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SECURITIES AND EXCHANGE COMMISSION
o | REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934 |
or |
þ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
or |
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
or |
o | SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Date of event requiring this shell company report: . |
(Translation of Registrant’s name into English)
(Jurisdiction of incorporation or organization)
Zhang Jiang Hi-Tech Park
Pudong New Area, Pudong
Shanghai 201203
People’s Republic of China
(Address of principal executive offices)
Tel: +86-21-5172-9999
Facsimile number: +86-21-5172-9903
Building No. 3, 690 Bibo Road
Zhang Jiang Hi-Tech Park
Pudong New Area, Pudong
Shanghai 201203
People’s Republic of China
(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)
American Depositary Shares, each representing one ordinary share, par value
US$0.01 per share, Nasdaq Global Market
NONE
(Title of Class)
NONE
(Title of Class)
o Large accelerated filer | þ Accelerated filer | o Non-accelerated filer |
þ U.S. GAAP | o International Financial Reporting Standards as issued | o Other | ||
by the International Accounting Standards Board |
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EX-8.1 | ||||||||
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EX-15.2 | ||||||||
EX-15.3 | ||||||||
EX-15.4 |
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ITEM 1. | IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS |
ITEM 2. | OFFER STATISTICS AND EXPECTED TIMETABLE |
ITEM 3. | KEY INFORMATION |
A. | Selected Financial Data |
For the Year Ended December 31, | ||||||||||||||||||||||||
2006 | 2007 | 2008 | 2009 | 2010 | 2010 | |||||||||||||||||||
RMB | RMB | RMB | RMB | RMB | US$(1) | |||||||||||||||||||
(in thousands, except for per share and per ADS data) | ||||||||||||||||||||||||
Consolidated Statement of Operation Data: | ||||||||||||||||||||||||
Revenues | 1,038,328 | 1,350,129 | 1,806,130 | 802,629 | 108,514 | 16,441 | ||||||||||||||||||
Sales taxes | (52,502 | ) | (70,522 | ) | (94,639 | ) | (42,113 | ) | (5,676 | ) | (860 | ) | ||||||||||||
Net revenues | 985,826 | 1,279,607 | 1,711,491 | 760,516 | 102,838 | 15,581 | ||||||||||||||||||
Cost of services | (524,032 | ) | (700,047 | ) | (997,949 | ) | (712,473 | ) | (103,257 | ) | (15,645 | ) | ||||||||||||
Gross profit (loss) | 461,794 | 579,560 | 713,542 | 48,043 | (419 | ) | (64 | ) | ||||||||||||||||
Operating expenses | (191,639 | ) | (343,695 | ) | (578,993 | ) | (530,884 | ) | (353,365 | ) | (53,540 | ) | ||||||||||||
Profit (loss) from operations | 270,155 | 235,865 | 134,549 | (482,841 | ) | (353,784 | ) | (53,604 | ) | |||||||||||||||
Interest income | 9,136 | 50,656 | 56,691 | 30,501 | 23,183 | 3,513 | ||||||||||||||||||
Other income (expense), net | 28,417 | (30,054 | ) | (18,967 | ) | 61,840 | 19,259 | 2,918 | ||||||||||||||||
Income (loss) before income tax (expense) benefit, gain on investment disposal, impairment loss on investments and share of loss in equity investments | 307,708 | 256,467 | 172,273 | (390,500 | ) | (311,342 | ) | (47,173 | ) | |||||||||||||||
Income tax (expense) benefit | 2,670 | (9,269 | ) | (47,929 | ) | 5,536 | (7,368 | ) | (1,116 | ) | ||||||||||||||
Income (loss) before gain on investment disposal, impairment loss on investments and share of loss in equity investments | 310,378 | 247,198 | 124,344 | (384,964 | ) | (318,710 | ) | (48,289 | ) | |||||||||||||||
Gain on investment disposal | 23,409 | — | — | — | 6,828 | 1,034 | ||||||||||||||||||
Impairment loss on investments | (20,402 | ) | (627 | ) | (25,922 | ) | (22,412 | ) | (196,116 | ) | (29,715 | ) | ||||||||||||
Share of loss in equity investments, net of taxes | (908 | ) | (5,679 | ) | (2,241 | ) | (2,556 | ) | (10,713 | ) | (1,623 | ) | ||||||||||||
Net income (loss) | 312,477 | 240,892 | 96,181 | (409,932 | ) | (518,711 | ) | (78,593 | ) | |||||||||||||||
Less: Net income (loss) attributable to noncontrolling interest(2) | — | — | (655 | ) | (4,780 | ) | (19,099 | ) | (2,894 | ) | ||||||||||||||
Net income (loss) attributable to holders of ordinary shares | 312,477 | 240,892 | 96,836 | (405,152 | ) | (499,612 | ) | (75,699 | ) | |||||||||||||||
Net income (loss) attributable to holders of ordinary shares per share | ||||||||||||||||||||||||
— Basic | 12.78 | 8.79 | 3.50 | (15.94 | ) | (19.89 | ) | (3.01 | ) | |||||||||||||||
— Diluted | 12.72 | 8.72 | 3.50 | (15.94 | ) | (19.89 | ) | (3.01 | ) | |||||||||||||||
Net income (loss) attributable to holders of ordinary shares per ADS(3) | ||||||||||||||||||||||||
— Basic | 12.78 | 8.79 | 3.50 | (15.94 | ) | (19.89 | ) | (3.01 | ) | |||||||||||||||
— Diluted | 12.72 | 8.72 | 3.50 | (15.94 | ) | (19.89 | ) | (3.01 | ) |
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As of December 31, | ||||||||||||||||||||||||
2006 | 2007 | 2008 | 2009 | 2010 | 2010 | |||||||||||||||||||
RMB | RMB | RMB | RMB | RMB | US$(1) | |||||||||||||||||||
(in thousands, except for per share and per ADS data) | ||||||||||||||||||||||||
Consolidated Balance Sheet Data: | ||||||||||||||||||||||||
Cash and cash equivalents | 937,846 | 2,215,282 | 2,152,586 | 1,675,081 | 1,416,189 | 214,574 | ||||||||||||||||||
Non-current assets | 537,492 | 831,342 | 769,023 | 522,161 | 295,886 | 44,831 | ||||||||||||||||||
Total assets | 1,624,585 | 3,246,101 | 3,263,009 | 2,324,958 | 1,857,339 | 281,415 | ||||||||||||||||||
Total current liabilities | 288,427 | 440,011 | 543,767 | 311,508 | 316,319 | 47,927 | ||||||||||||||||||
Total equity | 1,336,158 | 2,806,090 | 2,719,242 | 2,013,450 | 1,535,217 | 232,609 | ||||||||||||||||||
Total liabilities and equity | 1,624,585 | 3,246,101 | 3,263,009 | 2,324,958 | 1,857,339 | 281,415 |
(1) | Translation from RMB amounts into U.S. dollars was made at a rate of RMB6.6000 to US$1.00. See “— Exchange Rate Information.” | |
(2) | We adopted authoritative guidance regarding accounting for noncontrolling interests on January 1, 2009, retrospectively. | |
(3) | Each ADS represents one ordinary share. |
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Noon Buying Rate | ||||||||||||||||
Period | ||||||||||||||||
Period | End | Average(1) | Low | High | ||||||||||||
2006 | 7.8041 | 7.9579 | 8.0702 | 7.8041 | ||||||||||||
2007 | 7.2946 | 7.5806 | 7.8127 | 7.2946 | ||||||||||||
2008 | 6.8225 | 6.9193 | 7.2946 | 6.7800 | ||||||||||||
2009 | 6.8259 | 6.8295 | 6.8470 | 6.8176 | ||||||||||||
2010 | 6.6000 | 6.7603 | 6.8330 | 6.6000 | ||||||||||||
October | 6.6707 | 6.6678 | 6.6912 | 6.6397 | ||||||||||||
November | 6.6670 | 6.6538 | 6.6892 | 6.6330 | ||||||||||||
December | 6.6000 | 6.6497 | 6.6745 | 6.6000 | ||||||||||||
2011 | ||||||||||||||||
January | 6.6017 | 6.5964 | 6.6364 | 6.5809 | ||||||||||||
February | 6.5713 | 6.5761 | 6.5965 | 6.5520 | ||||||||||||
March | 6.5483 | 6.5645 | 6.5743 | 6.5483 | ||||||||||||
April (through April 1) | 6.5477 | 6.5477 | 6.5477 | 6.5477 |
(1) | Annual averages are calculated from month-end rates. Monthly averages are calculated using the average of the daily rates during the relevant period. |
B. | Capitalization and Indebtedness |
C. | Reasons for the Offer and Use of Proceeds |
D. | Risk Factors |
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• | the popularity of new online games that we operate; |
• | the introduction of new online games competing with or replacing our existing online games; |
• | general economic conditions, particularly economic conditions adversely affecting discretionary consumer spending; |
• | changes in customer tastes and preferences; |
• | the availability of other forms of entertainment; |
• | critical reviews and public tastes and preferences, all of which change rapidly and cannot be predicted; and |
• | the acceptance by customers of the purchase of in-game items. |
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• | actual or anticipated fluctuations in our quarterly operating results; |
• | announcements of new games by us or our competitors; |
• | changes in financial estimates by securities analysts; |
• | price fluctuations of publicly traded securities of other China-based companies engaging in Internet-related services or other similar businesses; |
• | conditions in the Internet or online game industries; |
• | changes in the economic performance or market valuations of other Internet or online game companies; |
• | announcements by us or our competitors of significant acquisitions, strategic partnerships, joint ventures or capital commitments; |
• | fluctuations in the exchange rates between the U.S. dollar and the RMB; |
• | addition or departure of key personnel; and |
• | pending and potential litigation. |
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ITEM 4. | INFORMATION ON THE COMPANY |
A. | History and Development of the Company |
• | Shanghai IT, which holds Internet content provision, Internet culture operation and Internet publishing licenses; |
• | Shanghai Jiucheng Advertisement, whose business license permits it to conduct advertisement operations. |
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B. | Business Overview |
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• | sophisticated 2D, 2.5D or 3D graphics which expose players to captivating screen scenes; |
• | player upgrading system which allows players to attain higher game attributes with their characters as they develop experience and enhanced game capabilities over time; and |
• | instant messaging system which allows players to communicate with each other during the game and form groups with other players, thereby coordinating their game skills to achieve collective objectives. |
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Game | Developer/Licensor | Description | Status | |||
SUN | Webzen, Inc. | 3D MMORPG | Commercially launched in China in May 2007 | |||
EA Sports™ FIFA Online 2 | EA Swiss Sàrl | Casual soccer game | Commercially launched in China in May 2009 | |||
Atlantica | Ndoors Corporation | 3D MMORPG | Commercially launched in China in June 2009 | |||
World of Fighter | The9 | 2D MMORPG | Commercially launched in China in January 2010 | |||
Kingdom Heroes 2 Online | USERJOY Technology Co., Ltd. | 3D MMORPG | Commercially launched in China in May 2010 | |||
Winning Goal | The9 | Web and SNS game | Commercially launched in China in July 2010 | |||
ShenXianZhuan | Hangzhou Fire Rain Network Technology Co., Ltd. | 2.5D MMORPG | Preparing for beta testing | |||
Planetside 2 | Sony Online Entertainment LLC | 3D MMOFPS game | In localization process | |||
Free Realms | Sony Online Entertainment LLC | 3D cartoon fairy online game | In localization process | |||
Seoyugi | NNG Lab/ CJ Internet Corporation | 2D MMORPG | In localization process |
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• | servers and network devices located in eleven internet data centers throughout China as of the end of December 2010; |
• | proprietary software, including game monitor tools, that are integrated with our websites and customer service center operations; and |
• | hardware platform and server sites primarily consisting of Lenovo, Hewlett-Packard/Compaq, Dell and IBM servers; EMC, HP and Cisco storage systems; and H3C network equipments. |
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• | Telecommunications Regulations (2000); |
• | The Administrative Rules for Foreign Investments in Telecommunications Enterprises (2001), as amended in 2008; |
• | The Administrative Measures for Telecommunications Business Operating License (2009); |
• | The Internet Information Services Administrative Measures (2000); |
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• | The Tentative Measures for Administration of Internet Culture (2003), as amended and reissued in 2011; |
• | The Notice on Several Issues Relating to the Implementation of The Tentative Measures for Administration of Internet Culture (2003); |
• | The Tentative Measures for Administration of Internet Publication (2002); |
• | The Tentative Measures for Administration of Online Games (2010); and |
• | The Foreign Investment Industrial Guidance Catalogue (2007). |
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• | Foreign Exchange Administration Rules (1996), as amended, or the Exchange Rules; and |
• | Administration Rules of the Settlement, Sale and Payment of Foreign Exchange (1996), or the Administration Rules. |
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• | The Foreign Investment Enterprise Law (1986), as amended; and |
• | Administrative Rules under the Foreign Investment Enterprise Law (2001). |
• | prior to establishing or assuming control of an offshore company for the purposes of financing that offshore company with assets or equity interests in an onshore enterprise in the PRC, each PRC resident must complete the overseas investment foreign exchange registration procedures with the local SAFE branch; |
• | an amendment to the registration with the local SAFE branch is required to be filed by any PRC resident that directly or indirectly holds interests in that offshore company upon either (1) the injection of equity interests or assets of an onshore enterprise in the offshore company, or (2) the completion of any overseas fundraising by such offshore company; and |
• | an amendment to the registration with the local SAFE branch is also required to be filed by such PRC resident when there is any material change involving a change in the capital of the offshore company. |
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C. | Organizational Structure |
![(STRUCTURE PLAN)](https://capedge.com/proxy/20-F/0000950123-11-033777/c15005p1500501.gif)
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D. | Property, Plant and Equipment |
ITEM 4A. | UNRESOLVED STAFF COMMENTS |
ITEM 5. | OPERATING AND FINANCIAL REVIEW AND PROSPECTS |
A. | Overview |
