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EX-10.3 - EXHIBIT 10.3 - V Media Corp | dvmg_8k-ex10x3.htm |
EX-10.4 - EXHIBIT 10.4 - V Media Corp | dvmg_8k-ex10x4.htm |
EX-16.1 - EXHIBIT 16.1 - V Media Corp | dvmg_8k-ex16x1.htm |
EX-10.6 - EXHIBIT 10.6 - V Media Corp | dvmg_8k-ex10x6.htm |
EX-10.5 - EXHIBIT 10.5 - V Media Corp | dvmg_8k-ex10x5.htm |
EX-10.2 - EXHIBIT 10.2 - V Media Corp | dvmg_8k-ex10x2.htm |
EX-10.1 - EXHIBIT 10.1 - V Media Corp | dvmg_8k-ex10x1.htm |
EX-10.7 - EXHIBIT 10.7 - V Media Corp | dvmg_8k-ex10x7.htm |
EX-10.13 - EXHIBIT 10.13 - V Media Corp | dvmg_8k-ex10x13.htm |
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
8-K
CURRENT
REPORT
Pursuant
to Section 13 or 15(d) of the
Securities
Exchange Act of 1934
Date of
Report: December 8, 2009
Golden
Key International, Inc.
(Exact
name of registrant as specified in its charter)
Delaware
|
000-53027
|
33-0944402
|
(State
or Other Jurisdiction
of
Incorporation)
|
(Commission
File Number)
|
(IRS
Employer
Identification
No.)
|
Dalian
Vastitude Media Group
8th
Floor, Golden Name Commercial Tower
68
Renmin Road, Zhongshan District, Dalian, P.R. China
(ADDRESS
OF PRINCIPAL EXECUTIVE OFFICES)
116001
(Zip
Code)
86-0411-82728168
(Registrant's telephone number,
including area code)
N/A
(Former
Name or Former Address if Changed Since Last Report)
Check the
appropriate box below if the Form 8-K filing is intended to simultaneously
satisfy the filing obligation of the registrant under any of the following
provisions (see General Instruction A.2. below):
|
o
|
Written
communications pursuant to Rule 425 under the Securities Act (17 CFR
230.425)
|
|
o
|
Soliciting
material pursuant to Rule 14a-12 under the Exchange Act (17 CFR
240.14a-12)
|
|
o
|
Pre-commencement
communications pursuant to Rule 14d-2(b) under the Exchange Act
(17 CFR 240.14d-2(b))
|
|
o
|
Pre-commencement
communications pursuant to Rule 13e-4(c) under the Exchange Act
(17 CFR 240.13e-4(c))
|
Item
1.01 Entry into a Material Definitive
Agreement
On December 8, 2009, Golden Key
International, Inc. (the “Company”) acquired all of the outstanding capital
stock of Hongkong Fortune-Rich Investment Co., Limited, a Hong Kong
corporation (“Fortune-Rich”), through China New Media Corp., a Delaware
corporation (the “Merger Sub”) wholly owned by the
Company. Fortune-Rich is a holding company whose only asset, held
through a subsidiary, is 100% of the registered capital of Dalian Guo-Heng
Management and Consultation Co., Ltd. (“Dalian Guo-Heng”), a limited liability
company organized under the laws of the People’s Republic of China.
Substantially all of Fortune-Rich's operations are conducted in China through
Dalian Guo-Heng, and through contractual arrangements with several of Dalian
Guo-Heng’s consolidated affiliated entities in China, including Dalian Vastitude
Media Group Co., Ltd. (“V-Media”) and its subsidiaries. V-Media is a
fast-growing outdoor advertising company with dominant operation in Dalian, the
commercial center of Northeastern China.
In connection with the acquisition, the
following transactions took place:
§
|
The
Merger Sub issued 10 shares of the common stock of the Merger Sub which
constituted no more than 10% ownership interest in the Merger Sub and
1,000,000 shares of Series A Preferred Stock of the Company to the
shareholders of Fortune-Rich, in exchange for all the shares of the
capital stock of Fortune-Rich (the “Share Exchange” or “Merger”). The 10
shares of the common stock of the Merger Sub were converted into
approximately 26,397,933 shares of the common stock of the Company so that
upon completion of the Merger, the shareholders of Fortune-Rich own
approximately 96% of the common stock of the
Company.
|
§
|
Robert
Blair resigned as the Company’s Chief Executive Officer, Secretary and
Treasurer on December 8, 2009.
|
§
|
Guojun
Wang, Chairman of V-Media, was elected to serve on our Board of Directors
as Chairman and as Chief Executive Officer of the
Company.
|
§
|
Ming
Ma, President of V-Media, was appointed as President of the
Company.
|
§
|
Hongwen
Liu, Chief Financial Officer of V-Media, was appointed as Chief Financial
Officer of the Company.
|
§
|
As
part of the Merger, pursuant to a stock purchase agreement (the “Stock
Purchase Agreement”), the Company transferred all of the outstanding
capital of its subsidiary, Deep Rooted, Inc. (“Deep Rooted”) to certain of
its shareholders in exchange for the cancellation of 9,760,000 shares of
the Company’s common stock (the “Split Off Transaction”). Deep
Rooted was engaged in the business of internet travel
planning. To date, Deep Rooted’s activities were limited to
capital formation, organization, set-up of a website and development of
its business plan and target customer market. Following the
Merger and the Split-Off Transaction, the Company discontinued its former
business and is now engaged in the outdoor advertising
business.
|
§
|
As
part of the Merger, the Company’s name was changed from “Golden Key
International, Inc.” to the Merger Sub’s name “China New Media Corp..” The
Company is communicating with FINRA for the name change and trading symbol
change on the OTC Bulletin Board.
|
As a
result of these transactions, persons affiliated with V-Media now own securities
that in the aggregate represent approximately 96% of the equity in the
Company.
1
New
Management
Upon the
completion of the Merger, the new executive officers and directors of the
Company will be:
Name
|
Age
|
Positions with the
Company
|
Guojun
Wang
|
45
|
Chairman
& CEO
|
Ming
Ma
|
43
|
President
|
Hongwen
Liu
|
42
|
Chief
Financial Officer
|
Wei
Wang
|
40
|
Chief
Operation Officer
|
Feng
Wan
|
32
|
Chief
Technology Officer
|
All directors hold office until the
next annual meeting of our shareholders and until their successors have been
elected and qualify. Officers serve at the pleasure of the Board of
Directors.
Guojun Wang, 45, Founder and
Chairman of V-Media, Director and General Manager of Dalian V-Media Engineering
& Design Co. Ltd. Before Mr. Wang founded V-Media in September 2000, he had
served as President of Dalian Pacific Advertisement Co., Ltd. for 11 years. With
his 20 years of experience in China media and advertising industry and his
success in building and managing one of the largest regional outdoor media
companies in China, Mr. Wang was elected Vice Chairman of China Advertising
Association of Commerce in 2007. He graduated from Dalian University
of Technology in 1986.
Ming Ma, 43, President and
Board of Director of V-Media, Mr. Wang’s wife. She has been in charge of
V-Media’s daily operation since its inception in September 2000. Prior to that,
she had served as Sales Manager in Dalian Pacific Advertisement Co. Ltd. Ms. Ma
graduated from Dalian Institute of Finance trade union in 1991.
Hongwen Liu, 42, Chief
Financial Officer of V-Media. He joined the Company as Chief Financial Officer
in December 2003. Prior to that, he served as Deputy Director of
Dalian Da-xin Accounting Firm for nine years. Mr. Liu graduated from the
Computer-Based Accounting Department of Dalian Radio and Television University
in July 1991.
Wei Wang, 40, Chief Operation
Officer of V-Media. He joined the Company as Chief Operation Officer in
September 2009. Prior to that, he had served as Assistant President of Sinorail
Bohai Train Ferry Logistics Co., Ltd. for 3 years. Prior to that, he served as
CEO of China International Shipping Network Corp for 2 years. Mr.Wang graduated
from Liaoning University in 1991.
Feng Wan, 32 , Chief
Technology Officer of V-Media. He joined the Company in 2001. Mr. Wan also
serves as General Manager of Dalian Vastitude Network Technology Co., Ltd. He
graduated from the Central Party School majored in Law in 2000.
2
Form
10 Disclosure
Prior to
closing of the Share Exchange, the Company was a “shell company” as such term is
defined in Rule 12b-2 under the Securities Exchange Act of 1934, as amended
(the “Exchange Act”). Accordingly, as required by SEC rules, set forth below is
the information that would be required if the Company were filing a general form
for registration of securities on Form 10 under the Exchange
Act.
Please
note that the information provided below relates to the combined Company after
the Share Exchange, unless otherwise specifically indicated.
Security Ownership of
Certain Beneficial Owners and Management
Upon
completion of the Merger, there were 27,500,000 shares of the Company’s common
stock issued and outstanding. In addition, there were 1,000,000
shares of Series A Preferred Stock issued and outstanding. The
holders of the Series A Preferred Stock have an aggregate voting power of 40% of
the combined voting power of all of the Company’s shares of Common Stock and
Preferred Stock as long as the Company is in existence .
The
following table sets forth information known to us with respect to the
beneficial ownership of our common stock as of December 8, 2009 by the
following:
·
|
each
shareholder who beneficially owns more than 5% of our
common;
|
·
|
each
of our named executive officers;
|
·
|
Each
of our directors; and
|
·
|
Executive
officers and directors as a group.
|
Beneficial ownership is determined in
accordance with the rules of the SEC, which deem a person to beneficially own
any shares the person has or shares voting or dispositive power over and any
additional shares obtainable within 60 days through the exercise of options,
warrants or other purchase rights. Shares of our common stock subject to
options, warrants or other rights to purchase that are currently exercisable or
are exercisable within 60 days of December 8, 2009 (including shares subject to
restrictions that lapse within 60 days of December 8, 2009) are deemed
outstanding for purposes of computing the percentage ownership of the person
holding such shares, options, warrants or other rights, but are not deemed
outstanding for purposes of computing the percentage ownership of any other
person. Unless otherwise indicated, each person possesses sole voting and
investment power with respect to the shares identified as beneficially
owned.
Name and
Address of Beneficial Owner(1)
|
Amount
and Nature
of
Beneficial
Ownership
|
Percentage
of Class
|
||||||
Guojun
Wang
|
6,850,000 | (5) | 24.91 | % | ||||
Ming
Ma
|
2,757,600 | (5) | 10.03 | % | ||||
Robert
Blair(2)
|
0 |
--
|
||||||
Hongwen
Liu
|
0 |
--
|
||||||
Wei
Wang
|
30,000 |
Less
than one percent
|
||||||
Feng
Wan
|
10,000 |
Less
than one percent
|
||||||
All such directors
and executive officers as a group (6
persons)
|
9,647,600 | (3) | 35.08 | % | ||||
Five
Percent Shareholders (other than directors and named executive
officers)
|
||||||||
Chuk Chung Fuk (3)
|
7,150,000 | (5) | 26 | % | ||||
China Reinv Partners, L.P. (4)
|
5,497,933 | 19.99 | % |
(1) All
shares are owned of record and beneficially. Except as otherwise noted, each
shareholder’s address is c/o Dalian Vastitude Media Group, 8th
Floor, Golden Name Commercial Tower, 68 Renmin Road, Zhongshan District, Dalian,
P.R. China.
(2) The
address of this stockholder is c/o Golden Key International, Inc. 119 11th
Street, Fort Macleod, Alberta, Canada T0L 0Z0.
(3) The address of this stockholder is
Room 1105, 11/F., Tower 1, Lippo Center, No. 89 Queensway, Admiralty,
Hong Kong.
(4) The
address of this stockholder is c/o Oded Har-Even, Zysman Aharoni Gayer
& Co./Sullivan & Worcester LLP, 1290 Avenue of the Americas,
29th Floor, New York, NY 10023
U.S.A.
(5)
Mr. Guojin Wang, Ms. Ming Ma and Mr. Chuk Chung
Fuk have entered into an agreement dated November 26, 2009 pursuant to which Mr.
Wang and Ms. Ma may purchase shares of the common stock of the merged company
from Mr. Chuk for a nominal price if V-Media achieves certain revenue
thresholds.
3
INFORMATION
REGARDING THE ACQUIRED COMPANIES
Dalian Guo-Heng Management
and Consultation Co., Ltd.
Dalian Guo-Heng was incorporated as a limited liability
company on November 6, 2009 under PRC law. It is currently 100% owned by
Fortune-Rich. Due to certain restrictions and qualification
requirements under PRC law that apply to foreign investment in China’s
advertising industry, our advertising business is currently conducted through
contractual arrangements among us, our subsidiary and our consolidated
affiliated entities in China, principally V-Media and its subsidiaries. V-Media
and several of its subsidiaries hold the requisite licenses to provide
advertising services in China. These contractual arrangements enable us
to:
§
|
exercise
effective control over V-Media and its
subsidiaries;
|
§
|
receive
a substantial portion of the economic benefits from V-Media and its
subsidiaries; and
|
§
|
have
an exclusive option to purchase all or part of the equity interests in
V-Media and all or part of the equity interests in V-Media’s subsidiaries
that are owned by V-Media or its nominee holders, as well as all or part
of the assets of V-Media, in each case when and to the extent permitted by
PRC law.
|
Dalian Vastitude Media Group
Co., Ltd.
We are a
fast-growing advertising provider in China. Through Nine years of development,
we have become one of the largest outdoor advertising companies in China with
dominant position in Dalian, the commercial center of Northeastern China. We own
and operate an outdoor advertising network which consists of over 600 bus
shelters furnished with billboards and displays, including 130
taxi shelters with displays and 13 large-size billboards, including 3
large-size LED displays at the major traffic conjunctions. We also furnished
more than 400 buses with advertising posters and 28 metro trains throughout
Dalian Metro Lines. We provide comprehensive adverting service from art design
to advertising publishing, from daily maintenance to technical
upgrading.
As of
June 30, 2009, more than 200 advertisers purchased advertising on our network.
We have a stable and expanding advertising client base, which includes major
banks, utility companies and consumer product companies. Some of our largest
advertising clients in terms of revenue include leading international brand name
advertisers such as Coca-Cola, Pepsi, UPS, HSBC, Sony, Canon, HP and
leading domestic brand name advertisers such as China Mobile, Pin-an Insurance,
China Unicom, CITIC Bank, and China Merchant Bank, which together accounted for
approximately one third of our revenue in the fiscal year 2009. In addition, we
believe that low installation and maintenance costs for operating our network
allow us to grow our business rapidly and efficiently.
Since we
commenced our current business operations in September 2000, we have experienced
significant growth in our network and in our financial results. In
the fiscal year ended June 30, 2009, we have generated RMB 57.5 million (USD 8.4
million) in revenue and RMB 19.3 million (USD 2.8 million) of net profit
attributable to the Company, which represent over 58% and 272% increase over the
fiscal year 2008 results, respectively.
4
Our
Industry
The
advertising market in China is one of the largest and fastest growing in the
world. According to the research of Outdoor Advertising Association of America
(“OAAA”), China has become the second largest outdoor advertising market in the
world. China’s overall advertising spending has kept double digit annual growth
in the last decade; from USD 6.5 billion (RMB 53.8 billion) in 1998 to USD 20.32
billion (RMB 138.79 billion) in 2008, according to Zenith Optimedia. We believe
the growth of China’s advertising industry is being driven by a number of
factors, including high and sustained levels of economic growth, a growing
consumer class, as well as relatively low levels of advertising spending per
capita and as a percentage of gross domestic product. Our sector of the
advertising industry in China, which is referred to as outdoor advertising, is
characterized by its newness, ability to target desirable and segmented consumer
audiences and its high recall rates.
Our
Strategies, Risks and Uncertainties
In order
to enhance our position as one of the largest outdoor advertising networks in
China, we intend to expand our network, promote our brand name, create
increasingly segmented network channels and explore new digital media
opportunities. Our ability to realize our business objectives and execute our
strategies is subject to risks and uncertainties, including the
following:
§
|
our
limited operating history for our current operations and the short history
of outdoor advertising sector that make it difficult for you to evaluate
the viability and prospects of our
business;
|
§
|
competition
from present and future competitors in China’s growing advertising market;
and
|
§
|
the possibility that the PRC
government could determine that the agreements that establish our
operating structure do not comply with PRC government restrictions on
foreign investment in the advertising industry, which could potentially
subject us to severe
penalties.
|
These
risks and uncertainties, along with others, are also described in the Risk
Factors section of this Current Report on Form 8-K.
5
MANAGEMENT’S DISCUSSION AND
ANALYSIS
OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
You
should read the following discussion and analysis of our financial condition and
results of operations in conjunction with our consolidated financial statements
and the related notes included elsewhere in this document. The following
discussion contains forward-looking statements. Dalian Vastitude Media Group
Co., Ltd. is referred to herein as “we”, “us”, “our”, or the “Company.” The
words or phrases “would be,” “will allow,” “expect to”, “intends to,” “will
likely result,” “are expected to,” “will continue,” “is anticipated,”
“estimate,” or similar expressions are intended to identify forward-looking
statements. Such statements include, among others, those statements concerning
our expected financial performance, our corporate strategy and operational
plans. Actual results could differ materially from those projected in the
forward-looking statements as a result of a number of risks and uncertainties,
including, among others: (a) those risks and uncertainties related to general
economic conditions in China, including regulatory factors that may affect such
economic conditions; (b) whether we are able to manage our planned growth
efficiently and operate profitable operations, including whether our management
will be able to identify, hire, train, retain, motivate and manage required
personnel or that management will be able to successfully manage and exploit
existing and potential market opportunities; (c) whether we are able to generate
sufficient revenues or obtain financing to sustain and grow our operations; and
(d) whether we are able to successfully fulfill our primary requirements for
cash which are explained below under “Liquidity and Capital Resources”. Unless
otherwise required by applicable law, we do not undertake, and we specifically
disclaim any obligation, to update any forward-looking statements to reflect
occurrences, developments, unanticipated events or any other circumstances after
the date of such statement unless required by law. For additional information
regarding these risks and uncertainties, see “Risk Factors”. Our consolidated
financial statements have been prepared in accordance with U.S. GAAP. In
addition, our consolidated financial statements and the financial data included
in this document reflect the Merger and have been prepared as if our current
corporate structure had been in place throughout the relevant
periods.
Overview
We are a fast-growing outdoor media
company in China, and we operate one of the largest outdoor advertising networks
in northeast China with strong market presence in Dalian and Shenyang, the two
most popular commercial cities in Northeast China. We provide clients with
advertising opportunities through our diverse media platform which includes
three major proprietary channels, (1) Street Fixture and Display Network, which
includes bus and taxi shelters; (2) Mobile advertisement displayed on mass city
transit systems, which includes displays on city buses and metro-trains; (3)
Billboard displays along the city’s streets and highways.
We have experienced sustainable
business growth in the recent years. The size of our network has grown
significantly over the years since the commercial launch of our advertising
network. The number of bus and taxi shelters on which we operate and
carry our advertisements increased from 509 as of June 30, 2007 to 604 as
of June 30, 2009. For the same period, the number of buses that carry
our mobile advertisements increased from 330 to 337; the number of mobile
displays through Dalian metro-trains increased from 16 to 28. We also added 3
mega-screen (100 M2 to 500 M2,) (approximately 1,076.4 square feet to
5,382 square feet) LED billboards in downtown business districts, which
tripled our advertising space and time slots in our outdoor billboard network.
The number of our clients has increased from 562 to 1102 during these two
years.
6
In March 2009, we set up a new joint
venture in which we maintain a controlling equity position, Dalian Vastitude
Network Technology Co., Ltd., which specializes in providing technical support
and development to our multi-media platform and outdoor advertising customers.
In April 2007, we established Shenyang Vastitude Media Co., Ltd. In July 2009,
we launched our innovated “City Navigator” Networks, one of the most
advanced outdoor advertising platforms in China.
During the fiscal year ended June 30,
2009, we generated net revenues of US$ 8.4 million and achieved a net income
attributable to V-Media of US$ 2.83 million, which represents a growth of 57.85%
and 271.87% compared to the previous fiscal year, respectively. This dramatic
increase is attributed to the full usage of existing advertisement channels and
the increase of number and variety of advertising channels. For the three months
ended September 30, 2009, our net revenues increased to US$ 3.17 million from
US$2.10 million for the same three-month period ended September 30, 2008 and our
net income increased to US$ 0.91 million from US$0.82 million for the same
period ended September 30, 2008.
Factors
Affecting Our Results of Operations
The increase in our operating results
in the last two years is attributable to a number of factors, including the
substantial expansion of our outdoor media network in Dalian and Shenyang, the
two largest cities in Northeast China, and our technical innovation and
large-scale media system upgrading. We expect our business to
continue to be driven by the following factors:
Increasing domestic spending in outdoor
advertising
The demand for our advertising time
slots is directly related to the outdoor advertising spending in northeast
China. The increase in advertising spending is largely determined by the
economic conditions in our region. According to the “Statistical Communiqué of
the PRC on 2008 National Economic and Social Development” released by National
Bureau of Statistics of China on Feb. 26, 2009, China’s economy has experienced
rapid growth in the last five years. The annual growth rate has been in the
range of 9% to 13%. The domestic retail sales have been growing even faster than
any other sectors, with an average annual growth rate of 15.5% in the last 5
years. The latest government’s economic stimulus plan is aimed at
building a domestic consumer-driven economy, which, we believe, is going to
generate more demand for outdoor advertising. We expect the outdoor advertising
spending in our regional market will maintain its double-digit growth in the
years to come.
Expansion of Our Market Presence by Launching City Navigator ®
Networks in Other Major Commercial Cities
We believe our proprietary multi-media
advertising system – City Navigator ®
Network is one of the most advanced outdoor advertising platforms available in
China. This system combines the latest LED displaying technology, internet and
WI-FI technology, and has proven to be very effective in our competition to get
access to top tier cities such as Shanghai and Beijing.
7
By using wireless access technology,
our LED displays at bus and taxi shelters are able to display real time programs
at the control of our computer terminal. It consists of a Wi-Fi receiver,
large-screen LED display, and web-based touch-screen kiosk which provide the
public with information on all aspects of the city life, including travel,
traffic, restaurants, shopping, hotels, business, medical and education, all at
the touch of the screen. In addition, every City Navigator is
equipped with Bluetooth, wireless access and printing technology. Users can
either print the information or send the information to their cell phones or
computers. As City Navigator®
Network adopts Wi-Fi technology, users do not need to stand before a City
Navigator to receive its information. They can enjoy its service from any area
covered by its Wi-Fi signals. We intend to aggressively expand our
media platform by launching City Navigator ®
Networks in our target cities, such as, Tianjin, Qingdao and Shanghai, to create
our own cross-region advertising network and enhance our advertising
distribution capacity.
Promotion of Our Brand Name to Attract a Wider Client Base and Increase
Revenues
We plan to promote our brand name,
国域无疆TM,
through both our own media channels and public channels in North China. We
believe that the enhancement of public awareness to our brand name will help to
broaden our client base, especially in the new marketplace such as Shenyang and
Tianjin. As we expand our advertising client base and promote public’s awareness
to our brand, demand for time slots and advertising space on our network will
continue to grow.
Upgrade of Our Outdoor Billboard Network with New Digital Display
Technology
We intend to capitalize recent advances
in digital display technology, especially mega-screen LED displays, to meet
major institutional clients’ needs. Because the LED displays can be linked
through centralized computer systems to instantaneously change static
advertisements, and it is highly visible even during bright daylight, it
improves the advertising effectiveness and efficiency markedly. We
plan to build more mega-screen (100 M2 to
500 M2)
(approximately 1,076.4 square feet to 5,382 square feet) LED displays at premier
locations in our marketplace.
As we continue to expand our network, we expect to face a number of challenges.
We have expanded our network rapidly, and we, as well as our competitors, have
occupied many of the most desirable locations in Dalian. In order to continue
expanding our network in a manner that is attractive to potential advertising
clients, we must continue to identify and occupy desirable locations and to
provide effective channels for advertisers. In addition, we must react to
continuing technological innovations in the use of wireless and broadband
technology in our network, and changes in the regulatory environment, such as
the regulations allowing 100% foreign ownership of PRC advertising companies and
new regulations governing cross-border investment by PRC persons.
We
believe that our business model and success in our regional market give us a
considerable advantage over our competitors. Our future growth will
depend primarily on the following factors:
§
|
Overall
economic growth in China, which we expect to contribute to an increase in
advertising spending in major urban areas in China where consumer spending
is concentrated;
|
§
|
Our
ability to expand our network into new locations and additional
cities;
|
8
§
|
Our
ability to expand our sales force and engage in increased sales and
marketing efforts;
|
§
|
Our
ability to expand our client base through promotion of our
services;
|
§
|
Our
ability to expand our new systems including large-screen LED display
network and City Navigator®
Networks which commenced operation in the third quarter of
2009.
|
Corporate
Structure and Contractual Arrangements
Substantially
all of our operations are conducted in China through Dalian Guo-Heng, our
wholly-owned subsidiary in China, and through our contractual arrangements with
several of our consolidated affiliated entities in China, including V-Media and
its subsidiaries.
PRC
regulations require any foreign entities that invest directly in the advertising
services industry to have at least two years of direct operations in the
advertising industry outside of China. Since December 10, 2005, foreign
investors have been allowed to own directly 100% of PRC companies operating an
advertising business if the foreign entity has at least three years of direct
operations in the advertising business outside of China or less than 100% if the
foreign investor has at least two years of direct operations in the advertising
industry outside of China. We do not currently directly operate an advertising
business outside of China and cannot qualify under PRC regulations any earlier
than two or three years after we commence any such operations outside of China
or until we acquire a company that has directly operated an advertising business
outside of China for the required period of time. Accordingly, since we
have not been involved in the direct operation of an advertising business
outside of China, our domestic PRC subsidiary, Dalian Guo-Heng, which
is considered foreign-invested, is currently ineligible to apply for the
required advertising services licenses in China. Our advertising business is
currently provided through contractual arrangements with our consolidated
affiliated entities in China, including V-Media and its
subsidiaries. V- Media is owned by 9 PRC citizens. V-
Media and several of its subsidiaries hold the requisite licenses to provide
advertising services in China.
