | 27,218,074 | 7,754,000 | 7,754,000 | ||||||||||||||||||
Earnings per sharebasic |
132.64 | 132.64 | 134.05 | 21.84 | 134.05 | 21.84 | ||||||||||||||||||
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Earnings per sharediluted: |
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Numerator |
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Allocation of net income attributable to Baidu, Inc. |
3,598,889 | 1,033,400 | 3,649,110 | 594,569 | 1,038,808 | 169,259 | ||||||||||||||||||
Reallocation of net income attributable to Baidu, Inc. as a result of conversion of Class B to Class A shares |
1,033,400 | 1,038,808 | 169,259 | |||||||||||||||||||||
Allocation of net income attributable to Baidu, Inc. |
4,632,289 | 1,033,400 | 4,687,918 | 763,828 | 1,038,808 | 169,259 | ||||||||||||||||||
Denominator |
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Weighted average ordinary shares outstanding |
27,121,980 | 7,803,000 | 27,218,074 | 27,218,074 | 7,754,000 | 7,754,000 | ||||||||||||||||||
Conversion of Class B to Class A ordinary shares |
7,803,000 | 7,754,000 | 7,754,000 |