Attached files
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EX-3.3 - SRKP 25 INC | v183689_ex3-3.htm |
EX-2.1 - SRKP 25 INC | v183689_ex2-1.htm |
EX-10.4 - SRKP 25 INC | v183689_ex10-4.htm |
EX-21.1 - SRKP 25 INC | v183689_ex21-1.htm |
EX-10.8 - SRKP 25 INC | v183689_ex10-8.htm |
EX-10.5 - SRKP 25 INC | v183689_ex10-5.htm |
EX-10.1 - SRKP 25 INC | v183689_ex10-1.htm |
EX-10.6 - SRKP 25 INC | v183689_ex10-6.htm |
EX-10.7 - SRKP 25 INC | v183689_ex10-7.htm |
EX-10.2 - SRKP 25 INC | v183689_ex10-2.htm |
EX-10.3 - SRKP 25 INC | v183689_ex10-3.htm |
EX-16.1 - SRKP 25 INC | v183689_ex16-1.htm |
UNITED STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
DC 20549
FORM
8-K
CURRENT
REPORT
Pursuant
to Section 13 or 15(d) of the
Securities
Exchange Act of 1934
Date of
report (Date of earliest event reported): April 30, 2010
China
Century Dragon Media, Inc.
(Exact
Name of Registrant as Specified in Its Charter)
Delaware
|
000-53021
|
26-1583852
|
(State
or Other Jurisdiction
|
(Commission
File Number)
|
(IRS
Employer Identification No.)
|
of
Incorporation)
|
Room 801, No. 7, Wenchanger Road, Jiangbei, Huizhou
City, Guangdong Province, China
(Address,
including zip code, off principal executive offices)
Registrant’s
telephone number, including area code 0086-0752-3138789
SRKP
25, INC.
4737 North Ocean Drive, Suite 207,
Lauderdale by the Sea, FL 33308
(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.
See Item 2.01, below, regarding the
discussion of the Subscription Agreement relating to the private placement of
3,566,667 shares of our common stock.
See Item 2.01, below, regarding the
discussion of the amended and restated share exchange agreement effective as of
April 23, 2010 (the “Exchange Agreement”), which was entered into by and among
SRKP 25, Inc. (“SRKP 25”), a Delaware corporation, CD Media (Holding) Co.,
Limited, a British Virgin Islands corporation (“CD Media BVI”), the shareholders
of CD Media BVI, Huizhou CD Media Co., Ltd., a company incorporated
under the laws of the People’s Republic of China, and Beijing CD Media
Advertisement Co., Ltd., a company incorporated under the laws of the People’s
Republic of China, (“CD Media Beijing”), as reported in the Current Report on
Form 8-K filed with the Securities Exchange Commission on April 28,
2010. A copy of the Exchange Agreement is attached hereto as Exhibit
2.1.
Item
2.01 Completion of Acquisition or
Disposition of Assets.
OVERVIEW
As used in this report, unless
otherwise indicated, the terms “we,” “Company” and “Century Dragon Media” refer
to China Century Dragon Media, Inc., a Delaware corporation, formerly known as
SRKP 25, Inc. (“SRKP 25”), its wholly-owned subsidiary CD Media
(Holding) Co., Limited, a British Virgin Islands corporation (“CD Media BVI”),
and CD Media BVI’s wholly-owned subsidiaries, CD Media (HK) Limited, a company
incorporated under the laws of Hong Kong (“CD Media HK”) and Huizhou CD Media
Co., Ltd., a company incorporated under the laws of the People’s Republic of
China (“CD Media Huizhou”). CD Media Huizhou, through a series of
contractual arrangements with Beijing CD Media Advertisement Co., Ltd., a
company incorporated under the laws of the People’s Republic of China and owned
by three individuals, Xu Wen, Cheng Yongxia and Zheng Hongbo (“CD Media
Beijing”). While CD Media Huizhou has no direct equity ownership of
CD Media Beijing, through the contractual agreements CD Media Huizhou receives
the economic benefits of CD Media Beijing’s operations.
“China” or “PRC” refers to the People’s
Republic of China. “RMB” or “Renminbi” refers to the legal currency
of China and “$” or “U.S. Dollars” refers to the legal currency of the United
States.
HISTORY
SRKP 25 was incorporated in the
State of Delaware on December 17, 2007 and was originally organized as a “blank
check” shell company to investigate and acquire a target company or business
seeking the perceived advantages of being a publicly held
corporation.
On April 30, 2010, SRKP 25
(i) closed a share exchange transaction, described below, pursuant to which
SRKP 25 became the 100% parent of CD Media BVI, (ii) assumed the operations of
CD Media BVI and its subsidiaries, including CD Media Huizhou, and (iii) changed
its name from SRKP 25, Inc. to China Century Dragon Media, Inc. CD
Media Huizhou, through contractual arrangements with CD Media Beijing, an entity
owned by three citizens of the PRC, promotes, sells and markets CCTV
advertisement packages. While CD Media Huizhou has no direct equity
ownership in CD Media Beijing, through the contractual agreements CD Media
Huizhou receives the economic benefits of CD Media Beijing’s
operations.
CD Media BVI is a holding company
incorporated on March 31, 2001 under the laws of the British Virgin
Islands. CD Media HK is a holding company incorporated on May 6, 2009
under the laws of Hong Kong. CD Media Huizhou is located in Huizhou,
Guangdong Province, PRC and was incorporated under the laws of the PRC on
November 2, 2009. CD Media Beijing is located in Beijing, PRC and was
incorporated under the laws of the PRC on June 29, 2001.
Through CD Media Beijing, we are
engaged in the promotion, sale and marketing of advertising packages on Chinese
television stations. We purchase advertising time packages that air on CCTV-1,
CCTV-2 and CCTV-3, three of the main channels of China Central Television
(“CCTV”), the state television station of the PRC, which we repackage and sell
to our customers. Currently we deal solely with third parties
that act as agents for the sale of advertising time slots by CCTV. We
also assist our clients in developing cost-effective advertising programs to
maximize their return on their advertising investments by identifying the most
appropriate advertising time slots and message points of the
advertisements.
2
CORPORATE
STRUCTURE
The corporate structure of the Company
is illustrated as follows:
Contractual
Arrangements
PRC laws, rules and regulations impose
special requirements on foreign investors having ownership of PRC companies
providing advertising services in the PRC. In order to invest in the
advertising industry in the PRC, a foreign investor must have at least two years
of direct operations in the advertising industry outside the PRC. We
are a Delaware corporation and have not had any direct operations in the
advertising industry outside of China. Therefore, we are unable to own a direct
interest in a company providing advertising services in the PRC and our PRC
subsidiary, CD Media Huizhou, cannot obtain the required business licenses to
provide advertising services. We operate our advertising operations
through contractual arrangements with CD Media Beijing. CD Media
Huizhou, CD Media Beijing and CD Media Beijing’s shareholders entered into a
series of contractual arrangements in March 2010 that provide us with effective
control over the operations of CD Media Beijing and of the related economic
benefits of CD Media Beijing in consideration for the services provided by CD
Media Huizhou. We intend to continue our business operations in China
upon the expiration of these contractual arrangements by renewing them or
entering into new contractual arrangements if the then current PRC law does not
allow us to directly operate advertising businesses in China. We believe that,
under these contractual arrangements, we have sufficient control over CD Media
Beijing to renew or enter into new contractual arrangements prior to the
expiration of the current arrangements on terms that would enable us to continue
to operate our business in China after the expiration of the current
arrangements.
3
Exclusive
Business Cooperation Agreement. Pursuant to the
exclusive business cooperation agreement entered into on March 30, 2010 between
CD Media Huizhou and CD Media Beijing, CD Media Huizhou provides technical and
consulting services related to the business operations of CD Media Beijing. As
consideration for such services, CD Media Beijing has agreed to pay service fees
as specified by CD Media Huizhou in its fee notice to CD Media Beijing from time
to time. The fees payable are calculated based on the rates set forth in the
agreement or otherwise agreed upon between the parties. The term of this
agreement is 10 years from the date thereof. CD Media Beijing may terminate the
agreement upon CD Media Huizhou’s gross negligence or commission of a fraudulent
act against CD Media Beijing. CD Media Huizhou may terminate the
agreement at any time upon giving 30 days’ prior written notice to CD Media
Beijing.
Exclusive Option
Agreement. CD Media Huizhou entered into option
agreements on March 30, 2010 with each of the shareholders of CD Media Beijing,
Xu Wen, Cheng Yongxia and Zheng Hongbo, as well as CD Media Beijing itself,
pursuant to which CD Media Huizhou has an exclusive option to purchase, or to
designate another qualified person to purchase, to the extent permitted by PRC
law and foreign investment policies, part or all of the equity interests in CD
Media Beijing owned by Xu Wen, Cheng Yongxia and Zheng Hongbo. The purchase
price for the entire equity interest shall equal the actual capital
contributions paid into the registered capital of CD Media Beijing by each of
the CD Media Beijing shareholders. Each of the exclusive option agreements has a
10 year term.
Power of
Attorney. Xu Wen, Cheng Yongxia and Zheng Hongbo
each signed a power of attorney dated March 30, 2010 providing CD Media Huizhou
the power to act as his exclusive agent with respect to all matters related to
his ownership of the ownership interest in CD Media Beijing, including the right
to attend shareholders’ meetings of CD Media Beijing and the right to exercise
voting rights to which he is entitled under PRC law.
Equity Interest
Pledge Agreement. Pursuant to equity pledge
agreements dated March 30, 2010, each of Xu Wen, Cheng Yongxia and Zheng Hongbo
pledged his equity interest in CD Media Beijing to CD Media Huizhou to secure CD
Media Beijing’s obligations under the exclusive business cooperation agreement
as described above. In addition, the shareholders of CD Media Beijing agreed not
to transfer, sell, pledge, dispose of or create any encumbrance on any equity
interests in CD Media Beijing that would affect CD Media Huizhou’s interests.
The equity pledge agreement will expire when CD Media Beijing fully performs its
obligations under the exclusive business cooperation agreement described
above.
In the opinion of Han Kun Law Offices,
our PRC legal counsel:
·
|
the ownership structure of our
company complies with current PRC laws, rules and
regulations;
|
|
·
|
our contractual arrangements with
CD Media Beijing and its shareholders are valid and binding on all parties
to these arrangements, and do not violate current PRC laws, rules or
regulations; and
|
|
·
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the business operations of CD
Media Huizhou, CD Media Beijing and its subsidiaries comply with current
PRC laws, rules and
regulations.
|
Our PRC legal counsel has, however,
advised us that the PRC regulatory authorities may take a view that is contrary
to the above opinions of our PRC legal counsel. If the PRC government determines
that the above-described agreements that establish the structure for operating
our PRC advertising businesses do not comply with applicable restrictions on
foreign investment in the advertising industry, we could be subject to severe
penalties including being prohibited from continuing operation. See “Risk
Factors—Risks Related to Our Corporate Structure.”
Our principal executive offices and
corporate offices are located at Room 801, No. 7, Wenchanger Road, Jiangbei,
Huizhou City, Guangdong Province, China.
4
PRINCIPAL
TERMS OF THE SHARE EXCHANGE
Effective as of March 31, 2010, SRKP 25
entered into a share exchange agreement with CD Media BVI, CD Media Huizhou, CD
Media Beijing and the shareholders of CD Media BVI. Effective as of
April 23, 2010, the parties to the share exchange agreement entered into an
amended and restated share exchange agreement (the “Exchange
Agreement”). Pursuant to the Exchange Agreement, SRKP 25 agreed to
issue an aggregate of 19,100,000 shares of its common stock in exchange for all
of the issued and outstanding securities of CD Media BVI (the “Share
Exchange”). The Share Exchange closed on April 30, 2010.
Upon the closing of the Share Exchange,
SRKP 25 issued an aggregate of 19,100,000 shares of its common stock to the
shareholders of CD Media BVI in exchange for all of the issued and outstanding
securities of CD Media BVI. Prior to the closing of the Share
Exchange and the closing of the Private Placement, as described below,
stockholders of SRKP 25 canceled an aggregate of 4,450,390 shares held by
them such that there were 2,646,000 shares of common stock outstanding
immediately prior to the Share Exchange. SRKP 25 stockholders also
canceled warrants to purchase an aggregate of 5,677,057 shares of common stock
such that the stockholders held warrants to purchase an aggregate of 1,419,333
shares of common stock immediately prior to the Share
Exchange. Immediately after the closing of the Share Exchange and
closing of the Private Placement, we had 25,312,667 outstanding shares of common
stock, no shares of Preferred Stock, no options, and warrants to purchase
1,419,333 shares of common stock. In addition we paid a $215,750
success fee to WestPark Capital, Inc. for services provided in connection with
the Share Exchange, including coordinating the share exchange transaction
process, interacting with principals of the shell corporation and negotiating
the definitive purchase agreement for the shell, conducting a financial analysis
of CD Media BVI, conducting due diligence on CD Media BVI and its subsidiaries
and managing the interrelationships of legal and accounting
activities.
Pursuant to the terms of the Share
Exchange and a Registration Rights Agreement entered into with each of the
original SRKP 25 stockholders, we agreed to register all of the 2,646,000 shares
of common stock and all of the 1,419,333 shares of common stock underlying the
1,419,333 warrants held by the original SRKP 25 stockholders, all of which were
outstanding immediately prior to the closing of the Share
Exchange. These shares will be included in a subsequent registration
statement (the “Subsequent Registration Statement”) filed by us no later than
the tenth (10th) day
after the end of the six (6) month period that immediately follows the date on
which we file the registration statement to register the shares issued in the
Private Placement (the “Required Filing Date”). We agreed to use
reasonable efforts to cause the Subsequent Registration Statement to become
effective within one hundred fifty (150) days after the Required Filing Date or
the actual filing date, whichever is earlier, or one hundred eighty (180) days
after the Required Filing Date or the actual filing date, whichever is earlier,
if such Subsequent Registration Statement is subject to a full review by the SEC
(the “Required Effectiveness Date”). If we fail to file the Subsequent
Registration Statement by the Required Filing Date or if it does not become
effective on or before the Required Effectiveness Date we are required to issue,
as liquidated damages, to each of the original SRKP 25 stockholders shares (the
“Penalty Shares”) equal to a total of 0.0333% of their respective shares for
each calendar day that the Subsequent Registration Statement has not been filed
or declared effective by the SEC (and until the Subsequent Registration
Statement is filed with or declared effective by the SEC), as
applicable. However, no Penalty Shares shall be due to the
original SRKP 25 stockholders if we are using our best efforts to cause the
Subsequent Registration Statement to be filed and declared effective in a timely
manner.
Immediately after the closing of the
Share Exchange, on April 30, 2010, SRKP 25 changed its corporate name from
“SRKP 25, Inc.” to “China Century Dragon Media, Inc.” Our shares of common stock
are not currently listed or quoted for trading on any national securities
exchange or national quotation system. We intend to apply for
the listing of our common stock on the Nasdaq Global Market.
The transactions contemplated by the
Exchange Agreement, as amended, were intended to be a “tax-free” reorganization
pursuant to the provisions of Sections 351 and/or 368(a) of the Internal Revenue
Code of 1986, as amended.
The execution of the share exchange
agreement effective as of March 31, 2010 and the amended and restated share
exchange agreement were reported in Current Reports on Form 8-K filed with the
Securities and Exchange Commission (the “SEC”) on April 6,
2010 and April 28, 2010, respectively. A copy of the amended and
restated share exchange agreement is filed as Exhibit 2.1 to this
Current Report on Form 8-K.
THE
PRIVATE PLACEMENT
On April 30, 2010, concurrently with
the closing of the Share Exchange, we closed a private placement of shares
of common stock (the “Private Placement”). The purpose of the Private
Placement was to increase our working capital and the net proceeds from the
Private Placement will be used for working capital. Pursuant to subscription
agreements entered into with the investors, we sold an aggregate of 3,566,667
shares of common stock at $1.50 per share, for gross proceeds of approximately
$5.35 million.
5
We agreed to file a registration
statement covering the common stock sold in the Private Placement within 30 days
of the closing of the Private Placement pursuant to the subscription agreement
entered into with each investor and to cause such registration statement to be
declared effective by the SEC no later than 150 days from the date of filing or
180 days from the date of filing if the registration statement is subject to a
full review by the SEC. Each of the stockholders and
warrantholders of SRKP 25 prior to the completion of the Share Exchange (the
“Existing Securityholders”) and the investors in the Private Placement also
entered into a lock-up agreement pursuant to which they agreed that (i) if the
proposed public offering that we expect to conduct is for $10 million or more,
then the investors and the Existing Securityholders would not be able to sell or
transfer their shares until at least six months after the public offering’s
completion, and (ii) if the offering is for less than $10 million, then
one-tenth of their shares would be released from the lock-up restrictions ninety
days after the offering and there would be a pro rata release of the
shares thereafter every 30 days over the following nine
months. WestPark Capital, Inc., the placement agent for the Private
Placement, in its discretion, may also release some or all the shares from the
lock-up restrictions earlier, however, (i) no early release shall be made with
respect to Existing Securityholders prior to the release in full of all such
lock-up restrictions on shares of the common stock acquired in the Private
Placement and (ii) any such early release shall be made pro rata with respect to
all investors’ shares acquired in the Private Placement.
We paid WestPark Capital, Inc.
(“Westpark Capital”) a commission equal to 10.0% with a non-accountable fee of
4.0% of the gross proceeds from the Private Placement. We are also
retaining WestPark Capital for a period of five months following the closing of
the Private Placement to provide us with financial consulting services for which
we will pay WestPark Capital $4,000 per month. Out of the proceeds of
the Private Placement, we paid $300,000 to Keen Dragon Group Limited, a third
party unaffiliated with CD Media BVI, the Company, or WestPark Capital for
services in connection with arranging the reverse merger.
Some of the controlling stockholders
and control persons of the placement agent were also, prior to the completion of
the Share Exchange, controlling stockholders and control persons of the Company,
including Richard Rappaport, who is the Chief Executive Officer of the placement
agent and was the President and a significant stockholder of the Company prior
to the Share Exchange, and Anthony C. Pintsopoulos, who is the President and
Treasurer of the placement agent and was one of the Company’s controlling
stockholders and an officer and director prior to the Share
Exchange. Mr. Rappaport is the sole owner of the membership interests
in the parent of the placement agent. Each of Messrs. Rappaport and
Pintsopoulos resigned from all of their executive and director positions with
the Company upon the closing of the Share Exchange.
THIS
CURRENT REPORT IS NOT AN OFFER OF SECURITIES FOR SALE. ANY SECURITIES
SOLD IN THE PRIVATE PLACEMENT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT
OF 1933, AS AMENDED, AND MAY NOT BE OFFERED OR SOLD IN THE UNITED STATES UNLESS
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR PURSUANT TO AN
EXEMPTION FROM SUCH REGISTRATION.
6
CHINA
CENTURY DRAGON MEDIA’S BUSINESS
We are a
television advertising company in China that primarily offers blocks of
advertising time on certain CCTV channels. In addition, we provide certain
production services to help our clients integrate market resources and find
partners to assist with producing the commercials. We purchase advertising time
on certain of the nationally broadcast television channels of CCTV, the state
television broadcaster of the PRC and China’s largest television network, which
we repackage and sell to our customers. We assist our customers in identifying
the most appropriate advertising time slots for their television commercials
based on the customer’s advertising goals and in developing a cost-effective
advertising program to maximize their return on their advertising
investment.
We have obtained a large amount of
quality advertising time aired on CCTV. For 2010, we have obtained
advertising rights to a number of daily television programs offering a total of
approximately 210 minutes of advertising time per weekday and approximately 90
minutes per day during the weekends on CCTV-1, CCTV-2 and CCTV-3.
Our clients are primarily entities
seeking to advertise their own products or services that purchase advertising
packages, either directly from us or indirectly through third party advertising
agencies. These entities include large companies in China such as Hualong Group,
Dabao Group, Grace China Co., Ltd. and Hengan International Group Co., Ltd.,
most of which purchase time packages from us through their advertising
agencies.
All references in this report to “CD
Media’s advertising business,” “CD Media’s customers,” CD Media’s operations in
general and similar connotations, refer to CD Media Beijing, an entity
controlled by CD Media Huizhou through contractual arrangement and which
operates the advertising business. While we have no direct equity
ownership in CD Media Beijing, through the contractual agreements our
wholly-owned subsidiary CD Media Huizhou receives the economic benefits of CD
Media Beijing’s operations. See the section entitled “Risk Factors — Risks
Related to our Corporate Structure” and “Corporate Structure — Contractual
Arrangements”.
Our
Industry
General
China is one of the world’s largest
consumer markets. In 2009, China’s gross domestic product (“GDP”)
increased 8.7% over 2008 according to the National Bureau of Statistics of
China. China’s GDP for 2008 increased 9% over 2007. This
rapid economic growth in China has led to greater levels of personal disposable
income and increased spending among China’s expanding middle-class consumer
base. Notwithstanding China’s economic growth, with a population of 1.3 billion
people, China’s economic output and consumption rates are still small on a per
capita basis compared to developed countries. As China’s economy
develops, we believe that disposable income and consumer spending levels will
continue to become closer to that of developed countries like the United
States.
China’s Advertising Market
With China’s economic growth, its
advertising market has also grown rapidly. China’s major advertising
spending categories consist of television, print, radio, and internet, with
television having the widest coverage and the greatest impact. The continued
rapid growth in China’s advertising market has been, and is expected to be,
largely driven by the rapid growth in disposable income and corresponding
consumer spending of China’s growing middle class. This growth in
disposable income is expected to be a key driver in supporting advertising
spending growth as corporate budget decisions on advertising are expected to be
largely driven by disposable income growth, not by economic cycles.
The advertising agency industry in
China is still highly fragmented, with a large number of small, independent
domestic agencies mainly focusing on resales of advertising time. The majority
of these companies act as sellers of advertising time for television networks
that have limited capabilities to conduct the sales internally. Brand
development is essential in China. In light of Chinese consumers’
general brand-sensitiveness and brand-responsiveness, advertising strategies in
China tend to focus on increasing brand penetration and awareness, through
product-based advertising strategies. We believe that the intense
competition among both international and domestic companies to increase
awareness of their brands in China will cause advertisers to continue to make
substantial investments in their brand-building and advertising campaigns
targeted at the market in China. In addition, China’s advertising
spending per capita and as a percentage of GDP has been low relative to other
countries, suggesting that there is growth potential as the consumer market
develops and companies compete through advertising to attract consumer
spending.
7
Television
China has emerged as the largest
television viewing nation in the world with a national television coverage of
over 96% or a potential audience of over 1.2 billion individuals. Television
channels have increased to over 3,000 in 2009, and the number of hours of
television programming increased to over 2,700,000 in 2009. This coverage makes
China the largest television market in the world.
Despite the large number of television
stations in China, there are only a limited number of television networks that
provide national coverage, among which CCTV, the national broadcasting network
owned by China’s central government, still provides the most comprehensive
national coverage for advertisers. CCTV has 21 public channels that can be
viewed nationwide. Although there is one nationally broadcast satellite channel
in each province, none of these channels reaches CCTV’s level of coverage or has
a wide selection of highly rated programs. As a result, CCTV continues to be the
preferred choice of television advertisers.
Competitive
Strengths
We believe the following strengths
contribute to our competitive advantages:
Comprehensive television advertising
offerings
Our core resource consists of
television advertising time that we have purchased from third parties that
either act as agents for the sale of advertising time slots by or purchase
advertising time slots directly from CCTV on some of the most watched television
channels in China. We seek to enhance our clients advertising campaigns by
identifying strategies and helping to create a comprehensive television
advertising plan that suits their specific needs. We conduct market research and
assist our customers in implementing a messaging strategy and in choosing the
most appropriate advertising times and packages to help our customers maximize
their advertising investment. Our production services team
assists clients in designing television advertisements to best meet their
advertising objectives. We provide distribution channels on a national scale to
implement our clients’ marketing and branding campaigns through our access to
certain highly rated CCTV programs and also monitor and assess the
advertisements.
Popular product and service
mix
For 2010, we have secured advertising
rights to approximately 90 minutes per weekday, and approximately 210 minutes
per day during the weekends, on CCTV-1, CCTV-2 and CCTV-3 during a variety of
daily television programs ranging from children’s programs to entertainment
shows and from daily news programs to drama series. With our prime time
advertising time packages as well as our cost-efficient daytime advertising
packages, we are able to offer flexible, bundled advertising packages designed
to suit our clients advertising needs and preferences, maximize the advertising
impact of their television offerings and achieve our clients’ advertising and
marketing goals.
Diversified customer base
During the year ended December 31,
2009, we had over 1,000 different customers across China. Our client
base spans a wide range of sectors and industries, such as telecommunications,
pharmaceuticals, financial services, textile, food and other consumer product
industries. We believe the range and depth of our client base
enhances our reputation in the advertising industry and positions us to continue
to attract new advertisers. Our integrated advertising agency
services and our production services allow us to be more responsive to clients’
specific requirements. As a result, we enjoy significant flexibility in
tailoring our service offerings to meet clients’ needs and enhance our service
quality and effectiveness.
Experienced management
team
Our senior management team has
extensive business and industry experience, including an understanding of
changing market trends, consumer needs, technologies and our ability to
capitalize on the opportunities resulting from these market
changes. Members of our senior management team also have significant
experience with respect to key aspects of our operations, including sales and
marketing.
8
Strategy
Our goal is to become a leading
provider of integrated advertising services in China. We intend to achieve this
goal by implementing the following strategies:
Maximize our existing resources to
increase our profitability
We plan to use our CCTV advertising
resources and advertising production services expertise to further increase our
profitability by:
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expanding
our sale force by recruiting experienced and knowledgeable sales personnel
to increase the use of our current portfolio advertising time packages and
to attract new advertising
customers;
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·
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strengthening
relationships with our existing clients to increase renewals of contracts
and cross-promoting our production services to our advertising agency
services clients; and
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·
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exploring
new opportunities for expanding our production service offerings to new
and existing clients.
|
Expand our purchases of advertising
time on CCTV
We intend to increase our purchases of
advertising time aired on CCTV based on our analysis of our advertising clients’
evolving needs and the inventory of available advertising time. We
believe that increasing the number and variety of advertising time slots within
the CCTV network will enable us to serve the needs of our clients who need to
reach a diverse group of television viewers. In the future, we intend to
purchase advertising directly from CCTV which we believe will provide access to
a wider variety of advertising opportunities.
Develop regional television advertising
opportunities
We intend
to leverage our successful business model to build relationships with providers
of advertising time aired on certain highly rated regional television
networks. We plan to target regional markets by providing services
that are focused on and responsive to the needs of local advertisers and the
preferences of local television viewers and by approaching regional television
networks or third party agents or providers to purchase advertising time
directly from them. We believe that our purchase of advertising time aired on
regional networks will allow us to offer our clients new ways to reach their
target audience and allow us to expand our client base to regional advertisers
who desire a more targeted marketing strategy.
Enhance our television production
services
We plan to actively market our
production capabilities to potential as well as to existing clients and make
these services part of our core value-added service package to increase customer
loyalty. We intend to open a production studio which will allow us to
shoot commercial television advertisements and public service announcements for
clients in China. Upon further expansion of our business scope, a
production studio will also enable us to produce proprietary television
programming, such as entertainment programs, television drama and documentary
series for broadcasting on CCTV and other regional television
networks. We believe that building a library of attractive
proprietary content will improve our overall financial and operational stability
by mitigating the risk and impact of adverse changes in any one of our operating
environments, such as a potential slowdown in one or more advertising channels,
and by generating additional revenues from selling our content to CCTV and other
regional networks.
Expand into new advertising
platforms
We intend to expand our media resources
in new advertising media platforms, including the Internet, radio, mobile
devices and indoor or outdoor flat panel displays. These advertising
platforms, especially the Internet and mobile devices, are becoming increasingly
popular alternative advertising mediums among advertisers. We believe that our
expansion into new media platforms will enable us to offer added value to our
clients by providing them with an avenue to reach consumers and will strengthen
our competitiveness in the advertising industry.
9
Pursue acquisitions to broaden our
service offerings and advertising platforms
The advertising market in China remains
highly fragmented, and the majority of advertising companies are regionally
focused with relatively few attaining national scale. We will
consider strategic acquisitions that will provide us with a broader range of
service offerings and access to new markets and new advertising media
platforms. When evaluating potential acquisition targets, we will
consider factors such as market position, growth potential and earnings
prospects and strength and experience of management.
Advertising
Packages
We
purchase blocks of advertising time from third-party agents of CCTV
and repackage the time blocks into smaller time slots, which is then
sold to our customers. These third parties agents act as whole-sale distributors
of advertising time, and acquire the time blocks directly from
CCTV. We currently only sell advertising time for airing on
CCTV. Advertising packages are packages of advertisements that air
together at various times during the day and during a wide variety of programs
on three CCTV channels, CCTV-1, the most watched CCTV channel, CCTV-2, a
financial information channel that is the seventh most watched channel in China,
and CCTV-3, an arts and entertainment channel that is the third most watched
television channel in China. We obtained an average of approximately
60 minutes per day of advertising time on CCTV in each of 2009, 2008 and
2007.
Advertisers or their agencies typically
provide advertising content to be broadcast in the time slots they purchase from
us. We set the prices of advertising slots based on the quality, ratings and
target audience of the relevant television programs where the advertisements
will be broadcast, the sales prices of our competitors, general market
conditions and market demand. Different advertising time slots are
sold at different prices. We negotiate the pricing terms for the
advertising time slots with third party providers that either act as agents for
CCTV or purchase advertising time directly from CCTV. We charge our customers a
premium for the advertising time slots we purchase and retain the difference as
revenue.
We enter
into contracts with our advertiser clients, which specify the advertising
package purchased by the client, the time slots or the programs within which
advertisements will be broadcast and the relevant price for the advertising
package purchased by the client. For advertisers who purchase advertising
packages from us through an advertising agent, we enter into similar contracts
with the advertising agent.
We usually require the agreed
advertising fees to be paid in advance before the advertisements are broadcast.
Third parties offering advertising time aired on CCTV have been increasing the
prices charged to us for many of their advertising time slots every year since
our establishment, and we expect that they will continue to raise such prices in
the future. We believe that we will be able to pass on these price increases to
our clients, however, there is no guarantee that we will be able to do
so.
Our television advertising packages
with CCTV include the following:
CCTV-1 and CCTV-2 Program Guide
Set: Our Program Guide Package for CCTV-1 and CCTV-2 includes advertising
time slots on these channels throughout the daytime and nighttime
programming. The advertisements run during various programs,
including After Diet Everyday, After Red Sunset, Before Today Law Statement,
After Today Law Statement, and Before Eastern Sky. This package airs at least
ten times per day and can reach an audience of approximately 120 million persons
per day in the PRC.
CCTV-3 Program
Sets: We offer various program sets that air on CCTV-3 during
various programs and at various frequencies during the week. Our
CCTV-3 program sets include:
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CCTV-3
Elite Set: Our Elite Set airs the most frequently at 52 times
per week. Advertising slots in the Elite Package air during
programs such as Dream Theater, The Same Song, Art Life, Happy China Tour,
Star Avenue and Want to Challenge.
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CCTV-3
Art Diamond Set: Our Art Diamond Set airs at least 49 times per
week during programs such as Golden Years and Behind the
Scenes.
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CCTV-3
Program Guide Set: Our Program Guide Set airs at least 49 times
per week at the break between two programs, Golden Years and The Same
Song.
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CCTV-3
TV Drama Set: Our TV Drama Set airs at least 47 times per week
during the break between two programs, Passion Square and Wanna
Challenge.
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CCTV-3
Art Daytime Set: Our Art Daytime Set airs at least 44 times per
week during the break between two programs, Animal World and TV
Series.
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CCTV-3
Art Comprehensive Set: Our Art Comprehensive Set airs at least
36 times per week during the break between two programs, Worldwide and
Dream Theatre.
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CCTV-3
Elite Art Set: Our Elite Art Set airs at least 27 times per
week during such programs as Passion Square, Behind the Scenes, and Golden
Years.
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10
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CCTV-3
Golden Art Set: Our Golden Art Set airs at least 25 times per
week during such programs as Entertainment
Express.
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CCTV
Classic Art Set: Our Classic Art Set airs at least 20 times per
week during such programs as International Art, China Stage and New
Audio.
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Art
Time Set: Our Art Set airs at least 25 times per week during
such programs as Art Arena and Passion
Square.
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Chinese
MTV Set: Our Chinese MTV Set airs at least 20 times per week
during such programs as New Audio and Date With
You.
