Unassociated Document
As Filed with the Securities and Exchange Commission on June 29, 2010
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Registration No. 333-166866
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SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
S-1/A
Amendment
No. 1
REGISTRATION
STATEMENT UNDER THE SECURITIES ACT OF 1933
China
Century Dragon Media, Inc.
(Name
of Registrant As Specified in its Charter)
Delaware
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7311
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26-1583852
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(State or Other Jurisdiction of
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(Primary Standard Industrial
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(I.R.S. Employer Identification No.)
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Incorporation
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Classification Code Number)
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or Organization)
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Room
801, No. 7, Wenchanger Road,
Jiangbei,
Huizhou City, Guangdong Province, China
0086-0752-3138789
(Address
and Telephone Number of Principal Executive Offices)
Corporation
Service Company
2711
Centerville Road
Suite
400
Wilmington,
DE 19808
800-222-2122
(Name,
Address and Telephone Number of Agent for Service)
Copies
to
Thomas
J. Poletti, Esq.
Melissa
A. Brown, Esq.
K&L
Gates LLP
10100
Santa Monica Blvd., 7th Floor
Los
Angeles, CA 90067
Telephone:
(310) 552-5000
Facsimile:
(310) 552-5001
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David
Ficksman, Esq.
TroyGould
PC
1801
Century Park East, Suite 1600
Los
Angeles, CA 90067-2367
Telephone:
(310) 789-1290
Facsimile:
(310) 789-1490
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Approximate Date of Proposed Sale to
the Public: From time to time after the effective date of this
Registration Statement
If any of
the securities being registered on this form are to be offered on a delayed or
continuous basis pursuant to Rule 415 under the Securities Act of 1933, check
the following box.R
If this
form is filed to register additional securities for an offering pursuant to Rule
462(b) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. £
If this
form is a post-effective amendment filed pursuant to Rule 462(c) under the
Securities Act, check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for the same
offering. £
If this
form is a post-effective amendment filed pursuant to Rule 462(d) under the
Securities Act, check the following box and list the Securities Act registration
statement number of the earlier effective registration statement the same
offering. £
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o
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Accelerated filer o
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Non-accelerated filer þ
(Do not check if a smaller reporting
company)
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Smaller reporting company o
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CALCULATION
OF REGISTRATION FEE
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Proposed
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Proposed
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Maximum
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Maximum
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Amount of
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Title of Each Class of
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Amount To Be
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Offering Price
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Aggregate
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Registration
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Securities To Be Registered
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Registered (1)
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Per Share
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Offering Price
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Fee
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Common
Stock, $0.0001 par value per share
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2,875,000 |
(2) |
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4.00 |
(2) |
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$ |
11,500,000 |
(2) |
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$ |
819.95 |
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Common
Stock, $0.0001 par value per share
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3,566,838 |
(3) |
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4.00 |
(4) |
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$ |
14,267,352 |
(4) |
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$ |
1,017.26 |
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Underwriter’s
Warrants to Purchase Common Stock
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125,000 |
(5) |
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N/A |
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N/A |
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N/A |
(6) |
Common
Stock Underlying Underwriter’s Warrants, $0.0001 par value per
share
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125,000 |
(7) |
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N/A |
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$ |
600,000 |
(8) |
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$ |
42.78 |
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Total
Registration Fee
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$ |
1,879.99 |
(9) |
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(1)
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In
accordance with Rule 416(a), the Registrant is also registering hereunder
an indeterminate number of additional shares of Common Stock that shall be
issuable pursuant to Rule 416 to prevent dilution resulting from stock
splits, stock dividends or similar
transactions.
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(2)
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The
registration fee for securities to be offered by the Registrant is based
on an estimate of the Proposed Maximum Aggregate Offering Price of the
securities, and such estimate is solely for the purpose of calculating the
registration fee pursuant to Rule 457(o). Includes shares that the
Underwriter has the option to purchase from the selling stockholders and
the Registrant to cover over-allotments, if
any.
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(3)
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This
Registration Statement also covers the resale under a separate resale
prospectus (the “Resale Prospectus”) by selling stockholders of the
Registrant of up to 3,566,838 shares of Common Stock previously issued to
the selling stockholders as named in the Resale
Prospectus.
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(4)
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Estimated
solely for the purpose of calculating the registration fee pursuant to
Rule 457.
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(5)
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Represents
the maximum number of warrants, each of which will be exercisable at a
percentage of the per share offering price, to purchase the Registrant’s
common stock to be issued to the Underwriter in connection with the public
offering.
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(6)
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In
accordance with Rule 457(g) under the Securities Act, because the shares
of the Registrant’s common stock underlying the Underwriter’s warrants are
registered hereby, no separate registration fee is required with respect
to the warrants registered hereby.
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(7)
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Represents
the maximum number of shares of the Registrant’s common stock issuable
upon exercise of the Underwriter’s
warrants.
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(8)
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Estimated
solely for the purpose of calculating the registration fee pursuant to
Rule 457(g) under the Securities Act, based on an estimated maximum
exercise price of $4.80 per share, or 120% of the maximum offering
price.
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The
Registrant amends this registration statement on such date or dates as may be
necessary to delay its effective date until the Registrant shall file a further
amendment which specifically states that this registration statement shall
hereafter become effective in accordance with Section 8(a) of the Securities Act
of 1933, or until the registration statement shall become effective on such date
as the Commission, acting pursuant to Section 8(a), may determine.
EXPLANATORY
NOTE
This
Registration Statement contains two prospectuses, as set forth
below.
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·
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Public
Offering Prospectus. A prospectus to be used for the public
offering by the Registrant (the “Public Offering Prospectus”) of up to
2,500,000 shares of the Registrant’s common stock (in addition to 375,000
shares that may be sold upon exercise of the Underwriter’s over-allotment
option, if any) through the Underwriter named on the cover page of the
Public Offering Prospectus. We are also registering the warrants and
shares of common stock underlying the warrants to be received by the
Underwriter in this offering.
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·
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Resale
Prospectus. A prospectus to be used for the resale by selling
stockholders of up to 3,566,838 shares of the Registrant’s common stock
(the “Resale Prospectus”).
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The
Resale Prospectus is substantively identical to the Public Offering Prospectus,
except for the following principal points:
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·
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they
contain different outside front
covers;
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·
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they
contain different Offering sections in the Prospectus Summary section
beginning on page 2;
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·
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they
contain different Use of Proceeds sections on page
33;
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·
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the
Capitalization and Dilution sections on pages 35 and 36, respectively, of
the Public Offering Prospectus are deleted from the Resale
Prospectus;
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·
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the
“Selling Stockholders” portion of the Beneficial Ownership of Certain
Beneficial Owners, Management, and Selling Stockholders on page 65 of the
Public Offering Prospectus is deleted from the Resale
Prospectus;
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·
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a
Selling Stockholder section is included in the Resale Prospectus beginning
on page 74A;
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·
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references
in the Public Offering Prospectus to the Resale Prospectus will be deleted
from the Resale Prospectus;
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the
Underwriting section from the Public Offering Prospectus on page 74 is
deleted from the Resale Prospectus and a Plan of Distribution is inserted
in its place;
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the
Legal Matters section in the Resale Prospectus on page 77 deletes the
reference to counsel for the Underwriter;
and
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the
outside back cover of the Public Offering Prospectus is deleted from the
Resale Prospectus.
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The
Registrant has included in this Registration Statement, after the financial
statements, a set of alternate pages to reflect the foregoing differences of the
Resale Prospectus as compared to the Public Offering Prospectus.
The
information in this prospectus is not complete and may be changed. We may not
sell these securities until the registration statement filed with the Securities
and Exchange Commission becomes effective. This prospectus is not an offer
to sell
these securities and we are not soliciting offers to buy these securities in any
state where the offer or sale is not permitted.
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PRELIMINARY
PROSPECTUS
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Subject
To Completion
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June
29, 2010
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2,500,000
Shares
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China
Century Dragon Media,
Inc.
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Common
Stock
This is a
public offering of our common stock. We are a reporting company under
Section 13 of the Securities Exchange Act of 1934, as amended. Our shares of
common stock are not currently listed or quoted for trading on any national
securities exchange or national quotation system. We intend to apply for the
listing of our common stock on the NASDAQ Global Market or the NYSE Amex
Equities under the symbol “[___].” There can, however, be no
assurance that our common stock will be accepted for listing on either such
exchange.
We are
offering all of the 2,500,000 shares of our common stock offered by this
prospectus. We expect that the public offering price of our common stock
will be between $3.00 and $4.00 per share.
Investing
in our common stock involves a high degree of risk. Before buying any
shares, you should carefully read the discussion of material risks of investing
in our common stock in “Risk Factors” beginning on page 10 of this
prospectus.
Neither
the U.S. Securities and Exchange Commission nor any state securities commission
has approved or disapproved of anyone’s investment in these securities or
determined if this prospectus is truthful or complete. Any representation to the
contrary is a criminal offense.
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Per Share
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Total
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Public
offering price
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$ |
[___] |
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$ |
[___] |
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Underwriting
discounts and commissions
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$ |
[___] |
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$ |
[___] |
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Proceeds,
before expenses, to China Century Dragon Media, Inc.
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$ |
[___] |
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$ |
[___] |
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Proceeds,
before expenses, to selling stockholders
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$ |
[___] |
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$ |
[___] |
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The
Underwriter has a 45-day option to purchase up to 375,000 additional shares of
common stock at the public offering price solely to cover over-allotments, if
any, if the Underwriter sells more than 2,500,000 shares of common stock in this
offering (the “Over-allotment Shares”). The Underwriter agreed to purchase
70% of the Over-allotment Shares from the selling stockholders identified in
this prospectus and the remaining shares from us. We will not receive any
proceeds from the sale of the shares, if any, by the selling stockholders.
If the Underwriter exercises this option in full, the total underwriting
discounts and commissions will be $[__], and total proceeds, before
expenses, to the selling stockholders will be $[__] and the additional proceeds
to us, before expenses, from the over-allotment option exercise will be
$[__].
We have
agreed to pay the Underwriter an aggregate non-accountable expense allowance of
3.0% of the gross proceeds of this offering or $[__], based on a public offering
price of $[__] per share.
The
Underwriter will also receive warrants to purchase a number of shares equal to
5% of the shares of our common stock sold in connection with this offering, or
125,000 shares, exercisable at a per share price equal to 120% of the offering
price of this offering. The Underwriter is offering the common stock as
set forth under “Underwriting.” Delivery of the shares will be made
on or about [__________], 2010.
WestPark
Capital, Inc.
The Date
of this Prospectus is ____________________, 2010
[INSIDE
FRONT COVER]
PROSPECTUS
SUMMARY
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2
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SUMMARY
FINANCIAL DATA
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9
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RISK
FACTORS
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10
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CAUTIONARY
STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
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31
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USE
OF PROCEEDS
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33
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DIVIDEND
POLICY
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33
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CAPITALIZATION
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35
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MARKET
FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
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36
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DILUTION
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36
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SELECTED
CONSOLIDATED FINANCIAL DATA
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38
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MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
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39
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DESCRIPTION
OF BUSINESS
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51
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MANAGEMENT
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61
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CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS
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66
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BENEFICIAL
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS, MANAGEMENT, AND SELLING
STOCKHOLDERS
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68
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DESCRIPTION
OF SECURITIES
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70
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SHARES
ELIGIBLE FOR FUTURE SALE
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74
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UNDERWRITING
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77
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LEGAL
MATTERS
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80
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EXPERTS
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80
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ADDITIONAL
INFORMATION
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80
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INDEX
TO FINANCIAL STATEMENTS
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F-1
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PART
II INFORMATION NOT REQUIRED IN THE PROSPECTUS
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II-1
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SIGNATURES
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II-7
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Please
read this prospectus carefully. It describes our business, our financial
condition and results of operations. We have prepared this prospectus so that
you will have the information necessary to make an informed investment
decision.
You
should rely only on information contained in this prospectus. We and the
selling stockholders have not, and the Underwriter has not, authorized any other
person to provide you with different information. This prospectus is not
an offer to sell, nor is it seeking an offer to buy, these securities in any
state where the offer or sale is not permitted. The information in this
prospectus is complete and accurate as of the date on the front cover, but the
information may have changed since that date.
PROSPECTUS
SUMMARY
Because this is only a summary, it
does not contain all of the information that may be important to you. You should
carefully read the more
detailed information contained in this prospectus, including our financial
statements and related notes. Our business involves significant risks. You
should carefully consider the information under the heading “Risk Factors” beginning on page
10.
As
used in this prospectus, unless otherwise indicated, the terms “we,” “our,”
“us,” “Company” and “China Media” refer to China Century Dragon Media, Inc., a
Delaware corporation, formerly known as SRKP 25, Inc. (“SRKP 25”). We conduct
our business through Beijing CD Media Advertisement Co., Ltd., a company
incorporated under the laws of the People’s Republic of China, (“CD Media
Beijing”), an entity controlled by our wholly-owned subsidiary, Huizhou CD Media
Co., Ltd., a company incorporated under the laws of the People’s Republic of
China (“CD Media Huizhou”) through a series of contractual
arrangements.
The
“selling stockholders” refers, collectively, to the selling stockholders named
in this prospectus under the heading “Beneficial Ownership of Certain Beneficial
Owners, Management, and Selling Stockholders” who have agreed to sell to the
Underwriter up to 70% of the Over-allotment Shares sold in this offering, if
any.
“China”
or “PRC” refers to the People’s Republic of China. “RMB” or “Renminbi” refers to
the legal currency of China and “$” or “U.S. Dollars” refers to the legal
currency of the United States.
Company
Overview
We are a
television advertising company in China that primarily offers blocks of
advertising time on certain channels on China Central Television (“CCTV”). In
addition, we provide certain production services to help our clients integrate
market resources and find partners to assist with producing the commercials. We
purchase advertising time on certain of the nationally broadcast television
channels of CCTV, the state television broadcaster of the PRC and China’s
largest television network, which we repackage and sell to our customers. We
assist our customers in identifying the most appropriate advertising time slots
for their television commercials based on the customer’s advertising goals and
in developing a cost-effective advertising program to maximize their return on
their advertising investment.
Our goal
is to become a leading provider of integrated advertising services in China. We
intend to achieve this goal by implementing the following
strategies:
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Maximize our existing
resources to increase our profitability. We
plan to increase our profitability by (1) expanding our sale force; (2)
strengthening relationships with our existing clients to increase renewals
of contracts and cross-promoting our production services to existing
clients; and (3) exploring new opportunities for expanding our production
service offerings to new and existing
clients.
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·
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Expand our purchases of
advertising time on CCTV. We intend to increase our purchases
of advertising time aired on CCTV to help our clients reach a diverse
audience. We also intend to purchase advertising directly from CCTV
which we believe will provide access to a wider variety of advertising
opportunities.
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Develop regional television
advertising opportunities. We intend to build relationships
with providers of advertising time aired on certain highly rated regional
television networks. We believe that our purchase of advertising
time aired on regional networks will allow us to offer our clients new
ways to reach their target audience and allow us to expand our client base
to advertisers who desire a more targeted marketing
strategy.
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Enhance our television
production services. We plan to actively market our
production capabilities to potential as well as to existing clients.
We intend to open a production studio which will allow us to shoot
commercial television advertisements and public service announcements for
clients in China, as well as enable us to produce proprietary television
programming.
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·
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Expand into new advertising
platforms. We intend to expand our media resources in new
advertising media platforms, including the Internet, radio, mobile devices
and indoor or outdoor flat panel displays. We believe that our
expansion into new media platforms will enable us to offer added value to
our clients by providing them with an avenue to reach consumers and will
strengthen our competitiveness in the advertising
industry.
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·
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Pursue acquisitions to broaden
our service offerings and advertising platforms. We will
consider strategic acquisitions that will provide us with a broader range
of service offerings and access to new markets and new advertising media
platforms.
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Our
business is subject to a number of risks and uncertainties, including risks
related to our dependence on CCTV and our ability to continue obtaining
advertising time slots on CCTV; the continued strength of CCTV’s market
position; CCTV’s continued use of third party agencies to sell advertising time;
our dependence on a limited number of suppliers for our advertising time; our
lack of long-term contracts with our customers; our ability to adapt to changing
advertising trends and preferences of advertisers, television channels and
viewers; our corporate structure based on contractual arrangements with CD Media
Beijing; our limited ability to adjust the fees we charge for our services; and
PRC regulations regarding the advertising industry and advertising content in
the PRC. In addition, many of the strategies to achieve our goal of
becoming leading provider of integrated advertising services in China described
above are new activities that we have not historically engaged in, including our
purchasing of advertising time from satellite and regional television networks
and our entrance into new advertising media platforms. We may not be able
to implement these initiatives effectively. Investors should carefully
consider these risks and all of the risks discussed in “Risk Factors” beginning
on page 9 of this prospectus before investing in our
securities.
Corporate
Information
We were
incorporated in the State of Delaware on December 17, 2007. We were
originally organized as a “blank check” shell company to investigate and acquire
a target company or business seeking the perceived advantages of being a
publicly held corporation. On April 30, 2010, we (i) closed a share
exchange transaction, described below, pursuant to which we became the 100%
parent of CD Media (Holding) Co., Limited, a British Virgin Islands corporation
(“CD Media BVI”), (ii) assumed the operations of CD Media BVI and its
subsidiaries, including CD Media Huizhou, and (iii) changed our name from SRKP
25, Inc. to China Century Dragon Media, Inc. CD Media Huizhou controls CD
Media Beijing through contractual arrangements. While CD Media Huizhou has
no direct equity ownership in CD Media Beijing, through the contractual
agreements CD Media Huizhou receives the economic benefits of CD Media Beijing’s
operations.
Our
principal executive offices and corporate offices are located at Room 801, No.
7, Wenchanger Road, Jiangbei, Huizhou City, Guangdong Province, China. Our
telephone number is 0086-0752-3138789.
We are a
reporting company under Section 13 of the Securities Exchange Act of 1934, as
amended. Our shares of common stock are not currently listed or quoted for
trading on any national securities exchange or national quotation system. We
intend to apply for the listing of our common stock on either the NASDAQ Global
Market or the NYSE Amex Equities.
Recent
Events
Share
Exchange
Effective
as of March 31, 2010, we entered into a share exchange agreement with CD Media
BVI, CD Media Huizhou, CD Media Beijing and the shareholders of CD Media
BVI. Effective as of April 23, 2010, the parties to the share exchange
agreement entered into an amended and restated share exchange agreement (the
“Exchange Agreement”). Pursuant to the Exchange Agreement, we agreed to
issue an aggregate of 19,100,000 shares of our common stock in exchange for all
of the issued and outstanding securities of CD Media BVI (the “Share
Exchange”). On April 30, 2010, the Share Exchange closed and CD Media BVI
became our wholly-owned subsidiary and we immediately changed our name from
“SRKP 25, Inc.” to “China Century Dragon Media, Inc.” We issued a
total of 19,100,000 shares of common stock to the shareholders of CD Media BVI
and their designees in exchange for all of the issued and outstanding shares of
CD Media BVI.
Prior
to the closing of the Share Exchange and the Private Placement, as described
below, our stockholders canceled an aggregate of 4,450,390 shares held by them
such that there were 2,646,000 shares of common stock outstanding immediately
prior to the Share Exchange. Our stockholders also canceled warrants to
purchase an aggregate of 5,677,057 shares of common stock such that the
stockholders held warrants to purchase an aggregate of 1,419,333 shares of
common stock immediately prior to the Share Exchange. Each warrant is
entitled to purchase one share of our common stock at $0.0001 per share and
expires five years from the closing of the Share Exchange. Immediately
after the closing of the Share Exchange and closing of the Private Placement, we
had 25,312,838 outstanding shares of common stock, no shares of Preferred Stock,
no options, and warrants to purchase 1,419,333 shares of common stock. The
stockholders did not receive any consideration for the cancellation of the
shares and warrants. The cancellation of the shares and warrants was
accounted for as a contribution to capital.
The
number of shares and warrants cancelled was determined based on negotiations
with the security holders of SRKP 25, Inc. and CD Media BVI. As indicated
in the Share Exchange Agreement, the parties to the transaction acknowledged
that a conflict of interest existed with respect to the negotiations for the
terms of the Share Exchange due to, among other factors, the fact that WestPark
Capital, Inc. (“WestPark Capital”) was advising CD Media BVI in the
transaction. As further discussed below in “Recent Events—Private
Placement,” certain of the controlling stockholders and control persons
of WestPark Capital were also, prior to the completion of the Share Exchange,
controlling stockholders and control persons of SRKP 25, Inc. Under these
circumstances, the shareholders of CD Media BVI and the stockholders of SRKP 25
negotiated an estimated value of CD Media BVI and its subsidiaries, an estimated
value of the shell company (based on similar recent public shell transactions),
and the mutually desired capitalization of the company resulting from the Share
Exchange.
With
respect to the determination of the amounts of shares and warrants cancelled,
the value of the shell company was derived primarily from its utility as a
public company platform, including its good corporate standing and its timely
public reporting status, which was expected to allow us to list our stock on a
national securities exchange and raise capital at an appropriate price per
share; the services provided by WestPark Capital were not a consideration in
determining this aspect of the transaction. Under these circumstances and
based on these factors, the shareholders of CD Media BVI and the stockholders of
SRKP 25 agreed upon the amount of shares and warrants to be cancelled.
Further to such negotiations, we paid a $215,750 success fee to WestPark Capital
for services provided in connection with the Share Exchange, including
coordinating the share exchange transaction process, interacting with principals
of the shell corporation and negotiating the definitive purchase agreement for
the shell, conducting a financial analysis of CD Media BVI, conducting due
diligence on CD Media BVI and its subsidiaries and managing the
interrelationships of legal and accounting activities. All of the fees due
to WestPark Capital in connection with the Share Exchange have been paid as of
the date of this prospectus.
Based
on the $1.50 per share offering price of the common shares issued in the private
placement on April 30, 2010, as described below, the 2,646,000 shares retained
by the SRKP 25 stockholders had an implied monetary value of approximately $4.0
million. Assuming exercise of the 1,419,333 warrants also retained by the
SRKP 25 stockholders, 4,065,333 shares would have been retained by the SRKP 25
stockholders with an implied monetary value of approximately $6.1 million.
The implied monetary value of the retained shares was calculated based on the
$1.50 per share offering price, without regard to liquidity, marketability, or
legal or resale restrictions; accordingly, such amounts should not be considered
as an indication of the fair value of the retained shares.
The
transactions contemplated by the Exchange Agreement, as amended, were intended
to be a “tax-free” contribution and/or reorganization pursuant to the provisions
of Sections 351 and/or 368(a) of the Internal Revenue Code of 1986, as
amended.
Private
Placement
On
April 30, 2010, concurrently with the closing of the Share Exchange, we closed a
private placement of shares of common stock (the “Private Placement”).
Pursuant to subscription agreements entered into with the investors, we sold an
aggregate of 3,566,838 shares of common stock at $1.50 per share, for gross
proceeds of approximately $5.35 million. We paid WestPark Capital a
commission equal to 10.0% with a non-accountable fee of 4.0% of the gross
proceeds from the Private Placement. We also agreed to retain WestPark
Capital for a period of five months following the closing of the Private
Placement to provide us with financial consulting services for which we will pay
WestPark Capital $4,000 per month. Out of the proceeds of the Private
Placement, we paid $300,000 to Keen Dragon Group Limited, a third party
unaffiliated with CD Media BVI, the Company, or WestPark Capital for services as
an advisor to the Company, including assisting in preparations for the Share
Exchange and the Company’s listing of securities in the United States. The
conducted the Private Placement in order to raise money for working capital and
to pay for anticipated expenses to be incurred in connection with the public
offering contemplated by this offering.
We agreed
to file a registration statement covering the common stock sold in the Private
Placement within 30 days of the closing of the Private Placement pursuant to the
subscription agreement entered into with each investor and to cause such
registration statement to be declared effective by the SEC no later than 150
days from the date of filing or 180 days from the date of filing if the
registration statement is subject to a full review by the SEC.
Each
of the stockholders and warrantholders of SRKP 25 prior to the
completion of the Share Exchange (the “Existing Securityholders”) and each of
the investors in the Private Placement also entered into a lock-up agreement
pursuant to which they agreed that (i) if the proposed public offering that we
expect to conduct is for $10 million or more, then the investors and the
Existing Securityholders would not be able to sell or transfer their shares
until at least six months after the public offering’s completion, and (ii) if
the offering is for less than $10 million, then one-tenth of their shares would
be released from the lock-up restrictions ninety days after the offering and
there would be a pro rata release of the shares thereafter every 30 days over
the following nine months. WestPark Capital in its discretion, may also
release some or all the shares from the lock-up restrictions earlier, however,
(i) no early release shall be made with respect to Existing Securityholders
prior to the release in full of all such lock-up restrictions on shares of the
common stock acquired in the Private Placement and (ii) any such early release
shall be made pro rata with respect to all investors’ shares acquired in the
Private Placement. We currently intend this offering to be in an amount less
than $10 million. However, there can be no assurance of the actual size of this
offering.
Some of
the controlling stockholders and control persons of WestPark Capital were also,
prior to the completion of the Share Exchange, controlling stockholders and
control persons of SRKP 25, Inc., our predecessor, including Richard Rappaport,
who is the Chief Executive Officer of the WestPark Capital and was the President
and a significant stockholder of SRKP 25, Inc. prior to the Share Exchange, and
Anthony C. Pintsopoulos, who is the President and Treasurer of WestPark Capital
and was one of the controlling stockholders and an officer and director of SRKP
25, Inc. prior to the Share Exchange. Mr. Rappaport is the sole owner of
the membership interests in the parent of WestPark Capital. Kevin
DePrimio, Robert Schultz and Jason Stern, each employees of WestPark Capital,
were also stockholders of SRKP 25, Inc. and are also our stockholders.
Each of Messrs. Rappaport and Pintsopoulos resigned from all of their executive
and director positions with the Company upon the closing of the Share
Exchange. Mr. Rappaport beneficially owns approximately 11.5% of our outstanding shares as
of the date of this prospectus, and Messrs. Rappaport, Pintsopoulos, DePrimio,
Schultz and Stern collectively beneficially own approximately 13.2% of our
outstanding shares as of the date of this prospectus.
Certain
Relationships and Related Transactions
The table below identifies all the
benefits that WestPark Capital and its affiliates have received and will receive
in connection with the Share Exchange, the Private Placement and this
offering.
|
|
$
|
|
|
Other
|
Share
Exchange
|
|
|
235,750 |
(1) |
|
Registration
rights for an aggregate of 2,244,616 shares and 1,262,178
shares underlying warrants (2)
|
Private
Placement
|
|
|
789,039 |
(3) |
|
|
Public
Offering
|
|
[______]
|
(4) |
|
Warrants
to purchase [________] shares of common stock at an exercise price of
$4.80 per share
|
(1)
Includes a success fee of $215,750 paid to WestPark Capital for services
provided in connection with the Share Exchange and $20,000 for consulting fees
payable to WestPark by the Company for five months of consulting services to be
provided to the Company by WestPark.
(2) Pursuant
to a Registration Rights Agreement executed in connection with the closing of
the Share Exchange, affiliates of WestPark Capital received registration rights
for an aggregate of 2,244,616 shares and 1,262,178 shares underlying
warrants. The shares will be registered in a registration statement that
we intend to file on or about November 24, 2010, which is 10 days after the end
of the six-month period that immediately follows the date on which we filed the
registration statement of which this prospectus is a part.
(3)
Represents commissions of $535,028, a non-accountable expense allowance of
$214,011, and a reimbursement of WestPark Capital’s fees for legal counsel of
$40,000.
(4)
Represents underwriting discounts and commissions of $[__], plus a
non-accountable fee of $[_____] and a reimbursement of $40,000 for WestPark
Capital’s legal fees.
Corporate
Structure
The
corporate structure of the Company is illustrated as follows:
Contractual
Arrangements
PRC laws, rules and regulations impose
special requirements on foreign investors having ownership of PRC companies
providing advertising services in the PRC. In order to invest in the
advertising industry in the PRC, a foreign investor must have at least two years
of direct operations in the advertising industry outside the PRC. We are a
Delaware corporation and have not had any direct operations in the advertising
industry outside of China. Therefore, we are unable to own a direct interest in
a company providing advertising services in the PRC and our PRC subsidiary, CD
Media Huizhou, cannot obtain the required business licenses to provide
advertising services. We operate our advertising operations through
contractual arrangements with CD Media Beijing. CD Media Huizhou, CD Media
Beijing and CD Media Beijing’s shareholders entered into a series of contractual
arrangements in March 2010 that provide us with effective control over the
operations of CD Media Beijing and of the related economic benefits of CD Media
Beijing in consideration for the services provided by CD Media Huizhou. We
intend to continue our business operations in China upon the expiration of these
contractual arrangements by renewing them or entering into new contractual
arrangements if the then current PRC law does not allow us to directly operate
advertising businesses in China. We believe that, under these contractual
arrangements, we have sufficient control over CD Media Beijing to renew or enter
into new contractual arrangements prior to the expiration of the current
arrangements on terms that would enable us to continue to operate our business
in China after the expiration of the current arrangements.
Exclusive
Business Cooperation Agreement. Pursuant to the
exclusive business cooperation agreement entered into on March 30, 2010 between
CD Media Huizhou and CD Media Beijing, CD Media Huizhou provides technical and
consulting services related to the business operations of CD Media Beijing. As
consideration for such services, CD Media Beijing has agreed to pay an annual
service fee to CD Media Huizhou in an amount equal to a certain percentage (the
“Rate of Service”) of its income for such year. The parties will agree on
the Rate of Service after further negotiations, which may be adjusted from time
to time. The term of this agreement is 10 years from the date thereof. CD
Media Beijing may terminate the agreement upon CD Media Huizhou’s gross
negligence or commission of a fraudulent act against CD Media Beijing. CD
Media Huizhou may terminate the agreement at any time upon giving 30 days’ prior
written notice to CD Media Beijing.
Exclusive Option
Agreement. CD Media Huizhou entered into option
agreements on March 30, 2010 with each of the shareholders of CD Media Beijing,
Xu Wen, Cheng Yongxia and Zheng Hongbo, as well as CD Media Beijing itself,
pursuant to which CD Media Huizhou has an exclusive option to purchase, or to
designate another qualified person to purchase, to the extent permitted by PRC
law and foreign investment policies, part or all of the equity interests in CD
Media Beijing owned by Xu Wen, Cheng Yongxia and Zheng Hongbo. To the
extent permitted by the PRC laws, the purchase price for the entire equity
interest shall equal the actual capital contributions paid into the registered
capital of CD Media Beijing by each of the CD Media Beijing shareholders. Each
of the exclusive option agreements has a 10 year term.
Power of
Attorney. Xu Wen, Cheng Yongxia and Zheng Hongbo each
signed a power of attorney dated March 30, 2010 providing CD Media Huizhou the
power to act as his/her exclusive agent with respect to all matters related to
his/her ownership of the ownership interest in CD Media Beijing, including the
right to attend shareholders’ meetings of CD Media Beijing and the right to
exercise voting rights to which he/she is entitled under PRC
law.
Equity Interest
Pledge Agreement. Pursuant to equity pledge agreements
dated March 30, 2010, each of Xu Wen, Cheng Yongxia and Zheng Hongbo pledged
his/her equity interest in CD Media Beijing to CD Media Huizhou to secure CD
Media Beijing’s obligations under the exclusive business cooperation agreement
as described above. In addition, the shareholders of CD Media Beijing agreed not
to transfer, sell, pledge, dispose of or create any encumbrance on any equity
interests in CD Media Beijing that would affect CD Media Huizhou’s interests.
The equity pledge agreement will expire when CD Media Beijing fully performs its
obligations under the exclusive business cooperation agreement described above.
All the equity pledges became effective on April 19, 2010 upon their
registration with the Mentougou Branch of Beijing Administration of Industry and
Commerce.
In the
opinion of Han Kun Law Offices, our PRC legal counsel:
|
·
|
the ownership structure of our
company complies with current PRC laws, rules and
regulations;
|
|
·
|
our contractual arrangements with
CD Media Beijing and its shareholders are valid and binding on all parties
to these arrangements, and do not violate current PRC laws, rules or
regulations; and
|
|
·
|
the business operations of CD
Media Huizhou, CD Media Beijing and its subsidiaries comply with current
PRC laws, rules and
regulations.
|
Our PRC legal counsel has, however,
advised us that the PRC regulatory authorities may take a view that is contrary
to the above opinions of our PRC legal counsel. If the PRC government determines
that the above-described agreements that establish the structure for operating
our PRC advertising businesses do not comply with applicable restrictions on
foreign investment in the advertising industry, we could be subject to severe
penalties including being prohibited from continuing operation. See “Risk
Factors—Risks Related to Our Corporate Structure.”
There are no material relationships
between any of the shareholders of CD Media Beijing, Xu Wen, Cheng Yongxia and
Zheng Hongbo, and the Company or any of its officers or directors. Each of
the CD Media Beijing shareholders are relatives of the original shareholders of
CD Media Beijing and were chosen to comply with the Company’s corporate
structure and regulations promulgated by the PRC State Administration of Foreign
Exchange (“SAFE”).
The
Offering
Common
stock we are offering
|
|
2,500,000
shares (1)
|
|
|
|
Common
stock included in Underwriter’s option to purchase shares from the selling
stockholders to cover over-allotments, if any (up to 70% of the
over-allotment option)
|
|
262,500
shares
|
|
|
|
Common
stock included in Underwriter’s option to purchase shares from us to cover
over-allotments, if any
|
|
112,500
shares
|
|
|
|
Common
stock outstanding after the offering
|
|
27,812,838
shares (2)
|
|
|
|
Offering
price
|
|
$3.00
to $4.00 per share (estimate)
|
|
|
|
Use
of proceeds
|
|
We
intend to use approximately one-fifth of the net proceeds from this
offering to invest in our present advertising business to obtain more
advertising time, two-fifths of the net proceeds of this offering to
obtain advertising time and cooperation rights on regional television
stations; one-fifth of the net proceeds to invest in program operation
projects with CCTV; and one fifth the proceeds for general corporate
purposes. See “Use of Proceeds” on page 33 for more information
on the use of proceeds. We will not receive any proceeds from the sale of
any shares in this offering by the selling
stockholders.
|
|
|
|
Conflicts
of interest
|
|
Affiliates
of WestPark Capital beneficially own approximately 13.2% of our company
and, therefore, WestPark Capital has a “conflict of interest” under FINRA
Rule 2720. Accordingly, this offering is being conducted in
accordance with FINRA Rule 2720, which requires that a “qualified
independent underwriter” as defined in FINRA Rule 2720 participate in the
preparation of the registration statement and prospectus and exercise its
usual standards of due diligence in respect thereto. [_________] is
assuming the responsibilities of acting as the qualified independent
underwriter in the offering. The public offering price will be no
higher than that recommended by [________]. See
“Underwriting—Conflicts of Interest” on page 74 for more
information.
|
|
|
|
Risk
factors
|
|
Investing
in these securities involves a high degree of risk. As an investor you
should be able to bear a complete loss of your investment. You should
carefully consider the information set forth in the “Risk Factors” section
beginning on page 9.
|
|
|
|
Proposed
symbol
|
|
We
intend to apply for the listing of our common stock on the NASDAQ Global
Market or the NYSE Amex Equities under the symbol
“[___].”
|
|
|
|
Concurrent
resale registration
|
|
Upon
the effectiveness of the Registration Statement of which this prospectus
forms a part, 3,566,838 shares of our common stock will be registered for
resale by the holders of such shares. None of these securities are
being offered by us and we will not receive any proceeds from the sale of
these shares. For additional information, see above under “Prospectus
Summary — Recent
Events.”
|
(1)
|
Excludes
(i) up to 125,000 shares of common stock underlying warrants to be
received by the Underwriters in this offering, and (ii) 3,566,838 shares
of our common stock held by the selling stockholders that are concurrently
being registered with this offering for resale by such selling stockholder
under a separate prospectus, and (iii) the 112,500 shares of our common
stock that we may issue upon the Underwriters’ over-allotment option
exercise. The exercise of the Underwriters’ over-allotment option to
purchase the 262,500
shares from selling stockholders named in this prospectus to cover
over-allotments, if any, will not affect the number of shares outstanding
after this offering.
|
(2)
|
Based
on 25,312,838 shares of common stock issued and outstanding as of the date
of this prospectus and (ii) 2,500,000 shares of common stock issued in the
public offering. Excludes (i) the Underwriters’ warrants to purchase
a number of shares equal to 5% of the shares of common stock sold in this
offering excluding the shares sold in the over-allotment option, and (ii)
1,419,333 shares of common stock underlying warrants that are exercisable
at $0.0001. Excludes the 112,500 shares of our common stock that we
may issue upon the Underwriters’ over-allotment option exercise and is not
affected by the 262,500 shares that the Underwriters may purchase from
selling stockholders named in this
prospectus.
|
SUMMARY
FINANCIAL DATA
The
following summary financial information contains (i) consolidated statement of
operations data for each of the years in the five-year period ended December 31,
2009 and the three months ended March 31, 2010 and 2009 and (ii) the
consolidated balance sheet data as of year-end for each of the years in the
five-year period ended December 31, 2009 and as of March 31, 2010. The
consolidated statement of operations data and balance sheet data were derived
from the audited consolidated financial statements, except for data for the
years ended and as of December 31, 2006 and 2005 and the three month ended and
as of March 31, 2010 and 2009. Such financial data should be read in conjunction
with the consolidated financial statements and the notes to the consolidated
financial statements starting on page F-1 and with “Management’s Discussion and
Analysis of Financial Condition and Results of Operations.”
Consolidated Statements of Operations
|
|
Three Months Ended March 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
|
|
(all amounts are in US Dollars and in thousands, except share and per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$ |
28,009 |
|
|
$ |
11,386 |
|
|
$ |
74,480 |
|
|
$ |
44,684 |
|
|
$ |
17,103 |
|
|
$ |
6,231 |
|
|
$ |
1,926 |
|
Gross
profit
|
|
|
4,452 |
|
|
|
2,055 |
|
|
|
14,734 |
|
|
|
8,186 |
|
|
|
4,264 |
|
|
|
1,417 |
|
|
|
(66 |
) |
Income
(loss) from operations
|
|
|
3,663 |
|
|
|
1,515 |
|
|
|
12,040 |
|
|
|
6,135 |
|
|
|
1,820 |
|
|
|
636 |
|
|
|
(131 |
) |
Net
income (loss)
|
|
$ |
2,735 |
|
|
$ |
1,137 |
|
|
$ |
9,010 |
|
|
$ |
4,605 |
|
|
$ |
1,223 |
|
|
$ |
711 |
|
|
$ |
(130 |
) |
Earnings
per share—basic and diluted
|
|
$ |
0.14 |
|
|
$ |
0.06 |
|
|
$ |
0.47 |
|
|
$ |
0.24 |
|
|
$ |
0.06 |
|
|
$ |
0.04 |
|
|
$ |
(0.01 |
) |
Weighted
average shares outstanding – basic and diluted
|
|
|
19,100,000 |
|
|
|
19,100,000 |
|
|
|
19,100,000 |
|
|
|
19,100,000 |
|
|
|
19,100,000 |
|
|
|
19,100,000 |
|
|
|
19,100,000 |
|
Consolidated Balance Sheets
|
|
As of March 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
|
|
(all amounts are in US Dollars and in thousands)
|
Total
Current Assets
|
|
$ |
20,984 |
|
|
$ |
13,678 |
|
|
$ |
11,158 |
|
|
$ |
4,545 |
|
|
|
2,265 |
|
|
|
1,443 |
|
Total
Assets
|
|
|
21,016 |
|
|
|
20,532 |
|
|
|
11,188 |
|
|
|
4,564 |
|
|
|
2,267 |
|
|
|
1,443 |
|
Total
Current Liabilities
|
|
|
2,045 |
|
|
|
4,844 |
|
|
|
4,579 |
|
|
|
2,767 |
|
|
|
1,777 |
|
|
|
2,229 |
|
Total
Liabilities
|
|
|
2,571 |
|
|
|
4,844 |
|
|
|
4,579 |
|
|
|
2,767 |
|
|
|
1,777 |
|
|
|
2,229 |
|
Total
Stockholders' Equity (Deficiency)
|
|
|
18,445 |
|
|
|
15,687 |
|
|
|
6,609 |
|
|
|
1,797 |
|
|
|
490 |
|
|
|
(786 |
) |
The
acquisition of CD Media BVI by us on April 30, 2010 pursuant to the Share
Exchange was accounted for as a recapitalization by us. The recapitalization
was, at the time of the Share Exchange, the merger of a private operating
company (CD Media BVI) into a non-operating public shell corporation (us) with
nominal net assets and as such is treated as a capital recapitalization, rather
than a business combination. As a result, the assets of the operating company
are recorded at historical cost. The transaction is the equivalent to the
issuance of stock by the private company for the net monetary assets of the
shell corporation. The pre-acquisition financial statements of CD Media BVI are
treated as the historical financial statements of the consolidated companies.
The financial statements presented will reflect the change in capitalization for
all periods presented, therefore the capital structure of the consolidated
enterprise, being the capital structure of the legal parent, is different from
that appearing in the financial statements of CD Media BVI in earlier periods
due to this recapitalization.
RISK
FACTORS
Any
investment in our common stock involves a high degree of risk. Investors
should carefully consider the risks described below and all of the information
contained in this prospectus before deciding whether to purchase our common
stock. Our business, financial condition or results of operations could be
materially adversely affected by these risks if any of them actually
occur. Our shares of common stock are not currently listed or quoted for
trading on any national securities exchange or national quotation system.
If and when our common stock is traded, the trading price could decline due to
any of these risks, and an investor may lose all or part of his or her
investment. Some of these factors have affected our financial condition
and operating results in the past or are currently affecting our company.
This prospectus also contains forward-looking statements that involve risks and
uncertainties. Our actual results could differ materially from those
anticipated in these forward-looking statements as a result of certain factors,
including the risks we face as described below and elsewhere in this
prospectus.
RISKS
RELATED TO OUR OPERATIONS
We
operate in the advertising industry which is subject to changing economic
conditions. A decline in the general economic conditions in the PRC could
have a material adverse effect on our business and financial
condition.
All of our revenues are generated from
our advertising business in the PRC, which in turn is subject to downturns in
the PRC economy. Advertisers typically decrease their purchases of
advertising time during economic downturns. Additionally, advertisers may
decrease their purchases of television advertising time to shift to other forms
of advertising media upon an adverse change in the PRC economy. Any decrease in
demand for advertising time or services from advertisers would negatively affect
our revenues and profitability and cause a material adverse effect on our
business and results of operations.
Our
CCTV-related business has been, and is expected to continue to be, critical to
our business and financial performance.
Our CCTV-related business has been, and
is expected to continue to be, critical to our business and financial
performance. In particular, we primarily derive revenues from representing
advertising clients to place their advertisements on CCTV, the largest
television network in China. Furthermore, we believe that our track record
and performance in securing prime-time advertising time on CCTV have
contributed, and may continue to contribute, significantly to our brand name and
the development of our client base of Chinese advertisers, which are expected to
have a substantial impact on our overall business. Consequently, the continued
success in our business is subject to a number of risks, including the
following:
|
·
|
CCTV
may change its sales method at any time as it wishes and without prior
notice. While CCTV currently uses third-party agencies to sell a
significant portion of its advertising time slots to companies such as
ours, CCTV also sells a portion of its advertising time slots
directly by itself or through auctions. If CCTV introduces new methods of
sales that are materially different from the methods it is currently
using, it may take us a significant amount of time to develop expertise,
if at all, in buying advertising time on CCTV under any new sales
method.
|
|
·
|
CCTV
may begin to specify a limit on total advertising time that may be
purchased by advertisers represented by one advertising agency in the
future, in which case our growth potential would be limited as we would
not be able to represent our advertising clients to purchase more CCTV
advertising time when we exceed the
limit.
|
|
·
|
CCTV’s
advertising time, particularly prime-time advertising time, is limited and
is highly coveted by advertisers and advertising agencies. As a result,
there is intense competition for such advertising time. In particular, we
face intense competition for CCTV related advertising business from a
number of domestic competitors, such as Walk-On Advertising Co., Ltd. (San
Ren Xing) and Vision CN Communications Group (Tong Lu), Charm
Communications, Inc. and China Mass Media Corp., which may have
competitive advantages, such as significantly greater financial, marketing
or other resources or stronger market
reputation.
|
Any of these risks could result in a
significant decrease in our revenues, which in turn would have a material
adverse effect on our business, results of operations, financial condition and
prospects.
We
depend on a limited number of suppliers for our advertising time. The loss
of any of these suppliers would cause a disruption to our operations and a
material adverse effect on our business.
We purchase a significant amount of
our advertising time from a few suppliers who act as agents for CCTV. Our
top three suppliers collectively accounted for 28.6%, 22.2%, 20.1%, 30.5% and
49.5% of our total purchases of advertising time during the three months ended
March 31, 2010 and 2009 and the years ended December 31, 2009, 2008 and 2007,
respectively. For the three months ended March 31, 2010, we had no
suppliers who each accounted for more than 10% of our total purchase of
advertising time during the period. If our relationship with any of these
suppliers were to end, we would have to obtain advertising time from other
suppliers. We cannot guaranty our investors that we will be able to obtain
an adequate supply of advertising time from other suppliers. Additionally,
advertising time that we are able to obtain from other suppliers may not be in
as popular time slots or be on as popular CCTV channels as the advertising time
that we currently purchase and our customers may not be willing to pay as much
for this advertising time. Our results of operations would be hurt if we
are not able to obtain adequate supplies of advertising time that is attractive
to our customers.
An
unfavorable change in CCTV’s market position could materially and adversely
affect our ability to generate revenues and income.
As the largest television network in
China, CCTV currently has 21 public channels and 19 pay television channels and
reaches approximately 90% of the households in the PRC. Due to CCTV’s vast
coverage across the PRC, advertising time on CCTV channels is seen as an
attractive marketing platform by advertisers for advertising their products and
services. Additionally, due to its ownership by the PRC central
government, CCTV benefits from special treatment provided by the PRC government,
such as the requirement that CCTV-1 be broadcast by all regional television
networks in China, making CCTV-1 an attractive channel for advertisers.
CCTV is not the only television network in the PRC. CCTV faces growing
competition from other television networks for market share. A decline in
CCTV’s market position could negatively affect the prices that we are able to
charge for the advertising time we purchase that are aired on CCTV, which could
negatively impact our ability to generate revenues and income.
We
rely on access to advertising time slots during television programs to place our
clients’ advertisements and the desirability of the advertising time slots we
obtain depends on the popularity of the relevant television programs and other
factors that are difficult to predict.
The value of our adverting time slots
on CCTV depends on the ratings, popularity and viewership demographics of the
shows during which our advertising time slots occur. We cannot predict the
popularity of television programs. Poor ratings for programs to which our
advertising time slots are attached could negatively affect the prices that we
can charge for our advertising time purchased for airing on CCTV, which could
negatively affect our revenues and results of operations.
Our
ability to adjust the fees we charge for our services is limited and any
substantial increase in the prices charged by CCTV for the advertising time
slots available to us may reduce our revenues and profitability.
In negotiating with our advertising
clients, we set the prices for our advertising packages based on a number of
factors, including the popularity of programs to which our time slots are
attached, viewer demographics for such programs, prices charged by our
competitors and market demand. We negotiate the pricing terms for the
advertising time slots that we purchase from third parties for airing on CCTV on
an annual basis. We then charge our customers a premium for the
advertising time slots and retain the difference in prices as a
commission. These third parties typically increase the prices charged to
us for the advertising time slots each year. Our ability to bargain for lower
prices for the advertising time slots is limited and while we are typically able
to pass on such price increases to our advertising clients, we cannot assure you
that we will always be able to pass such increases on to our customers. If
these third parties substantially raise the prices charged to us for the
advertising time slots we purchase and we are unable to pass on such costs to
our advertising clients, our results of operations would be materially adversely
affected.
We
may experience difficulties in our planned expansion into regional television
networks, which could result in a decrease in our revenues and
profitability.
Currently we purchase all of our
advertising time slots for airing on CCTV. As we expand our business, we
intend to purchase advertising time from third parties promoters for airing on
satellite and regional television networks, or from such networks directly, to
expand our products and service offerings. Our experience in selling
advertising time slots on CCTV channels may not translate to selling advertising
time slots on such networks. Our implementation of this strategy could
divert resources away from our existing business, which could result in a
decrease in our revenues and profitability.
We
plan to secure media resources in new advertising media platforms. We may not be
successful in that business due to our lack of experience and expertise with
respect to those new media platforms and we may face many other risks and
uncertainties.
We intend to secure media resources in
new advertising media platforms, such as the Internet, radio, mobile devices and
indoor or outdoor flat panel displays. Our expertise and experience in
television advertising may not be readily applied to advertising businesses
involving those new media platforms. Our existing and potential
competitors may have competitive advantages, such as significantly greater
financial, marketing or other resource or expertise and experience with respect
to new advertising media platforms. As a result, we may not be able to
successfully secure media resources in new advertising media platforms on
favorable terms, or at all.
Furthermore,
the market in China for advertising services involving some of those new media
platforms is relatively new and its potential is uncertain. Our success in
securing and managing media resources in new advertising media platforms depends
on the acceptance of advertising on those new media platforms by our advertising
clients and their continuing interest in such advertising as a component of
their advertising strategies.
Implementing
our plan to secure media resources in new advertising media platforms will also
require us to:
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continue
to identify and obtain media resources in those new media platforms that
are attractive to advertisers;
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significantly
expand our capital expenditures to pay for media
resources;
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obtain
related governmental approvals; and
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expand
the number of operations and sales staff that we
employ.
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We cannot
assure you that we will be able to successfully secure media resources in new
advertising media platforms or that the related business will generate new
revenues to pay for any increased capital expenditures or operating costs. If we
are unable to successfully implement our strategy relating to new advertising
media platforms, or if such expansion does not otherwise benefit our business,
our prospects and competitive position may be materially harmed and our
business, financial condition and results of operations may be materially and
adversely affected.
China regulates media content
extensively and we may be subject to government actions based on the advertising
content we design for advertising clients or services we provide to
them.
PRC
advertising laws and regulations require advertisers, advertising operators and
advertising distributors, including businesses such as ours, to ensure that the
content of the advertisements they prepare or distribute is fair and accurate
and is in full compliance with applicable laws, rules and regulations. Violation
of these laws, rules or regulations may result in penalties, including fines,
confiscation of advertising fees, orders to cease dissemination of the
advertisements and orders to publish an advertisement correcting the misleading
information. In circumstances involving serious violations, the PRC government
may revoke a violator’s license for advertising business
operations.
Our
business includes assisting advertising clients in designing and producing
advertisements, as well as executing their advertising campaign. Under our
agreements with third parties providing advertising time on CCTV we are
typically responsible for the compliance with applicable laws, rules and
regulations with respect to advertising content that we provide to the media. In
addition, some of our advertising clients provide completed advertisements for
us to display on CCTV. Although these advertisements are subject to internal
review and verification of CCTV, their content may not fully comply with
applicable laws, rules and regulations. Further, for advertising content related
to special types of products and services, such as alcohol, cosmetics,
pharmaceuticals and medical procedures, we are required to confirm that our
clients have obtained requisite government approvals, including operating
qualifications, proof of quality inspection of the advertised products and
services, government pre-approval of the content of the advertisement and
filings with the local authorities. We endeavor to comply with such
requirements, including by requesting relevant documents from the advertising
clients and employing qualified advertising inspectors who are trained to review
advertising content for compliance with applicable PRC laws, rules and
regulations. However, we cannot assure you that violations or alleged violations
of the content requirements will not occur with respect to our operations. If
the relevant PRC governmental agencies determine the content of the
advertisements that we represent violated any applicable laws, rules or
regulations, we could be subject to penalties. Although our agreements with our
clients normally require them to warrant the fairness, accuracy and compliance
with relevant laws and regulations of their advertising content and agree to
indemnify us for violations of these warranties, these contractual remedies may
not cover all of our losses resulting from governmental penalties. Violations or
alleged violations of the content requirements could also harm our reputation
and impair our ability to conduct and expand our
business.
We
may be exposed to liabilities from allegations that certain of our clients’
advertisements may be false or misleading or that our clients’ products may be
defective.
Our advertising customers may become
subject to claims that their advertisements are false or misleading or that
their products are defective. We may be joined as a defendant along with
our clients in litigation or administrative proceedings related to such
claims. These actions could be costly to defend and could result in harm
to our reputation. If we are made a party to any proceedings relating to
such claims, our results of operations would be materially adversely
affected.
We receive a significant portion of
our revenues from a few large clients, and the loss of one or more of these
clients could materially and adversely impact our business, results of
operations and financial condition.
We derive a significant portion of
our revenues from a limited number of large advertising clients. For example,
our ten largest advertising clients accounted for approximately 55.4%, 58.1%,
35.2%, 47.7% and 61.1% of our total revenues in the three months ended March 31,
2010 and 2009 and the years ended December 31, 2009, 2008 and 2007,
respectively. Our clients generally are able to reduce advertising and marketing
spending or cancel an advertising campaign at any time for any reason. It is
possible that our clients could reduce their advertising spending in a given
period in comparison with historical patterns, and they could reduce their
advertising spending for future periods. A significant reduction in advertising
and marketing spending by our large clients, or the loss of one or more of our
large clients, to the extent the loss in our revenues resulting from the loss of
these clients is not replaced by new client accounts or increased business from
existing clients, would lead to a substantial decline in our revenues, which
could have a material adverse effect on our business, results of operations and
financial condition.
Because we do not have long-term
contracts with our customers, our customers can terminate their relationship
with us at any time, which could cause a material adverse effect on our results
of operations.
