|
PRINCIPAL SHAREHOLDERS The following table sets forth information as of the date of this prospectus with respect to the beneficial ownership of our ordinary shares, by:
| | • | | each person known to us to own beneficially more than 5.0% of our ordinary shares; and |
| | • | | each of our directors and executive officers. |
Beneficial ownership is determined in accordance with the rules of the SEC and includes voting or investment power with respect to the securities. Except as indicated below, and subject to applicable laws, the persons named in the table have sole voting and investment power with respect to all ordinary shares shown as beneficially owned by them. Percentage of beneficial ownership for each of the persons listed below is determined by dividing (i) the number of ordinary shares beneficially owned by such person, including ordinary shares such person has the right to acquire within 60 days after the date of this prospectus, by (ii) the total number of ordinary shares outstanding plus the number of ordinary shares such person has the right to acquire within 60 days after the date of this prospectus. The total number of ordinary shares outstanding as of the date of this prospectus is 231,428,220. The total number of ordinary shares outstanding after completion of this offering will be 57,860,000 Class A ordinary shares and 262,197,450 Class B ordinary shares, based on the public offering price of US$13.00 per ADS and (i) no change in the number of ADSs offered by us as set forth on the cover page of this prospectus, (ii) issuance of Class B ordinary shares to Sequoia in connection with the conversion of the convertible note and the concurrent private placement to Sequoia, and (iii) the underwriters do not exercise their over-allotment option. The underwriters may choose to exercise the over-allotment option in full, in part or not at all.
| | | | | | | | | | | | | | | | | | | | | | | | Shares Beneficially
Owned Prior to This
Offering | | | Shares Beneficially
Owned After This
Offering | | | Percentage
of Votes
Held After
This
Offering | | | | | Number | | | Percent | | | Number | | | Percent | | | Percent | | Directors and Executive Officers: | | | | | | | | | | | | | | | | | | | | | Man San Law(1) | | | 54,933,854 | | | | 23.7 | % | | | 54,933,854 | | | | 17.1 | % | | | 20.3 | % | Qi Li(2) | | | 30,753,168 | | | | 13.0 | % | | | 30,753,168 | | | | 9.5 | % | | | 9.8 | % | Jiepin Fu(3) | | | 23,878,221 | | | | 10.3 | % | | | 23,878,221 | | | | 7.5 | % | | | 8.9 | % | Ying Zou(4) | | | 4,000,000 | | | | 1.7 | % | | | 4,000,000 | | | | 1.2 | % | | | 1.5 | % | Zhengming Pan(5) | | | 2,400,000 | | | | 1.0 | % | | | 2,400,000 | | | | 0.7 | % | | | 0.9 | % | Lei Zheng | | | * | | | | * | | | | * | | | | * | | | | * | | Zhaofu Tian | | | * | | | | * | | | | * | | | | * | | | | * | | Punleung Liu | | | * | | | | * | | | | * | | | | * | | | | * | | Jinping Ma | | | — | | | | — | | | | — | | | | — | | | | — | | Jun Niu | | | — | | | | — | | | | — | | | | — | | | | — | | Honghui Deng | | | — | | | | — | | | | — | | | | — | | | | — | | Zhe Wei | | | — | | | | — | | | | — | | | | — | | | | — | | Min Fan | | | — | | | | — | | | | — | | | | — | | | | — | | Catherine Qin Zhang | | | — | | | | — | | | | — | | | | — | | | | — | | Qian Sun | | | — | | | | — | | | | — | | | | — | | | | — | | Yu Wei | | | — | | | | — | | | | — | | | | — | | | | — | | | | | | | | Principal Shareholders: | | | | | | | | | | | | | | | | | | | | | Clear Treasure Group Limited(3) | | | 23,878,221 | | | | 10.3 | % | | | 23,878,221 | | | | 7.5 | % | | | 8.9 | % | Delite Limited(6) | | | 29,008,836 | | | | 12.5 | % | | | 29,008,836 | | | | 9.1 | % | | | 10.8 | % | Brothers Union International Limited(7) | | | 25,749,188 | | | | 11.1 | % | | | 25,749,188 | | | | 8.0 | % | | | 9.6 | % | Smart Mega Holding Limited(8) | | | 25,265,018 | | | | 10.9 | % | | | 25,265,018 | | | | 7.9 | % | | | 9.4 | % | HWL Partners Limited(9) | | | 14,574,840 | | | | 6.3 | % | | | 14,574,840 | | | | 4.6 | % | | | 5.4 | % | Vivoland Limited(10) | | | 16,113,055 | | | | 7.0 | % | | | 16,113,055 | | | | 5.0 | % | | | 6.0 | % | Blue Ivy Investment Limited(11) | | | — | | | | — | | | | 19,230,770 | | | | 6.0 | % | | | 7.2 | % | Sequoia Capital 2010 CGF Holdco, Ltd.(12) | | | — | | | | — | | | | 35,576,922 | | | | 11.1 | % | | | 13.3 | % |
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Table of Contents
| The business address of our directors and executive officers is 6th Floor, Block 9, Phase 2, Shenzhen Software Park, Keji Zhongerlu, Nanshan District, Shenzhen, 518057, People’s Republic of China. |
* | Less than 1% of our outstanding ordinary shares. |
(1) | represents (i) 29,008,836 Class B ordinary shares owned by Delite Limited, a BVI company with the address of P.O. Box 3321, Road Town, Tortola, British Virgin Islands, which shares are held in irrevocable discretionary family trusts established by Mr. Law, (ii) 660,000 Class A ordinary shares issuable upon the exercise of options within 60 days of the date of this prospectus granted to Mr. Law under our 2011 Share Incentive Plan, and (iii) 25,265,018 Class B ordinary shares owned by Smart Mega Holding Limited, a BVI company with the address of P.O. Box 957, Offshore, which shares are held in irrevocable discretionary family trusts established by Ms. Ping Yuan, wife of Mr. Law. Mr. Law, by virtue of the relationship described above, may be deemed to beneficially own such 25,265,018 Class B ordinary shares. |
(2) | represents (i) 25,749,188 Class B ordinary shares owned by Brothers Union International Limited, a BVI company wholly and beneficially owned by Mr. Li, and (ii) 5,003,980 Class A ordinary shares issuable upon the exercise of options within 60 days of the date of this prospectus granted to Mr. Li under our 2011 Share Incentive Plan. |
(3) | represents 23,878,221 Class B ordinary shares owned by Clear Treasure Group Limited, a BVI company wholly owned by Mr. Fu, with the address of P.O. Box 957, Offshore Incorporations Center, Road Town, Tortola, British Virgin Islands. Mr. Fu, by virtue of his sole ownership of Clear Treasure Group Limited, may be deemed to beneficially own such 23,878,221 Class B ordinary shares. |
(4) | represents 4,000,000 Class B ordinary shares owned by Wander Profits Holding Limited, a BVI company wholly owned by Mr. Zou, with the address of P.O. Box 957, Offshore Incorporations Center, Road Town, Tortola, British Virgin Islands. Mr. Zou, by virtue of his sole ownership of Wander Profits Holding Limited, may be deemed to beneficially own such 4,000,000 Class B ordinary shares. |
(5) | represents 2,400,000 Class B ordinary shares owned by Ace Chance Global Limited, a BVI company wholly and beneficially owned by Mr. Pan, with the address of P.O. Box 957, Offshore Incorporations Center, Road Town, Tortola, British Virgin Islands. Mr. Pan, by virtue of his sole ownership of Ace Chance Global Limited, may be deemed to beneficially own such 2,400,000 Class B ordinary shares. |
(6) | represents 29,008,836 Class B ordinary shares owned by Delite Limited, a BVI company with the address of P.O. Box 3321, Road Town, Tortola, British Virgin Islands. Delite Limited is wholly owned by Jackpot International Ltd, a Cayman Islands company which is wholly owned by The Jackpot Trust, a revocable discretionary trust established by Mr. Law with Mr. Law as settlor and Mr. Law and his family members as beneficiaries, which include Ms. Ping Yuan, wife of Mr. Law, Ms. Yuhan Law, daughter of Mr. Law, Mr. Lin Law, father of Mr. Law, and Ms. Ruihua Hu, mother of Mr. Law. The 29,008,836 Class B ordinary shares are held by Merrill Lynch Bank and Trust Company (Cayman) Limited as trustee of The Jackpot Trust. |
(7) | represents 25,749,188 Class B ordinary shares owned by Brothers Union International Limited, a BVI company wholly and beneficially owned by our director, Qi Li. The address of Brothers Union International Limited is P.O. Box 957, Offshore Incorporations Centre, Road Town, Tortola, British Virgin Islands. |
(8) | represents 25,265,018 Class B ordinary shares owned by Smart Mega Holding Limited, a BVI company with the address of P.O. Box 957, Offshore Incorporations Centre, Road Town, Tortola, British Virgin Islands. Smart Mega Holding Limited is wholly owned by Vibrant Jade Ltd., a Cayman Islands company which is wholly owned by The Vibrant Jade Trust, a revocable discretionary trust established by Ms. Ping Yuan, wife of Mr. Law, with Ms. Yuan as settlor and Mr. Law and Ms. Yuhan Law, daughter of Ms. Ping Yuan, as beneficiaries. The 25,265,018 Class B ordinary shares are held by Merrill Lynch Bank and Trust Company (Cayman) Limited as trustee of The Vibrant Jade Trust. |
(9) | represents 14,574,840 Class B ordinary shares owned by HWL Partners Limited, a Cayman company wholly owned by Mohamad Fadzly Bin Tahir. The address of HWL Partners Limited is P.O. Box 847, GT Grand Cayman KY1-1103, Cayman Islands. Mr. Tahir by virtue of his sole ownership of HWL Partners Limited, may be deemed to beneficially own such 14,574,840 Class B ordinary shares. |
(10) | represents 16,113,055 Class B ordinary shares owned by Vivoland Limited, a BVI Company wholly owned by Jingbo Wang. The address of Viroland Limited is Portcullis Trust Net Chambers. P.O. Box 3444, Road Town, Tortola, British Virgin Islands. Mr. Wang, by virtue of his sole ownership of Vivoland Limited, may be deemed to beneficially own such 16,113,055 Class B ordinary shares. |
(11) | represents 19,230,770 Class B ordinary shares acquirable from Vivoland Limited and Brother Union Investment Limited upon the exercise of exchange options granted to Blue Ivy Investment Limited by Vivoland Limited. Pursuant to an exchangeable, note agreement, Vivoland Limited issued exchangeable notes to Blue Ivy Investment Limited in the aggregate principal amount of US$20 million. The exchangeable notes are exchangeable at the option of Blue Ivy Investment Limited, into the number of Class B ordinary shares owned by Vivoland Limited equivalent to the outstanding amount of the exchangeable notes divided by the applicable exchange price immediately upon the completion of this offering. The exchange price per Class B ordinary share shall be equal to 80% of the public offering price of our ADSs adjusted to reflect our ADS-to-ordinary share ratio. Based on the public offering price, the exchangeable notes can be exchanged into 19,230,770 Class B ordinary shares upon the completion of this offering. Blue Ivy Investment Limited is a company limited by shares incorporated under the laws of the British Virgin Islands. Vision Knight Capital (China) Fund I, L.P. owns a majority of the issued and outstanding shares of Blue Ivy Investment Limited. Vision Knight Capital General Partners Ltd., acting as the general partner of Vision Knight Capital (China) Fund I, L.P., has the power to direct Blue Ivy Investment Limited as to the voting and disposition of shares directly and indirectly held by Blue Ivy Investment Limited. Mr. Zhe Wei and Mr. Daming Zhu are the directors of Vision Knight Capital General Partners Ltd. and have the power to, through unanimous resolutions, direct Blue Ivy |
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Table of Contents| | Investment Limited as to the voting and disposition of shares directly and indirectly held by Blue Ivy Investment Limited. Each of Mr. Zhe Wei and Mr. Daming Zhu disclaims beneficial ownership of any of the shares held by Blue Ivy Investment Limited except to the extent of his pecuniary interest therein. The registered office of Blue Ivy Investment Limited is at Trinity Chambers, PO Box 4301, Road Town, Tortola, British Virgin Islands. Blue Ivy Investment Limited has indicated to us that it is contemplating transferring ordinary shares acquired upon the exercise of exchange options to two third parties, namely Brilliant Vantage Investment Limited and NETDRAGON WEBSOFT INC., for an aggregate consideration of US$2 million and US$1 million, respectively, at a transfer price per share equals to the exchange price per share prior to the consummation of this offering. Brilliant Vantage Investment Limited and NETDRAGON WEBSOFT INC. are both third parties independent to Blue Ivy Investment Limited and to us and are currently not our shareholders. Based on a transfer price of US$1.04 per share, being 80% of the public offering price, Brilliant Vantage Investment Limited and NETDRAGON WEBSOFT INC. will acquire 1,923,077 and 961,538 ordinary shares after the transfers, respectively, representing 0.6% and 0.3% immediately following this offering. Assuming the transfer is consummated, Blue Ivy will hold 16,346,154 ordinary shares, representing 5.1% of our outstanding ordinary shares and 6.1% of votes of our ordinary shares immediately following this offering. Ilove Angels Limited, a BVI company wholly owned by Lim Sze Han, owns a majority of the issued and outstanding shares of Brilliant Vantage Investment Limited, a BVI company. Ms. Wei Ji is the sole director of Brilliant Vantage Investment Limited and has the power to direct Brilliant Vantage Investment Limited as to the voting and disposition of shares directly and indirectly held by Brilliant Vantage Investment Limited. NetDragon Websoft Inc., a Cayman Islands company which is publicly listed on the Hong Kong Stock Exchange, owns all the issued and outstanding shares of NETDRAGON WEBSOFT INC., a BVI company. Dejian Liu, Luyuan Liu, Hongzhan Chen, Dongliang Lin are directors of NETDRAGON WEBSOFT INC., and have the power to direct NETDRAGON WEBSOFT INC. as to the voting and disposition of shares directly and indirectly held by NETDRAGON WEBSOFT INC. |
(12) | represent (i) 19,230,770 Class B ordinary shares issuable upon automatic conversion of the convertible note upon the completion of this offering, (ii) 11,538,460 Class B ordinary shares to be sold to Sequoia Capital 2010 CGF Holdco., Ltd. upon the completion of this offering in the concurrent private placement to Sequoia Capital 2010 CGF Holdco., Ltd., and (iii) 4,807,692 Class B ordinary shares acquirable from an existing shareholder upon the exercise of exchange options granted by the existing shareholder to Sequoia Capital 2010 CGF Holdco., Ltd. pursuant to an exchangeable note agreement, the existing shareholder issued exchangeable notes to Sequoia Capital 2010 CGF Holdco., Ltd. in the aggregate principal amount of US$5,000,000. The exchangeable notes are exchangeable, at the option of Sequoia Capital 2010 CGF Holdco., Ltd., into the number of Class B ordinary shares owned by the existing shareholder equivalent to the outstanding amount of the exchangeable notes divided by the applicable exchange price immediately upon completion of this offering. The exchange price per Class B ordinary share shall be equal to 80% of the public offering price of our ADSs, adjusted to reflect our ADS-to-ordinary share ratio. Based on the public offering price, the exchangeable notes can be exchanged into 4,807,692 Class B ordinary shares upon completion of this offering. Sequoia Capital 2010 CGF Holdco., Ltd. is wholly owned by Sequoia Capital China Growth 2010 Fund, L.P., Sequoia Capital China Growth 2010 Partners Fund, L.P. and Sequoia Capital China Growth 2010 Principals Fund, L.P. (collectively “SCC 2010 Growth Funds”). The SCC 2010 Growth Funds’ general partner is SC China Growth 2010 Management, L.P. The general partner of SC China Growth 2010 Management, L.P. is SC China Holding Limited, a company incorporated in the Cayman Islands. SC China Holding Limited is wholly owned by SNP China Enterprises Limited, a company wholly owned by Mr. Neil Nanpeng Shen. Mr. Neil Nanpeng Shen has the power to direct Sequoia Capital 2010 CGF Holdco, Ltd. as to the voting and disposition of shares directly or indirectly held by Sequoia Capital 2010 CGF Holdco, Ltd. Mr. Shen disclaims beneficial ownership of the shares held by Sequoia Capital 2010 CGF Holdco, Ltd., except to the extent of his pecuniary interest therein. The registered address of Sequoia Capital 2010 CGF Holdco, Ltd. is Cricket Square, Hutchins Drive, PO box 2681, Grand Cayman, KY1-1111, Cayman Islands. |
As of the date of this prospectus, we are not aware of any of our shareholders being a resident in the United States or affiliated with a registered broker-dealer or being in the business of underwriting securities. We will issue Class A ordinary shares represented by our ADSs in this offering. Our existing shareholders will hold our Class B ordinary shares upon the closing of the offering and may choose to convert their Class B ordinary shares into the same number of Class A ordinary shares at any time. See “Description of Share Capital” for a more detailed description of our Class A ordinary shares and Class B ordinary shares. For details of our equity compensation plan, see “Management—Share Incentive Plan.” History of Recent Security Issuances The following is a summary of our securities issuances during the past three years. Our current holding company, 500.com Limited, was incorporated in the Cayman Islands in April 2007 by Delite Limited, a BVI company owned by Man San Law. In September 2007, we issued 1,200,000 series A preferred shares to certain independent investors including Yuzhen Fu, Xianzhen Liu and Jinxia Chen. We also issued an aggregate of 1,513,768 series B preferred shares to entities including SIG China Investment One, Ltd., IDG-ACCEL China Growth Fund L.P., IDG-ACCEL China Growth Fund-A L.P. and IDG-ACCEL China Investors L.P., and issued 692,305 series B-1 preferred shares to TSE Holdings Limited in September 2007. In February 2010, all series A preferred shares held by Yuzhen Fu, Xianzhen Liu and Jinxia Chen were transferred to Brothers Union Investment Holdings Limited, a Cayman Islands company owned at the time of the 132
Table of Contentstransfer by He Li and Xue Li who are brother and sister of Qi Li, and such transferred shares are converted to ordinary shares upon the transfer. In March 2010, we redeemed all series B preferred shares and series B-1 preferred shares owned by SIG China Investment One, Ltd., IDG-ACCEL China Growth Fund L.P., IDG-ACCEL China Growth Fund-A L.P., IDG-ACCEL China Investors L.P., and TSE Holdings Limited, and cancelled the registrations of such shares. In March 2010, we issued 607,285 Class B ordinary shares to Coherent Pioneer Enterprises Limited, 607,285 ordinary shares to Dai Fan, 262,761 ordinary shares to Brother Union Investment Holding Limited and 728,742 ordinary shares to HWL Partners Limited. In April 2012, we redeemed 11,250,000, 6,000,000 and 2,000,000 Ordinary Shares from IDG, Delite Limited and Nanpeng Shen, respectively. In April 2012, we issued 9,250,000 and 8,000,000 ordinary shares to Dragon Global International Ltd. and WinWin Solution Enterprise Ltd., respectively. On October 21, 2013, pursuant to a convertible note purchase agreement, we issued a convertible note due on June 30, 2014 in the aggregate principal amount of $20 million to Sequoia. The convertible note bears interest at 10% per annum, or 13% per annum upon an event of default, in both cases uncompounded and computed on the basis of the actual number of days elapsed. The convertible note will be automatically converted into our Class B ordinary shares upon completion of this offering. The conversion price per Class B ordinary share shall be equal to 80% of the public offering price of the ADSs adjusted to reflect our ADS-to-ordinary share ratio. Based on the public offering price, the convertible note will be automatically converted into 19,230,770 Class B ordinary shares upon the completion of this offering. In the event of automatic conversion triggered by this offering, the convertible note shall be deemed interest free between the date of issuance and the date of conversion. The convertible note shall become due and payable immediately prior to the closing of a change in control. The change in control events include (i) sale, lease or other disposition of all or substantially all of our assets, (ii) the sale, exchange or offer of a majority of our outstanding share capital, (iii) a merger, consolidation, amalgamation, recapitalization, reclassification, reorganization or similar combination transactions involving us, such that holders of our share capital immediately prior to such transaction beneficially own less than a majority in voting power of our outstanding share capital, or the surviving or resulting corporation or acquirer, as the case may be, immediately following such transaction. In the event of default, Sequoia may declare all outstanding payment obligations by us under the convertible note to be immediately due and payable. The automatic conversion feature meets the definition of a derivative where the underlying is based on the occurrence or non-occurrence of this offering, and is bifurcated from the convertible note and accounted for in accordance with ASC 815, Derivatives and Hedging, and the change in fair value of the embedded derivative is recognized through the consolidated statement of comprehensive income. Upon completion of this offering and in connection with the issuance and automatic conversion of the convertible note, we will recognize the interest expense of the convertible note and the change in the fair value of the embedded derivative relating to the convertible note in the aggregate amount of US$5 million through the consolidated statements of comprehensive income for the year and quarter ending December 31, 2013. On October 22, 2013, we issued 660,000 and 2,000,000 ordinary shares to Delite Limited and Ace Chance Global Limited, respectively, at the purchase price of US$0.20 per share, upon receipt of the exercise notices from Mr. Man San Law and Mr. Zhengming Pan of their vested options granted to them under our 2011 share incentive plan. 133
Table of ContentsRELATED PARTY TRANSACTIONS Contractual Arrangements with Our Consolidated Affiliated Entities and Their Shareholders Due to certain restrictions under PRC law on foreign ownership of businesses engaged in the Internet and lottery business, we conduct our operations in China principally through contractual arrangements among our wholly owned PRC subsidiary, E-Sun Sky Computer, our consolidated affiliated entities in China and their shareholders. For a description of these contractual arrangements, see “Our History and Corporate Structure.” Related Party Loans and Other Payments Historically, we extended loans to certain directors and entities controlled by certain directors, executive officers and a principal shareholder of our company. As of December 31, 2010 and 2011 and 2012 and September 30, 2013, the total outstanding balance due from these related parties was RMB78.8 million and RMB102.6 million, RMB188.2 million and RMB46.7 million (US$7.6 million), respectively, which were due on demand, interest free and uncollateralized. Such loans were repaid in full as of the date of this prospectus. As of December 31, 2010, all loans previously extended by us to the following persons and entities were repaid in full: (i) a loan to our chief executive officer and chairman of our board of directors, Man San Law, with the largest amount outstanding of RMB19.8 million during the period from 2008 to 2010; (ii) a loan to Shenzhen Internet Xintiandi Information Technology Co., Ltd., an entity controlled by Man San Law, with the largest amount outstanding of RMB2.4 million during the period from 2008 to 2010; (iii) a loan to Shenzhen Caimeng Century Internet Technology Co., Ltd., an entity significantly influenced by Man San Law, with the largest amount outstanding of RMB10.0 million during the period from 2008 to 2010; (iv) a loan to Shenzhen Huayu Investment & Development (Group) Co., Ltd., an entity controlled by one of our directors, Jiepin Fu, with the largest amount outstanding of RMB11.1 million during the period from 2008 to 2010; (v) a loan to entities controlled by one of our shareholders, Ping Yuan, including Shenzhen Yimengtianxia Technology Co., Ltd., with the largest amount outstanding of RMB55.4 million during the period from 2008 to 2010, Shenzhen Tiannuo Technology Co., Ltd., with the largest amount outstanding of RMB2.1 million during the period from 2008 to 2010, and Shenzhen Jisu Dark Blue Digital Technology Co., Ltd., with the largest amount outstanding of RMB9.1 million since January 1, 2008; (vi) a loan to Shenzhen Zonghengsihai Sailing Match Management Co. Ltd., an entity significantly influenced by one of our directors, Jiepin Fu, with the largest amount outstanding of RMB57.8 million during the period from 2008 to 2010; (vii) a loan to Jiepin Fu, with the largest amount outstanding of RMB2.0 million during the period from 2008 to 2010; (viii) a loan to Shijie Zhang, a member of our senior management, with the largest amount outstanding of RMB720,000 during the period from 2008 to 2010; and (ix) a loan to Ying Zou, one of our shareholders, with the largest amount outstanding of RMB261,000 during the period from 2008 to 2010. All such loans were due on demand, interest free and uncollateralized. We received a due on demand, interest free and uncollateralized loan from Shenzhen Yimengtianxia Technology Co., Ltd., an entity controlled by one of our shareholders, Ping Yuan, the aggregate balance of which was RMB200,000 as of December 31, 2009, with the largest amount outstanding of RMB3.7 million during the period from 2008 to 2010. We repaid the loan in full as of December 31, 2010. We received a due on demand, interest free and uncollateralized loan from Shenzhen Cub Digital Co., Ltd., an entity controlled by our chief executive officer and chairman of our board of directors, Man San Law, the aggregate balance of which was RMB131,000 as of December 31, 2009, with the largest amount outstanding of RMB131,000 during the period from 2009 to 2011. We repaid the loan in full as of December 31, 2010. We made a due on demand, interest free and uncollateralized loan to Shenzhen Bozhi Consulting Co., Ltd., an entity controlled by our chief executive officer and chairman of our board of directors, Man San Law, the aggregate balance of which was RMB45.7 million (US$7.5 million) as of September 30, 2013, with the largest amount outstanding of RMB192.6 million (US$31.4 million) during the period from 2009 to September 30, 2013. Such loan was repaid in full as of the date of this prospectus. We made a due on demand, interest free and uncollateralized loan to Delite Limited, an entity controlled by our chief executive officer and chairman of our board of directors, Man San Law, the aggregate balance of which 134
Table of Contentswas RMB976,000 (US$159,477) as of September 30, 2013, with the largest amount outstanding of RMB976,000 (US$159,025) during the period from 2009 to September 30, 2013. Such loan was repaid in full as of the date of this prospectus. We receive a due on demand, interest free and uncollateralized loan from Mr. Man San Law, the aggregate balance of which totaled RMB1.1 million as of December 31, 2010. We repaid the loan in full in March 2011. We received a due on demand, interest free and uncollateralized loan from Delite Limited, the aggregate balance of which totaled RMB8.4 million (US$1.4 million) as of September 30, 2013. We have settled all outstanding amounts of loans extended to and borrowed from related parties as of the date of this prospectus and we do not plan to enter into similar transactions with related parties after completion of this offering. Employment Agreements See “Management—Employment Agreements.” Share Options See “Management—Share Incentive Plan.” 135
Table of ContentsDESCRIPTION OF SHARE CAPITAL We are a Cayman Islands exempted company with limited liability and our affairs are governed by our memorandum and articles of association, and the Companies Law (as amended) of the Cayman Islands, which is referred to as the Companies Law below. As of the date of this prospectus, our authorized share capital is $50,000 consisting of (i) 955,878,540 ordinary shares of par value of US$0.00005 each, (ii) 30,275,360 Series B Preferred Shares of par value of US$0.00005 each and (iii) 13,846,100 Series B-1 Preferred Shares of par value US$0.00005 each. Our amended and restated memorandum and articles of association, which will become effective upon completion of this offering, provides for a dual-class share structure, with the 1,000,000,000 authorized ordinary shares divided into: (i) 700,000,000 Class A ordinary shares, par value US$0.00005 per share, and (ii) 300,000,000 Class B ordinary shares, par value US$0.00005 per share. As of the date of this prospectus, there are 231,428,220 ordinary shares issued and outstanding. Upon completion of this offering, we will have 57,860,000 Class A ordinary shares and 262,197,450 Class B ordinary shares issued and outstanding including (i) 19,230,770 Class B ordinary shares to be issued upon automatic conversion of the convertible note upon the completion of this public offering and (ii) 11,538,460 Class B ordinary shares to be issued and sold to Sequoia in the concurrent private placement. All of our ordinary shares issued and outstanding prior to the completion of the offering are and will be fully paid, and all of our shares to be issued in the offering will be issued as fully paid. We have adopted an amended and restated memorandum and articles of association which will become effective upon completion of this offering. The following are summaries of material provisions of our amended and restated memorandum and articles of association and the Companies Law insofar as they relate to the material terms of our ordinary shares. The following discussion primarily concerns ordinary shares and the rights of holders of ordinary shares. The holders of ADSs will not be treated as our shareholders and will be required to surrender their ADSs for cancellation and withdrawal from the depositary facility in which the ordinary shares are held in order to exercise shareholders’ rights with respect to the ordinary shares. The depositary will agree, so far as it is practical, to vote or cause to be voted the amount of ordinary shares represented by ADSs in accordance with the non-discretionary written instructions of the holders of such ADSs. See “Description of the American Depositary Shares.” Ordinary Shares General Certificates representing the ordinary shares are issued in registered form. Our shareholders who are non-residents of the Cayman Islands may freely hold and vote their ordinary shares. Our amended and restated memorandum and articles of association provide that the company shall only issue non-negotiable and not bearer of negotiable shares. Register of Members Under Cayman Islands law, we must keep a register of members and there shall be entered therein:
| | (a) | the names and addresses of the members, a statement of the shares held by each member, and of the amount paid or agreed to be considered as paid, on the shares of each member; |
| | (b) | the date on which the name of any person was entered on the register as a member; and |
| | (c) | the date on which any person ceased to be a member. |
Under Cayman Islands law, the register of members of our company is prima facie evidence of the matters set out therein (i.e. the register of members will raise a presumption of fact on the matters referred to above unless rebutted) and a member registered in the register of members shall be deemed as a matter of Cayman Islands law to have legal title to the shares as set against its name in the register of members. Upon the closing of this public offering, the register of members shall be immediately updated to reflect the issue of shares by us to 136
Table of ContentsDeutsche Bank Trust Company Americas, as the depositary. Once our register of members has been updated, Deutsche Bank Trust Company Americas, as the depositary, shall be deemed to have legal title to the shares set against their name. Dividends The holders of our ordinary shares are entitled to such dividends as may be declared by our board of directors. Voting Rights Subject to any special rights or restrictions as to voting for the time being attached to any shares, at any general meeting every shareholder who is present in person or by proxy (or, in the case of a shareholder being a corporation, by its duly authorized representative) shall have one vote on a show of hands, and on a poll (i) every shareholder holding Class A ordinary shares present in person or by proxy (or, in the case of a shareholder being a corporation, by its duly appointed representative) shall have one vote for each fully paid Class A ordinary share of which such shareholder is the holder and (ii) every shareholder holding Class B ordinary shares present in person or by proxy (or in the case of a shareholder being a corporation, by its duly appointed representative) shall have 10 votes for each fully paid Class B ordinary share of which such shareholder is the holder. Voting at any meeting of shareholders is by show of hands unless a poll is demanded. A poll may be demanded by the chairman of such meeting or any one shareholder present in person or by proxy. An ordinary resolution to be passed by the shareholders requires the affirmative vote of a simple majority of votes attached to the ordinary shares cast in a general meeting, while a special resolution requires the affirmative vote of no less than three-fourths of votes attached to the ordinary shares cast in a general meeting. A special resolution will be required for important matters such as a change of name or making changes to our memorandum and articles of association. Transfer of Ordinary Shares Subject to the restrictions contained in our articles of association, as applicable, any of our shareholders may transfer all or any of his or her ordinary shares by an instrument of transfer in the usual or common form or any other form approved by our board of directors. Our board of directors may, in its absolute discretion, decline to register any transfer of any ordinary share. Our board of directors may also decline to register any transfer of any ordinary share unless:
| | • | | the instrument of transfer is lodged with us, accompanied by the certificate for the ordinary shares to which it relates and such other evidence as our board of directors may reasonably require to show the right of the transferor to make the transfer; |
| | • | | the instrument of transfer is in respect of only one class of ordinary shares; |
| | • | | the instrument of transfer is properly stamped, if required; |
| | • | | the ordinary shares transferred are fully paid and free of any lien in favor of us; |
| | • | | any fee related to the transfer has been paid to us; and |
| | • | | the transfer is not to more than four joint holders. |
If our directors refuse to register a transfer they are required, within three months after the date on which the instrument of transfer was lodged, to send to each of the transferor and the transferee notice of such refusal. General Meetings and Shareholder Proposals. As a Cayman Islands exempted company, we are not obliged by the Companies Law to call shareholders’ annual general meetings. Our post-offering memorandum and articles of association provide that we may (but are not obliged to) in each year hold a general meeting as our annual general meeting in which case we shall specify the meeting as such in the notices calling it, and the 137
Table of Contentsannual general meeting shall be held at such time and place as may be determined by our directors. We, however, will hold an annual shareholders’ meeting during each fiscal year, as required by the rules of the NYSE. Cayman Islands law provides shareholders with only limited rights to requisition a general meeting, and does not provide shareholders with any right to put any proposal before a general meeting. However, these rights may be provided in a company’s articles of association. Our post-offering memorandum and articles of association allow our shareholders holding not less than one-third of our voting share capital to requisition a special meeting of the shareholders, in which case the directors are obliged to call such meeting and to put the resolutions so requisitioned to a vote at such meeting; however, our post-offering memorandum and articles of association do not provide our shareholders with any right to put any proposals before annual general meetings or extraordinary general meetings not called by such shareholders. A quorum required for a meeting of shareholders consists of at least one shareholder present in person or by proxy or, if a corporation or other non-natural person, by its duly authorized representative, who collectively hold no less than one-third of our voting share capital. Advance notice of at least 14 days is required for the convening of our annual general meeting and other shareholders’ meetings. Liquidation On a return of capital on winding up or otherwise (other than on conversion, redemption or purchase of ordinary shares), assets available for distribution among the holders of ordinary shares will be distributed among the holders of the ordinary shares on a pro rata basis. If our assets available for distribution are insufficient to repay all of the paid-up capital, the assets will be distributed so that the losses are borne by our shareholders proportionately. Calls on Ordinary Shares and Forfeiture of Ordinary Shares Our board of directors may from time to time make calls upon shareholders for any amounts unpaid on their ordinary shares. The ordinary shares that have been called upon and remain unpaid are subject to forfeiture. Redemption of Ordinary Shares We may issue shares on terms that such shares are subject to redemption, at our option or at the option of the holders, on such terms and in such manner, including out of capital, as may be determined by the board of directors or by a special resolution of our shareholders. Variations of Rights of Shares If at any time, our share capital is divided into different classes of shares, all or any of the special rights attached to any class of shares may, be varied with the sanction of a special resolution passed at a general meeting of the holders of the shares of that class. Consequently, the rights of any class of shares cannot be detrimentally altered without a majority of three-fourths of the vote of all of the shares in that class. The rights conferred upon the holders of the shares of any class issued with preferred or other rights will not, unless otherwise expressly provided by the terms of issue of the shares of that class, be deemed to be varied by the creation or issue of further shares ranking pari passu with such existing class of shares. General Meetings of Shareholders Shareholders’ meetings may be convened by a majority of our board of directors or our chairman. Additionally, on the requisition of shareholders holding not less than one-third of our voting share capital, the board shall convene an extraordinary general meeting. Advance notice of at least 14 days is required for the convening of our annual general shareholders’ meeting and any other general meeting of our shareholders. A quorum required for a meeting of shareholders consists of at least one shareholder present or by proxy, representing not less than one-third in nominal value of the total issued voting shares in our company. 138
Table of ContentsElection and Removal of Directors Unless otherwise determined by the Company in the general meeting, our articles provide that our board will consist of not less than two directors. There are no provisions relating to retirement of directors upon reaching any age limit. The directors have the power to appoint any person as a director either to fill a casual vacancy on the board or as an addition to the existing board, but so that the number of directors so appointed will not exceed any maximum number determined from time to time by the members in general meeting. Our articles provide that persons standing for election as directors at a duly constituted general meeting with requisite quorum are appointed by shareholders by a simple majority of the votes cast on the resolution. A director may be removed with or without cause by a shareholder resolution which has been passed by at least a simple majority of the votes cast by the shareholders having a right to attend and vote at such meeting. Proceedings of Board of Directors Our articles provide that our business is to be managed and conducted by our board of directors. The quorum necessary for the board meeting may be fixed by the board and, unless so fixed at another number, will be a majority of the directors. Our articles provide that the board may from time to time at its discretion exercise all powers of the Company to raise or borrow money, to mortgage or charge all or any part of the undertaking, property and assets (present and future) and uncalled capital of the Company and, subject to the Companies Law, issue debentures, bonds and other securities of the Company, whether outright or as collateral security for any debt, liability or obligation of the Company or of any third party. Inspection of Books and Records Holders of our ordinary shares will have no general right under Cayman Islands law to inspect or obtain copies of our list of shareholders or our corporate records. However, we will in our articles provide our directors the power to allow our shareholders to inspect our list of shareholders and to receive annual audited financial statements. See “Where You Can Find Additional Information.” Changes in Capital We may from time to time by ordinary resolution:
| | • | | increase the share capital by such sum, to be divided into shares of such classes and amount, as the resolution shall prescribe; |
| | • | | consolidate and divide all or any of our share capital into shares of a larger amount than our existing shares; |
| | • | | sub-divide our existing shares, or any of them into shares of a smaller amount than that fixed by our Memorandum of Association; provided that in the subdivision the proportion between the amount paid and the amount, if any, unpaid on each reduced share shall be the same as it was in case of the share from which the reduced share is derived; or |
| | • | | cancel any shares which, at the date of the passing of the resolution, have not been taken or agreed to be taken by any person and diminish the amount of our share capital by the amount of the shares so cancelled. |
Subject to the Companies Law, we may by special resolution reduce our share capital or any capital redemption reserve in any manner permitted by law. 139
Table of ContentsIssuance of Additional Ordinary Shares and Preferred Shares
| | • | | Our amended and restated memorandum and articles of association authorizes our board of directors to issue additional ordinary shares from time to time as our board of directors shall determine, to the extent of available authorized but unissued shares. |
| | • | | Our amended and restated memorandum and articles of association authorizes our board of directors to establish from time to time one or more series of preferred shares and to determine, with respect to any series of preferred shares, the terms and rights of that series, including: |
| | • | | the designation of the series; |
| | • | | the number of shares of the series; |
| | • | | the dividend rights, dividend rates, conversion rights, voting rights; and |
| | • | | the rights and terms of redemption and liquidation preferences. |
| | • | | Our board of directors may issue preferred shares without action by our shareholders to the extent authorized but unissued. In addition, the issuance of preferred shares may be used as an anti-takeover device without further action on the part of the shareholders. Issuance of these shares may dilute the voting power of holders of ordinary shares. |
Conversion Rights Attaching to the Shares Each Class B ordinary share is convertible into one Class A ordinary share at any time by the holder thereof. Class A ordinary shares are not convertible under any circumstances. Difference Between Class A and Class B Ordinary Shares The difference between the Class A ordinary shares and Class B ordinary shares are the special voting and conversion rights attached to the Class B ordinary shares as disclosed above. Exempted Company We are an exempted company with limited liability under the Companies Law of the Cayman Islands. The Companies Law in the Cayman Islands distinguishes between ordinary resident companies and exempted companies. Any company that is registered in the Cayman Islands but conducts business mainly outside of the Cayman Islands may apply to be registered as an exempted company. The requirements for an exempted company are essentially the same as for an ordinary company except for the exemptions and privileges listed below:
| | • | | an exempted company does not have to file an annual return of its shareholders with the Registrar of Companies; |
| | • | | an exempted company’s register of members is not open to inspection; |
| | • | | an exempted company does not have to hold an annual general meeting; |
| | • | | an exempted company may issue no par value, negotiable or bearer shares; |
| | • | | an exempted company may obtain an undertaking against the imposition of any future taxation (such undertakings are usually given for 20 years in the first instance); |
| | • | | an exempted company may register by way of continuation in another jurisdiction and be deregistered in the Cayman Islands; |
| | • | | an exempted company may register as a limited duration company; and |
| | • | | an exempted company may register as a segregated portfolio company. |