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11
Our
Customers
We have more than 1,000 customers in
major provinces and cities across China. Our customers include both
companies seeking to advertise their own products or services and advertising
agencies that purchase advertisement packages for their clients. In
2009, non-agency corporate advertisers and advertising agencies accounted for
70% and 30%, respectively, of our total customers. Our advertising
time slots on CCTV are attractive to our advertising agency customers and have
enabled us to establish relationships with both national and international
advertising agencies. We have also established business relationships with many
leading domestic and international advertising agencies, some of which are
members of the American Association of Advertising Agencies, who introduce
clients to us for all of our services.
Our non-agency corporate advertiser
clients come from a wide range of industries. The following table
sets forth the breakdown of revenue contributions in by the industries in which
our corporate customers operate:
Industry
|
Percentage of Total
Revenues in 2009
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Household
products and electronic appliances
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28.7 | % | ||
Fashion
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20.6 | % | ||
Pharmaceuticals
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16.9 | % | ||
Food
and beverages
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7.9 | % | ||
Paper
and tissue
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7.3 | % | ||
Gold
|
6.1 | % | ||
Cosmetics
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5.1 | % | ||
Telecommunications
and information technology
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2.1 | % | ||
Others
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5.3 | % | ||
100.0 | % |
We have
approximately 2 customers of our production services.
For the year ended December 31, 2009,
our top five customers accounted for 20.0% of our total
revenues. None of our customers for the year ended December 31, 2009
accounted for over 10% of our revenues. For the year ended December 31, 2008,
our top five customers accounted for 30.7% of our total revenues. We
had one customer, Hua Long Group, who accounted for at least 10% of our revenues
for the year ended December 31, 2008. Hua Long Group accounted for approximately
12.3% of our revenues in 2008. The loss of any of these customers could have a
material adverse effect on our results of operations.
Sales
and Marketing
We market
and sell advertising time slots to advertising agencies and corporate clients in
a variety of different industries. As we continue to expand our
service offerings, we intend to sell various services to our existing client
base.
We separate our sales staff into teams,
which are responsible for specific industries so that our staff members can
provide our advertising clients with information specific to the industry in
which they operate. Although the majority of our marketing staff has
prior experience working in the advertising industry, we train and educate our
sales and marketing personnel to ensure that they are familiar with our service
offerings and the advantages that our services offer over our
competitors.
Our sales
and marketing personnel coordinate with our clients to help effect their
advertising goals. We work closely with our clients to understand their
industry, business and marketing needs in order to deliver customized and
effective television advertising solutions.
We market our services primarily
through direct marketing, trade shows and other media events, including
participating in advertising industry award competitions, trade shows,
festivals, academic seminars and conferences to promote brand awareness of our
company and our services.
To encourage our sales staff, we
provide commission based bonuses for our sales and marketing
personnel. We periodically evaluate the performance of our marketing
personnel and pay seasonal quarterly bonuses and annual bonuses to each staff
member in an amount up to 0.9% of the sales revenues generated by such staff
member.
Quality
Control
We strive to provide our clients with
high-quality, cost-effective services. We analyze the content of each
of the advertisements to be broadcast on CCTV pursuant to our advertising
packages to assure the advertisement’s compliance with all PRC laws, rules and
regulations. We also monitor the broadcasting of our clients’
advertisements to ensure that they are properly broadcast at the correct time as
specified in our agreements with our clients. In addition, we provide
training to our employees to ensure that they are knowledgeable about any new
developments and regulations affecting out business and the advertising industry
so that our employees can provide outstanding services to our
customers.
12
Competition
The advertising industry in China is
very competitive and highly fragmented. Many of our competitors have
significantly more financial, marketing and other resources than we
have. We compete with other advertising businesses primarily on the
basis of service quality, available advertising time slots, price, reputation
and relationships with television networks. We face competition with other
television advertising agencies for the limited number of time slots available
on the CCTV channels. Our main competitors in the television advertising sector
in the PRC include China Mass Media Corp. Who’s Who Corp. and Impression Media
Group. In addition, we face competition from other alternative
advertising media companies, such as the Internet, street furniture, billboard,
frame and public transport advertising companies, and with other traditional
advertising media, such as newspapers, magazines and radio. We may
face increase competition in the future from new entrants into the PRC
advertising market from foreign-owned advertising companies who can enter the
PRC advertising sector in accordance with PRC law.
Insurance
We maintain property insurance for our
automobiles and key-man life insurance for certain of our officers and
directors. We do not maintain any other types of insurance. We believe our
insurance coverage is customary and standard for similarly sized companies in
our industry. However, we cannot assure you that our existing insurance policies
are sufficient to insulate us from all losses and liabilities that we may
incur.
Employees
As of December 31, 2009, we had
approximately 98 employees, all of whom are full-time employees. All
of our employees are based inside China. We have not experienced any
work stoppages and we consider our relations with our employees to be
good.
We are required to contribute a portion
of our employees’ total salaries to the Chinese government’s social insurance
funds, including pension insurance, medical insurance, unemployment insurance,
and job injuries insurance, and maternity insurance, in accordance with relevant
regulations. Total contributions to the funds are approximately
$13,384 and $13,318 for the years ended December 31, 2009 and 2008,
respectively. We expect that the amount of our contribution to the
government’s social insurance funds will increase in the future as we expand our
workforce and operations.
None of our employees currently live in
company-provided housing facilities. Under PRC laws, are required to
make contributions to a housing assistance fund for employees based in
China. Any increase in contributions to the housing assistance fund
will increase the costs and expenses of conducting our business operations and
could have negative effect on our results of operations.
PRC
Government Regulations
Business
license
Any company that conducts business in
the PRC must have a business license that covers a particular type of
work. Pursuant to PRC regulations governing the advertising
businesses, including the Advertising Law promulgated by the National People’s
Congress on October 27, 1994 (the “1994 Advertising Law”), the Advertising
Administrative Regulations (1987) and the Implementing Rules for the Advertising
Administrative Regulations (2004), advertising companies must obtain a business
license for its advertising activities from the State Administration for
Industry and Commerce (the “SAIC”) or its local branches. CD Media
Beijing’s business license covers its present business to design, create, handle
(as agent), and release advertisements in the PRC for domestic and foreign
investors; to arrange cultural communications (excluding shows); to undertake
exhibitions and presentations; and to provide advertising consulting
services (excluding intermediary services). CD Media Huizhou’s
business license permits CD Media Huizhou to design, handle (as agent) and
organize cultural communications (excluding news releases and advertisement
making), provide cultural consulting services and to design images for
advertising. Companies that operate outside the scope of their
licenses can be subjected to fines, disgorgement of income and ordered to cease
operations. Prior to expanding our business beyond that of our
business licenses, we may be required to apply and receive approval from the
relevant PRC government authorities.
13
Regulation of Advertising
Content
The PRC government regulates the
content for advertisements in China. Laws, rules and regulations
implemented by the PRC government prohibit, among other things, false or
misleading content, superlative wording, socially destabilizing content or
content involving obscenities, superstition, violence, discrimination or
infringement of the public interest. Advertisements for anesthetic,
psychotropic, toxic or radioactive drugs are not permitted. Advertisements for
tobacco may not be broadcast on television. Restrictions also exist
regarding the advertisement of patented products and processes, pharmaceuticals,
medical instruments, agrochemicals, foodstuff, alcohol and cosmetics. All advertisements
relating to pharmaceuticals, medical instruments, agrochemicals and veterinary
pharmaceuticals, along with any other advertisements which are subject to
censorship by administrative authorities according to relevant laws and
administrative regulations, must be submitted to the relevant administrative
authorities for content approval prior to dissemination.
Advertisers, advertising agencies, and
advertising distributors are required by PRC advertising laws and regulations to
ensure that the content of the advertisements they prepare or distribute is true
and accurate and in full compliance with applicable law. In providing
advertising services, advertising operators and advertising distributors must
review the specified supporting documents provided by advertisers for
advertisements and verify that the content of the advertisements complies with
applicable PRC laws, rules and regulations. Prior to distributing advertisements
for items that are subject to government censorship and approval, advertising
distributors must confirm that such censorship has been performed and approval
has been obtained. Violation of these regulations may result in penalties,
including fines, confiscation of advertising income, orders to cease
dissemination of the advertisements and orders to publish an advertisement
correcting the misleading information. In circumstances involving serious
violations, the SAIC or its local branches may revoke violators’ licenses or
permits for their advertising business operations. Additionally, advertisers,
advertising agencies or advertising distributors may be subject to civil
liability if they infringe on the legal rights and interests of third parties in
the course of their advertising business.
Television Advertising
The PRC government also regulates
television advertising. The State Administration of Radio, Film, and
Television (the “SARFT”) promulgated the Administration of Advertisement
Broadcasting of Radio and Television on September 11, 2009 that became effective
on January 1, 2010 which has superseded the Interim Measures of Administration
of Advertisement Broadcasting of Radio and Television in 2003 that became
effective on January 1, 2004. This regulation is applicable to
advertisement broadcasting operations of all radio and television stations and
channels and contains many restrictions. The 2009
Administration of Advertisement Broadcasting of Radio and Television limits the
aggregate time for broadcasting of advertisements to 12 minutes for every hour’s
program by television stations. Television stations may not
interrupt regular television programs for
advertisements. Advertisements may only be shown during normally
scheduled breaks between programs. Advertisements must be clearly
distinguishable from other television programs and may not be broadcast in the
form of news reports or other similar forms. Advertisements for
certain products are further restricted. For example, advertisements
for alcohol may not be broadcast more than 12 times per day and only 2
advertisements may appear between the hours of 7:00 p.m. CST and 9:00 p.m. CST
on each channel. Each television channel must also broadcast public service
advertisements for no less than 3% of its aggregate available advertising
time.
The 2009 Administration of
Advertisement Broadcasting of Radio and Television also provides that
registration review and filing systems must be established and maintained for
all advertising businesses. Advertising fees must be reasonable and
rates and fee collection methods must be filed with the PRC Commodity Price
Administration and the SAIC. Under the Implementation Rule of Advertising
Industry Administration, or the Implementation Rule, promulgated by the SAIC, as
amended, the advertising agent fee may not be more than 15% of the advertising
fees. The advertising customer must provide relevant documents, including
certificates rendered by relevant supervisory administrations before we can
deliver or place its advertisements.
We assure that all of our
advertisements comply with all applicable laws, rules and regulations. Our
employees are trained to inspect advertising content for compliance with
relevant laws and regulations. We do not believe that advertisements containing
content subject to restriction or censorship comprise a material portion of the
advertisements in our business. In the event that any of the advertisements our
advertising customers or agencies provide to us or our affiliated entities, and
which we or our affiliated entities include in advertising, are not in
compliance with relevant PRC advertising laws, rules and regulations, or when
these advertisements have not received required approvals or do not comply with
content requirements, we will remove the advertisements as soon as we notice
such violations.
14
Limitations
on Foreign Ownership in the Advertising Industry
The main regulations governing foreign
ownership in the PRC advertising industry include:
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The
Catalogue for Guiding Foreign Investment in Industry (as amended in
2007);
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The
Measures on Administration for Foreign-invested Advertising Enterprises
(as amended in 2008); and
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The
Notice Regarding Investment in the Advertising Enterprises by Foreign
Investors through Equity Acquisitions
(2006).
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The above regulations require that a
foreign entity may invest directly in the PRC advertising industry only if it
has at least two years of direct operations in the advertising industry outside
of China. Since December 10, 2005, foreign investors have been
permitted to own directly a 100% interest in advertising companies in China, but
such foreign investors are required to be a company with advertising as its main
business and to have at least three years of operations outside of China. PRC
laws and regulations do not permit the transfer of any approvals, licenses or
permits, including business licenses containing a scope of business that permits
engaging in the advertising business.
The establishment of a foreign-invested
advertising enterprise, by means of either new establishment or equity
acquisition of an existing domestic advertising company, is subject to
examination by the SAIC or its authorized branch at the provincial level and the
issuance of an Opinion on the Examination and Approval of the Foreign-invested
Advertising Enterprise Project. Upon obtaining such opinion from the SAIC or its
relevant branch, an approval from the Ministry of Commerce or its competent
local counterparts is required before a foreign-invested advertising enterprise
may apply for its business license. In addition, if a foreign-invested
advertising enterprise intends to set up any branch, it must meet the
requirements that (i) its registered capital has been fully subscribed and
contributed and (ii) its annual advertising sales revenues are not less
than RMB 20 million.
Employment
laws
We are subject to laws and regulations
governing our relationship with our employees, including: wage and hour
requirements, working and safety conditions, and social insurance, housing funds
and other welfare. These include local labor laws and regulations,
which may require substantial resources for compliance.
China’s National Labor Law, which
became effective on January 1, 1995, and China’s National Labor Contract Law,
which became effective on January 1, 2008, permit workers in both state and
private enterprises in China to bargain collectively. The National
Labor Law and the National Labor Contract Law provide for collective contracts
to be developed through collaboration between the labor union (or worker
representatives in the absence of a union) and management that specify such
matters as working conditions, wage scales, and hours of work. The
laws also permit workers and employers in all types of enterprises to sign
individual contracts, which are to be drawn up in accordance with the collective
contract. The National Labor Contract Law has enhanced rights for the
nation’s workers, including permitting open-ended labor contracts and severance
payments. The legislation requires employers to provide written
contracts to their workers, restricts the use of temporary labor and makes it
harder for employers to lay off employees. It also requires that
employees with fixed-term contracts be entitled to an indefinite-term contract
after a fixed-term contract is renewed twice or the employee has worked for the
employer for a consecutive ten-year period.
Regulations
on Trademarks
Both the PRC Trademark Law, adopted in
1982 and revised in 1993 and 2001, and the Implementation Regulation of the PRC
Trademark Law, adopted in 2002, provide protection to the holders of registered
trademarks. The State Trademark Bureau, under the authority of the SAIC, handles
trademark registrations and grants rights of a term of 10 years in connection
with registered trademarks. License agreements with respect to registered
trademark must be filed with the State Trademark Bureau.
Foreign
currency exchange
Under the PRC foreign currency exchange
regulations applicable to us, the Renminbi is convertible for current account
items, including the distribution of dividends, interest payments, trade and
service-related foreign exchange transactions. Conversion of Renminbi
for capital account items, such as direct investment, loan, security investment
and repatriation of investment, however, is still subject to the approval of the
PRC State Administration of Foreign Exchange, or
SAFE. Foreign-invested enterprises may only buy, sell and/or remit
foreign currencies at those banks authorized to conduct foreign exchange
business after providing valid commercial documents and, in the case of capital
account item transactions, obtaining approval from the SAFE. Capital
investments by foreign-invested enterprises outside of China are also subject to
limitations, which include approvals by the Ministry of Commerce (“MOFCOM”), the
SAFE and the State Reform and Development Commission. We currently do
not hedge our exposure to fluctuations in currency exchange
rates.
15
Dividend
distributions
Under applicable PRC regulations,
foreign-invested enterprises in China may pay dividends only out of their
accumulated profits, if any, determined in accordance with PRC accounting
standards and regulations. In addition, a foreign-invested enterprise
in China are required to set aside at least 10.0% of their after-tax profit
based on PRC accounting standards each year to its general reserves until the
accumulative amount of such reserves reach 50.0% of its registered
capital. These reserves are not distributable as cash
dividends. The board of directors of a foreign-invested enterprise
has the discretion to allocate a portion of its after-tax profits to staff
welfare and bonus funds, which may not be distributed to equity owners except in
the event of liquidation.
Properties
We lease our principal corporate office
located at Room 801, No. 7, Wenchanger Road, Jiangbei, Huizhou City, Guangdong
Province, China under a 2 year lease that expires on November 1,
2011. Rental expenses under this lease total RMB322 (US$47) per
month. We are in the process of filing and registering this lease
with the relevant government authority in the PRC, the Huizhou State
Administration for Industry & Commerce.
We lease office space at CD Media
Beijing’s registered office, Room 119, No. 12 North Shi Long Road, Meng Tou Gou
District, Beijing, pursuant to a lease that expires on October 25,
2010. Rental expenses under this lease total RMB 5,000 (US$735) per
month. We are in the process of filing and registering this lease
with the relevant government authority in the PRC.
CD Media Beijing also leases
approximately 404.5 square meters of office space in Beijing for operations
pursuant to a lease that expires on April 2, 2011. Rental expenses
under this lease total RMB55,000 (US$8,088) per month. We are in the process of
filing and registering this lease with the relevant government authority in the
PRC.
Legal
Proceedings
We are not involved in any material
legal proceedings outside of the ordinary course of our
business.
16
RISK
FACTORS
Any
investment in our common stock involves a high degree of
risk. Investors should carefully consider the risks described below
and all of the information contained in this Current Report on Form 8-K before
deciding whether to purchase our common stock. Our business,
financial condition or results of operations could be materially adversely
affected by these risks if any of them actually occur. Our shares of
common stock are not currently listed or quoted for trading on any national
securities exchange or national quotation system. If and when our
common stock is traded, the trading price could decline due to any of these
risks, and an investor may lose all or part of his or her
investment. Some of these factors have affected our financial
condition and operating results in the past or are currently affecting
us. This Current Report on Form 8-K also contains forward-looking
statements that involve risks and uncertainties. Our actual results
could differ materially from those anticipated in these forward-looking
statements as a result of certain factors, including the risks described below
and elsewhere in this Current Report on Form 8-K.
We
operate in the advertising industry which is subject to changing economic
conditions. A decline in the general economic conditions in the PRC
could have a material adverse effect on our business and financial
condition.
All of our revenues are generated from
our advertising business in the PRC, which in turn is subject to downturns in
the PRC economy. Advertisers typically decrease their purchases of advertising
time during economic downturns. Additionally, advertisers may decrease their
purchases of television advertising time to shift to other forms of advertising
media upon an adverse change in the PRC economy. Any decrease in demand for
advertising time or services from advertisers would negatively affect our
revenues and profitability and cause a material adverse effect on our business
and results of operations.
Our
CCTV-related business has been, and is expected to continue to be, critical to
our business and financial performance.
Our CCTV-related business has been, and
is expected to continue to be, critical to our business and financial
performance. In particular, we primarily derive revenues from representing
advertising clients to place their advertisements on CCTV, the largest
television network in China. Furthermore, we believe that our track record and
performance in securing prime-time advertising time on CCTV have contributed,
and may continue to contribute, significantly to our brand name and the
development of our client base of Chinese advertisers, which are expected to
have a substantial impact on our overall business. Consequently, the continued
success in our business is subject to a number of risks, including the
following:
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CCTV
may change its sales method at any time as it wishes and without prior
notice. While CCTV currently uses third-party agencies to sell a
significant portion of its advertising time slots to companies such as
ours, CCTV also sells a portion of its advertising time slots directly by
itself or through auctions. If CCTV introduces new methods of sales that
are materially different from the methods it is currently using, it may
take us a significant amount of time to develop expertise, if at all, in
buying advertising time on CCTV under any new sales
method.
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CCTV
may begin to specify a limit on total advertising time that may be
purchased by advertisers represented by one advertising agency in the
future, in which case our growth potential would be limited as we would
not be able to represent our advertising clients to purchase more CCTV
advertising time when we exceed the
limit.
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CCTV’s
advertising time, particularly prime-time advertising time, is limited and
is highly coveted by advertisers and advertising agencies. As a result,
there is intense competition for such advertising time. In particular, we
face intense competition for CCTV related advertising business from a
number of domestic competitors, such as Walk-On Advertising Co., Ltd. (San
Ren Xing) and Vision CN Communications Group (Tong Lu), Charm
Communications, Inc. and China Mass Media Corp., which may have
competitive advantages, such as significantly greater financial, marketing
or other resources or stronger market
reputation.
|
Any of these risks could result in a
significant decrease in our revenues, which in turn would have a material
adverse effect on our business, results of operations, financial condition and
prospects.
17
We
depend on a limited number of suppliers for our advertising time. The loss of
any of these suppliers would cause a disruption to our operations and a material
adverse effect on our business.
We purchase a significant amount of our
advertising time from a few suppliers who act as agents for CCTV. Our top three
suppliers accounted for 20.1%, 30.5% and 49.5% of our total purchases of
advertising time during the years ended December 31, 2009, 2008 and 2007,
respectively. If our relationship with any of these suppliers were to end, we
would have to obtain advertising time from other suppliers. We cannot guaranty
our investors that we will be able to obtain an adequate supply of advertising
time from other suppliers. Additionally, advertising time that we are able to
obtain from other suppliers may not be in as popular time slots or be on as
popular CCTV channels as the advertising time that we currently purchase and our
customers may not be willing to pay as much for this advertising time. Our
results of operations would be hurt if we are not able to obtain adequate
supplies of advertising time that is attractive to our
customers.
An
unfavorable change in CCTV’s market position could materially and adversely
affect our ability to generate revenues and income.
As the largest television network in
China, CCTV currently has 21 public channels and 19 pay television channels and
reaches approximately 90% of the households in the PRC. Due to CCTV’s vast
coverage across the PRC, advertising time on CCTV channels is seen as an
attractive marketing platform by advertisers for advertising their products and
services. Additionally, due to its ownership by the PRC central government, CCTV
benefits from special treatment provided by the PRC government, such as the
requirement that CCTV-1 be broadcast by all regional television networks in
China, making CCTV-1 an attractive channel for advertisers. CCTV is not the only
television network in the PRC. CCTV faces growing competition from other
television networks for market share. A decline in CCTV’s market position could
negatively affect the prices that we are able to charge for the advertising time
we purchase that are aired on CCTV, which could negatively impact our ability to
generate revenues and income.
We
rely on access to advertising time slots during television programs to place our
clients’ advertisements and the desirability of the advertising time slots we
obtain depends on the popularity of the relevant television programs and other
factors that are difficult to predict.
The value of our adverting time slots
on CCTV depends on the ratings, popularity and viewership demographics of the
shows during which our advertising time slots occur. We cannot predict the
popularity of television programs. Poor ratings for programs to which our
advertising time slots are attached could negatively affect the prices that we
can charge for our advertising time purchased for airing on CCTV, which could
negatively affect our revenues and results of operations.
Our
ability to adjust the fees we charge for our services is limited and any
substantial increase in the prices charged by CCTV for the advertising time
slots available to us may reduce our revenues and profitability.
In negotiating with our advertising
clients, we set the prices for our advertising packages based on a number of
factors, including the popularity of programs to which our time slots are
attached, viewer demographics for such programs, prices charged by our
competitors and market demand. We negotiate the pricing terms for the
advertising time slots that we purchase from third parties for airing on CCTV on
an annual basis. We then charge our customers a premium for the advertising time
slots and retain the difference in prices as a commission. These third parties
typically increase the prices charged to us for the advertising time slots each
year. Our ability to bargain for lower prices for the advertising time slots is
limited and while we are typically able to pass on such price increases to our
advertising clients, we cannot assure you that we will always be able to pass
such increases on to our customers. If these third parties substantially raise
the prices charged to us for the advertising time slots we purchase and we are
unable to pass on such costs to our advertising clients, our results of
operations would be materially adversely affected.
We
may experience difficulties in our planned expansion into regional television
networks, which could result in a decrease in our revenues and
profitability.
Currently we purchase all of our
advertising time slots for airing on CCTV. As we expand our business, we intend
to purchase advertising time from other third party promoters for airing on
satellite and regional television networks, or from such networks directly, to
expand our products and service offerings. Our experience in selling advertising
time slots on CCTV channels may not translate to selling advertising time slots
on such networks. Our implementation of this strategy could divert resources
away from our existing business, which could result in a decrease in our
revenues and profitability.
18
We
plan to secure media resources in new advertising media platforms. We may not be
successful in that business due to our lack of experience and expertise with
respect to those new media platforms and we may face many other risks and
uncertainties.
We intend to secure media resources in
new advertising media platforms, such as the Internet, radio, mobile devices and
indoor or outdoor flat panel displays. Our expertise and experience in
television advertising may not be readily applied to advertising businesses
involving those new media platforms. Our existing and potential competitors may
have competitive advantages, such as significantly greater financial, marketing
or other resource or expertise and experience with respect to new advertising
media platforms. As a result, we may not be able to successfully secure media
resources in new advertising media platforms on favorable terms, or at
all.
Furthermore,
the market in China for advertising services involving some of those new media
platforms is relatively new and its potential is uncertain. Our success in
securing and managing media resources in new advertising media platforms depends
on the acceptance of advertising on those new media platforms by our advertising
clients and their continuing interest in such advertising as a component of
their advertising strategies.
Implementing
our plan to secure media resources in new advertising media platforms will also
require us to:
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continue
to identify and obtain media resources in those new media platforms that
are attractive to advertisers;
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significantly
expand our capital expenditures to pay for media
resources;
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obtain
related governmental approvals; and
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expand
the number of operations and sales staff that we
employ.
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We cannot
assure you that we will be able to successfully secure media resources in new
advertising media platforms or that the related business will generate new
revenues to pay for any increased capital expenditures or operating costs. If we
are unable to successfully implement our strategy relating to new advertising
media platforms, or if such expansion does not otherwise benefit our business,
our prospects and competitive position may be materially harmed and our
business, financial condition and results of operations may be materially and
adversely affected.
China regulates media content
extensively and we may be subject to government actions based on the advertising
content we design for advertising clients or services we provide to
them.
PRC
advertising laws and regulations require advertisers, advertising operators and
advertising distributors, including businesses such as ours, to ensure that the
content of the advertisements they prepare or distribute is fair and accurate
and is in full compliance with applicable laws, rules and regulations. Violation
of these laws, rules 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.
Our
business includes assisting advertising clients in designing and producing
advertisements, as well as executing their advertising campaign. Under our
agreements with third parties providing advertising time on CCTV we are
typically responsible for the compliance with applicable laws, rules and
regulations with respect to advertising content that we provide to the media. In
addition, some of our advertising clients provide completed advertisements for
us to display on CCTV. Although these advertisements are subject to internal
review and verification of CCTV, their content may not fully comply with
applicable laws, rules and regulations. Further, for advertising content related
to special types of products and services, such as alcohol, cosmetics,
pharmaceuticals and medical procedures, we are required to confirm that our
clients have obtained requisite government approvals, including operating
qualifications, proof of quality inspection of the advertised products and
services, government pre-approval of the content of the advertisement and
filings with the local authorities. We endeavor to comply with such
requirements, including by requesting relevant documents from the advertising
clients and employing qualified advertising inspectors who are trained to review
advertising content for compliance with applicable PRC laws, rules and
regulations. However, we cannot assure you that violations or alleged violations
of the content requirements will not occur with respect to our operations. If
the relevant PRC governmental agencies determine the content of the
advertisements that we represent violated any applicable laws, rules or
regulations, we could be subject to penalties. Although our agreements with our
clients normally require them to warrant the fairness, accuracy and compliance
with relevant laws and regulations of their advertising content and agree to
indemnify us for violations of these warranties, these contractual remedies may
not cover all of our losses resulting from governmental penalties. Violations or
alleged violations of the content requirements could also harm our reputation
and impair our ability to conduct and expand our
business.
19
We
may be exposed to liabilities from allegations that certain of our clients’
advertisements may be false or misleading or that our clients’ products may be
defective.
Our advertising customers may become
subject to claims that their advertisements are false or misleading or that
their products are defective. We may be joined as a defendant along with our
clients in litigation or administrative proceedings related to such claims.
These actions could be costly to defend and could result in harm to our
reputation. If we are made a party to any proceedings relating to such claims,
our results of operations would be materially adversely affected.
We receive a significant portion of
our revenues from a few large clients, and the loss of one or more of these
clients could materially and adversely impact our business, results of
operations and financial condition.
We derive a significant portion of our
revenues from a limited number of large advertising clients. For example, our
ten largest advertising clients accounted for approximately 61.1%, 47.7% and
35.2% of our total revenues in 2009, 2008 and 2007, respectively. Our clients
generally are able to reduce advertising and marketing spending or cancel an
advertising campaign at any time for any reason. It is possible that our clients
could reduce their advertising spending in a given period in comparison with
historical patterns, and they could reduce their advertising spending for future
periods. A significant reduction in advertising and marketing spending by our
large clients, or the loss of one or more of our large clients, to the extent
the loss in our revenues resulting from the loss of these clients is not
replaced by new client accounts or increased business from existing clients,
would lead to a substantial decline in our revenues, which could have a material
adverse effect on our business, results of operations and financial
condition.
Because we do not have long-term
contracts with our customers, our customers can terminate their relationship
with us at any time, which could cause a material adverse effect on our results
of operations.
We generally do not have exclusive or
long-term agreements with our advertising clients. As a result, our customers
may terminate their agreements and we may lose our business with them if they
are unsatisfied with our services or for other reasons. Most of our contracts
with our advertisers are for a term of one year or less. We cannot rely on
long-term contracts to protect us from the negative financial effects of a
decline in the demand for television advertising time. We, therefore, must rely
on our attractive advertising time slots, our high-quality production services
and our favorable pricing to attract and retain customers. We cannot assure you
that we will be able to maintain our relationships with our current customers or
that we will be able to attract new customers. If a considerable number of our
current clients terminate their relationships with us and we are unable to
replace customers that leave us for our competitors, our revenues and net income
could decrease and cause a material adverse effect on our results of
operations.
If we are unable to adapt to changing
advertising trends and preferences of advertisers, television channels and
viewers, we will not be able to compete effectively.
The
market for television advertising requires us to continuously identify new
advertising trends and the preferences of advertisers, television channels and
viewers, which may require us to develop new features and enhancements for our
services. We may incur development and acquisition costs or to hire new managers
or other personnel in order to keep pace with new market trends, but we may not
have the financial and other resources necessary to fund and implement these
development or acquisition projects or to hire suitable personnel. Further, we
may fail to respond to changing market preferences in a timely fashion. If we
cannot succeed in developing and introducing new services on a timely and
cost-effective basis, the demand for our advertising services may decrease and
we may not be able to compete effectively or attract advertising clients, which
would have a material adverse effect on our business and
prospects.
We are subject to risks relating to
the nature of China’s advertising industry, including frequent and sudden
changes in advertising proposals.
The
nature of the advertising business in China is such that sudden changes in
advertising proposals and actual advertisements are frequent. In China,
television stations remain responsible for the content of advertisements, and as
a result, television stations may reject or recommend changes to the content of
advertisements. We strive to minimize problems related to work for clients by
encouraging the conclusion of basic written agreements, but we are exposed to
the risk of unforeseen incidents or disputes with advertising clients. In
addition, similar to other companies in our industry in the PRC where
relationships between advertising clients within a particular industry and
advertising companies are not typically exclusive, we are currently acting for
multiple clients within a single industry in a number of industries. If this
practice in China were to change in favor of exclusive relationships and if our
efforts to respond to this change were ineffective, our business, results of
operations and financial condition could be materially and adversely
affected.
20
We
are subject to intense competition in the industry in which we operate, which
could cause loss of our market share and material harm to our
profitability.
The advertising industry is highly
competitive and fragmented in China. We compete for business with other
advertising companies based on the desirability of the advertising time slots we
offer for advertising, the broadcast area of the television network, the
services we offer and the prices for our advertising time and our services. We
compete directly with advertising agencies that provide television airtime to
advertisers and with other companies that purchase advertising timeslots from
CCTV and other television networks.
Some of our competitors may have direct
relationships with CCTV, stronger relationships with third party providers that
purchase advertising time directly from CCTV, larger market shares, greater
media resources, larger access to adverting customer bases and greater financial
resources than us. Additionally, we may face competition from new foreign-owned
entrants into the PRC advertising industry. Additionally, we face competition
for advertisers’ spending from companies offering advertising services on
non-traditional advertising platforms, including the Internet, street furniture,
billboard, frame and public transport advertising companies, and with other
traditional advertising media, such as newspapers, magazines and radio. Greater
competition in the advertising industry could result in lower prices for our
products, which would lead to decreased revenues and net income.
We rely on computer software and
hardware systems in our operations, the failure of which could adversely affect
our business, results of operations and financial
condition.
We are
dependent upon our computer software and hardware systems in designing our
advertisements and keeping important operational and market information. In
addition, we rely on our computer hardware for the storage, delivery and
transmission of data. Any system failure that causes interruptions to the input,
retrieval and transmission of data or increase in the service time could disrupt
our normal operations. Although we have a disaster recovery plan that is
designed to address the failures of our computer software and hardware systems,
we may not be able to effectively carry out this disaster recovery plan or
restore our operations within a sufficiently short time frame to avoid business
disruptions. Any failure in our computer software or hardware systems could
decrease our revenues and harm our relationships with advertisers, television
channels and other media companies, which in turn could have a material adverse
effect on our business, results of operations and financial
condition.
Our
failure to maintain a skilled a dedicated sales and marketing team, our sales
and revenues could decrease and cause an adverse effect on our results of
operations.
