PART I
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
Not applicable.
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE
Not applicable.
Selected Consolidated Financial Data
The following table presents selected financial data regarding our business. It should be read in conjunction with our consolidated financial statements and related notes contained elsewhere in this annual report and the information under Item 5, “Operating and Financial Review and Prospects.” The selected consolidated statement of income data for the Company’s fiscal years ended December 31, 2012, 2011 and 2010, and the selected consolidated balance sheet data as of December 31, 2011 and 2010, have been derived from our audited restated consolidated financial statements that are included in this annual report beginning on page F-1. The selected statement of income data for the fiscal year ended December 31, 2009 and 2008 and the balance sheet data as of December 31, 2009 and 2008 have been derived from our combined financial statements of the Company’s operating entities - Kunming Television Station-Advertising Centre and Yellow River Television Station-Advertising Centre that are not included in this annual report.
The consolidated financial statements for the years ended December 31, 2012 and 2011 are prepared and presented in accordance with generally accepted accounting principles in the United States, or U.S. GAAP. The selected financial data information is only a summary and should be read in conjunction with the historical consolidated financial statements and related notes contained elsewhere herein. The financial statements contained elsewhere fully represent our financial condition and operations; however, they are not indicative of our future performance.
(In thousands of U.S. Dollars, except number of shares and per share data)
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Fiscal Year Ended December 31,
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2008
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2009
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2010
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2011
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2012
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Statement of Income Data:
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Net Revenue
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$
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4,344,012
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$
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19,010,661
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$
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22,289,808
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$
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-
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$
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-
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Operating income (loss)
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129,072
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9,756,277
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3,237,054
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(1,100,101)
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(909,729)
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Net income (loss) before non-controlling interest
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(3,409,673
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2,448,433
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(670,527)
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(13,554,510)
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(4,141,618)
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Net income (loss)
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(4,537,064)
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(1,672,454)
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(3,070,783)
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(13,534,445)
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(4,120,829)
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Weighted average ordinary shares
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1,108,767
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7,519,691
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32,826,462
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65,940,384
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83,109,978
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Weighted average number of diluted ordinary shares
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1,108,767
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7,519,691
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32,826,462
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65,948,384
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83,109,978
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Basic income (loss) per share
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$
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(4.09)
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$
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(0.22)
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$
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(0.09)
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)
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$
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(0.21)
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$
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(0.
05
)
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Diluted income (loss) per share
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$
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(4.09)
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$
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(0.22)
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$
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(0.09)
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$
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(0.21)
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$
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(0.
05
)
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Balance Sheet Data:
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Total current assets
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$
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16,827,967
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$
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20,869,835
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$
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42,649,676
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$
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8,170,617
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$
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2,624,873
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Total assets
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46,269,330
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52,019,042
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48,923,840
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8,182,561
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2,632,224
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Total current liabilities
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45,384,962
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53,110,643
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23,631,483
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1,825,013
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2,252,146
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Total liabilities
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45,697,690
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54,277,399
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23,927,279
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2,061,413
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2,488,546
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Non-controlling Interest
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1,257,807
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5,466,296
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1,060,349
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1,087,906
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1,083,073
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Shareholders’ equity (deficit)
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(686,165)
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(7,724,653)
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23,936,212
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5,033,242
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(939,395)
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Capitalization and Indebtedness
Not applicable.
Reasons for the Offer and Use of Proceeds
Not applicable.
Risk Factors
You should carefully consider the risks described below, which constitute the material risks facing us. If any of the following risks actually occur, our business could be harmed. You should also refer to the other information about us contained in this Annual Report, including our financial statements and related notes.
We currently have no business operations nor any revenues or earnings from operations.
We currently have no business operations or any revenues or earnings from operations. We currently have no significant assets or financial resources, and will, in all likelihood, continue to sustain operating expenses without corresponding revenues until the development of a new business plan or the consummation of a business combination.
Our proposed operations are purely speculative.
The success of our proposed plan of operation will depend to a great extent on the operations, financial condition and management of the identified target company. While business combinations with entities having established operating histories are preferred, there can be no assurance that we will be successful in locating candidates meeting these criteria. If we complete a business combination, the success of our operations will be dependent upon management of the target company and numerous other factors beyond our control. There is no assurance that we can identify a target company and consummate a business combination.
We may have significant difficulty in locating a viable business combination candidate.
We are and will continue to be an insignificant participant in the business of seeking mergers with and acquisitions of business entities. A large number of established and well-financed entities, including venture capital firms, are active in mergers and acquisitions of companies which may be merger or acquisition target candidates for us. Nearly all of these competitors have significantly greater financial resources, technical expertise and managerial capabilities than we do and, consequently, we will be at a competitive disadvantage in identifying possible business opportunities and successfully completing a business combination. Moreover, we will also compete with numerous other small public companies in seeking merger or acquisition candidates.
It is possible that the per share value of your stock will decrease upon the consummation of a business combination.
A business combination normally will involve the issuance of a significant number of additional shares. Depending upon the value of the assets acquired in a business combination, the per share value of our common stock may decrease, perhaps significantly.
Any business combination that we engage in may have tax effects on us.
Federal and state tax consequences will, in all likelihood, be major considerations in any business combination that we may undertake. Currently, a business combination may be structured so as to result in tax-free treatment to both companies pursuant to various federal and state tax provisions. We intend to structure any business combination so as to minimize the federal and state tax consequences to both us and the target company; however, there can be no assurance that a business combination will meet the statutory requirements of a tax-free reorganization or that the parties will obtain the intended tax-free treatment upon a transfer of stock or assets. A non-qualifying reorganization could result in the imposition of both federal and state taxes which may have an adverse effect on both parties to the transaction.
The market price of our ordinary shares is volatile, leading to the possibility of its value being depressed at a time when you may want to sell your holdings.
The market price of our ordinary shares is volatile, and this volatility may continue. Numerous factors, many of which are beyond our control, may cause the market price of our ordinary shares to fluctuate significantly. In addition to market and industry factors, the price and trading volume for our ordinary shares may be highly volatile for specific business reasons. Factors such as variations in our revenues, earnings and cash flow, announcements of new investments, cooperation arrangements or acquisitions, and fluctuations in market prices for our products could cause the market price for our shares to change substantially.
Securities class action litigation is often instituted against companies following periods of volatility in their stock price. This type of litigation could result in substantial costs to us and divert our management’s attention and resources.
Moreover, the trading market for our ordinary shares will be influenced by research or reports that industry or securities analysts publish about us or our business. If one or more analysts who cover us downgrade our ordinary shares, the market price for our ordinary shares would likely decline. If one or more of these analysts cease coverage of us or fail to regularly publish reports on us, we could lose visibility in the financial markets, which, in turn, could cause the market price for our ordinary shares or trading volume to decline.
Furthermore, securities markets may from time to time experience significant price and volume fluctuations for reasons unrelated to operating performance of particular companies. These market fluctuations may adversely affect the price of our ordinary shares and other interests in our company at a time when you want to sell your interest in us.
Our ordinary shares are quoted on the OTC Bulletin Board which may have an unfavorable impact on our stock price and liquidity.
Our ordinary shares are quoted on the OTC Bulletin Board. The OTC Bulletin Board is a significantly more limited market than the New York Stock Exchange or Nasdaq system. The quotation of our shares on the OTC Bulletin Board may result in a less liquid market available for existing and potential shareholders to trade shares of our ordinary shares, could depress the trading price of our ordinary shares and could have a long-term adverse impact on our ability to raise capital in the future.
Future sales or perceived sales of our ordinary shares could depress our stock price.
A substantial number of shares of our ordinary shares held by our current shareholders are freely tradable. If the holders of these shares were to attempt to sell a substantial amount of their holdings at once, the market price of our ordinary shares could decline. Moreover, the perceived risk of this potential dilution could cause shareholders to attempt to sell their shares and investors to short the ordinary shares, a practice in which an investor sells shares that he or she does not own at prevailing market prices, hoping to purchase shares later at a lower price to cover the sale. As each of these events would cause the number of our ordinary shares for sale to increase, our ordinary shares market price would likely further decline.
We do not intend to pay dividends on our ordinary shares for the foreseeable future.
For the foreseeable future, we intend to retain any earnings to finance the development and expansion of our business, and we do not anticipate paying any cash dividends on our ordinary shares. Accordingly, investors must be prepared to rely on sales of their ordinary shares after price appreciation to earn an investment return, which may never occur. Investors seeking cash dividends should not purchase our ordinary shares. Any determination to pay dividends in the future will be made at the discretion of our board of directors and will depend on our results of operations, financial condition, contractual restrictions, restrictions imposed by applicable law and other factors our board deems relevant.
We are a “foreign private issuer,” and have disclosure obligations that are different than those of U.S. domestic reporting companies so you should not expect to receive the same information about us at the same time as a U.S. domestic reporting company may provide.
We are a foreign private issuer and, as a result, we are not subject to certain of the requirements imposed upon U.S. domestic issuers by the SEC. For example, we are not required by the SEC or the federal securities laws to issue quarterly reports or proxy statements with the SEC. We are allowed four months following the end of our fiscal year to file our annual report with the SEC. We are not required to disclose certain detailed information regarding executive compensation that is required from U.S. domestic issuers. Further, our directors and executive officers are not required to report equity holdings under Section 16 of the Securities Act. As a foreign private issuer, we are also exempt from the requirements of Regulation FD (Fair Disclosure) which, generally, are meant to ensure that select groups of investors are not privy to specific information about an issuer before other investors. We are, however, still subject to the anti-fraud and anti-manipulation rules of the SEC, such as Rule 10b-5. Since many of the disclosure obligations required of us as a foreign private issuer are different than those required by other U.S. domestic reporting companies, our shareholders should not expect to receive information about us in the same amount and at the same time as information is received from, or provided by, other U.S. domestic reporting companies. We are liable for violations of the rules and regulations of the SEC which do apply to us as a foreign private issuer. Violations of these rules could affect our business, results of operations and financial condition.
You may have difficulty enforcing judgments obtained against us.
We are a BVI company and substantially all of our assets are located outside of the United States. Virtually all of our assets and a substantial portion of our current business operations are conducted in the PRC. In addition, almost all 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, many of whom are not residents in the United States and whose assets are located in significant part outside of the United States. In addition, there is uncertainty as to whether the courts of the British Virgin Islands or the PRC would recognize or enforce judgments of U.S. courts against us or such persons predicated upon the civil liability provisions of the securities laws of the United States or any state. In addition, it is uncertain whether such British Virgin Islands or PRC courts would be competent to hear original actions brought in the British Virgin Islands or the PRC against us or such persons predicated upon the securities laws of the United States or any state.
Because we are incorporated under the laws of the BVI, it may be more difficult for our shareholders to protect their rights than it would be for a shareholder of a corporation incorporated in another jurisdiction.
Our corporate affairs are governed by our memorandum and articles of Association and by the BVI Companies Act, 2004 (as amended) of the BVI. Principles of law relating to such matters as the validity of corporate procedures, the fiduciary duties of management and the rights of our shareholders differ from those that would apply if we were incorporated in the United States or another jurisdiction. The rights of shareholders under BVI law are not as clearly established as are the rights of shareholders in many other jurisdictions. Under the laws of most jurisdictions in the United States, majority and controlling shareholders generally have certain fiduciary responsibilities to the minority shareholders. Shareholder action must be taken in good faith, and actions by controlling shareholders which are obviously unreasonable may be declared null and void. BVI law protecting the interests of minority shareholders may not be as protective in all circumstances as the law protecting minority shareholders in US jurisdictions. In addition, the circumstances in which a shareholder of a BVI company may sue the company derivatively, and the procedures and defenses that may be available to the company, may result in the rights of shareholders of a BVI company being more limited than those of shareholders of a company organized in the US. Furthermore, our directors have the power to take certain actions without shareholder approval which would require shareholder approval under the laws of most US jurisdictions. The directors of a BVI corporation, subject in certain cases to court approval but without shareholder approval, may implement a reorganization, merger or consolidation, the sale of any assets, property, part of the business, or securities of the corporation. The ability of our board of directors to create new classes or series of shares and the rights attached by amending our memorandum of association and articles of association without shareholder approval could have the effect of delaying, deterring or preventing a change in our control without any further action by the shareholders, including a tender offer to purchase our ordinary shares at a premium over then current market prices. Thus, our shareholders may have more difficulty protecting their interests in the face of actions by our board of directors or our controlling shareholders than they would have as shareholders of a corporation incorporated in another jurisdiction.
We may be classified as a passive foreign investment company, which could result in adverse United States federal income tax consequences to U.S. shareholders.
We do not currently expect to be classified as a “passive foreign investment company,” or PFIC, for United States federal income tax purposes for our tax year ending December 31, 2011. However, the PFIC test is an annual test that, as discussed below, depends upon the composition of our gross income for the year and the percentage, based on a quarterly average for the year, of our gross assets that constitutes “passive” assets. Accordingly, it is not possible to determine whether we will not be classified as a PFIC for our tax year ending December 31, 20011 until after the year has ended. In addition, even if we are not classified as a PFIC for our taxable year ending December 31, 2011, because the PFIC test is annual, we cannot assure you that we will not be a PFIC for any following tax year. A non-U.S. corporation will be classified as a PFIC for the taxable year if (i) at least 75% of its gross income is passive income for such year or (ii) at least 50% of the fair market value of its assets (based on an average of the quarterly values of the assets during such year) is attributable to assets that produce or are held for the production of passive income. The fair market value of our assets may be determined to a large extent by the market price of our ordinary shares, which may fluctuate. Furthermore, how we spend as well as how quickly we spend the proceeds from offerings will affect the composition of our income and assets. If we are treated as a PFIC for any tax year during which U.S. shareholders hold ordinary shares, certain adverse United States federal income tax consequences could apply to such U.S. holders. See Item 10, “Additional Information — Taxation — U.S. Federal Income Taxation — Passive Foreign Investment Company Rules.”
ITEM 4. INFORMATION ON THE COMPANY
History and Development of the Company
We were incorporated in Delaware on August 16, 2006 as Alyst Acquisition Corp. in order to serve as a vehicle for the acquisition of an operating business in any industry, with a focus on the telecommunications industry, through a merger, capital stock exchange, asset acquisition or other similar business combination. Our initial shareholders purchased 1,750,000 shares of common stock, par value $0.0001 per share in a private placement. On July 5, 2007, Alyst consummated its initial public offering, or IPO, of 8,044,400 of its units, or Units. Each Unit consisted of one share of Common Stock and one warrant to purchase one share of Common Stock at an exercise price of $5.00 per share. Simultaneously with the consummation of the IPO, Alyst (i) consummated a private placement of 1,820,000 warrants to the original sponsors, officers and directors, and certain of their affiliates of Alyst, each warrant entitled upon exercise to one share of Common Stock at an exercise price of $5.00 per share, and (ii) issued to the representatives of the underwriters in the IPO an option to purchase 300,000 of its units, or the UPO, at an exercise price of $10.00 per unit. The units issuable upon exercise of the UPO were identical to the Units, except that the exercise price of the underlying warrants is $7.50 per share.
