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(Exact name of Registrant as specified in its charter)
N/A
(Translation of Registrant’s name into English)
Cayman Islands
(Jurisdiction of incorporation or organization)
17/F, Sky Plaza
No. 46 Dongzhimenwai Street
Dongcheng District
100027, Beijing
People’s Republic of China
(Address of principal executive offices)
Conor Chiahung Yang
AirMedia Group Inc.
17/F, Sky Plaza
No. 46 Dongzhimenwai Street
Dongcheng District
100027, Beijing
People’s Republic of China
Phone: +86 10 8438 6868
Email: conor@airmedia.net.cn
(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)
Securities registered or to be registered pursuant to Section 12(b) of the Act:
Title of each class
Name of exchange on which each class is to be registered
American Depositary Shares, each
representing two ordinary shares,
par value $0.001 per share
Nasdaq Global Market
Securities registered or to be registered pursuant to Section 12(g) of the Act:
None
(Title of Class)
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:
None
(Title of Class)
Indicate the number of outstanding shares of each of the Issuer’s classes of capital or common
stock as of the close of the period covered by the annual report. 134,425,925 ordinary shares, par
value US$0.001 per share, as of December 31, 2008.
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule
405 of the Securities Act. Yes o No þ
If this report is an annual or transition report, indicate by check mark if the registrant is
not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934. Yes o No þ
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated
filer” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o Accelerated filer þ Non-accelerated filer o
Indicate by check mark which basis of accounting the registrant has used to prepare the
financial statements included in this filing:
U.S. GAAP þ International Financial Reporting Standards as issued by the International
Accounting Standards Board o Other o
If “Other” has been checked in response to the previous question, indicate by check mark which
financial statement item the registrant has elected to follow. Item 17 o Item 18 o
If this is an annual report, indicate by check mark whether the registrant is a shell company
(as defined in Rule 12b-2 of the Exchange Act). Yes o No þ
(APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE YEARS)
Indicate by check mark whether the registrant has filed all documents and reports required to
be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the
distribution of securities under a plan confirmed by a court. Yes o No o
Unless otherwise indicated and except where the context otherwise requires, references in this
annual report on Form 20-F to:
•
“ADSs” are to our American depositary shares, each of which represents two ordinary shares;
•
“CAAC” are to the General Administration of Civil Aviation of China, a PRC
governmental agency; the largest airports in China are measured by the number of air passengers in the 2007 Airport Data Report of
CAAC and the largest airlines in China are measured by the number of air passengers in
China Civil Aviation, a journal sponsored by the CAAC;
•
“China” or the “PRC” are to the People’s Republic of China, excluding, for the
purpose of this annual report only, Hong Kong, Macau and Taiwan;
•
“Nasdaq” are to the Nasdaq Global Market;
•
“ordinary shares” are to our ordinary shares, par value US$0.001 per share;
•
“preferred shares” are to our Series A redeemable convertible preferred shares and
Series B redeemable convertible preferred shares, all of which were converted into our
ordinary shares upon the completion of our initial public offering on November 13,2007;
•
“RMB” and “Renminbi” are to the legal currency of China; and
•
“US$,”“U.S. dollars,”“$,” and “dollars” are to the legal currency of the United
States.
Unless the context indicates otherwise, “we,”“us,”“our company,”“our,” and “AirMedia” refer
to AirMedia Group Inc., its subsidiaries and consolidated variable interest entities and their
subsidiaries. Although AirMedia does not directly or indirectly own any equity interests in its
consolidated variable interest entities or their subsidiaries, AirMedia effectively controls, and
is the primary beneficiary of these entities, through a series of contractual arrangements with
them and their record owners. We have consolidated the financial results of these variable interest
entities and their subsidiaries in our consolidated financial statements in accordance with the
Generally Accepted Accounting Principles of the U.S. See “Item 4. Information on the Company—C.
Organizational Structure,”“Item 7. Major Shareholders and Related Party Transactions—B. Related
Party Transactions” and “Item 3. Key Information—D. Risk Factors” for further information on our
contractual arrangements with these parties.
FORWARD-LOOKING STATEMENTS
This annual report on Form 20-F contains forward-looking statements that involve risks and
uncertainties. All statements other than statements of historical facts are forward-looking
statements. These statements involve known and unknown risks, uncertainties and other factors that
may cause our actual results, performance or achievements to be materially different from those
expressed or implied by the forward-looking statements.
You can identify these forward-looking statements by words or phrases such as “may,”“will,”“expect,”“anticipate,”“aim,”“estimate,”“intend,”“plan,”“believe,”“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:
•
our anticipated growth strategies;
•
our future business development, results of operations and financial condition;
•
our plans to expand our air travel advertising network into additional locations,
airports and airlines;
competition in the advertising industry and the air travel advertising industry in
China;
•
the expected growth in consumer spending, average income levels and advertising
spending levels;
•
the growth of the air travel sector in China; and
•
PRC governmental policies relating to the advertising industry.
You should thoroughly read this annual report and the documents to which we refer with the
understanding that our actual future results may be materially different from and worse than our
expectations. We qualify all of our forward-looking statements with these cautionary statements.
Other sections of this annual report include additional factors that could adversely affect our
business and financial performance.
This annual report contains statistical data that we obtained from various government and
private publications. We have not independently verified the data in these reports. Statistical
data in these publications also include projections based on a number of assumptions. The air
travel industry and the advertising industry in China, particularly the out-of-home and air travel
advertising sectors, may not grow at the projected rates or at all. The failure of the air travel
industry and the advertising industry to grow at the projected rates may have a material adverse
effect on our business and the market price of our ADSs. Furthermore, if any one or more of the
assumptions underlying the statistical data turns out to be incorrect, actual results may differ
from the projections based on these assumptions. You should not place undue reliance on these
forward-looking statements. In particular, this annual report contains statistical data from an
August 2007 report of Sinomonitor commissioned by us, or the Sinomonitor report. The calculation of
digital TV screens in the Sinomonitor report does not include digital TV screens in VIP lounges for
logistical reasons.
You should not rely upon forward-looking statements as predictions of future events. We
undertake no obligation to update or revise any forward-looking statements, whether as a result of
new information, future events or otherwise.
PART I
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
Not Applicable.
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE
Not Applicable.
ITEM 3. KEY INFORMATION
A.
Selected Financial Data
Selected Consolidated Financial Data
The following table represents our selected consolidated financial information. The selected
consolidated statement of operations data for the period from August 7, 2005, the date we commenced
operations, to December 31, 2005 and the years ended December 31, 2006, 2007 and 2008 and the
consolidated balance sheet data as of December 31, 2005, 2006, 2007 and 2008 have been derived from
our audited consolidated financial statements for the relevant periods which have been audited by
Deloitte Touche Tohmatsu CPA Ltd., an independent registered public accounting firm, and are
prepared and presented in accordance with U.S. GAAP. The audited consolidated financial statements
for the years ended December 31, 2006, 2007 and 2008 are included elsewhere in this annual report.
The selected consolidated financial data should be read in conjunction with, and are qualified in
their entirety by reference to, our consolidated financial
statements and related notes included elsewhere in this annual report and “Item 5. Operating
and Financial Review and Prospects” below. Our historical results do not necessarily indicate
results expected for any future periods.
Net cash provided by (used in) operating
activities
US$
(3,277
)
US$
2,020
US$
(6,510
)
US$
3,586
Net cash used in investing activities
(762
)
(5,346
)
(15,673
)
(56,692
)
Net cash provided by financing activities
6,984
2,285
229,989
789
Exchange Rate Information
Our reporting and financial statements are expressed in the U.S. dollar, which is our
reporting and functional currency. However, substantially all of the revenues and expenses of our
consolidated operating subsidiaries and variable interest entities are denominated in RMB. This
annual report contains translations of RMB amounts into U.S. dollars at specific rates solely for
the convenience of the reader. The conversion of RMB into U.S. dollars in this annual report is
based on the noon buying rate in The City of New York for cable transfers of RMB as certified for
customs purposes by the Federal Reserve Bank of New York. Unless otherwise noted, all translations
from RMB to U.S. dollars and from U.S. dollars to RMB in this annual report were made at a rate of
RMB6.8225 to US$1.00, the noon buying rate in effect as of December 31, 2008. 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, the rates stated below, or at all.
The Chinese government imposes control over its foreign currency reserves in part through direct
regulation of the conversion of RMB into foreign exchange. See “Item 3. Key Information—D. Risk
Factors—Risks Related to Doing Business in China—Fluctuations in the value of the Renminbi may
have a material adverse effect on your investment” and “—Restrictions on currency exchange may
limit our ability to receive and use our revenues or financing
effectively” for discussions of the effects of fluctuating exchange rates and currency control
on the value of our ADSs. On April 24, 2009, the noon buying rate was RMB6.8250 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. These rates are provided solely for your convenience and are
not necessarily the exchange rates that we used in this annual report or will use in the
preparation of our periodic reports or any other information to be provided to you. The source of
these rates is the Federal Reserve Bank of New York.
Annual averages are calculated from month-end rates. Monthly averages are calculated using the
average of the daily rates during the relevant period.
B.
Capitalization and Indebtedness
Not Applicable.
C.
Reasons for the Offer and Use of Proceeds
Not Applicable.
D.
Risk Factors
Risks Related to Our Business
Our limited operating history may not provide an adequate basis to evaluate our future
prospects and results of operations.
We began our business operations in August 2005. Our limited operating history may not provide
a meaningful basis for you to evaluate our business, financial performance and prospects. It is
also difficult to evaluate the viability of our air travel advertising network because we do not
have sufficient experience to address the risks frequently encountered by early stage companies
using new forms of advertising media and entering new and rapidly evolving markets. Certain members
of our senior management team have worked together for only a relatively short period of time and
it may be difficult for you to evaluate their effectiveness, on an individual or collective basis,
and ability to address future challenges to our business.
Given our limited operating history, we may not be able to:
•
preserve our market position in the air travel advertising market in China;
•
manage our relationships with airports and airlines to retain existing
concession rights contracts and obtain new concession rights contracts to operate
digital and other media platforms in leading airports and on airlines on
commercially advantageous terms or at all;
•
retain and acquire advertising clients;
•
manage our relationships with third-party non-advertising content providers;
secure a sufficient amount of low-cost digital frames and digital TV screens
from our suppliers;
•
manage our expanding operations, including the integration of any past and
future acquisitions;
•
increase and diversify our revenue sources by successfully expanding into other
advertising media platforms, including traditional media platforms in leading
airports;
•
respond to competitive market conditions;
•
respond to changes in the PRC regulatory regime;
•
maintain adequate control of our costs and expenses; or
•
attract, train, motivate and retain qualified personnel.
If we are unsuccessful in addressing any of these risks, our business may be materially and
adversely affected.
If advertisers or the viewing public do not accept, or lose interest in, our air travel
advertising network, we may be unable to generate sufficient cash flow from our operating
activities and our prospects and results of operations could be negatively affected.
The market for air travel advertising network in China is relatively new and its potential is
uncertain. We compete for advertising spending with many forms of more established advertising
media, such as television, print media, Internet and other types of out-of-home advertising. Our
success depends on the acceptance of our air travel advertising network by advertising clients and
agencies and their continuing and increased interest in this medium as a component of their
advertising strategies. Our success also depends on the viewing public continuing to be receptive
towards our media network. Advertisers may elect not to use our services if they believe that
consumers are not receptive to our network or that our network does not provide sufficient value as
an effective advertising medium. Likewise, if consumers find some element of our network to be
disruptive or intrusive, airports and airplane companies may decide not to allow us to operate our
air travel advertising network in airports or place our programs on airplanes and advertisers may
view our network as a less attractive advertising medium compared to other alternatives. In that
event, advertisers may determine to reduce their spending on our network and air travel
advertising.
Air travel advertising is a relatively new concept in China and in the advertising industry
generally. If we are not able to adequately track air traveler responses to our programs, in
particular tracking the demographics of air travelers most receptive to air travel advertising, we
will not be able to provide sufficient feedback and data to existing and potential advertising
clients to help us generate demand and determine pricing. Without improved market research,
advertising clients may reduce their use of air travel advertising and instead turn to more
traditional forms of advertising that have more established and proven methods of tracking
effectiveness.
If a substantial number of advertisers lose interest in advertising on our media network for
these or other reasons or become unwilling to purchase advertising time slots on our network, we
will be unable to generate sufficient revenues and cash flow to operate our business, and our
revenues, prospects and results of operations could be negatively affected.
The recent global economic and financial market crisis has had and may continue to have a
negative effect on the market price of our ADSs, and could have a material adverse effect on
our business, financial condition, results of operations and cash flow.
The recent global economic and financial market crisis has caused, among other things, a
general tightening in the credit markets, lower levels of liquidity, increases in the rates of
default and bankruptcy, lower consumer and business spending, and lower consumer net worth, in the
United States and other parts of the world. This global economic and financial market crisis has
had, and may continue to have, a negative effect on the market price of our ADSs, the volatility of
which has increased as a result of the disruptions in the financial
markets. It may also impair our
ability to raise funds through capital market transactions or enter into other financial
arrangements if and when additional funds become necessary for our operations. We believe many of
our advertisers have also been affected by the current economic turmoil. Current or potential
advertisers may no longer be in business, may be unable to fund advertising purchases or determine
to reduce purchases, all of which would lead to reduced demand for our advertising services,
reduced gross margins, and increased delays of payments of accounts receivable or defaults of
payments. We are also limited in our ability to reduce costs to offset the results of a prolonged
or severe economic downturn given our fixed concession fee costs associated with our operations.
Therefore, the global economic and financial market crisis could have a material adverse effect on
our business, financial condition, results of operations and cash flow. In addition, the timing and
nature of any recovery in the economic and financial markets remains uncertain, and there can be no
assurance that market conditions will improve in the near future or that our results will not
continue to be materially and adversely affected.
We derive substantially all of our revenues from the provision of air travel advertising
services. Recent slowdown in the air travel advertising industry in China may materially and
adversely affect our revenues and results of operations.
Substantially all of our historical revenues and expected future revenues have been and will
be generated from the provision of air travel advertising services, in particular through the
display of advertisements on digital frames located in airports and digital TV screens located in
airports and on airplanes. Our other types of advertising media platforms, such as billboards and
painted advertisement on gate bridges, light box displays and shuttle bus displays are also located
in or near airports. We plan to expand into additional media platforms with a focus on increasing
our market share in traditional media in the air travel sector. As the air travel advertising
industry in China has been adversely affected by the recent economic slowdown, our revenues and
results of operations could be materially and adversely affected.
If we are unable to carry out our operations as specified in existing concession rights
contracts, retain existing concession rights contracts or obtain new concession rights
contracts on commercially advantageous terms, we may be unable to maintain or expand our
network coverage and our costs may increase significantly in the future.
Our ability to generate revenues from advertising sales depends largely upon our ability to
provide a large air travel advertising network to display our clients’ advertisements. This, in
turn, requires that we retain existing concession rights contracts and obtain new concession rights
contracts to operate in airports and on airlines.
As of March 1, 2009, we had concession rights to place and operate our digital frames in 26
airports and digital TV screens in 51 airports and to place our programs on the digital TV screens
of 10 airlines. As of March 1, 2009, we operated at 22 airports out of the 26 airports and 41 out
of the 51 airports where we had obtained contractual concession rights to operate our digital
frames and digital TV screens, respectively. As of March 1, 2009, we had concession rights to place
advertisements on gate bridges located in 10 major airports. We may roll out our operations of
digital frames in the additional four airports and our operations of digital TV screens in the
additional 10 airports where we have concession rights in the future. However, we cannot assure you
that we will be able to carry out our operations in these airports as specified in the concession
rights contracts.
A majority of our concession rights contracts to operate in airports and on airlines have
terms ranging from three to five years without any automatic renewal provisions. As of December 31,2008, 43 out of 104 and 9 out of 13 of our concession rights contracts to operate in airports and
on airlines, respectively, would be
subject to renewal by the end of 2010. The concession fees that we incur under our concession
rights contracts comprise a significant portion of our cost of revenues and accounted for
approximately 37.7%, 28.8% and 38.3% of our net revenues in 2006, 2007 and 2008, respectively. As
of March 31, 2009, we were contractually obligated to pay in aggregate US$315.7 million under our
concession rights contracts through the year 2015. Airports and airlines tend to increase
concession fees over time. As some of our concession rights contracts will terminate in the next
several years, we may experience a significant increase in our costs of revenues. If we are unable
to pass increased concession costs on to our advertising clients through rate increases, our
operating margins and earnings could decrease and our results of operations could be materially and
adversely affected.
Furthermore, as of December 31, 2008, 57 out of 104 and 11 out of 13 of our concession rights
contracts to operate in airports and on airlines, respectively, contained provisions granting us
certain exclusive
concession rights. The scope of the exclusivity, however, varies from contract to
contract. Most of these exclusivity provisions limit the scope of our exclusivity to the operation
of digital frames and digital TV screens in specific areas of an airport or to certain types of
programs on airplanes. We cannot assure you that we will be able to retain these contracts, with or
without exclusivity provisions, upon their expiration. If we were to lose exclusivity, in
particular with the major airports and leading airlines, we may lose market share if our customers
decide to place their advertisements on any competing digital frames or digital TV screens or
otherwise decrease their spending on our network. Furthermore, certain concession rights contracts
contain provisions allowing the airports to terminate the contracts unilaterally without any
compensation due to governmental policy reasons or the restructuring or reorganization of the
airports. We cannot assure you that our concession rights contracts will not be terminated, whether
with or without justification. In addition, most of our concession rights contracts were entered
into with the advertising companies operated by or advertising agencies hired by airports or
airline companies, and not with the airports or airline companies directly. Although these
advertising companies and agents have generally assured us in writing that they have the rights to
operate advertising media in airports or on airplanes and all of them have performed their
contractual obligations, we cannot assure you that airports or airline companies will not challenge
or revoke the contractual concession rights granted to us by their advertising companies or agents.
If any airport or airline company challenges or revokes the concession rights granted to us under
the relevant contracts, our business could be materially and adversely affected.
We plan to renew our existing concession rights contracts and enter into new concession rights
contracts for operating our air travel advertising network in airports and on airlines. There is no
assurance that we will be able to retain our concession rights contracts or obtain new concession
rights contracts for our digital frames and digital TV screens or programs on exclusive or
commercially viable terms, or at all. If we fail to retain our concession rights contracts to
operate in major airports or on key airlines, or retain exclusivity, if a significant number of our
existing concession rights contracts are terminated or not renewed, or if we are unable to
effectively expand our network by obtaining new concession rights contracts, advertisers may find
advertising on our network unattractive and may not wish to purchase advertising time slots on our
network, which would cause our revenues to decline and our business and prospects to deteriorate.
A significant portion of our revenues has been derived from the five largest airports and
three largest airlines in China. If any of these airports or airlines experiences a material
business disruption, we would likely incur substantial losses of revenues.
We derived 55.8% of our total revenues in 2008 from the five largest airports in China:
Beijing Capital International Airport, Guangzhou Baiyun International Airport, Shanghai Pudong
International Airport, Shanghai Hongqiao Airport and Shenzhen International Airport. A material
business disruption, major construction or renovation, or a natural disaster affecting any of these
airports in our network could render our advertising media in such airport inoperative or
materially limit the locations where we can place our digital frames, digital TV screens and other
air travel advertising media.
In addition, we derived 12.8% of our advertising revenues in 2008 from the three largest
domestic airlines in China: China Southern Airlines, China Eastern Airlines and Air China. If any
of these airlines loses market share and we are not able to add other airlines or increase the
revenues generated from existing airlines in our network, our advertising clients may decide to
spend less on our advertising network.
We expect these five airports and three airlines to continue to contribute a significant
portion of our revenues in the foreseeable future. If there were a material business disruption in
any of these airports or airlines, we would likely incur substantial losses of revenues.
We depend on third-party program producers to provide the non-advertising content that we
include in our programs. Failure to obtain high-quality content on commercially reasonable
terms could materially reduce the attractiveness of our network, harm our reputation and
cause our revenues to decline.
The programs on the majority of our digital TV screens include a mix of
advertising and non-advertising content. Substantially all of the non-advertising content
played over our network is provided by third-party content providers
such as China International TV Corporation and various local
television stations and television production companies.
There is no assurance that we will be able to renew these contracts or obtain non-advertising
content on satisfactory terms, or at all. In addition, some of the third-party content providers
that currently do not charge us for their content may do so in the future. To make our programs
more attractive, we must continue to secure contracts with these and other third-party content
providers. If we fail to obtain a sufficient amount of high-quality content on a cost-effective
basis, advertisers may find advertising on our network unattractive and may not wish to purchase
advertising time slots on our network, which would materially and adversely affect our ability to
generate revenues from our advertising time slots and cause our revenues to decline and our
business and prospects to deteriorate.
If we are unable to attract advertisers to purchase advertising time on our network, we will
be unable to maintain or increase our advertising fees, which could negatively affect our
ability to grow our profits.
The fees we charge advertising clients and agencies for advertisements on our network depend
on the size and quality of our network and the demand by advertisers for advertising time on our
network. We believe advertisers choose to advertise on our network in part based on the size of our
network, the desirability of the locations where we have placed our digital frames and digital TV
screens and the attractiveness of our network content. If we fail to maintain or increase the
number of our displays, solidify our brand name and reputation as a quality air travel advertising
provider, or obtain high-quality non-advertising content at commercially reasonable prices,
advertisers may be unwilling to purchase time on our network or to pay the levels of advertising
fees we require to grow our profits.
We have incurred net losses in the past and may incur losses in the future.
For the period from August 7, 2005, the date we commenced operations, to December 31, 2005, we
incurred a net loss of US$2.4 million. We incurred a net loss of US$5.1 million for the year ended
December 31, 2007. We pay concession fees to airports for placing and operating our digital
displays and to airlines for placing our programs on their digital TV screens. These fees
constitute a significant portion of our cost of revenues and accounted for approximately 37.7%,
28.8% and 38.3% of our net revenues in the years ended December 31, 2006, 2007 and 2008, respectively.
Most of the concession fees are fixed under the concession rights contracts with an
escalation clause and payments are usually due three or six months in advance. However, our
revenues may fluctuate significantly from period to period for various reasons. If our revenues
decrease in a given period, we may be unable to reduce our cost of revenues as a significant
portion of our cost of revenues is fixed, which could materially and adversely affect our results
of operations and result in a net loss in the period.
When our current advertising network of digital frames and digital TV screens reaches
saturation in the major airports and airlines where we operate, we may be unable to offer
additional time slots to satisfy all of our advertisers’ needs, which could hamper our
ability to generate higher levels of revenues and profitability over time.
When our network of digital frames and digital TV screens reaches saturation in any particular
airport or airline, we may be unable to offer additional advertising time slots to satisfy all of
our advertisers’
needs. We would need to increase our advertising rates for advertising in such airports or
airlines in order to increase our revenues. However, advertisers may be unwilling to accept rate
increases, which could hamper our ability to generate higher levels of revenues over time. In
particular, the utilization rates of our advertising time slots in the five largest airports and on
the three largest airlines are higher than those in other network airports or airlines and
saturation of digital frames and digital TV screens in these airports or airlines could have a
material adverse effect on our growth prospects.
Our strategy of expanding our air travel advertising network by building new media platforms
and expanding into traditional media may not succeed, and our failure to do so could
materially reduce the attractiveness of our network and harm our business, reputation and
results of operations.
In 2008, our air travel advertising network primarily consisted of standard digital frames and
digital TV screens. Our growth strategy includes broadening our service offerings by continuing to
increase our digital media network coverage and expanding into traditional media to become a
comprehensive air travel advertising provider in China.
In particular, we have significantly expanded our digital frame platform by upgrading our
light box displays to digital frames and installing new digital frames. As of March 1, 2009, we
operated 2,428 digital frames in 22 airports. We intend to significantly increase the number of our
digital frames in the near future. We could incur significant costs in installing new digital
frames or in upgrading our light box displays to digital frame displays.
In addition, our growth strategy includes expanding into the traditional air travel
advertising market to provide a broader range of advertising opportunities to our clients and to
become a one-stop provider for air travel advertising. We have taken the initial steps by expanding
our air travel advertising network to cover the advertising business on gate bridges in airports
and diversifying our media resources to include billboards and painted advertisements. In March
2009, we obtained the contractual concession rights to operate various traditional advertising
media including billboards, light boxes and other formats in Beijing Capital International Airport
and light boxes in Shenzhen International Airport.
The majority of our concession rights contracts containing exclusive concession rights only
grant us exclusivity with respect to digital frames and digital TV screens. By entering and
expanding into traditional advertising media platforms, we may face competition from other
companies that are already in these areas. We also have limited experience working in these areas.
It is uncertain how these businesses will perform, and there is the risk that they may not succeed
at all. Our failure to expand our air travel advertising network to introduce new platforms and
into new areas could materially reduce the attractiveness of our network and harm our business,
reputation and results of operations.
If advertising registration certificates are not obtained for our airport advertising
operations where such registration certificates are deemed to be required, we may be subject
to administrative sanctions, including the discontinuation of our advertisements at airports
where the required advertising registration is not obtained.
On May 22, 2006, the State Administration for Industry and Commerce, or the SAIC, amended the
Provisions on the Registration Administration of Outdoor Advertisements, or the new outdoor
advertisement provisions. Pursuant to the new outdoor advertisement provisions, advertisements
placed inside or outside of the “departure halls” of airports are treated as outdoor advertisements
and must be registered in accordance with the local SAIC by “advertising distributors.” However,
the terms “advertising distributors” and “departure halls” are not defined under the new outdoor
advertisement provisions or other PRC laws and regulations.
To ensure that our airport operations comply with the applicable PRC laws and regulations, we
are in the process of making inquiries with the local SAICs in the cities in which we have
operations or intend to operate with respect to the application for an advertising registration
certificate. However, the local SAICs with whom we consulted have expressed different views on
whether the advertisements shown on our digital frames and digital TV screens would be regarded as
outdoor advertisements and how to register those advertisements. As of the date of this annual
report, only Shanghai and Beijing SAICs have accepted our application and issued the outdoor
advertising registration certificates. Some local SAICs need more time to
consider the implementation of the new outdoor advertising provisions. Other SAICs do not
require us to register our advertisements.
We intend to register with the relevant SAICs if we are required to do so, but we cannot
assure you that we will obtain any applicable registration certificates in compliance with the new
outdoor advertisement provisions, or at all. If a required registration is not obtained, the
relevant local SAICs may require us to forfeit our advertising income and may impose administrative
fines of up to RMB30,000 on us. They may also require us to discontinue advertisements at airports
where the required advertising registration is not obtained, which may result in a breach of one or
more of our agreements with our advertising clients and materially and adversely affect our
business and results of operations.
If we fail to obtain approvals for including non-advertising content in our programs, we may
be unable to continue to include such non-advertising content in our programs, which may
cause our revenues to decline and our business and prospects to deteriorate.
A majority of the digital frames and digital TV screens in our network include programs that
consist of both advertising content and non-advertising content. On December 6, 2007, the State
Administration of Radio, Film or Television, or the SARFT, issued the Circular regarding
Strengthening the Management of Public Audio-Video in Automobiles, Buildings and Other Public
Areas, or the SARFT Circular. According to
the SARFT Circular, displaying audio-video programs such
as television news, films and television shows, sports, technology and entertainment through public
audio-video systems located in automobiles, buildings, airports, bus or train stations, shops,
banks and hospitals and other outdoor public systems must be approved by the SARFT.
The relevant authority in China has not promulgated any implementation rules on the procedure
of applying for the requisite approval pursuant to the SARFT Circular. We intend to obtain such
approval for our non-advertising content, but we cannot assure you that we will obtain such
approval in compliance with this new SARFT Circular, or at all. If the requisite approval is not
obtained, we will be required to eliminate non-advertising content from the programs displayed on
our digital frames and digital TV screens and advertisers may find our network less attractive and
be unwilling to purchase advertising time slots on our network, which may cause our revenues to
decline and our business and prospects to deteriorate.
Because we rely on third-party agencies to help source advertising clients, our failure to
retain key third-party agencies or attract additional agencies on favorable terms could
materially and adversely affect our revenue growth.
We engage third-party agencies to help source advertising clients from time to time. We do not
have long-term or exclusive agreements with these agencies, including our key third-party agencies,
and cannot assure you that we will continue to maintain favorable relationships with them. If we
fail to retain key third-party agencies or attract additional agencies, we may not be able to
retain existing advertising clients or attract new advertisers or advertising agency clients and
our business and results of operations could be materially and adversely affected. Furthermore, the
fees that we paid to these third-party agencies constituted a significant portion of our net
revenues in the years ended December 31, 2006, 2007 and 2008—13.2%,17.2% and 15.2%, respectively.
It is important therefore for us to maintain favorable commercial terms with these third-party
agencies.
We have been dependent on a limited number of customers for a significant portion of our
revenues and this dependence may reoccur in the future, which would make us more vulnerable
to the loss of major customers or delays in payments from these customers.
A small number of customers historically accounted for a significant portion of our revenue.
Our top five customers collectively accounted for approximately 27.5%, 25.2% and 21.7% of our total
revenues in the years ended December 31, 2006, 2007 and 2008, respectively. Our largest customers
have changed from year to year primarily as a result of our limited operating history and rapid
growth, broadened customer base and increased sales. No single advertising client accounted for
more than 10% of our total revenues for the years ended December 31, 2006, 2007 and 2008, and we do
not expect to be as dependent on a small number of customers in the future. Given our limited
operating history and the rapid growth of our industry, we cannot assure you that we will not once
again be dependent on a small number of customers in the future.
If we fail to sell our services to one or more of our major customers in any particular
period, or if a large customer purchases less of our services, fails to purchase additional
advertising time on our network or cancels some or all of its purchase orders, our revenues could
decline and our operating results could be adversely affected. In addition, the dependence on a
small number of customers could leave us more vulnerable to delays in payments from these
customers. We are required under certain of our concession rights contracts to make prepayments.
Although we do receive some prepayments from customers, there is typically a lag between the time
of our prepayment of concession fees and the time that we receive payments from our customers. As
our business expands and revenues grow, we have experienced and may continue to experience an
increase in our accounts receivable. Our accounts receivable increased from US$13.5 million as of
December 31, 2007 to US$38.4 million as of December 31, 2008. If our major customers are
significantly delinquent with their payments, our financial conditions and liquidity may be
materially and adversely affected.
If we are unable to adapt to changing advertising trends and the technology needs of
advertisers and consumers, we will not be able to compete effectively and we will be unable
to increase or maintain our revenues, which may materially and adversely affect our business
prospects and revenues.
The market for air travel advertising requires us to continuously identify new advertising
trends and the technological needs of both advertisers and consumers, which may require us to
develop new formats, features and enhancements for our advertising network.
We must be able to quickly and cost-effectively expand into additional advertising media and
platforms beyond digital frames and digital TV screens if advertisers find these other media and
platforms to be more attractive and cost-effective. In addition, as the advertising industry is
highly competitive and fragmented with many advertising agencies exiting and emerging, we must
closely monitor the trends in the advertising agency community. We must maintain strong
relationships with leading advertising agencies to make certain that we are reaching the leading
advertisers and are responsive to the needs of both the advertising agencies and the advertisers.
We currently play advertisements on digital frames through wireless network and on digital TV
screens in our network airports through closed-circuit television systems and we currently play
advertisements on our network airplanes mostly through video tapes. We may be required to incur
development and acquisition costs in order to keep pace with new technology needs but we may not
have the financial resources necessary to fund and implement future technological innovations or to
replace obsolete technology. Furthermore, we may fail to respond to these changing technology
needs. For example, if the use of broadband networking capabilities on our advertising network
becomes a commercially viable alternative, and we fail to implement such changes on our network or
fail to do so in a timely manner, our competitors or future entrants into the market who take
advantage of such initiatives could gain a competitive advantage over us.
If we cannot succeed in defining, developing and introducing new formats, features and
technologies on a timely and cost-effective basis, advertising demand for our advertising network
may decrease and we may not be able to compete effectively or attract advertising clients, which
would have a material and adverse effect on our business prospects and revenues.
We face significant competition in the PRC advertising industry, and if we do not compete
successfully against new and existing competitors, we may lose our market share, and our
profitability may be adversely affected.
We face significant competition in the PRC advertising industry. We compete for advertising
clients primarily on the basis of network size and coverage, location, price, the quality of our
programs, the range of services that we offer and brand recognition. We compete for overall
advertising spending with other alternative advertising media companies, such as Internet, street
furniture, billboard and public transport advertising companies, and with traditional advertising
media, such as newspapers, television, magazines and radio. We also compete for advertising dollars
spent in the air travel advertising industry. While we have a large market share of the digital
frames and digital TV screens located in airports and airplanes, we compete, and will compete, with
other media platforms of advertising, for which we do not have exclusivity, including billboards,
light boxes and print media. In addition, we may also face competition from new entrants into air
travel advertising in the future.
Significant competition could reduce our operating margins and profitability and result in a
loss of market share. Some of our existing and potential competitors may have competitive
advantages, such as significantly greater brand recognition, financial, marketing or other
resources and may be able to mimic and adopt our business model. In addition, several of our
competitors have significantly larger advertising networks than we do, which gives them an ability
to reach a larger number of overall potential consumers and which may make them less susceptible to
downturns in particular sectors, such as air travel. Moreover, significant competition will provide
advertisers with a wider range of media and advertising service alternatives, which could lead to
lower prices and decreased revenues, gross margins and profits. We cannot assure you that we will
be able to successfully compete against new or existing competitors.
Our results of operations are subject to fluctuations in the demand for air travel, which is
affected by, among other things, seasonality, general economic conditions, terrorist
attacks, security measures and plane crashes, and a decrease in the demand for air travel
may make it difficult for us to sell our advertising time slots.
Our results of operations are directly linked to the fortunes of the air travel industry.
Demand for air travel fluctuates significantly from period to period, is subject to seasonality due
to holiday travel and weather conditions, and is particularly susceptible to downturns in the
economy. In addition, among other things, terrorist attacks, or the fear of such attacks,
additional security measures, plane crashes and significant and persistent air travel delays could
lead to a reduction in the growth of the air travel industry in China.
Business travel is one of the primary drivers of the air travel industry. In times of economic
growth, air travel tends to increase. Conversely, in times of economic slowdown, air travel tends
to decrease significantly. In light of the recent economic downturn, overall air passengers in
China have decreased, which may cause advertisers to reduce their spending on our air travel
advertising network.
The terrorist attacks of September 11, 2001 in the U.S. involving commercial aircraft severely
and adversely affected the air travel industry in the U.S. and throughout the world. Any future
terrorist activity involving the air travel industry could have an equal or greater impact. There
have been highly reported attempted acts of terrorism involving aircraft flying out of Heathrow
Airport in London and JFK International Airport in New York. Additional terrorist attacks or fear
of such attacks, even if not made directly on the air travel industry, may negatively affect the
air travel industry and the demand for air travel.
Terrorist attacks have also resulted in significantly increased security costs and associated
passenger inconvenience. Since September 11, 2001, the Transportation Security Administration in
the U.S. has implemented numerous security measures that affect airport and airline operations and
costs, the effects of which may ultimately affect the demand for air travel. Increasingly, China
and other countries in Asia are adopting similarly stringent security measures that may lead some
air travelers to consider other travel options, such as trains, cars and boats, as more convenient
and less intrusive. In addition, these security measures have resulted in higher costs for airports
and airlines, which may result in our having to incur higher concession fees.
In addition, an aircraft crash or other accident could create a public perception that air
travel is not safe or reliable, which could result in air travelers being reluctant to fly.
Significant aircraft delays due to capacity constraints, weather conditions or mechanical problems
could also result in lower demand for air travel, especially for shorter domestic flights.
If the demand for air travel decreases for any of these or other reasons, advertisers may be
reluctant to advertise on our network and we may be unable to fill our advertising time slots and
charge premium prices.
A decrease in demand for our advertising services may materially and adversely affect our
ability to generate revenues, our financial condition and results of operations.
Demand for our advertising services, and the resulting advertising spending by our clients,
may fluctuate due to changes in general economic conditions and advertising spending typically
decreases during periods of economic downturn.
Our clients may reduce the money they spend to advertise on our network for a number of
reasons, including:
•
a general decline in economic conditions;
•
a general decline in the number of air travelers and flights;
•
a decline in economic conditions in the particular cities where our network
airports are located;
•
a decision to shift advertising expenditures to other available advertising
media; and
•
a decline in advertising spending in general.
A decrease in demand for advertising media in general and for our advertising services in
particular would materially and adversely affect our ability to generate revenues from our
advertising services, and our financial condition and results of operations.
If we fail to manage our growth effectively, we may not be able to take advantage of market
opportunities, execute our expansion strategies or meet the demands of our advertising
clients.
We have experienced a period of rapid growth and expansion that has placed, and continues to
place, significant strain on our management personnel, systems and resources. We must continue to
expand our
operations to meet the demands of advertisers for a larger and more diverse network
coverage. To accommodate our growth, we anticipate that we will need to implement a variety of new
and upgraded operational and financial systems, procedures and controls, including the improvement
of our accounting and other internal management systems, all of which require substantial
management efforts.
We will also need to continue to expand, train, manage and motivate our workforce as well as
manage our relationships with airports, airlines and third-party non-advertising content providers.
We must add sales and marketing offices and personnel to service relationships with new airports
that we aim to add as part of our network. As we add new digital frames, digital TV screens and
other media platforms, we will incur greater maintenance costs to maintain our equipment.
All of these endeavors will require substantial managerial efforts and skill, as well as the
incurrence of additional expenditures. We cannot assure you that we will be able to manage our
growth effectively, and we may not be able to take advantage of market opportunities, execute our
expansion strategies or meet the demands of our advertising clients.
Past and future acquisitions may have an adverse effect on our ability to manage our
business.
In July 2008, we acquired the advertising business on gate bridges in several airports by
purchasing 100% of the equity interest in Excel Lead International Limited, or Excel Lead, and 80%
of the equity interest in Flying Dragon Media Advertising Co., Ltd., or Flying Dragon. We may not
be able to effectively integrate the gate bridge advertising business into our operations. We plan
to continue to acquire businesses, technologies, services or products which are complementary to
our core air travel advertising network business. Past and future acquisitions may expose us to
potential risks, including risks associated with:
•
the integration of new operations, services and personnel;
•
unforeseen or hidden liabilities;
•
the diversion of resources from our existing business and technology;
•
our potential inability to generate sufficient revenue to offset new costs;
•
the expenses of acquisitions; or
•
the potential loss of or harm to relationships with both employees and
advertising clients resulting from our integration of new businesses.
Any of the potential risks listed above could have a material and adverse effect on our
ability to manage our business, our revenues and net income.
We may need to raise additional debt funding or sell additional equity securities to make such
acquisitions. The raising of additional debt funding by us, if required, would result in increased
debt service obligations and could result in additional operating and financing covenants, or liens
on our assets, that would restrict our operations. The sale of additional equity securities could
result in additional dilution to our shareholders.
We do not expect to sustain our recent rates of growth in revenue or the numbers of
airlines, airports or digital frames and digital TV screens in our network.
We have experienced significant growth in revenues in recent years. Our net revenues increased
substantially from US$17.9 million in 2006 to US$119.4 million in 2008. Our network was located in
41 airports and on nine airlines as of December 31, 2008, compared to 28 airports and nine airlines
by the end of 2006. The number of digital frames in airports increased from 632 as of December 31,2007 to 2,156 as of December 31, 2008 while the number of digital TV screens operated by us in
airports and on which we place our programs on airplanes increased from 1,562 and 16,015 as of
December 31, 2006, to 2,854 and 49,482 as of December 31, 2008, respectively. We do not expect to
achieve similar rates of growth in revenues or the number of airports, digital frames
or digital TV screens in our network in future periods.
Our quarterly and annual operating results are difficult to predict and may fluctuate significantly
from period to period in the future.
Our quarterly and annual operating results are difficult to predict and may fluctuate
significantly from period to period based on the seasonality of air travel, consumer spending and
corresponding advertising trends in China. In addition, air travel and advertising spending in
China generally tend to increase during the “golden” holiday periods, such as the National Day
weekend in October and the Chinese New Year holiday in January or February, and tend to decrease
during the fourth quarter. Air travel and advertising spending in China is also affected by certain
special events such as the Beijing Olympics in 2008 and related government measures. As a result,
you may not be able to rely on period-to-period comparisons of our operating results as an
indication of our future performance.
We may experience seasonality effects due to the seasonality of air travel and advertising
spending in China. Other factors that may cause our operating results to fluctuate include a
deterioration of economic conditions in China and potential changes to the regulation of the
advertising industry in China, which are discussed elsewhere in this annual report. If our revenues
for a particular quarter are lower than we expect, we may be unable to reduce our operating costs
and expenses for that quarter by a corresponding amount, which would harm our operating results for
that quarter relative to our operating results for other quarters.
Our business depends substantially on the continuing efforts of our senior executives, and
our business may be severely disrupted if we lose their services.
Our future success heavily depends upon the continued services of our senior executives and
other key employees. In particular, we rely on the expertise and experience of our chief executive
officer, Herman Man Guo, our president, Xiaoya Zhang, our chief operating officer, James Zhonghua
Feng, our chief financial officer, Conor Chiahung Yang and our executive president, Ken Zijian
Zeng. We rely on their industry expertise, their experience in our business operations and sales
and marketing, and their working relationships with our advertising clients, airports and airlines,
and relevant government authorities.
If one or more of our senior executives were unable or unwilling to continue in their present
positions, we might not be able to replace them easily or at all. If any of our senior executives
joins a competitor or forms a competing company, we may lose clients, suppliers, key professionals
and staff members. Each of our executive officers has entered into an employment agreement with us,
which contains non-competition provisions. However, if any dispute arises between our executive
officers and us, we cannot assure you the extent to which any of these agreements could be enforced
in China, where these executive officers reside, in light of the uncertainties with China’s legal
system. See “—Risks Related to Doing Business in China—Uncertainties with respect to the PRC
legal system could limit the legal protections available to us or result in substantial costs and
the diversion of resources and management attention.”
Failure to maintain an effective system of internal control over financial reporting could
have a material and adverse effect on the trading price of our ADSs.
We are subject to reporting obligations under the U.S. securities law. The Securities and
Exchange Commission, or the SEC, as required by Section 404 of the Sarbanes-Oxley Act of 2002, or
the Sarbanes-Oxley Act, adopted rules requiring every public company to include a management report
on such company’s internal control over financial reporting in its annual report, which must also
contain management’s assessment of the effectiveness of the company’s internal control over
financial reporting. In addition, an independent registered public accounting firm must attest to
the effectiveness of the company’s internal control over financial reporting. These requirements
first applied to our annual report on Form 20-F for this fiscal year ended December 31, 2008.
Our management has concluded that our internal control over financial reporting was effective
as of December 31, 2008. Our independent registered public accounting firm has issued an audit
report, which is included elsewhere in this annual report and has concluded that we maintained, in
all material aspects, effective internal control over financial reporting as of December 31, 2008.
However, if we fail to maintain effective internal control over financial reporting in the future,
our management and our independent registered public accounting firm may not be able to conclude
that we have effective internal control over financial reporting at a reasonable assurance level.
This could negatively affect the reliability of our financial information and result in the loss of
investors’ confidence in our reported financial information, which in turn could negatively impact
the trading price of our ADSs, result in lawsuits being filed against us by our shareholders or otherwise harm our
reputation. Furthermore, we have incurred and anticipate that we will continue to incur
considerable costs and use significant management time and other resources in an effort to comply
with Section 404 and other requirements of the Sarbanes-Oxley Act.
We may need additional capital, which, if obtained, could result in dilution or significant
debt service obligations. We may not be able to obtain additional capital on commercially
reasonable terms, which could adversely affect our liquidity and financial position.
We may require additional cash resources due to changed business conditions or other future
developments. If our current sources are insufficient to satisfy our cash requirements, we may
seek to sell additional equity or debt securities or obtain a credit facility. The sale of
convertible debt securities or additional equity securities could result in additional dilution to
our shareholders. The incurrence of indebtedness would result in increased debt service obligations
and could result in operating and financing covenants that would restrict our operations and
liquidity.
In addition, our ability to obtain additional capital on acceptable terms is subject to a
variety of uncertainties, including:
•
investors’ perception of, and demand for, securities of alternative advertising
media companies;
•
conditions of the U.S. and other capital markets in which we may seek to raise
funds;
•
our future results of operations, financial condition and cash flows;
•
PRC governmental regulation of foreign investment in advertising services
companies in China;
•
economic, political and other conditions in China; and
•
PRC governmental policies relating to foreign currency borrowings.
We cannot assure you that financing will be available in amounts or on terms acceptable to us,
if at all. Any failure to raise additional funds on favorable terms could have a material adverse
effect on our liquidity and financial condition.
We may be subject to, and may expend significant resources in defending against government
actions and civil suits based on the content we provide through our air travel advertising
network.
Civil claims may be filed against us for fraud, defamation, subversion, negligence, copyright
or trademark infringement or other violations due to the nature and content of the information
displayed on our network. If consumers find the content displayed on our network to be offensive,
airports or airlines may seek to hold us responsible for any consumer claims or may terminate their
relationships with us. Offensive and objectionable content and legal standards for defamation and
fraud in China are less defined than in other more developed countries and we may not be able to
properly screen out unlawful content.
In addition, if the security of our content management system is breached and unauthorized
images, text or audio sounds are displayed on our network, viewers or the PRC government may find
these images, text or audio sounds to be offensive, which may subject us to civil liability or
government censure despite our efforts to ensure the security of our content management system. Any
such event may also damage our reputation. If our advertising viewers do not believe our content is
reliable or accurate, our business model may become less appealing to viewers in China and our
advertising clients may be less willing to place advertisements on our network.