We depend on our dedicated sales staff
persons to sell our advertising packages and to increase awareness, acceptance
and use of our consulting services. We experience a high turnover rate among our
sales and marketing personnel and we cannot assure you that we will be able to
retain our current staff members or replace staff members who leave. As our
business grows, we will need to increase the size of our sales and marketing
staff. Because industry demand for experienced sales and marketing employees
exceeds the number of personnel available, the competition for attracting and
retaining these employees is intense. If we are unable to hire, retain,
integrate or motivate our current or new sales personnel, our sales and
marketing efforts may be materially impaired and our business, financial
condition and results of operations could be materially and adversely
affected.
We
do not carry any business interruption or liability insurance. As a result, we
may incur uninsured losses, increasing the possibility that you would lose your
entire investment in our company.
We could be exposed to liabilities or
other claims for which we would have no insurance protection. We do not
currently maintain any business interruption insurance or any other
comprehensive insurance policy, except for a key-man life insurance policy on
certain of officers and directors and liability insurance on our automobiles. As
a result, we may incur uninsured liabilities and losses as a result of the
conduct of our business. Business disruption insurance is available to a limited
extent in China, but we have determined that the risks of disruption, the cost
of such insurance and the difficulties associated with acquiring such insurance
make it impractical for us to have such insurance. Should uninsured losses
occur, any purchasers of our common stock could lose their entire
investment.
21
Our
labor costs are likely to increase as a result of changes in Chinese labor
laws.
We expect to experience an increase in
our cost of labor due to recent changes in Chinese labor laws which are likely
to increase costs further and impose restrictions on our relationship with our
employees. In June 2007, the National People’s Congress of the PRC enacted new
labor law legislation called the Labor Contract Law and more strictly enforced
existing labor laws. The new law, which became effective on January 1, 2008,
amended and formalized workers’ rights concerning overtime hours, pensions,
layoffs, employment contracts and the role of trade unions. As a result of the
new law, we have had to increase the salaries of our employees, provide
additional benefits to our employees, and revise certain other of our labor
practices. The increase in labor costs has increased our operating costs, which
increase we have not always been able to pass through to our customers. In
addition, under the new law, employees who either have worked for us for 10
years or more or who have had two consecutive fixed-term contracts must be given
an “open-ended employment contract” that, in effect, constitutes a lifetime,
permanent contract, which is terminable only in the event the employee
materially breaches our rules and regulations or is in serious dereliction of
his or her duties. Such non-cancelable employment contracts will substantially
increase our employment related risks and limit our ability to downsize our
workforce in the event of an economic downturn. No assurance can be given that
we will not in the future be subject to labor strikes or that we will not have
to make other payments to resolve future labor issues caused by the new laws.
Furthermore, there can be no assurance that the labor laws will not change
further or that their interpretation and implementation will vary, which may
have a negative effect upon our business and results of operations.
Our
business may be adversely affected by the global economic downturn, in addition
to the continuing uncertainties in the financial markets.
The global economy is currently in a
pronounced economic downturn. Global financial markets are continuing to
experience disruptions, including severely diminished liquidity and credit
availability, declines in consumer confidence, declines in economic growth,
increases in unemployment rates, and uncertainty about economic stability. Given
these uncertainties, there is no assurance that there will not be further
deterioration in the global economy, the global financial markets and consumer
confidence. Any economic downturn generally or any decrease in consumer spending
in the PRC, could cause advertisers to reduce their spending on advertisements,
would have a material adverse effect on our business, cash flows, financial
condition and results of operations.
Although we believe we have adequate
liquidity and capital resources to fund our operations internally, in light of
current market conditions, our inability to access the capital markets on
favorable terms, or at all, may adversely affect our financial performance. The
inability to obtain adequate financing from debt or capital sources could force
us to self-fund strategic initiatives or even forego certain opportunities,
which in turn could potentially harm our performance.
We
may pursue future growth through strategic acquisitions and alliances which may
not yield anticipated benefits and may adversely affect our operating results,
financial condition and existing business.
We may seek to grow in the future
through strategic acquisitions in order to complement and expand our business.
The success of our acquisition strategy will depend on, among other
things:
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the
availability of suitable
candidates;
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competition
from other companies for the purchase of available
candidates;
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our
ability to value those candidates accurately and negotiate favorable terms
for those acquisitions;
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the
availability of funds to finance
acquisitions;
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the
ability to establish new informational, operational and financial systems
to meet the needs of our business;
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the
ability to achieve anticipated synergies, including with respect to
complementary products or services;
and
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the
availability of management resources to oversee the integration and
operation of the acquired
businesses.
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If we are not successful in integrating
acquired businesses and completing acquisitions in the future, we may be
required to reevaluate our acquisition strategy. We also may incur substantial
expenses and devote significant management time and resources in seeking to
complete acquisitions. Acquired businesses may fail to meet our performance
expectations. If we do not achieve the anticipated benefits of an acquisition as
rapidly as expected, or at all, investors or analysts may not perceive the same
benefits of the acquisition as we do. If these risks materialize, our stock
price could be materially adversely affected.
22
We
may need additional capital to implement our current business strategy, which
may not be available to us, and if we raise additional capital, it may dilute
your ownership in us.
We currently depend on net revenues to
meet our short-term cash requirements. In order to grow revenues and sustain
profitability, we will need additional capital. Obtaining additional financing
will be subject to a number of factors, including market conditions, our
operating performance and investor sentiment. These factors may make the timing,
amount, terms and conditions of additional financing unattractive to us. We
cannot assure you that we will be able to obtain any additional financing. If we
are unable to obtain the financing needed to implement our business strategy,
our ability to increase revenues will be impaired and we may not be able to
sustain profitability.
Our
failure to effectively manage growth could harm our business.
We have rapidly and significantly
expanded our services offerings since our inception and will endeavor to further
expand our service offerings in the future. Any additional significant growth in
the market for our services or our entry into new markets may require and
expansion of our employee base for managerial, operational, financial, sales and
marketing and other purposes. During any growth, we may face problems related to
our operational and financial systems and controls, including quality control
and service capacities. We would also need to continue to expand, train and
manage our employee base. Continued future growth will impose significant added
responsibilities upon the members of management to identify, recruit, maintain,
integrate, and motivate new employees.
Aside from increased difficulties in
the management of human resources, we may also encounter working capital issues,
as we will need increased liquidity to finance the purchase of additional
advertising time slots, develop new services and the hiring of additional
employees. For effective growth management, we will be required to continue
improving our operations, management, and financial systems and controls. Our
failure to manage growth effectively may lead to operational and financial
inefficiencies that will have a negative effect on our profitability. We cannot
assure investors that we will be able to timely and effectively meet that demand
and maintain the quality standards required by our existing and potential
customers.
We
may be subject to intellectual property infringement claims, which could result
in litigation and substantial costs to defend.
We place advertisements provided by our
advertising clients on television and may be subject to claims of infringement
based on our clients’ advertisements. Some of our existing contracts with our
advertising clients do not provide us with indemnity from our clients for any
intellectual property infringement claims relating to the advertisements
provided by our clients. We cannot be certain that our operations or any aspects
of our business do not or will not infringe upon patents, copyrights or other
intellectual property rights held by third parties. We may receive notice of
claims of infringement of other parties’ proprietary rights. Such actions could
result in litigation and we could incur significant costs and diversion of
resources in defending such claims. The party making such claims could secure a
judgment awarding substantial damages, as well as injunctive or other equitable
relief. Even if such litigation is not successful, it could result in
substantial costs and diversion of resources and management’s attention from the
operation of our business.
We
face risks related to natural disasters, terrorist attacks or other
unpredictable events in China which could have a material adverse effect on our
business and results of operations.
Our business could be materially and
adversely affected by natural disasters, terrorist attacks or other events in
China where all of our operations are located. For example, in early 2008, parts
of China suffered a wave of strong snow storms that severely impacted public
transportation systems. In May 2008, Sichuan Province in China suffered a strong
earthquake measuring approximately 8.0 on the Richter scale that caused
widespread damage and casualties. The May 2008 Sichuan earthquake has had a
material adverse effect on the general economic conditions in the areas affected
by the earthquake. The occurrence of any future disasters such as earthquakes,
fires, floods, wars, terrorist attacks, computer viruses, transportation
disasters or other events, or our information system or communications network
breaks down or operates improperly as a result of such events, our facilities
may be seriously damaged, and we may have to stop or delay operations. We may
incur expenses relating to such damages, which could have a material adverse
effect on our business and results of operations.
23
We
may adopt an equity incentive plan under which we may grant securities to
compensate employees and other services providers, which would result in
increased share-based compensation expenses and, therefore, reduce net
income.
We may adopt an equity incentive plan
under which we may grant shares or options to qualified employees. Under current
accounting rules, we would be required to recognize share-based compensation as
compensation expense in our statement of operations, based on the fair value of
equity awards on the date of the grant, and recognize the compensation expense
over the period in which the recipient is required to provide service in
exchange for the equity award. We have not made any such grants in the past, and
accordingly our results of operations have not contained any share-based
compensation charges. The additional expenses associated with share-based
compensation may reduce the attractiveness of issuing stock options under an
equity incentive plan that we may adopt in the future. If we grant equity
compensation to attract and retain key personnel, the expenses associated with
share-based compensation may adversely affect our net income. However, if we do
not grant equity compensation, we may not be able to attract and retain key
personnel or be forced to expend cash or other compensation instead.
Furthermore, the issuance of equity awards would dilute the shareholders’
ownership interests in our company.
RISKS
RELATED TO OUR CORPORATE STRUCTURE
If
the PRC government determines that the agreements establishing the structure for
operating our China business do not comply with applicable PRC laws, rules and
regulations, we could be subject to severe penalties including being prohibited
from continuing our advertising operations in the PRC.
Foreign entities that invest in
companies that operate in the advertising industry in the PRC must have at least
two years of direct operations in the advertising industry outside of the PRC.
We are a Delaware corporation and have not engaged in any advertising operations
outside of the PRC and, therefore, are unable to directly provide advertising
services in China. As a result, our PRC subsidiary, CD Media Huizhou cannot
obtain the proper business licenses in China to provide advertising services. We
provide our advertising services through CD Media Beijing, which is owned
directly by three PRC citizens. CD Media Huizhou controls the operations of CD
Media Beijing and receives the economic benefits and bears the economic risks of
CD Media Beijing through a series of contractual arrangements.
There are considerable uncertainties
regarding the interpretation and application of current and future PRC laws,
rules and regulations, including but not limited to the laws, rules and
regulations governing the validity and enforcement of our contractual
arrangements with CD Media Beijing. Although our PRC legal counsel has advised
us that our corporate structure, including our contractual arrangements with CD
Media Beijing, complies with all applicable PRC laws, rules and regulations, we
cannot assure you that the PRC government will not take a view contrary to the
opinion of our PRC legal counsel and determine that our corporate structure and
our contractual arrangement violate PRC law, rules and regulations. Our PRC
legal counsel has also advised us that if the PRC government decides that our
contractual agreements with CD Media Beijing that establish the framework for
our advertising operations in the PRC violate PRC restrictions on foreign
ownership of advertising businesses, the PRC may impose harsh penalties upon us,
including but not limited to the following:
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revoking
the business and operating licenses of CD Media Huizhou and/or CD Media
Beijing;
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ending
or restricting any transactions among CD Media Huizhou and CD Media
Beijing;
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imposing
fines;
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confiscating
our, CD Media Huizhou’s or CD Media Beijing’s
income;
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imposing
restrictions on our operations with which we may be unable to
comply;
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requiring
us to restructure our corporate structure or operations;
or
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restricting
or prohibiting the use of any proceeds of an offering of our securities to
finance our operations in the PRC.
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The imposition of any such penalties
would have a material adverse effect on our business and results of
operations.
We
rely on contractual arrangements with CD Media Beijing, our consolidated
affiliated entity in China, and its shareholders, which may not be as effective
in providing us with operational control or enabling us to derive economic
benefits as through ownership of controlling equity interest.
We rely upon, and expect to continue to
rely upon, contractual arrangements with CD Media Beijing, our consolidated
affiliated entity in China, and its shareholders to operate our advertising
business. These contractual arrangements provide us with effective control over
CD Media Beijing and the economic benefits and risks of CD Media Beijing. If CD
Media Beijing or any of its shareholders fails to perform their responsibilities
under any of our contractual arrangements, we may incur substantial costs to
enforce such agreements and rely on legal remedies under PRC law, including
seeking specific performance or injunctive relief, and claiming damage. We
cannot assure investors that we will be successful in enforcing such
agreements.
24
If (i) the applicable PRC authorities
invalidate these contractual arrangements for violation of PRC laws, rules and
regulations, (ii) CD Media Beijing or its shareholder terminates these
contractual arrangements or (iii) CD Media Beijing or its shareholders fail to
perform their obligations under these contractual arrangements, we would not be
able to continue our business operations in China or to derive economic benefits
from operations of CD Media Beijing. Additionally, if we cannot renew these
contractual arrangements upon their expiration, we would not be able to continue
our business operations unless the then current PRC law allows us to directly
operate advertising businesses in China.
If CD Media Beijing or all or part of
its 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 severely
disrupt our business and result in a material adverse effect to our results of
operations. If CD Media Beijing undergoes a voluntary or involuntary liquidation
proceeding, its shareholders or unrelated third-party creditors may claim rights
to some or all of CD Media Beijing’s assets, which would inhibit our ability to
operate our advertising business and derive the economic benefits of CD media
Beijing.
All of these contractual arrangements
are governed by PRC laws. Accordingly, these contracts will be interpreted in
accordance with PRC laws and any disputes would be resolved in accordance with
PRC legal procedures. The legal environment in the PRC is not as developed as in
some 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 exercise effective control over our
operating entities, and we may be precluded from operating our business, which
would have a material adverse effect on our financial condition and results of
operations.
The
PRC tax authorities may scrutinize our contractual arrangements with CD Media
Beijing, which could result in the tax authorities determining that we owe
additional taxes or that we are not entitled for certain tax exemptions, or
both, which could substantially increase our taxes owed and have a negative
impact on our financial condition.
Under applicable PRC laws, rules and
regulations, arrangements and transactions among related parties may be subject
to audits or challenges by the PRC tax authorities. Neither we nor our PRC legal
counsel are able to determine whether any of our contractual arrangements with
CD Media Beijing will be regarded by the PRC tax authorities as arm’s length
transactions because, to our knowledge, the PRC tax authorities have not issued
a ruling or interpretation in respect of the type of transaction structure
similar to ours. The relevant tax authorities may determine that our contractual
relationships with CD Media Beijing and its shareholders were not entered into
on an arm’s length basis. If any of the transactions between CD Media Huizhou,
our wholly owned subsidiary in China, and CD Media Beijing, our affiliated
entity, and its shareholders, including our contractual arrangements with CD
Media Beijing, are determined not to have been entered into on an arm’s length
basis, or are found to result in an impermissible reduction in taxes under PRC
laws, the PRC tax authorities may adjust the profits and losses of CD Media
Beijing and assess more taxes on it. In addition, the PRC tax authorities may
impose late payment surcharges and other penalties to CD Media Beijing for
underpaid taxes. Our net income may be materially and adversely affected if CD
Media Beijing’s tax liabilities increase or if it is found to be subject to late
payment surcharges or other penalties.
We
rely principally on dividends and other distributions on equity paid by our
wholly-owned operating subsidiary to fund any cash and financing requirements we
may have, and any limitation on the ability of our operating subsidiary to pay
dividends to us could have a material adverse effect on our ability to conduct
our business.
As a holding company, we rely
principally on dividends and other distributions on equity paid by CD Media
Huizhou, our PRC operating subsidiary, for our cash requirements, including the
funds necessary to service any debt we may incur or for operating a public
company. If CD Media Huizhou incurs debt on its own behalf in the future, the
instruments governing the debt may restrict its ability to pay dividends or make
other distributions to us. In addition, the PRC tax authorities may require us
to adjust our taxable income under the contractual arrangements CD Media Huizhou
currently has in place with CD Media Beijing in a way that would materially and
adversely affect CD Media Huizhou’s ability to pay dividends and other
distributions to us. Furthermore, relevant PRC laws, rules and regulations
permit payments of dividends by CD Media Huizhou only out of its retained
earnings, if any, determined in accordance with PRC accounting standards and
regulations. Under PRC laws, rules and regulations, CD Media Huizhou is also
required to set aside a portion of its net income each year to fund specific
reserve funds. These reserves are not distributable as cash
dividends.
25
Furthermore, relevant PRC laws and
regulations permit payments of dividends by CD Media Huizhou only out of its
retained earnings, if any, determined in accordance with PRC accounting
standards and regulations. The statutory general reserve fund requires annual
appropriations of 10% of after-tax income to be set aside prior to payment of
dividends until the cumulative fund reaches 50% of the registered capital. As a
result CD Media Huizhou is restricted in its ability to transfer a portion of
its net assets to us whether in the form of dividends, loans or advances. Any
limitation on the ability of CD Media Huizhou to pay dividends to us could
materially and adversely limit our ability to grow, make investments or
acquisitions that could be beneficial to our businesses, pay dividends or
otherwise fund and conduct our business.
RISKS
RELATED TO US DOING BUSINESS IN CHINA
As
substantially all of our assets are located in the PRC and all of our revenues
are derived from our operations in China, changes in the political and economic
policies of the PRC government could have a significant impact upon the business
we may be able to conduct in the PRC and accordingly on the results of our
operations and financial condition.
Our business operations may be
adversely affected by the current and future political environment in the PRC.
The Chinese government exerts substantial influence and control over the manner
in which we must conduct our business activities. Our ability to operate in
China may be adversely affected by changes in Chinese laws and regulations,
including those relating to taxation, import and export tariffs, raw materials,
environmental regulations, land use rights, property and other matters. Under
the current government leadership, the government of the PRC has been pursuing
economic reform policies that encourage private economic activity and greater
economic decentralization. There is no assurance, however, that the government
of the PRC will continue to pursue these policies, or that it will not
significantly alter these policies from time to time without
notice.
Our
operations are subject to PRC laws and regulations that are sometimes vague and
uncertain. Any changes in such PRC laws and regulations, or the interpretations
thereof, may have a material and adverse effect on our business.
The PRC’s legal system is a civil law
system based on written statutes. Decided legal cases do not have so much value
as precedent in China as those in the common law system prevalent in the United
States. There are substantial uncertainties regarding the interpretation and
application of PRC laws and regulations, including but not limited to,
governmental approvals required for conducting business and investments, laws
and regulations governing the advertising industry, as well as commercial,
antitrust, patent, product liability, environmental laws and regulations,
consumer protection, and financial and business taxation laws and
regulations.
The Chinese government has been
developing a comprehensive system of commercial laws, and considerable progress
has been made in introducing laws and regulations dealing with economic matters.
However, because these laws and regulations are relatively new, and because of
the limited volume of published cases and judicial interpretation and their lack
of force as precedents, interpretation and enforcement of these laws and
regulations involve significant uncertainties. New laws and regulations that
affect existing and proposed future businesses may also be applied
retroactively.
Our PRC subsidiary, CD Media Huizhou,
is considered a foreign invested enterprise under PRC laws, and as a result is
required to comply with PRC laws and regulations, including laws and regulations
specifically governing the activities and conduct of foreign invested
enterprises. We cannot predict what effect the interpretation of existing or new
PRC laws or regulations may have on our businesses. If the relevant authorities
find us in violation of PRC laws or regulations, they would have broad
discretion in dealing with such a violation, including, without
limitation:
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levying
fines;
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revoking
our business license, other licenses or
authorities;
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requiring
that we restructure our ownership or operations;
and
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requiring
that we discontinue any portion or all of our
business.
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Investors
may experience difficulties in effecting service of legal process, enforcing
foreign judgments or bringing original actions in China based upon U.S. laws,
including the federal securities laws or other foreign laws against us or our
management.
All of our current operations are
conducted in China. Moreover, all of our directors and officers are nationals
and residents of China. All or substantially all of the assets of these persons
are located outside the United States and in the PRC. As a result, it may not be
possible to effect service of process within the United States or elsewhere
outside China upon these persons. In addition, uncertainty exists as to whether
the courts of China would recognize or enforce judgments of U.S. courts obtained
against us or such officers and/or directors predicated upon the civil liability
provisions of the securities laws of the United States or any state thereof, or
be competent to hear original actions brought in China against us or such
persons predicated upon the securities laws of the United States or any state
thereof.
26
The
scope of the business license for CD Media Beijing in China is limited, and we
may not expand or continue our business without government approval and renewal,
respectively.
Our principal operating entity, CD
Media Beijing, can only conduct business within its approved business scope,
which ultimately appears on its business license. CD Media Beijing’s business
license covers its present business to design, create, handle(as agent), and
release advertisements in PRC for domestic and foreign investors; to arrange
cultural communications (excluding shows); to undertake exhibitions and
presentations; and to provide advertising consulting services (excluding
intermediary services). Companies that operate outside the scope of their
licenses can be subjected to fines, disgorgement of income and ordered to cease
operations. Prior to expanding our business beyond that of our business
licenses, we are required to apply and receive approval from the relevant PRC
government authorities. In order for us to expand our business beyond the scope
of our license, we will be required to enter into a negotiation with the PRC
authorities for the approval to expand the scope of our business. We cannot
assure investors that we will be able to obtain the necessary government
approval for any change or expansion of CD Media Beijing’s
business.
Contract
drafting, interpretation and enforcement in China involves significant
uncertainty.
We have entered into numerous contracts
governed by PRC law, many of which are material to our business. As compared
with contracts in the United States, contracts governed by PRC law tend to
contain less detail and are not as comprehensive in defining contracting
parties’ rights and obligations. As a result, contracts in China are more
vulnerable to disputes and legal challenges. In addition, contract
interpretation and enforcement in China is not as developed as in the United
States, and the result of any contract dispute is subject to significant
uncertainties. Therefore, we cannot assure you that we will not be subject to
disputes under our material contracts, and if such disputes arise, we cannot
assure you that we will prevail.
Recent
PRC regulations relating to acquisitions of PRC companies by foreign entities
may create regulatory uncertainties that could restrict or limit our ability to
operate. Our failure to obtain the prior approval of the China Securities
Regulatory Commission, or the CSRC, for our planned public offering and the
listing and trading of our common stock could have a material adverse effect on
our business, operating results, reputation and trading price of our common
stock.
The PRC State Administration of Foreign
Exchange, or “SAFE,” issued a public notice in November 2005, known as Circular
75, concerning the use of offshore holding companies controlled by PRC residents
in mergers and acquisitions in China. This circular requires that (1) a PRC
resident shall register with a local branch of the SAFE before he or she
establishes or controls an overseas special purpose vehicle, or SPV, for the
purpose of overseas equity financing (including convertible debt financing); (2)
when a PRC resident contributes the assets of or his or her equity interests in
a domestic enterprise to an SPV, or engages in overseas financing after
contributing assets or equity interests to an SPV, such PRC resident must
register his or her interest in the SPV and any changes in such interest with a
local branch of the SAFE; and (3) when the SPV undergoes a material change
outside of China, such as a change in share capital or merger or acquisition,
the PRC resident shall, within 30 days from the occurrence of the event that
triggers the change, register such change with a local branch of the SAFE. In
addition, SAFE issued updated internal implementing rules, or the Implementing
Rules in relation to Circular 75. The Implementing Rules were promulgated and
became effective on May 29, 2007, known as Circular 106. Such Implementing Rules
provide more detailed provisions and requirements regarding the overseas
investment foreign exchange registration procedures. However, even after the
promulgation of Implementing Rules there still exist uncertainties regarding the
SAFE registration for PRC residents’ interests in overseas companies. If any PRC
resident stockholder of a SPV fails to make the required SAFE registration and
amended registration, the onshore PRC subsidiaries of that offshore company may
be prohibited from distributing their profits and the proceeds from any
reduction in capital, share transfer or liquidation to the offshore entity.
Failure to comply with the SAFE registration and amendment requirements
described above could result in liability under PRC laws for evasion of
applicable foreign exchange restrictions. Because of uncertainty in how the SAFE
notice will be interpreted and enforced, we cannot be sure how it will affect
our business operations or future plans. For example, CD Media Huizhou’s ability
to conduct foreign exchange activities, such as the remittance of dividends and
foreign currency-denominated borrowings, may be subject to compliance with the
SAFE notice by our PRC resident beneficial holders over whom we have no control.
In addition, we cannot assure you that such PRC residents will be able to
complete the necessary approval and registration procedures required by the SAFE
regulations. Failure by any PRC resident beneficial holder to register as
required with the relevant branch of SAFE could subject these PRC resident
beneficial holders to fines or legal sanctions, restrict our overseas or
cross-border investment activities, limit CD Media Huizhou’s ability to make
distributions or pay dividends or affect our ownership structure, which could
adversely affect our business and prospects.
27
On August 8, 2006, the PRC Ministry of
Commerce (“MOFCOM”), joined by the State-owned Assets Supervision and
Administration Commission of the State Council, the State Administration of
Taxation, the State Administration for Industry and Commerce, the China
Securities Regulatory Commission and SAFE, released a substantially amended
version of the Provisions for Foreign Investors to Merge with or Acquire
Domestic Enterprises (the “Revised M&A Regulations”), which took effect on
September 8, 2006 and was further amended on June 22, 2009. These new rules
significantly revised China’s regulatory framework governing onshore-to-offshore
restructurings and foreign acquisitions of domestic enterprises. These new rules
signify greater PRC government attention to cross-border merger, acquisition and
other investment activities, by confirming MOFCOM as a key regulator for issues
related to mergers and acquisitions in China and requiring MOFCOM approval of a
broad range of merger, acquisition and investment transactions. Further, the new
rules establish reporting requirements for acquisition of control by foreigners
of companies in key industries, and reinforce the ability of the Chinese
government to monitor and prohibit foreign control transactions in key
industries.
Among other things, the revised M&A
Regulations include new provisions that purport to require that an offshore
special purpose vehicle, or SPV, formed for listing purposes and controlled
directly or indirectly by PRC companies or individuals must obtain the approval
of the CSRC prior to the listing and trading of such SPV’s securities on an
overseas stock exchange. On September 21, 2006, the CSRC published on its
official website procedures specifying documents and materials required to be
submitted to it by SPVs seeking CSRC approval of their overseas listings.
However, the application of this PRC regulation remains unclear with no
consensus currently existing among the leading PRC law firms regarding the scope
and applicability of the CSRC approval requirement. Our PRC counsel, Han Kun Law
Offices, believes that it is uncertain whether the transaction is subject to
CSRC's approval, and in reality, many other similar companies have completed
similar transactions like the share exchange and private placement contemplated
under the Exchange Agreement without CSRC's approval and our PRC legal counsel
is not aware of any situation in which the CSRC has imposed a punishment or
penalty in connection with any such transactions. However, if the CSRC or other
PRC Government Agencies subsequently determine that CSRC approval is required
for the share exchange and private placement contemplated under the Exchange
Agreement, we may face material regulatory actions or other sanctions from the
CSRC or other PRC Government Agencies.
If the CSRC or another PRC regulatory
agency subsequently determines that CSRC approval was required for our
restructuring, we may face regulatory actions or other sanctions from the CSRC
or other PRC regulatory agencies. These regulatory agencies may impose fines and
penalties on our operations in the PRC, limit our operating privileges in the
PRC, or take other actions that could have a material adverse effect on our
business, financial condition, results of operations, reputation and prospects,
as well as the trading price of our common stock.
Also, if later the CSRC requires that
we obtain its approval, we may be unable to obtain a waiver of the CSRC approval
requirements, if and when procedures are established to obtain such a waiver.
Any uncertainties and/or negative publicity regarding this CSRC approval
requirement could have a material adverse effect on the trading price of our
common stock. Furthermore, published news reports in China recently indicated
that the CSRC may have curtailed or suspended overseas listings for Chinese
private companies.
It is uncertain how our business
operations or future strategy will be affected by the interpretations and
implementation of Circular 75 and the Revised M&A Regulations. It is
anticipated that application of the new rules will be subject to significant
administrative interpretation, and we will need to closely monitor how MOFCOM,
SAFE, CSRC and other ministries apply the rules to ensure that our domestic and
offshore activities continue to comply with PRC law. Given the uncertainties
regarding interpretation and application of the new rules, we may need to expend
significant time and resources to maintain compliance
If
the land use rights of our landlord are revoked, we would be forced to relocate
operations.
Under Chinese law, land is owned by the
state or rural collective economic organizations. The state issues to the land
users the land use right certificate. Land use rights can be revoked and the
land users could be forced to vacate at any time when redevelopment of the land
is in the public interest. The public interest rationale is interpreted quite
broadly and the process of land appropriation may be less than transparent. We
do have any land use rights and each of our facilities relies on land use rights
of a landlord, and the loss of such rights would require us to identify and
relocate our operations, which could have a material adverse effect on our
financial conditions and results of operations.
28
We
will not be able to complete an acquisition of prospective acquisition targets
in the PRC unless their financial statements can be reconciled to U.S. generally
accepted accounting principles in a timely manner.
Companies based in the PRC may not have
properly kept financial books and records that may be reconciled with U.S.
generally accepted accounting principles. If we attempt to acquire a significant
PRC target company and/or its assets, we would be required to obtain or prepare
financial statements of the target that are prepared in accordance with and
reconciled to U.S. generally accepted accounting principles. Federal securities
laws require that a business combination meeting certain financial significance
tests require the public acquirer to prepare and file historical and/or pro
forma financial statement disclosure with the SEC. These financial statements
must be prepared in accordance with, or be reconciled to U.S. generally accepted
accounting principles and the historical financial statements must be audited in
accordance with the standards of the Public Company Accounting Oversight Board
(United States), or PCAOB. If a proposed acquisition target does not have
financial statements that have been prepared in accordance with, or that can be
reconciled to, U.S. generally accepted accounting principles and audited in
accordance with the standards of the PCAOB, we will not be able to acquire that
proposed acquisition target. These financial statement requirements may limit
the pool of potential acquisition targets with which we may acquire and hinder
our ability to expand our retail operations. Furthermore, if we consummate an
acquisition and are unable to timely file audited financial statements and/or
pro forma financial information required by the Exchange Act, such as Item 9.01
of Form 8-K, we will be ineligible to use the SEC’s short-form registration
statement on Form S-3 to raise capital, if we are otherwise eligible to use a
Form S-3. If we are ineligible to use a Form S-3, the process of raising capital
may be more expensive and time consuming and the terms of any offering
transaction may not be as favorable as they would have been if we were eligible
to use Form S-3.
We
face uncertainty from China’s Circular on Strengthening the Administration of
Enterprise Income Tax on Non-Resident Enterprises' Share Transfer Income
(“Circular 698”) that was released in December 2009 with retroactive effect from
January 1, 2008.
The Chinese State Administration of
Taxation (SAT) released a circular (Guoshuihan No. 698 – Circular 698) on
December 10, 2009 that addresses the transfer of shares of Chinese resident
companies by nonresident companies. Circular 698, which is effective
retroactively to January 1, 2008, may have a significant impact on many
companies that use offshore holding companies to invest in China. Circular 698,
which provides parties with a short period of time to comply its requirements,
indirectly taxes foreign companies on gains derived from the indirect sale of a
Chinese company. Where a foreign investor indirectly transfers equity interests
in a Chinese resident enterprise by selling the shares in an offshore holding
company, and the latter is located in a country or jurisdiction where the
effective tax burden is less than 12.5% or where the offshore income of his,
her, or its residents is not taxable, the foreign investor is required to
provide the tax authority in charge of that Chinese resident enterprise with the
relevant information within 30 days of the transfers. Moreover, where a foreign
investor indirectly transfers equity interests in a Chinese resident enterprise
through an abuse of form of organization and there are no reasonable commercial
purposes such that the corporate income tax liability is avoided, the PRC tax
authority will have the power to re-assess the nature of the equity transfer in
accordance with PRC’s “substance-over-form” principle and deny the existence of
the offshore holding company that is used for tax planning
purposes.
There is uncertainty as to the
application of Circular 698. For example, while the term "indirectly transfer"
is not defined, it is understood that the relevant PRC tax authorities have
jurisdiction regarding requests for information over a wide range of foreign
entities having no direct contact with China. Moreover, the relevant authority
has not yet promulgated any formal provisions or formally declared or stated how
to calculate the effective tax in the country or jurisdiction and to what extent
and the process of the disclosure to the tax authority in charge of that Chinese
resident enterprise. In addition, there are not any formal declarations with
regard to how to decide “abuse of form of organization” and “reasonable
commercial purpose,” which can be utilized by us to balance if our company
complies with the Circular 698. As a result, we may become at risk of being
taxed under Circular 698 and we may be required to expend valuable resources to
comply with Circular 698 or to establish that we should not be taxed under
Circular 698, which could have a material adverse effect on our financial
condition and results of operations.
The
foreign currency exchange rate between U.S. Dollars and Renminbi could adversely
affect our financial condition.