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Table of Contents“Limited liability” means that the liability of each shareholder is limited to the amount, if any, unpaid by the shareholder on the shares of the company, provided that the memorandum and articles of association contains a declaration that the liability of the member is so limited. Upon the closing of this offering, we will be subject to reporting and other informational requirements of the Exchange Act, as applicable to foreign private issuers. Except as otherwise disclosed in this prospectus, we currently intend to comply with the NYSE Listing Rules in lieu of following home country practice after the closing of this offering. The NYSE Listing Rules require that every company listed on NYSE hold an annual general meeting of shareholders. In addition, our articles of association allow directors to call a special meeting of shareholders pursuant to the procedures set forth in our articles. Differences in Corporate Law The Companies Law is modeled after that of England and Wales but does not follow recent statutory enactments in England. In addition, the Companies Law differs from laws applicable to United States corporations and their shareholders. Set forth below is a summary of the significant differences between the provisions of the Companies Law applicable to us and the laws applicable to companies incorporated in the United States. Mergers and Similar Arrangements The Companies Law permits mergers and consolidations between Cayman Islands companies and between Cayman Islands companies and non-Cayman Islands companies. For these purposes, (a) “merger” means the merging of two or more constituent companies and the vesting of their undertaking, property and liabilities in one of such companies as the surviving company and (b) a “consolidation” means the combination of two or more constituent companies into a consolidated company and the vesting of the undertaking, property and liabilities of such companies to the consolidated company. In order to effect such a merger or consolidation, the directors of each constituent company must approve a written plan of merger or consolidation, which must then be authorized by (a) a special resolution of the shareholders of each constituent company and (b) such other authorization, if any, as may be specified in such constituent company’s articles of association. The written plan of merger or consolidation must be filed with the Registrar of Companies together with a declaration as to the solvency of the consolidated or surviving company, a list of the assets and liabilities of each constituent company and an undertaking that a copy of the certificate of merger or consolidation will be given to the members and creditors of each constituent company and published in the Cayman Islands Gazette. Dissenting shareholders have the right to be paid the fair value of their shares (which, if not agreed between the parties, will be determined by the Cayman Islands court) if they follow the required procedures, subject to certain exceptions. Court approval is not required for a merger or consolidation which is effected in compliance with these statutory procedures. In addition, there are statutory provisions that facilitate the reconstruction and amalgamation of companies, provided that the arrangement is approved by a majority in number of each class of shareholders and creditors (representing 75% by value) with whom the arrangement is to be made, and who must, in addition, represent three-fourths in value of each such class of shareholders or creditors, as the case may be, that are present and voting either in person or by proxy at a meeting, or meetings, convened for that purpose. The convening of the meetings and subsequently the arrangement must be sanctioned by the Grand Court of the Cayman Islands. While a dissenting shareholder has the right to express to the court the view that the transaction ought not to be approved, the court can be expected to approve the arrangement if it determines that:
| | • | | the statutory provisions as to the required majority vote have been met; |
| | • | | the shareholders have been fairly represented at the meeting in question and the statutory majority are acting bona fide without coercion of the minority to promote interests adverse to those of the class; |
| | • | | the arrangement is such that may be reasonably approved by an intelligent and honest man of that class acting in respect of his interest; and |
| | • | | the arrangement is not one that would more properly be sanctioned under some other provision of the Companies Law. |
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Table of ContentsWhen a takeover offer is made and accepted by holders of 90% of the shares affected within four months, the offeror may, within a two-month period commencing on the expiration of such four month period, require the holders of the remaining shares to transfer such shares on the terms of the offer. An objection can be made to the Grand Court of the Cayman Islands but this is unlikely to succeed in the case of an offer which has been so approved unless there is evidence of fraud, bad faith or collusion. If an arrangement and reconstruction is thus approved, the dissenting shareholder would have no rights comparable to appraisal rights, which would otherwise ordinarily be available to dissenting shareholders of Delaware corporations, providing rights to receive payment in cash for the judicially determined value of the shares. Shareholders’ Suits Generally legal proceedings can be originated in the Grand Court of the Cayman Islands. In principle, we will normally be the proper plaintiff and as a general rule a derivative action may not be brought by a minority shareholder. However, based on English authorities, which would in all likelihood be of persuasive authority in the Cayman Islands, the Cayman Islands courts can be expected to apply and follow the common law principles (namely the rule in Foss v. Harbottle and the exceptions thereto) which permit a minority shareholder to commence a class action against, or derivative actions in the name of, a company to challenge:
| | • | | an act which is illegal or ultra vires; |
| | • | | an action which requires a resolution with a qualified or special majority which has not been obtained; and |
| | • | | an act which constitutes a fraud on the minority where the wrongdoers are themselves in control of the company. |
Indemnification of Directors and Executive Officers and Limitation of Liability Cayman Islands law does not limit the extent to which a company’s memorandum and articles of association may provide for indemnification of officers and directors, except to the extent any such provision may be held by the Cayman Islands courts to be contrary to public policy, such as to provide indemnification against civil fraud or the consequences of committing a crime. Our memorandum and articles of association permit indemnification of officers and directors for losses, damages, costs and expenses incurred in their capacities as such unless such losses or damages arise from dishonesty or fraud which may attach to such directors or officers. This standard of conduct is generally the same as permitted under the Delaware General Corporation Law for a Delaware corporation. In addition, we intend to enter into indemnification agreements with our directors and senior executive officers that will provide such persons with additional indemnification beyond that provided in our memorandum and articles of association. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to our directors, officers or persons controlling us under the foregoing provisions, we have been informed that, in the opinion of the SEC, such indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable. Anti-Takeover Provisions in the Memorandum and Articles of Association Some provisions of our memorandum and articles of association may discourage, delay or prevent a change in control of our company or management that shareholders may consider favorable, including provisions that authorize our board of directors to issue preference shares in one or more series and to designate the price, rights, preferences, privileges and restrictions of such preference shares without any further vote or action by our shareholders. However, under Cayman Islands law, our directors may only exercise the rights and powers granted to them under our memorandum and articles of association, as amended and restated from time to time, for what they believe in good faith to be in the best interests of our company. 142
Table of ContentsDirectors’ Fiduciary Duties Under Delaware corporate law, a director of a Delaware corporation has a fiduciary duty to the corporation and its shareholders. This duty has two components: the duty of care and the duty of loyalty. The duty of care requires that a director act in good faith, with the care that an ordinarily prudent person would exercise under similar circumstances. Under this duty, a director must inform himself of, and disclose to shareholders, all material information reasonably available regarding a significant transaction. The duty of loyalty requires that a director act in a manner he or she reasonably believes to be in the best interests of the corporation. He or she must not use his or her corporate position for personal gain or advantage. This duty prohibits self-dealing by a director and mandates that the best interest of the corporation and its shareholders take precedence over any interest possessed by a director, officer or controlling shareholder and not shared by the shareholders generally. In general, actions of a director are presumed to have been made on an informed basis, in good faith and in the honest belief that the action taken was in the best interests of the corporation. However, this presumption may be rebutted by evidence of a breach of one of the fiduciary duties. Should such evidence be presented concerning a transaction by a director, a director must prove the procedural fairness of the transaction, and that the transaction was of fair value to the corporation. As a matter of Cayman Islands law, a director of a Cayman Islands company is in the position of a fiduciary with respect to the company and therefore it is considered that he owes the following duties to the company—a duty to act bona fide in the best interests of the company, a duty not to make a profit based on his or her position as director (unless the company permits him to do so) and a duty not to put himself in a position where the interests of the company conflict with his or her personal interest or his or her duty to a third party. A director of a Cayman Islands company owes to the company a duty to act with skill and care. It was previously considered that a director need not exhibit in the performance of his or her duties a greater degree of skill than may reasonably be expected from a person of his or her knowledge and experience. However, English and Commonwealth courts have moved towards an objective standard with regard to the required skill and care and these authorities are likely to be followed in the Cayman Islands. Shareholder Action by Written Consent Under the Delaware General Corporation Law, a corporation may eliminate the right of shareholders to act by written consent by amendment to its certificate of incorporation. Cayman Islands law and our articles of association provide that shareholders may approve corporate matters by way of a unanimous written resolution signed by or on behalf of each shareholder who would have been entitled to vote on such matter at a general meeting without a meeting being held. Shareholder Proposals Under the Delaware General Corporation Law, a shareholder has the right to put any proposal before the annual meeting of shareholders, provided it complies with the notice provisions in the governing documents. A special meeting may be called by the board of directors or any other person authorized to do so in the governing documents, but shareholders may be precluded from calling special meetings. Cayman Islands law provides shareholders with only limited rights to requisition a general meeting, and does not provide shareholders with any right to put any proposal before a general meeting. However, these rights may be provided in a company’s articles of association. Our Memorandum and Articles allow our shareholders holding not less than one-third of our voting share capital to requisition a special meeting of the shareholders, in which case the directors are obliged to call such meeting and to put the resolutions so requisitioned to a vote at such meeting; however, our Memorandum and Articles do not provide our shareholders with any right to put any proposals before annual general meetings or extraordinary general meetings not called by such shareholders. As a Cayman Islands exempted company, we are not obliged by the Companies Law to call shareholders’ annual general meetings. Our Memorandum and Articles provide that we may (but are not obliged to) in each year hold a general meeting as our annual general meeting in which case we shall specify the meeting as such in 143
Table of Contentsthe notices calling it, and the annual general meeting shall be held at such time and place as may be determined by our directors. We, however, will hold an annual shareholders’ meeting during each fiscal year, as required by the rules of the NYSE. Cumulative Voting Under the Delaware General Corporation Law, cumulative voting for elections of directors is not permitted unless the corporation’s certificate of incorporation specifically provides for it. Cumulative voting potentially facilitates the representation of minority shareholders on a board of directors since it permits the minority shareholder to cast all the votes to which the shareholder is entitled on a single director, which increases the shareholder’s voting power with respect to electing such director. As permitted under Cayman Islands law, our articles of association do not provide for cumulative voting. As a result, our shareholders are not afforded any less protections or rights on this issue than shareholders of a Delaware corporation. Removal of Directors Under the Delaware General Corporation Law, a director of a corporation with a classified board may be removed only for cause with the approval of a majority of the outstanding shares entitled to vote, unless the certificate of incorporation provides otherwise. Under our articles of association, directors may be removed by ordinary resolution. Transactions with Interested Shareholders The Delaware General Corporation Law contains a business combination statute applicable to Delaware public corporations whereby, unless the corporation has specifically elected not to be governed by such statute by amendment to its certificate of incorporation or bylaws that is approved by its shareholders, it is prohibited from engaging in certain business combinations with an “interested shareholder” for three years following the date that such person becomes an interested shareholder. An interested shareholder generally is a person or a group who or which owns or owned 15% or more of the target’s outstanding voting stock or who or which is an affiliate or associate of the corporation and owned 15% or more of the corporation’s outstanding voting stock within the past three years. This has the effect of limiting the ability of a potential acquirer to make a two-tiered bid for the target in which all shareholders would not be treated equally. The statute does not apply if, among other things, prior to the date on which such shareholder becomes an interested shareholder, the board of directors approves either the business combination or the transaction which resulted in the person becoming an interested shareholder. This encourages any potential acquirer of a Delaware corporation to negotiate the terms of any acquisition transaction with the target’s board of directors. Cayman Islands law has no comparable statute. As a result, we cannot avail ourselves of the types of protections afforded by the Delaware business combination statute. However, although Cayman Islands law does not regulate transactions between a company and its significant shareholders, it does provide that such transactions must be entered into bona fide in the best interests of the company and for a proper corporate purpose and not with the effect of constituting a fraud on the minority shareholders. Dissolution; Winding Up Under the Delaware General Corporation Law, unless the board of directors approves the proposal to dissolve, dissolution must be approved by shareholders holding 100% of the total voting power of the corporation. Only if the dissolution is initiated by the board of directors may it be approved by a simple majority of the corporation’s outstanding shares. Delaware law allows a Delaware corporation to include in its certificate of incorporation a supermajority voting requirement in connection with dissolutions initiated by the board. Under Cayman Islands law, a company may be wound up by either an order of the courts of the Cayman Islands or by a special resolution of its members or, if the company is unable to pay its debts as they fall due, by an ordinary resolution of its members. The court has authority to order winding up in a number of specified circumstances including where it is, in the opinion of the court, just and equitable to do so. 144
Table of ContentsUnder the Companies Law of the Cayman Islands and our memorandum and articles of association, our company may be dissolved, liquidated or wound up by special resolution, or by an ordinary resolution on the basis that our company is unable to pay its debt as they become due. Variation of Rights of Shares Under the Delaware General Corporation Law, a corporation may vary the rights of a class of shares with the approval of a majority of the outstanding shares of such class, unless the certificate of incorporation provides otherwise. Under Cayman Islands law and our articles of association, if our share capital is divided into more than one class of shares, we may vary the rights attached to any class only with the sanction of a special resolution passed at a general meeting of the holders of the shares of that class. Amendment of Governing Documents Under the Delaware General Corporation Law, a corporation’s certificate of incorporation may be amended only if adopted and declared advisable by the board of directors and approved by a majority of the outstanding shares entitled to vote, and the bylaws may be amended with the approval of a majority of the outstanding shares entitled to vote and may, if so provided in the certificate of incorporation, also be amended by the board of directors. Under the Companies Law, our memorandum and articles of association may only be amended by special resolution or the unanimous written resolution of all shareholders. Rights of Non-Resident or Foreign Shareholders There are no limitations imposed by our memorandum and articles of association on the rights of non-resident or foreign shareholders to hold or exercise voting rights on our shares. In addition, there are no provisions in our memorandum and articles of association governing the ownership threshold above which shareholder ownership must be disclosed. Directors’ Power to Issue Shares Subject to applicable law, our board of directors is empowered to issue or allot shares or grant options and warrants with or without preferred, deferred, qualified or other special rights or restrictions. Inspection of Books and Records Holders of our ordinary shares will have no general right under Cayman Islands law to inspect or obtain copies of our list of shareholders or our corporate records. However, our directors are empowered to allow our shareholders to inspect our list of shareholders and to receive annual audited financial statements. See “Where You Can Find More Information.” 145
Table of ContentsDESCRIPTION OF AMERICAN DEPOSITARY SHARES American Depositary Shares Deutsche Bank Trust Company Americas, as depositary, will register and deliver the ADSs. Each ADS will represent ownership of 10 Class A ordinary shares deposited with the office in Hong Kong of Deutsche Bank AG, Hong Kong Branch, as custodian for the depositary. Each ADS will also represent ownership of any other securities, cash or other property which may be held by the depositary. The depositary’s corporate trust office at which the ADSs will be administered is located at 60 Wall Street, New York, NY 10005, USA. The principal executive office of the depositary is located at 60 Wall Street, New York, NY 10005, USA. The Direct Registration System, or DRS, is a system administered by The Depository Trust Company, or DTC, pursuant to which the depositary may register the ownership of uncertificated ADSs, which ownership shall be evidenced by periodic statements issued by the depositary to the ADS holders entitled thereto. We will not treat ADS holders as our shareholders and accordingly, you, as an ADS holder, will not have shareholder rights. Cayman Islands law governs shareholder rights. The depositary will be the holder of the ordinary shares underlying your ADSs. As a holder of ADSs, you will have ADS holder rights. A deposit agreement among us, the depositary and you, as an ADS holder, and the beneficial owners of ADSs sets out ADS holder rights as well as the rights and obligations of the depositary. The laws of the State of New York govern the deposit agreement and the ADSs. The following is a summary of the material provisions of the deposit agreement. For more complete information, you should read the entire deposit agreement and the form of American Depositary Receipt. For directions on how to obtain copies of those documents, see “Where You Can Find Additional Information.” Holding the ADSs How will you hold your ADSs? You may hold ADSs either (1) directly (a) by having an American Depositary Receipt, or ADR, which is a certificate evidencing a specific number of ADSs, registered in your name, or (b) by holding ADSs in DRS, or (2) indirectly through your broker or other financial institution. If you hold ADSs directly, you are an ADS holder. This description assumes you hold your ADSs directly. If you hold the ADSs indirectly, you must rely on the procedures of your broker or other financial institution to assert the rights of ADS holders described in this section. You should consult with your broker or financial institution to find out what those procedures are. Dividends and Other Distributions How will you receive dividends and other distributions on the shares? The depositary has agreed to pay to you the cash dividends or other distributions it or the custodian receives on ordinary shares or other deposited securities, after deducting its fees and expenses. You will receive these distributions in proportion to the number of ordinary shares your ADSs represent as of the record date (which will be as close as practicable to the record date for our ordinary shares) set by the depositary with respect to the ADSs.
| | • | | Cash. The depositary will convert any cash dividend or other cash distribution we pay on the ordinary shares or any net proceeds from the sale of any ordinary shares, rights, securities or other entitlements into U.S. dollars if it can do so on a reasonable basis, and can transfer the U.S. dollars to the United States. If that is not possible or lawful or if any government approval is needed and cannot be obtained, the deposit agreement allows the depositary to distribute the foreign currency only to those ADS holders to whom it is possible to do so. It will hold the foreign currency it cannot convert for the account of the ADS holders who have not been paid and such funds will be held in a segregated account. It will not invest the foreign currency and it will not be liable for any interest. |
| | • | | Before making a distribution, any taxes or other governmental charges, together with fees and expenses of the depositary, that must be paid, will be deducted. See “Taxation.” It will distribute only whole |
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Table of Contents| | U.S. dollars and cents and will round fractional cents to the nearest whole cent. If the exchange rates fluctuate during a time when the depositary cannot convert the foreign currency, you may lose some or all of the value of the distribution.
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| | • | | Shares. The depositary may distribute additional ADSs representing any ordinary shares we distribute as a dividend or free distribution to the extent reasonably practicable and permissible under law. The depositary will only distribute whole ADSs. It will try to sell ordinary shares which would require it to deliver a fractional ADS and distribute the net proceeds in the same way as it does with cash. If the depositary does not distribute additional ADSs, the outstanding ADSs will also represent the new ordinary shares. The depositary may sell a portion of the distributed ordinary shares sufficient to pay its fees and expenses in connection with that distribution. |
| | • | | Elective Distributions in Cash or Shares. If we offer holders of our ordinary shares the option to receive dividends in either cash or shares, the depositary, after consultation with us and having received timely notice as described in the deposit agreement of such elective distribution by us, has discretion to determine to what extent such elective distribution will be made available to you as a holder of the ADSs. We must first instruct the depositary to make such elective distribution available to you and furnish it with satisfactory evidence that it is legal to do so. The depositary could decide it is not legal or reasonably practical to make such elective distribution available to you, or it could decide that it is only legal or reasonably practical to make such elective distribution available to some but not all holders of the ADSs. In such case, the depositary shall, on the basis of the same determination as is made in respect of the ordinary shares for which no election is made, distribute either cash in the same way as it does in a cash distribution, or additional ADSs representing ordinary shares in the same way as it does in a share distribution. The depositary is not obligated to make available to you a method to receive the elective dividend in shares rather than in ADSs. There can be no assurance that you will be given the opportunity to receive elective distributions on the same terms and conditions as the holders of ordinary shares. |
| | • | | Rights to Purchase Additional Shares. If we offer holders of our ordinary shares any rights to subscribe for additional shares or any other rights, the depositary may after consultation with us and having received timely notice as described in the deposit agreement of such distribution by us, make these rights available to you. We must first instruct the depositary to make such rights available to you and furnish the depositary with satisfactory evidence that it is legal to do so. If the depositary decides it is not legal and practical to make the rights available but that it is practical to sell the rights, the depositary will use reasonable efforts to sell the rights and distribute the net proceeds in the same way as it does with cash. The depositary will allow rights that are not distributed or sold to lapse. In that case, you will receive no value for them. |
If the depositary makes rights available to you, it will exercise the rights and purchase the shares on your behalf. The depositary will then deposit the shares and deliver ADSs to you. It will only exercise rights if you pay it the exercise price and any other charges the rights require you to pay. U.S. securities laws may restrict transfers and cancellation of the ADSs represented by shares purchased upon exercise of rights. For example, you may not be able to trade these ADSs freely in the United States. In this case, the depositary may deliver restricted depositary shares that have the same terms as the ADSs described in this section except for changes needed to put the necessary restrictions in place.
| | • | | Other Distributions. Subject to receipt of timely notice, as described in the deposit agreement, from us with the request to make any such distribution available to you, and provided the depositary has determined such distribution is lawful and reasonably practicable and feasible and in accordance with the terms of the deposit agreement, the depositary will send to you anything else we distribute on deposited securities by any means it thinks is legal, fair and practical. If it cannot make the distribution in that way, the depositary has a choice: it may decide to sell what we distributed and distribute the net proceeds in the same way as it does with cash; or, it may decide to hold what we distributed, in which case ADSs will also represent the newly distributed property. However, the depositary is not required to distribute any securities (other than ADSs) to you unless it receives satisfactory evidence from us that it is legal to make that distribution. The depositary may sell a portion of the distributed securities or property sufficient to pay its fees and expenses in connection with that distribution. |
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Table of ContentsThe depositary is not responsible if it decides that it is unlawful or impractical to make a distribution available to any ADS holders. We have no obligation to register ADSs, shares, rights or other securities under the Securities Act. We also have no obligation to take any other action to permit the distribution of ADSs, shares, rights or anything else to ADS holders. This means that you may not receive the distributions we make on our shares or any value for them if it is illegal or impractical for us to make them available to you. Deposit, Withdrawal and Cancellation How are ADSs issued? In connection with this offering, we will deposit ordinary shares with the custodian for the issuance of ADSs to you by the depositary. Following the offering, the depositary will deliver ADSs if you or your broker deposit ordinary shares or evidence of rights to receive ordinary shares with the custodian. Upon payment of its fees and expenses and of any taxes or charges, such as stamp taxes or stock transfer taxes or fees, the depositary will register the appropriate number of ADSs in the names you request and will deliver the ADSs to or upon the order of the person or persons entitled thereto. Except for ordinary shares deposited by us in connection with this offering, no shares will be accepted for deposit during a period of 180 days after the date of this prospectus. The 180-daylock-up period is subject to adjustment under certain circumstances as described in the section entitled “Underwriting—No Sales of Similar Securities.” How do ADS holders cancel an American Depositary Share? You may turn in your ADSs at the depositary’s corporate trust office or by providing appropriate instructions to your broker. Upon payment of its fees and expenses and of any taxes or charges, such as stamp taxes or stock transfer taxes or fees, the depositary will deliver the ordinary shares and any other deposited securities underlying the ADSs to you or a person you designate at the office of the custodian. Or, at your request, risk and expense, the depositary will deliver the deposited securities at its corporate trust office, if feasible. How do ADS holders interchange between Certificated ADSs and Uncertificated ADSs? You may surrender your ADR to the depositary for the purpose of exchanging your ADR for uncertificated ADSs. The depositary will cancel that ADR and will send you a statement confirming that you are the owner of uncertificated ADSs. Alternatively, upon receipt by the depositary of a proper instruction from a holder of uncertificated ADSs requesting the exchange of uncertificated ADSs for certificated ADSs, the depositary will execute and deliver to you an ADR evidencing those ADSs. Voting Rights How do you vote? You may instruct the depositary to vote the ordinary shares or other deposited securities underlying your ADSs. Otherwise, you could exercise your right to vote directly if you withdraw the ordinary shares. However, you may not know about the meeting sufficiently enough in advance to withdraw the ordinary shares. If we ask for your instructions and upon timely notice from us, as described in the deposit agreement, the depositary will notify you of the upcoming vote and arrange to deliver our voting materials to you. The materials will (1) describe the matters to be voted on and (2) explain how you may instruct the depositary to vote the ordinary shares or other deposited securities underlying your ADSs as you direct, including an express indication that such instruction may be given or deemed given in accordance with the second to last sentence of this paragraph if no instruction is received, to the depositary to give a discretionary proxy to a person designated by us. For instructions to be valid, the depositary must receive them on or before the date specified. The depositary will try, as far as practical, subject to the laws of the Cayman Islands and the provisions of our memorandum and articles of association, to vote or to have its agents vote the ordinary shares or other deposited securities as you instruct. The depositary will only vote or attempt to vote as you instruct. If we timely requested the depositary to 148
Table of Contentssolicit your instructions but no instructions are received by the depositary from an owner with respect to any of the deposited securities represented by the ADSs of that owner on or before the date established by the depositary for such purpose, the depositary shall deem that owner to have instructed the depositary to give a discretionary proxy to a person designated by us with respect to such deposited securities, and the depositary shall give a discretionary proxy to a person designated by us to vote such deposited securities. However, no such instruction shall be deemed given and no such discretionary proxy shall be given with respect to any matter if we inform the depositary we do not wish such proxy given, substantial opposition exists or the matter materially and adversely affects the rights of holders of the ordinary shares. We cannot assure you that you will receive the voting materials in time to ensure that you can instruct the depositary to vote the ordinary shares underlying your ADSs. In addition, the depositary and its agents are not responsible for failing to carry out voting instructions or for the manner of carrying out voting instructions. This means that you may not be able to exercise your right to vote and you may have no recourse if the ordinary shares underlying your ADSs are not voted as you requested. In order to give you a reasonable opportunity to instruct the depositary as to the exercise of voting rights relating to deposited securities, if we request the depositary to act, we will try to give the depositary notice of any such meeting and details concerning the matters to be voted upon more than 30 business days in advance of the meeting date. Fees and Expenses As an ADS holder, you will be required to pay the following service fees to the depositary bank:
| | | | Service | | Fees | | | • Issuance of ADSs, including issuances resulting from a distribution of shares or rights or other property | | Up to US$0.05 per ADS issued | | | • Cancellation of ADSs, including the case of termination of the deposit agreement | | Up to US$0.05 per ADS cancelled | | | • Distribution of cash dividends or other cash distributions | | Up to US$0.05 per ADS held | | | • Distribution of ADSs pursuant to share dividends, free share distributions or exercise of rights. | | Up to US$0.05 per ADS held | | | • Distribution of securities other than ADSs or rights to purchase additional ADSs | | A fee equivalent to the fee that would be payable if securities distributed to you had been ordinary shares and the ordinary shares had been deposited for issuance of ADSs | | | • Depositary services | | Up to US$0.05 per ADS held on the applicable record date(s) established by the depositary bank | | | • Transfer of ADRs | | U.S. $1.50 per certificate presented for transfer |
As an ADS holder, you will also be responsible to pay certain fees and expenses incurred by the depositary bank and certain taxes and governmental charges such as:
| | • | | Fees for the transfer and registration of ordinary shares charged by the registrar and transfer agent for the ordinary shares in the Cayman Islands (i.e., upon deposit and withdrawal of ordinary shares). |
| | • | | Expenses incurred for converting foreign currency into U.S. dollars. |
| | • | | Expenses for cable, telex and fax transmissions and for delivery of securities. |
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Table of Contents| | • | | Taxes and duties upon the transfer of securities, including any applicable stamp duties, any stock transfer charges or withholding taxes (i.e., when ordinary shares are deposited or withdrawn from deposit). |
| | • | | Fees and expenses incurred in connection with the delivery or servicing of ordinary shares on deposit. |
| | • | | Fees and expenses incurred in connection with complying with exchange control regulations and other regulatory requirements applicable to ordinary shares, deposited securities, ADSs and ADRs. |
| | • | | Any applicable fees and penalties thereon. |
The depositary fees payable upon the issuance and cancellation of ADSs are typically paid to the depositary bank by the brokers (on behalf of their clients) receiving the newly issued ADSs from the depositary bank and by the brokers (on behalf of their clients) delivering the ADSs to the depositary bank for cancellation. The brokers in turn charge these fees to their clients. Depositary fees payable in connection with distributions of cash or securities to ADS holders and the depositary services fee are charged by the depositary bank to the holders of record of ADSs as of the applicable ADS record date. The depositary fees payable for cash distributions are generally deducted from the cash being distributed or by selling a portion of distributable property to pay the fees. In the case of distributions other than cash (i.e., share dividends, rights), the depositary bank charges the applicable fee to the ADS record date holders concurrent with the distribution. In the case of ADSs registered in the name of the investor (whether certificated or uncertificated in direct registration), the depositary bank sends invoices to the applicable record date ADS holders. In the case of ADSs held in brokerage and custodian accounts (via DTC), the depositary bank generally collects its fees through the systems provided by DTC (whose nominee is the registered holder of the ADSs held in DTC) from the brokers and custodians holding ADSs in their DTC accounts. The brokers and custodians who hold their clients’ ADSs in DTC accounts in turn charge their clients’ accounts the amount of the fees paid to the depositary banks. In the event of refusal to pay the depositary fees, the depositary bank may, under the terms of the deposit agreement, refuse the requested service until payment is received or may set off the amount of the depositary fees from any distribution to be made to the ADS holder. Deutsche Bank Trust Company Americas, as depositary, has agreed to reimburse us for a portion of certain expenses we incur that are related to establishment and maintenance of the ADR program, including investor relations expenses. There are limits on the amount of expenses for which the depositary will reimburse us, but the amount of reimbursement available to us is not related to the amounts of fees the depositary collects from investors. Further, the depositary has agreed to reimburse us certain fees payable to the depositary by holders of ADSs. Neither the depositary nor we can determine the exact amount to be made available to us because (i) the number of ADSs that will be issued and outstanding, (ii) the level of service fees to be charged to holders of ADSs and (iii) our reimbursable expenses related to the program are not known at this time. Payment of Taxes You will be responsible for any taxes or other governmental charges payable on your ADSs or on the deposited securities represented by any of your ADSs. The depositary may refuse to register any transfer of your ADSs or allow you to withdraw the deposited securities represented by your ADSs until such taxes or other charges are paid. It may apply payments owed to you or sell deposited securities represented by your ADSs to pay any taxes owed and you will remain liable for any deficiency. If the depositary sells deposited securities, it will, if appropriate, reduce the number of ADSs to reflect the sale and pay to you any net proceeds, or send to you any property, remaining after it has paid the taxes. You agree to indemnify us, the depositary, the custodian and each of our and their respective agents, directors, employees and affiliates for, and hold each of them harmless from, any claims with respect to taxes (including applicable interest and penalties thereon) arising from any tax benefit obtained for you. 150
Table of ContentsReclassifications, Recapitalizations and Mergers
| | | | If we: | | Then: | | | | Change the nominal or par value of our ordinary shares | | The cash, shares or other securities received by the depositary will become deposited securities. | | | | Reclassify, split up or consolidate any of the deposited securities | | Each ADS will automatically represent its equal share of the new deposited securities. | | | Distribute securities on the ordinary shares that are not distributed to you
or
Recapitalize, reorganize, merge, liquidate, sell all or substantially all of our assets, or take any similar action | | The depositary may distribute some or all of the cash, shares or other securities it received. It may also deliver new ADSs or ask you to surrender your outstanding ADRs in exchange for new ADRs identifying the new deposited securities. |
Amendment and Termination How may the deposit agreement be amended? We may agree with the depositary to amend the deposit agreement and the form of ADR without your consent for any reason. If an amendment adds or increases fees or charges, except for taxes and other governmental charges or expenses of the depositary for registration fees, facsimile costs, delivery charges or similar items, including expenses incurred in connection with foreign exchange control regulations and other charges specifically payable by ADS holders under the deposit agreement, or materially prejudices a substantial existing right of ADS holders, it will not become effective for outstanding ADSs until 30 days after the depositary notifies ADS holders of the amendment. At the time an amendment becomes effective, you are considered, by continuing to hold your ADSs, to agree to the amendment and to be bound by the ADRs and the deposit agreement as amended. How may the deposit agreement be terminated? The depositary will terminate the deposit agreement if we ask it to do so, in which case the depositary will give notice to you at least 90 days prior to termination. The depositary may also terminate the deposit agreement if the depositary has told us that it would like to resign and we have not appointed a new depositary within 90 days. In such case, the depositary must notify you at least 30 days before termination. After termination, the depositary and its agents will do the following under the deposit agreement but nothing else: collect distributions on the deposited securities, sell rights and other property and deliver ordinary shares and other deposited securities upon cancellation of ADSs after payment of any fees, charges, taxes or other governmental charges. Six months or more after termination, the depositary may sell any remaining deposited securities by public or private sale. After that, the depositary will hold the money it received on the sale, as well as any other cash it is holding under the deposit agreement, for the pro rata benefit of the ADS holders that have not surrendered their ADSs. It will not invest the money and has no liability for interest. The depositary’s only obligations will be to account for the money and other cash. After termination, our only obligations will be to indemnify the depositary and to pay fees and expenses of the depositary that we agreed to pay. Books of Depositary The depositary will maintain ADS holder records at its depositary office. You may inspect such records at such office during regular business hours but solely for the purpose of communicating with other holders in the interest of business matters relating to the ADSs and the deposit agreement. The depositary will maintain facilities in New York to record and process the issuance, cancellation, combination, split-up and transfer of ADRs. 151
Table of ContentsThese facilities may be closed from time to time, to the extent not prohibited by law or if any such action is deemed necessary or advisable by the depositary or us, in good faith, at any time or from time to time because of any requirement of law, any government or governmental body or commission or any securities exchange on which the ADRs or ADSs are listed, or under any provision of the deposit agreement or provisions of, or governing, the deposited securities, or any meeting of our shareholders or for any other reason. Limitations on Obligations and Liability Limits on our Obligations and the Obligations of the Depositary; Limits on Liability to Holders of ADSs The deposit agreement expressly limits our obligations and the obligations of the depositary. It also limits our liability and the liability of the depositary. We and the depositary:
| | • | | are only obligated to take the actions specifically set forth in the deposit agreement without gross negligence or willful misconduct; |
| | • | | are not liable if either of us is prevented or delayed by law or circumstances beyond our control from performing our obligations under the deposit agreement, including, without limitation, requirements of any present or future law, regulation, governmental or regulatory authority or share exchange of any applicable jurisdiction, any present or future provisions of our memorandum and articles of association, on account of possible civil or criminal penalties or restraint, any provisions of or governing the deposited securities or any act of God, war or other circumstances beyond our control as set forth in the deposit agreement; |
| | • | | are not liable if either of us exercises, or fails to exercise, discretion permitted under the deposit agreement; |
| | • | | are not liable for the inability of any holder of ADSs to benefit from any distribution on deposited securities that is not made available to holders of ADSs under the terms of the deposit agreement, or for any indirect, special, consequential or punitive damages for any breach of the terms of the deposit agreement; |
| | • | | have no obligation to become involved in a lawsuit or other proceeding related to the ADSs or the deposit agreement on your behalf or on behalf of any other party; |
| | • | | may rely upon any documents we believe in good faith to be genuine and to have been signed or presented by the proper party; |
| | • | | disclaim any liability for any action/inaction in reliance on the advice or information of legal counsel, accountants, any person presenting ordinary shares for deposit, holders and beneficial owners (or authorized representatives) of ADSs, or any person believed in good faith to be competent to give such advice or information; |
| | • | | disclaim any liability for inability of any holder to benefit from any distribution, offering, right or other benefit made available to holders of deposited securities but not made available to holders of ADSs; and |
| | • | | disclaim any liability for any indirect, special, punitive or consequential damages. |
The depositary and any of its agents also disclaim any liability for any failure to carry out any instructions to vote, the manner in which any vote is cast or the effect of any vote or failure to determine that any distribution or action may be lawful or reasonably practicable or for allowing any rights to lapse in accordance with the provisions of the deposit agreement, the failure or timeliness of any notice from us, the content of any information submitted to it by us for distribution to you or for any inaccuracy of any translation thereof, any investment risk associated with the acquisition of an interest in the deposited securities, the validity or worth of the deposited securities, the credit-worthiness of any third party, or for any tax consequences that may result from ownership of ADSs, ordinary shares or deposited securities. In the deposit agreement, we and the depositary agree to indemnify each other under certain circumstances. 152
Table of ContentsRequirements for Depositary Actions Before the depositary will issue, deliver or register a transfer of an ADS, make a distribution on an ADS, or permit withdrawal of ordinary shares, the depositary may require:
| | • | | payment of stock transfer or other taxes or other governmental charges and transfer or registration fees charged by third parties for the transfer of any ordinary shares or other deposited securities and payment of the applicable fees, expenses and charges of the depositary; |
| | • | | satisfactory proof of the identity and genuineness of any signature or other information it deems necessary; and |
| | • | | compliance with regulations it may establish, from time to time, consistent with the deposit agreement, including presentation of transfer documents. |
The depositary may refuse to issue and deliver ADSs or register transfers of ADSs generally when the register of the depositary or our transfer books are closed or at any time if the depositary or we think it is necessary or advisable to do so. Your Right to Receive the Shares Underlying Your ADSs You have the right to cancel your ADSs and withdraw the underlying ordinary shares at any time except:
| | • | | when temporary delays arise because: (1) the depositary has closed its transfer books or we have closed our transfer books; (2) the transfer of ordinary shares is blocked to permit voting at a shareholders’ meeting; or (3) we are paying a dividend on our ordinary shares; |
| | • | | when you owe money to pay fees, taxes and similar charges; or |
| | • | | when it is necessary to prohibit withdrawals in order to comply with any laws or governmental regulations that apply to ADSs or to the withdrawal of ordinary shares or other deposited securities. |
This right of withdrawal may not be limited by any other provision of the deposit agreement. Pre-release of ADSs The deposit agreement permits the depositary to deliver ADSs before deposit of the underlying ordinary shares. This is called a pre-release of the ADSs. The depositary may also deliver ordinary shares upon cancellation of pre-released ADSs (even if the ADSs are cancelled before the pre-release transaction has been closed out). A pre-release is closed out as soon as the underlying ordinary shares are delivered to the depositary. The depositary may receive ADSs instead of ordinary shares to close out a pre-release. The depositary may pre-release ADSs only under the following conditions: (1) before or at the time of the pre-release, the person to whom the pre-release is being made represents to the depositary in writing that it or its customer (a) owns the ordinary shares or ADSs to be deposited, (b) assigns all beneficial rights, title and interest in such ordinary shares or ADSs to the depositary for the benefit of the owners, (c) will not take any action with respect to such ordinary shares or ADSs that is inconsistent with the transfer of beneficial ownership, (d) indicates the depositary as owner of such ordinary shares or ADSs in its records, and (e) unconditionally guarantees to deliver such ordinary shares or ADSs to the depositary or the custodian, as the case may be; (2) the pre-release is fully collateralized with cash or other collateral that the depositary considers appropriate; and (3) the depositary must be able to close out the pre-release on not more than five business days’ notice. Each pre-release is subject to further indemnities and credit regulations as the depositary considers appropriate. In addition, the depositary will limit the number of ADSs that may be outstanding at any time as a result of pre-release to 30% of the aggregate number of ADSs then outstanding, although the depositary may disregard the limit from time to time, if it thinks it is appropriate to do so, including (1) due to a decrease in the aggregate number of ADSs outstanding that causes existing pre-release transactions to temporarily exceed the limit stated above or (2) where otherwise required by market conditions. 153
Table of ContentsDirect Registration System In the deposit agreement, all parties to the deposit agreement acknowledge that the DRS and Profile Modification System, or Profile, will apply to uncertificated ADSs upon acceptance thereof to DRS by DTC. DRS is the system administered by DTC pursuant to which the depositary may register the ownership of uncertificated ADSs, which ownership shall be evidenced by periodic statements issued by the depositary to the ADS holders entitled thereto. Profile is a required feature of DRS which allows a DTC participant, claiming to act on behalf of an ADS holder, to direct the depositary to register a transfer of those ADSs to DTC or its nominee and to deliver those ADSs to the DTC account of that DTC participant without receipt by the depositary of prior authorization from the ADS holder to register such transfer. In connection with and in accordance with the arrangements and procedures relating to DRS/Profile, the parties to the deposit agreement understand that the depositary will not verify, determine or otherwise ascertain that the DTC participant which is claiming to be acting on behalf of an ADS holder in requesting registration of transfer and delivery described in the paragraph above has the actual authority to act on behalf of the ADS holder (notwithstanding any requirements under the Uniform Commercial Code). In the deposit agreement, the parties agree that the depositary’s reliance on, and compliance with, instructions received by the depositary through the DRS/Profile System and in accordance with the deposit agreement, shall not constitute negligence or bad faith on the part of the depositary. 154
Table of ContentsSHARES ELIGIBLE FOR FUTURE SALE Upon closing of this offering, we will have 5,786,000 ADSs outstanding representing approximately 17.9% of our ordinary shares. All of the ADSs sold in this offering and the ordinary shares they represent will be freely transferable by persons other than our “affiliates” without restriction or further registration under the Securities Act. Rule 144 of the Securities Act defines an “affiliate” of a company as a person that, directly or indirectly, through one or more intermediaries, controls or is controlled by, or is under common control with, our company. All outstanding ordinary shares prior to this offering are “restricted securities” as that term is defined in Rule 144 because they were issued in a transaction or series of transactions not involving a public offering. Restricted securities, in the form of ADSs or otherwise, may be sold only if they are the subject of an effective registration statement under the Securities Act or if they are sold pursuant to an exemption from the registration requirement of the Securities Act such as those provided for in Rules 144 or 701 promulgated under the Securities Act, which rules are summarized below. Restricted ordinary shares may also be sold outside of the United States to non-U.S. persons in accordance with Rule 904 of Regulation S under the Act. This prospectus may not be used in connection with any resale of our ADSs acquired in this offering by our affiliates. Sales of substantial amounts of our ADSs in the public market could adversely affect prevailing market prices of our ADSs. Prior to this offering, there has been no public market for our ordinary shares or ADSs, and while our application has been made to list our ADSs on the NYSE, we cannot assure you that a regular trading market will develop in the ADSs. We do not expect that a trading market will develop for our ordinary shares not represented by ADSs. Lock-up Agreements We, our directors, executive officers, Sequoia, our existing shareholders and option holders and holders of exchangeable notes which are exchangeable into our ordinary shares have agreed, subject to some exceptions, not to sell, transfer or dispose of, directly or indirectly, any of our ordinary shares, in the form of ADSs or otherwise, or any securities convertible into or exchangeable or exercisable for our ordinary shares, in the form of ADSs or otherwise for a period of 180 days after the date this prospectus. Rule 144 In general, under Rule 144 as currently in effect, a person who has beneficially owned our restricted securities for at least six months is entitled to sell the restricted securities without registration under the Securities Act, subject to certain restrictions. Persons who are our affiliates (including persons beneficially owning 10% or more of our outstanding shares) may sell within any three-month period a number of restricted securities that does not exceed the greater of the following:
| | • | | 1% of the number of our ordinary shares then outstanding, in the form of ADSs or otherwise, which will equal approximately 3,200,575 shares immediately after this offering, or 3,287,365 shares if the underwriters exercise in full their option to purchase additional ADSs; and |
| | • | | the average weekly trading volume of our ADSs on the NYSE during the four calendar weeks preceding the date on which notice of the sale is filed with the SEC. |
Such sales are also subject to manner-of-sale provisions, notice requirements and the availability of current public information about us. Persons who are not our affiliates and have beneficially owned our restricted securities for more than six months but not more than one year may sell the restricted securities without registration under the Securities Act subject to the availability of current public information about us. Persons who are not our affiliates and have beneficially owned our restricted securities for more than one year may freely sell the restricted securities without registration under the Securities Act. Rule 701 Beginning 90 days after the date of this prospectus, persons other than affiliates who purchased ordinary shares under a written compensatory plan or contract may be entitled to sell such shares in the United States in 155
Table of Contentsreliance on Rule 701 under the Securities Act, or Rule 701. Rule 701 permits affiliates to sell their Rule 701 shares under Rule 144 without complying with the holding period requirements of Rule 144. Rule 701 further provides that non-affiliates may sell these shares in reliance on Rule 144 subject only to its manner-of-sale requirements. However, the Rule 701 shares would remain subject to lock-uparrangements and would only become eligible for sale when the lock-up period expires. 156
Table of ContentsTAXATION The following is a discussion of the material Cayman Islands, People’s Republic of China and U.S. federal income tax consequences relevant to an investment in our ADSs and ordinary shares. The discussion is not intended to be, nor should it be construed as, legal or tax advice to any particular prospective purchaser. The discussion is based on laws and relevant interpretations thereof in effect as of the date of this prospectus, all of which are subject to change or different interpretations, possibly with retroactive effect. The discussion does not address U.S. state or local tax laws, or tax laws of jurisdictions other than the Cayman Islands, the People’s Republic of China and the United States. You are urged to consult your own tax advisors with respect to the consequences of acquisition, ownership and disposition of our ADSs and ordinary shares. Cayman Islands Taxation The Cayman Islands currently levies no taxes on individuals or corporations based upon profits, income, gains or appreciation and there is no taxation in the nature of inheritance tax or estate duty or withholding tax applicable to us or to any holder of our ADSs and ordinary shares. There are no other taxes likely to be material to us levied by the Government of the Cayman Islands except for stamp duties which may be applicable on instruments executed in, or after execution brought within the jurisdiction of the Cayman Islands. No stamp duty is payable in the Cayman Islands on transfers of shares of Cayman Islands companies except those which hold interests in land in the Cayman Islands. The Cayman Islands is not party to any double tax treaties which are applicable to payments made to or by our company. There are no exchange control regulations or currency restrictions in the Cayman Islands. Pursuant to Section 6 of the Tax Concessions Law (2011 Revision) of the Cayman Islands, we may obtain an undertaking from the Governor-in-Council: (1) that no law which is enacted in the Cayman Islands imposing any tax to be levied on profits or income or gains or appreciation shall apply to us or our operations; and (2) that the aforesaid tax or any tax in the nature of estate duty or inheritance tax shall not be payable on our shares, debentures or other obligations. People’s Republic of China Taxation In the opinion of our PRC counsel, Han Kun Law Offices, the following are the material PRC tax consequences relevant to an investment in our ADSs and ordinary shares. We are a holding company incorporated in the Cayman Islands and we gain substantial income by way of dividends from our PRC subsidiary. The EIT Law and its Implementation Rules, both of which became effective on January 1, 2008, provide that China-sourced income of foreign enterprises, such as dividends paid by a PRC subsidiary to its foreign investor, will normally be subject to PRC withholding tax at a rate of 10%, unless any such foreign investor’s jurisdiction of incorporation has a tax treaty with China that provides for a different withholding arrangement. The Cayman Islands do not have such a tax treaty with China. According to the Mainland and Hong Kong Special Administrative Region Arrangement on Avoiding Double Taxation or Evasion of Taxation on Income agreed between China and Hong Kong in August 2006, or the Double Tax Avoidance Arrangement, and other applicable PRC laws, if a Hong Kong resident enterprise is determined by the relevant PRC tax authority to have satisfied the relevant conditions and requirements under the Double Tax Avoidance Arrangement and other applicable laws, the 10% withholding tax on the dividends the Hong Kong resident enterprise receives from a PRC resident enterprise may be reduced to 5%. Under the EIT Law, enterprises established under the laws of jurisdictions outside China with their “de facto management bodies” located within China may be considered to be PRC tax resident enterprises for tax purposes. If we are considered a PRC tax resident enterprise under the above definition, then our global income will be subject to PRC enterprise income tax at the rate of 25%. 157
Table of ContentsAccording to the Notice Regarding the Determination of Chinese-Controlled Offshore Incorporated Enterprises as PRC Tax Resident Enterprises on the Basis of De Facto Management Bodies issued by the State Administration of Taxation on April 22, 2009, or Circular 82, a foreign enterprise controlled by a PRC company or a PRC company group will be classified as a “resident enterprise” with its “de facto management bodies” located within China if the following requirements are satisfied: (i) the place where the senior management and core management departments that are in charge of its daily operations perform their duties is mainly located in the PRC; (ii) its financial and human resources decisions are made by or are subject to approval by persons or bodies in the PRC; (iii) its major assets, accounting books, company seals, and minutes and files of its board and shareholders’ meetings are located or kept in the PRC; and (iv) more than half of the enterprise’s directors with voting rights or senior management frequently reside in the PRC. Although Circular 82 only applies to offshore enterprises controlled by PRC enterprises, not those invested in by PRC individuals, like our company, the determining criteria set forth in Circular 82 may reflect the State Administration of Taxation’s general position on how the “de facto management body” test should be applied in determining the tax resident status of offshore enterprises, regardless of whether they are controlled by PRC enterprises or controlled by or invested in by PRC individuals. We do not believe that any of 500wan.com Limited, Fine Brand Limited or 500wan HK Limited meets all of the conditions above. Though we conduct our business principally through contractual arrangements among our wholly owned PRC subsidiary and our consolidated affiliated entities in the PRC, and decisions relating to our financial and human resource matters are made by personnel of our wholly owned PRC subsidiary and our consolidated affiliated entities in the PRC, each of 500wan.com Limited, Fine Brand Limited or 500wan HK Limited is a company incorporated outside the PRC. As holding companies, these three entities’ key assets and records, including the resolutions of their respective board of directors and the resolutions of their respective shareholders’ meetings, are located and maintained outside the PRC. The Implementation Rules of the EIT Law provide that, (i) if the enterprise that distributes dividends is domiciled in the PRC, or (ii) if gains are realized from transferring equity interests of enterprises domiciled in the PRC, then such dividends or capital gains are treated as China-sourced income. It is not clear how “domicile” may be interpreted under the EIT Law, and it may be interpreted as the jurisdiction where the enterprise is a tax resident. Therefore, if we are considered as a PRC tax resident enterprise for tax purposes, any dividends we pay to our overseas shareholders or ADS holders as well as gains realized by such shareholders or ADS holders from the transfer of our shares or ADSs may be regarded as China-sourced income and as a result become subject to PRC withholding tax at a rate of up to 10.0%. Moreover, non-resident individual investors may be required to pay PRC individual income tax at a rate of 20% on dividends payable to the investors or any capital gains realized from the transfer of ADSs or ordinary shares if such gains are deemed income derived from sources within the PRC. Under the PRC Individual Income Tax Law, or IIT Law, “non-resident individual” refers to an individual who has no domicile in China and does not stay in the territory of China or who has no domicile in China and has stayed in the territory of China for less than one year. Pursuant to the IIT Law and its implementation rules, for purposes of the PRC capital gains tax, taxable income is the balance of the total income obtained from the transfer of the ADSs or ordinary shares minus all the costs and expenses that are permitted under PRC tax laws to be deducted from the income. Therefore, if we are considered a PRC “resident enterprise” and the relevant competent PRC tax authorities consider dividends we pay with respect to our ADSs or ordinary shares and the gains realized from the transfer of our ADSs or ordinary shares income derived from sources within the PRC, such gains earned by non-resident individuals may also be subject to PRC withholding tax at a rate of 20%. Under SAT Circular 698 issued by the SAT, on December 10, 2009 with retroactive effect from January 1, 2008, if a non-resident enterprise transfers the equity interests of a PRC resident enterprise in an Indirect Transfer, and such overseas holding company is located in a tax jurisdiction that: (i) has an effective tax rate less than 12.5%, or (ii) does not tax foreign income of its residents, the non-resident enterprise, being the transferor, shall report to the PRC competent tax authority of the PRC resident enterprise this Indirect Transfer. Using a “substance over form” principle, the PRC tax authority may disregard the existence of the overseas holding company if it lacks a reasonable commercial purpose and was established for the purpose of reducing, avoiding, or deferring PRC tax. As a result, gains derived from such Indirect Transfer may be subject to PRC withholding 158
Table of Contentstax at a rate of up to 10%. SAT Circular 698 also provides that, where a non-PRC resident enterprise transfers its equity interests in a PRC resident enterprise to its related parties at a price lower than the fair market value, the relevant tax authority has the power to make a reasonable adjustment to the taxable income of the transaction. SAT Circular 698 is retroactively effective as of January 1, 2008. There is uncertainty as to the application of SAT Circular 698. SAT Circular 698 may be determined by the tax authorities to be applicable to our offshore restructuring transactions where non-resident investors were involved, if any of such transactions were determined by the tax authorities to lack reasonable commercial purpose. As a result, we and our non-resident investors in such transactions may become at risk of being taxed under SAT Circular 698 and we may be required to expend valuable resources to comply with SAT Circular 698 or to establish that we should not be taxed under the general anti-avoidance rule of the EIT Law, which may have a material adverse effect on our financial condition and results of operations or such non-resident investors’ investments in us. See “Risk Factors—Risks Related to Doing Business in China—We face uncertainties with respect to indirect transfers of equity interests in PRC resident enterprises by their non-PRC holding companies.” Pursuant to the EIT Law and the Provisional Measures for the Administration of Withholding of Enterprise Income Tax for Non-resident Enterprises promulgated by SAT in January 2009, or the Measures, the entities which have the direct obligation to make the following payments to a non-resident enterprise shall be the relevant tax withholders for such non-resident enterprise, and such payments include: income from equity investment (including dividends and other return on investment), interest, rents, royalties, and income from assignment of property as well as other income subject to enterprise income tax received by non-resident enterprises in China. Further, in case of an 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 a tax declaration with the competent PRC tax authority, and the PRC company whose equity has been transferred shall assist the tax authorities to collect taxes from the relevant non-resident enterprise. In addition, pursuant to the IIT Law amended on June 30, 2011 and its Implementation Rules, the entities who are obligated to pay the income from interest, stock dividends and bonuses and income from transfer of property which may be treated as PRC source gain and as a result subject to PRC individual income tax, shall be the relevant tax withholders for the individual receiving the aforesaid income who has no domicile and does not stay in the territory of China or who has no domicile but has stayed in the territory of China for less than one year. The entities, as the tax withholders, shall deduct the tax from the payments to the non-resident enterprise or individual directly. In the event the non-resident enterprise or individual fails to file tax returns, submit the information on tax payment within a prescribed time limit, or pay the taxes as required by PRC laws, the tax authority may pursue the payment of the taxes unpaid or underpaid, or impose fines or penalties on such non-resident enterprise or the individual. See “Risk Factors—Risks Related to Doing Business in China—Under the EIT Law, we may be classified as a “resident enterprise” of China. Such classification will likely result in unfavorable tax consequences to us and our non-PRC shareholders,” and “Risk Factors—Risks Related to Doing Business in China—We face uncertainties with respect to indirect transfers of equity interests in PRC resident enterprises by their non-PRC holding companies. Material United States Federal Income Tax Considerations In the opinion of our United States counsel, Simpson Thacher & Bartlett LLP, the following are the material United States federal income tax consequences of the ownership of our ADSs and ordinary shares as of the date hereof. The discussion is applicable only to United States Holders (as defined below) who hold ADSs or ordinary shares as capital assets. As used herein, the term “United States Holder” means a beneficial owner of an ADS or ordinary share that is for United States federal income tax purposes:
| | • | | an individual citizen or resident of the United States; |
| | • | | a corporation (or other entity treated as a corporation for United States federal income tax purposes) created or organized in or under the laws of the United States, any state thereof or the District of Columbia; |
| | • | | an estate the income of which is subject to United States federal income taxation regardless of its source; or |
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Table of Contents| | • | | a trust if it (1) is subject to the primary supervision of a court within the United States and one or more United States persons have the authority to control all substantial decisions of the trust or (2) has a valid election in effect under applicable United States Treasury regulations to be treated as a United States person. |
This discussion does not represent a detailed description of the United States federal income tax consequences applicable to you if you are subject to special treatment under the United States federal income tax laws, including if you are:
| | • | | a dealer in securities or currencies; |
| | • | | a regulated investment company; |
| | • | | a real estate investment trust; |
| | • | | a tax-exempt organization; |
| | • | | a person holding our ADSs or ordinary shares as part of a hedging, integrated or conversion transaction, a constructive sale or a straddle; |
| | • | | a trader in securities that has elected the mark-to-market method of accounting for your securities; |
| | • | | a person liable for alternative minimum tax; |
| | • | | a person who owns or is deemed to own 10% or more of our voting stock; |
| | • | | a partnership or other pass-through entity for United States federal income tax purposes; or |
| | • | | a person whose “functional currency” is not the United States dollar. |
The discussion below is based upon the provision of the Internal Revenue Code of 1986, as amended (the “Code”), and regulations, rulings and judicial decisions thereunder as of the date hereof, and such authorities may be replaced, revoked or modified so as to result in United States federal income tax consequences different from those discussed below. In addition, this discussion is based, in part, upon representations made by the depositary to us and assumes that the deposit agreement, and all other related agreements, will be performed in accordance with their terms. If a partnership holds our ADSs or ordinary shares, the tax treatment of a partner will generally depend upon the status of the partner and the activities of the partnership. If you are a partner of a partnership holding our ADSs or ordinary shares, you are urged to consult your tax advisors. This discussion does not contain a detailed description of all the United States federal income tax consequences to you in light of your particular circumstances and, except as set forth below with respect to PRC tax considerations, does not address the effects of any state, local or non-United States tax laws. If you are considering the purchase, ownership or disposition of our ADSs or ordinary shares, you are urged to consult your own tax advisors concerning the United States federal income tax consequences to you in light of your particular situation as well as any consequences arising under the laws of any other taxing jurisdiction. The United States Treasury has expressed concerns that intermediaries in the chain of ownership between the holders of ADSs and the issuer of securities underlying the ADSs may be taking actions (including the pre-release of ADSs) that are inconsistent with the claiming of foreign tax credits by United States Holders of ADSs. Such actions would also be inconsistent with the claiming of the reduced rate of tax, described below, applicable to dividends received by non-corporate holders. Accordingly, the analysis of the creditability of PRC taxes and the availability of the reduced tax rate for dividends received by non-corporate holders, each described 160
Table of Contentsbelow, could be affected by actions taken by intermediaries in the chain of ownership between the holder of an ADS and our company. ADSs If you hold ADSs, for United States federal income tax purposes, you generally will be treated as the owner of the underlying ordinary shares that are represented by such ADSs. Accordingly, deposits or withdrawals of ordinary shares for ADSs will not be subject to United States federal income tax. Taxation of Dividends Subject to the discussion under “—Passive Foreign Investment Company” below, the gross amount of distributions on the ADSs or ordinary shares (including any amounts withheld to reflect PRC withholding taxes) will be taxable as dividends, to the extent paid out of our current or accumulated earnings and profits, as determined under United States federal income tax principles. Such income (including any withheld taxes) will be includable in your gross income as ordinary income on the day actually or constructively received by you, in the case of the ordinary shares, or by the depositary, in the case of ADSs. Such dividends will not be eligible for the dividends received deduction allowed to corporations under the Code. With respect to non-corporate United States investors, dividends received from a qualified foreign corporation generally will be subject to reduced rates of taxation. A foreign corporation is treated as a qualified foreign corporation with respect to dividends received from that corporation on ordinary shares (or ADSs backed by such shares) that are readily tradable on an established securities market in the United States. Our ADSs have been approved for listing on the NYSE. United States Treasury Department guidance indicates that our ADSs will be readily tradable on an established securities market in the United States. Thus, we believe that dividends we pay on our ADSs will meet the conditions required for the reduced tax rate. Since we do not expect that our ordinary shares will be listed on an established securities market, we do not believe that dividends that we pay on our ordinary shares that are not backed by ADSs currently meet the conditions required for these reduced tax rates. There can be no assurance that our ADSs will be considered readily tradable on an established securities market in later years. A qualified foreign corporation also includes a foreign corporation that is eligible for the benefits of certain income tax treaties with the United States. In the event that we are deemed to be a PRC resident enterprise under the EIT Law, we may be eligible for the benefits of the income tax treaty between the United States and the PRC, or the Treaty, and if we are eligible for such benefits, dividends we pay on our ordinary shares, regardless of whether such shares are represented by ADSs, would be eligible for the reduced rates of taxation. See “Taxation—People’s Republic of China Taxation.” Non-corporate United States Holders that do not meet a minimum holding period requirement during which they are not protected from the risk of loss or that elect to treat the dividend income as “investment income” pursuant to Section 163(d)(4) of the Code will not be eligible for the reduced rates of taxation regardless of our status as a qualified foreign corporation. In addition, the rate reduction will not apply to dividends if the recipient of a dividend is obligated to make related payments with respect to positions in substantially similar or related property. This disallowance applies even if the minimum holding period has been met. You are urged to consult your own tax advisors regarding the application of these rules given your particular circumstances. Non-corporate United States Holders will not be eligible for reduced rates of taxation on any dividends received from us if we are a PFIC in the taxable year in which such dividends are paid or in the preceding taxable year. See “—Passive Foreign Investment Company” below. In the event that we are deemed to be a PRC resident enterprise under the PRC tax law, you may be subject to PRC withholding taxes on dividends paid to you with respect to the ADSs or ordinary shares. See “Taxation—People’s Republic of China Taxation.” In that case, PRC withholding taxes on dividends will be treated as foreign taxes eligible for credit against your United States federal income tax liability. For purposes of calculating the foreign tax credit, dividends paid on the ADSs or ordinary shares will be treated as foreign-source income and will generally constitute passive category income. However, if you have held the ADSs or ordinary shares for less than a specified minimum period during which you are not protected from risk of loss, or are obligated to make payments related to the dividends, you will not be allowed a foreign tax credit for any PRC 161
Table of Contentswithholding taxes imposed on dividends paid on the ADSs or ordinary shares. The rules governing the foreign tax credit are complex. You are urged to consult your tax advisor regarding the availability of the foreign tax credit under your particular circumstances. To the extent that the amount of any distribution exceeds our current and accumulated earnings and profits for a taxable year, as determined under United States federal income tax principles, the distribution will first be treated as a tax-free return of capital, causing a reduction in the adjusted basis of your ADSs or ordinary shares (thereby increasing the amount of gain, or decreasing the amount of loss, to be recognized by you on a subsequent disposition of the ADSs or ordinary shares), and the balance in excess of adjusted basis will be taxed as capital gain recognized on a sale or exchange. However, we do not expect to determine earnings and profits in accordance with United States federal income tax principles. Therefore, you should expect that a distribution will generally be treated as a dividend (as discussed above). Passive Foreign Investment Company Based on our financial statements, and the projected composition of our income and valuation of our assets, including goodwill, we do not expect to be a PFIC for 2013, and we do not expect to become one in the future, although there can be no assurance in this regard. In general, we will be a PFIC for any taxable year in which:
| | • | | at least 75% of our gross income is passive income, or |
| | • | | at least 50% of the value (determined based on a quarterly average) of our assets is attributable to assets that produce or are held for the production of passive income. |
For this purpose, passive income generally includes dividends, interest, royalties and rents (other than royalties and rents derived in the active conduct of a trade or business and not derived from a related person). If we own at least 25% (by value) of the stock of another corporation, we will be treated, for purposes of the PFIC tests, as owning our proportionate share of the other corporation’s assets and receiving our proportionate share of the other corporation’s income. However, it is not entirely clear how the contractual arrangements between us and our affiliated consolidated entities will be treated for purposes of the PFIC rules. If it is determined that we do not own the stock of our consolidated affiliated entities for United States federal income tax purposes, we would likely be treated as a PFIC. The determination of whether we are a PFIC is made annually. Accordingly, it is possible that we may become a PFIC in the current or any future taxable year due to changes in our asset or income composition. Because we have valued our goodwill based on the projected market value of our equity, a decrease in the price of our ADSs may result in our becoming a PFIC. The composition of our income and our assets will also be affected by how, and how quickly, we spend the cash raised in this offering. Under circumstances where the cash is not deployed for active purposes, our risk of becoming a PFIC may increase. If we are a PFIC for any taxable year during which you hold our ADSs or ordinary shares, you will be subject to special tax rules discussed below. If we are a PFIC for any taxable year during which you hold our ADSs or ordinary shares, you will be subject to special tax rules with respect to any “excess distribution” received and any gain realized from a sale or other disposition, including a pledge, of ADSs or ordinary shares. Distributions received in a taxable year that are greater than 125% of the average annual distributions received during the shorter of the three preceding taxable years or your holding period for the ADSs or ordinary shares will be treated as excess distributions. Under these special tax rules:
| | • | | the excess distribution or gain will be allocated ratably over your holding period for the ADSs or ordinary shares, |
| | • | | the amount allocated to the current taxable year, and any taxable year prior to the first taxable year in which we were a PFIC, will be treated as ordinary income, and |
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Table of Contents| | • | | the amount allocated to each other year will be subject to tax at the highest tax rate in effect for that year and the interest charge generally applicable to underpayments of tax will be imposed on the resulting tax attributable to each such year. |
In addition, non-corporate United States Holders will not be eligible for reduced rates of taxation on any dividends received from us if we are a PFIC in the taxable year in which such dividends are paid or in the preceding taxable year. You will be required to file Internal Revenue Service Form 8621 if you hold our ADSs or ordinary shares in any year in which we are classified as a PFIC. If we are a PFIC for any taxable year during which you hold our ADSs or ordinary shares and any of our non-United States subsidiaries is also a PFIC, a United States Holder would be treated as owning a proportionate amount (by value) of the shares of the lower-tier PFIC for purposes of the application of these rules. You are urged to consult your tax advisors about the application of the PFIC rules to any of our subsidiaries. In lieu of being subject to the excess distribution rules discussed above, you may make an election to include gain on the stock of a PFIC as ordinary income under a mark-to-market method, provided that such stock is regularly traded on a qualified exchange. Under current law, the mark-to-market election will be available to holders of ADSs if the ADSs are listed on the NYSE, which constitutes a qualified exchange, and are “regularly traded” for purposes of the mark-to-market election (for which no assurance can be given). It should also be noted that it is intended that only the ADSs and not the ordinary shares will be listed on the NYSE. Consequently, if you are a holder of ordinary shares that are not represented by ADSs, you generally will not be eligible to make amark-to-market election if we are or were to become a PFIC. If you make an effective mark-to-market election, you will include in each year that we are a PFIC as ordinary income the excess of the fair market value of your ADSs at the end of the year over your adjusted tax basis in the ADSs. You will be entitled to deduct as an ordinary loss in each such year the excess of your adjusted tax basis in the ADSs over their fair market value at the end of the year, but only to the extent of the net amount previously included in income as a result of the mark-to-market election. If you make an effective mark-to-market election, any gain you recognize upon the sale or other disposition of your ADSs will be treated as ordinary income and any loss will be treated as ordinary loss, but only to the extent of the net amount previously included in income as a result of the mark-to-market election. Your adjusted tax basis in the ADSs will be increased by the amount of any income inclusion and decreased by the amount of any deductions under the mark-to-market rules. If you make amark-to-market election it will be effective for the taxable year for which the election is made and all subsequent taxable years unless the ADSs are no longer regularly traded on a qualified exchange or the Internal Revenue Service consents to the revocation of the election. You are urged to consult your tax advisor about the availability of the mark-to-market election, and whether making the election would be advisable in your particular circumstances. A U.S. investor in a PFIC generally can mitigate the consequences of the rules described above by electing to treat the PFIC as a “qualified electing fund” under Section 1295 of the Code. However, this option is not available to you because we do not intend to comply with the requirements necessary to permit you to make this election. We expect to file annual reports on Form 20-F with the U.S. Securities and Exchange Commission in which we will update our expectations as to whether or not we anticipate being a PFIC for such year. We do not intend to make any other annual determination or to otherwise notify you regarding our status as a PFIC for any taxable year. You are urged to consult your tax advisors concerning the United States federal income tax consequences of holding ADSs or ordinary shares if we are considered a PFIC in any taxable year. Taxation of Capital Gains For United States federal income tax purposes, you will recognize taxable gain or loss on any sale or exchange of ADSs or ordinary shares in an amount equal to the difference between the amount realized for the ADSs or ordinary shares and your tax basis in the ADSs or ordinary shares. Subject to the discussion under “—Passive Foreign Investment Company” above, such gain or loss will generally be capital gain or loss. Capital 163
Table of Contentsgains of individuals derived with respect to capital assets held for more than one year are eligible for reduced rates of taxation. The deductibility of capital losses is subject to limitations. Any gain or loss recognized by you will generally be treated as United States source gain or loss. However, if we are treated as a PRC “resident enterprise” for PRC tax purposes and PRC tax were imposed on any gain, and if you are eligible for the benefits of the Treaty, you may elect to treat such gain as PRC source gain under the Treaty. If you are not eligible for the benefits of the Treaty or you fail to make the election to treat any gain as PRC source, then you generally would not be able to use the foreign tax credit arising from any PRC tax imposed on the disposition of our ADSs or ordinary shares unless such credit can be applied (subject to applicable limitations) against tax due on other income derived from foreign sources. You will be eligible for the benefits of the Treaty if, for purposes of the Treaty, you are a resident of the United States, and you meet other factual requirements specified in the Treaty. Because qualification for the benefits of the Treaty is a fact-intensive inquiry which depends upon the particular circumstances of each investor, you are specifically urged to consult your tax advisors regarding your eligibility for the benefits of the Treaty. You are also urged to consult your tax advisors regarding the tax consequences if any PRC tax is imposed on gain on a disposition of our ADSs or ordinary shares, including the availability of the foreign tax credit and the election to treat any gain as PRC source, under your particular circumstances. Information Reporting and Backup Withholding In general, information reporting will apply to dividends in respect of our ADSs or ordinary shares and the proceeds from the sale, exchange or redemption of our ADSs or ordinary shares that are paid to you within the United States (and in certain cases, outside the United States), unless you are an exempt recipient. A backup withholding tax generally would apply to such payments if you fail to provide a taxpayer identification number or certification of other exempt status or, in the case of dividend payments, if you fail to report in full dividend and interest income. Any amounts withheld under the backup withholding rules will be allowed as a refund or a credit against your United States federal income tax liability provided the required information is furnished to the Internal Revenue Service in a timely manner. Under the Hiring Incentives to Restore Employment Act of 2010, individuals that own “specified foreign financial assets” with an aggregate value in excess of US$50,000 are required to file an information report with respect to such assets with their tax returns. “Specified foreign financial assets” include any financial accounts maintained by foreign financial institutions, as well as any of the following, but only if they are not held in accounts maintained by financial institutions: (i) stocks and securities issued by non-U.S. persons; (ii) financial instruments and contracts held for investment that have non-U.S. issuers or counterparties; and (iii) interests in foreign entities. United States Holders that are individuals are urged to consult their tax advisors regarding the application of this legislation to their ownership of ADSs or ordinary shares. 164
Table of ContentsUNDERWRITING Deutsche Bank Securities Inc. is acting as representative of each of the underwriters named below. Subject to the terms and conditions set forth in an underwriting agreement among us and the underwriters, we have agreed to sell to the underwriters, and each of the underwriters has agreed, severally and not jointly, to purchase from us, the number of ADSs set forth opposite its name below. The address of Deutsche Bank Securities Inc. is 60 Wall Street, New York, NY 10005.
| | | | | Underwriter | | Number of ADSs | | Deutsche Bank Securities Inc. | | | 4,628,800 | | Piper Jaffray & Co. | | | 867,900 | | Oppenheimer & Co. Inc. | | | 289,300 | | | |
|
| | Total | | | 5,786,000 | | | |
|
| |
Subject to the terms and conditions set forth in the underwriting agreement, the underwriters have agreed, severally and not jointly, to purchase all of the ADSs sold under the underwriting agreement if any of these ADSs are purchased. If an underwriter defaults, the underwriting agreement provides that the purchase commitments of the nondefaulting underwriters may be increased or the underwriting agreement may be terminated. We have agreed to indemnify the underwriters against certain liabilities, including liabilities under the Securities Act, or to contribute to payments the underwriters may be required to make in respect of those liabilities. The underwriters are offering the ADSs, subject to prior sale, when, as and if issued to and accepted by them, subject to approval of legal matters by their counsel, including the validity of the ordinary shares represented by the ADSs, and other conditions contained in the underwriting agreement, such as the receipt by the underwriters of officer’s certificates and legal opinions. The underwriters reserve the right to withdraw, cancel or modify offers to the public and to reject orders in whole or in part. Commissions and Discounts The representative has advised us that the underwriters propose initially to offer the ADSs to the public at the public offering price set forth on the cover page of this prospectus and to dealers at that price less a concession not in excess of US$0.55 per ADS. After the initial public offering, the public offering price, concession or any other term of the offering may be changed. The following table shows the public offering price, underwriting discounts and commissions and proceeds before expenses to us. The information assumes either no exercise or full exercise by the underwriters of their over-allotment option.