V-Media
and its subsidiaries directly operate our advertising network, enter into
display placement agreements and sell advertising time and space to our clients.
We have been and are expected to continue to be dependent on V-Media and its
subsidiaries to operate our advertising business until we qualify for direct
ownership of an advertising business in China under PRC laws and regulations and
acquire V-Media and its subsidiaries as our direct, wholly-owned subsidiaries,
as described below. Dalian Guo-Heng has entered into contractual arrangements
with V-Media and its subsidiaries and shareholders, pursuant to
which:
§
|
we
are able to exert effective control over V-Media and its
subsidiaries;
|
§
|
a
substantial portion of the economic benefits of V-Media and its
subsidiaries will be transferred to us;
and
|
§
|
Dalian
Guo-Heng or its designee has an exclusive option to purchase all or part
of the equity interests in V-Media , all or part of the equity interests
in V-Media ’s subsidiaries that are owned by V-Media or its
nominee holders, or all or part of the assets of V-Media, in each case
when and to the extent permitted by PRC
law.
|
9
In
connection with its entry into the World Trade Organization, China is required
to relax restrictions on foreign investment in the advertising industry in
China. Accordingly, since December 10, 2005, foreign investors have been
allowed to own 100% of PRC companies operating an advertising business if the
foreign entity has at least three years of direct operations in the
advertising business outside of China. We do not currently directly operate an
advertising business outside of China and cannot qualify for 100% ownership of a
PRC advertising company under PRC regulations any earlier than three years after
we commence any such operations or until we acquire a company which has directly
operated an advertising business for the required period of time. We do not
currently know how or when we will be able to qualify under these regulations.
Even if we do qualify in the future, it may be burdensome or not cost effective
for us to meet the required criteria for direct ownership. If and when we
qualify for direct ownership, we intend to explore the commercial feasibility of
changing our current structure, including possibly direct ownership
of V-Media and its subsidiaries, taking into consideration relevant
cost, market, competitive and other factors. In the event we take such steps, we
cannot assure you that we will be able to identity or acquire a qualified
foreign company for a possible future restructuring or that any restructuring we
may undertake to facilitate direct ownership will be successful.
●
|
Agreements
that Transfer Economic Benefits to
Us
|
Pursuant to our contractual
arrangements with V-Media and its subsidiaries, Dalian Guo-Heng provides
management and consulting
services to V- Media and its subsidiaries in exchange for service fees. The service fees shall equal to 100% of the
residual return of V-Media and its subsidiaries which can be waived by Guo-Heng from
time to time in its sole discretion.
●
|
Agreements
that Provide Effective Control over V-Media and Its
Subsidiaries
|
We have
entered into the following agreements with V- Media and its subsidiaries that
provide us with effective control over V- Media and its
subsidiaries:
§
|
an
exclusive service agreement, pursuant to which V-Media and its
Subsidiaries irrevocably entrust to Guo-Heng the right of management and
operation of V-Media and its subsidiaries and the responsibilities and
authorities of their shareholders and directors of Media and its
subsidiaries;
|
§
|
a
voting rights proxy agreement, pursuant to which the shareholder of
V-Media and its subsidiaries have granted the personnel designated by
Dalian Guo-Heng the right to appoint directors and senior management of
V-Media and its subsidiaries and to exercise all of their other voting
rights as shareholders of V-Media and its subsidiaries, as the case may
be, as provided under the articles of association of each such
entity;
|
§
|
a
call option agreement, pursuant to
which:
|
§
|
neither
V- Media nor any of its subsidiaries may enter into any transaction that
could materially affect its assets, liabilities, equity or operations
without the prior written consent of Dalian
Guo-Heng;
|
10
§
|
neither
V- Media nor any of its subsidiaries will distribute any dividends without
the prior written consent of Dalian Guo-Heng
and
|
§
|
Dalian
Guo-Heng or its designee has an exclusive option to purchase all or part
of the equity interests in V-Media, all or part of the equity interests in
V-Media’s subsidiaries owned by V-Media or its nominee holders, or all or
part of the assets of V-Media, in each case when and to the extent
permitted by PRC law. In case of Guo-Heng exercising the call option in
its sole discretion upon the occurrence of the situation in which such
call option exercise become feasible under the relevant laws in PRC, any
additional consideration paid other than the $1.00 which may be
required under the laws of China to effect such purchase to comply with
such legal formalities shall be either cancelled or returned to the
company immediately with no additional compensation to the owners;
and
|
§
|
an
equity pledge agreement pursuant to which each of shareholders of V-Media
has pledged his or its equity interest in V-Media and its subsidiaries, as
the case may be, to Dalian Guo-Heng to secure their obligations under the
relevant contractual control agreements, including but not limited to, the
obligations of V-Media and its subsidiaries under the exclusive services
agreement, the call option agreement, the voting rights proxy agreement
described above, and each of them has agreed not to transfer, sell,
pledge, dispose of or create any encumbrance on their equity interest in
V-Media or its subsidiaries without the prior written consent of Dalian
Guo-Heng.
|
See
“Related Party Transactions” for further information on our contractual
arrangements with these parties.
In the
opinion of Deheng Law Firm, our PRC legal counsel:
§
|
the
ownership structures of Dalian Guo-Heng, V- Media and its subsidiaries,
both currently and after giving effect to this merger, are in compliance
with existing PRC laws and
regulations;
|
§
|
the
contractual arrangements among Dalian Guo-Heng, V- Media and its
subsidiaries governed by PRC law are valid, binding and enforceable, and
will not result in any violation of PRC laws or regulations currently in
effect; and
|
§
|
the
business operations of Dalian Guo-Heng and V- Media and their
respective subsidiaries, as described in this Form 8-K, are in compliance
with existing PRC laws and regulations in all material
respects.
|
However,
in spite of the above, there are substantial uncertainties regarding the
interpretation and application of current and future PRC laws and regulations.
Accordingly, there can be no assurance that the PRC regulatory authorities, in
particular the SAIC which regulates advertising companies, will not in the
future take a view that is contrary to the above opinion of our PRC legal
counsel. If the PRC government finds that the agreements that establish the
structure for operating our PRC advertising business do not comply with PRC
government restrictions on foreign investment in advertising businesses, we
could be subject to severe penalties. See “Risk Factors — If the PRC
government finds that the agreements that establish the structure for operating
our China business do not comply with PRC governmental restrictions on foreign
investment in the advertising industry, we could be subject to severe
penalties”, “— Our business operations may be affected by legislative or
regulatory changes” and “— The PRC legal system embodies uncertainties
which could limit the legal protections available to you and us”.
11
Subsidiaries
of V- Media
The
following table sets forth information concerning V- Media’s
subsidiaries:
VMedia_Group’s
Ownership
Percentage
|
Region
of Operations
|
Primary
Business
|
||||
Shenyang
Vastitude Media Co., Ltd
|
100% |
Shenyang
|
Advertising
company
|
|||
Tianjin
Vastitude AD Media Co., Ltd
|
100% |
Tianjin
|
Advertising
company
|
|||
Dalian
Vastitude Network Technology Co., Ltd
|
60% |
Dalian
|
Computer
exploitation, technical service, domestic advertisement
|
|||
Dalian
Vastitude Engineering&Design Co., Ltd
|
83% |
Dalian
|
Engineering,
design, Construction
|
|||
Dalian
Vastitude &Modern Transit Media Co., Ltd
|
70% |
Dalian
|
Advertising company
|
Intellectual
Property
Mr. Guojun Wang, our CEO and largest
shareholder of V-Media, is the owner of 26 patents in outdoor advertising
display field. His innovations on billboards, bus and taxi shelters, newsstands,
and other street furniture have been vastly used in our outdoor display
networks.
Marketing
We market
our advertising services directly to advertisers and to advertising agencies. As
of June 30, 2009, we had 33 dedicated sales and marketing personnel. As we only
commenced our current business operations in September 2000, many of our sales
and marketing personnel have only worked for us for a short period of time. We
depend on our marketing staff to explain our service offerings to our existing
and potential clients and to cover a large number of clients in a wide variety
of industries. We will need to further increase the size of our sales and
marketing staff if our business continues to grow. We may not be able to hire,
retain, integrate or motivate our current or new marketing personnel which would
cause short-term disruptions of our operations, restrict our sales efforts and
negatively affect our advertising service revenue.
Competition
We compete with some of the largest
advertising companies in China that operate outdoor advertising networks such as
JCDecaux China, Clear Media, CBS Outdoor (China) and TOM OMG. We compete for
advertising clients primarily on the basis of network size and coverage,
location, price, the range of services that we offer and our brand name. We also
compete for overall advertising spending with other alternative advertising
media companies, such as Internet, street furniture, billboard, frame and public
transport advertising companies, and with traditional advertising media, such as
newspapers, television, magazines and radio.
Employees
V-Media
currently has 120 full-time employees as of June 30, 2009, including 21 in
manufacturing, 7 in research and development, 59 in administration and financial
department, and 33 in sales, purchasing and marketing.
Properties
Our principal executive offices are
located at 8th
Floor, Golden Name Commercial Tower, 68 Renmin Road, Zhongshan District,
Dalian, P.R. China, 116001. This office consists of approximately 8,987.94
square inches which we leased from Mr. Guojun Wang and Ms. Ming
Ma for $1 a year. The agreement will be renewed every
year.
12
Results of
Operations
Operation Results for the Three Months
Ended September 30, 2009 and 2008
The
following table sets forth information from our statements of operations for the
three months ended September 30, 2009 and 2008, in dollars and as a percentage
of revenues:
REVENUES
|
3
Months Ended September 30
|
|||||||||||||||
2009
|
2008
|
Difference
|
%
Change
|
|||||||||||||
Dalian
District
|
||||||||||||||||
Street Fixture and Display network
|
$ | 1,165,232 | $ | 1,265,543 | $ | (100,311 | ) | -7.93 | % | |||||||
City Transit system Display network
|
693,826 | 406,510 | 287,316 | 70.68 | % | |||||||||||
Outdoor
Billboards
|
792,789 | 157,147 | 635,642 | 404.49 | % | |||||||||||
City
Navigator
|
109,746 | - | 109,746 | 100.00 | % | |||||||||||
Other service income (a)
|
347,744 | 251,798 | 95,946 | 38.10 | % | |||||||||||
Subtotal
for Dalian District
|
$ | 3,109,337 | $ | 2,080,998 | $ | 1,028,339 | 49.42 | % | ||||||||
Shenyang
Distict
|
||||||||||||||||
Street Fixture and Display network
|
$ | 48,236 | $ | 19,122 | $ | 29,114 | 152.25 | % | ||||||||
Outdoor
Billboards
|
9,761 | 4,468 | 5,293 | 118.46 | % | |||||||||||
Subtotal
for Shenyang District
|
$ | 57,997 | $ | 23,590 | $ | 34,407 | 145.85 | % | ||||||||
Total
Revenues
|
$ | 3,167,334 | $ | 2,104,588 | $ | 1,062,746 | 50.50 | % |
(a) Other service income generated by
Construction & Design service provided by V-Media Engineering & Design
Company and technique service provided by V-Media Network Technology Company to
outside customers.
Revenues
During
the three months ended September 30, 2009 we had revenues of $ 3,167,334 as
compared to revenues of $2,104,588 during the three months ended September 30,
2008, an increase of $1,062,746, or 50.5%. The increase was a result of our
increased and expanded sale to the existing and new customers in 2009.. We
expand the scope of the advertising network rapidly. We have landed
some more desirable locations in Dalian, created new advertising media platforms
and continued our efforts to expand our client base.
13
COST
OF REVENUE
|
3
Months Ended September 30
|
|||||||||||||||
2009
|
2008
|
Difference
|
%
Change
|
|||||||||||||
Dalian
District
|
||||||||||||||||
Street Fixture and Display network
|
$ | 417,300 | $ | 498,426 | $ | (81,126 | ) | -16.28 | % | |||||||
City Transit system Display network
|
274,621 | 181,513 | 93,108 | 51.30 | % | |||||||||||
Outdoor Billboards
|
317,007 | 67,395 | 249,612 | 370.37 | % | |||||||||||
City Navigator
|
52,013 | - | 52,013 | 100.00 | % | |||||||||||
Other service cost (b)
|
105,661 | 107,987 | (2,326 | ) | -2.15 | % | ||||||||||
Subtotal for Dalian District
|
$ | 1,166,602 | $ | 855,321 | $ | 311,281 | 36.39 | % | ||||||||
Shenyang
District
|
||||||||||||||||
Street Fixture and Display network
|
$ | 21,928 | $ | 6,649 | $ | 15,279 | 229.79 | % | ||||||||
Outdoor Billboards
|
4,437 | 1,554 | 2,883 | 185.52 | % | |||||||||||
Subtotal for Shenyang District
|
$ | 26,365 | $ | 8,203 | $ | 18,162 | 221.41 | % | ||||||||
Total Cost of Revenue
|
$ | 1,192,967 | $ | 863,524 | $ | 329,443 | 38.15 | % |
(b) Other service cost attribute to
V-Media Engineering & Design Company and by V-Media Network Technology
Company when they provide Construction & Design service and technique
service to outside customers, respectively.
Cost
of Revenue
During
the 3 months ended September 30, 2009, our cost of revenue was $1,192,967, as
compared to cost of revenue of $863,524 during the 3 months ended September 30,
2008, an increase of $329,443, or 38.15%. The percentage of our increase in cost
of revenue was slightly less than that of the increase in revenue. As we become
more experienced in our operation, we have been able to cut more costs and
remain competitive. In addition, since the launch of our City Navigator and
large-screen LED, we are able to generate higher profit margin on these new
products due to lower maintenance costs.
Selling,
General and Administrative Expenses
Selling,
general and administrative expenses, totaled $581,270 during the three months
ended September 30, 2009 as compared to $340,991 for the three months ended
September 30, 2008. The increase in selling, general and administrative expense
was mainly attribute to increase in our payroll, depreciation expenses,
administrative costs and various fees associated with our efforts to go public
in the U.S. capital market
Interest
expense
Interest
expense increased from $65,236 during the three months ended September 30, 2008
to $69,359 for the three month ended September 30, 2009. The increased interest
expense resulted from the sizable increase in our loans during third quarter
2009.
Net
Income attributable to the Company
As a
result of the factors described above, we had net income attributable to the
Company in
the amount of $907,565 for the three months ended September 30, 2009, as
compared with $818,408during the three months ended September 30, 2008. The
increase in net income was mainly attributed to our increase in revenue and our
efforts to control the costs
Comprehensive
Income
Our
business operates primarily in Chinese Renminbi (“RMB”), but we report our
results in U.S. Dollars. The conversion of our accounts from RMB to U.S. Dollars
results in translation adjustments. As a result of a currency translation
adjustment gain, our comprehensive income was $820,560 during
the three months ended September 30, 2008, as compared with $910,912 during the
three months ended September 30, 2009. The increase is due to significant
currency exchange fluctuation of Chinese RMB to US Dollar for the
periods.
14
Liquidity
and Capital Resources
Presently,
our principal sources of liquidity were generated from our operations and
through bank loans. As of September 30, 2009, although we had a
negative working capital of $4,641,618, as compared to a negative working
capital of $3,974,320 as of June 30, 2009, we were still able to generate
$907,565 of net income attributable to the Company and our operating have
produced a positive cash flow of $1,282,307 for the three months ended September
30, 2009, as compared to a negative cash flow of 708,820 for the same period
ended September 30, 2008. Based on our current operating plan, we
believe that our existing resources, including cash generated from operations as
well as the bank loans, will be sufficient to meet our working capital
requirement for our current operations. In order to fully implement our business
plan and continue our growth, however, we will require additional capital either
from our shareholders or from outside sources.
Operating
Activities
Cash
provided by operating activities totaled $1,282,307 for the three months ended
September 30, 2009 as compared to $708,820 used inoperating activities for the
three months ended September 30, 2008. Increase in our cash provided by
operations is due to decrease in our advance to suppliers, increase in accounts
payable and advance from customers.
Investing
Activities
Cash used
in investing activities was $ 1,851,921 for the three months ended September 30,
2009 as compared to $340,883 used for the three months ended September 30, 2008.
Increase of cash used in investing activities is mainly because we have invested
heavily in our infrastructure related to our newly launched City
Navigator,
Financing
Activities
Cash
provided by financing activities totaled $557,136 for the three months ended
September 30, 2009 as compared to $1,076,520 provided for the three months ended
September 30, 2008. Decrease in cash provided by financing activities is because
we did not receive any new capital contributions from our shareholders for this
period.
15
Operation
Results of the Fiscal Year Ended June 30, 2008 and 2009
Revenues
We
generate revenues from the sale of outdoor advertising on our advertising
network. The following table sets the revenues generated from each of our
advertising categories for the periods indicated.
REVENUES
|
For
the year ended June 30
|
|||||||||||||||
2009
|
2008
|
Difference
|
%
Change
|
|||||||||||||
Dalian
District
|
||||||||||||||||
Street Fixture and Display network
|
$ | 4,353,014 | $ | 2,478,201 | $ | 1,874,813 | 75.65 | % | ||||||||
City Transit system Display network
|
1,836,678 | 1,418,440 | 418,238 | 29.49 | % | |||||||||||
Outdoor Billboards
|
1,564,299 | 568,722 | 995,577 | 175.06 | % | |||||||||||
Other service income (a)
|
472,619 | 867,660 | (395,041 | ) | -45.53 | % | ||||||||||
Subtotal for Dalian District
|
$ | 8,226,610 | $ | 5,333,023 | $ | 2,893,587 | 54.26 | % | ||||||||
Shenyang
District
|
||||||||||||||||
Street Fixture and Display network
|
$ | 159,471 | $ | - | $ | 159,471 | 100.00 | % | ||||||||
Outdoor Billboards
|
32,270 | - | 32,270 | 100.00 | % | |||||||||||
Subtotal for Shenyang District
|
$ | 191,741 | $ | - | $ | 191,741 | 100.00 | % | ||||||||
Total
Revenues
|
$ | 8,418,351 | $ | 5,333,023 | $ | 3,085,328 | 57.85 | % |
(a)
Other service income generated by Construction & Design service provided by
V-Media Engineering & Design Company and technique service provided by
V-Media Network Technology Company to outside customers.
During
the year ended June 30, 2009, we had revenues of $8,418,351, as compared
with $5,333,023 during the year ended June 30, 2008, an increase of
approximately $3,085,328, or 57.85% due to our increased and expanded sale to
the existing and new customers in 2009. Our advertising network has been
expanded quickly. We obtained more desirable locations in Dalian for
advertisements, created new media platforms and continued our efforts to expand
our client base.
16
Cost
of Revenue
COST
OF REVENUE
|
For
the year ended June 30
|
|||||||||||||||
2009
|
2008
|
Difference
|
%
Change
|
|||||||||||||
Dalian
District
|
||||||||||||||||
Street Fixture and Display network
|
$ | 1,663,837 | $ | 1,640,933 | $ | 22,904 | 1.40 | % | ||||||||
City Transit system Display network
|
793,751 | 779,942 | 13,809 | 1.77 | % | |||||||||||
Outdoor Billboards
|
536,828 | 360,449 | 176,379 | 48.93 | % | |||||||||||
Other service cost (b)
|
335,676 | 434,931 | (99,255 | ) | -22.82 | % | ||||||||||
Subtotal for Dalian District
|
$ | 3,330,092 | $ | 3,216,255 | $ | 113,837 | 3.54 | % | ||||||||
Shenyang
District
|
||||||||||||||||
Street Fixture and Display network
|
$ | 100,516 | $ | - | $ | 100,516 | 100.00 | % | ||||||||
Outdoor Billboards
|
23,486 | - | 23,486 | 100.00 | % | |||||||||||
Subtotal for Shenyang District
|
$ | 124,002 | $ | - | $ | 124,002 | 100.00 | % | ||||||||
Total Cost of Revenue
|
$ | 3,454,094 | $ | 3,216,255 | $ | 237,839 | 7.39 | % | ||||||||
During
the year ended June 30, 2009, we had cost of revenue of $3,454,094, as compared
with cost of revenue of $3,216,255, an increase of approximately $237,839, or
7.39%, reflecting the increase in revenues. The gross profit rose to $4,964,257,
or a 134.52% increase during the year ended June 30, 2009 compared with the year
ended June 30, 2008. The major reasons for the dramatic increase of
gross profit from 2008 to 2009 are as following: 1) Increased usage of
advertising space as we have been able to secure more popular locations and have
raised more brand awareness among our customers; 2) we are also able to realize
more profits on some of our new advertising channels, such as large-screen LED
billboards, due to lower maintenance costs and higher fee charged.
Selling,
General and Administrative Expenses
Our operating expenses were
$1,363,966 during the year ended June 30, 2009, compared with $1,174,148 during
the year ended June 30, 2008, an increase of $189,818, or approximately 16.17%.
Reflect the increased salary expense, depreciation expense and other
administrative expense.
Interest
Expense
Interest
expense increased from $235,182 during the year ended June 30, 2008 to $260,943
for the year ended June 30, 2009. The increase interest expense resulted from
the increase in our loans during 2009, as we borrowed to fund the rapid growth
in our sales and to invest in our infrastructure.
Net
Income attributable to the Company
As a
result of the factors described above, we had net income attributable to
the Company in the amount of $2,830,224 during the year ended June 30,
2009, compared with $761,078 during the year ended June 30, 2008. The increase
in net income was mainly attributed to our increase in revenue and our efforts
to control the costs.
Also, as
a result of a currency translation adjustment gain, our comprehensive income was
$2,837,667 during the year ended June 30 , 2009, compared with $770,190 during
the year ended June 30 , 2008. The change is due to the significant currency
exchange fluctuation.
17
Liquidity
and Capital Resources
Presently,
our principal sources of liquidity were generated from our operations and
through bank loans. As of June 30, 2009, although we had a negative
working capital of $3,974,320, as compared to a negative working capital of
$3,654,572 as of June 30, 2008, we were still able to generate $2,830,224 of net
income attributable to the Company and our operating have produced a positive
cash flow of $1,423,288 for the year ended June 30, 2009, as compared to only
$210,178 cash generated for the year ended June 30, 2008. Based on
our current operating plan, we believe that our existing resources, including
cash generated from operations as well as the bank loans, will be sufficient to
meet our working capital requirement for our current operations. In order to
fully implement our business plan and continue our growth, however, we will
require additional capital either from our shareholders or from outside
sources.
Operating
Activities
For the
year ended June 30, 2009, our operations generated cash in the total amount of
$1,423,288, as opposed to $210,178 used in operating activities for the year
ended June 30, 2008. This increase was mainly composed of the significant
increase in our net income and increased collections on our accounts
receivable.
Investing
Activities
Cash used
in investing activities was $4,056,536 for the year ended June 30, 2009 as
compared to only $532,779 for the year ended June 30, 2008. We have invested
heavily in building our infrastructures, including spending on purchase and
installation of our new products, City Navigator and Mega-screen
LEDs.
Financing
Activities
For the
year ended June 30, 2009, we have financed a total amount of $2,636,426 through
the bank loans and capital contributions, as compared to $386,091
provided by financing activities for the year ended June 30, 2008. Increase in
cash provided by financing activities is due to the increased short term loans
and long term bank loans.
Off-Balance
Sheet Arrangements
Neither
Fortune-Rich, Dalian Guo-Heng, nor V-Media or its subsidiaries has
any off-balance sheet arrangements that have or are reasonably likely to have a
current or future effect on their financial condition or results of
operations.
18
China’s
Advertising Market
The
advertising market in China is one of the largest and fastest growing
advertising markets in the world and has the following
characteristics:
§
|
Largest Market in Asia
Excluding Japan. Advertising spending in China totaled
$7.7 billion in 2003 according to ZenithOptimedia’s December 2004
Advertising Expenditure
Forecasts report, making it the largest advertising market in Asia
excluding Japan.
|
§
|
High Growth Rate.
According to ZenithOptimedia, advertising spending in China grew 20.8%
between 2002 and 2003 compared to the average worldwide growth rate of
3.0%, making it one of the fastest growing advertising markets in the
world during that period.
|
§
|
Urban Concentration of
Advertising Spending. Advertising spending in China is highly
concentrated in China’s more economically developed regions and
increasingly concentrated in urban areas. For example, Beijing, Shanghai
and Guangdong province (Guangdong province includes the major cities of
Guangzhou and Shenzhen), together accounted for 49.3% of total advertising
spending in China in 2003, according to the State Administration for
Industry and Commerce.
|
§
|
Importance of New Alternative
Advertising Media. Alternative advertising media, which is a term
we use to refer to media other than traditional broadcast and print media,
account for a larger percentage of total advertising spending in China
compared to Europe, the United States and other countries in
Asia.
|
§
|
Fragmented Industry.