Until 1994, the Renminbi experienced a
gradual but significant devaluation against most major currencies, including
dollars, and there was a significant devaluation of the Renminbi on January 1,
1994 in connection with the replacement of the dual exchange rate system with a
unified managed floating rate foreign exchange system. Since 1994, the value of
the Renminbi relative to the U.S. dollar has remained stable and has appreciated
slightly against the U.S. Dollar. Countries, including the United States, have
argued that the Renminbi is artificially undervalued due to China’s current
monetary policies and have pressured China to allow the Renminbi to float freely
in world markets. In July 2005, the PRC government changed its policy of pegging
the value of the Renminbi to the U.S. dollar. Under the new policy the Renminbi
is permitted to fluctuate within a narrow and managed band against a basket of
designated foreign currencies. While the international reaction to the Renminbi
revaluation has generally been positive, there remains significant international
pressure on the PRC government to adopt an even more flexible currency policy,
which could result in further and more significant appreciation of the Renminbi
against the U.S. dollar.
29
As we may rely on dividends and other
fees paid to us by our subsidiary and affiliated consolidated entities in China,
any significant revaluation of the Renminbi may materially and adversely affect
our cash flows, revenues, earnings and financial position, and the amount of,
and any dividends payable on, our shares in U.S. dollars. To the extent that we
need to convert U.S. dollars into Renminbi for our operations, appreciation of
the Renminbi against the U.S. dollar would have an adverse effect on the
Renminbi amount we would receive from the conversion. Conversely, if we decide
to convert our Renminbi into U.S. dollars for the purpose of making payments for
dividends on our shares or for other business purposes, appreciation of the U.S.
dollar against the Renminbi would have a negative effect on the U.S. dollar
amount available to us. In addition, since our functional and reporting currency
is the U.S. dollar while the functional currency of our subsidiary and
affiliated consolidated entities in China is Renminbi, appreciation or
depreciation in the value of the Renminbi relative to the U.S. dollar would have
a positive or negative effect on our reported financial results, which may not
reflect any underlying change in our business, results of operations or
financial condition.
Inflation
in the PRC could negatively affect our profitability and growth.
While the PRC economy has experienced
rapid growth, such growth has been uneven among various sectors of the economy
and in different geographical areas of the country. Rapid economic growth can
lead to growth in the money supply and rising inflation. According to the
National Bureau of Statistics of China, the change in China’s Consumer Price
Index increased to 8.5% in April 2008. If prices for our products and services
rise at a rate that is insufficient to compensate for the rise in the costs of
supplies such as raw materials, it may have an adverse effect on our
profitability.
Furthermore, in order to control
inflation in the past, the PRC government has imposed controls on bank credits,
limits on loans for fixed assets and restrictions on state bank lending. In
January 2010, the Chinese government took steps to tighten the availability of
credit including ordering banks to increase the amount of reserves they hold and
to reduce or limit their lending. The implementation of such policies may impede
economic growth. In October 2004, the People’s Bank of China, the PRC’s central
bank, raised interest rates for the first time in nearly a decade and indicated
in a statement that the measure was prompted by inflationary concerns in the
Chinese economy. In April 2006, the People’s Bank of China raised the interest
rate again. Repeated rises in interest rates by the central bank would likely
slow economic activity in China which could, in turn, materially increase our
costs and also reduce demand for our products and services.
Because
our funds are held in banks which do not provide insurance, the failure of any
bank in which we deposit our funds could affect our ability to continue in
business.
Banks and other financial institutions
in the PRC do not provide insurance for funds held on deposit. A significant
portion of our assets are in the form of cash deposited with banks in the PRC,
and in the event of a bank failure, we may not have access to our funds on
deposit. Depending upon the amount of money we maintain in a bank that fails,
our inability to have access to our cash could impair our operations, and, if we
are not able to access funds to pay our suppliers, employees and other
creditors, we may be unable to continue in business.
Failure
to comply with the United States Foreign Corrupt Practices Act could subject us
to penalties and other adverse consequences.
As our ultimate holding company is a
Delaware corporation, we are subject to the United States Foreign Corrupt
Practices Act, which generally prohibits United States companies from engaging
in bribery or other prohibited payments to foreign officials for the purpose of
obtaining or retaining business. Foreign companies, including some that may
compete with us, are not subject to these prohibitions. Corruption, extortion,
bribery, pay-offs, theft and other fraudulent practices may occur from
time-to-time in the PRC. We can make no assurance, however, that our employees
or other agents will not engage in such conduct for which we might be held
responsible. If our employees or other agents are found to have engaged in such
practices, we could suffer severe penalties and other consequences that may have
a material adverse effect on our business, financial condition and results of
operations.
30
If
we make equity compensation grants to persons who are PRC citizens, they may be
required to register with the State Administration of Foreign Exchange of the
PRC, or SAFE. We may also face regulatory uncertainties that could restrict our
ability to adopt an equity compensation plan for our directors and employees and
other parties under PRC law.
On March 28, 2007, SAFE issued the
“Operating Procedures for Administration of Domestic Individuals Participating
in the Employee Stock Ownership Plan or Stock Option Plan of An Overseas Listed
Company, also known as “Circular 78.” It is not clear whether Circular 78 covers
all forms of equity compensation plans or only those which provide for the
granting of stock options. Domestic individuals who are granted shares or share
options by companies listed on overseas stock exchanges based on the employee
share option or share incentive plan are required to register with the State
Administration of Foreign Exchange or its local counterparts. Pursuant to
Circular 78, PRC individuals participating in the employee stock option plans of
the overseas listed companies shall entrust their employers, including the
overseas listed companies and the subsidiaries or branch offices of such
offshore listed companies in China, or engage domestic agents to handle various
foreign exchange matters associated with their employee stock options plans. The
domestic agents or the employers shall, on behalf of the domestic individuals
who have the right to exercise the employee stock options, apply annually to the
State Administration of Foreign Exchange or its local offices for a quota for
the conversion and/or payment of foreign currencies in connection with the
domestic individuals’ exercise of the employee stock options. The foreign
exchange proceeds received by the domestic individuals from sale of shares under
the stock option plans granted by the overseas listed companies must be remitted
into the bank accounts in China opened by their employers or PRC agents. We
intend to adopt an equity compensation plan in the future and make option grants
to our officers and directors, most of whom are PRC citizens. Circular 78 may
require our officers and directors who receive option grants and are PRC
citizens to register with SAFE. We believe that the registration and approval
requirements contemplated in Circular 78 will be burdensome and time consuming.
If it is determined that any of our equity compensation plans are subject to
Circular 78, failure to comply with such provisions may subject us and
participants of our equity incentive plan who are PRC citizens to fines and
legal sanctions and prevent us from being able to grant equity compensation to
our PRC employees. In that case, our ability to compensate our employees and
directors through equity compensation would be hindered and our business
operations may be adversely affected.
Under
the New EIT Law, we and CD Media BVI may be classified as “resident enterprises”
of China for tax purpose, which may subject us and CD Media BVI to PRC income
tax on taxable global income.
Under the new PRC Enterprise Income Tax
Law (the “New EIT Law”) and its implementing rules, both of which became
effective on January 1, 2008, enterprises are classified as resident enterprises
and non-resident enterprises. An enterprise established outside of China with
its “de facto management bodies” located within China is considered a “resident
enterprise,” meaning that it can be treated in a manner similar to a Chinese
domestic enterprise for enterprise income tax purposes. The implementing rules
of the New EIT Law define de facto management body as a managing body that in
practice exercises “substantial and overall management and control over the
production and operations, personnel, accounting, and properties” of the
enterprise. Due to the short history of the New EIT law and lack of applicable
legal precedents, it remains unclear how the PRC tax authorities will determine
the PRC tax resident treatment of a foreign company such as us and CD Media BVI.
Both our and CD Media BVI’s members of management are located in China. If the
PRC tax authorities determine that we or CD Media BVI is a “resident enterprise”
for PRC enterprise income tax purposes, a number of PRC tax consequences could
follow. First, we may be subject to the enterprise income tax at a rate of 25%
on our worldwide taxable income, including interest income on the proceeds from
this offering, as well as PRC enterprise income tax reporting obligations.
Second, the New EIT Law provides that dividend paid between “qualified resident
enterprises” is exempted from enterprise income tax. A recent circular issued by
the State Administration of Taxation regarding the standards used to classify
certain Chinese-invested enterprises controlled by Chinese enterprises or
Chinese group enterprises and established outside of China as “resident
enterprises” clarified that dividends and other income paid by such “resident
enterprises” will be considered to be PRC source income, subject to PRC
withholding tax, currently at a rate of 10%, when recognized by non-PRC
shareholders. It is unclear whether the dividends that we or CD Media BVI
receives from CD Media Huizhou will constitute dividends between “qualified
resident enterprises” and would therefore qualify for tax exemption, because the
definition of qualified resident enterprises is unclear and the relevant PRC
government authorities have not yet issued guidance with respect to the
processing of outbound remittances to entities that are treated as resident
enterprises for PRC enterprise income tax purposes. We are actively monitoring
the possibility of “resident enterprise” treatment for the applicable tax years
and are evaluating appropriate organizational changes to avoid this treatment,
to the extent possible. As a result of the New EIT Law, our historical operating
results will not be indicative of our operating results for future periods and
the value of our common stock may be adversely affected.
31
Dividends
payable by us to our foreign investors and any gain on the sale of our shares
may be subject to taxes under PRC tax laws.
If dividends payable to our
shareholders are treated as income derived from sources within China, then the
dividends that shareholders receive from us, and any gain on the sale or
transfer of our shares, may be subject to taxes under PRC tax laws.
Under the New EIT Law and its
implementing rules, PRC enterprise income tax at the rate of 10% is applicable
to dividends payable by us to our investors that are non-resident enterprises so
long as such non-resident enterprise investors do not have an establishment or
place of business in China or, despite the existence of such establishment of
place of business in China, the relevant income is not effectively connected
with such establishment or place of business in China, to the extent that such
dividends have their sources within the PRC. Similarly, any gain realized on the
transfer of our shares by such investors is also subject to a 10% PRC income tax
if such gain is regarded as income derived from sources within China and we are
considered as a resident enterprise which is domiciled in China for tax purpose.
Additionally, there is a possibility that the relevant PRC tax authorities may
take the view that the purpose of us and CD Media BVI is holding CD Media
Huizhou, and the capital gain derived by our overseas shareholders or investors
from the share transfer is deemed China-sourced income, in which case such
capital gain may be subject to a PRC withholding tax at the rate of up to 10%.
If we are required under the New EIT Law to withhold PRC income tax on our
dividends payable to our foreign shareholders or investors who are non-resident
enterprises, or if you are required to pay PRC income tax on the transfer or our
shares under the circumstances mentioned above, the value of your investment in
our shares may be materially and adversely affected.
In January, 2009, the State
Administration of Taxation promulgated the Provisional Measures for the
Administration of Withholding of Enterprise Income Tax for Non-resident
Enterprises (“Measures”), pursuant to which, the entities which have the direct
obligation to make the following payment to a non-resident enterprise shall be
the relevant tax withholders for such non-resident enterprise, and such payment
includes: incomes from equity investment (including dividends and other return
on investment), interests, rents, royalties, and incomes from assignment of
property as well as other incomes subject to enterprise income tax received by
non-resident enterprises in China. Further, the Measures provides that in case
of equity transfer between two non-resident enterprises which occurs outside
China, the non-resident enterprise which receives the equity transfer payment
shall, by itself or engage an agent to, file tax declaration with the PRC tax
authority located at place of the PRC company whose equity has been transferred,
and the PRC company whose equity has been transferred shall assist the tax
authorities to collect taxes from the relevant non-resident enterprise. However,
it is unclear whether the Measures refer to the equity transfer by a
non-resident enterprise which is a direct or an indirect shareholder of the said
PRC company. Given these Measures, there is a possibility that we may have an
obligation to withhold income tax in respect of the dividends paid to
non-resident enterprise investors.
Any
recurrence of Severe Acute Respiratory Syndrome (SARS), Avian Flu, or another
widespread public health problem, such as the spread of H1N1 (“Swine”) Flu, in
the PRC could adversely affect our operations.
A renewed outbreak of SARS, Avian Flu
or another widespread public health problem, , such as the spread of H1N1
(“Swine”) Flu, in China, where all of our operations are located and where the
substantial portion of our sales occur, could have a negative effect on our
operations. Our business is dependent upon our ability to continue to market and
sell advertising time and produce television programs. Such an outbreak could
have an impact on our operations as a result of:
|
·
|
quarantines or closures of some
of our facilities, which would severely disrupt our
operations,
|
|
·
|
the sickness or death of our key
officers and employees, and
|
|
·
|
a general slowdown in the Chinese
economy.
|
Any of the foregoing events or other
unforeseen consequences of public health problems could adversely affect our
operations.
Further
downturn in the economy of the PRC may slow our growth and
profitability.
All of our revenues are generated from
sales in China. The growth of the Chinese economy has been uneven across
geographic regions and economic sectors, in large part due to the recent
downturn in the global economy, which resulted in slow growth of the China
economy. While the Chinese economy has recently begun to show signs of
improvement, there can be no assurance that growth of the Chinese economy will
be steady or that there will not be further deterioration in the global economy
as a whole or the Chinese economy in particular. If economic conditions
deteriorate further, our business and results of operations could be materially
and adversely affected, especially if such conditions result in a decreased use
of our products or in pressure on us to lower our prices.
32
Because
our business is located in the PRC, we may have difficulty establishing adequate
management, legal and financial controls, which we are required to do in order
to comply with U.S. GAAP and securities laws, and which could cause a materially
adverse impact on our financial statements, the trading of our common stock and
our business
PRC companies have historically not
adopted a Western style of management and financial reporting concepts and
practices, which includes strong corporate governance, internal controls and,
computer, financial and other control systems. Most of our middle and top
management staff are not educated and trained in the Western system, and we may
difficulty hiring new employees in the PRC with experience and expertise
relating to U.S. GAAP and U.S. public-company reporting requirements. In
addition, we may have difficulty in hiring and retaining a sufficient number of
qualified employees to work in the PRC. As a result of these factors, we may
experience difficulty in establishing management, legal and financial controls,
collecting financial data and preparing financial statements, books of account
and corporate records and instituting business practices that meet Western
standards. Therefore, we may, in turn, experience difficulties in implementing
and maintaining adequate internal controls as required under Section 404 of the
Sarbanes-Oxley Act of 2002. This may result in significant deficiencies or
material weaknesses in our internal controls which could impact the reliability
of our financial statements and prevent us from complying with SEC rules and
regulations and the requirements of the Sarbanes-Oxley Act of 2002. Any such
deficiencies, material weaknesses or lack of compliance could result in
restatements of our historical financial information, cause investors to lose
confidence in our reported financial information, have an adverse impact on the
trading price of our common stock, adversely affect our ability to access the
capital markets and our ability to recruit personnel, lead to the delisting of
our securities from the stock exchange on which they are traded, lead to
litigation claims, thereby diverting management’s attention and resources, and
which may lead to the payment of damages to the extent such claims are not
resolved in our favor, lead to regulatory proceedings, which may result in
sanctions, monetary or otherwise, and have a materially adverse effect on our
reputation and business.
RISKS
RELATED TO OUR CAPITAL STRUCTURE
There
is no current trading market for our common stock, and there is no assurance of
an established public trading market, which would adversely affect the ability
of our investors to sell their securities in the public market.
Our common stock is not currently
listed or quoted for trading on any national securities exchange or national
quotation system. We intend to apply for the listing of our common stock on the
Nasdaq Global Market in the future. There is no guarantee that Nasdaq Global
Market, or any other securities exchange or quotation system, will permit our
shares to be listed and traded. If we fail to obtain a listing on the Nasdaq
Global Market, we intend to apply for listing of our securities on the NYSE Amex
Equities. If we fail to obtain listing on NYSE Amex Equities, we may seek
quotation on the OTC Bulletin Board. FINRA has enacted changes that limit
quotations on the OTC Bulletin Board to securities of issuers that are current
in their reports filed with the Securities and Exchange Commission. The effect
on the OTC Bulletin Board of these rule changes and other proposed changes
cannot be determined at this time. The OTC Bulletin Board is an inter-dealer,
over-the-counter market that provides significantly less liquidity than the
Nasdaq Stock Market and the NYSE Amex Equities. Quotes for stocks included on
the OTC Bulletin Board are not listed in the financial sections of newspapers as
are those for the NYSE Amex Equities and The NASDAQ Stock Market. Therefore,
prices for securities traded solely on the OTC Bulletin Board may be difficult
to obtain and holders of common stock may be unable to resell their securities
at or near their original offering price or at any price.
The
market price and trading volume of shares of our common stock may be
volatile.
When and if a market develops for our
securities, the market price of our common stock could fluctuate significantly
for many reasons, including for reasons unrelated to our specific performance,
such as reports by industry analysts, investor perceptions, or negative
announcements by customers, competitors or suppliers regarding their own
performance, as well as general economic and industry conditions. For example,
to the extent that other large companies within our industry experience declines
in their share price, our share price may decline as well. In addition, when the
market price of a company’s shares drops significantly, shareholders could
institute securities class action lawsuits against the company. A lawsuit
against us could cause us to incur substantial costs and could divert the time
and attention of our management and other resources.
33
Shares
eligible for future sale may adversely affect the market price of our common
stock, as the future sale of a substantial amount of outstanding stock in the
public marketplace could reduce the price of our common stock.
Pursuant to the terms of the Share
Exchange, we agreed to file a registration statement with the Securities and
Exchange Commission to register the shares of our common stock issued in an
equity financing that was conducted concurrently with the Share Exchange. The
registration statement must be filed within 30 days of the closing of the equity
financing. Each investor in the Private Placement may sell or transfer any
shares of the common stock after the effective date of the registration
statement except that they, along with all of our pre-Share Exchange
shareholders, entered into a lock-up agreement pursuant to which they agreed
that (i) if the proposed public offering that we hope to conduct is for $10
million or more, then the investors would not be able sell or transfer their
shares until at least six months after the public offering’s completion, and
(ii) if the offering is for less than $10 million, then one-tenth of the
investors’ shares would be released from the lock-up restrictions ninety days
after offering and there would be a pro rata release of the shares thereafter
every 30 days over the following nine months. We currently intend to conduct a
public offering that exceeds $10 million. The placement agent, in its sole
discretion, may allow early releases under the referenced lock-up restrictions
provided however that (i) no early release shall be made with respect to
pre-Share Exchange shareholders prior to the release in full of all such lock-up
restrictions on shares of the common stock acquired in the Private Placement and
(ii) any such early release shall be made pro rata with respect to all
investors’ shares acquired in the Private Placement.
We also intend to register with the
2,646,000 shares of common stock held by our stockholders immediately prior to
the Share Exchange and all of the 1,419,333 shares of common stock underlying
the warrants held by our stockholders immediately prior to the Share Exchange.
These shares will be included in a subsequent registration statement filed by us
within 10 days after the end of the six-month period that immediately follows
the date on which we file the registration statement to register the shares
issued in the Private Placement. All of the shares included in an effective
registration statement may be freely sold and transferred, subject to a lock-up
agreement.
Additionally, following the Share
Exchange, the former shareholders of CD Media BVI may be eligible to sell all or
some of our shares of common stock by means of ordinary brokerage transactions
in the open market pursuant to Rule 144, promulgated under the Securities Act
(“Rule 144”), subject to certain limitations. Under Rule 144, an affiliate
stockholder who has satisfied the required holding period may, under certain
circumstances, sell within any three-month period a number of securities which
does not exceed the greater of 1% of the then outstanding shares of common stock
or the average weekly trading volume of the class during the four calendar weeks
prior to such sale. As of the closing of the Share Exchange, 1% of our issued
and outstanding shares of common stock was approximately 253,126 shares.
Non-affiliate stockholders are not subject to volume limitations. Any
substantial sale of common stock pursuant to any resale prospectus or Rule 144
may have an adverse effect on the market price of our common stock by creating
an excessive supply. Each of the former shareholders of CD Media BVI have agreed
to enter into a lock-up agreement pursuant to which they will agree not to sell
any of their securities of the Company until 24 months after our common stock
began to be listed on the NASDAQ Global Market.
Following
the Share Exchange, the former principal shareholders of CD Media BVI have
significant influence over us.
The former shareholders of CD Media BVI
beneficially own or control approximately 75.5% of our outstanding shares as of
the close of the Share Exchange and Private Placement and have a controlling
influence in determining the outcome of any corporate transaction or other
matters submitted to our stockholders for approval, including mergers,
consolidations and the sale of all or substantially all of our assets, election
of directors, and other significant corporate actions. These stockholders may
also have the power to prevent or cause a change in control. In addition,
without the consent of these stockholders, we could be prevented from entering
into transactions that could be beneficial to us. The interests of these
stockholders may differ from the interests of our other
stockholders.
If
we fail to maintain effective internal controls over financial reporting, the
price of our common stock may be adversely affected.
We are required to establish and
maintain appropriate internal controls over financial reporting. Failure to
establish those controls, or any failure of those controls once established,
could adversely impact our public disclosures regarding our business, financial
condition or results of operations. Any failure of these controls could also
prevent us from maintaining accurate accounting records and discovering
accounting errors and financial frauds. Rules adopted by the SEC pursuant to
Section 404 of the Sarbanes-Oxley Act of 2002 require annual assessment of our
internal control over financial reporting, and attestation of this assessment by
our independent registered public accountants. We believe that the annual
assessment of our internal controls requirement and the attestation requirement
of management’s assessment by our independent registered public accountants will
first apply to our annual report for the 2010 fiscal year. The standards that
must be met for management to assess the internal control over financial
reporting as effective are new and complex, and require significant
documentation, testing and possible remediation to meet the detailed standards.
We may encounter problems or delays in completing activities necessary to make
an assessment of our internal control over financial reporting. In addition, the
attestation process by our independent registered public accountants is new and
we may encounter problems or delays in completing the implementation of any
requested improvements and receiving an attestation of our assessment by our
independent registered public accountants. If we cannot assess our internal
control over financial reporting as effective, or our independent registered
public accountants are unable to provide an unqualified attestation report on
such assessment, investor confidence and share value may be negatively
impacted.
34
In addition, management’s assessment of
internal controls over financial reporting may identify weaknesses and
conditions that need to be addressed in our internal controls over financial
reporting or other matters that may raise concerns for investors. Any actual or
perceived weaknesses and conditions that need to be addressed in our internal
control over financial reporting, disclosure of management’s assessment of our
internal controls over financial reporting, or disclosure of our public
accounting firm’s attestation to or report on management’s assessment of our
internal controls over financial reporting may have an adverse impact on the
price of our common stock.
We
may not be able to achieve the benefits we expect to result from the Share
Exchange.
On April 23, 2010, we entered into an
Amended and Restated Share Exchange Agreement with CB Media BVI, the
shareholders of CD Media BVI, CD Media Beijing and CD Media Huizhou, pursuant to
which we agreed to acquire 100% of the issued and outstanding securities of CD
Media BVI in exchange for shares of our common stock. On April 30, 2010, the
Share Exchange closed, CD Media BVI became our 100%-owned subsidiary, and our
sole business operations became that of CD Media BVI and its subsidiaries and CD
Media Beijing. We also have a new Board of Directors and management consisting
of persons from CD Media BVI and changed our corporate name from SRKP 25, Inc.
to China Century Dragon Media, Inc.
We may not realize the benefits that we
hoped to receive as a result of the Share Exchange, which include:
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·
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access
to the capital markets of the United
States;
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·
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the
increased market liquidity expected to result from exchanging stock in a
private company for securities of a public company that may eventually be
traded;
|
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·
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the
ability to use registered securities to make acquisition of assets or
businesses;
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·
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increased
visibility in the financial
community;
|
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·
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enhanced
access to the capital markets;
|
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·
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improved
transparency of operations; and
|
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·
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perceived
credibility and enhanced corporate image of being a publicly traded
company.
|
There can be no assurance that any of
the anticipated benefits of the Share Exchange will be realized with respect to
our new business operations. In addition, the attention and effort devoted to
achieving the benefits of the Share Exchange and attending to the obligations of
being a public company, such as reporting requirements and securities
regulations, could significantly divert management’s attention from other
important issues, which could materially and adversely affect our operating
results or stock price in the future.
Compliance
with changing regulation of corporate governance and public disclosure will
result in additional expenses.
Changing laws, regulations and
standards relating to corporate governance and public disclosure, including the
Sarbanes-Oxley Act of 2002 and related SEC regulations, have created uncertainty
for public companies and significantly increased the costs and risks associated
with accessing the public markets and public reporting. For example, on January
30, 2009, the SEC adopted rules requiring companies to provide their financial
statements in interactive data format using the eXtensible Business Reporting
Language, or XBRL. We will have to comply with these rules by June 15, 2011. Our
management team will need to invest significant management time and financial
resources to comply with both existing and evolving standards for public
companies, which will lead to increased general and administrative expenses and
a diversion of management time and attention from revenue generating activities
to compliance activities.
35
Our
common stock may be considered a “penny stock,” and thereby be subject to
additional sale and trading regulations that may make it more difficult to
sell.
Our common stock, which is not
currently listed or quoted for trading, may be considered to be a “penny stock”
if it does not qualify for one of the exemptions from the definition of “penny
stock” under Section 3a51-1 of the Securities Exchange Act for 1934, as amended
(the “Exchange Act”), once, and if, it starts trading. Our common stock may be a
“penny stock” if it meets one or more of the following conditions (i) the stock
trades at a price less than $5.00 per share; (ii) it is NOT traded on a
“recognized” national exchange; (iii) it is NOT quoted on the Nasdaq Capital
Market, or even if so, has a price less than $5.00 per share; or (iv) is issued
by a company that has been in business less than three years with net tangible
assets less than $5 million.
The principal result or effect of being
designated a “penny stock” is that securities broker-dealers participating in
sales of our common stock will be subject to the “penny stock” regulations set
forth in Rules 15-2 through 15g-9 promulgated under the Exchange Act. For
example, Rule 15g-2 requires broker-dealers dealing in penny stocks to provide
potential investors with a document disclosing the risks of penny stocks and to
obtain a manually signed and dated written receipt of the document at least two
business days before effecting any transaction in a penny stock for the
investor’s account. Moreover, Rule 15g-9 requires broker-dealers in penny stocks
to approve the account of any investor for transactions in such stocks before
selling any penny stock to that investor. This procedure requires the
broker-dealer to (i) obtain from the investor information concerning his or her
financial situation, investment experience and investment objectives; (ii)
reasonably determine, based on that information, that transactions in penny
stocks are suitable for the investor and that the investor has sufficient
knowledge and experience as to be reasonably capable of evaluating the risks of
penny stock transactions; (iii) provide the investor with a written statement
setting forth the basis on which the broker-dealer made the determination in
(ii) above; and (iv) receive a signed and dated copy of such statement from the
investor, confirming that it accurately reflects the investor’s financial
situation, investment experience and investment objectives. Compliance with
these requirements may make it more difficult and time consuming for holders of
our common stock to resell their shares to third parties or to otherwise dispose
of them in the market or otherwise.
We
do not foresee paying cash dividends in the foreseeable future and, as a result,
our investors’ sole source of gain, if any, will depend on capital appreciation,
if any.
We do not plan to declare or pay any
cash dividends on our shares of common stock in the foreseeable future and
currently intend to retain any future earnings for funding growth. As a result,
investors should not rely on an investment in our securities if they require the
investment to produce dividend income. Capital appreciation, if any, of our
shares may be investors’ sole source of gain for the foreseeable future.
Moreover, investors may not be able to resell their shares of our common stock
at or above the price they paid for them.
CAUTIONARY
STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
The information contained in this
report, including in the documents incorporated by reference into this report,
includes some statement that are not purely historical and that are
“forward-looking statements” as defined by the Private Securities Litigation
Reform Act of 1995. Such forward-looking statements include, but are not limited
to, statements regarding our and our management’s expectations, hopes, beliefs,
intentions or strategies regarding the future, including our financial
condition, results of operations, and the expected impact of the Merger on the
parties’ individual and combined financial performance. In addition, any
statements that refer to projections, forecasts or other characterizations of
future events or circumstances, including any underlying assumptions, are
forward-looking statements. The words “anticipates,” “believes,” “continue,”
“could,” “estimates,” “expects,” “intends,” “may,” “might,” “plans,” “possible,”
“potential,” “predicts,” “projects,” “seeks,” “should,” “will,” “would” and
similar expressions, or the negatives of such terms, may identify
forward-looking statements, but the absence of these words does not mean that a
statement is not forward-looking.
The forward-looking statements
contained in this report are based on current expectations and beliefs
concerning future developments and the potential effects on the parties and the
transaction. There can be no assurance that future developments actually
affecting us will be those anticipated. These forward-looking statements involve
a number of risks, uncertainties (some of which are beyond the parties’ control)
or other assumptions that may cause actual results or performance to be
materially different from those expressed or implied by these forward-looking
statements, including the following:
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Our
ability to raise additional capital to fund our
operations;
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·
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Our
ability to continue obtaining advertising time slots aired on
CCTV;
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36
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·
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The
continued strong market position and national coverage of CCTV
channels;
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·
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CCTV’s
continuing to use third party agencies to sell advertising
time;
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·
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Our
ability to purchase advertising time from satellite and regional
television networks;
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·
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Our
ability enter into new advertising media
platforms;
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·
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Exposure
to PRC governmental actions regarding the advertising content of our
clients;
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·
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Exposure
to intellectual property claims from third
parties;
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·
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Expected
growth in consumer spending, average income levels and advertising
spending levels;
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·
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Changes
in the laws of the PRC that affect our operations and our corporate
structure;
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·
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Inflation
and fluctuations in foreign currency exchange
rates;
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·
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Our
ability to obtain all necessary government certifications, approvals,
and/or licenses to conduct our
business;
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·
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Development
of a public trading market for our
securities;
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·
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The
cost of complying with current and future governmental regulations and the
impact of any changes in the regulations on our operations;
and
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·
|
The
other factors referenced in this Current Report, including, without
limitation, under the sections entitled “Risk Factors,” “Management’s
Discussion and Analysis of Financial Condition and Results of Operations,”
and “Business.”
|
These risks and uncertainties, along
with others, are also described above under the heading “Risk Factors.” Should
one or more of these risks or uncertainties materialize, or should any of the
parties’ assumptions prove incorrect, actual results may vary in material
respects from those projected in these forward-looking statements. We undertake
no obligation to update or revise any forward-looking statements, whether as a
result of new information, future events or otherwise, except as may be required
under applicable securities laws.
ADDITIONAL
DISCLOSURE
For additional information that would
be required if the Company were filing a general form for registration of
securities on Form 10, see Item 2.02 for “Management’s Discussion and Analysis
of Financial Condition and Results of Operations,” Item 3.03 for a description
of the Company’s securities post-Share Exchange and related discussion of market
price, and Item 4.01 regarding changes in the Company’s accountant, all
incorporated by reference herein. Required disclosure regarding the change in
control of the Company, the impact on its directors, executive officers, control
persons and related compensation and beneficial ownership issues are addressed
in Item 5.01, incorporated by reference herein. Attention is also directed to
Item 9.01, which provides our audited financial statements as of and for the
years ended December 31, 2009, 2008 and 2007.
Item 2.02 Results of Operations and Financial
Condition.
SELECTED
CONSOLIDATED FINANCIAL DATA
The following selected consolidated
statement of operations data contains consolidated statement of operations data
for each of the years in the five-year period ended December 31, 2009 and the
consolidated balance sheet data as of year-end for each of the years in the
five-year period ended December 31, 2009. The consolidated statement of
operations data and balance sheet data were derived from the audited
consolidated financial statements, except for data for the years ended and as of
December 31, 2006 and 2005. Such financial data should be read in conjunction
with the consolidated financial statements and the notes to the consolidated
financial statements starting on page F-1 and with “Management’s Discussion and
Analysis of Financial Condition and Results of Operations.”