• | our revenue composition and sources of revenue; |
• | our cost of services; and |
• | our operating expenses. |
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For the Year Ended December 31, | ||||||||||||||||||||||||||||
2008 | 2009 | 2010 | ||||||||||||||||||||||||||
RMB | % | RMB | % | RMB | US$ | % | ||||||||||||||||||||||
(in thousands, except percentages) | ||||||||||||||||||||||||||||
Revenues: | ||||||||||||||||||||||||||||
Online game operation | 1,800,313 | 99.7 | 795,477 | 99.1 | 101,815 | 15,426 | 93.8 | |||||||||||||||||||||
Other revenues | 5,817 | 0.3 | 7,152 | 0.9 | 6,699 | 1,015 | 6.2 | |||||||||||||||||||||
Total revenues | 1,806,130 | 100.0 | 802,629 | 100.0 | 108,514 | 16,441 | 100.0 | |||||||||||||||||||||
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• | A provision on a receivable amounting to RMB18.0 million from a customer that purchased WoW prepaid player cards from the company for distribution, as a result of the expiration of the WoW license on June 7, 2009 and, among other things, the impact on the ongoing relationship with the customer; |
• | A RMB3.9 million provision for prepaid royalties; |
• | A RMB22.7 million charge to increase the valuation allowance for deferred tax assets, which represented incremental income taxes as a result of non-renewal of the WoW license prior to the evaluation and recording of impairment charges as a result of the non-renewal of the WoW license; |
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• | RMB68.4 million of additional depreciation expense related to computer equipment to reflect the change to a shorter expected useful life of the underlying assets due to non-renewal of the WoW license agreement; |
• | A RMB46.5 million provision for prepayment for equipment and a RMB8.7 million provision on advances to suppliers mainly related to a vendor which had been the primary supplier of computer servers and related computer equipment. With the non-renewal of the WoW license, we evaluated a number of factors, including the status of production of the assets underlying the advance prepayments, our ability to recover the value of the advances through the possible sale of the fixed assets upon the completion of production, the ability to utilize the servers upon completion of production, as well as our ability to recover the amounts advanced to the vendor and as a result of such assessment, and concluded that a full provision in connection with such advances and prepayments was necessary; |
• | RMB7.0 million provisions on receivable and prepayments and other current assets in connection with Game First International Corporation, or GFD, comprising: (i) a RMB5.6 million provision on prepayments and other current assets. We assessed the impact of non-renewal of the WoW license on its ongoing relationship with GFD and the resulting collectability of this receivable, and concluded collection to be unlikely; and (ii) a RMB1.4 million provision on accounts receivable; and |
• | A RMB1.7 million provision on inventories. |
• | A RMB103.2 million provision for royalty prepayments including withholding taxes that were paid in 2009 but not consumed prior to the expiration of the WoW license on June 7, 2009; |
• | RMB40.0 million of additional depreciation expense related to computer equipment to reflect the change to a shorter expected useful life of the underlying assets due to the non-renewal of the WoW license agreement; |
• | A RMB30.2 million impairment for goodwill which was deemed recoverable as of December 31, 2008 based on our company’s impairment test that includes the operating cash flow generated from WoW operation during the period from January 1 to June 6, 2009, but was no longer recoverable following the expiration of the WoW license on June 7, 2009; and |
• | A RMB22.1 million provision for additional cost of services related to the refund of point cards, which is the difference between the face value of the point cards and the net proceeds our company received in the sales of the respective point cards. |
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Year Ended December 31, | ||||||||||||
2008 | 2009 | 2010 | ||||||||||
% | % | % | ||||||||||
Revenues: | ||||||||||||
Online game services | 105.2 | 104.6 | 99.0 | |||||||||
Other revenues | 0.3 | 0.9 | 6.5 | |||||||||
Sales taxes | (5.5 | ) | (5.5 | ) | (5.5 | ) | ||||||
Net revenues | 100.0 | 100.0 | 100.0 | |||||||||
Cost of services | (58.3 | ) | (93.7 | ) | (100.4 | ) | ||||||
Gross profit (loss) | 41.7 | 6.3 | (0.4 | ) | ||||||||
Operating expenses: | ||||||||||||
Product development | (4.3 | ) | (15.0 | ) | (135.6 | ) | ||||||
Sales and marketing | (6.1 | ) | (14.8 | ) | (61.5 | ) | ||||||
General and administrative | (18.7 | ) | (29.6 | ) | (109.6 | ) | ||||||
Impairment of equipment, intangible assets and goodwill | (4.8 | ) | (10.4 | ) | (36.9 | ) | ||||||
Total operating expenses | (33.8 | ) | (69.8 | ) | (343.6 | ) | ||||||
Profit (loss) from operations | 7.9 | (63.5 | ) | (344.0 | ) | |||||||
Interest income | 3.3 | 4.0 | 22.5 | |||||||||
Other (expenses) income, net | (1.1 | ) | 8.1 | 18.8 | ||||||||
Income tax (expenses) benefit | (2.8 | ) | 0.7 | (7.2 | ) | |||||||
Gain on investment disposal | — | — | 6.6 | |||||||||
Impairment loss on investments | (1.5 | ) | (2.9 | ) | (190.7 | ) | ||||||
Share of loss in equity investments, net of taxes | (0.1 | ) | (0.3 | ) | (10.4 | ) | ||||||
Net income (loss) | 5.6 | (53.9 | ) | (504.4 | ) | |||||||
Net loss attributable to noncontrolling interest | * | (0.6 | ) | (18.6 | ) | |||||||
Net Income (loss) attributable to holders of ordinary shares | 5.7 | (53.3 | ) | (485.8 | ) | |||||||
* | Less than 0.1% |
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B. | Liquidity and Capital Resources |
Year Ended December 31, | ||||||||||||||||
2008 | 2009 | 2010 | ||||||||||||||
RMB | RMB | RMB | US$ | |||||||||||||
(in thousands) | ||||||||||||||||
Net cash provided by (used in) operating activities | 692,634 | (106,086 | ) | (247,552 | ) | (37,508 | ) | |||||||||
Net cash used in investing activities | (487,513 | ) | (16,276 | ) | (7,114 | ) | (1,078 | ) | ||||||||
Net cash provided by (used in) financing activities | (235,734 | ) | (356,548 | ) | (507 | ) | (77 | ) | ||||||||
Effect of foreign exchange rate changes on cash | (32,084 | ) | 1,405 | (3,719 | ) | (563 | ) | |||||||||
Net increase (decrease) in cash and cash equivalents | (62,696 | ) | (477,505 | ) | (258,892 | ) | (39,226 | ) | ||||||||
Cash and cash equivalents at beginning of year | 2,215,282 | 2,152,586 | 1,675,081 | 253,800 | ||||||||||||
Cash and cash equivalents at end of year | 2,152,586 | 1,675,081 | 1,416,189 | 214,574 |
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C. | Research and Development |
D. | Trend Information |
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E. | Off-Balance Sheet Arrangements |
F. | Contractual Obligations |
Payment Due by Period | ||||||||||||||||||||
Less than | More than | |||||||||||||||||||
Total | 1 year | 1-2 years | 3-5 years | 5 years | ||||||||||||||||
(in RMB) | ||||||||||||||||||||
Operating Lease Obligations | 11,200,749 | 8,009,544 | 1,729,965 | 1,461,240 | — |
G. | Recent Accounting Pronouncements |
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H. | Safe Harbor |
• | our ability to successfully launch and operate additional online games licensed by us in China; |
• | our ability to license, develop or acquire additional online games that are attractive to users; |
• | the maintenance and expansion of our relationships with online game developers, including our existing licensors; |
• | uncertainties in and the timeliness of obtaining necessary governmental approvals and licenses for operating any new online game; |
• | risks inherent in the online game business; |
• | risks associated with our future acquisitions and investments; |
• | our ability to compete successfully against our competitors; |
• | risks associated with our corporate structure and the regulatory environment in China; and |
• | other risks outlined in our filings with the SEC including this annual report on Form 20-F. |
ITEM 6. | DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES |
A. | Directors and Senior Management |
Directors and Executive Officers(1) | Age | Position/Title | ||
Jun Zhu | 44 | Chairman of the Board and Chief Executive Officer | ||
Cheung Kin Au-Yeung | 62 | Director | ||
Davin Alexander Mackenzie(2)(3) | 50 | Independent Director | ||
Chao Y. Wang(2)(3) | 46 | Independent Director | ||
Ka Keung Yeung(2)(3) | 51 | Independent Director | ||
George Lai | 34 | Chief Financial Officer | ||
Swun Woo Park | 37 | Vice President | ||
Chris Shen | 42 | Vice President | ||
Yong Wang | 43 | Vice President |
(1) | Our former president Xiaowei Chen’s employment contract with the company expired on May 16, 2010. Lingdong Huang, our former vice president, resigned on August 20, 2010. Xudong He, our former vice president, resigned on November 30, 2010. Huanxin Jiang, our former vice president, resigned on January 31, 2011. | |
(2) | Member of Compensation Committee. | |
(3) | Member of Audit Committee. |
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B. | Compensation of Directors and Executive Officers |
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Total Number of Ordinary | Exercise | |||||||
Shares Underlying Options | Price Range | |||||||
Granted† | (in US$) | Expiration date | ||||||
Jun Zhu | 1,600,000 | 5.13 | August 27, 2015 | |||||
Yong Wang | * | 5.13-6.07 | August 27, 2015 – December 11, 2015 | |||||
Chris Shen | * | 5.13-7.36 | March 6, 2012 – December 11, 2015 | |||||
Chao Y. Wang | * | 5.13-7.36 | March 6, 2012 – December 11, 2015 | |||||
Ka Keung Yeung | * | 5.13-7.36 | March 6, 2012 – December 11, 2015 | |||||
Davin Alexander Mackenzie | * | 5.13-7.36 | March 6, 2012 – December 11, 2015 | |||||
Cheung Kin Au-Yeung | * | 5.13-7.36 | November 17, 2013 – December 11, 2015 | |||||
Swun Woo Park | * | 5.13-6.07 | August 27, 2015 – December 11, 2015 | |||||
George Lai | * | 5.13-7.36 | November 17, 2013 – December 11, 2015 | |||||
All Directors and Senior Executive Officers as a Group† | 2,685,000 | 5.13-7.36 | March 6, 2012 – December 11, 2015 | |||||
Other Individuals as a Group (other than those listed above) | 1,218,651 | 5.13-30.90 | March 6, 2012 – December 11, 2015 |
† | Excluding 1,746,359 options forfeited as of the date of this annual report pursuant to the terms of our Amended 2004 Stock Option Plan. | |
* | The options held by each of these directors and officers represent less than 1% of our total outstanding shares. |
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C. | Board Practices |
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• | selecting the independent auditors and pre-approving all auditing and non-auditing services permitted to be performed by the independent auditors; |
• | reviewing and approving all proposed related-party transactions; |
• | discussing the annual audited financial statements with management and the independent auditors; |
• | annually reviewing and reassessing the adequacy of our audit committee charter; |
• | meeting separately and periodically with management and the independent auditors; |
• | reporting regularly to the full board of directors; and |
• | such other matters that are specifically delegated to our audit committee by our board of directors from time to time. |
• | reviewing and determining the compensation for our five most senior executives; |
• | reviewing the compensation of our other employees and recommending any proposed changes to the management; |
• | reviewing and approving director and officer indemnification and insurance matters; |
• | reviewing and approving any employee loans in an amount equal to or greater than US$60,000 (or such amount as from time to time announced by the relevant regulatory bodies as requiring the approval of the Committee); and |
• | reviewing periodically and approving any long-term incentive compensation or equity plans, programs or similar arrangements, annual bonuses, employee pensions and welfare benefits plans. |
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D. | Employees |
E. | Share Ownership |
(1) | each of our directors and executive officers who are also our shareholders; and |
(2) | each person known to us to own beneficially more than 5% of our ordinary shares. |
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Ordinary Shares Beneficially Owned | ||||||||
Name | Number(1) | %(2) | ||||||
Directors and executive officers: | ||||||||
Jun Zhu(3) | 6,755,086 | 22.2 | % | |||||
Cheung Kin Au-Yeung | * | * | ||||||
Davin Alexander Mackenzie | * | * | ||||||
Chao Y. Wang | * | * | ||||||
Ka Keung Yeung | * | * | ||||||
George Lai | * | * | ||||||
Swun Woo Park | * | * | ||||||
Chris Shen | * | * | ||||||
Yong Wang | * | * | ||||||
All Directors and Senior Executive Officers as a Group(4) | 7,081,550 | 23.0 | % | |||||
Principal shareholders: | ||||||||
Incsight Limited(5) | 6,399,530 | 21.3 | % | |||||
Bosma Limited(6) | 4,612,522 | 15.6 | % | |||||
CRCM Institutional Master Fund (BVI), Ltd.(7) | 3,100,000 | 10.5 | % | |||||
QVT Financial LP(8) | 1,479,788 | 5.0 | % |
* | Less than 1% of our total outstanding shares. | |
(1) | Beneficial ownership is determined in accordance with the rules of the SEC, and includes voting or investment power with respect to the securities. In computing the number of shares beneficially owned by a person and the percentage ownership of that person, we have included shares that the person has the right to acquire within 60 days of March 10, 2011, including through the exercise of any option, warrant or other right or the conversion of any other security. | |
(2) | Percentage of beneficial ownership is based on 29,512,745 ordinary shares outstanding as of March 10, 2011, as well as the shares underlying share options and warrants exercisable by such person or group within 60 days from March 10, 2011. | |