We generally do not have exclusive or
long-term agreements with our advertising clients. As a result, our
customers may terminate their agreements and we may lose our business with them
if they are unsatisfied with our services or for other reasons. Most of
our contracts with our advertisers are for a term of one year or less. We
cannot rely on long-term contracts to protect us from the negative financial
effects of a decline in the demand for television advertising time. We,
therefore, must rely on our attractive advertising time slots, our high-quality
production services and our favorable pricing to attract and retain
customers. We cannot assure you that we will be able to maintain our
relationships with our current customers or that we will be able to attract new
customers. If a considerable number of our current clients terminate their
relationships with us and we are unable to replace such clients, our revenues
and net income could decrease and cause a material adverse effect on our results
of operations.
If we are unable to adapt to changing
advertising trends and preferences of advertisers, television channels and
viewers, we will not be able to compete effectively.
The
market for television advertising requires us to continuously identify new
advertising trends and the preferences of advertisers, television channels and
viewers, which may require us to develop new features and enhancements for our
services. We may incur development and acquisition costs or to hire new managers
or other personnel in order to keep pace with new market trends, but we may not
have the financial and other resources necessary to fund and implement these
development or acquisition projects or to hire suitable personnel. Further, we
may fail to respond to changing market preferences in a timely fashion. If we
cannot succeed in developing and introducing new services on a timely and
cost-effective basis, the demand for our advertising services may decrease and
we may not be able to compete effectively or attract advertising clients, which
would have a material adverse effect on our business and
prospects.
We are subject to risks relating to
the nature of China’s advertising industry, including frequent and sudden
changes in advertising proposals.
The
nature of the advertising business in China is such that sudden changes in
advertising proposals and actual advertisements are frequent. In China,
television stations remain responsible for the content of advertisements, and as
a result, television stations may reject or recommend changes to the content of
advertisements. We strive to minimize problems related to work for clients by
encouraging the conclusion of basic written agreements, but we are exposed to
the risk of unforeseen incidents or disputes with advertising clients. In
addition, similar to other companies in our industry in the PRC where
relationships between advertising clients within a particular industry and
advertising companies are not typically exclusive, we are currently acting for
multiple clients within a single industry in a number of industries. If this
practice in China were to change in favor of exclusive relationships and if our
efforts to respond to this change were ineffective, our business, results of
operations and financial condition could be materially and adversely
affected.
We
are subject to intense competition in the industry in which we operate, which
could cause loss of our market share and material harm to our
profitability.
The advertising industry is highly
competitive and fragmented in China. We compete for business with other
advertising companies based on the desirability of the advertising time slots we
offer for advertising, the broadcast area of the television network, the
services we offer and the prices for our advertising time and our
services. We compete directly with advertising agencies that provide
television airtime to advertisers and with other companies that purchase
advertising timeslots from CCTV and other television networks.
Some of our competitors may have direct
relationships with CCTV, stronger relationships with third party providers that
purchase advertising time directly from CCTV, larger market shares, greater
media resources, larger access to advertising customer bases and greater
financial resources than us. Additionally, we may face competition from
new foreign-owned entrants into the PRC advertising industry.
Additionally, we face competition for advertisers’ spending from companies
offering advertising services on non-traditional advertising platforms,
including the Internet, street furniture, billboard, frame and public transport
advertising companies, and with other traditional advertising media, such as
newspapers, magazines and radio. Greater competition in the advertising
industry could result in lower prices for our products, which would lead to
decreased revenues and net income.
We rely on computer software and
hardware systems in our operations, the failure of which could adversely affect
our business, results of operations and financial
condition.
We are
dependent upon our computer software and hardware systems in designing our
advertisements and keeping important operational and market information. In
addition, we rely on our computer hardware for the storage, delivery and
transmission of data. Any system failure that causes interruptions to the input,
retrieval and transmission of data or increase in the service time could disrupt
our normal operations. Although we have a disaster recovery plan that is
designed to address the failures of our computer software and hardware systems,
we may not be able to effectively carry out this disaster recovery plan or
restore our operations within a sufficiently short time frame to avoid business
disruptions. Any failure in our computer software or hardware systems could
decrease our revenues and harm our relationships with advertisers, television
channels and other media companies, which in turn could have a material adverse
effect on our business, results of operations and financial
condition.
Our
failure to maintain a skilled a dedicated sales and marketing team, our sales
and revenues could decrease and cause an adverse effect on our results of
operations.
We depend on our dedicated sales staff
persons to sell our advertising packages and to increase awareness, acceptance
and use of our consulting services. We experience a high turnover rate
among our sales and marketing personnel and we cannot assure you that we will be
able to retain our current staff members or replace staff members who
leave. As our business grows, we will need to increase the size of our
sales and marketing staff. Because industry demand for experienced sales
and marketing employees exceeds the number of personnel available, the
competition for attracting and retaining these employees is intense. If we
are unable to hire, retain, integrate or motivate our current or new sales
personnel, our sales and marketing efforts may be materially impaired and our
business, financial condition and results of operations could be materially and
adversely affected.
We
do not carry any business interruption or liability insurance. As a
result, we may incur uninsured losses, increasing the possibility that you would
lose your entire investment in our company.
We could be exposed to liabilities or
other claims for which we would have no insurance protection. We do not
currently maintain any business interruption insurance or any other
comprehensive insurance policy, except for a key-man life insurance policy on
certain of officers and directors and liability insurance on our
automobiles. As a result, we may incur uninsured liabilities and losses as
a result of the conduct of our business. Business disruption insurance is
available to a limited extent in China, but we have determined that the risks of
disruption, the cost of such insurance and the difficulties associated with
acquiring such insurance make it impractical for us to have such insurance.
Should uninsured losses occur, any purchasers of our common stock could lose
their entire investment.
Our
labor costs are likely to increase as a result of changes in Chinese labor
laws.
We expect to experience an increase in
our cost of labor due to recent changes in Chinese labor laws which are likely
to increase costs further and impose restrictions on our relationship with our
employees. In June 2007, the National People’s Congress of the PRC enacted new
labor law legislation called the Labor Contract Law and more strictly enforced
existing labor laws. The new law, which became effective on January 1, 2008,
amended and formalized workers’ rights concerning overtime hours, pensions,
layoffs, employment contracts and the role of trade unions. As a result of the
new law, we have had to increase the salaries of our employees, provide
additional benefits to our employees, and revise certain other of our labor
practices. The increase in labor costs has increased our operating costs, which
increase we have not always been able to pass through to our customers. In
addition, under the new law, employees who either have worked for us for 10
years or more or who have had two consecutive fixed-term contracts must be given
an “open-ended employment contract” that, in effect, constitutes a lifetime,
permanent contract, which is terminable only in the event the employee
materially breaches our rules and regulations or is in serious dereliction of
his or her duties. Such non-cancelable employment contracts will substantially
increase our employment related risks and limit our ability to downsize our
workforce in the event of an economic downturn. No assurance can be given that
we will not in the future be subject to labor strikes or that we will not have
to make other payments to resolve future labor issues caused by the new laws.
Furthermore, there can be no assurance that the labor laws will not change
further or that their interpretation and implementation will vary, which may
have a negative effect upon our business and results of operations.
Our
business may be adversely affected by the global economic downturn, in addition
to the continuing uncertainties in the financial markets.
The global economy is currently in a
pronounced economic downturn. Global financial markets are continuing to
experience disruptions, including severely diminished liquidity and credit
availability, declines in consumer confidence, declines in economic growth,
increases in unemployment rates, and uncertainty about economic stability. Given
these uncertainties, there is no assurance that there will not be further
deterioration in the global economy, the global financial markets and consumer
confidence. Any economic downturn generally or any decrease in consumer spending
in the PRC, could cause advertisers to reduce their spending on advertisements,
would have a material adverse effect on our business, cash flows, financial
condition and results of operations.
Although we believe we have adequate
liquidity and capital resources to fund our operations internally, in light of
current market conditions, our inability to access the capital markets on
favorable terms, or at all, may adversely affect our financial performance. The
inability to obtain adequate financing from debt or capital sources could force
us to self-fund strategic initiatives or even forego certain opportunities,
which in turn could potentially harm our performance.
We
may pursue future growth through strategic acquisitions and alliances which may
not yield anticipated benefits and may adversely affect our operating results,
financial condition and existing business.
We may seek to grow in the future
through strategic acquisitions in order to complement and expand our business.
The success of our acquisition strategy will depend on, among other
things:
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the
availability of suitable
candidates;
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competition
from other companies for the purchase of available
candidates;
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our
ability to value those candidates accurately and negotiate favorable terms
for those acquisitions;
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the
availability of funds to finance
acquisitions;
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the
ability to establish new informational, operational and financial systems
to meet the needs of our business;
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the
ability to achieve anticipated synergies, including with respect to
complementary products or services;
and
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the
availability of management resources to oversee the integration and
operation of the acquired
businesses.
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If we are not successful in integrating
acquired businesses and completing acquisitions in the future, we may be
required to reevaluate our acquisition strategy. We also may incur substantial
expenses and devote significant management time and resources in seeking to
complete acquisitions. Acquired businesses may fail to meet our performance
expectations. If we do not achieve the anticipated benefits of an acquisition as
rapidly as expected, or at all, investors or analysts may not perceive the same
benefits of the acquisition as we do. If these risks materialize, our stock
price could be materially adversely affected.
We
may need additional capital to implement our current business strategy, which
may not be available to us, and if we raise additional capital, it may dilute
your ownership in us.
We currently depend on net revenues to
meet our short-term cash requirements. In order to grow revenues and
sustain profitability, we will need additional capital. Obtaining
additional financing will be subject to a number of factors, including market
conditions, our operating performance and investor sentiment. These
factors may make the timing, amount, terms and conditions of additional
financing unattractive to us. We cannot assure you that we will be able to
obtain any additional financing. If we are unable to obtain the financing
needed to implement our business strategy, our ability to increase revenues will
be impaired and we may not be able to sustain profitability.
Our
failure to effectively manage growth could harm our business.
We have rapidly and significantly
expanded our services offerings since our inception and will endeavor to further
expand our service offerings in the future. Any additional significant
growth in the market for our services or our entry into new markets may require
and expansion of our employee base for managerial, operational, financial, sales
and marketing and other purposes. During any growth, we may face problems
related to our operational and financial systems and controls, including quality
control and service capacities. We would also need to continue to expand, train
and manage our employee base. Continued future growth will impose significant
added responsibilities upon the members of management to identify, recruit,
maintain, integrate, and motivate new employees.
Aside from increased difficulties in
the management of human resources, we may also encounter working capital issues,
as we will need increased liquidity to finance the purchase of additional
advertising time slots, develop new services and the hiring of additional
employees. For effective growth management, we will be required to continue
improving our operations, management, and financial systems and controls. Our
failure to manage growth effectively may lead to operational and financial
inefficiencies that will have a negative effect on our profitability. We cannot
assure investors that we will be able to timely and effectively meet that demand
and maintain the quality standards required by our existing and potential
customers.
We
may be subject to intellectual property infringement claims, which could result
in litigation and substantial costs to defend.
We place advertisements provided by our
advertising clients on television and may be subject to claims of infringement
based on our clients’ advertisements. Some of our existing contracts with
our advertising clients do not provide us with indemnity from our clients for
any intellectual property infringement claims relating to the advertisements
provided by our clients. We cannot be certain that our operations or any
aspects of our business do not or will not infringe upon patents, copyrights or
other intellectual property rights held by third parties. We may receive notice
of claims of infringement of other parties’ proprietary rights. Such
actions could result in litigation and we could incur significant costs and
diversion of resources in defending such claims. The party making such
claims could secure a judgment awarding substantial damages, as well as
injunctive or other equitable relief. Even if such litigation is not
successful, it could result in substantial costs and diversion of resources and
management’s attention from the operation of our business.
We
face risks related to natural disasters, terrorist attacks or other
unpredictable events in China which could have a material adverse effect on our
business and results of operations.
Our business could be materially and
adversely affected by natural disasters, terrorist attacks or other events in
China where all of our operations are located. For example, in early 2008,
parts of China suffered a wave of strong snow storms that severely impacted
public transportation systems. In May 2008, Sichuan Province in China suffered a
strong earthquake measuring approximately 8.0 on the Richter scale that caused
widespread damage and casualties. The May 2008 Sichuan earthquake has had
a material adverse effect on the general economic conditions in the areas
affected by the earthquake. The occurrence of any future disasters such as
earthquakes, fires, floods, wars, terrorist attacks, computer viruses,
transportation disasters or other events, or our information system or
communications network breaks down or operates improperly as a result of such
events, our facilities may be seriously damaged, and we may have to stop or
delay operations. We may incur expenses relating to such damages, which
could have a material adverse effect on our business and results of
operations.
We
may adopt an equity incentive plan under which we may grant securities to
compensate employees and other services providers, which would result in
increased share-based compensation expenses and, therefore, reduce net
income.
We may adopt an equity incentive plan
under which we may grant shares or options to qualified employees. Under current
accounting rules, we would be required to recognize share-based compensation as
compensation expense in our statement of operations, based on the fair value of
equity awards on the date of the grant, and recognize the compensation expense
over the period in which the recipient is required to provide service in
exchange for the equity award. We have not made any such grants in the past, and
accordingly our results of operations have not contained any share-based
compensation charges. The additional expenses associated with share-based
compensation may reduce the attractiveness of issuing stock options under an
equity incentive plan that we may adopt in the future. If we grant equity
compensation to attract and retain key personnel, the expenses associated with
share-based compensation may adversely affect our net income. However, if we do
not grant equity compensation, we may not be able to attract and retain key
personnel or be forced to expend cash or other compensation instead.
Furthermore, the issuance of equity awards would dilute the shareholders’
ownership interests in our company.
RISKS
RELATED TO OUR CORPORATE STRUCTURE
If
the PRC government determines that the agreements establishing the structure for
operating our China business do not comply with applicable PRC laws, rules and
regulations, we could be subject to severe penalties including being prohibited
from continuing our advertising operations in the PRC.
Foreign entities that invest in
companies that operate in the advertising industry in the PRC must have at least
two years of direct operations in the advertising industry outside of the
PRC. We are a Delaware corporation and have not engaged in any advertising
operations outside of the PRC and, therefore, are unable to directly provide
advertising services in China. As a result, our PRC subsidiary, CD Media
Huizhou cannot obtain the proper business licenses in China to provide
advertising services. We provide our advertising services through CD Media
Beijing, which is owned directly by three PRC citizens. CD Media Huizhou
controls the operations of CD Media Beijing and receives the economic benefits
and bears the economic risks of CD Media Beijing through a series of contractual
arrangements.
There are considerable uncertainties
regarding the interpretation and application of current and future PRC laws,
rules and regulations, including but not limited to the laws, rules and
regulations governing the validity and enforcement of our contractual
arrangements with CD Media Beijing. Although our PRC legal counsel has advised
us that our corporate structure, including our contractual arrangements with CD
Media Beijing, complies with all applicable PRC laws, rules and regulations, we
cannot assure you that the PRC government will not take a view contrary to the
opinion of our PRC legal counsel and determine that our corporate structure and
our contractual arrangement violate PRC law, rules and regulations. Our
PRC legal counsel has also advised us that if the PRC government decides that
our contractual agreements with CD Media Beijing that establish the framework
for our advertising operations in the PRC violate PRC restrictions on foreign
ownership of advertising businesses, the PRC may impose harsh penalties upon us,
including but not limited to the following:
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revoking
the business and operating licenses of CD Media Huizhou and/or CD Media
Beijing;
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ending
or restricting any transactions among CD Media Huizhou and CD Media
Beijing;
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confiscating
our, CD Media Huizhou’s or CD Media Beijing’s
income;
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imposing
restrictions on our operations with which we may be unable to
comply;
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requiring
us to restructure our corporate structure or operations;
or
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restricting
or prohibiting the use of any proceeds of an offering of our securities to
finance our operations in the PRC.
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The imposition of any such penalties
would have a material adverse effect on our business and results of
operations.
We
rely on contractual arrangements with CD Media Beijing, our consolidated
affiliated entity in China, and its shareholders, which may not be as effective
in providing us with operational control or enabling us to derive economic
benefits as through ownership of controlling equity interest.
We rely upon, and expect to continue to
rely upon, contractual arrangements with CD Media Beijing, our consolidated
affiliated entity in China, and its shareholders to operate our advertising
business. These contractual arrangements provide us with effective control over
CD Media Beijing and the economic benefits and risks of CD Media Beijing.
If CD Media Beijing or any of its shareholders fails to perform their
responsibilities under any of our contractual arrangements, we may incur
substantial costs to enforce such agreements and rely on legal remedies under
PRC law, including seeking specific performance or injunctive relief, and
claiming damage. We cannot assure investors that we will be successful in
enforcing such agreements.
If (i) the applicable PRC
authorities invalidate these contractual arrangements for violation of PRC laws,
rules and regulations, (ii) CD Media Beijing or its shareholders terminate
these contractual arrangements or (iii) CD Media Beijing or its
shareholders fail to perform their obligations under these contractual
arrangements, we would not be able to continue our business operations in China
or to derive economic benefits from operations of CD Media Beijing.
Additionally, if we cannot renew these contractual arrangements upon their
expiration, we would not be able to continue our business operations unless the
then current PRC law allows us to directly operate advertising businesses in
China.
If CD Media Beijing or all or part of
its assets become subject to liens or rights of third-party creditors, we may be
unable to continue some or all of our business activities, which could severely
disrupt our business and result in a material adverse effect to our results of
operations. If CD Media Beijing undergoes a voluntary or involuntary liquidation
proceeding, its shareholders or unrelated third-party creditors may claim rights
to some or all of CD Media Beijing’s assets, which would inhibit our ability to
operate our advertising business and derive the economic benefits of CD media
Beijing.
All of these contractual arrangements
are governed by PRC laws. Accordingly, these contracts will be interpreted
in accordance with PRC laws and any disputes would be resolved in accordance
with PRC legal procedures. The legal environment in the PRC is not as developed
as in some other jurisdictions, such as the United States. As a result,
uncertainties in the PRC legal system could limit our ability to enforce these
contractual arrangements. In the event we are unable to enforce these
contractual arrangements, we may not be able to exercise effective control over
our operating entities, and we may be precluded from operating our business,
which would have a material adverse effect on our financial condition and
results of operations.
The
PRC tax authorities may scrutinize our contractual arrangements with CD Media
Beijing, which could result in the tax authorities determining that we owe
additional taxes or that we are not entitled for certain tax
exemptions, or both, which could substantially increase our taxes owed and have
a negative impact on our financial condition.
Under applicable PRC laws, rules and
regulations, arrangements and transactions among related parties may be subject
to audits or challenges by the PRC tax authorities. Neither we nor our PRC legal
counsel are able to determine whether any of our contractual arrangements with
CD Media Beijing will be regarded by the PRC tax authorities as arm’s length
transactions because, to our knowledge, the PRC tax authorities have not issued
a ruling or interpretation in respect of the type of transaction structure
similar to ours. The relevant tax authorities may determine that our contractual
relationships with CD Media Beijing and its shareholders were not entered into
on an arm’s length basis. If any of the transactions between CD Media Huizhou,
our wholly owned subsidiary in China, and CD Media Beijing, our affiliated
entity, and its shareholders, including our contractual arrangements with CD
Media Beijing, are determined not to have been entered into on an arm’s length
basis, or are found to result in an impermissible reduction in taxes under PRC
laws, the PRC tax authorities may adjust the profits and losses of CD Media
Beijing and assess more taxes on it. In addition, the PRC tax authorities may
impose late payment interest and other penalties to CD Media Beijing for
underpaid taxes. The late payment interest will be charged against the underpaid
taxes during the period from June 1 of the next year to the year the taxable
event occurs to the date the underpaid taxes are made up, and will be charged by
day. The daily rate is the then current base rate for RMB loans published
by the People’s Bank of China plus 5%. Our net income may be materially
and adversely affected if CD Media Beijing’s tax liabilities increase or if it
is found to be subject to late payment interest or other
penalties.
We
rely principally on dividends and other distributions on equity paid by our
wholly-owned operating subsidiary to fund any cash and financing requirements we
may have, and any limitation on the ability of our operating subsidiary to pay
dividends to us could have a material adverse effect on our ability to conduct
our business.
As a holding company, we rely
principally on dividends and other distributions on equity paid by CD Media
Huizhou, our PRC operating subsidiary, for our cash requirements, including the
funds necessary to service any debt we may incur or for operating a public
company. If CD Media Huizhou incurs debt on its own behalf in the future, the
instruments governing the debt may restrict its ability to pay dividends or make
other distributions to us. In addition, the PRC tax authorities may require us
to adjust our taxable income under the contractual arrangements CD Media Huizhou
currently has in place with CD Media Beijing in a way that would materially and
adversely affect CD Media Huizhou’s ability to pay dividends and other
distributions to us. Furthermore, relevant PRC laws, rules and regulations
permit payments of dividends by CD Media Huizhou only out of its retained
earnings, if any, determined in accordance with PRC accounting standards and
regulations. Under PRC laws, rules and regulations, CD Media Huizhou is also
required to set aside a portion of its net profit each year to fund specific
reserve funds. These reserves are not distributable as cash dividends. The
statutory general reserve fund requires annual appropriations of 10% of
after-tax profit to be set aside prior to payment of dividends until the
cumulative fund reaches 50% of the registered capital. As a result CD Media
Huizhou is restricted in its ability to transfer a portion of its net assets to
us whether in the form of dividends, loans or advances. Any limitation on the
ability of CD Media Huizhou to pay dividends to us could materially and
adversely limit our ability to grow, make investments or acquisitions that could
be beneficial to our businesses, pay dividends or otherwise fund and conduct our
business.
RISKS
RELATED TO US DOING BUSINESS IN CHINA
As
substantially all of our assets are located in the PRC and all of our revenues
are derived from our operations in China, changes in the political and economic
policies of the PRC government could have a significant impact upon the business
we may be able to conduct in the PRC and accordingly on the results of our
operations and financial condition.
Our business operations may be
adversely affected by the current and future political environment in the PRC.
The Chinese government exerts substantial influence and control over the manner
in which we must conduct our business activities. Our ability to operate in
China may be adversely affected by changes in Chinese laws and regulations,
including those relating to taxation, import and export tariffs, raw materials,
environmental regulations, land use rights, property and other matters. Under
the current government leadership, the government of the PRC has been pursuing
economic reform policies that encourage private economic activity and greater
economic decentralization. There is no assurance, however, that the government
of the PRC will continue to pursue these policies, or that it will not
significantly alter these policies from time to time without
notice.
Our
operations are subject to PRC laws and regulations that are sometimes vague and
uncertain. Any changes in such PRC laws and regulations, or the interpretations
thereof, may have a material and adverse effect on our business.
The PRC’s legal system is a civil law
system based on written statutes. Decided legal cases do not have so much value
as precedent in China as those in the common law system prevalent in the United
States. There are substantial uncertainties regarding the interpretation and
application of PRC laws and regulations, including but not limited to,
governmental approvals required for conducting business and investments, laws
and regulations governing the advertising industry, as well as commercial,
antitrust, patent, product liability, environmental laws and regulations,
consumer protection, and financial and business taxation laws and
regulations.
The Chinese government has been
developing a comprehensive system of commercial laws, and considerable progress
has been made in introducing laws and regulations dealing with economic matters.
However, because these laws and regulations are relatively new, and because of
the limited volume of published cases and judicial interpretation and their lack
of force as precedents, interpretation and enforcement of these laws and
regulations involve significant uncertainties. New laws and regulations that
affect existing and proposed future businesses may also be applied
retroactively.
Our PRC subsidiary, CD Media Huizhou,
is considered a foreign invested enterprise under PRC laws, and as a result is
required to comply with PRC laws and regulations, including laws and regulations
specifically governing the activities and conduct of foreign invested
enterprises. We cannot predict what effect the interpretation of existing or new
PRC laws or regulations may have on our businesses. If the relevant authorities
find us in violation of PRC laws or regulations, they would have broad
discretion in dealing with such a violation, including, without
limitation:
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revoking
our business license, other licenses or
authorities;
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requiring
that we restructure our ownership or operations;
and
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requiring
that we discontinue any portion or all of our
business.
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Investors
may experience difficulties in effecting service of legal process, enforcing
foreign judgments or bringing original actions in China based upon U.S. laws,
including the federal securities laws or other foreign laws against us or our
management.
All of our current operations are
conducted in China. Moreover, all of our directors and officers are nationals
and residents of China. All or substantially all of the assets of these persons
are located outside the United States and in the PRC. As a result, it may not be
possible to effect service of process within the United States or elsewhere
outside China upon these persons. In addition, uncertainty exists as to whether
the courts of China would recognize or enforce judgments of U.S. courts obtained
against us or such officers and/or directors predicated upon the civil liability
provisions of the securities laws of the United States or any state thereof, or
be competent to hear original actions brought in China against us or such
persons predicated upon the securities laws of the United States or any state
thereof.
The
scope of the business license for CD Media Beijing in China is limited, and we
may not expand or continue our business without government approval and renewal,
respectively.
Our principal operating entity, CD
Media Beijing, can only conduct business within its approved business scope,
which ultimately appears on its business license. CD Media Beijing’s
business license covers its present business to design, create, handle (as
agent), and release advertisements in PRC for domestic and foreign investors; to
arrange cultural communications (excluding shows); to undertake exhibitions and
presentations; and to provide advertising consulting services
(excluding intermediary services). While our business license covers our
current plans to expand into the purchase of advertising time on local and
regional networks, to open a production studio and shoot television
advertisements, public service announcements and proprietary television
programming and to expand into new advertising platforms, we may choose to enter
into new areas and activities that are not currently covered by our business
license. Prior to expanding our business and engaging in activities that
are not covered by our current business license, we are required to apply and
receive approval from the relevant PRC government authorities. In order
for us to expand our business beyond the scope of our license, we will be
required to enter into a negotiation with the PRC authorities for the approval
to expand the scope of our business. PRC authorities, which have
discretion over business licenses, may reject our request to expand the scope of
our business license to include our planned areas of expansion. We will be
prohibited from engaging in any activities that the PRC authorities do not
approve in our expanded business license. Companies that operate outside
the scope of their licenses can be subjected to fines, disgorgement of income
and ordered to cease operations. Our business and results of operations
may be materially and adversely affected if we are unable to obtain the
necessary government approval for an expanded business license that covers any
areas in which we wish to expand.
Contract
drafting, interpretation and enforcement in China involves significant
uncertainty.
We have entered into numerous contracts
governed by PRC law, many of which are material to our business. As compared
with contracts in the United States, contracts governed by PRC law tend to
contain less detail and are not as comprehensive in defining contracting
parties’ rights and obligations. As a result, contracts in China are more
vulnerable to disputes and legal challenges. In addition, contract
interpretation and enforcement in China is not as developed as in the United
States, and the result of any contract dispute is subject to significant
uncertainties. Therefore, we cannot assure you that we will not be subject to
disputes under our material contracts, and if such disputes arise, we cannot
assure you that we will prevail.
Recent
PRC regulations relating to acquisitions of PRC companies by foreign entities
may create regulatory uncertainties that could restrict or limit our ability to
operate. Our failure to obtain the prior approval of the China Securities
Regulatory Commission, or the CSRC, for our planned public offering and the
listing and trading of our common stock could have a material adverse effect on
our business, operating results, reputation and trading price of our common
stock.
The PRC State Administration of Foreign
Exchange, or “SAFE,” issued a public notice in November 2005, known as Circular
75, concerning the use of offshore holding companies controlled by PRC residents
in mergers and acquisitions in China. This circular requires that (1) a PRC
resident shall register with a local branch of the SAFE before he or she
establishes or controls an overseas special purpose vehicle, or SPV, for the
purpose of overseas equity financing (including convertible debt financing); (2)
when a PRC resident contributes the assets of or his or her equity interests in
a domestic enterprise to an SPV, or engages in overseas financing after
contributing assets or equity interests to an SPV, such PRC resident must
register his or her interest in the SPV and any changes in such interest with a
local branch of the SAFE; and (3) when the SPV undergoes a material change
outside of China, such as a change in share capital or merger or acquisition,
the PRC resident shall, within 30 days from the occurrence of the event that
triggers the change, register such change with a local branch of the SAFE. In
addition, SAFE issued updated internal implementing rules, or the Implementing
Rules in relation to Circular 75. The Implementing Rules were promulgated and
became effective on May 29, 2007, known as Circular 106. Such Implementing Rules
provide more detailed provisions and requirements regarding the overseas
investment foreign exchange registration procedures. However, even after the
promulgation of Implementing Rules there still exist uncertainties regarding the
SAFE registration for PRC residents’ interests in overseas companies. If any PRC
resident stockholder of a SPV fails to make the required SAFE registration and
amended registration, the onshore PRC subsidiaries of that offshore company may
be prohibited from distributing their profits and the proceeds from any
reduction in capital, share transfer or liquidation to the offshore
entity. Failure to comply with the SAFE registration and amendment
requirements described above could result in liability under PRC laws for
evasion of applicable foreign exchange restrictions. Because of uncertainty in
how the SAFE notice will be interpreted and enforced, we cannot be sure how it
will affect our business operations or future plans. For example, CD Media
Huizhou’s ability to conduct foreign exchange activities, such as the remittance
of dividends and foreign currency-denominated borrowings, may be subject to
compliance with the SAFE notice by our PRC resident beneficial holders over whom
we have no control. In addition, we cannot assure you that such PRC
residents will be able to complete the necessary approval and registration
procedures required by the SAFE regulations. Failure by any PRC resident
beneficial holder to register as required with the relevant branch of SAFE could
subject these PRC resident beneficial holders to fines or legal sanctions,
restrict our overseas or cross-border investment activities, limit CD Media
Huizhou’s ability to make distributions or pay dividends or affect our ownership
structure, which could adversely affect our business and
prospects.
On August 8, 2006, the PRC Ministry of
Commerce (“MOFCOM”), joined by the State-owned Assets Supervision and
Administration Commission of the State Council, the State Administration of
Taxation, the State Administration for Industry and Commerce, the China
Securities Regulatory Commission and SAFE, released a substantially amended
version of the Provisions for Foreign Investors to Merge with or Acquire
Domestic Enterprises (the “Revised M&A Regulations”), which took effect on
September 8, 2006 and was further amended on June 22, 2009. These new rules
significantly revised China’s regulatory framework governing onshore-to-offshore
restructurings and foreign acquisitions of domestic enterprises. These new rules
signify greater PRC government attention to cross-border merger, acquisition and
other investment activities, by confirming MOFCOM as a key regulator for issues
related to mergers and acquisitions in China and requiring MOFCOM approval of a
broad range of merger, acquisition and investment transactions. Further, the new
rules establish reporting requirements for acquisition of control by foreigners
of companies in key industries, and reinforce the ability of the Chinese
government to monitor and prohibit foreign control transactions in key
industries.
Among other things, the revised M&A
Regulations include new provisions that purport to require that an offshore
special purpose vehicle, or SPV, formed for listing purposes and controlled
directly or indirectly by PRC companies or individuals must obtain the approval
of the CSRC prior to the listing and trading of such SPV’s securities on an
overseas stock exchange. On September 21, 2006, the CSRC published on its
official website procedures specifying documents and materials required to be
submitted to it by SPVs seeking CSRC approval of their overseas listings.
However, the application of this PRC regulation remains unclear with no
consensus currently existing among the leading PRC law firms regarding the
scope and applicability of the CSRC approval requirement. Our PRC counsel, Han
Kun Law Offices, believes that it is uncertain whether the transaction is
subject to CSRC's approval, and in reality, many other similar companies have
completed similar transactions like the share exchange and private placement
contemplated under the Exchange Agreement without CSRC's approval and our PRC
legal counsel is not aware of any situation in which the CSRC has imposed a
punishment or penalty in connection with any such transactions. However,
if the CSRC or other PRC Government Agencies subsequently determine that CSRC
approval is required for the share exchange and private placement contemplated
under the Exchange Agreement, we may face material regulatory actions or other
sanctions from the CSRC or other PRC Government Agencies.
If the CSRC or another PRC regulatory
agency subsequently determines that CSRC approval was required for our
restructuring, we may face regulatory actions or other sanctions from the CSRC
or other PRC regulatory agencies. These regulatory agencies may impose fines and
penalties on our operations in the PRC, limit our operating privileges in the
PRC, or take other actions that could have a material adverse effect on our
business, financial condition, results of operations, reputation and prospects,
as well as the trading price of our common stock.
Also, if later the CSRC requires
that we obtain its approval, we may be unable to obtain a waiver of the CSRC
approval requirements, if and when procedures are established to obtain such a
waiver. Any uncertainties and/or negative publicity regarding this CSRC approval
requirement could have a material adverse effect on the trading price of our
common stock.
It is uncertain how our business
operations or future strategy will be affected by the interpretations and
implementation of Circular 75 and the Revised M&A Regulations. It is
anticipated that application of the new rules will be subject to significant
administrative interpretation, and we will need to closely monitor how MOFCOM,
SAFE, CSRC and other ministries apply the rules to ensure that our domestic and
offshore activities continue to comply with PRC law. Given the uncertainties
regarding interpretation and application of the new rules, we may need to expend
significant time and resources to maintain compliance with such
rules.
If
the land use rights of our landlord are revoked, we would be forced to relocate
operations.
Under Chinese law, land is owned by
the state or rural collective economic organizations. The state issues to the
land users the land use right certificate. Land use rights can be revoked and
the land users could be forced to vacate at any time when redevelopment of the
land is in the public interest. The public interest rationale is interpreted
quite broadly and the process of land appropriation may be less than
transparent. We do not have any land use rights and each of our facilities
relies on land use rights of our landlords, and the loss of such rights would
require us to identify and relocate our operations, which could have a material
adverse effect on our financial conditions and results of
operations.
CD
Media Beijing’s operation of business outside of its registered address may
subject us to penalties under relevant PRC laws and regulations governing
corporate registration matters.
Besides operation at its registered
address in Mentougou District, Beijing (as reflected in its currently effective
business license), CD Media Beijing also conduct its business in Chaoyang
District, Beijing, without application for establishment of any branch offices
at the relevant address with the competent administration of industry and
commerce. PRC laws and regulations require a company to register its
address with the competent administration of industry and commerce, and provide
that the establishment of any branch offices of an existing company shall be
subject to the registration requirement by such authority. If the
competent administration of industry and commerce finds the practice of CD Media
Beijing is in violation with the above requirements, CD Media Beijing will be
ordered to correct such violating activities, and we may be further subject to
severe fines (RMB10,000 to RMB100,000 for failure to register the modification
of address, and up to RMB30,000 for establishing branch offices without
registration).
We
will not be able to complete an acquisition of prospective acquisition targets
in the PRC unless their financial statements can be reconciled to U.S. generally
accepted accounting principles in a timely manner.
Companies based in the PRC may not have
properly kept financial books and records that may be reconciled with U.S.
generally accepted accounting principles. If we attempt to acquire a significant
PRC target company and/or its assets, we would be required to obtain or prepare
financial statements of the target that are prepared in accordance with and
reconciled to U.S. generally accepted accounting principles. Federal securities
laws require that a business combination meeting certain financial significance
tests require the public acquirer to prepare and file historical and/or pro
forma financial statement disclosure with the SEC. These financial statements
must be prepared in accordance with, or be reconciled to U.S. generally accepted
accounting principles and the historical financial statements must be audited in
accordance with the standards of the Public Company Accounting Oversight Board
(United States), or PCAOB. If a proposed acquisition target does not have
financial statements that have been prepared in accordance with, or that can be
reconciled to, U.S. generally accepted accounting principles and audited in
accordance with the standards of the PCAOB, we will not be able to acquire that
proposed acquisition target. These financial statement requirements may limit
the pool of potential acquisition targets with which we may acquire and hinder
our ability to expand our retail operations. Furthermore, if we consummate an
acquisition and are unable to timely file audited financial statements and/or
pro forma financial information required by the Exchange Act, such as Item 9.01
of Form 8-K, we will be ineligible to use the SEC’s short-form registration
statement on Form S-3 to raise capital, if we are otherwise eligible to use a
Form S-3. If we are ineligible to use a Form S-3, the process of raising capital
may be more expensive and time consuming and the terms of any offering
transaction may not be as favorable as they would have been if we were eligible
to use Form S-3.
We
face uncertainty from China’s Circular on Strengthening the Administration of
Enterprise Income Tax on Non-Resident Enterprises' Share Transfer Income
(“Circular 698”) that was released in December 2009 with retroactive effect from
January 1, 2008.
The Chinese State Administration of
Taxation (SAT) released a circular (Guoshuihan No. 698 – Circular 698) on
December 10, 2009 that addresses the transfer of shares of Chinese resident
companies by nonresident companies. Circular 698, which is effective
retroactively to January 1, 2008, may have a significant impact on many
companies that use offshore holding companies to invest in China. We have
sought the advice of PRC legal counsel regarding the application of and the
risks associated with Circular 698. Circular 698, which provides parties
with a short period of time to comply its requirements, indirectly taxes foreign
companies on gains derived from the indirect sale of a Chinese company.
Where a foreign investor indirectly transfers equity interests in a Chinese
resident enterprise by selling the shares in an offshore holding company, and
the latter is located in a country or jurisdiction where the effective tax
burden is less than 12.5% or where the offshore income of his, her, or its
residents is not taxable, the foreign investor is required to provide the tax
authority in charge of that Chinese resident enterprise with the relevant
information within 30 days of the transfers. Moreover, where a foreign investor
indirectly transfers equity interests in a Chinese resident enterprise through
an abuse of form of organization and there are no reasonable commercial purposes
such that the corporate income tax liability is avoided, the PRC tax authority
will have the power to re-assess the nature of the equity transfer in accordance
with PRC’s “substance-over-form” principle and deny the existence of the
offshore holding company that is used for tax planning
purposes.
There is uncertainty as to the
application of Circular 698. For example, while the term "indirectly
transfer" is not defined, it is understood that the relevant PRC tax authorities
have jurisdiction regarding requests for information over a wide range of
foreign entities having no direct contact with China. Moreover, the relevant
authority has not yet promulgated any formal provisions or formally declared or
stated how to calculate the effective tax in the country or jurisdiction and to
what extent and the process of the disclosure to the tax authority in charge of
that Chinese resident enterprise. In addition, there are no formal
declarations with regard to how to decide “abuse of form of organization” and
“reasonable commercial purpose,” which can be utilized by us to balance if our
company complies with the Circular 698. As a result, we may become at risk
of being taxed under Circular 698 and we may be required to expend valuable
resources to comply with Circular 698 or to establish that we should not be
taxed under Circular 698, which could have a material adverse effect on our
financial condition and results of operations. If the PRC tax authority
determines that Circular 698 applies to us, we will be obligated to make tax
returns filings with the relevant PRC tax authority in accordance with PRC tax
laws and regulations. Failure to do so will subject us to fines up to
RMB10,000 ($1,471). Furthermore, if the PRC tax authority determines that
our arrangement which resulted in the underpayment of taxes was done to evade
taxation, in addition to paying all the underpaid taxes, we may be subject to
further penalties including late fees, fines ranging from 50% to 500% of the
underpaid taxes, and even criminal liabilities under grave
circumstances.
The
foreign currency exchange rate between U.S. Dollars and Renminbi could adversely
affect our financial condition.
Until 1994, the Renminbi experienced a
gradual but significant devaluation against most major currencies, including
dollars, and there was a significant devaluation of the Renminbi on January 1,
1994 in connection with the replacement of the dual exchange rate system with a
unified managed floating rate foreign exchange system. Since 1994, the value of
the Renminbi relative to the U.S. dollar has remained stable and has appreciated
slightly against the U.S. Dollar. Countries, including the United States, have
argued that the Renminbi is artificially undervalued due to China’s current
monetary policies and have pressured China to allow the Renminbi to float freely
in world markets. In July 2005, the PRC government changed its policy of pegging
the value of the Renminbi to the U.S. dollar. Under the new policy the Renminbi
is permitted to fluctuate within a narrow and managed band against a basket of
designated foreign currencies. While the international reaction to the Renminbi
revaluation has generally been positive, there remains significant international
pressure on the PRC government to adopt an even more flexible currency policy,
which could result in further and more significant appreciation of the Renminbi
against the U.S. dollar.
As we may rely on dividends and other
fees paid to us by our subsidiary and affiliated consolidated entities in China,
any significant revaluation of the Renminbi may materially and adversely affect
our cash flows, revenues, earnings and financial position, and the amount of,
and any dividends payable on, our shares in U.S. dollars. To the extent
that we need to convert U.S. dollars into Renminbi for our operations,
appreciation of the Renminbi against the U.S. dollar would have an adverse
effect on the Renminbi amount we would receive from the conversion. Conversely,
if we decide to convert our Renminbi into U.S. dollars for the purpose of
making payments for dividends on our shares or for other business purposes,
appreciation of the U.S. dollar against the Renminbi would have a negative
effect on the U.S. dollar amount available to us. In addition, since our
functional and reporting currency is the U.S. dollar while the functional
currency of our subsidiary and affiliated consolidated entities in China is
Renminbi, appreciation or depreciation in the value of the Renminbi relative to
the U.S. dollar would have a positive or negative effect on our reported
financial results, which may not reflect any underlying change in our business,
results of operations or financial condition.
Governmental
control of currency conversion may limit our ability to utilize our
revenues.
Substantially all of our revenues
and expenses are denominated in Renminbi. Under PRC laws, the Renminbi is
currently convertible under a company’s “current account,” which includes
dividends, trade and service-related foreign exchange transactions, but not
under the company’s “capital account,” which includes foreign direct investment
and loans, without the prior approval of SAFE. Currently, our PRC subsidiary, CD
Media Huizhou, may purchase foreign currencies for settlement of current account
transactions, including payments of dividends to us, without the approval of
SAFE. However, foreign exchange transactions by CD Media Huizhou under the
capital account continue to be subject to significant foreign exchange controls
and require the approval of or need to register with PRC governmental
authorities, including SAFE. In particular, if CD Media Huizhou borrows foreign
currency loans from us or other foreign lenders, these loans must first be
registered with the SAFE. If CD Media Huizhou, a wholly foreign-owned
enterprise, borrows foreign currency, the accumulative amount of its foreign
currency loans shall not exceed the difference between the total investment and
the registered capital of CD Media Huizhou. If we finance CD Media Huizhou by
means of additional capital contributions, these capital contributions must be
approved by certain government authorities such as the Ministry of Commerce or
its local counterparts. Any existing and future restrictions on currency
exchange may affect the ability of our PRC subsidiary or affiliated entities to
obtain foreign currencies, limit our ability to meet our foreign currency
obligations, or otherwise materially and adversely affect our
business.
Inflation
in the PRC could negatively affect our profitability and growth.
While the PRC economy has experienced
rapid growth, such growth has been uneven among various sectors of the economy
and in different geographical areas of the country. Rapid economic growth can
lead to growth in the money supply and rising inflation. According to the
National Bureau of Statistics of China, the change in China’s Consumer Price
Index increased to 8.5% in April 2008. If prices for our products and services
rise at a rate that is insufficient to compensate for the rise in the costs of
supplies such as raw materials, it may have an adverse effect on our
profitability.
Furthermore, in order to control
inflation in the past, the PRC government has imposed controls on bank credits,
limits on loans for fixed assets and restrictions on state bank lending. In
January 2010, the Chinese government took steps to tighten the availability of
credit including ordering banks to increase the amount of reserves they hold and
to reduce or limit their lending. The implementation of such policies may impede
economic growth. In October 2004, the People’s Bank of China, the PRC’s central
bank, raised interest rates for the first time in nearly a decade and indicated
in a statement that the measure was prompted by inflationary concerns in the
Chinese economy. In April 2006, the People’s Bank of China raised the interest
rate again. Repeated rises in interest rates by the central bank would likely
slow economic activity in China which could, in turn, materially increase our
costs and also reduce demand for our products and services.
Because
our funds are held in banks which do not provide insurance, the failure of any
bank in which we deposit our funds could affect our ability to continue in
business.
Banks and other financial institutions
in the PRC do not provide insurance for funds held on deposit. A significant
portion of our assets are in the form of cash deposited with banks in the PRC,
and in the event of a bank failure, we may not have access to our funds on
deposit. Depending upon the amount of money we maintain in a bank that fails,
our inability to have access to our cash could impair our operations, and, if we
are not able to access funds to pay our suppliers, employees and other
creditors, we may be unable to continue in business.
Failure
to comply with the United States Foreign Corrupt Practices Act could subject us
to penalties and other adverse consequences.
As our ultimate holding company is a
Delaware corporation, we are subject to the United States Foreign Corrupt
Practices Act, which generally prohibits United States companies from engaging
in bribery or other prohibited payments to foreign officials for the purpose of
obtaining or retaining business. Foreign companies, including some that may
compete with us, are not subject to these prohibitions. Corruption, extortion,
bribery, pay-offs, theft and other fraudulent practices may occur from
time-to-time in the PRC. We can make no assurance, however, that our employees
or other agents will not engage in such conduct for which we might be held
responsible. If our employees or other agents are found to have engaged in such
practices, we could suffer severe penalties and other consequences that may have
a material adverse effect on our business, financial condition and results of
operations.
If
we make equity compensation grants to persons who are PRC citizens, they may be
required to register with the State Administration of Foreign Exchange of the
PRC, or SAFE. We may also face regulatory uncertainties that could restrict our
ability to adopt an equity compensation plan for our directors and employees and
other parties under PRC law.
On March 28, 2007, SAFE issued the
“Operating Procedures for Administration of Domestic Individuals Participating
in the Employee Stock Ownership Plan or Stock Option Plan of An Overseas Listed
Company, also known as “Circular 78.” It is not clear whether Circular 78 covers
all forms of equity compensation plans or only those which provide for the
granting of stock options. Domestic individuals who are granted
shares or share options by companies listed on overseas stock exchanges based on
the employee share option or share incentive plan are required to register with
the State Administration of Foreign Exchange or its local counterparts. Pursuant
to Circular 78, PRC individuals participating in the employee stock option plans
of the overseas listed companies shall entrust their employers, including the
overseas listed companies and the subsidiaries or branch offices of such
offshore listed companies in China, or engage domestic agents to handle various
foreign exchange matters associated with their employee stock options plans. The
domestic agents or the employers shall, on behalf of the domestic individuals
who have the right to exercise the employee stock options, apply annually to the
State Administration of Foreign Exchange or its local offices for a quota for
the conversion and/or payment of foreign currencies in connection with the
domestic individuals’ exercise of the employee stock options. The foreign
exchange proceeds received by the domestic individuals from sale of shares under
the stock option plans granted by the overseas listed companies must be remitted
into the bank accounts in China opened by their employers or PRC agents.
We intend to adopt an equity compensation plan in the future and
make option grants to our officers and directors, most of whom are PRC citizens.
Circular 78 may require our officers and directors who receive option grants and
are PRC citizens to register with SAFE. We believe that the registration and
approval requirements contemplated in Circular 78 will be burdensome and time
consuming. If it is determined that any of our equity compensation plans are
subject to Circular 78, failure to comply with such provisions may subject us
and participants of our equity incentive plan who are PRC citizens to fines and
legal sanctions and prevent us from being able to grant equity compensation to
our PRC employees. In that case, our ability to compensate our employees and
directors through equity compensation would be hindered and our business
operations may be adversely affected.
Under
the New EIT Law, we and CD Media BVI may be classified as “resident enterprises”
of China for tax purpose, which may subject us and CD Media BVI to PRC income
tax on taxable global income.
Under the new PRC Enterprise Income
Tax Law (the “New EIT Law”) and its implementing rules, both of which became
effective on January 1, 2008, enterprises are classified as resident enterprises
and non-resident enterprises. An enterprise established outside of China with
its “de facto management bodies” located within China is considered a “resident
enterprise,” meaning that it can be treated in a manner similar to a Chinese
domestic enterprise for enterprise income tax purposes. The implementing rules
of the New EIT Law define de facto management body as a managing body that in
practice exercises “substantial and overall management and control over the
production and operations, personnel, accounting, and properties” of the
enterprise. Due to the short history of the New EIT law and lack of applicable
legal precedents, it remains unclear how the PRC tax authorities will determine
the PRC tax resident treatment of a foreign company such as us and CD Media BVI.
The Company has not sought the advice of PRC tax counsel regarding the risks
associated with the New EIT Law. Both our and CD Media BVI’s members of
management are located in China. If the PRC tax authorities determine that we or
CD Media BVI is a “resident enterprise” for PRC enterprise income tax purposes,
a number of PRC tax consequences could follow. First, we may be
subject to the enterprise income tax at a rate of 25% on our worldwide taxable
income, including interest income on the proceeds from this offering, as well as
PRC enterprise income tax reporting obligations. The failure to pay such
taxes will subject us to fines up to RMB10,000 ($1,471), and furthermore, if the
PRC tax authority determines that our arrangement which resulted in the
underpayment of taxes was done to evade taxation, in addition to paying all the
underpaid taxes, we may be subject to further penalties including late fees,
fines ranging from 50% to 500% of the underpaid taxes, and even criminal
liabilities under grave circumstances. Second, the New EIT Law provides that
dividend paid between “qualified resident enterprises” is exempted from
enterprise income tax. A recent circular issued by the State Administration of
Taxation regarding the standards used to classify certain Chinese-invested
enterprises controlled by Chinese enterprises or Chinese group enterprises and
established outside of China as “resident enterprises” clarified that dividends
and other income paid by such “resident enterprises” will be considered to be
PRC source income, subject to PRC withholding tax, currently at a rate of 10%,
when recognized by non-PRC shareholders. It is unclear whether the dividends
that we or CD Media BVI receives from CD Media Huizhou will constitute dividends
between “qualified resident enterprises” and would therefore qualify for tax
exemption, because the definition of qualified resident enterprises is unclear
and the relevant PRC government authorities have not yet issued guidance with
respect to the processing of outbound remittances to entities that are treated
as resident enterprises for PRC enterprise income tax purposes. We are actively
monitoring the possibility of “resident enterprise” treatment for the applicable
tax years and are evaluating appropriate organizational changes to avoid this
treatment, to the extent possible. As a result of the New EIT Law, our
historical operating results will not be indicative of our operating results for
future periods and the value of our common stock may be adversely
affected.
Dividends
payable by us to our foreign investors and any gain on the sale of our shares
may be subject to taxes under PRC tax laws.
If dividends payable to our
stockholders are treated as income derived from sources within China, then the
dividends that stockholders receive from us, and any gain on the sale or
transfer of our shares, may be subject to taxes under PRC tax laws. We
have not consulted with PRC tax counsel regarding the taxes that may be
associated with dividends paid by us.
Under the New EIT Law and its
implementing rules, PRC enterprise income tax at the rate of 10% is applicable
to dividends payable by us to our investors that are non-resident enterprises so
long as such non-resident enterprise investors do not have an establishment or
place of business in China or, despite the existence of such establishment of
place of business in China, the relevant income is not effectively connected
with such establishment or place of business in China, to the extent that such
dividends have their sources within the PRC. Similarly, any gain realized on the
transfer of our shares by such investors is also subject to a 10% PRC income tax
if such gain is regarded as income derived from sources within China and we are
considered as a resident enterprise which is domiciled in China for tax purpose.
Additionally, there is a possibility that the relevant PRC tax authorities may
take the view that the purpose of us and CD Media BVI is holding CD Media
Huizhou, and the capital gain derived by our overseas shareholders or investors
from the share transfer is deemed China-sourced income, in which case such
capital gain may be subject to a PRC withholding tax at the rate of up to 10%.
If we are required under the New EIT Law to withhold PRC income tax on our
dividends payable to our foreign shareholders or investors who are non-resident
enterprises, or if you are required to pay PRC income tax on the transfer or our
shares under the circumstances mentioned above, the value of your investment in
our shares may be materially and adversely affected.
In January, 2009, the State
Administration of Taxation promulgated the Provisional Measures for the
Administration of Withholding of Enterprise Income Tax for Non-resident
Enterprises (“Measures”), pursuant to which, the entities which have the direct
obligation to make the following payment to a non-resident enterprise shall be
the relevant tax withholders for such non-resident enterprise, and such payment
includes: incomes from equity investment (including dividends and other return
on investment), interests, rents, royalties, and incomes from assignment of
property as well as other incomes subject to enterprise income tax received by
non-resident enterprises in China. Further, the Measures provides that in case
of equity transfer between two non-resident enterprises which occurs outside
China, the non-resident enterprise which receives the equity transfer payment
shall, by itself or engage an agent to, file tax declaration with the PRC tax
authority located at place of the PRC company whose equity has been transferred,
and the PRC company whose equity has been transferred shall assist the tax
authorities to collect taxes from the relevant non-resident enterprise. However,
it is unclear whether the Measures refer to the equity transfer by a
non-resident enterprise which is a direct or an indirect shareholder of the said
PRC company. Given these Measures, there is a possibility that we may have an
obligation to withhold income tax in respect of the dividends paid to
non-resident enterprise investors. If we have such an obligation, our
omission or failure to fulfill such obligation may subject us to similar
penalties to those applied to a taxpayer, including fines up to RMB10,000, and
in the case of being recognized as constituting evasion of taxation, other than
making up for the underpaid taxes, we may be subject to further penalties
including late fees, fines ranging from 50% to 500% of the underpaid taxes, and
even criminal liabilities under grave circumstances.
SAFE
rules and regulations may limit our ability to transfer the net proceeds from
this offering to CD Media Beijing, which may adversely affect the business
expansion of CD Media Beijing, and we may not be able to convert the net
proceeds from this offering into Renminbi to invest in or acquire any other PRC
companies.
