Indicate by check mark if the registrant is
a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☒ No ☐
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15
(d) of the Securities Exchange Act of 1934. Yes ☐ No ☒
Indicate by
check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required
to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such
files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a
large accelerated filer, an accelerated filer, a non-accelerated filer, or an emerging growth company. See the definitions of large accelerated filer, accelerated filer, and emerging growth company in Rule 12b-2
of the Exchange Act. (Check one):
Large accelerated
filer ☒ Accelerated filer ☐ Non-accelerated
filer ☐ Emerging growth company ☐
If an emerging
growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting
standards provided pursuant to Section 13(a) of the Exchange Act. ☐
The term new or revised financial accounting
standard refers to any update issued by the Financial Accounting Standards Board to its Accounting Standards Codification after April 5, 2012.
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
If Other has been checked in response to the previous question, indicate by check mark which financial statement
item the registrant has elected to follow. Item 17 ☐ Item 18 ☐
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act). Yes ☐ No ☒
(APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PAST FIVE YEARS)
Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections
12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes ☐ No ☐
Unless otherwise indicated and except where the context otherwise requires, references in this annual report on Form 20-F to:
Our financial statements are expressed in U.S. dollars, which is our reporting currency. Certain of our financial data in this
annual report on Form 20-F is translated into U.S. dollars solely for the readers convenience. Unless otherwise noted, all convenient translations from Renminbi to U.S. dollars in this annual report on Form 20-F were made at a rate of
RMB6.8098 to US$1.00, the exchange rate set forth in the H.10 statistical release of the Federal Reserve Board on May 31, 2017. We make no representation that any Renminbi or U.S. dollar amounts could have been, or could be, converted into U.S.
dollars or Renminbi, as the case may be, at any particular rate, at the rate stated above, or at all.
This annual report contains forward-looking statements that involve risks and uncertainties. All statements other than statements of historical facts are
forward-looking statements. These forward-looking statements are made under the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. These statements involve known and unknown risks, uncertainties and
other factors that may cause our actual results, performance or achievements to be materially different from those expressed or implied by the forward-looking statements.
You can identify these forward-looking statements by words or phrases such as may, will, expect, is expected
to, anticipate, aim, estimate, intend, plan, believe, is/are likely to or other similar expressions. We have based these forward-looking statements largely on
our current expectations and projections about future events and financial trends that we believe may affect our financial condition, results of operations, business strategy and financial needs. These forward-looking statements include, but are not
limited to:
You should not rely upon forward-looking statements as predictions of future events. The forward-looking statements made in this annual report relate only to
events or information as of the date on which the statements are made in this annual report. We undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as
required by applicable law.
PART I
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
Not applicable.
ITEM 2. OFFER
STATISTICS AND EXPECTED TIMETABLE
Not applicable.
3
ITEM 3. KEY INFORMATION
A.
Selected Financial Data
Our Selected
Consolidated Financial Data
The following tables present the selected consolidated financial data of our company. The selected consolidated
statement of operations data for the fiscal years ended May 31, 2015, 2016 and 2017 and the consolidated balance sheet data as of May 31, 2016 and 2017 have been derived from our audited consolidated financial statements, which are
included in this annual report beginning on page F-1. The selected consolidated statement of operations data for the fiscal years ended May 31, 2013 and 2014 and the selected consolidated balance sheet data as of May 31, 2013, 2014 and
2015 have been derived from our audited consolidated financial statements for the fiscal years ended May 31, 2013, 2014 and 2015, which are not included in this annual report. Our historical results do not necessarily indicate results expected
for any future periods. The selected consolidated financial data should be read in conjunction with, and are qualified in their entirety by reference to, our audited consolidated financial statements and related notes included elsewhere in this
annual report and Item 5A. Operating and Financial Review and Prospects. Our audited consolidated financial statements are prepared and presented in accordance with generally accepted accounting principles in the United States, or
U.S. GAAP.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended May 31,
|
|
(in thousands of US$ except share, per share and per ADS data)
|
|
2013
|
|
|
2014
|
|
|
2015
|
|
|
2016
|
|
|
2017
|
|
Consolidated Statement of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Educational programs and services
|
|
|
857,685
|
|
|
|
1,006,198
|
|
|
|
1,102,974
|
|
|
|
1,309,339
|
|
|
|
1,608,954
|
|
Books and others
|
|
|
102,169
|
|
|
|
132,689
|
|
|
|
143,792
|
|
|
|
169,009
|
|
|
|
190,555
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenues
|
|
|
959,854
|
|
|
|
1,138,887
|
|
|
|
1,246,766
|
|
|
|
1,478,348
|
|
|
|
1,799,509
|
|
Operating costs and expenses:
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues
|
|
|
(384,177
|
)
|
|
|
(451,669
|
)
|
|
|
(526,320
|
)
|
|
|
(614,364
|
)
|
|
|
(749,586
|
)
|
Selling and marketing
|
|
|
(142,098
|
)
|
|
|
(169,062
|
)
|
|
|
(188,483
|
)
|
|
|
(197,897
|
)
|
|
|
(232,826
|
)
|
General and administrative
|
|
|
(311,014
|
)
|
|
|
(324,210
|
)
|
|
|
(378,434
|
)
|
|
|
(471,010
|
)
|
|
|
(554,948
|
)
|
Total operating costs and expenses
|
|
|
(837,289
|
)
|
|
|
(944,941
|
)
|
|
|
(1,093,237
|
)
|
|
|
(1,283,271
|
)
|
|
|
(1,537,360
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on disposal of subsidiaries
|
|
|
|
|
|
|
3,621
|
|
|
|
|
|
|
|
3,760
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
122,565
|
|
|
|
197,567
|
|
|
|
153,529
|
|
|
|
198,837
|
|
|
|
262,149
|
|
Other income, net:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
30,121
|
|
|
|
44,880
|
|
|
|
66,605
|
|
|
|
66,861
|
|
|
|
61,445
|
|
Realized gain from long-term investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,086
|
|
Impairment loss from long-term investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,338
|
)
|
Miscellaneous income, net
|
|
|
772
|
|
|
|
752
|
|
|
|
342
|
|
|
|
1,586
|
|
|
|
2,367
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
(18,985
|
)
|
|
|
(28,235
|
)
|
|
|
(31,552
|
)
|
|
|
(39,467
|
)
|
|
|
(51,142
|
)
|
Deferred
|
|
|
3,630
|
|
|
|
2,193
|
|
|
|
5,331
|
|
|
|
1,936
|
|
|
|
518
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes
|
|
|
(15,355
|
)
|
|
|
(26,042
|
)
|
|
|
(26,221
|
)
|
|
|
(37,531
|
)
|
|
|
(50,624
|
)
|
Loss from equity method investments
|
|
|
(1,427
|
)
|
|
|
(1,453
|
)
|
|
|
(1,537
|
)
|
|
|
(4,425
|
)
|
|
|
(3,289
|
)
|
Loss from discontinued operations, net of tax
|
|
|
(407
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
136,269
|
|
|
|
215,704
|
|
|
|
192,718
|
|
|
|
225,328
|
|
|
|
276,796
|
|
Add: Net loss (gain) attributable to noncontrolling interests
|
|
|
|
|
|
|
|
|
|
|
295
|
|
|
|
(444
|
)
|
|
|
(2,339
|
)
|
Net income attributable to New Oriental Education & Technology Group Inc.
|
|
|
136,269
|
|
|
|
215,704
|
|
|
|
193,013
|
|
|
|
224,884
|
|
|
|
274,457
|
|
Net income from continuing operation per ADS attributable to shareholders of New Oriental
Education & Technology Group Inc.
(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-Basic
|
|
|
0.88
|
|
|
|
1.38
|
|
|
|
1.23
|
|
|
|
1.43
|
|
|
|
1.74
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-Diluted
|
|
|
0.87
|
|
|
|
1.37
|
|
|
|
1.23
|
|
|
|
1.43
|
|
|
|
1.74
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended May 31,
|
|
(in thousands of US$ except share, per share and per ADS data)
|
|
2013
|
|
|
2014
|
|
|
2015
|
|
|
2016
|
|
|
2017
|
|
Net income (loss) from discontinued operation per ADS attributable to shareholders of New Oriental
Education & Technology Group Inc.
(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- Basic
|
|
|
(0.00
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- Diluted
|
|
|
(0.00
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in calculating basic net income per share
|
|
|
155,762,959
|
|
|
|
156,033,992
|
|
|
|
156,438,606
|
|
|
|
156,782,439
|
|
|
|
157,551,320
|
|
Shares used in calculating diluted net income per share
|
|
|
157,823,792
|
|
|
|
157,903,464
|
|
|
|
157,302,174
|
|
|
|
157,391,686
|
|
|
|
157,986,394
|
|
(1)
|
Share-based compensation expenses are included in our operating costs and expenses as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended May 31,
|
|
(in thousands of US$)
|
|
2013
|
|
|
2014
|
|
|
2015
|
|
|
2016
|
|
|
2017
|
|
General and administrative
|
|
|
27,242
|
|
|
|
20,079
|
|
|
|
15,689
|
|
|
|
16,810
|
|
|
|
20,287
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
27,242
|
|
|
|
20,079
|
|
|
|
15,689
|
|
|
|
16,810
|
|
|
|
20,287
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2)
|
Each ADS represents one common share.
|
(3)
|
Historical financial statements were adjusted retrospectively to reflect the discontinued operations of Elite English in the year ended May 31, 2013.
|
The following table presents our selected consolidated balance sheet data as of May 31, 2013, 2014, 2015, 2016 and 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands of US$)
|
|
2013
|
|
|
2014
|
|
|
2015
|
|
|
2016
|
|
|
2017
|
|
Selected Consolidated Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
417,166
|
|
|
|
371,593
|
|
|
|
531,298
|
|
|
|
709,209
|
|
|
|
641,018
|
|
Total assets
|
|
|
1,353,441
|
|
|
|
1,603,545
|
|
|
|
1,951,537
|
|
|
|
2,354,834
|
|
|
|
2,924,979
|
|
Total current liabilities
|
|
|
489,835
|
|
|
|
576,065
|
|
|
|
725,232
|
|
|
|
918,190
|
|
|
|
1,202,681
|
|
Total liabilities
|
|
|
496,189
|
|
|
|
577,787
|
|
|
|
727,693
|
|
|
|
920,172
|
|
|
|
1,204,901
|
|
Total New Oriental Education & Technology Group Inc. shareholders equity
|
|
|
857,252
|
|
|
|
1,025,758
|
|
|
|
1,220,348
|
|
|
|
1,404,572
|
|
|
|
1,680,948
|
|
Noncontrolling interests
|
|
|
|
|
|
|
|
|
|
|
3,496
|
|
|
|
30,090
|
|
|
|
39,130
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total equity
|
|
|
857,252
|
|
|
|
1,025,758
|
|
|
|
1,223,844
|
|
|
|
1,434,662
|
|
|
|
1,720,078
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
B.
Capitalization and Indebtedness
Not applicable.
C.
Reasons for the Offer and Use of
Proceeds
Not applicable.
D.
Risk Factors
Risks Related to Our Business
If we are not able to
continue to attract students to enroll in our courses without a significant decrease in course fees, our revenues may decline and we may not be able to maintain profitability.
The success of our business depends primarily on the number of student enrollments in our courses and the amount of course fees that our students are willing
to pay. Therefore, our ability to continue to attract students to enroll in our courses without a significant decrease in course fees is critical to the continued success and growth of our business. This in turn will depend on several factors,
including our ability to develop new programs and enhance existing programs to respond to changes in market trends and student demands, expand our geographic reach, manage our growth while maintaining the consistency of our teaching quality,
effectively market our programs to a broader base of prospective students, develop and license additional high-quality educational content and respond to competitive pressures. If we are unable to continue to attract students to enroll in our
courses without a significant decrease in course fees, our revenue may decline and we may not be able to maintain profitability.
5
We depend on our dedicated and capable faculty, and if we are not able to continue to hire, train and
retain qualified teachers, we may not be able to maintain consistent teaching quality throughout our school network and our brand, business and operating results may be materially and adversely affected.
Our teachers are critical to maintaining the quality of our programs, services and products and maintaining our brand and reputation. It is critical for us to
continue to attract qualified teachers who have a strong command of the subject areas to be taught and meet our qualification. We also need to hire teachers who are capable of delivering innovative and inspirational instruction. The number of
teachers in China with the necessary experience and language proficiency to teach our courses is limited and we must provide competitive compensation packages to attract and retain qualified teachers. In addition, criteria such as commitment and
dedication are difficult to ascertain during the recruitment process, in particular as we continue to expand and add teachers to meet rising student enrollments. We must also provide continuous training to our teachers so that they can stay up to
date with changes in student demands, admissions and assessment tests, admissions standards and other key trends necessary to effectively teach their respective courses. We may not be able to hire, train and retain enough qualified teachers to keep
pace with our anticipated growth while maintaining consistent teaching quality across many different schools, learning centers and programs in different geographic locations. Shortages of qualified teachers or decreases in the quality of our
instruction, whether actual or perceived, in one or more of our markets may have a material and adverse effect on our business.
Our business
depends on our New Oriental brand, and if we are not able to maintain and enhance our brand, our business and operating results may be harmed.
We believe that market awareness of our New Oriental brand has contributed significantly to the success of our business. We also believe that
maintaining and enhancing the New Oriental brand is critical to maintaining our competitive advantage. We offer a diverse set of programs, services and products to primary and middle school students, college students and other adults
throughout many provinces and cities in China. As we continue to grow in size, expand our program, service and product offerings and extend our geographic reach, maintaining quality and consistency may be more difficult to achieve.
We have invested significantly in brand promotion initiatives. We cannot, however, assure you that these or our other marketing efforts will be successful in
promoting our brand to remain competitive. If we are unable to further enhance our brand recognition and increase awareness of our programs, services and products, or if we incur excessive marketing and promotion expenses, our business and results
of operations may be materially and adversely affected. In addition, any negative publicity relating to our company or our programs and services, regardless of its veracity, could harm our brand image and in turn materially and adversely affect our
business and operating results.
Our reputation and the trading price of our ADSs may be negatively affected by adverse publicity or other
detrimental conduct against us.
Adverse publicity concerning our failure or perceived failure to comply with legal and regulatory requirements,
alleged accounting or financial reporting irregularities, regulatory scrutiny and further regulatory action or litigation could harm our reputation and cause the trading price of our ADSs to decline and fluctuate significantly. For example, after we
issued a press release on July 17, 2012 disclosing that we were subject to the investigation by the U.S. Securities & Exchange Commission, or the SEC, and Muddy Waters LLC, an entity unrelated to us, issued a report containing various
allegations about us on July 18, 2012, the trading price of our ADSs declined sharply and we were inundated by numerous investor inquiries. More recently, in late 2016, there was negative media coverage referencing our small overseas study
consulting division, New Oriental Vision Overseas Consultancy Co. The negative publicity and the resulting decline of the trading price of our ADSs also led to the filing of shareholder class action lawsuits against us and some of our senior
executive officers.
We may continue to be the target of adverse publicity and other detrimental conduct against us. Such conduct includes complaints,
anonymous or otherwise, to regulatory agencies regarding our operations, accounting, revenues and regulatory compliance. Additionally, allegations against us may be posted on the internet by any person or entity which identifies itself or on an
anonymous basis. We may be subject to government or regulatory investigation or inquiries as a result of such third-party conduct and may be required to incur significant time and substantial costs to defend ourselves, and there is no assurance that
we will be able to conclusively refute each of the allegations within a reasonable period of time, or at all. Our reputation may also be negatively affected as a result of the public dissemination of allegations or malicious statements about us,
which in turn may materially and adversely affect the trading price of our ADSs.
6
We face risks related to health epidemics and other outbreaks, which could result in reduced attendance or
temporary closure of our schools, learning centers and bookstores.
Our business could be materially and adversely affected by the outbreak of
avian influenza, severe acute respiratory syndrome, or SARS, Ebola or other epidemics. For example, the influenza A (H1N1) outbreak from 2009 to 2010 adversely affected our business and results of operations in the first and second fiscal quarters
of 2010 as we experienced slower-than-usual student enrollment growth and large numbers of cancellations and deferments in enrollments from registered students. In addition, we had to cancel classes whenever an enrolled student was diagnosed with
influenza A (H1N1), as required by applicable health regulations. Starting from March 2013, H7N9 bird flu, a new strain of animal influenza, has been spreading in China and has infected more than a hundred people. While the spread of the avian virus
H7N9 has not materially affected our student enrollments as of the date of this annual report, any future outbreak of avian influenza, SARS, the influenza A (H1N1), H7N9 bird flu or other adverse public health developments in China may have a
material and adverse effect on our business operations. These occurrences could cause cancellations or deferments of student enrollments and require the temporary closure of our schools, learning centers and bookstores while we remain obligated to
pay rent and other expenses for these facilities, thus severely disrupting our business operations and materially and adversely affecting our liquidity, financial condition and results of operations.
Failure to effectively and efficiently manage the expansion of our school network may materially and adversely affect our ability to capitalize on new
business opportunities.
We have increased the number of our schools in China from 25 as of May 31, 2006 to 77 as of May 31, 2017, and
we increased the number of our learning centers in China from 111 as of May 31, 2006 to 855 as of May 31, 2017. We may continue to expand our operations in different geographic locations in China. Our expansion has resulted, and will
continue to result, in substantial demands on our management, faculty and operational, technological and other resources. Our expansion will also place significant demands on us to maintain the consistency of our teaching quality and our culture to
ensure that our brand does not suffer as a result of any decreases, whether actual or perceived, in our teaching quality. To manage and support our growth, we must continue to improve our existing operational, administrative and technological
systems and our financial and management controls, and recruit, train and retain additional qualified teachers, management personnel and other administrative and sales and marketing personnel, particularly as we expand into new markets. We cannot
assure you that we will be able to effectively and efficiently manage the growth of our operations, recruit and retain qualified teachers and management personnel and integrate new schools and learning centers into our operations. Any failure to
effectively and efficiently manage our expansion may materially and adversely affect our ability to capitalize on new business opportunities, which in turn may have a material adverse impact on our financial condition and results of operations.
If we fail to successfully execute our growth strategies, we may not be able to continue to attract students to enroll in our courses without a
significant decrease in course fees, and our business and prospects may be materially and adversely affected.
Our growth strategies include
expanding our program, service and product offerings and our network of schools, learning centers and bookstores, updating and expanding the content of our programs, services and products in a cost-effective and timely manner, as well as maintaining
and continuing to establish strategic relationships with complementary businesses. The expansion of our programs, services and products in terms of types of offerings and geographic locations may not succeed due to competition, failure to
effectively market our new programs, services and products and maintain their quality and consistency, or other factors. In addition, we may be unable to identify new cities with sufficient growth potential to expand our network, and we may fail to
attract students and increase student enrollments or recruit, train and retain qualified teachers for our new schools and learning centers. Some cities in China have undergone development and expansion for several decades while others are still at
an early stage of urbanization and development. In more developed cities, it may be difficult to increase the number of schools and learning centers because we and/or our competitors already have extensive operations in these cities. In recently
developed and developing cities, demand for our programs, services and products may not increase as rapidly as we expect. Furthermore, we may be unable to develop or license additional content on commercially reasonable terms and in a timely manner,
or at all, to keep pace with changes in market demands. If we fail to successfully execute our growth strategies, we may not be able to continue to attract students to enroll in our courses without a significant decrease in course fees, and our
business and prospects may be materially and adversely affected.
7
We may not be able to achieve the benefits we expect from recent and future acquisitions, and recent and
future acquisitions may have an adverse effect on our ability to manage our business.
As part of our business strategy, we have pursued and
intend to continue to pursue selective strategic acquisitions of businesses that complement our existing businesses. Acquisitions expose us to potential risks, including risks associated with the diversion of resources from our existing businesses,
difficulties in successfully integrating the acquired businesses, failure to achieve expected growth by the acquired businesses and an inability to generate sufficient revenue to offset the costs and expenses of acquisitions. If the revenue and cost
synergies that we expect to achieve from our acquisitions do not materialize, we may have to recognize impairment charges. For example, in September 2010, we completed the acquisition of a 100% equity interest in Newave Education, a K-12 English
language school in Shanghai. Due to the breach of contract by the seller of Newave Education, we submitted a request for arbitration to the China International Economic and Trade Arbitration Commission for full refund of the purchase consideration
which we had paid. The case was closed in December 2011, and we received the full refund by the end of the fiscal year ended May 31, 2012.
If any
one or more of the aforementioned risks associated with acquisitions materialize, our acquisitions may not be beneficial to us and may have a material adverse effect on our business, financial condition and results of operations.
Third parties have in the past brought intellectual property infringement claims against us based on the content of the books and other teaching or
marketing materials that we or our teachers authored and/or distributed and may bring similar claims against us in the future.
We may be subject
to claims by educational institutions and organizations, content providers and publishers, competitors and others on the ground of intellectual property rights infringement, defamation, negligence or other legal theories based on the content of the
materials that we or our teachers author and/or distribute as course materials. These types of claims have been brought, sometimes successfully, against print publications and educational institutions in the past, including ourselves. For example,
in January 2001, the Graduate Management Admission Council, or GMAC, and Educational Testing Service, or ETS, filed three separate lawsuits against us in the Beijing No. 1 Intermediate Peoples Court, alleging that we had violated the
copyrights and trademarks relating to the GMAT test owned by GMAC and relating to the GRE and TOEFL tests owned by ETS by duplicating, selling and distributing their test materials without their authorization. In September 2003, the trial court
found that we had violated GMACs and ETS respective copyrights and trademarks in connection with those admissions tests. The trial courts judgment was partially affirmed in a final judgment issued by the Beijing Higher
Peoples Court in December 2004. The Beijing Higher Peoples Court held that we had not misused the trademarks of GMAC or ETS. However, it also found that the TOEFL and GRE tests were the original works of ETS and the GMAT test was the
original work of GMAC, all of which are protected under the PRC Copyright Law. The Beijing Higher Peoples Court held that our duplication, sale and distribution of the test materials relating to these tests without ETS and GMACs
prior permission were not a reasonable use of the test materials under the PRC Copyright Law, and that we, therefore, had infringed upon ETS and GMACs respective copyrights. We were ordered to pay damages in an aggregate of
approximately RMB6.5 million, cease all infringing activities and destroy all copyright-infringing materials in our possession, all of which we have done. Since the Beijing Higher Peoples Court issued the final judgment in 2004, we have
endeavored to comply with the court order and applicable PRC laws and regulations relating to intellectual property, and we have adopted policies and procedures to prohibit our employees and contractors from engaging in any copyright, trademark or
trade name infringing activities. However, we cannot assure you that every teacher or other personnel will strictly comply with these policies at our schools, learning centers or other locations or media through which we provide our programs,
services and products.
We have also been involved in other claims and legal proceedings against us relating to infringement of third parties
copyrights in materials distributed by us and the unauthorized use of a third partys name in connection with the marketing and promotion of one of our programs, and may be subject to further claims in the future, particularly in light of the
uncertainties in the interpretation and application of intellectual property laws and regulations. Furthermore, if printed publications or other materials that we or our teachers author and/or distribute contain materials that government authorities
find objectionable, these publications may have to be recalled, which could result in increased expenses, loss in revenues and adverse publicity. Any claims against us, with or without merit, could be time-consuming and costly to defend or litigate,
divert our managements attention and resources or result in the loss of goodwill associated with our brand. If a lawsuit against us is successful, we may be required to pay substantial damages and/or enter into royalty or license agreements
that may not be based upon commercially reasonable terms, or we may be unable to enter into such agreements at all. We may also lose, or be limited in, the rights to offer some of our programs, services and products or be required to make changes to
our course materials or websites. As a result, the scope of our course materials could be reduced, which could adversely affect the effectiveness of our teaching, limit our ability to attract new students, harm our reputation and have a material
adverse effect on our results of operations and financial position.
8
We may lose our competitive advantage and our reputation, brand and operations may suffer if we fail to
prevent the loss or misappropriation of, or disputes over, our intellectual property rights.
We consider our trademarks and trade name invaluable
to our ability to continue to develop and enhance our brand recognition. We have spent over 20 years building our New Oriental brand by emphasizing quality and consistency and building trust among students and parents. From time to time,
our trademarks and trade name have been used by third parties for or as part of other branded programs, services and products unrelated to us. We have sent cease and desist letters to such third parties in the past and will continue to do so in the
future. However, preventing trademark and trade name infringement, particularly in China, is difficult, costly and time-consuming and continued unauthorized use of our trademarks and trade name by unrelated third parties may damage our reputation
and brand. In addition, we have spent significant time and expense developing or licensing and localizing the content of certain educational materials, such as books, software, CD-ROMs, magazines and other periodicals, to enrich our product
offerings and meet students needs. The measures we take to protect our trademarks, copyrights and other intellectual property rights, which presently are based upon a combination of trademark, copyright and trade secret laws, may not be
adequate to prevent unauthorized use by third parties. Furthermore, the application of laws governing intellectual property rights in China and abroad is uncertain and evolving, and could involve substantial risks to us. If we are unable to
adequately protect our trademarks, copyrights and other intellectual property rights, we may lose these rights, our brand name may be harmed, and our business may suffer materially.
We face significant competition in each major program we offer and each geographic market in which we operate, and if we fail to compete effectively, we
may lose our market share and our profitability may be adversely affected.
The private education sector in China is rapidly evolving, highly
fragmented and competitive, and we expect competition in this sector to persist and intensify. We face competition in each major program we offer and each geographic market in which we operate. For example, we face nationwide competition for our
IELTS preparation courses from Global IELTS School, which offers IELTS preparation courses in many cities in China. We face regional competition for our English for children program from several competitors that focus on childrens English
training in specific regions. We face competition from companies that focus on providing international and/or PRC test preparation courses in specific geographic markets in China. We also face competition from companies that focus on providing
after-school tutoring services, such as TAL Education Group.
Our student enrollments may decrease due to intense competition. Some of our competitors may
have more resources than we do. These competitors may be able to devote greater resources than we can to the development, promotion and sale of their programs, services and products and respond more quickly than we can to changes in student needs,
testing materials, admissions standards or new technologies. In addition, we face competition from many different smaller sized organizations that focus on some of our targeted markets, and they may be able to respond more promptly to changes in
student preferences in these markets. In addition, the increasing use of the internet and advances in internet- and computer-related technologies, such as web video conferencing and online testing simulators, are eliminating geographic and
cost-entry barriers to providing private educational services. As a result, many of our international competitors that offer online test preparation and language training courses may be able to more effectively penetrate the China market. Many of
these international competitors have strong education brands, and students and parents in China may be attracted to the offerings of international competitors based in the country that the student wishes to study in or in which the selected language
is widely spoken. Moreover, many smaller companies are able to use the internet to quickly and cost-effectively offer their programs, services and products to a large number of students with less capital expenditure than previously required. We may
have to reduce course fees or increase spending in response to competition in order to retain or attract students or pursue new market opportunities. As a result, our revenues and profitability may decrease. We cannot assure you that we will be able
to compete successfully against current or future competitors. If we are unable to maintain our competitive position or otherwise respond to competitive pressures effectively, we may lose our market share and our profitability may be adversely
affected.
9
Failure to adequately and promptly respond to changes in testing materials, admissions standards and
technologies could cause our programs, services and products to be less attractive to students.
Admissions and assessment tests undergo
continuous change, in terms of the focus of the subjects and questions tested, the format of the tests and the manner in which the tests are administered. For example, certain admissions and assessment tests in the United States now include an essay
component, which required us to hire and train teachers to be able to analyze written essays that tend to be more subjective in nature and require a higher level of English proficiency. In addition, some admissions and assessment tests that were
previously offered in paper format only are now offered in a computer-based testing format. These changes require us to continually update and enhance our test preparation materials and our teaching methods. Further, the Chinese Ministry of
Education, or the MOE, promulgated new curriculum standards on December 28, 2011 for primary and secondary schools in China covering 19 subjects, including mathematics, Chinese and English. These new curriculum standards took effect in the fall
semester of 2012, and we finished adapting our tutoring programs and materials to these changes in curriculum standards in July 2013. In September 2014, the government announced plans to change policies relating to the gaokao, or college entrance
exam, that will change the format of English exam in the coming years. In December 2014, the MOE issued the Implementation Opinions on Scholastic Standard Test of Senior Secondary Schools and the Opinions on Strengthening and Improving the
Comprehensive Aptitude Assessment of High School Students, both of which reform the policies relating to the college entrance exam, including but not limited to the subject, format and content of the exam. These policies will be implemented on a
province-by-province basis and some provinces such as Beijing, Shanghai, Zhejiang have promulgated relevant regulations on reformation of the college entrance exam. On September 18, 2016, the MOE promulgated the Guidance Opinions on Further
Promoting the Reform of Exams and Entrance System for High Schools which promotes that the secondary school students shall participate the Secondary School Academic Proficiency Test, instead of participating in both the secondary school graduation
exams and high school entrance exams, and the scores of students for certain subjects obtained in this Secondary School Academic Proficiency Test shall be taken into consideration for high school enrollment. In January 2017, MOE promulgated new
curriculum standards for the subject of science in primary schools, which took effect in the fall semester of 2017. We will adapt our tutoring programs and materials to new curriculum requirements promulgated from time to time. Any inability to
track and respond to these changes in a timely and cost-effective manner would make our programs, services and products less attractive to students, which may materially and adversely affect our reputation and ability to continue to attract students
without a significant decrease in course fees.
If colleges, universities and other higher education institutions reduce their reliance on
admissions and assessment tests, we may experience a decrease in demand for our test preparation courses and our business may be materially and adversely affected.
We provide preparation courses for both overseas and domestic admissions and assessment tests. The success of our test preparation courses depends on the
continued use of admissions and assessment tests as a requirement for admission or graduation. However, the use of admissions tests in China may decline or fall out of favor with educational institutions and government authorities. For example,
educational institutions and government authorities in China have recently initiated discussions and conducted early experiments in China on school admissions. Generally, these discussions and experiments exhibit a trend of basing admissions
decisions less on entrance exam scores and more on a combination of other factors, such as past academic record, extracurricular activities and comprehensive aptitude evaluations. There have been certain changes in some geographic areas in the way
the high school entrance exam is administered. If the use of admissions tests in China declines or falls out of favor with educational institutions and government authorities and if we fail to respond to these changes, the demand for certain of our
services may decline, and our business may be materially and adversely affected.
10
In the United States, there has been a continuing debate regarding the usefulness of admissions and assessment
tests to assess qualifications of applicants and many people have criticized the use of admissions and assessment tests as unfairly discriminating against certain test takers. If a large number of educational institutions abandon the use of existing
admissions and assessment tests as a requirement for admission, without replacing them with other admissions and assessment tests, we may experience a decrease in demand for our test preparation courses and our business may be seriously harmed.
We experienced and may continue to experience a decrease in our margins.
Many factors may cause our gross and net margins to decline. For example, there is a recent trend that the short-term language training and test preparation
markets are moving towards smaller class sizes, especially for students between the ages of 5 and 12. This may have resulted from discretionary income increases for families in China, which cause students to be more willing and able to pay higher
course fees for the more individualized attention that smaller classes can offer. The average class size for our short-term language training and test preparation courses started to decrease since the fiscal year ended May 31, 2009. In our
fiscal year ended May 31, 2017, the average class size was approximately nine students per class, compared to approximately 30 students per class for fiscal year ended May 31, 2009. Although our smaller-sized classes are highly profitable,
they are marginally less profitable on average than our large classes. In addition, new investments and acquisitions may cause our margins to decline before we successfully integrate the acquired businesses into our operations and realize the full
benefits of these investments and acquisitions. There is a risk that our margins could continue to decline in the future due to these factors.
New
programs, services and products that we develop may compete with our current offerings.
We are constantly developing new programs, services and
products to meet changes in student demands and respond to changes in testing materials, admissions standards, market needs and trends and technological changes. While some of the programs, services and products that we develop will expand our
current offerings and increase student enrollments, others may compete with or make irrelevant our existing offerings without increasing our total student enrollments. For example, our online courses may take away students from our existing
classroom-based courses, and our new schools and learning centers may take away students from our existing schools and learning centers. If we are unable to expand our program, service and product offerings while increasing our total student
enrollments and profitability, our business and growth may be adversely affected.
Our business is subject to fluctuations caused by seasonality or
other factors beyond our control, which may cause our operating results to fluctuate from quarter to quarter. This may result in volatility and adversely affect the price of our ADSs.
We have experienced, and expect to continue to experience, seasonal fluctuations in our revenues and results of operations, primarily due to seasonal changes
in student enrollments. Historically, our courses tend to have the largest student enrollments in our first fiscal quarter, which runs from June 1 to August 31 of each year, primarily because many students enroll in our courses during the
summer school holidays to enhance their foreign language skills and/or prepare for admissions and assessment tests in subsequent school terms. In addition, we have generally experienced larger student enrollments in our third fiscal quarter, which
runs from December 1 to February 28 of each year, primarily because many students enroll in our language training and other courses during the winter school holidays. However, our expenses vary, and certain of our expenses do not
necessarily correspond with changes in our student enrollments and revenues. For example, we make investments in marketing and promotion, teacher recruitment and training, and product development throughout the year and we pay rent for our
facilities based on the terms of the lease agreements. In addition, other factors beyond our control, such as special events that take place during a quarter when our student enrollment would normally be high, may have a negative impact on our
student enrollments. We expect quarterly fluctuations in our revenues and results of operations to continue. These fluctuations could result in volatility and adversely affect the price of our ADSs. As our revenues grow, these seasonal fluctuations
may become more pronounced.
11
Our historical financial and operating results are not indicative of our future performance; and our
financial and operating results are difficult to forecast.
Our financial and operating results may not meet the expectations of public market
analysts or investors, which could cause the price of our ADSs to decline. In addition to the fluctuations described above, our revenues, expenses and operating results may vary from quarter to quarter and from year to year in response to a variety
of other factors beyond our control, including:
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general economic conditions;
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regulations or actions pertaining to the provision of private educational services in China;
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detrimental negative publicity about us, our competitors or our industry;
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changes in consumers spending patterns; and
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non-recurring charges incurred in connection with acquisitions or other extraordinary transactions or unexpected circumstances.
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Due to these and other factors, we believe that quarter-to-quarter comparisons of our operating results may not be indicative of our future performance, and
therefore you should not rely on them to predict the future performance of our ADSs. In addition, our past results may not be indicative of future performance because of new businesses developed or acquired by us.
Our business is difficult to evaluate because we have limited experience generating net income from some of our new services.
Historically, our core businesses have been English language training for adults and test preparation courses for college and graduate students. We have
launched many new services to expand our business and student base. For example, in January 2010, we established a small pilot program whereby we permit third parties in certain small cities to offer our Pop Kids English program and
New Oriental Star kindergarten program under a brand name cooperation model. The cooperation facilities operated by such third parties are not included in the counts of our schools and learning centers, and student enrollments from these
facilities are not included as our student enrollments. In October 2013, we terminated the brand name cooperation for New Oriental Star kindergarten program. As another example, in October 2015, we launched Baixuehui
non-academic training program, which offers after-school tutoring courses in STEM (science, technology, engineering, and mathematics), sports, dancing, painting, music and arts for students from age 3 to 18. We cooperated with third parties for
teaching content and teachers in such non-academic training areas. We had four Baixuehui learning centers in Beijing as of May 31, 2017.
Some of these operations have not generated significant or any profit to date, and we have less experience responding quickly to changes, competing
successfully and maintaining and expanding our brand in these areas without jeopardizing our brand in other areas. Consequently, there is limited operating history on which you can base your evaluation of the business and prospects of these
relatively more recent operations.
The continuing efforts of our senior management team and other key personnel are important to our success, and
our business may be harmed if we lose their services.
It is important for us to have the continuing services of our senior management team, in
particular, Michael Minhong Yu, our founder and executive chairman, who has been our leader since our inception in 1993. If one or more of our senior executives or other key personnel are unable or unwilling to continue in their present positions,
we may not be able to replace them easily, and our business may be disrupted. Competition for experienced management personnel in the private education sector is intense, the pool of qualified candidates is very limited, and we may not be able to
retain the services of our senior executives or key personnel, or attract and retain high-quality senior executives or key personnel in the future. In addition, if any member of our senior management team or any of our other key personnel joins a
competitor or forms a competing company, we may lose teachers, students, key professionals and staff members. Each of our executive officers and key employees is subject to the duty of confidentiality and non-competition restrictions. However, if
any disputes arise between any of our senior executives or key personnel and us, it may be difficult to successfully pursue legal actions against these individuals because of the uncertainties of Chinas legal systems.
12
We generate a significant portion of our revenues from four cities in China. Any event negatively affecting
the private education industry in these cities could have a material adverse effect on our overall business and results of operations.
We derived
approximately 37.1% of our total net revenues for the fiscal year ended May 31, 2017 from our operations in Beijing, Shanghai, Xian and Wuhan, and we expect these four cities to continue to constitute important sources of our revenues. If
any of these cities experiences an event negatively affecting its private education industry, such as a serious economic downturn, a natural disaster or an outbreak of contagious disease, or if any of these cities adopts regulations relating to
private education that place additional restrictions or burdens on us, our overall business and results of operations may be materially and adversely affected.
If we are not able to continually enhance our online programs, services and products and adapt them to rapid technological changes and student needs, we
may lose market share and our business could be adversely affected.
The market for internet-based educational programs, services and products is
characterized by rapid technological changes and innovation, unpredictable product life cycles and user preferences. We have limited experience with generating revenues from online programs, services and products, and their results are largely
uncertain. The increasing adoption of computer-based testing formats for admissions testing may lead more students to seek online test preparation courses. We must quickly modify our programs, services and products to adapt to changing student needs
and preferences, technological advances and evolving internet practices. Ongoing enhancement of our online offerings and related technology may entail significant expense and technical risk. We may fail to use new technologies effectively or adapt
our online products or services and related technology on a timely and cost-effective basis. If our improvements to our online offerings and the related technology are delayed, result in systems interruptions or are not aligned with market
expectations or preferences, we may lose market share and our business could be adversely affected.
Failure to maintain effective internal control
over financial reporting could have a material and adverse effect on the trading price of our ADSs.
We are subject to the reporting obligations
under the U.S. securities laws. Although our management concluded, and our independent registered public accounting firm reported, that we maintained effective internal control over financial reporting as of May 31, 2017, we cannot assure you
that we will maintain effective internal control over financial reporting on an ongoing basis. If we fail to maintain effective internal control over financial reporting, we will not be able to conclude and our independent registered public
accounting firm will not be able to report that we have effective internal control over financial reporting in accordance with the Sarbanes-Oxley Act of 2002 in our future annual report on Form 20-F covering the fiscal year in which this failure
occurs. Effective internal control over financial reporting is necessary for us to produce reliable financial reports. Any failure to maintain effective internal control over financial reporting could result in the loss of investor confidence in the
reliability of our financial statements, which in turn could have a material and adverse effect on the trading price of our ADSs. Furthermore, we may need to incur additional costs and use additional management and other resources as our business
and operations further expand or in an effort to remediate any significant control deficiencies that may be identified in the future.
We do not
have liability or business disruption insurance in some of our teaching facilities, and a liability claim against us due to injuries suffered by our students or other people at our facilities could adversely affect our reputation and our financial
results.
We could be held liable for accidents that occur at our schools, learning centers and other facilities, including indoor facilities
where we organize certain summer camp activities and temporary housing facilities that we lease for our students from time to time. In the event of on-site food poisoning, personal injuries, fires or other accidents suffered by students or other
people, we could face claims alleging that we were negligent, provided inadequate supervision or were otherwise liable for the injuries. We currently do not have liability insurance or business disruption insurance in some of our teaching
facilities. A successful liability claim against us due to injuries suffered by our students or other people at our facilities could adversely affect our reputation and our financial results. Even if unsuccessful, such a claim could cause
unfavorable publicity, require substantial cost to defend and divert the time and attention of our management.
13
Capacity constraints or system disruptions to our computer systems or websites could damage our reputation,
limit our ability to retain students and increase student enrollments and require us to expend significant resources.
The performance and
reliability of our online program infrastructure is critical to our reputation and ability to retain students and increase student enrollments. Any system error or failure, or a sudden and significant increase in traffic, could result in the
difficulty of accessing our websites by our students or unavailability of our online programs. We cannot assure you that we will be able to timely expand our online program infrastructure to meet demand for such programs. Our computer systems and
operations could be vulnerable to interruption or malfunction due to events beyond our control, including natural disasters and telecommunications failures. We have built an off-site computer center which is able to restore service within several
minutes following significant damage to our on-site computer center.
Our computer networks may also be vulnerable to unauthorized access, hacking,
computer viruses and other security problems. A user who circumvents security measures could misappropriate proprietary information or cause interruptions or malfunctions in operations. Any interruption to our computer systems or operations could
have a material adverse effect on our ability to retain students and increase student enrollments. Furthermore, we may be required to expend significant resources to protect against the threat of security breaches or to alleviate problems caused by
these breaches.