On June 25, 2009, we completed a business combination pursuant to which Alyst merged with and into CNIH, its wholly-owned subsidiary, to effect its redomestication to the British Virgin Islands. On June 26, 2009, China Networks Merger Co., Ltd., our wholly-owned British Virgin Islands subsidiary, merged with and into China Networks, resulting in China Networks becoming our wholly-owned subsidiary. We refer to the foregoing transactions herein as the Business Combination, and the merger agreement pursuant to which the Business Combination was consummated as the Merger Agreement. CNIH and its subsidiary, China Networks, are the surviving entities of the Business Combination.
Upon consummation of the Business Combination, CNIH had outstanding 12,927,888 ordinary shares, par value $0.0001 per share, 9,864,400 warrants, and the UPO for 300,000 units, each unit containing one ordinary share and one warrant.
As of the effective time of the Business Combination, there were 8,044,400 public warrants outstanding. Each warrant entitles the holder to purchase one ordinary share. In order to obtain the shares, the holders of the warrants must pay an exercise price of $5.00 per share. We may redeem the warrants at a price of $0.01 per warrant upon a minimum of 30 days’ prior written notice of redemption if, and only if, the last sale price of our ordinary shares equals or exceeds $11.50 per share for any 20 trading days within a 30 trading day period ending three business days before we send the notice of redemption.
The 1,820,000 insider warrants outstanding at the effective time of the Business Combination became exercisable into ordinary shares after September 27, 2009, the date that was 90 days after consummation of the Business Combination. The insider warrants have terms and provisions that are identical to the public warrants, except that they may be exercised on a cashless basis if the warrants are redeemed at our option under the same conditions applicable to the public warrant holders and, at such time, are held by the initial holders.
In connection with the consummation of the Business Combination: (i) the former class A preferred shareholders of China Networks received one ordinary share of CNIH for each class A preferred share of China Networks for an aggregate of 980,000 ordinary shares; and (ii) the representatives of the underwriters in Alyst’s IPO received an aggregate of 253,488 ordinary shares in lieu of payment of certain fees. The 1,750,000 ordinary shares held by the former Alyst insiders are subject to a stock escrow agreement entered into at the time of issuance in 2006 and, unless such restrictions are modified or waived, such shares are not transferrable until the earlier or June 19, 2010, the date that is 12 months following the consummation of the Business Combination, or the consummation of a merger, business combination, liquidation or similar transaction (subsequent to the Business Combination) which results in all of our shareholders having the right to exchange their ordinary shares for cash, securities or other property.
Following the Business Combination we, through our subsidiaries and variable interest entities, provided broadcast television advertising services in the PRC and operated joint-venture partnerships with PRC televisions stations in regional areas of the country. We managed these regional businesses through a series of joint ventures and contractual arrangements to sell broadcast television advertising time slots and so-called “soft” advertising opportunities to local advertisers directly and through advertising agencies and brokers, and also assisted the PRC television stations in selling advertising time slots and “soft” advertising opportunities to national advertisers, specifically by offering multi-region campaigns to maximize value and cut costs these national advertisers would otherwise face when dealing with individual stations on a station-by-station basis.
In September 2010, we entered into an equity transfer agreement whereby ANT sold all of its equity ownership in Kunming Taishi Information Cartoon Co., Ltd., a PRC company, or Kunming JV, to Kunming TV Station our 50% joint venture partner, upon approval of the Chinese authorities. This discussion was initiated due to the recent restructuring of Kunming TV station, and the PRC government’s intent to integrate its television advertising assets.
As a result of the agreement, the total transfer price for the equity stake exchange was RMB 150,000,000 with the first installment of RMB 75,000,000 paid by Kunming TV in January 2011. The Company gave notice in January 2011 of the redemption of its convertible debentures issued in April 13, 2010. The aggregate amount of the Debentures being redeemed represented the entire outstanding principal of the Debentures. In addition, the Company gave notice to pay all outstanding interest owed on the debentures in ordinary shares of the Company. In May 2011, the remaining funds from the first installment were utilized for the redemption of an aggregate of 4,028,690 of the Company’s Preferred Shares. Upon receipt of the second installment of RMB 30,000,000 paid by Kunming TV, the Company redeemed an aggregate of 4,706,807 of its Preferred Shares on November 31, 2011, and upon receipt of the third installment of RMB 30,000,000 paid by Kunming TV in April 2012, the Company redeemed an aggregate of 1,575,000 of its Preferred Shares. The fourth installment of RMB 10,000,000 was paid by Kunming TV in March, 2012. The remaining RMB 5,000,000 due from Kunming TV is expected to be received by the Company by the end of 2012, subject to further negotiations with KM, and the funds will be partially used to redeem all remaining outstanding Preferred Shares.
In January 2011, China Yellow River Television Station, the Company’s joint venture partner in Shanxi Yellow River and Advertising Networks Cartoon Technology Co., Ltd., or Yellow River JV, was consolidated by merger into Shanxi Radio and TV Station, or Shanxi TV, a PRC state-owned entity, and Shanxi TV was the successor to all of China Yellow River Television Station’s obligations under the joint venture agreements. Upon consummation of the merger, Shanxi TV immediately and unilaterally terminated the cooperation agreement that established the Yellow River JV and transferred the advertising business of the Yellow River JV to its own internal advertising department. The Company believes that Shanxi’s actions constituted a direct violation of the cooperation agreement which granted to the Yellow River JV the exclusive and irrevocable right to operate China Yellow River Television Station’s advertising business.
In connection with the termination of the cooperation agreement and the transfer of the advertising business, Shanxi TV has also taken, as its own, the RMB 45,000,000 of registered capital contributed by the Company to the Yellow River JV. While the Company acknowledges the right of the PRC government to change policies and rules with respect to agreements with state-owned entities, such as Shanxi TV, however the Company believes that the RMB 45,000,000 contributed to the Yellow River JV by the Company must be returned to the Company. The Company has attempted, in good faith, to negotiate a settlement with respect to the funds, however, to date Shanxi TV has refused to return the funds to the Company or enter into any settlement agreement.
In addition to attempts at negotiations directly with Shanxi TV, the Company filed an application for arbitration with the China International Economic Trade Arbitration Commission, or CIETAC, in October 2011.
Shanxi TV filed its response in January 2012, and has since challenged CIETAC’s jurisdiction over the dispute, though in March 2012, subsequently withdrew the application.
Since the submission of the Company’s application for arbitration, two hearings have been held, and CEITAC initially indicated that it would render a decision by August 21, 2102. However, this deadline has been extended on three separate occasions. For strategic purposes, the Company submitted a withdrawal application to CERTAC on February 17, 2013 and CEITAC rendered a withdrawal decision on March 18, 2013. The Company is currently exploring other channels through which it may resolve this issue.
If the Company is successful in securing the return of part or all of the RMB 45,000,000 that we believe is owed to us from Shanxi TV, a portion of the funds will be used to redeem all or a portion of the Class A Preferred Shares that remain outstanding at such time.
Business Overview
We are currently a shell company in the British Virgin Islands with non-operating subsidiaries ANT, a Hong Kong company, WFOE, a PRC company, and Hetong, a PRC company and a variable interest entity. At present, in addition to pursuing a remedy to the dispute with Shanxi TV, the Company is exploring options with respect to future business operations. The Company may decide to seek a potential business combination with one or more yet to be identified privately held companies, or may determine that it is in the best interests of the Company and its shareholders to attempt to engage in another business through its subsidiaries and variable interest entities in China.
If management determines that it is in the best interests of the Company and its shareholders to enter into a business combination, we will not be restricted in our search for business combination candidates to any particular geographical area, industry or industry segment, and may enter into a combination with a private business engaged in any line of business. Management's discretion is, as a practical matter, unlimited in the selection of a combination candidate.
If we effect a business combination with any entity unaffiliated with our current management, our current officers and directors probably will resign their directorship and officer positions with us in connection with our consummation of a business combination. In such an instance, our current management will not have any control over the conduct of our business following the completion of a business combination.
It is anticipated that prospective business opportunities will come to our attention from various sources, including our management, our other stockholders, professional advisors such as attorneys and accountants, securities broker-dealers, venture capitalists, members of the financial community, and others who may present unsolicited proposals. We do not have any plans, understandings, agreements, or commitments with any individual or entity to act as a finder of or as a business consultant in regard to any business opportunities for us. There are no plans to use advertisements, notices or any general solicitation in the search for combination candidates.
Corporate Structure
We do not directly or indirectly have an equity interest in Hetong, however ANT, our wholly owned subsidiary, has entered into a series of contractual arrangements with Hetong and its shareholders. As a result of the following contractual arrangements, we control and are considered the primary beneficiary of Hetong. These arrangements include the following:
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●
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The shareholders of Hetong have jointly granted ANT an exclusive and irrevocable option to purchase all or part of their equity interests in Hetong at any time, and this option may only be terminated by mutual consent or at the direction of ANT.
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●
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Without ANT’s consent, the shareholders of Hetong may not (i) transfer or pledge their equity interests in Hetong, (ii) receive any dividends, loan interest or other benefits from Hetong, or (iii) make any material adjustment or change to Hetong’s business or operations.
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The shareholders of Hetong agreed to (i) accept the policies and guidelines furnished by ANT with respect to the hiring and dismissal of employees, or the operational management and financial system of Hetong, and (ii) appoint the candidates recommended by ANT as directors of Hetong.
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Each shareholder of Hetong has appointed ANT’s designee as their attorneys-in-fact to exercise all its voting rights as shareholders of Hetong, until 2037.
|
Each shareholder of Hetong has pledged all of its respective equity interests in Hetong to WFOE, a wholly-owned subsidiary of ANT in the PRC, to secure the payment obligations of Hetong under certain contractual arrangements between Hetong and WFOE. This pledge is effective until the later of the (i) date on which the last surviving of the Exclusive Service Agreements, the Loan Agreement and the Equity Option Agreement terminates and (ii) date on which all outstanding secured obligations are paid in full or otherwise satisfied. Each of these agreements are subject to customary termination provisions; however, the WFOE may terminate the Exclusive Services Agreement at any time upon 30 days’ notice to Hetong.
Property, Plants and Equipment
We do not currently maintain any executive office space. Our registered address is 801,29F Block C, Central International Trade Center, 6A Jian Guo Men Wai Avenue, Chao Yang District, BeiJing, PRC.
ITEM 4A. UNRESOLVED STAFF COMMENTS
Not Applicable
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
You should read the following discussion and analysis of our financial condition and results of operations in conjunction with our consolidated and unconsolidated financial statements and the related notes included elsewhere in this annual report on Form 20-F. This discussion may contain forward-looking statements based upon current expectations that involve risks and uncertainties. Our actual results may differ materially from those
anticipated
in these forward-looking statements as a result of various factors, including those set forth under “Item 3, Key Information — Risk Factors” or in other parts of this annual report on Form 20-F.
Operating Results
Overview and Plan of Operation
Following our Business Combination with Alyst on June 25, 2009 until January 2011, we, through our subsidiaries and variable interest entities, provided broadcast television advertising services in the PRC and operated joint-venture partnerships with PRC televisions stations in regional areas of the country. We managed these regional businesses through a series of joint ventures and contractual arrangements to sell broadcast television advertising time slots and so-called “soft” advertising opportunities to local advertisers directly and through advertising agencies and brokers, and also assisted the PRC television stations in selling advertising time slots and “soft” advertising opportunities to national advertisers, specifically by offering multi-region campaigns to maximize value and cut costs these national advertisers would otherwise face when dealing with individual stations on a station-by-station basis.
Since January 2011, we have been a shell company in the British Virgin Islands with non-operating subsidiaries ANT, a Hong Kong company, WFOE, a PRC company, and Hetong, a PRC company and a variable interest entity. At present, in addition to pursuing a remedy to the dispute with Shanxi TV as discussed elsewhere in this Report, we are exploring options with respect to future business operations. Management may decide to seek a potential business combination with one or more yet to be identified privately held companies, or may determine that it is in the best interests of the Company and its shareholders to attempt to engage in another business through its subsidiaries and variable interest entities in China.
If management determines that it is in the best interests of the Company and its shareholders to enter into a business combination, we will not be restricted in our search for business combination candidates to any particular geographical area, industry or industry segment, and may enter into a combination with a private business engaged in any line of business. Management's discretion is, as a practical matter, unlimited in the selection of a combination candidate.
If we effect a business combination with any entity unaffiliated with our current management, our current officers and directors probably will resign their directorship and officer positions with us in connection with our consummation of a business combination. In such an instance, our current management will not have any control over the conduct of our business following the completion of a business combination.
It is anticipated that prospective business opportunities will come to our attention from various sources, including our management, our other stockholders, professional advisors such as attorneys and accountants, securities broker-dealers, venture capitalists, members of the financial community, and others who may present unsolicited proposals. We do not have any plans, understandings, agreements, or commitments with any individual or entity to act as a finder of or as a business consultant in regard to any business opportunities for us. There are no plans to use advertisements, notices or any general solicitation in the search for combination candidates.
Corporate Update on Sale of Kunming JV
On March 4, 2011, we redeemed an aggregate of $11,000,000 of our outstanding convertible debentures due April 30, 2016, which were issued to certain investors in a private placement transaction that was consummated on April 13, 2010. The redeemed debentures represented the entire outstanding principal of the debentures issued in the private placement. In addition, we paid all outstanding interest owing on the debentures in 8,195,000 ordinary shares of the Company. The funds used to redeem the debentures were generated from the sale of our interest in the Kunming JV as discussed elsewhere in this report.
On May 12, 2011, we redeemed an aggregate of 4,028,690 of our Class A Preferred Shares at a per share price of $1.00. The redeemed shares were issued to certain investors in a private placement transaction that was consummated on April 13, 2010, and accounted for approximately 25.18% of the total 16,000,000 Class A Preferred Shares then outstanding. In connection with the redemption of the Class A Preferred Shares, the Company paid an aggregate of $4.69 million on June 2011 to pay accrued and outstanding dividend payments owing on the Class A Preferred Shares. The funds used to redeem the Class A Preferred Shares were generated from the sale of our interest in the Kunming JV as discussed elsewhere in this report.
On November 31, 2011, we redeemed an aggregate of 4,706,807 of our Class A Preferred Shares at a per share price of $1.00. The redeemed shares were issued to certain investors in a private placement transaction that was consummated on April 13, 2010, and accounted for approximately 39.32% of the 11,971,310 Class A Preferred Shares then outstanding. In connection with the redemption of the Class A Preferred Shares, the Company issued to the holders of the redeemed Class A Preferred Shares an aggregate of 14,964,100 Ordinary Shares as payment for all accrued and outstanding dividends owing on the Class A Preferred Shares.
