(Name, address, including zip code, and telephone number,
including area code, of agent for service)
Copies to:
David T. Zhang
John A. Otoshi
Latham & Watkins LLP
41st Floor, One Exchange Square
8 Connaught Place, Central
Hong Kong
(852) 2522-7886
William F. Barron
Davis Polk & Wardwell
18th Floor, The Hong Kong Club Building
3A Chater Road, Central
Hong Kong
(852) 2533-3300
Approximate date of
commencement of proposed sale to the public: As soon as
practicable after the effective date of this registration
statement
If any of the
securities being registered on this form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, check the following box.
o
If this Form is filed
to register additional securities for an offering pursuant to
Rule 462(b) under the Securities Act, check the following
box and list the Securities Act registration statement number of
the earlier effective registration statement for the same
offering.
o
If this Form is a
post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier
effective registration statement for the same offering.
o
If this Form is a
post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the
Securities Act registration statement number of the earliest
effective registration statement for the same offering.
o
CALCULATION OF REGISTRATION FEE
Title of each class of
Proposed maximum aggregate
Amount of
securities to be registered(2)(3)
offering price(1)
registration fee
Common shares, par value $0.001 per common share
$371,538,462
$11,407
(1)
Estimated solely for the purpose of determining the amount of
registration fee in accordance with Rule 457(o) under the
Securities Act of 1933.
(2)
Includes (i) common shares initially offered and sold
outside the United States that may be resold from time to time
in the United States either as part of their distribution or
within 40 days after the later of the effective date of
this registration statement and the date the shares are first
bona fide offered to the public and (ii) common shares that
may be purchased by the underwriters pursuant to an
over-allotment option. These common shares are not being
registered for the purposes of sales outside of the United
States.
(3)
American depositary shares issuable upon deposit of the common
shares registered hereby have been registered under a separate
registration statement on
Form F-6
(Registration
No. 333- ).
Each American depositary share represents two common shares.
The
Registrant hereby amends this registration statement on such
date or dates as may be necessary to delay its effective date
until the Registrant shall file a further amendment which
specifically states that this registration statement shall
thereafter become effective in accordance with Section 8(a)
of the Securities Act of 1933, as amended, or until the
registration statement shall become effective on such date as
the Securities and Exchange Commission, acting pursuant to such
Section 8(a), may determine.
The information in
this prospectus is not complete and may be changed. Neither we
nor the selling shareholders may sell these securities until the
registration statement filed with the Securities and Exchange
Commission is effective. This prospectus is not an offer to sell
these securities, and we are not soliciting an offer to buy
these securities in any state where the offer or sale is not
permitted.
This is an initial public offering of American depositary
shares, or ADSs, by Xinhua Finance Media Limited, or Xinhua
Finance Media. Xinhua Finance Media is offering
17,307,923 ADSs, and the selling shareholders identified in
this prospectus are offering an additional 5,769,000 ADSs.
Each ADS represents two common shares. The estimated
initial public offering price is between $12.00 and
$14.00 per ADS.
Prior to this offering, there has been no public market for the
ADSs. Our common shares have not been listed on any exchange. We
have applied to have the ADSs listed on the Nasdaq Global Market
under the symbol “XFML”.
Per ADS
Total
Initial public offering price
$
$
Underwriting discounts and commissions
$
$
Proceeds to Xinhua Finance Media, before expenses
$
$
Proceeds to the selling shareholders, before expenses
$
$
The underwriters have an option for a period of 30 days
from the date of this prospectus to purchase up to an additional
3,230,538 ADSs from Xinhua Finance Media and up to an
additional 231,000 ADSs from a selling shareholder at the
initial public price less the underwriting discounts and
commissions. We will not receive any proceeds from the sale of
ADSs by the selling shareholders.
Investing in our ADSs and common shares involves a high
degree of risk. See “Risk factors” beginning on page
15.
Neither the Securities and Exchange Commission nor any state
securities commission has approved or disapproved of these
securities or passed on the adequacy or accuracy of this
prospectus. Any representation to the contrary is a criminal
offense.
You should rely only on the information contained in this
prospectus. Neither we nor the underwriters have authorized
anyone, including the selling shareholders, to provide you with
information that is different from that contained in this
prospectus. This prospectus may only be used where it is legal
to offer and sell these securities. The information in this
prospectus is only accurate as of the date of this prospectus.
You should read the following summary together with the
entire prospectus, including the more detailed information
regarding us, the ADSs being sold in this offering, and our
financial statements and related notes appearing elsewhere in
this prospectus.
Overview
We are a leading diversified media company in China. We have
assembled and built a group of media assets and strategic
partnerships that we believe will enable us to achieve best in
class media and advertising services across various sectors of
the media business in China.
We have developed a unique, integrated platform that includes
the creation and production of high-quality content that is
distributed across nationwide television and print media outlets
and radio in Beijing and Shanghai, and where advertising sales
are supported by our own advertising agency. These outlets reach
an estimated 210 million potential television viewers, a
potential listening audience of 33 million people, and the
readers of leading magazines and newspapers. In addition, our
market research business enables our advertisers to analyze,
understand and better reach their targeted consumers.
Our content currently focuses on business and financial news as
well as wealth management and affluent lifestyle programming. We
focus on this programming because we believe it attracts the
highest income audience in China. This audience is highly sought
after by our target advertisers.
Our business operates across five groups:
•
Media production, which refers to our in-house production
studios that create and produce a diverse array of high-quality
programs, including business, entertainment, educational and
animation shows;
•
Broadcasting, which refers to the distribution of our
programming through Inner Mongolia Satellite Television; our
production and syndication of the Fortune China series of
financial programs, including Fortune Morning 7 a.m., a
popular financial news programs in China; and our production and
distribution of bilingual content for China Radio
International’s EasyFM stations in Beijing and Shanghai;
•
Print, which refers to our exclusive rights to sell advertising
for and provide management and information consulting services
to, Money Journal magazine and the Economic
Observer newspaper;
•
Advertising, which refers to our advertising agency that creates
and places advertising for television, print media and campus
billboards; and
•
Research, which refers to our market research group that
provides research services on products, advertisements and
markets.
We generate revenue principally by selling advertising on
broadcast and print distribution platforms; selling advertising
space on newspaper and magazine pages; selling produced
television programs; providing advertisement production
services; and providing research services.
We believe we have the following competitive strengths:
•
We produce high-quality content using a commercial,
ratings-driven approach, targeted at the affluent segment of the
Chinese population.
•
Our distribution channels are based on agreements with
distributors, most of which are long-term in nature and give us
the exclusive rights to sell advertising. Through this, we
provide advertisers with an integrated platform to reach their
target audience.
•
We believe our services allow advertisers to more
cost-effectively reach desirable consumers across multiple media
platforms.
•
We gain competitive advantage from sharing content among our
subsidiaries, including affiliated entities, and with our parent
company.
•
Our management team has a mix of Chinese cultural experience and
international media operational skills, and brings international
standards to our content offerings.
•
Our management has significant experience in identifying,
executing and integrating acquisitions in China.
Our strategies
We intend to become the leading diversified media company
targeting the rapidly growing affluent segment of the Chinese
population. We intend to achieve this objective by implementing
the following:
•
We plan to expand our distribution assets and strategic
partnerships in both traditional and new media.
•
We are committed to producing high-quality programming based on
our commercial, ratings-driven approach, targeting the affluent
segment of the Chinese population.
•
We plan to leverage our integrated platform to increase
operational and cross-selling synergies.
•
We plan to build our brands for both consumers and advertisers.
•
We plan to pursue strategic acquisitions and relationships that
fit with our current core competencies and brands.
Our challenges
Our ability to realize our business objectives and execute our
strategies is subject to risks and uncertainties, such as the
following:
•
We rely on key contracts and business relationships, and if our
business partners or contracting counterparties fail to perform
or terminate their contractual arrangements with us or cease
operations, it will have an adverse effect on our business.
•
We are not a party to some of the key contracts on which we
rely. Instead, we have contracts with companies, which in turn
have these key contracts with third parties. If the
third parties fail to perform or terminate these contracts or
cease operations, we will not be able to enforce our rights in
court.
•
We may not be able to achieve the benefits we expect from recent
and future acquisitions, and recent and future acquisitions may
have an adverse effect on our ability to manage our business.
Please see “Risk factors” and other information
included in this prospectus for a discussion of these and other
risks.
Corporate structure
We were incorporated on November 7, 2005 in the Cayman
Islands. We acquired several companies from our parent, Xinhua
Finance Limited, and continue to make acquisitions. To date, we
have acquired eight businesses that form our five operating
groups. For a detailed description of our acquisitions, see
“Management’s discussion and analysis of financial
condition and results of operations— Acquisitions”.
Upon completion of this offering, we will be 36.7% owned by our
parent, Xinhua Finance Limited, 8.0% owned by Patriarch Partners
Media Holdings, LLC, and 5.8% owned by Fredy Bush, our Chief
Executive Officer and the Chairman of our Board. We have several
other significant shareholders, as described in “Principal
and selling shareholders”. PRC laws and regulations
currently impose different levels of restrictions or
prohibitions on investment of private capital, including foreign
capital, in the media industry, including television, radio,
newspaper, magazine, advertising and media content production,
and the market research industry. Our subsidiaries in China are
limited in their abilities to engage in operations in the media,
advertising and market research industries. Accordingly, we
operate our businesses in China primarily through contractual
arrangements with our affiliated entities and the contractual
arrangements we and our affiliated entities have with third
parties.
We have entered into contractual arrangements with these
affiliated entities and their shareholders, all PRC citizens,
which enable us to:
•
exercise effective control over these affiliated entities and
their respective subsidiaries;
•
in the case of Beijing Century Advertising Co., Ltd., to receive
a substantial portion of the economic benefits from the
affiliated entity and its subsidiaries in consideration for the
services provided by our subsidiary, New China Media (Shanghai)
Co., Ltd.; and
•
have an exclusive option to purchase all or part of the equity
interests in the various affiliated entities and certain of
their subsidiaries in each case when and to the extent permitted
by PRC law.
Corporate information
Our principal executive offices are located at Rooms 3905-3909,
Tower 1, Grand Gateway, 1 Hongqiao Lu, Shanghai 200030,
People’s Republic of China. Our telephone number at this
address is (86-21) 6113-5900 and our fax number is (86-21)
6448-4955. Our registered office in the Cayman Islands is at
Cricket Square, Hutchins Drive, PO Box 2681, Grand Cayman
KYI-1111, Cayman
Islands.
The information contained on our or our strategic partners’
websites does not form part of this prospectus. Our agent for
service of process in the United States is Law Debenture
Corporate Services Inc., located at 400 Madison
Avenue, 4th Floor, New York, New York10017.
Conventions that apply to this prospectus
Unless the context otherwise requires, in this prospectus,
“we”, “us”, “our company”,
“our”, “XFM” and “Xinhua Finance
Media” refer to Xinhua Finance Media Limited and its
subsidiaries, including direct subsidiaries and affiliated
entities, except where the context requires otherwise, such as
in “Regulation”, where these terms refer to Xinhua
Finance Media Limited and its direct subsidiaries, but not its
affiliated entities; “production of” or “to
produce” drama series refer to “co-production with
third parties who hold drama series production licenses” or
“to cooperate with third parties who hold drama series
production license to produce”; “shares” or
“common shares” refers to our common shares;
“ADSs” refers to our American depositary shares, each
of which represents two common shares; “China” or
“PRC” refers to the People’s Republic of China,
excluding Taiwan, Hong Kong and Macau; “RMB” or
“Renminbi” refers to the legal currency of China, and
“$”, “US$” or “U.S. dollars,”
refers to the legal currency of the United States. Unless
otherwise noted, all translations from Renminbi amounts into
U.S. dollars were made at the noon buying rate in New York, New
York for cable transfers in Renminbi per U.S. dollar as
certified for customs purposes by the Federal Reserve Bank of
New York, or the noon buying rate, as of December 29, 2006,
which was RMB 7.8041 to $1.00. We make no representation that
the Renminbi amounts in this prospectus could have been or could
be converted into U.S. dollars at any particular rate or at all.
On February 20, 2007, the noon buying rate was
RMB 7.7466 to $1.00. “Subsidiaries” may refer to
both our direct subsidiaries and our affiliated entities, or may
refer only to direct subsidiaries, as the context requires. Some
names of companies given in this prospectus are translated or
transliterated from Chinese if the original legal name is only
in Chinese. The circulation data for Money Journal are
compiled by BPA Worldwide while the circulation data for
Beijing Review and the Economic Observer are
derived from the internal records of each.
Each ADS represents two common shares, par value
$0.001 per share. The ADSs are evidenced by American
depositary receipts issued by the depositary.
Reserved ADSs
At our request, the underwriters have reserved for sale, at the
initial public offering price, up to an aggregate of
1,153,846 ADSs to certain directors, officers, employees
and associates of our company through a directed share program.
These reserved ADSs account for an aggregate of approximately 5%
of the ADSs offered in the offering.
ADSs outstanding immediately after the offering
23,076,923 ADSs
Common shares outstanding immediately after the offering
136,648,481 common shares
Use of proceeds
We intend to use the net proceeds from this offering as follows:
• approximately $50 million to repay certain
outstanding indebtedness to our parent and Xinhua Financial
Network Limited. The indebtedness is due on demand and the
interest rates are not specified. The indebtedness was to pay
for the costs related to our acquisitions from our parent of
equity interests our parent had held before March 31, 2006
in Xinhua Finance Advertising Limited, and the contractual
control our parent had held before March 31, 2006 in
Beijing Century Media Culture Co., Ltd., as well as the advances
from our parent and Xinhua Financial Network enabling us to
acquire 19.0% equity interests in Upper Step Holdings Limited
and Accord Group Investments Limited;
• an undetermined amount for strategic acquisitions of
complementary businesses. At this time we have not entered into
advanced discussions or negotiations regarding potential
acquisitions except for the acquisition of the remaining equity
of Beijing Perspective; and
• the balance to fund working capital and for other
general corporate purposes.
The foregoing represents our current intentions to use and
allocate the net proceeds of this offering based upon our
present plans and business conditions. Our management, however,
will have significant flexibility and discretion to apply the
net proceeds of this offering differently than as described in
this prospectus.
We will not receive any of the proceeds from the sale of ADSs by
the selling shareholders.
Depositary
The Bank of New York
Risk factors
See “Risk factors” and other information included in
this prospectus for a discussion of factors you should carefully
consider before deciding to invest in the ADSs.
Proposed Nasdaq Global Market
symbol
XFML
The number of ADSs and common shares outstanding immediately
after this offering excludes 10,698,141 class A common
shares reserved for future issuance under our individual option
agreements entered into in 2006 and 1,029,461 class A
common shares for further share grants or individual option
agreements and includes the conversion of 15,585,254 convertible
preferred shares into 16,134,320 class A common shares and
the conversion of the convertible loan with Patriarch Partners
into an estimated 3,832,543 class A common shares. There
are also class A common shares available for future
issuance under our 2007 share option plan. Unless otherwise
indicated, all information in this prospectus:
•
assumes the issuance and sale by the company and sale by the
selling shareholders of an aggregate of 23,076,923 ADSs in
this offering at an initial public offering price of
$13.00 per ADS, the midpoint of the estimated range of the
initial public offering price; and
•
assumes no exercise by the underwriters of their option to
purchase up to 3,461,538 ADSs in this offering to cover
over-allotments.
The following summary consolidated statement of operations data
for EconWorld Media Limited (our predecessor), or EconWorld
Media, for the year ended December 31, 2004 and the period
ended May 25, 2005, and for our company for the period from
May 26, 2005, the date our parent acquired 60% of EconWorld
Media, to December 31, 2005 and the year ended
December 31, 2006 and the summary consolidated balance
sheet data for our company as of December 31, 2006 have
been derived from the audited financial statements of EconWorld
Media and our company included elsewhere in this prospectus. You
should read the summary consolidated financial data in
conjunction with those financial statements and the accompanying
notes and “Management’s discussion and analysis of
financial condition and results of operations”. The summary
consolidated statement of operations data for EconWorld Media
for the year ended December 31, 2003 have been derived from
the unaudited financial statements of EconWorld Media that are
not included in this prospectus. Our consolidated financial
statements are prepared and presented in accordance with United
States generally accepted accounting principles, or U.S. GAAP.
Our historical results do not necessarily indicate our results
expected for any future periods.
Period from
Period from
Year ended
Year ended
January 1,
May 26,
December 31,
December
2005 to May
2005(1) to
Year ended
2003
31, 2004
25, 2005
December 31,
December 31,
(in thousands, except per share data)
(Predecessor)
(Predecessor)
(Predecessor)
2005
2006
Net revenues:
Advertising services
$
23
$
301
$
53
$
580
$
44,862
Content production
—
—
—
3,641
6,545
Advertising sales
157
48
240
387
6,691
Publishing services
9
52
55
787
868
Total net revenues
189
401
348
5,395
58,966
Cost of revenues:
Advertising services
56
248
66
154
27,654
Content production
—
—
—
651
2,829
Advertising sales
11
35
42
85
1,912
Publishing services
51
325
347
534
1,386
Total cost of revenues
118
608
455
1,424
33,781
Operating expenses:
Selling and distribution
18
418
322
293
5,277
General and administrative(2)
692
608
456
1,248
12,840
Total operating expenses
710
1,026
778
1,541
18,117
Income (loss) from operations
(639
)
(1,233
)
(885
)
2,430
7,068
Other income (expense), net
26
(10
)
(3
)
(22
)
(898
)
Provision for income taxes (benefit)
1
5
(4
)
929
1,070
Minority interest
—
—
—
129
1,704
Equity in loss of an investment
—
—
—
—
52
Net income (loss)
(614
)
(1,248
)
(884
)
1,350
3,344
Deemed dividend on redeemable convertible preferred shares
Dividends declared to redeemable convertible preferred shares
—
—
—
—
(5,335
)
Net income (loss) attributable to holders of common shares
$
(614
)
$
(1,248
)
$
(884
)
$
1,350
$
(4,148
)
Net income (loss) per share:
Basic — Class A common share
$
—
$
—
$
—
$
—
$
(0.08
)
Basic — Class B common share
$
(8.53
)
$
(13.13
)
$
(7.85
)
$
0.03
$
(0.08
)
Diluted — Class A common share
$
—
$
—
$
—
$
—
$
(0.08
)
Diluted — Class B common share
$
(8.53
)
$
(13.13
)
$
(7.85
)
$
0.03
$
(0.08
)
Shares used in computation:
Basic — Class A common share
—
—
—
—
5,084
Basic — Class B common share
72
95
113
42,613
44,693
Diluted — Class A common share
—
—
—
—
5,084
Diluted — Class B common share
72
95
113
42,613
44,693
Pro forma income per share on an as converted basis(3):
Basic — Class A common share
—
—
—
—
$
0.076
Basic — Class B common share
—
—
—
—
$
0.076
Diluted — Class A common share
—
—
—
—
$
0.073
Diluted — Class B common share
—
—
—
—
$
0.076
Shares used in calculating pro forma per share amount on an as
converted basis:
Basic — Class A common share
—
—
—
—
21,225,762
Basic — Class B common share
—
—
—
—
44,693,266
Diluted — Class A common share
—
—
—
—
68,469,817
Diluted — Class B common share
—
—
—
—
44,693,266
(1)
Date our parent acquired 60% of EconWorld Media, our predecessor.
(2)
Includes share-based compensation expense of $2.4 million
for the year ended December 31, 2006.
(3)
Pro forma basic and diluted net income per common share is
computed by dividing net income attributable to holders of
common shares by the weighted average number of common shares
outstanding for the period plus the weighted average number of
common shares outstanding resulting from the assumed conversion
upon the closing of the planned initial public offering of the
outstanding redeemable convertible preferred shares and
convertible loan.
The following table presents a summary of the balance sheet data
as of December 31, 2006:
•
on an actual basis; and
•
on a pro forma basis to give effect to (1) the automatic
conversion of all of our outstanding convertible preferred
shares into 16,134,320 class A common shares immediately
upon the completion of this offering, and (2) the
conversion of our convertible loan into 3,832,543 class A
common shares.
•
on an as adjusted basis to give effect to (1) the automatic
conversion of all of our outstanding convertible preferred
shares into 16,134,320 class A common shares immediately
upon the completion of this offering, (2) the conversion of
our convertible loan into an estimated 3,832,543 class A
common shares and (3) the issuance and sale of
34,615,846 common shares in the form of ADSs by us in this
offering, assuming an initial public offering price of
$13.00 per ADS, the midpoint of the estimated range of the
initial public offering price, after deducting estimated
underwriting discounts and commissions and estimated aggregate
offering expenses payable by us and assuming no exercise of the
underwriters’
Introduction to unaudited pro forma condensed consolidated
financial information
The following unaudited pro forma condensed consolidated
financial information is derived from the historical financial
statements of our company, EconWorld Media Limited, or EconWorld
Media (our predecessor), Beijing Century Media Culture Co.,
Ltd., or Beijing Century Media, Xinhua Finance Advertising
Limited (formerly known as Ming Shing International Limited, or
Ming Shing), Accord Group Investments Limited, or Accord Group,
Beijing Perspective Orient Movie and Television Intermediary
Co., Ltd., or Beijing Perspective, and Shanghai Hyperlink
Research Co., Ltd., or Hyperlink, appearing elsewhere in this
prospectus, after giving effect to the pro forma adjustments
described in the notes thereto.
The preparation of the unaudited pro forma condensed
consolidated statements of operations appearing below is based
on financial statements prepared in accordance with U.S. GAAP.
These principles require the use of estimates that affect the
reported amounts of assets, liabilities, revenues and expenses.
Actual results could differ from those estimates. The objective
of the unaudited pro forma condensed consolidated statement of
operations is to provide information on the impact of the
acquisitions of minority interests in EconWorld Media in June
and December 2006, Ming Shing, which is now Xinhua Finance
Advertising, in January 2006 by our parent and the acquisition
of Accord Group in September 2006, Beijing Perspective in July
2006, Hyperlink in August and September 2006 and Upper Step in
September and November 2006 by our company.
The unaudited pro forma condensed consolidated statements of
operations for the year ended December 31, 2006 present
adjustments as if the acquisitions had been consummated on
January 1, 2006.
The unaudited pro forma condensed consolidated statements of
operations should be read in conjunction with historical
consolidated financial statements, including the notes thereto,
“Management’s discussion and analysis of financial
condition and results of operations”, and other financial
information included elsewhere in this prospectus.
While the unaudited pro forma condensed consolidated financial
information is helpful in showing the financial characteristics
of the consolidated companies, it is not intended to show how
the consolidated companies would have actually performed if the
events described above had in fact occurred on the dates assumed
or to project the results of operations or financial position
for any future date or period. We have included in the unaudited
pro forma condensed consolidated financial statements all the
adjustments, consisting of normal recurring adjustments,
necessary for a fair presentation of the operating results in
the historical periods.
Given the information regarding the acquisitions, the actual
consolidated results of operations may differ significantly from
the pro forma amounts reflected below.
Unaudited pro forma condensed consolidated statement of
operations
Net (loss ) income attributable to holders of common shares
$
(4,148,010
)
$
(274,799
)
$
(751,718
)
$
48,657
$
(115,053
)
$
(9,730,444
)
Net income (loss) per share:
Basic — Class A common share
$
(0.083
)
$
(0.195
)
Basic — Class B common share
$
(0.083
)
$
(0.195
)
Diluted — Class A common share
$
(0.083
)
$
(0.195
)
Diluted — Class B common share
$
(0.083
)
$
(0.195
)
Shares used in computation:
Basic — Class A common share
5,084,366
5,084,366
Basic — Class B common share
44,693,266
44,693,266
Diluted — Class A common share
5,084,366
5,084,366
Diluted — Class B common share
44,693,266
44,693,266
Pro forma net income (loss) per share on an as converted basis:
Basic — Class A common shares
0.076
(0.009
)
Basic — Class B common shares
0.076
(0.009
)
Diluted — Class A common shares
0.073
(0.009
)
Diluted — Class B common shares
0.076
(0.009
)
Share used in calculating pro forma per share amounts on an as
converted basis:
Basic — Class A common share
21,225,762
21,225,762
Basic — Class B common share
44,693,266
44,693,266
Diluted — Class A common share
68,469,817
21,225,762
Diluted — Class B common share
44,693,266
44,693,266
(1)
The operating results of Xinhua Finance Advertising Limited for
the period from January 1, 2006 to January 11, 2006
are not material and are not included in the above pro forma.
(2)
Based on the purchase price allocation, intangible assets of
$180,593,431 were recognized as if the acquisitions of the
following companies were completed on January 1, 2006.
Adjustment of $6,390,779 reflects additional amortization of
intangible assets as if they were acquired on January 1,2006. Tax effects of amortization charges of $1,541,459 were
adjusted based on respective statutory tax rates.
The intangible asset of Economic Observer Advertising
represents the exclusive advertising rights, which will be
amortized over 50 years.
(g)
Upper Step
The intangible asset of Upper Step represents television
station contracts and the net present value of the payments
Upper Step is required to make under the license contract, which
will be amortized over 17 to 27 years.
(3)
Adjustment to the share of results by minority interest as if
the acquisitions of the minority interests in EconWorld Media,
Upper Step, Hyperlink, Accord Group, Beijing Perspective, and
Economic Observer Advertising were completed on January 1,2006.
An investment in our ADSs involves significant risks. You
should carefully consider the risks described below before you
decide to buy our ADSs. If any of the following risks actually
occurs, our business, financial condition and results of
operations could be materially harmed, the trading price of our
ADSs could decline and you could lose all or part of your
investment.
Risks related to our business
Our limited operating history and successive acquisitions
make evaluating our business and prospects difficult.
We were incorporated in November 2005. Since our incorporation,
we have acquired various operating entities with distinct
businesses. Some of the businesses we acquired also have short
operating histories. Our successive acquisitions and rapid
expansion make comparisons with historical data difficult.
Accordingly, you should consider our future prospects in light
of the risks and uncertainties experienced by early stage
companies in evolving and heavily regulated industries such as
the media industry in China. Some of these risks and
uncertainties relate to our ability to:
•
successfully integrate the recently acquired companies;
•
navigate the regulatory landscape and respond to changes in the
regulatory environment;
•
offer new and innovative products and services to attract and
retain viewers, listeners and readers;
•
attract additional advertisers and increase advertising fees;
•
increase awareness of our branded media platforms;
•
respond to competitive market conditions;
•
manage risks associated with intellectual property rights;
•
maintain effective control of our costs and expenses;
•
raise sufficient capital to sustain and expand our business; and
•
attract, retain and motivate qualified personnel.
If we are unsuccessful in addressing any of these risks and
uncertainties, or any other risks listed below, our business may
be materially and adversely affected.
We rely on key contracts and business relationships, and
if our business partners or contracting counterparties fail to
perform, or terminate, any of their contractual arrangements
with us for any reason or cease operations, our business could
be disrupted, our reputation may be harmed and we may have to
resort to litigation to enforce our rights, which may be
time-consuming and expensive.
Our business relies on key contracts and business relationships.
Some of these key contracts have long terms, while others have
short terms ranging from one year to a few years and will
need renewal. The longer term contracts, which all expire in
2014 or later, or have no expiration, include, but are not
limited to, the following:
•
agreements to provide consulting and advisory services to, offer
content to, and be the exclusive external advertising agent for,
Shanghai Camera Media Investment Co., Ltd., or Shanghai Camera,
which has the exclusive rights to sell advertising for and
provides most of the content of Inner Mongolia Satellite
Television;
•
agreements with Economic Observer Press Office that allow us to
have the exclusive rights to sell advertising for the
Economic Observer and to provide management and
information consulting services;
•
agreement with the exclusive advertising agent for China Radio
International that allow us to have the exclusive rights to sell
advertising for and the right to provide content to its EasyFM
stations in Beijing and Shanghai. We intend to only provide
non-news content pursuant to this agreement; and
•
agreement with Money Journal Press Office that allows us to have
the exclusive rights to sell advertising for, and to provide
management and information consulting services to, Money
Journal.
The shorter term contracts, which expire in 2009 or earlier,
include, but are not limited to, the following:
•
agreement with Hunan Television Station that allows us to
broadcast Fortune Morning 7 a.m. on Hunan Satellite
Television;
•
agreement with Dow Jones that allows Money Journal to
publish Dow Jones content; and
•
agreement with Beijing Television Station’s advertising
agents that allow us to act as advertising agent for certain
programs.
If any of our business partners or contracting counterparties
fails to perform or terminates its agreement with us for any
reason (including, for example, a breach by them or the lack of
proper regulatory approvals), or if our business partners or
contracting counterparties with which we have short-term
agreements refuse to extend or renew the agreement or enter into
a similar agreement, our ability to carry on operations in that
sector, and our ability to cross-sell advertising services among
different platforms, may be impaired. Depending on the
circumstances, the consequences could be far-reaching and
extremely harmful to our reputation, existing business
relationships and future growth potential. In addition, we
depend on the continued operation of our long-term business
partners and contracting counterparties and on maintaining good
relations with them. If one of our long-term partners or
counterparties is unable (including as a result of bankruptcy or
liquidation proceeding) or unwilling to continue operating in
the line of business that is the subject of our contract, we may
not be able to obtain similar relationships and agreements on
terms acceptable to us or at all. The failure to perform or
termination of any of the agreements by a partner or a
counterparty, the discontinuation of operations of a partner or
counterparty, the loss of good relations with a partner or
counterparty or our inability to obtain similar relationships or
agreements, may have an adverse effect on our operating results
and financial condition. In addition, we have not renewed our
contract with Hunan Television Station for the broadcast of
Fortune Morning 7 a.m. on its satellite channel. Although
both parties have continued to
perform under the contract, we may not be able to enforce this
contract if Hunan Television Station were to refuse to perform
under the terms of the contract.
In the opinion of our PRC legal counsel, Commerce & Finance
Law Offices, these contractual arrangements (except for the
agreement with Dow Jones and one of the agreements with Economic
Observer Press Office, which are not under PRC law and to which
they express no opinion and the agreement with Hunan Television
Station, which has not been renewed) are valid, binding and
enforceable, and will not result in any violation of PRC laws or
regulations currently in effect. If any of these business
partners or contracting counterparties fails to perform its
obligations, we may not be able to enforce the relevant
agreements if the agreements are ruled in violation of the PRC
laws as mentioned in “Risk factors— Risks related to
the regulation of our business and to our structure—If the
PRC government finds that the agreements that establish the
structure for operating our China businesses do not comply with
PRC governmental restrictions on foreign investment in the media
and market research industries, or if these regulations or the
interpretation of existing regulations change in the future, we
could be subject to severe penalties or be forced to relinquish
our interests in those operations”, even if the agreements
are otherwise legal and valid.
We will seek to enforce our rights to the maximum extent allowed
by law. However, dispute resolution through litigation and
arbitration in China could be time-consuming and expensive.
Since the results of bringing actions in court and enforcing
arbitration awards in China are not predictable, we may not
prevail in court or at arbitration hearings even if we believe
we should win based on the merits of the case and may not be
able to collect arbitration awards even if there is no defect on
the arbitration rulings.
In addition, we may need to form new strategic partnerships or
joint ventures to access appropriate assets and industry
know-how. If we fail to identify, execute and integrate such
future partnerships or joint ventures, it may have an adverse
effect on our business and operating results.
We are not a party to some of the key contracts on which
we rely. Instead, we have contracts with companies which in turn
have these key contracts with third parties. If the third
parties fail to perform or terminate any of these key contracts
for any reason or cease operations, our business could be
disrupted, our reputation may be harmed and we will not be able
to enforce our rights in court.
Our business relies on certain key contracts to which we are not
a party. Instead, we have contracts with the companies that in
turn have those key contracts with third parties. The contracts
we have allow us to benefit financially and strategically from
our contracting counterparties’ roles in the following key
contracts:
•
we have contracts with Shanghai Camera, which has the exclusive
rights to sell advertising for and provides most of the content
of Inner Mongolia Satellite Television under a contract it has
with Inner Mongolia Television Station;
•
we have a contract with Beijing Guoguang Guangrong Advertising
Co., Ltd., or Guoguang Guangrong, the exclusive advertising
agent for China Radio International’s domestic stations,
giving us the exclusive rights to sell advertising for and the
rights to provide content to the EasyFM radio stations in
Beijing and Shanghai; and
we have contracts with Beijing Television Station’s
advertising agents that allow us to act as advertising agent for
certain television programs.
If Inner Mongolia Television Station does not perform or
terminates its agreement with Shanghai Camera, if China Radio
International does not perform or terminates its agreement with
Guoguang Guangrong, or if Beijing Television Station does not
perform or terminates its contract with its advertising agent
for any reason, including a breach by either party, our ability
to use Inner Mongolia Satellite Television, a unit of Inner
Mongolia Television Station, the EasyFM stations of Beijing and
Shanghai, or Beijing Television Station as a media platform, and
our ability to cross-sell advertising services among different
platforms, may be impaired. Depending on the circumstances, the
consequences of a failure to perform under the terms or the
termination of a contract could be far-reaching and extremely
harmful to our reputation, existing business relationships and
future growth potential. We may not be able to enforce these
contracts in court or at arbitration, because we do not have
direct contractual relationships with either of these entities.
Shanghai Camera and the advertising agents for China Radio
International and Beijing Television Station may be unable or
unwilling to enforce their rights under the key contracts, and
if they are unwilling to do so we have no direct recourse
against Inner Mongolia Television Station, China Radio
International or Beijing Television Station. In addition, we
rely on the continued operation of Inner Mongolia Satellite
Television, China Radio International and Beijing Television
Station to carry out certain parts of our operations. If either
of them is unable or unwilling to continue operating in the line
of business that is the subject of our contract, we do not have
contractual rights to enforce against them. We may not be able
to obtain access to similar platforms on terms acceptable to us
or at all. A failure to perform under the terms of or the
termination of either of these key contracts, the discontinuing
of operations of Inner Mongolia Television Station, China Radio
International or Beijing Television Station or our inability to
obtain access to similar media platforms, may have an adverse
effect on our operating results and financial condition.
We may not be able to achieve the benefits we expect from
recent and future acquisitions, and recent and future
acquisitions may have an adverse effect on our ability to manage
our business.
Our recent acquisitions and any future acquisitions expose us to
potential risks, including risks associated with unforeseen or
hidden liabilities, the diversion of resources from our existing
businesses and technologies, the change of laws and policies or
their interpretations that affect the operations of the acquired
businesses, the inability to generate sufficient revenue to
offset the costs and expenses of acquisitions, and potential
loss of, or harm to, relationships with employees, customers and
business partners as a result of integration of new businesses.
As of the date of this prospectus, we have not encountered any
of those potential risks. In addition, the revenue and cost
synergies that we expect to achieve from our acquisitions may
not materialize. The overhead and personnel cost of running a
large organization could be significantly higher than that of a
smaller organization. Any of these events could have an adverse
effect on our business and operating results.
Strategic acquisitions are a key part of our growth strategy.
Historically we have made acquisitions that were critical in
providing us with product and service suites, audience and
readers, customer base, market access and our talent pool. If we
are presented with appropriate opportunities, we may acquire
additional complementary companies, products or technologies.
The integration of acquired companies diverts a great deal of
management
attention and dedicated staff efforts from other areas of our
business. A successful integration process is important to
realizing the benefits of an acquisition. If we encounter
difficulty integrating our recent and future acquisitions, our
business may be adversely affected. Many of our acquired
companies are held in the form of affiliated entities, which
provides us less control than if they were direct subsidiaries,
and may cause difficulty in the integration process. See
“—Risks related to the regulation of our business and
to our structure— We rely on contractual arrangements with
our PRC operating affiliates and their subsidiaries and
shareholders for our China operations, which may not be as
effective in providing operational control as direct
ownership”. The acquisitions may not result in the expected
growth or development, which may have an adverse effect on our
business.
We may not be successful in identifying, financing, consummating
and integrating future acquisitions, which could significantly
impair our growth potential. We plan to continue to make
strategic acquisitions, and identifying acquisition
opportunities could demand substantial management time and
resources. Negotiating and financing the potential acquisitions
could involve significant cost and uncertainties. If we fail to
continue to execute advantageous acquisitions in the future, our
overall growth strategy could be impaired, and our operating
results could be adversely affected.
Our business could be materially and adversely affected if
our target audience and readers do not continue to accept our
programs and content or if we do not continue to produce and
purchase programs that generate high ratings.
We target affluent households in major urban centers. The
popularity of our programs and content among this group is the
primary reason that we are able to maintain and increase our
advertising fees. As our targeted audience and readers are
highly desirable to us and our competitors, attracting and
retaining a loyal following for our media offerings are serious
challenges. The taste and preferences of our targeted
demographic could be fluid and fickle. If the quality, or the
perceived quality, of our media offerings declines and we fail
to attract audience and readers going forward, our operating
results may be adversely affected.
The media platforms we use must successfully create or purchase,
on a cost-effective basis, popular, high-quality programming and
content that appeal to the affluent audience. Some significant
challenges include:
•
identifying popular programming and content;
•
competing with and adapting to new technological innovations,
including Internet television, portable entertainment systems,
and others;
•
attracting viewers, listeners and readers amidst the
proliferation of television, radio, magazines and newspapers in
China; and
•
controlling programming and content sourcing costs.
If the media platforms we use fail to create or purchase
popular, high-quality television and radio programming or
high-quality print content that appeals to the affluent audience
on a cost-effective basis, our operating results could be
adversely affected.
Our future success depends on attracting advertisers who
will advertise across our various platforms. If we fail to
attract a sufficient number of advertisers, our operating
results and revenues may not meet expectations.
One important strategy underlying our recent acquisitions is to
create an integrated media platform on which advertisers wishing
to reach affluent audience and readers may advertise
simultaneously on multiple media outlets. However, advertisers
may decide that they do not need to use multiple outlets, find
that our targeted demographic does not consist of their desired
consumers or a critical mass of consumers, decide to use a
competitor’s services or decide not to use our services for
other reasons. If the advertisers decide against advertising
with us, we may not realize our growth potential or meet
investor expectations. Our future operating results and business
prospects could be adversely affected.
Some segments of our business have sustained net losses in
the past and may continue to sustain net losses in the future or
may not grow as expected.
Some of our businesses, including our Fortune China
operations and our magazine operations, have sustained net
losses in the past and we may sustain net losses in any or all
of our subsidiaries operating in the future.
We expect that our operating expenses will increase and the
degree of increase in these expenses will depend on anticipated
organic growth and strategic acquisitions. We have accounted for
a significant amount of goodwill from acquisitions. Furthermore,
any additional acquisition giving rise to increased goodwill or
any decrease or delay in generating additional sales volume and
revenue could result in substantial operating and net losses in
future periods. If we sustain net losses or any of our operating
groups sustains net losses, it may have an adverse effect on our
financial condition and operating results.
We derive a substantial proportion of our revenues from
advertising, and the advertising market is particularly
volatile.
Most of our operating groups, including our broadcasting, print
and advertising groups, derive the majority of their revenues
from the provision of advertisement and sponsorships.
Advertising spending is volatile and sensitive to changes in the
economy. Our advertising customers may reduce the amount they
spend on our media for a number of reasons, including:
•
a downturn of economic conditions in China or around the globe;
•
a decision to shift advertising expenditure to other media and
platforms;
•
a deterioration of the ratings of our programs;
•
a change of government policy with regard to the type of
programs that can be broadcast; or
•
a decline in advertising spending in general.
If we are unable to continually attract advertisers to our media
services, we will be unable to maintain or increase our
advertising fees and sales, which could negatively affect our
ability to generate revenues in the future. A decrease in demand
for advertising in general and for our advertising services in
particular could materially and adversely affect our operating
results.
The market for most of our operating groups is
concentrated in a few major cities in China, and if advertising
spending decreases in any of these cities, our operating results
and revenues could be adversely affected.
The audience and readers of the media platforms we utilize are
concentrated in a few of the more affluent urban areas of China,
including Beijing, Shanghai, Guangzhou, Shenzhen and, to a
lesser extent, in other large cities in China. Beijing, Shanghai
and Guangdong province (which includes the major cities of
Guangzhou and Shenzhen), together accounted for 51.1% of total
advertising spending in China in 2005, according to the State
Administration for Industry and Commerce. We expect these cities
to continue to constitute important sources of our revenues. If
any of these major cities experiences an event negatively
affecting its advertising industry, such as an economic
downturn, the implementation of an adverse governmental policy
or a natural disaster, our business and operating results could
be adversely affected.
Our business could suffer if we do not successfully manage
current growth and potential future growth.
The business of each of our operating groups has expanded
rapidly in recent years. We anticipate further expansion of our
operations and workforce. Our growth to date has placed, and our
anticipated future operations will continue to place,
significant demands on our management, systems and resources. In
addition to training and managing our workforce, we will need to
continue to improve and develop our financial and managerial
controls and our reporting systems and procedures. Any failure
to efficiently or effectively manage the growth of our
operations may limit our future growth and hamper our business
strategy.
We may not have sufficient experience to address the risks
frequently encountered by fast growing companies. These risks
include our potential failure to:
•
develop new and enhance existing product and services, obtain
new customers, and retain existing customers;
•
maintain adequate control of our expenses;
•
attract and retain qualified personnel; and
•
respond to competitive market conditions.
If we do not successfully address each of these risks, our
financial position and operating results could be adversely
affected.
Our operating results may fluctuate, which makes our
results difficult to predict and could cause our results to fall
short of expectations.
Our operating results may fluctuate as a result of a number of
factors, many of which are outside of our control. Our quarterly
and annual revenues and costs and expenses as a percentage of
our revenues may be significantly different from our historical
or projected rates. Our operating results in future quarters may
fall below expectations. Any of these events could cause the
price of our ADSs to fall. Any of the risk factors listed in
this “Risk factors” section could cause our operating
results to fluctuate from quarter to quarter.
Because of our limited operating history, our rapidly growing
business and our recent acquisitions of substantially all of our
operations, our historical operating results may not be
useful to you, and you should not rely on our past results, in
predicting our future operating results. Advertising spending in
China has historically been volatile, reflecting overall
economic conditions as well as budgeting and buying patterns. As
we continue to grow, we expect that the volatility in our
business may cause our operating results to fluctuate. If our
revenues for a particular quarter are lower than we expect, we
may be unable to reduce our operating expenses for that quarter
by a corresponding amount, which would harm our operating
results for that quarter relative to our operating results from
other quarters.
Our quarterly operating results may fluctuate
significantly from period to period due to seasonality in our
business.
Our quarterly operating results may fluctuate significantly from
period to period based on the seasonality of consumer spending
and corresponding advertising trends. Revenues for our business
are driven largely by advertising and sponsorship across all our
operating groups and media platforms, which subject us to the
seasonal effects of China’s advertising industry. The
advertising cycle in China typically peaks towards the end of
the year. Advertising spending tends to decrease during January
and February due to the Chinese Lunar New Year holiday. In
addition, there is a decrease in advertising during the
May 1 Labor Day holiday week, and the October 1
National Day week. As a result, you may not be able to rely on
quarterly period comparisons of our operating results as an
indication of our future performance.
If we do not maintain and develop our brands and those of
our strategic partners, we will not be able to attract audience
and readers to the media platforms we use.
Many of the media platforms we use, including Fortune China,
Money Journal, EasyFM,the Economic Observer,
and Inner Mongolia Satellite Television, attract readers,
audience and advertisers partly through brand name recognition.
We believe that establishing, maintaining and enhancing our
portfolio of brand names and those of our strategic partners
will enhance our growth prospects. Some of our competitors have
well-established brands in the media industry. The promotion of
our brands and those of our strategic partners will depend
largely on our success in maintaining a sizable and loyal
audience and readership, providing high-quality content and
organizing effective marketing programs. While many of the media
platforms we utilize currently have a high level of brand
recognition, we may not be able to maintain our existing brands
or those of our strategic partners or develop new brands on a
cost-effective basis, which may have an adverse impact on our
operating results.
In addition, Xinhua Financial Network Limited, or Xinhua
Financial Network, the predecessor and now subsidiary of our
parent, Xinhua Finance Limited, and China Economic Information
Service, entered into an agreement, pursuant to which China
Economic Information Service granted to Xinhua Financial Network
and its affiliates the right to use the word “Xinhua”
as the first name worldwide. We have in turn entered into an
agreement with Xinhua Financial Network to use the word
“Xinhua”. Our agreement with Xinhua Financial Network
covers only the rights of Xinhua Financial Network and not any
rights held by our parent. Although our parent has applied to
register the trademark for the logo containing “Xinhua
Finance” in China, it is not clear whether the registration
will be accepted in China or whether we or our parent or its
affiliates could continue to use the name “Xinhua” if
the agreement between Xinhua Financial Network and China
Economic Information Service were to terminate. In addition, if
we were to cease to be an affiliate of our parent, we may be
unable to continue
using the “Xinhua” name. If we are unable to continue
using the name “Xinhua”, our branding will be
affected, which may have an adverse impact on our operating
results.
If we do not compete successfully against new and existing
competitors, we may lose our market share, and our operating
results may be adversely affected.
We compete with international and local media entities on
various platforms and advertising service providers. The media,
advertising and research sectors in China are very competitive
and constantly evolving. Many of our competitors have a longer
operating history, larger product and service suites, greater
capital resources and broader international or local
recognition. Given the recent growth in the China market, we
expect international competitors to increase their focus in this
region and local competitors to increase their focus in these
sectors, intensifying the competition in our business areas. If
we cannot successfully compete against new or existing
competitors, our operating results may be adversely affected.
Our broadcasting and print businesses face increasing
competition from new technologies, such as the Internet,
broadband wireless and Internet television, and new consumer
products, such as portable digital audio players and personal
digital video recorders. These new technologies and alternative
media platforms compete with our broadcasting and print groups
for audience and readership share and advertising revenue, and
in the case of some products, allow audience and readers to
avoid traditional advertisements. China has also established a
timetable to switch its radio and television broadcasting from
analog to digital. We are unable to predict the effect such
technologies and related services and products will have on our
broadcasting operations, but there exist certain risks,
including, among others, that the capital expenditures necessary
to adapt our products and services to such technologies could be
substantial, and other companies employing such technologies
could compete with our businesses.
We rely on services from third parties that are also our
competitors to carry out certain of our businesses. If any of
these firms refuses to continue its cooperative relationship
with us, or makes the terms of doing so more onerous, our
ability to attract customers or provide services will be
affected.
We rely on a number of third parties to attract customers and
provide other services. Some of the owners and operators of
those third party services also compete with us in one or more
of our principal business areas. For example, our advertising
group is dependent on large international advertising agencies
to attract many of our major international advertising
customers, yet we also compete with the same agencies. Also,
Inner Mongolia Satellite Television, a platform on which we
broadcast, competes with Hunan Satellite Television, the
platform on which we broadcast Fortune Morning
7 a.m. In addition, Hunan Television Station’s
supervising entity, Hunan Radio, Movie & Television
Group, is the sponsoring and supervising entity of our strategic
partner in publishing Money Journal. If one or more of
those firms refuses to continue their cooperative relationship
with us in the future, or makes the terms of doing so more
onerous, our ability to attract customers or provide services to
our audience, readers and customers will be adversely affected.
Furthermore, if our arrangements with any of these third parties
are terminated, we may not find an alternative source of support
on a timely basis, on terms as advantageous to us or at all. Any
of these events could have an adverse effect on our business and
operating results.
Our business depends substantially on the continuing
efforts of our key executives. Our business may be severely
disrupted if we lose their services.
Our future success heavily depends upon the continued services
of our key executives, particularly Fredy Bush, who is the Chief
Executive Officer of our company. Our Chief Executive Officer
also serves as the Chief Executive Officer of our parent company
and will be required to devote a substantial amount of time in
that capacity. We rely on the expertise of our key executives in
business operations and the advertising and media industries and
on their relationships with our shareholders, business partners
and regulators. If one or more of our key executives are unable
or unwilling to continue in their present positions, we may not
be able to replace them easily or at all. Therefore, our
business may be severely disrupted, our financial condition and
results of operations may be materially and adversely affected
and we may incur additional expenses to recruit and train
personnel.
In addition, if any of these key executives joins a competitor
or forms a competing company, we may lose customers and business
partners, and our operating results may be adversely affected.
Each of our executive officers has entered into an employment
agreement with us that contains confidentiality and
non-competition provisions. If any disputes arise between our
executive officers and us, these agreements may not be enforced
effectively.
Our senior management and employees have worked together
for a short period of time, which may make it difficult for you
to evaluate their effectiveness and ability to address
challenges.
Due to our limited operating history, recent acquisitions of
substantially all of our business operations and recent
additions to our management team, certain of our senior
management and employees have worked together at our company for
only a relatively short period of time. As we acquired
substantially all of our business operations recently, none of
our senior management has worked with our operating groups for a
substantial period of time. As a result of these circumstances,
it may be difficult for you to evaluate the effectiveness of our
senior management and other key employees and their ability to
work with the employees of our operating groups and address
future challenges to our business.
If we are unable to attract, train and retain key
individuals, highly skilled employees and important talent, our
business may be adversely affected.
We expect to need to hire additional employees, including
personnel to maintain and expand our print productions, graphics
designers and production personnel to create advertisements and
produce programming, information technology and engineering
personnel to maintain and expand our delivery platform,
marketing personnel to sell our products, and administrative
staff to support our operations. Some of our operating groups,
especially our broadcasting group, also rely on the appearances
of well-known personalities and talents during programming, such
as the Fortune China programs. If we are unable to
identify, attract, hire, train and retain individuals in these
areas or retain our existing employees, due to our failure to
provide them with adequate incentives or otherwise, the quality
of our products and services may be negatively impacted, which
could adversely affect our business and results of operations.
We may be subject to litigation for information provided
in our products and services, which may be time-consuming and
costly to defend.
Our products and services contain information such as financial
news, interviews, quotes of securities prices, analytical
reports, investment recommendations and portrayals of people in
our television productions. It is possible that if any
information contains errors or false or misleading information,
or is perceived to infringe intellectual property rights of
others, third parties could take action against us for losses
incurred in connection with the use of such information. Any
claims, with or without merit, could be time-consuming and
costly to defend, result in litigation and divert
management’s attention and resources, which could have an
adverse effect on our operating results.
We may not be able to prevent others from using our
intellectual property, which may harm our business and expose us
to litigation.
We regard our content, copyrights, domain names, trade names,
trademarks and similar intellectual property as critical to our
success. We try to protect our intellectual property rights by
relying on trademark, copyright and confidentiality laws and
contracts. The copyright, trademark and confidentiality
protection in China may not be as effective as in other
countries, such as the United States or elsewhere.
We seek to limit the threat of content misappropriation.
However, policing unauthorized use of our products and services
and related intellectual property is often difficult and the
steps we have taken may not in every case prevent the
infringement by unauthorized third parties. Developments in
technology, including digital copying, file compressing and the
growing penetration of high-bandwidth Internet connections
increase the threat of content misappropriation by making it
easier to duplicate and widely distribute misappropriated
material. In addition, the risk exists that some local
television stations or channels may, when airing our or Shanghai
Camera’s programs, remove the original advertisements we or
Shanghai Camera placed from the programs and replace them with
their own advertisements. Content misappropriation presents a
threat to our revenues from products and services, including,
but not limited to, television, radio, media production, and our
magazine and newspaper operations.
There can be no assurance that our efforts to enforce our rights
and protect our products, services and intellectual property
will be successful in preventing content misappropriation. Any
misappropriation could have a negative effect on our business
and operating results. Furthermore, we may need to resort to
litigation to enforce our intellectual property rights.
Litigation relating to our intellectual property might result in
substantial costs and diversion of resources and management
attention.
In addition, the ownership of certain trademarks used by us or
our strategic partners may be subject to claims by other parties
and if any litigation of such disputes is involved, substantial
costs and interruption of our business, or the business of our
strategic partners, may be involved, which may adversely affect
our business or results of operations.
Failure to achieve and maintain effective internal
controls 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 laws. The Securities and Exchange Commission, as
required under Section 404 of the Sarbanes-Oxley Act of
2002, or the Sarbanes-Oxley Act, has adopted rules requiring
public companies to include a report of management on the
effectiveness of such companies’ internal control over
financial reporting in their annual reports. In addition, an
independent registered public accounting firm for a public
company must attest to and report on management’s
assessment of the effectiveness of our company’s internal
control over financial reporting. These requirements will first
apply to our annual report on Form 20-F for the fiscal year
ending December 31, 2008. Management may not conclude that
our internal control over financial reporting is effective.
Moreover, even if our management concludes that our internal
control over financial reporting is effective, our independent
registered public accounting firm may still decline to attest to
our management’s assessment or may issue a report that is
qualified if such firm is not satisfied with our internal
control over financial reporting or the level at which our
controls are documented, designed, operated or reviewed, or if
such firm interprets the relevant requirements differently from
us. In addition, during the course of such evaluation,
documentation and testing, we may identify deficiencies which we
may not be able to remediate in time to meet the deadline
imposed by the Sarbanes-Oxley Act for compliance with the
requirements of Section 404.
During the process of preparing our consolidated financial
statements for the period from May 26, 2005 to
December 31, 2005, and for the year ended December 31,2006, we have identified a number of control deficiencies. The
significant control deficiencies identified by us included,
among others: (i) the lack of sufficient financial
reporting and accounting personnel to fulfill the post-offering
U.S. GAAP reporting requirements; and (ii) the lack of
a comprehensive accounting policies and procedures manual to
communicate to accounting and finance personnel to ensure the
consistent application of U.S. GAAP. We have taken, and
will continue to take, measures to remediate these control
deficiencies. See “Management’s discussion and
analysis of financial condition and results of operations—
Internal control over financial reporting”.
If we fail to achieve and maintain the adequacy of our internal
controls, we may not be able to conclude on an ongoing basis
that we have effective internal control over financial reporting
in accordance with the Sarbanes-Oxley Act. Moreover, effective
internal controls, particularly those related to revenue
recognition, are necessary for us to produce reliable financial
reports and are important to help prevent fraud. As a result,
any failure to achieve and maintain effective internal control
over financial reporting could result in the loss of investor
confidence in the reliability of our financial statements, which
in turn could negatively impact the trading price of our ADSs.
Furthermore, we may need to incur significant costs and use
significant management and other resources in an effort to
comply with Section 404 of the Sarbanes-Oxley Act and other
requirements.
We may need additional capital to finance future
acquisitions and we may not be able to obtain it.
We believe that our current cash and cash equivalents, cash flow
from operations and the proceeds from this offering will be
sufficient to meet our anticipated cash needs for the
foreseeable future. We may, however, require additional cash
resources in order to make acquisitions. We plan to expand
through acquisitions, but have not yet identified many of the
targets for acquisition. Often the cost of acquisitions is not
known until the opportunities are analyzed, due diligence has
commenced and negotiations are underway. If the cost of the
acquisitions that our management deems appropriate are higher
than our cash resources, we will need to seek additional cash
resources, and may seek to sell additional equity or debt
securities or obtain a credit facility. The sale of additional
equity securities could result in additional dilution to our
shareholders. If we sell additional equity securities and our
shareholders experience dilution, you will also experience
dilution of your ADSs. The incurrence of indebtedness would
result in increased debt service obligations and could result in
operating and financing covenants that would restrict our
operations. We may not be able to obtain financing in amounts or
on terms acceptable to us, if at all. As a result, our operating
results and financial condition could be adversely affected.
We may be required to record a significant charge to
earnings if our goodwill or acquired intangible assets are
determined to be impaired.
We are required to review our amortizable intangible assets for
impairment when events or changes in circumstances indicate the
carrying value may not be recoverable. Goodwill and intangible
assets with indefinite lives are required to be tested for
impairment at least annually, or more frequently if events or
changes in circumstances indicate that the asset might be
impaired. For the years ended December 31, 2005 and 2006,
we recorded $0.1 million and $3.5 million as
amortization of intangible assets, respectively. As of
December 31, 2005 and 2006, the amount of our goodwill was
$4.1 million and $83.7 million, respectively, and the
amount of our total intangible assets, including license
agreements and exclusive advertising agreements, was
$0.6 million and $176.2 million, respectively. Factors
that may be considered a change in circumstances indicating that
the carrying value of our goodwill or acquired intangible assets
may not be recoverable include, but are not limited to, a
decline in stock price and market capitalization and slower
growth rates in our industry. Should the carrying value of our
goodwill or acquired intangible assets be determined to be
impaired, their carrying value would be written down. We have
recorded significant goodwill and intangible assets relating to
our recent acquisitions and because we cannot ensure the future
profitability of the acquired entities, we may be required to
record a significant charge to earnings in our financial
statements during the period in which our goodwill or acquired
intangible assets is determined to be impaired, which would
adversely affect our operating results.
Our strategy of expanding our Internet and new media
presence may not be well received or may be more expensive than
we expected.
We may expand our presence on the Internet and expand the media
platforms we use to include new media, such as broadband
wireless broadcasting and Internet television. However, the
market for Internet and new media platforms is rapidly evolving
and is becoming increasingly competitive. We cannot predict
whether, or how fast, this market will grow. Moreover, if we
fail to expand our Internet and new media presence or adapt to
the rapid change in the Internet and new media markets and
technology, our business, competitiveness, or results of
operations could be materially affected.
Our success with expansion into these media platforms depends on
a number of factors, including:
•
sufficient demand for these services from our existing and
potential audience and readers, and sufficient advertising
revenues from customers, to offset the substantial investment we
will make in order to provide them;
•
our ability to compete effectively with other providers of these
services;
•
our ability to adapt and develop our products and services in
order to conform to market conditions and customer needs; and
•
our ability to form, acquire or cooperate with Internet content
and service providers and obtain the appropriate licenses to
conduct this business.
The absence or failure of any one or more of these factors,
based on our inability to predict the effect of emerging
technology or competition on the viability of our broadcasting
operations, products or investments, may materially and
adversely affect our business, results of operations, financial
condition and prospects.
The pro forma condensed consolidated financial information
is not necessarily reflective of what our actual financial
results would have been had the businesses acquired been under
common management during the periods presented in the pro forma
financial information and our actual financial results for
future periods may differ significantly from the pro forma
financial results.
The unaudited pro forma condensed consolidated financial
information presented in this prospectus was prepared in
accordance with the rules and regulations promulgated by the
Securities and Exchange Commission for such information. The pro
forma condensed consolidated financial information includes all
adjustments that management believes are necessary for a fair
presentation of the pro forma operating results in the
historical periods. In preparing the unaudited pro forma
condensed consolidated financial information, management has
made certain assumptions, such as the anticipated allocation of
purchase price and amortization of related intangible assets. In
addition, it is impossible to quantify and reflect the impact of
the combinations on results of operations in periods prior to
the combinations actually occurring. Because of the
uncertainties inherent in the preparation of pro forma
information, the unaudited pro forma condensed consolidated
financial statements are not necessarily indicative of the
results that would have been reported had the events for which
pro forma effect has been given actually occurred on the dates
specified, nor are they necessarily indicative of our future
results of operations.
Risks related to the regulation of our business and to our
structure
If the PRC government finds that the agreements that
establish the structure for operating our China businesses do
not comply with PRC governmental restrictions on foreign
investment in the media and market research industries, or if
these regulations or the interpretation of existing regulations
change in the future, we could be subject to severe penalties or
be forced to relinquish our interests in those
operations.
Most of our operations are conducted through operating
subsidiaries in China, and through our contractual arrangements
with several of our affiliated entities and their shareholders in
China. PRC regulations currently prohibit or restrict foreign
ownership of media, advertising and market research companies.
For a description of these regulations, see
“Regulation— Regulations on investment of foreign and
private capital in the media, advertising and market research
industries”. We have entered into contractual arrangements
with these affiliated entities and their shareholders, all PRC
citizens, which enable us to, among other things, exercise
effective control over these affiliated entities and their
respective subsidiaries. See “Corporate structure— Our
corporate structure and contractual arrangements”. In the
opinion of our PRC legal counsel, Commerce & Finance Law
Offices, the business operations of our subsidiaries in China
and our affiliated entities and their respective subsidiaries
comply in all material respects with existing PRC laws and
regulations.
However, if we or any of our subsidiaries or affiliated entities
are found to be in violation of any existing or future PRC laws
or regulations (for example, if we are deemed to be holding
equity interests in certain of our affiliated entities in which
direct foreign ownership is prohibited) the relevant PRC
regulatory authorities, including the State Administration of
Radio, Film and Television, and the Ministry of Culture, which
regulate the media, would have broad discretion in dealing with
such violations, including:
•
revoking the business and operating licenses of our PRC
subsidiaries or affiliates;
•
confiscating relevant income and imposing fines and other
penalties;
•
discontinuing or restricting our PRC subsidiaries’ or
affiliates’ operations;
•
requiring us or our PRC subsidiaries or affiliates to
restructure the relevant ownership structure or operations;
•
restricting or prohibiting our use of the proceeds of this
offering to finance our businesses and operations in China; or
•
imposing conditions or requirements with which we or our PRC
subsidiaries or affiliates may not be able to comply.
The imposition of any of these penalties would result in a
material and adverse effect on our ability to conduct our
business.
We conduct our business through agreements with our strategic
partners. Under these agreements, we provide services to our
strategic partners in return for a fee from, or the exclusive
rights to sell advertising for, our strategic partners. For
details of these agreements, see “Arrangements with
partners and suppliers”. If any of these agreements is
found to be in violation of any existing or future PRC laws or
regulations, we would have to terminate our operation under that
particular agreement or otherwise restructure our operation to
bring it in compliance with the relevant laws or regulations. In
addition, the relevant PRC regulatory authorities may impose
further penalties. Any of these consequences could have a
material and adverse effect on our operations.
In many cases, existing regulations with regard to investments
from foreign investors and domestic private capital in the media
industry lack detailed explanations and operational procedures,
and are subject to interpretation, which may change over time.
Most of these regulations have not been interpreted by the
relevant authorities in circumstances similar to our corporate
structure. Accordingly, we cannot be certain how the regulations
will be applied to our business, either currently or in the
future. Moreover, new regulations may be adopted
or the interpretation of existing regulations may change, any of
which could result in similar penalties, resulting in a material
and adverse effect on our ability to conduct our business.
We rely on contractual arrangements with our PRC operating
affiliates and their subsidiaries and shareholders for our China
operations, which may not be as effective in providing
operational control as direct ownership.
We rely on contractual arrangements with several affiliated PRC
entities and their shareholders, including Shanghai Yuan Zhi
Advertising Co., Ltd., or Yuan Zhi, Beijing Century
Advertising Co., Ltd., or Century Media Advertising,
Beijing Taide Advertising Co., Ltd., or Beijing Taide, Shenzhen
Active Trinity Advertising Co., Ltd., or Shenzhen Trinity,
Beijing Xintai Huade Advertising Co., Ltd., or Xintai Huade, and
Guangzhou Jingshi Culture Intermediary Co., Ltd., or Guangzhou
Jingshi, to operate our businesses. For a description of these
contractual arrangements, see “Corporate structure”.
In the opinion of our PRC legal counsel, Commerce & Finance
Law Offices, these contractual arrangements are valid, binding
and enforceable, and will not result in any violation of PRC
laws or regulations currently in effect. These contractual
arrangements may not be as effective in providing us with
control over these entities as direct ownership. If we had
direct ownership of these entities, we would be able to exercise
our rights as a shareholder to effect changes in the boards of
directors of these entities, which in turn could effect changes,
subject to any applicable fiduciary obligations, at the
management level. However, if any of these entities or any of
their subsidiaries or their shareholders fails to perform its or
his respective obligations under these contractual arrangements,
we may not be able to enforce the relevant agreements if the
agreements are ruled in violation of the PRC laws as mentioned
above, even if the contracts are otherwise legal and valid. We
may have to incur substantial costs and resources to enforce
them, and seek legal remedies under PRC law, including specific
performance or injunctive relief, and claiming damages, which
may not be effective. Accordingly, it may be difficult for us to
change our corporate structure or to bring claims against any of
these entities if they do not perform their obligations under
their contracts with us.
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. In the event
we are unable to enforce these contractual arrangements, we may
not be able to exert effective control over our operating
entities, and our ability to conduct our business may be
negatively affected.
The shareholders of our PRC affiliated entities may breach
our agreements with them or may have potential conflicts of
interest with us, and we may not be able to enter further
agreements to extract economic benefits from these entities,
which may materially and adversely affect our business and
financial condition.
The shareholders of Yuan Zhi, Century Media Advertising, Beijing
Taide, Shenzhen Trinity, Xintai Huade and Guangzhou Jingshi may
breach or cause our PRC affiliated entities and their
subsidiaries to breach or refuse to renew the existing
contractual arrangements that allow us to effectively control
our PRC affiliated entities and their subsidiaries, and receive
economic
benefits from them. In addition, Wang Yong Hong, the shareholder
of Century Media Advertising and a shareholder of Beijing Taide,
is also our Director of Business Development. Jiang Gui Bin, the
shareholder of Guangzhou Jingshi, is the Director of Sales for
Southern China for our magazine operations. All other
contracting shareholders are PRC citizens with no significant
relationship with us or our parent. Conflicts may arise between
their dual roles as a shareholder and as an employee. We cannot
assure you that when conflicts of interest arise, they will act
in the best interests of our company or that conflicts of
interests will be resolved in our favor. We do not have existing
arrangements to address potential conflicts of interest between
these individuals and our company. We have made long-term loans
in an aggregate principal amount of RMB 19.4 million
($2.5 million) to these shareholders. We extended these
loans to help them fund the initial capitalization, additional
capitalization or purchase of those entities. The security on
the loans is limited to their pledge of the shares of those
affiliates. We are unable to register the pledges of the shares
these shareholders have pledged to us due to the refusal of the
relevant public registrars to register these interests, which
could allow the shareholders to dishonor their pledges to us and
re-pledge the shares to another entity or person. We rely on
these individuals to abide by the contract laws of China and
honor their contracts with us. If we cannot resolve any
conflicts of interest or disputes between us and the
shareholders of our PRC affiliated entities, we would have to
rely on legal proceedings, which could result in disruption of
our business. There is also substantial uncertainty as to the
outcome of any such legal proceedings.
In addition, we do not yet have contractual arrangements in
place for some of our affiliated entities that would enable us
to receive economic benefits from them, and the shareholders may
refuse to enter into these contracts. Moreover, some of the
subsidiaries of these entities have minority shareholders and we
may not be permitted to enter into contracts to receive economic
benefits from the entities, because these contracts may not be
on an arm’s length basis. If we are unable to enter into
these contractual arrangements, we may attempt to receive
dividends through the shareholders of these entities, but the
minority shareholders may also be entitled to their share of
dividends. Any inability to transfer economic benefits from our
affiliated entities to us may have an adverse effect on our
business, and on our ability to pay dividends to our
shareholders, including our ADS holders.
Contractual arrangements we have entered into with our
subsidiaries and affiliated entities or acquisitions of offshore
entities that conduct PRC operations through affiliates in China
may be subject to scrutiny by the PRC tax authorities, and we
may have to pay additional taxes or be found ineligible for a
tax exemption.
Under PRC law, arrangements and transactions among related
parties may be subject to audit or challenge by the PRC tax
authorities. If any of the transactions we have entered into
with our subsidiaries and affiliated 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 any such tax savings
we may achieve, or that any of our affiliated entities are not
eligible for their tax exemptions, would substantially increase
our taxes owed and reduce our net income and the value of your
investment. In addition, in the event that in connection with
some of our acquisitions of offshore entities that conducted
their PRC operations through their affiliates in China, the
sellers of such entities failed to pay any taxes required under
PRC law, the PRC tax authorities could require us to pay the
tax, together with late-payment interest
and penalties. The occurrence of any of the foregoing could have
a negative impact on our operating results and financial
condition.
Certain of our PRC operating companies or strategic
partners have previously engaged or may currently engage in
activities without appropriate licenses or approvals or outside
the authorized scope of their business licenses or permitted
activities. This could subject those companies to fines and
other penalties, which could have a material adverse effect on
our business.
Some of our operating companies or strategic partners have
previously engaged or may currently engage in activities without
appropriate licenses or approvals or outside the authorized
scope of their business licenses or permitted activities. If we
or our strategic partners do not receive any necessary licenses
or approvals, broaden the authorized business scope or narrow
the scope of the activities as appropriate, we or the relevant
strategic partner may have to cease the operations or contract
our operations to third parties who hold the appropriate
licenses. In addition, counterparties to contracts we make when
engaging in activities that require licenses may legally default
on those contracts if we or the relevant strategic partner do
not possess the appropriate licenses. The occurrence of any of
these events would have an adverse effect on our business and
results of operations.
The authorities may refuse to grant any licenses we may seek.
For companies that exceeded the scope of their business licenses
or permitted activities or operated without a license or needed
approval in the past but are now compliant, as well as for any
companies that may currently operate without the appropriate
license or approval or outside the scope of their business
license or permitted activities, the relevant PRC authorities
have the authority to impose fines or other penalties, sometimes
as much as five to ten times the amount of the illegal revenues
and may require the disgorgement of profits or revocation of the
business license. Due to the inconsistent nature of regulatory
enforcements in the PRC, those of our PRC operating companies
and strategic partners that exceeded the scope of their business
licenses or permitted activities or operated without the
appropriate licenses or approvals in the past or may be doing so
currently may be subject to the above fines or penalties,
including the disgorgement of profits or revocation of the
business license of one or more of these companies. These fines
or penalties may have a material adverse effect on our business.
Any limitation on the ability of our subsidiaries and
affiliated entities to make dividend or distribution payments to
us could have a material adverse effect on our ability to
conduct our business.
Current PRC regulations permit our subsidiaries to pay dividends
to us only out of their accumulated profits, if any, determined
in accordance with Chinese accounting standards and regulations.
In addition, each of our subsidiaries and affiliated entities in
China is required to set aside at least 10% of its after-tax
profits each year, if any, to fund a statutory reserve until
such reserve reaches 50% of its registered capital, and to
further set aside a portion of its after-tax profits to fund the
employee welfare fund at the discretion of the
shareholders’ meeting or the board. These reserves are not
distributable as cash dividends. Furthermore, if our
subsidiaries and affiliated entities in China incur debt on
their own behalf in the future, the loan agreements governing
that debt may restrict their ability to pay dividends or make
other payments to us. In addition, the PRC tax authorities may
require us to adjust our taxable income under the contractual
arrangements we currently have in place in a manner that would
materially and adversely affect our subsidiaries’ ability
to pay dividends and other distributions to us. Any limitation
on the ability of our subsidiaries and affiliated entities to
distribute dividends or other payments to us could materially
limit our ability to grow, make investments or acquisitions that
could be beneficial to our businesses, or otherwise fund and
conduct our business.
The PRC government may prevent us or our strategic
partners from producing or distributing, and we or they may be
subject to liability for, content that it believes is
inappropriate.
The media sector in China is highly regulated and closely
monitored by various government agencies in China, in particular
the State Administration of Radio, Film and Television. China
has enacted laws and regulations governing the production and
distribution of news, information or other content. In the past,
the PRC government has stopped the production or distribution of
information or content that it believes violates PRC law and the
media entities in breach of such laws have been severely
reprimanded. The State Administration of Radio, Film and
Television continues to promulgate new regulations which
prohibit information and content from being distributed through
the media. If the State Administration of Radio, Film and
Television were to find the information or content
inappropriate. Inappropriate content includes, among others,
information that threatens the unity, sovereignty, and
territorial integrity of the PRC, endangers national security,
incites violence and uprising, propagates obscenity or
undermines public morality.
In addition, the State Administration of Radio, Film and
Television has published regulations that subject media
operators to potential liability for content distributed through
their broadcast or print media.
Under applicable PRC regulations, we or our strategic partners
may be held liable for any content we or they offer or will
offer through the media platforms we utilize, including news
articles, interviews, television and radio programs, and
advertisements.
It may be difficult to determine the type of content that may
result in liability. Censorship is carried out on a case by case
basis, often without consistency between the cases and without
explanation. If any of our content or the content of our
strategic partners is deemed to have violated any of such
content restrictions, we or they would not be able to continue
to create or distribute such content and could be subject to
penalties, including confiscation of income, fines, suspension
of business and revocation of licenses for operating media
services, which would materially and adversely affect our
business, financial condition and operating results.
The PRC law on advertising content is such that we may be
subject to liability for advertisements produced by us or
advertisements displayed on our or our strategic partners’
media platforms.
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 is fair and accurate
and is 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.
We and our strategic partners are obligated under PRC laws and
regulations to monitor the advertising content that is shown,
displayed or printed on any of our or their media outlets for
compliance with applicable law. In addition, for advertising
content related to specific types of products and services, such
as alcohol, cosmetics, pharmaceuticals and medical facilities,
we and our strategic partners are required to confirm that the
advertisers have obtained requisite government approvals,
including the advertiser’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 and, to our best knowledge, our
strategic partners, employ qualified advertising inspectors who
are trained to review advertising content for compliance with
relevant PRC laws and regulations, and we endeavor to comply,
and encourage our strategic partners to take measures to comply,
with such requirements, by methods including requesting relevant
documents from the advertisers.
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
advertisements displayed on our advertising network. In
addition, our reputation will be tarnished and our results of
operations may be adversely affected.
If the PRC government finds that the financial data and
media services we provide do not comply with PRC laws and
regulations relating to the provision of securities investment
advisory services, we may suffer severe disruption to our
business operations and lose a substantial portion of our
revenue.
PRC laws require entities providing securities investment
advisory services to the public to obtain a securities advisory
permit from the China Securities Regulatory Commission, or the
CSRC. Because we do not have this permit, if we or any of our
subsidiaries are found to be in violation of PRC laws and
regulations relating to the provision of securities investment
advisory services, the relevant PRC regulatory authorities would
have broad discretion in dealing with such violations, including
imposing monetary penalties on us, or forcing us to pursue more
limited business objectives that do not include offering
financial data and media services. Therefore, if the CSRC were
to conclude that we provide securities investment advisory
services, we could suffer severe disruption to our business
operations and lose a substantial portion of our revenue.
We are controlled by our parent company, whose interests
may differ from other shareholders.
After this offering, our parent company, Xinhua Finance Limited,
Patriarch Partners Media Holdings, LLC, or Patriarch
Partners, and Fredy Bush, the Chairman of our Board of Directors
and our Chief Executive Officer, will beneficially own
approximately 36.6%, 8.0% and 5.8% of the outstanding shares of
our equity, respectively. The shares held by our parent are
class B common shares, which have ten votes per share,
compared with one vote per share for our class A common
shares, giving our parent effective control of approximately
85.3% of the voting rights after this offering. Patriarch
Partners is also a shareholder in our parent and has agreements
with our parent regarding voting rights in us, an investor
rights agreement with us, and a credit agreement with us, as
well as special privileges due to its holding of our convertible
preferred shares. See “Related party
transactions—Transactions with Patriarch Partners”.
Accordingly, our parent, Patriarch Partners and our Chief
Executive Officer will have significant influence in determining
the outcome of any corporate transaction or other matter
submitted to the shareholders for approval, including mergers,
consolidations, the sale of all or substantially all of our
assets, election of directors and other significant corporate
actions. They will also have significant influence in preventing
or causing a change in control. In addition, without their
consent, we may be prevented from entering into transactions
that could be beneficial to us. Their interests may differ from
the interests of our other shareholders, including our ADS
holders.
Fredy Bush is also the Vice Chairman and Chief Executive Officer
of our parent, Xinhua Finance Limited and will be required to
devote a substantial amount of time in that capacity. Conflicts
of interest between her duties to our parent and us may arise.
We cannot assure you that when conflicts of interest arise, the
conflicts of interest will be resolved in our favor. These
conflicts may result in lost corporate opportunities, including
opportunities that are never brought to our attention, or
actions that may prevent us from taking advantage of
opportunities to expand and improve our operations.
Landing rights for satellite television in China are
increasingly granted through auction, which may increase our
cost of broadcasting rights or result in our strategic
partner’s inability to obtain landing rights.
Since 2004, certain cities have used an auction process to sell
landing rights to China’s provincial satellite stations, as
the increasing number of satellite channels seeking landing
rights exceeded the bandwidth limit of cable systems. This may
greatly increase the cost of broadcasting rights in such cities
or may prevent Inner Mongolia Television Station from obtaining
landing rights altogether. There is also a risk that Inner
Mongolia Television Station may lose landing rights previously
granted at no cost under reciprocal arrangements. If this
development has an adverse effect on Inner Mongolia Satellite
Television, it may also adversely affect our operating results.
Risks related to doing business in China
The PRC’s economic, political and social conditions,
as well as governmental policies, could affect the financial
markets in China and our liquidity and access to capital and our
ability to operate our business.
Substantially all of our business operations are conducted in
China. Accordingly, our results of operations, financial
condition and prospects are subject to a significant degree to
economic, political and legal developments in China.
China’s economy differs from the economies of developed
countries in many respects, including with respect to the amount
of government involvement, level of development, growth rate,
control of foreign exchange and allocation of resources. While
the PRC economy has experienced significant growth in the past
20 years, growth has been uneven across different regions
and among various economic sectors of China. The PRC government
has implemented various measures to encourage economic
development and guide the allocation of resources. Some of these
measures benefit the overall PRC economy, but may have a
negative effect on us. For example, our financial condition and
results of operations may be adversely affected by government
control over capital investments, especially in major
metropolitan areas, or changes in tax regulations that are
applicable to us. More generally, if the business environment in
China deteriorates from the perspective of domestic or
international investors, our business in China may also be
adversely affected.
Uncertainties with respect to the PRC legal system could
adversely affect us.
We conduct our business primarily through our subsidiaries and
affiliated entities in China. Our operations in China are
governed by PRC laws and regulations. Our subsidiaries are
generally subject to laws and regulations applicable to foreign
investments in China and, in particular, laws applicable to
wholly foreign-owned enterprises. 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, China has not
developed a fully integrated legal system and recently enacted
laws and regulations may not sufficiently cover all aspects of
economic activities in China. In particular, because these laws
and regulations are relatively new, and because of the limited
volume of published decisions and their non-binding nature, the
interpretation and enforcement of these laws and regulations
involve uncertainties. In addition, the PRC legal system is
based in part on government policies and internal rules (some of
which are not published on a timely basis or at all) that may
have a retroactive effect. As a result, we may not be aware of
our violation of these policies and rules until some time after
the violation. In addition, any litigation in China, regardless
of outcome, may be protracted and result in substantial costs
and diversion of resources and management attention.
We face risks related to health epidemics and other
outbreaks, or acts of terrorism, which could result in reduced
demand for advertising or disrupt our operations.
Our business could be materially and adversely affected by the
outbreak of avian flu, severe acute respiratory syndrome or
another epidemic, or an act of terrorism. From time to time,
there have been reports on the occurrences of avian flu in
various parts of China, including a few confirmed human cases
and deaths. Any prolonged recurrence of avian flu, severe acute
respiratory syndrome or other adverse public health developments
in China or elsewhere in Asia may have a material and adverse
effect on our business operations. In addition, terrorist
attacks, such as those that took place on September 11,2001, geopolitical uncertainty and international conflicts,
could have an adverse effect on our business operations. Any of
these events could adversely affect China’s economy and
cause an immediate and prolonged drop in consumer demand,
especially consumer demand for luxury or non-essential goods and
services. As we operate in the media and advertising industries
of affluent areas and many of the products we advertise are
luxury or non-essential goods and services, an immediate and
prolonged drop in consumer demand, especially that for luxury or
non-essential goods and services, could severely disrupt our
business operations and adversely affect our results of
operations.
The approval of the China Securities Regulatory
Commission, or the CSRC, may be required in connection with this
offering under a recently adopted PRC regulation; any
requirement to obtain prior CSRC approval could delay this
offering and a failure to obtain this approval, if required, may
create uncertainties for this offering and could have a material
adverse effect on our business, operating results, reputation,
prospects and trading price of our ADSs; the regulation also
establishes more 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 regulatory agencies, namely, the
Ministry of Commerce, the State Assets Supervision and
Administration Commission, the State Administration for
Taxation, the
State Administration for Industry and Commerce, the CSRC, and
the PRC State Administration of Foreign Exchange, jointly
adopted the Regulations on Mergers and Acquisitions of Domestic
Enterprises by Foreign Investors, or the New M&A Rule, which
became effective on September 8, 2006. This New M&A
Rule purports, among other things, to require offshore special
purpose vehicles formed for overseas listing purposes through
acquisitions of PRC domestic companies and controlled by PRC
companies or individuals, to obtain the approval of the CSRC
prior to publicly listing their securities on an overseas stock
exchange. On September 21, 2006, the CSRC published a
notice on its official website specifying documents and
materials required to be submitted to it by special purpose
vehicles seeking CSRC approval of their overseas listings. While
the application of the New M&A Rule remains unclear, we
believe, based on the advice of our PRC counsel, Commerce &
Finance Law Offices, that CSRC approval is not required in the
context of this offering because (1) we are not a special
purpose vehicle formed or controlled by PRC companies or PRC
individuals, and (2) we established our PRC subsidiaries by
means of direct investment other than by merger or acquisition
of PRC domestic companies. However, we cannot assure you that
the relevant PRC government agencies, including the CSRC, would
reach the same conclusion as our PRC counsel. If the CSRC or
other PRC regulatory body subsequently determines that we need
to obtain the CSRC’s approval for this offering, we may
face sanctions by the CSRC or other PRC regulatory agencies. In
such event, these regulatory agencies may impose fines and
penalties on our operations in the PRC, limit our operations in
the PRC, delay or restrict the repatriation of the proceeds from
this offering into the PRC, or take other actions that could
have a material adverse effect on our business, financial
condition, results of operations, reputation and prospects, as
well as the trading price of our ADSs. The CSRC or other PRC
regulatory agencies may also take actions requiring us, or
making it advisable for us, to halt this offering before
settlement and delivery of the ADSs offered by this prospectus.
The New M&A Rule also established additional 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 when a foreign investor acquires equity or
assets of a PRC domestic enterprise. 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 our ability to complete such
transactions, which could affect our ability to expand our
business or maintain our market share.
According to the New M&A Rule and other PRC rules regarding
foreign exchange, an offshore company’s shares can be used
as consideration for acquisition of a domestic PRC
company’s equity only under very limited circumstances and
prior approval from the Ministry of Commerce must be obtained
before such a share swap could be done.
When we acquired control of certain of our PRC affiliates, we
issued class A common shares to Stephen Xie Wei, Zhao Li
and Yu Gang, who are PRC citizens, in exchange for each of them
entering into a non-competition agreement. Stephen Xie Wei and
Yu Gang were originally shareholders of certain affiliated
entities. Zhao Li was formerly an officer of the seller of one
of our affiliated entities and is currently the director of the
Economic Observer Press Office and the general manager of our
affiliated entity, Economic Observer Advertising. Our PRC
counsel, Commerce & Finance Law Offices, advised us
that even though under PRC law the transaction of entering into
such a non-competition agreement and the acquisition of the
corresponding affiliated entity are regarded as separate
transactions, the PRC governmental agencies may
consider that the shares issued for a non-competition agreement
are in substance part of the consideration for the corresponding
acquisition of domestic equities because we have accounted for
them as if they are related transactions, and therefore may take
the view that we have acquired the equity of domestic companies
by using offshore shares as consideration without prior approval
of the Ministry of Commerce and are therefore in violation of
the PRC laws. In such an event, we may face sanctions by the
Ministry of Commerce, the State Administration of Foreign
Exchange, and the State Administration for Taxation.
Recent PRC regulations relating to offshore investment
activities by PRC residents may increase our administrative
burden and restrict our overseas and cross-border investment
activity. If our shareholders who are PRC residents fail to make
any required applications and filings under such regulations, we
may be unable to distribute profits and may become subject to
liability under PRC laws.
Regulations were recently promulgated by the PRC National
Development and Reform Commission and the PRC State
Administration of Foreign Exchange, that will require
registrations with, and approvals from, PRC government
authorities in connection with direct or indirect offshore
investment activities by PRC residents, including PRC
individuals and PRC corporate entities. These regulations apply
to our shareholders who are PRC residents and may also apply to
certain of our offshore acquisitions as well.
The State Administration of Foreign Exchange regulations
retroactively require registration of direct or indirect
investments previously made by PRC residents in offshore
companies. In the event that a PRC shareholder with a direct or
indirect stake in an offshore parent company fails to make the
required State Administration of Foreign Exchange registration,
the PRC subsidiaries of that offshore parent company may be
prohibited from making distributions of profit to the offshore
parent and from paying the offshore parent proceeds from any
reduction in capital, share transfer or liquidation in respect
of the PRC subsidiaries. Further, failure to comply with the
various State Administration of Foreign Exchange registration
requirements described above could result in liability under PRC
law for foreign exchange evasion.
We have already notified our shareholders and the shareholders
of the offshore entities in our corporate group who are PRC
residents, to urge them to make the necessary applications and
filings as required under these regulations and under any
implementing rules or approval practices that may be established
under these regulations. However, as a result of the newness of
the regulations, lack of implementing rules and uncertainty
concerning the reconciliation of the new regulations with other
approval requirements, it remains unclear how these regulations,
and any future legislation concerning offshore or cross-border
transactions, will be interpreted, amended and implemented by
the relevant government authorities. We attempt to comply, and
attempt to ensure that our shareholders who are subject to these
regulations comply, with the relevant rules. However, we cannot
provide any assurances that all of our shareholders who are PRC
residents will comply with our request to make or obtain any
applicable registration or approvals required by these
regulations or other related legislation. The failure or
inability of our PRC resident shareholders to receive any
required approvals or make any required registrations may
subject us to fines and legal sanctions, restrict our overseas
or cross-border investment activities, limit our PRC
subsidiaries’ ability to make distributions or pay
dividends or affect our ownership structure, as a result of
which our acquisition strategy and business operations and our
ability to distribute profits to you could
be materially and adversely affected. See “Regulation—
Regulations on foreign currency exchange— Foreign exchange
registration of offshore investment by PRC residents”.
Restrictions on currency exchange may limit our ability to
utilize our revenues effectively.
The PRC government imposes controls on the convertibility of RMB
into foreign currencies and, in certain cases, the remittance of
currency out of China. We receive much of our revenues in RMB.
Under our current structure, our income is primarily derived
from dividend payments from our PRC subsidiaries. Shortages in
the availability of foreign currency may restrict the ability of
our PRC subsidiaries and our affiliated entities to remit
sufficient foreign currency to pay dividends or other payments
to us, or otherwise satisfy their foreign currency denominated
obligations. Under existing PRC foreign exchange regulations,
payments of current account items, including profit
distributions, interest payments and expenditures from
trade-related transactions, can be made in foreign currencies
without prior approval from the PRC State Administration of
Foreign Exchange by complying with certain procedural
requirements. However, approval from appropriate government
authorities is required where RMB are to be converted into
foreign currency and remitted out of China to pay capital
expenses such as the repayment of bank loans denominated in
foreign currencies. The PRC government may also at its
discretion restrict access in the future to foreign currencies
for current account transactions. If the foreign exchange
control system prevents us from obtaining sufficient foreign
currency to satisfy our currency demands, we may not be able to
pay dividends in foreign currencies to our shareholders,
including holders of our ADSs.
Fluctuation in the value of RMB may have a material
adverse effect on your investment.
The value of the RMB against the U.S. dollar and other
currencies may fluctuate and is affected by, among other things,
changes in political and economic conditions. On July 21,2005, the PRC government changed its decade-old policy of
pegging the value of the RMB to the U.S. dollar. Under the new
policy, the RMB is permitted to fluctuate within a managed band
based on market supply and demand and by reference to a basket
of certain foreign currencies. This change in policy has
resulted in an approximately 5.7% appreciation of the RMB
against the U.S. dollar between July 21, 2005 and
December 29, 2006. While the international reaction to the
RMB revaluation has generally been positive, there remains
significant international pressure on the PRC government to
adopt an even more flexible currency policy, which may result in
a further and more significant appreciation of the RMB against
the U.S. dollar.
