UNITED STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
DC 20549
FORM
8-K/A
Amendment
No. 1
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
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000-53021
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26-1583852
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(State
or Other Jurisdiction
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(Commission
File Number)
|
(IRS
Employer Identification No.)
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of
Incorporation)
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Room 801, No. 7, Wenchanger Road, Jiangbei, Huizhou City, Guangdong Province, China
|
(Address,
including zip code, off principal executive
offices)
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Registrant’s
telephone number, including area code 0086-0752-3138789
SRKP
25, INC.
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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):
¨ Written
communications pursuant to Rule 425 under the Securities Act (17 CFR
230.425)
¨ Soliciting
material pursuant to Rule 14a-12 under the Exchange Act (17 CFR
240.14a-12)
¨ Pre-commencement
communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR
240.14d-2(b))
¨ Pre-commencement
communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR
240.13e-4(c))
EXPLANATORY
NOTE
This
Amendment No. 1 on Form 8-K/A (this “Amendment”) is being
filed as required by the Securities and Exchange Commission’s interpretive
guidance on post-acquisition reporting in accordance with Rule 13a-1 and Rule
13a-13 of the Securities and Exchange Act of 1934, as amended. Our current
report on Form 8-K filed on May 6, 2010 (the “Original Filing”), which disclosed
the closing of the Share Exchange was filed within 135 days of the end of the
fiscal year ended December 31, 2009 of CD Media (Holding) Co., Limited, a
British Virgin Islands corporation (the predecessor company). As the Form
8-K did not include the interim financial statements of our predecessor company
for the three months ended March 31, 2010, the interpretive guidance requires us
to file such interim financial statements in an amendment. Accordingly, this
Amendment has been updated to include, among other things, the interim financial
statements of the predecessor company as of and for the three months ended March
31, 2010 and the corresponding changes to the disclosure under the section
entitled Management’s Discussion and Analysis. In addition, this Amendment
contains changes needed pursuant to comments received from the Commission’s
review of the Company’s registration statement on Form S-1 (File No.
333-166866). Only Items 2.01, 2.02, 5.01 and 9.01 have been amended and
restated in this Amendment and this Amendment continues to describe conditions
as of the date of the Original Filing, and the disclosures contained herein have
not been updated to reflect events, results or developments that have occurred
after the Original Filing, or to modify or update those disclosures affected by
subsequent events unless otherwise indicated in this report. This Amendment
should be read in conjunction with the Original Filing and the Company’s filings
made with the SEC subsequent to the Original Filing, including any amendments to
those filings.
2
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.
CORPORATE
STRUCTURE
The corporate structure of the Company
is illustrated as follows:
3
Our
subsidiary, CD Media (HK) Limited (“CD Media HK”), is a holding company with no
operations at this time. Its operations are not subject to PRC laws and
regulations.
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. Our PRC
subsidiary, CD Media Huizhou, is a wholly foreign-owned enterprise (a
“WFOE”).
4
Pursuant to the Exclusive Business
Cooperation Agreement (as described below) between CD Media Huizhou, CD Media
Beijing and each of the shareholders of CD Media Beijing, CD Media Huizhou
provides “technical and consulting services” to CD Media Beijing.
“Technical and consulting services” is a general description of the various
services provided by CD Media Huizhou to CD Media Beijing, and include providing
cultural consulting to and designing enterprise images for CD Media
Beijing. CD Media Huizhou received a business license on November 2, 2009
which permits it to design, handle (as agent) and organize cultural
communications (excluding news releases and making advertisements), to provide
cultural consulting services and to design images for enterprises. The
license does not allow it to provide advertising services, the approval
authority of which business is with the competent administration of industry and
commerce. The scope of CD Media Huizhou’s business license is extensive
enough in its language to cover any necessary services to be provided by CD
Media Huizhou to CD Media Beijing under the Exclusive Business Cooperation
Agreement, and CD Media Huizhou does not need any special administrative
pre-approvals for it to engage in such activities, as long as it does not
directly engage in advertising business which is not stated in its business
license.
Due to the PRC regulations on foreign
ownership of PRC companies engaged in the Chinese advertising industry, we
cannot directly operate our advertising business through CD Media Huizhou.
Therefore, we operate our advertising operations through contractual
arrangements with CD Media Beijing.
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 an annual
service fee to CD Media Huizhou in an amount equal to a certain percentage (the
“Rate of Service”) of its income for such year. The parties will agree on
the Rate of Service after further negotiations, which may be adjusted from time
to time. 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.
The annual service fee and Rate of
Service has not yet been determined because (1) such fee is calculated based on
the audited annual income of CD Media Beijing, which can only be determined
after the completion of the annual audit of CD Media Beijing; and (2) it allows
CD Media Huizhou and CD Media Beijing to adjust the amount of funds distributed
from CD Media Beijing to CD Media Huizhou from time to time based on the
operational results of and financial needs of CD Media Beijing and CD Media
Huizhou. The parties will determine the amount of the service fee annually
based on the a variety of factors, including CD Media Beijing’s net profits and
CD Media Beijing’s working capital needs. The fee will also be structured
to assure that CD Media Beijing complies with PRC Corporate Law, which requires
a company organized in the PRC to set aside at least 10.0% of its after-tax net
profits based on PRC accounting standards each year to its statutory reserves
until the accumulative amount of such reserves reaches 50.0% of its registered
capital. Because each of the shareholders of CD Media Beijing has provided
a power of attorney (as described below) in which he/she provides CD Media
Huizhou the power to act as his/her exclusive agent with respect to all matters
related to his/her ownership of the equity interest in CD Media Beijing, CD
Media Huizhou alone may decide whether to defer payment of the annual service
fee
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. To the extent permitted
by the PRC laws, 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 without limitation to:
1) attend the shareholders’ meetings of CD Media Beijing; 2) exercise all
the shareholder's rights and shareholder's voting rights, including the sale,
transfer, pledge or disposition of such shareholder’s shareholding in part or in
whole; and 3) designate and appoint on behalf of such shareholders the legal
representative, the executive director and/or director, supervisor, the chief
executive officer and other senior management members of CD Media
Beijing.
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.
5
In the
opinion of Han Kun Law Offices, our PRC legal counsel:
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·
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the
ownership structure of CD Media Beijing and CD Media Huizhou complies with
current PRC laws, rules and
regulations;
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·
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each
agreement under our contractual arrangements with CD Media Beijing and its
shareholders is valid and binding on all parties to these arrangements,
and do not violate current PRC laws, rules or regulations;
and
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·
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the
business operations of CD Media Huizhou and CD Media Beijing comply with
current PRC laws, rules and
regulations.
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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 because contracts governed by PRC
law are interpreted using a “substance-over-form” principle which prohibits such
parties from using their contractual arrangements in legal form to violate the
compulsory rules of PRC laws and regulations or to cover up any illegal
purpose. Although none of the agreements comprising the contractual
arrangements described above does by itself violate PRC laws and regulations,
the PRC regulatory authorities may, by taking them as a whole, view the
structure established by the contractual arrangements as done to avoid the
application of certain restrictions or requirements on foreign investment in the
PRC advertising industry and determine such structure to be in violation of the
“substance-over-form” principle. However, our PRC counsel believes that
the uncertainty surrounding its opinions and the likelihood that the PRC
regulatory authorities would view the contractual arrangements as violating the
“substance-over-form” principle is low due to (i) the fact that many other
comparable companies have used similar contractual arrangements to establish a
similar corporate structure for the successful registration of their securities
with the SEC and listing of their securities on a U.S national securities
exchange and (ii) the lack of practical procedures and standards of penalties or
sanctions for the competent PRC authorities to take against the Company by
challenging the legal basis of the contractual arrangements based on the
“substance-over-form” principle. Additionally, due to the vagueness and
uncertainty surrounding PRC laws and regulations, the PRC authorities may issue
new rules and regulations that could be applied retroactively and may overturn
our PRC legal counsel’s opinion. Neither we nor our PRC legal counsel can
predict whether and when PRC government authorities will issue any such new
rules and regulations.
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. If CD Media Beijing or the
shareholders of CD Media Beijing 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 and 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. For further information on the
risks related to our contractual arrangement, see “Risk Factors.”
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.
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 19,031,500 shares of common stock to the
shareholders of CD Media BVI and 68,500 shares to Richever Limited, their
designee and in exchange for all of the issued and outstanding shares of CD
Media BVI. Richever Limited is an unaffiliated third party who was not a
shareholder of CD Media BVI prior to the Share Exchange. The shareholders
issued such shares to Richever Limited to satisfy an obligation owed to a
partner of its PRC legal counsel, Han Kun Law Offices (“Han Kun”), who had
personally paid an amount owed by the Company to Han Kun for legal
services.
6
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.
Each warrant is entitled to purchase one share of our common stock at $0.0001
per share and expires five years from the closing of the Share Exchange.
Immediately after the closing of the Share Exchange and closing of the Private
Placement, we had 25,312,838 outstanding shares of common stock, no shares of
Preferred Stock, no options, and warrants to purchase 1,419,333 shares of common
stock. The stockholders did not receive any consideration for the
cancellation of the shares and warrants. The cancellation of the shares
and warrants was accounted for as a contribution to capital.
The
number of shares and warrants cancelled was determined based on negotiations
with the securityholders of SRKP 25 and CD Media BVI. The number of shares
and warrants cancelled by SRKP 25 was not pro rata, but based on negotiations
between the security holders and SRKP 25. As indicated in the Share
Exchange Agreement, the parties to the transaction acknowledged that a conflict
of interest existed with respect to the negotiations for the terms of the Share
Exchange due to, among other factors, the fact that WestPark Capital, Inc.
(“WestPark Capital”) was advising CD Media BVI in the transaction. As
further discussed below, certain of the controlling stockholders and control
persons of WestPark Capital were also, prior to the completion of the Share
Exchange, controlling stockholders and control persons of SRKP 25. Under
these circumstances, the shareholders of CD Media BVI and the stockholders of
SRKP 25 negotiated an estimated value of CD Media BVI and its subsidiaries, an
estimated value of the shell company (based on similar recent transactions by
WestPark Capital involving similar public shells), and the mutually desired
capitalization of the company resulting from the Share Exchange.
With
respect to the determination of the amounts of shares and warrants cancelled,
the value of the shell company was derived primarily from its utility as a
public company platform, including its good corporate standing and its timely
public reporting status, which we believe allowed us to raise capital at an
appropriate price per share and subsequently list our stock on a national
securities exchange. We believe that investors may have been unwilling to
invest in our company in the Private Placement (as that term is defined below)
on acceptable terms, if at all, in the absence of an investment in a public
reporting vehicle and thus required us to effect the Share Exchange as a
condition to the Private Placement. We did not consider registering our
own securities directly as a viable option for accessing the public
markets. We felt that private financing absent a reverse merger was not
immediately available to us and we chose the structure offered by WestPark as
the best option to becoming publicly listed on a national securities
exchange.
The
services provided by WestPark Capital were not a consideration in determining
this aspect of the transaction. Under these circumstances and based on
these factors, the shareholders of CD Media BVI and the stockholders of SRKP 25
agreed upon the amount of shares and warrants to be cancelled. Further to
such negotiations, 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. All of the fees due to WestPark Capital in
connection with the Share Exchange have been paid.
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.
7
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 3,566,838
shares of common stock at $1.50 per share, for gross proceeds of approximately
$5.35 million.