The advertising industry in China is highly fragmented and is not
dominated by a small number of advertising companies. According to the
China Advertising Association, there were approximately 66,400 advertising
companies in China in 2003.
|
Market Size and
Composition. According to ZenithOptimedia statistics, China’s advertising
market in terms of advertising spending is expected to remain the largest in
Asia excluding Japan through at least 2007. The following table sets forth
historical and estimated future advertising spending in the countries and
regions described and for the years indicated:
2001 | 2002 | 2003 | 2004E | 2005E | 2006E | 2007E | ||||||||||||||||||||||
(In billions of U.S. dollars) | ||||||||||||||||||||||||||||
China | 5.1 | 6.3 | 7.7 | 9.0 | 10.5 | 12.2 | 14.2 | |||||||||||||||||||||
South
Korea
|
5.6 | 6.5 | 6.8 | 6.4 | 6.3 | 6.6 | 6.9 | |||||||||||||||||||||
India
|
1.8 | 1.9 | 2.1 | 2.7 | 2.9 | 3.1 | 3.3 | |||||||||||||||||||||
Taiwan | 1.9 | 1.9 | 2.1 | 2.2 | 2.3 | 2.4 | 2.5 | |||||||||||||||||||||
Hong Kong | 1.9 | 1.9 | 2.0 | 2.1 | 2.3 | 2.4 | 2.5 | |||||||||||||||||||||
Other Asia (1) (excluding Japan) | 4.9 | 5.7 | 6.4 | 8.0 | 9.2 | 10.7 | 12.4 | |||||||||||||||||||||
Total Asia (excluding Japan) | 21.2 | 24.2 | 27.0 | 30.5 | 33.5 | 37.4 | 41.8 | |||||||||||||||||||||
Japan | 38.9 | 36.3 | 36.2 | 38.0 | 39.2 | 40.3 | 41.5 | |||||||||||||||||||||
Total Asia | 60.1 | 60.4 | 63.2 | 68.5 | 72.6 | 77.7 | 83.3 | |||||||||||||||||||||
United States | 147.2 | 149.8 | 152.3 | 161.5 | 168.2 | 177.0 | 186.2 |
(1) Other Asia includes Indonesia,
Malaysia, Philippines, Singapore, Thailand and Vietnam.
Source: Advertising
Expenditure Forecasts, ZenithOptimedia, December 2004.
19
The
advertising industry is generally divided into television, newspaper, magazine,
radio and other types of advertising media. Other advertising media includes
Internet, outdoor, billboard, out-of-home, bus-stop display and other outdoor
advertising media. Other advertising media account for a larger percentage of
total advertising spending in China than in Europe, the United States or other
countries in the Asia Pacific region. The following table sets forth the
percentage breakdown of advertising spending by medium in the countries and
regions described below for 2003:
Country/Region: | Television | Newspaper | Magazine | Radio | Other | |||||||||||||||
China | 40.2 | % | 38.3 | % | 3.8 | % | 4.0 | % | 13.5 | % | ||||||||||
Asia (1) | 44.7 | % | 30.4 | % | 7.9 | % | 4.4 | % | 12.6 | % | ||||||||||
United
States
|
33.9 | % | 30.4 | % | 14.3 | % | 12.9 | % | 8.6 | % | ||||||||||
Europe (2) | 33.3 | % | 32.3 | % | 19.6 | % | 5.6 | % | 9.3 | % |
(1)
|
Asia includes China, Hong
Kong, India, Indonesia, Japan, Malaysia, Philippines, Singapore, South
Korea, Thailand and Vietnam.
|
(2)
|
Europe includes Austria,
Belgium, Czech Republic, Denmark, Estonia, Finland, France, Germany,
Greece, Hungary, Ireland, Italy, Latvia, Lithuania, Netherlands, Norway,
Poland, Portugal, Spain, Sweden, Switerland, and the United
Kingdom.
|
Source: Advertising Expenditure Forecasts, ZenithOptimedia, December 2004. |
Growth. We
believe advertising spending in China has considerable growth potential over the
next few years. According to ZenithOptimedia, advertising spending in China is
expected to increase to $14.2 billion in 2007 from $7.7 billion in
2003, a compound annual growth rate of 16.3% from 2004 to 2007, a much faster
rate compared to 6.8%, 4.9% and 4.8%, respectively, for Asia, the United States
and Europe. However, we cannot provide any assurance that we or our business
will benefit from growth that occurs in China’s advertising industry. The
following table sets forth the historical and prospective growth in advertising
spending in China for the periods indicated.
Source:
|
Advertising
Expenditure Forecasts, ZenithOptimedia, December
2004.
|
20
The
growth of China’s advertising industry is being driven by a number of factors
including:
§
|
High and Sustained Levels of
Economic Growth. China’s economy has grown and continues to grow
rapidly compared to the growth experienced by other developed economies.
China’s GDP grew by 8.9%, 8.1% and 11.1% in 2001, 2002 and 2003,
respectively, and is projected to grow by 13.2%, 10.7%, 10.0% and 9.8% in
2004, 2005, 2006 and 2007 according to
ZenithOptimedia.
|
§
|
Growing Consumer Class.
We believe the emergence and ongoing expansion of a consumer class
concentrated in major cities in China will encourage companies to spend
increasing amounts on advertising for new products and services
particularly in major urban areas.
|
§
|
Relatively Low Levels of
Advertising Spending in China Per Capita and as a Percentage of
GDP. Advertising spending per capita and as a percentage of GDP in
China remains very low relative to other countries and regions, indicating
that there is significant growth potential in China’s advertising industry
as its consumer markets continue to develop and income levels
increase.
|
The
following table sets forth advertising spending per capita and as a percentage
of GDP for the countries and regions indicated for 2003:
Advertising Spending | ||||||||
Country/Region |
Per
Capita
|
As
a
Percentage
of
GDP
|
||||||
(in
U.S. dollars,
except
percentages)
|
||||||||
China | $ | 6 | 0.5 | % | ||||
Hong Kong | $ | 282 | 1.3 | % | ||||
South Korea | $ | 142 | 1.1 | % | ||||
Japan | $ | 284 | 0.8 | % | ||||
Asia (1) Weighted Average | $ | 21 | 0.8 | % | ||||
United Kingdom | $ | 288 | 1.0 | % | ||||
United States | $ | 518 | 1.4 | % |
(1)
|
Asia includes China, Hong Kong,
India, Indonesia, Japan, Malaysia, Philippines, Singaport, South Korea,
Taiwan, Thailand, and Vietnam.
|
Source: Advertising
Expenditure Forecasts, ZenithOptimedia, December 2004
Rapid
Urbanization and Concentration of Advertising Spending. While the total
size of China’s advertising market is expected to increase by a compound annual
growth rate of 16.3% from 2004 to 2007, we expect that advertising spending in
certain regions and urban areas will increase at a faster rate compared to the
national average. This is due to:
§
|
Rapid urbanization.
According to the National Bureau of Statistics of China, China’s
urban population increased from 17.9% in 1978 to 29.0% in 1995, to 40.5%,
or 523 million people, in 2003. China’s Academy of Social Sciences
estimates that China’s urban population will reach 610 million people
by 2010.
|
§
|
Faster growth of consumer
spending in urban areas. Rapid urbanization, in turn, will result
in faster growth of consumer spending in urban areas, which already
accounts for a disproportionately larger amount of consumer spending.
According to the National Bureau of Statistics, in 2004, 77.4% of retail
sales for consumer goods took place in urban areas. Retail sales in urban
areas grew by 14.4% compared to growth in rural areas of 9.9% relative to
the same period in 2003.
|
The
impact of these trends is particularly notable in certain regions and urban
centers. For example, Beijing, Shanghai and Guangdong province (Guangdong
includes the major cities of Guangzhou and Shenzhen) together accounted for
49.3% of total advertising spending in China in 2003, according to the State
Administration for Industry and Commerce, while accounting for only 8.6% of the
population in 2003.
Outdoor
Advertising Networks in China
The rapid
development of outdoor advertising networks is a relatively recent development
in China. This form of advertising allows advertisers to effectively reach
increasingly mobile and urbanized target audiences. We believe that this form of
advertising appeals to advertisers for several reasons:
Provides an
Alternative and Supplement to Other Advertising Media. We believe
technological innovations and changing consumer habits have eroded the market
appeal of more traditional advertising media. For instance, total television
advertising spending as a percentage of all advertising spending in China has
decreased from 45.4% in 1999 to 40.2% in 2003 according to
ZenithOptimedia.
21
We
believe that the primary reasons for this include:
§
|
the
prevalence of digital-video recording and other technologies that enable
consumers to avoid watching television
advertising;
|
§
|
the
overall lack of high quality entertainment options for television viewers
in China leading to low viewer rates by desired consumer
groups;
|
§
|
changes
in consumer demographics and behavior, including the tendency of consumers
to spend greater periods of time out of home in professional and
commercial settings; and
|
§
|
technological
innovations in recent years that have provided advertisers with new means
to reach consumers in a wider range of locations, including the Internet
and, in our case, the development of outdoor advertising
displays.
|
Effective
Audience Reach and Attractive
Medium Welcomed by Consumers. Our outdoor advertising
networks are usually installed in venues such as bus shelters, taxi shelters and
Metro lines which occupy popular locations of the city which have a large
concentration of population. It has unlimited viewing exposure to the public and
our state-of-the-art display technology makes our displays very attractive to
watch and provides vast amount of information to the commuters.
Cost Effective.
Placed in public areas in populous urban centers where large numbers of
people congregate, outdoor advertising can reach consumers at a lower cost than
most mass media advertising such as traditional television.
We
believe that as we apply new display technologies, improve the existing display
network and expand into new market, we will continue to experience significant
growth in terms of market share of total advertising spending in the
region.
An
investment in our common stock or other securities involves a number of
risks. You should carefully consider each of the risks described
below before deciding to invest in our common stock. If any of the
following risks develops into actual events, our business, financial condition
or results of operations could be negatively affected, the market price of our
common stock or other securities could decline and you may lose all or part of
your investment.
The
risk factors presented below are all of the ones that we currently consider
material. However, they are not the only ones facing our
Company. Additional risks not presently known to us, or which we
currently consider immaterial, may also adversely affect us. There
may be risks that a particular investor views differently from us, and our
analysis might be wrong. If any of the risks that we face actually
occur, our business, financial condition and operating results could be
materially adversely affected and could differ materially from any possible
results suggested by any forward-looking statements that we have made or might
make. In such case, the trading price of our common stock could
decline, and you could lose part or all of your investment.
22
Risks
Relating to Our Business and Industry
We have a
limited operating history, which may make it difficult for you to evaluate our
business and prospects.
We began our
current business operations in September 2000. Accordingly, we have a limited
operating history for our current operations upon which you can evaluate the
viability and sustainability of our business and its acceptance by advertisers
and consumers. It is also difficult to evaluate the viability of our business
model because we do not have sufficient experience to address the risks
frequently encountered by early stage companies using new forms of advertising
media and entering new and rapidly evolving markets. These circumstances may
make it difficult for you to evaluate our business and prospects.
Our senior
management and employees have worked together for a short period of time, which
may make it difficult for you to evaluate their effectiveness and ability to
address challenges.
Due to our
limited operating history and recent additions to our management team, certain
of our senior management and employees have worked together at our company for
only a relatively short period of time. As a result, it may be difficult for you
to evaluate the effectiveness of our senior management and other key employees
and their ability to address future challenges to our business.
If
advertisers or the viewing public do not accept, or lose interest in, our
outdoor advertising network, our revenues may be negatively affected and our
business may not expand or be successful.
The market
for outdoor advertising networks in China is relatively new and its potential is
uncertain. We compete for advertising spending with many forms of more
established advertising media. Our success depends on the acceptance of our
outdoor advertising network by advertisers and their continuing interest in this
medium as a component of their advertising strategies. Our success also depends
on the viewing public continuing to be receptive towards our advertising
network. Advertisers may elect not to use our services if they believe that
consumers are not receptive to our network or that our network does not provide
sufficient value as an effective advertising medium. If a substantial number of
advertisers lose interest in advertising on our advertising network for these or
other reasons, we will be unable to generate sufficient revenues and cash flow
to operate our business, and our advertising service revenue, liquidity and
results of operations could be negatively affected.
We derive a
substantial majority of our revenues from the provision of advertising services,
and advertising is particularly sensitive to changes in economic conditions and
advertising trends.
Demand for
our advertising space and time slots, and the resulting advertising spending by
our clients, is particularly sensitive to changes in general economic conditions
and advertising spending typically decreases during periods of economic
downturn. Advertisers may reduce the money they spend to advertise on our
network for a number of reasons, including:
§
|
a
general decline in economic
conditions;
|
§
|
a
decline in economic conditions in the particular cities where we conduct
business;
|
23
§
|
a
decision to shift advertising expenditures to other available advertising
media; or
|
§
|
a
decline in advertising spending in
general.
|
A decrease in
demand for advertising media in general and for our advertising services in
particular would materially and adversely affect our ability to generate revenue
from our advertising services, and our financial condition and results of
operations.
A substantial
majority of our revenues are currently concentrated in Dalian. If the city
experiences an event negatively affecting its advertising industry, our
advertising network, and our ability to generate adequate cash flow would be
materially and adversely affected.
A substantial
majority of our revenues are currently concentrated in Dalian. We derived more
than 97.57% of our total revenues in 2009 from Dalian. We expect Dalian to
continue to constitute important sources of our revenues. If the city
experiences an event negatively affecting its advertising industry, such as a
serious economic downturn, a construction moratorium that would have the effect
of materially limiting the supply of bus shelters and taxi shelters in which we
can place our displays or similar changes in government policy, or a natural
disaster, our advertising network and our ability to generate adequate cash flow
would be materially and adversely affected.
Our quarterly
operating results are difficult to predict and may fluctuate significantly from
period to period in the future.
Our quarterly
operating results are difficult to predict and may fluctuate significantly from
period to period based on the seasonality of consumer spending and corresponding
advertising trends in China. As a result, you may not be able to rely on period
to period comparisons of our operating results as an indication of our future
performance. Factors that are likely to cause our operating results to
fluctuate, such as the seasonality of advertising spending in China, a
deterioration of economic conditions in China and potential changes to the
regulation of the advertising industry in China, are discussed elsewhere in this
Form 8-K. If our revenues for a particular quarter are lower than we expect, we
may be unable to reduce our operating expenses for that quarter by a
corresponding amount, which would harm our operating results for that quarter
relative to our operating results from other quarters.
We may not be
able to successfully expand our advertising network into new regions or
diversify our network into new advertising channels which could harm or reverse
our growth potential and our ability to increase our revenues, or even result in
a decrease in revenues.
We are
pursuing a strategy to expand our advertising network into new regions. In order
to expand our network into new regions, we must enter into new display placement
agreements in new cities. If we are unable to grow our outdoor network into new
regions, our advertising network may not be as attractive as those of our
competitors, which could harm or reverse our growth potential and our ability to
increase our revenues, or even result in a decrease in revenues.
24
When our
advertising network reaches saturation in the cities where we operate, we may be
unable to grow our revenue base or to satisfy all of our advertisers’ needs,
which could hamper our ability to generate higher levels of revenues over
time.
Our
advertising network in each city generally is designed to have a repeating
1500-minute cycle of advertisements per week. Where demand for time slots by
advertisers is high, our network may reach saturation, meaning we cannot
additional advertising time slots for that week’s cycle without further
increasing the length of the cycle and correspondingly reducing the number of
broadcasts per day of each advertisement. When our network reaches saturation in
any particular city, we will be forced to lengthen our advertising cycle to
accommodate additional advertisers, or increase our advertising rates to
increase our revenues in our existing cities of operation. However, advertisers
may be unwilling to accept rate increases or the placement of their
advertisement on a longer time cycle that gives their advertisement less
exposure each day. If we are unable to increase the duration of our advertising
cycle in cities that reach saturation, or if we are unable to pass through rate
increases to our advertising clients in those cities, we may be unable to grow
our revenue base or to satisfy all of our advertisers’ needs, which could hamper
our ability to generate higher levels of revenues over time.
If the market
supply of desirable commercial locations diminishes or ceases to expand, we may
be unable to expand our network into locations advertising clients find
desirable, which could decrease the value of our network to
advertisers.
We believe
advertisers place a premium on having their advertisements broadcast in the most
commercially desirable locations, which we believe includes commercial locations
frequented by more affluent consumer groups in China’s major urban areas. As
some of China’s cities have undergone development and expansion for several
decades while others are still at an early stage of development, the supply of
desirable commercial locations varies considerably from region to region. In
more developed cities, it may be difficult to increase the number of desirable
locations in our network because most such locations have already been occupied
either by us or by our competitors. In recently developing cities, the supply of
desirable locations may be small and the pace of economic development and
construction levels may not provide a steadily increasing supply of desirable
commercial locations. If, as a result of these possibilities, we are unable to
increase the placement of our network into commercial locations that advertisers
find desirable, we may be unable to expand our client base, sell advertising
time slots on our network or increase the rates we charge for time slots, which
could decrease the value of our network to advertisers.
Acquisitions,
including acquisitions of some of our regional distributors, which forms a part
of our growth strategy, may have an adverse effect on our ability to manage our
business, and our revenues and net income.
Acquisitions,
including acquisitions of some of our regional distributors, forms a part of our
growth strategy. If we are presented with appropriate opportunities, we may
acquire some or all of our regional distributors or other businesses,
technologies, services or products which are complementary to our core outdoor
advertising network business. Future acquisitions and the subsequent integration
of our regional distributors and other companies with our existing operations
may require significant attention from our management. The diversion of our
management’s attention and any difficulties encountered in the integration of
newly acquired companies could have an adverse effect on our ability to manage
our business. Future acquisitions may also expose us to potential risks,
including risks associated with the integration of new operations, services and
personnel, unforeseen or hidden liabilities, the diversion of resources from our
existing businesses and technologies, our inability to generate sufficient
revenue to offset the costs, expenses of acquisitions and potential loss of, or
harm to, relationships with employees and advertising clients as a result of our
integration of new businesses and new regulations governing cross-border
investment by PRC residents, any of which could have a material and adverse
effect on our ability to manage our business, and our revenues and net
income.
25
If we are
unable to attract advertisers to purchase advertising time on our network, we
will be unable to maintain or increase our advertising fees and the demand for
time on our network, which could negatively affect our ability to grow
revenues.
The amounts
of fees we can charge advertisers depend on the size and quality of our network
and the demand by advertisers for advertising time on our network. Advertisers
choose to advertise on our network in part based on the size of our network and
the desirability of the locations where we have placed our displays as well as
the quality of the services we offer. If we fail to maintain or increase the
number of commercial locations and quality of displays in our network, diversify
advertising channels in our network, or solidify our brand name and reputation
as a quality provider of advertising services, advertisers may be unwilling to
purchase time and space on our network or to pay the levels of advertising fees
we require to remain profitable. Our failure to attract advertisers to purchase
time and space on our network will reduce demand for our network, which could
necessitate lowering the fees we charge for advertising on our network and could
negatively affect our ability to increase revenues in the future.
Failure to
manage our growth could strain our management, operational and other resources,
which could materially and adversely affect our business and growth
potential.
We have been
rapidly expanding, and plan to continue to rapidly expand, our operations in
China. We must continue to expand our operations to meet the demands of
advertisers for larger and more diverse network coverage. This expansion has
resulted, and will continue to result, in substantial demands on our management
resources. To manage our growth, we must develop and improve our existing
administrative and operational systems and, our financial and management
controls and further expand, train and manage our work force. We have already
begun expanding our advertising network through contractual arrangements with
local operators in Dalian, Tianjin and Shenyang and may in the future expand to
other cities as well as countries or regions. As we continue this effort, we may
incur substantial costs and expend substantial resources in connection with any
such expansion. We may encounter difficulties when we expand into other cities
or if we begin operations in other countries due to different technology
standards, legal considerations and cultural differences. We may not be able to
manage our current or future international operations effectively and
efficiently or compete effectively in such markets. We cannot assure you that we
will be able to efficiently or effectively manage the growth of our operations,
recruit top talent and train our personnel. Any failure to efficiently manage
our expansion may materially and adversely affect our business and future
growth.
We depend on
the leadership and services of Mr. Guojun Wang, who is our founder, chairman,
and our largest shareholder, and our business and growth prospects may be
severely disrupted if we lose his services.
Our future
success is dependent upon the continued service of Mr. Guojun Wang, our founder
and chairman and a major shareholder. We rely on his industry expertise and
experience in our business operations, and in particular, his business vision,
management skills, and working relationships with our employees, our other major
shareholders and many of our clients. We do not maintain key-man life insurance
for Mr. Guojun Wang. If he was unable or unwilling to continue in his
present position, or if he joined a competitor or formed a competing company in
violation of his employment agreement and noncompetition agreement, we may not
be able to replace him easily or at all. As a result, our business and growth
prospects may be severely disrupted if we lose his services.
26
If we do not
continue to expand and maintain an effective sales and marketing team it will
cause short-term disruptions of our operations, restrict our sales efforts and
negatively affect our advertising service revenue.
We market our
advertising services directly to advertisers and to advertising agencies. As of
September 30, 2009, we had 49 dedicated sales and marketing personnel. Many of
our sales and marketing personnel have only worked for us for a short period of
time. We depend on our marketing staff to explain our service offerings to our
existing and potential clients and to cover a large number of clients in a wide
variety of industries. We will need to further increase the size of our sales
and marketing staff if our business continues to grow. We may not be able to
hire, retain, integrate or motivate our current or new marketing personnel which
would cause short-term disruptions of our operations, restrict our sales efforts
and negatively affect our advertising service revenue.
We may need
additional capital and we may not be able to obtain it, which could adversely
affect our liquidity and financial position.
To further
expand our outdoor advertising network, we may require additional cash
resources. If these sources are insufficient to satisfy our cash requirements,
we may seek to sell additional equity or debt securities or obtain a credit
facility. The sale of convertible debt securities or additional equity
securities could result in additional dilution to our shareholders. The
incurrence of indebtedness would result in increased debt service obligations
and could result in operating and financing covenants that would restrict our
operations and liquidity.
Our ability
to obtain additional capital on acceptable terms is subject to a variety of
uncertainties, including:
§
|
investors’
perception of, and demand for, securities of alternative advertising media
companies;
|
§
|
conditions
of the U.S. and other capital markets in which we may seek to raise
funds;
|
§
|
our
future results of operations, financial condition and cash
flows;
|
§
|
PRC
governmental regulation of foreign investment in advertising services
companies in China;
|
§
|
economic,
political and other conditions in China;
and
|
§
|
PRC
governmental policies relating to foreign currency
borrowings.
|
We cannot
assure you that financing will be available in amounts or on terms acceptable to
us, if at all. Any failure by us to raise additional funds on terms favorable to
us could have a material adverse effect on our liquidity and financial
condition.
27
If we are
unable to adapt to changing advertising trends and the technology needs of
advertisers and consumers, we will not be able to compete effectively and we
will be unable to increase or maintain our revenues which may materially and
adversely affect our business prospects and revenues.
The market
for outdoor advertising requires us to continuously identify new advertising
trends and the technology needs of advertisers and consumers, which may requires
us to develop new features and enhancements for our advertising network. We may
incur development and acquisition costs in order to keep pace with new
technology needs but we may not have the financial resources necessary to fund
and implement future technological innovations or to replace obsolete
technology. Furthermore, if we fail to implement new technology or cannot
succeed in defining, developing and introducing new features on a timely and
cost-effective basis, advertiser demand for our advertising network may decrease
and we may not be able to compete effectively or attract advertising clients,
which would have a material and adverse effect on our business prospects and
revenues.
We may be
subject to, and may expend significant resources in defending against,
government actions and civil suits based on the content and services we provide
through our outdoor advertising network.
PRC
advertising laws and regulations require advertisers, advertising operators and
advertising distributors, including businesses such as ours, to ensure that the
content of the advertisements they prepare or distribute are fair and accurate
and are in full compliance with applicable law. Violation of these laws or
regulations may result in penalties, including fines, confiscation of
advertising fees, orders to cease dissemination of the advertisements and orders
to publish an advertisement correcting the misleading information. In
circumstances involving serious violations, the PRC government may revoke a
violator’s license for advertising business operations.
As an outdoor
advertising service provider, we are obligated under PRC laws and regulations to
monitor the advertising content that is shown on our network for compliance with
applicable law. In general, the advertisements shown on our network have
previously been broadcast over public television networks and have been
subjected to internal review and verification of such networks. We are still
separately required to independently review and verify these advertisements for
content compliance before displaying the advertisements. In addition, where a
special government review is required for certain product advertisements before
broadcasting, if we employ regional distributors, we and our regional
distributors are separately obligated to confirm that such review has been
performed and approval has been obtained. We employ, and will ask our regional
distributors to employ, qualified advertising inspectors who are trained to
review advertising content for compliance with relevant PRC laws and
regulations. In addition, for advertising content related to certain types of
products and services, such as alcohol, cosmetics, pharmaceuticals and medical
procedures, we and our distributors are required to confirm that the advertisers
have obtained requisite government approvals including the advertiser’s
operating qualifications, proof of quality inspection of the advertised
products, government pre-approval of the contents of the advertisement and
filing with the local authorities. We endeavor to comply, and will encourage our
regional distributors to take measures to comply, with such requirements,
including by requesting relevant documents from the advertisers. However, we
cannot assure you that each advertisement an advertising client or agency
provides to us and which we include in our weekly advertising cycle is in
compliance with relevant PRC advertising laws and regulations or that the
supporting documentation and government approvals provided to us by our
advertising clients in connection with certain advertising content are complete;
nor can we assure you that the advertisements that our regional distributors
will procure for broadcasting on our network have received required approval
from the relevant local supervisory bodies or are content
compliant.
28
Moreover,
civil claims may be filed against us for fraud, defamation, subversion,
negligence, copyright or trademark infringement or other violations due to the
nature and content of the information displayed on our
network.