In April 2012, we redeemed an aggregate of 1,575,000 of our Class A Preferred Shares at a per share price of $1.00. The redeemed shares were issued to certain investors in a private placement transaction that was consummated on April 13, 2010, and accounted for approximately 21.68% of the 7,264,503 Class A Preferred Shares then outstanding.
Update on Yellow River JV
In January 2011, China Yellow River Television Station, the Company’s joint venture partner in Shanxi Yellow River and Advertising Networks Cartoon Technology Co., Ltd., or Yellow River JV, was consolidated by merger into Shanxi Radio and TV Station, or Shanxi TV, a PRC state-owned entity, and Shanxi TV was the successor to all of China Yellow River Television Station’s obligations under the joint venture agreements. Upon consummation of the merger, Shanxi TV immediately and unilaterally terminated the cooperation agreement that established the Yellow River JV and transferred the advertising business of the Yellow River JV to its own internal advertising department. The Company believes that Shanxi’s actions constituted a direct violation of the cooperation agreement which granted to the Yellow River JV the exclusive and irrevocable right to operate China Yellow River Television Station’s advertising business.
In connection with the termination of the cooperation agreement and the transfer of the advertising business, Shanxi TV has also taken, as its own, the RMB 45,000,000 of registered capital contributed by the Company to the Yellow River JV. While the Company acknowledges the right of the PRC government to change policies and rules with respect to agreements with state-owned entities, such as Shanxi TV, however the Company believes that the RMB 45,000,000 contributed to the Yellow River JV by the Company must be returned to the Company. The Company has attempted, in good faith, to negotiate a settlement with respect to the funds, however, to date Shanxi TV has refused to return the funds to the Company or enter into any settlement agreement.
In addition to attempts at negotiations directly with Shanxi TV, the Company filed an application for arbitration with the China International Economic Trade Arbitration Commission, or CIETAC, in October 2011. Shanxi TV filed its response in January 2012, and has since challenged CIETAC’s jurisdiction over the dispute, though in March 2012, subsequently withdrew the application. Since the submission of the Company’s application for arbitration, two hearings have been held, and CEITAC initially indicated that it would render a decision by August 21, 2102. However, this deadline has been extended on three separate occasions. For strategic purposes, the Company submitted a withdrawal application to CERTAC on February 17, 2013 and CEITAC rendered a withdrawal decision on March 18, 2013. The Company is currently exploring other channels through which it may resolve this issue.
If the Company is successful in securing the return of part or all of the RMB 45,000,000 that we believe is owed to us from Shanxi TV, a portion of the funds will be used to redeem all or a portion of the Class A Preferred Shares that remain outstanding at such time.
Taxation
BVI
CNIH is incorporated in the BVI. Under the current law of the BVI, CNIH is not subject to income or capital gains tax. In addition, dividend payments are not subject to withholding tax in the BVI.
Hong Kong
We did not have any assessable profits subject to the Hong Kong profits tax from 2008 to 2012. We do not anticipate having any income subject to income taxes in Hong Kong in the foreseeable future.
China
Before the implementation of the EIT Law, foreign invested enterprises, or FIEs, established in the PRC, unless granted preferential tax treatments by the PRC government, were generally subject to an earned income tax, or EIT, rate of 33.0%, which included a 30.0% state income tax and a 3.0% local income tax. On March 16, 2007, the National People’s Congress of China passed the EIT Law, and on November 28, 2007, the State Council of China passed the EIT Law Implementing Rules which took effect on January 1, 2008. The EIT Law and its implementing rules impose a unified EIT of 25.0% on all domestic-invested enterprises and FIEs, unless they qualify under certain limited exceptions. Despite these changes, the EIT Law gives FIEs established before March 16, 2007, or Old FIEs, a five-year grandfather period during which they can continue to enjoy their existing preferential tax treatments. During this five-year grandfather period, the Old FIEs which enjoyed tax rates lower than 25% under the original EIT law will be subject to gradually increased EIT rates over a 5-year period until their tax rate reaches 25%. In addition, the Old FIEs that are eligible for other preferential tax treatments by the PRC government under the original EIT law are allowed to continue enjoying their preference until these preferential treatment periods expire.
In addition to the changes to the current tax structure, under the EIT Law, an enterprise established outside of China with “de facto management bodies” within China is considered a resident enterprise and will normally be subject to an EIT of 25% on its global income. The implementing rules define the term “de facto management bodies” as “an establishment that exercises, in substance, overall management and control over the production, business, personnel, accounting, etc., of a Chinese enterprise.” If the PRC tax authorities subsequently determine that we should be classified as a resident enterprise, then our organization’s global income will be subject to PRC income tax of 25%. For detailed discussion of PRC tax issues related to resident enterprise status, see Item 3, “Key information — Risk Factors — Under the New Enterprise Income Tax Law, we may be classified as a ‘resident enterprise’ of China. Such classification will likely result in unfavorable tax consequences to us and our non-PRC shareholders.”
In addition, the EIT Law and its implementing rules generally provide that a 10% withholding tax applies to China-sourced income derived by non-resident enterprises for PRC enterprise income tax purposes unless the jurisdiction of incorporation of such enterprises’ shareholder has a tax treaty with China that provides for a different withholding arrangement. We expect that such 10% withholding tax will apply to dividends paid to us by our PRC subsidiaries, but this treatment will depend on our status as a non-resident enterprise.
Our future effective income tax rate depends on various factors, such as tax legislation, the geographic composition of our pre-tax income and non-tax deductible expenses incurred. Our management carefully monitors these legal developments and will timely adjust our effective income tax rate when necessary.
Results of Operations for continuing operations
Comparison of Fiscal Years Ended December 31, 2012 and 2011
The following table sets forth key components of our results of operations for the periods indicated, in dollars and as a percentage of revenue.
|
|
|
Year ended December 31, 2012
|
|
|
Year ended December 31, 2011
|
|
|
|
|
Amount
|
|
|
Percentage of Revenue
|
|
|
Amount
|
|
|
Percentage of Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling expense
|
|
|
-
|
|
|
|
-
|
|
|
|
(160
|
)
|
|
|
-
|
|
|
General and administrative expenses
|
|
|
(909,729
|
)
|
|
|
-
|
|
|
|
(1,099,941
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) from operations
|
|
|
(909,729
|
)
|
|
|
-
|
|
|
|
(1,100,101
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income
|
|
|
230
|
|
|
|
-
|
|
|
|
321
|
|
|
|
-
|
|
|
Interest income
|
|
|
113,165
|
|
|
|
-
|
|
|
|
337,961
|
|
|
|
-
|
|
|
Interest expense
|
|
|
-
|
|
|
|
-
|
|
|
|
(193,900
|
)
|
|
|
-
|
|
|
Impairment loss on receivables from YR TV Station
|
|
|
(3,345,284
|
)
|
|
|
-
|
|
|
|
(680,000
|
)
|
|
|
-
|
|
|
Impairment of intangible assets
|
|
|
-
|
|
|
|
|
|
|
|
(6,506,969
|
)
|
|
|
|
|
|
Written off debt discount and deferred finance cost on redemption
|
|
|
-
|
|
|
|
-
|
|
|
|
(3,237,616
|
)
|
|
|
-
|
|
|
Premium paid on redemption of debenture payable
|
|
|
-
|
|
|
|
-
|
|
|
|
(2,281,162
|
)
|
|
|
-
|
|
|
(Loss) before income tax and non-controlling interests
|
|
|
(1,756,334
|
)
|
|
|
-
|
|
|
|
(13,661,466
|
)
|
|
|
-
|
|
Impairment loss on receivables from YR TV station and intangible assets.
Pending the decision by CIETAC for the Company’s arbitration against YR TV Station, an impairment charges has made to write off the excess of the carrying value of receivables from YR TV Station over the recoverable amounts for the year ended December 31, 2012 and 2011. The intangible assets were fully reserved since year 2012 due to the termination of contracts.
General and Administrative Expenses
. General and administrative expenses include salaries and benefits for our employees, as well as costs and expenses associated with office, utilities, transportation, travel and other costs and expenses related to legal, accounting and other costs associated with regulatory filings. The general and administrative expense for 2012 was $909,729, a decrease of $190,212 or 17%, as compared to $1,099,941 in 2011. The decrease is primarily as a result of the reduction of business activities resulted from the disposal of investment projects and arbitration with venture partner.
Interest Income
. Interest income in 2012 was $113,165 compared with $337,961 in 2011. The decrease in interest income is due to the lower average daily balance of the bank deposit in 2012.
Interest Expense
. Interest expense in 2012 was nil compared with $193,900 in 2011. The decrease of $193,900 is due to the repayment of convertible debenture in March 2011.
Comparison of Fiscal Years Ended December 31, 2011 and 2010
The following table sets forth key components of our results of operations for the periods indicated, in dollars and as a percentage of revenue.
|
|
|
Year ended December 31, 2011
|
|
|
Year ended December 31, 2010
|
|
|
|
|
Amount
|
|
|
Percentage of Revenue
|
|
|
Amount
|
|
|
Percentage of Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
|
-
|
|
|
|
-
|
|
|
|
3,751,410
|
|
|
|
100
|
%
|
|
Cost of revenue
|
|
|
-
|
|
|
|
-
|
|
|
|
(2,394,173
|
)
|
|
|
63.8
|
%
|
|
Gross profit
|
|
|
-
|
|
|
|
-
|
|
|
|
1,357,237
|
|
|
|
36.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling expense
|
|
|
(160
|
)
|
|
|
-
|
|
|
|
(19,903
|
)
|
|
|
0.5
|
%
|
|
General and administrative expenses
|
|
|
(1,099,941
|
)
|
|
|
-
|
|
|
|
(2,253,785
|
)
|
|
|
103.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) from operations
|
|
|
(1,100,101
|
)
|
|
|
-
|
|
|
|
(916,451
|
)
|
|
|
67.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income and (expenses)
|
|
|
321
|
|
|
|
-
|
|
|
|
(9,023
|
)
|
|
|
(0.2
|
%)
|
|
Interest income
|
|
|
337,961
|
|
|
|
-
|
|
|
|
25,911
|
|
|
|
0.7
|
%
|
|
Interest expense
|
|
|
(193,900
|
)
|
|
|
-
|
|
|
|
(1,790,304
|
)
|
|
|
(4.5
|
%)
|
|
Impairment loss on receivables from YR TV Station
|
|
|
(680,000
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Impairment of intangible assets
|
|
|
(6,506,969
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premium paid on redemption of debenture payable
|
|
|
(2,281,162
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Gain on extinguishment and cancellation of debt
|
|
|
-
|
|
|
|
-
|
|
|
|
5,576,855
|
|
|
|
148.7
|
%
|
|
Written off debt discount and deferred finance cost on redemption
|
|
|
(3,237,616
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Income (loss) before income tax and non-controlling interests
|
|
|
(13,661,466
|
)
|
|
|
-
|
|
|
|
2,886,988
|
|
|
|
76.9
|
%
|
Impairment loss on receivables from YR TV station and intangible assets.
Pending the decision by CIETAC for the Company’s arbitration against YR TV Station, an impairment charges has made to write off the excess of the carrying value of receivables from YR TV Station over the recoverable amounts for the year ended December 31, 2011. The intangible assets were fully reserved for the year 2011 due to the termination of contracts.
General and Administrative Expenses
. General and administrative expenses include salaries and benefits for our employees, as well as costs and expenses associated with office, utilities, transportation, travel and other costs and expenses related to legal, accounting and other costs associated with regulatory filings. The general and administrative expense for 2011 was $1,099,941, a decrease of $1,153,844 or 52%, as compared to $2,253,785 in 2010. The decrease is primarily as a result of the reduction of business activities resulted from the disposal of investment projects and arbitration with venture partner.
Interest Income
. Interest income in 2011 was $337,961 compared with $25,911 in 2010. The increase in interest income is due to the higher bank deposit balance received from proceeds from disposal of Kunming entities before the Company repaid the convertible debenture in March, 2011 and the redemption of Preference shares in May and November, 2011.
Interest Expense
. Interest expense in 2011 was $193,900 compared with $1,790,304 in 2010. The decrease of $1,596,404 is due to the repayment of convertible debenture in March 2011.
Critical Accounting Policies
Our discussion and analysis of financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements and related disclosures in conformity with accounting principles generally accepted in the United States of America requires our management to make judgments, assumptions and estimates that affect the amounts reported in the consolidated financial statements and accompanying notes. Our management evaluates its estimates on an on-going basis based on historical experience and on various other assumptions it believes are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.
We believe the following critical accounting policies affect our significant judgments and estimates used in the preparation of its financial statements.
Valuation of long-lived assets
- The Company follows ASC 360, “Property, Plant and Equipment”. The Company periodically evaluates the carrying value of long-lived assets to be held and used, including intangible assets subject to amortization, when events and circumstances warrant such a review. The carrying value of a long-lived asset is considered impaired when the anticipated undiscounted cash flow from such asset is separately identifiable and is less than its carrying value. In that event, a loss is recognized based on the amount by which the carrying value exceeds the fair market value of the long-lived asset. Fair market value is determined primarily using the anticipated cash flows discounted at a rate commensurate with the risk involved. Losses on long-lived assets to be disposed of are determined in a similar manner, except that fair market values are reduced for the cost to dispose.
Fair Value of Financial Instruments
-
Accounting standards require the categorization of financial assets and liabilities, based on the inputs to the valuation technique, into a three-level fair value hierarchy. The various levels of the fair value hierarchy are described as follows:
Level 1 — Financial assets and liabilities whose values are based on unadjusted quoted market prices for identical assets and liabilities in an active market that we have the ability to access.
Level 2 — Financial assets and liabilities whose values are based on quoted prices in markets that are not active or model inputs that are observable for substantially the full term of the asset or liability.
Level 3 — Financial assets and liabilities whose values are based on prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement.
Accounting standards require the use of observable market data, when available, in making fair value measurements. When inputs used to measure fair value fall within different levels of the hierarchy, the level within which the fair value measurement is categorized is based on the lowest level input that is significant to the fair value measurement.
For certain financial instruments, including cash, accounts and other receivables, accounts payable, short-term loans, accruals and other payables, it was assumed that the carrying amounts approximate fair value because of the near term maturities of such obligations. The carrying amounts of long-term loans payable approximate fair value since the interest rate associated with the debt approximates the current market interest rate.
Cash and cash equivalents
- Cash and cash equivalents include cash on hand, cash accounts, interest bearing savings accounts and time certificates of deposit with a maturity of three months or less when purchased.