| | | | | | | | | | | | | | | | Per ADS | | | Without exercise
of over-allotment
option | | | With exercise of
over-allotment
option | | Public offering price | | US$ | 13.00 | | | US$ | 75,218,000 | | | US$ | 86,500,700 | | Underwriting discounts and commissions | | US$ | 0.91 | | | US$ | 5,265,260 | | | US$ | 6,055,049 | | Proceeds, before expenses, to us | | US$ | 12.09 | | | US$ | 69,952,740 | | | US$ | 80,445,651 | |
We have agreed to reimburse the underwriters for certain out-of-pocket expenses of the underwriters payable by us, in an aggregate amount not to exceed US$0.5 million. Over-allotment Option We have granted an option to the underwriters to purchase up to an additional 867,900 ADSs at the public offering price, less the underwriting discounts and commissions. The underwriters may exercise this option for 30 days from the date of this prospectus solely to cover any over-allotments. If the underwriters exercise this option, each will be obligated, subject to conditions contained in the underwriting agreement, to purchase a number of additional ADSs proportionate to that underwriter’s initial amount reflected in the above table. 165
Table of ContentsReserved ADSs At our request, the underwriters have reserved for sale, at the public offering price, up to 10% of the ADSs offered by this prospectus for sale to some of our directors, officers, employees, business associates and related persons. If these persons purchase reserved ADSs, this will reduce the number of ADSs available for sale to the general public. Any reserved ADSs that are not so purchased will be offered by the underwriters to the general public on the same terms as the other ADSs offered by this prospectus. Concurrently with, and subject to, completion of this offering, Sequoia has agreed to purchase from us Class B ordinary shares, at a price per share equal to the public offering price of our ADSs, adjusted to reflect our ADS-to-ordinary share ratio, for the aggregate amount of US$15 million. Based on the offering price of US$13.00 per ADS, Sequoia would purchase 11,538,460 Class B ordinary shares. This investment is being made pursuant to an exemption from registration with the U.S. Securities and Exchange Commission under Regulation S of the Securities Act. Sequoia has agreed, subject to certain customary exceptions, not to, for a period of 180 days after the date of this prospectus, without the prior written consent of the representative on behalf of the underwriters, offer, sell, contract to sell, announce the intention to sell, issue, pledge, lend, grant or purchase any option, right or warrant for the sale of, or otherwise dispose of or transfer, any of our ordinary shares acquired in its investment. No Sales of Similar Securities We, our executive officers and directors, our existing shareholders and option holders, Sequoia, and holders of exchangeable notes which are exchangeable into our Class B ordinary shares have agreed not to sell or transfer any ordinary shares, ADSs or securities convertible into, exchangeable for, exercisable for, or repayable with our ordinary shares or ADSs, for 180 days after the date of this prospectus without first obtaining the written consent of the representative on behalf of the underwriters. Specifically, we and these other persons have agreed, not to directly or indirectly:
| | • | | offer, pledge, sell or contract to sell any ordinary shares or ADSs; |
| | • | | sell any option or contract to purchase any ordinary shares or ADSs; |
| | • | | purchase any option or contract to sell any ordinary shares or ADSs; |
| | • | | grant any option, right or warrant for the sale of any ordinary shares or ADSs; |
| | • | | lend or otherwise dispose of or transfer any ordinary shares or ADSs; |
| | • | | request or demand that we file a registration statement related to our ordinary shares or ADSs; or |
| | • | | enter into any swap or other agreement that transfers, in whole or in part, the economic consequence of ownership of any ordinary shares or ADSs whether any such swap or transaction is to be settled by delivery of ordinary shares or ADSs or other securities, in cash or otherwise. |
The restrictions described in the preceding paragraph do not apply to:
| | • | | the sale of the ADSs to the underwriters; |
| | • | | the issuance of Class B ordinary shares to Sequoia by us in connection with the automatic conversion of the convertible note; |
| | • | | the issuance and sale of Class B ordinary shares to Sequoia by us in a private placement concurrently with completion of this offering; |
| | • | | the transfer of our ordinary shares by our existing shareholders upon the exchange of exchangeable notes outstanding on the date of and referred to in this prospectus; |
166
Table of Contents| | • | | the issuance by us of ordinary shares upon the exercise of an option or warrant or the conversion of a security outstanding on the date of and referred to in this prospectus; and |
| | • | | the issuance of Class A ordinary shares or the grant of options to purchase Class A ordinary shares under our 2011 share incentive plan. |
This lock-up provision applies to our ordinary shares and ADSs and to securities convertible into or exchangeable or exercisable for or repayable with our ordinary shares and ADSs. It also applies to our ordinary shares and ADSs owned now or acquired later by the person executing the agreement or for which the person executing the agreement later acquires the power of disposition. New York Stock Exchange We expect the ADSs to be approved for listing on the NYSE, subject to notice of issuance, under the symbol “WBAI.” Before this offering, there has been no public market for our ordinary shares or ADSs. The public offering price will be determined through negotiations between us and the representative. In addition to prevailing market conditions, the factors to be considered in determining the public offering price are:
| | • | | the valuation multiples of publicly traded companies that the representative believes to be comparable to us; |
| | • | | our financial information; |
| | • | | the history of, and the prospects for, our company and the industry in which we compete; |
| | • | | an assessment of our management, its past and present operations, and the prospects for, and timing of, our future revenues; |
| | • | | the present state of our development; and |
| | • | | the above factors in relation to market values and various valuation measures of other companies engaged in activities similar to ours. |
An active trading market for the ADSs may not develop. It is also possible that after the offering the ADSs will not trade in the public market at or above the public offering price. The underwriters do not expect to sell more than 5% of the ADSs in the aggregate to accounts over which they exercise discretionary authority. Price Stabilization, Short Positions and Penalty Bids Until the distribution of the ADSs is completed, SEC rules may limit underwriters and selling group members from bidding for and purchasing our ADSs. However, the representative may engage in transactions that stabilize the price of the ADSs, such as bids or purchases to peg, fix or maintain that price. In connection with the offering, the underwriters may purchase and sell our ADSs in the open market. These transactions may include short sales, purchases on the open market to cover positions created by short sales and stabilizing transactions. Short sales involve the sale by the underwriters of a greater number of ADSs than they are required to purchase in the offering. “Covered” short sales are sales made in an amount not greater than the underwriters’ over-allotment option described above. The underwriters may close out any covered short position by either exercising their over-allotment option or purchasing ADSs in the open market. In determining the source of ADSs to close out the covered short position, the underwriters will consider, among other things, the price of ADSs available for purchase in the open market as compared to the price at which they may purchase ADSs through the over-allotment option. “Naked” short sales are sales in excess of the over-allotment option. The underwriters must close out any naked short position by purchasing ADSs in the open market. A naked short position is more likely to be created if the underwriters are concerned that there may be downward pressure on the price of our ADSs in the open market after pricing that could adversely affect investors who purchase in the 167
Table of Contentsoffering. Stabilizing transactions consist of various bids for or purchases of ADSs made by the underwriters in the open market prior to the completion of the offering. The underwriters may also impose a penalty bid. This occurs when a particular underwriter repays to the underwriters a portion of the underwriting discounts and commissions received by it because the representative has repurchased ADSs sold by or for the account of such underwriter in stabilizing or short covering transactions. Similar to other purchase transactions, the underwriters’ purchases to cover the syndicate short sales may have the effect of raising or maintaining the market price of our ADSs or preventing or retarding a decline in the market price of our ADSs. As a result, the price of our ADSs may be higher than the price that might otherwise exist in the open market. The underwriters may conduct these transactions on the NYSE, in the over-the-counter market or otherwise. Neither we nor any of the underwriters make any representation or prediction as to the direction or magnitude of any effect that the transactions described above may have on the price of our ADSs. In addition, neither we nor any of the underwriters make any representation that the representative will engage in these transactions or that these transactions, once commenced, will not be discontinued without notice. Electronic Offer, Sale and Distribution of ADSs In connection with the offering, certain of the underwriters or securities dealers may distribute prospectuses by electronic means, such as e-mail. In addition, the representative may facilitate Internet distribution for this offering to certain of its Internet subscription customers. The representative may allocate a limited number of ADSs for sale to its online brokerage customers. An electronic prospectus may be made available on the Internet website maintained by the representative. Other than the prospectus in electronic format, the information on the website of the representative is not part of this prospectus. Other Relationships Some of the underwriters and their affiliates have engaged in, and may in the future engage in, investment banking and other commercial dealings in the ordinary course of business with us or our affiliates. They have received, or may in the future receive, customary fees and commissions for these transactions. Selling Restrictions No action has been taken in any jurisdiction (except in the United States) that would permit a public offering of the ADSs, or the possession, circulation or distribution of this prospectus or any other material relating to us or the ADSs in any jurisdiction where action for that purpose is required. Accordingly, the ADSs may not be offered or sold, directly or indirectly, and neither this prospectus nor any other offering material relating to the ADSs may be distributed or published, in or from any jurisdiction except under circumstances that will result in compliance with the applicable laws and regulations thereof. Australia This document has not been lodged with the Australian Securities & Investments Commission and is only directed to certain categories of exempt persons. Accordingly, if you receive this document in Australia: (a) you confirm and warrant that you are either: (i) a “sophisticated investor” under section 708(8)(a) or (b) of the Corporations Act 2001 (Cth) of Australia, or the Corporations Act; (ii) a “sophisticated investor” under section 708(8)(c) or (d) of the Corporations Act and that you have provided an accountant’s certificate to the company which complies with the requirements of section 708(8)(c)(i) or (ii) of the Corporations Act and related regulations before the offer has been made; (iii) a person associated with the company under section 708(12) of the Corporations Act; or 168
Table of Contents(iv) “professional investor” within the meaning of section 708(11)(a) or (b) of the Corporations Act, and to the extent that you are unable to confirm or warrant that you are an exempt sophisticated investor, associated person or professional investor under the Corporations Act any offer made to you under this document is void and incapable of acceptance. (b) you warrant and agree that you will not offer any of the ADSs issued to you pursuant to this document for resale in Australia within 12 months of those ADSs being issued unless any such resale offer is exempt from the requirement to issue a disclosure document under section 708 of the Corporations Act. Canada The ADSs may only be offered, sold or distributed, directly or indirectly, in the provinces of Ontario and Quebec, Canada or to residents thereof and not in any other province or territory of Canada or to or for the benefit of any resident of any other province or territory of Canada. Such offers or sales will be made pursuant to an exemption from the requirement to file a prospectus with the regulatory authorities in the provinces of Ontario and Quebec, and will be made only through a dealer duly registered under the applicable securities laws of the province of Ontario or Quebec, as the case may be, or in accordance with an exemption from the applicable registered dealer requirements. Cayman Islands This prospectus does not constitute an intention to offer to the public in the Cayman Islands of the ADSs, whether by way of sale or subscription. The ADSs will not be offered, sold, directly or indirectly in the Cayman Islands. Dubai International Financial Centre This document relates to an exempt offer in accordance with the Offered Securities Rules of the Dubai Financial Services Authority. This document is intended for distribution only to persons of a type specified in those rules. It must not be delivered to, or relied on by, any other person. The Dubai Financial Services Authority has no responsibility for reviewing or verifying any documents in connection with exempt offers. The Dubai Financial Services Authority has not approved this document nor taken steps to verify the information set out in it, and has no responsibility for it. The ADSs which are the subject of the offering contemplated by this prospectus may be illiquid and/or subject to restrictions on their resale. Prospective purchasers of the ADSs offered should conduct their own due diligence on the ADSs. If you do not understand the contents of this document you should consult an authorized financial adviser. European Economic Area In relation to each member state of the European Economic Area which has implemented the Prospectus Directive (each, a “Relevant Member State”), with effect from and including the date on which the Prospectus Directive is implemented in that Relevant Member State (the “Relevant Implementation Date”), no offer of the ADSs will be made to the public in that Relevant Member State (other than offers (the “Permitted Public Offers”) where a prospectus will be published in relation to the ADSs that has been approved by the competent authority in a Relevant Member State or, where appropriate, approved in another Relevant Member State and notified to the competent authority in that Relevant Member State, all in accordance with the Prospectus Directive), except that with effect from and including that Relevant Implementation Date, offers of ordinary shares may be made to the public in that Relevant Member State at any time:
| | (a) | to “qualified investors” as defined in the Prospectus Directive; |
| | (b) | to fewer than 100 or, if the Relevant Member State has implemented the relevant provision of the 2010 PD Amending Directive, 150, natural or legal persons (other than “qualified investors” as defined in the Prospectus Directive) ,as permitted in the Prospectus Directive, subject to obtaining the prior consent of the representatives for any such offer; or |
169
Table of Contents| | (c) | in any other circumstances falling within Article 3(2) of the Prospectus Directive, |
provided that no such offer of the ADSs shall result in a requirement for the publication of a prospectus pursuant to Article 3 of the Prospectus Directive or of a supplement to a prospectus pursuant to Article 16 of the Prospectus Directive. Each person in a Relevant Member State (other than a Relevant Member State where there is a Permitted Public Offer) who initially acquires any ADSs or to whom any offer is made will be deemed to have represented, acknowledged and agreed that (A) it is a “qualified investor”, and (B) in the case of any ADSs acquired by it as a financial intermediary, as that term is used in Article 3(2) of the Prospectus Directive: (i) the ADSs acquired by it in the offering have not been acquired on behalf of, nor have they been acquired with a view to their offer or resale to, persons in any Relevant Member State other than “qualified investors” as defined in the Prospectus Directive, or in circumstances in which the prior consent of the Subscribers has been given to the offer or resale, or (ii) where ADSs have been acquired by it on behalf of persons in any Relevant Member State other than “qualified investors” as defined in the Prospectus Directive, the offer of those ADSs to it is not treated under the Prospectus Directive as having been made to such persons. For the purpose of the above provisions, the expression “an offer to the public” in relation to any ADSs in any Relevant Member State means the communication in any form and by any means of sufficient information on the terms of the offer of any ADSs to be offered so as to enable an investor to decide to purchase any ADSs, as the same may be varied in the Relevant Member State by any measure implementing the Prospectus Directive in the Relevant Member State and the expression “Prospectus Directive” means Directive 2003/71 EC (and amendments thereto, including the 2010 PD Amending Directive, to the extent implemented in the Relevant Member State), and includes any relevant implementing measure in each Relevant Member State and the expression “2010 PD Amending Directive” means Directive 2010/73/EU. Hong Kong The ADSs may not be offered or sold by means of any document other than (i) in circumstances which do not constitute an offer to the public within the meaning of the Companies Ordinance (Cap.32, Laws of Hong Kong), or (ii) to “professional investors” within the meaning of the Securities and Futures Ordinance (Cap.571, Laws of Hong Kong) and any rules made thereunder, or (iii) in other circumstances which do not result in the document being a “prospectus” within the meaning of the Companies Ordinance (Cap.32, Laws of Hong Kong), and no advertisement, invitation or document relating to the ADSs may be issued or may be in the possession of any person for the purpose of issue (in each case whether in Hong Kong or elsewhere), which is directed at, or the contents of which are likely to be accessed or read by, the public in Hong Kong (except if permitted to do so under the laws of Hong Kong) other than with respect to ADSs which are or are intended to be disposed of only to persons outside Hong Kong or only to “professional investors” within the meaning of the Securities and Futures Ordinance (Cap.571, Laws of Hong Kong) and any rules made thereunder. Israel In the State of Israel, the ADSs offered hereby may not be offered to any person or entity other than the following: (a) a fund for joint investments in trust (i.e., mutual fund), as such term is defined in the Law for Joint Investments in Trust, 5754-1994, or a management company of such a fund; (b) a provident fund as defined in Section 47(a)(2) of the Income Tax Ordinance of the State of Israel, or a management company of such a fund; (c) an insurer, as defined in the Law for Oversight of Insurance Transactions, 5741-1981, a banking entity or satellite entity, as such terms are defined in the Banking Law (Licensing), 5741-1981, other than a joint services company, acting for their own account or for the account of investors of the type listed in Section 15A(b) of the Securities Law 1968; 170
Table of Contents(d) a company that is licensed as a portfolio manager, as such term is defined in Section 8(b) of the Law for the Regulation of Investment Advisors and Portfolio Managers, 5755-1995, acting on its own account or for the account of investors of the type listed in Section 15A(b) of the Securities Law 1968; (e) a company that is licensed as an investment advisor, as such term is defined in Section 7(c) of the Law for the Regulation of Investment Advisors and Portfolio Managers, 5755-1995, acting on its own account; (f) a company that is a member of the Tel Aviv Stock Exchange, acting on its own account or for the account of investors of the type listed in Section 15A(b) of the Securities Law 1968; (g) an underwriter fulfilling the conditions of Section 56(c) of the Securities Law, 5728-1968; (h) a venture capital fund (defined as an entity primarily involved in investments in companies which, at the time of investment, (i) are primarily engaged in research and development or manufacture of new technological products or processes and (ii) involve above-average risk); (i) an entity primarily engaged in capital markets activities in which all of the equity owners meet one or more of the above criteria; and (j) an entity, other than an entity formed for the purpose of purchasing the ADSs in this offering, in which the shareholders equity (including pursuant to foreign accounting rules, international accounting regulations and U.S. generally accepted accounting rules, as defined in the Securities Law Regulations (Preparation of Annual Financial Statements), 1993) is in excess of NIS 250 million. Any offeree of the ADSs offered hereby in the State of Israel shall be required to submit written confirmation that it falls within the scope of one of the above criteria. This prospectus will not be distributed or directed to investors in the State of Israel who do not fall within one of the above criteria. Japan The ADSs have not been and will not be registered under the Financial Instruments and Exchange Law of Japan, and ADSs will not be offered or sold, directly or indirectly, in Japan or to, or for the benefit of, any resident of Japan (which term as used herein means any person resident in Japan, including any corporation or other entity organized under the laws of Japan), or to others forre-offering or resale, directly or indirectly, in Japan or to a resident of Japan, except pursuant to any exemption from the registration requirements of, and otherwise in compliance with, the Financial Instruments and Exchange Law and any other applicable laws, regulations and ministerial guidelines of Japan. Korea The ADSs may not be offered, sold and delivered directly or indirectly, or offered or sold to any person for reoffering or resale, directly or indirectly, in Korea or to any resident of Korea except pursuant to the applicable laws and regulations of Korea, including the Securities and Exchange Act and the Foreign Exchange Transaction Law and the decrees and regulations thereunder. The ADSs have not been registered with the Financial Supervisory Commission of Korea for public offering in Korea. Furthermore, our ADSs may not be resold to Korean residents unless the purchaser of our ADSs complies with all applicable regulatory requirements (including but not limited to government approval requirements under the Foreign Exchange Transaction Law and its subordinate decrees and regulations) in connection with the purchase of our ADSs. Kuwait Unless all necessary approvals from the Kuwait Ministry of Commerce and Industry required by Law No. 31/1990 “Regulating the Negotiation of Securities and Establishment of Investment Funds”, its Executive Regulations and the various Ministerial Orders issued pursuant thereto or in connection therewith, have been given in relation to the marketing and sale of the ADSs, these may not be marketed, offered for sale, nor sold in 171
Table of Contentsthe State of Kuwait. Neither this prospectus (including any related document), nor any of the information contained therein is intended to lead to the conclusion of any contract of whatsoever nature within Kuwait. People’s Republic of China This prospectus may not be circulated or distributed in the PRC and the ADSs may not be offered or sold, and will not be offered or sold to any person for re-offering or resale directly or indirectly to any resident of the PRC except pursuant to applicable laws and regulations of the PRC. For the purpose of this paragraph, PRC does not include Taiwan and the special administrative regions of Hong Kong and Macau. Qatar In the State of Qatar, the offer contained herein is made on an exclusive basis to the specifically intended recipient thereof, upon that person’s request and initiative, for personal use only and shall in no way be construed as a general offer for the sale of securities to the public or an attempt to do business as a bank, an investment company or otherwise in the State of Qatar. This prospectus and the underlying securities have not been approved or licensed by the Qatar Central Bank or the Qatar Financial Centre Regulatory Authority or any other regulator in the State of Qatar. The information contained in this prospectus shall only be shared with any third parties in Qatar on a need to know basis for the purpose of evaluating the contained offer. Any distribution of this prospectus by the recipient to third parties in Qatar beyond the terms hereof is not permitted and shall be at the liability of such recipient. Saudi Arabia This prospectus may not be distributed in the Kingdom except to such persons as are permitted under the Offers of Securities Regulations issued by the Capital Market Authority. The Capital Market Authority does not make any representation as to the accuracy or completeness of this prospectus, and expressly disclaims any liability whatsoever for any loss arising from, or incurred in reliance upon, any part of this prospectus. Prospective purchasers of the securities offered hereby should conduct their own due diligence on the accuracy of the information relating to the securities. If you do not understand the contents of this prospectus you should consult an authorized financial adviser. Singapore This prospectus has not been registered as a prospectus with the Monetary Authority of Singapore. Accordingly, this prospectus and any other document or material in connection with the offer or sale, or invitation for subscription or purchase, of our ADSs may not be circulated or distributed, nor may our ADSs be offered or sold, or be made the subject of an invitation for subscription or purchase, whether directly or indirectly, to persons in Singapore other than (i) to an institutional investor under Section 274 of the Securities and Futures Act, Chapter 289 of Singapore, or SFA, (ii) to a relevant person or any person pursuant to Section 275(1A), and in accordance with the conditions specified in Section 275 of the SFA, or (iii) otherwise pursuant to, and in accordance with the conditions of, any other applicable provision of the SFA, in each case subject to compliance with conditions set forth in the SFA. Where our ADSs are subscribed or purchased under Section 275 by a relevant person which is: (a) a corporation (which is not an accredited investor as defined in Section 4A of the SFA) the sole business of which is to hold investments and the entire share capital of which is owned by one or more individuals, each of whom is an accredited investor; or (b) a trust (where the trustee is not an accredited investor) whose sole purpose is to hold investments and each beneficiary of the trust is an individual who is an accredited investor; shares, debentures and units of shares and debentures of that corporation or the beneficiaries’ rights and interest (howsoever described) in that trust shall not be transferred within six months after that corporation or that trust has acquired the ADSs under Section 275 of the SFA, except: (1) to an institutional investor (for corporations under Section 274 of the SFA) or to a relevant person defined in Section 275(2) of the SFA, or to any person pursuant to an offer that is made on terms that such shares, debentures and units of shares and debentures of that 172
Table of Contentscorporation or such rights and interest in that trust are acquired at a consideration of not less than S$200,000 (or its equivalent in a foreign currency) for each transaction, whether such amount is to be paid for in cash or by exchange of securities or other assets, and further for corporations, in accordance with the conditions specified in Section 275 of the SFA; (2) where no consideration is or will be given for the transfer; or (3) where the transfer is by operation of law. Switzerland This document, as well as any other material relating to the ADSs which are the subject of the offering contemplated by this prospectus, do not constitute an issue prospectus pursuant to Article 652a and/or 1156 of the Swiss Code of Obligations. The ADSs will not be listed on the SIX Swiss Exchange and, therefore, the documents relating to the ADSs, including, but not limited to, this document, do not claim to comply with the disclosure standards of the listing rules of SIX Swiss Exchange and corresponding prospectus schemes annexed to the listing rules of the SIX Swiss Exchange. The ADSs are being offered in Switzerland by way of a private placement, i.e., to a small number of selected investors only, without any public offer and only to investors who do not purchase the ADSs with the intention to distribute them to the public. The investors will be individually approached by the issuer from time to time. This document, as well as any other material relating to the ADSs, is personal and confidential and do not constitute an offer to any other person. This document may only be used by those investors to whom it has been handed out in connection with the offering described herein and may neither directly nor indirectly be distributed or made available to other persons without express consent of the issuer.It may not be used in connection with any other offer and shall in particular not be copied and/or distributed to the public in (or from) Switzerland. United Arab Emirates The ADSs have not been offered or sold, and will not be offered or sold, directly or indirectly, in the United Arab Emirates, except: (1) in compliance with all applicable laws and regulations of the United Arab Emirates; and (2) through persons or corporate entities authorized and licensed to provide investment advice and/or engage in brokerage activity and/or trade in respect of foreign securities in the United Arab Emirates. The information contained in this prospectus does not constitute a public offer of securities in the United Arab Emirates in accordance with the Commercial Companies Law (Federal Law No. 8 of 1984 (as amended)) or otherwise and is not intended to be a public offer and is addressed only to persons who are sophisticated investors. United Kingdom No offer of ADSs has been made or will be made to the public in the United Kingdom within the meaning of Section 102B of the Financial Services and Markets Act 2000, as amended, or FSMA, except to legal entities which are authorized or regulated to operate in the financial markets or, if not so authorized or regulated, whose corporate purpose is solely to invest in securities or otherwise in circumstances which do not require the publication by us of a prospectus pursuant to the Prospectus Rules of the Financial Services Authority, or FSA. The underwriters: (i) have only communicated or caused to be communicated and will only communicate or cause to be communicated an invitation or inducement to engage in investment activity (within the meaning of Section 21 of FSMA) to persons who have professional experience in matters relating to investments falling within Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 or in circumstances in which Section 21 of FSMA does not apply to us; and (ii) have complied with, and will comply with all applicable provisions of FSMA with respect to anything done by them in relation to the ADSs in, from or otherwise involving the United Kingdom. 173
Table of ContentsEXPENSES RELATED TO THIS OFFERING Set forth below is an itemization of the total expenses, excluding underwriting discounts and commissions, which are expected to be incurred in connection with the offer and sale of the ADSs by us. With the exception of the SEC registration fee and the Financial Industry Regulatory Authority filing fee, all amounts are estimates.
| | | | | SEC registration fee | | US$ | 19,320 | | NYSE listing fee | | US$ | 125,000 | | Financial Industry Regulatory Authority filing fee | | US$ | 21,500 | | Printing and engraving expenses | | US$ | 450,000 | | Legal fees and expenses | | US$ | 1,200,000 | | Accounting fees and expenses | | US$ | 650,000 | | Miscellaneous | | US$ | 2,000,000 | | | |
|
| | Total | | US$ | 4,465,820 | | | |
|
| |
These expenses will be borne by us. 174
Table of ContentsLEGAL MATTERS We are being represented by Simpson Thacher & Bartlett LLP with respect to legal matters of United States federal securities and New York State law. Certain legal matters of United States federal securities and New York State law in connection with this offering will be passed upon for the underwriters by Shearman & Sterling LLP. The validity of the Class A ordinary shares represented by the ADSs offered in this offering and legal matters as to Cayman Islands law will be passed upon for us by Maples and Calder. Certain legal matters as to PRC law will be passed upon for us by Han Kun Law Offices and for the underwriters by Commerce & Finance Law Offices. Simpson Thacher & Bartlett LLP may rely upon Maples and Calder with respect to matters governed by the laws of the Cayman Islands and upon Han Kun Law Offices with respect to matters governed by PRC law. Shearman & Sterling LLP may rely upon Commerce & Finance Law Offices with respect to matters governed by PRC law. 175
Table of ContentsEXPERTS The consolidated financial statements of 500.com Limited (formerly known as 500wan.com Limited and Fine Success Limited) as of December 31, 2011 and 2012, and for each year in the three-year period ended December 31, 2012, included in this prospectus, have been audited by Ernst & Young Hua Ming LLP, an independent registered public accounting firm, as stated in their report appearing herein. The financial statements audited by Ernst & Young Hua Ming LLP have been included in reliance on their report given on their authority as experts in accounting and auditing. The offices of Ernst & Young Hua Ming LLP are located at 21st Floor, China Resource Building, No. 5001 Shennan Dong Road, Shenzhen, People’s Republic of China. 176
Table of ContentsWHERE YOU CAN FIND MORE INFORMATION We have filed with the SEC a registration statement on Form F-1, including relevant exhibits and schedules under the Securities Act with respect to underlying ordinary shares represented by the ADSs, to be sold in this offering. A related registration statement on F-6 will be filed with the SEC to register the ADSs. This prospectus, which constitutes a part of the registration statement, does not contain all of the information contained in the registration statement. You may read the registration statement and its exhibits and schedules for further information with respect to us and our ADSs. Immediately upon closing of this offering, we will become subject to periodic reporting and other informational requirements of the Exchange Act as applicable to foreign private issuers. Accordingly, we will be required to file reports, including annual reports on Form 20-F, and other information with the SEC. All information filed with the SEC can be inspected and copied at the public reference facilities maintained by the SEC at 100 F Street, N.E., Washington, D.C. 20549. You can request copies of these documents upon payment of a duplicating fee, by writing to the SEC. Please call the SEC at 1-800-SEC-0330 for further information on the operation of the public reference rooms. Additional information may also be obtained over the Internet at the SEC’s web site at www.sec.gov. As a foreign private issuer, we are exempt under the Exchange Act from, among other things, the rules prescribing the furnishing and content of proxy statements, and our executive officers, directors and principal shareholders are exempt from the reporting and short-swing profit recovery provisions contained in Section 16 of the Exchange Act. In addition, we will not be required under the Exchange Act to file periodic reports and financial statements with the SEC as frequently or as promptly as U.S. companies whose securities are registered under the Exchange Act. However, we intend to furnish the depositary with our annual reports, which will include a review of operations and annual audited consolidated financial statements prepared in conformity with U.S. GAAP, and all notices of shareholders’ meeting and other reports and communications that are made generally available to our shareholders. The depositary will make such notices, reports and communications available to holders of ADSs and will mail to all record holders of ADSs the information contained in any notice of a shareholders’ meeting received by the depositary from us. 177
Table of Contents500WAN.COM LIMITED CONTENTS
| | | | | | | | Pages | | | | | F-2 | | | | AUDITED CONSOLIDATED FINANCIAL STATEMENTS | | | | | | | | | | F-3-F-4 | | | | | | | F-5 | | | | | | | F-6 | | | | | | | F-7 | | | | | | | F-8-F-42 | | | | UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS | | | | | | | | | | F-43-F-44 | | | | | | | F-45 | | | | | | | F-46 | | | | | | | F-47-F-61 | |
F-1
Table of ContentsREPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM The Board of Directors and Shareholders of 500wan.com Limited: We have audited the accompanying consolidated balance sheets of 500wan.com Limited (the “Company”) as of December 31, 2011 and 2012, and the related consolidated statements of comprehensive income, cash flows and changes in shareholders’ equity (deficit) for each of the three years in the period ended December 31, 2012. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company’s internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of 500wan.com Limited at December 31, 2011 and 2012, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2012, in conformity with U.S. generally accepted accounting principles. /s/ Ernst & Young Hua Ming LLP Shenzhen, the People’s Republic of China April 26, 2013 F-2
Table of Contents500WAN.COM LIMITED CONSOLIDATED BALANCE SHEETS (Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”), except for number of shares)
| | | | | | | | | | | | | | | | | | | | Notes | | | As of
December 31,
2011 | | | As of
December 31,
2012 | | | As of
December 31,
2012 | | | | | | | | RMB | | | RMB | | | US$ | | ASSETS | | | | | | | | | | | | | | | | | Current assets: | | | | | | | | | | | | | | | | | Cash and cash equivalents | | | | | | | 63,930 | | | | 31,555 | | | | 5,156 | | Restricted cash | | | | | | | - | | | | 11,209 | | | | 1,832 | | Short-term investments | | | | | | | 4,000 | | | | - | | | | - | | Accounts receivable | | | 4 | | | | 35,482 | | | | 22,937 | | | | 3,748 | | Accounts receivable due from employees | | | | | | | 6,013 | | | | 225 | | | | 37 | | Amounts due from related parties | | | 15 | | | | 102,626 | | | | 188,242 | | | | 30,758 | | Prepayments and other current assets | | | 5 | | | | 94,393 | | | | 68,659 | | | | 11,219 | | Deferred tax assets, current portion | | | 11 | | | | 2,079 | | | | 6,994 | | | | 1,143 | | | | | | | |
|
| | |
|
| | |
|
| | Total current assets | | | | | | | 308,523 | | | | 329,821 | | | | 53,893 | | | | | | | |
|
| | |
|
| | |
|
| | | | | | | Non-current assets: | | | | | | | | | | | | | | | | | Property and equipment, net | | | 6 | | | | 13,914 | | | | 38,102 | | | | 6,226 | | Intangible assets, net | | | 7 | | | | 1,741 | | | | 2,229 | | | | 364 | | Deposits | | | 5 | | | | 7,749 | | | | 5,463 | | | | 893 | | Deferred initial public offering expenses | | | | | | | 4,349 | | | | 1,496 | | | | 244 | | Deferred tax assets, non-current | | | 11 | | | | 982 | | | | 841 | | | | 137 | | Other non-current assets | | | | | | | - | | | | 1,391 | | | | 227 | | | | | | | |
|
| | |
|
| | |
|
| | Total non-current assets | | | | | | | 28,735 | | | | 49,522 | | | | 8,091 | | | | | | | |
|
| | |
|
| | |
|
| | TOTAL ASSETS | | | | | | | 337,258 | | | | 379,343 | | | | 61,984 | | | | | | | |
|
| | |
|
| | |
|
| | | | | | | LIABILITIES AND SHAREHOLDERS’ EQUITY | | | | | | | | | | | | | | | | | Current liabilities: | | | | | | | | | | | | | | | | | Dividends payable | | | 12 | | | | 104,526 | | | | 194,526 | | | | 31,785 | | Amount due to a related party | | | 15 | | | | - | | | | 8,520 | | | | 1,392 | | Accrued payroll and welfare payable (including accrued payroll and welfare payable of the consolidated VIEs without recourse to 500wan.com Limited of RMB9,003 and RMB7,038 (US$1,147) as of December 31, 2011 and 2012, respectively) | | | | | | | 12,257 | | | | 10,408 | | | | 1,701 | | Accrued expenses and other current liabilities (including accrued expenses and other current liabilities of the consolidated VIEs without recourse to 500wan.com Limited of RMB63,464 and RMB60,239 (US$9,815) as of December 31, 2011 and 2012, respectively) | | | 8 | | | | 65,479 | | | | 67,008 | | | | 10,949 | | Income tax payable (including income tax payable of the consolidated VIEs without recourse to 500wan.com Limited of RMB175 and RMB1,554 (US$253) as of December 31, 2011 and 2012, respectively) | | | 11 | | | | 175 | | | | 1,554 | | | | 254 | | | | | | | |
|
| | |
|
| | |
|
| | Total current liabilities | | | | | | | 182,437 | | | | 282,016 | | | | 46,081 | | | | | | | |
|
| | |
|
| | |
|
| |
The accompanying notes are an integral part of the consolidated financial statements. F-3
Table of Contents500WAN.COM LIMITED CONSOLIDATED BALANCE SHEETS (continued) (Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”), except for number of shares)
| | | | | | | | | | | | | | | | | | | | Note | | | As of
December 31,
2011 | | | As of
December 31,
2012 | | | As of
December 31,
2012 | | | | | | | | RMB | | | RMB | | | US$ | | Non-current liabilities: | | | | | | | | | | | | | | | | | Deferred tax liabilities, non-current | | | 11 | | | | 76,877 | | | | 88,796 | | | | 14,509 | | Long-term payables (including long-term payable of the consolidated VIE without recourse to 500wan.com Limited of RMB3,595 and RMB11,151 (US$1,817) as of December 31, 2011 and 2012, respectively) | | | | | | | 3,595 | | | | 11,151 | | | | 1,822 | | | | | | | |
|
| | |
|
| | |
|
| | Total non-current liabilities | | | | | | | 80,472 | | | | 99,947 | | | | 16,331 | | | | | | | |
|
| | |
|
| | |
|
| | TOTALLIABILITIES | | | | | | | 262,909 | | | | 381,963 | | | | 62,412 | | | | | | | |
|
| | |
|
| | |
|
| | Commitments and contingencies | | | 16 | | | | | | | | | | | | | | | | | | | Shareholders’equity (deficit): | | | | | | | | | | | | | | | | | Ordinary shares (par value of US$0.00005 per share; Authorized: 931,878,540 as of December 31, 2011 and 2012; issued and outstanding: 230,768,220 shares and 228,768,220 shares as of December 31, 2011 and 2012, respectively) | | | 18 | | | | 84 | | | | 84 | | | | 14 | | Additional paid-in capital | | | 18 | | | | 247,051 | | | | 255,781 | | | | 41,794 | | Accumulated other comprehensive income | | | 19 | | | | 15,930 | | | | 15,988 | | | | 2,612 | | Accumulated deficit | | | 10 | | | | (188,716 | ) | | | (274,473 | ) | | | (44,848 | ) | | | | | | |
|
| | |
|
| | |
|
| | Total shareholders’ equity (deficit) | | | | | | | 74,349 | | | | (2,620 | ) | | | (428 | ) | | | | | | |
|
| | |
|
| | |
|
| | TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY (DEFICIT) | | | | | | | 337,258 | | | | 379,343 | | | | 61,984 | | | | | | | |
|
| | |
|
| | |
|
| |
The accompanying notes are an integral part of the consolidated financial statements. F-4
Table of Contents500WAN.COM LIMITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”), except for number of shares and per share data)
| | | | | | | | | | | | | | | | | | | | | | | | | | | For the years ended December 31, | | | | | Notes | | | 2010 | | | 2011 | | | 2012 | | | 2012 | | | | | | | | RMB | | | RMB | | | RMB | | | US$ | | Net revenues | | | | | | | 157,378 | | | | 232,332 | | | | 171,527 | | | | 28,027 | | | | | | | | Operating expenses: | | | | | | | | | | | | | | | | | | | | | Cost of services | | | | | | | (22,052 | ) | | | (24,425 | ) | | | (18,476 | ) | | | (3,019 | ) | Sales and marketing | | | | | | | (14,252 | ) | | | (52,471 | ) | | | (45,794 | ) | | | (7,483 | ) | General and administrative | | | | | | | (34,255 | ) | | | (101,996 | ) | | | (57,784 | ) | | | (9,442 | ) | Service development expenses | | | | | | | (9,299 | ) | | | (19,566 | ) | | | (26,571 | ) | | | (4,342 | ) | Write-off of deferred initial public offering expenses | | | | | | | - | | | | - | | | | (6,404 | ) | | | (1,046 | ) | | | | | | |
|
| | |
|
| | |
|
| | |
|
| | Total operating expenses | | | | | | | (79,858 | ) | | | (198,458 | ) | | | (155,029 | ) | | | (25,332 | ) | Other operating income | | | | | | | 4,667 | | | | 6,455 | | | | 4,193 | | | | 685 | | Government grant | | | | | | | - | | | | 1,778 | | | | 2,242 | | | | 366 | | Other operating expenses | | | | | | | (537 | ) | | | (296 | ) | | | (1,821 | ) | | | (298 | ) | | | | | | |
|
| | |
|
| | |
|
| | |
|
| | Operating profit | | | | | | | 81,650 | | | | 41,811 | | | | 21,112 | | | | 3,448 | | | | | | | | Interest income | | | | | | | 102 | | | | 243 | | | | 1,132 | | | | 185 | | | | | | | |
|
| | |
|
| | |
|
| | |
|
| | Income before income taxes | | | | | | | 81,752 | | | | 42,054 | | | | 22,244 | | | | 3,633 | | Income tax expenses | | | 11 | | | | (43,463 | ) | | | (28,497 | ) | | | (18,001 | ) | | | (2,940 | ) | | | | | | |
|
| | |
|
| | |
|
| | |
|
| | Net income | | | | | | | 38,289 | | | | 13,557 | | | | 4,243 | | | | 693 | | | | | | | |
|
| | |
|
| | |
|
| | |
|
| | Other Comprehensive income (loss) | | | | | | | | | | | | | | | | | | | | | Foreign currency translation gain (loss) | | | | | | | 70 | | | | (224 | ) | | | 58 | | | | 9 | | | | | | | |
|
| | |
|
| | |
|
| | |
|
| | Comprehensive income | | | | | | | 38,359 | | | | 13,333 | | | | 4,301 | | | | 702 | | | | | | | |
|
| | |
|
| | |
|
| | |
|
| | | Reconciliation of net income to net income attributable to ordinary shareholders: | | | | | | | | | Net income | | | | | | | 38,289 | | | | 13,557 | | | | 4,243 | | | | 693 | | Accretion of Series A contingently redeemable convertible preferred shares | | | 9 | | | | (190 | ) | | | - | | | | - | | | | - | | Repurchase of Series B and B-1 contingently redeemable convertible preferred shares | | | 9 | | | | 24,392 | | | | - | | | | - | | | | - | | | | | | | |
|
| | |
|
| | |
|
| | |
|
| | Net income attributable to ordinary shareholders | | | | | | | 62,491 | | | | 13,557 | | | | 4,243 | | | | 693 | | | | | | | |
|
| | |
|
| | |
|
| | |
|
| | Earnings per share: | | | 17 | | | | | | | | | | | | | | | | | | Basic | | | | | | | 0.27 | | | | 0.06 | | | | 0.02 | | | | - | | Diluted | | | | | | | 0.16 | | | | 0.06 | | | | 0.02 | | | | - | | | | | | | | Pro-forma earnings per share (unaudited): | | | 23 | | | | | | | | | | | | | | | | | | Basic | | | | | | | - | | | | - | | | | 0.02 | | | | - | | Diluted | | | | | | | - | | | | - | | | | 0.02 | | | | - | | | | | | | | Weighted average number of ordinary shares outstanding: | | | 17 | | | | | | | | | | | | | | | | | | Basic | | | | | | | 219,290,540 | | | | 230,768,220 | | | | 229,374,777 | | | | 229,374,777 | | Diluted | | | | | | | 233,492,680 | | | | 237,243,569 | | | | 233,678,481 | | | | 233,678,481 | | | | | | | | Pro-forma weighted average number of ordinary shares outstanding (unaudited): | | | 23 | | | | | | | | | | | | | | | | | | Basic | | | | | | | - | | | | - | | | | 240,153,686 | | | | 240,153,686 | | Diluted | | | | | | | - | | | | - | | | | 244,457,390 | | | | 244,457,390 | |
The accompanying notes are an integral part of the consolidated financial statements. F-5
Table of Contents500WAN.COM LIMITED CONSOLIDATED STATEMENTS OF CASH FLOWS (Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”))
| | | | | | | | | | | | | | | | | | | | For the years ended December 31, | | | | | 2010 | | | 2011 | | | 2012 | | | 2012 | | | | | RMB | | | RMB | | | RMB | | | US$ | | Cash flow from operating activities | | | | | | | | | | | | | | | | | Net income | | | 38,289 | | | | 13,557 | | | | 4,243 | | | | 693 | | Adjustments to reconcile net income to net cash provided in operating activities: | | | | | | | | | | | | | | | | | Depreciation of property and equipment | | | 2,289 | | | | 3,589 | | | | 5,167 | | | | 844 | | Amortization of intangible assets | | | 70 | | | | 231 | | | | 353 | | | | 58 | | Bad debt provision | | | 100 | | | | - | | | | - | | | | - | | Deferred tax expense | | | 34,328 | | | | 20,564 | | | | 7,145 | | | | 1,167 | | Share-based compensation | | | - | | | | 50,154 | | | | 13,704 | | | | 2,239 | | Losses on disposal of property and equipment | | | 87 | | | | 96 | | | | 904 | | | | 148 | | Write-off of deferred initial public offering expenses | | | - | | | | - | | | | 6,404 | | | | 1,046 | | Changes in operating assets and liabilities: | | | | | | | | | | | | | | | | | Accounts receivable | | | (6,400 | ) | | | (16,104 | ) | | | 12,545 | | | | 2,050 | | Accounts receivable due from employees | | | 2,518 | | | | 88 | | | | 5,788 | | | | 946 | | Prepayments and other current assets | | | (21,004 | ) | | | (29,632 | ) | | | 25,662 | | | | 4,193 | | Deposits | | | (1,758 | ) | | | (886 | ) | | | 2,286 | | | | 374 | | Amount due to a related party | | | 723 | | | | (1,054 | ) | | | - | | | | - | | Accrued payroll and welfare payable | | | 2,250 | | | | 2,555 | | | | (1,849 | ) | | | (302 | ) | Accrued expenses and other current liabilities | | | 10,642 | | | | 28,117 | | | | 1,212 | | | | 198 | | Income tax payable | | | 107 | | | | (2,972 | ) | | | 1,379 | | | | 225 | | Long-term payables | | | 918 | | | | 1,122 | | | | 7,556 | | | | 1,235 | | | |
|
| | |
|
| | |
|
| | |
|
| | Net cash generated from operating activities | | | 63,159 | | | | 69,425 | | | | 92,499 | | | | 15,114 | | | |
|
| | |
|
| | |
|
| | |
|