We may be subject to intellectual property infringement claims, which may force us to incur
substantial legal expenses and, if determined adversely against us, may materially disrupt
our business.
Our commercial success depends to a large extent on our ability to operate without infringing
the intellectual property rights of third parties. There is no assurance that our displays or
other aspects of our business do not or will not infringe upon patents, copyrights or other intellectual property rights
held by third parties. We may become subject to legal proceedings and claims from time to time
relating to the intellectual property of others in the ordinary course of our business. If we are
found to have violated the intellectual property rights of others, we may be enjoined from using
such intellectual property, and we may incur licensing fees or be forced to develop alternatives.
In addition, we may incur substantial expenses and diversion of management time in defending
against these third-party infringement claims, regardless of their merit. Successful infringement
or licensing claims against us may result in substantial monetary liabilities, which may materially
and adversely disrupt our business.
We have limited insurance coverage in China, and any business disruption or litigation we
experience might result in our incurring substantial costs and the diversion of resources.
The insurance industry in China is still at an early stage of development. Insurance companies
in China offer limited business insurance products and do not, to our knowledge, offer business
liability insurance. While business disruption insurance is available to a limited extent in China,
we have determined that the risks of disruption, cost of such insurance and the difficulties
associated with acquiring such insurance on commercially reasonable terms make it impractical for
us to have such insurance. As a result, except for fire insurance and our liability insurance for
directors and officers, we do not have any business liability, disruption or litigation insurance
coverage for our operations in China. Any business disruption or litigation may result in our
incurring substantial costs and the diversion of resources.
We face risks related to health epidemics, which could materially and adversely affect air
travel and result in reduced demand for our advertising services or disrupt our operations.
Our business could be materially and adversely affected by the effect of a health epidemic or
outbreak on the economic and business climate. Any prolonged recurrence of avian flu, SARS, or
another epidemic or outbreak in China may have a material adverse effect on demand for air travel
in China. For example, the SARS outbreak in 2003 and 2004 alarmed air travelers around both the
region and the world raising issues pertaining to health and travel. During this time period, the
SARS outbreak significantly deterred air travel and had a material and adverse effect on the air
travel industry. From 2005 to 2008, there have also been reports on the occurrence of avian flu in
various parts of China, including a few confirmed human cases and
deaths. More recently, human cases of swine flu virus infection have
been identified internationally.
A
new outbreak of SARS, increased outbreaks of avian flu or swine flu,
or the occurrence of other epidemics may result in health or other
government authorities requiring the closure of our offices or other businesses, including airports
and airline operations which comprise the primary locations where we provide our advertising
services. A health epidemic could result in a significant drop in demand for air travel and
ultimately our advertising services, severely disrupt our business operations and adversely affect
our financial condition and results of operations.
If one or more of our PRC subsidiaries fails to maintain or obtain qualifications to receive
PRC preferential tax treatments, we will be required to pay more taxes, which may have a
material adverse effect on our result of operations.
On March 16, 2007, the PRC National People’s Congress passed the Enterprise Income Tax Law,
or the EIT Law, which imposes an uniform income tax rate of 25% on most domestic enterprises and
foreign investment enterprises. The EIT Law became effective on January 1, 2008. Under the EIT
Law, entities that qualify as “high and new technology enterprises strongly supported by the
state” are entitled to the preferential income tax rate of 15%. A company’s status as a “high and
new technology enterprise strongly supported by the state” is valid for three years, after which
the company must re-apply for such qualification in order to continue to enjoy the preferential
income tax rate. In addition, according to the Administrative Regulations on the Recognition of
High and New Technology Enterprises, the Guidelines for Recognition of High and New Technology
Enterprises and the Notice of Favorable Enterprise Income Tax Policies jointly issued by the PRC
Ministry of Science and Technology, the PRC Ministry of Finance and the PRC State Administration
of Taxation in April 2008, July 2008 and February 2008, respectively, “new software enterprises”
can enjoy an income tax exemption for two years beginning with their first profitable year and a
50% tax reduction to a rate of 12.5% for the subsequent three years.
On December 26, 2007, the PRC State Council issued the Notice of the State Council
Concerning
Implementation of Transitional Rules for Enterprise Income Tax Incentives, or Circular
39. Based on Circular 39, certain enterprises established before March 16, 2007 that were
eligible for tax exemptions or reductions according to the then effective tax laws and
regulations can continue to enjoy such exemption or reduction until
it expires. Furthermore, according to Circular 39, enterprises that were eligible for the preferential
tax rates according to the then effective tax laws and regulations may be eligible for a gradual
rate increase to 25% over the 5-year period beginning from January 1, 2008. Specifically, the
applicable rates under such an arrangement for such enterprises that enjoyed the 15% tax rate
prior to the effectiveness of the new PRC tax law will be 18% in 2008, 20% in 2009, 22% in 2010,
24% in 2011 and 25% in 2012. However, according to the Notice on Prepayment of Enterprise Income
Tax issued by the State Administration of Taxation on January 30, 2008, the gradually increased
rate of Enterprise Income Tax, or EIT, during the transition period is not applicable to entities
that qualified for preferential tax rates as high and new technology enterprises alone and they
would be subject to EIT at 25% from January 2008 if they cannot qualify as high and new
technology enterprises under the EIT Law and regulations.
AirMedia Technology (Beijing) Co., Ltd., or AM Technology, has qualified as a “high and new
technology enterprise” under the former EIT Law and was subject to a 15% preferential EIT. In
addition, AM Technology is registered and operates in the Beijing New Technology Industry
Development Zone. As a result, AM Technology was exempt from EIT from 2006 to 2008, and will be
entitled to a 50% tax reduction from 2009 to 2011 under the former Foreign-Invested Enterprise
Income Tax Law and the relevant implementation rules. AM Technology was recognized as a “high and
new technology enterprise supported by the state” under the new rules in December 2008. As a
result, it is entitled to continue to enjoy a preferential EIT at the rate of 7.5% from 2009 to
2011 and a preferential EIT of 15% thereafter. Xi’an Air Media Chuangyi Technology Co., Ltd, or
Xi’an AM, qualified as a “software enterprise” in August 2008 by the Technology Information
Bureau of Shanxi Province and has received an written approval from Xi’an local tax bureau that
it will be granted a two-year exemption from EIT commencing on its first profitable year and a
50% reduction of the 25% EIT rate for the succeeding three years. Shenzhen AirMedia Information
Technology Co., Ltd., or Shenzhen AM, was subject to a 15% preferential tax EIT rate as it is
located in Shenzhen and is currently subject to EIT on its taxable income at the gradual rate
pursuant to Circular 39. Shenzhen AM submitted its application to be qualified as a “high and new
technology enterprise strongly supported by the State” under the new PRC tax law in March 2009
and if successful, will be eligible for a 15% EIT rate.
There is no assurance that our PRC subsidiaries will be able to maintain or obtain
qualifications to receive the above preferential tax treatments. We will be required to pay more
taxes if they fail to become or continue to be eligible to receive PRC tax benefits, which may
have a material adverse effect on our result of operations.
Dividends payable to us by our wholly-owned operating subsidiaries may be subject to PRC
withholding taxes, or we may be subject to PRC taxation on our worldwide income and
dividends distributed to our investors may be subject to PRC withholding taxes under the new
PRC tax law.
Under the PRC tax laws effective prior to January 1, 2008, dividends paid to foreign investors
by foreign-invested enterprises, such as dividends paid to us by our PRC subsidiaries, were exempt
from PRC withholding tax. Under the EIT Law and its implementation rules, dividends payable by a
foreign-invested enterprise in China to its foreign investors who are non-resident enterprises are
subject to a 10% withholding tax, unless any such foreign investor’s jurisdiction of incorporation
has a tax treaty with China that provides for a different withholding arrangement. The British
Virgin Islands, where our wholly owned subsidiary and the 100% shareholder of Shenzhen AM is
incorporated, does not have such a tax treaty with China. Air Media (China) Limited, the 100%
shareholder of AM Technology, is incorporated in Hong Kong. According to the Mainland and Hong Kong
Special Administrative Region Arrangement on Avoiding Double Taxation or Evasion of Taxation on
Income agreed between China and Hong Kong in August 2006 and the relevant rules, dividends paid by
a foreign-invested enterprise in China to its direct holding company in Hong Kong will be subject
to withholding tax at a rate of 5% (if the foreign investor owns directly at least 25% of the
shares of the foreign-invested enterprise). The EIT Law provides, however, dividends distributed
between qualified resident enterprises will be exempted. As the term “resident enterprises” needs
further clarification and explanation, we cannot assure you that the dividends distributed by
Shenzhen AM, AM Technology and Xi’an AM to their direct shareholders would be regarded as dividends
distributed between qualified resident enterprises, and be exempted from the EIT.
Under the EIT Law, enterprises organized under the laws of jurisdictions outside China with
their “de facto management bodies” located within China may be considered PRC resident enterprises
and therefore be subject to EIT at the rate of 25% on their worldwide income. Under the
implementation rules of the EIT Law, “de facto management bodies” is defined as the bodies that
have material and overall management and control over the business, personnel, accounts and properties of the enterprise. It remains unclear how the PRC
tax authorities will interpret such a broad definition. We believe we are not a PRC resident
enterprise. However, if we were considered a PRC resident enterprise, we would be subject to the
PRC enterprise income tax at the rate of 25% on our worldwide income; dividend income we receive
from the PRC subsidiaries, however, would be exempt from PRC tax since such income to a PRC
resident recipient is exempted under the new EIT Law.
With the newly imposed 10% PRC dividend withholding tax, we will incur an incremental PRC tax
cost when PRC profits are distributed to ultimate shareholders. In addition, if we are determined
to be a PRC resident enterprise under the new PRC tax system and receive income other than
dividends, our profitability and cash flow would be adversely impacted due to our worldwide income
being taxed in China under the new PRC tax law.
Moreover, under the new PRC tax law, foreign ADS holders may be subject to a 10% withholding
tax upon dividends payable by us and gains realized on the sale or other disposition of ADSs or
ordinary shares, if such income is sourced from within the PRC. Although our company is
incorporated in the Cayman Islands, it remains unclear whether the dividends payable by us or the
gains our foreign ADS holders may realize will be regarded as income from sources within the PRC if
we are classified as a PRC resident enterprise. Any such tax on our dividend payments will reduce
the returns of your investment.
Risks Related to Regulation of Our Business and to Our Structure
Compliance with PRC advertising laws and regulations may be difficult and could be costly,
and failure to comply could subject us to government sanctions.
PRC advertising laws and regulations require advertisers, advertising operators and
advertising distributors, including businesses such as ours, to ensure that the content of the
advertisements they prepare or distribute are fair and accurate and are in full compliance with
applicable law. Violation of these laws or regulations may result in penalties, including fines,
confiscation of advertising fees, orders to cease dissemination of the advertisements and orders to
publish an advertisement correcting the misleading information. In circumstances involving serious
violations, the PRC government may revoke a violator’s license for advertising business operations.
As an air travel advertising service provider, we are obligated under PRC laws and regulations
to monitor the advertising content that is shown on our network for compliance with applicable law.
In general, the advertisements shown on our network have previously been broadcast over public
television networks and have been subjected to internal review and verification of such networks.
We are still required to independently review and verify these advertisements for content
compliance before displaying the advertisements. In addition, if a special government review is
required for certain product advertisements before they are shown to the public, we are obligated
to confirm that such review has been performed and approval has been obtained. In addition, for
advertising content related to certain types of products and services, such as food products,
alcohol, cosmetics, pharmaceuticals and medical procedures, we are required to confirm that the
advertisers have obtained requisite government approvals including the advertising client’s
operating qualifications, proof of quality inspection of the advertised products, government
pre-approval of the contents of the advertisement and filing with the local authorities.
We endeavor to comply with such requirements, including by requesting relevant documents from
the advertisers. However, we cannot assure you that each advertisement that an advertiser or
advertising agency client provides to us and which we include in our network programs is in
compliance with relevant PRC advertising laws and regulations or that the supporting documentation
and government approvals provided to us by our advertising clients in connection with certain
advertising content are complete. Although we employ qualified advertising inspectors who are
trained to review advertising content for compliance with relevant PRC laws and regulations, the
content standards in the PRC are less certain and less clear than in those in more developed
countries such as the U.S. and we cannot assure you that we will be able to properly review the
content to comply with the standards imposed on us with certainty.
If the PRC government finds that the agreements that establish the structure for operating
our
China business do not comply with PRC governmental restrictions on foreign investment in
the advertising industry and in the operating of non-advertising content, we could be
subject to severe penalties.
Substantially all of our operations are conducted through our contractual arrangements with
our consolidated variable interest entities in China, Beijing AirMedia Advertising Co., Ltd., or AM
Advertising, Beijing Shengshi Lianhe Advertising Co., Ltd, or Shengshi Lianhe, AirMedia UC
Advertising Co., Ltd., or AirMedia UC, and Beijing Yuehang Digital Media Advertising Co., Ltd., or
AM Yuehang. Though PRC regulations currently permit 100% foreign ownership of companies that
provide advertising services, any foreign entities that invest in the advertising services industry
are required to have at least three years of direct operations in the advertising industry outside
of China. In addition, PRC regulations currently prohibit foreign investment in the production and
operation of any non-advertising content. We do not currently directly operate an advertising
business outside of China and thus cannot qualify under PRC regulations until three years after we
commence any such operations outside of China or until we acquire a company that has directly
operated an advertising business outside of China for the required period of time. Accordingly, our
three subsidiaries, Shenzhen AM, AM Technology and Xi’an AM are currently ineligible to apply for the required
licenses for providing advertising services in China.
Our advertising business is primarily provided through our contractual arrangements with our
four consolidated variable interest entities in China. AM Advertising is owned by Shengshi Lianhe
and three PRC citizens: Herman Man Guo, Qing Xu and Xiaoya Zhang. Shengshi Lianhe is owned by three
PRC citizens: Herman Man Guo, Qing Xu and Xiaoya Zhang. AirMedia UC is owned by two PRC citizens:
Herman Man Guo and Qing Xu. AM Yuehang is owned by two PRC citizens: James Zhonghua Feng and Tao
Hong. Our variable interest entities are the major companies through which we provide advertising
services in China. They directly operate our advertising network, enter into concession rights
contracts and sell advertising time slots to our clients. We depend on our variable interest
entities to operate our advertising business. We have entered into contractual arrangements with
our variable interest entities, pursuant to which we, through AM Technology, provide technical
support and consulting services to our variable interest entities. In addition, we have entered
into agreements with our variable interest entities and each of their shareholders, which provide
us with the substantial ability to control our variable interest entities. For a description of
these contractual arrangements, see “Item 4. Information on the Company—C. Organizational
Structure” and “Item 7. Major Shareholders and Related Party Transactions—B. Related Party
Transactions.”
Under the equity pledge agreements, the shareholders of our variable interest entities
respectively pledged their equity interests in our variable interest entities to AM Technology.
This pledge was duly created by recording the pledge on AM Technology’s register of shareholders in
accordance with the PRC Security Law, which governed the validity of such pledge prior to the
effectiveness of the PRC Property Rights Law.
According to the PRC Property Rights Law, however, effective as of October 1, 2007, and
Measures for the Registration of Equity Pledge with Administration for Industry and Commerce,
effective as of October 1, 2008, such pledge will be effective upon registration with the relevant
administration for industry and commerce. AM Technology is in the process of applying for such
registration with the local administration for industry and commerce. Before the completion of such
registration procedure, we cannot assure you that the effectiveness of such pledge can be
recognized in PRC courts if disputes arise on certain pledged equity interest or that AM
Technology’s interests as pledgee will prevail over those of third parties.
If we or any of our variable interest entities are found to be in violation of any existing or
future PRC laws or regulations or fail to obtain or maintain any of the required permits or
approvals, the relevant PRC regulatory authorities, including the SAIC, which regulates advertising
companies, and the SARFT, would have broad discretion in dealing with such violations, including:
•
revoking the business and operating licenses of our PRC subsidiaries and
affiliates;
•
discontinuing or restricting our PRC subsidiaries’ and affiliates’ operations;
•
imposing conditions or requirements with which we or our PRC subsidiaries and
affiliates may not be able to comply; or
•
requiring us or our PRC subsidiaries and affiliates to restructure the relevant
ownership structure or operations.
The imposition of any of these penalties would result in a material and adverse effect on our
ability to conduct our business.
We rely on contractual arrangements with AM Advertising, Shengshi Lianhe, AirMedia UC and AM
Yuehang and their shareholders for a substantial portion of our China operations, which may
not be as effective as direct ownership in providing operational control.
We rely on contractual arrangements with AM Advertising, Shengshi Lianhe, AirMedia UC and AM
Yuehang to operate our advertising business. For a description of these contractual arrangements,
see “Item 4. Information on the Company—C. Organizational Structure” and “Item 7. Major
Shareholders and Related Party Transactions—B. Related Party Transactions.” These contractual
arrangements may not be as effective as direct ownership in providing us with control over our
variable interest entities. Under the current contractual arrangements, as a legal matter, if our
variable interest entities or their shareholders fail to perform their respective obligations under
these contractual arrangements, we may have to incur substantial costs and resources to enforce
such arrangements, and rely on legal remedies under PRC law, including seeking specific performance
or injunctive relief, and claiming damages, which we cannot assure you will be effective.
Many of these contractual arrangements are governed by PRC law and provide for the resolution
of disputes through either arbitration or litigation in the PRC. Accordingly, these contracts would
be interpreted in accordance with PRC law and any disputes would be resolved in accordance with PRC
legal procedures. The legal environment in the PRC is not as developed as in other jurisdictions,
such as the United States. As a result, uncertainties in the PRC legal system could limit our
ability to enforce these contractual arrangements, which may make it difficult to exert effective
control over our variable interest entities, and our ability to conduct our business may be
negatively affected.
Contractual arrangements we have entered into among our subsidiaries and variable interest
entities may be subject to scrutiny by the PRC tax authorities and a finding that we owe
additional taxes or are ineligible for our preferential tax treatment, or both, could
substantially increase our taxes owed, and reduce our net income and the value of your
investment.
Under PRC law, arrangements and transactions among related parties may be audited or
challenged by the PRC tax authorities. If any of the transactions we have entered into among AM
Technology and our variable interest entities are found not to be on an arm’s length basis, or to
result in an unreasonable reduction in tax under PRC law, the PRC tax authorities have the
authority to disallow our tax savings, adjust the profits and losses of our respective PRC entities
and assess late payment interest and penalties. A finding by the PRC tax authorities that we are
ineligible for the tax savings we achieved for the period from August 7, 2005, the date we
commenced operations, to December 31, 2005 or in 2006, 2007 and 2008, or that Shenzhen AM, AM
Technology, Xi’an AM, AM Advertising and its subsidiaries, Shengshi Lianhe, AirMedia UC or AM Yuehang are
ineligible for their preferential tax treatment, would substantially increase our taxes owed and
reduce our net income and the value of your investment.
We may rely principally on dividends and other distributions on equity paid by our
wholly-owned operating subsidiaries to fund any cash and financing requirements we may have,
and any limitation on the ability of our operating subsidiaries to pay dividends to us could
have a material adverse effect on our ability to conduct our business.
We are a holding company, and we may rely principally on dividends and other distributions on
equity paid by AM Technology, Shenzhen AM and Xi’an AM for our cash requirements, including the funds
necessary to service any debt we may incur. If AM Technology,
Shenzhen AM or Xi’an AM incur debt on its own
behalf in the future, the instruments governing the debt may restrict
the ability of AM Technology, Shenzhen AM or Xi’an AM to pay dividends or make other distributions to us. In addition, the PRC tax
authorities may require us to adjust our taxable income under the contractual arrangements AM
Technology currently has in place with our variable interest entities in a manner that would
materially and adversely affect AM Technology’s ability to pay dividends and other distributions to
us.
Furthermore,
relevant PRC laws and regulations permit payments of dividends by AM
Technology, Shenzhen AM and Xi’an AM only out of their retained earnings, if any, determined in accordance with PRC
accounting standards and regulations. Under PRC laws and regulations,
AM Technology, Shenzhen AM and Xi’an AM
are also required to set aside a portion of net income each year to fund certain reserve funds.
These reserves are not distributable as cash dividends. In addition, subject to certain cumulative limits, the
statutory general
reserve fund requires annual appropriations of at least 10% of after-tax income
to be set aside prior to payment of dividends until such reserve fund is equal to at least 50% of
the respective registered capital of AM Technology, Shenzhen AM or
Xi’an AM. As a result of these PRC laws
and regulations, our PRC subsidiaries and our PRC variable interest entities are restricted in
their ability to transfer a portion of their net assets to us whether in the form of dividends,
loans or advances.
Although
none of Shenzhen AM, Xi’an AM or AM Technology has any present plan to pay any cash dividends
to us in the foreseeable future any limitation on the ability of AM
Technology, Shenzhen AM or Xi’an AM to
pay dividends or make other distributions to us could materially and adversely limit our ability to
grow, make investments or acquisitions that could be beneficial to our business, or otherwise fund
and conduct our business.
Changes in laws and regulations governing air travel advertising or otherwise affecting our
business in China may result in substantial costs and diversion of resources and may
materially and adversely affect our business prospects and results of operations.
There are no existing PRC laws or regulations that specifically define or regulate air travel
advertising. It has been reported that the relevant PRC government authorities are currently
considering adopting new regulations governing air travel advertising. We cannot predict the timing
and effects of such new regulations. Changes in laws and regulations governing the content of air
travel advertising, our business licenses or otherwise affecting our business in China may result
in substantial costs and diversion of resources and may materially and adversely affect our
business prospects and results of operations.
Risks Related to Doing Business in China
Adverse changes in the political and economic policies of the PRC government could have a
material adverse effect on the overall economic growth of China, which could reduce the
demand for our services and have a material adverse effect on our competitive position.
Substantially all of our assets are located in China and substantially all of our revenues are
derived from our operations in China. Accordingly, our business, financial condition, results of
operations and prospects are affected significantly by economic, political and legal developments
of China. The Chinese economy differs from the economies of most developed countries in many
respects, including:
•
the amount of government involvement;
•
the level of development;
•
the growth rate;
•
the control of foreign exchange; and
•
the allocation of resources.
While the Chinese economy has experienced significant growth in the past decades, growth has
been uneven both geographically and among various sectors of the economy. The PRC government has
implemented various measures to encourage economic growth and guide the allocation of resources.
Some of these measures may benefit the overall Chinese economy, but may also have a negative effect
on us. We cannot predict the future direction of political or economic reforms or the effects such
measures may have on our business, financial position or results of operations. Any adverse change
in the political or economic conditions in China, including changes in the policies of the PRC
government or in laws and regulations in China, could have a material adverse effect on the overall
economic growth of China and in the air travel advertising industry. Such developments could have a
material adverse effect on our business, lead to a reduction in demand for our services and
materially and adversely affect our competitive position.
Uncertainties with respect to the PRC legal system could limit the legal protections
available to us or result in substantial costs and the diversion of resources and management
attention.
We
conduct our business primarily through AM Technology, Shenzhen AM and Xi’an AM, which are subject to
PRC laws and regulations applicable to foreign investment in China and, in particular, laws
applicable to
wholly-foreign owned companies. The PRC legal system is based on written statutes.
Prior court decisions may be cited for reference but have limited precedential value. Since 1979,
PRC legislation and regulations have significantly enhanced the protections afforded to various
forms of foreign investments in China. However, since these laws and regulations are relatively new
and the PRC legal system continues to rapidly evolve, the interpretations of many laws, regulations
and rules are not always uniform and the enforcement of these laws, regulations and rules involve
uncertainties, which may limit the legal protections available to us. In addition, any litigation
in China may be protracted and result in substantial costs and the diversion of resources and
management attention.
Fluctuations in the value of the Renminbi may have a material adverse effect on your
investment.
The value of the Renminbi against the U.S. dollar and other currencies is affected by, among
other things, changes in China’s political and economic conditions and China’s foreign exchange
policies. On July 21, 2005, the PRC government changed its decade-old policy of pegging the value
of the Renminbi to the U.S. dollar. Under the new policy, the Renminbi was permitted to fluctuate
within a narrow and managed band against a basket of certain foreign currencies. This change in
policy caused the Renminbi to appreciate approximately 21.5% against the U.S. dollar over the
following three years. Since reaching a high against the U.S. dollar in July 2008, however, the
Renminbi has traded within a narrow band against the U.S. dollar, remaining within 1% of its July
2008 high but never exceeding it. As a consequence, the Renminbi has also fluctuated sharply since
July 2008 against other freely traded currencies, in tandem with the U.S. dollar.
The reporting and functional currency of our Cayman Islands parent company is the U.S. dollar.
However, substantially all of the revenues and expenses of our consolidated operating subsidiaries
and affiliate entities are denominated in Renminbi. Substantially all of our sales contracts were
denominated in Renminbi and substantially all of our costs and expenses is denominated in Renminbi.
To the extent that we need to convert U.S. dollars into Renminbi for our operations, depreciation
of the Renminbi against the U.S. dollar would have an adverse effect on the Renminbi amount we
receive from the conversion. Conversely, if we decide to convert our Renminbi into U.S. dollars for
the purpose of dividend distribution or for other business purposes, appreciation of the U.S.
dollar against the Renminbi would have a negative effect on the U.S. dollar amount available to us.
Fluctuations in the exchange rate will also affect the relative value of any dividend we issue
which will be exchanged into U.S. dollars and earnings from and the value of any U.S.
dollar-denominated investments we make in the future.
Very limited hedging transactions are available in China to reduce our exposure to exchange
rate fluctuations. To date, we have not entered into any hedging transactions in an effort to
reduce our exposure to foreign currency exchange risk. While we may decide to enter into hedging
transactions in the future, the availability and effectiveness of these hedges may be limited so
that we may not be able to successfully hedge our exposure at all. In addition, our currency
exchange losses may be magnified by PRC exchange control regulations that restrict our ability to
convert RMB into foreign currency. As a result, fluctuations in exchange rates may have a material
adverse effect on your investment.
Restrictions on currency exchange may limit our ability to receive and use our revenues or
financing effectively.
Substantially all of our revenues and expenses are denominated in RMB. If our RMB-denominated
revenues increase or RMB-denominated expenses decrease in the future, we may need to convert a
portion of our revenues into other currencies to meet our foreign currency obligations, including,
among others, payments of dividends declared, if any, in respect of our ordinary shares or ADSs.
Under China’s existing foreign exchange regulations, Shenzhen
AM, AM Technology and Xi’an AM are able to pay
dividends in foreign currencies, without prior approval from State Administration of Foreign
Exchange, or SAFE, by complying with certain procedural requirements. However, we cannot assure you
that the PRC government will not take measures in the future to restrict access to foreign
currencies for current account transactions.
Foreign exchange transactions by our subsidiary and variable interest entities in China under
capital accounts continue to be subject to significant foreign exchange controls and require the
approval of, or registration with, PRC governmental authorities. In particular, if we or other
foreign lenders make foreign currency loans to our subsidiaries or variable interest entities in China, these loans must be registered with the
SAFE, and if we finance them by means of additional capital contributions, these capital
contributions must be approved or registered by certain government authorities including the SAFE,
the Ministry of Commerce or
their local counterparts. These limitations could affect the ability of
these entities to obtain foreign exchange through debt or equity financing, and could affect our
business and financial condition.
PRC regulations relating to the establishment of offshore special purpose companies by PRC
residents and registration requirements for employee stock ownership plans or share option
plans may subject our PRC resident beneficial owners or the plan participants to personal
liability, limit our ability to inject capital into our PRC subsidiaries, limit our
subsidiaries’ ability to increase their registered capital or distribute profits to us, or
may otherwise adversely affect us.
Current regulations promulgated by SAFE require PRC residents and PRC corporate entities to
register with local branches of SAFE in connection with their direct or indirect offshore
investment activities. These regulations apply to our shareholders who are PRC residents and may
apply to any offshore acquisitions that we make in the future.
Under the SAFE regulations, PRC residents who make, or have previously made, direct or
indirect investments in offshore companies, will be required to register those investments. In
addition, any PRC resident who is a direct or indirect shareholder of an offshore company is
required to file or update the registration with the local branch of SAFE, with respect to that
offshore company, any material change involving its round-trip investment, capital variation, such
as an increase or decrease in capital, transfer or swap of shares, merger, division, long-term
equity or debt investment or creation of any security interest. Moreover, the PRC subsidiaries of
that offshore company are required to urge the PRC resident shareholders to update their SAFE
registration with the local branch of SAFE when such updates are required under applicable SAFE
regulations. If any PRC shareholder fails to make the required SAFE registration or file or update
the registration, the PRC subsidiaries of that offshore parent company may be prohibited from
distributing their profits and the proceeds from any reduction in capital, share transfer or
liquidation, to their offshore parent company, and the offshore parent company may also be
prohibited from injecting additional capital into their PRC subsidiaries. Moreover, failure to
comply with the various SAFE registration requirements described above could result in liability
under PRC laws for evasion of applicable foreign exchange restrictions, such as restrictions on
distributing dividend to our offshore entities or pecuniary measures against us.
We cannot provide any assurances that all of our shareholders who are PRC residents will make
or obtain any applicable registrations or approvals required by these SAFE regulations. The failure
or inability of our PRC resident shareholders to comply with the registration procedures set forth
therein may subject us to fines and legal sanctions, restrict our cross-border investment
activities, or limit our PRC subsidiaries’ ability to distribute dividends or obtain
foreign-exchange-dominated loans to our company.
As it is uncertain how the SAFE regulations will be interpreted or implemented, we cannot
predict how these regulations will affect our business operations or future strategy. For example,
we may be subject to more stringent review and approval process with respect to our foreign
exchange activities, such as remittance of dividends and foreign-currency-denominated borrowings,
which may adversely affect our results of operations and financial condition. In addition, if we
decide to acquire a PRC domestic company, we cannot assure you that we or the owners of such
company, as the case may be, will be able to obtain the necessary approvals or complete the
necessary filings and registrations required by the SAFE regulations. This may restrict our ability
to implement our acquisition strategy and could adversely affect our business and prospects.
In December 2006, the People’s Bank of China promulgated the Administrative Measures of
Foreign Exchange Matters for Individuals, or the PBOC Regulation, setting forth the respective
requirements for foreign exchange transactions by PRC individuals under either the current account
or the capital account. In January 2007, SAFE issued implementing rules for the PBOC Regulation,
which, among other things, specified approval requirements for certain capital account transactions
such as a PRC citizen’s participation in the employee stock ownership plans or stock option plans
of an overseas publicly-listed company. On March 28, 2007, SAFE promulgated the Application
Procedure of Foreign Exchange Administration for Domestic Individuals Participating in Employee
Stock Holding Plan or Stock Option Plan of Overseas-Listed Company, or the Stock Option Rule. Under
the Stock Option Rule, PRC citizens who are granted stock options by an overseas publicly-listed
company are required, through a PRC agent or PRC subsidiary of such overseas publicly-listed
company, to register with SAFE and complete certain other procedures. We and our PRC employees who have been granted
stock options are subject to the Stock Option Rule. If we or our PRC optionees fail to comply with these regulations, we or
our PRC optionees may be subject to fines and legal sanctions. See “Item 4. Information on
the Company—B. Business Overview—Regulation—SAFE Regulations on Offshore Investment by PRC Residents
and Employee Stock Options.”
The new M&A rule sets forth complex procedures for acquisitions conducted by foreign investors
which could make it more difficult to pursue growth through acquisitions.
On August 8, 2006, six PRC government and regulatory authorities, including the PRC Ministry of
Commerce and the Chinese Securities Regulatory Commission, or the CSRC, promulgated a rule entitled
“Provisions regarding Mergers and Acquisitions of Domestic Enterprises by Foreign Investors,” or
the New M&A Rule, which became effective on September 8, 2006. The New M&A Rule, among other
things, sets forth complex procedures and requirements that could make merger and acquisition
activities by foreign investors more time-consuming and complex, including requirements in some
instances that the Ministry of Commerce be notified in advance of any change-of-control transaction
in which a foreign investor takes control of a PRC domestic enterprise. Part of our growth
strategy includes acquiring complementary businesses or assets. Complying with the requirements of
the New M&A Rule to complete such transactions could be time-consuming, and any required approval
processes, including obtaining approval from the Ministry of Commerce, may delay or inhibit the
completion of such transactions, which could affect our ability to expand our business or maintain
our market share. In addition, if any of our acquisitions were subject to the New
M&A Rule and were found not to be in compliance with the requirements of the New M&A Rule in the future, relevant
PRC regulatory agencies may impose fines and penalties on our operations in the PRC, limit our
operating privileges in the PRC, or take other actions that could have a material adverse effect on
our business, financial condition, results of operations, reputation and prospects.
Risks Related to Our ADSs
The trading price of our ADSs has been volatile.
The trading price of our ADSs has been and may continue to be subject to wide fluctuations.
During the year of 2008, the trading prices of our ADSs on the Nasdaq
ranged from US$3.80 to
US$26.51 per ADS and the closing sale price on April 24, 2009
was US$5.59 per ADS. The price of our
ADSs may fluctuate in response to a number of events and factors including the following:
•
changes in the economic performance or market valuations of other advertising
companies;
•
actual or anticipated fluctuations in our quarterly operating results and
changes or revisions of our expected results;
•
changes in financial estimates by securities research analysts;
•
conditions in the air travel advertising industry;
•
announcements of studies and reports relating to the circulation, ratings,
audience, quality or effectiveness of our services or those of our competitors;
•
announcements by us or our competitors of new services, acquisitions, strategic
relationships, joint ventures or capital commitments;
•
addition or departure of our senior management; and
•
sales or perceived potential sales of additional ordinary shares or ADSs.
In addition, the securities market has from time to time experienced significant price and
volume fluctuations that are not related to the operating performance of particular companies.
These market fluctuations may also have a material adverse effect on the market price of our ADSs.
Substantial future sales or perceived potential sales of our ADSs in the public market could
cause the price of our ADSs to decline.
Additional sales of our ordinary shares in the public market, or the perception that these
sales could occur, could cause the market price of our ADSs to decline. In addition, certain
holders of our ordinary shares have the right to cause us to register the sale of a certain number
of our shares under the Securities Act. Registration of these shares under the Securities Act would
result in these shares becoming freely tradable without restriction under the Securities Act
immediately upon the effectiveness of the registration. Sales of these registered shares in the
public market could cause the price of our ADSs to decline.
You may not have the same voting rights as the holders of our ordinary shares and may not
receive voting materials in time to be able to exercise your right to vote.
Except as described in this annual report and in the deposit agreement, holders of our ADSs
will not be able to exercise voting rights attaching to the shares evidenced by our ADSs on an
individual basis. Holders of our ADSs will appoint the depositary or its nominee as their
representative to exercise the voting rights attaching to the shares represented by the ADSs. You
may not receive voting materials in time to instruct the depositary to vote, and it is possible
that you, or persons who hold their ADSs through brokers, dealers or other third parties, will not
have the opportunity to exercise a right to vote.
Your right to participate in any future rights offerings may be limited, which may cause
dilution to your holdings and you may not receive cash dividends if it is impractical to
make them available to you.
We may from time to time distribute rights to our shareholders, including rights to acquire
our securities. However, we cannot make rights available to you in the United States unless we
register both the rights and the securities to which the rights relate under the Securities Act or
an exemption from the registration requirements is available. Under the deposit agreement, the
depositary bank will not make rights available to you unless both the rights and the underlying
securities to be distributed to ADS holders are either registered under the Securities Act or
exempt from registration under the Securities Act. We are under no obligation to file a
registration statement with respect to any such rights or securities or to endeavor to cause such a
registration statement to be declared effective and we may not be able to establish a necessary
exemption from registration under the Securities Act. Accordingly, you may be unable to participate
in our rights offerings and may experience dilution in your holdings.
The depositary of our ADSs has agreed to pay to you the cash dividends or other distributions
it or the custodian receives on our ordinary shares or other deposited securities after deducting
its fees and expenses. You will receive these distributions in proportion to the number of ordinary
shares your ADSs represent. However, the depositary may, at its discretion, decide that it is
inequitable or impractical to make a distribution available to any holders of ADSs. For example,
the depositary may determine that it is not practicable to distribute certain property through the
mail, or that the value of certain distributions may be less than the cost of mailing them. In
these cases, the depositary may decide not to distribute such property to you.
You may be subject to limitations on transfer of your ADSs.
Your ADSs are transferable on the books of the depositary. However, the depositary may close
its transfer books at any time or from time to time when it deems expedient in connection with the
performance of its duties.
In addition, the depositary may refuse to deliver, transfer or register transfers of ADSs
generally when our books or the books of the depositary are closed, or at any time if we or the
depositary deem it advisable to do so because of any requirement of law or of any government or
governmental body, or under any provision of the deposit agreement, or for any other reason.
You may face difficulties in protecting your interests, and your ability to protect your
rights through the U.S. federal courts may be limited, because we are incorporated under
Cayman Islands law, conduct a substantial portion of our operations in China and the
majority of our directors and officers reside outside the United States.
We are incorporated in the Cayman Islands, and conduct a substantial portion of our operations
in China through AM Technology, Shenzhen AM and Xi’an AM. A majority of our directors and officers reside
outside the United States and a substantial portion of their assets are located outside of the
United States. As a result, it may be difficult or impossible for you to bring an action against us
or against these individuals in the Cayman Islands or in China in the event that you believe that
your rights have been infringed under the securities laws or otherwise. Even if you are successful
in bringing an action of this kind, the laws of the Cayman Islands and of China may render you
unable to enforce a judgment against our assets or the assets of our directors and officers. There
is no statutory recognition in the Cayman Islands of judgments obtained in the United States,
although the courts of the Cayman Islands will generally recognize and enforce a non-penal judgment
of a foreign court of competent jurisdiction without retrial on the merits.
Our corporate affairs are governed by our memorandum and articles of association, as amended
and restated from time to time, and by the Companies Law (2007 Revision) and common law of the
Cayman Islands. The rights of shareholders to take legal action against us and our directors,
actions by minority shareholders and the fiduciary responsibilities of our directors are to a large
extent governed by the common law of the Cayman Islands. The common law of the Cayman Islands is
derived in part from comparatively limited judicial precedent in the Cayman Islands as well as from
English common law, which provides persuasive, but not binding, authority. The rights of our
shareholders and the fiduciary responsibilities of our directors under Cayman Islands law are not
as clearly established as they would be under statutes or judicial precedents in the United States.
In particular, the Cayman Islands has a less developed body of securities laws than the United
States and provides significantly less protection to investors. In addition, Cayman Islands companies may not have
standing to initiate a shareholder derivative action in U.S. federal courts.
As a result, our public shareholders may have more difficulty in protecting their interests
through actions against us, our management, our directors or our major shareholders than would
shareholders of a corporation incorporated in a jurisdiction in the United States.
Our memorandum and articles of association contain anti-takeover provisions that could
adversely affect the rights of holders of our ordinary shares and ADSs.
We have included certain provisions in our memorandum and articles of association that could
limit the ability of others to acquire control of our company, and deprive our shareholders of the
opportunity to sell their shares at a premium over the prevailing market price by discouraging
third parties from seeking to obtain control of our company in a tender offer or similar
transactions.
We have included the following provisions in our articles that may have the effect of delaying
or preventing a change of control of our company:
•
Our board of directors has the authority to establish from time to time one or
more series of preferred shares without action by our shareholders and to
determine, with respect to any series of preferred shares, the terms and rights of
that series, including the designation of the series, the number of shares of the
series, the dividend rights, dividend rates, conversion rights, voting rights, and
the rights and terms of redemption and liquidation preferences.
•
Our board of directors may issue a series of preferred shares without action by
our shareholders to the extent of available authorized but unissued preferred shares. Accordingly, the issuance of preferred shares may adversely affect the
rights of the holders of the ordinary shares. Issuance of preference shares may
dilute the voting power of holders of ordinary shares.
•
Subject to applicable regulatory requirements, our board of directors may issue
additional ordinary shares or rights to acquire ordinary shares without action by
our shareholders to the extent of available authorized but unissued shares.
Our corporate actions are substantially controlled by our principal shareholder who could
exert significant influence over important corporate matters, which may reduce the price of
our ADSs and deprive you of an opportunity to receive a premium for your shares.
As
of April 27, 2009, our principal shareholder, Herman Man Guo, beneficially owned
approximately 41.8% of our outstanding ordinary shares. In addition,
as of April 27, 2009, Global
Gateway Investments Limited, a wholly-owned subsidiary of CDH China Growth Capital Management
Company Limited, or CDH, beneficially owned approximately 19. 9% of our outstanding ordinary
shares. These shareholders, if acting together, could exert substantial influence over matters such
as electing directors and approving material mergers, acquisitions or other business combination
transactions. This concentration of ownership may also discourage, delay or prevent a change in
control of our company, which could have the dual effect of depriving our shareholders of an
opportunity to receive a premium for their shares as part of a sale of our company and reducing the
price of our ADSs. These actions may be taken even if they are opposed by our other shareholders.
In addition, these persons could divert business opportunities from us to themselves or others.
We may be classified as a passive foreign investment company, which could result in adverse
U.S. federal income tax consequences to U.S. Holders.
Based on the price of our ADSs and ordinary shares and the composition of our income and
assets, we believe that we were not a “passive foreign investment company,” or PFIC, for United
States federal income tax purposes for our taxable year ended December 31, 2008. However, the
application of the PFIC rules is subject to ambiguity in several respects and, in addition, we must
make a separate determination each year as to whether we are a PFIC (after the close of each
taxable year). Accordingly, we cannot assure you that we will not be a PFIC for our current taxable
year ending December 31, 2009 or any future taxable year. In particular, we believe that there is a
significant risk that we will be a PFIC for our taxable year ending December 31, 2009 unless the
market price of our ADSs increases and/or we invest a substantial amount of the cash and other passive assets
we hold in assets that produce active income. A non-U.S. corporation will be considered a PFIC for
any taxable year if either (1) at least 75% of its gross income is passive income or (2) at least
50% of the value of its assets (based on an average of the quarterly values of the assets during a
taxable year) is attributable to assets that
produce or are held for the production of passive income. The value of our assets will be determined based on the market price of our ADSs, which is
likely to fluctuate. In addition, the composition of our income and assets will be affected by how,
and how quickly, we utilize the cash (or other passive assets or investments) we have on hand or
raise in any offering. If we were treated as a PFIC for any taxable year during which a U.S. Holder
held an ADS or an ordinary share, certain adverse U.S. federal income tax consequences could apply
to the U.S. Holder. For example, if we are a PFIC, U.S. Holders will become subject to increased
tax liabilities under U.S. tax laws and regulations with respect to any gain recognized or the sale
of our ADSs or ordinary shares and certain distributions, and will become subject to burdensome
reporting requirements. See “Item 10. Additional Information—E. Taxation—United States Federal
Income Taxation—Passive Foreign Investment Company.”
We are a Cayman Islands incorporated holding company that conducts operations through our
subsidiaries, consolidated variable interest entities and the variable interest entities’
subsidiaries in China. We commenced operations in August 2005 in China through Shengshi Lianhe, a
consolidated variable interest entity of our principal subsidiary, AM Technology. We established
another wholly-owned subsidiary, Shenzhen AM, in June 2006 in China. In order to facilitate foreign
investment in our company, we established an offshore holding company, Broad Cosmos Enterprises
Limited, or Broad Cosmos, as a company registered in the British Virgin Islands in June 2006. To
prepare for our initial public offering, we incorporated AirMedia Group Inc. in the Cayman Islands
in April 2007 as our listing vehicle and as our holding company, followed by a share exchange
between AirMedia Group Inc. and Broad Cosmos. As a result of the share exchange, AirMedia Group
Inc. acquired 100% of the equity interests in Broad Cosmos, which in turn holds 100% of the equity
interests in AM Technology and Shenzhen AM.
On November 13, 2007, we completed our initial public offering, in which, including the
exercise of the over-allotment options, we issued and sold 13,500,000 ADSs, representing 27,000,000
of our ordinary shares, and certain of our then shareholders sold 3,750,000 ADSs, representing
7,500,000 of our ordinary shares, in each case at a public offering price of US$15.00 per ADS. On
November 7, 2007, we began trading our ADSs on the Nasdaq Global Market under the symbol “AMCN.”
In July 2008, we acquired our current airport gate bridge advertising business by purchasing all of
the equity interest in Excel Lead and an 80% equity interest in Flying Dragon. The consideration
for the acquisition of Excel Lead consisted of an initial cash consideration of US$0.3 million and a
contingent consideration to be determined based on the after-tax net profit performance of Excel
Lead in the second half of 2008, the full year of 2009 and 2010, respectively, in an aggregate amount of up to US$27.3
million in cash and 1,530,950 of our ordinary shares, or up to US$40.3 million in cash only, at the
sole discretion of the sellers of Excel Lead. In 2008, we paid a total of US$6.6 million to the
sellers of Excel Lead, including the US$0.3 million initial cash consideration and a US$6.3 million
advance payment of the contingent consideration. In addition, we paid US$1.5 million in cash for
the acquisition of the 80% equity interest in Flying Dragon in 2008.
Our principal executive offices are located at 17/F, Sky Plaza, No. 46 Dongzhimenwai Street,
Dongcheng District, Beijing 100027, People’s Republic of China. Our telephone number at this
address is +86-10-8438-6868 and our fax number is +86-10-8460-8658. Our registered office in the
Cayman Islands is P.O. Box 309GT, Ugland House, South Church Street, George Town, Grand Cayman,
Cayman Islands. Our telephone number at this address is +1-345-949-8066.