Our revenues and costs are mostly denominated in RMB, while a
significant portion of our financial assets are denominated in
U.S. dollars. We rely entirely on dividends and other fees paid
to us by our subsidiaries and affiliated entities in China. Any
significant revaluation of RMB may materially and adversely
affect our cash flows, revenues, earnings and financial
position, and the value of, and any dividends payable on, our
ADSs in U.S. dollars. For example, an appreciation of RMB
against the U.S. dollar would make any new RMB denominated
investments or expenditures more costly to us, to the extent
that we need to convert U.S. dollars into RMB for such
purposes.
We have limited insurance coverage in China.
The insurance industry in China is still at an early stage of
development. Insurance companies in China offer limited
insurance products. We have determined that the risks of
disruption or
liability from our business, or the loss or damage to our
property, including our facilities, equipment and office
furniture, the cost of insuring for these risks, and the
difficulties associated with acquiring such insurance on
commercially reasonable terms make it impractical for us to have
such insurance. As a result, we do not have any business
liability, disruption, litigation or property insurance coverage
for our operations in China except for insurance on certain
vehicles. Any uninsured occurrence of loss or damage to
property, litigation or business disruption may result in our
incurring substantial costs and the diversion of resources,
which could have an adverse effect on our operating results.
Risks related to the ADSs and this offering
There has been no public market for our ADSs prior to this
offering, and you may not be able to resell our ADSs at or above
the price you paid, or at all.
Prior to this initial public offering, there has been no public
market for our ADSs. Following the offering, our common shares
will not be listed on any exchange or quoted for trading on any
over-the-counter trading system. We have applied to have our
ADSs listed on the Nasdaq Global Market. If an active trading
market for our ADSs does not develop after this offering, the
market price and liquidity of our ADSs will be materially and
adversely affected. The initial public offering price for our
ADSs is determined by negotiations between us and the
underwriters and may bear no relationship to the market price
for our ADSs after this initial public offering. An active
trading market for our ADSs may not develop and the market price
of our ADSs may decline below the initial public offering price.
The market price for our ADSs may be volatile.
The market price for our ADSs is likely to be highly volatile
and subject to wide fluctuations in response to factors
including the following:
•
announcements of technological or competitive developments;
•
regulatory developments in our target markets affecting us, our
customers or our competitors;
•
announcements of studies and reports relating to the
circulation, ratings, audience or readership size or
composition, quality or effectiveness of our and our strategic
partners’ products and services or those of our competitors;
•
actual or anticipated fluctuations in our quarterly operating
results;
•
changes in financial estimates by securities research analysts;
•
changes in the economic performance or market valuations of
other media and advertising companies;
•
addition or departure of our executive officers and key
personnel;
•
fluctuations in the exchange rates between the U.S. dollar and
RMB;
•
release or expiration of lock-up or other transfer restrictions
on our outstanding ADSs; and
In addition, the securities markets have 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.
Because the initial public offering price is substantially
higher than our net book value per ADS, you will incur immediate
and substantial dilution.
If you purchase ADSs in this offering, you will pay more for
your ADSs than the amount paid by our existing shareholders for
their ADSs on a per ADS basis. As a result, you will experience
immediate and substantial dilution of approximately
$8.33 per ADS (assuming no exercise by the underwriters of
options to acquire additional ADSs), representing the difference
between our net book value per ADS as of December 31, 2006,
after giving effect to this offering, and the initial public
offering price of $13.00 per ADS, the midpoint of the
estimated price range. In addition, you may experience further
dilution to the extent that our ADSs are issued upon the
exercise of share options.
Substantial future sales or perceived sales of our ADSs in
the public market could cause the price of our ADSs to
decline.
Sales of our ADSs in the public market after this offering, or
the perception that these sales could occur, could cause the
market price of our ADSs to decline. Upon completion of this
offering, we will have 23,076,923 ADSs outstanding. All
ADSs sold in this offering will be freely transferable without
restriction or additional registration under the Securities Act
of 1933, as amended, or the Securities Act. The remaining ADSs
outstanding after this offering will be available for sale, upon
the expiration of the 180-day lock-up period beginning from the
date of this prospectus, subject to volume and other
restrictions as applicable under Rule 144 and Rule 701
under the Securities Act. Any or all of these shares may be
released prior to expiration of the lock-up period at the
discretion of the joint lead underwriters. To the extent shares
are released before the expiration of the lock-up period and
these shares are sold into the market, the market price of our
ADSs could decline.
You may not have the same voting rights as the holders of
our common shares and may not receive voting materials in time
to be able to exercise your right to vote.
Except as described in this prospectus and in the deposit
agreement, holders of our ADSs will not be able to exercise
voting rights attaching to the shares represented by our ADSs on
an individual basis. Holders of our ADSs will appoint the
depositary or its nominee to vote 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. Upon our written request, the depositary will mail to you
a shareholder meeting notice which contains, among other things,
a statement as to the manner in which your voting instructions
may be given, including an express indication that such
instructions may be given or deemed given to the depositary to
give a discretionary proxy to a person designated by us if no
instructions are received by the depositary from you on or
before the response date established by the depositary. However,
no voting instruction shall be deemed given and no such
discretionary proxy shall be given with respect to any matter as
to which we inform the
depositary that (i) we do not wish such proxy given,
(ii) substantial opposition exists, or (iii) such
matter materially and adversely affect the rights of
shareholders.
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 the rights and the securities to which the rights
relate under the Securities Act or an exemption from the
registration requirements is available. Also, under the deposit
agreement, the depositary bank will not make rights available to
you unless the distribution to ADS holders of both the rights
and any related securities are either registered under the
Securities Act or exempted 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. Moreover, we may not be able to
establish an 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.
In addition, the depositary of our ADSs has agreed to pay to you
the cash dividends or other distributions it or the custodian
receives on our common shares or other deposited securities
after deducting its fees and expenses. You will receive these
distributions in proportion to the number of common 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 that property and you will not receive that
distribution.
We are a Cayman Islands company and, because judicial
precedent regarding the rights of shareholders is more limited
under Cayman Islands law than that under U.S. law, you may have
less protection for your shareholder rights than you would under
U.S. law.
Our corporate affairs are governed by our amended and restated
memorandum and articles of association, the Cayman Islands
Companies Law and the common law of the Cayman Islands. The
rights of shareholders to take action against the directors,
actions by minority shareholders and the fiduciary
responsibilities of our directors to us under Cayman Islands law
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 that from English common law, which has
persuasive, but not binding, authority on a court in the Cayman
Islands. 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 precedent in some jurisdictions in the United States.
In particular, the Cayman Islands has a less developed body of
securities laws than the United States. In addition, some U.S.
states, such as Delaware, have more fully developed and
judicially interpreted bodies of corporate law than the Cayman
Islands.
As a result of all of the above, public shareholders of our
company may have more difficulty in protecting their interests
in the face of actions taken by management, members of the board
of directors or controlling shareholders of our company than
they would as shareholders of a U.S. public company.
Our management will have considerable discretion as to the
use of the net proceeds to be received by us from this
offering.
We have allocated much of the net proceeds of this offering to
be received by us for acquisitions and general corporate
purposes. Our management will have considerable discretion in
the application of the net proceeds received by us. You will not
have the opportunity, as part of your investment decision, to
assess whether proceeds are being used appropriately. You must
rely on the judgment of our management regarding the application
of the net proceeds of this offering. The net proceeds may be
used for corporate purposes that do not improve our efforts to
maintain profitability or increase our share price. The net
proceeds from this offering may be placed in investments that do
not produce income or that lose value.
Our dual-class common share structure with different
voting rights could discourage others from pursuing any change
of control transactions that holders of our class A common
shares and ADSs may view as beneficial.
On July 24, 2006, our shareholders amended and restated our
memorandum and articles of association to provide for a
dual-class common share structure. Our common shares are divided
into class A common shares and class B common shares.
Holders of class A common shares are entitled to one vote
per share, while holders of class B common shares are
entitled to ten votes per share. We will issue class A
common shares represented by our ADSs in this offering. Our
parent, Xinhua Finance Limited, is the only holder of our
class B common shares. We intend to maintain the dual-class
common share structure after the closing of this offering. Each
class B common share is convertible into one class A
common share at any time by its holder. Class A common
shares are not convertible into class B common shares under
any circumstances. Upon any transfer of class B common
shares by a holder thereof to any person or entity which is not
a wholly-owned and wholly-controlled subsidiary of our parent,
such class B common shares shall be automatically and
immediately converted into an equal number of class A
common shares.
Due to the disparate voting powers attached to these two
classes, our existing shareholders will have significant voting
power over matters requiring shareholder approval, including
election of directors and significant corporate transactions,
such as a merger or sale of our company or our assets. This
concentrated control could discourage others from pursuing any
potential merger, takeover or other change of control
transactions that holders of class A common shares and ADSs
may view as beneficial.
Our memorandum and articles of association contain
anti-takeover provisions that could adversely affect the rights
of holders of our common shares and ADSs.
Our shareholders recently adopted an amended and restated
articles of association that will become effective immediately
upon the closing of this offering. We have included certain
provisions in our new 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 new 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 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 common shares. Issuance of preference shares
may dilute the voting power of holders of common shares.
•
Subject to applicable regulatory requirements, our board of
directors may issue additional common shares without action by
our shareholders to the extent of available authorized but
unissued shares.
You may have difficulty enforcing judgments obtained
against us.
We are a Cayman Islands company and most of our assets are
located outside of the United States. Most of our current
operations are conducted in the PRC. In addition, most of our
directors and officers are nationals and residents of countries
other than the United States. A substantial portion of the
assets of these persons are located outside the United States.
As a result, it may be difficult for you to effect service of
process within the United States upon these persons. It may also
be difficult for you to enforce in U.S. courts judgments
obtained in U.S. courts based on the civil liability provisions
of the U.S. federal securities laws against us and our officers
and directors, most of whom are not residents in the United
States and the substantial majority of whose assets are located
outside of the United States. In addition, there is uncertainty
as to whether the courts of the Cayman Islands or the PRC would
recognize or enforce judgments of U.S. courts. See
“Enforceability of civil liabilities”.
We will incur increased costs as a result of being a
public company.
As a public company, we will incur a significantly higher level
of legal, accounting and other expenses than we did as a private
company. In addition, the Sarbanes-Oxley Act of 2002, as well as
new rules subsequently implemented by the SEC and the Nasdaq
Global Market, have required changes in corporate governance
practices of public companies. We expect these new rules and
regulations to increase our legal and financial compliance costs
and to make certain activities more time-consuming and costly.
As a result of becoming a public company, we will establish
additional board committees and adopt and implement additional
policies regarding internal controls over financial reporting
and disclosure controls and procedures. In particular,
compliance with Section 404 of the Sarbanes-Oxley Act,
which requires public companies to include a report of
management on the effectiveness of such company’s internal
control over financial reporting, will increase our costs. In
addition, we will incur costs associated with public company
reporting requirements, such as the requirements to file an
annual report and
other event-related reports with the Securities and Exchange
Commission. We also expect the rules and regulations that govern
public companies to make it more difficult and more expensive
for us to obtain director and officer liability insurance, and
we may be required to accept reduced policy limits and coverage
or incur substantially higher costs to obtain the same or
similar coverage. We are currently evaluating and monitoring
developments with respect to these new rules.
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 of our ADSs or common
shares.
Although it is not clear how the contractual arrangements
between us and our affiliated entities will be treated for
purposes of the passive foreign investment company, or PFIC,
rules, we believe that we should not be treated as a PFIC for
our current taxable year ending December 31, 2007 or for
the foreseeable future. However, we must make a separate
determination each year as to whether we are a PFIC, and
accordingly, even if we are not a PFIC for our current taxable
year our PFIC status may change. 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 is attributable to assets
that produce or are held for the production of passive income.
If we were treated as a PFIC for any taxable year during which a
U.S. person held an ADS or a common share, certain adverse U.S.
federal income tax consequences could apply to that
U.S. person. See “Taxation— United States federal
income taxation— Passive foreign investment company”.
We make “forward-looking statements” in the
“Summary,”“Risk factors,”“Management’s discussion and analysis of financial
condition and results of operations,”“Industry,”“Regulation”“Arrangements with partners and
suppliers” and “Business” sections and elsewhere
throughout this prospectus. Whenever you read a statement that
is not simply a statement of historical fact (such as when we
describe what we “believe,”“expect” or
“anticipate” will occur, and other similar
statements), you must remember that our expectations may not be
correct, even though we believe that they are reasonable. The
forward-looking statements included in this prospectus relate
to, among others:
•
our goals and strategies;
•
our future business development, financial condition and results
of operations;
•
projected revenues, profits, earnings and other estimated
financial information;
•
our plans to expand our Internet presence, and expand into new
media, such as, broadband wireless and Internet television;
•
the growth or acceptance of our integrated platform;
•
our plans to identify and create new advertising networks that
target specific consumer demographics, which could allow us to
charge a separate fee;
•
competition in the PRC media and advertising industries; and
•
the expected growth in advertising spending levels.
We do not guarantee that the transactions and events described
in this prospectus will happen as described or that they will
happen at all. You should read this prospectus completely and
with the understanding that actual future results may be
materially different from what we expect. The forward-looking
statements made in this prospectus relate only to events as of
the date on which the statements are made. We undertake no
obligation, beyond that required by law, to update any
forward-looking statement to reflect events or circumstances
after the date on which the statement is made, even though our
situation will change in the future.
Whether actual results will conform to our expectations and
predictions is subject to a number of risks and uncertainties,
many of which are beyond our control, and reflect future
business decisions that are subject to change. Some of the
assumptions, future results and levels of performance expressed
or implied in the forward-looking statements we make inevitably
will not materialize, and unanticipated events may occur which
will affect our results. The “Risk factors” section of
this prospectus describes the principal contingencies and
uncertainties to which we believe we are subject.
This prospectus also contains data related to the media and
advertising markets in several countries, including China. This
market data, including market data from ZenithOptimedia, an
independent research firm, include projections that are based on
a number of assumptions. The
media, advertising and research markets may not grow at the
rates projected by the market data, or at all. The failure of
the markets to grow at the projected rates may materially and
adversely affect our business and the market price of our ADSs.
In addition, the rapidly changing nature of the media and
advertising markets subjects any projections or estimates
relating to the growth prospects or future condition of our
market to significant uncertainties. If any one or more of the
assumptions underlying the market data proves 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.
We estimate that we will receive net proceeds for this offering
of approximately $204 million, after deducting estimated
underwriting discounts, commissions and estimated offering
expenses payable by us. For the purposes of estimating net
proceeds, we are assuming an initial public offering price of
$13.00 per ADS, the midpoint of the estimated range of the
initial public offering price. A $1.00 increase
(decrease) in the assumed public offering price of $13.00
per ADS would increase (decrease) the net proceeds to us
from this offering by $16 million.
We intend to use the net proceeds from this offering as follows:
•
approximately $50 million to repay certain outstanding
indebtedness to our parent and Xinhua Financial Network Limited.
The indebtedness is due on demand and the interest rates are not
specified. The indebtedness was to pay for the costs related to
our acquisitions from our parent of equity interests our parent
had held before March 31, 2006 in Xinhua Finance
Advertising Limited and the contractual control our parent had
held before March 31, 2006 in Beijing Century Media Culture
Co., Ltd. as well as advances from our parent and Xinhua
Financial Network enabling us to acquire 19.0% equity interests
in Upper Step Holdings Limited, or Upper Step, and Accord Group
Investments Limited, or Accord Group;
•
an undetermined amount for strategic acquisitions of
complementary businesses. At this time, we have not entered into
advanced discussions or negotiations with respect to any
potential acquisitions except for the acquisition of the
remaining equity of Beijing Perspective; and
•
the balance to fund working capital and for other general
corporate purposes.
We have not yet determined all of our anticipated expenditures
and therefore cannot estimate the amounts to be used for
acquisitions or general corporate purposes. The amounts and
timing of any expenditure will vary depending on the amount of
cash generated by our operations, competitive and technological
developments and the rate of growth, if any, of our business.
Accordingly, our management will have significant discretion in
the allocation of the net proceeds we will receive for this
offering. Depending on future events and other changes in the
business climate, we may determine at a later time to use the
net proceeds for different purposes. Pending their use, we
intend to invest the proceeds in a variety of capital
preservation instruments, including short-term,
investment-grade, interest-bearing instruments.
The foregoing represents our current intentions to use and
allocate the net proceeds of this offering based upon our
present plans and business conditions. Our management, however,
will have significant flexibility and discretion to apply the
net proceeds of this offering differently than as described in
this prospectus.
We will not receive any of the proceeds from the sale of ADSs by
the selling shareholders.
If you invest in our ADSs, your interest will be diluted to the
extent of the difference between the initial public offering
price per ADS and our net book value per ADS after this
offering. Dilution results from the fact that the initial public
offering price per common share is substantially in excess of
the book value per common share attributable to the existing
shareholders for our presently outstanding common shares.
Our net book value as of December 31, 2006 was
approximately $101.2 million, or $1.23 per common
share and $2.46 per ADS. Net book value represents the amount of
our total consolidated assets, minus the amount of our total
consolidated liabilities. Our pro forma net book value as of
December 31, 2006 was $115.3 million, or $1.13 per
ordinary share and $2.26 per ADS. Pro forma net book value per
common share represents the amount of total consolidated assets
less total consolidated liabilities, divided by the number of
common shares outstanding after giving effect to (1) the
automatic conversion of all outstanding convertible preferred
shares into 16,134,320 class A common shares and
(2) the conversion of our convertible loan into 3,832,543
class A common shares. Without taking into account any
other changes in such net book value after December 31,2006, other than to give effect to the issuance and sale of
34,615,846 common shares in the form of ADSs by us in this
offering, at the initial public offering price of
$13.00 per ADS, the midpoint of the estimated public
offering price range, and after deduction of the underwriting
discounts and commissions and estimated offering expenses of
this offering payable by us, our adjusted net book value as of
December 31, 2006 would have increased to $319 million
or $2.33 per common share or $4.67 per ADS. This represents an
immediate increase in net book value of $1.20 per common share
or $2.41 per ADS to the existing shareholders, and an immediate
dilution in net book value of $4.17 per common share or $8.33
per ADS to investors purchasing ADSs in this offering. The
following table illustrates such per share dilution:
Estimated initial public offering price per common share
Pro forma net book value per common share after giving effect to
this offering
$
2.33
Amount of dilution in net book value per common share to new
investors in this offering
$
4.17
Amount of dilution in net book value per ADS to new investors in
this offering
$
8.33
A $1.00 increase (decrease) in the assumed public offering price
of $13.00 per ADS would increase (decrease) our pro forma
net book value after giving effect to the offering by
$16 million, the pro forma net book value per common share
and per ADS after giving effect to this offering by $0.12 per
common share and $0.24 per ADS and the dilution in pro forma net
book value per common share and per ADS to new investors in this
offering by $0.38 per common share and $0.76 per ADS,
assuming no change to the number of ADSs offered by us as set
forth on the cover page of this prospectus, and after deducting
underwriting discounts and commissions and other offering
expenses. The pro forma information discussed above is
illustrative only. Our net book value following the completion
of this offering is subject to adjustment based on the actual
initial public offering price of our ADSs and other terms of
this offering determined at pricing.
The following table summarizes, on a pro forma basis as of
December 31, 2006, the differences between existing
shareholders and the new investors with respect to the number of
common shares (in the form of ADSs or shares) purchased from us,
the total consideration paid and the average price per common
share/ ADS paid before deducting the underwriting discounts and
commissions and estimated offering expenses. The total number of
common shares does not include common shares underlying the ADSs
issuable upon the exercise of the over-allotment option granted
to the underwriters.
Common shares
Average
purchased
Total consideration
price per
Average
common
price per
Number
Percent
Amount
Percent
share
ADS
Existing shareholders
102,032,635
(1)
74.7
%
$
117,227,718
36.5
%
$1.15
$ 2.30
New investors
34,615,846
25.3
203,767,534
63.5
$5.89
$11.77
Total
136,648,481
100.0
%
$
320,995,252
100.0
%
$2.35
$ 4.70
(1)
Common shares includes common shares available upon conversion
of convertible preferred shares and the convertible loan of
Patriarch Partners.
A $1.00 increase (decrease) in the assumed initial public
offering price of $13.00 per ADS would increase
(decrease) total consideration paid by new investors, total
consideration paid by all shareholders and the average price per
ADS paid by all shareholders by $16 million,
$16 million and $0.24, respectively, assuming no change in
the number of ADSs sold by us as set forth on the cover page of
this prospectus and without deducting underwriting discounts and
commissions and other offering expenses.
The discussion and tables above assume no exercise of any
outstanding share options or warrants. Pursuant to our agreement
with Patriarch Partners Media Holdings LLC, which limits the
number of share options that may be granted before this
offering, as of December 31, 2006, there were 10,698,141
common shares issuable upon exercise of outstanding share
options at an exercise price of $0.78 per share, and there were
1,029,461 common shares available for future issuance as share
grants or upon the exercise of future grants under individual
option agreements that may be entered into. For details see
“Related party transactions—Transactions with
Patriarch Partners”. There are also additional common
shares available for future issuance under future grants of
options pursuant to our 2007 share option plan. In addition,
there are 2,049,984 warrants held by Sino Investment,
2,049,984 warrants held by the Dennis L. Pelino Family
Trust and 221,280 warrants held by Ken Chen that are
immediately exercisable, as well as 630,000 warrants held
by Billy Kung that are subject to a five-year lock-up period. If
all of these options and the 4,321,248 immediately
exercisable warrants had been exercised at the time of this
offering, after giving effect to this offering, our net book
value would have been approximately $343 million, or $2.26
per common share and $4.52 per ADS, and the dilution in net book
value to new investors would have been $4.24 per common share
and $8.48 per ADS. In addition, the dilution to new investors
will be $4.08 per common share and $8.16 per ADS, if the
underwriters exercise their option to purchase additional ADSs
in full.
We have never declared or paid any dividends on our common
shares, nor do we have any present plan to pay any cash
dividends on our ADSs in the foreseeable future. We currently
intend to retain most of our available funds and any future
earnings to operate and expand our business. We have, however,
paid dividends to the holder of our convertible preferred shares
of approximately $1.7 million per quarter since
March 2006, which payment we plan to continue until
June 30, 2007. We will discontinue these dividends upon
conversion of the convertible preferred shares.
As we are a holding company, we rely on dividends paid to us by
our wholly-owned subsidiaries Upper Step Holdings Limited,
Accord Group Investments Limited, and Xinhua Finance Advertising
Limited, all of which are British Virgin Islands business
companies, and by our wholly-owned subsidiary EconWorld Media
Limited, a Hong Kong company, for our cash requirements,
including the funds necessary to pay dividends and other cash
distributions to our shareholders, service any debt we may incur
and pay our operating expenses.
In the British Virgin Islands, the payment of dividends is
subject to limitations. A British Virgin Islands business
company that prior to January 1, 2007 existed as an
international business company is permitted to declare and pay
dividends only out of surplus, meaning the excess, if any, at
the time of the determination, of the total assets of the
company over the sum of its total liabilities, as shown in the
books of account, plus its capital. In addition, such company
may not declare or pay a dividend unless the directors of the
company determine that immediately after the payment of the
dividend the company will be able to satisfy its liabilities as
they become due in the ordinary course of its business and the
realizable value of the assets of the company will not be less
than the sum of its total liabilities, other than deferred
taxes, as shown in the books of account, and its capital.
In Hong Kong, the payment of dividends is also subject to
limitations. Dividends may only be distributed out of
accumulated, realized profits less accumulated, realized losses.
Accumulated, realized profits must not have been previously
distributed or capitalized. Accumulated, realized losses do not
include those previously written off in a reduction or
reorganization of capital.
Our board of directors has complete discretion on whether to pay
dividends, subject to the approval of our shareholders. Even if
our board of directors decides to pay dividends, the form,
frequency and amount will depend upon our future operations and
earnings, capital requirements and surplus, general financial
condition, contractual restrictions and other factors that the
board of directors may deem relevant. Cash dividends on our
ADSs, if any, will be paid in U.S. dollars.
The following table sets forth our capitalization as of
December 31, 2006:
•
on an actual basis; and
•
on an as adjusted basis to give effect to (1) the automatic
conversion of all of our outstanding convertible preferred
shares into 16,134,320 class A common shares immediately
upon the completion of this offering, (2) the conversion of
our convertible loan into 3,832,543 class A common shares
and (3) the issuance and sale of 34,615,846 common shares
in the form of ADSs by us in this offering, assuming an initial
public offering price of $13.00 per ADS, the midpoint of the
estimated range of the initial public offering price, after
deducting estimated underwriting discounts and commissions and
estimated aggregate offering expenses payable by us and assuming
no exercise of the underwriters’ over-allotment option and
no other change to the number of ADSs sold by us as set forth on
the cover page of this prospectus.
You should read this table together with our financial
statements and the related notes included elsewhere in this
prospectus and the information under “Management’s
discussion and analysis of financial condition and results of
operations.”
Class A common shares and non-vested shares, $0.001 par
value, 69,035,751 shares authorized; 32,011,154 shares
issued and outstanding(1)
32
87
Class B common shares, $0.001 par value,
50,054,619 shares authorized; 50,054,618 shares issued
and outstanding
7
7
Preferred shares, $0.001 par value, 15,600,000 shares
authorized; 15,585,254 shares issued and outstanding
(liquidation value $115,770,726)
16
—
Additional paid-in capital(2)
103,155
320,901
Accumulated other comprehensive income
837
837
Deficit
(2,797
)
(2,797
)
Total shareholders’ equity(2)
101,250
319,035
Total capitalization(2)
$
115,267
$
319,035
(1)
Excludes 10,698,141 common shares issuable upon the exercise of
options outstanding as of December 31, 2006 and 1,029,461
common shares reserved for future issuance under any individual
option agreements that may be entered into.
(2)
A $1.00 increase (decrease) in the assumed initial public
offering price of $13.00 per ADS would increase
(decrease) each of additional paid-in capital, total
shareholders’ equity and total capitalization by
$16 million.
Our business is primarily conducted in China and substantially
all of our revenues are denominated in RMB. However, periodic
reports made to shareholders will be expressed in U.S. dollars
using the then applicable exchange rates. This prospectus
contains translations of RMB amounts into U.S. dollars at
specific rates solely for the convenience of the reader. Unless
otherwise noted, all translations from RMB to U.S. dollars
and from U.S. dollars to RMB in this prospectus were made at a
rate of RMB 7.8041 to $1.00, the noon buying rate in New York,
New York for cable transfers in Renminbi per U.S. dollar as
certified for customs purposes by the Federal Reserve Bank of
New York, or the noon buying rate, as of December 29, 2006.
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 PRC government
imposes control over its foreign currency reserves in part
through direct regulation of the conversion of RMB into foreign
exchange and through restrictions on foreign trade. On
February 20, 2007, the noon buying rate was RMB 7.7466
to $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
prospectus 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.
We are incorporated in the Cayman Islands to take advantage of
certain benefits associated with being a Cayman Islands exempted
company, such as political and economic stability, an effective
judicial system, a favorable tax system, the absence of exchange
control or currency restrictions and the availability of
professional and support services. However, certain
disadvantages accompany incorporation in the Cayman Islands.
These disadvantages include that the Cayman Islands has a less
developed body of securities laws as compared to the United
States and provides significantly less protection to investors,
and Cayman Islands companies do not have standing to sue before
the federal courts of the United States. Our constituent
documents do not contain provisions requiring that disputes,
including those arising under the securities laws of the United
States, between us, our officers, directors and shareholders, be
arbitrated.
Most of our current operations are conducted in China, and most
of our assets are located in China. A majority of our directors
and officers are nationals or residents of jurisdictions other
than the United States and a substantial portion of their assets
are located outside the United States. As a result, it may be
difficult for a shareholder to effect service of process within
the United States upon us or such persons, or to enforce against
us or them judgments obtained in United States courts, including
judgments predicated upon the civil liability provisions of the
securities laws of the United States or any state in the United
States.
We plan to appoint Law Debenture Corporate Services Inc. as our
agent to receive service of process with respect to any action
brought against us in the United States District Court for the
Southern District of New York under the federal securities laws
of the United States or of any state in the United States or any
action brought against us in the Supreme Court of the State of
New York in the County of New York under the securities laws of
the State of New York.
Conyers Dill & Pearman, our counsel as to Cayman Islands
law, and Commerce & Finance Law Offices, our counsel as to
PRC law, have advised us, respectively, that there is
uncertainty as to whether the courts of the Cayman Islands and
China, respectively, would:
•
recognize or enforce judgments of United States courts obtained
against us or our directors or officers predicated upon the
civil liability provisions of the securities laws of the United
States or any state in the United States; or
•
entertain original actions brought in each respective
jurisdiction against us or our directors or officers predicated
upon the securities laws of the United States or any state in
the United States.
Conyers Dill & Pearman has further advised us that a final
and conclusive judgment in the federal or state courts of the
United States under which a sum of money is payable, other than
a sum payable in respect of taxes, fines, penalties or similar
charges, may be subject to enforcement proceedings as debt in
the courts of the Cayman Islands under the common law doctrine
of obligation. Civil liability provisions of the U.S. federal
and state securities law permit punitive damages against us.
However, according to Conyers Dill & Pearman, the Cayman
Islands courts would not recognize or enforce judgments against
us to the extent the judgment is punitive or penal. It is
uncertain as to whether a judgment obtained from the U.S. courts
under civil liability provisions of the securities laws would be
determined by the Cayman
Islands courts as penal or punitive in nature. Such a
determination has yet to be made by any Cayman Islands court.
Commerce & Finance Law Offices has advised us further that
the recognition and enforcement of foreign judgments are
provided for under PRC Civil Procedures Law. Courts in China may
recognize and enforce foreign judgments in accordance with the
requirements of PRC Civil Procedures Law based on treaties
between China and the country where the judgment is made or on
reciprocity between jurisdictions.
The following selected consolidated statements of operations
data for EconWorld Media Limited (our predecessor) for the year
ended December 31, 2004 and the period ended May 25,2005, and for our company for the period from May 26, 2005,
the date our parent acquired 60% of EconWorld Media Limited, to
December 31, 2005 and the year ended December 31, 2006
and the selected consolidated balance sheet data for EconWorld
Media Limited as of December 31, 2004 and for our company
as of December 31, 2005 and 2006 have been derived from our
audited financial statements included elsewhere in this
prospectus. You should read the selected consolidated financial
data in conjunction with those financial statements and the
accompanying notes and “Management’s discussion and
analysis of financial condition and results of operations”.
The selected consolidated statement of operations data for the
year ended December 31, 2003 and the selected consolidated
balance sheet data as of December 31, 2003 of EconWorld
Media Limited have been derived from the unaudited financial
statements of EconWorld Media Limited that are not included in
this prospectus. Our consolidated financial statements are
prepared and presented in accordance with U.S. GAAP. Our
historical results do not necessarily indicate our results
expected for any future periods.
Deemed dividend on redeemable convertible preferred shares
—
—
—
—
(2,157
)
Dividends declared to redeemable convertible preferred shares
—
—
—
—
(5,335
)
Net income (loss) attributable to holders of common shares
(614
)
(1,248
)
(884
)
1,350
(4,148
)
Net income (loss) per share:
Basic — Class A common share
$
—
$
—
$
—
$
—
$
(0.08
)
Basic — Class B common share
$
(8.53
)
$
(13.13
)
$
(7.85
)
$
0.03
$
(0.08
)
Diluted — Class A common share
$
—
$
—
$
—
$
—
$
(0.08
)
Diluted — Class B common share
$
(8.53
)
$
(13.13
)
$
(7.85
)
$
0.03
$
(0.08
)
Shares used in computation:
Basic — Class A common share
—
—
—
—
5,084
Basic — Class B common share
72
95
113
42,613
44,693
Diluted — Class A common share
—
—
—
—
5,084
Diluted — Class B common share
72
95
113
42,613
44,693
Pro forma income per share on an as converted basis(3):
Basic — Class A common share
—
—
—
—
$
0.076
Basic — Class B common share
—
—
—
—
$
0.076
Diluted — Class A common share
—
—
—
—
$
0.073
Diluted — Class B common share
—
—
—
—
$
0.076
Shares used in calculating pro forma per share amount on an as
converted basis:
Basic — Class A common share
—
—
—
—
21,225,762
Basic — Class B common share
—
—
—
—
44,693,266
Diluted — Class A common share
—
—
—
—
68,469,817
Diluted — Class B common share
—
—
—
—
44,693,266
(1)
Date our parent acquired 60% of EconWorld Media Limited, our
predecessor.
(2)
Includes share-based compensation expense of $2.4 million
for the year ended December 31, 2006.
(3)
Pro forma basic and diluted net income per common share is
computed by dividing net income attributable to holders of
common shares by the weighted average number of common shares
outstanding for the period plus the weighted average number of
common shares outstanding resulting from the assumed conversion
upon the closing of the planned initial public offering of the
outstanding redeemable convertible preferred shares and
convertible loan.
Total owners’ and shareholders’ (deficiency) equity
177
(1,071
)
1,353
101,250
115,267
Total liabilities and owners’ and shareholders’
(deficiency) equity
$ 401
$ 198
$10,306
$399,450
$399,450
Note:
The unaudited pro forma balance sheet information as of
December 31, 2006 assumes the conversion upon completion of
the initial public offering of all redeemable convertible
preferred shares of $59,051,612 and convertible loan of
$14,017,289 outstanding as of December 31, 2006 into common
shares.
You should read the following discussion and analysis of our
financial condition and results of operations in conjunction
with our consolidated financial statements and related notes
included elsewhere in this prospectus. This discussion may
contain forward-looking statements based upon current
expectations, the fulfillment of which is uncertain and subject
to risks. 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 “Risk
factors” or in other parts of this prospectus.
Overview
We are a leading diversified media company in China. Since we
were established in November 2005, we have developed a unique,
integrated media platform through acquisitions and strategic
partnerships. We operate our businesses along five segments:
media production, broadcasting, print, advertising and research.
We serve the following constituencies:
•
Advertisers and marketing services customers. Our
primary source of revenue is advertising in various forms,
including advertisements broadcast during advertising breaks
during or between television or radio programs, advertisements
placed in print pages as well as advertisements in the form of
sponsorship and sponsored programming.
Sponsorship can take various forms, including when products,
services or expertise are promoted during a program. Sponsored
programming refers to programs that typically are supplied by
the advertiser and promote a product or service. We serve
advertisers not only by providing the media platform, but also
by creating the advertisements, and providing research services
to enable the advertiser to better understand its target market.
We provide marketing services to financial institutions and
other types of companies, leveraging on the brand names of the
media platforms of our strategic partners, especially that of
Money Journal. Our marketing services include events
organization and other services such as our Affluent Integrated
Marketing Solutions services. The events we organize include
investment seminars or other finance-related forums. For the
events we organize, we typically manage substantially the entire
process, including arranging for advertising or public notices,
booking venues, inviting speakers and providing cross-media
content.
•
Audience and readers. We seek to attract audience
and readers to the media platforms of our strategic partners. We
have staff working to provide some of the content for various
media outlets including Inner Mongolia Satellite Television,
Hunan Satellite Television, various local stations airing
Fortune China, and China Radio International’s
EasyFM stations in Beijing and Shanghai. We also offer
management and information consulting services to our strategic
partners to help improve the content of the Economic Observer
and Money Journal. In addition, we obtain content
from other providers, such as our parent and Dow Jones.
•
Television stations or channels. In addition to
creating content for the media platforms of our strategic
partners, our media production group produces television
programs, including
drama series for other customers. For these types of customers,
our media production group also engages in broadcast design as
well as animation and post-production services.
•
Research customers. In addition to providing
research services to our other operating groups, our research
group serves international and China-based customers who need to
conduct market research in China. We study market
characteristics, consumer preferences and opinions with respect
to advertising and media content, and business and technology
issues as needed for each project.
Although we currently operate all five operating groups and
serve all of the constituencies described above, our
consolidated financial statements for the period from
May 26, 2005 to December 31, 2005, which are included
elsewhere in this prospectus, reflect the operating results of
only two operating groups— the media production group and
our predecessor, the Money Journal operations of our
print group. Our consolidated financial statements for the year
ended December 31, 2006, which also are included in this
prospectus, reflect the operating results of all five operating
groups.
We have grown rapidly since we were established due to
acquisitions. We expect our future growth to be driven by a
number of factors and trends, including, among others:
•
overall economic growth in China, which we expect should
contribute to an increase in advertising spending, particularly
in major urban areas in China where consumer spending is
concentrated;
•
our ability, and the ability of our strategic partners to
operate in, and react to, an uncertain and developing regulatory
environment; and
•
our ability to
•
successfully integrate our acquisitions;
•
expand our sales and marketing efforts and integrate and
coordinate such efforts across our operating groups;
•
increase advertising sales by attracting new advertising
customers and increase spending per customer through promotion
of our services and cross-selling;
•
maintain the popularity and high-quality of our content, while
generating greater volumes of high-quality content;
•
generate higher ratings and circulation numbers from the content
we produce and source;
•
attract an audience that represents a desirable demographic for
our advertising customers;
•
successfully develop our presence in and use new media, such as
the Internet, as media platforms for delivery of our products
and services to consumers, and attract advertisements on those
new platforms;
acquire companies that operate media-related or advertising
businesses complementary to our existing operations; and
•
maintain existing and enter into new strategic partnerships that
allow us to access appropriate media assets and know-how.
As we continue to grow, we expect to face a number of
challenges. We have made acquisitions in rapid succession to
build our integrated platform of products and services. We must
integrate all these acquisitions successfully, as well as any
future acquisitions. Some of our businesses have incurred net
losses in the past, such as our Fortune China operations
in our broadcasting group and our magazine operations in our
print group, and we must ensure they are profitable in the
future. In addition, we must adapt to continuing technological
innovations and changes in the regulatory environment.
Acquisitions
We were established on November 7, 2005 by our parent,
Xinhua Finance Limited. We have acquired the companies listed
below to build our integrated platform of products and services.
We acquired all of our operating groups in 2006. We issued two
promissory notes on March 31, 2006, one in favor of our
parent for $68.5 million and the other in favor of its
subsidiary Xinhua Financial Network Limited, or Xinhua Financial
Network, for $38.2 million, in return for the following
transfers and advances: Two of our acquired entities, Beijing
Century Media Culture Co., Ltd, or Beijing Century Media, and
Ming Shing International Limited, or Ming Shing, were initially
acquired by our parent and subsequently transferred to us. In
addition, our parent and Xinhua Financial Network advanced the
purchase price for our purchase of 19.0% of the equity of Upper
Step Holdings Limited, or Upper Step, and 19.0% of the equity of
Accord Group Investments Limited, or Accord Group. See
“Related party transactions— Transactions with our
parent or its subsidiaries— Loan agreements between us and
our parent or its subsidiaries”. The transaction agreements
for some of our acquisitions contain earn-out provisions that
would require payment of additional consideration based on the
financial performance of the acquired company. Our parent is
contractually obligated for paying these earn-out considerations
except for the earn-out for Shanghai Hyperlink Market Research
Co., Ltd., or Hyperlink, for which we and our parent are both
responsible. Although the contracts do not specify whether the
parent has a right to make such a request, if the amount of the
earn-outs exceeds original estimates, our parent may request us
to pay for the difference between these payments and the amounts
due under the promissory notes or otherwise paid by us to our
parent or Xinhua Financial Network for certain acquisitions.
Several of the entities listed below are affiliated entities or
subsidiaries that exercise effective control over affiliated
entities, and we have contractual arrangements with each
affiliated entity and all of its shareholders that enable us to
effectively control such entity. Several others are subsidiaries
of affiliated entities. For a description of these contractual
arrangements, see “Corporate structure— Our corporate
structure and contractual arrangements”.
•
Media Production. Our parent, through a
subsidiary, lent funds to two PRC citizens, who used the funds
to buy a combined 100% equity interest in Beijing Century Media
on September 9, 2005. On the same day, the subsidiary of
our parent entered into a set of agreements with these two PRC
citizens to give our parent effective control over Beijing
Century Media. Our parent transferred its control of Beijing
Century Media to us through
one of our affiliated entities on March 16, 2006 at a price
of $11.4 million. This amount was included in our
promissory notes to our parent and Xinhua Financial Network.
•
Broadcasting. Our broadcasting group was formed
through the following three acquisitions:
•
Upper Step. We signed a series of agreements pursuant to
which we acquired 19.0% of the equity of Upper Step on
February 28, 2006, at an initial price of
$5.1 million. This amount was paid by Xinhua Financial
Network and included in our promissory notes to Xinhua Financial
Network and our parent. As part of the same series of
agreements, Sino Investment Holdings Limited, or Sino
Investment, also purchased 37.0% of Upper Step. We also injected
an additional $3.2 million into Upper Step. Of that amount,
$2.0 million was a loan from us paid by Xinhua Financial
Network, and we subsequently repaid Xinhua Financial Network. On
September 22, 2006, we acquired an additional 37.0% of the
equity of Upper Step from Sino Investment for a consideration of
6,478,437 class A common shares, $9.1 million paid by
our parent and 4,099,968 warrants to purchase our
class A common shares at $3.659 per share. The warrants are
immediately exercisable and valid for five years. In addition,
Sino Investment issued a demand promissory note to us in the
amount of $7.9 million as part of this transaction. On
October 24, 2006, we made an additional payment of $10.0
million partially under our obligations for the purchase of
19.0% of Upper Step and partially to meet the obligations of
Sino Investment for its purchase of 37.0% of Upper Step. On
November 1, 2006, we acquired the remaining 44.0% of the
equity of Upper Step from Honour Rise Services Limited, or
Honour Rise, a wholly-owned subsidiary of Shanghai Wai Gao Qiao
Free Trade Zone Development Co., Ltd., for 6,407,018
class A common shares. Primarily through Upper Step’s
subsidiaries and affiliated entities, we have our strategic
partnership with Shanghai Camera Media Investment Co., Ltd., or
Shanghai Camera, the content and advertising provider to Inner
Mongolia Satellite Television. Until Upper Step entered into
this strategic partnership, it had no operations.
•
Beijing Perspective. Through Beijing Century Media, an
affiliated entity, we acquired 51.0% of the equity of Beijing
Perspective Orient Movie and Television Intermediary Co., Ltd.,
or Beijing Perspective, on July 28, 2006. Xinhua Financial
Network financed the purchase price for this acquisition.
Beijing Perspective engages in the production, distribution and
syndication of Fortune China. On January 31, 2007,
our parent entered into a letter of intent by which it agreed to
use its best efforts to enter into a purchase agreement for the
remaining shares of Beijing Perspective by September 30,2007. After the acquisition, we intend to purchase this equity
from our parent. The closing of the acquisition is conditional
on a number of events, including compliance with PRC laws,
receipt of necessary approvals and delivery of customary legal
opinions.
•
Accord Group. We acquired 19.0% of the equity of Accord
Group on January 23, 2006 at a price of $440,000, which was
paid by Xinhua Financial Network. This amount was included in
our promissory notes to Xinhua Financial Network and our parent.
On September 22, 2006, we acquired 61.0% of the equity of
Accord Group from Sino Investment by issuing
451,107 class A common shares to Sino Investment. On
November 1, 2006, we acquired the remaining 20.0% of the
equity of Accord Group from Honour Rise for 125,053 class A
common shares. Through Accord Group and its affiliated entity,
Century Media Advertising, we have a partnership with China
Radio International’s exclusive advertising agent to
provide content to and exercise the exclusive right to sell
advertising for the EasyFM stations of Beijing and Shanghai.
Print. Our print group was formed through the
following two acquisitions:
•
Economic Observer Advertising. Through Beijing Taide
Advertising Co., Ltd., or Beijing Taide, an affiliated entity,
we acquired 50.0% of the equity of Beijing Jingguan Xincheng
Advertising Co., Ltd., or Economic Observer Advertising, on
June 8, 2006. Our parent financed the purchase price for
this acquisition, and we subsequently issued 5,761,317
class B common shares to our parent as consideration. We
acquired the remaining 50.0% of the equity of Economic Observer
Advertising through Beijing Taide on September 15, 2006.
Economic Observer Advertising has the exclusive rights to sell
advertising for and provides advisory services and other
management consulting services to the Economic Observer
newspaper.
•
EconWorld Media. Our parent subscribed for 60.0% of the
equity of EconWorld Media Limited, or EconWorld Media, on
May 26, 2005 at an initial price of $1.5 million and
transferred that interest to us on January 12, 2006. On
June 8, 2006, we subscribed to one additional share of
EconWorld Media at a price of $2.8 million in fulfillment
of an earn-out obligation, which was paid by our parent. We
issued one share to our parent as consideration, which was
subsequently divided into 1,000 shares. We acquired another
12.0% of the equity of EconWorld Media on June 21, 2006 at
a price of $1.1 million, which was also paid by our parent.
On December 18, 2006, we acquired the remaining 28.0% at a
price of $5.0 million, which was paid by our parent.
EconWorld Media operates the magazine business of our print
group. EconWorld Media is our predecessor.
•
Advertising. Our parent acquired 100% of the
equity in Ming Shing at a cost of $29.0 million plus a
series of earn-out obligations, which, together with the first
payment, were estimated to be $80.5 million, on
January 12, 2006 and subsequently transferred Ming Shing to
us on March 16, 2006, at a price of $80.5 million. Our
parent is responsible for the future earn-out payments. This
amount was included in our promissory notes to our parent and
Xinhua Financial Network. Ming Shing subsequently changed its
name to Xinhua Finance Advertising Limited, or Xinhua Finance
Advertising, on June 19, 2006. Xinhua Finance Advertising
and certain of its subsidiaries and affiliated entities operate
as our advertising group.
•
Research. Through Beijing Taide, an affiliated
entity, we acquired 51.0% of the equity of Hyperlink on
August 1, 2006. Our parent financed the purchase price for
this 51.0% equity, and we subsequently issued
1,679,012 class B common shares to our parent as
consideration. On September 18, 2006, we acquired the
remaining 49.0% of the equity of Hyperlink through Beijing
Taide. Hyperlink operates as our research group.
For certain acquisitions the consideration we paid was made in
two parts, one part within China, and the other part outside of
China. This exposes us to tax liability if the sellers did not
pay appropriate taxes. See “Risk factors—Risks related
to the regulation of our business and to our
structure—Contractual arrangements we have entered into
with our subsidiaries and affiliated entities or acquisitions of
offshore entities that conduct PRC operations through affiliates
in China may be subject to scrutiny by the PRC tax authorities,
and we may have to pay additional taxes or be found ineligible
for a tax exemption”.
We have a short operating history. For the period from
November 7, 2005, the date of our incorporation, to
December 31, 2005, we did not have any subsidiaries or PRC
affiliated entities. We acquired all of our operating groups in
2006. We have included in this prospectus
The audited consolidated financial statements of Xinhua Finance
Advertising for the period from December 21, 2005 (the date
Xinhua Finance Advertising acquired Active Advertising Agency
Limited, its predecessor) to, and as of, December 31, 2005.
The audited consolidated financial statements of Beijing Taide,
the other predecessor of Xinhua Finance Advertising, for the
period from March 23, 2005 (the date of establishment) to,
and as of, December 20, 2005.
•
The audited consolidated financial statements of Century Media
Advertising (the predecessor of Accord Group) for the period
from February 1, 2005 (the date of establishment of Century
Media Advertising) to, and as of, August 18, 2005 and of
Accord Group for the period from August 19, 2005 (the date
Accord Group acquired Century Media Advertising) to, and as of,
December 31, 2005. The unaudited consolidated financial
statements of Century Media Advertising for the period from
February 1, 2005 to, and as of, June 30, 2005 and of
Accord Group for the six months ended and as of, June 30,2006.
•
The audited consolidated financial statements of Beijing
Perspective, a subsidiary of one of our affiliated entities, for
the years ended, and as of, December 31, 2004 and 2005, and
the unaudited consolidated financial statements of Beijing
Perspective for the six months ended, and as of, June 30,2005 and 2006.
•
The audited consolidated financial statements of Hyperlink, a
subsidiary of one of our affiliated entities, for the years
ended, and as of, December 31, 2004 and 2005, and the
unaudited consolidated financial statements of Hyperlink for the
six months ended, and as of, June 30, 2005 and 2006.
General factors affecting our results of operations
We have benefited significantly from China’s overall
economic and population growth. The overall economic and
population growth and the increase in the gross domestic product
per capita in China have led to a significant increase in
spending on advertising in China. We
anticipate that advertising spending in China will continue to
increase as China’s economy continues to grow and as
disposable income of urban households continues to rise.
However, any adverse changes in the economic or political
conditions in China may have a material adverse effect on the
media industry in China and advertising spending, which in turn
may harm our business and results of operations.
PRC laws relating to foreign investments in the media and
advertising industries are relatively new compared with those in
more mature markets, and the PRC government continues to
promulgate and implement new laws and regulations. We believe
our current ownership structure, the ownership structure of our
subsidiaries, including our affiliated PRC entities, the
contractual arrangements among us, our subsidiaries, including
affiliated PRC entities, and their shareholders, our business
operations and the approvals and licenses to carry them out are
in compliance with all existing PRC laws, rules and regulations
in material respects. See “Risk factors— Risks related
to the regulation of our business and to our structure—
Certain of our PRC operating companies or strategic partners
have previously engaged or may currently engage in activities
without appropriate licenses or approvals or outside the
authorized scope of their business licenses or permitted
activities. This could subject those companies to fines and
other penalties, which could have a material adverse effect on
our business”. In addition, there are substantial
uncertainties regarding the interpretation, application and
administration of current PRC laws and regulations, and the
impact of any new laws and regulations is unknown. See
“Risk factors—Risks related to the regulation of our
business and to our structure—If the PRC government finds
that the agreements that establish the structure for operating
our China businesses do not comply with PRC governmental
restrictions on foreign investment in the media and market
research industries, or if these regulations or the
interpretation of existing regulations change in the future, we
could be subject to severe penalties or be forced to relinquish
our interests in those operations”. Accordingly, if PRC
government authorities ultimately take a view contrary to our
position, our business may suffer substantial interruptions and
our operating results may be negatively affected.
Specific factors affecting our results of
operations
While our business is affected by factors relating to the media
industry in China generally, we believe that our results of
operations are also affected by company-specific factors. We
believe that the results of operations of our broadcasting,
print and advertising operations are affected by, among other
factors, the following:
•
the quality of the content and ratings of our strategic
partners’ broadcast programs;
•
the reach and timing of our strategic partners’ broadcast;
•
the circulation numbers, the quality of the content of, and the
composition and location of the readership of, our strategic
partners’ publications;
•
the quality of the advertising we produce for advertisers;
•
the quality of the research services that we offer to
advertisers;
•
the pricing of our advertising; and
•
the pricing and quality of our marketing services, including
events organization.
We believe that the results of operations of our media
production operations are affected by, among other factors, the
following:
•
the quality of the programming we create;
•
the popularity of the programs; and
•
the pricing of our television programs and production services.
We believe that the results of operations of our research group
are affected by the pricing for its services and the quality of
its services, among other factors.
Our future results of operations will depend significantly upon
our ability to integrate our acquisitions and make new
acquisitions, manage the growth of new media successfully,
continue to attract and expand our base of audience and readers
and continue to attract and expand our base of advertisers. If
we cannot accomplish these matters, our financial condition and
results of operations may be materially and adversely affected.
We have acquired all our business operations recently and
continue to seek other acquisition opportunities. See
“—Acquisitions”. Strategic acquisitions are a key
part of our growth strategy. We must ensure that our recent and
future acquisitions are successfully integrated into our
operations in order to achieve the intended benefits from these
acquisitions.
We must continue to attract and expand our base of audience and
readers, which is important to attracting advertisers. We must
continue to attract our current base while also expanding this
base in order to grow.
We must continue to attract and expand our base of advertisers.
Advertising accounts for the largest portion of our revenue, and
our success depends on maintaining our current base of
advertisers while expanding that base.
Revenues for our business are driven largely by advertising and
sponsorship across all our operating groups and media platforms,
which subjects us to the seasonal effects of the Chinese
advertising industry. The advertising cycle in China typically
peaks towards the end of the year. Advertising spending tends to
decrease during January and February due to the Chinese Lunar
New Year holiday. In addition, there is a decrease in
advertising during the May 1 Labor Day holiday week, and
the October 1 National Day week.
Due to certain restrictions and qualification requirements under
PRC law that apply to foreign investment in China’s media
industry, most of our businesses are currently conducted through
contractual arrangements among us, our wholly-owned subsidiaries
in China, our affiliated entities in China and their
shareholders, and our strategic partners in China. Since
December 10, 2005, foreign investors with at least three
years of direct operations in the advertising industry outside
of China have been permitted to own directly a 100% interest in
advertising companies in China. We may decide to change the
ownership structure of our advertising group to that of a direct
ownership in the future.
In our media production, advertising and market research
businesses, our affiliated entities and their subsidiaries hold
the requisite licenses and permits. See “Risk factors—
Risks related to the regulation of our business and to our
structure— Certain of our PRC operating companies or
strategic partners have previously engaged or may currently
engage in activities without appropriate licenses or approvals
or outside the authorized scope of their business licenses or
permitted activities. This could subject those companies to
fines and other penalties, which
could have a material adverse effect on our business”. In
our broadcasting and print businesses, our affiliated entities
and their subsidiaries maintain some of the requisite licenses
and permits to conduct the business, and enter into agreements
with publishing institutions and the exclusive advertising
agents for radio stations or television stations to provide them
with various services and act as their advertising business
party. See “Arrangements with partners and suppliers”
for a description of those contractual relationships. We depend
on these affiliated entities and their subsidiaries to operate a
substantial portion of our businesses.
We expect to continue to depend on these affiliated entities and
their subsidiaries to operate a substantial portion of our
businesses unless and until we are permitted under PRC laws and
regulations to directly own and operate media-related businesses
without constraints. Under certain agreements we have with the
shareholders of these entities, we may acquire the affiliated
entities, in part or in whole, to make them our direct
subsidiaries.
Our revenues
Net revenues. For the period from May 26, 2005 to
December 31, 2005 and the year ended December 31,2006, we generated total net revenues of $5.4 million and
$59.0 million, respectively. Our net revenues differed
substantially in 2006 due to our acquisition and consolidation
of the acquired entities. Our revenues are net of PRC business
taxes, advertising rate adjustments and discounts.
We currently derive revenues from the following sources:
•
advertising sales, which accounted for 7.2% and 11.3% of our
total net revenues for the period from May 26, 2005 to
December 31, 2005 and the year ended December 31,2006, respectively;
•
content production, which accounted for 67.5% and 11.1% of our
total net revenues for the period from May 26, 2005 to
December 31, 2005 and the year ended December 31,2006, respectively;
•
advertising services, which accounted for 10.7% and 76.1% of our
total net revenues for the period from May 26, 2005 to
December 31, 2005 and the year ended December 31,2006, respectively; and
•
publishing services, which accounted for 14.6% and 1.5% of our
total net revenues for the period from May 26, 2005 to
December 31, 2005 and the year ended December 31,2006, respectively.
Our net revenue mix, and especially our net revenues from
advertising services, differed substantially in 2006 due to our
acquisition and consolidation of the acquired entities.
Advertising sales revenues. We generate advertising sales
revenues from the following media sources:
•
the Economic Observer (by the print group);
•
Money Journal (by the print group);
•
certain pages of the Beijing Review (by the print group);
•
Inner Mongolia Satellite Television (by the broadcasting group);
Hunan Satellite Television’s and certain local television
channels’ broadcasts of Fortune China programs (by
the broadcasting group); and
•
China Radio International’s EasyFM stations in Beijing and
Shanghai (by the broadcasting group).
In the year ended December 31, 2006, we generated revenues
from advertising, sponsorship and sponsored programming on Inner
Mongolia Satellite Television through our strategic partnership
with Shanghai Camera, which has the exclusive rights to sell
advertising for Inner Mongolia Satellite Television. In that
same period and currently we also generate revenues based on our
provision of content to Shanghai Camera and our provision of
consulting and advisory services to Shanghai Camera, both in
relation to Inner Mongolia Satellite Television. However, these
revenues are categorized as advertising services revenues. See
“—Our revenues— Advertising services
revenues”. We recognize revenues through our agreements
with Shanghai Camera. See “Arrangements with partners and
suppliers— Arrangements regarding Shanghai Camera”.
Initially, we recognized these revenues monthly and received
cash payment from Shanghai Camera monthly for the amount due in
the previous month. In November 2006, we began to recognize
revenues from Shanghai Camera by this method specifically in
relation to the consulting and advisory services and provision
of content. In December 2006, we began recognizing revenues from
advertising, sponsorship and sponsored programs directly, rather
than through Shanghai Camera, as the services were performed,
which revenues are categorized as advertising sales revenues.
Our consolidated results of operations for the period from
May 26, 2005 to December 31, 2005 did not include
these revenues as we acquired a majority interest in Upper Step,
which had entered into the strategic partnership with Shanghai
Camera through its subsidiaries and affiliated entity, in
September 2006. This strategic partnership was based on
agreements that were replaced with new agreements in November
and December 2006. Our consolidated results of operations for
the year ended December 31, 2006 included these revenues
from the date of our acquisition of a majority interest in Upper
Step. However, as we began recognizing revenues directly from
advertising sales only in January 2007, all our revenues from
this business for the year ended December 31, 2006 were
advertising services revenues. Upper Step had no operations for
periods ending on or before December 31, 2005.
We generate revenues from selling advertising time slots and
sponsorship on Hunan Satellite Television during its broadcast
of Fortune Morning 7 a.m. We are entitled to keep
all revenues from selling sponsorship for the show, and share
advertising revenues generated by the show with Hunan Television
Station on an equal basis. We also generate revenues from
placing advertisements and selling sponsorship rights on the
local television station broadcasts of the Fortune China
programs that we syndicate. We recognize these revenues when
the related advertisements or programs with sponsorship sold by
us are aired. Our consolidated results of operations for the
period from May 26, 2005 to December 31, 2005 did not
include these revenues as we acquired our Fortune China
operations in July 2006 as part of the acquisition of 51% of
Beijing Perspective. Our consolidated results of operations for
the year ended December 31, 2006 included these revenues
from the date of our acquisition of 51% of Beijing Perspective.
We generate revenues from selling advertising time slots and
sponsorship on China Radio International’s EasyFM stations
in Beijing and Shanghai. We recognize these revenues when the
related advertisements are broadcast. Our consolidated results
of operations for the period from May 26, 2005 to
December 31, 2005 did not include these revenues as we
acquired a
majority interest in Accord Group, which, through its affiliated
entity, had entered into a partnership with China Radio
International’s exclusive advertising agent in
November 2006, replacing a prior agreement entered into in
September 2006. Our consolidated results of operations for
the year ended December 31, 2006 included these revenues
from the date of our acquisition of a majority interest in the
Accord Group.
We generate revenues from selling advertising space on the pages
of the Economic Observer. We have the exclusive rights to
sell advertisements for the Economic Observer, and
typically other advertising agents engage us to place
advertisements on its pages. We receive payments through these
agents or, when an advertiser directly advertises with us, from
the advertiser. We recognize these revenues when the related
advertisements are published. Our consolidated results of
operations for the period from May 26, 2005 to
December 31, 2005 did not include these revenues as we
acquired our Economic Observer operations in June 2006.
Our consolidated results of operations for the year ended
December 31, 2006 included these revenues from the date of
the acquisition.
We generate revenues from selling advertising space on the pages
of Money Journal. Most advertisements placed in Money
Journal will result in revenues to us, except for those
advertisements placed in Money Journal by Dow Jones, most
of which result in revenues to Dow Jones. See “Arrangements
with partners and suppliers— Our print group’s
relationship with Dow Jones”. We generate some advertising
sales revenues directly from advertisers, and some through
agents. We recognize these revenues when the related
advertisements are published. Our consolidated results of
operations for the period from May 26, 2005 to
December 31, 2005 and the year ended December 31, 2006
include these revenues as our parent acquired a controlling
interest in the Money Journal operations in September
2005.
We generate revenues from placing advertisements on certain
pages of Beijing Review. Content for those pages is
provided by our parent and by Money Journal. We generate
some advertising sales revenues directly, and some through
agents. We recognize these revenues when the related
advertisements are published. Our consolidated results of
operations for the period from May 26, 2005 to
December 31, 2005 did not include these revenues as we
established this relationship with Beijing Review in July
2006. Our consolidated results of operations for the year ended
December 31, 2006 included these revenues from the date we
established the relationship with Beijing Review.
We price our advertising depending upon the type of advertising
we are providing and the media outlet where the advertisement is
placed. Even within one outlet, prices can vary greatly. For
example, television advertisement prices are highly sensitive to
the time of the day an advertisement is shown. Our pricing also
varies according to factors that affect the demand for
advertising, such as the ratings of our strategic partners’
broadcast programs, the reach and timing of our strategic
partners’ broadcast and the circulation numbers, and the
composition and location of the readership of our strategic
partners’ publications.
Content production revenues. Our content production
revenues consist of revenues from:
production of visual effects for television commercials and
films; and
•
post-production services.
We produce television programs, including drama series, and
purchase the rights to distribute some drama series that are
produced by other companies. We sell the rights to broadcast
these programs to television stations and channels. We typically
retain the distribution rights, and at the end of the contract
we may re-sell the broadcasting rights to another buyer. For
drama series that we produce, we start by creating a pilot.
After evaluating the pilot, we may decide to produce the entire
series before selling if we believe the pilot has a high chance
of success. For most pilots, we typically show the pilot to
potential buyers and, if a buyer decides to buy a drama series
based on the pilot, we enter into a contract to produce the
drama series. We often receive some payment in advance if a
television station purchases a drama series. We recognize
revenues for television programs when the master tape of a
television program is available for first airing under the terms
of the relevant licensing agreement we have entered into with a
television station or channel.
We engage in broadcast design for television channels. Broadcast
design mainly includes design of television channel logos,
production of trailers for advertising the television channels,
and image consulting and branding for the television channels.
We also produce three-dimensional animation advertisements,
education and public instruction, engage in post-production for
television commercials and create special visual effects for
television commercials and films. We recognize revenues when
products are delivered to and accepted by all customers or as
our services are provided.
Our consolidated results of operations for the period from
May 26, 2005 to December 31, 2005 and for the year
ended December 31, 2006 include these content production
revenues from the date of acquisition as our parent acquired our
media production group in September 2005.
Our pricing for these services varies. Our average price for
television programs, including drama series, varies
substantially upon the quality and popularity of the programs.
Our pricing for broadcast design, animation production and
post-production services is usually determined through
negotiations with our customers.
Advertising services revenues. We generate advertising
services revenues for:
•
acting as an advertising agent to place advertisements on
certain programs aired by Beijing Television Station and other
television stations, on billboards on some university campuses
in Shanghai and in certain print and electronic media (by the
advertising group);
•
designing and producing television, print and billboard
advertisements (by the advertising group);
•
marketing services, primarily events organization (by the print
group, the broadcasting group and the advertising group);
•
research services (by the research group); and
•
advertising, sponsorship and sponsored programming on Inner
Mongolia Satellite Television and provision of content and
advisory services to Shanghai Camera (by the broadcasting group).
We generate revenues from advertising broadcast on Beijing
Television Station and other television stations during certain
programs. We also generate revenues from advertising on
billboards placed on some university campuses in Shanghai and
from advertising in certain print and electronic media. We may
also provide additional services in relation to the placement
and sales of advertisements, including the creation of the
advertising or research services as part of our service package.
We recognize these revenues when the related advertisements are
aired on television, placed on the billboards or published in
the print or electronic media, respectively. Our consolidated
results of operations for the period from May 26, 2005 to
December 31, 2005 did not include these revenues as we
acquired our advertising group, which conducts these operations,
in March 2006 from our parent. Our consolidated results of
operations for the year ended December 31, 2006 include
these revenues from January 12, 2006, the date our parent
acquired Xinhua Finance Advertising.
Most of our marketing services are provided by our print and
advertising groups, although our broadcasting group also engages
in events organization. The fees we charge for marketing
services vary, depending primarily on competition and our
estimated costs of providing the services. We recognize these
revenues when the services are provided. Our consolidated
results of operations for the period from May 26, 2005 to
December 31, 2005 included the portion of these revenues
derived from our Money Journal operations as our parent
acquired our Money Journal operations in September 2005.
Our consolidated results of operations for the year ended
December 31, 2006 also included marketing services revenues
generated by the newspaper operations of our print group, our
advertising group and our broadcasting group. For the year ended
December 31, 2006, we organized one promotional event in
Beijing and recognized ticket sales and sponsorship revenues
from the event.
We generate revenues for providing research services to
companies relating to market characteristics, consumer
preferences and opinions with respect to advertising and media
content, as well as business and technology issues if needed for
each project. The fees we charge for research projects vary,
depending on competition and our estimated costs for providing
the research services. We recognize these revenues when the
reported data is accepted by the customer. Our consolidated
results of operations for the period from May 26, 2005 to
December 31, 2005 did not include these revenues as we
acquired our research operations in August 2006. Our
consolidated results of operations for the year ended
December 31, 2006 included these revenues from the date we
acquired a majority interest in Hyperlink.
In the year ended December 31, 2006, we generated
advertising services revenues from advertising, sponsorship and
sponsored programming on Inner Mongolia Satellite Television
through our strategic partnership with Shanghai Camera. In that
same period and currently, we also generate revenues based on
our provision of content to Shanghai Camera and our provision of
consulting and advisory services to Shanghai Camera.
In January 2007, we began recognizing revenues from advertising,
sponsorship and sponsored programming directly rather than
through Shanghai Camera, and at that point we began to
categorize our revenues for advertising, sponsorship and
sponsored programming in relation to Inner Mongolia Satellite
Television as advertising sales revenues. However, we continue
to categorize our revenues for providing consulting and advisory
services and provision of content as advertising services
revenues. See “—Our revenues— Advertising sales
revenues”.
Publishing services revenues. Since September 20,2006, publishing services revenues include revenues we generate
in connection with our management and information consulting
services relating to the subscriptions and sales of Money
Journal. These revenues are generated by our print group.
Our consolidated results of operations for the period from
May 26, 2005 to December 31, 2005 and the year ended
December 31, 2006 include these revenues as our parent
acquired our Money Journal operations in September 2005.
Guangzhou Jingshi Culture Intermediary Co., Ltd., or Guangzhou
Jingshi, our affiliated entity, provides management and
information consulting services to the publisher of Money
Journal. In return, Guangzhou Jingshi receives a fee from
Money Journal. Before September 20, 2006 Guangzhou
Jingshi received a fee reflecting the subscription fees and
retail sales of Money Journal, and we recognized revenues
in connection with the subscription revenues for Money
Journal over the subscription period. During that time, we
recognized revenues in connection with single copy sales of the
magazine through distributors or retail outlets such as
newsstands, supermarkets and convenience stores when a copy was
sold to an ultimate customer.
Although we no longer act as book publishing agent, for the
period from May 26, 2005 to December 31, 2005 and the
year ended December 31, 2006, we engaged in this business
and received revenues from this source. The revenue contribution
from book sales was immaterial for these periods.
Operating costs and expenses
Our operating costs and expenses consist of cost of revenues,
selling and distribution expenses and general and administrative
expenses. The following table sets forth the components of our
operating costs and expenses, both in dollar amounts and as a
percentage of total net revenues for the periods indicated.
Date our parent acquired 60% of EconWorld Media, our predecessor.
Cost of revenues. Our cost of revenues primarily consists
of the following four components:
•
Advertising sales. Advertising sales costs primarily consist of
(1) the fees we pay to our strategic partners, and
amortization of these fees, in return for advertising revenues
generated from Inner Mongolia Satellite Television, China Radio
International’s EasyFM stations in Beijing and Shanghai,
Money Journal, the Economic Observer and
Beijing Review, (2) program production costs for the
Fortune China programs and (3) royalties to Dow
Jones.
•
Content production. Content production costs are primarily
direct costs we incur in producing television programs,
including production overhead, development costs and
pre-production costs, the cost of purchasing distribution rights
of programs produced by other production companies, salaries and
purchases of software and hardware.
•
Advertising services. Advertising services costs primarily
consist of our direct costs to secure advertising time or space
with various broadcast and print media, costs to produce
advertisements, marketing services costs and research costs.
Marketing services costs represent our direct costs of providing
marketing services, including events organization. Research
costs are the direct costs relating to providing research
services to companies that hire us to conduct market research
for them including costs for conducting interviews and holding
focus groups.
•
Publishing services. Publishing services costs primarily
represent our costs incurred relating to the publication and
distribution of Money Journal and certain books.
We anticipate that our total cost of revenues will continue to
increase as we continue to expand our operations. In particular,
we expect our content production costs will increase as we
leverage on our content production capabilities to produce
content for the media platforms we use. Also, we expect the cost
for acquiring media for our advertising services will increase
as we expand our business in this area.
Selling and distribution expenses. Our selling and
distribution expenses primarily consist of amortization of
non-compete agreements, salaries and benefits for our sales and
marketing personnel and promotional and marketing expenses. We
expect that our selling and distribution expenses will increase
significantly as we further expand our operations.
General and administrative expenses. Our general and
administrative expenses primarily consist of compensation and
benefits of administrative staff and fees, office rent and
travel expenses. 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. We are also contemplating a new
enterprise resource planning system to facilitate stronger
management of our acquisitions, which would also increase costs.
In addition we expect to incur increased costs as we become a
publicly listed company in the United States. As a result of
becoming a public company, we will establish additional board
committees and will adopt and implement additional policies
regarding internal controls over financial reporting and
disclosure controls and procedures. In particular, compliance
with Section 404 of the Sarbanes-Oxley Act, which requires
public companies to include a report of management on the
effectiveness of such company’s internal control over
financial reporting, will increase our costs. In addition, we
will incur costs associated with public company reporting
requirements, such as the requirements to file an annual report
and other event-related reports with the Securities and Exchange
Commission. As a result, our legal, consulting and audit fees
will increase. We also expect the rules and regulations that
govern public companies, including Securities and Exchange
Commission regulations and Nasdaq Stock Market, Marketplace
Rules, to increase our costs and to make it more difficult and
more expensive for us to obtain director and officer liability
insurance and we may be required to accept reduced policy limits
and coverage or incur substantially higher costs to obtain the
same or similar coverage. For the year
ended December 31, 2007, we have budgeted $0.4 million
to prepare for compliance with the Sarbanes-Oxley Act,
$0.8 million for auditing fees for audits required as a
public company and for preparation of U.S. GAAP financial
statements, and $0.6 million for additional legal fees. In
addition, we have budgeted $0.3 million for an expected
increase in investor relations and corporate communications
expenses and $0.3 million for costs associated with
improvements in internal processes in finance, human resources
and information technology.
Share-based compensation expenses. In the year ended
December 31, 2005, we did not issue any restricted shares
or grant any stock options. In June 2006, we issued 11,050,000
restricted class A common shares to our Chief Executive
Officer. In July 2006, we entered into individual option
agreements in order to attract and retain quality personnel for
positions of substantial responsibility, provide additional
incentive to employees and consultants and promote the success
of our business. Under these option agreements, we have reserved
class A common shares amounting to approximately 11.0% of
our total common shares and convertible preferred shares
outstanding as of the date of this prospectus for issuance. In
addition, our shareholders adopted a 2007 share option plan on
February 7, 2007. See “Management — Share
options.” Because our proposed option plan will cover all
of our employees, the change in the amount of share-based
compensation expenses will primarily affect our reported net
income, earnings per share and all line items of our operating
costs and expenses, which include cost of revenues, selling and
distribution expenses and general and administrative expenses.
Under Statement of Financial Accounting
Standard No. 123R, “Share-Based Payment”, or
SFAS No. 123R, which became effective January 1,2006, we are required to recognize share-based compensation as
compensation expense in our statement of operations based on the
fair value of equity awards on the grant date, with the
compensation expense recognized over the period in which the
recipient is required to provide service in exchange for the
award (usually the vesting period). This statement also requires
us to adopt a fair value-based method of measuring the
compensation expense related to share-based compensation. For
restricted shares granted to our employees, we record
share-based compensation expense for the fair value of the
restricted shares at the grant date. For options granted to
employees, we record share-based compensation expense for the
fair value of the options at the grant date. We recognize such
share-based compensation expense over the vesting period of the
restricted shares or options, respectively.
The determination of fair value of equity awards such as
restricted shares and options requires making complex and
subjective judgments about the projected financial and operating
results of the subject company. It also requires making certain
assumptions such as cost of capital, general market and
macroeconomic conditions, industry trends, comparable companies,
share price volatility of the subject company, expected lives of
options and discount rates. These assumptions are inherently
uncertain. Changes in these assumptions could significantly
affect the amount of employee share-based compensation expense
we recognize in our consolidated financial statements.
We engaged American Appraisal China Limited, an independent
appraiser, to assess the fair values of our common shares as of
each relevant grant date on a contemporaneous basis. Typically
fair value is determined either by the income approach, which
applies discount rates to projected cash flows from estimated
forecasts, and/ or the market approach, which analyzes and
applies the financial metrics of comparable companies engaged in
the same or a similar line of business to determine a value of
the subject company’s common shares. Determining
the fair value of the business enterprise and common shares
requires making complex and subjective judgments regarding
projected financial and operating results, our unique business
risks, the expected volatility and liquidity of our shares, and
our operating history and prospects at the grant date. These
fair values are inherently uncertain and highly subjective. The
assumptions used in deriving the fair values include: no
material changes in the existing political, legal, fiscal and
economic conditions in China; no material changes in tax law in
China or the tax rates applicable to our subsidiaries and
consolidated affiliated entities in operations; and no material
deviation in market conditions from economic forecasts. These
assumptions are inherently uncertain. If the independent
appraiser had used different assumptions and judgments, the
valuation would have been different and the amount of
share-based compensation would also have been different because
the fair value of the non-vested shares and the options granted
would have been different.
In determining the fair value of common shares, the first step
was to determine the business enterprise value of our company.
In June 2006, since we were planning a series of acquisitions
and were in the process of integrating entities we had acquired,
we were not able to produce a long-term financial forecast
necessary for the application of the income approach. Therefore,
the independent appraiser adopted a combination of a
sum-of-the-parts approach and a market approach to determine our
business enterprise value. As of June 2006, our company owned
and derived earnings solely from its shareholdings in three
business units, namely Beijing Century Media, EconWorld Media
and Xinhua Finance Advertising. The independent appraiser first
developed the fair value of equity interest in each of these
three business units through the market approach. Under the
market approach, the independent appraiser considered the market
profile and performance of comparable companies in the
television program production, publishing and advertising
industries. The independent appraiser applied leading enterprise
value/ earning before interest, tax, depreciation and
amortization, or leading EV/ EBITDA, leading enterprise value/
earning before interest and tax, or leading EV/ EBIT and leading
price/ earning, or leading P/ E, multiples as metrics.
Adjustments were also made to the metrics for the differences
between the business units and the comparable companies in terms
of growth rate, risks factors and tax rates.
When valuing the business units based on the comparable
companies’ multiples, the level of value is presented on a
freely traded and non-controlling basis. Since we owned a
controlling interest in the three business units, control
premiums were also considered. To estimate the control premium
applicable to the business units, the independent appraiser
considered the monthly data of control premiums of acquisition
transactions of Asia Pacific media and advertising industries,
extracted from a third party source.
The fair values of equity interest of the three business units
attributable to our company were added up to derive the value of
the combined operations of our company. The independent
appraiser then added the balances of cash and cash equivalents,
securities investments and net non-operating assets to, and
subtracted the balance of amounts due to our parent and related
companies and capitalized corporate overhead from the value of
operations to derive the fair value of invested capital
attributable to common shares, preferred shares and convertible
loan holders.
To reflect the fact that we were a private company at the time
of the valuation, a 17% lack of marketability discount, or LOMD,
was applied to the fair value of the invested capital. The
independent appraiser quantified the LOMD by the option pricing
method. Under the option pricing method, the cost of a put
option, which can hedge the price change before the
privately held shares can be sold, was considered as a basis to
determine LOMD. The farther the valuation date is from a
liquidation event, the higher the option value and thus the
higher the implied LOMD. The basis of key input parameters used
in the option pricing method for quantification of LOMD are risk
free interest rate, volatility of our company’s common
shares and the time to expiration of the option.
After developing the fair value of the invested capital of our
company, the independent appraiser then used the option pricing
method to allocate the value to different classes of capital
(i.e., convertible loans, preferred shares and common
shares). The option pricing method treats convertible loans,
preferred shares and common shares as call options to purchase
the underlying enterprise at a predetermined or exercise price.
In applying the option pricing method, the independent appraiser
considered the same key input parameters used for the
quantification of LOMD discussed above, namely, the risk-free
interest rate, volatility of our company’s underlying
common shares and the time to expiration of the option. In
addition, the independent appraiser considered the liquidation
preference and conversion mechanism of the convertible loans and
preferred shares. After the allocation, the value attributable
to common shareholders was then divided by the number of
outstanding common shares and non-vested shares to arrive at a
fair value of $0.60 per share.
Set forth below is a summary of our share-based awards granted
in 2006:
•
We granted the following restricted class A common shares
to our chief executive officer:
Options representing an aggregate of 500,039 common shares have
been cancelled due to termination of employment.
The independent appraiser has used the market approach to assess
the fair value of common shares underlying the options we
granted in July 2006.
The independent appraiser determined the fair value of the
options using the Black-Scholes option pricing model at each
option grant date under the following assumptions: 38.3%
volatility, no dividends, a risk-free interest rate of 5.68%,
and an expected option life of 3.61 years. If different
assumptions were used, our share-based compensation expenses,
net income and income per share could have been significantly
different.
In respect of the options, the total expenses that will be
recognized for the vesting period from July 2006 to December
2009 will be approximately $1,526,000. In respect of the
non-vested shares, the total expenses that will be recognized
for the vesting period from June 2006 to June 2011 were
approximately $6,630,000.
Although it is reasonable to expect that the completion of this
offering may increase the value of our common shares underlying
our outstanding options as a result of their increased liquidity
and marketability, the amount of such additional value cannot be
measured with precision or certainty.
Our estimated fair value per common share increased from $0.60
in June 2006 to $6.50 in February 2007. At the time of the June
2006 valuation by American Appraisal, our scale of operations
and revenue base were relatively small as we were formed in
November 2005. As of June 2006, we had acquired controlling
interests in three businesses: print, production and
advertising. Our focus was on executing a strategy of increasing
our interest in existing assets and acquiring additional assets
in order to build our media platform. Additionally, given our
limited operating history, our ability to make and integrate
acquisitions was untested. The June 2006 valuation considered
our future prospects in light of the risks and uncertainties
experienced by early stage companies in evolving and heavily
regulated industries such as the media industry in China. In
light of our limited operating history and operating assets at
that time, there was significant execution risk in our strategy
to acquire and integrate other media assets.
The primary factors and events which contributed to the increase
in the fair value of our common shares from June 2006 to the
date of this prospectus can be categorized broadly into three
groups: acquisitions, operations and integration. The following
is a summary of the significant factors and events within each
group that contributed to the increase:
(1) We made a number of acquisitions that significantly
expanded our scope of business. These include:
•
Our Fortune China operations, through acquisition of
Beijing Perspective;
•
Our right to advertise on China Radio International’s
Beijing and Shanghai stations through acquisition of the Accord
Group;
•
Our right to advertise and provide content through Shanghai
Camera on Inner Mongolia Satellite Television through
acquisition of Upper Step;
•
Our exclusive rights to sell advertising for and provide
management and information consulting services to the
Economic Observer newspaper, through acquisition of
Economic Observer Advertising; and
•
Our research group, through acquisition of Hyperlink.
(2) Since June 2006, we significantly improved our
operations, with several of our operating units achieving better
operating results than expected. This was due to number of
factors, including the better ratings of television programs
aired on Inner Mongolia Satellite Television, improved
circulation of Money Journal, our strengthening of our
strategic partnerships in television and radio, respectively,
and increased advertising inventory secured for 2007.
(3) We expect the completion of the above-mentioned
acquisitions and integration of the existing and acquired
businesses to generate synergies and enhance the value of our
company. These expected synergies include:
•
Cross-selling, which we believe should increase the quality of
our services and amount of our revenue;
Integrated product offerings, which would enhance revenue growth
through sales of bundled products; and
•
Cost synergies, which are derived from rationalization of sales,
administration and services and thereby increase cost-efficiency.
(4) In addition to the above-mentioned factors, the
positive performance of equity markets in the United States and
China and positive share performance of comparable companies
since June 2006 have also contributed to the increased fair
value of our common shares.
Taxation
We and each of our subsidiaries, including affiliated entities,
file separate income tax returns.
The Cayman Islands, the British Virgin Islands and Hong
Kong
Under the current laws of the Cayman Islands and the British
Virgin Islands, we and our subsidiaries incorporated in the
British Virgin Islands are not subject to income or capital
gains taxes. In addition, dividend payments are not subject to
withholding tax in those jurisdictions. Our subsidiaries
incorporated in Hong Kong are subject to a profits tax rate of
17.5% of its assessable profits. Payment of dividends is not
subject to withholding tax in Hong Kong.
PRC
Pursuant to the PRC enterprise income tax laws, enterprise
income tax is calculated based on taxable income. Most of our
subsidiaries, including affiliated entities, in China are
subject to the standard enterprise income tax rate, which
currently is 33.0% (30.0% of state income tax plus 3.0% of local
income tax). The enterprise income tax is calculated based on
taxable income under PRC GAAP. For some entities, the enterprise
income tax is calculated based on the actual revenue or expense
at a deemed tax rate according to the local practices of the
respective local tax bureaus in charge. In particular, Shanghai
Yuanxin Advertising Co., Ltd. and Shanghai Heyuan Media Co.,
Ltd. have been filing their enterprise income tax based on a
deemed tax basis at 3.5% and 4.0% on revenues, respectively. In
addition, our subsidiaries and affiliated entities in China are
subject to a 3.0% to 5.0% business tax on gross revenues
generated from providing services. Business tax generally
includes two additional fees, the city construction fee and the
education fee, which are generally calculated at 7.0% and 3.0%,
respectively, on business tax. Our advertising revenues are
generally also subject to an additional 3.0% culture charges.
However, some of our subsidiaries, including affiliated
entities, in China are entitled to certain preferential income
treatments described below.
The State Administration of Taxation and its delegates are
authorized to grant exemptions from enterprise income tax of up
to two years to newly established domestic companies that are
engaged in consulting services, technology services or are in
the information industry. Some of our subsidiaries, including
consolidated entities, are entitled to tax exemptions. For
example, Beijing Taide and Shangtuo Zhiyang International
Advertising (Beijing) Co., Ltd., two affiliated entities in our
advertising group, were granted exemptions from enterprise
income tax in 2005 and 2006 and in 2006 and 2007, respectively.
Beijing Jin Long Run Xin Advertising Co., Ltd., a subsidiary of
an affiliated entity in our advertising group, was granted an
exemption from enterprise income tax for 2005 and 2006. Also,
Shanghai Yuan Zhi Advertising Co., Ltd., an affiliated entity in
our broadcasting group, and Economic Observer Advertising, a
subsidiary of an affiliated entity, which is part of our print
group, were granted exemptions from enterprise
income tax for 2006 and 2007. Beijing Jingshi Jingguan
Advertising Co., Ltd., a subsidiary of an affiliated entity in
our print group, received an exemption from enterprise income
tax for 2006. Xintai Huade Advertising Co., Ltd., an affiliated
entity in our advertising group, was granted an exemption from
enterprise income tax for 2007 and 2008. Beijing Century Media
received an exemption from enterprise income tax for 2006.
Beijing Century Workshop Communications Co., Ltd., a subsidiary
of an affiliated entity in our media production group, has
received exemptions from enterprise income tax in 2005 and 2006
and plans to apply for an exemption for 2007.
Preferential tax treatments granted to some of our consolidated
entities are subject to review and may be adjusted or revoked at
any time. In addition, if the government regulations or
authorities were to phase out preferential tax benefits
currently granted to newly established domestic companies that
are engaged in consulting services, technology services or the
information industry, our consolidated entities that have been
entitled to such preferential tax benefits would be subject to
the standard statutory tax rate, which currently is 33%. The
discontinuation of any preferential tax treatments currently
available to us will cause our effective tax rate to increase,
which could have a material adverse effect on our results of
operations.
Internal control over financial reporting
During the process of preparing our consolidated financial
statements for the period from May 26, 2005 to December 31,2005, and the year ended December 31, 2006, we have
identified a number of control deficiencies. The significant
control deficiencies identified by us included, among others:
(i) the lack of sufficient financial reporting and
accounting personnel to fulfill the post-offering U.S. GAAP
reporting requirements; and (ii) the lack of a
comprehensive accounting policies and procedures manual to
communicate to accounting and finance personnel to ensure the
consistent application of U.S. GAAP.
To address these control deficiencies, we have hired a director
of accounting and reporting with experience in U.S. GAAP and
compliance with the Sarbanes-Oxley Act. We are also in the
process of recruiting an internal audit director with 10 to
15 years of audit and finance experience from a major
international auditing firm or a multinational organization with
experience in the planning and implementation of Sarbanes-Oxley
Act related activities. The internal audit director will report
to the chief financial officer and audit committee, establish
the audit framework, in particular focusing on the planning and
implementation of Sarbanes-Oxley Act internal controls, oversee
financial, operational and risk-based audits at various
locations, and provide recommendations on improvements to
current processes and systems to ensure compliance with
corporate policies and procedures. In addition, since
identifying these deficiencies prior to July 1, 2006, we
also have added five new staff members to our accounting
department, two of whom are certified public accountants.
Furthermore, we are in the process of implementing the following
measures to further remedy the control deficiencies:
(i) hiring and training qualified financial reporting and
accounting personnel with experience in U.S. GAAP;
(ii) developing a comprehensive U.S. GAAP accounting
policies and procedures manual, a treasury manual and a
compliance manual for Section 404 of the Sarbanes-Oxley
Act; (iii) establishing an internal audit team separate
from that of our parent; and (iv) introducing a training
program on the fundamentals of U.S. GAAP for staff
accountants. We are also in the process of forming an audit
committee, as described in “Management—Committees of
the board of directors—Audit committee.”
In addition, under the supervision, and with the participation,
of our senior management, including our Chief Executive Officer
and Chief Financial Officer, we are in the process of conducting
further evaluations of our internal control over financial
reporting. We plan to engage an external consultant to assist us
in evaluating, designing, implementing and testing our internal
controls over financial reporting.
Results of operations
The following table sets forth a summary of the consolidated
results of operations of our company for the periods indicated.
This information should be read together with the consolidated
financial statements of our company, including the related
notes, that appear elsewhere in this prospectus. Because these
periods are of different lengths and our scope of operations
during these periods changed, the results of operations for
these periods are not comparable. 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.
Net income (loss) attributable to holders of common shares
$
1,350
$
(4,148
)
Net income (loss) per share:
Basic — Class A common share
—
$
(0.08
)
Basic — Class B common share
$
0.03
$
(0.08
)
Diluted — Class A common share
—
$
(0.08
)
Diluted — Class B common share
$
0.03
$
(0.08
)
Shares used in computation:
Basic — Class A common share
—
5,084
Basic — Class B common share
42,613
44,693
Diluted — Class A common share
—
5,084
Diluted — Class B common share
42,613
44,693
(1)
Date our parent acquired 60% of EconWorld Media, our predecessor.
(2)
Includes share-based compensation expense of $2.4 million
for the year ended December 31, 2006.
Our consolidated results of operations for the year ended
December 31, 2006.
Net revenues. Our total net revenues of
$59.0 million for the year ended December 31, 2006
were generated from the following sources:
•
Content production. Our net revenues of $6.5 million
from content production constituted 11.1% of our total net
revenues for the year ended December 31, 2006 and
represented primarily revenues from the production and
distribution of drama series and other television programs,
graphic design services, provision of post-production services
and animation.
•
Advertising sales. Our net revenues of $6.7 million
from advertising sales, representing 11.3% of our total net
revenues for the year ended December 31, 2006, primarily
consisted of advertising sales generated by the Economic
Observer and Money Journal, provision of content and
sales of advertising in relation to radio and sales of
advertising and sponsorship on our Fortune China programs.