Terrorist attacks, geopolitical uncertainty, economic slowdown and international conflicts involving the United States, the United
Kingdom and elsewhere may discourage more students from studying in the United States, the United Kingdom and elsewhere outside of China, which could cause declines in the student enrollments for our courses.
Terrorist attacks, geopolitical uncertainty, economic slowdown and international conflicts involving the United States, the United Kingdom and elsewhere, such
as the attacks on September 11, 2001, the Boston marathon bombings on April 15, 2013, and the announcement of Brexit in June 2016, could have an adverse effect on our overseas test preparation courses and English language training courses.
Such events may discourage students from studying in the United States and elsewhere outside of China and may also make it more difficult for Chinese students to obtain visas to study abroad. These factors could cause declines in the student
enrollments for our test preparation and English language training courses and could have an adverse effect on our overall business and results of operations.
Risks Related to Our Corporate Structure
If the
PRC government finds that the agreements that establish the structure for operating our China business do not comply with applicable PRC laws and regulations, we could be subject to severe penalties.
PRC laws and regulations currently require any foreign entity that invests in the education business in China to be an educational institution with relevant
experience in providing educational services outside China. Our offshore holding companies are not educational institutions and do not provide educational services outside China. In addition, in the PRC, foreign ownership of high schools for
students in grade ten to twelve is restricted and foreign ownership of primary and middle schools for students in grades one to nine is prohibited. As a result, our offshore holding companies are not allowed to directly own and operate schools in
China. We conduct substantially all of our education business in China through a series of contractual arrangements with New Oriental China and its schools and subsidiaries and New Oriental Chinas shareholder. These contractual arrangements
enable us to (1) have power to direct the activities that most significantly affect the economic performance of New Oriental China and its schools and subsidiaries; (2) receive substantially all of the economic benefits from New Oriental
China and its schools and subsidiaries in consideration for the services provided by our wholly-owned subsidiaries in China; and (3) have an exclusive option to purchase all or part of the equity interests in New Oriental China, when and to the
extent permitted by PRC law, or request any existing shareholder of New Oriental China to transfer all or part of the equity interest in New Oriental China to another PRC person or entity designated by us at any time in our discretion. For a
description of these contractual arrangements, see Item 4. Information on the CompanyC. Organizational StructureContractual Arrangements with New Oriental China, its Schools and Subsidiaries and its Shareholder.
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Tian Yuan Law Firm, our PRC legal counsel, is of the opinion that the corporate structure of New Oriental China
and its schools and subsidiaries and our wholly-owned subsidiaries in China are in compliance with existing PRC laws and regulations; and the contractual arrangements among our wholly-owned subsidiaries in China, New Oriental China and its schools
and subsidiaries and the shareholder of New Oriental China are valid, binding and enforceable under, and do not violate, PRC laws or regulations currently in effect. We have been advised by our PRC legal counsel, however, that there are substantial
uncertainties regarding the interpretation and application of current and future PRC laws and regulations. Accordingly, there can be no assurance that the PRC regulatory authorities will not in the future take a view that is contrary to the above
opinion of our PRC legal counsel.
It is uncertain whether any new PRC laws, rules or regulations relating to variable interest entity structures will be
adopted or if adopted, what they would provide. In particular, in January 2015, the Ministry of Commerce published a discussion draft of the proposed Foreign Investment Law for public review and comments. Among other things, the draft Foreign
Investment Law expands the definition of foreign investment and introduces the principle of actual control in determining whether a company is considered a foreign-invested enterprise. Under the draft Foreign Investment Law, variable
interest entities would also be deemed as foreign-invested enterprises if they are ultimately controlled by foreign investors, and be subject to restrictions on foreign investments. However, the draft law has not taken a position on what
actions will be taken with respect to the existing companies with the variable interest entity structure, whether or not these companies are controlled by Chinese parties. It is uncertain when the draft would be signed into law and
whether the final version would have any substantial changes from the draft. See Risks Related to Doing Business in ChinaSubstantial uncertainties exist with respect to the enactment timetable, final content, interpretation and
implementation of draft PRC Foreign Investment Law published for public comments and how it may impact the viability of our current corporate structure, corporate governance and business operations.
We have been further advised by our PRC counsel that if we, any of our wholly-owned subsidiaries, New Oriental China or any of its schools or subsidiaries are
found to be in violation of any existing or future PRC laws or regulations or fail to obtain or maintain any of the required permits or approvals, the relevant PRC regulatory authorities, including the Ministry of Education, which regulates the
education industry, would have broad discretion in dealing with such violations, including:
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revoking the business and operating licenses of our PRC subsidiaries, New Oriental China or New Oriental Chinas schools and subsidiaries;
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discontinuing or restricting the operations of any related-party transactions among our PRC subsidiaries and New Oriental China and its schools and subsidiaries;
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restricting our right to collect revenues or limiting our business expansion in China by way of entering into contractual arrangements;
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imposing fines or other requirements with which we may not be able to comply;
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requiring us to restructure our corporate structure or operations; or
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restricting or prohibiting our use of the proceeds of our future offering to finance our business and operations in China.
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The imposition of any of these penalties could result in a material and adverse effect on our ability to conduct our business and on our results of
operations. If any of these penalties results in our inability to direct the activities of New Oriental China and its schools and subsidiaries that most significantly impact their economic performance, and/or our failure to receive the economic
benefits from New Oriental China and its schools and subsidiaries, we may not be able to consolidate New Oriental China and its schools and subsidiaries in our consolidated financial statements in accordance with U.S. GAAP. However, we do not
believe that such actions would result in the liquidation or dissolution of our company, our wholly-owned subsidiaries in China or New Oriental China or its schools or subsidiaries.
15
We rely on contractual arrangements for our operations in China, which may not be as effective in providing
operational control as direct ownership.
We have relied and expect to continue to rely on contractual arrangements with New Oriental China, its
schools and subsidiaries and its shareholder to operate substantially all of our education business. These contractual arrangements may not be as effective in providing us with control over New Oriental China as direct ownership. From the legal
perspective, if New Oriental China, any of its schools and subsidiaries or its shareholder fails to perform its respective obligations under the contractual arrangements, we may have to incur substantial costs and spend other resources to enforce
such arrangements, and rely on legal remedies under PRC law, including seeking specific performance or injunctive relief and claiming damages. For example, if Beijing Century Friendship Education Investment Co., Ltd., or Century Friendship, the sole
shareholder of New Oriental China, were to refuse to transfer its equity interest in New Oriental China to us or our designee when we exercise the call option pursuant to the option agreement, or if it otherwise acts in bad faith toward us, then we
may have to take legal action to compel it to fulfill its contractual obligations, which could be time consuming and costly.
These contractual
arrangements are governed by PRC law and provide for the resolution of disputes through arbitration in the PRC or through the PRC courts. 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 fiscal years ended May 31, 2015, 2016 and 2017, our variable interest entity(ies) contributed in aggregate 97.9%, 97.7%
and 98.8%, respectively, of our total net revenues. In the event we are unable to enforce these contractual arrangements, we may not be able to have the power to direct the activities that most significantly affect the economic performance of New
Oriental China and its schools and subsidiaries, and our ability to conduct our business may be negatively affected, and we may not be able to consolidate the financial results of New Oriental China and its schools and subsidiaries into our
consolidated financial statements in accordance with U.S. GAAP.
Our ability to enforce the equity pledge agreements between us and New Oriental
Chinas shareholder may be subject to limitations based on PRC laws and regulations.
Pursuant to the equity pledge agreements among New
Oriental China, Century Friendship and five of our wholly-owned subsidiaries in China, Century Friendship, as New Oriental Chinas sole shareholder, agrees to pledge its equity interests in New Oriental China to our subsidiaries to secure New
Oriental Chinas and its schools and subsidiaries performance of their obligations under the relevant contractual arrangements. The equity pledges of Century Friendship under these equity pledge agreements have been registered with the
relevant local branch of the State Administration for Industry and Commerce, or SAIC. According to the PRC Property Law and PRC Guarantee Law, the pledgee and the pledgor are prohibited from making an agreement prior to the expiration of the debt
performance period to transfer the ownership of the pledged equity to the pledgee when the obligor fails to pay the debt due. However, under the PRC Property Law, when an obligor fails to pay its debt when due, the pledgee may choose to either
conclude an agreement with the pledgor to obtain the pledged equity or seek payments from the proceeds of the auction or sell-off of the pledged equity. If New Oriental China or its shareholder fails to perform its obligations secured by the pledges
under the equity pledge agreements, one remedy in the event of default under the agreements is to require the pledgor to sell the equity interests of New Oriental China in an auction or private sale and remit the proceeds to our wholly-owned
subsidiaries in China, net of related taxes and expenses. Such an auction or private sale may not result in our receipt of the full value of the equity interests in New Oriental China. We consider it very unlikely that the public auction process
would be undertaken since, in an event of default, our preferred approach is to ask Beijing Decision Education & Consulting Co., Ltd., or Beijing Decision, which is one of our PRC wholly-owned subsidiaries and a party to the option
agreement with New Oriental Chinas shareholder, to designate another PRC person or entity to replace the existing shareholder of New Oriental China pursuant to the direct transfer option we have under the option agreement.
In addition, in the registration forms of the local branch of State Administration for Industry and Commerce for the pledges over the equity interests under
the equity pledge agreements, the amount of registered equity interests pledged to our wholly-owned subsidiaries was stated as RMB3,000,000, RMB18,500,000, RMB9,500,000, RMB14,000,000 and RMB5,000,000, respectively, which in aggregate represent 100%
of the registered capital of New Oriental China. The equity pledge agreements with New Oriental Chinas shareholder provide that the pledged equity interest shall constitute continuing security for any and all of the indebtedness, obligations
and liabilities under all of the principal service agreements and the scope of pledge shall not be limited by the amount of the registered capital of New Oriental China. However, it is possible that a PRC court may take the position that the amount
listed on the equity pledge registration forms represents the full amount of the collateral that has been registered and perfected. If this is the case, the obligations that are supposed to be secured in the equity pledge agreements in excess of the
amount listed on the equity pledge registration forms could be determined by the PRC court as unsecured debt, which takes last priority among creditors and often does not have to be paid back at all. We do not have agreements that pledge the assets
of New Oriental China and its schools and subsidiaries for the benefit of us or our wholly-owned subsidiaries.
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The controlling shareholder of Century Friendship, which is the sole shareholder of New Oriental China,
may have potential conflicts of interest with us, and if any such conflicts of interest are not resolved in our favor, our business may be materially and adversely affected.
New Oriental China is wholly owned by Century Friendship, a PRC domestic company which is beneficially owned by Mr. Michael Minhong Yu, our
founder and executive chairman. The interests of Mr. Yu as the controlling shareholder of the entity which owns New Oriental China may differ from the interests of our company as a whole, since Mr. Yu is only one of the beneficial owners
of our company, holding 13.5% of our total common shares issued and outstanding as of September 23, 2017.
We cannot assure you that when conflicts of interest arise, Mr. Yu will act in the best interests of our company or that
conflicts of interests will be resolved in our favor. In addition, Mr. Yu may breach or cause New Oriental China and its schools and subsidiaries to breach or refuse to renew the existing contractual arrangements with us. Currently, we do not
have existing arrangements to address potential conflicts of interest Mr. Yu may encounter in his capacity as a beneficial owner and director of New Oriental China, on the one hand, and as a beneficial owner and director of our company, on the
other hand; provided that we could, at all times, exercise our option under the option agreement with Century Friendship to cause it to transfer all of its equity ownership in New Oriental China to a PRC entity or individual designated by us, and
this new shareholder of New Oriental China could then appoint a new director of New Oriental China to replace Mr. Yu. In addition, if such conflicts of interest arise, Beijing Pioneer could also, in the capacity of Century Friendships
attorney-in-fact as provided under the proxy agreement and power of attorney, directly appoint a new director of New Oriental China to replace Mr. Yu. We rely on Century Friendship and Mr. Yu to comply with the laws of China, which protect
contracts, including the contractual arrangements New Oriental China and its schools and subsidiaries and its shareholder have entered into with us, which provide that directors and executive officers owe a duty of loyalty to our company and require
them to avoid conflicts of interest and not to take advantage of their positions for personal gains. We also rely on Mr. Yu to abide by the laws of the Cayman Islands, which provide that directors have a duty of care and a duty of loyalty to
act honestly in good faith with a view to our best interests. However, the legal frameworks of China and the Cayman Islands do not provide guidance on resolving conflicts in the event of a conflict with another corporate governance regime. If we
cannot resolve any conflicts of interest or disputes between us and Century Friendship and Mr. Yu, we would have to rely on legal proceedings, which could result in disruption of our business and subject us to substantial uncertainty as to the
outcome of any such legal proceedings.
If the custodians or authorized users of our controlling non-tangible assets, including chops and
seals, fail to fulfill their responsibilities, or misappropriate or misuse these assets, our business and operations could be materially and adversely affected.
Under PRC law, legal documents for corporate transactions, including agreements and contracts such as the leases and sales contracts that our business relies
on, are executed using the chop or seal of the signing entity or with the signature of a legal representative whose designation is registered and filed with the relevant local branch of the SAIC. We generally execute legal documents by affixing
chops or seals, rather than having the designated legal representatives sign the documents.
We have three major types of chopscorporate chops,
contract chops and finance chops. We use corporate chops generally for documents to be submitted to government agencies, such as applications for changing business scope, directors or company name, and for legal letters. We use contract chops for
executing leases and commercial, contracts. We use finance chops generally for making and collecting payments, including, but not limited to issuing invoices. Use of corporate chops and contract chops must be approved by our legal department and
administrative department, and use of finance chops must be approved by our finance department. The chops of our subsidiaries and New Oriental China and its schools and subsidiaries are generally held by the relevant entities so that documents can
be executed locally. Although we usually utilize chops to execute contracts, the registered legal representatives of our PRC subsidiaries, New Oriental China and its schools and subsidiaries have the apparent authority to enter into contracts on
behalf of such entities without chops. All designated legal representatives of our PRC subsidiaries and New Oriental China and its schools and subsidiaries are members of our senior management who have signed employment agreements with us under
which they agree to abide by duties they owe to us.
In order to maintain the physical security of our chops, we generally have them stored in secured
locations accessible only to the department heads of the legal, administrative or finance departments. Our designated legal representatives generally do not have access to the chops. Although we monitor our employees, including the designated legal
representatives of our PRC subsidiaries and New Oriental China and its schools and subsidiaries, the procedures may not be sufficient to prevent all instances of abuse or negligence. There is a risk that our employees or designated legal
representatives could abuse their authority, for example, by binding the relevant subsidiary or New Oriental China and its schools and subsidiaries with contracts against our interests, as we would be obligated to honor these contracts if the other
contracting party acts in good faith in reliance on the apparent authority of our chops or signatures of our legal representatives. If any designated legal representative obtains control of the chop in an effort to obtain control over the relevant
entity, we would need to have a shareholder or board resolution to designate a new legal representative and to take legal action to seek the return of the chop, apply for a new chop with the relevant authorities, or otherwise seek legal remedies for
the legal representatives misconduct. If any of the designated legal representatives obtains and misuses or misappropriates our chops and seals or other controlling intangible assets for whatever reason, we could experience disruption to our
normal business operations. We may have to take corporate or legal action, which could involve significant time and resources to resolve while distracting management from our operations.
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Our ability to operate private schools may be subject to significant limitations or may otherwise be
materially and adversely affected by changes in PRC laws and regulations.
The principal regulations governing private education in China are The
Law for Promoting Private Education (2003) and The Implementation Rules for the Law for Promoting Private Education (2004). Under these regulations, a private school may elect to be a school that does not require reasonable returns or a school
that requires reasonable returns. As of May 31, 2017, 22 of our schools elected as schools not requiring reasonable returns, 39 of our schools elected as schools requiring reasonable returns, and the remaining schools are not classified or
registered as companies.
At the end of each fiscal year, every private school is required to allocate a certain amount to its development fund for the
construction or maintenance of the school or procurement or upgrade of educational equipment. In the case of a private school that requires reasonable returns, this amount shall be no less than 25% of annual net income of the school, while in the
case of a private school that does not require reasonable returns, this amount shall be equivalent to no less than 25% of the annual increase in the net assets of the school, if any. A private school that requires reasonable returns must publicly
disclose such election and additional information required under the regulations. A private school shall consider factors such as the schools tuition, ratio of the funds used for education-related activities to the course fees collected,
admission standards and educational quality when determining the percentage of the schools net income that would be distributed to the investors as reasonable returns. However, none of the current PRC laws and regulations provides a formula or
guidelines for determining reasonable returns. In addition, none of the current PRC laws and regulations sets forth different requirements or restrictions on a private schools ability to operate its education business based on such
schools status as a school that requires reasonable returns or a school that does not require reasonable returns.
In some cities, our schools are
registered as schools that require reasonable returns, while in other cities, our schools are registered as schools that do not require reasonable returns.
On November 7, 2016, the Standing Committee of the National Peoples Congress promulgated the Amended Law for Promoting Private Education, or the
Amended Private Education Law, which took effect on September 1, 2017. Under the Amended Private Education Law, the term reasonable return is no longer used, and sponsors of private school may choose to establish non-profit or
for-profit private schools at their own discretion. Sponsors of for-profit private schools are entitled to retain the profits from their schools and the operating surplus may be allocated to the sponsors pursuant to the PRC Company Law and other
relevant laws and regulations. Sponsors of non-profit private schools are not entitled to any distribution of profits from their schools and the entire income must be used for the operations of the schools. See Item 4. Information on the
CompanyB. Business OverviewRegulation.
Upon the implementation of the Amended Private Education Law and the relevant regulations, if
our schools choose to be for-profit private education entities, they may be subject to income tax at the rate of 25% and other taxes as if they were enterprises. For the year ended May 31, 2017, schools that accounted for approximately 60.3% of
our consolidated net revenues were subject to a 25% income tax rate. Historically, the effective income tax rates for all our schools were 8.55%, 11.05% and 12.17% in the fiscal years ended May 31, 2015, 2016 and 2017, respectively.
Additionally, the cost of reregistration may be involved if our schools choose to be for-profit private education entities, including the payment of overdue enterprise income tax. If our schools choose to be not-for-profit private education
entities, our contractual arrangements with New Oriental China and its schools and subsidiaries may be subject to more stringent scrutiny. As a result, implementation of the Amended Private Education Law or the relevant regulations may adversely
affect our results of operations. However, as the implementation rules for the Amended Private Education Law or the relevant regulations have not been issued yet, it remains uncertain how the Amended Private Education Law will be interpreted and
implemented, what impact it would have on our business operations, and whether our schools meet the requirements and conditions to register as for-profit private schools and the cost or difficulties of the registration.
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Our contractual arrangements may be subject to scrutiny by the PRC tax authorities, and a finding that we owe
additional taxes could substantially reduce our consolidated net income and the value of your investment.
Under PRC laws and regulations, arrangements
and transactions among related parties may be subject to audit or challenge by the PRC tax authorities. We could face material and adverse tax consequences if the PRC tax authorities determine that the contractual arrangements among our wholly-owned
subsidiaries in China and New Oriental China and its schools and subsidiaries do not represent an arms-length price and adjust New Oriental China or any of its schools or its subsidiaries income in the form of a transfer pricing
adjustment. A transfer pricing adjustment could, among other things, result in a reduction, for PRC tax purposes, of expense deductions recorded by New Oriental China or any of its schools or its subsidiaries, which could in turn increase its tax
liabilities. In addition, the PRC tax authorities may impose late payment fees and other penalties to New Oriental China and its schools and subsidiaries for under-paid taxes. Our consolidated net income may be materially and adversely affected if
our tax liabilities increase or if we are found to be subject to late payment fees or other penalties.
Regulatory agencies may commence
investigations of the private primary and secondary schools controlled and operated by New Oriental China. If the results of the investigations are unfavorable to us, we may be subject to fines, penalties, injunctions or other censure that could
have an adverse impact on our results of operations.
PRC laws and regulations currently prohibit foreign ownership of primary and middle schools
for students in grades one to nine in China, and restrict foreign ownership of high schools for students in grades ten to twelve. New Oriental China controls and operates a private primary and secondary school in Yangzhou and a private secondary
school in Beijing. As the provision of private primary and middle school services is a heavily regulated industry in China, our existing and any new primary or middle schools we establish or acquire in the future may be subject from time to time to
investigations, claims of non-compliance or lawsuits by governmental agencies, which may allege statutory violations, regulatory infractions or other causes of action. If the results of the investigations are unfavorable to us, we may be subject to
fines, injunctions or other penalties that could have an adverse impact on our results of operations. Even if we adequately address the issues raised by a government investigation, we may have to devote significant financial and management resources
to resolve these issues, which could harm our business.
We may rely on dividends and other distributions on equity paid by our wholly-owned
subsidiaries to fund any cash and financing requirements we may have, and any limitation on the ability of our subsidiaries or New Oriental China and its schools and subsidiaries to make payments to us could have a material adverse effect on our
ability to conduct our business.
We are a holding company, and we may rely on dividends from our wholly-owned subsidiaries in China and service,
license and other fees paid to our wholly-owned subsidiaries by New Oriental China and its schools and subsidiaries for our cash requirements, including any debt we may incur. Current PRC regulations permit our subsidiaries to pay dividends to us
only out of their accumulated profits, if any, determined in accordance with Chinese accounting standards and regulations. In addition, each of our subsidiaries and New Oriental China and its subsidiaries in China is required to set aside at least
10% of its after-tax profits each year, if any, to fund a statutory reserve until such reserve reaches 50% of its registered capital, and each of our subsidiaries is required to further set aside a portion of its after-tax profits to fund the
employee welfare fund at the discretion of its board of directors. These reserves are not distributable as cash dividends. Furthermore, if our subsidiaries and New Oriental China and its schools and subsidiaries in China incur debt on their own
behalf in the future, the instruments governing the debt may restrict their ability to pay dividends or make other payments to us. In addition, the PRC tax authorities may require us to adjust our taxable income under the contractual arrangements we
currently have in place in a manner that would materially and adversely affect our subsidiaries ability to pay dividends and other distributions to us. Moreover, at the end of each fiscal year, every private school in China is required to
allocate a certain amount to its development fund for the construction or maintenance of the school or procurement or upgrade of educational equipment. In the case of a private school that requires reasonable returns, this amount shall be no less
than 25% of the annual net income of the school, while in the case of a private school that does not require reasonable returns, this amount shall be equivalent to no less than 25% of the annual increase in the net assets of the school, if any. Any
limitation on the ability of our subsidiaries to distribute dividends to us or on the ability of New Oriental China and its schools and subsidiaries to make payments 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.
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PRC regulation of loans to, and direct investment in, PRC entities by offshore holding companies and
governmental control of currency conversion may restrict or prevent us from making loans to our PRC subsidiaries or New Oriental China and its schools and subsidiaries or making additional capital contributions to our PRC subsidiaries, which could
materially and adversely affect our liquidity and our ability to fund and expand our business.
We are an offshore holding company conducting our
operations in China through our PRC subsidiaries and New Oriental China and its schools and subsidiaries. We may need to make loans to our PRC subsidiaries or New Oriental China and its schools and subsidiaries, or we may make additional capital
contributions to our PRC subsidiaries.
Any loans to our PRC subsidiaries or New Oriental China and its schools and subsidiaries are subject to PRC
regulations. For example, loans by us to our wholly-owned subsidiaries in China, each of which is a foreign-invested enterprise, to finance their activities cannot exceed statutory limits and must be registered with the PRC State Administration of
Foreign Exchange, or SAFE, or its local counterparts. Loans by us to New Oriental China and its schools and subsidiaries, which are domestic PRC entities, must be approved by the relevant government authorities and must also be registered with SAFE
or its local counterparts.
We may also decide to finance our PRC subsidiaries by means of capital contributions. These capital contributions must be
approved by the PRC Ministry of Commerce or its local counterparts. We are unlikely, however, to finance the activities of New Oriental China and its schools and subsidiaries by means of capital contributions due to regulatory issues related to
foreign investment in domestic PRC entities, as well as the licensing and other regulatory issues. SAFE promulgated the Circular on the Relevant Operating Issues Concerning the Improvement of the Administration of the Payment and Settlement of
Foreign Currency Capital of Foreign Invested Enterprises, or SAFE Circular 142 to regulate the conversion by a foreign-invested company of its capital contribution in foreign currency into RMB. SAFE Circular 142 requires that the paid-in capital of
a foreign-invested company settled in RMB converted from foreign currencies shall be used only for purposes within the business scope as approved by the authorities in charge of foreign investment or by other competent authorities and as registered
with the local branch of the SAIC and, unless set forth in the business scope or in other regulations, may not be used for equity investments within the PRC. In addition, SAFE strengthened its oversight of the flow and use of the paid-in capital of
a foreign-invested company settled in RMB converted from foreign currencies. The use of such RMB paid-in capital may not be changed without SAFEs approval. Violations of Circular 142 will result in severe monetary or other penalties. We expect
that if we convert the net proceeds from offshore offerings into RMB pursuant to SAFE Circular 142, our use of RMB funds will be for purposes within the approved business scope of our PRC subsidiaries. However, we may not be able to use such RMB
funds to make equity investments in China through our PRC subsidiaries. SAFE promulgated the Notice on Reforming the Management Method relating to Conversion of the Capital Contribution of Foreign Invested Company from Foreign Exchange to Renminbi,
or SAFE Circular 19, effective June 2015, which abolished SAFE Circular 142, but the foregoing rules have been retained in SAFE Circular 19. SAFE promulgated the Notice on Further Simplifying and Improving the Policies of Foreign Exchange
Administration Applicable to Direct Investment, or SAFE Circular 13, effective in June 2015. Pursuant to SAFE Circular 13, annual foreign exchange inspection of direct investment is not required anymore and the registration of existing equity is
required. SAFE Circular 13 also grants the authority to banks to examine and process foreign exchange registration with respect to both domestic and offshore direct investment. SAFE issued the Circular on Reforming and Regulating Policies on the
Control over Foreign Exchange Settlement of Capital Accounts, or SAFE Circular 16, effective in June 2016. Pursuant to SAFE Circular 16, enterprises registered in China may also convert their foreign debts from foreign currency to RMB on a
self-discretionary basis. SAFE Circular 16 provides an integrated standard for conversion of foreign exchange under capital account items (including but not limited to foreign currency capital and foreign debts) on a self-discretionary basis which
applies to all enterprises registered in China. SAFE Circular 16 reiterates the principle that RMB converted from foreign currency-denominated capital of a company may not be directly or indirectly used for purposes beyond its business scope or
prohibited by PRC laws or regulations, while such converted RMB shall not be provided as loans to its non-affiliated entities. As SAFE Circular 16 is newly issued and SAFE has not provided detailed guidelines with respect to its interpretation or
implementations, it is uncertain how these rules will be interpreted and implemented. See also Item 4. Information on the CompanyB. Business OverviewRegulation.
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We expect that PRC laws and regulations may continue to limit our use of proceeds from offshore offerings. There
are no costs associated with registering loans or capital contributions with relevant PRC government authorities, other than nominal processing charges. Under PRC laws and regulations, the PRC government authorities are required to process such
approvals or registrations or deny our application within a prescribed period which is usually less than 90 days, but may be longer due to administrative delay. We cannot assure you that we will be able to obtain these government registrations or
approvals on a timely basis, if at all. If we fail to receive such registrations or approvals, our ability to capitalize our PRC operations may be negatively affected, which could adversely affect our liquidity and our ability to fund and expand our
business.
If any of New Oriental China and its schools and subsidiaries becomes the subject of a bankruptcy or liquidation proceeding, we may lose
the ability to use and enjoy their assets, which could reduce the size of our operations and materially and adversely affect our business, ability to generate revenue and the market price of our ADSs.
To comply with PRC laws and regulations relating to foreign ownership restrictions in the education business, we currently conduct substantially all of our
operations in China through contractual arrangements with New Oriental China and its schools and subsidiaries as well as its shareholder. As part of these arrangements, New Oriental China and its schools and subsidiaries hold assets that are
important to the operation of our business.
We do not have priority pledges and liens against New Oriental Chinas assets. As a contractual and
property right matter, this lack of priority pledges and liens has remote risks. If New Oriental China undergoes an involuntary liquidation proceeding, third-party creditors may claim rights to some or all of its assets and we may not have priority
against such third-party creditors on New Oriental Chinas assets. If New Oriental China liquidates, we may take part in the liquidation procedures as a general creditor under the PRC Enterprise Bankruptcy Law and recover any outstanding
liabilities owed by New Oriental China to our PRC subsidiaries under the applicable service agreements. To ameliorate the risks of an involuntary liquidation proceeding initiated by a third-party creditor, we closely monitor the operations and
finances of New Oriental China through carefully designed budgetary and internal controls to ensure that New Oriental China is well capitalized and is highly unlikely to trigger any third party monetary claims in excess of its assets and cash
resources. Furthermore, our PRC subsidiaries have the ability, if necessary, to inject capital in Renminbi into New Oriental China to prevent such an involuntary liquidation.
If the shareholder of New Oriental China were to attempt to voluntarily liquidate New Oriental China without obtaining our prior consent, we could effectively
prevent such unauthorized voluntary liquidation by exercising our right to request New Oriental Chinas shareholder to transfer all of its equity ownership interest to a PRC entity or individual designated by us in accordance with the option
agreement with the New Oriental China shareholder. In addition, under the equity pledge agreements signed by the shareholder of New Oriental China and the PRC Property Law, the shareholder of New Oriental China does not have the right to issue
dividends to itself or otherwise distribute the retained earnings or other assets of New Oriental China without our consent. Also, under the proxy agreement and power of attorney, the shareholder of New Oriental China undertakes to Beijing Pioneer,
our wholly-owned PRC subsidiary, that if it receives, among other things, any dividends, residual assets upon liquidation or proceeds from the transfer of its equity interest in New Oriental China, it will, to the extent permitted under applicable
law, remit all such dividends, residual assets and proceeds to Beijing Pioneer without any compensation or other consideration. In the event that the shareholder of New Oriental China initiates a voluntary liquidation proceeding without our
authorization or attempts to distribute the retained earnings or assets of New Oriental China without our prior consent, we may need to resort to legal proceedings to enforce the terms of the contractual agreements. Any such litigation may be costly
and may divert our managements time and attention away from the operation of our business, and the outcome of such litigation would be uncertain.
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Risks Related to Doing Business in China
Adverse changes in economic and political policies of the PRC government could have a material adverse effect on the overall economic growth of China,
which could adversely affect our business.
Substantially all of our business operations are conducted in China. Accordingly, our results of
operations, financial condition and prospects are subject to a significant degree to economic, political and legal developments in China. Chinas economy differs from the economies of most developed countries in many respects, including with
respect to the amount of government involvement, level of development, growth rate, control of foreign exchange and allocation of resources. While the PRC economy has experienced significant growth for over three decades, growth has been uneven
across different regions and among various economic sectors of China. The PRC government has implemented various measures to encourage economic development and guide the allocation of resources. While some of these measures benefit the overall PRC
economy, they may also have a negative effect on us. For example, our financial condition and results of operations may be adversely affected by government control over capital investments, conversion of foreign exchange into Renminbi or changes in
tax regulations that are applicable to us. In addition, future actions or policies of the PRC government to control the pace of economic growth may cause a decrease in the level of economic activity in China, which in turn could materially affect
our liquidity and access to capital and our ability to operate our business.
In addition, the changes in the policies regarding the control of foreign
exchange could adversely affect our business. In 2016, PRC government implemented various measures and policies regarding strengthening the management and supervision control of foreign control in both capital item and current item, which resulted
in extension of time in the filing, registration and approval procedures of local branches and authorized banks in foreign control activities, and could result in delayed payment of salary to foreign employees by our subsidiaries and subsidiaries of
our variable interest entity. The evolving policies regarding strengthening the management and supervision control of foreign control could adversely affect our business.
Our business, financial condition and results of operations, as well as our ability to obtain financing, may be adversely affected by the downturn in
the global or PRC economy.
The global financial markets experienced significant disruptions in 2008 and the United States, Europe and other
economies went into recession. The recovery from the lows of 2008 and 2009 was uneven and it is facing new challenges, including the escalation of the European sovereign debt crisis since 2011 and the slowdown of the Chinese economy since 2012. It
is unclear whether the European sovereign debt crisis will be contained and when the Chinese economy will resume the high growth rate. There is considerable uncertainty over the long-term effects of the expansionary monetary and fiscal policies that
have been adopted by the central banks and financial authorities of some of the worlds leading economies, including Chinas. There have also been concerns over unrest in the Middle East and Africa, which have resulted in higher oil prices
and significant market volatility, and over the possibility of a war involving Iran. There have also been concerns about the economic effect of the earthquake, tsunami and nuclear crisis in Japan and the relationship between China and Japan.
Economic conditions in China are sensitive to global economic conditions and also have their own challenges, and our business, results of operations and
financial condition are sensitive to PRC and global economic conditions. Any prolonged slowdown in the PRC or global economy may have a negative impact on our business, results of operations and financial condition, and continued turbulence in the
international markets may adversely affect our ability to access the capital markets to meet liquidity needs.
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Uncertainties with respect to the PRC legal system could adversely affect us.
Our operations in China are governed by PRC laws and regulations. Our subsidiaries are generally subject to laws and regulations applicable to foreign
investments in China and, in particular, laws applicable to wholly foreign-owned enterprises. The PRC legal system is based on written statutes. Prior court decisions may be cited for reference but have limited precedential value. China has not
developed a fully integrated legal system and recently enacted laws and regulations may not sufficiently cover all aspects of economic activities in China. In particular, because many of these laws and regulations are relatively new, and because of
the limited volume of published decisions and their nonbinding nature, the interpretation and enforcement of these laws and regulations involve uncertainties. In addition, the PRC legal system is based in part on government policies and internal
rules and interpretations (some of which are not published on a timely basis or at all) that may have a retroactive effect. As a result, we may not be aware of our violation of these policies, rules and interpretations until sometime after the
violation. In addition, any litigation in China may be protracted and may result in substantial costs and diversion of resources and management attention.
Substantial uncertainties exist with respect to the enactment timetable, final content, interpretation and implementation of draft PRC Foreign
Investment Law published for public comments and how it may impact the viability of our current corporate structure, corporate governance and business operations.
The Ministry of Commerce published a discussion draft of the proposed Foreign Investment Law in January 2015 aiming to, upon its enactment, replace the
trio of existing laws regulating foreign investment in China, namely, the Sino-foreign Equity Joint Venture Enterprise Law, the Sino-foreign Cooperative Joint Venture Enterprise Law and the Wholly Foreign-invested Enterprise Law, together with their
implementation rules and ancillary regulations. The draft Foreign Investment Law embodies an expected PRC regulatory trend to rationalize its foreign investment regulatory regime in line with prevailing international practice and the
legislative efforts to unify the corporate legal requirements for both foreign and domestic investments. The Ministry of Commerce has solicited comments on this draft and substantial uncertainties exist with respect to its enactment timetable, final
content, interpretation and implementation.
Among other things, the draft Foreign Investment Law expands the definition of foreign investment and
introduces the principle of actual control in determining whether a company is considered a foreign-invested enterprise. The draft Foreign Investment Law specifically provides that entities established in China but controlled
by foreign investors will be treated as foreign-invested enterprises, whereas an entity established in China by an investor from a foreign jurisdiction would nonetheless be, upon market entry clearance by the Ministry of Commerce, treated as a PRC
domestic investor in a restricted industry as indicated in the negative list, provided that the entity is controlled by PRC entities and/or citizens. In this connection, control is broadly defined in the draft law
to cover the following summarized categories: (i) holding 50% or more of the shares, voting rights or other similar rights of the subject entity; (ii) holding less than 50% of the shares, voting rights or other similar rights of the
subject entity but having the power to secure at least 50% of the seats on the board or other equivalent decision making bodies, or having the voting power to exert material influence on the board, the shareholders meeting or other equivalent
decision making bodies; or (iii) having the power to exert decisive influence, via contractual or trust arrangements, over the subject entitys operations, financial matters or other key aspects of business operations. Once an entity is
determined to be a foreign-invested enterprise, it will be subject to the foreign investment restrictions or prohibitions set forth in a negative list, to be separately issued by the State Council at a later date. Unless the underlying
business of the foreign-invested enterprise falls within the negative list, which calls for market entry clearance by the Ministry of Commerce, prior approval from the government authorities as mandated by the existing foreign investment legal
regime would no longer be required for establishment of the foreign-invested enterprise.
The variable interest entity structure, or VIE
structure, has been adopted by many PRC-based companies, including us, to obtain necessary licenses and permits in the industries that are currently subject to foreign investment restrictions in China. See Item 3 Key Information D. Risk
Factors Risks Related to Our Corporate Structure and Item 4. Information on the Company C. Organizational Structure Contractual Arrangements with New Oriental China, its Schools and Subsidiaries and its
Shareholder. Under the draft Foreign Investment Law, variable interest entities that are controlled via contractual arrangement would also be deemed as foreign-invested enterprises, if they are ultimately controlled by foreign
investors. Therefore, for any companies with a VIE structure in an industry category that is included in the negative list as restricted industry, the VIE structure may be deemed legitimate if the ultimate controlling
person(s) is/are of PRC nationality (either PRC companies or PRC citizens) or the foreign investment obtains market entry clearance from the Ministry of Commerce. Conversely, if the actual controlling person(s) is/are of foreign
nationalities, then the variable interest entities will be treated as foreign-invested enterprises and any operation in the industry category on the negative list without market entry clearance may be considered as illegal. There are
uncertainties as to whether the Foreign Investment Law, once it is enacted, will have retrospective effect on existing VIE structures such as ours, or will grant real and full grandfathering and grace periods for such existing VIE structures.
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It is likely that we would not be considered as ultimately controlled by Chinese parties, as our record
shareholders in the U.S. hold a substantial majority of our total voting power. The draft Foreign Investment Law has not taken a position on what actions will be taken with respect to the existing companies with a VIE structure, whether or not
these companies are controlled by Chinese parties, while it has solicited comments from the public on this point. If the enacted version of the Foreign Investment Law and the final negative list mandate further actions, such as market
entry clearance or certain restructuring of our corporate structure and operations, to be completed by companies with existing VIE structure like us, there may be substantial uncertainties as to whether we can complete these actions in a timely
manner, or at all, and our business and financial condition may be materially and adversely affected.
The draft Foreign Investment Law, if enacted as
proposed, may also materially impact our corporate governance practice and increase our compliance costs. For instance, the draft Foreign Investment Law imposes stringent ad hoc and periodic information reporting requirements on foreign investors
and the applicable foreign-invested enterprises. Aside from an investment implementation report and an investment amendment report that are required for each investment and alteration of investment specifics, an annual report is mandatory, and large
foreign-invested enterprises meeting certain criteria are required to report on a quarterly basis. Also, the Ministry of Commerce may supervise and examine the foreign investors and the FIEs regularly or irregularly on their compliance with the
Foreign Investment Law. Any company found to be non-compliant with these information reporting obligations may potentially be subject to fines and/or administrative or criminal liabilities, and the persons directly responsible may be subject to
criminal liabilities.
Regulation and censorship of information disseminated over the internet in China may adversely affect our business and
reputation and subject us to liability for information displayed on our websites.
The PRC government has adopted regulations governing internet
access and the distribution of news and other information over the internet. Under these regulations, internet content providers and internet publishers are prohibited from posting or displaying over the internet content that, among other things,
violates PRC laws and regulations, impairs the national dignity of China, or is reactionary, obscene, superstitious, fraudulent or defamatory. Failure to comply with these requirements may result in the revocation of licenses to provide internet
content and other licenses, and the closure of the concerned websites. In the past, failure to comply with such requirements has resulted in the closure of certain websites. The website operator may also be held liable for such censored information
displayed on or linked to the websites. If any of our websites, including those used for our online education business, are found to be in violation of any such requirements, we may be penalized by relevant authorities, and our operations or
reputation could be adversely affected.
We are required to obtain various operating licenses and permits and to make registrations and filings for
our business operations in China; failure to comply with these requirements may materially adversely affect our business and results of operations.
We are required to obtain and maintain various licenses and permits and fulfill registration and filing requirements in order to conduct and operate our
business. For instance, to establish and operate a school to provide language training and test preparation services, we are required to obtain a private school operating permit and to make necessary filings for each learning center with the local
counterparts of the Ministry of Education and the Ministry of Civil Affairs. In June 2017, the Chengdu Education Bureau, Chengdu Civil Affairs Bureau and certain other local governmental authorities issued the Bulletin on Governing the Operation of
Private Cultural and Educational Training Activities, which provides that private schools may not establish branches. It is uncertain whether the implementation rules of the Amended Private Education Law and other supporting regulations will have
more stringent requirements for learning centers, such as requiring all learning centers nationwide to obtain private school operating permits. If we fail to comply with applicable legal requirements, we may be subject to fines, confiscation of any
gains derived from our non-compliant operations or the suspension of our non-compliant operations, which may materially and adversely affect our business and results of operations. Our business is also subject to various health, safety and other
regulations that affect various aspects of our business in the cities in which we operate and we must obtain various licenses and permits under these regulations for our operations. We have been making efforts to ensure compliance with applicable
rules and regulations in all material respects. In addition, we follow internal guidelines to make necessary registrations and filings and obtain necessary licenses and permits on a timely basis. If we fail to comply with applicable legal
requirements, we may be subject to fines, confiscation of the gains derived from our noncompliant operations or the suspension of our noncompliant operations, which may materially and adversely affect our business and results of operations.