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 (“Keen Dragon”)
for services as an advisor to the Company. Keen Dragon conducts advisory
services exclusively for Chinese companies and is paid directly by such Chinese
companies. It provides on-the-ground support that WestPark Capital cannot
provide for Chinese entities seeking to access the U.S. capital markets, employs
only Mandarin speakers and helps bridge the cultural gap for many Chinese
entities in the same type of deals. WestPark Capital does not pay Keen
Dragon referral fees or other consideration for providing services to the
Company. There neither are nor were any arrangements between WestPark
Capital and Keen Dragon regarding their representation of, or services provided
to, the Company. We conducted the Private Placement in order to raise money for
working capital and a contemplated public offering of our equity
securities.
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.
8
Some of
the controlling stockholders and control persons of WestPark Capital were also,
prior to the completion of the Share Exchange, controlling stockholders and
control persons of SRKP 25, Inc., our predecessor, including Richard Rappaport,
who is the Chief Executive Officer of the WestPark Capital and was the President
and a significant stockholder of SRKP 25, Inc. prior to the Share Exchange, and
Anthony C. Pintsopoulos, who is the President and Treasurer of WestPark Capital
and was one of the controlling stockholders and an officer and director of SRKP
25, Inc. prior to the Share Exchange. Mr. Rappaport is the sole owner of
the membership interests in the parent of WestPark Capital. Kevin
DePrimio, Robert Schultz and Jason Stern, each employees of WestPark Capital,
were also stockholders of SRKP 25, Inc. and are also our stockholders.
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. Mr. Rappaport beneficially owns approximately 11.5% of our outstanding shares as
of the closing of the Share Exchange, and Messrs. Rappaport, Pintsopoulos,
DePrimio, Schultz and Stern collectively beneficially own approximately 13.2% of
our outstanding shares as of 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.
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. 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, including
advertising rights to a number of daily television programs 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.
These companies accounted for 2.3%, 3.4%, 4.7% and 5.1%, respectively, of our
total revenues for the year ended December 31, 2009.
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.
9
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.
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.
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 consulting services
team assists clients to integrate market resources, design their television
advertisements, find partners to assist them with the actual production of their
commercials and design and package content for public service announcements. 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.
10
Diversified customer base
During the year ended December 31,
2009, we had over 150 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 consulting 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.
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 consulting 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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strengthening
relationships with our existing clients to increase the rate of renewals
of contracts and cross-promoting our production consulting services to our
advertising agency services clients;
and
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exploring
new opportunities for expanding our production consulting service
offerings to new and existing
clients.
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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.
11
Enhance our production consulting
services and begin providing production services
We currently offer production
consulting services pursuant to which we help our clients to integrate market
resources, design their television advertisements, find partners to assist them
with the actual production of their commercials and design and package content
for public service announcements. We plan to actively market our production
consulting 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 also intend to begin providing production services by opening a
production studio which will allow us to shoot commercial television
advertisements and public service announcements for clients in China. Upon
further expansion of the scope of our business license, 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. We are currently not able to
produce proprietary television programming until we expand the scope of our
business license, which does not allow us to produce such programming. While we
have no experience in providing production services or directly producing
proprietary television programming, we have in the past, through CD Media
Beijing, been involved in the production of a television series, “Chi Dan Zhong
Xin,” pursuant to a cooperation agreement with a television production company,
under which we supervised the cash distribution process for the series. We were
also involved in the production of an animation series, “Xiao Mo Dou,” pursuant
to a cooperation agreement with a media distribution company and a software
development company, under which we were responsible for funding, marketing and
promoting the series. Our supervision of the cash distribution
process for the Chi Dan Zhong Xin series and our funding, marketing and
promotion of the Xiao Mo Dou series did not constitute production work of
television series which would require expansion of the scope of business license
of CD Media Beijing, but was within the scope of CD Media Beijing’s business
license because CD Media Beijing’s provision of support services for these
series is not prohibited by its license. CD Media Beijing was never the
registered copyright owner of either of the two television series, but its
interests in these two television series were limited to economic rights based
on the relevant cooperation agreements, including the rights to receive certain
percentages of the profits deriving from the series. CD Media Beijing’s
economic interest in such productions did not violate its business license
because CD Media Beijing did not directly perform any production services.
We do not have any specific plans regarding our expansion into production
services and are currently unsure of when we will begin to provide such services
or open a production studio.
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.
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 mainly 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 wholesale 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.
For 2009, the largest third-party agent
suppliers to the Company are Beijing Qidi Xingye Advertisement Company Ltd.,
Beijing All TV Advertisement Company Ltd., Beijing Kuanshi Shentong
Advertisement Company Ltd. and SRX Media and Advertisement Company Limited,
which accounted for 4.8%, 6.8%, 5.1% and 8.2%, respectively, of our purchases of
advertising time during the year ended December 31, 2009. For 2008, the
largest third-party agent suppliers to the Company are Beijing Qidi Xingye
Advertisement Company Ltd, Beijing Yinsong Advertisement and Arts Company Ltd,
Beijing Oriental Bojie Advertisement Company Ltd and Beijing Benzou Xianggao
Advertisement Company ltd, which accounted for 11.8%, 9.7%, 9.0% and 8.0%,
respectively, of our purchases of advertising time during the year ended
December 31, 2008. For 2007, the largest third-party agent suppliers to the
Company are Beijing Qidi Xinye Advertisement Company Ltd, Beijing Yinshong
Advertisement and Arts Company Ltd, ZBeijing Shijie Global Advertisement Center
and Beijing Yinshan Creative Advertisement Company ltd, which accounted
for 28.9%, 13.4%, 7.2% and 5.7%, respectively, of our purchases of advertising
time during the year ended December 31, 2007.
12
We are required to make advances for
our future purchases from vendors. At first, these advances are deposits.
They are then used as advances for purchases of specific blocks of advertising
time. We are committed to pay the balance, usually prior to the scheduled
broadcast. We use these advances as consideration to buy advertising time based
on what we believe would be desirable to our advertising customers. At year-end,
we also make advances to our vendors which do not correspond to any specific
advertising time slots. These advance payments represent a formal commitment
evidencing our future intention to purchase time slots from these vendors. These
advance payments will be applied when we identify and purchase specific blocks
of advertising time. At year-end, it is our normal business practice that we pay
larger unspecified advance payments to our vendors to indicate our intention to
do business with them in the forthcoming year and to secure the opportunity to
buy the most desirable time slots from them.
The practice of paying supplier
advances has been the key part of building a trusted business relationship with
our suppliers. Our advances represent our commitment to purchasing television
commercial time slots in the next few months from suppliers since the advances
are not refundable. Suppliers are more confident in setting aside time slots for
us for our future purchases after receiving advances from us. The advances
also demonstrate our capability to pay. While we do not obtain any legal rights
from our suppliers for our advances, we obtain advantages from the suppliers to
lock up favorable time slots time slots in advance, as compared to other
companies which do not pay advances. By paying advances, we sometimes also
obtain price reduction incentives from our suppliers, which are determined after
negotiations with the supplier when we make our final purchases of time slots
with our advances.
Our purchases of advertising time are
seasonal in nature. We purchase more advertising time during the first and
last quarters of the fiscal year due to Chinese New Year, which occurs during
the first quarter. Advertisers tend to purchase more television
advertising time during the first and fourth quarters each year in order to gain
greater exposure to consumers prior to and during Chinese New Year, during which
time consumers increase their purchases and spending. In addition,
we do not restrict our advertising purchases to a set schedule and instead
conduct purchases throughout the year based on an evaluation of our and our
customers’ need, not on actual orders received from customers.
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 enter into contracts with our
advertiser clients, which specify the advertising package, the time slots or the
programs within which advertisements will be broadcast and the relevant price
for the advertising package. 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 typical 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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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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The packages above are examples of our
typical packages that we offer throughout the year. We constantly evaluate
our customer needs and preferences and will adjust our packages
accordingly.
The advertising time that we purchase
changes from year to year and each year we purchase advertising time during
different programs. We purchase certain time slots prior to the start of
each quarter and package the time as described above for our regular
clients. Also, during the year we allow ourselves lead time to make
purchases and re-package the time prior to sale to our clients. We change
our packages yearly depending on the advertising time that we purchase.
Our purchases are not restricted to a set time schedule or content; instead we
conduct purchases throughout the year based on an evaluation of our and our
customers’ need.
Production
Consulting Services
We currently provide a small amount of
production consulting services, in which we help our clients to integrate market
resources, design their television advertisements, find partners to assist them
with the actual production of their commercials and design and package content
for public service announcements. We currently provide these services to
our existing customers who purchase advertising time from us.
Our
Customers
We have more than 150 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 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 clients
operate:
14
Industry
|
Percentage of Total
Revenues in the
three months ended
March 31, 2010
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Percentage of Total
Revenues in the
year ended
December 31, 2009
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Food
and beverages
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27.0 | % | 7.9 | % | ||||
Household
products and electronic appliances
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12.1 | % | 28.7 | % | ||||
Pharmaceuticals
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26.0 | % | 16.9 | % | ||||
Cosmetics
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12.9 | % | 5.1 | % | ||||
Fashion
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7.7 | % | 20.6 | % | ||||
Gold
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5.2 | % | 6.1 | % | ||||
Paper
and tissue
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- | 7.3 | % | |||||
Telecommunications
and information technology
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- | 2.1 | % | |||||
Others
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9.1 | % | 5.3 | % | ||||
Total
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100.0 | % | 100.0 | % |
For the three months ended March 31,
2010 and 2009, our top five customers accounted for 33.9% and 30.6% of our total
revenues, respectively. None of our customers during the three months
ended March 31, 2010 accounted for more than 10% of our revenues for the
period. 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.
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.
15
Competition
The advertising industry in China is
very competitive and highly fragmented. Due to the highly fragmented
nature of the industry, we cannot accurately determine our share of the
television advertising market in the PRC. 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. 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 March 31, 2010, we had
approximately 114 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 were approximately $4,903
and $3,381 for the three months ended March 31, 2010 and 2009, respectively, and
$13,385 and $13,270 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.
Under PRC laws, we 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.
16
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.
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 a 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
trademarks 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.
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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 is 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$775 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.
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 selling
television advertising time slots to advertising clients 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’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.
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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.
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 collectively accounted for 28.6%, 22.2%, 20.1%, 30.5% and 49.5% of our
total purchases of advertising time during the three months ended March 31, 2010
and 2009 and the years ended December 31, 2009, 2008 and 2007, respectively. For
the three months ended March 31, 2010, we had no suppliers who each accounted
for more than 10% of our total purchase of advertising time during the period.
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.
We
make advances to our suppliers which do not correspond with specific advertising
time slots and if we do not use the entire amount of such advances to purchase
specific advertising time slots within one year of making an advance, we will
lose the amount of any unused advance.
We make advances to our suppliers which
do not correspond to specific advertising time slots. These advances are
deposits which we later use to purchase specific time slots from our
suppliers. At each year-end, we make large advances to our suppliers to
show our future intent to purchase time slots from our suppliers in the next
year. As of March 31, 2010 and December 31, 2009, we had outstanding
advances of $0.8 million and $7.6 million, respectively, which were not
allocated to specific time slots. While these advances provide us with
certain advantages, such as the ability to purchase favorable time slots from
our suppliers, we do not receive any legal rights from making such
advances. The advances are non-refundable and we will lose the
amount of any advance with which we do not purchase specific time slots within
one year of making such advance. While we strive to predict accurately the
amount of advertising time we will need in the coming year when making our
year-end advances, we cannot assure you that we will accurately be able to
predict our need for advertising timeslots. If we fail to predict
accurately our need for advertising time slots and pay advances to our suppliers
in excess of our actual need for advertising time slots, we will lose any unused
advances. The loss of a large portion of our advances could negatively
affect our ability to purchase advertising time in the future, and could have a
negative impact on our results of operations and financial
condition.
