omniture

TOM Online Reports Second Quarter 2007 Results

2007-07-23 22:56 1560

BEIJING, July 23 /Xinhua-PRNewswire-FirstCall/ -- TOM Online Inc. (Nasdaq: TOMO; Hong Kong GEM: 8282) (the "Company" or "TOM Online"), a leading wireless Internet company in China, today announced the results of the Company and its controlled operating entities including subsidiaries and variable interest entities (collectively referred to as the "Group") for the second quarter ended June 30, 2007.

Financial Overview

For the second quarter of 2007:

-- Total revenues were US$34.39 million ("mn"), a decrease of 30.4% from

the same period last year and a decrease of 2.1% from the last quarter.

-- Wireless Internet service revenues were US$30.24 mn, representing a

32.9% decrease from the same period last year and a 5.0% decrease from

the previous quarter. Wireless Internet service revenues made up 87.9%

of our total quarterly revenues.

-- Online advertising revenues were US$3.38 mn, representing a 13.2%

decrease from the same period last year but a 27.0% increase from the

previous quarter. Online advertising revenues made up 9.8% of our total

quarterly revenues.

-- Net loss for 2Q07 was US$9.56 mn compared to net income of US$11.75 mn

in 2Q06 and net income of US$0.15 mn in 1Q07.

-- 2Q07 net loss included goodwill impairment charge on our wireless

Internet business of US$6.82 mn and our share of losses from our TOM

Eachnet Joint Venture ("JV") of US$3.95 mn. Excluding goodwill

impairment charge of US$6.82 mn, Non-GAAP net loss was US$2.74 mn.

-- Fully diluted losses per American Depository Share ("ADS") were US$18.0

cents or US$0.22 cents per common share.

-- Excluding goodwill impairment charge, Non-GAAP fully diluted losses per

ADS were US$5.2 cents per ADS or US$0.06 cents per common share.

-- Our balance of cash and cash equivalents and short-term bank deposits

was approximately US$144.38 mn at the end of the second quarter of 2007.

Second Quarter 2007 -- Financial Performance Review

The Company's unaudited consolidated revenues for the three months ended June 30, 2007 were US$34.39 mn, a decrease of 30.4% compared to the same period year on year ("YoY") and a decrease of 2.1% quarter on quarter ("QoQ").

Wireless Internet service revenues were US$30.24 mn, representing a 32.9% decrease from the same period last year and a 5.0% decrease from the previous quarter. Wireless Internet service revenues made up 87.9% of total quarterly revenues compared to 90.6% in 1Q07.

In May 2007, China Mobile introduced a new practice of sending fee reminders to its WAP service users when they request downloads of WAP pages onto their mobile handsets and seeking their confirmation before such download requests are processed. Furthermore, in the past, China Mobile entered into its own strategic alliances with selected mobile phone producers pursuant to which it embedded menus in their handsets for all the best-selling products on China Mobile's Monternet wireless portal, including certain of our products. However, beginning in May 2007, China Mobile has started to promote only its own wireless value-added service products in such menus and not those of us or other third-party value-added service providers. These policies had caused an adverse effect on our wireless Internet business, in particular WAP business in 2Q07 and beyond.

Online advertising revenues were US$3.38 mn, representing a 27.0% increase QoQ but a 13.2% decrease YoY. Online advertising revenues made up 9.8% of our total quarterly revenues compared to 7.6% in 1Q07.

Other revenues were US$0.77 mn in 2Q07 compared to US$0.66 mn in 1Q07 and US$0.50 mn in 2Q06. Other revenues made up 2.3% of total revenues in 2Q07. Other revenues consist of revenues from online games, paid email and others.

Gross profit was US$8.98 mn representing a decrease of 52.9% compared to the same period last year but a 4.7% increase QoQ. Gross margins increased to 26.1% in 2Q07 from 24.4% in 1Q07. The small sequential increase in gross margins was primarily due to online advertising making up a larger portion of our overall revenues compared to 1Q07 as our online advertising business which has higher gross margins than our wireless Internet business. Total cost of revenues were US$25.41 mn in 2Q07 compared to US$26.56 mn in 1Q07.

Total operating expenses were US$14.92 mn in 2Q07 compared to US$5.84 mn in 1Q07 and US$7.58 mn in 2Q06. The significant jump in QoQ increase in operating expenses was driven by a seasonal rebound in sales and marketing spending, which was US$2.10 mn in 2Q07 compared to US$0.56 mn in 1Q07 and an increase accrued professional service fees of US$0.83 mn mainly associated with the proposed privatization by way of a Scheme of Arrangement. In addition, a goodwill impairment charge of US$6.82 mn was recorded in Q207 in view of potential adverse impact on wireless Internet business, in particular WAP business, subsequent to the new operational practices implemented by China Mobile in May 2007.