On August 29, 2008, SAFE promulgated
Circular 142, a notice regulating the conversion by a foreign-invested company
of foreign currency into Renminbi by restricting how the converted Renminbi may
be used. The notice requires that the registered capital of a foreign-invested
company settled in Renminbi converted from foreign currencies may only be used
for purposes within the business scope approved by the applicable governmental
authority and may not be used for equity investments within the PRC. In
addition, SAFE strengthened its oversight of the flow and use of the registered
capital of a foreign-invested company settled in Renminbi converted from foreign
currencies. The use of such Renminbi capital may not be changed without SAFE’s
approval, and may not in any case be used to repay Renminbi loans if the
proceeds of such loans have not been used. Violations of Circular 142 will
result in severe penalties, such as heavy fines. As a result, Circular 142 may
significantly limit our ability to transfer the net proceeds from this offering
to CD Media Beijing, and we may not be able to convert the net proceeds from
this offering into Renminbi to invest in or acquire any other PRC
companies
Any
recurrence of Severe Acute Respiratory Syndrome (SARS), Avian Flu, or another
widespread public health problem, such as the spread of H1N1 (“Swine”) Flu, in
the PRC could adversely affect our operations.
A renewed outbreak of SARS, Avian Flu
or another widespread public health problem, , such as the spread of H1N1
(“Swine”) Flu, in China, where all of our operations are located and where the
substantial portion of our sales occur, could have a negative effect on our
operations. Our business is dependent upon our ability to continue to market and
sell advertising time and produce television programs. Such an outbreak could
have an impact on our operations as a result of:
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quarantines or closures of some
of our facilities, which would severely disrupt our
operations,
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the sickness or death of our key
officers and employees, and
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a general slowdown in the Chinese
economy.
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Any of the foregoing events or other
unforeseen consequences of public health problems could adversely affect our
operations.
Further
downturn in the economy of the PRC may slow our growth and
profitability.
All of our revenues are generated from
sales in China. The growth of the Chinese economy has been uneven across
geographic regions and economic sectors, in large part due to the recent
downturn in the global economy, which resulted in slow growth of the China
economy. While the Chinese economy has recently begun to show signs of
improvement, there can be no assurance that growth of the Chinese economy will
be steady or that there will not be further deterioration in the global economy
as a whole or the Chinese economy in particular. If economic conditions
deteriorate further, our business and results of operations could be materially
and adversely affected, especially if such conditions result in a decreased use
of our products or in pressure on us to lower our prices.
Because
our business is located in the PRC, we may have difficulty establishing adequate
management, legal and financial controls, which we are required to do in order
to comply with U.S. GAAP and securities laws, and which could cause a materially
adverse impact on our financial statements, the trading of our common stock and
our business
PRC companies have historically not
adopted a Western style of management and financial reporting concepts and
practices, which includes strong corporate governance, internal controls and,
computer, financial and other control systems. Most of our middle and top
management staff are not educated and trained in the Western system, and we may
have difficulty hiring new employees in the PRC with experience and expertise
relating to U.S. GAAP and U.S. public-company reporting requirements. In
addition, we may have difficulty in hiring and retaining a sufficient number of
qualified employees to work in the PRC. As a result of these factors, we may
experience difficulty in establishing management, legal and financial controls,
collecting financial data and preparing financial statements, books of account
and corporate records and instituting business practices that meet Western
standards. Therefore, we may, in turn, experience difficulties in implementing
and maintaining adequate internal controls as required under Section 404 of the
Sarbanes-Oxley Act of 2002. This may result in significant deficiencies or
material weaknesses in our internal controls which could impact the reliability
of our financial statements and prevent us from complying with SEC rules and
regulations and the requirements of the Sarbanes-Oxley Act of 2002. Any such
deficiencies, material weaknesses or lack of compliance could result in
restatements of our historical financial information, cause investors to lose
confidence in our reported financial information, have an adverse impact on the
trading price of our common stock, adversely affect our ability to access the
capital markets and our ability to recruit personnel, lead to the delisting of
our securities from the stock exchange on which they are traded, lead to
litigation claims, thereby diverting management’s attention and resources, and
which may lead to the payment of damages to the extent such claims are not
resolved in our favor, lead to regulatory proceedings, which may result in
sanctions, monetary or otherwise, and have a materially adverse effect on our
reputation and business.
RISKS
RELATED TO OUR OWNERSHIP OF OUR COMMON STOCK AND THIS OFFERING
There
is no current trading market for our common stock, and there is no assurance of
an established public trading market, which would adversely affect the ability
of our investors to sell their securities in the public market.
Our
common stock is not currently listed or quoted for trading on any national
securities exchange or national quotation system. We intend to apply for
the listing of our common stock on either the NASDAQ Global Market of the NYSE
Amex Equities. There is no guarantee that either of these exchange, or any
other securities exchange or quotation system, will permit our shares to be
listed and traded. If we fail to obtain a listing on the NASDAQ Global
Market or the NYSE Amex Equities, we will not complete this offering. Even
if such listing is approved, there can be no assurance that any broker will be
interested in trading our stock. Our underwriter, WestPark Capital, is not
obligated to make a market in our securities and, even after making a market,
can discontinue market making at any time without notice.
The
market price and trading volume of shares of our common stock may be
volatile.
When and
if a market develops for our securities, the market price of our common stock
could fluctuate significantly for many reasons, including for reasons unrelated
to our specific performance, such as reports by industry analysts, investor
perceptions, or negative announcements by customers, competitors or suppliers
regarding their own performance, as well as general economic and industry
conditions. For example, to the extent that other large companies within our
industry experience declines in their share price, our share price may decline
as well. In addition, when the market price of a company’s shares drops
significantly, shareholders could institute securities class action lawsuits
against the company. A lawsuit against us could cause us to incur substantial
costs and could divert the time and attention of our management and other
resources.
Shares
eligible for future sale may adversely affect the market price of our common
stock, as the future sale of a substantial amount of outstanding stock in the
public marketplace could reduce the price of our common stock.
In
addition to the 2,500,000 shares of common stock offered in this offering, the
registration statement of which this prospectus is a part also covers 3,566,838
shares of our common stock issued in a private placement that closed
concurrently with the Share Exchange on April 30, 2010. Each investor in
the private placement may sell or transfer any shares of the common stock after
the effective date of the registration statement except that they, along with
all of our pre-Share Exchange stockholders, entered into a lock-up agreement
pursuant to which they agreed that (i) if the proposed public offering that we
hope to conduct is for $10 million or more, then the investors would not be
able sell or transfer their shares until at least six months after the public
offering’s completion, and (ii) if the offering is for less than
$10 million, then one-tenth of the investors’ shares would be released from
the lock-up restrictions ninety days after offering and there would be a pro
rata release of the shares thereafter every 30 days over the following nine
months. We currently intend this offering to be in an amount less than $10
million. However, there can be no assurance of the actual size of this
offering.
WestPark
Capital, the placement agent in the Private Placement, in its sole discretion,
may allow early releases under the referenced lock-up restrictions provided
however that (i) no early release shall be made with respect to pre-Share
Exchange shareholders prior to the release in full of all such lock-up
restrictions on shares of the common stock acquired in the Private Placement and
(ii) any such early release shall be made pro rata with respect to all
investors’ shares acquired in the Private Placement.
We have
also agreed to register shares of common stock held by our stockholders
immediately prior to the Share Exchange and all of the shares of common stock
underlying the warrants held by our stockholders immediately prior to the Share
Exchange, both of which total 4,065,333 shares of common stock. All of the
shares included in an effective registration statement may be freely sold and
transferred, subject to any applicable lock-up agreement.
Additionally,
the former stockholder of CD Media BVI and their designees received 19,100,000
shares of common stock in the Share Exchange, and may be eligible to sell all or
some of our shares of common stock by means of ordinary brokerage transactions
in the open market pursuant to Rule 144, promulgated under the Securities Act
(“Rule 144”), subject to certain limitations. Under Rule 144, an affiliate
stockholder who has satisfied the required holding period may, under certain
circumstances, sell within any three-month period a number of securities which
does not exceed the greater of 1% of the then outstanding shares of common stock
or the average weekly trading volume of the class during the four calendar weeks
prior to such sale. Immediately prior to this offering, 1% of our issued
and outstanding shares of common stock was approximately 253,128 shares.
Non-affiliate stockholders are not subject to volume limitations. Any
substantial sale of common stock pursuant to any resale prospectus or Rule 144
may have an adverse effect on the market price of our common stock by creating
an excessive supply.
If
you purchase securities in this offering, you will suffer immediate dilution of
your investment.
Assuming
our sale of 2,500,000 shares of common stock at an assumed public offering price
of $3.50 per share of common stock, which is the mid-point of the estimated
initial offering price range set forth on the cover of this prospectus, and
after deducting the underwriting discount and commissions and estimated offering
expenses, our pro forma, as-adjusted net tangible book value as of March 31,
2010 would be approximately $29.1 million, or $1.05 per share of common stock
outstanding, based on 27,812,838 after this offering. The pro forma adjusts for
the issuance of 3,566,838 shares of common stock in the Private Placement that
we closed in April 2010 pursuant to which we received approximately $3.7 million
in net proceeds and the cancellation of 4,450,390 in connection with the Share
Exchange such that there were 2,646,000 shares of common stock outstanding
immediately prior to the Share Exchange. The sale of 2,500,000 shares of
common stock in this offering represents an immediate increase in net tangible
book value of $0.18 per share of common stock to our existing stockholders and
an immediate dilution of $2.45 per share of common stock to the new investors
purchasing common stock in this offering. There would be further dilution
when our outstanding warrants to purchase 1,419,333 shares of common stock are
exercised at $0.0001 per share. In addition, purchasers of common stock in
this offering will have contributed approximately 59.4% of the aggregate price
paid by all owners of our common stock but will own only approximately 8.6% of
our common stock outstanding after this offering, assuming the exercise of our
outstanding warrants to purchase 1,419,333 shares.
The
shareholders of CD Media BVI and their designee have significant influence over
us.
Collectively,
the former shareholders of CD Media BVI and their designee beneficially own or
control approximately 75.5% of our outstanding common stock prior to the
completion of this offering. Two of the former shareholders of CD Media
BVI, Li HuiHua, our Chief Executive Officer and Chairman of the Board, and Fu
HaiMing, one of our directors, collectively beneficially own or control
approximately 25.0% of our outstanding common stock prior to the completion of
this offering.
As a
result, the former shareholders of CD Media BVI and their designee have
significant influence over our company and they, with their combined share
ownership, have a controlling influence in determining the outcome of any
corporate transaction or other matters submitted to our stockholders for
approval, including mergers, consolidations and the sale of all or substantially
all of our assets, election of directors, and other significant corporate
actions. The designee is an unaffiliated third party who was not a
shareholder of CD Media BVI prior to the Share Exchange, and none of the former
shareholders of CD Media BVI has control over the shares held by such
designee. While there is no agreement among the former shareholders of CD
Media BVI and the designee to vote their shares in any particular manner, should
these stockholders vote together they would have the power to prevent
or cause a change in control. In addition, without the consent of these
stockholders, we could be prevented from entering into transactions that could
be beneficial to us. The interests of these stockholders may differ from
the interests of our other stockholders.
We
have broad discretion in the use of the net proceeds from this offering and may
not use them effectively.
Our
management will have broad discretion in the application of the net proceeds
from this offering and could spend the proceeds in ways that do not improve our
results of operations or enhance the value of our securities. We intend to use
the net proceeds for working capital and general corporate purposes. The
failure by our management to apply these funds effectively could result in
financial losses that could have a material adverse effect on our business and
cause the price of our securities to decline. Pending the application of these
funds, we may invest the net proceeds from this offering in a manner that does
not produce income or that loses value.
For a
further description of our intended use of the proceeds of this offering, see
the “Use of Proceeds” section of this prospectus.
If
we fail to maintain effective internal controls over financial reporting, the
price of our common stock may be adversely affected.
We are
required to establish and maintain appropriate internal controls over financial
reporting. Failure to establish those controls, or any failure of those controls
once established, could adversely impact our public disclosures regarding our
business, financial condition or results of operations. Any failure of these
controls could also prevent us from maintaining accurate accounting records and
discovering accounting errors and financial frauds. Rules adopted by the SEC
pursuant to Section 404 of the Sarbanes-Oxley Act of 2002 require annual
assessment of our internal control over financial reporting, and attestation of
this assessment by our independent registered public accountants. We believe
that the annual assessment of our internal controls requirement and the
attestation requirement of management’s assessment by our independent registered
public accountants will first apply to our annual report for the 2010 fiscal
year. The standards that must be met for management to assess the internal
control over financial reporting as effective are new and complex, and require
significant documentation, testing and possible remediation to meet the detailed
standards. We may encounter problems or delays in completing activities
necessary to make an assessment of our internal control over financial
reporting. In addition, the attestation process by our independent registered
public accountants is new and we may encounter problems or delays in completing
the implementation of any requested improvements and receiving an attestation of
our assessment by our independent registered public accountants. If we cannot
assess our internal control over financial reporting as effective, or our
independent registered public accountants are unable to provide an unqualified
attestation report on such assessment, investor confidence and share value may
be negatively impacted.
In addition, management’s assessment of
internal controls over financial reporting may identify weaknesses and
conditions that need to be addressed in our internal controls over financial
reporting or other matters that may raise concerns for investors. Any actual or
perceived weaknesses and conditions that need to be addressed in our internal
control over financial reporting, disclosure of management’s assessment of our
internal controls over financial reporting, or disclosure of our public
accounting firm’s attestation to or report on management’s assessment of our
internal controls over financial reporting may have an adverse impact on the
price of our common stock.
We
may not be able to achieve the benefits we expect to result from the Share
Exchange.
On April
23, 2010, we entered into an Amended and Restated Share Exchange Agreement with
CB Media BVI, the shareholders of CD Media BVI, CD Media Beijing and CD Media
Huizhou, pursuant to which we agreed to acquire 100% of the issued and
outstanding securities of CD Media BVI in exchange for shares of our common
stock. On April 30, 2010, the Share Exchange closed, CD Media BVI became
our 100%-owned subsidiary, and our sole business operations became that of CD
Media BVI and its subsidiaries and CD Media Beijing. We also have a new
Board of Directors and management consisting of persons from CD Media BVI and
changed our corporate name from SRKP 25, Inc. to China Century Dragon Media,
Inc.
We may not realize the benefits that we
hoped to receive as a result of the Share Exchange, which include:
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access
to the capital markets of the United
States;
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the
increased market liquidity expected to result from exchanging stock in a
private company for securities of a public company that may eventually be
traded;
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the
ability to use registered securities to make acquisition of assets or
businesses;
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increased
visibility in the financial
community;
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enhanced
access to the capital markets;
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improved
transparency of operations; and
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perceived
credibility and enhanced corporate image of being a publicly traded
company.
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There can be no assurance that any of
the anticipated benefits of the Share Exchange will be realized with respect to
our new business operations. In addition, the attention and effort devoted
to achieving the benefits of the Share Exchange and attending to the obligations
of being a public company, such as reporting requirements and securities
regulations, could significantly divert management’s attention from other
important issues, which could materially and adversely affect our operating
results or stock price in the future.
Compliance
with changing regulation of corporate governance and public disclosure will
result in additional expenses.
Changing
laws, regulations and standards relating to corporate governance and public
disclosure, including the Sarbanes-Oxley Act of 2002 and related SEC
regulations, have created uncertainty for public companies and significantly
increased the costs and risks associated with accessing the public markets and
public reporting. For example, on January 30, 2009, the SEC adopted rules
requiring companies to provide their financial statements in interactive data
format using the eXtensible Business Reporting Language, or XBRL. We will have
to comply with these rules by June 15, 2011. Our management team will need to
invest significant management time and financial resources to comply with both
existing and evolving standards for public companies, which will lead to
increased general and administrative expenses and a diversion of management time
and attention from revenue generating activities to compliance
activities.
Our
common stock may be considered a “penny stock,” and thereby be subject to
additional sale and trading regulations that may make it more difficult to
sell.
Our
common stock, which is not currently listed or quoted for trading, may be
considered to be a “penny stock” if it does not qualify for one of the
exemptions from the definition of “penny stock” under Section 3a51-1 of the
Securities Exchange Act for 1934, as amended (the “Exchange Act”), once, and if,
it starts trading. Our common stock may be a “penny stock” if it meets one
or more of the following conditions (i) the stock trades at a price less than
$5.00 per share; (ii) it is NOT traded on a “recognized” national exchange;
(iii) it is NOT quoted on the Nasdaq Capital Market, or even if so, has a price
less than $5.00 per share; or (iv) is issued by a company that has been in
business less than three years with net tangible assets less than $5
million.
The
principal result or effect of being designated a “penny stock” is that
securities broker-dealers participating in sales of our common stock will be
subject to the “penny stock” regulations set forth in Rules 15-2 through 15g-9
promulgated under the Exchange Act. For example, Rule 15g-2 requires
broker-dealers dealing in penny stocks to provide potential investors with a
document disclosing the risks of penny stocks and to obtain a manually signed
and dated written receipt of the document at least two business days before
effecting any transaction in a penny stock for the investor’s account. Moreover,
Rule 15g-9 requires broker-dealers in penny stocks to approve the account of any
investor for transactions in such stocks before selling any penny stock to that
investor. This procedure requires the broker-dealer to (i) obtain from the
investor information concerning his or her financial situation, investment
experience and investment objectives; (ii) reasonably determine, based on that
information, that transactions in penny stocks are suitable for the investor and
that the investor has sufficient knowledge and experience as to be reasonably
capable of evaluating the risks of penny stock transactions; (iii) provide the
investor with a written statement setting forth the basis on which the
broker-dealer made the determination in (ii) above; and (iv) receive a signed
and dated copy of such statement from the investor, confirming that it
accurately reflects the investor’s financial situation, investment experience
and investment objectives. Compliance with these requirements may make it more
difficult and time consuming for holders of our common stock to resell their
shares to third parties or to otherwise dispose of them in the market or
otherwise.
If
securities or industry analysts do not publish research or reports or publish
unfavorable research about our business, the price and trading volume of our
common stock could decline.
The
trading market for our common stock will depend in part on the research and
reports that securities or industry analysts publish about us or our business.
We do not currently have and may never obtain research coverage by securities
and industry analysts. If no securities or industry analysts commence coverage
of us the trading price for our common stock and other securities would be
negatively affected. In the event we obtain securities or industry analyst
coverage, if one or more of the analysts who covers us downgrades our
securities, the price of our securities would likely decline. If one or more of
these analysts ceases to cover us or fails to publish regular reports on us,
interest in the purchase of our securities could decrease, which could cause the
price of our common stock and other securities and their trading volume to
decline.
We
do not foresee paying cash dividends in the foreseeable future and, as a result,
our investors’ sole source of gain, if any, will depend on capital appreciation,
if any.
We do not
plan to declare or pay any cash dividends on our shares of common stock in the
foreseeable future and currently intend to retain any future earnings for
funding growth. As a result, investors should not rely on an investment in
our securities if they require the investment to produce dividend income.
Capital appreciation, if any, of our shares may be investors’ sole source of
gain for the foreseeable future. Moreover, investors may not be able to
resell their shares of our common stock at or above the price they paid for
them.
CAUTIONARY
STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
The
information contained in this prospectus, including in the documents
incorporated by reference into this prospectus, includes some statements that
are not purely historical and that are “forward-looking
statements.” Such forward-looking statements include, but are not
limited to, statements regarding our company’s and our management’s
expectations, hopes, beliefs, intentions or strategies regarding the future,
including our financial condition, results of operations, and the expected
impact of the Share Exchange. In addition, any statements that refer to
projections, forecasts or other characterizations of future events or
circumstances, including any underlying assumptions, are forward-looking
statements. The words “anticipates,” “believes,” “continue,” “could,”
“estimates,” “expects,” “intends,” “may,” “might,” “plans,” “possible,”
“potential,” “predicts,” “projects,” “seeks,” “should,” “will,” “would” and
similar expressions, or the negatives of such terms, may identify
forward-looking statements, but the absence of these words does not mean that a
statement is not forward-looking.
The
forward-looking statements contained in this prospectus are based on current
expectations and beliefs concerning future developments and the potential
effects on the parties and the transaction. There can be no assurance that
future developments actually affecting us will be those anticipated. These
forward-looking statements involve a number of risks, uncertainties (some of
which are beyond the parties’ control) or other assumptions that may cause
actual results or performance to be materially different from those expressed or
implied by these forward-looking statements, including the
following:
|
·
|
Our
dependence on CCTV;
|
|
·
|
Our
ability to continue obtaining advertising time slots aired on
CCTV;
|
|
·
|
The
continued strong market position and national coverage of CCTV
channels;
|
|
·
|
CCTV’s
continuing to use third party agencies to sell advertising
time;
|
|
·
|
Our
dependence on a limited number of suppliers for our advertising
time;
|
|
·
|
Our
lack of long-term contracts with our
customers;
|
|
·
|
Our
ability to adapt to changing advertising trends and preferences of
advertisers, television channels and
viewers;
|
|
·
|
Our
limited ability to adjust the fees we charge for our
services;
|
|
·
|
Our
ability to purchase advertising time from satellite and regional
television networks;
|
|
·
|
Our
ability enter into new advertising media
platforms;
|
|
·
|
Exposure
to PRC governmental actions regarding the advertising content of our
clients;
|
|
·
|
Exposure
to intellectual property claims from third
parties;
|
|
·
|
Our
ability to raise additional capital to fund our
operations;
|
|
·
|
Expected
growth in consumer spending, average income levels and advertising
spending levels;
|
|
·
|
Changes
in the laws of the PRC that affect our operations and our corporate
structure;
|
|
·
|
Inflation
and fluctuations in foreign currency exchange
rates;
|
|
·
|
Our
ability to obtain all necessary government certifications, approvals,
and/or licenses to conduct our
business;
|
|
·
|
Development
of a public trading market for our
securities;
|
|
·
|
The
cost of complying with current and future governmental regulations and the
impact of any changes in the regulations on our operations;
and
|
|
·
|
The
other factors referenced in this Current Report, including, without
limitation, under the sections entitled “Risk Factors,” “Management’s
Discussion and Analysis of Financial Condition and Results of Operations,”
and “Business.”
|
The risks
included above are not exhaustive. Other sections of this prospectus may include
additional factors that could adversely impact our business and operating
results. Moreover, we operate in a very competitive and rapidly changing
environment. New risk factors emerge from time to time and we cannot
predict all such risk factors, nor can we assess the impact of all such risk
factors on our business or the extent to which any factor, or combination of
factors, may cause actual results to differ materially from those contained in
any forward-looking statements.
You
should not rely upon forward-looking statements as predictions of future events.
We cannot assure you that the events and circumstances reflected in the
forward-looking statements will be achieved or occur. Although we believe
that the expectations reflected in the forward-looking statements are
reasonable, we cannot guarantee future results, levels of activity, performance
or achievements. Moreover, neither we nor any other person assume
responsibility for the accuracy and completeness of the forward-looking
statements. Except as required by law, we undertake no obligation to
update publicly any forward-looking statements for any reason after the date of
this prospectus to conform these statements to actual results or to changes in
our expectations.
You
should read this prospectus, and the documents that we reference in this
prospectus and have filed as exhibits to this prospectus with the Securities and
Exchange Commission, completely and with the understanding that our actual
future results, levels of activity, performance and achievements may materially
differ from what we expect. We qualify all of our forward-looking statements by
these cautionary statements.
USE
OF PROCEEDS
Based
on a per share offering price of $3.50, which is the midpoint of our estimated
offering price range, we estimate that the net proceeds from the sale of the
2,500,000 shares of common stock in the offering will be approximately $7.0
million after deducting the estimated underwriting discounts and commissions of
9% and estimated offering expenses of approximately $1.0
million.
We intend to use approximately
one-fifth of the net proceeds from this offering to invest in our present
advertising business to obtain more advertising time, two-fifths of the net
proceeds of this offering to obtain advertising time and cooperation rights on
regional television stations; one-fifth of the net proceeds to invest in program
operation projects with CCTV; and one fifth the proceeds for general corporate
purposes. There are no restrictions on the use of the proceeds from this
offering for investments in CD Media Beijing. Other than as indicated in
this Use of Proceeds section, we cannot specify with certainty the exact amounts
that will be used for each purpose. The amounts and timing of our actual
expenditures will depend on numerous factors, including the status of our
development efforts, sales and marketing activities, the amount of cash
generated or used by our operations and competition. We may find it necessary or
advisable to use portions of the proceeds for other purposes, and we will have
broad discretion in the application of the net proceeds. We have no current
intentions to acquire any other businesses. Pending these uses, the proceeds
will be invested in short-term, investment grade, interest-bearing
securities.
Circular
142 promulgated by SAFE regulates the conversion of foreign currency into
Renminbi by a foreign-invested company like our company and restricts how the
converted Renminbi may be used. To the extent that we need to convert the
net proceeds of this offering into Renminbi, we will be subject to the
restrictions of Circular 142. Pursuant to Circular 142, the registered
capital of a foreign-invested company, like CD Media Huizhou, settled in
Renminbi converted from foreign currencies may only be used for purposes within
the business license approved by the applicable governmental authority and may
not be used for equity investments within the PRC. In addition, the use of such
registered capital may not be changed without SAFE’s approval, and may not in
any case be used to repay Renminbi loans if the proceeds of such loans have not
been used.
The
Underwriters have a 45-day option to purchase up to 375,000 additional shares of
common stock at the public offering price solely to cover over-allotments, if
any, if the Underwriters sell more than 2,500,000 shares of common stock in this
offering. The Underwriters agreed to purchase up to 70% of the
over-allotment shares from the selling stockholders identified in this
prospectus and the remaining shares from us. We will not receive any
proceeds from the sale of the shares by the selling stockholders, if
any.
DIVIDEND
POLICY
We do not
expect to declare or pay any cash dividends on our common stock in the
foreseeable future, and we currently intend to retain future earnings, if any,
to finance the expansion of our business. The decision whether to pay cash
dividends on our common stock will be made by our board of directors, in its
discretion, and will depend on our financial condition, operating results,
capital requirements and other factors that the board of directors considers
significant. We did not pay cash dividends for the years ended
December 31, 2009, 2008, and 2007.
Under
applicable PRC regulations, foreign-invested enterprises in China may pay
dividends only out of their accumulated profits, if any, determined in
accordance with PRC accounting standards and regulations. In addition, a
foreign-invested enterprise in China is required to set aside at least 10.0% of
its after-tax profit based on PRC accounting standards each year to its general
reserves until the accumulative amount of such reserves reaches 50.0% of its
registered capital. These reserves are not distributable as cash dividends. The
board of directors of a foreign-invested enterprise has the discretion to
allocate a portion of its after-tax profits to staff welfare and bonus funds,
which may not be distributed to equity owners except in the event of
liquidation.
Because
all of our operations are conducted in the PRC, substantially all of our
revenues and expenses are denominated in Renminbi (RMB). Under PRC law, RMB is
currently convertible into U.S. Dollars under a company’s “current account,”
which includes dividends, trade and service-related foreign exchange
transactions, without prior approval of SAFE, but is not from a company’s
“capital account,” which includes foreign direct investment and loans, without
the prior approval of SAFE. Currently, CD Media Huizhou may convert RMB into
U.S. Dollars to declare and pay dividends outside of the PRC without the
approval of SAFE.
Our
inability to receive dividends or other payments from our Chinese operating
subsidiary could adversely limit our ability to grow, make investments or
acquisitions that could be beneficial to our business, pay dividends, or
otherwise fund and conduct our business. Our funds may not be readily available
to us to satisfy obligations which have been incurred outside the PRC, which
could adversely affect our business and prospects or our ability to meet our
cash obligations. Accordingly, if we do not receive dividends from our Chinese
operating subsidiary, our liquidity, financial condition and ability to make
dividend distributions to our stockholders will be materially and adversely
affected.
CAPITALIZATION
The
following table sets forth our capitalization as of March 31, 2010 (unaudited)
on:
|
(i)
|
consists
of the 19,100,000 shares of common stock that were issued to the
shareholders of CD Media BVI and their designees pursuant to the Share
Exchange as outstanding as of March 31, 2010, as the Share Exchange was
accounted for as a reverse merger and a recapitalization CD Media BVI and
its subsidiaries (see Note 1 to the financial statements);
and
|
|
(ii)
|
excludes
the 2,646,000 shares of common stock outstanding immediately prior to the
issuance of the 19,100,000 shares of common stock after giving effect to
the cancellation of 4,450,390 shares in connection with the Share Exchange
that closed on April 30,
2010;
|
|
·
|
a
pro forma basis,
which includes
|
|
(i)
|
the
addition of the 2,646,000 shares of common stock outstanding immediately
prior to the Share Exchange after giving effect to the cancellation of
4,450,390 shares in connection with the Share Exchange that closed on
April 30, 2010; and
|
|
(ii)
|
the
sale and issuance of 3,566,838 shares of common stock at $1.50 per share
in the Private Placement that closed concurrently with the Share Exchange
pursuant to which we received approximately $3.7 million (unaudited) in
net proceeds; and
|
|
·
|
an
as adjusted to
give effect to reflect our receipt of estimated net proceeds of
approximately $7.0 million from the sale of 2,500,000 shares of common
stock in this offering at an assumed public offering price of $3.50, which
is the mid-point of the estimated range of the per share offering price,
and after deducting estimated underwriting discounts of 9% and commissions
and estimated offering expenses of approximately $1.0
million.
|
You
should read this table in conjunction with “Use of Proceeds,” “Summary Financial
Information,” “Management’s Discussion and Analysis of Financial Condition and
Results of Operations” and our consolidated financial statements and related
notes included elsewhere in this prospectus.
|
|
March 31, 2010
|
|
|
|
Actual
|
|
|
Pro Forma
|
|
|
Pro Forma, as
Adjusted
|
|
|
|
(amounts in thousands)
|
|
Due
to Related Parties
|
|
|
526 |
|
|
|
526 |
|
|
|
526 |
|
Stockholders’
equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
stock, $0.0001 par value, 10,000,000 shares authorized, none issued and
outstanding
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
Common
stock, $0.0001 par value, 100,000,000 shares authorized, 19,100,000 shares
issued and outstanding on an actual basis, 25,312,838 issued and
outstanding on a pro forma basis, and 27,812,838 issued and outstanding on
a pro forma, as-adjusted basis (1)
|
|
|
2 |
|
|
|
3 |
|
|
|
3 |
|
Additional
paid-in capital
|
|
|
630 |
|
|
|
4,329 |
|
|
|
11,284 |
|
Accumulated
other comprehensive income
|
|
|
406 |
|
|
|
406 |
|
|
|
406 |
|
Statutory
reserves
|
|
|
790 |
|
|
|
790 |
|
|
|
790 |
|
Retained
earnings (unrestricted)
|
|
|
16,617 |
|
|
|
16,617 |
|
|
|
16,617 |
|
Total
stockholders’ equity
|
|
$ |
18,445 |
|
|
$ |
22,145 |
|
|
$ |
29,100 |
|
Total
capitalization
|
|
$ |
18,971 |
|
|
$ |
22,671 |
|
|
$ |
29,626 |
|
|
(1)
|
The
number of our shares of common stock shown above to be outstanding after
this offering is based on (i) 19,100,00 shares of common stock issued and
outstanding as of March 31, 2010, (ii) April 30, 2010 cancellation of
4,450,390 shares in connection with the Share Exchange such that there
were 2,646,000 shares of common stock outstanding, (iii) the April 30,
2010 issuance of 3,566,838 shares of common stock at $1.50 per share in
our Private Placement, and (iv) 2,500,000 shares of common
stock issued in the public offering. The number (i) excludes the
112,500 shares of our common stock that we may issue upon the
Underwriters’ over-allotment option exercise, (ii) excludes the 1,419,333
shares of common stock that will be issued upon the exercise of
outstanding warrants exercisable at $0.0001 per share; (iii) excludes the
125,000 shares of common stock underlying warrants that will be issued to
the Underwriters upon completion of this offering, and (iv) is not
affected by the 262,500 shares that the Underwriters may purchase from
selling stockholders named in this
prospectus.
|
MARKET
FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
There has
never been a public trading market for our common stock and our shares of common
stock are not currently listed or quoted for trading on any national securities
exchange or national quotation system. We intend to apply for the listing
of our common stock on the NASDAQ Global Market or the NYSE Amex Equities.
As of the date of this prospectus, we had 140 stockholders of
record.
DILUTION
If you invest in our shares of common
stock, you will incur immediate, substantial dilution based on the difference
between the public offering price per share you will pay in this offering and
the net tangible book value per share of common stock immediately after this
offering.
As of
March 31, 2010, we had 19,100,000 shares of common stock outstanding, which
consists of the shares of common stock that were issued to the former
shareholders of CD Media BVI and their designees pursuant to the Share Exchange,
which was accounted for as a reverse merger and a recapitalization CD Media BVI
and its subsidiaries (see Note 1 to the financial statements). On a pro
forma basis, we had 25,312,838 shares of common stock outstanding as of March
31, 2010 after giving effect to (i) the 2,646,000 shares of common stock
outstanding immediately prior to the issuance of the 19,100,000 shares of common
stock and after the cancellation of 4,450,390 shares in connection with the
Share Exchange that closed on April 30, 2010, and (ii) the sale and issuance of
3,566,838 shares of common stock at $1.50 per share in the Private Placement
that closed concurrently with the Share Exchange pursuant to which we received
approximately $3.7 million (unaudited) in net proceeds.
On a
pro forma basis, our net tangible book value as of March 31, 2010 was
approximately $22.1 million, or $0.87 per share (unaudited) based on 25,312,838
shares of common stock outstanding. Based on the mid-range point of
the per share offering price of $3.50, investors will incur further dilution
from the sale by us of 2,500,000 shares of common stock offered in this
offering, and after deducting the estimated underwriting discount and
commissions of 9% and estimated offering expenses of $1.0 million, our pro
forma, as adjusted net tangible book value as of March 31, 2010 would have been
$29.1 million, or $1.05 per share, based on 27,812,838 after this
offering. This represents an immediate increase in net tangible book value
of $0.18 per share to our existing stockholders and an immediate dilution of
$2.45 per share to the new investors purchasing shares of common stock in this
offering.
The
following table illustrates this per share dilution:
Assumed
public offering price per share (mid-range price) Pro forma net
tangible book value per share as of March 31, 2010
|
|
$ |
0.87 |
|
|
$ |
3.50 |
|
Increase
per share attributable to new public investors
|
|
$ |
0.18 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
tangible book value per share after this offering
|
|
|
|
|
|
$ |
1.05 |
|
|
|
|
|
|
|
|
|
|
Dilution
per share to new public
investors
|
|
|
|
|
|
$ |
2.45 |
|
Furthermore,
our stockholders hold warrants to purchase 1,419,333 shares of common stock at a
per share exercise price of $0.0001. If all of the warrants were
exercised, the as-adjusted net tangible book value per share as of March 31,
2010 would decrease to $1.00 per share after this offering, which would
represent an immediate increase in net tangible book value of $0.13 per share to
our existing stockholders and an immediate dilution of $2.50 per share to the
new investors purchasing shares of common stock in this
offering.
The
following table sets forth, on a pro forma, as adjusted basis as of March 31,
2010, the difference between the number of shares of common stock purchased from
us, the total cash consideration paid, and the average price per share paid by
our existing shareholders and the average price to be paid by new investors in
this public offering before deducting estimated underwriting discounts and
commissions and estimated offering expenses payable by us, using an assumed
public offering price of $3.50 per share of common stock. The information
is as of March 31, 2010 on a pro forma basis giving effect to:
|
(i)
|
the
cancellation of 4,450,390 shares in connection with the Share Exchange
that closed on April, 30, 2010 such that there were 2,646,000 shares of
common stock outstanding immediately prior to the Share
Exchange;
|
|
(ii)
|
the
sale of 3,566,838 shares of common stock at $1.50 per share in our Private
Placement that closed concurrently with the Share Exchange;
and
|
|
(iii)
|
the
issuance of 1,419,333 shares of common stock underlying currently
outstanding warrants held by the original SRKP 25, Inc. stockholders that
are exercisable at $0.0001 per
share.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
issued to shareholders of CD Media BVI in the Share
Exchange
|
|
|
19,100,000 |
|
|
|
65.3 |
% |
|
$ |
632 |
|
|
|
4.3 |
% |
|
$ |
0.03 |
|
Shares
held by original SRKP 25, Inc. stockholders after Share Exchange,
including assumed exercise of warrants to purchase 1,419,333 shares of
common stock at $0.0001 per share
|
|
|
4,065,333 |
|
|
|
13.9 |
% |
|
$ |
2 |
|
|
|
0 |
% |
|
$ |
0.00 |
|
Investors
in the Private Placement
|
|
|
3,566,838 |
|
|
|
12.2 |
% |
|
$ |
5,350 |
|
|
|
36.3 |
% |
|
$ |
1.50 |
|
New
investors in this offering
|
|
|
2,500,000 |
|
|
|
8.6 |
% |
|
$ |
8,750 |
|
|
|
59.4 |
% |
|
$ |
3.50 |
|
Total
|
|
|
29,232,171 |
|
|
|
100.0 |
% |
|
$ |
14,734 |
|
|
|
100.0 |
% |
|
|
|
|
The
total consideration amount for shares of common stock held by our existing
stockholders includes total cash paid for our outstanding shares of common
stock, including imputed interest allocated for interest free loans that we have
received from related parties, as of March 31, 2010 and excludes the value of
securities that we have issued for services.
The
existing shareholders, which consist of the shareholders of CD Media BVI and
their designees who received shares in the Share Exchange, the original SRKP 25,
Inc. stockholders (assuming exercise of the warrants to purchase 1,419,333
shares), and investors from the Private Placement, will account for 26,732,171
shares of our common stock, or 91.4% of our outstanding shares after this
offering. If the Underwriters’ over-allotment option of 375,000 shares of
common stock is exercised in full, 70% of such shares, or 262,500 shares, will
be purchased from the selling stockholders, who obtained their shares in the
Private Placement, and 30% of the over-allotment shares, or 112,500 shares, will
be purchased from us. In such case, the number of shares held by existing
stockholders will be reduced to 26,469,671 shares of common stock, or 90.2% of
the total number of shares that will be outstanding after this offering, and the
number of shares held by the new investors in this offering will be increased to
2,875,000 shares, or 9.8% of the total number of shares of common stock
outstanding after this offering.
The
number of our shares of common stock shown above to be outstanding after this
offering is based on (i) 7,096,390 shares of common stock issued and
outstanding as of March 31, 2010, (ii) the cancellation of 4,450,390
shares in connection with the Share Exchange that closed on April 30, 2010 such
that there were 2,646,000 shares of common stock outstanding immediately prior
to the Share Exchange; (iii) the sale of 3,566,838 shares of common stock
at $1.50 per share in our Private Placement that closed concurrently with the
Share Exchange, and (iv) 2,500,000 shares of common stock issued in this
public offering. The number of our shares outstanding after this offering as
shown above (i) excludes 1,419,333 shares of common stock underlying
warrants that are exercisable at $0.0001 per share, (ii) excludes the
112,500 shares of our common stock that we may issue upon the Underwriters’
over-allotment option exercise, and (iii) is not affected by the 262,500
shares that the Underwriters may purchase from selling stockholders named in
this prospectus.
We may
choose to raise additional capital due to market conditions or strategic
considerations even if we believe we have sufficient funds for our current or
future operating plans. To the extent that additional capital is raised through
the sale of equity or convertible debt securities, the issuance of these
securities could result in further dilution to our stockholders.
SELECTED
CONSOLIDATED FINANCIAL DATA
The
following selected consolidated financial data contains (i) consolidated
statement of operations data for each of the years in the five-year period ended
December 31, 2009 and the three months ended March 31, 2010 and 2009 and (ii)
the consolidated balance sheet data as of year-end for each of the years in the
five-year period ended December 31, 2009 and as of March 31, 2010. The
consolidated statement of operations data and balance sheet data were derived
from the audited consolidated financial statements, except for data for the
years ended and as of December 31, 2006 and 2005 and the three month ended and
as of March 31, 2010 and 2009. Such financial data should be read in conjunction
with the consolidated financial statements and the notes to the consolidated
financial statements starting on page F-1 and with “Management’s Discussion and
Analysis of Financial Condition and Results of Operations.”
Consolidated Statements of Operations
|
|
Three Months Ended March 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
|
|
(all amounts are in US Dollars and in thousands, except share and per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$ |
28,009 |
|
|
$ |
11,386 |
|
|
$ |
74,480 |
|
|
$ |
44,684 |
|
|
$ |
17,103 |
|
|
$ |
6,231 |
|
|
$ |
1,926 |
|
Gross
profit
|
|
|
4,452 |
|
|
|
2,055 |
|
|
|
14,734 |
|
|
|
8,186 |
|
|
|
4,264 |
|
|
|
1,417 |
|
|
|
(66 |
) |
Income
(loss) from operations
|
|
|
3,663 |
|
|
|
1,515 |
|
|
|
12,040 |
|
|
|
6,135 |
|
|
|
1,820 |
|
|
|
636 |
|
|
|
(131 |
) |
Net
income (loss)
|
|
$ |
2,735 |
|
|
$ |
1,137 |
|
|
$ |
9,010 |
|
|
$ |
4,605 |
|
|
$ |
1,223 |
|
|
$ |
711 |
|
|
$ |
(130 |
) |
Earnings
per share—basic and diluted
|
|
$ |
0.14 |
|
|
$ |
0.06 |
|
|
$ |
0.47 |
|
|
$ |
0.24 |
|
|
$ |
0.06 |
|
|
$ |
0.04 |
|
|
$ |
(0.01 |
) |
Weighted
average shares outstanding – basic and diluted
|
|
|
19,100,000 |
|
|
|
19,100,000 |
|
|
|
19,100,000 |
|
|
|
19,100,000 |
|
|
|
19,100,000 |
|
|
|
19,100,000 |
|
|
|
19,100,000 |
|
Consolidated Balance Sheets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
|
|
(all
amounts are in US Dollars and in thousands)
|
Total
Current Assets
|
|
$ |
20,984 |
|
|
$ |
13,678 |
|
|
$ |
11,158 |
|
|
$ |
4,545 |
|
|
|
2,265 |
|
|
|
1,443 |
|
Total
Assets
|
|
|
21,016 |
|
|
|
20,532 |
|
|
|
11,188 |
|
|
|
4,564 |
|
|
|
2,267 |
|
|
|
1,443 |
|
Total
Current Liabilities
|
|
|
2,045 |
|
|
|
4,844 |
|
|
|
4,579 |
|
|
|
2,767 |
|
|
|
1,777 |
|
|
|
2,229 |
|
Total
Liabilities
|
|
|
2,571 |
|
|
|
4,844 |
|
|
|
4,579 |
|
|
|
2,767 |
|
|
|
1,777 |
|
|
|
2,229 |
|
Total
Stockholders' Equity (Deficiency)
|
|
|
18,445 |
|
|
|
15,687 |
|
|
|
6,609 |
|
|
|
1,797 |
|
|
|
490 |
|
|
|
(786 |
) |
The
acquisition of CD Media BVI by us on April 30, 2010 pursuant to the Share
Exchange was accounted for as a recapitalization by us. The recapitalization
was, at the time of the Share Exchange, the merger of a private operating
company (CD Media BVI) into a non-operating public shell corporation (us) with
nominal net assets and as such is treated as a capital recapitalization, rather
than a business combination. As a result, the assets of the operating company
are recorded at historical cost. The transaction is the equivalent to the
issuance of stock by the private company for the net monetary assets of the
shell corporation. The pre-acquisition financial statements of CD Media BVI are
treated as the historical financial statements of the consolidated companies.
The financial statements presented will reflect the change in capitalization for
all periods presented, therefore the capital structure of the consolidated
enterprise, being the capital structure of the legal parent, is different from
that appearing in the financial statements of CD Media BVI in earlier periods
due to this recapitalization.
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF
FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Forward-Looking
Statements
The
following discussion of our financial condition and results of operations should
be read in conjunction with our financial statements and the related notes, and
the other financial information included in this prospectus.
This
prospectus contains forward-looking statements. The words “anticipated,”
“believe,” “expect, “plan,” “intend,” “seek,” “estimate,” “project,” “could,”
“may,” and similar expressions are intended to identify forward-looking
statements. These statements include, among others, information regarding
future operations, future capital expenditures, and future net cash flow.
Such statements reflect our management’s current views with respect to future
events and financial performance and involve risks and uncertainties, including,
without limitation, the current economic downturn adversely affecting demand for
the our products; our reliance on our major customers for a large portion of our
net sales; our ability to develop and market new products; our ability to raise
additional capital to fund our operations; our ability to accurately forecast
amounts of supplies needed to meet customer demand; market acceptance of our
products; exposure to product liability and defect claims; fluctuations in the
availability of raw materials and components needed for our products; protection
of our intellectual property rights; changes in the laws of the PRC that affect
our operations; inflation and fluctuations in foreign currency rates and various
other matters, many of which are beyond our control. Should one or more of
these risks or uncertainties occur, or should underlying assumptions prove to be
incorrect, actual results may vary materially and adversely from those
anticipated, believed, estimated or otherwise indicated. Consequently, all
of the forward-looking statements made in this prospectus are qualified by these
cautionary statements and there can be no assurance of the actual results or
developments.
Overview
Through CD Media Beijing, we are
engaged in the promotion, sale and marketing of advertising packages on China
television stations. We purchase advertising time packages that air on CCTV-1,
CCTV-2 and CCTV-3, three of the main channels of CCTV, the state television
station of the PRC, which we repackage and sell to our customers.
Currently we deal solely with third parties that act as agents for the
sale of advertising time slots by CCTV. In addition, we provide certain
production services to help our clients integrate market resources and find
partners to assist with producing the commercials.
Our advertising business includes
securing all or a portion of the advertising time and other advertising rights,
which include soft advertising, such as sponsorship, on a specific television
channel or program. We derive revenues in these cases from selling the
advertising media resources that we have acquired to advertisers. We
account for revenues in these cases on a gross basis to our clients and the cost
for purchasing the advertising time slots is allocated to costs of revenues on a
straight –line basis because we acquire the advertising media resources in
advance at a predetermined price and bear the inventory risk of being a
principal in acquiring the advertising media resources. We also have the
ability to establish the prices that we charge for selling these advertising
media resources to our clients.
Recent
Events
SRKP 25 entered into an amended and
restated share exchange agreement effective April 23, 2010, with CD Media BVI,
CD Media Huizhou, CD Media Beijing, and the shareholders of CD Media BVI
pursuant to which the shareholders of CD Media BVI would transfer all of the
issued and outstanding securities of CD Media BVI to SRKP 25 in exchange for
19,100,000 shares of SRKP 25’s common stock. On April 30, 2010, the Share
Exchange closed and CD Media BVI became a wholly-owned subsidiary of SRKP 25,
which immediately changed its name to “China Century Dragon Media, Inc.” A total
of 19,100,000 shares were issued to the former shareholders of CD Media
BVI. Prior to the closing of the Share Exchange and the closing of the
Private Placement, the stockholders of SRKP 25 agreed to the cancellation of an
aggregate of 4,450,390 shares and 5,677,057 warrants to purchase shares of
common stock held by them such that there were 2,646,000 shares of common stock
and warrants to purchase 1,419,333 shares of common stock owned by them
immediately after the Share Exchange and Private Placement. The warrants are
currently exercisable and expire on April 30, 2015. We paid a $215,750
success fee to WestPark Capital for services provided in connection with the
Share Exchange, including coordinating the share exchange transaction process,
interacting with principals of the shell corporation and negotiating the
definitive purchase agreement for the shell, conducting a financial analysis of
CD Media BVI, conducting due diligence on CD Media BVI and its subsidiaries and
managing the interrelationships of legal and accounting
activities.
Pursuant
to the terms of the Share Exchange and a Registration Rights Agreement entered
into with each of the original SRKP 25 stockholders, we agreed to register all
of the 2,646,000 shares of common stock and all of the 1,419,333 shares of
common stock underlying the 1,419,333 warrants held by the original SRKP 25
stockholders, all of which were outstanding immediately prior to the closing of
the Share Exchange. These shares will be included in a subsequent
registration statement (the “Subsequent Registration Statement”) that we intend
to file on or about November 24, 2010, which is 10 days after the end of the
six-month period that immediately follows the date on which we filed the
registration statement of which this prospectus is a part (the “Required Filing
Date”). We agreed to use reasonable efforts to cause the Subsequent
Registration Statement to become effective within one hundred fifty (150) days
after the Required Filing Date or the actual filing date, whichever is earlier,
or one hundred eighty (180) days after the Required Filing Date or the actual
filing date, whichever is earlier, if such Subsequent Registration Statement is
subject to a full review by the SEC (the “Required Effectiveness Date”). If we
fail to file the Subsequent Registration Statement by the Required Filing Date
or if it does not become effective on or before the Required Effectiveness Date
we are required to issue, as liquidated damages, to each of the original SRKP 25
stockholders shares (the “Penalty Shares”) equal to a total of 0.0333% of their
respective shares for each calendar day that the Subsequent Registration
Statement has not been filed or declared effective by the SEC (and until the
Subsequent Registration Statement is filed with or declared effective by the
SEC), as applicable. However, no Penalty Shares shall be due to the
original SRKP 25 stockholders if we are using our best efforts to cause the
Subsequent Registration Statement to be filed and declared effective in a timely
manner.
In addition, on April 30, 2010,
concurrently with the close of the Share Exchange, we closed a private placement
of shares of our common stock (the “Private Placement”). Pursuant to
subscription agreements entered into with the investors, we sold an aggregate of
3,566,838 shares of common stock at $1.50 per share. As a result, we
received gross proceeds in the amount of approximately $5.35 million. We paid
WestPark Capital a commission equal to 10.0% with a non-accountable fee of 4.0%
of the gross proceeds from the Private Placement. We have also retained
WestPark Capital for a period of five months following the closing of the
Private Placement to provide us with financial consulting services for which we
will pay WestPark Capital $4,000 per month. Out of the proceeds of the
Private Placement, we paid $300,000 to Keen Dragon Group Limited, a third party
unaffiliated with CD Media BVI, the Company, or WestPark Capital for services as
an advisor to the Company, including assisting in preparations for the Share
Exchange and the Company’s listing of securities in the United
States.
Factors
Affecting Our Results of Operations
Material
underlying drivers of our ability to maintain and increase our level of revenues
include the unit advertising price that we are able to charge our customers, the
overall volume of advertising time sold, our ability to develop regional
television business, and enhancement of our portfolio of advertising time and
production services. Our business, results of operations and financial
condition are significantly affected by a number of factors and trends,
including:
Ability
to Obtain High Quality Advertising Time Slots on Favorable Terms
We depend on the high quality
advertising time slots we obtain from third party providers for airing on CCTV
for our advertising agency services. All of our revenues for our advertising
agency services are derived from the advertising time slots we obtain from these
providers. Our ability to continue to obtain our existing advertising time slots
and to add additional high quality advertising time slots will have a
significant effect on our results of operations.
The
quality of advertising time slots available to us is measured based on the
perceived effectiveness of advertisements placed during such time slots, which
is in turn affected by the ratings and the geographical and demographic coverage
of the relevant television programs. Our results of operations will be affected
by any changes with respect to the popularity, rating or coverage of the
television programs during which our advertising time slots occur.
Our profitability also depends on the
price of advertising time slots charged to us by these third party providers.
These providers have been increasing the prices for many of their advertising
time slots in recent years, and we expect that they will continue to raise such
prices in the future. Our profit margin may be affected if we are not able to
obtain the rights to these advertising time slots on favorable terms or pass on
the increasing costs to our clients. If any other advertising agency is able to
obtain such high quality advertising time slots on terms more favorable than
ours, we may lose our clients and our revenues may decline.
Ability
to Increase the Size, Quality and the Level of Diversification of Our
Advertising Client Base
We compete for the advertising spending
of advertisers with other advertising agencies, including both international
advertising agencies and domestic Chinese advertising agencies, some of which
are also our clients. From time to time these agencies introduce their clients
to us, primarily due to our rights over certain advertising time slots on CCTV.
We plan to continue to attract new business from potential clients, as well as
to gain more business from our existing corporate clients, by increasing our
sales efforts and by seeking opportunities to provide these clients with
additional services. We will continue to improve the size, quality and level of
diversification of our client base, leveraging the high quality advertising time
slots we have obtained.
Level
of Advertising Spending
Demand for our services and, as a
result, growth in our revenues are driven by overall advertising spending in
China, which is influenced by the pace of overall economic growth. We expect
that the overall economic growth in China will contribute to an increase in
advertising spending by international and domestic brand names looking to reach
a growing consumer market. The global financial crisis and economic downturn in
2008 and 2009 adversely affected economies and businesses around the world,
including those in China. We believe that, as the Chinese economy recovers from
the adverse effects of the global financial crisis, advertising spending should
increase in both urban areas and smaller cities in China. However, if the global
or Chinese economy does not fully recover from the recent financial crisis or
another economic downturn occurs, our business, results of operations and
financial condition could continue to be materially and adversely
affected.
In addition, the demand for our
services is affected by the level of television advertising spending in China,
which is in turn affected by the popularity of television programs in China and
advertisers’ perceptions regarding the effectiveness of television
advertising. Television advertising also competes with other advertising
media, such as billboards, Internet, mobile phones and out-of-home advertising
networks. If television advertising becomes a less favorable choice for
advertisers in China, we may not be able to successfully attract enough
advertisers for our advertising time slots and our revenues and earnings growth
may be adversely affected.
Aside from fluctuations in the level of
advertising spending resulting from changes in the overall economic and market
conditions in China, our revenues are affected by seasonal fluctuations in
consumer spending that also affect the level of advertising spending over time
in China. The first and second quarters of each year are expected to be slower
seasons for the Chinese advertising industry in general. As a result, our
quarterly results of operations may fluctuate significantly from period to
period.