Restricted cash
– Restricted cash represents cash held in Alyst’s checking account as at December 31, 2010, which is obligated to be used for repurchase of 30,000 CNIH common shares, as stipulated by the Amendment to Stock Purchase Agreement between shareholders and Alyst in July 2009.
Accounts receivable –
Accounts receivable are stated at the amount management expects to collect from balances outstanding at the period end. Allowances for doubtful accounts receivable balances are recorded when circumstances indicate that collection is doubtful for particular accounts receivable or as a general reserve for all accounts receivable. Management estimates such allowances based on historical evidence such as amounts that are subject to risk and customer credit worthiness. Accounts receivable are written off if reasonable collection efforts are not successful.
Management periodically reviews the outstanding account balances for collectability. Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote.
Property and equipment
– Property and equipment are stated at cost including the cost of improvements. Maintenance and repairs are charged to expense as incurred. Depreciation and amortization are provided on the straight-line method based on the shorter of the estimated useful lives of the assets or lease term as follows:
|
Leasehold improvement
|
3 years
|
|
Furniture, fixtures and equipment
|
5 years
|
|
Computer software
|
1 year
|
Revenue recognition
– The Company has advertising revenue, net of agency commissions and sales tax, and advertisement production revenue. Advertising revenue is generated from advertising time-slots sold to advertising agencies or advertisers to broadcast their advertisements on television or radio channels. Advertisement production revenue is generated from service provided to advertisers in designing and producing video advertisements. Advertisement production revenue represented less than 10% of total net sales for the year ended December 31, 2010. The Company recognizes revenue on advertisement when advertisements are broadcast or when the advertisement production service is provided, collection of the relevant receivable is probable, persuasive evidence of an arrangement exists and the sales price is fixed or determinable. Net sales represent the invoiced value of services, net of business tax and agency commissions. The Company is subject to business tax which is levied on majority of the Company’s sales at the rate of 5.0-8.625% on the invoiced value of services.
The Company requires customers to prepay certain amounts, as determined by both parties, at the time the contracts are signed. Customer deposits are recognized into revenue when the related service is provided or advertisement is aired and all other revenue recognition criteria are met.
Cost of revenue
– The Company’s cost of revenue on advertising revenue includes amortization of purchased program inventory, costs to buy back certain advertising time-slots sold to agency companies which the Company’s advertising customers need, and cost of producing advertisements.
Comprehensive income (loss)
– The Company follows FASB ASC 220 "Comprehensive Income". Comprehensive income is defined as the change in equity of a company during a period from transactions and other events and circumstances excluding transactions resulting from investments from owners and distributions to owners. For the Company, comprehensive income (loss) for the periods presented includes net income (loss) and foreign currency translation adjustments.
Income taxes-
Alyst was subject to US federal, New York State and New York City taxes prior to the redomestication to the BVI through a merger with CNIH. China Networks was originally incorporated in the Cayman Islands and subsequently reincorporated in the BVI. China Networks is not subject to income taxes under the current laws of the Cayman Islands or BVI. PRC entities are subject to the PRC Enterprise Income tax at the applicable rates on taxable income at the commencement of operations.
Income taxes are provided on an asset and liability approach for financial accounting and reporting of income taxes. Current tax is based on the profit or loss from ordinary activities adjusted for items that are non-assessable or disallowable for income tax purpose and is calculated using tax rates that have been enacted or substantively enacted at the balance sheet date. Deferred income tax liabilities or assets are recorded to reflect the tax consequences in future differences between the tax basis of assets and liabilities and the financial reporting amounts at each year end. A valuation allowance is recognized if it is more likely than not that some portion, or all, of a deferred tax asset will not be realized.
Foreign Currency-
The functional currency of each foreign operation is the local currency. The consolidated financial statements of the Company are presented in United States Dollars (“US$”). Transactions in foreign currencies during the year are translated into US$ at the exchange rates prevailing on the transaction dates. Monetary assets and liabilities denominated in foreign currencies on the balance sheet date are translated into US$ at the exchange rates prevailing on that date. Gains and losses on foreign currency transactions (if any) are included in the statement of operations.
The JV Tech Cos and JV Ad Cos translate their assets and liabilities into US$ at the current exchange rate at the end of the reporting period. Revenues and expenses are translated into US$ using the average exchange rate during the period. Gains and losses that result from the translation are included in other comprehensive loss.
Earnings per Common Share –
The Company follows ASC 260,
Earnings per Share
, resulting in the presentation of basic and diluted earnings per share. Diluted earnings per common share assume that outstanding common shares were increased by shares convertible from preferred stock. Since the Company’s common stock equivalents are not dilutive for the year ended December 31, 2010 and 2009, the basic and diluted earnings per share for those periods are the same.
Use of estimates -
The preparation of the Company’s 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. The most significant estimates relate to valuation of program rights and intangible assets, preferred stock valuation, discount on promissory notes, allowance for uncollectible accounts receivable, depreciation, useful lives of property, taxes, and contingencies. These estimates may be adjusted as more current information becomes available and any adjustment could be significant. Estimates and assumptions are periodically reviewed and the effects of revisions are reflected in the consolidated financial statements in the period they are determined to be necessary.
Non-controlling interest in consolidated financial statements
– In December 2007, the FASB issued authoritative guidance related to non-controlling interests in consolidated financial statements, which was an amendment of ARB No. 51. This guidance is set forth in Topic 810 in the Accounting Standards Codification (ASC 810). ASC 810 establishes accounting and reporting standards for the non-controlling interest in a subsidiary and for the deconsolidation of a subsidiary. This accounting standard is effective for fiscal years beginning after December 15, 2008. The Company adopted this guidance on January 1, 2009.
Recently Issued Accounting Standards
There are no recently issued accounting pronouncements adopted by the Company. Management does not believe that any recently issued, but not effective, accounting standards, if currently adopted, would have a material effect on the accompanying financial statements.
The Company accounts for and discloses events that occur after the balance sheet but before financial statements are issued or are available to be issued through December 31, 2012.
Liquidity and Capital Resources
As of December 31, 2012, we had cash and cash equivalents of $2,117,731. We redeemed all outstanding convertible debentures in 2011.
The following table provides detailed information about our net cash flow for all financial statement periods presented in this report. To date, we have financed our operations primarily through cash flows from operations, augmented by short-term bank borrowings and equity contributions by our shareholders.
(All amounts in thousands of U.S. dollars)
|
|
|
Year Ended December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
Net cash provided by (used in) operating activities – Continuing operation
|
|
$
|
(617,891)
|
|
|
$
|
(830,201)
|
|
|
$
|
2,108,912
|
|
|
Net cash provided by operating activities – Discontinued operation
|
|
|
-
|
|
|
|
-
|
|
|
|
23,661
|
|
|
Net cash provided by (used in) investing activities
|
|
|
2,259,728
|
|
|
|
8,277,668
|
|
|
|
3,059,804
|
|
|
Net cash provided by (used in) financing activities
|
|
|
(1,575,000)
|
|
|
|
(20,306,608)
|
|
|
|
(1,206,563)
|
|
|
Effects of Exchange Rate Change in Cash
|
|
|
45,167
|
|
|
|
(31,630)
|
|
|
|
522,173
|
|
|
Net Increase (decrease) in Cash and Cash Equivalents
|
|
|
66,837
|
|
|
|
(12,859,141)
|
|
|
|
3,985,814
|
|
|
Cash and Cash Equivalent at Beginning of the Year
|
|
|
2,005,727
|
|
|
|
14,896,498
|
|
|
|
10,388,511
|
|
|
Cash and Cash Equivalent at End of the Year
|
|
|
2,117,731
|
|
|
|
2,005,727
|
|
|
|
14,896,498
|
|
Operating activities – Continuing operation
Net cash used in operating activities for continuing operation was $(617,891) for the year ended December 31, 2012, as compared to $830,201 provided by operating activities during 2011. The amount is insignificant because there were limited operations during the year.
Net cash used in operating activities for continuing operation was $830,201 for the year ended December 31, 2011, as compared to $2,108,912 provided by operating activities during 2010. The amount is insignificant because there were limited operations during the year.
Operating activities – Discontinued operation
Net cash provided by operating activities for discontinued operation was nil for the year ended December 31, 2012, as compared to nil and $23,661 for the years ended December 31, 2011 and 2010, respectively.
Investing activities
Net cash provided by investing activities for the year ended December 31, 2012 was $2,259,728, as compared to $8,277,668 net cash provided by investing activities in 2011. The net cash provided by investing activities in 2012 and 2011 was mainly attributable to the cash proceeds from disposal of Kunming entities.
Net cash provided by investing activities for the year ended December 31, 2011 was $8,277,668, as compared to $3,059,804 net cash provided by investing activities in 2010. The increase in net cash provided by investing activities was mainly attributable to the cash proceeds from disposal of Kunming entities.
Financing activities
Net cash used in financing activities for the year ended December 31, 2012 was $1,575,000, as compared to $20,306,608 net cash used in financing activities in 2011. The net cash used in financing activities in 2012 was mainly attributable to the redemption of preferred stock.
Net cash used in financing activities for the year ended December 31, 2011 was $20,306,608, as compared to $1,206,563 net cash used in financing activities in 2010. The increase of net cash used in financing activities was mainly attributable to the redemption of convertible debentures and preferred stock during the year.
Research and Development, Patents and Licenses, Etc.
We do not engage in any significant research and development activities, nor do we own any intellectual property.
Trend Information
Other than as disclosed in the foregoing disclosures and elsewhere in this annual report, we are not aware of any trends, uncertainties, demands, commitments or events during the period from January 1, 2012 to December 31, 2012 that are reasonably likely to have a material adverse effect on our net revenues, income, profitability, liquidity or capital resources, or that would cause our disclosed financial information to be not necessarily indicative of future operating results or financial conditions.
Off-Balance Sheet Arrangements
We have not entered into, nor do we expect to enter into, any off-balance sheet arrangements. We also have not entered into any financial guarantees or other commitments to guarantee the payment obligations of third parties. In addition, we have not entered into any derivative contracts that are indexed to our equity interests and classified as shareholders’ equity. Furthermore, we do not have any retained or contingent interest in assets transferred to an unconsolidated entity that serves as credit, liquidity or market risk support to such entity. We do not have any variable interest in any unconsolidated entity that provides financing, liquidity, market risk or credit support to us or that engages in leasing, hedging or research and development services with us.
Tabular Disclosure of Contractual Obligations
The following table sets forth our contractual obligations in respect of operating leases as of December 31, 2012.
|
|
|
Payments Due By Period
|
|
|
|
|
Total
|
|
|
Less than 1 year
|
|
|
1-3 years
|
|
|
3-5 years
|
|
|
More than 5 years
|
|
|
Operating Lease Obligations
|
|
|
3,182
|
|
|
|
3,182
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Total
|
|
$
|
3,182
|
|
|
|
3,182
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Safe Harbor
See the section headed “Forward-Looking Information.”
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
Directors and Senior Management
The following table sets forth certain information regarding our directors and senior management as of the date of this annual report.
|
NAME
|
|
AGE
|
|
POSITION
|
|
Li Shuangqing
|
|
59
|
|
Chief Executive Officer and Chairman
|
|
Jian Ping Huang
|
|
53
|
|
Director
|
|
May Huang
|
|
45
|
|
Director
|
|
Kerry Propper
|
|
39
|
|
Director
|
|
George Kaufman
|
|
38
|
|
Director
|
Li Shuangqing
. Mr. Li Shuangqing has been our chairman and chief executive officer and director since our merger with China Networks. Prior to the merger, Mr. Li had served as the chairman and chief executive officer and a director of China Networks since May 2008. From 2006 to 2007, Mr. Li was the chairman of Shandong Huashi Media & Technology, a leading Electronic Program Guide provider in China. Prior to that, he was from 2001 to 2006 the general manager of Huicong Advertising, a leading Chinese internet and TV advertising company and director of advertising department of Qilu TV Station from 1997 to 2001. Mr. Li had various management and TV production roles with Shandong and Qilu TV Stations from 1980 to 1997. Mr. Li completed EMBA course from Guanghua School of Management, Peking University.
Jian Ping Huang
. Dr. Jian Ping Huang
has been our director since our merger with China Networks. He is the Chairman Emeritus and Chief Strategic Adviser of Jpigroup Inc., a company he founded in 1988. Under Dr. Huang’s advisory guidance, Jpigroup has become one of China's major private investment and development companies that has invested and advised in the areas of manufacturing, human capital development, technologies and financial services. From 1985 and prior to founding Jpigroup, Dr. Huang worked for the Government of China in the former Ministry of Foreign Economic Relations and Trade and during this time, he was very active and instrumental in helping formulate some of China's first open door strategies and reform plans, especially in the area of international investment and trade. Dr. Huang holds a Ph.D. in economics from the University of International Business and Economics in Beijing, where he now concurrently holds a Professorship in Finance. Dr. Huang is a director of China Gerui Advanced Materials Group Limited, and a member of that company’s audit committee.
May Huang
. Ms. May Huang has been our director since our merger with China Networks. Ms. Huang has been the Chief Operating Officer of Jpigroup Inc. since 2006. She is responsible for coordinating the business activities and objectives of Jpigroup’s two major divisions: investment banking services and principal investments. Jpigroup is one of China’s major private investment and development companies that has invested and advised in the areas of manufacturing, human capital development, technologies and financial services. Before 2006, Ms. Huang was Jpigroup’s Chief Financial Officer. Ms. Huang holds a Bachelor’s degree in economics from Sun Yatsen University at Zhongshan.
Ms. Huang is the sister of Dr. Huang.
Kerry Propper
. Mr. Kerry Propper has been our director since our merger with China Networks and a director of China Networks Media since May 2008. Mr. Propper has been the owner and chief executive officer of Chardan Capital Markets LLC, a New York based broker/dealer, since July 2003. He has also been a managing director of SUJG, Inc., an investment company, since April 2005. From its inception in December 2003 until November 2005, Mr. Propper served as a member of the board of directors of each of Chardan China Acquisition Corp., Chardan North China Acquisition Corporation and Chardan South China Acquisition Corporation, each an OTC Bulletin Board listed blank check company. In November 2005, Chardan China Acquisition Corp. completed its business combination with State Harvest Holdings Ltd. and changed its name to Origin Agritech Ltd., in September 2007, Chardan North completed its business combination with Gifted Time Holdings, Limited and changed its name to HLS Systems International, Ltd. and in January 2008 Chardan South completed its business combination with Head Dragon Holdings, Limited and changed its name to A-Power Energy Generation Systems, Ltd. Mr. Propper has continued to serve as a member of the board of directors of Origin Agritech and HLS Systems International Ltd. since their mergers. Mr. Propper also sits on the board of directors of China Cablecom Holdings, Ltd., a joint-venture provider of cable TV services in China. Mr. Propper was a founder, and from February 1999 to July 2003 owner and managing director of Windsor Capital Advisors, a full service brokerage firm also based in New York. Mr. Propper was also a founder of The Private Capital Group LLC, a small private investment firm specializing in hard money loans and convertible preferred debt and equity offerings for small companies, in May 2000 and was affiliated with it until December 2003. From July 1997 until February 1999, Mr. Propper worked at Aegis Capital Corp., a broker dealer and member firm of FINRA. Mr. Propper received his B.A. (with honors) in Economics and International Studies from Colby College and studied at the London School of Economics.