B. Business Overview
Overview
We operate the largest digital media network in China dedicated to air travel advertising. We
believe we have the leading market share of digital frames in airports in China. We operate over
95% of the digital TV screens that display advertisements in the 15 largest airports in China,
according to the Sinomonitor report. The advertising portion of our programs accounts for over 80%
of the total length of the advertisements played on the digital TV screens for each of the three
largest airlines in China. As of March 1, 2009, we operated 2,428 digital frames and 2,752 digital
TV screens in airports and place our programs on 49,482 digital TV screens on airplanes. Due to PRC
regulatory restrictions on foreign ownership of advertising businesses in China, we operate our
advertising business through our consolidated variable interest entities and their subsidiaries in
China. We have a series of contractual arrangements with these variable interest entities and their
record owners that enable us to effectively control and derive substantially all of the economic
benefits from these variable interest entities.
Currently, we have contractual concession rights to operate digital frames in 26 airports in
China. As of March 1, 2009, we operated 2,428 digital frames in 22 airports. We plan to gradually
roll out our digital frame operations in the additional four airports and intend to significantly
increase the number of digital frames in our network. As of March 1, 2009, we had contractual
concession rights to operate digital TV screens in 51 airports, including all of the 30 largest
airports in China. As of March 1, 2009, our digital TV screens were located in 41 airports in
China, including the five largest airports, Beijing Capital International Airport,
Guangzhou Baiyun International Airport, Shanghai Pudong International Airport, Shanghai Hongqiao International
Airport and Shenzhen International Airport. In addition, we have contractual concession rights to
place our programs on the routes operated by 10 airlines, including the three largest airlines in
China, China Southern Airlines, China Eastern Airlines and Air China. We are also currently the
sole sales agent in mainland China to sell advertisements on both the international and domestic
routes operated by Dragonair and Cathay Pacific Airways.
In July 2008, we expanded into the traditional air travel advertising market through
acquisition of an airport gate bridge advertising business. As a result, we have
obtained the contractual concession rights to place advertisements on gate bridges located in 10
major airports in China. Our advertisements on gate bridges include billboard advertisements on
interior walls of gate bridges and painted advertisements on exterior walls of gate bridges. As of
March 1, 2009, we placed 2,806 billboard advertisements on 134 gate bridges located in 10 major
airports in China, including Terminals 1 and 2 of Beijing Capital International Airport and
Guangzhou Baiyun International Airport; and we placed painted advertisements on 46 gate bridges
located in 10 major airports in China.
In addition, in March 2009, we obtained the contractual concession rights to operate various
traditional advertising media including billboards, light boxes and other formats in Beijing
Capital International Airport and light boxes in Shenzhen International Airport. We will continue
to acquire new media platforms to provide a broader range of advertising opportunities for our
clients and to become a one-stop provider for air travel advertising.
Air travel advertising in China has experienced significant growth in recent years as a result
of growth in China’s advertising market and air travel sector. By focusing on air travel
advertising, we enable our advertising clients to target air travelers in China, who we believe are
an attractive demographic for advertisers due to their higher-than-average disposable income. We
strategically place our digital frames and digital TV screens and other displays in high-traffic
locations of airports, particularly in areas where there tend to be significant waiting time, such
as departure halls, security check areas, boarding gates, baggage claim areas and arrival halls. In
addition, the digital TV screens on our network airplanes are located in highly visible locations
in passenger compartments and on the back of passenger seats. Furthermore, gate bridges connect
terminal gates with airplanes. They are the areas through which every air passenger must pass
before and after he or she boards airplanes. Our combined coverage in airports and on airplanes
enables our programs to attract air travelers at multiple points during their travel experience,
from check-in, boarding, flight time, to arrival.
We combine advertising content with non-advertising content, such as news, weather, sports and
comedy clips, in our digital TV screen programs. We have agreements to show documentary clips
provided by China International TV Corporation in airports and on airplanes. We also obtain program clips such as “Home Video
Heroes” and “Globe Trekker” from other third-party content providers. We believe this makes air
travelers more receptive to the advertisements included in our programs and ultimately makes our
programs more effective for our advertising clients. Our standard programs in airports currently
include 25 minutes of advertising content during each hour of programming and are shown for
approximately 16 hours per day. The length of our in-flight programs typically ranges from
approximately 45 minutes to an hour per flight, approximately five to 13 minutes of which consist
of advertising content.
We derive revenues principally by selling advertising time slots on our network to our
advertising clients, including both direct advertisers and advertising agencies. Since commencing
operations in August 2005 to December 31, 2008, a total of 439 advertisers have purchased
advertising time slots on our network. Our advertisers consist of international and domestic
brands. Our top fifteen advertisers for 2008 in alphabetical order included China Mobile, China
Unicom, Dragon Bay Villa, GE, Great Wall Wine, Haier, Hitachi, HSBC, Land Rover, Lexus, Mengniu
Dairy, Nissan, Samsung, Toyota and Vodone.com., which collectively accounted for 43.9% of our
revenues for 2008.
We have grown rapidly since we commenced operations. The number of airports and airlines in
which we operated and the number of digital TV screens operating in our network increased from 16,
six and 12,385 as of December 31, 2005 to 41, nine and 52,336 as of December 31, 2008,
respectively. Our net revenues increased from US$17.9 million in 2006 to US$119.4 million in 2008,
representing a compound annual growth rate of 158.3%. In 2008, we achieved a net income of US$30.2
million.
We generate revenues from advertising services at the following platforms: digital frames in
airports, digital TV screens in airports and on airplanes, billboards and painted advertisements on
gate bridges in airports and other displays in airports, such as traditional advertising displays
and light boxes.
Digital Frames in Airports
We own and operate a network of digital frames, strategically placed in areas of airports such
as departure halls, terminals and arrival halls, where most of the air travelers congregate and
spend significant time waiting. Our digital frames are high-definition LCD screens that change
digital picture displays every 12 seconds. Our digital frames include standalone digital frames
and TV-attached digital frames. Standalone digital frames display advertisements on vertical or
horizontal display panels and all of our standalone digital frames were newly installed in our
network airports, in sizes from 63 to 82 inches. TV-attached digital frames consist of a vertical
digital frame beneath a digital TV screen and most of our TV-attached digital frames were upgraded
from light boxes, in sizes ranging from 46 to 50 inches. As of March 1, 2009, we operated 2,428
digital frames in 22 airports, 698 of which were standalone digital frames, and 1,730 of which were
TV-attached digital frames. Our digital frames play advertising content repeatedly in ten-minute
cycles.
We believe digital frames provide an effective advertising platform to our advertising
clients. We sell our advertisements on digital frames in one-week units which affords scheduling
flexibility and cost-effectiveness to our clients. In addition, as our digital frames are located
in both domestic and international terminals in a number of airports, our clients can choose to
place their advertisements in domestic terminals only, international terminals only or a mix of
domestic and international terminals. This flexibility in terms of location selection provides our
clients with the ability to tailor their advertisement packages to effectively attract their target
audiences. We also continue to diversify the arrangement and placement of our digital frames to
offer enhanced visual effects. For example, in Guangzhou International Airport we put our digital
frames in sets of two or three screens together as a group. An advertisement can be displayed in
one picture on multiple screens to better attract air travelers’ attention.
We began placing clients’ advertisements on 46-inch digital frames upgraded from light box
displays at Terminal 2 of Beijing Capital International Airport in December 2007. The new digital
frames at Terminal 3 began displaying paid advertisements at the end of February 2008. We started
selling advertisements on digital frames in five additional airports in April 2008 and another
seven airports in early May 2008. We intend to significantly increase the number of our digital
frames in the near future.
Digital TV Screens in Airports
As of March 1, 2009, we operated 2,752 digital TV screens in 41 airports in China and had
entered into concession rights contracts to operate digital TV screens in 51 airports in China.
The 41 airports in which we operate digital TV screens accounted for approximately 95.0% of the total air travelers in China in 2008
according to CAAC.
Our most common form of digital advertising in airports is closed-circuit television displays.
We strategically place our digital TV screens in high-traffic areas of airports such as departure
halls, security check areas, boarding gates, baggage claim areas and arrival halls, where there
tend to be significant waiting time. A majority of our standard digital TV screens are 42-inch
plasma display panels, or PDPs, or liquid crystal displays, or LCDs.
Our airport programs consist of advertising and non-advertising content and are played for
approximately 16 hours per day. Our non-advertising content is played in two-hour cycles, during
which our advertising content is repeated hourly. During each hour, 25 minutes of the program
consists of advertising content provided to us by our advertising clients and the rest of the
program consists of non-advertising content such as sports and entertainment content provided by
third-party content providers. In addition to the separate advertising messages or videos, which are updated weekly, we promote the brand names of our advertising clients by
naming our programs after their brand names. The non-advertising content consists of humor clips
such as “The World’s Funniest Home Videos,” sports clips such as soccer, basketball and extreme
sports, movie previews and interviews with celebrities, as well as the latest world fashion shows
provided by Fashion TV. These programs are generally updated monthly, with the programs in Shanghai
Pudong and Hongqiao airports updated weekly.
In addition to the traditional displays, some of our major network airports also have feature
displays such as:
Mega display screens. In both the departure hall and the arrival hall of the Beijing
Capital International Airport, we have placed four LED mega display screens with a size
of nine square meters each, featuring large viewing angles and high resolution images.
We have also placed one LED mega display screen of 22 square meters in Guangzhou Baiyun
International Airport.
•
Shuttle bus displays. We have placed 252 digital TV screens on 104 airport shuttle
buses operated by the largest five airports to transport air passengers.
We will seek to expand our use of these applications and develop other technically advanced
display platforms to other airports in our network in the future.
Digital TV Screens on Airplanes
As of March 1, 2009, our programs were placed on 49,482 digital TV screens on over 2,300
routes of 10 airlines. The displays on our network airplanes, which have been installed by aircraft
manufacturers, are located at the top of passenger compartments and on the back of passenger seats.
The digital TV screens at the top of passenger compartments typically range from 14 inches to 50
inches in size and there are approximately 10 to 300 on each plane. The display screens on the back
of passenger seats typically range from seven inches to nine inches in size, depending on the class
of the passenger seating area, and typically there is a display screen behind each passenger seat.
Our airplane display programs are played once for approximately 45 minutes to an hour per
flight. Approximately five to 13 minutes of each program consists of advertising content provided
to us by our advertising clients and the rest of the program consists of non-advertising content.
The non-advertising content on our planes includes the latest domestic and international news,
market updates and sports snapshots and other content similar to that shown on our airport
programs. We also promote brand names of our advertising clients through our programs by naming our
programs after their brand names or displaying their logos on the corner of the screens during the
programs. We have obtained rights from film production companies to play blockbuster films on
airplanes in our network.
As
most of the airplanes on which our programs are played use video tape
or DVD players
to play video messages and most of these airplanes only have one
video tape or DVD playing unit,
passengers are not typically given a selection of channels.
Billboards and Painted Advertisement on Gates Bridges in Airports
In July 2008, we acquired a business selling advertisements on gate bridges in airports. As a
result, we have obtained the contractual concession rights to place advertisements on gate bridges
located in 10 major airports in China. The addition of gate bridges to our air travel advertising
network has diversified our media resources to include billboard and painted advertisements.
Our advertisements on gate bridges in airports includes billboard advertisements on interior
walls of gate bridges and painted advertisements on exterior walls of gate bridges. Our billboard
advertisements measure 0.6 meter by 0.9 meter in size. As of March 1, 2009, we placed 2,806
billboard advertisements on 134 gate bridges located in 10 major airports in China, including
Terminals 1 and 2 of Beijing Capital International Airport and Guangzhou Baiyun International
Airport. As of March 1, 2009, we placed painted advertisements on 46 gate bridges located in 10
major airports in China.
Other Displays
In March 2009, we entered into a concession rights contract with Beijing Capital International
Airport to operate traditional advertising formats including billboards, light boxes and other
formats in 376 locations in Terminals 1, 2, and 3 of Beijing Capital International Airport. We
started operating in most of these 376 locations in April 2009. We also entered into a concession
rights contract with Shenzhen International Airport to operate 90 light boxes in the arrival
walkways of Terminals A and B of Shenzhen International Airport. We started operating light boxes
in most of these 90 locations in April 2009.
Light box advertisements are static poster advertisements illuminated with back lighting and
set underneath our digital TV screens. As of March 1, 2009, we operated 292 light boxes in 17
airports. We will
upgrade 128 of these static light boxes to 46-inch digital frame displays that
will run advertisements across a ten-minute cycle.
We also have digital TV screens on top of newspaper racks. In Guangzhou Baiyun International
Airport and Shenzhen International Airport, we have placed 50 14-inch digital TV screens on top of
newspaper racks, which play advertising content repeatedly in 20-minute cycles.
Advertising Network
Airports
As of December 31, 2008, we had entered into 104 concession rights contracts to operate our
digital frames, digital TV screens and other displays in 51 airports in China, covering
substantially all of the major airports in China. Our air travel advertising network currently
includes 41 airports in China, including the five largest airports in China, Beijing Capital
International Airport, Guangzhou Baiyun International Airport, Shanghai Pudong International
Airport, Shanghai Hongqiao International Airport and Shenzhen International Airport, where we have
placed and operated an aggregate of 828 digital frames and 1,077 digital TV screens. We derived
more than 55.8% of our total revenue in 2008 from these five airports and we believe advertising in
other airports in our network will further drive the increase of our revenues.
As of December 31, 2008, 57 out of these 104 concession rights contracts to operate in
airports contained provisions granting us exclusive concession rights. The scope of the
exclusivity, however, varies from contract to contract. Most of these exclusivity provisions limit
the exclusivity to certain areas of an airport. For example, our contract with Guangzhou Baiyun
International Airport granted us the exclusive right to operate all the closed-circuit displays
located in the domestic and international arrival and departure areas.
We also have concession rights contracts to place advertisements on gate bridges or operate
other displays, such as billboards and light box displays. For example, we have concession rights
to place advertisements on gate bridges located in 10 major airports in mainland China, including
Beijing Capital International Airport and Guangzhou Baiyun International Airport.
Most of the concession fees are fixed under the concession rights contracts with escalation,
meaning fixed increases over each year of the agreement, and payments are usually due three or six
months in advance. The concession fee that we pay for operation in each airport varies by its
passenger volume and the city where the airport is located. As part of the value added service to
our network airports, we provide up to 10% of the non-advertising content at the request of the
network airports to provide displays of flight and airport information on our digital TV screens
without charging the airports any fee. A majority of our concession rights contracts for our
digital frames and digital TV screens in the airports have terms ranging from three to five years
without any automatic renewal provisions. However, under some agreements we can opt to renew the
agreements three or five months before the expiration of certain concession rights contracts, on
the condition that we renew on similar commercial terms as those proposed by any third party. As of
December 31, 2008, 43 out of 104 of our concession rights contracts to operate in airports would be
subject to renewal by the end of 2010, including the concession rights contracts to operate in the
four major airports in Beijing, Shanghai and Shenzhen. The number of displays and placement
locations are explicitly specified in the majority of our concession rights contracts. As of
December 31, 2008, five out of seven of our gate bridge concession rights contracts would be
subject to renewal by the end of 2010.
Airlines
Our programs are currently placed on over 49,400 digital TV screens located on over 2,300
routes operated by the following 10 airlines:
Among the 13 concession rights contracts we had entered into to place our programs on these
network airlines as of December 31, 2008, 11 concession rights contracts contained provisions
granting us exclusive concession rights. The scope of the exclusivity, however, varies from
contract to contract. Most of these exclusivity provisions limit the exclusivity to certain types
of programs played on airplanes. For example, our concession rights contract for our programs on
Air China granted us the exclusive right to operate the Air Panorama program, including both
advertising and non-advertising content, that is played on all routes operated by Air China and we
have the exclusive right to operate the Eastern Airlines Entertainment program under our concession
rights contracts for our programs on China Eastern Airlines. Most of the concession fees are fixed
under the concession rights contracts with an escalation clause, varying by the number of routes and
airplanes, type of aircraft and the departure and destination cities. Some of the concession rights
contracts set forth the number and model of airplanes on which our programs can be played. As of
December 31, 2008, nine out of 13 of our concession rights contracts to operate on airlines would
be subject to renewal by the end of 2010.
In March 2008, we entered into an agreement with China Eastern Media Corporation, Ltd., a
subsidiary of China Eastern Group and China Eastern Airlines Corporation Limited operating the
media resources of China Eastern Group, to establish a joint venture, Beijing Eastern Media
Corporation, Ltd., or BEMC. China Eastern Media Corporation holds 51% stake of BEMC and we hold the
remaining 49% stake. BEMC obtained concession rights of certain media resources from its
shareholders, including the digital TV screens on airplanes of China Eastern Airlines, and paid
concession fees to its shareholders as consideration. The operation period of the joint venture is
currently fixed at 50 years. Although we do not expect this joint venture to materially change our
currently effective concession rights contracts with and our existing operations on China Eastern
Airlines, we believe this innovative strategic partnership will further strengthen our relationship
with China Eastern Group and help retain our contractual concession rights to operate our programs
on China Eastern Airlines in the future. Going forward we intend to operate additional media
resources other than digital TV screens that will be obtained by this joint venture, including
other existing media resources of China Eastern Airlines and new media resources to be developed
through cooperative efforts by China Eastern Airlines and us. BEMC did not generate any revenue
from third parties in 2008.
In August 2008, we entered into an exclusive agency agreement to be the sole sales agent in
mainland China to sell advertisements on both international and domestic routes operated by
Dragonair and Cathay Pacific Airways from August 2008 to December 31, 2010. According to the
agreement, we would earn commissions by selling advertisements on routes operated by Dragonair and
Cathay Pacific Airways to advertisers. There was no revenue contribution from this new agency
commission model in 2008.
Advertising Clients, Sales and Marketing
Our Advertising Clients
Advertisers purchase advertising time slots on our advertising network either directly or
through advertising agencies. Many advertisers negotiate the terms of the advertising purchase
agreements directly with us. We rely on advertising agency clients for a significant portion of our
sales. Our advertisers consist of international and domestic brands. From the commencement of our
operations in August 2005 to December 31, 2008, a total of 439 advertisers have purchased
advertising time slots on our network, 251 of which purchased advertisements on our network
directly and 188 of which purchased advertisements through advertising agencies. Our top fifteen
advertisers for 2008 in alphabetical order included China Mobile, China Unicom, Dragon Bay Villa,
GE, Great Wall Wine, Haier, Hitachi, HSBC, Land Rover, Lexus, Mengniu Dairy, Nissan, Samsung,
Toyota and Vodone.com., which collectively accounted for 43.9% of our revenues in 2008.
We have a broad base of international and domestic advertisers in various industries. In 2008,
the top three industries which advertise on our network were automobile, electric appliances and
food, tobacco and wines, based on revenues derived from companies in these industries. Advertising
for the automobile industry, the electric appliances industry and the food, tobacco and wines
industry accounted for approximately 26.4%, 19.6% and 13.6% of our total revenues in 2008,
respectively.
We offer advertisers 12-second time slots of advertising on digital frames and five-, 15- or
30-second time slots of advertising on digital TV screens in our network. Our sales are made
pursuant to written contracts with commitments ranging from one week to several months. The sales
contracts typically fix the duration, time and frequency of advertisements. Payments under the
certain sales contracts are subject to our clients’ receipt of monitoring reports which verify the
proper display of the advertisements. We generally require our clients to submit advertising
content at least seven days prior to the campaign start date. We also reserve the right to refuse
to display advertisements that are not in compliance with content requirements under PRC laws and
regulations.
For the period from August 7, 2005, the date we commenced operations, to December 31, 2005,
Shanghai Volkswagen and Mengniu Dairy accounted for 15.5% and 10.8% of our total revenues,
respectively. No single advertising client accounted for more than 10% of our total revenues for
2006, 2007 and 2008.
Sales and Marketing
We provide a number of services in connection with each client’s advertising campaign. We rely
on our experienced sales team to assist advertisers in structuring advertising campaigns by
analyzing advertisers’ target audiences and consumer products and services. We conduct market
research, consumer surveys, demographic analysis and other advertising industry research for
internal use to help our advertisers to create effective advertisements. We also purchase or
commission studies containing relevant market study data from third-party market research firms
such as Sinomonitor. We typically consult such studies to assist us in evaluating the effectiveness
of our network to our advertising clients and to illustrate to our clients our ability to reach
targeted demographic groups effectively.
Our experienced advertising sales team is organized by region and city with presence in 21
cities. Our regional marketing managers have an average of seven years of experience in the
advertising industry in China. The members of our current sales team have an average of four years
of sales experience in the advertising industry. We provide in-house education and training to our
sales force to ensure they provide our current and prospective clients with comprehensive
information about our services, the advantages of using our air travel advertising network as a
marketing channel, and relevant information regarding the advertising industry. Our
performance-linked compensation structure and career-oriented training are key drivers that
motivate our sales employees.
We actively attend various public relation events to promote our brand image and the value of
air travel digital advertising. We also market our advertising services by displaying our name and
logo on all of our digital TV screens and by placing advertisements on third-party media from time
to time, including CCTV.
We engage third-party agencies to help source advertising clients. Agency fees are calculated
based on a pre-set percentage of revenues generated from the clients introduced to us by the
agencies.
Pricing
The listing prices of our advertising services vary by the size of the airport or airline in
which the advertisement is placed, the demand of advertising services for each airport and
airlines, as well as by the number of time slots purchased. Prices for advertisements on our
network are fixed under our sales contracts with advertisers or advertising agency clients,
typically at a discount to our listing prices. We increased our listing prices in April 2007,
October 2007 and January 2008, and going forward we plan to review our listing prices periodically.
Programming
Our digital frames in airports play advertising content repeatedly in ten-minute cycles
throughout the day. We compile each cycle from advertisements of 12-seconds in length provided by
advertisers to us. We generally update the contents displayed on our digital frames on a weekly
basis.
A majority of our digital TV screens in airports play programs in a two-hour cycle repeatedly
throughout the day and our digital TV screens on our network airplanes play programs ranging from
45 minutes to one hour once per flight. We compile each cycle from advertisements of five-, 15- or
30-seconds in length provided by advertisers to us and from non-advertising content provided by
third-party content providers. We generally create a programming list on a weekly and monthly basis
for programs played in airports and on airlines, respectively, by first fixing the schedule for
advertising content according to the respective sales contract with our clients to guarantee the
agreed duration, time and frequency of advertisements. We then add the non-advertising content to
achieve an optimal blend of advertising and non-advertising content.
Substantially all of the advertising content on our network is provided by our advertising
clients. All of the advertising content displayed on the portion of the network we operate directly
is reviewed by qualified members of our staff to ensure compliance with PRC laws and regulations.
See “—Regulation—Regulation of Advertising Services—Advertising Content.” We update advertising
content for our programs played on the digital TV screens in our network airports and airplanes on
a weekly and monthly basis, respectively. Substantially all of the non-advertising content played over our network is provided by
third-party content providers such as China International TV
Corporation and various local television stations and television
production companies.
In March 2008, we established a strategic partnership with Shanghai Media Group, or SMG, the
second largest comprehensive media group in China, to provide TV programs to air travelers.
According to the agreement with WingsMedia, a wholly-owned subsidiary of SMG, we obtained the
exclusive right to show selected news, theme programs and documentary clips provided by SMG in
airports and on airplanes of our network from March 2008 to February 2010. We have also entered
into program purchase agreements with various television production companies to acquire the right
to play certain of their programs on our network at fixed prices.
Our programming team edits, compiles and records into digital format all of our network
programs according to the programming list. Each programming list and pre-recorded program is
carefully reviewed by the head of the execution team to ensure the accuracy of the order, duration
and frequency as well as the appropriateness of the content.
Airports
For content displayed on digital frames in our network airports, our programming team edits
the content received from the advertisers into JPG files or Adobe flash files and delivers them to
the display control panel in each of our network airports through CDMA wireless network, which in
turn transmits the contents to each digital frame through Wi-Fi Alliance local wireless network.
For the programs played on our digital TV screens in our network airports, our programming team
converts content to a MPEG file and delivers it to the local execution teams in our network
airports nationwide. The local execution team uploads the MPEG file to the local servers in each
network airport, which transmits the pre-recorded programs to each digital TV screen through the
closed-circuit television system in the airport. In each airport, we either use the closed-circuit
television systems provided by the airport or install our own systems. The more technically
advanced systems used in eight airports, including Beijing, Shanghai, Guangzhou and Shenzhen,
enable us to simultaneously monitor digital TV screens from our headquarters in Beijing.
Airplanes
Most of the network airplanes use video tape players to show video programs while others use
DVD players or digital format data players. Our programming team converts the content from digital
format to video tapes and mails a master video tape to each airline on a monthly or weekly basis.
For airlines that display news programs, we transfer edited news and advertising contents in
digital format to airlines on a daily basis through secured online services. Airlines generally
review the pre-recorded programs that we provide before duplicating and distributing the video
tapes to each airplane. Flight attendants on each airplane are responsible for the daily operation
of our programs on the airplane digital TV screens.
Display Equipment Supplies and Maintenance
The primary hardware required for the operation of our network are the digital frames and
digital TV screens that we use in our media network. Our digital frames are flat-panel LCD
displays. The majority of our
digital TV screens consist of PDPs and LCDs. Maintaining a steady
supply of our display equipment is important to our operations and the growth of our network. The
top five suppliers of our digital frames were Samsung, Haier, HPC, Sharp and Hitachi as of December31, 2008, which collectively provided 100% of our total digital frames. As of December 31, 2008 the
top three suppliers of our digital TV screens were Hitachi, Haier and Konka, which collectively
provided 99.9% of our total digital TV screens. Our digital frame suppliers typically provide us
with one- to two-year warranties while our TV screen suppliers typically provide us with one-year
warranties.
Approximately 2.1% of our digital TV screen purchases in 2008 were made through barter
transactions, which means we provided advertising time slots to the digital TV screen manufacturers
in exchange for the digital TV screens. Such barter transactions are based on our determination of
the fair value of the advertising time slots exchanged for digital TV screens.
Our service team cleans, maintains and monitors digital frames, digital TV screens and other
displays in our network airports on a daily basis. We have engaged two to four skilled maintenance
staff for each network airport to make five scheduled inspections on our displays every day. They
report any technical problems that they cannot solve on-site to our technicians in Beijing who
strive to remotely analyze and fix problems within 12 hours.
Customer Service
Our customer service team is responsible for compiling monitoring reports to clients as
evidence that their advertisements are played on our network within one week after launching the
advertising campaign. We also provide our advertising clients with weekly reports prepared by third
parties, which verify the proper functioning of our displays and the proper dissemination of the
advertisement by conducting on-site evaluations and polls to analyze the effectiveness of and
public reaction to the advertisement. In addition, our network airports and airlines are also
actively involved in the monitoring process and provide our clients with stamped certificates
certifying the playing of the advertisements.
Competition
We compete primarily with several different groups of competitors:
•
advertising companies that operate airport advertising networks, such as JC Decaux,
and out-of-home digital advertising networks beyond the air travel sector, such as
Focus Media;
•
in-house advertising companies of airports and airlines that may operate their own
advertising networks; and
•
other advertising media companies, such as Internet, street furniture displays,
billboard and public transport advertising companies, and with traditional advertising
media, such as newspapers, television, magazines and radio, some of which may advertise
in the airports in which we have exclusive contract rights to operate digital TV
screens.
We compete for advertising clients primarily on the basis of network size and coverage,
location, price, quality of our programs, the range of services that we offer and our brand
recognition. Many of our competitors have a variety of competitive advantages over us, such as
larger resources. Many competitors have a longer history than us in the out-of-home advertising
industry and may have a more extensive network that extends beyond the air travel sector and offers
a more diversified portfolio. This may make their network more attractive to advertising clients
and less reliant on a particular advertising sector. In addition, we may also face competition from
new entrants into the air travel advertising sector in the future.
Intellectual Property
To protect our brand and other intellectual property, we rely on a combination of trademark
and trade secret laws as well as confidentiality agreements with our employees, sales agents,
contractors and others. We are in the process of registering three trademarks in China, including
“,”“AirMedia” and our business logo. We have registered our domain name www.AirMedia.net.cnwith
the Internet Corporation for Assigned Names and Numbers. We do not hold any patents or copyrights
and cannot be certain that our efforts
to protect our intellectual property rights will be adequate
or that third parties will not infringe or misappropriate these rights.
Legal Proceedings
We are currently not a party to any material legal proceeding. From time to time, however, we
may be subject to various claims and legal actions arising in the ordinary course of business.
Regulation
We operate our business in China under a legal regime consisting of the State Council, which
is the highest authority of the executive branch of the National People’s Congress, and several
ministries and agencies under its authority including the SAIC.
China’s Advertising Law was promulgated in 1994. In addition, the State Council, SAIC and
other ministries and agencies have issued regulations that regulate our business, all of which are
discussed below.
Limitations on Foreign Ownership in the Advertising Industry
The principal regulations governing foreign ownership in the advertising industry in China
include:
•
The Administrative Regulations on Foreign-invested Advertising Enterprises (as
amended in 2008); and
•
Foreign Investment Industrial Guidance Catalogue (as amended in 2007).
On October 31, 2007, the Ministry of Commerce and National Development and Reform Commission
jointly issued and amended Foreign Investment Industrial Guidance Catalogue, effective since
December 1, 2007. According to the Provisions on Guiding the Orientation of Foreign Investment
which became effective on April 1, 2002, foreign investment projects are divided into four
categories: encouraged, permitted, restricted and prohibited. The foreign investment projects that
are encouraged, restricted and prohibited shall be listed in the Foreign Investment Industrial
Guidance Catalogue. The foreign investment projects that do not fall into the categories of
encouraged, restricted or prohibited projects shall be the permitted foreign investment projects.
The permitted foreign investments projects shall not be listed in the Foreign Investment Industrial
Guidance Catalogue. Applicable regulations and approval requirements vary based on the different
categories. Investments in the PRC by foreign investors through wholly foreign-owned enterprises
must be in compliance with the applicable regulations, and such foreign investors must obtain
governmental approvals as required by these regulations. Since the advertising industry is not
listed in the Foreign Investment Industrial Guidance Catalogue, it falls into the permitted foreign
investment category.
The Administrative Regulations on Foreign-invested Advertising Enterprises require foreign
entities that directly invest in the advertising industry to have at least two years of direct
operations in the advertising industry outside of China. Since December 10, 2005, foreign investors
have been permitted to directly own a 100% interest in advertising companies in China, but must
also have at least three years of direct operations in the advertising industry outside of China. PRC laws and regulations do not permit the transfer of any
approvals, licenses or permits, including business licenses containing a scope of business that
permits engaging in the advertising industry. In the event we are permitted to acquire the equity
interests of our variable interest entities under the rules allowing for complete foreign
ownership, our variable interest entities would continue to hold the required advertising licenses
consistent with current regulatory requirements.
Since we have not been involved in advertising outside of China for the required number of
years, our domestic PRC operating subsidiaries are currently ineligible to apply for the required
advertising services licenses in China. Our advertising business is currently mainly provided
through our contractual arrangements with our consolidated variable interest entities in China,
including AM Advertising, Shengshi Lianhe, AirMedia UC and AM Yuehang. Our variable interest
entities are the major companies through which we provide advertising services in China. Our
subsidiary, AM Technology, has entered into a series of contractual arrangements with our PRC
operating affiliates and their respective subsidiaries and shareholders under which:
we are able to exert effective control over our PRC operating affiliates and their
respective subsidiaries;
•
a substantial portion of the economic benefits of our PRC operating affiliates and
their respective subsidiaries are transferred to us; and
•
we have an exclusive option to purchase all of the equity interests in our PRC
operating affiliates in each case when and to the extent permitted by PRC law.
See “Item 4. Information on the Company—C. Organizational Structure” and “Item 7. Major
Shareholders and Related Party Transactions—B. Related Party Transactions.”
In the opinion of Commerce & Finance Law Offices, our PRC legal counsel:
•
the respective ownership structures of AM Technology and our consolidated variable
interest entities are in compliance with existing PRC laws and regulations;
•
the contractual arrangements among AM Technology and our consolidated variable
interest entities, in each case governed by PRC law, are valid, binding and
enforceable, and will not result in any violation of PRC laws or regulations currently
in effect; and
•
except for the SAIC outdoor advertising registrations and the SARFT approval for our
non-advertising content, the PRC business operations of our variable interest entities
as described in this annual report are in compliance with existing PRC laws and
regulations in all material respects.
We have been advised by our PRC legal counsel, however, that there are some uncertainties
regarding the interpretation and application of current and future PRC laws and regulations.
Accordingly, there can be no assurance that the PRC regulatory authorities, in particular the SAIC
(which regulates advertising companies), will not in the future take a view that is contrary to the
opinion of our PRC legal counsel. We have been further advised by our PRC counsel that if the PRC
government determines that the agreements establishing the structure for operating our PRC
advertising business do not comply with PRC government restrictions on foreign investment in the
advertising industry, we could be subject to severe penalties. See “Item 3. Key Information—D.
Risk Factors—Risks Related to Regulation of Our Business and to Our Structure—If the PRC
government finds that the agreements that establish the structure for operating our China business
do not comply with PRC governmental restrictions on foreign investment in the advertising industry
and in the operating of non-advertising content, we could be subject to severe penalties.”
Regulation of Advertising Services
Business License for Advertising Companies
The principal regulations governing advertising businesses in China include:
•
The Advertising Law (1994);
•
The Advertising Administrative Regulations (1987); and
•
The Implementing Rules for the Advertising Administrative Regulations (2004).
These regulations stipulate that companies that engage in advertising activities must obtain
from the SAIC or its local branches a business license which specifically includes within its scope
the operation of an advertising business. Companies conducting advertising activities without such
a license may be subject to penalties, including fines, confiscation of advertising income and
orders to cease advertising operations. The business license of an advertising company is valid for
the duration of its existence, unless the license is suspended or revoked due to a violation of any
relevant law or regulation. We do not expect to encounter any difficulties in maintaining our
business licenses. Each of our variable interest entities has obtained such a business license from the local branches of the SAIC as required by existing PRC
regulations.
PRC advertising laws and regulations set forth certain content requirements for advertisements
in China, which include prohibitions on, among other things, misleading content, superlative
wording, socially destabilizing content or content involving obscenities, superstition, violence,
discrimination or infringement of the public interest. Advertisements for anesthetic, psychotropic,
toxic or radioactive drugs are also prohibited. The dissemination of tobacco advertisements via
media is also prohibited as well as the display of tobacco advertisements in any waiting lounge,
theater, cinema, conference hall, stadium or other public area. There are also specific
restrictions and requirements regarding advertisements that relate to matters such as patented
products or processes, pharmaceuticals, medical instruments, agrochemicals, foodstuff, alcohol and
cosmetics. In addition, all advertisements relating to pharmaceuticals, medical instruments,
agrochemicals and veterinary pharmaceuticals advertised through radio, film, television, newspaper,
magazine, out-of-home and other forms of media, together with any other advertisements which are
subject to censorship by administrative authorities according to relevant laws and administrative
regulations, must be submitted to the relevant administrative authorities for content approval
prior to dissemination. We do not believe that advertisements containing content subject to
restriction or censorship comprise a material portion of the advertisements displayed on our
network.
Advertisers, advertising operators and advertising distributors are required by PRC
advertising laws and regulations to ensure that the content of the advertisements they prepare or
distribute are true and in full compliance with applicable law. In providing advertising services,
advertising operators and advertising distributors must review the prescribed supporting documents
provided by advertisers for advertisements and verify that the content of the advertisements comply
with applicable PRC laws and regulations. In addition, prior to distributing advertisements for
certain commodities which are subject to government censorship and approval, advertising
distributors are obligated to ensure that such censorship has been performed and approval has been
obtained. Violation of these regulations may result in penalties, including fines, confiscation of
advertising income, orders to cease dissemination of the advertisements and orders to publish an
advertisement correcting the misleading information. In circumstances involving serious violations,
the SAIC or its local branches may revoke violators’ licenses or permits for advertising business
operations. Furthermore, advertisers, advertising operators or advertising distributors may be
subject to civil liability if they infringe on the legal rights and interests of third parties in
the course of their advertising business.
Outdoor Advertising
The Advertising Law stipulates that the exhibition and display of outdoor advertisements must
not:
•
utilize traffic safety facilities and traffic signs;
•
impede the use of public facilities, traffic safety facilities and traffic signs;
•
obstruct commercial and public activities or create an unpleasant sight in urban
areas;
•
be placed in restrictive areas near government offices, cultural landmarks or
historical or scenic sites; or
•
be placed in areas prohibited by the local governments from having outdoor
advertisements.
In addition to the Advertising Law, the SAIC promulgated the Outdoor Advertising Registration
Administrative Regulations on December 8, 1995, as amended on December 3, 1998 and May 22, 2006,
respectively, which governs the outdoor advertising industry in China.
Outdoor advertisements in China must be registered with the local SAIC before dissemination.
The advertising distributors are required to submit a registration application form and other
supporting documents for registration. After review and examination, if an application complies
with the requirements, the local SAIC will issue an Outdoor Advertising Registration Certificate
for such advertisement. The content, format, specifications, periods and locations of dissemination
of the outdoor advertisement must be submitted for filing with the local SAIC. See “Item 3. Key
Information—D. Risk Factors—Risks Related to Our Business—If advertising registration
certificates are not obtained for our airport advertising operations where such
registration certificates are deemed to be required, we may be subject to administrative
sanctions, including the discontinuation of our advertisements at airports where the required
advertising registration is not obtained.”
In addition, according to the SARFT Circular dated December 6, 2007, displaying audio-video
programs such as television news, films and television shows, sports, technology and entertainment
through public audio-video systems located in automobiles, buildings, airports, bus or train
stations, shops, banks and hospitals and other outdoor public systems must be approved by the
SARFT. The relevant authority in China has not promulgated any implementation rules on the
procedure of applying for the requisite approval pursuant to the SARFT Circular. See “Item 3. Key
Information—D. Risk Factors—Risks Related to Our Business—If we fail to obtain approvals for
including non-advertising content in our programs, we may be unable to continue to include such
non-advertising content in our programs, which may cause our revenues to decline and our business
and prospects to deteriorate.”
Regulations on Foreign Exchange
Foreign exchange regulation in China is primarily governed by the following rules:
•
Foreign Currency Administration Rules (1996), as amended, or the Exchange Rules; and
•
Administration Rules of the Settlement, Sale and Payment of Foreign Exchange (1996),
or the Administration Rules.
Under the Exchange Rules, the RMB is convertible for current account items, including the
distribution of dividends, interest payments, trade and service-related foreign exchange
transactions. Conversion of RMB for capital account items, such as direct investment, loan,
security investment and repatriation of investment, however, is still subject to the approval of
the SAFE or its qualified local branches.
Under the Administration Rules, foreign-invested enterprises may only buy, sell and/or remit
foreign currencies at those banks authorized to conduct foreign exchange business after providing
valid commercial documents and, in the case of capital account item transactions, obtaining
approval from the SAFE. Capital investments by foreign-invested enterprises outside of China are
also subject to limitations, including approval by the Ministry of Commerce, the SAFE and the State
Development and Reform Commission or their respective qualified local branches.
Regulations on Dividend Distribution
The principal regulations governing dividend distributions of wholly foreign-owned companies
include:
•
Wholly Foreign-Owned Enterprise Law (1986), as amended;
•
Wholly Foreign-Owned Enterprise Law Implementing Rules (1990), as amended; and
•
The Enterprise Income Tax Law (2007) and its Implementation Regulations (2007).
Under these regulations, wholly foreign-owned companies in the PRC may pay dividends only out
of their accumulated profits as determined in accordance with PRC accounting standards. The
distribution of dividends by a wholly foreign-owned enterprise out of China is subject to
examination by banks designated by the SAFE. In addition, based on PRC accounting standards, these
wholly foreign-owned companies are required to set aside at least 10% of their after-tax profits
each year, if any, to fund certain statutory reserve funds. A company is required to set aside its
profits to fund the reserve until its cumulative total reserve fund is equal to at least 50% of the
company’s registered capital. At the discretion of these wholly foreign-owned companies, they may
allocate a portion of their after-tax profits based on PRC accounting standards to staff welfare
and bonus funds. These reserve funds and staff welfare and bonus funds are not distributable as
cash dividends.
In addition, under the new PRC enterprise income tax law, dividends generated after January1, 2008 and payable by a foreign-invested enterprise in China to its foreign investors who are
non-resident enterprises will be subject to a 10% withholding tax unless any such foreign
investor’s jurisdiction of
incorporation has a tax treaty with China that provides for a different withholding
arrangement. The British Virgin Islands, where our wholly owned subsidiary and the
100% shareholder of Shenzhen AM is incorporated, does not have such a tax treaty
with China. Air Media (China) Limited, the 100% shareholder of AM Technology, is incorporated
in Hong Kong. According to the Mainland and Hong Kong Special Administrative Region
Arrangement on Avoiding Double Taxation or Evasion of Taxation on Income agreed between
China and Hong Kong in August 2006, dividends paid by a foreign-invested enterprise in China to
its direct holding company in Hong Kong will be subject to withholding tax at a rate of 5% (if
the foreign investor owns directly at least 25% of the shares of the foreign-invested
enterprise). The new PRC tax law provides, however, dividends distributed between
qualified resident enterprises are exempted. According to the Implementation Regulations of
the Enterprise Income Tax Law, the qualified dividend and profit distribution from equity
investment between resident enterprises shall refer to investment income derived by a resident
enterprise from the direct investment in other resident enterprises with exception to the
investment income from circulating stocks issued publicly by resident enterprises and traded on
stock exchanges where the holding period is less than 12 months. As the term “resident
enterprises” needs further clarification and interpretation, we cannot assure you that the
dividends distributed by Shenzhen AM, AM Technology and Xi’an AM
to their direct shareholders would be
regarded as dividends distributed between qualified resident enterprises, and be
exempted from the EIT. See “Item 3. Key Information — D. Risk Factors —Risks Related to our
Business—Dividends payable to us by our wholly-owned operating subsidiaries may be subject to
PRC withholding taxes, or we may be subject to PRC taxation on our worldwide income and dividends
distributed to our investors may be subject to PRC withholding taxes under the new PRC tax law.”
SAFE Regulations on Offshore Investment by PRC Residents and Employee Stock Options
SAFE issued a public notice in January 2005 concerning foreign exchange regulations on mergers
and acquisitions in China. The public notice stated that if an offshore company controlled by PRC
residents intends to acquire a PRC domestic company, such acquisition will be subject to strict
examination by the relevant foreign exchange authorities. The public notice also stated that the
approval of the relevant foreign exchange authorities is required for any sale or transfer by PRC
residents of a PRC domestic company’s assets or equity interests to foreign entities, such as us,
for equity interests or assets of the foreign entities. In April 2005, SAFE issued another public
notice. In accordance with the April notice, if an acquisition of a PRC company by an offshore
company controlled by PRC residents has been confirmed by a Foreign Investment Enterprise
Certificate prior to the promulgation of the January notice, the PRC residents must each submit a
registration form to the local SAFE branch with respect to their respective ownership interests in
the offshore company, and must also file an amendment to such registration if the offshore company
experiences material events, such as changes in the share capital, share transfer, mergers and
acquisitions, spin-off transaction or use of assets in China to guarantee offshore obligations. The
April notice also provided that failure to comply with the registration procedures set forth in the
April notice may result in a restriction on the PRC company’s ability to distribute profits to its
offshore parent company and to increase its registered capital.
On October 21, 2005, SAFE issued a new public notice which became effective on November 1,2005. The new notice repealed the January and April 2005 SAFE notices, effective from November 1,2005. The October 2005 notice also required every PRC resident to register with the local SAFE
branch before setting up a special purpose company outside of China. PRC residents who had set up
or controlled such special purpose offshore companies before November 1, 2005 are required to
register with the local SAFE branch before March 31, 2006. On May 29, 2007, SAFE issued a new
public notice requiring PRC companies to urge their PRC resident shareholders to register or update
their SAFE registration with the local SAFE branch as required under the October 2005 notice.
Failure to register with SAFE will subject such PRC residents to personal liability, and may also
limit our ability to contribute additional capital into our PRC subsidiary or our subsidiary’s
ability to distribute dividends to us, or otherwise adversely affect our business.
In December 2006, the People’s Bank of China promulgated the Administrative Measures of
Foreign Exchange Matters for Individuals, or the PBOC Regulation, setting forth the respective
requirements for foreign exchange transactions by PRC individuals under either the current account
or the capital account. In January 2007, SAFE issued implementing rules for the PBOC Regulation,
which, among other things, specified approval requirements for certain capital account transactions
such as a PRC citizen’s participation in the employee stock ownership plans or stock option plans
of an overseas publicly-listed company. On March 28, 2007, SAFE promulgated the Application
Procedure of Foreign Exchange Administration for Domestic
Individuals Participating in Employee Stock Holding Plan or Stock Option Plan of Overseas
Listed Company, or the Stock Option Rule. The purpose of the Stock Option Rule is to regulate
foreign exchange administration of PRC domestic individuals who participate in employee stock
holding plans and stock option plans of overseas listed companies.
According to the Stock Option Rule, if a PRC domestic individual participates in any employee
stock holding plan or stock option plan of an overseas listed company, a PRC domestic agent or the
PRC subsidiary of such overseas listed company shall, among others things, file, on behalf of such
individual, an application with SAFE to obtain approval for an annual allowance with respect to the
purchase of foreign exchange in connection with stock holding or stock option exercises as PRC
domestic individuals may not directly use overseas funds to purchase stock or exercise stock
options. Concurrent with the filing of such application with SAFE, the PRC subsidiary shall obtain
approval from SAFE to open a special foreign exchange account at a PRC domestic bank to hold the
funds required in connection with the stock purchase or option exercise, any returned principal or
profits upon sales of stock, any dividends issued upon the stock and any other income or
expenditures approved by SAFE. The PRC subsidiary also is required to obtain approval from SAFE to
open an overseas special foreign exchange account at an overseas trust bank to hold overseas funds
used in connection with any stock purchase.