•
Advertising services. Our net revenues of
$44.9 million from advertising services accounted for 76.1%
of our total net revenues for the year ended December 31,2006 and were derived primarily from advertising agency services
for print and television for advertising, marketing services,
including events organization, visual design and production,
advertising services for billboards and websites and research
services.
•
Publishing services. Our net revenues of $868,000 from
publishing services, representing 1.5% of our total net revenues
for the year ended December 31, 2006, primarily consisted
of subscription fees and retail sales of Money Journal.
Cost of revenues. Our total cost of revenues of
$33.8 million for the year ended December 31, 2006
consisted of the following:
•
Content production. Our content production cost of
$2.8 million constituted 8.4% of our total cost of revenues
for the year ended December 31, 2006 and represented
primarily costs of purchasing distribution rights of programs,
development costs, pre-production costs, production overhead and
purchases of software and hardware.
•
Advertising sales. Our advertising sales cost of
$1.9 million, representing 5.6% of our total cost of
revenues for the year ended December 31, 2006, primarily
consisted of amortization
of advertising rights in relation to the Economic
Observer, commissions we paid to advertising agents for
placing advertisements on the pages of Money Journal,
production fees for our Fortune China operations and
costs to secure advertising time for radio.
•
Advertising services. Our advertising services cost of
$27.7 million accounted for 81.9% of our total cost of
revenues for the year ended December 31, 2006 and was
incurred primarily in connection with the purchase of
advertising time or space from various media and events
organization cost.
•
Publishing services. Our publishing services cost of
$1.4 million, representing 4.1% of our total cost of
revenues for the year ended December 31, 2006, primarily
consisted of cost incurred relating to the publication and
distribution of Money Journal and certain books.
Operating expenses. Our total operating expenses of
$18.1 million for the year ended December 31, 2006
consisted of the following:
•
Selling and distribution expenses. Our selling and
distribution expenses of $5.3 million, representing 29.1%
of our total operating expenses for the year ended
December 31, 2006, primarily consisted of amortization of
non-compete agreements and customer-based intangible assets,
promotion and marketing expenses and salaries and benefits for
our sales and marketing personnel.
•
General and administrative expenses. Our general and
administrative expenses of $12.8 million, or 70.9% of our
total operating expenses for the year ended December 31,2006, primarily consisted of compensation and benefits of our
administrative staff, rental and travel expenses.
Other expense, net. Our other expense, net, of $898,000
for the year ended December 31, 2006 represented interest
expense of a convertible loan, imputed interest on long-term
obligations, and other liabilities net of interest income.
Provision for income taxes. For the year ended
December 31, 2006, we recorded a provision of $1,069,537
for income taxes according to the laws of the relevant tax
authorities. Our effective tax rate was 17.3% for the same
period.
Minority interest. Minority interest of $1.7 million
for the year ended December 31, 2006 represented the
portions of our income certain minority shareholders of Beijing
Century Media and Xinhua Finance Advertising Limited’s
subsidiaries were entitled to receive.
Net income. We had net income of $3.3 million for
the year ended December 31, 2006, while a loss of
$4.1 million was attributable to holders of common shares,
due to dividends and deemed dividends to Patriarch Partners, the
holder of our preferred shares.
Net revenues. Our total net revenues of $5.4 million
represented revenues of $3.6 million from content
production and revenues of $1.8 million from advertising
sales, advertising services and publishing services.
•
Content production. Net revenues of $3.6 million
from content production constituted 67.5% of our total net
revenues and represented primarily revenues earned by Beijing
Century
Media in producing and distributing television drama series and
other programs, providing graphic design services and creating
animation.
•
Advertising sales. Net revenues of $387,000 from
advertising sales, representing 7.1% of our total net revenues,
primarily consisted of revenues generated by placing
advertisements on the pages of Money Journal.
•
Advertising services. Net revenues of $580,000 from
advertising services accounted for 10.8% of our total net
revenues and were derived primarily from providing marketing
services, including events organization services.
•
Publishing services. Net revenues of $787,000 from
publishing services, representing 14.6% of our total net
revenues, primarily consisted of subscription fees and retail
sales of Money Journal.
Cost of revenues. Our total cost of revenues of
$1.4 million consisted of content production cost of
$651,000 and cost of $773,000 relating to advertising sales,
advertising services and publishing services.
•
Content production. Content production cost of $651,000
constituted 45.7% of our total cost of revenues and represented
primarily amortization of capitalized cost in producing,
purchasing and distributing television drama series and other
programs.
•
Advertising sales. Advertising sales cost of $85,000,
representing 6.0% of our total cost of revenues, primarily
consisted of commissions we paid to advertising agents for
placing advertisements on the pages of Money Journal.
•
Advertising services. Advertising services cost of
$154,000 accounted for 10.8% of our total cost of revenues and
was incurred primarily in connection with our events
organization services, including booking venues, printing
material and purchasing flight tickets for certain guests.
•
Publishing services. Publishing services cost of
$534,000, representing 37.5% of our total cost of revenues,
primarily consisted of costs incurred relating to the
publication and distribution of Money Journal and certain
books.
Operating expenses. Our total operating expenses of
$1.5 million consisted of selling and distribution expenses
of $293,000 and general and administrative expenses of
$1.2 million.
•
Selling and distribution expenses. Our selling and
distribution expenses of $293,000 represented 19.0% of our total
operating expenses and primarily consisted of salaries and
benefits for our sales and marketing personnel and promotional
and marketing expenses.
•
General and administrative expenses. Our general and
administrative expenses of $1.2 million accounted for 81.0%
of our total operating expenses and primarily consisted of
compensation and benefits of administrative staff, rental and
travel expenses.
Other income (expense), net. Our other expense, net, of
$22,000 represented interest payments to certain minority
shareholders of EconWorld Media for outstanding loans from such
shareholders in excess of interest income we earned over the
same period.
Provision for income taxes. We recorded a provision of
$929,000 for income taxes according to the laws of the relevant
tax authorities. Our effective tax rate was 38.6%.
Minority interest. Minority interest of $129,000
represented the portions of our income certain minority
shareholders of Beijing Century Media were entitled to receive.
Net income. We had a net income of $1.4 million
which is 25.0% of our total net revenues.
Discussion of segment operations
In our management’s view, we operate through five operating
groups that offer distinct products and services, consisting of
media production, broadcasting, print, advertising and research.
These five operating groups constitute our five reportable
segments. However, for the period from May 26, 2005 to
December 31, 2005, we only had two reportable segments,
namely, media production and print. For the year ended
December 31, 2006, we had all five reportable segments. The
following table lists our net revenues and operating costs and
expenses by reportable segments for the periods indicated.
Net Revenues. Our total net revenues of
$59.0 million for the year ended December 31, 2006
were generated by our operating groups as follows:
•
Media production. Net revenues of $6.5 million from
the media production group constituted 11.1% of our total net
revenues and represented primarily revenues from the production
and distribution of drama series and other television programs,
animation, graphic design services and provision of
post-production services.
•
Print. Net revenues of $13.6 million from the print
group, or 23.0% of our total net revenues, were derived
primarily from marketing services, including events organizing,
advertising sales relating to the Economic Observer and
Money Journal, and publishing revenues.
•
Advertising. Net revenues of $35.6 million from the
advertising group, representing 60.4% of our total net revenues,
primarily consisted of advertising services revenues derived
from advertising agency services for print and television,
revenues derived from marketing services, including events
organization, visual design, and advertising services for
billboard and websites.
•
Broadcasting. Net revenues of $1.4 million from the
broadcasting group constituted 2.4% of our total net revenues,
and primarily consisted of provision of content and sales of
advertising in relation to radio, sales of advertising and
sponsorship on Inner Mongolia Satellite Television, and sales of
advertising and sponsorship on our Fortune China programs.
•
Research. Net revenues of $1.8 million from the
research group constituted 3.1% of our total net revenues.
Cost of revenues and other expenses excluding depreciation
and amortization. Our total costs of revenues and other
expenses excluding depreciation and amortization of
$46.7 million for the year ended December 31, 2006
consisted of the following:
•
Media production. Media production group costs of
$2.5 million constituted 5.4% of our total cost of revenues
and other operating expenses excluding depreciation and
amortization and represented primarily costs of purchasing
distribution rights of programs, development
costs, pre-production costs, salaries and allowances, production
overhead and purchases of software and hardware.
•
Print. Print group costs of $7.1 million, or 15.2%
of our total cost of revenues and other operating expenses
excluding depreciation and amortization, were incurred primarily
from event organization costs, including booking venues,
printing material and purchasing flight tickets for certain
guests, costs incurred relating to the publication and
distribution of Money Journal and certain books and sales
commissions.
•
Advertising. Advertising group costs of
$26.2 million, representing 56.1% of our total cost of
revenues and other operating expenses excluding depreciation and
amortization, primarily consisted of the purchase of advertising
time or space from various media outlets, events organization
costs, salaries and allowances, marketing costs, and sales
commissions.
•
Broadcasting. Broadcasting group costs of
$2.0 million constituted 4.3% of our total cost of revenues
and other operating expenses excluding depreciation and
amortization, and primarily consisted of production fees and
salaries of reporters and editors.
•
Research. Research group costs of $1.1 million
constituted 2.3% of our total cost of revenues and other
operating expenses excluding depreciation and amortization, and
primarily consisted of salaries, costs for outsourcing research,
translation costs and transportation costs.
•
XFM corporate. Corporate costs of $7.8 million
constituted 16.6% of our total cost of revenues and other
operating expenses excluding depreciation and amortization and
consisted primarily of staff benefits, staff salary, auditor
remuneration and legal and professional fees.
Net Revenues. Our total net revenues of $5.4 million
represented revenues of $3.6 million from our media
production group and revenues of $1.8 million from our
print group.
•
Media production. Net revenues of $3.6 million from
the media production group constituted 67.5% of our total net
revenues and represented primarily revenues earned by Beijing
Century Media in producing and distributing television drama
series and other programs, creating animation and providing
graphic design services.
•
Print. Net revenues of $1.8 million from the print
group, or 32.5% of our total net revenues, are derived from
selling Money Journal through subscription and retail
channels, providing events organization services and selling
advertisements on the pages of Money Journal.
Cost of revenues and other expenses excluding depreciation
and amortization. Our total costs of revenues and other
expenses excluding depreciation and amortization of
$2.4 million consisted of media production group cost of
$460,000, print group cost of $1.6 million, and XFM
corporate cost of $301,000.
•
Media production. Media production group cost of $460,000
constituted 19.3% of our total cost of revenues and other
operating expenses excluding depreciation and amortization and
represented primarily amortization of capitalized cost in
producing, purchasing and distributing television drama series
and other programs marketing and promotion expenses
and other costs related to our selling and marketing activities,
and compensation and benefits of administrative staff.
•
Print. Print group cost of $1.6 million, or 68.1% of
our total cost of revenues and other operating expenses
excluding depreciation and amortization, consisted primarily of
cost in connection with the publication and distribution of
Money Journal and certain books, events organization
cost, and commissions paid to advertising agents.
Selected quarterly results of operations
The following table presents our unaudited consolidated selected
quarterly results of operations for the four quarters ended
December 31, 2006. You should read the following table in
conjunction with our audited consolidated financial statements
and related notes contained elsewhere in this prospectus. We
have prepared the unaudited consolidated financial information
on the same basis as our audited consolidated financial
statements. The unaudited consolidated financial information
includes all adjustments, consisting only of normal recurring
adjustments, that we consider necessary for a fair presentation
of our financial position and operating results for the quarters
presented.
Net income (loss) attributable to holders of common shares
(1,535
)
(2,707
)
(1,320
)
1,414
Our net revenues have increased due to both growth in our
business and acquisitions. In the first quarter, our operating
results reflected only our magazine operations, our advertising
group and our media production group. As we made significant
acquisitions in the third quarter, our net revenues for the
third quarter reflect the revenues from our acquisitions of
Economic Observer Advertising, which is part of our print group,
our broadcasting group and our research group, and our net
revenues for the fourth quarter more fully reflect these
revenues. At the same time, we have experienced organic growth
from our magazine operations, our advertising group and our
media production group.
We experienced sequential quarter-on-quarter growth in 2006 for
our income from operations and net income. This growth was
offset in part by a corresponding increase in our cost of
revenues and operating expenses. As our income from operations
grew, our net loss for the first quarter became net income in
the remaining quarters. After dividends and deemed dividends to
Patriarch Partners, the holder of our preferred shares, we
recorded a net loss in each of the first three quarters, and net
income in the fourth quarter.
As we have a limited operating history, our growth has occurred
during the most recent quarters and our quarterly results have
fluctuated, our operating results for any quarter are not
necessarily indicative of results of any future quarters or for
a full year. Furthermore, we have grown in large part due to
acquisitions. See “Risk factors—Risks related to our
business—Our limited operating history and successive
acquisitions make evaluating our business and prospects
difficult”, “—Our operating results may
fluctuate, which makes our results difficult to predict and
could cause our results to fall short of expectations” and
“—Our quarterly operating results may fluctuate
significantly from period to period due to seasonality in our
business”.
Critical accounting policies
Management’s discussion and analysis of the financial
condition and results of operations is based upon our
consolidated financial statements, which have been prepared in
accordance with U.S. GAAP. The preparation of these financial
statements requires us to make estimates and judgments that
affect the reported amounts of our assets, liabilities, revenues
and expenses, and related disclosure of our contingent assets
and liabilities. We base our estimates and judgments on
historical experience, knowledge of current conditions and
beliefs of what could occur in the future given available
information. We consider the following accounting policies to be
both those most important to the portrayal of our financial
condition and those that require the most subjective judgment.
If actual results differ significantly from management’s
estimates and projections, there could be a material effect on
our financial statements.
Revenue recognition
As of December 31, 2006, we do not have multiple element
arrangements and each source of revenue is typically generated
from unrelated arrangements. We recognize advertising sales
revenue when advertisements are published. Magazines are either
sold on a subscription basis or through distributors. We
recognized subscription revenue over the subscription period and
single copy sales were recognized when sold to the ultimate
customers. Revenue from book sales was recognized when books
were sold to end customers. We did not carry book and magazine
inventories. We no longer act as book publishing agents.
Magazines and books were delivered to distributors when they
were published. Because we did not provide distributors the
right to return unsold books and magazines and did not provide
them with any refunds, costs of publishing were charged to cost
of revenue as incurred.
Advertising services revenue is generally recognized as services
are provided.
Episodic television series are produced or acquired for
distribution to the television market. Revenues are recognized
when the master tape of the program is available for first
airing under the terms of the related licensing agreement. When
accounting for program production costs, we exercise judgment
relating to the process of estimating the total revenues to be
earned throughout a program’s estimated life cycle. We
estimate the ultimate revenues, less additional costs to be
incurred, in order to determine whether the carrying value of a
program is impaired and thus requires an immediate write-off of
unrecoverable program costs. The amount of capitalized program
costs recognized as cost of revenue for a given program
throughout its life cycle is based on the proportion of the
program’s revenues recognized during such reporting period
to the program’s estimated ultimate total revenue. Prior to
release, we base our estimates of ultimate revenue for each
program on the historical performance of similar programs. We
update such estimates based on information available on the
progress of the program production and, upon release, the actual
results of each program.
We record revenues net of rate adjustments, discounts, and
applicable business taxes. We estimate allowances for estimated
rate adjustments and discounts based on historical experiences.
In certain arrangements, we act as or use an intermediary or
agent in placing advertising with TV stations with third
parties. We recognize revenue for this type of transaction
either on a gross or net basis depending on whether we act as
the principal or agent in the transaction. For transactions in
which we purchase blocks of advertising time and attempt to sell
the time to advertisers, because we bear substantial risks and
rewards of ownership we record revenue on a gross basis. For
those transactions in which we find advertising space for
advertisers, we do not have substantial risks and rewards of
ownership, we are considered to be the agent in the transaction
and record revenue on a net basis.
Impairment of goodwill and long-lived assets
We are required to review our amortizable intangible assets for
impairment when events or changes in circumstances indicate the
carrying value may not be recoverable. Goodwill and intangible
assets with indefinite lives are required to be tested for
impairment at least annually or more frequently if events or
changes in circumstances indicate that the assets might be
impaired. Should the carrying value of our goodwill or acquired
intangible assets be determined to be impaired, their carrying
value would be written down.
To assess potential impairment of goodwill, we perform an
assessment of the carrying value of our reporting units at least
on an annual basis or when events and changes in circumstances
occur that would more likely than not reduce the fair value of
our reporting units below their carrying value. If the carrying
value of a reporting unit exceeds its fair value, we would
perform the second step in our assessment process and record an
impairment loss to earnings to the extent the carrying amount of
the reporting unit’s goodwill exceeds its implied fair
value. We estimate the fair value of our reporting units through
internal analysis and external valuations, which utilize income
and market valuation approaches through the application of
capitalized earnings and discounted cash flow. These valuation
techniques are based on a number of estimates and assumptions,
including the projected future operating results of the
reporting unit, appropriate discount rates and long-term growth
rates.
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
carryforwards and credits by applying enacted statutory tax
rates applicable to future years. Deferred tax assets are
reduced by a valuation allowance when, in our opinion, 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 of the
relevant taxing authorities. The components of the deferred tax
assets and liabilities are individually classified as current
and non-current based on their characteristics.
Income taxes generated from our Hong Kong operations have not
been material as we have not had significant operations in Hong
Kong to date. For our operations based in the PRC, we are taxed
at a statutory rate of 33% (30% state income tax plus 3% local
income tax) applied to PRC taxable income reported in our PRC
statutory financial statements unless one or more of our
operations qualifies as “cultural media enterprise”,
and are exempt from taxation in certain periods.
Valuation of share-based compensation
We account for share-based compensation to our employees based
on SFAS No. 123R and will record compensation expense
based on the fair value of the options, shares and warrants on
the date of grant. We incurred share-based compensation expenses
of $2,404,240 for the year ended December 31, 2006.
With respect to the non-vested shares granted in June 2006, we
retained an independent appraiser to produce a valuation report
on the fair value of our company. Significant management
judgment is involved in determining the underlying variables. We
concluded that $0.60 was the fair value based on
management’s evaluation of the report.
In the third quarter of 2006, we granted share options to our
employees. In addition, we issued warrants to purchase common
shares to a consultant in December 2006. We used the
Black-Scholes option-pricing model to determine the amount of
employee share-based compensation expense. This approach
requires us to make assumptions on such variables as share price
volatility, expected lives of options and discount rates.
Changes in these assumptions could significantly affect the
amount of employee share-based compensation expense we recognize
in our consolidated financial statements. See
“—Operating costs and expenses— Share-based
compensation expenses”.
Liquidity and capital resources
Our principal sources of liquidity have been cash generated from
financing activities, which consisted of our private placements
of convertible preferred shares to, and borrowing from,
Patriarch Partners. See “Related party transactions—
Transactions with Patriarch Partners”. As of
December 31, 2006, we had $36.4 million in cash and
$12.6 million in restricted cash. We do not have direct
access to cash or future earnings of any of our PRC affiliated
entities but can direct the use of their cash through agreements
that provide us with effective control of these entities. See
“Corporate structure— Agreements that provide
effective control over our affiliated entities”.
We require cash to fund our ongoing business needs, particularly
future acquisitions. Since our incorporation on November 7,2005, we have made a number of strategic acquisitions and expect
to continue to acquire businesses that complement our existing
operations. See “—Overview— Acquisitions”.
To date, we have not encountered any difficulties in meeting our
cash obligations. We believe that our current cash, anticipated
cash flow from operations, and the net proceeds we expect to
receive from this offering will be sufficient to meet our
anticipated cash needs for the foreseeable future, given our
current growth plans.
On March 31, 2006, we issued a promissory note in the
amount of $38.2 million for the benefit of Xinhua Financial
Network and a promissory note in the amount of
$68.5 million for the benefit of our parent. Both notes are
due on demand and the interest rates are not specified. See
“Related party transactions—Transactions with our
parent and its subsidiaries—Loan agreement with our parent
and its subsidiaries”. These notes are subordinated to our
borrowing from Patriarch Partners. If our parent and Xinhua
Financial Network were to demand immediate payment of the
outstanding amount under these notes, we would not have
sufficient cash on hand to meet such demand and, as a result,
would have difficulty meeting our other cash needs.
The following table sets forth a summary of our cash flows for
the periods indicated:
Net cash provided by (used in) operating activities
$
109
$
(4,463
)
Net cash provided by (used in) investing activities
376
(32,214
)
Net cash provided by financing activities
1,594
70,104
Effect of exchange rate changes
2
846
Net increase in cash
2,081
34,273
Cash at beginning of period
—
2,081
Cash at end of period
$
2,081
$
36,354
(1)
Date our parent acquired 60% of EconWorld Media, our predecessor.
Operating activities
We have financed our operating activities primarily through cash
generated from financing activities. We currently anticipate
that we will be able to fund our operations beyond the next
twelve months with operating cash flow, existing cash balances
generated from financing activities, and the portion of the net
proceeds from this offering reserved for general corporate
purposes.
Net cash used in operating activities totaled $4.5 million
for the year ended December 31, 2006 and was primarily
attributable to (i) an increase in accounts receivable of
$11.1 million, (ii) an increase in capitalized content
production costs of $4.5 million, and (iii) an
increase in prepaid expenses and other current assets of
$3.8 million, partially offset by (i) net income of
$3.3 million and (ii) the add-back of non-cash items
including depreciation and amortization of $5.2 million and
share-based compensation of $2.4 million. The increase in
prepaid expenses and other current assets is primarily due to an
advisory fee we paid to Patriarch Partners and a deposit to
Small World for content production. See “Related party
transactions—Transactions with Patriarch
Partners—Advisory agreement among us, our parent, and
Patriarch Partners Management Group, LLC” and
“Arrangements with partners and suppliers—Agreements
related to Small World Television LLC”.
Net cash provided by operating activities amounted to
approximately $109,000 in the period from May 26, 2005 to
December 31, 2005 and was primarily attributable to
(i) net income of $1.3 million, (ii) an add-back
of non-cash items, such as $577,000 in depreciation and
amortization, (iii) an increase of $169,000 in accounts
payable, and (iv) an increase of $835,000 in income taxes
payable, partially offset by an increase of $2.0 million in
accounts receivable and a decrease of $847,000 in accrued
expenses and other payables.
Investing activities
Net cash used in investing activities totaled $32.2 million
for the year ended December 31, 2006 and was primarily
attributable to an increase in restricted cash of
$9.4 million, cash paid for acquisitions of subsidiaries,
net of cash received of $7.9 million, an advance to an
independent third party of $4.6 million and purchases of
intangible assets of $4.2 million. The restricted cash is
cash deposited in order to secure loans in RMB. The advance to
an independent third party is for business development purposes.
Net cash provided by investing activities of $376,000 in the
period from May 26, 2005 to December 31, 2005
primarily related to cash totaling $464,000 received in excess
of cost from the acquisition of certain subsidiaries, partially
offset by purchases of property and equipment totaling $88,000.
Financing activities
Net cash provided by financing activities totaled
$70.1 million for the year ended December 31, 2006 and
was attributable to the issuance of $60.0 million of
convertible preferred shares to Patriarch Partners, the
borrowing of a $10.0 million loan from Patriarch Partners
and bank borrowings of $5.6 million, partially offset by
dividends paid on preferred shares of $3.6 million. See
“Related party transactions—Transactions with
Patriarch Partners”.
Our net cash provided by financing activities of
$1.6 million in the period from May 26, 2005 to
December 31, 2005 consisted of proceeds from the issuance
of EconWorld Media ordinary shares, partially offset by a
decrease in the amount due to a related party.
Notes are due on demand. Interest rate is not specified. See
“Related party transactions— Transactions with our
parent or its subsidiaries— Loan agreements between us and
our parent or its subsidiaries”.
(2)
Interest is LIBOR plus 2.75%, plus an additional
$3.0 million, as described in “Related party
transactions— Transactions with Patriarch Partners—
Credit agreement among us, Patriarch Partners, Patriarch
Partners Agency Services, LLC and our direct subsidiaries, as
guarantors”.
In addition to the promissory notes to Xinhua Financial Network
and our parent, we have additional amounts payable to them in
the amounts of $25.2 million and $6.7 million,
respectively. These amounts are due in relation to payments that
Xinhua Financial Network and our parent paid on our behalf for
certain acquisition costs, as well as amounts loaned to us by
Xinhua Financial Network for certain operating expenses and
group services charges.
Capital expenditures
Our capital expenditures were incurred primarily in connection
with the purchase of property and equipment and acquired
intangible assets totaling $6.3 million during the year
ended December 31, 2006 and $88,000 during the period from
May 26, 2005 to December 31, 2005. We plan to continue
to make acquisitions of businesses and assets that complement
our operations when suitable opportunities arise.
The following table sets forth our contractual obligations as of
December 31, 2006:
Payment due by December 31
Less than
1-3
3-5
More than
(in thousands)
Total
1 year
years
years
5 years
Long-term debt
obligations(1)
$
10,000
$
—
$
10,000
$
—
$
—
Interest on long-term debt obligations
(1)
6,376
1,654
4,722
—
—
Short-term debt
obligations(2)
117,968
117,968
—
—
—
Interest related to short-term debt
obligations(3)
379
379
—
—
—
Capital (finance) lease obligations
—
—
—
—
—
Operating lease obligations
998
769
174
55
—
Purchase
obligations(4)
88,960
14,540
6,152
7,833
60,435
Other long-term liabilities reflected on the balance
sheet(5)
152,955
10,306
20,612
20,612
101,425
Total
$
377,636
$
145,616
$
41,660
$
28,500
$
161,860
(1)
Represents the loan with Patriarch Partners mentioned above
under “—Liquidity and capital resources—
Financing activities”, and interest on the loan is at a
rate of LIBOR plus 2.75%. Interest is estimated based on a LIBOR
of 5.32%, which was the rate as of December 31, 2006.
(2)
Represents promissory notes to our parent and Xinhua Financial
Network, as well as loans from Shanghai Pudong Development Bank.
See “—Liquidity and capital resources— Financing
activities”.
(3)
Interest on short-term debt is calculated based on the interest
rates under the relevant loans, ranging from 5.0% to 5.9%. The
loans are the loans mentioned above under “—Liquidity
and capital resources— Financing activities” for
Shanghai Pudong Development Bank Zhabei Sub-branch.
(4)
Represents obligations to purchase advertising rights on various
media outlets, to purchase advertising rights for our magazine
operations, to pay for production costs for television programs,
to pay for obtaining network services from internet providers,
to obtain a publishing right from a publisher, to pay for
outsourcing of research services, to pay for consulting services
to partners and vendors of the research group and to pay for
events organizing services.
(5)
Represents commitments under contracts in relation to our
newspaper operations and securing advertising rights in relation
to Shanghai Camera.
Holding company structure
We are a holding company with no material operations of our own.
We conduct our operations in the PRC primarily through our
wholly- and majority-owned subsidiaries, other affiliated
entities and strategic partners in the PRC and Hong Kong. As a
result, our ability to pay dividends and to finance any debt we
may incur depends upon dividends paid by our subsidiaries and
service fees paid by an affiliated entity, Beijing Century
Media. If our current or future subsidiaries incur debt on their
own behalf in the future, the instruments governing their debt
may restrict their ability to pay dividends to us. In addition,
our wholly- and majority-owned subsidiaries in the PRC are
permitted to pay dividends to us out of their retained earnings,
if any, as determined in accordance with PRC accounting
standards and regulations. Under PRC law, each of our
subsidiaries and affiliated entities in the PRC is required to
set aside at least 10% of its after-tax profits each year, if
any, to fund certain statutory reserves until such reserves
reach 50% of its registered capital, and to further set aside a
portion of its after-tax profits to fund the employee welfare
fund at the discretion of each subsidiary’s or
affiliate’s board of directors or shareholders’
meeting. Although the statutory reserves can be used to, among
other uses, increase the registered capital and eliminate future
losses in excess of retained earnings of the respective
companies, the reserves
may not be distributed as cash dividends except in the event of
liquidation of the companies. See Note 25 of our
consolidated financial statements included elsewhere in this
prospectus.
Off-balance sheet commitments and arrangements
We have not entered into any financial guarantees or other
commitments to guarantee the payment obligations of any third
parties, except for a guarantee described in “Related party
transactions— Transactions with our parent and its
subsidiaries— Transaction securing banking facility of
Xinhua Investment Consulting (Shanghai) Co., Ltd“. We did
not enter into any derivative contracts that are indexed to our
shares and classified as owners’ and shareholders’
equity, or that are not reflected in our consolidated financial
statements. Furthermore, we did 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 did 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.
Inflation
Inflation in China has not materially impacted our results of
operations in recent years. According to the National Bureau of
Statistics of China, the increase of the consumer price index in
China was 3.9% in 2004, 1.8% in 2005 and 1.3% from January to
November 2006.
Quantitative and qualitative disclosure about market risk
Market risk is the potential loss arising from adverse changes
in market rates and prices, such as interest rates, and foreign
currency exchange rates.
Interest rate risk
Our exposure to interest rate risk primarily relates to the
interest rates for our outstanding debt and the interest income
generated by excess cash invested in liquid investments with
original maturities of three months or less. As of
December 31, 2006, our total bank borrowings amounted to
$11.2 million with interest rates varying from 5.0% to 5.9%
for those borrowings with declared interest rates. Assuming the
principal amount of the outstanding bank borrowings remains
approximately the same as of December 31, 2007, a 1%
increase in each applicable interest rate would add
approximately $112,000 to our interest expense in 2007. In
addition, our $10.0 million loan with Patriarch Partners
bears interest at LIBOR plus 2.75%, and assuming the principal
amount remains the same, a 1% increase in the interest rate
would not significantly change our interest expense in 2007.
This loan will convert into class A common shares upon IPO.
We have not used any derivative financial instruments to manage
our interest risk exposure. Interest-earning instruments carry a
degree of interest rate risk. We have not been exposed to
material risks due to changes in interest rates. However, our
future interest income may be lower than expected due to changes
in market interest rates.
Foreign currency risk
Substantially all of our revenues and most of our expenses are
denominated in RMB. Our exposure to foreign exchange risk
primarily relates to cash and cash equivalents denominated
in U.S. dollars as a result of our past issuances of preferred
shares through a private placement and proceeds from this
offering. We do not believe that we currently have any
significant direct foreign exchange risk and have not hedged
exposures denominated in foreign currencies or any other
derivative financial instruments. 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 and RMB because the value of
our business is effectively denominated in RMB, while the ADSs
will be traded in U.S. dollars.
The value of the RMB against the U.S. dollar and other
currencies may fluctuate and is affected by, among other things,
changes in China’s political and economic conditions. The
conversion of RMB into foreign currencies, including U.S.
dollars, has been based on rates set by the People’s Bank
of China. On July 21, 2005, the PRC government changed its
decade-old policy of pegging the value of the RMB to the U.S.
dollar. Under the new policy, the RMB is permitted to fluctuate
within a narrow and managed band against a basket of certain
foreign currencies. This change in policy has resulted in an
approximately 5.7% appreciation of the RMB against the U.S.
dollar by December 29, 2006. There remains significant
international pressure on the PRC government to adopt an even
more flexible currency policy, which could result in a further
and more significant appreciation of the RMB against the U.S.
dollar. To the extent that we need to convert U.S. dollars we
receive from this offering into RMB for our operations,
appreciation of the RMB against the U.S. dollar would have an
adverse effect on the RMB amount we receive from the conversion.
Conversely, if we decide to convert our RMB denominated cash
amounts into U.S. dollars amounts for the purpose of making
payments for dividends on our common shares or ADSs or for other
business purposes, appreciation of the U.S. dollar against the
RMB would have a negative effect on the U.S. dollar amount
available to us. We have not used any forward contracts or
currency borrowings to hedge our exposure to foreign currency
exchange risk.
Recent accounting pronouncements
In May 2005, the Financial Accounting Standards Board, or FASB
issued Statement of Financial Accounting Standard, or
SFAS No. 154, “Accounting Changes and Error
Corrections”, which replaces Accounting Principles Board
Opinions No. 20 “Accounting Changes” and
SFAS No. 3, “Reporting Accounting Changes in
Interim Financial Statements— An Amendment of APB Opinion
No. 28”. SFAS No. 154 provides guidance on
the accounting for and reporting of accounting changes and error
corrections. It establishes retrospective application, or the
latest practicable date, as the required method for reporting a
change in accounting principle and the reporting of a correction
of an error. SFAS No. 154 is effective for accounting
changes and corrections of errors made in fiscal years beginning
after December 15, 2005. The adoption of this statement did
not have a material effect on our financial position, results of
operations and cash flows.
In February 2006, the FASB issued FASB No. 155,
(“SFAS 155”), “Accounting for Certain Hybrid
Financial Instruments—an amendment of FASB Statements
No. 133 and 140.” This statement is effective for all
financial instruments acquired, issued, or subject to a
remeasurement (new basis) event occurring after the beginning of
an entity’s first fiscal year that begins after
September 15, 2006. The Company will adopt SFAS 155 in
the first quarter of 2007. We have not determined the impact, if
any, of SFAS 155 on our financial position, results of
operation and cash flow.
In June 2006, the FASB issued FASB Interpretation No. 48,
“Accounting for Uncertainty in Income Taxes—an
interpretation of FASB Statement No. 109”, or
FIN 48, which clarifies the accounting for uncertainty in
income tax positions in FASB Statement No. 109,
“Accounting for Income Taxes”. FIN 48 prescribes
a recognition threshold and measurement attribute for the
financial statement recognition and measurement of a tax
position taken or expected to be taken in a tax return.
FIN 48 is effective for fiscal years beginning after
December 15, 2006. We will adopt FIN 48 in the first
quarter of 2007. We have not determined its impact, if any, of
SFAS 48 on our financial position, results of operations
and cash flows.
In September, 2006 the FASB issued FASB Statement No. 157,
or SFAS 157, “Fair Value Measurement”.
SFAS 157 addresses standardizing the measurement of fair
value for companies which are required to use a fair value
measure of recognition for recognition or disclosure purposes.
The FASB defines fair value as “the price that would be
received to sell an asset or paid to transfer a liability in an
orderly transaction between market participants at the measure
date”. SFAS No. 157 is effective for financial
statements issued for fiscal years beginning after
November 15, 2007 and interim periods within those fiscal
years. We are currently evaluating the impact, if any, of
SFAS 157 on our financial position, results of operations
and cash flows.
In September 2006, the Securities and Exchange Commission issued
Staff Accounting Bulletin No. 108, “Considering the
Effects of Prior Year Misstatements when Quantifying
Misstatements in Current Year Financial Statements”, or
SAB108. SAB108 provides interpretive guidance on how the effects
of the carryover or reversal of prior year misstatements should
be considered in quantifying a current year misstatement. The
SEC staff believes that registrants should quantify errors using
both a balance sheet and an income statement approach and
evaluate whether either approach results in quantifying a
misstatement that, when all relevant quantitative and
qualitative factors are considered, is material. SAB108 is
effective for fiscal years ending after November 15, 2006.
The adoption of SAB108 did not have a material impact on our
consolidated financial position, results of operations or cash
flows.
We are a leading diversified media company in China. We have
assembled and built a group of media assets and strategic
partnerships that we believe will enable us to achieve best in
class media and advertising services across various sectors of
the media business in China.
We have developed a unique, integrated platform that includes
the creation and production of high-quality content that is
distributed across nationwide television and print media outlets
and radio in Beijing and Shanghai, and where advertising sales
are supported by our own advertising agency. These outlets reach
an estimated 210 million potential television viewers, a
potential listening audience of 33 million people, and the
readers of leading magazines and newspapers. In addition, our
market research business enables our advertisers to analyze,
understand and better reach their targeted consumers.
Our content currently focuses on business and financial news as
well as wealth management and affluent lifestyle programming. We
focus on this programming because we believe it attracts the
highest income audience in China. This audience is highly sought
after by our target advertisers.
Our business operates across five groups:
•
Media production, which refers to our in-house production
studios that create and produce a diverse array of high-quality
programs, including business, entertainment, educational and
animation shows;
•
Broadcasting, which refers to the distribution of our
programming through Inner Mongolia Satellite Television; our
production and syndication of the Fortune China series of
financial programs, including Fortune Morning 7 a.m., a
popular financial news program in China; and our production and
distribution of bilingual content for China Radio
International’s EasyFM stations in Beijing and Shanghai;
•
Print, which refers to our exclusive rights to sell advertising
for and provide management and information consulting services
to, Money Journal magazine and the Economic
Observer newspaper;
•
Advertising, which refers to our advertising agency that creates
and places advertising for television, print media and campus
billboards; and
•
Research, which refers to our market research group that
provides research services on products, advertisements and
markets.
We generate revenue principally by selling advertising on
broadcast and print distribution platforms; selling advertising
space on newspaper and magazine pages; selling produced
television programs; providing advertisement production
services; and providing research services.
We were founded by Xinhua Finance Limited on November 7,2005 as a holding company for its China media assets. We have
grown significantly since our founding, primarily through the
acquisition of assets and the development of distribution
rights. We acquired several companies from our parent, Xinhua
Finance Limited, and continue to make acquisitions.
We believe we have the following competitive strengths:
High-quality content
We produce high-quality content using a commercial,
ratings-driven approach, targeted at the affluent segment of the
Chinese population. We believe we have a competitive advantage
in producing high-quality popular content due to our control of
our media production studios, our strategic partnerships with
some well-known financial publications in China and our strategy
of hiring talented and experienced production personnel and
writers. Our management, which is experienced in international
media operations, infuses international standards into our
locally produced content.
We believe much of our content is among the best in its class,
including the content generated for Money Journal, our
Fortune China television programs and the content of the
Economic Observer. By controlling our production studios
and hiring talented staff, we believe our television production
studios are advanced by both Chinese standards and international
standards. In addition, our focus on understanding our audiences
through research enhances our ability to develop innovative and
original programming geared to produce high ratings.
Reach and breadth of our established distribution
channels
Our distribution channels are based on agreements with
distributors, most of which are long-term in nature and give us
the exclusive rights to sell advertising. We provide advertisers
with an integrated platform to reach their target audience,
including through:
•
cable and satellite television broadcasting on Inner Mongolia
Satellite Television, to an estimated audience of
210 million potential television viewers in key Chinese
urban areas including Beijing, Shanghai and Guangzhou;
•
our Fortune China programs broadcast on Inner Mongolia
Satellite Television and Hunan Satellite Television, which is a
leading satellite television channel in China;
•
radio broadcasting via China Radio International to Beijing and
Shanghai, with a combined potential radio audience of
33 million people; and
•
the pages of Money Journal, Beijing Review, and the
Economic Observer, which have a current circulation of
112,000, 50,000, and 145,000, respectively.
We also provide advertising content for Beijing Television
Station and other television stations, in several newspapers,
and on billboards on some university campuses in Shanghai.
Ability to produce and sell advertising across multiple
media
We believe our services allow advertisers to more
cost-effectively reach desirable consumers across multiple media
platforms.
•
Our channels, as described above, span television, radio,
newspapers, magazines and billboards.
•
Our in-house advertising group creates advertising campaigns
having a unified message across all media platforms.
•
Our market research group objectively analyzes the effectiveness
of the advertising message.
Our services attract a large base of leading international
advertisers such as HSBC, Audi and Nokia, as well as large
domestic companies and financial institutions such as Bank of
China, China Mobile and Lenovo. Control of our production,
advertising and market research gives us sophisticated
analytical tools, which we believe will continue to give us a
competitive advantage as the advertising market develops over
the next few years.
Ability to distribute content across multiple media
We gain competitive advantage from sharing content among our
subsidiaries, including affiliated entities, and with our parent
company, Xinhua Finance Limited. Currently, our parent provides
content to Fortune China, the Economic Observer, Money
Journal and Beijing Review. The ability to use the
same content across multiple media platforms tends to lower
costs. Leveraging on our integrated platform for content is a
key strength of our business model, and is central to our
ability to provide both high-quality entertainment and
information to our audiences and sophisticated advertising
services to our advertiser customers.
Strong and experienced management team
Our management team is one of our strongest assets. Our
management team has a mix of Chinese cultural experience and
international media operational skills, and brings international
standards to our content offerings. Ms. Fredy Bush, our
Chief Executive Officer and the Chairman of our Board, has 20
years of experience building businesses in Asia. In 2006,
Ms. Bush received CNBC’s Asia Entrepreneur of the Year
Award. Ms. Bush, together with our management team, focuses
on innovative business and strategic initiatives and the
execution of our business model. In addition, we employ
experienced and capable managers to run our business groups and
operations.
Experience in identifying, executing and integrating
acquisitions
Our management has significant experience in identifying,
executing and integrating acquisitions in China. Our management
identified the acquisitions that currently comprise our business
operations based on their experience and understanding of the
regulatory environment in China. To date, we have successfully
acquired and integrated a number of new businesses and
integrated them into our operations with minimal disruption.
This strength has enabled us to successfully assemble our
integrated platform.
We intend to become the leading diversified media company
targeting the rapidly growing affluent segment of the Chinese
population. We intend to achieve this objective by implementing
the following:
Expand our broad distribution channels
We plan to expand our distribution assets and strategic
partnerships in both traditional and new media in order to offer
our advertisers complementary and reinforcing methods of
reaching targeted consumers. We may expand our business into the
Internet as well as other forms of new media such as broadband
wireless broadcasting and Internet television. With new forms of
distribution integrated into our existing platform, we believe
we will be able to extend our brands, distribute our content
more effectively to our target audience, increase our scale and
enhance our market position.
Continue to develop high-quality content
We are committed to producing high-quality programming based on
our commercial, ratings-driven approach, targeting the affluent
segment of the Chinese population. Accordingly, we intend to
increase our investment in programming, attract more talent,
increase production capacity and enter into more international
partnerships.
Leverage our integrated platform to increase operational
and cross-selling synergies
We plan to maximize opportunities for our business to increase
both revenue and cost synergies. We intend to increase
cross-selling by developing additional flexible, bundled
advertising packages that allow advertisers to reach consumers
by complementary and reinforcing media. At the same time, we
intend to further leverage the existing elements of our
integrated media platform to enhance the platform’s
attractiveness to advertisers. Advertisers can launch a
coordinated campaign across multiple media while enjoying cost
savings from our bundling and volume discounts. Finally, we plan
to promote content sharing across our internal capabilities and
with our parent.
Build our brands for both consumers and advertisers
We plan to continue to promote our brands to both consumers and
advertisers. For consumers, we intend to brand the platforms we
use, the offerings of our strategic partners, and specific
programs. We believe our high-quality content will attract more
affluent consumers, as well as increase the loyalty of our
target audience. For instance, we believe viewers who regularly
watch one Fortune China show will watch others in the
same series.
For our advertisers, we plan to continue to promote our brand so
that domestic and international advertisers will recognize the
name “Xinhua Finance Media” as synonymous with an
integrated platform that reaches the affluent Chinese
demographic. Enhancing our brand name should enhance market
awareness of our services, which should allow us to strengthen
and broaden our customer base and increase our advertising
revenues.
We plan to pursue strategic relationships and acquisitions that
fit with our current core competencies and brands. We believe
that growth through acquisition is particularly attractive given
the fragmentation in China’s media industry. We plan to
continue our track record of successfully identifying, executing
and integrating acquisitions to build scale and enter into
complementary businesses and new media platforms. We plan to
evaluate strategic acquisition opportunities that we believe
will further enhance our leadership position while also
providing an attractive return on investment. When evaluating
potential acquisition targets, we will consider factors such as
market position, growth and earnings prospects and ease of
integration.
Our products and services
Media production
We produce television programs and offer broadcast design
services through our media production group.
Television production
Our television production operations create and distribute
television programs, including drama series. Our production
studios in Beijing and Shanghai are able to manage the entire
production process. Television production involves writing
scripts, casting, creating sets, securing venues, filming and
post-production. Post-production refers to all stages of
production that occur after the actual filming of a program and
includes editing and remixing original recordings for both video
and sound, and adding sound and visual effects. For our drama
series production, we cooperate with third parties who hold
drama series production licenses, to produce our drama series.
For drama series, we often produce a pilot episode at our own
expense. We then show the pilot to television stations, and if a
television station wishes to purchase the series, it enters into
a contract with us, typically to produce 20 episodes. Sometimes
we produce an entire series at our own expense before seeking a
station to purchase the rights to broadcast it. We have produced
drama series such as Floating Dust, a series about
hardships in life, and Marriage Vacation, a drama series
about a modern family.
We develop animation concepts and produce three-dimensional
animation for advertisements, education and public instructions,
engage in post-production for television commercials and create
special visual effects for television commercials and films. We
have created approximately 100 episodes of animation for China
Central Television, including animation that won an award from
the China Television Artist Association Cartoon Industry
Committee for the best short animation introducing a program. We
also create animated public service advertisements for various
government agencies.
Broadcast design services
Our broadcast design services consist of providing brand
management services for television channels. We reposition
television channels, which refers to the process of developing
the branding and image of the television channel. To support
repositioning, we develop content,
graphics and advertisements, including “bumpers”.
Bumpers are short broadcasts of a few seconds between
programming and advertisements that identify and self-advertise
the channel. We also develop other graphics and advertising for
the channel, some of which are displayed through other channels
or print media to promote the channel. We have repositioned many
of the China Central Television channels. We have won several
awards from Travel Satellite Television for producing the best
branding and image products in categories such as bumpers,
program trailers and slogans.
Broadcasting
Television
We have a strategic partnership with Shanghai Camera Media
Investment Ltd., or Shanghai Camera. Shanghai Camera has the
exclusive rights to sell advertising for Inner Mongolia
Satellite Television and provides most of its content. We
provide consulting and advisory services to Shanghai Camera,
including the production or sourcing of the content and sourcing
of advertisements. For more information on these arrangements,
see “Arrangements with partners and suppliers—
Agreements regarding Shanghai Camera”.
Inner Mongolia Satellite Television is the satellite channel of
Inner Mongolia Autonomous Region, one of 31 national satellite
television channels in China operated by regional authorities.
Shanghai Camera’s programming is distributed by Inner
Mongolia Satellite Television to cities where it has landing
rights.
We produce or source diversified content for Shanghai Camera
that is broadcast on Inner Mongolia Satellite Television. This
content includes Warrior and Access Hollywood:
China, which we recently began to produce with our partner
Small World Television. In addition, Inner Mongolia Satellite
Television broadcasts financial programming from our Fortune
China production studios. The local news and the My Blue
Home series of programs, which are documentaries set in
Inner Mongolia, are produced by Inner Mongolia Television.
Inner Mongolia Satellite Television reaches 103 cities in 29 of
31 provinces across China, including Beijing, Shanghai and
Guangzhou. Inner Mongolia Satellite Television reaches an
estimated 210 million potential television viewers
according to Inner Mongolia Television. The geographic reach of
Inner Mongolia Satellite Television is depicted below, with
additional information given in the following table.
Selected cities reached by Inner Mongolia Satellite
Television
Source: Inner Mongolia Television Station. The numbers
set forth are based on estimates by Inner Mongolia Television
Station that include areas where it has secured landing rights
by contract as well as other areas where Inner Mongolia
Satellite Television is broadcast. The viewership is estimated
by multiplying the number of households in each cable system
where Inner Mongolia Satellite Television is carried by the
estimated average number of persons per household.
(2)
Provincial-level cities.
Fortune China programs
We produce (in our studios in Beijing, Shanghai and Shenzhen)
and syndicate the Fortune China series of financial
television programs. We produce nine different programs under
the Fortune China name. One is broadcast by Hunan
Satellite Television and two are syndicated to local television
stations. Six are broadcast on Inner Mongolia Satellite
Television.
We produce Fortune Morning 7 a.m., a popular financial
information television program in China. The half-hour program
covers topics such as investments, Chinese economic data and
personal finance. This program is broadcast on Hunan Satellite
Television. For more information on the contract with Hunan
Television Station, see “Arrangements with partners and
suppliers— Agreements related to Hunan Satellite
Television”.
Some of our Fortune China programs are syndicated to
provincial and city channels in China. Under our syndication
relationships, we typically provide the program to our
syndication partner and pay them an annual fee. In return we
earn revenues by selling two minutes of advertising time for
every 30 minutes of programming. We also sell sponsorship, which
allows the sponsor the right to promote its products, services
or expertise during the program. This is typically done by
explicit naming of the program sponsor, and sometimes we receive
sponsorship in another media platform in lieu of receiving a
fee. In addition, we produce programs for third parties,
typically providing studios, equipment, personnel and sometimes
satellite transmission.
The syndicated programs are as follows:
•
New Fortune Weekly is a comprehensive financial program,
reviewing and analyzing popular topics relating to the Chinese
economy. The 90-minute program airs on weekends, typically
Saturday nights.
Fortune People is a popular financial talk show in China,
hosting guests such as economists, business executives, finance
professionals and academics. The 30-minute program airs at
different times during weekends, typically Sunday nights.
Inner Mongolia Satellite Television commenced broadcasting four
new Fortune China programs in August 2006, bringing
Fortune China programs to all places where Inner Mongolia
Satellite Television has landing rights. These programs are
Fortune Unlimited, which focuses on financial and
investment related news, including financial events and
influential business people, Fortune China Weekly, which
analyzes important economic events of the week, Fortune
Celebrity, which interviews guests in the financial arena,
and Fortune Morning, which is a financial news program.
In October and November 2006 we began airing two other
Fortune China programs on Inner Mongolia Satellite
Television. Our Fortune China studios also recently began
to produce other diversified content for broadcast on Inner
Mongolia Satellite Television with our partner Small World
Television such as Access Hollywood: China and
Warrior.
The new programs on Inner Mongolia Satellite Television are one
example of how we leverage our Fortune China
operations’ synergies with our other activities. Our
Fortune China operations also utilize the Xinhua FTSE
indices produced by our affiliate, Xinhua FTSE Index Co., Ltd.,
bring experts from our parent onto Fortune China programs
and broadcast the Xinhua Finance newswire on the bottom of the
screen on some Fortune China programs.
We also organize financial and economic-themed events through
our television broadcasting operations. The events are attended
by financial professionals, affluent persons and academia. We
endeavor to find a corporate sponsor to cover the cost of these
events, and use these events to promote our services and
branding. Our Fortune China operations cooperate with our
print group and our radio operations to produce joint events,
forums and meetings.
Radio
We have a strategic partnership with China Radio
International’s exclusive advertising agent, under which we
have the exclusive rights to sell advertising for and the right
to provide content to China Radio International’s EasyFM
91.5 of Beijing and EasyFM 87.9 of Shanghai. The exclusive
rights to sell advertising also extend to program sponsorship.
For more information on this partnership arrangement with China
Radio International, see “Arrangements with partners and
suppliers— Agreements regarding our radio broadcasting
business”.
China Radio International owns the EasyFM radio network, which
broadcasts in Chinese and English. The EasyFM stations in
Beijing and Shanghai reach the populations of these cities, a
potential audience of 33 million people. For more
information on China Radio International, see
“Industry— Media distribution platforms—
Broadcast”.
We intend to only provide non-news content under this
partnership. We maintain radio studios in Shanghai and Beijing
that are responsible for advertisement and program production.
We provide content at intervals during the day, ranging from one
minute to two hours in length. The content we provide to these
stations includes short English language broadcasts, forums on
educational institutions, personal interviews, lifestyle
programs and short talk shows. We produce some of the content we
provide, while the remainder is sourced externally. Our radio
programs are produced and broadcast in Chinese and English and
are intended to appeal to Chinese people who have bilingual
capability, an attractive affluent demographic segment.
According to a survey conducted by ChinaHR.com, the average
wages of Chinese employees with advanced and intermediate levels
of English are 72.5% and 24.3% higher than those with basic
levels of English, respectively.
We leverage synergies of our radio operations with our other
operating groups, and with our parent, Xinhua Finance Limited.
For instance, our radio operations provide our parent’s
market updates to EasyFM twice daily, adapting information
provided by our parent’s financial news operations for
radio broadcast. Our radio operations also use content provided
by Money Journal magazine to produce a financial radio
program for broadcast on Shanghai’s EasyFM station.
Print
Newspaper
For our strategic partner the Economic Observer, we have
the exclusive rights to sell advertising and we provide
consulting services with respect to the newspaper.
We sell advertising for the Economic Observer through our
own sales force as well as through third party advertising
agents. One of our affiliated entities is the exclusive
advertising agent for the Beijing, Shanghai and Tianjin real
estate pages of the Economic Observer.
The Economic Observer is a leading financial newspaper in
China. According to Huicong Research, the Economic
Observer had 16.7% of the advertising market share by
revenues for financial newspapers in China for the first six
months of 2006. In addition, the Economic Observer has an
online version. The Economic Observer is published weekly
and has a circulation of 145,000. Over 90% of this circulation
is in Beijing, Shanghai, Guangzhou and Shenzhen. The Economic
Observer has approximately 118 journalists in China
based in several major cities.
The majority of the content of the Economic Observer is
produced by its own staff. Some of its content also comes from
other organizations, including newswires. Certain index-related
content and topical reports are sourced from our parent, Xinhua
Finance Limited.
The Economic Observer’s content includes national
and regional news and analysis, as well as news and analysis
related to economic matters, capital markets, real estate and
personal finance. It also contains the special
“Observer” section, which covers diverse areas such as
technology, history and lifestyle. The Economic Observer
regularly publishes special inserts such as the monthly real
estate section.
The Economic Observer is increasing its focus on
international news and bringing international standards to its
reporting by sourcing content such as our parent’s index
values and ratings reports.
Magazines
We have the exclusive rights to sell advertising for and provide
management and information consulting services, including with
respect to distribution, to Money Journal.Money
Journal is a wealth and financial magazine, with a paid
subscription rate at 46% as of November 2006, one of the highest
among national personal finance magazines in China. We have
writers and other content producers who create content for
Money Journal.
Money Journal is a monthly financial magazine providing
wealth management and investment information for the China
market. Money Journal has an online version. It covers a
range of topics from entrepreneurship and personal finance to
content on affluent lifestyles. Money Journal contains a
section of content that is provided under an agreement with Dow
Jones, which is described in “Arrangements with partners
and suppliers”. The circulation of Money Journal was
112,000 per month for November 2006 according to an audit
conducted by BPA Worldwide.
We have the exclusive rights to sell advertising for the
financial pages of the Beijing Review for which we
provide content. The Beijing Review is an English weekly
news magazine in China with a circulation of 50,000.
As a complementary service to the sale of advertising, we
provide marketing services, including organizing events for
financial institutions. The events may include investment
seminars or other forums on financial topics. When we organize
events, we manage the entire process including the advertising
or notices, the venues, the speakers, and any cross-media
content. Money Journal offers the Affluent Integrated
Marketing Solutions, in which we
•
target the affluent by partnering with educational institutions
and other financial media to carry out events;
•
send sponsored gifts to readers of Money Journal; and
•
organize presentations and product exhibitions.
We also organize the Million Dollar Investors’ Club, which
is composed of readers of Money Journal.
We leverage synergies our magazine operations have with our
other operating groups, and with our parent, Xinhua Finance
Limited. For example, our marketing services are carried out
through a joint venture between one of our subsidiaries in our
magazine operations and Economic Observer Advertising. Also,
Money Journal sources some content from our parent.
Advertising
We create and place advertising for television, radio, print
media and campus billboards. We purchase the rights to be the
advertising agent for certain television shows broadcast by
Beijing Television Station and other television stations, and in
the Beijing, Shanghai and Tianjin real estate pages of the
Economic Observer, as well as other newspapers.
On Beijing Television Station, we are the exclusive advertising
agent for Top Music, an entertainment show focusing on
music and music news, and Star Press, a show in which a
panel of journalists interviews guests in the format of a press
conference. We also act as advertising agent for programs aired
on other television stations. For more information on these
arrangements, see “Arrangements with partners and
suppliers— Agreements by our advertising group securing
agency”. We also place advertisements on approximately
200 billboards on university campuses in Shanghai. In
addition, we serve as a non-exclusive advertising agent for
other newspapers, such as Beijing Evening News and
Beijing Youth Daily.
Our advertising group creates much of the advertising it places,
including planning, design and production. Production work for
print media includes creating advertising copy, design and
layout, and coordination of printing or placement on billboards.
Production work for television
advertisements includes writing storyboards, set design for the
advertisements, filming and post-production editing.
Our advertising group also engages in events organizing. From
March to October 2006, we organized a promotional event based in
Beijing.
In addition, our advertising group is leveraging on our magazine
group’s network of advertisers to find new customers to use
its advertising creation and placement services.
Research
We conduct market research for our own use and for our
international and Chinese-based customers. We also partner with
international research companies to participate in global
research projects. We study market characteristics, consumer
preferences and opinions with respect to advertising and media
content, and business and technology issues as needed for each
project. We use various analytical tools to conduct this
research, including both quantitative and qualitative tools.
Our research services are a key part of our integrated platform.
Our research services provide the feedback necessary to help
advertisers understand their consumers better and assist our
production, print and broadcasting groups to produce and select
content that will be popular with our target demographic. For
example, we are using focus groups to study the pilot programs
of our drama series in preparation for broadcast on Inner
Mongolia Satellite Television. We also use focus groups to
improve the quality and demographic aim of various advertising
campaigns.
Each research project begins with a project planning phase which
tailors the project to meet the needs of the customer or
in-house group. We then gather, compile and analyze the data.
Finally, we issue a report to the customer or in-house group
stating the results of the project. We have various analytical
methods to provide our services, such as in-depth individual
interviews or focus group interviews. We also have quantitative
methods, such as computer assisted telephone interviews,
door-to-door surveys and product placement tests.
We have research offices in Shanghai, Beijing and Guangzhou. We
also maintain partnerships with research companies in over 200
cities in China in locations outside Beijing, Shanghai and
Guangzhou. We also gather data from across China using our
computer assisted telephone interviewing system.
Our customers
Our products and services attract a variety of international and
domestic customers. The data we give for our customers below
includes data from our subsidiaries for the full periods given
regardless of the date we acquired them.
Media production
The high-quality of our media production group’s products
has attracted many customers. For the year ended
December 31, 2006, approximately 122 customers had
used our television production, animation, and broadcast design,
including leading international customers such as Small World
Television LLC and Legend Entertainment Inc. and domestic
customers such as Che
Jia Media, China Central Television, Kuai Le Purchasing Company,
Travel Satellite Television and Hunan Television.
Small World Television LLC, Dong Yang Zhong Tian Dragon, West
Xinjiang Culture Co., Ltd., Jiangsu Zhong Tian Dragon and Che
Jia Media, which were the top five customers of our media
production group in 2006, accounted for 26.3%, 6.6%, 4.0%, 3.8%
and 3.5% of our media production revenues for 2006,
respectively. The customer relationship with Small World
Television LLC was transferred to our broadcasting group in the
second half of 2006. Our media production group’s
television production, animation, and broadcast design
operations contributed 63.8%, 10.2% and 26.0%, respectively, of
our media production group’s revenues for 2006.
Our top ten media production customers accounted for 57.9% of
our media production revenues in 2006.
Broadcasting and print
The quality and coverage of our integrated platform have
attracted a broad range of customers. For the year ended
December 31, 2006, approximately 198 and 250 customers had
used the services of our broadcasting and print groups,
respectively, for advertising and sponsorship, including
international advertisers such as Mindshare Media and domestic
advertisers such as Shanghai Jin Kong Investment, Beijing Sheng
Shi Hui Huang Advertisement and Beijing Hua Shang Media. Beijing
Sheng Shi Hui Huang Advertisement, Beijing Hua Shang Media,
Shanghai Si Yuan Jing Hong Advertising, Beijing An Bi Xin Home
Shopping Network, and Beijing Jin Nuo Bo Er Advertising, which
were the top five customers of our broadcasting group in 2006,
accounted for 12.0%, 9.0%, 6.4%, 6.3% and 5.4% of our
broadcasting group’s revenues for 2006, respectively. Step
City Investment Ltd., Shanghai Jin Kong Investment,
Mindshare Media, Wit Good Investments and Sheng Shi Chang Cheng
International Advertising, which were the top five customers of
our print group in 2006, accounted for 10.0%, 9.4%, 7.9%, 5.3%
and 4.6% of our print groups’ revenues for 2006,
respectively.
Advertisers purchase advertising time or sponsorship on Inner
Mongolia Satellite Television’s, EasyFM’s and
Fortune China’s programs and on Money
Journal’s and the Economic Observer’s print
pages either directly from us or through advertising agencies
that purchase these services on behalf of their domestic and
international customers. In 2006, direct sales to advertisers
accounted for 25.3% and 10.3% of the revenues of our
broadcasting and print groups, respectively.
Our top ten broadcasting customers accounted for 50.6% of our
broadcasting group’s revenues in 2006. Our top ten print
customers accounted for 54.5% of our print group’s revenues
in 2006.
Advertising
The quality and placement access of our advertising group has
attracted a broad range of international and domestic customers.
For the year ended December 31, 2006 approximately 524
customers, not including customers of the promotional event we
organized in Beijing from March to October 2006, had used the
advertising services of our advertising group, including
international customers such as Mindshare Media, Carat Media and
City Chain Company Ltd. and domestic customers such as
Shanghai Yang Zhi Culture Broadcasting Co., Ltd., Beijing Jin
Yue Property and Beijing Gao Xing Yi Lu Culture Development.
City Chain Company Limited, Carat Media, Mindshare Media,
Beijing Jin Yue and Shi Li Media, which were the top five
customers of our advertising group in 2006, accounted for 7.3%,
4.3%, 2.9%, 2.4% and 2.2% of our advertising group’s
revenues in 2006, respectively. In addition, the promotional
event that we organized in Beijing from March to October 2006
accounted for 7.3% of our advertising group’s revenues in
2006.
Customers purchase advertising placements and advertising
creation services either directly from us or through their
advertising agents which purchase these services on behalf of
their domestic and international customers. In 2006, direct
sales to advertisers accounted for 56.8% of our advertising
group’s revenues.
Our top ten customers accounted for 28.9% of our advertising
group’s revenues in 2006. No single customer accounted for
more than 10% of our advertising group’s revenues in 2006.
Research
The quality of our research group has attracted a broad range of
international and domestic customers. For the year ended
December 31, 2006, approximately 116 customers had
used our research services, including leading international
brand name customers such as Market Insights Group Ltd., Wrigley
and Wal-Mart and leading domestic brand name customers such as
Pepsi (China), Baisheng and Inner Mongolia Milk Industry Group.
Wal-Mart, Pepsi (China), Inner Mongolia Milk Industry Group,
Market Insights Group and Wrigley, which were the top five
customers of our research group in 2006, accounted for 11.9%,
9.3%, 5.0%, 4.5% and 3.5% of our research group’s revenues
for 2006, respectively.
Customers purchase research services either directly from us or
through research firms which purchase these services on behalf
of their international customers. In 2006, direct sales to
customers accounted for approximately 66.8% of our research
group’s revenues.
Our top ten research customers accounted for 47.1% of our
research group’s revenues in 2006.
Distribution
Inner Mongolia Satellite Television’s programs are
broadcast via satellite to cities where they have landing
rights. A typical landing rights contract may have a term of one
year. Some other cities where no landing rights are established
by contract also carry Inner Mongolia Satellite Television.
Our Fortune China studios are interconnected by a leased
optical fiber network. Programming content is sent via optical
fiber cables to Changsha from the studios. From Changsha,
Fortune Morning 7 a.m. is transmitted to Hunan Satellite
Television Station, which carries the program via satellite
across China. Similarly, the programs aired on Inner Mongolia
Satellite Television are transmitted from Changsha to the
headquarters of Inner Mongolia Television Station via optical
fiber. The remaining programs are routed from Changsha to the
Shanghai studio. From there, these programs are transmitted by
satellite to be distributed across China to all the channels
carrying them. For Fortune Morning 7 a.m., we use the
services of China Cable Network for optical fiber connection.
For our Fortune China programming that is syndicated for
broadcast by local stations, we contract China Cable Television
to carry our programs from our Shanghai studio to its earth
station by optical fiber, where the program is transmitted to
satellite. We contract with the local stations as well. The
syndication relationships we have are typically on the basis
that we provide the program to our syndication partner with an
annual fee, and in return we earn revenues by placing two
minutes of advertising for every 30 minutes of programming.
Typically, the contract is for a term of one to two years.
As part of the management consulting services to Money
Journal and the Economic Observer, we advise on their
engagement of distributors. Guangzhou Jingyu Culture Development
Co., Ltd., or Guangzhou Jingyu, provides management consulting
and information provision services on distribution in China for
the magazine. The Economic Observer has relationships
with 90 distribution agencies in China to distribute it. We do
not receive any proceeds from subscriptions and sales of the
Economic Observer.
Our sales and marketing
Our sales and marketing team comprises 172 employees across
our operational groups. The sales and marketing team allocated
to each group focuses on the specific products of that group and
the needs of customers of that group, while being held together
through common strategies and broader service to our company as
a whole. We strengthen relationships with advertisers by
cross-selling our integrated platforms to our existing
advertisers, offering attractive and flexible packages to suit
their needs. We promote our brand to advertisers as synonymous
with the affluent demographic. We use the ratings of our
programs, the circulation numbers of the magazine and newspaper
and the research conducted by our research group to evidence our
ability to reach this demographic effectively.
Competition
Each of our businesses is subject to significant competition,
much of it from state-owned competitors. We believe we
distinguish ourselves from our competitors by being the only
company that can provide a full range of production services,
including animation, broadcast design and post-production for
television commercials, while having a partnership with a
research group and distribution channels through various types
of media outlets.
Media production
We compete against a strong field of competitors in media
production, including large state-owned production companies.
There are approximately 1,160 licensed television production
companies in China and approximately 700 companies producing
drama series.
Broadcasting
We and our strategic partners face many competitors in the
Chinese broadcast market. Within each province or city, there
are up to 16 China Central Television satellite channels and up
to 30 regional satellite channels, which compete with Inner
Mongolia Satellite Television. There may also be local cable
channels and local terrestrial channels.
The major competitors of our Fortune China operations are
China Central Television Channel 2, a satellite television
channel covering many cities throughout China, and Fortune
One, a financial news program broadcast primarily in
Shanghai.
The radio markets in Beijing and Shanghai are very competitive.
EasyFM has only a small share of the Beijing and Shanghai radio
markets, respectively.
Print
The Economic Observer, a weekly newspaper, faces
competition from several financial newspapers in China,
including 21st Century, which prints three times a week,
CBN, which prints daily and China Business.
Money Journal competes against several financial
magazines, both international and domestic, such as Caijing
Magazine, Harvard Business Review, and the Chinese versions
of Business Week, Fortune and Forbes.
Advertising
Our primary competition in advertising comes from the American
Association of Advertising Agencies, or 4A, advertising
companies, which are the dominant international advertising
companies. Although we have relationships with them in which
they act as advertising agents, at the same time the 4A
companies have much of the market share both globally and in
China and are our competitors.
Research
There are approximately 2,000 research companies in China, but
many of these are capable only of data gathering. International
firms also make up a large portion of the research market in
China.
Intellectual property
Some of our groups have developed strong brand awareness for
their products and services. We also benefit from strong brand
awareness relating to our parent, Xinhua Finance Limited.
Accordingly, we consider our trademarks, copyrights and similar
intellectual property critical to our success and rely on
trademark and copyright laws, as well as licensing and
confidentiality agreements, to protect our intellectual property
rights. The intellectual property rights, including copyrights,
trademarks and Internet domains held by us and our strategic
partners are described in “Regulation— Regulations on
intellectual property protection”.
Xinhua Financial Network Limited, or Xinhua Financial Network,
the predecessor and now subsidiary of our parent, Xinhua Finance
Limited, and China Economic Information Service entered into a
Content License Agreement Supplement to the Exclusive
Broadcasting Agreement dated December 15, 2001, pursuant to
which China Economic Information Service granted to Xinhua
Financial Network and its affiliates an exclusive license
(worldwide excluding China) to be the only party other than
China Economic Information Service to distribute its real time
newsfeeds and a non-exclusive license (in China) to distribute
its real time newsfeeds, as well as the right to use the word
“Xinhua” as the first name by Xinhua Financial Network
and its affiliates worldwide. The agreement is effective for
20 years from May 18, 2000 and renewable for an
additional term of ten years at Xinhua Financial Network’s
option on terms to be agreed between the parties. We have in
turn entered into an agreement with Xinhua Financial Network to
use the word “Xinhua”. Although our parent or Xinhua
Financial Network has registered the trademark for the logo
containing “Xinhua Finance” and the name
“Xinhua” in the U.S., Hong Kong, Japan and South Korea
and our parent has applied for registration of the logo in the
PRC, it is not clear whether the registration will be accepted
in the PRC or whether we or our parent or affiliates could
continue to use the name “Xinhua” if the agreement
were to terminate. See “Risk factors— Risks related to
our business”.
Employees
As of December 31, 2006, we had 623 full-time employees,
including 582 located in the PRC and 41 in Hong Kong. Our
employees are not covered by any collective bargaining
agreement. We consider our relations with our employees to be
good. A functional breakdown of our employees is set out in the
following table:
Advertising
Media
and
Function
Headquarters
Broadcasting
Print
production
research
Total
Administration
8
12
10
9
30
69
Analyst
1
1
Design
10
10
45
27
92
Content production
59
21
1
81
Finance
15
11
12
6
22
66
General management
3
9
5
12
29
Information technology
13
5
1
11
30
Research
75
75
Sales and marketing
1
34
57
5
83
180
Total
27
148
121
66
261
623
From time to time, we also employ part-time employees and
independent contractors. We plan to hire additional employees as
we expand.
As required by PRC regulations, we participate in various
employee benefit plans that are organized by municipal and
provincial governments, including pension, work-related injury
benefits, maternity insurance, medical and unemployment benefit
plans. We are required under PRC law to make contributions to
the employee benefit plans at specified percentages of the
salaries, bonuses and certain allowances of our employees, up to
a maximum amount specified by the local government from time to
time. Members of the retirement plan are entitled to a pension
equal to a fixed proportion of the salary prevailing at the
member’s retirement date. The total amount of contributions
we made to employee benefit plans in 2005 was $26,980 and in
2006 was $214,129. Our employees in Hong Kong are covered by the
Mandatory Provident Fund Scheme. The contribution of our company
for the eligible employees is based on 5% of the applicable
payroll costs, and contributions are matched by the employees.
We contributed $3,780 under this scheme in 2005 and $41,427 in
2006.
Our principal executive offices are located on premises
comprising approximately 11,728 square feet in Shanghai,
China. We have offices and facilities located in Beijing,
Shanghai, Guangzhou, Hong Kong and Shenzhen. All of our offices
and other facilities are leased. The following table presents
our facilities, the expiration year of the lease and the
approximate size.
Expiration of
Approximate
Facility location
Use of facility
lease
square feet
Room 3905-09, Tower One, Grand Gateway, 1 Hongqiao Lu,
Shanghai(1)
Headquarters
2007
11,728
Floor 22, D Wing, World Trade Center, City Center,
Beijing
Beijing Headquarters
2010
12,244
Room 2102, Floor 21, D Wing, World Trade Center,
City Center, Beijing
We are currently not a party to any material legal proceeding.
From time to time, we may be subject to various claims and legal
actions arising in the ordinary course of business. Although we
cannot predict with certainty the results of such litigation, we
believe that the final outcome of pending litigation will not
have a material adverse effect on our business and results of
operations. Regardless of the outcome, however, any litigation
can result in substantial costs and diversion of management
resources and attention.
Since 1949, the PRC media industry has been largely owned and
controlled by the state. In recent years, economic and
legislative reforms have produced significant change across the
media industry in China. The strong and sustained growth of
China’s economy has led to substantial development of
China’s media industry. The government has reduced
subsidies for state-owned media companies, causing the industry
to become more commercially oriented. At the same time,
deregulation permitting private entities to participate in some
sectors of the industry has attracted new investment.
The scope and scale of China’s media industry
In 2004, China’s media industry included 314 television
stations and 282 radio stations, according to the National
Bureau of Statistics, and 2,199 newspaper publications and
9,074 magazines, according to the China Print Industry Research
Report (2006) by Beijing Huiren Zhongtian Economic Development
Co., Ltd. China has the largest population in the world,
estimated by the Population Division of the United Nations to
have reached 1.3 billion in 2005. More than 97.0% of all
households owned at least one television set, according to 2005
estimates by CSM Media Research. Television signals reached
approximately 95.8% of the population by the end of 2005,
according to the China Radio and Television Yearbook (2006).
China’s radio signals reached 93.6% of the population in
2005, according to the China Radio Rating Yearbook (2005).
We believe the growth of the Chinese media industry is primarily
supported by the following drivers:
•
High and sustained levels of economic and consumption
growth. According to the World Bank, China’s nominal
gross domestic product, or GDP, grew from RMB 9.9 trillion
($1.3 trillion) in 2000 to RMB 18.3 trillion
($2.3 trillion) in 2005, the fourth largest in the world,
at a compound annual growth rate of 13.0% over the period,
faster than the world average of 6.9%. This rapid economic
growth led to a significant increase in consumer spending, which
grew from RMB 3.4 trillion ($0.4 trillion) in 2000 to RMB
6.7 trillion ($0.9 trillion) in 2005, at a compound annual
growth rate of 14.5%.
•
Rapid urbanization. The Chinese population, economy and
consumer consumption are increasingly concentrated in urban
areas. The urban population as a percentage of total population
increased from 36.2% in 2000 to 41.8% in 2004, according to the
National Bureau of Statistics. Urban areas are much wealthier
than rural areas. According to the National Bureau of Statistics
for August 2006, monthly disposable income per capita in the two
largest urban markets, Beijing and Shanghai, was RMB 1,583
($203) and RMB 1,648 ($211), respectively, compared to the
national average of RMB 918 ($118). Consumer consumption,
as a result, is increasingly concentrating in urban areas.
According to the National Bureau of Statistics, in the first
half of 2006, 67.5% of retail sales for consumer goods occurred
in urban areas, which grew by 14.0% year-on-year from 2005,
while the retail sales in the rural areas grew only 11.7%.
•
Relatively early stage of media industry development.
China’s media industry is still in its early stages of
deregulation and remains subject to significant government
control. For
details, see “Regulation”. We believe that
deregulation will gradually allow more investment into many
sectors of the media industry, including content production and
advertising. As the industry continues to develop, we expect
that deregulation and investment from the private sector will
further support growth of the media industry.
The Chinese media industry broadly includes the following three
markets:
•
Media distribution: Media distribution platforms include,
among others, television stations and networks, radio stations,
publishers of books, magazines and newspapers and Internet
website operators;
•
Content production: Content production companies collect,
purchase or produce content to be placed on media platforms; and
•
Advertising services: Advertising services companies
include those that provide services such as creating advertising
campaigns and placing advertising in various media, as well as
those that provide a range of other functions such as advising
on brands, consulting and market research.
Some industry participants play multiple roles, while some
specialize in a specific market. Our diversified media model
operates across all three categories.
Media distribution platforms
Media distributors either produce or purchase content, and
distribute the content to consumers in the form of a product,
such as television programs, radio programs or newspaper
articles.
Media distributors sell advertising space on their platforms,
such as newspaper space or television time slots, to companies
seeking to place advertisements and reach consumers. Media
distributors may partner with companies to outsource their
advertising operations where these advertising business partners
pay a fee and sometimes provide certain services including the
sourcing and provision of content to the media distributors and
share the advertising revenue with the media distributor to a
certain degree. The advertising business partners then sell
their advertising space with their media distributors to
advertisers. In doing so, they engage an advertising agency, on
an exclusive or non-exclusive basis.
Broadcast. According to the National Bureau of
Statistics and China Media Yearbook and Directory (2005),
at the end of 2004, China had 314 television stations, which
broadcast 11.0 million hours of television programs during
the year over 2,058 channels. Channels with national reach
include:
•
16 channels operated by China Central Television, according to
its website;
•
national satellite channels operated by provinces, autonomous
regions or directly administered municipalities, which must
negotiate with regional television authorities for landing
rights, permission to broadcast over those regions’
television channels (as there are 31 provinces, autonomous
regions and directly administered municipalities in China, there
are 31 such channels); and
•
5 channels operated by China Educational Television, according
to its website.
local terrestrial television broadcasting channels, which are
distributed by the one or two television stations run by each
province, autonomous region, directly administered municipality,
and major city;
•
local cable television channels; and
•
foreign channels that are only allowed to broadcast in certain
locations such as high-end hotels.
According to the National Bureau of Statistics, by the end of
2004 there were 282 radio stations, carrying 2,264 radio
programs, which broadcast an aggregate of 9.8 million hours
of programming during 2004.
According to the China Media Yearbook and Directory (2005),
China Radio International and China National Radio are two radio
networks that broadcast nationally. CRI is China’s largest
producer of foreign language radio content, broadcasting nearly
300 hours of programming each day in more than forty languages,
including Chinese. China Radio International also broadcasts
internationally through shortwave frequency. China National
Radio operates eight channels and broadcasts on both AM and
FM frequencies throughout the country, producing
156 programs daily. China National Radio is a part of the
China Media Group, which operates China Central Television as
well.
Print. According to the China Print Industry Research
Report (2006) by Beijing Huiren Zhongtian Economic Technology
Development Co., Ltd., there were 1,926 newspaper publications
in 2005, with a total of 42.2 billion copies produced. By
the end of 2004, there were 9,074 magazines in China, with a
total of 2.69 billion copies produced in year 2004.
The most influential newspaper in China is the People’s
Daily, published by the Chinese Communist Party. However, in
recent years, a large number of municipal and local newspapers,
as well as other specialized newspapers and magazines have
generated significant readership and circulation.
Other. A variety of other media distribution platforms
exist in China. They include movie theatres, outdoor and out of
home advertising networks, and the Internet, among others. In
particular, the Internet is becoming an increasingly accessible
distribution platform for consumers. According to China Network
Information Center, there were 137 million Internet users in
China as of January 2007.
Revenues from media distribution
Chinese media platform providers derive most of their revenues
from advertising and a small portion of their revenues from
selling access to their distribution platforms such as
subscription, syndication and book sales.
According to ZenithOptimedia, China’s total advertising
expenditures grew from RMB 39.5 billion ($5.1 billion)
in 2000 to RMB 80.1 billion ($10.3 billion) in 2005,
the seventh highest worldwide and the largest in Asia excluding
Japan, at a compound annual growth rate of 15.2%. China’s
advertising market is expected to reach RMB 133.2 billion
($17.1 billion) in 2008,
representing a compound annual growth rate of 18.5% from 2005 to
2008. The chart below sets forth the historical and projected
size of China’s advertising expenditure in absolute terms:
Total advertising expenditure at current prices (RMB
billion)
Source:
ZenithOptimedia Advertising Expenditure Forecast, June 2006.
Note:
The numbers are based on State Administration of Industry and
Commerce statistics. Advertising expenditure excludes agency
income, which comprises regular commission and income from
program syndication, sports sponsorship, event marketing,
industry training and other sources, and production costs.
Advertising expenditure includes classified advertising but
excludes the discounts that are negotiated between agency and
media owners.
The key factors driving the growth of Chinese advertising
expenditure include:
•
High and sustained levels of economic and consumption
growth. Advertising expenditure increases as the economy and
consumer demand grow. The GDP per capita increased from
RMB 7,858 ($1,007) in 2000 to RMB 14,035 ($1,798) in
2005, at a compound annual growth rate of 12.3%. Consumer
spending per capita increased from RMB 2,705 ($347) in 2000
to RMB 5,150 ($660) in 2005, at a compound annual growth
rate of 13.7%. According to the National Bureau of Statistics,
total retail sales of consumer goods increased from
RMB 3.9 trillion ($0.5 trillion) in 2000 to
RMB 6.7 trillion ($0.9 trillion) in 2005, at a
compound annual growth rate of 11.4% over the period.
•
Relatively low advertising expenditure as a percentage of GDP
and advertising expenditure per capita. According to
ZenithOptimedia, advertising expenditure as a percentage of
gross domestic product in China increased from 0.4% in 2000 to
0.6% in 2005. Still, China’s advertising expenditure as a
share of gross domestic product is well below that of the United
States at 1.3% in 2005 or Japan at 0.9% in 2005. Similarly
China’s advertising expenditure per capita increased from
$3.8 to $6.5 from 2000 to 2004, which is well below that of the
United States at $546.7 in 2004 and that of Japan at $309.4 in
2004. We believe this indicates significant potential for growth.
Advertising expenditure per capita ($) (2004) and as a % of
gross domestic product (%) (2005)
Source:
ZenithOptimedia Advertising Expenditure Forecast, June 2006.
Note:
(1)
The numbers and ratios are based on State Administration of
Industry and Commerce statistics. Advertising expenditures
excludes agency income, which comprises regular commission and
income from program syndication, sports sponsorship, event
marketing, industry training and other sources, and production
costs. Advertising expenditure includes classified advertising
but excludes the discounts that are negotiated between agency
and media owners.
(2)
Asia includes Australia, China, Hong Kong, India,
Indonesia, Japan, Malaysia, Philippines, Singapore, South Korea,
Taiwan, Thailand, and Vietnam.
•
Rapid urbanization. The Chinese population, economy and
consumer consumption are increasingly concentrated in urban
areas. Urbanization contributes to the growth of the advertising
market as an increase in population and consumption in cities
beyond certain critical thresholds that justify a significant
increase in advertising expenditures.
•
Olympics and World Expo. According to ZenithOptimedia,
there may be significant economic and advertising growth between
2007 and 2010 during the build-up to the Beijing Olympics in
2008 and Shanghai World Expo in 2010.
With the emergence of a growing affluent population in China
over the past decade, targeted advertising has become
increasingly popular. In contrast to the average annual
disposable income and consumption expenditure, per capita, in
urban areas in China of approximately RMB 9,422 ($1,207)
and approximately RMB 7,182 ($920), respectively, in 2004,
the top 10% of the Chinese population by income in urban areas
had an annual disposable income per capita of RMB 25,377
($3,252) or more and annual disposable consumption expenditure
of approximately RMB 16,842 ($2,158) or more in the same year,
according to the National Bureau of Statistics. This newly
emerging affluent population broadly represents an attractive
consumer demographic for many companies. Compared to the
traditional blanket coverage advertising, targeted advertising
enables companies to advertise more efficiently and effectively,
reaching a specific group of consumers who are more likely to be
purchasers of their products and services. Media which appeals
to consumers in this category would likewise attract advertisers
who aim to sell their products to the same group.
Television, radio, newspapers and magazines altogether
contributed 84.4% of the total national media advertising
expenditure in 2005, according to ZenithOptimedia, as described
in the chart below.
Segmental advertising expenditure, 2005 (%)
Source:
ZenithOptimedia Advertising Expenditure Forecast, June 2006.
Note:
The percentages are based on State Administration of Industry
and Commerce statistics. Advertising expenditure excludes agency
income, which comprises regular commission and income from
program syndication, sports sponsorship, event marketing,
industry training and other sources, and production costs.
Advertising expenditure includes classified advertising but
excludes the discounts that are negotiated between agency and
media owners. Others include, but are not limited to, outdoors,
cinema and Internet.
Broadcast. Television accounted for 44.4% of total
advertising expenditure in 2005. Forms of television advertising
include block advertisements, sponsorships and paid programs.
ZenithOptimedia estimated that the advertising expenditure on
television was $4.3 billion (RMB 33.6 billion) in
2005, up from $2.1 billion (RMB 16.4 billion) in
2000, indicating a CAGR of 16.0% over the five years.
ZenithOptimedia predicts that the advertising expenditure on
television in China will increase to $7.4 billion
(RMB 57.8 billion) in 2008, at a CAGR of 19.4% from
2005 to 2008.
Forms of radio advertising include block advertisements,
sponsorships and paid programs. ZenithOptimedia estimated that
the advertising expenditure on radio was $0.5 billion
(RMB 3.9 billion) in 2005, up from $0.2 billion
(RMB 1.6 billion) in 2000, indicating a CAGR of 19.8% over
the five years. ZenithOptimedia predicts that the advertising
expenditure on radio in China will increase to $0.8 billion
(RMB 6.2 billion) in 2008, at a CAGR of 19.7% from
2005 to 2008.
Print. ZenithOptimedia estimated that the advertising
expenditure on newspapers and magazines was $3.1 billion
(RMB 24.2 billion) and $0.3 billion
(RMB 2.3 billion) in 2005, respectively, up from
$1.8 billion (RMB 14.0 billion) and $0.1 billion
(RMB 0.8 billion) in 2000, indicating a compound
annual growth rate of 11.8% and 17.1% over the five years.
ZenithOptimedia predicted that the advertising revenue from
newspapers and magazines would grow at 17.0% and 19.2%,
respectively, from 2006 to 2008 and reach $5.0 billion
(RMB 39.0 billion) and $0.5 billion
(RMB 3.9 billion), respectively in 2008. Newspaper
advertising expenditure was 32.0% of the total advertising
expenditure in 2005, higher than the world average rate of
29.8%. In China, the advertising expenditure in magazines was
only 3.1% of total advertising expenditure in 2003, lower than
the world average rate of 13.3% in 2005.
The print media advertising market in China is concentrated in
major cities. The print media with nationwide coverage accounted
for 6.1% of the total advertising expenditure in the first
half of 2006, while local publications in Beijing, Shanghai and
Guangzhou accounted for 9.1%, 7.3% and 5.8% of total print media
advertising expenditures in the first half of 2006,
respectively, according to Huicong Research.
Content Production
Content production companies include, among others, news
agencies, television production companies and content
aggregators. Although there are a diverse number of each of the
aforementioned content producers in China, we describe here only
the television content production industry, as it is most
relevant to our operations.
Television program production
According to the State Administration of Radio, Film and
Television, 2.5 million hours of television programs were
produced in year 2005, an increase of approximately 21% from
2004. However, according to China Media Yearbook and Directory
(2005), the demand for television programs still exceeded the
supply by 6 million hours per year.
Production entities. The television production market is
highly concentrated and dominated by state-owned entities.
Although most television stations have internal production
capabilities, according to CSM Media Research’s China
Television Market Report (2004-2005), on average, 40% of
original programming is purchased, and 20% is produced via
cooperation with third party production companies.
According to the China Television Market Report (2004-2005), in
2004, 1,160 entities held requisite licenses from the government
to produce television programs. Private production companies are
gaining scale and importance, although their role is still
limited.
The production of drama series, a particular type of television
program, requires significant capital investment and specific
licenses. According to the China Television Market Report
(2004-2005), there were more than 700 drama series production
entities in China by the end of 2003, mostly located around
Beijing, Shanghai and Guangzhou. To engage in drama series
production, an entity must either hold a license or cooperate
with another entity that holds the license. There are two types
of licenses: a type A drama series production license authorizes
general drama series production and a type B drama series
production license is a more limited license authorizing the
production of a specific drama series. In 2004, 127 entities,
including 24 private entities, had a type A drama series
production license. According to the China Drama
Series Market Report
(2005-2006), the number
of type A license holders increased to 143 by June 2004 while
the number of private company holders remained the same.
Among all the drama series production entities, China Central
Television was the biggest drama series producer, producing,
internally or via cooperation, 89 drama series containing 1,498
episodes, which constituted 14% of the total production volume
in China during 2004.
Television production revenue. According to the China
Television Market Report (2004-2005), the price of a television
program is typically determined by the expected and actual
ratings of the program, the perceived quality of the channel,
the time slot for which the program is suitable and the
buyer’s budget. For a drama series, the price is also based
on the topic, the casting and the production cost. Typically, an
episode of a modern drama series suitable for broadcasting at
primetime, which runs from 7 p.m. to 9 p.m., would
sell for an average price
between RMB 300,000 ($38,000) and RMB 400,000
($51,000) for nationwide broadcasting and an average price
between RMB 40,000 ($5,000) and RMB 50,000 ($6,000)
for citywide broadcasting in a large city such as Shanghai or
Beijing. The price decreases by approximately 50% for dramas not
suitable for broadcasting at primetime. Among non-drama series
television programs, variety shows command higher prices, at
approximately from RMB 2,000 ($260) to RMB 3,000
($380) per episode.
Advertising service providers
Advertising services include creative services, advice, account
management, production of advertising material, media planning,
placing advertising, research, and analysis. An advertising
agency may provide a range of these services. There may be
multiple advertising agents involved in any given advertising
process. The role of an advertising agent may be an independent
intermediary between media distribution platforms and companies
seeking to place advertisement. In addition, some media
platforms and advertiser companies will assign an agent or an
in-house department to act as the broker, account manager, or
creative management for their advertising sales.