George B. Kaufman
. Mr. George B. Kaufman has been our director since our merger with China Networks. Mr. Kaufman has served as the Vice President of Investment Banking for Chardan Capital Markets LLC, a New York based broker/dealer, since January 2006 and served as an Investment Banking Associate for Chardan from November 2004, when he joined the firm, to December 2005. As one of the seven original members of Chardan, Mr. Kaufman established the investment banking, brokerage and marketing protocols and standards. He has extensive experience with operating and development stage companies, particularly those in the China and Greater Asian region, having lead and/or managed over 30 public and private transactions. In addition, Mr. Kaufman founded Detroit Coffee Company, a national roaster, wholesaler and retail distributor of high-end specialty coffees, in January 2002 and currently serves as its chief executive officer. Mr. Kaufman received a Bachelor of Arts degree in Economics from the University of Vermont in 1999.
No family relationship exists between any of our directors and executive officers. There are no arrangements or understandings with major shareholders, customers, suppliers or others pursuant to which any person referred to above was selected as a director or member of senior management.
Compensation
In 2012, we paid an aggregate of $157,000 in salary to our directors and senior management as a group. None of our directors or senior management received any equity awards, including options, restricted stock or other equity incentives in 2011. We do not set aside or accrue any amounts for pension, retirement or other benefits for our directors and senior management. However, we reimburse our directors for out-of-pocket expenses incurred in connection with their services in such capacity.
Our board of directors conducts reviews informally, and compensation is not being typically changed on a regimented time-frame. Our board of directors bases the salaries of our executive officers on the amounts similarly-situated companies pay their executive officers for similar performance. In general, if an executive performs exceptionally well, the performance and, if applicable, the increase in responsibilities would also merit a salary increase.
Board Practices
Terms of Directors and Executive Officers
Our board of directors is currently divided into three classes with only one class of directors being elected in each year and each class serving a three-year term. The term of the Class A directors expires at the first annual meeting of our shareholders, with the Class B term expiring at the second annual meeting, and the Class C term expiring at the third annual meeting. The current board members are classified as follows:
|
●
|
Class A directors to stand for reelection in 2013: Ms. May Huang;
|
|
●
|
Class B directors to stand for reelection in 2014: Mr. Kaufman and Mr. Li; and
|
|
●
|
Class C directors to stand for reelection in 2015: Mr. Propper and Dr. J.P. Huang.
|
At a general meeting in each year, successors to the class of directors whose term expires in that year shall be elected for a three year term. A majority of votes cast at the relevant meeting shall be sufficient to elect directors. The directors may appoint one or more directors to fill a vacancy on the Board.
Our executive officers are appointed by our board. The executive officers shall hold office until their successors are duly elected and qualified, but any officer elected or appointed by the directors may be removed at any time, with or without cause, by resolution of directors. Any vacancy occurring in any office may be filled by resolution of directors.
Independence of Directors
We have elected to follow the rules of NYSE MKT to determine whether a director is independent. Our board will also consult with counsel to ensure that our board’s determinations are consistent with those rules and all relevant securities and other laws and regulations regarding the independence of directors. Consistent with these considerations, our board has affirmatively determined that Dr. J.P. Huang, Ms. Huang and Mr. Kaufman are our independent directors.
Board Committees
Audit Committee
We established an audit committee of the board of directors, which consists of Dr. J.P. Huang (Chairman) and Ms. Huang. We have determined that each of these individuals is an independent director under the NYSE MKT listing standards. Our board has also determined that Ms. Huang possesses the accounting or related financial management experience that qualifies her as financially sophisticated within the meaning of the NYSE MKT listing standards and that he is an “audit committee financial expert” as defined by the rules and regulations of the SEC.
The audit committee is mainly responsible for, among other things:
|
●
|
reviewing and discussing with management and the independent auditor the annual audited financial statements;
|
|
●
|
discussing with management and the independent auditor significant financial reporting issues and judgments made in connection with the preparation of financial statements;
|
|
●
|
discussing with management major risk assessment and risk management policies;
|
|
●
|
monitoring the independence of the independent auditor;
|
|
●
|
verifying the rotation of the lead (or coordinating) audit partner having primary responsibility for the audit and the audit partner responsible for reviewing the audit as required by law;
|
|
●
|
reviewing and approving all related-party transactions;
|
|
●
|
inquiring and discussing with management compliance with applicable laws and regulations;
|
|
●
|
pre-approving all audit services and permitted non-audit services to be performed by our independent auditor, including the fees and terms of the services to be performed;
|
|
●
|
appointing or replacing the independent auditor;
|
|
●
|
determining the compensation and oversight of the work of the independent auditor (including resolution of disagreements between management and the independent auditor regarding financial reporting) for the purpose of preparing or issuing an audit report or related work; and
|
|
●
|
establishing procedures for the receipt, retention and treatment of complaints received by us regarding accounting, internal accounting controls or reports which raise material issues regarding our financial statements or accounting policies.
|
Compensation Committee
We established a compensation committee of the board of directors, which consists of Mr. Kaufman (Chairman) and Dr. J.P. Huang, each of whom is an independent director under the NYSE MKT’s listing standards. Our compensation committee is responsible for reviewing and approving corporate goals and objectives relevant to the compensation for executive officers, evaluating the performance of executive officers in light of those goals and objectives, and determining and approving the compensation level of executive officers based on this evaluation. In addition, our compensation committee is responsible for administering our incentive-compensation plans and equity-based plans, including our 2008 Omnibus Securities and Incentive Plan, and for making recommendations to the board of directors with respect to the adoption, amendment, termination or replacement of such plans.
Nominating and Corporate Governance Committee
We established a nominating and corporate governance committee of the board of directors, which currently consists solely of Dr. J.P. Huang, each of whom is an independent director under the NYSE MKT’s listing standards. The nominating and corporate governance committee is responsible for overseeing the selection of persons to be nominated to serve on our board of directors.
The nominating and corporate governance committee will consider a number of qualifications relating to management and leadership experience, background and integrity and professionalism in evaluating a person’s candidacy for membership on the board of directors. The nominating and corporate governance committee may require certain skills or attributes, such as financial or accounting experience, to meet specific board needs that arise from time to time. The nominating and corporate governance committee does not distinguish among nominees recommended by shareholders and other persons and will consider persons identified by its members, management, shareholders, investment bankers and others. We do not have any restrictions on shareholder nominations under our amended and restated memorandum and articles of association. The only restrictions are those applicable generally under British Virgin Islands law and the federal proxy rules, if applicable. Currently, we will consider suggestions from individual shareholders, subject to evaluation of the person’s merits. Shareholders may communicate nominee suggestions directly to the board, accompanied by biographical details and a statement of support for the nominees, subject to certain timing restrictions in connection with our annual meetings. The suggested nominee must also provide a statement of consent to being considered for nomination. Although there are no formal criteria for nominees, our board of directors believes that persons should be actively engaged in business endeavors, have a financial background, and be familiar with acquisition strategies and money management.
Employees
As of December 31, 2012, we had a total of 4
employees. We offer employees competitive compensation packages and various training programs, which are intended to attract and retain qualified personnel. As required by PRC regulations, we participate in various employee benefit plans that are organized by municipal and provincial governments, including housing, pension, 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 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. We typically enter into a standard employment agreement and a confidentiality agreement with our employees and we believe our relationship with our employees is good. Our employees are not represented by any collective bargaining agreements or labor unions.
Share Ownership
Security Ownership of Certain Beneficial Owners and Management
The following table sets forth information with respect to the beneficial ownership of our ordinary shares as of May 14, 2013, by (i) each person who is known by us to beneficially own more than 5% of our ordinary shares; (ii) by each of our officers and directors; and (iii) by all of our officers and directors as a group. The address of each of the persons set forth below is in care of the Company, 9 Dong San Huan Zhong Lu, Suite 1101, Chaoyang District, Beijing, 100020, People’s Republic of China.
|
Name and Address of Beneficial Owner
Office, if any
|
|
|
|
Title of Class
|
|
Amount and Nature of Beneficial Ownership(1)
|
|
% of Class(2)
|
|
|
Officers and Directors
|
|
|
Li Shuangqing
|
|
Chief Executive Officer and Chairman
|
|
Ordinary Shares,
$0.0001 par value
|
|
|
-
|
|
-
|
|
|
Jian Ping Huang
|
|
Director
|
|
Ordinary Shares,
$0.0001 par value
|
|
|
-
|
|
-
|
|
|
May Huang
|
|
Director
|
|
Ordinary Shares,
$0.0001 par value
|
|
|
-
|
|
|
|
-
|
|
|
Kerry Propper (3)
|
|
Director
|
|
Ordinary Shares,
$0.0001 par value
|
|
|
1,214,177
|
|
|
|
*
|
|
|
George Kaufman
|
|
Director
|
|
Ordinary Shares,
$0.0001 par value
|
|
|
-
|
|
|
|
-
|
|
|
All officers and directors as a group (5 persons named above)
|
|
|
|
Ordinary Shares,
$0.0001 par value
|
|
|
-
|
|
|
|
-
|
|
|
5% Security Holders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Platinum Partners Value
152 W 57th St 54th Floor
New York, NY 10019 (4)
|
|
|
|
Ordinary Shares,
$0.0001 par value
|
|
|
9,043,366
|
|
|
|
10.4
|
%
|
|
South Ferry #2 LP
One State Street
New York, NY 10004 (5)
|
|
|
|
Ordinary Shares,
$0.0001 par value
|
|
|
12,558,625
|
|
|
|
14.5
|
%
|
|
Atlas Master Fund
135 E 57th Street
New York, NY 10022 (6)
|
|
|
|
Ordinary Shares,
$0.0001 par value
|
|
|
5,426,029
|
|
|
|
6.3
|
%
|
|
AQR Capital Management LLC
233 E 69th Street #6J
New York, NY 10021
|
|
|
|
Ordinary Shares,
$0.0001 par value
|
|
|
6,099,409
|
|
|
|
7.2
|
%
|
* Less than 1%.
|
(1)
|
Beneficial Ownership is determined in accordance with the rules of the Securities and Exchange Commission and generally includes voting or investment power with respect to securities. Except as otherwise indicated, each of the beneficial owners listed above has direct ownership of and sole voting power and investment power with respect to our ordinary shares.
|
|
(2)
|
As of April 29, 2013, a total of 85,211,410 of our ordinary shares are outstanding pursuant to SEC Rule 13d-3(d)(1). Ordinary shares that may be acquired by an individual or group within 60 days, pursuant to the exercise of warrants or options, are deemed to be outstanding for the purpose of computing the percentage ownership of such individual or group, but are not deemed to be outstanding for the purpose of computing the percentage ownership of any other person shown in the above table.
|
|
(3)
|
Includes 898,729 Ordinary Shares held by Chardan Capital Markets LLC. Mr. Propper is the CEO of Chardan Capital Markets LLC and holds voting and dispositive over such Ordinary Shares.
|
|
|
|
|
(4)
|
Includes 1,424,412 Ordinary Shares underlying Preferred Shares held by Platinum Partners Value.
|
|
|
|
|
(5)
|
Includes 1,438,656 Ordinary Shares underlying Preferred Shares held by South Ferry #2 LP.
|
|
|
|
|
(6)
|
Includes 854,647 Ordinary Shares underlying Preferred Shares held by Atlas Master Fund.
|
None of our major shareholders have different voting rights from other shareholders. We are not aware of any arrangement that may, at a subsequent date, result in a change of control of our company.
2008 Omnibus Securities and Incentive Plan
We adopted the 2008 Omnibus Securities and Incentive Plan, or the Share Incentive Plan, in connection with the Business Combination. The Share Incentive Plan provides for the grant of distribution equivalent rights, incentive share options, non-qualified share options, performance share awards, performance unit awards, restricted share awards, share appreciation rights, tandem share appreciation rights and unrestricted share awards for an aggregate of not more than 2,500,000 shares of our ordinary shares, to directors, officers, employees and consultants of the Company or its affiliates. If any award expires, is cancelled, or terminates unexercised or is forfeited, the number of shares subject thereto, if any, is again available for grant under the Share Incentive Plan. The number of ordinary shares with respect to which share options or share appreciation rights may be granted to an employee under the Share Incentive Plan in any calendar year cannot exceed 500,000.
The following description of the Share Incentive Plan is a summary of the material terms of the Share Incentive Plan.
Plan Administration
The Share Incentive Plan is administered by our compensation committee, or the Committee. Among other things, the Committee has complete discretion, subject to the express limits of the Share Incentive Plan, to determine the employees, directors and consultants to be granted awards, the types of awards to be granted, the number of our ordinary shares to be subject to each award, if any, the exercise price under each option, the base price of each share appreciation right, the term of each award, the vesting schedule and/or performance goals for each award that utilizes such a schedule or provides for performance goals, whether to accelerate vesting, the value of the ordinary shares, and any required withholdings. Either our board of directors or the Committee may amend, modify or terminate any outstanding award, provided that the participant’s consent to such action is required if the action would materially and adversely affect the participant. The Committee is also authorized to construe the award agreements and may prescribe rules relating to the operation of the Share Incentive Plan.
Share Options
The Share Incentive Plan provides for the grant of share options, which may be either “incentive share options” (ISOs), which are intended to meet the requirements for special U.S. federal income tax treatment under the Code, or “nonqualified share options” (NQSOs). Options may be granted on such terms and conditions as the Committee may determine; provided, however, that the per share exercise price under an option may not be less than the fair market value of an underlying ordinary share on the date of grant, and the term of an ISO may not exceed ten years (110% of such value and five years in the case of an ISO granted to an employee who owns (or is deemed to own) more than 10% of the total combined voting power of all classes of our capital or a parent or subsidiary). ISOs may only be granted to employees. In addition, the aggregate fair market value of the ordinary shares underlying one or more ISOs (determined at the time of grant) which are exercisable for the first time by any one employee during any calendar year may not exceed $100,000.
Share Awards
A restricted share award under the Share Incentive Plan is a grant or sale of our ordinary shares to the participant, subject to such transfer, forfeiture and/or other restrictions specified by the Committee in the award. Dividends, if any, declared by us will be paid on the shares, even during the period of restriction.
An unrestricted share award under the Share Incentive Plan is a grant or sale of our ordinary shares to the participant that is not subject to transfer, forfeiture or other restrictions, in consideration for past services rendered thereby to us or an affiliate or for other valid consideration.