Our
Growth Strategy
As part of our growth strategy, we
intend to increase our purchases of advertising time aired on CCTV and to
purchase advertising directly from CCTV, to develop a regional television
business, enhance our production services and expand into new advertising
platforms. With respect to our purchase of advertising time from CCTV, we
will face significant competition from advertising agencies that purchase time
directly from CCTV, many of which have greater financial resources and a more
established relationship with CCTV than us. Additionally, as a part of the
PRC government, CCTV, has many restrictions for companies that purchase time
directly from it, which restrictions we may be unable to meet. We will
face some difficultly in establishing a regional television business because we
do not currently have any relationships with any regional television
stations. We will face competition from many companies that already have
extensive relationships with such television stations. In addition, we may
be unable to enter into certain local markets due to a region’s preference to
protect its local advertising agents in the area. Our expansion into
production services and our opening of a production studio will require
significant amounts of capital. We have no significant experience in the
production of television advertisements, public service announcements and
television series and we may have a difficult time entering into such areas
because of our inexperience. In addition, we have no significant experience in
any media platform other than television advertising. We have no
experience in any of our planned areas of expansion and we will have to hire
additional personnel to assist us in our expansion efforts. We may not be
able to find people qualified to assist us in such endeavors.
Other
Factors
In addition to the factors discussed
above, our reported results are also affected by the fluctuations in the value
of the Renminbi against the U.S. dollar because our reporting currency is the
U.S. dollar while the functional currency of our subsidiary and affiliated
consolidated entities in China, which operate all of our business, is the
Renminbi. In 2007 and 2008, the Renminbi appreciated against the U.S. dollar by
approximately 6.5% and 6.5%, respectively, and in 2009, the Renminbi depreciated
against the U.S. dollar by approximately 0.1%. The fluctuation of the Renminbi
against the U.S. dollar contributed to the fluctuation in our net income
reported in U.S. dollar terms in 2007, 2008 and 2009, respectively. For
additional information relating to the fluctuations in the value of the Renminbi
against the U.S. dollar, see “Risk Factors — Risks Relating to Doing Business in
China — The foreign currency exchange rate between U.S. Dollars and Renminbi
could adversely affect our financial condition” and “— Quantitative and
Qualitative Disclosure About Market Risk — Foreign Exchange
Risk.”
Revenues
Substantially
all of our revenues are derived from reselling blocks (or slots) of advertising
time on several popular television channels of CCTV. We acquire this advertising
time in large blocks from certain advertising agencies that work directly with
CCTV. We repackage these large blocks into smaller time slots and sell these
smaller slots to advertising agencies or other companies. Our pricing depends on
the quality, ratings and target audience of the relevant television programs
where the advertisements will be broadcast, the sales prices of our competitors,
general market conditions and market demand. We typically require payment
several weeks before the relevant advertisements are broadcast, and record these
prepayments as a current liability. We recognize the revenue ratably over the
broadcast period, which is normally one to two weeks. If the advertisements are
not broadcast, for instance due to CCTV’s change of program schedule, the
advance payments will be returned to our clients.
When we
purchase a block of advertising time, we are required to pay a deposit and are
committed to pay the remainder of the balance prior to the broadcast. As a
result, we bear the risks and rewards in these arrangements. Consequently,
revenues are recognized at gross billings to our clients and the cost for
purchasing the advertising time slots is recorded as our cost of goods sold and
recognized over the same period as the related revenue, which is the broadcast
period.
We derive
a minimal portion of our revenues from production services. We design,
produce and package content for public service announcements and commercial
advertisements. For commercial television advertisements, advertisers will
pay for our production services and sometimes for the broadcast of the
advertisements produced by us if we also arrange for such broadcast. We
typically require a prepayment from our clients at the time of the execution of
the advertising production agreements and prior to the commencement of our work,
but our revenues are typically recognized at the time the final work products
are delivered to our clients for broadcast
Cost
of Revenues
We purchase blocks of advertising time
on certain CCTV programs for a fixed fee. Part or all of the fee is paid in
advance and we recognize this cost, as our cost of goods sold, at the same time
that we recognize the related revenue, which is ratably over the broadcast
periods. The broadcast period typically ranges from one to three weeks and
represents substantially all of our cost of goods sold. In 2009, third party
providers offering television advertising slots on CCTV significantly increased
the media fees for certain programs, which significantly increased our cost of
goods sold. However, as a percentage of revenue, cost of goods sold only
decreased slightly.
Sales
and Marketing Expenses
Our sales and marketing expenses
consist primarily of salaries and benefits for our sales and marketing
personnel, office rental expenses directly related to our sales and marketing
activities, traveling expenses incurred by our sales personnel and promotional
and entertainment expenses. Our sales personnel receive performance-based
compensation and we market our services primarily through the efforts of our
sales and marketing personnel. We expect selling and marketing expenses to
increase as we expand our sales force.
General
and Administrative Expenses
Our general and administrative expenses
primarily consist of salaries and benefits for our management, accounting and
administrative personnel, professional service fees, office rental and
maintenance expenses directly related to our general office administration
activities, depreciation of office equipment, other administrative expenses and
allowances for doubtful accounts. We expect our general and administrative
expenses to increase as we hire additional personnel, improve our corporate
infrastructure and incur additional costs to meet the requirements of being a
public company in the U.S.
PRC
Business Tax and Related Surcharges
Our PRC subsidiaries, CD Media
Huizhou and CD Media Beijing, are required to pay business tax at a rate of
5.0%, and related surcharges at a rate of approximately 3.0%, on our gross
profit from providing advertising services. Under the PRC tax law, business tax
is levied on the net amount of total advertising revenues less media fees paid
to the media providers. As we reported revenues from certain of our advertising
time slots on a gross basis, our effective business tax rate was approximately
1.08% of our total revenues in 2009.
Critical
Accounting Policies and Estimates
We prepare our combined financial
statements in conformity with U.S. GAAP, which requires us to make estimates and
assumptions that affect the reported amounts of our assets and liabilities as of
the date of our financial statements and our revenues and expenses during the
financial reporting period. Our estimates and assumptions are based on available
information and our historical experience, as well as other estimates and
assumptions that we believe to be reasonable. The estimates and assumptions that
form the basis for our judgments may not be readily apparent from other sources.
We continually evaluate these estimates and assumptions based on the most
recently available information, our own experience and other assumptions that we
believe to be reasonable. Our actual results may differ significantly from
estimated amounts as a result of changes in our estimates or changes in the
facts or circumstances underlying our estimates and assumptions. Some of our
accounting policies require higher degrees of judgment than others in their
application. We consider the policies discussed below to be critical to an
understanding of our financial statements as their application places the most
significant demands on our management’s judgment. When reviewing our combined
financial statements, you should take into account:
|
·
|
our
critical accounting policies discussed
below;
|
|
·
|
the
related judgments made by our management and other uncertainties affecting
the application of these policies;
|
|
·
|
the
sensitivity of our reported results to changes in prevailing facts and
circumstances and our related estimates and assumptions;
and
|
|
·
|
the
risks and uncertainties described under “Risk
Factors.”
|
See note
2 to our combined financial statements for additional information regarding our
critical accounting policies.
Revenue
Recognition
Substantially all of our revenues are
derived from reselling blocks (or slots) of advertising time on several popular
television channels of CCTV. We acquire this advertising time in large blocks,
repackage the blocks into smaller time slots and sell these smaller slots to
advertising agencies or other companies. Our pricing depends on the quality,
ratings and target audience of the relevant television programs where the
advertisements will be broadcast, the sales prices of our competitors, general
market conditions and market demand. We typically require payment several weeks
before the relevant advertisements are broadcast, and record these prepayments
as a current liability. We recognize the revenue when persuasive evidence of an
arrangement exists, delivery has occurred, the price is fixed or determinable
and collection is reasonably assured, which is generally over the broadcast
period.
Revenue
arrangements involving multiple deliverables are broken down into single-element
arrangements based on their relative fair value for revenue recognition
purposes, when possible. We recognize revenues on the elements delivered and
defer the recognition of revenues of the undelivered elements until the
remaining obligations have been satisfied. Generally, we receive advanced
payments for our advertising services and record them as customer advances. Such
prepayments are only recognized as revenues when the services are rendered over
the broadcast period.
Our
business is centered around purchasing blocks of advertising time, repackaging
the time into smaller units and reselling the smaller blocks (or slots) to our
clients. We generally pay for the blocks of advertising time in advance of
reselling it to our customers and we are committed to pay the remainder of the
balance prior to the broadcast. In determining whether revenue is reported gross
or net, we considered the eight factors outlined in ASC 605-45. We sell the
right to utilize advertising space on certain TV channels of CCTV. This right is
conveyed to us by CCTV through contractual arrangements and we provide this
right to our clients through an unrelated contractual arrangement. As a result,
we are the primary obligor in this arrangement. In addition, we acquire the
advertising blocks in advance and have unmitigated inventory risk. We are
required to pay for the advertising time regardless whether we can resell the
time or collect our fees from our customers. We also have latitude in
establishing the price; discretion in supplier selection; and we assume the
credit risk for the amount billed to our customers. Based on these factors,
revenues are recognized at gross billings to our clients and the cost for
purchasing the advertising time slots is recorded as our cost of goods sold and
recognized over the same period as the related revenue, which is the broadcast
period.
We derive a minimal portion of our
revenues from production services. We design, produce and package content
for public service announcements and commercial advertisements. For
commercial television advertisements, advertisers will pay for our production
services and sometimes for the broadcast of the advertisements produced by us if
we also arrange for such broadcast. We typically require a prepayment from
our clients at the time of the execution of the advertising production
agreements and prior to the commencement of our work, but our revenues are
typically recognized at the time the final work products are delivered to our
clients for broadcast.
We report revenues gross of business
tax and related surcharges, which are charged to cost of goods
sold.
Income
Tax
The
Company accounts for income taxes in accordance with current accounting
standards, which require an asset and liability approach for financial
accounting and reporting for income taxes and allow recognition and measurement
of deferred tax assets based upon the likelihood of realization of tax benefits
in future years. Under the asset and liability approach, deferred taxes are
provided for the net tax effects of temporary differences between the carrying
amounts of assets and liabilities for financial reporting purposes and the
amounts used for income tax purposes. A valuation allowance is provided for
deferred tax assets if it is more likely than not these items will either expire
before the Company is able to realize their benefits, or that future
deductibility is uncertain.
The
Company adopted the accounting standard for uncertainty in income taxes which
prescribes a comprehensive model for how a company should recognize, measure,
present and disclose in its financial statements uncertain tax positions that
the Company has taken or expects to take on a tax return (including a decision
whether to file or not to file a return in a particular
jurisdiction).
Results
of Operations
The
following table sets forth information from our statements of operations for the
three months ended March 31, 2010 and 2009 (unaudited) and the years ended
December 31, 2009, 2008 and 2007, in dollars (in thousands) and as a percentage
of revenue:
|
|
Three Months Ended March 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$ |
28,009 |
|
|
100.0 |
% |
|
$ |
11,386 |
|
|
100.0 |
% |
|
$ |
74,480 |
|
|
100.0 |
% |
|
$ |
44,684 |
|
|
100.0 |
% |
|
$ |
17,103 |
|
|
|
100.0 |
% |
Cost
of Goods Sold
|
|
|
(23,557 |
) |
|
84.1 |
% |
|
|
(9,331 |
) |
|
82.0 |
% |
|
|
(59,746 |
) |
|
80.2 |
% |
|
|
(36,498 |
) |
|
81.7 |
% |
|
|
(12,839 |
) |
|
|
75.1 |
% |
Gross
Profit
|
|
|
4,452 |
|
|
15.9 |
% |
|
|
2,055 |
|
|
18.0 |
% |
|
|
14,734 |
|
|
19.8 |
% |
|
|
8,186 |
|
|
18.3 |
% |
|
|
4,264 |
|
|
|
24.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General
and administrative
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling
expenses
|
|
|
606 |
|
|
2.2 |
% |
|
|
417 |
|
|
3.7 |
% |
|
|
2,110 |
|
|
2.8 |
% |
|
|
1,673 |
|
|
3.8 |
% |
|
|
2,068 |
|
|
|
12.1 |
% |
General
and administrative
|
|
|
181 |
|
|
0.6 |
% |
|
|
121 |
|
|
1.1 |
% |
|
|
575 |
|
|
0.8 |
% |
|
|
371 |
|
|
0.8 |
% |
|
|
374 |
|
|
|
2.2 |
% |
Depreciation
of equipment
|
|
|
2 |
|
|
* |
|
|
|
2 |
|
|
* |
|
|
|
9 |
|
|
* |
|
|
|
7 |
|
|
* |
|
|
|
2 |
|
|
|
* |
|
Total
operating expenses
|
|
|
789 |
|
|
2.8 |
% |
|
|
540 |
|
|
4.7 |
% |
|
|
2,694 |
|
|
3.6 |
% |
|
|
2,051 |
|
|
4.6 |
% |
|
|
2,444 |
|
|
|
14.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from operations
|
|
|
3,663 |
|
|
13.1 |
% |
|
|
1,515 |
|
|
13.3 |
% |
|
|
12,040 |
|
|
16.2 |
% |
|
|
6,135 |
|
|
13.7 |
% |
|
|
1,820 |
|
|
|
10.6 |
% |
Gain
on disposal of assets
|
|
|
- |
|
|
- |
|
|
|
- |
|
|
- |
|
|
|
1 |
|
|
* |
|
|
|
- |
|
|
- |
|
|
|
- |
|
|
|
- |
|
Interest
income
|
|
|
- |
|
|
* |
|
|
|
1 |
|
|
* |
|
|
|
2 |
|
|
* |
|
|
|
5 |
|
|
* |
|
|
|
5 |
|
|
|
* |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
before income taxes
|
|
|
3,663 |
|
|
13.1 |
% |
|
|
1,516 |
|
|
13.3 |
% |
|
|
12,043 |
|
|
16.2 |
% |
|
|
6,140 |
|
|
13.7 |
% |
|
|
1,825 |
|
|
|
10.7 |
% |
Income
taxes
|
|
|
928 |
|
|
3.3 |
% |
|
|
379 |
|
|
3.3 |
% |
|
|
3,033 |
|
|
4.1 |
% |
|
|
1,535 |
|
|
3.4 |
% |
|
|
602 |
|
|
|
3.5 |
% |
Net
Income
|
|
$ |
2,735 |
|
|
9.8 |
% |
|
$ |
1,137 |
|
|
10.0 |
% |
|
$ |
9,010 |
|
|
12.1 |
% |
|
$ |
4,605 |
|
|
10.3 |
% |
|
$ |
1,223 |
|
|
|
7.2 |
% |
*Less
than 0.1%
Three
Months ended March 31, 2010 and 2009
Revenues were $28.0 million for the
three months ended March 31, 2010, an increase of $16.6 million, or 146%,
compared to $11.4 million for the same period in 2009. The increase was
attributable to an increase in the total advertising time slots sold by us in
the three months ended March 31, 2010, compared to the three months ended March
31, 2009. We sold a total of approximately 2,492 minutes of advertising time in
the three months ended March 31, 2010 as compared to 2,437 minutes in 2009,
which is a 2.3% increase in the number of minutes sold at a higher average price
per minute. We had no revenues from our production services during the three
months ended March 31, 2010 or the comparable period in 2009.
We do not restrict our advertising purchases to a set schedule and
instead make purchases throughout the year based on an evaluation of our and our
customers’ need, not on actual orders received from customers. No
advertising time remained unsold at the end of the three months ended March 31,
2010 or 2009.
Cost
of goods sold was $23.6 million for the three months ended March 31, 2010, an
increase of $14.3 million, or 153.8%, compared to $9.3 million for the same
period in 2009. Cost of goods sold consists of the costs to obtain the
advertising time slots from television networks. The increase of cost of goods
sold was primarily a result of a 2.3% increase in the number of advertising
minutes purchased in 2010 as compared to 2009 and a 36.4% increase in the
average cost of the adverting minutes purchased. As a percentage of revenue,
cost of goods sold for the three months ended March 31, 2010 and 2009 were 84.1%
and 82.0%, respectively.
Gross
profit for the three months ended March 31, 2010 was $4.5 million, or 15.9% of
revenues, an increase of $2.4 million or 114% compared to $2.1 million, or 18.0%
of revenues, for the comparable period in 2009. The decrease in our gross profit
margin for the three months ended March 31, 2010 is primarily due to the fact
that we were unable to pass the full cost of the increase in our costs to
purchase advertising time to our customers.
Selling
expenses were $0.6 million for the three months ended March 31, 2010, an
increase of $0.2 million, or 50%, compared to $0.4 million for the same period
in 2009. The increase primarily resulted from an increase in marketing expenses
we spent on expanding our business.
General
and administrative expenses were $0.18 million for the three months ended March
31, 2010, an increase of $0.06 million, or 50%, compared to $0.12 million for
the same period in 2009. The increase was primarily a result of an increase in
rental costs and compensation-related expenses.
Income taxes for the three months
ended March 31, 2010 were $0.93 million, an increase of $0.55 million, or 145%,
over income taxes of $0.38 million for the three months ended March 31, 2009.
The increase in income taxes was primarily a result of an increase in our
taxable income. Our income tax rate for three months ended March 31, 2010 and
2009 was 25% and 25%, respectively.
Net income for the three months
ended March 31, 2010 was $2.7 million, an increase of 145% over net income of
$1.1 million for the three months ended March 31, 2009, based on the factors
described above.
Years
ended December 31, 2009 and 2008
Revenues were $74.5 million for the
year ended December 31, 2009, an increase of $29.8 million, or 66.7%, compared
to $44.7 million for the same period in 2008. The increase was
attributable to an increase in the total advertising time slots sold by us in
the year ended December 31, 2009, compared to the year ended December 31,
2008. We sold a total of 11,459 minutes of advertising time in 2009 as
compared to 7,843 minutes in 2008, which is a 46.1% increase in the number of
minutes sold at a higher average price per minute. Revenues from our production
services decreased to $12,000 during the year ended December 31, 2009, as
compared to $14,000 in 2008. We do not restrict our advertising
purchases to a set schedule and instead conduct purchases throughout the year
based on an evaluation of our and our customers’ need, not on actual orders
received from customers. No advertising time remained unsold at the end of
the years ended December 31, 2009 or 2008.
Cost
of goods sold was $59.7 million for the year ended December 31, 2009, an
increase of $23.2 million, or 63.6%, compared to $36.5 million for the same
period in 2008. Cost of goods sold consists of the costs to obtain the
advertising time slots from television networks. The increase of cost of
goods sold was primarily a result of a 46.1% increase in the number of
advertising minutes purchased in 2009 as compared to 2008 and a 40.9% increase
in the average cost of the adverting minutes purchased. As a percentage of
revenue, cost of goods sold for the years ended December 31, 2009 and 2008 were
80.2% and 81.7%, respectively.
Gross
profit for the year ended December 31, 2009 was $14.7 million, or 19.8% of
revenues, an increase of $6.5 million or 79.3% compared to $8.2 million, or
18.3% of revenues, for the comparable period in 2008. The increase in our gross
profit margin for the year ended December 31, 2009 is primarily due to our
ability to charge more per unit for advertising time in 2009 as compared to 2008
allowing us a slight increase in gross profit per dollar sold.
Selling
expenses were $2.1 million for the year ended December 31, 2009, an increase of
$0.4 million, or 23.5%, compared to $1.7 million for the same period in 2008.
The increase primarily resulted from an increase in marketing expenses we spent
on expanding our business.
General
and administrative expenses were $575,000 for the year ended December 31, 2009,
an increase of $204,000, or 55.0%, compared to $371,000 for the same period in
2008. The increase was primarily a result of an increase in rental costs of
$43,781 in the year ended December 31, 2009 as compared to the comparable period
in 2008, an increase in compensation-related expenses of $21,453 in the year
ended December 31, 2009 as compared to the comparable period in 2008 and an
increase in payment to staff welfare and bonus funds. Additionally, our
general offices expenses increased $43,781 in the year ended December 31, 2009
as compared to the year ended December 31, 2008.
Income
taxes for the year ended December 31, 2009 were $3.0 million, an increase of
$1.5 million, or 100%, over income taxes of $1.5 million for the year ended
December 31, 2008. The increase in income taxes was primarily a result of
an increase in our taxable income. Our income tax rate for fiscal 2009 and
fiscal 2008 was 25%.
Net
income for the year ended December 31, 2009 was $9.0 million, an increase of
95.7% over net income of $4.6 million for the year ended December 31, 2008,
based on the factors described above.
Years
ended December 31, 2008 and 2007
Revenues were $44.7 million for the
year ended December 31, 2008, an increase of $27.6 million, or 161.4%, compared
to $17.1 million for the same period in 2007. The increase in revenue was
attributed mainly an increase in the number of our customers and to an increase
40.8% increase in advertising time slots sold and a 35.5% increase in the
average price per minute of advertising time sold in 2008 compared to
2007. The increase in the amount and price of advertising time sold
resulted from the 2008 Olympic Games held in Beijing, which caused advertisers
in China to purchase more advertising time at higher prices than in 2007.
Revenues from our advertising agency services were $44.7 million during the year
ended December 31, 2008 as compared to $17.1 million in 2007. We sold a
total of 7,843 minutes of advertising time in 2008 as compared to 4,639 minutes
in 2007. Revenues from our production services were $14,000 during the
year ended December 31, 2008 as compared to $29,000, respectively, in
2007. No advertising time remained unsold at the end of the years ended
December 31, 2008 or 2007.
Cost
of goods sold was $36.5 million for the year ended December 31, 2008, an
increase of $23.7 million, or 185.2%, compared to $12.8 million for the same
period in 2007. The increase of cost of goods sold was primarily a result of an
increase in prices charged for advertising time due to the 2008 Olympic Games in
Beijing and also the additional time slots we purchased from our vendors to
generate our revenues. As a percentage of revenue, cost of goods sold for
the years ended December 31, 2008 and 2007 were 81.7% and 75.1%,
respectively.
Gross
profit for the year ended December 31, 2008 was $8.2 million, or 18.3% of
revenues, compared to $4.3 million, or 24.9% of revenues, for the comparable
period in 2007. The decrease in our gross profit margin for the year ended
December 31, 2008 is primarily due to our inability to increase our rates in
2008 to keep up with increased unit costs.
Selling
expenses were $1.7 million for the year ended December 31, 2008, a decrease of
$0.4 million, or 19.0%, compared to $2.1 million for the same period in
2007. The decrease primarily resulted from a reduction in commission
expenses, traveling expenses and entertainment fees in fiscal 2009 as compared
to fiscal 2008, compared to additional marketing related costs spent in 2007 in
preparation for the 2008 Olympic Games held in Beijing
General
and administrative expenses remained relatively flat at $371,000 for the year
ended December 31, 2008, as compared to $374,000 for the same period in
2007.
Interest
income for the year ended December 31, 2008 remained flat at $5,000, compared to
$5,000 for the comparable period in 2007.
Income
taxes for the year ended December 31, 2008 were $1.5 million, an increase of
$0.9 million, or 150%, over income taxes of $0.6 million for the year ended
December 31, 2007. The increase in income taxes was primarily a result of
an increase in taxable income partially offset by a decrease in our income tax
rate. Our income tax rate for fiscal 2008 was reduced by the PRC
government to 25% from 33% for fiscal 2007.
Net
income for the year ended December 31, 2008 was $4.6 million, an increase of
283.3% over net income of $1.2 million for the year ended December 31,
2007.
Liquidity
and Capital Resources
We had
cash and cash equivalents of approximately $0.4 million as of March 31, 2010, as
compared to $0.7 million as of December 31, 2009 and $1.2 million as of December
31, 2008. Our funds are kept in financial institutions located in the PRC, which
do not provide insurance for amounts on deposit. Moreover, we are subject to the
regulations of the PRC which restrict the transfer of cash from the PRC, except
under certain specific circumstances. Accordingly, such funds may not be readily
available to us to satisfy obligations which have been incurred outside the
PRC.
On
April 30, 2010, we received gross proceeds of approximately $5.35 million in the
closing of a private placement transaction (the “Private Placement”). Pursuant
to subscription agreements entered into with the investors, we sold an aggregate
of 3,566,838 shares of Common Stock at $1.50 per share. We paid WestPark Capital
a commission equal to 10.0% with a non-accountable fee of 4.0% of the gross
proceeds from the Private Placement. We are also retaining WestPark Capital for
a period of five months following the closing of the Private Placement to
provide us with financial consulting services for which we will pay WestPark
Capital $4,000 per month. Out of the proceeds of the Private Placement, we paid
$300,000 to Keen Dragon Group Limited, a third party unaffiliated with CD Media
BVI, the Company, or WestPark Capital for services as an advisor to the Company,
including assisting in preparations for the Share Exchange and the Company’s
listing of securities in the United States.
We are
required to contribute a portion of our employees’ total salaries to the Chinese
government’s social insurance funds, including pension insurance, medical
insurance, unemployment insurance, and job injuries insurance, and maternity
insurance, in accordance with relevant regulations. Total contributions to the
funds were approximately $4,900 and $3,400 in the three months ended March 31,
2010 and 2009, respectively and $13,000 in each of the years ended December 31,
2009, 2008 and 2007, respectively. We expect that the amount of our contribution
to the government’s social insurance funds will increase in the future as we
expand our workforce and operations and commence contributions to an employee
housing fund.
Net
cash used in operating activities was $0.8 million for the three months ended
March 31, 2010 compared to net cash provided by operating activities of $4.4
million for the comparable period in 2009. The decrease in cash provided
by operating activities was primarily due to an increase of cash used in the
amount of $2.5 million, $2.8 million, and $2.0 million related to accounts
receivable, prepayments for advertising time slot purchases, and accounts
payable, respectively, all of which were related to our increased efforts to
expand of our business during the three months ended March 31, 2010 as compared
to the amounts from same period in 2009. These amounts were partially
offset by an increase of cash provided in the amount $2.9 million in capitalized
television costs and $1.6 million in net income for the three months ended March
31, 2010 as compared to the amounts from same period in 2009. Net cash
used in operating activities was $614,000 for the year ended December 31, 2009,
compared to net cash used in operating activities of $266,000 for the year ended
December 31, 2008. The increase of cash used in the amount of $6.8 million
and $2.9 million related to capitalized television costs and prepayments for
advertising time slots, respectively, all of which were related to our increased
efforts to expand our business during the year ended December 31, 2009 as
compared to the amounts in the same period in 2009. These amounts were
partially offset by an increase of cash provided in the amount $6.7 million and
$4.4 million related to accounts receivable and net income, respectively, for
the year ended December 31, 2009 as compared to the amounts in the same period
in 2008. Net cash used in operating activities was $266,000 for the year
ended December 31, 2008, compared to net cash provided by operating activities
of $1.0 million for the year ended December 31, 2007. The decrease in cash
provided by operating activities was primarily due to an increase in prepaid
deposits for the purchase of advertising time
Net
cash used in investing activities for the three months ended March 31, 2010 was
approximately $3,000, which remained relatively flat compared to net cash used
in investing activities of $400 for the comparable period in 2009. Net
cash used in investing activities amounted to approximately $6,000 and $17,000
for the years ended December 31, 2009 and 2008, respectively. The decrease in
net cash used in investing activities was primarily attributable to a $15,000
gain from cash received on disposal of fixed assets during the year ended
December 31, 2009. Net cash used in investing activities remained relatively
flat for the years ended December 31, 2008 and 2007, amounting to $17,000 and
$18,000, respectively.
Net
cash provided by financing activities was $0.5 million for the three months
ended March 31, 2010 as compared to nil during the three months ended March 31,
2009. The increase in cash provided by financing activities was due to CD
Media BVI’s prepayment of its investment in CD Media Huizhou. Net cash used in
financing activities was nil during the years ended December 31, 2009 and 2008.
Net cash used in financing activities was $390,000 during the year ended
December 31, 2007 was related to the repayment of shareholder
advances.
Based
upon our present plans, we believe that our working capital together with cash
flow from operations and funds available to us through financing will be
sufficient to fund our capital needs for at least the next 12 months. We raised
approximately $5.35 million from the Private Placement that we closed in April
2010, and assuming our sale of 2,500,000 shares of common stock at an assumed
public offering price of $3.00 - $4.00 per shares of common stock, we currently
intend this offering to be in an amount equal to approximately $7.5- $10
million, before deducting the underwriting discount and commissions and
estimated offering expenses. Therefore, we believe that we will have sufficient
cash available to fund our operations in the next 12 months. After 12
months, we may need to seek additional debt or equity financing through other
external sources, which may not be available on acceptable terms, or at
all. Failure to maintain financing arrangements on acceptable terms would
have a material adverse effect on our business, results of operations and
financial condition.
Contractual
obligations
The
following table describes our contractual commitments and obligations as of
December 31, 2009:
|
|
Payments due by Period (in $)
|
|
Contractual Obligations
|
|
Total
|
|
Less Than
1 Year
|
|
1 - 3
Years
|
|
3 - 5
Years
|
|
More Than
5 Years
|
|
Operating
Lease Obligations
|
|
$ |
298,970 |
|
$ |
230,796 |
|
$ |
68,174 |
|
$ |
- |
|
$ |
- |
|
Total
|
|
$ |
298,970 |
|
$ |
230,796 |
|
$ |
68,174 |
|
$ |
- |
|
$ |
- |
|
As of
December 31, 2009, there were no other contractual obligations, related to the
purchase of advertising time or otherwise.
Seasonality
Our
business is not seasonal in nature.
Quarterly
Information (unaudited)
The table
below presents selected (unaudited) results of operations for the quarters
indicated. All amounts are in thousands except share and per share
data.
|
Quarter Ended
|
|
|
December 31,
|
|
September 30,
|
|
June 30,
|
|
March 31,
|
|
|
|
|
2009
|
|
2009
|
|
2009
|
|
2009
|
|
Total
|
|
Revenues
|
|
$ |
36,377 |
|
|
$ |
14,344 |
|
|
$ |
12,373 |
|
|
$ |
11,386 |
|
|
$ |
74,480 |
|
Gross
profit
|
|
$ |
7,549 |
|
|
$ |
2,819 |
|
|
$ |
2,311 |
|
|
$ |
2,055 |
|
|
$ |
14,734 |
|
Net
Income
|
|
$ |
4,971 |
|
|
$ |
1,639 |
|
|
$ |
1,263 |
|
|
$ |
1,137 |
|
|
$ |
9,010 |
|
Earnings
per share – Basic and Diluted
|
|
$ |
0.26 |
|
|
$ |
0.09 |
|
|
$ |
0.07 |
|
|
$ |
0.06 |
|
|
$ |
0.47 |
|
Weighted-average
shares outstanding – Basic and Diluted
|
|
|
19,100,000 |
|
|
|
19,100,000 |
|
|
|
19,100,000 |
|
|
|
19,100,000 |
|
|
|
19,100,000 |
|
|
|
Quarter Ended
|
|
|
|
December 31,
|
|
|
September 30,
|
|
|
June 30,
|
|
|
March 31,
|
|
|
|
|
|
|
2008
|
|
|
2008
|
|
|
2008
|
|
|
2008
|
|
|
Total
|
|
Revenues
|
|
$ |
13,514 |
|
|
$ |
11,283 |
|
|
$ |
11,094 |
|
|
$ |
8,793 |
|
|
$ |
44,684 |
|
Gross
profit
|
|
$ |
1,815 |
|
|
$ |
2,509 |
|
|
$ |
2,153 |
|
|
$ |
1,710 |
|
|
$ |
8,187 |
|
Net
Income
|
|
$ |
946 |
|
|
$ |
1,474 |
|
|
$ |
1,243 |
|
|
$ |
942 |
|
|
$ |
4,605 |
|
Earnings
per share – Basic and Diluted
|
|
$ |
0.05 |
|
|
$ |
0.08 |
|
|
$ |
0.07 |
|
|
$ |
0.05 |
|
|
$ |
0.24 |
|
Weighted-average
shares outstanding – Basic and Diluted
|
|
|
19,100,000 |
|
|
|
19,100,000 |
|
|
|
19,100,000 |
|
|
|
19,100,000 |
|
|
|
19,100,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our
revenues, gross profit and net income during the quarterly periods in fiscal
2008 were negatively affected by the global economic downturn and, as a result,
were generally less than the revenues, gross profit and net income for the
quarterly periods in 2009. Our revenues, gross profit and net income for
the three months ended December 31, 2009 increased significantly in comparison
to other quarterly periods in fiscal 2008 and 2009. During three months
ended December 31, 2009, we added two large clients to our client base who
collectively accounted for $15.2
million in revenue for the quarter. Additionally, one of our
existing clients purchased a large amount of advertising time during this
quarter, accounting for $6.9
million of our revenue for the year. We believe that
the addition of our two new clients will contribute to an overall increase in
our revenues, gross profit and net income in future quarters. While we
believe that our client base will continue to expand in future quarters, we do
not anticipate that similar very large purchases of advertising time, such as
those made by our two new customers, will occur or that our quarterly results
for future quarters will be consistent with our results for the three months
ended December 31, 2009.
Off-Balance
Sheet Arrangements
We have no material off-balance sheet
transactions.
Quantitative
and Qualitative Disclosure Regarding Market Risk
Interest
Rate Risk
We may face some risk from potential
fluctuations in interest rates, although our debt obligations are primarily
short-term in nature, but some bank loans have variable rates. If interest
rates have great fluctuations, our financing cost may be significantly
affected.
Foreign
Currency Risk
Substantially all of our operations are
conducted in the PRC, and our primary operational currency is the Chinese
Renminbi (“RMB”). Substantially all of our revenues and expenses are
denominated in RMB. However, we use the United States dollar for financial
reporting purposes. Conversion of RMB into foreign currencies is regulated
by the People’s Bank of China through a unified floating exchange rate
system. Although the PRC government has stated its intention to support
the value of the RMB, there can be no assurance that such exchange rate will not
again become volatile or that the RMB will not devalue significantly against the
U.S. dollar. Exchange rate fluctuations may adversely affect the value, in
U.S. dollar terms, of our net assets and income derived from our operations in
the PRC.
Country
Risk
The substantial portion of our assets
and operations are located and conducted in China. While the PRC economy
has experienced significant growth in the past twenty years, growth has been
uneven, both geographically and among various sectors of the economy. The
Chinese government has implemented various measures to encourage economic growth
and guide the allocation of resources. Some of these measures benefit the
overall economy of China, but may also have a negative effect on us. For
example, our operating results and financial condition may be adversely affected
by government control over capital investments or changes in tax regulations
applicable to us. If there are any changes in any policies by the Chinese
government and our business is negatively affected as a result, then our
financial results, including our ability to generate revenues and profits, will
also be negatively affected.
Change
in Auditors
MaloneBailey, LLP
On
April 30, 2010, we dismissed AJ. Robbins, PC ("AJ. Robbins") as our independent
registered public accounting firm following the change in control of the Company
on the closing of the Share Exchange. SRKP 25, Inc. engaged AJ. Robbins to
audit its financial statements for the years ended December 31, 2009 and
December 31, 2008. The decision to change accountants was approved and
ratified by our Board of Directors. The reports of AJ. Robbins on the
financial statements of the Company for the years ended December 31, 2009 and
December 31, 2008 did not contain any adverse opinion or disclaimer of opinion
and was not qualified or modified as to uncertainty, audit scope, or accounting
principle, except for an explanatory paragraph relative to the Company’s ability
to continue as a going concern. Additionally, during the Company's two
most recent fiscal years and any subsequent interim period, there were no
disagreements with AJ. Robbins on any matter of accounting principles or
practices, financial statement disclosure, or auditing scope or procedure.
While AJ. Robbins was engaged by the
Company, there were no disagreements with AJ. Robbins on any matter of
accounting principles or practices, financial statement disclosure, or auditing
scope or procedure with respect to the Company, which disagreements if not
resolved to the satisfaction of AJ. Robbins would have caused it to make
reference to the subject matter of the disagreements in connection with its
report on the Company’s financial statements for the fiscal year ended December
31, 2009 or its report on the Company’s financial statements for the fiscal year
ended December 31, 2008.
The Company provided AJ. Robbins
with a copy of the disclosures to be included in Item 4.01 of the Current Report
on Form 8-K and requested that AJ. Robbins furnish the Company with a letter
addressed to the Commission stating whether or not AJ. Robbins agrees with the
foregoing statements. A copy of the letter from AJ. Robbins to the
Commission, dated May 6, 2010, was attached as Exhibit 16.1 to the
Company’s Current Report on Form 8-K filed with the Securities and Exchange
Commission on May 6, 2010. The Company provided AJ. Robbins with a copy of
the disclosure to be included in this Form S-1 Amendment No. 1 and requested
that AJ. Robbins furnish the Company with a letter addressed to the Commission
stating whether or not AJ. Robbins agrees with the foregoing statements. A
copy of the letter from AJ. Robbins to the Commission, dated June 29, 2010, is
attached as Exhibit 16.1 of this Form S-1 Amendment No.
1.
We engaged MaloneBailey, LLP
(“MaloneBailey”) as our independent registered public accounting firm as of
April 30, 2010. MaloneBailey is and has been CD Media BVI’s independent
registered public accounting firm.
DESCRIPTION
OF BUSINESS
Overview
We are engaged in the promotion, sale
and marketing of advertising packages on Chinese television stations. We
purchase advertising time packages that air on CCTV-1, CCTV-2 and CCTV-3, three
of the main channels of China Central Television (“CCTV”), the state television
station of the PRC, which we repackage and sell to our customers.
Currently we deal solely with third parties that act as agents for the
sale of advertising time slots by CCTV. We also assist our clients in
developing cost-effective advertising programs to maximize their return on their
advertising investments by identifying the most appropriate advertising time
slots and message points of the advertisements.
We have
obtained a large amount of quality advertising time aired on CCTV, including
advertising rights to a number of daily television programs on CCTV-1, CCTV-2
and CCTV-3.
Our clients are primarily entities
seeking to advertise their own products or services that purchase advertising
packages, either directly from us or indirectly through third party advertising
agencies. These entities include large companies in China such as Hualong Group,
Dabao Group, Grace China Co., Ltd. and Hengan International Group Co., Ltd.,
most of which purchase time packages from us through their advertising
agencies. These companies accounted for 2.3%, 3.4%, 4.7% and 5.1%,
respectively, of our total revenues for the year ended December 31,
2009.
Industry
General
China is one of the world’s largest
consumer markets. In 2009, China’s gross domestic product (“GDP”)
increased 8.7% over 2008 according to the National Bureau of Statistics of
China. China’s GDP for 2008 increased 9% over 2007. This rapid
economic growth in China has led to greater levels of personal disposable income
and increased spending among China’s expanding middle-class consumer base.
Notwithstanding China’s economic growth, with a population of 1.3 billion
people, China’s economic output and consumption rates are still small on a per
capita basis compared to developed countries. As China’s economy develops,
we believe that disposable income and consumer spending levels will continue to
become closer to that of developed countries like the United
States.
China’s Advertising Market
With China’s economic growth, its
advertising market has also grown rapidly. China’s major advertising
spending categories consist of television, print, radio, and internet, with
television having the widest coverage and the greatest impact. The continued
rapid growth in China’s advertising market has been, and is expected to be,
largely driven by the rapid growth in disposable income and corresponding
consumer spending of China’s growing middle class. This growth in
disposable income is expected to be a key driver in supporting advertising
spending growth as corporate budget decisions on advertising are expected to be
largely driven by disposable income growth, not by economic cycles.
The advertising agency industry in
China is still highly fragmented, with a large number of small, independent
domestic agencies mainly focusing on resales of advertising time. The majority
of these companies act as sellers of advertising time for television networks
that have limited capabilities to conduct the sales internally. Brand
development is essential in China. In light of Chinese consumers’ general
brand-sensitiveness and brand-responsiveness, advertising strategies in China
tend to focus on increasing brand penetration and awareness, through
product-based advertising strategies. We believe that the intense
competition among both international and domestic companies to increase
awareness of their brands in China will cause advertisers to continue to make
substantial investments in their brand-building and advertising campaigns
targeted at the market in China. In addition, China’s advertising spending
per capita and as a percentage of GDP has been low relative to other countries,
suggesting that there is growth potential as the consumer market develops and
companies compete through advertising to attract consumer spending.
Television
China has emerged as the largest
television viewing nation in the world with a national television coverage of
over 96% or a potential audience of over 1.2 billion individuals. Television
channels have increased to over 3,000 in 2009, and the number of hours of
television programming increased to over 2,700,000 in 2009.
Despite the large number of television
stations in China, there are only a limited number of television networks that
provide national coverage, among which CCTV, the national broadcasting network
owned by China’s central government, still provides the most comprehensive
national coverage for advertisers. CCTV has 21 public channels that can be
viewed nationwide. Although there is one nationally broadcast satellite channel
in each province, none of these channels reaches CCTV’s level of coverage or has
a wide selection of highly rated programs. As a result, CCTV continues to be the
preferred choice of television advertisers.
Competitive
Strengths
We believe the following strengths
contribute to our competitive advantages:
Comprehensive television advertising
offerings
Our core resource consists of
television advertising time that we have purchased from third parties that
either act as agents for the sale of advertising time slots by or purchase
advertising time slots directly from CCTV on some of the most watched television
channels in China. We seek to enhance our clients advertising campaigns by
identifying strategies and helping to create a comprehensive television
advertising plan that suits their specific needs. We conduct market research and
assist our customers in implementing a messaging strategy and in choosing the
most appropriate advertising times and packages to help our customers maximize
their advertising investment. Our production services team assists
clients in designing television advertisements to best meet their advertising
objectives. We provide distribution channels on a national scale to implement
our clients’ marketing and branding campaigns through our access to certain
highly rated CCTV programs and also monitor and assess the
advertisements.
Popular product and service
mix
For 2010, we have secured advertising
rights on CCTV-1, CCTV-2 and CCTV-3 during a variety of daily television
programs ranging from children’s programs to entertainment shows and from daily
news programs to drama series. With our prime time advertising time packages as
well as our cost-efficient daytime advertising packages, we are able to offer
flexible, bundled advertising packages designed to suit our clients advertising
needs and preferences, maximize the advertising impact of their television
offerings and achieve our clients’ advertising and marketing goals.
Diversified customer base
During the year ended December 31,
2009, we had over 1,000 different customers across China. Our client base
spans a wide range of sectors and industries, such as telecommunications,
pharmaceuticals, financial services, textile, food and other consumer product
industries. We believe the range and depth of our client base enhances our
reputation in the advertising industry and positions us to continue to attract
new advertisers. Our integrated advertising agency services and our
production services allow us to be more responsive to clients’ specific
requirements. As a result, we enjoy significant flexibility in tailoring our
service offerings to meet clients’ needs and enhance our service quality and
effectiveness.
Experienced management
team
Our senior management team has
extensive business and industry experience, including an understanding of
changing market trends, consumer needs, technologies and our ability to
capitalize on the opportunities resulting from these market changes.
Members of our senior management team also have significant experience with
respect to key aspects of our operations, including sales and
marketing.
Strategy
Our goal is to become a leading
provider of integrated advertising services in China. We intend to achieve this
goal by implementing the following strategies:
Maximize our existing resources to
increase our profitability
We plan to use our CCTV advertising
resources and advertising production services expertise to further increase our
profitability by:
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expanding
our sale force by recruiting experienced and knowledgeable sales personnel
to increase the use of our current portfolio advertising time packages and
to attract new advertising
customers;
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strengthening
relationships with our existing clients to increase renewals of contracts
and cross-promoting our production services to our advertising agency
services clients; and
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exploring
new opportunities for expanding our production service offerings to new
and existing clients.
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Expand our purchases of advertising
time on CCTV
We intend to increase our purchases of
advertising time aired on CCTV based on our analysis of our advertising clients’
evolving needs and the inventory of available advertising time. We believe
that increasing the number and variety of advertising time slots within the CCTV
network will enable us to serve the needs of our clients who need to reach a
diverse group of television viewers. In the future, we intend to purchase
advertising directly from CCTV which we believe will provide access to a wider
variety of advertising opportunities.
Develop regional television advertising
opportunities
We intend
to leverage our successful business model to build relationships with providers
of advertising time aired on certain highly rated regional television
networks. We plan to target regional markets by providing services that
are focused on and responsive to the needs of local advertisers and the
preferences of local television viewers and by approaching regional television
networks or third party agents or providers to purchase advertising time
directly from them. We believe that our purchase of advertising time aired on
regional networks will allow us to offer our clients new ways to reach their
target audience and allow us to expand our client base to regional advertisers
who desire a more targeted marketing strategy.
Enhance our television production
services
We plan to actively market our
production capabilities to potential as well as to existing clients
and make these services part of our core value-added service package to increase
customer loyalty. We intend to open a production studio which will allow
us to shoot commercial television advertisements and public service
announcements for clients in China. Upon further expansion of our business
scope, a production studio will also enable us to produce proprietary television
programming, such as entertainment programs, television drama and documentary
series for broadcasting on CCTV and other regional television networks. We
believe that building a library of attractive proprietary content will improve
our overall financial and operational stability by mitigating the risk and
impact of adverse changes in any one of our operating environments, such as a
potential slowdown in one or more advertising channels, and by generating
additional revenues from selling our content to CCTV and other regional
networks.
Expand into new advertising
platforms
We intend to expand our media resources
in new advertising media platforms, including the Internet, radio, mobile
devices and indoor or outdoor flat panel displays. These advertising
platforms, especially the Internet and mobile devices, are becoming increasingly
popular alternative advertising mediums among advertisers. We believe that our
expansion into new media platforms will enable us to offer added value to our
clients by providing them with an avenue to reach consumers and will strengthen
our competitiveness in the advertising industry.
Pursue acquisitions to broaden our
service offerings and advertising platforms
The advertising market in China remains
highly fragmented, and the majority of advertising companies are regionally
focused with relatively few attaining national scale. We will consider
strategic acquisitions that will provide us with a broader range of service
offerings and access to new markets and new advertising media platforms.
When evaluating potential acquisition targets, we will consider factors such as
market position, growth potential and earnings prospects and strength and
experience of management.
Advertising
Packages
We purchase blocks of advertising time
from third-party agents of CCTV and repackage the time blocks into smaller time
slots, which is then sold to our customers. These third parties agents act as
wholesale distributors of advertising time, and acquire the time blocks directly
from CCTV. We currently only sell advertising time for airing on
CCTV. Advertising packages are packages of advertisements that air
together at various times during the day and during a wide variety of programs
on three CCTV channels, CCTV-1, the most watched CCTV channel, CCTV-2, a
financial information channel that is the seventh most watched channel in China,
and CCTV-3, an arts and entertainment channel that is the third most watched
television channel in China.
For 2009, the largest third-party
agent suppliers to the Company are Beijing Qidi Xingye Advertisement Company
Ltd., Beijing All TV Advertisement Company Ltd., Beijing Kuanshi Shentong
Advertisement Company Ltd. and SRX Media and Advertisement Company Limited,
which accounted for 4.8%, 6.8%, 5.1% and 8.2%, respectively, of our purchases of
advertising time during the year ended December 31, 2009. For 2008, the
largest third-party agent suppliers to the Company are Beijing Qidi Xingye
Advertisement Company Ltd, Beijing Yinsong Advertisement and Arts Company Ltd,
Beijing Oriental Bojie Advertisement Company Ltd and Beijing Benzou Xianggao
Advertisement Company ltd, which accounted for 11.8%, 9.7%, 9.0% and 8.0%,
respectively, of our purchases of advertising time during the year ended
December 31, 2008. For 2007, the largest third-party agent suppliers to the
Company are Beijing Qidi Xinye Advertisement Company Ltd, Beijing Yinshong
Advertisement and Arts Company Ltd, ZBeijing Shijie Global Adbertisement Center
and Beijing Yinshan Creative Advertisement Company ltd, which
accounted for 28.9%, 13.4%, 7.2% and 5.7%, respectively, of our purchases of
advertising time during the year ended December 31, 2007.
Our purchases of advertising time
are not seasonal in nature. In addition, we do not restrict our
advertising purchases to a set schedule and instead conduct purchases throughout
the year based on an evaluation of our and our customers’ need, not on actual
orders received from customers. No advertising time remained unsold at the
end of March 31, 2010.
Advertisers or their agencies typically
provide advertising content to be broadcast in the time slots they purchase from
us. We set the prices of advertising slots based on the quality, ratings and
target audience of the relevant television programs where the advertisements
will be broadcast, the sales prices of our competitors, general market
conditions and market demand. Different advertising time slots are sold at
different prices. We negotiate the pricing terms for the advertising time
slots with third party providers that either act as agents for CCTV or purchase
advertising time directly from CCTV. We charge our customers a premium for the
advertising time slots we purchase and retain the difference as
revenue.
We enter into contracts with our
advertiser clients, which specify the advertising package purchased by the
client, the time slots or the programs within which advertisements will be
broadcast and the relevant price for the advertising package purchased by the
client. For advertisers who purchase advertising packages from us through an
advertising agent, we enter into similar contracts with the advertising
agent.
We usually require the agreed
advertising fees to be paid in advance before the advertisements are broadcast.
Third parties offering advertising time aired on CCTV have been increasing the
prices charged to us for many of their advertising time slots every year since
our establishment, and we expect that they will continue to raise such prices in
the future. We believe that we will be able to pass on these price increases to
our clients, however, there is no guarantee that we will be able to do
so.
Our television advertising packages
with CCTV include the following:
CCTV-1 and CCTV-2 Program Guide
Set: Our Program Guide Package for CCTV-1 and CCTV-2 includes advertising
time slots on these channels throughout the daytime and nighttime
programming. The advertisements run during various programs, including
After Diet Everyday, After Red Sunset, Before Today Law Statement, After Today
Law Statement, and Before Eastern Sky. This package airs at least ten times per
day and can reach an audience of approximately 120 million persons per day in
the PRC.
CCTV-3 Program
Sets: We offer various program sets that air on CCTV-3 during
various programs and at various frequencies during the week. Our CCTV-3
program sets include:
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CCTV-3
Elite Set: Our Elite Set airs the most frequently at 52 times
per week. Advertising slots in the Elite Package air during programs
such as Dream Theater, The Same Song, Art Life, Happy China Tour, Star
Avenue and Want to Challenge.
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CCTV-3
Art Diamond Set: Our Art Diamond Set airs at least 49 times per
week during programs such as Golden Years and Behind the
Scenes.
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CCTV-3
Program Guide Set: Our Program Guide Set airs at least 49 times
per week at the break between two programs, Golden Years and The Same
Song.
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CCTV-3
TV Drama Set: Our TV Drama Set airs at least 47 times per week
during the break between two programs, Passion Square and Wanna
Challenge.
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CCTV-3
Art Daytime Set: Our Art Daytime Set airs at least 44 times per
week during the break between two programs, Animal World and TV
Series.
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CCTV-3
Art Comprehensive Set: Our Art Comprehensive Set airs at least
36 times per week during the break between two programs, Worldwide and
Dream Theatre.
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CCTV-3
Elite Art Set: Our Elite Art Set airs at least 27 times per
week during such programs as Passion Square, Behind the Scenes, and Golden
Years.
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CCTV-3
Golden Art Set: Our Golden Art Set airs at least 25 times per
week during such programs as Entertainment
Express.
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CCTV
Classic Art Set: Our Classic Art Set airs at least 20 times per
week during such programs as International Art, China Stage and New
Audio.
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Art
Time Set: Our Art Set airs at least 25 times per week during
such programs as Art Arena and Passion
Square.
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Chinese
MTV Set: Our Chinese MTV Set airs at least 20 times per week
during such programs as New Audio and Date With
You.
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The advertising time that we
purchase changes from year to year and each year we purchase advertising time
during different programs. We change our packages yearly depending on the
advertising time that we purchase. Our purchases are not restricted to a
set time schedule or content; instead we conduct purchases throughout the year
based on an evaluation of our and our customers’ need. The time from our
purchase of the advertising time to the point of our resale to customers is less
than one week.
Our
Customers
We have more than 1,000 customers in
major provinces and cities across China. Our customers include both
companies seeking to advertise their own products or services and advertising
agencies that purchase advertisement packages for their clients. In
2009, non-agency corporate advertisers and advertising agencies accounted for
70% and 30%, respectively, of our total customers. Our advertising
time slots on CCTV are attractive to our advertising agency customers and have
enabled us to establish relationships with both national and international
advertising agencies. We have also established business relationships with many
leading domestic and international advertising agencies, some of which are
members of the American Association of Advertising Agencies, who introduce
clients to us for all of our services.
Our non-agency corporate advertiser
clients come from a wide range of industries. The following table
sets forth the breakdown of revenue contributions in by the industries in which
our corporate customers operate:
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Percentage of Total
Revenues in the
three months ended
March 31, 2010
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Percentage of Total
Revenues in the
year ended
December 31, 2009
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Food
and beverages
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27.0 |
% |
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7.9 |
% |
Pharmaceuticals
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26.0 |
% |
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16.9 |
% |
Cosmetics
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12.9 |
% |
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5.1 |
% |
Household
products and electronic appliances
|
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12.1 |
% |
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28.7 |
% |
Fashion
|
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7.7 |
% |
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20.6 |
|
Gold
|
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|
5.2 |
% |
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6.1 |
% |
Paper
and tissue
|
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- |
|
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7.3 |
% |
Telecommunications
and information technology
|
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- |
|
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2.1 |
% |
Others
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9.1 |
% |
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5.3 |
% |
|
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|
100.0 |
% |
|
|
100.0 |
% |
We have 2
customers of our production services.
For
the three months ended March 31, 2010 and 2009, our top five customers accounted
for 33.9% and 30.6% of our total revenues, respectively. None of our
customers during the three months ended March 31, 2010 accounted for more than
10% of our revenues for the period. For the year ended December 31, 2009,
our top five customers accounted for 20.0% of our total revenues. None of our
customers for the year ended December 31, 2009 accounted for over 10% of our
revenues. None of our customers for the year ended December 31, 2009
accounted for over 10% of our revenues. For the year ended December 31, 2008,
our top five customers accounted for 30.7% of our total revenues. We had
one customer, Hua Long Group, who accounted for at least 10% of our revenues for
the year ended December 31, 2008. Hua Long Group accounted for approximately
12.3% of our revenues in 2008. The loss of any of these customers could have a
material adverse effect on our results of operations.
Sales
and Marketing
We market and sell advertising time
slots to advertising agencies and corporate clients in a variety of different
industries. As we continue to expand our service offerings, we intend to
sell various services to our existing client base.