In contrast to the world’s developed markets, the Chinese
advertising market is fragmented. According to the State
Administration of Industry and Commerce, there were
approximately 84,300 advertising agencies in China by the end of
2005. Many companies in China are local, with regional
distribution and advertising budgets which are much better
served by regional advertising. In addition, nationwide
advertising media is not common, which makes it difficult to
create a nation-wide advertising campaign. These factors tend to
favor the smaller independent advertising agencies that are more
likely to have better local knowledge and connections with the
local media.
The PRC government imposes extensive regulations and censorship
over the media industry, including television, radio,
newspapers, magazines, advertising, media content production,
and the market research industry. This section summarizes the
principal PRC regulations that are relevant to our lines of
business.
Regulatory authorities
The legal regime in China consists of the National People’s
Congress, the State Council, which is the highest authority of
the executive branch of the PRC central government, various
ministries and agencies under the State Council’s authority
and their respective authorized local branches. Our businesses
in China in the media and the market research industries are
subject to a number of existing laws, regulations, circulars,
decisions, and opinions issued by various authorities, including:
•
the National People’s Congress;
•
the State Council;
•
the National Development & Reform Commission, (formerly the
State Development and Planning Commission);
•
the Ministry of Commerce, a combination of the former Ministry
of Foreign Trade and Economic Co-operation, the State Economy
and Trade Commission, and the State Development and Planning
Commission;
•
the State Administration for Industry and Commerce;
•
the Ministry of Culture;
•
the State Administration of Radio, Film & Television;
•
the General Administration for Press and Publication (formerly
the State Press and Publications Administration);
•
the National Bureau of Statistics; and
•
the Ministry of Information Industry.
Regulatory framework
The PRC laws and regulations that are relevant to our business
generally fall into five categories:
•
laws and regulations restricting and governing investments of
private capital in general and foreign capital in particular.
For purposes of these restrictions under PRC laws,
“foreign” investment includes investment from Hong
Kong, Taiwan and Macau. As a result of these restrictions on
investments of foreign and private capital, we conduct our
businesses in China substantially through contractual
arrangements with our affiliated PRC entities. To further comply
with these restrictions, our affiliated PRC entities in our
print and broadcasting groups operate through contractual
arrangements with our business partners, including a television
station, radio stations, a newspaper press office and a magazine
press office;
industry specific laws and regulations that govern the entities
and business activities within the specified industry;
•
copyright and trademark protection and domain name registration
regulations, which we and our affiliated entities use to protect
our and their intellectual property;
•
regulations on foreign currency exchange; and
•
regulations on tax.
According to our PRC counsel, Commerce & Finance Law
Offices, the ownership structures, businesses and operations of
our subsidiaries and affiliated entities in China comply in all
material respects with all existing PRC laws and regulations.
Regulations on investment of foreign and private capital in
the media, advertising and market research industries
Three principal regulations govern the investment of foreign and
private capital in the media, advertising and market research
industries:
•
the Foreign Investment Industrial Guidance Catalog, or the
Catalog, jointly promulgated by the National Development &
Reform Commission and the Ministry of Commerce on
November 30, 2004 and which became effective as of
January 1, 2005;
•
the Several Decisions on the Entry of Private Capital into the
Culture Industry, or the Decisions, issued by the State Council
on April 13, 2005; and
•
the Several Opinions on Foreign Investment in the Culture
Sector, or the Opinions, jointly issued by the State
Administration of Radio, Film and Television, the Ministry of
Culture, the General Administration for Press and Publication,
the National Development & Reform Commission and the
Ministry of Commerce on July 6, 2005.
Under the Catalog and the Opinions, the investment of foreign
capital is prohibited or restricted in companies that conduct
various aspects of the television, radio, publishing and market
research businesses, as described below, but is permitted in the
advertising business.
The Decisions affect the investment of private capital in
companies that engage in the business of television, radio,
publishing, advertising and media content production. Under the
Decisions, investment of private capital is prohibited or
restricted in many aspects of the television, radio and
publishing business areas, as described below, but is allowed in
other business areas such as advertising and the production of
drama series.
The following discussion summarizes the relevant regulations,
including the three principal ones discussed above, governing
the investment of foreign and private capital in each of our
lines of business.
Television and radio
Television and radio stations. According to the
Regulations on the Administration of Radio and Television,
promulgated by the State Council on August 11, 1997,
Detailed Procedures for the Financing of Radio Film and
Television Conglomerates, promulgated by the State
Administration of Radio, Film and Television on
December 20, 2001, and the Measures for the
Administration of Examination and Approval of Radio Stations and
Television Stations, promulgated by the State Administration of
Radio, Film and Television on August 18, 2004, radio
stations, television stations, radio frequencies or television
channels may only be established and operated by the government.
Pursuant to the Opinions and the Decisions, foreign or private
capital may not be invested to establish or operate radio
stations, television stations or transmission networks,
broadcast radio or television programs, or operate radio
frequencies or television channels for radio or television
stations. Under the Opinions and the Circular on the Further
Strengthening of the Supervision of Radio and Television
Channels, or the Supervision Circular, promulgated by the State
Administration of Radio, Film and Television on August 4,2005, foreign investors are prohibited from operating radio
frequencies or television channels by means of providing
advertising, printing or distribution services.
We and our affiliated entities do not own or operate television
or radio stations. Neither do we nor our affiliated entities
operate television channels or radio frequencies. Through our
contractual arrangements with our strategic partner, Shanghai
Camera, our affiliated entity provides consulting and advisory
services to Shanghai Camera, including the production or
sourcing of the content and advertisements placed on Inner
Mongolia Satellite Television, a unit of Inner Mongolia
Television Station. In our Fortune China financial
program business, our affiliated entity produces financial
programs to be broadcast on satellite channels and provincial
and city channels in exchange for advertising or syndication
revenues. In our radio business, our affiliated entity has the
exclusive rights to sell advertising for and the rights to
provide content to radio stations.
The content provision by our affiliated entities for our
business partners is allowed under PRC laws and regulations and
the content is subject to review and approval by the radio and
television stations. There is a risk that the strategic
partnerships we or our affiliated entities have may be deemed to
have the actual effect of operating radio or television stations
under the Opinions or Supervision Circular. See “Risk
factors—Risks related to the regulation of our business and
to our structure—If the PRC government finds that the
agreements that establish the structure for operating our China
businesses do not comply with PRC governmental restrictions on
foreign investment in the media and market research industries,
or if these regulations or the interpretation of existing
regulations change in the future, we could be subject to severe
penalties or be forced to relinquish our interests in those
operations”.
Television and radio program and drama series production.
According to the Regulations on the Administration of
Radio and Television Stations, the Interim Provisions on the
Administration of Sino-foreign Equity and Contractual Joint
Ventures of Radio and Television Program Production, or the
Regulations, promulgated by the State Administration of Radio,
Film and Television on October 28, 2004, wholly foreign
owned enterprises are prohibited from producing radio and
television programs or drama series. A joint venture between a
Chinese and a foreign partner is permitted for these activities,
and a foreign investor is permitted to hold up to 49% of the
equity interest, subject to certain restrictions. Under the
Decisions, investment of private capital is encouraged in the
production of drama series.
We do not directly engage in the production of radio and
television programs or drama series, nor have we set up any
joint ventures for that purpose. Our affiliated PRC entities
engage in the production of television programs. For our drama
series production, our affiliated PRC entities cooperate with
third parties who hold drama series production licenses to
produce our drama series. For details, see “Arrangements
with partners and suppliers” and “Corporate
structure”.
Publication of newspapers or magazines. Under the
Catalog and the Decisions, investment of foreign or private
capital is not permitted in the establishment or operation of
newspapers, publishing institutions or news agencies or in the
operation of newspaper or magazine sections. However, the
investment of foreign or private capital is permitted in
companies engaging in the printing and wholesale or retail
distribution of newspapers or magazines. Under the Opinions,
foreign investors are prohibited from providing wholesale or
retail distribution, printing or advertising services to the
publishing institutions if the actual effect is to operate
newspaper or magazine sections or to engage in the editorial
work for or to publish newspapers or magazines.
We and our affiliated entities do not engage in the business of
publishing newspapers or magazines. We and our affiliated
entities provide management and information consulting services
to various publishing institutions in relation to the
Economic Observer newspaper and Money Journal
magazine. For details in relation to the magazine and
newspaper, see “Arrangements with partners and
suppliers” and “Corporate structure”. To our best
knowledge, these publishing institutions have the requisite
approvals and licenses to publish newspapers or magazines. There
is a risk that the strategic partnerships we or our affiliated
entities have with these publishing institutions may be deemed
to have the actual effect of operating newspaper or magazine
sections. See “Risk factors—Risks related to the
regulation of our business and to our structure—If the PRC
government finds that the agreements that establish the
structure for operating our China businesses do not comply with
PRC governmental restrictions on foreign investment in the media
and market research industries, or if these regulations or the
interpretation of existing regulations change in the future, we
could be subject to severe penalties or be forced to relinquish
our interests in those operations”.
Printing. According to the Provisional Regulation
on Establishment of Foreign Invested Printing Enterprises
promulgated by the General Administration for Press and
Publication and the Ministry of Commerce on January 29,2002, the Opinions and the Decisions, investment of foreign and
private capital is permitted in the business of printing
newspapers or magazines in China. Foreign investment must take
the form of joint ventures in which a PRC investor must hold the
controlling interest, but private investment is not under the
same restriction.
We and our affiliated entities do not print newspapers or
magazines. Rather, our affiliated entities provide management
and information consulting services to the publishing
institutions on outsourcing the printing of Money Journal
and the Economic Observer to third party service
providers.
Distribution. Under the Catalog and the Decisions,
the investment of foreign capital is prohibited in companies
engaging in the general distribution of newspapers or magazines.
According to the Measures for the Administration of
Foreign-invested Enterprises in Distribution of the Books,
Newspapers and Periodicals, or the Measures, promulgated by the
General Administration for Press and Publication and the
Ministry of Commerce on March 17, 2003, investment of
foreign capital is permitted in companies that engage in
wholesale and retail distribution of newspapers or magazines.
Wholesale distribution, for which foreign investment was
permitted starting December 1, 2004, is the non-exclusive
distribution of publications to other entities in the
publication related businesses, such as newsstands and
bookstores. Retail distribution, for which foreign investment
was permitted starting on May 1, 2003, is the non-exclusive
distribution of publications to readers.
We and our affiliated entities do not currently engage in the
general, wholesale or retail distribution of newspapers or
magazines. Our affiliated PRC entities provide management and
information consulting services to the respective press offices
on outsourcing the wholesale and retail distribution of Money
Journal and the Economic Observer to third party
service providers.
Advertising
Under the Catalog and the Administrative Provision on Foreign
Investment in the Advertising Industry, jointly promulgated by
the State Administration for Industry and Commerce and the
Ministry of Commerce on March 2, 2004, foreign investors
can invest in PRC advertising companies through either
wholly-owned enterprises or joint ventures with Chinese parties.
Since December 10, 2005, foreign investment in PRC
advertising companies has been allowed to be up to 100% equity
interest. However, the foreign investors are required to have at
least three years of direct operations in the advertising
industry as their core businesses outside of the PRC. This
requirement is reduced to two years if foreign investment in the
advertising company is in the form of a joint venture.
Advertising enterprises with foreign capital investment can
engage in advertising design, production, publishing and agency,
provided that certain conditions are met and necessary approvals
are obtained. Under the Decisions, private capital is allowed to
conduct outdoor advertising activities and production of
advertising programs.
We primarily operate our advertising businesses in Beijing,
Shanghai and Shenzhen through our affiliated PRC advertising
companies. For details, see “Corporate structure”. In
addition, our Hong Kong advertising subsidiary, Active
Advertising Agency Limited, or Active Advertising Hong Kong, has
been engaged in the advertising business in Hong Kong since 1997
and satisfied the track record requirement under applicable
regulations. Therefore, Active Advertising Hong Kong was
qualified to establish our wholly-owned domestic PRC subsidiary,
Active Advertising (Guangzhou), Co., Ltd., or Active Guangzhou,
to conduct part of our advertising business in China.
Research
Under the Catalog, the investment of foreign capital is
permitted in the market research industry through a joint
venture with a PRC entity. There are currently no rules
restricting the investment of private capital in the market
research industry. Nevertheless, we do not directly operate in
the market research industry, but rather engage in such business
through our affiliated PRC entities. For details, see
“Corporate structure”.
Regulations on television and radio industry
Radio and television program production
According to the Regulations on the Administration of Radio and
Television and the Provisions on the Administration of Radio and
Television Program Production promulgated by the State
Administration of Radio, Film and Television on July 19,2004, entities engaging in the production of radio and
television programs, such as feature programs, general programs,
drama series and animations, and the trading activities and
agency services on the copyrights
of such programs must first obtain preliminary approval from the
State Administration of Radio, Film and Television or its
provincial branches for the appropriate license. Then the entity
must register with the State Administration for Industry and
Commerce to obtain or update its business license.
The establishment of a production company for drama series must
be approved by the State Administration of Radio, Film and
Television. Such company must also obtain the appropriate
licenses from the provincial branches of the State
Administration of Radio, Film and Television. There are two
types of drama series production licenses. The first type is a
general license applicable to all drama series produced by the
license holder during the two-year term. The second type is a
specific license applicable to the specific drama series
identified on the license.
In our media production and broadcasting groups, our affiliated
PRC entities engaging in media content production have all
obtained the requisite business licenses and appropriate
licenses for television program production. For our drama series
production, our affiliated entity cooperates with third parties
who hold drama series production licenses to produce our drama
series.
Regulations on the publication industry
Publication of newspapers or magazines
The publication industry in China is governed by the Regulations
on the Administration of Publication, promulgated by the State
Council on December 25, 2001, and the Provisions on the
Administration of the Publications Market, promulgated and
amended by the General Administration for Press and Publication
on June 16, 2004. These regulations govern publication
activities including the publishing, printing, reproduction,
importing and distribution of publications, including
newspapers, magazines, books, audio and video products and
electronic publications published by lawfully established press
offices with the proper government approval. Such institutions
may include, among others, newspaper agencies and periodical
publication agencies. The establishment of a publishing
institution requires approval from the General Administration
for Press and Publication. The publishing institution must be
sponsored by a sponsoring entity and supervised by a supervising
entity, both duly authorized by the General Administration for
Press and Publication on a case by case basis. The sponsoring
entity and the supervising entity may be the same entity.
After establishment, a newspaper or magazine press office must
apply for a license for newspaper publication or a license for
periodical publication and obtain a domestic unified serial
number, for the newspaper or the magazine. No newspaper or
magazine press office may sell, lease, or transfer its own name
or the domestic unified serial number, name or section of the
publication, nor shall it lend, transfer, lease or sell its
license(s).
A press office shall implement a system of editorial
accountability to ensure that its published content complies
with applicable laws. No publication shall, among other things,
contain content that may violate, or may be deemed to violate
the basic principles of the PRC Constitution, jeopardize state
unification, harm sovereign and territorial integrity, divulge
state secrets or jeopardize state security.
In our print group, we, including our affiliated entities,
provide management and information consulting services on
distribution and printing to, and have the exclusive rights to
sell advertising for, Money Journal. In addition, for the
Economic Observer, we, including our
affiliated entities, provide management and information
consulting services on distribution and assist in the management
of the printing, as well as provide proposals and views on the
editing, content, appearance, and format of the newspaper. For
details, see “Arrangements with partners and
suppliers”. To the best of our knowledge, the press offices
of these publications are properly established and have the
requisite approvals and licenses.
Printing of publications
According to the Regulations on the Administration of
Publication, entities engaged in the business of printing
publications shall first obtain approval from the provincial
branch of the General Administration for Press and Publication
and then register with the public security bureau and the local
branch of the State Administration for Industry and Commerce. A
press office shall not commission an entity that has not
obtained the requisite approval to provide printing services.
In our print group, our affiliated entities provide management
and information consulting services to a press office on the
printing of Money Journal and assist a press office in
the management of the printing of the Economic Observer,
including on outsourcing the printing of these publications to
third-party service providers. To the best of our knowledge,
these printing service providers have the requisite approvals.
Our affiliated entities advise the press offices to periodically
monitor these service providers to ensure that they have
obtained all required approvals, although it is possible that
one or more of these printing service providers may not be in
compliance with all PRC regulations at all times. If we or our
affiliated entities learn that any of the printing service
providers are not in compliance with applicable laws and
regulations, our affiliated entities will advise the press
offices to notify the printing service providers of the need to
complete any steps necessary to obtain the required licenses and
approvals and to terminate a contract with a printing service
provider if necessary.
Distribution of publications
According to the Regulations on the Administration of
Publication, entities engaging in the general distribution of
newspapers or magazines must obtain approval from the General
Administration for Press and Publication. Entities engaging in
the wholesale distribution or retail distribution of newspapers
or magazines must obtain approval from GAPP branches at the
provincial and county level. The distribution of newspapers or
magazines by post shall comply with the postal law.
In our print group, our affiliated entities provide management
and information consulting services to the press offices for
Money Journal and the Economic Observer in
relation to engaging local distribution service providers to
carry out the wholesale and retail distribution of the magazine
or newspaper. To our knowledge, these press offices and the
wholesale and retail distributors have the requisite approvals
and licenses to distribute magazines or newspapers, except for
Guangzhou Jingyu Culture Development Co., Ltd., a distribution
service provider that is the primary general distributor engaged
in the retail and wholesale distribution of Money
Journal. Our affiliated entities advise the press offices to
periodically monitor these wholesale and retail service
providers to ensure that they have obtained all required
licenses, although it is possible that one or more of these
distributors may not be in compliance with all PRC regulations
at all times. If we or our affiliated entities learn that any of
the distributors are not in compliance with applicable laws and
regulations, our affiliated
entities will advise the publishing institutions to notify the
distributors of the need to complete any steps necessary to
obtain the required licenses and approvals and to terminate a
contract with the distributor if necessary.
Regulations on the advertising industry
Establishment of advertising entities
The principal regulations governing the PRC advertising industry
include:
•
the Advertising Law promulgated by the National People’s
Congress on October 27, 1994;
•
the Administration Regulations of Advertising Industry,
promulgated by the State Council on October 26, 1987;
•
the Implementation Rule of Advertising Industry Administration,
or the Implementation Rule, promulgated by the State
Administration for Industry and Commence on January 9,
1988, amended in 1998, 2000 and 2004, and effective as of
January 1, 2005; and
•
the Measures on Administration of Advertising Operation
Licenses, promulgated by the State Administration for Industry
and Commence on November 30, 2004.
Under these regulations, advertising companies may only engage
in the advertising business if they have obtained from the State
Administration for Industry and Commence or its local branches a
business license which specifically includes operating an
advertising business within its business scope. A company
conducting advertising activities without such a license may be
subject to penalties, including fines, confiscation of
advertising income and orders to cease advertising operations.
Subject to annual examination, 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. Furthermore, pursuant to the
Implementation Rule, certain entities, including, but not
limited to, radio and television stations and publishing
institutions, must also obtain an advertising operating license
from a branch of the State Administration for Industry and
Commence at the county level or above before they can engage in
the advertising business. These licenses will set forth the
permitted advertising activities.
We conduct our advertising business in China through Active
Guangzhou and our affiliated PRC entities. Each of them has
obtained the licenses to operate an advertising business from
the State Administration for Industry and Commence or its local
branches as required by PRC regulations.
We and our affiliated entities work with various advertising
agents in our broadcasting business. To the best of our
knowledge, these advertising agents also have the requisite
business licenses and advertising operating licenses, where
applicable. We and our affiliated entities periodically monitor
these advertising agents to ensure that they have obtained all
required licenses, although it is possible that one or more of
them may not be in compliance with all PRC regulations at all
times. If we or our affiliated entities learn that any of them
is not in compliance with applicable regulations, we or our
affiliated entities will notify the entity of the need to
complete any necessary steps to receive the required licenses.
Under the contracts between our affiliated entities and the
advertising agents, our affiliated entities have the rights to
claim compensation for any direct or indirect losses caused by
the non-compliance
of the advertising agents. We and our affiliated entities will
take steps to terminate the contract with such advertising
agents if necessary.
In addition, to our best knowledge, the publishing institutions
and radio stations we and our affiliated entities work with, as
well as Inner Mongolia Television Station and Hunan Television
Station, have the requisite business licenses and advertising
operating licenses.
Advertising content
PRC advertising laws and regulations set forth certain content
requirements for advertisements in China, which include
prohibitions on, among other things, false or 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 prohibited. It is prohibited to
disseminate tobacco advertisements via radio, film, television,
newspapers or magazines. It is also prohibited to display
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, newspapers, magazines, 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 relevant administrative authorities for content approval
prior to dissemination.
Advertisers, advertising agencies, and advertising distributors
are required by PRC advertising laws and regulations to ensure
that the content of the advertisements they prepare or
distribute is 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 complies with applicable
PRC laws and regulations. Prior to distributing advertisements
that 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 State
Administration for Industry and Commerce or its local branches
may revoke violators’ licenses or permits for advertising
business operations. Furthermore, advertisers, advertising
agencies 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.
As we and our affiliated entities conduct our business in the
advertising industry, we and they take steps to make sure that
all of our and their advertisements comply with relevant laws
and regulations. The advertisements placed by our advertising
group, on or through Fortune China, Inner Mongolia
Satellite Television, EasyFM of Shanghai and Beijing, the
Economic Observer, Money Journal and on or through other
media platforms, are subject to the review and final approval of
the partners through whom we place the advertisement. Our
business partners employ qualified advertising inspectors who
are trained to review advertising content for
compliance with relevant laws and regulations. We do not believe
that advertisements containing content subject to restriction or
censorship comprise a material portion of the advertisements
broadcast by Inner Mongolia Satellite Television, with
Fortune China, or by EasyFM of Shanghai or Beijing, or
printed by the Economic Observer or Money Journal,
or the advertisements created or placed by our advertising
group. In the event that some of the advertisements our
advertising customers or agencies provide to us or our
affiliated entities and which we or our affiliated entities
include in advertising are not in compliance with relevant PRC
advertising laws and regulations, or when these advertisements
that we or our customers or agencies place have not received
required approval from the relevant local supervisory bodies,
such as the local branches of the State Administration for
Industry and Commerce, or do not comply with content
requirements, we will remove the advertisements or advise our
business partners to remove the advertisements as soon as we
notice such violations.
Operational matters of the advertising business
Under the Advertising Law, registration, review and filing
systems need to be established and maintained for the operation
of entities engaged in the advertising business. Advertising
fees must be reasonable, and rates and fee collection methods
must be filed with the PRC Commodity Price Administration and
the State Administration for Industry and Commerce for their
records. Under the Implementation Rule, the advertising agent
fee must be 15% of the advertising cost. The advertising
customer must provide relevant documents, including certificates
rendered by relevant supervisory administrations before it can
broadcast or place its advertisements.
As we and our affiliated entities conduct our business in the
advertising industry, we and they take steps to make sure that
all of our and their operations are in compliance with relevant
laws and regulations.
Outdoor advertising
Laws and regulations generally applicable to advertisements in
the PRC are all applicable to outdoor advertisements. In
addition, outdoor advertising is subject to regulation under the
Measure for the Administration of Registration of Outdoor
Advertisements, promulgated by the State Administration for
Industry and Commerce on December 8, 1995, amended on
December 3, 1998 and May 22, 2006, which became
effective on July 1, 2006.
Under the Advertising Law, the exhibition and display of outdoor
advertisements may 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 damage the urban
area landscape;
•
be placed in restricted 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.
Under the Measure for the Administration of Registration of
Outdoor Advertisements, all outdoor advertisements must be
registered with the local branches of the State Administration
for Industry and Commerce above county level 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 branches of the State Administration for
Industry and Commerce will issue an Outdoor Advertising
Registration Certificate for the advertisement. Outdoor
advertisements shall be published in accordance with the
contents stipulated in the register such as venue, format,
specification and time period, which cannot be altered without
prior approval. The content of the outdoor advertisement must be
submitted for filing with the local branches of the State
Administration for Industry and Commerce.
Local governments also have regulations relating to outdoor
advertising, such as the Measures for the Administration of the
Installation of Outdoor Advertisements in Shanghai Municipality,
promulgated on December 15, 2004 and effective as of
February 1, 2005 in Shanghai, and the Measures for the
Administration of the Installation of Outdoor Advertisements in
Beijing Municipality, passed on June 22, 2004 and
promulgated on August 5, 2004 and effective as of
October 1, 2004 in Beijing.
We operate our campus billboard advertising business in China
via our affiliated PRC entity. Our operation is currently in
Shanghai only. We have received a verbal interpretation from the
relevant Shanghai authorities that our affiliated entity does
not need a license for outdoor advertising as billboards on a
university campus are not considered “outdoor”
advertising. We and our affiliated entity take steps to make
sure that all of our affiliated PRC entity’s campus
billboard advertisements are in compliance with relevant laws
and regulations.
Marketing services
The laws and regulations generally applicable to the advertising
industry are also applicable to the marketing services business.
In our marketing services business, our affiliated PRC entity
places advertising posters at various event venues. These
posters are defined as “normal print advertisements”
under the Print Advertisements Administrative Regulations,
promulgated by the State Administration for Industry and
Commerce on January 13, 2000, as amended on
November 30, 2004. Under these regulations, print
advertisements must not be placed in areas prohibited by laws or
regulations, such as controlled areas around governmental
buildings. Such print advertisement must not include
non-advertisement content such as news. Such print advertisement
must contain the names and addresses of the advertiser and the
advertising agents or distributors.
We and our affiliated entities take steps to make sure that all
of our and their advertisements in marketing services are in
compliance with relevant laws and regulations.
Regulations on the market research industry
Pursuant to Measures Governing the Administration of
Foreign-related Surveys issued by the National Bureau of
Statistics on October 13, 2004, foreign-related market
research includes market research conducted under the commission
or financial aid of, conducted in cooperation with or whose
materials and results are to be provided to any overseas
organization, overseas individual or the agency in China of any
overseas organization. Foreign-related market research must be
conducted through a research institution that holds the
appropriate license issued by the National Bureau of Statistics
or its counterparts at the provincial level.
We conduct our market research business, including
foreign-related market research, through our affiliated PRC
entities, which have the requisite licenses to conduct such
foreign-related market research.
Regulations on intellectual property protection
China has adopted legislation governing intellectual property
rights, including copyrights, registered trademarks, exclusive
rights and patent rights. China is a signatory to the main
international conventions on intellectual property rights and
became a member of the Agreement on Trade Related Aspects of
Intellectual Property Rights upon its accession to the World
Trade Organization in December 2001.
Copyright
The National People’s Congress amended the Copyright Law on
October 27, 2001 to widen the scope of works and rights
that are eligible for copyright protection. The amended
Copyright Law extends copyright protection to Internet
activities, products disseminated over the Internet and software
products. In addition, there is a voluntary registration system
administered by the China Copyright Protection Center.
To address the problem of copyright infringement related to
content posted or transmitted over the Internet, the National
Copyright Administration and the Ministry of Information
Industry jointly promulgated the Administrative Measures for
Copyright Protection Related to the Internet on April 30,2005, which became effective on May 30, 2005.
Our affiliated entity Economic Observer Advertising has the
contractual right to acquire the copyrights of the Economic
Observer when permitted by law. Our affiliated entity
Beijing Perspective Orient Movie and Television Intermediary
Co., Ltd. owns the copyrights of the Fortune China series
of programs. Our affiliated entity Beijing Century Media Culture
Co., Ltd. also shares the copyrights to certain drama series
that were produced in cooperation with third parties who hold
drama series production licences. We own the copyrights of the
content provided by us to Money Journal. We and our
affiliated entities rely on the protection of relevant copyright
laws.
Trademark
The PRC Trademark Law, adopted on August 23, 1982 and
revised on October 27, 2001, protects the proprietary
rights to registered trademarks. The Trademark Office under the
State Administration for Industry and Commerce handles trademark
registrations and grants a term of ten years to registered
trademarks. Upon its expiration, a second term of ten years may
be granted. Trademark license agreements must be filed with the
records of the Trademark Office. In addition, if a registered
trademark is recognized as a well-known trademark in a specific
case, the proprietary right of the trademark holder may be
extended beyond the registered sphere of products and services
of the trademark in such case.
We plan to file to register the name and trademark of
“Xinhua Finance Media” in the PRC. Our business
partner has registered “IMTV” with the Trademark
Office. Beijing Perspective and Money Journal Publication
Limited have registered a symbol resembling an “F” and
the Chinese name for “Money Journal” with the
Trademark Office, respectively. Our business partners have also
registered “EEO.com.cn”, “The Economic
Observer”, “The Observer Forum”,
“China Blue Chip Real Estate”, “The Most
Respected Companies of China; The20”, “EasyFM”
and the Chinese equivalents for each of these with the Trademark
Office.
Moreover, Xinhua Financial Network Limited, or Xinhua Financial
Network, a subsidiary of our parent, entered into an agreement
with China Economic Information Service, under which Xinhua
Financial Network and its affiliates were granted the right to
use the word “Xinhua” as the first name worldwide.
Either our parent or Xinhua Financial Network has also
registered the trademark for the logo containing “Xinhua
Finance” and the name “Xinhua” in the U.S., Hong
Kong, Japan and South Korea, and our parent has applied to
register its logo in the PRC. We have in turn entered into a
trademark license agreement with Xinhua Financial Network, under
which we and our subsidiaries were granted a non-exclusive
worldwide license to use the trademark “Xinhua”. We
rely on the trademark laws to protect our rights under the
agreements to use the word.
Domain names
On November 5, 2004, the Ministry of Information Industry
amended the Measures for Administration of Domain Names for the
Chinese Internet, or the Domain Name Measures. The Domain Name
Measures regulate the registration of domain names with the
affix “.cn.” Domain name disputes are governed by the
Measures on Domain Name Dispute Resolution promulgated by the
Chinese Internet Network Infrastructure Center on
September 25, 2002, which was revised on March 17,2006. Under the Measures on Domain Name Dispute Resolution, the
Chinese Internet Network Infrastructure Center can authorize
domain name dispute resolution institutions to decide disputes.
We, our affiliated entities and strategic partners have
registered many domain names. There are some domain names that
one of our affiliated entities uses for which it is unclear if
the registrations rest with our affiliated entity or with its
management.
Some of the domain names we and our affiliated entities use have
been registered by third parties, and some have not been
registered.
Regulations on foreign currency exchange
Foreign currency exchange
Pursuant to the Foreign Currency Administration Rules
promulgated on January 29, 1996 and amended on
January 14, 1997 and various regulations issued by State
Administration of Foreign Exchange and other relevant PRC
government authorities, RMB is freely convertible only to the
extent of current account items, such as trade-related receipts
and payments, interest and dividends. Capital account items,
such as direct equity investments, loans and repatriation of
investment, require the prior approval from the State
Administration of Foreign Exchange or its local branch for
conversion of RMB into a foreign currency, such as
U.S. dollars, and remittance of the foreign currency
outside the PRC. Payments for transactions that take place
within the PRC must be made in RMB. Unless otherwise approved,
PRC companies must repatriate foreign currency payments received
from abroad. Foreign-invested enterprises may retain foreign
exchange in accounts with designated foreign exchange banks
subject to a cap set by the State Administration of Foreign
Exchange or its local branch. Unless otherwise approved,
domestic enterprises must convert all of their foreign currency
receipts into RMB.
The business operations of our PRC subsidiaries and affiliated
entities, which are subject to the foreign currency exchange
regulations, have all been in accordance with these regulations.
We
will take steps to ensure that the future operations of these
PRC entities are in compliance with these regulations.
Foreign exchange registration of offshore investment by
PRC residents
Pursuant to the the State Administration of Foreign
Exchange’s Notice on Relevant Issues Concerning Foreign
Exchange Administration for PRC Residents to Engage in Financing
and Inbound Investment via Overseas Special Purpose Vehicles, or
Circular No. 75, issued on October 21, 2005,
(i) a PRC resident, including a PRC resident natural person
or a PRC company, shall register with the local branch of the
State Administration of Foreign Exchange before it establishes
or controls an overseas special purpose vehicle, or SPV, for the
purpose of overseas equity financing (including convertible debt
financing); (ii) when a PRC resident contributes the assets
of or its equity interests in a domestic enterprise into a
special purpose vehicle, or engages in overseas financing after
contributing assets or equity interests into a special purpose
vehicle, such PRC resident shall register his or her interest in
the special purpose vehicle and the change thereof with the
local branch of the State Administration of Foreign Exchange;
and (iii) when the special purpose vehicle undergoes a
material event outside of China, such as change in share capital
or merger and acquisition, the PRC resident shall, within
30 days from the occurrence of such event, register such
change with the local branch of the State Administration of
Foreign Exchange. PRC residents who are shareholders of special
purpose vehicles established before November 1, 2005 were
required to register with the local State Administration of
Foreign Exchange branch before March 31, 2006.
Under Circular No. 75, failure to comply with the
registration procedures set forth above may result in penalties,
including restrictions on a PRC subsidiary’s foreign
exchange activities and its ability to distribute dividends to
the special purpose vehicle.
On January 5, 2007, the People’s Bank of China
promulgated the “Measures for the Administration of
Individual Foreign Exchange”, and on the same date the
State Administration of Foreign Exchange further promulgated the
implementation rules on those measures. Both became effective on
February 1, 2007. According to the implementation rules, if
an individual in the PRC participates in any employee stock
ownership plan or stock option plan of an overseas listed
company, the individual must apply to the State Administration
of Foreign Exchange or the appropriate local branch for approval
for any foreign exchange-related transactions concerning that
plan.
Dividend distribution
The principal regulations governing dividend distributions by
foreign owned enterprises include:
•
The Wholly Foreign Owned Enterprise Law, promulgated by the
National People’s Congress on April 12, 1986 and
amended on October 31, 2000; and
•
The Wholly Foreign Owned Enterprise Law Implementing Rules,
promulgated by the National People’s Congress on
December 12, 1990 and amended on April 12, 2001.
Under these regulations, wholly or partially foreign owned
enterprises in the PRC may pay dividends only out of their
accumulated profits, if any, determined in accordance with PRC
accounting standards and regulations. Additionally, enterprises
are required to set aside certain amounts of their accumulated
profits each year, if any, to contribute to certain reserve
funds. These reserves are not distributable as cash dividends.
Tax
For a discussion of applicable tax regulations, see
“Management’s discussion and analysis of financial
condition and results of operations— Taxation”.
After this offering, we will be a 36.6% owned direct subsidiary
of Xinhua Finance Limited, a public company incorporated in the
Cayman Islands and listed on the Mothers Board of the Tokyo
Stock Exchange. Due to our parent’s ownership of
class B common shares, our parent will hold 85.3% of the
voting power of our common shares. Xinhua Finance Limited,
together with its direct and indirect subsidiaries, is an
integrated service provider of financial information products
focused on China’s financial markets and international
financial markets. Our parent offers the following principal
services:
•
Market indices. Our parent provides equity indices and
bond indices measuring the performance of China’s stock and
bond markets, all developed according to methodology used in
international markets. Our parent also provides a customized
U.S. index that tracks dividend-paying equities in the U.S.
•
Ratings. Our parent issues public information ratings
based on publicly available information, according to
methodology generally used in international markets. The group
also offers a comprehensive global portfolio of company,
securities, and financial information along with research and
analytical tools.
•
Financial news and analysis. Our parent provides
financial news mainly covering China’s financial markets
and international financial markets, as well as a comprehensive
range of analytical reports and products for China and the
international markets, covering economic developments,
fixed-income and foreign exchange, currency and interest rate
movements, government policies and central bank activities.
•
Investor relations. Our parent offers corporate
announcement services that allow companies inside and outside of
China to communicate their news and events. Our parent also
offers investor and public relations services.
Our history
We were incorporated on November 7, 2005 in the Cayman
Islands. We acquired several companies from our parent, Xinhua
Finance Limited, and continue to make acquisitions. To date, we
have acquired eight businesses that form our five operating
groups. For a detailed description of our acquisitions, see
“Management’s discussion and analysis of financial
condition and results of operations— Acquisitions”.
The acquisitions are:
•
Media Production. Our parent, through a
subsidiary, lent funds to two PRC citizens, who used the funds
to buy a combined 100% equity interest in Beijing Century Media
Culture Co., Ltd., or Beijing Century Media, on
September 9, 2005. On the same day, the subsidiary of our
parent entered into a set of agreements with these two PRC
citizens to give our parent effective control over Beijing
Century Media. Our parent transferred its control of Beijing
Century Media to us through one of our affiliated entities on
March 16, 2006.
•
Broadcasting. Our broadcasting group was formed
through the following three acquisitions:
•
Upper Step. We signed a series of agreements pursuant to
which we acquired 19.0% of the equity of Upper Step Holdings
Limited, or Upper Step, on February 28, 2006. On
September 22, 2006, we acquired an additional 37.0% of the
equity of Upper Step and on November 1, 2006, we acquired
the remaining 44.0% of the equity of Upper Step.
•
Beijing Perspective. Through our affiliated entity, we
acquired 51.0% of the equity of Beijing Perspective Orient Movie
and Television Intermediary Co., Ltd., or Beijing Perspective,
on July 28, 2006. On January 31, 2007, our parent
entered into a letter of intent by which it agreed to use its
best efforts to enter into a purchase agreement for the
remaining shares of Beijing Perspective by September 30,2007. After the acquisition, we intend to purchase this equity
from our parent.
•
Accord Group. We acquired 19.0% of the equity of Accord
Group Investments Limited, or Accord Group, on January 23,2006. On September 22, 2006, we acquired 61.0% of the
equity of Accord Group and on November 1, 2006, we acquired
the remaining 20.0% of the equity of Accord Group.
•
Print. Our print group was formed through the
following two acquisitions:
•
Economic Observer Advertising. Through our affiliated
entity, we acquired 50.0% of the equity of Beijing Jingguan
Xincheng Advertising Co., Ltd., or Economic Observer
Advertising, on June 8, 2006 and the remaining 50.0% of the
equity of Economic Observer Advertising on September 15,2006.
•
EconWorld Media. Our parent subscribed for 60.0% of the
equity of EconWorld Media Limited, or EconWorld Media, on
May 26, 2005 and transferred that interest to us on
January 12, 2006. On June 8, 2006, we subscribed to
one additional share of EconWorld Media. We acquired another
12.0% of the equity of EconWorld Media on June 21, 2006,
and the remaining 28% on December 18, 2006.
•
Advertising. Our parent acquired 100% of the
equity in Ming Shing International Limited, or Ming Shing, on
January 12, 2006 and subsequently transferred Ming Shing to
us on March 16, 2006. Ming Shing subsequently changed its
name to Xinhua Finance Advertising Limited, or Xinhua Finance
Advertising, on June 19, 2006.
•
Research. Through our affiliated entity, we
acquired 51.0% of the equity of Shanghai Hyperlink Market
Research Co., Ltd., or Hyperlink, on August 1, 2006. On
September 18, 2006, we acquired the remaining 49.0% of the
equity of Hyperlink through our affiliated entity.
Our corporate structure and contractual arrangements
We conduct a substantial portion of our operations in China
through our contractual arrangements with certain of our
affiliated entities and their shareholders, as well as certain
of our direct subsidiaries in China. The affiliated entities,
along with their subsidiaries, on which we rely to carry out our
operations in China are:
•
Beijing Pioneer Media Advertising Co., Ltd., a wholly-owned
subsidiary of Shanghai Yuan Zhi Advertising Co., Ltd., our
affiliated entity, that acts as exclusive external advertising
agent for Shanghai Camera Media Investment Co., Ltd., or
Shanghai Camera;
•
Beijing Perspective, an affiliated entity that primarily engages
in producing the Fortune China series of television
programming;
Beijing Century Advertising Co., Ltd., or Century Media
Advertising, an affiliated entity that has the exclusive rights
to sell advertising for and provides non-news content to China
Radio International’s EasyFM stations in Beijing and
Shanghai;
•
Guangzhou Jingshi Culture Intermediary Co., Ltd., or Guangzhou
Jingshi, an affiliated entity that has the exclusive rights to
sell advertising for and provides management and information
consulting services to Money Journal magazine;
•
Shenzhen Active Trinity Advertising Co., Ltd., or Shenzhen
Trinity, and Beijing Taide Advertising Co., Ltd., or Beijing
Taide, two affiliated entities whose subsidiaries include
Chinese advertising agencies that also produce advertising;
•
Economic Observer Advertising, a wholly-owned subsidiary of
Beijing Taide that has the exclusive rights to sell advertising
for, and provide consulting services to the Economic
Observer, a financial newspaper. Economic Observer
Advertising also subcontracts events-related business to and
serves as advertising agent for financial institution
advertisers of the Economic Observer through Beijing
Jingshi Jingguan Advertising Co., Ltd., its joint venture with
Guangzhou Jingshi;
•
Beijing Century Media, a subsidiary of Beijing Taide that holds
a group of subsidiaries primarily engaging in producing
entertainment programming content for television stations,
creating three-dimensional animations and special effects and
providing broadcast design for television channels;
•
Hyperlink, a subsidiary of Beijing Taide that primarily engages
in market research in China and provides services including
overall market evaluation, consumer analysis, brand analysis and
product evaluation; and
•
Beijing Xintai Huade Advertising Co., Ltd., an affiliated entity
that carries out advertising services.
Our subsidiaries on which we rely to carry out our operations in
China are:
•
Jia Luo Business Consulting (Shanghai) Co., Ltd., or Jia Luo,
which provides consulting services and advisory services to
Shanghai Camera;
•
New China Media (Shanghai) Co., Ltd., or New China, which
primarily engages in providing services to Century Media
Advertising;
•
EconWorld (Shanghai) Co., Ltd., or EconWorld Shanghai, which
primarily engages in organizing events in China; and
•
Active Advertising (Guangzhou) Co., Ltd., or Active Guangzhou,
which primarily operates as advertising agent for PRC customers.
We conduct a small portion of our operations in Hong Kong and
Taiwan through the following two entities:
•
Money Journal Publication Limited, or Money Journal Publication
Hong Kong, which engages primarily in providing management and
information consulting services, including with respect to
distribution, to Money Journal and its 100% owned
subsidiary, Money Journal Advertising Company Limited, or Money
Journal Advertising Hong Kong, which engages primarily in
advertising for Money Journal in Hong Kong; and
•
Active Advertising Agency Limited, or Active Advertising Hong
Kong, which primarily operates as an advertising agent to place
advertising on media in Hong Kong.
The following diagram illustrates our corporate structure and
the place of incorporation of each named entity as of the date
of this prospectus.
(1)
Xinhua Finance Media wholly owns three other subsidiaries,
Xinhua Finance Media (Shanghai) Co., Ltd., Xinhua Finance Media
(Beijing) Co., Ltd. and Zhongxi Taihe Culture Consultation
(Shanghai) Co., Ltd.
(2)
Xinhua Finance Media owns 100% of the equity interest in Upper
Step Holdings Limited, or Upper Step, a British Virgin Islands
company. Upper Step is the 100% equity owner of China Lead
Profits Limited, or China Lead, a British Virgin Islands
company. China Lead is the 100% equity holder of Jia Luo
Business Consulting (Shanghai) Co., Ltd., or Jia Luo.
(3)
Xinhua Finance Media owns 100% of the equity interest in Accord
Group Investments Ltd., a British Virgin Islands company, which
owns 100% of the equity interest in Great Triumph Investments
Ltd., or Great Triumph, a British Virgin Islands company. Great
Triumph is the 100% owner of the equity interests in New China
Media (Shanghai) Co., Ltd, or New China, a PRC company.
(4)
Xinhua Finance Media owns 100% of the equity interest in Xinhua
Finance Advertising Limited, or Xinhua Finance Advertising,
formerly known as Ming Shing International Limited, a British
Virgin Islands company. Xinhua Finance Advertising owns 100% of
the equity interest in Upper Will Enterprises Limited, a British
Virgin Islands company, which in turn owns 100% of the equity
interest in Active Advertising Agency Limited, or Active
Advertising Hong Kong, a Hong Kong company. Active Advertising
Hong Kong owns 100% of the equity interest in Active Advertising
(Guangzhou) Co., Ltd.
(5)
EconWorld Media owns 100% of the equity interest in Money
Journal Publication Limited, or Money Journal Publication Hong
Kong, a Hong Kong company, 100% of the equity interest in
EconWorld Publishing Limited, a Hong Kong company, and 100% of
the equity interest in Financial World (Shanghai) Co., Ltd., a
PRC company. Money Journal Advertising Company Limited, a Hong
Kong company, is a wholly-owned subsidiary of Money Journal
Publication Hong Kong.
(6)
Contractual agreements consist of a secured loan agreement
entered by Wan Jun, the 51% shareholder of Shanghai Yuan Zhi
Advertising Co., Ltd., or Yuan Zhi, an exclusive equity purchase
option agreement entered into between Jia Luo and Wan Jun, and
an equity pledge agreement and a subrogation agreement entered
into among Jia Luo, Yuan Zhi and Wan Jun; a loan agreement
entered by Li Guang Jie, the 49% shareholder of Yuan Zhi, an
exclusive equity purchase option agreement entered into between
Jia Luo and Li Guang Jie, and an equity pledge agreement and a
subrogation agreement entered into among Jia Luo, Yuan Zhi and
Li Guang Jie. Yuan Zhi has a wholly-owned subsidiary, Beijing
Pioneer Media Advertising Co., Ltd.
(7)
Contractual agreements consist of a secured loan agreement
entered by Wang Yong Hong, a member of the management team of
and the 100% shareholder of Beijing Century Advertising Co.,
Ltd., or Century Media Advertising, an exclusive conditional
equity purchase agreement entered into between New China and
Wang Yong Hong, an equity pledge agreement and a subrogation
agreement entered into among New China, Century Media
Advertising, and Wang Yong Hong, and a service agreement between
New China and Century Media Advertising.
(8)
Contractual agreements consist of a secured loan agreement
entered by Jiang Gui Bin, the 50% shareholder of Guangzhou
Jingshi Culture Intermediary Co., Ltd., or Guangzhou Jingshi, an
exclusive conditional equity purchase agreement entered
into between EconWorld (Shanghai)
Co., Ltd., or EconWorld Shanghai, and Jiang Gui Bin, and an
equity pledge agreement and a subrogation agreement entered into
among EconWorld Shanghai, Guangzhou Jingshi and Jiang Gui Bin; a
secured loan agreement entered into by Wang Yong Hong, the 50%
shareholder of Guangzhou Jingshi, an exclusive conditional
equity purchase option agreement entered into between EconWorld
Shanghai and Wang Yong Hong, and an equity pledge agreement and
a subrogation agreement entered into among EconWorld Shanghai,
Guangzhou Jingshi and Wang Yong Hong.
(9)
Contractual agreements consist of
a secured loan agreement entered by Eric An, the 50% equity
shareholder of Beijing Taide Advertising Co., Ltd., or Beijing
Taide, an exclusive conditional equity purchase agreement
entered into between Active Guangzhou and Eric An, and an equity
pledge agreement and a subrogation agreement entered into among
Active Guangzhou, Beijing Taide and Eric An; a secured loan
agreement entered by Wang Yong Hong, the 50% shareholder of
Beijing Taide, an exclusive conditional equity purchase
agreement entered into between Active Guangzhou and Wang Yong
Hong, and an equity pledge agreement and a subrogation agreement
entered into among Active Guangzhou, Beijing Taide and Wang Yong
Hong.
(10)
Contractual agreements consist of a secured loan agreement
entered by Eric An, the 50% equity shareholder of Shenzhen
Active Trinity Advertising Co., Ltd., or Shenzhen Trinity, an
exclusive conditional equity purchase agreement entered into
between Active Guangzhou and Eric An, and an equity pledge
agreement and a subrogation agreement entered into among Active
Guangzhou, Shenzhen Trinity and Eric An, a secured loan
agreement entered by Zhang Wen Jin, the 50% equity shareholder
of Shenzhen Trinity, an exclusive conditional equity purchase
agreement entered into between Active Guangzhou and Zhang Wen
Jin, and an equity pledge agreement and a subrogation agreement
entered into among Active Guangzhou, Shenzhen Trinity and Zhang
Wen Jin.
(11)
Contractual agreements consist of a secured loan agreement
entered by Kuang Peiyue, the 50% shareholder of Beijing
Xintai Huade Advertising Co., Ltd., or Xintai Huade, an
exclusive equity purchase option agreement entered into among
Xintai Huade and Kuang Peiyue, and an equity pledge agreement
and a subrogation agreement entered into between Xintai Huade,
Active Advertising (Guangzhou) Co., Ltd. and Kuang Peiyue;
a loan agreement entered by Wang Yue, the 50% shareholder
of Xintai Huade, an exclusive equity purchase option agreement
entered into between Xintai Huade and Wang Yue, and an equity
pledge agreement and a subrogation agreement entered into among
Xintai Huade, Active Advertising (Guangzhou) Co., Ltd. and
Wang Yue.
(12)
Beijing Taide is the 80% shareholder of the following entities:
Shangtuo Zhiyang International Advertising (Beijing) Co., Ltd.,
or Shangtuo Zhiyang, Beijing Longmei Television and Broadcast
Advertising Co., Ltd., or Beijing Longmei, Beijing Jinlong
Runxin Advertising Co., Ltd., or Beijing Jinlong Runxin. Wang
Xiao Yu is the 20% equity holder of Shangtuo Zhiyang. Zhang Yi
Ran and Zhou Jia are both the 10% equity holders of Beijing
Longmei. Zhou Jia and Zhang Yu Yu are both the 10% equity
holders of Beijing Jinlong Runxin. Wang Xiao Yu is a manager of
Shangtuo Zhiyang. Zhou Jia is a manager of Beijing Longmei and
of Beijing Jinlong Runxin. Beijing Taide is the 100% shareholder
of Shanghai Yuanxin Advertising Intermediary Co., Ltd., a PRC
company.
(13)
Beijing Perspective Orient Movie and Television Intermediary
Co., Ltd., or Beijing Perspective, is the 100% shareholder of
Beijing Perspective Orient Advertising Co., Ltd., or Beijing
Perspective Orient Advertising, a PRC company.
(14)
Hunan Television and Broadcast Intermediary Co., Ltd., or Hunan
Television & Broadcast, owns 40.5% of the equity
interest in Beijing Perspective. Shenzhen Ronghan Investment
Co., Ltd., a subsidiary of Hunan Television &
Broadcast, holds the remaining 8.5% of the equity interest on
behalf of Hunan Television & Broadcast. Hunan
Television Station is a shareholder of Hunan
Television & Broadcast.
(15)
Hyperlink has a wholly-owned subsidiary Guangzhou Hyperlink
Market Research Co., Ltd., a PRC company.
(16)
Guangzhou Jingshi has a wholly-owned subsidiary Beijing Qiannuo
Advertising Co., Ltd., a PRC company.
(17)
The remaining 3.3% of the equity interests of Beijing Workshop
Communications Co., Ltd. is owned equally by Yu Gang and Xia
Huai. Yu Gang is the Managing Director of our media production
group. Xia Huai is Yu Gang’s wife.
(18)
The remaining 1% of the equity interests of Beijing Golden Ways
Animation Production Co., Ltd., formerly Beijing Golden Ways
Culture Development Co., Ltd., is owned equally by Yu Gang and
Xia Huai.
(19)
The remaining 10% of the equity interests of Shanghai Heyuan
Movie and Culture Co., Ltd. is owned by Xia Huai.
PRC laws and regulations currently impose different levels of
restrictions or prohibitions on investment of foreign and
private capital in the media industry, including television,
radio, newspapers, magazines, advertising and media content
production, and the market research industry. See
“Regulation— Regulations on investment of foreign and
private capital in the media, advertising and market research
industries”. Our subsidiaries in China, which are
considered as foreign-invested entities, are limited in their
abilities to engage in operations in the media, advertising and
market research industries. Accordingly, we operate our
businesses in China primarily through our affiliated entities
and their contractual arrangements with our strategic partners.
In our media production, advertising and market research
businesses, our affiliated entities and their subsidiaries hold
the requisite licenses and permits. See “Risk factors—
Risks related to the
regulation of our business and to our structure— Certain of
our PRC operating companies or
In our media production, advertising and market research
businesses, our affiliated entities and their subsidiaries hold
the requisite licenses and permits. See “Risk factors—
Risks related to the regulation of our business and to our
structure— Certain of our PRC operating companies or
strategic partners have previously engaged or may currently
engage in activities without appropriate licenses or approvals
or outside the authorized scope of their business licenses or
permitted activities. This could subject those companies to
fines and other penalties, which could have a material adverse
effect on our business”. In our broadcasting and print
businesses, our affiliated entities and their subsidiaries
maintain some of the requisite licenses and permits to conduct
the business, and enter into agreements with press offices,
radio stations or television stations to provide them with
various services and act as their advertising business party.
See “Arrangements with partners and suppliers” for a
description of those contractual relationships. We depend on
these affiliated entities and their subsidiaries to operate a
substantial portion of our businesses. We have entered into
contractual arrangements with these affiliated entities and
their shareholders, all PRC citizens, which enable us to:
•
exercise effective control over these affiliated entities and
their respective subsidiaries;
•
in the case of Century Media Advertising, to receive a
substantial portion of the economic benefits from the affiliated
entity and its subsidiaries in consideration for the services
provided by our subsidiary, New China; and
•
have an exclusive option to purchase all or part of the equity
interests in the various affiliated entities and certain of
their subsidiaries in each case when and to the extent permitted
by PRC law.
We are expected to continue to depend on these affiliated
entities and their subsidiaries to operate a substantial portion
of our businesses unless and until we are permitted under PRC
laws and regulations to directly own and operate media-related
businesses without constraints. Under certain agreements we have
with the shareholders of these entities, we may exercise the
option to acquire the affiliated entities, in part or in whole,
to make them our direct subsidiaries.
Agreements that provide effective control over our
affiliated entities
To obtain effective control over our affiliated entities, our
subsidiaries loaned money to PRC citizens for the purpose of
contributing the registered capital to or acquiring an equity
interest in our affiliated entities, in each instance to become
shareholders in their own names. With each contracting
shareholder, our subsidiary entered into four agreements
relating to each shareholder’s interest in the affiliated
entity. The contracting shareholders have effective control over
our affiliated entities as a result of their shareholding.
Consequently, we have effective control over our affiliated
entities.
Loan agreement. Each contracting shareholder has
entered into a loan agreement, as amended and restated, with our
subsidiary, evidencing a zero interest loan granted to such
shareholder. The contracting shareholder used the loan solely
for the purpose of contributing or acquiring the registered
capital of the affiliated entity. Each contracting shareholder
also pledged all the equity interest in the affiliated entity as
from time to time owned by him or her, as security for the
contracting shareholder’s obligations under the loan
agreement. The loan is due in full in 2016 and can be extended
by mutual consent. During the term or extended term of the loan,
the contracting shareholder may not repay all or part of the
outstanding principal without our subsidiary’s prior
written consent. Our subsidiary may accelerate the loan
repayment upon certain events including, if the contracting
shareholder quits or is dismissed or if our subsidiary purchases
the shares in accordance with the exclusive conditional equity
purchase agreement.
Each loan is payable in cash or otherwise as agreed in writing
by our subsidiary and as permitted under the PRC laws, including
but not limited to, by way of transferring to our subsidiary or
a designated third party all or part of the equity interest in
the affiliated equity held by the contracting shareholder, at a
purchase price in accordance with the exclusive conditional
equity purchase option agreement between our subsidiary and the
contracting shareholder described below. Set forth below is a
list of all loan agreements:
•
a loan agreement in the amount of RMB 100,000 ($13,000), entered
into between Wan Jun, the 51% shareholder of Yuan Zhi and Li
Guang Jie, the 49% shareholder of Yuan Zhi, as borrowers, and
Jia Luo, as lender;
•
a loan agreement in the amount of RMB 3.0 million
($380,000), entered into between Wang Yong Hong, the 100%
shareholder of Century Media Advertising, as borrower, and
New China, as lender;
•
a loan agreement in the amount of RMB 500,000 ($64,000),
entered into between Jiang Gui Bin, the 50% shareholder of
Guangzhou Jingshi, as borrower, and EconWorld Shanghai, as
lender;
•
a loan agreement in the amount of RMB 500,000 ($64,000),
entered into between Wang Yong Hong, the 50% shareholder of
Guangzhou Jingshi, as borrower, and EconWorld Shanghai as lender;
•
a loan agreement in the amount of RMB 300,000 ($38,000), entered
into between Zhang Wen Jin and Eric An, each a 50% shareholder
of Shenzhen Trinity, as borrowers, and Active Guangzhou, as
lender;
•
a loan agreement in the amount of RMB 10.0 million
($1.3 million), entered into between Eric An and Wang Yong
Hong, each a 50% shareholder of Beijing Taide, as borrowers, and
Active Guangzhou, as lender;
•
a loan agreement in the amount of RMB 2.5 million
($320,000), entered into between Kuang Peiyue, the 50%
shareholder of Xintai Huade, as borrower, and Active Guangzhou,
as lender; and
•
a loan agreement in the amount of RMB 2.5 million
($320,000), entered into between Wang Yue, the 50% shareholder
of Xintai Huade, as borrower, and Active Guangzhou, as lender.
Equity pledge agreement. Pursuant to equity pledge
agreements among our subsidiary, such subsidiary’s
affiliated entity, and each contracting shareholder of such
affiliated entity, the contracting shareholder has pledged all
of his or her equity interests in the affiliated entity, to our
subsidiary to secure the performance of his or her obligations
under the secured loan agreement and the exclusive equity
purchase option agreement described below. Our subsidiary holds
a capital contribution certificate signed by the affiliated
entity’s legal representative and affixed with the company
seal as evidence of the pledged equity held by that shareholder.
However, we have been unable to register these equity pledges
with the relevant public registrars, which could allow the
shareholders to dishonor their pledges to us
and re-pledge the shares to another entity or person. See
“Risk factors— Risks related to the regulation of our
business and to our structure— The shareholders of our PRC
affiliated entities may breach our agreements with them or may
have potential conflicts of interest with us, and we may not be
able to enter further agreements to extract economic benefits
from these entities, which may materially and adversely affect
our business and financial condition”.
Subrogation agreement. Each of our relevant
subsidiaries has entered into a subrogation agreement with its
respective affiliated entity and the contracting shareholders of
that affiliated entity. Each contracting shareholder has agreed
to unconditionally and irrevocably appoint a person as
designated in writing by our subsidiary from time to time with
his or her shareholder’s voting rights and other
shareholder’s rights for representing the shareholder at
the shareholders’ meeting including the shareholder’s
rights to sell or transfer the shareholder’s equity
interest, change the registered capital, or merge, change the
form, wind up or liquidate the entity. The contracting
shareholder will provide all necessary assistance to the
appointee. Each subrogation agreement will terminate upon the
repayment in full of the indebtedness incurred under the secured
loan agreement.
Agreements that provide the option to purchase the equity
interest in the affiliated entity
Exclusive equity purchase option agreement. Each
of our relevant subsidiaries has entered into an agreement with
each contracting shareholder of such subsidiary’s
affiliated entity, giving that subsidiary the right to purchase,
directly or in the name of a nominee, from the respective
contracting shareholder, in its sole discretion, part or all of
the shareholder’s equity interests in the affiliated entity
as and when permitted by PRC law. The purchase price to be paid
by our subsidiary will be the same as the initial principal
amount of the secured loan agreement between our subsidiary and
the contracting shareholder, or any other amount as permitted by
PRC law. Our subsidiary has the right to exercise the purchase
right at any time by providing the shareholder with written
notice 30 days in advance. The shareholder has agreed to
execute with our subsidiary a binding equity transfer agreement
upon the conclusion of the
30-day period or at
such earlier time as agreed upon by the parties. The shareholder
is required to use his or her best efforts to ensure timely
finalization and government approval and registration of such
equity transfer.
Agreements that transfer economic benefits to us
Service agreement. Century Media Advertising
entered into a service agreement with New China on
January 23, 2006. Under the service agreement, New China
agreed to provide certain general administrative support and
related services to Century Media Advertising. In consideration
for the services provided, Century Media Advertising will pay a
quarterly service fee in the amount of $38,500, plus or minus
10%, or such other amount as the parties may agree from time to
time. The service fee will be paid by Century Media Advertising
within 20 business days after the issuance of the financial
reports of Century Media Advertising for each calendar year. The
agreement has an initial term of two years starting from
January 23, 2006, and will be automatically and perpetually
renewed for two-year terms until New China serves a written
notice of termination to Century Media Advertising at least
seven business days before the expiry of the then current
two-year term. Moreover, during any two-year term, New China has
the right to terminate the agreement at any time without
compensation by serving written notice 30 business days in
advance. New China also has the right to terminate immediately
with written notice to Century Media Advertising in the event
Century Media Advertising
materially breaches this agreement and fails to remedy such
breach within ten business days from the date it receives
written notice of such breach from New China. The agreement does
not explicitly provide any right for Century Media Advertising
to terminate the agreement.
We have not yet entered into further service agreements with
other affiliated entities. See “Risk factors— Risks
related to the regulation of our business and to our
structure— The shareholders of our PRC affiliated entities
may breach our agreements with them or may have potential
conflicts of interest with us, and we may not be able to enter
further agreements to extract economic benefits from these
entities, which may materially and adversely affect our business
and financial condition”.
In the opinion of Commerce & Finance Law Offices, our PRC
legal counsel:
•
the ownership structures of our affiliated entities, Yuan Zhi,
Century Media Advertising, Beijing Taide, Shenzhen Trinity,
Xintai Huade and Guangzhou Jingshi, and our subsidiaries in
China, comply in all material respects with all existing PRC
laws and regulations;
•
the contractual arrangements among our PRC subsidiaries,
affiliated entities and their shareholders 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
•
the business operations of our subsidiaries in China and our
affiliated entities and their respective subsidiaries comply in
all material respects with existing PRC laws and regulations.
We have been advised by our PRC legal counsel, however, that
there are substantial uncertainties regarding the interpretation
and application of current and future PRC laws and regulations.
Accordingly, the PRC regulatory authorities may in the future
take a view that is contrary to the above opinion of our PRC
legal counsel. We have been further advised by our PRC counsel
that if the PRC government finds that the agreements that
establish the structure for operating our PRC media related
businesses do not comply with PRC government restrictions on
foreign investment in the media industry, we could be subject to
severe penalties including being prohibited from continuing
operation. See “Risk factors— Risks related to the
regulation of our business and to our structure”.
We rely on a number of arrangements with partners and suppliers
in order to conduct our businesses.
Agreements regarding Shanghai Camera. Beijing
Pioneer Media Advertising Co., Ltd., or Beijing Pioneer, which
is a subsidiary of Shanghai Yuan Zhi Advertising Co., Ltd.,
which is our affiliated entity controlled by Jia Luo Business
Consulting (Shanghai) Co., Ltd., or Jia Luo, our
subsidiary, entered into an advertising services agreement with
Shanghai Camera Media Investment Co., Ltd., or Shanghai Camera,
under which Beijing Pioneer agrees to make monthly payments to
Shanghai Camera and Shanghai Camera agrees to grant the external
advertising rights on an exclusive basis in connection with
Inner Mongolia Satellite Television to Beijing Pioneer. This
agreement expires on December 31, 2023 and will be extended
for not less than ten years. Beijing Pioneer may terminate upon
60 business days’ written notice, and either party may
terminate the agreement immediately by written notice in case of
the material breach of the other party.
Jia Luo entered into an agreement with Shanghai Camera to
provide consulting and advisory services to Shanghai Camera, in
return for a service fee. This agreement expires on
December 31, 2023 and will be extended for no less than
ten years. This agreement may be terminated by Jia Luo or
Shanghai Camera on 30 business days’ written notice
without compensation or in certain events of breach.
Beijing Century Media Culture Co., Ltd., or Beijing Century
Media, which is a subsidiary of our affiliated entity, entered
into an agreement with Shanghai Camera, under which Beijing
Century Media agrees to provide content to Shanghai Camera for
broadcast on Inner Mongolia Satellite Television, in return for
a service fee. This agreement expires on December 31, 2023
and will be extended for not less than ten years. Beijing
Century Media may terminate upon 30 business days’
written notice and either party may terminate upon
10 business days’ written notice in certain events of
breach.
Jia Luo entered into a call option agreement with Wai Gao Qiao,
the shareholder of Shanghai Camera, under which it has the right
to purchase, directly or through its nominee, all or part of the
equity of Shanghai Camera from Wai Gao Qiao, to the extent
permissible under PRC law. The agreement terminates only when
the whole equity is transferred to Jia Luo or its nominee and
has no other termination provisions.
Shanghai Camera has entered into a strategic cooperation
agreement with Inner Mongolia Television Station, which gives
Shanghai Camera the exclusive rights to sell advertising for
Inner Mongolia Satellite Television and makes it the content
provider for content on the satellite channel except for news,
mandatory and policy-related programs and other programs as
stipulated by the parties. The government requires the broadcast
of provincial news on provincial satellite television channels.
Mandatory and policy-related programs are also occasionally
required by the government. As a result, Inner Mongolia
Television currently creates its own content for local news and
for My Blue Home, a series of programs set in Inner
Mongolia. Inner Mongolia Satellite Television has the right to
review and approve the programming provided by Shanghai Camera,
and is responsible to review the content for regulatory
compliance. Shanghai Camera receives all revenues from
advertising, and in return pays an annual fee to Inner Mongolia
Television Station. This agreement expires on December 31,2023, with an option to renew for at least ten years granted to
Shanghai
Camera. This agreement may not be terminated by either party,
including due to material breach of a party, except in the case
of certain unforeseen events beyond the parties’ control.
Agreements related to Hunan Satellite Television.
Our affiliated entity Beijing Perspective entered into a
contract with Hunan Television Station, of which Hunan Satellite
Television is a unit. Pursuant to the agreement, Hunan
Television Station agreed to broadcast Fortune Morning
7 a.m., a 30-minute daily economic news program
provided by Beijing Perspective, on its satellite channel until
October 2007. Beijing Perspective is entitled to keep all
revenue from selling program sponsorship, and share advertising
revenue with Hunan Television Station on an equal basis. Under
the terms of the contract, it was to be signed each year, and
Beijing Perspective has not signed it since the original
execution in October 2004. Nevertheless, both parties continue
to operate under the contract. This agreement has no early
termination provisions.
Agreements related to Small World Television LLC.
We, Xinhua Finance Media Limited, entered into a
cooperation agreement with Small World Television LLC, or Small
World, pursuant to which Small World agrees to develop and
produce certain television programs for us and we agree to pay
Small World the agreed upon costs for the development and
production of such programs, including the production costs,
general and administrative costs and costs of the promotional
and production launch services. Under the agreement, we and
Small World agree to own an undivided 58% and 42% interest,
respectively, in the television programs they deliver to us,
including all the intellectual property rights. Each party can
license to third parties, on mutually agreed upon terms, the
rights to broadcast these television programs by cable,
satellite or digital distribution on a non-exclusive basis or to
generate revenues otherwise. Under the agreement, Small World
agreed that we may license the distribution rights on an
exclusive basis to Shanghai Camera or Inner Mongolia Satellite
Television, for a period of one year, in areas in the PRC where
Inner Mongolia Satellite Television has landing rights, upon
terms mutually agreed by both parties. Small World also agreed
to enter into a separate agreement with a qualified PRC
production company approved by us to produce the television
programs. Pursuant to this clause, Small World entered into an
agreement with Beijing Perspective, our affiliated entity, to
produce Access Hollywood: China. Further agreements for
the production of television programs are planned. The
cooperation agreement is effective in perpetuity, unless in
certain situations where one party commits a material breach,
fails to pay its debt or engages in procedures leading to
winding up or liquidation.
Agreement regarding our radio broadcasting business.
Our affiliated entity, Century Media Advertising,
entered into an agreement with Beijing Guoguang Guangrong
Advertising Co., Ltd., or Guoguang Guangrong, the exclusive
advertising agent for all the domestic stations of China Radio
International. Under this agreement Century Media Advertising
was granted the exclusive rights to sell advertising for EasyFM
91.5, of Beijing, and EasyFM 87.9, of Shanghai, and the right to
provide content to these two stations at its own expense. We
intend to provide only non-news content pursuant to this
agreement. The content is subject to China Radio
International’s approval. The agreement expires on
December 31, 2026. This agreement may be terminated by
Guoguang Guangrong if Century Media Advertising fails to pay for
the advertising rights. China Radio International has orally
confirmed to us that Guoguang Guangrong has the right to provide
content for these stations.
Our print group’s relationship with Dow
Jones. Money Journal Publishing, a subsidiary of
EconWorld Media, has an agreement with Dow Jones under which Dow
Jones provides content for a section of Money Journal.
The agreement expires on April 1, 2009, and is automatically
renewable for successive 12 month terms. Money Journal
has the exclusive right to publish in China Chinese language
articles sourced from and translated by Dow Jones. In return,
Money Journal allots a certain amount of free advertising
space to Dow Jones, which may sell the advertising space to
advertisers outside the PRC, Hong Kong, Macau and Taiwan. Dow
Jones may use additional advertising space beyond its allotment
for a fee. Dow Jones has the exclusive rights to sell
advertising for Money Journal outside the PRC, Hong Kong,
Macau and Taiwan. Either party may terminate this agreement upon
breach or insolvency of the other party or a change in control
of EconWorld Media. We have obtained a waiver from Dow Jones for
the purchase of EconWorld Media by us so that this change of
control provision will not allow for a termination of the
contract due to that event.
Our print group’s services for Money Journal.Our affiliated entity, Guangzhou Jingshi Culture
Intermediary Co., Ltd., or Guangzhou Jingshi, entered into a
contract with Hunan Television & Broadcast and Money Journal
Press Office, which is sponsored by Hunan Radio,
Movie & Television Group. Hunan Television &
Broadcast is a subsidiary of Hunan Radio, Movie & Television
Group. Money Journal Press Office is the legal sponsor for
Money Journal. Under the contract, Guangzhou Jingshi is
to provide management consulting and information provision
services on distribution to Money Journal Press Office and has
the exclusive right to sell advertising for Money Journal Press
Office. The contract expires on March 15, 2014. Money
Journal Press Office has rights to terminate if Guangzhou
Jingshi fails to pay under the contract, or if Money Journal
Press Office suffers significant damage or loss due to Guangzhou
Jingshi’s activities.
Agreements regarding the Economic Observer. Xinhua
Finance Limited, our parent, entered into a master cooperation
agreement with Economic Observer Advertising, Economic Observer
Press Office, Shandong Sanlian Group Co., Ltd., or Shandong
Sanlian Group, and Shandong Economic Observer Co., Ltd., or
Shandong Economic Observer, on April 20, 2006 to purchase
through its nominee Beijing Taide Advertising Co., Ltd., or
Beijing Taide, 50% of the equity interest in Economic Observer
Advertising from its sole shareholder, Shandong Economic
Observer. Shandong Sanlian Group is the 76.1% shareholder of
Shandong Economic Observer and the sponsor and owner of Economic
Observer Press Office, which is licensed by the government to
edit, publish and distribute the Economic Observer.
We entered into additional business cooperation agreements as
contemplated by the master cooperation agreement, including:
•
a business cooperation agreement, as amended, entered into by
Shandong Sanlian Group, Shandong Economic Observer, Economic
Observer Press Office and Economic Observer Advertising. The
term of the agreement is 50 years, expiring on May 9,
2056. It automatically renews thereafter. Under this business
cooperation agreement, Economic Observer Advertising has the
exclusive rights to sell advertising for the Economic
Observer and pays Economic Observer Press Office an
advertising agency fee. Economic Observer Advertising has the
right to acquire the intellectual property assets of the
Economic Observer to the extent permissible under
applicable law, provides management and information consulting
services on the distribution of the Economic Observer and
assists Economic Observer Press Office in the management of the
printing of the Economic Observer. Economic Observer
Press Office may terminate the agreement by paying for losses
incurred by Economic Observer Advertising due to the
termination, including future losses resulting from such
termination. Economic Observer Advertising may unilaterally
terminate and may terminate and seek damages including future
losses upon certain breaches by Economic Observer Press Office;
an agreement on organizing an information consultation committee
entered into by Shandong Sanlian Group, our parent, Xinhua
Finance Limited, Economic Observer Press Office, and Economic
Observer Advertising. Shandong Sanlian Group and our parent
agreed to establish an eight-member committee with four members
appointed by Shandong Sanlian Group and four members, including
the chairman of the committee, appointed by our parent. The
committee is to provide proposals and views on the editing,
content, appearance, and format of the Economic Observer,
hold discussions with Economic Observer Press Office and provide
consultancy to Economic Observer Press Office. Economic Observer
Press Office retains final editing rights. The parties assume
their own costs in operating the committee, and there are
otherwise no payment terms. None of the parties may unilaterally
terminate the agreement; and
•
a business cooperation agreement, as amended, entered into by
Economic Observer Press Office, Economic Observer Advertising,
Guangzhou Jingshi, which is our affiliated entity, and Beijing
Jingshi Jingguan Advertising Co., Ltd., or Jingshi Jingguan, a
joint venture between Guangzhou Jingshi and Economic Observer
Advertising. Jingshi Jingguan operates as the advertising agent
in relation to advertisements placed by financial institutions
for the Economic Observer and conducts events-related
businesses. No party may unilaterally terminate the agreement.
Agreements by our advertising group securing agency.
Our advertising group has entered into various
agreements granting us the advertising agency, and at times the
exclusive agency, for advertising on various media platforms.
Much of the revenue from this business is derived under the
following contracts:
•
Beijing Xintai Huade Advertising Co., Ltd., or Xintai Huade, our
affiliated entity, entered into an advertising agency contract
with Beijing Guangxian Media Co., Ltd., which has the exclusive
advertising rights and content provision rights for two
television programs aired on Beijing Television Station.
Pursuant to this contract, Xintai Huade serves as the exclusive
advertising agent for these two programs during the period from
January 1, 2007 to December 31, 2007. The programs are
Top Music and Star Press, both of which air on
Beijing Television Station Channel 2. Exclusive advertising
agent agreements for programs broadcast on Beijing Television
Station typically have a term of one year, after which one of
our affiliated entities in our advertising group typically
enters into new contracts in relation to different programs.
•
Shangtuo Zhiyang International Advertising (Beijing) Co., Ltd.,
or Shangtuo Zhiyang, a subsidiary of our affiliated entity,
Beijing Taide, entered into an advertising agent contract with
Shandong Economic Observer, which at the time was the exclusive
advertising agent for Economic Observer Press Office. Pursuant
to the contract, Shangtuo Zhiyang serves as the exclusive
advertising agent for the Economic Observer with respect
to the real estate advertisements on certain pages of the
newspaper in Beijing, Shanghai, and Tianjin. The contract
expires on April 30, 2009. Either party may terminate the
contract under certain conditions of breach. There are no
specific terms in the contract with regard to renewability.
Currently, Economic Observer Advertising is the exclusive
advertising agent for Economic Observer Press Office, and the
rights of Shangtuo Zhiyang under this contract are still
observed.
Chairman of Board of Directors and
Chief Executive Officer
Shelly
Singhal(1)
39
Chief Financial Officer and Director Nominee
Zhu
Shan(1)
38
Chief Operating Officer and Director Nominee
Alex Fan
35
President, Print Group
Teddy Liu Weidong
35
President, Advertising Group
Yu Gang
39
President, Media Production Group
Stephen Xie Wei
37
President, Research Group
Graham
Earnshaw(1)
54
President, Editorial and Director Nominee
Aloysius
T. Lawn(1)
48
Independent Director Nominee
John
H. Springer(1)
50
Independent Director Nominee
Zhao
Li(1)
36
Director Nominee
Long Qiu
Yun(1)
43
Independent Director Nominee
(1)
Appointed to serve as a director, commencing from the Securities
and Exchange Commission’s declaration of effectiveness of
our registration statement on
Form F-1, of which
this prospectus is a part.
Directors
Fredy Bushhas been our Chief Executive Officer and
Chairman of the Board of Directors since our founding in
November 2005. She has served as a director and Chief Executive
Officer of our parent, Xinhua Finance Limited, since February
2004. Since June 2001 and January 2002, respectively, she has
served as Vice Chairman and Chief Executive Officer of Xinhua
Financial Network Limited, or XFN, the predecessor to our
parent. From 1987 to 2001, Ms. Bush operated a consulting
business in Asia where she assisted clients in building business
alliances, particularly between the United States and Asia and
in the financial sector. Her consulting business worked in
Taiwan from 1985 to 1990 to establish Taiwan’s first
official futures market. Ms. Bush serves as a director for
27 subsidiaries or affiliates of our parent, including
EconWorld Media Limited. Ms. Bush serves on the board of Bush
Corporation, Chazara Foundation, and Xinhua Finance Library
Foundation Limited.
Ms. Bush has received a number of awards, including being
listed among the Wall Street Journal’s Top 50 Women to
Watch in 2004 and the Ellis Island Medal of Honor by the
National Ethnic Coalition of Organizations in 2006. In 2006, she
also received the Asia Entrepreneur of the Year Award from CNBC
and a Woman of Influence Award for Entrepreneur of the Year by
the American Chamber of Commerce in Hong Kong.
Shelly Singhalhas served as our Chief Financial Officer
since September 2006, and has served as a director of our
parent, Xinhua Finance Limited, since July 2004.
Mr. Singhal will serve as our director, commencing from the
Securities and Exchange Commission’s declaration of
effectiveness of our registration statement on
Form F-1, of which
this prospectus is a part.
Mr. Singhal sits on the Compensation Committee, Audit
Committee and Investment Committee of our parent.
Mr. Singhal founded the SBI Group, an investment company,
in June 2001, serving as its Managing Director until December
2003, and as Chairman and CEO since that time. Mr. Singhal
has also served as a director and member of the Compensation
Committee of Small World Kids Inc. since October 2004.
Mr. Singhal owns Bedrock Securities, a NASD licensed broker
dealer and its sister company, Bedrock China Futures, Ltd.,
which is an Asian securities trading company. Mr. Singhal
worked for SBI-E2
Capital, a member of Softbank Investment Group, from 2001 to
2003. Mr. Singhal holds a B.S. degree in Business
Administration from Seaver College at Pepperdine University.
Zhu Shan has served as our Chief Operating Officer since
September 2006. Mr. Zhu will serve as our director,
commencing from the Securities and Exchange Commission’s
declaration of effectiveness of our registration statement on
Form F-1, of which this prospectus is a part. From April 2002 to
August 2006, Mr. Zhu was the Managing Director of FTSE
Xinhua Index, a joint venture between Xinhua Financial Network
and FTSE International. Prior to that, Zhu Shan was the Vice
President of China business development for Xinhua Financial
Network and once a leading negotiator of the PRC Ministry of
Defense with 10 years of management experience. Zhu Shan
holds a Master’s degree in Public Administration degree
from Harvard University and a B.A. degree in British and
American literature from Luoyang Foreign Studies Institute in
China.
Graham Earnshaw has served as our Editorial President
since September 2006. Mr. Earnshaw will serve as our
director, commencing from the Securities and Exchange
Commission’s declaration of effectiveness of our
registration statement on Form F-1, of which this prospectus is
a part. Mr. Earnshaw has also served as Editor-in-Chief of
Xinhua Financial Network, a subsidiary of our parent, since
January 2001. From 1997 to 2000, Mr. Earnshaw was the
director of SinoMedia Ltd. From 1984 to 1997, Mr. Earnshaw
worked for Reuters news agency in a variety of positions
including Asian Editor from 1990 to 1995.
Aloysius T. Lawn will serve as our independent director,
commencing from the Securities and Exchange Commission’s
declaration of effectiveness of our registration statement on
Form F-1, of which this prospectus is a part. Mr. Lawn
served as a director of Stonepath Group, Inc. from
February 2001 to February 2007. Until
December 2006, Mr. Lawn was the Executive Vice
President— General Counsel and Secretary of Talk America
Holdings, Inc., an integrated communications service provider
with programs designed to benefit the residential and small
business markets. Prior to joining Talk America Holdings, Inc.
in 1996, Mr. Lawn was an attorney in private practice with
extensive experience in private and public financings, mergers
and acquisitions, securities regulation and corporate governance
from 1985 through 1995. Mr. Lawn graduated from Yale
University and Temple University School of Law.
John H. Springer will serve as our independent director,
commencing from the Securities and Exchange Commission’s
declaration of effectiveness of our registration statement on
Form F-1, of which this prospectus is a part.
Mr. Springer served on the board of directors of Stonepath
Group, Inc. from May 2003 to February 2007.
Mr. Springer has held both domestic U.S. and international
logistics positions at IBM Corporation, Union Pacific
Corporation’s third party logistics unit, and at Dell
Computer from 1995 to 2002. Mr. Springer joined Nike, Inc.
in 2002 and is its Director of Global Operations— Golf
Division. Mr. Springer has been active in the Council of
Logistics Management throughout his career, including holding
the position of President for the Central Texas region. He
earned his B.S. at Syracuse University in
Transportation & Distribution Management, and his MBA from
St. Edwards University in Austin, Texas.
Zhao Li will serve as our director, commencing from the
Securities and Exchange Commission’s declaration of
effectiveness of our registration statement on
Form F-1, of which
this prospectus is a part. Mr. Zhao has served as General
Manager at our subsidiary, Economic Observer Advertising since
June 2006. Mr. Zhao has served as the director of Economic
Observer Press Office since December 2000. Prior to joining the
Economic Observer Press Office, Mr. Zhao held various
positions for China Business News, including journalist,
editor, and director of the news and finance department, from
1993 to 2000. Mr. Zhao attended China Foreign Affairs
University and subsequently in Free University of Berlin in
Germany.
Long Qiu Yun will serve as our independent director,
commencing from the Securities and Exchange Commission’s
declaration of effectiveness of our registration statement on
Form F-1, of which
this prospectus is a part. Mr. Long has served as a director of
our subsidiary, Beijing Perspective Orient Movie and Television
Intermediary Co., Ltd. since July 2006. Mr. Long has served
as the board chairman and general manager of Hunan
Television & Broadcast Intermediary Co., Ltd. since
1995. Mr. Long served at the news department and the
advertising department of Hunan Television Station as journalist
and director respectively from 1985 to 1994. Mr. Long holds
a degree in Chinese from Heng Yang Normal University.
Executive officers
Alex Fan has served as the President of our print group
since our founding in November 2005. Since January 2003,
Mr. Fan has served as Chief Executive Officer and Director
of EconWorld Media, one of our acquired entities. Mr. Fan
was the CEO and Chief Editor of the Economic Digest from June
1999 to May 2003, the founder of Successful Management and
Re-engineering Tactics (SMART), from January 2001 to May 2003,
and worked at Hong Kong Economic Times Press Ltd. from 1996 to
1999 and Hong Kong Commercial Daily Limited from 1993 to 1995.
Mr. Fan holds a B.Sc. degree in mathematics from the
Chinese University of Hong Kong.
Teddy Liu Weidong has served as the President of our
advertising group since January 2006. Mr. Liu has served as
the Chief Executive Officer of Xinhua Finance Advertising
Limited, or Xinhua Finance Advertising, which became our
advertising group when we acquired it. He worked as a business
manager in Beijing Sangxia Advertising from January 1997 to
January 2005, as a business manager in Beijing Sunshine
Advertising from January 1994 to December 1996. Mr. Liu
holds a B.A. degree in garden design from China Agriculture
University.
Yu Gang has served as the President of our media
production group since our founding in November 2005.
Mr. Yu founded Beijing Century Advertising Co., Ltd. in
February 2005 and has served as its Chief Executive Officer
since that time. Mr. Yu established and served as Chief
Executive Officer of Beijing Century Media Culture Co., Ltd.
since June 2004. Mr. Yu served as Chairman of Camera Film
& Television Production Company from August 2003 to May 2004
and of Camera Media Investment Company from 1994 to July 2003.
Mr. Yu received a B.A. degree in directing from Shanghai
Theater Academy in 1989.
Stephen Xie Wei has served as the President of our
research group since August 2006. In 1997 Mr. Xie founded
Shanghai Hyperlink Market Research Co., Ltd., or Hyperlink, and
served as its Director and General Manager, which became our
research group when we acquired it. From
1994 to 1997, Mr. Xie was a research manager at Research
International China. Mr. Xie holds a
associate’s degree in art design from Shanghai Light
Industry College.
Board of directors
Our board of directors currently consists of one director. Seven
other directors are nominated to take directorships at the time
the Securities and Exchange Commission declares effective our
registration statement on
Form F-1, of which
this prospectus is a part. A director is not required to hold
any shares in the company by way of qualification. Provided he
has properly disclosed his interest, a director may vote with
respect to any contract, proposed contract or arrangement in
which he is materially interested. Our board 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. Prior
to the completion of this offering, we intend to appoint more
directors to our board. All of our nominee directors have signed
an agreement with us governing the rights and duties as
directors. Under these agreements, there are no benefits upon
termination of their directorships.
Committees of the board of directors
Upon the completion of this offering, we will have three
committees under the board of directors: an audit committee, a
compensation committee and a nominating and corporate governance
committee. We adopted a charter on February 21, 2007 for
each of the three committees, which will become effective upon
the closing of this offering.
Audit committee
We have appointed Aloysius Lawn as chairman of our audit
committee, and John Springer and Shelly Singhal as members.
Aloysius Lawn and John Springer satisfy the
“independence” requirements of the Nasdaq Stock
Market, Marketplace Rules and Rule 10A-3 under the
Securities Exchange Act of 1934. We are under obligation by
Nasdaq Rules to ensure that within one year from this offering
all our audit committee members must satisfy these independence
requirements. 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:
•
appointing, retaining and overseeing the work of the independent
auditors, including resolving disagreements between the
management and the independent auditors relating to financial
reporting;
•
pre-approving all auditing and non-auditing services permitted
to be performed by the independent auditors;
•
reviewing annually the independence and quality control
procedures of the independent auditors;
•
discussing material off-balance sheet transactions, arrangements
and obligations with the management and the independent auditors;
•
reviewing and approving all proposed related party transactions;
discussing the annual audited financial statements with the
management;
•
annually reviewing and reassessing the adequacy of our audit
committee charter;
•
meeting separately with the independent auditors to discuss
critical accounting policies, management letters,
recommendations on internal controls, the auditor’s
engagement letter and independence letter and other material
written communications between the independent auditors and the
management; and
•
attending to such other matters that are specifically delegated
to our audit committee by our board of directors from time to
time.
Compensation committee
We have appointed John Springer as chairman of our compensation
committee, and Aloysius Lawn and Shelly Singhal as members. John
Springer and Aloysius Lawn satisfy the “independence”
requirements of the Nasdaq Stock Market, Marketplace Rules. The
compensation committee will assist the board in reviewing and
approving our compensation structure, including all forms of
compensation relating to our directors and executive officers.
Within one year from this offering all committee members must
satisfy the independence requirements of the Nasdaq rules. Our
chief executive officer may not be present at any committee
meeting while her compensation is deliberated. The compensation
committee will be responsible for, among other things:
•
reviewing and approving executive compensation;
•
reviewing periodically and managing any long-term incentive
compensation plans, share option plans, annual bonuses, employee
pension and welfare benefit plans;
•
determining our policy with respect to change of control or
“parachute” payments; and
•
managing and reviewing director and executive officer
indemnification and insurance matters.
Nominating and corporate governance committee
We have appointed John Springer as chairman of our nominating
and corporate governance committee, and Aloysius Lawn and Shelly
Singhal as a members. Aloysius Lawn and John Springer satisfy
the “independence” requirements of the Nasdaq Stock
Market, Marketplace Rules. Within one year from this offering
all committee members must satisfy the independence requirements
of the Nasdaq rules. The nominating and corporate governance
committee will assist the board of directors in selecting
individuals qualified to become our directors and in determining
the composition of the board. The nominating and corporate
governance committee will be responsible for, among other things:
•
recommending to the board nominees for election or re-election
to the board or for appointments to fill any vacancies;
•
reviewing annually the performance of each incumbent director in
determining whether to recommend such director for an additional
term;
overseeing the board in the board’s annual review of its
own performance and the performance of the management; and
•
considering, preparing and recommending to the board such
policies and procedures with respect to corporate governance
matters as may be required to be disclosed under the applicable
laws or otherwise considered to be material.