Operating loss was US$5.94 mn in 2Q07 compared to operating profit of US$2.74 mn 1Q07, down 151.7% from the same period last year and a decrease of 316.7% from the previous quarter.

2Q07 EBITDA ("Earnings before Interest, Taxes, Depreciation and Amortization") were US$3.07 mn, a decrease of 77.1% YoY and a 35.2% decline QoQ. EBITDA margins were 8.9% for the quarter compared to 13.3% in 1Q07 and 26.7% in 2Q06.

Beginning on February 1, 2007, we recognized our share of losses from the TOM Eachnet JV based on the equity method of accounting. For the three months ended June 30, 2007, our 51% share of losses from the TOM Eachnet JV was US$3.95 mn and has been included in share of loss on equity investment in a joint venture in the unaudited consolidated statements of operations.

Net loss for 2Q07 was US$9.56 mn compared to a net profit of US$0.15 mn in 1Q07. 2Q07 net loss includes US$0.30 mn in losses from discontinued operations offset by exchange gain of US$0.95 mn due to the effect of the appreciation of RMB upon the translation of our net non-RMB liabilities at the period end as our functional currency is RMB.

Excluding goodwill impairment charge of US$6.82 mn, Non-GAAP net loss was US$2.74 mn.

US GAAP basic losses per ADS were US$18.0 cents for the quarter. US GAAP basic losses per Hong Kong ordinary share were US$0.22 cents for the quarter. Shares used in computing US GAAP basic losses per ADS were 53.25 mn and shares used in computing US GAAP basic losses per Hong Kong ordinary share were 4,259.65 mn.

Excluding goodwill impairment charge, Non-GAAP basic losses per ADS were US$5.2 cents for the quarter. Non-GAAP basic losses per Hong Kong ordinary share were US$0.06 cents for the quarter. Shares used in computing basic losses per ADS were 53.25 mn and shares used in computing basic losses per Hong Kong ordinary share were 4,259.65 mn.

US GAAP diluted losses per ADS were US$18.0 cents for the quarter. US GAAP diluted losses per Hong Kong ordinary share were US$0.22 cents for the quarter. Shares used in computing US GAAP diluted losses per ADS were 53.25 mn shares and shares used in computing US GAAP diluted losses per Hong Kong ordinary share were 4,259.65 mn.

Excluding goodwill impairment charge, Non-GAAP diluted losses per ADS were US$5.2 cents for the quarter. Non-GAAP diluted losses per Hong Kong ordinary share were US$0.06 cents for the quarter. Shares used in computing diluted losses per ADS were 53.25 mn and shares used in computing diluted losses per Hong Kong ordinary share were 4,259.65 mn.

Our balance of cash and cash equivalents and short-term bank deposits was approximately US$144.38 mn at the end of 2Q07.

Business Review

Wireless Internet Services

Total wireless Internet service revenues were US$30.24 mn for 2Q07, a decrease of 5.0% QoQ and a decrease of 32.9% YoY. Wireless Internet service revenues accounted for 87.9% of our total revenues in 2Q07 compared to 90.6% in 1Q07.

SMS services

SMS ("Short Messaging Service") revenues in 2Q07 were US$9.91 mn, up 13.9% QoQ but down 47.7% YoY. SMS revenues made up 32.8% of our total wireless Internet service revenues for the quarter.

2.5G services

MMS ("Multimedia Messaging Service") revenues for 2Q07 were US$2.46 mn, down 23.0% QoQ and down 38.1% YoY. MMS revenues made up 8.1% of our total wireless Internet service revenues in the quarter.

WAP ("Wireless Application Protocol") revenues for 2Q07 were US$4.71 mn, representing a 27.4% decrease QoQ and 29.6% decrease YoY. WAP revenues made up 15.6% of our total wireless Internet service revenues in the quarter compared to 20.4% in 1Q07. QoQ decline in our WAP business was driven by the factors described in a joint announcement with TOM Group on June 25, 2007, and relate principally to new operational practices of China Mobile that have an adverse impact on our WVAS business, in particular our WAP business.

Voice services

IVR ("Interactive Voice Response") revenues in 2Q07 were US$9.50 mn, down 3.0% QoQ and down 19.8% YoY. IVR revenues made up 31.4% of our total wireless Internet service revenues in the quarter.