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PRC regulations relating to the establishment of offshore special purpose companies by PRC residents may
subject our PRC resident shareholders to personal liability and limit our ability to inject capital into our PRC subsidiaries, limit our PRC subsidiaries ability to distribute profits to us or otherwise adversely affect us.
SAFE issued a notice in July 2014, which replaced the previous notice issued in October 2005. The 2014 SAFE notice requires PRC domestic residents, including
both PRC domestic institutions and PRC domestic individual residents, to register with the local SAFE branch before establishing or controlling any company outside of China with the domestic or overseas assets or equity they legally hold for the
purpose of investment, financing or conducting roundtrip investment. Such a company located outside of China is referred to in the notice as an offshore special purpose company. Our beneficial owners immediately before our initial public
offering who are PRC residents had registered with the local branch of SAFE prior to our initial public offering in 2006. The failure of these beneficial owners to timely amend their SAFE registrations, if required, or the failure of future
beneficial owners of our company who are PRC residents to comply with the registration procedures set forth in the SAFE notice may subject such beneficial owners to fines and legal sanctions and may also limit our ability to contribute additional
capital into our PRC subsidiaries, limit our PRC subsidiaries ability to distribute dividends or repay loans in foreign exchange to our company or otherwise adversely affect our business.
We face regulatory uncertainties in China concerning our employees participation in our share incentive plan.
In February 2012, SAFE issued the Notices on Issues Concerning the Foreign Exchange Administration for Domestic Individuals Participating in a Stock
Incentive Plan of an Overseas Publicly-Listed Company, or Circular 7. According to Circular 7, if PRC individuals (meaning both PRC residents and non-PRC residents who reside in the PRC for a continuous period of not less than one year,
excluding the foreign diplomatic personnel and representatives of international organizations) participate in any share incentive plan of an overseas listed company, a qualified PRC domestic agent, which could be the PRC subsidiaries of such
overseas listed company, shall, among other things, file, on behalf of such individuals, an application with SAFE to conduct the SAFE registration with respect to such share incentive plan, and obtain approval for an annual allowance with respect to
the purchase of foreign exchange in connection with the share purchase or share option exercise. Such PRC individuals foreign exchange income received from the sale of shares and dividends distributed by the overseas listed company and any
other income shall be fully remitted into a collective foreign currency account in the PRC opened and managed by the PRC domestic agent before distribution to such individuals. In addition, such PRC individuals must also retain an overseas entrusted
institution to handle matters in connection with the exercise of their share options and their purchase and sale of shares.
According to Circular 7, from
time to time, we need to make applications or update our registration with SAFE or its local branches on behalf of our employees who are affected by our new share incentive plan or material changes in our current share incentive plan. We are in the
process of making an application on behalf of the PRC individuals who participate in our companys share incentive plans with SAFE in compliance with Circular 7; however, we cannot assure you that such application will be successful. If we or
the participants of our share incentive plans who are PRC citizens fail to comply with Circular 7, we and/or such participants of our share incentive plans may be subject to fines and legal sanctions. In addition, there may be additional
restrictions on the ability of such participants to exercise their stock options or remit proceeds gained from sale of their stock into China, and we may be prevented from further granting share incentive awards under our share incentive plans to
our employees who are PRC citizens. Such events could adversely affect our ability to retain talented employees.
The M&A rules establish
complex procedures for some acquisitions of Chinese companies by foreign investors, which could make it more difficult for us to pursue growth through acquisitions in China.
In August 2006, the Ministry of Commerce, the State Assets Supervision and Administration Commission, the State Administration for Taxation, the State
Administration for Industry and Commerce, the China Securities Regulatory Commission, or the CSRC, and SAFE, jointly adopted the Regulations on Mergers and Acquisitions of Domestic Enterprises by Foreign Investors, commonly referred to as the
M&A Rules. The M&A Rules establish procedures and requirements that could make some acquisitions of Chinese companies by foreign investors more time-consuming and complex, including requirements in some instances that the Ministry of
Commerce be notified in advance of any change-of-control transaction in which a foreign investor takes control of a Chinese domestic enterprise. We may expand our business in part by acquiring complementary businesses. Complying with the
requirements of the M&A Rules to complete such transactions could be time-consuming, and any required approval processes, including obtaining approval from the Ministry of Commerce, may delay or inhibit our ability to complete such transactions,
which could affect our ability to expand our business or maintain our market share.
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Increases in labor costs in the PRC may adversely affect our business and our profitability.
The economy of China has been experiencing significant growth, leading to inflation and increased labor costs. According to the National Bureau of Statistics
of China, the year-over-year percent change in the consumer price index in China, the broadest measure of inflation, was 1.5% for May 2017. Chinas overall economy and the average wage in the PRC are expected to continue to grow. As a result,
the average wage level for our employees has also increased in recent years. Future increases in Chinas inflation and material increases in the cost of labor may diminish our competitive advantage and, unless we are able pass on these
increased labor costs to our students by increasing prices for our services, our profitability and results of operations could be materially and adversely affected.
Governmental control of currency conversion may affect the value of your investment.
The PRC government imposes controls on the convertibility between the RMB and foreign currencies and, in certain cases, the remittance of currency out of
China. We receive substantially all of our revenues in RMB. Under our current corporate structure, our income at the holding company level may be primarily derived from dividend payments from our PRC subsidiaries. Shortages in the availability of
foreign currency may restrict the ability of our PRC subsidiaries and New Oriental China and its schools and subsidiaries to remit sufficient foreign currency to pay dividends or other payments to us, or otherwise satisfy their foreign currency
denominated obligations. Under existing PRC foreign exchange regulations, payments of current account items, including profit distributions, interest payments and expenditures from trade-related transactions, can be made in foreign currencies
without prior approval from SAFE by complying with certain procedural requirements. However, approval from appropriate government authorities is required where RMB is to be converted into foreign currency and remitted out of China to pay capital
expenses such as the repayment of loans denominated in foreign currencies. The PRC government may also at its discretion restrict access in the future to foreign currencies for current account transactions. If the foreign exchange control system
prevents us from obtaining sufficient foreign currency to satisfy our currency demands, we may not be able to pay dividends in foreign currencies to our shareholders, including holders of our ADSs.
Fluctuation in the value of the RMB may have a material adverse effect on your investment.
The value of the RMB against the U.S. dollar and other currencies is affected by, among other things, changes in Chinas political and economic
conditions and Chinas foreign exchange policies. The conversion of the RMB into foreign currencies, including the U.S. dollar, has been based on exchange rates set by the Peoples Bank of China. The PRC government allowed the Renminbi to
appreciate by more than 20% against the U.S. dollar between July 2005 and July 2008. Between July 2008 and June 2010, this appreciation was halted and the exchange rate between the RMB and the U.S. dollar remained within a narrow band. Since June
2010, the RMB has fluctuated against the U.S. dollar, at times significantly and unpredictably. It is difficult to predict how market forces or PRC or U.S. government policy may impact the exchange rate between the RMB and the U.S. dollar in the
future. In addition, there remains significant international pressure on the PRC government to adopt a substantial liberalization of its currency policy, which could result in further appreciation in the value of the RMB against the U.S. dollar.
Our revenues and costs are mostly denominated in the RMB, and a significant portion of our financial assets are also denominated in RMB. We may rely
entirely on dividends and other fees paid to us by our subsidiaries and New Oriental China and its schools and subsidiaries in China. Any significant revaluation of the RMB may materially and adversely affect our cash flows, revenues, earnings and
financial position, and the value of, and any dividends payable on, our ADSs in U.S. dollars. For example, a further appreciation of the RMB against the U.S. dollar would make any new RMB-denominated investments or expenditures more costly to us, to
the extent that we need to convert U.S. dollars into the RMB for such purposes. Conversely, a significant depreciation of the RMB against the U.S. dollar may significantly reduce our reported earnings in U.S. dollars, which in turn could adversely
affect the price of our ADSs.
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The discontinuation of any preferential tax treatments currently available to us could materially and
adversely affect our results of operations.
In March 2007, the National Peoples Congress passed the Enterprise Income Tax Law, or the
EIT Law, which took effect in January 2008. The EIT Law applies a uniform 25% enterprise income tax rate to both foreign-invested enterprises and domestic enterprises. The EIT Law provides that preferential tax treatments will be granted to
industries and projects that are strongly supported and encouraged by the state, and that enterprises otherwise classified as high and new technology enterprises strongly supported by the state will be entitled to a preferential
enterprise income tax rate. The implementation rules of the EIT Law promulgated by the State Council in December 2007 and other supplemental rules promulgated by the Ministry of Science and Technology, the Ministry of Finance and the State
Administration of Taxation in April 2008 and July 2008 which were amended in January 2016 and June 2016, respectively, have stipulated new criteria for such high and new technology enterprises, and all enterprises which had been granted
such status before the effectiveness of the EIT Law are required to be re-examined according to such new rules before they can continue to be entitled to such preferential tax treatments.
In December 2008, two of our wholly-owned subsidiaries in China, Beijing Hewstone Technology Co., Ltd., or Beijing Hewstone, and Beijing Decision
Education & Consulting Co., Ltd., or Beijing Decision, and one subsidiary of New Oriental China, Beijing New Oriental Xuncheng Network Technology Co., Ltd., or Xuncheng Network, were recertified as high and new technology
enterprise in Beijing. In November 2015, one of our wholly-owned subsidiaries in China, Beijing Pioneer Technology Co., Ltd., or Beijing Pioneer, was certified as a high and new technology enterprise. In December 2016, one of our
wholly-owned subsidiaries in China, Beijing Smart Wood Software Technology Co., Ltd., or Beijing Smart Wood, was also certified as a high and new technology enterprise. All of them are entitled to a 15% tax rate as long as they continue
to qualify as a high and new technology enterprise. Enterprises that qualify as a software enterprise are exempt from enterprise income tax for two years beginning in the enterprises first profitable year followed by a
tax rate of 12.5% for the succeeding three years. Seven of our wholly-owned subsidiaries in China, Beijing Smart Wood, Beijing Joy Tend, Beijing Right Time, Beijing Top, Beijing Shenghe, Beijing Magnificence and Beijing Jinghong, are qualified as
software enterprises. Beijing Smart Wood was entitled to an income tax exemption from in 2012 and 2013 followed by reduced income tax at a rate of 12.5% from 2014 through 2016. Beijing Right Time and Beijing Joy Tend were exempt from income taxes in
2013 and 2014 and are eligible for reduced income taxes at a rate of 12.5% from 2015 through 2017. Beijing Top and Beijing Shenghe were exempt from income taxes in 2014 and 2015 and are eligible for reduced income taxes at a rate of 12.5% from 2016
through 2018. Beijing Magnificence is entitled to an income tax exemption in 2015 and 2016 followed by reduced income tax at a rate of 12.5% from 2017 through 2019. Beijing Jinghong is entitled to an income tax exemption in 2017 and 2018 followed by
reduced income tax at a rate of 12.5% from 2019 through 2021.
According to the Implementation Rules for the Law for Promoting Private Education (2004),
private schools that do not require reasonable returns enjoy the same preferential tax treatment as public schools, while the preferential tax treatment policies applicable to private schools requiring reasonable returns shall be separately
formulated by the relevant authorities under the State Council. As of May 31, 2017, 22 of our schools elected as schools not requiring reasonable returns, 39 of our schools elected as requiring reasonable returns and the remaining schools were
not classified or registered as companies. The implementation rules of the EIT Law provide certain conditions under which not-for-profit entities may be exempted from enterprise income tax. According to such conditions, our schools may not be
entitled to income tax exemption. To date, however, no separate specific regulations or policies have been promulgated by the relevant authorities in this regard and whether our schools can be entitled to any preferential income tax treatment
remains unclear. In practice, tax treatments for private schools vary across different cities in China. For example, private schools in certain cities are subject to a 25% standard enterprise income tax starting from January 1, 2008, while in
other cities, private schools are subject to a fixed amount of enterprise income tax each year as determined by the local tax authority in lieu of the 25% standard enterprise income tax or are not required to pay enterprise income tax. Shanghai
promulgated the Interim Measures for the Registration of Operational Private Training Institutions, or Measure No. 5, which requires for-profit private training institutions to register with local administration of industry and commerce bureau.
The Measure No. 5 came into effect in August 2013 and expired after two years. However, based on telephone inquiries our PRC counsel made to the Shanghai Municipal Education Commission, these provisional measures still apply in practice,
since no alternative regulation is currently available. Our school in Shanghai has been subject to 25% standard enterprise income tax, and is thus not affected by Measure No. 5. However, if similar regulations or policies are promulgated in
other cities where we operate, and our schools choose to be or are required to be registered as for-profit private training institutions, they may be required to pay 25% standard enterprise income tax, which may be higher than the tax rates they are
currently subject to, and our results of operations may be materially and adversely affected. Beijing Haidian School was not required by the governing tax bureau to pay any EIT since its establishment through May 31, 2017. Prior to the
promulgation of new laws and regulations or significant changes of tax policy are made by the competent tax authorities, Beijing Haidian Schools may continue their current income tax treatment subject to the current practice of tax authorities. As
the Amended Private Education Law took effect on September 1, 2017, the income tax treatment of Beijing Haidian Schools shall be judged according to the specific provisions promulgated by the competent departments of finance, taxation and
education of the State Council and/or Beijing government.
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Preferential tax treatments granted to us by governmental authorities are subject to review and may be adjusted
or revoked at any time in the future. The discontinuation of any preferential tax treatments currently available to us, especially to those schools in major cities, will cause our effective tax rate to increase, which will increase our income tax
expenses and in turn decrease our net income.
We may be treated as a resident enterprise for PRC tax purposes under the EIT Law, which may subject
us to PRC income tax for our global income and withholding for any dividends we pay to our non-PRC shareholders and ADS holders.
Under the EIT
Law, enterprises established outside of China whose de facto management bodies are located in China are considered resident enterprises, and will generally be subject to the uniform 25% enterprise income tax rate for their
global income. Although the term de facto management bodies is defined as management bodies which has substantial and overall management and control power on the operation, human resources, accounting and assets of the
enterprise, the circumstances under which an enterprises de facto management body would be considered to be located in China are currently unclear. The State Administration of Taxation has issued a circular providing that a
foreign enterprise controlled by a PRC company or a PRC company group will be classified as a resident enterprise with its de facto management bodies located within China if the following requirements are satisfied:
(1) the senior management and core management departments in charge of its daily operations function mainly in the PRC; (2) its financial and human resources decisions are subject to determination or approval by persons or bodies in the
PRC; (3) its major assets, accounting books, company seals, and minutes and files of its board and shareholders meetings are located or kept in the PRC; and (4) at least half of the enterprises directors or senior management
with voting rights reside in the PRC.
In addition, the State Administration of Taxation issued a bulletin to provide more guidance on the implementation
of the above circular. The bulletin clarified certain matters relating to resident status determination, post determination administration and competent tax authorities. It also specifies that when provided with a copy of a PRC tax resident
determination certificate from a resident PRC-controlled offshore incorporated enterprise, the payer should not withhold 10% income tax when paying the PRC-sourced dividends, interest and royalties to the PRC-controlled offshore incorporated
enterprise. Although both the circular and the bulletin only apply to offshore enterprises controlled by PRC enterprises and not those by PRC individuals, the determination criteria set forth in the circular and administration clarification made in
the bulletin may reflect the State Administration of Taxations general position on how the de facto management body test should be applied in determining the tax residency status of offshore enterprises and how the administration
measures should be implemented, regardless of whether they are controlled by PRC enterprises or PRC individuals.
In addition, the State Administration of
Taxation issued a bulletin in January 2014, to provide more guidance on the implementation of the above circular. This bulletin further provided that, among other things, an entity that is classified as a resident enterprise in
accordance with the circular shall file the application for classifying its status of residential enterprise with the local tax authorities where its main domestic investors registered. From the year in which the entity is determined as a
resident enterprise, any dividend, profit and other equity investment gain shall be taxed in accordance with the Article 26 of EIT law and the Article 17 and Article 83 of its implementation rules.
Most members of our management team are based in China and are expected to remain in China. Although our offshore holding companies are not controlled by any
PRC company or company group, we cannot assure you that we will not be deemed to be a PRC resident enterprise under the EIT Law and its implementation rules. If we are deemed to be a PRC resident enterprise, we will be subject to PRC enterprise
income tax at the rate of 25% on our global income. In that case, however, dividend income we receive from our PRC subsidiaries may be exempt from PRC enterprise income tax because the EIT Law and its implementation rules generally provide that
dividends received by a PRC resident enterprise from its directly invested entity that is also a PRC resident enterprise is exempt from enterprise income tax. Accordingly, if we are deemed to be a PRC resident enterprise and earn income other than
dividends from our PRC subsidiaries, a 25% enterprise income tax on our global income could significantly increase our tax burden and materially and adversely affect our cash flow and profitability.
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In addition, if we are deemed to be a PRC resident enterprise, dividends distributed to our non-PRC entity
investors by us, or the gain our non-PRC entity investors may realize from the transfer of our common shares or ADSs, may be treated as PRC-sourced income and therefore be subject to a 10% PRC withholding tax pursuant to the EIT Law. This could
increase our and our shareholders effective income tax rates and may require us to deduct withholding tax from any dividends we pay to our non-PRC shareholders.
Dividends we receive from our subsidiaries located in the PRC are subject to the PRC withholding tax.
The EIT Law provides that a maximum income tax rate of 20% may apply to dividends payable to non-PRC investors that are non-resident enterprises,
to the extent such dividends are derived from sources within the PRC. The State Council has reduced such rate to 10%, in the absence of any applicable tax treaties that may reduce such rate. We are a Cayman Islands holding company and may derive our
income from dividends we receive from our operating subsidiaries located in the PRC. If we are required under the EIT Law to pay income tax for any dividends we receive from our PRC subsidiaries, the amount of dividends, if any, we may pay to our
shareholders and ADS holders may be materially and adversely affected.
According to the Arrangement between the PRC and the Hong Kong Special
Administrative Region on the Avoidance of Double Taxation and Prevention of Fiscal Evasion with respect to Taxes on Income, or the Double Taxation Arrangement (Hong Kong), which became effective in January 2007, the Notice of the State
Administration of Taxation on Negotiated Reduction of Dividends and Interest Rates, which was issued in 2008, and the Notice of the State Administration of Taxation Regarding Interpretation and Recognition of Beneficial Owners under Tax Treaties,
which became effective in October 2009, dividends paid to enterprises incorporated in Hong Kong are subject to a withholding tax of 5% provided that a Hong Kong resident enterprise owns over 25% of the PRC enterprise distributing the dividend and
can be considered as a beneficial owner and entitled to treaty benefits under the Double Taxation Arrangement (Hong Kong). Elite Concept Holdings Limited, Winner Park Limited and Smart Shine International Limited, our Hong Kong
wholly-owned subsidiaries, own 100% of our PRC subsidiaries. Thus, dividends paid by our PRC subsidiaries to us through our Hong Kong wholly-owned subsidiaries may be subject to the 5% withholding tax if we and our Hong Kong subsidiaries are
considered as non-resident enterprises under the EIT Law and our Hong Kong subsidiaries are considered as beneficial owners and entitled to treaty benefits under the Double Taxation Arrangement (Hong Kong). If our Hong Kong
subsidiaries are not regarded as the beneficial owners of any such dividends, they will not be entitled to the treaty benefits under the Double Taxation Arrangement (Hong Kong). As a result, such dividends would be subject to regular withholding tax
of 10% as provided by the PRC domestic law rather than the favorable rate of 5% applicable under the Double Taxation Arrangement (Hong Kong).
We
face uncertainties with respect to indirect transfers of equity interests in PRC resident enterprises by their non-PRC holding companies.
Pursuant to the Notice on Strengthening Administration of Enterprise Income Tax for Share Transfers by Non-PRC Resident Enterprises, or Circular 698, issued
by the State Administration of Taxation in December 2009, where a foreign investor transfers the equity interests in a PRC resident enterprise indirectly via disposition of the equity interests of an overseas holding company, or an Indirect
Transfer, and such overseas holding company is located in a tax jurisdiction that (1) has an effective tax rate less than 12.5% or (2) does not tax foreign income of its residents, the foreign investor shall report the Indirect
Transfer to the competent PRC tax authority. The PRC tax authority will examine the nature of such Indirect Transfer, and if the tax authority considers that the foreign investor has adopted an abusive arrangement in order to reduce,
avoid or defer PRC taxes, it may disregard the existence of the overseas holding company and re-characterize the Indirect Transfer such that gains derived from such Indirect Transfer may be subject to PRC withholding tax at a rate of up to 10%.
Circular 698 was partially terminated by the Announcement of the State Administration of Taxation on Several Issues Concerning the Enterprise Income Tax on Indirect Property Transfer by Non-Resident Enterprises, or Bulletin 7, pursuant to which
where a non-resident enterprise indirectly transfers properties such as equity in PRC resident enterprises without any justifiable business purposes with the aim of avoiding to pay enterprise income tax, such indirect transfer shall be reclassified
as a direct transfer of equity in PRC resident enterprise. To determine whether there are reasonable commercial purposes, all arrangements related to the indirect transfer of PRC taxable properties shall be considered comprehensively and factors set
out in the Announcement shall be comprehensively analyzed in light of the actual situation.
29
According to Bulletin 7, where a non-PRC resident enterprise transfers its equity interests in a PRC resident
enterprise to its related parties at a price lower than the fair market value, the competent tax authority has the power to make a reasonable adjustment to the taxable income of the transaction. Bulletin 7 is newly issued, and there is uncertainty
as to the application of this bulletin. As a result, we and our non-resident investors may have the risk of being taxed under Bulletin 7 and may be required to spend valuable resources to comply with Bulletin 7 or to establish that we or our
non-resident investors should not be taxed under Bulletin 7, which may have a material adverse effect on our financial condition and results of operations or such non-resident investors investments in us.
The audit report included in this annual report is prepared by auditors who are not inspected by the Public Company Accounting Oversight Board and, as
such, you are deprived of the benefits of such inspection.
Our independent registered public accounting firm that issues the audit reports
included in our annual reports filed with the US Securities and Exchange Commission (the SEC) as auditors of companies that are traded publicly in the United States and a firm registered with the U.S. Public Company Accounting Oversight
Board (the PCAOB), is required by the laws of the United States to undergo regular inspections by the PCAOB to assess its compliance with the laws of the United States and professional standards. Because our auditors are located in the
Peoples Republic of China, a jurisdiction where the PCAOB is currently unable to conduct inspections without the approval of the PRC government authorities, our auditors are not currently inspected by the PCAOB.
Inspections of other accounting firms that the PCAOB has conducted outside China have identified deficiencies in those firms audit procedures and
quality control procedures, which may be addressed as part of the inspection process to improve future audit quality. This lack of PCAOB inspections in China prevents the PCAOB from regularly evaluating our auditors audits and its quality
control procedures. As a result, investors may be deprived of the benefits of PCAOB inspections.
The inability of the PCAOB to conduct inspections of
auditors in China makes it more difficult to evaluate the effectiveness of our auditors audit procedures or quality control procedures as compared to auditors outside of China that are subject to PCAOB inspections. Investors may lose
confidence in our reported financial information and procedures and the quality of our financial statements.
If additional remedial measures are
imposed on the big four PRC-based accounting firms, including our independent registered public accounting firm, in administrative proceedings brought by the SEC alleging such firms failure to meet specific criteria set by the SEC
with respect to requests for the production of documents, we could be unable to timely file future financial statements in compliance with the requirements of the Securities Exchange Act of 1934, as amended, or the Exchange Act.
Starting in 2011 the Chinese affiliates of the big four accounting firms, including our independent registered public accounting firm, were
affected by a conflict between U.S. and PRC law. Specifically, for certain U.S. listed companies operating and being audited in mainland China, the SEC and the PCAOB sought to obtain from the Chinese accounting firms access to their audit work
papers and related documents. The accounting firms were, however, advised and directed that under PRC law they could not respond directly to the U.S. regulators on those requests, and that requests by foreign regulators for access to such papers in
China had to be channeled through the China Securities Regulatory Commission, or the CSRC.
In late 2012 this impasse led the SEC to commence
administrative proceedings under Rule 102(e) of its Rules of Practice and also under the Sarbanes-Oxley Act of 2002 against the Chinese accounting firms, including our independent registered public accounting firm. A first instance trial of the
proceedings in July 2013 in the SECs internal administrative court resulted in an adverse judgment against the accounting firms. The administrative law judge proposed penalties on the firms including a temporary suspension of their right to
practice before the SEC, although that proposed penalty did not take effect pending review by the commissioners of the SEC. On February 6, 2015, before a review by the commissioners of the SEC had taken place, the firms reached a settlement
with the SEC. Under the settlement, the SEC accepted that future requests by the SEC for the production of documents will normally be made to the CSRC. The firms will receive matching Section 106 requests, and are required to abide by a
detailed set of procedures with respect to such requests, which in substance require them to facilitate production via the CSRC. If they fail to meet specified criteria, the SEC retains authority to impose a variety of additional remedial measures
on the firms depending on the nature of the failure. Remedies for any future noncompliance could include, as appropriate, an automatic six-month bar on a single firms performance of certain audit work, commencement of a new proceeding against
a firm, or in extreme cases the resumption of the current proceeding against all four firms.
30
In the event that the SEC restarts the administrative proceedings, depending upon the final outcome, listed
companies in the United States with major PRC operations may find it difficult or impossible to retain auditors in respect of their operations in the PRC, which could result in financial statements being determined to not be in compliance with the
requirements of the Exchange Act, including possible delisting. Moreover, any negative news about any such future proceedings against these accounting firms may cause investor uncertainty regarding China-based, United States-listed companies and the
market price of our ADSs may be adversely affected.
If our independent registered public accounting firm were denied, even temporarily, the ability to
practice before the SEC and we were unable to timely find another registered public accounting firm to audit and issue an opinion on our financial statements, our financial statements could be determined not to be in compliance with the requirements
of the Exchange Act. Such a determination could ultimately lead to the delisting of our common shares from the NYSE or the deregistration of our common shares from the SEC, or both, which would substantially reduce or effectively terminate the
trading of our ADSs in the United States.
Risks Related to Our ADSs
The market price for our ADSs may be volatile.
The
market price for our ADSs has fluctuated significantly since our ADSs became listed on the New York Stock Exchange, or the NYSE, on September 7, 2006. See Item 9. The Offer and ListingC. Markets for more information. The
market price for our ADSs is likely to be highly volatile and subject to wide fluctuations in response to factors such as:
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actual or anticipated fluctuations in our operating results,
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changes in financial estimates by securities research analysts,
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changes in the economic performance or market valuation of other education companies,
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announcements by us or our competitors of material acquisitions, strategic partnerships, joint ventures or capital commitments,
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addition or departure of our executive officers,
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detrimental negative publicity about us, our competitors or our industry,
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regulatory investigation or other governmental proceedings against us,
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substantial sales or perception of sales of our ADSs in the public market, and
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general economic, regulatory or political conditions in China and the U.S.
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In addition, the stock market in
general, and the market prices for companies with operations in China in particular, have experienced volatility that often has been unrelated to the operating performance of such companies. In addition, any negative news or perceptions about
inadequate corporate governance practices or fraudulent accounting, corporate structure or other matters of other Chinese companies may also negatively affect the attitudes of investors towards Chinese companies in general, including us, regardless
of whether we have conducted any inappropriate activities. Further, the global financial crisis and the ensuing economic recessions in many countries and the slowing Chinese economy have contributed and may continue to contribute to extreme
volatility in the U.S. stock market. These broad market and industry fluctuations may adversely affect our operating performance. Volatility or a lack of positive performance in our ADS price may also adversely affect our ability to retain key
employees, some of whom have been granted options and other share incentives under our share incentive plans.
31
We may need additional capital, and the sale of additional ADSs or other equity securities could result in
additional dilution to our shareholders.
We believe that our current cash and cash equivalents and anticipated cash flow from operations will be
sufficient to meet our anticipated cash needs for the near future. We may, however, require additional cash resources to finance our continued growth or other future developments, including any investments or acquisitions we may decide to pursue.
The amount and timing of such additional financing needs will vary principally depending on the timing of new school and learning center openings, investments and/or acquisitions, and the amount of cash flow from our operations. If our existing cash
resources are insufficient to satisfy our cash requirements, we may seek to sell additional equity or debt securities or obtain a credit facility. The sale of additional equity securities could result in additional dilution to our shareholders. The
incurrence of indebtedness would result in increased debt service obligations and could result in operating and financing covenants that would restrict our operations.
Our ability to obtain additional capital on acceptable terms is subject to a variety of uncertainties, including:
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investors perception of, and demand for, securities of educational service providers;
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conditions of the U.S. and other capital markets in which we may seek to raise funds;
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our future results of operations, financial condition and cash flows;
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PRC governmental regulation of foreign investment in education in China;
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economic, political and other conditions in China; and
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PRC governmental policies relating to foreign currency borrowings.
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We cannot assure you that financing will
be available in amounts or on terms acceptable to us, if at all, especially in the event of a severe and prolonged global economic recession. If we fail to raise additional funds, we may need to reduce our growth to a level that can be supported by
our cash flow. Without additional capital, we may not be able to open additional schools and learning centers, acquire necessary technologies, products or businesses, hire, train and retain teachers and other employees, market our programs, services
and products, or respond to competitive pressures or unanticipated capital requirements.
If securities or industry analysts publish negative
reports about our business, the price and trading volume of our ADSs securities could decline.
The trading market for our ADSs is influenced by
the research reports and ratings that securities or industry analysts or ratings agencies publish about us, our business and the private education market in China in general. We do not have any control over these analysts or agencies. If one or more
of the analysts or agencies who cover us downgrades us or our securities, the price of our ADSs may decline. If one or more of these analysts cease coverage of our company or fail to regularly publish reports on us, we could lose visibility in the
financial markets, which could cause the price of our ADSs or trading volume to decline.
You may not have the same voting rights as the holders of
our common shares and may not receive voting materials in time to be able to exercise your right to vote.
Except as described in the deposit
agreement, holders of our ADSs will not be able to exercise voting rights attaching to the common shares evidenced by our ADSs on an individual basis. Holders of our ADSs will appoint the depositary or its nominee as their representative to exercise
the voting rights attaching to the common shares represented by the ADSs. You may not receive voting materials in time to instruct the depositary to vote, and it is possible that you, or persons who hold their ADSs through brokers, dealers or other
third parties, will not have the opportunity to exercise a right to vote. Upon our written request, the depositary will mail to you a shareholder meeting notice which contains, among other things, a statement as to the manner in which your voting
instructions may be given, including an express indication that such instructions may be given or deemed given to the depositary to give a discretionary proxy to a person designated by us if no instructions are received by the depositary from you on
or before the response date established by the depositary. However, no voting instruction shall be deemed given and no such discretionary proxy shall be given with respect to any matter as to which we inform the depositary that (1) we do not
wish such proxy given, (2) substantial opposition exists or (3) such matter materially and adversely affects the rights of shareholders.
32
You may not be able to participate in rights offerings and may experience dilution of your holdings as a
result.
We may from time to time distribute rights to our shareholders, including rights to acquire our securities. Under the deposit agreement
for the ADSs, the depositary will not offer those rights to ADS holders unless both the rights and the underlying securities to be distributed to ADS holders are either registered under the Securities Act, or exempt from registration under the
Securities Act with respect to all holders of ADSs. We are under no obligation to file a registration statement with respect to any such rights or underlying securities or to endeavor to cause such a registration statement to be declared effective.
In addition, we may not be able to take advantage of any exemptions from registration under the Securities Act. Accordingly, holders of our ADSs may be unable to participate in our rights offerings and may experience dilution in their holdings as a
result.
You may be subject to limitations on transfer of your ADSs.
Your ADSs are transferable on the books of the depositary. However, the depositary may close its transfer books at any time or from time to time when it deems
expedient in connection with the performance of its duties. In addition, the depositary may refuse to deliver, transfer or register transfers of ADSs generally when our books or the books of the depositary are closed, or at any time if we or the
depositary deems it advisable to do so because of any requirement of law or of any government or governmental body, or under any provision of the deposit agreement, or for any other reason.
You may experience difficulties in effecting service of legal process, enforcing foreign judgments or bringing original actions in the Cayman Islands or
China based on United States or other foreign laws against us or our management.
We are incorporated in the Cayman Islands and conduct
substantially all of our operations in China. Substantially all of our assets are located in China. All of our executive officers reside in China and some or all of the assets of those persons are located outside of the United States. As a result,
it may be difficult for you to effect service of process within the United States or elsewhere outside the Cayman Islands and China upon us or our executive officers, including with respect to matters arising under U.S. federal securities laws or
applicable state securities laws. It may also be difficult or impossible for you to bring an action against us or against our executive officers in the Cayman Islands or in China in the event that you believe that your rights as an ADS holder have
been infringed under the securities laws of the United States or otherwise. Even if you are successful in bringing an action of this kind in the United States, the respective laws of the Cayman Islands and China may render you unable to enforce a
judgment against our assets or the assets of our directors and officers. There is no statutory recognition in the Cayman Islands of judgments obtained in the United States, although the courts of the Cayman Islands will generally recognize and
enforce a non-penal judgment of a foreign court of competent jurisdiction without retrial on the merits. Moreover, our PRC counsel has advised us that the PRC does not have treaties with the United States or many other countries providing for the
reciprocal recognition and enforcement of judgment of courts.
33
We are a Cayman Islands company and, because judicial precedent regarding the rights of shareholders is
more limited under Cayman Islands law than under U.S. law, you may have less protection of your shareholder rights than you would under U.S. law.
Our corporate affairs are governed by our memorandum and articles of association and by the Companies Law (2013 Revision) and common law of the Cayman
Islands. The rights of shareholders to take legal action against our directors and us, actions by minority shareholders and the fiduciary responsibilities of our directors to us under Cayman Islands law are to a large extent governed by the common
law of the Cayman Islands. The common law of the Cayman Islands is derived in part from comparatively limited judicial precedents in the Cayman Islands as well as from English common law, which has persuasive, but not binding, authority on a court
in the Cayman Islands. The rights of our shareholders and the fiduciary responsibilities of our directors under Cayman Islands law are not as clearly established as they would be under statutes or judicial precedents in the United States. In
particular, the Cayman Islands has a less developed body of securities laws as compared to the United States, and provides significantly less protection to investors. In addition, Cayman Islands companies may not have standing to initiate a
shareholder derivative action before the federal courts of the United States.
As a result of all of the above, holders and beneficial owners of our ADSs
may have more difficulties in protecting their interests through actions against our management, directors or major shareholders than would shareholders of a corporation incorporated in a jurisdiction in the United States.
Our articles of association contain anti-takeover provisions that could have a material adverse effect on the rights of holders of our common shares and
ADSs.
Our articles of association contain provisions that limit the ability of others to acquire control of our company or cause us to engage in
change-of-control transactions. These provisions could have the effect of depriving our shareholders of an opportunity to sell their shares at a premium over prevailing market prices by discouraging third parties from seeking to obtain control of
our company in a tender offer or similar transaction. For example, our board of directors has the authority, without further action by our shareholders, to issue preferred shares in one or more series and to fix their designations, powers,
preferences, privileges, and relative participating, optional or special rights and the qualifications, limitations or restrictions, including dividend rights, conversion rights, voting rights, terms of redemption and liquidation preferences, any or
all of which may be greater than the rights associated with our common shares, in the form of ADS or otherwise. Preferred shares could be issued quickly with terms calculated to delay or prevent a change in control of our company or make removal of
management more difficult. If our board of directors decides to issue preferred shares, the price of our ADSs may fall and the voting and other rights of the holders of our common shares and ADSs may be materially and adversely affected.
We may be classified as a passive foreign investment company, which could result in adverse U.S. federal income tax consequences to
U.S. holders of our ADSs or common shares.
A non-U.S. corporation, such as our company, will be a passive foreign investment
company, or PFIC, for U.S. federal income tax purposes for any taxable year if either, (1) 75% or more of its gross income for such year consists of certain types of passive income or (2) 50% or more of its average
quarterly assets as determined on the basis of fair market value during such year produce or are held for the production of passive income.
Although the
law in this regard is unclear, we treat New Oriental China as being owned by us for U.S. federal income tax purposes, not only because we control its management decisions but also because we are entitled to substantially all of the economic benefits
associated with this entity, and, as a result, we consolidate this entitys operating results in our combined financial statements. If it were determined, however, that we are not the owner of New Oriental China for U.S. federal income tax
purposes, we may be or become a PFIC. Assuming that we are the owner of New Oriental China for U.S. federal income tax purposes, and based upon an analysis of our companys income and assets in respect of the 2017 taxable year, we do not
believe that we were a PFIC, for U.S. federal income tax purposes, for the taxable year ended May 31, 2017. In light of the amount of our cash balances and because the value of our assets for purposes of the PFIC test will generally be
determined by reference to the market value of our ADSs, the determination of whether we will be or become a PFIC will depend in large part upon the market value of our ADSs, of which we cannot control. Accordingly, fluctuations in the market price
of our ADSs may cause us to become a PFIC for the current taxable year or future taxable years. The determination of whether we will be or become a PFIC will also depend, in part, upon the nature of our income and assets over time, which are subject
to change from year to year. There can be no assurance that our business plans will not change in a manner that will affect the composition of our income and assets and our PFIC status. Because there are uncertainties in the application of the
relevant rules and PFIC status is a fact-intensive determination made on an annual basis, no assurance can be given that we are not or will not become classified as a PFIC.
34
If we were to be classified as a PFIC in any taxable year, a U.S. Holder (as defined in Item 10. Additional
InformationE. TaxationU.S. Federal Income Taxation) may incur significantly increased U.S. income tax on gain recognized on the sale or other disposition of the ADSs or common shares and on the receipt of distributions on the ADSs
or common shares to the extent such gain or distribution is treated as an excess distribution under U.S. federal income tax rules. Further, if we are classified as a PFIC for any year during which a U.S. Holder holds our ADSs or common
shares, we generally will continue to be treated as a PFIC for all succeeding years during which such U.S. Holder holds our ADSs or common shares. U.S. Holders of our ADSs or common shares are urged to consult their tax advisors concerning the
United States federal income tax consequences if we are or become classified as a PFIC. See Item 10. Additional InformationE. TaxationU.S. Federal Income TaxationPassive Foreign Investment Company Rules.
ITEM 4. INFORMATION ON THE COMPANY
A.
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History and Development of the Company
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Our first school was established by Michael Minhong Yu, our
executive chairman, in Beijing, China in 1993 to offer TOEFL test preparation courses to college students. We established New Oriental China in 2001 as a domestic holding company to act as the sponsor of our schools and hold some operating
subsidiaries. Since our inception, we have grown rapidly and transformed ourselves from primarily a language training and test preparation company to the largest provider of private educational services in China offering a wide range of educational
programs, services and products to a varied student population throughout China.
In order to facilitate foreign investment in our company, we established
our offshore holding company, New Oriental Education & Technology Group Inc., in the British Virgin Islands in August 2004. On January 25, 2006, our shareholders approved the change of our offshore holding companys corporate
domicile to the Cayman Islands, and we are now a Cayman Islands company. Since December 2007, we have established three wholly-owned subsidiaries in Hong Kong, which now directly own our wholly-owned subsidiaries in China.
We and certain selling shareholders of our company completed an initial public offering and listed our ADSs on the NYSE under the symbol EDU in
September 2006. In February 2007, we and certain selling shareholders of our company completed an additional public offering of ADSs. On August 18, 2011, we effected a change in the ratio of our ADSs to common shares from one ADS representing
four common shares to one ADS representing one common share.
Xuncheng Network, a majority-owned subsidiary of New Oriental China, which operates our
online education platform, Koolearn.com, submitted an application for the listing and open transfer of its shares on the National Equities Exchange and Quotations in China. The listing application has received the approval from the National Equities
Exchange and Quotations Co. Xuncheng Networks shares have started trading on the NEEQ since March 21, 2017.
Our principal executive offices
are located at No. 6 Hai Dian Zhong Street, Haidian District, Beijing 100080, Peoples Republic of China. Our telephone number at this address is +(8610) 6090-8000. Our registered office in the Cayman Islands is located at Conyers Trust
Company (Cayman) Limited, Cricket Square, Hutchins Drive, P.O. Box 2681, Grand Cayman KY1-1111, Cayman Islands. We have branch offices in 65 cities in China.