37
Consolidated Statements of
Operations
Years Ended December 31,
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||||||||||||||||||||
2009
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2008
|
2007
|
2006
|
2005
|
||||||||||||||||
(unaudited)
|
(unaudited)
|
|||||||||||||||||||
(all amounts are in thousands except share and per share amounts)
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||||||||||||||||||||
Revenue
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$ | 74,480 | $ | 44,684 | $ | 17,103 | $ | 6,231 | $ | 1,926 | ||||||||||
Cost
of Goods Sold
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(59,746 | ) | (36,498 | ) | (12,839 | ) | (4,814 | ) | 1,992 | |||||||||||
Gross
Profit
|
14,734 | 8,186 | 4,264 | 1,417 | (66 | ) | ||||||||||||||
General
and administrative
|
||||||||||||||||||||
Selling
expenses
|
2,110 | 1,673 | 2,068 | 625 | 57 | |||||||||||||||
General
and administrative
|
575 | 371 | 374 | 156 | 7 | |||||||||||||||
Depreciation
of equipment
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9 | 7 | 2 | - | 1 | |||||||||||||||
Total
operating expenses
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2,694 | 2,051 | 2,444 | 781 | 65 | |||||||||||||||
Income
(loss) from operations
|
12,040 | 6,135 | 1,820 | 636 | (131 | ) | ||||||||||||||
Gain
on disposal of assets
|
1 | - | - | - | - | |||||||||||||||
Interest
income
|
2 | 5 | 5 | 2 | 1 | |||||||||||||||
Income
(loss) before income taxes
|
12,043 | 6,140 | 1,825 | 638 | (130 | ) | ||||||||||||||
Income
taxes
|
(3,033 | ) | (1,535 | ) | (602 | ) | 73 | - | ||||||||||||
Net
Income (loss)
|
$ | 9,010 | $ | 4,605 | $ | 1,223 | $ | 711 | $ | (130 | ) |
Consolidated Balance Sheets
|
December 31,
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|||||||||||||||||||
2009
|
2008
|
2007
|
2006
|
2005
|
||||||||||||||||
(unaudited)
|
(unaudited)
|
|||||||||||||||||||
(in thousands)
|
||||||||||||||||||||
Total
Current Assets
|
$ | 13,678 | $ | 11,158 | $ | 4,545 | 2,265 | 1,443 | ||||||||||||
Total
Assets
|
20,532 | 11,188 | 4,564 | 2,267 | 1,443 | |||||||||||||||
Total
Current Liabilities
|
4,844 | 4,579 | 2,767 | 1,777 | 2,229 | |||||||||||||||
Total
Stockholders' Equity
|
15,687 | 6,609 | 1,797 | 490 | (786 | ) |
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The
following discussion relates to a discussion of the financial condition and
results of operations of CD Media (Holding) Co., Limited (“CD Media BVI”), which
operates through Beijing CD Media Advertisement Co., Ltd. (“CD Media Beijing”),
a company it controls through contractual arrangements with its wholly-owned
subsidiary, Huizhou CD Media Co., Ltd., a company incorporated under the laws of
the People’s Republic of China (“CD Media Huizhou”). Collectively, CD Media BVI
and its subsidiaries and CD Media Beijing are referred to throughout as the
“Company,” “we,” “our,” and “us.”
This
management’s discussion and analysis of financial condition and results of
operations should be read in conjunction with our financial statements and the
related notes, and the other financial information included in this report. For
a discussion of important factors that could cause actual results to differ from
results discussed in the forward-looking statements, see above section entitled
“Cautionary Statement Regarding Forward-Looking Statements.”
Overview
Through CD Media Beijing, we are
engaged in the promotion, sale and marketing of advertising packages on China
television stations. We purchase advertising time packages that air on CCTV-1,
CCTV-2 and CCTV-3, three of the main channels of CCTV, the state television
station of the PRC, which we repackage and sell to our customers. Currently we
deal solely with third parties that act as agents for the sale of advertising
time slots by CCTV. We also assist our clients in developing cost-effective
advertising programs to maximize their return on their advertising investment by
identifying the most appropriate advertising time slots and message points of
the advertisements. In addition, we provide certain production services to help
our clients integrate market resources and find partners to assist with
producing the commercials.
Our advertising business includes
securing all or a portion of the advertising time and other advertising rights,
which include soft advertising, such as sponsorship, on a specific television
channel or program. We derive revenues in these cases from selling the
advertising media resources that we have acquired to advertisers. We account for
revenues in these cases on a gross basis to our clients and the cost for
purchasing the advertising time slots is allocated to costs of revenues on a
straight –line basis because we acquire the advertising media resources in
advance at a predetermined price and bear the inventory risk of being a
principal in acquiring the advertising media resources from the television
stations. We also have the ability to establish the prices that we charge for
selling these advertising media resources to our clients.
38
Recent
Events
SRKP 25, Inc., a Delaware corporation
(“SRKP 25”), entered into an amended and restated share exchange agreement
effective April 23, 2010, with CD Media BVI, CD Media Huizhou, CD Media Beijing,
and the shareholders of CD Media BVI pursuant to which the shareholders of CD
Media BVI would transfer all of the issued and outstanding securities of CD
Media BVI to SRKP 25 in exchange for 19,100,000 shares of SRKP 25’s common
stock. On April 30, 2010, the Share Exchange closed and CD Media BVI became a
wholly-owned subsidiary of SRKP 25, which immediately changed its name to “China
Century Dragon Media, Inc.” A total of 19,100,000 shares were issued to the
former shareholders of CD Media BVI. In addition we paid a $215,750 success fee
to WestPark Capital for services provided in connection with the Share Exchange,
including coordinating the share exchange transaction process, interacting with
principals of the shell corporation and negotiating the definitive purchase
agreement for the shell, conducting a financial analysis of CD Media BVI,
conducting due diligence on CD Media BVI and its subsidiaries and managing the
interrelationships of legal and accounting activities.
In addition, on April 30, 2010,
concurrently with the close of the Share Exchange, we closed a private placement
of shares of our common stock (the “Private Placement”). Pursuant to
subscription agreements entered into with the investors, we sold an aggregate of
3,566,667 shares of common stock at $1.50 per share. As a result, we received
gross proceeds in the amount of approximately $5.35 million. We paid WestPark
Capital, Inc. (“WestPark Capital”) a commission equal to 10.0% with a
non-accountable fee of 4.0% of the gross proceeds from the Private Placement. We
are also retaining WestPark Capital for a period of five months following the
closing of the Private Placement to provide us with financial consulting
services for which we will pay WestPark Capital $4,000 per month. Out of the
proceeds of the Private Placement, we paid $300,000 to Keen Dragon Group
Limited, a third party unaffiliated with CD Media BVI, the Company, or WestPark
Capital for services in connection with arranging the reverse
merger.
Factors
Affecting Our Results of Operations
Our
business, results of operations and financial condition are significantly
affected by a number of factors and trends, including:
Ability
to Obtain High Quality Advertising Time Slots on Favorable Terms
We depend on the high quality
advertising time slots we obtain from third party providers for airing on CCTV
for our advertising agency services. All of our revenues for our advertising
agency services are derived from the advertising time slots we obtain from these
providers. Our ability to continue to obtain our existing advertising time slots
and to add additional high quality advertising time slots will have a
significant effect on our results of operations.
The
quality of advertising time slots available to us is measured based on the
perceived effectiveness of advertisements placed during such time slots, which
is in turn affected by the ratings and the geographical and demographic coverage
of the relevant television programs. Our results of operations will be affected
by any changes with respect to the popularity, rating or coverage of the
television programs during which our advertising time slots occur.
Our profitability also depends on the
price of advertising time slots charged to us by these third party providers.
These providers have been increasing the prices for many of its advertising time
slots in recent years, and we expect that they will continue to raise such
prices in the future. Our profit margin may be affected if we are not able to
obtain the rights to these advertising time slots on favorable terms or pass on
the increasing costs to our clients. If any other advertising agency is able to
obtain such high quality advertising time slots on terms more favorable than
ours, we may lose our clients and our revenues may decline.
Ability
to Increase the Size, Quality and the Level of Diversification of Our
Advertising Client Base
We compete for the advertising spending
of advertisers with other advertising agencies, including both international
advertising agencies and domestic Chinese advertising agencies, some of which
are also our clients. From time to time these agencies introduce their clients
to us, primarily due to our rights over certain advertising time slots on CCTV.
We plan to continue to attract new business from potential clients, as well as
to gain more business from our existing corporate clients, by increasing our
sales efforts and by seeking opportunities to provide these clients
with additional services. We will continue to improve the size, quality and
level of diversification of our client base, leveraging the high quality
advertising time slots we have obtained.
39
Level
of Advertising Spending
Demand for our services and, as a
result, growth in our revenues are driven by overall advertising spending in
China, which is influenced by the pace of overall economic growth. We expect
that the overall economic growth in China will contribute to an increase in
advertising spending by international and domestic brand names looking to reach
a growing consumer market. The global financial crisis and economic downturn in
2008 and 2009 adversely affected economies and businesses around the world,
including those in China. We believe that, as the Chinese economy recovers from
the adverse effects of the global financial crisis, advertising spending should
increase in both urban areas and smaller cities in China. However, if the global
or Chinese economy does not fully recover from the recent financial crisis or
another economic downturn occurs, our business, results of operations and
financial condition could continue to be materially and adversely
affected.
In addition, the demand for our
services is affected by the level of television advertising spending in China,
which is in turn affected by the popularity of television programs in China and
advertisers’ perceptions regarding the effectiveness of television advertising.
Television advertising also competes with other advertising media, such as
billboards, Internet, mobile phones and out-of-home advertising networks. If
television advertising becomes a less favorable choice for advertisers in China,
we may not be able to successfully attract enough advertisers for our
advertising time slots and our revenues and earnings growth may be
affected.
Aside from fluctuations in the level of
advertising spending resulting from changes in the overall economic and market
conditions in China, our revenues are affected by seasonal fluctuations in
consumer spending that also affect the level of advertising spending over time
in China. The first and second quarters of each year are expected to be slower
seasons for the Chinese advertising industry in general. As a result, our
quarterly results of operations may fluctuate significantly from period to
period.
Other
Factors
In addition to the factors discussed
above, our reported results are also affected by the fluctuations in the value
of the Renminbi against the U.S. dollar because our reporting currency is the
U.S. dollar while the functional currency of our subsidiary and affiliated
consolidated entities in China, which operate substantially all of our business,
is the Renminbi. In 2007 and 2008, the Renminbi appreciated against the U.S.
dollar by approximately 6.5% and 6.5%, respectively, and in 2009, the Renminbi
depreciated against the U.S. dollar by approximately 0.1%. The fluctuation of
the Renminbi against the U.S. dollar contributed to the fluctuation in our net
income reported in U.S. dollar terms in 2007, 2008 and 2009, respectively. For
additional information relating to the fluctuations in the value of the Renminbi
against the U.S. dollar, see “Risk Factors — Risks Relating to Doing Business in
China — The foreign currency exchange rate between U.S. Dollars and Renminbi
could adversely affect our financial condition” and “— Quantitative and
Qualitative Disclosure About Market Risk — Foreign Exchange Risk.”
Revenues
Substantially
all of our revenues are derived from reselling blocks (or slots) of advertising
time on several popular television channels of CCTV. We acquire this advertising
time in large blocks from certain advertising agencies that work directly with
CCTV. We repackage these large blocks into smaller time slots and sell these
smaller slots to advertising agencies or other companies. Our pricing depends on
the quality, ratings and target audience of the relevant television programs
where the advertisements will be broadcast, the sales prices of our competitors,
general market conditions and market demand. We typically require payment
several weeks before the relevant advertisements are broadcast, and record these
prepayments as a current liability. We recognize the revenue ratably over the
broadcast period, which is normally one to two weeks. If the advertisements are
not broadcast, for instance due to CCTV’s change of program schedule, the
advance payments will be returned to our clients.
Our business is centered around
purchasing blocks of advertising time, repackaging the time into smaller units
and reselling the smaller blocks (or slots) to our clients. When we purchase a
block of advertising time, we are required to pay a deposit and are committed to
pay the remainder of the balance prior to the broadcast. As a result, we bear
the risks and rewards in these arrangements. Consequently, revenues are
recognized at gross billings to our clients and the cost for purchasing the
advertising time slots is recorded as our cost of goods sold and recognized over
the same period as the related revenue, which is the broadcast
period.
We derive a minimal portion of our
revenues from production services. We design, produce and package
content for public service announcements and commercial
advertisements. For commercial television advertisements, advertisers
will pay for our production services and sometimes for the broadcast of the
advertisements produced by us if we also arrange for such
broadcast. We typically require a prepayment from our clients at the
time of the execution of the advertising production agreements and prior to the
commencement of our work, but our revenues are typically recognized at the time
the final work products are delivered to our clients for broadcast.
40
Cost
of Revenues
We
purchase blocks of advertising time on certain CCTV programs for a fixed fee.
Part or all of the fee is paid in advance and we recognize this cost, as our
cost of goods sold, at the same time that we recognize the related revenue,
which is ratably over the broadcast periods. The broadcast period typically
ranges from one to three weeks and represents substantially all of our cost of
goods sold. In 2009, third party providers offering television advertising slots
on CCTV significantly increased the media fees for certain programs, which
significantly increased our cost of goods sold. However, as a percentage of
revenue, cost of goods sold only decreased slightly.
Sales
and Marketing Expenses
Our sales and marketing expenses
consist primarily of salaries and benefits for our sales and marketing
personnel, office rental expenses directly related to our sales and marketing
activities, traveling expenses incurred by our sales personnel and promotional
and entertainment expenses. Our sales personnel receive performance-based
compensation and we market our services primarily through the efforts of our
sales and marketing personnel. We expect selling and marketing expenses to
increase as we expand our sales force.
General
and Administrative Expenses
Our general and administrative expenses
primarily consist of salaries and benefits for our management, accounting and
administrative personnel, professional service fees, office rental and
maintenance expenses directly related to our general office administration
activities, depreciation of office equipment, other administrative expenses and
allowances for doubtful accounts. We expect our general and administrative
expenses to increase as we hire additional personnel, improve our corporate
infrastructure and incur additional costs to meet the requirements of being a
public company in the U.S.
PRC
Business Tax and Related Surcharges
Our PRC subsidiaries, CD Media Huizhou
and CD Media Beijing, are required to pay business tax at a rate of 5.0%, and
related surcharges at a rate of approximately 3.0%, on our revenues from
providing advertising services. Under the PRC tax law, business tax is levied on
the net amount of total advertising revenues less media fees paid to the media
providers. As we reported revenues from certain of our advertising time slots on
a gross basis, our effective business tax rate was approximately 1.08% of our
total revenues in 2009.
Critical
Accounting Policies and Estimates
We prepare our combined financial
statements in conformity with U.S. GAAP, which requires us to make estimates and
assumptions that affect the reported amounts of our assets and liabilities as of
the date of our financial statements and our revenues and expenses during the
financial reporting period. Our estimates and assumptions are based on available
information and our historical experience, as well as other estimates and
assumptions that we believe to be reasonable. The estimates and assumptions that
form the basis for our judgments may not be readily apparent from other sources.
We continually evaluate these estimates and assumptions based on the most
recently available information, our own experience and other assumptions that we
believe to be reasonable. Our actual results may differ significantly from
estimated amounts as a result of changes in our estimates or changes in the
facts or circumstances underlying our estimates and assumptions. Some of our
accounting policies require higher degrees of judgment than others in their
application. We consider the policies discussed below to be critical to an
understanding of our financial statements as their application places the most
significant demands on our management’s judgment. When reviewing our combined
financial statements, you should take into account:
|
·
|
our
critical accounting policies discussed
below;
|
|
·
|
the
related judgments made by our management and other uncertainties affecting
the application of these policies;
|
|
·
|
the
sensitivity of our reported results to changes in prevailing facts and
circumstances and our related estimates and assumptions;
and
|
41
|
·
|
the
risks and uncertainties described under “Risk
Factors.”
|
See note
2 to our combined financial statements for additional information regarding our
critical accounting policies.
Revenue
Recognition
Substantially
all of our revenues are derived from reselling blocks (or slots) of advertising
time on several popular television channels of CCTV. We acquire this advertising
time in large blocks, repackage the blocks into smaller time slots
and sell these smaller slots to advertising agencies or other companies. Our
pricing depends on the quality, ratings and target audience of the relevant
television programs where the advertisements will be broadcast, the sales prices
of our competitors, general market conditions and market demand. We typically
require payment several weeks before the relevant advertisements are broadcast,
and record these prepayments as a current liability. We recognize the revenue
when persuasive evidence of an arrangement exists, delivery has occurred, the
price is fixed or determinable and collection is reasonably assured, which is
generally over the broadcast period.
Revenue
arrangements involving multiple deliverables are broken down into single-element
arrangements based on their relative fair value for revenue recognition
purposes, when possible. We recognize revenues on the elements delivered and
defer the recognition of revenues of the undelivered elements until the
remaining obligations have been satisfied. Generally, we receive advanced
payments for our advertising services and record them as customer advances. Such
prepayments are only recognized as revenues when the services are rendered over
the broadcast period.
Our
business is centered around purchasing blocks of advertising time, repackaging
the time into smaller units and reselling the smaller blocks (or slots) to our
clients. We generally pay for the blocks of advertising time in advance of
reselling it to our customers and we are committed to pay the remainder of the
balance prior to the broadcast. In determining whether revenue is reported gross
or net, we considered the eight factors outlined in ASC 605-45. We sell the
right to utilize advertising space on certain TV channels of CCTV. This right is
conveyed to us by CCTV through contractual arrangements and we provide this
right to our clients through an unrelated contractual arrangement. As a result,
we are the primary obligor in this arrangement. In addition, we acquire the
advertising blocks in advance and have unmitigated inventory risk. We
are required to pay for the advertising time regardless whether we can resell
the time or collect our fees from our customers. We also have latitude in
establishing the price; discretion in supplier selection; and we assume the
credit risk for the amount billed to our customers. Based on these
factors, revenues are recognized at gross billings to our clients and
the cost for purchasing the advertising time slots is recorded as our cost of
goods sold and recognized over the same period as the related revenue, which is
the broadcast period.
We derive a minimal portion of our
revenues from production services. We design, produce and package
content for public service announcements and commercial
advertisements. For commercial television advertisements, advertisers
will pay for our production services and sometimes for the broadcast of the
advertisements produced by us if we also arrange for such
broadcast. We typically require a prepayment from our clients at the
time of the execution of the advertising production agreements and prior to the
commencement of our work, but our revenues are typically recognized at the time
the final work products are delivered to our clients for broadcast.
We report
revenues gross of business tax and related surcharges, which are charged to cost
of goods sold.
Income Tax.
The
Company accounts for income taxes in accordance with ASC740 "Accounting for
Income Taxes". ASC 740 requires an asset and liability approach for financial
accounting and reporting for income taxes and allows recognition and measurement
of deferred tax assets based upon the likelihood of realization of tax benefits
in future years. Under the asset and liability approach, deferred taxes are
provided for the net tax effects of temporary differences between the carrying
amounts of assets and liabilities for financial reporting purposes and the
amounts used for income tax purposes. A valuation allowance is provided for
deferred tax assets if it is more likely than not these items will either expire
before the Company is able to realize their benefits, or that future
deductibility is uncertain.
The Company adopted the accounting
standard for uncertainty in income taxes which prescribes a comprehensive model
for how a company should recognize, measure, present and disclose in its
financial statements uncertain tax positions that the Company has taken or
expects to take on a tax return (including a decision whether to file or not to
file a return in a particular jurisdiction).
Results
of Operations
The
following table sets forth information from our statements of operations for the
years ended December 31, 2009, 2008 and 2007, in dollars (in thousands) and as a
percentage of revenue:
42
Years Ended December 31,
|
||||||||||||||||||||||||
2009
|
2008
|
2007
|
||||||||||||||||||||||
Revenue
|
$ | 74,480 | 100.0 | % | $ | 44,684 | 100 | % | $ | 17,103 | 100 | % | ||||||||||||
Cost
of Goods Sold
|
(59,746 | ) | 80.2 | % | (36,498 | ) | 81.7 | % | (12,839 | ) | 75.1 | % | ||||||||||||
Gross
Profit
|
14,734 | 19.8 | % | 8,186 | 18.3 | % | 4,264 | 24.9 | % | |||||||||||||||
General
and administrative
|
||||||||||||||||||||||||
Selling
expenses
|
2,110 | 2.8 | % | 1,673 | 3.8 | % | 2,068 | 12.1 | % | |||||||||||||||
General
and administrative
|
575 | 0.8 | % | 371 | 0.8 | % | 374 | 2.2 | % | |||||||||||||||
Depreciation
of equipment
|
9 | * | 7 | * | 2 | * | ||||||||||||||||||
Total
operating expenses
|
2,694 | 3.6 | % | 2,051 | 4.6 | % | 2,444 | 14.3 | % | |||||||||||||||
Income
from operations
|
12,040 | 16.2 | % | 6,135 | 13.7 | % | 1,820 | 10.6 | % | |||||||||||||||
Gain
on disposal of assets
|
1 | * | - | - | - | - | ||||||||||||||||||
Interest
income
|
2 | * | 5 | * | 5 | * | ||||||||||||||||||
Income
before income taxes
|
12,043 | 16.2 | % | 6,140 | 13.7 | % | 1,825 | 10.7 | % | |||||||||||||||
Income
taxes
|
3,033 | 4.1 | % | 1,535 | 3.4 | % | 602 | 3.5 | % | |||||||||||||||
Net
Income
|
$ | 9,010 | 12.1 | % | $ | 4,605 | 10.3 | % | $ | 1,223 | 7.2 | % |
* Less
than 0.1%
Years
ended December 31, 2009 and 2008
Revenues were $74.5 million for the
year ended December 31, 2009, an increase of $29.8 million, or 66.7%, compared
to $44.7 million for the same period in 2008. The increase was attributable to
an increase in the total advertising time slots sold by us in the year ended
December 31, 2009, compared to the year ended December 31, 2008. We sold a total
of 11,459 minutes of advertising time in 2009 as compared to 7,843 minutes in
2008, which is a 45% increase in the number of minutes sold at a higher average
price per minute. Revenues from our production services decreased to $12,000
during the year ended December 31, 2009, as compared to $14,000 in 2008. We
expect that revenues from production services will increase in total dollars and
as a percentage of total revenues in future periods as we focus on growth of
this area of our business.
Cost of
goods sold was $59.7 million for the year ended December 31, 2009, an increase
of $23.2 million, or 63.6%, compared to $36.5 million for the same period in
2008. Cost of goods sold consists of the costs to obtain the advertising time
slots from television networks. The increase of cost of goods sold was primarily
a result of a 45% increase in the number of advertising minutes purchased in
2009 as compared to 2008 and a 40.9% increase in the average cost of the
adverting minutes purchased. As a percentage of revenue, cost of goods sold for
the years ended December 31, 2009 and 2008 were 80.2% and 81.7%,
respectively.
Gross
profit for the year ended December 31, 2009 was $14.7 million, or 19.8% of
revenues, an increase of $6.5 million or 79.3% compared to $8.2 million, or
18.3% of revenues, for the comparable period in 2008. The increase in our gross
profit margin for the year ended December 31, 2009 is primarily due to our
ability to charge more per unit for advertising time in 2009 as compared to 2008
allowing us a slight increase in gross profit per dollar sold.
Selling
expenses were $2.1 million for the year ended December 31, 2009, an increase of
$0.4 million, or 23.5%, compared to $1.7 million for the same period in 2008.
The increase primarily resulted from an increase in marketing expenses we spent
on expanding our business.
General
and administrative expenses were $575,000 for the year ended December 31, 2009,
an increase of $204,000, or 55.0%, compared to $371,000 for the same period in
2008. The increase was primarily a result of an increase in rental costs of
$43,781 in the year ended December 31, 2009 as compared to the comparable period
in 2008, an increase in compensation-related expenses of $21,453 in the year
ended December 31, 2009 as compared to the comparable period in 2008 and an
increase in payment to staff welfare and bonus funds. Additionally, our general
offices expenses increased $43,781 in the year ended December 31, 2009 as
compared to the year ended December 31, 2008.
43
Income
taxes for the year ended December 31, 2009 were $3.0 million, an increase of
$1.5 million over income taxes of $1.5 million for the year ended December 31,
2008. The increase in income taxes was primarily a result of an increase in our
taxable income. Our income tax rate for fiscal 2009 and fiscal 2008 was
25%.
Net
income for the year ended December 31, 2009 was $9.0 million, an increase of
95.7% over net income of $4.6 million for the year ended December 31, 2008,
based on the factors described above.
Years
ended December 31, 2008 and 2007
Revenues were $44.7 million for the
year ended December 31, 2008, an increase of $27.6 million, or 161.4%, compared
to $17.1 million for the same period in 2007. The increase in revenue was
attributed mainly an increase in the of number of our customers and to an
increase 40.8% increase in advertising time slots sold and a 35.5% increase in
the average price per minute of advertising time sold in 2008 compared to 2007.
The increase in the amount and price of advertising time sold resulted from the
2008 Olympic Games held in Beijing, which caused advertisers in China to
purchase more advertising time at higher prices than in 2007. Revenues from our
advertising agency services were $44.7 million during the year ended December
31, 2008 as compared to $17.1 million in 2007. We sold a total of 7,843 minutes
of advertising time in 2008 as compared to 4,639 minutes in 2007. Revenues from
our production services were $14,000 during the year ended December 31, 2008 as
compared to $29,000, respectively, in 2007.
Cost of
goods sold was $36.5 million for the year ended December 31, 2008, an increase
of $23.7 million, or 185.2%, compared to $12.8 million for the same period in
2007. The increase of cost of goods sold was primarily a result of an increase
in prices charged by CCTV for advertising time due to the 2008 Olympic Games in
Beijing and also the additional time slots we purchased from our vendors to
generate our revenues. As a percentage of revenue, cost of goods sold for the
years ended December 31, 2008 and 2007 were 81.7% and 75.1%,
respectively.
Gross
profit for the year ended December 31, 2008 was $8.2 million, or 18.3% of
revenues, compared to $4.3 million, or 24.9% of revenues, for the comparable
period in 2007. The decrease in our gross profit margin for the year ended
December 31, 2008 is primarily due to our inability to increase our rates in
2008 to keep up with increased unit costs.
Selling
expenses were $1.7 million for the year ended December 31, 2008, a decrease of
$0.4 million, or 19.0%, compared to $2.1 million for the same period in 2007.
The decrease primarily resulted from a reduction in commission expenses,
traveling expenses and entertainment fees in fiscal 2009 as compared to fiscal
2008, compared to additional marketing related costs spent in 2007 in
preparation for the 2008 Olympic Games held in Beijing
General
and administrative expenses remained relatively flat at $371,000 for the year
ended December 31, 2008, as compared to $374,000 for the same period in
2007.
Interest
income for the year ended December 31, 2008 remained flat at $5,000, compared to
$5,000 for the comparable period in 2007.
Income
taxes for the year ended December 31, 2008 were $1.5 million, an increase of
$0.9 million over income taxes of $0.6 million for the year ended December 31,
2007. The increase in income taxes was primarily a result of an increase in
taxable income partially offset by a decrease in our income tax rate. Our income
tax rate for fiscal 2008 was reduced by the PRC government to 25% from 33% for
fiscal 2007.
Net
income for the year ended December 31, 2008 was $4.6 million, an increase of
283.3% over net income of $1.2 million for the year ended December 31,
2007.
Liquidity
and Capital Resources
We had
cash and cash equivalents of approximately $0.7 million as of December 31, 2009,
as compared to approximately $1.2 million as of December 31, 2008. Our funds are
kept in financial institutions located in the PRC, which do not provide
insurance for amounts on deposit. Moreover, we are subject to the regulations of
the PRC which restrict the transfer of cash from the PRC, except under certain
specific circumstances. Accordingly, such funds may not be readily available to
us to satisfy obligations which have been incurred outside the PRC.
On April
30, 2010, we received gross proceeds of approximately $5.35 million in the
closing of a private placement transaction (the “Private Placement”). Pursuant
to subscription agreements entered into with the investors, we sold an aggregate
of 3,566,667 shares of Common Stock at $1.50 per share. We paid WestPark Capital
a commission equal to 10.0% with a non-accountable fee of 4.0% of the gross
proceeds from the Private Placement. We are also retaining WestPark Capital for
a period of five months following the closing of the Private Placement to
provide us with financial consulting services for which we will pay WestPark
Capital $4,000 per month. Out of the proceeds of the Private Placement, we paid
$300,000 to Keen Dragon Group Limited, a third party unaffiliated with CD Media
BVI, the Company, or WestPark Capital for services in connection with arranging
the reverse merger.
44
We are
required to contribute a portion of our employees’ total salaries to the Chinese
government’s social insurance funds, including pension insurance, medical
insurance, unemployment insurance, and job injuries insurance, and maternity
insurance, in accordance with relevant regulations. Total contributions to the
funds were approximately $13,424, $13,318, and $12,629, for the years ended
December 31, 2009, 2008 and 2007, respectively. We expect that the amount of our
contribution to the government’s social insurance funds will increase in the
future as we expand our workforce and operations and commence contributions to
an employee housing fund.
Net cash
used in operating activities was $614,000 for the year ended December 31, 2009,
compared to net cash used in operating activities of $266,000 for the year ended
December 31, 2008. The $348,000 difference was primarily attributable to an
increase in deposits for the purchase of advertising time. Net cash used in
operating activities was $266,000 for the year ended December 31, 2008, compared
to net cash provided by operating activities of $1.0 million for the year ended
December 31, 2007. The decrease in cash provided by operating activities was
primarily due to an increase in prepaid deposits for the purchase of advertising
time.
Net cash
used in investing activities amounted to approximately $6,000 and $17,000 for
the years ended December 31, 2009 and 2008, respectively. The decrease in net
cash used in investing activities was primarily attributable to a $15,000 gain
from cash received on disposal of fixed assets during the year ended December
31, 2009. Net cash used in investing activities remained relatively flat for the
years ended December 31, 2008 and 2007, amounting to $17,000 and $18,000,
respectively.
Net cash
used in financing activities was nil during the years ended December 31, 2009
and 2008. Net cash used in financing activities was $390,000 during the year
ended December 31, 2007 was related to the repayment of shareholder
advances.
Based
upon our present plans, we believe that our working capital together with cash
flow from operations and funds available to us through financing will be
sufficient to fund our capital needs for at least the next 12 months. We expect
that our primary sources of funding for our operations for the upcoming 12
months and thereafter will result from our operations and possibility of
conducting debt and equity financings. However, our ability to maintain
sufficient liquidity depends partially on our ability to achieve anticipated
levels of revenue, while continuing to control costs. If we did not have
sufficient available cash, we would have to seek additional debt or equity
financing through other external sources, which may not be available on
acceptable terms, or at all. Failure to maintain financing arrangements on
acceptable terms would have a material adverse effect on our business, results
of operations and financial condition.
Contractual
obligations
The
following table describes our contractual commitments and obligations as of
December 31, 2009:
Payments due by Period (in $)
|
||||||||||||||||||||
Contractual Obligations
|
Total
|
Less Than
1 Year
|
1 - 3
Years
|
3 - 5
Years
|
More Than
5 Years
|
|||||||||||||||
Operating
Lease Obligations
|
$ | 298,970 | $ | 230,796 | $ | 68,174 | $ | - | $ | - | ||||||||||
Total
|
$ | 298,970 | $ | 230,796 | $ | 68,174 | $ | - | $ | - |
Seasonality
The
seasonal fluctuation in consumer spending in the PRC affects the level of
advertising spending in China. Our revenues, therefore, are affected by such
seasonal fluctuations in consumer spending. We experience higher revenues in the
fourth quarter due to the greater number of holidays during the fourth quarter
and lower revenues in the first quarter due to advertisers’ tendencies to be
more conservative in spending early in their annual advertising budgets for the
calendar year.
The table
below presents selected (unaudited) results of operations for the quarters
indicated. All amounts are in thousands.
45
Quarter Ended
|
|||||||||||||||||
December 31,
2009
|
September 30,
2009
|
June 30,
2009
|
March 31,
2009
|
Total
|
|||||||||||||
Revenues
|
$
|
36,370
|
14,343
|
12,373
|
$ |
11,394
|
$ 74,480
|
||||||||||
Gross
Profit
|
7,548
|
2,818
|
2,311
|
2,057
|
14,734
|
||||||||||||
Net
Income
|
4,941
|
1,656
|
1,276
|
1,137
|
9,010
|
Quarter
Ended
|
|||||||||||||||||
December 31,
2008
|
September 30,
2008
|
June 30,
2008
|
March 31,
2008
|
Total
|
|||||||||||||
Revenues
|
$
|
13,745
|
10,713
|
11,283
|
8,943
|
$ 44,684
|
|||||||||||
Gross
Profit
|
2,017
|
1,878
|
2,392
|
1,900
|
8,187
|
||||||||||||
Net
Income (loss)
|
1,426
|
(144)
|
1,890
|
1,433
|
4,605
|
Off-Balance
Sheet Arrangements
We have no material off-balance sheet
transactions.
Quantitative
and Qualitative Disclosure Regarding Market Risk
Interest
Rate Risk
We may face some risk from potential
fluctuations in interest rates, although our debt obligations are primarily
short-term in nature, but some bank loans have variable rates. If
interest rates have great fluctuations, our financing cost may be significantly
affected.