In addition,
if the security of our content management system is breached through the
placement of unauthorized images, text or audio sounds displayed on our network,
viewers or the PRC government may find these images, text or audio sounds to be
offensive, which may subject us to civil liability or government censure despite
our efforts to ensure the security of our content management system. Any such
event may also damage our reputation. If our advertising viewers do not believe
our content is reliable or accurate, our business model may become less
appealing to viewers in China and our advertising clients may be less willing to
place advertisements on our network.
We may be
subject to intellectual property infringement claims, which may force us to
incur substantial legal expenses and, if determined adversely against us, may
materially disrupt our business.
We cannot be
certain that our outdoor displays or other aspects of our business do not or
will not infringe upon patents, copyrights or other intellectual property rights
held by third parties. Although we are not aware of any such claims, we may
become subject to legal proceedings and claims from time to time relating to the
intellectual property of others in the ordinary course of our business. If we
are found to have violated the intellectual property rights of others, we may be
enjoined from using such intellectual property, and we may incur licensing fees
or be forced to develop alternatives. In addition, we may incur substantial
expenses in defending against these third party infringement claims, regardless
of their merit. Successful infringement or licensing claims against us may
result in substantial monetary liabilities, which may materially and adversely
disrupt our business.
We face
significant competition, and if we do not compete successfully against new and
existing competitors, we may lose our market share, and our profitability may be
adversely affected.
We compete with some
of the largest advertising companies in China that operate outdoor advertising
networks such as JCDecaux China, Clear Media, CBS Outdoor (China) and TOM OMG.
Increased competition could reduce our operating margins and
profitability and result in a loss of market share. Some of our existing and
potential competitors may have competitive advantages, such as significantly
greater financial, marketing or other resources and may be able to mimic and
adopt our business model. Moreover, increased competition will provide
advertisers with a wider range of media and advertising service alternatives,
which could lead to lower prices and decreased revenues, gross margins and
profits. We cannot assure you that we will be able to successfully compete
against new or existing competitors.
Any business
disruption or litigation we experience might result in our incurring substantial
costs and the diversion of resources.
The insurance
industry in China is still at an early stage of development. Insurance companies
in China offer limited business insurance products and do not, to our knowledge,
offer business liability insurance. While business disruption insurance is
available to a limited extent in China, we have determined that the risks of
disruption, cost of such insurance and the difficulties associated with
acquiring such insurance on commercially reasonable terms make it impractical
for us to have such insurance. As a result, except for fire insurance, we do not
have any business liability, disruption or litigation insurance coverage for our
operations in China. Any business disruption or litigation may result in our
incurring substantial costs and the diversion of resources.
If we fail to
maintain an effective system of internal controls, we may be unable to
accurately report our financial results or prevent fraud, and investor
confidence and the market price of our stock may be adversely
impacted.
We are a new
public reporting company. Our reporting obligations as a public company will
place a significant strain on our management, operational and financial
resources and systems for the foreseeable future. If we fail to maintain an
effective system of internal controls in the future, we may be unable to
accurately report our financial results or prevent fraud and investor confidence
and the market price of our stock may be adversely impacted.
29
Risks
Relating to Regulation of Our Business and to Our Structure
If the PRC
government finds that the agreements that establish the structure for operating
our China business do not comply with PRC governmental restrictions on foreign
investment in the advertising industry, we could be subject to severe
penalties.
Substantially
all of our operations are or will be conducted through our indirectly
wholly-owned operating subsidiaries in China, which we collectively refer to as
our PRC operating subsidiaries, and through our contractual arrangements with
our consolidated affiliated entities in China. PRC regulations require any
foreign entities that invest directly in the advertising services industry to
have at least two years of direct operations in the advertising industry outside
of China. Since December 10, 2005, foreign investors have been allowed to
own directly 100% of PRC companies operating an advertising business if the
foreign entity has at least three years of direct operations in the advertising
business outside of China or less than 100% if the foreign investor has at least
two years of direct operations in the advertising industry outside of China. We
do not currently directly operate an advertising business outside of China and
cannot qualify under PRC regulations any earlier than two or three years after
we commence any such operations outside of China or until we acquire a company
that has directly operated an advertising business outside of China for the
required period of time. Accordingly, our PRC operating subsidiaries which are
directly owned by non-PRC subsidiaries of ours, which we collectively refer to
as wholly-foreign owned, or WFOE, operating subsidiaries, are currently
ineligible to apply for the required licenses for providing advertising services
in China. Our non-PRC subsidiaries are ineligible to apply for such required
licenses too. As such, our advertising businesses are currently primarily
provided through contractual arrangements between our WFOE operating
subsidiaries and our consolidated affiliated entities in China, which we
collectively refer to as our PRC operating affiliates. These PRC operating
affiliates include V-Media, Dalian Vastitude &Modern Transit Media Co., Ltd,
Dalian Vastitude Engineering&Design Co., Ltd, Dalian Vastitude Network
Technology Co., Ltd, Shenyang Vastitude Media Co., Ltd, Tianjin Vastitude AD
Media Co., Ltd. The PRC restriction on foreign investment in advertising
industry, however, does not apply to wholly foreign owned subsidiaries
established in China, or WFOEs, and WFOEs may establish PRC subsidiaries to
operate advertising business directly in China. Accordingly, a portion of the
operations of our commercial location network are conducted by our indirect PRC
subsidiaries owned by our WFOE operating subsidiaries. Accordingly, our
advertising services are currently conducted by (i) our indirect PRC
operating subsidiaries and (ii) our PRC operating affiliates. Our PRC
operating affiliates, which we control through contractual relationships are
owned by either (i) one or more PRC citizens designated by us,
(ii) one or more PRC entities owned by our subsidiaries or by our
designated appointees or (iii) a combination of PRC citizens and PRC
entities owned by our subsidiaries designated by us or our designated
appointees. Our PRC operating affiliates, certain of their respective
subsidiaries and certain of our indirect PRC operating subsidiaries hold the
requisite licenses to provide advertising services in China. Our PRC operating
affiliates and their respective subsidiaries directly operate our advertising
network. While our indirect PRC operating subsidiaries are eligible for the
required licenses for providing advertising services in China and some of our
indirect PRC operating subsidiaries have obtained such licences, we have been
using and are expected to continue to use PRC operating affiliates and their
subsidiaries to operate a significant portion of our advertising business for
the foreseeable future. We have entered into contractual arrangements with PRC
operating affiliates and their respective subsidiaries, pursuant to which we,
through our PRC operating subsidiaries or non-PRC subsidiaries, provide
technical support and consulting services to our PRC operating affiliates and
their subsidiaries. In addition, we have entered into agreements with our PRC
operating affiliates and each of their shareholders which provide us with the
substantial ability to control these affiliates and their existing and future
subsidiaries.
30
•
|
revoking
the business and operating licenses of our PRC subsidiaries and
affiliates;
|
||
•
|
discontinuing
or restricting our PRC subsidiaries’ and affiliates’
operations;
|
||
•
|
imposing
conditions or requirements with which we or our PRC subsidiaries and
affiliates may not be able to comply;
|
||
•
|
requiring
us or our PRC subsidiaries and affiliates to restructure the relevant
ownership structure or operations; or
|
||
•
|
restricting
or prohibiting our use of the proceeds of this offering to finance our
business and operations in China.
|
The
imposition of any of these penalties would result in a material and adverse
effect on our ability to conduct our business.
We rely on
contractual arrangements with V-Media and its subsidiaries and
shareholders for a substantial portion of our China operations, which may not be
as effective in providing operational control as direct ownership.
We rely on
contractual arrangements with V-Media and its subsidiaries and
shareholders to operate our advertising business. For a description of these
contractual arrangements, see “Corporate Structure” and “Related Party
Transactions”. These contractual arrangements may not be as effective in
providing us with control over V-Media as direct ownership. If we had direct
ownership of V-Media, we would be able to exercise our rights as a shareholder
to effect changes in the board of directors of V-Media which in turn could
effect changes, subject to any applicable fiduciary obligations, at the
management level. However, under the current contractual arrangements, as a
legal matter, if V-Media or any of its subsidiaries and shareholders fails to
perform its or his respective obligations under these contractual arrangements,
we may have to incur substantial costs and resources to enforce such
arrangements, and rely on legal remedies under PRC law, including seeking
specific performance or injunctive relief, and claiming damages, which we cannot
assure you to be effective. For example, if Mr. Guojun Wang were to refuse to
transfer his equity interest in V-Media to us or our designee when we exercise
the purchase option pursuant to these contractual arrangements, or if
Mr. Guojun Wang were otherwise to act in bad faith toward us, then we may
have to take legal action to compel him to fulfill his contractual
obligations.
Many of these
contractual arrangements are governed by PRC law and provide for the resolution
of disputes through either arbitration or litigation in the PRC. Accordingly,
these contracts would be interpreted in accordance with PRC law and any disputes
would be resolved in accordance with PRC legal procedures. The legal environment
in the PRC is not as developed as in other jurisdictions, such as the United
States. As a result, uncertainties in the PRC legal system could limit our
ability to enforce these contractual arrangements. In the event we are unable to
enforce these contractual arrangements, we may not be able to exert effective
control over our operating entities, and our ability to conduct our business may
be negatively affected.
31
Contractual
arrangements we have entered into among our subsidiaries and affiliated entities
may be subject to scrutiny by the PRC tax authorities and a finding that we owe
additional taxes or are ineligible for our tax exemption, or both, could
substantially increase our taxes owed, and reduce our net income and the value
of your investment.
Under
PRC law, arrangements and transactions among related parties may be subject
to audit or challenge by the PRC tax authorities. If any of the transactions we
have entered into among our subsidiaries and affiliated entities are found not
to be on an arm’s-length basis, or to result in an unreasonable reduction in tax
under PRC law, the PRC tax authorities have the authority to disallow our tax
savings, adjust the profits and losses of our respective PRC entities and assess
late payment interest and penalties.
As a result
of this risk, you should evaluate our results of operations and financial
condition without regard to these tax savings.
Our business
operations may be affected by legislative or regulatory changes.
Changes in
laws and regulations or the enactment of new laws and regulations governing
placement or content of out-of-home advertising, our business licenses or
otherwise affecting our business in China may materially and adversely affect
our business prospects and results of operations.
Substantially
all of our assets are located in China and substantially all of our revenues are
derived from our operations in China. Accordingly, our business, financial
condition, results of operations and prospects are subject, to a significant
extent, to economic, political and legal developments in China.
The PRC’s
economic, political and social conditions, as well as governmental policies,
could affect the financial markets in China and our liquidity and access to
capital and our ability to operate our business.
The PRC
economy differs from the economies of most developed countries in many respects,
including the amount of government involvement, level of development, growth
rate, control of foreign exchange and allocation of resources. While the PRC
economy has experienced significant growth over the past, growth has been
uneven, both geographically and among various sectors of the economy. The PRC
government has implemented various measures to encourage economic growth and
guide the allocation of resources. Some of these measures benefit the overall
PRC economy, but may also have a negative effect on us. For example, under
current PRC regulations, since December 10, 2005, foreign entities have
been allowed to directly own 100% of a PRC advertising business if the foreign
entity has at least three years of direct operations of an advertising business
outside of China, or to directly own less than 100% of a PRC advertising
business if the foreign entity has at least two years of direct operations of an
advertising business outside of China. This may encourage foreign advertising
companies with more experience, greater technological know-how and more
extensive financial resources than we have to compete against us and limit the
potential for our growth. Moreover, our financial condition and results of
operations may be adversely affected by government control over capital
investments or changes in tax regulations that are applicable to
us.
The PRC
economy has been transitioning from a planned economy to a more market-oriented
economy. Although the PRC government has implemented measures since the late
1970s emphasizing the utilization of market forces for economic reform, the
reduction of state ownership of productive assets and the establishment of
improved corporate governance in business enterprises, a substantial portion of
productive assets in China is still owned by the PRC government. In addition,
the PRC government continues to play a significant role in regulating industry
development by imposing industrial policies. The PRC government also exercises
significant control over China’s economic growth through the allocation of
resources, controlling payment of foreign currency- denominated obligations,
setting monetary policy and providing preferential treatment to particular
industries or companies. Since late 2003, the PRC government implemented a
number of measures, such as raising bank reserves against deposit rates to place
additional limitations on the ability of commercial banks to make loans and
raise interest rates, in order to slow down specific segments of China’s economy
which it believed to be overheating. These actions, as well as future actions
and policies of the PRC government, could materially affect our liquidity and
access to capital and our ability to operate our business.
32
The PRC legal
system is a civil law system based on written statutes. Unlike common law
systems, it is a system in which decided legal cases have little precedential
value. In 1979, the PRC government began to promulgate a comprehensive system of
laws and regulations governing economic matters in general. The overall effect
of legislation over the past 26 years has significantly enhanced the
protections afforded to various forms of foreign investment in China. Our PRC
operating subsidiary, Dalian Guo-Heng, is a wholly foreign-owned enterprise
which is an enterprise incorporated in China and wholly-owned by foreign
investors. Dalian Guo-Heng is subject to laws and regulations applicable to
foreign investment in China in general and laws and regulations applicable to
wholly foreign-owned enterprises in particular. However, these laws, regulations
and legal requirements change frequently, and their interpretation and
enforcement involve uncertainties. For example, we may have to resort to
administrative and court proceedings to enforce the legal protection that we
enjoy either by law or contract. However, since PRC administrative and court
authorities have significant discretion in interpreting and implementing
statutory and contractual terms, it may be more difficult to evaluate the
outcome of administrative and court proceedings and the level of legal
protection we enjoy than in more developed legal systems. For example, these
uncertainties may impede our ability to enforce the contracts we have entered
into with V-Media and its subsidiaries. In addition, such uncertainties,
including the inability to enforce our contracts, could materially and adversely
affect our business and operation. In addition, intellectual property rights and
confidentiality protections in China may not be as effective as in the United
States or other countries. Accordingly, we cannot predict the effect of future
developments in the PRC legal system, particularly with regard to the
advertising industry, including the promulgation of new laws, changes to
existing laws or the interpretation or enforcement thereof, or the preemption of
local regulations by national laws. These uncertainties could limit the legal
protections available to us, including our ability to enforce our agreements
with V-Media and its subsidiaries, and other foreign investors, including
you.
Recent
regulations relating to offshore investment activities by PRC residents may
increase the administrative burden we face and create regulatory uncertainties
that could restrict our overseas and cross-border investment activity, and a
failure by our shareholders who are PRC residents to make any required
applications and filings pursuant to such regulations may prevent us from being
able to distribute profits and could expose us and our PRC resident shareholders
to liability under PRC law.
The PRC
National Development and Reform Commission, or NDRC, and SAFE recently
promulgated regulations that require PRC residents and PRC corporate entities to
register with and obtain approvals from relevant PRC government authorities in
connection with their direct or indirect offshore investment activities. These
regulations apply to our shareholders who are PRC residents and may apply to any
offshore acquisitions that we make in the future.
Under the
SAFE regulations, PRC residents who make, or have previously made, direct or
indirect investments in offshore companies will be required to register those
investments. In addition, any PRC resident who is a direct or indirect
shareholder of an offshore company is required to file with the local branch of
SAFE, with respect to that offshore company, any material change involving
capital variation, such as an increase or decrease in capital, transfer or swap
of shares, merger, division, long term equity or debt investment or creation of
any security interest over the assets located in China. If any PRC shareholder
fails to make the required SAFE registration, the PRC subsidiaries of that
offshore parent company may be prohibited from distributing their profits and
the proceeds from any reduction in capital, share transfer or liquidation, to
their offshore parent company, and the offshore parent company may also be
prohibited from injecting additional capital into their PRC subsidiaries.
Moreover, failure to comply with the various SAFE registration requirements
described above could result in liability under PRC laws for evasion of
applicable foreign exchange restrictions.
33
The PRC tax
authorities may require us to pay additional taxes in connection with our
acquisitions of offshore entities that conducted their PRC operations through
their affiliates in China.
Our
operations and transactions are subject to review by the PRC tax authorities
pursuant to relevant PRC laws and regulations. However, these laws, regulations
and legal requirements change frequently, and their interpretation and
enforcement involve uncertainties. For example, in the case of some of our
acquisitions of offshore entities that conducted their PRC operations through
their affiliates in China, we cannot assure you that the PRC tax authorities
will not require us to pay additional taxes in relation to such acquisitions. In
the event that the sellers failed to pay any taxes required under PRC law in
connection with these transactions, the PRC tax authorities might require us to
pay the tax, together with late-payment interest and penalties.
If any of our
PRC affiliates becomes the subject of a bankruptcy or liquidation proceeding, we
may lose the ability to use and enjoy those assets, which could reduce the size
of our advertising network and materially and adversely affect our business,
ability to generate revenue and the market price of our stock.
To comply
with PRC laws and regulations relating to foreign ownership restrictions in the
advertising business, we currently conduct our operations in China through
contractual arrangements with V-Media, its shareholders and subsidiaries. As
part of these arrangements, V-Media and its subsidiaries hold certain of the
assets that are important to the operation of our business. If any of these
entities goes bankrupt and all or part of their assets become subject to liens
or rights of third-party creditors, we may be unable to continue some or all of
our business activities, which could materially and adversely affect our
business, financial condition and results of operations. If any
of V-Media and its subsidiaries undergoes a voluntary or involuntary
liquidation proceeding, its shareholders or unrelated third-party creditors may
claim rights to some or all of these assets, thereby hindering our ability to
operate our business, which could materially and adversely affect our business,
our ability to generate revenue and the market price of our stock.
Restrictions
on currency exchange may limit our ability to utilize our revenues
effectively.
Substantially
all of our revenues and operating expenses are denominated in Renminbi. The
Renminbi is currently convertible under the “current account”, which includes
dividends, trade and service-related foreign exchange transactions, but not
under the “capital account”, which includes foreign direct investment and loans.
Currently, Dalian Guo-Heng may purchase foreign exchange for settlement of
“current account transactions”, including payment of dividends to us, without
the approval of the State Administration of Foreign Exchange. However, we cannot
assure you that the relevant PRC governmental authorities will not limit or
eliminate our ability to purchase foreign currencies in the future. Since a
significant amount of our future revenues will be denominated in Renminbi, any
existing and future restrictions on currency exchange may limit our ability to
utilize revenues generated in Renminbi to fund our business activities outside
China, if any, or expenditures denominated in foreign currencies. Foreign
exchange transactions under the capital account are still subject to limitations
and require approvals from, or registration with, the State Administration of
Foreign Exchange and other relevant PRC governmental authorities. This could
affect Dalian Guo-Heng’s ability to obtain foreign exchange through debt or
equity financing, including by means of loans or capital contributions from
us.
34
Because our
earnings and cash and cash equivalent assets are denominated in Renminbi and the
net proceeds from this offering will be denominated in U.S. dollars,
fluctuations in exchange rates between U.S. dollars and Renminbi will affect the
relative purchasing power of these proceeds and our balance sheet and earnings
per share in U.S. dollars following this offering. In addition, appreciation or
depreciation in the value of the Renminbi relative to the U.S. dollar would
affect our financial results reported in U.S. dollar terms without giving effect
to any underlying change in our business or results of operations. Since
July 2005 the Renminbi is no longer pegged solely to the U.S. dollar.
Instead, it is reported to be pegged against a basket of currencies, determined
by the People’s Bank of China, against which it can rise or fall by as much as
0.3% each day. This change in policy has resulted in the gradual increase in the
value of the Renminbi against the U.S. dollar over time. As of March 31,
2009, the Renminbi had appreciated approximately 17.4% against the U.S. dollar
since July 21, 2005. On March 31, 2008, the Renminbi was valued
against the U.S. dollar at approximately RMB6.8240 to the U.S. dollar. The
Renminbi may appreciate or depreciate significantly in value against the U.S.
dollar in the long term, depending on the fluctuation of the basket of
currencies against which it is currently valued or it may be permitted to enter
into a full float, which may also result in a significant appreciation or
depreciation of the Renminbi against the U.S. dollar. Fluctuations in the
exchange rate will also affect the relative value of any dividend we issue in
the future which will be exchanged into U.S. dollars and earnings from and the
value of any U.S. dollar-denominated investments we make in the
future.
Very limited
hedging transactions are available in China to reduce our exposure to exchange
rate fluctuations. To date, we have not entered into any hedging transactions in
an effort to reduce our exposure to foreign currency exchange risk. We do not
intend to enter into any hedging transactions. Even if we may decide to enter
into hedging transactions in the future, the availability and effectiveness of
these hedges may be limited and we may not be able to successfully hedge our
exposure at all. In addition, our currency exchange losses may be magnified by
PRC exchange control regulations that restrict our ability to convert Renminbi
into foreign currency.
Executive
Compensation
Information
regarding the compensation paid to the executive officers and directors of the
Company during the past two fiscal years is set forth in Part III, Item 11 of
the Company’s Annual Report on Form 10-K, which was filed with the Securities
and Exchange Commission on September 14, 2009. None of the
individuals who served as officers of the Company during the past two fiscal
years will remain an officer or director of the Company after the
merger.
The following
table sets forth all compensation paid or accrued by V-Media to the individuals
who will become the officers and directors of Golden Key International, Inc. for
services rendered during the preceding two fiscal years. The compensation
comprises base salary and bonus.
35
Summary
Compensation Table
Name and Principal Position | Year |
Salary
($)(1)
|
Bonus
($)(2)
|
Nonequity Incentive Plan Compensation ($) | All Other Compensation ($) |
Total
($)
|
||||||||||||||||
Gujun
Wang
|
2009
|
43,904 | 4,390 | - | - | 48,294 | ||||||||||||||||
Chief
Executive Officer and
|
2008
|
43,180 | 4,318 | - | - | 47,498 | ||||||||||||||||
Chairman
of the Board
|
||||||||||||||||||||||
Ming
Ma
|
2009
|
43,904 | 4,390 | - | - | 48,294 | ||||||||||||||||
President
and Director
|
2008
|
43,180 | 4,318 | - | - | 47,498 | ||||||||||||||||
Hongwen
Liu
|
2009
|
29,269 | - | - | - | 29,269 | ||||||||||||||||
Chief
Financial Officer
|
2008
|
28,787 | - | - | - | 28,787 | ||||||||||||||||
Wei
Wong
|
2009
|
43,904 | 4,390 | - | - | 48,294 | ||||||||||||||||
Chief
Operation Officer
|
2008
|
- | - | - | - | - | ||||||||||||||||
Feng
Wan
|
2009
|
17,562 | 3,512 | - | - | 21,074 | ||||||||||||||||
Chief
Technology Officer
|
2008
|
17,272 | 3,454 | - | - | 20,726 |
(1) The Company pays salaries in
RMB to all executive officers and directors of the board every month. The RMB
amount is translated into USD when the Company files SEC documents. The exchange
rates used were the average rates of 2009 and 2008. They were 6.83 and 6.95,
respectively.
(2) The
Company pays bonus in cash to every executive officer each year which equals to
10% of their base salary except that Mr. Hongwen Liu does not have annual bonus
and that Mr. Feng Wan's bonus equals to 20% of this base salary.
Employment Agreements
V-Media has entered into an employment
agreement with each of its executive employees. Each agreement has a term
of three years. Except for the salary and bonus, the terms of the
agreements are substantially identical, and reflect employment standards common
in China as a result of law or custom. Mr. Guojun Wang, as Chairman and
CEO of the Company, has an annual salary of RMB 300,000, less all applicable
taxes and other appropriate deductions. Mr. Guojun Wang is entitled to an annual
bonus in an amount of 10% of his annual salary, which shall be approved by the
Company’s board of directors based on the operation results of the
Company.
Related Party
Transactions
Agreements
Among Us, Dalian Guo-Heng, V-Media and Its Subsidiaries
We have
entered into a series of contractual arrangements with V-Media and its
subsidiaries, including contracts relating to the provision of services and
certain shareholder rights and corporate governance matters.
The
following is a summary of the material provisions of these agreements. For more
complete information you should read these agreements in their entirety which
are attached to this Form 8-K as exhibits.
Transfer of Ownership When Permitted by Law
Pursuant
to the call option agreement by and among Dalian Guo-Heng, V-Media,
V-Media’s shareholders and subsidiaries dated as of November 6, 2009, each of
V-Media, V-Media’s shareholders has granted Dalian Guo-Heng or its designee an
exclusive option to purchase all or part of their equity interests in V-Media
and its subsidiaries, or all or part of the assets of V-Media, in each case, at
any time determined by Dalian Guo-Heng and to the extent permitted by PRC
law.
36
Voting Arrangement
Pursuant
to the voting rights proxy agreement by and among Dalian Guo-Heng, V-Media,
V-Media’s shareholders and subsidiaries dated as of November 6, 2009, the
shareholders of V-Media and its subsidiaries have granted the personnel
designated by Dalian Guo-Heng the right to appoint directors and senior
management of V-Media and its subsidiaries and to exercise all of their other
voting rights as shareholders of V-Media and its subsidiaries, as the case may
be, as provided under the articles of association of each such entity. Under the
voting rights proxy agreement, there are no restrictions on the number, to the
extent allowed under the respective articles of association of V-Media and its
subsidiaries, or identity of those persons we can appoint as directors and
officers.
Equity Pledge Agreement
Pursuant
to the equity pledge agreement by and among Dalian Guo-Heng, V-Media, V-Media’s
shareholders and subsidiaries, dated as of November 6, 2009, each of
shareholders has pledged his or its equity interest in V-Media and its
subsidiaries, as the case may be, to Dalian Guo-Heng to secure their obligations
under the relevant contractual control agreements to which each is a party,
including but not limited to, the obligations of V-Media and its
subsidiaries under the exclusive services agreement, call option agreement and
voting rights proxy agreement entered into with Dalian Guo-Heng. Under this
equity pledge agreement, shareholders have agreed not to transfer, assign,
pledge or otherwise dispose of their interest in V-Media or its subsidiaries, as
the case may be, without the prior written consent of Dalian
Guo-Heng.