We are the largest provider of private educational services in China based on the
number of program offerings, total student enrollments and geographic presence. We offer a wide range of educational programs, services and products, consisting primarily of language training and test preparation, primary and secondary school
education, online education, content development and distribution, overseas study consulting services, pre-school education and study tour. We provide educational services primarily under our New Oriental brand, which we believe is the
leading consumer brand in Chinas private education sector.
Since our inception in 1993, we have had approximately 30.1 million cumulative
student enrollments. In the fiscal year ended May 31, 2017, we had over 4.8 million student enrollments, including approximately 4.0 million student enrollments in our K-12 after-school tutoring courses, approximately 0.6 million
student enrollments in our test preparation courses and approximately 0.1 million student enrollments in our language training programs. We deliver our educational programs, services and products to students through an extensive physical
network of schools, learning centers and bookstores, as well as through our virtual online network.
35
Our total net revenues increased from US$1,246.8 million for the fiscal year ended May 31, 2015 to
US$1,799.5 million for the fiscal year ended May 31, 2017, representing a compound annual growth rate, or CAGR, of 20.1%. Net revenues from our language training and test preparation courses accounted for 83.4%, 83.8% and 83.9%, respectively,
of our total net revenues in the fiscal years ended May 31, 2015, 2016 and 2017. Net income attributable to New Oriental Education & Technology Group Inc. increased from US$193.0 million in the fiscal year ended May 31, 2015 to
US$274.5 million in the fiscal year ended May 31, 2017, representing a CAGR of 19.3%.
Our Network
As of May 31, 2017, we deliver our educational programs, services and products to students through our extensive network of 77 schools, 855 learning
centers and 20 bookstores operated by us, approximately 22,000 teachers in 65 cities, and websites, which had approximately 17.0 million registered users, as well as through 187 third-party distributors, who provided us with access to a
nationwide network of online and offline bookstores. In addition, we have an extensive network of students and alumni, which has been essential in helping us promote our brand and our programs, services and products by word-of-mouth referrals and
through our students and alumnis academic and career achievements. We plan to continue to open new schools and learning centers in cities that exhibit strong enrollment potential.
All of our schools, learning centers and bookstores operate under our New Oriental brand. Our hub schools in major cities consist of classrooms
and administrative facilities with full student and administrative services, while our schools in satellite cities and our learning centers consist primarily of classroom facilities and limited course registration and management capabilities. We
select new locations based on various factors, including demographics and the number of colleges in, and the economic condition of, the particular region. We have opened bookstores in our established schools to primarily sell educational materials
relating to our courses and also sell self-help, know-how, inspirational and other books.
We lease all of our facilities except for our Yangzhou school,
part of the premises for our headquarters in Beijing and our schools in Xian, Tianjin, Kunming, Wuhan, Guangzhou, Xiamen, Changsha and Zhengzhou. The following table sets forth information concerning the locations of our schools, learning
centers and bookstores as of May 31, 2017.
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City
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Number of
schools
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Number of
learning centers
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Number of
bookstores
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Beijing
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5
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92
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1
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Shanghai
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1
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51
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1
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Guangzhou
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1
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30
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1
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Wuhan
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1
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48
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1
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Yangzhou
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3
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Tianjin
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1
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27
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Xian
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1
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21
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1
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Nanjing
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2
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17
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Shenyang
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1
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26
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Chongqing
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1
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13
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1
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Chengdu
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1
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24
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1
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Shenzhen
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1
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15
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Xiangyang
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1
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9
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Taiyuan
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1
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24
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1
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Haerbin
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1
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14
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1
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Changsha
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1
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24
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Jinan
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1
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17
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Zhengzhou
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1
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34
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Hangzhou
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1
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21
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1
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Changchun
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3
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|
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14
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1
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Shijiazhuang
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|
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1
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11
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Suzhou
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1
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29
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1
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Zhuzhou
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|
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1
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2
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Anshan
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|
1
|
|
|
|
1
|
|
|
|
|
|
36
|
|
|
|
|
|
|
|
|
|
|
|
|
City
|
|
Number of
schools
|
|
|
Number of
learning centers
|
|
|
Number of
bookstores
|
|
Hefei
|
|
|
1
|
|
|
|
23
|
|
|
|
|
|
Kunming
|
|
|
1
|
|
|
|
20
|
|
|
|
1
|
|
Wuxi
|
|
|
1
|
|
|
|
10
|
|
|
|
|
|
Foshan
|
|
|
1
|
|
|
|
5
|
|
|
|
|
|
Fuzhou
|
|
|
1
|
|
|
|
12
|
|
|
|
|
|
Yichang
|
|
|
1
|
|
|
|
3
|
|
|
|
|
|
Nanchang
|
|
|
1
|
|
|
|
23
|
|
|
|
1
|
|
Jingzhou
|
|
|
1
|
|
|
|
4
|
|
|
|
|
|
Dalian
|
|
|
1
|
|
|
|
7
|
|
|
|
1
|
|
Lanzhou
|
|
|
1
|
|
|
|
9
|
|
|
|
1
|
|
Huangshi
|
|
|
1
|
|
|
|
2
|
|
|
|
|
|
Ningbo
|
|
|
1
|
|
|
|
6
|
|
|
|
|
|
Xiamen
|
|
|
1
|
|
|
|
19
|
|
|
|
|
|
Qingdao
|
|
|
4
|
|
|
|
10
|
|
|
|
|
|
Nanning
|
|
|
1
|
|
|
|
6
|
|
|
|
|
|
Xuzhou
|
|
|
1
|
|
|
|
6
|
|
|
|
1
|
|
Xiangtan
|
|
|
1
|
|
|
|
1
|
|
|
|
|
|
Zhenjiang
|
|
|
1
|
|
|
|
3
|
|
|
|
|
|
Luoyang
|
|
|
1
|
|
|
|
5
|
|
|
|
|
|
Nantong
|
|
|
1
|
|
|
|
|
|
|
|
|
|
Jilin
|
|
|
1
|
|
|
|
5
|
|
|
|
|
|
Guiyang
|
|
|
1
|
|
|
|
5
|
|
|
|
|
|
Hohhot
|
|
|
1
|
|
|
|
4
|
|
|
|
1
|
|
Tangshan
|
|
|
1
|
|
|
|
7
|
|
|
|
|
|
Urumqi
|
|
|
1
|
|
|
|
7
|
|
|
|
1
|
|
Shiyan
|
|
|
1
|
|
|
|
3
|
|
|
|
|
|
Quanzhou
|
|
|
1
|
|
|
|
|
|
|
|
|
|
Wenzhou
|
|
|
1
|
|
|
|
1
|
|
|
|
|
|
Weifang
|
|
|
1
|
|
|
|
2
|
|
|
|
|
|
Zhuhai
|
|
|
1
|
|
|
|
1
|
|
|
|
1
|
|
Jinzhou
|
|
|
1
|
|
|
|
2
|
|
|
|
|
|
Baoding
|
|
|
1
|
|
|
|
1
|
|
|
|
|
|
Yantai
|
|
|
1
|
|
|
|
1
|
|
|
|
|
|
Taian
|
|
|
1
|
|
|
|
|
|
|
|
|
|
Kaifeng
|
|
|
1
|
|
|
|
|
|
|
|
|
|
Cangzhou
|
|
|
1
|
|
|
|
|
|
|
|
|
|
Qinhuangdao
|
|
|
1
|
|
|
|
|
|
|
|
|
|
Anyang
|
|
|
1
|
|
|
|
|
|
|
|
|
|
Handan
|
|
|
1
|
|
|
|
|
|
|
|
|
|
Zhangzhou
|
|
|
1
|
|
|
|
|
|
|
|
|
|
Nanyang
|
|
|
1
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
77
|
|
|
|
778
|
|
|
|
20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our Programs, Services and Products
We provide a wide variety of educational programs, services and products. We deliver education to our students primarily in traditional classroom settings and
also through online instruction. With the exception of the full-time primary and secondary school in Yangzhou and a full-time secondary school in Beijing, our classroom-based courses are generally designed to be completed in 2 to 16 weeks. Course
fees are determined based on the length of the course, the size and the subject of the class, the area of study and the geographic location of the school. We update and expand our course offerings frequently in response to evolving market needs. We
currently have a full-time staff of approximately 700 people involved in our centralized curriculum development process. Our program, service and product offerings are generally divided into seven areas: test preparation; K-12 after-school tutoring;
language training; primary and secondary schools; educational content, software and other technology development and distribution; online education; and other services and products.
37
Test Preparation Courses
We offer test preparation courses to students taking language and entrance exams used by educational institutions in the United States, the PRC and
Commonwealth countries. In our fiscal year ended May 31, 2017, we had approximately 612,000 student enrollments in our test preparation courses, of which approximately 298,000 were in overseas test preparation courses, 314,000 were in PRC test
preparation courses.
We offer test preparation courses for the following major overseas exams: TOEFL, SAT, ACT, IELTS, GRE, GMAT, LSAT, BEC and TOEIC. In
addition, we offer test preparation classes for the following major PRC admissions tests: CET 4, CET 6, National Tests for Entrance into Masters Degree Programs, and PETS.
In our fiscal year ended May 31, 2017, approximately 31.7% and 10.0% of the total student enrollments in our overseas test preparation courses took place
in Beijing and Shanghai, respectively, and approximately 13.0% and 10.4% of the total student enrollments in our PRC test preparation courses took place in Xian and Beijing, respectively. Our test preparation courses focus on quality
instruction and test-taking techniques designed to help students achieve high scores on the admissions and assessment tests. Except for the customized VIP class, our experienced teachers generally teach in classes ranging from 6 to 50 students. Our
students enroll in a 50- to 240-hour program with classes meeting one to six times per week for approximately 1 to 3 hours per class. We also offer intensive and condensed versions of our courses, which are compacted into shorter time periods.
Course fees for our test preparation courses range from RMB1,500 to RMB30,000 per course.
K-12 After-School Tutoring Courses
After-School Tutoring Courses for Middle School and High School Students
. Given the intense competition to gain admission into top high schools and
higher education institutions in China, exam scores can be a deciding factor in gaining admission. Our after-school tutoring courses for middle school and high school students are designed to supplement students regular school curricula and
help students achieve better scores on entrance exams for admission into high schools or higher education institutions.
English proficiency is
tested as a major subject of entrance exams for admission into Chinas high schools, colleges and universities. In 2002, we first established English after-school training program for middle and high school students. In March 2008, we launched
our New Oriental U-Can All Subjects training program, which targets middle and high school Chinese students from ages 13 to 18 who are preparing for the high school entrance examination in China, known as the zhongkao and the college
entrance examination, known as the gaokao. The gaokao is required for admission to bachelor degree programs and most associate degree programs at Chinese colleges and universities. To complement New Oriental U-Can All Subjects training program, we
provide tutoring services to students who seek to retake the gaokao through Tongwen Gaokao School, a private school based in Changchun. In February 2009, we launched a customized learning program for students from ages 12 to 18, offering small class
size tutoring ranging from one to five students per class, in all subjects required for the college and high school entrance examinations, respectively. With this strategy of offering affordable larger classes and higher priced individualized small
classes for school aged children, we aim to capture more market share in the after-school training market in China.
Our typical U-Can All Subjects
after-school tutoring courses for middle school and high school students last for 8 to 16 weeks with classroom instruction one to four times per week for 2 to 3 hours per visit. We also offer more intensive and condensed versions of our
courses, in particular during the summer months when many academic institutions are on summer break. The sizes of these courses typically range from 6 to approximately 150 students per class.
In our fiscal year ended May 31, 2017, we had approximately 2,216,000 student enrollments in our after-school tutoring courses for middle school and high
school students, and approximately 20.2% and 9.1% of the enrollments took place in Beijing and Xian, respectively. Course fees for our all subject after-school tutoring courses for middle school and high school students range from
approximately RMB400to approximately RMB5,000 per course.
38
After-School Tutoring Courses for Children.
English is a major subject in elementary schools. We
established our English for children program in 2002 for children in kindergarten through grade six and it has achieved rapid growth since that time. We designed our English for children program based upon the following principles: (1) we use
localized materials originally published by international education content providers and publishers while taking into account the local public schools curricula and the skills and abilities of the individual child and adapting to his or her
particular needs; (2) we assist students in mastering the basics of the language in various fun ways, including interactive games, activities and cultural studies; and (3) we help children develop a passion for learning the language and
guide and inspire them to develop their self-learning abilities. In 2008, we launched our Pop Kids All Subjects training program, which offered after-school tutoring courses in English, math, Chinese, writing, music and arts for children
in kindergarten and elementary schools.
Our after-school tutoring courses for children are typically divided into classes of 6 to approximately
25 students per class. Students attend class one to four times per week for 2 to 3 hours per class. We test our students to measure their progress and make sure they are progressing as needed to advance to the next book and class level without
jeopardizing the fundamentals that will allow them to excel in the future.
To enhance our Pop Kids English program, we cooperate with the Sino-British
Academic Exchange Center for Education Measurement (SBC), Cambridge ESOLs sole representative in China, for the administration of the Cambridge Young Learners English exam (YLE) to our students in the Pop Kids English program. Cambridge ESOL
is a not-for-profit department of the University of Cambridge focusing on examinations for the English language. We currently administer the YLE exam for our POP Kids English students in 17 cities.
In our fiscal year ended May 31, 2017, we had approximately 1,739,000 student enrollments in our Pop Kids All Subjects after-school tutoring courses and
approximately 10.9% and 9.2% of the enrollments took place in Beijing and Wuhan, respectively. Course fees for these courses range from approximately RMB300 to approximately RMB3,600 per course.
Language Training Courses for Adults
We provide
various types of English language training courses as well as training courses for other foreign languages, including German, Japanese, French, Korean, Italian and Spanish.
English language training courses is a primary component of our language training courses. Many employers in China, including foreign-invested enterprises,
multinational corporations branch offices as well as domestic enterprises involved in international business transactions or the tourism industry, require their employees to have a high level of English proficiency. Our English for adults
program offers courses designed to teach and improve students English writing, reading, listening and speaking skills. Our schools and learning centers also have language labs at which our students can listen to and recite spoken passages on
CDs and audio tapes to improve their listening and speaking skills. A typical course lasts for 6 to 12 weeks with classroom instruction 1 to 5 times per week for 1.5 to 5 hours per visit. We also offer more intensive and condensed versions of our
courses, in particular during the summer months when many academic institutions are on summer break. The sizes of our English courses for adults typically range from 6 to approximately 50 students per class.
In our fiscal year ended May 31, 2017, we had approximately 90,000 student enrollments in our English courses for adults and approximately 36.9% and
15.8% of the total enrollments were for courses taught in Beijing and Shanghai, respectively. Course fees for our English courses for adults range from approximately RMB300 to approximately RMB3,600 per course.
Primary and Secondary Schools
We established the
first full-time private primary and secondary school in Yangzhou in 2002. This is a private boarding school for students in grades 1 to 12 seeking a full curriculum taught in both Chinese and English, with a strong emphasis on English language
training. We target parents who desire to provide their children with a global vision and an understanding and appreciation of both traditional Chinese culture and the modern world, a competitive advantage in academics and social development and
English language proficiency. Our goal is to develop the Yangzhou school, and other new schools to be established in the future, into elite schools whose students consistently gain acceptance into the top universities in China and around the world.
39
We attempt to immerse our students in the English language at an early age through native English speaking
teachers and activities designed to emphasize early and significant exposure to a bilingual environment. The Yangzhou private school has a capacity of up to 4,000 students. As of May 31, 2017, there were over 3800 students at the Yangzhou
school, approximately 48% of whom came from Yangzhou, with the remainder from various parts of China. Our students must take an admission test and undergo an interview to gain acceptance into our school.
There are over 400 teachers and 300 supporting staff at the Yangzhou school. The school has been regarded as one of the best primary and secondary schools in
the local market since shortly after its inception. In our fiscal year ended May 31, 2017, the school accepted 1,121 students out of over approximately 1,900 applicants from the local market as well as elsewhere in China.
The Yangzhou school has received various accreditations from local authorities. We work closely with the local educational authorities to make sure that our
curriculum is compatible with public school curriculums and covers the full spectrum of required courses. We have also expanded our curriculum to include subjects, activities and techniques that teach the students to learn and think independently.
There is less emphasis on memorization and recitation and greater emphasis on creative thinking and analytical activities. We use computers as a major part of our teaching and learning methods and encourage students to learn in an interactive
format. In our fiscal year ended May 31, 2017, tuition at the Yangzhou school ranged from RMB22,000 to RMB75,000 per year.
In July 2006, we
established an international high school program within the Yangzhou school. In July 2010, we opened an international high school in Beijing. Our international high school aims to provide students with a full curriculum of high school education in a
bilingual environment while preparing them for admission into foreign universities. Each of the students of the class of 2017 of the international high school program at our Yangzhou school was admitted into at least one of the top 100 universities
in the United States. In our fiscal year ended May 31, 2017, tuition at our international school ranges from RMB95,000 to RMB120,000 per year.
Educational Content, Software and other Technology Development and Distribution
We develop and edit educational materials for language training and test preparation, such as books, software, CD-ROMs, magazines and other periodicals. We
distribute these materials through various distribution channels, consisting of our classrooms and bookstores as well as third-party distributors. In the fiscal year ended May 31, 2017, we developed and edited about 235 titles and distributed
approximately 15.5 million books authored or licensed by us in China. Most of the materials distributed by us are education-related and include the materials that we use in our courses and titles that we market for use in English language area.
Our extensive distribution channels have attracted international education content providers to cooperate with us in distributing localized versions of
their materials in China. We currently have arrangements with British Council, Cengage Learning, Coursera, Monash College Pty Ltd, NCUK, International Baccalaureate, Bell Education, ETS, HMH, Cambridge University Press, Cambridge English Language
Assessment, The McGraw-Hill Companies, Pearson Education, Oxford University Press, Harper Collins or their respective authorized local publishers, to develop and distribute localized versions of selected educational materials in China, some of which
bear both our logo and the original publishers logo. We plan to establish additional strategic relationships with leading international education content providers to enrich our content offerings.
Online Education
We offer online education
programs on our website www.koolearn.com and www.koo.cn. As of May 31, 2017, approximately 17.0 million users had registered accounts with us, with access to free informational content on our website. In the fiscal year ended May 31,
2017, we had approximately 855,000 users that paid for additional access to our specialized education programs. These users purchase pre-paid cards that give them the right to use our paid content for a specific period of time or for specific
courses.
In the fiscal year ended May 31, 2017, we offered approximately 4,600 new online courses, including language training courses, test
preparation courses, professional certification courses, and business knowledge and skills training courses in the areas of accounting, legal, management and others. We have live interactive online courses as well as courses that allow students to
view replays of pre-recorded lectures. Our online courses are particularly attractive to students who need the flexibility to prepare at any time of the day or night and on short notice. As a supplement to our online courses, we also offer many
online study services, including course planning, testing, composition correcting and one-on-one tutoring. Our online tools provide more flexibility by offering our students the ability to choose their best and most convenient way of learning as
they experience our programs.
40
Partially through our Koolearn.com website, we also offer enterprise clients customized training services. By
working closely with enterprise clients, we gain a good understanding of the clients specific training needs and design training solutions to meet those needs. We also have the capability to develop customized e-learning management systems for
enterprise clients.
Other Services
Overseas Studies Consulting
. Our consultants help students through the application and admission process for overseas educational institutions and
provide useful college, graduate and career counseling advice to help students make informed decisions. We also counsel students with the immigration process for overseas studies, such as obtaining visas and housing. We charge each student a fee
based on the scope of consulting services requested by the student.
Pre-school Education
. In September 2007, we established our pre-school
business with the opening of our first kindergarten in Beijing. We opened our second kindergarten in Nanjing in April 2009, the third one in Yangzhou in August 2014 and the fourth one in Beijing in January 2017. As of May 31, 2017, there were
approximately 940 students at these four kindergartens. In December 2014, we acquired a kindergarten chain in the city of Qingdao with three schools, which had approximately 750 students as of May 31, 2017.
Brand Name Cooperation
. In January 2010, we established a small pilot program whereby we permit third parties in certain small cities to offer our
Pop Kids English program and New Oriental Star kindergarten program under a brand name cooperation model. The cooperation schools operated by such third parties are not included in the counts of our schools and learning
centers, and student enrollments from these schools are not included as our student enrollments. In October 2013, we terminated the brand name cooperation for New Oriental Star kindergarten program. As of May 31, 2017, there were a
total of 14 brand cooperation schools offering our Pop Kids English program. For the fiscal years ended May 31, 2015, 2016 and 2017, we recognized revenues in an aggregate amount of US$680 thousand, US$265 thousand and US$311
thousand, respectively, from license and training fees received from these schools.
Overseas Study Tour
. In May 2012, we started our
overseas study tour business, organizing primary and middle school students to go overseas to learn foreign languages and other short-term curriculum, attend summer/winter school programs, or take part in other educational activities. For the fiscal
year ended, May 31, 2017, we recognized revenues of US$17.3 million from organizing overseas study tour.
Marketing and Student
Recruitment
We employ a variety of marketing and recruiting methods to attract students. We have positioned ourselves as a provider of private
educational services that inspires students to achieve their potential and build self-confidence and that boosts students enthusiasm for learning. We believe prospective students are attracted to our schools due to our excellent brand name,
the quality of our programs and our relatively long operating history in the private education sector.
We employ the following marketing methods to
attract new and returning students:
Speeches and Seminars
. Our management, most of whom are experienced teachers and were among our earliest
teachers, and our top teachers frequently give speeches at colleges, universities, high schools and middle schools and to student groups, parent groups and educational organizations. They also participate in educational seminars and workshops. Their
speeches include direct program promotion speeches during which they directly explain the merits and advantages of our programs or general English learning methods, as well as inspirational speeches designed to motivate students to reach their full
potential and strive for success.
Referrals
. Historically, our student enrollments have grown primarily through word-of-mouth referrals.
Our student enrollments have benefited and will continue to benefit by referrals from our extensive network of students and alumni and the successful academic and professional careers that many of them have achieved.
41
Distribution of Marketing Materials
. We use New Oriental booths and information
tables to distribute free inspirational books authored by our executive chairman Michael Minhong Yu and others, informational brochures, posters and flyers at various on-campus events, educational expos, conferences and college and employment
fairs. We also conduct extensive free information sessions to introduce our programs to our target markets.
Advertisements
. We advertise
through our own websites and also on Chinas leading portals. We also have advertising arrangements with many Chinese national and regional newspapers and other media outlets, including school campus newspapers. In addition, we advertise
through local radio stations and other advertisement platforms, including building lobby or elevator LCD displays and outdoor advertisement displays.
Social Events and Activities
. We participate in and host community events designed to promote awareness of the virtues of education. We believe that
these events enhance our public image and increase brand awareness. We also host English speech competitions, English drama performances and cultural events designed to raise enthusiasm for English language learning and to further promote awareness
of our brand.
Cross-Selling
. As we gain footholds in many different markets, we use our programs in one market as an opportunity to
advertise our programs in other markets. With a variety of programs aimed at different age groups, our goal is to create a brand name that permeates every stage of our potential students educational, career and life progression, from English
for children to English for adults to test preparation to continuing professional education, and to encourage our students to introduce their children to the same system and courses. Outside of our organization, we have established cross-promotional
relationships with a number of companies to promote our programs, services and products and awareness of our brand.
Competition
The private education sector in China is rapidly evolving, highly fragmented and competitive, and we expect competition in this sector to persist and
intensify. We face competition in each major program we offer and each geographic market in which we operate. For example, we face nationwide competition for our IELTS preparation courses from Global IELTS School, which offers IELTS preparation
courses in many cities in China. We face regional competition for our English for children program from several competitors that focus on childrens English language training in specific regions, including English First. We face limited
competition from many competitors that focus on providing international and/or PRC test preparation courses in specific geographic markets in China. We also face competition from companies that focus on providing after-school tutoring services,
including TAL Education Group and Xueda Education Group.
We believe that the principal competitive factors in our markets include the following:
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|
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overall student experience;
|
|
|
|
ability to effectively market programs, services and products to a broad base of prospective students; and
|
|
|
|
scope and quality of program, service and product offerings.
|
We believe that our primary competitive
advantages are our well-known New Oriental brand, our innovative and inspirational instruction methods and the breadth and quality of our programs, services and products. However, some of our existing and potential competitors may have
more resources than we do. These competitors may be able to devote greater resources than we can to the development, promotion and sale of their programs, services and products and respond more quickly than we can to changes in student demands,
testing materials, admissions standards, market needs or new technologies. In addition, we face competition from many different smaller sized organizations that focus on some of our targeted markets, which may be able to respond more promptly to
changes in student preferences in these markets.
42
The increasing use of the internet and advances in internet- and computer-related technologies, such as web video
conferencing and online testing simulators, are eliminating geographic and cost-entry barriers to providing private educational services. As a result, many of our international competitors that offer online test preparation and language training
courses may be able to more effectively penetrate the China market. Many of these international competitors have strong education brands, and students and parents in China may be attracted to the offerings of our international competitors based in
the country that the student wishes to study in or in which the selected language is widely spoken. In addition, many smaller companies are able to use the internet to quickly and cost-effectively offer their programs, services and products to a
large number of students with less capital expenditure than previously required.
Seasonality
We have experienced, and expect to continue to experience, seasonal fluctuations in our operations, primarily due to seasonal changes in student enrollments.
Historically, our courses tend to have the largest student enrollments in our first fiscal quarter, which runs from June 1 to August 31 of each year, primarily because many students enroll in our courses during the summer vacation to
enhance their foreign language skills and/or prepare for admissions and assessment tests in subsequent school terms. In addition, we have generally experienced larger student enrollments in our third fiscal quarter, which runs from December 1
to February 28 of each year, primarily because many students enroll in our language training and other courses during the winter school holidays. We expect quarterly fluctuations in our revenues and results of operations to continue.
Regulation
This section summarizes the principal PRC
regulations relating to our businesses.
We operate our business in China under a legal regime consisting of the State Council, which is the highest
authority of the executive branch of the PRC central government, and several ministries and agencies under its authority, including the Ministry of Education, or the MOE, the General Administration of Press and Publication, or GAPP, the Ministry of
Industry and Information Technology, or the MIIT, the SAIC, the Ministry of Civil Affairs and their respective authorized local counterparts.
Regulations on Private Education
The principal
regulations governing private education in China consist of the Education Law of the PRC, the Law for Promoting Private Education (2003), as amended, and the Implementation Rules for the Law for Promoting Private Education (2004), and the
Regulations on Chinese-Foreign Cooperation in Operating Schools. Below is a summary of the relevant provisions of these regulations.
Education Law of
the PRC
The National Peoples Congress enacted the Education Law of the PRC, or the Education Law, most recent amendment effective on
June 1, 2016. The Education Law sets forth provisions relating to the fundamental education systems of the PRC, including a school system of pre-school education, primary education, secondary education and higher education, a system of
nine-year compulsory education and a system of education certificates. The Education Law stipulates that the government should formulate plans for the development of education and establish and operate schools and other institutions of education,
and that in principle, enterprises, social organizations and individuals are encouraged to operate schools and other types of educational organizations in accordance with PRC laws and regulations. However, no organization or individual may establish
or operate a school or any other institution of education for profit-making purposes, though private schools may be operated for reasonable returns, as described in more detail below.
On December 27, 2015, the National Peoples Congress amended the Education Law of the PRC, which became effective on June 1, 2016. The amended
Education Law of the PRC, among other things, deleted the restrictions on organization or individual establishing or operating a school or any other institution of education for profit-making purposes, and added a requirement that the schools and
other institution of education which are established with governmental fund or donated assets may not establish profit-making institutions of education.
43
The Law for Promoting Private Education (2003) and the Implementation Rules for the Law for Promoting
Private Education (2004)
Under the Law for Promoting Private Education and the Implementation Rules for the Law for Promoting Private Education,
private schools are defined as schools established by social organizations or individuals using non-government funds. In addition, private schools providing certifications, pre-school education, education for self-study aid and other
academic education shall be subject to approval by the education authorities, while private schools engaging in occupational qualification training and occupational skill training shall be subject to approvals from the authorities in charge of labor
and social welfare. A duly approved private school will be granted a Permit for Operating a Private School, and shall be registered with the Ministry of Civil Affairs or its local counterparts as a privately run non-enterprise institution. Each of
our non-profit private schools which is formed as privately run non-enterprise institutions has obtained the Permit for Operating a Private School and has been registered with the relevant local counterpart of the Ministry of Civil Affairs.
Under the above regulations, private schools have the same status as public schools, though private schools are prohibited from providing military, police,
political and other kinds of education which are of a special nature. Government-run schools that provide compulsory education are not permitted to be converted into private schools. In addition, the operation of a private school is highly
regulated. For example, the types and amounts of fees charged by a private school providing certifications shall be approved by the governmental pricing authority and be publicly disclosed. A private school that does not provide certifications shall
file its pricing information with the governmental pricing authority and publicly disclose such information. Except for our primary and secondary school in Yangzhou and a private secondary school in Beijing, which provide graduation certifications
to students, none of the schools operated by New Oriental China provides a diploma or certification to students.
Private education is treated as a public
welfare undertaking under the regulations. Nonetheless, investors of a private school may choose to require reasonable returns from the annual net balance of the school after deduction of costs, donations received, government subsidies,
if any, the reserved development fund and other expenses as required by the regulations. Private schools are divided into three categories: private schools established with donated funds; private schools that require reasonable returns and private
schools that do not require reasonable returns.
The election to establish a private school requiring reasonable returns shall be provided in the articles
of association of the school. The percentage of the schools annual net balance that can be distributed as reasonable return shall be determined by the schools board of directors, taking into consideration the following factors:
(1) items and criteria for the schools fees, (2) the ratio of the schools expenses used for educational activities and improving the educational conditions to the total fees collected, and (3) the admission standards and
educational quality. The relevant information relating to the above factors shall be publicly disclosed before the schools board determines the percentage of the schools annual net balance that can be distributed as reasonable returns.
Such information and the decision to distribute reasonable returns shall also be filed with the approval authorities within 15 days from the decision made by the board. However, none of the current PRC laws and regulations provides a formula or
guidelines for determining reasonable returns. In addition, none of the current PRC laws and regulations sets forth different requirements or restrictions on a private schools ability to operate its education business based on such
schools status as a school that requires reasonable returns or a school that does not require reasonable returns.
On November 7, 2016, the
Standing Committee of the National Peoples Congress promulgated the amended Law for Promoting Private Education, or Amended Private Education Law, which became effective on September 1, 2017.
Under the Amended Private Education Law, the term reasonable return is no longer used, and sponsors of private school may choose to establish
non-profit or for-profit private schools at their own discretion. Nevertheless, school sponsors are not allowed to establish for-profit private schools that are engaged in mandatory education according to the Amended Private Education Law.
Therefore, schools engaged in mandatory education must retain their non-profit status after the effectiveness of the Amended Private Education Law.
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The Amended Private Education Law further establishes a new classification system for private schools on whether
they are established and operated for profit-making purposes. Key features of this system include the following:
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sponsors of for-profit private schools are entitled to retain the profits and proceeds from the schools and the operation surplus may be allocated to the sponsors pursuant to the PRC Company Law and other relevant laws
and regulations, whereas sponsors of non-profit private schools are not entitled to the distribution of profits or proceed from the non-profit schools and all operation surplus of non-profit schools shall be used for the operation of the schools;
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for-profit private schools are entitled to set their own tuition and other miscellaneous fees without seeking prior approval from or reporting to the relevant government authorities. whereas the collection of fees by
non-profit private schools shall be regulated by the provincial, autonomous regional or municipal governments;
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private schools (for-profit and non-profit alike) may enjoy preferential tax treatments; non-profit private schools will be entitled to the same tax benefits as public schools whereas taxation policies for for-profit
private schools are still unclear as more specific provisions are yet to be introduced;
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for construction or expansion of the school, non-profit schools may acquire the required land use rights in the form of allocation by the government as a preferential treatment, whereas for-profit private schools shall
acquire the required land use rights by purchasing them from the government;
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the remaining assets of non-profit private schools after liquidation shall continue to be used for the operation of non-profit schools, whereas the remaining assets of for-profit private schools shall be distributed to
the sponsors in accordance with the PRC Company Law; and
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governments at or above the prefecture level may support private schools (for-private and non-private alike) by subscribing to their services, providing student loans and scholarships, and leasing or transferring unused
state assets to the schools, and the governments may further support non-profit private schools in the form of government subsidies, bonus funds and incentives for donation.
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On December 29, 2016, the State Council issued the Several Opinions of the State Council on Encouraging the Operation of Education by Social Forces and
Promoting the Healthy Development of Private Education, which require to ease the access to the operation of private schools and encourage social forces to enter into the education industry. The opinions also provide that each level of the
government shall increase their support to the private schools in terms of financial investment, financial support, autonomy policies, preferential tax treatments, land policies, fee policies, autonomy operation, protection of the rights of teachers
and students etc. Further, the opinions require each level of the government to improve local policies on government support to for-profit and non-profit private schools by such means as preferential tax treatments.
On December 30, 2016, the MOE, Ministry of Civil Affairs, the SAIC, the Ministry of Human Resources and Social Welfare and the State Commission Office of
Public Sectors Reform jointly issued the Implementation Rules on the Classification Registration of Private Schools to reflect the new classification system for private schools as set out in the Amended Private Education Law. Generally, if a private
school established before promulgation of the Amended Private Education Law chooses to register as a non-profit school, it shall amend its articles of association, continue its operation and complete the new registration process. If such private
school chooses to register as a for-profit school, it shall conduct financial liquidation process, have the property rights of its assets such as lands, school buildings and net balance being authenticated by relevant government authorities, pay up
relevant taxes, apply for a new Permit for Operating a Private School, re-register as for-profit schools and continue its operation. Specific provisions regarding the above registration process are yet to be introduced by governments at the
provincial level.
On December 30, 2016, the MOE, the SAIC and the Ministry of Human Resources and Social Welfare jointly issued the Implementation
Rules on the Supervision and Administration of For-profit Private Schools, pursuant to which the establishment, division, merger and other material changes of a for-profit private school shall first be approved by the education authorities or the
authorities in charge of labor and social welfare, and then be registered with the competent branch of the SAIC.
Besides the Amended Private Education
Law and the above regulations, other details of the requirements on the operation of non-profit schools and for-profit schools will be provided in implementation regulations that are yet to be introduced, such as
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an amendment to the Implementation Rules for the Law for Promoting Private Education;
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local regulations relating to legal person registration of for-profit and non-profit private schools; and
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specific measures to be formulated and promulgated by the competent authorities in the province(s) in which our schools are located, including specific measures for registration of pre-existing private schools and the
collection of non-profit private schools fees, specific requirements for authenticating various parties property rights of for-profit private schools, taxation policies for for-profit private schools.
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At the end of each fiscal year, every private school is required to allocate a certain amount to its development fund for the construction or maintenance of
the school or procurement or upgrade of educational equipment. In the case of a private school that requires reasonable returns, this amount shall be no less than 25% of the annual net income of the school, while in the case of a private school that
does not require reasonable returns, this amount shall be equal to no less than 25% of the annual increase in the net assets of the school, if any. Private schools that do not require reasonable returns shall be entitled to the same preferential tax
treatment as public schools, while the preferential tax treatment policies applicable to private schools requiring reasonable returns shall be formulated by the finance authority, taxation authority and other authorities under the State Council. To
date, however, no regulations have been promulgated by the relevant authorities in this regard. As of May 31, 2017, 22 of our schools elected as schools not requiring reasonable returns, 39 of our schools elected as schools requiring reasonable
returns, and the remaining schools are not classified or registered as companies. Preferential tax treatments granted to our schools by governmental authorities are subject to review and may be adjusted or revoked at any time in the future.
Sponsorship of Private Schools
Under the Law for
Promoting Private Education and the Implementation Rules for Promoting Private Education, entities and individuals that establish private schools are referred to as sponsors. As of May 31, 2017, New Oriental China was the sponsor of
77 schools.
The sponsorship interest that a sponsor holds in a private school is, for all practical purposes, substantially equivalent under
PRC law and practice to the equity interest a shareholder holds in a company. Pursuant to the Implementation Rules for Promoting Private Education, a sponsor of a private school has the obligation to make capital contributions to the
school in a timely manner. The contributed capital can be in the form of tangible or non-tangible assets such as materials in kind, land use rights or intellectual property rights. Pursuant to the Law for Promoting Private Education, the capital
contributed by the sponsor becomes assets of the school and the school has independent legal person status. In addition, pursuant to the Law for Promoting Private Education and the Implementation Rules for Promoting Private Education, the sponsor of
a private school has the right to exercise ultimate control over the school. Specifically, the sponsor has control over the private schools constitutional documents and has the right to elect and replace the private schools decision
making bodies, such as the schools board of directors, and therefore controls the private schools business and affairs.
We are not aware that
PRC law provides that upon liquidation of a private school, the sponsor is legally restricted to receive only its invested capital and is not allowed to have other return. According to our PRC counsel, there is no national law that addresses this
subject one way or the other. In the absence of a national law providing for the sponsors rights upon liquidation of a private school, provincial regulations and interpretations are ambiguous and inconsistent on this subject. There are local
regulations or interpretations that specifically provide that sponsors are entitled to private schools residual assets pro rata based on their respective capital contribution. Nevertheless, there are also local regulations that are less clear
in this regard.
Notwithstanding the legal uncertainties surrounding this issue, we believe that the potential risk that we will not receive all of the
residual assets upon the liquidation of a school is immaterial. There were no capital contributions made by any PRC governmental authorities to our schools. Nor did any of our schools ever receive donations from any third parties, including PRC
governmental authorities or any third party enterprises. Neither we nor our PRC counsel is aware of any case in China where a private school which has been solely funded by private sponsors without any government or donated funds became state
property or was otherwise appropriated by a government authority upon liquidation without the prior consent of its sponsor. We historically have never liquidated any school that was profitable and we have no plan to do so in the future unless
required by the laws and regulations. If, for any reason, we would like to divest a profitable school, a commercially sensible way to do so is to sell the school, rather than to liquidate the school. In this situation, the sponsor is entitled to
receive consideration for transferring sponsorship, which often exceeds its initial investment in the school.
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Regulations on Chinese-Foreign Cooperation in Operating Schools
Chinese-foreign cooperation in operating schools or training programs is specifically governed by the Regulations on Operating Chinese-Foreign Schools,
promulgated by the State Council in accordance with the Education Law of the PRC, the Occupational Education Law and the Law for Promoting Private Education, and the Implementation Rules for the Regulations on Operating Chinese-Foreign Schools. The
Regulations on Operating Chinese-foreign Schools and its implementation rules encourage substantive cooperation between overseas educational organizations with relevant qualifications and experience in providing high-quality education and Chinese
educational organizations to jointly operate various types of schools in the PRC, with such cooperation in the areas of higher education and occupational education being encouraged. Chinese-foreign cooperative schools are not permitted, however, to
engage in compulsory education and military, police, political and other kinds of education that are of a special nature in the PRC.
Permits for
Chinese-Foreign Cooperation in Operating Schools shall be obtained from the relevant education authorities or the authorities that regulate labor and social welfare in the PRC. We have not applied for a Permit for Chinese-Foreign Cooperation in
Operating Schools at this stage since we currently do not have Chinese-foreign Cooperation Schools.
Foreign-Investment Industrial Guidance Catalog
(2017)
According to applicable PRC regulations on foreign-invested enterprises, capital contributions from a foreign holding company to its PRC
subsidiaries, which are considered foreign-invested enterprises, may only be made when approval by the Ministry of Commerce or its local branch has been obtained. In approving such capital contributions, the Ministry of Commerce or its local branch
examines the business scope of each foreign invested enterprise under review to ensure it complies with the Foreign-Investment Industrial Guidance Catalog, which classifies industries in China into three categories, namely encouraged foreign
investment industries, restricted foreign investment industries and prohibited foreign investment industries. Industries not listed in the Foreign-Investment Industrial Guidance Catalog are generally open to foreign
investment unless specifically restricted by other PRC regulations. On June 28, 2017, a new Foreign-Investment Industrial Guidance Catalog was issued to become effective on July 28, 2017 and to replace the previous one issued in 2015.
Under such Foreign Investment Catalog, foreign investment is encouraged in non-academic vocational training institutions. Preschool education, senior high
school education in grades 10 to 12, and higher education are in a restricted industry, meaning foreign educational organizations with relevant qualifications and experience and Chinese educational organizations are only allow to operate preschool
education, senior high schools and higher education in cooperative ways by the form of a cooperative joint venture in the PRC. Foreign investment is banned from compulsory education, which means grades 1 to 9. Foreign investment is allowed in
after-school tutoring services and training services which do not grant certificates or diplomas.
The Draft PRC Foreign Investment Law
In January 2015, the Ministry of Commerce published a discussion draft of the proposed Foreign Investment Law aiming to, upon its enactment, replace the trio
of existing laws regulating foreign investment in China, namely, the Sino-foreign Equity Joint Venture Enterprise Law, the Sino-foreign Cooperative Joint Venture Enterprise Law and the Wholly Foreign-invested Enterprise Law, together with their
implementation rules and ancillary regulations.