Duties of directors
Under Cayman Islands law, our directors have a 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
possess and 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. We have the
right to seek damages if a duty owed by our directors is
breached.
Terms of directors and officers
In accordance with our articles of association, a director must
vacate his directorship if the director resigns, becomes of
unsound mind or dies, is absent from board meetings for six
consecutive months without special leave from our board, becomes
bankrupt or ceases to be a director under the law or is removed
by our shareholders. A director may be removed by an ordinary
resolution of our shareholders. Officers are selected by and
serve at the discretion of the board of directors. The
compensation of our directors will be determined by the board of
directors, and divided among the directors as determined by the
board. There is no maximum age at which a director must retire.
Employment agreements
General. We have entered into employment agreements with
each of our executive officers. Under some of these agreements
there is a specified period of employment, while under others
there is not. 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 of a
criminal offense involving integrity or honesty, being guilty of
fraud, gross misconduct, or gross incompetence or unsatisfactory
or poor performance after receiving a written warning. An
executive officer may terminate his employment at any time by
giving the company a specified period of written notice or
payment in lieu of notice, and under most agreements neither
party may terminate for 36 months absent good reason.
Except for the agreements for Fredy Bush and Shelly Singhal,
described below, 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 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, technical data, trade secrets and
know-how of our company or the confidential information of any
third party, including our affiliated entities and our
subsidiaries, received by us. The executive officers have also
agreed to disclose in confidence to us all inventions, designs
and trade secrets which they conceive, develop or reduce to
practice and that they shall be the
absolute property of us. In addition, each executive officer has
agreed to be bound by the non-competition restrictions set forth
in his or her employment agreement. Specifically, each executive
officer has agreed, while employed by us and for a period of one
year after termination of his or her employment, not to:
•
solicit business from or perform services for any person who was
a client, customer, supplier or prospective client of us or our
affiliated entities during the executive officers’
employment;
•
solicit or induce any person to terminate his or her employment
or consulting relationship with us or our affiliated entities; or
•
engage, invest or assist in any business that competes with the
business or future business of us or our affiliated entities.
Fredy Bush. The employment contract of Fredy Bush is
similar in most respects to the above description, except that
the termination provisions and termination benefits vary.
Ms. Bush may be terminated in case of a criminal conviction
for fraud that involves the performance of her duties and an
amount greater that $250,000. In this case, termination action
must be taken by the board of directors, for which Ms. Bush
is currently the only director. If Ms. Bush is unable to
continue in employment for 180 days or upon her death, she
will be entitled to one year’s current salary and bonus,
plus continued participation in any share option plan we adopt.
If Ms. Bush’s employment is terminated because there
is a change of control of our company, if her employment is
terminated by the board without cause or if we fail to pay her
bonus in a timely fashion, she will be entitled to her annual
salary and bonus for the remainder of the contract, including
the period of extension, which could total up to ten years. In
such an event, all her options become immediately vested and we
or our successor must purchase all her shares at market price.
Shelly Singhal. The employment contract of Shelly Singhal
is similar in most respects to the above description, except
that the termination provisions and termination benefits vary.
Mr. Singhal may be terminated in case of a criminal
conviction for fraud that involves the performance of his duties
and an amount greater than $250,000. In this case, termination
action must be taken by the board of directors, for which Fredy
Bush is currently the only director. If Mr. Singhal is
unable to continue in employment for 180 days or upon his
death, he will be entitled to one year’s current salary and
bonus, plus continued participation in any share option plan we
adopt. If Mr. Singhal’s employment is terminated
because there is a change of control of our company, if his
employment is terminated by the board without cause or if we
fail to pay his bonus in a timely fashion, he will be entitled
to his annual salary and bonus for the remainder of the
contract, including the period of extension, which could total
up to ten years. In such an event, all his options become
immediately vested and we or our successor must purchase all his
shares at market price.
Compensation of directors and executive officers
For the year ended December 31, 2006, the aggregate cash
compensation that we paid to our executive officers was
approximately $3.5 million. No executive officer is
entitled to any severance benefits upon termination of his or
her employment with our company except for Fredy Bush and Shelly
Singhal, as described above. On June 13, 2006, we issued
11,050,000 shares to Fredy Bush at par value as
compensation.
We have entered into individual option agreements in order to
attract and retain the best available personnel for positions of
substantial responsibility, provide additional incentive to
employees and promote the success of our business. These option
agreements were entered on July 11, 2006. We have reserved
class A common shares amounting to approximately 11.0% of our
total outstanding common shares and convertible preferred shares
as of the date of this prospectus under these option agreements.
Our shareholders adopted a 2007 share option plan in furtherance
of the same purposes on February 7, 2007. The maximum
aggregate number of shares that may be issued pursuant to all
awards is equal to the lesser of (y) 19,530,205 common
shares, or (z) a lesser number of common shares determined
by the administrator of the plan. No options have been granted
under this plan as of the date of this prospectus. We plan to
grant options to some of our nominated directors after this
offering has closed.
The following paragraphs describe the principal terms of our
2007 share option plan, and the terms of the individual option
agreements.
Termination of options. Where the option agreement
permits the exercise or purchase of the options granted for a
certain period of time following the recipient’s
termination of service with us, or the recipient’s
disability or death, the options will terminate to the extent
not exercised or purchased on the last day of the specified
period or the last day of the original term of the options,
whichever occurs first.
Administration. Our share option plan will be
administered by our board of directors or an option
administrative committee designated by our board of directors
constituted to comply with applicable laws. In each case, our
board of directors or the committee it designates will determine
the provisions, terms and conditions of each option grant,
including, but not limited
to, the option vesting schedule, repurchase provisions, rights
of first refusal, forfeiture provisions, form of payment upon
settlement of the award, payment contingencies and satisfaction
of any performance criteria. As these matters are set forth in
an individual option agreement, no such administration will be
necessary for individual option agreements, but the
administrative committee and our human resources personnel may
have limited roles.
Vesting schedule. In general, options granted under our
individual option agreements will vest in the following manner.
The first half of any option grant will vest upon the earlier of
the date of this offering and December 31, 2007. The next
two quarters will vest on December 31, 2008 and 2009,
respectively. For options under the share option plan, this will
be subject to the discretion of the option administrative
committee.
Option agreement. Options granted under our share option
plan will be evidenced by an option agreement that contains,
among other things, provisions concerning exercisability and
forfeiture upon termination of employment or consulting
arrangement, as determined by our board.
Option exercise. The term of options granted under our
share option plan or under individual option agreements may not
exceed five years from the date of grant. The consideration to
be paid for our shares upon exercise of an option or purchase of
shares underlying the option will be determined by the plan
administrator and may include a certified or cashier’s
check or consideration received by us under a cashless exercise
program implemented by us in connection with our share option
plan, or any combination of the foregoing methods of payment.
Third-party acquisition. If a third party acquires us
through the purchase of all or substantially all of our assets,
a merger or other business combination, all options or share
purchase rights will become fully vested and exercisable
immediately prior to such transaction.
Termination of plan. Unless terminated earlier, our share
option plan and options granted under individual option
agreements will expire in 2011. Our board of directors will have
the authority to amend or terminate our share option 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 share option plan administrator, or
(ii) affect the share option plan administrator’s
ability to exercise the powers granted to it under our share
option plan.
The following table sets forth information with respect to the
beneficial ownership, within the meaning of
Rule 13d-3 under
the Exchange Act, of our common shares, as of the date of this
prospectus, by:
Assumes that the underwriters do not exercise the over-allotment
option.
(2)
Beneficial ownership of each listed person is determined
assuming the conversion of all outstanding convertible preferred
shares held by such person into common shares and the exercise
of options held by such person within 60 days.
(3)
The percentage of beneficial ownership of each listed person
prior to this offering is based on (i) 102,032,635 common
shares outstanding, on an as-converted basis, as of the date of
this prospectus, including common shares convertible from our
convertible preferred shares and (ii) common shares
available upon the exercise of options convertible debt or
warrants held by such person within 60 days. The percentage
of beneficial ownership of each listed person after this
offering is based on (i) 136,648,481 shares
outstanding immediately after the closing of this offering,
including common shares issued in this offering and common
shares issued upon the conversion of all of our convertible
preferred shares and (ii) common shares available upon the
exercise of options or warrants held by such person within
60 days.
(4)
Includes 9,365,000 class A common shares owned by Dragon
Era Group Limited that are restricted. See “Description of
share capital”. The business address of Ms. Bush is
Rooms 3905-3909, Tower 1, Grand Gateway, 1 Hongqiao Lu, Shanghai
200030 People’s Republic of China. The 9,365,000
class A common shares held by Dragon Era Group Limited are
subject to staggered lock-up periods ranging up to five years
from June 13, 2006 with 3,000,000 class A common
shares vesting when the Securities and Exchange Commission
declares our registration statement on Form F-1, of which this
prospectus is a part, effective. 1,420,000 will vest on
June 13, 2008, 2,210,000 will vest on June 13, 2009,
2,210,000 will vest on June 13, 2010 and 525,000 will vest
on June 13, 2011.
(5)
Includes 3,464,772 class A common shares and 2,049,984
class A common shares exercisable per warrants beneficially
owned through Mr. Singhal’s beneficial ownership of
the equity of Sino Investment and 900,000 shares to be
granted to Mr. Singhal as compensation at the time of the
offering. The shareholders of Sino Investment are Mr. Singhal
and Sino (US) LLC. Mr. Singhal holds 89.4% of the equity of Sino
(US) LLC. The business address of Mr. Singhal is
Suite 2003-2005 Vicwood Plaza, 199 Des Voeux Road
Central, Hong Kong. Sino Investment has identified itself to us
as an affiliate of a broker-dealer and has represented to us
that it purchased the securities in the ordinary course of
business and at the time of such purchase, it had no agreement
or understanding, directly or indirectly, with any person to
distribute the securities.
(6)
Includes 350,000 class A common shares exercisable upon
options held by Mr. Zhu that are exercisable only upon IPO.
Does not include a further 350,000 options. See
“Description of share capital”. The business address
of Mr. Zhu is Rooms 3905-3909, Tower 1, Grand Gateway, 1
Hongqiao Lu, Shanghai 200030 People’s Republic of China.
(7)
Includes 350,000 class A common shares exercisable upon
options held by Mr. Earnshaw that are exercisable only upon
IPO. Does not include a further 350,000 options. See
“Description of share capital”. The business address
of Mr. Earnshaw is Rooms 3905-3909, Tower 1, Grand Gateway,
1 Hongqiao Lu, Shanghai 200030 People’s Republic of
China.
(8)
Includes 147,093 class A common shares exercisable upon
options held by Mr. Fan that are exercisable only upon IPO.
Does not include a further 147,093 options. See
“Description of share capital”. The business address
of Mr. Fan is Room 408, 55 Dong’an Menda Street,
Dongcheng District, Beijing, People’s Republic of China.
Includes 68,430 class A common shares exercisable upon
options held by Mr. Liu that are exercisable only upon IPO.
Does not include an additional 68,430 options. See
“Description of share capital”. The business address
of Mr. Liu is 1706 Tower A, Jing Song Qiao Fu Dun Center,
Beijing, People’s Republic of China.
(10)
Includes 125,053 class A common shares, and 270,491 class A
common shares exercisable upon options held by Mr. Yu or
41,316 class A common shares exercisable upon options held
by Xia Huai, Mr. Yu’s wife, that are exercisable only
upon IPO. Does not include an additional 270,491 options
held by Mr. Yu and 41,316 options held by Xia Huai.
See “Description of share capital”. The business
address of Mr. Yu is D-10, 798 Art Zone, 4 Jiu Xian
Qiao Road, Chaoyang District, Beijing, People’s Republic of
China.
(11)
Includes 1,613,169 class A common shares held as nominee
for members of the management team of Hyperlink and 167,630
class A common shares exercisable upon options held by
Mr. Xie that are exercisable only upon IPO. Does not
include an additional 167,630 options. See
“Description of share capital”. The business address
of Mr. Xie is 12th Floor, Xincheng Building, No. 167
Jiangning Road, Shanghai, People’s Republic of China.
(12)
Includes 56,588 class A common shares exercisable upon
options held by Mr. Zhao and 5,761,317 class A common
shares. These options are exercisable only upon IPO. Does not
include an additional 56,588 options. The business address
of Mr. Zhao’s business address is No. 7 Building
Xinghua Dongli, Heping Li Street, Dong Cheng District, Beijing,
People’s Republic of China.
(13)
Includes common shares and warrants held by all of our directors
and senior executive officers as a group.
(14)
Shares are class B common shares. See “Description of
share capital”. Xinhua Finance Limited is a public company
listed on the Mothers Board of the Tokyo Stock Exchange. The
business address of Xinhua Finance Limited is Suite 2003-2005
Vicwood Plaza, 199 Des Voeux Road Central, Hong Kong. The
holdings of our parent in our shares have decreased from 100%
holding at our founding.
(15)
Includes 15,585,254 convertible preferred shares and 3,832,543
class A common shares that may be issued upon conversion of
a convertible loan granted by Patriarch Partners Media Holdings,
LLC, or Patriarch Partners, to us. The convertible preferred
shares will convert into 16,134,320 common shares, assuming
there are no accrued and unpaid dividends and no change in the
conversion price. For a description of how Patriarch
Partners’ holdings in our shares have changed and other
information on the convertible loan and preferred shares, see
“Description of share capital” and “Related party
transactions— Transactions with Patriarch Partners—
Credit agreement among us, Patriarch Partners, Patriarch
Partners Agency Services, LLC and our direct subsidiaries, as
guarantors”. Lynn Tilton, in her capacity as the manager of
Patriarch Partners, may be deemed to share investment and voting
control over the shares held by Patriarch Partners.
Ms. Tilton disclaims beneficial ownership of the shares
owned by Patriarch Partners, except to the extent of her
pecuniary interest in Patriarch Partners. The business address
of Patriarch Partners is 40 Wall Street, 25th Floor, New York,
NY10005.
(16)
Includes 3,464,772 class A common shares and 2,049,984
class A common shares that may be issued upon the exercise
of warrants. The shareholders of Sino Investment are Mr. Shelly
Singhal and Sino (US) LLC, who share investment and voting power
over the shares held by Sino Investment. The registered address
of Sino Investment is Charlotte House, Charlotte Street, P.O.
Box N-341, Nassau,
Bahamas. Mr. Singhal holds 89.4% of the interest of Sino (US)
LLC. Sino Investment has identified itself to us as an affiliate
of a broker-dealer and has represented to us that it purchased
the securities in the ordinary course of business and at the
time of such purchase, it had no agreement or understanding,
directly or indirectly, with any person to distribute the
securities. Sino Investment has held these shares and warrants
since September 22, 2006. Sino Investment also owned the
shares and warrants now belonging to the Dennis L. Pelino Family
Trust, which were transferred on January 29, 2007.
(17)
Shares are class A common shares that are restricted,
Dragon Era Group Limited is owned by Fredy Bush’s family
trust. The business address of Dragon Era Group Limited is 31/F,
The Center, 99 Queens Road Central, Hong Kong. 3,000,000 of
these shares will vest upon the Securities and Exchange
Commission’s declaration of effectiveness of our
registration statement on
Form F-1, of which
this prospectus is a part. 1,420,000 will vest on June 13,2008, 2,210,000 will vest on June 13, 2009, 2,210,000 will
vest on June 13, 2010 and 525,000 will vest on
June 13, 2011. Fredy Bush was initially granted 11,050,000
restricted shares, the majority of which were transferred to
Dragon Era on November 30, 2006, and others of which were
transferred to other persons on November 20 and
December 20, 2006.
(18)
Shares are class A common shares held by Honour Rise
Services Limited, or Honour Rise, a wholly-owned subsidiary of
Shanghai Wai Gao Qiao Free Trade Zone Development Co., Ltd, or
Wai Gao Qiao. Wai Gao Qiao is a majority-owned subsidiary of
Shanghai Wai Gao Qiao (Group) Co., Ltd, a state-owned enterprise
in China. The business address of Wai Gao Qiao is
3rd Floor, No. 458, Fute Road North, Shanghai,
People’s Republic of China. The registered address of
Honour Rise is P.O. Box 957, Offshore Incorporations
Centre, Road Town, Tortola, British Virgin Islands. Honour Rise
has owned these shares since November 1, 2006.
(19)
Includes 3,464,772 class A common shares and 2,049,984 class A
common shares that may be issued upon the exercise of warrants.
The trustee is Mr. Dennis Pelino, who has investment and voting
power over the shares held by the trust. The registered address
of the trust is 118 West
4th
Court, Miami, FL33139. Mr. Pelino is an independent director of
our parent, Xinhua Finance Limited, and serves on its audit,
compensation and investment committees. Mr. Pelino also serves
on the board of Xinhua Financial Network Limited. These shares
and warrants were transferred from Sino Investment on
January 29, 2007.
As of the date of this prospectus, 15,585,254 convertible
preferred shares representing approximately 15.8% of our total
outstanding shares on an as-converted basis are held by one
record holder in the United States and 3,934,772 class A common
shares representing 3.9% of our total outstanding shares are
held by six record holders in the United States. In aggregate
19.7% of our common shares on an as-converted basis are held by
seven record holders in the United States.
Our common shares are divided into class A common shares
and class B common shares. Holders of class A common
shares are entitled to one vote per share, while holders of
class B common shares are entitled to ten votes per share.
We will issue class A common shares represented by our ADSs
in this offering. Holders of our class B common shares may
choose to convert their class B common shares into the same
number of class A common shares at any time. We are
controlled by our parent, Xinhua Finance Limited, the only
holder of our class B common shares, on an as-converted
basis, as of the date of this prospectus. Pursuant to a proxy
agreement entered into between Patriarch Partners and our parent
in July 2006, our parent granted to Patriarch Partners an
irrevocable proxy to vote, at any time after January 7,2009, our shares held by our parent. The proxy agreement will
terminate upon the completion of this offering. See
“Related party transactions — Transactions with
Patriarch Partners — Proxy agreement and amendment to
our Memorandum and Articles of Association”.
Contractual arrangements with our affiliated entities and
their shareholders
PRC laws and regulations currently limit foreign equity
ownership of companies that engage in media, advertising and
market research businesses. To comply with these foreign
ownership restrictions, we operate a substantial portion of our
businesses in China through a series of contractual arrangements
with our affiliated entities and their shareholders. For a
description of these contractual arrangements, see
“Corporate structure— Agreements that provide
effective control over our affiliated entities”,
“Corporate structure— Agreements that provide the
option to purchase the equity interest in the affiliated
entity” and “Corporate structure— Agreements that
transfer economic benefits to us”.
On September 13, 2006, we entered into a Group Services
Agreement with our parent. Under this agreement, certain
services shall be provided to us in exchange for a variable
charge. The services include a wide range of services including
management, human resources, finance, legal, corporate
communications, public relations, information technology and
administrative services. The agreement expires on
December 31, 2007 and is renewable for
two-year terms, and may
be terminated upon six months’ notice, upon material
breach, insolvency, or if we are no longer a controlled
subsidiary of our parent.
The variable charges for the Group Services Agreement are based
on several factors and calculated according to a formula, and
subject to a mark-up, initially agreed at 5%. For head office
costs, the charges are based on the product of the total head
office costs for the Xinhua Finance Limited group multiplied by
a fraction, the numerator of which is our revenue and the
denominator of which is the group’s revenue. For human
resources and administration charges, the charges are based on
the product of the total group human resources and
administration costs multiplied by a fraction, the numerator of
which is our headcount and the denominator of which is the
group’s headcount. For finance services charges, the
charges are based on the product of the total group finance
services costs multiplied by a fraction, the numerator of which
is our revenue plus operating costs and the denominator of which
is the group’s revenue plus operating costs. For legal
services charges, the charges are based on the product of the
total group legal services costs multiplied by a fraction, the
numerator of which is our revenue and the denominator of which
is the group’s revenue. For information technology charges,
the charges are based on the product of the total group
information technology costs multiplied by a fraction, the
numerator of which is our revenue plus operating costs and the
denominator of which is the group’s revenue plus operating
costs. In this formula, the operating costs are considered to be
all costs incurred in operations, excluding interest charges,
depreciation, amortization and taxes. On January 25, 2007,
the Group Services Agreement was amended to provide that charges
for 2006 under the agreement would not exceed $700,000 and for
subsequent years would not exceed $1.0 million.
On September 21, 2006, we entered into a Trademark License
Agreement with Xinhua Financial Network Limited, or Xinhua
Financial Network, our parent’s predecessor and now
subsidiary. Under this agreement, XFN granted us and our
subsidiaries a non-exclusive license worldwide to use certain
Xinhua trademarks in consideration for an annual license fee of
$50,000. The contract has a term of 15 years and expires on
September 20, 2021. Each party may terminate the agreement
if the other party commits a material non-remediable breach or a
material breach and fails to remedy it within 30 days upon
receiving written notice, becomes insolvent or bankrupt or if we
cease to be a subsidiary. We can not sublicense or assign any of
our rights under this agreement to any other parties without
obtaining prior written consent from Xinhua Financial Network.
There is no specific renewability provision.
The terms and prices of these transactions, taken as a whole,
were determined on an arm’s-length basis and we believe we
could have obtained comparable terms from independent third
parties.
Loan agreements between us and our parent or its
subsidiaries
On March 31, 2006, we issued a promissory note in the
amount of $38.2 million for the benefit of Xinhua Financial
Network and a promissory note in the amount of $68.5 million for
the benefit of our parent. Both notes are due on demand and the
interest rates are not specified. We issued the promissory notes
to borrow money from our parent and Xinhua Financial Network to
pay for the costs related to our acquisition from our parent of
equity interests our parent had held before March 31, 2006
in Xinhua Finance Advertising Limited, the contractual control
our parent had held before March 31, 2006 in Beijing
Century Media Culture Co., Ltd. and advances from our parent and
Xinhua Financial Network enabling us to acquire 19.0% equity
interests in Upper Step Holdings Limited, or Upper Step, and
Accord Group Investments Limited, or Accord Group.
On February 14, 2006, our subsidiary, EconWorld Media
Limited, or EconWorld Media, issued a promissory note in the
amount of $1,330,000 for the benefit of Xinhua Financial
Network, evidencing a loan in the same amount borrowed by
EconWorld Media for working capital purposes. The note was due
on June 30, 2006 and the interest rate was 4% per annum.
The loan was settled on June 9, 2006 by being set off
against the purchase price of $2.8 million for one share of
EconWorld Media. See “Management’s discussion and
analysis of financial condition and results of
operations—Acquisitions”.
On October 18, 2005, EconWorld Media issued a promissory
note in the amount of $300,000 for the benefit of Xinhua
Financial Network, evidencing a loan in the same amount borrowed
by EconWorld Media for working capital purposes. The note was
due on June 30, 2006 and the interest rate was 4% per
annum. The loan was settled on June 9, 2006 by being set
off against the purchase price of $2.8 million for one
share of EconWorld Media. See “Management’s discussion
and analysis of financial condition and results of
operations—Acquisitions”.
On November 7, 2005, EconWorld Media issued a promissory
note in the amount of $200,000 for the benefit of Xinhua
Financial Network, evidencing a loan in the same amount borrowed
by EconWorld Media for working capital purposes. The note was
due on June 30, 2006 and the interest rate was 4% per
annum. The loan was settled on June 9, 2006 by being set
off against the purchase price of $2.8 million for one
share of EconWorld Media. See “Management’s discussion
and analysis of financial condition and results of
operations—Acquisitions”.
On February 6, 2006, Beijing Century Media entered into a
loan agreement with Xinhua Financial Network (Beijing) Limited,
under which Beijing Century Media borrowed
RMB 3.0 million ($0.4 million) for working
capital. The loan does not carry interest and does not specify a
due date.
The terms of these loans were favorable to us as we are part of
the Xinhua Finance Limited group.
Transactions involving our acquisitions
See “Management’s discussion and analysis of financial
condition and results of operations—Acquisitions”. The
terms and pricing of each acquisition, taken as a whole, were
determined on an arm’s-length basis between the sellers and
the buyers and we believe the terms are comparable to terms that
could have been obtained from independent third parties.
However, we received assistance from our parent and Xinhua
Financial Network in executing these acquisitions and in certain
instances the acquisition target was initially acquired by our
parent and injected to us in exchange for certain consideration.
We received favorable terms from our parent and Xinhua Financial
Network as we are part of the Xinhua Finance Limited group.
Redesignation of our common shares held by our parent as
class B common shares
On May 19, 2006, we entered into an agreement with ABN Amro
Bank N.V., Shanghai Branch to secure a banking facility of
Xinhua Investment Consulting (Shanghai) Co., Ltd., or Xinhua
Investment Consulting. As of June 30, 2006 Xinhua Financial
Network pledged a collateral deposit in a total amount of
$4.1 million in respect of this banking facility with a
maximum borrowable amount of RMB 80.0 million
($10.3 million) to Xinhua Investment Consulting, which is a
subsidiary of Xinhua Financial Network. The underlying loan was
repayable on demand and we were contingently liable as a
guarantor. As of December 1, 2006, we are no longer a
guarantor with respect to the loan.
Transactions with Shanghai Wai Gao Qiao Free Trade Zone
Development Co., Ltd.
Shanghai Wai Gao Qiao Free Trade Zone Development Co., Ltd., or
Wai Gao Qiao, holds 6.4% of the equity interest in us via its
wholly-owned subsidiary, Honour Rise Services Limited. Wai Gao
Qiao has significant influence over us due to its shareholding
and our dependence on the strategic cooperation relationship
between us and its wholly-owned subsidiary, Shanghai Camera
Media Investment Co., Ltd., or Shanghai Camera, to carry out our
television broadcasting operations. The transactions we entered
into with Wai Gao Qiao and its subsidiaries, including, but not
limited to, Shanghai Camera, are treated as related party
transactions, as set forth below. The terms and prices of these
transactions, taken as a whole, were determined on an
arm’s-length basis and we believe we could have obtained
comparable terms from independent third parties.
Agreements in respect of shares in the Capital of Upper
Step Holdings Limited among us, Sino Investment Holdings
Limited, Sungolden Limited and its subsidiaries
We entered into a series of agreements pursuant to which we
purchased 19.0% of the shares of Upper Step Holdings Limited, or
Upper Step, from subsidiaries of Sungolden Limited, a subsidiary
of Wai Gao Qiao. Under these agreements, Sino Investment also
purchased 37.0% of the shares of Upper Step. These agreements
also included a non-interest bearing loan as part of the
consideration, to be repaid only with the unanimous consent of
the shareholders of Upper Step.
Agreement for Sale and Purchase of Shares between us and
Honour Rise Services Limited
Under this agreement, we purchased 20.0% of the shares of Accord
Group Investments and 44.0% of the shares of Upper Step from
Honour Rise Services Limited. See “—Private placement
and share restructuring”.
Agreements regarding Shanghai Camera Media Investment Co.,
Ltd.
See “Arrangements with partners and suppliers —
Agreements regarding Shanghai Camera”.
In addition, we have loaned $1.7 million to Shanghai Camera
for working capital purposes. The loan is effective for one year
beginning on March 28, 2006 and carries no interest. The
maximum amount drawable under the loan is
RMB 30.0 million ($3.8 million).
Transactions with Sino Investment Holdings
Shelly Singhal, our Chief Financial Officer, owns 89.4% of the
equity interest Sino (US) LLC, which holds 99.0% of the equity
interest of Sino Investment Holdings, or Sino Investment.
Mr. Singhal holds the remaining 1.0%. He is a member of the
board of directors of our parent and may also become one of our
directors. The transactions we entered into with Shelly Singhal
or entities controlled by Shelly Singhal, including, but not
limited to, Sino Investment, are treated as related party
transactions, as set forth below. The terms and prices of these
transactions, taken as a whole, were determined on an
arm’s-length basis, and we believe we could have obtained
comparable terms from independent third parties.
Transactions in which Sino Investment purchased its
shareholdings in Upper Step Holdings Limited from subsidiaries
of Sungolden Limited and sold its shareholdings in Upper Step
Holdings Limited and Accord Group Investments Ltd. to us in
exchange for our shares
See “Management’s discussion and analysis of financial
condition and results of operations-Acquisitions”,
“—Transactions with Shanghai Wai Gao Qiao Free Trade
Zone Development Co., Ltd.—Agreements in respect of shares
in the capital of Upper Step Holdings Limited among us, Sino
Investment Holdings Limited and Sungolden Limited and its
subsidiaries”, and “—Private placement and share
restructuring”.
Transaction with Patriarch Partners
Patriarch Partners Media Holdings, LLC and its affiliates held
7.5% of the equity interests of our parent as of June 30, 2006.
Patriarch Partners also holds 15,585,254 of our convertible
preferred shares, which will automatically convert into
16,134,320 class A common shares upon
the completion of this offering. The number of class A
common shares into which the convertible preferred shares will
convert, if converted upon consummation of this offering, is
determined by multiplying the number of convertible preferred
shares by $3.66 and adding any amounts for accrued and unpaid
dividends. The result is then divided by a conversion price,
which is initially $3.66 but may be adjusted upon certain
events. Since March 2006 we have been paying and plan to
continue to pay dividends on the convertible preferred shares
until June 30, 2007 in the amount of $1.7 million per
quarter. Under our Memorandum and Articles of Association,
Patriarch Partners, as a holder of our convertible preferred
shares, is entitled to vote on an “as converted” basis
together with the holders of our common shares. Moreover,
subject to certain exceptions, we must obtain prior written
consent from Patriarch Partners before, among other things,
incurring certain indebtedness or liens, entering into certain
transactions with shareholders or affiliates, entering into
certain merger agreements or issuing any common shares. On
September 19, 2006, we redeemed 819,672 convertible
preferred shares, with a face value of $3.0 million, held by
Patriarch Partners for a total consideration of $1.00. As the
result of its shareholding in us and our parent and the
influence over us conferred by our Memorandum and Articles of
Association, Patriarch Partners has significant influence over
us. The transactions we entered into with Patriarch Partners are
treated as related party transactions, as set forth below. The
terms and prices of these transactions, taken as a whole, were
determined on an arm’s-length basis, and we believe we
could have obtained comparable terms from independent third
parties.
On July 24, 2006, Patriarch Partners consented to the
amendment of our Memorandum and Articles of Association,
including the creation of class B common shares held by our
parent with ten votes per share. As consideration, our parent
granted to Patriarch Partners an irrevocable proxy over our
shares held by our parent. Under the proxy agreement, Patriarch
has the exclusive right to vote (or consent) with respect to the
shares held by our parent at any time after January 7,2009. Prior to that, our parent can exercise full voting power
with respect to its shares, and has agreed to vote to ensure
that Fredy Bush remains our sole director until this offering.
Furthermore, our parent has agreed not to sell, directly or
indirectly, any of our shares that it holds. This proxy
agreement terminates upon the completion of this offering.
Share purchase agreement between us and Patriarch
Partners
Patriarch Partners entered into a share purchase agreement with
us on March 16, 2006, agreeing to purchase 16,404,926 of
our convertible preferred shares for $60.0 million.
Patriarch Partners also agreed to purchase 5,468,309 additional
convertible preferred shares for $20.0 million, but did not
do so because we did not purchase additional assets for which
the additional $20.0 million was to be raised. The purchase
price was determined through our arm’s-length transaction
with Patriarch Partners.
In connection with our issuance and sale of convertible
preferred shares in March 2006, we entered into an investor
rights agreement and credit agreement with Patriarch Partners.
Investor rights agreement among us, Patriarch Partners and
our parent
Pursuant to an Investor Rights Agreement dated as of
March 16, 2006, we have granted Patriarch Partners and
certain holders of our common shares customary registration
rights,
including demand and piggyback registration rights and
Form F-3
registration rights. A total of 16,134,320 common shares of
our company are covered by registration rights, assuming all of
the outstanding preferred shares are converted, there are no
accrued and unpaid dividends and the conversion price is not
adjusted. For a detailed description of these rights, see
“Description of share capital— Registration
rights”. The number of shares covered by registration
rights may increase if Patriarch Partners owns more of our
shares, for instance, if it converts the loan under the credit
agreement described below into common shares. In addition, the
investor rights agreement grants Patriarch Partners preemptive
rights with respect to any issuance of equity securities issued
by us, which provision will terminate upon the completion of
this offering.
In the event our parent decides to transfer some of its
securities in us, it must give rights of
co-sale to Patriarch
Partners, so that Patriarch Partners may sell securities along
with our parent in the sale.
Credit agreement among us, Patriarch Partners, Patriarch
Partners Agency Services, LLC and our direct subsidiaries, as
guarantors
In connection with its purchase of the 16,404,926 convertible
preferred shares, Patriarch Partners and Patriarch Partners
Agency Services, LLC entered into a credit agreement with us and
our subsidiaries from time to time on March 16, 2006. Under
the credit agreement, we borrowed $10.0 million from
Patriarch Partners, an amount that is payable on
December 31, 2008. The interest payable on the loan is
LIBOR plus 2.75%. Patriarch Partners may convert any outstanding
principal and accrued and unpaid interest into our class A
common shares at any time, at an initial conversion ratio of
$3.657438 per common share, subject to certain anti-dilution
adjustments. The outstanding principal and accrued and unpaid
interest will be converted automatically into class A
common shares upon this offering. Pursuant to this agreement, we
also entered into pledge and security agreements pledging the
shares of certain of our subsidiaries and granting security over
our property, including shares and intellectual property, and
over the property of certain of our subsidiaries. On September20, 2006, the credit agreement was amended to provide for
additional interest in the aggregate amount of
$3.0 million, which is expected to result in the issuance
of an additional 820,246 class A common shares upon
the conversion of the loan. This amendment was executed one day
after the redemption of 819,672 convertible preferred shares
mentioned above.
Advisory agreement among us, our parent, and Patriarch
Partners Management Group, LLC
We and our parent entered into an advisory agreement with
Patriarch Partners Management Group, LLC on April 18, 2006
under which Patriarch Partners Management Group, LLC is to act
as advisor to us and our parent in making acquisitions of the
majority of stock or assets in target companies. We and our
parent agreed to pay a success fee to Patriarch Partners
Management Group, LLC for each successful acquisition in an
amount to be mutually agreed by the parties, and not to exceed
$5.0 million. As of June 30, 2006, we had paid
$3.5 million in fees under this agreement. The agreement
terminates on April 18, 2007.
On September 22, 2006, we issued 125,053 class A
common shares to Yu Gang in exchange for his entering into a
Deed of Non-Competition Undertaking and Release with us. Under
the Deed of Non-Competition Undertaking and Release, Yu Gang
promised that he will not compete with us or Beijing Century
Advertising Co., Ltd., or Century Media Advertising, for a term
of four years. The terms of this non-competition agreement,
including the price paid by us, when taken as a whole with the
acquisition of 20% of the equity interest in Century Media
Advertising by our controlled shareholder described below, were
determined on an arm’s length basis, and we believe the
terms are comparable to terms we could obtain from independent
third parties.
On September 22, 2006, we issued 1,613,169 class A
common shares to Stephen Xie Wei, in exchange for his entering
into a Deed of Non-Competition Undertaking and Release with us.
Under the Deed of Non-Competition Undertaking and Release,
Stephen Xie Wei promised that he will not compete with us or
Hyperlink for a term of four years. The terms of this
non-competition agreement, including the price paid by us, when
taken as a whole with the acquisition of 49% of the equity
interest in Hyperlink by us through Beijing Taide described
below, were determined on an arm’s length basis, and we
believe the terms are comparable to terms we could obtain from
independent third parties.
On September 22, 2006, we issued
5,761,317 class A common shares to Zhao Li, in
exchange for his entering into a Deed of Non-Competition
Undertaking and Release with us. Under the Deed of
Non-Competition Undertaking and Release, Zhao Li promised that
he will not compete with us or Economic Observer Advertising for
a term of four years. The terms of this non-competition
agreement, including the price paid by us, when taken as a whole
with the acquisition of 50% of the equity interest in Economic
Observer Advertising by us through Beijing Taide in September
2006, were determined on an arm’s length basis, and we
believe the terms are comparable to terms we could obtain from
independent third parties. See “Management’s
discussion and analysis of financial condition and results of
operations — Acquisitions”.
See “Risk factors—Risks related to doing business in
China— The approval of the China Securities Regulatory
Commission, or the CSRC, may be required in connection with this
offering under a recently adopted PRC regulation; any
requirement to obtain prior CSRC approval could delay this
offering and a failure to obtain this approval, if required, may
create uncertainties for this offering and could have a material
adverse effect on our business, operating results, reputation,
prospects and trading price of our ADSs; the regulation also
establishes more complex procedures for acquisitions conducted
by foreign investors which could make it more difficult to
pursue growth through acquisitions”.
Private placement and share restructuring
On March 16, 2006, we entered into a share purchase
agreement with Patriarch Partners to sell 16,404,926 convertible
preferred shares to Patriarch Partners, at a price per share
equal to $3.66 for an aggregate purchase price of approximately
$60.0 million.
On September 22, 2006, we issued 4,099,968 warrants and
6,478,437 class A common shares and our parent paid
$9.1 million to Sino Investment Holdings Limited, or Sino
Investment, the 37.0% shareholder of our subsidiary Upper Step,
and the 61.0% shareholder of Accord Group,
another subsidiary of ours, in exchange for its shareholdings in
Upper Step, and 451,107 class A common shares in exchange
for its shareholdings in Accord Group. The warrants are
exercisable at an initial price of $3.659 per share. In
addition, Sino Investment issued a demand promissory note to us
in the amount of $7.9 million as part of this transaction,
which note has no specified interest rate. The warrants are
immediately exercisable and valid for a period of five years.
On November 1, 2006, we issued 6,407,018 class A
common shares to Honour Rise Services Limited (Hong Kong), a
wholly-owned subsidiary of Wai Gao Qiao, and the 44.0%
shareholder of our subsidiary Upper Step and 20.0% shareholder
of our subsidiary Accord Group, and paid $10.0 million in
exchange for its shareholdings in Upper Step and
125,053 shares in exchange for its shareholdings in Accord
Group.
On July 24, 2006, we redesignated the 42,614,289 shares of
our common shares held by Xinhua Finance Limited, our parent as
class B common shares.
Acquisitions
On March 23, 2006, Yu Gang, then the 20.0% shareholder of
Beijing Century Advertising Co., Ltd., or Century Media
Advertising, and the President of our media production group,
transferred 3.8% of his equity interest in Century Media
Advertising to our controlled shareholder of Century Media
Advertising for a price of RMB114,000 ($15,000) and 16.2% equity
interest to Xia Huai, his wife, for RMB486,000 ($62,000).
On September 15, 2006, Xia Huai, the 16.2% shareholder of our
affiliated entity Century Media Advertising and wife of Yu Gang
transferred her 16.2% equity interest in Century Media
Advertising to our controlled shareholder of Century Media
Advertising for an aggregate price of RMB510,000 ($65,000).
The terms of this acquisition from Yu Gang and Xia Huai,
including the prices paid by us, when taken as a whole with the
non-competition agreement between Yu Gang and us described
above, were determined on an arm’s length basis, and we
believe the terms are comparable to terms we could obtain from
independent third parties.
On September 18, 2006, Stephen Xie Wei, 39.2% shareholder
of Hyperlink, and Lu Qin Yong, 9.8% shareholder of Hyperlink,
both members of the management team of Hyperlink, transferred
their aggregate 49.0% of the equity interest in Hyperlink to us
in exchange for an aggregate price of RMB245,000 ($31,000). The
terms of the acquisitions from Stephen Xie Wei and Lu Qin Yong,
including the price paid by us, when taken as a whole with the
non-competition agreement between Stephen Xie Wei and us
described above, were determined on an arm’s length basis,
and we believe the terms are comparable to terms we could obtain
from independent third parties.
See “Risk factors— Risks related to doing business in
China— The approval of the China Securities Regulatory
Commission, or the CSRC, may be required in connection with this
offering under a recently adopted PRC regulation; any
requirement to obtain prior CSRC approval could delay this
offering and a failure to obtain this approval, if required, may
create uncertainties for this offering and could have a material
adverse effect on our business, operating results, reputation,
prospects and trading price of our ADSs; the regulation also
establishes more complex procedures for acquisitions conducted
by foreign investors which could make it more difficult to
pursue growth through acquisitions”.
We are a Cayman Islands company and our affairs are governed by
our Memorandum and Articles of Association and the Companies Law
(2004 Revision) of the Cayman Islands, which is referred to as
the Companies Law below.
As of December 31, 2006 and as of the date of this
prospectus, our authorized share capital consists of 69,035,751
class A common shares, 50,054,619 class B common
shares, and 15,600,000 preferred shares with a par value of
$0.001 each. As of December 31, 2006 and as of the date of
this prospectus, there are 32,011,154 class A common
shares, 50,054,618 class B common shares and 15,585,254
convertible preferred shares issued and outstanding. As of
December 31, 2005, there were 50,000 authorized common
shares of par value $1.00 each and one outstanding. Upon
completion of this offering, there will be 143,822,874
class A common shares, 50,054,619 class B common
shares and 806,122,507 undesignated common shares authorized.
Upon the closing of this offering, we will adopt an amended and
restated memorandum and articles of association. The following
are summaries of material provisions of our proposed amended and
restated memorandum and articles of association and the
Companies Law insofar as they relate to the material terms of
our common shares that we expect will become effective upon the
closing of this offering.
Common shares
General. All of our outstanding common shares are fully
paid and non-assessable. Our common shares are issued in
registered form. Our shareholders who are non-residents of the
Cayman Islands may freely hold and vote their shares.
Dividends. The holders of our common shares are entitled
to such dividends as may be declared by our board of directors
subject to the Companies Law.
Voting rights. Each class A common share is entitled
to one vote on all matters upon which the common shares are
entitled to vote, and each class B common share is entitled
to ten votes. Voting at any meeting of shareholders is by show
of hands unless a poll is demanded. A poll may be demanded by
(i) the chairman of the meeting or (ii) at least three
shareholders present in person or, in the case of a shareholder
being a corporation, by its duly authorized representative or by
proxy for the time being entitled to vote at the meeting or
(iii) any shareholder or shareholders present in person or,
in the case of a shareholder being a corporation, by its duly
authorized representative or by proxy and representing not less
than one tenth of the total voting rights of all the
shareholders having the right to vote at the meeting or
(iv) a shareholder or shareholders present in person or, in
the case of a shareholder being a corporation, by its duly
authorized representative or by proxy and holding our shares
conferring a right to vote at the meeting being shares on which
an aggregate sum has been paid equal to not less than one tenth
of the total sum paid up on all the shares conferring that right
or (v) if required by the rules of the designated stock
exchange, by any director or directors who, individually or
collectively, hold proxies in respect of shares representing 5%
or more of the total voting rights at such meeting.
A quorum required for a meeting of shareholders consists of at
least two shareholders present in person or by proxy or, if a
corporation or other non-natural person, by its duly authorized
representative. The shareholders must represent at least
one-third of the total issued common shares in our company.
Shareholders’ meetings are held annually and may be
convened by our board of directors on its own initiative or upon
a request to the directors by shareholders holding in aggregate
at least 10% of our voting share capital. Advance notice of at
least ten clear days is required for the convening of our annual
general meeting and other shareholders’ meetings.
An ordinary resolution to be passed by the shareholders requires
the affirmative vote of a simple majority of the votes attaching
to the common shares cast in a general meeting, while a special
resolution requires the affirmative vote of no less than
two-thirds of the votes cast attaching to the common shares. A
special resolution is required for important matters such as a
change of name and amendments to our Memorandum and Articles of
Association. Holders of the common shares may effect certain
changes by ordinary resolution, including alter the amount of
our authorized share capital, consolidate and divide all or any
of our share capital into shares of larger amount than our
existing share capital, and cancel any shares.
Transfer of shares. Subject to the restrictions of our
Memorandum and Articles of Association, as applicable, any of
our shareholders may transfer all or any of his or her common
shares by an instrument of transfer in the usual or common form
or any other form approved by our board.
Our board of directors may, in its absolute discretion, decline
to register any transfer of any common share which is not fully
paid up or on which we have a lien. Our directors may also
decline to register any transfer of any common share unless
(a) the instrument of transfer is lodged with us,
accompanied by the certificate for the common shares to which it
relates and such other evidence as our board of directors may
reasonably require to show the right of the transferor to make
the transfer; (b) the instrument of transfer is in respect
of only one class of common shares; (c) the instrument of
transfer is properly stamped, if required; (d) in the case
of a transfer to joint holders, the number of joint holders to
whom the common share is to be transferred does not exceed four;
(e) the shares conceded are free of any lien in favor of
us; or (f) a fee of such maximum sum as the Nasdaq Global
Market may determine to be payable, or such lesser sum as our
board of directors may from time to time require, is paid to us
in respect thereof.
If our directors refuse to register a transfer they shall,
within two months after the date on which the instrument of
transfer was lodged, send to each of the transferor and the
transferee notice of such refusal. The registration of transfers
may, on notice being given by advertisement in such one or more
newspapers or by electronic means, be suspended and the register
closed at such times and for such periods as our board of
directors may from time to time determine, provided, however,
that the registration of transfers shall not be suspended nor
the register closed for more than 30 days in any year.
Liquidation. On a return of capital on winding up or
otherwise (other than on conversion, redemption or purchase of
shares), assets available for distribution among the holders of
common shares shall be distributed among the holders of the
common shares on a pro rata basis. If our assets available for
distribution are insufficient to repay all of the paid-up
capital, the assets will be distributed so that the losses are
borne by our shareholders proportionately.
Calls on shares and forfeiture of shares. Our board of
directors may from time to time make calls upon shareholders for
any amounts unpaid on their shares in a notice served to such
shareholders at least 14 days prior to the specified time
and place of payment. The shares that have been called upon and
remain unpaid on the specified time are subject to forfeiture.
Redemption of shares. Subject to the provisions of the
Companies Law, we may issue shares on terms that are subject to
redemption, at our option or at the option of the holders, on
such terms and in such manner as may be determined by special
resolution.
Variations of rights of shares. All or any of the special
rights attached to any class of shares may, subject to the
provisions of the Companies Law, be varied either with the
written consent of the holders of three-fourths of the issued
shares of that class or with the sanction of a special
resolution passed at a general meeting of the holders of the
shares of that class.
Inspection of books and records. Holders of our common
shares will have no general right under Cayman Islands law to
inspect or obtain copies of our list of shareholders or our
corporate records. However, we will provide our shareholders
with annual audited financial statements. See “Where you
can find additional information”.
History of securities issuances
The following is a summary of our securities issuances since our
inception in November 2005.
Shares issued to our parent. On November 7, 2005,
the date of our inception, we issued one share to our
parent, Xinhua Finance Limited. On January 12, 2006, we
issued one share to our parent. These two shares were
subsequently divided into 1,000 shares each on March 24,2006. On March 16, 2006, we issued 42,612,289 shares
to our parent, and on September 21, 2006 we issued
7,440,329 shares to our parent.
Convertible preferred shares and convertible debt. We
issued 16,404,926 convertible preferred shares and debt
initially convertible into 2,734,154 class A common shares
to Patriarch Partners Media Holdings, LLC, or Patriarch
Partners, on March 16, 2006. On September 19, 2006, we
redeemed 819,672 of these shares. On September 20, 2006, we
amended the terms of our credit agreement with Patriarch
Partners so that the debt is convertible for 3,554,401
class A common shares plus common shares for accrued and
unpaid interest. See “Related party transactions—
Transactions with Patriarch Partners— Share purchase
agreement between us and Patriarch Partners” and
“Related party transactions— Private placement and
share restructuring”.
Class A common shares to Fredy Bush. We issued
11,050,000 class A common shares to Fredy Bush on
June 13, 2006. The shares are subject to staggered lock-up
periods ranging up to five years from the date of issuance.
On November 20, 2006, Ms. Bush transferred 635,000 of the
shares that vest in 2007 to certain third parties unrelated to
us, which are subject to
lock-up until
June 13, 2011. On December 20, 2006, Dragon Era Group
Limited, which is owned by Fredy Bush’s family trust and
holds the shares beneficially owned by Ms. Bush,
transferred 1,050,000 of the shares that vest in 2007 to certain
third parties unrelated to us. These shares are also subject to
lock-up until
June 13, 2011. Of the shares held by Dragon Era,
3.0 million are subject to
lock-up until the
Securities and Exchange Commission’s declaration of
effectiveness of our registration statement on
Form F-1, of which
this prospectus is a part, 1,420,000 are subject to
lock-up until
June 13, 2008, 2,210,000 are subject to
lock-up until
June 13, 2009, 2,210,000 are subject to
lock-up until
June 13, 2010, and 525,000 are subject to
lock-up until
June 13, 2011.
Private placement and share restructuring. We issued
14,429,083 class A common shares and 4,099,968 warrants
exercisable for class A common shares to various persons
and entities on September 22, 2006 and 6,532,071
class A common shares on November 1, 2006 as described
in “Related party transactions— Private placement and
share restructuring”.
Option grants. We have entered into individual option
agreements for an aggregate of 11,198,180 share options in
order to attract and retain the best available personnel for
positions of substantial responsibility, provide additional
incentive to employees, directors and consultants and promote
the success of our business. Options representing an aggregate
of 500,039 common shares have been cancelled due to termination
of employment. These option agreements were entered on
July 11, 2006. We have reserved class A common shares
amounting to approximately 11.0% of our total outstanding common
shares and convertible preferred shares as of the date of this
prospectus for issuance under these option agreements.
Warrants to Billy Kung. We issued 630,000 warrants
exercisable for class A common shares to Billy Kung, an
independent consultant, on December 7, 2006 for consulting
work carried out by him for us. The shares are subject to a
lock-up period of five
years which commenced on December 21, 2006.
Warrants to Ken Chen. We issued 221,280 warrants
exercisable for class A common shares to Ken Chen, a former
employee, on January 15, 2007 as compensation for past
services.
Differences in corporate law
The Companies Law is modeled after that of the United Kingdom
but does not follow recent United Kingdom statutory enactments.
In addition, the Companies Law differs from laws applicable to
United States corporations and their shareholders. Set forth
below is a summary of the significant differences between the
provisions of the Companies Law applicable to us and the laws
applicable to companies incorporated in the United States and
their shareholders.
Mergers and similar arrangements. Cayman Islands law does
not provide for mergers as that expression is understood under
United States corporate law. However, there are statutory
provisions that facilitate the reconstruction and amalgamation
of companies, provided that the arrangement is approved by a
majority in number of each class of shareholders and creditors
with whom the arrangement is to be made, and who must in
addition represent three-fourths in value of each such class of
shareholders or creditors, as the case may be, that are present
and voting either in person or by proxy at a meeting, or
meetings, convened for that purpose. The convening of the
meetings and subsequently the arrangement must be sanctioned by
the Grand Court of the Cayman Islands. While a dissenting
shareholder has the right to express to the court the view that
the transaction ought not to be approved, the court can be
expected to approve the arrangement if it determines that:
•
the statutory provisions as to majority vote have been met;
•
the shareholders have been fairly represented at the meeting in
question;
•
the arrangement is such that a businessman would reasonably
approve; and
•
the arrangement is not one that would more properly be
sanctioned under some other provision of the Companies Law.
When a take-over offer is made and accepted by holders of 90.0%
of the shares within four months, the offeror may, within a two
month period, require the holders of the remaining shares to
transfer such shares on the terms of the offer. An objection can
be made to the Grand Court of the Cayman Islands but this is
unlikely to succeed unless there is evidence of fraud, bad faith
or collusion.
If the arrangement and reconstruction is thus approved, the
dissenting shareholder would have no rights comparable to
appraisal rights, which would otherwise ordinarily be available
to dissenting shareholders of United States corporations,
providing rights to receive payment in cash for the judicially
determined value of the shares.
Shareholders’ suits. We are not aware of any
reported class action or derivative action having been brought
in a Cayman Islands court. In principle, we will normally be the
proper plaintiff and a derivative action may not be brought by a
minority shareholder. However, based on English authorities,
which would in all likelihood be of persuasive authority in the
Cayman Islands, exceptions to the foregoing principle apply in
circumstances in which:
•
a company is acting or proposing to act illegally or ultra vires;
•
the act complained of, although not ultra vires, could be
effected if duly authorized by more than a simple majority vote
which has not been obtained; and
•
those who control the company are perpetrating a “fraud on
the minority”.
Registration rights
Pursuant to our investor rights agreement entered into on
March 16, 2006 with Patriarch Partners, we have granted
certain registration rights to holders of our registrable
securities, which include our convertible preferred shares and
common shares converted from our convertible preferred shares
held by Patriarch Partners. Set forth below is a description of
the registration rights granted under the agreement.
Demand registration rights. At any time commencing
180 days after this offering, holders of registrable
securities representing 2% of the outstanding common shares have
the right to demand that we file a registration statement
covering the offer and sale of their securities with anticipated
aggregate proceeds in excess of $5.0 million. We are
required to use our reasonable best efforts to have the related
registration statement declared effective and remain effective
for 180 days or until all the registered shares are sold.
We, however, are not obligated to effect a demand registration
(1) if we have already effected two demand registrations or
(2) during the period beginning on the 60th day prior
to our good faith estimate of the filing date of, and ending on
the 180th day after the effective date of, a public
offering of our securities initiated by us. We have the right to
defer filing of a registration statement for up to 90 days
if we provide the requesting holders a certificate signed by
either our Chief Executive Officer, Chief Financial Officer,
President or Vice-President (or equivalent) or Chairman of the
board of directors stating that in the good faith judgment of
the board of directors that filing of a registration statement
will be detrimental to our business and affairs due to the
public disclosure of certain material information that would be
required to be included in the registration statement, but we
cannot exercise the deferral right more than twice in any
12 month period.
Piggyback registration rights. If we propose to file a
registration statement for a public offering of our securities
then we must offer holders of registrable securities an
opportunity to include in the registration all or any part of
their registrable securities. We must use our reasonable best
efforts to include these shares in the registration statement.
Form F-3 or S-3
registration rights. When we are eligible to use
Form F-3 or S-3,
holders of registrable securities representing 2% of the
outstanding common shares have the right to request that we file
a registration statement under
Form F-3 or S-3.
We are required to use our reasonable best efforts to have the
related registration statement declared effective and remain
effective until the registered shares are sold or can be sold
freely under Rule 144 of the Securities Act without volume
limitations. We may defer filing of a registration statement on
Form F-3 or S-3
for up to 90 days if we provide the requesting holders a
certificate signed by either our Chief Executive Officer, Chief
Financial Officer, President or Vice-President (or equivalent)
or Chairman of the board of directors stating that in the good
faith judgment of the board of directors that filing such a
registration statement will be detrimental to our business and
affairs due to the public disclosure of certain material
information that would be required to be included in the
registration statement, but we cannot exercise the deferral
right more than twice in any 12 month period. We are not
obligated to file a registration statement on
Form F-3 or S-3 if
the holders propose to sell registrable securities and such
other securities (if any) at an aggregate public price of less
than $1.0 million, net of any underwriters’ discounts
or commissions.
Expenses of registration. We will pay all expenses, other
than underwriting discounts, selling commissions and stock
transfer taxes, relating to any demand, piggyback or F-3 or
S-3 registration,
including all registration, filing and qualification fees,
printers’ and accounting fees, fees and disbursement of
counsel for us and the reasonable fees and disbursements of one
counsel for the selling holders.
The Bank of New York, as depositary, will register and deliver
American depositary shares, or ADSs. Each ADS will represent
two shares (or a right to receive two shares)
deposited with the principal Hong Kong office of the Hong Kong
and Shanghai Banking Corporation Limited, as custodian for the
depositary. Each ADS will also represent any other securities,
cash or other property which may be held by the depositary. The
depositary’s corporate trust office at which the ADSs will
be administered is located at 101 Barclay Street, New York,
New York10286. The Bank of New York’s principal executive
office is located at One Wall Street, New York, New York10286.
You may hold ADSs either (A) directly (i) by having an
American depositary receipt, which is a certificate evidencing a
specific number of ADSs, registered in your name, or
(ii) by holding ADSs in the Direct Registration System, or
(B) indirectly through your broker or other financial
institution. If you hold ADSs directly, you are an ADS holder.
This description assumes you hold your ADSs directly. If you
hold the ADSs indirectly, you must rely on the procedures of
your broker or other financial institution to assert the rights
of ADR holders described in this section. You should consult
with your broker or financial institution to find out what those
procedures are.
The Direct Registration System, or DRS, is a system administered
by The Depository Trust Company, or DTC, under which the
depositary may register the ownership of uncertificated ADSs.
That ownership will be evidenced by periodic statements sent by
the depositary to the ADS holders entitled to them.
As an ADS holder, we will not treat you as one of our
shareholders and you will not have shareholder rights. Cayman
Islands law governs shareholder rights. The depositary will be
the holder of the shares underlying your ADSs. As a holder of
ADSs, you will have ADS holder rights. A deposit agreement among
us, the depositary and you, as an ADS holder, and the beneficial
owners of ADSs set out ADS holder rights as well as the rights
and obligations of the depositary. New York law governs the
deposit agreement and the ADSs.
The following is a summary of the material provisions of the
deposit agreement. For more complete information, you should
read the entire deposit agreement and the form of American
Depositary Receipt. For directions on how to obtain copies of
those documents, please see “Where you can find additional
information”.
Dividends and other distributions
How will you receive dividends and other distributions on
the shares?
The depositary has agreed to pay to you the cash dividends or
other distributions it or the custodian receives on shares or
other deposited securities, after deducting its fees and
expenses. You will receive these distributions in proportion to
the number of shares your ADSs represent.
•
Cash. The depositary will convert any cash
dividend or other cash distribution we pay on the shares into
U.S. dollars, if it can do so on a reasonable basis and can
transfer the U.S. dollars
to the United States. If that is not possible or if any
government approval is needed and can not be obtained, the
deposit agreement allows the depositary to distribute the
foreign currency only to those ADR holders to whom it is
possible to do so. It will hold the foreign currency it cannot
convert for the account of the ADS holders who have not been
paid. It will not invest the foreign currency and it will not be
liable for any interest.
Before making a distribution, any withholding taxes or other
governmental charges that must be paid will be deducted. See
“Taxation”. It will distribute only whole
U.S. dollars and cents and will round fractional cents to
the nearest whole cent. If the exchange rates fluctuate
during a time when the depositary cannot convert the foreign
currency, you may lose some or all of the value of the
distribution.
•
Shares.The depositary may distribute
additional ADSs representing any shares we distribute as a
dividend or free distribution. The depositary will only
distribute whole ADSs. It will sell shares which would require
it to deliver a fractional ADS and distribute the net proceeds
in the same way as it does cash. If the depositary does not
distribute additional ADSs, the outstanding ADSs will also
represent the new shares. The depositary may sell a portion of
the distributed shares sufficient to pay its fees and expenses
in connection with that distribution.
•
Rights to purchase additional shares.If we
offer holders of our securities any rights to subscribe for
additional shares or any other rights, the depositary may make
these rights available to you. If the depositary decides it is
not legal and practical to make the rights available but that it
is practical to sell the rights, the depositary will use
reasonable efforts to sell the rights and distribute the
proceeds in the same way as it does with cash. The depositary
will allow rights that are not distributed or sold to lapse.
In that case, you will receive no value for them.
If the depositary makes rights available to you, it will
exercise the rights and purchase the shares on your behalf. The
depositary will then deposit the shares and deliver ADSs to you.
It will only exercise rights if you pay it the exercise price
and any other charges the rights require you to pay.
U.S. securities laws may restrict transfers and
cancellation of the ADSs represented by shares purchased upon
exercise of rights. For example, you may not be able to trade
these ADSs freely in the United States. In this case, the
depositary may deliver restricted depositary shares that have
the same terms as the ADRs described in this section except for
changes needed to put the necessary restrictions in place.
•
Other distributions.The depositary will
send to you anything else we distribute on deposited securities
by any means it thinks is legal, fair and practical. If it
cannot make the distribution in that way, the depositary has a
choice. It may decide to sell what we distributed and distribute
the net proceeds, in the same way as it does with cash. Or, it
may decide to hold what we distributed, in which case ADSs will
also represent the newly distributed property. However, the
depositary is not required to distribute any securities (other
than ADSs) to you unless it receives satisfactory evidence from
us that it is legal to make that distribution. The depositary
may sell a portion of the distributed securities or property
sufficient to pay its fees and expenses in connection with that
distribution.
The depositary is not responsible if it decides that it is
unlawful or impractical to make a distribution available to any
ADS holders. We have no obligation to register ADSs, shares,
rights or other securities under the Securities Act. We also
have no obligation to take any other action to permit the
distribution of ADSs, shares, rights or anything else to ADS
holders. This
means that you may not receive the distributions we make on
our shares or any value for them if it is illegal or impractical
for us to make them available to you.
Deposit, withdrawal and cancellation
How are ADSs issued?
The depositary will deliver ADSs if you or your broker deposit
shares or evidence of rights to receive shares with the
custodian. Upon payment of its fees and expenses and of any
taxes or charges, such as stamp taxes or stock transfer taxes or
fees, the depositary will register the appropriate number of
ADSs in the names you request and will deliver the ADSs to or
upon the order of the person or persons entitled to them.
How do ADS holders cancel an ADS?
You may turn in your ADSs at the depositary’s corporate
trust office. Upon payment of its fees and expenses and of any
taxes or charges, such as stamp taxes or stock transfer taxes or
fees, the depositary will deliver the shares and any other
deposited securities underlying the ADSs to you or a person you
designate at the office of the custodian. Or, at your request,
risk and expense, the depositary will deliver the deposited
securities at its corporate trust office, if feasible.
How do ADS holders interchange between certificated ADSs
and uncertificated ADSs?
You may surrender your ADR to the depositary for the purpose of
exchanging your ADR for uncertificated ADSs. The depositary will
cancel that ADR and will send you a statement confirming that
you are the owner of uncertificated ADSs. Alternatively, upon
receipt by the depositary of a proper instruction from a holder
of uncertificated ADSs requesting the exchange of uncertificated
ADSs for certificated ADSs, the depositary will execute and
deliver to you an ADR evidencing those ADSs.
Voting rights
How do you vote?
ADS holders may instruct the depositary to vote the number of
deposited shares their ADSs represent. The depositary will
notify ADS registered holders of shareholders’ meetings and
arrange to deliver our voting materials to them if we ask it to.
Those materials will describe the matters to be voted on and
explain how ADS registered holders may instruct the depositary
how to vote. For instructions to be valid, they must reach the
depositary by a date set by the depositary. Otherwise, you
will not be able to exercise your right to vote unless you
withdraw the shares. However, you may not know about the meeting
enough in advance to withdraw the shares.
The depositary will try, as far as practical, subject to the
laws of Cayman Islands and the Memorandum and Articles of
Association, to vote or to have its agents vote the shares or
other deposited securities as you instruct. The depositary will
only vote or attempt to vote as you instruct or as described
below.
We cannot assure you that you will receive the voting materials
in time to ensure that you can instruct the depositary to vote
your shares. In addition, the depositary and its agents are not
responsible for failing to carry out voting instructions or for
the manner of carrying out voting instructions. This means
that you may not be able to exercise your right to vote and
there may be nothing you can do if your shares are not voted as
you requested.
If we timely asked the depositary to solicit your instructions
and the depositary does not receive voting instructions from you
by the specified date, it will consider you to have authorized
and directed it to give a discretionary proxy to a person
designated by us to vote the number of deposited securities
represented by your ADSs. The depositary will give a
discretionary proxy in those circumstances to vote on all
questions to be voted upon unless we notify the depositary that:
•
we do not wish to receive a discretionary proxy;
•
we think there is substantial shareholder opposition to the
particular question; or
•
we think the particular question would have an adverse impact on
our shareholders.
In order to give you a reasonable opportunity to instruct the
depositary as to the exercise of voting rights relating to
deposited securities, if we request the depositary to act, we
will try to give the depositary notice of any such meeting and
details concerning the matters to be voted upon at least
45 days in advance of the meeting date.
Fees and expenses
Persons depositing or withdrawing
shares must pay:
For:
$5.00 (or less) per 100 ADSs
• Issuance of ADSs, including issuances resulting
from a
(or portion of 100 ADSs)
distribution of shares or rights or other property
• Cancellation of ADSs for the purpose of withdrawal,
including if the deposit agreement terminates
$0.02 (or less) per ADS
• Any cash distribution to you
A fee equivalent to the fee that would be payable if securities
distributed to you had been shares and the shares had been
deposited for issuance of ADSs
• Distribution of securities distributed to holders
of deposited securities which are distributed by the depositary
to ADS holders
$0.02 (or less) per ADS per calendar year
• Depositary services
Registration or transfer fees
• Transfer and registration of shares on our share
register to or from the name of the depositary or its agent when
you deposit or withdraw shares
• Cable, telex and facsimile transmissions (when
expressly provided in the deposit agreement)
• converting foreign currency to U.S. dollars
Taxes and other governmental charges the depositary or the
custodian have to pay on any ADS or share underlying an ADS, for
example, stock transfer taxes, stamp duty or withholding taxes
• As necessary
Any charges incurred by the depositary or its agents for
servicing the deposited securities
• As necessary
The Bank of New York, as depositary, has agreed to reimburse us
for certain expenses we incur that are related to establishment
and maintenance of the ADS program, including investor relations
expenses and stock market application and listing fees. There
are limits on the amount of expenses for which the depositary
will reimburse us, but the amount of reimbursement available to
us is not related to the amount of fees the depositary collects
from investors.
The depositary collects its fees for delivery and surrender of
ADSs directly from investors depositing shares or surrendering
ADSs for the purpose of withdrawal or from intermediaries acting
for them. The depositary collects fees for making distributions
to investors by deducting those fees from the amounts
distributed or by selling a portion of distributable property to
pay the fees. The depositary may collect its annual fee for
depositary services by deduction from cash distributions or by
directly billing investors or by charging the book-entry system
accounts of participants acting for them. The depositary may
generally refuse to provide fee-attracting services until its
fees for those services are paid.
Payment of taxes
You will be responsible for any taxes or other governmental
charges payable on your ADSs or on the deposited securities
represented by any of your ADSs. The depositary may refuse to
register any transfer of your ADSs or allow you to withdraw the
deposited securities represented by your ADSs until such taxes
or other charges are paid. It may apply payments owed to you or
sell deposited securities represented by your ADSs to pay any
taxes owed and you will remain liable for any deficiency. If the
depositary sells deposited securities, it will, if appropriate,
reduce the number of ADSs to reflect the sale and pay to you any
proceeds, or send to you any property, remaining after it has
paid the taxes.
The cash, shares or other securities received by the depositary will become deposited securities.
• Reclassify, split up or consolidate any of the
deposited securities
Each ADS will automatically represent its equal share of the new deposited securities.
• Distribute securities on the shares that are not
distributed to you
• Recapitalize, reorganize, merge, liquidate, sell
all or substantially all of our assets, or take any similar
action
The depositary may, and will if we ask it to, distribute some or all of the cash, shares or other securities it received. It may also deliver new ADSs or ask you to surrender your outstanding ADSs in exchange for new ADSs identifying the new deposited securities.
Amendment and termination
How may the deposit agreement be amended?
We may agree with the depositary to amend the deposit agreement
and the ADSs without your consent for any reason. If an
amendment adds or increases fees or charges, except for taxes
and other governmental charges or expenses of the depositary for
registration fees, facsimile costs, delivery charges or similar
items, or prejudices a substantial right of ADS holders, it will
not become effective for outstanding ADSs until 30 days
after the depositary notifies ADS holders of the amendment.
At the time an amendment becomes effective, you are
considered, by continuing to holdyour ADS, to agree to
the amendment and to be bound by the ADRs and the deposit
agreement as amended.
How may the deposit agreement be terminated?
The depositary will terminate the deposit agreement at our
direction by mailing notice of termination to the ADS holders
then outstanding at least 30 days prior to the date fixed
in such notice for such termination. The depositary may also
terminate the deposit agreement by mailing notice of termination
to us and the ADS holders then outstanding if at any time
60 days shall have expired after the depositary shall have
delivered to the Company a written notice of its election to
resign and a successor depositary shall not have been appointed
and accepted its appointment.
After termination, the depositary and its agents will do the
following under the deposit agreement but nothing else: collect
distributions on the deposited securities, sell rights and other
property, and deliver shares and other deposited securities upon
cancellation of ADSs. Six months after termination, the
depositary may sell any remaining deposited securities by public
or private sale. After that, the depositary will hold the money
it received on the sale, as well as any other cash it is holding
under the deposit agreement for the pro rata benefit of the ADS
holders that have not surrendered their ADSs. It will not invest
the money and has no liability for interest. The
depositary’s only obligations will be to account for the
money and other cash.
After termination our only obligations will be to indemnify the
depositary and to pay fees and expenses of the depositary that
we agreed to pay.
Limitations on obligations and liability
Limits on our obligations and the obligations of the
depositary; limits on liability to holders of ADSs
The deposit agreement expressly limits our obligations and the
obligations of the depositary. It also limits our liability and
the liability of the depositary. We and the depositary:
•
are only obligated to take the actions specifically set forth in
the deposit agreement without negligence or bad faith;
•
are not liable if either of us is prevented or delayed by law or
circumstances beyond our control from performing our obligations
under the deposit agreement;
•
are not liable if either of us exercises discretion permitted
under the deposit agreement;
•
have no obligation to become involved in a lawsuit or other
proceeding related to the ADSs or the deposit agreement on your
behalf or on behalf of any other party; and
•
may rely upon any documents we believe in good faith to be
genuine and to have been signed or presented by the proper party.
In the deposit agreement, we and the depositary agree to
indemnify each other under certain circumstances.
Requirements for depositary actions
Before the depositary will deliver or register a transfer of an
ADS, make a distribution on an ADS, or permit withdrawal of
shares, the depositary may require:
•
payment of stock transfer or other taxes or other governmental
charges and transfer or registration fees charged by third
parties for the transfer of any shares or other deposited
securities;
•
satisfactory proof of the identity and genuineness of any
signature or other information it deems necessary; and
•
compliance with regulations it may establish, from time to time,
consistent with the deposit agreement, including presentation of
transfer documents.
The depositary may refuse to deliver ADSs or register transfers
of ADSs generally when the transfer books of the depositary or
our transfer books are closed or at any time if the depositary
or we think it advisable to do so.
Your right to receive the shares underlying your ADSs
You have the right to cancel your ADSs and withdraw the
underlying shares at any time except:
•
when temporary delays arise because: (i) the depositary has
closed its transfer books or we have closed our transfer books;
(ii) the transfer of shares is blocked to permit voting at
a shareholders’ meeting; or (iii) we are paying a
dividend on our shares;
•
when you or other ADS holders seeking to withdraw shares owe
money to pay fees, taxes and similar charges; and
•
when it is necessary to prohibit withdrawals in order to comply
with any laws or governmental regulations that apply to ADSs or
to the withdrawal of shares or other deposited securities.
This right of withdrawal may not be limited by any other
provision of the deposit agreement.
Pre-release of ADSs
The deposit agreement permits the depositary to deliver ADSs
before deposit of the underlying shares. This is called a
pre-release of the ADSs. The depositary may also deliver shares
upon cancellation of pre-released ADSs (even if the ADSs are
canceled before the pre-release transaction has been closed
out). A pre-release is closed out as soon as the underlying
shares are delivered to the depositary. The depositary may
receive ADSs instead of shares to close out a pre-release. The
depositary may pre-release ADSs only under the following
conditions: (1) before or at the time of the pre-release,
the person to whom the pre-release is being made represents to
the depositary in writing that it or its customer (i) owns
the shares or ADSs to be deposited, (ii) assigns all
beneficial rights, title and interest in the shares of ADSs to
the depositary and (iii) will not take any action with
respect to such shares or ADSs that is inconsistent with the
transfer of beneficial ownership, other than in satisfaction of
such pre-release; (2) the pre-release is fully
collateralized with cash or other collateral that the depositary
considers appropriate; and (3) the depositary must be able
to close out the pre-release on not more than five business
days’ notice. In addition, the depositary will limit the
number of ADSs that may be outstanding at any time as a result
of pre-release, although the depositary may disregard the limit
from time to time, if it thinks it is appropriate to do so.
Direct registration system
In the deposit agreement, all parties to the deposit agreement
acknowledge that the DRS and Profile Modification System, or
Profile, will apply to uncertificated ADSs upon acceptance of
them to DRS by the DTC. DRS is the system administered by DTC
pursuant to which the depositary may register the ownership of
uncertificated ADSs, which ownership shall be evidenced by
periodic statements issued by the depositary to the ADS holders
entitled to them. Profile is a required feature of DRS which
allows a DTC participant, claiming to act on behalf of an ADS
holder, to direct the depositary to register a transfer of those
ADSs to DTC or its nominee and to deliver those ADSs to the DTC
account of that DTC participant without receipt by the
depositary of prior authorization from the ADS holder to
register such transfer.
In connection with and in accordance with the arrangements and
procedures relating to DRS/Profile, the parties to the deposit
agreement understand that the depositary will not verify,
determine or otherwise ascertain that the DTC participant which
is claiming to be acting on behalf of an ADS holder in
requesting registration of transfer and delivery described in
the paragraph above has the actual authority to act on behalf of
the ADS holder (notwithstanding any requirements under the
Uniform Commercial Code). In the deposit agreement, the parties
agree that the depositary’s reliance on and compliance with
instructions received by the depositary through the DRS/Profile
system and in accordance with the deposit agreement, shall not
constitute negligence or bad faith on the part of the depositary.
Shareholder communications; inspection of register of holders
of ADSs
The depositary will make available for your inspection at its
office all communications that it receives from us as a holder
of deposited securities that we make generally available to
holders of deposited securities. The depositary will send you
copies of those communications if we ask it to. You have a right
to inspect the register of holders of ADSs, but not for the
purpose of contacting those holders about a matter unrelated to
our business or the ADSs.
Upon completion of this offering, we will have
23,076,923 outstanding ADSs representing approximately
33.9% of our common shares in issue. All of the ADSs sold in
this offering will be freely transferable by persons other than
our “affiliates” without restriction or further
registration under the Securities Act. Sales of substantial
amounts of our ADSs in the public market could adversely affect
prevailing market prices of our ADSs. Prior to this offering,
there has been no public market for our common shares or the
ADSs, and while application has been made for the ADSs to be
quoted on the Nasdaq Global Market, we cannot assure you that a
regular trading market will develop in the ADSs. We do not
expect that a trading market will develop for our common shares
not represented by the ADSs.
Lock-up agreements
Our directors, executive officers, significant shareholders and
certain other option and warrant holders, who collectively hold
approximately 97% of our outstanding shares immediately before
this offering, have signed lock-up agreements under which they
have agreed, subject to some exceptions, not to transfer or
dispose of, directly or indirectly, any of our common shares, in
the form of ADSs or otherwise, or any securities convertible
into or exchangeable or exercisable for our common shares, in
the form of ADSs or otherwise, for a period of 180 days
after the date this Registration Statement becomes effective.
After the expiration of the 180-day period, the common shares or
ADSs held by our directors, executive officers or principal
shareholders may be sold subject to the restrictions under
Rule 144 under the Securities Act or by means of registered
public offerings.
Rule 144
In general, under Rule 144 as currently in effect, a person
(or persons whose shares are aggregated) who has beneficially
owned our common shares for at least one year, is entitled to
sell within any three-month period a number of common shares
that does not exceed the greater of the following:
•
1% of the then outstanding common shares, in the form of ADSs or
otherwise, which will equal approximately 1.4 million
common shares immediately after this offering; or
•
the average weekly trading volume of our common shares in the
form of ADSs or otherwise, during the four calendar weeks
preceding the date on which notice of the sale is filed with the
SEC.
Sales under Rule 144 must be made through unsolicited
brokers’ transactions. They are also subject to manner of
sale provisions, notice requirements and the availability of
current public information about us.
Rule 144(k)
Under Rule 144(k), a person who is not our affiliate at any
time during the three months preceding a sale, and who has
beneficially owned the common shares, in the form of ADSs or
otherwise, proposed to be sold for at least two years, including
the holding period of any prior owner other than an affiliate,
is entitled to sell those common shares without complying with
the manner of sale, public information, volume limitation or
notice provisions of Rule 144. Therefore, unless otherwise
restricted, “144(k) shares” may be sold at any time.
Rule 701
In general, under Rule 701 of the Securities Act as
currently in effect, each of our employees, consultants or
advisors who purchases our common shares from us in connection
with a compensatory stock plan or a written agreement executed
prior to the completion of this offering is eligible to resell
such common shares in reliance on Rule 144, but without
compliance with some of the restrictions, including the holding
period, contained in Rule 144.
Registration rights
Upon completion of this offering, certain holders of our common
shares, in the form of ADSs or otherwise, or their transferees
will be entitled to request that we register their shares under
the Securities Act, following the expiration of the lockup
agreements described above. See “Description of share
capital— Registration rights”.
The following discussion of the material Cayman Islands and
United States federal income tax consequences of an investment
in our ADSs or common 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
discussion does not deal with all possible tax consequences
relating to an investment in our ADSs or common shares, such as
the tax consequences under state, local and other tax laws. To
the extent that the discussion relates to matters of Cayman
Islands tax law, it represents the opinion of Conyers, Dill
& Pearman, special Cayman Islands counsel to us. Based on
the facts and subject to the limitations set forth herein, the
statements of law or legal conclusions under the caption
“—United States federal income taxation”
constitute the opinion of Latham & Watkins LLP,
our U.S. counsel, as to the material United States federal
income tax consequences of an investment in the ADSs or common
shares.
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. There are no other taxes likely to be material to
the Company levied by the Government of the Cayman Islands
except for stamp duties which may be applicable on instruments
executed in, or brought within, the jurisdiction of 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.
United States federal income taxation
The following discussion describes the material U.S. federal
income tax consequences under present law of an investment in
the ADSs or common shares. This discussion applies only to
investors that hold the ADSs or common 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, which change could apply retroactively and
could 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:
persons holding an ADS or common share as part of a straddle,
hedging, conversion or integrated transaction;
•
persons that actually or constructively own 10% or more of our
voting stock; or
•
persons holding ADSs or common shares through partnerships or
other pass-through entities.
PROSPECTIVE PURCHASERS 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 COMMON 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 common shares and you are,
for U.S. federal income tax purposes,
•
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 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.
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 their terms. If you hold ADSs, you
should be treated as the holder of the underlying common shares
represented by those ADSs for U.S. federal income tax
purposes.
The U.S. Treasury has expressed concerns that parties to
whom ADSs are pre-released may be taking actions that are
inconsistent with the claiming, by U.S. Holders of ADSs, of
foreign tax credits for U.S. federal income tax purposes.
Such actions would also be inconsistent with the claiming of the
reduced rate of tax applicable to dividends received by certain
non-corporate U.S. Holders, as described below.
Accordingly, the availability of the reduced tax rate for
dividends received by certain non-corporate U.S. Holders
could be affected by future actions that may be taken by the
U.S. Treasury.
Taxation of dividends and other distributions on the ADSs
or common shares
Subject to the passive foreign investment company rules
discussed below, the gross amount of our distributions to you
with respect to the ADSs or common shares generally will be
included in your gross income as dividend income on the date of
receipt by the depositary, in the case of ADSs, or by you, in
the case of common 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). The 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 certain non-corporate U.S. Holders, including
individual U.S. Holders, for taxable years beginning before
January 1, 2011, dividends may be taxed at the lower
applicable capital gains rate provided that (1) the ADSs or
common shares, as applicable, are readily tradable on an
established securities market in the United States, (2) we
are not a passive foreign investment company (as discussed
below) for either our taxable year in which the dividend was
paid or the preceding taxable year, and (3) certain holding
period requirements are met. ADSs will be considered for
purposes of clause (1) above to be readily tradable on an
established securities market in the United States if they are
listed on Nasdaq Global Market. You should consult your tax
advisors regarding the availability of the lower rate for
dividends paid with respect to our ADSs or common 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 in general 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
common shares will generally constitute “passive category
income” but could, in the case of certain
U.S. Holders, constitute “general category
income”.
To the extent that the amount of the distribution exceeds our
current and accumulated earnings and profits, it will be treated
first as a tax-free return of your tax basis in your ADSs or
common 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 should expect that a distribution will
generally 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 disposition of shares
Subject to the passive foreign investment company rules
discussed below, you will recognize taxable gain or loss on any
sale, exchange or other taxable disposition of an ADS or common
share equal to the difference between the amount realized (in
U.S. dollars) for the ADS or common share and your tax
basis (in U.S. dollars) in the ADS or common share. The
gain or loss generally will be capital gain or loss. If you are
a non-corporate U.S. holder, including an individual who
has held the ADS or common share for more than one year, you
will be eligible for reduced tax rates. The deductibility of
capital losses is subject to limitations. Any such gain or loss
that you recognize will generally be treated as U.S. source
income or loss for foreign tax credit limitation purposes.
A non-U.S. corporation is considered a passive foreign
investment company (“PFIC”) for U.S. federal
income tax purposes, 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.
For this purpose, 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, more than 25% (by value) of the stock.
Although it is not clear how the contractual arrangements
between us and our affiliated entities will be treated for
purposes of the PFIC rules, we believe that we should not be
treated as a PFIC for our current taxable year ending
December 31, 2007 or for the foreseeable future. We must
make a separate determination each year as to whether we are a
PFIC. As a result, even if we are currently not a PFIC our PFIC
status may change. Because PFIC status is a factual
determination for each taxable year which cannot be made until
the close of the taxable year, our U.S. counsel expresses
no opinion with respect to our PFIC status for any taxable year.
If we are a PFIC for any year during which you hold ADSs or
common shares, we generally will continue to be treated as a
PFIC for all succeeding years during which you hold ADSs or
common shares.
If we are a PFIC for any taxable year during which you hold ADSs
or common 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 common 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 common 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 common 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
generally 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 common
shares cannot be treated as capital, even if you hold the ADSs
or common shares as capital assets.
Alternatively, a U.S. Holder of “marketable
stock” in a PFIC may make a mark-to-market election for
stock of a PFIC to elect out of the tax treatment discussed in
the two preceding paragraphs. If you make a mark-to-market
election for the ADSs or common 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 common shares as of
the close of your taxable year over your adjusted basis in such
ADSs or common shares. You are allowed a deduction for the
excess, if any, of the adjusted basis of the ADSs or common
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 common
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
common 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 common shares, as well as to
any loss realized on the actual sale or disposition of the ADSs
or common 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 common shares. Your basis in the ADSs or common
shares will be adjusted to reflect any such income or loss
amounts. 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
discussed above under “Taxation of dividends and other
distributions on the ADSs or common shares” would not apply.
The mark-to-market election is available only for stock which is
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 Nasdaq Global Market and,
consequently, if you are a holder of ADSs the mark-to-market
election would be available to you were we to be or become a
PFIC.
In general, if a non-U.S. corporation is a PFIC, a holder
of shares in that corporation may 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 may
make a qualified electing fund election with respect to your
ADSs or common shares only if we agree to furnish you annually
with certain tax information, and we do not presently intend to
prepare or provide such information.
If you hold ADSs or common 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
common shares and any gain realized on the disposition of the
ADSs or common shares.
You are urged to consult your tax advisor regarding the
application of the PFIC rules to your investment in ADSs or
common shares.
Information reporting and backup withholding
Dividend payments with respect to ADSs or common shares and
proceeds from the sale, exchange or redemption of ADSs or common
shares may be subject to information reporting to the Internal
Revenue Service and possible U.S. backup withholding at a
current rate of 28%. Backup withholding will not apply, however,
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 generally must 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.
We and the selling shareholders are offering the ADSs described
in this prospectus through a number of underwriters, for whom
J.P. Morgan Securities Inc. and UBS AG are acting as
the representatives. J.P. Morgan Securities Inc. and UBS AG are
also the global coordinators and bookrunners for this offering.
We and the selling shareholders have entered into an
underwriting agreement with the underwriters. Subject to the
terms and conditions of the underwriting agreement, we and the
selling shareholders have agreed to sell to the underwriters,
and each underwriter has severally and not jointly agreed to
purchase, at the public offering price less the underwriting
discounts and commissions set forth on the cover page of this
prospectus, the respective number of ADSs listed next to its
name in the following table:
Name
Number of ADSs
J.P. Morgan Securities Inc.
UBS AG
CIBC World Markets Corp.
WR Hambrecht + Co., LLC
ABN AMRO Bank N.V., Hong Kong Branch and
N M Rothschild & Sons
(Hong Kong) Limited, each trading as ABN AMRO Rothschild
Total
23,076,923
The underwriting agreement provides that the obligations of the
underwriters to pay for and accept delivery of the ADSs offered
by this prospectus are subject to certain conditions precedent,
including the absence of any material adverse change in our
business and the receipt of certain certificates, opinions and
letters from us, our counsel and the independent accountants.
The underwriters are committed to purchase all of the ADSs
offered by us and the selling shareholders if they purchase any
ADS. The underwriting agreement also provides that if an
underwriter defaults, the purchase commitments of non-defaulting
underwriters may also be increased or the offering may be
terminated. All sales of our ADSs in the United States will be
made by U.S. registered broker/dealers. Sales of our ADSs
outside the United States may be made by the underwriters
directly or through their affiliated entities. ABN AMRO Bank
N.V., Hong Kong Branch and N M Rothschild & Sons
(Hong Kong) Limited, each trading as ABN AMRO Rothschild is
expected to make offers and sales of the ADSs in the United
States through its registered broker/dealer affiliate, ABN AMRO
Rothschild LLC.
The underwriters propose to offer the ADSs directly to the
public at the initial public offering price set forth on the
cover page of this prospectus and to certain dealers at that
price less a concession not in excess of
$ per
ADS. Any such dealers may resell ADSs to certain other brokers
or dealers at a discount of up to
$ per
ADS from the initial public offering price. After the initial
public offering of the ADSs, the offering price and other
selling terms may be changed by the underwriters. The
representatives have advised us that the underwriters do not
intend to confirm discretionary sales in excess of 5% of the
ADSs offered in this offering.
At our request, the underwriters have reserved for sale, at the
initial public offering price, up to an aggregate of
1,153,846 ADSs to certain directors, officers, employees
and associates of our company through a directed share program.
These reserved ADSs account for an aggregate of approximately 5%
of the ADSs offered in the offering. Any ADSs not so purchased
through
the directed share program will be offered to the general public
on the same basis as the ADSs offered hereby.
The underwriters have an option to buy from us up to 3,230,538
additional ADSs and from the selling shareholders up to 231,000
additional ADSs to cover sales of ADSs by the underwriters which
exceed the number of ADSs specified in the table above. The
underwriters have 30 days from the date of this prospectus
to exercise this over-allotment option. If any ADSs are
purchased with this over-allotment option, the underwriters will
purchase the ADSs in approximately the same proportion as shown
in the table above. If any additional ADSs are purchased, the
underwriters will offer the additional ADSs on the same terms as
those on which the ADSs are being offered.
The following table sets forth the per ADS and total
underwriting discounts and commissions to be paid by us and the
selling shareholders in connection with this offering, assuming
an initial public offering price of $13 per ADS, being the
midpoint of the estimated range of the initial public offering
price. The information in the following table is illustrative
only. The per ADS and total underwriting discounts and
commissions to be paid by the selling shareholders and us are
subject to adjustment based on the actual initial public
offering price of our ADSs and other terms of this offering
determined at pricing. The amounts in the following table are
shown assuming both no exercise and full exercise of the
underwriters’ over-allotment option.
Underwriting discounts and commissions
Per ADS
Total
To be paid by
No exercise
Full exercise
No exercise
Full exercise
Xinhua Finance Media
$
$
$
$
Selling shareholders
$
$
$
$
The underwriting discounts and commissions are determined by
negotiations among us, the selling shareholders and the
representative and are a percentage of the offering price to the
public. Among the factors to be considered in determining the
discounts and commissions are the size of the offering, the
nature of the security to be offered and the discounts and
commissions charged in comparable transactions.