All proceeds obtained by PRC domestic individuals from sales of stock shall be fully remitted
back to China after relevant overseas expenses are deducted. The foreign exchange proceeds from
these sales can be converted into RMB or transferred to such individual’s foreign exchange savings
account after the proceeds have been remitted back to the special foreign exchange account opened
at the PRC domestic bank. If the stock option is exercised in a cashless exercise, the PRC domestic
individuals are required to remit the proceeds to the special foreign exchange account.
Although
many issues relating to the Stock Option Rule still require further
interpretation, we and our PRC employees who have been granted stock
options are subject to the
Stock Option Rule. If we or our PRC employees
fail to comply with the Stock Option Rule, we and/or our PRC employees may face sanctions imposed
by foreign exchange authority or any other PRC government authorities.
In addition, the General Administration of Taxation has issued a few circulars concerning
employee stock options. Under these circulars, our employees working in China who exercise stock
options will be subject to PRC individual income tax. Our PRC subsidiaries have obligations to file
documents related to employee stock options with relevant tax authorities and withhold individual
income taxes of those employees who exercise their stock options. If our employees fail to pay and
we fail to withhold their income taxes, we may face sanctions imposed by tax authorities or any
other PRC government authorities.
C. Organizational Structure
The following diagram illustrates our corporate structure as of March 1, 2009:
Shengshi Lianhe is 79.86% owned by Herman Man Guo, our founder, chairman, chief
executive officer and an ultimate owner of our ordinary shares, 11.94% owned by Qing Xu, our
director and an ultimate owner of our ordinary shares and 8.2% owned by Xiaoya Zhang, our
president, director and an ultimate owner of our ordinary shares.
(2)
AM Advertising is 96.76% owned by Shengshi Lianhe, 2.833% owned by
Herman Man Guo, our founder, chairman, chief executive officer and an ultimate
owner of our ordinary shares, 0.241% owned by Qing Xu, our director and an ultimate
owner of our ordinary shares and 0.166% owned by Xiaoya Zhang, our president, director
and an ultimate owner of our ordinary shares.
(3)
AirMedia UC is 82.76% owned by Herman Man Guo, our founder, chairman, chief
executive officer and an ultimate owner of our ordinary shares and 17.24% owned by Qing
Xu, our director and an ultimate owner of our ordinary shares. AirMedia UC became a
consolidated variable interest entity in 2007.
(4)
AM Yuehang is 80% owned by James Zhonghua Feng, our chief operating officer and
20% owned by Tao Hong. Yuehang became a consolidated variable
interest entity in 2008.
D. Property, Plants and Equipment
Our headquarters are located in Beijing, China, where we lease over 2,800 square meters of
office space. Our branch offices lease approximately 3,997 square meters of office space in
approximately 20 other locations.
ITEM 4A. UNRESOLVED STAFF COMMENTS
None.
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
You should read the following discussion and analysis of our financial condition and results
of
operations in conjunction with our consolidated financial statements and the related notes
included elsewhere in this annual report on Form 20-F. This discussion may contain
forward-looking statements based upon current expectations that involve risks and uncertainties.
Our actual results may differ materially from those anticipated in these forward-looking
statements as a result of various factors, including those set forth under “Item 3. Key
Information—D. Risk Factors” or in other parts of this annual report on Form 20-F.
A. Operating Results
Factors Affecting Our Results of Operations
Our operating results are substantially affected by the following factors and trends.
Demand for Our Advertising Time Slots
The demand for our advertising time slots is directly related to the demand for air travel
and advertising spending in China. The demand for air travel is in turn affected by general
economic conditions, the affordability of air travel in China and certain special events that may
attract air travelers into and within China. Advertising spending is also particularly
sensitive to changes in general economic conditions. The increase or decrease in demand
for air travel and advertising spending could affect the attractiveness of our network to
advertisers, our ability to fill our advertising time slots and the price we charge for our
advertising time slots.
Service Offerings
Currently, our air travel advertising network primarily consists of standard digital frames
and digital TV screens. We intend to broaden our service offerings by adding new advertising media
platforms to make our network more comprehensive and effective. In particular, we have recently
expanded our air travel advertising network to cover the advertising business on gate bridges in
airports and have diversified our media resources to include billboards and painted advertisements.
We have also recently obtained the contractual concession rights to operate various traditional
advertising formats in two major airports. We believe our broadened service offerings will provide
our advertising clients with more choices in selecting and combining different air travel
advertising platforms that best suit their advertising needs and preferences. It will also expand
the consumer reach of the advertisements shown on our network and allow us to cross-sell different
advertising services. Ultimately, we believe these efforts will increase and diversify the sources
of revenue we can generate from our network of airports and airplanes.
Number of Our Advertising Time Slots Available for Sale
The number of time slots available for our digital frames and digital TV screens in airports
during the period presented is calculated by multiplying the time slots per week per airport by
the number of weeks during the period presented when we had operations in each airport and then
calculating the sum of all the time slots available for each of our network airports. The
number of time slots available for our digital TV screens on airplanes during the period
presented is calculated by multiplying the time slots per airline per month by the number of
months during the period presented when we had operations on each airline and then calculating
the sum of all the time slots for each of our network airlines.
By increasing the number of airports and airlines in our network, we can increase the number
of advertising time slots that we have available to sell. In addition, the length of our
advertising cycle can potentially be extended to longer durations depending on demand in each
airport or airline. However, advertisers may be unwilling to accept placement of their
advertisements on a longer time cycle which decreases the frequencies of their advertisements
displayed each day. See “Item 3. Key Information — D. Risk Factors —Risks Related to our
Business—When our current advertising network of digital frames and digital TV screens reaches
saturation in the major airports and airlines where we operate, we may be unable to offer
additional time slots to satisfy all of our advertisers’ needs, which could hamper our ability to
generate higher levels of revenues and profitability over time.”
Pricing
The average selling price we charge for our advertising time slots is calculated by dividing
our
advertising revenue by the number of 12-second equivalent advertising time slots for digital
frames in airports and 30-second equivalent advertising time slots for digital TV screens in
airports and on airplanes sold during that period, after taking into account any discounts
offered. The primary factors that affect the effective price we charge advertising clients for
time slots on our network and our utilization rate include the attractiveness of our network to
advertisers, which depends on the number of displays, the number and scale of airports and
airplanes in our network, the level of demand for time slots, and the perceived effectiveness by
advertisers of their advertising campaigns placed on our network. We may increase the average
selling prices of our advertising time slots from time to time depending on the demand for our
advertising time slots.
A significant percentage of the programs played on our digital TV screens in airports and on
airlines includes non-advertising content. We do not directly generate revenue from
non-advertising content, but instead obtain such content from third party content providers. We
believe that the combination of non-advertising content with advertising content makes air
travelers more receptive to our programs, which in turn makes the advertising content more
effective for our advertisers. We believe this in turn allows us to charge a higher price for
each advertising time slot. We closely track the program blend and customer demand to optimize
our ability to generate revenue for each program cycle.
Utilization Rate
Our utilization rate is the total time slots sold as a percentage of total time slots
available during the relevant period. In order to provide meaningful comparisons of our
utilization rate, we normalize our time slots into 12-second units for digital frames in airports
and 30-second units for digital TV screens in airports and on airplanes, which we can then compare
across network airports, airlines and periods to chart the normalized utilization rate of our
network by airports and airlines and over time. Our utilization rate is primarily affected by the
demand for our advertising time slots and our ability to increase the sales of our advertising time
slots, especially those advertising time slots on our network airports in second tier cities. We
plan to strengthen our sales efforts in these cities by building local sales teams to increase our
direct sales of advertising time slots in these cities and ultimately improve our utilization rate.
Network Coverage and Concession Fees
The demand for our advertising time slots and the effective price we charge advertising
clients for time slots on our network depend on the attractiveness and effectiveness of our network
to our advertising clients. This, in turn, is related to the breadth of our network coverage,
including significant coverage in the major airports and airlines that advertisers wish to reach.
As a result, it has been, and will continue to be, important for us to secure and retain concession
rights contracts to operate our digital frames, digital TV screens and other displays in major
airports and to place our programs on major airlines and to increase the number of displays which
we operate in those airports and programs we place on those airlines.
Concession fees constitute a significant portion of our cost of revenues. Airports and
airlines tend to increase concession fees over time, and a significant increase in concession fees
will increase our cost while our revenues may not increase proportionately, or at all. It will
therefore be important to our results of operations that we secure and retain these concession
rights contracts on commercially advantageous terms.
Revenues
We generate revenues from the sale of advertising time slots on our air travel
advertising network. The following table sets forth the revenues generated from each of
our advertising categories, both in absolute amounts and as percentages of total revenues
for the periods indicated.
Revenues from our digital frames in airports accounted for 2.9% and 35.9% of our total
revenues for the years ended 2007 and 2008, respectively. We started generating revenues from
digital frames located in Beijing Capital International Airport in December 2007. In 2008, we have
significantly expanded the number of digital frames in our network. As of December 31, 2008, we
operated 2,156 digital frames in 22 airports. We plan to gradually roll out our operations in the
additional four airports where we have contractual concession rights to operate digital frames.
Revenues from our digital TV screens in airports accounted for 55.6%, 61.7% and
37.9% of our total revenues for the years ended December 31, 2006, 2007 and 2008, respectively.
As of December 31, 2006, we operated 1,562 digital TV screens in 28 airports. As of December 31,2007, we operated 2,041 digital TV screens in 39 airports. As of December 31, 2008, we operated
2,854 digital TV screens in 41 airports.
Revenues from our digital TV screens on airplanes accounted for 25.8%, 25.4% and
15.3% of our total revenues for the years ended December 31, 2006, 2007 and 2008, respectively.
Our network was located on nine, nine and nine airlines as of December 31, 2006, 2007 and 2008,
respectively.
Revenues from billboards on gate bridges in airports accounted for 4.8% of our total
revenues for the year ended December 31, 2008. We started generating revenues from billboards on
gate bridges in airports in the third quarter of 2008. As of December 31, 2008, we have
concession rights to place advertisements on gate bridges located in 10 major airports in
mainland China, including Terminals 1 and 2 of Beijing Capital International Airport and
Guangzhou Baiyun International Airport.
Revenues from our other displays accounted for 18.6%, 10.0% and 6.1% of our total revenues
for the years ended December 31, 2006, 2007 and 2008, respectively. We have offered light box
displays since the commencement of our operations. At the same time, we continue to diversify
our display offerings and in March 2009, we entered into traditional advertising market by
obtaining concession rights to operate traditional media formats such as billboards, light boxes
and other formats in Beijing Capital International Airport and Shenzhen International Airport.
We believe that our ability to broaden our service offerings and increase and diversify our
revenue sources will be increasingly important in the future. With the recent addition of
certain traditional advertising formats, we expect that revenues from our other displays will
increase in 2009.
We exchange advertising time slots with other businesses for assets or services, such as
digital TV screens and office rental from time to time. We recognized US$0.8 million, US$0.4
million and US$1.1 million in revenues from the exchange of our advertising time slots for
assets or services for the years ended December 31, 2006, 2007 and 2008, respectively. No costs
were directly attributable to these revenues.
Our PRC subsidiaries and consolidated variable interest entities are subject to PRC
business tax and other sales related taxes at the rate of 8.5% on total revenues after
deduction of certain costs of revenues permitted by the PRC tax laws. We deduct these business
taxes and other sales taxes from revenues to arrive at net revenues.
Cost of Revenues
Our cost of revenues consists primarily of concession fees, agency fees and other costs,
including digital frames and digital TV screen depreciation costs, digital frames and digital
TV screen maintenance costs and non-advertising content costs. The following table sets forth
the major components of our cost of revenues, both in absolute amounts and as percentages of
net revenues for the periods indicated.
We incur concession fees to airports for placing and operating our digital frames, digital
TV screens and other displays and to airlines for placing our programs on their digital TV
screens. These fees constitute a significant portion of our cost of revenues and accounted for
approximately 37.7%, 28.8% and 38.3% of our net revenues in years ended December 31, 2006, 2007
and 2008, respectively. Most of the concession fees are fixed under the concession
rights contracts with an escalation clause, which requires fixed fee increases over each
year of the agreement, and payments are usually due three or six months in advance. The
concession fees that we incur under concession rights contracts for our digital frames and
digital TV screen in airports vary by the airports’ passenger flow, the city where the airport is
located and the profile of air passengers. The concession fees that we incur under concession
rights contracts for our programs on airlines vary by the number of routes and airplanes, type of
aircrafts and the departure and destination cities.
Concession fees tend to increase over time as growth in passenger volume increases demand
for air travel advertising among advertisers. Our concession fees have increased significantly
due to the new concession rights contracts that we have entered into in 2007 and 2008. As some
of our concession rights contracts are subject to renewal in the next several years, we may
experience a significant increase in our concession fees in order to retain these concession
contracts.
Agency Fees
We engage third-party agencies to help source advertising clients from time to
time. These third-party agencies assist us in identifying and introducing advertisers to us.
In return, we pay them fees if any of these advertisers generates advertising revenues for us.
Fees that we pay to these third-party agencies are calculated based on a pre-set percentage of
revenues generated from the clients introduced to us by the third-party agencies and are paid
when payments are received from the clients. We record these agency fees as cost of
revenues ratably over the period in which the related advertisements are displayed.
Agency fees accounted for 13.2%, 17.2% and 15.2% of our net revenues for the years ended
December 31, 2006, 2007 and 2008, respectively. We expect to continue using these third-party
agencies in the near future.
Others. Our other cost of revenues accounted for 5.1%, 5.3% and 6.0% of our net revenues for
the years ended December 31, 2006, 2007 and 2008, respectively, and include the following:
Display Equipment Depreciation. Generally, we capitalize the cost of our digital
frames and digital TV screens and recognize depreciation costs on a straight-line
basis over the term of their useful lives, which we estimate to be five years.
The primary factors affecting our depreciation costs are the number of digital frames
and digital TV screens in our network and the unit cost for those displays, as well as
the remaining useful life of the displays.
Display Equipment Maintenance Cost. Our display maintenance cost consists of
salaries for our network maintenance staff, travel expenses in relation to
on-site visits and monitoring and costs for materials and maintenance in connection with the upkeep of our
advertising network. The primary factor affecting our display equipment maintenance
cost is the size of our network maintenance staff. As we add new digital frames and
digital TV screens and other media platforms, we expect that our network maintenance
staff, and associated costs, will increase.
Non-advertising Content Cost. We do not produce or create any of the
non-advertising content shown on our network. The non-advertising content played over
our network is provided
by third-party content providers either for free or at fixed prices. Some of the third-party content providers that currently do not
charge us for their content may do so in the future and other third-party
content providers may increase the prices for their programs over time. This may
increase our cost of revenues in the future.
Operating Expenses
Our operating expenses consist of general and administrative expenses and selling and
marketing expenses. The following table sets forth the two components of our operating
expenses, both in absolute amount and as a percentage of net revenues for the periods
indicated.
We expect that our operating expenses will further increase in the future as
we expand our network and operations and enhance our sales and marking activities.
General and Administrative Expenses
General and administrative expenses accounted for 7.2%, 52.8% and 12.0% of our net
revenues for the years ended December 31, 2006, 2007 and 2008, respectively. Our general and
administrative expenses included a one-time share-based compensation expense of US$17.5 million
in 2007 and share-based compensation expenses of US$3.8 million in 2008. General and
administrative expenses consist primarily of office and utility expenses, salaries
and benefits for general management, finance and administrative personnel, depreciation
of office equipment, public relations related expenses and other administration
related expenses. Excluding the share-based compensation expenses in 2008, we expect that our
general and administrative expenses will increase in the near term as we hire additional
personnel and incur additional costs in connection with the expansion of our business.
Selling and Marketing Expenses
Selling and marketing expenses accounted for 15.3%, 11.6% and 8.5% of our net revenues for
the years ended December 31, 2006, 2007 and 2008, respectively. Our selling and marketing
expenses consist primarily of salaries and benefits for our sales and marketing
personnel, office and utility expenses related to our selling and marketing activities,
traveling expenses incurred by our sales personnel, expenses for the promotion, advertisement
and sponsorship of media events, and other sales and marketing related expenses. We expect
selling and marketing expenses to increase as we invest greater resources in sales and
marketing of our air travel advertising network.
Minority Interest
On October 10, 2006, through our consolidated variable interest entity, AM Advertising, we acquired 75% of the equity interest in AirTV United Media & Culture Co., Ltd., or
AirTV United, which holds a license granted by the SARFT to produce and operate
television programs in airports and on airplanes. AirTV United entered into business
cooperation agreements with AM Advertising and Shengshi Lianhe respectively in June 2007 to
provide program collecting, selecting, editing and compiling services to AM Advertising and
Shengshi Lianhe. We recorded minority interest in 2006, 2007 and 2008 to account for the
interests of 25% held by the other shareholder in AirTV United. In July 2008, we acquired 80%
of the equity interest in Flying Dragon, the operator of advertisement network on gate bridges
in airports in China. We recorded a minority interest in 2008 to account for the 20% interest
held by the other shareholder in Flying Dragon.
Equity Method Investments
In January 2007, through our consolidated variable interest entity, AM Advertising, we acquired
a 51% equity interest in Beijing Aiyike Information Technology Ltd., or Beijing Aiyike. Because the
minority equity owners of Beijing Aiyike had substantive participating rights in making major
operating decisions for Beijing Aiyike, this acquisition was accounted for under the equity method of
accounting. In November 2008, we sold our interest in Beijing Aiyike to a third party.
In March 2008, we formed a joint venture, BEMC, with China Eastern Media Corporation, Ltd. China
Eastern Media Corporation Ltd. holds 51% stake of BEMC and we hold the remaining 49% stake. This
investment was accounted for under the equity method of accounting since we have the ability to
exercise significant influence on the operation of BEMC.
Under the current laws of the Cayman Islands, we are not subject to tax on its income or
capital gains. In addition, payments of dividends by us are not subject to withholding tax in the
Cayman Islands.
We did not record any Hong Kong profits tax for the years ended December 31, 2007 and 2008 on
the basis that Royal Mart Limited and Glorious Star Investment Limited did not have any assessable
profits arising in or derived from Hong Kong for 2007 and 2008.
PRC Enterprise Income Tax
On March 16, 2007, the PRC National People’s Congress passed the EIT Law, which imposes an
uniform income tax rate of 25% on most domestic enterprises and foreign investment enterprises.
The EIT Law became effective on January 1, 2008. Under the EIT Law, entities that qualify as
“high and new technology enterprises strongly supported by the state” are entitled to the
preferential income tax rate of 15%. A company’s status as a “high and new technology
enterprises strongly supported by the state” is valid for three years, after which the company
must re-apply for such qualification in order to continue to enjoy the preferential income tax
rate. In addition, according to the Administrative Regulations on the Recognition of High and
New Technology Enterprises, the Guidelines for Recognition of High and New Technology Enterprises
and the Notice of Favorable Enterprise Income Tax Policies jointly issued by the PRC Ministry of
Science and Technology, the PRC Ministry of Finance and the PRC State Administration of Taxation
in April 2008, July 2008 and February 2008, respectively, “new software enterprises” can enjoy an
income tax exemption for two years beginning with their first profitable year and a 50% tax
reduction to a rate of 12.5% for the subsequent three years.
On December 26, 2007, the PRC State Council issued Circular 39. Based on Circular 39,
certain enterprises established before March 16, 2007 that were eligible for tax exemptions or
reductions according to the then effective tax laws and regulations can continue to enjoy such
exemption or reduction until it expires. Furthermore, according to Circular 39, enterprises that
were eligible for the preferential tax rates according to the then effective tax laws and
regulations may be eligible for a gradual rate increase to 25% over the 5-year period beginning
from January 1, 2008. Specifically, the applicable rates under such an arrangement for such
enterprises that enjoyed the 15% tax rate prior to the effectiveness of the new PRC tax law will
be 18% in 2008, 20% in 2009, 22% in 2010, 24% in 2011 and 25% in 2012. However, according to the
Notice on Prepayment of EIT issued by the State Administration of Taxation on January 30, 2008,
the gradually increased EIT rate during the transition period is not applicable to entities that
qualified for preferential rates as high and new technology enterprises alone and they would be
subject to EIT at 25% from January 2008 if they cannot qualify as high and new
technology enterprises under the EIT Law and regulations.
AM Technology has qualified as a “high and new technology enterprise” and is registered and
operates in the Beijing New Technology Industry Development Zone. As a result, it was entitled
to a three-year exemption from EIT from 2006 to 2008, and will be entitled to a preferential EIT
at the rate of 7.5% from 2009 to 2011 and a preferential EIT of 15% thereafter. Xi’an AM
qualified as a “software enterprise” in August 2008 by the Technology Information Bureau of
Shanxi Province and has received the written notice from Xi’an local tax bureau that it will be
granted a two-year exemption from EIT commencing on its first profitable year and a 50% deduction
of the 25% EIT rate for the succeeding three years. Shenzhen AM was subject to 15% preferential
tax EIT rate as it is located in Shenzhen and is currently subject to EIT on the taxable income
at the gradual rate pursuant to Circular 39. Shenzhen AM submitted its application to be qualified as a “high and new technology enterprise strongly supported by the State” under
the new PRC tax law in March 2009 and if successful, will be eligible for a 15% EIT rate. See
“Item 3. Key Information—D. Risk Factors—Risks Related to Our Business— If one or more of our
PRC subsidiaries fails to maintain or obtain qualifications to receive PRC preferential tax
treatments, we will be required to pay more taxes, which may have a material adverse effect on
our result of operations.” AM Advertising, Shengshi Lianhe, AirTV United, AM Film, AirMedia UC,
AM Yuehang, Flying Dragon and AM Wenzhou were registered in the PRC, are all subject to 25% EIT
on the taxable income in accordance with the EIT Law.
Furthermore, under the new PRC tax law, a “resident enterprise,” which includes an
enterprise established outside of China with management located in China, are subject
to PRC income tax. If the PRC tax authorities subsequently determine that the Company and
its subsidiaries established outside of
China should be deemed as a resident enterprise, the Company and its subsidiaries established outside of China will be subject to PRC income tax at a
rate of 25%. In addition, under the new PRC enterprise income tax law, dividends generated after
January 1, 2008 and payable by a foreign-invested enterprise in China to its foreign investors
who are non-resident enterprises are subject to a 10% withholding tax, unless any such foreign
investor’s jurisdiction of incorporation has a tax treaty with China that provides for a
different withholding arrangement. The British Virgin Islands, where our wholly owned
subsidiary and the 100% shareholder of Shenzhen AM is incorporated, does not have
such a tax treaty with China. Air Media (China) Limited, the 100% shareholder of AM
Technology, is incorporated in Hong Kong. According to the Mainland and Hong Kong Special
Administrative Region Arrangement on Avoiding Double Taxation or Evasion of Taxation on
Income agreed between China and Hong Kong in August 2006, dividends paid by a foreign-invested
enterprise in China to its direct holding company in Hong Kong will be subject to withholding tax
at a rate of 5% (if the foreign investor owns directly at least 25% of the shares of the
foreign-invested enterprise). The new PRC tax law provides, however, dividends distributed
between qualified resident enterprises are exempted. Notwithstanding the foregoing
provision, according to the Implementation Regulations of the Enterprise Income Tax Law, the
qualified dividend and profit distribution from equity investment between resident enterprises
shall refer to investment income derived by a resident enterprise from the direct investment in
other resident enterprises with exception to the investment income from circulating stocks issued
publicly by resident enterprises and traded on stock exchanges where the holding period is less
than 12 months. We do not believe we and our subsidiaries located outside the PRC are PRC
“resident enterprises.” However, as the term “resident enterprises” needs further clarification
and interpretation, we cannot assure you that the dividends
distributed by Shenzhen AM, AM
Technology and Xi’an AM to their direct shareholders would be regarded as dividends distributed
between qualified resident enterprises, and be exempted from the EIT. See “Item 3. Key
Information — D. Risk Factors —Risks Related to our Business—Dividends payable to us by our
wholly-owned operating subsidiaries may be subject to PRC withholding taxes, or we may be subject
to PRC taxation on our worldwide income and dividends distributed to our investors may be subject
to PRC withholding taxes under the new PRC tax law.”
Critical Accounting Policies
We prepare our financial statements in conformity with U.S. GAAP, which requires us to make
estimates and assumptions that affect our reporting of, among other things, assets and
liabilities, contingent assets and liabilities and revenues and expenses. We
continually evaluate these estimates and assumptions based on the most recently
available information, our own historical experiences and other factors that we
believe to be relevant under the circumstances. Since our financial reporting process
inherently relies on the use of estimates and assumptions, our actual results could differ from
our expectations. This is especially true with some accounting policies that require
higher degrees of judgment than others in their application. We consider the policies
discussed below to be critical to an understanding of our audited consolidated
financial statements because they involve the greatest reliance on our management’s judgment.
Revenue Recognition
We derive revenues from selling advertising time slots on our air travel advertising
network. For the year ended December 31, 2008, substantially most of the advertising revenues are
generated from digital frames in airports and digital TV screens in airports and on airlines.
We typically sign standard contracts with our advertising customers, which require us to run
the advertiser’s advertisements on our network in specified airports and on specified airplanes for
a period of time.
We recognize advertising revenues ratably over the performance period for which the
advertisements are displayed, so long as collection of the fees remains probable.
Deferred Revenue
Prepayments from customers for advertising service are deferred and recognized as revenue when
the advertising services are rendered.
We periodically exchange advertising time slots with other entities for assets or services,
such as digital TV screen network equipment and office rental. Consistent with the guidance in
APB Opinion No. 29 Accounting for Nonmonetary Transactions, as amended by FASB Statement
No. 153 Exchanges of Nonmonetary Assets, an amendment of APB Opinion No. 29, such
transactions are accounted for as nonmonetary exchange, and based on guidance in EITF 99-17
Accounting for Advertising Barter Transactions, we recognize revenue and assets/expenses of the exchanges based on the fair value of the advertising provided, which can be
determined based on our historical practice of receiving cash. For the years ended December 31,2006, 2007 and 2008, the amounts of revenues recognized for nonmonetary transactions were
US$0.8 million, US$0.4 million and US$1.0 million, respectively. No costs are directly
attributable to these revenues.
Concession Fees
We entered into concession rights contracts with airports and airlines, under which we
have the right to use the spaces or equipment of the airports and airlines to display
advertisements. The concession rights contracts are treated as operating lease arrangements.
Fees under concession right agreements with airports and airlines are usually due every
three or six months. Payments made are recorded as current assets and current liabilities
according to the respective payment terms. Most of the concession fees are fixed with
escalation, which means fixed increase over each year of the agreement. The total concession
fee under each concession right agreement is charged to the consolidated statements of
operations on a straight-line basis over the agreement periods, which is generally between three
and five years.
Agency Fees
We pay agency fees to advertising agencies, which assist us in identifying and introducing
advertisers to us, based on a certain percentage of revenue made through the advertising agencies
upon receipt of payment from advertisers. The agency fees are direct costs to generate
revenues and they are charged to the consolidated statement of operation ratably over the
period in which the advertising is displayed.
Prepaid and accrued agency fees are recorded as current assets and current liabilities according to the relative timing of payments made and advertising services provided.
Consolidation of Variable Interest Entity
PRC laws and regulations currently limit foreign ownership of companies that provide
advertising services, including out-of-home advertising services. In order to comply with
these foreign ownership restrictions, we conduct substantially all of our activities through
our variable interest entities Shengshi Lianhe, AM Advertising, AirMedia UC, AM Yuehang and their
subsidiaries. We have entered into a series of contractual arrangements with Shengshi Lianhe, AM
Advertising, AirMedia UC, AM Yuehang and their subsidiaries. Through these contractual
arrangements, we have the ability to effectively control Shengshi Lianhe, AM Advertising,
AirMedia UC, AM Yuehang and their subsidiaries and are considered the primary beneficiary of
Shengshi Lianhe, AM Advertising, AirMedia UC, AM Yuehang and their subsidiaries. Accordingly,
Shengshi Lianhe, AM Advertising, AirMedia UC, AM Yuehang and their subsidiaries are variable interest entities of our company under U.S. GAAP and we consolidate their
results in our consolidated financial statements.
Income Taxes
We recognize deferred income taxes for temporary differences between the tax basis of assets
and liabilities and their reported amounts in the financial statements, net operating loss carry
forwards and credits, by applying enacted statutory tax rates applicable to future years.
Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it
is more likely than not that some portion or all of the deferred tax assets will not be realized.
We record current income taxes in accordance with the laws and regulations applicable to us as
enacted by the relevant tax authorities.
We adopted Interpretation No. 48 (“FIN 48”), Accounting for Uncertainty in Income Taxes, an
interpretation of FASB Statement No. 109 for the years ended December 31, 2006, 2007 and 2008.
Under FIN
48, the impact of an uncertain income tax position on the income tax return must be
recognized at the largest amount that is more-likely-than not to be sustained upon audit by the
relevant tax authority. An uncertain income tax position will not be recognized if it has less
than a 50% likelihood of being sustained. Additionally, FIN 48 provides guidance on
de-recognition, classification, interest and penalties, accounting in interim periods, disclosure
and transition.
Share-based Compensation
For the options granted to our executive officers, directors and employees, we
have accounted for these options to employees in accordance with SFAS No.123(R)—Share-Based
Payment by recognizing compensation expenses based on the grant-date fair value over the
period during which the grantee is required to provide service in exchange for the award.
For the options granted to consultants, we have accounted for these options in accordance with
EITF 96-18—Accounting for Equity Instruments That Are Issued to Other Than Employees for
Acquiring, or in Conjunction with Selling, Goods or Services. The compensation
expenses relating to options granted to these consultants have been recognized entirely in
July and November 2007 at the time the options were granted.
The fair value of the option award was estimated on the date of grant or the date of
modification using the Black-Scholes option pricing model that uses the assumptions
including fair value of the ordinary shares underlying to the options, risk free interest rate,
expected life, expected dividend yield and expected volatility. The Black-Scholes model is
one of the most commonly used models that meet the criteria required by SFAS No.123(R) in
estimating fair value of employee share options.
The risk-free rate for periods within the expected life of the option was based on the
implied yield rates of China International Bond denominated in US dollars as of the
grant date. The expected life of options represented the period of time the granted
options were expected to be outstanding. As we did not have sufficient historical exercising
pattern to be followed in estimating the expected life, the expected life was estimated as the
average of the contractual term and the vesting period. The employees that were granted the share
options were expected to exhibit similar behavior. As we expected to grow the business with
internally generated cash, we did not expect to pay dividend in the foreseeable
future. The expected volatility was based on the historical volatilities of comparable
publicly traded companies engaged in similar business because we did not have sufficient historic
volatility data of our own ordinary shares, which commenced being publicly traded after our
initial public offering in November 2007.
Our Results of Operations
The following table sets forth a summary of our consolidated results of operations for the
periods indicated. This information should be read together with our consolidated financial
statements, including the related notes, that appear elsewhere in this annual report.
Our limited operating history makes it difficult to predict our future operating
results. Therefore, our historical consolidated results of operations are not necessarily
indicative of our results of operations you may expect for any future period.
After our adjustment of time-slot length in mid May, we define a time slot as a
12-second equivalent advertising time unit for digital frames in airports, which is shown during each advertising cycle on a weekly
basis in a given airport. Our airport advertising programs are shown repeatedly on a
daily basis during a given week in 10-minute cycles, which allows us to sell a maximum
of 50 time slots per week. The number of time slots available for our digital frames in
airports during the period presented is calculated by multiplying the time slots per
week per airport by the number of weeks during the period presented when we had
operations in each airport and then calculating the sum of all the time slots available
for each of our network airports.
(2)
Number of time slots sold refers to the number of 30-second equivalent
advertising time units for digital TV screens in airports and digital TV screens on
airplanes or 12-second equivalent advertising time units for digital frames in
airports sold during the period presented.
(3)
Utilization rate refers to total time slots sold as a percentage of total
time slots available for sale during the relevant period.
(4)
Average advertising revenue per time slot sold for digital TV screens in
airports, digital TV screens on airplanes and digital frames in airports is calculated
by dividing our revenues derived from digital TV screens in airports, digital TV
screens on airplanes and digital frames in airports by their respective number of time
slots sold, respectively.
(5)
We define a time slot as a 30-second equivalent advertising time unit for
digital TV screens in airports and digital TV screens on airplanes, which is shown
during each advertising cycle on a weekly basis in a given airport or on a monthly
basis on the routes of a given airline, respectively. Our airport advertising programs
are shown repeatedly on a daily basis during a given week in one-hour cycles and each
hour of programming includes 25 minutes of advertising content, which allows us to
sell a maximum of 50 time slots per week. The number of time slots available for our
digital TV screens in airports during the period presented is calculated by
multiplying the time slots per week per airport by the number of weeks during the
period presented when we had operations in each airport and then calculating the sum
of all the time slots available for each of our network airports. The length of our
in-flight programs typically ranges from approximately 45 minutes to an hour per
flight, approximately five to 13 minutes of which consist of advertising content. The
number of time slots available for our digital TV screens on airplanes during the
period presented is calculated by multiplying the time slots per airline per month by
the number of months during the period presented when we had operations on each
airline and then calculating the sum of all the time slots for each of our network
airlines.
Net Revenues. Our net revenues increased by 186.9% from US$41.6 million in 2007 to US$119.4
million in 2008. The increase was primarily due to (1) a significant increase in revenues
generated from the sale of advertising time slots of our digital frames in airports from US$1.3
million in 2007 to US$45.0 in 2008, (2) an increase in revenues generated from the sale of
advertising time slots of our digital TV screens in airports from US$26.9 million in 2007 to
US$47.6 million in 2008, (3) an increase in revenues generated from the sale of advertising time
slots of the digital TV screens on airplanes from US$11.1 million in 2007 to US$19.2 million in
2008, and (4) revenues of US$6.1 million generated from the sale of billboard advertising on gate
bridges in airports in the second half of 2008.
The increases were due in large part to the expansion of our network, the increase in average
selling prices per time slot sold and the increase in time slots sold for digital frames in
airports and digital TV screens on airplanes. We expanded our digital frame network coverage from
the one-month operation in Beijing Capital International Airport in 2007 to 22 airports as of
December 31, 2008 and the expansion of our digital TV screen advertising network coverage from 39
airports as of December 31, 2007 to 41 airports as of December 31, 2008. As a result, the number
of advertising time slots available for sale in airports increased from 354 in 2007 to 48,570 in
2008 for digital frames and from 77,574 in 2007 to 100,624 in 2008 for digital TV screens. The
number of advertising time slots available for sale on airlines increased from 1,752 in 2007 to
1,878 in 2008.
The number of time slots sold for digital frames in airports increased from 128 in 2007 to
9,559 in 2008. The number of time slots sold for digital TV screens in airports decreased from
28,539 in 2007 to 27,223 in 2008. For airlines, the number of time slots sold increased from 845 in
2007 to 962 in 2008. The increases were due to (1) our continued sales efforts (2) the growing
acceptance of the emerging air travel digital advertising, (3) our rapid build-up of our brand and
reputation among advertising clients, and (4) the increase in the number of network airports and
airlines in which we operated. Primarily due to the increases in time slots available for sale, our
utilization rates decreased from 36.2% to 19.7% for digital frames in airports, and from 36.6% to
27.1% for digital TV screens in airports from 2007 to 2008. Our utilization rate increased from
48.2% to 51.2% for airlines from 2007 to 2008.
In addition, average selling prices per time slot sold increased for digital TV screens in
airports and on airlines as we increased the listing prices for our advertising time slots of the
digital TV screens in select airports and fewer discounts off the listing price were offered to our
customers in 2008. The average selling price per time slot sold for digital TV screens in our
network airports increased from US$949 in 2007 to US$1,748 in 2008. For network airlines, the
average selling price per time slot sold increased from US$13,132 to US$19,992 for those periods.
The average selling prices per time slot sold decreased for digital frames in airports from
US$9,841 in 2007 to US$4,709 in 2008, as the listing prices of digital frames in the newly operated
airports in 2008 were significantly lower than the listing price of digital frames in Beijing
Capital International Airport, which was the only airport where we had operation of digital frames
in the fourth quarter of 2007.
Cost of Revenues. Our cost of revenues increased by 232.3% from US$21.4 million in 2007 to
US$71.0 million in 2008. The increase was primarily due to the increases in concession fees and
other components of cost of revenues. Our cost of revenues as a percentage of our total net
revenues increased from 51.3% in 2007 to 59.4% in 2008.
Concession fees for 2008 were US$45.7 million, representing an increase of 281.1% from US$12.0
million in 2007 due to additional new concession contracts. Concession fees as a percentage of net
revenues in 2008 increased to 38.3% from 28.8% in 2007 because concession fees were fixed once
concession rights contracts were entered into while revenues generated from newly signed concession
rights contracts need time to ramp up.
Operating Expenses. Our operating expenses decreased by 8.4% from US$26.8 million in 2007 to
US$24.5 million in 2008. Operating expenses as a percentage of our total net revenues decreased
from 64.4% in 2007 to 20.6% in 2008. Our total operating expenses in 2008 included share-based
compensation expenses of US$5.0 million while our total operating expenses in 2007 included
one-time share-based compensation expenses of US$17.5 million. Our operating expenses excluding
share-based compensation expenses and amortization of acquired intangible assets were US$18.4
million in 2008, increased by 147.6% from US$7.4 million in 2007. Total operating expenses
excluding share-based compensation expenses and amortization of acquired intangible assets as a
percentage of net revenues in fiscal year 2008 decreased to 15.4% in 2008 from 17.9% in 2007.
•
Selling and Marketing Expenses. Our selling and marketing expenses increased
from US$4.8 million in 2007 to US$10.2 million in 2008. This increase was primarily
due to the expansion of the direct sales force and higher marketing expenses.
•
General and Administrative Expenses. Our general and administrative expenses
decreased from US$22.0 million in 2007 to US$14.4 million in 2008. Our general and
administrative expenses excluding share-based compensation expense increased from
US$3.2 million in 2007 to US$10.5 million in 2008, primarily due to the increase in
the number of our administrative staff in support of our growing operations and our
compliance with Section 404 of the Sarbanes-Oxley Act.
Income(loss) from Operations. We recorded US$23.9 million of income from operations in 2008,
as compared to our loss from operations of US$6.5 million in 2007 as a cumulative result of the
above factors.
Income Taxes. We recorded US$498,000 income tax benefits in 2008 with an effective tax rate
of negative 1.6% and we recorded US$195,000 income tax benefits in 2007 with an effective tax
rate of negative 4.1%, due to the preferential PRC enterprise income tax treatments enjoyed by
our PRC subsidiaries.
Net Income. As a result of the foregoing, we had net income of US$30.2 million in 2008, as
compared to our net loss of US$5.1 million in 2007.
Net Revenues. Our net revenues increased by 132.1% from US$17.9 million in 2006 to US$41.6
million in 2007. The increase was primarily due to (1) a significant increase in revenues
generated from the sale of advertising time slots of our digital TV screens in airports from
US$10.5 million in 2006 to US$26.9 million in 2007, (2) an increase in revenues generated from
the sale of advertising time slots of the digital TV screens on airplanes from US$4.9 million in
2006 to US$11.1 million in 2007, and (3) revenues of US$1.3 million generated from the sale of
advertising time slots of our digital frames in airports in the fourth quarter of 2007.
The increases were due in large part to the expansion of our network coverage from 28 airports
as of December 31 2006 to 39 airports as of December 31, 2007, respectively. In addition, in the
beginning of 2007, we increased the length of our advertising cycle in airports from 20 minutes per
hour of our programs to 25 minutes per hour. As a result of the greater breadth of our network
coverage and the longer advertising cycle, the number of advertising time slots available for sale
in airports increased from 42,800 in 2006 to 77,574 in 2007. The number of advertising time slots
available for sale on airlines increased from 1,356 in 2006 to 1,752 in 2007.
The number of time slots sold for airports increased from 14,409 in 2006 to 28,359 in 2007.
For airlines, the number of time slots sold increased from 568 in 2006 to 845 in 2007. The
increases were due to (1) the growing acceptance of the emerging air travel digital advertising,
(2) our rapid build-up of our brand and reputation among advertising clients, and (3) the increase
in the number of network airports and airlines in which we operated. As a result, our utilization
rates increased from 33.7% in 2006 to 36.6% in 2007 for airports, and from 41.9% to 48.2% for
airlines for those same periods.
In addition, average selling prices per time slot sold increased for both airports and
airlines as we increased the listing prices for our advertising time slots of the digital TV
screens in airports and on airplanes twice by over 30% each time in April 2007 and October 2007.
The average selling price per time slot sold for
our network airports increased from US$729 to
US$949 in 2006 and 2007, respectively. For network airlines, the average selling price per time
slot sold increased from US$8,572 to US$13,132 for those periods.
We started generating revenues from digital frames located in Beijing Capital International
Airport in the fourth quarter of 2007. We upgraded 90 light box displays to 46-inch digital
frames at Terminal 2 of Beijing Capital International Airport and have begun placing clients’
advertisements on these frames in the beginning of December 2007. As of December 31, 2007, we had
installed 328 46-inch digital frames at Terminal 3 of Beijing Capital International Airport. The
new digital frames at Terminal 3 have begun displaying paid advertisements when Terminal 3 was open
for testing at the end of February 2008. We intend to significantly increase the number of our
digital frames in the near future.
Cost of Revenues. Our cost of revenues increased from US$10.0 million in 2006 to US$21.4
million in 2007. The increase was primarily due to an increase in concession fees from US$6.8
million in 2006 to US$12.0 million in 2007. Our cost of revenues as a percentage of our total net
revenues decreased from 56.0% in 2006 to 51.3% in 2007.
The increase in concession fees was due primarily to the significant increase in the number of
concession rights contracts that we had, from 49 as of December 31, 2006 to 107 as of December 31,2007, and the higher amounts of concession fees that we incurred in 2007 after the renewal of
certain existing concession rights contracts. The increase in third-party agency fees we paid was
due to the increase in the number of agencies that we used and in the number of customers that
these third-party agencies helped us source as we sought to grow our business to fill a larger
number of time slots available for sale and at higher prices.
Operating Expenses. Our operating expenses increased by 562.6% from US$4.0 million in 2006
to US$26.8 million in 2007. Operating expenses as a percentage of our total net revenues
increased from 22.5% in 2006 to 64.4% in 2007. Our total operating expenses in 2007 included a
one-time share-based compensation expenses of US$17.5 million. Our operating expenses excluding
share-based compensation expenses and amortization of acquired intangible assets were US$7.4
million in 2007, increased by 86.4% from US$4.0 million in 2006. Total operating expenses
excluding share-based compensation expenses and amortization of acquired intangible assets as a
percentage of net revenues in fiscal year 2007 decreased to 17.9% in 2007 from 22.2% in 2006.
•
Selling and Marketing Expenses. Our selling and marketing expenses increased
from US$2.8 million in 2006 to US$4.8 million in 2007. This increase was primarily
due to an increase of US$1.0 million in salaries and benefits for our sales and
marketing personnel as we grew our sales staff, an increase of US$0.4 million in
office and utility expenses related to our sales and marketing activities, and an
increase of US$0.3 million in travel expenses incurred by our sales and marketing
personnel.
•
General and Administrative Expenses. Our general and administrative expenses
increased from US$1.3 million in 2006 to US$22.0 million in 2007, primarily due to an
increase of 17.5 million in share-based compensation expenses in connection with the
one-time share transfer of 5,000,000 ordinary shares in September 2007 and the
employee stock option grants made in 2007, an increase of US$0.5 million in salaries
and benefits for our administrative personnel as our operations have grown and an
increase of approximately US$0.3 million in professional fees.
Income(loss) from Operations. We recorded US$6.5 million loss from operations in 2007, as
compared to our income from operations of US$3.9 million in 2006 as a cumulative result of the
above factors.
Net Income. As a result of the foregoing, we had net loss of US$5.1 million in 2007, as
compared to our net income of US$4.1 million in 2006 as a result of an one-time share-based
compensation expense of US$17.5 million in connection with the share transfer of 5,000,000
ordinary shares in September 2007 by a principal shareholder of our company to Mr. Herman Man
Guo, our chairman and chief executive officer.
Inflation
In recent years, China has not experienced significant inflation, and thus historically
inflation has not had a significant effect on our business. According to the National
Bureau of Statistics of China, the change in the Consumer Price Index in China was 1.8%,
1.5%, 4.8% and 5.9% in 2005, 2006, 2007 and 2008,
To date, we have financed our operations primarily through internally generated
cash, the sale of preferred shares in private placements and the proceeds we received from our
public offering. As of December 31, 2008, we had approximately US$161.5 million in cash. We
generally deposit our excess cash in interest bearing bank accounts. Although we consolidate the
results of our variable interest entities in our consolidated financial statements, we can only
receive cash payments from them pursuant to our contractual arrangements with them and their
shareholders. See “Item 4. Information on the Company — C. Organizational Structure.” Our
accounts receivable as of December 31, 2008 included US$10.4 million billed receivable and
US$28.0 million unbilled receivable. Unbilled receivable represents amounts earned under advertising
contracts in progress but not billable as of December 31, 2008. We intend to maintain our
current policies for collections of accounts receivable, which typically provide a credit period
no longer than 120 days following the advertisement is displayed, and expect our accounts
receivable to increase as a result of the increase in our advertising service revenues.