(3) | Consists of (i) 5,847,334 ordinary shares held by Incsight Limited, a British Virgin Islands company 100% owned by Mr. Zhu, as jointly reported by Incsight Limited and Jun Zhu, (ii) options to purchase 355,556 shares held by Mr. Zhu and (iii) warrants to purchase 552,196 ordinary shares of our company that are also held by Incsight Limited. The business address for Mr. Zhu is Building No. 3, 690 Bibo Road, Zhangjiang Hi-Tech Park, Pudong New Area, Shanghai 201203, People’s Republic of China. | |
(4) | Includes ordinary shares, ordinary shares issuable upon exercise of options and restricted shares, held by all of our directors and executive officers as a group. | |
(5) | Consists of (i) 5,847,334 ordinary shares held by Incsight Limited, a British Virgin Islands company 100% owned by Jun Zhu, our chairman and chief executive officer, as jointly reported by Incsight Limited and Jun Zhu, and (ii) warrants to purchase 552,196 ordinary shares of our company. The business address for Incsight Limited is Building No. 3, 690 Bibo Road, Zhangjiang Hi-Tech Park, Pudong New Area, Shanghai 201203, People’s Republic of China. | |
(6) | Consists of 4,612,522 ordinary shares held by Bosma Limited, as reported by Bosma Limited on the Schedule 13G/A filed with the SEC on February 13, 2009. Bosma Limited, a British Virgin Islands corporation, is wholly-owned by Morningside VC Limited, a British Virgin Islands corporation, which is in turn wholly-owned by The HCB Trust, an Isle of Man trust, the trustee of which is Dunn Investments Limited, an Isle of Man corporation. Dunn Investments Limited controls indirectly, through The HCB Trust, a 100% interest in Bosma Limited, and as a result has the sole power to vote and dispose of the shares of The9 Limited held by Bosma Limited. Dunn Investments Limited is controlled by its board of directors, consisting of Lorna Irene Cameron and Philip Alvaro Salazar, both of whom expressly disclaim beneficial ownership of the shares held by Bosma Limited. The address for Bosma Limited is Pasea Estate, Road Town, Tortola, British Virgin Islands. | |
(7) | Consists of 3,100,000 ADSs, each representing one ordinary share of our company, owned by CRCM Institutional Master Fund (BVI), Ltd., or the Fund, a British Virgin Islands company, as it reported on the Schedule 13G/A filed with the SEC on February 11, 2011. The Fund’s investment manager with respect to the ADSs held by the Fund is CRCM LP, a Delaware limited partnership, which in turn has ChinaRock Capital Management Limited, a Hong Kong company limited by shares as its sub-investment adviser. CRCM LP’s general partner is CRCM LLC, a Delaware limited liability company. Chun R. Ding, a United States citizen, is the managing partner of CRCM LP, the director of ChinaRock Capital Management Limited and a member of CRCM LLC, with respect to the ADSs held by the Fund. The address for CRCM is c/o Walkers (BVI) Limited, PO Box 92, Road Town, Tortola, British Virgin Islands VG1110. | |
(8) | Consists of 1,337,038 ordinary shares held by QVT Fund LP and 142,750 ordinary shares held by Quintessence Fund L.P., as reported by QVT Financial LP on the Schedule 13G/A filed with the SEC on February 14, 2011. QVT Financial LP is the investment manager for QVT Fund LP and Quintessence Fund LP and has the power to direct the vote and disposition of ordinary shares held by each fund. QVT Financial LP is a Delaware limited liability company, with an address at 1177 Avenue of the Americas, 9th Floor, New York, New York 10036. |
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ITEM 7. | MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS |
A. | Major Shareholders |
B. | Related Party Transactions |
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C. | Interests of Experts and Counsel |
ITEM 8. | FINANCIAL INFORMATION |
A. | Consolidated Statements and Other Financial Information |
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B. | Significant Changes |
ITEM 9. | THE OFFER AND LISTING |
A. | Offer and Listing Details |
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Sales Price | ||||||||
High | Low | |||||||
Annual Highs and Lows | ||||||||
2006 | 32.87 | 15.50 | ||||||
2007 | 52.44 | 19.56 | ||||||
2008 | 28.50 | 9.97 | ||||||
2009 | 16.64 | 6.28 | ||||||
2010 | 8.66 | 3.70 | ||||||
Quarterly Highs and Lows | ||||||||
First Quarter 2009 | 16.64 | 9.16 | ||||||
Second Quarter 2009 | 15.90 | 8.62 | ||||||
Third Quarter 2009 | 10.20 | 7.08 | ||||||
Fourth Quarter 2009 | 8.97 | 6.28 | ||||||
First Quarter 2010 | 8.66 | 6.35 | ||||||
Second Quarter 2010 | 7.33 | 3.70 | ||||||
Third Quarter 2010 | 5.78 | 3.75 | ||||||
Fourth Quarter 2010 | 7.10 | 5.04 | ||||||
First Quarter 2011 | 8.49 | 6.03 | ||||||
Monthly Highs and Lows | ||||||||
October 2010 | 5.70 | 5.04 | ||||||
November 2010 | 7.10 | 5.60 | ||||||
December 2010 | 6.99 | 5.94 | ||||||
January 2011 | 8.49 | 6.63 | ||||||
February 2011 | 8.20 | 6.99 | ||||||
March 2011 | 7.52 | 6.03 | ||||||
April 2011 (through April 6, 2011) | 6.96 | 6.50 |
B. | Plan of Distribution |
C. | Markets |
D. | Selling Shareholders |
E. | Dilution |
F. | Expenses of the Issue |
ITEM 10. | ADDITIONAL INFORMATION |
A. | Share Capital |
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B. | Memorandum and Articles of Association |
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• | 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 |
• | 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. |
• | a special resolution of the shareholders of each constituent company voting together as one class, if the shares to be issued to each shareholder in the consolidated or surviving company will have the same rights and economic value as the shares held in the relevant constituent company; or |
• | a shareholder resolution of each constituent company passed by a majority in number representing 75% in value of the shareholders voting together as one class. |
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• | the statutory provisions as to majority vote have been met; |
• | the shareholders have been fairly represented at the meeting in question; |
• | the arrangement is such that a businessman would reasonably approve; and |
• | the arrangement is not one that would more properly be sanctioned under some other provision of the Companies Law. |
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• | 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; and |
• | create a classified board of directors pursuant to which our directors are elected for staggered terms, which means that shareholders can only elect, or remove, a limited number of directors in any given year. |
C. | Material Contracts |
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D. | Exchange Controls |
E. | Taxation |
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• | banks and other financial institutions; |
• | insurance companies; |
• | regulated investment companies; |
• | real estate investment trusts; |
• | broker-dealers; |
• | traders that elect to use a mark-to-market method of accounting; |
• | U.S. expatriates; |
• | tax-exempt entities; |
• | persons liable for alternative minimum tax; |
• | persons holding an ADS or ordinary share as part of a straddle, hedging, conversion or integrated transaction; |
• | persons that actually or constructively own 10% or more of the total combined voting power of all classes of our voting stock; |
• | partnerships or other pass-through entities, or persons holding ADSs or ordinary shares through such entities; or |
• | persons who acquired ADSs or ordinary shares pursuant to the exercise of any employee share option or otherwise as compensation. |
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• | an individual who is a citizen or resident of the United States; |
• | a corporation (or other entity taxable as a corporation for U.S. federal income tax purposes) organized under the laws of the United States, any State thereof or the District of Columbia; |
• | an estate, the income of which is subject to U.S. federal income taxation regardless of its source; or |
• | a trust that (1) is subject to the primary supervision of a court within the United States and the control of one or more U.S. persons for all substantial decisions or (2) has a valid election in effect under applicable U.S. Treasury regulations to be treated as a U.S. person. |
• | at least 75% of its gross income for such year is passive income; or |
• | at least 50% of the value of its assets (based on an average of the quarterly values of the assets) during such year is attributable to assets that produce passive income or are held for the production of passive income (the “asset test”). |
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• | the excess distribution or recognized 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 years in your holding period prior to the first taxable year in which we were a PFIC, will be treated as ordinary income; and |
• | the amount allocated to each other taxable year will be subject to tax at the highest tax rate in effect for individuals or corporations, as applicable, for each such year and the interest charge generally applicable to underpayments of tax will be imposed on the resulting tax attributable to each such year. |
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F. | Dividends and Paying Agents |
G. | Statement by Experts |
H. | Documents on Display |
I. | Subsidiary Information |
ITEM 11. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
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ITEM 12. | DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES |
A. | Debt Securities |
B. | Warrants and Rights |
C. | Other Securities |
D. | American Depositary Shares |
Persons depositing or withdrawing shares must pay: | For: | |
$5.00 (or less) per 100 ADSs (or portion of 100 ADSs) | • Issuance of ADSs, including issuances resulting from a distribution of shares or rights or other property | |
• Cancellation of ADSs for the purpose of withdrawal, including if the deposit agreement terminates | ||
$.02 (or less) per ADS | • Any cash distribution to ADS registered holders |
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Persons depositing or withdrawing shares must pay: | For: | |
A fee equivalent to the fee that would be payable if securities distributed to you had been shares and the shares had been deposited for issuance of ADSs | • Distribution of securities distributed to holders of deposited securities that are distributed by the depositary to ADS registered holders | |
$.02 (or less) per ADSs per calendar year | • Depositary services | |
Registration or transfer fees | • Transfer and registration of shares on our share register to or from the name of the depositary or its agent when you deposit or withdraw shares | |
Expenses of the depositary | • Cable, telex and facsimile transmissions (when expressly provided in the deposit agreement) | |
• Converting foreign currency to U.S. dollars | ||
Taxes and other governmental charges the depositary or the custodian have to pay on any ADS or share underlying an ADS, for example, stock transfer taxes, stamp duty or withholding taxes | • As necessary | |
Any charges incurred by the depositary or its agents for servicing the deposited securities | • As necessary |
ITEM 13. | DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES |
ITEM 14. | MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS |
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ITEM 15. | CONTROLS AND PROCEDURES |
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Shanghai, China
April 7, 2011
ITEM 16A. | AUDIT COMMITTEE FINANCIAL EXPERT |
ITEM 16B. | CODE OF ETHICS |
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ITEM 16C. | PRINCIPAL ACCOUNTANT FEES AND SERVICES |
2009 | 2010 | |||||||||||
RMB | RMB | US$ | ||||||||||
Audit fees(1) | 7,067,896 | 3,754,970 | 568,935 | |||||||||
Audit-related fees(2) | 1,652,614 | 1,078,526 | 163,413 | |||||||||
Tax fees(3) | 155,030 | 230,786 | 34,968 | |||||||||
All other fees | — | — | — |
(1) | “Audit fees” means the aggregate fees billed in each of the fiscal years listed for professional services rendered by our principal auditors for the audit of our annual financial statements. | |
(2) | “Audit-related fees” means the aggregate fees billed in each of the fiscal years listed for assurance and related services by our principal auditors that are reasonably related to the performance of the audit or review of our financial statements and are not reported under “Audit fees.” Services comprising the fees disclosed under the category of “Audit-related fees” involve principally the issue of consent letters and other audit-related services for the years ended December 31, 2009 and 2010. | |
(3) | “Tax fees” means the fees billed for tax compliance services, including the preparation of tax returns and tax consultations. |
ITEM 16D. | EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES |
ITEM 16E. | PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS. |
ITEM 16F. | CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT |
ITEM 16G. | CORPORATE GOVERNANCE |
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ITEM 17. | FINANCIAL STATEMENTS |
ITEM 18. | FINANCIAL STATEMENTS |
ITEM 19. | EXHIBITS |
Exhibit Number | Document | |||
1.1 | * | Amended and Restated Memorandum and Articles of Association of The Registrant as currently in effect | ||
2.1 | Specimen American Depositary Receipt of The Registrant (incorporated by reference to Exhibit 4.1 from our Registration Statement on Form F-1 Amendment No.2 (file no. 333-120810) filed with the Securities and Exchange Commission on December 9, 2004) | |||