We have agreed that, without the prior written consent of the
global coordinators, we will not offer, sell, contract to sell,
pledge or otherwise dispose of, directly or indirectly, or file
with the SEC a registration statement under the Securities Act
relating to, any of our ADSs or securities convertible into or
exchangeable or exercisable for any of our ADSs, or publicly
disclose the intention to make any offer, sale, pledge,
disposition or filing for a period of 180 days after the
date of this prospectus. Notwithstanding the foregoing, if
(1) during the last 17 days of the 180-day restricted
period, we issue an earnings release or material news or a
material event relating to our company occurs; or (2) prior
to the expiration of the 180-day restricted period, we announce
that we will release earnings results during the 16-day period
beginning on the last day of the 180-day period, the
restrictions described above shall continue to apply until the
expiration of the 18-day period beginning on the issuance of the
earnings release or the occurrence of the material news or
material event.
Our directors, executive officers, significant shareholders,
certain warrant holders and certain option holders have entered
into lock-up agreements with the underwriters prior to the
commencement of this offering pursuant to which each of these
persons or entities, with limited exceptions, for a period of
180 days after the date of this prospectus, may not,
without the prior written consent of the global coordinators,
(1) offer, pledge, announce the intention to sell, grant
any option, right or warrant to purchase, or otherwise transfer
or dispose of, directly or indirectly, any of our ADSs
(including, without limitation, ADSs or common shares which may
be deemed to be beneficially owned with sole disposition power
by such directors and executive officers in accordance with the
rules and regulations of the SEC and securities which may be
issued upon exercise of a share option or warrant) or
(2) enter into any swap or other agreement that transfers,
in whole or in part, any of the economic consequences of
ownership of our ADSs, whether any such transaction described in
clause (1) or (2) above is to be settled by delivery
of ADSs or such other securities, in cash or otherwise.
Notwithstanding the foregoing, if (1) during the last
17 days of the 180-day restricted period, we issue an
earnings release or material news or a material event relating
to our company occurs; or (2) prior to the expiration of
the 180-day restricted period, we announce that we will release
earnings results during the 16-day period beginning on the last
day of the 180-day period, the restrictions described above
shall continue to apply until the expiration of the
18-day period beginning
on the issuance of the earnings release or the occurrence of the
material news or material event.
The underwriters have advised us that they have no present
intent or arrangement to release any of the securities subject
to these lock-up agreements. The release of any lock-up
agreement is considered on a case by case basis. The
underwriters have further advised us that the factors they would
consider in determining whether to release shares subject to a
lock-up agreement include, but are not limited to, the length of
time before the lock-up agreement expires, the number of shares
involved, the reasons for the requested release, market
conditions, the trading price of our common shares, historical
trading volumes of our common shares and whether the person
seeking the release is an officer, director or other affiliate
of us.
We have agreed to indemnify the underwriters against certain
liabilities, including liabilities under the Securities Act of
1933.
We have applied to have our ADSs approved for quotation on
Nasdaq Global Market under the symbol “XFML”.
In connection with this offering, the underwriters may engage in
stabilizing transactions, which involves making bids for,
purchasing and selling ADSs in the open market for the purpose
of preventing or retarding a decline in the market price of the
ADSs while this offering is in progress. These stabilizing
transactions may include making short sales of the ADSs, which
involves the sale by the underwriters of a greater number of
ADSs than they are required to purchase in this offering, and
purchasing ADSs on the open market to cover positions created by
short sales. Short sales may be “covered” shorts,
which are short positions in an amount not greater than the
underwriters’ over-allotment option referred to above, or
may be “naked” shorts, which are short positions in
excess of that amount. The underwriters may close out any
covered short position either by exercising their over-allotment
option, in whole or in part, or by purchasing ADSs in the open
market. In making this determination, the underwriters will
consider, among other things, the price of ADSs available for
purchase in the open market compared to the price at which the
underwriters may purchase ADSs through the over-allotment
option. A naked short position is more likely to be created if
the underwriters are concerned that there may be downward
pressure on the price of the ADSs in the open market
that could adversely affect investors who purchase in this
offering. To the extent that the underwriters create a naked
short position, they will purchase ADSs in the open market to
cover the position.
The underwriters have advised us that, pursuant to
Regulation M of the Securities Act of 1933, they may also
engage in other activities that stabilize, maintain or otherwise
affect the price of the ADSs, including the imposition of
penalty bids. This means that if the representatives of the
underwriters purchase ADSs in the open market in stabilizing
transactions or to cover short sales, the representatives can
require the underwriters that sold those ADSs as part of this
offering to repay the underwriting discount received by them.
These activities may have the effect of raising or maintaining
the market price of the ADSs or preventing or retarding a
decline in the market price of the ADSs, and, as a result, the
price of the ADSs may be higher than the price that otherwise
might exist in the open market. If the underwriters commence
these activities, they may discontinue them at any time. The
underwriters may carry out these transactions on the Nasdaq
Global Market or otherwise.
Prior to this offering, there has been no public market for our
ADSs. The initial public offering price will be determined by
negotiations between us and the representatives of the
underwriters. In determining the initial public offering price,
we and the representatives of the underwriters expect to
consider a number of factors including:
•
the information set forth in this prospectus and otherwise
available to the representatives;
•
our prospects and the history and prospects for the industry in
which we compete;
•
an assessment of our management;
•
our prospects for future earnings;
•
the general condition of the securities markets at the time of
this offering;
•
the recent market prices of, and demand for, publicly traded
securities of generally comparable companies; and
•
other factors deemed relevant by the underwriters and us.
Neither we nor the underwriters can assure investors that an
active trading market will develop for our ADSs, or that the
ADSs will trade in the public market at or above the initial
public offering price.
Certain of the underwriters and their affiliates have provided
in the past to us and our affiliates and may provide from time
to time in the future certain commercial banking, financial
advisory, investment banking and other services for us and such
affiliates in the ordinary course of their business, for which
they have received and may continue to receive customary fees
and commissions. In addition, from time to time, certain of the
underwriters and their affiliates may effect transactions for
their own account or the account of customers, and hold on
behalf of themselves or their customers, long or short positions
in our debt or equity securities or loans, and may do so in the
future.
The address of J.P. Morgan Securities Inc. is at 277 Park
Avenue, New York, New York10172 and the address of UBS AG is at
52/F, Two International Finance Centre, 8 Finance Street,
Central, Hong Kong.
The address of CIBC World Markets Corp. is
300 Madison Ave., 4th floor, New York, NewYork10017. The address of WR Hambrecht
+ Co., LLC is 539 Bryant Street, Suite 100,
San Francisco, CA94107. The address of ABN AMRO Bank N.V.,
Hong Kong Branch and N M Rothschild & Sons (Hong
Kong) Limited, each trading as ABN AMRO Rothschild is 38/F
Cheung Kong Center, 2 Queens Road Central, Hong Kong.
Selling restrictions
General
No action has been or will be taken by us or by any underwriter
in any jurisdiction except in the United States that would
permit a public offering of our ADSs, or the possession,
circulation or distribution of a prospectus or any other
material relating to us and our ADSs in any country or
jurisdiction where action for that purpose is required.
Accordingly, our ADSs may not be offered or sold, directly or
indirectly, and neither this prospectus nor any other material
or advertisements in connection with this offering may be
distributed or published, in or from any country or jurisdiction
except in compliance with any applicable rules and regulations
of any such country or jurisdiction.
We will not offer to sell any common shares or ADSs to any
member of the public in the Cayman Islands.
This prospectus has not been approved by an authorized person in
the United Kingdom and has not been registered with the
Registrar of Companies in the United Kingdom. The ADSs have not
been offered or sold, and prior to the expiry of a period of six
months from the latest date of the issue of the ADSs, the ADSs
may not be offered or sold to any persons in the United Kingdom
except to persons whose ordinary activities involve them in
acquiring, holding, managing or disposing of investments (as
principal or agent) for the purposes of their businesses, or
otherwise in circumstances which have not resulted and will not
result in an offer to the public in the United Kingdom within
the meaning of the Public Offers of Securities Regulations 1995,
as amended. In addition, no person may communicate or cause to
be communicated any invitation or inducement to engage in
investment activity (within the meaning of section 21 of
the Financial Services and Markets Act 2000, or the FSMA, in
connection with the issue or sale of any ADSs except in
circumstances in which section 21(I) of the FSMA does not
apply.
The ADSs have not been offered or sold and will not be offered
or sold in Hong Kong, by means of any document, other than
(1) to “professional investors” as defined in the
Securities and Futures Ordinance (Cap. 571) of Hong Kong
and any rules made under that Ordinance; or (2) in other
circumstances which do not result in the document being a
“prospectus” as defined in the Companies Ordinance
(Cap. 32) of Hong Kong or which do not constitute an offer to
the public within the meaning of that Ordinance; and there has
not been any advertisement, invitation or document relating to
the ADSs, whether in Hong Kong or elsewhere, which is directed
at, or the contents of which are likely to be accessed or read
by, the public in Hong Kong (except if permitted to do so under
the securities laws of Hong Kong) other than with respect to
ADSs which are or are intended to be disposed of only to persons
outside Hong Kong or only to “professional investors”
as defined in the Securities and Futures Ordinance
(Cap. 571) and any rules made thereunder.
The ADSs have not been and will not be registered under the
Securities and Exchange Law of Japan and have not, directly or
indirectly, been offered or sold and will not, directly or
indirectly, be offered or sold in Japan or to, or for the
benefit of, any resident of Japan (which term as used herein
means any person resident in Japan, including any corporation or
other entity organized under the laws of Japan), or to others
for re-offering or resale, directly or indirectly, in Japan or
to, or for the benefit of, a resident of Japan except pursuant
to an exemption from the registration requirements of, and
otherwise in compliance with, the Securities and Exchange Law of
Japan and any other applicable laws and regulations of Japan.
This prospectus has not been registered as a prospectus with the
Monetary Authority of Singapore. Accordingly, this prospectus
and any other document or material in connection with the offer
or sale, or invitation for subscription or purchase of the ADSs
may not be circulated or distributed, nor may the ADSs be
offered or sold, or be made the subject of an invitation for
subscription or purchase, whether directly or indirectly, to
persons in Singapore other than (i) to an institutional
investor under Section 274 of the Securities and Futures
Act Chapter 289 of Singapore, or the SFA, (ii) to a
relevant person, or any person pursuant to
Section 275 (1A), and in accordance with the
conditions, specified in Section 275 of the SFA or
(iii) otherwise pursuant to, and in accordance with the
conditions of, any other applicable provision of the SFA.
Where the ADSs are subscribed or purchased under
Section 275 by a relevant person, which is:
(a)
a corporation (which is not an accredited investor) the sole
business of which is to hold investments and the entire share
capital of which is owned by one or more individuals, each of
whom is an accredited investor; or
(b)
a trust (where the trustee is not an accredited investor) whose
sole purpose is to hold investments and each beneficiary is an
accredited investor,
shares, debentures and units of shares and debentures of that
corporation or the beneficiaries’ rights and interest in
that trust shall not be transferable for six months after that
corporation or that trust has acquired the ADSs under
Section 275 except:
(1)
to an institutional investor under Section 274 of the SFA
or to a relevant person, or any person pursuant to
Section 275(1A), and in accordance with the conditions,
specified in Section 275 of the SFA;
(2)
where no consideration is given for the transfer; or
(3)
by operation of law.
In relation to each Member State of the European Economic Area
which has implemented the Prospectus Directive (each, a Relevant
Member State), and effective as of the date on which the
Prospectus Directive is implemented in that Relevant Member
State (the Relevant Implementation Date), no ADS has been
offered or will be offered to the public in that Relevant Member
State, except that the ADSs may, with effect from and including
the Relevant Implementation Date, be offered to the public in
that Relevant Member State:
(A)
in the period beginning on the date of publication of a
prospectus in relation to the ADSs which has been approved by
the competent authority in that Relevant Member State or, where
appropriate, approved in another Relevant Member State and
notified to the competent authority in that Relevant Member
State, all in accordance with the
Prospectus Directive and ending on the date which is
12 months after the date of such publication;
(B)
at any time to legal entities which are authorized or regulated
to operate in the financial markets or, if not so authorized or
regulated, whose corporate purpose is solely to invest in
securities;
(C)
at any time to any legal entity which has two or more of
(1) an average of at least 250 employees during the
last financial year, (2) a total balance sheet or more than
€43,000,000 and
(3) an annual net turnover of more than
€50,000,000, as
shown in its last annual or consolidated accounts; or
(D)
at any time in any other circumstances which do not require the
publication by us of a prospectus pursuant to Article 3 of
the Prospectus Directive.
For the purposes of this provision, the expression an
“offer of ADSs to the public” in relation to any ADSs
in any Relevant Member State means the communication in any form
and by any means of sufficient information on the terms of the
offer and the ADSs to be offered so as to enable an investor to
decide to purchase or subscribe the ADSs, as the same may be
varied in that Member State by any measure implementing the
Prospectus Directive in that Member State and the expression
Prospectus Directive means Directive 2003/71/EC and
includes any relevant implementing measure in each Relevant
Member State.
No action may be taken in any jurisdiction other than the United
States that would permit a public offering of the ADSs or the
possession, circulation or distribution of this prospectus in
any jurisdiction where action for that purpose is required.
Accordingly, the ADSs may not be offered or sold, directly or
indirectly, and neither the prospectus nor any other offering
material or advertisements in connection with the ADSs may be
distributed or published in or from any country or jurisdiction
except under circumstances that will result in compliance with
any applicable rules and regulations of any such country or
jurisdiction.
Set forth below is an itemization of the total expenses,
excluding underwriting discounts and commissions, that are
expected to be incurred in connection with the offer and sale of
the ADSs by us and the selling shareholders. With the exception
of the Securities and Exchange Commission registration fee, the
National Association of Securities Dealers, Inc. filing fee and
the Nasdaq Global Market listing fee, all amounts are estimates.
Securities and Exchange Commission registration fee
$
11,406
Nasdaq Global Market listing fee
100,000
National Association of Securities Dealers, Inc. filing fee
30,500
Printing and engraving expenses
700,000
Legal fees and expenses
2,620,000
Accounting fees and expenses
1,740,000
Miscellaneous
283,349
Total
$
5,485,255
Expenses will be borne in proportion to the numbers of ADSs sold
in the offering by us and the selling shareholders,
respectively. The Bank of New York, as depositary, has agreed to
reimburse us for certain expenses we incur that are related to
the establishment and maintenance of the ADS program.
The validity of the ADSs and certain other legal matters in
connection with this offering will be passed upon for us by
Latham & Watkins LLP. Certain legal matters in connection
with this offering will be passed upon for the underwriters by
Davis Polk & Wardwell. The validity of the common shares
represented by the ADSs offered in this offering will be passed
upon for us by Conyers Dill & Pearman. Legal matters as to
PRC law will be passed upon for us by Commerce & Finance Law
Offices and for the underwriters by Jingtian & Gongcheng
Associates. Latham & Watkins LLP may rely upon Conyers Dill
& Pearman with respect to matters governed by Cayman Islands
law and Commerce & Finance Law Offices with respect to
matters governed by PRC law. Davis Polk & Wardwell may rely
upon Conyers Dill & Pearman with respect to matters governed
by Cayman Islands law and Jingtian & Gongcheng Law Offices
with respect to matters governed by PRC law.
Experts
The consolidated financial statements as of December 31,2005 and 2006 and for the period from May 26, 2005 (date
Xinhua Finance Limited acquired EconWorld Media Limited, the
predecessor to Xinhua Finance Media Limited) to
December 31, 2005 and for the year ended December 31,2006 for Xinhua Finance Media Limited, included in this
prospectus have been audited by Deloitte Touche Tohmatsu, an
independent registered public accounting firm, as stated in
their report appearing herein, and is included in reliance upon
the report of such firm given upon their authority as experts in
auditing and accounting.
The consolidated financial statements as of December 31,2004 and May 25, 2005 and for the year ended
December 31, 2004 and the period from January 1, 2005
to May 25, 2005 for EconWorld Media Limited (the
predecessor to Xinhua Finance Media Limited), included in this
prospectus have been audited by Deloitte Touche Tohmatsu, an
independent registered public accounting firm, as stated in
their report appearing herein, and is included in reliance upon
the report of such firm given upon their authority as experts in
auditing and accounting.
The consolidated financial statements as of December 31,2004 and September 8, 2005 and for the period from
June 25, 2004 (date of establishment) to December 31,2004 and the period from January 1 to September 8,2005 for Beijing Century Media Culture Co., Ltd., included in
this prospectus have been audited by Deloitte Touche Tohmatsu,
an independent registered public accounting firm, as stated in
their report appearing herein, and is included in reliance upon
the report of such firm given upon their authority as experts in
auditing and accounting.
The consolidated financial statements as of December 31,2005 and for the period from December 21, 2005 (date Xinhua
Finance Advertising Limited acquired Active Advertising Agency
Limited, the predecessor to Xinhua Finance Advertising Limited)
to December 31, 2005 for Xinhua Finance Advertising
Limited, included in this prospectus have been audited by
Deloitte Touche Tohmatsu, an independent registered public
accounting firm, as stated in their report appearing herein, and
is included in reliance upon the report of such firm given upon
their authority as experts in auditing and accounting.
The consolidated financial statements as of December 31,2004 and December 21, 2005 and for the year ended
December 31, 2004 and the period from January 1 to
December 21, 2005 for Active Advertising Agency Limited
(the predecessor to Xinhua Finance Advertising Limited),
included in this prospectus have been audited by Deloitte Touche
Tohmatsu, an independent
registered public accounting firm, as stated in their report
appearing herein, and is included in reliance upon the report of
such firm given upon their authority as experts in auditing and
accounting.
The consolidated financial statements as of December 20,2005 and for the period from March 23, 2005 (date of
establishment) to December 20, 2005 for Beijing Taide
Advertising Co., Ltd., included in this prospectus have been
audited by Deloitte Touche Tohmatsu, an independent registered
public accounting firm, as stated in their report appearing
herein, and is included in reliance upon the report of such firm
given upon their authority as experts in auditing and accounting.
The consolidated financial statements as of August 18, 2005
(predecessor entity — Beijing Shiji Guangnian
Advertising Co., Ltd.), and December 31, 2005 and for the
period from February 1, 2005 (date of establishment of
Beijing Shiji Guangnian Advertising Co., Ltd.) to
December 31, 2005 for Accord Group Investments Limited and
its predecessor entity — Beijing Shiji Guangnian
Advertising Co., Ltd., included in this prospectus have been
audited by Deloitte Touche Tohmatsu, an independent registered
public accounting firm, as stated in their reports appearing
herein, and are included in reliance upon the reports of such
firm given upon their authority as experts in auditing and
accounting.
The consolidated financial statements as of December 31,2004 and 2005 and for the years ended December 31, 2004 and
2005 for Beijing Perspective Orient Movie and Television
Intermediary Co., Ltd., included in this prospectus have been
audited by Deloitte Touche Tohmatsu, an independent registered
public accounting firm, as stated in their report appearing
herein, and is included in reliance upon the report of such firm
given upon their authority as experts in auditing and accounting.
The consolidated financial statements as of December 31,2004 and 2005 and for the years ended December 31, 2004 and
2005 for Shanghai Hyperlink Market Research Co., Ltd., included
in this prospectus have been audited by Deloitte Touche
Tohmatsu, an independent registered public accounting firm, as
stated in their report appearing herein, and is included in
reliance upon the report of such firm given upon their authority
as experts in auditing and accounting.
The office of Deloitte Touche Tohmatsu is located at 35F, One
Pacific Place, 88 Queensway, Hong Kong S.A.R.
Where you can find additional information
We have filed with the SEC a registration statement on
Form F-1,
including relevant exhibits and securities under the Securities
Act with respect to underlying common shares represented by the
ADSs, to be sold in this offering. A related registration
statement on F-6 will
be filed with the SEC to register the ADSs. This prospectus,
which constitutes a part of the registration statement, does not
contain all of the information contained in the registration
statement. You should read the registration statement and its
exhibits and schedules for further information with respect to
us and our ADSs.
Immediately upon completion of this offering we will become
subject to periodic reporting and other informational
requirements of the Exchange Act as applicable to foreign
private issuers. Accordingly, we will be required to file
reports, including annual reports on
Form 20-F, and
other information with the SEC. As a foreign private issuer, we
are exempt from the rules of
the Exchange Act prescribing the furnishing and content of proxy
statements to shareholders. All information filed with the SEC
can be inspected and copied at the public reference facilities
maintained by the SEC at Room 1580, 100 F. Street,
N.E., Washington, D.C. 20549. You can request copies of these
documents upon payment of a duplicating fee, by writing to the
SEC. Please call the SEC at 1-800-SEC-0330 for further
information on the operation of the public reference rooms.
Additional information may also be obtained over the Internet at
the SEC’s website at www.sec.gov. Our SEC filings,
including this registration statement and other information may
also be inspected at the offices of the Nasdaq Global Market,
Reports Section, 1735 K Street, N.W. Washington, D.C.20006.
Report of independent registered public accounting firm
To the Board of Directors and Shareholders of
Xinhua Finance Media Limited:
We have audited the accompanying consolidated balance sheets of
Xinhua Finance Media Limited and its subsidiaries and affiliates
(the ”Company”) as of December 31, 2005 and 2006
and the related consolidated statements of operations,
shareholders’ equity and comprehensive income, and cash
flows for the period from May 26, 2005 (date Xinhua Finance
Limited acquired EconWorld Media Limited, the predecessor to
Xinhua Finance Media Limited) to December 31, 2005 and the
year ended December 31, 2006. These financial statements
are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these financial
statements 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. The Company is not required to
have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audits included
consideration of internal control over financial reporting as a
basis for designing audit procedures that are appropriate in the
circumstances but not for the purpose of expressing an opinion
on the effectiveness of the Company’s internal control over
financial reporting. Accordingly, we express no such opinion. An
audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial
statements, 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 financial statements present fairly, in all
material respects, the consolidated financial position of the
Company as of December 31, 2005 and 2006 and the results of
its consolidated operations and its consolidated cash flows for
the period from May 26, 2005 (date Xinhua Finance Limited
acquired EconWorld Media Limited, the predecessor to Xinhua
Finance Media Limited) to December 31, 2005 and year ended
December 31, 2006 in conformity with accounting principles
generally accepted in the United States of America.
Class A common shares and nonvested shares (par value
$0.001; nil as of December 31, 2005 and 69,035,751 as of
December 31, 2006 shares authorized; nil as of
December 31, 2005 and 32,011,154 as of
December 31, 2006 shares issued and outstanding)
(51,978,017 (unaudited) shares issued and outstanding on a pro
forma basis)
Convertible preferred shares (par value $0.001; 15,600,000 as of
December 31, 2006 shares authorized; 15,585,254 as of
December 31, 2006 shares issued and outstanding
(liquidation value $115,770,726))
Xinhua Finance Media Limited (”XFM”) was incorporated
by Xinhua Finance Limited (”XFL”, a Tokyo Stock
Exchange listed company) on November 7, 2005 under the laws
of the Cayman Islands.
XFM and its subsidiaries and affiliates included in the
accompanying consolidated financial statements (collectively,
the ”Company”) are principally engaged in the
production of television programs, the placement of advertising,
the provision of advertising services, market research and the
publication of a financial magazine titled ”Money
Journal” in the People’s Republic of China
(”PRC”) including Hong Kong. As of December 31,2006, included in the Company’s current liabilities is an
amount of approximately $75 million owed by XFM to XFL. XFL
has undertaken not to demand repayment of such amount until such
time when XFM is able to do so without adversely impairing its
liquidity position.
For a description of XFM’s subsidiaries and affiliates
included in the accompanying consolidated financial statements
see note 3.
A variable interest entity (”VIE”) is an entity in
which equity investors generally do not have the characteristics
of a ”controlling financial interest” or there is not
sufficient equity at risk for the entity to finance its
activities without additional subordinated financial support. A
VIE is consolidated by its primary beneficiary when it is
determined that the primary beneficiary will absorb the majority
of the VIE’s expected losses and/or expected residual
returns. Consistent with the provisions of FASB Interpretation
No. 46, ”Consolidation of Variable Interest
Entities — an Interpretation of ARB No. 51”(as revised, ”FIN 46R”), certain companies
are accounted for as a VIE of XFM.
The following financial statement amounts and balances of
Beijing Century Media, a VIE, as of December 31, 2005 and
covering the period from September 9, 2005 (effective date
of the nomination and equity pledge agreements) to
December 31, 2005 were included in the accompanying 2005
consolidated financial statements:
Total assets
$
4,016,270
Total liabilities
1,574,522
Total net revenues
3,640,792
Total operating expenses
269,819
Net income
1,682,596
The following financial statement amounts and balances of the
Company’s VIEs, Shanghai Yuan Zhi Advertising Co., Ltd.,
Beijing Shiji Guangnian Advertising Co. Limited, Beijing Taide
Advertising Co., Ltd., Shenzhan Active Trinity Advertising Co.,
Ltd. and Guangzhou Jingshi
Culture Intermediary Co., Ltd. as of December 31, 2006 and
for the year ended December 31, 2006 were included in the
accompanying 2006 consolidated financial statements:
Total assets
$
18,858,803
Total liabilities
16,200,217
Total net revenues
9,612,595
Total operating expenses
2,298,615
Net income
3,112,548
2. Summary of principal accounting policies
(a) Basis of presentation
The consolidated financial statements of the Company have been
prepared in accordance with accounting principles generally
accepted in the United States of America (”US GAAP”).
(b) Basis of consolidation
The accompanying consolidated financial statements of the
Company include the accounts of XFM, all its majority-owned
subsidiaries and its VIEs from the dates they were acquired or
first consolidated by XFL.
The contribution of the businesses by XFL to XFM was accounted
for as common control mergers and the related assets and
liabilities are recorded based on their fair value when acquired
by XFL on the carryover basis. All intercompany transactions and
balances have been eliminated in consolidation.
(c) Use of estimates
The preparation of financial statements in conformity with US
GAAP requires management to make estimates and assumptions that
affect reported amounts of assets and liabilities and disclosure
of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could
differ from those estimates. Significant accounting estimates
reflected in the Company’s consolidated financial
statements included valuation of deferred tax assets, useful
lives of property and equipment, impairment of goodwill,
economic lives of intangible assets and remaining ultimate
content production revenue for purpose of recognizing costs of
content production.
(d) Revenue recognition
Advertising sales revenues are recognized when advertisements
are published net of provisions for estimated rate adjustments
and discounts. Payments received in advance are deferred until
earned and such amounts are reported as deferred revenue
included in accrued expenses and other payables of the
accompanying consolidated balance sheets.
Publishing services revenues include management and information
consulting fees relating to magazine subscriptions and sale of
Money Journal. Magazine subscription revenues are recognized
over the subscription period. Single copy sales of magazines
through distributors or retail outlets such as newsstands,
supermarkets, and convenience stores are recognized when
sold to the ultimate customers. Revenue from book sales is
recognized when books are sold to end customers. To date,
revenue from book sales has not been significant. The Company
does not carry book and magazine inventories on its consolidated
balance sheets. Costs of books and magazines published are
charged to cost of revenues when incurred.
Advertising services include revenues from event organization
and advertising agency services and are generally recognized as
services are provided. Revenues from event organization include
ticketing revenue recognized upon the delivery of tickets and
admission to the events. Revenues from sponsorship at events are
generally recorded over the period of the applicable agreements
commencing from the operating of the related event.
Advertising services revenue include revenues from provision of
market research services. Revenues are recognized when the
services are provided.
Content production revenues include revenues from producing
television programs, animations, visual effects and
post-production for television commercials and broadcast design.
Episodic television series are produced or acquired for
distribution to the television market. Revenues are recognized
when the master tape of the program is available for first
airing under the terms of the related licensing agreement.
Broadcast design mainly includes design of television channel
logos, production of trailers for advertising the television
channels, and image consulting and branding for the television
channels. Revenue for the production of the logos and trailers
are recognized upon delivery of the products and customer
acceptance. Revenue for image and branding consultations are
recognized as the services are provided.
Consulting services revenue includes revenue from the provision
of advisory and consulting services. Revenues are recognized
when the services are provided.
Revenues are recorded net of applicable business taxes totaling
$336,608 for the period from May 26, 2005 (date XFL
acquired EconWorld Media, the predecessor to XFM) to
December 31, 2005; and $1,856,053 for the year ended
December 31, 2006.
In the normal course of business, the Company acts as an
intermediary or agent in placing advertising transactions with
TV and radio stations with third parties. Such transactions are
recorded at either gross or net basis depending on whether the
Company is acting as the principal or as an agent in the
transaction. The Company is considered as the principal in
transactions where it purchases blocks of advertising time and
attempts to sell the time to advertisers and it has substantial
risks and rewards of ownership, accordingly, records revenue on
a gross basis. For those transactions in which the Company finds
advertising space for advertisers and it does not have
substantial risks and rewards of ownership, the Company is
considered an agent in the transaction and, accordingly, records
revenue on a net basis.
The Company extends credit based upon an evaluation of the
customers’ financial condition and collateral is not
required from such customers. Allowances for estimated credit
losses are generally established based on historical experience.
Restricted cash are cash balances pledged for the use of banking
facilities granted by banks.
(f) Capitalized content production costs
Capitalized content production costs consisted of direct
production costs, production overhead, development, and
pre-production costs, and are stated at cost, less accumulated
amortization and impairment. Capitalized content production
costs recognized as cost of revenues for a given program are
determined using the program forecast method. Under this method,
the amount of capitalized costs recognized as expense is based
on the proportion of the program’s revenues recognized for
such period to the program’s estimated remaining ultimate
revenues. Similarly, the recognition of expenses for
participations and residuals are recognized based on the
proportion of the program’s revenues recognized for such
period to the program’s estimated remaining ultimate
revenues. These estimates are revised periodically and losses,
if any, are provided in full.
(g) Investment
Investments in equity securities of privately held companies
where the Company’s level of ownership is such that it
cannot exercise significant influence over the investee (i.e.
voting common stock ownership of less than 20%) are stated at
cost, adjusted for declines in fair value that are considered
other than temporary. Fair value of the investments is estimated
based on market value appraisals or other valuation techniques.
In determining whether impairment is other-than-temporary, the
Company considers whether it has the ability and intent to hold
the investment until a market price recovery and whether
evidence indicating the cost of the investment is recoverable
outweighs evidence to the contrary. Evidence that would be
considered in this assessment includes, but is not limited to,
the reasons for the impairment, the severity and duration of the
impairment, and forecasted recovery. Any impairment is charged
to earnings and a new cost basis for the investment is
established.
(h) Property and equipment
Property and equipment are recorded at cost less accumulated
depreciation and amortization. Depreciation and amortization are
provided on a straight-line basis over the following estimated
useful lives:
Leasehold improvements
Lesser of 5 years or lease term
Billboards and lampposts
10 years
Furniture, fixtures and equipment
4-5 years
Motor vehicles
5 years
(i) Intangible assets
Intangible assets consist of advertising customer base,
consulting customer base, research customer relationship,
trademark, television station contract, television advertising
agency right, lamp post advertising agency right, program
advertising agency right, backlog order, distribution network,
noncompete agreements, exclusive advertising agreement,
publishing
title, subscriber base, CEPA certificate arising from the
acquisitions of EconWorld Media Limited, Xinhua Finance
Advertising Limited, Accord Group Limited, Beijing Perspective
Orient Movie and Television Intermediary Co., Ltd. and Shanghai
Hyperlink Market Research Co., Ltd., licensing agreements Upper
Step and exclusive advertising agreement in Economic Observer
Advertising. The intangible assets are carried at cost less
accumulated amortization. Amortization is computed using the
straight-line method over the intangible assets’ economic
lives.
The weighted average economic lives are as follows:
Customer base
4 years
Research customer relationship
4 years
Trademark
15 years
Advertising agency right
7.5 years
Program advertising right
20 years
Backlog order
1 year
Noncompete agreements
3 years
Exclusive advertising agreements
27.5 years
Publishing title
10 years
License agreements
30 years
Others
5 years
(j) Goodwill
Goodwill is not amortized but tested for impairment annually as
of December 31 and whenever events or circumstances make it more
likely than not that an impairment may have occurred. Goodwill
impairment is tested using a two-step approach. The first step
compares the fair value of a reporting unit to its carrying
amount, including goodwill. If the fair value of the reporting
unit is greater than its carrying amount, goodwill is not
considered impaired and the second step is not required. If the
fair value of the reporting unit is less than its carrying
amount, the second step of the impairment test measures the
amount of the impairment loss, if any, by comparing the implied
fair value of goodwill to its carrying amount. If the carrying
amount of goodwill exceeds its implied fair value, an impairment
loss is recognized equal to that excess. The implied fair value
of goodwill is calculated in the same manner that goodwill is
calculated in a business combination, whereby the fair value of
the reporting unit is allocated to all of the assets and
liabilities of that unit, with the excess purchase price over
the amounts assigned to assets and liabilities. Estimating fair
value is performed by utilizing various valuation techniques,
with the primary technique being a discounted cash flow.
(k) Impairment of long-lived assets
The Company evaluates its long-lived assets for impairment
whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. When these
events occur, the Company measures impairment by comparing the
carrying amount of the assets to future undiscounted 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 Company
would recognize an impairment loss as the excess
of carrying amounts over fair value of the assets. There were no
impairment losses in the years ended December 31, 2005
and 2006.
(l) 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
carryforwards 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 of the
relevant taxing authorities. The components of the deferred tax
assets and liabilities are individually classified as current
and non-current based on their characteristics.
(m) Foreign currency translation
The functional currency of XFM’s subsidiaries and
affiliates are either the Renminbi (”RMB”) or
Hong Kong dollar (”HKD”). Transactions
denominated in other currencies are translated into RMB or HKD
at the average rates of exchange prevailing during each period.
Monetary assets and liabilities denominated in other currencies
are translated into RMB or HKD at rates of exchange in effect on
the balance sheet dates. Nonmonetary assets and liabilities are
remeasured into RMB or HKD at historical exchange rates.
The Company uses the United States dollar as its functional
and reporting currency. Accordingly, assets and liabilities are
translated using exchange rates in effect at the balance sheet
date and average exchange rates for the period are used for
revenue and expense transactions.
Currency transaction gains and losses are recorded in the
consolidated statement of operations. Translation adjustments
are recorded in accumulated other comprehensive income, a
component of shareholders’ equity.
(n) Concentration of credit risk
Financial instruments that potentially expose the Company to
concentrations of credit risk consist primarily of cash,
accounts receivable, and amounts due from related parties.
One customer contributed $585,765, or 11 %, of the
Company’s revenues during the period from May 26, 2005
(date XFL acquired EconWorld Media, the predecessor to XFM) to
December 31, 2005. This customer contributed $1,601,362, or
3% of the Company’s revenues during the year ended
December 31, 2006. No single group or customer contributed
more than 10% of the total revenue during the year ended
December 31, 2006. Two customers as of December 31,2005 each accounted for 10% or more of the Company’s
accounts receivable, representing 24% and 11%, respectively, of
the Company’s accounts receivable balance at
December 31, 2005. At December 31, 2006, these
customers represented 1% and 3% of the Company’s accounts
receivable balance. No single group or customer contributed more
than 10% of the Company’s accounts receivable balance as of
December 31, 2006. The Company performs ongoing credit
evaluations of its customers and generally does not require
collateral on accounts receivable. The Company maintains an
allowance for doubtful accounts and such losses have been within
management’s expectations.
Substantially all of the Company’s revenue for the period
from May 26, 2005 (date XFL acquired EconWorld Media, the
predecessor to XFM) to December 31, 2005 and 2006 were
generated from the PRC including Hong Kong.
A substantial portion of the identifiable assets of the Company
are located in the PRC. Accordingly, no geographical segments
are presented.
(o) Fair value of financial instruments
The carrying amounts of accounts receivable, promissory note
receivable, accounts payable, bank borrowings and amounts due
from (to) related parties approximate their fair values due to
the short-term maturity of these instruments.
The convertible preferred shares and convertible loans are
recorded at their fair value upon issuance and subsequently at
their accreted values, which approximate the cash outlay which
would be due upon settlement, if not converted into common
shares.
(p) Net income per share
The Company has two classes of common shares which participate
in undistributed earnings. Accordingly, the Company has used the
two-class method of
computing income per share, income per share is computed for
each class of common share according to participation rights in
undistributed earnings. Under this method, net income applicable
to holders of common shares is allocated on a pro rata basis to
each class of common shares to the extent that each class may
share in income for the period had been distributed.
Diluted income per share is computed using the more dilutive of
(a) the two-class
method or (b) the
if-converted method. As
of December 31, 2006the Company had convertible preferred
shares, convertible loan, nonvested shares, options and warrants
outstanding which could potentially dilute basic earnings per
share in the future, but were excluded from the computation of
diluted net income per share in the period presented, as their
effects would have been antidilutive. No dilutive potential
common shares equivalents were outstanding as of
December 31, 2005.
(q) Share-based compensation
Share-based payment transactions with employees, such as share
options and nonvested shares, are measured based on the
grant-date fair value of the equity instrument issued and
recognized as compensation expense over the requisite service
period, with a corresponding addition to paid-in capital.
(r) License agreements
The license agreements for program material are accounted for as
a purchase of right or group of rights. The assets and
liabilities for license agreement are initially recorded at fair
value which is the present value of the future required
payments. The difference between the gross and net liability are
then recorded as interest under the effective interest method
and the asset is amortized over the life of the agreement.
In May 2005, the Financial Accounting Standards Board
(“FASB”) issued SFAS No. 154, “Accounting
Changes and Error Corrections,” which replaces Accounting
Principles Board Opinions No. 20 “Accounting
Changes” and SFAS No. 3, “Reporting Accounting
Changes in Interim Financial Statements—An Amendment of APB
Opinion No. 28.” SFAS No. 154 provides guidance
on the accounting for and reporting of accounting changes and
error corrections. It establishes retrospective application, or
the latest practicable date, as the required method for
reporting a change in accounting principle and the reporting of
a correction of an error. SFAS No. 154 is effective for
accounting changes and corrections of errors made in fiscal
years beginning after December 15, 2005. The adoption of
this statement did not have a material effect on the
Company’s financial position, results of operations and
cash flows.
In February 2006, the FASB issued FASB No. 155, (“SFAS
155”), “Accounting for Certain Hybrid Financial
Instruments—an amendment of FASB Statements No. 133
and 140.” This statement is effective for all financial
instruments acquired, issued, or subject to a remeasurement (new
basis) event occurring after the beginning of an entity’s
first fiscal year that begins after September 15, 2006. The
Company will adopt SFAS 155 in the first quarter of 2007.
The Company has not determined the impact, if any, of
SFAS 155 on its financial position, results of operation
and cash flow.
In June 2006, the FASB issued FASB Interpretation No. 48,
”Accounting for Uncertainty in Income Taxes—an
interpretation of FASB Statement No. 109”(”FIN 48”), which clarifies the accounting
for uncertainty in income tax positions in FASB Statement
No. 109, ”Accounting for Income Taxes.”FIN 48 prescribes a recognition threshold and
measurement attribute for the financial statement recognition
and measurement of a tax position taken or expected to be taken
in a tax return. FIN 48 is effective for fiscal years
beginning after December 15, 2006. The Company will adopt
FIN 48 in the first quarter of 2007. The Company has not
determined its impact, if any, of FIN 48 on its financial
position, results of operations and cash flows.
In September 2006 the FASB issued FASB Statement No. 157,
(”SFAS 157”), ”Fair Value
Measurement.”SFAS 157 addresses standardizing the
measurement of fair value for companies who are required to use
a fair value measure of recognition for recognition or
disclosure purposes. The FASB defines fair value as ”the
price that would be received to sell an asset or paid to
transfer a liability in an orderly transaction between market
participants at the measure date.” SFAS 157 is
effective for financial statements issued for fiscal years
beginning after November 15, 2007 and interim periods
within those fiscal years. The Company is currently evaluating
the impact, if any, of SFAS 157 on its financial position,
results of operations and cash flows.
In September 2006, the U.S. Securities and Exchange
Commission issued Staff Accounting Bulletin No.108,
“Considering the Effects of Prior Year Misstatements
when Quantifying Misstatements in Current Year Financial
Statements” (“SAB 108”). SAB 108
provides interpretive guidance on how the effects of the
carryover or reversal of prior year misstatements should be
considered in quantifying a current year misstatement. The SEC
staff believes that registrants should quantify errors using
both a balance sheet and an income statement approach and
evaluate whether either approach results in quantifying a
misstatement that, when all relevant quantitative and
qualitative factors are considered, is material. SAB 108 is
effective for fiscal years ending after November 15, 2006.
The adoption of SAB 108 did not have a material impact on
the Company’s consolidated financial position, results of
operations or cash flows.
The unaudited pro forma balance sheet information as of
December 31, 2006 assumes the conversion upon completion of
the initial public offering of all redeemable convertible
preferred shares of $59,051,612 and convertible loan of
$14,017,289 outstanding as of December 31, 2006 into common
shares.
(u) Unaudited pro forma net income per share
Pro forma basic and diluted net income per ordinary share is
computed by dividing net income attributable to holders of
common shares by the weighted average number of common shares
outstanding for the period plus the weighted average number of
common shares outstanding resulting from the assumed conversion
upon the closing of the planned initial public offering of the
outstanding redeemable convertible preferred shares and
convertible loan.
3. Acquisitions
(a) EconWorld Media
EconWorld Media Limited was incorporated in Hong Kong on
March 13, 2003. EconWorld Media Limited and its
wholly-owned subsidiaries (collectively, “EconWorld
Media”, the predecessor to XFM) have the exclusive rights
to sell advertising for a financial magazine titled “Money
Journal” in the PRC and Hong Kong. In addition, EconWorld
Media provides management and information consulting services on
the distribution of “Money Journal”.
On May 26, 2005, XFL subscribed 210,000 newly issued
ordinary shares of EconWorld Media representing 60% of EconWorld
Media’s total ordinary shares for an initial cash
consideration of $1,500,000. Direct costs of $233,599 were
incurred. The purpose of the acquisition was to enhance the
Company’s distribution capabilities. EconWorld Media is the
predecessor to XFM and its operating results have been included
in the accompanying consolidated financial statements effective
on the date of XFL’s acquisition.
In addition to the initial cash consideration for the
subscription of the 210,000 newly issued ordinary shares, the
shareholders of EconWorld Media are entitled to additional cash
consideration based on a predetermined earn-out formula applied
to aggregate audited operating results through March 31,2006. Based on EconWorld Media’s audited operating results
through March 31, 2006, the Company contributed totaling
$2,820,000 during the year ended December 31, 2006 which
resulted in an additional goodwill of $1,121,257, representing a
minority interest proportionate share of the contribution.
On January 12, 2006, XFL transferred its equity interest in
EconWorld Media to XFM in exchange of 1,000 XFM’s shares
(adjusted for the effect of share split on March 16, 2006)
with par value of $0.001 (note 17).
On June 21, 2006, XFM acquired another 12% of the equity of
EconWorld Media at a price of $1,082,910 which resulted in an
additional goodwill of $530,936. The purchase price for this
acquisition was paid by XFL on behalf of XFM and was included in
amount due to Parent. XFM’s ownership of EconWorld Media is
increased to 72% as a result of this transaction. The results of
EconWorld Media’s operations, attributable to the 12%
interest acquired, have been included in the Company’s
consolidated financial statements for the year ended
December 31, 2006 since the date of acquisition.
On December 28, 2006, XFM acquired the remaining 28% of the
equity of EconWorld Media at a price of $5,039,985 which
resulted in an additional goodwill of $3,655,487. The purchase
price for this acquisition was paid by XFL on behalf of XFM and
was included in amount due to Parent. XFM’s ownership of
EconWorld Media is increased to 100% as a result of this
transaction. The results of EconWorld Media’s operations,
attributable to the 28% interest acquired have been included in
the Company’s consolidated financial statements for the
year ended December 31, 2006 since the date of acquisition.
The following table summarizes the estimated fair values of the
assets acquired and liabilities assumed on the respective date
of acquisitions of EconWorld Media by XFL or XFM.
Assets and liabilities are reflected at 100% of their historical
cost plus a 60% step up for the acquisition. There is no
minority interest because the company was in a net liabilities
position.
(2)
12% minority interest in respective assets and liabilities were
acquired.
(3)
28% minority interest in respective assets and liabilities were
acquired.
(4)
60% of intangible assets relating to the acquisition of 60%
interest in EconWorld Media were recognized.
(5)
12% of intangible assets relating to the acquisition of 12%
minority interest in EconWorld Media were recognized.
(6)
28% of intangible assets relating to the acquisition of 28%
minority interest in EconWorld Media were recognized.
The following pro forma information summarizes the effect of the
acquisition, if the acquisitions of EconWorld Media had occurred
as of January 1, 2005. This pro forma information is
presented for information purposes only. It is based on
historical information and does not purport to represent the
actual results that may have occurred had the Company
consummated the acquisitions on January 1, 2005, nor is it
necessarily indicative of future results of operations of the
consolidated enterprises:
2005
2006
Pro forma net revenues
$
5,743,400
$
58,966,432
Pro forma income from operations
1,431,156
6,974,770
Pro forma net income
389,900
3,281,842
(b) Beijing Century Media
Beijing Century Media Culture Co. Ltd., was established on
June 25, 2004 in the PRC. Beijing Century Media Culture Co.
Ltd. and its majority-owned subsidiaries (collectively,
”Beijing Century Media”) are principally engaged in
the production of television programs, animations,
post-production for television commercials and visual effects
for television commercials and film. Beijing Century Media also
offers broadcast design services.
On September 9, 2005, XFL signed a number of loan
agreements, exclusive equity purchase option agreements, equity
pledge agreements and subrogation agreements with the equity
owners of Beijing Century Media for an initial consideration of
$3,000,000 payable in XFL common shares. Direct costs of $56,384
were incurred.
As a result of the transaction, XFL became the primary
beneficiary of 100% interest in Beijing Century Media and
accounted for the transaction similar to a business combination.
On
March 16, 2006, XFL transferred its beneficial interest in
Beijing Century Media to XFM in exchange for the same amount
payable to XFL by XFM. This transaction was accounted for as a
purchase, as a result, assets and liabilities are stated at
either their fair value or net realizable value, as appropriate.
The primary asset acquired under the transaction was content
production backlog which would enhance the Company’s
operating activities. The Company has consolidated the operating
results of Beijing Century Media effective on the date XFL
became the beneficial owner of Beijing Century Media.
The following table summarizes the estimated fair values of the
assets and liabilities XFL assumed on the effective date of the
nomination and equity pledge agreements for Beijing Century
Media.
Assets acquired:
Cash
$
417,849
Accounts receivable
325,802
Capitalized content production costs
921,000
Prepaid expenses and other current assets
129,006
Property and equipment
40,201
Deferred tax assets
125,271
Total
1,959,129
Liabilities assumed:
Accounts payable
95,336
Accrued expenses and other payables
1,216,640
Amounts due to related parties
246,944
Income taxes payable
123,316
Total
1,682,236
Minority interest
32,016
Net assets acquired
244,877
Initial purchase consideration
3,056,384
Goodwill
$
2,811,507
In addition to the initial consideration, upon achievement of
certain income milestones through 2007, the equity owners of
Beijing Century Media are entitled to additional considerations,
payable at the discretion of XFL in cash or XFL common shares,
determined based on a pre-determined earn-out formula applied to
aggregate audited net income through December 31, 2005,
2006 and 2007. Based on the relevant income level of Beijing
Century Media reported through December 31, 2005, the
Company recorded additional consideration of $8,378,317 in 2006
which resulted in an additional goodwill of $8,378,317. The
additional consideration of $8,378,317 was paid by XFL on behalf
of XFM.
On April 4, 2006, Beijing Century Media made an additional
capital contribution of $333,374 (RMB2.7 million) to
Beijing Golden Ways Culture Development Co., Limited which
increased the
registered capital of its 90% owned subsidiary from $37,042
(RMB300,000) to $370,416 (RMB3 million). Beijing Century
Media’s ownership interest also increased to 99%, and
resulted in a goodwill of $2,878.
On June 9, 2006, Beijing Century Media made an additional
capital contribution of $246,944 (RMB2 million) in Beijing
Workshop Communications Co., Ltd. (a majority-owned subsidiary
of Beijing Century Media) which increased the registered capital
of Beijing Workshop Communications Co., Ltd. from $123,472
(RMB1 million) to $370,416 (RMB3 million) and
increased its ownership interest from 90% to 96.6%. This
resulted in an excess of fair value of acquired net assets over
costs of $40,189 which was applied pro-ratably against the fair
value of long lived assets.
The following pro forma information summarizes the effect of the
acquisition, if the acquisitions of Beijing Century Media had
occurred as of January 1, 2005. This pro forma information
is presented for information purposes only. It is based on
historical information and does not purport to represent the
actual results that may have occurred had the Company
consummated the acquisitions on January 1, 2005, nor is it
necessarily indicative of future results of operations of the
consolidated enterprises:
2005
2006
Pro forma net revenues
$
6,045,820
$
58,966,432
Pro forma income from operations
2,748,912
7,067,977
Pro forma net income
1,578,092
3,344,291
(c) Xinhua Finance Advertising Limited
Xinhua Finance Advertising Limited (formerly “Ming Shing
International Limited”) was incorporated in the British
Virgin Islands (“BVI”) under the laws of the BVI on
October 6, 2005 and is an investment holding company for
its wholly- and majority-owned subsidiaries and VIEs
(collectively, “XFA”). XFA provides advertising
design, production and placement services for television, print
media and outdoor billboards on university campuses to customers
in the PRC and Hong Kong. On June 19, 2006, Ming Shing
International Limited changed its name to Xinhua Finance
Advertising Limited.
On January 12, 2006, XFL acquired 100% of XFA’s
ordinary shares at an initial consideration of $29,000,000 plus
future contingent consideration to be determined based on net
income in each of the years from 2005 to 2007. Direct costs of
$650,889 were incurred. On March 16, 2006, XFL transferred
its equity interest in XFA to XFM in exchange for the same
amount due to XFL under a promissory note The primary assets
acquired were television, print, and outdoor advertising agency
operations in the PRC which would enhance the Company’s
geographic reach and operating scope. The accompanying
consolidated financial statements include the accounts and
balances of XFA and its wholly and majority-owned subsidiaries
and VIEs as of December 31, 2006 and for the period from
January 12, 2006 (date of acquisition by XFL) through
December 31, 2006.
In addition to the initial cash consideration, the shareholders
of XFA are entitled to additional cash consideration based on a
predetermined earn-out formula applied to aggregate operating
results through December 31, 2005, 2006 and 2007. Based on
XFA’s audited operating results through December 31,2005, the Company recorded additional consideration totaling
$31,424,973 during the year ended December 31, 2006, which
resulted in additional goodwill of $31,424,973.
The following table summarizes the estimated fair values of the
assets acquired and liabilities assumed on the date of the
acquisition of XFA, including the additional consideration paid
in 2006.
On July 1, 2006, Beijing Taide Advertising Co, Ltd., a
majority owned subsidiary of XFA, acquired additional 20%
interest of its subsidiary, Shanghai Yuanxin Advertising
Intermediary Co, Ltd., at a consideration of $49,389
(RMB0.4 million). This increased its ownership interest
from 80% to 100%, and resulted in an excess of fair value of
acquired net assets over cost of $37,754 which had been applied
pro-ratably against the fair value of long lived assets.
The following pro forma information summarizes the effect of the
acquisition, if the acquisitions of XFA had occurred as of
January 1, 2005. This pro forma information is presented
for information purposes only. It is based on historical
information and does not purport to represent the actual results
that may have occurred had the Company consummated the
acquisitions on January 1, 2005, nor is it necessarily
indicative of future results of operations of the consolidated
enterprises:
Beijing Jingguan Xinchen Advertising Co., Ltd. (“Economic
Observer Advertising”) was established in the PRC on
January 25, 2006. Economic Observer Advertising has the
exclusive rights to sell advertising for and provides management
and information consulting services to a financial newspaper.
On June 8, 2006, XFM acquired 50% equity interest of
Economic Observer Advertising and control of a majority of its
board of directors at an initial cash consideration of
$9,241,465 and incurred transaction costs of $2,229,612. Out of
the total $11,471,077, $8,962,397 was paid by Xinhua Finance
Network (“XFN”) and XFL and behalf of XFM. The primary
asset acquired was the exclusive rights to sell advertising and
provide management and information consulting services. In
addition to the initial cash consideration, the equity holders
of Economic Observer Advertising are entitled to additional cash
considerations based on a predetermined earn-out formula applied
to aggregate operating results through December 31, 2006.
The following table summarizes the estimated fair values of the
assets acquired and liabilities assumed on the date of
acquisition of Economic Observer Advertising.
On September 15, 2006, other shareholders of Economic
Observer Advertising transferred their aggregate 50% of the
equity interests in Economic Observer Advertising to XFM in
exchange for total consideration of $6,708,221, which include a
cash consideration of $308,680 and 5,761,317 XFM’s
class A common shares valued at $1.1 per share. Direct
costs of $62,092 were incurred and included in purchase price of
the acquisition.
The following table summarizes the estimated fair values of the
assets acquired and liabilities assumed at the date of
acquisition of the remaining 50% equity interest in Economic
Observer Advertising.
The exclusive advertising agreement has an amortization period
of 50 years.
The accompanying consolidated financial statements included the
accounts and balance of Economic Observer Advertising as of
December 31, 2006 and the operating results for the period
from June 8, 2006 (date of acquisition by XFM) through
December 31, 2006.
(e) Accord Group Investments ltd.
Accord Group Investments Limited was established in the BVI on
June 15, 2005. Accord and its subsidiaries and consolidated
VIE, (collectively the ”Accord Group”) place
advertisements, provide advertising services to customers in the
PRC and have the exclusive rights to sell advertising for and
the rights to provide content to the EasyFM radio stations of
Beijing and Shanghai. Accord Group also provides design and
production services to its customers.
On January 23, 2006, XFL acquired a 19% equity interest in
Accord Group for cash consideration of $440,000 which was paid
by XFN, a subsidiary of XFL, on its behalf. On March 16,2006, XFL transferred all its 19% beneficial interests in Accord
Group to XFM in exchange for the same amount due to XFN.
On September 22, 2006, XFM acquired 61% of the equity of
Accord Group from Sino Investment Holdings Limited (”Sino
Investment”), a company controlled by two directors of XFL
and the chief financial officer of the Company has beneficial
interest, by issuing 451,107 of its class A common shares
valued at $1.1 per share. As part of the acquisition, the
Company also issued 125,053 class A common shares valued at
$1.1 per share to an individual in exchange of his entering into
a Deed of Non-Competition Undertaking and Release with the
Company. The total value of the shares issued amounted to
$633,776.
On November 1, 2006, XFM acquired the remaining 20% equity
of Accord Group for $237,600, which was settled by the issuance
of 125,053 of its class A common shares valued at $1.90
each. As a result, Accord Group became a wholly-owned subsidiary
of XFM.
The following table summarizes the estimated fair values of the
assets acquired and liabilities assumed on the respective date
of acquisitions of Accord Group. The table also reflects a
non-cash activity for purposes of the consolidated statement of
cash flows:
Assets and liabilities are reflected at 100% of their historical
cost plus a 80% step up for the acquisition. There is no
minority interest because the company was in net liabilities
position.
(2)
20% minority interest in respective assets and liabilities were
acquired. The net liabilities were not assumed from the
acquisition because the minority interest had not shared the
attributable loss in the company in excess of its capital
contribution.
(3)
80% of total intangible assets relating to the acquisitions of
80% interest in Accord Group were recognized.
(4)
20% of total intangible assets relating to the acquisitions of
20% interest in Accord Group were recognized.
The accompanying consolidated financial statements included the
accounts and balance of Accord Group as of December 31,2006 and the operating results for the period from
September 22, 2006 (date of acquisition by XFM) through
December 31, 2006. As a result of the subsequent
acquisition of a controlling interest and eventually 100% of
Accord Group, the results of Accord Group’s operations
attributable to the first 19% interest acquired was adjusted
retrospectively and accounted for using the equity method during
the period from January 23, 2006 to September 21, 2006.
The following pro forma information summarizes the effect of the
acquisition, if the acquisitions of Accord Group had occurred as
of January 1, 2005. This pro forma information is presented for
information purposes only. It is based on historical information
and does not purport to represent the actual results that may
have occurred had the Company consummated the acquisitions on
January 1, 2005, nor is it necessarily indicative of future
results of operations of the consolidated enterprises:
2005
2006
Pro forma net revenues
$
5,886,360
$
60,088,070
Pro forma income from operations
938,920
6,456,903
Pro forma net (loss) income
(210,408
)
2,880,912
(f) Beijing Perspective Orient Movie and Television
Intermediary Co., Ltd.
Beijing Perspective Orient Movie and Television Intermediary
Co., Ltd. was established in the PRC on September 25, 2000
for a term of 20 years. Beijing Perspective and its
subsidiary (collectively the ”Beijing Perspective”)
are engaged in the production and syndication of financial
television programs under the Fortune China name and earn
revenues by selling advertising time and sponsorship rights at
the time the programs are broadcasted.
On July 28, 2006, XFM acquired 51% of the equity of Beijing
Perspective, through Beijing Century Media. XFL paid the
purchase price of $6,275,052 for this acquisition. Transaction
costs of $662,092 were included in this transaction and were
paid by XFN and XFL on behalf of XFM.
The following table summarizes the estimated fair values of the
assets acquired and liabilities assumed on the date of the
acquisition of Beijing Perspective.
The accompanying consolidated financial statements included the
accounts and balance of Beijing Perspective as of
December 31, 2006 and the operating results for the period
from July 28, 2006 (date of acquisition by XFM) through
December 31, 2006.
The following pro forma information summarizes the effect of the
acquisition, if the acquisitions of Beijing Perspective occurred
as of January 1, 2005. This pro forma information is
presented for information purposes only. It is based on
historical information and does not purport to represent the
actual results that may have occurred had the Company
consummated the acquisitions on January 1, 2005, nor is it
necessarily indicative of future results of operations of the
consolidated enterprises:
2005
2006
Pro forma net revenues
$
8,130,358
$
59,797,031
Pro forma income from operations
1,682,951
6,137,829
Pro forma net income
598,398
1,885,579
(g) Shanghai Hyperlink Market Research Co.,
Ltd
Shanghai Hyperlink Market Research Co., Ltd was established in
the PRC on July 15, 1997 for a term of 20 years.
Shanghai Hyperlink and its subsidiary (collectively the
”Shanghai Hyperlink”) primarily engage in market
research in the PRC and provide services including the study of
market characteristics, consumer preferences and opinions with
respect to advertising and media content, and business and
technology issues.
On August 1, 2006, XFL acquired 51% of the equity of
Shanghai Hyperlink, and paid partial purchase price with initial
consideration of $2.0 million and subsequent consideration
based on a predetermined earn-out formula applied to aggregate
audited operating results through June 30, 2007 and 2008
with a maximum of $3.6 million for this 51% equity. On
September 1, 2006, XFM issued 1,679,012 class B common
shares to XFL in exchange for the 51% equity interest in
Shanghai Hyperlink.
On September 15, 2006, members of the management team of
Shanghai Hyperlink, transferred their aggregate 49% of the
equity interest in Shanghai Hyperlink to the Company at total
consideration of $1,804,737; of which of $30,251 (RMB245,000)
was settled in cash and $1,774,486 was settled by the issuance
of 1,613,169 class A common shares at fair value of
$1.1 each.
The following table summarizes the estimated fair values of the
assets acquired and liabilities assumed on the respective date
of acquisitions of Shanghai Hyperlink.
The accompanying consolidated financial statements included the
accounts and balance of Shanghai Hyperlink as of
December 31, 2006 and the operating results for the period
from August 1, 2006 (date of acquisition by XFL) through
December 31, 2006.
The following pro forma information summarizes the effect of the
acquisition, if the acquisitions of Shanghai Hyperlink occurred
as of January 1, 2005. This pro forma information is
presented for information purposes only. It is based on
historical information and does not purport to represent the
actual results that may have occurred had the Company
consummated the acquisitions on January 1, 2005, nor is it
necessarily indicative of future results of operations of the
consolidated enterprises:
2005
2006
Pro forma net revenues
$
7,748,321
$
60,250,623
Pro forma income from operations
2,518,351
6,900,362
Pro forma net income
1,370,109
3,364,955
(h) Upper Step Holdings Ltd
Upper Step Holdings Limited (”Upper Step”) was
established in the BVI on September 28, 2005. Upper Step is
engaged in the provision of advertising and consulting services
in relation to the strategic partnership with Shanghai Camera
Media Investment Co., Ltd.
On February 28, 2006, XFN paid cash of $5,100,000 to a
selling shareholder as consideration for 19% of the equity of
Upper Step. On March 16, 2006, the 19% equity holding was
transferred to XFM. XFM subsequently contributed cash amounting
to $1,200,000 directly to Upper Step as additional contribution
for its existing 19% equity interest. This resulted in total
consideration of $6,300,000 for acquiring this equity interest
from XFM’s perspective. Transaction costs of $133,250 were
incurred. On September 22, 2006, XFM obtained that 37%
equity of Upper Step from Sino Investment, for a total
consideration of $18,954,281, of which $7,126,281 was settled by
the issuance of 6,478,437 of its class A common shares at a
price of $1.1 per share, $628,000 was settled by the issuance of
4,099,968 of its warrants, additional cash consideration of
$9,100,000 paid by XFL on behalf of XFM and cash consideration
of $10,000,000 paid by XFM. Included in total cash consideration
of $19,100,000, $7,900,000 represented payment made by XFM on
behalf of Sino Investment to vendor. Direct costs of $142,820
were incurred. The warrants are immediately exercisable at a
price of $3.659 per share and valid for a period of five years.
The chief financial officer of the Company has beneficial
interest in Sino Investment.
On November 1, 2006, XFM had obtained the remaining 44%
equity in Upper Step at total consideration of $12,173,334,
which were settled by the issuance of 6,407,018 class A
common shares of the Company valued at $1.9 each.
The following table summarizes the estimated fair values of the
assets acquired and liabilities assumed on the respective date
of acquisitions of Upper Step. The table also reflects a
non-cash activity for purposes of the consolidated statement of
cash flows:
The licensing agreements have amortization period of
30 years.
The accompanying consolidated financial statements included the
accounts and balance of Upper Step as of December 31, 2006
and the operating results for the period from September 22,2006 (date of acquisition by XFM) through December 31, 2006.
4. Investment
As of December 31, 2006, the Company’s investment
represented 19% equity interest in Hyperlink E-data
International Limited, a company incorporated in BVI and is
intended to be engaged in market research online business. The
purpose of this investment is to strengthen the market research
capabilities of the Company in the PRC market. The investment
was accounted for as a cost method investment.
In 2006, XFM had issued to XFL and its affiliates promissory
notes amounting to $29,246,500 that was included as part of the
amounts due to Parent and its affiliates as of December 31,2006 (Note 20) for settling the potential earn-out
considerations relating to the acquisition of XFA and
contractual control of Beijing Century Media, which will be paid
by XFL.
Amortization expense was $444,558 for the period from
May 26, 2005 (date XFL acquired EconWorld Media, the
predecessor to XFM) to December 31, 2005; and $1,098,228
for the year ended December 31, 2006, respectively.
Advances to employees are non-interest bearing and are due on
the Company’s demand.
Other loan receivable is advance to an independent third party.
The amount is carried interest at 5% per annum, unsecured and
repayable within one year; however, the Company can request for
security from the borrower anytime pursuant to the agreement.
Depreciation and amortization expense was $36,817 for the period
from May 26, 2005 (date XFL acquired EconWorld Media, the
predecessor to XFM) to December 31, 2005; and $633,119 for
the year ended December 31, 2006.
Amortization expense was $95,948 for the period from
May 26, 2005 (date XFL acquired EconWorld Media, the
predecessor to XFM) to December 31, 2005; and $3,504,505
(including license agreements in Upper Step and exclusive
advertising agreement in Economic Observer Advertising) for the
year ended December 31, 2006. The Company will record
amortization expense of $8,005,160, $7,906,576, $6,879,030,
$6,251,606 and $5,535,013 in the years ending 2007 through 2011,
respectively.
Management performed the annual goodwill impairment test as of
December 31, 2006 in respect of goodwill arising from
EconWorld Media, Beijing Century Media and XFA and no impairment
loss is identified.
11. Accrued expenses and other payables
Accrued expenses and other payables consisted of the following:
The long term payables represent the outstanding consideration
for the acquisition of license agreement and exclusive
advertising agreement in Economic Observer Advertising and
advertising services agreement in Upper Step which are
non-interest bearing and have repayment terms ranging from 5 to
50 years with fixed monthly or annual payments. The payable
was accordingly discounted at an effective interest rate of 6%
per annum. Such imputed interest included in the statement of
operation for the year ended December 31, 2006 amounted to
$792,872.
The schedule of principal payments of long-term payables as of
December 31, 2006 was as follows:
2007
$
8,900,988
2008
9,066,943
2009
8,546,652
2010
8,056,223
2011
5,626,982
After 2011
33,641,158
Total
$
73,838,946
Less: Current portion
(8,900,988
)
Non-current portion
$
64,937,958
13. Bank borrowings
The bank borrowings as of December 31, 2006, were secured
by bank deposits of approximately $12.6 million. The
amounts carry interest of approximately 6% per annum and
are repayable in 2007.
14. Convertible securities
(a) Redeemable convertible preferred shares
On March 16, 2006, XFM entered into an agreement with one
of XFL’s shareholders and sold 16,404,926 of XFM’s
redeemable convertible preferred shares (”Preferred
Shares”) for $60,000,000. The cash proceeds were used
primarily to acquire the equity interest of certain subsidiaries
and affiliates.
The key terms of the Preferred Shares are as follows:
Dividends. The holders of the Preferred Shares are
entitled to receive mandatory cumulative dividends at an annual
rate of 11% of the original issue price per annum for each
Preferred Share and to be received on a quarterly basis. The
Company has declared and paid $1,943,333 preferred share
dividends for the period from the date of issuance of the
Preferred Shares to July 24, 2006.
Conversion. The Preferred Shares are automatically
convertible into common shares at any time after the date of
issuance of such shares by obtaining the necessary written
consent from the holders of the Preferred Shares; or upon the
consummation of a qualified public offering. Each Preferred
Share shall be convertible into such number of fully paid and
nonassessable common shares as is determined by dividing the par
value of the convertible Preferred Shares plus all accrued
unpaid dividends on the Preferred Share by the applicable
conversion price of (i) $3.66 if certain assets were not
acquired directly or indirectly by the Company; and
(ii) $5.17 if 100% of certain assets were acquired directly
or indirectly by the Company.
The conversion price is subject to adjustments for issuances of
the Company’s shares below the conversion price, dividend
payment, stock split and other dilution events, except for
certain issuances such as issuances in connection with the
employee share benefit plan. The Redeemable Convertible
Preferred Shares will be automatically converted into the
Company’s common shares upon a qualified initial public
offering by the Company.
Voting rights. Each Preferred Share shall entitle the
holder to such number of votes as shall equal the number of
common shares into which such Preferred Share is then
convertible.
Redemption. Preferred Shares may be redeemed at any time
after the earlier of (i) December 31, 2008;
(ii) the date there is an initial public offering that is
not a qualified initial public offering as described in the
share purchase agreement; (iii) the Company elects to
optionally redeem the Preferred Share; or (iv) failure for
the Company to fulfill its certain obligations. In connection
with the redemption of the Preferred Share, the Company shall
pay a redemption price either (a) equal to the face amount
plus any accrued and unpaid dividends due on such Preferred
Share plus an amount equal to face amount times 42.86% times
number of calendar days in the period from the issuance date to
redemption date divided by number of calendar days in the period
from the issuance date to December 31, 2008; or
(b) the fully paid and non-assessable common shares of XFL,
with the price per common share of XFL determined at a 10%
discount to the 30 trading day trailing average closing price of
such common share of XFL on the relevant exchange. The Company
accrued the premium over the redemption period as a deemed
dividend with a debit to the retained earnings of $2,157,301 for
the period from date of issuance of Preferred Share to
July 24, 2006.
Liquidation preference. In the event of any liquidation,
dissolution or winding up of the Company, of any distribution of
assets to its shareholders, either voluntary or involuntary,
each Preferred Share holder shall be entitled to receive for
each of its Preferred Shares, out of any lawfully available
assets of the Company, in preference to the holders of common
shares and any other preferred shares, an amount equal to the
face amount plus any accrued and unpaid dividends due on such
Preferred Share plus an amount equal to face amount times 42.86%
times number of calendar days in the period from the issuance
date
to the payment date divided by number of calendar days in the
period from the issuance date to December 31, 2008.
On July 24, 2006, the Memorandum of Association were
amended and the terms of the Preferred Shares were changed as
follow:
(i) The Preferred Shares are revised to be redeemable at
the option of the Company.
(ii) the dividends are no longer cumulative, and are paid
only if declared.
The significant terms of the revised Preferred Shares are as
follows:
Conversion. Each convertible preferred share is
convertible into class A common share at a conversion price
of $3.66, at the option of the holder at any time after the
original date of issuance of such shares, or is automatically
converted upon the qualified initial public offering as
described in the amended and restated Memorandum of Association
of the Company that occurs prior to the December 31, 2008.
At any time after January 7, 2009, holder of Preferred
Shares may notify XFM to convert all of its preferred shares
into 160,000 XFL’s shares. In such case, XFM must use best
efforts to procure the delivery of such shares.
Voting rights. Each Preferred Shares shall entitle this
holder to vote on an as converted basis with the class A
common share.
Dividends. The holders of Preferred Shares are entitled
to receive noncumulative dividends only if declared.
Liquidation preference. In the event of any liquidation,
dissolution, or winding up of the Company, or any distribution
of assets to its shareholders, either voluntary or involuntary,
each preferred shareholder shall be entitled to receive for each
of its Preferred Shares, out of any lawfully available assets of
the Company, in preference to the holders of common shares and
any other preferred shares, an amount equal to the sum of
(i) two times the face amount (which is $3.66 per preferred
share, as adjusted for any split, consolidation or similar event
with respect to the preferred shares) plus (ii) any accrued
and unpaid dividends due on such Preferred Share plus
(iii) after December 31, 2008, 15% per annum
multiplied by the sum of (i) and (ii) above.
After the payment in full of the liquidation preference amount
to the holders, the total preferred shares shall also be
entitled to a share of 1% of the remaining assets of the Company.
With the change of terms, the Preferred Shares were reclassified
from mezzanine equity to permanent equity.
On September 20, 2006, 819,672 Preferred Shares at carrying
value of $3,105,689 were redeemed by the Company for a total
redemption amount of $1.00. At the same time, the credit
agreement was amended (see note 14(b)), pursuant to which
$3,000,000 was reclassified as convertible loan. Redemption gain
of $105,688 was recognized directly in equity.
(b) Convertible loan
In addition to the issuance of the Preferred Shares, on
March 16, 2006, XFM also entered into a credit agreement
with the same XFL shareholder discussed above. Under the credit
agreement,
XFM borrowed $10.0 million from the XFL shareholder for a
term through December 31, 2008. Interest is payable at
LIBOR plus 2.75%; however, the Company shall pay on the loan
maturity date an amount either (a) equal to the face amount
plus any accrued and unpaid interest due on such loan plus an
amount equal to face amount times 42.86% times number of
calendar days in the period from the issuance date to payment
date divided by number of calendar days in the period from the
issuance date to December 31, 2008; or (b) the fully
paid and non-assessable common shares of XFL, with the price per
common share of XFL determined at a 10% discount to the 30
trading day trailing average closing price of such common share
of XFL on the relevant exchange. That holder may convert the
note into XFM’s class A common shares at any time, at
a conversion rate of $3.657438 per share. Pursuant to this
credit agreement, XFM also entered into pledge and security
agreements pledging the ownership interest of certain of
XFM’s subsidiaries and XFM’s assets.
Immediately following redemption of the 819,672 preferred
shares, the credit agreement was amended such that the
additional interest of $272,727.27 related to the convertible
loan in arrears from the quarter starting April 1, 2006
shall accrue until the quarter ending December 31, 2008
with the total increase amounting to $3,000,000 being payable
upon maturity.
In addition, upon conversion, the sum of (i) the aggregate
amount of the outstanding principal amount of the loans plus
(ii) all accrued and unpaid interest plus
(iii) $3,000,000 less any amount of accrued accreting
interest paid simultaneously therewith shall be convertible into
XFM’s common shares. Hence, the $3,000,000 interest
originally accruing through maturity of the notes will be
immediately available for conversion into XFM’s common
shares upon a qualified initial public offering by XFM if that
happens before December 31, 2008.
15. Nonvested Shares
In June 2006, the Company granted 11,050,000 common shares of
$0.001 each (”Nonvested Shares”) to a director, Fredy
Bush as fully paid shares at par. The Nonvested Shares shall be
subject to a 5-year vesting period and one-fifth of the total
Nonvested Shares granted, being 2,210,000 common shares, shall
become vested on each of the first annual anniversary dates
after the date of grant. Accordingly, the Company recorded
compensation expense of $1,666,382 in general and administrative
expenses for the year ended December 31, 2006 which
represents amortization on the fair value of the common shares
on the grant date over a period of 5 years.
The following table summarizes information regarding the
Nonvested Shares:
* The fair value was determined based on a valuation by
an independent appraiser, American Appraisal China Limited
(“Independent Appraiser”).
As of December 31, 2006, there are 11,050,000 Nonvested
Shares outstanding. These shares are subject to transfer
restrictions and do not have any voting rights, entitlement of
dividends,
rights to the surplus assets of the Company in the event of a
winding-up or reorganization of the Company and generally all of
the rights attaching to common shares.
On November 20, 2006, 635,000 nonvested class A shares
held by Fredy Bush were transferred to seven individuals. On
November 30, 2006, 10,415,000 class A nonvested shares
held by Fredy Bush were transferred to her family trust fund.
16. Warrants
In connection with the acquisition of Upper Step, the Company
issued to Sino Investment warrants to purchase 4,099,968
class A common shares with a strike price of $3.659 per
share on September 22, 2006. In addition, the Company
issued warrants to purchase 630,000 class A common shares
to a consultant with a strike price of $3.659 per share on
December 7, 2006. The warrants are fully vested upon the
date of grant. For the warrant to Sino Investment, total fair
value of $628,000 at the date of grant was capitalized as part
of the consideration paid for the acquisition of Upper Step. The
warrants to the consultant shall be subject to a 5-year lock-up
period. The related compensation expense of $111,000 was
recorded as consultancy fee in general and administration
expense in the year ended December 31, 2006 and represents
the fair value of the warrants on the grant date.
The fair value of the warrants granted to Sino Investment and
the consultant were approximately $0.15 per warrant and $0.18
per warrant, respectively, at respective dates of grant, which
were estimated on the basis of the Black-Scholes option pricing
model with the following assumptions:
Warrant to Sino
Warrant to
Investment
consultant
Expected price volatility range
45%
44%
Risk-free interest rate
5.11%
4.91%
Contractual life of the warrant
5 years
5 years
Expected dividends
0%
0%
The fair value was determined based on a valuation by
Independent Appraiser.
As of December 31, 2006, there are 4,729,968 warrants
outstanding. These warrants are subject to transfer restrictions
and do not have any voting rights, entitlement of dividends,
rights to the surplus assets of the Company in the event of a
winding-up or reorganization of the Company and generally all of
the rights attaching to common shares.
17. Capital Structure
On November 7, 2005, XFM issued 1,000 common shares
(adjusted for the effect of share splite on March 16, 2006)
at par value of $0.001 per share to XFL.
On January 12, 2006, in connection with the acquisition of
60% interest in EconWorld Media, XFM issued 1,000 shares
(adjusted for the effect of share subdivision on March 16,2006) with par value of $0.001 for a total consideration of
$4,553,599, which represented XFL’s investment in EconWorld
Media.
On March 16, 2006, XFM issued 42,612,289 shares at par
value of $0.001 per share to XFL, which has been accounted for
as a stock split. The share proceeds of $42,612 remained
outstanding and subscription receivable of $42,612 was recorded.
Pursuant to a special resolution passed on March 16, 2006,
every issued and unissued share of $1.0 each in the capital of
XFM is subdivided into 1,000 share of $0.001 each. Accordingly,
immediately after the subdivision, XFM has an authorized share
capital of $50,000 divided into 50,000,000 shares of $0.001 each
and issued share capital of $2 divided into 2,000 shares of
$0.001 each. All share and per share amounts were retroactively
adjusted to reflect this share subdivision.
In addition, on March 16, 2006, the authorized share
capital of XFM was increased to $1,000,000 and thereafter, be
redesignated and reclassified into (a) 22,000,000 preferred
shares of $0.001 each and (b) 978,000,000 common shares of
$0.001 each. Accordingly the amended authorized share capital is
$1,000,000 divided into 978,000,000 common shares of a nominal
or par value of $0.001 each and 22,000,000 preferred shares of a
nominal or par value of $0.001 each.
On July 24, 2006, XFM redesignated its 42,614,289 common
shares held by XFL as class B common shares and 11,050,000
nonvested shares held by a director, Fredy Bush, as class A
common shares.
The class A common shares shall entitle the holder to one
vote per share; entitle the holder to such dividends as the
Board may from time to time declare; in the event of a
winding-up or dissolution of the Company, whether voluntary or
involuntary or for the purpose of a reorganization or otherwise
or for the purpose of a reorganization or otherwise or upon any
distribution of capital, entitle to the surplus assets of the
Company; and generally entitle the holder to enjoy all of the
rights attaching to class A common shares.
The class B common shares shall entitle the holder to ten
votes per share; entitle the holder to convert such shares into
class A common shares on a one to one basis at any time
upon delivery of written notice to the Board of Directors; upon
any sale, pledge, transfer, assignment or disposition of
class B common shares by a holder thereof to any person or
entity which is not at any time a wholly-owned and
wholly-controlled subsidiary of XFL, automatically convert into
class A common shares (and, for the avoidance of doubt, at
any time such subsequent holder ceases to be a wholly-owned and
wholly-controlled subsidiary of XFL, the class B common
shares held by such holder shall automatically convert into
class A common shares; and otherwise rank pari passu with
the class A common shares.
On September 20, 2006, 6,400,000 authorized and unissued
Preferred Shares were cancelled and the authorized number was
reduced to 15,600,000 Preferred Shares.
On September 21, 2006, 5,761,317 and 1,679,012 class B
common shares were issued to XFL for the acquisition of 50%
equity interests of Economic Observer Advertising and 51% equity
interest of Shanghai Hyperlink, respectively.
On September 22, 2006, pursuant to a number of share
subscription agreements, XFM issued 125,053 and 1,613,169 and
5,761,317 class A common shares to three individuals in
exchange for their entering into Deeds of Non-Competition
Undertaking and Release with XFM and Beijing Century Media,
Shanghai Hyperlink, and Economic Observer Advertising
respectively, for
a term of four years as part of the acquisitions of Beijing
Shiji Guangnian Advertising Co., Ltd. (“Beijing Century
Advertising”), Shanghai Hyperlink and Economic Observer
Advertising.
On September 22, 2006, 6,929,544 class A common shares
were issued to Sino Investment for its investments in Upper Step
and Accord Group.
On November 1, 2006, pursuant to a share subscription
agreement, XFM issued 6,532,071 and 6,532,071 class A
common shares to an individual in exchange for his entering into
a Deed of Non-Competition Undertaking and Release with XFM and
Beijing Century Advertising for a term of four years as part of
the acquisition of Accord Group and Upper Step.
18. Share options
Pursuant to the directors’ resolution on July 11,2006, the Company granted options to employees for the purchase
of a maximum of 11,727,602 shares in the Company, subject to
vesting requirements. The options entitle the option holder to
acquire one ordinary share of the Company at an exercise price
of $0.78 per share.
The key terms of the share options are as follows:
Termination of options. Where the option agreement
permits the exercise or purchase of the options granted for a
certain period of time following the recipient’s
termination of service with us, or the recipient’s
disability or death, the options will terminate to the extent
not exercised or purchased on the last day of the specified
period or the last day of the original term of the options,
whichever occurs first.
Vesting period. In general, options granted under our
individual option agreements will vest in the following manner.
The first half of any option grant will vest upon the earlier of
the date of the initial public offering and December 31,2007. The next two quarters will vest on December 31, 2008
and 2009, respectively. For options under the share option plan,
this will be subject to the discretion of the option
administrative committee.
Option exercise. The term of options granted under
individual option agreements may not exceed five years from the
date of grant. The consideration to be paid for XFM shares upon
exercise of an option or purchase of shares underlying the
option will be determined by the plan administrator and may
include a certified or cashier’s check or consideration
received by us under a cashless exercise program implemented by
us in connection with the XFM share option agreement, or any
combination of the foregoing methods of payment.
Termination of option agreements. Unless terminated
earlier, XFM share options granted under individual option
agreements will expire in 2011. XFM’s board of directors
will have the authority to amend or terminate XFM’s share
option agreement subject to shareholder approval to the extent
necessary to comply with applicable law.
The excisable period of the option is 5 years up to 2011.
During the year ended December 31, 2006, compensation
expense of $626,858 was recognized and included in general and
administrative expenses.
The grant date fair value was $0.14 for each option.
As of December 31, 2006, there was $940,887 of total
unrecognized compensation cost related to nonvested share
options granted during the year. That cost is expected to be
recognized over 3 years.
19. Provision for income taxes
XFM is a tax exempted company incorporated in the Cayman
Islands. The Company’s subsidiaries incorporated in Hong
Kong and PRC are subject to Hong Kong Profits Tax and foreign
Enterprise Income Tax in the PRC.
The Company’s subsidiaries incorporated in Hong Kong are
taxed at 17.5% on the assessable profits arising in or derived
from Hong Kong. For those Hone Kong subsidiaries which generate
PRC sourced income, PRC income tax should still be payable on
the assessable profits at 33%.
The Company’s subsidiaries incorporated in the PRC are
generally subject to income tax at a statutory rate of 33% in
respect of its profits (30% state income tax plus 3% local
income tax) on PRC taxable income. Some of the PRC subsidiaries
are currently tax exempted or subject to income tax at a reduced
tax rate of 15% according to the relevant tax incentives. In
particular, the subsidiaries of “cultural education
enterprises” are generally exempt from income tax for the
first year since their commencement of business, while those of
“information enterprises” are generally exempt from
income tax for the first and second year since their
commencement of business.
Due to the uncertainty of the level of PRC statutory income and
the Company’s lack of operating history, management does
not believe certain subsidiaries will generate taxable PRC
statutory income in the near future and it is more likely than
not that not all of the deferred tax assets will be realized, a
valuation allowance has been established for the certain amount
of deferred tax assets at December 31, 2005 and
December 31, 2006. The Company has operating loss carry
forwards of $2,198,306 for the period from May 26, 2005
(date XFL acquired EconWorld Media, the predecessor to XFM) to
December 31, 2005 and $11,050,028 for the year ended
December 31, 2006. The net operating loss carry forwards
for the PRC subsidiaries expire on various dates through 2011
and the net operating loss carry forwards for the Hong Kong
subsidiaries which may carry forward indefinitely.
As of December 31, 2006, valuation allowance for deferred
tax assets for which subsequently recognized tax benefits will
be allocated to reduce goodwill or other noncurrent intangible
assets of the acquired entities amounted to approximately
$2,204,000.
Reconciliation between the provision for income taxes computed
by applying the PRC enterprise income rate of 33% to income
before income taxes and the actual provision for income taxes is
as follows:
Effect of income tax rate differences in other jurisdictions
(42,185
)
2,319,620
Changes in valuation allowances
79,143
705,553
Foreign income taxes
65,640
183,797
Effect of tax exemptions
(136,174
)
(4,997,098
)
Other
2,742
25,624
Provision for income taxes
$ 928,634
$1,069,537
PRC income taxes that would have been payable without the tax
exemptions amounted to approximately $136,000 for the period
from May 26, 2005 (date XFL acquired EconWorld Media, the
predecessor to XFM) to December 31, 2005 and approximately
$4,997,000 for the year ended December 31, 2006. Basic and
diluted net income per share would have been decreased to $0.029
for the period from May 26, 2005 (date XFL acquired
EconWorld Media, the predecessor to XFM) to December 31,2005 and basic and diluted net loss per share would have been
increased to $0.184 for the year ended December 31, 2006.
Amounts due from affiliates principally represented advance to
investee and a former shareholder of a subsidiary and are
non-interest bearing and repayable on demand.
(b)
Amounts due from and to directors represented advance from and
to directors of subsidiaries and are non-interest bearing and
repayable in demand.
(c)
Amounts due from minority shareholders represented advances to
minority shareholders of subsidiaries. These amounts are
non-interest bearing and are due on demand. Amounts due from
minority shareholders are expected to be collectible, therefore,
no allowance for uncollectible amount was considered necessary
at December 31, 2005. Amount due to a minority shareholder
as of December 31, 2005 represented borrowings from an
EconWorld Media shareholder and bore interest at 4.5% on the
unpaid balance payable at the time the principal balance was
paid.
(d)
Amount due from a related company represented advances to a
related company owned by one of the Company’s shareholders
which is non-interest bearing and repayble within one year.
Out of the total amount, $2,000,000 is secured by the registered
capital of the borrower.
(e)
Amounts due to XFL and its affiliates represented amounts
borrowed from XFL and subsidiaries of XFL which are not members
of the Company and are due on demand. The balance as of
December 31, 2006 included two promissory notes amounting
to $106,751,685, which includes the initial consideration of
$3,000,000 paid for the acquisition of Beijing Century Media,
additional consideration and transaction cost of $8,728,570 in
respect of the acquisition of Beijing Century Media, contingent
consideration of $7,862,500 to be paid based on the net income
of 2006 and 2007, estimated employee bonus paid or payable of
$1,081,250 in relation to acquisition of Beijing Century Media;
and, of contingent consideration of $47,860,102 for the
acquisition of XFA paid or payable based
on the net income of 2005 and 2006; consideration of $440,000
paid for the acquisition of Accord Group, $5,131,517 deposit
paid for the proposed acquisition of 19% equity interest in
Upper Step, initial consideration of $29,000,000 paid for the
acquisition of XFA and contingent consideration of $3,647,746
paid for the acquisition of XFA. Both notes are due on demand
and the interest rates are not specified. XFM issued the
promissory notes to borrow money from XFL and XFN to pay for the
costs related to XFM’s acquisition of XFA, Upper Step, and
Accord Group and the contractual control of Beijing Century
Media. The transaction agreements for some of these acquisitions
contain earn-out provisions that would require payment of
additional consideration based on the financial performance of
the acquired companies. These earn-out considerations are the
obligations of XFL. While not specified in the contract XFL may
request that the Company pay any difference between those
payments and amounts due under the promissory notes.
As of December 31, 2005, the amount due to parent and its
affiliates of $5,599,545 included the initial consideration for
Beijing Century Media of $3,000,000 (Note 3), $1,500,000
for the 60% interest in EconWorld Media and two other promising
notes for $500,000 in total. During the year ended
December 31, 2006, the Company issued common shares to
settle the aforesaid share subscription in EconWorld Media,
earn-out considerations for the acquisition and other
transaction costs and repaid the two promising notes.
On February 14, 2006, EconWorld Media issued a promissory
note in the amount of $1,330,000 to XFN. The promissory note was
due on June 30, 2006 and the interest rate was 4% per
annum. The note was for working capital purposes and was settled
on June 9, 2006.
On April 18, 2006, the Company entered into an advisory
agreement with Patriarch Partners Management Group, LLC and XFL.
Patriarch Partners Management Group, LLC, being the holder of
preferred shares and convertible loan of the Company, is to act
as advisor to the Company in making acquisitions of the majority
of stock or assets in target companies. It is agreed to pay a
success fee to Patriarch Partners Management Group, LLC for each
successful acquisition in an amount to be mutually agreed, and
not to exceed $5.0 million. During the year ended
December 31, 2006, the Company paid $3.5 million
consulting fees under this agreement. The agreement will be
terminated on April 18, 2007.