Our principal uses of cash primarily include capital expenditures, contractual
concession fees and, to a lesser extent, salaries and benefits for our employees and
other operating expenses. We expect that these will remain our principal uses of cash
in the foreseeable future. However, we may use additional cash to fund strategic
acquisitions, although we are not currently negotiating any material acquisitions.
The following table shows our cash flows with respect to operating activities,
investing activities and financing activities for the years ended December 31, 2006, 2007 and
2008:
Net cash provided by (used in) operating
activities
US$
2,020
US$
(6,510
)
US$
3,586
Net cash used in investing activities
(5,346
)
(15,673
)
(56,692
)
Net cash provided by financing activities
2,285
229,989
789
Net increase (decrease) in cash
(866
)
208,829
(49,381
)
Effect of exchange rate changes on cash
175
1,023
2,936
Cash at the beginning of the period
2,952
2,086
210,915
Cash at the end of the period
2,086
210,915
161,534
Operating Activities
Net cash provided by operating activities was US$3.6 million for the year ended December 31,2008. This was primarily attributable to (1) our net income of US$30.2 million from the operation
of our advertising networks and (2) an increase of US$10.6 million in accounts payable primarily
consisting of the concession fees payable under our concession rights contracts for our digital
frames, digital TV screens or programs due to the expansion of our network coverage and increased
number of concession rights contracts. The foregoing was partly offset by (1) an increase of
US$24.4 million in accounts receivable from our customers due to our increased sales, (2) an
increase of US$15.9 million in prepaid concession fees under our concession rights contracts with
the airports and airlines, and (3) an increase of US$8.9 million in long-term deposits primarily
as security for office rental deposits.
Net cash used in operating activities was US$6.5 million for the year ended December 31,2007.
This was primarily attributable to (1) an increase of US$11.7 million in prepaid concession
fees under our concession rights contracts with the airports and airlines, (2) an increase of
US$7.8 million in accounts receivable from our customers due to our increased sales, and (3) an
increase of US3.8 million in long term-deposits primarily as security for office rental deposits.
The foregoing was partly offset by (1) our net profit of US$16.2 million from the
operation of our advertising networks, and (2) an increase of US$1.6 million in accounts
payable primarily consisting of the concession fees payable under our concession rights
contracts for our digital TV screens or programs due to the expansion of our network coverage and
increased number of concession rights contracts.
We had cash provided by operating activities of US$2.0 million in 2006. This was primarily
attributable to (1) our net income of US$4.1 million generated from the operation of our
advertising networks, (2) an increase of US$1.8 million in accounts payable primarily
consisting of the concession fees payable under our concession rights contracts for our
digital TV screens or programs due to the expansion of our network coverage, and (3) an increase
of US$1.0 million in deferred revenues derived from prepayment by customers due to
our increased sales. The foregoing was partly offset by (1) an increase of US$4.5
million in accounts receivable from our customers due to our increased sales, and (2)
an increase of US$1.1 million in other current assets primarily attributable to our
prepayment of agency fees to third-party agencies and advance payments to our employees.
Investing Activities
Net cash used in investing activities for the year ended December 31, 2008 amounted
to US$56.7 million, mainly as a result of (1) our purchases of equipment, primarily digital
frames and digital TV screens for US$50.4 million, and (2) US$6.3 million for the advance payment
of contingent considerations in connection with our acquisition of the airport gate bridge
advertising business.
Net cash used in investing activities amounted to US$15.7 million for the year ended
December 31, 2007, mainly as a result of (1) our purchases of equipment, primarily digital TV
screens, for US$13.0 million, and (2) the final US$1.3 million payment to acquire a 75% equity
interest in AirTV United. The initial US$2.0 million payment of the total consideration of US$3.3
million for the 75% equity interest was paid in 2006. We also used US$1.3 million for a long-term
investment in connection with our acquisition of a 51% equity interest in Beijing Aiyike.
Net cash used in investing activities in 2006 amounted to US$5.3 million, mainly
as a result of our purchases of equipment, primarily digital TV screens, for US$3.3 million
and the purchase of intangible assets, primarily to acquire a 75% equity interest in AirTV
United, for an initial US$2.0 million payment out of total consideration of US$3.3 million,
the balance of which was recorded as amount due to a related party as of December31, 2006.
Financing Activities
Net cash provided by financing activities amounted to US$0.8 million for the year ended
December 31, 2008, as a result of the proceeds from stock option exercises.
Net cash provided by financing activities amounted to US$230.0 million for the year ended
December 31, 2007, mainly as a result of (1) US$190.8 million of the proceeds from our initial
public offering in November 2007, (2) the US$39.0 million of net proceeds from our Series B
preferred share placement in June 2007, and (3) the final drawdown of US$2.9 million of
the total US$12.0 million proceeds from our Series A preferred share placements.
Net cash provided by financing activities in 2006 amounted to US$2.3 million,
mainly as a result of US$3.1 million of proceeds from our Series A preferred share
placements, partly offset by our repayment of note payable of US$0.8 million.
Capital Expenditures
We incurred capital expenditures of US$7.4 million, US$13.0 million and US$50.4 million for
the
years ended December 31, 2006, 2007 and 2008, respectively. Our capital expenditures were
made primarily to purchase digital TV screens, digital frames and associated equipment for
our network. We also periodically exchange advertising time slots with other entities for digital
TV screens, other equipment and office rental through barter transactions.
We expect to incur capital expenditures of approximately US$32.2 million in 2009
primarily to purchase additional digital frames, upgrade our light box displays to digital
frames and install mega LED
We believe that our current cash and anticipated cash flow from operations will be
sufficient to meet our anticipated cash needs, including our cash needs for capital
expenditures for the next 12 months. We may, however, require additional cash due to
changing business conditions or other future developments, including any investments or
acquisitions we may decide to pursue. If our existing cash is insufficient to meet
our requirements, we may seek to sell additional equity securities, debt securities or borrow
from lending institutions.
Recently Issued Accounting Standards
In September 2006, FASB issued SFAS 157. Effective January 1, 2008, we adopted the
measurement and disclosure other than those requirements related to nonfinancial assets and
liabilities in accordance with guidance from FASB Staff Position 157-2, “Effective Date of FASB
Statement No. 157,” which delayed the effective date of SFAS 157 for all nonfinancial assets and
nonfinancial liabilities, except for items that are recognized or disclosed at fair value in the
financial statements on a recurring basis (at least annually), until the beginning of fiscal year
2009. We do not expect the adoption of SFAS 157 for nonfinancial assets and liabilities will
have a significant effect on our consolidated financial statements.
In December 2007, the FASB issued SFAS No. 141, Business Combinations: (Revised 2007) (“SFAS
141R”). SFAS 141R is relevant to all transactions or events in which one entity obtains control
over one or more other businesses. SFAS 141R requires an acquirer to recognize any assets and
noncontrolling interest acquired and liabilities assumed to be measured at fair value as of the
acquisition date. Liabilities related to contingent consideration are recognized and measured at
fair value on the date of acquisition rather than at a later date when the amount of the
consideration may be resolved beyond a reasonable doubt. This revised approach replaces SFAS
141’s cost allocation process in which the cost of an acquisition was allocated to the individual
assets acquired and liabilities assumed based on their respective fair value. SFAS 141R requires
any acquisition-related costs and restructuring costs to be expensed as incurred as opposed to
allocating such costs to the assets acquired and liabilities assumed as previously required by
SFAS 141. Under SFAS 141R, an acquirer recognizes liabilities for a restructuring plan in
purchase accounting only if the requirements of SFAS 146, Accounting for Costs Associated with
Exit or Disposal Activities, are met. SFAS 141R allows for the recognition of pre-acquisition
contingencies at fair value only if these contingencies are likely to materialize. If this
criterion is not met at the acquisition date, then the acquirer accounts for the non-contractual
contingency in accordance with recognition criteria set forth under SFAS 5, Accounting for
Contingencies, in which case no amount should be recognized in purchase accounting. SFAS 141R is
effective as of the beginning of an entity’s first fiscal year that begins after December 15,2008. We do not expect the adoption of SFAS 141R will have a significant impact on our
consolidated financial statements.
In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated
Financial Statements-An Amendment of ARB No. 51, or SFAS 160. This Statement amends ARB 51 to
establish accounting and reporting standards for the noncontrolling interest in a subsidiary and
for the deconsolidation of a subsidiary. It clarifies that a noncontrolling interest in a
subsidiary is an ownership interest in the consolidated entity and should be reported as equity
on the financial statements. SFAS 160 requires consolidated net income to be reported at amounts
that include the amounts attributable to both the parent and the noncontrolling interest.
Furthermore, disclosure of the amounts of consolidated net income attributable to the parent and
to the noncontrolling interest is required on the face of the financial statements. SFAS 160 is
effective as of the beginning of an entity’s first fiscal year that begins after December 15,2008. We do not expect the adoption of SFAS 160 will have significant impact on our consolidated
financial position or results of operations, other than certain changes to the presentation of
the financial statements.
In April 2008, the FASB issued FASB Staff Position FAS142-3: Determination of the Useful
Life of Intangible Assets. This FSP amends the factors that should be considered in developing
renewal or extension assumptions used to determine the useful life of a recognized intangible
asset under FASB Statement No. 142, Goodwill and Other Intangible Assets. This FSP is effective
for fiscal years beginning after December 15, 2008, and interim periods within those fiscal
years. Early adoption is prohibited. The guidance for determining the useful life of a
recognized intangible asset in this FSP shall be applied prospectively to intangible assets
acquired after the effective date. We are in the process of assessing the potential impact the
adoption of FSP 142-3 may have on our consolidated financial position or results of operations.
At a November 24, 2008 meeting, the FASB ratified the consensus reached by the Task Force in
Issue No. 08-6: Equity Method Investment Accounting Considerations, or EITF 08-6. Because of the
significant changes to the guidance on subsidiary acquisitions and subsidiary equity transactions
and the increased use of fair value measurements as a result of Statements 141(R) and 160,
questions have arisen regarding the application of that accounting guidance to equity method
investments. EITF 08-6 provides guidance for entities that acquire or hold investments accounted
for under the equity method. This issue is effective for transactions occurring in fiscal years
and interim periods beginning on or after December 15, 2008. Early adoption is not permitted.
We do not expect the adoption of EITF 08-6 will have significant impact on our consolidated
financial position or results of operations.
C. Research and Development, Patents and Licenses, Etc.
Intellectual Property
To protect our brand and other intellectual property, we rely on a combination of trademark
and trade secret laws as well as confidentiality agreements with our employees, sales agents,
contractors and others. We are in the process of registering three trademarks in China, including
“,”“AirMedia” and our business logo. We have registered our domain name www.AirMedia.net.cn with
the Internet Corporation for Assigned Names and Numbers. We do not hold any patents or
copyrights and cannot be certain that our efforts to protect our intellectual property
rights will be adequate or that third parties will not infringe or misappropriate these rights.
We cannot assure you that our efforts to protect our intellectual property rights will be
adequate or that third parties will not infringe or misappropriate these rights. If
others are able to copy and use our proprietary information and operational system
and other proprietary technology platform without spending time and resources to
develop their own, we may not be able to maintain our competitive position.
Furthermore, the application of laws governing intellectual property rights in China is
uncertain and evolving and could involve substantial risks to us. If litigation is necessary to
enforce our intellectual property rights or determine the scope of the proprietary rights of
others, we may have to incur substantial costs or divert other resources, which could harm our
business and prospects.
D. Trend Information
Other than as disclosed elsewhere in this annual report, we are not aware of any trends,
uncertainties, demands, commitments or events since January 1, 2008 that are reasonably likely to
have a material adverse effect on our net revenues, income, profitability, liquidity or capital
resources, or that caused the disclosed financial information to be not necessarily indicative of
future operating results or financial conditions.
E. Off-balance Sheet Arrangements
We have not entered into any financial guarantees or other commitments to guarantee the
payment obligations of any third parties. We have not entered into any derivative contracts that
are indexed to our shares and classified as shareholder’s equity, or that are not reflected in
our consolidated financial statements. Furthermore, we do not have any retained or contingent
interest in assets transferred to an unconsolidated entity that serves as credit, liquidity or
market risk support to such entity. We do not have any variable interest in any unconsolidated
entity that provides financing, liquidity, market risk or credit support to us or
engages in leasing, hedging or research and development services with us.
F. Tabular Disclosure of Contractual Obligations
We have entered into operating lease agreements primarily for our office spaces in
China. These leases expire through 2010 and are renewable upon negotiation. In addition, the
contract terms of our concession rights contracts are usually three to five years. Most of these
concession rights expire through 2015 and are renewable upon negotiation. The following table sets
forth our contractual obligations and commercial commitments as of December 31, 2008:
Other long-term liabilities, such as non-current deferred tax liabilities, have been
excluded from the above table due to the uncertainty of the timing of payments. The above table
also excludes the contingent consideration to be paid in connection with our acquisition of the
gate bridge advertising business in 2008, which would amount to a total of up to US$27.3 million in cash and 1,530,950 of our ordinary
shares, or up to US$40.3 million in cash only, at the sole discretion of the sellers of Excel Lead,
over the next two years, depending on the after-tax net profit performance of Excel Lead in the
second half of 2008, the full year of 2009 and 2010, respectively.
G. Safe Harbor
This annual report on Form 20-F contains forward-looking statements that relate to future
events, including our future operating results and conditions, our prospects and our future
financial performance and condition, all of which are largely based on our current expectations and
projections. The forward-looking statements are contained principally in the sections entitled
“Item 3. Key Information—D. Risk Factors,”“Item 4. Information on the Company” and “Item 5.
Operating and Financial Review and Prospects.” 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 and similar expressions.
Forward-looking statements involve inherent risks and uncertainties.
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:
•
our anticipated growth strategies;
•
our future business development, results of operations and financial condition;
•
our plans to expand our air travel advertising network into additional
locations, airports and airlines;
•
competition in the advertising industry and the air travel advertising industry
in China;
•
the expected growth in consumer spending, average income levels and advertising
spending levels;
•
the growth of the air travel sector in China; and
•
PRC governmental policies relating to the advertising industry.
You should read thoroughly this annual report and the documents that we refer to in this
annual report with the understanding that our actual future results may be materially different
from and worse than what we expect. We qualify all of our forward-looking statements by these
cautionary statements. Other sections of this annual report include additional factors which could
adversely impact our business and financial performance. Moreover, we operate in an evolving
environment. New risk factors and uncertainties emerge from time to time and it is not possible for
our management to predict all risk factors and uncertainties, 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 materially from those contained in any forward-looking statements. You
should not
rely upon forward-looking statements as predictions of future events. We undertake no
obligation to update or revise any forward-looking statements, whether as a result of new
information, future events or otherwise.
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
A. Directors and Senior Management
The following table sets forth information regarding our directors and executive officers as
of the date of this annual report.
Mr. Herman Man Guois our founder and has served as the chairman of our board of directors and
our chief executive officer since our company’s inception. He was the general manager of Beijing
Sunshine Media Co., Ltd. from 1997 to 2004. From 1991 to 1996, Mr. Guo served as the deputy general
manager of Beijing Trade & Technology Development Company. Prior to that, he worked in China Civil
Aviation Development Service Company in 1988. Mr. Guo received his bachelor’s degree in applied
mathematics from People’s Liberation Army Information Engineering University in China in 1983 and
currently attends the Executive MBA program at Peking University in China.
Mr. Xiaoya Zhang has served as our director and president since our company’s inception. From
1995 to 2004, Mr. Zhang was a department director of China Investment Engineering Consulting
Company. Prior to that, he served as the deputy general manager of Dalian Zhongxing Industrial
Company from 1992 to 1995. From 1989 to 1992, Mr. Zhang served as the program manager of China
Agriculture Development Trust Investment Company. Mr. Zhang received his bachelor’s degree in
mathematics from Shandong University in China in 1983 and his master’s degree in system engineering
from Beijing University of Aeronautics and Astronautics in China in 1989.
Mr. Qing Xu has served as our director since October 2005. From 2003 to 2005, Mr. Xu served as
a vice president of Zhongyuan Guoxin Investment Guarantee Co., Ltd. Prior to that, he served as a
department director of China Haohua Group Co., Ltd. from 1997 to 2003 and as a department manager
of Beijing Trade & Technology Development Company from 1991 to 1997. Mr. Xu was a secretary at the
PRC State Council Secretary Bureau from 1984 to 1991. Mr. Xu received his associate’s degree in
business and economics management from Beijing Normal University in 1996.
Mr. Shichong Shan has served as our independent director since July 2007. Mr. Shan has retired
since 1996. Before he retired, Mr. Shan had held a number of senior executive positions in various
government agencies and other organizations in the aviation industry in China, including CAAC. Mr.
Shan attended the college program at the Eastern China Military and Politics Institute in China.
Mr. Donglin Xia has served as our independent director since October 2007. Mr. Xia is an
accounting professor of the School of Economics and Management, Tsinghua University. He is also an
advisor to the Accounting Standard Committee of the Ministry of Finance in China and the deputy
chairman of the Section of Basic Accounting Theory of the Accounting Society
of China. He served as the head of the accounting department at the School of Economics and
Management, Tsinghua University from 1998 to 2000. Mr. Xia currently serves on the board of Huaneng
Power International, a power generation company in China that is listed on the New York Stock
Exchange, Shanghai Stock Exchange and Hong Kong Stock Exchange, Shantui Construction Machinery Co.,
Ltd., a soil-moving equipment company listed on the Shenzhen Stock Exchange in China, and Xinxing
Pipes Group, a company manufacturing ductile iron pipes and steel listed on the Shenzhen Stock
Exchange in China. Mr. Xia received his Ph.D. degree in economics from the Research Institute of
Fiscal Science of the Ministry of Finance in China in 1994.
Mr. Junjie Ding has served as our independent director since November 2008. Mr. Ding is also
an independent director of SinoMedia Holding Limited, a media advertising operator in China that
is listed on the Hong Kong Stock Exchange. Mr. Ding is a vice president of the Communication
University of China and the
deputy officer of the China Advertising Association of Commerce. With
nearly 20 years of experience in the media and advertisement industry, Mr. Ding is the editor of
various periodicals, such as International Advertising and the Annual Book of Chinese Advertising
Works. He received his Ph.D. degree in communications in 2003 from the Communication University of
China.
Dr. Songzuo Xiang has served as our independent director since November 2008. He currently
serves on the board of Hurray Holding Co., Ltd., a Nasdaq-listed company providing music and
music-related products to mobile users in China, and China Digital TV Co. Ltd., a NYSE-listed
company providing conditional access systems to China’s digital television market. Dr. Songzuo
Xiang previously served as the Deputy Director of the Fund Planning Department at the People’s Bank
of China Shenzhen Branch and was an investment manager at Shenzhen Resources & Property Development
Group. He was a visiting scholar at Columbia University from May 1999 to July 2000 and at Cambridge
University from October 1998 to May 1999. Dr. Xiang received his bachelor’s degree in engineering
in Huazhong University of Science and Technology in 1986, his master’s degree in international
affairs from Columbia University in 1999, his master’s degree in management science in 1993 and his
Ph.D. degree in economics in 1993 from Renmin University in China.
Mr. James Zhonghua Feng has served as our chief operating officer since October 2005. Before
joining us in 2005, he served as the general manager of New Chang’an Media Advertising Company from
2004 to 2005. From 2002 to 2004, Mr. Feng served as the deputy general manager of Beijing Tianzhi
Creative Advertising Company. Prior to that, he was the general manager of the Beijing and Shanghai
branches of Shenzhen Nantong Umbrella Industry Group Co., Ltd. Mr. Feng received his bachelor’s
degree in Chinese literature from Sichuan Normal University in China in 1993 and currently attends
the Executive MBA program at Peking University in China.
Mr. Conor Chiahung Yang has served as our chief financial officer since March 2007. Prior to
joining our company, he was the chief executive officer of Rock Mobile Corporation from 2004 to
February 2007. From 1999 to 2004, Mr. Yang served as the chief financial officer of the Asia
Pacific region for CellStar Asia Corporation. Mr. Yang was an executive director of Goldman Sachs
(Asia) L.L.C. from 1997 to 1999 and the chief investment officer of Sherwood Inc. from 1996 to
1997. Mr. Yang was a vice president of Lehman Brothers Asia Limited from 1994 to 1996 and worked at
Morgan Stanley Asia from 1992 to 1994. Mr. Yang received his bachelor’s degree in food science from
Fu Jen University in Taiwan in 1985 and his MBA degree from University of California, Los Angeles
in 1992.
Ms. Wei He has served as our chief public relations officer since May 2006. Prior to joining
our company, she worked as the deputy general manager of Taixiang Investment Consulting Co. Ltd.
from 2003 to 2006. Prior to this, she served as the director of the liaison department of Kelon
Electrical Holdings Company Ltd. from 2000 to 2002. She served as the account manager of Hongkong
Pengli Group from 1999 to 2000. She received her bachelor’s degree from Qufu Normal University in
China in 1998 and her MBA degree from the City University of Washington in 2006.
Mr. Ken Zijian Zeng has served as our executive president since January 2008. Prior to
joining our company, he served as the general manager of Asiaray Media Group, an out-of-home
advertising company with operation in approximately 30 airports in China, where he oversaw its
overall operation and management from
1999 to 2007 and expanded its business from approximately 6 airports to 30 airports. From
2002 to 2005, Mr. Zeng served as the general manager of Posterscope China, an outdoor advertising
company. From 1994 to 1998, Mr. Zeng ran his own business of international trade between Australia
and China. Prior to that, Mr. Zeng worked as a programmer at Industrial and Commercial Bank of
China from 1990 to 1997. Mr. Zeng received his bachelor’s degree in computer science from
University of Technology Sydney in Australia in 1991 and another bachelor’s degree in automatic
control from Sun Yat-sen University in China in 1983.
Mr. Jacky Jian Li has served as our vice president of operations since October 2005. Prior to
joining our company, Mr. Li worked for ASDM International Advertising Co., Ltd. from 2003 to 2005,
where he was a program director. From 2002 to 2003, he served as a program director of CCTV. He was
the deputy general manager of Super Star Reader Company from 2000 to 2002 after he served as the
chief representative of Polyglot International in China from 1993 to 2000. Mr. Li received his
bachelor’s degree in Chinese literature from Peking University in China in 1983.
Mr. Aaron Ting Pan Tsoi has served as our vice president of sales since June 2008. Prior to
joining our company, Mr. Tsoi served as a regional managing partner of North Asia at MindShare
Beijing, a leading global media network of the WPP Group, where he oversaw the accounts for the
North Asia markets, People’s
Republic of China, Hong Kong, Taiwan and Japan since 2006. From March
2001 to May 2006, Mr. Tsoi served as the general manager of MediaCom China, a Grey Group company,
where he was in charge of the overall operation of the Beijing, Shanghai and Guangzhou offices. Mr.
Tsoi received his bachelor’s degree in economics from the University of Hong Kong in 1993.
Employment Agreements
We have entered into employment agreements with all of our senior executive officers, Herman
Man Guo, Xiaoya Zhang, James Zhonghua Feng and Conor Chiahung Yang. Under these employment
agreements, each of our four executive officers is employed for a specified time period, subject to
automatic extension unless either we or the executive officer gives a one-month prior notice to
terminate such employment. We have also entered into employment agreements with our other executive
officers, including Jacky Jian Li, Ken Zijian Zeng, Aaron Tsoi and Wei He. Each of the contract
terms was a period of two or three years. We may terminate the employment for cause, at any time,
without notice or remuneration, for certain acts of the employee, including but not limited to a
conviction or plea of guilty to certain crimes, negligence or dishonesty to our detriment and
failure to perform the agreed-to duties after a reasonable opportunity to cure the failure. An
executive officer may terminate his employment at any time without notice or penalty if there is a
material reduction in his authority, duties and responsibilities or if there is a material
reduction in his annual salary before the next annual salary review. Furthermore, either we or an
executive officer may terminate the employment at any time without cause upon advance written
notice to the other party. These agreements do not provide for any special termination benefits,
nor do we have other arrangements with these executive officers for special termination benefits.
Each executive officer has agreed to hold, both during and after the employment agreement
expires or is earlier terminated, in strict confidence and not to use, except as required in the
performance of his duties in connection with the employment, any confidential information, trade
secrets and know-how of our company or the confidential information of any third party, including
our variable interest entities and our subsidiaries, received by us. In addition, each executive
officer has agreed to be bound by non-competition restrictions set forth in his or her employment
agreement. Specifically, each executive officer has agreed not to, for a period ranging from one to
two years following the termination or expiration of the employment agreement, (i) carry on or be
engaged or interested, directly or indirectly, as shareholder, director, employee, partner, agent
or otherwise carry on any business in direct competition with our business; (ii) solicit or entice
away from us, or attempt to solicit or entice away from us, any person or entity who has been our
customer, client or our representative or agent or in the habit of dealing with us within two years
prior to such executive officer’s termination of employment; (iii) solicit or entice away from us,
or attempt to solicit or entice away from us, any person or entity who has been our officer,
manager, consultant or employee within two years prior to such executive officer’s termination of
employment; or (iv) use a name including the word “AirMedia” or any other words used by us in our
name or in the name of any of our products or services, in such a way as to be capable of or likely
to be confused with our name or the name of our products or services.
B. Compensation of Directors and Executive Officers
In 2008, the aggregate cash compensation to our executive officers was approximately US$1.1
million and the aggregate cash compensation to our non-executive directors was approximately
US$70,735.
Share Options
In July 2007, we adopted the 2007 Share Incentive Plan to attract and retain the best
available personnel, provide additional incentives to employees, directors and consultants, and
promote the success of our business. As of the date of this annual report, our board of directors
has authorized the issuance of up to 17,000,000 ordinary shares upon the exercise of awards granted
under our plan. As of December 31, 2008, options to purchase a total of 10,395,000 of
our ordinary shares have been granted and 9,902,052 options were outstanding. These options will vest on a
straight-line basis over a three-year period, with one-twelfth of the options vesting each quarter
from the date of grant.
The following table summarizes, as of the date of this annual report, the options granted to
our senior executive officers, directors and to other individuals as a group, without giving effect
to the options that were exercised or terminated, if any.
Aggregate beneficial ownership of our company by such officer or director is less than 1% of our total outstanding ordinary shares.
Note (1):
On December 10, 2008, to provide better incentive to our employees, our board of
directors approved an adjustment to the exercise price of the stock options previously granted on
November 29, 2007. The exercise price of each option was originally $8.50 per ordinary share. The
revised exercise price for each option is $2.98 per ordinary share.
The following paragraphs summarize the terms of our 2007 Share Incentive Plan.
Plan Administration. Our board of directors, or a committee designated by our board or
directors, will administer the plan. The committee or the full board of directors, as appropriate,
will determine the provisions and terms and conditions of each option grant.
Award Agreements. Options and stock purchase rights granted under our plan are evidenced by a
stock option agreement or a stock purchase right agreement, as applicable, that sets forth the
terms, conditions and limitations for each grant. In addition, the stock option agreement and the
stock purchase right agreement also provide that securities granted are subject to a 180-day
lock-up period following the effective date of a registration statement filed by us under the
Security Act, if so requested by us or any representative of the underwriters in connection with
any registration of the offering of any of our securities.
Eligibility. We may grant awards to our employees, directors and consultants or any of our
related entities, which include our subsidiaries or any entities in which we hold a substantial
ownership interest.
Acceleration of Options upon Corporate Transactions. The outstanding options will terminate
and accelerate upon occurrence of a change-of-control corporate transaction where the successor
entity does not assume our outstanding options under the plan. In such event, each outstanding
option will become fully vested and immediately exercisable, and the transfer restrictions on the
awards will be released and the
repurchase or forfeiture rights will terminate immediately before the date of the
change-of-control transaction provided that the grantee’s continuous service with us shall not be
terminated before that date.
Term of the Options. The term of each option grant shall be stated in the stock option
agreement, provided that the term shall not exceed 10 years from the date of the grant.
Vesting Schedule. In general, the plan administrator determines, or the stock option agreement
specifies, the vesting schedule.
Transfer Restrictions. Options to purchase our ordinary shares may not be transferred in any
manner by the optionee other than by will or the laws of succession and may be exercised during the
lifetime of the optionee only by the optionee.
Termination of the Plan. Unless terminated earlier, the plan will expire and no further awards
may be granted after July 2017. Our board of directors has the authority to amend or terminate the
plan subject to shareholder approval to the extent necessary to comply with applicable law.
However, no such action may (i) impair the rights of any optionee unless agreed by the optionee and
the plan administrator or (ii) affect the plan administrator’s ability to exercise the powers
granted to it under our plan.
Our board of directors currently consists of seven directors. A director is not required to
hold any shares in the company by way of qualification. A director may vote with respect to any
contract, proposed contract or arrangement in which he is materially interested. A director may
exercise all the powers of the company to borrow money, mortgage its undertaking, property and
uncalled capital, and issue debentures or other securities whenever money is borrowed or as
security for any obligation of the company or of any third party.
Committees of the Board of Directors
We have established two committees under the board of directors: the audit committee and the
compensation committee. We currently do not plan to establish a nominating committee. The
independent directors of our company will select and recommend to the board for nomination by the
board such candidates as the independent directors, in the exercise of their judgment, have found
to be well qualified and willing and available to serve as our directors prior to each annual
meeting of our shareholders at which our directors are to be elected or re-elected. In addition,
our board of directors has resolved that director nominations be approved by a majority of the
board as well as a majority of the independent directors of the board. In compliance with Rule
5605(b)(1) of the Nasdaq Marketplace Rules, all members of our audit committee and compensation
committee are independent directors. We have adopted a charter for each of the board committees.
Each committee’s members and responsibilities are described below.
In 2008, our board held meetings or passed resolutions by unanimous written consent 15 times.
Audit Committee. Our audit committee consists of Messrs. Songzuo Xiang, Shichong Shan and
Donglin Xia. We have determined that Messrs. Songzuo Xiang, Shichong Shan and Donglin Xia satisfy
the “independence” requirements of Rule 10A-3 under the Securities Exchange Act of 1934, as
amended, or the Exchange Act, and Rule 5605(c)(2)(A) of the Nasdaq Marketplace Rules. The audit
committee will oversee our accounting and financial reporting processes and the audits of the
financial statements of our company. The audit committee will be responsible for, among other
things:
•
selecting the independent auditors and pre-approving all auditing and non-auditing
services permitted to be performed by the independent auditors;
•
reviewing with the independent auditors any audit problems or difficulties and
management’s response;
•
reviewing and approving all proposed related-party transactions, as defined in Item
404 of Regulation S-K under the Securities Act;
•
discussing the annual audited financial statements with management and the
independent auditors;
•
reviewing major issues as to the adequacy of our internal controls and any special
audit steps adopted in light of material control deficiencies;
•
annually reviewing and reassessing the adequacy of our audit committee charter;
•
such other matters that are specifically delegated to our audit committee by our
board of directors from time to time;
•
meeting separately and periodically with management and the independent auditors;
and
•
reporting regularly to the full board of directors.
In 2008, our audit committee held meetings or passed resolutions by unanimous written consent
five times.
Compensation Committee. Our compensation committee consists of Messrs. Junjie Ding, Shichong
Shan and Donglin Xia. We have determined that Messrs. Junjie Ding, Shichong Shan and Donglin Xia
satisfy the “independence” requirements of Rule 5605(d) of the Nasdaq Marketplace Rules. Our
compensation committee assists the board in reviewing and approving the compensation structure of
our directors and executive officers, including all forms of compensation to be provided to our
directors and executive officers. Our chief executive officer may not be present at any committee
meeting during which his compensation is deliberated. The compensation committee will be
responsible for, among other things:
•
reviewing and recommending to the board with respect to the total compensation
package for our four most senior executives;
•
approving and overseeing the total compensation package for our executives other
than the four most senior executives;
•
reviewing and making recommendations to the board with respect to the compensation
of our directors; and
•
reviewing periodically and approving any long-term incentive compensation or equity
plans, programs or similar arrangements, annual bonuses, employee pension and welfare
benefit plans.
In 2008, our compensation committee held meetings or passed resolutions by unanimous written
consent five times.
Duties of Directors
Under Cayman Islands law, our directors have a statutory duty of loyalty to act honestly in
good faith with a view to our best interests. Our directors also have a duty to exercise the skill
they actually possess and with such care and diligence that a reasonably prudent person would
exercise in comparable circumstances. In fulfilling their duty of care to us, our directors must
ensure compliance with our memorandum and articles of association. A shareholder has the right to
seek damages if a duty owed by our directors is breached.
Terms of Directors and Officers
All directors hold office until their successors have been duly elected and qualified. A
director may only be removed by the shareholders. Officers are elected by and serve at the
discretion of the board of directors.
D. Employees
We had 165, 451 and 564 employees as of December 31, 2006, 2007 and 2008, respectively. The
following table sets forth the number of our employees by area of business as of December 31, 2008:
Number of
Employees
% of Total
Sales and Marketing Department
262
46.5
%
Quality Control and Technology Department
131
23.2
Programming Department
37
6.6
Resources Development Department
24
4.3
General Administrative and Accounting
110
19.4
Total
564
100.0
%
Generally we enter into standard employment contracts with our officers, managers and other
employees. According to these contracts, all of our employees are prohibited from engaging in any
other employment during the period of their employment with us. The employment contracts with
officers and managers are subject to renewal every three years and the employment contracts with
other employees are subject to renewal every year.
In addition, we enter into standard confidentiality agreements with all of our employees
including officers and managers that prohibit any employee from disclosing confidential information
obtained during their
employment with us. Furthermore, the confidentiality agreements include a
covenant that prohibits all employees from engaging in any activities that compete with our
business up to two years after the period of their employment with us.
None of our employees is a member of a labor union and we consider our relationship with our
employees to be good.
E. Share Ownership
The following table sets forth information with respect to the beneficial ownership of our
ordinary shares, as of April 27, 2009, by:
•
each of our directors and executive officers; and
•
each person known to us to own beneficially more than 5.0% of our ordinary shares.
The calculations in the shareholder table below are based on 131,132,919 ordinary shares
issued and outstanding as of April 27, 2009. Beneficial ownership is determined in accordance with
the rules and regulations of the SEC. In computing the number of shares beneficially owned by a
person and the percentage ownership of that person, we have included shares that the person has the
right to acquire within 60 days after April 27, 2009, including through the exercise of any option,
or other right or the conversion of any other security. These shares, however, are not included in
the computation of the percentage ownership of any other person.
Aggregate beneficial ownership of our company by such
director or officer is less than 1% of our total outstanding ordinary
shares.
Note: (1)
Includes (i) 53,747,558 ordinary shares held by Wealthy Environment Limited, a British
Virgin Islands company wholly owned by Mr. Guo,
(ii) 361,844 ordinary shares held by Wealthy Environment
Limited, in the form of ADSs, each representing two ordinary shares
of the company, and (iii) 1,166,666 ordinary shares issuable upon
exercise of options held by Mr. Guo that are exercisable within
60 days after April 27, 2009. The business address of Mr. Guo is 17/F, Sky Plaza, No.46 of Dongzhimenwai Street,
Dongcheng District, Beijing, China.
Includes 6,950,560 ordinary shares held by Mambo Fiesta Limited, a British Virgin
Islands company wholly owned by Mr. Xu. The business address of Mr. Xu is 17/F, Sky
Plaza, No.46 of Dongzhimenwai Street, Dongcheng District, Beijing, China.
(3)
Includes 2,623,466 ordinary shares held by Great Bridges International
Corporation, a British Virgin Islands company wholly owned by Mr. Zhang, and 583,332
ordinary shares issuable upon exercise of options held by Mr. Zhang that are
exercisable within 60 days after April 27, 2009. The business address of Mr. Zhang is
17/F, Sky Plaza, No.46 of Dongzhimenwai Street, Dongcheng District, Beijing, China.
(4)
Includes 53,747,558 ordinary shares of the company and
361,844 ordinary shares of the company in the form of ADSs. Wealthy Environment Limited, a company incorporated in the British Virgin
Islands, is wholly owned and controlled by Herman Man Guo. The registered address of
Wealthy Environment Limited is P.O. Box 173, Kingston Chambers, Road Town Tortola,
British Virgin Islands.
(5)
All of the issued and outstanding shares of Global Gateway Investments Limited
are wholly owned by CDH Fund II, a Cayman Islands exempted limited partnership. CDH
China Growth Capital Holdings Company Limited, or CDH Growth Capital Holdings, a Cayman
Islands exempted limited liability company, is the general partner of CDH Fund II and
has the power to direct CDH Fund II as to the voting and disposition of shares directly
and indirectly held by CDH Fund II. The investment committee of CDH Growth Capital
Holdings comprises Wu Shangzhi, Jiao Shuge and Liu Xinlai. Changes to the investment
committee require the approval of the directors of CDH Growth Capital Holdings. The
directors of CDH Growth Capital Holdings are nominated by the principal shareholders of
CDH Growth Capital Holdings, being (1) an affiliate of Capital Z Partners, (2) an
affiliate of the Government of Singapore Investment Corporation, and (3) China Diamond
Holdings II, L.P., a British Virgin Islands limited partnership controlled by senior
members of the CDH Fund II investment team. The registered address for Global Gateway
Investments Limited is P.O. Box 957, Offshore Incorporation Centre, Road Town, Tortola,
British Virgin Islands.
(6)
Mambo Fiesta Limited, a company incorporated in the British Virgin Islands, is
wholly owned and controlled by Qing Xu. The registered address of Mambo Fiesta Limited is
P.O. Box 173, Kingston Chambers, Road Town Tortola, British Virgin Islands.
None of our existing shareholders have different voting rights from other shareholders. We are
not aware of any arrangement that may, at a subsequent date, result in a change of control of our
company.
As
of April 27, 2009, 131,132,919 of our ordinary shares were issued and outstanding. To our
knowledge, we had only one record shareholder in the United States, JPMorgan Chase Bank, N.A.,
which is the depositary of our ADS program and held approximately 31.8% of our total outstanding
ordinary shares as of April 27, 2009. The number of beneficial owners of our ADSs in the United
States is likely to be much larger than the number of record holders of our ordinary shares in the
United States.
For the options granted to our directors, officers and employees, please refer to “—B.
Compensation of Directors and Executive Officers.”
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
A.
Major Shareholders
Please refer to “Item 6. Directors, Senior Management and Employees—E. Share Ownership.”
B.
Related Party Transactions
Contractual Arrangements
Since December 10, 2005, foreign investors have been permitted to own directly a 100% interest
in PRC advertising companies with at least three years of direct operations outside of China. We do
not currently directly operate an advertising business outside of China and cannot qualify under
the PRC regulations allowing 100% foreign ownership of a PRC advertising company any earlier than
three years after we commence any such operations or until we acquire a company which has directly
operated an advertising business for the required period of time. Accordingly, since we have not
been involved in the direct operation of an advertising business outside of China, our domestic PRC
subsidiaries, AM Technology, Shenzhen AM and Xi’an AM which are considered foreign-invested, are currently
ineligible to apply for the required advertising services licenses in China. Our advertising
business is currently provided through contractual arrangements with our consolidated variable
interest entities in China, principally AM Advertising, certain of its subsidiaries, Shengshi
Lianhe, AirMedia UC and AM Yuehang.
Our consolidated variable interest entities directly operate our advertising network, enter
into concession rights contracts and sell advertising time slots to our clients. We have been and
are expected to continue to be dependent on our variable interest entities to operate our advertising business
until we qualify for
direct ownership of an advertising business in China under the PRC laws and
regulations and acquire our variable interest entities as our direct, wholly-owned subsidiaries. AM
Technology has entered into contractual arrangements with our variable interest entities, pursuant
to which AM Technology provide exclusive technology support and service and technology development
services in exchange for payments from them. In addition, AM Technology has entered into agreements
with our variable interest entities and each of their shareholders which provide AM Technology with
the substantial ability to control our variable interest entities. These agreements are summarized
in the following paragraphs.
Technology Support and Service Agreements. Pursuant to the technology support and service
agreements and the supplementary agreements thereto between AM Advertising and AM Technology,
Shengshi Lianhe and AM Technology, AirMedia UC and AM Technology, and AM Yuehang and AM Technology,
respectively, AM Technology has the exclusive right to provide to AM Advertising, Shengshi Lianhe,
AirMedia UC and AM Yuehang technology consulting services, including research and development of
technologies related to AM Advertising, Shengshi Lianhe, AirMedia UC and AM Yuehang’s operation,
the maintenance and monitoring of displays and programming systems, research on the solution of
technical problems, and other related technical support and services. AM Technology owns the
intellectual property rights developed in the performance of these agreements. The service fees
that AM Advertising, Shengshi Lianhe, AirMedia UC and AM Yuehang pay to AM Technology,
respectively, should be in amounts that guarantee that AM Advertising, Shengshi Lianhe, AirMedia UC
or AM Yuehang can achieve, after deducting such service fees payable to AM Technology, a net
cost-plus rate of no less than 0.5% in the case of AM Advertising, Shengshi Lianhe and AirMedia UC,
or 1.0% in the case of AM Yuehang, which final rate should be determined by AM Technology. The “net
cost-plus rate” refers to the operating profit as a percentage of total costs and expenses of a
certain entity. These service fees should be settled by the end of each quarter and subject to
adjustments in the annual account settlement that should be completed within three months after the
end of each fiscal year. These agreements run for ten-year terms and are subject to automatic
renewal for an additional ten-year term provided that no objection is made in the twenty-days prior
to the renewal of the term.
Technology Development Agreements. Pursuant to the technology development agreements and the
supplementary agreements thereto between AM Advertising and AM Technology, Shengshi Lianhe and AM
Technology, AirMedia UC and AM Technology and AM Yuehang and AM Technology, respectively, AM
Advertising, Shengshi Lianhe, AirMedia UC and AM Yuehang exclusively engage AM Technology to
provide technology development services. AM Technology owns the intellectual property rights
developed in the performance of these agreements. The service fees that AM Advertising, Shengshi
Lianhe and AirMedia UC pay to AM Technology, respectively, should be in amounts that guarantee that
AM Advertising, Shengshi Lianhe and AirMedia UC can achieve, after deducting such service fees
payable to AM Technology, a net cost-plus rate of no less than 0.5%, which final rate should be
determined by AM Technology. The “net cost-plus rate” refers to the operating profit as a
percentage of total costs and expenses of a certain entity. The service fees that AM Yuehang pays
to AM Technology should be an amount mutually agreed by AM Yuehang and AM Technology in the first
month of each year. These service fees should be settled by the end of each quarter and subject to
adjustments in the annual account settlement that should be completed within three months after the
end of each fiscal year. These agreements run for ten-year terms and are subject to automatic
renewal for an additional ten-year term provided that no objection is made within twenty-days prior
to the renewal of the term.
Call Option Agreements. Under the call option agreements among AM Advertising, AM Technology,
and the shareholders of AM Advertising, among Shengshi Lianhe, AM Technology and the shareholders
of Shengshi Lianhe, among AirMedia UC, AM Technology and the shareholders of AirMedia UC and among
AM Yuehang, AM Technology and the shareholders of AM Yuehang, respectively, the shareholders of AM
Advertising, Shengshi Lianhe, AirMedia UC and AM Yuehang irrevocably granted AM Technology or its
designated third party an exclusive and irrevocable right to purchase from AM Advertising, Shengshi
Lianhe, AirMedia UC or AM Yuehang’s shareholders, as the case may be, to the extent permitted under
PRC law, all of the equity interests in AM Advertising, Shengshi Lianhe, AirMedia UC or AM Yuehang,
as the case may be, for the minimum amount of consideration permitted by the applicable law without
any other conditions. AM Technology agrees to provide a guarantee for AM Advertising, Shengshi
Lianhe, AirMedia UC or AM Yuehang’s performance of their obligations under any contracts or
agreements relating to their business operations and committed to provide loans to support the
business development needs of AM Advertising, Shengshi Lianhe, AirMedia UC or AM Yuehang or when AM
Advertising, Shengshi Lianhe, AirMedia UC or AM Yuehang suffers any operating difficulties. In
April 2008, AM Technology provided an
entrusted loan in the amount of US$5.9 million and US$4.4 million to Shengshi Lianhe and AM
Advertising, respectively, to meet their working capital needs. As of
December 31, 2008, US$3.7 million of these entrusted loans
was outstanding.
Equity Pledge Agreements. Under the equity pledge agreements among AM Advertising, AM
Technology and the shareholders of AM Advertising, among Shengshi Lianhe, AM Technology and the
shareholders of Shengshi Lianhe, among AirMedia UC, AM Technology and the shareholders of AirMedia
UC and among AM Yuehang, AM Technology and the shareholders of AM Yuehang, respectively, the
shareholders of AM Advertising, Shengshi Lianhe, AirMedia UC and AM Yuehang pledged all of their
equity interests in AM Advertising, Shengshi Lianhe, AirMedia UC or AM Yuehang, as the case may be,
to AM Technology to guarantee AM Advertising, Shengshi Lianhe, AirMedia UC or AM Yuehang’s
performance of its obligations under the technology support and service agreements and the
technology development agreements. AM Technology has the right to receive dividends from the shares
pledged by the shareholders of AM Advertising, Shengshi Lianhe, AirMedia UC and AM Yuehang.
Loan
Agreements. In 2007 and 2008, AM Technology entered into loan
agreements with, and extended interest-free loans in the
aggregate amount of US$675,899 to, the record owners of the following consolidated variable interest
entities: AM Advertising, AirMedia UC and AM Yuehang. These loans were made solely in connection
with the initial capitalization and the subsequent increase of registered capitals of the
applicable variable interest entities by the respective record owners. All record owners of these
variable interest entities have pledged their respective equity interests in these entities to AM
Technology to secure their obligations to repay the loans upon maturity. Each loan agreement will
expire ten years from the date thereof.