2.2 | Specimen Certificate for Ordinary Shares of The Registrant (incorporated by reference to Exhibit 4.2 from our Registration Statement on Form F-1 (file no. 333-120810) filed with the Securities and Exchange Commission on November 26, 2004) | |||
2.3 | Form of Deposit Agreement dated as of December 20, 2004, as amended and restated as of January 16, 2009, as further amended and restated as of March 20, 2009, and as further amended and restated as of 2010 among The Registrant, The Bank of New York Mellon as Depositary, and all Owners and Beneficial Owners from time to time of American Depositary Shares issued thereunder (incorporated by reference to Exhibit 1 of our Post-Effective Amendment No. 2 to the Registration Statement on Form F-6 (file No. 333-156635) filed with the Securities and Exchange Commission on November 19, 2010) | |||
4.1 | Amended 2004 Stock Option Plan (incorporated by reference to Exhibit 10.1 from our Post-Effective Amendment No. 2 to our Registration Statement on Form S-8 (file no. 333-127700) filed with the Securities and Exchange Commission on December 16, 2010) | |||
4.2 | Form of Indemnification Agreement with the Registrant’s directors and executive officers (incorporated by reference to Exhibit 10.2 from our Registration Statement on Form F-1 Amendment No. 1 (file no. 333-120810) filed with the Securities and Exchange Commission on November 30, 2004) | |||
4.3 | Form of Employment Agreement between the Registrant and a Senior Executive Officer of the Registrant (incorporated by reference to Exhibit 10.3 from our Registration Statement on Form F-1 Amendment No. 1 (file no. 333-120810) filed with the Securities and Exchange Commission on November 30, 2004) | |||
4.4 | Translation of Exclusive Technical Support Service Agreement, dated January 14, 2004, between Shanghai IT and The9 Computer (incorporated by reference to Exhibit 10.4 from our Registration Statement on Form F-1 (file no. 333-120810) filed with the Securities and Exchange Commission on November 26, 2004) |
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Exhibit Number | Document | |||
4.5 | Translation of Master Agreement, dated January 1, 2004, among 9Webzen Shanghai, The9 Computer and Shanghai IT (incorporated by reference to Exhibit 10.5 from our Registration Statement on Form F-1 (file no. 333-120810) filed with the Securities and Exchange Commission on November 26, 2004) | |||
4.6 | Translation of Form of Call Option Agreement among The9 Computer, Shanghai IT and other parties therein (incorporated by reference to Exhibit 10.6 from our Registration Statement on Form F-1 Amendment No.1 (file no. 333-120810) filed with the Securities and Exchange Commission on November 30, 2004) | |||
4.7 | Translation of Form of Equity Pledge Agreement among The9 Computer, Shanghai Advertisement and the other parties therein (incorporated by reference to Exhibit 10.7 from our Registration Statement on Form F-1 (file no. 333-120810) filed with the Securities and Exchange Commission on November 30, 2004) | |||
4.8 | Translation of Form of Loan Agreement between The9 Computer and a shareholder of the Registrant (incorporated by reference to Exhibit 10.8 from our Registration Statement on Form F-1 Amendment No.1 (file no. 333-120810) filed with the Securities and Exchange Commission on November 30, 2004) | |||
4.9 | Translation of Domain Name License Agreement, dated January 1, 2004, between GameNow.net (Hong Kong) Limited and Shanghai IT (incorporated by reference to Exhibit 10.9 from our Registration Statement on Form F-1 (file no. 333-120810) filed with the Securities and Exchange Commission on November 26, 2004) | |||
4.10 | Joint Venture Agreement, dated September 10, 2002, between Webzen Inc. and GameNow.net (Hong Kong) Limited (incorporated by reference to Exhibit 10.10 from our Registration Statement on Form F-1 (file no. 000-53051) filed with the Securities and Exchange Commission on November 26, 2004) | |||
4.11 | Subscription and Purchase Agreement, dated April 2, 2004, by and among The Registrant, Object Software Limited and other parties thereto (incorporated by reference to Exhibit 10.19 from our Registration Statement on Form F-1 (file no. 333-120810) filed with the Securities and Exchange Commission on November 26, 2004) | |||
4.12 | Shareholders’ Agreement, dated April 16, 2004, by and among The Registrant, Object Software Limited and its shareholders party thereto (incorporated by reference to Exhibit 10.20 from our Registration Statement on Form F-1 (file no. 333-120810) filed with the Securities and Exchange Commission on November 26, 2004) | |||
4.13 | Memorandum of Agreement, dated November 9, 2004, between The Registrant and Object Software Limited (incorporated by reference to Exhibit 10.21 from our Registration Statement on Form F-1 (file no. 333-120810) filed with the Securities and Exchange Commission on November 26, 2004) | |||
4.14 | Software License Agreement, dated September 20, 2004, among HanbitSoft, Inc., IMC Games, Co., Ltd. and GameNow.net (Hong Kong) Limited (incorporated by reference to Exhibit 10.22 from our Registration Statement on Form F-1 (file no. 333- 120810) filed with the Securities and Exchange Commission on November 26, 2004) | |||
4.15 | Translation of Mystina Online Cooperative Agreement, dated July 19, 2004, between Lager (Beijing) Information Co., Ltd and The Registrant (incorporated by reference to Exhibit 10.23 from our Registration Statement on Form F-1 (file no. 333-120810) filed with the Securities and Exchange Commission on November 26, 2004) |
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Exhibit Number | Document | |||
4.16 | Translation of Capital Subscription Agreement, dated October 19, 2004, among Beijing Wanwei Sky Technology Co., Ltd., its shareholders and Shanghai IT (incorporated by reference to Exhibit 10.24 from our Registration Statement on Form F-1 (file no. 333-120810) filed with the Securities and Exchange Commission on November 26, 2004) | |||
4.17 | Translation of Shanghai Municipality Property Lease Commodity Housing Pre-lease Contract, dated May 17, 2005, between The9 Computer and Shanghai Zhangjiang Port of Microelectronics Co. Ltd., with respect to the premises where the Registrant’s principal executive offices are located (incorporated by reference to Exhibit 4.22 from our Annual Report on Form 20-F filed with the Securities and Exchange Commission on June 30, 2006) | |||
4.18 | Translation of Presale Agreement, dated March 17, 2005, between The9 Computer and Shanghai Zhangjiang Port of Microelectronics Co. Ltd (incorporated by reference to Exhibit 4.23 from our Annual Report on Form 20-F filed with the Securities and Exchange Commission on June 30, 2006) | |||
4.19 | Loan Agreement, dated December 25, 2004, between China Interactive (Singapore) Pte. Ltd. and GameNow.net (Hong Kong) Limited (incorporated by reference to Exhibit 4.24 from our Annual Report on Form 20-F filed with the Securities and Exchange Commission on June 30, 2006) | |||
4.20 | Share Purchase Agreement, dated December 25, 2004, between China Interactive (Singapore) Pte. Ltd. and GameNow.net (Hong Kong) Limited (incorporated by reference to Exhibit 4.25 from our Annual Report on Form 20-F filed with the Securities and Exchange Commission on June 30, 2006) | |||
4.21 | Loan Agreement, dated April 4, 2005, between China Interactive (Singapore) Pte. Ltd. and GameNow.net (Hong Kong) Limited (incorporated by reference to Exhibit 4.26 from our Annual Report on Form 20-F filed with the Securities and Exchange Commission on June 30, 2006) | |||
4.22 | Pledge of Shares, dated April 4, 2005, between China Interactive (Singapore) Pte. Ltd. and GameNow.net (Hong Kong) Limited (incorporated by reference to Exhibit 4.27 from our Annual Report on Form 20-F filed with the Securities and Exchange Commission on June 30, 2006) | |||
4.23 | Option, dated April 4, 2005, between China Interactive (Singapore) Pte. Ltd. and GameNow.net (Hong Kong) Limited (incorporated by reference to Exhibit 4.28 from our Annual Report on Form 20-F filed with the Securities and Exchange Commission on June 30, 2006) | |||
4.24 | Share Purchase Agreement, dated August 26, 2005, between China Interactive (Singapore) Pte. Ltd. and GameNow.net (Hong Kong) Limited (incorporated by reference to Exhibit 4.29 from our Annual Report on Form 20-F filed with the Securities and Exchange Commission on June 30, 2006) | |||
4.25 | Share Purchase Agreement, dated December 14, 2005, between GameNow.net (Hong Kong) Limited and Webzen Inc. (incorporated by reference to Exhibit 4.30 from our Annual Report on Form 20-F filed with the Securities and Exchange Commission on June 30, 2006) |
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Exhibit Number | Document | |||
4.26 | Addendum to Joint Venture Agreement, dated December 16, 2005, between Webzen Inc. and GameNow.net (Hong Kong) Limited (incorporated by reference to Exhibit 4.31 from our Annual Report on Form 20-F filed with the Securities and Exchange Commission on June 30, 2006) | |||
4.27 | List of Counterparties and Translation of Form of Shanghai Municipality Commodity Property Sale Contract (incorporated by reference to Exhibit 4.32 from our Annual Report on Form 20-F filed with the Securities and Exchange Commission on June 30, 2006) | |||
4.28 | Translation of Share Transfer Agreement, dated August 14, 2006, between Qin Jie, Wang Yong, Zhu Jun and Shanghai IT (incorporated by reference to Exhibit 4.33 from our Annual Report on Form 20-F filed with the Securities and Exchange Commission on June 30, 2006) | |||
4.29 | Translation of Novation Agreement, dated August 14, 2006, between Qin Jie, Wang Yong, Zhu Jun, The9 Computer and Shanghai IT (incorporated by reference to Exhibit 4.34 from our Annual Report on Form 20-F filed with the Securities and Exchange Commission on June 30, 2006) | |||
4.30 | Translation of Supplementary Agreement between Wang Yong, Zhu Jun and The9 Computer (incorporated by reference to Exhibit 4.35 from our Annual Report on Form 20-F filed with the Securities and Exchange Commission on June 30, 2006) | |||
4.31 | * | Translation of Form of Shareholder Voting Proxy Agreement among The9 Computer, Shanghai IT and its shareholders | ||
4.32 | * | Translation of Exclusive Technical Support Service Agreement dated December 13, 2010 between Huopu Cloud and The9 Computer | ||
4.33 | * | Translation of Exclusive Call Option Agreement dated December 13, 2010 among Junping Han, Wei Xiong and The9 Computer with respect to Huopu Cloud | ||
4.34 | * | Translation of Equity Pledge Agreement dated January 6, 2011 among Junping Han, Wei Xiong and The9 Computer with respect to Huopu Cloud | ||
4.35 | * | Translation of Loan Agreement dated December 13, 2010 among Junping Han, Wei Xiong and The9 Computer | ||
4.36 | * | Translation of Shareholder Voting Proxy Agreement dated December 13, 2010 among Junping Han, Wei Xiong, Huopu Cloud and The9 Computer | ||
8.1 | * | List of Subsidiaries of the Registrant | ||
11.1 | Amended Code of Business Conduct and Ethics of the Registrant (incorporated by reference to Exhibit 11.1 to our annual report on Form 20-F filed with the Securities and Exchange Commission on June 30, 2005) | |||
12.1 | * | CEO Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | ||
12.2 | * | CFO Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | ||
13.1 | * | CEO Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | ||
13.2 | * | CFO Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | ||
15.1 | * | Consent of Maples and Calder | ||
15.2 | * | Consent of Fangda Partners | ||
15.3 | * | Consent of Deloitte Touche Tohmatsu CPA Ltd. | ||
15.4 | * | Consent of PricewaterhouseCoopers Zhong Tian CPAs Limited Company |
* | Filed with this Form 20-F. |
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THE9 LIMITED | ||||
By: | /s/ Jun Zhu | |||
Name: | Jun Zhu | |||
Title: | Chairman and Chief Executive Officer |
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FOR THE YEARS ENDED DECEMBER 31, 2008, 2009 AND 2010
Notes | 2008 | 2009 | 2010 | 2010 | ||||||||||||||||
RMB | RMB | RMB | US$ | |||||||||||||||||
(Note 3) | ||||||||||||||||||||
Revenues: | ||||||||||||||||||||
Online game services | 1,800,313,225 | 795,476,714 | 101,815,232 | 15,426,550 | ||||||||||||||||
Other revenues | 5,816,996 | 7,152,637 | 6,698,350 | 1,014,902 | ||||||||||||||||
1,806,130,221 | 802,629,351 | 108,513,582 | 16,441,452 | |||||||||||||||||
Sales taxes | (94,639,527 | ) | (42,113,498 | ) | (5,675,992 | ) | (859,999 | ) | ||||||||||||
Net revenues | 1,711,490,694 | 760,515,853 | 102,837,590 | 15,581,453 | ||||||||||||||||
Cost of services | (997,948,540 | ) | (712,472,751 | ) | (103,256,343 | ) | (15,644,900 | ) | ||||||||||||
Gross profit (loss) | 713,542,154 | 48,043,102 | (418,753 | ) | (63,447 | ) | ||||||||||||||
Operating expenses: | ||||||||||||||||||||
Product development | (73,819,607 | ) | (114,443,552 | ) | (139,431,649 | ) | (21,126,008 | ) | ||||||||||||
Sales and marketing | (103,725,123 | ) | (112,517,602 | ) | (63,290,886 | ) | (9,589,528 | ) | ||||||||||||
General and administrative | (319,298,044 | ) | (225,051,424 | ) | (112,692,772 | ) | (17,074,662 | ) | ||||||||||||
Impairment of equipment, intangible assets and goodwill | 9, 10, 11 | (82,149,755 | ) | (78,871,643 | ) | (37,949,452 | ) | (5,749,917 | ) | |||||||||||
Total operating expenses | (578,992,529 | ) | (530,884,221 | ) | (353,364,759 | ) | (53,540,115 | ) | ||||||||||||
Profit (loss) from operations | 134,549,625 | (482,841,119 | ) | (353,783,512 | ) | (53,603,562 | ) | |||||||||||||
Interest income | 56,690,807 | 30,501,101 | 23,183,239 | 3,512,612 | ||||||||||||||||
Other (expenses) income, net | (18,967,099 | ) | 61,840,303 | 19,258,286 | 2,917,922 | |||||||||||||||
Income (loss) before income tax (expense) benefit, gain on investment disposal, impairment loss on investments and share of loss in equity investments | 172,273,333 | (390,499,715 | ) | (311,341,987 | ) | (47,173,028 | ) | |||||||||||||