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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
when we make the purchase of the advertising time. We then charge our
customers a premium for the advertising time slots. 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 gross profits
and 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 third parties 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.
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.
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 35.2%, 47.7% and
61.1% 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.
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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 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 such clients, 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.
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 advertising 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.
23
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.
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.
24
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:
·
|
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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·
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the
ability to achieve anticipated synergies, including with respect to
complementary products or services;
and
|
|
·
|
the
availability of management resources to oversee the integration and
operation of the acquired
businesses.
|
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.
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.
25
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.
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.
26
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. Our wholly-owned subsidiary CD Media BVI has not engaged in any
advertising operations outside of the PRC and, therefore, is unable to make
direct investments in or establish enterprises in the advertising industry in
China. As a result, our PRC subsidiary, CD Media Huizhou cannot directly
provide advertising services in the PRC. 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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·
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ending
or restricting any transactions among CD Media Huizhou and CD Media
Beijing;
|
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·
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imposing
fines;
|
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·
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confiscating
our, CD Media Huizhou’s or CD Media Beijing’s
income;
|
|
·
|
imposing
restrictions on our operations with which we may be unable to
comply;
|
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·
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requiring
us to restructure our corporate structure or operations;
or
|
|
·
|
restricting
or prohibiting the use of any proceeds of an offering of our securities to
finance our operations in the PRC.
|
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.
If (i) the applicable PRC authorities
invalidate these contractual arrangements for violation of PRC laws, rules and
regulations, (ii) CD Media Beijing or its shareholders terminate 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.
27
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 interest and other penalties to CD Media Beijing for
underpaid taxes. The late payment interest will be charged against the underpaid
taxes during the period from June 1 of the next year to the year the taxable
event occurs to the date the underpaid taxes are made up, and will be charged by
day. The daily rate is the then current base rate for RMB loans published
by the People’s Bank of China plus 5%. 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 interest or other penalties.
We
rely principally on dividends and other distributions on equity paid by our
wholly-owned subsidiary to fund any cash and financing requirements we may have,
and any limitation on the ability of our 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 subsidiary, for our cash requirements, including the funds
necessary to service any debt we may incur or for operating a public company. CD
Media Huizhou’s sole operations consist of providing technical and consulting
services to CD Media Beijing pursuant to the contractual arrangements and all of
CD Media Huizhou’s revenue is generated from the service fees paid to it by CD
Media Beijing pursuant to the contractual arrangements. As all of CD Media
Huizhou’s revenues consist of the annual service fee that CD Media Beijing pays
to CD Media Huizhou pursuant to the contractual arrangements, the amount of cash
that CD Media Huizhou has to distribute to us is entirely dependent on the
operations of CD Media Beijing and the amount of annual service fee, which can
vary from time to time. The payment of the service fee can be delayed by
the Company, which could negatively affect its cash and financing
requirements.
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 profit each
year to fund specific reserve funds. These reserves are not distributable as
cash dividends. The statutory general reserve fund requires annual
appropriations of 10% of after-tax profit 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.
28
CD
Media Huizhou may not receive any cash from the operations of CD Media Beijing
with which it has contractual arrangements.
All of CD Media Huizhou’s revenue
consists of the service fees derived from the exclusive business cooperation
agreement under the contractual arrangements that CD Media Huizhou has with CD
Media Beijing. The amount of annual service fee to CD Media Huizhou is to
be determined by the parties based on the audited annual revenue of CD Media
Beijing and the Rate of Service payable under the exclusive business cooperation
agreement which is adjustable from time to time by the parties. It is
possible that CD Media Huizhou and CD Media Beijing may decide to have CD Media
Beijing retain all or most of its annual after-tax profit and cause CD Media
Huizhou to receive no cash from CD Media Beijing. Given that CD Media
Huizhou has been vested with and may exercise the shareholder’s rights of all
shareholders of CD Media Beijing pursuant to the power of attorney under the
contractual arrangements between CD Media Huizhou and CD Media Beijing, CD Media
Huizhou can alone decide the Rate of Service and the amount of cash to be
received from CD Media Beijing pursuant to the exclusive business cooperation
agreement.
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:
·
|
levying
fines;
|
·
|
revoking
our business license, other licenses or
authorities;
|
·
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requiring
that we restructure our ownership or operations;
and
|
29
·
|
requiring
that we discontinue any portion or all of our
business.
|
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.
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). Currently, we plan to expand into the purchase of
advertising time on local and regional networks, to expand our production
consulting services and begin providing production services. CD Media Beijing’s
business license currently covers all of our planned expansion activities
described in this prospectus, except for the production of proprietary
television programming. We, through CD Media Beijing, were previously involved
in the production of a television series, “Chi Dan Zhong Xin,” pursuant to a
cooperation agreement with a television production company, under which we
supervised the cash distribution process for the series. We were also involved
in the production of an animation series, “Xiao Mo Dou,” pursuant to a
cooperation agreement with a media distribution company and a software
development company, under which we were responsible for funding, marketing and
promoting the series. Our supervision of the cash distribution process for the
Chi Dan Zhong Xin series and our funding, marketing and promotion of the Xiao Mo
Dou series did not constitute production work of television series which would
require expansion of the scope of business license of CD Media Beijing, but was
within the scope of CD Media Beijing’s business license because CD Media
Beijing’s provision of support services for these series is not prohibited by
its license. CD Media Beijing was never the registered copyright owner of
either of the two television series, and its interests in these two television
series were limited to economic rights based on the relevant cooperation
agreements, including the rights to receive certain percentages of the profits
deriving from the series. CD Media Beijing’s economic interest in such
productions did not violate its business license because CD Media Beijing did
not directly perform any production services.
We may choose to enter into new areas
and activities that are not currently covered by our business license. Prior to
expanding our business and engaging in activities that are not covered by our
current business license, 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.
PRC authorities, which have discretion over business licenses, may reject our
request to expand the scope of our business license to include our planned areas
of expansion. We will be prohibited from engaging in any activities that the PRC
authorities do not approve in our expanded business license. Specifically, if an
entity engages in the production of television series without the requisite
approvals from competent PRC authorities, it can be subject to fines from RMB
10,000 to RMB 50,000, a ban from engaging in such activities and the possible
confiscation of its tools, equipment and media used for television series
production. Our business and results of operations may be materially and
adversely affected if we are unable to obtain the necessary government approval
for an expanded business license that covers any areas in which we wish to
expand.
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.
30
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. However, there 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 Circular 75 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 Circular 75 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.
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.
31
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.
According to the Revised M&A
Regulations and other PRC rules regarding foreign exchange, an offshore
company’s shares can be used as consideration for the acquisition of a domestic
PRC company’s equity by foreign investors only under very limited circumstances.
Prior approval from the MOFCOM must be obtained before such a share exchange can
be done. If relevant PRC government authorities deem a future acquisition
of a domestic PRC company’s equity by us or our offshore subsidiary using our
common stock or other types of our securities as consideration to be a
transaction subject to the Revised M&A Regulations, complying with the
requirements of this regulation to complete such transactions could be
time-consuming and any required approval processes, including obtaining approval
from the MOFCOM, may delay or inhibit our ability to complete such transactions.
Any delay or inability to obtain applicable approvals to complete acquisitions
could affect our ability to expand our business or maintain our market
share. However, the application of the Revised M&A
Regulations remains unclear and it is uncertain whether a future
acquisition of a domestic PRC company’s equity by our domestic PRC subsidiary
using our common stock or other types of our securities as consideration will be
subject to such regulations.
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. It is uncertain that CSRC is or will be curtailing or
suspending 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 with such
rules.
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 not have any land use rights and each of our facilities relies on land use
rights of our landlords, 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.
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 Securities Exchange Act for
1934, as amended (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.
32
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. While,
Circular 698 does not apply to shareholders who are individuals, two of the
original shareholders of CD Media BVI were BVI companies. The PRC
authority has the discretion to determine whether these enterprise shareholders
are treated as resident enterprises. If such shareholders are recognized as
non-resident enterprises, Circular 698 may have been applicable to the Share
Exchange due to the transfer of shares of CD Media BVI, which directly holds the
equity interests of CD Media Huizhou, to the Company by such enterprise
shareholders. Circular 698 provides that where a non-resident enterprise
investor indirectly transfers the equity of a PRC resident enterprise, if the
overseas intermediary holding company being transferred by the non-resident
enterprise is established in a country/region where the effective tax rate is
less than 12.5% or which does not tax the overseas income of its residents, the
non-resident enterprise must submit the required documents to the PRC tax
authority in charge of the PRC resident enterprise within 30 days after the
equity transfer agreement is concluded. However, 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. We have not provided
any information to the relevant PRC tax authorities regarding the share exchange
transaction.
We have sought the advice, but not an
opinion, of PRC legal counsel regarding the application of and the risks
associated with Circular 698. 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. It
further provides that 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. However, there are no 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.
If the PRC tax authorities determines
that Circular 698 applies to the Share Exchange and we need to make up underpaid
taxes, the underpaid taxes will equal the equity transfer gains multiplied by
the applicable income tax rate determined by the PRC tax authorities, and
pursuant to Circular 698, equity transfer gains will equal the balance of the
equity transfer price after deducting the cost of equity investment.
However, because the transfer of the equity of CD Media BVI by its original
company shareholders involved a share exchange transaction with the Company, a
"blank check" shell company at that time, it is difficult to determine the fair
market value of the shares of the Company, and thus the equity transfer gains
received by the original company shareholders. Circular 698 has not provided any
guidance under such circumstances. The short history of and lack of clear
guidance on the application of Circular 698 make it hard to quantify the tax
consequences in advance.
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 our holding
companies, China Century Dragon Media, Inc., a Delaware corporation, and CD
Media BVI a company organized under the laws of the British Virgin
Islands. If China Century Dragon Media, Inc. or CD Media BVI is
determined to be a PRC resident enterprise by PRC tax authorities, Circular 698
will not be applicable to any direct or indirect transfer of our shareholdings
in CD Media Huizhou, or in an intermediary holding company between China Century
Dragon Media, Inc. and CD Media Huizhou. If China Century Dragon Media,
Inc. or CD Media BVI is determined to be a non-resident enterprise by the PRC
tax authorities and the direct or indirect transfer of our shareholdings in CD
Media Huizhou, or in an intermediary holding company between China Century
Dragon Media, Inc. and CD Media Huizhou, is recognized by the tax authority in
charge as the transfer of shares of Chinese resident companies by nonresident
companies, 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. Because CD Media BVI, a British Virgin Islands company
owns 100% of CD Media Huizhou and the Company, a Delaware corporation, owns 100%
of CD Media BVI, it is possible that Circular 698 could apply to any transfer of
shares of the Company or CD Media BVI, as an indirect transfer of the equity of
CD Media Huizhou, if such transfers are not made through a public securities
market or by individuals. If the PRC tax authority determines that Circular 698
applies to us, we will be obligated to make tax returns filings with the
relevant PRC tax authority in accordance with PRC tax laws and
regulations. Failure to do so will subject us to fines up to RMB10,000
($1,471). Furthermore, if the PRC tax authority determines that our
arrangement which resulted in the underpayment of taxes was done to evade
taxation, in addition to paying all the underpaid taxes, we may be subject to
further penalties including late fees, fines ranging from 50% to 500% of the
underpaid taxes, and even criminal liabilities under grave
circumstances.
33
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.
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.
Governmental
control of currency conversion may limit our ability to utilize our
revenues.