Foreign
Currency Risk
Substantially all of our operations are
conducted in the PRC and our primary operational currency in Chinese Renminbi
(“RMB”). Substantially all of our revenues and expenses are
denominated in RMB. However, we use the United States dollar for
financial reporting purposes. Conversion of RMB into foreign
currencies is regulated by the People’s Bank of China through a unified floating
exchange rate system. Although the PRC government has stated its
intention to support the value of the RMB, there can be no assurance that such
exchange rate will not again become volatile or that the RMB will not devalue
significantly against the U.S. dollar. Exchange rate fluctuations may
adversely affect the value, in U.S. dollar terms, of our net assets and income
derived from our operations in the PRC.
Country
Risk
The substantial portion of our assets
and operations are located and conducted in China. While the PRC
economy has experienced significant growth in the past twenty years, growth has
been uneven, both geographically and among various sectors of the
economy. The Chinese government has implemented various measures to
encourage economic growth and guide the allocation of resources. Some
of these measures benefit the overall economy of China, but may also have a
negative effect on us. For example, our operating results and
financial condition may be adversely affected by government control over capital
investments or changes in tax regulations applicable to us. If there
are any changes in any policies by the Chinese government and our business is
negatively affected as a result, then our financial results, including our
ability to generate revenues and profits, will also be negatively
affected.
Item 3.02
|
Unregistered Sales of Equity
Securities.
|
On April 30, 2010, pursuant to the
terms of the Exchange Agreement, entered into by and between SRKP 25, Inc.
(“SRKP 25”), CD Media (Holding) Co., Limited, a British Virgin Islands
corporation (“CD Media BVI”), the shareholders of CD Media
BVI, Huizhou CD Media Co., Ltd., a company incorporated under the
laws of the People’s Republic of China, and Beijing CD Media Advertisement Co.,
Ltd., a company incorporated under the laws of the People’s Republic of China,
(“CD Media Beijing”) (as described in Item 2.01 above), SRKP 25 issued
19,100,000 shares of common stock to the shareholders of CD Media BVI in
exchange for all of the issued and outstanding securities of CD Media
BVI. All of the securities were offered and issued in reliance upon
an exemption from registration pursuant to Regulation S of the Securities Act of
1933, as amended. We complied with the conditions of Rule 903 as
promulgated under the Securities Act including, but not limited to, the
following: (i) each recipient of the shares is a non-U.S. resident and has not
offered or sold their shares in accordance with the provisions of Regulation S;
(ii) an appropriate legend was affixed to the securities issued in accordance
with Regulation S; (iii) each recipient of the shares has represented that it
was not acquiring the securities for the account or benefit of a U.S. person;
and (iv) each recipient of the shares agreed to resell the securities only in
accordance with the provisions of Regulation S, pursuant to a registration
statement under the Securities Act of 1933, as amended (the “Securities Act”),
or pursuant to an available exemption from registration. We will
refuse to register any transfer of the shares not made in accordance with
Regulation S, after registration, or under an exemption.
46
On April 30, 2010, we closed a private
placement (the “Private Placement”) of shares of our common stock. We received
gross proceeds of approximately $5.35 million in the Private Placement. Pursuant
to subscription agreements entered into with the investors, we sold an aggregate
of 3,566,667 shares of common stock at a price of $1.50 per share. The
securities were offered and sold to investors in reliance upon exemptions from
registration pursuant to Section 4(2) under the Securities Act and Rule 506
promulgated thereunder. Each of the persons and/or entities receiving our
securities qualified as an accredited investor (as defined by Rule 501 under the
Securities Act).
We agreed to file a registration
statement covering the common stock sold in the Private Placement within 30 days
of the closing of the Private Placement pursuant to the subscription agreement
entered into with each investor. All existing stockholders and warrantholders of
SRKP 25 (the “Existing Securityholders”) and the investors in the Private
Placement entered into lock-up agreements pursuant to which they agreed that (i)
if the proposed public offering that we expect to conduct is for $10 million or
more, then the investors and the Existing Securityholders would not be able to
sell or transfer their shares until at least six months after the public
offering’s completion, and (ii) if the offering is for less than $10 million,
then one-tenth of their shares would be released from the lock-up restrictions
ninety days after the offering and there would be a pro rata release of the
shares thereafter every 30 days over the following nine months. WestPark
Capital, Inc., the placement agent for the Private Placement, in its discretion,
may also release some or all the shares from the lock-up restrictions earlier,
however, (i) no early release shall be made with respect to Existing
Securityholders prior to the release in full of all such lock-up restrictions on
shares of the common stock acquired in the Private Placement and (ii) any such
early release shall be made pro rata with respect to all investors’ shares
acquired in the Private Placement.
This
current report is not an offer of securities for sale. Any securities
sold in the private placement have not been registered under the Securities Act
of 1933, as amended, and may not be offered or sold in the United States unless
registered under the Securities Act of 1933, as amended, or pursuant to an
exemption from such registration.
DESCRIPTION
OF SECURITIES - POST-SHARE EXCHANGE
Common
Stock
We are authorized to issue 100,000,000
shares of common stock, $0.0001 par value per share. Prior to the
Share Exchange and Private Placement, the stockholders of SRKP 25 held an
aggregate of 7,096,390 shares, and an aggregate of 4,450,390 shares were
cancelled in conjunction with the closing of the Share
Exchange. There are currently 25,312,667 shares of common stock
issued and outstanding. Each outstanding share of common stock is
entitled to one vote, either in person or by proxy, on all matters that may be
voted upon by their holders at meetings of the stockholders.
Holders of our common
stock:
|
(i)
|
have
equal ratable rights to dividends from funds legally available therefore,
if declared by our Board of
Directors;
|
|
(ii)
|
are
entitled to share ratably in all of the Company’s assets available for
distribution to holders of common stock upon our liquidation, dissolution
or winding up;
|
|
(iii)
|
do
not have preemptive, subscription or conversion rights or redemption or
sinking fund provisions; and
|
|
(iv)
|
are
entitled to one non-cumulative vote per share on all matters on which
stockholders may vote at all meetings of our
stockholders.
|
The holders of shares of our common
stock do not have cumulative voting rights, which means that the holders of more
than fifty percent (50%) of outstanding shares voting for the election of
directors can elect all of our directors if they so choose and, in such event,
the holders of the remaining shares will not be able to elect any of our
directors.
47
At the completion of the Share Exchange
and the closing of the Private Placement, the former shareholders of CD Media
BVI and their designees own approximately 75.5% of the outstanding shares of our
common stock. Accordingly, after completion of the Share Exchange,
these stockholders are in a position to control all of our affairs.
Preferred
Stock
We may issue up to 10,000,000 shares of
our preferred stock, par value $0.0001 per share, from time to time in one or
more series. No shares of Preferred Stock have been
issued.
Our Board of Directors, without further
approval of our stockholders, is authorized to fix the dividend rights and
terms, conversion rights, voting rights, redemption rights, liquidation
preferences and other rights and restrictions relating to any
series. Issuances of shares of preferred stock, while providing
flexibility in connection with possible financings, acquisitions and other
corporate purposes, could, among other things, adversely affect the voting power
of the holders of our common stock and prior series of preferred stock then
outstanding.
Warrants
Prior to the Share Exchange and Private
Placement, the stockholders of SRKP 25 held an aggregate of 7,096,390 warrants
to purchase shares of our common stock, and an aggregate of 5,677,057 warrants
were cancelled in conjunction with the closing of the Share
Exchange. Immediately after the closing of the Share Exchange and
Private Placement, the shareholders held an aggregate of 1,419,333 warrants with
an exercise price of $0.0001. The warrants expire five years from the
closing date of the Share Exchange.
MARKET
PRICE OF AND DIVIDENDS ON THE COMPANY’S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
The shares of our common stock are not
currently listed or quoted for trading on any national securities exchange or
national quotation system. We intend to apply for the listing of our
common stock on the NASDAQ Global Market. If and when our common
stock is listed or quoted for trading, the price of our common stock will likely
fluctuate in the future. The stock market in general has experienced
extreme stock price fluctuations in the past few years. In some
cases, these fluctuations have been unrelated to the operating performance of
the affected companies. Many companies have experienced dramatic
volatility in the market prices of their common stock. We believe
that a number of factors, both within and outside our control, could cause the
price of our common stock to fluctuate, perhaps
substantially. Factors such as the following could have a significant
adverse impact on the market price of our common stock:
|
·
|
Our
financial position and results of
operations;
|
|
·
|
Our
ability to obtain additional financing and, if available, the terms and
conditions of the financing;
|
|
·
|
Announcements
of innovations or new products or services by us or our
competitors;
|
|
·
|
Federal
and state regulatory actions and the impact of such requirements on our
business;
|
|
·
|
The
development of litigation against
us;
|
|
·
|
Changes
in estimates of our performance by any securities
analysts;
|
|
·
|
The
issuance of new equity securities pursuant to a future offering or
acquisition;
|
|
·
|
Competitive
developments, including announcements by competitors of new products or
services or significant contracts, acquisitions, strategic partnerships,
joint ventures or capital
commitments;
|
|
·
|
Period-to-period
fluctuations in our operating
results;
|
|
·
|
Investor
perceptions of us; and
|
|
·
|
General
economic and other national
conditions.
|
48
Stockholders
of Record
As of May 5, 2010, there were 140
stockholders of record of our common stock.
Dividends
There were no dividends paid during the
years ended December 31, 2009 or 2008.
DELAWARE
ANTI-TAKEOVER LAW AND CHARTER AND BYLAW PROVISIONS
We are subject to Section 203 of the
Delaware General Corporation Law. This provision generally prohibits
a Delaware corporation from engaging in any business combination with any
interested stockholder for a period of three years following the date the
stockholder became an interested stockholder, unless:
|
·
|
prior
to such date, the Board of Directors approved either the business
combination or the transaction that resulted in the stockholder becoming
an interested stockholder;
|
|
·
|
upon
consummation of the transaction that resulted in the stockholder becoming
an interested stockholder, the interested stockholder owned at least 85%
of the voting stock of the corporation outstanding at the time the
transaction commenced, excluding for purposes of determining the number of
shares outstanding those shares owned by persons who are directors and
also officers and by employee stock plans in which employee participants
do not have the right to determine confidentially whether shares held
subject to the plan will be tendered in a tender or exchange offer;
or
|
|
·
|
on
or subsequent to such date, the business combination is approved by the
Board of Directors and authorized at an annual meeting or special meeting
of stockholders and not by written consent, by the affirmative vote of at
least 66 2/3% of the outstanding voting stock that is not owned by the
interested stockholder.
|
Section 203 defines a business
combination to include:
|
·
|
any
merger or consolidation involving the corporation and the interested
stockholder;
|
|
·
|
any
sale, transfer, pledge or other disposition of 10% or more of the assets
of the corporation involving the interested
stockholder;
|
|
·
|
subject
to certain exceptions, any transaction that results in the issuance or
transfer by the corporation of any stock of the corporation to the
interested stockholder;
|
|
·
|
any
transaction involving the corporation that has the effect of increasing
the proportionate share of the stock of any class or series of the
corporation beneficially owned by the interested stockholder;
or
|
|
·
|
the
receipt by the interested stockholder of the benefit of any loans,
advances, guarantees, pledges or other financial benefits provided by or
through the corporation.
|
In general, Section 203 defines an
“interested stockholder” as any entity or person beneficially owning 15% or more
of the outstanding voting stock of a corporation, or an affiliate or associate
of the corporation and was the owner of 15% or more of the outstanding voting
stock of a corporation at any time within three years prior to the time of
determination of interested stockholder status; and any entity or person
affiliated with or controlling or controlled by such entity or
person.
Our certificate of incorporation and
bylaws contain provisions that could have the effect of discouraging potential
acquisition proposals or making a tender offer or delaying or preventing a
change in control of our company, including changes a stockholder might consider
favorable. In particular, our certificate of incorporation and
bylaws, as applicable, among other things, will:
|
·
|
provide
our board of directors with the ability to alter its bylaws without
stockholder approval;
|
|
·
|
provide
for an advance notice procedure with regard to the nomination of
candidates for election as directors and with regard to business to be
brought before a meeting of
stockholders;
|
49
|
·
|
provide
that vacancies on our board of directors may be filled by a majority of
directors in office, although less than a
quorum.
|
Such provisions may have the effect of
discouraging a third-party from acquiring us, even if doing so would be
beneficial to our stockholders. These provisions are intended to
enhance the likelihood of continuity and stability in the composition of our
board of directors and in the policies formulated by them, and to discourage
some types of transactions that may involve an actual or threatened change in
control of our company. These provisions are designed to reduce our
vulnerability to an unsolicited acquisition proposal and to discourage some
tactics that may be used in proxy fights. We believe that the
benefits of increased protection of its potential ability to negotiate with the
proponent of an unfriendly or unsolicited proposal to acquire or restructure our
company outweigh the disadvantages of discouraging such proposals because, among
other things, negotiation of such proposals could result in an improvement of
their terms.
However, these provisions could have
the effect of discouraging others from making tender offers for our shares that
could result from actual or rumored takeover attempts. These
provisions also may have the effect of preventing changes in our
management.
Item 4.01 Changes in Registrant’s Certifying
Accountant.
On April 30, 2010, China Century Dragon
Media, Inc. (the “Company”) dismissed AJ. Robbins, PC ("AJ. Robbins") as its
independent registered public accounting firm following the change in control of
the Company on the closing of the Share Exchange. The Company engaged
AJ. Robbins to audit its financial statements for the year ended December 31,
2009. The decision to change accountants was approved and ratified by
the Company’s Board of Directors. The report of AJ. Robbins on the
financial statements of the Company for the year ended December 31, 2009 did not
contain any adverse opinion or disclaimer of opinion and was not qualified or
modified as to uncertainty, audit scope, or accounting principle, except for an
explanatory paragraph relative to the Company’s ability to continue as a going
concern. Additionally, during the Company's two most recent fiscal
years and any subsequent interim period, there were no disagreements with
AJ. Robbins on any matter of accounting principles or practices,
financial statement disclosure, or auditing scope or procedure.
While AJ. Robbins was engaged by the
Company, there were no disagreements with AJ. Robbins on any matter of
accounting principles or practices, financial statement disclosure, or auditing
scope or procedure with respect to the Company, which disagreements if not
resolved to the satisfaction of AJ. Robbins would have caused it to make
reference to the subject matter of the disagreements in connection with its
report on the Company’s financial statements for the fiscal year ended December
31, 2009.
The Company provided AJ. Robbins with a
copy of the disclosures to be included in Item 4.01 of this Current Report on
Form 8-K and requested that AJ. Robbins furnish the Company with a letter
addressed to the Commission stating whether or not AJ. Robbins agrees with the
foregoing statements. A copy of the letter from AJ. Robbins to the
Commission, dated May 6, 2010, is attached as Exhibit 16.1 to this
Current Report on Form 8-K.
The Company engaged MaloneBailey, LLP
(“MaloneBailey”) as the Company’s independent registered public accounting
firm as of April 30, 2010. MaloneBailey is and has been CD Media
BVI’s independent registered public accounting firm.
Item 5.01
|
Changes in Control of
Registrant.
|
OVERVIEW
SRKP 25, Inc. (“SRKP 25”) entered
into an amended and restated share exchange agreement effective as of April 23,
2010 with CD Media (Holding) Co., Limited, a British Virgin Islands corporation
(“CD Media BVI”), Huizhou CD Media Co., Ltd., a company incorporated under the
laws of the People’s Republic of China (“CD Media Huizhou”), the shareholders of
CD Media BVI and Beijing CD Media Advertisement Co., Ltd., a company
incorporated under the laws of the PRC and controlled by CD Media Huizhou
through a series of contractual arrangements. Pursuant to the amended
and restated share exchange agreement (the “Exchange Agreement”), SRKP 25
issued 19,100,000 shares of its common stock to the shareholders of CD
Media BVI in exchange for all of the issued and outstanding securities of CD
Media BVI (the “Share Exchange”). On April 30, 2010, the Share
Exchange closed. Upon the closing of the Share Exchange, SRKP 25 (i)
became the 100% parent of CD Media BVI, (ii) assumed the operations of CD Media
BVI and its subsidiaries, including CD Media Beijing and (iii) changed its name
from “SRKP 25, Inc.” to “China Century Dragon Media, Inc.”
50
On April 30, 2010, concurrently with
the close of the Share Exchange, we closed a private placement (the “Private
Placement”) of shares of our common stock. We received gross proceeds of
approximately $5.35 million in the Private Placement. Pursuant to subscription
agreements entered into with the investors, we sold an aggregate of 3,566,667
shares of our Common Stock at a price of $1.50 per share.
We agreed to file a registration
statement covering the common stock sold in the private placement within 30 days
of the closing of the Share Exchange pursuant to the subscription agreement
entered into with each investor. All existing stockholders and warrantholders of
SRKP 25 prior to the closing of the Share Exchange (the “Existing
Securityholders”) and the investors in the Private Placement also entered into a
lock-up agreement pursuant to which they agreed that (i) if the proposed public
offering that we expect to conduct is for $10 million or more, then the
investors and the Existing Securityholders would not be able to sell or transfer
their shares until at least six months after the public offering’s completion,
and (ii) if the offering is for less than $10 million, then one-tenth of their
shares would be released from the lock-up restrictions ninety days after the
offering and there would be a pro rata release of the
shares thereafter every 30 days over the following nine months. WestPark
Capital, Inc., the placement agent for the Private Placement, in its discretion,
may also release some or all the shares from the lock-up restrictions earlier,
however, (i) no early release shall be made with respect to Existing
Securityholders prior to the release in full of all such lock-up restrictions on
shares of the common stock acquired in the Private Placement and (ii) any such
early release shall be made pro rata with respect to all investors’ shares
acquired in the Private Placement.
Immediately following the closing of
the Share Exchange and the Private Placement, the former shareholders of CD
Media BVI and their designees beneficially owned approximately 75.5% of our
issued and outstanding common stock, the pre-existing stockholders of SRKP 25
owned approximately 15.2% and investors in the Private Placement (described
below) that closed concurrently with the Share Exchange owned approximately
14.1%. Prior to the closing of the Share Exchange and the closing of the Private
Placement, the stockholders of SRKP 25 agreed to the cancellation of an
aggregate of 4,450,390 shares held by them such that there were 2,646,000 shares
of common stock outstanding immediately prior to the Share Exchange and Private
Placement. We issued no fractional shares in connection with the Share Exchange.
SRKP 25 stockholders also canceled an aggregate of 5,677,057 warrants such that
the stockholders held an aggregate of 1,419,333 warrants immediately prior to
the Share Exchange. Immediately after the closing of the Share Exchange and
Private Placement, we had 25,312,667 outstanding shares of common stock, no
shares of Preferred Stock, no options, and warrants to purchase 1,419,333 shares
of common stock.
Pursuant to the terms of the Share
Exchange, we agreed to register all of the 2,646,000 shares of common stock and
all of the 1,419,333 shares of common stock underlying the 1,419,333 warrants
held by the original SRKP 25 stockholders, all of which were outstanding
immediately prior to the closing of the Share Exchange. These shares, will be
included in a subsequent registration statement filed by us within 10 days after
the end of the six-month period that immediately follows the date on which we
file the registration statement to register the shares issued in the Private
Placement.
The shares of our common stock are not
currently listed or quoted for trading on any national securities exchange or
national quotation system. We intend to apply for the listing of its common
stock on the Nasdaq Global Market.
The shares of our common stock issued
to the shareholders of CD Media BVI in connection with the Share Exchange were
not registered under the Securities Act of 1933, as amended (the “Securities
Act”) and, as a result, are “restricted securities” that may not be offered or
sold in the United States absent registration or an applicable exemption from
registration.
We intend to carry on the business of
CD Media BVI, including CD Media Beijing which it controls through contractual
arrangements with its wholly-owned subsidiary CD Media Huizhou. Our relocated
executive offices became that of CD Media Huizhou, which are located at Room
801, No. 7, Wenchanger Road, Jiangbei, Huizhou City, Guangdong Province,
China.
For accounting purposes, the Share
Exchange is being treated as a reverse acquisition, because the shareholder of
CD Media BVI owns a majority of the issued and outstanding shares of common
stock of our company immediately following the exchange. Due to the issuance of
the 19,100,000 shares of our common stock, a change in control of our company
occurred on April 30, 2010.
At the consummation of the Share
Exchange, SRKP 25’s board of directors immediately prior to the Share Exchange,
which consisted of Richard A. Rappaport and Anthony C. Pintsopoulos, appointed
Li Hui Hua and Fu Hai Ming to the board of directors of our company, with Li Hui
Hua serving as Chairman. The directors and officers of SRKP 25 prior to the
Share Exchange then resigned as officers and directors of our company upon the
closing of the Share Exchange. In addition, concurrent with the closing of the
Share Exchange, our board appointed Li Hui Hua as our Chief Executive Officer
and Zhang Le as our Chief Financial Officer and Corporate Secretary. Because of
the change in the composition of our board of directors and the exchange of
securities pursuant to the Exchange Agreement, there was a change-of-control of
our company on the date the Share Exchange was completed.
51
The execution of the Exchange Agreement
was reported in a Current Report on Form 8-K filed with the Securities and
Exchange Commission on April 28, 2010. A copy of the Exchange
Agreement is filed as Exhibit 2.1 to this
Current Report on Form 8-K. The transactions contemplated by the
Exchange Agreement, as amended, were intended to be a
“tax-free” reorganization pursuant to the provisions of Sections 351 and/or
368(a) of the Internal Revenue Code of 1986, as amended.
EXECUTIVE
OFFICERS, DIRECTORS AND KEY EMPLOYEES
Prior to the Share Exchange, Richard A.
Rappaport and Anthony C. Pintsopoulos served as directors of SRKP 25 and
Mr. Pintsopoulos served as Chief Financial Officer and Secretary and Mr.
Rappaport served as President of SRKP 25.
Upon
closing of the Share Exchange, the following individuals were named to the board
of directors and executive management of our company:
Name
|
Age
|
Position
|
||
Li
Huihua
|
37
|
Chief
Executive Office and Chairman of the Board
|
||
Zhang
Le
|
25
|
Chief
Financial Officer and Corporate Secretary
|
||
Fu
Haiming
|
35
|
Director
|
Li Huihua has
been the Chief Executive Officer of the Company since April 2010 and Chief
Executive Officer of CD Media BVI since 2009. Ms. Li has also been a
director of CD Media BVI since March 2010. From February 2003 to June
2009, Ms. Li was self-employed at a self-owned electronic products business.
From January 1998 to December 2002, Mr. Li was a Financial Controller in the
accounting and capital management department of Huizhou Tongda Electronic Co.,
Ltd. From February 1994 to December 1997, Ms. Li was an Accountant at Tuopu
Technology Co., Ltd. (Huizhou). From July 1009 to October 1993 Ms. Li
served as a Quality Assurance Supervisor at Zhongou Electronic Co., Ltd.
(Huizhou). Ms. Li received a degree in accounting from the Accounting Department
of Huizhou Business School in 1990.
Zhang Le has been the Chief
Financial Officer and Corporate Secretary of the Company since April 2010 and
has served as the Financial Manager of CD Media BVI since August 2008.
From July 2007 to July 2008, Mr. Zhang served as an accountant at CD Media
BVI. From May 2005 to June 2007, Mr. Zhang served as an accountant at
Beijing Lindi European Construction Design Consulting Company Limited. From
August 2004 to August 2005, Mr. Zhang served as an accountant at the Oriental
Hospital of the Beijing Chinese Medicine University. Mr. Zhang
received a bachelor’s degree in Finance and Accounting in 2007 from Beijing
Lianhe College.
Fu Haiming has served as a
director of the Company since April 2010 and the General Manager of CD Media BVI
since February 2007. From March 2001 to December 2006, Mr. Fu served as
the Vice President of CD Media BVI. From March 2001 to December 2006, Mr.
Fu served as the Vice President of Business Expansion and Implementation of
Beijing Future Advertisement Company. Mr. Fu received a bachelor’s degree
in mechanics engineering from Neimonggu Mechanics University in
1999.
Family
Relationships
There are no family relationships among
any of the officers and directors.
Involvement
in Certain Legal Proceedings
There have been no events under any
bankruptcy act, no criminal proceedings and no judgments, injunctions, orders or
decrees material to the evaluation of the ability and integrity of any director,
executive officer, promoter or control person of the Company during the past ten
years.
The Company is not aware of any legal
proceedings in which any director, nominee, officer or affiliate of the Company,
any owner of record or beneficially of more than five percent of any class of
voting securities of the Company, or any associate of any such director,
nominee, officer, affiliate of the Company, or security holder is a party
adverse to the Company or any of its subsidiaries or has a material interest
adverse to the Company or any of its subsidiaries.
52
Board
of Directors and Committees
Our Board of Directors does not
maintain a separate audit, nominating or compensation
committee. Functions customarily performed by such committees are
performed by its Board of Directors as a whole. We are not required
to maintain such committees under the rules applicable to companies that do not
have securities listed or quoted on a national securities exchange or national
quotation system. We intend to create board committees, including an
independent audit committee, in the near future. If we are successful
in listing our common stock on the Nasdaq Global Market, we would be required to
have, prior to listing, an independent audit committee formed, in compliance
with the requirements for listing on the Nasdaq Global Market and in compliance
with Rule 10A-3 of the Securities Exchange Act of 1934, as amended.
Director
Independence
None of our directors are considered
independent directors under Nasdaq Marketplace Rules, even though such
definition does not currently apply to us because we are not listed on the
Nasdaq Global Market.
EXECUTIVE
COMPENSATION
Compensation
Discussion and Analysis
Compensation
Before the Share Exchange
Prior to the closing of the Share
Exchange on April 30, 2010, we were a “blank check” shell company named SRKP 25,
Inc. that was formed to investigate and acquire a target company or business
seeking the perceived advantages of being a publicly held corporation. The
only officers and directors of SRKP 25, Inc., Richard Rappaport and Anthony
Pintsopoulos, SRKP 25’s President and Chief Financial Officer, respectively, did
not receive any compensation or other perquisites for serving in such
capacities. Messrs. Rappaport and Pintsopoulos resigned from all of
their executive and director positions with SRKP 25 upon the closing of the
Share Exchange and are no longer employed by or affiliated with our
company.
Prior to the closing of the Share
Exchange, our current named executive officers were compensated by CD Media
Beijing until the closing of the Share Exchange, including for the year ended
December 31, 2009 and the period from January 1, 2010 to April 30,
2010. The Chairman of the Board of CD Media Beijing, Li HuiHua
determined the compensation for herself and the other executive officers of CD
Media Beijing that was earned in fiscal 2009 and the period from January 1, 2010
to April 30, 2010 after consulting with the board members of CD Media
Beijing. In addition, the Board of Directors of CD Media Beijing
approved the compensation. From January 1, 2010 to April 30, 2010 and
during the fiscal years of 2009, 2008 and 2007, the compensation for CD Media
Beijing’s named executive officers consisted solely of each executive officer’s
salary and cash bonus. The Board of Directors of CD Media Beijing
believes that the salaries paid to our executive officers during 2009 and the
period from January 1, 2010 to April 30, 2010 are indicative of the objectives
of its compensation program and reflect the fair value of the services provided
to CD Media Beijing, as measured by the local market in China.
Compensation
After the Share Exchange
Upon the
closing of the Share Exchange, the executive officers of CD Media Beijing were
appointed as our executive officers and we adopted the compensation policies of
CD Media Beijing, as modified for a company publicly reporting in the United
States. Compensation for our current executive officers is determined
with the goal of attracting and retaining high quality executive officers and
encouraging them to work as effectively as possible on our
behalf. Compensation is designed to reward executive officers for
successfully meeting their individual functional objectives and for their
contributions to our overall development. For these reasons, the
elements of compensation of our executive officers are salary and
bonus. Salary is paid to cover an appropriate level of living
expenses for the executive officers and the bonus is paid to reward the
executive officer for individual and company achievement.
Salary is designed to attract, as
needed, individuals with the skills necessary for us to achieve our business
plan, to motivate those individuals, to reward those individuals fairly over
time, and to retain those individuals who continue to perform at or above the
levels that we expect. When setting and adjusting individual
executive salary levels, we consider the relevant established salary range, the
named executive officer’s responsibilities, experience, potential, individual
performance and contribution. We also consider other factors such as
our overall corporate budget for annual merit increases, unique skills, demand
in the labor market and succession planning.
53
We determine the levels of salary as
measured primarily by the local market in China. We determine market rate by
conducting a comparison with the local geographic area averages and industry
averages in China. In determining market rate, we review statistical data
collected and reported by the Beijing Labor Bureau which is published monthly.
The statistical data provides the high, median, low and average compensation
levels for various positions in various industry sectors. In particular, we use
the data for the advertising services sector as our benchmark to determine
compensation levels because we operate in Beijing as a provider of advertising
services. Our compensation levels are at roughly the 80th-90th
percentile of the compensation spectrum for the manufacturing
sector.
Corporate performance goals include
selling more advertising time. Additional key areas of corporate performance
taken into account in setting compensation policies and decisions are cost
control, profitability, and innovation. The key factors may vary depending on
which area of business a particular executive officer’s work is focused.
Individual performance goals include subjective evaluation, based on an
employee’s team-work, creativity and management capability, and objective goals
such as sales targets. As motivation to our management team, we provide
commission based bonuses to management personnel. We periodically evaluate the
performance of our management personnel and pay seasonal bonuses three times per
year and annual bonuses to each member of management in an amount up to 3% of
the sales revenues generated by such staff member.
As motivation to our management team,
we provide commission based bonuses to management personnel. We periodically
evaluate the performance of our management personnel and pay seasonal and annual
bonuses to each member of management in an amount up to 3% of the sales revenues
generated by such staff member. If we successfully complete our proposed listing
of our common stock on the NYSE Amex or Nasdaq, we may increase the amount of
our bonuses to management personnel if corporate and individual performance
goals are met. Generally, the amount of an annual bonus, when awarded, will be
equal to one month’s salary plus 5% to 25% of the individual's annual salary. If
the corporate and individual goals are fully met, the bonus will be closer to
the top end of the range. If the goals are only partially met, the amount of the
bonus will be closer to the bottom end of the range. In no event will there be a
bonus equal to more than one month's salary if the corporate goals are not met
by at least 50%.
Our board of directors intends to
establish a compensation committee in 2010 comprised of non-employee directors.
The compensation committee will perform, at least annually, a strategic review
of the compensation program for our executive officers to determine whether it
provides adequate incentives and motivation to our executive officers and
whether it adequately compensates our executive officers relative to comparable
officers in other companies with which we compete for executives. Those
companies may or may not be public companies or companies located in the PRC or
even, in all cases, companies in a similar business. Prior to the formation of
the compensation committee, Li Hui Hua, upon consulting with our board members,
determined the compensation for our current executive officers. In 2010, our
compensation committee will determine compensation levels for our executive
officers. We have established a compensation program for executive officers for
2010 that is designed to attract, as needed, individuals with the skills
necessary for us to achieve our business plan, to motivate those individuals, to
reward those individuals fairly over time, and to retain those individuals who
continue to perform at or above the levels that we expect. If paid, bonuses for
executive officers in 2010 will be based on company and individual performance
factors, as described above.
If we successfully complete our
proposed listing on Nasdaq or NYSE Amex Equities in 2010, we intend to adjust
our compensation evaluations upwards in 2010, including through the payment of
bonuses. However, in such case, we do not intend to increase compensation by
more than 20%. We believe that adopting higher compensation in the future may be
based on the increased amount of responsibilities and the expansion of our
business to be assumed by each of the executive officers after we become a
publicly listed company.
We also intend to expand the scope of
our compensation, such as the possibility of granting options to executive
officers and tying compensation to predetermined performance goals. We intend to
adopt an equity incentive plan in the near future and issue stock-based awards
under the plan to aid our company’s long-term performance, which we believe will
create an ownership culture among our named executive officers that fosters
beneficial, long-term performance by our company. We do not currently have a
general equity grant policy with respect to the size and terms of grants that we
intend to make in the future, but we expect that our compensation committee will
evaluate our achievements for each fiscal year based on performance factors and
results of operations such as revenues generated, cost of revenues, and net
income.
54
Summary
Compensation Table
The following table sets forth
information concerning the compensation for the three fiscal years ended
December 31, 2009 of the principal executive officer, principal financial
officer, in addition to our three most highly compensated officers whose annual
compensation exceeded $100,000, and up to two additional individuals, as
applicable, for whom disclosure would have been required but for the fact that
the individual was not serving as an executive officer of the registrant at the
end of the last fiscal year.