Income tax (expense) benefit | 15 | (47,928,533 | ) | 5,535,866 | (7,368,020 | ) | (1,116,367 | ) | ||||||||||||
Income (loss) before gain on investment disposal, impairment loss on investments and share of loss in equity investments | 124,344,800 | (384,963,849 | ) | (318,710,007 | ) | (48,289,395 | ) | |||||||||||||
Gain on investment disposal | 8 | — | — | 6,827,900 | 1,034,530 | |||||||||||||||
Impairment loss on investments | 7, 8 | (25,922,363 | ) | (22,412,269 | ) | (196,115,321 | ) | (29,714,442 | ) | |||||||||||
Share of loss in equity investments, net of taxes | 7 | (2,241,135 | ) | (2,555,515 | ) | (10,713,295 | ) | (1,623,227 | ) | |||||||||||
Net income (loss) | 96,181,302 | (409,931,633 | ) | (518,710,723 | ) | (78,592,534 | ) | |||||||||||||
Less: Net loss attributable to noncontrolling interest | (654,734 | ) | (4,779,226 | ) | (19,099,129 | ) | (2,893,807 | ) | ||||||||||||
Net income (loss) attributable to holders of ordinary shares | 96,836,036 | (405,152,407 | ) | (499,611,594 | ) | (75,698,727 | ) | |||||||||||||
Net income (loss) | 96,181,302 | (409,931,633 | ) | (518,710,723 | ) | (78,592,534 | ) | |||||||||||||
Other comprehensive income (loss): | ||||||||||||||||||||
Transfer to earnings of other-than-temporary impairment loss on available-for-sale investments | 8 | — | (13,643,131 | ) | — | — | ||||||||||||||
Currency translation adjustments | — | — | (2,511,883 | ) | (380,588 | ) | ||||||||||||||
Comprehensive income (loss) | 96,181,302 | (423,574,764 | ) | (521,222,606 | ) | (78,973,122 | ) | |||||||||||||
Less: Comprehensive income (loss) attributable to noncontrolling interest | (654,734 | ) | (4,779,226 | ) | (19,514,314 | ) | (2,956,714 | ) | ||||||||||||
Comprehensive income (loss) attributable to holders of ordinary shares | 96,836,036 | (418,795,538 | ) | (501,708,292 | ) | (76,016,408 | ) | |||||||||||||
F-4
Table of Contents
Notes | 2008 | 2009 | 2010 | 2010 | ||||||||||||||||
RMB | RMB | RMB | US$ | |||||||||||||||||
(Note 3) | ||||||||||||||||||||
Net income (loss) attributable to holders of ordinary shares per share | 23 | |||||||||||||||||||
- Basic | 3.50 | (15.94 | ) | (19.89 | ) | (3.01 | ) | |||||||||||||
- Diluted | 23 | 3.50 | (15.94 | ) | (19.89 | ) | (3.01 | ) | ||||||||||||
Weighted average number of shares outstanding | 23 | |||||||||||||||||||
- Basic | 27,664,687 | 25,414,620 | 25,121,679 | 25,121,679 | ||||||||||||||||
- Diluted | 23 | 27,704,201 | 25,414,620 | 25,121,679 | 25,121,679 | |||||||||||||||
F-5
Table of Contents
AS OF DECEMBER 31, 2009 AND 2010
December 31, | December 31, | December 31, | ||||||||||||||
Notes | 2009 | 2010 | 2010 | |||||||||||||
RMB | RMB | US$ | ||||||||||||||
(Note 3) | ||||||||||||||||
ASSETS | ||||||||||||||||
Current assets: | ||||||||||||||||
Cash and cash equivalents | 1,675,081,345 | 1,416,189,294 | 214,574,135 | |||||||||||||
Accounts receivable, net of allowance for doubtful accounts of 2009: RMB22.2 million, 2010: RMB22.2 million (US$3.4 million) | 920,214 | 10,712,252 | 1,623,068 | |||||||||||||
Due from related party | 22 | 1,110,424 | — | — | ||||||||||||
Advances to suppliers | 27 | 44,132,089 | 52,054,494 | 7,887,045 | ||||||||||||
Prepayments and other current assets | 77,896,385 | 63,969,737 | 9,692,385 | |||||||||||||
Prepaid royalties | 6, 27 | — | 15,615,493 | 2,365,984 | ||||||||||||
Deferred costs | 6, 27 | 1,516,601 | 2,911,937 | 441,203 | ||||||||||||
Deferred tax assets, current | 15 | 2,139,896 | — | — | ||||||||||||
Total current assets | 1,802,796,954 | 1,561,453,207 | 236,583,820 | |||||||||||||
Investments in equity investees | 7 | 308,806,125 | 74,843,710 | 11,339,957 | ||||||||||||
Property, equipment and software | 9 | 75,977,200 | 58,061,464 | 8,797,192 | ||||||||||||
Goodwill | 10 | — | 10,548,323 | 1,598,231 | ||||||||||||
Intangible assets | 11 | 51,628,286 | 17,647,842 | 2,673,915 | ||||||||||||
Land use right | 12 | 79,877,847 | 77,956,936 | 11,811,657 | ||||||||||||
Other long-term assets | 603,910 | 56,827,902 | 8,610,288 | |||||||||||||
Deferred tax assets, non-current | 15 | 5,267,185 | — | — | ||||||||||||
Total assets | 2,324,957,507 | 1,857,339,384 | 281,415,060 | |||||||||||||
LIABILITIES | ||||||||||||||||
Current liabilities: | ||||||||||||||||
Accounts payable (including accounts payable of the consolidated VIEs without recourse to the Group of 17,061,480 and 24,878,129 as of December 31, 2009 and December 31, 2010, respectively) | 35,013,675 | 46,948,658 | 7,113,433 | |||||||||||||
Income tax payable(including income tax payable of the consolidated VIEs without recourse to the Group of nil as of both December 31, 2009 and December 31, 2010) | 29,947 | — | — | |||||||||||||
Other taxes payable (including other taxes payable of the consolidated VIEs without recourse to the Group of 2,768,124 and 2,995,044 as of December 31, 2009 and December 31, 2010, respectively) | 6,270,518 | 5,437,764 | 823,904 | |||||||||||||
Advances from customers (including advances from customers of the consolidated VIEs without recourse to the Group of 10,628,644 and 6,574,768 as of December 31, 2009 and December 31, 2010, respectively) | 27 | 11,154,437 | 7,101,645 | 1,076,007 | ||||||||||||
Deferred revenue (including deferred revenue of the consolidated VIEs without recourse to the Group of 8,330,989 and 13,757,771 as of December 31, 2009 and December 31, 2010, respectively) | 27 | 10,933,464 | 18,508,169 | 2,804,268 | ||||||||||||
Refund of game points (including refund of game points of the consolidated VIEs without recourse to the Group of 196,401,437 and 195,993,716 as of December 31, 2009 and December 31, 2010, respectively) | 27 | 196,401,440 | 195,993,716 | 29,696,018 | ||||||||||||
Other payables and accruals (including other payables and accruals of the consolidated VIEs without recourse to the Group of 15,155,234 and 15,629,966 as of December 31, 2009 and December 31, 2010, respectively) | 16 | 51,704,425 | 42,328,817 | 6,413,457 | ||||||||||||
Total current liabilities | 311,507,906 | 316,318,769 | 47,927,087 | |||||||||||||
Deferred tax liabilities, non-current (including deferred tax liabilities, non-current of the consolidated VIEs without recourse to the Group of nil as of both December 31, 2009 and December 31, 2010) | 15 | — | 5,803,848 | 879,371 | ||||||||||||
Total liabilities | 311,507,906 | 322,122,617 | 48,806,458 | |||||||||||||
Commitments and contingencies | 26 | |||||||||||||||
EQUITY | ||||||||||||||||
The9 Limited shareholders’ equity | ||||||||||||||||
Ordinary shares (US$0.01 par value; 100,000,000 shares authorized as of December 31, 2009 and 250,000,000 shares authorized as of December 31, 2010, 25,121,645 shares issued and outstanding as of December 31, 2009, and 25,124,147 shares issued and outstanding as of December 31, 2010) | 2,051,712 | 2,051,878 | 310,891 | |||||||||||||
Additional paid-in capital | 2,069,616,975 | 2,091,113,883 | 316,835,437 | |||||||||||||
Statutory reserves | 24 | 28,071,982 | 28,071,982 | 4,253,331 | ||||||||||||
Accumulated other comprehensive income | — | (2,096,698 | ) | (317,682 | ) | |||||||||||
Accumulated deficit | (88,364,685 | ) | (587,976,279 | ) | (89,087,315 | ) | ||||||||||
Total The9 Limited shareholders’ equity | 2,011,375,984 | 1,531,164,766 | 231,994,662 | |||||||||||||
Noncontrolling interest | 25 | 2,073,617 | 4,052,001 | 613,940 | ||||||||||||
Total equity | 2,013,449,601 | 1,535,216,767 | 232,608,602 | |||||||||||||
Total liabilities and equity | 2,324,957,507 | 1,857,339,384 | 281,415,060 | |||||||||||||
F-6
Table of Contents
FOR THE YEARS ENDED DECEMBER 31, 2008, 2009 AND 2010
The9 Limited shareholder’s equity | ||||||||||||||||||||||||||||||||
Ordinary shares | Additional paid-in | Statutory | Accumulated other | Retained | Noncontrolling | |||||||||||||||||||||||||||
(US$0.01 par value) | capital | reserves | comprehensive income | earnings(deficit) | interest | Total equity | ||||||||||||||||||||||||||
Number of shares | Par value | |||||||||||||||||||||||||||||||
RMB | RMB | RMB | RMB | RMB | RMB | RMB | ||||||||||||||||||||||||||
Balance as of December 31, 2007 | 28,763,188 | 2,350,463 | 2,218,516,672 | 20,745,422 | 13,643,131 | 550,834,861 | — | 2,806,090,549 | ||||||||||||||||||||||||
Net income | — | — | — | — | — | 96,836,036 | (654,734 | ) | 96,181,302 | |||||||||||||||||||||||
Recognition of noncontrolling interest | — | — | — | — | — | — | 654,734 | 654,734 | ||||||||||||||||||||||||
Issuance of ordinary shares from stock option exercise | 72,583 | 5,067 | 8,840,640 | — | — | — | — | 8,845,707 | ||||||||||||||||||||||||
Repurchase and retirement of ADSs (Note 18) | (2,018,083 | ) | (164,885 | ) | (150,799,327 | ) | — | — | (93,615,638 | ) | — | (244,579,850 | ) | |||||||||||||||||||
Employee share based compensation (Note 21) | — | — | 52,049,596 | — | — | — | — | 52,049,596 | ||||||||||||||||||||||||
Appropriations to statutory reserves (Note 24) | — | — | — | 4,090,932 | — | (4,090,932 | ) | — | — | |||||||||||||||||||||||
Balance as of December 31, 2008 | 26,817,688 | 2,190,645 | 2,128,607,581 | 24,836,354 | 13,643,131 | 549,964,327 | — | 2,719,242,038 |
F-7
Table of Contents
The9 Limited shareholder’s equity | ||||||||||||||||||||||||||||||||
Ordinary shares | Additional | Statutory | Accumulated other | Retained | Noncontrolling | |||||||||||||||||||||||||||
(US$0.01 par value) | paid-in capital | reserves | comprehensive income | earnings (deficit) | interest | Total Equity | ||||||||||||||||||||||||||
Number of shares | Par value | |||||||||||||||||||||||||||||||
RMB | RMB | RMB | RMB | RMB | RMB | RMB | ||||||||||||||||||||||||||
Net loss | — | — | — | — | — | (405,152,407 | ) | (4,779,226 | ) | (409,931,633 | ) | |||||||||||||||||||||
Recognition of noncontrolling interest in exchange for product development expenses | — | — | — | — | — | — | 3,094,220 | 3,094,220 | ||||||||||||||||||||||||
Dividend distribution (Note 17) | — | — | — | — | — | (201,028,477 | ) | — | (201,028,477 | ) | ||||||||||||||||||||||
Issuance of ordinary shares from stock option exercise (Note 21) | 29,067 | 1,985 | 1,458,898 | — | — | — | — | 1,460,883 | ||||||||||||||||||||||||
Repurchase and retirement of ADSs (Note 18) | (1,725,110 | ) | (140,918 | ) | (127,927,178 | ) | — | — | (28,912,500 | ) | — | (156,980,596 | ) | |||||||||||||||||||
Employee share based compensation (Note 21) | — | — | 70,234,857 | — | — | — | 1,001,440 | 71,236,297 | ||||||||||||||||||||||||
Appropriations to statutory reserves (Note 24) | — | — | — | 3,235,628 | — | (3,235,628 | ) | — | — | |||||||||||||||||||||||
Transfer to earnings of other-than-temporary impairment loss on available-for-sale investment (Note 8) | — | — | — | — | (13,643,131 | ) | — | — | (13,643,131 | ) | ||||||||||||||||||||||
Conversion of a loan into equity of a VIE subsidiary | — | — | (2,757,183 | ) | — | — | — | 2,757,183 | — | |||||||||||||||||||||||
Balance as of December 31, 2009 | 25,121,645 | 2,051,712 | 2,069,616,975 | 28,071,982 | — | (88,364,685 | ) | 2,073,617 | 2,013,449,601 |
F-8
Table of Contents
The9 Limited shareholder’s equity | ||||||||||||||||||||||||||||||||
Ordinary shares | Additional | Statutory | Accumulated other | Retained | Noncontrolling | |||||||||||||||||||||||||||
(US$0.01 par value) | paid-in capital | reserves | comprehensive income | earnings (deficit) | interest | Total Equity | ||||||||||||||||||||||||||
Number of shares | Par value | |||||||||||||||||||||||||||||||
RMB | RMB | RMB | RMB | RMB | RMB | RMB | ||||||||||||||||||||||||||
Net loss | — | — | — | — | — | (499,611,594 | ) | (19,099,129 | ) | (518,710,723 | ) | |||||||||||||||||||||
Recognition of noncontrolling interest from an acquisition | — | — | — | — | — | — | 15,417,870 | 15,417,870 | ||||||||||||||||||||||||
Issuance of ordinary shares from stock option exercise (Note 21) | 2,502 | 166 | 84,838 | — | — | — | — | 85,004 | ||||||||||||||||||||||||
Employee share based compensation (Note 21) | — | — | 27,864,312 | — | — | — | 2,315,605 | 30,179,917 | ||||||||||||||||||||||||
Purchase of shares of a subsidiary from holders of noncontrolling interest | — | — | 523,586 | — | — | — | (1,122,325 | ) | (598,739 | ) | ||||||||||||||||||||||
Dissolution of two VIEs | — | — | — | — | — | — | (2,100,946 | ) | (2,100,946 | ) | ||||||||||||||||||||||
Capital contribution to subsidiaries attributable to noncontrolling interest | — | — | (6,981,392 | ) | — | — | — | 6,981,392 | — | |||||||||||||||||||||||
Issuance of shares by a subsidiary upon exercise of stock options | — | — | 5,564 | — | — | — | 1,102 | 6,666 | ||||||||||||||||||||||||
Currency translation adjustments | — | — | — | — | (2,096,698 | ) | — | (415,185 | ) | (2,511,883 | ) | |||||||||||||||||||||
Balance as of December 31, 2010 | 25,124,147 | 2,051,878 | 2,091,113,883 | 28,071,982 | (2,096,698 | ) | (587,976,279 | ) | 4,052,001 | 1,535,216,767 | ||||||||||||||||||||||
Balance as of December 31, 2010 (US$ except share data, Note 3) | 25,124,147 | 310,891 | 316,835,437 | 4,253,331 | (317,682 | ) | (89,087,315 | ) | 613,940 | 232,608,602 | ||||||||||||||||||||||
F-9
Table of Contents
Notes | 2008 | 2009 | 2010 | 2010 | ||||||||||||||||
RMB | RMB | RMB | US$ | |||||||||||||||||
(Note 3) | ||||||||||||||||||||
Cash flows from operating activities: | ||||||||||||||||||||
Net income (loss) | 96,181,302 | (409,931,633 | ) | (518,710,723 | ) | (78,592,534 | ) | |||||||||||||
Adjustments for: | ||||||||||||||||||||
Deferred taxes | 15 | 34,474,878 | (7,407,081 | ) | 7,407,081 | 1,122,285 | ||||||||||||||
Gain on disposal of property, equipment and software | (29,717 | ) | (490,369 | ) | (984,264 | ) | (149,131 | ) | ||||||||||||
Impairment of intangible assets | 11 | 73,248,491 | 27,507,199 | 33,020,462 | 5,003,100 | |||||||||||||||
Impairment of goodwill | 10 | — | 30,199,751 | — | — | |||||||||||||||