CRBT ("Colour Ringback Tones") revenues in 2Q07 were US$3.44 mn, up 2.8% QoQ and up 6.6% YoY. CRBT revenues made up 11.4% of our total wireless Internet service revenues in the quarter.

Other Wireless Internet Services

Other wireless Internet service revenues were US$0.22 mn, representing a 25.3% decrease QoQ. Other wireless Internet service revenues made up 0.7% of our total wireless Internet service revenues and consist primarily of revenues from Java-based mobile game download services.

Historically, we included revenues from our Indiagames subsidiary as part of other wireless Internet service revenues. However, due to the re-classification of Indiagames as "held for sale" at the end of 2006, the associated losses of Indiagames have been separately reported as losses from discontinued operations below our losses from continuing operations.

Online Advertising and Portal

Online advertising revenues were US$3.38 mn in 2Q07, representing an increase of 27.0% QoQ but a decrease of 13.2% YoY. Whilst our portal remains an important business area for the Company, we continue to face competitive pressures for share of advertiser budgets allocated towards our target audience, the young and trendy demographic.

New Business Opportunities

TOM-SKYPE JV and TOM Eachnet JV

At the end of June 2007, we have over 42.0 mn TOM-Skype registered users up from over 35.5 mn at the end of March 2007.

Beginning on February 1, 2007, we recognized our share of losses from the TOM Eachnet JV based on the equity method of accounting. For the three months ended June 30, 2007, our 51% share of losses from the TOM Eachnet JV was US$3.95 mn and has been included in share of loss on equity investment in a joint venture in the unaudited consolidated statements of operations.

Proposed conditional possible privatisation of TOM Online

On March 9, 2007, the respective directors of the Company and TOM Group Limited ("TOM") jointly announced that, on March 3, 2007, a letter was sent by TOM to inform the Company that TOM was considering making a proposal to take the Company private by way of a scheme of arrangement ("Proposal") under Section 86 of the Cayman Islands Companies Law. On March 9, 2007, TOM requested the board of directors of TOM Online to put forward the Proposal to TOM Online's shareholders. On April 25, 2007, TOM announced that the Proposal and the transactions contemplated thereunder were approved at its extraordinary general meeting held on April 25, 2007. A scheme document (the "Scheme Document") in relation to the Proposal and the related offers to optionholders was sent by the Company and TOM to, among others, shareholders and optionholders of the Company on April 30, 2007. The meetings to vote on scheme of arrangement and the Proposal were scheduled for June 8, 2007. However, the Company and TOM proposed that such meetings were adjourned to a later date. Upon ordinary resolutions, the meetings were adjourned to a later date. A supplement to the Scheme Document was sent by the Company and TOM to, among others, shareholders and optionholders of the Company on July 10, 2007. For further details of the Proposal, please see the joint announcement of the Company and TOM dated March 9, 2007, the announcement of the Company dated March 28, 2007, the joint announcement of the Company and TOM dated March 30, 2007, the announcement of TOM dated April 11, 2007, the announcement of TOM dated April 25, 2007, the joint announcement of the Company and TOM dated April 30, 2007, the joint announcement of the Company and TOM dated June 6, 2007, the joint announcement of the Company and TOM dated June 8, 2007, the joint announcement of the Company and TOM dated June 27, 2007 and the joint announcement of the Company and TOM dated July 10, 2007, which were posted on the website of the Growth Enterprise Market of the Stock Exchange of Hong Kong on March 12, 2007, March 28, 2007, April 2, 2007, April 13, 2007, April 25, 2007, May 2, 2007, June 7, 2007, June 11, 2007, June 27, 2007 and July 10, 2007, respectively. Such announcements and information on the Proposal were also filed with the U.S. Securities and Exchange Commission on March 12, 2007, March 29, 2007, March 30, 2007 on Form 6-K; on April 12, 2007 under Schedule 13D; on April 30, 2007 under Schedule 13E-3 (including the Scheme Document); and on May 2, 2007, May 29, 2007, June 7, 2007, June 8, 2007, June 27, 2007 and July 10, 2007 (including the supplement) as amendments to Schedule 13E-3 and on Form 6-K.

About TOM Online Inc.

TOM Online Inc. (Nasdaq: TOMO, Hong Kong GEM: 8282) is a leading wireless Internet company in China providing value-added multimedia products and services. A premier online brand in China targeting the young and trendy demographics, the Company's primary business activities include wireless value-added services and online advertising. The company offers an array of services such as SMS, MMS, WAP, wireless IVR (interactive voice response) services, content channels, search-based ads, and free and fee-based advanced email. As at June 30, 2007, TOM Online is the only portal in China that enjoyed a top three ranking in every wireless Internet segment.