We separate our sales staff into teams
which are responsible for specific industries so that our staff members can
provide our advertising clients with information specific to the industry in
which they operate. Although the majority of our marketing staff has prior
experience working in the advertising industry, we train and educate our sales
and marketing personnel to ensure that they are familiar with our service
offerings and the advantages that our services offer over our
competitors.
Our sales and marketing personnel
coordinate with our clients to help effect their advertising goals. We work
closely with our clients to understand their industry, business and marketing
needs in order to deliver customized and effective television advertising
solutions.
We market our services primarily
through direct marketing, trade shows and other media events, including
participating in advertising industry award competitions, trade shows,
festivals, academic seminars and conferences to promote brand awareness of our
company and our services.
To encourage our sales staff, we
provide commission based bonuses for our sales and marketing personnel. We
periodically evaluate the performance of our marketing personnel and pay
seasonal quarterly bonuses and annual bonuses to each staff member in an amount
up to 0.3% of the sales revenues generated by such staff member.
Quality
Control
We strive to provide our clients with
high-quality, cost-effective services. We analyze the content of each of
the advertisements to be broadcast on CCTV pursuant to our advertising packages
to assure the advertisement’s compliance with all PRC laws, rules and
regulations. We also monitor the broadcasting of our clients’
advertisements to ensure that they are properly broadcast at the correct time as
specified in our agreements with our clients. In addition, we provide
training to our employees to ensure that they are knowledgeable about any new
developments and regulations affecting out business and the advertising industry
so that our employees can provide outstanding services to our
customers.
Competition
The advertising industry in China is
very competitive and highly fragmented. Due to the highly fragmented
nature of the industry, we cannot accurately determine our share of the
television advertising market in the PRC. Many of our competitors have
significantly more financial, marketing and other resources than we have.
We compete with other advertising businesses primarily on the basis of service
quality, available advertising time slots, price, reputation and relationships
with television networks. We face competition with other television advertising
agencies for the limited number of time slots available on the CCTV channels.
Our main competitors in the television advertising sector in the PRC include
China Mass Media Corp. Who’s Who Corp. and Impression Media Group. In
addition, we face competition from other alternative advertising media
companies, such as the Internet, street furniture, billboard, frame and public
transport advertising companies, and with other traditional advertising media,
such as newspapers, magazines and radio. We may face increase competition
in the future from new entrants into the PRC advertising market from
foreign-owned advertising companies who can enter the PRC advertising sector in
accordance with PRC law.
Insurance
We maintain property insurance for our
automobiles and key-man life insurance for certain of our officers and
directors. We do not maintain any other types of insurance. We believe our
insurance coverage is customary and standard for similarly sized companies in
our industry. However, we cannot assure you that our existing insurance policies
are sufficient to insulate us from all losses and liabilities that we may
incur.
Employees
As of March 31, 2010, we had
approximately 114 full-time employees. All of our employees are based
inside China. We have not experienced any work stoppages and we consider
our relations with our employees to be good.
We are required to contribute a
portion of our employees’ total salaries to the Chinese government’s social
insurance funds, including pension insurance, medical insurance, unemployment
insurance, and job injuries insurance, and maternity insurance, in accordance
with relevant regulations. Total contributions to the funds were
approximately $4,903 and $3,381 for the three months ended March 31, 2010 and
2009, respectively, and $13,384 and $13,318 for the years ended December 31,
2009 and 2008, respectively. We expect that the amount of our contribution
to the government’s social insurance funds will increase in the future as we
expand our workforce and operations.
None of our employees currently live in
company-provided housing facilities. Under PRC laws, we are required to
make contributions to a housing assistance fund for employees based in
China. Any increase in contributions to the housing assistance fund will
increase the costs and expenses of conducting our business operations and could
have negative effect on our results of operations.
PRC
Government Regulations
Business
license
Any company that conducts business in
the PRC must have a business license that covers a particular type of
work. Pursuant to PRC regulations governing the advertising businesses,
including the Advertising Law promulgated by the National People’s Congress on
October 27, 1994 (the “1994 Advertising Law”), the Advertising
Administrative Regulations (1987) and the Implementing Rules for the Advertising
Administrative Regulations (2004), advertising companies must obtain a business
license for its advertising activities from the State Administration for
Industry and Commerce (the “SAIC”) or its local branches. CD Media
Beijing’s business license covers its present business to design, create, handle
(as agent), and release advertisements in the PRC for domestic and foreign
investors; to arrange cultural communications (excluding shows); to undertake
exhibitions and presentations; and to provide advertising consulting
services (excluding intermediary services). CD Media Huizhou’s business
license permits CD Media Huizhou to design, handle (as agent) and organize
cultural communications (excluding news releases and advertisement making),
provide cultural consulting services and to design images for advertising.
Companies that operate outside the scope of their licenses can be subjected to
fines, disgorgement of income and ordered to cease operations. Prior to
expanding our business beyond that of our business licenses, we may be required
to apply and receive approval from the relevant PRC government
authorities.
Regulation of Advertising
Content
The PRC government regulates the
content for advertisements in China. Laws, rules and regulations
implemented by the PRC government prohibit, among other things, false or
misleading content, superlative wording, socially destabilizing content or
content involving obscenities, superstition, violence, discrimination or
infringement of the public interest. Advertisements for anesthetic,
psychotropic, toxic or radioactive drugs are not permitted. Advertisements for
tobacco may not be broadcast on television. Restrictions also exist
regarding the advertisement of patented products and processes, pharmaceuticals,
medical instruments, agrochemicals, foodstuff, alcohol and cosmetics. All advertisements
relating to pharmaceuticals, medical instruments, agrochemicals and veterinary
pharmaceuticals, along with any other advertisements which are subject to
censorship by administrative authorities according to relevant laws and
administrative regulations, must be submitted to the relevant administrative
authorities for content approval prior to dissemination.
Advertisers, advertising agencies, and
advertising distributors are required by PRC advertising laws and regulations to
ensure that the content of the advertisements they prepare or distribute is true
and accurate and in full compliance with applicable law. In providing
advertising services, advertising operators and advertising distributors must
review the specified supporting documents provided by advertisers for
advertisements and verify that the content of the advertisements complies with
applicable PRC laws, rules and regulations. Prior to distributing advertisements
for items that are subject to government censorship and approval, advertising
distributors must confirm that such censorship has been performed and
approval has been obtained. Violation of these regulations may result in
penalties, including fines, confiscation of advertising income, orders to cease
dissemination of the advertisements and orders to publish an advertisement
correcting the misleading information. In circumstances involving serious
violations, the SAIC or its local branches may revoke violators’ licenses or
permits for their advertising business operations. Additionally, advertisers,
advertising agencies or advertising distributors may be subject to civil
liability if they infringe on the legal rights and interests of third parties in
the course of their advertising business.
Television Advertising
The PRC government also regulates
television advertising. The State Administration of Radio, Film, and
Television (the “SARFT”) promulgated the Administration of Advertisement
Broadcasting of Radio and Television on September 11, 2009 that became effective
on January 1, 2010 which has superseded the Interim Measures of Administration
of Advertisement Broadcasting of Radio and Television in 2003 that became
effective on January 1, 2004. This regulation is applicable to
advertisement broadcasting operations of all radio and television stations and
channels and contains many restrictions. The 2009 Administration of
Advertisement Broadcasting of Radio and Television limits the aggregate time for
broadcasting of advertisements to 12 minutes for every hour’s program by
television stations. Television stations may not interrupt regular
television programs for advertisements. Advertisements may only be shown
during normally scheduled breaks between programs. Advertisements must be
clearly distinguishable from other television programs and may not be broadcast
in the form of news reports or other similar forms. Advertisements for
certain products are further restricted. For example, advertisements for
alcohol may not be broadcast more than 12 times per day and only 2
advertisements may appear between the hours of 7:00 p.m. CST and 9:00 p.m. CST
on each channel. Each television channel must also broadcast public service
advertisements for no less than 3% of its aggregate available advertising
time.
The 2009 Administration of
Advertisement Broadcasting of Radio and Television also provides that
registration review and filing systems must be established and maintained for
all advertising businesses. Advertising fees must be reasonable and rates
and fee collection methods must be filed with the PRC Commodity Price
Administration and the SAIC. Under the Implementation Rule of Advertising
Industry Administration, or the Implementation Rule, promulgated by the SAIC, as
amended, the advertising agent fee may not be more than 15% of the advertising
fees. The advertising customer must provide relevant documents, including
certificates rendered by relevant supervisory administrations before we can
deliver or place its advertisements.
We assure that all of our
advertisements comply with all applicable laws, rules and regulations. Our
employees are trained to inspect advertising content for compliance with
relevant laws and regulations. We do not believe that advertisements containing
content subject to restriction or censorship comprise a material portion of the
advertisements in our business. In the event that any of the advertisements our
advertising customers or agencies provide to us or our affiliated entities, and
which we or our affiliated entities include in advertising, are not in
compliance with relevant PRC advertising laws, rules and regulations, or when
these advertisements have not received required approvals or do not comply with
content requirements, we will remove the advertisements as soon as we notice
such violations.
Limitations
on Foreign Ownership in the Advertising Industry
The main regulations governing foreign
ownership in the PRC advertising industry include:
|
·
|
The
Catalogue for Guiding Foreign Investment in Industry (as amended in
2007);
|
|
·
|
The
Measures on Administration for Foreign-invested Advertising Enterprises
(as amended in 2008); and
|
|
·
|
The
Notice Regarding Investment in the Advertising Enterprises by Foreign
Investors through Equity Acquisitions
(2006).
|
The above regulations require that a
foreign entity may invest directly in the PRC advertising industry only if it
has at least two years of direct operations in the advertising industry outside
of China. Since December 10, 2005, foreign investors have been
permitted to own directly a 100% interest in advertising companies in China, but
such foreign investors are required to be a company with advertising as its main
business and to have at least three years of operations outside of China. PRC
laws and regulations do not permit the transfer of any approvals, licenses or
permits, including business licenses containing a scope of business that permits
engaging in the advertising business.
The establishment of a foreign-invested
advertising enterprise, by means of either a new establishment or equity
acquisition of an existing domestic advertising company, is subject to
examination by the SAIC or its authorized branch at the provincial level and the
issuance of an Opinion on the Examination and Approval of the Foreign-invested
Advertising Enterprise Project. Upon obtaining such Opinion from the SAIC or its
relevant branch, an approval from the Ministry of Commerce or its competent
local counterparts is required before a foreign-invested advertising enterprise
may apply for its business license. In addition, if a foreign-invested
advertising enterprise intends to set up any branch, it must meet the
requirements that (i) its registered capital has been fully subscribed and
contributed and (ii) its annual advertising sales revenues are not less
than RMB 20 million.
Employment
laws
We are subject to laws and regulations
governing our relationship with our employees, including: wage and hour
requirements, working and safety conditions, and social insurance, housing funds
and other welfare. These include local labor laws and regulations, which
may require substantial resources for compliance.
China’s National Labor Law, which
became effective on January 1, 1995, and China’s National Labor Contract Law,
which became effective on January 1, 2008, permit workers in both state and
private enterprises in China to bargain collectively. The National Labor
Law and the National Labor Contract Law provide for collective contracts to be
developed through collaboration between the labor union (or worker
representatives in the absence of a union) and management that specify such
matters as working conditions, wage scales, and hours of work. The laws
also permit workers and employers in all types of enterprises to sign individual
contracts, which are to be drawn up in accordance with the collective
contract. The National Labor Contract Law has enhanced rights for the
nation’s workers, including permitting open-ended labor contracts and severance
payments. The legislation requires employers to provide written contracts
to their workers, restricts the use of temporary labor and makes it harder for
employers to lay off employees. It also requires that employees with
fixed-term contracts be entitled to an indefinite-term contract after a
fixed-term contract is renewed twice or the employee has worked for the employer
for a consecutive ten-year period.
Regulations
on Trademarks
Both the PRC Trademark Law, adopted in
1982 and revised in 1993 and 2001, and the Implementation Regulation of the PRC
Trademark Law, adopted in 2002, provide protection to the holders of registered
trademarks. The State Trademark Bureau, under the authority of the SAIC, handles
trademark registrations and grants rights of a term of 10 years in connection
with registered trademarks. License agreements with respect to registered
trademarks must be filed with the State Trademark Bureau.
Foreign
currency exchange
Under the PRC foreign currency exchange
regulations applicable to us, the Renminbi is convertible for current account
items, including the distribution of dividends, interest payments, trade and
service-related foreign exchange transactions. Conversion of Renminbi for
capital account items, such as direct investment, loan, security investment and
repatriation of investment, however, is still subject to the approval of the PRC
State Administration of Foreign Exchange, or SAFE. Foreign-invested
enterprises may only buy, sell and/or remit foreign currencies at those banks
authorized to conduct foreign exchange business after providing valid commercial
documents and, in the case of capital account item transactions, obtaining
approval from the SAFE. Capital investments by foreign-invested
enterprises outside of China are also subject to limitations, which include
approvals by the Ministry of Commerce (“MOFCOM”), SAFE and the State Reform and
Development Commission. We currently do not hedge our exposure to
fluctuations in currency exchange rates.
Dividend
distributions
Under applicable PRC regulations,
foreign-invested enterprises in China may pay dividends only out of their
accumulated profits, if any, determined in accordance with PRC accounting
standards and regulations. In addition, a foreign-invested enterprise in
China is required to set aside at least 10.0% of their after-tax profit based on
PRC accounting standards each year to its general reserves until the
accumulative amount of such reserves reach 50.0% of its registered
capital. These reserves are not distributable as cash dividends. The
board of directors of a foreign-invested enterprise has the discretion to
allocate a portion of its after-tax profits to staff welfare and bonus funds,
which may not be distributed to equity owners except in the event of
liquidation.
Properties
We lease our principal corporate office
located at Room 801, No. 7, Wenchanger Road, Jiangbei, Huizhou City, Guangdong
Province, China under a 2 year lease that expires on November 1, 2011.
Rental expenses under this lease total RMB322 (US$47) per month. We
are in the process of filing and registering this lease with the relevant
government authority in the PRC.
We lease office space at CD Media
Beijing’s registered office, Room 119, No. 12 North Shi Long Road, Meng Tou Gou
District, Beijing, pursuant to a lease that expires on October 25, 2010.
Rental expenses under this lease total RMB 5,000 (US$735) per month. We
are in the process of filing and registering this lease with the relevant
government authority in the PRC.
CD Media Beijing also leases
approximately 404.5 square meters of office space in Beijing for operations
pursuant to a lease that expires on April 2, 2011. Rental expenses under
this lease total RMB55,000 (US$8,088) per month. We are in the process of filing
and registering this lease with the relevant government authority in the
PRC.
Legal
Proceedings
We are not involved in any material
legal proceedings outside of the ordinary course of our
business.
MANAGEMENT
Executive
Officers, Directors and Key Employees
The
following individuals constitute our board of directors and executive management
as of the date of this prospectus.
Name
|
|
Age
|
|
Position
|
Li HuiHua
|
|
37
|
|
Chief Executive Office and Chairman of the Board
|
Zhang Le
|
|
25
|
|
Chief Financial Officer and Corporate Secretary
|
Fu HaiMing
|
|
35
|
|
Director
|
Li HuiHua has
been the Chief Executive Officer of the Company since April 2010 and Chief
Executive Officer of CD Media BVI since 2009. Ms. Li has also been a
director of CD Media BVI since March 2010. Ms. Li has also served as the
Chief
Executive Officer and as a
director of CD Media Beijing since April
2010.
From February 2003 to June 2009, Ms. Li was self-employed at a self-owned
electronic products business. From January 1998 to December 2002, Ms. Li was a
Financial Controller in the accounting and capital management department of
Huizhou Tongda Electronic Co., Ltd. From February 1994 to December 1997, Ms. Li
was an Accountant at Tuopu Technology Co., Ltd. (Huizhou). From July 1990
to October 1993 Ms. Li served as a Quality Assurance Supervisor at Zhongou
Electronic Co., Ltd. (Huizhou). Ms. Li received a degree in accounting from the
Accounting Department of Huizhou Business School in 1990.
Zhang Le has been the Chief
Financial Officer and Corporate Secretary of the Company since April 2010 and
has served as the Financial Manager of CD Media BVI since August 2008. Mr.
Zhang has also served as the Chief
Financial Officer and as a
director of CD Media Beijing since April
2010. From July 2007 to July 2008, Mr. Zhang served as an
accountant at CD Media BVI. From May 2005 to June 2007, Mr. Zhang served
as an accountant at Beijing Lindi European Construction Design Consulting
Company Limited. From August 2004 to August 2005, Mr. Zhang served as an
accountant at the Oriental Hospital of the Beijing Chinese Medicine
University. Mr. Zhang received a bachelor’s degree in Finance and
Accounting in 2007 from Beijing Lianhe College.
Fu HaiMing has served as a
director of the Company since April 2010 and the General Manager of CD Media BVI
since February 2007. Mr. Fu has also served as the Chief Operating Officer and as a
director of CD Media Beijing since April
2010. From March 2001 to December 2006, Mr. Fu served as the Vice
President of CD Media BVI. From March 2001 to December 2006, Mr. Fu served
as the Vice President of Business Expansion and Implementation of Beijing Future
Advertisement Company. Mr. Fu received a bachelor’s degree in mechanics
engineering from Neimonggu Mechanics University in 1999.
Family
Relationships
There are no family relationships among
any of the officers and directors.
Involvement
in Certain Legal Proceedings
There have been no events under any
bankruptcy act, no criminal proceedings and no judgments, injunctions, orders or
decrees material to the evaluation of the ability and integrity of any director,
executive officer, promoter or control person of the Company during the past ten
years.
The Company is not aware of any legal
proceedings in which any director, nominee, officer or affiliate of the Company,
any owner of record or beneficially of more than five percent of any class of
voting securities of the Company, or any associate of any such director,
nominee, officer, affiliate of the Company, or security holder is a party
adverse to the Company or any of its subsidiaries or has a material interest
adverse to the Company or any of its subsidiaries.
Board
of Directors and Committees
Our Board
of Directors does not maintain a separate audit, nominating or compensation
committee. Functions customarily performed by such committees are
performed by its Board of Directors as a whole. We are not required to
maintain such committees under the rules applicable to companies that do not
have securities listed or quoted on a national securities exchange or national
quotation system. We intend to create board committees, including an
independent audit committee, in the near future. If we are successful in
listing our common stock on either the NASDAQ Global Market or the NYSE Amex
Equities, we would be required to have, prior to listing, an independent audit
committee formed, in compliance with the requirements for listing on the NASDAQ
Global Market or the NYSE Amex Equities and in compliance with Rule 10A-3 of the
Securities Exchange Act of 1934, as amended.
Director
Independence
None of our directors are considered
independent directors under NASDAQ Marketplace Rules or the rules of the NYSE
Amex Equities, even though such definition does not currently apply to us
because we are not listed on the NASDAQ Global Market or the NYSE Amex
Equities.
Code
of Business Conduct and Ethics
On December 20, 2007, we adopted a
formal code of ethics statement for senior officers and directors (the “Code of
Ethics”) that is designed to deter wrongdoing and to promote ethical conduct and
full, fair, accurate, timely and understandable reports that the Company files
or submits to the Securities and Exchange Commission and others. A form of
the Code of Ethics is filed as Exhibit 14.1 to the Company’s annual report on
Form 10-K filed with the Securities and Exchange Commission on February 18,
2009. Requests for copies of the Code of Ethics should be sent in writing
to China Century Dragon Media, Inc., Attention: Secretary, Room 801, No. 7,
Wenchanger Road, Jiangbei, Huizhou City, Guangdong Province, China.
EXECUTIVE
COMPENSATION
Compensation
Discussion and Analysis
Compensation
Before the Share Exchange
Prior to the closing of the Share
Exchange on April 30, 2010, we were a “blank check” shell company named SRKP 25,
Inc. that was formed to investigate and acquire a target company or business
seeking the perceived advantages of being a publicly held corporation. The
only officers and directors of SRKP 25, Inc., Richard Rappaport and Anthony
Pintsopoulos, SRKP 25’s President and Chief Financial Officer, respectively, did
not receive any compensation or other perquisites for serving in such
capacities. Messrs. Rappaport and Pintsopoulos resigned from all of their
executive and director positions with SRKP 25 upon the closing of the Share
Exchange and are no longer employed by or affiliated with our
company.
Prior to the closing of the Share
Exchange, our current named executive officers were compensated by CD Media
Beijing until the closing of the Share Exchange, including for the year ended
December 31, 2009 and the period from January 1, 2010 to April 30, 2010.
The Chairman of the Board of CD Media Beijing, Li HuiHua, determined the
compensation for herself and the other executive officers of CD Media Beijing
that was earned in fiscal 2009 and the period from January 1, 2010 to April 30,
2010 after consulting with the board members of CD Media Beijing. In
addition, the Board of Directors of CD Media Beijing approved the
compensation. From January 1, 2010 to April 30, 2010 and during the fiscal
years of 2009, 2008 and 2007, the compensation for CD Media Beijing’s named
executive officers consisted solely of each executive officer’s salary and cash
bonus. The Board of Directors of CD Media Beijing believes that the
salaries paid to our executive officers during 2009 and the period from January
1, 2010 to April 30, 2010 are indicative of the objectives of its compensation
program and reflect the fair value of the services provided to CD Media Beijing,
as measured by the local market in China.
Compensation
After the Share Exchange
Upon the closing of the Share
Exchange, the executive officers of CD Media BVI were appointed as our executive
officers and we adopted the compensation policies of CD Media Beijing, as
modified for a company publicly reporting in the United States.
Compensation for our current executive officers is determined with the goal of
attracting and retaining high quality executive officers and encouraging them to
work as effectively as possible on our behalf. Compensation is designed to
reward executive officers for successfully meeting their individual functional
objectives and for their contributions to our overall development. For
these reasons, the elements of compensation of our executive officers are salary
and bonus. Salary is paid to cover an appropriate level of living expenses
for the executive officers and the bonus is paid to reward the executive officer
for individual and company achievement.
Salary is designed to attract, as
needed, individuals with the skills necessary for us to achieve our business
plan, to motivate those individuals, to reward those individuals fairly over
time, and to retain those individuals who continue to perform at or above the
levels that we expect. When setting and adjusting individual executive
salary levels, we consider the relevant established salary range, the named
executive officer’s responsibilities, experience, potential, individual
performance and contribution. We also consider other factors such as our
overall corporate budget for annual merit increases, unique skills, demand in
the labor market and succession planning.
We determine the levels of salary as
measured primarily by the local market in China. We determine market rate
by conducting a comparison with the local geographic area averages and industry
averages in China. In determining market rate, we review statistical data
collected and reported by the Beijing Labor Bureau which is published
monthly. The statistical data provides the high, median, low and average
compensation levels for various positions in various industry sectors. In
particular, we use the data for the advertising services sector as our benchmark
to determine compensation levels because we operate in Beijing as a provider of
advertising services. Our compensation levels are at roughly the
80th-90th
percentile of the compensation spectrum for the manufacturing
sector.
Corporate performance goals include
selling more advertising time. Additional key areas of corporate
performance taken into account in setting compensation policies and decisions
are cost control, profitability, and innovation. The key factors may vary
depending on which area of business a particular executive officer’s work is
focused. Individual performance goals include subjective evaluation, based
on an employee’s team-work, creativity and management capability, and objective
goals such as sales targets. As motivation to our management team, we
provide commission based bonuses to management personnel. We periodically
evaluate the performance of our management personnel and pay seasonal bonuses
three times per year and annual bonuses to each member of management in an
amount up to .3% of the sales revenues generated by such staff
member.
If we successfully complete our
proposed listing of our common stock on the NYSE Amex or NASDAQ, we may increase
the amount of our bonuses to management personnel if corporate and individual
performance goals are met. Generally, the amount of an annual bonus, when
awarded, will be equal to one month’s salary plus 5% to 25% of the individual's
annual salary. If the corporate and individual goals are fully met, the
bonus will be closer to the top end of the range. If the goals are only
partially met, the amount of the bonus will be closer to the bottom end of the
range. In no event will there be a bonus equal to more than one month's
salary if the corporate goals are not met by at least 50%.
Our board of directors intends to
establish a compensation committee in 2010 comprised of non-employee
directors. The compensation committee will perform, at least annually, a
strategic review of the compensation program for our executive officers to
determine whether it provides adequate incentives and motivation to our
executive officers and whether it adequately compensates our executive officers
relative to comparable officers in other companies with which we compete for
executives. Those companies may or may not be public companies or
companies located in the PRC or even, in all cases, companies in a similar
business. Prior to the formation of the compensation committee, Li HuiHua,
upon consulting with our board members, determined the compensation for our
current executive officers. In 2010, our compensation committee will
determine compensation levels for our executive officers. We have
established a compensation program for executive officers for 2010 that is
designed to attract, as needed, individuals with the skills necessary for us to
achieve our business plan, to motivate those individuals, to reward those
individuals fairly over time, and to retain those individuals who continue to
perform at or above the levels that we expect. If paid, bonuses for
executive officers in 2010 will be based on company and individual performance
factors, as described above.
If we successfully complete our
proposed listing on Nasdaq or NYSE Amex Equities in 2010, we intend to adjust
our compensation evaluations upwards in 2010, including through the payment of
bonuses. However, in such case, we do not intend to increase compensation
by more than 20%. We believe that adopting higher compensation in the
future may be based on the increased amount of responsibilities and the
expansion of our business to be assumed by each of the executive officers after
we become a publicly listed company.
We also intend to expand the scope of
our compensation, such as the possibility of granting options to executive
officers and tying compensation to predetermined performance goals. We
intend to adopt an equity incentive plan in the near future and issue
stock-based awards under the plan to aid our company’s long-term performance,
which we believe will create an ownership culture among our named executive
officers that fosters beneficial, long-term performance by our company. We
do not currently have a general equity grant policy with respect to the size and
terms of grants that we intend to make in the future, but we expect that our
compensation committee will evaluate our achievements for each fiscal year based
on performance factors and results of operations such as revenues generated,
cost of revenues, and net income.
Summary
Compensation Table
The following table sets forth
information concerning the compensation for the three fiscal years ended
December 31, 2009 of the principal executive officer and principal financial
officer. No other officer received annual compensation which exceeded
$100,000.
Name
and Position
|
|
Year
|
|
Salary
|
|
|
Bonus
|
|
|
Total
|
|
Li
HuiHua
|
|
2009
|
|
$ |
23,400 |
|
|
$ |
2,000 |
|
|
$ |
25,400 |
|
Chief
Executive Officer
|
|
2008
|
|
|
21,000 |
|
|
|
1,800 |
|
|
|
22,800 |
|
|
|
2007
|
|
|
18,000 |
|
|
|
1,500 |
|
|
|
19,500 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Zhang
Le
|
|
2009
|
|
$ |
15,000 |
|
|
$ |
1,250 |
|
|
$ |
16,250 |
|
Chief
Financial Officer
|
|
2008
|
|
|
12,000 |
|
|
|
1,000 |
|
|
|
13,000 |
|
|
|
2007
|
|
|
9,500 |
|
|
|
800 |
|
|
|
10,300 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Richard
Rappaport (1)
|
|
2009
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
Former
President
|
|
2008
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
and
Former Director
|
|
2007
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Anthony
Pintsopoulos (1)
|
|
2009
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
Former
Secretary, Former Chief
|
|
2008
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Financial
Officer, and Former
|
|
2007
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Director
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) Upon
the close of the Share Exchange on April 30, 2010, Messrs. Rappaport and
Pintsopoulos resigned from all positions with the Company, which they held from
the Company’s inception on December 17, 2007.
Grants
of Plan-Based Awards in 2009
There were no option grants in
2009.
Outstanding
Equity Awards at 2009 Fiscal Year End
There were no outstanding equity awards
in 2009.
Option
Exercises and Stock Vested in Fiscal 2009
There were no option exercises or stock
vested in 2009.
Pension
Benefits
There were no pension benefit plans in
effect in 2009.
Nonqualified
Defined Contribution and Other Nonqualified Deferred Compensation
Plans
There were no nonqualified defined
contribution or other nonqualified deferred compensation plans in effect in
2009.
Employment
Agreements
We have employment agreements with the
following persons and terms:
|
·
|
Li
HuiHua is paid a monthly salary of RMB 11,000 ($1,613) pursuant to a
two-year agreement that expires on March 17, 2011;
and
|
|
·
|
Zhang
Le is paid a monthly salary of RMB 4,500 ($658) pursuant to a two-year
agreement that expires on December 31,
2010.
|
Pursuant to each of the foregoing
person’s employment agreement with us, we may terminate the agreement without
notice or severance if, among other things, the executive materially breaches
our rules and regulations, is convicted of a criminal offense, commits series
dereliction of duty causing damages of over RMB50,000 (US$7,353) to us, or is
declared bankrupt. We may terminate the agreement upon thirty (30) days written
notice if the executive is unable to work due to illness or injury (not caused
by work) after completing medical treatment. The executive may terminate
the agreement without prior notice to us if, among other things, we do not
provide labor protection or conditions specified in the agreement, we do not pay
the executive’s compensation in full and on time, our regulations are not in
compliance with relevant PRC laws or we coerce the executive to enter into
changes to the agreement against his will. In addition, none of the
agreements provide for severance upon termination.
Director
Compensation
The following table shows information
regarding the compensation earned during the fiscal year ended December 31,
2009 by members of board of directors.
Name
|
|
Fees Earned
or Paid in
Cash
($) (1)
|
|
Stock
Awards
($)
|
|
Option
Awards
($)
|
|
Non-Equity
Incentive Plan
Compensation
($)
|
|
Change in
Pension Value
and
Nonqualified
Deferred
Compensation
Earnings
|
|
All Other
Compensation
($)
|
|
Total
($)
|
|
Li
HuiHua
|
|
|
-
|
|
-
|
|
|
-
|
|
-
|
|
|
-
|
|
-
|
|
|
-
|
|
Fu
HaiMing
|
|
|
-
|
|
-
|
|
|
-
|
|
-
|
|
|
-
|
|
-
|
|
|
-
|
|
We do not
currently have an established policy to provide compensation to members of our
Board of Directors for their services in that capacity. We intend to
develop such a policy in the near future.
Indemnification
of Directors and Executive Officers and Limitations of Liability
Under
Section 145 of the General Corporation Law of the State of Delaware, we can
indemnify our directors and officers against liabilities they may incur in such
capacities, including liabilities under the Securities Act of 1933, as amended
(the “Securities Act”). Our certificate of incorporation provides that, pursuant
to Delaware law, our directors shall not be liable for monetary damages for
breach of the directors’ fiduciary duty of care to us and our stockholders. This
provision in the certificate of incorporation does not eliminate the duty of
care, and in appropriate circumstances equitable remedies such as injunctive or
other forms of non-monetary relief will remain available under Delaware law. In
addition, each director will continue to be subject to liability for breach of
the director’s duty of loyalty to us or our stockholders, for acts or omissions
not in good faith or involving intentional misconduct or knowing violations of
the law, for actions leading to improper personal benefit to the director, and
for payment of dividends or approval of stock repurchases or redemptions that
are unlawful under Delaware law. The provision also does not affect a director’s
responsibilities under any other law, such as the federal securities laws or
state or federal environmental laws.
Our
bylaws provide for the indemnification of our directors to the fullest extent
permitted by the Delaware General Corporation Law. Our bylaws further provide
that our Board of Directors has discretion to indemnify our officers and other
employees. We are required to advance, prior to the final disposition of any
proceeding, promptly on request, all expenses incurred by any director or
executive officer in connection with that proceeding on receipt of an
undertaking by or on behalf of that director or executive officer to repay those
amounts if it should be determined ultimately that he or she is not entitled to
be indemnified under the bylaws or otherwise. We are not, however, required to
advance any expenses in connection with any proceeding if a determination is
reasonably and promptly made by our Board of Directors by a majority vote of a
quorum of disinterested Board members that (i) the party seeking an advance
acted in bad faith or deliberately breached his or her duty to us or our
stockholders and (ii) as a result of such actions by the party seeking an
advance, it is more likely than not that it will ultimately be determined that
such party is not entitled to indemnification pursuant to the applicable
sections of our bylaws.
We have
been advised that in the opinion of the Securities and Exchange Commission,
insofar as indemnification for liabilities arising under the Securities Act may
be permitted to our directors, officers and controlling persons pursuant to the
foregoing provisions, or otherwise, such indemnification is against public
policy as expressed in the Securities Act and is therefore unenforceable. In the
event a claim for indemnification against such liabilities (other than our
payment of expenses incurred or paid by our director, officer or controlling
person in the successful defense of any action, suit or proceeding) is asserted
by such director, officer or controlling person in connection with the
securities being registered, we will, unless in the opinion of our counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question of whether such indemnification by us is
against public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.
We may
enter into indemnification agreements with each of our directors and officers
that are, in some cases, broader than the specific indemnification provisions
permitted by Delaware law, and that may provide additional procedural
protection. As of the date of the Share Exchange, we have not entered into any
indemnification agreements with our directors or officers, but may choose to do
so in the future. Such indemnification agreements may require us, among other
things, to:
|
·
|
indemnify
officers and directors against certain liabilities that may arise because
of their status as officers or
directors;
|
|
·
|
advance
expenses, as incurred, to officers and directors in connection with a
legal proceeding, subject to limited exceptions;
or
|
|
·
|
obtain
directors’ and officers’ insurance.
|
At
present, there is no pending litigation or proceeding involving any of our
directors, officers or employees in which indemnification is sought, nor are we
aware of any threatened litigation that may result in claims for
indemnification.
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS
CD
Media BVI
CD Media BVI, CD Media Huizhou and CD
Media HK, which are either directly or indirectly wholly-owned subsidiaries of
the Company, and CD Media Beijing, which is controlled by CD Media Huizhou
through a series of contractual arrangements, each have interlocking executive
and director positions with us and with each other.
Share
Exchange
On April 30, 2010, SRKP 25 completed
the Share Exchange with CD Media BVI, the shareholders of CD Media BVI, CD Media
Huizhou and CD Media Beijing. At the closing, CD Media BVI became a
wholly-owned subsidiary of SRKP 25 and 100% of the issued and outstanding
securities of CD Media BVI were exchanged for securities of SRKP 25. An
aggregate of 19,100,000 shares of common stock were issued to the shareholders
of CD Media BVI and their designees. As of the close of the Share
Exchange, the former shareholders of CD Media BVI owned approximately 75.5% of
the issued and outstanding stock of SRKP 25. Prior to the closing of the
Share Exchange and the closing of the Private Placement, the stockholders of
SRKP 25 agreed to the cancellation of an aggregate of 4,450,390 shares and
5,677,057 warrants to purchase shares of common stock held by them such that the
original stockholders of SRKP 25 held 2,646,000 shares of common stock and
warrants to purchase 1,419,333 shares of common stock immediately after the
Share Exchange and Private Placement. The warrants are currently
exercisable at an exercise price of $0.0001 per share and expire on April 30,
2015. The number of shares and warrants cancelled was determined based on
negotiations with the security holders of SRKP 25, Inc. and CD Media BVI.
As indicated in the Share Exchange Agreement, the parties to the transaction
acknowledged that a conflict of interest existed with respect to the
negotiations for the terms of the Share Exchange due to, among other factors,
the fact that WestPark Capital, Inc. (“WestPark Capital”) was advising CD Media
BVI in the transaction. Under these circumstances, the shareholders of CD
Media BVI and the stockholders of SRKP 25 negotiated an estimated value of CD
Media BVI and its subsidiaries, an estimated value of the shell company (based
on similar recent public shell transactions), and the mutually desired
capitalization of the company resulting from the Share Exchange. With respect to
the determination of the amounts of shares and warrants cancelled, the value of
the shell company was derived primarily from its utility as a public company
platform, including its good corporate standing and its timely public reporting
status, which was expected to allow us to list our stock on a national
securities exchange and raise capital at an appropriate price per share; the
services provided by WestPark Capital were not a consideration in determining
this aspect of the transaction. Under these circumstances and based on
these factors, the shareholders of CD Media BVI and the stockholders of SRKP 25
agreed upon the amount of shares and warrants to be cancelled.
The Board resigned in full and
appointed Li Hui Hua and Fu HaiMing to the board of directors of our company,
with Li HuiHua serving as Chairman. The Board also appointed Li HuiHua as
our Chief Executive Officer and Zhang Le as our Chief Financial Officer and
Corporate Secretary. Each of these executives and directors were executives and
directors of CD Media BVI and/or its subsidiaries. In addition, we paid a
$215,750 success fee to WestPark Capital for services provided in connection
with the Share Exchange, including coordinating the share exchange transaction
process, interacting with principals of the shell corporation and negotiating
the definitive purchase agreement for the shell, conducting a financial analysis
of CD Media BVI, conducting due diligence on CD Media BVI and its subsidiaries
and managing the interrelationships of legal and accounting
activities.
Private
Placement
Richard Rappaport, the President of
SRKP 25 and one of its controlling stockholders prior to the Share Exchange,
indirectly holds a 100% interest in WestPark Capital the placement agent for the
equity financing of approximately $5.35 million conducted by us on the close of
the Share Exchange.
Anthony C. Pintsopoulos, an officer,
director and significant stockholder of SRKP 25 prior to the Share Exchange, is
the President and Treasurer of the placement agent. Kevin DePrimio, Jason
Stern and Robert Schultz, each employees of WestPark Capital, are also
stockholders of SRKP 25. In addition, Richard Rappaport is the sole owner
of the membership interests of the parent of the placement agent. Each of
Messrs. Rappaport and Pintsopoulos resigned from all of their executive and
director positions with the Company upon the closing of the Share
Exchange. We paid WestPark Capital a commission equal to 10.0% with a
non-accountable fee of 4.0% of the gross proceeds from the Private
Placement. We are also retaining WestPark Capital for a period of five
months following the closing of the Private Placement to provide us with
financial consulting services for which we will pay WestPark Capital $4,000 per
month. Out of the proceeds of the Private Placement, we paid $300,000 to
Keen Dragon Group Limited, a third party unaffiliated with CD Media BVI, the
Company, or WestPark Capital for services as an advisor to the Company,
including assisting in preparations for the Share Exchange and the Company’s
listing of securities in the United States.
Each of Messrs. Rappaport and
Pintsopoulos may be considered a promoter of our company prior to the Share
Exchange. In addition to the director and executive officer positions that
each held with our company prior to the Share Exchange, each currently holds
director and executive officer positions with SRKP 2, Inc., SRKP 3, Inc., SRKP
5, Inc., SRKP 10, Inc., SRKP 12, Inc., SRKP 14, Inc., SRKP 15, Inc., SRKP 16,
Inc., SRKP 20, Inc., SRKP 23, Inc., SRKP 24, Inc., SRKP 26, Inc., SRKP 27, Inc.,
SRKP 28, Inc., SRKP 29, Inc., WRASP 30, Inc., WRASP 31, Inc. and WRASP 32, Inc.,
all of which are publicly-reporting, blank check and non-trading shell
companies.
WestPark
Capital, Inc.
WestPark
Capital is the Underwriter in this offering. Subject to the terms and
conditions of the underwriting agreement dated [_________], 2010, WestPark
Capital has agreed to purchase from us the number of shares set forth in the
“Underwriting” section of this prospectus at the public offering price less the
underwriting discounts and commissions indicated in the “Underwriting”
section. In addition, we have agreed to pay the Underwriter an aggregate
non-accountable expense allowance of 3.0% of the gross proceeds of this
offering. Based on the mid-range point of the per share offering price of
$3.50 and the sale by us of 2,500,000 shares of common stock offered in this
offering, we will pay the Underwriter a non-accountable fee equal to
approximately $262,500. The Underwriter will also receive warrants to
purchase a number of share equal to 5% of the shares of our common stock sold in
connection with this offering excluding the shares sold in the over-allotment
option. The warrants will be exercisable at a per share price equal to
120% of the offering price of this offering.
The table below identifies all the
benefits that WestPark Capital and its affiliates have received and will receive
in connection with the Share Exchange, the Private Placement and this
offering.
|
|
$
|
|
Other
|
Share
Exchange
|
|
|
235,750 |
(1) |
Registration
rights for an aggregate of 2,244,616 shares and 1,262,178
shares underlying warrants (2)
|
Private
Placement
|
|
|
789,039 |
(3) |
|
Public
Offering
|
|
[______]
|
(4) |
Warrants
to purchase [________] shares of common stock at an exercise price of
$4.80 per
share
|
(1)
Includes a success fee of $215,750 paid to WestPark Capital for services
provided in connection with the Share Exchange and $20,000 for consulting fees
payable to WestPark by the Company for five months of consulting services to be
provided to the Company by WestPark.
(2) Pursuant
to a Registration Rights Agreement executed in connection with the closing of
the Share Exchange, affiliates of WestPark Capital received registration rights
for an aggregate of 2,244,616 shares and 1,262,178 shares underlying
warrants. The shares will be registered in a registration statement that
we intend to file on or about November 24, 2010, which is 10 days after the end
of the six-month period that immediately follows the date on which we filed the
registration statement of which this prospectus is a part.
(3)
Represents commissions of $535,028, a non-accountable expense allowance of
$214,011, and a reimbursement of WestPark Capital’s fees for legal counsel of
$40,000.
(4)
Represents underwriting discounts and commissions of $[__], plus a
non-accountable fee of $[_____] and a reimbursement of $40,000 for WestPark
Capital’s legal fees.
The
Underwriter has a 45-day option to purchase up to 375,000 additional shares of
common stock at the public offering price solely to cover over-allotments, if
any, if the Underwriter sells more than 2,500,000 shares of common stock in this
offering. The Underwriter agreed to purchase 70% of the over-allotment shares
from the selling stockholders identified in this prospectus and the remaining
shares from us. We will not receive any proceeds from the sale of the
shares, if any, by the selling stockholders. If the Underwriter exercises
this option in full, the total underwriting discounts and commissions will
be $[__], and total proceeds, before expenses, to the selling stockholders will
be $[__] and the total proceeds to us, before expenses, from the over-allotment
option exercise will be $[__].
See
“Underwriting” on page 90 of this prospectus for more information.
Policy
for Approval of Related Party Transactions
We do not currently have a formal
related party approval policy for review and approval of transactions required
to be disclosed pursuant to Item 404 (a) of Regulation S-K. We expect our board
to adopt such a policy in the near future.
BENEFICIAL
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS, MANAGEMENT,
AND
SELLING STOCKHOLDERS
Beneficial
ownership is determined in accordance with the rules of the SEC. In computing
the number of shares beneficially owned by a person and the percentage of
ownership of that person, shares of common stock subject to options and warrants
held by that person that are currently exercisable or become exercisable within
60 days of the date of this prospectus are deemed outstanding even if they have
not actually been exercised. Those shares, however, are not deemed outstanding
for the purpose of computing the percentage ownership of any other
person.
The
following table sets forth certain information with respect to beneficial
ownership of our common stock based on issued and outstanding shares of common
stock before and after the offering, by:
|
·
|
Each
person known to be the beneficial owner of 5% or more of our outstanding
common stock;
|
|
·
|
Each
executive officer;
|
|
·
|
All
of the executive officers and directors as a group;
and
|
|
·
|
Each
selling stockholder.
|
The
number of shares of our common stock outstanding as of the date of this
prospectus, excludes up to 2,500,000 shares of our common stock to be offered by
us in a firm commitment public offering concurrently herewith. Unless
otherwise indicated, the persons and entities named in the table have sole
voting and sole investment power with respect to the shares set forth opposite
the stockholder’s name, subject to community property laws, where
applicable. Unless otherwise indicated, the address of each beneficial
owner listed in the table is c/o China Century Dragon Media, Inc., Room 801, No.
7, Wenchanger Road, Jiangbei, Huizhou City, Guangdong Province,
China.
|
|
|
|
Before the Offering
|
|
|
Number of
|
|
|
After the Offering
|
|
of Beneficial Owner
|
|
Title
|
|
Stock
|
|
|
Class(1)
|
|
|
Offered(2)
|
|
|
Stock
|
|
|
Class(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Directors
and Executive Officers
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Li
HuiHua
|
|
Chief
Executive Officer and Chairman of the Board
|
|
|
6,261,500 |
|
|
|
24.7 |
% |
|
|
- |
|
|
|
6,261,500 |
|
|
|
22.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Zhang
Le
|
|
Chief
Financial Officer and Corporate Secretary
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fu
HaiMing
|
|
Director
|
|
|
700,000 |
|
|
|
2.8 |
% |
|
|
- |
|
|
|
700,000 |
|
|
|
2.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Officers
and Directors as a Group (total of 3 persons)
|
|
|
|
|
6,961,500 |
|
|
|
27.5 |
% |
|
|
- |
|
|
|
6,961,500 |
|
|
|
25.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5%
or More Owners
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Richard
A. Rappaport(4)
1900
Avenue of the Stars, Suite 310
Los
Angeles, CA 90067
|
|
|
|
|
3,043,916 |
|
|
|
11.5 |
% |
|
|
- |
|
|
|
3,043,916 |
|
|
|
10.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
WestPark
Capital Financial Services, LLC(5)
1900
Avenue of the Stars, Suite 310
Los
Angeles, CA 90067
|
|
|
|
|
2,356,611 |
|
|
|
9.0 |
% |
|
|
- |
|
|
|
2,356,611 |
|
|
|
8.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Zhang
HaiLan
|
|
|
|
|
2,000,000 |
|
|
|
7.9 |
% |
|
|
- |
|
|
|
2,000,000 |
|
|
|
7.2 |
% |
(1)
|
Based
on 25,312,838 shares of common stock issued and outstanding as of June 25,
2010.
|
(2)
|
Up
to 375,000 shares may be sold by the selling stockholders and us if the
Underwriter
exercises its over-allotment option. See “Selling Stockholders”
table that follows.
|
(3)
|
Based
on 27,812,838 shares of common stock, which consists of (i) 25,312,838
shares of common stock issued and outstanding as of May 13, 2010, and (ii)
2,500,000 shares of common stock issued in the public offering. This
amount (i) excludes the 112,500 shares of our common stock that we may
issue upon the Underwriter’s over-allotment option exercise, (ii) excludes
1,419,333 shares of common stock underlying warrants that are exercisable
at $0.0001 per share; (iii) excludes 125,000 shares of common stock
underlying warrants that will be issued to the Underwriter upon the
completion of this offering, and (iv) is not affected by the 262,500
shares that the Underwriter may be purchased from selling stockholders
named below.
|
(4)
|
Richard
A. Rappaport served as President and director of the Company prior to the
Share Exchange. Includes 312,479 shares of common stock and a
warrant to purchase 122,346 shares of common stock owned by Mr.
Rappaport. Also including 90,720 shares and warrants to purchase
35,520 shares of common stock owned by each of the Amanda Rappaport Trust
and the Kailey Rappaport Trust, of which Mr. Rappaport serves as the
trustee, and 1,418,057 shares and a warrant to purchase 938,554 shares of
common stock owned by WestPark Capital Financial Services, LLC, of which
Mr. Rappaport is CEO and Chairman. Mr. Rappaport may be deemed the
indirect beneficial owner of these securities and disclaims beneficial
ownership of the securities except to of his pecuniary interest in the
securities.
|
(5)
|
Consists
of 1,418,057 shares and a warrant to purchase 938,554 shares owned by
WestPark Capital Financial Services, LLC, of which Mr. Rappaport is CEO
and Chairman. Mr. Rappaport may be deemed the indirect beneficial owner of
these securities and disclaims beneficial ownership of the securities
except to the extent of his pecuniary interest in the
securities.
|
Selling
Stockholders
The
Underwriter has a 45-day option to purchase up to 375,000 additional shares of
common stock at the public offering price solely to cover over-allotments, if
any, if the Underwriter sells more than 2,500,000 shares of common stock in this
offering (the “Over-allotment Shares”). The Underwriter agreed to purchase
up to 70% of the Over-allotment Shares, or 262,500 shares, from the selling
stockholders identified in this prospectus and the remaining 30%, or 112,500
shares, will be purchased from us. We will not receive any proceeds from
the sale of the shares, if any, by the selling stockholders. The selling
stockholders acquired their shares in the private placement that we conducted on
April 30, 2010 pursuant to which we sold we sold an aggregate of 3,566,838
shares of common stock for total gross proceeds of $5.35 million. If any
of the stockholders that participated in the private placement elect not to
participate as a selling stockholder for the Over-allotment Shares, we will
cover such sale of shares to the Underwriter.
Except as
indicated below, no selling stockholder is the beneficial owner of any
additional shares of common stock or other equity securities issued by us or any
securities convertible into, or exercisable or exchangeable for, our equity
securities. Except as indicated below, no selling security holder is a
registered broker-dealer or an affiliate of a broker-dealer.
Except as
described below, none of the selling stockholders, to our knowledge, has had a
material relationship with our company other than as a stockholder at any time
within the past three years.
|
|
Beneficial Ownership
|
|
|
|
|
|
Beneficial Ownership
After the Offering
|
|
Name of Selling Stockholder
|
|
|
|
|
|
|
|
Number of
Shares
Being
Offered(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DESCRIPTION
OF SECURITIES
Common
Stock
We are authorized to issue 100,000,000
shares of common stock, $0.0001 par value per share. Prior to the Share
Exchange and Private Placement, the stockholders of SRKP 25 held an aggregate of
7,096,390 shares, and an aggregate of 4,450,390 shares were cancelled in
conjunction with the closing of the Share Exchange. There are currently
25,312,838 shares of common stock issued and outstanding. Each outstanding
share of common stock is entitled to one vote, either in person or by proxy, on
all matters that may be voted upon by their holders at meetings of the
stockholders.
Holders of our common
stock:
|
(i)
|
have
equal ratable rights to dividends from funds legally available therefore,
if declared by our Board of
Directors;
|
|
(ii)
|
are
entitled to share ratably in all of the Company’s assets available for
distribution to holders of common stock upon our liquidation, dissolution
or winding up;
|
|
(iii)
|
do
not have preemptive, subscription or conversion rights or redemption or
sinking fund provisions; and
|
|
(iv)
|
are
entitled to one non-cumulative vote per share on all matters on which
stockholders may vote at all meetings of our
stockholders.
|
The holders of shares of our common
stock do not have cumulative voting rights, which means that the holders of more
than fifty percent (50%) of outstanding shares voting for the election of
directors can elect all of our directors if they so choose and, in such event,
the holders of the remaining shares will not be able to elect any of our
directors.
The former shareholders of CD Media BVI
and their designees own approximately 75.5% of the outstanding shares of our
common stock. Accordingly, these stockholders are in a position to control
all of our affairs.
Preferred
Stock
We may
issue up to 10,000,000 shares of our preferred stock, par value $0.0001 per
share, from time to time in one or more series. No shares of Preferred Stock
have been issued.
Our Board
of Directors, without further approval of our stockholders, is authorized to fix
the dividend rights and terms, conversion rights, voting rights, redemption
rights, liquidation preferences and other rights and restrictions relating to
any series. Issuances of shares of preferred stock, while providing flexibility
in connection with possible financings, acquisitions and other corporate
purposes, could, among other things, adversely affect the voting power of the
holders of our common stock and prior series of preferred stock then
outstanding.
Warrants
Prior to
the Share Exchange and Private Placement, the stockholders of SRKP 25 held an
aggregate of 7,096,390 warrants to purchase shares of our common stock, and an
aggregate of 5,677,057 warrants were cancelled in conjunction with the closing
of the Share Exchange. As of the date of this prospectus, the stockholders
held an aggregate of 1,419,333 warrants with an exercise price of $0.0001.
The warrants are currently exercisable. According to the terms of the warrant
agreement, the warrants expire on the earlier of December 17, 2017 or five years
from the date we consummate a merger or other business combination with an
operating business or any other event pursuant to which we cease to be a “shell
company,” as defined by Rule 12b-2 under the Securities Exchange Act of 1934 and
a “blank check company,” as defined by Rule 419 of the Securities Act of
1933. As a result of the close of the Share Exchange on April 30, 2010,
the warrants will expire on April 30, 2015.
In addition, we plan to issue a warrant
to the Underwriter as
partial compensation for underwriting services in connection with this
offering. The Underwriter will be able to
purchase up to 125,000 shares of common stock at an exercise price equal to 120%
of the per share offering price of our shares of common stock in this
offering. The warrants will have a term of five years. The warrants
will be subject to standard anti-dilution adjustments for stock splits and
similar transactions, and will become exercisable 180 days after the date of
this prospectus and expire five years from the effective date of the
registration statement of which this prospectus forms a part.