Impairment loss on investments | 7, 8 | 25,922,363 | 22,412,269 | 196,115,321 | 29,714,442 | |||||||||||||||
Impairment on equipment | 9 | 8,901,264 | 21,164,693 | 4,928,990 | 746,817 | |||||||||||||||
Depreciation and amortization of property, equipment and software | 9 | 207,787,590 | 123,028,739 | 23,856,884 | 3,614,679 | |||||||||||||||
Amortization of land use right | 12 | 1,920,910 | 1,920,908 | 1,920,911 | 291,047 | |||||||||||||||
Amortization of intangible assets | 11 | 88,886,444 | 49,481,516 | 10,012,288 | 1,517,013 | |||||||||||||||
Share of loss in equity investments, net of taxes | 7 | 2,241,135 | 2,555,515 | 10,713,295 | 1,623,227 | |||||||||||||||
Gain on investment disposal | 8 | — | — | (6,827,900 | ) | (1,034,530 | ) | |||||||||||||
Allowance for doubtful accounts | 20,733,448 | 855,130 | — | — | ||||||||||||||||
Provision for prepaid royalties and deferred costs | 6, 27 | 3,882,516 | 160,069,079 | 5,518,917 | 836,199 | |||||||||||||||
Provision for due from related party | — | — | 1,285,845 | 194,825 | ||||||||||||||||
Provision for advances to suppliers and prepayment for equipment | 27 | 55,191,282 | — | — | — | |||||||||||||||
Provision for prepayments and other current assets | 8,065,933 | — | 200,000 | 30,303 | ||||||||||||||||
Loss on deconsolidation of two VIEs | — | — | 1,082,591 | 164,029 | ||||||||||||||||
Exchange loss (gain) | 31,657,480 | (1,405,166 | ) | 4,527,477 | 685,981 | |||||||||||||||
Share based compensation expense | 21 | 52,049,596 | 71,236,297 | 30,179,917 | 4,572,715 | |||||||||||||||
Recognition of noncontrolling interest in exchange for product development expenses | 654,734 | 3,094,220 | — | — | ||||||||||||||||
Change in accounts receivable | (6,999,641 | ) | 6,547,740 | (9,792,038 | ) | (1,483,642 | ) | |||||||||||||
Change in due from related party | (637,708 | ) | (472,716 | ) | (175,421 | ) | (26,579 | ) | ||||||||||||
Change in advances to suppliers | (1,195,620 | ) | (42,696,308 | ) | (10,086,545 | ) | (1,528,264 | ) | ||||||||||||
Change in prepayments and other current assets | (38,849,005 | ) | 32,128,649 | 11,804,104 | 1,788,501 | |||||||||||||||
Change in prepaid royalties | (70,788,361 | ) | 17,227,594 | (21,134,410 | ) | (3,202,183 | ) | |||||||||||||
Change in deferred costs | (7,989,724 | ) | 15,778,691 | (1,395,336 | ) | (211,415 | ) | |||||||||||||
Change in other long-term assets | 454,212 | (603,910 | ) | (18,016,107 | ) | (2,729,713 | ) | |||||||||||||
Change in accounts payable | (14,360,918 | ) | 5,529,144 | 4,163,941 | 630,900 | |||||||||||||||
Change in due to related parties | (77,052 | ) | — | — | — | |||||||||||||||
Change in income tax payable | (2,272,777 | ) | (26,733 | ) | (29,947 | ) | (4,537 | ) | ||||||||||||
Change in other taxes payable | 44,182,027 | (93,146,297 | ) | (2,044,225 | ) | (309,731 | ) | |||||||||||||
Change in advances from customers | 25,308,833 | (104,601,759 | ) | (2,052,793 | ) | (311,029 | ) | |||||||||||||
Change in deferred revenue | 34,729,841 | (41,111,862 | ) | 7,574,705 | 1,147,682 | |||||||||||||||
Change in other payables and accruals | 19,360,340 | 5,071,097 | (10,614,609 | ) | (1,608,274 | ) | ||||||||||||||
Net cash provided by (used in) operating activities | 692,634,096 | (106,085,603 | ) | (247,551,589 | ) | (37,507,817 | ) | |||||||||||||
F-10
Table of Contents
2008 | 2009 | 2010 | 2010 | |||||||||||||
RMB | RMB | RMB | US$ | |||||||||||||
(Note 3) | ||||||||||||||||
Cash flows from investing activities: | ||||||||||||||||
Acquisition, net of cash acquired | — | — | (7,512,404 | ) | (1,138,243 | ) | ||||||||||
Cash disposed of upon deconsolidation of two VIEs | — | — | (2,207,437 | ) | (334,460 | ) | ||||||||||
Cash paid to acquire equity investees and available-for-sale investments | (299,365,918 | ) | (26,837,000 | ) | (39,093,200 | ) | (5,923,212 | ) | ||||||||
Lending of loans receivable | — | (13,660,000 | ) | (2,000,000 | ) | (303,030 | ) | |||||||||
Collection of loans receivable | — | — | 13,660,000 | 2,069,697 | ||||||||||||
Proceeds from disposal of available-for-sale investments | — | — | 6,827,900 | 1,034,530 | ||||||||||||
Cash paid for short-term investments | (795,162,471 | ) | — | — | — | |||||||||||
Proceeds from maturities of short-term investments | 728,000,000 | 68,039,221 | — | — | ||||||||||||
Proceeds from disposal of property, equipment and software | 184,110 | 532,644 | 1,500,000 | 227,273 | ||||||||||||
Proceeds from refund of upfront licensing fees | — | — | 41,873,102 | 6,344,409 | ||||||||||||
Purchase of property, equipment and software | (96,515,362 | ) | (20,452,845 | ) | (7,856,721 | ) | (1,190,412 | ) | ||||||||
Purchase of intangible assets | (24,652,900 | ) | (23,897,622 | ) | (12,305,541 | ) | (1,864,476 | ) | ||||||||
Net cash used in investing activities | (487,512,541 | ) | (16,275,602 | ) | (7,114,301 | ) | (1,077,924 | ) | ||||||||
Cash flows from financing activities: | ||||||||||||||||
Purchase of shares of a subsidiary from holders of noncontrolling interest | — | — | (598,739 | ) | (90,718 | ) | ||||||||||
Proceeds from stock option exercise | 8,845,707 | 1,460,883 | 85,004 | 12,879 | ||||||||||||
Proceeds from exercise of stock options of a subsidiary | — | — | 6,666 | 1,010 | ||||||||||||
Dividend paid | — | (201,028,477 | ) | — | — | |||||||||||
Repurchase of ADSs | (244,579,850 | ) | (156,980,596 | ) | — | — | ||||||||||
Net cash provided by (used in) financing activities | (235,734,143 | ) | (356,548,190 | ) | (507,069 | ) | (76,829 | ) | ||||||||
Effect of foreign exchange rate changes on cash | (32,083,695 | ) | 1,405,166 | (3,719,092 | ) | (563,499 | ) | |||||||||
Net change in cash and cash equivalents | (62,696,283 | ) | (477,504,229 | ) | (258,892,051 | ) | (39,226,069 | ) | ||||||||
Cash and cash equivalents, beginning of year | 2,215,281,857 | 2,152,585,574 | 1,675,081,345 | 253,800,204 | ||||||||||||
Cash and cash equivalents, end of year | 2,152,585,574 | 1,675,081,345 | 1,416,189,294 | 214,574,135 | ||||||||||||
Supplemental disclosure of cash flow information: | ||||||||||||||||
Cash paid for income taxes | 23,405,934 | 6,454,702 | 1,839 | 279 | ||||||||||||
Supplemental disclosure of non-cash investing and financing activities: | ||||||||||||||||
Accrual related to purchase of property, equipment and software | 1,072,640 | 736,608 | 886,319 | 134,291 | ||||||||||||
Accrual related to purchase of intangible assets and related withholding taxes | — | — | 8,609,510 | 1,304,471 | ||||||||||||
Conversion of a loan into equity of a VIE subsidiary | — | 2,757,183 | — | — | ||||||||||||
Receivable on refund of investment in an equity investee | — | — | 66,227,000 | 10,034,394 | ||||||||||||
Receivable on refund of upfront licensing fees | — | 31,410,422 | 13,245,400 | 2,006,879 |
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Date of | Place of | Interest held | ||||||||||||
Name of entity | incorporation | incorporation | Relationship | Direct | Indirect | |||||||||
GameNow.net (Hong Kong) Limited (“GameNow Hong Kong”) | January-00 | Hong Kong | Subsidiary | 100 | % | — | ||||||||
The9 Computer Technology Consulting (Shanghai) Co., Ltd. (“The9 Computer”) | June-00 | PRC | Subsidiary | — | 100 | % | ||||||||
China The9 Interactive Limited (“C9I”) | October-03 | Hong Kong | Subsidiary | — | 100 | % | ||||||||
China The9 Interactive (Shanghai) Limited (“C9I Shanghai”) | February-05 | PRC | Subsidiary | — | 100 | % | ||||||||
9Dream Limited (“9Dream”) | July-05 | Hong Kong | Subsidiary | 100 | % | — | ||||||||
China The9 Interactive (Beijing) Limited (“C9I Beijing”) | March-07 | PRC | Subsidiary | — | 100 | % | ||||||||
Jiu Jing Era Information Technology (Beijing) Limited (“Jiu Jing”) | April-07 | PRC | Subsidiary | — | 100 | % | ||||||||
Jiu Tuo (Shanghai) Information Technology Limited(“Jiu Tuo”) | July-07 | PRC | Subsidiary | — | 100 | % | ||||||||
China Crown Technology Limited(“China Crown Technology”) | November-07 | Hong Kong | Subsidiary | 100 | % | — | ||||||||
Asian Way Development Limited(“Asian Way”) | November-07 | Hong Kong | Subsidiary | 100 | % | — | ||||||||
New Star International Development Limited(“New Star”) | January-08 | Hong Kong | Subsidiary | 100 | % | — | ||||||||
The9 Development Center Limited(“TDC”) | June-08 | Hong Kong | Subsidiary | 100 | % | — |
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Date of | Place of | Interest held | ||||||||||||
Name of entity | incorporation | incorporation | Relationship | Direct | Indirect | |||||||||
TDC (Asia) Limited(“TDC Asia”) | April-09 | British Virgin Islands | Subsidiary | — | 100 | % | ||||||||
Red 5 Studios, Inc. (“Red 5”) | June-05 | USA | Subsidiary | — | 83 | % | ||||||||
The9 Singapore Pte. Ltd. (“The9 Singapore”) | April-10 | Singapore | Subsidiary | 100 | % | — | ||||||||
The9 Interactive, Inc. (“The9 Interactive”) | June-10 | USA | Subsidiary | 100 | % | — | ||||||||
Shanghai The9 Information Technology Co., Ltd. (“Shanghai IT”) | September-00 | PRC | VIE subsidiary | None (Note 4) | ||||||||||
Shanghai Jiucheng Advertisement Co., Ltd. (“Shanghai Jiucheng Advertisement”) | April-07 | PRC | VIE subsidiary | None (Note 4) | ||||||||||
Hangzhou Fire Rain Network Technology Co., Ltd.(“Fire Rain”) | December-08 | PRC | VIE subsidiary | 25% (Note 4) | ||||||||||
Shenzhen Wanyouyinli Technology Co., Ltd. (“Wanyouyl”)* | June-09 | PRC | VIE subsidiary | 20% (Note 4) | ||||||||||
Shanghai Huopu Cloud Computing Terminal Technology Co., Ltd. (“Huopu Cloud”) | December-10 | PRC | VIE subsidiary | None (Note 4) |
* | Previously named as Shenzheng Fatiaocheng Technology Co., Limited. |
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(i) | Royalties paid to the licensors of games are initially recognized as prepaid royalties when paid and subsequently recognized as deferred costs upon the customers’ online registration and activation of their cards or online points, and then ultimately recognized as cost of services in the consolidated statements of operations and comprehensive income (loss) based upon the actual usage of the game playing time by the customers or when the likelihood that the Group would provide further services to those customers becomes remote. |
(ii) | Royalties payable to the licensors or receivable from collection agents upon customers’ charging their accounts are initially recorded as deferred costs upon the customers’ online registration and activation of their cards or online points. Deferred costs are recognized as costs of services in the consolidated statements of operations and comprehensive income (loss) based upon the actual usage of the game points by end customers. |
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Leasehold improvements | Respective term of the leases or the estimated useful lives of the leasehold improvements | |
Computer and equipment | 3 to 4 years | |
Software | 5 years | |
Office furniture and fixtures | 3 years | |
Motor vehicles | 5 years | |
Office buildings | 10 to 20 years |
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December 31, 2009 | December 31, 2010 | December 31, 2010 | ||||||||||
RMB | RMB | US$ | ||||||||||
(Note 3) | ||||||||||||
Total assets | 167,391,153 | 141,428,028 | 21,428,489 | |||||||||
Total liabilities | 251,945,913 | 265,829,394 | 40,277,181 |
December 31, | December 31, | December 31, | December 31, | |||||||||||||
2008 | 2009 | 2010 | 2010 | |||||||||||||
RMB | RMB | RMB | US$ (Note 3) | |||||||||||||
Revenues | 1,801,713,116 | 802,074,406 | 107,447,650 | 16,279,947 | ||||||||||||
Net income(loss) | 14,501,809 | (79,376,759 | ) | (72,685,391 | ) | (11,012,938 | ) |
5. | ACQUISITION |
RMB | ||||
Cash | 11,876,274 | |||
Subscription receivable | 95,549,799 | |||
Fixed assets | 3,650,947 | |||
Identifiable intangible assets: | ||||
In-process research and development | 12,285,000 | |||
Backlog | 2,730,000 | |||
Goodwill | 10,870,537 | |||
Other assets | 1,968,347 | |||
Liabilities assumed | (2,599,092 | ) | ||
Deferred tax liability | (5,981,135 | ) | ||
Noncontrolling interest at fair value | (15,417,870 | ) | ||
Total | 114,932,807 | |||
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Revenues | Net Loss | |||||||
RMB | RMB | |||||||
Pro forma for 2009 | 802,629,351 | (491,679,970 | ) | |||||
Pro forma for 2010 | 108,513,582 | (532,673,479 | ) |
December 31, | December 31, | December 31, | ||||||||||||
Note | 2009 | 2010 | 2010 | |||||||||||
RMB | RMB | US$ | ||||||||||||
(Note 3) | ||||||||||||||
Investments accounted for under equity method: | ||||||||||||||
Object Software Limited (“Object Software”) | 7.1<1> | 4,218,795 | 894,361 | 135,509 | ||||||||||
Beijing Zhongqing Shenglian Internet Technology Co., Ltd. (“BZSIT”) | 7.1<2> | 18,564,513 | — | — | ||||||||||
Beijing Linkage Technology Co., Ltd. (“BLT”) | 7.1<3> | — | 11,963,228 | 1,812,610 | ||||||||||
9 Webzen Limited (“9Webzen Hong Kong”) | 7.1<4> | — | — | — | ||||||||||
Ideas Corporation (“Ideas”) | 7.1<5> | — | — | — | ||||||||||
Investments accounted for under cost method: | ||||||||||||||
Shanghai Institute of Visual Art of Fudan University (“SIVA”) | 7.2<1> | 10,000,000 | 10,000,000 | 1,515,152 | ||||||||||
G10 Entertainment Corporation (“G10”) | 7.2<2> | 276,022,817 | 24,892,921 | 3,771,656 | ||||||||||
OpenFeint Inc. (formerly named Aurora Feint Inc., “OpenFeint”) | 7.2<3> | — | 27,093,200 | 4,105,030 | ||||||||||
Total | 308,806,125 | 74,843,710 | 11,339,957 | |||||||||||
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Object | ||||||||||||||||
Software | BZSIT | BLT | Total | |||||||||||||
<1> | <2> | <3> | ||||||||||||||
Balance at December 31, 2008 (RMB) | 5,338,823 | — | — | 5,338,823 | ||||||||||||
Investments | — | 20,000,000 | — | 20,000,000 | ||||||||||||
Share of loss in equity investments, net of taxes | (1,120,028 | ) | (1,435,487 | ) | — | (2,555,515 | ) | |||||||||
Balance at December 31, 2009 (RMB) | 4,218,795 | 18,564,513 | — | 22,783,308 | ||||||||||||