| | Cash flows from investing activities | | | | | | | | | | | | | | | | | Acquisition of property and equipment | | | (3,833 | ) | | | (9,345 | ) | | | (29,840 | ) | | | (4,876 | ) | Acquisition of intangible assets | | | (1,185 | ) | | | (786 | ) | | | (2,247 | ) | | | (367 | ) | Restricted cash | | | - | | | | 2,500 | | | | (11,209 | ) | | | (1,832 | ) | Short-term investments | | | - | | | | (4,000 | ) | | | 4,000 | | | | 654 | | Change in amounts due from related parties | | | 5,175 | | | | (23,800 | ) | | | (85,616 | ) | | | (13,989 | ) | Proceeds from disposal of property and equipment | | | 5 | | | | 97 | | | | 43 | | | | 7 | | | |
|
| | |
|
| | |
|
| | |
|
| | Net cash generated from (used in) investing activities | | | 162 | | | | (35,334 | ) | | | (124,869 | ) | | | (20,403 | ) | | |
|
| | |
|
| | |
|
| | |
|
| | Cash flows from financing activities | | | | | | | | | | | | | | | | | Proceeds from issuance of ordinary shares | | | 112,362 | | | | - | | | | 43,006 | | | | 7,027 | | Repurchase of ordinary shares | | | - | | | | - | | | | (39,460 | ) | | | (6,448 | ) | Repayment of Series B Preferred Shares | | | (89,019 | ) | | | - | | | | - | | | | - | | Repayment of Series B-1 Preferred Shares | | | (23,224 | ) | | | - | | | | - | | | | - | | Payment of dividends | | | (55,375 | ) | | | - | | | | - | | | | - | | Payment for initial public offering expenses | | | (1,427 | ) | | | (2,830 | ) | | | (3,551 | ) | | | (580 | ) | | |
|
| | |
|
| | |
|
| | |
|
| | Net cash used in financing activities | | | (56,683 | ) | | | (2,830 | ) | | | (5 | ) | | | (1 | ) | | |
|
| | |
|
| | |
|
| | |
|
| | Net increase (decrease) in cash and cash equivalents | | | 6,638 | | | | 31,261 | | | | (32,375 | ) | | | (5,290 | ) | Cash and cash equivalents at beginning of the year | | | 26,031 | | | | 32,669 | | | | 63,930 | | | | 10,446 | | | |
|
| | |
|
| | |
|
| | |
|
| | Cash and cash equivalents at end of the year | | | 32,669 | | | | 63,930 | | | | 31,555 | | | | 5,156 | | | |
|
| | |
|
| | |
|
| | |
|
| | Supplemental disclosures of cash flow information: | | | | | | | | | | | | | | | | | Income tax paid | | | (8,080 | ) | | | (10,152 | ) | | | (1,920 | ) | | | (314 | ) | Interest received | | | 102 | | | | 243 | | | | 1,132 | | | | 185 | | | |
|
| | |
|
| | |
|
| | |
|
| | Non-cash movements : | | | | | | | | | | | | | | | | | Issuance of ordinary shares upon conversion of Series A Preferred Shares | | | 49,614 | | | | - | | | | - | | | | - | | Payable to a related party from repurchase of ordinary shares | | | - | | | | - | | | | 8,520 | | | | 1,392 | | | |
|
| | |
|
| | |
|
| | |
|
| |
The accompanying notes are an integral part of the consolidated financial statements. F-6
Table of Contents500WAN.COM LIMITED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (DEFICIT) (Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”) except for number of shares)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | Number of
ordinary shares | | | Ordinary
shares | | | Additional
paid-in
capital | | | Accumulated
other
comprehensive
income | | | Accumulated
deficit | | | Total
shareholders’
equity
(deficit) | | | | | | | | RMB | | | RMB | | | RMB | | | RMB | | | RMB | | Balance as of December 31, 2009 | | | 162,646,760 | | | | 61 | | | | 34,944 | | | | 16,084 | | | | (104,863 | ) | | | (53,774 | ) | Issuance of ordinary shares | | | 68,121,460 | | | | 23 | | | | 161,953 | | | | - | | | | - | | | | 161,976 | | Net income for the year | | | - | | | | - | | | | - | | | | - | | | | 38,289 | | | | 38,289 | | Other comprehensive income | | | - | | | | - | | | | - | | | | 70 | | | | - | | | | 70 | | Repurchase of preferred shares | | | - | | | | - | | | | - | | | | - | | | | 24,392 | | | | 24,392 | | Dividend declared | | | - | | | | - | | | | - | | | | - | | | | (159,901 | ) | | | (159,901 | ) | Accretion of preferred shares | | | - | | | | - | | | | - | | | | - | | | | (190 | ) | | | (190 | ) | | |
|
| | |
|
| | |
|
| | |
|
| | |
|
| | |
|
| | Balance as of December31, 2010 | | | 230,768,220 | | | | 84 | | | | 196,897 | | | | 16,154 | | | | (202,273 | ) | | | 10,862 | | | |
|
| | |
|
| | |
|
| | |
|
| | |
|
| | |
|
| | Net income for the year | | | - | | | | - | | | | - | | | | - | | | | 13,557 | | | | 13,557 | | Other comprehensive loss | | | - | | | | - | | | | - | | | | (224 | ) | | | - | | | | (224 | ) | Share-based compensation | | | - | | | | - | | | | 50,154 | | | | | | | | - | | | | 50,154 | | | |
|
| | |
|
| | |
|
| | |
|
| | |
|
| | |
|
| | Balance as of December31, 2011 | | | 230,768,220 | | | | 84 | | | | 247,051 | | | | 15,930 | | | | (188,716 | ) | | | 74,349 | | | |
|
| | |
|
| | |
|
| | |
|
| | |
|
| | |
|
| | Net income for the year | | | - | | | | - | | | | - | | | | - | | | | 4,243 | | | | 4,243 | | Other comprehensive income | | | - | | | | - | | | | - | | | | 58 | | | | - | | | | 58 | | Repurchase and cancellation of ordinary shares | | | (19,250,000 | ) | | | (5 | ) | | | (47,975 | ) | | | - | | | | - | | | | (47,980 | ) | Issuance of ordinary shares | | | 17,250,000 | | | | 5 | | | | 43,001 | | | | - | | | | - | | | | 43,006 | | Share-based compensation | | | - | | | | - | | | | 13,704 | | | | - | | | | - | | | | 13,704 | | Dividend declared | | | - | | | | - | | | | - | | | | - | | | | (90,000 | ) | | | (90,000 | ) | | |
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| | Balance as of December31, 2012 | | | 228,768,220 | | | | 84 | | | | 255,781 | | | | 15,988 | | | | (274,473 | ) | | | (2,620 | ) | | |
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| | Balance as of December 31, 2012, in US$ | | | | | | | 14 | | | | 41,794 | | | | 2,612 | | | | (44,848 | ) | | | (428 | ) | | | | | | |
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F-7
Table of Contents500WAN.COM LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”), except for number of shares and per share data)
500wan.com Limited (the “Company”) was incorporated under laws of the Cayman Islands on April 20, 2007 under the name Fine Success Limited, which was changed to the current name on May 9, 2011. As of December 31, 2012, the Company has three wholly owned subsidiaries in British Virgin Island, Hong Kong and the People’s Republic of China (“PRC”), and also consolidates three variable interest entities and a subsidiary of a VIE (collectively “VIEs”), details of which are as follows:
| | | | | | | | | | | Entity | | Date of
establishment | | Place of
establishment | | Percentage of
ownership by
the Company | | | Principal
activities | | | | | | Subsidiaries | | | | | | | | | | | Fine Brand Limited (“BVI”) | | | | British Virgin
Islands | | | 100 | % | | Investment
Holding | 500wan HK Limited (“500wan HK”) | | March 8, 2011 | | Hong Kong | | | 100 | % | | Investment
Holding | E-Sun Sky Computer (Shenzhen) Co., Ltd. (“E-Sun Sky Computer”) | | June 18, 2007 | | PRC | | | 100 | % | | Software
Service | | | | | | VIEs | | | | | | | | | | | Shenzhen E-Sun Network Co., Ltd. (“E-Sun Network”) | | December 7, 1999 | | PRC | | | 100 | % | | Online Lottery
Service | Shenzhen Youlanguang Science and Technology Co., Ltd. (“Youlanguang Technology”) | | December 16, 2008 | | PRC | | | 100 | % | | Online Lottery
Service | Shenzhen Guangtiandi Science and Technology Co., Ltd. (“Guangtiandi Technology”) | | December 16, 2008 | | PRC | | | 100 | % | | Online Lottery
Service | | | | | | Subsidiary of E-Sun Network | | | | | | | | | | | Shenzhen E-Sun Sky Network Technology Co., Ltd. (“E-Sun Sky Network”) | | May 22, 2006 | | PRC | | | 100 | % | | Online Lottery
Service |
The Company, its subsidiaries and VIEs are hereinafter collectively referred to as the “Group”. The Group provides online lottery purchase services in the PRC. The Group’s principal geographic market is in the PRC. The Company does not conduct any substantive operations on its own but instead conducts its business operations through E-Sun Sky Computer and VIEs. PRC laws and regulations prohibit or restrict foreign ownership of internet business. To comply with these foreign ownership restrictions, the Group operates its websites and provides online lottery purchase services in the PRC through VIEs. The Company has entered into exclusive business cooperation agreements, power of attorney, equity interest pledge agreements, exclusive option agreements, and supplementary agreements to the exclusive option agreements (previously named as exclusive technical consulting and service agreements, power F-8
Table of Contents500WAN.COM LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”), except for number of shares and per share data) 1. | ORGANIZATION (continued) |
of attorney, equity pledge agreements, equity interest disposal agreements, financial support agreements, business operation agreements and intellectual properties license agreements before June 1, 2011) (the “Contractual Arrangements”), with the VIEs through E-Sun Sky Computer, which obligate E-Sun Sky Computer to absorb a majority of the expected losses from the activities of the VIEs’ activities, and entitles E-Sun Sky Computer to receive a majority of residual returns from the VIEs. Through these aforementioned agreements, the Company maintains the ability to approve decisions made by the VIEs, and ability to acquire the equity interests in the VIEs when permitted by the PRC laws via E-Sun Sky Computer. As a result of the Contractual Arrangements, the Company consolidates the VIEs as required by Accounting Standards Codification (“ASC”) subtopic 810-10, Consolidation: Overall. Effective on January 1, 2010, the Company is required to continue to consolidate the VIEs as through E-Sun Sky Computer under the new guidance in ASU 2009-17 because the Company has determined that 1)E-Sun Sky Computer is most closely associated with the VIEs and the subsidiary of E-Sun Network among the members of the related party group who share the power to direct the activities of the VIEs that most significantly impact their economic performance, and 2) has the obligation to absorb losses or the right to receive benefits of the VIEs that could potentially be significant to the VIEs. F-9
Table of Contents500WAN.COM LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”), except for number of shares and per share data) 1. | ORGANIZATION (continued) |
The carrying amounts of the assets, liabilities and the results of operations of the VIEs included in the Company’s consolidated balance sheets and statements of comprehensive income are as follows:
| | | | | | | | | | | | | | | | As of
December 31,
2011 | | | As of
December 31,
2012 | | | As of
December 31,
2012 | | | | | RMB | | | RMB | | | US$ | | ASSETS | | | | | | | | | | | | | Current assets: | | | | | | | | | | | | | Cash and cash equivalents | | | 38,461 | | | | 16,392 | | | | 2,678 | | Restricted cash | | | - | | | | 10,609 | | | | 1,733 | | Short-term investments | | | 4,000 | | | | - | | | | - | | Accounts receivable | | | 17,439 | | | | 13,531 | | | | 2,211 | | Accounts receivable due from employees | | | 6,013 | | | | 225 | | | | 37 | | Amounts due from related parties | | | 201,650 | | | | 169,273 | | | | 27,659 | | Prepayments and other current assets | | | 93,783 | | | | 67,759 | | | | 11,072 | | Deferred tax assets, current portion | | | 2,079 | | | | 6,498 | | | | 1,062 | | | |
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| | Total current assets | | | 363,425 | | | | 284,287 | | | | 46,452 | | | |
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|
| | | | | | Non-current assets: | | | | | | | | | | | | | Property and equipment, net | | | 11,617 | | | | 30,929 | | | | 5,054 | | Intangible assets, net | | | 1,597 | | | | 1,338 | | | | 219 | | Deposits | | | 7,581 | | | | 5,295 | | | | 865 | | Deferred initial public offering expenses | | | 2,163 | | | | 250 | | | | 41 | | Deferred tax assets, non-current | | | 982 | | | | 841 | | | | 137 | | | |
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|
| | Total non-current assets | | | 23,940 | | | | 38,653 | | | | 6,316 | | | |
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|
| | TOTAL ASSETS | | | 387,365 | | | | 322,940 | | | | 52,768 | | | |
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|
| | | | | | LIABILITIES | | | | | | | | | | | | | Current liabilities: | | | | | | | | | | | | | Amounts due to related parties | | | 118,214 | | | | 46,322 | | | | 7,569 | | Accrued payroll and welfare payable | | | 9,003 | | | | 7,038 | | | | 1,150 | | Accrued expenses and other current liabilities | | | 63,464 | | | | 60,239 | | | | 9,843 | | Income tax payable | | | 175 | | | | 1,554 | | | | 254 | | | |
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|
| | Total current liabilities | | | 190,856 | | | | 115,153 | | | | 18,816 | | | |
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| | | | | | Non-current liabilities: | | | | | | | | | | | | | Long-term payables | | | 3,595 | | | | 11,151 | | | | 1,822 | | | |
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| | |
|
| | |
|
| | Total non-current liabilities | | | 3,595 | | | | 11,151 | | | | 1,822 | | | |
|
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|
| | | | | | TOTAL LIABILITIES | | | 194,451 | | | | 126,304 | | | | 20,638 | | | |
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| | | | | | | | | | | | | | | | | | | | For the years ended December 31, | | | | | 2010 | | | 2011 | | | 2012 | | | 2012 | | | | | RMB | | | RMB | | | RMB | | | US$ | | Net revenues | | | 157,378 | | | | 169,463 | | | | 113,566 | | | | 18,557 | | Net income | | | 207,481 | | | | 39,257 | | | | 3,720 | | | | 608 | |
F-10
Table of Contents500WAN.COM LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”), except for number of shares and per share data) 1. | ORGANIZATION (continued) |
There was no pledge or collateralization of the VIEs’ assets. Creditors of the VIEs have no recourse to the general credit of E-Sun Sky Computer, which is the primary beneficiary of the VIEs. In addition, the Company has not provided any financial support to its VIEs as of December 31, 2012.
2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
Basis of presentation and use of estimates The accompanying consolidated financial statements have been prepared in accordance with United States generally accepted accounting principles (“U.S. GAAP”). The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities at the balance sheet dates and the reported amounts of revenues and expenses during the reporting periods. Significant estimates and assumptions reflected in the Group’s financial statements include, but are not limited to, revenue recognition, useful lives of property and equipment and intangible assets, realization of deferred tax assets, share-based compensation, Series A, B and B-1 Preferred Shares, and consolidation of variable interest entities. Actual results could materially differ from those estimates. Changes in Presentation of Comparative Information Certain comparative amounts have been reclassified to conform with the current year’s presentation. Principles of consolidation The consolidated financial statements of the Group include the financial statements of the Company, its subsidiaries and VIEs in which it has a controlling financial interest. The results of the subsidiaries are consolidated from the date on which the Group obtained control and continue to be consolidated until the date that such control ceases. A controlling financial interest is typically determined when a company holds a majority of the voting equity interest in an entity. However, if the company demonstrates its ability to control the VIEs through its rights to all the residual benefits of the VIEs and its obligation to fund losses of the VIEs then the entity is consolidated. All significant intercompany balances and transactions among the Company, its subsidiaries and VIEs have been eliminated in consolidation. Convenience translation Translations of amounts from Renminbi (“RMB”) into United States dollars for the convenience of the reader were calculated at the noon buying rate of US$1.00 to RMB6.1200 on September 30, 2013 in the city of New York for cable transfers of RMB as certified for customs purposes by the Federal Reserve Bank of New York. No representation is made that the RMB amounts could have been, or could be, converted into United States dollars at such rate. Foreign currency The functional currency of the Company, BVI and 500wan HK is the United States dollars. E-Sun Sky Computer and VIEs determined their functional currencies to be the RMB, which is their respective local currency based on the criteria of ASC subtopic 830-10, Foreign Currency Matters: Overall. The Company uses the monthly average exchange rate for the year and the exchange rate at the balance sheet date to translate the operating results F-11
Table of Contents500WAN.COM LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”), except for number of shares and per share data) 2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) |
Foreign currency (continued) and financial position, respectively. Translation differences are recorded in accumulated other comprehensive income, a component of shareholders’ equity. The Company uses the RMB as its reporting currency. Transactions denominated in foreign currencies are remeasured into the functional currency at the exchange rates prevailing on the transaction dates. Financial assets and liabilities denominated in foreign currencies are remeasured into the functional currency at the exchange rates prevailing at the balance sheet date. Exchange gains and losses resulting from foreign currency transactions are included in the consolidated statements of comprehensive income. Cash and cash equivalents Cash and cash equivalents represent cash on hand and demand deposits which are unrestricted as to withdrawal and use, and which have original maturities of three months or less when purchased. Restricted cash Restricted cash represents amounts of cash held by a bank which were granted to the Company by various government authorities. The restricted cash can only be used for the purchase of specified fixed assets for certain approved projects. Short-term investments Short-term investments represent the investments that the Group has positive intent and ability to hold to maturity, which are classified as held-to-maturity securities and are stated at amortized cost. The Group evaluates whether a decline in fair value below the amortized cost basis is other than temporary in accordance to ASC 320-10-35, Investments—Debt and Equity Securities: Overall—Subsequent Measurement. If the decline in fair value is judged to be other than temporary, the cost basis of the individual security would be written down to its fair value as a charge to the consolidated statements of comprehensive income. The short-term investment matured in February 2012. Accounts receivable and allowance for doubtful accounts Accounts receivables are carried at net realizable value. An allowance for doubtful accounts is recorded when collection of the amount is no longer probable. In evaluating the collectability of receivable balances, the Group considers factors such as customer circumstances or age of the receivable. Accounts receivable are written off after all collection efforts have ceased. Collateral is not typically required, nor is interest charged on accounts receivable. Accounts receivable due from employees Under the current prize payout scheme of national and provincial lottery products, prizes can only be claimed by natural persons who present the winning lottery tickets at the time of collection. Accounts receivable due from employees represents cash from winning tickets deposited into certain employees’ personal bank accounts which will be transferred into the Group’s bank accounts prior to allocation to the winner’s accounts. The Company employs several measures to ensure that the employees’ personal bank accounts are under the Company’s control, for example, keeping a record of the account numbers, passwords, online login information and electronic banking keys of such personal accounts, and monitoring the account activities constantly. F-12
Table of Contents500WAN.COM LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”), except for number of shares and per share data) 2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) |
Property and equipment, net Property and equipment are stated at cost and are depreciated using the straight-line method over the estimated useful lives of the assets, as follows:
| | | | | Category | | | | | Electronic and office equipment | | 3-5 years | | 5% | Motor vehicles | | 10 years | | 2-5% | Leasehold improvement | | Shorter of lease term or the estimated useful lives of the assets | | - |
Repair and maintenance costs are charged to expense as incurred, whereas the cost of renewals and betterment that extend the useful lives of property and equipment are capitalized as additions to the related assets. Retirements, sales and disposals of assets are recorded by removing the cost and accumulated depreciation from the asset and accumulated depreciation accounts with any resulting gain or loss reflected in the consolidated statements of comprehensive income. Intangible assets Intangible assets represent computer software and purchased domain name. These intangible assets are amortized on a straight line basis over their estimated useful lives of the respective assets, which are set out as follows:
| | | Category | | | Computer software | | 5 years | Purchased domain name | | 10 years |
Impairment of long-lived assets The Group evaluates its long-lived assets or asset group with finite lives for impairment whenever events or changes in circumstances (such as a significant adverse change to market conditions that will impact the future use of the assets) indicate that the carrying amount of a group of long-lived assets may not be fully recoverable. When these events occur, the Group evaluates the impairment by comparing the carrying amount of the assets to future undiscounted cash flows expected to result from the use of the assets and their eventual disposition. If the sum of the expected undiscounted cash flow is less than the carrying amount of the assets, the Group recognizes an impairment loss based on the excess of the carrying amount of the asset group over its fair value. No impairment charge for the long-lived assets was recognized for any of the years presented. Fair value of financial instruments Financial instruments include cash and cash equivalents, restricted cash, short-term investments, accounts receivable, accounts receivable due from employees, amounts due from related parties and amount due to a related party. The carrying values of these financial instruments approximate their fair values due to their short-term maturities. F-13
Table of Contents500WAN.COM LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”), except for number of shares and per share data) 2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) |
Revenue recognition The Group’s revenues are derived principally from online lottery purchase services. Revenue is recognized in accordance with ASC 605-10, Revenue Recognition: Overall, when all of the following four criteria are met: (i) persuasive evidence of an arrangement exists; (ii) the service has been rendered; (iii) the fees are fixed or determinable; and (iv) collectability is reasonably assured. Online lottery purchase services The Group earns service income for online lottery purchase services and revenues are generated from processing lottery purchase orders from end users (“Service Fee”). The Group receives purchase orders from end users through its websites and processes the orders with the lottery administration centers. Service Fee is received from the lottery administration centers based on thepre-determined service fee rate and the total amount of the processed orders. Pursuant to ASC 605-45, Principal Agent Considerations, the Group records Service Fee on a net basis because the Group is not the primary obligor in the arrangement, but acts as an agent in providing such purchase services. Contingent service fee The Group is entitled to receive additional Service Fee from lottery administration centers when the total amounts of purchase orders reach an agreed threshold (“Contingent Service Fee”). As the Group is the agent in providing lottery purchase services, any Contingent Service Fee received is recorded as net revenue when the agreed thresholds are reached. Once the Group reaches the agreed thresholds, the Contingent Service Fee is then fixed and not subject to any adjustments. The Super VIP incentive Certain qualified end users (“Super VIP”) are entitled to receive incentives from the Group based on actual purchase amount of each transaction. As the Group does not receive an additional service or benefit from the Super VIP other than service fee earned from lottery administration centers by the Group from the transaction, the incentives are recognized as a reduction of revenue at each year end in accordance with ASC 605-50, Customer Payments and Incentives. Lottery pool purchase service Lottery pools involve individual end users purchasing a share in a pooled lottery outcome or group of outcomes with other users. Through the lottery pool purchase service, an end user, an initiator, starts a lottery pool by specifying a range of parameters, such as the lottery portfolio, total purchase amount and payout ratio. The initiator is required to commit a minimum initial purchase amount when they initiate a pool, usually a certain percentage of the total purchase amount. Other end users then join the pool by agreeing to the parameters set by the initiator and committing on the purchase amount. When the total purchase amount as specified by the initiator is reached, the pooled lottery purchase order will be delivered in the manner specified by the initiator. When the actual purchase amount does not reach the total purchase amount as specified by the initiator but reaches a certain percentage of total purchase amount before the lottery pool purchase deadline, in order to complete the lottery pool transaction, the Group contributes the remaining outstanding purchase amount (i.e., residual amount of lottery pool). If the tickets win prizes from the lottery, the Group distributes the cash prizes to the end users based on the predetermined payout ratio, and the residual amount after distribution is retained by the Group. F-14
Table of Contents500WAN.COM LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”), except for number of shares and per share data) 2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) |
Lottery pool purchase service (continued) As the Group contributes the residual amount of lottery pool in order to earn Service Fee from the purchase made by the lottery pool and does not provide any service to the lottery administration centers, the residual amount of lottery pool contributed by the Group paid to the lottery administration centers is recognized as a reduction of revenue. As the Group’s principal activity is to provide lottery purchase services to end users, the residual amount of the lottery pool retained by the Group after distribution of the prizes are presented as “other operating income”, and recognized upon the announcement of lottery results. Adoption of ASU 2009-13, Revenue Recognition (Topic 605). The Company adopted ASU 2009-13, Revenue Recognition (Topic 605), from January 1, 2011. The adoption of ASU 2009-13 had no material effect on the financial statements in periods after the initial adoption. Cost of services Cost of services comprises employee costs, business tax and surcharges and other direct costs incurred in providing the purchase services. These costs are expensed as incurred. Business tax and surcharges Business tax and surcharges for the years ended December 31, 2010, 2011 and 2012 of RMB5,254, RMB7,639 and RMB5,485 (US$896) respectively, were recorded in cost of services in the consolidated statements of comprehensive income. The Group’s online lottery purchase services are subject to business taxes, surcharges and cultural development fees totaling approximately 3.37%-5.61% of revenues before deduction for incentives to certain registered users and residual amount payment to complete the lottery pool purchase. Sales and marketing expenses Commission to certain internet companies The Group is responsible to pay certain internet companies a predetermined fixed percentage of the total purchase or deposit amount only if 1) public users enter the Group’s websites by redirection through these internet companies’ websites, and/or 2) public users have successfully purchased any lottery tickets or deposited certain amounts of cash into their accounts in the Group’s websites. The Group is responsible for providing services when such public users enter the Group’s websites to purchase lottery tickets. Neither service has been provided by these internet companies, nor have separate lottery service agreements been entered into between internet companies and public users. Since these internet companies are providing similar services as those services that have been provided by the Group’s internal sale personal/agent, any relevant costs to be paid by the Group is treated as sales and marketing expenses. Advertising expenditure Advertising costs are expensed as incurred and are included in “sales and marketing expenses” in the consolidated statement of comprehensive income. Advertising expenses were approximately RMB2,329, RMB20,848 and RMB12,143 (US$1,984) for years ended December 31, 2010, 2011 and 2012, respectively. Sponsorship expenses A significant amount of the Company’s sales and marketing expenses consist of payments under a sponsorship contract. Accounting for sponsorship payments is based upon specific contract provisions. F-15
Table of Contents500WAN.COM LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”), except for number of shares and per share data) 2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) |
Sales and marketing expenses (continued) Sponsorship expenses (continued) Generally, sponsorship payments are expensed on a straight-line basis over the term of the contract after giving recognition to periodic performance provisions of the contract. Prepayments made under the contract are included in prepayments based on the period to which the prepayments apply. Awards granted to certain qualified end users All new end users are entitled to receive bonus credits from the Group upon the initial registration of their user accounts and all existing users are entitled to receive bonus credits from the Group by depositing a specified amount of cash into their user accounts during a marketing promotion period. The end users can only apply the bonus credits received against future lottery product purchases processed by the Group. The bonus credits are recognized as sales and marketing expenses when the bonus credits are granted to the end users. All new and existing end users are entitled to receive additional prize money for winning tickets from selected lotteries purchased through the Group during a marketing promotion period. The cost of the additional prize money is to be shared between the lottery administration centers and the Group at a predetermined percentage or funded entirely by the Group. As the Group does not receive an identifiable benefit in return for the consideration that is sufficiently separable from the lottery administration centers’ purchase of lottery processing services from the Group, the additional prize money provided to the lottery administration center, are recognized as a reduction of revenue at each period end in accordance with ASC 605-50, Customer Payments and Incentives. Service development expenses Service development expenses consist primarily of personnel-related expenses incurred for the development of, enhancement to, and maintenance of the Group’s websites that either (i) did not meet the ASC 350-50-25 capitalization criteria; or (ii) met the capitalization criteria but the capitalizable internal costs cannot be separated on a reasonably cost-effective basis between maintenance and relatively minor upgrades and enhancements. Service development expenses are recognized as expenses when incurred. Leases The Group leases certain office facilities under cancelable and non-cancelable operating leases, generally with an option to renew upon expiry of the lease term. In accordance with ASC 840,Leases, leases for a lessee are classified at the inception date as either a capital lease or an operating lease. For the lessee, a lease is a capital lease if any of the following conditions exist: a) ownership is transferred to the lessee by the end of the lease term, b) there is a bargain purchase option, c) the lease term is at least 75% of the properties estimated remaining economic life or d) the present value of the minimum lease payments at the beginning of the lease term is 90% or more of the fair value of the leased property to the lessor at the inception date. A capital lease is accounted for as if there was an acquisition of an asset and an incurrence of an obligation at the inception of the lease. The Group had no capital lease for the years ended December 31, 2010, 2011 and 2012. Income taxes The Group follows the liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on the difference between the financial reporting and tax bases of assets and liabilities using enacted tax rates that will be in effect in the period in which the differences are F-16
Table of Contents500WAN.COM LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”), except for number of shares and per share data) 2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) |
Income taxes (continued) expected to reverse. The Group records a valuation allowance to offset deferred tax assets if based on the weight of available evidence, it is more-likely-than-not that some portion, or all, of the deferred tax assets will not be realized. The effect on deferred taxes of a change in tax rates is recognized in the consolidated statement of comprehensive income in the period that includes the enactment date. On January 1, 2007, the Group adopted ASC 740-10, Income taxes: Overall, (Pre-Codification: FIN48, Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No, 109), to account for uncertainties in income taxes. There was no cumulative effect of the adoption of ASC 740-10 to beginning retained earnings. Interest and penalties arising from underpayment of income taxes shall be computed in accordance with the related PRC tax law. The amount of interest expense is computed by applying the applicable statutory rate of interest to the difference between the tax position recognized and the amount previously taken or expected to be taken in a tax return. Interest and penalties recognized in accordance with ASC 740-10 is classified in the consolidated statements of comprehensive income as income tax expense. In accordance with the provisions of ASC 740-10, the Group recognizes in its financial statements the impact of a tax position if a tax return position or future tax position is “more likely than not” to sustained upon examination based solely on the technical merits of the position. Tax positions that meet the “more likely than not” recognition threshold are measured at the largest amount of tax benefit, determined on a cumulative probability basis, that has a greater than fifty percent likelihood of being realized upon settlement. The Group’s estimated liability for unrecognized tax benefits which is included in the “long-term payables” account is periodically assessed for adequacy and may be affected by changing interpretations of laws, rulings by tax authorities, changes and/or developments with respect to tax audits, and expiration of the statute of limitations. The outcome for a particular audit cannot be determined with certainty prior to the conclusion of the audit and, in some cases, appeal or litigation process. The actual benefits or liability ultimately realized may differ from the Group’s estimates. As each audit is concluded, adjustments, if any, are recorded in the Group’s financial statements. Additionally, in future periods, changes in facts, circumstances, and new information may require the Group to adjust the recognition and measurement estimates with regard to individual tax positions. Changes in recognition and measurement estimates are recognized in the period in which the changes occur. Share-based compensation Share options granted to employees and directors Share options granted to employees and the director are accounted for under ASC 718, Share-Based Payment. In accordance with ASC 718, the Company determines whether a share option should be classified and accounted for as a liability award or an equity award. All grants of share options to employees and the director classified as equity awards, are recognized in the financial statements based on their grant date fair values. There were no liability awards granted during any of the periods stated herein. The Company recognizes compensation expenses using the straight-line method for share options granted with graded vesting based on service conditions. ASC 718 requires forfeitures to be estimated at the time of grant and revised, if necessary, in the subsequent period if actual forfeitures differ from initial estimates. Forfeiture rate is estimated based on historical and future F-17
Table of Contents500WAN.COM LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”), except for number of shares and per share data) 2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) |
Share-based compensation (continued) Share options granted to employees and directors (continued) expectation of employee turnover rate and is adjusted to reflect future change in circumstances and facts, if any. Share-based compensation expense is recorded net of estimated forfeitures such that expense was recorded only for those share-based awards that are expected to vest. To the extent the Company revises this estimate in the future, the share-based payments could be materially impacted in the period of revision, as well as in following periods. The compensation costs associated with a modification of the terms of the award (“modification award”) are recognized if either the original vesting condition or the new vesting condition has been achieved. Such compensation costs cannot be less than the grant-date fair value of the original award. The incremental compensation cost is measured as the excess of the fair value of the modification award over the fair value of the original award at the modification date. Therefore, in relation to the modification award, the Company recognizes share-based compensation over the vesting periods of the new options, which comprises, (1) the amortization of the incremental portion of share-based compensation over the remaining vesting term, and (2) any unrecognized compensation cost of original award, using either the original term or the new term, whichever is higher for each reporting period. Share options granted to non-employees The Company records share-based compensation expense for awards granted to consultants in exchange for services at fair value in accordance with the provisions of ASC 505-50, Equity based payment to non-employees. As the share options granted to non-employees were fully vested on the grant date, the related compensation expense was fully recognized in the consolidated statement of comprehensive income on the grant date. The Company, with the assistance of an independent valuation firm, determined the fair values of the share-based compensation options recognized in the consolidated financial statements. The binomial option pricing model is applied in determining the estimated fair value of the options granted to employees and non-employees. Share split On April 26, 2011, the Company effected a share split by which each of the Company’s ordinary share, par value US$0.001 per share, was split into 20 ordinary shares, par value US$0.00005 per share. All ordinary share and per share information before April 26, 2011 are adjusted retroactively for this share split for all periods presented in accordance with ASC 260-10-55-12, Earnings Per Share. Deferred initial public offering expenses Direct costs incurred by the Group attributable to its proposed initial public offering of ordinary shares in the United States have been deferred. Such costs, including legal and other professional fees, are recorded as deferred initial public offering expenses in the consolidated balance sheets and will be charged against the gross proceeds received from such offering. The Group expensed the previously deferred initial public offering F-18
Table of Contents500WAN.COM LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”), except for number of shares and per share data) 2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) |
Deferred initial public offering expenses (continued) expenses of RMB6,404 (US$1,046) associated with its prior registration statements on Form F-1 for the year ended December 31, 2012. The initial public offering was postponed for a period in excess of 90 days and as a result the Group deemed it to be an aborted offering in accordance with ASC 340-10-S99-1. Earnings per share Earnings per share are calculated in accordance with ASC 260, Earnings Per Share. Basic earnings per common share is computed by dividing income attributable to holders of ordinary shares by the weighted average number of ordinary shares outstanding during the period using the two-class method. Under the two-class method, net income is allocated between common shares and other participate securities based on their participating rights. The Group’s preferred shares are considered participating securities. Diluted earnings per share is calculated by dividing net income attributable to holders of ordinary shares as adjusted for the effect of dilutive ordinary equivalent shares, if any, by the weighted-average number of ordinary and dilutive ordinary share equivalents outstanding during the period. Dilutive equivalent shares are excluded from the computation of diluted loss per share if their effects would be anti-dilutive. Ordinary share equivalents consist of the ordinary shares issuable in connection with the Group’s convertible redeemable preferred shares using the if-converted method. Government grants Government grants are recognized when there is reasonable assurance that the attached conditions will be complied with. When the grant relates to an expense item, it is recognized in the consolidated statements of comprehensive income as operating income over the period necessary to match the grant on a systematic basis to the related costs. Where the grant relates to an asset acquisition, it is recognized as a deferred government grant and recognized in the consolidated statements of comprehensive income as operating income in proportion to the depreciation of the related assets. Recent accounting pronouncement In February 2013, the Financial Accounting Standards Board (“FASB”) issued ASU 2013-02, Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income. The amendments do not change the current requirements for reporting net income or other comprehensive income in financial statements. However, the amendments require an entity to provide information about the amounts reclassified out of accumulated other comprehensive income by component. In addition, an entity is required to present, either on the face of the statement where net income is presented or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income but only if the amount reclassified is required under U.S. GAAP to be reclassified to net income in its entirety in the same reporting period. For public entities, the amendments are effective prospectively for reporting periods beginning after December 15, 2012. The Company does not expect the adoption of ASU 2013-2 will have a significant effect on its consolidated financial statements. F-19
Table of Contents500WAN.COM LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”), except for number of shares and per share data)
Concentration of credit risk Assets that potentially subject the Group to significant concentration of credit risk primarily consist of cash and accounts receivable. As of December 31, 2012, substantially all of the Group’s cash was deposited in financial institutions located in the PRC and Hong Kong, which management believes are of high credit quality. Accounts receivable are typically unsecured and are derived from commission earned from lottery administration centers in the PRC. The risk with respect to accounts receivable is mitigated by credit evaluations the Group performs on its lottery administration centers and its ongoing monitoring of outstanding balances. Concentration of suppliers Approximately 90.7%, 90.3% and 98.3% of total net revenues were derived from service fees received from lottery purchased from three lottery administration centers for the years ended December 31, 2010, 2011 and 2012, respectively. The significance of the service fees received from the three lottery administration centers are as follows. The service fees received from the respective lottery administration centers represent net revenues recognized before the reduction of: (i) incentives paid to end users and (ii) the residual amount of lottery pool contributed by the Group.
| | | | | | | | | | | | | | | | | | | | For the years ended December 31 | | | | | 2010 | | | 2011 | | | 2012 | | | 2012 | | | | | RMB | | | RMB | | | RMB | | | US$ | | Lottery administration center A | | | 90,620 | | | | 133,809 | | | | 111,533 | | | | 18,224 | | Lottery administration center B | | | 31,673 | | | | 34,744 | | | | 43,440 | | | | 7,098 | | Lottery administration center C | | | 20,397 | | | | 41,339 | | | | 13,653 | | | | 2,231 | |
Concentration of serviced lottery products Approximately 88.1%, 88.0% and 88.0% of total net revenues was derived from five lottery products for the years ended December 31, 2010, 2011 and 2012, respectively. Current vulnerability due to certain other concentrations The Group’s operations may be adversely affected by significant political, economic and social uncertainties in the PRC. Although the PRC government has been pursuing economic reform policies for more than 30 years, no assurance can be given that the PRC government will continue to pursue such policies or that such policies may not be significantly altered, especially in the event of a change in leadership, social or political disruption or unforeseen circumstances affecting the PRC’s political, economic and social conditions. There is also no guarantee that the PRC government’s pursuit of economic reforms will be consistent or effective. The Group transacts the majority of its business in RMB, which is not freely convertible into foreign currencies. On January 1, 1994, the PRC government abolished the dual rate system and introduced a single rate of exchange as quoted daily by the People’s Bank of China (the “PBOC”). However, the unification of the exchange rates does not imply that the RMB may be readily convertible into United States dollars or other foreign currencies. All foreign exchange transactions continue to take place either through the PBOC or other banks authorized to buy and sell foreign currencies at the exchange rates quoted by the PBOC. Approval of foreign currency payments by the PBOC or other institutions requires submitting a payment application form together with suppliers’ invoices, shipping documents and signed contracts. Additionally, the value of the RMB is subject to changes in central government policies and international economic and political developments affecting supply and demand in the PRC foreign exchange trading system market. F-20
Table of Contents500WAN.COM LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”), except for number of shares and per share data)
Accounts receivable and the related allowance for doubtful accounts are summarized as follows:
| | | | | | | | | | | | | | | | As of
December 31,
2011 | | | As of
December 31,
2012 | | | As of
December 31,
2012 | | | | | RMB | | | RMB | | | US$ | | Accounts receivable | | | 35,482 | | | | 22,937 | | | | 3,748 | | Less: Allowance for doubtful accounts | | | - | | | | - | | | | - | | | |
|
| | |
|
| | |
|
| | Accounts receivable, net | | | 35,482 | | | | 22,937 | | | | 3,748 | | | |
|
| | |
|
| | |
|
| |
5. | PREPAYMENTS, OTHER CURRENT ASSETS AND DEPOSITS |
Prepayments and other current assets consist of the following:
| | | | | | | | | | | | | | | | As of
December 31,
2011 | | | As of
December 31,
2012 | | | As of
December 31,
2012 | | | | | RMB | | | RMB | | | US$ | | Prepayments | | | 6,233 | | | | 968 | | | | 158 | | Deposits for future lottery ticket purchase | | | 56,815 | | | | 45,055 | | | | 7,362 | | Receivables from third party payment service providers | | | 11,812 | | | | 5,997 | | | | 980 | | Receivables from third parties | | | 3,327 | | | | 1,924 | | | | 314 | | Receivables from lottery administration centers for winnings | | | 12,302 | | | | 5,960 | | | | 974 | | Deferred sponsorship and advertising expenses | | | 1,356 | | | | 6,891 | | | | 1,126 | | Others | | | 2,548 | | | | 1,864 | | | | 305 | | | |
|
| | |
|
| | |
|
| | | | | 94,393 | | | | 68,659 | | | | 11,219 | | | |
|
| | |
|
| | |
|
| |
Deposits consist of the following:
| | | | | | | | | | | | | | | | As of
December 31,
2011 | | | As of
December 31,
2012 | | | As of
December 31,
2012 | | | | | RMB | | | RMB | | | US$ | | Deposits for lottery ticket equipments and office leases | | | 7,749 | | | | 5,463 | | | | 893 | | | |
|
| | |
|
| | |
|
| |
Deposits for future lottery ticket purchase represent cash paid in advance by the Group to lottery administration centers for the purchase of lottery tickets. F-21
Table of Contents500WAN.COM LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”), except for number of shares and per share data)
6. | PROPERTY AND EQUIPMENT, NET |
Property and equipment consist of the following:
| | | | | | | | | | | | | | | | As of
December 31,
2011 | | | As of
December 31,
2012 | | | As of
December 31,
2012 | | | | | RMB | | | RMB | | | US$ | | Electronic and office equipment | | | 12,506 | | | | 18,962 | | | | 3,098 | | Motor vehicles | | | 3,862 | | | | 4,772 | | | | 780 | | Leasehold improvement | | | 6,991 | | | | 27,327 | | | | 4,465 | | | |
|
| | |
|
| | |
|
| | Property and equipment, cost | | | 23,359 | | | | 51,061 | | | | 8,343 | | Less: Accumulated depreciation | | | (9,445 | ) | | | (12,959 | ) | | | (2,117 | ) | | |
|
| | |
|
| | |
|
| | Property and equipment, net | | | 13,914 | | | | 38,102 | | | | 6,226 | | | |
|
| | |
|
| | |
|
| |
Depreciation expenses were approximately RMB2,289, RMB3,589 and RMB5,167 (US$844) for the years ended December 31, 2010, 2011 and 2012, respectively.