Market
Price of Our Common Stock
The
shares of our common stock are not currently listed or quoted for trading on any
national securities exchange or national quotation system. We intend to apply to
list our common stock on either the NASDAQ Global Market or the NYSE Amex
Equities. If and when our common stock is listed or quoted for trading,
the price of our common stock will likely fluctuate in the future. The stock
market in general has experienced extreme stock price fluctuations in the past
few years. In some cases, these fluctuations have been unrelated to the
operating performance of the affected companies. Many companies have experienced
dramatic volatility in the market prices of their common stock. We believe that
a number of factors, both within and outside our control, could cause the price
of our common stock to fluctuate, perhaps substantially. Factors such as the
following could have a significant adverse impact on the market price of our
common stock:
|
·
|
Our
financial position and results of
operations;
|
|
·
|
Our
ability to obtain additional financing and, if available, the terms and
conditions of the financing;
|
|
·
|
Announcements
of innovations or new services by us or our
competitors;
|
|
·
|
Federal
and state regulatory actions and the impact of such requirements on our
business;
|
|
·
|
The
commencement of litigation against
us;
|
|
·
|
Changes
in estimates of our performance by any securities
analysts;
|
|
·
|
The
issuance of new equity securities pursuant to a future offering or
acquisition;
|
|
·
|
Competitive
developments, including announcements by competitors of new services or
significant contracts, acquisitions, strategic partnerships, joint
ventures or capital commitments;
|
|
·
|
Period-to-period
fluctuations in our operating
results;
|
|
·
|
Investor
perceptions of us; and
|
|
·
|
General
economic and other national
conditions.
|
Delaware
Anti-Takeover Law and Charter Bylaws Provisions
We are
subject to Section 203 of the Delaware General Corporation Law. This
provision generally prohibits a Delaware corporation from engaging in any
business combination with any interested stockholder for a period of three years
following the date the stockholder became an interested stockholder,
unless:
|
·
|
prior
to such date, the Board of Directors approved either the business
combination or the transaction that resulted in the stockholder becoming
an interested stockholder;
|
|
·
|
upon
consummation of the transaction that resulted in the stockholder becoming
an interested stockholder, the interested stockholder owned at least 85%
of the voting stock of the corporation outstanding at the time the
transaction commenced, excluding for purposes of determining the number of
shares outstanding those shares owned by persons who are directors and
also officers and by employee stock plans in which employee participants
do not have the right to determine confidentially whether shares held
subject to the plan will be tendered in a tender or exchange offer;
or
|
|
·
|
on
or subsequent to such date, the business combination is approved by the
Board of Directors and authorized at an annual meeting or special meeting
of stockholders and not by written consent, by the affirmative vote of at
least 66 2/3% of the outstanding voting stock that is not owned by the
interested stockholder.
|
Section
203 defines a business combination to include:
|
·
|
any
merger or consolidation involving the corporation and the interested
stockholder;
|
|
·
|
any
sale, transfer, pledge or other disposition of 10% or more of the assets
of the corporation involving the interested
stockholder;
|
|
·
|
subject
to certain exceptions, any transaction that results in the issuance or
transfer by the corporation of any stock of the corporation to the
interested stockholder;
|
|
·
|
any
transaction involving the corporation that has the effect of increasing
the proportionate share of the stock of any class or series of the
corporation beneficially owned by the interested stockholder;
or
|
|
·
|
the
receipt by the interested stockholder of the benefit of any loans,
advances, guarantees, pledges or other financial benefits provided by or
through the corporation.
|
In
general, Section 203 defines an “interested stockholder” as any entity or person
beneficially owning 15% or more of the outstanding voting stock of a
corporation, or an affiliate or associate of the corporation and was the owner
of 15% or more of the outstanding voting stock of a corporation at any time
within three years prior to the time of determination of interested stockholder
status; and any entity or person affiliated with or controlling or controlled by
such entity or person.
Our
certificate of incorporation and bylaws contain provisions that could have the
effect of discouraging potential acquisition proposals or making a tender offer
or delaying or preventing a change in control of our company, including changes
a stockholder might consider favorable. In particular, our certificate of
incorporation and bylaws, as applicable, among other things, will:
|
·
|
provide
our board of directors with the ability to alter our bylaws without
stockholder approval; and
|
|
·
|
provide
that vacancies on our board of directors may be filled by a majority of
directors in office, although less than a
quorum.
|
Such
provisions may have the effect of discouraging a third-party from acquiring us,
even if doing so would be beneficial to our stockholders. These provisions
are intended to enhance the likelihood of continuity and stability in the
composition of our board of directors and in the policies formulated by them,
and to discourage some types of transactions that may involve an actual or
threatened change in control of our company. These provisions are designed
to reduce our vulnerability to an unsolicited acquisition proposal and to
discourage some tactics that may be used in proxy fights. We believe that
the benefits of increased protection of our potential ability to negotiate with
the proponent of an unfriendly or unsolicited proposal to acquire or restructure
our company outweigh the disadvantages of discouraging such proposals because,
among other things, negotiation of such proposals could result in an improvement
of their terms.
However,
these provisions could have the effect of discouraging others from making tender
offers for our shares that could result from actual or rumored takeover
attempts. These provisions also may have the effect of preventing changes
in our management.
Transfer
Agent
The
transfer agent and registrar for our common stock is Corporate Stock Transfer,
Inc.
Listing
We expect
to apply to list our common stock on either the NASDAQ Global Market or the NYSE
Amex Equities under the symbol “[___].” If we fail to obtain a
listing on either of these exchanges, we will not complete this
offering.
SHARES
ELIGIBLE FOR FUTURE SALE
Prior to
this offering, there has been no public market for our common stock. Future
sales of substantial amounts of our common stock in the public market could
adversely affect market prices. Upon completion of this offering, we will have
outstanding an aggregate of 27,812,838 shares of common stock, assuming no
exercise of the Underwriter’s over-allotment
option. The 2,500,000 shares sold in this offering, in addition to the
3,566,838 shares of our common stock that we are concurrently registering under
a separate prospectus for resale by the selling stockholders named under such
prospectus, will be freely tradable without restriction or further registration
under the Securities Act, except that any shares purchased by our “affiliates,”
as that term is defined in Rule 144 of the Securities Act, may generally only be
sold in compliance with the limitations of Rule 144 described
below.
All other
outstanding shares not sold in this offering will be deemed “restricted
securities” as defined under Rule 144. Restricted securities may be sold in the
public market only if registered or if they qualify for an exemption from
registration under Rule 144 promulgated under the Securities Act, which rules
are summarized below. Our current stockholders will not be eligible to utilize
Rule 144 until May 6, 2011, at the earliest, which is 12 months from the date we
filed our Form 10 information, as required under Rule 144. Subject to the
lock-up agreements described below and the provisions of Rule 144, additional
shares will be available for sale in the public market as follows (excluding
1,419,333 shares of common stock underlying previously issued warrants that are
exercisable at $0.0001 per share and up to 125,000 shares of common stock that
may underlie the Underwriter’s
warrants).
Approximate Number of
Shares Eligible for
Future Sale
|
|
|
2,500,000
|
|
After
the date of this prospectus, these shares sold in this offering, excluding
the 375,000 additional shares that the Underwriter has a 45-day
option to purchase from us and the selling stockholders identified in this
prospectus will be freely tradeable.
|
|
|
|
3,566,838
|
|
After
the date of this prospectus, these shares will have been registered under
a separate prospectus (“Resale Prospectus”) and will be freely tradable by
selling stockholders listed in the Resale Prospectus, subject to the
lock-up arrangement described below. These shares consist of all of
the shares of common stock registered under the Resale Prospectus.
The selling stockholders have agreed that (i) if this offering is for
$10 million or more, then the selling stockholders would not be able
to sell or transfer their shares until at least six months after this
offering’s completion, and (ii) if this offering is for less than
$10 million, then one-tenth of the selling stockholders’ shares would
be released from the lock-up restrictions ninety days after this offering
and there would be a pro
rata release of the shares thereafter every 30 days over the
following nine months. WestPark Capital, in its discretion, may also
release some or all the shares from the lock-up restrictions
earlier. We currently intend this offering to be in an amount less
than $10 million. However, there can be no assurance of the actual size of
this offering.
|
|
|
|
2,646,000
|
|
Subject
to a lock-up arrangement described below, these shares, which were held by
our stockholders prior to the Share Exchange (the “Existing Security
holders”), will be freely tradable after the Securities and Exchange
Commission declares effective the registration statement that we intend to
file on or about November 24, 2010, which is 10 days after the end of the
six-month period that immediately follows the date on which we filed the
registration statement of which this prospectus is a part. Also to
be registered under the registration statement is 1,419,333 shares of
common stock underlying warrants that have been previously issued to the
Existing Security holders, which are currently exercisable at $0.0001 per
share. The Existing Security holders have agreed that they will not
sell any of their shares subject to the same restrictions as that of the
selling stockholders, as described above.
|
|
|
|
19,100,000
|
|
On
May 6, 2011, which is twelve months after the filing of a current report
on Form 8-K reporting the closing of the share exchange transaction, these
shares, which were issued in connection with the share exchange
transaction, may be sold under and subject to Rule 144. However, all
of the holders of these shares have agreed with the Underwriter not to
directly or indirectly sell, offer, contract or grant any option to sell,
pledge, transfer (excluding intra-family transfers, transfers to a trust
for estate planning purposes or to beneficiaries of officers, directors
and shareholders upon their death), or otherwise dispose of or
enter into any transaction which may result in the disposition of any
shares of our common stock or securities convertible into, exchangeable or
exercisable for any shares of our common stock, without
the prior written consent of the Underwriter, for a period
of 24 months after the date of this
prospectus.
|
Rule
144
In
general, under Rule 144 a person, or persons whose shares are aggregated, who is
not deemed to have been one of our affiliates at any time during the 90 days
preceding a sale and who has beneficially owned shares of our common stock for
at least nine months, including the holding period of any prior owner, except if
the prior owner was one of our affiliates, would be entitled to sell all of
their shares, provided the availability of current public information about our
company.
Sales
under Rule 144 may also subject to manner of sale provisions and notice
requirements and to the availability of current public information about our
company. Any substantial sale of common stock pursuant to any resale
registration statement or Rule 144 may have an adverse effect on the market
price of our common stock by creating an excessive supply.
Because
we were a shell company with no operations prior to the close of the Share
Exchange, none of our shares of common stock may not be sold under Rule 144
until May 6, 2011, which is 12 months after the filing of a current report on
Form 8-K reporting the closing of the Share Exchange.
Lock-Up Agreements and
Registration
The
investors in our Private Placement, in which we sold 3,566,838 shares of common
stock, entered into lock-up agreements pursuant to which they agreed that (i) if
this offering is for $10 million or more, then the investors would not be
able to sell or transfer their shares until at least six months after this
offering’s completion, and (ii) if this offering is for less than
$10 million, then one-tenth of the investors’ shares would be released from
the lock-up restrictions ninety days after the offering and there would be a
pro rata release of the
shares thereafter every 30 days over the following nine months. WestPark
Capital, Inc., in its discretion, may also release some or all the shares from
the lock-up restrictions earlier. We currently intend this offering to be
in an amount less than $10 million. However, there can be no assurance of the
actual size of this offering.
Notwithstanding
the foregoing, such investors must provide written confirmation to WestPark
Capital and us (the “Confirmations”) that he, she or it (i) is and has been in
compliance with any and all state and federal securities and other laws, statues
and regulations regarding his, her or its ownership and/or any sale, transfer or
hypothecation of shares of our common stock including but not limited to
those rules and regulations promulgated by the SEC, FINRA and any exchange on
which the our common stock is listed, and those of federal and state governments
and other agencies such as improper short selling of our common stock and
failure to properly file all documents required by the SEC or otherwise and (ii)
does not wish to have the shares subject to partial release to continue to bear
a lock-up legend, failure to provide such written confirmation being sufficient
grounds to allow the placement agent, in its sole discretion, to disallow the
automatic release of such shares until the expiration in totality of the
referenced lock-up. Subject to the lock-up agreement, the shares will be
freely tradable upon effectiveness of the registration statement that we filed
to register the investors’ shares.
We
have agreed to register 2,646,000 shares of common stock and the 1,419,333
shares of common stock underlying the warrants held by our stockholders
immediately prior to the Share Exchange (the “Existing Security holders”). The
shares will be included in a registration statement that we agreed to file on or
about November 24, 2010, which is 10 days after the end of the six-month period
that immediately follows the date on which we filed the registration statement
of which this prospectus is a part. All of the shares included in an effective
registration statement may be freely sold and transferred, subject to a lock-up
agreement pursuant to which the Existing Security holders agreed to be subject
to the lock up restrictions that the selling stockholders are subject, as
described above.
We have
agreed with the Underwriter that we will not,
without the prior consent of the Underwriter, directly or
indirectly sell, offer, contract or grant any option to sell, pledge, transfer,
or otherwise dispose of or enter into any transaction which may result in the
disposition of any shares of our common stock or securities convertible into,
exchangeable or exercisable for any shares of our common stock (excluding the
exercise of certain warrants and/or options currently outstanding and
exercisable) for a period of 24 months after the date of this
prospectus.
In
addition, each of our executive officers and directors, in addition to all of
the stockholders that received shares issued in the Share Exchange holding an
aggregate of 19,100,000 shares of common stock, have agreed with the Underwriter not to directly or
indirectly sell, offer, contract or grant any option to sell, pledge, transfer
(excluding intra-family transfers, transfers to a trust for estate planning
purposes or to beneficiaries of officers, directors and stockholders upon their
death), or otherwise dispose of or enter into any transaction which may result
in the disposition of any shares of our common stock or securities convertible
into, exchangeable or exercisable for any shares of our common stock, without
the prior written consent of the Underwriter, for a period of 24
months after the date of this prospectus.
We have
been advised by the Underwriter that it has no
present intention and there are no agreements or understandings, explicit or
tacit, relating to the early release of any locked-up shares. The Underwriter may, however,
consent to an early release from the lock-up period if, in its opinion, the
market for the common stock would not be adversely impacted by sales. The
release of any lock-up would be considered on a case-by-case basis. Factors that
the Underwriter may
consider in deciding whether to release shares from the lock-up restriction
include the length of time before the lock-up expires, the number of shares
involved, the reason for the requested release, market conditions, the trading
price of our securities, historical trading volumes of our securities and
whether the person seeking the release is an officer, director or affiliate of
us.
UNDERWRITING
Subject
to the terms and conditions of the underwriting agreement dated [_________],
2010 WestPark Capital, Inc., (the “Underwriter”), has agreed to purchase from us
the number of shares of common stock set forth below at the public offering
price less the underwriting discounts and commissions set forth on the cover
page of this prospectus.
|
|
|
WestPark
Capital, Inc.
|
|
[_____]
|
Total
|
|
[_____]
|
The
underwriting agreement provides that the agreement may be terminated by the
Underwriter at any time prior to delivery of and payment for the shares if, in
the Underwriter’s judgment, payment for and delivery of the shares is rendered
impracticable or inadvisable by reason of events specified in the underwriting
agreement, including but not limited to the state of the financial markets and
our financial condition. Subject to the foregoing, the Underwriter is committed
to purchase all of the common stock being offered by us if any of such shares
are purchased, other than those covered by the over-allotment option described
below.
The
Underwriter proposes to offer the common stock directly to the public at the
public offering price set forth on the cover page of this prospectus. The
Underwriter may offer the common stock to some dealers at that price less a
concession not in excess of $[__] per share. Dealers may re-allow a concession
not in excess of $[__] per share to some other dealers. After the shares of
common stock are released for sale to the public, the Underwriter may vary the
offering price and other selling terms.
The
Underwriter has a 45-day option to purchase up to 375,000 additional shares of
common stock at the public offering price solely to cover over-allotments, if
any, if the Underwriter sell more than 2,500,000 shares of common stock in this
offering (the “Over-allotment Shares”). The Underwriter agreed to purchase
up to 70% of the Over-allotment Shares from the selling stockholders identified
in this prospectus and the remaining shares from us. We will not receive
any proceeds from the sale of the shares, if any, by the selling stockholders.
The Underwriter can exercise this right at any time and from time to time, in
whole or in part, within 45 days after the offering.
The
following table summarizes the compensation and estimated expenses we and the
selling stockholders will pay:
|
|
Per Share
|
|
|
Total
|
|
|
|
Without
Over-
allotment
|
|
|
With
Over-
allotment
|
|
|
Without
Over-
allotment
|
|
|
With
Over-
allotment
|
|
Underwriting
Discounts and Commissions paid by us
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Expenses
payable by us
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Underwriting
Discounts and Commissions paid by selling stockholders
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Expenses
payable by the selling stockholders
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
The
Underwriter may make offers and sales both inside and outside the United States
through its selling agents. Any offers and sales in the United States will be
conducted by broker-dealers registered with the SEC.
The
Underwriter has entered into an agreement in which it agreed to restrictions on
where and to whom it and any dealer purchasing from it may offer shares of
common stock, as a part of the distribution of the shares.
We have
agreed with the Underwriter that we will not, without the prior consent of the
Underwriter, directly or indirectly sell, offer, contract or grant any option to
sell, pledge, transfer, or otherwise dispose of or enter into any transaction
which may result in the disposition of any shares of our common stock or
securities convertible into, exchangeable or exercisable for any shares of our
common stock (excluding the exercise of certain warrants and/or options
currently outstanding and exercisable) for a period of 24 months after the date
of this prospectus.
Each of
our executive officers and directors, in addition to all of the stockholders
that received shares issued in the Share Exchange holding an aggregate of
19,100,000 shares of common stock, have agreed with the Underwriter not to
directly or indirectly sell, offer, contract or grant any option to sell,
pledge, transfer (excluding intra-family transfers, transfers to a trust for
estate planning purposes or to beneficiaries of officers, directors and
stockholders upon their death), or otherwise dispose of or enter into any
transaction which may result in the disposition of any shares of our common
stock or securities convertible into, exchangeable or exercisable for any shares
of our common stock, without the prior written consent of the Underwriter, for a
period of 24 months after the date of this prospectus.
We have
agreed to indemnify the Underwriter against some liabilities, including
liabilities under the Securities Act, and to contribute to payments that the
Underwriter may be required to make in respect thereof.
We
have agreed to pay the Underwriter an aggregate non-accountable expense
allowance of 3.0% of the gross proceeds of this offering or $262,500, based on a
public offering price of $3.50 per share. In addition, we have agreed to pay the
Underwriter’s road show expenses of $10,000 and counsel fees (excluding blue sky
fees) of $40,000.
Upon the
closing of this offering, we have agreed to sell to the Underwriter warrants to
purchase a number of shares equal to 5% of the shares of our common stock sold
in this offering, excluding any shares that may be sold pursuant to the
Underwriter’s exercise of the over-allotment option. The warrants will be
exercisable at a per share exercise price equal to 120% of the public offering
price, subject to standard anti-dilution adjustments for stock splits and
similar transactions, and will become exercisable 180 days after the date of
this prospectus and expire five years from the effective date of the
registration statement date of which this prospectus forms a part. The warrants
and the 125,000 shares of common stock underlying the warrants have been deemed
compensation by the FINRA and are therefore subject to a 180-day lock-up
pursuant to FINRA Rule 5110(g)(1). The Underwriter (or permitted assignees
under the Rule) will not sell, transfer, assign, pledge, or hypothecate the
warrants or the securities underlying the warrants, nor will it engage in any
hedging, short sale, derivative, put, or call transaction that would result in
the effective economic disposition of the warrants or the underlying securities
for a period of 180 days from the date of this prospectus. Additionally, the
warrants may not be sold transferred, assigned, pledged or hypothecated for a
one-year period (including the foregoing 180 day period) following the effective
date of the registration statement except to any underwriter and selected dealer
participating in the offering and their bona fide officers or partners. Although
the warrants and the underlying shares of common stock have been registered on
the registration statement of which this prospectus forms a part, the warrants
grant holders certain demand and “piggy back” registration rights. These rights
apply to all of the securities directly and indirectly issuable upon exercise of
the warrants. We will bear all fees and expenses attendant to registering the
securities issuable on exercise of the warrants, other than underwriting
commissions incurred and payable by the holders.
The
Underwriter may engage in over-allotment, stabilizing transactions, syndicate
covering transactions, penalty bids and passive market making in accordance with
Regulation M under the Exchange Act. Over-allotment involves syndicate sales in
excess of the offering size, which creates a syndicate short position.
Stabilizing transactions permit bids to purchase the underlying security so long
as the stabilizing bids do not exceed a specified maximum. Syndicate covering
transactions involve purchases of the common stock in the open market after the
distribution has been completed in order to cover syndicate short positions.
Penalty bids permit the representative to reclaim a selling concession from a
syndicate member when the common stock originally sold by the syndicate member
is purchased in a syndicate covering transaction to cover syndicate short
positions. Penalty bids may have the effect of deterring syndicate members from
selling to people who have a history of quickly selling their shares. In passive
market making, market makers in the common stock who are underwriters or
prospective underwriters may, subject to some limitations, make bids for or
purchases of the common stock until the time, if any, at which a stabilizing bid
is made. These stabilizing transactions, syndicate covering transactions and
penalty bids may cause the price of the common stock to be higher than it would
otherwise be in the absence of these transactions. These transactions may be
effected on the NASDAQ Global Market or the NASDAQ Global Market or otherwise
and, if commenced, may be discontinued at any time.
In
connection with the offering, the Underwriter may make short sales of the
issuer’s shares and may purchase the issuer’s shares on the open market to cover
positions created by short sales. Short sales involve the sale by the
Underwriter of a greater number of shares than it is required to purchase in the
offering. ‘Covered’ short sales are sales made in an amount not greater than the
Underwriter’s over-allotment option to purchase additional shares in the
offering. The Underwriter may close out any covered short position by either
exercising its over-allotment option or purchasing shares in the open market. In
determining the source of shares to close out the covered short position, the
Underwriter will consider, among other things, the price of shares available for
purchase in the open market as compared to the price at which they may purchase
shares through the over-allotment option. ‘Naked’ short sales are sales in
excess of the over-allotment option. The Underwriter must close out any naked
short position by purchasing shares in the open market. A naked short position
is more likely to be created if the Underwriter is concerned that there may be
downward pressure on the price of the shares in the open market after pricing
that could adversely affect investors who purchase in the offering. Similar to
other purchase transactions, the Underwriter’s purchases to cover the syndicate
short sales may have the effect of raising or maintaining the market price of
the issuer’s stock or preventing or retarding a decline in the market price of
issuer’s stock. As a result, the price of the issuer’s stock may be higher than
the price that might otherwise exist in the open market.
Prior to
this offering, there has been no public market of the common stock.
Consequently, the public offering price will be determined by negotiations
between us and the Underwriter. Among the factors considered in these
negotiations will be prevailing market conditions, the market capitalizations
and the stages of development of other companies that we and the Underwriter
believe to be comparable to us, estimates of our business potential, our results
of operations in recent periods, the present state of our development and other
factors deemed relevant.
We intend
to apply to list our common stock on either the NASDAQ Global Market or the NYSE
Amex Equities under the symbol “[___].” If we fail to obtain a
listing on either of these exchanges, we will not complete this
offering.
We
estimate that our out of pocket expenses for this offering will be approximately
$[___] million.
Conflicts
of Interest
Affiliates
of WestPark Capital beneficially own more than 10% of the Company. Because
WestPark Capital is an Underwriter and its affiliates beneficially own more than
10% of the Company, WestPark Capital may be deemed to have a “conflict of
interest” and/or be an “affiliate” of us under NASD Conduct
Rule 2720(f)(5). Accordingly, this offering is being conducted in
accordance with NASD Conduct Rule 2720. This rule requires that a
“qualified independent underwriter,” as defined by FINRA, participate in the
preparation of the registration statement and prospectus, and exercise the usual
standards of due diligence in respect thereto. [_______] is assuming the
responsibilities of acting as the qualified independent underwriter in this
offering. The public offering price will be no higher than that recommended by
[_________]. We have agreed to indemnify [____] against any liabilities arising
in connection with acting as a qualified independent underwriter, including
liabilities under the Securities Act.
Foreign
Regulatory Restrictions on Purchase of the Common Stock
No action
may be taken in any jurisdiction other than the United States that would permit
a public offering of the common stock or the possession, circulation or
distribution of this prospectus in any jurisdiction where action for that
purpose is required. Accordingly, the common stock may not be offered or sold,
directly or indirectly, and neither the prospectus nor any other offering
material or advertisements in connection with the common stock may be
distributed or published in or from any country or jurisdiction except under
circumstances that will result in compliance with any applicable rules and
regulations of any such country or jurisdiction.
LEGAL
MATTERS
The
validity of the common stock offered by this prospectus will be passed upon for
us by K&L Gates LLP, Los Angeles, California. TroyGould PC, Los
Angeles, California, is acting as counsel for the Underwriter. Legal matters as
to PRC law will be passed upon for us by Han Kun Law Offices. K&L
Gates LLP may rely upon Han Kun Law Offices with respect to matters governed by
PRC law.
EXPERTS
The
(i) consolidated financial statements of China Century Dragon Media, Inc. as of
December 31, 2009 and 2008 and for the years ended December 31, 2009,
2008 and 2007 (ii) condensed parent-only balance sheet China Century Dragon
Media, Inc. as of December 31, 2009 and 2008, and the related condensed
parent-only statements of income and cash flows for the years ended
December 31, 2009, 2008 and 2007 included in footnote 13 to the
Consolidated Financial Statements of China Century Dragon Media, Inc., each
appearing in this prospectus and registration statement have been audited by
MaloneBailey, LLP, an independent registered public accounting firm, as set
forth in their report thereon appearing elsewhere herein, and are included in
reliance upon such report given on the authority of such firm as experts in
accounting and auditing.
ADDITIONAL
INFORMATION
We filed
with the Securities and Exchange Commission a registration statement under the
Securities Act of 1933 for the shares of common stock in this offering. This
prospectus does not contain all of the information in the registration statement
and the exhibits and schedule that were filed with the registration statement.
For further information with respect to us and our common stock, we refer you to
the registration statement and the exhibits and schedule that were filed with
the registration statement. Statements contained in this prospectus about the
contents of any contract or any other document that is filed as an exhibit to
the registration statement are not necessarily complete, and we refer you to the
full text of the contract or other document filed as an exhibit to the
registration statement. A copy of the registration statement and the exhibits
and schedules that were filed with the registration statement may be inspected
without charge at the Public Reference Room maintained by the Securities and
Exchange Commission at 100 F Street, N.E. Washington, DC 20549, and copies of
all or any part of the registration statement may be obtained from the
Securities and Exchange Commission upon payment of the prescribed fee.
Information regarding the operation of the Public Reference Room may be obtained
by calling the Securities and Exchange Commission at 1-800-SEC-0330. The
Securities and Exchange Commission maintains a website that contains reports,
proxy and information statements, and other information regarding registrants
that file electronically with the SEC. The address of the website is
www.sec.gov.
We file
periodic reports under the Securities Exchange Act of 1934, including annual,
quarterly and special reports, and other information with the Securities and
Exchange Commission. These periodic reports and other information are available
for inspection and copying at the regional offices, public reference facilities
and website of the Securities and Exchange Commission referred to
above.
We are in
the process of establishing a corporate website and expect to have it complete
in the near future. We intend to make available free of charge on or through our
internet website our annual reports on Form 10-K, quarterly reports on Form
10-Q, current reports on Form 8-K, and amendments to those reports filed or
furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of
1934 as soon as reasonably practicable after we electronically file such
material with, or furnish it to, the Securities and Exchange
Commission.
INDEX
TO FINANCIAL STATEMENTS
CHINA
CENTURY DRAGON MEDIA, INC. AND SUBSIDIARIES
FINANCIAL
STATEMENTS
INDEX
|
PAGE
|
|
|
REPORTS
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMS
|
F-2
|
|
|
CONSOLIDATED
BALANCE SHEETS
|
F-4
|
|
|
CONSOLIDATED
STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
|
F-5
|
|
|
CONSOLIDATED
STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
|
F-6
|
|
|
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
F-7
|
|
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
F-8
|
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the
Board of Directors and Stockholders of
China
Century Dragon Media, Inc.
Guangdong,
China
We have
audited the accompanying consolidated balance sheets of China Century Dragon
Media, Inc. and Subsidiaries (the “Company”) as of December 31, 2009 and 2008
and the related consolidated statements of operations and comprehensive income,
changes in shareholders’ equity and cash flows for each of the three years in
the period ended December 31, 2009. These financial statements are the
responsibility of the Company’s management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We
conducted our audits in accordance with standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audits included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company’s internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our
opinion, the financial statements of the Company referred to above present
fairly, in all material respects, the financial position of the Company as of
December 31, 2009 and 2008 and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 2009 in
conformity with accounting principles generally accepted in the United States of
America.
/s/
MaloneBailey, LLP
www.malonebailey.com
Houston,
Texas
May 14,
2010
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the
Board of Directors
China
Century Dragon Media, Inc.
Guangdong,
China
We have
audited the condensed Parent Only balance sheets of China Century Dragon Media,
Inc. (the “Company”) as of December 31, 2009 and 2008 and the related
condensed Parent Only statements of income and cash flows for the years ended
December 31, 2009 and 2008 and the period from October 11, 2007 (inception) to
December 31, 2007 included in Footnote 13 to the Consolidated Financial
Statements of the Company. These Parent Only condensed financial statements are
the responsibility of the Company’s management. Our responsibility is to express
an opinion on these financial statements based on our audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required at
this time, to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audit included consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Company’s internal control
over financial reporting. Accordingly, we express no such opinion. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
In our
opinion, the condensed Parent Only financial statements referred to above
present fairly, in all material respects, the financial position of the Company
as of December 31, 2009 and 2008 and the results of its operations and its cash
flows for the years ended December 31, 2009 and 2008 and the period from October
11, 2007 (inception) to December 31, 2007 in conformity with accounting
principles generally accepted in the United States of America
/s/
MaloneBailey, LLP
www.malonebailey.com
Houston,
Texas
May 14,
2010
China
Century Dragon Media, Inc. and Subsidiaries
Consolidated
Balance Sheets
|
|
March 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
Current
Assets
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
435,901 |
|
|
$ |
654,831 |
|
|
$ |
1,219,894 |
|
Accounts
receivable, net
|
|
|
12,922,084 |
|
|
|
5,433,776 |
|
|
|
6,905,814 |
|
Prepayments
and deposit for advertising slots purchases
|
|
|
7,625,888 |
|
|
|
7,589,725 |
|
|
|
3,032,760 |
|
Total
current assets
|
|
|
20,983,873 |
|
|
|
13,678,332 |
|
|
|
11,158,468 |
|
Property
and equipment, net
|
|
|
32,267 |
|
|
|
31,900 |
|
|
|
29,465 |
|
Capitalized
television cost
|
|
|
- |
|
|
|
6,821,550 |
|
|
|
- |
|
Total
Assets
|
|
$ |
21,016,140 |
|
|
$ |
20,531,782 |
|
|
$ |
11,187,933 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
and Shareholders' Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$ |
420,809 |
|
|
$ |
885,013 |
|
|
$ |
781,105 |
|
Customer
deposit for media time
|
|
|
391,364 |
|
|
|
1,776,364 |
|
|
|
225,531 |
|
Accrued
liabilities
|
|
|
126,803 |
|
|
|
184,341 |
|
|
|
89,990 |
|
Other
taxes payable
|
|
|
175,372 |
|
|
|
320,712 |
|
|
|
1,334,144 |
|
Corporate
tax payable
|
|
|
930,765 |
|
|
|
1,678,069 |
|
|
|
2,147,916 |
|
Total
current liabilities
|
|
|
2,045,113 |
|
|
|
4,844,499 |
|
|
|
4,578,686 |
|
Due
to Related parties
|
|
|
525,674 |
|
|
|
- |
|
|
|
- |
|
Total
Liabilities
|
|
|
2,570,787 |
|
|
|
4,844,499 |
|
|
|
4,578,686 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders'
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
stock, $0.0001 par value, 10,000,000 shares authorized, 0 shares
outstanding at March 31, 2010 and December 31, 2009 and 2008,
respectively
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Common
Stock $0.0001 par value, 100,000,000 shares authorized, 19,100,000 shares
issued and outstanding at March 31, 2010 and December 31, 2009 and 2008,
respectively
|
|
|
1,910 |
|
|
|
1,910 |
|
|
|
1,910 |
|
Additional
paid-in capital
|
|
|
630,440 |
|
|
|
630,440 |
|
|
|
630,440 |
|
Accumulated
other comprehensive income
|
|
|
406,126 |
|
|
|
383,533 |
|
|
|
315,582 |
|
Statutory
surplus reserve fund
|
|
|
790,138 |
|
|
|
790,138 |
|
|
|
790,138 |
|
Retained
earnings
|
|
|
16,616,739 |
|
|
|
13,881,262 |
|
|
|
4,871,177 |
|
Total
shareholders' equity
|
|
|
18,445,353 |
|
|
|
15,687,283 |
|
|
|
6,609,247 |
|
Total
Liabilities and Shareholders' Equity
|
|
$ |
21,016,140 |
|
|
$ |
20,531,782 |
|
|
$ |
11,187,933 |
|
See
accompanying notes to the Consolidated Financial Statements.
China
Century Dragon Media, Inc. and Subsidiaries
Consolidated
Statements of Operations and Comprehensive Income
|
|
For the Three Months Ended
|
|
|
For the Years Ended
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$ |
28,009,149 |
|
|
$ |
11,385,849 |
|
|
$ |
74,479,651 |
|
|
$ |
44,684,432 |
|
|
$ |
17,102,819 |
|
Cost
of Revenue
|
|
|
(23,556,886 |
) |
|
|
(9,330,769 |
) |
|
|
(59,745,755 |
) |
|
|
(36,497,828 |
) |
|
|
(12,838,439 |
) |
Gross
Profit
|
|
|
4,452,263 |
|
|
|
2,055,080 |
|
|
|
14,733,896 |
|
|
|
8,186,604 |
|
|
|
4,264,380 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General
and administrative
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling
Expenses
|
|
|
605,998 |
|
|
|
416,668 |
|
|
|
2,109,502 |
|
|
|
1,672,606 |
|
|
|
2,068,178 |
|
General
and administrative
|
|
|
180,554 |
|
|
|
121,290 |
|
|
|
575,118 |
|
|
|
371,323 |
|
|
|
374,265 |
|
Depreciation
of equipment
|
|
|
2,530 |
|
|
|
2,109 |
|
|
|
8,995 |
|
|
|
7,338 |
|
|
|
1,780 |
|
Total
operating expenses
|
|
|
789,082 |
|
|
|
540,067 |
|
|
|
2,693,615 |
|
|
|
2,051,267 |
|
|
|
2,444,223 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from operations
|
|
|
3,663,181 |
|
|
|
1,515,013 |
|
|
|
12,040,281 |
|
|
|
6,135,337 |
|
|
|
1,820,157 |
|
Gain
on disposal of assets
|
|
|
- |
|
|
|
- |
|
|
|
660 |
|
|
|
- |
|
|
|
- |
|
Interest
income
|
|
|
333 |
|
|
|
663 |
|
|
|
2,528 |
|
|
|
4,700 |
|
|
|
5,221 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
before income taxes
|
|
|
3,663,514 |
|
|
|
1,515,676 |
|
|
|
12,043,469 |
|
|
|
6,140,037 |
|
|
|
1,825,378 |
|
Income
taxes
|
|
|
(928,037 |
) |
|
|
(378,923 |
) |
|
|
(3,033,384 |
) |
|
|
(1,535,009 |
) |
|
|
(602,375 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$ |
2,735,477 |
|
|
$ |
1,136,753 |
|
|
$ |
9,010,085 |
|
|
$ |
4,605,028 |
|
|
$ |
1,223,003 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
Comprehensive Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustment
|
|
|
22,593 |
|
|
|
(8,560 |
) |
|
|
67,951 |
|
|
|
207,288 |
|
|
|
84,227 |
|
Comprehensive
Income
|
|
$ |
2,758,070 |
|
|
$ |
1,128,193 |
|
|
$ |
9,078,036 |
|
|
$ |
4,812,316 |
|
|
$ |
1,307,230 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
per share, Basic and Diluted
|
|
$ |
0.14 |
|
|
$ |
0.06 |
|
|
$ |
0.47 |
|
|
$ |
0.24 |
|
|
$ |
0.06 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighed-average
shares outstanding, Basic and Diluted
|
|
|
19,100,000 |
|
|
|
19,100,000 |
|
|
|
19,100,000 |
|
|
|
19,100,000 |
|
|
|
19,100,000 |
|
See
accompanying notes to the Consolidated Financial Statements.
China
Century Dragon Media, Inc. and Subsidiaries
Consolidated
Statement of Changes in Shareholders' Equity
For
the Years Ended December 31, 2009, 2008 and 2007 and the Three Months Ended
March 31, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
Statutory
|
|
|
Other
|
|
|
Retained
|
|
|
Total
|
|
|
|
Common
Stock
|
|
|
Paid-in
|
|
|
Reserve
|
|
|
Comprehensive
|
|
|
Earnings
|
|
|
Shareholders'
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Fund
|
|
|
Income
|
|
|
(Unrestricted)
|
|
|
Equity
|
|
Balances,
December 31, 2006
|
|
|
19,100,000 |
|
|
$ |
1,910 |
|
|
$ |
630,440 |
|
|
$ |
- |
|
|
$ |
24,067 |
|
|
$ |
(166,716 |
) |
|
$ |
489,701 |
|
Allocation
of retained earnings to statutory reserve fund
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
316,055 |
|
|
|
- |
|
|
|
(316,055 |
) |
|
|
- |
|
Foreign
currency translation adjustment
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
84,227 |
|
|
|
- |
|
|
|
84,227 |
|
Net
income for the year
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
1,223,003 |
|
|
|
1,223,003 |
|
Balances,
December 31, 2007
|
|
|
19,100,000 |
|
|
|
1,910 |
|
|
|
630,440 |
|
|
|
316,055 |
|
|
|
108,294 |
|
|
|
740,232 |
|
|
|
1,796,931 |
|
Allocation
of retained earnings to statutory reserve fund
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
474,083 |
|
|
|
- |
|
|
|
(474,083 |
) |
|
|
- |
|
Foreign
currency translation adjustment
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
207,288 |
|
|
|
- |
|
|
|
207,288 |
|
Net
income for the year
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
4,605,028 |
|
|
|
4,605,028 |
|
Balances,
December 31, 2008
|
|
|
19,100,000 |
|
|
|
1,910 |
|
|
|
630,440 |
|
|
|
790,138 |
|
|
|
315,582 |
|
|
|
4,871,177 |
|
|
|
6,609,247 |
|
Foreign
currency translation adjustment
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
67,951 |
|
|
|
- |
|
|
|
67,951 |
|
Net
income for the year
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
9,010,085 |
|
|
|
9,010,085 |
|
Balances,
December 31, 2009
|
|
|
19,100,000 |
|
|
|
1,910 |
|
|
|
630,440 |
|
|
|
790,138 |
|
|
|
383,533 |
|
|
|
13,881,262 |
|
|
|
15,687,283 |
|
Foreign
currency translation adjustment
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
22,593 |
|
|
|
- |
|
|
|
22,593 |
|
Net
income for the three months ended March 31, 2010
(unaudited)
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
2,735,477 |
|
|
|
2,735,477 |
|
Balances,
March 31, 2010
|
|
|
19,100,000 |
|
|
$ |
1,910 |
|
|
$ |
630,440 |
|
|
$ |
790,138 |
|
|
$ |
406,126 |
|
|
$ |
16,616,739 |
|
|
$ |
18,445,353 |
|
See
accompanying notes to the Consolidated Financial Statements.
China
Century Dragon Media, Inc. and Subsidiaries
Consolidated
Statements of Cash Flows
|
|
For the Three Month Ended
|
|
|
For the Years Ended
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
Cash
Flows From Operating Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income
|
|
$ |
2,735,477 |
|
|
$ |
1,136,753 |
|
|
$ |
9,010,085 |
|
|
$ |
4,605,028 |
|
|
$ |
1,223,003 |
|
Adjustments
to reconcile net income to net cash provided by (used in) operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
2,530 |
|
|
|
192 |
|
|
|
8,995 |
|
|
|
7,338 |
|
|
|
1,780 |
|
Gain
on disposal of assets
|
|
|
- |
|
|
|
- |
|
|
|
(660 |
) |
|
|
- |
|
|
|
- |
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(1,405,203 |
) |
|
|
1,062,036 |
|
|
|
1,476,745 |
|
|
|
(5,198,481 |
) |
|
|
(856,843 |
) |
Prepayments
and deposit for advertising slots purchases
|
|
|
(35,646 |
) |
|
|
2,796,174 |
|
|
|
(4,554,897 |
) |
|
|
(1,673,286 |
) |
|
|
(904,430 |
) |
Deferred
income tax assets
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
69,798 |
|
Capitalized
television cost
|
|
|
739,280 |
|
|
|
(2,197,650 |
) |
|
|
(6,817,365 |
) |
|
|
- |
|
|
|
- |
|
Accounts
payable and accrued liabilities
|
|
|
(667,177 |
) |
|
|
1,380,361 |
|
|
|
(816,676 |
) |
|
|
703,416 |
|
|
|
583,157 |
|
Customer
deposit for media time
|
|
|
(1,385,121 |
) |
|
|
(56,892 |
) |
|
|
1,550,679 |
|
|
|
(346,695 |
) |
|
|
364,250 |
|
Corporate
income tax payable
|
|
|
(747,418 |
) |
|
|
263,493 |
|
|
|
(471,311 |
) |
|
|
1,636,318 |
|
|
|
547,421 |
|
Net
cash provided by (used in) operating activities
|
|
|
(763,278 |
) |
|
|
4,384,467 |
|
|
|
(614,405 |
) |
|
|
(266,362 |
) |
|
|
1,028,136 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
Flows From Investing Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
paid for equipment additions
|
|
|
(2,894 |
) |
|
|
(400 |
) |
|
|
(20,867 |
) |
|
|
(16,646 |
) |
|
|
(17,807 |
) |
Cash
received on disposal of fixed assets
|
|
|
- |
|
|
|
- |
|
|
|
14,661 |
|
|
|
- |
|
|
|
- |
|
Net
cash used in investing activities
|
|
|
(2,894 |
) |
|
|
(400 |
) |
|
|
(6,206 |
) |
|
|
(16,646 |
) |
|
|
(17,807 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
Flows From Financing Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due
to related parties
|
|
|
525,672 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(389,755 |
) |
Net
cash provided by (used in) financing activities
|
|
|
525,672 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(389,755 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect
of exchange rate changes on cash
|
|
|
21,570 |
|
|
|
336 |
|
|
|
55,548 |
|
|
|
239,507 |
|
|
|
78,470 |
|
Net
increase (decrease) in cash and cash equivalents
|
|
|
(218,930 |
) |
|
|
4,384,403 |
|
|
|
(565,063 |
) |
|
|
(43,501 |
) |
|
|
699,044 |
|
Cash
and cash equivalents, beginning of period
|
|
|
654,831 |
|
|
|
1,219,894 |
|
|
|
1,219,894 |
|
|
|
1,263,395 |
|
|
|
564,351 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents, end of period
|
|
$ |
435,901 |
|
|
$ |
5,604,297 |
|
|
$ |
654,831 |
|
|
$ |
1,219,894 |
|
|
$ |
1,263,395 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosure information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
taxes paid
|
|
$ |
1,675,896 |
|
|
$ |
115,422 |
|
|
$ |
3,502,943 |
|
|
$ |
- |
|
|
|
- |
|
Interest
paid
|
|
|
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
See
accompanying notes to the Consolidated Financial Statements.
CHINA
CENTURY DRAGON MEDIA, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
NOTE
1. DESCRIPTION OF BUSINESS
AND ORGANIZATION
China
Century Dragon Media, Inc. (“CD Media”, or “the Company”) (formerly SRKP 25,
Inc.), was incorporated under the laws of the State of Delaware on December 17,
2007. SRKP 25 agreed to issue an aggregate of 19,100,000 shares of its common
stock in exchange for all of the issued and outstanding share capital of CD
Media (Holding) Co., Limited (“CD Media BVI”) under a Share Exchange Agreement
(the “Share Exchange”). The Share Exchange closed on April 30, 2010. After the
share exchange, China Century Dragon Media, Inc. became parent company of CD
Media BVI.
CD Media
BVI was incorporated under the laws of British Virgin Island on March 31,
2009. CD Media BVI has 50,000 common shares authorized with $1.00 par
value each and 50,000 shares issued and outstanding.
CD
Media (HK) Limited (“CD Media HK”) was incorporated under the laws of Hong Kong,
PRC on May 6, 2009. CD Media HK has 10,000 common shares authorized with HKD 1
par value each and 10,000 shares are issued and outstanding.
Huizhou
CD Media Co., Ltd (“CD Media HZ”) is located at Huizhou, Guangdong Province, PRC
and incorporated under the Chinese laws on November 2, 2009. CD Media HZ had a
registered capital of HKD 20 million. The legal representative of CD Media HZ is
Mr. Lin, Huabiao.
Beijing
CD Media Advertisement Co., Ltd (“CD Media Beijing”) is located at Beijing, PRC
and incorporated under the Chinese laws on June 29, 2001. CD Media Beijing had a
registered capital of RMB 5 million.
On
March 30, 2010, CD Media HZ and CD Media Beijing entered into an Exclusive
Business Cooperation Agreement which entitles CD Media HZ to substantially all
of the economic benefits of CD Media Beijing in consideration for services
provided by CD Media HZ to CD Media Beijing. In addition, CD Media HZ entered
into certain agreements with each of Xu Wen, Cheng Yongxia and Zheng Hongbo (the
“CD Media Beijing Shareholders”), including Exclusive Option
Agreements allowing CD Media HZ to acquire the shares of CD Media Beijing
when permitted by PRC laws, Powers of Attorney that provide CD Media HZ with the
voting rights of the CD Media Beijing Shareholders and Equity Interest Pledge
Agreements that pledge the shares in CD Media Beijing to CD Media HZ.
Effective control over CD Media Beijing was transferred to CD Media HZ through
these series of contractual arrangements without transferring legal ownership in
CD Media Beijing to CD Media HZ (the “Reorganization”). As a result of the
Reorganization, CD Media Beijing became a variable interest entity (“VIE”) and
is included in the consolidated group.
This VIE
structure provides CD Media HZ, a wholly-owned subsidiary of CD Media BVI, with
control over the operations and benefits and determents of CD Media HZ without
having a direct equity ownership in CD Media Beijing.
On
April 30, 2010, the Company completed the Share Exchange with CD Media BVI, the
shareholders of CD Media BVI, CD Media HZ and CD Media Beijing. At the closing,
CD Media BVI became a wholly-owned subsidiary of the Company and 100% of the
issued and outstanding securities of CD Media BVI were exchanged for securities
of the Company. An aggregate of 19,100,000 shares of common stock were issued to
the shareholders of CD Media BVI and their designees. Prior to the closing of
the Share Exchange, the stockholders of the Company agreed to the cancellation
of an aggregate of 4,450,390 shares and 5,677,057 warrants to purchase shares of
common stock held by them such that there were 2,646,000 shares of common
stock and warrants to purchase 1,419,333 shares of common stock owned by them
immediately after the Share Exchange. Each member of the Company’s board of
directors prior to the Share Exchange resigned in full and appointed Li Hui Hua
and Fu Hai Ming to the board of directors of the Company, with Li Hui Hua
serving as Chairman. The Board also appointed Li Hui Hua as the Company’s Chief
Executive Officer and Zhang Le as the Company’s Chief Financial Officer
and Corporate Secretary. Each of these executives and directors were
executives and directors of CD Media BVI and/or its
subsidiaries.
The
warrants have an exercise price of $0.0001 per share and are currently
exercisable. According to the terms of the warrants, the warrants expire on the
earlier of December 17, 2017 or five years from the date that the Company
consummates a merger or other business combination with an operating business or
any other event pursuant to which the Company ceases to be a “shell company,” as
defined by Rule 12b-2 under the Securities Exchange Act of 1934 and a “blank
check company,” as defined by Rule 419 of the Securities Act of 1933. As a
result of the close of the Share Exchange on April 30, 2010, the warrants will
expire on April 30, 2015.
CHINA
CENTURY DRAGON MEDIA, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
The
transaction has been treated as a recapitalization of CD Media BVI and its
subsidiaries, with China Century Dragon Media, Inc. (the legal acquirer of CD
Media BVI and its subsidiaries, including the consolidation of the VIE Beijing
CD Media Advertisement Co., Ltd.) considered the accounting acquiree, and CD
Media BVI whose management took control of China Century Dragon Media, Inc. (the
legal acquiree of CD Media BVI) considered the accounting acquirer. The Company
did not recognize goodwill or any intangible assets in connection with the
transaction. All costs related to the transaction are being charged to
operations as incurred. The 19,100,000 shares of common stock issued to the
shareholders and designees of CD Media BVI in conjunction with the Share
Exchange have been presented as outstanding for all periods. The historical
consolidated financial statements include the operations of the accounting
acquirer for all periods presented.
The
corporate structure of the Company is as follows:
CD Media
Beijing is engaged in the sale of commercial breaks on certain channels of China
Central Television (“CCTV”) and providing production services for television
commercials.
NOTE
2. SUMMARIES OF SIGNIFICANT
ACCOUNTING POLICIES
Basis
of preparation and consolidation
These
financial statements have been prepared in accordance with accounting principles
generally accepted in the United States of America.
CHINA
CENTURY DRAGON MEDIA, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
The
reorganization has been accounted for as a common control transaction and a
recapitalization of CD Media with retroactive effect in the accompanying
financial statements. The companies were controlled by the same three people
before and after the reorganization. The financial statements have been prepared
as if the existing corporate structure had been in existence throughout all
periods and the reorganization had occurred as of the beginning of the earliest
period presented in the accompanying financial statements.
In the
opinion of the management, the consolidated financial statements reflect all
adjustments (which include only normal recurring adjustments) necessary to
present fairly the financial position of the Company as of March 31, 2010 and
2009; and the results of operations and cash flows for the three month ended
March 31, 2010 and 2009, respectively.
|
b.
|
Basis
of consolidation
|
The
consolidated financial statements include the accounts of the Company and its
subsidiaries, and its VIE. All significant inter-company transactions and
balance have been eliminated upon consolidation.
We
consolidate CD Media Beijing because it meets the requirement of being a VIE
under US GAAP. In general, a VIE is a corporation, partnership, limited
liability company, trust, or any other legal structure used to conduct
activities or hold assets that either (1) has an insufficient amount of equity
to carry out its principal activities without additional subordinated financial
support, (2) has a group of equity owners that are unable to make significant
decisions about its activities, or (3) has a group of equity owners that do not
have the obligation to absorb losses or the right to receive returns generated
by its operations.
The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities, disclosure of contingent
assets and liabilities at the date of the financial statements, and the reported
amounts of revenues and expenses during the reporting period. Because of the use
of estimates inherent in the financial reporting process, actual results could
differ from those estimates.
|
d.
|
Cash
and cash equivalents
|
Cash
and cash equivalents include cash on hand, cash on deposit with various
financial institutions in PRC, Hong Kong, and all highly-liquid investments with
original maturities of three months or less at the time of purchase. Banks and
other financial institutions in PRC do not provide insurance for funds held on
deposit.
Accounts
receivable are recognized and carried at original invoiced amount less an
allowance for uncollectible accounts, as needed.
The
Company uses the aging method to estimate the valuation allowance for
anticipated uncollectible receivable balances. Under the aging method, bad debts
percentages determined by management based on historical experience as well as
current economic climate are applied to customers’ balances categorized by the
number of months the underlying invoices have remained outstanding. The
valuation allowance balance is adjusted to the amount computed as a result of
the aging method. When facts subsequently become available to indicate that the
amount provided as the allowance was incorrect, an adjustment which
classified as a change in estimate is made. As of March 31, 2010, December 31,
2009 and 2008, there was no allowance for doubtful accounts
recorded.
Advances
are payments to broadcast outlets for the purchase of future commercial break
time. Costs are calculated based on the breaks available and sold based on the
average cost of the breaks purchased as a package.
|
g.
|
Property
and equipment
|
Property
and equipment are initially recognized and recorded at cost. Gains or losses on
disposals are reflected as gain or loss in the period of disposal. The cost of
improvements that extend the life of plant and equipment are capitalized. These
capitalized costs may include structural improvements, equipment and fixtures.
All ordinary repairs and maintenance costs are expensed as
incurred.
CHINA
CENTURY DRAGON MEDIA, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
Depreciation
for financial reporting purposes is provided using the straight-line method over
the estimated useful lives of the assets:
|
Office
and Other Equipment
|
5
years
|
|
Automobile
|
4
years
|
|
h.
|
Impairment
of long-lived assets
|
The
Company accounts for impairment of plant and equipment and amortizable
intangible assets in accordance with current accounting standards, which
requires the Company to evaluate a long-lived asset for recoverability when
there is event or circumstance that indicate the carrying value of the asset may
not be recoverable. An impairment loss is recognized when the carrying amount of
a long-lived asset or asset group is not recoverable (when carrying amount
exceeds the gross, undiscounted cash flows from use and disposition) and is
measured as the excess of the carrying amount over the asset’s (or asset
group’s) fair value.
The
Company has adopted the standards for reporting and displaying comprehensive
income, its components, and accumulated balances in a full-set of
general-purpose financial statements. Accumulated other comprehensive income
represents the accumulated balance of foreign currency translation
adjustments.
Revenue
Recognition
Substantially
all of our revenues are derived from reselling blocks (or slots) of advertising
time on several popular television channels of CCTV. We acquire this advertising
time in large blocks, repackage the blocks into smaller time slots and sell
these smaller slots to advertising agencies or other companies. Our pricing
depends on the quality, ratings and target audience of the relevant television
programs where the advertisements will be broadcast, the sales prices of our
competitors, general market conditions and market demand. We typically require
payment several weeks before the relevant advertisements are broadcast, and
record these prepayments as a current liability. We recognize the revenue when
persuasive evidence of an arrangement exists, delivery has occurred, the price
is fixed or determinable and collection is reasonably assured, which is
generally over the broadcast period.
Revenue
arrangements involving multiple deliverables are broken down into single-element
arrangements based on their relative fair value for revenue recognition
purposes, when possible. We recognize revenues on the elements delivered and
defer the recognition of revenues of the undelivered elements until the
remaining obligations have been satisfied. Generally, we receive advanced
payments for our advertising services and record them as customer advances. Such
prepayments are only recognized as revenues when the services are rendered over
the broadcast period.
Our
business is centered on purchasing blocks of advertising time, repackaging
the time into smaller units and reselling the smaller blocks (or slots) to our
clients. We generally pay for the blocks of advertising time in advance of
reselling it to our customers and we are committed to pay the remainder of the
balance prior to the broadcast. In determining whether revenue is reported gross
or net, we considered the eight factors outlined in the current accounting
standards related to this matter. We sell the right to utilize advertising space
on certain TV channels of CCTV. This right is conveyed to us by CCTV through
contractual arrangements and we provide this right to our clients through an
unrelated contractual arrangement. As a result, we are the primary obligor in
this arrangement. In addition, we acquire the advertising blocks in advance and
have unmitigated inventory risk. We are required to pay for the advertising time
regardless whether we can resell the time or collect our fees from our
customers. We also have latitude in establishing the price; discretion in
supplier selection; and we assume the credit risk for the amount billed to our
customers. Based on these factors, revenues are recognized at gross billings to
our clients and the cost for purchasing the advertising time slots is recorded
as our cost of goods sold and recognized over the same period as the related
revenue, which is the broadcast period.