Investments | — | — | 12,000,000 | 12,000,000 | ||||||||||||
Share of loss in equity investments, net of taxes | (3,324,434 | ) | (7,352,089 | ) | (36,772 | ) | (10,713,295 | ) | ||||||||
Impairment | — | (11,212,424 | ) | — | (11,212,424 | ) | ||||||||||
Balance at December 31, 2010 (RMB) | 894,361 | — | 11,963,228 | 12,857,589 | ||||||||||||
Balance at December 31, 2010 (US$, Note 3) | 135,509 | — | 1,812,610 | 1,948,120 | ||||||||||||
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December 31, 2009 | December 31, 2010 | December 31, 2010 | ||||||||||
RMB | RMB | US$ | ||||||||||
(Note 3) | ||||||||||||
Office buildings | 58,835,873 | 59,911,552 | 9,077,508 | |||||||||
Computer and equipment | 581,259,400 | 223,054,013 | 33,796,063 | |||||||||
Leasehold improvements | 6,399,643 | 8,860,119 | 1,342,442 | |||||||||
Office furniture and fixtures | 7,219,856 | 13,822,926 | 2,094,383 | |||||||||
Motor vehicles | 10,411,896 | 10,251,896 | 1,553,318 | |||||||||
Software | 13,690,415 | 16,366,922 | 2,479,837 | |||||||||
Less: accumulated depreciation and amortization | (571,773,926 | ) | (248,627,064 | ) | (37,670,767 | ) | ||||||
Impairment provision | (30,065,957 | ) | (25,578,900 | ) | (3,875,592 | ) | ||||||
Net book value | 75,977,200 | 58,061,464 | 8,797,192 | |||||||||
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Accumulated | ||||||||||||||||
Gross | Impairment | Net | ||||||||||||||
Note | Amount | Loss | Amount | |||||||||||||
RMB | RMB | RMB | ||||||||||||||
Balance at January 1, 2009 | 30,199,751 | — | 30,199,751 | |||||||||||||
Impairment loss recognized | 27 | — | (30,199,751 | ) | (30,199,751 | ) | ||||||||||
Balance at December 31, 2009 | 30,199,751 | (30,199,751 | ) | — | ||||||||||||
Acquisition | 5 | 10,870,537 | — | 10,870,537 | ||||||||||||
Translation difference | (322,214 | ) | — | (322,214 | ) | |||||||||||
Balance at December 31, 2010 | 40,748,074 | (30,199,751 | ) | 10,548,323 | ||||||||||||
Balance at December 31, 2010 (US$, Note 3) | 6,173,951 | (4,575,720 | ) | 1,598,231 | ||||||||||||
December 31, | December 31, | December 31, | ||||||||||
2009 | 2010 | 2010 | ||||||||||
RMB | RMB | US$ | ||||||||||
(Note 3) | ||||||||||||
Backlog | — | 2,730,000 | 413,636 | |||||||||
Upfront licensing fees | 275,860,798 | 237,258,342 | 35,948,234 | |||||||||
Less: Accumulated amortization | (66,779,481 | ) | (76,791,769 | ) | (11,635,117 | ) | ||||||
Impairment provision | (126,042,609 | ) | (130,683,870 | ) | (19,800,586 | ) | ||||||
Licensing fee refunds transferred to prepayments and other current assets | (31,410,422 | ) | (26,704,800 | ) | (4,046,182 | ) | ||||||
Translation difference | — | (80,920 | ) | (12,261 | ) | |||||||
51,628,286 | 5,726,983 | 867,724 | ||||||||||
Intangible assets from an acquisition relating to C9I | 283,701,360 | 283,701,360 | 42,985,055 | |||||||||
Less: accumulated amortization | (283,701,360 | ) | (283,701,360 | ) | (42,985,055 | ) | ||||||
— | — | — | ||||||||||
Net book value of intangible assets subject to amortization | 51,628,286 | 5,726,983 | 867,724 | |||||||||
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December 31, | December 31, | December 31, | ||||||||||
2009 | 2010 | 2010 | ||||||||||
RMB | RMB | US$ | ||||||||||
(Note 3) | ||||||||||||
In-process research and development | — | 12,285,000 | 1,861,364 | |||||||||
Translation difference | — | (364,141 | ) | (55,173 | ) | |||||||
Net book value of intangible assets not subject to amortization | — | 11,920,859 | 1,806,191 | |||||||||
RMB | US$ | |||||||
(Note 3) | ||||||||
2011 | 1,844,544 | 279,476 | ||||||
2012 | 1,093,913 | 165,744 | ||||||
2013 | 413,254 | 62,614 | ||||||
2014 | 377,143 | 57,143 | ||||||
2015 | 377,143 | 57,143 | ||||||
Total | 4,105,997 | 622,120 | ||||||
December 31, 2009 | December 31, 2010 | December 31, 2010 | ||||||||||
RMB | RMB | US$ | ||||||||||
(Note 3) | ||||||||||||
Land use right | 85,160,349 | 85,160,349 | 12,903,083 | |||||||||
Less: accumulated amortization | (5,282,502 | ) | (7,203,413 | ) | (1,091,426 | ) | ||||||
Net book value | 79,877,847 | 77,956,936 | 11,811,657 | |||||||||
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(i) | Due to weaker than expected operating performance of certain games, the Group recognized impairment provisions on computer equipment and upfront licensing fees of RMB8.9 million and RMB7.1 million, respectively, in 2008 and RMB7.6 million and RMB26.7 million, respectively, in 2009. Impairment provisions on computer equipment and upfront licensing fees of RMB4.9 million (US$0.7 million) and RMB21.5 million (US$3.3 million), respectively, were recognized in 2010. A significant factor for the internally developed income approach is forecasting performance and revenue from the games. The Group continued to monitor the actual revenue performance versus forecast revenue. Due to the lower than expected market acceptance of the games and the following the content updates, certain games experienced significantly lower than expected user levels and revenue. |
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(ii) | The Group has been monitoring its licensed games that have not commercially launched, including but not limited to their market acceptance and operational performance in other regions where they are commercially launched and operated by other operators. Such information includes ceased operation in certain regions where games were commercially launched, delayed or unsuccessful commercial launch, and user number significantly below the expectation despite the launching of patches. The Group incorporated these results and experience into it continuous evaluation of the forecasted results of the respective games and taking into account the Group’s expected commercial launch and cash flows in the evaluation of impairment testing for the carrying value of upfront licensing fees. Based on the Group’s impairment tests, impairment provisions on upfront licensing fees of RMB66.1 million, RMB0.8 million and RMB11.5 million (US$1.7 million) were recognized in 2008, 2009 and 2010, respectively. |
(iii) | During the year ended December 31, 2009, impairment provisions on idle computer equipment of RMB13.6 million was recognized in view of the low possibility to reuse the idle computer equipment in the foreseeable future. |
Fair Value Measurements Using Significant | ||||||||
Unobservable Inputs | ||||||||
(Level 3) | ||||||||
2008 | 2009 | |||||||
RMB | RMB | |||||||
Balance at the beginning of the year | 29,218,400 | 29,218,400 | ||||||
Purchases | 14,634,730 | 6,837,000 | ||||||
Reversal of unrealized gain previously recognized in other comprehensive income | — | (13,643,131 | ) | |||||
Impairment losses included in earnings | (14,634,730 | ) | (22,412,269 | ) | ||||
Balance at the end of the year | 29,218,400 | — | ||||||
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Fair Value Measurements at Reporting Date Using | ||||||||||||||||||||||||
Quoted Prices | Significant | |||||||||||||||||||||||
in Active | Other | Significant | ||||||||||||||||||||||
Year Ended | Markets for | Observable | Unobservable | |||||||||||||||||||||
December 31, | Identical Assets | Inputs | Inputs | |||||||||||||||||||||
Note | 2009 | (Level 1) | (Level 2) | (Level 3) | Total Losses | |||||||||||||||||||
RMB | RMB | RMB | RMB | RMB | ||||||||||||||||||||
Computers and equipment | 13 | — | — | — | — | 21,164,693 | ||||||||||||||||||
Upfront licensing fees | 13 | — | — | — | — | 27,507,199 | ||||||||||||||||||
Goodwill | 10 | — | — | — | — | 30,199,751 | ||||||||||||||||||
Total | — | — | — | — | 78,871,643 | |||||||||||||||||||
Fair Value Measurements at Reporting Date Using | ||||||||||||||||||||||||
Quoted Prices | Significant | |||||||||||||||||||||||
in Active | Other | Significant | ||||||||||||||||||||||
Year Ended | Markets for | Observable | Unobservable | |||||||||||||||||||||
December 31, | Identical Assets | Inputs | Inputs | |||||||||||||||||||||
Note | 2010 | (Level 1) | (Level 2) | (Level 3) | Total Losses | |||||||||||||||||||
RMB | RMB | RMB | RMB | RMB | ||||||||||||||||||||
Investments in equity investees | 7.2 | 24,892,921 | — | — | 24,892,921 | 196,115,321 | ||||||||||||||||||
Computers and equipment | 13 | — | — | — | — | 4,928,991 | ||||||||||||||||||
Upfront licensing fees | 13 | — | — | — | — | 33,020,462 | ||||||||||||||||||
Total | — | — | — | 24,892,921 | 234,064,774 | |||||||||||||||||||
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Significant unobservable inputs (Level 3) were used in measuring the fair value of the Group’s investments in equity investees based on which the other-than-temporary impairment losses were calculated. The Group measured the fair value of its investment in BZSIT as of December 31, 2010 using the income approach based on a weighted average of multiple discounted cash flow scenarios, which required the use of unobservable inputs including assumptions of projected revenue, expenses, capital spending, and other costs, as well as a discount rate calculated based on the risk profile of the online game industry and company-specific risk adjustments. As a result of the impairment test, the investment in BZSIT with a carrying amount of RMB11.2 million (US$1.7 million) was fully impaired. Using the valuation technique described in 7.2<2>, the Group measured the fair value of its investment in G10 at RMB24.9 million (US$3.8 million) as of December 31, 2010. The investment in G10 with a carrying amount of RMB276.0 million (US$41.8 million), after reduction of RMB66.2 million (US$10.0 million) receivable, was impaired by the amount of RMB184.9 million (US$28.0 million). The above impairment charges were included in impairment loss on investments on the consolidated statement of operations and comprehensive income (loss) for the year ended December 31, 2010. |
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For the year ended December 31, | ||||||||||||||||
2008 | 2009 | 2010 | 2010 | |||||||||||||
RMB | RMB | RMB | US$ | |||||||||||||
(Note 3) | ||||||||||||||||
Current income tax (expense) benefit | (13,453,655 | ) | (1,871,215 | ) | 39,061 | 5,918 | ||||||||||
China | (13,453,655 | ) | (1,871,215 | ) | 39,061 | 5,918 | ||||||||||
Other jurisdictions | — | — | — | — | ||||||||||||
Deferred taxation | 15,831,538 | 69,182,452 | 131,458,011 | 19,917,880 | ||||||||||||
China | 15,831,538 | 69,182,452 | 56,671,847 | 8,586,643 | ||||||||||||
Other jurisdictions | — | — | 74,786,164 | 11,331,237 | ||||||||||||
Change in valuation allowance | (50,306,416 | ) | (61,775,371 | ) | (138,865,092 | ) | (21,040,165 | ) | ||||||||
China | (50,306,416 | ) | (61,775,371 | ) | (64,078,928 | ) | (9,708,928 | ) | ||||||||
Other jurisdictions | — | — | (74,786,164 | ) | (11,331,237 | ) | ||||||||||
Income tax (expense) benefit | (47,928,533 | ) | 5,535,866 | (7,368,020 | ) | (1,116,367 | ) | |||||||||
For the year ended | For the year ended | For the year ended | ||||||||||
December 31, | December 31, | December 31, | ||||||||||
2008 | 2009 | 2010 | ||||||||||
PRC Statutory EIT rate | 25 | % | 25 | % | 25 | % | ||||||
Effect of different tax rates in other jurisdictions | 24 | % | (15 | %) | (4 | %) | ||||||
Change of valuation allowance | 35 | % | (15 | %) | (15 | %) | ||||||
Income not subject to tax and non-deductible expenses, net | — | (8 | %) | (9 | %) | |||||||
Effect of tax holidays | (49 | %) | 3 | % | (1 | %) | ||||||
Effect of future tax rate change | — | 11 | % | 3 | % | |||||||
Other | (2 | %) | — | — | ||||||||
Effective EIT rate | 33 | % | 1 | % | (1 | %) | ||||||
December 31, | December 31, | December 31, | ||||||||||
2009 | 2010 | 2010 | ||||||||||
RMB | RMB | US$ | ||||||||||
(Note 3) | ||||||||||||
Temporary differences related to expenses and accruals | 4,985,989 | 4,719,640 | 715,097 | |||||||||
Temporary differences related to provision for advances to suppliers | 1,912,082 | 2,085,908 | 316,047 | |||||||||
Temporary differences related to provision for doubtful accounts | 3,744,950 | 6,080,201 | 921,243 | |||||||||
Temporary differences related to prepaid royalties | 5,564,504 | 7,795,758 | 1,181,175 | |||||||||
Other | — | 939,162 | 142,297 | |||||||||
Total current deferred tax assets | 16,207,525 | 21,620,669 | 3,275,859 | |||||||||
Less: Valuation allowance | (14,067,629 | ) | (21,620,669 | ) | (3,275,859 | ) | ||||||
Net current deferred tax assets | 2,139,896 | — | — | |||||||||
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December 31, | December 31, | December 31, | ||||||||||
2009 | 2010 | 2010 | ||||||||||
RMB | RMB | US$ | ||||||||||
(Note 3) | ||||||||||||
Temporary differences related to depreciation, amortization, and impairment of equipment and intangible assets | 49,732,344 | 19,516,778 | 2,957,088 | |||||||||
Startup expenses and advertising fee | 2,483,828 | 5,929,990 | 898,483 | |||||||||
Temporary differences related to research and development credits | — | 2,916,809 | 441,941 | |||||||||
Foreign tax credits | — | 16,358,069 | 2,478,495 | |||||||||
Temporary differences related to provision for prepayment for equipment | 11,625,000 | 11,625,000 | 1,761,364 | |||||||||
Tax loss carry forwards | 45,621,033 | 179,160,426 | 27,145,519 | |||||||||
Total non-current deferred tax assets | 109,462,205 | 235,507,072 | 35,682,890 | |||||||||
Less: Valuation allowance | (104,195,020 | ) | (235,507,072 | ) | (35,682,890 | ) | ||||||
Net non-current deferred tax assets | 5,267,185 | — | — | |||||||||
Total deferred tax assets | 7,407,081 | — | — | |||||||||
December 31, | December 31, | December 31, | ||||||||||
2009 | 2010 | 2010 | ||||||||||
RMB | RMB | US$ | ||||||||||
(Note 3) | ||||||||||||
Temporary differences related to amortization of intangible assets | — | 5,803,848 | 879,371 |
For the year ended | For the year ended | For the year ended | ||||||||||
December 31, 2009 | December 31, 2010 | December 31, 2010 | ||||||||||