Exclusive Services Agreement
Pursuant
to the exclusive services agreement by and among Dalian Guo-Heng, V-Media, and
its subsidiaries, dated November 6, 2009, V-Media and its subsidiaries
irrevocably entrust to Guo-Heng the right of management and operation of V-Media
and its subsidiaries and the responsibilities and authorities of their
shareholders and directors of -Media and V-Media Subsidiaries. The service fee
to be paid by V-Media and its subsidiaries shall equal to 100% of their residual
return which can be waived by Guo-Heng from time to time in its sole
discretion
Description of
Securities
The Board
of Directors of the Company is authorized to issue:
Ø
|
80,000,000
shares of Common Stock, $.0001 par value per share, of which 10,862,067
shares were outstanding before the
Merger;
|
Ø
|
10,000,000
shares of Series A Convertible Preferred
Stock.
|
Common
Stock. The
Company's Certificate of Incorporation authorizes the issuance of 80,000,000
shares of common stock, 0.0001 par value per share. Holders of shares of common
stock are entitled to one vote for each share on all matters to be voted on by
the stockholders. Holders of shares of common stock are entitled to share
ratably in dividends, if any, as may be declared from time to time by the board
of directors in its discretion, from funds legally available therefore. In the
event of a liquidation, dissolution, or winding up of the Company, the holders
of shares of common stock are entitled to share pro rata all assets remaining
after payment in full of all liabilities. Holders of common stock have no
preemptive or other subscription rights, and there are no conversion rights or
redemption or sinking fund provisions with respect to such shares. Delaware law
does not have any anti-takeover provision that would delay or prevent a change
in control.
37
The Series A
Preferred Stockholders of the Company are entitled to one vote for each share in
the election of directors and in all other matters to be voted on by the
stockholders. There is no cumulative voting in the election of
directors. The one million shares of Series A Preferred Stock shall
have an aggregate voting power of 40% of the combined voting power of the entire
Company’s shares, Common Stock and Preferred Stock as long as the Company is in
existence. Holders of Series A Preferred Stock are not entitled to
receive such dividends as may be declared from time to time by the Board of
Directors with respect to the Common Stock. In the event of
liquidation, dissolution or winding up of the Company, holders of Series A
Preferred Stock shall be entitled to share ratably, prior and in preference to
any distribution of any of the assets of the Company to the holders of Common
Stock and any other series of Series A Preferred Stock ranking junior to the
Series A Preferred Stock, in all assets remaining after payment of liabilities.
The holders of Preferred A Stock have no pre-emptive or conversion rights and
are not subject to further calls or assessments.
Market Price and Dividends
on Common Equity and Other Shareholder Matters
Information
regarding the market price of the Company’s common equity, payment of dividends,
and other shareholder matters is set forth in is set forth in Part II, Item 5
of the Company’s Annual Report on Form 10-K, which was filed with the
Securities and Exchange Commission on September 14, 2009.
Legal
Proceedings
From time to
time, we may become involved in various lawsuits and legal proceedings which
arise in the ordinary course of business. We are currently not a party to
any legal proceeding and are not aware of any legal claims that we believe will
have a material adverse affect on our business, financial condition or operating
results.
Indemnification of Directors
and Officers
The Articles
and By-Laws of the Company have no specific provisions to allow for the
indemnification of the officer and director in regard to his carrying out the
duties of his offices. Indemnification of directors and officers is as provided
by the General Corporate Law of the State of Delaware. In the event that a claim
for indemnification against such liabilities is asserted by our director,
officer, or other controlling person in connection with the securities
registered, we will, unless in the opinion of our legal counsel the matter has
been settled by controlling precedent, submit the question of whether such
indemnification is against public policy to a court of appropriate jurisdiction.
We will then be governed by the court's decision.
Item
2.01 Completion of Acquisition of
Assets
The
information set forth in Item 1.01 of this Current Report on Form 8-K is
incorporated by reference into this Item 2.01.
38
Item
3.02 Unregistered Sale of Equity
Securities
The
information set forth in Item 1.01 of this Current Report on Form 8-K is
incorporated by reference into this Item 3.02.
Item
3.03 Material Modification to
Rights of Security holders
The
information set forth in Item 1.01 of this Current Report on Form 8-K is
incorporated by reference into this Item 3.02.
Item
4.01 Changes in Registrant’s Certifying
Accountant
On
December 8, 2009, the Company changed its principal independent accountants. On
such date, Chang G. Park, CPA was dismissed from serving as the Company’s
principal independent accountants and the Company retained Bagell, Josephs,
Levine & Company, LLC as its principal independent accountants. The decision
to change accountants was approved by the Company’s Board of Directors on
December 8, 2009.
The
dismissal of Chang G. Park, CPA
Chang G.
Park, CPA was the independent registered public accounting firm for the Company
from December 7, 2006 to December 8, 2009. None of Chang G. Park, CPA’s reports
on the Company’s financial statements, including the Company’s two most recent
fiscal years ending May 31, 2009 and May 31, 2008 through the dismissal date of
December 8, 2009 (a) contained an adverse opinion or disclaimer of opinion, (b)
was modified as to uncertainty other than mentioned below, audit scope, or
accounting principles, or (c) contained any disagreements on any matters of
accounting principles or practices, financial statement disclosure, or auditing
scope or procedures, which disagreements, if not resolved to the satisfaction of
Chang G. Park, CPA, would have caused it to make reference to the subject matter
of the disagreements in connection with its reports. None of the reportable
events set forth in Item 304(a)(1)(ii) of Regulation S-K occurred during the
period in which Chang G. Park, CPA served as the Company’s principal independent
accountants.
In
accordance with Item 304(a)(3), the Company has provided Chang G. Park, CPA with
a copy of this disclosure and has requested that Chang G. Park, CPA furnish it
with a letter addressed to the U.S. Securities and Exchange Commission stating
whether it agrees with the above statements, and if not, stating the respects in
which it does not agree. A copy of the letter from Chang G. Park, CPA addressed
to the Securities and Exchange Commission dated December 9, 2009 is filed as
Exhibit 16.1 to this 8-K Report.
The Engagement of Bagell, Josephs,
Levine & Company, LLC
Prior to December 8, 2009, the date
that Bagell, Josephs, Levine & Company, LLC was retained as the principal
independent accountants of the Company:
(1)
The Company did not consult Bagell, Josephs, Levine & Company,
LLC regarding either the application of accounting principles to a
specified transaction, either completed or proposed, or the type of audit
opinion that might be rendered on Company’s financial statements;
39
(2)
Neither a written report nor oral advice was provided to the Company
by Bagell, Josephs, Levine & Company, LLC that they concluded was
an important factor considered by the Company in reaching a decision as to the
accounting, auditing or financial reporting issue; and
(3)
The Company did not consult Bagell, Josephs, Levine & Company, LLC regarding
any matter that was either the subject of a “disagreement” (as defined in Item
304(a)(1)(iv) of Regulation S-K and the related instructions) or any of the
reportable events set forth in Item 304(a)(1)(iv) of Regulation
S-K.
Item
5.01 Changes in Control of
Registrant
The
information set forth in Item 1.01 of this Current Report on Form 8-K is
incorporated by reference into this Item 5.01.
Item
5.02
|
Departure
of Directors or Certain Officers; Election of Directors; Appointment
of Certain Officers; Compensatory Arrangements of Certain
Officers
|
The
information set forth in Item 1.01 of this Current Report on Form 8-K is
incorporated by reference into this Item 5.02.
Item
5.06 Change in Shell Company
Status
As a result of the consummation of
the Merger described in Item 1.01 of this Current Report on Form 8-K, we
believe that we are no longer a shell corporation as that term is defined in
Rule 405 of the Securities Act and Rule 12b-2 of the Exchange
Act.
40
Item
9.01 Financial Statements and Exhibits
Financial
Statements
Page | ||
Consolidated
Financial Statements of HongHong Fortune-Rich Co., Limited for the three
month periods ended September 30, 2009 and 2008
(Unaudited)
|
F-2 | |
Notes
to Consolidated Financial Statements (Unaudited)
|
F-6 | |
Consolidated
Financial Statements of Dalian Vastitude Media Group Co., Ltd. for the
years ended June 30, 2009 and 2008 (Audited)
|
F-21 | |
Notes
to Consolidated Financial Statements (Audited)
|
F-25 | |
Pro
Forma Condensed Consolidated Financial Statements of Golden Key
International, Inc. (Unaudited)
|
F-39 | |
Notes
to Consolidated Financial Statements (Unaudited)
|
F-44 |
Exhibits
Exhibit
No.
|
Description
|
3.1
|
Articles
of Incorporation as filed with the Secretary of State of Delaware.
Incorporated by reference to Exhibit 3.1 to the Registrant’s registration
statement on Form SB2 filed on April 11,
2007.
|
3.2
|
Bylaws.
Incorporated by reference to Exhibit 3.1 to the Registrant’s registration
statement on Form SB2 filed on April 11,
2007.
|
10.1
|
Agreement
and Plan of Merger dated December 8, 2009 among the
Company and the shareholders of Fortune-Rich.
*
|
10.2
|
Designation
Certificate of Series A Preferred Stock.
*
|
10.3
|
Exclusive
Service Agreement dated November 6, 2009 among Dalian Guo-Heng, V-Media
and its subsidiaries. *
|
10.4
|
Call
Option Agreement dated November 6, 2009 among Dalian Guo-Heng, V-Media,
V-Media’s shareholders and subsidiaries.
*
|
10.5
|
Shareholders’
voting Rights Proxy Agreement dated November 6, 2009 among Dalian
Guo-Heng, V-Media and V-Media’s shareholders.
*
|
10.6
|
Equity
Pledge Agreement dated November 6, 2009 among Dalian Guo-Heng, V-Media,
V-Media’s shareholders and subsidiaries.
*
|
10.7
|
Form
of Employment Agreement. *
|
10.13
|
Stock
Purchase Agreement dated December 8, 2009, by and
between the Company and the shareholders listed therein.
*
|
16.1 Letter, dated December 9, 2009,
from Chang G. Park, CPA to the Securities and
Exchange Commission.
*
* Filed
herewith.
** To be
filed by amendment.
41
SIGNATURES
Pursuant to the requirements of the
Securities Exchange Act of 1934, the registrant has duly caused this report to
be signed on its behalf by the undersigned hereunto duly
authorized.
Dated:
December 8, 2009
Golden
Key International, Inc.
|
|||
By:
|
/s/ Guojun
Wang
|
|
|
Name:
Guojun Wang
Title:
Chief Executive Officer
|
42
EXHIBIT
INDEX
Exhibit
No.
|
Description
|
3.1
|
Articles
of Incorporation as filed with the Secretary of State of Delaware.
Incorporated by reference to Exhibit 3.1 to the Registrant’s registration
statement on Form SB2 filed on April 11,
2007.
|
3.2
|
Bylaws.
Incorporated by reference to Exhibit 3.1 to the Registrant’s registration
statement on Form SB2 filed on April 11,
2007.
|
10.1
|
Agreement
and Plan of Merger dated December 8, 2009 among the
Company and the shareholders of Fortune-Rich.
*
|
10.2
|
Designation
Certificate of Series A Preferred Stock.
*
|
10.3
|
Exclusive
Service Agreement dated November 6, 2009 among Dalian Guo-Heng, V-Media
and its subsidiaries. *
|
10.4
|
Call
Option Agreement dated November 6, 2009 among Dalian Guo-Heng, V-Media,
V-Media’s shareholders and subsidiaries.
*
|
10.5
|
Shareholders’
voting Rights Proxy Agreement dated November 6, 2009 among Dalian
Guo-Heng, V-Media and V-Media’s shareholders.
*
|
10.6
|
Equity
Pledge Agreement dated November 6, 2009 among Dalian Guo-Heng, V-Media,
V-Media’s shareholders and subsidiaries.
*
|
10.7
|
Form
of Employment Agreement. *
|
10.13
|
Stock
Purchase Agreement dated December 8, 2009, by and
between the Company and the shareholders listed therein.
*
|
16.1 Letter, dated December 9, 2009, from
Chang G. Park, CPA to the Securities and
Exchange Commission.
*
* Filed
herewith.
** To be
filed by amendment.
43
HONGKONG
FORTUNE-RICH INVESTMENT CO., LTD
CONSOLIDATED
FINANCIAL STATEMENTS
SEPTEMBER
30, 2009 AND 2008
HONGKONG
FORTUNE-RICH INVESTMENT CO., LTD
TABLE
OF CONTENTS
Consolidated
Balance Sheets as of September 30, 2009 (Unaudited) and June 30,
2009
|
F-2 |
Consolidated
Statements of Income and Other Comprehensive Income for
the Three Months Ended September 30, 2009 and
2008(Unaudited)
|
F-3 |
Consolidated
Statements of Changes in Shareholders' equity for
the Three Months Ended September 30, 2009 and
2008(Unaudited)
|
F-4 |
Consolidated
Statements of Cash Flows for
the Three Months Ended September 30, 2009 and 2008
(Unaudited)
|
F-5 |
Notes to Consolidated Financial Statements (Unaudited) | F-6 to F-18 |
F-1
HONGKONG FORTUNE-RICH INVESTMENT CO., LTD.
CONSOLIDATED BALANCE SHEETS
As
of
|
||||||||
Septermber
30,
|
June
30,
|
|||||||
2009
|
2009
|
|||||||
(Unaudited)
|
||||||||
ASSETS
|
||||||||
Current
assets
|
||||||||
Cash
& cash equivalents
|
$ | 134,974 | $ | 147,366 | ||||
Restricted
cash
|
65,921 | - | ||||||
Accounts
receivable, net of allowance for bad debt of
|
||||||||
$62,223
and $62,183, respectively
|
4,318,817 | 3,026,031 | ||||||
Advance
to suppliers
|
1,406,009 | 1,732,640 | ||||||
Other
assets
|
88,917 | 55,958 | ||||||
Total
current assets
|
6,014,638 | 4,961,995 | ||||||
Property,
plant and equipment, net
|
9,559,001 | 7,847,350 | ||||||
Other
assets
|
||||||||
Security
deposits
|
656,824 | 672,145 | ||||||
Intangible
asset, net
|
30,899 | 33,843 | ||||||
Deferred
charges
|
1,205,183 | 1,237,465 | ||||||
Total
other assets
|
1,892,906 | 1,943,453 | ||||||
Total
Assets
|
$ | 17,466,545 | $ | 14,752,798 | ||||
LIABILITIES
AND SHAREHOLDERS' EQUITY
|
||||||||
Current
liabilities
|
||||||||
Short
term loans
|
$ | 3,193,517 | $ | 2,898,682 | ||||
Bank
acceptance notes payable
|
219,737 | - | ||||||
Long
term loan-current
|
585,966 | 585,592 | ||||||
Accounts
payable
|
1,288,228 | 825,325 | ||||||
Deferred
revenues
|
3,620,745 | 3,265,245 | ||||||
Taxes
payable
|
1,123,869 | 819,150 | ||||||
Accrued
expenses and other payables
|
110,284 | 73,497 | ||||||
Due
to shareholders
|
513,910 | 468,824 | ||||||
Total
current liabilities
|
10,656,256 | 8,936,315 | ||||||
Long
term loans
|
1,171,933 | 1,171,185 | ||||||
Total Liabilities
|
11,828,189 | 10,107,500 | ||||||
Shareholders'
equity
|
||||||||
Common
stock, $0.01 Par value; 50,000,000 shares authorized;
|
||||||||
50,000,000
shares issued and outstanding at
|
||||||||
Septermber
30, 2009 and June 30, 2009
|
500,000 | 500,000 | ||||||
Subscription
receivable
|
(500,000 | ) | (500,000 | ) | ||||
Additional
paid-in-capital
|
2,623,926 | 2,623,926 | ||||||
Accumulated
other comprehensive income
|
36,462 | 33,115 | ||||||
Retained
earnings
|
2,544,415 | 1,636,850 | ||||||
Total
shareholders' equity
|
5,204,803 | 4,293,891 | ||||||
Noncontrolling
interest
|
433,553 | 351,407 | ||||||
Total
shareholders' equity
|
5,638,356 | 4,645,298 | ||||||
Total
Liabilities and Shareholders' Equity
|
$ | 17,466,545 | $ | 14,752,798 | ||||
The accompany notes are an integral part of
these consolidated financial statements
F-2
HONGKONG FORTUNE-RICH INVESTMENT CO., LTD.
CONSOLIDATED STATMENTS OF INCOME AND OTHER
COMPREHENSIVE INCOME
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2009
AND 2008 (UNAUDITED)
For
the three months ended September 30,
|
||||||||
2009
|
2008
|
|||||||
Revenues
|
$ | 3,167,334 | $ | 2,104,588 | ||||
Cost
of revenue
|
(1,192,967 | ) | (863,524 | ) | ||||
Gross
profit
|
1,974,367 | 1,241,064 | ||||||
Selling,
general and administrative expenses
|
(581,270 | ) | (340,991 | ) | ||||
Income
from operations
|
1,393,097 | 900,073 | ||||||
Non-operating
income (expenses):
|
||||||||
Interest
income
|
7,778 | 281 | ||||||
Interest
expense
|
(69,359 | ) | (65,236 | ) | ||||
Other
expenses
|
(12,274 | ) | (2,112 | ) | ||||
Total
non-operating income (expenses)
|
(73,855 | ) | (67,067 | ) | ||||
Income
before income taxes
|
1,319,242 | 833,006 | ||||||
Provision
for income taxes
|
329,810 | 8,614 | ||||||
Net
income
|
989,432 | 824,392 | ||||||
Less:
net income (loss) attribute to the noncontrolling interest
|
81,867 | 5,984 | ||||||
Net
income attributable to HongKong Fortune-Rich Investment Co.,
Ltd.
|
907,565 | 818,408 | ||||||
Other
comprehensive income
|
||||||||
Foreign
currency translation gain
|
3,347 | 2,152 | ||||||
Comprehensive
income
|
$ | 910,912 | $ | 820,560 | ||||
Basic
and diluted earnings per share
|
0.02 | 0.02 | ||||||
Weighted
average number of shares
|
50,000,000 | 50,000,000 | ||||||
The accompany notes are an integral part of
these consolidated financial statements
F-3
HONGKONG FORTUNE-RICH INVESTMENT CO., LTD.
CONSOLIDATED STATEMENTS OF CHANGES IN
SHAREHOLDER' EQUITY
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2009
AND 2008 (UNAUDITED)
Common
Stock
|
|
|
|
|
|
|||||||||||||||||||||||||||
Par
value $0.01
|
||||||||||||||||||||||||||||||||
Shares
|
Amount
|
Subscription Receivable |
Additional
paid-in
capital
|
Accumulated Other comprehensive income |
Retained
earnings (Accumulated
Deficits)
|
Noncontrolling Interest | Total | |||||||||||||||||||||||||
Balance
at June 30, 2008
|
50,000,000 | $ | 500,000 | $ | (500,000 | ) | $ | 1,748,408 | $ | 25,672 | $ | (1,193,374 | ) | $ | 296,940 | $ | 877,646 | |||||||||||||||
Capital
contributions
|
875,518 | 875,518 | ||||||||||||||||||||||||||||||
Net
income for the year
|
818,408 | 5,984 | 824,392 | |||||||||||||||||||||||||||||
Foreign
currency translation gain
|
2,152 | 78 | 2,230 | |||||||||||||||||||||||||||||
Balance
at September 30, 2008
|
50,000,100 | 500,000 | (500,000 | ) | 2,623,926 | 27,824 | (374,966 | ) | 303,002 | 2,579,786 | ||||||||||||||||||||||
Balance
at June 30, 2009
|
50,000,000 | 500,000 | (500,000 | ) | 2,623,926 | 33,115 | 1,636,850 | 351,407 | 4,645,298 | |||||||||||||||||||||||
Capital
contributions
|
||||||||||||||||||||||||||||||||
Net
income for the year
|
907,565 | 81,867 | 989,432 | |||||||||||||||||||||||||||||
Foreign currency translation gain | 3,347 | 279 | 3,626 | |||||||||||||||||||||||||||||
Balance
at September 30, 2009
|
50,000,000 | $ | 500,000 | $ | (500,000 | ) | $ | 2,623,926 | $ | 36,462 | $ | 2,544,415 | $ | 433,553 | $ | 5,638,356 |
The accompany notes are an integral part of
these consolidated financial statements
F-4
HONGKONG FORTUNE-RICH INVESTMENT CO., LTD.
CONDENSED CONSOLIDATED STATEMENTS OF CASH
FLOWS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2009
AND 2008 (UNAUDITED)
For
the three months ended September 30,
|
||||||||
2009
|
2008
|
|||||||
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
||||||||
Net
income attributable to HongKong Fortune-Rich Investment Co.,
Ltd.
|
$ | 907,565 | $ | 818,408 | ||||
Adjustments
to reconcile net income to net cash
|
||||||||
provided
by (used in) operating activities:
|
||||||||
Depreciation
and amortization
|
149,381 | 141,125 | ||||||
Minority
interest
|
81,867 | 5,984 | ||||||
Changes
in operating assets and liabilities
|
||||||||
Accounts
receivable
|
(1,289,994 | ) | (1,035,206 | ) | ||||
Restricted
cash
|
(65,877 | ) | 65,810 | |||||
Other
assets
|
(32,900 | ) | (95,115 | ) | ||||
Security
deposit
|
15,740 | (131,623 | ) | |||||
Advance
to suppliers
|
327,519 | (465,169 | ) | |||||
Deferred
assets
|
33,050 | 33,017 | ||||||
Accounts
payable
|
462,068 | (438,742 | ) | |||||
Advances
from customers
|
353,179 | 380,380 | ||||||
Taxes
payable
|
303,994 | 14,943 | ||||||
Accrued
expenses and other payables
|
36,715 | (2,632 | ) | |||||
Net
cash provided by (used in) operating activities
|
1,282,307 | (708,820 | ) | |||||
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
||||||||
Acquisition
of property, plant & equipment
|
(1,851,921 | ) | (340,883 | ) | ||||
Net
cash used in investing activities
|
(1,851,921 | ) | (340,883 | ) | ||||
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
||||||||
Capital
contributions
|
- | 875,518 | ||||||
Net
proceeds from short-term bank loans
|
292,788 | 438,742 | ||||||
Net
Proceeds from bank acceptance notes payable
|
219,591 | - | ||||||
Repayments
of bank acceptance notes payable
|
- | (219,371 | ) | |||||
Net
proceeds from shareholder loan
|
44,757 | - | ||||||
Repayments
of shareholder loan
|
- | (18,369 | ) | |||||
Net
cash provided by financing activities
|
557,136 | 1,076,520 | ||||||
EFFECT
OF EXCHANGE RATE CHANGE ON
|
||||||||
CASH
& CASH EQUIVALENTS
|
86 | 1,687 | ||||||
NET
INCREASE (DECREASE) IN CASH & CASH EQUIVALENTS
|
(12,392 | ) | 28,504 | |||||
CASH
& CASH EQUIVALENTS, BEGINNING OF PERIOD
|
147,366 | 142,665 | ||||||
CASH
& CASH EQUIVALENTS, END OF PERIOD
|
$ | 134,974 | $ | 171,169 | ||||
SUPPLEMENTAL
CASH FLOW DISCLOSURE
|
||||||||
Income
taxes paid
|
$ | 73,607 | $ | - | ||||
Interest
paid
|
$ | 66,815 | $ | 41,003 | ||||
The
accompany notes are an integral part of these consolidated financial
statements
F-5
HONGKONG
FORTUNE-RICH INVESTMENT CO., LTD
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008
(UNAUDITED)
NOTE
1- ORGANIZATION AND BASIS OF PRESENTATION
HongKong
Fortune-Rich Investment Co., Ltd. (the “Company” or “Fortune-Rich”) is a Hong
Kong corporation established in September 2009 with registered capital of
$500,000.
Fortune-Rich
is a holding company whose only asset, held through a subsidiary, is 100% of the
registered capital of Dalian Guo-Heng Management & Consultation Co., Ltd.
(“Dalian Guo-Heng”), a limited liability holding company organized under the
laws of the People’s Republic of China. The Company does not conduct any
substantive operations of its own, but conducts its primary business operations
through Dalian Guo-Heng’s variable interest entity (“VIE”), Dalian Vastitude
Media Group Co., Ltd. (“V-Meida Group”) and V-Media Group’s
subsidiaries. V-Media Group was incorporated under the laws of the
PRC in September 2000.
The
Company, through Dalian Guo-Heng, has entered into certain exclusive agreements
with V-Meida Group, which obligate the Company to absorb a majority of the risk
of loss from V-Media’s activities and entitle it to receive a majority of its
residual returns. In addition, V-Media Group 's shareholders have pledged their
equity interest in V-Media Group to Dalian Guo-Heng, irrevocably granted Dalian
Guo-Heng an exclusive option to purchase, to the extent permitted under PRC law,
all or part of the equity interests in V-Media Group and agreed to entrust all
the rights to exercise their voting power to the person(s) appointed by Dalian
Guo-Heng. Through these contractual arrangements, the Company and Dalian
Guo-Heng hold all the variable interests of V-Media Group, and the Company and
Dalian Guo-Heng have been determined to be the most closely associated with
V-Media Group. Therefore, the Company is the primary beneficiary of V-Media
Group.
Based on
these contractual arrangements, the Company believes that V-Media Group should
be considered as a VIE under ASC 810, "Consolidation of Variable
Interest Entities, an Interpretation of ARB No.51", because the equity investors
in V-Media Group do not have the characteristics of a controlling financial
interest and the Company through Dalian Guo-heng is the primary beneficiary of
V-Media Group. Accordingly, the Company believes that V-Media Group should be
consolidated under ASC 810.