Intangible assets consist of the following:
| | | | | | | | | | | | | | | | As of
December 31,
2011 | | | As of
December 31,
2012 | | | As of
December 31,
2012 | | | | | RMB | | | RMB | | | US$ | | Cost: | | | | | | | | | | | | | Software | | | 1,313 | | | | 2,168 | | | | 354 | | Domain name | | | 758 | | | | 658 | | | | 108 | | | |
|
| | |
|
| | |
|
| | | | | 2,071 | | | | 2,826 | | | | 462 | | | |
|
| | |
|
| | |
|
| | Accumulated amortization: | | | | | | | | | | | | | Software | | | (144 | ) | | | (427 | ) | | | (70 | ) | Domain name | | | (186 | ) | | | (170 | ) | | | (28 | ) | | |
|
| | |
|
| | |
|
| | | | | (330 | ) | | | (597 | ) | | | (98 | ) | | |
|
| | |
|
| | |
|
| | Intangible assets, net | | | 1,741 | | | | 2,229 | | | | 364 | | | |
|
| | |
|
| | |
|
| |
Amortization expenses were approximately RMB70, RMB231 and RMB353 (US$58) for the years ended December 31, 2010, 2011 and 2012, respectively. Annual estimated amortization expense for each of the five succeeding years is as follows:
| | | | | | | | | | | | RMB | | | US$ | | 2013 | | | 353 | | | | 58 | | 2014 | | | 353 | | | | 58 | | 2015 | | | 353 | | | | 58 | | 2016 | | | 353 | | | | 58 | | 2017 and thereafter | | | 817 | | | | 132 | | | |
|
| | |
|
| | | | | 2,229 | | | | 364 | | | |
|
| | |
|
| |
F-22
Table of Contents500WAN.COM LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”), except for number of shares and per share data)
8. | ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES |
Accrued expenses and other current liabilities consist of the following:
| | | | | | | | | | | | | | | | As of
December 31,
2011 | | | As of
December 31,
2012 | | | As of
December 31,
2012 | | | | | RMB | | | RMB | | | US$ | | Advance from end users | | | 44,146 | | | | 30,505 | | | | 4,984 | | Business tax and other taxes payable | | | 2,618 | | | | 5,396 | | | | 882 | | Deferred government grant | | | 2,800 | | | | 14,702 | | | | 2,402 | | Professional fee payable | | | 2,800 | | | | 4,823 | | | | 788 | | Advertising and sponsorship payable | | | 8,870 | | | | 2,653 | | | | 433 | | Others | | | 4,245 | | | | 8,929 | | | | 1,460 | | | |
|
| | |
|
| | |
|
| | | | | 65,479 | | | | 67,008 | | | | 10,949 | | | |
|
| | |
|
| | |
|
| |
Advance from end users represents 1) payments received by the Group in advance from the end users prior to purchase of lottery tickets, and 2) prize distribution made by the Group to the winning end users’ registered account.
9. | CONTINGENTLY REDEEMABLE CONVERTIBLE PREFERRED SHARES |
Issuance of Series A, B and B-1 contingently redeemable convertible preferred shares On September 29, 2007, the Company issued 1,200,000 Series A Preferred Shares with a conversion price of US$3.3130 to three shareholders of Delite Limited (“Series A Investors”) in exchange for Series A Investors’ 12% equity interest in Delite Limited, a investor of the Company. On September 29, 2007, the Company issued 1,513,768 Series B Preferred Shares, and 692,305 Series B-1 Preferred Shares for an aggregate purchase price of US$14,293. The conversion price of Series B Preferred Shares and Series B-1 Preferred Shares are US$6.4739 and US$6.4901, respectively. Conversion of Series A Preferred Shares On February 2, 2010, the holders of Series A Preferred Shares converted all of the Series A Preferred Shares into ordinary shares. Repurchase of Series B and B-1 Preferred Shares On March 17, 2010, the Company repurchased all of Series B and B-1 Preferred Shares for an aggregate purchase price of US$16,437. These shares were immediately retired following the repurchase by the Company. The key terms of Series A, B and B-1 Preferred Shares (collectively, the “Preferred Share”) are summarized as follows: Voting rights Each holder of the Preferred Shares is entitled to the number of votes equal to the number of ordinary shares into which such holder’s Preferred Shares could be converted at the record date for determination of the Company’s shareholders entitled to vote on such matters. F-23
Table of Contents500WAN.COM LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”), except for number of shares and per share data) 9. | CONTINGENTLY REDEEMABLE CONVERTIBLE PREFERRED SHARES (continued) |
Liquidation preference In the event of any liquidation, dissolution or winding up of the Company, either voluntary or involuntary, the holders of the Preferred Shares are entitled to receive, prior to and in preference to any distribution of any other class or series of shares by reason of their ownership of such shares, the amount equal to the 100% of the original issue price plus an amount equal to all declared or accrued but unpaid dividends thereon (the “Preferred Shares Liquidation Preference”). Dividends No dividends (other than those payable solely in ordinary shares) shall be declared or paid on the ordinary shares or any future series of preference shares, unless and until a dividend in like amount is declared and paid on each outstanding Preferred Shares (on an as-if-converted basis) in the following order of priority: (i) first, to the holders of Series B and B-1 Preferred Shares on a pari passu basis; (ii) second, to the holders of Series A Preferred Shares. Conversion rights Each Preferred Share shall, at the option of the holder, be converted at any time into ordinary shares based on the then-effective applicable conversion price. The conversion price is initially the original issue price and subject to adjustment for dividends, share splits, combination, sales of shares under conversion price of Preferred Shares and future profits. Each Preferred Share shall automatically be converted into ordinary shares based on the then-effective applicable conversion price upon (a) the closing of a qualified initial public offering, or (b) the date specified by written consent or agreement of the holders of at least 75% of all outstanding Preferred Shares, voting together as a single class as to its conversion. Redemption The Preferred Shares shall be redeemable at the option of holders of the Preferred Shares as provided herein: Optional Redemption Date. At any time beginning on the earlier of (i) the date that is 5 years after the Original Series B Issue Date (September 29, 2007); (ii) the date on which another series of Shares is redeemable at the written request to the Company made by a holder of Series A Preferred Shares, Series B Preferred Shares or Series B-1 Preferred Shares, (iii) the date of the Redemption Trigger Event (as defined below), or (iv) the date agreed between the Company and 75% or more of holders of outstanding Preferred Shares, such holder may require that the Company redeem all of such holder of Series A, B and B-1 Preferred Shares in accordance with the following terms. The “Redemption Trigger Event” shall mean the failure of any group company to obtain one of the first three licenses for the online lottery business to be granted by the Ministry of Finance or any other applicable governmental authority in the People’s Republic of China upon the date such online lottery licenses are granted by the PRC Governmental Authorities. Redemption Price. The redemption price for each Preferred Share requested to be redeemed shall be equal to the higher of (i) a price per share which is one hundred forty percent (140%) of the original issue price plus all declared or accrued but unpaid dividends thereon up until the date of redemption, proportionally adjusted for any share splits, share dividends, combinations, recapitalizations or similar transactions, or (ii) the fair market value of the Preferred Share. F-24
Table of Contents500WAN.COM LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”), except for number of shares and per share data) 9. | CONTINGENTLY REDEEMABLE CONVERTIBLE PREFERRED SHARES (continued) |
Accounting for the preferred shares The Preferred Shares are classified as mezzanine equity as these preferred shares can be redeemed at the option of the holders on or after an agreed upon date. Since it was probable upon issuance that Preferred Shares would be redeemed, each issuance of the Preferred Shares was recognized at its total proceeds net of direct and incremental costs at issuance date, except Series A Preferred Shares which are further discussed below. On September 29, 2007, three shareholders of Delite Limited agreed to acquire 1,200,000 Series A contingently redeemable convertible preferred shares (“Series A Preferred Shares”) in exchange for 1,200,000 ordinary shares of the Company held through their 12% equity interest in Delite Limited. The Company adopted an accounting policy where any amendment to the terms of equity-classified instruments, or any issuance of new equity-classified instruments in exchange of existing equity-classified instruments with different terms, with the exception of ministerial changes, is accounted for as extinguishment of the existing instrument and a concurrent issuance of a new instrument. Therefore, on the date of exchange, the Company recognized the issuance of Series A Preferred Shares at fair value, and any difference between the carrying value of ordinary share and fair value of Series A Preferred Shares was recognized as income available to the shareholders. The holders of the Preferred Shares have the ability to convert the shares into the Company’s ordinary shares. The conversion option did not require bifurcation because the feature is clearly and closely related to the host equity instrument. Additionally, the conversion option does not meet the net settlement criterion to be considered a derivative as the underlying ordinary shares are not publicly traded nor ready convertible into cash. A beneficial conversion feature exists when the conversion price of Preferred Share is lower than the fair value of the ordinary shares at the commitment date. When a beneficial conversion feature exists as of the commitment date, its intrinsic value is bifurcated from the carrying value of the preferred shares as a contribution to additional paid-in capital. The resulting discount to the Preferred Shares is then accreted to the redemption value immediately. The Company determined the fair value of ordinary shares with the assistance of an independent third-party valuation firm. No beneficial conversion feature was recognized for the Preferred Shares as the fair value per ordinary share at each issuance date was less than the most favorable conversion price for each issuance. The Company elected to recognize the changes in redemption value immediately as they occur and adjust the carrying amount of the instrument to equal the redemption value at each reporting period. The changes in redemption value were recorded as a reduction of income available to ordinary shareholders. Upon the conversion of Series A Preferred Shares, the excess of carrying amount of the Series A Preferred Shares over the par value of ordinary shares issued upon conversion date was accounted for as an addition to additional paid-in capital. Upon the repurchase of Series B and B-1 Preferred Shares, the excess of the carrying amount of the Series B and B-1 Preferred Shares over the repurchase price upon repurchase date was accounted for as an increase of income available to ordinary shareholders. F-25
Table of Contents500WAN.COM LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”), except for number of shares and per share data) 9. | CONTINGENTLY REDEEMABLE CONVERTIBLE PREFERRED SHARES (continued) |
Accounting for the preferred shares (continued) The movement of carrying value of the Preferred Shares is as follows:
| | | | | | | | | | | | | | | | | | | | Series A
Preferred
Shares | | | Series B
Preferred
Shares | | | Series B-1
Preferred
Shares | | | Total | | | | | RMB | | | RMB | | | RMB | | | RMB | | Balance as of January 1, 2010 | | | 49,424 | | | | 93,683 | | | | 42,952 | | | | 186,059 | | Accretion | | | 190 | | | | - | | | | - | | | | 190 | | Foreign currency translation adjustment | | | (8 | ) | | | (27 | ) | | | (12 | ) | | | (47 | ) | Conversion | | | (49,606 | ) | | | - | | | | - | | | | (49,606 | ) | Repurchase | | | - | | | | (93,656 | ) | | | (42,940 | ) | | | (136,596 | ) | | |
|
| | |
|
| | |
|
| | |
|
| | Balance as of December 31, 2010 | | | - | | | | - | | | | - | | | | - | | | |
|
| | |
|
| | |
|
| | |
|
| |
The Company’s ability to pay dividends is primarily dependent on the Company receiving distributions of funds from its subsidiaries. Relevant PRC statutory laws and regulations permit payments of dividends by the Group’s PRC subsidiary only out of its retained earnings, if any, as determined in accordance with PRC accounting standards and regulations. The results of operations reflected in the financial statements prepared in accordance with U.S. GAAP differ from those reflected in the statutory financial statements of the Company’s PRC subsidiary. In accordance with the Regulations on Enterprises with Foreign Investment of China and its Articles of Association, Company’s PRC subsidiary, E-Sun Sky Computer, being a foreign-invested enterprise established in the PRC, is required to provide for certain statutory reserves, namely the general reserve fund, enterprise expansion fund and staff welfare and bonus fund, all of which are appropriated from net profit as reported in its PRC statutory accounts. E-Sun Sky Computer is required to allocate at least 10% of its after-tax profits to the general reserve fund until such fund has reached 50% of its registered capital. Appropriations to the enterprise expansion fund and staff welfare and bonus fund are at the discretion of the board of directors of the E-Sun Sky Computer. In accordance with the China Company Laws, the Company’s VIEs are PRC domestic companies (i.e. E-Sun Network, E-Sun Sky Network, Youlanguang Technology and Guangtiandi Technology), and they must make appropriations from their after-tax profits as reported in their PRC statutory accounts to non-distributable reserve funds, namely statutory surplus fund, statutory public welfare fund and discretionary surplus fund. The VIEs are required to allocate at least 10% of their after-tax profits to the statutory surplus fund until such fund has reached 50% of their respective registered capital. Appropriation to discretionary surplus is made at the discretion of each individual VIE. F-26
Table of Contents500WAN.COM LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”), except for number of shares and per share data) 10. | ACCUMULATED DEFICIT (continued) |
The general reserve fund and statutory surplus fund are restricted to set-off against losses, expansion of production and operation and increasing registered capital of the respective company. The staff welfare and bonus fund and statutory public welfare fund are restricted to the capital expenditures for the collective welfare of employees. The reserves are not allowed to be transferred to the Company in terms of cash dividends, loans or advances, nor are they available for distribution except under liquidation.
| | | | | | | | | | | | | | | | As of
December 31,
2011 | | | As of
December 31,
2012 | | | As of
December 31,
2012 | | | | | RMB | | | RMB | | | US$ | | PRC statutory reserved funds | | | 21,980 | | | | 19,724 | | | | 3,224 | | Unreserved accumulated deficit | | | (210,696 | ) | | | (294,197 | ) | | | (48,072 | ) | | |
|
| | |
|
| | |
|
| | | | | (188,716 | ) | | | (274,473 | ) | | | (44,848 | ) | | |
|
| | |
|
| | |
|
| |
Under PRC laws and regulations, there are restrictions on the Company’s PRC subsidiary and VIEs with respect to transferring certain of their net assets to the Company either in the form dividends, loans, or advances. Amounts restricted include paid-in capital, statutory reserve funds and retained earnings of the Company’s PRC subsidiary and VIEs, as determined pursuant to PRC generally accepted accounting principles, totaling approximately RMB207,131 (US$33,845) as of December 31, 2012; therefore in accordance with Rules 504 and 4.08 (e) (3) of Regulation S-X, the condensed parent company only financial statements as of December 31, 2011 and 2012 and for each of the three years in the period ended December 31, 2012 are disclosed in note 22. Furthermore, cash transfers from the Company’s PRC subsidiary to its subsidiaries outside of China are subject to PRC government control of currency conversion. Shortages in the availability of foreign currency may restrict the ability of the PRC subsidiary and consolidated affiliated entities to remit sufficient foreign currency to pay dividends or other payments to the Company, or otherwise satisfy their foreign currency denominated obligations.
Cayman Islands Under the current laws of the Cayman Islands, the Company is not subject to tax on income or capital gains. In addition, upon payments of dividends by the Company to its shareholders, no Cayman Islands withholding tax will be imposed. British Virgin Islands Under the current laws of the British Virgin Islands, the subsidiary of BVI is not subject to tax on income or capital gains. Hong Kong Under the current laws, profits tax in Hong Kong is generally assessed at the rate of 16.5% of taxable income. F-27
Table of Contents500WAN.COM LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”), except for number of shares and per share data) 11. | INCOME TAXES (continued) |
China A new enterprise income tax law (the “EIT Law”) in the PRC was enacted and became effective on January 1, 2008. The EIT Law applies a uniform 25% enterprise income tax (“EIT”) rate to both foreign invested enterprises and domestic enterprises. Accordingly, Youlanguang Technology and Guangtiandi Technology are subject to the EIT rate of 25% for the three years ended December 31, 2012. The EIT Law provides a transition period from its effective date for enterprises which were established before the promulgation date of the EIT Law and were entitled to a preferential tax treatment such as a reduced tax rate or a tax holiday. According to the transitional rule, certain categories of enterprises, including the enterprises located in Shenzhen Special Economic Zone which previously enjoyed a preferential EIT rate of 15%, are eligible for a five-year transition period during which the EIT rate will be gradually increased to the uniform rate of 25%. Therefore, E-Sun Network is subject to the transitional EIT rate of 22%, 24% and 25% in 2010, 2011 and 2012, respectively. E-Sun Sky Network, which is qualified as “Software Enterprise”, was granted an exemption of EIT for its first two years of operations and a half reduction in tax rate for succeeding three years commencing from the first profit-making year. 2006 was the first year of EIT exemption for E-Sun Sky Network. In addition, E-Sun Sky Network is subject to aforesaid transition rule. As a result, E-Sun Sky Network is subject to EIT at the rate of 11%, 24% and 25% in 2010, 2011 and 2012, respectively. In February 2011, E-Sun Sky Network obtained the certificate of “Key Software Enterprise” and therefore was granted a preferential income tax rate of 10% for the year ended December 31, 2010. In October 2011, E-Sun Sky Network obtained the certificate of “High-tech Enterprise” and was granted a preferential income tax rate of 15% for the three years commencing from 2011. In March 2011, E-Sun Sky Computer obtained the certificate of “Software Enterprise”, and was granted an exemption of EIT for its first two years of operations and a half reduction in tax rate for succeeding three years commencing from the first profit-making year. 2011 was the first year of EIT exemption for E-Sun Sky Computer and E-Sun Sky Computer is subject to EIT at the rate of 25%, 0% and 0% in 2010, 2011 and 2012, respectively. Income (loss) before income taxes consists of:
| | | | | | | | | | | | | | | | | | | | 2010 | | | 2011 | | | 2012 | | | 2012 | | | | | RMB | | | RMB | | | RMB | | | US$ | | Cayman Island | | | (301 | ) | | | (667 | ) | | | (2,842 | ) | | | (464 | ) | British Virgin Island | | | - | | | | (3 | ) | | | (22 | ) | | | (4 | ) | Hong Kong | | | - | | | | - | | | | (159 | ) | | | (26 | ) | PRC | | | 82,053 | | | | 42,724 | | | | 25,267 | | | | 4,127 | | | |
|
| | |
|
| | |
|
| | |
|
| | | | | 81,752 | | | | 42,054 | | | | 22,244 | | | | 3,633 | | | |
|
| | |
|
| | |
|
| | |
|
| |
F-28
Table of Contents500WAN.COM LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”), except for number of shares and per share data) 11. | INCOME TAXES (continued) |
China (continued) The current and deferred components of the income tax expense appearing in the consolidated statements of comprehensive income are as follows:
| | | | | | | | | | | | | | | | | | | | 2010 | | | 2011 | | | 2012 | | | 2012 | | | | | RMB | | | RMB | | | RMB | | | US$ | | Current tax expense | | | (9,135 | ) | | | (7,933 | ) | | | (10,856 | ) | | | (1,773 | ) | Deferred tax expense | | | (34,328 | ) | | | (20,564 | ) | | | (7,145 | ) | | | (1,167 | ) | | |
|
| | |
|
| | |
|
| | |
|
| | Income tax expense | | | (43,463 | ) | | | (28,497 | ) | | | (18,001 | ) | | | (2,940 | ) | | |
|
| | |
|
| | |
|
| | |
|
| |
The reconciliation of tax computed by applying the statutory income tax rate applicable to PRC operations to income tax expense is as follows:
| | | | | | | | | | | | | | | | | | | | 2010 | | | 2011 | | | 2012 | | | 2012 | | | | | RMB | | | RMB | | | RMB | | | US$ | | Income before income taxes | | | 81,752 | | | | 42,054 | | | | 22,244 | | | | 3,633 | | Income tax computed at applicable tax rates (25%) | | | 20,438 | | | | 10,513 | | | | 5,561 | | | | 908 | | Effect of different tax rates in different jurisdictions | | | 75 | | | | 168 | | | | 755 | | | | 123 | | Non-deductible expenses | | | 1,269 | | | | 15,164 | | | | 8,603 | | | | 1,406 | | Additional taxable expenses | | | - | | | | (1,935 | ) | | | - | | | | - | | Effect of tax holiday | | | (9,637 | ) | | | (11,783 | ) | | | (8,449 | ) | | | (1,381 | ) | Effect of tax rate changes | | | (3,692 | ) | | | (4,110 | ) | | | (3,076 | ) | | | (503 | ) | Change in valuation allowance | | | 170 | | | | (79 | ) | | | 1,621 | | | | 265 | | Unrecognized tax benefits and related interest and penalties | | | (707 | ) | | | 305 | | | | 544 | | | | 89 | | Over-accrued EIT for previous years | | | - | | | | (1,253 | ) | | | - | | | | - | | Outside basis differences | | | 35,563 | | | | 21,482 | | | | 11,919 | | | | 1,948 | | Others | | | (16 | ) | | | 25 | | | | 523 | | | | 85 | | | |
|
| | |
|
| | |
|
| | |
|
| | | | | 43,463 | | | | 28,497 | | | | 18,001 | | | | 2,940 | | | |
|
| | |
|
| | |
|
| | |
|
| |
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
| | | | | | | | | | | | | | | | | | | | 2010 | | | 2011 | | | 2012 | | | 2012 | | | | | RMB | | | RMB | | | RMB | | | US$ | | Balance at beginning of year | | | 1,552 | | | | 2,833 | | | | 4,315 | | | | 705 | | Increase relating to current year tax positions | | | 2,455 | | | | 2,738 | | | | 7,464 | | | | 1,220 | | Decrease relating to prior year tax positions | | | - | | | | (1,253 | ) | | | - | | | | - | | Decrease relating to expiration of applicable statute of limitations | | | (1,174 | ) | | | (3 | ) | | | (202 | ) | | | (33 | ) | | |
|
| | |
|
| | |
|
| | |
|
| | Balance at end of year | | | 2,833 | | | | 4,315 | | | | 11,577 | | | | 1,892 | | | |
|
| | |
|
| | |
|
| | |
|
| |
At December 31, 2010, 2011 and 2012, there are RMB1,723, RMB1,150 and RMB6,024 (US$984) of unrecognized tax benefits that would affect the annual effective tax rate if recognized. The unrecognized tax benefits mainly related to non-deductible expenses. It is possible that the amount of unrecognized tax benefits will change in the next 12 months, pending factors such as changes in PRC tax law or administrative practices and precedents, or tax authority inquiries. An estimate of the change cannot be reasonably made. F-29
Table of Contents500WAN.COM LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”), except for number of shares and per share data) 11. | INCOME TAXES (continued) |
China (continued) The Company recognizes interest and penalties accrued related to unrecognized tax benefits in taxation expenses. During the years ended December 31, 2010, 2011 and 2012, the Company recognized approximately RMB147, RMB305 and RMB544 (US$89) in interest and penalties. The company had approximately RMB242, RMB547 and RMB1,091 (US$178) for the payment of interest and penalties accrued at December 31, 2010, 2011 and 2012, respectively. In general, the PRC tax authorities have up to three to five years to conduct examinations of the Company’s tax filings. As of December 31, 2012, the PRC subsidiaries’ 2010-2012 tax returns remain open to examination. The aggregate amount and per share effect of tax holidays are as follows:
| | | | | | | | | | | | | | | | | | | | 2010 | | | 2011 | | | 2012 | | | 2012 | | | | | RMB | | | RMB | | | RMB | | | US$ | | The aggregate amount | | | 9,637 | | | | 11,783 | | | | 8,449 | | | | 1,381 | | | |
|
| | |
|
| | |
|
| | |
|
| | The aggregate effect on basic and diluted earnings per share: | | | | | | | | | | | | | | | | | Basic | | | 0.04 | | | | 0.05 | | | | 0.04 | | | | 0.01 | | | |
|
| | |
|
| | |
|
| | |
|
| | Diluted | | | 0.04 | | | | 0.05 | | | | 0.04 | | | | 0.01 | | | |
|
| | |
|
| | |
|
| | |
|
| |
The components of deferred taxes are as follows:
| | | | | | | | | | | | | | | | 2011 | | | 2012 | | | 2012 | | | | | RMB | | | RMB | | | US$ | | Deferred tax assets, current portion | | | | | | | | | | | | | Accrued payroll and welfare payable | | | 1,664 | | | | 1,917 | | | | 313 | | Advertising expenditure deductible in future years | | | 687 | | | | 3,539 | | | | 578 | | Deferred government grants | | | 420 | | | | 2,109 | | | | 345 | | Others | | | - | | | | - | | | | - | | Less: valuation allowance | | | (692 | ) | | | (571 | ) | | | (93 | ) | | |
|
| | |
|
| | |
|
| | Total deferred tax assets, current portion | | | 2,079 | | | | 6,994 | | | | 1,143 | | | |
|
| | |
|
| | |
|
| | Deferred tax assets, non-current portion | | | | | | | | | | | | | Net operating losses | | | 1,748 | | | | 3,349 | | | | 547 | | Less: valuation allowance | | | (766 | ) | | | (2,508 | ) | | | (410 | ) | | |
|
| | |
|
| | |
|
| | Total deferred tax assets, non-current portion | | | 982 | | | | 841 | | | | 137 | | | |
|
| | |
|
| | |
|
| | Deferred tax liabilities, non-current portion | | | | | | | | | | | | | Outside basis differences | | | (76,877 | ) | | | (88,796 | ) | | | (14,509 | ) | | |
|
| | |
|
| | |
|
| | Total deferred tax liabilities, non-current portion | | | (76,877 | ) | | | (88,796 | ) | | | (14,509 | ) | | |
|
| | |
|
| | |
|
| |
The Company records a valuation allowance on its deferred tax assets that is sufficient to reduce the deferred tax assets to an amount that is more likely than not to be realized. Future reversal of the valuation allowance will be recognized either when the benefit is realized or when it has been determined that it is more likely than not that the benefit in future earnings will be realized. F-30
Table of Contents500WAN.COM LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”), except for number of shares and per share data) 11. | INCOME TAXES (continued) |
China (continued) As of December 31, 2012, the Company had net operating losses (“NOLs”) of approximately RMB13,395 (US$2,189) from several of its VIEs, which can be carried forward to offset future net profit for income tax purposes. The NOLs as of December 31, 2012 will expire in years 2013 to 2017 if not utilized. Deferred tax liabilities arising from undistributed earnings and share capital The deferred tax expense relating to outside basis differences arises from (i) aggregate undistributed earnings and share capital of the VIEs that are available for distribution to E-Sun Sky Computer, a PRC tax resident company, and (ii) aggregate undistributed earnings of the foreign subsidiaries that are available for distribution to the Company. The cumulative amount of the temporary differences in respect of investments in foreign subsidiaries are RMB150,642 and RMB175,402 (US$28,660), as of December 31, 2011 and 2012, respectively. Before May 31, 2010, the aggregate undistributed earnings of the PRC subsidiaries that are available for distribution to the Company were considered to be indefinitely reinvested and accordingly, no provision has been made for income taxes that would be payable upon the distribution of those amounts to the Company. Determination of the amount of unrecognized deferred tax liability related to these earnings is not practicable. On May 31, 2010 and November 15, 2010, the Company’s management reassessed the adequacy of working capital and declared the distribution of dividends totaling RMB159,901,000 to all ordinary shareholders of the Company. As a result, the Company recorded deferred tax liabilities related to the aggregate undistributed earnings of the PRC subsidiaries that will be remitted to the Company for the dividends declared. The portion of undistributed earnings of the PRC subsidiaries exceeding the dividend distribution was considered to be indefinitely reinvested. On December 6, 2012, the Company declared the distribution of dividends totaling RMB90,000 to all ordinary shareholders of the Company. Upon the declaration of this distribution of dividends, the Company’s management ceased indefinite reinvestment plan on the undistributed earnings of the PRC subsidiaries. As a result, the Company recorded a deferred tax liability related to the aggregate undistributed earnings of the PRC subsidiaries that are available for distribution to the Company.
For the years ended December 31, 2010 and 2012, the board of directors of the Company declared the distribution of dividends of RMB159,901 and RMB90,000 (US$14,706), respectively, to all ordinary shareholders of the Company. The remaining unpaid dividends of RMB194,526 (US$31,785) as of December 31, 2012 will be paid prior to the completion of the IPO.
13. | EMPLOYEE DEFINED CONTRIBUTION PLAN |
Employees of the Group in PRC participate in a government mandated defined contribution plan, pursuant to which certain pension benefits, medical care, employee housing fund and other welfare benefits are provided to employees. Chinese labor regulations require that the PRC subsidiaries of the Group make contributions to the government for these benefits based on certain percentages of the employees’ salaries. The Group has no legal F-31
Table of Contents500WAN.COM LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”), except for number of shares and per share data) 13. | EMPLOYEE DEFINED CONTRIBUTION PLAN (continued) |
obligation for the benefits beyond the contributions made. Such employee benefits, which were expensed as incurred, amounted to approximately RMB2,957, RMB4,975 and RMB6,595 (US$1,078) for the years ended December 31, 2010, 2011 and 2012, respectively.