RMB | RMB | US$ | ||||||||||
(Note 3) | ||||||||||||
Balance at January 1 | 56,487,278 | 118,262,649 | 17,918,583 | |||||||||
Increase in valuation allowance | 70,599,298 | 138,865,092 | 21,040,166 | |||||||||
Reversal of valuation allowance | (8,823,927 | ) | — | — | ||||||||
Balance at December 31 | 118,262,649 | 257,127,741 | 38,958,749 | |||||||||
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December 31, | December 31, | December 31, | ||||||||||
2009 | 2010 | 2010 | ||||||||||
RMB | RMB | US$ | ||||||||||
(Note 3) | ||||||||||||
Staff cost related payables | 23,944,309 | 20,037,102 | 3,035,925 | |||||||||
Professional services | 16,721,169 | 12,761,093 | 1,933,499 | |||||||||
Product development services | 2,665,366 | 2,665,366 | 403,843 | |||||||||
Marketing and promotion | 2,045,100 | 1,034,855 | 156,796 | |||||||||
Others | 6,328,481 | 5,830,401 | 883,394 | |||||||||
51,704,425 | 42,328,817 | 6,413,457 | ||||||||||
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Weighted-Average | ||||||||||||||||
Remaining | ||||||||||||||||
Number of | Weighted-Average | Contractual Term | Aggregate Intrinsic | |||||||||||||
Options | Exercise Price | (years) | Value | |||||||||||||
Outstanding at January 1, 2010 | 1,304,100 | US$ | 8.07 | 2.63 | Nil | |||||||||||
Granted | 3,887,382 | US$ | 5.35 | |||||||||||||
Exercised | (2,502 | ) | US$ | 5.13 | ||||||||||||
Forfeited | (1,193,098 | ) | US$ | 7.33 | ||||||||||||
Outstanding at December 31, 2010 | 3,995,882 | US$ | 5.65 | 4.57 | US$ | 6,061,473 | ||||||||||
Vested and expected to vest at December 31, 2010 | 3,538,957 | US$ | 5.68 | 4.55 | US$ | 5,341,379 | ||||||||||
Exercisable at December 31, 2010 | 527,389 | US$ | 7.37 | 3.57 | US$ | 584,692 | ||||||||||
For the year | For the year | |||||||
ended December 31, 2008 | ended December 31, 2010 | |||||||
Risk-free interest rate | 1.53 | % | 0.77%-1.03 | % | ||||
Expected life (years) | 2.90 | 3.25 | ||||||
Expected dividend yield | — | — | ||||||
Volatility | 54 | % | 59.24%-60.71 | % | ||||
Fair value of options at grant date | US$4.46 | US$2.13-US$2.58 |
For the year | ||||
ended December 31, 2009 | ||||
Risk-free interest rate | 0.08%-1.44 | % | ||
Expected remaining life (years) | 0.13-3.14 | |||
Expected dividend yield | — | |||
Volatility | 49%-67 | % | ||
Fair value of incremental cost | US$0.06-US$2.03 |
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Risk-free interest rate | 1.22 | % | ||
Expected life (years) | 1.81 | |||
Expected dividend yield | — | |||
Volatility | 57 | % | ||
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Weighted-Average | ||||||||||||||||
Weighted-Average | Remaining | |||||||||||||||
Number of | Exercise Price | Contractual Term | Aggregate | |||||||||||||
Options | per Option | (years) | Intrinsic Value | |||||||||||||
Outstanding at January 1, 2010 | 18,901,000 | HK$ | 0.10 | 6.0 | RMB | 414,915 | ||||||||||
Forfeited | (2,026,000 | ) | HK$ | 0.10 | ||||||||||||
Outstanding at December 31, 2010 | 16,875,000 | HK$ | 0.10 | 5.0 | Nil | |||||||||||
Vested and expected to vest at December 31, 2010 | 16,875,000 | HK$ | 0.10 | 5.0 | Nil | |||||||||||
Exercisable at December 31, 2010 | 12,656,250 | HK$ | 0.10 | 5.0 | Nil | |||||||||||
Risk-free interest rate | 3.75 | % | ||
Expected life (years) | 5.00 | |||
Expected dividend yield | — | |||
Volatility | 53 | % |
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Weighted-Average | ||||||||||||||||
Weighted-Average | Remaining | |||||||||||||||
Number of | Exercise Price | Contractual Term | Aggregate | |||||||||||||
Options | per Option | (years) | Intrinsic Value | |||||||||||||
Outstanding at April 6, 2010 | 3,168,201 | US$ | 0.190 | 3.08 | US$ | 85,185 | ||||||||||
Granted | 7,235,874 | US$ | 0.137 | |||||||||||||
Exercised | (122,355 | ) | US$ | 0.038 | ||||||||||||
Forfeited | (1,891,848 | ) | US$ | 0.236 | ||||||||||||
Outstanding at December 31, 2010 | 8,389,872 | US$ | 0.136 | 4.86 | US$ | 78,375 | ||||||||||
Vested and expected to vest at December 31, 2010 | 8,246,548 | US$ | 0.136 | 4.88 | US$ | 69,670 | ||||||||||
Exercisable at December 31, 2010 | 2,354,921 | US$ | 0.136 | 4.05 | US$ | 53,269 | ||||||||||
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Risk-free interest rate | 1.70%-5.00 | % | ||
Expected life (years) | 5.00-6.00 | |||
Expected dividend yield | — | |||
Volatility | 38.89%-69.36 | % |
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For the year | For the year | For the year | For the year | |||||||||||||
ended December | ended December | ended December | ended December | |||||||||||||
31, 2008 | 31, 2009 | 31, 2010 | 31, 2010 | |||||||||||||
RMB | RMB | RMB | US$ | |||||||||||||
(Note 3) | ||||||||||||||||
Numerator: | ||||||||||||||||
Net income (loss) attributable to ordinary shareholders | 96,836,036 | (405,152,407 | ) | (499,611,594 | ) | (75,698,727 | ) | |||||||||
Denominator: | ||||||||||||||||
Denominator for basic earnings (loss) per share — weighted-average shares outstanding | 27,664,687 | 25,414,620 | 25,121,679 | 25,121,679 | ||||||||||||
Dilutive effect of share options and warrants | 39,514 | — | — | — | ||||||||||||
Denominator for diluted earnings (loss) per share | 27,704,201 | 25,414,620 | 25,121,679 | 25,121,679 | ||||||||||||
Earnings per share | ||||||||||||||||
- Basic | 3.50 | (15.94 | ) | (19.89 | ) | (3.01 | ) | |||||||||
- Diluted | 3.50 | (15.94 | ) | (19.89 | ) | (3.01 | ) | |||||||||
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December 31, 2008 | December 31, 2009 | December 31, 2010 | ||||||||||
RMB | RMB | RMB | ||||||||||
Net income (loss) attributable to The9 Limited | 96,836,036 | (405,152,407 | ) | (499,611,594 | ) | |||||||
Transfers (to) from the noncontrolling interest | ||||||||||||
Increase in The9 Limited’s additional paid-in capital for issuance of shares by Red 5 upon stock option exercise | — | — | 5,564 | |||||||||
Increase in The9 Limited’s additional paid-in capital for purchase of common stock of Red 5 from holders of noncontrolling interest | — | — | 523,586 | |||||||||
Decrease in The9 Limited’s additional paid-in capital for conversion of a loan into equity of Fire Rain | — | (2,757,183 | ) | — | ||||||||
Decrease in The9 Limited’s additional paid-in capital for capital contribution to Red 5, Fire Rain and Wanyouyl | — | — | (6,981,392 | ) | ||||||||
Change from net income attributable to The9 Limited and transfers (to) from noncontrolling interest | 96,836,036 | (407,909,590 | ) | (506,063,836 | ) | |||||||
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RMB | US$ | |||||||
(Note 3) | ||||||||
2011 | 8,009,544 | 1,213,567 | ||||||
2012 | 1,729,965 | 262,116 | ||||||
2013 | 1,461,240 | 221,400 | ||||||
11,200,749 | 1,697,083 | |||||||
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• | A provision on a receivable amounting to RMB18.0 million from a customer that purchased WoW prepaid player cards from the Group for distribution, as a result of the expiration of the Group’s WoW license on June 7, 2009 and, among other things, the impact on the ongoing relationship with the customer. |
• | A RMB3.9 million provision for prepaid royalties. |
• | A RMB22.7 million charge to increase the valuation allowance for deferred tax assets, which represented incremental income taxes as a result of non-renewal of the WoW license prior to the evaluation and recording of impairment charges as a result of non-renewal of the WoW license. | ||
• | A RMB68.4 million additional depreciation expense related to computer equipment to reflect the change to a shorter expected useful life of the underlying assets due to non-renewal of the WoW license agreement. The Group assessed the alternative uses for equipment used in connection with the operation of WoW, taking into consideration future expected game operations, as well as expected value at the WoW license expiration date. As a result, the Group adjusted the expected useful life of the servers and related equipment, and the expected value of the servers and related equipment at the end of the WoW license. This change in accounting estimate has been accounted for prospectively from January 1, 2008. As a result, the Group recorded additional depreciation expense as a component of cost of service in the amount of RMB68.4 million in 2008 to reflect the change to a shorter expected useful life of the underlying assets. Depreciation expense relating to this change is to decrease both profit from operations and net income by RMB68.4 million, and to decrease both basic and diluted net income attributable to holders of ordinary shares per share by RMB2.47 in 2008. |
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• | A full provision for prepayments to a vendor, whom had been the Group’s primary supplier of computer servers and related computer equipment, in connection with its purchase of certain fixed assets, including RMB46.5 million originally recorded as prepayments for equipment and RMB8.7 million originally recorded as advances to suppliers. With the non-renewal of WoW license, the Company evaluated a number of factors, including the status of production of the assets underlying the advance prepayments, ability to recover the value of the advances through the possible sale of the fixed assets upon the completion of production, the ability to utilize the servers upon completion of production, as well as the ability to recover the amounts advanced to the vendor and as a result of such assessment, and concluded that a full provision in connection with such advances and prepayments was necessary. The provision was recorded as general and administrative expenses for the year ended December 31, 2008. |
• | A RMB7.0 million provision on receivables and prepayments and other current assets in connection with Game First International Corporation (“GFD”) — As of December 31, 2008, the Group’s outstanding receivable from selling of 100% of its interest in Spring Asia Limited, a wholly owned subsidiary to a third party in 2006, amounted to RMB7.0 million, including RMB1.4 million recorded in accounts receivable and RMB5.6 million recorded in prepayments and other current assets. The Group assessed the impact of the non-renewal of the WoW license on its ongoing relationship with GFD, whose equity interest is 30% held by Spring Asia Limited, and resulting collectability of this receivable and concluded collection to be unlikely resulting in the recording of impairment charge in the amount of RMB7.0 million recorded in general and administrative expenses for the year ended December 31, 2008. |
• | A RMB1.7 million provision on inventories. |
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• | The Group continued to make prepayment of royalties for WoW until the expiration of the WoW license. As a result of the non-renewal of the WoW license, the Group recognized an impairment loss for prepaid royalties, deferred cost and related prepaid withholding taxes of RMB60.7 million, RMB38.1 million and RMB4.4 million, respectively, for the year ended December 31, 2009. |
• | As a result of change in accounting estimate on the useful life of computer equipment through the end of the WoW license, the Group recorded additional depreciation expense as a component of cost of service in the amount of RMB40.0 million in 2009. Depreciation expense relating to this change is to increase both loss from operations and net loss by RMB40.0 million, and to increase both basic and diluted net loss per share by RMB1.57 in 2009. |
• | A RMB30.2 million impairment of goodwill following the expiration of the WoW license on June 7, 2009. The Group determined the fair value of the reporting unit related to WoW using the income approach. The income approach included the use of a discounted cash flow model, which required assumptions of projected revenue expenses, capital expenditures and other costs, as well as a discount rate calculated based on the risk profile of the online game industry. The Group does not expect any revenue from WoW reporting unit after expiration of the WoW license and assessed the fair value of the WoW reporting unit to be zero. Accordingly, the assigned value for goodwill related to WoW was zero and a full impairment was recognized. |
• | As a result of non-renewal of WoW license beyond June 7, 2009, the Group announced a refund plan in connection with unactivated WoW game point cards, which the Group recorded as advance from customers. According to the plan, unactivated WoW game point card holders are eligible to receive a cash refund from the Group. In connection with the settlement of both unactivated points cards and activated but unconsumed point cards, the maximum refund the Group may potentially make amounts to approximately RMB200.4 million, of which RMB4.0 million was refunded in 2009. The difference between the face value of the point cards and the net proceeds the Group received in the sales of the respective point cards was recorded as additional cost of services, amounting to RMB22.1 million for the year ended December 31, 2009. The advances from customers and deferred revenue relating to these WoW game point cards will be recorded as revenue after the release of legal liability to refund under the respective laws. The Group has engaged an agent to settle the liability with the game point card holders who have claimed a refund. As of December 31, 2009, the balance of the advance payment to the agent was RMB43.3 million. In 2010, RMB0.4 million (US$0.1 million) was refunded to game point card holders. |
• | As of December 31, 2009, the WoW related computer and equipment and intangible assets have been fully depreciated and no additional impairment was recognized in 2009. |
For the year ended December 31, 2010, there was no additional impairment and charges provided related to the expiration of WoW license. |
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