The
financial statements present the operations of V-Media Group as if the
aforementioned exclusive agreements between Dalian Guo-Heng and V-Media Group
had become effective as of the beginning of the first period
presented.
The
Company, along with its subsidiary and VIEs, is engaging in the sales,
construction and operations of outdoor advertising displays in the Northeast
part of China. The Company’s revenues are derived primarily from the sale of
advertising on outdoor advertising displays owned and operated by the
Company.
F-6
HONGKONG
FORTUNE-RICH INVESTMENT CO., LTD
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008 (UNAUDITED)
NOTE
2- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The
Company’s consolidated financial statements have been prepared in accordance
with generally accepted accounting principles in the United States of America
(“US GAAP”).
Principles
of Consolidation
The
consolidated financial statements include the financial statements of
Fortune-Rich and its wholly-owned subsidiary Dalian Guo-Heng, as well as Dalian
Guo-Heng’s variable interest entity, V-Media Group. All significant
inter-company balances and transactions are eliminated in
consolidation.
Use
of Estimates
In
preparing the financial statements in conformity with accounting principles
generally accepted in the United States of America, management makes estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the dates of the financial
statements, as well as the reported amounts of revenues and expenses during the
reporting year. Significant estimates, required by management, include the
recoverability of long-lived assets and the valuation of
inventories. Actual results could differ from those
estimates.
Cash
and Cash Equivalents
For
purposes of the statement of cash flow, the Company considers all highly liquid
investments with an original maturity of three months or less to be cash
equivalents.
Accounts
Receivables
Accounts
receivables are recorded at net realizable value consisting of the carrying
amount less an allowance for uncollectible amounts, as needed.
The
Company uses the aging method to estimate the valuation allowance for
anticipated uncollectible receivable balances. Under the aging method, bad debt
percentages determined by management based on historical experience as well as
current economic climate are applied to customers’ balances categorized by the
number of months the underlying invoices have remained outstanding. The
valuation allowance balance is adjusted to the amount computed as a result of
the aging method. When facts subsequently become available to indicate that the
allowance provided requires an adjustment, then the adjustment will be
classified as a change in estimate. There were allowances of $62,223 and $62,183
for uncollectible amounts for the periods ended September 30, 2009 and June 30,
2008, respectively.
F-7
HONGKONG
FORTUNE-RICH INVESTMENT CO., LTD
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008
(UNAUDITED)
NOTE
2-SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Property,
Equipment and Construction in Progress
Property,
plant and equipment are stated at cost less accumulated depreciation.
Expenditures for maintenance and repairs are charged to earnings as incurred
while additions, renewals and betterments are capitalized. When the asset
property and equipment is retired or otherwise disposed of, the related cost and
accumulated depreciation are removed from the respective accounts, and any gain
or loss is included in operations. Depreciation of property, plant and equipment
is provided using the straight-line method for substantially all assets with
estimated lives as follows:
Estimated Useful Life | Residual value | |||
Advertising equipment | 4 - 15 years | 5% | ||
Automobile
|
7 years | 5% | ||
Computer, office equipment and furniture | 5 years | 5% | ||
Boat | 7 years | 5% |
Construction
in progress represents direct costs of construction or acquisition and design
fees incurred. Capitalization of these costs ceases and the construction in
progress is transferred to plant and equipment when substantially all the
activities necessary to prepare the assets for their intended use are completed.
No depreciation is provided until it is completed and ready for intended
use.
Intangible
asset
Intangible
assets are accounted for in accordance with the provisions of ASC 350, “Goodwill
and Other Intangible Assets”. Under ASC 350, intangible asset included in the
carrying value of investments accounted for using the equity method of
accounting, and certain other intangible assets deemed to have indefinite useful
lives are not amortized. Indefinite-lived intangible assets are assessed for
impairment at least annually based on comparisons of their respective fair
values to their carrying values.
Impairment
of long-lived assets
Long-lived
assets, which include property, plant and equipment and intangible assets, are
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. Recoverability of
long-lived assets to be held and used is measured by a comparison of the
carrying amount of an asset to the estimated undiscounted future cash flows
expected to be generated by the assets. If the carrying amount
of an asset exceeds its estimated undiscounted future cash flows, an impairment
charge is recognized by the amount by which the carrying amount of the asset
exceeds the fair value of the assets. Fair value is generally
determined using the asset’s expected future discounted cash flows or market
value, if readily determinable. No impairment loss is recorded for the years
ended June 30, 2009 and 2008.
F-8
HONGKONG
FORTUNE-RICH INVESTMENT CO., LTD
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008 (UNAUDITED)
NOTE
2-SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Revenue
recognition
The
Company’s revenue recognition policies are in compliance with the provision of
ASC 605 ”Revenue Recognition”. The Company recognizes revenues when the
advertisements are posted over the contractual term based on the schedules
agreed with the customer and collections are reasonably assured. Payments
received in advance of services provided are recorded as deferred
revenue.
Cost
of revenues
Cost of
advertising services consists primarily of media costs payable under exclusive
advertising agreements, depreciation of advertising equipment, business taxes
and surcharges and other direct operating costs. Media costs are expensed as
incurred.
Selling,
General and administrative Costs
Selling,
general and administrative costs consist primarily of salaries and commissions
for sales representatives, salaries for administrative staffs, rent expenses,
office supply’s depreciation expense and employee benefits for administrative
staffs.
Foreign
currency translation
The
Company uses the United States dollar (“US Dollars”) for financial reporting
purposes. The Company, Dalian Guo-Heng and Dalian Vastitute Group maintain their
books and records in their functional currency Renminbi (“RMB”), being the
primary currency of the economic environment in which their operations are
conducted.
For
financial reporting purposes, RMB has been translated into United States dollars
("USD") as the reporting currency. Assets and liabilities are translated at the
exchange rate in effect at the balance sheet date. Revenues and expenses are
translated at the average rate of exchange prevailing during the reporting
period. Translation adjustments arising from the use of different exchange rates
from period to period are included as a component of stockholders' equity as
"Accumulated other comprehensive income". Gains and losses resulting from
foreign currency translations are included in accumulated other comprehensive
income. There is no significant fluctuation in exchange rate for the
conversion of RMB to USD after the balance sheet date.
F-9
HONGKONG
FORTUNE-RICH INVESTMENT CO., LTD
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008 (UNAUDITED)
NOTE
2-SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Income
Taxes
The
Company utilizes ASC 740, “Accounting for Income Taxes,” which requires
recognition of deferred tax assets and liabilities for the expected future tax
consequences of events that have been included in the financial statements or
tax returns. Under this method, deferred income taxes are recognized
for the tax consequences in future years of differences between the tax bases of
assets and liabilities and their financial reporting amounts at each period end
based on enacted tax laws and statutory tax rates applicable to the periods in
which the differences are expected to affect taxable income. Valuation
allowances are established, whenever necessary, against net deferred tax assets
when it is more likely than not that some portion or all of the deferred tax
asset will not be realized.
Fair
Value of Financial Instruments
The
Company’s financial instruments include cash and cash equivalents, accounts
receivable, advances to suppliers, other receivables, accounts payable, accrued
expenses, taxes payable, notes payable and other loans payable. Management has
estimated that the carrying amounts approximate their fair value due to the
short-term nature.
Earnings
per Share
The
Company computes earnings per share (“EPS’) in accordance with ASC 260,
“Earnings per share.” ASC 260 requires companies with complex capital structures
to present basic and diluted EPS. Basic EPS is measured as net income
divided by the weighted average common shares outstanding for the period.
Diluted EPS is similar to basic EPS but presents the dilutive effect on a per
share basis of potential common shares (e.g., convertible securities, options
and warrants) as if they had been converted at the beginning of the periods
presented, or issuance date, if later. Potential common shares that have
an anti-dilutive effect (i.e., those that increase income per share or decrease
loss per share) are excluded from the calculation of diluted EPS.
Statement
of Cash Flows
In
accordance with ASC 230, “Statement of Cash Flows,” cash flows from the
Company's operations is calculated based upon the local
currencies. As a result, amounts related to assets and liabilities
reported on the statement of cash flows may not necessarily agree with changes
in the corresponding balances on the balance sheet.
F-10
HONGKONG
FORTUNE-RICH INVESTMENT CO., LTD
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008 (UNAUDITED)
NOTE
2-SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Asset
Retirement Obligations
ASC 410,
“Accounting for Asset
Retirement Obligations” requires companies to record the present value of
obligations associated with the retirement of tangible long-lived assets in the
period in which it is incurred. The liability is required to be capitalized as
part of the related long-lived asset’s carrying amount. Over time, accretion of
the liability should be recognized as an operating expense and the capitalized
cost should be depreciated over the expected useful life of the related asset.
The Company’s asset retirement obligations relate primarily to the
dismantlement, removal, site reclamation and similar activities of its
properties. The Company has no retirement obligations accrued on book because
the disposed properties will be used to offset the expense incurred during these
activities.
New
Accounting Pronouncements
In
June 2009, the FASB issued ASC 105, the FASB Accounting Standards
Codification and the Hierarchy of Generally Accepted Accounting Principles – a
replacement of FASB Statement No. 162. The FASB Accounting Standards
Codification TM (“Codification”) will become the source of authoritative U.S.
generally accepted accounting principles (“GAAP”) recognized by FASB to be
applied by nongovernmental entities. Rules and interpretive releases of the SEC
under authority of federal securities laws are also sources of authoritative
GAAP for SEC registrants. On the effective date of ASC 105, the Codification
will supersede all then-existing non-SEC accounting and reporting standards. All
other nongrandfathered non-SEC accounting literature not included in the
Codification will become nonauthoritative. ASC 105 is effective for financial
statements issued for interim and annual periods ending after September 15,
2009. Adoption of ASC 105 is not expected to have a material impact on the
Company’s results of operations or financial position.
In
June 2009, the FASB issued ASC 810, Amendments to FASB Interpretation
No. 46(R), which improves financial reporting by enterprises involved with
variable interest entities. ASC 810 addresses (1) the effects on certain
provisions of FASB Interpretation No. 46 (revised December 2003),
Consolidation of Variable Interest Entities , as a result of the elimination of
the qualifying special-purpose entity concept in SFAS 166 and (2) concerns
about the application of certain key provisions of FIN 46(R), including those in
which the accounting and disclosures under the Interpretation do not always
provide timely and useful information about an enterprise’s involvement in a
variable interest entity. ASC 810 shall be effective as of the beginning of each
reporting entity’s first annual reporting period that begins after
November 15, 2009, for interim periods within the first annual reporting
period, and for interim and annual reporting periods thereafter. Earlier
application is prohibited. Adoption of ASC 810 is not expected to have a
material impact on the Company’s results of operations or financial
position.
F-11
HONGKONG
FORTUNE-RICH INVESTMENT CO., LTD
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008 (UNAUDITED)
NOTE
2-SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
In
May 2009, FASB issued FAS No. 165, "Subsequent Events," which was
subsequently codified within ASC 855, “Subsequent Events”. The standard
establishes general standards of accounting for and disclosure of events that
occur after the balance sheet date but before financial statements are issued or
are available to be issued. An entity should apply the requirements of ASC 855
to interim or annual financial periods ending after June 15, 2009. Adoption
of this standard does not have a material impact on the Company’s results of
operations or financial position.
NOTE
3 - CONCENTRATION AND RISKS
(a) Major
suppliers
A summary
of the major suppliers who provided 10% or more of the Group’s combined purchase
is as follows:
For the three months ended September 30, | ||||||||
2009 | 2008 | |||||||
Major Suppliers | ||||||||
Supplier A
|
$ | 575,466 | $ | 499,422 | ||||
Supplier B | 664,682 | 99,151 | ||||||
Other suppliers | 234,368 | 289,847 | ||||||
Total Purchase | $ | 1,474,516 | $ | 888,421 | ||||
(b)
Credit risk
Financial
instruments that potentially expose the Company to concentrations of credit risk
consist primarily of cash, cash equivalents and accounts receivable. The Company
places its cash, cash equivalents with financial institutions that management
believes are of high-credit ratings and quality.
The
Company primarily collects revenues for advertising services up front and has
not experienced significant losses from uncollectible accounts. The Company will
continue to evaluate its collection experience and will provide for an allowance
for doubtful accounts as appropriate.
F-12
HONGKONG
FORTUNE-RICH INVESTMENT CO., LTD
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008 (UNAUDITED)
NOTE
3 - CONCENTRATION AND RISKS (Continued)
(c)
Foreign currency risk
A
majority of the Company’s sales and expenses transactions and a significant
portion of the Company’s assets and liabilities are denominated in RMB. RMB is
not freely convertible into foreign currencies. In the PRC, certain foreign
exchange transactions are required by law to be transacted only by authorized
financial institutions at exchange rates set by the People’s Bank of China
(“PBOC”). Remittances in currencies other than RMB by the Company in China must
be processed through the PBOC or other China foreign exchange regulatory bodies
which require certain supporting documentation in order to affect the
remittance.
NOTE
4 – RESTRICTED CASH
As of
September 30, 2009, the Company had restricted cash of $65,921, while at June
30, 2009, the Company did not draw upon any bank acceptance notes. Thus, there
was no restricted cash set aside at June 30, 2009. The Company is required by
its lenders to maintain with the lending banks a cash balance of 30% to 100% of
the outstanding balance of the bank acceptance notes payable it draws as
restricted cash. (See Note 10).
NOTE
5- ACCOUNTS RECEIVABLE
Accounts
receivables consist of trade receivables resulting from advertisement services
during the normal course of business. Account receivables as of September 30,
2009 and June 30, 2009 amounted to $4,318,817 and $ 3,026,031, net of bad debt
allowance, respectively.
NOTE
6- ADVANCE TO SUPPLIERS
The
Company periodically makes advances to certain vendors for purchases of
advertising materials and equipments and records those advances as advance to
suppliers. Advances to suppliers as of September 30, 2009 and June 30, 2009
amounted to $1,406,009 and $1,732,640, respectively.
F-13
HONGKONG
FORTUNE-RICH INVESTMENT CO., LTD
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008 (UNAUDITED)
NOTE
7-PROPERTY AND EQUIPMENT, NET
As of | ||||||||
30-Sep
2009
|
June
30,
2009
|
|||||||
Advertising Equipments | $ | 10,425,158 | $ | 8,175,318 | ||||
Office
equipment and furniture
|
242,355 | 230,897 | ||||||
Automobiles | 593,569 | 314,796 | ||||||
Boats | 312,125 | 312,125 | ||||||
Subtotal | 11,573,207 | 9,033,136 | ||||||
Less: Accumulated Depreciation | (3,285,998 | ) | (3,137,478 | ) | ||||
Construction in Progress | 1,271,792 | 1,951,692 | ||||||
Total | $ | 9,559,001 | $ | 7,847,350 |
Depreciation
expense for the three months period ended September 30, 2009 and 2008 was
$146,418, and $140,759, respectively.
NOTE
8 - INTANGIBLE ASSETS
Intangible
asset consists of computer software program acquired. The Company has the right
to use the software for four years and amortizes the assets on a straight line
basis over four years. Amortization expense was $2,963 and $366 for the three
months period ended September 30, 2009 and 2008, respectively.
NOTE
9 - DEFERRED CHARGES
The
Company makes advance payments for the right to construct advertising equipments
and post advertisements in certain locations based on long-term contracts with
local government authorities or other business entities. These payments are
recorded as deferred charges and amortized over the terms of the
contracts.
NOTE
10- BANK ACCEPTANCE NOTES PAYABLE
As of
September 30, 2009, the Company had drawn upon bank acceptance notes in the
amount of $ 219,737. The notes are guaranteed to be paid by the banks and
usually for a short-term period of three (3) to six (6) months. The Company is
required to maintain cash deposits at 30% to 100% of the outstanding balance of
the notes payable with the banks, in order to ensure future credit
availability.
F-14
HONGKONG
FORTUNE-RICH INVESTMENT CO., LTD
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008 (UNAUDITED)
NOTE
11- DEFERRED REVENUES
Deferred
revenues represent cash received in advance from customers according to the
contracts for the advertising service fees, advertisement production and
sponsorship fees. These advances are usually refundable to the customers if the
Company is unable to deliver the advertising services. Deferred revenues are
recognized as income when services are provided based on the terms of the
contracts. Deferred revenues as of September 30, 2009 and June 30, 2009 totaled
$3,620,745 and $3,265,245, respectively.
NOTE
12 - TAXES
1) Corporate
Income Tax
Dalian
Guo-heng and variable interest entity, V-Media Group are governed by the Income
Tax Law of the People’s Republic of China concerning the private-run
enterprises, which are currently subject to tax at a statutory rate of 25% on
net income reported after appropriated tax adjustments.
Reconciliation
of the difference between income tax expense and the amounts computed by
applying the PRC statutory rate for the operation of the periods
presented:
For the three months period ended | ||||||||
September 30,
2009
|
September 30,
2008
|
|||||||
Statutory income tax rate | 25% | 25% | ||||||
Change in
valuation allowance
|
- | (24% | ) | |||||
Effective tax rate | 25% | 1% | ||||||
2)
Business Tax
Dalian
Guo-heng, Dalian Vastitude Media Group Co., Ltd. and its four subsidiaries are
also subject to 5% business tax and related surcharges levied on advertising
services in China, which are approximately 3% on our revenues from providing
advertising services. Dalian V-Media’s another subsidiary is only subject to 3%
business tax.
F-15
HONGKONG
FORTUNE-RICH INVESTMENT CO., LTD
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008
(UNAUDITED)
NOTE
12 – TAXES (Continued)
3) Taxes payable at September 30, 2009 and June 30, 2009 consisted of
the following:
As
of
|
||||||||
September
30
|
June
30,
|
|||||||
2009
|
2009
|
|||||||
Business
tax payable
|
$ | 385,074 | $ | 337,574 | ||||
Corporate
income tax payable
|
734,481 | 478,233 | ||||||
Other
|
4,314 | 3,343 | ||||||
Total
taxes payable
|
$ | 1,123,869 | $ | 819,150 |
NOTE
13 - SHORT TERM LOANS
The Short
term loans include the following:
As
of
|
||||||||
September
30
|
June
30,
|
|||||||
2009
|
2009
|
|||||||
a)
Loan payable to Harbin bank
|
$ | 878,950 | $ | 878,389 | ||||
b)
Loan payable to Shanghai Pudong Development Bank
|
878,950 | 878,388 | ||||||
c)
Loan payable to Dalian Bank Xiguang Branch
|
1,142,634 | 1,141,905.14 | ||||||
d)
Loan payable to Gongshang bank
|
292,983 | - | ||||||
Total
short term loans
|
$ | 3,193,517 | $ | 2,898,682 |
a) Loan
payable to Harbin Bank was one year term from March 28, 2008 to March 27, 2009
at the fixed interest rate of 7.47% per year. The loan has been renewed for
another year from April 14, 2009 to April 13, 2010 at the fixed interest rate of
5.31% per year. This loan has been guaranteed by an unrelated company, Union
Chuangye Guaranty Company.
b) Loan
payable to Shanghai Pudong Development bank was one year term
from November 09, 2007 to November 09, 2008 at the fixed
interest rate of 9.48% per year. The loan has been renewed for another year from
November 10, 2008 to November 10, 2009 at the fixed interest rate of 7.99% per
year. This loan has been guaranteed by the Company’s major shareholders Mr.
Guojun Wang and Ms. Ming Ma using their personal properties as
collateral.
c) Loan
payable to Dalian Bank Xiguang Branch was one year term from January 6, 2009 to
January 6, 2010 at the fixed interest rate of 6.90% per year. This loan has been
guaranteed by an unrelated company, Dalian Huanbohai Development Credit Guaranty
Company.
d) Loan
payable to Gongshang Bank was one year term from July 20, 2009 to
July 5, 2010 at the fixed interest rate of 6.93% per year. This loan has been
guaranteed by an unrelated company, Dalian Baifute Xianlan Manufacture
Company.
F-16
HONGKONG
FORTUNE-RICH INVESTMENT CO., LTD
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008
(UNAUDITED)
NOTE
14 - LONG TERM LOANS
The long
term loans include the following:
As
of
|
||||||||
September
30
|
June
30
|
|||||||
2009
|
2009
|
|||||||
a)
Loan payable to China Development Bank
|
$ | 585,966 | $ | 585,592 | ||||
b)
Loan payable to Dalian Bank
|
1,171,933 | 1,171,185 | ||||||
Total
long term loans
|
$ | 1,757,899 | $ | 1,756,777 | ||||
Less:
current portion
|
(585,966 | ) | (585,592 | ) | ||||
Total
long term loans noncurrent portion
|
$ | 1,171,933 | $ | 1,171,185 |
a) Loan
payable to China Development Bank was four year term from December 28, 2006 to
December 27, 2010 at the fixed interest rate of 7.13% per year. Repayments of
equal amount of RMB 2,000,000 (approximately $292,000) are required on January
18, 2008, November 19, 2008, November 19, 2009 and December 27, 2010. This loan
has been guaranteed by the majority shareholder, Mr. Guojun Wang, and an
unrelated company, Dalian Liuhe Guaranty Company. In the guarant contract, the
Company pledged part of its advertising equipments with the value of RMB 12.2
million (approximately $1.78 million) to Dalian Liuhe Guaranty
Company.
b) Loan
payable to Dalian Bank was three year term from May 31, 2009 to June 25, 2012 at
the fixed interest rate of 5.94% per year. Repayment of RMB 2,000,000
(approximately $292,000) is required on June 23, 2010 and repayments of equal
amount of RMB 3,000,000 (approximately $439,000) are required on June 23, 2011
and June 25, 2012. This loan has been guaranteed by an unrelated company, Dalian
Enterprise Credit Guaranty Company.
Interest
expense for the above short-term and long-term loans totaled $69,359 and $65,236
for the three months ended September 30, 2009 and 2008,
respectively.
F-17
HONGKONG
FORTUNE-RICH INVESTMENT CO., LTD
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008 (UNAUDITED)
NOTE
15 - RELATED PARTY TRANSACTIONS
Amounts
due to shareholders are as follows:
As
of
|
||||||||
September
|
June
30
|
|||||||
2009
|
2009
|
|||||||
Due
to shareholders
|
||||||||
Ma, Ming
|
$ | 81,047 | $ | 76,009 | ||||
Modern Trailer Company
|
321,870 | 322,076 | ||||||
Wang, Guojun
|
61,433 | 41,460 | ||||||
Liu,Hongwen
|
49,560 | 29,280 | ||||||
Total Due to shareholders
|
$ | 513,910 | $ | 468,824 | ||||
All of
the above individuals are shareholders of the Company. Modern Trailer Company is
the minority shareholder of Dalian Vastitude Modern Transit Media Co., Ltd.,
which is one of Dalian V-Media’s subsidiaries. The shareholders provide funds
for the Company’s operations for advertising material and equipments purchase
purpose.
These
amounts due are generally unsecured, non-interest bearing and due upon
demand.
Note
16 - SHAREHOLDERS’ EQUITY
HongKong
Fortune-Rich Investment Co., Ltd. was incorporated under the laws of the
Hongkong, with 50,000,000 shares of common stock authorized at par value of
US$0.01.
As of
September 30, 2009, there were 50,000,000 shares of common stock issued and
outstanding.
DALIAN
VASTITUDE MEDIA GROUP CO., LTD.
CONSOLIDATED
FINANCIAL STATEMENTS
JUNE
30, 2009 and 2008
TABLE
OF CONTENTS
Report
of Independent Registered Public Accounting Firm
|
F-20 |
Consolidated
Balance Sheets as of June 30, 2009 and 2008
|
F-21
|
Consolidated
Statements of Income and Other Comprehensive Income for
the Years Ended June 30, 2009 and 2008
|
F-22
|
Consolidated
Statements of Changes in Shareholders’ Equity for
the Years Ended June 30, 2009 and 2008
|
F-23
|
Consolidated
Statements of Cash Flows for
the Years Ended June 30, 2009 and 2008
|
F-24
|
Notes
to Consolidated Financial Statements
|
F-25
to F-37
|
F-19
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the
Board of Directors and Shareholders of
Dalian
Vastitude Media Group Co., Ltd.
We have
audited the accompanying consolidated balance sheets of Dalian Vastitude Media
Group Co., Ltd. as of June 30, 2009 and 2008, and the related consolidated
statements of income and other comprehensive income, changes in shareholders’
equity, and cash flows for each of the years in the two-year period ended June
30, 2009. Dalian Vastitude Media Group Co., Ltd.’s management is responsible for
these financial statements. Our responsibility is to express an opinion on these
financial statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the company’s internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our
opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of Dalian Vastitude Media Group Co.,
Ltd. as of June 30, 2009 and 2008 and the results of its operations, changes in
shareholders’ equity, and cash flows for each of the years in the two-year
period ended June 30, 2009 in conformity with accounting principles generally
accepted in the United States of America.