Authorization Letters. Each shareholder of AM Advertising, Shengshi Lianhe, AirMedia UC and AM
Yuehang has executed an authorization letter to authorize AM Technology to exercise certain of its
rights as shareholder of AM Advertising, Shengshi Lianhe, AirMedia UC or AM Yuehang, as the case
may be, including voting rights, the rights to enter into legal documents to transfer any or all of
its equity interests in AM Advertising, Shengshi Lianhe, AirMedia UC or AM Yuehang, as the case may
be, and the rights to designate the general manager of AM Advertising, Shengshi Lianhe, AirMedia UC
and AM Yuehang in the shareholder meetings. Such authorization letters will remain effective during
the respective operating periods of AM Advertising, Shengshi Lianhe, AirMedia UC and AM Yuehang.
Business Cooperation Agreements. AirTV United, a PRC company 75% owned by AM Advertising,
holds a license to produce and operate television programs to be played in airports and on
airplanes, which was granted by the State Administration of Radio, Film and Television. Under the
business cooperation agreements between AirTV United and AM Advertising, and AirTV United and
Shengshi Lianhe, respectively, AirTV United agreed to provide program collecting, selecting,
editing and compiling services to AM Advertising and Shengshi Lianhe to satisfy their requirements
for non-advertising contents shown in airports or on airplanes. AirTV United owns the copyrights
developed in the performance of these agreements. AM Advertising and Shengshi Lianhe pay AirTV
United a certain amount of service fees based on the program acquisition costs of AirTV United, the
number and experience of program editing staff of AirTV United and the contents and value of the
programs provided by AirTV United. AirTV United agreed not to enter into similar cooperation
agreements or arrangements with any third parties without the written consent of AM Advertising and
Shengshi Lianhe. These agreements run for ten-year terms.
Amounts Due to BEMC
We assigned concession rights of certain media resources to BEMC, our joint venture with China
Eastern Media Corporation, Ltd. As of December 31, 2008, we
received US$408,000 deposit from BEMC as
the consideration for the assignment of these concession rights.
Amounts Due to Sunshine Media Co., Ltd.
Sunshine Media Co., Ltd., or Sunshine, is a PRC company that was incorporated in September
1997. It was formed by Herman Man Guo, our chairman and chief executive officer, Qing Xu, our
director, and other third party shareholders. Its principal business operation is to sell flight
tickets for airlines.
In 2005, Sunshine paid to third parties on our behalf the costs of purchasing digital TV
screens and certain operating expenses, and we agreed to reimburse Sunshine. We do not expect to
enter into similar
arrangements with Sunshine in the future. In October 2006, AM Advertising acquired a 75%
equity interest in AirTV United from Sunshine at a purchase price of approximately US$3.3 million.
Our amounts due to Sunshine were US$0.6 million and US$2.6 million as of December 31, 2005 and
2006, respectively. The amount for 2005 comprised operating expenses paid by Sunshine on behalf of
and reimbursable by us for the purchase of digital TV screens. The amount for 2006 comprised
operating expenses paid by Sunshine on behalf
of and reimbursable by us for the purchase of digital
TV screens and payable in connection with AM Advertising’s acquisition of 75% of the equity
interest in AirTV United from Sunshine. The amount due to Sunshine has been paid off by us in June
2007.
Amounts Due from Beijing Aiyike
We entered into an agreement with Beijing Aiyike, of which we own a 51% equity interest, in
June 2007 to provide short-term, interest free and unsecured loans to Beijing Aiyike, which was
repaid in July 2007.
In November 2008, we sold the investments in Beijing Aiyike to a third party for cash
consideration of US$0.7 million.
Private Placements
Series A Preferred Shares
In October 2005, we and CDH entered into an agreement, according to which we agreed that CDH
or its affiliate would acquire a Series A preferred share interest in us. Under this agreement, CDH
or its affiliate was obligated to pay US$12.0 million to us in return for a Series A preferred
share interest of 37.6% of our total equity interest on an as converted basis, with the payments to
be made at our discretion. CDH, through its wholly-owned subsidiary, paid approximately US$6.0
million and US$3.0 million in 2005 and 2006, respectively, and paid the remaining balance in
February 2007. In February 2007, we and Global Gateway Investments Limited, a wholly-owned
subsidiary of CDH, entered into a Series A share purchase agreement to document the issuance of a
Series A preferred share interest contemplated under the October 2005 agreement.
In conjunction with the October 2005 agreement, CDH agreed to transfer up to 5,000,000
ordinary shares (converted from CDH’s Series A preferred shares) to Herman Man Guo, our founder,
chairman and chief executive officer, if we achieved certain pre-determined performance benchmarks.
On September 27, 2007, the share transfer arrangement was amended to eliminate the performance
benchmarks and CDH transferred 5,000,000 ordinary shares (converted from CDH’s Series A preferred
shares) to Mr. Guo without any conditions in recognition of his service to us.
Each of the remaining outstanding Series A preferred shares was automatically converted into
one ordinary share upon the closing of our initial public offering in November 2007.
Series B Preferred Shares
In June 2007, we issued and sold an aggregate of 16,000,000 Series B Redeemable Convertible
Preferred Shares, par value US$0.001 each, in a private placement pursuant to a Series B share
purchase agreement dated April 26, 2007 at an aggregate price of US$40.0 million to a group of
investors, including OZMO, which purchased 3,868,000 shares, OZMA, which purchased 3,447,200
shares, SIMF, which purchased 684,800 shares, and AM SPV Limited, which purchased 8,000,000 shares
from us. The 16,000,000 Series B preferred shares were automatically converted into 5,925,925
ordinary shares upon the completion of our initial public offering in November 2007. The price at
which the Series B preferred shares converted into ordinary shares was 90% of the initial public
offering price.
Shareholders Agreement
In connection with our Series A private placement in October 2005, we and certain of our
shareholders entered into a shareholders agreement in March 2007 to further document the
shareholding relationship agreed upon in October 2005. That shareholders agreement was terminated
in June 2007 when we and certain of our shareholders entered into a new shareholders agreement,
dated as of June 7, 2007, with the
Series B investors pursuant to the Series B private placement. The June shareholders agreement
was further amended and restated on September 27, 2007. Under this agreement, we have granted
certain of our shareholders customary registration rights, including demand and piggyback
registration rights and Form F-3 registration rights.
Pursuant to a share exchange agreement dated June 7, 2007 among AirMedia Group Inc., Broad
Cosmos, Global Gateway Investments Limited and Herman Man Guo, Qing Xu and Xiaoya Zhang, or the
Existing Shareholders, AirMedia Group Inc. acquired all of shares of Broad Cosmos from Global
Gateway Investments Limited and each Existing Shareholders in exchange for the issuance of
substantially identical equity securities of AirMedia Group Inc. to Global Gateway Investments
Limited and each Existing Shareholders as held in Broad Cosmos immediately prior to the share
exchange. As a result, AirMedia Group Inc. owns 100% of the outstanding equity securities of Broad
Cosmos and Global Gateway Investments Limited and the Existing Shareholders together owned (prior
to the Series B private placement) 100% of the outstanding equity securities of AirMedia Group Inc.
Share Options
See “Item 6. Directors, Senior Management and Employees—B. Compensation of Directors and
Executive Officers—Share Options.”
C.
Interests of Experts and Counsel
Not applicable.
ITEM 8. FINANCIAL INFORMATION
A.
Consolidated Statements and Other Financial Information
We have appended consolidated financial statements filed as part of this annual report.
Legal and Administrative Proceedings
We may be subject to legal proceedings, investigations and claims incidental to the conduct of
our business from time to time. We are not currently a party to, nor are we aware of, any legal
proceeding, investigation or claim which, in the opinion of our management, is likely to have a
material adverse effect on our business, financial condition or results of operations.
Dividend Policy
We have never declared or paid any dividends, nor do we have any present plan to pay any cash
dividends on our ordinary shares in the foreseeable future. We currently intend to retain most, if
not all, of our available funds and any future earnings to operate and expand our business.
Our board of directors has complete discretion in deciding whether to distribute dividends.
Even if our board of directors decides to pay dividends, the timing, amount and form of future
dividends, if any, will depend on, among other things, our future results of operations and cash
flow, our capital requirements and surplus, the amount of distributions, if any, received by us
from our subsidiaries, our financial condition, contractual restrictions and other factors deemed
relevant by our board of directors.
If we pay any dividends, we will pay our ADS holders to the same extent as holders of our
ordinary shares, subject to the terms of the deposit agreement, including the fees and expenses
payable thereunder. Cash dividends on our ordinary shares, if any, will be paid in U.S. dollars.
B.
Significant Changes
Except as disclosed elsewhere in this annual report, we have not experienced any significant
changes since the date of our audited consolidated financial statements included in this annual
report.
ITEM 9. THE OFFER AND LISTING
A.
Offering and Listing Details
Our ADSs, each representing two of our ordinary shares, have been listed on the Nasdaq Global
Market since November 7, 2007. Our ADSs trade under the symbol “AMCN.” For the period from November
7, 2007 to
April 24, 2009, the trading price of our ADSs on the Nasdaq Global Market has ranged
from US$3.80 to US$26.51 per ADS. The following table provides the high and low trading prices for
our ADSs on the Nasdaq Global Market for (1) the year 2008; (2) the first quarter in 2009, the
fourth quarter in 2007 and all quarters in 2008; and (3) each of the past six months.
Our ADSs, each representing two of our ordinary shares, have been listed on the Nasdaq
Global Market since November 7, 2007. Our ADSs trade under the symbol “AMCN.”
We have not entered into any material contracts other than in the ordinary course of business
and other than those described in “Item 4. Information on the Company” or elsewhere in this annual
report on Form 20-F.
D.
Exchange Controls
See “Item 4. Information on the Company—B. Business Overview—Regulation—Regulations on
Foreign Exchange.”
E.
Taxation
The following summary of the material Cayman Islands and United States federal income tax
consequences of an investment in our ADSs or ordinary shares is based upon laws and relevant
interpretations thereof in effect as of the date of this Registration Statement, all of which are
subject to change. This summary does not deal with all possible tax consequences relating to an
investment in our ADSs or ordinary shares, such as the tax consequences under state, local and
other tax laws.
Cayman Islands Taxation
The Cayman Islands currently levies no taxes on individuals or corporations based upon
profits, income, gains or appreciation and there is no taxation in the nature of inheritance tax or
estate duty. No Cayman Islands stamp duty will be payable unless an instrument is executed in,
brought to or produced before a court in the Cayman Islands. The Cayman Islands is not party to any
double tax treaties. There are no exchange control regulations or currency restrictions in the
Cayman Islands.
PRC Taxation
Under the Income Tax Law for Enterprises with Foreign Investment and Foreign Enterprises
effective prior to January 1, 2008, dividends payable to non-PRC investors are exempt from PRC
withholding tax. In addition, under the PRC laws effective prior to January 1, 2008, any dividends
payable, or distributions made, by us to holders or beneficial owners of our ADSs would not be
subject to any PRC tax, provided that the holders or beneficial owners have not been physically
resident in the PRC for a period of one year or more and have not become subject to PRC tax.
Under the new PRC tax law, which took effect on January 1, 2008, enterprises established
outside of China whose “de facto management bodies” are located in China are considered “resident
enterprises,” and are generally subject to the uniform 25% enterprise income tax rate as to their
global income. Under the implementation rules of the new PRC tax law, “de facto management bodies”
is defined as the bodies that have material and overall management and control over the business,
personnel, accounts and properties of the enterprise. Substantially all of our management is
currently based in China, and may remain in China after the effectiveness of the EIT Law. In
addition, although the new PRC tax law provides that dividend income between “qualified resident
enterprises” is exempted income, it is unclear what is considered a “qualified resident enterprise”
under the new PRC tax law. Even a foreign enterprise otherwise classified as a “non-
resident enterprise” shall be subject to the EIT on its income derived from PRC at the rate of
25% provided it has an establishment and premise in the PRC and at 10% provided its income derived
from PRC is not effectively connected with that establishment and premise or it has no
establishment or premise in the PRC.
Furthermore, unlike the Income Tax Law for Enterprises with Foreign Investment and Foreign
Enterprise effective prior to January 1, 2008, which specifically exempted withholding tax on
dividends payable to non-PRC investors, under the new PRC tax law, foreign corporate shareholders
and corporate ADSs holders may be subject to a 10% income tax upon the dividends payable by us or
on any gains they realize from the transfer of our shares or ADSs, if such income is regarded as
income from “sources within the PRC.” Given the fact that (i) the new PRC tax law does not define
what is “sources within the PRC”, (ii) whether we would be regarded as “Resident Enterprise” is not
clear; and (iii) official clarification of the proper interpretation and implementation of the new
PRC enterprise income tax law has not been promulgated, it is uncertain whether
foreign corporate shareholders and corporate ADSs holders may be subject to a 10% income tax upon the dividends
payable by us or on any gains they realize from the transfer of our shares or ADSs. If we are
required under the new tax law to withhold PRC income tax on our dividends payable to our non-PRC
corporate shareholders and ADSs holders or on any gains of the transfer of their shares or ADSs,
your investment in our ADSs or ordinary shares may be materially and adversely affected.
United States Federal Income Taxation
The following discussion describes the material U.S. federal income tax consequences to U.S.
Holders (defined below) under present law of an investment in the ADSs or ordinary shares. This
discussion applies only to U.S. Holders that hold the ADSs or ordinary shares as capital assets and
that have the U.S. dollar as their functional currency. This discussion is based on the tax laws of
the United States as in effect on the date of this registration statement and on U.S. Treasury
regulations in effect or, in some cases, proposed, as of the date of this registration statement,
as well as judicial and administrative interpretations thereof available on or before such date.
All of the foregoing authorities are subject to change, and it is possible that such change will
apply retroactively and affect the tax consequences described below.
The following discussion does not deal with the tax consequences to any particular investor or
to persons in special tax situations such as:
•
certain financial institutions;
•
insurance companies;
•
broker dealers;
•
traders that elect to mark to market;
•
tax-exempt entities;
•
persons liable for alternative minimum tax;
•
persons holding an ADS or ordinary share as part of a straddle, hedging, conversion
or integrated transaction;
•
persons that actually or constructively own 10% or more of our voting stock;
•
persons who acquired ADSs or ordinary shares pursuant to the exercise of any
employee stock options or otherwise as compensation; or
•
persons holding ADSs or ordinary shares through partnerships or other pass-through
entities.
U.S. HOLDERS ARE URGED TO CONSULT THEIR TAX ADVISORS ABOUT THE APPLICATION OF THE U.S. FEDERAL
TAX RULES TO THEIR PARTICULAR CIRCUMSTANCES AS WELL AS THE STATE AND LOCAL AND FOREIGN TAX
CONSEQUENCES TO THEM OF THE PURCHASE, OWNERSHIP AND DISPOSITION OF ADSs OR ORDINARY SHARES.
The discussion below of the U.S. federal income tax consequences to “U.S. Holders” will apply
if you are the beneficial owner of ADSs or ordinary shares and you are, for U.S. federal income tax
purposes,
•
an individual who is a citizen or resident of the United States;
•
a corporation (or other entity taxable as a corporation for U.S. federal income tax
purposes) organized under the laws of the United States, any state or the District of
Columbia;
•
an estate whose income is subject to U.S. federal income taxation regardless of its
source; or
a trust that (1) is subject to the primary supervision of a court within the United
States and the control of one or more U.S. persons or (2) has a valid election in
effect under applicable U.S. Treasury regulations to be treated as a U.S. person.
If you are a partner in a partnership or other entity taxable as a partnership that holds ADSs
or ordinary shares, your tax treatment will depend on your status and the activities of the
partnership.
The discussion below assumes that the representations contained in the deposit agreement are
true and that the obligations in the deposit agreement and any related agreement will be complied
with in accordance with the terms. If you hold ADSs, you should be treated as the holder of the
underlying ordinary shares represented by those ADSs for U.S. federal income tax purposes.
The U.S. Treasury has expressed concerns that intermediaries in the chain of ownership between
the holder of an ADS and the issuer of the security underlying the ADS may be taking actions that
are inconsistent with the beneficial ownership of the underlying shares (for example, pre-releasing
ADSs to persons who do not have the beneficial ownership of the securities underlying the ADSs).
Accordingly, the availability of the reduced tax rate for dividends received by certain
non-corporate U.S. Holders (discussed below) could be affected by actions taken by intermediaries
in the chain of ownership between the holder of ADSs and our company if as a result of such actions
the holders of ADSs are not properly treated as beneficial owners of underlying shares.
Taxation of Dividends and Other Distributions on the ADSs or Ordinary Shares
Subject to discussions below under “—Passive Foreign Investment Company,” the gross amount of
all our distributions to you with respect to the ADSs or ordinary shares will be included in your
gross income as ordinary dividend income on the date of actual or constructive receipt by the
depositary, in the case of ADSs, or by you, in the case of ordinary shares, but only to the extent
that the distribution is paid out of our current or accumulated earnings and profits (as determined
under U.S. federal income tax principles). Such dividends will not be eligible for the
dividends-received deduction allowed to corporations in respect of dividends received from other
U.S. corporations.
With respect to non-corporate U.S. Holders, including individual U.S. Holders, for taxable
years beginning before January 1, 2011, dividends will be “qualified dividend income” that is taxed
at the lower applicable capital gains rate, provided that certain conditions are satisfied,
including that (1) the ADSs or ordinary shares are readily tradable on an established securities
market in the United States or we are eligible for the benefit of the income tax treaty between the
United States and the PRC, (2) we are not a passive foreign investment company (as discussed below)
for either our taxable year in which the dividend is paid or the preceding taxable year, and (3)
certain holding period requirements are met. United States Treasury Department guidance indicates
that our ADSs, upon listing on the Nasdaq Global Market (but not our ordinary shares), will be
readily tradable on an established securities market in the United States. There can be no
assurance that our ADSs will be considered readily tradable on an established securities market in
later years. You should consult
your tax advisors regarding the availability of the lower rate for dividends paid with respect
to our ADSs or ordinary shares.
Dividends will constitute foreign source income for foreign tax credit limitation purposes. If
the dividends are qualified dividend income (as discussed above), the amount of the dividend taken
into account for purposes of calculating the foreign tax credit limitation will be limited to the
gross amount of the dividend, multiplied by the reduced rate divided by the highest rate of tax
normally applicable to dividends. The limitation on foreign taxes eligible for credit is calculated
separately with respect to specific classes of income. For this purpose, dividends distributed by
us with respect to the ADSs or ordinary shares will constitute “passive category income” or, in the
case of certain U.S. Holders, constitute “general category income.” If PRC withholding taxes apply
to dividends paid to you with respect to the ADSs or ordinary shares, you may be able to obtain a
reduced rate of PRC withholding taxes under the income tax treaty between the United States and the
PRC if certain requirements are met. In addition, subject to certain conditions and limitations,
PRC withholding taxes on dividends may be treated as foreign taxes eligible for credit against your
U.S. federal income tax liability. U.S. Holders should consult their own tax advisors regarding the
creditability of any PRC tax.
To the extent that the amount of the distribution exceeds our current and accumulated earnings
and profits (determined under U.S. federal income tax principles), it will be treated first as a
tax-free return of your
tax basis in your ADSs or ordinary shares, and to the extent the amount of
the distribution exceeds your tax basis, the excess will be taxed as capital gain. We do not intend
to calculate our earnings and profits under U.S. federal income tax principles. Therefore, a U.S.
Holder can expect that a distribution will be reported as a dividend even if that distribution
would otherwise be treated as a non-taxable return of capital or as capital gain under the rules
described above.
Taxation of a Disposition of ADSs or Ordinary Shares
Subject to discussions below under “—Passive Foreign Investment Company,” you will recognize
capital gain or loss on any sale, exchange or other taxable disposition of an ADS or ordinary share
equal to the difference between the amount realized (in U.S. dollars) for the ADS or ordinary share
and your tax basis (in U.S. dollars) in the ADS or ordinary share. If you are a non-corporate U.S.
holder (such as an individual), you will be eligible for reduced tax rates if you have held the
ADSs or ordinary shares for more than a year. The deductibility of capital losses is subject to
limitations. Any such gain or loss that you recognize will be treated as U.S. source gain or loss
for foreign tax credit limitation purposes, subject to exceptions and limitations. However, in the
event we are deemed to be a Chinese “resident enterprise” under PRC tax law, we may be eligible for
the benefits of the income tax treaty between the United States and the PRC. In such event, if PRC
tax were to be imposed on any gain from the disposition of the ADSs or ordinary shares, a U.S.
Holder that is eligible for the benefits of the income tax treaty between the United States and the
PRC may elect to treat such gain as PRC source income. U.S. Holders should consult their own tax
advisors regarding the creditability of any PRC tax.
Passive Foreign Investment Company
Based on the price of our ADSs and ordinary shares and the composition of our income and
assets, we believe that we were not a “passive foreign investment company,” or PFIC, for United
States federal income tax purposes for our taxable year ended December 31, 2008. However, the
application of the PFIC rules is subject to ambiguity in several respects and, in addition, we must
make a separate determination each year as to whether we are a PFIC (after the close of each
taxable year). Accordingly, we cannot assure you that we will not be a PFIC for our current taxable
year ending December 31, 2009 or any future taxable year. In particular, we believe that there is a
significant risk that we will be a PFIC for our taxable year ending December 31, 2009 unless the
market price of our ADSs increases and/or we invest a substantial amount of the cash and other
passive assets we hold in assets that produce active income. A non-U.S. corporation is considered a
PFIC for any taxable year if either:
•
at least 75% of its gross income is passive income, or
•
at least 50% of the value of its assets (based on an average of the quarterly values
of the assets during a taxable year) is attributable to assets that produce or are held
for the production of passive income (the “asset test”).
We will be treated as owning our proportionate share of the assets and earning our
proportionate share of the income of any other corporation in which we own, directly or indirectly,
25% or more (by value) of the stock.
We must make a separate determination each year as to whether we are a PFIC. As a result, it
is possible that our PFIC status will change. In particular, because the total value of our assets
for purposes of the asset test will be calculated using the market price of our ADSs and ordinary
shares, our PFIC status will depend in large part on the market price of our ADSs and ordinary
shares. Accordingly, it is possible that fluctuations in the market price of the ADSs and ordinary
shares will result in our being a PFIC for any year. In addition, the composition of our income and
assets will be affected by how, and how quickly, we utilize the cash (or other passive assets or
investments) we have on hand or raise in any offering. If we are a PFIC for any year during which
you hold ADSs or ordinary shares, we will continue to be treated as a PFIC for all succeeding years
during which you hold ADSs or ordinary shares, absent a special election. For instance, if we cease
to be a PFIC, you can avoid some of the adverse effects of the PFIC regime by making a deemed sale
election with respect to the ADSs or ordinary shares, as applicable. If we are a PFIC for any
taxable year and any of our foreign subsidiaries is also a PFIC, a U.S. Holder would be treated as
owning a proportionate amount (by value) of the shares of the lower-tier PFIC for purposes of the
application of these rules. You are urged to consult your tax advisors about the application of the
PFIC rules to any of our subsidiaries.
If we are a PFIC for any taxable year during which you hold ADSs or ordinary shares, you will
be subject to special tax rules with respect to any “excess distribution” that you receive and any
gain you realize from a sale or other disposition (including a pledge) of the ADSs or ordinary
shares, unless you make a “mark-to-market” election as discussed below. Distributions you receive
in a taxable year that are greater than 125% of the average annual distributions you received
during the shorter of the three preceding taxable years or your holding period for the ADSs or
ordinary shares will be treated as an excess distribution. Under these special tax rules:
•
the excess distribution or gain will be allocated ratably over your holding period
for the ADSs or ordinary shares;
•
the amount allocated to the current taxable year, and any taxable year prior to the
first taxable year in which we were a PFIC, will be treated as ordinary income; and
•
the amount allocated to each other year will be subject to the highest tax rate in
effect for that year and the interest charge applicable to underpayments of tax will be
imposed on the resulting tax attributable to each such year.
The tax liability for amounts allocated to years prior to the year of disposition or “excess
distribution” cannot be offset by any net operating losses for such years, and gains (but not
losses) realized on the sale of the ADSs or ordinary shares cannot be treated as capital, even if
you hold the ADSs or ordinary shares as capital assets.
Alternatively, a U.S. Holder of “marketable stock” (as defined below) in a PFIC can make a
mark-to-market election for such stock of a PFIC to elect out of the tax treatment discussed in the
two preceding paragraphs. However, such election cannot be made with respect to any lower tier
PFIC. If you make a mark-to-market election for the ADSs or ordinary shares, you will include in
income each year an amount equal to the excess, if any, of the fair market value of the ADSs or
ordinary shares as of the close of your taxable year over your adjusted basis in such ADSs or
ordinary shares. You are allowed a deduction for the excess, if any, of the adjusted basis of the
ADSs or ordinary shares over their fair market value as of the close of the taxable year. However,
deductions are allowable only to the extent of any net mark-to-market gains on the ADSs or ordinary
shares included in your income for prior taxable years. Amounts included in your income under a
mark-to-market election, as well as gain on the actual sale or other disposition of the ADSs or
ordinary shares, are treated as ordinary income. Ordinary loss treatment also applies to the
deductible portion of any mark-to-market loss on the ADSs or ordinary shares, as well as to any
loss realized on the actual sale or
disposition of the ADSs or ordinary shares, to the extent that the amount of such loss does
not exceed the net mark-to-market gains previously included for such ADSs or ordinary shares. Your
basis in the ADSs or ordinary shares will be adjusted to reflect any such income or loss amounts.
If you make a mark-to-market election, the tax rules that apply to distributions by corporations
which are not PFICs would apply to distributions by us, except that the lower applicable capital
gains rate for qualified dividend income discussed above under “—Taxation of Dividends and Other
Distributions on the ADSs or Ordinary Shares” would not apply.
The mark-to-market election is available only for “marketable stock,” which is stock that is
traded in other than de minimis quantities on at least 15 days during each calendar quarter
(“regularly traded”) on a qualified exchange or other market, as defined in applicable U.S.
Treasury regulations. We expect that the ADSs will be listed on the Nasdaq Global Market and,
consequently, if you are a holder of ADSs and the ADSs are regularly traded on the Nasdaq Global
Market, the mark-to-market election would be available to you were we to be or become a PFIC.
If a non-U.S. corporation is a PFIC, a holder of shares in that corporation can avoid taxation
under the rules described above by making a “qualified electing fund” election to include its share
of the corporation’s income on a current basis, or a “deemed sale” election once the corporation no
longer qualifies as a PFIC. However, you can make a qualified electing fund election with respect
to your ADSs or ordinary shares only if we agree to furnish you annually with certain tax
information, and we do not intend to prepare or provide such information.
If you hold ADSs or ordinary shares in any year in which we are a PFIC, you will be required
to file Internal Revenue Service Form 8621 regarding distributions received on the ADSs or ordinary
shares and any gain realized on the disposition of the ADSs or ordinary shares.
You are strongly urged to consult your tax advisor regarding the application of the PFIC rules
to your investment in ADSs or ordinary shares.
Information Reporting and Backup Withholding
Dividend payments with respect to ADSs or ordinary shares and proceeds from the sale, exchange
or redemption of ADSs or ordinary shares will be subject to information reporting to the Internal
Revenue Service and possible U.S. backup withholding at a current rate of 28%, unless the
conditions of an applicable exception are satisfied. Backup withholding will not apply to a U.S.
Holder who furnishes a correct taxpayer identification number and makes any other required
certification or who is otherwise exempt from backup withholding. U.S. Holders who are required to
establish their exempt status can provide such certification on Internal Revenue Service Form W-9.
U.S. Holders should consult their tax advisors regarding the application of the U.S. information
reporting and backup withholding rules.
Backup withholding is not an additional tax. Amounts withheld as backup withholding can be
credited against your U.S. federal income tax liability, and you can obtain a refund of any excess
amounts withheld under the backup withholding rules by timely filing the appropriate claim for
refund with the Internal Revenue Service and furnishing any required information.
F.
Dividends and Paying Agents
Not applicable.
G.
Statement by Experts
Not applicable.
H.
Documents on Display
We are subject to the periodic reporting and other informational requirements of the
Securities Exchange Act of 1934, as amended, or the Exchange Act. Under the Exchange Act, we are
required to file reports and other information with the SEC. Specifically, we are required to file
annually a Form 20-F no later
than six months after the close of each fiscal year, which is December 31. Copies of reports
and other information, when so filed, may be inspected without charge and may be obtained at
prescribed rates at the public reference facilities maintained by the Securities and Exchange
Commission at 100 F Street, N.E., Room 1580, Washington, D.C. 20549. The public may obtain
information regarding the Washington, D.C. Public Reference Room by calling the Commission at
1-800-SEC-0330. The SEC also maintains a web site at
www.sec.gov that contains reports, proxy and
information statements, and other information regarding registrants that make electronic filings
with the SEC using its EDGAR system. As a foreign private issuer, we are exempt from the rules
under the Exchange Act prescribing the furnishing and content of quarterly reports and proxy
statements, and officers, directors and principal shareholders are exempt from the reporting and
short-swing profit recovery provisions contained in Section 16 of the Exchange Act.
We will furnish JPMorgan Chase Bank, N.A., the depositary of our ADSs, with our annual
reports, which will include a review of operations and annual audited consolidated financial
statements prepared in conformity with U.S. GAAP, and all notices of shareholders’ meetings and
other reports and communications that are made generally available to our shareholders. The
depositary will make such notices, reports and communications available to holders of ADSs and,
upon our request, will mail to all record holders of ADSs the information contained in any notice
of a shareholders’ meeting received by the depositary from us.
I.
Subsidiary Information
For a listing of our subsidiaries, see “Item 4. Information on the Company—C. Organizational
Structure.”
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our exposure to interest rate risk primarily relates to the interest income generated by
excess cash, which is mostly held in interest-bearing bank deposits. We have not used derivative
financial instruments in our investment portfolio. Interest earning instruments carry a degree of
interest rate risk. We have not been exposed nor do we anticipate being exposed to material risks
due to changes in market interest rates. However, our future interest income may fall short of
expectations due to changes in market interest rates.
Foreign Exchange Risk
Our financial statements are expressed in U.S. dollars, which is our reporting and functional
currency. However, substantially all of the revenues and expenses of our consolidated operating
subsidiaries and affiliate entities are denominated in RMB. Substantially all of our sales
contracts are denominated in RMB and substantially all of our costs and expenses are denominated in
RMB. We have not had any material foreign exchange gains or losses. Although in general, our
exposure to foreign exchange risks should be limited, the value of your investment in our ADSs will
be affected by the foreign exchange rate between U.S. dollars relative to the RMB because the value
of the business of our operating subsidiaries and entities is effectively denominated in RMB, while
the ADSs will be traded in U.S. dollars. Furthermore, a decline in the value of the RMB could
reduce the U.S. dollar equivalent of the value of the earnings from, and our investments in, our
subsidiaries and PRC-incorporated affiliates in China.
The value of the Renminbi against the U.S. dollar and other currencies is affected by, among
other things, changes in China’s political and economic conditions and China’s foreign exchange
policies. On July 21, 2005, the PRC government changed its decade-old policy of pegging the value
of the Renminbi to the U.S. dollar. Under the new policy, the Renminbi was permitted to fluctuate
within a narrow and managed band against a basket of certain foreign currencies. This change in
policy caused the Renminbi to appreciate approximately 21.5% against the U.S. dollar over the
following three years. Since reaching a high against the U.S. dollar in July 2008, however, the
Renminbi has traded within a narrow band against the U.S. dollar, remaining within 1% of its July
2008 high but never exceeding it. As a consequence, the Renminbi has fluctuated sharply since July
2008 against other freely traded currencies, in tandem with the U.S. dollar. It is difficult to
predict how long the current situation may last and when and how it may change again. We have not
used any forward contracts or currency borrowings to hedge our exposure to foreign currency
exchange risk.
Inflation
In recent years, China has not experienced significant inflation, and thus historically
inflation has not had a significant effect on our business. According to the National Bureau of
Statistics of China, the change in the Consumer Price Index in China was 1.8%, 1.5%, 4.8% and 5.9%
in 2005, 2006, 2007 and 2008, respectively.
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
Not Applicable.
PART II
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
None.
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS
See “Item 10. Additional Information” for a description of the rights of securities holders,
which remain unchanged.
The following “Use of Proceeds” information relates to the registration statement on Form F-1
(File number: 333-146825) filed by us in connection with our initial public offering. The
registration statement was declared effective by the SEC on November 6, 2007. We received net
proceeds of approximately US$187.0 million from our initial public offering.
As of December 31, 2008, the net proceeds from our initial public offering have been used as
follows:
approximately US$41.8 million for purchasing digital displays and other equipment;
•
approximately US$6.3 million for the advanced payment for contingent considerations
in connection with our acquisition of the airport gate bridge advertising business; and
•
approximately US$1.2 million for other investments.
In 2009, we expect to use the net proceeds received from our initial public offering as
follows: approximately US$32.2 million to fund capital expenditure and approximately US$13.6
million for other general corporate purposes, which may include strategic acquisitions of
businesses that could complement our existing capabilities and businesses.
ITEM 15. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including our chief
executive officer and our chief financial officer, we conducted an evaluation of our disclosure
controls and procedure, as such term is defined under 13a-15(f) promulgated under the Securities
Exchange Act of 1934, as amended. Based on that evaluation, our chief executive officer and chief
financial officer have concluded that our disclosure controls and procedures were effective as of
the end of the period covered by this annual report.
Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over
financial reporting, as such term is defined in Rule 13a-15(f) under the Securities Exchange Act of
1934, as amended. Internal control over financial reporting is a process designed to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of
consolidated financial statements in accordance with generally accepted accounting principles and
includes those policies and procedures that (1) pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect the transactions and dispositions of a company’s
assets, (2) provide reasonable assurance that transactions are recorded as necessary to permit
preparation of consolidated financial statements in accordance with generally accepted accounting
principles, and that a company’s receipts and expenditures are being made only in accordance with
authorizations of a company’s management and directors, and (3) provide reasonable assurance
regarding prevention or timely detection of unauthorized acquisition, use, or disposition of a
company’s assets that could have a material effect on the consolidated financial statements.
Because of its inherent limitations, a system of internal control over financial reporting can
provide only reasonable assurance with respect to consolidated financial statement preparation and
presentation and may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become inadequate because
of changes in conditions, or that the degree of compliance with the policies or procedures may
deteriorate.
As required by Section 404 of the Sarbanes-Oxley Act of 2002 and related rules as promulgated
by the Securities and Exchange Commission, management assessed the effectiveness of our internal
control over financial reporting as of December 31, 2008 using criteria established in Internal
Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission.
Based on this assessment, management concluded that our internal control over financial
reporting was effective as of December 31, 2008 based on the criteria established in Internal
Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission.
Our management has excluded from our assessment for internal control over financial reporting
that of Excel Lead and Flying Dragon, which were acquired on July 4, 2008 and July 7, 2008,
respectively, and in aggregate accounted for 2.5% and 3.2% of our net and total assets,
respectively, 6.5% of our revenues and 3.3% of our net income on a consolidated basis as of and for
the year ended December 31, 2008.
The effectiveness of internal control over financial reporting as of December 31, 2008 has
been audited by Deloitte Touche Tohmatsu CPA Ltd., an independent registered public accounting
firm, who has also audited our consolidated financial statements for the year ended December 31,2008.
Attestation Report of the Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of AirMedia Group Inc.
We have audited the internal control over financial reporting of AirMedia Group Inc. (the
“Company”), its subsidiaries, its variable interest entities (the “VIEs”) and its VIEs’
subsidiaries (collectively the “Group”) as of December 31, 2008, based on the criteria established
in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of
the Treadway Commission. As described in Management’s Report on Internal Control Over Financial
Reporting, management excluded from its assessment the internal control over financial reporting at
Excel Lead International Limited and Flying Dragon Media Advertising Co., Ltd., which were acquired
on July 4, 2008 and July 7, 2008, respectively, and whose financial statements, in aggregate, constitute 2.5% and
3.2% of net and total assets, respectively, 6.5% of revenues and 3.3% of net income of the
consolidated financial statement amounts as of and for the year ended December 31, 2008.
Accordingly, our audit did not include the internal control over financial reporting at Excel Lead
International Limited and Flying Dragon Media Advertising Co., Ltd. The Company’s management is
responsible for maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting, included in the
accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility
is to express an opinion on the Group’s internal control over financial reporting based on our
audit.
We conducted our audit in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether effective internal control over financial reporting was
maintained in all material respects. Our audit included obtaining an understanding of internal
control over financial reporting, assessing the risk that a material weakness exists, testing and
evaluating the design and operating effectiveness of internal control based on the assessed risk,
and performing such other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed by, or under the
supervision of, the company’s principal executive and principal financial officers, or persons
performing similar functions, and effected by the company’s board of director, management and other
personnel to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with generally accepted
accounting principles. A company’s internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted accounting principles, and that receipts
and expenditures of the company are being made only in accordance with authorizations of management
and directors of the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company’s assets that could have
a material effect on the financial statements.
Because of the inherent limitations of internal control over financial reporting, including
the possibility of collusion or improper management override of controls, material misstatements
due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any
evaluation of the effectiveness of the internal control over financial reporting to future periods
are subject to the risk that the controls may become inadequate because of changes in conditions,
or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the Group maintained, in all material respects, effective internal control
over financial reporting as of December 31, 2008, based on the criteria established in Internal
Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission.
We have also audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated financial statements and financial statement
schedule as of and for the
year ended December 31, 2008 of the Group and our report dated
April 28, 2009 expressed an
unqualified opinion on those financial statements and financial statement schedule.
There were no adverse changes in our internal controls over financial reporting that occurred
during the period covered by this annual report on Form 20-F that have materially affected, or are
reasonably likely to materially affect our internal controls over financial reporting.
ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT
Our board of directors has determined that Donglin Xia, a member of our audit committee, is an
audit committee financial expert. Donglin Xia is an independent director as defined by Nasdaq
Marketplace Rule 5605(a)(2) and under Rule 10A-3 of the Exchange Act.
ITEM 16B. CODE OF ETHICS
Our board of directors has adopted a code of ethics that applies to our directors, officers,
employees and agents, including certain provisions that specifically apply to our chief executive
officer, chief financial officer, chief operating officer, chief technology officer, vice
presidents and any other persons who perform similar functions for us. We have filed our code of
business conduct and ethics as an exhibit to our registration statement on Form F-1 (No.
333-146825).
ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The following table sets forth the aggregate fees by categories specified below in connection
with certain professional services rendered by Deloitte Touche Tohmatsu CPA Ltd., our principal
external auditors, for the periods indicated. We did not pay any other fees to our auditors during
the periods indicated below.
“Audit fees” means the aggregate fees billed for professional services rendered by our
principal auditors for the audit of our annual financial statements and the review of our
comparative interim financial statements, and also the other assurance services rendered in
connection with our initial public offering in 2007.
(2)
“Audit related fees” represents aggregate fees billed for professional services rendered by
our principal auditors for the assurance and related services, which mainly included the
financial due diligence services rendered by our principal auditors.
(3)
“All other fees” represents aggregate fees billed for professional services rendered by our
principal auditors, other than the audit fees and audit-related fees, which mainly included
the tax reconstruction and transfer price consulting fees incurred in 2008.
The policy of our audit committee is to pre-approve all audit and non-audit services provided
by Deloitte Touche Tohmatsu CPA Ltd., including audit services, audit-related services, tax
services and other services as described above, other than those for de minimus services which are
approved by the Audit Committee prior to the completion of the audit.
ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS
No equity securities of our company were purchased by or on behalf of our company or any
“affiliated purchaser” (as such term is defined in Rule 10b-18 under the Exchange Act) of our
company in the year ended December 31, 2008. In December 2008, our board of directors authorized a
repurchase of up to US$50 million worth of our outstanding ADSs throughout 2009.
We commenced repurchases of our ADSs in the open market pursuant to our share repurchase plan
in the first quarter of 2009 through an agent. As of the date of this
annual report, we have purchased a total of
1,646,502 ADSs at a total cost of US$7.4 million. The ordinary shares underlying the repurchased
ADSs have been canceled pursuant to Cayman Islands law.
ITEM 16F. CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT
Not applicable.
ITEM 16G. CORPORATE GOVERNANCE
Nasdaq Marketplace Rule 5620(a) requires each issuer to hold an annual meeting of shareholders
no later than one year after the end of the issuer’s fiscal year-end. Nasdaq Marketplace Rule
5635(c) and IM-5635-1 require each issuer to seek shareholder approval for any material amendments
to the issuer’s equity compensation plans, including a repricing of outstanding options. However,
Nasdaq Marketplace Rule 5615(a)(3) permits foreign private issuers like us to follow “home country
practice” in certain corporate governance matters.
Maples and Calder has provided a letter to the Nasdaq Stock Market certifying that under
Cayman Islands law, we are not required to hold annual shareholder meetings. We followed home
country practice with respect to annual meetings and did not hold any annual meeting of
shareholders in 2008. We may hold additional annual shareholder meetings in the future if there
are significant issues that require shareholder approval.
Maples and Calder, our Cayman Islands counsel, has also provided a letter to the Nasdaq Stock
Market certifying that under Cayman Islands law, we are not required to seek shareholder approval
for any material amendments to our equity compensation plans. In 2008, we followed home country
practice with respect to our 2007 Share Incentive Plan by amending it to permit repricings of
options without seeking shareholder approval. On December 10, 2008, we adjusted the exercise price
of the stock options granted on November 29, 2007.
Other than the above, we have followed and intend to continue to follow the applicable
corporate governance standards under Nasdaq Marketplace Rules.
In accordance with Nasdaq Marketplace Rule 5250(d)(1), we will post this annual report on Form
20-F on our companywebsitewww.airmedia.net.cn. In addition, we will provide hard copies of our
annual report free of charge to shareholders and ADS holders upon request.
PART III
ITEM 17. FINANCIAL STATEMENTS
We have elected to provide financial statements pursuant to Item 18.
ITEM 18. FINANCIAL STATEMENTS
The consolidated financial statements of AirMedia Group Inc. are included at the end of this
annual report.
Amended and Restated Memorandum and Articles of Association (incorporated
by reference to Exhibit 3.2 of our F-1 registration statement (File No.
333-146825), as amended, initially filed with the Commission on October19, 2007)
2.1
Registrant’s Specimen Certificate for Ordinary Shares (incorporated by
reference to Exhibit 4.2 (included as Exhibit A thereof) of our F-1
registration statement (File No. 333-146825), as amended, initially filed
with the Commission on October 19, 2007)
2.2
Form of Deposit Agreement among the Registrant, the depositary and holder
of the American Depositary Receipts (incorporated by reference to Exhibit
4.3 of our F-1 registration statement (File No. 333-146825), as amended,
initially filed with the Commission on October 19, 2007)
Amended and Restated 2007 Share Incentive Plan (incorporated by reference
to Exhibit 10.1 of our Registration Statement on Form S-8 (file no.
333-148352) filed with the Securities and Exchange Commission on December11, 2008)
Series A Convertible Preferred Share Purchase Agreement dated February 28,2007, as amended on September 27, 2007, among Broad Cosmos Enterprises
Ltd., certain of its shareholders, its existing group companies and Global
Gateway Investments Limited (incorporated by reference to Exhibit 10.5 of
our F-1 registration statement (File No. 333-146825), as amended,
initially filed with the Commission on October 19, 2007)
4.6
Series B Convertible Preferred Share Purchase Agreement dated April 26,2007 among the Registrant, certain of its shareholders, its existing group
companies, OZ Master Fund, Ltd., OZ Asia Master Fund, Ltd., OZ Global
Special Investments Master Fund, L.P. and AM SPV Limited (incorporated by
reference to Exhibit 10.6 of our F-1 registration statement (File No.
333-146825), as amended, initially filed with the Commission on October19, 2007)
4.7
Share Exchange Agreement dated June 7, 2007 among the Registrant, Man Guo,
Qing Xu, Xiaoya Zhang and Global Gateway Investments Ltd. (incorporated by
reference to Exhibit 10.7 of our F-1 registration statement (File No.
333-146825), as amended, initially filed with the Commission on October19, 2007)
4.8
Agreement for the Transfer and Assumption of Various Obligations and
Rights under the February 28, 2007 Share Purchase Agreement, dated June 7,2007, among the Registrant, Broad Cosmos Enterprises Ltd., Global Gateway
Investment Ltd., consolidated subsidiaries and variable interest equities
of the Registrant and Man Guo, Qing Xu and Xiaoya Zhang (incorporated by
reference to Exhibit 10.8 of our F-1 registration statement (File No.
333-146825), as amended, initially filed with the Commission on October19, 2007)
English Translation of Business Cooperation Agreement dated June 14, 2007
between Shengshi Lianhe Advertising Co., Ltd. and AirTV United Media &
Culture Co., Ltd. (incorporated by reference to Exhibit 10.9 of our F-1
registration statement (File No. 333-146825), as amended, initially filed
with the Commission on October 19, 2007)
4.10
English Translation of Business Cooperation Agreement dated June 14, 2007
between Beijing AirMedia Advertising Co., Ltd. and AirTV United Media &
Culture Co., Ltd. (incorporated by reference to Exhibit 10.10 of our F-1
registration statement (File No. 333-146825), as amended, initially filed
with the Commission on October 19, 2007)
4.11*
English Translation of Amended Power of Attorneys dated November 28, 2008
from each of the shareholders of Beijing Shengshi Lianhe Advertising Co.,
Ltd.
4.12
English Translation of Amended and Restated Technology Development
Agreement dated June 14, 2007 between AirMedia Technology (Beijing) Co.,
Ltd. and Beijing Shengshi Lianhe Advertising Co., Ltd. (incorporated by
reference to Exhibit 10.12 of our F-1 registration statement (File No.