Forward-looking Statements

This announcement contains statements that may be viewed as "forward-looking statements" within the meaning of Section 27A of the United States Securities Act of 1933, as amended, and Section 21E of the United States Securities Exchange Act of 1934, as amended. Such forward-looking statements are, by their nature, subject to significant risks and uncertainties that may cause the actual performance, financial condition or results of operations of the Company to be materially different from any future performance, financial condition or results of operations implied by such forward-looking statements. Such forward-looking statements include, without limitation, statements that are not historical fact relating to the financial performance and business operations of the Company in mainland China and in other markets, the continued growth of the telecommunications industry in China and in other markets, the development of the regulatory environment and the Company's latest product offerings, and the Company's ability to successfully execute its business strategies and plans.

Such forward-looking statements reflect the current views of the Company with respect to future events and are not a guarantee of future performance. Actual results may differ materially from information contained in the forward-looking statements as a result of a number of factors, including, without limitation, any changes in our relationships with telecommunication operators in China and elsewhere, the effect of competition on the demand for the price of our services, changes in customer demand and usage preference for our products and services, changes in the regulatory policies by relevant government authorities, any changes in telecommunications and related technology and applications based on such technology, and changes in political, economic, legal and social conditions in China, India and other countries where the Company conducts business operations, including, without limitation, the Chinese government's policies with respect to economic growth, foreign exchange, foreign investment and entry by foreign companies into China's telecommunications market. Please also see "Item 3 -- Key Information -- Risk Factors" section of the Company's annual report on Form 20-F for the year ended December 31, 2006 as filed with the United States Securities and Exchange Commission.

Non-GAAP Financial Measures

To supplement the financial measures prepared in accordance with US GAAP, the Company uses Non-GAAP financial measures including EBITDA, Non-GAAP Net Income/(Loss), Non-GAAP basic and diluted earnings/(losses) per share which are adjusted from results based on US GAAP in analyzing its financial results. The use of Non-GAAP measures is provided to enhance the reader's overall understanding of the Company's current financial performance and its prospects for the future. Specifically, the Company believes the Non-GAAP results provide useful information to both management and investors by excluding certain items that are not expected to result in future cash payments.

In calculating the EBITDA, depreciation, amortization expenses and provision for goodwill impairment have been excluded from the total operating profit/(loss). In calculating Non-GAAP Net Income/(Loss), provision for goodwill impairment has been excluded from the Net Income/(Loss) Attributable to Shareholders due to its non-recurring and non-cash in nature and the Company believes that the exclusion of such provision could enhance the comparison of the Company's current financial performance with that of previous periods. Correspondingly, the Non-GAAP basic and diluted earnings/(losses) per share data were calculated based on the Non-GAAP Net Income/(Loss).

CONSOLIDATED BALANCE SHEETS

Audited Unaudited

December

31, June 30,

2006 2007

(in thousands of U.S. dollars)

Assets

Current assets:

Cash and cash equivalents 110,993 118,120

Short-term bank deposits 25,613 26,263

Accounts receivable, net 23,473 25,587

Restricted cash 300 --

Prepayments 4,754 3,880

Deposits and other receivables 2,616 3,128

Due from related parties 170 4,586

Inventories 65 71

Current portion of restricted securities -- 9,874

Assets held for sale 12,192 12,781

Total current assets 180,176 204,290

Restricted securities 97,729 88,169

Investment under cost method 1,588 1,628

Long-term prepayments and deposits 333 341

Property and equipment, net 15,360 12,518

Deferred tax assets 673 910

Goodwill, net 214,791 212,879

Intangibles, net 2,949 2,282

Total assets 513,599 523,017

CONSOLIDATED BALANCE SHEETS (continued)

Audited Unaudited

December

31, June 30,

2006 2007

(in thousands of U.S. dollars)

Liabilities and shareholders’ equity

Current liabilities:

Accounts payable 9,365 6,067

Other payables and accruals 14,679 19,322

Income tax payable 432 1,274

Deferred revenues 328 890

Consideration payable 12,037 11,836

Short-term bank loan 35,340 --

Current portion of secured bank loans -- 9,500

Due to related parties 204 235

Equity investment in a joint venture -- 6,426

Liabilities held for sale 1,131 1,657

Total current liabilities 73,516 57,207

Non-current liabilities:

Secured bank loans 55,271 81,111

Deferred tax liabilities 152 301

Liabilities for unrecognized tax benefits -- 1,408

Total liabilities 128,939 140,027

Minority interests 878 844

Minority interests of a subsidiary held for

sale 2,324 2,078

132,141 142,949

Commitments

Shareholders’ equity:

Share capital

(ordinary share, US$0.001282 par value,

10,000,000,000 shares

authorized, 4,259,654,528 and 4,259,654,528

shares issued and outstanding

as at December 31, 2006 and June

30, 2007 respectively) 5,461 5,461

Paid-in capital 322,459 323,393

Statutory reserves 11,535 11,535

Accumulated other comprehensive income 10,645 19,112

Retained earnings 31,358 20,567

Total shareholders’ equity 381,458 380,068

Total liabilities, minority interests and

shareholders’ equity 513,599 523,017

UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS

Three months ended Six months ended

June 30 June 30,

2006 2007 2006 2007

(in thousands of U.S. dollars,

except number of shares & per share amounts)

Restated** Restated**

Revenues:

Wireless Internet

services 45,039 30,239 89,452 62,057

Online Advertising 3,889 3,375 6,591 6,032

Others 495 774 879 1,437

Total revenues 49,423 34,388 96,922 69,526

Cost of revenues:

Cost of services * (30,349) (25,408) (58,189) (51,966)

Total cost of revenues (30,349) (25,408) (58,189) (51,966)

Gross profit 19,074 8,980 38,733 17,560

Operating expenses:

Selling and marketing

expenses * (1,736) (2,102) (2,950) (2,657)

General and

administrative expenses * (5,245) (5,309) (12,254) (9,968)

Product development

expenses * (384) (326) (838) (586)

Amortization of

intangibles (219) (367) (332) (731)

Provision for goodwill

impairment -- (6,819) -- (6,819)

Total operating expenses (7,584) (14,923) (16,374) (20,761)

Operating profit/(loss) 11,490 (5,943) 22,359 (3,201)

Other income/(loss):

Net interest income 343 416 786 815

Exchange gain 40 946 958 1,532

Share of loss on equity

investment

in a joint venture -- (3,954) -- (6,877)

Income/(loss) from

continuing operations

before tax 11,873 (8,535) 24,103 (7,731)

Income tax

credit/(expenses) 110 (763) 104 (1,065)

Income/(loss) from

continuing operations

after tax 11,983 (9,298) 24,207 (8,796)

Minority interests 10 34 16 57

Income/(loss) from

continuing

operations 11,993 (9,264) 24,223 (8,739)

Loss from discontinued

operations,

net of income tax (242) (299) (337) (679)

Net income/(loss)

attributable to

shareholders 11,751 (9,563) 23,886 (9,418)

UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS (continued)

Three months ended Six months ended

June 30, June 30,

2006 2007 2006 2007

(in thousands of U.S. dollars, except

number of shares & per share amounts)

Restated Restated

** **

Earnings/(Losses) per

ordinary share

- basic (cents):

Continuing operations 0.29 (0.21) 0.57 (0.20)

Discontinued operations (0.01) (0.01) (0.01) (0.02)

Total earnings/(losses)

per ordinary share

- basic 0.28 (0.22) 0.56 (0.22)

Earnings/(Losses) per

ordinary share

- diluted (cents):

Continuing operations 0.28 (0.21) 0.56 (0.20)

Discontinued operations (0.01) (0.01) (0.01) (0.02)

Total earnings/(losses)

per ordinary share

- diluted 0.27 (0.22) 0.55 (0.22)

Earnings/(Losses) per

American

Depositary Share -

basic (cents):

Continuing operations 22.5 (17.4) 45.6 (16.4)

Discontinued operations (0.4) (0.6) (0.6) (1.3)

Total earnings/(losses)

per American

Depositary Share -

basic 22.1 (18.0) 45.0 (17.7)

Earnings/(Losses) per

American

Depositary Share -

diluted (cents):

Continuing operations 22.2 (17.4) 45.0 (16.4)

Discontinued operations (0.4) (0.6) (0.6) (1.3)

Total earnings/(losses)

per American

Depositary Share -

diluted 21.8 (18.0) 44.4 (17.7)

Weighted average number of shares used in

computing Earnings/(Losses) Per Share:

Ordinary shares -

basic 4,257,675,421 4,259,654,528 4,249,142,166 4,259,654,528

Ordinary shares -

diluted 4,317,457,860 4,259,654,528 4,304,992,421 4,259,654,528

American Depositary

Shares - basic 53,220,943 53,245,682 53,114,277 53,245,682

American Depositary

Shares - diluted 53,968,223 53,245,682 53,812,405 53,245,682

* Included share-based

compensation expense

under SFAS 123R

Cost of services 24 10 48 29

Selling and

marketing expenses 1 1 2 2

General and

administrative

expenses 731 123 1,476 534

Product development

expenses 8 3 16 10

** Figures in 2006 were restated as the results of Indiagames were

separately presented under “Discontinued Operations”.