Among other things, the draft Foreign Investment Law expands the definition of foreign investment and
introduces the standard of actual control in determining whether a company is considered a foreign-invested enterprise, or an FIE. The draft Foreign Investment Law specifically provides that entities established in China but
controlled by foreign investors must be deemed as FIEs, whereas an entity set up in a foreign jurisdiction would nonetheless be, upon market entry clearance by the Ministry of Commerce, treated as a PRC domestic investor provided that
the entity is controlled by PRC entities and/or citizens. In this connection, control is broadly defined in the draft law to cover the following summarized categories: (i) holding 50% or more of the voting rights or
similar equity interest of the subject entity; (ii) holding less than 50% of the voting rights or similar equity interest of the subject entity but having the power to secure at least 50% of the seats on the board or other equivalent decision
making bodies, or having the voting power to exert material influence on the board, the shareholders meeting or other equivalent decision making bodies; or (iii)having the power to exert decisive influence, via contractual or trust
arrangements, over the subject entitys operations, financial matters or other key aspects of business operations. Once an entity is determined to be an FIE, and its investment amount exceeds certain thresholds or its business operation falls
within a negative list, to be separately issued by the State Council in the future and to replace the Foreign-Investment Industrial Guidance Catalog, market entry clearance by the Ministry of Commerce or its local counterparts will be
required. Otherwise, all foreign investors may make investments on the same terms as domestic investors without being subject to additional approval from the government authorities as mandated by the existing foreign investment legal regime.
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Under the draft Foreign Investment Law, variable interest entities that are controlled via contractual
arrangement would also be deemed as FIEs, if they are ultimately controlled by foreign investors. Therefore, for any companies with a VIE structure in an industry category that is on the negative list, the VIE structure may
be deemed legitimate only if the ultimate controlling person(s) is/are of PRC nationality (either PRC state-owned enterprises or agencies or PRC citizens). Conversely, if the actual controlling person(s) is/are of foreign nationalities, then the
variable interest entities will be treated as FIEs and any operation in the industry category on the negative list without market entry clearance may be considered as illegal. However, the draft Foreign Investment Law has not taken a
position on what actions shall be taken with respect to the existing companies with a VIE structure, whether or not these companies are controlled by PRC parties, while it has solicited comments from the public on this point.
The draft Foreign Investment Law also imposes stringent ad hoc and periodic information reporting requirements on foreign investors and the applicable FIEs.
Aside from investment implementation report and investment amendment report that are required at each investment and alteration of investment specifics, an annual report is mandatory, and large foreign investors meeting certain criteria are required
to report on a quarterly basis. Some of the information requested may be sensitive to foreign investors, such as the identity of the actual controller and the source of investment. Any company found to be non-compliant with these information
reporting obligations may potentially be subject to fines and/or administrative or criminal liabilities, and the persons directly responsible may be subject to criminal liabilities.
Regulations on Online and Distance Education
Pursuant to the Administrative Regulations on Educational Websites and Online and Distance Education Schools issued by the MOE, educational websites and online
education schools may provide educational services in relation to higher education, elementary education, pre-school education, teaching education, occupational education, adult education, other education and public educational information services.
Educational websites refer to organizations providing education or education-related information services to website visitors by means of a database or online education platform connected via the internet or an educational television
station through an Internet Service Provider, or ISP. Online education schools refer to education websites providing academic education services or training services with the issuance of various certificates.
Setting up education websites and online education schools was subject to approval from relevant education authorities, depending on the specific types of
education. Any education website and online education school had to, upon the receipt of approval, indicate on its website such approval information as well as the approval date and file number.
According to the Administrative License Law promulgated by the Standing Committee of the National Peoples Congress, only laws promulgated by the
National Peoples Congress and regulations and decisions promulgated by the State Council may set down administrative license. Furthermore, the State Council promulgated the Decision on Setting Down Administrative Licenses for the
Administrative Examination and Approval Items Really Necessary to be Retained, in which the administrative license for online education schools was retained, while the administrative license for educational websites was not
retained. In January 2014, the State Council promulgated the Decision to Cancel or to Delegate another Batch of Administrative Approval Items to Lower Level, in which the administrative license for online education schools was
cancelled for higher education. On February 3, 2016, the State Council promulgated the Decision of State Council to Cancel the Second Batch of Administrative Approval Items (152 Items) that Delegated to Lower Lever, in which the administrative
license for online education schools and educational websites were cancelled.
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Regulations on Publishing and Distribution of Publications
The State Council promulgated the Administrative Regulations on Publication, or the Publication Regulations, which was most recently amended on
February 6, 2016. The Publication Regulations apply to publication activities, i.e., the publishing, printing, copying, importation or distribution of publications, including books, newspapers, periodicals, audio and video products and
electronic publications, each of which requires approval from the relevant publication administrative authorities. According to the Publication Regulations, any entity engaging in the activities of publishing, printing, copying, importation or
distribution of publications, shall obtain relevant permits of publishing, printing, copying, importation or distribution of publications. In addition, according to the effective Foreign Investment Industrial Guidance Catalog, foreign investors are
prohibited from engaging in the publishing business. Therefore, our subsidiaries and New Oriental China and its schools and subsidiaries are not permitted to engage in the publishing business under this regulation. Beijing New Oriental Dogwood
Cultural Communications Co., Ltd., a subsidiary of New Oriental China, has been cooperating with qualified PRC publishing companies to publish our self-developed teaching materials and other content.
According to the prior Measures for the Administration of Internal Informative Publications, entities engaging in printing internal informative publications
may obtain an internal informative publications printing permit instead of the permit of publishing. Such internal informative publications are defined as publications used for internal information communication and work guidance purpose and are not
for sale. In April 2015, the current Measures for the Administration of Internal Informative Publications took effect and abolished the prior measures. Under the new regulation, the internal informative publications printing permit is not available
for printing and publishing of textbooks and teaching materials for primary and secondary school students. In addition, the new regulation prohibits entities which have obtained the internal permit from offering the internal informative publications
to its client or to the public. New Oriental China and its schools and subsidiaries engage in printing and providing teaching handouts and other materials to our students. Under the new regulation, it is uncertain whether printing and providing
teaching handouts and other materials to our students would be deemed publishing activities. If the GAPP or its local branches or other competent authorities deem such activities as publishing, we may become subject to significant penalties, fines,
legal sanctions or an order suspending our printing and providing of teaching handouts and other materials to our students.
GAPP issued newAdministrative
Regulations on Publications Market, effective on June 1, 2016, abolished the old regulation. According to the new regulation, any organization or individual engaged in whole sale or retail of publications shall obtain a Permit for Operating
Publications. Distribution of publications in the PRC is regulated on different administrative levels. An entity engaged in wholesaling of publications shall obtain such permit from the provincial counterpart of GAPP; and an entity engaged in retail
distribution of publications shall obtain such permit from the local counterpart of GAPP at the county level. According to the new regulation, foreign-invested enterprises are allowed to engage in the business of distribution of publications.
Foreign investors who intends to establish an enterprise engaging in the business of distribution of publications and foreign-invested enterprise which intends to engage in the business of distribution of publications shall firstly obtain the
approval from local branch of the Ministry of Commerce. If and upon approval, the Ministry of Commerce will issue the Approval Certificate for Foreign-Invested Enterprises, on which the business scope of distribution of publications is specified
along with the word subject to the permission in this industry. Afterwards, the foreign-invested enterprise shall file with its business scope of distribution of publications local office of the SAIC and shall obtain the Permit for
Operating Publications Business from relevant offices of the GAPP before engaging in the business of distribution of publications.
In addition, pursuant
to the Administrative Regulations on Publishing Audio-Video Products promulgated by the State Council on December 25, 2001, which became effective as of February 1, 2002, any entity engaged in the wholesale or retail distribution of
audio-video products was required tosecure a Permit for Operating Audio-Video Products from the relevant culture authorities.
The Administrative
Regulations on Publishing Audio-Video Products was later amended in 2011, 2013 and was most recently amended on January 2, 2016, pursuant to which the Permit for Operating Audio-Video Products was replaced by the Permit for Operating
Publications and entities or individuals engaging in distribution of audio-video products shall only need to hold a Permit for Operating Publications Business, while a Permit for Publishing Audio-Video Products shall no longer be needed.
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The subsidiaries of New Oriental China engaged in the wholesale and retail distribution of books, periodicals,
audio-visual products and electronic publications have obtained the relevant Permits for Operating Publications. During the term of the above-mentioned permits or licenses, GAPP or its local counterparts or other competent authorities may conduct
annual or random examination or inspection from time to time to ascertain their compliance with applicable regulations and may require for change or renewal of such permits or licenses. If the subsidiaries of New Oriental China engaged in the
wholesale and retail distribution of books, periodicals, audio-visual products and electronic publications are not able to pass the subsequent inspection or examination, they may not be able to maintain such permits or licenses necessary for their
business.
Regulations on Online Publications
GAPP and the MIIT jointly promulgated the Regulations on the Administration of Internet Publishing Services, or the Internet Publishing Regulations, which took
effect on March 10, 2016. The Internet Publishing Regulations require Online Publishing to obtain approval from competent administrative department for publication. The term Online Publishing Service is defined as activities of
providing the public through information networks with digitized works which have the publishing features such as editing, producing and processing.
Xuncheng Network, a subsidiary of New Oriental China engaging in internet content services, received verbal confirmation from GAPP that the online content
services that Xuncheng Network provides does not fall within the scope of Internet Publishing that requires approval or a license from GAPP. Obtaining an online publication license requires certain conditions, including having five or
more qualified editors, which Xuncheng Network cannot satisfy. However, because there is no further official or publicly available interpretation of Internet publishing, we cannot assure you that Xuncheng Network will not be required to
obtain an online publication license in the future.
Regulations on Consulting Services for Overseas Studies or Other Overseas Visits for Private
Matters
The Ministry of Public Security and SAIC jointly issued the Administrative Measures on Intermediate Activities relating to Entry and Exit
for Private Purpose on June 6, 2001, which requires that any entity engaged in intermediate and consulting services for Chinese citizens going abroad to visit families, relatives or friends, to reside abroad, to inherit properties, or to
conduct other non-business matters other than studying, working or touring, shall obtain a license granted by the relevant provincial authority on public security.
With respect to intermediate and consulting business activities relating to self-funded overseas studies, the Education Commission of Beijing and Beijing
Administration for Industry and Commerce jointly issued the Beijing Measures of Supervisions and Recognition of Intermediate Services for Self-Funded Overseas Studies (Trial) in September 2015, which require that any intermediate service
organization engaged in such services in Beijing shall satisfy certain requirements set up therein, including having employees with experience in educational services, having established stable and cooperative relations with an overseas educational
institution, and having sufficient funds to protect the rights and interests of customers. The intermediate service organizations which satisfy such requirements may apply with the Education Commission of for the Recognition on the Intermediate
Service Organization for Self-funded Overseas Studies. Organizations or individuals without such Recognition from the Education Commission of Beijing are not allowed to engage in any intermediate and consulting business activities relating to
self-funded overseas studies.
On January 12, 2017, the State Council promulgated the Decision of the State Council on the Third Installment of the
Cancellation of the Administrative Licensing Matters Delegated to Local Governments, which, among other things, cancelled the Recognition on the Intermediate Service Organization for Self-funded Overseas Studies, which means that the requirement for
intermediate service organizations to obtain Recognition on the Intermediate Service Organization for Self-funded Overseas Studies from the provincial government for their engaging in intermediate and consulting business activities relating to
self-funded overseas studies is cancelled. This Decision provided that after the cancellation of such requirements, the MOE and the SAIC shall study and develop contract template for reference and strengthen their guidance, regulating and service to
intermediate service organizations and that the relevant industrial association shall play their role in self-discipline.
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Guidelines for Overseas Study Tour participated by Primary and Middle School Students (Trial)
The MOE promulgated the Guidelines for Overseas Study Tour participated by Primary and Middle School Students (Trial) (the Guidelines) in
July 2014. Under the Guidelines, overseas study tours participated in by primary and middle school students(the Overseas Study Tour) means, by adapting to the characteristics of primary and middle school students and the educational
needs, programs that organize primary and middle school students to go overseas to learn foreign languages and other short-term curriculum, perform art shows, compete in contests, visit schools, attend summer/winter school programs, or take part in
other activities that help students expand their horizon and promote enrichment and enhancement, in the manner of group travel and group accommodation during the academic semesters or vacations. Overseas Study Tours attended by primary and middle
school students shall follow the principles of safety, civility and efficiency. The schedule for study, from the perspective of both the content and the duration, shall be no less than 1/2 of the total schedule. The organizer shall choose legitimate
and qualified cooperation institutions, and stress the importance of safe education, and shall appoint a guiding teacher for each group. The organizer shall apply the rules of cost accounting, notify the students and their supervisors of the
composition of the fees and expenses, and enter into an agreement as required by law. The school and its staff shall not seek any economic benefit from organizing its own students to attend an Overseas Study Tour.
Regulations on Tourism
Tourism Law of the PRC,
which was promulgated by the Standing Committee of the NPC and most recently amended on November 11, 2016, provides that, among other things, to engage in the businesses of outbound tourism, a travel agency shall obtain corresponding business
permit, and the specific conditions shall be provided for by the State Council and that when organizing an outbound touring group, or organizing or receiving an inbound touring group, a travel agency shall, in accordance with the relevant
provisions, arrange for a tour leader or tour guide to accompany the touring group in the whole tour. Regulations on Travel Agencies promulgated by the State Council, revised on February 6, 2016, and the implementation rules of Regulations on
Travel Agencies, provide that, among other things, travel agent shall mean any entity that engages in the business of attracting, organizing, and receiving tourists, providing tourism services for tourists and operating domestic, outbound or border
tourism; the aforementioned business shall include but not limit to arranging for transport services, arranging for accommodation services, providing services for tour guides or team leaders, providing services of tourism consultation and tourism
activities design. According to the Regulations on Travel Agencies and its implementation rules, any tourism agent engages in the outbound tourism shall apply for a permit to engage in the outbound tourism from the administrative department of
tourism under the State Council, the governments of provinces, autonomous regions, or municipalities.
The touring group for the Overseas Study Tour shall
be organized by a qualified travel agent. Beijing New Oriental Walkite International Travel Co., Ltd, a subsidiary of the Company engaging the businesses of outbound tourism has obtained the aforementioned permit.
Regulations on Value-added Telecommunications Services
Under the PRC Telecommunications Regulations, promulgated by the State Council and most recently amended in February 2016, a telecommunication services
provider in China must obtain an operating license from the MIIT, or its provincial authorities. The PRC Telecommunications Regulations categorize all telecommunication services in China as either basic telecommunications business or value-added
telecommunications business. Internet information services and the business of online data transaction processing are two of the subsectors of the value-added telecommunications business.
As a subsector of the value-added telecommunications business, business of online data transaction processing refers to the business to provide online data
processing and transaction processing services through public communication network or Internet for users through various data/transaction application platform connected to the public communication network or Internet, including transaction
processing services, electronic data exchange services and network or electronic equipment data processing services. Under the PRC Telecommunications Regulations, any entity engages in the business of transaction processing services as an online
marketplace platform is required to obtain a license from the MITT or its provincial authorities in providing transaction processing services.
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As a subsector of the value-added telecommunications business, Internet information services are also regulated
by the Administrative Measures on Internet Information Services promulgated by the State Council, or the Internet Information Measures. The Internet Information Measures require that commercial Internet content providers, or ICP providers, obtain a
license for Internet information services, or ICP license, from the appropriate telecommunications authorities in order to carry on any commercial Internet information services in the PRC. ICP providers shall display their ICP license number in a
conspicuous location on their home page. In addition, the Internet Information Measures also provide that ICP providers that operate in sensitive and strategic sectors, including news, publishing, education, health care, medicine and medical
devices, must obtain additional approvals from the relevant authorities in charge of those sectors as well. Xuncheng Network has obtained the ICP license.
The Notice on Strengthening Management of Foreign Investment in Operating Value-Added Telecom Services issued by the MIIT prohibits PRC Internet content
providers from leasing, transferring or selling their ICP licenses or providing facilities or other resources to any illegal foreign investors. The notice states that PRC Internet content providers should directly own the trademarks and domain names
for websites operated by them, as well as servers and other infrastructure used to support these websites.
Regulations on Internet Culture
Activities
The Ministry of Culture of the PRC promulgated the Internet Culture Administration Tentative Measures, or the Internet Culture
Measures, on May 10, 2003, which became effective on July 1, 2003, and which were amended on July 1, 2004 and April 17, 2011. The Internet Culture Measures require ICP operators engaging in Internet culture activities to obtain
an Internet culture business operations license from the Ministry of Culture in accordance with the Internet Culture Measures. The term Internet culture activities includes, among other things, acts of online dissemination of Internet
cultural products, such as audio-visual products, games, performances of plays or programs, works of art and cartoons, and the production, reproduction, importation, sale (wholesale or retail), leasing and broadcasting of Internet cultural products.
Xuncheng Network, a subsidiary of New Oriental China engaging in the distribution of certain audio-visual products through the Internet, obtained
Internet culture business operations license from Beijing Municipal Bureau of Culture on October 18, 2012.
Regulation on Broadcasting
Audio-Video Programs through the Internet or Other Information Network
The Rules for Administration of Broadcasting of Audio-Video Programs
through the Internet and Other Information Networks, or the Broadcasting Rules, promulgated by the State Administration of Radio, Film and Television, or SARFT, apply to the activities of broadcasting, integration, transmission, downloading of
audio-video programs with computers, televisions or mobile phones as the main terminals and through various types of information networks. Pursuant to the Broadcasting Rules, a Permit for Broadcasting Audio-video Programs via Information Network is
required to engage in these Internet broadcasting activities. The State Council announced a policy on private investments in businesses in China that relate to cultural matters, which prohibits private investments in businesses relating to the
dissemination of audio-video programs through information networks.
The SARFT and MIIT issued the Internet Audio-Video Program Measures, revised in
August, 2015. Among other things, the Internet Audio-Video Program Measures stipulate that no entities or individuals may provide Internet audio-video program services without a license for disseminating audio-video programs through information
network issued by SARFT or its local counterparts or completing the relevant registration with SARFT or its local counterparts and only entities wholly owned or controlled by the PRC government may engage in the production, editing, integration or
consolidation, and transfer to the public through the Internet, of audio-video programs, and the provision of audio-video program uploading and transmission services. The SARFT promulgated the Notice on Several Issues regarding the license for
disseminating audio-video programs through information network in 2009. The Notice restates the necessity of applying for such license and sets forth the legal liabilities for those providing Internet audio-video program services without the
license. Xuncheng Network, a subsidiary of New Oriental China engaging in online education services, obtained the license for disseminating audio-video programs through information network from SARFT in January 2010.
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On April 25, 2016, the SAPPRFT promulgated the Private Network and Directional Broadcasting Audio-Video
Programs Regulations, which came into effect on June 1, 2016 and replaced the Broadcasting Rules. The Broadcasting Audio-Video Programs Regulations provides, among other things, that a Permit for Broadcasting Audio-Video Programs via
Information Network is required for engaging in broadcasting services through private network and directional communication. According to such Regulations, the Broadcasting Services through Private Network and Directional Communication shall mean
the services and activities provided to the public through the private transmission channels that include internet, LAN and VPN based on Internet and through the receiving terminals of televisions, and other handheld electronic equipment, and such
services and activities include the activities of content supply, integrated broadcast control, transmission and distribution with IPTVs, private-network mobile televisions, internet televisions. According to such Regulations, only the entities
wholly or substantially owned by the State could apply for such Permit.
Regulations on Protection of the Right of Dissemination through Information
Networks
The Regulations on Protection of the Right of Dissemination through Information Networks, promulgated by the State Council, require that
every organization or individual who disseminates a third partys work, performance, audio or visual recording products to the public through information networks shall obtain permission from, and pay compensation to, the legitimate copyright
owner of such products, unless otherwise provided under relevant laws and regulations. The legitimate copyright owner may take technical measures to protect his or her right of dissemination through information networks and any organization or
individual shall not intentionally avoid, destroy or otherwise assist others in avoiding such protective measures unless permissible under law. This regulation also provides that permission from and compensation for the copyright owner are not
required in the event of limited dissemination to teaching or research staff for the purpose of school teaching or scientific research only.
Regulations on Copyright and Trademark Protection
China has adopted legislation governing intellectual property rights, including copyrights, trademarks and domain names. China is a signatory to the main
international conventions on intellectual property rights and became a member of the Agreement on Trade Related Aspects of Intellectual Property Rights upon its accession to the World Trade Organization in 2001.
Copyright
. The National Peoples Congress amended the Copyright Law to widen the scope of works and rights that are eligible for copyright
protection. The amended Copyright Law extends copyright protection to Internet activities, products disseminated over the Internet and software products. In addition, there is a voluntary registration system administered by the China Copyright
Protection Center.
To address the problem of copyright infringement related to the content posted or transmitted over the Internet, the National
Copyright Administration and the MIIT jointly promulgated the Administrative Measures for Copyright Protection Related to the Internet.
Trademark
.
The PRC Trademark Law, most recently revised in May 2014, protects the proprietary rights to registered trademarks. The Trademark Office under SAIC handles trademark registrations and grants a term of ten years to registered trademarks and another
ten years to trademarks as requested upon expiry of the prior term. Trademark license agreements must be filed with the Trademark Office for record. We have registered certain trademarks and logos, including New Oriental and Pop
Kids, with the Trademark Office and are in the process of registering additional marks. In addition, if a registered trademark is recognized as a well-known trademark in a specific case, the proprietary right of the trademark holder may be
extended beyond the registered sphere of products and services of the trademark in such case. In July 2014, the State Administration for Industry and Commerce released Provisions on the Recognition and Protection of Well-Known Trademarks.
According to these provisions, well-known trademarks shall be recognized on a case-by-case basis, and be subject to the principle of passive protection. Our trademarks
and New Oriental were recognized as well-known trademarks in a civil action adjudicated by the Intermediate Peoples Court of Jilin City, Jilin Province and an adjudication on disputed registered
trademark issued by trademark appraisal committee.
Domain names.
Internet domain name registration and related matters are primarily regulated by
(i) the Implementation Rules on Registration of Domain Names issued by China Internet Network Information Center, or CNNIC, (ii) the Measures for Administration of Internet Domain Names of PRC issued by the MIIT, and (iii) the
Measures on Domain Name Disputes Resolution for the PRC Internet issued by the CNNIC. Domain name registrations are handled through domain name service agencies established under the relevant regulations, and the applicants become domain name
holders upon successful registration. We have registered many domain names with CNNIC.
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Foreign Currency Exchange
Pursuant to the Foreign Currency Administration Rules promulgated in 1996 and amended in 2008 and various regulations issued by SAFE and other relevant PRC
government authorities, RMB is freely convertible to current account items, such as trade-related receipts and payments, interest and dividend. Capital account items, such as direct equity investments, loans and repatriation of investment, require
the prior approval from SAFE or its local counterpart or prior registration with banks for conversion of RMB into a foreign currency.
Domestic companies
or individuals can repatriate payments received from abroad in foreign currencies or deposit those payments abroad. Foreign-invested enterprises may retain foreign exchange in accounts with designated foreign exchange banks. Foreign exchange on the
current account and capital account can be either retained or sold to financial institutions that have foreign exchange settlement or sales business based on the need of the enterprise without prior approval from SAFE, subject to certain
restrictions.
SAFE promulgated the Circular on the Relevant Operating Issues Concerning the Improvement of the Administration of the Payment and
Settlement of Foreign Currency Capital of Foreign Invested Enterprises, or SAFE Circular 142, to regulate the conversion by a foreign-invested company of its capital contribution in foreign currency into RMB. The circular requires that the paid-in
capital of a foreign-invested company settled in RMB converted from foreign currencies shall be used only for purposes within the business scope as approved by the authorities in charge of foreign investment or by other competent authorities and as
registered with the Administration for Industries and Commerce and, unless set forth in the business scope or in PRC regulations, may not be used for equity investments within the PRC. In addition, SAFE has strengthened its oversight of the flow and
use of the paid-in capital of a foreign-invested company settled in RMB converted from foreign currencies. The use of such RMB paid-in capital may not be changed without SAFEs approval. Violations of Circular 142 will result in severe monetary
or other penalties.
SAFE promulgated the Notice on Reforming the Management Method relating to Conversion of the Capital Contribution of Foreign Invested
Company from Foreign Exchange to Renminbi, or SAFE Circular 19, effective in June 2015 to abolish. SAFE Circular 142 but the foregoing rules have been retained in SAFE Circular 19. SAFE promulgated the Notice on Further Simplifying and Improving the
Policies of Foreign Exchange Administration Applicable to Direct Investment, or SAFE Circular 13, effective in June 2015, pursuant to which annual foreign exchange inspection of direct investment is not required anymore and the registration of
existing equity is required. SAFE Circular 13 also grants the authority to banks to directly examine and process foreign exchange registration with respect to both domestic and overseas direct investment. SAFE issued Notice on reform and regulations
of the Administration Policy of Foreign Exchange under Capital Account, or SAFE Circular 16, effective June 9, 2016. Pursuant to SAFE Circular 16, enterprises registered in China may also convert their foreign debts from foreign currency to
Renminbi on a self-discretionary basis. SAFE Circular 16 provides an integrated standard for conversion of foreign exchange under capital account items (including but not limited to foreign currency capital and foreign debts) on a self-discretionary
basis which applies to all enterprises registered in China. SAFE Circular 16 reiterates the principle that Renminbi converted from foreign currency-denominated capital of a company may not be directly or indirectly used for purposes beyond its
business scope or prohibited by PRC laws or regulations, while such converted Renminbi shall not be provided as loans to its non-affiliated entities. As SAFE Circular 16 is newly issued and SAFE has not provided detailed guidelines with respect to
its interpretation or implementations, it is uncertain how these rules will be interpreted and implemented.
Foreign Exchange Registration of
Offshore Investment by PRC Residents
Pursuant to the Notice of the State Administration of Foreign Exchange on the Administration of Foreign
Exchange Involved in Overseas Investment, Financing and Round-Trip Investment Conducted by Domestic Residents through Special-Purpose Companies, or SAFE Circular 37, effective in July 2014 and repealed the previous SAFEs Notice on
Relevant Issues Concerning Foreign Exchange Administration for PRC Residents to Engage in Financing and Inbound Investment via Overseas Special Purpose Vehicles, or SAFE Circular 75 on the same date, a PRC Resident, including both PRC domestic
institutions and PRC domestic individual residents, shall register with the local branch of SAFE before it establishes or controls an company outside of China with the domestic or overseas assets or equity they legally hold for the purpose of
investment and financing and conducting roundtrip investment in China. Such a company located outside of China is referred to as an offshore special purpose vehicle.
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Under SAFE Circular 37, failure to comply with the registration procedures set forth above may result in the
penalties, including imposition of restrictions on a PRC subsidiarys foreign exchange activities and its ability to distribute dividends to the SPV.
In June 2015, SAFE promulgated SAFE Circular 13, according to which, in order to simplify the procedures of performing the foreign exchange control policy of
direct investment, the registration authorities under the SAFE foreign exchange control policies, including the registration of PRC residents under SAFE Circular 37 change from local SAFE branches to local banks authorized by SAFE and SAFE will
strengthen the training and supervision for banks in performing the foreign exchange control policy of direct investment. Thus, according to SAFE Circular 13, the registration of PRC residents under SAFE Circular 37 shall be conducted with local
banks authorized by SAFE.
Our beneficial owners immediately before our initial public offering who are PRC residents had registered with the local branch
of SAFE prior to our initial public offering in 2006.
Regulations on Dividend Distribution
The principal regulations governing dividend distributions by wholly foreign-owned enterprises and Sino-foreign equity joint ventures include:
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Wholly Foreign-Owned Enterprise Law (1986), as amended;
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Wholly Foreign-Owned Enterprise Law Implementing Rules (1990), as amended;
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Sino-foreign Equity Joint Venture Enterprise Law (1979), as amended; and
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Sino-foreign Equity Joint Venture Enterprise Law Implementing Rules (1983), as amended.
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Under these
regulations, wholly foreign-owned enterprises and Sino-foreign equity joint ventures in the PRC may pay dividends only out of their accumulated profits, if any, determined in accordance with PRC accounting standards and regulations. Additionally,
these foreign-invested enterprises are required to set aside certain amounts of their accumulated profits each year, if any, to fund certain reserve funds. These reserves are not distributable as cash dividends.
Regulations on Offshore Lending
On
November 19, 2012, the SAFE promulgated the Circular regarding Further Improvement and Adjustment of Policies on Foreign Exchange Administration of Direct Investment, or Circular 59, which aims to simplify foreign exchange administration
procedures concerning inbound and outbound direct investment. Pursuant to Circular 59, foreign invested enterprises are permitted to make loans to its offshore parent company provided that the amount of the lending is not greater than the sum of the
distributed but unremitted profits and the proportionate undistributed profits.
Regulations on Labor
Pursuant to the PRC Labor Law, the PRC Labor Contract Law and its Implementing Regulations of the Employment Contracts Law, labor contracts in written form
shall be executed to establish labor relationships between employers and employees. Wages cannot be lower than local minimum wage. The employer must establish a system for labor safety and sanitation, strictly abide by state standards, and provide
relevant education to its employees. Employees are also required to work in safe and sanitary conditions meeting State rules and standards, and carry out regular health examinations of employees engaged in hazardous occupations.
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In the respect of the employment of foreigner in PRC, Provision on the Employment of Foreigners in China provides
that, among other things, to employ a foreigner who does not have Chinese nationality, an employer shall apply for an employment license for such foreigner, and may only employ him or her after such foreigner obtains a Foreigners Employment
License of the Peoples Republic of China, or Employment License; prior to obtaining employment in China, a foreigner shall enter China with an employment visa (or in accordance with an agreement on mutual exemption of visas if there is such an
agreement); and after entering China, such foreigner shall obtain an Employment Permit for Foreigners, or Employment Permit, and a residence permit for foreigners, save that the foreigners holding the Foreign Expert Permit issued by the State
Administration of Foreign Experts Affairs are not required to hold Employment Licenses and Employment Permit. Provision on the Employment of Foreigners in China also provides that the Employment License is valid only in the area defined by the
authority which issued such license; the actual employer of a foreigner shall be consistent with the employer recorded on the Employment License; if the actual employer changed but the foreigner is employed in a similar job by another employer
within the same area defined by the authority which issued such license, the foreigner shall file with such authority to change information on the Employment License.
The Notice of Issues Related to the Management of Employment of Foreigners in China provides that, among other things, the Ministry of Labor and Social
Security should cooperate with Ministry of Public Security to carry out regular and irregular investigation on the entities that employ relatively large number of foreigners about their employment of foreigners.
In the respect of hiring foreigners as teachers in schools, State Administration of Foreign Experts Affairs, promulgated a Notice of Issuing Regulations for
Foreign Experts to Apply Permit to Work in China and Other Regulations, or SAFEA Circular 139. SAFEA Circular 139 provides that foreign experts shall obtain Foreign Expert Permit. Any foreign expert that apply the Foreign Expert Permit shall obey
the laws and regulations of PRC, shall be healthy, shall have no criminal record, and shall meet one of the following requirement: (i) such foreign expert is employed to work in China in order to perform agreements between governments or
international organizations, or to perform economic or trade agreements between Chinese party(s) and foreign party(s) as a professional person with foreign nationality who has technology or management skills; (ii)such foreign expert is employed to
perform the work in the fields of education, scientific research, press, publication, culture, arts, health, or sport as a professional person with foreign nationality; (iii) such foreign expert is employed to perform a position higher than
vice president of a domestic enterprise or equivalent position as a professional person with foreign nationality who has technology or management skills; (iv) such foreign expert is a representative with foreign nationality, who is a PRC
representative officer of a experts association or recruitment agent approved by State Administration of Foreign Experts Affairs; or (v) such foreign expert is employed to perform the work in the fields of economy, technology, engineering,
trade, finance, accounting, tax, tourism who possesses specialty as a professional person with foreign nationality in urgent need with technology or management skills. According to SAFEA Circular 139, to apply a Foreign Expert Permit as a foreign
expert to perform the work in the field of education, the applicant shall submit the application together with a copy of the employers Certificate of Employing Foreign Experts and the agreement entered by such applicant and its employer to the
provincial Administration of Foreign Experts Affairs where the employer located, provided that if the employer is the ministry, commission directly under the State Council, the authority directly under the State Council, the public institution or
the professional corporation, the applicant shall submit the application to the State Administration of Foreign Experts Affairs. SAFEA Circular 139 also provides that entity shall obtain Certificate of Employing Foreign Experts to employ foreign
experts and the application of Certificate of Employing Foreign Experts shall submit to the provincial Administration of Foreign Experts Affairs where the employer located, provided that the non-educational public institution located in Beijing that
is directly under the ministry, commission of the State Council, the authority directly under the state council, the application shall submit to the State Administration of Foreign Experts Affairs. According to SAFEA Circular 139, the Administration
of Foreign Experts Affairs will carry out annual inspection on the entity that has obtained Certificate of Employing Foreign Experts in January of each year.
In addition, State Administration of Foreign Experts Affairs promulgated an Opinion on Further Regulating the Employment of Foreign Experts in Education and
Culture, which provides that, among other things, any entity that dispatches and introduce foreign experts in education and culture to work in China shall obtain Certificate of Employing Foreign Experts; the entity that dispatches the foreign
experts, the dispatched foreign expert and the entity that employs the dispatched expert shall enter into an agreement to confirm each partys obligations and rights related to the employment of such foreign expert, and the entity that
dispatches the foreign expert and the entity that employs the foreigner expert shall have the joint liability in the management of such foreign expert. Such Opinion on Further Regulating the Employment of Foreign Experts in Education and Culture
also provides that any entity that engages in dispatching foreign expert in education and culture with Certificate of Employing Foreign Experts shall not introduce foreign experts working in the entity that without Certificate of Employing Foreign
Experts, the provincial and regional Administration of Foreign Experts Affairs shall cooperate with the public security authorities and their exit-entry administration divisions to investigate and handle the illegal employment of foreign experts
under applicable laws.
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On February 19, 2016, the State Council promulgated the Decision of the State Council on the Second
Installment of the Cancellation of the Administrative Licensing Matters Delegated to Local Governments, which among other things, cancelled Certificate of Employing Foreign Experts, which means that the requirements for the entity to obtain
Certificate of Employing Foreign Experts for employing foreign experts from the provincial Administration of Foreign Experts Affairs is cancelled. According to a Q&A in relation to the cancellation of the requirement to obtain Certificate of
Employing Foreign Experts in employing foreign experts publicized by the Education, Culture, Heath Experts Department of State Administration of Foreign Experts Affairs on March 31, 2016, the provincial education authorities shall pay close
attention to the study the necessity of setting up the requirements for qualification in employing foreign experts in their area, and set up the requirements through the development of local laws and temporary regulations if necessary. As of the
date of this annual report, we are not aware of any local laws and temporary regulations was set up regarding the requirements to obtaining Certificate of Employing Foreign Experts for employing foreign experts.
According to the Circular on the Comprehensive Implementation of the Permit System for Foreigners to Work in China promulgated by the State Administration of
Foreign Experts Affairs, the Ministry of Human Resources and Social Welfare, the Ministry of Foreign Affairs, and the Ministry of Public Security on March 28, 2017, from April 1, 2017, a foreigner who is approved to work in China will be
issued a Permit to Working in China, which supersedes the Employment License or Foreign Expert Permit. The Employment License or Foreign Expert Permit issued before April 1, 2017 remain valid subject to its expiration date. According to the
circular, the process of application and approval of the Permit to Working in China will be further simplified and standardized, with new and detailed regulation of the application and approval process of Permit to Working in China to be promulgated
shortly. As of the date of this annual report, we are not aware of any new and detailed regulation set up regarding application and approval of the Permit to Working in China.
If the employment of foreigners is not in compliance with the above relevant regulations, the employer may become subject to penalties, fines or an order to
terminate such employment and to bear all the expenses and costs arising from the repatriation of such foreigner.
Regulations on Employee Share
Incentive Awards Granted by Listed Companies
According to a series of notices concerning individual income tax on earnings from employee share
incentive awards, issued by the Ministry of Finance and the SAT, companies that implement employee stock ownership programs shall file the employee stock ownership plans and other relevant documents with the local tax authorities having jurisdiction
over such companies before implementing such plans, and shall file share option exercise notices and other relevant documents with local tax authorities before exercise by their employees of any share options, and clarify whether the shares issuable
under the employee share options referenced in the notice are shares of publicly listed companies.
The SAFE issued the Notices on Issues Concerning the
Foreign Exchange Administration for Domestic Individuals Participating in a Stock Incentive Plan of an Overseas Publicly-Listed Company, or SAFE Circular 7, in February 2012, pursuant to which if domestic individuals (meaning both PRC
residents and non-PRC residents who reside in China for a continuous period of not less than one year, excluding the foreign diplomatic personnel and representatives of international organizations) participate in any stock incentive plan of an
overseas listed company, a qualified PRC domestic agent, which could be the PRC subsidiaries of such overseas listed company, shall, among other things, file, on behalf of such individuals, an application with SAFE to conduct the SAFE registration
with respect to such stock incentive plan, and obtain approval for an annual allowance with respect to the purchase of foreign exchange in connection with the stock purchase or stock option exercise. Such PRC individuals foreign exchange
income received from the sale of stocks and dividends distributed by the overseas listed company and any other income shall be fully remitted into a collective foreign currency account in China opened and managed by the PRC domestic agent before
distribution to such individuals. In addition, such domestic individuals must also retain an overseas entrusted institution to handle matters in connection with the exercise of their stock options and their purchase and sale of stock. The PRC
domestic agent also needs to update registration with SAFE within three months after the overseas-listed company materially changes its stock incentive plan or make any new stock incentive plans.
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According to SAFE Circular 7, from time to time, we need to make applications or update our registration with
SAFE or its local branches on behalf of our employees who are affected by our new share incentive plan or material changes in our current share incentive plan. However, we may not always be able to make applications or update our registration on
behalf of our employees who hold our restricted shares or other types of share incentive awards in compliance with SAFE Circular 7, nor can we ensure you that such applications or update of registration will be successful. If we or the participants
of our share incentive plans who are PRC citizens fail to comply with SAFE Circular 7, we and/or such participants of our share incentive plans may be subject to fines and legal sanctions, there may be additional restrictions on the ability of such
participants to exercise their stock options or remit proceeds gained from sale of their stock into China, and we may be prevented from further granting share incentive awards under our share incentive plans to our employees who are PRC citizens.
Provisions Regarding Mergers and Acquisitions of Domestic Enterprises by Foreign Investors
On August 8, 2006, six PRC regulatory agencies, including the CSRC, promulgated the M&A Rule to more effectively regulate foreign investment in PRC
domestic enterprises. The M&A Rule, as amended on June 22, 2009, provides that the Ministry of Commerce must be notified in advance of any change-of-control transaction in which a foreign investor takes control of a PRC domestic enterprise
and any of the following situations exists: (1) the transaction involves an important industry in China, (2) the transaction may affect national economic security, or (3) the PRC domestic enterprise has a well-known
trademark or historical Chinese trade name in China. The M&A Rule also contains a provision requiring offshore special purpose vehicles, or SPVs, formed for listing purposes through acquisitions of PRC domestic companies and controlled by PRC
individuals to obtain the approval of the CSRC prior to publicly listing their securities on an overseas stock exchange.
The M&A Rule became
effective on September 8, 2006 without retroactive effect. Based on the advice of Tian Yuan Law Firm, our PRC counsel, we do not believe that the CSRC approval was required for our listing on the NYSE because trading of our ADSs commenced prior
to the effective date of the M&A Rule.
Regulations on Taxation
PRC Enterprise Income Tax.
The National Peoples Congress, the Chinese legislature, passed the EIT Law, effective in 2008. The EIT Law applies a
uniform 25% enterprise income tax rate to both foreign-invested enterprises and domestic enterprises Preferential tax treatments grants to industries and projects that are strongly supported and encouraged by the state, and enterprises otherwise
classified as high and new technology enterprises strongly supported by the state upon re-examination will be entitled to a 15% enterprise income tax rate. The State Council promulgated the implementation rules of the EIT Law in 2007 and
the Ministry of Science and Technology, the Ministry of Finance and the State Administration of Taxation promulgated other supplemental rules in 2008 which were amended in 2016, respectively, regarding new criteria for the granting of high and
new technology enterprises status. Any enterprises to be granted with high and new technology enterprises status shall meet certain requirements, including but not limited to the following: (1) the enterprise has incorporated
for more than one year before application; (2) the enterprise itself owns the intellectual property right for the core technology of its product or service; (3) the enterprises core technology of its product or service falls into the
ambit of high-tech fields heavily supported by the government; (4) technicians has engaged into research and development account for more than 10% of all the staff; (5) in the latest three financial years (actual operating year
if incorporated less than three years), the research and development expenses account for 3%-5% or more of the latest sales revenue and the research and development expenses incurred within China shall not be less than 60% of the total research and
development expenses; (6) the revenue in the latest year derived from the high-tech product or service accounts for more 60% of the total revenue; (7) the innovation capability of the enterprise shall meet the relevant evaluation
standards; and (8) no major security or qualification incident or sever environmental illegal behavior occurred within the previous year before application. To apply for the high and new technology enterprises status, an enterprise
shall file its corporate certificates and supporting documents evidencing the requirements to the relevant government authority. The government authority will examine the filed certificates and documents to determine whether the enterprise meets the
high and new technology enterprises requirements. If the decision is positive, the authority will make a public announcement and grant the enterprise with a high and new technology enterprises certificate with a valid term of
three years. Upon the expiration of the initial term, the enterprise shall file a new application to obtain such status. Loss of any preferential tax treatments previously granted to us could have a material and adverse effect on our financial
condition and results of operations.