Substantially all of our revenues and
expenses are denominated in Renminbi. Under PRC laws, the Renminbi is
currently convertible under a company’s “current account,” which includes
dividends, trade and service-related foreign exchange transactions, but not
under the company’s “capital account,” which includes foreign direct investment
and loans, without the prior approval of SAFE. SAFE reserves the
discretion to deny the conversion of RMB into foreign currencies for capital
account transactions. Currently our PRC subsidiary, CD Media Huizhou, may
purchase foreign currencies for settlement of current account transactions,
including payments of dividends to us, without the approval of SAFE.
Therefore, CD Media Huizhou may convert the annual service fee it receives in
RMB from CD Media Beijing into other currencies, such as U.S. Dollars, for
settlement of current account transactions without having to obtain approval
from SAFE. However, foreign exchange transactions by CD Media Huizhou
under the capital account continue to be subject to significant foreign exchange
controls and require the approval of or need to register with PRC governmental
authorities, including SAFE. Therefore, CD Media Huizhou may not convert the
annual service fee from RMB into other currencies for capital account
transactions, such as to repay a loan, without first obtaining the approval of
SAFE. If CD Media Huizhou borrows foreign currency loans from us or other
foreign lenders, these loans must first be registered with the SAFE. If CD
Media Huizhou, a wholly foreign-owned enterprise, borrows foreign currency, the
accumulative amount of its foreign currency loans shall not exceed the
difference between the total investment and the registered capital of CD Media
Huizhou. If we finance CD Media Huizhou by means of additional capital
contributions, these capital contributions must be approved by certain
government authorities such as the Ministry of Commerce or its local
counterparts. Additionally, the existing and future restrictions on currency
exchange may affect the ability of our PRC subsidiary or affiliated entities to
obtain foreign currencies, limit our ability to meet our foreign currency
obligations, or otherwise materially and adversely affect our
business.
34
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.
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. If we
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 will comply with Circular 78 if we adopt an equity
incentive plan. 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 our PRC subsidiary when
it is deemed a domestic agent as defined under Circular 78 and participants of
our incentive plan who are PRC citizens to fines and legal sanctions and may
prevent us from being able to grant equity compensation to our PRC employees. If
we are unable to compensate our PRC employees and directors through equity
compensation, our business operations may be adversely
affected.
35
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.
The Company has not sought the advice of PRC tax counsel regarding the risks
associated with the New EIT Law. Because both our and CD Media BVI’s
members of management are located in China, we believe it is likely that the we
and CD Media BVI meet the qualifications of a “resident enterprise” and would be
recognized as a Chinese “resident enterprise,” subject to the ultimate judgment
of the PRC tax authority, based on the standard of “de facto management
body”.
“Resident
enterprise” treatment would not have impacted the Company’s results since the
New EIT Law’s effectiveness, as CD Media BVI has no taxable income and no
dividends were paid by any of our subsidiaries, including CD Media BVI and CD
Media Huizhou. 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. The failure to pay such taxes
will subject us to fines up to RMB 10,000 ($1,471), and furthermore, if the PRC
tax authority determines that our arrangement which resulted in the underpayment
of taxes was done to evade taxation, in addition to paying all the underpaid
taxes, we may be subject to further penalties including late fees, fines ranging
from 50% to 500% of the underpaid taxes, and even criminal liabilities under
grave circumstances. 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 on April 22,
2010, 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.
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
stockholders are treated as income derived from sources within China, then the
dividends that stockholders receive from us, and any gain on the sale or
transfer of our shares, may be subject to taxes under PRC tax laws. We
have not consulted with PRC tax counsel regarding the taxes that may be
associated with dividends paid by us.
36
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. If we have such an obligation, our omission
or failure to fulfill such obligation may subject us to similar penalties to
those applied to a taxpayer, including fines up to RMB 10,000, and in the case
of being recognized as constituting evasion of taxation, other than making up
for the underpaid taxes, we may be subject to further penalties including late
fees, fines ranging from 50% to 500% of the underpaid taxes, and even criminal
liabilities under grave circumstances.
SAFE
rules and regulations may limit our ability to transfer the net proceeds from
this offering to CD Media Beijing, which may adversely affect the business
expansion of CD Media Beijing, and we may not be able to convert the net
proceeds from this offering into Renminbi to invest in or acquire any other PRC
companies.
On August 29, 2008, SAFE promulgated
Circular 142, a notice regulating the conversion by a foreign-invested company
of foreign currency into Renminbi by restricting how the converted Renminbi may
be used. The notice requires that the registered capital of a foreign-invested
company settled in Renminbi converted from foreign currencies may only be used
for purposes within the business scope approved by the applicable governmental
authority and may not be used for equity investments within the PRC. In
addition, SAFE strengthened its oversight of the flow and use of the registered
capital of a foreign-invested company settled in Renminbi converted from foreign
currencies. The use of such Renminbi capital may not be changed without SAFE’s
approval, and may not in any case be used to repay Renminbi loans if the
proceeds of such loans have not been used. Violations of Circular 142 will
result in severe penalties, such as heavy fines. As a result, Circular 142 may
significantly limit our ability to transfer the net proceeds from this offering
to CD Media Beijing, and we may not be able to convert the net proceeds from
this offering into Renminbi to invest in or acquire any other PRC
companies.
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.
|
37
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.
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
have 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.
38
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.
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 shareholders of CD Media BVI and their designee
have significant influence over us.
Collectively, the former shareholders
of CD Media BVI and their designee beneficially own or control approximately
75.5% of our outstanding shares as of the close of the Share Exchange and
Private Placement. The designee is an unaffiliated third party who was not
a shareholder of CD Media BVI prior to the Share Exchange, and none of the
former shareholders of CD Media BVI has control over the shares held by such
designee. While there is no agreement among the former shareholders of CD
Media BVI and the designee to vote their shares in any particular manner, should
these stockholders vote together they would 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.
39
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.
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:
|
·
|
access
to the capital markets of the United
States;
|
|
·
|
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;
|
|
·
|
the
ability to use registered securities to make acquisition of assets or
businesses;
|
|
·
|
increased
visibility in the financial
community;
|
|
·
|
enhanced
access to the capital markets;
|
|
·
|
improved
transparency of operations; and
|
|
·
|
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.
40
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.
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.
41
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:
|
·
|
Our
ability to raise additional capital to fund our
operations;
|
|
·
|
Our
ability to continue obtaining advertising time slots aired on
CCTV;
|
|
·
|
The
continued strong market position and national coverage of CCTV
channels;
|
|
·
|
CCTV’s
continuing to use third party agencies to sell advertising
time;
|
|
·
|
Our
ability to purchase advertising time from satellite and regional
television networks;
|
|
·
|
Our
ability enter into new advertising media
platforms;
|
|
·
|
Exposure
to PRC governmental actions regarding the advertising content of our
clients;
|
|
·
|
Exposure
to intellectual property claims from third
parties;
|
|
·
|
Expected
growth in consumer spending, average income levels and advertising
spending levels;
|
|
·
|
Changes
in the laws of the PRC that affect our operations and our corporate
structure;
|
|
·
|
Inflation
and fluctuations in foreign currency exchange
rates;
|
|
·
|
Our
ability to obtain all necessary government certifications, approvals,
and/or licenses to conduct our
business;
|
|
·
|
Development
of a public trading market for our
securities;
|
|
·
|
The
cost of complying with current and future governmental regulations and the
impact of any changes in the regulations on our operations;
and
|
|
·
|
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.
42
Item 2.02 Results of Operations and Financial
Condition.
SELECTED
CONSOLIDATED FINANCIAL DATA
The following selected consolidated
statement of operations data contains (i) consolidated statement of operations
data for each of the years in the five-year period ended December 31, 2009 and
the three months ended March 31, 2010 and 2009 and (ii) the consolidated balance
sheet data as of year-end for each of the years in the five-year period ended
December 31, 2009 and as of March 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 and the three month ended and as of March 31, 2010
and 2009. 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.”
Consolidated Statements of
Operations
Three Months Ended March 31,
|
Years Ended December 31,
|
|||||||||||||||||||||||||||
2010
|
2009
|
2009
|
2008
|
2007
|
2006
|
2005
|
||||||||||||||||||||||
(unaudited)
|
(unaudited)
|
(unaudited)
|
(unaudited)
|
|||||||||||||||||||||||||
(all
amounts are in thousands)
|
||||||||||||||||||||||||||||
Revenue
|
$ | 20,405 | $ | 11,386 | $ | 74,480 | $ | 44,684 | $ | 17,103 | $ | 6,231 | $ | 1,926 | ||||||||||||||
Cost
of Goods Sold
|
16,266 | 9,331 | (59,746 | ) | (36,498 | ) | (12,839 | ) | (4,814 | ) | 1,992 | |||||||||||||||||
Gross
Profit
|
4,139 | 2,055 | 14,734 | 8,186 | 4,264 | 1,417 | (66 | ) | ||||||||||||||||||||
General
and administrative
|
||||||||||||||||||||||||||||
Selling
expenses
|
606 | 417 | 2,110 | 1,673 | 2,068 | 625 | 57 | |||||||||||||||||||||
General
and administrative
|
180 | 121 | 575 | 371 | 374 | 156 | 7 | |||||||||||||||||||||
Depreciation
of equipment
|
3 | 2 | 9 | 7 | 2 | - | 1 | |||||||||||||||||||||
Total
operating expenses
|
789 | 540 | 2,694 | 2,051 | 2,444 | 781 | 65 | |||||||||||||||||||||
Income
(loss) from operations
|
3,350 | 1,515 | 12,040 | 6,135 | 1,820 | 636 | (131 | ) | ||||||||||||||||||||
Gain
on disposal of assets
|
- | - | 1 | - | - | - | - | |||||||||||||||||||||
Interest
income
|
- | 1 | 2 | 5 | 5 | 2 | 1 | |||||||||||||||||||||
Income
(loss) from continuing operations before income taxes
|
3,350 | 1,516 | 12,043 | 6,140 | 1,825 | 638 | (130 | ) | ||||||||||||||||||||
Income
taxes
|
850 | 379 | (3,033 | ) | (1,535 | ) | (602 | ) | 73 | - | ||||||||||||||||||
Income
from continuing operations
|
$ | 2,500 | $ | 1,137 | $ | 9,010 | $ | 4,605 | $ | 1,223 | $ | 711 | $ | (130 | ) | |||||||||||||
Income
from discontinued operations
|
235 | - | - | - | - | - | - | |||||||||||||||||||||
Net
Income (loss)
|
$ | 2,735 | $ | 1,137 | $ | 9,010 | $ | 4,605 | $ | 1,223 | $ | 711 | $ | (130 | ) |
Consolidated Balance Sheets
|
March 31,
|
December 31,
|
||||||||||||||||||||||
2010
|
2009
|
2008
|
2007
|
2006
|
2005
|
|||||||||||||||||||
(unaudited)
|
(unaudited)
|
(unaudited)
|
||||||||||||||||||||||
(in
thousands)
|
||||||||||||||||||||||||
Total
Current Assets
|
$ | 20,984 | $ | 13,678 | $ | 11,158 | $ | 4,545 | 2,265 | 1,443 | ||||||||||||||
Total
Assets
|
21,016 | 20,532 | 11,188 | 4,564 | 2,267 | 1,443 | ||||||||||||||||||
Total
Current Liabilities
|
2,045 | 4,844 | 4,579 | 2,767 | 1,777 | 2,229 | ||||||||||||||||||
Total
Liabilities
|
2,571 | 4,844 | 4,579 | 2,767 | 1,777 | 2,229 | ||||||||||||||||||
Total
Stockholders' Equity
|
18,445 | 15,687 | 6,609 | 1,797 | 490 | (786 | ) |
43
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.