On March 28, 2011, the shareholders and board of directors of the Company approved the 2011 Share Incentive Plan (the “Plan”). The Plan provides for the grant of options, restricted shares and other share-based awards. These options were granted with exercise prices denominated in U.S. dollars, which is the functional currency of the Company. The board of directors has authorized under the Plan the issuance of up to 12% of the Company’s issued and outstanding ordinary shares from time to time, on an as-exercised and fully diluted basis, upon exercise of awards granted under the Plan. The maximum term of any issued share option is ten years from the grant date. On April 8, 2011, the Company granted 13,864,000 share options to a director and employees with an exercise price of US$0.40 per share. For these awards, 5,506,600 options will be vested upon the first anniversary of the grant date, 5,225,800 options will be vested upon the second anniversary of the grant date, 1,565,800 options will be vested upon the third anniversary of the grant date, and 1,565,800 options will be vested upon the fourth anniversary of the grant date. On April 8, 2011, the Company granted 5,003,980 share options to another director with an exercise price of US$0.40 per share, and all were vested on the grant date. On April 8, 2011, the Company granted 12,600,000 share options to consultants with an exercise price of US$0.40 per share, and all were vested on the grant date. A summary of share option activity and related information for the year ended December 31, 2012 is as follows: Share options granted to employees and directors
| | | | | | | | | | | | | | | | | | | | | | | | Number of
option | | | Weighted
average
exercise
price | | | Weighted
average
grant date
fair value
per share | | | Weighted
average
remaining
contractual
year | | | Aggregated
intrinsic
value | | | | | | | | US$ | | | US$ | | | (Years) | | | US$’000 | | Outstanding, January 1, 2012 | | | 18,819,980 | | | | 0.40 | | | | 0.35 | | | | 9.27 | | | | 9,034 | | Forfeited | | | (100,000 | ) | | | 0.40 | | | | 0.38 | | | | | | | | | | | |
|
| | | | | | | | | | | | | | | | | | Outstanding, December 31, 2012 | | | 18,719,980 | | | | 0.25 | | | | 0.35 | | | | 8.27 | | | | 6,300 | | | |
|
| | | | | | | | | | | | | | | | | | Vested and expected to vest at December 31, 2012 | | | 18,337,300 | | | | 0.25 | | | | 0.35 | | | | 8.27 | | | | 6,151 | | | |
|
| | | | | | | | | | | | | | | | | | Exercisable at December 31, 2012 | | | 10,473,580 | | | | 0.30 | | | | 0.34 | | | | 8.27 | | | | 3,084 | | | |
|
| | | | | | | | | | | | | | | | | |
F-32
Table of Contents500WAN.COM LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”), except for number of shares and per share data) 14. | SHARE-BASED PAYMENT (continued) |
Share options granted to consultants
| | | | | | | | | | | | | | | | | | | | | | | | Number of
option | | | Weighted
average
exercise
price | | | Weighted
average
grant date
fair value
per share | | | Weighted
average
remaining
contractual
year | | | Aggregated
intrinsic
value | | | | | | | | US$ | | | US$ | | | (Years) | | | US$’000 | | Outstanding, January 1, 2012 | | | 12,600,000 | | | | 0.40 | | | | 0.31 | | | | 9.27 | | | | 6,048 | | | |
|
| | | | | | | | | | | | | | | | | | Outstanding, December 31, 2012 | | | 12,600,000 | | | | 0.40 | | | | 0.31 | | | | 8.27 | | | | 2,394 | | | |
|
| | | | | | | | | | | | | | | | | | Vested at December 31, 2012 | | | 12,600,000 | | | | 0.40 | | | | 0.31 | | | | 8.27 | | | | 2,394 | | | |
|
| | | | | | | | | | | | | | | | | | Exercisable at December 31, 2012 | | | 12,600,000 | | | | 0.40 | | | | 0.31 | | | | 8.27 | | | | 2,394 | | | |
|
| | | | | | | | | | | | | | | | | |
The aggregate intrinsic value in the table above represents the difference between the fair value of Company’s common share as of December 31, 2012 and the exercise price. As of December 31, 2012, there was RMB6,429 (US$1,050) of unvested share-based compensation costs related to equity awards granted to employees that is expected to be recognized over a weighted-average vesting period of 1.8 years. To the extent the actual forfeiture rate is different from original estimate, actual share-based compensation costs related to these awards may be different from the expectation. As the share options granted to a director and consultants were fully vested at the grant date, the related compensation expenses were fully recognized in the consolidated statement of comprehensive income at the grant date. On June 8, 2012 (the “modification date”), the Company modified the exercise price of both vested and unvested 13,740,000 options that were previously granted to 88 employees, from US$0.4 to US$0.2. The modification was intended to provide additional incentives for these employees. In accordance with ASC 718-20 Compensation—Stock Compensation, the effects of a modification resulted in incremental compensation cost of US$670, which was measured as the excess of the fair value of the modified award of US$3,460 over the fair value of the original award of US$2,790 at the modification date. The total compensation cost measured at modification date was US$2,214, representing the portion of the grant-date fair value of the original award for which the requisite service is expected to be rendered (or has already been rendered) at the modification date of US$1,544 and the incremental compensation cost resulting from the modification of US$670. The incremental compensation cost of US$178 for vested options was recognized immediately at the modification date, while the compensation cost of US$2,036 for unvested options is being amortized on a straight-line basis over the remaining vesting term of the original award. The fair value of share options was determined using the binomial option valuation model, with the assistance from an independent third-party appraiser. The binomial model requires the input of highly subjective F-33
Table of Contents500WAN.COM LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”), except for number of shares and per share data) 14. | SHARE-BASED PAYMENT (continued) |
assumptions, including the expected share price volatility and the suboptimal early exercise factor. For expected volatilities, the Company has made reference to historical volatilities of several comparable companies. The suboptimal early exercise factor was estimated based on the vesting and contractual terms of the awards and management’s expectation of exercise behavior of the grantees. The risk-free rate for periods within the contractual life of the options is based on market yield of U.S. Treasury Bond in effect at the time of grant. The assumptions used to estimate the fair value of the share options granted are as follows:
| | | | | | | | | | | | For the year ended December 31 | | | | | 2011 | | | 2012 | | Expected volatility | | | 50.34 | % | | | 50.11 | % | Risk-free interest rate | | | 3.69 | % | | | 1.34 | % | Dividend yield | | | 0.00 | % | | | 0.00 | % | Forfeiture rate | | | 0.00 | % | | | 0.00 | % | Suboptimal early exercise factor | | | 2 | | | | 2 | |
The total fair value of the vested equity awards granted to a director and consultants during the year ended December 31, 2011 was RMB9,970 and RMB25,104 (US$4,102), respectively. No equity awards granted to the employees were vested during the year ended December 31, 2011. The total fair value of the vested equity awards granted to the employees during the year ended December 31, 2012 was RMB12,437 (US$2,032). Total share-based compensation expenses relating to options granted to employees, the director and consultants for the years ended December 31, 2011 and 2012 are included in:
| | | | | | | | | | | | | | | | | | | | | | | | For the year ended December 31, 2012 | | | | | Employees | | | Directors | | | Consultants | | | Total | | | Total | | | | | RMB | | | RMB | | | RMB | | | RMB | | | US$ | | Cost of services | | | 222 | | | | - | | | | - | | | | 222 | | | | 36 | | Sales and marketing | | | 780 | | | | - | | | | - | | | | 780 | | | | 127 | | General and administrative | | | 10,892 | | | | - | | | | - | | | | 10,892 | | | | 1,780 | | Service development expenses | | | 1,810 | | | | - | | | | - | | | | 1,810 | | | | 296 | | | |
|
| | |
|
| | |
|
| | |
|
| | |
|
| | | | | 13,704 | | | | - | | | | - | | | | 13,704 | | | | 2,239 | | | |
|
| | |
|
| | |
|
| | |
|
| | |
|
| |
| | | | | | | | | | | | | | | | | | | | | | | | For the year ended December 31, 2011 | | | | | Employees | | | Directors | | | Consultants | | | Total | | | Total | | | | | RMB | | | RMB | | | RMB | | | RMB | | | US$ | | Cost of services | | | 206 | | | | - | | | | - | | | | 206 | | | | 34 | | Sales and marketing | | | 749 | | | | - | | | | - | | | | 749 | | | | 122 | | General and administrative | | | 12,290 | | | | 9,970 | | | | 25,104 | | | | 47,364 | | | | 7,739 | | Service development expenses | | | 1,835 | | | | - | | | | - | | | | 1,835 | | | | 300 | | | |
|
| | |
|
| | |
|
| | |
|
| | |
|
| | | | | 15,080 | | | | 9,970 | | | | 25,104 | | | | 50,154 | | | | 8,195 | | | |
|
| | |
|
| | |
|
| | |
|
| | |
|
| |
F-34
Table of Contents500WAN.COM LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”), except for number of shares and per share data) 15. | RELATED PARTY TRANSACTIONS |
| | | Name of related parties | | Relationship with the Group | Shenzhen Bozhi Consulting Co.,Ltd. | | Entity controlled by the Chairman and Chief Executive Officer of the Company * | Delite Limited | | Shareholder of the Company |
(b) | The Group had the following related party balances as of December 31, 2011 and 2012: |
| | | | | | | | | | | | | | | | As of
December 31,
2011 | | | As of
December 31,
2012 | | | As of
December 31,
2012 | | | | | | | | | RMB | | | RMB | | | US$ | | Amounts due from related parties: | | | | | | | | | | | | | Shenzhen Bozhi Consulting Co. Ltd. | | | 101,650 | | | | 187,266 | | | | 30,599 | | Delite Limited | | | 976 | | | | 976 | | | | 159 | | | |
|
| | |
|
| | |
|
| | | | | 102,626 | | | | 188,242 | | | | 30,758 | | | |
|
| | |
|
| | |
|
| | Amount due to a related party: | | | | | | | | | | | | | Delite Limited | | | - | | | | 8,520 | | | | 1,392 | | | |
|
| | |
|
| | |
|
| | | | | - | | | | 8,520 | | | | 1,392 | | | |
|
| | |
|
| | |
|
| |
All balances with related parties as of December 31, 2011 and 2012 were unsecured, non-interest bearing and repayable on demand. The balances with Delite Limited and Shenzhen Bozhi Consulting Co. Ltd. as of December 31, 2012 will be settled prior to the completion of the IPO. The Company does not plan to enter into any unsecured and non-interest bearing loan transactions upon effectiveness of the IPO.
16. | COMMITMENTS AND CONTINGENCIES |
Operating lease commitments Future minimum payments under non-cancelable operating leases of office rent consist of the following as of December 31, 2012:
| | | | | | | | | | | | RMB | | | US$ | | 2013 | | | 3,273 | | | | 535 | | 2014 | | | 2,918 | | | | 477 | | 2015 | | | 2,918 | | | | 477 | | 2016 | | | 2,918 | | | | 477 | | 2017 and thereafter | | | 2,584 | | | | 422 | | | |
|
| | |
|
| | | | | 14,611 | | | | 2,388 | | | |
|
| | |
|
| |
F-35
Table of Contents500WAN.COM LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”), except for number of shares and per share data) 16. | COMMITMENTS AND CONTINGENCIES (continued) |
Operating lease commitments (continued) Payments under operating leases are expensed on a straight-line basis over the periods of their respective leases. The Company’s lease arrangements have no renewal options, rent escalation clauses, restrictions or contingent rents and are all conducted with third parties. For the years ended December 31, 2010, 2011 and 2012, total rental expenses for all operating leases amounted to approximately RMB1,577, RMB3,480 and RMB4,435 (US$725), respectively. Income taxes As of December 31, 2011 and 2012, the Group has recognized approximately RMB3,595 and RMB11,151 (US$1,822), respectively, as an accrual for unrecognized tax benefits, including related interest and penalties. The final outcome of the tax uncertainty is dependent upon various matters including tax examinations, interpretation of tax laws or expiration of status of limitation. However, due to the uncertainties associated with the status of examinations, including the protocols of finalizing audits by the relevant tax authorities, there is a high degree of uncertainty regarding the future cash outflows associated with these tax uncertainties. As of December 31, 2011, and 2012, the Group classified the accrual of RMB3,595 and RMB11,151 (US$1,822), respectively, as a non-current liability. Variable interest entity structure In the opinion of management, (i) the ownership structure of the Company and its VIEs are in compliance with existing PRC laws and regulations; (ii) the contractual arrangements with the VIEs and their shareholders are valid and binding, and will not result in any violation of PRC laws or regulations currently in effect; and (iii) the Group’s business operations are in compliance with existing PRC laws and regulations in all material respects. However, there are substantial uncertainties regarding the interpretation and application of current and future PRC laws and regulations. Accordingly, the Company cannot be assured that PRC regulatory authorities will not ultimately take a contrary view to its opinion. If the current ownership structure of the Group and its contractual arrangements with VIEs are found to be in violation of any existing or future PRC laws and regulations, the Group may be required to restructure its ownership structure and operations in the PRC to comply with the changing and new PRC laws and regulations. In the opinion of management, the likelihood of loss in respect of the Group’s current ownership structure or the contractual arrangements with VIEs is remote based on current facts and circumstances. Contractual Arrangements among E-Sun Sky Computer and the VIEs Under applicable PRC tax laws and regulations, arrangements and transactions among related parties may be subject to audit or scrutiny by the PRC tax authorities within ten years after the taxable year when the arrangements or transactions are conducted. The Company could face material and adverse tax consequences if the PRC tax authorities were to determine that the Contractual Arrangements among E-Sun Sky Computer and the respective VIEs were not entered into on an arm’s-length basis and therefore constituted unfavorable transfer pricing arrangements. Unfavorable transfer pricing arrangements could, among other things, result in an upward adjustment on taxation. In addition, the PRC tax authorities may impose interest on late payments on E-Sun Sky Computer and the respective VIEs for the adjusted but unpaid taxes. In the opinion of management, the likelihood of such an upward adjustment on taxation and related interest is remote based on current facts and circumstances. F-36
Table of Contents500WAN.COM LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”), except for number of shares and per share data) 16. | COMMITMENTS AND CONTINGENCIES (continued) |
Commitment on sponsorship Future payments under sponsorship contracts consist of the following as of December 31, 2012:
| | | | | | | | | | | | RMB | | | US$ | | 2013 | | | 2,400 | | | | 392 | | | |
|
| | |
|
| | | | | 2,400 | | | | 392 | | | |
|
| | |
|
| |
Payments for sponsorships are expensed on a straight-line basis over the beneficial periods. For the year ended December 31, 2012, total sponsorship expenses amounted to approximately RMB8,400 (US$1,373).
Basic and diluted earnings per share for each of the years presented is calculated as follows:
| | | | | | | | | | | | | | | | | | | | For the years ended December 31, | | | | | 2010 | | | 2011 | | | 2012 | | | 2012 | | | | | RMB | | | RMB | | | RMB | | | US$ | | Numerator: | | | | | | | | | | | | | | | | | Net income | | | 38,289 | | | | 13,557 | | | | 4,243 | | | | 693 | | Less: Accretion of Series A Preferred Shares | | | (190 | ) | | | - | | | | - | | | | - | | Add: Repurchase of Series B and B-1 Preferred Shares | | | 24,392 | | | | - | | | | - | | | | - | | | |
|
| | |
|
| | |
|
| | |
|
| | Undistributed earnings | | | 62,491 | | | | 13,557 | | | | 4,243 | | | | 693 | | Undistributed earnings allocated to participating preferred shares | | | (3,801 | ) | | | - | | | | - | | | | - | | | |
|
| | |
|
| | |
|
| | |
|
| | Income allocated to ordinary shares for computing earnings per share | | | | | | | | | | | | | | | | | Basic | | | 58,690 | | | | 13,557 | | | | 4,243 | | | | 693 | | | |
|
| | |
|
| | |
|
| | |
|
| | Diluted | | | 38,289 | | | | 13,557 | | | | 4,243 | | | | 693 | | | |
|
| | |
|
| | |
|
| | |
|
| | Denominator: | | | | | | | | | | | | | | | | | Weighted average number of ordinary shares outstanding used in calculating basic earnings per share | | | 219,290,540 | | | | 230,768,220 | | | | 229,374,777 | | | | 229,374,777 | | Conversion of convertible preferred shares (Series A, B, B-1) to ordinary shares | | | 14,202,140 | | | | - | | | | - | | | | - | | Share options | | | - | | | | 6,475,349 | | | | 4,303,704 | | | | 4,303,704 | | | |
|
| | |
|
| | |
|
| | |
|
| | Weighted average number of ordinary shares outstanding used in calculating diluted earnings per share | | | 233,492,680 | | | | 237,243,569 | | | | 233,678,481 | | | | 233,678,481 | | | |
|
| | |
|
| | |
|
| | |
|
| | Earnings per share: | | | | | | | | | | | | | | | | | Basic | | | 0.27 | | | | 0.06 | | | | 0.02 | | | | - | | | |
|
| | |
|
| | |
|
| | |
|
| | Diluted | | | 0.16 | | | | 0.06 | | | | 0.02 | | | | - | | | |
|
| | |
|
| | |
|
| | |
|
| |
Since each preferred share has the same participating right as each ordinary share, the allocation of undistributed earnings was based on the proportionate number of ordinary shares and preferred shares outstanding. F-37
Table of Contents500WAN.COM LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”), except for number of shares and per share data)
In April 2012, the Company repurchased (and subsequently cancelled) 19,250,000 ordinary shares at a par value of US$0.00005 from certain shareholders for an aggregate consideration of US$7,596, the excess of par value over the repurchase price was debited to additional paid-in capital in accordance with ASC 505-30 Equity: Treasury Stock. The Company concurrently issued 17,250,000 ordinary shares with an aggregate consideration of US$6,807 to certain independent third parties. The newly issued ordinary shares of the Company were fully paid, and the difference between the par value and the issue price was credited to additional paid-in capital for the year ended December 31, 2012.
19. | ACCUMULATED OTHER COMPREHENSIVE INCOME |
Changes in the balance of the component of accumulated other comprehensive income for the years ended December 31, 2011 and 2012 are as follows:
| | | | | | | | | | | | Foreign currency translation | | | | | RMB | | | US$ | | Balance as of December 31, 2010 | | | 16,154 | | | | 2,640 | | Other comprehensive loss | | | (224 | ) | | | (37 | ) | | |
|
| | |
|
| | Balance as of December 31, 2011 | | | 15,930 | | | | 2,603 | | Other comprehensive income | | | 58 | | | | 9 | | | |
|
| | |
|
| | Balance as of December 31, 2012 | | | 15,988 | | | | 2,612 | | | |
|
| | |
|
| |
In accordance with ASC 280-10 Segment Reporting: Overall, the Group’s chief operating decision maker has been identified as the chief executive officer, who makes resource allocation decisions and assesses performance based on the Group’s consolidated results. As a result, the Group has only one reportable segment. Geographic disclosures As the Group generates substantially all of its revenues from customers domiciled in the PRC, no geographical segments are presented. All of the Group’s long-lived assets are located in the PRC.
Subsequent events were evaluated through to April 26, 2013, the date the financial statements were issued. F-38
Table of Contents500WAN.COM LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”), except for number of shares and per share data)
22. | CONDENSED FINANCIAL INFORMATION OF THE PARENT COMPANY |
Under PRC laws and regulations, the Company’s PRC subsidiary E-Sun Sky Computer and VIEs are restricted in their ability to transfer certain of its net assets to the Company in the form of dividend payments, loans or advances. The amounts restricted include paid up capital, retained earnings and statutory reserves, as determined pursuant to PRC generally accepted accounting principles, totaling RMB207,131 (US$33,845) as of December 31, 2012. The following is the condensed financial information of the Company on a parent company only basis. Condensed balance sheets
| | | | | | | | | | | | | | | | As of
December 31,
2011 | | | As of
December 31,
2012 | | | As of
December 31,
2012 | | | | | RMB | | | RMB | | | US$ | | ASSETS | | | | | | | | | | | | | Current assets: | | | | | | | | | | | | | Cash and cash equivalents | | | 649 | | | | 3,500 | | | | 572 | | Amounts due from related parties | | | 6,436 | | | | 6,609 | | | | 1,080 | | | |
|
| | |
|
| | |
|
| | Total current assets | | | 7,085 | | | | 10,109 | | | | 1,652 | | | |
|
| | |
|
| | |
|
| | Non-current assets: | | | | | | | | | | | | | Investment in subsidiaries and VIEs | | | 178,906 | | | | 207,239 | | | | 33,863 | | Property and equipment, net | | | 705 | | | | 620 | | | | 101 | | Deferred initial public offering expenses | | | 2,186 | | | | 1,243 | | | | 203 | | | |
|
| | |
|
| | |
|
| | Total non-current assets | | | 181,797 | | | | 209,102 | | | | 34,167 | | | |
|
| | |
|
| | |
|
| | TOTAL ASSETS | | | 188,882 | | | | 219,211 | | | | 35,819 | | | |
|
| | |
|
| | |
|
| |
F-39
Table of Contents500WAN.COM LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”), except for number of shares and per share data) 22. | CONDENSED FINANCIAL INFORMATION OF THE PARENT COMPANY (continued) |
Condensed balance sheets (continued)
| | | | | | | | | | | | | | | | As of
December 31,
2011 | | | As of
December 31,
2012 | | | As of
December 31,
2012 | | | | | RMB | | | RMB | | | US$ | | LIABILITIES AND SHAREHOLDERS’ EQUITY | | | | | | | | | | | | | Current liabilities: | | | | | | | | | | | | | Accrued expenses and other liabilities | | | - | | | | 1,245 | | | | 204 | | Dividends payable | | | 104,526 | | | | 194,526 | | | | 31,785 | | Amounts due to related parties | | | - | | | | 8,520 | | | | 1,392 | | | |
|
| | |
|
| | |
|
| | Total current liabilities | | | 104,526 | | | | 204,291 | | | | 33,381 | | | |
|
| | |
|
| | |
|
| | Non-current liabilities: | | | | | | | | | | | | | Deferred tax liabilities, non-current | | | 10,007 | | | | 17,540 | | | | 2,866 | | | |
|
| | |
|
| | |
|
| | Total non-current liabilities | | | 10,007 | | | | 17,540 | | | | 2,866 | | | |
|
| | |
|
| | |
|
| | TOTAL LIABILITIES | | | 114,533 | | | | 221,831 | | | | 36,247 | | | |
|
| | |
|
| | |
|
| | Shareholders’ equity (deficit): | | | | | | | | | | | | | Ordinary shares (par value of US$0.00005 per share; Authorized: 931,878,540 as of December 31, 2011 and 2012; issued and outstanding: 230,768,220 shares and 228,768,220 shares as of December 31, 2011 and 2012, respectively) | | | 84 | | | | 84 | | | | 14 | | Additional paid-in capital | | | 247,051 | | | | 255,781 | | | | 41,794 | | Accumulated other comprehensive income | | | 15,930 | | | | 15,988 | | | | 2,612 | | Accumulated deficit | | | (188,716 | ) | | | (274,473 | ) | | | (44,848 | ) | | |
|
| | |
|
| | |
|
| | Total shareholder’s equity (deficit) | | | 74,349 | | | | (2,620 | ) | | | (428 | ) | | |
|
| | |
|
| | |
|
| | TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY (DEFICIT) | | | 188,882 | | | | 219,211 | | | | 35,819 | | | |
|
| | |
|
| | |
|
| |
Condensed statements of comprehensive income
| | | | | | | | | | | | | | | | | | | | For the years ended December 31, | | | | | 2010 | | | 2011 | | | 2012 | | | 2012 | | | | | RMB | | | RMB | | | RMB | | | US$ | | Net Revenues | | | - | | | | - | | | | - | | | | - | | Operating expenses: | | | | | | | | | | | | | | | | | General and administrative | | | (118 | ) | | | (659 | ) | | | (608 | ) | | | (99 | ) | Write-off of deferred initial public offering expenses | | | - | | | | - | | | | (2,230 | ) | | | (365 | ) | | |
|
| | |
|
| | |
|
| | |
|
| | Total operating expenses | | | (118 | ) | | | (659 | ) | | | (2,838 | ) | | | (464 | ) | Other operating expenses | | | (183 | ) | | | (8 | ) | | | (4 | ) | | | (1 | ) | | |
|
| | |
|
| | |
|
| | |
|
| | Operating loss | | | (301 | ) | | | (667 | ) | | | (2,842 | ) | | | (465 | ) | Equity in profits of subsidiaries and VIEs | | | 46,213 | | | | 16,608 | | | | 14,618 | | | | 2,389 | | | |
|
| | |
|
| | |
|
| | |
|
| | Income before income taxes | | | 45,912 | | | | 15,941 | | | | 11,776 | | | | 1,924 | | Income tax expenses | | | (7,623 | ) | | | (2,384 | ) | | | (7,533 | ) | | | (1,231 | ) | | |
|
| | |
|
| | |
|
| | |
|
| | Net income | | | 38,289 | | | | 13,557 | | | | 4,243 | | | | 693 | | | |
|
| | |
|
| | |
|
| | |
|
| | Other comprehensive income (loss) | | | | | | | | | | | | | | | | | Foreign currency translation gain (loss) | | | 70 | | | | (224 | ) | | | 58 | | | | 9 | | | |
|
| | |
|
| | |
|
| | |
|
| | Comprehensive income | | | 38,359 | | | | 13,333 | | | | 4,301 | | | | 702 | | | |
|
| | |
|
| | |
|
| | |
|
| |
F-40
Table of Contents500WAN.COM LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”), except for number of shares and per share data) 22. | CONDENSED FINANCIAL INFORMATION OF THE PARENT COMPANY (continued) |
Condensed statements of cash flows
| | | | | | | | | | | | | | | | 2011 | | | 2012 | | | 2012 | | | | | RMB | | | RMB | | | US$ | | Net cash generated from (used in) operating activities | | | (1,880 | ) | | | 38 | | | | 6 | | Net cash generated from (used in) investing activities | | | (689 | ) | | | 511 | | | | 83 | | Net cash generated from (used in) financing activities | | | (1,596 | ) | | | 2,302 | | | | 377 | | | |
|
| | |
|
| | |
|
| | Net increase (decrease) in cash and cash equivalents | | | (4,165 | ) | | | 2,851 | | | | 466 | | Cash and cash equivalents at beginning of the year | | | 4,814 | | | | 649 | | | | 106 | | | |
|
| | |
|
| | |
|
| | Cash and cash equivalents at end of the year | | | 649 | | | | 3,500 | | | | 572 | | | |
|
| | |
|
| | |
|
| |
Basis of presentation Condensed financial information is used for the presentation of the Company, or the parent company. The condensed financial information of the parent company has been prepared using the same accounting policies as set out in the Company’s consolidated financial statements except that the parent company used the equity method to account for investment in its subsidiaries. The parent company records its investment in its subsidiaries under the equity method of accounting as prescribed in ASC 323-10, Investments-Equity Method and Joint Ventures: Overall. Such investments are presented on the condensed balance sheets as “Investment in subsidiaries and VIEs” and their respective profit or loss as “Equity in profits of subsidiaries and VIEs” on the condensed statements of comprehensive income. Equity method accounting ceases when the carrying amount of the investment, including any additional financial support, in a subsidiary is reduced to zero unless the parent company has guaranteed obligations of the subsidiary or is otherwise committed to provide further financial support. If the subsidiary subsequently reports net income, the parent company shall resume applying the equity method only after its share of that net income equals the share of net losses not recognized during the period the equity method was suspended. The parent company’s condensed financial statements should be read in conjunction with the Company’s consolidated financial statements. F-41
Table of Contents500WAN.COM LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”), except for number of shares and per share data)
23. | PRO-FORMA EARNINGS PER SHARE FOR DISTRIBUTION OF DIVIDENDS (UNAUDITED) |
On December 6, 2012, the Company declared a distribution of dividends. The unaudited pro-forma earnings per share (basic and diluted) for the year ended December 31, 2012 after giving effect to the issuance of 10,778,909 Class A ordinary shares on January 1, 2012 at the public offering price of US$1.30 per share to pay RMB85.8 million dividend declared in excess of net income of RMB4.2 million for the year ended December 31, 2012 are calculated as follows:
| | | | | | | | | | | | For the year ended | | | | | December 31,
2012 | | | December 31,
2012 | | | | | RMB | | | US$ | | | | | (unaudited) | | | (unaudited) | | Numerator: | | | | | | | | | Net income attributable to ordinary shareholders for computing earnings per share – basic and diluted | | | 4,243 | | | | 693 | | | |
|
| | |
|
| | Denominator: | | | | | | | | | Weighted average ordinary shares outstanding used in calculating basic earnings per share | | | 229,374,777 | | | | 229,374,777 | | Pro-forma effect of dividends | | | 10,778,909 | | | | 10,778,909 | | | |
|
| | |
|
| | Pro-forma weighted average ordinary shares outstanding used in calculating basic earnings per share | | | 240,153,686 | | | | 240,153,686 | | Share options | | | 4,303,704 | | | | 4,303,704 | | | |
|
| | |
|
| | Pro-forma weighted average ordinary shares outstanding used in calculating diluted earnings per share | | | 244,457,390 | | | | 244,457,390 | | | |
|
| | |
|
| | Pro-forma earnings per share: | | | | | | | | | Basic | | | 0.02 | | | | - | | | |
|
| | |
|
| | Diluted | | | 0.02 | | | | - | | | |
|
| | |
|
| |
F-42
Table of Contents500WAN.COM LIMITED UNAUDITED INTERIM CONDENSED CONSOLIDATED BALANCE SHEETS (Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”), except for number of shares)
| | | | | | | | | | | | | | | | | | | | | | | As of | | | | | Notes | | | December 31,
2012* | | | September 30,
2013 | | | September 30,
2013 | | | | | | | | RMB | | | RMB | | | US$ | | | | | | | | | | | (unaudited) | | | (unaudited) | | ASSETS | | | | | | | | | | | | | | | | | Current assets: | | | | | | | | | | | | | | | | | Cash and cash equivalents | | | | | | | 31,555 | | | | 49,296 | | | | 8,055 | | Restricted cash | | | | | | | 11,209 | | | | 155,897 | | | | 25,473 | | Accounts receivable | | | 2 | | | | 22,937 | | | | 49,658 | | | | 8,114 | | Accounts receivable due from employees | | | | | | | 225 | | | | 41 | | | | 7 | | Amounts due from related parties | | | 10 | | | | 188,242 | | | | 46,721 | | | | 7,634 | | Prepayments and other current assets | | | 3 | | | | 68,659 | | | | 97,987 | | | | 16,011 | | Deferred tax assets, current portion | | | | | | | 6,994 | | | | 17,625 | | | | 2,880 | | | | | | | |
|
| | |
|
| | |
|
| | Total current assets | | | | | | | 329,821 | | | | 417,225 | | | | 68,174 | | | | | | | |
|
| | |
|
| | |
|
| | | | | | | Non-current assets: | | | | | | | | | | | | | | | | | Property and equipment, net | | | 4 | | | | 38,102 | | | | 35,941 | | | | 5,873 | | Intangible assets, net | | | 5 | | | | 2,229 | | | | 2,003 | | | | 327 | | Deposits | | | 3 | | | | 5,463 | | | | 5,949 | | | | 972 | | Deferred initial public offering expenses | | | | | | | 1,496 | | | | 1,475 | | | | 241 | | Deferred tax assets, non-current | | | | | | | 841 | | | | 841 | | | | 137 | | Other non-current assets | | | | | | | 1,391 | | | | 1,629 | | | | 266 | | | | | | | |
|
| | |
|
| | |
|
| | Total non-current assets | | | | | | | 49,522 | | | | 47,838 | | | | 7,816 | | | | | | | |
|
| | |
|
| | |
|
| | TOTAL ASSETS | | | | | | | 379,343 | | | | 465,063 | | | | 75,990 | | | | | | | |
|
| | |
|
| | |
|
| | | | | | | LIABILITIES AND SHAREHOLDERS’ EQUITY | | | | | | | | | | | | | | | | | Current liabilities: | | | | | | | | | | | | | | | | | Short-term loans (including short-term loans of the consolidated VIEs without recourse to 500wan.com Limited of nil and RMB14,982 (US$2,448) as of December 31, 2012 and September 30, 2013, respectively) | | | 11 | | | | - | | | | 146,621 | | | | 23,958 | | Dividends payable | | | | | | | 194,526 | | | | 94,526 | | | | 15,445 | | Amounts due to a related party | | | 10 | | | | 8,520 | | | | 8,373 | | | | 1,368 | | Accrued payroll and welfare payable (including accrued payroll and welfare payable of the consolidated VIEs without recourse to 500wan.com Limited of RMB7,038 and RMB2,817 (US$460) as of December 31, 2012 September 30, 2013, respectively) | | | | | | | 10,408 | | | | 2,817 | | | | 460 | | Accrued expenses and other current liabilities (including accrued expenses and other current liabilities of the consolidated VIEs without recourse to 500wan.com Limited of RMB60,239 and RMB71,405 (US$11,669) as of December 31, 2012 and September 30, 2013, respectively) | | | 6 | | | | 67,008 | | | | 73,663 | | | | 12,036 | | Income tax payable (including income tax payable of the consolidated VIEs without recourse to 500wan.com Limited of RMB1,554 and RMB10,516 (US$1,718) as of December 31, 2012 and September 30, 2013, respectively) | | | | | | | 1,554 | | | | 12,163 | | | | 1,988 | | | | | | | |
|
| | |
|
| | |
|
| | Total current liabilities | | | | | | | 282,016 | | | | 338,163 | | | | 55,255 | | | | | | | |
|
| | |
|
| | |
|
| |
* | Amounts for the year ended December 31, 2012 were derived from the December 31, 2012 audited consolidated financial statements. |
The accompanying notes are an integral part of the unaudited interim condensed consolidated financial statements. F-43
Table of Contents500WAN.COM LIMITED UNAUDITED INTERIM CONDENSED CONSOLIDATED BALANCE SHEETS (continued) (Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”), except for number of shares) | | | | | | | | | | | | | | | | | | | | | | | As of | | | | | Notes | | | December 31,
2012* | | | September 30,
2013 | | | September 30,
2013 | | | | | | | | RMB | | | RMB | | | US$ | | | | | | | | | | | (unaudited) | | | (unaudited) | | Non-current liabilities: | | | | | | | | | | | | | | | | | Deferred tax liabilities, non-current | | | | | | | 88,796 | | | | 93,897 | | | | 15,343 | | Long-term payables (including long-term payable of the consolidated VIE without recourse to 500wan.com Limited of RMB11,151 and RMB10,708 (US$1,750) as of December 31, 2012 and September 30, 2013, respectively) | | | | | | | 11,151 | | | | 10,708 | | | | 1,750 | | | | | | | |
|
| | |
|
| | |
|
| | Total non-current liabilities | | | | | | | 99,947 | | | | 104,605 | | | | 17,093 | | | | | | | |
|
| | |
|
| | |
|
| | TOTAL LIABILITIES | | | | | | | 381,963 | | | | 442,768 | | | | 72,348 | | | | | | | |
|
| | |
|
| | |
|
| | Commitments and contingencies | | | 12 | | | | | | | | | | | | | | | | | | | Shareholders’ Equity: | | | | | | | | | | | | | | | | | Ordinary shares (par value of US$0.00005 per share; authorized: 931,878,540 shares as of December 31, 2012 and September 30, 2013, respectively; issued and outstanding: 228,768,220 shares as of December 31, 2012 and September 30, 2013, respectively) | | | | | | | 84 | | | | 84 | | | | 14 | | Additional paid-in capital | | | | | | | 255,781 | | | | 258,802 | | | | 42,288 | | Accumulated other comprehensive income | | | | | | | 15,988 | | | | 17,284 | | | | 2,824 | | Accumulated deficit | | | | | | | (274,473 | ) | | | (253,875 | ) | | | (41,484 | ) | | | | | | |
|
| | |
|
| | |
|
| | Total shareholders’ equity (deficit) | | | | | | | (2,620 | ) | | | 22,295 | | | | 3,642 | | | | | | | |
|
| | |
|
| | |
|
| | TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY (DEFICIT) | | | | | | | 379,343 | | | | 465,063 | | | | 75,990 | | | | | | | |
|
| | |
|
| | |
|
| |
* | Amounts for the year ended December 31, 2012 were derived from the December 31, 2012 audited consolidated financial statements. |
The accompanying notes are an integral part of the unaudited interim condensed consolidated financial statements. F-44
Table of Contents500WAN.COM LIMITED UNAUDITED INTERIM CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”), except for number of shares and per share data)
| | | | | | | | | | | | | | | | | | | | | | | For the nine months ended | | | | | Notes | | | September 30,
2012 | | | September 30,
2013 | | | September 30,
2013 | | | | | | | | RMB | | | RMB | | | US$ | | | | | | | | (unaudited) | | | (unaudited) | | | (unaudited) | | Net revenues | | | | | | | 130,736 | | | | 163,411 | | | | 26,701 | | | | | | | Operating expenses: | | | | | | | | | | | | | | | | | Cost of services | | | | | | | (13,922 | ) | | | (19,564 | ) | | | (3,197 | ) | Sales and marketing | | | | | | | (36,322 | ) | | | (61,201 | ) | | | (10,000 | ) | General and administrative | | | | | | | (39,899 | ) | | | (46,517 | ) | | | (7,601 | ) | Service development expenses | | | | | | | (17,673 | ) | | | (18,924 | ) | | | (3,092 | ) | Write-off of deferred initial public offering expenses | | | | | | | (6,404 | ) | | | - | | | | - | | | | | | | |
|
| | |
|
| | |
|
| | Total operating expenses | | | | | | | (114,220 | ) | | | (146,206 | ) | | | (23,890 | ) | | | | | | Other operating income | | | | | | | 4,139 | | | | 11,371 | | | | 1,858 | | Government grant | | | | | | | 2,203 | | | | 139 | | | | 23 | | Other operating expenses | | | | | | | (1,582 | ) | | | (2,647 | ) | | | (433 | ) | | | | | | |
|
| | |
|
| | |
|
| | Operating profit | | | | | | | 21,276 | | | | 26,068 | | | | 4,259 | | | | | | | Interest income | | | | | | | 813 | | | | 251 | | | | 41 | | Interest expense | | | | | | | - | | | | (430 | ) | | | (70 | ) | | | | | | |
|
| | |
|
| | |
|
| | Income before income tax | | | | | | | 22,089 | | | | 25,889 | | | | 4,230 | | Income tax expenses | | | 7 | | | | (11,631 | ) | | | (5,291 | ) | | | (865 | ) | | | | | | |
|
| | |
|
| | |
|
| | Net income | | | | | | | 10,458 | | | | 20,598 | | | | 3,365 | | | | | | | |
|
| | |
|
| | |
|
| | Other comprehensive income, net of tax | | | | | | | | | | | | | | | | | Foreign currency translation gain | | | | | | | 6 | | | | 1,296 | | | | 212 | | | | | | | |
|
| | |
|
| | |
|
| | Comprehensive income | | | | | | | 10,464 | | | | 21,894 | | | | 3,577 | | | | | | | |
|
| | |
|
| | |
|
| | Earnings per share: | | | 13 | | | | | | | | | | | | | | Basic | | | | | | | 0.05 | | | | 0.09 | | | | 0.01 | | Diluted | | | | | | | 0.04 | | | | 0.08 | | | | 0.01 | | | | | | | Pro-forma earnings per share: | | | 16 | | | | | | | | | | | | | | Basic | | | | | | | - | | | | 0.08 | | | | 0.01 | | Diluted | | | | | | | - | | | | 0.08 | | | | 0.01 | | | | | | | Weighted average number of ordinary shares outstanding: | | | 13 | | | | | | | | | | | | | | Basic | | | | | | | 229,578,439 | | | | 228,768,220 | | | | 228,768,220 | | Diluted | | | | | | | 234,226,252 | | | | 246,304,916 | | | | 246,304,916 | | | | | | | Pro-forma weighted average number of ordinary shares outstanding: | | | 16 | | | | | | | | | | | | | | Basic | | | | | | | - | | | | 239,547,129 | | | | 239,547,129 | | Diluted | | | | | | | - | | | | 257,083,825 | | | | 257,083,825 | |
F-45
Table of Contents500WAN.COM LIMITED UNAUDITED INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”))
| | | | | | | | | | | | | | | | For the nine months ended | | | | | September 30,
2012 | | | September 30,
2013 | | | September 30,
2013 | | | | | RMB | | | RMB | | | US$ | | | | | (unaudited) | | | (unaudited) | | | (unaudited) | | Cash flow from operating activities | | | | | | | | | | | | | Net income | | | 10,458 | | | | 20,598 | | | | 3,365 | | Adjustments to reconcile net income to net cash generated from (used in) operating activities: | | | | | | | | | | | | | Depreciation of property and equipment | | | 3,210 | | | | 5,857 | | | | 957 | | Amortization of intangible assets | | | 232 | | | | 460 | | | | 75 | | Deferred tax expense (benefit) | | | 2,919 | | | | (5,530 | ) | | | (903 | ) | Share-based compensation | | | 11,000 | | | | 3,021 | | | | 494 | | Losses on disposal of property and equipment | | | 1,298 | | | | 489 | | | | 80 | | Write-off of deferred initial public offering expenses | | | 6,404 | | | | - | | | | - | | Changes in operating assets and liabilities: | | | | | | | | | | | | | Accounts receivable | | | 22,678 | | | | (26,721 | ) | | | (4,366 | ) | Accounts receivable due from employees | | | 5,926 | | | | 184 | | | | 30 | | Prepayments and other current assets | | | 27,833 | | | | (28,011 | ) | | | (4,577 | ) | Deposits | | | 2,174 | | | | (486 | ) | | | (79 | ) | Amounts due to a related party | | | - | | | | (147 | ) | | | (24 | ) | Accrued payroll and welfare payable | | | (8,952 | ) | | | (7,591 | ) | | | (1,240 | ) | Accrued expenses and other current liabilities | | | (9,008 | ) | | | 8,149 | | | | 1,330 | | Income tax payable | | | 5,560 | | | | 10,609 | | | | 1,733 | | Long-term payables | | | 1,258 | | | | (443 | ) | | | (72 | ) | | |
|
| | |
|
| | |
|
| | Net cash generated from (used in) operating activities | | | 82,990 | | | | (19,562 | ) | | | (3,197 | ) | | |
|
| | |
|
| | |
|
| | Cash flows from investing activities | | | | | | | | | | | | | Acquisition of property and equipment | | | (18,737 | ) | | | (5,917 | ) | | | (967 | ) | Acquisition of intangible assets | | | (115 | ) | | | (234 | ) | | | (38 | ) | Restricted cash | | | (10,995 | ) | | | (144,688 | ) | | | (23,642 | ) | Short-term investments | | | 4,000 | | | | - | | | | - | | Change in amounts due from related parties | | | (87,793 | ) | | | 141,521 | | | | 23,125 | | Proceeds from disposal of property and equipment | | | 43 | | | | - | | | | - | | | |
|
| | |
|
| | |
|
| | Net cash used in investing activities | | | (113,597 | ) | | | (9,318 | ) | | | (1,522 | ) | | |
|
| | |
|
| | |
|
| | Cash flows from financing activities | | | | | | | | | | | | | Proceeds from short-term loans | | | - | | | | 149,805 | | | | 24,478 | | Repayment of short-term loans | | | - | | | | (3,184 | ) | | | (520 | ) | Proceeds from issuance of ordinary shares | | | 43,006 | | | | - | | | | - | | Repurchase of ordinary shares | | | (39,351 | ) | | | - | | | | - | | Payment for initial public offering expenses | | | (2,055 | ) | | | - | | | | - | | Payment of dividends | | | - | | | | (100,000 | ) | | | (16,340 | ) | | |
|
| | |
|
| | |
|
| | Net cash generated from financing activities | | | 1,600 | | | | 46,621 | | | | 7,618 | | | |
|
| | |
|
| | |
|
| | Net increase (decrease) in cash and cash equivalents | | | (29,007 | ) | | | 17,741 | | | | 2,899 | | Cash and cash equivalents at beginning of the period | | | 63,930 | | | | 31,555 | | | | 5,156 | | | |
|
| | |
|
| | |
|
| | Cash and cash equivalents at end of the period | | | 34,923 | | | | 49,296 | | | | 8,055 | | | |