We
derive a minimal portion of our revenues from production services. We design,
produce and package content for public service announcements and commercial
advertisements. For commercial television advertisements, advertisers will pay
for our production services and sometimes for the broadcast of the
advertisements produced by us if we also arrange for such broadcast. We
typically require a prepayment from our clients at the time of the execution of
the advertising production agreements and prior to the commencement of our work,
but our revenues are typically recognized at the time the final work products
are delivered to our clients for broadcast.
We report
revenues gross of business tax and related surcharges, which are charged to cost
of goods sold.
CHINA
CENTURY DRAGON MEDIA, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
We
purchase blocks of advertising time on certain CCTV programs for a fixed fee.
Part or the entire fee is paid in advance and we recognize this cost, as our
cost of goods sold, at the same time that we recognize the related revenue,
which is ratably over the broadcast periods. The broadcast period typically
ranges from one to three weeks and represents substantially all of our cost of
goods sold.
|
l.
|
Capitalized television
costs
|
The
Company capitalizes television costs when incurred. Film costs are stated
at the lower of cost, less accumulated amortization, or fair value. Production
overhead, a component of film costs, includes allocable costs of individuals or
departments with exclusive or significant responsibility for the production of
films. Substantially all of the Company’s resources are dedicated to the
production of its films. Capitalized production overhead does not include
selling, general and administrative expenses. Interest expense on funds invested
in production is capitalized into film costs until production is completed. In
addition to the films being produced, costs of productions in development are
capitalized as development film costs and are transferred to film production
costs when a film is set for production. In the event a film is not set for
production within three years from the time the first costs are capitalized or
the film is abandoned, all such costs are generally expensed.
Television Cost
Amortization - Once a film is released, film costs are amortized and
participations and residual costs are accrued on an individual film basis in the
proportion that the revenue during the period for each film (“Current Revenue”)
bears to the estimated remaining total revenue to be received from all sources
for each film (“Ultimate Revenue”) as of the beginning of the current fiscal
period. The amount of film costs that is amortized each period will depend on
the ratio of Current Revenue to Ultimate Revenue for each film for such period.
The Company makes certain estimates and judgments of Ultimate Revenue to be
received for each film based on information received from its distributor and
its knowledge of the industry. Ultimate Revenue does not include estimates of
revenue that will be earned beyond ten years of a film’s initial theatrical
release date.
Unamortized
film production costs are evaluated for impairment each reporting period on a
film-by-film basis. If estimated remaining net cash flows are not sufficient to
recover the unamortized film costs for that film, the unamortized film costs
will be written down to fair value determined using a net present value
calculation.
As of
March 31, 2010, the Company had sold these productions.
The
Company accounts for income taxes in accordance with current accounting
standards, which require an asset and liability approach for financial
accounting and reporting for income taxes and allow recognition and measurement
of deferred tax assets based upon the likelihood of realization of tax benefits
in future years. Under the asset and liability approach, deferred taxes are
provided for the net tax effects of temporary differences between the carrying
amounts of assets and liabilities for financial reporting purposes and the
amounts used for income tax purposes. A valuation allowance is provided for
deferred tax assets if it is more likely than not these items will either expire
before the Company is able to realize their benefits, or that future
deductibility is uncertain.
The
Company adopted the accounting standard for uncertainty in income taxes which
prescribes a comprehensive model for how a company should recognize, measure,
present and disclose in its financial statements uncertain tax positions that
the Company has taken or expects to take on a tax return (including a decision
whether to file or not to file a return in a particular
jurisdiction).
|
n.
|
Foreign
currency translation
|
The
functional currency of CD Media BVI and CD Media HK is Hong Kong Dollar
(“HKD”). These two companies maintain their financial statements using the
functional currency. Monetary assets and liabilities denominated in currencies
other than the functional currency are translated into the functional currency
at rates of exchange prevailing at the balance sheet dates. Transactions
denominated in currencies other than the functional currency are translated into
the functional currency at the exchange rates prevailing at the dates of the
transaction. Exchange gains or losses arising from foreign currency transactions
are included in the determination of net income (loss) for the respective
periods.
CHINA
CENTURY DRAGON MEDIA, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
The
functional currency of CD Media HZ and CD Media Beijing is the Renminbi (“RMB”),
the PRC’s currency. The companies maintain their financial statements using
their own functional currency. Monetary assets and liabilities denominated in
currencies other than the functional currency are translated into the functional
currency at rates of exchange prevailing at the balance sheet dates.
Transactions denominated in currencies other than the functional currency are
translated into the functional currency at the exchange rates prevailing at the
dates of the transaction. Exchange gains or losses arising from foreign currency
transactions are included in the determination of net income (loss) for the
respective periods.
For
financial reporting purposes, the financial statements of CD Media BVI and
CD Media HK, which are prepared in HKD, are translated into the Company’s
reporting currency, United States Dollars (“USD”); the financial statements of
CD Media HZ and CD Media Beijing, which are prepared in RMB, are translated into
the Company’s reporting currency, USD. Balance sheet accounts are translated
using the closing exchange rate in effect at the balance sheet date and income
and expense accounts are translated using the average exchange rate prevailing
during the reporting period.
Adjustments
resulting from the translation, if any, are included in accumulated other
comprehensive income (loss) in stockholder’s equity.
The
exchange rates used for foreign currency translation were as follows (USD$1 =
RMB):
Period Covered
|
|
Balance Sheet Date Rates
|
|
|
Annual Average Rates
|
|
Year
ended December 31, 2007
|
|
|
7.29410 |
|
|
|
7.59474 |
|
Year
ended December 31, 2008
|
|
|
6.81710 |
|
|
|
6.93722 |
|
Year
ended December 31, 2009
|
|
|
6.83574 |
|
|
|
6.82082 |
|
Three
month ended March 31, 2010
|
|
|
6.81616 |
|
|
|
6.83620 |
|
Three
month ended March 31, 2009
|
|
|
6.82547 |
|
|
|
6.82547 |
|
The
exchange rates used for foreign currency translation were as follows (USD$1 =
HKD):
Period Covered
|
|
Balance Sheet Date Rates
|
|
|
Average Rates
|
|
Year
ended December 31, 2007
|
|
|
7.80190 |
|
|
|
7.80153 |
|
Year
ended December 31, 2008
|
|
|
7.74960 |
|
|
|
7.86342 |
|
Year
ended December 31, 2009
|
|
|
7.76759 |
|
|
|
7.75194 |
|
Three
month ended March 31, 2010
|
|
|
7.76406 |
|
|
|
7.76390 |
|
Three
month ended March 31, 2009
|
|
|
7.74999 |
|
|
|
7.75374 |
|
A party
is considered to be related to the Company if the party directly or indirectly
or through one or more intermediaries, controls, is controlled by, or is under
common control with the Company. Related parties also include principal owners
of the Company, its management, members of the immediate families of principal
owners of the Company and its management and other parties with which the
Company may deal if one party controls or can significantly influence the
management or operating policies of the other to an extent that one of the
transacting parties might be prevented from fully pursuing its own separate
interests. A party which can significantly influence the management or operating
policies of the transacting parties or if it has an ownership interest in one of
the transacting parties and can significantly influence the other to an extent
that one or more of the transacting parties might be prevented from fully
pursuing its own separate interests is also a related party.
CHINA
CENTURY DRAGON MEDIA, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
|
p.
|
Recently
issued accounting pronouncements
|
In
June 2009, the Financial Accounting Standards Board (FASB) issued a standard
that established the FASB Accounting Standards Codification (ASC) and amended
the hierarchy of generally accepted accounting principles (ASC) and amended the
hierarchy of generally accepted accounting principles (GAAP) such that the ASC
became the single source of authoritative nongovernmental U.S. GAAP. The ASC did
not change current U.S. GAAP, but was intended to simplify user access to all
authoritative U.S. GAAP by providing all the authoritative literature related to
a particular topic in one place. All previously existing accounting standard
documents were superseded and all other accounting literature not included in
the ASC is considered non-authoritative. New accounting standards issued
subsequent to June 30, 2009 are communicated by the FASB through Accounting
Standards Updates (ASUs). The Company adopted the ASC on July 1, 2009. This
standard did not have an impact on the Company’s consolidated results of
operations or financial condition. However, throughout the notes to the
consolidated financial statements references that were previously made to
various former authoritative U.S. GAAP pronouncements have been changed to
coincide with the appropriate section of the ASC.
In
December 2007, the FASB issued a new standard which established the accounting
for and reporting of noncontrolling interests (NCIs) in partially owned
consolidated subsidiaries and the loss of control of subsidiaries. Certain
provisions of this standard indicate, among other things, that NCIs (previously
referred to as minority interests) be treated as a separate component of equity,
not as a liability (as was previously the case); that increases and decreases in
the parent’s ownership interest that leave control intact be treated as equity
transactions, rather than as step acquisitions or dilution gains or losses; and
that losses of a partially owned consolidated subsidiary be allocated to the NCI
even when such allocation might result in a deficit balance. This standard also
required changes to certain presentation and disclosure requirements. The
Company adopted the standard beginning January 1, 2009. The provisions of the
standard were applied to all NCIs prospectively, except for the presentation and
disclosure requirements, which were applied retrospectively to all periods
presented. As a result, upon adoption, the Company retroactively reclassified
the “Minority interest in subsidiaries” balance previously included in the
“Other liabilities” section of the consolidated balance sheet to a new
component of equity with respect to NCIs in consolidated subsidiaries. The
adoption also impacted certain captions previously used on the consolidated
statement of income, largely identifying net income including NCI and net income
attributable to the Company. The adoption of this standard did not have a
material impact on the Company’s consolidated financial position or results of
operations.
In
June 2009, the FASB issued a new standard regarding the accounting for transfers
of financial assets amending the existing guidance on transfers of financial
assets to, among other things, eliminate the qualifying special-purpose entity
concept, include a new unit of account definition that must be met for transfers
of portions of financial assets to be eligible for sale accounting, clarify and
change the derecognition criteria for a transfer to be accounted for as a sale,
and require significant additional disclosure. The standard is effective for new
transfers of financial assets beginning January 1, 2010. The adoption of this
standard is not expected to have a material impact on the Company’s consolidated
results of operations or financial condition.
In
June 2009, the FASB issued an accounting standard that revised the
consolidation guidance for variable-interest entities. The modifications include
the elimination of the exemption for qualifying special purpose entities, a new
approach for determining who should consolidate a variable-interest entity, and
changes to when it is necessary to reassess who should consolidate a
variable-interest entity. The standard is effective January 1, 2010. The
Company evaluated the impact of this standard, and does not expect it to have a
material impact on the Company’s consolidated results of operations or financial
condition.
In
October 2009, the FASB issued ASU No. 2009-13, Multiple-Deliverable
Revenue Arrangements—a consensus of the FASB Emerging Issues Task Force, that
provides amendments to the criteria for separating consideration in
multiple-deliverable arrangements. As a result of these amendments,
multiple-deliverable revenue arrangements will be separated in more
circumstances than under existing U.S. GAAP. The ASU does this by establishing a
selling price hierarchy for determining the selling price of a deliverable. The
selling price used for each deliverable will be based on vendor-specific
objective evidence if available, third-party evidence if vendor-specific
objective evidence is not available, or estimated selling price if neither
vendor-specific objective evidence nor third-party evidence is available. A
vendor will be required to determine its best estimate of selling price in a
manner that is consistent with that used to determine the price to sell the
deliverable on a standalone basis. This ASU also eliminates the residual method
of allocation and will require that arrangement consideration be allocated at
the inception of the arrangement to all deliverables using the relative selling
price method, which allocates any discount in the overall arrangement
proportionally to each deliverable based on its relative selling price. Expanded
disclosures of qualitative and quantitative information regarding application of
the multiple-deliverable revenue arrangement guidance are also required under
the ASU. The ASU does not apply to arrangements for which industry specific
allocation and measurement guidance exists, such as long-term construction
contracts and software transactions. The ASU is effective beginning
January 1, 2011. The Company is currently evaluating the impact of this
standard on the Company’s consolidated results of operations and financial
condition.
CHINA
CENTURY DRAGON MEDIA, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
In
October 2009, the FASB issued ASU No. 2009-14, Certain Revenue
Arrangements That Include Software Elements—a consensus of the FASB Emerging
Issues Task Force, that reduces the types of transactions that fall within the
current scope of software revenue recognition guidance. Existing software
revenue recognition guidance requires that its provisions be applied to an
entire arrangement when the sale of any products or services containing or
utilizing software when the software is considered more than incidental to the
product or service. As a result of the amendments included in ASU
No. 2009-14, many tangible products and services that rely on software will
be accounted for under the multiple-element arrangements revenue recognition
guidance rather than under the software revenue recognition guidance. Under the
ASU, the following components would be excluded from the scope of software
revenue recognition guidance: the tangible element of the product,
software products bundled with tangible products where the software components
and non-software components function together to deliver the product’s essential
functionality, and undelivered components that relate to software that is
essential to the tangible product’s functionality. The ASU also provides
guidance on how to allocate transaction consideration when an arrangement
contains both deliverables within the scope of software revenue guidance
(software deliverables) and deliverables not within the scope of that
guidance (non-software deliverables). The ASU is effective beginning
January 1, 2011. The Company is currently evaluating the impact of this
standard on the Company’s consolidated results of operations and financial
condition.
q.
Recently adopted accounting pronouncements
In
August 2009, the FASB issued ASU No. 2009-05, Measuring Liabilities at Fair
Value, which provides additional guidance on how companies should measure
liabilities at fair value under ASC 820. The ASU clarifies that the quoted price
for an identical liability should be used. However, if such information is not
available, a entity may use, the quoted price of an identical liability when
traded as an asset, quoted prices for similar liabilities or similar liabilities
traded as assets, or another valuation technique (such as the market or income
approach). The ASU also indicates that the fair value of a liability is not
adjusted to reflect the impact of contractual restrictions that prevent its
transfer and indicates circumstances in which quoted prices for an identical
liability or quoted price for an identical liability traded as an asset may be
considered level 1 fair value measurements. The ASU is effective
October 1, 2009. The adoption of this guidance did not have a material
impact on the Company’s consolidated results of operations or financial
condition.
In
September 2009, the FASB issued ASU No. 2009-12, Investments in Certain Entities
That Calculate Net Asset Value per Share (or Its Equivalent) , that
amends ASC 820 to provide guidance on measuring the fair value of certain
alternative investments such as hedge funds, private equity funds and venture
capital funds. The ASU indicates that, under certain circumstance, the fair
value of such investments may be determined using net asset value (NAV) as a
practical expedient, unless it is probable the investment will be sold at
something other than NAV. In those situations, the practical expedient cannot be
used and disclosure of the remaining actions necessary to complete the sale
is required. The ASU also requires additional disclosures of the attributes of
all investments within the scope of the new guidance, regardless of whether an
entity used the practical expedient to measure the fair value of any of its
investments. This ASU is effective October 1, 2009. The adoption of this
guidance did not have a material impact on the Company’s consolidated results of
operations or financial condition.
In May
2009, the FASB issued SFAS No. 165, “Subsequent Events” (Now ASC 855), which
provides guidance to establish general standards of accounting for and
disclosures of events that occur after the balance sheet date but before
financial statements are issued or are available to be issued. ASC
855 also requires entities to disclose the date through which subsequent events
were evaluated as well as the rationale for why that date was
selected. This disclosure should alert all users of financial
statements that an entity has not evaluated subsequent events after that date in
the set of financial statements being presented. ASC 855 is effective for
interim and annual periods ending after June 15, 2009. The adoption
of this guidance did not have a material impact on the Company’s
consolidated results of operations or financial condition.
NOTE
3. ADVANCES TO
SUPPLIERS
Advances
to suppliers represent amounts prepaid for commercial breaks. The advances are
applied against amounts due to the supplier as commercial breaks are
aired.
Advances
consist of the following:
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
Advances
|
|
$ |
7,625,888 |
|
|
$ |
7,589,725 |
|
|
$ |
3,032,760 |
|
CHINA
CENTURY DRAGON MEDIA, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
NOTE
4. CAPITALIZED TELEVISION
COST
Capitalized television
cost consists of:
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
“Chi
Dan Zhong Xin” television series
|
|
$ |
- |
|
|
$ |
2,347,200 |
|
“Xiao
Mo Dou” animation
|
|
|
- |
|
|
|
4,474,350 |
|
Total
|
|
$ |
- |
|
|
$ |
6,821,550 |
|
"Chi Dan
Zhong Xin" Television Series
On
January 14, 2009, CD Media Beijing entered into a Cooperation Agreement with a
television production company with respect to the production and distribution of
the television series "Chi Dan Zhong Xin." The total investment for the series
was RMB16,000,000 ($2,347,200), which was fully paid in cash by the Company in
2009. The television production company is in charge of the entire
production of the series. CD Media Beijing supervises the cash
distribution process. The television series was approved by the Chinese Culture
Department in March 2009 and it will be aired in 2010 on China Central
Television. The Company will share the intellectual property rights related to
the series with the production company and will receive 60% of the net profits
generated from the series.
On
March 26, 2010, CD Media Beijing entered into an agreement to sell its entire
interest in the Chi Dan Zhong Xin television series to an unaffiliated third
party for RMB 16,800,000 (approximately $2,458,000). The purchaser
agreed to pay 20% of the purchase price to CD Media Beijing within five days of
the closing of the agreement, 20% of the purchase price during the quarter ended
June 30, 2010, 30% of the purchase price during the quarter ended September 30,
2010 and the remaining 30% of the purchase price during the quarter ended
December 31, 2010. The selling price was reported in revenues and the costs
are reported as cost of revenues in the accompanying consolidated statements of
operations.
“Xiao Mo
Dou” Animation Series
On
February 2, 2009, CD Media Beijing entered into a Cooperation Agreement with a
media distribution company and a software development company with respect to
the production and distribution of the animation series “Xiao Mo Dou.” The total
investment for the series was RMB33,500,000 ($4,474,350), of which RMB30,500
($4,474,350) was paid by the Company in 2009 and RMB3,000,000 ($440,130 was paid
in January 2010. The media distribution company is responsible for the
negotiation of the distribution channels for the series with entities such as
China Mobile, China Unicom and China Telecom, as well as accounting of
production costs and profits. The software company is responsible for
developing “Xiao Mo Dou” and technology that accommodates the series with the
distribution channels. CD Media Beijing is responsible for funding of the
production of the series as well as providing marketing and promotion for the TV
series. Net profits are calculated on a monthly base and are
distributed to the parties to the Cooperation Agreement in accordance with the
following percentages: 35% to the media distribution company,
30% to the software development company and 35% to CD Media
Beijing. If there is any loss, CD Media Beijing also takes 100% of
the loss.
On
March 21, 2010, CD Media Beijing entered into an agreement to sell its entire
interest in the Xia Mo Duo television series to an unaffiliated third party for
RMB 35,175,000 (approximately $5,145,000) on March 20, 2010. The
purchaser agreed to pay 20% of the purchase price to CD Media Beijing within
three days of the closing of the agreement, 20% of the purchase price during the
quarter ended June 30, 2010, 30% of the purchase price during the quarter ended
September 30, 2009 and the remaining 30% of the purchase price during the
quarter ended December 31, 2010. The selling price was reported in revenues
and the costs are reported as cost of revenues in the accompanying consolidated
statements of operations.
CD Media
Beijing evaluated the unamortized film production costs for impairment as of
December 31, 2009 and determined that no impairment existed related to
capitalized film costs.
CHINA
CENTURY DRAGON MEDIA, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
NOTE
5. CUSTOMER
DEPOSITS
Customer
deposits represent amounts prepaid by the customers for commercial breaks. The
deposits are applied and revenues are recognized as commercial breaks are
aired.
Customer
deposits consist of the following:
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
Customer
Deposit
|
|
$ |
391,364 |
|
|
$ |
1,776,364 |
|
|
$ |
225,531 |
|
NOTE
6. RELATED PARTY BALANCE
AND TRANSCATIONS
Ms.
Hailan Zhang, Shareholder of CD Media BVI, loaned HKD 4,063,187 ($523,333) to
the Company as of March 31, 2010. This loan is non-interest bearing and has no
maturity date.
Mr.
Huabiao Lin, legal representative of CD Media HZ, loaned RMB 15,954 ($2,341) to
the Company as of March 31, 2010. This loan is non-interest bearing and has no
maturity date.
During
the year ended December 31, 2006, Mr. Haiming Fu, the General Manager of CD
Media, advanced RMB3,250,000 (USD415,734) to the Company. The shareholder loan
was free of interest with no maturity date. The balance was paid off by the
Company during the year ended December 31, 2007.
The
Company also leased an office space from a related party. During the years ended
December 31, 2009 and 2008, the Company paid rent in the amount of RMB210,000
(USD30,272) and RMB900,000 (USD125,698), respectively.
NOTE
7. INCOME
TAX
CD Media
HZ was established in Huizhou, PRC, was entitled to a preferential Enterprise
Income Tax (”EIT”) rate. CD Media HZ had applied for foreign investment
Enterprise title, subject to tax at a statutory rate of 25%.
CD Media
Beijing is governed by the Income Tax Law of the PRC concerning the private-run
enterprises, which are generally subject to tax at a statutory rate of 25%, 25%
and 33% on income reported in the statutory financial statements after
appropriate tax adjustments in 2009, 2008 and 2007, respectively.
The
effective tax rate for the Company for the three months ended March 31, 2010 and
2009 was 25.3% and 25%, respectively.
The
provision for taxes on earnings consisted of:
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
Income
before income taxes
|
|
$ |
3,663,514 |
|
|
$ |
1,515,676 |
|
|
$ |
12,043,469 |
|
|
$ |
6,140,037 |
|
|
$ |
1,825,378 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
income taxes expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PRC
Enterprises Income Taxes:
|
|
|
(928,037 |
) |
|
|
(378,923 |
) |
|
|
(3,033,384 |
) |
|
|
(1,535,009 |
) |
|
|
(602,375 |
) |
United
States Federal Income Taxes
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Income
Taxes (at 25%, 25% 25%, 25% and 33% respectively)
|
|
$ |
(928,037 |
) |
|
$ |
(378,923 |
) |
|
$ |
(3,033,384 |
) |
|
$ |
(1,535,009 |
) |
|
$ |
(602,375 |
) |
CHINA
CENTURY DRAGON MEDIA, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
A
reconciliation between the income tax computed at the U.S. statutory rate and
the Group’s provision for income tax is as follows:
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
U.S.
statutory rate
|
|
|
34 |
% |
|
|
34 |
% |
|
|
34 |
% |
|
|
34 |
% |
|
|
34 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
income not recognized in the U.S.
|
|
|
-34 |
% |
|
|
-34 |
% |
|
|
-34 |
% |
|
|
-34 |
% |
|
|
-34 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PRC
preferential enterprise income tax rate
|
|
|
25 |
% |
|
|
25 |
% |
|
|
25 |
% |
|
|
25 |
% |
|
|
33 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision
for income tax
|
|
|
25 |
% |
|
|
25 |
% |
|
|
25 |
% |
|
|
25 |
% |
|
|
33 |
% |
Accounting
for Uncertainty in Income Taxes
On
January 1, 2007, the Company adopted new accounting rules which address the
determination of whether tax benefits claimed or expected to be claimed on a tax
return should be recorded in the financial statements. The provisions clarify
the accounting for uncertainty in income taxes recognized in an enterprise’s
financial statements, and prescribes a recognition threshold and
measurement process for financial statement recognition and measurement of a tax
position taken or expected to be taken in a tax return. These provisions also
provide guidance on de-recognition, classification, interest and penalties,
accounting in interim periods, disclosure and transition.
Based on
the Company’s evaluation, the Company has concluded that there are no
significant uncertain tax positions requiring recognition in its financial
statements.
NOTE
8. STATUTORY
RESERVES
As
stipulated by the relevant laws and regulations for enterprises operating in
PRC, the subsidiaries of the Company are required to make annual appropriations
to a statutory surplus reserve fund. Specifically, the subsidiaries of the
Company are required to allocate 10% of their profits after taxes, as determined
in accordance with the PRC accounting standards applicable to the subsidiaries
of the Company, to a statutory surplus reserve until such reserve reaches 50% of
the registered capital of the subsidiaries of the Company.
NOTE
9. COMMITMENTS AND
CONTINGENCIES
Lease
Obligation
The
Company has entered into a tenancy agreement for the lease of office premises.
The Company’s commitments for minimum lease payments under these non-cancelable
operating leases for the next five years are as follows:
|
|
Payments due by Period (in $)
|
|
Contractual Obligations
|
|
Total
|
|
|
Less Than
1 Year
|
|
|
1 - 3
Years
|
|
|
3 - 5
Years
|
|
|
More Than
5 Years
|
|
Operating
Lease Obligations
|
|
$
|
298,970
|
|
|
$
|
230,796
|
|
|
$
|
68,174
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Total
|
|
$
|
298,970
|
|
|
$
|
230,796
|
|
|
$
|
68,174
|
|
|
$
|
-
|
|
|
$
|
-
|
|
As of
December 31, 2009, there were no other contractual obligations, related to the
purchase of advertising time or otherwise.
NOTE
10. OPERATING RISKS
Country
risk
The
Company has significant operations in the PRC. The operating results of the
Company may be adversely affected by changes in the political and social
conditions in the PRC and by changes in Chinese government policies with respect
to laws and regulations, anti-inflationary measures, currency conversion and
remittance abroad, and rates and methods of taxation, among other things. The
Company can give no assurance that those changes in political and other
conditions will not result in have a material adverse effect upon the Company’s
business and financial condition.
CHINA
CENTURY DRAGON MEDIA, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
Exchange
risk
The
Company cannot guarantee the Renminbi, Hong Kong dollar and US dollar exchange
rate will remain steady, therefore the Company could post the same profit for
two comparable periods and post higher or lower profit depending on exchange
rate of Renminbi, Hong Kong dollar and US dollar. The exchange rate could
fluctuate depending on changes in the political and economic environments
without notice.
Political
risk
Currently,
PRC is in a period of growth and is openly promoting business development in
order to bring more business into PRC. Additionally PRC currently allows a
Chinese corporation to be owned by a United States corporation. If the laws or
regulations relating to ownership of a Chinese corporation are changed by the
PRC government, the Company's ability to operate the PRC subsidiaries could be
affected.
NOTE
11. CONCENTRATION OF CREDIT
RISK
A
significant portion of the Company’s cash at March, 31, 2010, March 31, 2009,
December 31, 2009 and 2008 was maintained at various financial institutions in
the PRC which do not provide insurance for amounts on deposits. The
Company has not experienced any losses in such accounts and believes it is not
exposed to significant credit risk in this area.
The
Company operates principally in the PRC and grants credit to its customers in
this geographic region. Although the PRC is economically stable, it is always
possible that unanticipated events in foreign countries could disrupt the
Company’s operations.
For
the three months ended March 31,
2010 and for the year ended December 31, 2009, no customer had net sales
exceeding 10% of the Company’s total net sales of the year. For the year ended
December 31, 2008, one customer had net sales exceeding 10% of the Company’s
total net sales and for year ended December 31, 2007, one customer had net sales
exceeding 10% of the Company’s total net sales of the year.
The
Company’s top three vendors accounted for 20.1%, 30.5% and 49.5% of our total
purchases of advertising time during the years ended December 31, 2009, 2008 and
2007, respectively. For the year ended December 31, 2009, no vendor
had net purchases exceeding 10% of the Company’s total net purchases of the
year. For the year ended December 31, 2008, one vendor had net purchases
exceeding 10% of the Company’s total net purchases of the year. For year ended
December 31, 2007, two vendors had net purchases exceeding 10% of the Company’s
total net purchases of the year. For the three months ended March 31, 2010 and
2009, no vendor had net purchases exceeding 10% of the Company’s total net
purchases for the respective periods.
CHINA
CENTURY DRAGON MEDIA, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
NOTE
12. QUARTERLY INFORMATION
(UNAUDITED)
The table
below presents selected (unaudited) results of operations for the quarters
indicated:
|
|
Quarter Ended
|
|
|
|
December 31,
|
|
|
September
30,
|
|
|
June
30,
|
|
|
March
31,
|
|
|
|
|
|
|
2009
|
|
|
2009
|
|
|
2009
|
|
|
2009
|
|
|
Total
|
|
Revenues
|
|
$ |
36,377,462 |
|
|
$ |
14,343,825 |
|
|
$ |
12,372,515 |
|
|
$ |
11,385,849 |
|
|
$ |
74,479,651 |
|
Gross
profit
|
|
$ |
7,548,677 |
|
|
$ |
2,818,949 |
|
|
$ |
2,311,190 |
|
|
$ |
2,055,080 |
|
|
$ |
14,733,896 |
|
Net
Income
|
|
$ |
4,970,774 |
|
|
$ |
1,639,237 |
|
|
$ |
1,263,321 |
|
|
$ |
1,136,753 |
|
|
$ |
9,010,085 |
|
Earnings
per share – Basic and Diluted
|
|
$ |
0.26 |
|
|
$ |
0.09 |
|
|
$ |
0.07 |
|
|
$ |
0.06 |
|
|
$ |
0.47 |
|
Weighted-average
shares outstanding – Basic and Diluted
|
|
|
19,100,000 |
|
|
|
19,100,000 |
|
|
|
19,100,000 |
|
|
|
19,100,000 |
|
|
|
19,100,000 |
|
|
|
Quarter Ended
|
|
|
|
December 31,
|
|
|
September 30,
|
|
|
June 30,
|
|
|
March 31,
|
|
|
|
|
|
|
2008
|
|
|
2008
|
|
|
2008
|
|
|
2008
|
|
|
Total
|
|
Revenues
|
|
$ |
13,514,064 |
|
|
$ |
11,283,327 |
|
|
$ |
11,093,684 |
|
|
$ |
8,793,357 |
|
|
$ |
44,684,432 |
|
Gross
profit
|
|
$ |
1,815,173 |
|
|
$ |
2,509,134 |
|
|
$ |
2,152,721 |
|
|
$ |
1,709,576 |
|
|
$ |
8,186,604 |
|
Net
Income
|
|
$ |
946,196 |
|
|
$ |
1,473,629 |
|
|
$ |
1,242,810 |
|
|
$ |
942,393 |
|
|
$ |
4,605,028 |
|
Earnings
per share – Basic and Diluted
|
|
$ |
0.05 |
|
|
$ |
0.08 |
|
|
$ |
0.07 |
|
|
$ |
0.05 |
|
|
$ |
0.24 |
|
Weighted-average
shares outstanding – Basic and Diluted
|
|
|
19,100,000 |
|
|
|
19,100,000 |
|
|
|
19,100,000 |
|
|
|
19,100,000 |
|
|
|
19,100,000 |
|
|
|
Quarter Ended
|
|
|
|
December 31,
|
|
|
September 30,
|
|
|
June 30,
|
|
|
March 31,
|
|
|
|
|
|
|
2007
|
|
|
2007
|
|
|
2007
|
|
|
2007
|
|
|
Total
|
|
Revenues
|
|
$ |
4,127,282 |
|
|
$ |
5,719,250 |
|
|
$ |
3,659,294 |
|
|
$ |
3,596,993 |
|
|
$ |
17,102,819 |
|
Gross
profit
|
|
$ |
1,065,163 |
|
|
$ |
1,313,262 |
|
|
$ |
968,230 |
|
|
$ |
917,725 |
|
|
$ |
4,264,380 |
|
Net
Income
|
|
$ |
281,185 |
|
|
$ |
401,304 |
|
|
$ |
282,894 |
|
|
$ |
257,620 |
|
|
$ |
1,223,003 |
|
Earnings
per share – Basic and Diluted
|
|
$ |
0.01 |
|
|
$ |
0.02 |
|
|
$ |
0.01 |
|
|
$ |
0.01 |
|
|
$ |
0.06 |
|
Weighted-average
shares outstanding – Basic and Diluted
|
|
|
19,100,000 |
|
|
|
19,100,000 |
|
|
|
19,100,000 |
|
|
|
19,100,000 |
|
|
|
19,100,000 |
|
NOTE
13. CONDENSED PARENT COMPANY FINANCIAL
INFORMATION
Basis of
Presentation
The
condensed parent company financial statements have been prepared in accordance
with Rule 12-04, Schedule I of Regulation S-X, as the restricted net assets
of the subsidiaries of China Century Dragon Media, Inc. exceed 25% of the
consolidated net assets of China Century Dragon Media, Inc. The ability of the
Company’s Chinese operating subsidiaries to pay dividends may be restricted due
to the foreign exchange control policies and availability of cash balances of
the Chinese operating subsidiaries. Because substantially all of the Company’s
operations are conducted in China and a substantial majority of its revenues are
generated in China, a majority of the Company’s revenue being earned and
currency received are denominated in Renminbi (RMB). RMB is subject to the
exchange control regulation in China, and, as a result, the Company may be
unable to distribute any dividends outside of China due to PRC exchange control
regulations that restrict its ability to convert RMB into US
Dollars.
The
condensed parent company financial statements have been prepared using the same
accounting principles and policies described in the notes to the consolidated
financial statements, with the only exception being that the parent company
accounts for its subsidiaries using the equity method. Refer to the consolidated
financial statements and notes presented above for additional information and
disclosures with respect to these financial statements.
CHINA
CENTURY DRAGON MEDIA, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
China
Century Dragon Media, Inc.
Condensed
Parent Company Balance Sheets
(US
Dollars in Thousands)
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
ASSETS
|
|
|
|
|
|
|
Cash
|
|
|
|
|
|
|
Investment
in subsidiaries, at equity in net assets
|
|
$ |
15,687 |
|
|
$ |
6,609 |
|
Total
Assets
|
|
$ |
15,687 |
|
|
$ |
6,609 |
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL
LIABILITIES
|
|
$ |
- |
|
|
$ |
- |
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS'
EQUITY
|
|
|
|
|
|
|
|
|
Preferred
stock, $0.0001 par value, 10,000,000 shares authorized, 0 shares
outstanding at December 31, 2009 and 2008,
respectively
|
|
|
- |
|
|
|
- |
|
Common
Stock $0.0001 par value, 100,000,000 shares authorized, 19,100,000
shares issued and outstanding at December 31, 2009 and 2008,
respectively
|
|
|
2 |
|
|
|
2 |
|
Additional
paid-in capital
|
|
|
630 |
|
|
|
630 |
|
Accumulated
other comprehensive income
|
|
|
384 |
|
|
|
316 |
|
Statutory
reserve fund
|
|
|
790 |
|
|
|
790 |
|
Retained
earnings (unrestricted)
|
|
|
13,881 |
|
|
|
4,871 |
|
Total
Stockholders' Equity
|
|
|
15,687 |
|
|
|
6,609 |
|
Total
Liabilities & Stockholders' Equity
|
|
$ |
15,687 |
|
|
$ |
6,609 |
|
CHINA
CENTURY DRAGON MEDIA, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
China
Century Dragon Media, Inc.
Condensed
Parent Company Statements of Income
(US
Dollars in Thousands)
|
|
|
|
|
|
|
|
For the period
from
|
|
|
|
For the Year
Ended
|
|
|
For the Year
Ended
|
|
|
October 11, 2007
(Inception) to
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
Equity
in undistributed income of subsidiaries
|
|
$
|
9,010
|
|
|
$
|
4,605
|
|
|
$
|
1,223
|
|
Income
before income taxes
|
|
|
9,010
|
|
|
|
4,605
|
|
|
|
1,223
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision
for income tax
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Net
income
|
|
$
|
9,010
|
|
|
$
|
4,605
|
|
|
$
|
1,223
|
|
CHINA
CENTURY DRAGON MEDIA, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
China
Century Dragon Media, Inc.
Condensed
Parent Company Statements of Cash Flows
(US
Dollars in Thousands)
|
|
|
|
|
|
|
|
For
the period
from
|
|
|
|
For
the Year
|
|
|
For
the Year
|
|
|
October
11, 2007
|
|
|
|
Ended
|
|
|
Ended
|
|
|
(Inception)
to
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
Cash
Flows from Operating Activities
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
9,010
|
|
|
$
|
4,605
|
|
|
$
|
1,223
|
|
Adjustments
to reconcile net income to net cash provided (used) by operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
in undistributed income of subsidiaries
|
|
|
(9,010)
|
|
|
|
(4,605)
|
|
|
|
(1,223)
|
|
Net
Cash Provided (Used) by Operating Activities
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Increase in Cash and Cash Equivalents
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Cash
and Cash Equivalents, beginning of period
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Cash
and Cash Equivalents, end of period
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
[INSIDE
BACK COVER]
2,500,000
Shares of Common Stock
China Century Dragon
Media,
Inc.
[RESALE
PROSPECTUS ALTERNATE PAGE]
The
information in this prospectus is not complete and may be changed. We may not
sell these securities until the registration statement filed with the Securities
and Exchange Commission becomes effective. This prospectus is not an offer to
sell these securities
and we are not soliciting offers to buy these securities in any state where the
offer or sale is not permitted.
PRELIMINARY
PROSPECTUS
|
Subject
To Completion
|
June
29, 2010
|
3,566,838
Shares
|
|
China
Century Dragon Media, Inc.
|
Common
Stock
This
prospectus relates to the resale by the selling stockholders of up to 3,566,838
shares of our common stock. The selling stockholders may sell common stock from
time to time in the principal market on which the stock is traded at the
prevailing market price or in negotiated transactions. We will not receive any
proceeds from the sales by the selling stockholders. The selling
stockholders named herein may be deemed underwriters of the shares of common
stock which they are offering.
Our
shares of common stock are not currently listed or quoted for trading on any
national securities exchange or national quotation system. We intend
to apply for the listing of our common stock on the NASDAQ Global Market or the
NYSE Amex Equities under the symbol “[___].” There can, however, be
no assurance that our common stock will be accepted for listing on either such
exchange.
Since
there is currently no public market established for our securities, the selling
security holders will sell at a fixed price that is equal to the price at which
we sell shares in our public offering pursuant to the registration statement of
which this prospectus is a part. Once, and if, our shares of common stock are
quoted on the NASDAQ Global Market or the NYSE Amex Equities and there is an
established market for these resale shares, the selling stockholders may sell
the resale shares from time to time at the market price prevailing on the NASDAQ
Global Market or the NYSE Amex Equities at the time of offer and sale, or at
prices related to such prevailing market prices or in negotiated transactions or
a combination of such methods of sale directly or through brokers.
The
Selling Stockholders have agreed not to sell any of these shares until
[_______], 2010, which is six months after closing of the public offering that
we conducted on [_______], 2010. WestPark Capital, Inc., the
placement agent in the private placement in which the Selling Stockholders
acquired their shares and an underwriter to the public offering, in its
discretion, may also release some or all the shares from the lock-up
restrictions earlier.
The purchase of the securities
involves a high degree
of risk. See section entitled “Risk Factors” beginning on page 10.
Neither
the U.S. Securities and Exchange Commission nor any state securities commission
has approved or disapproved of anyone’s investment in these securities or
determined if this prospectus is truthful or complete. Any
representation to the contrary is a criminal offense.
The Date
of This Prospectus Is: ____________________, 2010
[RESALE
PROSPECTUS ALTERNATE PAGE]
TABLE
OF CONTENTS
PROSPECTUS
SUMMARY
|
|
2
|
SUMMARY
FINANCIAL DATA
|
|
9
|
RISK
FACTORS
|
|
10
|
CAUTIONARY
STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
|
|
31
|
USE
OF PROCEEDS
|
|
33
|
DIVIDEND
POLICY
|
|
33
|
CAPITALIZATION
|
|
35
|
MARKET
FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
|
|
36
|
DILUTION
|
|
36
|
SELECTED
CONSOLIDATED FINANCIAL DATA
|
|
38
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
|
39
|
DESCRIPTION
OF BUSINESS
|
|
51
|
MANAGEMENT
|
|
61
|
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS
|
|
66
|
BENEFICIAL
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS, MANAGEMENT, AND SELLING
STOCKHOLDERS
|
|
68
|
DESCRIPTION
OF SECURITIES
|
|
70
|
SHARES
ELIGIBLE FOR FUTURE SALE
|
|
74
|
PLAN
OF DISTRIBUTION
|
|
70
|
SELLING
STOCKHOLDERS
|
|
70A
|
LEGAL
MATTERS
|
|
72
|
EXPERTS
|
|
72
|
ADDITIONAL
INFORMATION
|
|
72
|
INDEX
TO FINANCIAL STATEMENTS
|
|
F-1
|
|
|
|
PART
II INFORMATION NOT REQUIRED IN THE PROSPECTUS
|
|
II-1
|
SIGNATURES
|
|
II-7
|
Please
read this prospectus carefully. It describes our business, our financial
condition and results of operations. We have prepared this prospectus so that
you will have the information necessary to make an informed investment
decision.
You
should rely only on information contained in this prospectus. We have
not authorized any other person to provide you with different
information. This prospectus is not an offer to sell, nor is it
seeking an offer to buy, these securities in any state where the offer or sale
is not permitted. The information in this prospectus is complete and
accurate as of the date on the front cover, but the information may have changed
since that date.
[RESALE
PROSPECTUS ALTERNATE PAGE]
The
Offering
Common
stock offered by selling stockholders
|
|
3,566,838
shares
|
|
|
|
Common
stock outstanding
|
|
25,312,838
shares(1)
|
|
|
|
Use
of proceeds
|
|
We
will not receive any proceeds from the sale of the common stock by the
selling
stockholders.
|
|
(1)
|
Based
on 25,312,838 shares
of common stock issued and outstanding as of the date of this prospectus,
and excludes (i) 2,500,000 shares of common stock being registered for
issuance in a public offering, (ii) the underwriter’s warrants to purchase
up to 125,000 shares of common stock, and (iii) 1,419,333 shares of common
stock that are issuable upon the exercise of outstanding warrants,
exercisable at $0.0001 per share.
|
The
Selling Stockholders have agreed not to sell any of these shares until
[_______], 2010, which is six months after closing of the public offering that
we conducted on [_______], 2010. WestPark Capital, Inc., the
placement agent in the private placement in which the Selling Stockholders
acquired their shares and an underwriter to the public offering, in its
discretion, may also release some or all the shares from the lock-up
restrictions earlier.
[RESALE
PROSPECTUS ALTERNATE PAGE]
USE
OF PROCEEDS
We will
not receive any proceeds from the sale of the shares of common stock by the
selling stockholders.
[RESALE
PROSPECTUS ALTERNATE PAGE]
SELLING
STOCKHOLDERS
The
following table provides as of the date of this prospectus information regarding
the beneficial ownership of our common stock held by each of the selling
stockholders, including:
|
·
|
the
number of shares owned by each stockholder prior to this
offering;
|
|
·
|
the
percentage owned by each stockholder prior to completion of the
offering;
|
|
·
|
the
total number of shares that are to be offered for each
stockholder;
|
|
·
|
the
total number of shares that will be owned by each stockholder upon
completion of the offering; and
|
|
·
|
the
percentage owned by each stockholder upon completion of the
offering.
|
On
April 30, 2010, we received gross proceeds of approximately $5.35 million in the
closing of a private placement transaction (the “Private
Placement”). Pursuant to subscription agreements entered into with
the investors, we sold an aggregate of 3,566,838 shares of Common Stock at $1.50
per share. We sold the shares to an aggregate of 111
investors. We paid WestPark Capital a placement agent commission
equal to 10.0% with a non-accountable fee of 4.0% of the gross proceeds from the
financing. We also agreed to retain WestPark Capital for a period of
five months following the closing of the Private Placement to provide us with
financial consulting services for which we will pay WestPark Capital $4,000 per
month.
We
agreed to file a registration statement covering the common stock sold in the
Private Placement within 30 days of the final closing of the Private Placement
pursuant to the subscription agreement entered into with each investor. The
investors in the Private Placement also entered into a lock-up agreement
pursuant to which they agreed that (i) if the proposed public offering that we
expect to conduct is for $10 million or more, then the investors would not
be able to sell or transfer their shares until at least six months after the
public offering’s completion, and (ii) if the offering is for less than
$10 million, then one-tenth of the investors’ shares would be released from
the lock-up restrictions ninety days after the offering and there would be a pro
rata release of the shares thereafter every 30 days over the following nine
months. WestPark Capital, in its discretion, may also release some or
all the shares from the lock-up restrictions earlier. We currently
intend this offering to be in an amount less than $10 million. However, there
can be no assurance of the actual size of this offering.
Except as
described below, none of the selling stockholders, to our knowledge, has had a
material relationship with our company other than as a shareholder at any time
within the past three years.
Name of Selling Shareholder
|
|
Number
of Shares
of Common
Stock
Beneficially
Owned
Prior to
Offering
|
|
|
|
Percentage of
Shares of
Common
Stock
Beneficially
Owned Prior
to the
Offering(1)
|
|
|
Number of
Shares of
Common
Stock
Registered
for Sale
Hereby
|
|
|
Number of Shares
of Common stock
Beneficially Owned
After Completion of
the Offering(2)
|
|
|
Percentage of
Shares of Common
Stock Beneficially
Owned After
Completion of the
Offering(2)
|
|
J&N
Invest, LLC
|
|
|
400,000 |
|
(3)
|
|
|
* |
|
|
|
400,000 |
|
|
|
— |
|
|
|
— |
|
MidSouth
Investor Fund LP
|
|
|
333,333 |
|
(4)
|
|
|
* |
|
|
|
333,333 |
|
|
|
— |
|
|
|
— |
|
Continuum
Capital Partners, LP
|
|
|
333,333 |
|
(5)
|
|
|
* |
|
|
|
333,333 |
|
|
|
— |
|
|
|
— |
|
Clarke, David
H.
|
|
|
153,333 |
|
|
|
|
* |
|
|
|
153,333 |
|
|
|
— |
|
|
|
— |
|
Berg,
Howard
|
|
|
120,000 |
|
|
|
|
* |
|
|
|
120,000 |
|
|
|
— |
|
|
|
— |
|
Stellar
Capital Fund LLC
|
|
|
100,000 |
|
(6)
|
|
|
* |
|
|
|
100,000 |
|
|
|
— |
|
|
|
— |
|
Colman,
Frederic
|
|
|
100,000 |
|
|
|
|
* |
|
|
|
100,000 |
|
|
|
— |
|
|
|
— |
|
Kuber,
Douglas
|
|
|
100,000 |
|
|
|
|
* |
|
|
|
100,000 |
|
|
|
— |
|
|
|
— |
|
Delaware
Charter , Tax Id #51-0099493, FBO David H Clarke R/O IRA #2056-8346, C/O
Legent Clearing, 9300 Underwood Suite 400, Omaha, NE 68114
|
|
|
86,666 |
|
(7)
|
|
|
* |
|
|
|
86,666 |
|
|
|
— |
|
|
|
— |
|
Delaware
Charter, Tax Id #51-0099493, FBO Frederick Berdon R/O IRA #4284-6540, C/O
Legent Clearing, 9300 Underwood, Suite 400, Omaha, NE
68114
|
|
|
80,000 |
|
(8)
|
|
|
* |
|
|
|
80,000 |
|
|
|
— |
|
|
|
— |
|
[RESALE
PROSPECTUS ALTERNATE PAGE]
Name of Selling Shareholder
|
Number
of Shares
of Common
Stock
Beneficially
Owned
Prior to
Offering
|
|
|
|
Percentage of
Shares of
Common
Stock
Beneficially
Owned Prior
to the
Offering(1)
|
|
|
Number of
Shares of
Common
Stock
Registered
for Sale
Hereby
|
|
|
Number of Shares
of Common stock
Beneficially Owned
After Completion of
the Offering(2)
|
|
|
Percentage of
Shares of Common
Stock Beneficially
Owned After
Completion of the
Offering(2)
|
|
Kagel,
David L.
|
|
|
79,333 |
|
|
|
|
* |
|
|
|
79,333 |
|
|
|
— |
|
|
|
— |
|
Metsch,
Richard
|
|
|
66,666 |
|
|
|
|
* |
|
|
|
66,666 |
|
|
|
— |
|
|
|
— |
|
Jordon,
David L.
|
|
|
66,666 |
|
|
|
|
* |
|
|
|
66,666 |
|
|
|
— |
|
|
|
— |
|
Schwartzberg,
Gil N.
|
|
|
397,490 |
|
(9)
|
|
|
2.1 |
% |
|
|
66,666 |
|
|
|
330,824 |
|
|
|
1.8 |
% |
Delaware
Charter, Tax Id #51-0099493, FBO Stanley Wayne Gerlach IRA #6035-6566, C/O
Legent Clearing, 9300 Underwood, Suite 400, Omaha, NE
68114
|
|
|
50,000 |
|
(10)
|
|
|
* |
|
|
|
50,000 |
|
|
|
— |
|
|
|
— |
|
Delaware
Charter, Tax Id #51-0099493, FBO Paul Masters IRA #6910-2620, C/O Legent
Clearing, 9300 Underwood, Suite 400, Omaha, NE 68114
|
|
|
50,000 |
|
(11)
|
|
|
* |
|
|
|
50,000 |
|
|
|
— |
|
|
|
— |
|
Micro
PIPE Fund 1, LLC
|
|
|
50,000 |
|
(12)
|
|
|
* |
|
|
|
50,000 |
|
|
|
— |
|
|
|
— |
|
Pearson,
Eric J.
|
|
|
43,333 |
|
|
|
|
* |
|
|
|
43,333 |
|
|
|
— |
|
|
|
— |
|
Rosenberg,
Jonathan
|
|
|
42,666 |
|
|
|
|
* |
|
|
|
42,666 |
|
|
|
— |
|
|
|
— |
|
Rothstein,
Steven
|
|
|
40,000 |
|
|
|
|
* |
|
|
|
40,000 |
|
|
|
— |
|
|
|
— |
|
Hayden,
Matthew M.
|
|
|
34,000 |
|
|
|
|
* |
|
|
|
34,000 |
|
|
|
— |
|
|
|
— |
|
Taylor,
Stephen S.
|
|
|
34,000 |
|
|
|
|
* |
|
|
|
34,000 |
|
|
|
— |
|
|
|
— |
|
Merkel,
Charles M.
|
|
|
30,000 |
|
|
|
|
* |
|
|
|
30,000 |
|
|
|
— |
|
|
|
— |
|
Pawliger,
Richard
|
|
|
30,000 |
|
|
|
|
* |
|
|
|
30,000 |
|
|
|
— |
|
|
|
— |
|
Hoefer,
Richard and Donna
|
|
|
30,000 |
|
|
|
|
* |
|
|
|
30,000 |
|
|
|
— |
|
|
|
— |
|
Sperling,
Gerlad and Seena, JTWROS
|
|
|
30,000 |
|
|
|
|
* |
|
|
|
30,000 |
|
|
|
— |
|
|
|
— |
|
Rosenberg,
Linda
|
|
|
29,666 |
|
|
|
|
* |
|
|
|
29,666 |
|
|
|
— |
|
|
|
— |
|
Rothstein,
Norman
|
|
|
29,333 |
|
|
|
|
* |
|
|
|
29,333 |
|
|
|
— |
|
|
|
— |
|
Delaware
Charter, Tax Id #51-0099493, FBO S. Michael Rosenberg R/O IRA
#5993-9479, C/O Legent Clearing, 9300 Underwood, Suite 400, Omaha, NE
68114
|
|
|
28,666 |
|
(13)
|
|
|
* |
|
|
|
28,666 |
|
|
|
— |
|
|
|
— |
|
Antin,
Norman B.
|
|
|
26,666 |
|
|
|
|
* |
|
|
|
26,666 |
|
|
|
— |
|
|
|
— |
|
Boyer,
David L.
|
|
|
23,333 |
|
|
|
|
* |
|
|
|
23,333 |
|
|
|
— |
|
|
|
— |
|
Miriam
Mooney Trust FBO Catherine Sotto
|
|
|
23,333 |
|
(14)
|
|
|
* |
|
|
|
23,333 |
|
|
|
— |
|
|
|
— |
|
The
Gerlach Survivor Trust under the Gerlach Family Trust
|
|
|
20,000 |
|
(15)
|
|
|
* |
|
|
|
20,000 |
|
|
|
— |
|
|
|
— |
|
Delaware
Charter, Tax Id #51-0099493, FBO Thomas G. Charles R/O IRA #5149-4214, C/O
Legent Clearing, 9300 Underwood, Suite 400, Omaha, NE
68114
|
|
|
20,000 |
|
(16)
|
|
|
* |
|
|
|
20,000 |
|
|
|
— |
|
|
|
— |
|
Zheng,
Qiping
|
|
|
20,000 |
|
|
|
|
* |
|
|
|
20,000 |
|
|
|
— |
|
|
|
— |
|
Rosenblatt,
Marvin
|
|
|
20,000 |
|
|
|
|
* |
|
|
|
20,000 |
|
|
|
— |
|
|
|
— |
|
Miriam
Mooney Trust FBO Joan Connolly
|
|
|
20,000 |
|
(17)
|
|
|
* |
|
|
|
20,000 |
|
|
|
— |
|
|
|
— |
|
MSL
Investment Association LLC
|
|
|
20,000 |
|
(18)
|
|
|
* |
|
|
|
20,000 |
|
|
|
— |
|
|
|
— |
|
Collins,
William and Ann
|
|
|
20,000 |
|
|
|
|
* |
|
|
|
20,000 |
|
|
|
— |
|
|
|
— |
|
Lahr,
John W.
|
|
|
20,000 |
|
|
|
|
* |
|
|
|
20,000 |
|
|
|
— |
|
|
|
— |
|
[RESALE
PROSPECTUS ALTERNATE PAGE]
Name of Selling Shareholder
|
|
Number
of Shares
of Common
Stock
Beneficially
Owned
Prior to
Offering
|
|
|
|
Percentage of
Shares of
Common
Stock
Beneficially
Owned Prior
to the
Offering(1)
|
|
|
Number of
Shares of
Common
Stock
Registered
for Sale
Hereby
|
|
|
Number of Shares
of Common stock
Beneficially Owned
After Completion of
the Offering(2)
|
|
|
Percentage of
Shares of Common
Stock Beneficially
Owned After
Completion of the
Offering(2)
|
|
Baleno,
John
|
|
|
20,000 |
|
|
|
|
* |
|
|
|
20,000 |
|
|
|
— |
|
|
|
— |
|
BDB
Irrevocable Family Trust
|
|
|
19,200 |
|
(19)
|
|
|
* |
|
|
|
19,200 |
|
|
|
— |
|
|
|
— |
|
Rosenberg,
S. Michael
|
|
|
18,500 |
|
|
|
|
* |
|
|
|
18,500 |
|
|
|
— |
|
|
|
— |
|
Tangiers
Investors LP
|
|
|
16,666 |
|
(20)
|
|
|
* |
|
|
|
16,666 |
|
|
|
— |
|
|
|
— |
|
Lyons,
Allan R.
|
|
|
16,666 |
|
(21)
|
|
|
* |
|
|
|
16,666 |
|
|
|
— |
|
|
|
— |
|
Miriam
Mooney Trust FBO David Forrer
|
|
|
16,000 |
|
(22)
|
|
|
* |
|
|
|
16,000 |
|
|
|
— |
|
|
|
— |
|
Nielsen,
Mark
|
|
|
15,000 |
|
|
|
|
* |
|
|
|
15,000 |
|
|
|
— |
|
|
|
— |
|
Moro
Inc.
|
|
|
15,000 |
|
(23)
|
|
|
* |
|
|
|
15,000 |
|
|
|
— |
|
|
|
— |
|
Purdom,
Mark W.
|
|
|
15,000 |
|
|
|
|
* |
|
|
|
15,000 |
|
|
|
— |
|
|
|
— |
|
Tocco,
James
|
|
|
15,000 |
|
|
|
|
* |
|
|
|
15,000 |
|
|
|
— |
|
|
|
— |
|
Chazanovitz,
David
|
|
|
14,000 |
|
|
|
|
* |
|
|
|
14,000 |
|
|
|
— |
|
|
|
— |
|
Mitchell
J. Lipcon Profit Sharing Keough Plan
|
|
|
13,666 |
|
(24)
|
|
|
* |
|
|
|
13,666 |
|
|
|
— |
|
|
|
— |
|
Lurie,
William L.
|
|
|
13,666 |
|
|
|
|
* |
|
|
|
13,666 |
|
|
|
— |
|
|
|
— |
|
Izmirian,
George Glenn
|
|
|
13,500 |
|
|
|
|
* |
|
|
|
13,500 |
|
|
|
— |
|
|
|
— |
|
McCartney,
Timothy M.
|
|
|
13,500 |
|
|
|
|
* |
|
|
|
13,500 |
|
|
|
— |
|
|
|
— |
|
Delaware
Charter, Tax Id #51-0099493, FBO Fred Williams R/O IRA #7201-7149, C/O
Legent Clearing, 9300 Underwood, Suite 400, Omaha, NE
68114
|
|
|
13,333
|
|
(25)
|
|
|
* |
|
|
|
13,333
|
|
|
|
— |
|
|
|
— |
|
Forrer,
John
|
|
|
13,333 |
|
|
|
|
* |
|
|
|
13,333 |
|
|
|
— |
|
|
|
— |
|
Delaware
Charter, Tax Id #51-0099493, FBO Jonathan A Gerlach IRA #2299-5859, C/O
Legent Clearing, 9300 Underwood, Suite 400, Omaha, NE
68114
|
|
|
12,600 |
|
(26)
|
|
|
|
|
|
|
12,600 |
|
|
|
|
|
|
|
|
|
Blisko,
Solomon
|
|
|
11,666 |
|
|
|
|
* |
|
|
|
11,666 |
|
|
|
— |
|
|
|
— |
|
Reiff,
Jerry N.
|
|
|
11,000 |
|
|
|
|
* |
|
|
|
11,000 |
|
|
|
— |
|
|
|
— |
|
Jasper,
Scott Francis
|
|
|
11,000 |
|
|
|
|
* |
|
|
|
11,000 |
|
|
|
— |
|
|
|
— |
|
Hall,
Warren James
|
|
|
10,000 |
|
|
|
|
* |
|
|
|
10,000 |
|
|
|
— |
|
|
|
— |
|
Darwin,
Charles Barnes II
|
|
|
10,000 |
|
|
|
|
* |
|
|
|
10,000 |
|
|
|
— |
|
|
|
— |
|
Paul,
Melvyn
|
|
|
10,000 |
|
|
|
|
* |
|
|
|
10,000 |
|
|
|
— |
|
|
|
— |
|
Kendall,
Peter M.
|
|
|
10,000 |
|
|
|
|
* |
|
|
|
10,000 |
|
|
|
— |
|
|
|
— |
|
Quave,
Gerald J. Jr.
|
|
|
10,000 |
|
|
|
|
* |
|
|
|
10,000 |
|
|
|
— |
|
|
|
— |
|
Whittle,
Brian A.
|
|
|
10,000 |
|
|
|
|
* |
|
|
|
10,000 |
|
|
|
— |
|
|
|
— |
|
S.