On September 21, 2006, 5,761,317 class B common shares
of the Company was allotted and issued to XFL for the
acquisition of 50% equity interests of Economic Observer
Advertising and 1,679,012 class B common shares of the
Company was allotted and issued to XFL for the acquisition of
51% equity interests of Shanghai Hyperlink respectively.
On September 22, 2006, XFM obtained the 37% equity of Upper
Step from Sino Investment, which was then 50% owned by one of
the Company’s senior management officers, for a total
consideration of $18,954,281, and paid $7,900,000 on behalf of
Sino Investment to the vendor. Sino Investment issued a
promissory note in the amount of $7,900,000 to the Company. The
amount is repayable on demand and has no specified interest rate
stated in the promissory note.
On September 13, 2006, the Company entered into a Group
Services Agreement with XFL. Under this agreement, certain
services shall be provided to XFM in exchange for a variable
charge. The services include a wide range of services including
management, human resources, finance, legal, corporate
communications, public relations, information technology and
administrative services. The agreement expires on
December 31, 2007 and is renewable for two-year terms, and
may be terminated upon six months’ notice, upon material
breach, insolvency, or if we are no longer a controlled
subsidiary of our parent. On January 25, 2007, the Group
Services Agreement was amended to provide that charges for 2006
under the agreement would not exceed $700,000 and for subsequent
years would not exceed $1.0 million. For 2006, the group
services charges paid or payable by XFM was $700,000 under the
Group Services Agreement.
On September 21, 2006, we entered into a Trademark License
Agreement with XFN. Under this agreement, XFN granted the
Company a non-exclusive license worldwide to use certain Xinhua
trademarks in consideration for an annual license fee of
$50,000. The contract has a term of 15 years and expires on
September 20, 2021. There is no specific renewability
provision.
21. Dividends
The Company has declared and paid $1,943,333 preferred shares
dividend for the period from the date of issuance of the
Preferred Shares to July 24, 2006 (Note 14(a))
On September 20, 2006, the board of directors declared cash
dividends in total of $3,391,667 to the holder of Preferred
Shares. The amount has been charged to retained earnings. Out of
the total $3,391,667, $1,705,000 cash dividends was paid
and the remaining $1,686,667 was recorded in other payable as of
December 31, 2006.
The Company has operating lease agreements principally for its
office spaces in the PRC and Hong Kong. These leases expire
through March 2011 and are renewable upon negotiation. Rent
expenses were $51,391 for the period from May 26, 2005
(date XFL acquired EconWorld Media, the predecessor to XFM) to
December 31, 2005; and $889,080 for the year ended
December 31, 2006.
Future minimum lease payments under non-cancelable operating
lease agreements are as follows at December 31, 2006:
The Company has entered into an agreement to purchase
advertising airtime from radio stations for a period of twenty
years. As of December 31, 2006, future minimum purchase
commitments under the agreements totaled approximately
$75,925,000. The Company is committed to pay approximately
$3 million to $4 million in each of the next five
years and the remainder of approximately $56.0 million in
fifteen years thereafter.
The Company also has a number of agreements to purchase
advertising airtime from television programme producers. As of
December 31, 2006, future minimum fee commitments under the
agreements totaled approximately $8,364,000 and approximately
$7,281,000 will be paid next year and the remainder within 2008.
The Company also has a number of agreements to obtain
advertising rights from publishers and other parties in the PRC.
As of December 31, 2006, future minimum agency fee under
the agreements totaled approximately $2,053,000.
The Company entered into a number of agreements to obtain
advertising production and network services from various
services providers. As of December 31, 2006, future minimum
services fee commitments under the agreements totaled
approximately $1,339,000 and approximately $823,000 of which
will be paid in 2007, and approximately $80,000 will be paid in
each of 2008 through 2012.
23. Segment information
During the period from May 26, 2005 (date XFL acquired
EconWorld Media, the predecessor to XFM), to December 31,2005, the Company operated in two reportable segments that
include media production and print. With the acquisitions of
various companies during the year 2006, the Company currently
operates in five reportable segments that include media
production, print, advertising, broadcasting and research. Each
reportable segments are separately organized and provide
distinct products and services to different customer groups.
Each reportable segment prepares a stand-alone set of financial
reporting package including information such as revenue,
expenses, and capital expenditures, and the package is regularly
reviewed by the chief operating decision maker. During the
period from May 26, 2005 (date XFL acquired EconWorld
Media, the predecessor to XFM) to December 31, 2005 and
year ended December 31, 2006, the Company’s chief
operating decision maker was the Chief Executive Officer.
The following is a summary of relevant information relating to
each segment reconciled to amounts on the accompanying
consolidated financial statements for the period from
May 26, 2005 (date XFL acquired EconWorld Media, the
predecessor to XFM) to December 31, 2005:
Media
production
Print
XFM Corporate
Total
Net revenues:
Media production
$
3,640,792
$
—
$
—
$
3,640,792
Advertising sales
—
386,668
—
386,668
Advertising services
—
580,133
—
580,133
Publishing services
—
787,451
—
787,451
Total net revenues
$
3,640,792
$
1,754,252
$
—
$
5,395,044
Depreciation and amortization
461,352
115,971
—
577,323
Cost of revenues and operating expenses excluding depreciation
and amortization
459,460
1,626,711
301,117
2,387,288
Operating income (loss)
2,719,980
11,570
(301,117
)
2,430,433
Other expense, net
22,128
Income before provision for income taxes and minority interest
The following is a summary of relevant information relating to
each segment reconciled to amounts on the accompanying
consolidated financial statements for the year ended
December 31, 2006:
Media
XFM
production
Print
Advertising
Research
Broadcasting
Corporate
Total
Net revenues:
Media production
$
6,545,148
$
—
$
—
$
—
$
—
$
—
$
6,545,148
Advertising sales
—
6,303,646
—
—
387,897
—
6,691,543
Advertising services
—
6,418,279
35,628,274
1,802,660
1,012,739
—
44,861,952
Publishing services
—
867,789
—
—
—
—
867,789
Total net revenues
$
6,545,148
$
13,589,714
$
35,628,274
$
1,802,660
$
1,400,636
$
—
$
58,966,432
Depreciation and amortization
1,263,793
795,398
2,489,034
110,097
570,899
6,631
5,235,852
Cost of revenues and operating expenses excluding depreciation
and amortization
2,538,522
7,111,971
26,177,829
1,078,565
1,988,200
7,767,516
46,662,603
Operating income (loss)
2,742,833
5,682,345
6,961,411
613,998
(1,158,463
)
(7,774,147
)
7,067,977
Other expenses, net
897,651
Income before provision for income taxes and minority interest
6,170,326
Provision for income taxes
1,069,537
Net income before minority interest
5,100,789
Minority interest
32,417
1,495,008
703,332
66,129
(592,599
)
—
1,704,287
Equity in loss of an investment
—
—
—
—
52,211
—
52,211
Net income
$
3,344,291
Total assets, excluding goodwill
$
5,253,462
$
71,892,068
$
26,904,500
$
2,865,901
$
123,771,680
$
85,092,679
$
315,780,290
Goodwill
11,192,702
6,566,376
54,534,384
4,102,074
7,274,474
—
83,670,010
Capital expenditures
1,093,472
1,963,144
430,415
47,111
2,707,830
81,879
6,323,851
24. Employee benefit plans
Employees of the Company and its subsidiaries located in Hong
Kong are covered by the Mandatory Provident Fund Scheme
(”MPF Scheme”) established on December 1, 2000
under the Mandatory Provident Fund Scheme Ordinance of Hong
Kong. The calculation of contributions for these eligible
employees is based on 5% of the applicable payroll costs, and
contributions are matched by the employees. The amounts paid by
the Company to the MPF Scheme were $3,780 for the period from
May 26, 2005 (date XFL acquired EconWorld Media, the
predecessor to XFM) to December 31, 2005; and $41,427 for
the year ended December 31, 2006.
Employees of the Company located in the PRC are covered by the
retirement schemes defined by local practice and regulations,
which are essentially defined contribution schemes. The amounts
to be contributed are determined based on 20% of the applicable
payroll costs. The amounts paid by the Company to these defined
contribution schemes were $26,980 for the period from
May 26, 2005 (date XFL acquired EconWorld Media, the
predecessor to XFM) to December 31, 2005; and $214,129 for
year ended December 31, 2006.
In addition, the Company is required by law to contribute
medical insurance benefits, housing funds, unemployment, and
other statutory benefits ranging from 1% to 10% of applicable
salaries. The PRC government is directly responsible for the
payment of the benefits to these employees. The amounts
contributed for medical insurance benefits were $11,808 for the
period from May 26, 2005 (date XFL acquired EconWorld
Media, the predecessor to XFM) to December 31, 2005; and
$131,289 for the year ended December 31, 2006,
respectively. The amounts contributed for housing funds was
$12,708 in 2005 and $38,649 for the year ended December 31,2006, respectively. The amounts contributed for other benefits
were not material for the period from May 26, 2005 (date
XFL acquired EconWorld Media, the predecessor to XFM) to
December 31, 2005; and the amounts contributed for other
benefits was $181,933 for the year ended December 31, 2006.
25. Statutory reserves
As stipulated by the relevant laws and regulations in the PRC,
the Company is required to maintain non-distributable reserves
which include a statutory surplus reserve and a statutory
welfare 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 Company’s PRC statutory financial
statements. The statutory welfare reserve allocations are
determined annually at the discretion of the Company’s
board of directors. Once appropriated, these amounts are not
available for future distribution to owners or shareholders. The
statutory surplus reserve may be applied against prior year
losses, if any, and may be applied to the purchase of capital
assets upon the board of directors’ approval. Amounts
contributed to the statutory surplus reserve and the statutory
welfare reserve were not material during the period from
May 26, 2005 (date XFL acquired EconWorld Media, the
predecessor to XFM) to December 31, 2005; and for the year
ended December 31, 2006.
26. Subsequent events
On January 4, 2007, the Company borrowed from bank
$5,377,721 (RMB42 million) which is secured by a cash
deposit of $6 million, carries interest at 5.51% per annum
and repayable on January 4, 2008.
On January 15, 2007, the Company issued warrants to
purchase 221,280 class A common shares to a former staff
with a strike price of $5 per share. The warrants are vested
upon the date of grant. The fair value of the warrants was
approximately $2.08 per warrant at the date of grant.
On February 7, 2007, the shareholders of the Company
adopted a 2007 share option plan, under which the Company may
grant its employees, directors and consultants various types of
awards including options to purchase common shares of the
Company, restricted shares or restricted share units. The
maximum aggregate number of shares that may be issued pursuant
to all awards is equal to the lesser of (i) 19,530,205
common shares, or (ii) a lesser number of
common shares determined by the administrator of the plan. The
term of each award under the 2007 share option plan will be
specified in the award agreement, but the life of any award may
not exceed ten years from the adoption of the plan
On February 20, 2007, a written resolution was passed by
the sole director of the Company pursuant to which the vesting
of 10,415,000 class A nonvested shares held by the family
trust fund of Fredy Bush was revised as such 3,000,000 of such
shares will vest upon the Securities and Exchange
Commission’s declaration of effectiveness of the
Company’s registration statement on Form F-1, 1,420,000 of
such shares will vest on June 13, 2008, 2,210,000 of such
shares will vest each on June 13, 2009 and 2010, and the
remaining 525,000 shares will vest on June 13, 2011. All
other restrictions of these shares will remain unchanged.
Report of independent registered public accounting firm
To the Board of Directors and Shareholders of
EconWorld Media Limited:
We have audited the accompanying consolidated balance sheets of
EconWorld Media Limited (the predecessor to Xinhua Finance Media
Limited) and its subsidiaries (collectively, the
“Company”) as of December 31, 2004 and
May 25, 2005, and the related consolidated statements of
operations, shareholders’ deficiency and comprehensive
loss, and cash flows for the year ended December 31, 2004
and period from January 1, 2005 to May 25, 2005. These
financial statements are the responsibility of the
Company’s management. Our responsibility is to express an
opinion on these financial statements 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. The Company is not required to
have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audits included
consideration of internal control over financial reporting as a
basis for designing audit procedures that are appropriate in the
circumstances but not for the purpose of expressing an opinion
on the effectiveness of the Company’s internal control over
financial reporting. Accordingly, we express no such opinion. An
audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial
statements, 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 financial statements present fairly, in all
material respects, the consolidated financial position of the
Company as of December 31, 2004 and May 25, 2005 and
the consolidated results of its operations and its cash flows
for the year ended December 31, 2004 and period from
January 1, 2005 to May 25, 2005 in conformity with
accounting principles generally accepted in the United States of
America.
Ordinary shares, par value HK$0.01; authorized
1,000,000 shares; issued and outstanding 95,000 and
140,000 shares at December 31, 2004 and May 25,2005, respectively
EconWorld Media Limited (“EconWorld Media”, the
predecessor to Xinhua Finance Media Limited) was incorporated in
Hong Kong on March 13, 2003. EconWorld is the predecessor
to Xinhua Finance Media Limited, a Cayman Islands company and a
wholly-owned subsidiary of Xinhua Finance Limited
(“XFL”, a Tokyo Stock Exchange listed company).
EconWorld Media and its subsidiaries (collectively, the
“Company”) have the exclusive rights to sell
advertising for and provide management and information
consulting services to Money Journal and also provide
advertising placement and advertising related services to
customers in the People’s Republic of China
(“PRC”) and Hong Kong. On May 26, 2005, XFL
acquired 210,000 shares, or 60%, of EconWorld Media’s
ordinary shares. XFL has agreed to provide continuous financial
and operational support to EconWorld Media.
The following is a description of EconWorld Media’s
wholly-owned subsidiaries and their businesses:
•
Money Journal Publication Limited (“Money Journal
Publication”), a wholly-owned subsidiary of EconWorld
Media, was incorporated in Hong Kong on January 14, 2004
and is engaged in the provision of management and information
consulting services to Money Journal. The primary sources of
Money Journal Publication’s revenue are advertising agency
and marketing services and the sale and circulation of Money
Journal.
•
Money Journal Advertising Company Limited (“Money Journal
Advertising Hong Kong”), a wholly-owned subsidiary of Money
Journal Publication, was incorporated in Hong Kong on
September 28, 2004 and has not had significant business
activities to date.
•
EconWorld Publishing Limited (“EconWorld Hong Kong”),
a wholly-owned subsidiary of EconWorld Media, was incorporated
in Hong Kong on June 27, 2003 and is engaged in the
publishing and circulation of books. EconWorld Hong Kong sells
its publications through a single distributor. All of the books
are published by a single printing company. Revenue from book
sales is not material to date.
•
Financial World (Shanghai) Co., Limited (“Financial
World”), a wholly-owned subsidiary of EconWorld Media, was
established in the PRC on April 29, 2003 for a term of
10 years and is engaged in the provision of management and
information consulting services on the publishing and
circulation of books and magazines in the PRC. Revenue is
primarily generated from magazine subscriptions and book and
magazine sales.
•
EconWorld (Shanghai) Co., Limited (“EconWorld
Shanghai”), a wholly-owned subsidiary of EconWorld Media,
was established in the PRC on April 29, 2003 for a term of
10 years and is primarily engaged in event organization for
its customers in Shanghai.
On September 14, 2004, Money Journal Publication signed a
cooperation agreement with the equity owners of Beijing Qiannuo
Advertising Co., Ltd (“Beijing Qiannuo”) to operate
Beijing Qiannuo for a term of five years. The Company is
responsible for Beijing Qiannuo’s operations including
revenue earned and costs incurred. Under the agreement, the
Company will pay the equity owners an amount equaling to a
percentage of Beijing Qiannuo’s annual revenue. Beijing
Qiannuo has the exclusive rights to sell advertising for the
magazine Money Journal to its corporate advertiser customers.
The agreement provides Money Journal Publication a beneficial
interest in Beijing Qiannuo. A variable interest entity
(“VIE”) is an entity in which equity investors
generally do not have the characteristics of a “controlling
financial interest” or there is not sufficient equity at
risk for the entity to finance its activities without additional
subordinated financial support. A VIE is consolidated by its
primary beneficiary when it is determined that the primary
beneficiary will absorb the majority of the VIE’s expected
losses and/or expected residual returns. Consistent with the
provisions of FASB Interpretation No. 46,
“Consolidation of Variable Interest Entities—an
Interpretation of ARB No. 51” (as revised,
“FIN 46R”), Beijing Qiannuo is accounted for as a
VIE of Money Journal Publication.
The following financial statement amounts and balances of
Beijing Qiannuo for the period from September 14, 2004
(effective date of the cooperation agreement) and from
January 1, 2005 to May 25, 2005 were included in the
accompanying consolidated financial statements:
The consolidated financial statements of the Company have been
prepared in accordance with 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 EconWorld Media, its wholly-owned subsidiaries,
and Beijing Qiannuo. All significant intercompany transactions
and balances are eliminated during consolidation.
(c) Use of estimates
The preparation of financial statements in conformity with US
GAAP requires management to make estimates and assumptions that
affect reported amounts of assets and liabilities and disclosure
of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could
differ from those estimates. Significant accounting estimates
reflected in the accompanying consolidated finance statements
include allowance for doubtful accounts, valuation of deferred
tax assets, and useful lives of property and equipment.
(d) Revenue
recognition
Advertising sales revenues are recognized when advertisements
are published net of provisions for estimated rate adjustments
and discounts. Payments received in advance are deferred until
earned and such amounts are reported as deferred revenue on the
accompanying consolidated balance sheets.
Publishing services revenues include management and information
consulting fees relating to magazine subscriptions and sale of
Money Journal. Magazine subscription revenues are recognized
over the subscription period. Single copy sales of magazines
through distributors or retail outlets such as newsstands,
supermarkets, and convenience stores are recognized when sold to
the ultimate customers. Revenue from book sales is recognized
when books are sold to end customers. To date, revenue from book
sales has not been significant. The Company does not carry book
and magazine inventories on its consolidated balance sheets.
Costs of books and magazines published are charged to cost of
revenues when incurred.
Advertising services include revenues from event organization
and advertising agency and marketing services and are generally
recognized as services are provided.
Revenues are recorded net of applicable business and value added
taxes which totaled $18,602 and $11,165 for the year ended
December 31, 2004 and the period ended May 25, 2005,
respectively.
The Company extends credit based upon an evaluation of the
customer’s financial condition and collateral is not
required from such customers. Allowances for estimated credit
losses, rate adjustments and discounts are generally established
based on historical experience. As of December 31, 2004 and
May 25, 2005, such allowances were not material.
In the normal course of business, the Company acts as or uses an
intermediary or agent in executing transactions with third
parties. Such transactions are recorded on a gross or net basis
depending on whether the Company is acting as the principal or
as an agent in the transaction. The Company serves as the
principal in transactions in which it has substantial risks and
rewards of ownership and, accordingly, records revenue on a
gross basis. For those transactions in which the Company does
not have substantial risks and rewards of ownership, the Company
is considered an agent in the transaction and, accordingly,
records revenue on a net basis.
(e) Property and
equipment
Property and equipment are recorded at cost less accumulated
depreciation and amortization. Depreciation and amortization are
provided on a straight-line basis over the following estimated
useful lives:
The Company evaluates its long-lived assets for impairment
whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. When these
events occur, the Company measures impairment by comparing the
carrying amount of the assets to future undiscounted 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 Company
would recognize an impairment loss as the excess of carrying
amounts over fair value of the assets. There were no impairment
losses recorded in the year ended December 31, 2004 and the
period ended May 25, 2005.
(g) 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
carryforwards 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 of the
relevant taxing authorities. The components of the deferred tax
assets and liabilities are individually classified as current
and non-current based on their characteristics.
(h) Foreign currency translation
EconWorld Media’s functional currency is the Hong Kong
dollars. The functional currencies of EconWord Media’s
subsidiaries are either the Renminbi (“RMB”) or Hong
Kong dollars (“HKD”). Transactions denominated in
other currencies are translated into RMB or HKD, as appropriate,
at the average rates of exchange prevailing during each period.
Monetary assets and liabilities denominated in other currencies
are translated into RMB at rates of exchange in effect on the
balance sheet dates. Nonmonetary assets and liabilities are
remeasured into RMB or HKD at historical exchange rates. To
date, transactions in HKD have not been significant.
The Company uses the U.S. dollar as its reporting currency.
Accordingly, assets and liabilities are translated using
exchange rates in effect at each balance sheet date and average
exchange rates for the periods are used for revenue and expense
transactions.
Currency transaction gains and losses are recorded in the
consolidated statements of operations. Translation adjustments
are recorded in accumulated other comprehensive income, a
component of shareholders’ deficiency. Both transaction
gains and losses and translation adjustments are not material
for the year ended December 31, 2004 and the period ended
May 25, 2005.
(i) Concentration of credit risk
Financial instruments that potentially expose the Company to
concentrations of credit risk consisted primarily of cash,
accounts receivable, and amounts due from related parties.
The following customers contributed 10% or more of the
Company’s revenues during the year ended December 31,2004 and period ended May 25, 2005:
2004
2005
Customer A
$
150,000
$
*
Customer B
130,219
*
*
Represents less than 10% of revenue.
Five customers as of December 31, 2004 accounted for 10% or
more of the Company’s accounts receivable balance,
representing an aggregate of 78% of the Company’s accounts
receivable balance at December 31, 2004. No single customer
accounted for 10% or more of the Company’s accounts
receivable balance at May 25, 2005. The Company performs
ongoing credit evaluations of its customers and generally does
not require collateral on accounts receivable. The Company
maintains an allowance for doubtful accounts and such losses
have been within management’s expectations.
The carrying amounts of accounts receivable, amounts due from
related parties, accounts payable, accrued expenses and other
payables, and amounts due to related parties approximate their
fair values due to the short-term maturity of these instruments.
(k) Net loss per share
Basic net loss per share is computed by dividing net loss
attributable to holders of ordinary shares by the weighted
average number of ordinary shares outstanding during the year
and period. Diluted net loss per ordinary share reflects the
potential dilution that could occur if securities or other
contracts to issue ordinary shares were exercised or converted
into ordinary shares. Ordinary share equivalents are excluded
from the computation in loss periods as their effects would be
anti-dilutive. No dilutive potential ordinary shares equivalents
were outstanding as of December 31, 2004 and May 25,2005.
(l) Comprehensive loss
Comprehensive loss is reported on the accompanying consolidated
statements of shareholders’ deficiency and consisted of net
loss and foreign currency translation gains and losses.
EconWorld Media, and its subsidiaries incorporated in Hong Kong
are subjected to Hong Kong Profits Tax calculated at a rate of
17.5%.
EconWorld Media’s subsidiaries incorporated in the PRC are
governed by either the PRC Enterprises Income Tax or the Income
Tax Law of the PRC Concerning Foreign Investment Enterprises and
Foreign Enterprises and various local income tax laws
(“Income Tax Laws”). Pursuant to the PRC Income Tax
Laws, the foreign investment enterprises are subject to income
tax at statutory rate of 33% (30% of the state income tax plus
3% local income tax) on PRC taxable income.
The provision (benefit) for income taxes consisted of the
following for the year ended December 31, 2004 and period
ended May 25, 2005:
As management does not believe that it is more likely than not
that all of the deferred tax assets will be realized, a
valuation allowance has been established as of December 31,2004 and May 25, 2005. The increase in valuation allowance
from December 31, 2004 to May 25, 2005 represents
additional net operating losses incurred during 2005.
The Company has operating loss carry forwards of $1,381,012 and
$2,153,910 for the year ended December 31, 2004 and the
period ended May 25, 2005, respectively. Net operating loss
generated in the PRC will expire on various dates through 2010
and net operating loss generated in Hong Kong may be carried
forward indefinitely.
Reconciliation between the provision for income tax computed by
applying the PRC enterprise income tax rate of 33% to income
before income taxes and the actual provision for income taxes is
as follows:
2004
2005
Net loss before provision for income taxes (benefit)
$
(1,243,007
)
$
(888,329
)
PRC statutory tax rate
33%
33%
Income tax at statutory tax rate
(410,192
)
(293,149
)
Expenses not deductible for tax purposes:
Entertainment
3,477
3,312
Salaries and employee benefits
13,994
32,045
Other
5,419
8,559
Effect of income tax rate differences in other jurisdictions
Amounts due to related party at December 31, 2004 and
May 25, 2005 represented amounts borrowed from shareholders
and directors. Amounts borrowed are non-interest bearing and are
payable on demand. There were no other related party
transactions and balances for the year ended December 31,2004 and the period ended May 25, 2005.
9. Commitments
The Company has operating lease agreements principally for its
office spaces in the PRC and Hong Kong. These leases expire in
December 2005, and are renewable upon negotiation. The Company
had not yet entered into a new lease at May 25, 2005. Rent
expenses were $79,030 and $31,890 for the year ended
December 31, 2004 and the period ended May 25, 2005,
respectively.
10. Segment information
The Company operates in one business segment in book and
magazine publications. Substantially all of the Company’s
identifiable assets are located in the PRC. During the year
ended December 31, 2004 and the period ended May 25,2005, the Company’s chief decision maker was the Chief
Executive Officer of the Company. To date, assets and revenues
from Hong Kong have not been significant.
11. Employee benefit plans
Employees of the Company and its subsidiaries located in Hong
Kong are covered by the Mandatory Provident Fund Scheme
(“MPF Scheme”) established on December 1, 2000
under the Mandatory Provident Fund Scheme Ordinance of Hong
Kong. The calculation of contributions for these eligible
employees is based on 5% of the applicable payroll costs, and
contributions are matched by the employees. The amounts paid by
the Company to the MPF Scheme were $9,853 and $2,230 for the
year ended December 31, 2004 and the period ended
May 25, 2005, respectively.
Employees of the Company and its subsidiaries located in the PRC
are covered by the retirement schemes defined by local practice
and regulations, which are essentially defined contribution
schemes. The amounts to be contributed are determined based on
20% of the applicable payroll costs. Expenses paid by the
Company to these defined contribution schemes were $5,303 and
$2,530 for the year ended December 31, 2004 and the period
ended May 25, 2005, respectively.
In addition, the Company is required by law to contribute
approximately 1.2% to 10% of applicable salaries for medical
insurance benefits, housing funds, unemployment, and other
statutory benefits. The PRC government is directly responsible
for the payment of the benefits to these employees. The amounts
contributed for medical insurance benefits were $2,818 and
$1,379 for the year ended December 31, 2004 and the period
ended May 25, 2005, respectively. The amounts contributed
for housing funds were $1,600 and $761 for the year ended
December 31, 2004 and the period ended May 25, 2005,
respectively. The amounts contributed to other benefits were not
material for the year ended December 31, 2004 and the
period ended May 25, 2005.
As stipulated by the relevant laws and regulations in the PRC,
the Company is required to maintain non-distributable reserves
which include a statutory surplus reserve and a statutory
welfare reserve. Appropriations to the statutory surplus reserve
are required to be made at not less than 10% of the profit after
taxes as determined under PRC GAAP. The statutory welfare
reserve allocations are determined annually at the discretion of
the Company’s board of directors. Once appropriated, these
amounts are not available for future distribution to owners or
shareholders. The statutory surplus reserve may be applied
against prior year losses, if any, and may be applied to the
purchase of capital assets upon the board of directors’
approval. There were no amounts appropriated to any of the
statutory reserves as the Company had incurred PRC statutory
losses during the year ended December 31, 2004 and the
period ended May 25, 2005.
Report of independent registered public accounting firm
To the Board of Directors and Owners of
Beijing Century Media Culture Co., Ltd.:
We have audited the accompanying consolidated balance sheets of
Beijing Century Media Culture Co., Ltd., and its subsidiaries
(the “Company”) as of December 31, 2004 and
September 8, 2005, and the related consolidated statements
of operations, owners’ equity and comprehensive income, and
cash flows for the period from June 25, 2004 (date of
establishment) to December 31, 2004 and period from
January 1, 2005 to September 8, 2005. These financial
statements are the responsibility of the Company’s
management. Our responsibility is to express an opinion on these
financial statements 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. The Company is not required to
have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audits included
consideration of internal control over financial reporting as a
basis for designing audit procedures that are appropriate in the
circumstances but not for the purpose of expressing an opinion
on the effectiveness of the Company’s internal control over
financial reporting. Accordingly, we express no such opinion. An
audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial
statements, 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 financial statements present fairly, in all
material respects, the consolidated financial position of the
Company as of December 31, 2004 and September 8, 2005
and the consolidated results of its operations and its cash
flows for the period from June 25, 2004 (date of
establishment) to December 2004 and period from January 1,2005 to September 8, 2005 in conformity with accounting
principles generally accepted in the United States of America.
Beijing Century Media Culture Co., Ltd. (“Beijing Century
Media”) was established on June 25, 2004 in the
People’s Republic of China (“PRC”) under the laws
of the PRC. Beijing Century Media and its subsidiaries (the
“Company”) are principally engaged in the production
of television programs, animations, and visual effects and
post-production for television commercials and also offer
broadcast design services. On September 9, 2005, through a
number of nomination and equity pledge agreements between Xinhua
Finance Limited (“XFL”, a Tokyo Stock Exchange listed
company) and the equity owners of Beijing Century Media, XFL
became the primary beneficiary of Beijing Century Media.
The following is a description of Beijing Century Media’s
subsidiaries and their businesses:
•
Beijing Golden Ways Culture Development Co., Ltd. (“Golden
Ways”) was established in the PRC on July 31, 2001 for
a term of 20 years with an initial registered capital of
$37,042 (RMB 300,000). On August 30, 2005, Beijing
Century Media acquired 90% of Golden Ways ordinary shares for
$33,337 (RMB 270,000) in cash. Golden Ways is engaged in
the production of
three-dimensional
animation, the production of television commercials, and the
provision of broadcast design services for television stations.
•
Beijing Workshop Communications Co., Limited (“Beijing
Workshop”) was established in the PRC on July 21, 2004
for a term of 30 years with an initial registered capital
of $123,472 (RMB 1,000,000). On August 30, 2005,
Beijing Century Media acquired 90% of Beijing Workshop’s
ordinary shares for $111,125 (RMB 900,000) in cash. Beijing
Workshop provides broadcast design services to television
station customers, and provides two- and
three-dimensional
designs and motion graphics.
2. Significant accounting policies
(a) Basis of presentation
The consolidated financial statements of the Company have been
prepared in accordance with 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 Beijing Century Media and its majority-owned
subsidiaries. All significant intercompany transactions and
balances are eliminated during consolidation.
The preparation of financial statements in conformity with US
GAAP requires management to make estimates and assumptions that
affect reported amounts of assets and liabilities and disclosure
of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could
differ from those estimates. Significant accounting estimates
reflected in the Company’s consolidated financial
statements include allowance for doubtful accounts, valuation of
deferred tax assets, useful lives of property and equipment,
impairment of long-lived assets, and remaining ultimate revenues
for the purpose of recognizing content production costs.
(d) Revenue recognition
Content production revenues include revenues from television
program production, animations, visual effects post-production
for television commercials and broadcast design. Episodic
television series are produced or acquired for distribution to
the television market. Revenues are recognized when the master
tape of the program is available for first airing under the
terms of the related licensing agreement. Broadcast design
mainly includes design of television channel logos, production
of trailers for advertising the television channels, and image
consulting and branding for the television channels. Revenue for
the production of the logos and trailers are recognized upon
delivery of the products and customer acceptance. Revenue for
image and branding consultations are recognized as the services
are provided. Revenue is recorded net of applicable business
taxes which totaled $22,354 and $20,196 for the period from
June 25, 2004 (date of establishment) to December 31,2004 and the period ended September 8, 2005, respectively.
The Company extends credit based upon an evaluation of the
customers’ financial condition and collateral is not
required from such customers. Allowances for estimated credit
losses, rate adjustments, and discounts are generally
established based on historical experience.
In the normal course of business, the Company acts as an
intermediary or agent in placing advertising transactions with
TV stations with third parties. Such transactions are recorded
at either gross or net basis depending on whether the Company is
acting as the principal or as an agent in the transaction. The
Company is considered as the principal in transactions where it
purchase blocks of advertising time and attempts to sell the
time to advertisers and it has substantial risks and rewards of
ownership, accordingly, records revenue on a gross basis. For
those transactions in which the Company find advertising space
for advertisers and it does not have substantial risks and
rewards of ownership, the Company is considered an agent in the
transaction and, accordingly, records revenue on a net basis.
(e) Capitalized content production costs
Capitalized content production costs consists of direct
production costs, production overhead, development, and
pre-production costs, and are stated at cost, less accumulated
amortization and impairment. Capitalized content production
costs recognized as cost of revenues for a given program are
determined using the forecast method. Under this method, the
amount of capitalized costs recognized as expense is based on
the proportion of a program’s revenues recognized for such
period to the program’s estimated remaining ultimate
revenues. Similarly, the recognition of expenses for
participations and residuals are recognized based on the
proportion of the programs’ revenues recognized for such
period to the programs’ estimated
remaining ultimate revenues. These estimates are revised
periodically and losses, if any, are provided in full.
(f) Property and equipment
Property and equipment are recorded at cost less accumulated
depreciation and amortization. Depreciation and amortization are
provided on a straight-line basis over the following estimated
useful lives:
Leasehold improvements
Lesser of 5 years or lease term
Furniture, fixtures and equipment
5 years
(g) Goodwill
Goodwill includes acquired workforce and is not amortized but
tested for impairment annually on December 31 and whenever
events or circumstances make it more likely than not that
impairment may have occurred. Goodwill impairment is tested
using a two-step
approach. The first step compares the fair value of a reporting
unit to its carrying amount, including goodwill. If the fair
value of the reporting unit is greater than its carrying amount,
goodwill is not considered impaired and the second step is not
required. If the fair value of the reporting unit is less than
its carrying amount, the second step of the impairment test
measures the amount of the impairment loss, if any, by comparing
the implied fair value of goodwill to its carrying amount. If
the carrying amount of goodwill exceeds its implied fair value,
an impairment loss is recognized equal to that excess. The
implied fair value of goodwill is calculated in the same manner
that goodwill is calculated in a business combination, whereby
the fair value of the reporting unit is allocated to all of the
assets and liabilities of that unit, with the excess purchase
price over the amounts assigned to assets and liabilities.
Estimating fair value is performed by utilizing various
valuation techniques, with the primary technique being a
discounted cash flow.
(h) Impairment of long-lived assets
The Company evaluates its long-lived assets for impairment
whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. When these
events occur, the Company measures impairment by comparing the
carrying amount of the assets to future undiscounted 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 Company
would recognize an impairment loss as the excess of carrying
amounts over fair value of the assets. There were no impairment
losses reported in the period from June 25, 2004 (date of
establishment) to December 31, 2004 or the period ended
September 8, 2005.
(i) 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
carryforwards 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 of the
relevant taxing authorities. The components of the deferred tax
assets and liabilities are individually classified as current
and non-current based on their characteristics.
(j) Foreign currency translation
The functional currency of the Company is Renminbi
(“RMB”). Transactions denominated in other currencies
are translated into RMB at the average rates of exchange
prevailing during each period. Monetary assets and liabilities
denominated in other currencies are translated into RMB at rates
of exchange in effect on the balance sheet dates. Nonmonetary
assets and liabilities are remeasured into RMB at historical
exchange rates.
The Company uses the United States dollar as its reporting
currency. Accordingly, assets and liabilities are translated
using exchange rates in effect at each balance sheet date and
average exchange rates for the period are used for revenue and
expense transactions.
Currency transaction gains and losses are recorded in the
consolidated statements of operations. Translation adjustments
are recorded in accumulated other comprehensive gain, a
component of owners’ equity. Both transaction gains
(losses) and translation adjustments are not material for the
period from June 25, 2004 (date of establishment) to
December 31, 2004 and the period ended September 8,2005.
(k) Concentration of credit risk
Financial instruments that potentially expose the Company to
concentrations of credit risk consist primarily of cash and
accounts receivable.
The following customers contributed 10% or more of the
Company’s revenues during the period from June 25,2004 (date of establishment) to December 31, 2004 and the
period ended September 8, 2005:
2004
2005
Customer A
$
158,411
$
*
Customer B
122,027
*
Customer C
117,030
*
Customer D
105,982
*
Customer E
98,492
*
Customer F
83,512
*
Customer G
*
77,609
Customer H
*
71,683
*
Represents less than 10% of revenue.
One customer accounted for 74% and 28% of the Company’s
accounts receivable balances at December 31, 2004 and
September 8, 2005, respectively. The Company performs
ongoing credit evaluations of its customers and generally does
not require collateral on accounts receivable. No allowance for
doubtful accounts was considered necessary at December 31,2004 and September 8, 2004 as accounts receivable balances
were expected to be collectible. Historical bad debts have not
been material.
The carrying amounts of accounts receivable, accounts payable,
accrued expenses and other payable, and amounts due to related
parties approximated their fair values due to the short-term
maturity of these instruments.
(m) Comprehensive income
Comprehensive income is reported on the accompanying
consolidated statement of owners’ equity and consisted of
net income and foreign currency translation gains and losses
3. Acquisitions
(a) Beijing Workshop
On August 30, 2005, the Company acquired 90% of the assets
and liabilities of Beijing Workshop for an initial cash
consideration of $111,125 (RMB 900,000). The primary assets
acquired were facilities, equipment, and assembled workforce,
which would enhance the Company’s production capabilities.
The Company has consolidated the operating results of Beijing
Workshop effective on the date of acquisition.
The following table summarizes the estimated fair values of the
assets acquired and liabilities assumed at the date of
acquisition:
On August 30, 2005, the Company acquired 90% of the assets
and liabilities of Golden Ways for an initial cash consideration
of $33,337 (RMB 270,000). The primary assets acquired were
facilities, equipment, and assembled workforce, which would
enhance the Company’s production capabilities. The Company
has consolidated the operating results of Golden Ways effective
on the date of acquisition.
The following table summarizes the estimated fair values of the
assets acquired and liabilities assumed at the date of
acquisition:
Assets acquired:
Cash
$
153,479
Accounts receivable
8,344
Prepaid expenses and other current assets
11,820
Property and equipment
15,211
Deferred tax assets
40,203
Total assets acquired
229,057
Liabilities assumed:
Accounts payable
15,051
Accrued expenses and other payable
179,918
Amount due to a related party
123,472
Income tax payable
6,748
Total liabilities assumed
325,189
Total net liabilities
(96,132
)
Total consideration
33,337
Goodwill
$
129,469
The following pro forma information summarizes the effect of the
acquisition of Beijing Workshop and Golden Ways, if the
acquisitions had occurred as of June 25, 2004 and
January 1, 2005. This pro forma information is presented
for informational purposes only. It is based on historical
information and does not purport to represent the actual results
that may have occurred had the Company consummated the
acquisitions on June 25, 2004 and January 1, 2005, nor
is it necessarily indicative of future results of operations of
the consolidated enterprises for the periods ended
December 31, 2004 and September 8, 2005.
During 2005, the Company moved its office to a new location and
abandoned fully depreciated leasehold improvements at the old
location. No gains or losses were recorded on the disposal.
Depreciation and amortization expenses were $185 and $21,113 for
the period from June 25, 2004 (date of establishment) to
December 31, 2004 and the period ended September 8,2005, respectively.
5. Capital structure
The Company was established on June 25, 2004 with both
registered and contributed capital of $120,948. On
September 9, 2005, under a number of nomination and equity
pledge agreements, all of the beneficial interest of the Company
was assumed by Shanghai Huacai Investment Advisory Company
Limited, a wholly-owned subsidiary of XFL for an initial
consideration of $3,000,000 in the form of XFL’s common
shares and contingent consideration to be determined based on
the Company’s future earnings.
The Company is subject to PRC Enterprises Income Tax on the
taxable income in accordance with the relevant PRC income tax
laws. Pursuant to the PRC Income Tax Laws, the Company is
subject to income tax at a statutory rate of 33% (30% of the
state income tax plus 3% local income tax) on PRC taxable
income. Beijing Workshop qualified as a “cultural media
enterprise” and had been granted by the relevant taxing
authorities a two-year exemption from PRC income taxes through
December 31, 2006. Beijing Century Media qualified as a
“cultural education enterprise” and had been granted
an exemption from PRC income taxes by the relevant taxing
authorities for the year 2004. Provision for income taxes
consisted of $91,285 in PRC current income taxes during the
period ended September 8, 2005.
Deferred tax assets consisted of net operating losses totaling
$40,203. There were no deferred tax liabilities as of
September 8, 2005. The Company did not have deferred tax
assets or
Reconciliation between provision for income taxes computed by
applying the PRC enterprise income rate of 33% to income before
provision for income taxes was as follows for the year ended
December 31, 2004 and the period ended September 8,2005:
2004
2005
Income before provision for income taxes
$
250,236
$
259,417
PRC statutory tax rate
33%
33%
Income taxes at statutory tax rate
82,578
85,608
Effect of expenses not deductible for tax purposes:
Entertainment
2,132
1,470
Salaries and employee benefits
6,398
4,207
Tax exemption
(91,108
)
—
Provision for income taxes
$
—
$
91,285
PRC Enterprises income taxes that would have been payable
without the tax exemption was $91,108 for the year ended
December 31, 2004.
10. Related party transaction
Amounts due to a related party consisted of advances from an
affiliate totaling $246,944 at September 8, 2005. There
were no amounts due from (to) related parties at
December 31, 2004. The amount advanced to the affiliate is
non-interest bearing and is due on demand.
11. Commitments
(a) Purchase of program rights
The Company entered into an agreement for the purchase of
program rights for a total of $802,568. Unexpended balance
totaled $740,832 at December 31, 2005.
(b) Operating lease
During 2005, the Company moved into a new office space under a
new operating lease agreement which does not require a rent
deposit. The lease will expire in July 2007 and is renewable
upon negotiation. Rent expenses were $27,136 and $617 for the
period from June 25, 2004 (date of establishment) to
December 31, 2004 and the period ended September 8,2005, respectively.
Future minimum lease payments under non-cancellable operating
lease agreements are as follows at September 8, 2005:
The Company operates in one business segment in the production
and distribution of television programs, television branding,
video clips, and animation design. All of the Company’s
identifiable assets are located in PRC. During the period from
June 25, 2004 (date of establishment) to December 31,2004 and the period ended September 8, 2005, the
Company’s chief decision maker was its General Manager.
13. Employee benefit plans
Employees of the Company located in the PRC are covered by the
retirement schemes defined by local practice and regulations,
which are essentially defined contribution schemes. The amounts
to be contributed are determined based on 20% of the applicable
payroll costs expenses paid by the Company to these defined
contribution schemes were $4,312 and $3,604 for the period from
June 25, 2004 (date of establishment) to December 31,2004 and the period ended September 8, 2005, respectively.
In addition, the Company is required by law to contribute
approximately 1.2% to 10% of applicable salaries for medical
insurance benefits, housing funds, unemployment, and other
statutory benefits. The PRC government is directly responsible
for the payment of the benefits to these employees. The amounts
contributed for medical insurance benefits were $2,212 and
$2,344 for the period from June 25, 2004 (date of
establishment) to December 31, 2004 and the period ended
September 8, 2005, respectively. The amounts contributed
for housing funds were $1,069 and $2,029 for the period from
June 25, 2004 (date of establishment) to December 31,2004 and the period ended September 8, 2005, respectively.
The amounts contributed for other benefits were not material
during 2004 and 2005.
14. Statutory reserves
As stipulated by the relevant laws and regulations in the PRC,
the Company is required to maintain non-distributable reserves
which include a statutory surplus reserve and a statutory
welfare reserve. Appropriations to the statutory surplus reserve
are required to be made at not less than 10% of the profit after
taxes as determined under PRC GAAP. The statutory welfare
reserve allocations are determined annually at the discretion of
the Company’s board of directors. Once appropriated, these
amounts are not available for future distribution to owners or
shareholders. The statutory surplus reserve may be applied
against prior year losses, if any, and may be applied to the
purchase of capital assets upon the board of directors’
approval. Since the date of establishment, no appropriation was
made to any of the reserves.
Report of independent registered public accounting firm
To the Board of Directors and Shareholder of
Xinhua Finance Advertising Limited
We have audited the accompanying consolidated balance sheet of
Xinhua Finance Advertising Limited and its subsidiaries (the
“Company”) as of December 31, 2005, and the
related consolidated statements of operations,
shareholder’s deficiency and cash flows for the period from
December 21, 2005 (date Xinhua Finance Advertising Limited
acquired Active Advertising Agency Limited, the predecessor to
Xinhua Finance Advertising Limited) to December 31, 2005.
These financial statements are the responsibility of the
Company’s management. Our responsibility is to express an
opinion on these financial statements 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 the financial statements are
free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audit included
consideration of internal control over financial reporting as a
basis for designing audit procedures that are appropriate in the
circumstances but not for the purpose of expressing an opinion
on the effectiveness of the Company’s internal control over
financial reporting. Accordingly, we express no such opinion. An
audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audit provides a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all
material respects, the consolidated financial position of the
Company as of December 31, 2005 and the consolidated
results of its operations and its cash flows for the period from
December 21, 2005 (date Xinhua Finance Advertising Limited
acquired Active Advertising Agency Limited, the predecessor to
Xinhua Finance Advertising Limited) to December 31, 2005 in
conformity with accounting principles generally accepted in the
United States of America.
Xinhua Finance Advertising Limited (formerly Ming Shing
International Limited, “Ming Shing”) was incorporated
in the British Virgin Islands (“BVI”) under the laws
of the BVI on October 6, 2005 and is an investment holding
company for its wholly- and majority-owned subsidiaries and
variable interest entities (“VIEs”). On
January 12, 2006, Ming Shing was acquired by Xinhua Finance
Limited (“XFL”) for an initial cash consideration of
$29 million plus future contingent considerations to be
determined based on net income in each of the years through
2007. XFL has agreed to provide continuous financial and
operational support to the Company.
Ming Shing and its subsidiaries (collectively the
“Company”) provide advertising design, production and
placement services for television, print media and outdoor
billboards on university campuses to customers in the
People’s Republic of China (“PRC”) and Hong Kong.
The following is a description of Ming Shing’s subsidiaries
and their businesses:
•
Upper Will Enterprises Limited (“Upper Will”) was
incorporated in the BVI on November 10, 2005 and is an
investment holding company for its wholly- and majority-owned
subsidiaries and VIEs. Upper Will was acquired by Ming Shing on
December 14, 2005 and is a wholly-owned subsidiary of Ming
Shing effective from the acquisition date.
•
Active Advertising Agency Limited (“Active Advertising Hong
Kong”) was incorporated in Hong Kong on February 17,1997 and was acquired by Upper Will on December 21, 2005.
Active Advertising Hong Kong places advertisements and provides
advertising services to customers in Hong Kong. Active
Advertising Hong Kong acts as an agent for newspaper companies
and outdoor advertising companies selling advertising spaces to
corporate advertisers. Active Advertising Hong Kong also
provides design and production services to its customers. To
date, revenue from design and production services has not been
material.
•
Active Advertising (Guangzhou) Co. Ltd. (“Active
Guangzhou”) was established in the PRC on June 1, 2005
as a wholly-owned subsidiary of Active Advertising Hong Kong.
Active Guangzhou provides advertising placement services to
customers in Guangzhou and customers referred by Active
Advertising Hong Kong. Active Guangzhou acts as an agent for
newspaper companies and outdoor advertising companies selling
advertising space to corporate advertisers. Effective
December 21, 2005, Active Guangzhou became the primary
beneficiary of two variable interest entities (“VIEs”)
through a number of nomination and equity pledged agreements
with the VIE’s equity owners. A VIE is an entity in which
equity investors generally do not have the characteristics of a
“controlling financial interest” or there is not
sufficient equity at risk for the entity to finance its
activities without additional subordinated financial support. A
VIE is consolidated by its primary beneficiary when it is
determined that the primary beneficiary will absorb the majority
of the VIE’s expected losses
and/or expected residual returns. Consistent with the provisions
of FASB Interpretation No. 46, “Consolidation of
Variable Interest Entities — an Interpretation of ARB
No. 51” (as revised, “FIN 46R”),
these VIEs are included in the consolidated financial statements
of Active Guangzhou.
The following is a summary and description of Active
Guangzhou’s consolidated VIEs and their subsidiaries:
•
Shenzhen Active Trinity Advertising Co., Ltd. (“Shenzhen
Trinity”) was established in the PRC in December 2005 by
two PRC citizens for a term of 10 years and provides
advertising placement services to customers in Shenzhen and
customers referred by Active Advertising Hong Kong. Through a
number of nomination and equity pledged agreements dated
December 21, 2005, Shenzhen Trinity is accounted for as a
wholly-owned VIE of Active Guangzhou and is included in the
consolidated financial statements of Active Guangzhou.
•
Beijing Taide Advertising Co., Ltd. (“Beijing Taide”)
was established in the PRC on March 23, 2005 by two PRC
citizens for a term of 20 years and provides design,
production and placement of print advertisements to customers in
Beijing. Through a number of nomination and equity pledged
agreements dated December 21, 2005, Beijing Taide is
accounted for as a wholly-owned VIE of Active Guangzhou and is
included in the consolidated financial statements of Active
Guangzhou.
•
Shangtuo Zhiyang International Advertising (Beijing) Co. Ltd.
(“Shangtuo Zhiyang”) was established on
December 9, 2005 by Beijing Taide and a PRC Citizen for a
term of 30 years and is engaged in the design, production,
and placement of advertising and provides advertising services.
Shangtuo Zhiyang is the sole advertising placement agent for a
newspaper published in the PRC, and also acts as an advertising
placement agent for other internet websites, newspapers, and
magazines. Shangtuo Zhiyang also provides other forms of
promotion and consultancy services to property developers and
other customers in real estate and property sales.
•
Beijing Longmei Television and Broadcast Advertising Co., Ltd.
(“Beijing Longmei”) was established on
September 24, 2002 by two PRC citizens for a term of
20 years and is engaged in the design, production and
distribution of television advertisements, and acts as the agent
for placement of advertisements during certain television shows
broadcast by a major television station in Beijing. On
December 12, 2005, Beijing Taide acquired 80% of the
controlling interest in Beijing Longmei from its equity owners.
•
Beijing Jinlong Runxin Advertising Co., Ltd. (“Beijing
Jinlong Runxin”) was established on August 5, 2004 by
two PRC citizens for a term of 20 years and is engaged in
the design, production and distribution of television
advertisements. On December 9, 2005, Beijing Taide acquired
80% of the controlling interest in Beijing Jinlong Runxin from
its equity owners.
•
Shanghai Yuanxin Advertising Intermediary Co., Ltd.
(“Shanghai Yuanxin”) was established on
December 23, 2003 by two PRC citizens for a term of
10 years and is engaged in the design, production and
distribution of television advertisements, and acts as the agent
for placement of advertisements during certain television shows
broadcast by a major television station in Shanghai. Yuanxin
also acts as the exclusive advertising agent for approximately
200 billboards on some university campuses in Shanghai. On
December 16, 2005, Beijing Taide acquired 80% of the
controlling interest in Shanghai Yuanxin from its equity owners.
The following financial statement amounts and balances of
Beijing Taide and Shenzhen Trinity for the period from
December 21, 2005 to December 31, 2005 were included
in the accompanying consolidated financial statements:
Shenzhen
Beijing Taide
Trinity
Total
Total assets
$
5,229,959
$
37,042
$
5,267,001
Total liabilities
(1,403,309
)
—
(1,403,309
)
Total revenue
326,113
—
326,113
Total expenses
332,452
—
332,452
Net loss
(6,339
)
—
(6,339
)
2. Summary of principal accounting policies
(a) Basis of presentation
The consolidated financial statements of the Company 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 assets,
liabilities, revenues and expenses of Ming Shing, its wholly-
and majority-owned subsidiaries, and their VIEs. All significant
intercompany transactions and balances are eliminated during
consolidation.
(c) Use of estimates
The preparation of financial statements in conformity with US
GAAP requires management to make estimates and assumptions that
affect reported amounts of assets and liabilities and disclosure
of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could
differ from those estimates. Significant accounting estimates
reflected in the Company’s consolidated financial
statements include allowance for doubtful accounts, valuation of
deferred tax assets, useful lives of property and equipment, and
impairment of long-lived assets.
(d) Revenue recognition
Advertising revenue is recognized when advertisements are
published, broadcasted, or placed on customers’ websites
net of provisions for estimated rebates, rate adjustments, and
discounts. Revenues are recorded net of applicable business
taxes totaling $3,940 for the period from December 21, 2005
(date Ming Shing acquired Active Advertising Hong Kong, the
predecessor to Ming Shing) to December 31, 2005.
Payments received in advance are deferred until earned and are
reported as deferred revenue in the consolidated balance sheet.
The Company extends credit based upon an evaluation of the
customers’ financial condition and collateral is not
required from such customers. Allowances for estimated credit
losses, rebates, rate adjustments and discounts are generally
established based on historical experience.
In the normal course of business, the Company acts as or uses an
intermediary or agent in executing transactions with third
parties. Such transactions are recorded on a gross or net basis
depending on whether the Company is acting as the principal or
as an agent in the transaction. The Company serves as the
principal in transactions in which it has substantial risks and
rewards of ownership and, accordingly, records revenue on a
gross basis. For those transactions in which the Company does
not have substantial risks and rewards of ownership, the Company
is considered an agent in the transaction and, accordingly,
records revenue on a net basis.
(e) Restricted cash
Restricted cash are cash balances pledged for the use of banking
facilities granted by banks.
(f) Property and equipment
Property and equipment are recorded at cost less accumulated
depreciation. Depreciation is provided on a straight-line basis
over the following estimated useful lives:
Leasehold improvement
2 years
Billboards and lampposts
10 years
Furniture, fixtures and equipment
5 years
Motor vehicles
5 years
(g) Impairment of long-lived assets
The Company evaluates its long-lived assets for impairment
whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. When these
events occur, the Company measures impairment by comparing the
carrying amount of the assets to future undiscounted 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 Company
would recognize an impairment loss as the excess of carrying
amounts over fair value of the assets. There was no impairment
losses recorded in the period from December 21, 2005 (date
Ming Shing acquired Active Advertising Hong Kong, the
predecessor to Ming Shing) to December 31, 2005.
(h) 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
carryforwards 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 of the
relevant taxing authorities. The components of the deferred tax
assets and liabilities are individually classified as current
and non-current based on their characteristics.
(i) Foreign currency translation
The functional currency of Ming Shing subsidiaries are either
Renminbi (“RMB”) or Hong Kong dollar
(“HKD”). Transactions denominated in other currencies
are translated into RMB or HKD at the average rates of exchange
prevailing during each period. Monetary assets and liabilities
denominated in other currencies are translated into RMB or HKD
at rates of exchange in effect on the balance sheet dates.
Nonmonetary assets and liabilities are remeasured into RMB or
HKD at historical exchange rates.
The Company uses the United States dollar as its reporting
currency. Accordingly, assets and liabilities are translated
using exchange rates in effect at each balance sheet date and
average exchange rates for the period are used for revenue and
expense transactions.
Currency transaction gains and losses are recorded in the
consolidated statement of operations. Translation adjustments
are recorded in accumulated other comprehensive income, a
component of shareholder’s equity. Both transaction gains
and losses and translation adjustments are not material for the
period from December 21, 2005 (date Ming Shing acquired
Active Advertising Hong Kong, the predecessor to Ming Shing) to
December 31, 2005.
(j) Concentration of credit risk
Financial instruments that potentially expose the Company to
concentrations of credit risk consisted primarily of cash,
accounts receivable, and amounts due from (to) related
parties.
One customer as of December 31, 2005 accounted for 38% of
the Company’s accounts receivable. The Company performs
ongoing credit evaluations of its customers and generally does
not require collateral on accounts receivable. As of
December 31, 2005, no allowance for doubtful accounts was
considered necessary as accounts receivable balances are
expected to be collectible. Historical bad debts have not been
significant.
(k) Fair value of financial instruments
The carrying amounts of accounts receivable, accounts payable,
accrued expenses and other payable, amounts due from related
parties, and amounts due to related parties approximated their
fair values at December 31, 2005 due to the short-term
maturity of these instruments.
(l) Comprehensive income
Comprehensive income is reported on the accompanying statements
of shareholder’s deficiency and consists of net loss for
the period.
(m) Recent accounting pronouncements
In December 2004, the Financial Accounting Standards Board
(“FASB”) issued Statement of Financial Accounting
Standards (“SFAS”) No. 123 (revised 2004),
“Share-Based Payments”or SFAS 123R. This
statement eliminates the option to apply the intrinsic value
measurement provisions of Accounting Principles Board
(“APB”) Opinion No. 25, “Accounting for
Stock Issued
to Employees” to stock compensation awards issued to
employees. Rather, SFAS 123R requires companies to measure
the cost of employee services received in exchange for an award
of equity instruments based on the grant-date fair value of the
award. That cost will be recognized over the period during which
an employee is required to provide services in exchange for the
award— the requisite service period (usually the vesting
period). SFAS 123R applies to all awards granted after the
required effective date and to awards modified, repurchased, or
cancelled after that date. SFAS 123R is effective for the
fiscal year beginning January 1, 2006. The adoption of this
statement did not have a material effect on the Company’s
financial position, results of operations and cash flows.
In May 2005, the FASB issued SFAS No. 154,
“Accounting Changes and Error Corrections,”
which replaces Accounting Principles Board Opinions No. 20
“Accounting Changes” and SFAS No. 3,
“Reporting Accounting Changes in Interim Financial
Statements— An Amendment of APB Opinion
No. 28.” SFAS No. 154 provides guidance
on the accounting for and reporting of accounting changes and
error corrections. It establishes retrospective application, or
the latest practicable date, as the required method for
reporting a change in accounting principle and the reporting of
a correction of an error. SFAS No. 154 is effective
for accounting changes and corrections of errors made in fiscal
years beginning after December 15, 2005. The adoption of
this statement did not have a material effect on the
Company’s financial position, results of operations and
cash flows.
In June 2006, the FASB issued FASB Interpretation No. 48,
“Accounting for Uncertainty in Income Taxes— an
interpretation of FASB Statement No. 109”(“FIN 48”), which clarifies the accounting
for uncertainty in income tax positions in FASB Statement
No. 109, “Accounting for Income Taxes.”
FIN 48 prescribes a recognition threshold and measurement
attribute for the financial statement recognition and
measurement of a tax position taken or expected to be taken in a
tax return. FIN 48 is effective for fiscal years beginning
after December 15, 2006. The Company will adopt FIN 48
in the first quarter of 2007. The Company has not determined its
impact, if any, of FIN 48 on its financial position,
results of operations and cash flows
In September, 2006 the FASB issued FASB Statement No. 157,
(“SFAS 157”), ”Fair Value
Measurement.” SFAS 157 addresses standardizing the
measurement of fair value for companies who are required to use
a fair value measure of recognition for recognition or
disclosure purposes. The FASB defines fair value as “the
price that would be received to sell an asset or paid to
transfer a liability in an orderly transaction between market
participants at the measure date.” SFAS 157 is
effective for financial statements issued for fiscal years
beginning after November 15, 2007 and interim periods
within those fiscal years. The Company is currently evaluating
the impact, if any, of SFAS 157 on its financial position,
results of operations and cash flows.
3. Acquisitions
On December 21, 2005, the Company, through a wholly-owned
subsidiary, acquired 100% of the ordinary shares of Active
Advertising Hong Kong. Initial consideration for the acquisition
consisted of $1,815,349 in cash payment. The primary asset
acquired was television, print, and outdoor advertising agency
operations in the PRC which would enhance the Company’s
geographic reach and operating scope. The Company has
consolidated the operating results of Active Advertising Hong
Kong effective on the date of the acquisition.
The following table summarizes the estimated fair values of the
assets acquired and liabilities assumed at the date of
nomination and equity pledge agreement. The Company is in the
process of obtaining third-party valuations, from American
Appraisal China Limited, of its property and equipment and
certain identifiable intangible assets; thus, the allocation of
the purchase price consideration disclosed herein is preliminary
and subject to revision once the Company completes its valuation
exercise.
Fair value
Assets acquired:
Cash
$
1,321,402
Restricted cash
115,385
Accounts receivable
3,722,180
Prepaid advertising program and airtime
1,082,863
Prepaid expenses and other current assets
92,652
Amounts due from related parties
1,104,072
Rent deposits
15,657
Deferred tax asset
147,211
Property and equipment, net
829,515
Total
8,430,937
Liabilities assumed:
Accounts payable
2,238,460
Accrued expenses and other payables
666,817
Deferred revenue
25,188
Income taxes payable
264,956
Amount due to related parties
2,783,486
Total
5,978,907
Minority interest
636,681
Net assets acquired
1,815,349
Total considerations
1,815,349
The following pro forma information summarizes the effect of the
acquisition, if the acquisitions had occurred as of January 1,2005. This pro forma information is presented for information
purposes only. It is based on historical information and does
not purport to represent the actual results that may have
occurred had the Company consummated the acquisitions on
January 1, 2005, nor is it necessarily indicative of future
results of operations of the combined enterprises:
Prepaid expenses and other current assets consisted of the
following at December 31, 2005:
Subsidy income receivable
$
45,803
Consulting income receivable
12,347
Rent deposit
4,367
Utility deposit
4,194
Prepaid expenses
1,235
Other
4,797
Total
$
72,743
Subsidy income receivable represented amounts receivable from
local governments as an incentive to companies who help bring in
and set up businesses in these jurisdictions. Subsidy income is
determined based on a percentage of a new business’ taxable
income. The Company assisted a number of companies setting up
businesses in these jurisdictions and is entitled to a portion
of the subsidy income. The Company reported subsidy income as
other income when earned. Costs incurred under these projects
were reported as other expenses when incurred. Both subsidy
income and the related costs were de minimis for the period from
December 21, 2005 (date Ming Shing acquired Active
Advertising Hong Kong, the predecessor to Ming Shing) to
December 31, 2005.
The Company provides consultancy services from time to time to
its customers. Consultancy services are not considered to be the
Company’s core service nor are they the Company’s
current business strategy. As such, consultancy services are
reported as other income as services are provided. Consultancy
income for the period from December 21, 2005 (date of
acquiring Active Advertising Hong Kong, the predecessor to Ming
Shing) to December 31, 2005 was de minimis. The related
consultancy receivables are included in prepaid expenses and
other current assets in the accompanying consolidated balance
sheet.
6. Property and equipment, net
Property and equipment, net consisted of the following at
December 31, 2005:
Depreciation expense was de minimus for the period from
December 21, 2005 (Date Ming Shing acquired Active
Advertising Agency Limited, the predecessor to Ming Shing) to
December 31, 2005.
Accrued expenses and other payables consisted of the following
at December 31, 2005:
Accrued advertising placement
$
105,641
Accrued salary and welfare
80,582
Payable for acquisition of property and equipment
175,775
Other taxes payable
293,959
Other
15,403
Total
$
671,360
9. Provision for income taxes
Under the current BVI law, income from Ming Shing and Upper Will
is not subject to taxation. Active Advertising Hong Kong is
subject to Hong Kong Profits Tax calculated at a rate of 17.5%
on Hong Kong taxable income. Current provision for Hong Kong
income tax totaled $199 for the period from December 21,2005 (date Ming Shing acquired Active Advertising Hong Kong, the
predecessor to Ming Shing) to December 31, 2005.
Beijing Taide and Beijing Jinlong Runxin qualified as
“cultural media enterprises” and were granted a
two-year income tax exemption by the relevant tax authorities
effective through December 31, 2006.
All other subsidiaries of the Company were established in the
PRC and are subject to PRC Enterprises Income Tax on the taxable
income in accordance with the relevant PRC income tax laws at a
statutory rate of 33% (30% state income tax plus 3% local income
tax) on PRC taxable income. There was no provision for income
taxes for the period from December 21, 2005 (date of
acquiring Active Advertising Hong Kong, the predecessor to Ming
Shing) to December 31, 2005.
Deferred tax asset consisted of net operating losses totaling
$147,211 at December 31, 2005.
There were no significant deferred tax liabilities as of
December 31, 2005.
The Company has operating loss carry forwards of $446,239 for
the period from December 21, 2005 (date Ming Shing acquired
Active Advertising Hong Kong, the predecessor to Ming Shing) to
December 31, 2005. Net operating loss generated in the PRC
will expire on various dates through 2010 and net operating loss
generated in Hong Kong may be carried forward indefinitely.
Reconciliation between the provision for income tax computed by
applying the PRC enterprise income rate of 33% to income before
income taxes and the actual provision for income taxes for the
period from December 21, 2005 (date Ming Shing acquired
Active Advertising Hong Kong, the predecessor to Ming Shing) to
December 31, 2005 is as follows:
2005
Net loss before provision for income taxes
$
(6,264
)
PRC statutory tax rate
33%
Income tax at statutory tax rate
(2,067
)
Other
2,266
Provision for income taxes
$
199
10. Related party transactions
Amounts due from (to) related parties are as follows as of
December 31, 2005:
All amounts due from related parties are non-interest bearing
and are collectible on demand. Amounts due from affiliate
represented advances to an entity affiliated with one of the
Company’s directors. Amounts due from related parties are
expected to be collectible therefore no allowance for
uncollectible amounts was considered necessary at
December 31, 2005. Amounts due to minority shareholders and
former shareholders represented considerations paid by these
individuals in business combinations and are refundable by the
Company. All amounts advanced or borrowed are non-interest
bearing and are due on demand. Amounts due from former
shareholders of subsidiaries were collected in full during 2006.
11. Commitments
(a) Capital expenditure
The Company has entered into agreements during the period ended
December 31, 2005 to purchase equipment for a total of
$59,958. Unexpended balance at December 31, 2005 was
$38,568.
The Company has operating lease agreements principally for its
office spaces in the PRC and Hong Kong. Rent expenses were de
minimus for the period from December 21, 2005 (date Ming
Shing acquired Active Advertising Hong Kong, the predecessor to
Ming Shing) to December 31, 2005. These leases expire in
2007 and are renewable upon negotiation.
Future minimum lease payments under non-cancellable operating
lease agreements are as follows:
2006
$
121,517
2007
57,891
Total
$
179,408
(c) Other
The Company has a number of agreements to purchase advertising
airtime from television stations. As of December 31, 2005,
future minimum purchase commitments under the agreements totaled
approximately $5,963,000.
12. Segment information
The Company operates in one business segment providing
advertising placement services. The Company’s revenue are
generated from advertising revenue and substantially all the
Company’s identifiable assets are primarily located in the
PRC. During the period from December 21, 2005 (date Ming
Shing acquired Active Advertising Hong Kong, the predecessor to
Ming Shing) to December 31, 2005, the Company’s chief
decision maker was its General Manager.
13. Employee benefit plans
Employees of the Company located in the PRC are covered by the
retirement schemes defined by local practice and regulations,
which are essentially defined contribution schemes. The amounts
to be contributed are determined based on 20% of the applicable
payroll costs. Expenses paid by the Company to these defined
contribution schemes were immaterial for the period from
December 21, 2005 (date Ming Shing acquired Active
Advertising Hong Kong, the predecessor to Ming Shing) to
December 31, 2005.
In addition, the Company is required by law to contribute
approximately 1.2% to 10% of applicable salaries for medical
insurance benefits, housing funds, unemployment, and other
statutory benefits. The PRC government is directly responsible
for the payment of the benefits to these employees. The amounts
contributed for medical insurance, housing funds, and other
benefits were not material for the period from December 21,2005 (date Ming Shing acquired Active Advertising Hong Kong, the
predecessor to Ming Shing) to December 31, 2005.
14. Statutory reserves
As stipulated by the relevant laws and regulations in the PRC,
the Company is required to maintain non-distributable reserves
which include a statutory surplus reserve and a statutory
welfare reserve. Appropriations to the statutory surplus reserve
are required to be made at not
less than 10% of the profit after taxes as determined under PRC
GAAP. The statutory welfare reserve allocations are determined
annually at the discretion of the Company’s board of
directors. Once appropriated, these amounts are not available
for future distribution to owners or shareholders. The statutory
surplus reserve may be applied against prior year losses, if
any, and may be applied to the purchase of capital assets upon
the board of directors’ approval. Amounts contributed to
the statutory surplus reserve and the statutory welfare reserve
were not material during the period from December 21, 2005
(date Ming Shing acquired Active Advertising Hong Kong, the
predecessor to Ming Shing) to December 31, 2005.
15. Subsequent events
On June 20, 2006, Beijing Taide made a capital contribution
of $3.5 million (RMB28 million) to acquire 96.55% of
the registered capital of Beijing Century Media Culture Co.,
Ltd., which increased its registered capital from $123,000
(RMB1 million) to $3.6 million (RMB29 million).
Report of independent registered public accounting firm
To the Board of Directors and Shareholder of
Active Advertising Agency Limited:
We have audited the accompanying consolidated balance sheets of
Active Advertising Agency Limited and its subsidiaries (the
“Company”, the predecessor to Xinhua Finance
Advertising Limited) as of December 31, 2004 and
December 21, 2005, and the related consolidated statements
of operations, shareholder’s equity and comprehensive
income, and cash flows for the year ended December 31, 2004
and period from January 1, 2005 to December 21, 2005.
These financial statements are the responsibility of the
Company’s management. Our responsibility is to express an
opinion on these financial statements 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. The Company is not required to
have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audits included
consideration of internal control over financial reporting as a
basis for designing audit procedures that are appropriate in the
circumstances but not for the purpose of expressing an opinion
on the effectiveness of the Company’s internal control over
financial reporting. Accordingly, we express no such opinion. An
audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial
statements, 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 financial statements present fairly, in all
material respects, the consolidated financial position of the
Company as of December 31, 2004 and December 21, 2005
and the consolidated results of its operations and its cash
flows for the year ended December 31, 2004 and the period
from January 1, 2005 to December 21, 2005 in
conformity with accounting principles generally accepted in the
United States of America.
Active Advertising Agency Limited (“Active Advertising Hong
Kong”) was incorporated in Hong Kong on February 17,1997. All of its ordinary shares were acquired by Upper Will
Enterprise Limited, a British Virgin Islands company and a
wholly-owned subsidiary of Xinhua Finance Advertising Limited
(formerly Ming Shing International Limited), on
December 21, 2005. Active Advertising Hong Kong and its
subsidiaries (collectively the “Company”, the
predecessor to Xinhua Finance Advertising Limited) place
advertisements and provide advertising services to customers in
Hong Kong. Active Advertising Hong Kong acts as an agent for
newspaper companies and outdoor advertising companies selling
advertising spaces to corporate advertisers. Active Advertising
Hong Kong also provides design and production services to its
customers. To date, revenue from design and production services
has not been material.
The following is a description of Active Advertising Hong
Kong’s wholly-and majority-owned subsidiaries and their
businesses:
Active Advertising (Guangzhou) Co. Ltd. (“Active
Guangzhou”) was established in the People’s Republic
of china (“PRC”) on June 1, 2005 as a
wholly-owned subsidiary of Active Advertising Hong Kong. Active
Guangzhou provides advertising placement services to customers
in Guangzhou and customers referred by Active Advertising Hong
Kong. Active Guangzhou acts as an agent for newspaper companies
and outdoor advertising companies selling advertising space to
corporate advertisers. Effective December 21, 2005, Active
Guangzhou became the primary beneficiary of two variable
interest entities (“VIEs”) through a number of
nomination and equity pledged agreements with the VIE’s
equity owners. A VIE is an entity in which equity investors
generally do not have the characteristics of a “controlling
financial interest” or there is not sufficient equity at
risk for the entity to finance its activities without additional
subordinated financial support. A VIE is consolidated by its
primary beneficiary when it is determined that the primary
beneficiary will absorb the majority of the VIE’s expected
losses and/or expected residual returns. Consistent with the
provisions of FASB Interpretation No. 46,
“Consolidation of Variable Interest Entities—an
Interpretation of ARB No. 51” (as revised,
“FIN 46R”), these VIEs are included in the
consolidated financial statements of Active Guangzhou.
The following is a summary and description of Active
Guangzhou’s consolidated VIEs and their majority-owned
subsidiaries:
•
Shenzhen Active Trinity Advertising Co., Ltd. (“Shenzhen
Trinity”) was established in the PRC in December 2005 by
two PRC citizens for a term of 10 years and provides
advertising placement services to customers in Shenzhen and
customers referred by Active Advertising Hong Kong. Through a
number of nomination and equity pledged agreements, dated
December 21, 2005, Shenzhen Trinity is accounted for as a
wholly-owned VIE of Active Guangzhou and is included in the
consolidated financial statements of Active Guangzhou.
Beijing Taide Advertising Co., Ltd. (“Beijing Taide”)
was established in the PRC on March 23, 2005 by two PRC
citizens for a term of 20 years and provides design,
production and placement of print advertisements to customers in
Beijing. Through a number of nomination and equity pledged
agreements dated December 21, 2005, Beijing Taide is
accounted for as a wholly-owned VIE of Active Guangzhou and is
included in the consolidated financial statements of Active
Guangzhou.
•
Shangtuo Zhiyang International Advertising (Beijing) Co. Ltd.
(“Shangtuo Zhiyang”) was established on
December 9, 2005 by Beijing Taide and a PRC citizen for a
term of 30 years and is engaged in the design, production,
and placement of advertising and provides advertising services.
Shangtuo Zhiyang is the sole advertising placement agent for a
newspaper published in the PRC, and also acts as an advertising
placement agent for other internet websites, newspapers, and
magazines. Shangtuo Zhiyang also provides other forms of
promotion and consultancy services to property developers and
other customers in real estate and property sales.
•
Beijing Longmei Television and Broadcast Advertising Co., Ltd.
(“Beijing Longmei”) was established on
September 24, 2002 by two PRC citizens for a term of
20 years and is engaged in the design, production and
distribution of television advertisements, and acts as the agent
for placement of advertisements during certain television shows
broadcast by a major television station in Beijing. On
December 12, 2005, Beijing Taide acquired 80% of the
controlling interest in Beijing Longmei from its equity owners.
•
Beijing Jinlong Runxin Advertising Co., Ltd. (“Beijing
Jinlong Runxin”) was established on August 5, 2004 by
two PRC citizens for a term of 20 years and is engaged in
the design, production and distribution of television
advertisements. On December 19, 2005, Beijing Taide
acquired 80% of the controlling interest in Beijing Jinlong
Runxin from its equity owners.
•
Shanghai Yuanxin Advertising Intermediary Co., Ltd.
(“Shanghai Yuanxin”) was established on
December 23, 2003 by two PRC citizens for a term of
10 years and is engaged in the design, production and
distribution of television advertisements, and acts as the agent
for placement of advertisements during certain television shows
broadcast by a major television station in Shanghai. Shanghai
Yuanxin also acts as the exclusive advertising agent for
approximately 200 billboards on some university campuses in
Shanghai. On December 16, 2005, Beijing Taide acquired 80%
of the controlling interest in Shanghai Yuanxin from its equity
owners.
The following financial statement balances of Beijing Taide and
Shenzhen Trinity were included in the accompanying consolidated
financial statements as of December 21, 2005:
Beijing Taide
Shenzhen Trinity
Total
Total assets
$
5,229,959
$37,042
$
5,267,001
Total liabilities
(1,403,309
)
—
(1,403,309
)
2. Summary of principal accounting policies
(a) Basis of presentation
The consolidated financial statements of the Company have been
prepared in accordance with the accounting principles generally
accepted in the United States of America (“US GAAP”).
The consolidated financial statements include the assets,
liabilities, revenues and expenses of Active Advertising Hong
Kong, its wholly- and majority-owned subsidiaries, and VIEs.
All of the VIEs’ registered capital is held as collateral
against borrowings from Active Advertising Hong Kong.
All significant intercompany transactions and balances are
eliminated on consolidation.
(c) Use of estimates
The preparation of financial statements in conformity with US
GAAP requires management to make estimates and assumptions that
affect reported amounts of assets and liabilities and disclosure
of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could
differ from those estimates. Significant accounting estimates
reflected in the accompanying consolidated financial statements
include allowances for doubtful accounts, valuation of deferred
tax assets, useful lives of property and equipment, and
impairment of long-lived assets.
(d) Revenue recognition
Advertising revenue is recognized when advertisements are
published, broadcasted, or placed on customers’ websites
net of provisions for estimated rebates, rate adjustments, and
discounts. Revenues are recorded net of applicable business
taxes totaling $357,471 and $188,346 for the year ended
December 31, 2004 and the period ended December 21,2005.
Payments received in advance are deferred until earned and are
reported as deferred revenue in the consolidated balance sheet.
The Company extends credit based upon an evaluation of the
customers’ financial condition and collateral is not
required from such customers. Allowances for estimated credit
losses, rebates, rate adjustments and discounts are generally
established based on historical experience.
In the normal course of business, the Company acts as or uses an
intermediary or agent in placing advertising transactions with
third parties. Such transactions are recorded on a gross or net
basis depending on whether the Company is acting as the
principal or as an agent in the transaction. The Company serves
as the principal in transactions where it purchases blocks of
advertising time and attempts to sell the time to advertisers
and it has substantial risks and rewards of ownership and,
accordingly, records revenue on a gross basis. For those
transactions in which the Company finds advertising space for
advertisers and it does not have substantial risks and rewards
of ownership, the Company is considered an agent in the
transaction and, accordingly, records revenue on a net basis.
Restricted cash are cash balances pledged for the use of banking
facilities granted by banks.
(f) Property and equipment
Property and equipment are recorded at cost less accumulated
depreciation. Depreciation is provided on a straight-line basis
over the following estimated useful lives:
Leasehold improvements
2 years
Billboards and lampposts
10 years
Furniture, fixtures and equipment
5 years
Motor vehicles
5 years
(g) Impairment of long-lived assets
The Company evaluates its long-lived assets for impairment
whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. When these
events occur, the Company measures impairment by comparing the
carrying amount of the assets to future undiscounted 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 Company
would recognize an impairment loss as the excess of carrying
amounts over fair value of the assets. There was no impairment
losses recorded for the year ended December 31, 2004 or the
period ended December 21, 2005.
(h) 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 of the
relevant taxing authorities. The components of the deferred tax
assets and liabilities are individually classified as current
and non-current based on their characteristics.
(i) Foreign currency translation
The functional currency of the Company is Hong Kong dollars
(“HKD”). Transactions denominated in other currencies
are translated into HKD at the average rates of exchange
prevailing during each period. Monetary assets and liabilities
denominated in other currencies are translated into HKD at rates
of exchange in effect on the balance sheet dates. Nonmonetary
assets and liabilities are remeasured into HKD at historical
exchange rates.
The Company uses the United States dollar as its reporting
currency. Accordingly, assets and liabilities are translated
using exchange rates in effect at each balance sheet date and
average exchange rates for the period are used for revenue and
expense transactions.
Currency transaction gains and losses are recorded in the
statement of operations. Translation adjustments are recorded in
accumulated other comprehensive income, a component of
shareholders’ equity. Both transaction gains and losses and
translation adjustments are not material for the year ended
December 31, 2004 and the period ended December 21,2005.
(j) Concentration of credit risk
Financial instruments that potentially expose the Company to
concentrations of credit risk consist primarily of cash,
accounts receivable, and amounts due from related parties.
One customer at December 31, 2004 and the same customer at
December 21, 2005 accounted for 73% and 38% of the
Company’s accounts receivable balances as of
December 31, 2004 and December 21, 2005, respectively.
The Company performs ongoing credit evaluations of its customers
and generally does not require collateral on accounts
receivable. As of December 31, 2004 and December 21,2005, no allowances for doubtful accounts were considered
necessary as accounts receivable balances are expected to be
collectible. Historical bad debts have not been significant.
The carrying amounts of accounts receivables, accounts payable,
accrued expenses and other payables, amounts due from related
parties, and amounts due to related parties approximated their
fair values due to the short-term maturity of these instruments.
The carrying amount of long-term debt approximated its fair
value as it was approaching maturity.
(l) Long-term debt
The Company had a long-term debt at December 31, 2004. The
original amount of the borrowing was approximately $10,300
(HKD80,000) with a payment term of two years bearing interest at
4.5% per annum. The balance of the loan was paid off during
2005.
(m) Comprehensive income
Comprehensive income is reported on the accompanying statements
of shareholder’s equity and consisted of net income and
foreign currency translation gains and losses.
3. Acquisitions
On December 21, 2005, the Company became the primary
beneficiary of Beijing Taide through a number of loan
agreements, equity pledge agreements, exclusive equity purchase
option agreements and subrogation agreements. Accordingly,
Beijing Taide is considered to be a wholly-owned VIE of the
Company and is accounted for similar to a purchase. All assets
acquired and liabilities assumed are stated at fair value.
Initial consideration for the acquisition
consisted of $1,368,639 in cash payment. The primary asset
acquired was television, print, and outdoor advertising agency
operations in the PRC which would enhance the Group’s
geographic reach and operating scope. The Company has
consolidated the operating results of Beijing Taide effective on
the date of acquisition.
The following table summarizes the estimated fair values of the
assets acquired and liabilities assumed at the date of
nomination and equity pledge agreement. The Company is in the
process of obtaining third-party valuations, from American
Appraisal China Limited, of its property and equipment and
certain identifiable intangible assets; thus, the allocation of
the purchase price consideration disclosed herein is preliminary
and subject to revision once the Company completes its valuation
exercise.
Fair value
Assets acquired:
Cash
$
997,506
Accounts receivable
1,541,918
Prepaid advertising program space and airtime
847,347
Prepaid expenses and other current assets
65,614
Amounts due from related parties
980,785
Rent deposit
15,657
Deferred tax asset
138,800
Property and equipment, net
811,180
Total
5,398,807
Liabilities assumed:
Accrued expenses and other payables
561,843
Deferred revenue
25,188
Amounts due to related parties
2,649,567
Income taxes payable
156,889
Total
3,393,487
Minority interest
636,681
Net assets acquired
1,368,639
Total considerations
1,368,639
The following pro forma information summarizes the effect of the
acquisition, if the acquisitions had occurred as of
March 23, 2005 (date of establishment of Beijing Taide).
The pro forma information is presented for informational
purposes only. It is based on historical information and does
not purport to represent the actual results that may have
occurred had the Company consummated the acquisitions on
March 23, 2005, nor is it necessarily indicative of future
results of operations of the combined enterprise:
On February 17, 1997, the Company authorized 10,000
ordinary shares with a par value of HK$1 per share and
issued 2 ordinary shares. During 2005, the Company was
acquired by Upper Will Enterprises Limited.
The Company provides consultancy services from time to time to
its customers. Consultancy services are not considered to be the
Company’s core service nor are they the Company’s
current business strategy. As such, consultancy services are
reported as other income as services are provided. The related
consultancy receivables are included in prepaid expenses and
other current assets in the accompanying balance sheets.
Active Advertising Hong Kong is subject to Hong Kong Profits Tax
calculated at a rate of 17.5% on Hong Kong taxable income.
Current provision for Hong Kong income tax totaled $19,643 and
$119,100 for the year ended December 31, 2004 and the
period ended December 21, 2005, respectively.
Beijing Taide and Beijing Jinlong Runxin qualified as
“cultural media enterprises” and were granted a
two-year income tax exemption by the relevant tax authorities
effective through December 31, 2006.
All other subsidiaries of the Company incorporated in the PRC
are governed by either the PRC Enterprises Income Tax or the
Income Tax Law of the PRC Concerning Foreign Investment
Enterprises and Foreign Enterprises and various local income tax
laws (“Income Tax Laws”). Pursuant to the PRC Income
Tax Laws, the foreign investment enterprises are subject to
income tax at statutory rate of 33% (30% of the state income tax
plus 3% local income tax) on PRC taxable income.
Deferred tax asset consisted of net operating losses totaling
$147,211 at December 21, 2005.
The Company has operating loss carry forwards of $446,239 which
will expire on various dates through 2010 and net operating loss
generated in Hong Kong may be carried forward indefinitely.
Reconciliation between the provision for income tax computed by
applying the PRC enterprise income rate of 33% to income before
income taxes and the actual provision for income taxes is as
follows:
All amounts due from related parties are non-interest bearing
and are collectible on demand. Amounts due from affiliate
represented advances to an entity affiliated with one of the
Company’s directors. Amounts due from related parties are
expected to be collectible therefore no allowance for
uncollectible amounts was considered necessary at
December 31, 2004 and at December 21, 2005. Amounts
due to minority shareholders and former shareholders represented
considerations paid by these individuals in business
combinations and are refundable by the Company. All amounts
advanced or borrowed are non-interest bearing and are due on
demand. Amounts due from former shareholders were collected in
full during 2006.
The Company has entered into an agreement during the period
ended December 21, 2005 to purchase equipment for a total
of $59,958. Unexpended balance at December 21, 2005 was
$38,568.
(b) Operating leases
The Company has operating lease agreements principally for its
office spaces in the PRC and Hong Kong. These leases expire in
2007 and are renewable upon negotiation. Rent expenses were
$20,424 and $27,692 for the year ended December 31, 2004
and the period ended December 21, 2005, respectively.
Future minimum lease payments under non-cancellable operating
lease agreements are as follows:
2006
$
121,517
2007
57,891
Total
$
179,408
(c) Other
The Company has a number of agreements to purchase advertising
airtime from television stations. As of December 31, 2004
and December 21, 2005, future minimum purchase commitments
under the agreements totaled approximately $5,116,110 and
$5,963,370, respectively. During the period ended
December 21, 2005, $5,116,110 was paid and $5,963,370 will
be payable in 2006.
11. Segment information
The Company operates in one business segment in the provision of
advertising placement services. The Company’s revenues are
generated from advertising revenue and substantially all the
Company’s identifiable assets are located in the PRC.
During the year ended December 31, 2004 and the period
ended December 21, 2005, the Company’s chief decision
maker was its General Manager.
12. Employee benefit plans
Employees of the Company and its subsidiaries located in Hong
Kong are covered by the Mandatory Provident Fund Scheme
(“MPF Scheme”) established on December 1, 2000
under the Mandatory Provident Fund Scheme Ordinance of Hong
Kong. The calculation of contributions for these eligible
employees is based on 5% of the applicable payroll costs, and
contributions are matched by the employees. The amounts paid by
the Company to the MPF Scheme were $14,497 and $16,251 for the
year ended December 31, 2004 and the period ended
December 21, 2005, respectively.
Employees of the Company located in the PRC are covered by the
retirement schemes defined by local practice and regulations,
which are essentially defined contribution schemes. The amounts
to be contributed are determined based on 20% of the applicable
payroll costs. Expenses paid by the Company to these defined
contribution schemes were not material for the year ended
December 31, 2004 and the period ended December 21,2005.
In addition, the Company is required by law to contribute
approximately 2% to 8% of applicable salaries for medical
insurance benefits, unemployment, and other statutory benefits.
The PRC government is directly responsible for the payment of
the benefits to these employees. The amounts contributed to
medical insurance benefits, unemployment, and other statutory
benefits were de minimis for the year ended December 31,2004 and the period ended December 21, 2005.
13. Statutory reserves
As stipulated by the relevant laws and regulations in the PRC,
the Company is required to maintain non-distributable reserves
which include a statutory surplus reserve and a statutory
welfare reserve. Appropriations to the statutory surplus reserve
are required to be made at not less than 10% of the profit after
taxes as determined under PRC GAAP. The statutory welfare
reserve allocations are determined annually at the discretion of
the Company’s board of directors. Once appropriated, these
amounts are not available for future distribution to owners or
shareholders. The statutory surplus reserve may be applied
against prior year losses, if any, and may be applied to the
purchase of capital assets upon the board of directors’
approval. Amount appropriated to the statutory surplus fund
totaled $489 in 2005. There was no appropriation made to the
statutory surplus reserve during 2004. There has been no
appropriation made to the staff welfare and incentive bonus
reserve during the year ended December 31, 2004 and period
ended the December 21, 2005.