Performance Awards
Performance unit awards under the Share Incentive Plan entitle the participant to receive a specified payment in cash upon the attainment of specified individual or company performance goals.
Performance share awards under the Share Incentive Plan entitle the participant to receive a specified number of our ordinary shares upon the attainment of specified individual or company performance goals.
Share Appreciation Rights
The award of a share appreciation right, or SAR, under the Share Incentive Plan entitles the participant, upon exercise, to receive an amount in cash, our ordinary shares or a combination thereof, equal to the increase in the fair market value of the underlying ordinary shares between the date of grant and the date of exercise. SARs may be granted in tandem with, or independently of, options granted under the Share Incentive Plan. A SAR granted in tandem with an option under the Share Incentive Plan is granted at the same time as the related option and is exercisable only at such times, and to the extent, that the related option is exercisable and expires upon termination or exercise of the related option. In addition, the related option may be exercised only when the value of our ordinary shares subject to the option exceeds the exercise price under the option. A SAR that is not granted in tandem with an option is exercisable at such times as the Committee may specify.
Distribution Equivalent Rights
A distribution equivalent right award under the Share Incentive Plan entitles the participant to receive bookkeeping credits, cash payments and/or our ordinary share distributions equal in amount to the distributions that would have been made to the participant had the participant held a specified number of our ordinary shares during the period the participant held the distribution equivalent right. A distribution equivalent right may be awarded under the Share Incentive Plan as a component of another award, where, if so awarded, such distribution equivalent right will expire, terminate or be forfeited by the participant under the same conditions as under such other award.
Other Terms
The Share Incentive Plan prohibits the issuance of an award with terms and conditions that would cause the award to be considered nonqualified deferred compensation under Section 409A of the Internal Revenue Code. Except as provided in the Share Incentive Plan, awards granted under the Share Incentive Plan are not transferable and may be exercised only by the participant or by the participant’s guardian or legal representative. Each award agreement will specify, among other things, the effect on an award of the disability, death, retirement, authorized leave of absence or other termination of employment of the participant. We may require a participant to pay us the amount of any required withholding in connection with the grant, vesting, exercise or disposition of an award. A participant is not considered a shareholder with respect to our ordinary shares underlying an award until the shares are issued to the participant.
Our board of directors may at any time terminate the Share Incentive Plan with respect to any awards that have not theretofore been granted, provided that no such termination may be effected if it would materially and adversely affect the rights of a participant with respect to any award theretofore granted without the participant’s consent. Our board of directors may at any time amend or alter the Share Incentive Plan, provided that no change in any award theretofore granted may be made which would materially and adversely impair the rights of a participant with respect to such award without that participant’s consent
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
Major Shareholders
Please refer to Item 6, “Directors, Senior Management and Employees — Share Ownership.”
Related Party Transactions
There were no transactions since the beginning of the 2012 fiscal year, nor is there any currently proposed transaction, in which we were or are to be a participant and the amount involved exceeded or exceeds the lesser of $120,000 or one percent of the average of our total assets at year-end for the last two completed years, and in which any related person had or will have a direct or indirect material interest.
Interests of Experts and Counsel
Not applicable.
ITEM 8. FINANCIAL INFORMATION
Consolidated Statements and Other Financial Information
Financial Statements
We have appended consolidated financial statements filed as part of this annual report. See Item 18, “Financial Statements.”
We may be subject to legal proceedings, investigations and claims incidental to the conduct of our business from time to time. Other than as set forth below, we are currently not a party to any litigation or other legal proceedings brought against us and we are also not aware of any legal proceeding, investigation or claim, or other legal exposure that has a more than remote possibility of having a material adverse effect on our business, financial condition or results of operations:
In January 2011, China Yellow River Television Station, the Company’s joint venture partner in Shanxi Yellow River and Advertising Networks Cartoon Technology Co., Ltd., or Yellow River JV, was consolidated by merger into Shanxi Radio and TV Station, or Shanxi TV, a PRC state-owned entity, and Shanxi TV was the successor to all of China Yellow River Television Station’s obligations under the joint venture agreements. Upon consummation of the merger, Shanxi TV immediately and unilaterally terminated the cooperation agreement that established the Yellow River JV and transferred the advertising business of the Yellow River JV to its own internal advertising department. The Company believes that Shanxi’s actions constituted a direct violation of the cooperation agreement which granted to the Yellow River JV the exclusive and irrevocable right to operate China Yellow River Television Station’s advertising business.
In connection with the termination of the cooperation agreement and the transfer of the advertising business, Shanxi TV has also taken, as its own, the RMB 45,000,000 of registered capital contributed by the Company to the Yellow River JV. While the Company acknowledges the right of the PRC government to change policies and rules with respect to agreements with state-owned entities, such as Shanxi TV, however the Company believes that the RMB 45,000,000 contributed to the Yellow River JV by the Company must be returned to the Company. The Company has attempted, in good faith, to negotiate a settlement with respect to the funds, however, to date Shanxi TV has refused to return the funds to the Company or enter into any settlement agreement.
In addition to attempts at negotiations directly with Shanxi TV, the Company filed an application for arbitration with the China International Economic Trade Arbitration Commission, or CIETAC, in October 2011. Shanxi TV filed it’s response in January 2012, and has since challenged CIETAC’s jurisdiction over the dispute, though it subsequently withdrew its application in March 2012. Since the submission of the Company’s application for arbitration, two hearings have been held, and CEITAC initially indicated that it would render a decision by August 21, 2102. However, this deadline has been extended on three separate occasions. For strategic purposes, the Company submitted a withdrawal application to CERTAC on February 17, 2013 and CEITAC rendered a withdrawal decision on March 18, 2013. The Company is currently exploring other channels through which it may resolve this issue.
Dividend Policy
We have never declared or paid any cash dividends on our ordinary shares. We currently intend to retain all future earnings, if any, for use in the operations and expansion of our business. As a result, we do not anticipate paying cash dividends in the foreseeable future. Any future determination as to the declaration and payment of cash dividends will be at the discretion of our board of directors and will depend on factors our directors deem relevant, including among others, our results of operations, financial condition and cash requirements, business prospects, and the terms of our credit facilities, if any, and any other financing arrangements. Accordingly, realization of a gain on our investments will depend on the appreciation of the price of our ordinary shares. There is no guarantee that our ordinary shares will appreciate in value.
Significant Changes
No significant change has occurred since the date of our consolidated financial statements filed as part of this annual report.
ITEM 9. THE OFFER AND LISTING
Offer and Listing Details
On July 24, 2009, our ordinary shares and warrants began trading on the OTC Bulletin Board under the symbols “CNWHF” and “CHNWF,” respectively. The common stock and warrants of our predecessor, Alyst, were traded on the NYSE Amex until completion of the Business Combination on June 25, 2009.
Our ordinary shares and warrants traded on the NYSE Amex until July 17, 2009, when the trading of such securities was suspended pending our ability to meet the Exchange’s listing requirements following our business combination with China Networks. We were delisted from the NYSE Amex in September 2009 for failure to meet such listing requirements.
The following table provides the high and low closing bid prices for our ordinary shares and warrants and the historical prices for Alyst’s common stock and warrants prior to the Business Combination, for the periods indicated below, as reported by www.quotemedia.com. The over-the-counter market quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not necessarily reflect actual transactions.
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|
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Ordinary Shares/
Common Stock
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|
|
Warrants
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|
|
|
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High
|
|
|
Low
|
|
|
High
|
|
|
Low
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|
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Annual Market Prices
|
|
|
|
|
|
|
|
|
|
|
|
|
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2008
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$
|
7.70
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|
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$
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7.00
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|
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$
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1.07
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|
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$
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0.01
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|
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2009
|
|
|
7.82
|
|
|
|
0.75
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|
|
|
0.25
|
|
|
|
0.01
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|
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2010
|
|
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1.15
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|
|
|
0.12
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|
|
|
0.07
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|
|
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0.00
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|
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2011
|
|
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0.25
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|
|
|
0.01
|
|
|
|
-
|
|
|
|
-
|
|
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2012
|
|
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0.07
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|
|
|
0.02
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|
|
|
-
|
|
|
|
-
|
|
|
2013
|
|
|
0.05
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|
|
|
0.01
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Quarterly Market Prices
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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First Quarter 2011
|
|
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0.24
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|
|
|
0.12
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|
|
|
-
|
|
|
|
-
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|
|
Second Quarter 2011
|
|
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0.19
|
|
|
|
0.02
|
|
|
|
-
|
|
|
|
-
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|
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Third Quarter 2011
|
|
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0.25
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|
|
|
0.015
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|
|
|
-
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|
|
|
-
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Fourth Quarter 2011
|
|
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0.10
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|
|
|
0.01
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|
|
|
-
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|
|
|
-
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First Quarter 2012
|
|
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0.07
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|
|
|
0.02
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|
|
|
-
|
|
|
|
-
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|
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Second Quarter 2012
|
|
|
0.04
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|
|
|
0.02
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|
|
|
-
|
|
|
|
-
|
|
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Third Quarter 2012
|
|
|
0.05
|
|
|
|
0.02
|
|
|
|
-
|
|
|
|
-
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|
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Fourth Quarter 2012
|
|
|
0.05
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|
|
|
0.05
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|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Monthly Market Prices
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|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
-
|
|
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November 2012
|
|
|
0.05
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|
|
|
0.05
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|
|
|
-
|
|
|
|
-
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|
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December 2012
|
|
|
0.05
|
|
|
|
0.01
|
|
|
|
-
|
|
|
|
-
|
|
|
January 2013
|
|
|
0.05
|
|
|
|
0.05
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|
|
|
-
|
|
|
|
-
|
|
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February 2013
|
|
|
0.05
|
|
|
|
0.01
|
|
|
|
-
|
|
|
|
-
|
|
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March 2013
|
|
|
0.02
|
|
|
|
0.01
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|
|
|
-
|
|
|
|
-
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|
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April 2013
|
|
|
0.01
|
|
|
|
0.01
|
|
|
|
-
|
|
|
|
-
|
|
Plan of Distribution
Not applicable.
Markets
See our disclosures above under “Offer and Listing Details.”
Selling Shareholders
Not applicable.
Dilution
Not applicable.
Expenses of the Issue
Not applicable.
ITEM 10. ADDITIONAL INFORMATION
Share Capital
Not applicable.
Memorandum and Articles of Association
The following represents a summary of certain key provisions of the Company’s amended and restated memorandum and articles of association. The summary does not purport to be a summary of all of the provisions of our memorandum and articles of association and of all relevant provisions of BVI law governing the management and regulation of BVI companies.
Register
We were incorporated in the BVI on April 17, 2008 under the BVI Business Companies Act, 2004, or the Act. Our amended and restated memorandum of association authorizes the issuance of a maximum of 500,000,000 shares, of which 74,000,000 are ordinary shares, with $.0001 par value per share, and 1,000,000 are preferred shares of $.0001 par value per share. Our board of directors or shareholders may from time to time by the consent of the majority of our board of directors or the consent of the majority of our shareholders increase the maximum number of shares we are authorized to issue, by amendment to our amended and restated memorandum and articles of association.
Objects and Purposes
Clause 5 of our amended and restated memorandum of association sets forth the objects and powers of our company. Section 5.1 provides that, subject to certain provisions set forth in our amended and restated memorandum of association, the objects for which we are established are unrestricted and we shall have the full power and authority to carry out any object not prohibited by the Act or any other law of the British Virgin Islands. Notwithstanding the foregoing, Section 5.2 provides that we have no power to: (i) carry on banking or trust business, unless licensed to do so under the Banks and Trust Companies Act, 1990; (ii) carry on business as an insurance or as a reinsurance company, insurance agent or insurance broker, unless licensed or authorized to do so under the Insurance Act, 1994; (iii) carry on the business of company management unless licensed to do so under the Companies Management Act, 1990; (iv) carry on the business of providing the registered office or the registered agent for companies incorporated in the British Virgin Islands unless licensed to do so under the Banks and Trust Companies Act, 1990; and (v) carry on the business as a mutual fund, mutual fund manager or mutual fund administrator unless licensed to do so under the Mutual Funds Act, 1996.
Directors
BVI law requires that the board of directors of a company consist of one or more members and that the number of directors shall be fixed by the company’s articles of association. Our amended and restated articles of association provide for no maximum number of directors, subject to any subsequent amendment to change the number of directors. The power to determine the number of directors is vested in the board of directors and the shareholders. The power to fill vacancies, whether occurring by reason of an increase in the number of directors or by resignation, is vested in the board of directors in the interim period between annual or special meetings of members called for the election of directors and/or the removal of one or more directors and the filling of any vacancy in that connection. Directors may be removed by the members for cause or without cause on a vote of a majority of the shareholders passed at a meeting called for the purpose of removing the director or by written resolution or with cause by a resolution of directors passed at a meeting or by written resolution.
Under BVI law, there is no cumulative voting by shareholders for the election of the directors. The absence of cumulative voting rights effectively means that the holders of a majority of the shares voted at a shareholders meeting may, if they so choose, elect all of our directors, thus precluding a small group of shareholders from controlling the election of one or more representatives to the board of directors.
Our amended and restated articles of association provide that a director who is interested in a transaction entered into or to be entered into by us may: (i) vote on a matter relating to the transaction; attend a meeting of directors at which a matter relating to the transaction arises and be included among the directors present at the meeting for the purposes of a quorum; and (iii) sign a document on our behalf, or do any other thing in his capacity as a director, that relates to the transaction. Additionally, our amended and restated articles of association provide that no director shall be disqualified by his office from contracting with us either as a buyer, seller or otherwise, nor shall any such contract or arrangement entered into by or on our behalf in which any director shall be in any way interested be voided, nor shall any director so contracting or being so interested be liable to account to us for any profit realized by any such contract or arrangement, by reason of such director holding that office or by reason of the fiduciary relationship thereby established, provided such director shall, immediately after becoming aware of the fact that he is interested in a transaction entered into or to be entered into by us, disclose such interest to our board of directors. For the purposes of the articles of association:
(a) A director is not required to make such a disclosure if: (i) the transaction or proposed transaction is between us and the director, and (ii) the transaction or proposed transaction is or is to be entered into in the ordinary course of our business and on usual terms and conditions.
(b) A disclosure to our board of directors to the effect that a director is a member, director, officer or trustee of another named company or other person and is to be regarded as interested in any transaction which may, after the date of the entry or disclosure, be entered into with that company or person, is a sufficient disclosure of interest in relation to that transaction. Such a disclosure is not made to our board of directors unless it is made or brought to the attention of every director on the board.
(c) Subject to Section 125(1) of the Act, the failure by a director to comply with this provision does not affect the validity of a transaction entered into by the director or the Company.