UNAUDITED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

Accumul

ated

other Total

Stat compreh shareh

Sha Paid utor ensiv Retain olders

Number re -in y e ed ‘

cap rese (losses

of ita capi rves )/incom earnin

shares l tal e gs equity

(in thousands of U.S. dollars, except number of

shares)

Balance as of

January 1,

2006 4,224,532,105 5,416 312,643 11,396 (3,187) 2,842 329,110

Issuance of

shares on

exercise

of employee

share

options 35,034,719 45 6,693 -- -- -- 6,738

Share-based

compensation -- -- 1,542 -- -- -- 1,542

Unrealized

loss on

securities -- -- -- -- (1, 300) -- (1,300)

Currency

translation

adjustments -- -- -- -- 6,363 -- 6,363

Net income for

the period -- -- -- -- -- 23,886 23,886

Balance as of

June 30,

2006 4,259,566,824 5,461 320,878 11,396 1,876 26,728 366,339

Balance as of

January 1,

2007 4,259,654,528 5,461 322,459 11,535 10,645 31,358 381,458

Effect of

adoption of

FIN 48 -- -- -- -- -- (1,373) (1,373)

Balance as of

January 1,

2007, as

restated 4,259,654,528 5,461 322,459 11,535 10,645 29,985 380,085

Share-based

compensation -- -- 934 -- -- -- 934

Unrealized

gain on

securities -- -- -- -- 508 -- 508

Currency

translation

adjustments -- -- -- -- 7,959 -- 7,959

Net loss for

the period -- -- -- -- -- (9,418) (9,418)

Balance as of

June 30,

2007 4,259,654,528 5,461 323,393 11,535 19,112 20,567 380,068

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

Six months ended

June 30,

2006 2007

(in thousands of

U.S. dollars)

Cash flow from operating activities:

Net income/(loss) 23,886 (9,418)

Adjustments to reconcile net income to net cash

provided by operating activities:

Amortization of intangibles 414 731

Amortization of premium on debt securities 187 195

Allowance for doubtful accounts receivables 244 (27)

Provision for goodwill impairment -- 6,819

Depreciation 4,194 4,528

Deferred income tax (165) (19)

Minority interests (170) (464)

Exchange gain, net (958) (1,447)

Loss on disposal of property and equipment 2 4

Share-based compensation expense 1,542 575

Share of loss on equity investment in a joint

venture -- 6,877

Change in assets and liabilities, net of effects

from acquisitions:

Accounts receivable 1,226 (1,118)

Prepayments (946) 345

Deposits and other receivables 47 (310)

Due from related parties 6 (4,364)

Inventories (59) (4)

Accounts payable (1,697) (1,662)

Other payables and accruals 2,165 4,508

Income tax payable (220) 707

Deferred revenues 48 546

Due to related parties 849 32

Net cash provided by operating activities 30,595 7,034

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)

Six months ended

June 30,

2006 2007

(in thousands of

U.S. dollars)

Cash flow from investing activities:

Payments for purchase of property and equipment (3,881) (3,149)

Cash paid for short-term bank deposits (51,082) --

Cash received from short-term bank deposits -- 1,627

Net cash used in acquisition of subsidiaries (15,642) --

Contribution of services which involved cash outflow

by the Group to a joint

venture -- (168)

Net cash used in investing activities (70,605) (1,690)

Cash flow from financing activities:

Issue of ordinary shares including from the exercise

of share options, net of

expenses 6,738 --

Bank loan, net of handling charges 35,340 --

Partial repayment of bank loan (580) --

Net cash provided by financing activities 41,498 --

Net increase in cash and cash equivalents 1,488 5,344

Cash and cash equivalents, beginning of period 99,869 111,366

Foreign currency translation 1,154 2,127

Cash and cash equivalents, end of period 102,511 118,837

Representing:

Cash and cash equivalents in discontinued

operations, end of period 155 717

Cash and cash equivalents in continuing operations,

end of period 102,356 118,120

Supplemental disclosures of cash flow information

Cash (paid)/received during the period:

Cash paid for income taxes (220) (381)

Interest received from bank deposits and debt

securities 3,523 3,420

Interest paid for loans due to parent company and

bank loans (1,585) (2,577)

Non-cash activities:

Contribution of services which did not involve cash

outflow by the Group to a -- (359)

joint venture

Summarized information by business segment for the three months and six months ended June 30, 2006 and 2007 is as follows:

Three months ended June 30, Six months ended June 30,

2006 2007 2006 2007

(in thousands of U.S. dollars)

(restated*) (restated*)

Revenues:

Wireless Internet

services 45,039 30,239 89,452 62,057

Online advertising 3,889 3,375 6,591 6,032

Others 495 774 879 1,437

Total revenues 49,423 34,388 96,922 69,526

Cost of revenues:

Wireless Internet

services (29,019) (23,261) (55,816) (47,911)

Online advertising (1,169) (1,584) (2,098) (3,142)

Others (161) (563) (275) (913)

Total cost of revenues (30,349) (25,408) (58,189) (51,966)

Gross profit 19,074 8,980 38,733 17,560

* Figures in 2006 were restated as the results of Indiagames were

separately presented under “Discontinued Operations”.

The Non-GAAP financial measures have been reconciled to the nearest US GAAP measures as follows:

Three months ended Six months ended

June 30, June 30,

2006 2007 2006 2007

(in thousands of U.S. dollars)

Operating profit/(loss):

Continuing operations 11,490 (5,943) 22,359 (3,201)

Discontinued operations (443) (415) (664) (1,066)

Total operating

profit/(loss) 11,047 (6,358) 21,695 (4,267)

Add back: Depreciation 2,102 2,242 4,194 4,528

Amortization of intangibles

and others 233 367 414 731

Provision for goodwill

impairment -- 6,819 -- 6,819

EBITDA 13,382 3,070 26,303 7,811

Appendix:

1. TOM Eachnet Joint Venture

Pursuant to a joint venture deed signed between the Company and eBay International AG ("eBay") on December 20, 2006, a joint venture, TOM Eachnet, has been formed on February 1, 2007 to carry on the business of owning and operating a mobile and Internet-based marketplace in China. TOM Eachnet is jointly controlled and owned by the Company and eBay with each owing 51% and 49% interest respectively.

eBay provided an initial funding of US$40,000,000 cash to TOM Eachnet and the Company will provide a shareholder's loan in the amount of US$20,000,000, bearing interest at 1.3% over London Inter-Bank Offered Rate("LIBOR"), to TOM Eachnet when the remaining cash balance of TOM Eachnet is only enough to finance no more than six months of its operation. If the funding from eBay and the shareholder's loan from the Company have been fully utilized, additional funding in the form of shareholders' loans of not exceeding US$10,000,000 will be provided by the Company and eBay in equal proportions if additional funding is required by TOM Eachnet and as mutually agreed by eBay and the Company. In addition, eBay injected its subsidiary engaging in the business of operating an online auction and marketplace site in China to TOM Eachnet while the Company contributes its expertise in the Internet and mobile industries in China and its leadership and management services to TOM Eachnet.

The Company accounts for this joint venture using the equity method of accounting since February 1, 2007. As of June 30, 2007, the Company had a negative investment in TOM Eachnet of US$6,426,000, representing its investment cost of US$527,000, being contribution of services to TOM Eachnet by the Company, less the Company's share of TOM Eachnet's losses for the five months ended June 30, 2007 of US$6,877,000 and currency translation adjustment of US$76,000. As the Company has a commitment to fund TOM Eachnet as disclosed above, such amount is classified as current liability in the consolidated balance sheet.

2. Discontinued operations

In December 2006, the Company committed to a plan which was approved by the Company's Board of Directors on December 29, 2006 to sell substantially all its equity interests in Indiagames in order to focus on the China market and initiated actions to locate a buyer. As a result, the assets and liabilities of Indiagames were classified as held for sale and presented separately in the asset and liability sections, respectively, of the audited consolidated balance sheet as at December 31, 2006 and the unaudited consolidated balance sheet as at June 30, 2007. The results of its operation were also separately presented on the face of the unaudited consolidated statements of operations under "Discontinued Operations" for the three months and six months ended June 30, 2006 and 2007. On March 5, 2007, the Company signed a binding term sheet with a potential buyer of the disposal of Indiagames and the definitive agreement was still under preparation as at June 30, 2007. The Company expects the disposal will be completed in the second half of 2007.

The major classes of assets and liabilities classified as held for sale were as follows:

Audited Unaudited

December 31, June 30, 2007

2006

(in thousands of U.S. dollars)

Cash and cash equivalents 373 717

Short-term bank deposits 2,592 1,184

Accounts receivable, net 2,067 1,593

Other current assets 1,856 2,654

Goodwill, net 4,754 5,493

Other non-current assets 550 1,140

Assets held for sale 12,192 12,781

Accounts payable 104 221

Other payable and accruals 1,027 1,436

Liabilities held for sale 1,131 1,657

Minority shareholders’ interest in Indiagames amounting to US$2,324,000 and US$2,078,000 were reported separately in the Group’s audited/unaudited consolidated balance sheets as at December 31, 2006 and June 30, 2007 respectively.