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.
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. 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 warrants are currently exercisable and expire on April 30,
2015. We paid a $215,750 success fee to WestPark Capital, Inc. (“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.
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.
44
We
originally agreed to include such shares in a subsequent registration statement
(the “Subsequent Registration Statement”) that was to be filed no later than the
tenth (10th) day
after the end of the six (6) month period that immediately follows the filing of
the registration statement that the Company agreed to file for the resale of the
shares sold 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”). In addition, we
agreed to use our reasonable best efforts to maintain the registration statement
effective for a period of 12 months at our expense. We also agreed to a
penalty provision pursuant to which we agreed that 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.
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
3,566,838 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 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 as an advisor to the
Company, including assisting in preparations for the Share Exchange and the
Company’s listing of securities in the United States.
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 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 their 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.
45
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 adversely
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 second and third 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.
Our
Growth Strategy
As part of our growth strategy, we
intend to increase our purchases of advertising time aired on CCTV and to
purchase more advertising directly from CCTV, to develop a regional television
business, enhance our production consulting services, begin providing production
services and expand into new advertising platforms. With respect to our
purchase of advertising time from CCTV, we will face significant competition
from advertising agencies that purchase time directly from CCTV, many of which
have greater financial resources and a more established relationship with CCTV
than us. While there are no restrictions or rules promulgated by CCTV that
regulate a company’s ability to purchase advertising time directly from CCTV,
the majority of the available commercial time offered by CCTV is in large
blocks, which will require large amounts of capital for us to acquire directly
from CCTV. If we purchase this time in large blocks, we could be subject
to additional risk as it may be difficult for us to sell such a large amount of
advertising time. CCTV does sell some of its most sought after commercial
time in smaller blocks at higher prices per minute. We will evaluate our
purchases of advertising time directly from CCTV and may purchase time directly
from CCTV in the future if we see an economic benefit to do so. We will
face some difficultly in establishing a regional television business because we
do not currently have any relationships with any regional television
stations. We will face competition from many companies that already have
extensive relationships with such television stations. In addition, we may
be unable to enter into certain local markets due to a region’s preference to
protect its local advertising agents in the area. We intend to expand into
production services and our opening of a production studio will require
significant amounts of capital. We do not have any specific plans
regarding our expansion into production services and are currently unsure of
when we will begin to provide such services. As we have no specific plans for
our expansion into production services, we are unsure of the costs that we will
incur in expanding to provide such services. We have no significant
experience in the production of television advertisements, public service
announcements and television series and we may have a difficult time entering
into such areas because of our inexperience. In addition, we have no significant
experience in any media platform other than television advertising. We
have no experience in any of our planned areas of expansion and we will have to
hire additional personnel to assist us in our expansion efforts. We may
not be able to find people qualified to assist us in such
endeavors.
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 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.”
46
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 recognize the revenue ratably over the
broadcast period, which is normally several weeks. If the advertisements are not
broadcast, for instance due to CCTV’s change of program schedule, the advance
payments made to us by our clients will be returned to our clients.
Our revenue growth is driven by
increasing the number of advertising minutes we sell and an increase in the
price per minute at which we sell advertising time to our clients. In
2009, the most important driving force in our increase in revenues was increased
customer demand. We do not base our purchases of advertising time based on the
amount of advertising time available for purchase, but instead base our
purchases on anticipated customer demand. We purchased more time slots
that were more attractive to customers, which caused our existing customers to
place additional orders with us and attracted new customers to our company and
allowed us to increase the price at which we re-sold our advertising time to our
customers. The average price per minute of advertising time sold during
2009 increased 12% over the average price per minute we charged in 2008.
The increase in the volume of advertising sold by us during 2009 was affected
only by an increase in customer demand for advertising time and was not affected
by an increase in advertising inventory available to us for purchase or an
increase in funds available to us to make purchases. We do not offer any
special pricing or incentives to new or existing customers to entice them to
make purchases from us.
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.
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. We were able to increase our
prices and as a percentage of revenue, cost of goods sold 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 gross profit 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.
47
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
|
|
·
|
the
risks and uncertainties described under “Risk
Factors.”
|
See note
3 to our combined financial statements for additional information regarding our
critical accounting policies.
Revenue
Recognition
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 recognize 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.
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 risk that we may not be able to resell all of the advertising
time we purchase. 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, we recognize revenues on the basis of 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 report
revenues gross of business tax and related surcharges, which are charged to cost
of goods sold.
48
Income
Tax
The
Company accounts for income taxes in accordance with current accounting
standards, which require an asset and liability approach for financial
accounting and reporting for income taxes and allow 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
three months ended March 31, 2010 and 2009 (unaudited) and the years ended
December 31, 2009, 2008 and 2007, in dollars (in thousands) and as a percentage
of revenue:
Three Months Ended March 31,
|
Years Ended December 31,
|
|||||||||||||||||||||||||||||||||||||||
2010
|
2009
|
2009
|
2008
|
2007
|
||||||||||||||||||||||||||||||||||||
(unaudited)
|
(unaudited)
|
|||||||||||||||||||||||||||||||||||||||
Revenue
|
$ | 20,405 | 100.0 | % | $ | 11,386 | 100.0 | % | $ | 74,480 | 100.0 | % | $ | 44,684 | 100.0 | % | $ | 17,103 | 100.0 | % | ||||||||||||||||||||
Cost
of Goods Sold
|
16,266 | 79.7 | % | 9,331 | 90.0 | % | (59,746 | ) | 80.2 | % | (36,498 | ) | 81.7 | % | (12,839 | ) | 75.1 | % | ||||||||||||||||||||||
Gross
Profit
|
4,139 | 20.3 | % | 2,055 | 18.0 | % | 14,734 | 19.8 | % | 8,186 | 18.3 | % | 4,264 | 24.9 | % | |||||||||||||||||||||||||
General
and administrative
|
||||||||||||||||||||||||||||||||||||||||
Selling
expenses
|
606 | 3.0 | % | 417 | 3.7 | % | 2,110 | 2.8 | % | 1,673 | 3.8 | % | 2,068 | 12.1 | % | |||||||||||||||||||||||||
General
and administrative
|
180 | 0.9 | % | 121 | 1.1 | % | 575 | 0.8 | % | 371 | 0.8 | % | 374 | 2.2 | % | |||||||||||||||||||||||||
Depreciation
of equipment
|
3 | * | 2 | * | 9 | * | 7 | * | 2 | * | ||||||||||||||||||||||||||||||
Total
operating expenses
|
789 | 3.9 | % | 540 | 4.7 | % | 2,694 | 3.6 | % | 2,051 | 4.6 | % | 2,444 | 14.3 | % | |||||||||||||||||||||||||
Income
from operations
|
3,350 | 16.4 | % | 1,515 | 13.3 | % | 12,040 | 16.2 | % | 6,135 | 13.7 | % | 1,820 | 10.6 | % | |||||||||||||||||||||||||
Gain
on disposal of assets
|
- | - | - | - | 1 | * | - | - | - | - | ||||||||||||||||||||||||||||||
Interest
income
|
- | - | 1 | * | 2 | * | 5 | * | 5 | * | ||||||||||||||||||||||||||||||
Income
(loss) from continuing operations before income taxes
|
3,350 | 16.4 | % | 1,516 | 13.3 | % | 12,043 | 16.2 | % | 6,140 | 13.7 | % | 1,825 | 10.7 | % | |||||||||||||||||||||||||
Income
taxes
|
850 | 4.2 | % | 379 | 3.3 | % | 3,033 | 4.1 | % | 1,535 | 3.4 | % | 602 | 3.5 | % | |||||||||||||||||||||||||
Income
from continuing operations
|
$ | 2,500 | 12.2 | % | $ | 1,137 | 10.0 | % | $ | 9,010 | 12.1 | % | $ | 4,605 | 10.3 | % | $ | 1,223 | 7.2 | % | ||||||||||||||||||||
Income
from discontinues operations
|
235 | 1.2 | % | - | - | - | - | - | - | - | - | |||||||||||||||||||||||||||||
Net
Income
|
$ | 2,735 | 13.4 | % | $ | 1,137 | 10.0 | % | $ | 9,010 | 12.1 | % | $ | 4,605 | 10.3 | % | $ | 1,223 | 7.2 | % |
* Less than 0.1%
Three
Months ended March 31, 2010 and 2009
Revenues were $20.4 million for the
three months ended March 31, 2010, an increase of $9.0 million, or 79.2%,
compared to $11.4 million for the same period in 2009. The increase was
attributable to an increase in the total advertising time slots sold by us in
the three months ended March 31, 2010, compared to the three months ended March
31, 2009. We sold a total of approximately 2,492 minutes of advertising time in
the three months ended March 31, 2010 as compared to 2,437 minutes in 2009,
which is a 2.3% increase in the number of minutes sold at a higher average price
per minute. In addition, the average price per minute of the time slot
sold in the first three months of 2010 is $8,188, or 75.3% greater than the
average price per minute of time sold of $4,672 sold in the first three months
of 2009. The sale price increase in the average price per minute of
advertising sold is due to higher demand for advertising time on CCTV
channels, including an increased demand from our clients for advertising time on
programs with higher viewerships for which we were able to charge more per
minute sold. We had no revenues from our production services during the
three months ended March 31, 2010 or the comparable period in 2009. We do
not restrict our advertising purchases to a set schedule and instead make
purchases throughout the year based on an evaluation of our and our customers’
need, not on actual orders received from customers.
49
Cost of
goods sold was $16.3 million for the three months ended March 31, 2010, an
increase of $7.0 million, or 74.3%, compared to $9.3 million for the same period
in 2009. 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 2.3% increase in the number of advertising minutes purchased in
2010 as compared to 2009 and a 70.5% increase in the average cost of the
adverting minutes purchased. As a percentage of revenue, cost of goods sold for
the three months ended March 31, 2010 and 2009 were 79.7% and 82.0%,
respectively. As of March 31, 2010, advances of $6,796,867 are associated
with specific time slots purchased while advances of $829,021 are for
unspecified time slots.
Gross
profit for the three months ended March 31, 2010 was $4.1 million, or 20.3% of
revenues, an increase of $2.0 million or 101.4% compared to $2.1 million, or
18.1% of revenues, for the comparable period in 2009. The increase in our gross
profit margin for the three months ended March 31, 2010 is primarily due to the
fact that we were able to pass the full cost of the increase in our costs to
purchase advertising time to our customers.
Selling
expenses were $0.6 million for the three months ended March 31, 2010, an
increase of $0.2 million, or 45.3%, compared to $0.4 million for the same period
in 2009. The increase primarily resulted from an increase in marketing expenses
we spent on expanding our business.
General
and administrative expenses were $180 thousand for the three months ended March
31, 2010, an increase of $59 thousand, or 48.9%, compared to $121 thousand for
the same period in 2009. The increase was primarily a result of an increase in
rental costs and compensation-related expense.
Income taxes for the three months ended
March 31, 2010 were $0.9 million, an increase of $0.5 million over income taxes
of $0.4 million for the three months ended March 31, 2009. The increase in
income taxes was primarily a result of an increase in our taxable income. Our
income tax rate for three months ended March 31, 2010 and 2009 was 25% and 25%,
respectively.
Net
income from continuing operations for the three months ended March 31, 2010 was
$2.7 million, an increase of 140.6% over net income of $1.1 million for the
three months ended March 31, 2009, based on the factors described
above.