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According to the Circular On Several Policies for Further Encouraging the Development of Software Industry and
Integrated Circuit Industry promulgated by the State Council in January 2011 and the Circular On Policies of Enterprises Income Tax for Further Encouraging the Development of Software Industry and Integrated Circuit Industry, jointly
promulgated by the Ministry of Finance and the State Administration of Taxation in April 2012 and effective from January 1, 2011, or Circular 27, an enterprise that qualifies as a software enterprise established after
January 1, 2011, or a software enterprise, is exempted from enterprise income tax for two years beginning in the enterprises first profitable year followed by a tax rate of 12.5% for the succeeding three years before December 31,
2017. The qualifications for a software enterprise provided in Circular 27 include the following:
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the core business shall be software development;
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the enterprise shall be a legal person established after January 1, 2011 and shall be granted the status of a software enterprise;
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the enterprises employees who have at least a junior college degree shall be more than 40% of the average monthly headcount of its total employees of that year, among whom the research and development staff shall
be more than 20% of the average monthly headcount of its total employees of that year;
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the enterprise shall own core technology and shall base its operation on such core technology, the annual total research and development expenses shall be more than 6% of its total revenue of that fiscal year, among
which the research and development expenses incurred in China shall be more than 60% of the total research and development expenses;
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the revenue generated from the sale of its software products shall normally be more than 50% of its total revenue (the revenue generated from the sale of embedded software products and integrated information system
products shall be more than 40% of its total revenue), among which the revenue generated from the sale of software products developed by such enterprise shall normally be more than 40% of its total revenue (the revenue generated from the sale of
embedded software products and integrated information system products shall be more than 30% of its total revenue);
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the enterprise shall own intellectual property rights in the technologies used in its core business, among which its software products shall be certified with testing documents issued by a software testing institution
recognized by provincial authority in charge of software industry and with Software Product Registration Certificates granted by the authority in charge of software industry;
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the enterprise shall possess the means and ability to ensure the quality of the products it designs, and shall have established a quality control system which is fit for software engineering and shall provide the
records for the valid operation of such system; and
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the enterprise shall possess operation premises and maintain a working environment suitable for software development, and have technical support for the services it provides. In order to be qualified as a software
enterprise and be entitled to such preferential treatment, software enterprises are required to submit supporting materials to their respective competent tax authorities within four months from the end of each fiscal year.
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Enterprises which have been entitled to similar tax preferential treatments according to previous tax regulations are allowed to continue enjoying the above
preferential treatments until the tax holiday granted to them expires, even though they were established before January 1, 2011.
Pursuant to the
Notice on Issues Related to the Enterprise Income Tax Preferential Policies of Software and Integrated Circuit Industry on May 4, 2016, the software enterprises which enjoy preferential tax treatments shall provide filing documents with respect
to preferential tax treatments to the relevant tax authority when filing annual enterprise income tax returns for the settlement of tax payments.
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Seven of our wholly-owned subsidiaries in China, Beijing Smart Wood, Beijing Joy Tend, Beijing Right Time,
Beijing Top, Beijing Shenghe, Beijing Magnificence and Beijing Jinghong, are qualified as software enterprises. Beijing Smart Wood was entitled to an income tax exemption from in 2012 and 2013 followed by reduced income tax at a rate of 12.5% from
2014 through 2016. Beijing Right Time and Beijing Joy Tend were exempt from income taxes in 2013 and 2014 and are eligible for reduced income taxes at a rate of 12.5% from 2015 through 2017. Beijing Top and Beijing Shenghe were exempt from income
taxes in 2014 and 2015 and are eligible for reduced income taxes at a rate of 12.5% from 2016 through 2018. Beijing Magnificence is entitled to an income tax exemption in 2015 and 2016 followed by reduced income tax at a rate of 12.5% from 2017
through 2019. Beijing Jinghong is entitled to an income tax exemption in 2017 and 2018 followed by reduced income tax at a rate of 12.5% from 2019 through 2021.
The EIT Law also provides that enterprises established outside of China whose de facto management bodies are located in China are considered
resident enterprises and will generally be subject to the uniform 25% enterprise income tax rate on their global income. Although the term de facto management bodies is defined as management bodies which has substantial
and overall management and control power on the operation, human resources, accounting and assets of the enterprise, the circumstances under which an enterprises de facto management body would be considered to be located in
China are currently unclear. A circular issued by the State Administration of Taxation in April 2009 provides that a foreign enterprise controlled by a PRC company or a PRC company group will be classified as a resident enterprise with
its de facto management bodies located within China if the following requirements are satisfied: (1) the senior management and core management departments in charge of its daily operations function mainly in the PRC; (2) its
financial and human resources decisions are subject to determination or approval by persons or bodies in the PRC; (3) its major assets, accounting books, company seals, and minutes and files of its board and shareholders meetings are
located or kept in the PRC; and (4) at least half of the enterprises directors or senior management with voting rights reside in the PRC.
In
addition, the State Administration of Taxation issued a bulletin in August 2011, effective as of September 1, 2011, to provide more guidance on the implementation of the above circular. The bulletin clarified certain matters relating to
resident status determination, post determination administration and competent tax authorities. It also specifies that when provided with a copy of a PRC tax resident determination certificate from a resident PRC-controlled offshore incorporated
enterprise, the payer should not withhold 10% income tax when paying the PRC-sourced dividends, interest and royalties to the PRC-controlled offshore incorporated enterprise. Although both the circular and the bulletin only apply to offshore
enterprises controlled by PRC enterprises and not those by PRC individuals, the determination criteria set forth in the circular and administration clarification made in the bulletin may reflect the SATs general position on how the de
facto management body test should be applied in determining the tax residency status of offshore enterprises and how the administration measures should be implemented, regardless of whether they are controlled by PRC enterprises or PRC
individuals.
In addition, the State Administration of Taxation issued a bulletin in January 2014, to provide more guidance on the implementation of
the above circular. This bulletin further provided that, among other things, an entity that is classified as a resident enterprise in accordance with the circular shall file the application for classifying its status of residential
enterprise with the local tax authorities where its main domestic investors registered. From the year in which the entity is determined as a resident enterprise, any dividend, profit and other equity investment gain shall be taxed in
accordance with the Article 26 of EIT law and the Article 17 and Article 83 of its implementation rules.
The EIT Law provides that a maximum income tax
rate of 20% may apply to dividends payable to non-PRC investors that are non-resident enterprises, to the extent such dividends are derived from sources within the PRC. The State Council has reduced such rate to 10%, in the absence of
any applicable tax treaties that may reduce such rate. We are a Cayman Islands holding company and substantially all of our income may be derived from dividends we receive from our operating subsidiaries located in the PRC. If we are required under
the EIT Law to pay income tax for any dividends we receive from our PRC subsidiaries, the amount of dividends, if any, we may pay to our shareholders and ADS holders may be materially and adversely affected.
60
PRC Withholding Tax.
According to the Double Taxation Arrangement (Hong Kong), effective in 2007, the
Notice of the State Administration of Taxation on Negotiated Reduction of Dividends and Interest Rates, issued in 2008, and the Notice of the State Administration of Taxation Regarding Interpretation and Recognition of Beneficial Owners under Tax
Treaties, effective in 2009, dividends paid to enterprises incorporated in Hong Kong are subject to a withholding tax of 5% provided that a Hong Kong resident enterprise owns over 25% of the PRC enterprise distributing the dividend and can be
considered as a beneficial owner and entitled to treaty benefits under the Double Taxation Arrangement (Hong Kong). Our wholly-owned Hong Kong subsidiaries, Elite Concept Holdings Limited, Winner Park Limited and Smart Shine
International Limited, own 100% of our PRC subsidiaries. Thus, dividends paid to us by our PRC subsidiaries through our Hong Kong wholly-owned subsidiaries may be subject to the 5% withholding tax if we and our Hong Kong subsidiaries are considered
as non-resident enterprises under the EIT Law and our Hong Kong subsidiaries are considered as beneficial owners and entitled to treaty benefits under the Double Taxation Arrangement (Hong Kong). If our Hong Kong subsidiaries
are not regarded as the beneficial owners of any such dividends, it will not be entitled to the treaty benefits under the Double Taxation Arrangement (Hong Kong). As a result, such dividends would be subject to regular withholding tax of 10% as
provided by the PRC domestic law rather than the favorable rate of 5% applicable under the Double Taxation Arrangement (Hong Kong).
PRC
Business Tax and Value-Added Tax (VAT).
The VAT reform program change the charge of sales tax from business tax to VAT for certain pilot industries, and was initially applied only to certain pilot industries in Shanghai and was extended to apply
nationwide and to cover more additional industry sectors. On March 24, 2016, the Ministry of Finance and the State Administration promulgated the Circular Regarding Overall Promotion of Pilot Practice of Replacing Business Tax with Value-Added
Tax, or Circular No. 36, effective on May 1, 2016. On June 18, 2016, the Ministry of Finance and the State Administration of Taxation promulgated the Circular Regarding Overall Promotion of Pilot Practice of Replacing Business Tax
with Value-Added Tax in the Policy of Reinsurance, Real Estate Leasehold and Non-degree Education, or Circular No. 68, in which the general taxpayers providing non-academic education services may apply a simple method for calculating the tax
payable amount in accordance with the tax rate of 3%.
C.
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Organizational Structure
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Substantially all of our operations are conducted in China through
contractual arrangements between our wholly-owned subsidiaries in China, New Oriental China (our variable interest entity) and New Oriental Chinas schools and subsidiaries and shareholder. The wholly-owned subsidiaries that are currently
parties to these contractual arrangements are Beijing Hewstone, Beijing Decision, Beijing Pioneer, Beijing Smart Wood, Beijing Joy Tend, Beijing Right Time, Beijing Top, Beijing Shenghe, Beijing Magnificence and Beijing Jinghong. Beijing Hewstone
primarily engages in the educational software development business and also sub-licenses our trademarks to New Oriental China and its schools and subsidiaries. Beijing Decision primarily engages in the business of providing educational technology
services and educational management services. Each of Beijing Pioneer, Beijing Smart Wood, Beijing Joy Tend, Beijing Right Time, Beijing Top, Beijing Shenghe, Beijing Magnificence and Beijing Jinghong primarily engages in the educational software
development business.
In addition, we have a wholly-owned subsidiary in China, Beijing Judgment Education & Consulting Co., Ltd., or Beijing
Judgment, which holds the real estate properties on which certain of our schools are located. In September 2016, Beijing Judgment transfer all the equity interest it held in Beijing New Oriental Stars, a holding company for our two kindergartens, to
Beijing Bright The Future Education & Technology Co., Ltd., a wholly-owned subsidiary of New Oriental China. Beijing Bright The Future Education & Technology Co., Ltd., also hold the equity interest in three kindergartens in
Qingdao.
In 2013, Beijing Hewstone established a wholly-owned subsidiary in China, Beijing Sincerity, which holds our oversea study tour business.
61
The following diagram sets out details of our significant subsidiaries and New Oriental China and its schools and
subsidiaries as of the date of this annual report:
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Equity interest for companies.
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Sponsorship interest for schools and kindergartens.
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Contractual arrangements including equity pledge agreements, option agreement and proxy agreement, power of attorney, master exclusive service agreement and related service agreements. See C. Organizational
StructureContractual Arrangements with New Oriental China, its Schools and Subsidiaries and its Shareholder.
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(1)
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Beijing Century Friendship Education Investment Co., Ltd is 80% owned by Mr. Michael Minhong Yu, our companys founder and executive chairman, and 20% owned by Ms. Bamei Li, Mr. Yus mother.
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(2)
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Excluding Guangzhou Panyu Privately-Funded New Oriental Training Center, Guangzhou New Oriental School and Fuyang New Oriental Training School, which are separate legal entities but have been counted to our learning
centers from the perspective of our internal management.
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(3)
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Consisting of various PRC companies operating our educational content and other technology development and distribution business, online education business and overseas studies consulting business in China, including
Xuncheng Network. As part of an internal restructuring, we entered into a series of contractual arrangements with Xuncheng Network, its subsidiary and its shareholder during the fiscal year ended May 31, 2015. See C.
Organizational StructureContractual Arrangements with Xuncheng Network, Its Subsidiary and Its Shareholder.
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62
Contractual Arrangements with New Oriental China, Its Schools and Subsidiaries and Its Shareholder
PRC laws and regulations currently require any foreign entity that invests in the education business in China to be an educational institution
with relevant experience in providing educational services outside China. Our offshore holding companies are not educational institutions and do not provide educational services outside China. In addition, in the PRC, foreign ownership of high
schools for students in grades ten to twelve is restricted and foreign ownership of primary and middle schools for students in grades one to nine is prohibited. As a result, our offshore holding companies are not allowed to directly own and operate
schools in China. We conduct substantially all of our education business in China through contractual arrangements between our wholly-owned subsidiaries in China, and our variable interest entity(ies), their schools and subsidiaries and their
shareholders. In the fiscal years ended May 31, 2015, 2016 and 2017, our variable interest entity(ies) contributed in aggregate 97.9%, 97.7% and 98.8%, respectively, of our total net revenues. New Oriental China is our variable interest entity
which is directly wholly owned by Century Friendship, a PRC domestic company controlled by Mr. Michael Minhong Yu, our founder and executive chairman.
New Oriental Chinas schools and subsidiaries hold the requisite licenses and permits necessary to conduct our education business and have been directly
conducting our education business. We have been and are expected to continue to be dependent on New Oriental China and its schools and subsidiaries to operate our education business until we qualify for direct ownership of our education business in
China under PRC laws and regulations and acquire New Oriental China as our direct, wholly-owned subsidiary. We have entered into contractual arrangements with New Oriental China, its schools and subsidiaries and its shareholder, which enable us to:
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have power to direct the activities that most significantly affect the economic performance of New Oriental China and its schools and subsidiaries;
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receive substantially all of the economic benefits from New Oriental China and its schools and subsidiaries in consideration for the services provided by our wholly-owned subsidiaries in China; and
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have an exclusive option to purchase all or part of the equity interests in New Oriental China, when and to the extent permitted by PRC law, or request any existing shareholder of New Oriental China to transfer all or
part of the equity interest in New Oriental China to another PRC person or entity designated by us at any time in our discretion.
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These
contractual arrangements are summarized in the following paragraphs.
Equity Pledge Agreements
. Pursuant to the equity pledge agreements
dated as of May 25, 2006 among New Oriental China, all of the eleven shareholders of New Oriental China, Beijing Hewstone and Beijing Decision, each shareholder of New Oriental China agreed to pledge his or its equity interests in New Oriental
China to Beijing Hewstone and Beijing Decision to secure the performance of obligations of New Oriental China and its schools and subsidiaries under the existing service agreements and any such agreements to be entered into in the future. The
shareholders of New Oriental China agreed not to transfer, sell, pledge, dispose of or otherwise create any encumbrance on their equity interests in New Oriental China without the prior written consent of Beijing Decision and Beijing Hewstone. All
parties to the equity pledge agreement have agreed that the equity pledge agreement is binding upon New Oriental Chinas shareholders and their successors.
In January 2012, the ten former shareholders of New Oriental China completed the transfer of all of their equity interests in New Oriental China to Century
Friendship, a PRC domestic enterprise controlled by Mr. Michael Minhong Yu, our founder and executive chairman, without consideration. Prior to the transfer, Century Friendship had held 53% of the equity interests in the New Oriental China
while the ten former shareholders of New Oriental China held the remaining equity interests. The purpose of the transfers was to further strengthen our corporate structure by simplifying the shareholding structure of New Oriental China.
63
Pursuant to the five equity pledge agreements dated April 23, 2012 among New Oriental China, Century
Friendship and five of our wholly-owned subsidiaries in China, namely Beijing Hewstone, Beijing Decision, Shanghai Smart Words, Beijing Pioneer and Beijing Smart Wood, Century Friendship agreed to pledge its equity interests in New Oriental China to
these five subsidiaries to secure New Oriental Chinas and its schools and subsidiaries performance of their obligations under the relevant principal agreements, and Century Friendship has agreed not to transfer, sell, pledge, dispose of
or otherwise create any encumbrance on its equity interests in New Oriental China without the prior written consents of our wholly-owned subsidiaries in China. Upon the conclusion of the master exclusive service agreement on September 19, 2014
between Beijing Pioneer and New Oriental China, the list of principal agreements has been updated to include the master exclusive service agreement and the relevant service agreements. The equity pledges of Century Friendship under these equity
pledge agreements have been registered with the Haidian District, Beijing branch of the SAIC. The terms of the April 2012 equity pledge agreements are substantially the same as the 2006 agreements.
In February 2017, as part of our efforts to streamline the corporate structure, we removed Shanghai Smart Words as a party to the contractual arrangements
with New Oriental China and its schools and subsidiaries and shareholder. The rights and obligations of Shanghai Smart Words under these contractual arrangements have been assumed by Beijing Decision. The April 2012 equity pledge agreements have
been amended to reflect the foregoing change while the terms of these agreements remain unchanged. The equity pledges of Century Friendship under the amended agreements have been registered with the Haidian District, Beijing branch of the SAIC.
Exclusive Option Agreement
. Exclusive option agreements were entered into by us and New Oriental China and the shareholders of New Oriental
China on various dates, and amended on May 25, 2006. After the ten former shareholders of New Oriental China completed the transfer of all of their equity interests in New Oriental China to Century Friendship in early 2012, Century Friendship,
as the sole shareholder of New Oriental China, executed a new option agreement with Shanghai Smart Words, one of our wholly-owned subsidiaries in China, and New Oriental China on April 23, 2012, replacing previous exclusive option agreements.
On February 16, 2017, Beijing Decision entered into a new option agreement with Century Friendship and New Oriental China, replacing the previous option agreement dated April 23, 2012. Pursuant to the current option agreement, Century
Friendship is obligated to sell to Beijing Decision, and Beijing Decision has an exclusive, irrevocable and unconditional right to purchase from Century Friendship, in its sole discretion, part or of all of Century Friendships equity interests
in New Oriental China when and to the extent that applicable PRC law permits it to own part or all of the equity interest in New Oriental China. In addition, Beijing Decision has an exclusive option to require Century Friendship to transfer all or
part of Century Friendships equity interest in New Oriental China to another PRC person or entity designated by Beijing Decision at any time in its discretion. The purchase price to be paid by Beijing Decision will be the minimum amount of
consideration permitted by applicable PRC law at the time when such share transfer occurs.
Power of Attorney
. On
December 3, 2012, Century Friendship, in the capacity of the sole shareholder of New Oriental China, executed a proxy agreement and power of attorney with Beijing Pioneer, one of our wholly-owned subsidiaries in China, and New Oriental China,
whereby Century Friendship irrevocably appoints and constitutes Beijing Pioneer as its attorney-in-fact to exercise on Century Friendships behalf any and all rights that Century Friendship has in respect of its equity interests in New Oriental
China. This proxy agreement and power of attorney became effective on December 3, 2012 and replaces the powers of attorney executed by Century Friendship on April 23, 2012. The proxy agreement and power of attorney will remain effective as
long as New Oriental China exists. Century Friendship does not have the right to terminate the proxy agreement and power of attorney or revoke the appointment of the attorney-in-fact without the prior written consent of Beijing Pioneer.
Service Agreements
. Our wholly-owned subsidiaries in China have entered into a series of service agreements with New Oriental China
and its schools and subsidiaries to enable them to receive substantially all of the economic benefits of New Oriental China and its schools and subsidiaries. On September 19, 2014, one of our wholly-owned subsidiaries, Beijing Pioneer, has
entered into a master exclusive service agreement, as amended, with New Oriental China to enable our wholly-owned subsidiaries in China to receive substantially all of the economic benefits of New Oriental China and its schools and subsidiaries.
After the conclusion of the master exclusive service agreement, the various existing service agreements between our wholly-owned subsidiaries will remain effective; however, if they have any conflict with the terms and conditions of the master
exclusive service agreement, the master exclusive service agreement will prevail.
64
Under the master exclusive service agreement, Beijing Pioneer has the exclusive right to provide or designate any
entities affiliated with it to provide New Oriental China and its schools and subsidiaries the technical and business support services set forth in schedule 2 of the agreement, including new enrollment system development service, sale of educational
software and other operating services. Each service provider has the right to determine the fees associated with the services it provides based on the technical difficulty and complexity of the services and the actual labor costs it incurs for
providing the services during the relevant period. The term of this agreement is ten years and will be automatically extended upon the expiration. Beijing Pioneer may terminate the agreement at any time with a 30-day prior written notice to New
Oriental China, whereas none of New Oriental China and its schools and subsidiaries can terminate this agreement. In the fiscal years ended May 31, 2015, 2016 and 2017, the total amount of service fees that our PRC subsidiaries received from
New Oriental China and its schools and subsidiaries under all the service agreements was US$179.5 million, US$149.3 million and US$269.2 million, respectively.
Contractual Arrangements with Xuncheng Network, Its Subsidiary and Its Shareholder.
Prior to a series of restructuring transactions starting in October 2015, Xuncheng Network was a wholly-owned subsidiary of New Oriental China. As part of an
internal restructuring, we entered into a series of contractual arrangements with Xuncheng Network, its subsidiary and its shareholder during the fiscal year ended May 31, 2015, including an equity pledge agreement, an exclusive option
agreement, a power of attorney and a master exclusive service agreement. These agreements are substantially the same as our contractual agreements with New Oriental China and its shareholder. In connection with New Oriental Chinas entry into
the foregoing Xuncheng VIE agreements, Beijing Pioneer, Beijing Hewstone, Beijing Smart Wood, Beijing Decision and Shanghai Smart Words issued confirmation letters acknowledging that the foregoing agreements are effective as provided thereunder.
Following a change in our restructuring strategy, the foregoing agreements were terminated in September 2015.
In the opinion of Tian Yuan Law Firm, our
PRC legal counsel:
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the corporate structure of New Oriental China and its schools and subsidiaries, Xuncheng Network and its subsidiary, and our wholly-owned subsidiaries in China are in compliance with existing PRC laws and regulations;
and
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the contractual arrangements among our wholly-owned subsidiaries in China, New Oriental China and its schools and subsidiaries and the shareholder of New Oriental China are valid, binding and enforceable under, and do
not violate, PRC laws or regulations currently in effect. The contractual arrangements among our wholly-owned subsidiary in China, Xuncheng Network, its subsidiary and its shareholder were valid, binding and enforceable under, and did not violate,
PRC laws or regulations currently in effect prior to their termination.
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We have been advised by our PRC legal counsel, however, that there
are substantial uncertainties regarding the interpretation and application of current and future PRC laws and regulations. Accordingly, there can be no assurance that the PRC regulatory authorities will not in the future take a view that is contrary
to the above opinion of our PRC legal counsel. We have been further advised by our PRC counsel that if the PRC government finds that the agreements that establish the structure for operating our education business in China do not comply with PRC
regulatory restrictions on foreign investment in the education business, we could be subject to severe penalties. The imposition of any of these penalties could result in a material adverse effect on our ability to conduct our business. See
Item 3. Key InformationD. Risk FactorsRisks Related to Our Corporate StructureIf the PRC government finds that the agreements that establish the structure for operating our China business do not comply with applicable PRC
laws and regulations, we could be subject to severe penalties and Item 3. Key InformationD. Risk FactorsRisks Related to Doing Business in ChinaUncertainties with respect to the PRC legal system could adversely affect
us.
D.
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Property, Plants and Equipment
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Our headquarters are located in Beijing, China, where we own
approximately 19,000 square meters of office and classroom space. In addition, we own approximately 210,000 square meters of schools in Yangzhou and an aggregate of approximately 62,000 square meters of space for our schools, learning centers and
bookstores in various cities in China, including Xiamen, Zhengzhou, Xian, Tianjin, Kunming, Wuhan, Guangzhou, Changsha and Beijing.
65
ITEM 4A. UNRESOLVED STAFF COMMENTS
None.
ITEM 5. OPERATING AND
FINANCIAL REVIEW AND PROSPECTS
You should read the following discussion and analysis of our financial condition and results of operations in
conjunction with our consolidated financial statements and the related notes included elsewhere in this annual report on Form 20-F. This discussion may contain forward-looking statements based upon current expectations that involve risks and
uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under Item 3. Key InformationD. Risk Factors or in other
parts of this annual report on Form 20-F.
A.
Operating Results
General Factors Affecting Our Results of Operations
We have benefited significantly from favorable demographic trends, the overall economic growth and the demand for high-quality private education and English
language training in China. The overall economic growth and the increase in the GDP per capita in China have led to a significant increase in spending on education in China. At the same time, Chinas integration into the global economy has
continued, resulting in more career opportunities for Chinese citizens who are able to communicate effectively in English. We anticipate that the demand for private education and English language training in China will continue to increase as
Chinas economy continues to grow and as disposable income of urban households continues to rise. However, any adverse changes in the economic conditions or regulatory environment in China may have a material adverse effect on the private
education industry in China, which in turn may harm our business and results of operations.
Specific Factors Affecting Our Results of Operations
While our business is influenced by factors affecting the private education industry in China generally and by conditions in each of the
geographic markets we serve, we believe our business is more directly affected by company-specific factors such as the number of student enrollments, the amount of course fees and our operating costs and expenses. The number of student enrollments
is in turn largely driven by the demand for our courses, the effectiveness of our marketing and brand promotion efforts, our ability to optimize our comprehensive online and offline integrated education ecosystem in a constant basis, the locations
of our schools and learning centers, our ability to maintain the consistency and quality of our teaching, and our ability to respond to competitive pressure, as well as seasonal factors. We determine course fees primarily based on demand for our
courses, the targeted market for our courses, the subject of the course, the geographic location of the school, cost of services, and the course fees charged by our competitors for the same or similar courses.
Our future results of operations will depend significantly upon our ability to increase paying users for our online courses, increase student enrollments at
existing schools and learning centers and further expand our school network throughout China, as well as offer a greater variety of courses, including smaller-size classes. Our planned expansion may result in substantial demands on our management,
operational, technological, financial and other resources. To manage and support our growth, we must improve our existing operational, administrative and technological systems and our financial and management controls, and recruit, train and retain
additional qualified teachers and school management personnel as well as other administrative and sales and marketing personnel, particularly as we grow outside of our existing markets. We will continue to implement additional systems and measures
and recruit qualified personnel in order to effectively manage and support our growth. If we cannot achieve these improvements, our financial condition and results of operations may be materially adversely affected.
Due to certain restrictions and qualification requirements under PRC law that apply to foreign investment in Chinas education industry, we conduct
substantially all of our education business in China through contractual arrangements between our wholly-owned subsidiaries in China, New Oriental China and its schools and subsidiaries and the shareholder of New Oriental China. New Oriental
Chinas schools and subsidiaries hold the requisite licenses and permits necessary to conduct our educational services business in China and operate our schools and learning centers and have been directly conducting our education business and
operating our schools and learning centers.
66
Net Revenues
. In the fiscal years ended May 31, 2015, 2016 and 2017, we generated total net revenues
of US$1,246.8 million, US$1,478.3 million and US$1,799.5 million, respectively. Our revenues are net of PRC business taxes and related surcharges as well as refunds.
We currently derive revenues from the following sources:
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educational programs and services, which accounted for 88.5%, 88.6% and 89.4% of our total net revenues in the fiscal years ended May 31, 2015, 2016 and 2017, respectively; and
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books and others, which accounted for 11.5%, 11.4% and 10.6% of our total net revenues in the fiscal years ended May 31, 2015, 2016 and 2017, respectively.
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Educational Programs and Services
. Our educational programs and services consist of language training and test preparation courses, primary and
secondary school education and online education. Revenues from language training courses and test preparation courses accounted for 83.4%, 83.8% and 83.9%, respectively, of our total net revenues in the fiscal years ended May 31, 2015, 2016 and
2017.
We recognize revenues from course fees collected for enrollment in our language training and test preparation courses proportionally as we
deliver the instruction over the period of the course. Course fees are generally paid in advance by students and are initially recorded as deferred revenues. Students are entitled to a short-term trial period which commences on the date the course
begins. Tuition refunds are provided to students if they decide within the trial period that they no longer want to take the course. After the trial period, if a student withdraws from a class, usually no refunds will be provided and any collected
but unearned portion of the fee is recognized at that time. We recognize revenues from school fees collected for enrollment in our primary and secondary schools ratably over the corresponding academic year. We sell pre-paid online education cards
primarily to distributors, who in turn sell them to students. We recognize revenues from sales of pre-paid cards in proportion to the actual time that students spend on our online courses. Course fees and school fees collected and amounts received
from sales of pre-paid cards are recorded as deferred revenues until they can be recognized as revenues upon their use or expiration. Upon expiration of a prepaid card, which is six months to one year from the date of the sale of the card, we
recognize the remaining amount of deferred revenues as revenues.
The most significant factors that directly affect our revenues from educational programs
and services are the number of student enrollments and the amount of course fees. We believe our students are attracted to us primarily because of our established brand and reputation in the private education sector, especially in the areas of
English language training, overseas admissions and assessment test preparation and K-12 after-school tutoring program, the quality of our instruction and the variety of our programs, services and products. For the past several years, our revenue
growth has been driven primarily by increased enrollments in our K-12 after-school tutoring courses and overseas test preparation courses and other programs and services. The number of student enrollments for our courses is affected by the demand
for our courses, the effectiveness of our marketing and brand promotion, the demographic composition of the cities where we have schools and learning centers, our ability to respond to competitive pressure, as well as seasonal factors. To further
penetrate the K-12 after-school tutoring market, we have expanded the scope of our course offerings to cover non-English subjects, including through our New Oriental U-Can (Non-English) all subjects training program for middle and high school
students and Pop Kids (Non-English) all subjects training program for elementary school students, and plan to further expand our course offerings and geographic coverage in the future to capture a larger share of the huge after-school training
market in China. In order to use new technology to reshape our traditional offline classroom-teaching offerings and enhance customers learning experience, we developed our own O2O two-way interactive learning platform, or the O2O platform, by
standardizing and digitalizing our education content and user data. We established a database of learning modules for internet-based self-learning practice and assessment. The O2O platform complements and supports students offline learning
activities by offering online learning components, such as pushing customized content to students, recommending additional courses based on their online study records and performance, facilitating interaction between students, teachers and parents
across a variety of devices, including smartphones, tablets and PCs.
67
Our courses generally have the largest student enrollments in our first fiscal quarter, which runs from
June 1 to August 31 of each year, primarily because many students enroll in our courses during the summer vacation to enhance their foreign language skills and/or prepare for admissions and assessment tests in subsequent school terms. We
expect this seasonality in enrollment pattern to continue, especially for most of our language training courses for college and middle school students and test preparation courses.
We determine course fees primarily based on demand for our courses, the targeted market for our courses, the subject of the course, the geographic location of
the school, cost of services, and the course fees charged by our competitors for the same or similar programs. Our test preparation courses are generally delivered in class settings ranging from 1 student to 150 students per class. Our K-12
after-school tutoring courses and our English language training courses are delivered in class settings generally ranging from 1 student to 100 students per class. In November 2013, we launched an online test preparation program on our own online
education website koolearn.com, which features live broadcasts of a series of our most popular offline test preparation classes. We typically adjust course fees or school fees based on the market conditions of the city where the particular school is
located, subject to the relevant local governmental authoritys advance approval, if required. We expect to continue to derive a substantial majority of our revenues from educational programs and services.
A significant portion of our revenues has been derived from test preparation courses. The success of our test preparation courses depends on the continued use
of admissions and assessment tests by educational institutions and governmental authorities both in China and abroad. If the use of admissions and assessment tests declines or falls out of favor with educational institutions, government authorities
and other entities, the markets for our test preparation courses will shrink and our business may be materially and adversely affected.
Books and
Others
. We distribute and sell books and other educational materials developed or licensed by us through our own distribution channels, which consist of our bookstores and websites, and also through third-party distributors. We normally provide
books and other educational materials that are required for our courses and do not separately charge students for these items. We recognize revenues from sales of books and other educational materials when the products are sold to end customers. As
we believe successful content development is important to the success of our business, we intend to continuously enhance the quality and breadth of our education content offerings and distribute more books and other educational materials through our
own bookstores, as well as third-party distributors.
We also provide consulting services to students regarding overseas studies and related
processes, such as visa applications. We charge each student a fee based on the scope of consulting services requested by the student and recognize revenues when our consulting services are delivered. We expect that revenues from these consulting
services will continue to increase in the future.
Operating Costs and Expenses
. Our operating costs and expenses consist of cost of revenues,
selling and marketing expenses and general and administrative expenses. The following table sets forth the components of our operating costs and expenses, both in absolute amount and as a percentage of total net revenues for the periods indicated.
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For the Year Ended
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(in thousands, except percentages)
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2015
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2016
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2017
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US$
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%
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US$
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%
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US$
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%
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Net revenues
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1,246,766
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100.0
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1,478,348
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100.0
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1,799,509
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100.00
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Operating costs and expenses:
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Cost of revenues
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(526,320
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)
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(42.2
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)
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(614,364
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)
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(41.5
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)
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(749,586
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)
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(41.7
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)
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Selling and marketing
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(188,483
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)
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(15.1
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)
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(197,897
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)
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(13.4
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)
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(232,826
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(12.9
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)
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General and administrative
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(378,434
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)
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(30.4
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)
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(471,010
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)
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(31.9
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)
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(554,948
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)
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(30.8
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)
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating costs and expenses
|
|
|
(1,093,237
|
)
|
|
|
(87.7
|
)
|
|
|
(1,283,271
|
)
|
|
|
(86.8
|
)
|
|
|
(1,537,360
|
)
|
|
|
(85.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
68
We rely on our teachers to deliver educational services. Our teachers consist of both full-time teachers and
contract teachers. Full-time teachers deliver instruction and may also be involved in management, administration and other functions at our schools. Full-time teachers compensation and benefits primarily consist of teaching fees based on
hourly rates, performance-linked bonuses based on student evaluations, as well as base salary, annual bonus and standard employee benefits in connection with their services other than teaching. Compensation of our contract teachers is comprised
primarily of teaching fees based on hourly rates and performance-linked bonuses based on student evaluations and other factors. To attract and retain high-quality teachers, we have granted equity incentives, including restricted shares and share
options, to some of our teachers. We account for teaching fees and performance-linked bonuses paid to our teachers as cost of revenues as they are directly associated with the provision of educational services, and account for the other compensation
and benefits to our teachers as general and administrative expenses.
Cost of Revenues
. Cost of revenues for educational programs and services
primarily consists of teaching fees and performance-linked bonuses paid to our teachers and rental payments for our schools and learning centers and, to a lesser degree, depreciation and amortization of property and equipment used in the provision
of educational services, as well as costs of course materials. Cost of books and other materials primarily consist of printing costs of books and other materials, and licenses fees, royalties and other fees paid to content licensors, publishing
companies and third-party distributors. We anticipate that our total cost of revenues will continue to increase as we continue to open new schools and learning centers and hire additional teachers.
Selling and Marketing Expenses
. Our selling and marketing expenses primarily consist of expenses relating to advertising, seminars, marketing and
promotional trips and other community activities for brand promotion purpose. We expect that our selling and marketing expenses will continue to increase as we further expand into new geographic locations and enhance our brand recognition.
General and Administrative Expenses
. Our general and administrative expenses primarily consist of compensation and benefits of administrative
staff, compensation and benefits of full-time teachers excluding teaching fees and performance-linked bonuses and, to a lesser extent, costs to develop curriculum, costs of third-party professional services, rental and utilities payments relating to
office and administrative functions, and depreciation and amortization of property and equipment used in our general and administrative activities. We expect that our general and administrative expenses will increase in the near term as we hire
additional personnel and incur additional costs in connection with the expansion of our business.
Share-based Compensation Expenses
. In
January 2006, we adopted the 2006 Share Incentive Plan, under which we are authorized to, starting from 2006, issue up to 8,000,000 common shares pursuant to awards (including options) granted to our employees, directors and consultants. The number
of common shares available for grant under the 2006 Share Incentive Plan may be increased by (i) an additional 5,000,000 shares on January 1, 2007, (ii) an additional 5,000,000 shares on January 1, 2008, and (iii) an annual
increase in common shares to be added on the first business day of each calendar year beginning in 2009 equal to the lesser of (x) 3,000,000 shares, (y) two percent (2%) of total common shares outstanding as of such date, or
(z) a lesser number of shares as determined by the plan administrator. Since the adoption of our 2006 Share Incentive Plan, we have granted options to purchase 15,826,000 common shares, of which 2,277,546 options to purchase common shares had
been forfeited under our 2006 Share Incentive Plan. In addition, since the adoption of our 2006 Share Incentive Plan, we have granted a total of 8,608,671 non-vested equity shares under 2006 Share Incentive Plan. Our 2006 Share Incentive Plan
expired in January 2016, but the expiration of our 2006 Share Incentive Plan does not affect the effectiveness of options granted prior to such expiration.
In January 2016, we adopted the 2016 Share Incentive Plan, under which we are authorized to issue up to 10,000,000 common shares pursuant to awards (including
options) granted to our employees, directors and consultants. Since the adoption of our 2016 Share Incentive Plan, we have granted a total of 436,016 non-vested equity shares, all of which were granted in the fiscal year ended May 31, 2017, and
of which 4,050 shares had been forfeited as of May 31, 2017.
We account for share-based compensation expenses in accordance with an authoritative
accounting pronouncement, which requires share-based compensation expense to be determined based on the fair value of our common shares as of their grant date. The following table sets forth the allocation of our share-based compensation expenses,
both in absolute amount and as a percentage of total share-based compensation expenses, among our employees based on the nature of work which they were assigned to perform.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended
|
|
(in thousands, except percentages)
|
|
2015
|
|
|
2016
|
|
|
2017
|
|
|
|
US$
|
|
|
%
|
|
|
US$
|
|
|
%
|
|
|
US$
|
|
|
%
|
|
Allocation of Share-based Compensation Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative
|
|
|
15,689
|
|
|
|
100.0
|
|
|
|
16,810
|
|
|
|
100.0
|
|
|
|
20,287
|
|
|
|
100.0
|
|
69
For options granted to our employees and directors, we record share-based compensation expenses based on the fair
value of our common shares underlying options as of the date of option grant and amortize the expenses over the vesting periods of the options. For non-vested equity shares granted to employees and directors, we record share-based compensation
expenses based on the quoted market price of our ADSs on the grant date and amortize the expenses over the vesting periods of the non-vested equity shares.
In April 2016, we sold 51% equity interest in Beijing Dianshijingwei Technology Co., Ltd, or Dianshijingwei, one of our wholly-owned subsidiaries, to some of
Dianshijingweis management, for a cash consideration of US$2.3 million, of which US$1.5 million had been collected as of May 31, 2016, and the remaining consideration was collected in June 2017. We recorded a gain of US$3.8 million from
this disposal. After the disposal, we stopped consolidating Dianshijingwei and started to recognize our remaining investment in Dianshijingwei using the equity method as we retained the ability to exercise significant influence over Dianshijingwei.
Taxation
Cayman Islands
We are incorporated in the Cayman Islands. Under the current law of the Cayman Islands, we are not subject to income or capital gains tax. In addition,
dividend payments are not subject to withholding tax in the Cayman Islands.