/s/
Bagell Josephs, Levine & Company, LLC
Bagell
Josephs, Levine & Company, LLC
Marlton,
New Jersey
October
26, 2009
F-20
DALIAN VASTITUTE MEDIA GROUP CO. LTD
CONSOLIDATED BALANCE SHEETS
As
of June 30,
|
||||||||
2009
|
2008
|
|||||||
ASSETS
|
||||||||
Current
assets
|
||||||||
Cash
& cash equivalents
|
$ | 147,366 | $ | 142,665 | ||||
Restricted
cash
|
- | 357,190 | ||||||
Accounts
receivable, net of allowance for bad debt of
|
||||||||
$62,183
and $3,460, respectively
|
3,026,031 | 2,153,725 | ||||||
Advance
to suppliers
|
1,732,640 | 1,731,543 | ||||||
Other
assets
|
55,958 | 51,688 | ||||||
Total
current assets
|
4,961,995 | 4,436,811 | ||||||
Property,
plant and equipment, net
|
7,847,350 | 4,444,966 | ||||||
Other
assets
|
||||||||
Security
deposits
|
672,145 | 270,444 | ||||||
Intangible
asset, net
|
33,843 | 1,630 | ||||||
Deferred
charges
|
1,237,465 | 398,345 | ||||||
Total
other assets
|
1,943,453 | 670,419 | ||||||
Total
Assets
|
$ | 14,752,798 | $ | 9,552,196 | ||||
LIABILITIES
AND SHAREHOLDERS' EQUITY
|
||||||||
Current
liabilities
|
||||||||
Short
term loans
|
$ | 2,898,682 | $ | 1,749,501 | ||||
Bank
acceptance notes payable
|
- | 510,271 | ||||||
Long
term loan-current
|
585,592 | 291,583 | ||||||
Accounts
payable
|
825,325 | 2,607,668 | ||||||
Deferred
revenues
|
3,265,245 | 2,432,368 | ||||||
Taxes
payable
|
819,150 | 214,364 | ||||||
Accrued
expenses and other payables
|
73,497 | 41,612 | ||||||
Due
to shareholders
|
468,824 | 244,016 | ||||||
Total
current liabilities
|
8,936,315 | 8,091,383 | ||||||
Long
term loans
|
1,171,185 | 583,167 | ||||||
Total Liabilities
|
10,107,500 | 8,674,550 | ||||||
Shareholders'
equity
|
||||||||
Registered
capital
|
2,623,926 | 1,748,408 | ||||||
Accumulated
other comprehensive income
|
33,115 | 25,672 | ||||||
Retained
earnings (accumulated deficits)
|
1,636,850 | (1,193,374 | ) | |||||
Total
shareholders' equity
|
4,293,891 | 580,706 | ||||||
Noncontrolling
interest
|
351,407 | 296,940 | ||||||
Total
shareholders' equity
|
4,645,298 | 877,646 | ||||||
Total
Liabilities and Shareholders' Equity
|
$ | 14,752,798 | $ | 9,552,196 |
The
accompany notes are an integral part of these consolidated financial
statements
F-21
DALIAN VASTITUTE MEDIA GROUP CO. LTD
CONSOLIDATED STATEMENTS OF INCOME AND OTHER
COMPREHENSIVE INCOME
For
the years ended June 30,
|
||||||||
2009
|
2008
|
|||||||
Revenues
|
$ | 8,418,351 | $ | 5,333,023 | ||||
Cost
of revenue
|
(3,454,094 | ) | (3,216,255 | ) | ||||
Gross
profit
|
4,964,257 | 2,116,768 | ||||||
Selling,
general and administrative expenses
|
(1,363,966 | ) | (1,174,148 | ) | ||||
Income
from operations
|
3,600,291 | 942,620 | ||||||
Non-operating
income (expenses):
|
||||||||
Interest
income
|
1,126 | 1,421 | ||||||
(260,943 | ) | (235,182 | ) | |||||
Other
income
|
- | 27,506 | ||||||
Other
expenses
|
(8,448 | ) | (3,118 | ) | ||||
Total
non-operating income (expenses)
|
(268,265 | ) | (209,373 | ) | ||||
Income
before income taxes
|
3,332,026 | 733,247 | ||||||
Provision
for income taxes
|
477,868 | - | ||||||
Net
income
|
2,854,158 | 733,247 | ||||||
Less:
net income (loss) attribute to the noncontrolling interest
|
23,934 | (27,831 | ) | |||||
Net
income attributable to Dalian Vastitute Media Group Co.
Ltd
|
2,830,224 | 761,078 | ||||||
Other
comprehensive income
|
||||||||
Foreign
currency translation gain
|
7,443 | 9,113 | ||||||
Comprehensive
income
|
$ | 2,837,667 | $ | 770,190 | ||||
Basic
and diluted earnings per share
|
0.14 | 0.06 | ||||||
Weighted
average number of shares
|
19,835,616 | 12,312,329 |
The
accompany notes are an integral part of these consolidated financial
statements
F-22
DALIAN VASTITUTE MEDIA GROUP CO. LTD
CONSOLIDATED STATEMENTS OF CHANGES IN
SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED JUNE 30, 2009 AND 2008
Registered
capital
|
Accumulated
Other comprehensive income
|
Retained
earnings (Accumulated deficits)
|
Noncontrolling
Interest
|
Total
|
||||||||||||||||
Balance
at June 30, 2007
|
$ | 1,208,142 | $ | 16,559 | $ | (1,954,452 | ) | $ | 215,351 | $ | (514,400 | ) | ||||||||
Capital
contributions
|
540,266 | - | - | 109,420 | 649,686 | |||||||||||||||
Net
income for the year
|
- | - | 761,078 | (27,831 | ) | 733,247 | ||||||||||||||
Foreign
currency translation gain
|
- | 9,113 | - | - | 9,113 | |||||||||||||||
Balance
at June 30, 2008
|
1,748,408 | 25,672 | (1,193,374 | ) | 296,940 | 877,646 | ||||||||||||||
Capital
contributions
|
875,518 | - | - | 30,533 | 906,051 | |||||||||||||||
Net
income for the year
|
- | - | 2,830,224 | 23,934 | 2,854,158 | |||||||||||||||
Foreign
currency translation gain
|
- | 7,443 | - | - | 7,443 | |||||||||||||||
Balance
at June 30, 2009
|
$ | 2,623,926 | $ | 33,115 | $ | 1,636,850 | $ | 351,407 | $ | 4,645,298 |
The
accompany notes are an integral part of these consolidated financial
statements
F-23
DALIAN VASTITUTE MEDIA GROUP CO. LTD
CONSOLIDATED STATEMENTS OF CASH FLOWS
For
the years ended June 30,
|
||||||||
2009
|
2008
|
|||||||
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
||||||||
Net
income
|
$ | 2,830,224 | $ | 761,078 | ||||
Adjustments
to reconcile net income to net cash
|
||||||||
provided
by operating activities:
|
||||||||
Depreciation
and amortization
|
643,035 | 752,501 | ||||||
Bad
debt expense
|
58,664 | 3,262 | ||||||
Minority
interest
|
23,934 | (27,831 | ) | |||||
Changes
in operating assets and liabilities
|
||||||||
Accounts
receivable
|
(921,355 | ) | (1,573,042 | ) | ||||
Restricted
cash
|
358,402 | (336,700 | ) | |||||
Other
assets
|
(4,051 | ) | (48,724 | ) | ||||
Security deposit
|
(400,272 | ) | (85,893 | ) | ||||
Advance
to suppliers
|
6,100 | (965,546 | ) | |||||
Deferred assets
|
(836,825 | ) | (375,495 | ) | ||||
Accounts
payable
|
(1,791,823 | ) | 327,979 | |||||
Advances
from customers
|
822,133 | 1,633,615 | ||||||
Taxes
payable
|
603,434 | 193,307 | ||||||
Accrued
expenses and other payables
|
31,688 | (48,333 | ) | |||||
Net
cash provided by operating activities
|
1,423,288 | 210,178 | ||||||
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
||||||||
Acquisition
of intangible asset
|
(33,646 | ) | - | |||||
Acquisition
of property, plant & equipment
|
(4,022,890 | ) | (532,779 | ) | ||||
Net
cash used in investing activities
|
(4,056,536 | ) | (532,779 | ) | ||||
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
||||||||
Capital
contributions
|
906,051 | 649,686 | ||||||
Net
proceeds from short-term bank loans
|
3,335,334 | 1,649,145 | ||||||
Repaymnet
of short-term bank loans
|
(2,194,299 | ) | (412,286 | ) | ||||
Net
Proceeds from bank acceptance notes payable
|
- | 481,001 | ||||||
Repayments
of bank acceptance notes payable
|
(512,003 | ) | - | |||||
Net
proceeds from shareholder loan
|
223,623 | 217,405 | ||||||
Net
proceeds from long-term bank loans
|
1,170,293 | - | ||||||
Repayments
of long-term bank loans
|
(292,573 | ) | (2,198,860 | ) | ||||
Net
cash provided by financing activities
|
2,636,426 | 386,091 | ||||||
EFFECT
OF EXCHANGE RATE CHANGE ON
|
||||||||
CASH
& CASH EQUIVALENTS
|
1,523 | (5,430 | ) | |||||
NET
INCREASE IN CASH & CASH EQUIVALENTS
|
4,701 | 58,060 | ||||||
CASH
& CASH EQUIVALENTS, BEGINNING OF YEAR
|
142,665 | 84,605 | ||||||
CASH
& CASH EQUIVALENTS, END OF YEAR
|
$ | 147,366 | $ | 142,665 | ||||
SUPPLEMENTAL
CASH FLOW DISCLOSURE
|
||||||||
Income
taxes paid
|
$ | - | $ | - | ||||
Interest
paid
|
$ | 187,626 | $ | 286,451 |
The
accompany notes are an integral part of these consolidated financial
statements
F-24
DALIAN
VASTITUDE MEDIA GROUP CO., LTD.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED JUNE 30, 2009 AND 2008
NOTE
1- ORGANIZATION AND BASIS OF PRESENTATION
Dalian
Vastitude Media Group Co., Ltd. (the “Company” or “V-Media”) is a
corporation organized under the laws of the People’s Republic of China
(“PRC”) in September 2000 with registered capital of RMB 20 million
(approximately $2.6 millions).
The
Company has the following subsidiaries under its control: (i) Two wholly-owned
subsidiaries, Shenyang Vastitude Media Co., Ltd., established in
April, 2007, and Tianjin Vastitude AD Media Co., Ltd., established in July,
2008; (ii) Three majority-owned subsidiaries, Dalian Vastitude & Modern
Transit Media Co., Ltd., formed in April, 2004 with the
Company holding 70% of controlling stake and Dalian
Vastitude Engineering & Design Co., Ltd., also established in February 2007
with the Company holding 83.33% of interests; and Dalian Vastitude Network
Technology Co., Ltd., established in March 2009 with the Company
holding 60% of its equity stake.
The
Company, along with all of its subsidiaries, is engaging in the sales,
construction and operations of outdoor advertising displays in the Northeast
part of China. The Company’s revenues are derived primarily from the sale of
advertising on outdoor advertising displays owned and operated by the
Company.
The
Company’s consolidated financial statements have been prepared in accordance
with generally accepted accounting principles in the United States of America
(“US GAAP”).
NOTE
2- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles
of Consolidation
The
consolidated financial statements of the Company include the accounts of Dalian
Vastitude Media Group Co., Ltd., Dalian Vastitude & Mordern Transit Media
Co., Ltd., Dalian Vastitude Engineering & Design Co., Ltd.,
Dalian Vastitude Network Technolology Co.,Ltd., Shenyang Vastitude Media Co.,
Ltd. and Tianjin Vastitude AD Media Co., Ltd. All significant inter-company
balances and transactions are eliminated in consolidation.
Use
of Estimates
In
preparing the financial statements in conformity with accounting principles
generally accepted in the United States of America, management makes estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the dates of the financial
statements, as well as the reported amounts of revenues and expenses during the
reporting year. Significant estimates, required by management, include the
recoverability of long-lived assets and the valuation of
inventories. Actual results could differ from those
estimates.
F-25
DALIAN
VASTITUDE MEDIA GROUP CO., LTD.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR
THE YEARS ENDED JUNE 30, 2009 AND 2008
NOTE
2-SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Cash
and Cash Equivalents
For
purposes of the statement of cash flow, the Company considers all highly liquid
investments with an original maturity of three months or less to be cash
equivalents.
Accounts
Receivables
Accounts
receivables are recorded at net realizable value consisting of the carrying
amount less an allowance for uncollectible amounts, as needed.
The
Company uses the aging method to estimate the valuation allowance for
anticipated uncollectible receivable balances. Under the aging method, bad debt
percentages determined by management based on historical experience as well as
current economic climate are applied to customers’ balances categorized by the
number of months the underlying invoices have remained outstanding. The
valuation allowance balance is adjusted to the amount computed as a result of
the aging method. When facts subsequently become available to indicate that the
allowance provided requires an adjustment, then the adjustment will be
classified as a change in estimate. There were allowances of $62,183 and $3,460
for uncollectible amounts for the years ended June 30, 2009 and 2008,
respectively.
Property,
Equipment and Construction in Progress
Property,
plant and equipment are stated at cost less accumulated depreciation.
Expenditures for maintenance and repairs are charged to earnings as incurred
while additions, renewals and betterments are capitalized. When the asset
property and equipment is retired or otherwise disposed of, the related cost and
accumulated depreciation are removed from the respective accounts, and any gain
or loss is included in operations. Depreciation of property, plant and equipment
is provided using the straight-line method for substantially all assets with
estimated lives as follows:
Estimated Useful Life | Residual value | |||
Advertising equipment | 4 - 15 years | 5% | ||
Automobile
|
7 years | 5% | ||
Computer, office equipment and furniture | 5 years | 5% | ||
Boat | 7 years | 5% |
Construction
in progress represents direct costs of construction or acquisition and design
fees incurred. Capitalization of these costs ceases and the construction in
progress is transferred to plant and equipment when substantially all the
activities necessary to prepare the assets for their intended use are completed.
No depreciation is provided until it is completed and ready for intended use.
For the years ended June 30, 2009 and 2008, the Company had total accumulated
costs involved with construction in progress in the amount of $ 1,951,692 and $
164,283, respectively.
F-26
DALIAN
VASTITUDE MEDIA GROUP CO., LTD.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR
THE YEARS ENDED JUNE 30, 2009 AND 2008
NOTE
2-SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Intangible
asset
Intangible
assets are accounted for in accordance with the provisions of SFAS No. 142,
“Goodwill and Other Intangible Assets”. Under SFAS 142, intangible asset
included in the carrying value of investments accounted for using the equity
method of accounting, and certain other intangible assets deemed to have
indefinite useful lives are not amortized. Indefinite-lived intangible assets
are assessed for impairment at least annually based on comparisons of their
respective fair values to their carrying values.
Impairment
of long-lived assets
Long-lived
assets, which include property, plant and equipment and intangible assets, are
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. Recoverability of
long-lived assets to be held and used is measured by a comparison of the
carrying amount of an asset to the estimated undiscounted future cash flows
expected to be generated by the assets. If the carrying amount
of an asset exceeds its estimated undiscounted future cash flows, an impairment
charge is recognized by the amount by which the carrying amount of the asset
exceeds the fair value of the assets. Fair value is generally
determined using the asset’s expected future discounted cash flows or market
value, if readily determinable. No impairment loss is recorded for the years
ended June 30, 2009 and 2008.
Revenue
recognition
The Company’s revenue recognition
policies are in compliance with Staff Accounting Bulletin (“SAB”)
104. The
Company recognizes revenues when the advertisements are posted over the
contractual term based on the schedules agreed with the customer and collections
are reasonably assured. Payments received in advance of services provided are
recorded as deferred revenue.
Cost
of revenues
Cost of
advertising services consists primarily of media costs payable under exclusive
advertising agreements, depreciation of advertising equipment, business taxes
and surcharges and other direct operating costs. Media costs are expensed as
incurred.
Selling,
General and administrative Costs
Selling,
general and administrative costs consist primarily of salaries and commissions
for sales representatives, salaries for administrative staffs, rent expenses,
office supply’s depreciation expense and employee benefits for administrative
staffs.
F-27
DALIAN
VASTITUDE MEDIA GROUP CO., LTD.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR
THE YEARS ENDED JUNE 30, 2009 AND 2008
NOTE
2-SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Foreign
currency translation
The
Company’s functional currency is the Renminbi (“RMB”). For financial reporting
purposes, RMB has been translated into United States dollars ("USD") as the
reporting currency. Assets and liabilities are translated at the exchange rate
in effect at the balance sheet date. Revenues and expenses are translated at the
average rate of exchange prevailing during the reporting period. Translation
adjustments arising from the use of different exchange rates from period to
period are included as a component of stockholders' equity as "Accumulated other
comprehensive income". Gains and losses resulting from foreign currency
translations are included in accumulated other comprehensive
income. There is no significant fluctuation in exchange rate for the
conversion of RMB to USD after the balance sheet date.
Income
Taxes
The
Company accounts for income tax under the provisions of SFAS No.109 "Accounting
for Income Taxes", which requires recognition of deferred tax assets and
liabilities for the expected future tax consequences of events that have been
included in the financial statements or tax returns. Under this
method, deferred income taxes are recognized for the tax consequences in future
years of differences between the tax bases of assets and liabilities and their
financial reporting amounts at each period end based on enacted tax laws and
statutory tax rates applicable to the periods in which the differences are
expected to affect taxable income. Valuation allowances are established,
whenever necessary, against net deferred tax assets when it is more likely than
not that some portion or all of the deferred tax asset will not be
realized.
Fair
Value of Financial Instruments
The
Company’s financial instruments include cash and cash equivalents, accounts
receivable, advances to suppliers, other receivables, accounts payable, accrued
expenses, taxes payable, notes payable and other loans payable. Management has
estimated that the carrying amounts approximate their fair value due to the
short-term nature.
F-28
DALIAN
VASTITUDE MEDIA GROUP CO., LTD.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR
THE YEARS ENDED JUNE 30, 2009 AND 2008
NOTE
2-SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Earnings
per Share
The
Company computes earnings per share (“EPS’) in accordance with Statement of
Financial Accounting Standards No. 128, “Earnings per Share” (“SFAS No. 128”),
and SEC Staff Accounting Bulletin No. 98 (“SAB 98”). SFAS
No. 128 requires companies with complex capital structures to present basic
and diluted EPS. Basic EPS is measured as net income divided by the
weighted average common shares outstanding for the period. Diluted EPS is
similar to basic EPS but presents the dilutive effect on a per share basis of
potential common shares (e.g., convertible securities, options and warrants) as
if they had been converted at the beginning of the periods presented, or
issuance date, if later. Potential common shares that have an
anti-dilutive effect (i.e., those that increase income per share or decrease
loss per share) are excluded from the calculation of diluted EPS.
Statement
of Cash Flows
In
accordance with SFAS No. 95, “Statement of Cash Flows,” cash flows from the
Company's operations is calculated based upon the local
currencies. As a result, amounts related to assets and liabilities
reported on the statement of cash flows may not necessarily agree with changes
in the corresponding balances on the balance sheet.
Asset
Retirement Obligations
Statement
of Financial Accounting Standards No. 143, “Accounting for Asset Retirement
Obligations” (SFAS 143) SFAS 143 requires companies to record the present
value of obligations associated with the retirement of tangible long-lived
assets in the period in which it is incurred. The liability is required to be
capitalized as part of the related long-lived asset’s carrying amount. Over
time, accretion of the liability should be recognized as an operating expense
and the capitalized cost should be depreciated over the expected useful life of
the related asset. The Company’s asset retirement obligations relate primarily
to the dismantlement, removal, site reclamation and similar activities of its
properties. The Company has no retirement obligations accrued on book because
the disposed properties will be used to offset the expense incurred during these
activities.
F-29
DALIAN
VASTITUDE MEDIA GROUP CO., LTD.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR
THE YEARS ENDED JUNE 30, 2009 AND 2008
NOTE
2-SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
New
Accounting Pronouncements
In
June 2009, the FASB issued SFAS 168, The FASB Accounting Standards
Codification TM and the Hierarchy of Generally Accepted Accounting Principles –
a replacement of FASB Statement No. 162. The FASB Accounting Standards
Codification TM (“Codification”) will become the source of authoritative U.S.
generally accepted accounting principles (“GAAP”) recognized by FASB to be
applied by nongovernmental entities. Rules and interpretive releases of the SEC
under authority of federal securities laws are also sources of authoritative
GAAP for SEC registrants. On the effective date of SFAS 168, the Codification
will supersede all then-existing non-SEC accounting and reporting standards. All
other nongrandfathered non-SEC accounting literature not included in the
Codification will become nonauthoritative. SFAS 168 is effective for financial
statements issued for interim and annual periods ending after September 15,
2009. Adoption of SFAS 168 is not expected to have a material impact on the
Company’s results of operations or financial position.
In
June 2009, the FASB issued SFAS 167, Amendments to FASB Interpretation
No. 46(R), which improves financial reporting by enterprises involved with
variable interest entities. SFAS 167 addresses (1) the effects on certain
provisions of FASB Interpretation No. 46 (revised December 2003),
Consolidation of Variable Interest Entities , as a result of the elimination of
the qualifying special-purpose entity concept in SFAS 166 and (2) concerns
about the application of certain key provisions of FIN 46(R), including those in
which the accounting and disclosures under the Interpretation do not always
provide timely and useful information about an enterprise’s involvement in a
variable interest entity. SFAS 167 shall be effective as of the beginning of
each reporting entity’s first annual reporting period that begins after
November 15, 2009, for interim periods within the first annual reporting
period, and for interim and annual reporting periods thereafter. Earlier
application is prohibited. Adoption of SFAS 167 is not expected to have a
material impact on the Company’s results of operations or financial
position.
In
May 2009, the FASB issued SFAS 165, Subsequent Events , which establishes
general standards of accounting for and disclosure of events that occur after
the balance sheet date but before financial statements are issued or are
available to be issued. An entity should apply the requirements of SFAS 165 to
interim or annual financial periods ending after June 15, 2009. Adoption of
SFAS 165 did not have a material impact on the Company’s results of operations
or financial position.
F-30
DALIAN
VASTITUDE MEDIA GROUP CO., LTD.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR
THE YEARS ENDED JUNE 30, 2009 AND 2008
NOTE
2-SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
On
April 1, 2009, the FASB approved FSP FAS 141(R)-1, Accounting for Assets Acquired and
Liabilities Assumed in a Business Combination That Arise from Contingencies,
which amends Statement 141(R) and eliminates the distinction between
contractual and non-contractual contingencies. Under FSP FAS 141(R), an acquirer
is required to recognize at fair value an asset acquired or liability assumed in
a business combination that arises from a contingency if the acquisition-date
fair value of that asset or liability can be determined during the measurement
period. If the acquisition-date fair value cannot be determined, the acquirer
applies the recognition criteria in SFAS No. 5, Accounting for Contingencies
and Interpretation 14, “Reasonable Estimation of the Amount of a Loss –
and interpretation of FASB Statement No. 5,” to determine whether the
contingency should be recognized as of the acquisition date or after it.
Adoption of this statement did not have a material impact on the Company’s
results of operations or financial position.
On
April 9, 2009, the FASB also approved FSP FAS 107-1 and APB 28-1, Interim Disclosures about Fair Value
of Financial Instruments to require disclosures about fair value of
financial instruments in interim period financial statements of publicly traded
companies and in summarized financial information required by APB Opinion
No. 28, Interim Financial
Reporting. We are required to adopt this FSP for our interim and annual
reporting periods ending after June 15, 2009. This FSP does not require
disclosures for periods presented for comparative purposes at initial adoption.
This FSP requires comparative disclosures only for periods ending after initial
adoption. Adoption of this statement did not have a material impact on the
Company’s results of operations or financial position.
On
October 10, 2008, the FASB issued FSP 157-3, “Determining the Fair Value of a
Financial Asset When the Market for That Asset Is Not Active,” which clarifies
the application of SFAS 157 in a market that is not active and provides an
example to illustrate key considerations in determining the fair value of a
financial asset when the market for that financial asset is not active. FSP
157-3 became effective on October 10, 2008, and its adoption did not have a
material impact on our financial position or results.
In
June 2008, the FASB issued FSP No. EITF 03-6-1, “Determining Whether
Instruments Granted in Share-Based Payment Transactions Are Participating
Securities” (“FSP EITF 03-6-1”). FSP EITF 03-6-1 concludes that
unvested share-based payment awards that contain rights to receive
non-forfeitable dividends or dividend equivalents are participating securities,
and thus, should be included in the two-class method of computing earnings per
share (“EPS”). FSP EITF 03-6-1 is effective for fiscal years
beginning after December 15, 2008, and interim periods within those
years. It also requires that all prior-period EPS data be adjusted
retrospectively. Its adoption did not have a material impact on our
financial position or results.
F-31
DALIAN
VASTITUDE MEDIA GROUP CO., LTD.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR
THE YEARS ENDED JUNE 30, 2009 AND 2008
NOTE
3 - CONCENTRATION AND RISKS
(a) Major
suppliers
A summary
of the major suppliers who provided 10% or more of the Group’s combined purchase
is as follows:
For the years ended June 30, | ||||||||
2009 | 2008 | |||||||
Major Suppliers | ||||||||
Supplier A
|
$ | 3,034,737 | $ | 353,808 | ||||
Supplier B | 1,497,363 | 11,255 | ||||||
Other suppliers | 1,689,068 | 1,401,142 | ||||||
Total Purchase | $ | 6,221,168 | $ | 1,766,206 | ||||
(b)
Credit risk
Financial
instruments that potentially expose the Company to concentrations of credit risk
consist primarily of cash, cash equivalents and accounts receivable. The Company
places its cash, cash equivalents with financial institutions that management
believes are of high-credit ratings and quality.
The
Company primarily collects revenues for advertising services up front and has
not experienced significant losses from uncollectible accounts. The Company will
continue to evaluate its collection experience and will provide for an allowance
for doubtful accounts as appropriate.
c)
Foreign currency risk
A
majority of the Company’s sales and expenses transactions and a significant
portion of the Company’s assets and liabilities are denominated in RMB. RMB is
not freely convertible into foreign currencies. In the PRC, certain foreign
exchange transactions are required by law to be transacted only by authorized
financial institutions at exchange rates set by the People’s Bank of China
(“PBOC”). Remittances in currencies other than RMB by the Company in China must
be processed through the PBOC or other China foreign exchange regulatory bodies
which require certain supporting documentation in order to affect the
remittance.