Pursuant to our amended and restated articles of association, a director shall not require a share qualification, but nevertheless shall be entitled to attend and speak at any meeting of the directors and meeting of the members and at any separate meeting of the holders of any class of our shares. In addition, the remuneration of directors (whether by way of salary, commission, participation in profits or otherwise) in respect of services rendered or to be rendered in any capacity to us (including to any company in which we may be interested) shall be fixed by Resolution of Directors or Resolution of Members. The directors may also be paid such travelling, hotel and other expenses properly incurred by them in attending and returning from meetings of the directors, or any committee of the directors or meetings of the members, or in connection with our business as shall be approved by Resolution of Directors or Resolution of Members.
Rights and Obligations of Shareholders
Dividends
Subject to the Act, the directors may, by resolution of directors, authorize a distribution (including a dividend) by us to members (
i.e.
, shareholders) at such time and of such an amount as they think fit if they are satisfied, on reasonable grounds, that immediately after the distribution, the value of our assets exceeds our liabilities and we are able to pay our debts as they fall due. Any distribution payable in respect of a share which has remained unclaimed for three years from the date when it became due for payment shall, if the board of the directors so resolves, be forfeited and cease to remain owing by us. The directors may, before authorizing any distribution, set aside out of our profits such sum as they think proper as a reserve fund, and may invest the sum so set apart as a reserve fund upon such securities as they may select.
The holder of each ordinary share has the right to an equal share in any distribution paid by us.
We do not intend to pay any dividends to our shareholders in the foreseeable future.
Voting Rights
Each ordinary share confers on the shareholder the right to one vote at a meeting of the members or on any resolution of members on all matters before our shareholders.
Rights in the event of winding up
The holder of each ordinary share is entitled to an equal share in the distribution of the surplus assets of us on a winding up.
Redemption
We may purchase, redeem or otherwise acquire and hold our own shares with the consent of members whose shares are to be purchased, redeemed or otherwise acquired unless we are permitted by the Act or any provision of the amended and restated memorandum of association or the amended and restated articles of association to purchase, redeem or otherwise acquire the shares without their consent. We may only offer to acquire shares if at the relevant time the directors determine by resolution of directors that immediately after the acquisition the value of our assets exceeds our liabilities and we are able to pay our debts as they fall due.
The directors may make an offer to purchase, redeem or otherwise acquire shares issued by us if the offer is (i) an offer to all members that would, if accepted, leave the relative voting and distribution rights of the members unaffected and affords each member a reasonable opportunity to accept the offer; or (ii) an offer to one or more members which either (1) all members have consented to in writing or (2) the directors have passed a resolution of directors stating that, in their opinion (a) the purchase, redemption or other acquisition is to the benefit of the remaining members and (b) that the terms of the offer and the consideration offered for the shares are fair and reasonable to us and to the remaining members, and setting out the reasons for their opinion.
We may purchase, redeem or otherwise acquire our shares at a price lower than the fair value if permitted by, and then only in accordance with, the terms of the amended and restated memorandum and articles of association or a written agreement for the subscription for the shares to be purchased, redeemed or otherwise acquired.
Changes in the rights of shareholders
The rights attached to any class or series of shares (unless otherwise provided by the terms of issue of the shares of that class or series), whether or not we are being wound-up, must be varied with the consent in writing of all the holders of the issued shares of that class or series or with the sanction of a resolution passed by a majority of the votes cast at a separate meeting of the holders of the shares of the class or series.
Meetings
An annual meeting of members must be held each year at such date and time as may be determined by the directors. The directors shall call a meeting of the members if requested in writing to do so by members entitled to exercise at least 30% of the voting rights in respect of the matter for which the meeting is being held. No less than ten days and not more than sixty days notice of meetings are required to be given to members.
A meeting of members is properly constituted if at the commencement of the meeting there are two (2) members present in person or by proxy or (in the case of a member being a corporation) by its duly authorized representative representing not less than one third of the votes of the shares or class or series of shares entitled to vote on resolutions of members to be considered at the meeting.
A member shall be deemed to be present at the meeting if he participates by telephone or other electronic means and all members participating in the meeting are able to hear each other.
An ordinary resolution of members is a resolution approved at a duly constituted meeting of members by the affirmative vote of a simple majority of the votes cast by such members entitled to vote and voting on the resolution. A special resolution of members is a resolution passed by a majority of not less than two-thirds of votes cast by such members as, being entitled so to do, vote in person or, in the case of such members as are corporations, by their respective duly authorized representative or, where proxies are allowed, by proxy at a general meeting of which not less than ten (10) clear days’ notice, specifying the intention to propose the resolution as a special resolution, has been duly given, provided that, except in the case of an annual general meeting, if it is so agreed by a majority in number of the members having the right to attend and vote at any such meeting, being a majority together holding not less than ninety-five (95) per cent in nominal value of the shares giving that right and in the case of an annual general meeting, if it is so agreed by all members entitled to attend and vote thereat, a resolution may be proposed and passed as a special resolution at a meeting of which less than ten (10) clear days’ notice has been given.
The inadvertent failure of the directors to give notice of a meeting to a member, or the fact that a member has not received notice, does not invalidate the meeting.
A member may be represented at a meeting of members by a proxy (who need not be a member) who may speak and vote on behalf of the member. A written instrument giving the proxy such authority must be produced at the place appointed for such purpose not less than 48 hours before the time for holding the meeting.
Limitations on Ownership of Securities
There are no limitations on the right of non-residents or foreign persons to own our securities imposed by BVI law or by our amended and restated memorandum and articles of association.
Change in Control of Company
A special resolution of members is required for us to issue our shares or securities convertible into our shares resulting in our change of control. Additionally, the board of directors is empowered to issue preferred shares with such rights attaching to them as they decide and such power could be used in a manner that would delay, defer or prevent a change of control of our company
Ownership Threshold
There are no provisions governing the ownership threshold above which shareholder ownership must be disclosed imposed by BVI law or by our amended and restated memorandum and articles of association.
Differences in Corporate Law
The companies law of the BVI differs from laws applicable to U.S. 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.
Protection for minority shareholders
Under the laws of most U.S. jurisdictions, majority and controlling shareholders of a company generally have certain “fiduciary” responsibilities to the minority shareholders. Corporate actions taken by majority and controlling shareholders who are unreasonable and materially detrimental to the interests of minority shareholders may be declared null and void. Minority shareholders may have less protection for their rights under BVI law than they would have under U.S. law.
Powers of directors
Unlike most U.S. jurisdictions, the directors of a BVI company, subject in certain cases to court approval but without shareholders’ approval, may implement the sale, transfer, exchange or disposition of any Company asset, property, part of the business, or securities, with the exception that shareholder approval is required for the disposition of over 50% in the value of our total assets.
Conflict of interests
Similar to the laws of most U.S. jurisdictions, when a director becomes aware of the fact that he has an interest in a transaction which we are to enter into, he must disclose it to our board. However, with sufficient disclosure of interest in relation to that transaction, the director who is interested in a transaction entered into or to be entered into by us may (i) vote on a matter relating to the transaction; (ii) attend a meeting of directors at which a matter relating to the transaction arises and be included in the quorum; and (iii) sign a document on behalf of us, or do any other thing in his capacity as a director, that relates to the transaction.
Written consent and cumulative voting
Similar to the laws of most U.S. jurisdictions, under BVI law, shareholders are permitted to approve matters by way of written resolution in place of a formal meeting. BVI law does not make a specific reference to cumulative voting, and our current amended and restated memorandum and articles of association have no provisions authorizing cumulative voting.
Independent directors
There is no requirement for a majority of our directors to be independent as a matter of BVI law.
Redemption
Our ordinary shares are not redeemable at a shareholder’s option. We may redeem our shares only with the consent of the shareholders whose shares are to be redeemed, except that the consent from the shareholders whose shares are being redeemed is not needed when (i) they are subject to compulsory redemption by us following our receipt of a written request by a shareholder or shareholders holding 90% of the votes of the outstanding ordinary shares entitled to vote that such shares be redeemed or (ii) if the directors make an offer to purchase, redeem or otherwise acquire shares that we have issued and such offer is an offer to one or more members which either (1) all members have consented to in writing or (2) the directors have passed a resolution of directors stating that, in their opinion (a) the purchase, redemption or other acquisition is to the benefit of the remaining members and (b) that the terms of the offer and the consideration offered for the shares are fair and reasonable to us and to the remaining members, and setting out the reasons for their opinion.
Takeover provisions
Some provisions of our amended and restated memorandum and articles of association may discourage, delay or prevent a change in control of our company or management that shareholders may consider favorable. For instance, our directors are empowered to amend the relevant provisions of the memorandum of association for the purposes of creating new classes or series of shares and the rights attached thereto and may amend the articles of association to take into account any ancillary changes required, provided that the directors do not, however, have the power to amend the memorandum and articles of Association to (a) restrict the rights or powers of the members to amend the memorandum or articles of association, (b) to change the percentage of members required to pass a resolution to amend the memorandum and articles of association, or (c) in circumstances where the memorandum or articles of association cannot be amended by the members.
Shareholder’s access to corporate records
Pursuant to the Act, a shareholder is entitled, on giving written notice to us, to inspect our (i) memorandum and articles of association; (ii) register of members; (iii) register of directors; and (iv) minutes of meetings and resolutions of members and of those classes of members of which the shareholder is a member.
The directors may, if they are satisfied that it would be contrary to our interests to allow a member to inspect any document listed above (or any part thereof), deny or limit the inspection of the document.
Indemnification
We shall indemnify against all expenses, including legal fees, and against all judgments, fines and amounts paid in settlement and reasonably incurred in connection with legal, administrative or investigative proceedings any person who (i) is or was a party or is threatened to be made a party to any threatened, pending or completed proceedings, whether civil, criminal, administrative or investigative, by reason of the fact that the person is or was a director, an officer or a liquidator of us; or (ii) is or was, at our request, serving as a director, officer or liquidator of, or in any other capacity is or was acting for, another body corporate or a partnership, joint venture, trust or other enterprise. To be entitled to indemnification, these persons must have acted honestly and in good faith and in what they believe to be our best interest, and in the case of criminal proceedings, they must have had no reasonable cause to believe their conduct was unlawful.
Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers or persons controlling us under the foregoing provisions, we have been advised that in the opinion of the SEC, such indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable.
Mergers and similar arrangements
Under the laws of the BVI, two or more companies may merge or consolidate in accordance with Section 170 of the Act. A merger means the merging of two or more constituent companies into one of the constituent companies, and a consolidation means the uniting of two or more constituent companies into a new company. In order to merge or consolidate, the directors of each constituent company must approve a written plan of merger or consolidation which must be authorized by a resolution of shareholders.
While a director may vote on the plan even if he has a financial interest in the plan of merger of consolidation, in order for the resolution to be valid, the interest must have been disclosed to our board forthwith upon him becoming aware of such interest.
Shareholders not otherwise entitled to vote on the merger or consolidation may still acquire the right to vote if the plan of merger or consolidation contains any provision which, if proposed as an amendment to the memorandum or articles of association, would entitle them to vote as a class or series on the proposed amendment. In any event, all shareholders must be given a copy of the plan of merger or consolidation irrespective of whether they are entitled to vote at the meeting or consent to the written resolution to approve the plan of merger or consolidation.
The shareholders of the constituent companies are not required to receive shares of the surviving or consolidated company, but may receive debt obligations or other securities of the surviving or consolidated company, or other assets, or a combination thereof. Furthermore, some or all of the shares of a class or series may be converted into a kind of asset while the other shares of the same class or series may receive a different kind of asset. As such, not all the shares of a class or series must receive the same kind of consideration.
After the plan of merger or consolidation has been approved by the directors and authorized by a resolution of the shareholders, articles of merger or consolidation are executed by each company and filed with the Registrar of Corporate Affairs in the BVI.
Dissenter Rights
A shareholder may dissent from a mandatory redemption of his shares, an arrangement (if permitted by the court), a merger (unless the shareholder was a shareholder of the surviving company prior to the merger and continues to hold the same or similar shares after the merger) and a consolidation. A shareholder properly exercising his dissent rights is entitled to payment of the fair value of their shares.
A shareholder dissenting from a merger or consolidation must object in writing to the merger or consolidation before the vote by the shareholders on the merger or consolidation, unless notice of the meeting was not given to the shareholder. If the merger or consolidation is approved by the shareholders, we must within 20 days give notice of this fact to each shareholder who gave written objection, and to each shareholder who did not receive notice of the meeting. Such shareholders then have 20 days to give us their written election in the form specified by the BVI Business Companies Act to dissent from the merger or consolidation, provided that in the case of a merger, the 20 days starts when the plan of merger is delivered to the shareholder.
Upon giving notice of his election to dissent, a shareholder ceases to have any rights of a shareholder except the right to be paid the fair value of his shares. As such, the merger or consolidation may proceed in the ordinary course notwithstanding the dissent.
Within seven days of the later of the delivery of the notice of election to dissent and the effective date of the merger or consolidation, we must make a written offer to each dissenting shareholder to purchase his shares at a specified price that the company determines to be their fair value. We and the shareholders then have 30 days to agree upon the price. If we and a shareholder fail to agree on the price within the 30 days, then we and the shareholder shall each designate an appraiser and these two appraisers shall designate a third appraiser. These three appraisers shall fix the fair value of the shares as of the close of business on the day before the shareholders approved the transaction without taking into account any change in value as a result of the transaction.
Shareholders’ Suits
Similar to the laws of most U.S. jurisdictions, BVI law permits derivative actions against its directors. However, the circumstances under which such actions may be brought, and the procedures and defenses available may result in the rights of shareholders of a BVI company being more limited than those of shareholders of a company incorporated and/or existing in the United States.
The court of the BVI may, on the application of a shareholder of a company, grant leave to that shareholder to bring proceedings in the name and on behalf of that company, or intervene in proceedings to which the company is a party for the purpose of continuing, defending or discontinuing the proceedings on behalf of the company. In determining whether to grant leave, the High Court of the BVI must take into account (i) whether the shareholder is acting in good faith; (ii) whether the derivative action is in the interests of the company taking account of the views of the company’s directors on commercial matters; (iii) whether the proceedings are likely to succeed; (iv) the costs of the proceedings in relation to the relief likely to be obtained; and (v) whether an alternative remedy to the derivative claim is available.
Leave to bring or intervene in proceedings may be granted only if the High Court of the BVI is satisfied that (i) we do not intend to bring, diligently continue or defend, or discontinue the proceedings, as the case may be; or (ii) it is in our interests that the conduct of the proceedings should not be left to the directors or to the determination of the shareholders as a whole.
Changes in Capital
Subject to the provisions of the amended and restated memorandum and articles of association and the Act, our unissued shares shall be at the disposal of the directors who may, without prejudice to any rights previously conferred on the holders of any existing shares or class or series of shares, offer, allot, grant options over or otherwise dispose of the shares to such persons, at such times and upon such terms and conditions as we may by resolution of directors determine.