|
| | |
|
| | |
|
| |
F-46
Table of Contents500WAN.COM LIMITED NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”), except for number of shares and per share data)
1. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
Basis of presentation The accompanying unaudited interim condensed consolidated financial statements include the financial statements of the Company, its subsidiaries and variable interest entities (“VIEs”). The Company, its subsidiaries and VIEs are hereinafter collectively referred to as the “Group”. These unaudited interim condensed consolidated financial statements of the Group have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) for interim financial information using accounting policies that are consistent with those used in the preparation of the Group’s audited consolidated financial statements for the year ended December 31, 2012. In the opinion of management, the accompanying unaudited interim condensed consolidated financial statements contain all normal recurring adjustments necessary to present fairly the financial position, operating results and cash flows of the Group for each of the periods presented. The results of operations for the nine months ended September 30, 2013 are not necessarily indicative of results to be expected for any other interim period or the full year of 2013 due in part to the seasonality of the Group’s business. The expenditures on sports lotteries are affected by the seasonality of sports events. The consolidated balance sheet as of December 31, 2012 was derived from the audited consolidated financial statements at that date but does not include all of the disclosures required by U.S. GAAP for complete financial statements. These unaudited interim condensed consolidated financial statements should be read in conjunction with the Group’s consolidated financial statements and related notes for the year ended December 31, 2012. To comply with PRC laws and regulations, which prohibit or restrict foreign ownership of internet businesses, the Group operates its websites and provides online lottery purchase services in the PRC through VIEs. The Company has entered into exclusive business cooperation agreements, power of attorney, equity interest pledge agreements, exclusive option agreements, financial support agreements and supplementary agreements to the exclusive option agreements (previously named as exclusive technical consulting and service agreements, power of attorney, equity pledge agreements, equity interest disposal agreements, financial support agreements, business operation agreements and intellectual properties license before June 1, 2011) (the “Contractual Arrangements”), with the VIEs through E-Sun Sky Computer (Shenzhen) Co., Ltd. (“E-Sun Sky Computer”), which obligate E-Sun Sky Computer to absorb a majority of the expected losses from the activities of the VIEs’ activities, and entitles E-Sun Sky Computer to receive a majority of residual returns from the VIEs. Through these aforementioned agreements, the Company maintains the ability to approve decisions made by the VIEs, and ability to acquire the equity interests in the VIEs when permitted by the PRC laws via E-Sun Sky Computer. As a result of the Contractual Arrangements, the Company consolidates the VIEs as required by Accounting Standards Codification (“ASC”) subtopic 810-10, Consolidation: Overall. Effective on January 1, 2010, the Company is required to continue to consolidate the VIEs through E-Sun Sky Computer under the new guidance in ASU 2009-17 because the Company has determined that 1) E-Sun Sky Computer is most closely associated with the VIEs and the subsidiary of Shenzhen E-Sun Network Co., Ltd. (“E-Sun Network”) among the members of the related party group who share the power to direct the activities of the VIEs that most significantly impact their economic performance, and 2) has the obligation to absorb losses or the right to receive benefits of the VIEs that could potentially be significant to the VIEs. F-47
Table of Contents500WAN.COM LIMITED NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”), except for number of shares and per share data) 1. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) |
Basis of presentation (continued) The carrying amounts of the assets, liabilities and the results of operations of the VIEs included in the Company’s unaudited interim condensed consolidated balance sheets and statements of comprehensive income are as follows:
| | | | | | | | | | | | | | | | December 31,
2012 | | | September 30,
2013 | | | September 30,
2013 | | | | | RMB | | | RMB | | | US$ | | | | | | | | (unaudited) | | | (unaudited) | | ASSETS | | | | | | | | | | | | | Current assets: | | | | | | | | | | | | | Cash and cash equivalents | | | 16,392 | | | | 14,650 | | | | 2,394 | | Restricted cash | | | 10,609 | | | | 16,390 | | | | 2,678 | | Accounts receivable | | | 13,531 | | | | 42,719 | | | | 6,980 | | Accounts receivable due from employees | | | 225 | | | | 41 | | | | 7 | | Amounts due from related parties | | | 169,273 | | | | 126,768 | | | | 20,714 | | Prepayments and other current assets | | | 67,759 | | | | 96,839 | | | | 15,825 | | Deferred tax assets, current portion | | | 6,498 | | | | 17,129 | | | | 2,799 | | | |
|
| | |
|
| | |
|
| | Total current assets | | | 284,287 | | | | 314,536 | | | | 51,397 | | | |
|
| | |
|
| | |
|
| | | | | | Non-current assets: | | | | | | | | | | | | | Property and equipment, net | | | 30,929 | | | | 28,590 | | | | 4,672 | | Intangible assets, net | | | 1,338 | | | | 1,191 | | | | 195 | | Deposits | | | 5,295 | | | | 5,781 | | | | 945 | | Deferred initial public offering expenses | | | 250 | | | | 250 | | | | 41 | | Deferred tax assets, non-current | | | 841 | | | | 841 | | | | 137 | | Other non-current assets | | | - | | | | 238 | | | | 38 | | | |
|
| | |
|
| | |
|
| | Total non-current assets | | | 38,653 | | | | 36,891 | | | | 6,028 | | | |
|
| | |
|
| | |
|
| | TOTAL ASSETS | | | 322,940 | | | | 351,427 | | | | 57,425 | | | |
|
| | |
|
| | |
|
| | | | | | LIABILITIES | | | | | | | | | | | | | Current liabilities: | | | | | | | | | | | | | Short-term loans | | | - | | | | 14,982 | | | | 2,448 | | Amounts due to a related party | | | 46,322 | | | | 40,705 | | | | 6,651 | | Accrued payroll and welfare payable | | | 7,038 | | | | 2,817 | | | | 460 | | Accrued expenses and other current liabilities | | | 60,239 | | | | 71,405 | | | | 11,669 | | Income tax payable | | | 1,554 | | | | 10,516 | | | | 1,718 | | | |
|
| | |
|
| | |
|
| | Total current liabilities | | | 115,153 | | | | 140,425 | | | | 22,946 | | | |
|
| | |
|
| | |
|
| | | | | | Non-current liabilities: | | | | | | | | | | | | | Long-term payables | | | 11,151 | | | | 10,708 | | | | 1,750 | | | |
|
| | |
|
| | |
|
| | Total non-current liabilities | | | 11,151 | | | | 10,708 | | | | 1,750 | | | |
|
| | |
|
| | |
|
| | TOTAL LIABILITIES | | | 126,304 | | | | 151,133 | | | | 24,696 | | | |
|
| | |
|
| | |
|
| |
F-48
Table of Contents500WAN.COM LIMITED NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”), except for number of shares and per share data) 1. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) |
Basis of presentation (continued)
| | | | | | | | | | | | | | | | For the nine months ended | | | | | September 30,
2012 | | | September 30,
2013 | | | September 30,
2013 | | | | | RMB | | | RMB | | | US$ | | | | | (unaudited) | | | (unaudited) | | | (unaudited) | | Net revenues | | | 84,846 | | | | 111,567 | | | | 18,230 | | Net income | | | 6,980 | | | | 3,417 | | | | 558 | |
There was no pledge or collateralization of the VIEs’ assets. Creditors of the VIEs have no recourse to the general credit of E-Sun Sky Computer, which is the primary beneficiary of the VIEs. In addition, the Company has not provided any financial support to its VIEs as of September 30, 2013. Use of estimates The preparation of the unaudited interim condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities at the balance sheet dates and the reported amounts of revenues and expenses during the reporting periods. Significant estimates and assumptions reflected in the Group’s financial statements include, but are not limited to, revenue recognition, useful lives of property and equipment and intangible assets, realization of deferred tax assets, share-based compensation and consolidation of VIEs. Actual results could materially differ from those estimates. Principles of consolidation The consolidated financial statements of the Group include the financial statements of the Company, its subsidiaries and VIEs in which it has a controlling financial interest. The results of the subsidiaries are consolidated from the date on which the Group obtained control and continue to be consolidated until the date that such control ceases. A controlling financial interest is typically determined when a company holds a majority of the voting equity interest in an entity. However, if the company demonstrates its ability to control the VIEs through its rights to all the residual benefits of the VIEs and its obligation to fund losses of the VIEs then the entity is consolidated. All significant intercompany balances and transactions among the Company, its subsidiaries and VIEs have been eliminated in consolidation. Convenience translation Translations of amounts from Renminbi (“RMB”) into United States dollars for the convenience of the reader were calculated at the noon buying rate of US$1.00 to RMB6.1200 on September 30, 2013 in the city of New York for cable transfers of RMB as certified for customs purposes by the Federal Reserve Bank of New York. No representation is made that the RMB amounts could have been, or could be, converted into United States dollars at such rate. F-49
Table of Contents500WAN.COM LIMITED NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”), except for number of shares and per share data) 1. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) |
Fair value of financial instruments Financial instruments include cash and cash equivalents, restricted cash, accounts receivable, accounts receivable due from employees, amounts due from related parties, other current assets, short-term loans, amounts due to a related party and other current liabilities. The carrying values of these financial instruments approximate their fair values due to their short-term maturities. Restricted cash Restricted cash represents amounts of cash held by a bank which (i) were granted by the government and designated only for the purchase of fixed assets for certain approved projects, (ii) were drawn from short-term loans and designated only for marketing activities, and (iii) were pledged to the financial institutions as collateral for the Company’s bank loan (note 11). Advertising The Company expenses the production costs of advertising upon the first time the advertising takes place. The cost of television airtime is expensed according to when the airtime is used. For the nine months ended September 30, 2012 and 2013, advertising expense was nil and RMB9,002 (US$1,471), respectively. Service development expenses Service development expenses consist primarily of personnel-related expenses incurred for the development of, enhancement to, and maintenance of the Group’s websites that either (i) did not meet the ASC 350-50-25 capitalization criteria; or (ii) met the capitalization criteria but the capitalizable internal costs cannot be separated on a reasonably cost-effective basis between maintenance and relatively minor upgrades and enhancements. Service development expenses are recognized as expenses when incurred. Share-based compensation Share options granted to employees and directors Share options granted to employees and the director are accounted for under ASC 718, Share-Based Payment. In accordance with ASC 718, the Company determines whether a share option should be classified and accounted for as a liability award or an equity award. All grants of share options to employees and the director classified as equity awards, are recognized in the financial statements based on their grant date fair values. There were no liability awards granted during any of the periods stated herein. The Company recognizes compensation expenses using the straight-line method for share options granted with graded vesting based on service conditions. ASC 718 requires forfeitures to be estimated at the time of grant and revised, if necessary, in the subsequent period if actual forfeitures differ from initial estimates. Forfeiture rate is estimated based on historical and future expectation of employee turnover rate and is adjusted to reflect future change in circumstances and facts, if any. Share-based compensation expense is recorded net of estimated forfeitures such that expense was recorded only for those share-based awards that are expected to vest. To the extent the Company revises this estimate in the future, the share-based payments could be materially impacted in the period of revision, as well as in following periods. F-50
Table of Contents500WAN.COM LIMITED NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”), except for number of shares and per share data) 1. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) |
Share-based compensation (continued) Share options granted to employees and directors (continued) The compensation costs associated with a modification of the terms of the award (“modification award”) are recognized if either the original vesting condition or the new vesting condition has been achieved. Such compensation costs cannot be less than the grant-date fair value of the original award. The incremental compensation cost is measured as the excess of the fair value of the modification award over the fair value of the original award at the modification date. Therefore, in relation to the modification award, the Company recognizes share-based compensation over the vesting periods of the new options, which comprises, (1) the amortization of the incremental portion of share-based compensation over the remaining vesting term, and (2) any unrecognized compensation cost of original award, using either the original term or the new term, whichever is higher for each reporting period. Share options granted to non-employees The Company records share-based compensation expense for awards granted to consultants in exchange for services at fair value in accordance with the provisions of ASC 505-50, Equity based payment to non-employees. As the share options granted to non-employees were fully vested on the grant date, the related compensation expense was fully recognized in the consolidated statement of comprehensive income on the grant date. The Company, with the assistance of an independent valuation firm, determined the fair values of the share-based compensation options recognized in the consolidated financial statements. The binomial option pricing model is applied in determining the estimated fair value of the options granted to employees and non-employees. Recently issued accounting standards In July 2013, the FASB issued ASU No. 2013-11, Income Taxes (Topic 740) (“ASU 2013-11”) to provide guidance on the financial statement presentation of an unrecognized tax benefit when a net operating loss carryforward, similar tax loss, or tax credit carryforward exists. This ASU requires an unrecognized tax benefit, or a portion of an unrecognized tax benefit, to be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward, with certain exceptions. The modifications to ASC Topic 740 resulting from the issuance of ASU 2013-11 are effective for fiscal years beginning after December 15, 2013 and interim periods within those years. Early adoption is permitted. The Company will adopt ASU 2013-11 on January 1, 2014. Starting from January 1, 2014, the Company will present unrecognized tax benefit or a portion of an unrecognized tax benefit as deduction of deferred tax assets if applicable. F-51
Table of Contents500WAN.COM LIMITED NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”), except for number of shares and per share data)
Accounts receivable and the related allowance for doubtful accounts are summarized as follows:
| | | | | | | | | | | | | | | | As of
December 31,
2012 | | | As of
September 30,
2013 | | | As of
September 30,
2013 | | | | | RMB | | | RMB | | | US$ | | | | | | | | (unaudited) | | | (unaudited) | | Accounts receivable | | | 22,937 | | | | 49,658 | | | | 8,114 | | Less: Allowance for doubtful accounts | | | - | | | | - | | | | - | | | |
|
| | |
|
| | |
|
| | Accounts receivable, net | | | 22,937 | | | | 49,658 | | | | 8,114 | | | |
|
| | |
|
| | |
|
| |
3. | PREPAYMENTS, OTHER CURRENT ASSETS AND DEPOSITS |
Prepayments and other current assets consist of the following:
| | | | | | | | | | | | | | | | As of
December 31,
2012 | | | As of
September 30,
2013 | | | As of
September 30,
2013 | | | | | RMB | | | RMB | | | US$ | | | | | | | | (unaudited) | | | (unaudited) | | Prepayments | | | 968 | | | | 455 | | | | 74 | | Deposits for future lottery ticket purchase | | | 45,055 | | | | 61,895 | | | | 10,114 | | Receivables from third party payment service providers | | | 5,997 | | | | 10,914 | | | | 1,783 | | Receivables from third parties | | | 1,924 | | | | 363 | | | | 59 | | Receivables from lottery administration centers for winnings | | | 5,960 | | | | 10,344 | | | | 1,690 | | Deferred sponsorship and advertising expenses | | | 6,891 | | | | 8,038 | | | | 1,313 | | Others | | | 1,864 | | | | 5,978 | | | | 978 | | | |
|
| | |
|
| | |
|
| | | | | 68,659 | | | | 97,987 | | | | 16,011 | | | |
|
| | |
|
| | |
|
| |
Deposits consist of the following:
| | | | | | | | | | | | | | | | As of
December 31,
2012 | | | As of
September 30,
2013 | | | As of
September 30,
2012 | | | | | RMB | | | RMB | | | US$ | | | | | | | | (unaudited) | | | (unaudited) | | Deposits for lottery ticket equipments and office leases | | | 5,463 | | | | 5,949 | | | | 972 | | | |
|
| | |
|
| | |
|
| |
Deposits for future lottery ticket purchase represent cash paid in advance by the Group to lottery administration centers for the purchase of lottery tickets. F-52
Table of Contents500WAN.COM LIMITED NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”), except for number of shares and per share data)
4. | PROPERTY AND EQUIPMENT, NET |
Property and equipment consist of the following:
| | | | | | | | | | | | | | | | As of
December 31,
2012 | | | As of
September 30,
2013 | | | As of
September 30,
2012 | | | | | RMB | | | RMB | | | US$ | | | | | | | | (unaudited) | | | (unaudited) | | Electronic and office equipment | | | 18,962 | | | | 21,659 | | | | 3,539 | | Motor vehicles | | | 4,772 | | | | 4,566 | | | | 746 | | Leasehold improvement | | | 27,327 | | | | 25,469 | | | | 4,162 | | | |
|
| | |
|
| | |
|
| | Property and equipment, cost | | | 51,061 | | | | 51,694 | | | | 8,447 | | Less: Accumulated depreciation | | | (12,959 | ) | | | (15,753 | ) | | | (2,574 | ) | | |
|
| | |
|
| | |
|
| | Property and equipment, net | | | 38,102 | | | | 35,941 | | | | 5,873 | | | |
|
| | |
|
| | |
|
| |
Depreciation expenses were approximately RMB3,210 and RMB5,857 (US$957) for the nine months ended September 30, 2012 and 2013, respectively.
Intangible assets consist of the following:
| | | | | | | | | | | | | | | | As of
December 31,
2012 | | | As of
September 30,
2013 | | | As of
September 30,
2013 | | | | | RMB | | | RMB | | | US$ | | | | | | | | (unaudited) | | | (unaudited) | | Cost: | | | | | | | | | | | | | Software | | | 2,168 | | | | 2,402 | | | | 392 | | Domain name | | | 658 | | | | 658 | | | | 108 | | | |
|
| | |
|
| | |
|
| | | | | 2,826 | | | | 3,060 | | | | 500 | | | |
|
| | |
|
| | |
|
| | Accumulated amortization: | | | | | | | | | | | | | Software | | | (427 | ) | | | (838 | ) | | | (137 | ) | Domain name | | | (170 | ) | | | (219 | ) | | | (36 | ) | | |
|
| | |
|
| | |
|
| | | | | (597 | ) | | | (1,057 | ) | | | (173 | ) | | |
|
| | |
|
| | |
|
| | Intangible assets, net | | | 2,229 | | | | 2,003 | | | | 327 | | | |
|
| | |
|
| | |
|
| |
Amortization expenses were approximately RMB232 and RMB460 (US$75) for the nine months ended September 30, 2012 and 2013, respectively. F-53
Table of Contents500WAN.COM LIMITED NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”), except for number of shares and per share data)
6. | ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES |
Accrued expenses and other current liabilities consist of the following:
| | | | | | | | | | | | | | | | As of
December 31,
2012 | | | As of
September 30,
2013 | | | As of
September 30,
2012 | | | | | RMB | | | RMB | | | US$ | | | | | | | | (unaudited) | | | (unaudited) | | Advance from end users | | | 30,505 | | | | 38,812 | | | | 6,342 | | Business tax and other taxes payable | | | 5,396 | | | | 3,459 | | | | 565 | | Deferred government grant | | | 14,702 | | | | 20,163 | | | | 3,295 | | Professional fee payable | | | 4,823 | | | | 1,260 | | | | 206 | | Advertising and sponsorship payable | | | 2,653 | | | | 2,400 | | | | 392 | | Others | | | 8,929 | | | | 7,569 | | | | 1,236 | | | |
|
| | |
|
| | |
|
| | | | | 67,008 | | | | 73,663 | | | | 12,036 | | | |
|
| | |
|
| | |
|
| |
Advance from end users represents 1) payments received by the Group in advance from the end users prior to purchase of lottery tickets, and 2) prize distribution made by the Group to the winning end users’ registered account.
Tax expense For the nine months ended September 30, 2012 and 2013, the Group recognized income tax expenses of RMB11,631 and RMB5,291 (US$865), respectively. The decrease in the income tax expense in the nine months ended September 30, 2013 is mainly due to the change of income tax rate of Shenzhen E-Sun Sky Network Technology Co., Ltd. (“E-sun Sky Network”) from 15% to 10% for 2011 and 2012. In April 2013, E-sun Sky Network was qualified as the “national key software enterprise” and was entitled to a preferential income tax rate of 10% for the years ended December 31, 2011 and 2012. The effect of the change in tax rate of RMB6,366 (US$1,040) was recognized as a discrete event in the current period accordingly. Unrecognized tax positions It is possible that the amount of unrecognized tax benefits will change in the next 12 months, pending factors such as changes in PRC tax law or administrative practices and precedents, or tax authority inquiries. An estimate of the change cannot be reasonably made.
8. | EMPLOYEE DEFINED CONTRIBUTION PLAN |
Employees of the Group in PRC participate in a government mandated defined contribution plan, pursuant to which certain pension benefits, medical care, employee housing fund and other welfare benefits are provided to employees. Chinese labor regulations require that the PRC subsidiaries of the Group make contributions to the government for these benefits based on certain percentages of the employees’ salaries. The Group has no legal obligation for the benefits beyond the contributions made. Such employee benefits, which were expensed as incurred, amounted to approximately RMB4,891 and RMB6,470 (US$1,057) for the nine months ended September 30, 2012 and 2013, respectively. F-54
Table of Contents500WAN.COM LIMITED NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”), except for number of shares and per share data)
On March 28, 2011, the shareholders and board of directors of the Company approved the 2011 Share Incentive Plan (the “Plan”). The Plan provides for the grant of options, restricted shares and other share-based awards. These options were granted with exercise prices denominated in U.S. dollars, which is the functional currency of the Company. The board of directors has authorized under the Plan the issuance of up to 12% of the Company’s issued and outstanding ordinary shares from time to time, on an as-exercised and fully diluted basis, upon exercise of awards granted under the Plan. The maximum term of any issued share option is ten years from the grant date. On June 8, 2012 (the “modification date”), the Company modified the exercise price of both vested and unvested 13,740,000 options that were previously granted to 88 employees, from US$0.4 to US$0.2. The modification was intended to provide additional incentives for these employees. In accordance with ASC 718-20 Compensation—Stock Compensation, the effects of a modification resulted in incremental compensation cost of US$670, which was measured as the excess of the fair value of the modified award of US$3,460 over the fair value of the original award of US$2,790 at the modification date. The total compensation cost measured at modification date was US$2,214, representing the portion of the grant-date fair value of the original award for which the requisite service is expected to be rendered (or has already been rendered) at the modification date of US$1,544 and the incremental compensation cost resulting from the modification of US$670. The incremental compensation cost of US$178 for vested options was recognized immediately at the modification date, while the compensation cost of US$2,036 for unvested options is being amortized on a straight-line basis over the remaining vesting term of the original award. As of September 30, 2013, there was RMB3,294 (US$538) of unrecognized share-based compensation costs related to equity awards granted to employees that is expected to be recognized over a weighted-average vesting period of 1.50 years. To the extent the actual forfeiture rate is different from original estimate, actual share-based compensation costs related to these awards may be different from the expectation. As the share options granted to a director and consultants were fully vested at the grant date, the related compensation expenses were fully recognized in the consolidated statement of comprehensive income at the grant date. The total fair value of the vested equity awards granted to the employees during the nine months ended September 30, 2012 and 2013 were RMB12,612 and RMB11,581 (US$1,892), respectively. F-55
Table of Contents500WAN.COM LIMITED NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”), except for number of shares and per share data) 9. | SHARE-BASED PAYMENT (continued) |
Total share-based compensation expenses relating to options granted to employees for the nine months ended September 30, 2012 and 2013 are included in:
| | | | | | | | | | | | | | | | For the nine months ended | | | | | September 30,
2012 | | | September 30,
2013 | | | September 30,
2013 | | | | | RMB | | | RMB | | | US$ | | | | | (unaudited) | | | (unaudited) | | | (unaudited) | | Cost of services | | | 175 | | | | 74 | | | | 12 | | Sales and marketing | | | 616 | | | | 256 | | | | 42 | | General and administrative | | | 8,772 | | | | 2,114 | | | | 346 | | Service development expenses | | | 1,437 | | | | 577 | | | | 94 | | | |
|
| | |
|
| | |
|
| | | | | 11,000 | | | | 3,021 | | | | 494 | | | |
|
| | |
|
| | |
|
| |
10. | RELATED PARTY TRANSACTIONS |
| | | Name of related parties | | Relationship with the Group | Shenzhen Bozhi Consulting Co., Ltd. | | Entity controlled by the Chairman and Chief Executive Officer of the Company * | Delite Limited | | Shareholder of the Company |
(b) | The Group had the following related party balances at the end of the following periods: |
| | | | | | | | | | | | | | | | As of
December 31,
2012 | | | As of
September 30,
2013 | | | As of
September 30,
2013 | | | | | RMB | | | RMB | | | US$ | | | | | | | | (unaudited) | | | (unaudited) | | Amounts due from related parties: | | | | | | | | | | | | | Shenzhen Bozhi Consulting Co., Ltd. | | | 187,266 | | | | 45,745 | | | | 7,475 | | Delite Limited | | | 976 | | | | 976 | | | | 159 | | | |
|
| | |
|
| | |
|
| | | | | 188,242 | | | | 46,721 | | | | 7,634 | | | |
|
| | |
|
| | |
|
| | Amounts due to a related party: | | | | | | | | | | | | | Delite Limited | | | 8,520 | | | | 8,373 | | | | 1,368 | | | |
|
| | |
|
| | |
|
| | | | | 8,520 | | | | 8,373 | | | | 1,368 | | | |
|
| | |
|
| | |
|
| |
All balances with related parties as of December 31, 2012 and September 30, 2013 were unsecured, non-interest bearing and repayable on demand. The balances with Shenzhen Bozhi Consulting Co., Ltd. as of September 30, 2013 was settled in October 2013. The Company does not plan to enter into any unsecured and non-interest bearing loan transactions upon effectiveness of the IPO. F-56
Table of Contents500WAN.COM LIMITED NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”), except for number of shares and per share data)
On March 29 and June 28, 2013, the Company entered into short-term loan arrangements for an aggregate amount of RMB18,166 (US$2,960) with a financial institution in the PRC, for working capital purposes. The loans have a fixed interest rate of 7.32% per annum and a maturity term of twelve months. The loans are guaranteed by E-sun Sky Computer, Mr. Man San Law and Ms. Ping Yuan (i.e. shareholder). As of September 30, 2013, the amount of RMB3,184 (US$520) has been repaid in cash. In September 2013, the Company entered into a US dollar denominated short-term loan arrangement for an amount of RMB131,639 (US$21,510) with a financial institution in France for general corporate purposes. The short-term loan is secured by HK dollar denominated banks deposits of RMB139,446 (US$22,785) placed with a financial institution in the PRC. These pledged deposits are classified as restricted cash on the interim consolidated balance sheet as of September 30, 2013. The short-term loan bears an interest rate of London InterBank Offered Rate (“LIBOR”) plus 1.9% and is due within 6 months. The loan proceeds were used to pay a dividend to the respective shareholders.
12. | COMMITMENTS AND CONTINGENCIES |
Operating lease commitments Future minimum payments under non-cancelable operating leases of office rent consist of the following as of September 30, 2013:
| | | | | | | | | | | | RMB | | | US$ | | | | | (unaudited) | | | (unaudited) | | 2013 | | | 907 | | | | 148 | | 2014 | | | 2,989 | | | | 488 | | 2015 | | | 2,918 | | | | 477 | | 2016 | | | 2,918 | | | | 477 | | 2017 and thereafter | | | 2,584 | | | | 422 | | | |
|
| | |
|
| | | | | 12,316 | | | | 2,012 | | | |
|
| | |
|
| |
Payments under operating leases are expensed on a straight-line basis over the periods of their respective leases. The Company’s lease arrangements have no renewal options, rent escalation clauses, restrictions or contingent rents and are all conducted with third parties. Income taxes As of September 30, 2013, the Group has recognized approximately RMB10,708 (US$1,750) as an accrual for unrecognized tax positions and related interest and penalties. The final outcome of the tax uncertainty is dependent upon various matters including tax examinations, interpretation of tax laws or expiration of statutes of limitation. However, due to the uncertainties associated with the status of examinations, including the protocols of finalizing audits by the relevant tax authorities, there is a high degree of uncertainty regarding the future cash outflows associated with these tax uncertainties. As of September 30, 2013, the Group classified the RMB10,708 (US$1,750) accrual as a non-current liability. F-57
Table of Contents500WAN.COM LIMITED NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”), except for number of shares and per share data) 12. | COMMITMENTS AND CONTINGENCIES (continued) |
Variable interest entity structure In the opinion of management, (i) the ownership structure of the Company and its VIEs are in compliance with existing PRC laws and regulations; (ii) the contractual arrangements with the VIEs and their shareholders are valid and binding, and will not result in any violation of PRC laws or regulations currently in effect; and (iii) the Group’s business operations are in compliance with existing PRC laws and regulations in all material respects. However, there are substantial uncertainties regarding the interpretation and application of current and future PRC laws and regulations. Accordingly, the Company cannot be assured that PRC regulatory authorities will not ultimately take a contrary view to its opinion. If the current ownership structure of the Group and its contractual arrangements with VIEs are found to be in violation of any existing or future PRC laws and regulations, the Group may be required to restructure its ownership structure and operations in the PRC to comply with the changing and new PRC laws and regulations. In the opinion of management, the likelihood of loss in respect of the Group’s current ownership structure or the contractual arrangements with VIEs is remote based on current facts and circumstances. Contractual Arrangements among E-Sun Sky Computer and the VIEs Under applicable PRC tax laws and regulations, arrangements and transactions among related parties may be subject to audit or scrutiny by the PRC tax authorities within ten years after the taxable year when the arrangements or transactions are conducted. The Company could face material and adverse tax consequences if the PRC tax authorities were to determine that the Contractual Arrangements among E-Sun Sky Computer and the respective VIEs were not entered into on an arm’s-length basis and therefore constituted unfavorable transfer pricing arrangements. Unfavorable transfer pricing arrangements could, among other things, result in an upward adjustment on taxation. In addition, the PRC tax authorities may impose interest on late payments on E-Sun Sky Computer and the respective VIEs for the adjusted but unpaid taxes. In the opinion of management, the likelihood of such an upward adjustment on taxation and related interest is remote based on current facts and circumstances. Commitment on sponsorship Future payments under sponsorship contracts consist of the following as of September 30, 2013:
| | | | | | | | | | | | RMB | | | US$ | | | | | (unaudited) | | | (unaudited) | | 2013 | | | - | | | | - | | 2014 | | | 2,000 | | | | 327 | | | |
|
| | |
|
| | | | | 2,000 | | | | 327 | | | |
|
| | |
|
| |
Payments for sponsorship are expensed on a straight-line basis over the beneficial period. For the nine months ended September 30, 2013, total sponsorship expenses amounted to approximately RMB8,129 (US$1,328). F-58
Table of Contents500WAN.COM LIMITED NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”), except for number of shares and per share data) 12. | COMMITMENTS AND CONTINGENCIES (continued) |
Legal proceedings The Group is currently involved in an arbitration proceeding in relation to a dispute over an online advertising contract, or “Advertising Contract”, entered into in September 2011 between E-Sun Sky Network and Beijing Tianying Chuangzhi Advertising Limited Company, or Tianying Chuangzhi. E-Sun Sky Network ceased to perform the Advertising Contract due to Tianying Chuangzhi’s failure to meet certain performance targets as set forth in the Advertising Contract. In June 2013, Tianying Chuangzhi instituted the said arbitration before Beijing Arbitration Commission, claiming for the payment of RMB3,320 (US$542) and other arbitration expenses. The Group lodged a counterclaim in July 2013, counterclaiming for a refund of RMB786 (US$128), other reasonable out-of-pocket expenses and arbitration expenses. The arbitration application filed by Tianying Chuangzhi was accepted by the Beijing Arbitration Commission on June 27, 2013 and the Group’s counterclaim application was accepted by the Beijing Arbitration Commission on July 25, 2013. The Group is in the process of exchanging evidence. The Group believe the result of the arbitration may not be in their favor and accrued the contingent liability in the amount of RMB2,400 (US$392) accordingly.
Basic and diluted earnings per share for each of the periods presented are calculated as follows:
| | | | | | | | | | | | | | | | For the nine months ended | | | | | September 30,
2012 | | | September 30,
2013 | | | September 30,
2013 | | | | | RMB | | | RMB | | | US$ | | | | | (unaudited) | | | (unaudited) | | | (unaudited) | | Numerator: | | | | | | | | | | | | | Net income attributable to ordinary shareholders for computing earnings per share – basic and diluted | | | 10,458 | | | | 20,598 | | | | 3,365 | | | |
|
| | |
|
| | |
|
| | Denominator: | | | | | | | | | | | | | Weighted average ordinary shares outstanding used in calculating basic earnings per share | | | 229,578,439 | | | | 228,768,220 | | | | 228,768,220 | | Share options | | | 4,647,813 | | | | 17,536,696 | | | | 17,536,696 | | | |
|
| | |
|
| | |
|
| | Weighted average ordinary shares outstanding used in calculating diluted earnings per share | | | 234,226,252 | | | | 246,304,916 | | | | 246,304,916 | | | |
|
| | |
|
| | |
|
| | Earnings per share: | | | | | | | | | | | | | Basic | | | 0.05 | | | | 0.09 | | | | 0.01 | | | |
|
| | |
|
| | |
|
| | Diluted | | | 0.04 | | | | 0.08 | | | | 0.01 | | | |
|
| | |
|
| | |
|
| |
In accordance with ASC 280-10 Segment Reporting: Overall, the Group’s chief operating decision maker has been identified as the chief executive officer, who makes resource allocation decisions and assesses performance based on the Group’s consolidated results. As a result, the Group has only one reportable segment. F-59
Table of Contents500WAN.COM LIMITED NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”), except for number of shares and per share data) 14. | SEGMENT REPORTING (continued) |
Geographic disclosures As the Group generates substantially all of its revenues from customers domiciled in the PRC, no geographical segments are presented. All of the Group’s long-lived assets are located in the PRC.
Subsequent events were evaluated through to October 22, 2013, the date the financial statements were issued. Change of company name In October 2013, the Company changed its name from 500wan.com Limited to 500.com Limited. Short-term loan In October 2013, the Company entered into a US dollar denominated short-term loan arrangement for an amount of RMB53,575 (US$8,754) with a financial institution in France for general corporate purposes. The short-term loan is secured by HK dollar denominated banks deposits of RMB57,654 (US$9,421) placed with a financial institution in the PRC. The short-term loan bears an interest rate of London InterBank Offered Rate (“LIBOR”) plus 2.0% and is due within 6 months. The loan proceeds were used to pay a dividend to the respective shareholders. Convertible note In October 2013, pursuant to a convertible note purchase agreement, the Company issued a convertible note due June 30, 2014 in the aggregate principal amount of US$20,000 to Sequoia Capital 2010 CGF Holdco, Ltd., or Sequoia. The convertible note bear interest at 10% per annum, uncompounded and computed on the basis of the actual number of days elapsed, or 13% per annum upon an event of default, uncompounded and computed on the basis of the actual number of days elapsed. Automatic conversion The convertible note will be automatically converted into the number of Class B ordinary shares equivalent to the outstanding amount of the convertible note divided by the applicable conversion price immediately upon the completion of the Company’s initial public offering. The applicable conversion price is equal to 80% of the per share issuance price of the Class A ordinary share issued for the Company’s initial public offering. In the event of automatic conversion triggered by the initial public offering, the convertible note shall be deemed interest free between the date of issuance and the date of conversion. Sequoia concurrent private investment In conjunction with, and subject to, the completion of this offering, Sequoia agreed to purchase from the Company the Class B ordinary shares, at a price per share equal to the per share issuance price of Class A ordinary share issued for the Company’s initial public offering, for the aggregate amount of US$15,000. Issuance of share options In October 2013, the Company granted 2,660,000 share options to employees with an exercise price of US$0.40 per share, under the Plan. For these awards, 600,000 options will be vested on 180 days after the grant date, 1,620,000 options will be vested upon the first anniversary of the grant date, 220,000 options will be vested upon the second anniversary of the grant date, and 220,000 options will be vested upon the third anniversary of the grant date. These options have a contractual term of ten years. F-60
Table of Contents500WAN.COM LIMITED NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”), except for number of shares and per share data)
16. | PRO-FORMA EARNINGS PER SHARE FOR DISTRIBUTION OF DIVIDENDS |
On December 6, 2012, the Company declared a distribution of dividends. The unaudited pro-forma earnings per share (basic and diluted) for the nine months ended September 30, 2013 after giving effect to the issuance of 10,778,909 Class A ordinary shares on January 1, 2012 at the public offering price of US$1.30 per share to pay RMB85.8 million dividend declared in excess of net income of RMB4.2 million for the year ended December 31, 2012 are calculated as follows:
| | | | | | | | | | | | For the nine months ended | | | | | September 30,
2013 | | | September 30,
2013 | | | | | RMB | | | US$ | | | | | (unaudited) | | | (unaudited) | | Numerator: | | | | | | | | | Net income attributable to ordinary shareholders for computing earnings per share – basic and diluted | | | 20,598 | | | | 3,365 | | | |
|
| | |
|
| | Denominator: | | | | | | | | | Weighted average ordinary shares outstanding used in calculating basic earnings per share | | | 228,768,220 | | | | 228,768,220 | | Pro-forma effect of dividends | | | 10,778,909 | | | | 10,778,909 | | | |
|
| | |
|
| | Pro-forma weighted average ordinary shares outstanding used in calculating basic earnings per share | | | 239,547,129 | | | | 239,547,129 | | Share options | | | 17,536,696 | | | | 17,536,696 | | | |
|
| | |
|
| | Pro-forma weighted average ordinary shares outstanding used in calculating diluted earnings per share | | | 257,083,825 | | | | 257,083,825 | | | |
|
| | |
|
| | Pro-forma earnings per share: | | | | | | | | | Basic | | | 0.09 | | | | 0.01 | | | |
|
| | |
|
| | Diluted | | | 0.08 | | | | 0.01 | | | |
|
| | |
|
| |
F-61
Table of Contents
5,786,000 American Depositary Shares 500.com Limited Representing 57,860,000 Class A Ordinary Shares
| | | | | Piper Jaffray | | | | Oppenheimer & Co. |
Prospectus dated November 21, 2013
|
张立立立@张大峰
楼主