Name
and Position
|
Year
|
Salary
|
Bonus
|
Total
|
||||||||||
Li
Hui Hua
|
2009
|
$ | 23,400 | $ | 2,000 | $ | 25,400 | |||||||
Chief
Executive Officer
|
2008
|
21,000 | 1,800 | 22,800 | ||||||||||
2007
|
18,000 | 1,500 | 19,500 | |||||||||||
Zhang
Le
|
2009
|
$ | 15,000 | $ | 1,250 | $ | 16,250 | |||||||
Chief
Financial Officer
|
2008
|
12,000 | 1,000 | 13,000 | ||||||||||
2007
|
9,500 | 800 | 10,300 | |||||||||||
Richard
Rappaport (1)
|
2009
|
$ | - | $ | - | $ | - | |||||||
Former
President
|
2008
|
- | - | - | ||||||||||
and
Former Director
|
2007
|
- | - | - | ||||||||||
Anthony
Pintsopoulos (1)
|
2009
|
$ | - | $ | - | $ | - | |||||||
Former
Secretary, Former Chief
|
2008
|
- | - | - | ||||||||||
Financial
Officer, and Former
|
2007
|
- | - | - | ||||||||||
Director
|
(1) Upon
the close of the Share Exchange on April 30, 2010, Messrs. Rappaport and
Pintsopoulos resigned from all positions with the Company, which they held from
the Company’s inception on December 17, 2007.
Grants
of Plan-Based Awards in 2009
There were no option grants in
2009.
Outstanding
Equity Awards at 2009 Fiscal Year End
There were no outstanding equity awards
in 2009.
Option
Exercises and Stock Vested in Fiscal 2009
There were no option exercises or stock
vested in 2009.
Pension
Benefits
There were no pension benefit plans in
effect in 2009.
Nonqualified
Defined Contribution and Other Nonqualified Deferred Compensation
Plans
There were no nonqualified defined
contribution or other nonqualified deferred compensation plans in effect in
2009.
Employment
Agreements
We have employment agreements with the
following persons and terms:
|
·
|
Li
Huihua is paid a monthly salary of RMB 11,000 ($1,613) pursuant to a
two-year agreement that expires on March 17, 2011;
and
|
|
·
|
Zhang
Le is paid a monthly salary of RMB 4,500 ($658) pursuant to a two-year
agreement that expires on December 31,
2010.
|
55
Pursuant to each of the foregoing
person’s employment agreement with us, we may terminate the agreement without
notice or severance if, among other things, the executive materially breaches
our rules and regulations, is convicted of a criminal offense, commits series
dereliction of duty causing damages of over RMB50,000 (US$7,353) to us, or is
declared bankrupt. We may terminate the agreement upon thirty (30) days written
notice if the executive is unable to work due to illness or injury (not caused
by work) after completing medical treatment. The executive may
terminate the agreement without prior notice to us if, among other things, we do
not provide labor protection or conditions specified in the agreement, we do not
pay the executive’s compensation in full and on time, our regulations are not in
compliance with relevant PRC laws or we coerce the executive to enter into
changes to the agreement against his will. In addition, none of the
agreements provide for severance upon termination.
Director
Compensation
The following table shows information
regarding the compensation earned during the fiscal year ended December 31,
2009 by members of board of directors.
Name
|
Fees Earned
or Paid in
Cash
($) (1)
|
Stock
Awards
($)
|
Option
Awards
($)
|
Non-Equity
Incentive Plan
Compensation
($)
|
Change in
Pension Value
and
Nonqualified
Deferred
Compensation
Earnings
|
All Other
Compensation
($)
|
Total
($)
|
||||||||||||
Li
Hui Hua
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
||||||||||||
Fu
Hai Ming
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
We do not
currently have an established policy to provide compensation to members of our
Board of Directors for their services in that capacity. We intend to
develop such a policy in the near future.
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS
CD
Media BVI
CD Media BVI, CD Media Huizhou and CD
Media HK, which are either directly or indirectly wholly-owned subsidiaries of
the Company, and CD Media Beijing, which is controlled by CD Media Huizhou
through a series of contractual arrangements, each have interlocking executive
and director positions with us and with each other.
Share
Exchange
On April 30, 2010, SRKP 25 completed
the Share Exchange with CD Media BVI, the shareholders of CD Media BVI, CD Media
Huizhou and CD Media Beijing. At the closing, CD Media BVI became a
wholly-owned subsidiary of SRKP 25 and 100% of the issued and outstanding
securities of CD Media BVI were exchanged for securities of SRKP
25. An aggregate of 19,100,000 shares of common stock were issued to
the shareholders of CD Media BVI and their designees. As of the close
of the Share Exchange, the former shareholders of CD Media BVI owned
approximately 75.5% of the issued and outstanding stock of SRKP
25. Prior to the closing of the Share Exchange and the closing of the
Private Placement, the stockholders of SRKP 25 agreed to the cancellation of an
aggregate of 4,450,390 shares and 5,677,057 warrants to purchase shares of
common stock held by them such that there were 2,646,000 shares of common stock
and warrants to purchase 1,419,333 shares of common stock owned by them
immediately after the Share Exchange and Private Placement. The Board
resigned in full and appointed Li Hui Hua and Fu Hai Ming to the board of
directors of our company, with Li Hui Hua serving as Chairman. The
Board also appointed Li Hui Hua as our Chief Executive Officer and
Zhang Le as our Chief Financial Officer and Corporate Secretary. Each of these
executives and directors were executives and directors of CD Media BVI and/or
its subsidiaries. In addition, we paid a $215,750 success fee to WestPark
Capital for services provided in connection with the Share Exchange, including
coordinating the share exchange transaction process, interacting with principals
of the shell corporation and negotiating the definitive purchase agreement for
the shell, conducting a financial analysis of CD Media BVI, conducting due
diligence on CD Media BVI and its subsidiaries and managing the
interrelationships of legal and accounting activities.
Private
Placement
Richard Rappaport, the President of
SRKP 25 and one of its controlling stockholders prior to the Share Exchange,
indirectly holds a 100% interest in WestPark Capital, Inc. (“WestPark Capital”)
the placement agent for the equity financing of approximately $5.35 million
conducted by us on the close of the Share Exchange.
56
Anthony C. Pintsopoulos, an officer,
director and significant stockholder of SRKP 25 prior to the Share Exchange, is
the President and Treasurer of the placement agent. Kevin DePrimio,
Jason Stern and Robert Schultz, each employees of WestPark Capital, are also
stockholders of SRKP 25. In addition, Richard Rappaport is the sole
owner of the membership interests of the parent of the placement
agent. Each of Messrs. Rappaport and Pintsopoulos resigned from all
of their executive and director positions with the Company upon the closing of
the Share Exchange. We paid WestPark Capital a commission equal to
10.0% with a non-accountable fee of 4.0% of the gross proceeds from the Private
Placement. We are also retaining WestPark Capital for a period of
five months following the closing of the Private Placement to provide us with
financial consulting services for which we will pay WestPark Capital $4,000 per
month. Out of the proceeds of the Private Placement, we paid $300,000
to Keen Dragon Group Limited, a third party unaffiliated with CD Media BVI, the
Company, or WestPark Capital for services in connection with arranging the
reverse merger.
Policy
for Approval of Related Party Transactions
We do not currently have a formal
related party approval policy for review and approval of transactions required
to be disclosed pursuant to Item 404 (a) of Regulation S-K. We expect our board
to adopt such a policy in the near future.
This
current report is not an offer of securities for sale. Any securities
sold in the private placement have not been registered under the Securities Act
of 1933, as amended, and may not be offered or sold in the United States unless
registered under the Securities Act of 1933, as amended, or pursuant to an
exemption from such registration.
INDEMNIFICATION
OF DIRECTORS AND EXECUTIVE OFFICERS AND LIMITATION OF LIABILITY
Under Section 145 of the General
Corporation Law of the State of Delaware, we can indemnify our directors and
officers against liabilities they may incur in such capacities, including
liabilities under the Securities Act of 1933, as amended (the “Securities
Act”). Our certificate of incorporation provides that, pursuant to
Delaware law, our directors shall not be liable for monetary damages for breach
of the directors’ fiduciary duty of care to us and our
stockholders. This provision in the certificate of incorporation does
not eliminate the duty of care, and in appropriate circumstances equitable
remedies such as injunctive or other forms of non-monetary relief will remain
available under Delaware law. In addition, each director will
continue to be subject to liability for breach of the director’s duty of loyalty
to us or our stockholders, for acts or omissions not in good faith or involving
intentional misconduct or knowing violations of the law, for actions leading to
improper personal benefit to the director, and for payment of dividends or
approval of stock repurchases or redemptions that are unlawful under Delaware
law. The provision also does not affect a director’s responsibilities
under any other law, such as the federal securities laws or state or federal
environmental laws.
Our bylaws provide for the
indemnification of our directors to the fullest extent permitted by the Delaware
General Corporation Law. Our bylaws further provide that our Board of
Directors has discretion to indemnify its officers and other
employees. We are required to advance, prior to the final disposition
of any proceeding, promptly on request, all expenses incurred by any director or
executive officer in connection with that proceeding on receipt of an
undertaking by or on behalf of that director or executive officer to repay those
amounts if it should be determined ultimately that he or she is not entitled to
be indemnified under the bylaws or otherwise. We are not, however,
required to advance any expenses in connection with any proceeding if a
determination is reasonably and promptly made by our Board of Directors by a
majority vote of a quorum of disinterested Board members that (i) the party
seeking an advance acted in bad faith or deliberately breached his or her duty
to us or our stockholders and (ii) as a result of such actions by the party
seeking an advance, it is more likely than not that it will ultimately be
determined that such party is not entitled to indemnification pursuant to the
applicable sections of its bylaws.
We have been advised that in the
opinion of the Securities and Exchange Commission, insofar as indemnification
for liabilities arising under the Securities Act may be permitted to our
directors, officers and controlling persons pursuant to the foregoing
provisions, or otherwise, such indemnification is against public policy as
expressed in the Securities Act and is therefore unenforceable. In
the event a claim for indemnification against such liabilities (other than our
payment of expenses incurred or paid by its director, officer or controlling
person in the successful defense of any action, suit or proceeding) is asserted
by such director, officer or controlling person in connection with the
securities being registered, we will, unless in the opinion of our counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question of whether such indemnification by us is
against public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.
We may enter into indemnification
agreements with each of our directors and officers that are, in some cases,
broader than the specific indemnification provisions permitted by Delaware law,
and that may provide additional procedural protection. As of the date
of the Share Exchange, we have not entered into any indemnification agreements
with our directors or officers, but may choose to do so in the
future. Such indemnification agreements may require us, among other
things, to:
57
|
·
|
indemnify
officers and directors against certain liabilities that may arise because
of their status as officers or
directors;
|
|
·
|
advance
expenses, as incurred, to officers and directors in connection with a
legal proceeding, subject to limited exceptions;
or
|
|
·
|
obtain
directors’ and officers’ insurance.
|
At present, there is no pending
litigation or proceeding involving any of our directors, officers or employees
in which indemnification is sought, nor are we aware of any threatened
litigation that may result in claims for indemnification.
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT FOLLOWING THE SHARE
EXCHANGE
Beneficial ownership is determined in
accordance with the rules of the SEC. In computing the number of
shares beneficially owned by a person and the percentage of ownership of that
person, shares of common stock subject to options and warrants held by that
person that are currently exercisable or become exercisable within 60 days of
the closing of the Share Exchange on April 30, 2010 are deemed outstanding even
if they have not actually been exercised. Those shares, however, are
not deemed outstanding for the purpose of computing the percentage ownership of
any other person.
Immediately prior to the closing of the
Share Exchange and the Private Placement, we had outstanding 7,096,390 shares of
common stock, no options and 7,096,390 warrants to purchase shares of common
stock. Immediately after the closing of the Share Exchange, the
closing of the Private Placement, we had 25,312,667 shares of common stock and
warrants to purchase 1,419,333 shares of common stock issued and
outstanding.
The following table sets forth certain
information with respect to beneficial ownership of our common stock immediately
after the closing of the Share Exchange based on issued and outstanding shares
of common stock, by:
·
|
Each
person known to be the beneficial owner of 5% or more of our outstanding
common stock;
|
·
|
Each
executive officer;
|
·
|
Each
director; and
|
·
|
All
of the executive officers and directors as a
group.
|
Unless otherwise indicated, the persons
and entities named in the table have sole voting and sole investment power with
respect to the shares set forth opposite the stockholder’s name, subject to
community property laws, where applicable. Unless otherwise indicated, the
address of each stockholder listed in the table is c/o Huizhou CD Media Co.,
Ltd., Room 801, No. 7, Wenchanger Road, Jiangbei, Huizhou City, Guangdong
Province, China.
Name and Address
of Beneficial Owner
|
Title
|
Beneficially
Owned
Post-Share
Exchange
|
Percent
of Class
(1)
|
|||||||
Directors
and Executive Officers
|
||||||||||
Li
Hui Hua
|
Chief
Executive Officer and Chairman of the Board
|
6,261,500 | 24.7 | % | ||||||
Zhang
Le
|
Chief
Financial Officer and Corporate Secretary
|
- | - | |||||||
Fu
Hai Ming
|
Director
|
700,000 | 2.8 | % | ||||||
Officers
and Directors as a Group (total of 3 persons)
|
6,961,500 | 27.5 | % | |||||||
5%
Holders
|
||||||||||
Richard
A. Rappaport (2)
1900
Avenue of the Stars, Suite 310
Los
Angeles, CA 90067
|
3,043,916 | 11.5 | % |
58
(1)
|
Each
stockholder's percentage of ownership in the above table is based upon
25,312,667 shares of China Century Dragon Media’s common stock outstanding
as of May 3, 2010.
|
(2)
|
Includes
312,479 shares of common stock and a warrant to purchase 122,346 shares of
common stock owned by Mr. Rappaport. Also including 90,720
shares and warrants to purchase 35,520 shares of common stock owned by
each of the Amanda Rappaport Trust and the Kailey Rappaport Trust, of
which Mr. Rappaport serves ad the trustee, and 1,418,057 shares and a
warrant to purchase 938,554 shares of common stock owned by WestPark
Capital Financial Services, LLC, of which Mr. Rappaport is CEO and
Chairman. Mr. Rappaport may be deemed the indirect beneficial owner of
these securities and disclaims beneficial ownership of the securities
except to of his pecuniary interest in the
securities.
|
Item 5.02
Departure of Directors or Principal
Officers; Election of Directors; Appointment of Principal
Officers.
At the consummation of the Share
Exchange, SRKP 25’s board of directors immediately prior to the Share Exchange,
which consisted of Richard A. Rappaport and Anthony C. Pintsopoulos, appointed
Li Hui Hua and Fu Hai Ming to the board of directors of our company, with Li Hui
Hua serving as Chairman. The directors and officers of SRKP 25 prior
to the Share Exchange then resigned as officers and directors of our company
upon the closing of the Share Exchange. In addition, concurrent with
the closing of the Share Exchange, our company’s board appointed Li Hui Hua as
our Chief Executive Officer, Zhang Le as our Chief Financial Officer and
Corporate Secretary.
For complete information regarding our
new officers and directors, refer to “Executive Officers, Directors and Key
Employees” under Item 5.01, above.
Item 5.03
|
Amendments to Articles of
Incorporation or Bylaws; Change in Fiscal
Year.
|
Immediately after the closing of the
Share Exchange, SRKP 25 changed its corporate name from “SRKP 25, Inc.” to
“China Century Dragon Media, Inc.” by the filing of Articles of Merger with the
Delaware Secretary of State’s Office on April 30, 2010. SRKP 25
effected the name change to better reflect the nature of its new business
operations following the Share Exchange. The Articles of Merger are
attached hereto as Exhibit
3.3. Holders of stock certificates bearing the name “SRKP 25,
Inc.” may continue to hold them and will not be required to exchange them for
new certificates or take any other action.
Item 5.06
|
Change in Shell Company
Status.
|
Prior to the closing of the Share
Exchange, SRKP 25 was a “shell company” as defined in Rule 405 of the Securities
Act and Rule 12b-2 of the Exchange Act. As described in Item 2.01
above, which is incorporated by reference into this Item 5.06, SRKP 25 ceased
being a shell company upon completion of the Share Exchange on April 30,
2010.
Item 9.01 Financial Statements and
Exhibits.
(a)
Financial Statements of Business Acquired.
We are providing financial and other
information for informational purposes only. It does not necessarily
represent or indicate what the financial position and results of operations of
our company will be now that the Share Exchange is concluded.
FINANCIAL
STATEMENTS OF CD MEDIA (HOLDING) CO., LIMITED
The financial statements of CD Media
(Holding) Co., Limited, a British Virgin Islands corporation, for the years
ended December 31, 2009, 2008 and 2007 are provided below. You are
encouraged to review the financial statements and related
notes.
59
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the
Board of Directors and Stockholders of
CD Media
(Holdings) Co., Limited
British
Virgin Islands
We have
audited the accompanying consolidated balance sheets of CD Media (Holding) Co.,
Limited and Subsidiaries (the “Company”) as of December 31, 2009
and 2008 and the related consolidated statements of operations and
comprehensive income, changes in shareholders’ equity and cash flows for each of
the three years in the period ended December 31, 2009. These financial
statements are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We
conducted our audits in accordance with standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audits included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company’s internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our
opinion, the financial statements of the Company referred to above present
fairly, in all material respects, the financial position of the Company as of
December 31, 2009 and 2008 and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 2009 in
conformity with accounting principles generally accepted in the United States of
America.
/s/
MaloneBailey, LLP
www.malonebailey.com
Houston,
Texas
May 6,
2010
60
CD
Media (Holding) Co., Limited and Subsidiaries
Consolidated
Balance Sheets
December 31,
|
||||||||
2009
|
2008
|
|||||||
Assets
|
||||||||
Current
Assets
|
||||||||
Cash
and cash equivalents
|
$ | 654,831 | $ | 1,219,894 | ||||
Accounts
receivable, net
|
5,433,776 | 6,905,814 | ||||||
Prepayments
and deposit for advertising slots purchases
|
7,589,725 | 3,032,760 | ||||||
Total
current assets
|
13,678,332 | 11,158,468 | ||||||
Property
and equipment, net
|
31,900 | 29,465 | ||||||
Capitalized
television cost
|
6,821,550 | - | ||||||
Total
Assets
|
$ | 20,531,782 | $ | 11,187,933 | ||||
Liabilities
and Shareholders' Equity
|
||||||||
Current
Liabilities
|
||||||||
Accounts
payable
|
$ | 885,013 | $ | 781,105 | ||||
Customer
deposit for media time
|
1,776,364 | 225,531 | ||||||
Accrued
liabilities
|
184,341 | 89,990 | ||||||
Other
taxes payable
|
320,712 | 1,334,144 | ||||||
Corporate
income tax payable
|
1,678,069 | 2,147,916 | ||||||
Total
current liabilities
|
4,844,499 | 4,578,686 | ||||||
Shareholders’
Equity
|
||||||||
Common
Stock ($1.00 par value, 50,000 shares authorized, issued and
outstanding)
|
50,000 | 50,000 | ||||||
Additional
paid-in capital
|
582,350 | 582,350 | ||||||
Accumulated
other comprehensive income
|
383,533 | 315,582 | ||||||
Statutory
surplus reserve fund
|
790,138 | 790,138 | ||||||
Retained
earnings
|
13,881,262 | 4,871,177 | ||||||
Total
shareholders' equity
|
15,687,283 | 6,609,247 | ||||||
Total
Liabilities and Shareholders’ Equity
|
$ | 20,531,782 | $ | 11,187,933 |
See
accompanying notes to the Consolidated Financial Statements.
61
CD
Media (Holding) Co., Limited and Subsidiaries
Consolidated
Statements of Operations and Comprehensive Income
For the Years Ended December 31,
|
||||||||||||
2009
|
2008
|
2007
|
||||||||||
Revenue
|
$ | 74,479,651 | $ | 44,684,432 | $ | 17,102,819 | ||||||
Cost
of Goods Sold
|
(59,745,755 | ) | (36,497,828 | ) | (12,838,439 | ) | ||||||
Gross
Profit
|
14,733,896 | 8,186,604 | 4,264,380 | |||||||||
General
and administrative
|
||||||||||||
Selling
Expenses
|
2,109,502 | 1,672,606 | 2,068,178 | |||||||||
General
and administrative
|
575,118 | 371,323 | 374,265 | |||||||||
Depreciation
of equipment
|
8,995 | 7,338 | 1,780 | |||||||||
Total
operating expenses
|
2,693,615 | 2,051,267 | 2,444,223 | |||||||||
Income
from operations
|
12,040,281 | 6,135,337 | 1,820,157 | |||||||||
Gain
on disposal of assets
|
660 | - | - | |||||||||
Interest
income
|
2,528 | 4,700 | 5,221 | |||||||||
Income
before income taxes
|
12,043,469 | 6,140,037 | 1,825,378 | |||||||||
Income
taxes
|
(3,033,384 | ) | (1,535,009 | ) | (602,375 | ) | ||||||
Net
income
|
$ | 9,010,085 | $ | 4,605,028 | $ | 1,223,003 | ||||||
Other
Comprehensive Income
|
||||||||||||
Foreign
currency
|
||||||||||||
Translation adjustment
|
67,951 | 207,288 | 84,227 | |||||||||
Comprehensive
Income
|
$ | 9,078,036 | $ | 4,812,316 | $ | 1,307,230 |
See
accompanying notes to the Consolidated Financial Statements.
62
CD
Media (Holding) Co., Limited and Subsidiaries
Consolidated
Statements of Changes in Shareholders’ Equity
Accumulated
|
||||||||||||||||||||||||||||
Additional
|
Statutory
|
Other
|
Retained
|
Total
|
||||||||||||||||||||||||
Capital share
|
Paid-in
|
Reserve
|
Comprehensive
|
Earnings
|
Stockholders'
|
|||||||||||||||||||||||
Shares
|
Amount
|
Capital
|
Fund
|
Income
|
(Unrestricted)
|
Equity
|
||||||||||||||||||||||
Balances,
December 31, 2006
|
50,000 | 50,000 | 582,350 | - | 24,067 | (166,716 | ) | 489,701 | ||||||||||||||||||||
Allocation
of retained earnings to statutory reserve fund
|
- | - | - | 316,055 | - | (316,055 | ) | - | ||||||||||||||||||||
Foreign
currency translation adjustment
|
- | - | - | - | 84,227 | - | 84,227 | |||||||||||||||||||||
Net
income for the year
|
- | - | - | - | - | 1,223,003 | 1,223,003 | |||||||||||||||||||||
Balances,
December 31, 2007
|
50,000 | 50,000 | 582,350 | 316,055 | 108,294 | 740,232 | 1,796,931 | |||||||||||||||||||||
Allocation
of retained earnings to statutory reserve fund
|
- | - | - | 474,083 | - | (474,083 | ) | - | ||||||||||||||||||||
Foreign
currency translation adjustment
|
- | - | - | - | 207,288 | - | 207,288 | |||||||||||||||||||||
Net
income for the year
|
- | - | - | - | - | 4,605,028 | 4,605,028 | |||||||||||||||||||||
Balances,
December 31, 2008
|
50,000 | 50,000 | 582,350 | 790,138 | 315,582 | 4,871,177 | 6,609,247 | |||||||||||||||||||||
Foreign
currency translation adjustment
|
- | - | - | - | 67,951 | - | 67,951 | |||||||||||||||||||||
Net
income for the year
|
- | - | - | - | - | 9,010,085 | 9,010,085 | |||||||||||||||||||||
Balances,
December 31, 2009
|
50,000 | $ | 50,000 | $ | 582,350 | $ | 790,138 | $ | 383,533 | $ | 13,881,262 | $ | 15,687,283 |
See
accompanying notes to the Consolidated Financial
Statements.
63
CD
Media (Holding) Co., Limited and Subsidiaries
Consolidated
Statements of Cash Flows
For the Years Ended December 31,
|
||||||||||||
2009
|
2008
|
2007
|
||||||||||
Cash
Flows From Operating Activities
|
||||||||||||
Net
Income
|
$ | 9,010,085 | $ | 4,605,028 | $ | 1,223,003 | ||||||
Adjustments
to reconcile net income to net cash provided by(used in) operating
activities:
|
||||||||||||
Depreciation
|
8,995 | 7,338 | 1,780 | |||||||||
Gain
on disposal of assets
|
(660 | ) | - | - | ||||||||
Changes
in operating assets and liabilities:
|
||||||||||||
Account
receivable-trade
|
1,476,745 | (5,198,481 | ) | (856,843 | ) | |||||||
Prepayments
and deposit for advertising slots purchases
|
(4,554,897 | ) | (1,673,286 | ) | (904,430 | ) | ||||||
Deferred
income tax assets
|
- | - | 69,798 | |||||||||
Capitalized
television cost
|
(6,817,365 | ) | - | - | ||||||||
Accounts
payable and accrued liabilities
|
(816,676 | ) | 703,416 | 583,157 | ||||||||
Customer
deposits
|
1,550,679 | (346,695 | ) | 364,250 | ||||||||
Corporate
income tax payable
|
(471,311 | ) | 1,636,318 | 547,421 | ||||||||
Net
cash provided by (used in) operating activities
|
(614,405 | ) | (266,362 | ) | 1,028,136 | |||||||
Cash
Flows From Investing Activities
|
||||||||||||
Cash
paid for equipment additions
|
(20,867 | ) | (16,646 | ) | (17,807 | ) | ||||||
Cash
received on disposal of fixed assets
|
14,661 | - | - | |||||||||
Net
cash used in investing activities
|
(6,206 | ) | (16,646 | ) | (17,807 | ) | ||||||
Cash
Flows From Financing Activities
|
||||||||||||
Due
to shareholder
|
- | - | (389,755 | ) | ||||||||
Net
cash used in financing activities
|
- | - | (389,755 | ) | ||||||||
Effect
of exchange rate changes on cash
|
55,548 | 239,507 | 78,470 | |||||||||
Net
increase (decrease) in cash and cash equivalents
|
(565,063 | ) | (43,501 | ) | 699,044 | |||||||
Cash
and cash equivalents, beginning of year
|
1,219,894 | 1,263,395 | 564,351 | |||||||||
Cash
and cash equivalents, end of year
|
$ | 654,831 | $ | 1,219,894 | $ | 1,263,395 | ||||||
Supplemental
disclosure information:
|
||||||||||||
Income
taxes paid
|
$ | 3,502,943 | $ | - | $ | - | ||||||
Interest
paid
|
$ | - | $ | - | $ | - |
See
accompanying notes to the Consolidated Financial
Statements.
64
CD
Media (Holding) Co., Limited and Subsidiaries
Notes
to Consolidated Financial Statements
NOTE
1. DESCRIPTION OF BUSINESS AND ORGANIZATION
CD Media
(Holding) Co., Limited (“CD Media” or the “Company”) was incorporated under the
laws of British Virgin Island on March 31, 2009.
CD Media
has 50,000 common shares authorized with $1.00 par value each and 50,000 shares
issued and outstanding.
CD Media
(HK) Limited (“CD Media HK”) was incorporated under the laws of Hong Kong,
PRC on May 6, 2009 by CD Media. CD Media HK has 10,000 common shares authorized
with HKD 1 par value each and 10,000 shares are issued and
outstanding.
Huizhou
CD Media Co., Ltd (“CD Media HZ”) is located at Huizhou, Guangdong Province, PRC
and incorporated under the Chinese laws on November 2, 2009. CD Media HZ had a
registered capital of HKD 20 million by CD Media. The legal representative of CD
Media HZ is Mr. Lin, Huabiao.
Beijing
CD Media Advertisement Co., Ltd (“CD Media Beijing”) is located at Beijing, PRC
and incorporated under the Chinese laws on June 29, 2001. CD Media Beijing had a
registered capital of RMB 5 million.
On March
30, 2010, CD Media HZ and CD Media Beijing entered into an Exclusive Business
Cooperation Agreement which entitles CD Media HZ to substantially all of the
economic benefits of CD Media Beijing in consideration for services provided by
CD Media HZ to CD Media Beijing. In addition, CD Media HZ entered
into certain agreements with each of Xu Wen, Cheng Yongxia and Zheng Hongbo (the
“CD Media Beijing Shareholders”), including Exclusive Option Agreements allowing
CD Media HZ to acquire the shares of CD Media Beijing when permitted by PRC
laws, Powers of Attorney that provide CD Media HZ with the voting rights of the
CD Media Beijing Shareholders and Equity Interest Pledge Agreements that pledge
the shares in CD Media Beijing to CD Media HZ. Effective control over CD Media
Beijing was transferred to CD Media HZ through these series of contractual
arrangements without transferring legal ownership in CD Media Beijing to CD
Media HZ (the “Reorganization”). As a result of the Reorganization, CD Media
Beijing became a variable interest entity (“VIE”) and is included in the
consolidated group.
This VIE
structure provides CD Media HZ, a wholly-owned subsidiary of CD Media BVI, with
control over the operations and benefits and determents of CD Media HZ without
having a direct equity ownership in CD Media Beijing.
The
corporate structure of the Company is as follows:
65
CD Media
Beijing is engaged in the sale of commercial breaks on certain channels of China
Central Television (“CCTV”) and providing production services for television
commercials.
NOTE
2
SUMMARIES OF SIGNIFICANT ACCOUNTING POLICIES
Basis
of preparation and consolidation
a.
|
Basis
of preparation
|
These
financial statements have been prepared in accordance with accounting principles
generally accepted in the United States of America.
The
reorganization has been accounted for as a common control transaction and a
recapitalization of CD Media with retroactive effect in the accompanying
financial statements. The companies were controlled by the same three people
before and after the reorganization. The financial statements have been prepared
as if the existing corporate structure had been in existence throughout all
periods and the reorganization had occurred as of the beginning of the earliest
period presented in the accompanying financial statements.
66
b.
|
Basis of
consolidation
|
The
consolidated financial statements include the accounts of the Company and its
subsidiaries, and its VIE. All significant inter-company transactions
and balance have been eliminated upon consolidation.
We
consolidate CD Media Beijing because it meets the requirement of being a VIE
under US GAAP. In general, a VIE is a corporation, partnership, limited
liability company, trust, or any other legal structure used to conduct
activities or hold assets that either (1) has an insufficient amount of equity
to carry out its principal activities without additional subordinated financial
support, (2) has a group of equity owners that are unable to make significant
decisions about its activities, or (3) has a group of equity owners that do not
have the obligation to absorb losses or the right to receive returns generated
by its operations.
c.
|
Use of
estimates
|
The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities, disclosure of contingent
assets and liabilities at the date of the financial statements, and the reported
amounts of revenues and expenses during the reporting year. Because of the use
of estimates inherent in the financial reporting process, actual results could
differ from those estimates.
d.
|
Cash
and cash equivalents
|
Cash and
cash equivalents include cash on hand, cash on deposit with various financial
institutions in PRC, Hong Kong, and all highly-liquid investments with original
maturities of three months or less at the time of purchase. Banks and
other financial institutions in PRC do not provide insurance for funds held on
deposit.
e.
|
Accounts
receivable
|
Accounts
receivable are recognized and carried at original invoiced amount less an
allowance for uncollectible accounts, as needed.
The
Company uses the aging method to estimate the valuation allowance for
anticipated uncollectible receivable balances. Under the aging method, bad debts
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
amount provided as the allowance was incorrect, an adjustment which classified
as a change in estimate is made. As of December 31, 2009 and 2008, there was no
allowance for doubtful accounts recorded.
f.
|
Advances
|
Advances
are payments to broadcast outlets for the purchase of future commercial break
time.. Costs are calculated based on the breaks available and sold based on the
average cost of the breaks purchased as a package.
g.
|
Property and
equipment
|
Property
and equipment are initially recognized and recorded at cost. Gains or losses on
disposals are reflected as gain or loss in the period of disposal. The cost of
improvements that extend the life of plant and equipment are capitalized. These
capitalized costs may include structural improvements, equipment and fixtures.
All ordinary repairs and maintenance costs are expensed as
incurred.