NOTE
4 – RESTRICTED CASH
As of
June 30, 2009, the Company did not draw upon any bank acceptance notes. Thus,
there was no restricted cash set aside at June 30, 2009. At June 30, 2008, the
Company had restricted cash of $357,190. The Company is required by its lenders
to maintain with the lending banks a cash balance of 30% to 100% of the
outstanding balance of the bank acceptance notes payable it draws as restricted
cash. (See Note 10).
F-32
DALIAN
VASTITUDE MEDIA GROUP CO., LTD.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR
THE YEARS ENDED JUNE 30, 2009 AND 2008
NOTE
5- ACCOUNTS RECEIVABLE
Accounts
receivables consist of trade receivables resulting from advertisement services
during the normal course of business. Account receivables as of June 30, 2009
and 2008 amounted to $ 3,026,031 and $ 2,153,725, net of bad debt allowance,
respectively.
NOTE
6- ADVANCE TO SUPPLIERS
The
Company periodically makes advances to certain vendors for purchases of
advertising materials and equipments and records those advances as advance to
suppliers. Advances to suppliers as of June 30, 2009 and 2008 amounted to
$1,732,640 and $1,731,543, respectively.
NOTE
7-PROPERTY AND EQUIPMENT, NET
As of June 30, | ||||||||
2009
|
2008
|
|||||||
Advertising Equipments | $ | 8,175,318 | $ | 6,003,417 | ||||
Office
equipment and furniture
|
230,897 | 138,024 | ||||||
Automobiles | 314,796 | 313,493 | ||||||
Boats | 312,125 | 310,832 | ||||||
Subtotal | 9,033,136 | 6,765,766 | ||||||
Less: Accumulated Depreciation | (3,137,478 | ) | (2,485,083 | ) | ||||
Construction in Progress | 1,951,692 | 164,283 | ||||||
Total | $ | 7,847,350 | $ | 4,444,966 |
Depreciation
expense for the years ended June 30, 2009 and June 30, 2008 was $641,570, and
$751,125, respectively.
NOTE
8 - INTANGIBLE ASSETS
Intangible
asset consists of computer software program acquired. The Company has the right
to use the software for four years and amortizes the assets on a straight line
basis over four years. Amortization expense was $1,465 and $1,376 for the years
ended June 30, 2009 and 2008, respectively.
NOTE
9 - DEFERRED CHARGES
The
Company makes advance payments for the rights to construct advertising
equipments and post advertisements in certain locations based on long-term
contracts with local government authorities or other business entities. These
payments are recorded as deferred charges and amortized over the terms of the
contracts.
F-33
DALIAN
VASTITUDE MEDIA GROUP CO., LTD.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR
THE YEARS ENDED JUNE 30, 2009 AND 2008
NOTE
10- BANK ACCEPTANCE NOTES PAYABLE
As of
June 30, 2008, the Company had drawn upon bank acceptance notes in the amount of
$ 510,271. The notes are guaranteed to be paid by the banks and usually for a
short-term period of three (3) to six (6) months. The Company is required to
maintain cash deposits at 30% to 100% of the outstanding balance of the notes
payable with the banks, in order to ensure future credit
availability.
NOTE
11- DEFERRED REVENUES
Deferred
revenues represent cash received in advance from customers according to the
contracts for the advertising service fees, advertisement production and
sponsorship fees. These advances are usually refundable to the customers if the
Company is unable to deliver the advertising services. Deferred revenues are
recognized as income when services are provided based on the terms of the
contracts. Deferred revenues as of June 30, 2009 and 2008 totaled $3,265,245 and
$2,432,368, respectively.
NOTE
12 - TAXES
1) Corporate
Income Tax
The
Company is governed by the Income Tax Law of the People’s Republic of China
concerning the private-run enterprises, which are currently subject to tax at a
statutory rate of 25% on net income reported after appropriated tax
adjustments.
Reconciliation
of the difference between income tax expense and the amounts computed by
applying the PRC statutory rate for the operation of the periods
presented:
For the year ended June 30, | ||||||||
2009
|
2008
|
|||||||
Statutory income tax rate | 25% | 25% | ||||||
Non-deductible expenses | 1% | 7% | ||||||
Change in
valuation allowance
|
(12% | ) | (32% | ) | ||||
Effective tax rate | 14% | 0% | ||||||
The
principal components of deferred income taxes were as follows:
For the year ended June 30, | ||||||||
2009 | 2008 | |||||||
Deferred income tax assets: | ||||||||
Operating loss carry forwards | $ | - | $ | 395,120 | ||||
Total gross deferred income tax assets | - | 395,120 | ||||||
Less: Valuation allowance | - | (395,120 | ) | |||||
Net deferred income tax assets | $ | - | $ | - | ||||
F-34
DALIAN
VASTITUDE MEDIA GROUP CO., LTD.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR
THE YEARS ENDED JUNE 30, 2009 AND 2008
NOTE
12 – TAXES (Continued)
2)
Business Tax
The
Company and its four subsidiaries are also subject to 5% business tax and
related surcharges levied on advertising services in China, which are
approximately 3% on our revenues from providing advertising services. Dalian
Vastitude Engineering & Design Co., Ltd. is only subject to 3% business
tax.
3) Taxes
payable at June 30, 2009 and 2008 consisted of the following:
As
of June 30,
|
||||||||
2009
|
2008
|
|||||||
Business
tax payable
|
$ | 337,574 | $ | 213,134 | ||||
Corporate
income tax payable
|
478,233 | - | ||||||
Other
|
3,343 | 1,230 | ||||||
Total
taxes payable
|
$ | 819,150 | $ | 214,364 |
NOTE 13 - SHORT TERM LOANS
The Short
term loans include the following:
As
of June 30,
|
||||||||
2009
|
2008
|
|||||||
a)
Loan payable to Harbin bank
|
$ | 878,389 | $ | 874,750 | ||||
b)
Loan payable to Shanghai Pudong Development Bank
|
878,388 | 874,751 | ||||||
c)
Loan payable to Dalian Bank Xiguang Branch
|
1,141,905 | - | ||||||
Total
short term loans
|
$ | 2,898,682 | $ | 1,749,501 |
a) Loan
payable to Harbin Bank was one year term from March 28, 2008 to March 27, 2009
at the fixed interest rate of 7.47% per year. The loan has been renewed for
another year from April 14, 2009 to April 13, 2010 at the fixed interest rate of
5.31% per year. This loan has been guaranteed by an unrelated company Union
Chuangye Guaranty Company.
b) Loan
payable to Shanghai Pudong Development bank was one year term
from November 09, 2007 to November 09, 2008 at the fixed
interest rate of 9.48% per year. The loan has been renewed for another year from
November 10, 2008 to November 10, 2009 at the fixed interest rate of 7.99% per
year. This loan has been guaranteed by the Company’s major shareholders Mr.
Guojun Wang and Ms. Ming Ma using their personal properties as
collateral.
F-35
DALIAN
VASTITUDE MEDIA GROUP CO., LTD.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR
THE YEARS ENDED JUNE 30, 2009 AND 2008
NOTE
13 - SHORT TERM LOANS (Continued)
c) Loan
payable to Dalian Bank Xiguang Branch was one year term from January 6, 2009 to
January 6, 2010 at the fixed interest rate of 6.90% per year. This loan has been
guaranteed by an unrelated company, Dalian Huanbohai Development Credit Guaranty
Company.
NOTE
14 - LONG TERM LOANS
The long
term loans include the following:
As
of June 30,
|
||||||||
2009
|
2008
|
|||||||
a)
Loan payable to China Development Bank
|
$ | 585,592 | $ | 874,750 | ||||
b)
Loan payable to Dalian Bank
|
1,171,185 | - | ||||||
Total
long term loans
|
$ | 1,756,777 | $ | 874,750 | ||||
Less:
current portion
|
(585,592 | ) | (291,583 | ) | ||||
Total
long term loans noncurrent portion
|
$ | 1,171,185 | $ | 583,167 |
a) Loan
payable to China Development Bank was four year term from December 28, 2006 to
December 27, 2010 at the fixed interest rate of 7.13% per year. Repayments of
equal amount of RMB 2,000,000 (approximately $292,000) are required on January
18, 2008, November 19, 2008, November 19, 2009 and December 27, 2010. This loan
has been guaranteed by the majority shareholder, Mr. Guojun Wang, and an
unrelated company, Dalian Liuhe Guaranty Company. In the guarant contract, the
Company pledged part of its advertising equipments with the value of RMB 12.2
million (approximately $1.78 million) to Dalian Liuhe Guaranty
Company.
b) Loan
payable to Dalian Bank was three year term from May 31, 2009 to June 25, 2012 at
the fixed interest rate of 5.94% per year. Repayment of RMB 2,000,000
(approximately $292,000) is required on June 23, 2010 and repayments of equal
amount of RMB 3,000,000 (approximately $439,000) are required on June 23, 2011
and June 25, 2012. This loan has been guaranteed by an unrelated company, Dalian
Enterprise Credit Guaranty Company.
Interest
expense for the above short-term and long-term loans totaled $260,943 and
$235,182 for the years ended June 30, 2009 and 2008, respectively.
F-36
DALIAN
VASTITUDE MEDIA GROUP CO., LTD.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR
THE YEARS ENDED JUNE 30, 2009 AND 2008
NOTE
15 - RELATED PARTY TRANSACTIONS
Amounts
due to shareholders are as follows:
As
of June 30
|
||||||||
2009
|
2008
|
|||||||
Due
to shareholders
|
||||||||
Ma, Ming
|
$ | 76,009 | $ | 26,145 | ||||
Modern Trailer Company
|
322,076 | 174,950 | ||||||
Wang, Guojun
|
41,460 | 42,921 | ||||||
Liu,Hongwen
|
29,280 | - | ||||||
Total Due to shareholders
|
$ | 468,824 | $ | 244,016 |
All of
the above individuals are shareholders of the Company. Modern Trailer Company is
the minority shareholder of Dalian Vastitude Modern Transit Media Co.,
Ltd. The shareholders provide funds for the Company’s operations for
advertising material and equipments purchase purpose.
These
amounts due are generally unsecured, non-interest bearing and due upon
demand.
NOTE
16 – SHAREHOLDERS’ EQUITY
The
Company’s registered capital is RMB 20,000,000, equivalent of $2.67 million,
which were contributed by the nine shareholders of the Company. The industry
practice in PRC does not require the issuance of stock certificates to the
shareholders, nor a third party transfer agent to maintain the records. For the
purpose of financial reporting, the Company elected to designate one (1) common
share for each RMB contributed. Accordingly, there were total 20,000,000 and
14,000,000 shares issued and outstanding for the years ended June 30, 2009 and
2008, respectively.
F-37
GOLDEN
KEY INTERNATIONAL INC.
INDEX
TO UNAUDITED PRO FORMA CONDENSED CONSOLODATED
FINANCIAL
STATEMENTS
Introduction to Unaudited Pro Forma Condensed Consolidated Financial statements | F-39 |
Pro Forma Balance Sheet As of August 31, 2009 (Unaudited) | F-41 |
Pro Forma Condensed Consolidated Statement of Income for the three months ended August 31, 2009 (Unaudited) | F-42 |
Pro Forma Condensed Consolidated Statement of Income for the year ended May 31, 2009 (Unaudited) | F-43 |
Notes to Pro Forma Condensed Consolidated Financial Statements (Unaudited) | F-44 |
F-38
GOLDEN
KEY INTERNATIONAL INC.
INTRODUCTION
TO UNAUDITIED PRO FORMA CONDENSED
CONSOLIDATED
FINANCIAL STATEMENTS
On
December 8, 2009, Golden Key International Inc. (the “Company”) acquired all of
the outstanding capital stock of HongKong Fortune-Rich Investment Co., Ltd., a
Hong Kong corporation (“Fortune-Rich ”), through China New Media Group
Corp., a Delaware corporation (the “Merger Sub”) wholly owned by the
Company. Fortune-Rich is a holding company whose only asset, held
through a subsidiary, is 100% of the registered capital of Dalian Guo-Heng
Management & Consultation Co., Ltd. (“Dalian Guo-Heng”), a limited liability
company organized under the laws of the People’s Republic of China.
Substantially all of the Fortune-Rich’s operations are conducted in China though
Dalian Guo-Heng, and through contractual arrangements with several of Dalian
Guo-Heng’s consolidated affiliated entities in China, including Dalian Vastitude
Media Group Co., Ltd. (“V-Media”) and its subsidiaries. V-Media is a
fast-growing out-door advertising company with dominant operation in Dalian, the
commercial center of Northeastern China.
In
connection with the acquisition, Merger Sub issued 10 shares of the common stock
of the Merger Sub which constituted no more than 10% ownership interest in the
Merger Sub and 1,000,000 shares of Series A Preferred Stock of the Company to
the shareholders of Fortune-Rich, in exchange for all the shares of the capital
stock of Fortune-Rich (the “Share Exchange” or “Merger”). The 10 shares of the
common stock of the Merger Sub were converted into approximately 26,397,933
shares of the common stock of the Company so that upon completion of the Merger,
the shareholders of Fortune-Rich own approximately 96 % of the common
stock of the Company;
As a
result of the above-mentioned transactions, the shareholders of Fortune-Rich and
persons affiliated with V-Media now own securities that represents 96% of the
equity in the Company.
The
acquisition will be accounted for as a reverse merge under the purchase method
of accounting since there was a change of control. Accordingly, Hong Kong
Fortune-Rich Investment Co., Ltd. and its subsidiaries will be treated as the
continuing entity for accounting purposes.
F-39
GOLDEN
KEY INTERNATIONAL INC.
INTRODUCTION
TO UNAUDITIED PRO FORMA CONDENSED
CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
The
accompanying unaudited pro forma condensed consolidated balance sheet has been
presented with consolidated subsidiaries at August 31, 2009. The unaudited pro
forma condensed consolidated statement of income for the three months ended
August 31, 2009 and for the year ended May 31, 2009 has been presented as if the
acquisition had occurred June 1, 2008.
The
unaudited pro forma condensed consolidated statements do not necessarily
represent the actual results that would have been achieved had the companies
been combined at the beginning of the year, nor may they be indicative of future
operations. These unaudited pro forma condensed financial statements should be
read in conjunction with the companies’ respective historical financial
statements and notes included thereto.
F-40
GOLDEN KEY INTERNATIONAL, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
BALANCE SHEET
AUGUST 31, 2009
Golden
Key
International
Inc.
|
HongKong
Fortune-Rich
Investment
Co., Ltd.
|
Adjustments
|
Notes
|
(1)
Pro
Forma
|
||||||||||||||||
ASSETS
|
||||||||||||||||||||
Current
assets
|
||||||||||||||||||||
Cash
& cash equivalents
|
$ | - | $ | 85,355 | $ | 85,355 | ||||||||||||||
Restricted
cash
|
- | 65,903 | 65,903 | |||||||||||||||||
Accounts
receivable, net of allowance for bad debt of
|
- | |||||||||||||||||||
$ 0
and $24,126, respectively
|
- | 3,959,342 | 3,959,342 | |||||||||||||||||
Advance
to suppliers
|
- | 1,462,201 | 1,462,201 | |||||||||||||||||
Other
assets
|
- | 56,257 | 56,257 | |||||||||||||||||
Total
current assets
|
- | 5,629,058 | 5,629,058 | |||||||||||||||||
Property,
plant and equipment, net
|
- | 9,162,309 | 9,162,309 | |||||||||||||||||
Other
assets
|
||||||||||||||||||||
Security
deposits
|
- | 672,397 | 672,397 | |||||||||||||||||
Intangible
asset, net
|
- | 31,838 | 31,838 | |||||||||||||||||
Deferred
charges
|
- | 1,163,603 | 1,163,603 | |||||||||||||||||
Total
other assets
|
- | 1,867,838 | 1,867,838 | |||||||||||||||||
Total
Assets
|
$ | - | $ | 16,659,205 | $ | 16,659,205 | ||||||||||||||
LIABILITIES
AND SHAREHOLDERS' EQUITY
|
||||||||||||||||||||
Current
liabilities
|
||||||||||||||||||||
Short
term loans
|
$ | - | $ | 3,192,675 | $ | 3,192,675 | ||||||||||||||
Bank
acceptance notes payable
|
- | 219,679 | 219,679 | |||||||||||||||||
Long
term loan-current
|
- | 585,812 | 585,812 | |||||||||||||||||
Accounts
payable
|
4,825 | 1,034,806 | (4,825 | ) | a | 1,034,806 | ||||||||||||||
Deferred
revenues
|
- | 3,492,015 | 3,492,015 | |||||||||||||||||
Taxes
payable
|
- | 999,491 | 999,491 | |||||||||||||||||
Accrued
expenses and other payables
|
- | 51,480 | 51,480 | |||||||||||||||||
Due
to shareholders
|
33,000 | 474,500 | (33,000 | ) | a | 474,500 | ||||||||||||||
Total
current liabilities
|
37,825 | 10,050,458 | 10,050,458 | |||||||||||||||||
Long
term loans
|
- | 1,171,624 | 1,171,624 | |||||||||||||||||
Total Liabilities
|
37,825 | 11,222,082 | 11,222,082 | |||||||||||||||||
Shareholders'
equity
|
||||||||||||||||||||
Common
Stock, .$0.0001 par value, 80,000,000
|
||||||||||||||||||||
shares
authorized, 4,451,667 shares issued
|
||||||||||||||||||||
and
outstanding at August 31, 2009
|
445 | - | 445 | |||||||||||||||||
Common
Stock, .$0.01 par value, 50,000,000
|
||||||||||||||||||||
shares
authorized, 50,000,000 shares issued
|
||||||||||||||||||||
and
outstanding at August 31, 2009
|
- | 500,000 | (500,000 | ) | b | - | ||||||||||||||
Subscription
Receivable
|
(500,000 | ) | (500,000 | ) | ||||||||||||||||
Additional
paid-in capital
|
49,205 | 2,623,926 | 450,350 | a,b | 3,123,481 | |||||||||||||||
Accumulated
other comprehensive income
|
- | 35,442 | 35,442 | |||||||||||||||||
Retained
earnings (Accumulated deficits)
|
(87,475 | ) | 2,362,531 | 87,475 | a,b | 2,362,531 | ||||||||||||||
Total
shareholders' equity
|
(37,825 | ) | 5,021,899 | 5,021,899 | ||||||||||||||||
Noncontrolling
interest
|
415,224 | 415,224 | ||||||||||||||||||
Total
shareholders' equity
|
(37,825 | ) | 5,437,123 | 5,437,123 | ||||||||||||||||
Total
Liabilities and Shareholders' Equity
|
$ | - | $ | 16,659,205 | $ | 16,659,205 |
See Notes to unaudited Pro forma condensed
consolidated financial statements
F-41
GOLDEN KEY INTERNATIONAL INC
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
STATEMENT OF OPERATIONS
FOR THREE MONTHS PERIOD FROM JUNE 1, 2009 TO
AUGUST 31, 2009
Golden
Key International Inc.
|
HongKong
Fortune-Rich
Investment
Co., Ltd.
|
Adjustments
|
Notes
|
(1)
Pro
Forma
|
||||||||||||||||
Revenues
|
$ | - | $ | 3,076,822 | $ | 3,076,822 | ||||||||||||||
- | ||||||||||||||||||||
Cost
of revenue
|
- | (1,155,065 | ) | (1,155,065 | ) | |||||||||||||||
- | ||||||||||||||||||||
Gross
profit
|
- | 1,921,757 | 1,921,757 | |||||||||||||||||
- | ||||||||||||||||||||
Selling,
general and administrative expenses
|
(5,109 | ) | (499,628 | ) | 5,109 | a | (499,628 | ) | ||||||||||||
- | ||||||||||||||||||||
Income
from operations
|
(5,109 | ) | 1,422,129 | 1,422,129 | ||||||||||||||||
- | ||||||||||||||||||||
Non-operating
income (expenses):
|
- | |||||||||||||||||||
Interest income
|
- | 282 | 282 | |||||||||||||||||
Interest expense
|
- | (65,266 | ) | (65,266 | ) | |||||||||||||||
Other income
|
- | - | - | |||||||||||||||||
Other expenses
|
- | (2,231 | ) | (2,231 | ) | |||||||||||||||
- | ||||||||||||||||||||
Total
non-operating income (expenses)
|
- | (67,215 | ) | (67,215 | ) | |||||||||||||||
- | ||||||||||||||||||||
Income
before income taxes
|
(5,109 | ) | 1,354,914 | 1,354,914 | ||||||||||||||||
- | ||||||||||||||||||||
Provision
for income taxes
|
- | 338,728 | 338,728 | |||||||||||||||||
- | ||||||||||||||||||||
Net
income (loss)
|
(5,109 | ) | 1,016,186 | 1,016,186 | ||||||||||||||||
Less: net income attribute to the noncontrolling interest
|
- | 54,653 | 54,653 | |||||||||||||||||
- | ||||||||||||||||||||
Net
income (loss) attributable to the Company
|
(5,109 | ) | 961,533 | 961,533 | ||||||||||||||||
- | ||||||||||||||||||||
Other
comprehensive item
|
- | |||||||||||||||||||
Foreign currency translation income
|
- | 3,661 | 3,661 | |||||||||||||||||
- | ||||||||||||||||||||
Comprehensive
income (loss)
|
$ | (5,109 | ) | 965,194 | $ | 965,194 | ||||||||||||||
- | ||||||||||||||||||||
Basic
and diluted earnings per share
|
$ | 0.00 | $ | 0.02 | (0.20 | ) | b | $ | 0.22 | |||||||||||
- | ||||||||||||||||||||
Weighted
average number of shares
|
4,451,667 | 50,000,000 | 4,451,667 |
See Notes
to unaudited Pro forma condensed consolidated financial statements
F-42
GOLDEN KEY INTERNATIONAL INC
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED MAY 31, 2009
Golden
Key
International
Inc.
|
HongKong
Fortune-Rich
Investment
Co., Ltd.
|
Adjustments
|
Notes
|
(1)
Pro
Forma
|
||||||||||||||||
Revenues
|
$ | - | $ | 8,186,719 | $ | 8,186,719 | ||||||||||||||
- | ||||||||||||||||||||
Cost
of revenue
|
- | (3,377,037 | ) | (3,377,037 | ) | |||||||||||||||
- | ||||||||||||||||||||
Gross
profit
|
- | 4,809,682 | 4,809,682 | |||||||||||||||||
- | ||||||||||||||||||||
Selling,
general and administrative expenses
|
(18,336 | ) | (1,260,960 | ) | 18,336 | a | (1,260,960 | ) | ||||||||||||
- | ||||||||||||||||||||
Income
from operations
|
(18,336 | ) | 3,548,722 | 3,548,722 | ||||||||||||||||
- | ||||||||||||||||||||
Non-operating
income (expenses):
|
- | |||||||||||||||||||
Interest income
|
- | 1,329 | 1,329 | |||||||||||||||||
Interest expense
|
- | (303,782 | ) | (303,782 | ) | |||||||||||||||
Other income
|
- | - | - | |||||||||||||||||
Other expenses
|
- | (8,381 | ) | (8,381 | ) | |||||||||||||||
- | ||||||||||||||||||||
Total
non-operating income (expenses)
|
- | (310,835 | ) | (310,835 | ) | |||||||||||||||
- | ||||||||||||||||||||
Income
before income taxes
|
(18,336 | ) | 3,237,887 | 3,237,887 | ||||||||||||||||
- | ||||||||||||||||||||
Provision
for income taxes
|
451,951 | 451,951 | ||||||||||||||||||
- | ||||||||||||||||||||
Net
income (loss)
|
(18,336 | ) | 2,785,936 | 2,785,936 | ||||||||||||||||
Less: net income attribute to the noncontrolling interest
|
- | 16,883 | 16,883 | |||||||||||||||||
- | ||||||||||||||||||||
Net
income (loss) attributable to the Company
|
(18,336 | ) | 2,769,053 | 2,769,053 | ||||||||||||||||
- | ||||||||||||||||||||
Other
comprehensive item
|
- | |||||||||||||||||||
Foreign currency translation income
|
- | 7,282 | 7,282 | |||||||||||||||||
- | ||||||||||||||||||||
Comprehensive
income (loss)
|
$ | (18,336 | ) | 2,776,335 | $ | 2,776,335 | ||||||||||||||
- | ||||||||||||||||||||
Basic
and diluted earnings per share
|
$ | 0.00 | 0.06 | (4.92 | ) | b | $ | 0.62 | ||||||||||||
- | ||||||||||||||||||||
Weighted
average number of shares
|
4,451,667 | 50,000,000 | 4,451,667 |
See Notes
to unaudited Pro forma condensed consolidated financial
statements
F-43
GOLDEN
KEY INTERNATIONAL INC.
NOTES
TO THE UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
FINANCIAL
STATEMENTS
The
following unaudited pro forma adjustments are included in the accompanying
unaudited pro forma condensed consolidated balance sheet as of August 31, 2009
and the unaudited pro forma condensed consolidated statement of income for three
months ended August 31, 2009 and for the year ended May 31, 2009 to reflect the
acquisition of Hong Kong Fortune-Rich Co., Ltd. by the Merger Sub and the
Company:
a.
|
To
record the spin-off of the Company’s assets and liabilities prior to the
reverse acquisition;
|
b.
|
These
adjustments reflect the recapitalization as a result of the transactions
related to the share exchange.
|
F-44