Subject to the provisions of the amended and restated memorandum and articles of association relating to changes in the rights of shareholders and the powers of directors in relation to preferred shareholders, we may, by a special resolution of members, amend our amended and restated memorandum and articles of association to increase or decrease the number of ordinary shares authorized to be issued.
Material Contracts
We have not entered into any material contracts other than in the ordinary course of business and other than those described in Item 4, “Information on the Company,” Item 7, “Major Shareholders and Related Party Transactions,” or Item 5, “Operating and Financial Review and Prospects – Contractual Obligations,” or filed (or incorporated by reference) as exhibits to this annual report or otherwise described or referenced in this annual report.
Exchange Controls
BVI Exchange Controls
There are no material exchange controls restrictions on payment of dividends, interest or other payments to the holders of our ordinary or preferred shares or on the conduct of our operations in the BVI, where we were incorporated. There are no material BVI laws that impose any material exchange controls on us or that affect the payment of dividends, interest or other payments to nonresident holders of our ordinary or preferred shares. BVI law and our amended and restated memorandum and articles of association do not impose any material limitations on the right of non-residents or foreign owners to hold or vote our ordinary or preferred shares.
Exchange Controls in China
Under the Foreign Currency Administration Rules promulgated in 1996 and revised in 1997, and various regulations issued by SAFE and other relevant PRC government authorities, RMB is convertible into other currencies without prior approval from SAFE only to the extent of current account items, such as trade related receipts and payments, interest and dividends and after complying with certain procedural requirements. The conversion of RMB into other currencies and remittance of the converted foreign currency outside PRC for the purpose of capital account items, such as direct equity investments, loans and repatriation of investment, requires the prior approval from SAFE or its local office. Payments for transactions that take place within China 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 SAFE or its local office. Unless otherwise approved, domestic enterprises must convert all of their foreign currency proceeds into RMB.
On October 21, 2005, SAFE issued the Notice on Issues Relating to the Administration of Foreign Exchange in Fund-raising and Reverse Investment Activities of Domestic Residents Conducted via Offshore Special Purpose Companies, which became effective as of November 1, 2005. According to the notice, a special purpose company, or SPV, refers to an offshore company established or indirectly controlled by PRC residents for the special purpose of carrying out financing of their assets or equity interest in PRC domestic enterprises. Prior to establishing or assuming control of an SPV, each PRC resident, whether a natural or legal person, must complete the overseas investment foreign exchange registration procedures with the relevant local SAFE branch. The notice applies retroactively. As a result, PRC residents who have established or acquired control of these SPVs that previously made onshore investments in China were required to complete the relevant overseas investment foreign exchange registration procedures by March 31, 2006. These PRC residents must also amend the registration with the relevant SAFE branch in the following circumstances: (i) the PRC residents have completed the injection of equity investment or assets of a domestic company into the SPV; (ii) the overseas funding of the SPV has been completed; (iii) there is a material change in the capital of the SPV. Under the rules, failure to comply with the foreign exchange registration procedures may result in restrictions being imposed on the foreign exchange activities of the violator, including restrictions on the payment of dividends and other distributions to its offshore parent company, and may also subject the violators to penalties under the PRC foreign exchange administration regulations.
Taxation
The following is a general summary of certain material BVI and U.S. federal income tax considerations. The discussion is not intended to be, nor should it be construed as, legal or tax advice to any particular prospective shareholder. The discussion is based on laws and relevant interpretations thereof in effect as of the date hereof, all of which are subject to change or different interpretations, possibly with retroactive effect.
BVI Taxation
The BVI does not impose a withholding tax on dividends paid by us to holders of our ordinary shares, nor does the BVI levy any capital gains or income taxes on us. Further, a holder of our ordinary shares who is not a resident of the BVI is exempt from the BVI income tax on dividends paid with respect to the ordinary shares. Holders of ordinary shares are not subject to the BVI income tax on gains realized on the sale or disposition of the ordinary shares.
Our ordinary shares are not subject to transfer taxes, stamp duties or similar charges in the BVI. However, as a business company, we are required to pay the BVI government an annual license fee based on the number of shares we are authorized to issue.
There is no income tax treaty or convention currently in effect between the United States and the BVI.
Taxation in China
In 2007, the PRC government promulgated the EIT Law and the relevant implementation rules, which became effective on January 1, 2008. Under the EIT Law and its implementation rules, all domestic and foreign investment companies will be subject to a uniform enterprise income tax at the rate of 25% and dividends from PRC subsidiaries to their non-PRC shareholders will be subject to a withholding tax at a rate of 20%, which is further reduced to 10% by the implementation rules, if the non-PRC shareholder is considered to be a non-PRC tax resident enterprise without any establishment or place within China or if the dividends payable has no connection with the non-PRC shareholder’s establishment or place within China, unless any such non-PRC shareholder’s jurisdiction of incorporation has a tax treaty with China that provides for a different withholding arrangement. In addition, pursuant to the EIT Law, enterprises established under the laws of non-PRC jurisdictions, but whose “de facto management body” is located in the PRC, should be treated as resident enterprises for PRC tax purposes. However, it is currently uncertain whether we may be deemed a resident enterprise, or how to interpret whether any income or gain is derived from sources within China. See Item 3, “Key information — Risk Factors — Under the Enterprise Income Tax Law, we may be classified as a ‘resident enterprise’ of China. Such classification will likely result in unfavorable tax consequences to us and our non-PRC shareholders.” If we, as a BVI company with substantially all of our management located in China, were treated as a resident enterprise for PRC tax purposes, we will be subject to PRC tax on our worldwide income at the 25% uniform tax rate, which would have an impact on our effective tax rate.
U.S. Federal Income Taxation
The following is a discussion of the material U.S. federal tax consequences of the ownership of our ordinary shares by U.S. Holders (as described below). It does not purport to be a comprehensive description of all of the tax considerations that may be relevant to a particular person’s situation. The discussion applies to investors in shares that hold the shares as capital assets for U.S. federal income tax purposes and it does not describe all of the tax consequences that may be relevant to holders subject to special rules, such as:
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certain financial institutions;
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insurance companies;
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dealers and traders in securities or foreign currencies;
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persons holding shares as part of a hedge, “straddle,” integrated transaction or similar transaction;
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persons whose functional currency for U.S. federal income tax purposes is not the U.S. dollar;
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partnerships or other entities classified as partnerships for U.S. federal income tax purposes;
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persons liable for the alternative minimum tax;
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tax-exempt organizations;
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persons holding shares that own or are deemed to own 10% or more of our voting stock;
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persons who hold the shares in connection with a trade or business outside the United States; or
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persons who acquired our shares pursuant to the exercise of any employee stock option or otherwise as compensation.
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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, LOCAL AND FOREIGN TAX CONSEQUENCES TO THEM OF THE PURCHASE, OWNERSHIP AND DISPOSITION OF ORDINARY SHARES.
This discussion is based on the U.S. Internal Revenue Code of 1986, as amended, or the Code, administrative pronouncements, judicial decisions and final, temporary and proposed Treasury regulations, all as of the date hereof. These laws are subject to change, and can change on a retroactive basis. “U.S. Holder” means a beneficial owner of shares that, for U.S. federal income tax purposes, is: a citizen or resident of the United States; a corporation, or other entity taxable as a corporation, created or organized in or under the laws of the United States or any political subdivision thereof; or an estate or trust the income of which is subject to U.S. federal income taxation, regardless of its source. This discussion assumes that we are not, and will not become, a passive foreign investment company, or a PFIC, for U.S. federal income tax purposes, as described below.
Taxation of Dividends
The gross amount of any distributions paid with respect to shares, other than certain pro rata distributions of shares, generally will be treated as foreign source dividend income for U.S. federal income tax purposes. U.S. Holders will not be entitled to claim a dividends-received deduction with respect to distributions paid by us. Dividends will be included in a U.S. Holder’s income on the date of such U.S. Holder’s receipt of the dividend.
If you are a non-corporate U.S. Holder, subject to applicable limitations, you may be eligible to be taxed at a maximum rate of 15% in respect of dividends received in taxable years beginning before January 1, 2011. Please consult your tax advisors to determine whether you are subject to any special rules that limit your ability to be taxed at this favorable rate.
In the event that we are deemed to be a Chinese “resident enterprise” under PRC tax law, you may be subject to PRC withholding taxes on dividends paid to you with respect to the ordinary shares. In addition, subject to certain conditions and limitations, PRC withholding taxes on dividends not in excess of the rate allowed under the income tax treaty between the United States and the PRC, or the Treaty, if applicable, may be treated as foreign taxes eligible for credit against your U.S. federal income tax liability. The rules governing the foreign tax credit are complex. You are urged to consult your tax advisors regarding the availability of the foreign tax credit in light of your particular circumstances.
Taxation of Capital Gains
Upon sale or other disposition of the ordinary shares, a U.S. Holder will generally recognize capital gain or loss for U.S. federal income tax purposes in an amount equal to the difference between such holder’s tax basis in the shares sold or disposed of and the amount realized on the sale or other disposition. Such gain or loss will be long-term capital gain or loss if the U.S. Holder has held the shares for more than one year and will generally be U.S. source gain or loss for foreign tax credit purposes. However, if we are deemed to be a Chinese “resident enterprise” under PRC tax law, gains on disposal may be subject to PRC tax. In that event, a U.S. Holder may be eligible for the benefits of the Treaty. Under the Treaty, if any PRC tax were to be imposed on any gain from the disposition of the shares, the gain would be treated as PRC source income. We urge you to consult your tax advisors regarding the tax consequences if a foreign tax is imposed on gain on a disposition of our shares, including the availability of the foreign tax credit in light of your particular circumstances.
Passive Foreign Investment Company Rules (PFIC)
We believe that we were not a PFIC for United States federal income tax purposes for our taxable year ended December 31, 2012. However, since PFIC status depends upon the composition of a company’s income and assets and the market value of its assets (including goodwill) from time to time, there can be no assurance that we will not be a PFIC for any taxable year.
In general, if we were a PFIC for any taxable year during which a U.S. Holder held shares, gain recognized by such U.S. Holder on a sale or other disposition (including certain pledges) of the shares would be allocated ratably over the U.S. Holder’s holding period for the shares. The amounts allocated to the taxable year of the sale or other disposition and to any year before we became a PFIC would be taxed as ordinary income. The amount allocated to each other taxable year would be subject to tax at the highest rate in effect for individuals or corporations, as appropriate, for such taxable year, and an interest charge would be imposed on the amount allocated to such taxable year. Similar rules would apply to any distribution in respect of shares in excess of 125% of the average of the annual distributions on shares received by a U.S. Holder during the preceding three years or such holder’s holding period, whichever is shorter. Certain elections may be available that would result in alternative treatments (such as a mark-to-market treatment) of the shares. U.S. Holders should consult their tax advisers to determine whether such elections are available and, if so, what the consequences of the alternative treatments would be in those holders' particular circumstances.
Information Reporting and Backup Withholding
Payment of dividends and sales proceeds that are made within the United States or through certain U.S.-related financial intermediaries generally are subject to information reporting and to backup withholding unless (i) the U.S. Holder is a corporation or other exempt recipient or (ii) in the case of backup withholding, the U.S. Holder provides a correct taxpayer identification number and certifies that backup withholding does not apply.
The amount of any backup withholding from a payment to a U.S. Holder will be allowed as a credit against the U.S. Holder’s U.S. federal income tax liability and may entitle the U.S. Holder to a refund, provided that the required information is furnished to the Internal Revenue Service.
Dividends and Paying Agents
Not applicable.
Statement by Expert
Not applicable.
Documents on Display
We have filed this Annual Report on Form 20-F with the SEC under the Exchange Act. Statements made in this Annual Report as to the contents of any document referred to are not necessarily complete. With respect to each such document filed as an exhibit to this Annual Report, reference is made to the exhibit for a more complete description of the matter involved, and each such statement shall be deemed qualified in its entirety by such reference.
We are subject to the informational requirements of the Exchange Act as a foreign private issuer and file reports and other information with the SEC. Reports and other information filed by us with the SEC, including this Annual Report on Form 20-F, may be inspected and copied at the public reference room of the SEC at 100 F. Street, N.E., Washington D.C. 20549. You can also obtain copies of this Annual Report on Form 20-F by mail from the Public Reference Section of the SEC, 100 F. Street, N.E., Washington D.C. 20549, at prescribed rates. Additionally, copies of this material may be obtained from the SEC’s Internet site at
http://www.sec.gov
. The SEC’s telephone number is 1-800-SEC-0330.
As a foreign private issuer, we are exempt from the rules under the Exchange Act prescribing the furnishing and content of quarterly reports and proxy statements, and officers, directors and principal shareholders are exempt from the reporting and short-swing profit recovery provisions contained in Section 16 of the Exchange Act.
Subsidiary Information
Not applicable.
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk
We are not exposed to significant interest rate risk as we do not have any significant bank loans which bear interest at a variable prime rate.
Foreign Exchange Risk
While our reporting currency is the U.S. Dollar, substantially all of our consolidated revenues and consolidated costs and expenses are denominated in RMB. All of our assets are denominated in RMB except for cash. As a result, we are exposed to foreign exchange risk as our revenues and results of operations may be affected by fluctuations in the exchange rate between U.S. Dollars and RMB. If the RMB depreciates against the U.S. Dollar, the value of our RMB revenues, earnings and assets as expressed in our U.S. Dollar financial statements will decline. Assets and liabilities are translated at exchange rates at the balance sheet dates and revenue and expenses are translated at the average exchange rates and shareholders’ equity is translated at historical exchange rates. Any resulting translation adjustments are not included in determining net income but are included in determining other comprehensive income, a component of shareholders’ equity. We have not entered into any hedging transactions in an effort to reduce our exposure to foreign exchange risk.
Very limited hedging transactions are available in China to reduce our exposure to exchange rate fluctuations. To date, we have not entered into any hedging transactions in an effort to reduce our exposure to foreign currency exchange risk. While we may enter into hedging transactions in the future, the availability and effectiveness of these transactions may be limited, and we may not be able to successfully hedge our exposure at all. In addition, our foreign currency exchange losses may be magnified by PRC exchange control regulations that restrict our ability to convert RMB into foreign currencies.
Inflation
Inflationary factors such as increases in the cost of our product and overhead costs may adversely affect our operating results. Although we do not believe that inflation has had a material impact on our financial position or results of operations to date, a high rate of inflation in the future may have an adverse effect on our ability to maintain current levels of gross margin and selling, general and administrative expenses as a percentage of net revenues if the selling prices of our products do not increase with these increased costs.
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
Debt Securities
Not applicable.
Warrants and Rights
Not applicable.
Other Securities
Not applicable.
American Depositary Shares
The Company does not have any American Depositary Receipts.