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 and
an increase of average price per minute of the advertising time sold 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 46.1% increase in the number of minutes sold at a
14.1% increase in the average price per minute of time sold. We do not restrict
our advertising purchases to a set schedule and instead conduct purchases
throughout the year based on an evaluation of our and our customers’ need, not
on actual orders received from customers. We paid advances to our
suppliers for unspecified time slots in anticipation of purchases in the next
year and obtained the right from suppliers to receive favorable time slots. No
advertising time remained unsold as of December 31, 2009 or 2008 because we had
no specific time slots purchased as of such dates.
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 46.1% increase in the number of advertising minutes
purchased in 2009 as compared to 2008 and a 12% 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 pass our increased costs on to our clients.
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. We expect selling expenses as a percentage of revenue
will be flat or slightly decrease in the future. Our selling expenses
consist of fixed expenses, such as depreciation, and flexible expenses, such as
travel and commissions. We expect our selling expenses to fluctuate in
proportion to our revenue changes.
50
General
and administrative expenses were $0.6 million for the year ended December 31,
2009, an increase of $0.2 million, or 55.0%, compared to $0.4 million for the
same period in 2008. The increase was primarily a result of an increase in
rental costs, compensation related expense and payment of staff welfare and
bonus. Additionally, our general offices expenses increased $49,102 in the year
ended December 31, 2009 as compared to the year ended December 31, 2008.
We expect that our general and administrative expenses will increase as a
percentage of revenues in future periods as we will incur additional expenses as
a public reporting company in the U.S.
Income
taxes for the year ended December 31, 2009 were $3.0 million, an increase of
$1.5 million, or 100%, 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 is
attributable mainly to an increased number of customers and to a 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. We sold a total of
7,843 minutes of advertising time in 2008 as compared to 4,639 minutes in
2007. No advertising time remained unsold as of December 31, 2008 or 2007
because we had no specific time slots purchased as of such dates.
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 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 the fact that we could not pass on our
increased costs on to our clients.
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 2008 as compared to 2007.
In 2007, we incurred additional marketing related costs in preparation for the
2008 Olympic Games held in Beijing.
General
and administrative expenses remained relatively flat at $0.4 million for the
year ended December 31, 2008, as compared to the same period in
2007.
Income
taxes for the year ended December 31, 2008 were $1.5 million, an increase of
$0.9 million, or 150%, over income taxes of $0.6 million for the year ended
December 31, 2007. The increase in income taxes was primarily a result of
increased 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 $0.4 million as of March 31, 2010, as
compared to $0.7 million as of December 31, 2009 and $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.
51
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 3,566,838 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 as an advisor to the Company,
including assisting in preparations for the Share Exchange and the Company’s
listing of securities in the United States.
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 $4,900 and $3,400 in the three months ended March 31,
2010 and 2009, respectively and $13,000 in each of the years ended December 31,
2009, 2008, respectively and $11,000 in 2007. 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 $0.8 million for the three months ended March
31, 2010 compared to net cash provided by operating activities of $4.4 million
for the comparable period in 2009. The decrease in cash provided by
operating activities was primarily due to increase of cash used in the amount of
$1.4 million, related to accounts receivable. We also reduced our trade payable
and tax payable by $667 thousand and $747 thousand, respectively.
The customer deposit accounts balance decreased by $1.4 million. These
amounts were partially offset by an increase of cash provided in the amount of
$1 million related to discontinued operation and $2.7 million in net
income for the three months ended March 31, 2010.
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 increase of cash used in the amount of $6.8 million and
$2.9 million related to discontinued television costs and prepayments for
advertising time slots, respectively, all of which were related to our increased
efforts to expand our business during the year ended December 31, 2009 as
compared to the amounts in the same period in 2008. These amounts were
partially offset by an increase of cash provided in the amount $6.7 million and
$4.4 million related to accounts receivable and net income, respectively, for
the year ended December 31, 2009 as compared to the amounts in the same period
in 2008. 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.
The
accounts receivable balance at December 31, 2009 is lower than it is during
other periods because our vendors required timely payment at the year-end for
their accounting closing and we in turn required timely payment from our
clients. The increased accounts receivable as of March 31, 2010 is due to an
increase in monthly sales. Our sales of television advertising time increased
79.2%% during the three months ended March 31, 2010, as compared to the three
months ended March 31, 2009, with sales increasing steadily month over month in
2010.
Net cash
used in investing activities for the three months ended March 31, 2010 was
$2,894, which remained relatively flat compared to net cash used in investing
activities of $400 for the comparable period in 2009. 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
provided by financing activities was $0.5 million for the three months ended
March 31, 2010 as compared to nil during the three months ended March 31,
2009. The increase in cash provided by financing activities was due to
loans received from related parties. 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.
52
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 raised
approximately $5.4 million from the Private Placement that we closed in April
2010. We also intend to conduct a public offering of our common stock
later this year. Therefore, we believe that we will have sufficient cash
available to fund our operations in the next 12 months. After 12
months, we may need to seek additional debt or equity financing through other
external sources, which may not be available on acceptable terms, or at
all. Our ability to maintain sufficient liquidity depends partially on our
ability to achieve anticipated levels of revenue, while continuing to control
costs. 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 | $ | - | $ | - |
As of
December 31, 2009, there were no other contractual obligations, related to the
purchase of advertising time or otherwise.
Seasonality
Our
business is seasonal in nature, with the first and fourth quarters of the fiscal
being stronger quarters. The second and third quarter are generally slower
seasons for the Chinese advertising industry in general. This is due to the
occurrence of Chinese New Year during the first quarter of each year, during
which consumer purchases and spending tend to increase. Our clients
purchase more advertising time during the fourth and first quarters to gain
greater exposure to consumers during this period of increased consumer
spending.
Quarterly
Information (unaudited)
The table
below presents selected (unaudited) results of operations for the quarters
indicated. All amounts are in thousands except share and per share
data.
|
Quarter Ended
|
|||||||
March 31,
|
||||||||
|
2010
|
Total
|
||||||
Revenues
|
$ | 20,405 | $ | 20,405 | ||||
Gross
profit
|
$ | 4,139 | $ | 4,139 | ||||
Income
from continuing operations
|
$ | 2,500 | 2,500 | |||||
Net
Income
|
$ | 2,735 | $ | 2,735 |
Quarter Ended
|
||||||||||||||||||||
|
December 31,
|
September 30,
|
June 30,
|
March 31,
|
||||||||||||||||
|
2009
|
2009
|
2009
|
2009
|
Total
|
|||||||||||||||
Revenues
|
$ | 36,377 | $ | 14,344 | $ | 12,373 | $ | 11,386 | $ | 74,480 | ||||||||||
Gross
profit
|
$ | 7,549 | $ | 2,819 | $ | 2,311 | $ | 2,055 | $ | 14,734 | ||||||||||
Net
Income
|
$ | 4,971 | $ | 1,639 | $ | 1,263 | $ | 1,137 | $ | 9,010 | ||||||||||
Quarter
Ended
|
||||||||||||||||||||
December 31,
|
September
30,
|
June
30,
|
March
31,
|
|||||||||||||||||
2008
|
2008
|
2008
|
2008
|
Total
|
||||||||||||||||
Revenues
|
$ | 13,514 | $ | 11,283 | $ | 11,094 | $ | 8,793 | $ | 44,684 | ||||||||||
Gross
profit
|
$ | 1,815 | $ | 2,509 | $ | 2,153 | $ | 1,710 | $ | 8,187 | ||||||||||
Net
Income
|
$ | 946 | $ | 1,474 | $ | 1,243 | $ | 942 | $ | 4,605 |
53
Our
revenues, gross profit and net income during the quarterly periods in fiscal
2008 were negatively affected by the global economic downturn and, as a result,
were generally less than the revenues, gross profit and net income for the
quarterly periods in 2009. Our revenues, gross profit and net income for
the three months ended December 31, 2009 increased significantly in comparison
to other quarterly periods in fiscal 2008 and 2009. The key reasons for
this increase in the three months ended December 31, 2009 were increased demand
from new and existing customers due to an improvement in general economic
conditions during the quarter compared to other quarters, an increase in the
amount of advertising minutes sold during the quarter compared to other quarters
and a higher average selling price for the time slots we sold during this
quarter compared to other quarters, and an increased number of air time we
purchased anticipating the demand. During the three months ended December
31, 2009, we sold approximately $5.1 million of advertising time to new
customers. During this quarter, we also increased our sales to our
existing customers. Existing customers increased their purchases by an
aggregate of approximately 794 minutes, as compared to the average number of
minutes of 2,620 purchased by our existing clients during each of the first
three quarters of 2009. Additionally, we increased the average price per
minute charged for our advertising time by 120% to approximately $10,652 per
minute, as compared to the prior three quarter’s average price per minute of
approximately $4,848. We believe that the addition of our new clients will
contribute to an overall increase in our revenues, gross profit and net income
in future quarters.
While we
believe that our client base will continue to expand in future quarters, we do
not anticipate that large increases in the purchase of advertising time will
occur similar to the increases experienced in the three months ended December
31, 2009 or that our quarterly results for future quarters will be consistent
with our results for the three months ended December 31, 2009. It is
difficult for us to predict our customers' future orders. However, we believe
that the size of our customer base and our increase in revenues will continue in
future periods.
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 is the 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 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.”
54
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
3,566,838 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 25,312,838 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.
55
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.
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 November 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, Ms. 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 1990 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. We believe that Ms. Li is qualified to
serve a director of our Company due to her knowledge of our business operations
from her prior and current employment positions with CD Media BVI and CD Media
Beijing, as well as her prior employment experience in financial
management
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. Mr. Fu has served as the General Manager of CD Media
Beijing since January 2009. From May 2006 to December 2008, Mr. Fu served
as Vice General Manager of CD Media Beijing. From March 2001 to April 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.
56
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.
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 BVI 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.
57
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.
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.
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 HuiHua, 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.
58
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 Director
|
2007
|
- | - | - |
(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.
|
59
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 designee. 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 stockholders of SRKP 25 did not receive any consideration
for the cancellation of the shares and warrants. The cancellation of the
shares and warrants was accounted for as a contribution to capital. The
number of shares and warrants cancelled was determined based on negotiations
with the securityholders of SRKP 25, Inc. and CD Media BVI. The number of
shares and warrants cancelled by SRKP 25, Inc. was not pro rata, but based on
discussions between the securityholders and SRKP 25, Inc. The discussions
regarding the relative amounts of share and warrant cancellations were
arms-length discussions between all of the securityholders of SRKP 25. All
SRKP 25 securityholders unanimously agreed as to the share and warrant
allocations. No other criteria were involved nor was any additional compensation
or monies paid or concessions given to any SRKP secuityholder in connection with
the determination of the relative number of shares and warrants cancelled by
each securityholder.
60
As
indicated in the Share Exchange Agreement, the parties to the transaction
acknowledged that a conflict of interest existed with respect to the
negotiations for the terms of the Share Exchange due to, among other factors,
the fact that WestPark Capital, Inc. (“WestPark Capital”) was advising CD Media
BVI in the transaction. As further discussed below in “Certain Relationships And Related
Transactions —Private Placement,” certain of the controlling stockholders
and control persons of WestPark Capital were also, prior to the completion of
the Share Exchange, controlling stockholders and control persons of SRKP 25,
Inc. Under these circumstances, the shareholders of CD Media BVI and the
stockholders of SRKP 25 negotiated an estimated value of CD Media BVI and its
subsidiaries, an estimated value of the shell company (based on similar recent
transactions by WestPark Capital involving similar public shells), and the
mutually desired capitalization of the company resulting from the Share
Exchange.