Report of independent registered public accounting firm
To the Board of Directors and Owners of
Beijing Taide Advertising Co., Ltd.:
We have audited the accompanying consolidated balance sheet of
Beijing Taide Advertising Co., Ltd. and its subsidiaries (the
“Company”) as of December 20, 2005, and the
related consolidated statements of operations, owners’
equity and cash flows for the period from March 23, 2005
(date of establishment) to December 20, 2005. These
financial statements are the responsibility of the
Company’s management. Our responsibility is to express an
opinion on these financial statements 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 the financial statements are
free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audit included
consideration of internal control over financial reporting as a
basis for designing audit procedures that are appropriate in the
circumstances but not for the purpose of expressing an opinion
on the effectiveness of the Company’s internal control over
financial reporting. Accordingly, we express no such opinion. An
audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audit provides a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all
material respects, the consolidated financial position of the
Company as of December 20, 2005 and the consolidated
results of its operations and its cash flows for the period from
March 23, 2005 (date of establishment) to December 20,2005, in conformity with accounting principles generally
accepted in the United States of America.
Beijing Taide Advertising Co., Ltd. (“Beijing Taide”)
was established in the People’s Republic of China
(“PRC”) on March 23, 2005 by two PRC citizens for
a term of 20 years and provides design, production and
placement of print advertisements to customers in Beijing.
Beijing Taide and its subsidiaries (collectively the
“Company”) are principally engaged in the creation and
placement of advertising for television, radio, print media and
campus billboards. Through a number of contractual arrangements,
Beijing Taide is considered to be a wholly-owned variable
interest entity of Active Advertising (Guangzhou) Co., Ltd.
(“Active Guangzhou”, a PRC company and an indirect
wholly-owned subsidiary of Xinhua Finance Advertising Limited
(formerly Ming Shing International Limited, “Ming
Shing”)). Beijing Taide is also, along with Active
Advertising Agency Limited, a predecessor of Ming Shing.
The following is a description of Beijing Taide’s
majority-owned subsidiaries and their businesses:
•
Shangtuo Zhiyang International Advertising (Beijing) Co. Ltd.
(“Shangtuo Zhiyang”) was established on
December 9, 2005, by Beijing Taide who owns 80% and a PRC
citizen who owns 20%, for a term of 30 years and is engaged
in the creation, production, and placement of advertising.
Shangtuo Zhiyang has the exclusive rights to selling advertising
for a newspaper published in the PRC, and also acts as an
advertising placement agent for other internet websites,
newspapers, and magazines. Shangtuo Zhiyang also provides other
forms of promotion and consultancy services to property
developers and other customers in real estate and property sales.
•
Beijing Longmei Television and Broadcast Advertising Co., Ltd.,
(“Beijing Longmei”) was established on
September 24, 2002 by two PRC citizens for a term of
20 years and is engaged in the creation, production and
distribution of television advertisements, and acts as the agent
for placement of advertisements during certain television shows
broadcast by a major television station in Beijing. On
December 12, 2005, Beijing Taide acquired 80% of the
controlling interest in Beijing Longmei from its equity owners.
•
Beijing Jinlong Runxin Advertising Co., Ltd. (“Beijing
Jinlong Runxin”) was established on August 5, 2004 by
two PRC citizens for a term of 20 years and is engaged in
the creation, production and distribution of television
advertisements. On December 19, 2005, Beijing Taide
acquired 80% of the controlling interest in Beijing Jinlong
Runxin from its equity owners.
•
Shanghai Yuanxin Advertising Intermediary Co., Ltd.,
(“Shanghai Yuanxin”) was established on
December 23, 2003 by two PRC citizens for a term of
10 years and is engaged in the creation, production and
distribution of television advertisements, and acts as the agent
for placement of advertisements during certain television shows
broadcast by a major television station in Shanghai. Shanghai
Yuanxin also acts as the exclusive advertising agent for
approximately 281 billboards on some university campuses in
Shanghai. On December 16,
2005, Beijing Taide acquired 80% of the controlling interest in
Shanghai Yuanxin from its equity owners.
2. Summary of principal accounting policies
(a) Basis of presentation
The financial statements of the Company 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
statement of Beijing Taide and its subsidiaries. All significant
intercompany transactions and balances are eliminated during
consolidation.
(c) Use of estimates
The preparation of financial statements in conformity with US
GAAP requires management to make estimates and assumptions that
affect reported amounts of assets and liabilities and disclosure
of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could
differ from those estimates. Significant accounting estimates
reflected in the accompanying financial statements include
allowance for doubtful accounts, valuation of deferred tax
assets, useful lives of property and equipment and impairment of
long-lived assets.
(d) Revenue recognition
Advertising revenue is recognized when advertisements are
published, broadcasted, or placed on customers’ website,
net of provisions for rebates, rate adjustments, and discounts.
Advertising revenue is recorded net of applicable business taxes
totaling $19,400 for the period from March 23, 2005 (date
of establishment) to December 20, 2005. Payments received
in advance are deferred until earned and such amounts are
reported as deferred revenue on the accompanying consolidated
balance sheet.
The Company extends credit based upon an evaluation of the
customers’ financial condition and collateral is not
required from such customers. Allowances for estimated credit
losses, rebates, rate adjustments and discounts are generally
established based on historical experience.
In the normal course of business, the Company acts as an
intermediary or agent in placing advertising transactions with
TV stations. Such transactions are recorded on a gross or
net basis depending on whether the Company is acting as the
principal or as an agent in the transaction. The Company is
considered the principal in transactions where it purchases
blocks of advertising time and attempts to sell the time to
advertisers and it has substantial risks and rewards of
ownership and, accordingly, records revenue on a gross basis.
For those transactions in which the Company find advertising
space for an advertisers and it does not have substantial risks
and rewards of ownership, the Company is considered an agent in
the transaction and, accordingly, records revenue on a net basis.
Property and equipment are recorded at cost less accumulated
depreciation and amortization. Depreciation and amortization are
provided on a straight-line basis over the following estimated
useful lives:
Leasehold improvements
2 years
Billboards and lampposts
10 years
Furniture, fixtures and equipment
5 years
Motor vehicles
5 years
(f) Impairment of long-lived assets
The Company evaluates its long-lived assets for impairment
whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. When these
events occur, the Company measures impairment by comparing the
carrying amount of the assets to future undiscounted 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 Company
would recognize an impairment loss as the excess of carrying
amounts over fair value of the assets. There was no impairment
losses recorded for the period from March 23, 2005 (date of
establishment) to December 20, 2005.
(g) 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 of the
relevant taxing authorities. The components of the deferred tax
assets and liabilities are individually classified as current
and non-current based on their characteristics.
(h) Foreign currency translation
The functional currency of the Company is Renminbi
(“RMB”). Transactions dominated in other currencies
are translated into RMB at the average rates of exchange
prevailing during each period. Monetary assets and liabilities
denominated in other currencies are translated into RMB at rates
of exchange in effect on the balance sheet dates. Non monetary
assets and liabilities are remeasured into RMB at historical
exchange rates.
The Company uses the United States dollar as its reporting
currency. Accordingly, assets and liabilities are translated
using exchange rates in effect at each balance sheet date and
average exchange rates for the period are used for revenue and
expense transactions.
Currency transaction gains and losses are recorded in the
statement of operations. Translation adjustments are recorded in
accumulated other comprehensive income, a component of
owners’ equity. Both transaction gains and losses and
translation adjustments are not material for the period from
March 23, 2005 (date of establishment) to December 20,2005.
Financial instruments that potentially expose the Company to
concentrations of credit risk consist primarily of cash,
accounts receivable and amounts due from (to) related party.
The following customers contributed 10% or more of the
Company’s revenues during the period from March 23,2005 (date of establishment) to December 20, 2005:
Customer A
$
135,819
Customer B
98,778
Three customers as of December 20, 2005 each accounted for
10% or more of the Company’s accounts receivable balances,
representing an aggregate of 51% of the Company’s accounts
receivable balance at December 20, 2005. The Company
performs ongoing credit evaluations of its customers and
generally does not require collateral on accounts receivable. As
of December 20, 2005, no allowance for doubtful accounts
was considered necessary as accounts receivable balances were
expected to be collectible. Historical bad debts have not been
significant.
The carrying amounts of accounts receivables, accounts payable,
accrued expenses and other payables and amounts due from
(to) related parties approximated their fair values at
December 20, 2005 due to the short-term maturity of these
instruments.
(k) Comprehensive income
Comprehensive income is reported on the accompanying
consolidated statement of owners’ equity and consists of
net income for the period.
3. Acquisitions
(a) Beijing Longmei
On December 12, 2005, Beijing Taide acquired 80% equity
interests of Beijing Longmei for initial consideration of
$398,519, including estimated transaction costs of $1,511. The
amount has not yet been paid and was recorded as due to related
parties. The primary asset acquired was the television
advertising agency operations with a major television station in
Beijing, which would enhance the Group’s geographic reach
and operation scope. Beijing Taide has consolidated the
operating results of Beijing Longmei effective on acquisition
date.
The following table summarizes the estimated fair values of the
assets acquired and liabilities assumed at the date of
acquisition. The Company is in the process of obtaining
third-party valuations, from American Appraisal China Limited,
of its property and equipment and certain
identifiable intangible assets; thus, the allocation of the
purchase price consideration disclosed herein is preliminary and
subject to revision once the Company completes its valuation
exercise.
Fair value
Assets acquired:
Cash
$
157,130
Accounts receivable
97,172
Prepaid advertising airtime
847,347
Prepaid expenses and other current assets
4,663
Deferred tax asset
89,900
Property and equipment
161,129
Total
1,357,341
Liabilities assumed:
Accrued expenses and other payable
88,410
Deferred revenue
25,188
Amount due to related parties
300,037
Total
413,635
Minority interest
545,187
Net assets acquired
398,519
Cash consideration
398,519
(b) Beijing Jinlong Runxin
On December 19, 2005, Beijing Taide acquired 80% equity
interests of Beijing Jinlong Runxin for initial consideration of
$1,620,790, including estimated transaction costs of $1,510. The
amount has not yet been paid and was recorded as due to related
parties. The primary asset acquired was television advertising
agency operations, which would enhance the Group’s
operation scope. Beijing Taide has consolidated the operating
results of Beijing Jinlong Runxin effective on acquisition date.
The following table summarizes the estimated fair values of the
assets acquired and liabilities assumed at the date of
acquisition. The Company is in the process of obtaining
third-party valuations, from American Appraisal China Limited,
of its property and equipment and certain identifiable
intangible assets; thus, the allocation of the purchase price
consideration disclosed herein is preliminary and subject to
revision once the Company completes its valuation exercise.
Fair value
Assets acquired:
Cash
$
453,292
Accounts receivable
1,311,472
Property and equipment
16,728
Deferred tax asset
48,900
Rent deposit
3,210
Total
1,833,602
Liabilities assumed:
Accrued expenses and other payable
174,042
Income taxes payable
38,770
Total
212,812
Net assets acquired
1,620,790
Cash consideration
1,620,790
(c) Shanghai Yuanxin
On December 16, 2005, Beijing Taide acquired 80% equity
interests of Shanghai Yuanxin for initial consideration of
$267,202, including estimated transaction costs of $1,445 The
amount has not yet been paid and was recorded as due to related
parties. The primary asset acquired was the advertising agency
operations in Shanghai, which would enhance the Group’s
geographic reach and operation scope. Beijing Taide has
consolidated the operating results of Shanghai Yuanxin effective
on acquisition date.
The following table summarizes the estimated fair values of the
assets acquired and liabilities assumed at the date of
acquisition. The Company is in the process of obtaining
third-party valuations, from American Appraisal China Limited,
of its property and equipment and certain identifiable
intangible assets; thus, the allocation of the purchase price
consideration disclosed herein is preliminary and subject to
revision once the Company completes its valuation exercise.
Fair value
Assets acquired:
Cash
$
85,533
Accounts receivable
42,595
Prepaid expenses and other current assets
59,385
Property and equipment
608,073
Rent deposit
2,716
Total
798,302
Liabilities assumed:
Accounts payable
175,775
Accrued expenses and other payable
107,387
Amount due to related parties
63,019
Income taxes payable
118,119
Total
464,300
Minority interest
66,800
Net assets acquired
267,202
Cash consideration
267,202
The following unaudited pro forma information summarizes the
effect of the acquisition of Beijing Longmei, Beijing Jinlong
Runxin and Shanghai Yuanxin, if the acquisitions had occurred as
of March 23, 2005 (date of establishment). The pro forma
information is presented for informational purposes only and
does not include related party amounts. It is based on
historical information and does not purport to represent the
actual results that may have occurred had the Company
consummated the acquisitions on March 23, 2005 (date of
establishment), nor is it necessarily indicative of future
results of operations of the combined enterprise:
Property and equipment, net consisted of the following at
December 20, 2005:
Leasehold improvements
$
12,781
Billboards and lampposts
554,778
Furniture, fixtures and equipment
95,783
Motor vehicles
132,315
Total
795,657
Less: accumulated depreciation and amortization
5,867
Total
789,790
Deposit paid for the purchase of equipment
21,390
Property and equipment, net
$
811,180
5. Capital structure
The Company was established on March 23, 2005 with
registered and contributed capital of $1,234,720. Effective on
December 20, 2005, Active Guangzhou became the primary
beneficiary of Beijing Taide through a number of nomination and
equity pledge agreements between Active Guangzhou and the equity
owners of Beijing Taide. A variable interest entity
(“VIE”) is an entity in which equity investors
generally do not have the characteristics of a “controlling
financial interest” or there is not sufficient equity at
risk for the entity to finance its activities without additional
subordinated financial support. A VIE is consolidated by its
primary beneficiary when it is determined that the primary
beneficiary will absorb the majority of the VIE’s expected
losses and/or expected residual returns. Consistent with the
provisions of FASB Interpretation No. 46,
“Consolidation of Variable Interest Entities— an
Interpretation of ARB No. 51” (as revised,
“FIN 46R”), Beijing Taide is accounted for as a
VIE of Active Guangzhou.
6. Prepaid expenses and other current assets
Prepaid expenses and other current assets consisted of the
following at December 20, 2005:
Subsidy income receivable
$
45,803
Consulting income receivable
12,347
Rent deposit
1,803
Other
5,661
Total
$
65,614
The Company provides consultancy services from time to time to
its customers. Consultancy services are not considered to be the
Company’s core service nor are they the Company’s
current business strategy. As such, consultancy services are
reported as other income as services are provided. The related
consultancy receivables are included in prepaid expenses and
other current assets in the accompanying balance sheet.
Accrued expenses and other payable consisted of the following at
December 20, 2005:
Accrual salary and welfare
$
80,582
Payable for acquisition of property and equipment
175,775
Other taxes payable
292,276
Other
13,210
Total
$
561,843
8. Provision for income taxes
Beijing Taide and Beijing Jinlong Runxin qualified as
“cultural media enterprises” and were granted a
two-year income tax exemption by the relevant tax authorities
effective through December 31, 2006.
All other subsidiaries of the Company were established in the
PRC and are subject to PRC Enterprises Income Tax on the taxable
income in accordance with the relevant PRC income tax laws at a
statutory rate of 33% (30% state income tax plus 3% local income
tax) on PRC taxable income. There was no provision for PRC
income taxes for the period from May 23, 2005 (date of
establishment) to December 20, 2005.
Deferred tax asset consisted of net operating losses totalling
$138,800 at December 20, 2005. Deferred tax liabilities
were not significant at December 20, 2005.
The Company has operating loss carry forwards of $420,751 for
the year ended December 20, 2005. Net operating loss
generated in the PRC will expire on various dates through 2010.
Reconciliation between the provision for income tax computed by
applying the PRC enterprise income rate of 33% to income before
income taxes and the actual provision for income taxes is as
follows for the period from March 23, 2005 (date of
establishment) to December 20, 2005:
Net income before provision for income taxes
$
133,919
PRC statutory tax rate
33
%
Income tax at statutory tax rate
44,193
Expenses not deductible for tax purposes
213
Effect of tax exemption
(44,406
)
Provision for income taxes
$
—
PRC income taxes that would have been payable without the tax
exemptions amounted to approximately $44,000 for the period from
May 23, 2005 (date of establishment) to December 20,2005.
Amounts due from (to) related parties were as follows at
December 20, 2005:
Due from related parties:
Due from directors
$
256,622
Due from minority shareholders
724,163
Total
$
980,785
Due to related parties:
Due to directors
$
363,056
Due to minority shareholders
2,286,511
Total
$
2,649,567
All amounts due from related parties are non-interest bearing
and are collectible on demand. Amounts due from related parties
are expected to be collectible therefore no allowance for
uncollectible amounts was considered necessary at
December 20, 2005. Amounts due to minority shareholders
represented considerations paid by these individuals in business
combinations and are refundable by the Company. All amounts
advanced or borrowed are non-interest bearing and are due on
demand. Amounts due from minority shareholders were collected in
full during 2006.
The Company has operating lease agreements principally for its
office spaces in the PRC. The leases expire in 2007 and are
renewable upon negotiation. Rent expenses aggregated $34,680 for
the period from March 23, 2005 (date of establishment) to
December 20, 2005.
Future minimum lease payments under non-cancellable operating
lease are as follows:
2006
$
84,520
2007
54,790
Total
$
139,310
(c) Other
The Company has a number of agreements to purchase advertising
airtime from television stations. As of December 20, 2005,
future minimum purchase commitments under the agreements totaled
approximately $5,963,000.
The Company operates in one business segment in providing
advertising placement services. All of the Company’s
identifiable assets are located in the PRC. During the period
from March 23, 2005 (date of establishment) to
December 20, 2005, the Company’s chief decision maker
was its General Manager.
12. Employee benefit plans
Employees of the Company and its subsidiaries located in the PRC
are covered by the retirement schemes defined by local practice
and regulations, which are essentially defined contribution
schemes. The amounts to be contributed are determined based on
20% of the applicable payroll costs. Expenses paid by the
Company to these defined contribution schemes were $1,361 for
the period from March 23, 2005 (date of establishment) to
December 20, 2005.
In addition, the Company is required by law to contribute
approximately, 1.2% to 8% of applicable salaries for medical
insurance benefits, unemployment, and other statutory benefits.
The PRC government is directly responsible for the payment of
the benefits to these employees. The amounts contributed to
medical insurance benefits, unemployment, and other statutory
benefits were de minimis for the period from March 23, 2005
(date of establishment) to December 20, 2005.
13. Statutory reserves
As stipulated by the relevant laws and regulations in the PRC,
the Company is required to maintain non-distributable reserves
which include a statutory surplus reserve and a statutory
welfare reserve. Appropriations to the statutory surplus reserve
are required to be made at not less than 10% of the profit after
taxes as determined under PRC GAAP. The statutory welfare
reserve allocations are determined annually at the discretion of
the Company’s board of directors. Once appropriated, these
amounts are not available for future distribution to owners or
shareholders. The statutory surplus reserve may be applied
against prior year losses, if any, and may be applied to the
purchase of capital assets upon the board of directors’
approval.
There were no appropriations made to the statutory welfare
reserve during the period from period March 23, 2005 (date
of establishment) to December 20, 2005.
Report of independent registered public accounting firm
To the Board of Directors and Shareholders of
Accord Group Investments Limited:
We have audited the accompanying consolidated balance sheet of
Accord Group Investments Limited and its subsidiaries and
affiliates (the “Company”) as of December 31,2005 and the related consolidated statements of operations,
shareholders’ deficiency, and cash flows for the period
from August 19, 2005 (date Accord Group Investments Limited
acquired Beijing Shiji Guangnian Advertising Co., Ltd.) to
December 31, 2005. These financial statements are the
responsibility of the Company’s management. Our
responsibility is to express an opinion on these financial
statements 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 the financial statements are
free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audit included
consideration of internal control over financial reporting as a
basis for designing audit procedures that are appropriate in the
circumstances but not for the purpose of expressing an opinion
on the effectiveness of the Company’s internal control over
financial reporting. Accordingly, we express no such opinion. An
audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audit provides a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all
material respects, the consolidated financial position of the
Company as of December 31, 2005 and the consolidated
results of its operations and its cash flows for the period from
August 19, 2005 (date Accord Group Investments Limited
acquired Beijing Shiji Guangnian Advertising Co., Ltd.) to
December 31, 2005 in conformity with accounting principles
generally accepted in the United States of America.
Report of independent registered public accounting firm
To the Board of Directors and Owners of
Beijing Shiji Guangnian Advertising Co., Ltd.:
We have audited the accompanying balance sheets of Beijing Shiji
Guangnian Advertising Co., Ltd. (Predecessor to Accord Group
Investments Limited, the “Predecessor”) as of
August 18, 2005 and the related statements of operations,
owner’s deficiency, and cash flows for the period from
February 1, 2005 (date of establishment) to August 18,2005. These financial statements are the responsibility of the
Predecessor’s management. Our responsibility is to express
an opinion on these financial statements 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 the financial statements are
free of material misstatement. The Predecessor is not required
to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audit included
consideration of internal control over financial reporting as a
basis for designing audit procedures that are appropriate in the
circumstances but not for the purpose of expressing an opinion
on the effectiveness of the Predecessor’s internal control
over financial reporting. Accordingly, we express no such
opinion. An audit also includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audit provides a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all
material respects, the financial position of the Predecessor as
of August 18, 2005 and the results of its operations and
its cash flows for the period from February 1, 2005 (date
of establishment) to August 18, 2005 in conformity with
accounting principles generally accepted in the United States of
America.
Accord Group Investments Limited (“Accord”) was
established in the British Virgin Islands (the “BVI”)
on June 15, 2005. Accord and its subsidiaries and
consolidated variable interest entity (“VIE”,
collectively the “Company”) place advertisements,
provide advertising services to customers in the PRC and have
the exclusive rights to sell advertising for and the rights to
provide content to the EasyFM radio stations of Beijing and
Shanghai. The Company also provides design and production
services to its customers. To date, revenue from design and
production services has not been material.
On January 23, 2006, Xinhua Finance Limited
(“XFL”) acquired 19% equity interest of the Company
from and transferred all its 19% beneficial interests in the
Company to Xinhua Finance Media Limited (“XFM”). On
September 22, 2006, XFM acquired an additional 61%
beneficial interest in the Company. On November 1, XFM
obtained the remaining 20% equity in Accord from the selling
shareholder by issuing 125,053 of its class A shares. XFM
has agreed to provide continuous financial and operational
support to the Company.
The following is a summary and description of Accord’s
consolidated VIEs and its majority-owned subsidiaries:
•
Great Triumph Investments Ltd. (“Great Triumph”) was
incorporated in the British Virgin Islands (the “BVI”)
on June 13, 2005 and acted as an investment holding
company. The entire equity interest of Great Triumph was
acquired by Accord on July 8, 2005.
•
New China Media Co., Ltd. (“New China”) was
incorporated in the BVI by Great Triumph on August 18,2005. It is a wholly-owned investment holding company.
•
In addition, Accord is the primary beneficiary of Beijing Shiji
Guangnian Advertising Co., Ltd. (“Shiji Guangnian” or
the “Predecessor”), a variable interest entity
(“VIE”) through a number of agreements establishing
effective control, including an equity pledge agreement, a
subrogation agreement and an option agreement dated
August 18, 2005 with the VIE’s equity owner. A
variable interest entity (“VIE”) is an entity in which
equity investors generally do not have the characteristics of a
“controlling financial interest” or there is not
sufficient equity at risk for the entity to finance its
activities without additional subordinated financial support. A
VIE is consolidated by its primary beneficiary when it is
determined that the primary beneficiary will absorb the majority
of the VIE’s expected losses and/or expected residual
returns. Consistent with the provisions of FASB Interpretation
No. 46, “Consolidation of Variable Interest
Entities—an Interpretation of ARB No. 51” (as revised,
‘FIN 46R”). Shiji Guangnian is a predecessor to Accord
and Shiji Guangnian is included in the consolidated financial
statements of Accord.
Shiji Guangnian, was established in the PRC on February 1,2005 by two PRC citizens for a term of 20 years and
provides advertising placement services to customers in Beijing.
Through a number of agreements establishing effective control,
including an equity pledge agreement, a subrogation agreement
and an option agreement dated August 19, 2005, Shiji
Guangnian is accounted for as an 80%-owned VIE of Accord and is
included in the
consolidated financial statements of Accord. As of
December 31, 2005, the equity interest holder in Shiji
Guangnian maintains a 20% economic interest that is recorded as
minority interest. On March 23, 2006 and September 22,2006, XFM acquires the remaining 3.8% and 16.2% equity interest
respectively, in Shiji Guangnian through a number of agreements.
Minority interest in the net assets consists of the amount of
those interests at the date of the acquisition and the
minority’s share of changes in equity since the date of the
acquisition. Without the binding obligation from the minority
shareholder to make an additional investment to cover the
losses, minority shareholder would only share the losses of the
relevant subsidiary up to its cost of investment.
The following financial statement amounts and balances of Shiji
Guangnian as of December 31, 2005 and covering the period
from August 19, 2005 (effective date of the nomination and
equity pledge agreements) to December 31, 2005 were
included in the accompanying consolidated financial statements:
Total assets (excluding goodwill and intangible assets)
$
1,866,400
Total liabilities
2,962,575
Total net revenues
491,316
Total cost and expenses
1,767,313
Net loss
1,416,910
2. Summary of principal accounting policies
(a) Basis of presentation
The consolidated financial statements of the Company have been
prepared in accordance with accounting principles generally
accepted in the United States of America (“US GAAP”).
(b) Basis of consolidation
The Predecessor’s financial statements represented the
financial statements of Shiji Guangnian.
The consolidated financial statements include the financial
statements of the Company, its wholly-owned subsidiaries and a
variable interest entity, Shiji Guangnian. VIEs are entities in
which equity investors generally do not have the characteristics
of a “controlling financial interest” or there is not
sufficient equity at risk for the entity to finance its
activities without additional subordinated financial support.
VIEs are consolidated by the Company when it is determined that
it will, as the primary beneficiary, absorb the majority of the
VIEs expected losses and/or expected residual returns
All inter-company transactions and balances have been eliminated
upon consolidation.
(c) Use of estimates
The preparation of financial statements in conformity with US
GAAP requires management to make estimates and assumptions that
affect reported amounts of assets and liabilities and disclosure
of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could
differ from those estimates. Significant accounting estimates
reflected in the Company’s
The Company extends credit based upon an evaluation of the
customers’ financial condition and collateral is not
required from such customers. Allowances for estimated credit
losses, rate adjustments and discounts are generally established
based on historical experience.
(e) Property and equipment
Property and equipment are recorded at cost less accumulated
depreciation and amortization. Depreciation and amortization are
provided on a straight-line basis over the following estimated
useful lives:
Leasehold improvements
Lesser of 5 years or lease term
Furniture, fixtures and equipment
5 years
(f) Intangible assets
Intangible assets consist of exclusive advertising agreement and
customer base arising from the acquisition of Shiji Guangnian as
described in Note 3, which are carried at cost less
accumulated amortization. Amortization is computed using the
straight-line method over the intangible assets’ useful
lives.
(g) Impairment of long-lived assets
The Company evaluates its long-lived assets for impairment
whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. When these
events occur, the Company measures impairment by comparing the
carrying amount of the assets to future undiscounted 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 Company
would recognize an impairment loss as the excess of carrying
amounts over fair value of the assets. There were no impairment
losses recorded for the period from February 1, 2005 (date
of establishment of Shiji Guangnian) to August 18, 2005;
the period from February 1, 2005 (date of establishment of Shiji
Guangnian) to June 30, 2005 (unaudited); the period from
August 19, 2005 (date the Company acquired Shiji
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
carryforwards 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 of the
relevant taxing authorities. The components of the deferred tax
assets and liabilities are individually classified as current
and non-current based on their characteristics.
(i) Foreign currency translation
Functional currencies of the Company and its subsidiaries,
including Shiji Guangnian, are either Renminbi (“RMB”)
or Hong Kong dollars (“HKD”). Transactions denominated
in other currencies are translated into RMB or HKD at the
average rates of exchange prevailing during each period.
Monetary assets and liabilities denominated in other currencies
are translated into RMB or HKD at rates of exchange in effect on
the balance sheet dates. Nonmonetary assets and liabilities are
remeasured into RMB or HKD at historical exchange rates.
Transactions denominated in HKD were not material for the period.
The Company and Shiji Guangnian use the U.S. dollar as its
reporting currency. Accordingly, assets and liabilities are
translated using exchange rates in effect at the balance sheet
date and average exchange rates for the period are used for
revenue and expense transactions.
Currency transaction gains and losses are recorded in the
consolidated statement of operations. Translation adjustments
are recorded in accumulated other comprehensive income, a
component of shareholders’ equity.
(j) Concentration of credit risk
The following customers contributed 10% or more of the
Company’s revenues:
Three customers, three customers and four customers as of
August 18, 2005 (Predecessor Entity— Shiji Guangnian),
December 31, 2005 and (unaudited) June 30, 2006
representing an aggregate of 100%, 100% and (unaudited) 93% of
the Company’s accounts receivable balance at
August 18, 2005 (Predecessor Entity— Shiji Guangnian),
December 31, 2005 and (unaudited) June 30, 2006,
respectively. The Company performs ongoing credit evaluations of
its customers and generally does not require collateral on
accounts receivable. The Company maintains an allowance for
doubtful accounts and such loss have been within
management’s expectations.
The carrying amounts of accounts receivable, prepaid expenses
and other current assets, accounts payable, accrued expenses and
other payables, deferred revenue and amounts due from (to)
related parties approximate their fair values due to the
short-term maturity of these instruments.
(l) Unaudited interim financial information
The financial information with respect to the period from
February 1, 2005 (date of establishment of Shiji Guangnian)
to June 30, 2005 and the six-month period ended
June 30, 2006 is unaudited and has been prepared on the
same basis as the audited consolidated financial statements. In
the opinion of management, such unaudited financial information
contains all adjustments, consisting of only normal recurring
adjustment, necessary for a fair presentation of the results of
such periods, The results of operations for the six-month period
ended June 30, 2006 are not necessarily indicative of
results to be expected for the full year.
(m) Recent accounting pronouncements
In December 2004, the Financial Accounting Standards Board
(“FASB”) issued Statement of Financial Accounting
Standard (“SFAS”) No. 123 (revised 2004),
“Share-Based Payments”or SFAS 123R. This
statement eliminates the option to apply the intrinsic value
measurement provisions of Accounting Principles Board
(“APB”) Opinion No. 25, “Accounting for
Stock Issued to Employees”to stock compensation awards
issued to employees. Rather, SFAS 123R requires companies
to measure the cost of employee services received in exchange
for an award of equity instruments based on the grant-date fair
value of the award. That cost will be recognized over the period
during which an employee is required to provide services in
exchange for the award— the requisite service period
(usually the vesting period). SFAS 123R applies to all
awards granted after the required effective date and to awards
modified, repurchased, or cancelled after that date.
SFAS 123R is effective for the fiscal year beginning
January 1, 2006. The adoption of this statement did not
have a material effect on the Company’s financial position,
results of operations and cash flows.
In May 2005, the FASB issued SFAS No. 154,
“Accounting Changes and Error Corrections,”
which replaces Accounting Principles Board Opinions No. 20
“Accounting Changes”and SFAS No. 3,
“Reporting Accounting Changes in Interim Financial
Statements— An Amendment of APB Opinion No. 28.”SFAS No. 154 provides guidance on the accounting
for and reporting of accounting changes and error corrections.
It establishes retrospective application, or the latest
practicable date, as the required method for reporting a change
in accounting principle and the reporting of a correction of an
error. SFAS No. 154 is effective for accounting
changes and corrections of errors made in fiscal years beginning
after December 15, 2005. The adoption of this statement did
not have a material effect on the Company’s financial
position, results of operations and cash flows.
In June 2006, the FASB issued FASB Interpretation No. 48,
“Accounting for Uncertainty in Income Taxes— an
interpretation of FASB Statement No. 109”(“FIN 48”), which clarifies the accounting
for uncertainty in income tax positions in FASB Statement
No. 109, “Accounting for Income Taxes.”
FIN 48 prescribes a recognition threshold and measurement
attribute for the financial statement recognition and
measurement of a tax position taken or expected to be taken in a
tax return. FIN 48 is effective for fiscal years beginning
after December 15, 2006. The Company will adopt FIN 48
in the first quarter of 2007. The Company has not determined its
impact, if any, of FIN 48 on its financial position,
results of operations and cash flows
In September, 2006 the FASB issued FASB Statement No. 157,
(“SFAS 157”), “Fair Value
Measurement.” SFAS 157 addresses standardizing the
measurement of fair value for companies who are required to use
a fair value measure of recognition for recognition or
disclosure purposes. The FASB defines fair value as “the
price that would be received to sell an asset or paid to
transfer a liability in an orderly transaction between market
participants at the measure date.” SFAS 157 is
effective for financial statements issued for fiscal years
beginning after November 15, 2007 and interim periods
within those fiscal years. The Company is currently evaluating
the impact, if any, of SFAS 157 on its financial position,
results of operations and cash flows.
3. Acquisition
On August 19, 2005, the Company became the primary
beneficiary of Shiji Guangnian through a number of loan
agreements, equity pledge agreements, exclusive equity purchase
option agreements and subrogation agreements. Accordingly, Shiji
Guangnian is considered to be an 80%-owned VIE of the Company
and is accounted for similar to a purchase. All assets acquired
and liabilities assumed are stated at fair value. Purchase price
for the acquisition consisted of $296,332 in cash payment. The
primary asset acquired was radio, broadcasting, and advertising
agency operations in the PRC which would enhance the
Company’s geographic reach and operating scope. The Company
has consolidated the operating results of Shiji Guangnian
effective on the date of nomination and equity pledge agreement.
The following table summarizes the preliminary estimated fair
values of the assets acquired and liabilities assumed at the
date of nomination and equity pledge agreement. The table also
reflects a non-cash activity for purposes of the consolidated
statement of cash flows:
Assets acquired:
Cash
$
30,703
Accounts receivable
126,248
Prepaid expenses and other current assets
204,911
Amount due from a related party
118,110
Property and equipment, net
39,003
Rent deposits
22,967
Deferred tax assets
167,592
Total
709,534
Liabilities assumed:
Accounts payable
116,716
Accrued expenses and other payables
20,483
Deferred revenue
267,674
Amounts due to related parties
958,419
Deferred tax liability
468,000
Total
1,831,292
Net liabilities
(1,121,758
)
Intangible assets
1,418,090
Net assets acquired
$
296,332
Cash consideration
$
296,332
Amortization
period
(Years)
Intangible assets comprised of:
Exclusive advertising agreement
1,402,546
7
Customer base
15,544
3
Total
1,418,090
80% of intangible assets relating to the acquisition of Shigi
Guangnian were recognized.
The following pro forma information summarizes the effect of the
acquisition, if the acquisitions had occurred as of
February 1, 2005 (date of establishment of Shiji
Guangnian). The pro forma information is presented for
informational purposes only. It is based on historical
information and does not purport to represent the actual results
that may have occurred had the Company consummated the
acquisitions on February 1, 2005, nor is it necessarily
indicative of future results of operations of the combined
enterprise:
On June 21, 2006, based on the same conditions of the
nomination and equity pledged agreements dated August 19,2005, the Company acquired another 3.8% of the beneficial
interest of Shiji Guangnian at a price of (unaudited) $14,076
which resulted in an additional intangible assets of (unaudited)
$21,006 and the related deferred tax liability of $6,930. The
purchase price for this acquisition was paid by XFL on behalf of
the Company. The Company’s ownership of Shiji Guangnian
increased to 83.8% as a result of this transaction. In
September, 2006, the Company also acquired the remaining 16.2%
of the equity of Shiji Guangnian at a consideration of $60,007,
through the VIE equity owner.
4. Property and equipment, net
Property and equipment, net consisted of the following:
Depreciation and amortization expenses were $3,115 for the
period from February 1, 2005 (date of establishment of
Shiji Guangnian) to August 18, 2005; (unaudited) $1,909 for
the period from February 1, 2005 (date of establishment of
Shiji Guangnian) to June 30, 2005;
$3,975 for the period from August 19, 2005 (date the
Company acquired Shiji Guangnian) to December 31, 2005; and
(unaudited) $14,092 for the six-month period ended June 30,2006.
5. Intangible assets, net
Intangible assets, net consisted of the following:
Amortization expense was $77,084 for the period from
August 19, 2005 (date the Company acquired Shiji Guangnian)
to December 31, 2005; and (unaudited) $104,295 six-month
period ended June 30, 2006, respectively. The Company will
record amortization expense of $208,590, $208,590, $206,647,
$203,332, and $203,332 in the years ending 2006 through 2010,
respectively.
6. Prepaid expenses and other current assets
Prepaid expenses and other current assets consisted of the
following:
Under the current BVI law, income from Accord and Great Triumph
is not subject to taxation.
All other subsidiaries of the Company were established in the
PRC and are subject to PRC Enterprises Income Tax on the taxable
income in accordance with the relevant PRC income tax laws at a
statutory rate of 33% (30% state income tax plus 3% local income
tax) on PRC taxable income.
Provision for income taxes comprises of the following:
Due to the uncertainty of the level of PRC statutory income and
our lack of operating history, management does not believe the
Group will generate taxable PRC statutory income in the near
future and does not believe that it is more likely than not that
all of the deferred tax assets will be realized. As management
does not believe that it is more likely than not that all of the
deferred tax assets will be realized, a valuation allowance has
been established for certain portions of deferred tax assets at
August 18, 2005 and for the full amount of deferred tax
assets at December 31, 2005 and (unaudited) June 30,2006. The Company has operating loss carry forwards of
$1,106,506 and $1,708,092 as of August 18, 2005 and
December 31, 2005, respectively. The net operating loss
carry forwards for the PRC subsidiaries expire on various dates
through 2010.
Reconciliation between the provision for income taxes computed
by applying the PRC enterprise income rate of 33% to income
before income taxes is as follows:
Amounts due from (to) related parties were non-interest
bearing and payable on demand. Amounts due from related parties
are expected to be collectable therefore no allowance for
The Company has entered into agreements during the period from
August 19, 2005 (Date Accord Group Investments Limited
acquired Beijing Shiji Guangnian Advertising Co., Ltd.) to
December 31, 2005 for purchase of leasehold improvements
for a total of $4,445. Unexpended balance at December 31,2005 was $4,445.
There was no significant unexpended balance at June 30,2006 (unaudited).
(b) Operating leases
The Company has operating lease agreements principally for its
office spaces in the PRC. These leases expire through August
2007 and are renewable upon negotiation. Rent expenses were
$131,387 for the period from February 1, 2005 (date of
establishment of Shiji Guangnian) to August 18, 2005;
(unaudited) $72,361 for the period from February 1, 2005 (date
of establishment of Shiji Guangnian) to June 30, 2005;
$165,376 for the period from August 19, 2005 (date the
Company acquired Shiji Guangnian) to December 31, 2005; and
(unaudited) $169,965 for the period from January 1, 2006 to
June 30, 2006.
Future minimum lease payments under non-cancelable operating
lease agreements are as follow at December 31, 2005:
2006
$
257,414
2007
$
114,891
Total
$
372,305
Future minimum lease payments under non-cancelable operating
lease agreements are as follow at June 30, 2006 (unaudited):
The Company has entered an agreement to purchase all advertising
airtime from EasyFM stations in Beijing and Shanghai. As of
August 18, 2005 (Predecessor Entity— Beijing Shiji
Guangnian Advertising Co., Ltd.), December 31, 2005 and
June 30, 2006, future minimum purchase commitments under
the agreement totaled approximately $2,071,243, $1,767,708, and
(unaudited) $911,121.
The Company and Shiji Guangnian (Predecessor entity) principally
operate in one segment in providing advertising placement
service. All of the identifiable assets of the Company and Shiji
Guangnian are located in the PRC.
During the period from February 1, 2005 (date of
establishment of Shiji Guangnian) to August 18, 2005; and
(unaudited) the period from February 1, 2005 (date of
establishment of Shiji Guangnian) to June 30, 2005, the
chief decision maker of Shiji Guangnian was its General Manager.
During the period from August 19, 2005(date the Company
acquired Shiji Guangnian) to December 31, 2005; and
(unaudited) for the six-month period ended June 30,2006, the chief decision maker of Company was its General
Manager.
12. Employee benefit plans
Employees of the Company located in the PRC are covered by the
retirement schemes defined by local practice and regulations,
which are essentially defined contribution schemes. The amounts
to be contributed are determined based on 20% of the applicable
payroll costs. The amounts paid by the Company to these defined
contribution schemes were $15,753 for the period from
February 1, 2005 (date of establishment of Shiji Guangnian)
to August 18, 2005; (unaudited) $5,602 for the period from
February 1, 2005 (date of establishment of Shiji Guangnian)
to June 30, 2005; $16,137 for the period from
August 19, 2005 (date the Company acquired Shiji Guangnian)
to December 31, 2005; and (unaudited) $25,206 for the
six-month period ended June 30, 2006.
In addition, the Company is required by law to contribute
approximately 1.2% to 10% of applicable salaries for medical
insurance benefits, housing funds, unemployment, and other
statutory benefits. The PRC government is directly responsible
for the payment of the benefits to these employees. The amounts
contributed for medical insurance benefits were $9,261 for the
period from February 1, 2005 (date of establishment of
Shiji Guangnian) to August 18, 2005; (unaudited) $3,409 for
the period from February 1, 2005 (date of establishment of
Shiji Guangnian) to June 30, 2005; $4,737 for the period
from August 19, 2005 (date the Company acquired of Shiji
Guangnian) to December 31, 2005; and (unaudited) $9,576 for
the six-month period ended June 30, 2006. The amounts
contributed for other benefits were not material for the period
from February 1, 2005 (date of establishment of Shiji
Guangnian) to August 18, 2005; (unaudited) the period from
February 1, 2005 (date of establishment of Shiji Guangnian)
to June 30, 2005; the period from August 19, 2005(date
the Company acquired Shiji Guangnian) to December 31, 2005;
and (unaudited) the six-month period ended June 30, 2006.
As stipulated by the relevant laws and regulations in the PRC,
the Company is required to maintain non-distributable reserves
which include a statutory surplus reserve and a statutory
welfare 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 Company’s PRC statutory financial
statements. The statutory welfare reserve allocations are
determined annually at the discretion of the Company’s
board of directors. Once appropriated, these amounts are not
available for future distribution to owners or shareholders. The
statutory surplus reserve may be applied against prior year
losses, if any, and may be applied to the purchase of capital
assets upon the board of directors’ approval. There were no
contributions to the statutory surplus reserve and the statutory
welfare reserve for the period from February 1, 2005 (date
of establishment of Shiji Guangnian) to August 18, 2005;
(unaudited) the period from February 1, 2005 (date of
establishment of Shiji Guangnian) to June 30, 2005; the
period from August 19, 2005 (date the Company acquired
Shiji Guangnian) to December 31, 2005; and (unaudited) the
six-month period ended June 30, 2006.
Report of independent registered public accounting firm
To the Board of Directors and Owners’ of
Beijing Perspective Orient Movie and Television Intermediary
Co., Ltd.:
We have audited the accompanying consolidated balance sheets of
Beijing Perspective Orient Movie and Television Intermediary
Co., Ltd. and its subsidiary (the “Company”) as of
December 31, 2004 and 2005 and the related consolidated
statements of operations, owners’ equity and comprehensive
loss, and cash flows for the two years in the period ended
December 31, 2005. These financial statements are the
responsibility of the Company’s management. Our
responsibility is to express an opinion on these financial
statements 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. The Company is not
required to have, nor were we engaged to perform, an audit of
its internal control over financial reporting. Our audits
included consideration of internal control over financial
reporting as a basis for designing audit procedures that are
appropriate in the circumstances but not for the purpose of
expressing an opinion on the effectiveness of the Company’s
internal control over financial reporting. Accordingly, we
express no such opinion. An audit also includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements, 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 financial statements present fairly, in all
material respects, the consolidated financial position of the
Company as of December 31, 2004 and 2005 and the
consolidated results of its operations and its cash flows for
the two years in the period ended December 31, 2005 in
conformity with accounting principles generally accepted in the
United States of America.
Beijing Perspective Orient Movie and Television Intermediary
Co., Ltd. (“Beijing Perspective”) was established in
the People’s Republic of China (“PRC”) on
September 25, 2000 for a term of 20 years. Beijing
Perspective and its subsidiary (collectively the
“Company”) are engaged in the production and
syndication of financial television programs under the Fortune
China name and earn revenues by selling advertising time and
sponsorship rights at the time the programs are broadcasted. On
July 28, 2006, Beijing Century Media Culture Co., Ltd., a
company controlled by Xinhua Finance Media Limited
(“XFM”), acquired 51% equity interest of Beijing
Perspective. XFM has agreed to provide continuous financial and
operational support to Beijing Perspective.
Beijing Perspective’s majority-owned subsidiary, Beijing
Perspective Orient Advertising Co., Ltd. (“Perspective
Advertising”), was established together with one of its
employees for a term of 20 years on August 6, 2001
where Beijing Perspective holds an 80% equity interest.
2. Summary of principal accounting policies
(a) Basis of presentation
The consolidated financial statements of the Company have been
prepared in accordance with 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 and its majority-owned subsidiary. All
significant intercompany transactions have been eliminated on
consolidation. Investment in an affiliate representing ownership
of at least 20%, but less than 50%, is accounted for under the
equity method. The Company’s share of earnings of the
equity investments is included in accompanying consolidated
statements of operations.
(c) Use of estimates
The preparation of financial statements in conformity with US
GAAP requires management to make estimates and assumptions that
affect reported amounts of assets and liabilities and disclosure
of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could
differ from those estimates. Significant accounting estimates
reflected in the Company’s consolidated financial
statements included valuation of deferred tax assets, allowance
for trade receivables, useful lives of property and equipment,
and impairment of long-lived assets and intangible assets.
Advertising sales revenues are recognized when advertisements
are broadcasted. Payments received in advance are deferred until
earned and such amounts are reported as deferred revenue on the
accompanying consolidated balance sheet.
Revenues are recorded net of applicable business taxes totaling
$67,350 and $98,118 for the years ended December 31, 2004
and 2005, respectively, and (unaudited) $44,501 and (unaudited)
$23,968 for the six-month periods ended June 30, 2005 and
2006, respectively.
The Company extends credit based upon an evaluation of the
customers’ financial condition and collateral is not
required from such customers. Allowances for estimated credit
losses, rate adjustments and discounts are generally established
based on historical experience.
(e) Property and equipment
Property and equipment are recorded at cost less accumulated
depreciation and amortization. Depreciation and amortization are
provided on a straight-line basis over the following estimated
useful lives:
Leasehold improvements
Lesser of 5 years or lease term
Furniture, fixtures and equipment
5 years
Motor vehicles
10 years
(f) Intangible assets
Intangible assets, which consist of trademarks, are valued at
cost less accumulated amortization. Amortization is computed
using the straight-line method over their expected useful lives
of 10 years.
(g) Impairment of long-lived assets
The Company evaluates its long-lived assets for impairment
whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. When these
events occur, the Company measures impairment by comparing the
carrying amount of the assets to future undiscounted 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 Company
would recognize an impairment loss as the excess of carrying
amounts over fair value of the assets. There were no impairment
losses during the years ended December 31, 2004 and 2005
and (unaudited) the six months periods ended June 30,2005 and 2006.
(h) 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
carryforwards 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 of the relevant taxing authorities. The
components of the deferred tax assets and liabilities are
individually classified as current and non-current based on
their characteristics.
(i) Foreign currency translation
The functional currency of the Company is Renminbi
(“RMB”). Transactions dominated in other currencies
are translated into RMB at the average rates of exchange
prevailing during each period. Monetary assets and liabilities
denominated in other currencies are translated into RMB at rates
of exchange in effect on the balance sheet dates. Nonmonetary
assets and liabilities are remeasured into RMB at historical
exchange rates.
The Company uses the U.S. dollar as its reporting currency.
Accordingly, assets and liabilities are translated using
exchange rates in effect at each balance sheet date and average
exchange rates for the period are used for revenue and expense
transactions.
Currency transaction gains and losses are recorded in the
statement of operations. Translation adjustments are recorded in
accumulated other comprehensive income, a component of
owners’ equity.
(j) Concentration of credit risk
The following customers contributed 10% or more of the
Company’s revenues:
Three customers, two customers, (unaudited) two customers and
(unaudited) five customers accounted for 10% or more of the
Company’s accounts receivable balance, representing an
aggregate of 58%, 49%, (unaudited) 94% and (unaudited) 36%
of the Company’s accounts receivable balances at
December 31, 2004, December 31, 2005, June 30,2005 and June 30, 2006, respectively. The Company performs
ongoing credit evaluations of its customers and generally does
not require collateral on accounts receivable. No allowance for
doubtful accounts was considered necessary at December 31,2004, December 31, 2005 and (unaudited) June 30,2006 as accounts receivable balances were expected to be
collectible. Historical bad debts have not been material.
The financial information with respect to the six-month periods
ended June 30, 2005 and 2006 is unaudited and has been
prepared on the same basis as the audited consolidated financial
statements. In the opinion of management, such unaudited
financial information contains all adjustments, consisting of
only normal recurring adjustment, necessary for a fair
presentation of the results of such periods. The results of
operations for the six-month period ended June 30, 2006 are
not necessarily indicative of results to be expected for the
full year.
(l) Recent accounting pronouncements
In December 2004, the Financial Accounting Standards Board
(“FASB”) issued Statement of Financial Accounting
Standards (“SFAS”) No. 123 (revised 2004),
“Share-Based Payments” or SFAS 123R. This
statement eliminates the option to apply the intrinsic value
measurement provisions of Accounting Principles Board
(“APB”) Opinion No. 25, “Accounting for
Stock Issued to Employees” to stock compensation awards
issued to employees. Rather, SFAS 123R requires companies
to measure the cost of employee services received in exchange
for an award of equity instruments based on the grant-date fair
value of the award. That cost will be recognized over the period
during which an employee is required to provide services in
exchange for the award— the requisite service period
(usually the vesting period). SFAS 123R applies to all
awards granted after the required effective date and to awards
modified, repurchased, or cancelled after that date.
SFAS 123R is effective for the fiscal year beginning
January 1, 2006. The adoption of this statement did not
have a material effect on the Company’s financial position,
results of operations and cash flows.
In May 2005, the FASB issued SFAS No. 154,
“Accounting Changes and Error Corrections,” which
replaces Accounting Principles Board Opinions No. 20
“Accounting Changes” and SFAS No. 3,
“Reporting Accounting Changes in Interim Financial
Statements— An Amendment of APB Opinion
No. 28.” SFAS No. 154 provides guidance
on the accounting for and reporting of accounting changes and
error corrections. It establishes retrospective application, or
the latest practicable date, as the required method for
reporting a change in accounting principle and the reporting of
a correction of an error. SFAS No. 154 is effective
for accounting changes and corrections of errors made in fiscal
years beginning after December 15, 2005. The adoption of
this statement did not have a material effect on the
Company’s financial position, results of operations and
cash flows.
In June 2006, the FASB issued FASB Interpretation No. 48,
“Accounting for Uncertainty in Income Taxes— an
interpretation of FASB Statement No. 109”
(“FIN 48”), which clarifies the accounting for
uncertainty in income tax positions in FASB Statement
No. 109, “Accounting for Income Taxes.”
FIN 48 prescribes a recognition threshold and measurement
attribute for the financial statement recognition and
measurement of a tax position taken or expected to be taken in a
tax return. FIN 48 is effective for fiscal years beginning
after December 15, 2006. The Company will adopt FIN 48
in the first quarter of 2007. The Company has not determined its
impact, if any, of FIN 48 on its financial position,
results of operations and cash flows
In September, 2006 the FASB issued FASB Statement No. 157,
(“SFAS 157”), “Fair Value
Measurement.” SFAS 157 addresses standardizing the
measurement of fair value for companies who are required to use
a fair value measure of recognition for recognition or
disclosure purposes. The FASB defines fair value as “the
price that would be received to sell an asset or paid to
transfer a liability in an orderly transaction between market
participants at the
measure date.” SFAS 157 is effective for financial
statements issued for fiscal years beginning after
November 15, 2007 and interim periods within those fiscal
years. The Company is currently evaluating the impact, if any,
of SFAS 157 on its financial position, results of
operations and cash flows.
3. Investment in an affiliate
On July 4, 2005, the Company and two other independent
third parties formed a limited liability company, Beijing
JingShi Orient Culture and Communications Co., Ltd.
(“Beijing Orient”), in the PRC where the Company
contributed $222,250 in cash for a 30% equity interest.
In June 2006, Beijing Orient was dissolved and the initial
investment cost was returned to the Company, resulting in a loss
of $213.
4. Property and equipment, net
Property and equipment, net consisted of the following:
Depreciation and amortization expense were $384,804 and $399,403
for the years ended December 31, 2004 and 2005,
respectively, and (unaudited) $200,270 and (unaudited) $197,079
for the six-month periods ended June 30, 2005 and 2006,
respectively.
5. Prepaid expenses and other current assets
Prepaid expenses and other current assets consisted of the
following:
Amortization expenses were $120,948 and $123,473 for the years
ended December 31, 2004 and 2005, respectively, and
(unaudited) $61,736 and (unaudited) $61,736 for the six-month
periods ended June 30, 2005 and 2006, respectively. For
each of the next five years, the Company will record annual
amortization expenses of approximate $123,500.
7. Accrued expenses and other payables
Accrued expenses and other payables consisted of the following:
The Company and its subsidiary are established in the PRC and
are governed by the PRC Enterprises Income Tax and various local
income tax laws. They are subject to income tax at a statutory
rate of 33% (30% state income tax plus 3% local income tax) on
PRC taxable income.
The income tax expenses for the years ended December 31,2004 and 2005 and for the (unaudited) six-month periods
ended 30 June 2005 and 2006 represent deferred income tax
charges in respect of the net operating losses.
There were no significant deferred tax liabilities as of
December 31, 2004 and 2005 and
(unaudited) June 30, 2006. Due to the uncertainty of
the level of PRC statutory income and the lack of operating
history, management does not believe the Company will generate
taxable PRC statutory income in the near future. As management
does not believe that it is more likely than not that all of the
deferred tax assets will be realized, a valuation allowance has
been established for certain portion of the deferred tax assets
as of December 31, 2004 and 2005 and
(unaudited) June 30, 2006.
The Company has operating loss carry forwards of $4,031,345 and
$4,028,432 as of December 31, 2004 and 2005, respectively.
These net operating loss carry forwards expire at various dates
through 2010.
Reconciliation between the provision for income taxes computed
by applying the PRC enterprise income rate of 33% to loss before
provision for income taxes is as follows:
Amounts due from (to) related parties were non-interest
bearing and repayable on demand.
During the years ended December 31, 2004 and 2005, and the
six-month period ended June 30, 2006, receivables of
$634,437 and $14,816, and (unaudited) $209,023, respectively,
from two subsidiaries of the shareholder were waived.
Accordingly, the amounts were recorded as deemed distributions.
The Company has an operating lease agreement for its office
spaces in the PRC with one of its shareholders which expires in
January 2007. Rent expenses were $133,335 and $120,888 for the
years ended December 31, 2004 and 2005, respectively, and
(unaudited) $60,444 and (unaudited) $60,444 for the six month
periods ended June 30, 2005 and 2006, respectively.
10. Commitments
Operating leases
The Company has operating lease agreements principally for its
office spaces in the PRC. These leases expire through July 2007
and are renewable upon negotiation. Rent expenses were $133,335
and $129,305 for the years ended December 31, 2004 and
2005, respectively, and (unaudited) $64,653 and (unaudited)
$75,709 for the six-month periods ended June 30, 2005 and
2006, respectively.
Future minimum lease payments under non-cancelable operating
lease agreements are as follows at December 31, 2005:
The Company operates in one segment in the production and
syndication of financial television program. All of the
Company’s identifiable assets are located in the PRC.
During the years ended December 31, 2004 and 2005 and
(unaudited) the six-month periods ended June 30, 2005
and 2006, the Company’s chief decision maker was its
General Manager.
12. Employee benefit plans
Employees of the Company located in the PRC are covered by the
retirement schemes defined by local practice and regulations,
which are essentially defined contribution schemes. The amounts
to be contributed are determined based on 20% of the applicable
payroll costs. The amounts paid by the Company to these defined
contribution schemes were $39,254 and $50,038 for the years
ended December 31, 2004 and 2005, respectively, and
(unaudited) $19,139 and (unaudited) $24,874 for the six-month
periods ended June 30, 2005 and 2006, respectively.
In addition, the Company is required by law to contribute
approximately 1.2% to 10% of applicable salaries for medical
insurance benefits, housing funds, unemployment, and other
statutory benefits. The PRC government is directly responsible
for the payment of the benefits to these employees. The amounts
contributed for medical insurance benefits were $78,763 and
$20,516 for the years ended December 31, 2004 and 2005,
respectively, and (unaudited) $8,613 and (unaudited) $11,318 for
the six-month periods ended June 30, 2005 and 2006,
respectively. The amounts contributed for other benefits were
not material for the years ended December 31, 2004 and 2005
and for the (unaudited) six-month periods ended
June 30, 2005 and 2006.
13. Statutory reserves
As stipulated by the relevant laws and regulations in the PRC,
the Company is required to maintain non-distributable reserves
which include a statutory surplus reserve and a statutory
welfare 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 Company’s PRC statutory financial
statements. The statutory welfare reserve allocations are
determined annually at the discretion of the Company’s
board of directors. Once appropriated, these amounts are not
available for future distribution to owners or shareholders. The
statutory surplus reserve may be applied against prior year
losses, if any, and may be applied to the purchase of capital
assets upon the board of directors’ approval. There was no
appropriation to the statutory surplus reserve and the statutory
welfare reserve for the years ended December 31, 2004 and
2005 and (unaudited) for the six-month periods ended
June 30, 2005 and 2006.
In 2001, the Company entered into an agreement with an
advertising company in Beijing (the “Advertising
Company”), under which the Advertising Company would act as
an agent for the Company in selling advertising space for the
period from April 2001 to March 2002. After the advertisement
was broadcasted, the Company was required to provide written
documents to prove the advertisements had been broadcasted.
In September 2003, the Advertising Company commenced legal
proceedings against the Company for failure in fulfilling its
obligations. The People’s District Court of Beijing City
ruled the case in favor of the Advertising Company and demanded
the Company to pay the Advertising Company in a total amount of
approximately $123,000. In 2005, the Company commenced an appeal
in the People’s Intermediate Court of Beijing City, but the
court ruled in favor of the Advertising Company again and
demanded the Company to pay approximately $123,000 together with
interest to the Advertising Company as compensation for the
breach of contract.
In June 2006, the Company commenced another legal proceedings in
the People’s District Court of Changsha City against the
Advertising Company for outstanding advertising fee of
approximately $185,000. As management believes that a loss
arising from this matter is probable and can reasonably be
estimated, the Company has recorded the estimated expected loss
amount of $123,472 (note 7).
In September 2006, the Court ruled in favor of the Company and
demanded the Advertising Company to settle the outstanding sum
of approximately $185,000 within 10 days of the judgment;
however, no payment has been received within the period as the
Advertising Company has appealed the judgment.
Report of independent registered public accounting firm
To the Board of Directors and Owners of
Shanghai Hyperlink Market Research Co., Ltd.:
We have audited the accompanying consolidated balance sheets of
Shanghai Hyperlink Market Research Co., Ltd. and its subsidiary
(the “Company”) as of December 31, 2004 and 2005
and the related consolidated statements of operations,
owners’ equity and comprehensive income (loss), and cash
flows for the two years in the period ended December 31,2005. These financial statements are the responsibility of the
Company’s management. Our responsibility is to express an
opinion on these financial statements 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. The Company is not required to
have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audit included
consideration of internal control over financial reporting as a
basis for designing audit procedures that are appropriate in the
circumstances but not for the purpose of expressing an opinion
on the effectiveness of the Company’s internal control over
financial reporting. Accordingly, we express no such opinion. An
audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial
statements, 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 financial statements present fairly, in all
material respects, the consolidated financial position of the
Company as of December 31, 2004 and 2005 and the
consolidated results of its operations and its cash flows for
the two years in the period ended December 31, 2005 in
conformity with accounting principles generally accepted in the
United States of America.
Accounts receivable, less allowance for doubtful accounts of
$6,187 and $17,638 as of December 31, 2004 and 2005,
respectively, and (unaudited) $17,638 as of June 30, 2006
Adjustments to reconcile net income (loss) to net cash provided
by operating activities:
Minority interest
(7,015
)
(12,534
)
(5,241
)
(5,874
)
Depreciation and amortization
19,175
35,010
14,889
39,514
Provision for doubtful debts
6,187
11,323
3,797
—
Loss on disposal of property and equipment
—
—
—
15
Deferred income tax
—
—
—
—
Changes in operating assets and liabilities:
Accounts receivable
(128,251
)
157,806
(47,197
)
(1,194
)
Prepaid expenses and other current assets
18,813
(159,594
)
(12,993
)
154,141
Rent deposits
(17,281
)
4,023
4,024
(38,811
)
Accounts payable
33,117
(5,971
)
(22,762
)
(8,423
)
Accrued expenses and other payables
24,159
134,160
205,179
(26,410
)
Deferred revenue
—
17,086
—
19,184
Income taxes payable
40,996
74,387
16,055
11,290
Cash provided by operating activities
60,924
416,444
137,677
71,236
Cash flows from investing activities:
Purchases of property and equipment
(40,605
)
(56,972
)
(12,727
)
(238,415
)
Amount due from a related party
18,298
13,706
(10,675
)
10,290
Cash used in investing activities
(22,307
)
(43,266
)
(23,402
)
(228,125
)
Cash flows from financing activities:
Amounts due to related parties
(18,822
)
(25,535
)
19,769
57,041
Dividend paid
—
(43,215
)
(37,042
)
(87,665
)
Cash used in financing activities
(18,822
)
(68,750
)
(17,273
)
(30,624
)
Effect of exchange rate changes
—
4,984
4,984
—
Net increase (decrease) in cash
19,795
309,412
101,986
(187,513
)
Cash, beginning of the year/period
219,029
238,824
238,824
548,236
Cash, end of the year/period
238,824
548,236
340,810
$
360,723
Supplemental disclosure of cash flow information:
Income taxes paid
$
54,304
$
79,068
$
37,172
$
24,489
Interest paid
$
—
$
—
$
—
$
—
Supplemental schedule of non-cash investing and financing
activities
During the six-month period ended June 30, 2006, the
Company purchased the remaining 45% equity interest of Guangzhou
Hyperlink for $nil consideration. In conjunction with the
acquisition, liabilities were assumed as follows:
Shanghai Hyperlink Market Research Co., Ltd (“Shanghai
Hyperlink”) was established in the People’s Republic
of China (the “PRC”) on August 6, 1997 for a term
of 20 years. Shanghai Hyperlink and its subsidiary
(collectively the “Company”) primarily engage in
market research in China and provide services including the
study of market characteristics, consumer preferences and
opinions with respect to advertising and media content, and
business and technology issues.
Shanghai Hyperlink’s majority-owned subsidiary, Guangzhou
Hyperlink Market Research Co., Ltd. (“Guangzhou
Hyperlink”) was established on July 4, 1997 by
independent third parties. During 2003, Shanghai Hyperlink
acquired a 55% equity interest of Guangzhou Hyperlink at cash
consideration of $30,237. On March 10, 2006, Shanghai
Hyperlink acquired the remaining 45% equity interest of
Guangzhou Hyperlink at $24,694; however, the purchase price was
subsequently waived by the vendor.
Beijing Taide Advertising Co., Ltd., a company controlled by
Xinhua Finance Media Limited, (“XFM”) acquired a
51% interest in Shanghai Hyperlink on August 1, 2006
and the remaining 49% on September 15, 2006.
2. Summary of principal accounting policies
(a) Basis of presentation
The consolidated financial statements of the Company have been
prepared in accordance with 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 and its majority-owned subsidiary. All
significant intercompany transactions and balances have been
eliminated on consolidation.
(c) Use of estimates
The preparation of financial statements in conformity with US
GAAP requires management to make estimates and assumptions that
affect reported amounts of assets and liabilities and disclosure
of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could
differ from those estimates. Significant accounting estimates
reflected in the Company’s consolidated financial
statements included allowance for doubtful accounts, useful
lives of property and equipment and impairment of long-lived
assets.
The Company generates revenues from data research and executes
contracts that govern the terms and conditions of each
arrangement. Research service revenues are recognized under the
completed performance method which is when the reported data is
accepted by the customer. Furthermore, the Company’s
revenue recognition determines the timing of subcontractor
expenses that are deferred and expensed to operations as the
related revenue is recognized. The Company evaluates the
recoverability of deferred subcontractor expenses at each
balance sheet date. Payments received in advance are deferred
until earned and such amounts are reported as deferred revenue
on the accompanying consolidated balance sheets.
Revenues are recorded net of applicable business taxes totaling
$90,231 and $136,749 for the years ended December 31, 2004
and 2005, respectively, and (unaudited) $58,254 and (unaudited)
$60,773 for the six-month periods ended June 30, 2005 and
2006, respectively.
The Company extends credit based upon an evaluation of the
customers’ financial condition and collateral is not
required from such customers. Allowances for estimated credit
losses, rate adjustments and discounts are generally established
based on historical experience.
(e) Property and equipment
Property and equipment are recorded at cost less accumulated
depreciation and amortization. Depreciation and amortization are
provided on a straight-line basis over the following estimated
useful lives:
Leasehold improvements
Lesser of 3 years or lease term
Furniture, fixtures and equipment
5 years
Motor vehicles
5 years
(f) Impairment of long-lived assets
The Company evaluates its long-lived assets for impairment
whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. When these
events occur, the Company measures impairment by comparing the
carrying amount of the assets to future undiscounted 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 Company
would recognize an impairment loss as the excess of carrying
amounts over fair value of the assets. There were no impairment
losses recorded in the years ended December 31, 2004 and
2005 and (unaudited) the six-month periods ended
June 30, 2005 and 2006.
(g) 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
carryforwards 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 of the
relevant taxing authorities. The components of the deferred tax
assets and liabilities are individually classified as current
and non-current based on their characteristics.
(h) Foreign currency translation
The functional currency of the Company is Renminbi
(“RMB”). Transactions dominated in other currencies
are translated into RMB at the average rates of exchange
prevailing during each period. Monetary assets and liabilities
denominated in other currencies are translated into RMB at rates
of exchange in effect on the balance sheet dates. Nonmonetary
assets and liabilities are remeasured into RMB at historical
exchange rates.
The Company uses the U.S. dollar as its reporting currency.
Accordingly, assets and liabilities are translated using
exchange rates in effect at each balance sheet date and average
exchange rates for the period are used for revenue and expense
transactions.
Currency transaction gains and losses are recorded in the
consolidated statements of operations. Translation adjustments
are recorded in accumulated other comprehensive income, a
component of owners’ equity.
(i) Concentration of credit risk
The following customers contributed 10% or more of the
Company’s revenues:
Three customers, two customers and four customers as of
December 31, 2004 and 2005 and
(unaudited) June 30, 2006, respectively, accounted for
10% or more of the Company’s accounts receivable balance,
representing an aggregate of 45%, 28% and (unaudited) 61%
of the Company’s accounts receivable balance at
December 31, 2004 and 2005 and
(unaudited) June 30, 2006, respectively. The Company
performs ongoing credit evaluations of its customers and
generally does not require collateral on accounts receivable.
The Company maintains an allowance for doubtful accounts and
such loss have been within management’s expectations.
The financial information with respect to the six-month periods
ended June 30, 2005 and 2006 is unaudited and has been
prepared on the same basis as the audited consolidated financial
statements. In the opinion of management, such unaudited
financial information contains all adjustments, consisting of
only normal recurring adjustment, necessary for a fair
presentation
of the results of such periods, The results of operations for
the six-month period ended June 30, 2006 are not
necessarily indicative of results to be expected for the full
year.
(k) Recent accounting pronouncement
In December 2004, the Financial Accounting Standards Board
(“FASB”) issued Statement of Financial Accounting
Standards (“SFAS”) No. 123 (revised 2004),
“Share-Based Payments” or SFAS 123R. This
statement eliminates the option to apply the intrinsic value
measurement provisions of Accounting Principles Board
(“APB”) Opinion No. 25, “Accounting for
Stock Issued to Employees”to stock compensation awards
issued to employees. Rather, SFAS 123R requires companies
to measure the cost of employee service received in exchange
services received in exchange for an award of equity instruments
based on the grant-date fair value of the award. That cost will
be recognized over the period during which an employee is
required to provide services in exchange for the
award — the requisite service period (usually the
vesting period). SFAS 123R applies to all awards granted
after the required effective date and to awards modified,
repurchased, or cancelled after that date. SFAS 123R is
effective for the fiscal year beginning January 1, 2006.
The adoption of this statement did not have a material effect on
the Company’s financial position, results of operations and
cash flows.
In May 2005, the FASB issued SFAS No. 154,
“Accounting Changes and Error Corrections,”
which replaces Accounting Principles Board Opinions No. 20
“Accounting Changes” and SFAS No. 3,
“Reporting Accounting Changes in Interim Financial
Statements — An Amendment of APB Opinion
No. 28.” SFAS No. 154 provides guidance on
the accounting for and reporting of accounting changes and error
corrections. It establishes retrospective application, or the
latest practicable date, as the required method for reporting a
change in accounting principle and the reporting of a correction
of an error. SFAS No. 154 is effective for accounting
changes and corrections made in fiscal years beginning after
December 15, 2005. The adoption of this statement did not
have a material effect on the Company’s financial position,
results of operations and cash flows.
In June 2006, the Financial Accounting Standards Board
(“FASB”) issued FASB Interpretation No. 48,
“Accounting for Uncertainty in Income Taxes —
an interpretation of FASB Statement No. 109”
(“FIN 48”), which clarifies the accounting for
uncertainty in income tax position in FASB Statement
No. 109, “Accounting for Income Taxes”.
FIN 48 prescribes a recognition threshold and measurement
attribute for the financial statement recognition and
measurement of a tax position taken or expected to be taken in a
tax return. FIN 48 is effective for fiscal years beginning
after December 15, 2006. The company will adopt FIN 48
in the first quarter of 2007. The Company has not determined its
impact, if any, of FIN 48 on its financial position,
results of operations and cash flows.
In September, 2006 the FASB issued FASB Statement No. 157,
(“SFAS 157”), (“Fair Value
Measurement”). SFAS 157 addresses standardizing
the measurement of fair value for companies who are required to
use a fair value measure of recognition for recognition or
disclosure purposes. The FASB defines fair value as “the
price that would be received to sell an asset or paid to
transfer a liability in an orderly transaction between market
participants at the measure date.” SFAS 157 is
effective for financial statements issued for fiscal years
beginning after November 15, 2007 and interim periods
within those fiscal years. The Company is currently evaluating
the impact, if any, of SFAS 157 on its financial position,
results of operations and cash flows.
Depreciation and amortization expense was $19,175 and $35,010
for the years ended December 31, 2004 and 2005,
respectively, and (unaudited) $14,889 and (unaudited) $39,514
for the six-month periods ended June 30, 2005 and 2006,
respectively.
4. Prepaid expenses and other current assets
Prepaid expenses and other current assets consisted of the
following:
The Company and its subsidiary are established in the PRC and
governed by the PRC Enterprises Income Tax and various local
income tax laws. They are subject to income tax at a statutory
rate of 33% (30% state income tax plus 3% local income tax) on
PRC taxable income.
Provision for income tax comprises of the following:
Reconciliation between the provision for income taxes computed
by applying the PRC enterprise income rate of 33% to income
before income taxes is as follows:
Amounts due from (to) related parties were non-interest
bearing and payable on demand. Amounts due from related parties
are expected to be collectable therefore no allowance was
considered necessary as of December 31, 2004 and 2005 and
(unaudited) June 30, 2006.
8. Commitments
Operating leases
The Company has operating lease agreements principally for its
office spaces in the PRC. These leases expire through June 2008
and are renewable upon negotiation. Rent expenses were $143,545
and $158,512 for the years ended December 31, 2004 and
2005, respectively, and (unaudited) $89,575 and (unaudited)
$126,603 for the six-month periods ended June 30, 2005 and
2006, respectively.
Future minimum lease payments under non-cancelable operating
lease agreements are as follows at December 31, 2005:
2006
$
118,149
2007
54,471
2008
27,235
Total
$
199,855
Future minimum lease payments under non-cancelable operating
lease agreements are as follows at June 30, 2006
(unaudited):
The Company operates in one segment in the marketing research.
All of the Company’s identifiable assets are located in the
PRC. During the years ended December 31, 2004 and 2005 and
(unaudited) the six-month periods ended June 30, 2005
and 2006, the Company’s chief decision maker was its
General Manager.
10. Employee benefit plans
Employees of the Company located in the PRC are covered by the
retirement schemes defined by local practice and regulations,
which are essentially defined contribution schemes. The amounts
to be contributed are determined based on 20% of the applicable
payroll costs. The amounts paid by the Company to these defined
contribution schemes were $20,170 and $28,697 for the years
ended December 31, 2004 and 2005, respectively, and
(unaudited) $13,435 and (unaudited) $18,373 for the six-month
periods ended June 30, 2005 and 2006, respectively.
In addition, the Company is required by law to contribute
approximately 1.2% to 10% of applicable salaries for medical
insurance benefits, housing funds, unemployment, and other
statutory benefits. The PRC government is directly responsible
for the payment of the benefits to these employees. The amounts
contributed for medical insurance benefits were $16,464 and
$23,357 for the years ended December 31, 2004 and 2005,
respectively, and (unaudited) $10,882 and (unaudited) $14,933
for the six-month periods ended June 30, 2005 and 2006,
respectively. The amounts contributed for other benefits were
not material for the years ended December 31, 2004 and 2005
and (unaudited) for the six-month periods ended
June 30, 2005 and 2006.
11. Statutory reserves
As stipulated by the relevant laws and regulations in the PRC,
the Company is required to maintain non-distributable reserves
which include a statutory surplus reserve and a statutory
welfare 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 Company’s PRC statutory financial
statements. The statutory welfare reserve allocations are
determined annually at the discretion of the Company’s
board of directors. Once appropriated, these amounts are not
available for future distribution to owners or shareholders. The
statutory surplus reserve may be applied against prior year
losses, if any, and may be applied to the purchase of capital
assets upon the board of directors’ approval. There were no
contribution to the statutory surplus reserve and the statutory
welfare reserve for the years ended December 31, 2004 and
2005 and (unaudited) for the six-month periods ended
June 30, 2005 and 2006.
12. Subsequent events
On September 22, 2006, pursuant to a Share Subscription
Agreements in Respect of Shares in the Capital of Xinhua Finance
Media Limited, XFM issued 1,613,169 class A common shares
to an individual in exchange for his entering into Deeds of
Non-Competition Undertaking and Release with XFM and Shanghai
Hyperlink for a term of four years.
You should rely only on the information contained in this
prospectus. We have not authorized anyone to provide you with
information different from that contained in this prospectus. We
are offering to sell, and seeking offers to buy, ADSs only in
jurisdictions where offers and sales are permitted. The
information contained in this prospectus is accurate only as of
the date of this prospectus, regardless of the time of delivery
of this prospectus or of any sale of our ADSs.
No action is being taken in any jurisdiction outside the
United States to permit a public offering of the ADSs or
possession or distribution of this prospectus in that
jurisdiction. Persons who come into possession of this
prospectus in jurisdictions outside the United States are
required to inform themselves about and to observe any
restrictions as to this offering and the distribution of this
prospectus applicable to that jurisdiction.
Until ,
2007, all dealers that buy, sell or trade in our ADSs, whether
or not participating in this offering, may be required to
deliver a prospectus. This is in addition to the dealers’
obligation to deliver a prospectus when acting as underwriters
and with respect to their unsold allotments or subscriptions.
Cayman Islands law does not limit the extent to which a
company’s articles of association may provide for
indemnification of officers and directors, except to the extent
any such provision may be held by the Cayman Islands courts to
be contrary to public policy, such as to provide indemnification
against civil fraud or the consequences or committing a crime.
Our Memorandum and Articles of Association provide for
indemnification of officers and directors for losses, damages,
costs and expenses incurred in their capacities as such, except
through their own willful neglect or default.
Pursuant to the form of indemnification agreements filed as
Exhibit 10.2 to this Registration Statement, we will agree
to indemnify our directors and officers against certain
liabilities and expenses incurred by such persons in connection
with claims made by reason of their being such a director or
officer.
The Underwriting Agreement the form of which is filed as
Exhibit 1.1 to this Registration Statement will also
provide for indemnification of us and our officers and directors.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933, as amended (the “Securities
Act”) may be permitted to directors, officers or persons
controlling us pursuant to the foregoing provisions, we have
been informed that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as
expressed in the Securities Act and is therefore unenforceable.
During the past three years, we have issued the following
securities (including options to acquire our common shares). We
believe that each of the following issuances was exempt from
registration under the Securities Act in reliance on
Regulation S under the Securities Act or pursuant to
Section 4(2) of the Securities Act regarding transactions
not involving a public offering.
(1) Initially issued as one share, divided into 1,000
shares on March 24, 2006.
(2) Shares issued to our parent in exchange for 60.0% of
the equity of EconWorld Media.
(3)
Of convertible preferred shares issued on March 16, 2006,
819,672 were redeemed in exchange for an increase of
$3 million in interest in the Loan Agreement with Patriarch
Partners. The Loan Agreement was amended on September 20,2006 to allow for additional conversion of
820,246 class A common shares. The Loan Agreement will
convert into an estimated 3,832,543 class A common shares
upon this offering.
(4)
Class A common shares that may be issued upon conversion of
convertible loan. See “—Related party
transactions—Transactions with Patriarch Partners—
Credit agreement among us, Patriarch Partners, Patriarch
Partners Agency Services, LLC and our direct subsidiaries as
guarantors”.
(5)
Shares issued as consideration for payment of advances in
relation to the acquisition of equity interests in Shanghai
Hyperlink Market Research Co., Ltd. and Beijing Jingguan
Xincheng Advertising Co., Ltd.
(6)
Includes 6,929,544 class A common shares and
4,099,968 warrants issued for shares in Upper Step Holdings
Limited and Accord Group Investments Limited held by Sino
Investment. Subsequently, 3,464,772 shares and
2,049,984 warrants were transferred to the Dennis L. Pelino
Family Trust. See “Related party transactions— Private
placement and share restructuring”.
Shares issued in exchange for non-compete agreements. See
“Related party transactions— Non-competition
agreements”.
(8)
Shares issued for shares in Upper Step Holdings Limited and
Accord Group Investments Limited held by Shanghai Wai Gao Qiao
Free Trade Zone Development Ltd. See “Related party
transactions— Private placement and share
restructuring”.
(9)
Options convertible into class A common shares. Options
representing an aggregate of 500,039 common shares have been
cancelled due to termination of employment.
(10)
Warrants convertible into class A common shares as
compensation for consulting work carried out by Billy Kung for
us.
(11)
Warrants convertible into class A common shares as
compensation for past services to Ken Chen, a former employee.
Item 8. Exhibits and Financial Statement
Schedules.
(a) Exhibits
See Exhibit Index beginning on
page II-6 of this
registration statement.
(b) Financial Statement Schedules
Schedules have been omitted because the information required to
be set forth therein is not applicable or is shown in the
Consolidated Financial Statements or the Notes thereto.
Item 9. Undertakings.
The undersigned registrant hereby undertakes to provide to the
underwriter at the closing specified in the underwriting
agreements, certificates in such denominations and registered in
such names as required by the underwriter to permit prompt
delivery to each purchaser.
Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and
controlling persons of the registrant pursuant to the provisions
described in Item 6, or otherwise, the registrant has been
advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as
expressed in the Securities Act and is therefore unenforceable.
In the event that a claim for indemnification against such
liabilities (other than the payment by the registrant of
expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any
action, suit or proceeding) is asserted by such director,
officer or controlling person in connection with the securities
being registered, the registrant will, unless in the opinion of
its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed
by the final adjudication of such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the
Securities Act, the information omitted from the form of
prospectus filed as part of this registration statement in
reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant under Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to
be part of this registration statement as of the time it was
declared effective.
(2) For the purpose of determining any liability under the
Securities Act, each post-effective amendment that contains a
form of prospectus shall be deemed to be a new registration
statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
Pursuant to the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe
that it meets all of the requirements for filing on
Form F-1 and has
duly caused this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the
Hong Kong Special Administrative Region, People’s Republic
of China, on February 21, 2007.
Each person whose signature appears below constitutes and
appoints Fredy Bush and Shelly Singhal as attorneys-in-fact with
full power of substitution, for him or her in any and all
capacities, to do any and all acts and all things and to execute
any and all instruments which said attorney and agent may deem
necessary or desirable to enable the registrant to comply with
the Securities Act of 1933, as amended (the “Act”),
and any rules, regulations and requirements of the Securities
and Exchange Commission thereunder, in connection with the
registration under the Act of common shares of the registrant
(the “Shares”), including, without limitation, the
power and authority to sign the name of each of the undersigned
in the capacities indicated below to the Registration Statement
on Form F-1 to be
filed with the Securities and Exchange Commission with respect
to such Shares, to any and all amendments or supplements to such
Registration Statement, whether such amendments or supplements
are filed before or after the effective date of such
Registration Statement, to any related Registration Statement
filed pursuant to Rule 462(b) under the Act, and to any and
all instruments or documents filed as part of or in connection
with such Registration Statement or any and all amendments
thereto, whether such amendments are filed before or after the
effective date of such Registration Statement; and each of the
undersigned hereby ratifies and confirms all that such attorney
and agent shall do or cause to be done by virtue hereof.
Pursuant to the requirements of the Act, this registration
statement has been signed by the following persons in the
capacities and on the dates indicated.
English translation of Business Cooperation Agreement, amended
and restated as of November 6, 2006, among Economic
Observer Press Office, Guangzhou Jingshi Culture Intermediary
Co., Ltd., Beijing Jingguan Xincheng Advertising Co., Ltd and
Beijing Jingshi Jingguan Advertising Co., Ltd.
Credit Agreement, amended and restated as of September 20,2006, among the Registrant, Patriarch Partners Media Holdings
LLC, Patriarch Partners Agency Services LLC and the
Registrant’s direct subsidiaries as guarantors.
Pledge Agreement and Irrevocable Proxy, dated as of
March 16, 2006, among Patriarch Partners Agency Services
LLC (as agent for itself and the lender Patriarch Partners Media
Holdings LLC), the Registrant and Xinhua Finance Advertising
Limited.
Consulting Agreement, dated as of November 1, 2006, between
Jia Luo Business Consulting (Shanghai) Co., Ltd. and Shanghai
Camera Media Investment Co., Ltd.
Strategic Partnership Agreement, dated and supplemented as of
June 15, 2006, among Beijing Century Media Culture Co.,
Ltd., Hunan Television & Broadcast Intermediary Co., Ltd.,
Shenzhen Ronghan Investment Co., Ltd. and Beijing Perspective
Orient Movie & Television Intermediary Co., Ltd.
English Translation of Equity Call Option Agreement, dated as of
September 22, 2006, between Shanghai Wai Gao Qiao Free
Trade Zone Development Co., Ltd and Jia Luo Business Consulting
(Shanghai) Co., Ltd.
Advertising Services Agreement, dated as of December 23,2006, between Beijing Pioneer Media Advertising Co., Ltd. and
Shanghai Media Investment Co., Ltd.
English Translation of Cooperation Agreement, dated as of
October 2004, between Hunan Television Station and Beijing
Perspective Orient Advertising Co., Ltd.
English translation of Exclusive Advertising Agreement regarding
Beijing FM91.5 and Shanghai FM87.9 of China Radio International,
amended and restated as of November 28, 2006, between
Beijing Guoguang Guangrong Advertising Co., Ltd. and Beijing
Century Advertising Co., Ltd.
English translation of Money Journal Cooperation Agreement,
amended and restated as of September 20, 2006, among Hunan
Television and Broadcasting Intermediary Co., Ltd., Money
Journal Press Office and Guangzhou Jingshi Culture Intermediary
Co., Ltd.
English Translation of Cooperation Agreement, dated as of
September 25, 2005, between Guangzhou Jingyu Culture
Development Co., Ltd. and Beijing Qiannuo Advertising Co., Ltd.
Information Consulting Committee Organization Agreement, amended
and restated as of November 6, 2006, among Shandong Sanlian
Group, Xinhua Finance Limited, Economic Observer Press Office
and Beijing Jingguan Xincheng Advertising Co., Ltd.
English Translation of Business Cooperation Agreement, amended
and restated as of November 6, 2006, among Shandong Sanlian
Group, Shandong Economic Observer Co., Ltd., Economic Observer
Press Office and Beijing Jingguan Xincheng Advertising Co., Ltd.
Cooperation Agreement in relation to Economic Observer, dated as
of April 20, 2006, among Xinhua Finance Limited, Shandong
Economic Observer Co., Ltd., Shandong Sanlian Group and Beijing
Jingguan Xincheng Advertising Co., Ltd.
English translation of Equity Transfer Agreement in relation to
Beijing Jingguan Xincheng Advertising Co., Ltd., dated as of
May 10, 2006, between Shandong Economic Observer Co., Ltd.
and Beijing Taide Advertising Co., Ltd.
English translation of Agreement for Equity Transfer and Capital
Increase, dated as of June 26, 2006, among Beijing Century
Media Culture Co., Ltd., Hunan Television and Broadcast
Intermediary Co., Ltd., Shenzhen Ronghan Investment Co., Ltd.
and Beijing Perspective Orient Movie and Television Intermediary
Co., Ltd.
Agreement for the Sale and Purchase of Equity Interest and
Subscription in Shanghai Hyperlink Market Research Co., Ltd.,
dated as of June 14, 2006, among Stephen Xie Wei, Lu
Qinyong, Win Jei-Ching, Yang Jing, Shi Hui, Pang Lu, Yang
Weidong, Xinhua Finance Limited, Beijing Taide Advertising Co.,
Ltd., and Shanghai Hyperlink Market Research Co., Ltd.
Loan and Share Purchase Agreement in respect of shares in the
capital of Upper Step Holdings Limited, dated as of
February 28, 2006, among the Registrant, Sino Investment
Holdings Limited and Sungolden Limited.
Subscription Agreement in respect of EconWorld Media Limited
shares, dated as of May 26, 2005, amended as of
November 2, 2005 among Xinhua Finance Limited, Fan Cho Tak
Alex and others, and EconWorld Media Limited.
Share Purchase Agreement in respect of shares of EconWorld Media
Limited, dated as of June 8, 2006, among the Registrant and
Cheung Wah Keung and others.
Share Purchase Agreement in respect of shares of Ming Shing
International Limited, dated as of December 21, 2005, among
Xinhua Finance Limited, Lu Chin Chien, Li Tong and Ming Shing
International Limited.
Agreement for Sale and Purchase of Equity Interest in Beijing
Century Media Culture Co., Ltd., dated as of September 9,2005 among Yu Gang, Xia Huai and our parent.
Share Subscription Agreement in respect of shares in the capital
of Accord Group Investments Limited, dated as of
January 17, 2006, between the Registrant and Accord Group
Investments Limited.
Agreement for Sale and Purchase of Shares dated as of
September 22, 2006, amended as of November 10, 2006,
among Sino Investment Holdings Limited, Fine Power Limited,
Quality Idea Limited and the Registrant.
English translation of Share Purchase and Sale Agreement dated
as of September 12, 2006 among Stephen Xie Wei,
Lu Qin Yong and Beijing Taide Advertising Co., Ltd.
English translation of Share Transfer Agreement dated as of
September 12, 2006 between Shandong Sanlian Group Co., Ltd.
and Beijing Taide Advertising Co., Ltd.
Share Purchase Agreement in respect of shares in the capital of
EconWorld Media Limited, dated as of December 18, 2006,
among the Registrant, Fan Cho Tak Alex and others.
English translation of Strategic Cooperation Agreement, dated as
of December 18, 2003 and supplemented as of November 30,2005, between Inner Mongolia Television Station and Shanghai
Camera Media Investment Co., Ltd.
English translation of Zhou Mo Wen Hui Cooperation Agreement
dated as of August 8, 2005, between Zhou Mo Wen Hui Press
Office and Guangzhou Jingyu Culture Development Co., Ltd.
Content License Agreement, dated as of December 15, 2001,
between China Economic Information Service of Xinhua News Agency
and Xinhua Financial Network Limited.