Gerlach & L. Gerlach TTEE
|
|
|
10,000 |
|
(27)
|
|
|
* |
|
|
|
10,000 |
|
|
|
— |
|
|
|
— |
|
Glantz,
Michael
|
|
|
10,000 |
|
|
|
|
* |
|
|
|
10,000 |
|
|
|
— |
|
|
|
— |
|
Tedesco,
Gino and Joseph
|
|
|
10,000 |
|
|
|
|
* |
|
|
|
10,000 |
|
|
|
— |
|
|
|
— |
|
Hardy,
John
|
|
|
10,000 |
|
|
|
|
* |
|
|
|
10,000 |
|
|
|
— |
|
|
|
— |
|
Rosenblatt,
Kenneth
|
|
|
10,000 |
|
|
|
|
* |
|
|
|
10,000 |
|
|
|
— |
|
|
|
— |
|
Mormando,
Anthony
|
|
|
10,000 |
|
|
|
|
* |
|
|
|
10,000 |
|
|
|
— |
|
|
|
— |
|
Gordon,
Morton and Devera
|
|
|
10,000 |
|
|
|
|
* |
|
|
|
10,000 |
|
|
|
— |
|
|
|
— |
|
Delaware
Charter, Tax Id #51-10099493, FBO Steve Lilcata SEP IRA #2127-0567, C/O
Legent Clearing, 9300 Underwood, Suite 400, Omaha, NE
68114
|
|
|
9,958 |
|
(28)
|
|
|
* |
|
|
|
9,958 |
|
|
|
— |
|
|
|
— |
|
Grossman,
Martin
|
|
|
9,000 |
|
|
|
|
* |
|
|
|
9,000 |
|
|
|
— |
|
|
|
— |
|
Cooke,
Carl G.
|
|
|
8,333 |
|
|
|
|
* |
|
|
|
8,333 |
|
|
|
— |
|
|
|
— |
|
[RESALE
PROSPECTUS ALTERNATE PAGE]
Name of Selling Shareholder
|
|
Number
of Shares
of Common
Stock
Beneficially
Owned
Prior to
Offering
|
|
|
|
Percentage of
Shares of
Common
Stock
Beneficially
Owned Prior
to the
Offering(1)
|
|
|
Number of
Shares of
Common
Stock
Registered
for Sale
Hereby
|
|
|
Number of Shares
of Common stock
Beneficially Owned
After Completion of
the Offering(2)
|
|
|
Percentage of
Shares of Common
Stock Beneficially
Owned After
Completion of the
Offering(2)
|
|
Delaware
Charter, Tax Id #51-0099493, FBO Edward M Liceaga SEP-IRA #3944-8590, C/O
Legent Clearing, 9300 Underwood, Suite 400, Omaha, NE
68114
|
|
|
8,028 |
|
(29)
|
|
|
* |
|
|
|
8,028 |
|
|
|
— |
|
|
|
— |
|
Baylis,
Carl
|
|
|
8,000 |
|
|
|
|
* |
|
|
|
8,000 |
|
|
|
— |
|
|
|
— |
|
Smith,
Christopher
|
|
|
8,000 |
|
|
|
|
* |
|
|
|
8,000 |
|
|
|
— |
|
|
|
— |
|
Christopher
and Julie Blair JTWROS
|
|
|
7,500 |
|
|
|
|
* |
|
|
|
7,500 |
|
|
|
— |
|
|
|
— |
|
Wang,
Luo
|
|
|
7,000 |
|
|
|
|
* |
|
|
|
7,000 |
|
|
|
— |
|
|
|
— |
|
Mauser,
Joseph T.
|
|
|
7,000 |
|
|
|
|
* |
|
|
|
7,000 |
|
|
|
— |
|
|
|
— |
|
Stahl
Family Revocable Family Trust TTEE 08/23/2001
|
|
|
7,000 |
|
(30)
|
|
|
* |
|
|
|
7,000 |
|
|
|
— |
|
|
|
— |
|
Maine,
Jerry
|
|
|
7,000 |
|
|
|
|
* |
|
|
|
7,000 |
|
|
|
— |
|
|
|
— |
|
Delaware
Charter, Tax Id #51-0099493, FBO Lynita C DeCotis IRA #7537-9018, C/O
Legent Clearing, 9300 Underwood, Suite 400, Omaha, NE
68114
|
|
|
6,700 |
|
(31)
|
|
|
* |
|
|
|
6,700 |
|
|
|
— |
|
|
|
— |
|
DeCotis,
James Anthony and Lynita Carla
|
|
|
6,700 |
|
|
|
|
* |
|
|
|
6,700 |
|
|
|
— |
|
|
|
— |
|
Joury,
Sasson
|
|
|
6,700 |
|
|
|
|
* |
|
|
|
6,700 |
|
|
|
— |
|
|
|
— |
|
Taylor,
Richard Charles
|
|
|
6,700 |
|
|
|
|
* |
|
|
|
6,700 |
|
|
|
— |
|
|
|
— |
|
Walker,
James
|
|
|
6,700 |
|
|
|
|
* |
|
|
|
6,700 |
|
|
|
— |
|
|
|
— |
|
Nicolosi,
Anthony Joseph
|
|
|
6,700 |
|
|
|
|
* |
|
|
|
6,700 |
|
|
|
— |
|
|
|
— |
|
Getz,
Norman W.
|
|
|
6,700 |
|
|
|
|
* |
|
|
|
6,700 |
|
|
|
— |
|
|
|
— |
|
Cohen,
Robert and Debbie
|
|
|
6,700 |
|
|
|
|
* |
|
|
|
6,700 |
|
|
|
— |
|
|
|
— |
|
Goldstein,
Gary M.
|
|
|
6,700 |
|
|
|
|
* |
|
|
|
6,700 |
|
|
|
— |
|
|
|
— |
|
Tafel,
Zeev
|
|
|
6,700 |
|
|
|
|
* |
|
|
|
6,700 |
|
|
|
— |
|
|
|
— |
|
Lerner,
Jerry S. and Deborah A.
|
|
|
6,700 |
|
|
|
|
* |
|
|
|
6,700 |
|
|
|
— |
|
|
|
— |
|
Antunes,
Louis Philippe
|
|
|
6,700 |
|
|
|
|
* |
|
|
|
6,700 |
|
|
|
— |
|
|
|
— |
|
Jerkins,
Ken M.
|
|
|
6,700 |
|
|
|
|
* |
|
|
|
6,700 |
|
|
|
— |
|
|
|
— |
|
Lowe,
Joan
|
|
|
6,700 |
|
|
|
|
* |
|
|
|
6,700 |
|
|
|
— |
|
|
|
— |
|
Krauser,
Jack T.
|
|
|
6,700 |
|
|
|
|
* |
|
|
|
6,700 |
|
|
|
— |
|
|
|
— |
|
Centauro,
George
|
|
|
6,700 |
|
|
|
|
* |
|
|
|
6,700 |
|
|
|
— |
|
|
|
— |
|
Stange,
David W.
|
|
|
6,700 |
|
|
|
|
* |
|
|
|
6,700 |
|
|
|
— |
|
|
|
— |
|
Treesh,
Richard C.
|
|
|
6,700 |
|
|
|
|
* |
|
|
|
6,700 |
|
|
|
— |
|
|
|
— |
|
Cheley,
Dean
|
|
|
6,700 |
|
|
|
|
* |
|
|
|
6,700 |
|
|
|
— |
|
|
|
— |
|
McCormick,
John
|
|
|
6,700 |
|
|
|
|
* |
|
|
|
6,700 |
|
|
|
— |
|
|
|
— |
|
Palmatier,
Steven Jon
|
|
|
6,666 |
|
|
|
|
* |
|
|
|
6,666 |
|
|
|
— |
|
|
|
— |
|
Simon,
Steve B.
|
|
|
6,666 |
|
|
|
|
* |
|
|
|
6,666 |
|
|
|
— |
|
|
|
— |
|
JK
Investment Inc.
|
|
|
6,666 |
|
(32)
|
|
|
* |
|
|
|
6,666 |
|
|
|
— |
|
|
|
— |
|
Newton,
David Keith
|
|
|
6,400 |
|
|
|
|
* |
|
|
|
6,400 |
|
|
|
— |
|
|
|
— |
|
Jelcada
LP
|
|
|
5,333 |
|
|
|
|
* |
|
|
|
5,333 |
|
|
|
— |
|
|
|
— |
|
Yablonsky,
Mitchell
|
|
|
5,000 |
|
|
|
|
* |
|
|
|
5,000 |
|
|
|
— |
|
|
|
— |
|
* Less
than 1%
(1)
|
Based
on 25,312,838 shares of common stock outstanding as of the date of this
prospectus. The number of shares of our common stock
outstanding excludes (i) up to 2,500,000 shares of our common stock to be
offered by us in a firm commitment public offering concurrently herewith
and (ii) 1,419,333 shares of common stock that are issuable upon the
exercise of outstanding warrants. Also (i) excludes the 125,000
shares underlying warrants that we will issue to the Underwriter upon the
closing of the public offering, (ii) excludes the 375,000 shares of our
common stock that we may issue upon the Underwriter’s over-allotment
option exercise in a public offering and (iii) is not affected by the
112,500 shares that the Underwriter may be purchased from selling
stockholders in such public
offering.
|
[RESALE
PROSPECTUS ALTERNATE PAGE]
(2)
|
Represents
the amount of shares that will be held by the selling stockholders after
completion of this offering based on the assumption that all shares
registered for sale hereby will be sold. However, the selling stockholders
may offer all, some or none of the shares pursuant to this prospectus, and
to our knowledge there are currently no agreements, arrangements or
understandings with respect to the sale of any of the shares that may be
held by the selling stockholders after completion of this
offering.
|
(3)
|
Jeffrey
Rubin, as manager, has voting and investment control over the shares owned
by this entity.
|
(4)
|
Lyman
O. Heidtke, as general partner, has voting and investment control over the
shares owned by this entity.
|
(5)
|
Gil
N. Schwartzberg, as manager of the general partner, has voting and
investment control over the shares owned by this entity. Mr. Schwartzberg
is the spouse of Debbie Schwartzberg. Excludes shareholdings
discussed under footnote (9),
below.
|
(6)
|
Richard
Schmidt, as managing member, has voting and investment control over the
shares owned by this entity.
|
(7)
|
David
H. Clarke has voting and investment control over the shares owned by this
entity.
|
(8)
|
Frederick
Berdon has voting and investment controls over the shares owned by this
entity. Based on information provided to us by this selling
stockholder, Mr. Berdon is an affiliate of a broker-dealer but the selling
stockholder acquired these securities in the ordinary course of business
and that at the time of the acquisition of these securities, it had no
agreements or understandings, directly or indirectly, with any person to
distribute these securities.
|
(9)
|
Includes
274,008 shares of common stock and 107,283 shares of common stock issuable
upon the exercise of outstanding warrants, each held by Debbie
Schwartzberg, who is the spouse of the selling
stockholder. Also includes 28,408 shares of common stock and
11,123 shares of common stock issuable upon the exercise of outstanding
warrants held in such amounts by each of the Julie Schwartzberg Trust
dated 2/9/2009 and the David N. Sterling Trust dated
2/3/2000. The selling stockholder is a co-trustee of the
foregoing trusts. As a result, the selling stockholder may be
deemed the indirect beneficial owner of these securities and disclaims
beneficial ownership of the securities except to of his pecuniary interest
in the securities. Excludes the shares held by Continuum
Capital Partners, LP listed in the table above and footnote (5)
above.
|
(10)
|
Stanley
W. Gerlach has voting and investment control over the shares owned by this
entity.
|
(11)
|
Paul
Masters has voting and investment control over the shares owned by this
entity. Based on information provided to us by this selling
stockholder, Mr. Masters is an affiliate of a broker-dealer but the
selling stockholder acquired these securities in the ordinary course of
business and that at the time of the acquisition of these securities, it
had no agreements or understandings, directly or indirectly, with any
person to distribute these
securities.
|
(12)
|
David
F. Mickelson, as managing member, has voting and investment control over
the shares owned by this entity.
|
(13)
|
S. Michael Rosenberg has
voting and investment control over the shares owned by this
entity.
|
(14)
|
John
O. Forrer, as trustee, has voting and investment control over the shares
owned by this entity.
|
(15)
|
Suzanne
A. Gerlach, as trustee, has voting and investment control over the shares
owned by this entity.
|
(16)
|
Thomas G. Charles has
voting and investment control over the shares owned by this
entity.
|
(17)
|
John O. Forrer, as trustee, has
voting and investment control over the shares owned by this
entity.
|
(18)
|
Marilyn Lefkowitz, as manager,
has voting and investment control over the shares owned by this
entity.
|
(19)
|
Duane
H. Butcher, as Trustee has voting and investment control over the shares
owned by this entity.
|
(20)
|
Justin
Ederle, as managing member of the general partner, has voting and
investment control over the shares owned by this
entity.
|
(21)
|
Based on information
provided to us by this selling stockholder, Mr. Allen is an affiliate of a
broker-dealer but the selling stockholder acquired these securities in the
ordinary course of business and that at the time of the acquisition of
these securities, it had no agreements or understandings, directly or
indirectly, with any person to distribute these
securities.
|
(22)
|
John
O. Forrer, as trustee, has voting and investment control over the shares
owned by this entity.
|
(23)
|
Stephen
Schwartz, as President, has voting and investment control over the shares
owned by this entity.
|
(24)
|
Mitchell
J. Lipcon, as Trustee, has voting and investment control over the shares
owned by this entity.
|
(25)
|
Fred Williams has voting
and investment control over the shares owned by this
entity.
|
(26)
|
Jonathan A Gerlach has
voting and investment control over the shares owned by this
entity.
|
[RESALE
PROSPECTUS ALTERNATE PAGE]
(27)
|
Stanley
Wayne Gerlach, Jr. and Linda B. Gerlach, as trustees, president and
secretary, have voting and investment control over the shares owned by
this entity.
|
(28)
|
Steve Lilcata has voting
and investment control over the shares owned by this
entity.
|
(29)
|
Edward M Liceaga has
voting and investment control over the shares owned by this
entity.
|
(30)
|
Frederic
Colman as Custodian has voting and investment control over the shares
owned by this entity.
|
(31)
|
Lynita C DeCotis has
voting and investment control over the shares owned by this
entity.
|
(32)
|
Jagadish
Gangahanumaiah, as president, has voting and investment control over the
shares owned by this entity.
|
[RESALE
PROSPECTUS ALTERNATE PAGE]
PLAN
OF DISTRIBUTION
The
selling stockholders of our common stock and any of their pledgees, assignees
and successors-in-interest may, from time to time, sell any or all of their
shares of common stock on any stock exchange, market or trading facility on
which the shares are traded or in private transactions. These sales may be at
fixed or negotiated prices. The selling stockholders may use any one or more of
the following methods when selling shares:
|
•
|
ordinary
brokerage transactions and transactions in which the broker-dealer
solicits purchasers;
|
|
•
|
block
trades in which the broker-dealer will attempt to sell the shares as agent
but may position and resell a portion of the block as principal to
facilitate the transaction;
|
|
•
|
purchases
by a broker-dealer as principal and resale by the broker-dealer for its
account;
|
|
•
|
an
exchange distribution in accordance with the rules of the applicable
exchange;
|
|
•
|
privately
negotiated transactions;
|
|
•
|
settlement
of short sales entered into after the date of this
prospectus;
|
|
•
|
broker-dealers
may agree with the selling stockholders to sell a specified number of such
shares at a stipulated price per
share;
|
|
•
|
a
combination of any such methods of
sale;
|
|
•
|
through
the writing or settlement of options or other hedging transactions,
whether through an options exchange or otherwise;
or
|
|
•
|
any
other method permitted pursuant to applicable
law.
|
The
selling stockholders may also sell shares under Rule 144 under the Securities
Act of 1933, as amended (the “Securities Act”), if available, rather than under
this prospectus.
Broker-dealers
engaged by the selling stockholders may arrange for other brokers-dealers to
participate in sales. Broker-dealers may receive commissions or discounts from
the selling stockholders (or, if any broker-dealer acts as agent for the
purchaser of shares, from the purchaser) in amounts to be negotiated. Each
selling stockholder does not expect these commissions and discounts relating to
its sales of shares to exceed what is customary in the types of transactions
involved. The maximum commission or discount to be received by any
FINRA member or independent broker-dealer, however, will not be greater than
eight (8) percent for the sale of any securities being registered hereunder
pursuant to Rule 415 of the Securities Act.
WestPark
Capital, Inc. (the “Underwriter”) is an underwriter of up to 2,500,000 shares of
our common stock (excluding an Underwriter’s option to purchase an additional
375,000 shares from us and the selling stockholders to cover over-allotments) to
be offered by us in a firm commitment public offering concurrently herewith, may
dispose of shares on behalf of its account holders who are also selling
stockholders. The maximum commission or discount to be received by Underwriter
will not be greater than eight percent (8%) for the sale of any securities being
registered hereunder. Additionally, any securities acquired by any participating
FINRA members during the 180-day period preceding the date of the filing of the
prospectus with the Commission will be subject to lock-up restrictions under
FINRA Rule 5110(g), unless an exemption is available under FINRA Rule
5110(g)(2). FINRA Rule 5110(g) provides that such securities shall not be sold
during our public offering or sold, transferred, assigned, pledged or
hypothecated, or be the subject of any hedging, short sale, derivative, put or
call transaction that would result in the effective economic disposition of the
securities by any person for a period of 180 days immediately following the date
of effectiveness of sales of our public offering.
[RESALE
PROSPECTUS ALTERNATE PAGE]
In
connection with the sale of our common stock or interests therein, the selling
stockholders may enter into hedging transactions with broker-dealers or other
financial institutions, which may in turn engage in short sales of the common
stock in the course of hedging the positions they assume. The selling
stockholders may also sell shares of our common stock short and deliver these
securities to close out their short positions, or loan or pledge the common
stock to broker-dealers that in turn may sell these securities. The selling
stockholders may also enter into option or other transactions with
broker-dealers or other financial institutions or the creation of one or more
derivative securities which require the delivery to such broker-dealer or other
financial institution of shares offered by this prospectus, which shares such
broker-dealer or other financial institution may resell pursuant to this
prospectus (as supplemented or amended to reflect such
transaction).
The
selling stockholders and any broker-dealers or agents that are involved in
selling the shares may be deemed to be “underwriters” within the meaning of the
Securities Act in connection with such sales. In such event, any commissions
received by such broker-dealers or agents and any profit on the resale of the
shares purchased by them may be deemed to be underwriting commissions or
discounts under the Securities Act. Each selling stockholder has informed us
that it does not have any agreement or understanding, directly or indirectly,
with any person to distribute the common stock.
We are
required to pay certain fees and expenses incurred by us incident to the
registration of the shares. We have agreed to indemnify the selling stockholders
against certain losses, claims, damages and liabilities, including liabilities
under the Securities Act.
Because
selling stockholders may be deemed to be “underwriters” within the meaning of
the Securities Act, they will be subject to the prospectus delivery requirements
of the Securities Act. In addition, any securities covered by this prospectus
which qualify for sale pursuant to Rule 144 under the Securities Act may be sold
under Rule 144 rather than under this prospectus. Each selling stockholder has
advised us that they have not entered into any agreements, understandings or
arrangements with any underwriter or broker-dealer regarding the sale of the
resale shares. There is no underwriter or coordinating broker acting in
connection with the proposed sale of the resale shares by the selling
stockholders.
We agreed
to keep this prospectus effective for twelve (12) months. The resale shares will
be sold only through registered or licensed brokers or dealers if required under
applicable state securities laws. In addition, in certain states, the resale
shares may not be sold unless they have been registered or qualified for sale in
the applicable state or an exemption from the registration or qualification
requirement is available and is complied with.
Under
applicable rules and regulations under the Exchange Act, any person engaged in
the distribution of the resale shares may not simultaneously engage in market
making activities with respect to our common stock for a period of two business
days prior to the commencement of the distribution. In addition, the selling
stockholders will be subject to applicable provisions of the Exchange Act and
the rules and regulations thereunder, including Regulation M, which may limit
the timing of purchases and sales of shares of our common stock by the selling
stockholders or any other person. We will make copies of this prospectus
available to the selling stockholders and have informed them of the need to
deliver a copy of this prospectus to each purchaser at or prior to the time of
the sale.
[RESALE
PROSPECTUS ALTERNATE PAGE]
LEGAL
MATTERS
The
validity of the common stock offered by this prospectus will be passed upon for
us by K&L Gates LLP, Los Angeles, California. Legal matters as to PRC law
will be passed upon for us by Han Kun Law Offices. K&L Gates LLP may rely
upon Han Kun Law Offices with respect to matters governed by PRC
law.
EXPERTS
The (i)
consolidated financial statements of China Century Dragon Media, Inc. as of
December 31, 2009 and 2008 and for the years ended December 31, 2009,
2008 and 2007 (ii) condensed parent-only balance sheet China Century Dragon
Media, Inc. as of December 31, 2009 and 2008, and the related condensed
parent-only statements of income and cash flows for the years ended
December 31, 2009, 2008 and 2007included in footnote 13 to the Consolidated
Financial Statements of China Century Dragon Media, Inc., each appearing in this
prospectus and registration statement have been audited by MaloneBailey, LLP, an
independent registered public accounting firm, as set forth in their report
thereon appearing elsewhere herein, and are included in reliance upon such
report given on the authority of such firm as experts in accounting and
auditing.
ADDITIONAL
INFORMATION
We filed
with the Securities and Exchange Commission a registration statement under the
Securities Act of 1933, as amended, for the shares of common stock in this
offering. This prospectus does not contain all of the information in the
registration statement and the exhibits and schedule that were filed with the
registration statement. For further information with respect to us and our
common stock, we refer you to the registration statement and the exhibits and
schedule that were filed with the registration statement. Statements contained
in this prospectus about the contents of any contract or any other document that
is filed as an exhibit to the registration statement are not necessarily
complete, and we refer you to the full text of the contract or other document
filed as an exhibit to the registration statement. A copy of the registration
statement and the exhibits and schedules that were filed with the registration
statement may be inspected without charge at the Public Reference Room
maintained by the Securities and Exchange Commission at 100 F Street, N.E.
Washington, DC 20549, and copies of all or any part of the registration
statement may be obtained from the Securities and Exchange Commission upon
payment of the prescribed fee. Information regarding the operation of the Public
Reference Room may be obtained by calling the Securities and Exchange Commission
at 1-800-SEC-0330. The Securities and Exchange Commission maintains a website
that contains reports, proxy and information statements, and other information
regarding registrants that file electronically with the SEC. The address of the
website is www.sec.gov.
We file
periodic reports under the Securities Exchange Act of 1934, including annual,
quarterly and special reports, and other information with the Securities and
Exchange Commission. These periodic reports, and other information, are
available for inspection and copying at the regional offices, public reference
facilities and website of the Securities and Exchange Commission referred to
above.
We are in
the process of establishing a corporate website and expect to have it complete
in the near future. We intend to make available free of charge on or through our
internet website our annual reports on Form 10-K, quarterly reports on Form
10-Q, current reports on Form 8-K, and amendments to those reports filed or
furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of
1934 as soon as reasonably practicable after we electronically file such
material with, or furnish it to, the Securities and Exchange
Commission.
PART
II
INFORMATION
NOT REQUIRED IN THE PROSPECTUS
Item
13. Other Expenses of Issuance and Distribution
The
following table sets forth the costs and expenses, other than underwriting
discounts and commissions, if any, payable by the Registrant relating to the
sale of common stock being registered. All amounts are estimates
other than the Commission’s registration fee and FINRA filing
fee.
Securities
and Exchange Commission registration fee
|
|
$ |
1,880 |
|
FINRA
filing fee
|
|
|
3,077 |
|
National
securities exchange initial listing fee
|
|
|
100,000 |
|
Printing
and transfer agent fees
|
|
|
90,000 |
|
Accounting
fees and expenses
|
|
|
200,000 |
|
Legal
fees and expenses
|
|
|
300,000 |
|
Underwriter’s
counsel fees and blue sky fees
|
|
|
40,000 |
|
Non-accountable
fee to underwriter equal to 3.0% of gross proceeds (assuming no exercise
of the over-allotment option)
|
|
|
262,500 |
|
Roadshow
fees and expenses
|
|
|
10,000 |
|
Total
|
|
$ |
1,007,457 |
|
Item
14. Indemnification of directors and officers
Under
Section 145 of the General Corporation Law of the State of Delaware, we can
indemnify our directors and officers against liabilities they may incur in such
capacities, including liabilities under the Securities Act of 1933, as amended
(the “Securities Act”). Our certificate of incorporation provides that, pursuant
to Delaware law, our directors shall not be liable for monetary damages for
breach of the directors’ fiduciary duty of care to us and our stockholders. This
provision in the certificate of incorporation does not eliminate the duty of
care, and in appropriate circumstances equitable remedies such as injunctive or
other forms of non-monetary relief will remain available under Delaware law. In
addition, each director will continue to be subject to liability for breach of
the director’s duty of loyalty to us or our stockholders, for acts or omissions
not in good faith or involving intentional misconduct or knowing violations of
the law, for actions leading to improper personal benefit to the director, and
for payment of dividends or approval of stock repurchases or redemptions that
are unlawful under Delaware law. The provision also does not affect a director’s
responsibilities under any other law, such as the federal securities laws or
state or federal environmental laws.
Our
bylaws provide for the indemnification of our directors to the fullest extent
permitted by the Delaware General Corporation Law. Our bylaws further provide
that our Board of Directors has discretion to indemnify our officers and other
employees. We are required to advance, prior to the final disposition of any
proceeding, promptly on request, all expenses incurred by any director or
executive officer in connection with that proceeding on receipt of an
undertaking by or on behalf of that director or executive officer to repay those
amounts if it should be determined ultimately that he or she is not entitled to
be indemnified under the bylaws or otherwise. We are not, however, required to
advance any expenses in connection with any proceeding if a determination is
reasonably and promptly made by our Board of Directors by a majority vote of a
quorum of disinterested Board members that (i) the party seeking an advance
acted in bad faith or deliberately breached his or her duty to us or our
stockholders and (ii) as a result of such actions by the party seeking an
advance, it is more likely than not that it will ultimately be determined that
such party is not entitled to indemnification pursuant to the applicable
sections of our bylaws.
We have
been advised that in the opinion of the Securities and Exchange Commission,
insofar as indemnification for liabilities arising under the Securities Act may
be permitted to our directors, officers and controlling persons pursuant to the
foregoing provisions, or otherwise, such indemnification is against public
policy as expressed in the Securities Act and is therefore unenforceable. In the
event a claim for indemnification against such liabilities (other than our
payment of expenses incurred or paid by our director, officer or controlling
person in the successful defense of any action, suit or proceeding) is asserted
by such director, officer or controlling person in connection with the
securities being registered, we will, unless in the opinion of our counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question of whether such indemnification by us is
against public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.
We may
enter into indemnification agreements with each of our directors and officers
that are, in some cases, broader than the specific indemnification provisions
permitted by Delaware law, and that may provide additional procedural
protection. As of the date of the Share Exchange, we have not entered into any
indemnification agreements with our directors or officers, but may choose to do
so in the future. Such indemnification agreements may require us, among other
things, to:
|
·
|
indemnify
officers and directors against certain liabilities that may arise because
of their status as officers or
directors;
|
|
·
|
advance
expenses, as incurred, to officers and directors in connection with a
legal proceeding, subject to limited exceptions;
or
|
|
·
|
obtain
directors’ and officers’ insurance.
|
At
present, there is no pending litigation or proceeding involving any of our
directors, officers or employees in which indemnification is sought, nor are we
aware of any threatened litigation that may result in claims for
indemnification.
Item
15. Recent sales of securities
On April
30, 2010, pursuant to the terms of the Exchange Agreement, as amended, entered
into by and between SRKP 22, CD Media BVI and the shareholders of CD Media BVI,
SRKP 25 issued 19,100,000 shares of common stock to the shareholders and their
designees in exchange for all of the issued and outstanding securities of CD
Media BVI. All of the securities were offered and issued in reliance
upon an exemption from registration pursuant to Regulation S of the Securities
Act of 1933, as amended (“Securities Act”). We complied with the
conditions of Rule 903 as promulgated under the Securities Act including, but
not limited to, the following: (i) each recipient of the shares is a non-U.S.
resident and has not offered or sold their shares in accordance with the
provisions of Regulation S; (ii) an appropriate legend was affixed to the
securities issued in accordance with Regulation S; (iii) each recipient of the
shares has represented that it was not acquiring the securities for the account
or benefit of a U.S. person; and (iv) each recipient of the shares agreed to
resell the securities only in accordance with the provisions of Regulation S,
pursuant to a registration statement under the Securities Act, or pursuant to an
available exemption from registration. We will refuse to register any
transfer of the shares not made in accordance with Regulation S, after
registration, or under an exemption.
On April
30, 2010, we received gross proceeds of approximately $5.35 million in the
closing of a private placement transaction (the “Private
Placement”). Pursuant to subscription agreements entered into with
the investors, we sold an aggregate of 3,566,838 shares of Common Stock at $1.50
per share. We agreed to pay WestPark Capital, the placement agent
for the Private Placement, a commission equal to 10.0% with a non-accountable
fee of 4.0% of the gross proceeds from the Private Placement. The
securities were offered and sold to investors in reliance upon exemptions from
registration pursuant to Section 4(2) under the Securities Act and Rule 506
promulgated thereunder. Each of the persons and/or entities receiving our
securities qualified as an accredited investor (as defined by Rule 501 under the
Securities Act).
On
December 17, 2007, we offered and sold an aggregate of 7,096,390 shares of our
common stock for aggregate proceeds equal to $5,000.12, pursuant to the terms
and conditions set forth in those certain common stock purchase agreements (each
a “Common Stock Purchase Agreement”), and warrants (the “Warrants”) to purchase
an aggregate of 7,096,390 shares of our common stock for aggregate proceeds
equal to $2,500.05, pursuant to the terms and conditions set forth in those
certain warrant purchase agreement (each a “Warrant Purchase Agreement”). The
Warrants have an exercise price equal to $0.0001. The Warrants are immediately
exercisable and terminate on the earlier of December 17, 2017 or five years from
the date the Company consummates a merger or other business combination with an
operating business or any other event pursuant to which the Company ceases to be
a “shell company” and a “blank check company.” This occurred upon the close of
the Share Exchange that closed on April 30, 2010. We sold these shares of common
stock and Warrants under the exemption from registration provided by Section
4(2) of the Securities Act and Regulation D promulgated
thereunder.
Item
16. Exhibits
Exhibit No.
|
|
Exhibit Description
|
|
|
|
1.1*
|
|
Form
of Underwriting Agreement.
|
|
|
|
2.1
|
|
Amended
and Restated Share Exchange Agreement, dated as of April 14, 2010, by and
among the Registrant, CD Media (Holding) Co., Limited, the shareholders of
CD Media BVI, Huizhou CD Media Co., Ltd., and Beijing CD Media
Advertisement Co., Ltd.
|
|
|
|
3.1
|
|
Certificate
of Incorporation (incorporated by reference from Exhibit 3.1 to the
Registration Statement on Form 10-SB (File No. 000-53021) filed with the
Securities and Exchange Commission on January 16,
2008).
|
|
|
|
3.2
|
|
Bylaws
(incorporated by reference from Exhibit 3.2 to the Registration Statement
on Form 10-SB (File No. 000-53021) filed with the Securities and Exchange
Commission on January 16, 2008).
|
|
|
|
3.3**
|
|
Articles
of Merger effecting name change filed with the Office of Secretary of
State of Delaware on April 30, 2010.
|
|
|
|
4.1
|
|
Specimen
Certificate of Common Stock.
|
|
|
|
4.2
|
|
Form
of Warrant dated December 17, 2007 (incorporated by reference from Exhibit
4.1 to the Registration Statement on Form 10-SB (File No. 000-53021) filed
with the Securities and Exchange Commission on January 16,
2008).
|
|
|
|
4.3*
|
|
Form
of Underwriter Warrant.
|
|
|
|
5.1*
|
|
Opinion
of K&L Gates LLP.
|
|
|
|
10.1
|
|
Registration
Rights Agreement dated April 30, 2010 entered into by and between the
Registrant and Stockholders (incorporated by reference from Exhibit 10.1
to the Current Report on Form 8-K filed with the Securities and Exchange
Commission on May 6, 2010).
|
|
|
|
10.2
|
|
Amended
and Restated Share and Warrant Cancellation Agreement dated April 23, 2010
entered into by and between the Registrant and Stockholders (incorporated
by reference from Exhibit 10.2 to the Current Report on Form 8-K filed
with the Securities and Exchange Commission on May 6,
2010).
|
|
|
|
10.3
|
|
Form
of Subscription Agreement by and between the Company, CD Media BVI and the
investors. (incorporated by reference from Exhibit 10.3 to the Current
Report on Form 8-K filed with the Securities and Exchange Commission on
May 6, 2010).
|
|
|
|
10.4
|
|
Form
of Employment Agreement entered into with executive officers indicated in
Schedule A attached to the Form of Agreement (translated to English)
(incorporated by reference from Exhibit 10.4 to the Current Report on Form
8-K filed with the Securities and Exchange Commission on May 6,
2010).
|
|
|
|
10.5
|
|
Exclusive
Cooperation Agreement dated as of March 30, 2010 by and among CD Media HZ
and CD Media. (incorporated by reference from Exhibit 10.5 to the Current
Report on Form 8-K filed with the Securities and Exchange Commission on
May 6, 2010).
|
|
|
|
10.6
|
|
Form
of Exclusive Option Agreement dated March 30, 2010 entered into with the
individuals indicated in Schedule A attached to the Form of Agreement
(incorporated by reference from Exhibit 10.6 to the Current Report on Form
8-K filed with the Securities and Exchange Commission on May 6,
2010).
|
Exhibit No.
|
|
Exhibit Description
|
|
|
|
10.7
|
|
Form
of Power of Attorney dated March 30, 2010 entered into with the
individuals indicated in Schedule A attached to the Form of Agreement
(incorporated by reference from Exhibit 10.7 to the Current Report on Form
8-K filed with the Securities and Exchange Commission on May 6,
2010).
|
|
|
|
10.8
|
|
Form
of Equity Pledge Agreement dated March 30, 2010 entered into with the
individuals indicated in Schedule A attached to the Form of Agreement
(incorporated by reference from Exhibit 10.8 to the Current Report on Form
8-K filed with the Securities and Exchange Commission on May 6,
2010).
|
|
|
|
10.9
|
|
Cooperation
Agreement the television series Chi Dan Zhong Xin dated January 14, 2009
entered into between the Company, Sino-Euro United Investment Co., Ltd,
and Beijing Zhonghai Rongtong Culture Broadcasting Co.,
Ltd.
|
|
|
|
10.10
|
|
Interest
Transfer Agreement for Xia Mo Duo television series dated March 20, 2010
entered into by and between the Company; Yangguang Shixun Media (Beijing)
Co., Ltd; Dongguan Hanyu Software Tech Co., Ltd; and Beijing Zhonghai
Rongtong Culture Broadcasting Co., Ltd.
|
|
|
|
16.1
|
|
Letter
from AJ. Robbins, PC to the Securities and Exchange Commission dated June
29, 2010
|
|
|
|
21.1
|
|
List
of Subsidiaries (incorporated by reference from Exhibit 21.1 to the
Current Report on Form 8-K filed with the Securities and Exchange
Commission on May 6, 2010).
|
|
|
|
23.1*
|
|
Consent
of K&L Gates LLP (contained in Exhibit 5.1).
|
|
|
|
23.2*
|
|
Consent
of Han Kun Law Offices.
|
|
|
|
23.3
|
|
Consent
of MaloneBailey, LLP.
|
|
|
|
24.1**
|
|
Power
of Attorney (included on signature
page).
|
* To be
filed by amendment.
**
Previously filed.
Item
17. Undertakings
The
undersigned registrant hereby undertakes with respect to the securities being
offered and sold in this offering:
To file,
during any period in which offers or sales are being made, a post-effective
amendment to this registration statement:
|
i. To
include any prospectus required by Section 10(a)(3) of the Securities Act
of 1933;
|
|
ii. To
reflect in the prospectus any facts or events arising after the effective
date of the registration statement (or the most recent post-effective
amendment thereof) which, individually or in the aggregate, represent a
fundamental change in the information set forth in the registration
statement. Notwithstanding the foregoing, any increase or decrease in
volume of securities offered (if the total dollar value of securities
offered would not exceed that which was registered) and any deviation from
the low or high end of the estimated maximum offering range may be
reflected in the form of prospectus filed with the Commission pursuant to
Rule 424(b) if, in the aggregate offering price set forth in the
“Calculation of Registration Fee” table in the effective registration
statement;
|
|
iii. To
include any material information with respect to the plan of distribution
not previously disclosed in the registration statement or any material
change in such information in registration
statement.
|
That, for
the purpose of determining any liability under the Securities Act of 1933, each
such post-effective amendment shall be deemed to be a new registration statement
relating to the securities offered therein and the offering of such securities
at that time shall be deemed to be the initial bona fide offering
thereof.
To remove
from registration by means of post-effective amendment any of the securities
being registered which remain unsold at the termination of the
offering.
For
determining liability of the undersigned registrant under
the Securities Act to any purchaser in the initial distribution of the
securities, the undersigned registrant
undertakes that in a primary offering of securities of the undersigned registrant pursuant
to this registration statement, regardless of the underwriting method used to
sell the securities to the purchaser, if the securities are offered or sold to
such purchaser by means of any of the following communications, the undersigned
registrant
will be a seller to the purchaser and will be considered to offer or sell such
securities to the purchaser:
|
i. in
any preliminary prospectus or prospectus of the undersigned registrant
relating to the offering required to be filed pursuant to Rule
424;
|
|
ii. any
free writing prospectus relating to the offering prepared by or on behalf
of the undersigned registrant or used or referred to by the undersigned
registrant;
|
|
iii. the
portion of any other free writing prospectus relating to the offering
containing material information about the undersigned registrant or its
securities provided by or on behalf of the undersigned registrant;
and
|
|
iv. any
other communication that is an offer in the offering made by the
undersigned registrant to the
purchaser.
|
Insofar
as indemnification for liabilities arising under the Securities Act of 1933 (the
“Act”) may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable.
In the
event that a claim for indemnification against such liabilities, other than the
payment by the registrant of
expenses incurred and paid by a director, officer or controlling person of the
registrant in
the successful defense of any action, suit or proceeding, is asserted by such
director, officer or controlling person in connection with the securities being
registered hereby, the registrant will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act of 1933 and will be governed by the final adjudication of such
issue.
The
undersigned Registrant hereby undertakes that it will:
|
(i) for
determining any liability under the Securities Act, treat the information
omitted from the form of prospectus filed as part of this registration
statement in reliance upon Rule 430A and contained in a form of prospectus
filed by the registrant under Rule 424(b)(1), or (4) or 497(h) under the
Securities Act as part of this registration statement as of the time the
Commission declared it effective.
|
|
(ii)
for determining any liability under the Securities Act, treat each
post-effective amendment that contains a form of prospectus as a new
registration statement for the securities offered in the registration
statement, and that offering of the securities at that time as the initial
bona fide offering of those
securities.
|
For the
purpose of determining liability under the Securities Act to any purchaser, the
undersigned registrant undertakes that each prospectus filed pursuant to Rule
424(b) as part of a registration statement relating to an offering, other than
registration statements relying on Rule 430B or other than prospectuses filed in
reliance on Rule 430A, shall be deemed to be part of and included in the
registration statement as of the date it is first used after effectiveness.
Provided, however, that no statement made in a registration statement or
prospectus that is part of the registration statement or made in a document
incorporated or deemed incorporated by reference into the registration statement
or prospectus that is part of the registration statement will, as to a purchaser
with a time of contract of sale prior to such first use, supersede or modify any
statement that was made in the registration statement or prospectus that was
part of the registration statement or made in any such document immediately
prior to such date of first use.
For the
purpose of determining liability under the Securities Act to any purchaser, the
undersigned registrant undertakes that:
(i) if the undersigned registrant is
relying on Rule 430B:
|
(a)
each prospectus filed by the undersigned registrant pursuant to Rule
424(b)(3) shall be deemed to be part of the registration statement as of
the date the filed prospectus was deemed part of and included in the
registration statement; and
|
|
(b)
Each prospectus required to be filed pursuant to Rule 424(b)(2), (b)(5),
or (b)(7) as part of a registration statement in reliance on Rule 430B
relating to an offering made pursuant to Rule 415(a)(1)(i), (vii), or (x)
for the purpose of providing the information required by section 10(a) of
the Securities Act shall be deemed to be part of and included in the
registration statement as of the earlier of the date such form of
prospectus is first used after effectiveness or the date of the first
contract of sale of securities in the offering described in the
prospectus. As provided in Rule 430B, for liability purposes of the issuer
and any person that is at that date an underwriter, such date shall be
deemed to be a new effective date of the registration statement relating
to the securities in the registration statement to which that prospectus
relates, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof. Provided, however, that no
statement made in a registration statement or prospectus that is part of
the registration statement or made in a document incorporated or deemed
incorporated by reference into the registration statement or prospectus
that is part of the registration statement will, as to a purchaser with a
time of contract of sale prior to such effective date, supersede or modify
any statement that was made in the registration statement or prospectus
that was part of the registration statement or made in any such document
immediately prior to such effective date;
or
|
(ii) if the undersigned registrant is
subject to Rule 430C:
(a) Each
prospectus filed pursuant to Rule 424(b) as part of a registration statement
relating to an offering, other than registration statements relying on Rule 430B
or other than prospectuses filed in reliance on Rule 430A, shall be deemed to be
part of and included in the registration statement as of the date it is first
used after effectiveness. Provided, however, that no statement made in a
registration statement or prospectus that is part of the registration statement
or made in a document incorporated or deemed incorporated by reference into the
registration statement or prospectus that is part of the registration statement
will, as to a purchaser with a time of contract of sale prior to such first use,
supersede or modify any statement that was made in the registration statement or
prospectus that was part of the registration statement or made in any such
document immediately prior to such date of first use.
SIGNATURES
Pursuant
to the requirements of the Securities Act, the Registrant has duly caused this
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Huizhou, People’s Republic of China, on the 28th
day of June, 2010.
|
China
Century Dragon Media, Inc.
|
|
|
|
|
By:
|
/s/ Li Hui
Hua
|
|
Name:
|
Li
Hui Hua
|
|
Title:
|
Chief
Executive Officer
|
Pursuant
to the requirements of the Securities Act of 1933, as amended, this Registration
Statement has been signed by the following persons in the capacities and on the
dates indicated:
SIGNATURE
|
|
TITLE
|
|
DATE
|
|
|
|
|
|
|
|
Chief
Executive Office and Chairman
|
|
|
|
|
of
the Board (Principal Executive
|
|
|
/s/ Li Hui Hua
|
|
Officer)
|
|
June
28, 2010
|
Li
Hui Hua
|
|
|
|
|
|
|
|
|
|
|
|
Chief
Financial Officer and Corporate Secretary
|
|
|
|
|
(Principal
Financial and Accounting
|
|
|
/s/ Zhang Le
|
|
Officer)
|
|
June
28, 2010
|
Zhang
Le
|
|
|
|
|
|
|
|
|
|
*
|
|
Director
|
|
June
28, 2010
|
Fu
Hai Ming
|
|
|
|
|
*
By:
|
/s/ Li Hui Hua
|
|
Li
Hui Hua, as Attorney in
Fact
|
EXHIBIT
INDEX
Exhibit No.
|
|
Exhibit Description
|
|
|
|
1.1*
|
|
Form
of Underwriting Agreement.
|
|
|
|
2.1
|
|
Amended
and Restated Share Exchange Agreement, dated as of April 14, 2010, by and
among the Registrant, CD Media (Holding) Co., Limited, the shareholders of
CD Media BVI, Huizhou CD Media Co., Ltd., and Beijing CD Media
Advertisement Co., Ltd.
|
|
|
|
3.1
|
|
Certificate
of Incorporation (incorporated by reference from Exhibit 3.1 to the
Registration Statement on Form 10-SB (File No. 000-53021) filed with the
Securities and Exchange Commission on January 16,
2008).
|
|
|
|
3.2
|
|
Bylaws
(incorporated by reference from Exhibit 3.2 to the Registration Statement
on Form 10-SB (File No. 000-53021) filed with the Securities and Exchange
Commission on January 16, 2008).
|
|
|
|
3.3**
|
|
Articles
of Merger effecting name change filed with the Office of Secretary of
State of Delaware on April 30, 2010.
|
|
|
|
4.1
|
|
Specimen
Certificate of Common Stock.
|
|
|
|
4.2
|
|
Form
of Warrant dated December 17, 2007 (incorporated by reference from Exhibit
4.1 to the Registration Statement on Form 10-SB (File No. 000-53021) filed
with the Securities and Exchange Commission on January 16,
2008).
|
|
|
|
4.3*
|
|
Form
of Underwriter Warrant.
|
|
|
|
5.1*
|
|
Opinion
of K&L Gates LLP.
|
|
|
|
10.1
|
|
Registration
Rights Agreement dated April 30, 2010 entered into by and between the
Registrant and Stockholders (incorporated by reference from Exhibit 10.1
to the Current Report on Form 8-K filed with the Securities and Exchange
Commission on May 6, 2010).
|
|
|
|
10.2
|
|
Amended
and Restated Share and Warrant Cancellation Agreement dated April 23, 2010
entered into by and between the Registrant and Stockholders (incorporated
by reference from Exhibit 10.2 to the Current Report on Form 8-K filed
with the Securities and Exchange Commission on May 6,
2010).
|
|
|
|
10.3
|
|
Form
of Subscription Agreement by and between the Company, CD Media BVI and the
investors. (incorporated by reference from Exhibit 10.3 to the Current
Report on Form 8-K filed with the Securities and Exchange Commission on
May 6, 2010).
|
|
|
|
10.4
|
|
Form
of Employment Agreement entered into with executive officers indicated in
Schedule A attached to the Form of Agreement (translated to English)
(incorporated by reference from Exhibit 10.4 to the Current Report on Form
8-K filed with the Securities and Exchange Commission on May 6,
2010).
|
|
|
|
10.5
|
|
Exclusive
Cooperation Agreement dated as of March 30, 2010 by and among CD Media HZ
and CD Media. (incorporated by reference from Exhibit 10.5 to the Current
Report on Form 8-K filed with the Securities and Exchange Commission on
May 6, 2010).
|
|
|
|
10.6
|
|
Form
of Exclusive Option Agreement dated March 30, 2010 entered into with the
individuals indicated in Schedule A attached to the Form of Agreement
(incorporated by reference from Exhibit 10.6 to the Current Report on Form
8-K filed with the Securities and Exchange Commission on May 6,
2010).
|
|
|
|
10.7
|
|
Form
of Power of Attorney dated March 30, 2010 entered into with the
individuals indicated in Schedule A attached to the Form of Agreement
(incorporated by reference from Exhibit 10.7 to the Current Report on Form
8-K filed with the Securities and Exchange Commission on May 6,
2010).
|
Exhibit No.
|
|
Exhibit Description
|
|
|
|
10.8
|
|
Form
of Equity Pledge Agreement dated March 30, 2010 entered into with the
individuals indicated in Schedule A attached to the Form of Agreement
(incorporated by reference from Exhibit 10.8 to the Current Report on Form
8-K filed with the Securities and Exchange Commission on May 6,
2010).
|
|
|
|
10.9
|
|
Cooperation
Agreement the television series Chi Dan Zhong Xin dated January 14, 2009
entered into between the Company, Sino-Euro United Investment Co., Ltd,
and Beijing Zhonghai Rongtong Culture Broadcasting Co.,
Ltd.
|
|
|
|
10.10
|
|
Interest
Transfer Agreement for Xia Mo Duo television series dated March 20, 2010
entered into by and between the Company; Yangguang Shixun Media (Beijing)
Co., Ltd; Dongguan Hanyu Software Tech Co., Ltd; and Beijing Zhonghai
Rongtong Culture Broadcasting Co., Ltd.
|
|
|
|
16.1
|
|
Letter
from AJ. Robbins, PC to the Securities and Exchange Commission dated June
29, 2010
|
|
|
|
21.1
|
|
List
of Subsidiaries (incorporated by reference from Exhibit 21.1 to the
Current Report on Form 8-K filed with the Securities and Exchange
Commission on May 6, 2010).
|
|
|
|
23.1*
|
|
Consent
of K&L Gates LLP (contained in Exhibit 5.1).
|
|
|
|
23.2*
|
|
Consent
of Han Kun Law Offices.
|
|
|
|
23.3
|
|
Consent
of MaloneBailey, LLP.
|
|
|
|
24.1**
|
|
Power
of Attorney (included on signature
page).
|
* To be
filed by amendment.
**
Previously filed.