PRC
Other than our primary and secondary schools, our operating entities in China are subject to a value-added tax (VAT) at varying rates ranging from
3% to 17% on their respective net revenues. Our operating entities in China used to be subject to a 3% to 5% business tax on gross revenues generated from providing services and related surcharges. According to the then-in-effect Circular 111 and
Circular 71 issued by the Ministry of Finance and the State Administration of Taxation on November 11, 2011 and July 31, 2012, respectively, the new enrollment system development services and other operating services provided by Beijing
Hewstone, Beijing Decision, Shanghai Smart Words, Beijing Smart Wood and Beijing Pioneer which were previously subject to business tax before the implementation of Circular No. 111 and Circular 71, have since become subject to value-added tax
following the implantation of these two circulars. Pursuant to the same, the operating services provided by Beijing Joy Tend and Beijing Right Time, Beijing Top, Beijing Shenghe, Beijing Magnificence and Beijing Jinghong are also subject to
value-added tax. On May 24, 2013, the Ministry of Finance and the State Administration of Taxation promulgated Circular 37, which replaces Circular No. 111 and Circular 71 and expands such practice of replacing business tax with
value-added tax to nationwide starting August 1, 2013. Following the change from business tax to value-added tax, the applicable tax rate for such services increased by 1%, from 5% up to 6%, while the tax payable amount of value-added tax
relating to such services was the output tax amount in a tax period minus input tax amount in the same period. Pursuant to Circular 68 which was promulgated on June 18, 2016, our operating entities that provide non-academic education services
are subject to a simple VAT collection method and apply for a 3% VAT rate since May 2016. VAT is reported as a deduction to revenue when incurred. Circular 37 and the subsequent relevant implementation measures and rules are relatively new, and the
interpretation and enforcement of this circular and its implementation measures and rules involve uncertainties. To date, the practices instituted under the new circular have had no material adverse effect on the tax positions of our operating
entities in China.
With regard to income tax, according to the Implementation Rules for the Law for Promoting Private Education (2004), private schools
that do not require reasonable returns enjoy the same preferential tax treatment as public schools, while the preferential tax treatment policies applicable to private schools requiring reasonable returns shall be separately formulated by the
relevant authorities under the State Council. To date, however, no regulations have been promulgated by the relevant authorities in this regard. As of May 31, 2017, 22 of our schools elected as schools not requiring reasonable returns, 39 of
our schools elected as requiring reasonable returns and the remaining schools were not classified or registered as companies. The implementation rules of the EIT Law provide certain conditions under which not-for-profit entities may be exempted from
enterprise income tax. According to such conditions, our schools may not be entitled to income tax exemption. To date, however, no separate specific regulations or policies have been promulgated by the relevant authorities in this regard and whether
our schools can be entitled to any preferential income tax treatment remains unclear. In practice, tax treatments for private schools vary across different cities in China. For example, private schools in certain cities are subject to a 25% standard
enterprise income tax starting from January 1, 2008, while in other cities, private schools are subject to a fixed amount of enterprise income tax each year as determined by the local tax authority in lieu of the 25% standard enterprise income
tax or are not required to pay enterprise income tax. Among our schools in the four major cities from which we derived a significant portion of our revenues in the fiscal year ended May 31, 2017, three schools are subject to the standard 25%
enterprise income tax rate and one school is not required by the governing tax bureau to pay any EIT since its establishment through May 31, 2017.
70
Enterprises that qualify as high and new technology enterprises are entitled to a 15% enterprise
income tax rate rather than the 25% uniform statutory tax rate. In December 2008, Beijing Hewstone and Beijing Decision and Xuncheng Network were recertified as high and new technology enterprises in Beijing, and Beijing Pioneer was
added to this list in November 2015 and enjoyed a reduced tax rate of 15% starting January 2015. In December 2016, Beijing Smart Wood, was also certified as a high and new technology enterprise. All of them are entitled to a 15% tax rate as
long as they continue to qualify as high and new technology enterprises. The deferred tax balance of Beijing Hewstone, Beijing Decision, Beijing Pioneer and Xuncheng Network is calculated at a rate of 15%, as we expect them to continue to be
qualified as high and new technology enterprises.
An enterprises that qualifies as a software enterprise is exempt from
enterprise income tax for two years beginning from such enterprises first profitable year followed by a tax rate of 12.5% for the succeeding three years. Seven of our wholly-owned subsidiaries in China, Beijing Smart Wood, Beijing Joy Tend,
Beijing Right Time, Beijing Top, Beijing Shenghe, Beijing Magnificence and Beijing Jinghong, are qualified as software enterprises. Beijing Smart Wood was entitled to an income tax exemption from in 2012 and 2013 followed by reduced income tax at a
rate of 12.5% from 2014 through 2016. Beijing Right Time and Beijing Joy Tend were exempt from income taxes in 2013 and 2014 and are eligible for reduced income taxes at a rate of 12.5% through from 2015 through 2017. Beijing Top and Beijing Shenghe
were exempt from income taxes in 2014 and 2015 and are eligible for reduced income taxes at a rate of 12.5% from 2016 through 2018. Beijing Magnificence is entitled to an income tax exemption in 2015 and 2016 followed by reduced income tax at a rate
of 12.5% from 2017 through 2019. Beijing Jinghong is entitled to an income tax exemption in 2017 and 2018 followed by reduced income tax at a rate of 12.5% from 2019 through 2021.
Preferential tax treatments granted to our schools by local governmental authorities are subject to review and may be adjusted or revoked at any time. In
addition, if the government regulations or authorities were to phase out preferential tax benefits currently granted to high and new technology enterprises, New Oriental China and our wholly-owned subsidiaries in China would be subject
to the 25% uniform statutory tax rate. The discontinuation of any preferential tax treatments currently available to our schools, especially those schools in major cities, and to New Oriental China and our wholly-owned subsidiaries, will cause our
effective tax rate to increase, which could have a material adverse effect on our results of operations.
For additional information on PRC regulations on
taxation, see Item 4. Information on the CompanyB. Business OverviewEducationRegulations on Taxation.
Recent Acquisition
In December 2014, we acquired a 100% equity interest in a kindergarten chain in the city of Qingdao with three schools and approximately 700 students
for US$12.9 million.
In March 2015, we acquired 18% equity interest in Beijing Ainuoshida Education & Technology Co., Ltd., or Ainuoshida, for a
total consideration of US$1,129. In December 2016, we acquired another 33% equity interest in Ainuoshida, for a total consideration of US$3,842. After the acquisition we owned totally 51% equity interest in Ainuoshida.
Recent Disposal
In April 2016, we disposed 51% equity
interest in Dianshijingwei for a cash consideration of US$2.3 million and recorded a gain of US$3.8 million from this disposal.
71
Results of Operations
The following table sets forth a summary of our consolidated results of operations for the periods indicated. This information should be read together with our
consolidated financial statements and related notes included elsewhere in this annual report. The operating results in any period are not necessarily indicative of the results that may be expected for any future period.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended May 31,
|
|
(in thousands of US$)
|
|
2015
|
|
|
2016
|
|
|
2017
|
|
Net revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Educational programs and services
|
|
|
1,102,974
|
|
|
|
1,309,339
|
|
|
|
1,608,954
|
|
Books and others
|
|
|
143,792
|
|
|
|
169,009
|
|
|
|
190,555
|
|
Total net revenues
|
|
|
1,246,766
|
|
|
|
1,478,348
|
|
|
|
1,799,509
|
|
Operating costs and expenses
(1)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues
|
|
|
(526,320
|
)
|
|
|
(614,364
|
)
|
|
|
(749,586
|
)
|
Selling and marketing
|
|
|
(188,483
|
)
|
|
|
(197,897
|
)
|
|
|
(232,826
|
)
|
General and administrative
|
|
|
(378,434
|
)
|
|
|
(471,010
|
)
|
|
|
(554,948
|
)
|
Total operating costs and expenses
|
|
|
(1,093,237
|
)
|
|
|
(1,283,271
|
)
|
|
|
(1,537,360
|
)
|
Gain on disposal of subsidiaries
|
|
|
|
|
|
|
3,760
|
|
|
|
|
|
Operating income
|
|
|
153,529
|
|
|
|
198,837
|
|
|
|
262,149
|
|
Other income, net
|
|
|
66,947
|
|
|
|
68,447
|
|
|
|
68,560
|
|
Provision for income taxes
|
|
|
(26,221
|
)
|
|
|
(37,531
|
)
|
|
|
(50,624
|
)
|
Loss from equity method investments
|
|
|
(1,537
|
)
|
|
|
(4,425
|
)
|
|
|
(3,289
|
)
|
Net income
|
|
|
192,718
|
|
|
|
225,328
|
|
|
|
276,796
|
|
Net loss (gain) attributable to the noncontrolling interests
|
|
|
295
|
|
|
|
(444
|
)
|
|
|
(2,339
|
)
|
Net income attributable to New Oriental Education & Technology Group Inc.
|
|
|
193,013
|
|
|
|
224,884
|
|
|
|
274,457
|
|
(1)
|
Share-based compensation expenses are included in our operating costs and expenses as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended May 31,
|
|
(in thousands of US$)
|
|
2015
|
|
|
2016
|
|
|
2017
|
|
General and administrative
|
|
|
15,689
|
|
|
|
16,810
|
|
|
|
20,287
|
|
Fiscal Year Ended May 31, 2017 Compared to Fiscal Year Ended May 31, 2016
Net Revenues
. Our total net revenues increased by 21.7% from US$1,478.3 million for the fiscal year ended May 31, 2016 to US$1,799.5 million for
the fiscal year ended May 31, 2017. This increase was due to the increased revenues from both educational programs and services as well as from books and others.
|
|
|
Educational Programs and Services
. Net revenues from our educational programs and services increased by 22.9% from US$1,309.3 million for the fiscal year ended May 31, 2016 to US$1,608.9 million for
the fiscal year ended May 31, 2017. This increase was primarily due to the growth in revenues from language training and test preparation courses from US$1,238.6 million in the fiscal year ended May 31, 2016 to US$1,510.5 million in the
fiscal year ended May 31, 2017. The increase in revenues from language training and test preparation courses was mainly attributable to the increase in the number of student enrollments from approximately 3.6 million in the fiscal year
ended May 31, 2016 to over 4.8 million in the fiscal year ended May 31, 2017, and in particular, the increased number of student enrollments in test preparation courses for middle and high school students and language training courses
for children. Our total numbers of schools and learning centers were 77 and 778, respectively, as of May 31, 2017, compared to 66 and 682, respectively, as of May 31, 2016.
|
|
|
|
Books and Others
. Net revenues from sales of books and other educational materials and services increased by 12.7% from US$169.0 million in the fiscal year ended May 31, 2016 to US$190.6 million in
the fiscal year ended May 31, 2017, primarily due to the increased revenue of US$18.8 million from the overseas consulting business in the fiscal year ended May 31, 2017.
|
72
Operating Costs and Expenses
. Our total operating costs and expenses increased by 19.8% from US$1,283.3
million in the fiscal year ended May 31, 2016 to US$1,537.4 million in the fiscal year ended May 31, 2017. This increase resulted from increases in our cost of revenues, selling and marketing expenses and general and administrative
expenses line items.
|
|
|
Cost of Revenues
. Our cost of revenues increased by 22.0% from US$614.4 million in the fiscal year ended May 31, 2016 to US$749.6 million in the fiscal year ended May 31, 2017. This increase was
primarily due to an increase in teaching fees and performance-linked bonuses paid to our teachers during the fiscal year ended May 31, 2017.
|
|
|
|
Selling and Marketing Expenses
. Our selling and marketing expenses increased by 17.7% from US$197.9 million in the fiscal year ended May 31, 2016 to US$232.8 million in the fiscal year ended
May 31, 2017. This increase was primarily due to the addition of over 500 new sales and marketing personnel during the fiscal year ended May 31, 2017.
|
|
|
|
General and Administrative Expenses
. Our general and administrative expenses increased by 17.8% from US$471.0 million in the fiscal year ended May 31, 2016 to US$554.9 million in the fiscal year ended
May 31, 2017. This increase was primarily due to an increase of US$56 million in human resources expenses and an increase of US$13.2 million in general operational expenses during the fiscal year ended May 31, 2017.
|
Other Income, Net
. Our other income, net which primarily includes interest income, increased from US$68.4 million in the fiscal
year ended May 31, 2016 to US$68.6 million in the fiscal year ended May 31, 2017.
Provision for Income Tax
. Our income tax
expense increased by 34.9% from US$37.5 million in the fiscal year ended May 31, 2016 to US$50.6 million in the fiscal year ended May 31, 2017. The increase was primarily due to higher income tax rate incurred in the fiscal year ended
May 31, 2017.
Net Income
. As a result of the foregoing, our net income for the fiscal year ended May 31, 2017 was US$276.8
million, compared to US$225.3 million for the fiscal year ended May 31, 2016.
Fiscal Year Ended May 31, 2016 Compared to Fiscal
Year Ended May 31, 2015
Net Revenues
. Our total net revenues increased by 18.6% from US$1,246.8 million for the fiscal year ended
May 31, 2015 to US$1,478.3 million for the fiscal year ended May 31, 2016. This increase was due to the increased revenues from both educational programs and services as well as from books and others.
|
|
|
Educational Programs and Services
. Net revenues from our educational programs and services increased by 18.7% from US$1,103.0 million for the fiscal year ended May 31, 2015 to US$1,309.3 million for
the fiscal year ended May 31, 2016. This increase was primarily due to the growth in revenues from language training and test preparation courses from US$1,040.4 million in the fiscal year ended May 31, 2015 to US$1,238.6 million in the
fiscal year ended May 31, 2016. The increase in revenues from language training and test preparation courses was mainly attributable to the increase in the number of student enrollments from approximately 2.9 million in the fiscal year
ended May 31, 2015 to over 3.6 million in the fiscal year ended May 31, 2016, and in particular, the increased number of student enrollments in test preparation courses for middle and high school students and language training courses
for children. Our total numbers of schools and learning centers were 66 and 682, respectively, as of May 31, 2016, compared to 60 and 664, respectively, as of May 31, 2015.
|
|
|
|
Books and Others
. Net revenues from sales of books and other educational materials and services increased by 17.5% from US$143.8 million in the fiscal year ended May 31, 2015 to US$169.0 million in
the fiscal year ended May 31, 2016, primarily due to the increased revenue of US$17.5 million from the overseas consulting business in the fiscal year ended May 31, 2016.
|
Operating Costs and Expenses
. Our total operating costs and expenses increased by 17.4% from US$1,093.2 million in the fiscal year ended May 31,
2015 to US$1,283.3 million in the fiscal year ended May 31, 2016. This increase resulted from increases in our cost of revenues, selling and marketing expenses and general and administrative expenses line items.
73
|
|
|
Cost of Revenues
. Our cost of revenues increased by 16.7% from US$526.3 million in the fiscal year ended May 31, 2015 to US$614.4 million in the fiscal year ended May 31, 2016. This increase was
primarily due to an increase in teaching fees and performance-linked bonuses paid to our teachers during the fiscal year ended May 31, 2016.
|
|
|
|
Selling and Marketing Expenses
. Our selling and marketing expenses by 5.0% from US$188.5 million in the fiscal year ended May 31, 2015 to US$197.9 million in the fiscal year ended May 31, 2016.
This increase was primarily due to the addition of over 400 new sales and marketing personnel during the fiscal year ended May 31, 2016.
|
|
|
|
General and Administrative Expenses
. Our general and administrative expenses increased by 24.5% from US$378.4 million in the fiscal year ended May 31, 2015 to US$471.0 million in the fiscal year ended
May 31, 2016. This increase was primarily due to an increase of US$31.7 million in human resources expenses and an increase of US$20.3 million in general operational expenses during the fiscal year ended May 31, 2016.
|
Other Income, Net
. Our other income, net which primarily includes interest income, increased from US$66.9 million in the fiscal
year ended May 31, 2015 to US$68.4 million in the fiscal year ended May 31, 2016.
Provision for Income Tax
. Our income tax
expense increased by 43.1% from US$26.2 million in the fiscal year ended May 31, 2015 to US$37.5 million in the fiscal year ended May 31, 2016. The increase was primarily due to higher income tax rate incurred in the fiscal year ended
May 31, 2016.
Net Income.
As a result of the foregoing, our net income for the fiscal year ended May 31, 2016 was US$225.3
million, compared to US$192.7 million for the fiscal year ended May 31, 2015.
Discussion of Segment Operations
During the year ended May 31, 2015, we identified six operating segments, including language training and test preparation, primary and secondary school
education, online education, content development and distribution, pre-school education and overseas study consulting services. During the year ended May 31, 2016, we further separated study tour previously included in the overseas study
consulting services as a separate operating segment. The seven operation segments for the years ended May 31, 2016 and 2017 are identified as language training and test preparation, primary and secondary school education, online education,
content development and distribution, pre-school education, overseas study consulting services and study tour. Language training and test preparation and primary and secondary school education have been identified as reportable segments. Online
education, content development and distribution, pre-school education, overseas study consulting services and study tour operating segments were aggregated as others because individually they do not exceed the 10% quantitative threshold.
Net revenues from our language training and test preparation courses accounted for 83.4%, 83.8% and 83.9%, respectively, of our total net revenues in the
fiscal years ended May 31, 2015, 2016 and 2017. Net revenues from our primary and secondary school education accounted for 2.1%, 2.0% and 1.7%, respectively, of our total net revenues in the fiscal years ended May 31, 2015, 2016 and 2017.
We recognize revenues from course fees collected for enrollment in our language training and test preparation courses proportionally as we deliver the instruction over the period of the course. We recognize revenues from school fees collected for
enrollment in New Oriental Chinas primary and secondary schools ratably over the corresponding academic year.
Cost of revenues for our language
training and test preparation courses primarily consists of teaching fees and performance-linked bonuses paid to our teachers, rental payments for our schools and learning centers and, to a lesser degree, depreciation and amortization of property
and equipment used in the provision of educational services.
Cost of revenues for our primary and secondary schools primarily consists of compensation
and benefits to school teachers and depreciation and amortization of property and equipment used in the provision of educational services.
74
Selling and marketing expenses for each of our reportable segments primarily consist of marketing and promotion
expenses and other costs related to our selling and marketing activities for the corresponding reportable segment.
General and administrative expenses
for our language training and test preparation courses primarily consist of compensation and benefits of administrative staff of our language training and test preparation courses segment, compensation and benefits, rental and utilities payments
relating to office and administrative functions of our language training and test preparation courses segment, depreciation and amortization of property and equipment used in the general and administrative activities of our language training and
test preparation courses segment and, to a lesser extent, costs to develop our curriculum. General and administrative expenses for our primary and secondary school education segment primarily consist of compensation and benefits of administrative
staff of our primary and secondary schools, depreciation and amortization of property and equipment used in the general and administrative activities of our primary and secondary schools and, to a lesser extent, costs to develop our curriculum.
The following table lists our net revenues and operating costs and expenses by reportable segment for the periods indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended May 31,
|
|
(in thousands of US$)
|
|
2015
|
|
|
2016
|
|
|
2017
|
|
Net revenues of reportable segments:
|
|
|
|
|
|
|
|
|
|
|
|
|
Language training and test preparation courses
|
|
|
1,040,380
|
|
|
|
1,238,572
|
|
|
|
1,510,497
|
|
Primary and secondary education
|
|
|
26,735
|
|
|
|
30,011
|
|
|
|
30,782
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenues of reportable segments
|
|
|
1,067,115
|
|
|
|
1,268,583
|
|
|
|
1,541,279
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenues of our company
|
|
|
1,246,766
|
|
|
|
1,478,348
|
|
|
|
1,799,509
|
|
Operating costs and expenses of reportable segments:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Language training and test preparation courses
|
|
|
(442,994
|
)
|
|
|
(516,370
|
)
|
|
|
(623,364
|
)
|
Primary and secondary education
|
|
|
(9,083
|
)
|
|
|
(9,812
|
)
|
|
|
(10,465
|
)
|
Selling and marketing:
|
|
|
|
|
|
|
|
|
|
|
|
|
Language training and test preparation courses
|
|
|
(122,697
|
)
|
|
|
(125,815
|
)
|
|
|
(146,544
|
)
|
Primary and secondary education
|
|
|
(1,039
|
)
|
|
|
(744
|
)
|
|
|
(1,347
|
)
|
General and administrative:
|
|
|
|
|
|
|
|
|
|
|
|
|
Language training and test preparation courses
|
|
|
(245,315
|
)
|
|
|
(296,686
|
)
|
|
|
(363,949
|
)
|
Primary and secondary education
|
|
|
(10,068
|
)
|
|
|
(12,558
|
)
|
|
|
(11,317
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating costs and expenses of reportable segments
|
|
|
(831,196
|
)
|
|
|
(961,985
|
)
|
|
|
(1,156,986
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating costs and expenses of our company
|
|
|
(1,093,237
|
)
|
|
|
(1,283,271
|
)
|
|
|
(1,537,360
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended May 31, 2017 Compared to Fiscal Year Ended May 31, 2016
Net Revenues of Reportable Segments
|
|
|
Language Training and Test Preparation Courses
. Net revenues from our language training and test preparation courses increased by 22.0% from US$1,238.6 million for the fiscal year ended May 31, 2016
to US$1,510.5 million for the fiscal year ended May 31, 2017, primarily due to the factors discussed in Results of OperationsFiscal Year Ended May 31, 2017 Compared to Fiscal Year Ended May 31, 2016Net
RevenuesEducational Programs and Services.
|
|
|
|
Primary and Secondary School Education
. Net revenues from our primary and secondary school education increased by 2.6% from US$30.0 million for the fiscal year ended May 31, 2016 to US$30.8 million
for the fiscal year ended May 31, 2017, primarily due to an increase in the number of students as we offered additional classes.
|
75
Operating Costs and Expenses of Reportable Segments
Cost of Revenues
|
|
|
Language Training and Test Preparation Courses
. Cost of revenues for our language training and test preparation courses increased by 20.7% from US$516.4 million for the fiscal year ended May 31, 2016
to US$623.4 million for the fiscal year ended May 31, 2017, primarily due to the factors discussed in Results of OperationsFiscal Year Ended May 31, 2017 Compared to Fiscal Year Ended May 31, 2016Operating
Costs and ExpensesCost of Revenues.
|
|
|
|
Primary and Secondary School Education
. Cost of revenues for our primary and secondary school education increased from US$9.8 million for the fiscal year ended May 31, 2016 to US$10.5 million for the
fiscal year ended May 31, 2017, primarily due to an increase in teaching fees paid to our teachers.
|
Selling and Marketing
Expenses
|
|
|
Language Training and Test Preparation Courses
. Selling and marketing expenses for our language training and test preparation courses increased by 16.5% from US$125.8 million for the fiscal year ended
May 31, 2016 to US$146.5 million for the fiscal year ended May 31, 2017, primarily due to the factors discussed in Results of OperationsFiscal Year Ended May 31, 2017 Compared to Fiscal Year Ended May 31,
2016Operating Costs and ExpensesSelling and Marketing Expenses.
|
|
|
|
Primary and Secondary School Education
. Selling and marketing expenses for our primary and secondary school education decreased from US$0.7 million for the fiscal year ended May 31, 2016 to US$1.3
million for the fiscal year ended May 31, 2017.
|
General and Administrative Expenses
|
|
|
Language Training and Test Preparation Courses
. General and administrative expenses for our language training and test preparation courses increased by 22.7% from US$296.7 million for the fiscal year ended
May 31, 2016 to US$363.9 million for the fiscal year ended May 31, 2017, primarily due to the factors discussed in Results of OperationsFiscal Year Ended May 31, 2017 Compared to Fiscal Year Ended May 31,
2016Operating Costs and ExpensesGeneral and Administrative Expenses.
|
|
|
|
Primary and Secondary School Education
. General and administrative expenses for our primary and secondary school education decreased slightly from US$12.6 million for the fiscal year ended May 31,
2016 to US$11.3 million for the fiscal year ended May 31, 2017.
|
Fiscal Year Ended May 31, 2016 Compared to Fiscal
Year Ended May 31, 2015
Net Revenues of Reportable Segments
|
|
|
Language Training and Test Preparation Courses
. Net revenues from our language training and test preparation courses increased by 19.0% from US$1,040.4 million for the fiscal year ended May 31, 2015
to US$1,238.6 million for the fiscal year ended May 31, 2016, primarily due to the factors discussed in Results of OperationsFiscal Year Ended May 31, 2016 Compared to Fiscal Year Ended May 31, 2015Net
RevenuesEducational Programs and Services.
|
|
|
|
Primary and Secondary School Education
. Net revenues from our primary and secondary school education increased by 12.3% from US$26.7 million for the fiscal year ended May 31, 2015 to US$30.0 million
for the fiscal year ended May 31, 2016, primarily due to an increase in the number of students as we offered additional classes.
|
76
Operating Costs and Expenses of Reportable Segments
Cost of Revenues
|
|
|
Language Training and Test Preparation Courses
. Cost of revenues for our language training and test preparation courses increased by 16.6% from US$443.0 million for the fiscal year ended May 31, 2015
to US$516.4 million for the fiscal year ended May 31, 2016, primarily due to the factors discussed in Results of OperationsFiscal Year Ended May 31, 2016 Compared to Fiscal Year Ended May 31, 2015Operating
Costs and ExpensesCost of Revenues.
|
|
|
|
Primary and Secondary School Education
. Cost of revenues for our primary and secondary school education increased from US$9.1 million for the fiscal year ended May 31, 2015 to US$9.8 million for the
fiscal year ended May 31, 2016, primarily due to an increase in teaching fees paid to our teachers.
|
Selling and Marketing
Expenses
|
|
|
Language Training and Test Preparation Courses
. Selling and marketing expenses for our language training and test preparation courses increased by 2.5% from US$122.7 million for the fiscal year ended
May 31, 2015 to US125.8 million for the fiscal year ended May 31, 2016, primarily due to the factors discussed in Results of OperationsFiscal Year Ended May 31, 2016 Compared to Fiscal Year Ended May 31,
2015Operating Costs and ExpensesSelling and Marketing Expenses.
|
|
|
|
Primary and Secondary School Education
. Selling and marketing expenses for our primary and secondary school education decreased from US$1.0 million for the fiscal year ended May 31, 2015 to US$0.7
million for the fiscal year ended May 31, 2016.
|
General and Administrative Expenses
|
|
|
Language Training and Test Preparation Courses
. General and administrative expenses for our language training and test preparation courses increased by 20.9% from US$245.3 million for the fiscal year ended
May 31, 2015 to US$296.7 million for the fiscal year ended May 31, 2016, primarily due to the factors discussed in Results of OperationsFiscal Year Ended May 31, 2016 Compared to Fiscal Year Ended May 31,
2015Operating Costs and ExpensesGeneral and Administrative Expenses.
|
|
|
|
Primary and Secondary School Education
. General and administrative expenses for our primary and secondary school education increased by 24.7% from US$10.1 million for the fiscal year ended May 31,
2015 to US$12.6 million for the fiscal year ended May 31, 2016, primarily due to an increase in salaries and welfare benefits for administrative staff.
|
Inflation
According to the National Bureau of Statistics
of China, the year-over-year percent changes in the consumer price index in China for May 2015, 2016 and 2017 were increases of 1.2%, 2.0% and 1.5%, respectively. Inflation has had some impact on our operations in recent years, in the form of higher
salaries for our teachers and other staff and higher rental payments for certain of the properties we lease. Additionally, because a substantial portion of our assets consists of cash and cash equivalents and short-term investments in RMB, high
inflation could significantly reduce the value and purchasing power of these assets. We are not able to hedge our exposure to higher inflation in China. We can provide no assurance that we will not be affected in the future should rates of inflation
increase again in China.
Critical Accounting Policies
We prepare our financial statements in accordance with U.S. GAAP, which requires us to make judgments, estimates and assumptions that affect the reported
amounts of our assets and liabilities and the disclosure of our contingent assets and liabilities at the end of each fiscal period and the reported amounts of revenues and expenses during each fiscal period. We continually evaluate these judgments
and estimates based on our own historical experience, knowledge and assessment of current business and other conditions, our expectations regarding the future based on available information and assumptions that we believe to be reasonable, which
together form our basis for making judgments about matters that are not readily apparent from other sources. Since the use of estimates is an integral component of the financial reporting process, our actual results could differ from those
estimates. Some of our accounting policies require a higher degree of judgment than others in their application.
77
The selection of critical accounting policies, the judgments and other uncertainties affecting application of
those policies and the sensitivity of reported results to changes in conditions and assumptions are factors that should be considered when reviewing our financial statements. We believe the following accounting policy involves the most significant
judgments and estimates used in the preparation of our financial statements.
Revenue recognition
We recognize revenue when persuasive evidence that an arrangement exists, delivery of the product or service has occurred, the selling price is both fixed and
determinable and collection is reasonably assured. The primary sources of our companys revenues are as follows:
Educational programs and
services
Educational programs and services consist of language training and test preparation courses, primary and secondary school education and
college admission examination retaking training services. Tuition is generally paid in advance and is initially recorded as deferred revenue. Tuition revenue for educational programs and services is recognized proportionately as the instructions are
delivered, and is reported net of business taxes, VAT and related surcharges, and tuition refunds. Students are entitled to a short term course trial period which commences on the date the course begins. Tuition refunds are provided to students if
they decide within the trial period that they no longer want to take the course. Tuition refunds have been insignificant in the fiscal years ended May 31, 2015, 2016 and 2017, respectively. After the trial period, if a student withdraws from a
class, usually no refunds will be provided and any collected but unearned portion of the fee is recognized at that time.
We also sell online-learning
cards primarily to distributors at fixed prices after deducting a pre-determined fixed discount to the face value of the cards. Online-learning card sales represent prepaid service fees received from students for e-learning services. The prepaid
service fee is recorded as deferred revenue upon receiving the upfront payment. Revenue is recognized upon actual usage of the cards by the students based on the number of minutes the students use the e-learning services, of which the actual usage
is tracked by us on an individual basis. Upon the expiration of the online-learning card, which ranges from six months to one year from the date of sale of the card to the distributor, we will recognize the remaining unused minutes as revenue.
Books and others
Our company sells educational books or
other educational materials either through our own book stores or websites or through third-party distributors. Revenue from sales made through our book stores is recognized upon sales to customers. Revenue through distributors is recognized once
the products are sold to the end customers.
Consolidation of Variable Interest Entity
PRC laws and regulations currently require any foreign entity that invests in the education business in China to be an educational institution with relevant
experience in providing educational services outside China. Our offshore holding companies are not educational institutions and do not provide educational services outside China. To comply with the PRC laws and regulations, we conduct substantially
all of our business through New Oriental China and Xuncheng, our variable interest entities, and their schools and subsidiaries. We have, through our wholly-owned subsidiaries in the PRC, entered into contractual arrangements with New Oriental
China, its schools and subsidiaries, Xuncheng and its subsidiary, and their shareholders such that New Oriental China and its schools and subsidiaries, Xuncheng and its subsidiary (collectively the VIEs) are considered variable interest
entities for which we are considered their primary beneficiary. We believe we have substantive kick-out rights per the terms of the option agreement, which gives us the power to control the shareholder of New Oriental China and Xuncheng. More
specifically, we believe that the terms of the exclusive option agreement are currently exercisable and legally enforceable under PRC laws and regulations. We also believe that the minimum amount of consideration permitted by the applicable PRC law
to exercise the option does not represent a financial barrier or disincentive for us to exercise our rights under the exclusive option agreement. A simple majority vote of our board of directors is required to pass a resolution to exercise our
rights under the exclusive option agreement, for which consent of the shareholder of New Oriental China and Xuncheng is not required. Therefore, we believe this gives us the power to direct the activities that most significantly impact the
VIEs economic performance. We believe that our ability to exercise effective control, together with the service agreements and the equity pledge agreements, give us the rights to receive substantially all of the economic benefits from the VIEs
in consideration for the services provided by our wholly-owned subsidiaries in China. Accordingly, as the primary beneficiary of the VIEs and in accordance with U.S. GAAP, we consolidate their financial results and assets and liabilities in our
consolidated financial statements. In September 2015, the contractual arrangements with Xuncheng Network were terminated, subsequent to which we continued to consolidate Xuncheng Network through voting interest held by New Oriental China.
78
As advised by Tian Yuan Law Firm, our PRC counsel, our corporate structure in China complies with all existing
PRC laws and regulations. However, our PRC legal counsel has also advised us that as there are substantial uncertainties regarding the interpretation and application of PRC laws and regulations, and we cannot assure you that the PRC government would
agree that our corporate structure or any of the above contractual arrangements comply with current or future PRC laws or regulations. PRC laws and regulations governing the validity of these contractual arrangements are uncertain and the relevant
government authorities may have broad discretion in interpreting these laws and regulations. See Item 3. Risk factorsD. Risks Related to Our Corporate StructureIf the PRC government finds that the agreements that establish the
structure for operating our China business do not comply with applicable PRC laws and regulations, we could be subject to severe penalties and Risks Related to Our Corporate Structure We rely on contractual arrangements for
our operations in China, which may not be as effective in providing operational control as direct ownership, Risks Related to Our Corporate Structure Our ability to enforce the equity pledge agreements between us and New
Oriental Chinas shareholder may be subject to limitations based on PRC laws and regulations and Risks Related to Our Corporate Structure The controlling shareholder of Century Friendship, which is the sole shareholder
of New Oriental China, may have potential conflicts of interest with us, and if any such conflicts of interest are not resolved in our favor, our business may be materially and adversely affected.
We are a holding company with no material operations of our own. We conduct substantially all of our education business in China through contractual
arrangements with the VIEs. See Item 4. Information on the CompanyC. Organizational StructureContractual Arrangements with New Oriental China, its Schools and Subsidiaries and Its Shareholder and Item 4. Information on
the CompanyC. Organizational StructureContractual Arrangements with Xuncheng Network and Its Shareholder for a summary of these contractual arrangements. In the fiscal years ended May 31, 2015, 2016 and 2017, the VIEs
contributed in aggregate 97.9%, 97.7% and 98.8%, respectively, of our total net revenues. Our operations not conducted through contractual arrangements with the VIEs primarily consist of our kindergarten programs and the leasing of our commercial
property. As of the fiscal years ended May 31, 2016 and 2017, the VIEs accounted for an aggregate of 69.8% and 71.1%, respectively, of our total assets, and 93.7% and 94.6%, respectively, of our total liabilities. The assets not associated with
the VIEs primarily consist of cash, investments and commercial property.
Business Combinations
Business combinations are recorded using the acquisition method of accounting. The purchase price of the acquisition is allocated to the tangible assets,
liabilities, identifiable intangible assets acquired and non-controlling interest, if any, based on their estimated fair values as of the acquisition date. The excess of the purchase price over those fair values is recorded as goodwill.
Acquisition-related expenses and restructuring costs are expensed as incurred.
Where the consideration in an acquisition includes contingent
consideration and the payment of which depends on the achievement of certain specified conditions post-acquisition, the contingent consideration is recognized and measured at its fair value at the acquisition date and if recorded as a liability, it
is subsequently carried at fair value with changes in fair value reflected in earnings. As of May 31, 2017, there was no contingent consideration outstanding.
79
Share-based Compensation
Share-based payments to employees and directors are measured based on the grant-date fair value of the equity instrument issued and recognized as compensation
expense net of a forfeiture rate on a straight-line basis over the requisite service period, with a corresponding addition to paid-in capital. We use the binomial option pricing model to measure the fair value of options granted and the quoted
market price of our companys equity shares to measure the fair value of non-vested equity shares granted to employees at each measurement date. The binomial option pricing model is adopted because we believe that considering the possibility of
exercise of an option over the life of the option, as affected by the reality of changing stock prices and non-constant risk free rates, would better reflect the measurement objective of relevant accounting literature.
The amount of compensation expense recognized at any date is at least equal to the portion of the fair value of the awards that are vested as of that date.
The estimate of forfeitures is based on historical turnover rate and will be adjusted over the requisite service period to the extent that actual forfeitures differ, or are expected to differ from such estimates. Changes in estimated forfeitures
will be recognized through a cumulative catch-up adjustment in the period of change and will impact the amount of share-based compensation expense to be recognized in future periods.
Equity Method Investments
Investee companies over
which we have the ability to exercise significant influence, but do not have a controlling interest, are accounted for using the equity method. Significant influence is generally considered to exist when we have an ownership interest in the voting
stock of the investee between 20% and 50%. Other factors, such as representation on the investees board of directors, voting rights and the impact of commercial arrangements, are also considered in determining whether the equity method of
accounting is appropriate. For certain investments, where we hold more than 50% equity interest, we may only have significant influence but not control over the investees. Equity method is also used to account for these investments.
An impairment charge is recorded if the carrying amount of the investment exceeds its fair value and this condition is determined to be other-than-temporary.
We estimated the fair value of the investee company based on comparable quoted price for similar investment in active market, if applicable, or discounted cash flow approach which requires significant judgments, including the estimation of future
cash flows, which is dependent on internal forecasts, the estimation of long term growth rate of a companys business, the estimation of the useful life over which cash flows will occur, and the determination of the weighted average cost of
capital. We did not record impairment losses on our equity method investment during the years ended May 31, 2015, 2016 and 2017, respectively.
Cost Method Investments
For investee companies
over which we do not have significant influence and a controlling interest, we carry the investment at cost and recognize as income any dividend received from distribution of the investees earnings.
We review our cost method investments for impairment whenever an event or circumstance indicates that an other-than-temporary impairment has occurred. We
consider available quantitative and qualitative evidence in evaluating potential impairment of our cost method investments. An impairment charge is recorded if the cost of an investment exceeds its fair value and such excess is determined to be
other-than-temporary. We did not record impairment losses on our cost method investment during the years ended May 31, 2015, 2016 and 2017, respectively.
Available-for-sale Securities Investments
For
investments in investees stocks which are determined to be debt securities, we account for them as long-term available-for-sale investments when they are not classified as either trading or held-to-maturity investments.
Available-for-sale investments are carried at their fair values and the unrealized gains or losses from the changes in fair values are included in accumulated
other comprehensive income.
80
We review our investments for other-than-temporary impairment based on the specific identification method. We
consider available quantitative and qualitative evidence in evaluating potential impairment of our investments. If the cost of an investment exceeds the investments fair value, we consider, among other factors, general market conditions,
government economic plans, the duration and the extent to which the fair value of the investment is less than the cost, our intent and ability to hold the investment, and the financial condition and near term prospects of the investees. We
recognized no impairment charge for the years ended May 31, 2015 and 2016, respectively, and we recognized US$2,338 impairment charge for the year ended May 31, 2017.
Long-term held-to-maturity investment
The
long-term held-to-maturity investment represents a trust guaranteed by a bank with the maturity of more than one year, which is stated at its amortized cost. As of May 31, 2017, the related balance was reclassified to long-term investment due
to the maturity of the investment being less than one year.
Income Taxes
As part of the process of preparing our consolidated financial statements, we are required to estimate our income taxes in each of the jurisdictions in which
we operate. Significant judgment is required in determining our provision for income taxes and income tax assets and liabilities, including evaluating uncertainties in the application of accounting principles and complex tax laws.
We account for income taxes using the asset and liability approach. Under this method, deferred tax assets and liabilities are determined based on the
difference between the financial reporting and tax bases of assets and liabilities using enacted tax rates that will be in effect for the period in which the differences are expected to reverse. The effect on deferred taxes of a change in tax rates
is recognized in the consolidated statements of operations in the period of change. Deferred tax assets are reduced by a valuation allowance when it is considered more likely than not that some portion or all of the deferred tax assets will not be
realized.
We account for uncertain tax positions by reporting a liability for unrecognized tax benefits resulting from uncertain tax positions taken or
expected to be taken in a tax return. Tax benefits are recognized from uncertain tax positions when we believe that it is more likely than not that the tax position will be sustained on examination by the taxing authorities based on the technical
merits of the position. We recognize interest and penalties, if any, related to unrecognized tax benefits in income tax expense.
Uncertainties exist with
respect to how the PRCs Enterprise Income Tax Law applies to our overall operations, and more specifically, with regard to our tax residency status. The Enterprise Income Tax Law includes a provision specifying that legal entities organized
outside of the PRC will be considered residents for PRC income tax purposes if their place of effective management or control is within the PRC. The implementation rules to the Enterprise Income Tax Law provide that non-resident legal entities will
be considered PRC residents if substantial and overall management and control over the manufacturing and business operations, personnel, accounting, properties, among others, occur within the PRC. Despite the present uncertainties resulting from the
limited PRC tax guidance on the issue, we do not believe that our legal entities organized outside of the PRC should be treated as residents for the Enterprise Income Tax Laws purposes. If one or more of our legal entities organized outside of
the PRC were characterized as PRC tax residents, the impact would adversely affect our results of operation. See Item 3. Key InformationD. Risk FactorsRisks Related to Doing Business in ChinaWe may be treated as a resident
enterprise for PRC tax purposes under the EIT Law, which may subject us to PRC income tax for our global income and withholding for any dividends we pay to our non-PRC shareholders and ADS holders.
Allowance for doubtful accounts
Accounts
receivable represents amounts due from corporate customers of our schools and subsidiaries. We provide allowance for doubtful accounts equal to the estimated amounts. Our estimates are based on historical collection experience and a review of the
current status of accounts receivable and advances to suppliers. Accounts receivable and advances to suppliers are presented net of allowance for doubtful accounts.
Economic lives and impairment of property and equipment
Property and equipment are stated at cost less accumulated depreciation and amortization. Depreciation and amortization is calculated on a straight line basis
over the following estimated economic lives:
81
|
|
|
Buildings
|
|
20-50 years
|
Transportation equipment
|
|
10 years
|
Furniture and education equipment
|
|
5 years
|
Computer equipment and software
|
|
3 years
|
Leasehold improvements
|
|
Shorter of the lease term or estimated economic life
|
Judgment is required to determine the estimated useful lives of property and equipment, especially for the equipment,
including determining how long existing equipment can function and when new technologies will be introduced at cost-effective price points to replace existing equipment. Changes in these estimates and assumptions could materially impact our
financial position and results of operations.