The unaudited results and cash flow information for Indiagames during the three months and six months ended June 30, 2006 and 2007 were as follows:

Three months ended Six months ended

June 30, June 30,

2006 2007 2006 2007

(in thousands of U.S. dollars)

Revenues 672 736 1,752 1,286

Operating expenses (1,115) (1,151) (2,416) (2,352)

Operating loss (443) (415) (664) (1,066)

Other income/(losses) 53 (20) 98 (20)

Loss before tax (390) (435) (566) (1,086)

Income tax credit/(expenses) 9 (44) 75 --

Loss after tax (381) (479) (491) (1,086)

Minority interest 139 180 154 407

Loss from discontinued

operations (242) (299) (337) (679)

Six months ended

June 30,

2006 2007

(in thousands of U.S. dollars)

Net cash provided by/(used in) operating

activities 361 (1,223)

Net cash (used in)/provided by investing

activities (1,287) 1,541

Net cash provided by financing

activities -- --

Net (decrease)/increase in cash and cash

equivalents (926) 318

Cash and cash equivalents, beginning of

period 1,135 373

Foreign currency translation (54) 26

Cash and cash equivalents, end

of period 155 717

3. Provision for goodwill impairment

In May 2007, China Mobile began the operational practice of displaying a service fee reminder to WAP service users when they request the download of a WAP page onto their mobile handsets and seeking their confirmation before processing the download request. In addition, China Mobile started to place links to only its own WVAS offerings on the embedded menus of mobile handsets with customized software for China Mobile users. In the past, such embedded menus on handsets featured links to all popular products on China Mobile's networks, including the products of the Group. The Company believes the above changes by China Mobile could have an adverse impact on the Company's WVAS business, in particular WAP business.

In view of the potential adverse impact of the above and the uncertainties in future operating environment, the Company tested the carrying value of goodwill for impairment as at June 30, 2007 and recorded an impairment charge of US$6,819,000 for the three months ended June 30, 2007 relating to goodwill of the Company's wireless Internet business. The valuation was arrived at after using a combination of a market value approach (with comparisons to selected publicly traded companies operating in the same industry) and an income approach (discounted cash flows). Any continued adverse changes in mobile operators' policies or in the competitive environment could lead to additional impairment charges and the Company is continually monitoring such changes to assess its impact on the Group.

4. Earnings/(Losses) per share

(a) Basic earnings/(losses) per share

The calculation of basic losses per share for the three months and

six months ended June 30, 2007 is based on:

-- the unaudited consolidated loss from continuing operations, loss

from discontinued operations and net loss attributable to

shareholders of US$9,264,000, US$299,000 and US$9,563,000

respectively for the three months ended June 30, 2007 (2006:

US$11,993,000 of unaudited consolidated income from continuing

operations, US$242,000 of loss from discontinued operations, and

US$11,751,000 of net income attributable to shareholders,

respectively);

-- the unaudited consolidated loss from continuing operations, loss

from discontinued operations and net loss attributable to

shareholders of US$8,739,000, US$679,000 and US$9,418,000

respectively for the six months ended June 30, 2007 (2006:

US$24,223,000 of unaudited consolidated income from continuing

operations, US$337,000 of loss from discontinued operations, and

US$23,886,000 of net income attributable to shareholders,

respectively);

-- the weighted average number of 4,259,654,528 and 4,259,654,528

(2006: 4,257,675,421 and 4,249,142,166) ordinary shares

outstanding during the periods and 53,245,682 and 53,245,682

(2006: 53,220,943 and 53,114,277) American Depositary Shares

outstanding during the periods.

(b) Diluted earnings/(losses) per share

The calculation of diluted losses per share for the three months

and six months ended June 30, 2007 is based on:

-- the same financial data in 4(a);

-- the weighted average number of 4,259,654,528 and 4,259,654,528

(2006: 4,317,457,860 and 4,304,992,421) ordinary shares, after

adjusting for the effects of all dilutive potential shares

during the periods and 53,245,682 and 53,245,682 (2006:

53,968,223 and 53,812,405) American Depositary Shares

outstanding during the periods.

For the three months and six months ended June 30, 2007, stock options outstanding were excluded from the computation of diluted losses per share because the Group incurred losses for the three months and six months ended June 30, 2007 making such options anti dilutive.

Source: TOM Online Inc.,
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