With
respect to the determination of the amounts of shares and warrants cancelled,
the value of the shell company was derived primarily from its utility as a
public company platform, including its good corporate standing and its timely
public reporting status, which we believe allowed us to raise capital at an
appropriate price per share and subsequently list our stock on a national
securities exchange. We believe that investors may have been unwilling to
invest in our company in the Private Placement (as that term is defined below)
on acceptable terms, if at all, in the absence of an investment in a public
reporting vehicle and thus required us to effect the Share Exchange as a
condition to the Private Placement. The services provided by WestPark
Capital were not a consideration in determining this aspect of the
transaction. Under these circumstances and based on these factors, the
shareholders of CD Media BVI and the stockholders of SRKP 25 agreed upon the
amount of shares and warrants to be cancelled. Further to such
negotiations, 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. All of the fees due to WestPark Capital in
connection with the Share Exchange have been paid.
The Board resigned in full on April 30,
2010 and appointed HuiHua Li and HaiMing Fu to the board of directors of our
company, with HuiHua Li serving as Chairman. On April 30, 2010, the Board
also appointed HuiHua Li as our Chief Executive Officer and Le Zhang 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. On July 28, 2010, the Board appointed ZhiFeng Yan as a
director of the Company. Additionally, on July 28, 2010, the Board
appointed HaiMing Fu as our Chief Executive Officer, replacing HuiHua Li, and
Dapeng “George” Duan as our Chief Financial Officer and Corporate Secretary,
replacing Le Zhang. Mr. HaiMing Fu resigned as a director of the Company
on July 30, 2010.
The Board resigned in full in full on
April 30, 2010 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.
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.
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 as an advisor to the Company,
including assisting in preparations for the Share Exchange and the Company’s
listing of securities in the United States.
Each of Messrs. Rappaport and
Pintsopoulos may be considered a promoter of our company prior to the Share
Exchange. In addition to the director and executive officer positions that
each held with our company prior to the Share Exchange, each currently holds
director and executive officer positions with SRKP 2, Inc., SRKP 3, Inc., SRKP
5, Inc., SRKP 10, Inc., SRKP 12, Inc., SRKP 14, Inc., SRKP 15, Inc., SRKP 16,
Inc., SRKP 20, Inc., SKRP 23, Inc., SRKP 24, Inc., SRKP 26, Inc., SRKP 27, Inc.,
SRKP 28, Inc., SRKP 29, Inc., WRASP 30, Inc., WRASP 31, Inc. and WRASP 32, Inc.,
all of which are publicly-reporting, blank check and non-trading shell
companies. None of the other original stockholders of SRKP 25 may be
considered a promoter of our company because none of them were involved in
founding or organizing the business of SRKP 25 and each received their
securities of the Company solely in consideration for personal funds paid
directly by such stockholders to the Company.
61
Mr. Rappaport and Pintsopoulos did not
receive any benefits related to the transactions described above, except their
retention of shares in the Company upon the closing of the Share Exchange
described above in this section.
Related
Party Loans
During the quarter ended March 31,
2010, Hailan Zhang, one of our stockholders loaned a total of HKD 4,063,187
($523,333) to the Company. The loan was made to provide the company with
working capital. The loan was repaid in full by the Company prior to June 30,
2010. The loan was non-interest bearing and had no maturity date.
During the quarter ended March 31, 2010, Huabiao Lin, the legal representative
of CD Media Huizhou, loaned a total of RMB 15,954 ($2,341) to the Company.
The loan was made to provide the Company with working capital. The loan was
repaid in full by the Company prior to June 30, 2010. The loan was
non-interest bearing and had no maturity date. The Company does not intend
to engage in any related party financing in the future.
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 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 no 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.
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.
62
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:
|
·
|
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 25,312,838 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.
63
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 | % | |||||||
WestPark
Capital Financial Services, LLC (3)
1900
Avenue of the Stars, Suite 310
Los
Angeles, CA 90067
|
2,356,611 | 9.0 | % | |||||||
Zhang
HaiLan
|
2,000,000 | 7.9 | % |
(1)
|
Each
stockholder's percentage of ownership in the above table is based upon
25,312,838 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 includes 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.
|
(3)
|
Consists
of 1,418,057 shares and a warrant to purchase 938,554 shares 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 the extent of his pecuniary interest in the
securities.
|
Item 9.01 Financial Statements and
Exhibits.
(d)
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 three
months ended March 31, 2010 (unaudited) and the years ended December 31, 2009,
2008 and 2007 are provided below. You are encouraged to review the
financial statements and related notes.
64
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
65
CD
Media (Holding) Co., Limited and Subsidiaries
Consolidated
Balance Sheets
March 31,
|
December 31,
|
December 31,
|
December 31,
|
|||||||||||||
2010
|
2009
|
2008
|
2007
|
|||||||||||||
(Unaudited)
|
||||||||||||||||
Assets
|
||||||||||||||||
Current
Assets
|
||||||||||||||||
Cash
and cash equivalents
|
$ | 435,901 | $ | 654,831 | $ | 1,219,894 | $ | 1,263,395 | ||||||||
Accounts
receivable, net
|
6,844,297 | 5,433,776 | 6,905,814 | 1,826,884 | ||||||||||||
Accounts
receivable – discontinued operations
|
6,077,787 | |||||||||||||||
Advances
– time slots purchased
|
6,796,867 | - | - | - | ||||||||||||
Advances
- general
|
829,021 | 7,589,725 | 3,032,760 | 1,454,666 | ||||||||||||
Total
current assets
|
20,983,873 | 13,678,332 | 11,158,468 | 4,544,945 | ||||||||||||
Property
and equipment, net
|
32,267 | 31,900 | 29,465 | 18,684 | ||||||||||||
Capitalized
television cost – discontinued operations
|
- | 6,821,550 | - | - | ||||||||||||
Total
Assets
|
$ | 21,016,140 | $ | 20,531,782 | $ | 11,187,933 | $ | 4,563,629 | ||||||||
Liabilities
and Shareholders' Equity
|
||||||||||||||||
Current
Liabilities
|
||||||||||||||||
Accounts
payable
|
$ | 420,809 | $ | 885,013 | $ | 781,105 | $ | 972,949 | ||||||||
Customer
deposit for media time
|
391,364 | 1,776,364 | 225,531 | 612,294 | ||||||||||||
Accrued
liabilities
|
126,803 | 184,341 | 89,990 | 97,871 | ||||||||||||
Other
taxes payable
|
175,372 | 320,712 | 1,334,144 | 536,163 | ||||||||||||
Corporate
tax payable
|
930,765 | 1,678,069 | 2,147,916 | 547,421 | ||||||||||||
Total
current liabilities
|
2,045,113 | 4,844,499 | 4,578,686 | 2,766,698 | ||||||||||||
Due
to Related parties
|
525,674 | - | - | - | ||||||||||||
Total
Liabilities
|
2,570,787 | 4,844,499 | 4,578,686 | 2,766,698 | ||||||||||||
Shareholders'
Equity
|
||||||||||||||||
Common
Stock ($1.00 par value, 50,000 shares authorized, issued and
outstanding)
|
50,000 | 50,000 | 50,000 | 50,000 | ||||||||||||
Additional
paid-in capital
|
582,350 | 582,350 | 582,350 | 582,350 | ||||||||||||
Accumulated
other comprehensive income
|
406,126 | 383,533 | 315,582 | 108,294 | ||||||||||||
Statutory
surplus reserve fund
|
790,138 | 790,138 | 790,138 | 316,055 | ||||||||||||
Retained
earnings
|
16,616,739 | 13,881,262 | 4,871,177 | 740,232 | ||||||||||||
Total
shareholders' equity
|
18,445,353 | 15,687,283 | 6,609,247 | 1,796,931 | ||||||||||||
Total
Liabilities and Shareholders' Equity
|
$ | 21,016,140 | $ | 20,531,782 | $ | 11,187,933 | $ | 4,563,629 |
See
accompanying notes to the Consolidated Financial Statements.
66
CD
Media (Holding) Co., Limited and Subsidiaries
Consolidated
Statements of Operations and Comprehensive Income
For the Three Months Ended
|
For the Years Ended
|
|||||||||||||||||||
March 31,
|
December 31,
|
|||||||||||||||||||
2010
|
2009
|
2009
|
2008
|
2007
|
||||||||||||||||
(Unaudited)
|
(Unaudited)
|
|||||||||||||||||||
Revenues
|
$ | 20,404,617 | $ | 11,385,849 | $ | 74,479,651 | $ | 44,684,432 | $ | 17,102,819 | ||||||||||
Cost
of Goods Sold
|
(16,265,622 | ) | (9,330,769 | ) | (59,745,755 | ) | (36,497,828 | ) | (12,838,439 | ) | ||||||||||
Gross
Profit
|
4,138,995 | 2,055,080 | 14,733,896 | 8,186,604 | 4,264,380 | |||||||||||||||
General
and administrative
|
||||||||||||||||||||
Selling
Expenses
|
605,998 | 416,668 | 2,109,502 | 1,672,606 | 2,068,178 | |||||||||||||||
General
and administrative
|
180,554 | 121,290 | 575,118 | 371,323 | 374,265 | |||||||||||||||
Depreciation
of equipment
|
2,530 | 2,109 | 8,995 | 7,338 | 1,780 | |||||||||||||||
Total
operating expenses
|
789,082 | 540,067 | 2,693,615 | 2,051,267 | 2,444,223 | |||||||||||||||
Income
from operations
|
3,349,913 | 1,515,013 | 12,040,281 | 6,135,337 | 1,820,157 | |||||||||||||||
Gain
on disposal of assets
|
- | - | 660 | - | - | |||||||||||||||
Interest
income
|
333 | 663 | 2,528 | 4,700 | 5,221 | |||||||||||||||
Income
from continuing operations before income taxes
|
3,350,246 | 1,515,676 | 12,043,469 | 6,140,037 | 1,825,378 | |||||||||||||||
Income
taxes
|
(849,720 | ) | (378,923 | ) | (3,033,384 | ) | (1,535,009 | ) | (602,375 | ) | ||||||||||
Income
from continuing operations
|
2,500,526 | 1,136,753 | 9,010,085 | 4,605,028 | 1,223,003 | |||||||||||||||
Income
from discontinued operations, net of income taxes of
$78,317
|
234,951 | - | - | - | - | |||||||||||||||
Net
income
|
$ | 2,735,477 | $ | 1,136,753 | $ | 9,010,085 | $ | 4,605,028 | $ | 1,223,003 | ||||||||||
Other
Comprehensive Income(Loss)
|
||||||||||||||||||||
Foreign
currency translation adjustment
|
22,593 | (8,560 | ) | 67,951 | 207,288 | 84,227 | ||||||||||||||
Comprehensive
Income
|
$ | 2,758,070 | $ | 1,128,193 | $ | 9,078,036 | $ | 4,812,316 | $ | 1,307,230 |
See
accompanying notes to the Consolidated Financial Statements.
67
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
|
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 | |||||||||||||||||||||
Foreign
currency translation adjustment
|
- | - | - | - | 22,593 | - | 22,593 | |||||||||||||||||||||
Net
income for the three months ended March 31, 2010
(unaudited)
|
- | - | - | - | - | 2,735,477 | 2,735,477 | |||||||||||||||||||||
Balances,
March 31, 2010
|
50,000 | $ | 50,000 | $ | 582,350 | $ | 790,138 | $ | 406,126 | $ | 16,616,739 | $ | 18,445,353 |
See
accompanying notes to the Consolidated Financial Statements.