333-146825), as amended, initially filed with the Commission on October19, 2007)
4.13
English Translation of Supplementary Agreement dated November 30, 2007 to
the Amended and Restated Technology Development Agreement dated June 14,2007 between AirMedia Technology (Beijing) Co., Ltd. and Beijing Shengshi
Lianhe Advertising Co., Ltd. (incorporated by reference to Exhibit 10.1 of
our annual report on Form 20-F (File No. 001-33765) filed with the
Commission on April 30, 2008)
4.14
English Translation of Amended and Restated Technology Support and Service
Agreement dated June 14, 2007 between AirMedia Technology (Beijing) Co.,
Ltd. and Beijing Shengshi Lianhe Advertising Co., Ltd. (incorporated by
reference to Exhibit 10.13 of our F-1 registration statement (File No.
333-146825), as amended, initially filed with the Commission on October19, 2007)
4.15
English Translation of Supplementary Agreement dated November 30, 2007 to
the Amended and Restated Technology Support and Service Agreement dated
June 14, 2007 between AirMedia Technology (Beijing) Co., Ltd. and Beijing
Shengshi Lianhe Advertising Co., Ltd. (incorporated by reference to
Exhibit 10.2 of our annual report on Form 20-F (File No. 001-33765) filed
with the Commission on April 30, 2008)
4.16
English Translation of Amended and Restated Equity Pledge Agreement dated
June 14, 2007 among AirMedia Technology (Beijing) Co., Ltd., Beijing
Shengshi Lianhe Advertising Co., Ltd. and the shareholders of Beijing
Shengshi Lianhe Advertising Co., Ltd. (incorporated by reference to
Exhibit 10.14 of our F-1 registration statement (File No. 333-146825), as
amended, initially filed with the Commission on October 19, 2007)
4.17*
English Translation of Supplementary Agreement dated November 28, 2008 to
the Amended and Restated Equity Pledge Agreement dated June 14, 2007 among
AirMedia Technology (Beijing) Co., Ltd., Beijing Shengshi Lianhe
Advertising Co., Ltd. and the shareholders of Beijing Shengshi Lianhe
Advertising Co., Ltd.
4.18
English Translation of Amended and Restated Call Option Agreement dated
June 14, 2007 among AirMedia Technology (Beijing) Co., Ltd., Beijing
Shengshi Lianhe Advertising Co., Ltd. and the shareholders of Beijing
Shengshi Lianhe Advertising Co., Ltd. (incorporated by reference to
Exhibit 10.15 of our F-1 registration statement (File No. 333-146825), as
amended, initially filed with the Commission on October 19, 2007)
4.19*
English Translation of Supplementary Agreement dated November 28, 2008 to
the Amended and Restated Call Option Agreement dated June 14, 2007 among
AirMedia Technology (Beijing) Co., Ltd., Beijing Shengshi Lianhe
Advertising Co., Ltd. and the shareholders of Beijing Shengshi Lianhe
Advertising Co., Ltd.
English Translation of Amended and Restated Technology Development
Agreement dated June 14, 2007 between AirMedia Technology (Beijing) Co.,
Ltd. and Beijing AirMedia Advertising Co., Ltd. (incorporated by reference
to Exhibit 10.17 of our F-1 registration statement (File No. 333-146825),
as amended, initially filed with the
English Translation of Supplementary Agreement dated November 30, 2007 to
the Amended and Restated Technology Development Agreement dated June 14,2007 between AirMedia Technology (Beijing) Co., Ltd. and Beijing AirMedia
Advertising Co., Ltd. (incorporated by reference to Exhibit 10.3 of our
annual report on Form 20-F (File No. 001-33765) filed with the Commission
on April 30, 2008)
4.23
English Translation of Amended and Restated Technology Support and Service
Agreement dated June 14, 2007 between AirMedia Technology (Beijing) Co.,
Ltd. and Beijing AirMedia Advertising Co., Ltd. (incorporated by reference
to Exhibit 10.18 of our F-1 registration statement (File No. 333-146825),
as amended, initially filed with the Commission on October 19, 2007)
4.24
English Translation of Supplementary Agreement dated November 30, 2007 to
the Amended and Restated Technology Support and Service Agreement dated
June 14, 2007 between AirMedia Technology (Beijing) Co., Ltd. and Beijing
AirMedia Advertising Co., Ltd. (incorporated by reference to Exhibit 10.4
of our annual report on Form 20-F (File No. 001-33765) filed with the
Commission on April 30, 2008)
4.25
English Translation of Amended and Restated Equity Pledge Agreement dated
June 14, 2007 among AirMedia Technology (Beijing) Co., Ltd., Beijing
AirMedia Advertising Co., Ltd. and the shareholders of Beijing AirMedia
Advertising Co., Ltd. (incorporated by reference to Exhibit 10.19 of our
F-1 registration statement (File No. 333-146825), as amended, initially
filed with the Commission on October 19, 2007)
4.26*
English Translation of Supplementary Agreement No. 1 dated June 19, 2008
to the Amended and Restated Equity Pledge Agreement dated June 14, 2007
among AirMedia Technology (Beijing) Co., Ltd., Beijing AirMedia
Advertising Co., Ltd. and the shareholders of Beijing AirMedia Advertising
Co., Ltd.
4.27*
English Translation of Supplementary Agreement No. 2 dated November 28,2008 to the Amended and Restated Equity Pledge Agreement dated June 14,2007 among AirMedia Technology (Beijing) Co., Ltd., Beijing AirMedia
Advertising Co., Ltd. and the shareholders of Beijing AirMedia Advertising
Co., Ltd.
4.28
English Translation of Amended and Restated Call Option Agreement dated
June 14, 2007 among AirMedia Technology (Beijing) Co., Ltd., Beijing
AirMedia Advertising Co., Ltd. and the shareholders of Beijing AirMedia
Advertising Co., Ltd. (incorporated by reference to Exhibit 10.20 of our
F-1 registration statement (File No. 333-146825), as amended, initially
filed with the Commission on October 19, 2007)
4.29*
English Translation of Supplementary Agreement No. 1 dated June 19, 2008
to the Amended and Restated Call Option Agreement dated June 14, 2007
among AirMedia Technology (Beijing) Co., Ltd., Beijing AirMedia
Advertising Co., Ltd. and the shareholders of Beijing AirMedia Advertising
Co., Ltd.
4.30*
English Translation of Supplementary Agreement No. 2 dated November 28,2008 to the Amended and Restated Call Option Agreement dated June 14, 2007
among AirMedia Technology (Beijing) Co., Ltd., Beijing AirMedia
Advertising Co., Ltd. and the shareholders of Beijing AirMedia Advertising
Co., Ltd.
4.31*
English Translation of
Supplementary Agreement dated November 28, 2008
among AirMedia Technology (Beijing) Co., Ltd. and Guo Man, a shareholder
of Beijing AirMedia Advertising Co., Ltd., supplementing the original Loan
Agreement dated June 14, 2007
4.32*
English Translation of Amended Power of Attorneys dated November 28, 2008
from the shareholders of Beijing AirMedia UC Advertising Co., Ltd.
4.33
English Translation of Technology Development Agreement dated June 14,2007 between AirMedia Technology (Beijing) Co., Ltd. and Beijing AirMedia
UC Advertising Co., Ltd. (incorporated by reference to Exhibit 10.22 of
our F-1 registration statement (File No. 333-146825), as amended,
initially filed with the Commission on October 19, 2007)
4.34
English Translation of Supplementary Agreement dated November 30, 2007 to
the Amended and Restated Technology Development Agreement dated June 14,2007 between AirMedia Technology (Beijing) Co., Ltd. and Beijing AirMedia
UC
English Translation of Technology Support and Service Agreement dated June14, 2007 between AirMedia Technology (Beijing) Co., Ltd. and Beijing
AirMedia UC Advertising Co., Ltd. (incorporated by reference to Exhibit
10.23 of our F-1 registration statement (File No. 333-146825), as amended,
initially filed with the Commission on October 19, 2007)
4.36
English Translation of Supplementary Agreement dated November 30, 2007 to
the Amended and Restated Technology Support and Service Agreement dated
June 14, 2007 between AirMedia Technology (Beijing) Co., Ltd. and Beijing
AirMedia UC Advertising Co., Ltd. (incorporated by reference to Exhibit
10.6 of our annual report on Form 20-F (File No. 001-33765) filed with the
Commission on April 30, 2008)
4.37
English Translation of Equity Pledge Agreement dated June 14, 2007 among
AirMedia Technology (Beijing) Co., Ltd., Beijing AirMedia UC Advertising
Co., Ltd. and the shareholders of Beijing AirMedia UC Advertising Co.,
Ltd. (incorporated by reference to Exhibit 10.24 of our F-1 registration
statement (File No. 333-146825), as amended, initially filed with the
Commission on October 19, 2007)
4.38*
English Translation of Supplementary Agreement dated November 28, 2008 to
the Equity Pledge Agreement dated June 14, 2007 among AirMedia Technology
(Beijing) Co., Ltd., Beijing AirMedia UC Advertising Co., Ltd. and the
shareholders of Beijing AirMedia UC Advertising Co., Ltd.
4.39
English Translation of Call Option Agreement dated June 14, 2007 among
AirMedia Technology (Beijing) Co., Ltd., Beijing AirMedia UC Advertising
Co., Ltd. and the shareholders of Beijing AirMedia UC Advertising Co.,
Ltd. (incorporated by reference to Exhibit 10.25 of our F-1 registration
statement (File No. 333-146825), as amended, initially filed with the
Commission on October 19, 2007)
4.40*
English Translation of Supplementary Agreement dated November 28, 2008 to
the Call Option Agreement dated June 14, 2007 among AirMedia Technology
(Beijing) Co., Ltd., Beijing AirMedia UC Advertising Co., Ltd. and the
shareholders of Beijing AirMedia UC Advertising Co., Ltd.
4.41*
English Translation of Supplementary Agreement dated October 31, 2008
among AirMedia Technology (Beijing) Co., Ltd. and the shareholders of
Beijing AirMedia UC Advertising Co., Ltd., supplementing the original Loan
Agreement dated January 1, 2007
4.42*
English Translation of Power of Attorneys dated April 1, 2008 from each of
the shareholders of Beijing Yuehang Digital Media Advertising Co., Ltd.
4.43*
English Translation of Technology Development Agreement dated April 1,2008 between AirMedia Technology (Beijing) Co., Ltd. and Beijing Yuehang
Digital Media Advertising Co., Ltd.
4.44*
English Translation of Technology Support and Service Agreement dated
April 1, 2008 between AirMedia Technology (Beijing) Co., Ltd. and Beijing
Yuehang Digital Media Advertising Co., Ltd.
4.45*
English Translation of Supplementary Agreement dated June 25, 2008 to the
Technology Support and Service Agreement dated April 1, 2008 between
AirMedia Technology (Beijing) Co., Ltd. and Beijing Yuehang Digital Media
Advertising Co., Ltd.
4.46*
English Translation of Equity Pledge Agreement dated April 1, 2008 among
AirMedia Technology (Beijing) Co., Ltd., Beijing Yuehang Digital Media
Advertising Co., Ltd. and the shareholders of Beijing Yuehang Digital
Media Advertising Co., Ltd.
4.47*
English Translation of Call Option Agreement dated April 1, 2008 among
AirMedia Technology (Beijing) Co., Ltd., Beijing Yuehang Digital Media
Advertising Co., Ltd. and the shareholders of Beijing Yuehang Digital
Media Advertising Co., Ltd.
4.48*
Share Purchase Agreement dated July 4, 2008 among the Registrant, First
Reach Holdings Limited and Excel Lead International Limited
Code of Business Conduct and Ethics of the Registrant (incorporated by
reference to Exhibit 99.1 of our F-1 registration statement (File No.
333-146825), as amended, initially filed with the Commission on October19, 2007)
12.1*
CEO Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
12.2*
CFO Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
13.1*
CEO Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
13.2*
CFO Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F
and that it has duly caused and authorized the undersigned to sign this annual report on its
behalf.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF AIRMEDIA GROUP INC.
We have audited the accompanying consolidated balance sheets of AirMedia Group Inc. (the
“Company”), its subsidiaries, its variable interest entities (the “VIEs”) and its VIEs’
subsidiaries (collectively the “Group”) as of December 31, 2007 and 2008 and the related
consolidated statements of operations, shareholders’ equity (deficiency) and comprehensive
income (loss), and cash flows for the years ended December 31, 2006, 2007 and 2008 and
related financial statement schedule included in Schedule I. These consolidated financial
statements and financial statement schedule are the responsibility of the Company’s
management. Our responsibility is to express an opinion on these consolidated financial
statements and financial statement schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our audits provide
a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material
respects, the consolidated financial position of the Group as of December 31, 2007 and 2008,
and the consolidated results of its operations and its cash flows for the years ended
December 31, 2006, 2007 and 2008 in conformity with accounting principles generally accepted
in the United States of America. Also, in our opinion, the related financial statement
schedule, when considered in relation to the basic consolidated financial statements taken
as a whole, presents fairly in all material respects, the information set forth therein.
We have also audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the Group’s internal control over financial reporting as
of December 31, 2008, based on the criteria established in Internal Control-Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and
our report dated April 28, 2009 expressed an unqualified opinion on
the Group’s internal
control over financial reporting.
Accounts receivable, net of allowance for doubtful accounts
of $455 and $1,521 in 2007 and 2008
13,478
38,386
Prepaid concession fees
13,130
32,706
Other current assets
2,393
7,830
Deferred tax assets — current
95
380
Total current assets
240,011
240,836
Acquired intangible assets, net
4,862
9,027
Property and equipment, net
15,985
62,443
Long-term investments
788
1,099
Long term deposits
4,706
14,724
Deferred tax assets — non-current
507
1,762
TOTAL ASSETS
266,859
329,891
Liabilities
Current liabilities:
Accounts payable
4,666
15,696
Accrued expenses and other current liabilities
1,309
5,664
Deferred revenue
1,712
2,929
Income tax payable
32
852
Amounts due to related parties
11
408
Total current liabilities
7,730
25,549
Non-current liabilities:
Deferred tax liability — non-current
1,527
2,659
Total liabilities
9,257
28,208
Commitments (Note 19)
Minority interest
(3
)
951
Shareholders’ equity
Ordinary shares ($0.001 par value; 162,400,000 shares authorized in 2007 and 2008;
133,425,925 shares and 134,425,925 shares issued and outstanding
as of December 31, 2007 and 2008, respectively)
133
134
Additional paid-in capital
263,130
268,881
Statutory reserve
1,782
5,593
Retained earnings (accumulated deficiency)
(10,317
)
16,070
Accumulated other comprehensive income
2,877
10,054
Total shareholders’ equity
257,605
300,732
TOTAL LIABILITIES, MINORITY INTEREST,
AND SHAREHOLDERS’ EQUITY
$
266,859
$
329,891
The accompanying notes are an integral part of these consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2006, 2007 AND 2008
(In U.S. dollars in thousands, except share data)
1.
ORGANIZATION AND PRINCIPAL ACTIVITIES
Introduction of the Group
AirMedia Group Inc. (“AirMedia” or the “Company”) was incorporated in the Cayman Islands on
April 12, 2007.
AirMedia, its subsidiaries, its variable interest entities (“VIEs”) and VIEs’ subsidiaries
(collectively referred to “AirMedia and its subsidiaries” or the “Group”) operate air travel
TV media network in the People’s Republic of China (“the PRC”) with exclusive contracts and
concession rights to operate digital displays and billboards on gate bridges in the major
airports in the PRC, and on the airplanes operated by major airline companies in the PRC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — continued
FOR THE YEARS ENDED DECEMBER 31, 2006, 2007 AND 2008
(In U.S. dollars in thousands, except share data)
1.
ORGANIZATION AND PRINCIPAL ACTIVITIES — continued
The VIE arrangements
Chinese regulations currently limit foreign ownership of companies that provide advertising
services, including out-of-home television advertising services. Since December 30, 2005,
foreign investors have been permitted to own directly a 100% interest in PRC advertising
companies if the foreign investor has at least three years of direct operations outside of
PRC.
However, since the Group has not been involved in the direct operation of the advertising
business outside of the PRC over three years, the PRC subsidiaries of the Group, AM
Technology , Shenzhen AM and Xi’an AM which are considered foreign-invested, are currently
ineligible to apply for the required advertising service licenses in the PRC.
The Group therefore conducts substantially all of its activities through Shengshi Lianhe, AM
Advertising, AirMedia UC and AM Yuehang (the “VIEs”) and the VIEs’ subsidiaries. The VIEs
have entered into a series of agreements with AM Technology as below:
•
Technology support and service agreement: AM Technology provides exclusive
technology supports and consulting services to the VIEs and VIEs are required to pay AM
Technology for the technical and consulting services they are provided. The VIEs pay
to AM Technology annual service fees in the amount that guarantee that the VIEs can
achieve, after deducting such service fees payable to AM Technology, a net cost-plus
rate of no less than 0.5% in the case of AM Advertising, Shengshi Lianhe and AirMedia
UC, or 1.0% in the case of AM Yuehang, which final rate should be determined by AM
Technology. The “net cost-plus rate” refers to the operating profit as a percentage of
total costs and expenses of a certain entity.
•
Technology development agreement: VIEs exclusively engage AM Technology to provide
technology development services. AM Technology owns the intellectual property rights
developed in the performance of these agreements. The VIEs pay to AM Technology annual
service fees in the amount that guarantee that the VIEs can achieve, after deducting
such service fees payable to AM Technology, a net cost-plus rate of no less than 0.5%
in the case of AM Advertising, Shengshi Lianhe and AirMedia UC, which final rate should
be determined by AM Technology. The “net cost-plus rate” refers to the operating
profit as a percentage of total costs and expenses of a certain entity.
•
Call option agreement: Under the call option agreements, the shareholders of VIEs
irrevocably granted AM Technology or its designated third party an exclusive option to
purchase from VIEs’ shareholders, to the extent permitted under PRC law, all the equity
interests in the VIEs, as the case may be, for the minimum amount of consideration
permitted by the applicable law without any other conditions. In addition, AM
Technology will act as guarantor of VIEs in all operation related contracts, agreements
and transactions and commit to provide loans to support the business development needs
of VIEs or when the VIEs are suffering operating difficulties. In
2008, AM Technology provided such loans without collateral in the
amount of $10,260 to the VIEs. The loans’ balance, $3,664 as of
December 31, 2008, was fully eliminated in the accompanying
consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — continued
FOR THE YEARS ENDED DECEMBER 31, 2006, 2007 AND 2008
(In U.S. dollars in thousands, except share data)
1.
ORGANIZATION AND PRINCIPAL ACTIVITIES — continued
The VIE arrangements — continued
•
Equity pledge agreement: Under the equity pledge, the shareholders of the VIEs
pledged all of their equity interests, including the right to receive declared
dividends, in the VIEs to AM Technology to guarantee VIEs’ performance of its
obligations under the technology support and service agreement and the technology
development agreement.
•
Authorization letter: Each shareholder of the VIEs has executed an authorization
letter to authorize AM Technology to exercise certain of its rights, including voting
rights, the rights to enter into legal documents and the rights to transfer any or all
of its equity interest in the VIEs. Such authorization letters will remain effective
during the operating periods of the VIEs.
Through the above contractual arrangements, AM Technology has obtained 100% of shareholders’
voting interest in the VIEs, has the right to receive all dividends declared and paid by the
VIEs and may receive substantially all of the net income of the VIEs through the technical
support and service fees as determined by AM Technology. As a result, AM Technology
receives substantially all of the VIEs’ expected residual returns and holds variable
interests in the VIEs. Since AM Technology is the primary beneficiary of the VIE
arrangement, it consolidates the VIEs under Financial Accounting Standards Board (“FASB”)
Interpretation (“FIN”) No. 46(R), “Consolidation of Variable Interest Entities-an
interpretation of ARB No. 51”, which requires certain variable interest entities to be
consolidated by the primary beneficiary of the entity if the equity investors in the entity
do not have characteristics of a controlling financial interest or do not have sufficient
equity at risk for the entity to finance its activities without additional subordinated
financial support from other parties.
Other than the contractual arrangements described above, because the management and certain employees
of AM Technology also serve in the VIEs as management or employees, certain operating costs
paid by AM Technology, such as payroll costs and office rental, were recharged to the VIEs.
The following financial statement amounts and balances of Air Media’s VIEs were included in
the accompanying consolidated financial statements as of and for the years ended December
31:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — continued
FOR THE YEARS ENDED DECEMBER 31, 2006, 2007 AND 2008
(In U.S. dollars in thousands, except share data)
The Group’s history began with the commencement of operation by the following shareholders
in Shengshi Lianhe, a company registered in the PRC, on August 7, 2005. Prior to the
commencement of operations, Shengshi Lianhe had no assets, no liabilities and no operations.
It was incorporated on March 12, 2001 with the following owners:
Percentage
of ownership
Mr. Guo, Man (“Guo, Man”)
79.86
%
Mr. Xu, Qing (“Xu, Qing”)
11.94
%
Mr. Zhang, Xiaoya (“Zhang, Xiaoya”)
8.20
%
Shengshi Lianhe began to enter into concession right agreements with airports and airlines
to display advertising at those airports and on airplanes.
In October 2005, Guo, Man, Xu, Qing and Zhang, Xiaoya, (collectively the “founding
shareholders”) and CDH China Management Company Limited entered into a legally binding
agreement (the “2005 Agreement”), according to which CDH China Growth Fund II L.P. or its
affiliate (collectively “CDH”), became an investor through the ownership of convertible
preferred shares. CDH is a third party private equity fund. Under this 2005 Agreement:
(i)
the founding shareholders obtained 100% of the common stock issued and
outstanding in AM Technology, which entered into a VIE arrangement with Shengshi in
November, 2005, and any new entities formed in the Group. Assuming the conversion of
the convertible preferred interest held by CDH into ordinary shares, the founding
shareholders would hold 62.4% of total ordinary shares.
(ii)
CDH agreed to contribute $12,000 cash into the business in return for a
convertible redeemable preferred share interest, which represents 37.6% of the total
equity interest in AM Technology on an if converted basis and in any new entities
formed in the Group (see Note 14).
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — continued
FOR THE YEARS ENDED DECEMBER 31, 2006, 2007 AND 2008
(In U.S. dollars in thousands, except share data)
1.
ORGANIZATION AND PRINCIPAL ACTIVITIES — continued
History of the Group and corporate reorganization — continued
Upon CDH’s investment, the equity interest structure of AM Technology on and as converted
basis was as follows:
Percentage
of ownership
%
Guo, Man
49.83
Xu, Qing
7.45
Zhang, Xiaoya
5.12
CDH
37.60
Total
100.00
In anticipation of making such an investment, in August 2005, CDH had established AirMedia
(China) Ltd. in Hong Kong with 100% ownership through AM International, a wholly owned BVI
company and in September 2005, AirMedia (China) Ltd. established a wholly owned PRC
subsidiary, AM Technology.
There was no change in control of the underlying business of Shengshi Lianhe before and
after CDH became a shareholder of AM Technology and this has been treated as a
recapitalization of the Shengshi Lianhe business with no change in basis.
Broad Cosmos was incorporated in the BVI on June 26, 2006 for the purpose of holding a 100%
equity interest in AM Technology and other subsidiaries and VIEs formed subsequent to the
incorporation of AM Technology.
In March 2007, Broad Cosmos executed a share split which made total ordinary shares issued
and outstanding 62,400,000.
On April 12, 2007, the shareholders of Broad Cosmos incorporated AirMedia in the Cayman
Islands as a new holding Company of Broad Cosmos and executed a 1 to 1 share swap between
Broad Cosmos and AirMedia. As a result, AirMedia has become the holding company of Broad
Cosmos and its subsidiaries, its VIEs and its VIE’s subsidiary. The impact of this share
split and share swap has been retroactively reflected in the Group’s consolidated financial
statements.
In November 2007, the Group completed an initial public offering (“IPO”) and issued
13,750,000 American depositary shares representing 27,500,000 of the Company’s ordinary
shares. Immediately prior to the completion of the IPO, all of the Company’s then
outstanding Series A preferred shares and Series B preferred shares were automatically
converted into 32,600,000
ordinary shares and 5,925,925 ordinary shares, respectively.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — continued
FOR THE YEARS ENDED DECEMBER 31, 2006, 2007 AND 2008
(In U.S. dollars in thousands, except share data)
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a)
Basis of presentation
The consolidated financial statements of the Group have been prepared in accordance
with the accounting principles generally accepted in the United States of America
(“US GAAP”).
(b)
Basis of consolidation
The consolidated financial statements include the financial statements of the
Company, its subsidiaries, its VIEs and its VIE’s subsidiaries. All inter-company
transactions and balances have been eliminated upon combination.
(c)
Use of estimates
The preparation of financial statements in conformity with US GAAP requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and revenue and expenses in the financial statements and
accompanying notes, including allowance for doubtful accounts, the useful lives of
and impairment for property and equipment and intangible assets, impairment of
long-term investment and valuation allowance for deferred tax assets. Actual results
could differ from those estimates.
(d)
Significant risks and uncertainties
The Group participates in a dynamic industry and believes that changes in any of the
following areas could have a material adverse effect on the Group’s future financial
position, results of operations, or cash flows: the Group’s limited operating
history; advances and trends in new technologies and industry standards; competition
from other competitors; regulatory or other PRC related factors; and risks associated
with the Group’s ability to attract and retain employees necessary to support its
growth; risks associated with the Group’s growth strategies; and general risks
associated with the advertising industry.
(e)
Property and equipment, net
Property and equipment, net is carried at cost less accumulated depreciation and
amortization. Depreciation and amortization is calculated on a straight-line basis
over the following estimated useful lives:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — continued
FOR THE YEARS ENDED DECEMBER 31, 2006, 2007 AND 2008
(In U.S. dollars in thousands, except share data)
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — continued
(f)
Impairment of long-lived assets
The Group reviews its long-lived assets for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may no longer be
recoverable. When these events occur, the Group measures impairment by comparing the
carrying value of the long-lived assets to the estimated undiscounted future cash
flows expected to result from the use of the assets and their eventual disposition.
If the sum of the expected undiscounted cash flow is less than the carrying amount of
the assets, the Group would recognize an impairment loss based on the fair value of
the assets.
(g)
Equity method investments
Investee companies over which the Company has the ability to exercise significant
influence, but does not have a controlling interest are accounted for using the
equity method. Significant influence is generally considered to exist when the
Company has an ownership interest in the voting stock of the investee between 20% and
50%, and other factors, such as representation on the investee’s Board of Directors,
voting rights and the impact of commercial arrangements, are considered in
determining whether the equity method of accounting is appropriate.
(h)
Cost method investment
For investments in an investee over which the Group does not have significant
influence, the Group carries the investment at cost and recognizes income as any
dividends declared from distribution of investee’s earnings. The Group reviews the
cost method investments for impairment whenever events or changes in circumstances
indicate that the carrying value may no longer be recoverable. An impairment loss is
recognized in earnings equal to the difference between the investment’s cost and its
fair value at the balance sheet date of the reporting period for which the assessment
is made. The fair value of the investment would then become the new cost basis of
the investment. No impairment charges were recorded during the years presented.
(i)
Acquired intangible assets
Acquired intangible assets with finite lives are carried at cost less accumulated
amortization.
Amortization of finite-lived intangible assets is computed using the straight-line
method over the following estimated economic lives:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — continued
FOR THE YEARS ENDED DECEMBER 31, 2006, 2007 AND 2008
(In U.S. dollars in thousands, except share data)
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — continued
(j)
Revenue recognition
The Group’s revenues are derived from selling advertising time slots on the Group’s
air travel digital media network. For the year ended December 31, 2008,
substantially most of the advertising revenues are generated from digital frames in
airports, digital TV screens in airports, digital TV screens on airlines and
billboards advertising on gate bridges in airports.
The Group typically signs standard contracts with its advertising customers, who
require the Group to run the advertiser’s advertisements on the Group’s network in
specified airports and on specified airplanes for a period of time. The Group
recognizes advertising revenues ratably over the performance period for which the
advertisements are displayed, so long as collection of the fees remains probable.
Deferred revenue
Prepayments from customers for advertising service are deferred and recognized as
revenue when the advertising services are rendered.
Non-monetary exchanges
The Group periodically exchange advertising time slots with other entities for assets
or services, such as digital screen network equipment and office rental. Consistent
with the guidance in APB Opinion No. 29 Accounting for nonmonetary transactions as
amended by FASB Statement No. 153 Exchanges of nonmonetary assets, an amendment of
APB Opinion No. 29, such transactions are accounted for as nonmonetary exchange, and
based on guidance in EITF 99-17, Accounting for Advertising Barter Transactions, the
Group recognizes revenue and assets/expenses of the exchanges based on the fair value
of the advertising provided, which can be determined based on the Group’s historical
practice of receiving cash. The amounts of revenue recognized for nonmonetary
transactions were $759, $430 and $1,049 for the years ended December 31, 2006, 2007
and 2008, respectively. No direct costs are attributable to the revenues.
(k)
Business tax and other sale related taxes
The Group’s PRC subsidiary and VIEs are subject to business tax and other sale
related taxes at the rate of 8.5% on total revenues after deduction of certain costs
of revenues permitted by the PRC tax laws. Business tax is recorded as a deduction
to revenue when incurred.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — continued
FOR THE YEARS ENDED DECEMBER 31, 2006, 2007 AND 2008
(In U.S. dollars in thousands, except share data)
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — continued
(l)
Concession fees
The Group enters concession right agreements with airports and airlines, under which
the Group has the right to use the spaces or equipment of the airports and airlines
to display the advertisements. The concession right agreement is treated as an
operating lease arrangement.
Fees under concession right agreements with airports and airlines are usually due
every three or six months. Payments made are recorded as current assets and current
liabilities according to the respective payment terms. Most of the concession fees
are fixed with escalation, which means fixed increase over each year of the
agreement. The total concession fee under each concession right agreement is charged
to the consolidated statements of operations on a straight-line basis over the
agreement periods, which is generally between three and five years.
(m)
Agency fees
The Group pays fees to advertising agencies based on certain percentage of revenue
made through the advertising agencies upon receipt of payment from advertisers. The
agency fees are charged to cost of revenues in the consolidated statement of
operation ratably over the period in which the advertising is displayed. Prepaid and
accrued agency fees are recorded as current assets and current liabilities according
to relative timing of payments made and advertising service provided.
(n)
Other operating leases
Leases where substantially all the rewards and risks of ownership of assets remain
with the leasing company are accounted for as operating lease. Payments made under
operating leases are charged to the consolidated statements of operations on a
straight-line basis over the lease periods.
(o)
Advertising costs
The Group expenses advertising costs as incurred. Total advertising expenses were
$239, $400 and $1,430 for the years ended December 31, 2006, 2007 and 2008,
respectively, and have been included as part of selling and marketing expenses.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — continued
FOR THE YEARS ENDED DECEMBER 31, 2006, 2007 AND 2008
(In U.S. dollars in thousands, except share data)
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — continued
(p)
Foreign currency translation
The functional and reporting currency of AirMedia is the United States dollar (“US
dollar”). Monetary assets and liabilities denominated in currencies other than the
US dollar are translated into the US dollar at the rates of exchange ruling at the
balance sheet date. Transactions in currencies other than the US dollar during the
year are converted into US dollar at the applicable rates of exchange prevailing when
the transactions occurred. Transaction gains and losses are recognized in the
statements of operations.
The financial records of the Group’s subsidiaries, its VIEs and its VIEs’
subsidiaries located in the PRC are maintained in its local currency, the Renminbi
(“RMB”), which is the functional currency of these entities. Assets and liabilities
are translated using the exchange rates in effect on the balance sheet date. Equity
accounts are translated at historical exchange rates. Revenues, expenses, gains and
losses are translated using the transaction weighted average rate for the year.
Translation adjustments are reported as cumulative translation adjustments and are
shown as a separate component of other comprehensive income in the accompanying
consolidated statements of shareholders’ equity (deficiency) and comprehensive income
(loss).
(q)
Income taxes
Deferred income taxes are recognized for temporary differences between the tax basis
of assets and liabilities and their reported amounts in the financial statements, net
operating loss carry forwards and credits, by applying enacted statutory tax rates
applicable to future years. Deferred tax assets are reduced by a valuation allowance
when, in the opinion of management, it is more likely than not that some portion or
all of the deferred tax assets will not be realized. Current income taxes are
provided for in accordance with the laws and regulations applicable to the Group as
enacted by the relevant tax authorities.
The Group adopted Interpretation No. 48 (“FIN 48”), Accounting for Uncertainty in
Income Taxes-an interpretation of FASB Statement No. 109 for the years ended December31, 2006, 2007 and 2008. Under FIN 48, the Group may recognize the tax benefit from
an uncertain tax position only if it is more likely than not that the tax position
will be sustained on examination by the taxing authorities, based on the technical
merits of the position. The tax benefits recognized in the financial statements from
such a position should be measured based on the largest benefit that has a greater
than 50% likelihood of being realized upon ultimate settlement. FIN 48 also
provides guidance on de-recognition of income tax assets and liabilities,
classification of current and deferred income tax assets and liabilities, accounting
for interest and penalties associated with tax positions, and income tax disclosures.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — continued
FOR THE YEARS ENDED DECEMBER 31, 2006, 2007 AND 2008
(In U.S. dollars in thousands, except share data)
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — continued
(r)
Share based payments
Share-based payment transactions with employees are measured based on the grant date
fair value of the equity instrument issued in accordance with the FASB Statement of
Financial Accounting Standard (“SFAS”) No. 123(R), Share-Based Payment, and
recognized as compensation expense over the requisite service period based on a
straight-line attribution method, with a corresponding impact reflected in additional
paid-in capital.
Share-based payment transactions with non-employees are accounted for as share based
compensation expense in accordance with EITF 96-18, Accounting for Equity Instruments
That Are Issued to Other Than Employees for Acquiring, or in Conjunction with
Selling, Goods or Services.
(s)
Comprehensive income (loss)
Comprehensive income (loss) includes net income (loss) and foreign currency
translation adjustments. Comprehensive income (loss) is defined as the change in
equity during a period from transactions and other events and circumstances except
for transactions resulting from investments by shareholders and distributions to
shareholders.
(t)
Concentration of credit risk
Financial instruments that potentially expose the Group to concentrations of credit
risk consist primarily of cash and accounts receivable. The Group places their cash
with financial institutions with high-credit ratings and quality.
The Group conducts credit evaluations of customers and generally do not require
collateral or other security from their customers. The Group establishes an
allowance for doubtful accounts primarily based upon the age of the receivables and
factors relevant to determining the credit risk of specific customers. The amount of
receivables ultimately not collected by the Group has generally been consistent with
management’s expectations and the allowance established for doubtful accounts.
There was no customer, which accounted for 10% or more of total revenues, for each of
the years ended December 31, 2006, 2007 and 2008, respectively and there was no
customer accounting for 10% or more of accounts receivable for each of the years
ended December 31, 2007 and 2008, respectively.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — continued
FOR THE YEARS ENDED DECEMBER 31, 2006, 2007 AND 2008
(In U.S. dollars in thousands, except share data)
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — continued
(u)
Fair value
The Group adopted Statement of Financial Accounting Standards (“SFAS”) No. 157, “Fair
Value Measurements” (“SFAS 157”) on January 1, 2008 for all financial assets and
liabilities and nonfinancial assets and liabilities that are recognized or disclosed
at fair value in the financial statements on a recurring basis (at least annually).
SFAS 157 defines fair value, establishes a framework for measuring fair value, and
expands disclosures about fair value measurements.
SFAS 157 defines fair value as the price that would be received from selling an asset
or paid to transfer a liability in an orderly transaction between market participants
at the measurement date. When determining the fair value measurements for assets and
liabilities required or permitted to be recorded at fair value, the Group considers
the principal or most advantageous market in which it would transact and it considers
assumptions that market participants would use when pricing the asset or liability.
SFAS 157 establishes a fair value hierarchy that requires an entity to maximize the
use of observable inputs and minimize the use of unobservable inputs when measuring
fair value. A financial instrument’s categorization within the fair value hierarchy
is based upon the lowest level of input that is significant to the fair value
measurement. SFAS 157 establishes three levels of inputs that may be used to measure
fair value:
Level 1
Level 1 applies to assets or liabilities for which there are quoted prices in active
markets for identical assets or liabilities.
Level 2
Level 2 applies to assets or liabilities for which there are inputs other than quoted
prices included within Level 1 that are observable for the asset or liability such as
quoted prices for similar assets or liabilities in active markets; quoted prices for
identical assets or liabilities in markets with insufficient volume or infrequent
transactions (less active markets); or model-derived valuations in which significant
inputs are observable or can be derived principally from, or corroborated by,
observable market data.
Level 3
Level 3 applies to assets or liabilities for which there are unobservable inputs to
the valuation methodology that are significant to the measurement of the fair value
of the assets or liabilities.
The Group did not have any financial assets and liabilities or nonfinancial assets
and liabilities that are measured at fair value on recurring basis as of December 31,2008.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — continued
FOR THE YEARS ENDED DECEMBER 31, 2006, 2007 AND 2008
(In U.S. dollars in thousands, except share data)
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — continued
(v)
Fair value of financial instruments
The carrying amounts of accounts receivable, accounts payable, amounts due to related
parties and income tax payable approximate their fair values due to the short-term
maturity of these instruments.
The fair value of the long-term investments is not disclosed because it is not
readily determinable.
(w)
Net income/(loss) per share
Basic net income (loss) per share are computed by dividing net income/(loss)
attributable to holders of ordinary shares by the weighted average number of ordinary
shares outstanding during the year. Diluted EPS reflects the potential dilution that
could occur if securities or other contracts to issue ordinary shares (convertible
preferred stock, forward contract, warrants to purchase ordinary shares, contingently
issuable shares, common stock options and warrants and their equivalents using the
treasury stock method) were exercised or converted into ordinary shares. Potential
common shares in the diluted net income/(loss) per share computation are excluded in
periods of losses from continuing operations, as their effect would be antidilutive.
The holders of Series A preferred shares and Series B preferred shares were entitled
to share dividends on a pro rata basis, as if their shares had been converted into
ordinary shares. Accordingly, the Group used the two-class method in computing net
income (loss) per share for the year 2006 and 2007. Under the two-class method, net
income was allocated on a pro rata basis to each class of ordinary shares and other
participating securities based on their participating rights. Net losses applicable
to holders of ordinary shares were allocated to ordinary shares because the Series A
and Series B preferred shares were not contractually obligated to participate in
sharing losses.
(x)
Recently issued accounting standards
In September 2006, FASB issued SFAS 157. Effective January 1, 2008, the Group
adopted the measurement and disclosure other than those requirements related to
nonfinancial assets and liabilities in accordance with guidance from FASB Staff
Position 157-2, “Effective Date of FASB Statement No. 157,” which delayed the
effective date of SFAS 157 for all nonfinancial assets and nonfinancial liabilities,
except for items that are recognized or disclosed at fair value in the financial
statements on a recurring basis (at least annually), until the beginning of fiscal
year 2009. The Group does not expect the adoption of SFAS 157 for nonfinancial
assets and liabilities will have a significant effect on the Group’s consolidated
financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — continued
FOR THE YEARS ENDED DECEMBER 31, 2006, 2007 AND 2008
(In U.S. dollars in thousands, except share data)
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — continued
(x)
Recently issued accounting standards — continued
In December 2007, the FASB issued SFAS No. 141, Business Combinations: (Revised 2007)
(“SFAS 141R”). SFAS 141R is relevant to all transactions or events in which one
entity obtains control over one or more other businesses. SFAS 141R requires an
acquirer to recognize any assets and noncontrolling interest acquired and liabilities
assumed to be measured at fair value as of the acquisition date. Liabilities related
to contingent consideration are recognized and measured at fair value on the date of
acquisition rather than at a later date when the amount of the consideration may be
resolved beyond a reasonable doubt. This revised approach replaces SFAS 141’s cost
allocation process in which the cost of an acquisition was allocated to the
individual assets acquired and liabilities assumed based on their respective fair
value. SFAS 141R requires any acquisition-related costs and restructuring costs to
be expensed as incurred as opposed to allocating such costs to the assets acquired
and liabilities assumed as previously required by SFAS 141. Under SFAS 141R, an
acquirer recognizes liabilities for a restructuring plan in purchase accounting only
if the requirements of SFAS 146, Accounting for Costs Associated with Exit or
Disposal Activities, are met. SFAS 141R allows for the recognition of
pre-acquisition contingencies at fair value only if these contingencies are likely to
materialize. If this criterion is not met at the acquisition date, then the acquirer
accounts for the non-contractual contingency in accordance with recognition criteria
set forth under SFAS 5, Accounting for Contingencies, in which case no amount should
be recognized in purchase accounting. SFAS 141R is effective as of the beginning of
an entity’s first fiscal year that begins after December 15, 2008. The Group does
not expect the adoption of SFAS 141R will have a significant impact on the Group’s
consolidated financial statements.
In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in
Consolidated Financial Statements-An Amendment of ARB No. 51 (“SFAS 160”). This
Statement amends ARB 51 to establish accounting and reporting standards for the
noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary.
It clarifies that a noncontrolling interest in a subsidiary is an ownership interest
in the consolidated entity and should be reported as equity on the financial
statements. SFAS 160 requires consolidated net income to be reported at amounts that
include the amounts attributable to both the parent and the noncontrolling interest.
Furthermore, disclosure of the amounts of consolidated net income attributable to the
parent and to the noncontrolling interest is required on the face of the financial
statements. SFAS 160 is effective as of the beginning of an entity’s first fiscal
year that begins after December 15, 2008. The Group does not expect the adoption of
SFAS 160 will have significant impact on its consolidated financial position or
results of operations, other than certain changes to the presentation of the
financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — continued
FOR THE YEARS ENDED DECEMBER 31, 2006, 2007 AND 2008
(In U.S. dollars in thousands, except share data)
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — continued
(x)
Recently issued accounting standards — continued
In April 2008, the FASB issued FASB Staff Position FAS142-3: Determination of the
Useful Life of Intangible Assets. This FSP amends the factors that should be
considered in developing renewal or extension assumptions used to determine the
useful life of a recognized intangible asset under FASB Statement No. 142, Goodwill
and Other Intangible Assets. This FSP is effective for fiscal years beginning after
December 15, 2008, and interim periods within those fiscal years. Early adoption is
prohibited. The guidance for determining the useful life of a recognized intangible
asset in this FSP shall be applied prospectively to intangible assets acquired after
the effective date. The Group is in the process of assessing the potential impact
the adoption of FSP 142-3 may have on its consolidated financial position or results
of operations.
At a November 24, 2008 meeting, the FASB ratified the consensus reached by the Task
Force in Issue No. 08-6: Equity Method Investment Accounting Considerations (“EITF
08-6”). Because of the significant changes to the guidance on subsidiary
acquisitions and subsidiary equity transactions and the increased use of fair value
measurements as a result of Statements 141(R) and 160, questions have arisen
regarding the application of that accounting guidance to equity method investments.
EITF 08-6 provides guidance for entities that acquire or hold investments accounted
for under the equity method. This issue is effective for transactions occurring in
fiscal years and interim periods beginning on or after December 15, 2008. Early
adoption is not permitted. The Group does not expect the adoption of EITF 08-6 will
have significant impact on its consolidated financial position or results of
operations.
3.
SEGMENT INFORMATION AND REVENUE ANALYSIS
The Group is mainly engaged in selling air-traveling television advertising time slots and
digital frame advertising time slots on their network of television screens and digital
frame screens located in high traffic airports and on airplanes of airline companies
throughout PRC.
In accordance with SFAS No. 131, Disclosures About Segments of an Enterprise and Related
Information, the Group chief operating decision maker has been identified as the Chief
Executive Officer, who reviews consolidated results when making decisions about allocating
resources and assessing performance of the Group; hence, the Group has only one operating
segment. The Group has internal reporting that does not distinguish between markets or
segments.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — continued
FOR THE YEARS ENDED DECEMBER 31, 2006, 2007 AND 2008
(In U.S. dollars in thousands, except share data)
3.
SEGMENT INFORMATION AND REVENUE ANALYSIS — continued
Geographic information
The Group operates in the PRC and all of the Group’s long-lived assets are located in the
PRC. Although the Group operates through multiple airports and airlines in PRC which
include Beijing, Shanghai, Guangzhou, Shenzhen, Chengdu and Wenzhou etc, it believes it
operates in one segment as all airports and airlines provide selling digital frame
advertising time slots, air-traveling television advertising time slots and billboards
advertising on gate bridges in airports to the customers and advertisers.
Acquisition of Advertising Business on Gate Bridges in Airports
In July 2008, the Group acquired 100% of the equity interest in Excel Lead and 80% of the
equity interest in Flying Dragon, which operate the advertising business on gate bridges in
10 airports in mainland China, with an initial cash consideration of $1,789. The
transaction further expanded the Group’s air travel advertising network to cover the
advertising business on gate bridges in airports, and diversify its media resources to
include billboard advertisements.
Contingent consideration will be paid to the selling shareholders in installments based on
the after-tax net profit of the acquired business for each of the periods from July 1, 2008
to December 31, 2008 and of the years of 2009 and 2010. The total contingent considerations
will be up to $27,257 in cash and 1,530,950 ordinary shares of AirMedia, or up to $39,653 in
cash only, at the sole discretion of the selling shareholders.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — continued
FOR THE YEARS ENDED DECEMBER 31, 2006, 2007 AND 2008
(In U.S. dollars in thousands, except share data)
4.
BUSINESS ACQUISITION — continued
Acquisition of Advertising Business on Gate Bridges in Airports — continued
The transaction was considered as an acquisition of a business and accordingly the purchase
method of accounting has been applied in accordance with SFAS No. 141, Business Combination
(“SFAS 141”). The acquired net assets were recorded at their estimated fair values on the
acquisition date.