Depreciation
for financial reporting purposes is provided using the straight-line method over
the estimated useful lives of the assets:
Office
and Other Equipment
|
5
years
|
Automobile
|
4
years
|
67
h.
|
Impairment
of long-lived assets
|
The
Company accounts for impairment of plant and equipment and amortizable
intangible assets in accordance with ASC360, “Accounting for Impairment of
Long-Lived Assets and Long-Lived Assets to be Disposed Of”, which requires the
Company to evaluate a long-lived asset for recoverability when there is event or
circumstance that indicate the carrying value of the asset may not be
recoverable. An impairment loss is recognized when the carrying amount of a
long-lived asset or asset group is not recoverable (when carrying amount exceeds
the gross, undiscounted cash flows from use and disposition) and is measured as
the excess of the carrying amount over the asset’s (or asset group’s) fair
value.
i.
|
Comprehensive
income
|
The
Company has adopted ASC220, Reporting Comprehensive
Income, which establishes standards for reporting and displaying comprehensive
income, its components, and accumulated balances in a full-set of
general-purpose financial statements. Accumulated other comprehensive income
represents the accumulated balance of foreign currency translation
adjustments.
j.
|
Revenue
recognition
|
Revenue
Recognition
Substantially
all of our revenues are derived from reselling blocks (or slots) of advertising
time on several popular television channels of CCTV. We acquire this advertising
time in large blocks, repackage the blocks into smaller time slots and sell
these smaller slots to advertising agencies or other companies. Our pricing
depends on the quality, ratings and target audience of the relevant television
programs where the advertisements will be broadcast, the sales prices of our
competitors, general market conditions and market demand. We typically require
payment several weeks before the relevant advertisements are broadcast, and
record these prepayments as a current liability. We recognize the revenue when
persuasive evidence of an arrangement exists, delivery has occurred, the price
is fixed or determinable and collection is reasonably assured, which is
generally over the broadcast period.
Revenue
arrangements involving multiple deliverables are broken down into single-element
arrangements based on their relative fair value for revenue recognition
purposes, when possible. We recognize revenues on the elements delivered and
defer the recognition of revenues of the undelivered elements until the
remaining obligations have been satisfied. Generally, we receive advanced
payments for our advertising services and record them as customer advances. Such
prepayments are only recognized as revenues when the services are rendered over
the broadcast period.
Our
business is centered around purchasing blocks of advertising time, repackaging
the time into smaller units and reselling the smaller blocks (or slots) to our
clients. We generally pay for the blocks of advertising time in advance of
reselling it to our customers and we are committed to pay the remainder of the
balance prior to the broadcast. In determining whether revenue is reported gross
or net, we considered the eight factors outlined in ASC 605-45. We sell the
right to utilize advertising space on certain TV channels of CCTV. This right is
conveyed to us by CCTV through contractual arrangements and we provide this
right to our clients through an unrelated contractual arrangement. As a result,
we are the primary obligor in this arrangement. In addition, we acquire the
advertising blocks in advance and have unmitigated inventory risk. We
are required to pay for the advertising time regardless whether we can resell
the time or collect our fees from our customers. We also have latitude in
establishing the price; discretion in supplier selection; and we assume the
credit risk for the amount billed to our customers. Based on these
factors, revenues are recognized at gross billings to our clients and
the cost for purchasing the advertising time slots is recorded as our cost of
goods sold and recognized over the same period as the related revenue, which is
the broadcast period.
We derive a minimal portion of our
revenues from production services. We design, produce and package
content for public service announcements and commercial
advertisements. For commercial television advertisements, advertisers
will pay for our production services and sometimes for the broadcast of the
advertisements produced by us if we also arrange for such
broadcast. We typically require a prepayment from our clients at the
time of the execution of the advertising production agreements and prior to the
commencement of our work, but our revenues are typically recognized at the time
the final work products are delivered to our clients for broadcast.
We report
revenues gross of business tax and related surcharges, which are charged to cost
of goods sold.
68
Production services. We
recognize revenues from production services at the time the productions are
completed.
k.
|
Cost
of goods sold
|
We
purchase blocks of advertising time on certain CCTV programs for a fixed fee.
Part or all of the fee is paid in advance and we recognize this cost, as our
cost of goods sold, at the same time that we recognize the related revenue,
which is ratably over the broadcast periods. The broadcast period typically
ranges from one to three weeks and represents substantially all of our cost of
goods sold.
l.
|
Capitalized film
costs
|
The
Company capitalizes film costs when incurred. Film costs are stated at the lower
of cost, less accumulated amortization, or fair value. Production overhead, a
component of film costs, includes allocable costs of individuals or departments
with exclusive or significant responsibility for the production of films.
Substantially all of the Company’s resources are dedicated to the production of
its films. Capitalized production overhead does not include selling, general and
administrative expenses. Interest expense on funds invested in production is
capitalized into film costs until production is completed. In addition to the
films being produced, costs of productions in development are capitalized as
development film costs in accordance with the provisions of the SOP and are
transferred to film production costs when a film is set for production. In the
event a film is not set for production within three years from the time the
first costs are capitalized or the film is abandoned, all such costs are
generally expensed.
Film Cost
Amortization - Once a film is released, film costs are amortized and
participations and residual costs are accrued on an individual film basis in the
proportion that the revenue during the period for each film (“Current Revenue”)
bears to the estimated remaining total revenue to be received from all sources
for each film (“Ultimate Revenue”) as of the beginning of the current fiscal
period. The amount of film costs that is amortized each period will depend on
the ratio of Current Revenue to Ultimate Revenue for each film for such period.
The Company makes certain estimates and judgments of Ultimate Revenue to be
received for each film based on information received from its distributor and
its knowledge of the industry. Ultimate Revenue does not include estimates of
revenue that will be earned beyond ten years of a film’s initial theatrical
release date.
Unamortized
film production costs are evaluated for impairment each reporting period on a
film-by-film basis in accordance with the requirements of the SOP. If estimated
remaining net cash flows are not sufficient to recover the unamortized film
costs for that film, the unamortized film costs will be written down to fair
value determined using a net present value calculation.
As of
December 31, 2009 these productions had not been completed and are in
process.
m.
|
Income
taxes
|
The
Company accounts for income taxes in accordance with ASC740 "Accounting for
Income Taxes". ASC 740 requires an asset and liability approach for financial
accounting and reporting for income taxes and allows recognition and measurement
of deferred tax assets based upon the likelihood of realization of tax benefits
in future years. Under the asset and liability approach, deferred taxes are
provided for the net tax effects of temporary differences between the carrying
amounts of assets and liabilities for financial reporting purposes and the
amounts used for income tax purposes. A valuation allowance is provided for
deferred tax assets if it is more likely than not these items will either expire
before the Company is able to realize their benefits, or that future
deductibility is uncertain.
The
Company adopted the accounting standard for uncertainty in income taxes which
prescribes a comprehensive model for how a company should recognize, measure,
present and disclose in its financial statements uncertain tax positions that
the Company has taken or expects to take on a tax return (including a decision
whether to file or not to file a return in a particular
jurisdiction).
n.
|
Foreign
currency translation
|
The
functional currency of CD Media and CD Media HK is Hong Kong Dollar (“HKD”).
These two Companies maintain their financial statements using the functional
currency. Monetary assets and liabilities denominated in currencies other than
the functional currency are translated into the functional currency at rates of
exchange prevailing at the balance sheet dates. Transactions denominated in
currencies other than the functional currency are translated into the functional
currency at the exchange rates prevailing at the dates of the transaction.
Exchange gains or losses arising from foreign currency transactions are included
in the determination of net income (loss) for the respective
periods.
69
The
functional currency of CD Media Beijing is the Renminbi (“RMB”), the PRC’s
currency. The Company maintains its financial statements using its own
functional currency. Monetary assets and liabilities denominated in currencies
other than the functional currency are translated into the functional currency
at rates of exchange prevailing at the balance sheet dates. Transactions
denominated in currencies other than the functional currency are translated into
the functional currency at the exchange rates prevailing at the dates of the
transaction. Exchange gains or losses arising from foreign currency transactions
are included in the determination of net income (loss) for the respective
periods.
For
financial reporting purposes, the financial statements of CD Media and CD Media
HK, which are prepared in HKD, are translated into the Company’s reporting
currency, United States Dollars (“USD”); the financial statements of CD Media
Beijing, which is prepared in RMB, are translated into the Company’s reporting
currency, USD. Balance sheet accounts are translated using the closing exchange
rate in effect at the balance sheet date and income and expense accounts are
translated using the average exchange rate prevailing during the reporting
period.
Adjustments
resulting from the translation, if any, are included in accumulated other
comprehensive income (loss) in stockholder’s equity.
The
exchange rates used for foreign currency translation were as follows (USD$1 =
RMB):
Period Covered
|
Balance Sheet Date Rates
|
Annual Average Rates
|
||
Year
ended December 31, 2007
|
7.29410
|
7.59474
|
||
Year
ended December 31, 2008
|
6.81710
|
6.93722
|
||
Year
ended December 31, 2009
|
6.83574
|
6.82082
|
The
exchange rates used for foreign currency translation were as follows (USD$1 =
HKD):
Period Covered
|
Balance Sheet Date Rates
|
Average Rates
|
||
Year
ended December 31, 2007
|
7.80190
|
7.80153
|
||
Year
ended December 31, 2008
|
7.74960
|
7.86342
|
||
Year
ended December 31, 2009
|
7,76759
|
7.75194
|
|
o.
|
Related
parties
|
A party
is considered to be related to the Company if the party directly or indirectly
or through one or more intermediaries, controls, is controlled by, or is under
common control with the Company. Related parties also include principal owners
of the Company, its management, members of the immediate families of principal
owners of the Company and its management and other parties with which the
Company may deal if one party controls or can significantly influence the
management or operating policies of the other to an extent that one of the
transacting parties might be prevented from fully pursuing its own separate
interests. A party which can significantly influence the management or operating
policies of the transacting parties or if it has an ownership interest in one of
the transacting parties and can significantly influence the other to an extent
that one or more of the transacting parties might be prevented from fully
pursuing its own separate interests is also a related party.
|
p.
|
Recently
issued accounting pronouncements
|
In
June 2009, the Financial Accounting Standards Board (FASB) issued a
standard that established the FASB Accounting Standards Codification (ASC) and amended the
hierarchy of generally accepted accounting principles (ASC) and amended the
hierarchy of generally accepted accounting principles (GAAP) such that the ASC
became the single source of authoritative nongovernmental U.S. GAAP. The ASC did
not change current U.S. GAAP, but was intended to simplify user access to all
authoritative U.S. GAAP by providing all the authoritative literature related to
a particular topic in one place. All previously existing accounting standard
documents were superseded and all other accounting literature not included in
the ASC is considered non-authoritative. New accounting standards issued
subsequent to June 30, 2009 are communicated by the FASB through Accounting
Standards Updates (ASUs). The Company adopted the ASC on July 1, 2009. This
standard did not have an impact on the Company’s consolidated results of
operations or financial condition. However, throughout the notes to the
consolidated financial statements references that were previously made to
various former authoritative U.S. GAAP pronouncements have been changed to
coincide with the appropriate section of the ASC.
70
In
December 2007, the FASB issued a new standard which established the
accounting for and reporting of noncontrolling interests (NCIs) in partially
owned consolidated subsidiaries and the loss of control of subsidiaries. Certain
provisions of this standard indicate, among other things, that NCIs (previously
referred to as minority interests) be treated as a separate component of equity,
not as a liability (as was previously the case); that increases and decreases in
the parent’s ownership interest that leave control intact be treated as equity
transactions, rather than as step acquisitions or dilution gains or losses; and
that losses of a partially owned consolidated subsidiary be allocated to the NCI
even when such allocation might result in a deficit balance. This standard also
required changes to certain presentation and disclosure requirements. The
Company adopted the standard beginning January 1, 2009. The provisions of
the standard were applied to all NCIs prospectively, except for the presentation
and disclosure requirements, which were applied retrospectively to all periods
presented. As a result, upon adoption, the Company retroactively reclassified
the “Minority interest in subsidiaries” balance previously included in the
“Other liabilities” section of the consolidated balance sheet to a new component
of equity with respect to NCIs in consolidated subsidiaries. The adoption also
impacted certain captions previously used on the consolidated statement of
income, largely identifying net income including NCI and net income attributable
to the Company. The adoption of this standard did not have a material
impact on the Company’s consolidated financial position or results of
operations.
In
June 2009, the FASB issued a new standard regarding the accounting for
transfers of financial assets amending the existing guidance on transfers of
financial assets to, among other things, eliminate the qualifying
special-purpose entity concept, include a new unit of account definition that
must be met for transfers of portions of financial assets to be eligible for
sale accounting, clarify and change the derecognition criteria for a transfer to
be accounted for as a sale, and require significant additional disclosure. The
standard is effective for new transfers of financial assets beginning
January 1, 2010. The adoption of this standard is not expected to have a
material impact on the Company’s consolidated results of operations or financial
condition.
In
June 2009, the FASB issued an accounting standard that revised the
consolidation guidance for variable-interest entities. The modifications include
the elimination of the exemption for qualifying special purpose entities, a new
approach for determining who should consolidate a variable-interest entity, and
changes to when it is necessary to reassess who should consolidate a
variable-interest entity. The standard is effective January 1, 2010. The
Company evaluated the impact of this standard, and does not expect it to
have a material impact on the Company’s consolidated results of operations or
financial condition.
In
October 2009, the FASB issued ASU No. 2009-13, Multiple-Deliverable
Revenue Arrangements—a consensus of the FASB Emerging Issues Task Force, that
provides amendments to the criteria for separating consideration in
multiple-deliverable arrangements. As a result of these amendments,
multiple-deliverable revenue arrangements will be separated in more
circumstances than under existing U.S. GAAP. The ASU does this by establishing a
selling price hierarchy for determining the selling price of a deliverable. The
selling price used for each deliverable will be based on vendor-specific
objective evidence if available, third-party evidence if vendor-specific
objective evidence is not available, or estimated selling price if neither
vendor-specific objective evidence nor third-party evidence is available. A
vendor will be required to determine its best estimate of selling price in a
manner that is consistent with that used to determine the price to sell the
deliverable on a standalone basis. This ASU also eliminates the residual method
of allocation and will require that arrangement consideration be allocated at
the inception of the arrangement to all deliverables using the relative selling
price method, which allocates any discount in the overall arrangement
proportionally to each deliverable based on its relative selling price. Expanded
disclosures of qualitative and quantitative information regarding application of
the multiple-deliverable revenue arrangement guidance are also required under
the ASU. The ASU does not apply to arrangements for which industry specific
allocation and measurement guidance exists, such as long-term construction
contracts and software transactions. The ASU is effective beginning
January 1, 2011. The Company is currently evaluating the impact of this
standard on the Company’s consolidated results of operations and financial
condition.
In
October 2009, the FASB issued ASU No. 2009-14, Certain Revenue
Arrangements That Include Software Elements—a consensus of the FASB Emerging
Issues Task Force, that reduces the types of transactions that fall within the
current scope of software revenue recognition guidance. Existing software
revenue recognition guidance requires that its provisions be applied to an
entire arrangement when the sale of any products or services containing or
utilizing software when the software is considered more than incidental to the
product or service. As a result of the amendments included in ASU
No. 2009-14, many tangible products and services that rely on software will
be accounted for under the multiple-element arrangements revenue recognition
guidance rather than under the software revenue recognition guidance. Under the
ASU, the following components would be excluded from the scope of software
revenue recognition guidance: the tangible element of the product,
software products bundled with tangible products where the software components
and non-software components function together to deliver the product’s essential
functionality, and undelivered components that relate to software that is
essential to the tangible product’s functionality. The ASU also provides
guidance on how to allocate transaction consideration when an arrangement
contains both deliverables within the scope of software revenue guidance
(software deliverables) and deliverables not within the scope of that guidance
(non-software deliverables). The ASU is effective beginning January 1,
2011. The Company is currently evaluating the impact of this standard on the
Company’s consolidated results of operations and financial
condition.
71
|
q.
|
Recently
adopted accounting pronouncements
|
In
August 2009, the FASB issued ASU No. 2009-05, Measuring Liabilities at Fair
Value, which provides additional guidance on how companies should measure
liabilities at fair value under ASC 820. The ASU clarifies that the quoted price
for an identical liability should be used. However, if such information is not
available, a entity may use, the quoted price of an identical liability when
traded as an asset, quoted prices for similar liabilities or similar liabilities
traded as assets, or another valuation technique (such as the market or income
approach). The ASU also indicates that the fair value of a liability is not
adjusted to reflect the impact of contractual restrictions that prevent its
transfer and indicates circumstances in which quoted prices for an identical
liability or quoted price for an identical liability traded as an asset may be
considered level 1 fair value measurements. The ASU is effective
October 1, 2009. The adoption of this guidance did not have a material
impact on the Company’s consolidated results of operations or financial
condition.
In
September 2009, the FASB issued ASU No. 2009-12, Investments in Certain Entities That
Calculate Net Asset Value per Share (or Its Equivalent), that amends ASC
820 to provide guidance on measuring the fair value of certain alternative
investments such as hedge funds, private equity funds and venture capital funds.
The ASU indicates that, under certain circumstance, the fair value of such
investments may be determined using net asset value (NAV) as a practical
expedient, unless it is probable the investment will be sold at something other
than NAV. In those situations, the practical expedient cannot be used and
disclosure of the remaining actions necessary to complete the sale is required.
The ASU also requires additional disclosures of the attributes of all
investments within the scope of the new guidance, regardless of whether an
entity used the practical expedient to measure the fair value of any of its
investments. This ASU is effective October 1, 2009. The adoption of this
guidance did not have a material impact on the Company’s consolidated results of
operations or financial condition.
In May
2009, the FASB issued SFAS No. 165, “Subsequent Events” (Now ASC 855), which
provides guidance to establish general standards of accounting for and
disclosures of events that occur after the balance sheet date but before
financial statements are issued or are available to be issued. ASC
855 also requires entities to disclose the date through which subsequent events
were evaluated as well as the rationale for why that date was
selected. This disclosure should alert all users of financial
statements that an entity has not evaluated subsequent events after that date in
the set of financial statements being presented. ASC 855 is effective for
interim and annual periods ending after June 15, 2009. The adoption
of this guidance did not have a material impact on the Company’s consolidated
results of operations or financial condition.
NOTE
3. ADVANCES TO SUPPLIERS
Advances
to suppliers represent amounts prepaid for commercial breaks. The advances are
applied against amounts due to the supplier as commercial breaks are
aired.
Advances
consist of the following:
December
31,
|
||||||||
2009
|
2008
|
|||||||
Advances
|
$ | 7,589,725 | 3,032,760 |
NOTE
4. CAPITALIZED FILM COST
Capitalized
film cost consists of:
December 31,
|
||||
2009
|
||||
“Chi
Dan Zhong Xin” television series
|
$ | 2,347,200 | ||
“Xiao
Mo Dou” animation
|
4,474,350 | |||
Total
|
$ | 6,821,550 |
"Chi Dan
Zhong Xin" Television Series
On
January 14, 2009, CD Media Beijing entered into a Cooperation Agreement with a
television production company with respect to the production and distribution of
the television series "Chi Dan Zhong Xin." The total investment for the series
was RMB16,000,000 ($2,347,200), which was fully paid in cash by the Company in
2009. The television production company is in charge of the entire
production of the series. CD Media Beijing supervises the cash
distribution process. The television series was approved by the Chinese Culture
Department in March 2009 and it will be aired in 2010 on China Central
Television. The Company will share the intellectual property rights related to
the series with the production company and will receive 60% of the net profits
generated from the series.
72
On March
26, 2010, CD Media Beijing entered into an agreement to sell its entire interest
in the Chi Dan Zhong Xin television series to an unaffiliated third party for
RMB 16,800,000 ($2,455,830). The purchaser agreed to pay 20% of the
purchase price to CD Media Beijing within five days of the closing of the
agreement, 20% of the purchase price during the quarter ended June 30, 2010, 30%
of the purchase price during the quarter ended September 30, 2010 and the
remaining 30% of the purchase price during the quarter ended December 31, 2010.
CD Media Beijing recognized a gain of $108,630 on this sale.
“Xiao Mo
Dou” Animation Series
On
February 2, 2009, CD Media Beijing entered into a Cooperation Agreement with a
media distribution company and a software development company with respect to
the production and distribution of the animation series “Xiao Mo Dou.” The total
investment for the series was RMB30,500,000 ($4,474,350), which was fully paid
by the Company in 2009. The media distribution company is responsible for the
negotiation of the distribution channels for the series with entities such as
China Mobile, China Unicom and China Telecom, as well as accounting of
production costs and profits. The software company is responsible for
developing “Xiao Mo Dou” and technology that accommodates the series with the
distribution channels. CD Media Beijing is responsible for funding of the
production of the series as well as providing marketing and promotion for the TV
series. Net profits are calculated on a monthly base and are
distributed to the parties to the Cooperation Agreement in accordance with the
following percentages: 35% to the media distribution company, 30% to
the software development company and 35% to CD Media Beijing. If
there is any loss, CD Media Beijing also takes 100% of the loss.
On March
21, 2010, CD Media Beijing entered into an agreement to sell its entire interest
in the Xia Mo Duo television series to an unaffiliated third party for RMB
35,175,000 ($5,143,000) on March 20, 2010. The purchaser agreed to
pay 20% of the purchase price to CD Media Beijing within three days of the
closing of the agreement, 20% of the purchase price during the quarter ended
June 30, 2010, 30% of the purchase price during the quarter ended September 30,
2009 and the remaining 30% of the purchase price during the quarter ended
December 31, 2010. CD Media Beijing recognized a gain of $245,340 on this
sale.
CD Media
Beijing evaluated the unamortized film production costs for impairment as of
December 31, 2009 and determined that no impairment existed related to
capitalized film costs.
NOTE
5. CUSTOMER DEPOSITS
Customer
deposits represent amounts prepaid by the customers for commercial breaks. The
deposits are applied and revenues are recognized as commercial breaks are
aired.
Customer
deposits consist of the following:
December
31,
|
||||||||
2009
|
2008
|
|||||||
Customer
Deposit
|
$ | 1,776,364 | $ | 225,531 |
NOTE
6. RELATED PARTY BALANCE AND TRANSCATIONS
During
the year ended December 31, 2006, Mr. Haiming Fu, the General Manager of CD
Media, advanced RMB3,250,000 (USD415,734) to the Company. The shareholder loan
was free of interest with no maturity date. The balance was paid off by the
Company during the year ended December 31, 2007.
The
Company also leased an office space from a related party. During the years ended
December 31, 2009 and 2008, the Company paid rent in the amount of RMB210,000
(USD30,272) and RMB900,000 (USD125,698), respectively.
NOTE
7. INCOME TAX
CD Media
HZ was established in Huizhou, PRC, was entitled to a preferential Enterprise
Income Tax (”EIT”) rate. CD Media HZ had applied for foreign investment
Enterprise title, subject to tax at a statutory rate of 25%.
73
CD Media
Beijing is governed by the Income Tax Law of the PRC concerning the private-run
enterprises, which are generally subject to tax at a statutory rate of 25%, 25%
and 33% on income reported in the statutory financial statements after
appropriate tax adjustments in 2009, 2008 and 2007, respectively
The
provision for taxes on earnings consisted of:
December
31,
|
||||||||||||
2009
|
2008
|
2007
|
||||||||||
Income
before income taxes
|
$ | 12,043,469 | $ | 6,140,037 | $ | 1,825,378 | ||||||
Current
income taxes expenses:
|
||||||||||||
PRC
Enterprises Income Taxes:
|
(3,033,384 | ) | (1,535,009 | ) | (602,375 | ) | ||||||
United
States Federal Income Taxes
|
- | - | - | |||||||||
Income
Taxes (at 25%, 25% and 33% respectively)
|
$ | (3,033,384 | ) | $ | (1,535,009 | ) | $ | (602,375 | ) |
A
reconciliation between the income tax computed at the U.S. statutory rate and
the Group’s provision for income tax is as follows:
2009
|
December
31,
2008
|
2007
|
||||||||||
U.S.
statutory rate
|
34 | % | 34 | % | 34 | % | ||||||
Foreign
income not recognized in the U.S.
|
-34 | % | -34 | % | -34 | % | ||||||
PRC
preferential enterprise income tax rate
|
25 | % | 25 | % | 33 | % | ||||||
Provision
for income tax
|
25 | % | 25 | % | 33 | % |
Accounting for Uncertainty
in Income Taxes
On
January 1, 2007, the Company adopted new accounting rules which address the
determination of whether tax benefits claimed or expected to be claimed on a tax
return should be recorded in the financial statements. The provisions clarify
the accounting for uncertainty in income taxes recognized in an enterprise’s
financial statements, and prescribes a recognition threshold and measurement
process for financial statement recognition and measurement of a tax position
taken or expected to be taken in a tax return. These provisions also provide
guidance on de-recognition, classification, interest and penalties, accounting
in interim periods, disclosure and transition.
Based on
the Company’s evaluation, the Company has concluded that there are no
significant uncertain tax positions requiring recognition in its financial
statements.
NOTE
8. STATUTORY RESERVES
As
stipulated by the relevant laws and regulations for enterprises operating in
PRC, the subsidiaries of the Company are required to make annual appropriations
to a statutory surplus reserve fund. Specifically, the subsidiaries of the
Company are required to allocate 10% of their profits after taxes, as determined
in accordance with the PRC accounting standards applicable to the subsidiaries
of the Company, to a statutory surplus reserve until such reserve reaches 50% of
the registered capital of the subsidiaries of the Company.
NOTE
9. COMMITMENTS AND CONTINGENCIES
Lease
Obligation
The
Company has entered into a tenancy agreement for the lease of office premises.
The Company’s commitments for minimum lease payments under these non-cancelable
operating leases for the next year are as follows:
Payments due by Period (in $)
|
||||||||||||||||||||
Contractual Obligations
|
Total
|
Less Than
1 Year
|
1 - 3
Years
|
3 - 5
Years
|
More Than
5 Years
|
|||||||||||||||
Operating
Lease Obligations
|
$ | 298,970 | $ | 230,796 | $ | 68,174 | $ | - | $ | - | ||||||||||
Total
|
$ | 298,970 | $ | 230,796 | $ | 68,174 | $ | - | $ | - |
74
NOTE
10. OPERATING RISKS
Country
risk
The
Company has significant operations in the PRC. The operating results of the
Company may be adversely affected by changes in the political and social
conditions in the PRC and by changes in Chinese government policies with respect
to laws and regulations, anti-inflationary measures, currency conversion and
remittance abroad, and rates and methods of taxation, among other things. The
Company can give no assurance that those changes in political and other
conditions will not result in have a material adverse effect upon the Company’s
business and financial condition.
Exchange
risk
The
Company can not guarantee the Renminbi, Hong Kong dollar and US dollar exchange
rate will remain steady, therefore the Company could post the same profit for
two comparable periods and post higher or lower profit depending on exchange
rate of Renminbi, Hong Kong dollar and US dollar. The exchange rate could
fluctuate depending on changes in the political and economic environments
without notice.
Political
risk
Currently,
PRC is in a period of growth and is openly promoting business development in
order to bring more business into PRC. Additionally PRC currently allows a
Chinese corporation to be owned by a United States corporation. If the laws or
regulations relating to ownership of a Chinese corporation are changed by the
PRC government, the Company's ability to operate the PRC subsidiaries could be
affected.
NOTE
11. CONCENTRATION OF CREDIT RISK
A
significant portion of the Company’s cash at December 31, 2009 and 2008 was
maintained at various financial institutions in the PRC which do not provide
insurance for amounts on deposits. The Company has not experienced
any losses in such accounts and believes it is not exposed to significant credit
risk in this area.
The
Company operates principally in the PRC and grants credit to its customers in
this geographic region. Although the PRC is economically stable, it is always
possible that unanticipated events in foreign countries could disrupt the
Company’s operations.
For the
year ended December 31, 2009, no customer had net sales exceeding 10% of the
Company’s total net sales of the year. For the year ended December 31, 2008, one
customer had net sales exceeding 10% of the Company’s total net sales of the
year. For year ended December 31, 2007, one customer had net sales exceeding 10%
of the Company’s total net sales of the year.
For the
year ended December 31, 2009, no vendor had net purchases exceeding 10% of the
Company’s total net purchases of the year. For the year ended December 31, 2008,
one vendor had net purchases exceeding 10% of the Company’s total net purchases
of the year. For year ended December 31, 2007, two vendors had net purchases
exceeding 10% of the Company’s total net purchases of the year.
NOTE
12. SUBSEQUENT EVENTS
On March
30, 2010, CD Media HZ and CD Media Beijing entered into an Exclusive Business
Cooperation Agreement which entitles CD Media HZ to substantially all of the
economic benefits of CD Media Beijing in consideration for services provided by
CD Media HZ to CD Media Beijing. In addition, CD Media HZ entered
into certain agreements with each of Xu Wen, Cheng Yongxia and Zheng Hongbo (the
“CD Media Beijing Shareholders”), including Exclusive Option Agreements allowing
CD Media HZ to acquire the shares of CD Media Beijing when permitted by PRC
laws, Powers of Attorney that provide CD Media HZ with the voting rights of the
CD Media Beijing Shareholders and Equity Interest Pledge Agreements that pledge
the shares in CD Media Beijing to CD Media HZ. Effective control over CD Media
Beijing was transferred to CD Media HZ through these series of contractual
arrangements without transferring legal ownership in CD Media Beijing to CD
Media HZ (the “Reorganization”). As a result of the Reorganization, CD Media
Beijing because a VIE and therefore CD Media BVI consolidates CD Media
Beijing.
75
On April
23, 2010, the Company entered into an Amended and Restated Share Exchange
Agreement with SRKP 25, Inc., a Delaware corporation, CD Media HZ, CD Media
Beijing and all of the shareholders of the Company. Upon closing the closing of
the share exchange transaction on April 30, 2010, the equity owners of the
Company delivered all of their shares in the Company to SRKP 25, Inc. in
exchange for 19,100,000 shares of common stock of SRKP 25, Inc. The transaction
was accounted for as a reverse merger and recapitalization whereby the Company
is the accounting acquirer. Upon completion, SRKP 25, Inc. had 25,312,667
shares of common stock and warrants to purchase 1,419,333 shares of common
stock issued and outstanding. The warrants have an exercise price of
$0.0001 and expire five years from the closing of the share exchange
transaction. Of the 25,312,667 shares issued and outstanding as of the
closing of the share exchange, 2,646,000 were held by the former
shareholders of SRKP 25, Inc. 19,100,000 shares or approximately 75.5% of the
outstanding shares of common stock upon the closing of the share exchange, were
held by the equity owners of the Company. The Company became a wholly owned
subsidiary of SRKP 25, Inc. upon the closing of the share exchange on April 30,
2010.
The
Company has evaluated all subsequent events through May 6, 2010, the date of
this report.
76
Item
9.01 (d) Exhibits:
Exhibit No.
|
Exhibit Description
|
|
2.1
|
Amended and Restated Share
Exchange Agreement, dated as of April 14, 2010, by and among the
Registrant, CD Media (Holding) Co., Limited, the shareholders of CD Media
BVI, Huizhou CD
Media Co., Ltd., and Beijing CD Media Advertisement Co.,
Ltd.
|
|
3.1
|
Certificate of Incorporation
(incorporated by reference from Exhibit 3.1 to the Registration Statement
on Form 10-SB (File No. 000-53021) filed with the Securities and Exchange
Commission on January 16, 2008).
|
|
3.2
|
Bylaws (incorporated by reference
from Exhibit 3.2 to the Registration Statement on Form 10-SB (File No.
000-53021) filed with the Securities and Exchange Commission on January
16, 2008).
|
|
3.3
|
Articles of Merger effecting name
change filed with the Office of Secretary of State of Delaware on April
30, 2010.
|
|
4.1
|
Form
of Warrant (incorporated by reference from Exhibit 4.1 to the Registration
Statement on Form 10-SB (File No. 000-53021) filed with the Securities and
Exchange Commission on January 16, 2008).
|
|
10.1
|
Registration Rights Agreement
dated April 30, 2010 entered into by and between the Registrant and
Stockholders.
|
|
10.2
|
Amended and Restated Share and
Warrant Cancellation Agreement dated April 23, 2010 entered into by and
between the Registrant and Stockholders.
|
|
10.3
|
Form
of Subscription Agreement by and between the Company, CD Media BVI and the
investors.
|
|
10.4
|
Form of Employment Agreement
entered into with executive officers indicated in Schedule A attached to
the Form of Agreement (translated to
English).
|
|
10.5
|
Exclusive
Cooperation Agreement dated as of March 30, 2010 by and among CD Media HZ
and CD Media.
|
|
10.6
|
Form
of Exclusive Option Agreement dated March 30, 2010 entered into with the
individuals indicated in Schedule A attached to the Form of
Agreement.
|
|
10.7
|
Form
of Power of Attorney dated March 30, 2010 entered into with the
individuals indicated in Schedule A attached to the Form of
Agreement.
|
|
10.8
|
Form
of Equity Pledge Agreement dated March 30, 2010 entered into with the
individuals indicated in Schedule A attached to the Form of
Agreement.
|
|
16.1
|
Letter
from AJ. Robbins, PC to the Securities and Exchange Commission dated May
6, 2010.
|
|
21.1
|
List
of Subsidiaries.
|
77
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.
China
Century Dragon Media, Inc.
|
|||
Date:
May 6, 2010
|
|||
By:
|
/s/ Li Hui Hua
|
||
Name: Li
Hui Hua
|
|||
Title:
Chief Executive Officer
|
78