CD
Media (Holding) Co., Limited and Subsidiaries
Consolidated
Statements of Cash Flows
For
the Three Months Ended
|
For
the Years Ended
|
|||||||||||||||||||
March 31,
|
December 31,
|
|||||||||||||||||||
2010
|
2009
|
2009
|
2008
|
2007
|
||||||||||||||||
(Unaudited)
|
(Unaudited)
|
|||||||||||||||||||
Cash
Flows From Operating Activities
|
||||||||||||||||||||
Net
Income
|
$ | 2,735,477 | $ | 1,136,753 | $ | 9,010,085 | $ | 4,605,028 | $ | 1,223,003 | ||||||||||
Gain
from discontinued operations
|
(313,268 | ) | - | - | - | - | ||||||||||||||
Adjustments
to reconcile net income to net cash provided by (used in) operating
activities:
|
||||||||||||||||||||
Depreciation
|
2,530 | 192 | 8,995 | 7,338 | 1,780 | |||||||||||||||
Gain
on disposal of assets
|
- | (660 | ) | - | - | |||||||||||||||
Changes
in operating assets and liabilities:
|
||||||||||||||||||||
Accounts
receivable-trade
|
(1,405,203 | ) | 1,062,036 | 1,476,745 | (5,198,481 | ) | (856,843 | ) | ||||||||||||
Advances
for advertising slots
|
(35,646 | ) | 2,796,174 | (4,554,897 | ) | (1,673,286 | ) | (904,430 | ) | |||||||||||
Deferred
income tax assets
|
- | - | - | 69,798 | ||||||||||||||||
Accounts
payable and accrued liabilities
|
(667,177 | ) | 1,380,361 | (816,676 | ) | 703,416 | 583,157 | |||||||||||||
Customer
deposit
|
(1,385,121 | ) | (56,892 | ) | 1,550,679 | (346,695 | ) | 364,250 | ||||||||||||
Income
taxes payable
|
(747,418 | ) | 263,493 | (471,311 | ) | 1,636,318 | 547,421 | |||||||||||||
Cash
provided by (used in) - continuing operations
|
(1,815,826 | ) | 6,582,117 | 6,202,960 | (266,362 | ) | 1,028,136 | |||||||||||||
Cash
provided by (used in) discontinued operations
|
1,052,548 | (2,197,650 | ) | (6,817,365 | ) | - | - | |||||||||||||
Net
cash provided by (used in) operating activities
|
(763,278 | ) | 4,384,467 | (614,405 | ) | (266,362 | ) | 1,028,136 | ||||||||||||
Cash
Flows From Investing Activities
|
||||||||||||||||||||
Cash
paid for equipment additions
|
(2,894 | ) | (400 | ) | (20,867 | ) | (16,646 | ) | (17,807 | ) | ||||||||||
Cash
received on disposal of fixed assets
|
- | 14,661 | - | - | ||||||||||||||||
Net
cash used in investing activities
|
(2,894 | ) | (400 | ) | (6,206 | ) | (16,646 | ) | (17,807 | ) | ||||||||||
Cash
Flows From Financing Activities
|
||||||||||||||||||||
Cash
received from related parties
|
525,672 | - | - | - | - | |||||||||||||||
Cash
paid to related parties
|
- | - | - | - | (389,755 | ) | ||||||||||||||
Net
cash provided by (used in) financing activities
|
525,672 | - | - | - | (389,755 | ) | ||||||||||||||
Effect
of exchange rate changes on cash
|
21,570 | 336 | 55,548 | 239,507 | 78,470 | |||||||||||||||
Net
increase (decrease) in cash and cash equivalents
|
(218,930 | ) | 4,384,403 | (565,063 | ) | (43,501 | ) | 699,044 | ||||||||||||
Cash
and cash equivalents, beginning of period
|
654,831 | 1,219,894 | 1,219,894 | 1,263,395 | 564,351 | |||||||||||||||
Cash
and cash equivalents, end of period
|
$ | 435,901 | $ | 5,604,297 | $ | 654,831 | $ | 1,219,894 | $ | 1,263,395 | ||||||||||
Supplemental
disclosure information:
|
||||||||||||||||||||
Income
taxes paid
|
$ | 1,675,896 | $ | 115,422 | $ | 3,502,943 | $ | - | $ | - | ||||||||||
Interest
paid
|
$ | - | $ | - | $ | - | $ | - | $ | - |
See
accompanying notes to the Consolidated Financial Statements.
69
CD
Media (Holding) Co., Limited and Subsidiaries
Notes
to Consolidated Financial Statements
NOTE
1. DESCRIPTION OF BUSINESS AND ORGANIZATION
CD Media
BVI was incorporated under the laws of British Virgin Island on March 31,
2009. CD Media BVI 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. 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.
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. CD Media Beijing is engaged in the sale of
commercial breaks on certain channels of China Central Television
(“CCTV”).
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.
70
The
corporate structure of the Company is as follows:
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.
71
In the
opinion of the management, the consolidated financial statements reflect all
adjustments (which include only normal recurring adjustments) necessary to
present fairly the financial position of the Company as of March 31, 2010 and
2009; and the results of operations and cash flows for the three month ended
March 31, 2010 and 2009, respectively.
|
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 period. 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 March 31, 2010, 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.
|
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
|
72
|
h.
|
Impairment of long-lived
assets
|
The
Company accounts for impairment of plant and equipment and amortizable
intangible assets in accordance with current accounting standards, 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 the 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
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 on 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 the current accounting
standards related to this matter. 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 through
non-refundable advances and have significant unmitigated risk that we may not be
able to resell all of the advertising time we purchase. 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, we
recognize revenue on the basis of 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 report
revenues gross of business tax and related surcharges, which are charged to cost
of goods sold.
|
k.
|
Cost of goods
sold
|
We
purchase blocks of advertising time on certain CCTV programs for a fixed fee.
Part or the entire 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.
73
|
l.
|
Capitalized television
costs
|
The
Company capitalizes television 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 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.
Television 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. 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 March 30, 2010, the Company had sold these productions.
|
m.
|
Income
taxes
|
The
Company accounts for income taxes in accordance with current accounting
standards, which require an asset and liability approach for financial
accounting and reporting for income taxes and allow 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 BVI 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.
The
functional currency of CD Media HZ and CD Media Beijing is the Renminbi (“RMB”),
the PRC’s currency. The companies maintain their financial statements using
their 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.
74
For
financial reporting purposes, the financial statements of CD Media BVI 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 HZ and CD Media Beijing, which are 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 | ||||||
Three
month ended March 31, 2010
|
6.81616 | 6.83620 | ||||||
Three
month ended March 31, 2009
|
6.82547 | 6.82547 |
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 | ||||||
Three
month ended March 31, 2010
|
7.76406 | 7.76390 | ||||||
Three
month ended March 31, 2009
|
7.74999 | 7.75374 |
|
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.
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.
75
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.
76
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. The advance payments generally give us the rights to purchase
favorable time slots from vendors. We would not get a refund of advances from
vendors if we fail to make further purchases within a year. “Advances
– general” represents cash advances paid to our suppliers that are not yet
applied to the purchase of specific time slots. We make these general advances
to secure our ability to acquire premium time slots. These general advances are
normally used to purchase specific time slots within a few months. Consequently,
“Advances – time slots purchased” represents cash advances that have
been applied to the purchase of specific time slots.
Advances
consist of the following:
March 31,
|
December 31,
|
|||||||||||
2010
|
2009
|
2008
|
||||||||||
Advances
- general
|
$ | 829,021 | $ | 7,589,725 | $ | 3,032,760 | ||||||
Advances
– time slot purchased
|
6,796,867 |
NOTE
4.
|
DISCOUNTINUED
OPERATIONS
|
On March
21, 2010, CD Media Beijing entered into an agreement to sell its entire interest
in two television series to an unaffiliated third party for RMB 51,975,000
(approximately $7,604,000). Since the Company does not plan to reenter the
television series business in the short term, the Company recorded the
transaction as disposal of discontinued operations. The selling price minus
the costs and associated taxes is reported as gain from disposal of discontinued
operations, net of income taxes.
The prior
year cost related to the two television series was reclassified as “Capitalized
television costs – discontinued operations.”
The
receivable related to the sales of the two television series is recorded as
"Accounts receivable - discontinued operations," separately from trade
receivables. 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.
77
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:
March 31,
|
December 31,
|
|||||||||||
2010
|
2009
|
2008
|
||||||||||
Customer
Deposit
|
$ | 391,364 | $ | 1,776,364 | $ | 225,531 |
NOTE
6.
|
RELATED
PARTY BALANCE AND TRANSCATIONS
|
Ms.
Hailan Zhang, Shareholder of CD Media BVI, loaned HKD 4,063,187 ($523,333) to
the Company as of March 31, 2010. This loan is non-interest bearing and has no
maturity date.
Mr.
Huabiao Lin, legal representative of CD Media HZ, loaned RMB 15,954 ($2,341) to
the Company as of March 31, 2010. This loan is non-interest bearing and has no
maturity date.
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%.
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
effective tax rate for the Company for the three months ended March 31, 2010 and
2009 was 25.3% and 25%, respectively.
The
provision for taxes on earnings consisted of:
March 31,
|
December 31,
|
|||||||||||||||||||
2010
|
2009
|
2009
|
2008
|
2007
|
||||||||||||||||
Income
before income taxes
|
$ | 3,350,246 | $ | 1,515,676 | $ | 12,043,469 | $ | 6,140,037 | $ | 1,825,378 | ||||||||||
Current
income taxes expenses:
|
||||||||||||||||||||
PRC
Enterprises Income Taxes:
|
(849,720 | ) | (378,923 | ) | (3,033,384 | ) | (1,535,009 | ) | (602,375 | ) | ||||||||||
United
States Federal Income Taxes
|
- | - | - | - | - | |||||||||||||||
Income
Taxes (at 25%, 25% 25%, 25% and 33% respectively)
|
$ | (849,720 | ) | $ | (378,923 | ) | $ | (3,033,384 | ) | $ | (1,535,009 | ) | $ | (602,375 | ) |
78
A
reconciliation between the income tax computed at the U.S. statutory rate and
the Group’s provision for income tax is as follows:
March 31,
|
December 31,
|
|||||||||||||||||||
2010
|
2009
|
2009
|
2008
|
2007
|
||||||||||||||||
U.S.
statutory rate
|
34 | % | 34 | % | 34 | % | 34 | % | 34 | % | ||||||||||
Foreign
income not recognized in the U.S.
|
-34 | % | -34 | % | -34 | % | -34 | % | -34 | % | ||||||||||
PRC
preferential enterprise income tax rate
|
25 | % | 25 | % | 25 | % | 25 | % | 33 | % | ||||||||||
Provision
for income tax
|
25 | % | 25 | % | 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 five years 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 | $ | - | $ | - |
As of
December 31, 2009, there were no other contractual obligations, related to the
purchase of advertising time or otherwise.
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 cannot 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.
79
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 March, 31, 2010, March 31, 2009,
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
three months ended March 31, 2010 and 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 and for year ended December 31, 2007, one
customer had net sales exceeding 10% of the Company’s total net sales of the
year.
The
Company’s top three vendors 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. 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. For the three months ended March 31, 2010 and 2009, no
vendor had net purchases exceeding 10% of the Company’s total net purchases for
the respective periods.
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.
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.
80
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.
|
* previously filed
81
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:
February 2, 2011
|
||
By:
|
/s/ Dapeng
Duan
|
|
Name: Dapeng
Duan
|
||
Title: Chief
Financial Officer
|
82