The Group recognized $4,160, which represented the excess of the fair value of the net
assets acquired over the initial cash consideration, as a liability in respect of contingent
consideration in accordance with SFAS 141. The aggregate initial recognized consideration of
$5,949 consisted of the following:
The 20% interest held by other shareholders of Flying Dragon is recorded as minority
interest in the consolidated balance sheets and consolidated statement of operations.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — continued
FOR THE YEARS ENDED DECEMBER 31, 2006, 2007 AND 2008
(In U.S. dollars in thousands, except share data)
4.
BUSINESS ACQUISITION — continued
Acquisition of Advertising Business on Gate Bridges in Airports — continued
The following unaudited pro forma information summarizes the results of operations for the
years ended December 31, 2008 of the Group as if the acquisition had occurred on January 1,2008. The following pro forma financial information is not necessarily indicative of the
results that would have occurred had the acquisition been completed at the beginning of the
periods indicated, nor is it indicative of future operating results:
The Group made an advance payment of $6,334 to the selling shareholders on the date of
acquisition. The advance payment is interest-free without collateral. The amount will be
used to offset the contingent considerations based on the future after-tax net profit of the
acquired business and the excess amount over the final contingent consideration to be determined,
if any, will be repayable to the Group after the availability of the 2010 operating results
of the acquired business.
The amount of contingent consideration, based on the after-tax net profit of acquired
business in the second half of 2008, was determined to be $2,340 in 2008, which was paid by
offsetting the advance payment as set out in preceding paragraph. Accordingly, the
remaining balance of advance payment in other current assets was $3,994 (Note 7) and the
liability in respect of contingent consideration in accrued expenses and other current
liabilities was $1,820 (Note 11) as of December 31, 2008.
Management believes the payment of the contingent consideration based on 2009 earnings
will probably exceed the advance payment balance as of December 31, 2008, and accordingly
the balance was recorded in other current assets of the balance sheet as of December 31,2008 as set out in Note 7.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — continued
FOR THE YEARS ENDED DECEMBER 31, 2006, 2007 AND 2008
(In U.S. dollars in thousands, except share data)
5.
LONG-TERM INVESTMENTS
(a)
Equity method investments
The Group had the following equity method investments:
Beijing Aiyike Information
Technology Ltd.
(“Beijing Aiyike”) (1)
51
$
788
—
$
—
Beijing Eastern Media Corporation,
Ltd. (“BEMC”) (2)
—
—
49
953
$
788
$
953
(1):
On January 1, 2007, the Group, through AM Advertising, a VIE of
the Group, acquired 51% equity interest of Beijing Aiyike, an advertising
service provider focusing on exhibit advertising at airports in the PRC, with
initial cash consideration of $640. An additional cash consideration of $663
was paid on October 22, 2007 in line with that the founders of Beijing Aiyike
obtained certain concession rights from certain airports as defined in the share
purchase agreement. Because the minority equity owners have substantive
participating rights in making major operating decisions, including annual
budgets and appointment of CEO and his/her compensation, among others, over
Beijing Aiyike, the acquisition was accounted for using the equity method of
accounting in accordance with EITF 96-16, “Investor’s Accounting for an Investee
When the Investor Has a Majority of the Voting Interest but the Minority
Shareholder or Shareholders Have Certain Approval or Veto Rights”.
The Group shared the loss of Beijing Aiyike of $520 and $243 for the year
ended December 31, 2007 and the ten-month period ended October 31, 2008,
respectively.
On November 1, 2008, the Group sold the investment in Beijing Aiyike to a
third party with the cash consideration of $671. A gain of $42, which
represented the excess of consideration received and the carrying amount of
the investment as of November 1, 2008, was recognized as share of loss from
equity method investments in the consolidated statements of operation.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — continued
FOR THE YEARS ENDED DECEMBER 31, 2006, 2007 AND 2008
(In U.S. dollars in thousands, except share data)
5.
LONG-TERM INVESTMENTS — continued
(a)
Equity method investments — continued
(2):
In March 2008, the Group entered into a definitive agreement with
China Eastern Media Corporation, Ltd., a subsidiary of China Eastern Group and
China Eastern Airlines Corporation Limited operating the media resources of
China Eastern Group, to establish a joint venture, BEMC. BEMC was incorporated
on March 18, 2008 with China Eastern Media Corporation and the Group holding 51%
and 49% equity interest, respectively. BEMC obtained concession rights of
certain media resources from its shareholders, including the digital TV screens
on airplanes of China Eastern Airlines, and paid concession fees to its
shareholders as consideration. The total paid in capital of BEMC was $2,119,
which was contributed by both parties proportionately.
The investment was accounted for using equity method of accounting since the
Group has the ability to exercise the significant influence to the operation
of BEMC.
The Group shared the loss of BEMC of $124 from the loss for the year ended
December 31, 2008.
The financial statement amounts and balances of the investments as shown in its
financial statements as of and for the year ended December 31, 2008 were as follows:
Total current assets
$1,929
Total assets
2,028
Total current liabilities
84
Total liabilities
84
Total net revenue
1,353
Loss from operations
(700
)
(b)
Cost method investment
Beijing AirMedia City Outdoor Advertising Co., Ltd (“AM Outdoor”) was incorporated on
December 4, 2008 and the Group holds 10% shares as of December 31, 2008. The
investment was carried at cost of $146. As of December 31, 2008, AM Outdoor did
not commence to operating activities.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — continued
FOR THE YEARS ENDED DECEMBER 31, 2006, 2007 AND 2008
(In U.S. dollars in thousands, except share data)
6.
ACCOUNTS RECEIVABLE, NET
Accounts receivable, net consists of the following:
Unbilled receivable represents amounts earned under advertising contracts in progress but
not billable at the respective balance sheet dates. These amounts become billable according
to the contract term. The Group anticipates that substantially all of such unbilled amounts
will be billed and collected within twelve months of the balance sheet dates.
Movement of allowance for doubtful accounts is as follows:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — continued
FOR THE YEARS ENDED DECEMBER 31, 2006, 2007 AND 2008
(In U.S. dollars in thousands, except share data)
7.
OTHER CURRENT ASSETS — continued
Receivable from underwriters represents cash advance to one of the underwriters for the
expenses to be paid by the underwriter on behalf of the company in connection with the
Company’s IPO. The balance was fully repaid by the underwriter in January 2008.
Short-term deposits primarily consist of prepaid deposit for leasing office space and
bidding for concession rights.
Concession fee deposits normally have terms of three to five years and are refundable at the
end of the concession terms. Office rental deposits normally have terms of two to three
years and are refundable at the end of the lease term.
The long term deposits are not within the scope of Accounting Principles Board Opinion No.
21, Interests on Receivables and Payables, because they are intended to provide security for
the counterparty to the concession rights or office rental agreements. Therefore, the
deposits are recorded at costs.
9.
ACQUIRED INTANGIBLE ASSETS, NET
Acquired intangible assets, net, consist of the following:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — continued
FOR THE YEARS ENDED DECEMBER 31, 2006, 2007 AND 2008
(In U.S. dollars in thousands, except share data)
9.
ACQUIRED INTANGIBLE ASSETS, NET — continued
(1):
On October 10, 2006, the Group, through AM Advertising, acquired 75% equity
interest of AirTV United with cash consideration of $3,310. AirTV United had no
material assets and liabilities and was inactive other than holding a TV program
production and operation license (“TV program license”), which is authorized by China
National TV & Movie Broadcasting Bureau. This license allows editing, producing and
operating non-advertising programs that are displayed on TV. The license has perpetual
life but is subject to annual compliance review by a government agency. The Company
determined the license has an estimated economic useful life of 20 years and computed
the amortization using the straight-line method. Accordingly, the purchase was
accounted for as an asset acquisition. The following table presents the allocation of
the acquisition costs:
Amortization
period
Total consideration
$
3,310
Less: cash acquired
(1
)
Cost allocated to TV program license
3,309
Plus: deferred income tax liability recognized
1,631
Total acquired intangible asset cost
initially recognized
$
4,940
20 years
The 25% interest held by other shareholders of AirTV United is recorded as minority
interest in the consolidated balance sheets and consolidated statement of operations.
The amortization expenses for the years ended December 31, 2006, 2007 and 2008 were $55,
$254 and $1,170, respectively. The Group expects to record amortization expenses of $2,157,
$1,200, $1,197, $579 and $3,894 for 2009, 2010, 2011, 2012, 2013 and thereafter,
respectively.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — continued
FOR THE YEARS ENDED DECEMBER 31, 2006, 2007 AND 2008
(In U.S. dollars in thousands, except share data)
10.
PROPERTY AND EQUIPMENT, NET
Property and equipment, net consists of the follows:
Contingent consideration in connection with a
business acquisition (Note 4)
—
1,820
Others liabilities
500
1,514
$
1,309
$
5,664
Others liabilities primarily consist of professional fee, staff disbursement, social
insurance and miscellaneous operating expenses incurred but not yet paid.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — continued
FOR THE YEARS ENDED DECEMBER 31, 2006, 2007 AND 2008
(In U.S. dollars in thousands, except share data)
12.
INCOME TAXES
AirMedia is a tax-exempted company incorporated in the Cayman Islands.
Broad Cosmos and Excel Lead are tax-exempted company incorporated in the British Virgin
Islands.
No provision for Hong Kong Profits Tax was made for the years ended December 31, 2007 and
2008 on the basis that Royal HK and Glorious Star did not have any assessable profits
arising in or derived from Hong Kong for the years.
AM Advertising, Shengshi Lianhe, AirTV United, AM Film, AirMedia UC, AM Yuehang, Flying
Dragon and AM Wenzhou were registered in the PRC, are all subject to PRC Enterprise Income
Tax (“EIT”) on the taxable income in accordance with the relevant PRC income tax laws. EIT
rate for companies operating in the PRC was 33% prior to January 1, 2008. On March 16,2007, the National People’s Congress adopted the Enterprise Income Tax Law (the “EIT Law”),
which became effective on January 1, 2008. The EIT rate was reduced to 25% in accordance
with the EIT Law in 2008.
AM Technology qualified for the New and High-Tech Enterprise (“HNTE”) status that would
allow for a reduced 15% tax rate under EIT Law since year 2006. AM Technology also
qualified as a HNTE located in a high-tech zone in Beijing and, therefore, was entitled to a
three-year exemption from EIT from year 2006 to 2008 and a preferential EIT of 7.5% from the
year 2009 to 2011.
Shenzhen AM is subject to EIT on the taxable income at the gradual rate, which is 18% in
2008, and will be 20% in 2009, 22% in 2010, 24% in 2011, 25% in 2012, respectively, since it
is located in Shenzhen. Shenzhen AM submitted its application to be qualified as a HNTE in
March 2009 and if rewarded Shenzhen AM will enjoy a 15% preferential EIT rate since January
2009.
Xi’an AM qualified as an “Software Enterprise” in August 2008 by Technology Information
Bureau of Shan Xi province, and has been agreed by the relevant tax authorities as entitled
to a two-year exemption from the EIT commencing from its first profitable year and an 50%
deduction of 25% EIT rate for the succeeding three years.
The Group did not record any Hong Kong profits tax for the years ended December 31, 2007 and
2008 on the basis that Royal Mart and Glorious Star did not have any assessable profits
arising in or derived from Hong Kong for 2007 and 2008.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — continued
FOR THE YEARS ENDED DECEMBER 31, 2006, 2007 AND 2008
(In U.S. dollars in thousands, except share data)
12.
INCOME TAXES — continued
The principal components of the Group’s deferred income tax assets and liabilities are as
follows:
Taxable loss arising from a disposal of
an equity method investment
—
198
Net operating loss carry forwards
318
200
Total deferred tax assets
507
1,762
Valuation allowance
—
—
Net deferred tax assets
602
2,142
Deferred tax liabilities:
Non-current
Acquired intangible assets
1,527
2,659
Total deferred tax liabilities
$
1,527
$
2,659
As management believes that the Group will generate taxable PRC statutory income in the near
future and it is more likely than not that all of the deferred tax assets will be realized,
no valuation allowance has been established for the deferred tax assets as of December 31,2007 and 2008.
The subsidiaries, registered in the PRC, had total net operating loss carryforward of $852
as of December 31, 2008. The net operating loss carry forwards for the PRC subsidiaries
will expire on various dates through 2013.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — continued
FOR THE YEARS ENDED DECEMBER 31, 2006, 2007 AND 2008
(In U.S. dollars in thousands, except share data)
12.
INCOME TAXES — continued
Reconciliation between the provision for income taxes computed by applying the PRC EIT rate
of 25% or 33% to income before income taxes and the actual provision of income taxes is as
follows:
Net income/(loss) before provision
for income taxes
$
3,868
$
(4,787
)
$
30,407
PRC statutory tax rate
33
%
33
%
25
%
Income tax at statutory tax rate
1,277
(1,580
)
7,602
Expenses not deductible for tax purposes:
Entertainment expenses exceeded the tax limit
96
46
62
Payroll expenses exceeded the tax limit
82
202
—
Others
106
79
19
Effect of income tax holidays in subsidiaries
and VIEs in the PRC
(1,784
)
1,251
(9,217
)
Effect of income tax rate difference in
other jurisdictions
26
(193
)
1,036
Income tax benefits
$
(197
)
$
(195
)
$
(498
)
Effective tax rates
(5.1
)%
4.1
%
(1.6
)%
If the Group’s subsidiaries and VIEs in the PRC were not in a tax holiday period in the year
ended December 31, 2008, net income/(loss) per share amounts would be as follows:
2006
2007
2008
Changes in income tax expenses
$
1,685
$
4,562
$
9,217
Decrease in net income/(loss) per
ordinary share-basic
0.01
0.06
0.07
Decrease in net income/(loss) per
ordinary share-diluted
0.01
0.06
0.07
Decrease in net income/(loss) per
preferred share A — basic and diluted
0.02
—
N/A
Decrease in net income/(loss) per
preferred share B — basic and diluted
N/A
—
N/A
The Group did not identify significant unrecognized tax benefits for the years ended
December 31, 2006, 2007 and 2008. The Group did not incur any interest and penalties
related to potential underpaid income tax expenses for the year ended December 31, 2006,
2007 and 2008.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — continued
FOR THE YEARS ENDED DECEMBER 31, 2006, 2007 AND 2008
(In U.S. dollars in thousands, except share data)
12.
INCOME TAXES — continued
Since the commencement of operations in August 2005, the relevant tax authorities of the
Group’s subsidiaries in PRC have not conducted a tax examination. As such, the Group’s
subsidiaries, VIEs and VIE’s subsidiary are subject to tax audits at the tax authority’s
discretion.
Uncertainties exist with respect to how the current income tax law in the PRC applies to the
Group’s overall operations, and more specifically, with regard to tax residency status. EIT
Law includes a provision specifying that legal entities organized outside of China will be
considered residents for Chinese Income tax purposes if the place of effective management or
control is within China. The Implementation Rules to the EIT Law provide that non-resident
legal entities will be considered China residents if substantial and overall management and
control over the manufacturing and business operations, personnel, accounting, properties,
etc, occurs within China. Additional guidance is expected to be released by the Chinese
government in the near future that may clarify how to apply this standard to taxpayers.
Despite the present uncertainties resulting from the limited PRC tax guidance on the issue,
the Group does not believe that its legal entities organized outside of China should be
treated as residents for EIT Law purposes.
Under applicable accounting principles, a deferred tax liability should be recorded for
taxable temporary differences attributable to the excess of financial report over tax basis,
including those differences attributable to a more than 50% interest in a subsidiary.
However, recognition is not required in situations where the tax law provides a means by
which reported amount of that investment in subsidiary can be recovered tax-free and the
enterprise expects that it will ultimately use that means.
The Company, which has subsidiaries located in the PRC, is subject to the PRC dividend
withholding tax of 10% when and if undistributed earnings are declared to be paid as
dividends commencing on January 1, 2008 to the extent those dividends are paid out of
profits that arose on or after January 1, 2008.
Aggregate undistributed earnings of the Company’s subsidiaries located in the PRC that are
taxable upon distribution to the Company of approximately $32,038 at December 31, 2008 are
considered to be indefinitely reinvested under APB opinion No. 23, because the Group does
not have any present plan to pay any cash dividends on its ordinary shares in the
foreseeable future and intends to retain most of its available funds and any future earnings
for use in the operation and expansion of its business. Accordingly, no deferred tax
liability has been made for the Chinese dividend withholding taxes that would be payable
upon the distribution of those amounts to the Company as of December 31, 2008.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — continued
FOR THE YEARS ENDED DECEMBER 31, 2006, 2007 AND 2008
(In U.S. dollars in thousands, except share data)
13.
NET INCOME/(LOSS) PER SHARE
The calculation of the net income/(loss) per share is as follows:
Deemed dividend on Series A convertible redeemable
preferred shares — Accretion of redemption premium
(1,440
)
(1,201
)
—
Deemed dividend on Series B convertible redeemable
preferred shares — Accretion of redemption premium
—
(2,152
)
—
Net income/(loss) attributable to holders of ordinary shares
2,626
(8,463
)
30,198
Numerator used in basic and diluted net income/(loss) per share:
Net income/(loss) allocated for computing net
income/(loss) per ordinary share — basic and diluted
$
1,639
(i)
$
(8,463
)(i)
$
30,198
Net income/(loss) allocated for computing net
income/(loss) per preferred share A — basic
2,427
(i)
1,201
(i)
—
Net income/(loss) allocated for computing net
income/(loss) per preferred share B — basic
N/A
(i)
2,152
(i)
—
Shares (denominator):
Weighted average ordinary shares outstanding used in computing
net income/(loss) per ordinary share — basic
62,400,000
(ii)
73,469,589
133,603,419
Weighted average ordinary and preferred shares outstanding used in
computing net income/(loss) per ordinary share — diluted
62,400,000
(iii)
73,469,589
(iii)
137,782,135
(iii)
Weighted average shares outstanding used in computing net
income/(loss) per preferred share A- basic
37,600,000
31,461,918
N/A
Weighted average shares outstanding used in computing net
income/(loss) per preferred share B- basic
N/A
6,706,849
N/A
Net income/(loss) per ordinary share-basic
$
0.03
$
(0.12
)
$
0.23
Net income/(loss) per ordinary share-diluted
0.03
(0.12
)
0.22
Net income/(loss) per preferred share A-basic
$
0.06
$
0.04
N/A
Net income/(loss) per preferred share B-basic
N/A
$
0.32
N/A
(i)
The net income attributable to holders of ordinary shares was allocated between
ordinary shares and preferred shares on pro rata basis on the dividend participant
rights. Since each Series A and Series B preferred share had the same participating
right as each ordinary shares, the allocation was based on the number of ordinary
shares and Series A and Series B preferred shares issued. The net income allocated for
computing net income per preferred share-basic also contained the deemed dividend for
accretion of the redemption premium.
(ii)
The proceeds for subscription of ordinary shares were paid off in June 2007.
However, since the unpaid ordinary shares were entitled to full rights, such as right
to participate in dividends, for the full year 2006, they are included in computation
of net income (loss) per share.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — continued
FOR THE YEARS ENDED DECEMBER 31, 2006, 2007 AND 2008
(In U.S. dollars in thousands, except share data)
13.
NET INCOME/(LOSS) PER SHARE — continued
(iii)
The Group had securities outstanding which could potentially dilute basic net
income/(loss) per share, but which were excluded from the computation of diluted net
income/(loss) per share for the years end December 31, 2006, 2007 and 2008, as their
effects would have been anti-dilutive. For year 2006, such outstanding securities
consisted of 37,600,000 shares on Series A preferred shares. For 2007, such
outstanding securities consisted of 37,600,000 shares on Series A preferred shares,
16,000,000 shares on Series B preferred shares, and stock options of a weighted average
number of 4,083,329. For year 2008, such outstanding securities consisted of stock
options of a weighted average number of 2,320,767.
The calculation of the weighted average number of ordinary shares in 2008 for the
purpose of diluted net income per share has included the effect of stock of a
weighted average number of 7,874,013 which gives rise to an incremental weighted
average number of 4,178,716 ordinary shares from the assumed conversion of these
stock options using the treasury stock method.
14.
CONVERTIBLE REDEEMABLE PREFERRED SHARES
Series A convertible redeemable preferred shares
On October 18, 2005, CDH, the founding shareholders and AM Technology entered into an
agreement whereby CDH purchased an aggregate of $12,000 of the Series A convertible
redeemable preferred share interest in AM Technology, representing 37.6% voting power in the
Group.
The preferred share interest in AM Technology was subsequently replaced with the preferred
shares representing the same interest in Broad Cosmos, which subsequently became the
corresponding number of preferred shares in AirMedia through share swap.
The significant terms of Series A Preferred Shares were as follows.
Dividends
If the Group declares and pays any dividends on the ordinary shares, then, holders of Series
A Preferred Shares shall be entitled to share in such dividends on a pro rata basis, as if
their shares have been converted into ordinary shares.
Liquidation preference
In the event of any liquidation event, the shareholders of the series A preferred share
would be entitled to receive in preference to the shareholders of the ordinary shares a an
amount per Series A Preferred Shares equal to the Series A issue price plus all accrued or
declared but unpaid dividends. After full preference amount has been paid on all the shares
of the Series A Preferred Shares, any remaining funds or assets of the Group legally
available for distribution to
shareholders shall be distributed pro rata among the holders of the Series A Preferred
Shares (on an as-if-converted basis) together with the holders of the ordinary shares.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — continued
FOR THE YEARS ENDED DECEMBER 31, 2006, 2007 AND 2008
(In U.S. dollars in thousands, except share data)
14.
CONVERTIBLE REDEEMABLE PREFERRED SHARES — continued
Series A convertible redeemable preferred shares — continued
Voting rights
Each Series A Share carries a number of votes equal to the number of ordinary shares then
issuable upon its conversion into ordinary shares. The Series A Preferred Shares generally
vote together with the Ordinary Shares and not as a separate class.
Conversion
Each holder of Series A Preferred Shares shall have the right, at such holder’s sole
discretion, to convert at any time and from time to time all or any portion of the Series A
Preferred Shares held by it into ordinary shares. The initial conversion ratio shall be on
a one for one basis, subject to certain general anti-dilution adjustments.
The Series A Preferred Shares are automatically converted into ordinary shares upon the
closing of a qualified public offering, which means a firm commitment underwritten initial
public offering and listing on an internationally recognized stock exchange by the Group of
its ordinary shares representing at least 15% of the ordinary shares (on a fully diluted
basis immediately prior to such initial public offering) at a price per share implying a
pre-money valuation of the Group of at least $100,000.
As the effective conversion price exceeded the fair value of ordinary shares on commitment
day of October 18, 2005, there was no beneficial conversion feature upon issuance of Series
A Preferred Shares.
Redemption
The Series A Preferred Shares shall be redeemed wholly or in part from time to time at the
election of holders of majority Series A Preferred Shares on or after the third anniversary
of the date of issuance of the Series A Preferred Shares. The redemption price will be
sufficient to yield a 12% annualized effective internal rate of return with respect to the
Series A Preferred Shares issue price, computed from the date of issuance of the Series A
preferred shares until the date that the redemption payment has been paid in full, plus any
declared but unpaid dividends thereon.
The Group accrued the 12% premium over the redemption period as deemed dividends with debits
to the accumulated deficit of $1,440 and $1,201 for the year ended December 31, 2006 and
2007, respectively.
On September 27, 2007, CDH converted 5,000,000 Series A preferred share into ordinary shares
and transferred the 5,000,000 ordinary shares to Mr. Guo Man in connection with the
share-based compensation arrangement as set out in Note 15.
On November 7, 2007, all remaining outstanding 32,600,000 Series A preferred shares were
automatically converted into ordinary shares upon the IPO of the Company.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — continued
FOR THE YEARS ENDED DECEMBER 31, 2006, 2007 AND 2008
(In U.S. dollars in thousands, except share data)
14.
CONVERTIBLE REDEEMABLE PREFERRED SHARES — continued
Series B convertible redeemable preferred shares
On June 8, 2007, AirMedia issued 16,000,000 shares of Series B Preferred Shares for
consideration of $2.50 per share for an aggregate purchase price of $40,000. The
consideration was fully paid in June 2007 and the total proceeds were $39,000 (net of
issuance cost of $1,000).
The significant terms of Series B Preferred Shares were as follows.
Dividends
If the Group declares and pays any dividends on the ordinary shares, then, holders of Series
B Preferred Shares shall be entitled to share in such dividends on a pro rata basis, as if
their shares have been converted into ordinary shares.
Liquidation preference
In the event of any liquidation event, the shareholders of the Series A and Series B
preferred shares (collectively “Preferred Shares”) shall be entitled to receive, on the same
basis, prior to any distribution to the holders of the ordinary shares or any other class or
series of shares, an amount per Preferred Share equal to the applicable issue price plus all
accrued or declared but unpaid dividends. After full preference amount has been paid on all
the shares of the Preferred Shares, any remaining funds or assets of the Group legally
available for distribution to shareholders shall be distributed pro rata among the holders
of the Preferred Shares (on an as-if-converted basis) together with the holders of the
ordinary shares.
Voting rights
Each Preferred Share carries a number of votes equal to the number of ordinary shares then
issuable upon its conversion into ordinary shares. The Preferred Shares generally vote
together with the ordinary shares and not as a separate class.
Conversion
Unless converted resulting from automatic conversion, the Series B Preferred Shares may not
be optionally converted unless the Company gives its prior written consent for such optional
conversion. Each Series B Preferred Share, if consented to by the Company in writing, shall
be convertible into such number of ordinary shares as is determined by dividing the Series B
issue price by the Series B conversion price in effect at the time of conversion. The
initial conversion ratio shall be on a one for one basis, subject to certain anti-dilution
adjustments.
The Series B Preferred Shares shall automatically be converted into ordinary shares, at the
Series B conversion price determined below, upon the earlier of (i) the closing of an IPO
and (ii) the three year anniversary of the Series B original issue date.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — continued
FOR THE YEARS ENDED DECEMBER 31, 2006, 2007 AND 2008
(In U.S. dollars in thousands, except share data)
14.
CONVERTIBLE REDEEMABLE PREFERRED SHARES — continued
Series B convertible redeemable preferred shares — continued
Conversion — continued
In the event that triggering event is an IPO, the Series B conversion price shall
automatically be adjusted for purpose of such conversion to a price per ordinary share that
will result in the conversion of Series B Preferred Shares into such number of ordinary
shares that equal to the quotient of the Series B investment amount dividend by product of
ninety percent multiplied by the IPO price. “IPO Price” means the price per ordinary share
as set forth in the final prospectus and underwriting agreement for the IPO
As the effective conversion price exceeded the fair value of ordinary shares on commitment
day of April 26, 2007, there was no beneficial conversion feature upon issuance of Series B
Preferred Shares as of June 8, 2007, the issuance date. On November 7, 2007, the conversion
price was adjusted to $6.75 determined by the ninety percent of the IPO price of the
Company. Since adjusted conversion price exceeded the fair value of ordinary shares on
commitment day of April 26, 2007, there was no beneficial conversion feature upon the
triggering contingency events, which was the IPO, occurred on November 7, 2007.
Redemption
The Series B Preferred Shares shall be redeemed wholly of in part from time to time at the
election of holders of Series B Preferred Shares holding at least twenty five percent of all
then outstanding Series B Preferred Shares, on or after February 27, 2010. The redemption
price will be sufficient to yield a 12% annualized effective internal rate of return with
respect to the Series B Preferred Shares issue price, computed from the date of issuance of
the Series B preferred shares until the date that the redemption payment has been paid in
full, plus any declared but unpaid dividends thereon.
The Group accrued the 12% premium and the amortization of issuance cost over the redemption
period as deemed dividends with debits to the retained earnings of $2,152 for the year ended
December 31, 2007.
On November 7, 2007, all remaining outstanding 16,000,000 Series B preferred shares were
automatically converted into ordinary shares upon the IPO of the Company.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — continued
FOR THE YEARS ENDED DECEMBER 31, 2006, 2007 AND 2008
(In U.S. dollars in thousands, except share data)
15.
STOCK BASED PAYMENTS
Share transfer from CDH to Mr. Guo Man
Pursuant to the 2005 Agreement, in the event that the Group’s 2006 audited net income after
certain agreed adjustments (the “Adjusted Net Income”) defined in the 2005 agreement
exceeded the pre-determined 2006 threshold, CDH should have transferred to Guo Man, a
founder, chairman and the Chief Executive Officer of the Group, 2006 Reward Shares up to
5,000,000 ordinary shares converted from Series A preferred shares, based on a graded
vesting increasing schedule, for zero consideration. If the 2006 Reward Shares did not
reach the maximum number of shares which was 5,000,000, and if the average Adjusted Net
Income of 2006 and 2007 exceeded pre-determined 2007 threshold, then CDH would have
transferred to Guo Man, the applicable 2007 Reward Shares, based on a graded vesting
increasing schedule, for zero consideration, until the aggregate number of 2007 Reward
Shares and 2006 Reward Shares equaled the maximum number of reward shares, which was
5,000,000.
As of December 31, 2006, since the 2006 Adjusted Net Income did not meet the pre-determined
2006 threshold and management did not believe the average Adjusted Net Income of 2006 and
2007 would meet the pre-determined 2007 threshold, no share based compensation was
recognized in the statement of operations for the year ended December 31, 2006.
On September 27, 2007, the share transfer arrangement was amended to eliminate the
performance conditions set out above and CDH transferred 5,000,000 ordinary shares,
converted from Series A preferred shares, to Mr. Guo Man without any conditions in
recognition of his service to the Company. As a result of the transaction, a share-based
compensation of $17,500 was recognized in the statement of operation for the year ended
December 31, 2007 at the fair value of the ordinary shares as of the date of share transfer
determined based on the estimated preliminary valuation of the Company in connection with
the IPO as of the date.
2007 Stock incentive plan
On July 2, 2007, the Board of Directors adopted the 2007 share incentive plan (the “2007
Option Plan”) , which allows the Group to grant options to its employees and directors to
purchase up to 12,000,000 ordinary shares of the Company subject to vesting requirement.
On December 29, 2008, the Board of Directors amended 2007 Option Plan to allow the Group to
grant options to its employees and directors to purchase up to 17,000,000 ordinary shares.
No options shall be exercisable after ten years from the date of grant. On July 2, 2007,
The Group awarded options to the Company’s four senior executives (the “Senior Executive
Options”) and certain other officers and employees (the “ Employee Options”) to purchase an
aggregate of 4,600,000 and 3,125,000 ordinary shares of the Company, respectively, at an
exercise price of $2.00 per share. One twelfth of the Senior Executive Options will vest
each quarter until July 2, 2010.
On July 20, 2007, the Board of Directors decided to remove the vesting clause that the
vesting of the Employee Option is subject to management’s determination of whether the
grantee passes the periodic evaluation of the performance of each vesting period. After
this modification, the vesting of these Employee Option is only subject to services and one
twelfth of the Employee
Options will vest each quarter from July 20, 2010. Therefore, July 20, 2007 was treated as
the grant date of the Employee Options.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — continued
FOR THE YEARS ENDED DECEMBER 31, 2006, 2007 AND 2008
(In U.S. dollars in thousands, except share data)
15.
STOCK BASED PAYMENTS — continued
2007 Stock incentive plan — continued
On July 20, 2007, the Board of Directors also granted options to certain consultants (the
“Consultant Options”) to purchase an aggregate of 340,000 ordinary shares of the company at
an exercise price of $2.00 per share. The Consultant Options have the same vesting schedule
with the Employee Options.
On November 29, 2007, the Board of Directors granted options to the Company’s non-employee
directors, employees and consultants to purchase an aggregate of 2,330,000 ordinary shares
of the Company, at an exercise price of $8.50 per share. One twelfth of the Options will
vest each quarter until November 29, 2010.
On December 10, 2008, the Board of Directors voted to adjust the exercise price of the stock
options which were granted on November 29, 2007 from $8.50 per share to $2.98 per share.
The fair value of the options on December 10, 2008, the modification date, was $1.38 per
option calculated using black-scholes model based on the closing market price of the
ordinary shares of the Company on the date. The incremental compensation cost of the
re-priced options was $1,727, with totalling $626 recognized as compensation cost during
2008, and $1,101 to be recognized as expense over the remaining vesting period.
The following table summarizes information regarding the stock options granted/modified:
The weighted average exercise price per option as of December 31, 2008 has reflected the
impact of the exercise price adjustment made in the modification as set out in the preceding
paragraph.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — continued
FOR THE YEARS ENDED DECEMBER 31, 2006, 2007 AND 2008
(In U.S. dollars in thousands, except share data)
15.
STOCK BASED PAYMENTS — continued
2007 Stock incentive plan — continued
The following table summarizes information with respect to stock options outstanding as of
December 31, 2008:
Options outstanding
Options exercisable
Weighted
Weighted
Aggregate
Weighted
Aggregate
average
average
intrinsic
average
intrinsic
remaining
exercise
value as of
exercise
value as of
Number
contractual
price per
December 31,
Number
price per
December 31,
outstanding
life
option
2008
exercisable
option
2008
Ordinary shares
9,902,052
7.48
$
2.22
3,057
3,742,469
$
2.20
1,186
As of December 31, 2008, options to purchase 6,703,334 ordinary shares were available for
future grant.
The range of fair value of the options as of their respective grant/modification dates is as
follows:
The fair value of each option granted was estimated on the date of grant/modification using
the Black-Scholes option pricing model with the following assumptions used for grants during
the applicable period.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — continued
FOR THE YEARS ENDED DECEMBER 31, 2006, 2007 AND 2008
(In U.S. dollars in thousands, except share data)
15.
STOCK BASED PAYMENTS — continued
2007Stock incentive plan — continued
(1)
Volatility
Expected volatility is estimated based on daily stock price of comparable company for
a period with length commensurate to expected term since the Company lacks historic
records of its own stock prices. The companies selected for reference were Focus
Media Holding Limited, Lamar Advertising Company, Clear Media Limited, Dahe Media
Company Limited, Tom Group Limited.
(2)
Risk-free rate
Risk free rate is based on yield of US treasury bill as of valuation date with
maturity date same as the qualified IPO time.
(3)
Expected term
The expected term is estimated by averaging the expiration period and the vesting
term. This is determined in accordance with information on the Staff Accounting
Bulletin No. 107 of the Securities and Exchange Commission of the United States.
(4)
Dividend yield
The dividend yield was estimated by the Company based on its expected dividend policy
over the expected term of the options. The Company has no plan to pay any dividend
in the foreseeable future. Therefore, the Company considers the dividend yield to be
zero.
(5)
Exercise price
The exercise price of the options was determined by the Company’s board of directors.
(6)
Fair value of underlying ordinary shares
When estimating the fair value of the ordinary shares on the grant dates before the
IPO of the Company in November 2007, management had considered a number of factors,
including the result of a third-party appraisal and equity transactions of the
Company, while taking into account standard valuation methods and the achievement of
certain events. After the IPO, the closing market price of the ordinary shares of
the Company as of the grant/modification date was used as the fair value of the
ordinary shares on that date.
The Group recorded share-based compensation of nil, $19,105 and $4,963 for the year ended
December 31, 2006, 2007 and 2008, respectively.
There was $8,531 of total unrecognized compensation expense related to nonvested share
options granted as of December 31, 2008. The expense is expected to be recognized over a
weighted-average period of 1.61 years on a straight-line basis.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — continued
FOR THE YEARS ENDED DECEMBER 31, 2006, 2007 AND 2008
(In U.S. dollars in thousands, except share data)
16.
SHARE REPURCHASE PLAN
On December 29, 2008, AirMedia’s Board of Directors has authorized, but not obligated,
AirMedia to repurchase up to $50,000 worth of its own outstanding American Depositary Shares
(“ADSs”) throughout 2009. The repurchases will be made from time to time on the open market
at prevailing market prices, in negotiated transactions off the market, in block trades or
otherwise. AirMedia may execute its repurchase program pursuant to a plan in conformity
with Rule 10b5-1 under the Securities Exchange Act of 1934, as amended, which allows
AirMedia to repurchase its ADSs pursuant to the pre-determined terms under the plan at any
time, including during periods in which it may be in possession of material non-public
information. The timing and extent of any purchases will depend upon market conditions, the
trading price of ADSs and other factors, and be subject to the restrictions relating to
volume, price and timing in accordance with applicable laws. No shares were repurchased as
of December 31, 2008.
17.
MAINLAND CHINA CONTRIBUTION PLAN
Full time employees of the Group in the PRC participate in a government-mandated
multiemployer defined contribution plan pursuant to which certain pension benefits, medical
care, unemployment insurance, employee housing fund and other welfare benefits are provided
to employees. PRC labor regulations require the Group to accrue for these benefits based on
certain percentages of the employees’ salaries. The total contribution for such employee
benefits were $89, $392 and $1,270 for the year ended December 31, 2006, 2007 and 2008,
respectively.
18.
STATUTORY RESERVES
As stipulated by the relevant law and regulations in the PRC, the Group’s subsidiaries in
the PRC are required to maintain non-distributable statutory surplus reserve.
Appropriations to the statutory surplus reserve are required to be made at not less than 10%
of profit after taxes as reported in the subsidiaries’ statutory financial statements
prepared under PRC GAAP. Once appropriated, these amounts are not available for future
distribution to owners or shareholders. Once the general reserve is accumulated to 50% of
the subsidiaries’ registered capital, the subsidiaries can choose not to provide more
reserves. The statutory reserve may be applied against prior year losses, if any, and may
be used for general business expansion and production and increase in registered capital of
the subsidiaries. Amounts contributed to the statutory reserve were $1,680 and $3,811 for
the year ended December 31, 2007 and 2008, respectively. As of December 31, 2008, the
aggregate amounts of capital and reserves restricted which represented the amount of net
assets of the relevant subsidiaries in the Group not available for distribution was
$187,056.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — continued
FOR THE YEARS ENDED DECEMBER 31, 2006, 2007 AND 2008
(In U.S. dollars in thousands, except share data)
19.
COMMITMENTS
(a)
Rental leases
The Group has entered into operating lease agreements principally for its office
spaces in the PRC. These leases expire through 2010 and are renewable upon
negotiation. Rental expenses under operating leases for the years ended December 31,2006, 2007 and 2008 were $305, $846 and $1,368, respectively.
Future minimum rental lease payments under non-cancellable operating leases
agreements were as follows:
Year ending
2009
$
1,435
2010
618
$
2,053
(b)
Concession fees
The Group has entered into concession right agreements with airports and airlines.
The contract terms of such concession rights are usually three to five years. The
concession rights expire through 2015 and are renewable upon negotiation. Concession
fees charged into statement of operations for the year ended December 31, 2006, 2007
and 2008 was $6,758, $11,992 and $45,704, respectively.
Future minimum concession fee payments under non-cancellable concession right
agreements were as follows:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — continued
FOR THE YEARS ENDED DECEMBER 31, 2006, 2007 AND 2008
(In U.S. dollars in thousands, except share data)
20.
CONTINGENT LIABILITIES
(a)
Outdoor advertisement registration certificate
On May 22, 2006, the State Administration for Industry and Commerce, or the SAIC, a
governmental authority in the PRC, amended the Provisions on the Registration
Administration of Outdoor Advertisements, or the new outdoor advertisement
provisions. Pursuant to the amended outdoor advertisement provisions, advertisements
placed inside or outside of the “departure halls” of airports are treated as outdoor
advertisements and must be registered in accordance with the local SAIC by
“advertising distributors.” To ensure that the Group’s airport operations comply
with the applicable PRC laws and regulations, the Group is in the process of making
inquiries with the local SAICs in the cities in which the Group has operations or
intends to operate with respect to the application for an advertising registration
certificate. However, the local SAICs with whom the Group consulted have expressed
different views on whether the advertisements shown on the Group’s digital TV screens
should be regarded as outdoor advertisements and how to register those
advertisements. As of the date of this annual report, only Shanghai and Beijing SAIC
has accepted the Group’s application and issued the outdoor advertising registration
certifications. Some local SAICs need more time to consider the implementation of the
new outdoor advertising provisions. Other SAICs do not require the Group to
register. The Group intends to register with the relevant SAICs if the Group is
required to do so, But the Group cannot assure that the Group will obtain the
registration certificate in compliance with the new outdoor advertisement provisions,
or at all. If the requisite registration is not obtained, the relevant local SAICs
may require the Group to forfeit advertising income earned. They may also require
the Group to discontinue advertisements at airports where the requisite advertising
registration is not obtained, which may result in a breach of one or more of the
Group’s agreements with the Group’s advertising clients and materially and adversely
affect the Group’s business and results of operations. As of December 31, 2008, the
Group did not record a provision for this matter as management believes the
possibility of adverse outcome of the matter is unlikely and any liability it may
incur would not have a material adverse effect on its financial condition and its
results of operations.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — continued
FOR THE YEARS ENDED DECEMBER 31, 2006, 2007 AND 2008
(In U.S. dollars in thousands, except share data)
20.
CONTINGENT LIABILITIES — continued
(b)
Approval for non-advertising content
A majority of the digital frames and digital TV screens in the Group’s network
include programs that consist of both advertising content and non-advertising
content. On December 6, 2007, the State Administration of Radio, Film or Television,
or the SARFT, a governmental authority in the PRC, issued the Circular regarding
Strengthening the Management of Public Audio-Video in Automobiles, Buildings and
Other Public Areas, or the SARFT Circular. According to the SARFT Circular,
displaying audio-video programs such as television news, films and television shows,
sports, technology and entertainment through public audio-video systems located in
automobiles, buildings, airports, bus or train stations, shops, banks and hospitals
and other outdoor public systems must be approved by the SARFT. The Group intends to
obtain the requisite approval of the SARFT for the Group’s non-advertising content,
but the Group cannot assure that the Group will obtain such approval in compliance
with this new SARFT Circular, or at all. If the requisite approval is not obtained,
the Group will be required to eliminate non-advertising content from the programs
included in the Group’s digital frames and digital TV screens and advertisers may
find the Group’s network less attractive and be unwilling to purchase advertising
time slots on the Group’s network. As of December 31, 2008, the Group did not record
a provision for this matter as management believes the possibility of adverse outcome
of the matter is unlikely and any liability it may incur would not have a material
adverse effect on its financial condition and its results of operations.
(c)
Contingent consideration in connection with a business acquisition
The Group is contractually obligated to pay additional consideration to the selling
shareholders contingently based on the future earnings of the acquired business as
set out in the Note 4.
21.
RELATED PARTY TRANSACTIONS
Details of amounts due to related parties as of December 31, 2007 and 2008 were as follows:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — continued
FOR THE YEARS ENDED DECEMBER 31, 2006, 2007 AND 2008
(In U.S. dollars in thousands, except share data)
22.
SUBSEQEUENT EVENT
In accordance with the share repurchase plan as set out in
Note 16, as of April 28, 2009,
the Company had repurchased 1,646,502 ADSs, each representing two ordinary shares, of the
Company at a total cost of $7,387. The average executed price was $4.4864 per ADS. The
Company plans to continue to repurchase shares from time to time in 2009.
ADDITIONAL INFORMATION-FINANCIAL STATEMENT SCHEDULE I
CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY
BALANCE SHEET
(In U.S. dollars in thousands, except share related data)
Ordinary Shares ($0.001 par value; 162,400,000 shares
authorized in 2007 and 2008; 133,425,925 shares and
134,425,925 shares issued and outstanding
in 2007 and 2008 respectively)
ADDITIONAL INFORMATION-FINANCIAL STATEMENT SCHEDULE I
CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY
STATEMENTS OF OPERATIONS
(In U.S. dollars in thousands)
ADDITIONAL INFORMATION-FINANCIAL STATEMENT SCHEDULE I
CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY
STATEMENTS OF SHAREHOLDERS’ EQUITY AND COMPREHENSIVE INCOME
(In U.S. dollars in thousands, except share related data)
ADDITIONAL INFORMATION-FINANCIAL STATEMENT SCHEDULE I
CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY
STATEMENTS OF CASH FLOWS
(In U.S. dollars in thousands)
NOTES TO ADDITIONAL INFORMATION-FINANCIAL STATEMENT SCHEDULE I
CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY
(In U.S. dollars in thousands)
Notes:
1.
BASIS FOR PREPARATION
The Condensed Financial Information of the parent company, AirMedia Group Inc., only has
been prepared using the same accounting policies as set out in the Group’s consolidated
financial statements except that the parent company has used equity method to account for
its investment in its subsidiaries, AM Technology, Shenzhen AM, Xi’an AM, Royal HK and
Glorious Star, and its VIEs, Shengshi Lianhe, AM Advertising AirMedia UC and AM Yuehang, and
VIE’s subsidiaries, AirTV United, AM Film, Flying Dragon and AM Wenzhou.
2.
INVESTMENTS IN SUBSIDIARIES AND VARIABLE INTEREST ENTITIES
The Company and its subsidiaries and its variable interest entities are included in the
consolidated financial statements where the inter-company balances and transactions are
eliminated upon consolidation. For the purpose of the Company’s stand-alone financial
statements, its investments in subsidiaries and variable interest entities are reported
using the equity method of accounting. The Company’s share of income and losses from its
subsidiaries and variable interest entities is reported as earnings from subsidiaries and
variable interest entities in the accompanying condensed financial information of parent
company.
3.
INCOME TAXES
The Company is a tax exempted company incorporated in the Cayman Islands.
F-52
Dates Referenced Herein and Documents Incorporated by Reference
,” “AirMedia” and our business logo. We have registered our domain name www.AirMedia.net.cn with
the Internet Corporation for Assigned Names and Numbers. We do not hold any patents or copyrights
and cannot be certain that our efforts