We review its long-lived assets for impairment whenever events or changes in circumstances indicate that
the carrying amount of an asset may no longer be recoverable. When these events occur, we measure impairment by comparing the carrying value of the long-lived assets to the estimated undiscounted future cash flows expected to result from the use of
the assets and their eventual disposition. If the sum of the expected undiscounted cash flow is less than the carrying amount of the assets, we would recognize an impairment loss based on the fair value of the assets. We recognized no impairment
loss on long-lived assets for the years ended May 31, 2015, 2016 and 2017.
Impairment of goodwill
Goodwill represents the excess of the purchase price over the fair value of identifiable net assets acquired in business combinations. Goodwill is not
amortized but is tested for impairment annually or more frequently if events or changes in circumstances indicate that it might be impaired.
We review
the carrying value of intangible assets not subject to amortization, including goodwill, to determine whether impairment may exist, whenever events or changes in circumstances indicate that the carrying amount of an asset may no longer be
recoverable at least annually.
Goodwill is tested for impairment at the reporting unit level on an annual basis (May 31 of each year) and between annual
tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value. These events or circumstances could include a significant change in the stock prices, business
climate, legal factors, operating performance indicators, competition, or sale or disposition of a significant portion of a reporting unit.
Application
of the goodwill impairment test requires judgment, including the identification of reporting units, assignment of assets and liabilities to reporting units, assignment of goodwill to reporting units, and determination of the fair value of each
reporting unit. The estimation of fair value of each reporting unit using a discounted cash flow methodology also requires significant judgments, including estimation of future cash flows, which is dependent on internal forecasts, estimation of the
long-term rate of growth for our business, estimation of the useful life over which cash flows will occur, and determination of the our weighted average cost of capital. The estimates used to calculate the fair value of a reporting unit change from
year to year based on operating results and market conditions. Changes in these estimates and assumptions could materially affect the determination of fair value and goodwill impairment for the reporting unit.
In order to test goodwill for impairment, we first assess qualitative factors to determine whether it is more likely than not that the fair value
of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test. If it is more likely than not that the fair value of a reporting unit is less than its carrying
amount, goodwill is then tested following a two-step process. The first step compares the fair value of each reporting unit to its carrying amount, including goodwill. If the fair value of each reporting unit exceeds its carrying amount, goodwill is
not considered to be impaired and the second step will not be required. If the carrying amount of a reporting unit exceeds its fair value, the second step compares the implied fair value of goodwill to the carrying value of a reporting units
goodwill.
The implied fair value of goodwill is determined in a manner similar to accounting for a business combination with the allocation of the
assessed fair value determined in the first step to the assets and liabilities of the reporting unit. The excess of the fair value of the reporting unit over the amounts assigned to the assets and liabilities is the implied fair value of goodwill.
An impairment loss is recognized for any excess in the carrying value of goodwill over the implied fair value of goodwill.
82
We assessed the qualitative factors to determine it is not more likely than not that the fair value of each
reporting unit is less than its respective carrying amount. Impairment of goodwill were nil, nil, and $1.6 million during the years ended May 31, 2015, 2016 and 2017, respectively.
Recently Issued Accounting Pronouncements
Refer
to Note 2 to our consolidated financial statements regarding recent issued accounting pronouncements.
83
B.
Liquidity and Capital Resources
Our principal source of liquidity has been cash generated from operating activities. As of May 31, 2017, we had US$641.0 million in cash and cash
equivalents. Our cash and cash equivalents consist of cash on hand and liquid investments that are unrestricted as to withdrawal or use, have maturities of three months or less and are placed with banks and other financial institutions. Although we
consolidate the results of New Oriental China and its schools and subsidiaries, we do not have direct access to the cash and cash equivalents or future earnings of New Oriental China. However, a portion of the cash balances of New Oriental China and
its schools and subsidiaries are paid to our wholly-owned subsidiaries in China pursuant to contractual arrangements for the services our subsidiaries provide to New Oriental China and its schools and subsidiaries.
We expect to require cash to fund our ongoing business needs, particularly the rent and other costs and expenses relating to opening new schools and learning
centers. We opened 191 new learning centers and closed 84 existing centers in fiscal year 2017. We plan to continue to add schools and learning centers in the future with a focus on opening new learning centers in fast growing, high profit margin
cities. We expect to incur capital expenditures ranging from approximately RMB1.0 million (US$0.1 million) to RMB4.0 million (US$0.6 million) per new school depending primarily on the size and geographic location of the school. Other cash needs
include acquisitions of businesses and properties that complement our operations when suitable opportunities arise. We have not encountered any difficulties in meeting our cash obligations to date. We believe that our current cash and cash
equivalents and anticipated cash flow from operations will be sufficient to meet our anticipated cash needs for the foreseeable future.
The following
table sets forth a summary of our cash flows for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended May 31,
|
|
(in thousands of US$)
|
|
2015
|
|
|
2016
|
|
|
2017
|
|
Net cash provided by operating activities
|
|
|
374,145
|
|
|
|
517,894
|
|
|
|
618,137
|
|
Net cash used in investing activities
|
|
|
(173,417
|
)
|
|
|
(309,737
|
)
|
|
|
(672,264
|
)
|
Net cash provided by (used in) financing activities
|
|
|
(44,297
|
)
|
|
|
5,503
|
|
|
|
9,349
|
|
Effect of foreign exchange rate changes
|
|
|
3,274
|
|
|
|
(35,749
|
)
|
|
|
(23,413
|
)
|
Net change in cash and cash equivalents
|
|
|
159,705
|
|
|
|
177,911
|
|
|
|
(68,191
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at beginning of period
|
|
|
371,593
|
|
|
|
531,298
|
|
|
|
709,209
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of the period
|
|
|
531,298
|
|
|
|
709,209
|
|
|
|
641,018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
84
Operating Activities
Net cash provided by operating activities amounted to US$618.1 million in the fiscal year ended May 31, 2017. Our net cash provided by operating
activities in the fiscal year ended May 31, 2017 reflected net income of US$276.8 million, as adjusted by the reconciliation of certain non-cash items, including US$53.9 million in depreciation and US$20.3 million in share-based compensation
expense. Additional factors affecting operating cash flow included an increase in deferred revenues in the amount of US$237.6 million due to the increased amount of course fees received during the period, and an increase in the accrued expenses and
other current liabilities account of US$35.8 million, primarily due to an increase in accrued employee salary expenses and welfare benefits.
Net cash
provided by operating activities amounted to US$517.9 million in the fiscal year ended May 31, 2016. Our net cash provided by operating activities in the fiscal year ended May 31, 2016 reflected net income of US$225.3 million, as adjusted
by the reconciliation of certain non-cash items, including US$47.3 million in depreciation and US$16.8 million in share-based compensation expense. Additional factors affecting operating cash flow included an increase in deferred revenues in the
amount of US$179.6 million due to the increased amount of course fees received during the period, and an increase in the accrued expenses and other current liabilities account of US$47.9 million, primarily due to an increase in accrued employee
salary expenses and welfare benefits.
Net cash provided by operating activities amounted to US$374.1 million in the fiscal year ended May 31, 2015.
Our net cash provided by operating activities in the fiscal year ended May 31, 2015 reflected net income of US$192.7 million, as adjusted by the reconciliation of certain non-cash items, including US$46.7 million in depreciation and US$15.7
million in share-based compensation expense. Additional factors affecting operating cash flow included an increase in deferred revenues in the amount of US$117.1 million due to the increased amount of course fees received during the period, an
increase in the accrued expenses and other current liabilities account of US$11.1 million, primarily due to an increase in accrued employee salary expenses and welfare benefits.
Investing Activities
We lease all of our
facilities except for part of the premises for the Beijing, Xian, Tianjin, Kunming, Wuhan, Guangzhou, Changsha, Xiamen, Zhengzhou and Yangzhou schools, which premises we own. Our cash used in investing activities is primarily related to our
purchase of land use rights and the premises for the Beijing, Xian, Tianjin, Kunming, Wuhan, Guangzhou, Changsha, Xiamen, Zhengzhou and Yangzhou schools and equipment used in our operations, our investment in term deposits and short term
investments. Net cash used in investing activities amounted to US$672.3 million in the fiscal year ended May 31, 2017, compared to US$309.7 million in the fiscal year ended May 31, 2016 and US$173.4 million in the fiscal year ended
May 31, 2015.
Net cash used in investing activities in the fiscal year ended May 31, 2017 was primarily attributable to net purchase of short
term held-to-maturity investments in the amount of US$522.8 million, long term available for sale investments in the amount of US$43.5 million and the purchase of property and equipment in the amount of US$105.7 million in connection with the
expansion of our school network.
Net cash used in investing activities in the fiscal year ended May 31, 2016 was primarily attributable to net
purchase of short term held-to-maturity investments in the amount of US$260.9 million, long term available for sale investments in the amount of US$78.8 million and the purchase of property and equipment in the amount of US$64.4 million in
connection with the expansion of our school network.
Net cash used in investing activities in the fiscal year ended May 31, 2015 was primarily
attributable to net purchase of held-to-maturity investment in the amount of US$145.4 million and the purchase of property and equipment in the amount of US$55.3 million in connection with the expansion of our school network.
Financing Activities
Net cash provided by
financing activities amounted to US$9.3 million in the fiscal year ended May 31, 2017, compared to net cash provided by financing activities of US$5.5 million in the fiscal year ended May 31, 2016 and net cash used in financing activities
of US$44.3 million in the fiscal year ended May 31, 2015.
85
Net cash provided by financing activities in the fiscal year ended May 31, 2017 was primarily attributable
to capital contribution from noncontrolling interests of US$8.8 million.
Net cash provided by financing activities in the fiscal year ended May 31,
2016 was primarily attributable to investment of RMB445.7 million (US$68.3 million) by investors into Xuncheng Network, a subsidiary of New Oriental China and cash dividend in the amount of US$62.7 million.
Net cash used in financing activities in the fiscal year ended May 31, 2015 was primarily attributable to cash paid for share repurchase in the amount of
US$59.4 million.
Holding Company Structure
Overview
We are a holding company with no material
operations of our own. We conduct substantially all of our education business in China through contractual arrangements with New Oriental China, our variable interest entity, and its schools and subsidiaries and shareholder. See Item 4.
Information on the CompanyC. Organizational StructureContractual Arrangements with New Oriental China, Its Schools and Subsidiaries and Its Shareholder for a summary of these contractual arrangements. In the fiscal year ended
May 31, 2015, we entered into a series of contractual arrangements with Xuncheng Network, a then wholly-owned subsidiary of New Oriental China, its subsidiaries and its shareholder as part of an internal restructuring. Following a change in our
restructuring strategy, these contractual arrangements were terminated in September 2015. See Item 4. Information on the CompanyC. Organizational StructureContractual Arrangements with Xuncheng Network, Its Subsidiary and Its
Shareholder for a summary of these contractual arrangements. In the fiscal years ended May 31, 2015, 2016 and 2017, our variable interest entity(ies) contributed in aggregate 97.9%, 97.7% and 98.8%, respectively, of our total net
revenues. Our operations not conducted through contractual arrangements with our variable interest entity(ies) primarily consist of our kindergarten programs and the leasing of our commercial property. As of May 31, 2016 and 2017, our variable
interest entity(ies) accounted for an aggregate of 69.8% and 71.1%, respectively, of our total assets, and 93.7% and 94.6%, respectively, of our total liabilities. The assets not associated with our variable interest entity(ies) primarily consist of
cash and cash equivalents, term deposits and short-term investments. As of May 31, 2016 and 2017, US$51.9 million and US$75.9 million, respectively, of these assets were denominated in U.S. dollars, and $317.6 million and US$441.2 million,
respectively, of these assets were denominated in RMB.
As a holding company, our ability to pay dividends and other cash distributions to our
shareholders depends in part upon dividends and other distributions paid to us by our PRC subsidiaries. The amount of dividends paid by our PRC subsidiaries to us primarily depends on the service fees paid to our PRC subsidiaries from our variable
interest entity(ies), and, to a lesser degree, our PRC subsidiaries retained earnings. As of May 31, 2015, 2016 and 2017, the total amount of service fees payable to our PRC subsidiaries from our variable interest entity(ies) under the
service agreements was US$29.4 million, US$262.7 million and US$267.5 million, respectively. Conducting our operations through contractual arrangements with our variable interest entity(ies) entails a risk that we may lose the power to direct the
activities that most significantly affect the economic performance of our variable interest entity(ies), which may result in our being unable to consolidate their financial results with our results and may impair our access to their cash flow from
operations and thereby reduce our liquidity. See Item 3. Risk FactorsD. Risks Related to Our Corporate Structure for more information, including the risk factors titled If the PRC government finds that the agreements that
establish the structure for operating our China business do not comply with applicable PRC laws and regulations, we could be subject to severe penalties and We rely on contractual arrangements for our operations in China, which may not
be as effective in providing operational control as direct ownership.
Dividend Distributions
Under PRC law, each of our PRC subsidiaries, New Oriental China and its subsidiaries which is not a school is required to set aside at least 10% of its
after-tax profits each year, if any, to fund a statutory surplus reserve until such reserve reaches 50% of its registered capital and to further set aside a portion of its after-tax profit to fund the reserve fund at the discretion of our board of
directors. Although the statutory reserves can be used, among other ways, to increase the registered capital and eliminate future losses in excess of retained earnings of the respective companies, the reserve funds are not distributable as cash
dividends except in the event of liquidation. In addition, at the end of each fiscal year, each of our schools in China is required to allocate a certain amount out of its annual net income, if any, to its development fund for the construction or
maintenance of the school or procurement or upgrade of educational equipment. For our schools which have elected to require reasonable returns, this amount shall be no less than 25% of the annual net income of the school, and for our schools which
have elected not to require reasonable returns, this amount shall be equivalent to no less than 25% of the annual increase in the net assets of the school, if any. Our PRC subsidiaries are permitted to pay dividends to us only out of their retained
earnings, if any, as determined in accordance with PRC accounting standards and regulations.
86
Pursuant to contractual arrangements that our wholly-owned subsidiaries in China have with New Oriental China,
the earnings and cash of New Oriental China and its schools and subsidiaries are used to pay service fees in RMB to our PRC subsidiaries in the manner and amount set forth in these agreements. After paying the applicable withholding taxes and making
appropriations for its statutory reserve requirement, the remaining net profits of our PRC subsidiaries would be available for distribution to three Hong Kong-incorporated intermediate holding companies wholly owned by our company, and from these
three Hong Kong-incorporated intermediate holding companies to our company. See Item 4. Information on the CompanyC. Organizational Structure for a diagram of our corporate structure. As of May 31, 2017, the net assets of our
PRC subsidiaries and New Oriental China and its schools and subsidiaries which were restricted due to statutory reserve requirements and other applicable laws and regulations, and thus not available for distribution, were in aggregate US$488.6
million, and the net assets of our PRC subsidiaries and New Oriental China and its schools and subsidiaries which were unrestricted and thus available for distribution were in aggregate US$1,192.4 million. We do not believe that these restrictions
on the distribution of our net assets will have a significant impact on our ability to timely meet our financial obligations in the future. See Item 3. Key InformationD. Risk FactorsRisks Related to Doing Business in ChinaWe
may rely on dividends and other distributions on equity paid by our wholly-owned subsidiaries to fund any cash and financing requirements we may have, and any limitation on the ability of our subsidiaries and New Oriental China and its schools and
subsidiaries to make payments to us could have a material adverse effect on our ability to conduct our business for more information.
Furthermore,
cash transfers from our PRC subsidiaries to our Hong Kong-incorporated intermediate holding companies are subject to PRC government control of currency conversion. Restrictions on the availability of foreign currency may affect the ability of our
PRC subsidiaries and New Oriental China and its schools and subsidiaries to remit sufficient foreign currency to pay dividends or other payments to us, or otherwise satisfy their foreign currency denominated obligations. See Item 3. Key
InformationD. Risk FactorsRisks Related to Doing Business in ChinaGovernmental control of currency conversion may affect the value of your investment.
Capital Expenditures
The expansion of our network of
schools, learning centers, O2O ecosystem and bookstores has required significant investment. Our capital expenditures were US$55.3 million, US$64.4 million and US$105.7 million in the fiscal years ended May 31, 2015, 2016 and 2017,
respectively. Our capital expenditures are incurred primarily in connection with facility acquisitions, leasehold improvements and investments in equipment, technology and operating systems. Our capital expenditures for the fiscal year ended
May 31, 2017 were primarily due to our investments in facilities, equipment, technology and operating systems to meet the expected growth of our operations. We intend to cost-efficiently allocate our capital resources by leasing most of our new
facilities in the foreseeable future. We may also make acquisitions of businesses and properties that complement our operations when suitable opportunities arise. We believe that we will be able to fund our capital needs in the foreseeable future
through cash generated from our operating activities.
C.
Research and Development, Patents and Licenses, etc.
Technology
Our technology platform is designed to provide
systems that help distinguish us in the marketplace, operate cost-effectively and accommodate future growth. We currently use a combination of commercially available and custom developed software and hardware systems. Our technology platform is a
combination of e-learning platforms, alumni platforms, content management systems, exam platforms, e-business promotion platforms and bookstore platforms, live Internet classrooms, as well as licensed speech recognition platforms. Our investment in
system infrastructure has several key benefits: simplification of the storage and processing of large amounts of data, facilitation of the deployment and operation of large-scale programs and services and automation of much of the administration of
our business. It also provides us with the ability to scale both capacity and functionality and build large clusters seamlessly.
87
One of our ongoing primary objectives is to maintain reliable systems. We have implemented performance monitoring
for all key web and business systems to enable us to respond quickly to potential problems. Based on cluster technology, our system can identify errors and isolate failed servers automatically so that our clients can access our services at any time.
Our websites are hosted at third party facilities in Beijing. This facility provides redundant utility systems, a backup electric generator and 24-hour a day server support. All servers have redundant power supplies and file systems to maximize
system and data availability. We regularly back up our database on a server hosted at an Internet data center to minimize the impact of data loss due to system failures. We do not capitalize any related costs.
Intellectual Property
Our trademarks, copyrights, trade
secrets and other intellectual property rights distinguish our services and products from those of our competitors and contribute to our competitive advantage in our target markets. To protect our brand and other intellectual property, we rely on a
combination of trademark, copyright and trade secret laws as well as confidentiality agreements with our employees, contractors and others.
, New Oriental,
,
and
are registered trademarks in China and have been recognized as well-known trademarks (
) in civil action adjudicated and/or administrative determination in China. We have also registered additional trademarks and logos, including Pop Kids, with the Trademark Office of the State Administration
for Industry and Commerce in China. Our main websites are located at www.df.cn, www.neworiental.org, english.neworiental.org, and www.koolearn.com. In addition, we have registered other domain names, including www.dogwood.com.cn, www.popkids.com.cn,
www.youneng.com, www.ileci.com, www.okayzhihui.com, www.51zhishang.com, www.donut.cn, www.maxen.com.cn, www.51pigai.com and www.66xue.com.
In order to
develop, improve, market and deliver new programs and services, we are required to obtain licenses from others from time to time. For example, we currently have arrangements with international education content providers and publishers such as
British Council, Cengage Learning, Coursera, Monash College Pty Ltd, NCUK, International Baccalaureate, Bell Education, ETS, HMH, Cambridge University Press, Cambridge English Language Assessment, The McGraw-Hill Companies, Pearson Education, Oxford
University Press, Harper Collins, or their respective authorized local publishers, to develop and distribute localized versions of specified books in China. There can be no assurance that we will be able to continue to obtain licenses on
commercially reasonable terms or at all or that rights granted under any licenses will be valid and enforceable.
We cannot be sure that our efforts to
protect our intellectual property rights will be adequate or that third parties will not infringe or misappropriate these rights. In addition, there can be no assurance that competitors will not independently develop similar intellectual property.
If others are able to copy and use our programs and services, we may not be able to maintain our competitive position. Furthermore, the application of laws governing intellectual property rights in China and abroad is uncertain and evolving and
could involve substantial risks to us. If litigation is necessary to enforce our intellectual property rights or determine the scope of the proprietary rights of others, we may have to incur substantial costs or divert other resources, which could
harm our business
In addition, competitors, content providers, publishers and others may claim that we have infringed their intellectual property rights.
Defending any such lawsuit, whether with or without merit, could be time-consuming, result in costly litigation or prevent us from offering our programs and services, which could harm our business. If a lawsuit against us is successful, we may lose
the rights to use our products or be required to modify them, or we may have to pay financial damages.
We have adopted guidelines, procedures and
safeguards designed to educate our employees and contractors regarding the importance of respecting the intellectual property rights of third parties, and detect and prevent any conduct or activities by our employees or contractors that infringe or
have the potential to infringe upon such third-party rights. The guidelines specify certain key principles and policies that we require all of our employees and contractors to uphold as a fundamental condition of their employment. The procedures and
safeguards we have implemented to ensure compliance with these principles and policies include the assignment of dedicated staff to monitor and enforce compliance with these intellectual property guidelines, including in particular our content
control group, which reviews the content of our course materials to ensure that no infringing materials are used in our classrooms. We have also made efforts to ensure that our marketing materials are reviewed and approved by appropriate management
before being distributed to the public. We believe these guidelines, procedures and safeguards will further improve our ability to avoid infringing or potentially infringing activities, minimize our exposure to third party claims and protect our
reputation as a company that respects the intellectual property rights of third parties.
88
Other than as disclosed elsewhere in this annual report, we are not aware of any
trends, uncertainties, demands, commitments or events since the beginning of our fiscal year 2017 that are reasonably likely to have a material effect on our net revenues, income from operations, profitability, liquidity or capital resources, or
that would cause the disclosed financial information to be not necessarily indicative of future operating results or financial condition.
E.
|
Off-balance Sheet Arrangements
|
We have not entered into any financial guarantees or other commitments
to guarantee the payment obligations of any third parties. We have not entered into any derivative contracts that are indexed to our shares and classified as shareholders equity, or that are not reflected in our consolidated financial
statements. Furthermore, we do not have any retained or contingent interest in assets transferred to an unconsolidated entity that serves as credit, liquidity or market risk support to such entity. We do not have any variable interest in any
unconsolidated entity that provides financing, liquidity, market risk or credit support to us or engages in leasing, hedging or research and development services with us.
F.
|
Tabular Disclosure of Contractual Obligations
|
The following table sets forth our contractual
obligations as of May 31, 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payment due by period
|
|
(in thousands of US$)
|
|
Total
|
|
|
Less than 1 year
|
|
|
1-3 years
|
|
|
3-5 years
|
|
|
More than 5 years
|
|
Operating Lease Obligations
(1)
|
|
|
843,222
|
|
|
|
204,996
|
|
|
|
342,392
|
|
|
|
207,223
|
|
|
|
88,611
|
|
Purchase and Leasehold Improvements
Obligations
(2)
|
|
|
19,697
|
|
|
|
19,697
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
862,919
|
|
|
|
224,693
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Represents lease obligations under our facility leases.
|
(2)
|
Represents leasehold improvement obligations in connection with renovations of the leased facilities.
|
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
A.
|
Directors and Senior Management
|
The following table sets forth information regarding our executive
officers and directors as of the date of this annual report.
89
|
|
|
|
|
Name
|
|
Age
|
|
Position/Title
|
Michael Minhong Yu
|
|
54
|
|
Executive Chairman
|
Chenggang Zhou
|
|
55
|
|
Director and Chief Executive Officer
|
Zhihui Yang
|
|
43
|
|
Chief Financial Officer
|
Louis T. Hsieh
|
|
53
|
|
Director
|
Robin Yanhong Li
|
|
48
|
|
Independent Director
|
Denny Lee
|
|
49
|
|
Independent Director
|
John Zhuang Yang
|
|
62
|
|
Independent Director
|
Mr. Michael Minhong Yu
is the founder of our company and has served as the chairman of our board of directors
since 2001. He was also our chief executive officer from 2001 to September 2016. In addition to his roles in our company, Mr. Yu also serves as vice chairman of the Beijing Young Entrepreneurs Association and vice chairman of the Committee of
Education of the Central Committee of the China Democratic League. Prior to founding our first school in 1993, Mr. Yu was an English instructor at Peking University from 1985 and 1991. Mr. Yu received his bachelors degree in English
from Peking University.
Mr. Chenggang Zhou
has served as our director since November 2010 and chief executive officer since September
2016. Mr. Zhou joined New Oriental in 2000 and has held multiple positions in our company since then, including president, executive president for domestic business, executive vice president, vice president and president of Beijing and Shanghai
New Oriental Schools. Prior to joining us, Mr. Zhou was a correspondent for the Asia Pacific region and a program host at BBC. Mr. Zhou received his bachelors degree in English from Suzhou University in China and his masters
degree in communications from Macquarie University, Australia.
Mr. Zhihui Yang
has served as our chief financial officer since April
2015. Prior to that, Mr. Yang held multiple positions after he joined our company in April 2006, including vice president of finance, deputy director of president office and senior financial manager. Prior to joining us, Mr. Yang served as
the financial director of Beijing Hua De Xin Investment Co., Ltd. from July 2002 to March 2006. From August 1997 and May 2002, Mr. Yang worked for PricewaterhouseCoopers as a senior auditor. Mr. Yang received his bachelors degree in
economics from Guanghua School of Management of Peking University.
Mr. Louis Hsieh
has served as our director since March 2007 and
senior advisor since January 2016. From May 2009 to January 2016, Mr. Hsieh served as our president, and from December 2005 to April 2015, he served as our chief financial officer. Mr. Hsieh currently serves as the chief financial officer at NIO (or
NextEV). Previously, Mr. Hsieh was the chief financial officer of ARIO Data Networks, Inc. in San Jose, California from April 2004. From 2002 to 2003, Mr. Hsieh was a managing director for private equity firm Darby Asia Investors (HK) Limited. Prior
to that, Mr. Hsieh was managing director and Asia-Pacific tech/media/telecoms head of UBS Capital Asia Pacific, the private equity division of UBS AG from 2000. Over the period from 1997 to 2000, Mr. Hsieh was a technology investment banker at JP
Morgan in San Francisco, California, where he was a vice president, and Credit Suisse First Boston in Palo Alto, California, where he was an associate. From 1990 to 1996, Mr. Hsieh was a corporate and securities attorney at White & Case LLP in
Los Angeles and is a member of the California bar. Mr. Hsieh also serves as an independent director of JD.com, Inc. (NASDAQ: JD), Chinas leading online direct sales company, and Nord Anglia Education, Inc. (NYSE: NORD), the worlds
leading premium schools organization. Mr. Hsieh has been appointed to serve on the board of Yum China Holdings, Inc. as an independent director following the spin-off of Yum China Holdings, Inc. from Yum! Brands, Inc., an NYSE-listed company, which
is expected to occur after the close of business on October 31, 2016. Mr. Hsieh holds a B.S. degree in Industrial Engineering and Engineering Management from Stanford University, an MBA degree from the Harvard Business School, and a J.D. degree from
the University of California at Berkeley.
Mr. Robin Yanhong Li
has served as our independent director since September 6, 2006.
Mr. Li is a co-founder of Baidu, Inc., the leading Chinese language Internet search provider listed on the Nasdaq Global Select Market. Mr. Li has served as the chairman of the board of directors of Baidu since its inception in January
2000 and as its chief executive officer since January 2004. He served as the president of Baidu from February 2000 to December 2003. Prior to founding Baidu, Mr. Li worked as an engineer at Infoseek, a pioneer in the Internet search engine
industry, from July 1997 to December 1999. Currently, Mr. Li acts as the vice chairman of the Internet Society of China (ISC). Mr. Li has also been a vice chairman of All-China Federation of Industry & Commerce since December
2012. Mr. Li received a bachelors degree in information science from Peking University and a masters degree in computer science from the State University of New York at Buffalo.
90
Mr. Denny Lee
has served as our independent director since September 6, 2006. Mr. Lee has
served as a director of NetEase, Inc., formerly known as Netease.com, Inc., a leading internet technology company in China listed on the Nasdaq Global Select Market, since April 2002. He was the chief financial officer of NetEase, Inc. from April
2002 to June 2007 and its financial controller from November 2001 to April 2002. Prior to joining NetEase, Inc. in 2001, Mr. Lee worked in the Hong Kong office of KPMG for more than ten years. Mr. Lee currently serves as the chairman of
the audit committees and an independent non-executive director on the board of Concord Medical Services Holdings Limited, which is listed on the New York Stock Exchange, and as an independent non-executive director on the board of China Metal
Resources Utilization Ltd., which is listed on the main board of Hong Kong Stock Exchange. Mr. Lee graduated from the Hong Kong Polytechnic University majoring in accounting and is a member of The Hong Kong Institute of Certified Public
Accountants and The Chartered Association of Certified Accountants.
Dr. John Zhuang Yang
has served as our independent director since
September 3, 2007. Dr. Yang is currently the Dean of the Beijing International M.B.A. Program at Peking University. He also serves as a full-time professor at National School of Development of Peking University and holds a tenured
professorship at Fordham Universitys graduate school of business. Dr. Yang currently also serves as an independent director of Tristate Holdings Limited, a company listed on the Hong Kong Stock Exchange. Dr. Yang holds a Ph.D. degree
in business administration from Columbia University, a masters degree in sociology from Columbia University, a masters degree in international and public affairs from the Woodrow Wilson School of Public and International Affairs at
Princeton University, and a bachelors degree from the English Language and Literature Department of Peking University.
Employment
Agreements
We have entered into employment agreements with each of our executive officers. We may terminate employment for cause, at any time, without
notice or remuneration, for certain acts of the executive officer, such as a conviction of or plea of guilty to a felony, negligence or dishonesty to our detriment and failure to perform agreed duties after a reasonable opportunity to cure the
failure, death, or physical or mental incapacitation. We may also terminate an executive officers employment without cause. In such case we are required to provide severance compensations as expressly required by applicable law. An executive
officer may terminate his employment with us at any time with a one-month prior notice if there is a material reduction in his or her authority, duties and responsibilities or if there is a material reduction in his or her annual salary before the
next annual salary review. An executive officer may also resign prior to the expiry of the term of his or her employment agreement if our board approves his or her resignation or agrees to an alternative arrangement with such executive officer.
Each executive officer has agreed to hold, both during and after the termination or expiry of his or her employment agreement, in strict confidence and not to
use, except as required in the performance of his or her duties in connection with the employment, any of our confidential information or trade secrets, any confidential information or trade secrets of our clients or prospective clients, or the
confidential or proprietary information of any third party received by us and for which we have confidential obligations. Our executive officers have also agreed to disclose in confidence to us all inventions, designs and trade secrets which they
conceive, develop or reduce to practice and to assign all right, title and interest in them to us, and assist us in obtaining patents, copyrights and other legal rights for these inventions, designs and trade secrets. In addition, each executive
officer has agreed to be bound by non-competition and non-solicitation restrictions during the term of his or her employment and one year following the termination or expiry of such employment agreement. Specifically, each executive officer has
agreed not to (1) approach our clients, customers or contacts or other persons or entities introduced to the executive officer for the purpose of doing business with such person or entities that will harm our business relationships with these
persons or entities; (2) assume employment with or provide services as a director for any of our competitors, or engage, whether as principal, partner, licensor or otherwise, in any business which is in direct or indirect competition with our
business or (3) seek directly or indirectly, to solicit the services of any of our employees who is employed by us on or after the date of the executive officers termination, or in the year preceding such termination.
B.
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Compensation of Directors and Executive Officers
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For the fiscal year ended May 31, 2017, we paid
an aggregate of approximately US$1.7 million in cash to our executive officers and non-executive directors as a group. In addition, we made contributions to the pension insurance, medical insurance, housing fund, unemployment and other benefits for
the benefits of our executive officers and non-executive directors in the aggregate amount of US$130,000. See Share Incentives below for more information. No executive officer is entitled to any severance benefits upon termination
of his employment with our company except as required under applicable PRC law.
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Share Incentives
2006 Share Incentive Plan
Our 2006 Share Incentive
Plan, as amended, or the 2006 plan, is designed to attract and retain the best available personnel, provide additional incentives to employees, directors and consultants and promote the success of our business. The maximum aggregate number of shares
which may be issued pursuant to all awards (including options) granted under the 2006 plan is 8,000,000 shares, plus (1) 5,000,000 shares added on January 1, 2007, (2) 5,000,000 shares added on January 1, 2008 and (3) an
annual increase on the first business day of each calendar year beginning in 2009 equal to the lesser of (x) 3,000,000 shares, (y) two percent (2%) of the number of shares outstanding as of such date, and (z) a lesser number of
shares determined by the administrator of the 2006 plan. The 2006 plan expired in January 2016. No additional awards may be granted under the 2006 plan after its expiration, but the expiration of the plan would not impair any award previously
granted under the plan.
2016 Share Incentive Plan
We adopted our 2016 Share Incentive Plan, or the 2016 plan, in January 2016 to continue to provide incentives to employees, directors and consultants after the
expiration of our 2006 plan. The maximum aggregate number of shares which may be issued pursuant to all awards (including options) granted under the 2016 plan is 10,000,000 shares.
The following table summarizes, as of September 23, 2017, the outstanding non-vested equity shares granted under our 2006 plan to several of our
directors and executive officers.
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Name
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Common Shares
Underlying
Outstanding NES
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Exercise Price
(US$/Share)
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Date
of Grant
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Date
of Expiration
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Chenggang Zhou
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*
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2/6/2015
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12/31/17
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Zhihui Yang
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*
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2/6/2015
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12/31/17
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Louis T. Hsieh
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*
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10/19/2015
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12/31/17
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*
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Less than 1% of our total outstanding voting securities.
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Non-vested equity share awards.
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The following paragraphs describe the principal terms of the 2006 plan.
Types of Awards.
We may grant the following types of awards under our 2006 plan:
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options to purchase our common shares;
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restricted shares, which are common shares issued to the grantee that are subject to transfer restrictions, right of first refusal, repurchase, forfeiture, and other terms and conditions as established by our plan
administrator; and restricted share units, which may be earned upon the passage of time or the attainment of performance criteria and which may be settled for cash, common shares or other securities, or a combination of cash, common shares or other
securities as established by our plan administrator;
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share appreciation rights, which entitle the grantee the right to common shares or cash compensation measured by the appreciation in the value of common shares; and
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dividend equivalent rights, which entitle the grantee to compensation measured by dividends paid with respect to common shares.
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Plan Administration
. Our board of directors, or a committee designated by our board or directors, administers the 2006 plan. The committee or the full
board of directors, as appropriate, determines the provisions and terms and conditions of each award grant.
Award Agreement
. Awards
granted under our 2006 plan are evidenced by an award agreement that sets forth the terms, conditions and limitations for each award. In addition, the award agreement also specifies whether the option constitutes an incentive share option, or ISO,
or a non-qualifying stock option.
Eligibility
. We may grant awards to our employees, directors and consultants, including those of our
parent companies and subsidiaries. However, we may grant options that are intended to qualify as ISOs only to our employees and employees of our parent companies and subsidiaries.
Acceleration of Awards upon Corporate Transactions
. The outstanding awards will terminate and accelerate upon occurrence of certain significant
corporate transactions, including amalgamations, consolidations, liquidations or dissolutions, sales of substantially all or all of the assets, reverse takeovers or acquisitions resulting in a change of control. If the successor entity assumes or
replaces our outstanding awards under the 2006 plan, such assumed or replaced awards will become fully vested and immediately exercisable and payable, and be released from repurchase or forfeiture rights immediately upon termination of the
grantees continuous service to us if such service is terminated by the successor entity without cause within 12 months after the effective date of the corporate transaction. Furthermore, if the successor entity does not assume or replace our
outstanding awards, each outstanding award will become fully vested and immediately exercisable and payable, and will be released from any repurchase or forfeiture rights immediately before the effective date of the corporate transaction, as long as
the grantees continuous service with us has not been terminated before this date.
Exercise Price and Term of Awards
. In general, the
plan administrator determines the exercise price of an option and sets forth the price in the award agreement. The exercise price may be a fixed or variable price related to the fair market value of our common shares. In September 2012, we amended
the 2006 plan to clarify that the plan administrator has the power to reduce the exercise price of an outstanding option and also reduce the number of the underlying common shares without seeking shareholders approval, if such modification
would not result in significant additional share-based compensation expenses to be incurred by our company.
The term of each award under our 2006
plan will be specified in an award agreement, but the term of an ISO shall not exceed ten years from the date of grant thereof.
Vesting Schedule
.
In general, one-sixth of the common shares underlying the option will vest on each six-month anniversary of the vesting commencement date specified in the option award notice. The vesting will be suspended if the grantees leave of absence
exceeds 90 days and will resume upon the grantees return to service to us.
The vesting schedule of equity share awards is subject to the applicable award agreement.
The following paragraphs describe the principal terms of the 2016 plan.
Amendment of the Plan.
Our board of director may at any time amend, suspend or terminate the 2016 plan. Unless we decide to follow home country
practice, the following amendments to the 2016 plan require approval from our shareholders (i) increase of the number of shares available under the 2016 plan, (ii) extension of the term of the 2016 plan, (iii) extension of the
exercise period of an option beyond ten years, and (iv) any other amendments about which shareholders approval are necessary and desirable under applicable laws or stock exchange rules.
The remaining terms of the 2016 plan are substantially identical to the terms of the 2006 plan described above.
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Xuncheng Network Employee Share Ownership Arrangement
In October 2015, Xuncheng Network completed a transaction to sell 21% equity interest to seven limited partnerships, the special purpose vehicles established
for holding Xuncheng Networks shares on behalf of a number of our employees. As of the date of this annual report, our director and chief executive officer, Mr. Chenggang Zhou and our chief financial officer, Mr. Zhihui Yang each
held the economic interest associated with no more than 1% of equity interest in Xuncheng Network.
Our board of directors currently consists of six directors, which consist of three
independent directors and three directors who are, or have been within the past three years, also our executive officers. Section 303A.01 of the NYSE Listed Company Manual requires each listed company to have a majority of independent directors
on the board of directors after the first anniversary of the companys listing on the NYSE. We are not required under the laws of the Cayman Islands to have a majority of independent directors on our board of directors. Pursuant to the
exception granted to foreign private issuers under Section 303A.00 of the NYSE Listed Company Manual, we have elected to follow our home country practice with respect to our board of directors. A director is not required to hold any shares in
the company by way of qualification. A director may vote with respect to any contract, proposed contract or arrangement in which he is materially interested. A director may exercise all the powers of the company to borrow money, mortgage its
undertaking, property and uncalled capital, and issue debentures or other securities whenever money is borrowed or as security for any obligation of the company or of any third party. Our independent directors hold executive sessions, during which
only the independent directors are present, at least once a year. Depending on the nature of the discussion at an executive session, each of the three independent directors may preside at the executive sessions. In the fiscal year ended May 31,
2017, our board held meetings or passed resolutions by unanimous written consent 13 times.
Committees of the Board of Directors
We have established three fully independent committees under the board of directors: the audit committee, the compensation committee and the nominating and
corporate governance committee. We have adopted a charter for each of the three committees. The committee charters are available on our website at http://investor.neworiental.org. Each committees members and functions are described below.
Audit Committee
. Our audit committee consists of Mr. Denny Lee, Mr. Robin Yanhong Li and Dr. John Zhuang Yang. Mr. Lee is the
chairman of our audit committee. All of the members of our audit committee satisfy the independence requirements of Section 303A of the NYSE Listed Company Manual and Rule 10A-3 under the Exchange Act. Our board of directors has
determined that Mr. Denny Lees simultaneous service on the audit committee of two other public companies would not impair his ability to effectively serve on our audit committee. The audit committee oversees our accounting and financial
reporting processes and the audits of the financial statements of our company. The audit committee is responsible for, among other things:
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selecting the independent registered public accounting firm and pre-approving all auditing and non-auditing services permitted to be performed by the independent registered public accounting firm;
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reviewing with the independent registered public accounting firm any audit problems or difficulties and managements response;
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reviewing and approving all proposed related party transactions, as defined in Item 404 of Regulation S-K under the U.S. Securities Act of 1933, as amended;
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discussing the annual audited financial statements with management and the independent registered public accounting firm;
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reviewing major issues as to the adequacy of our internal controls and any special audit steps adopted in light of material control deficiencies; and
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meeting separately and periodically with management and the independent registered public accounting firm.
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In the fiscal year ended May 31, 2017, the audit committee held meetings or passed resolutions by unanimous
written consent three times, and also approved certain other matters together with the rest of the board members four times, including the audit committees approval of four quarterly earnings releases.
Compensation Committee
. Our compensation committee consists of Mr. Robin Yanhong Li, Mr. Denny Lee and Dr. John Zhuang Yang. Mr. Li
is the chairman of our compensation committee. All of the members of our compensation committee satisfy the independence requirements of Section 303A of the NYSE Listed Company Manual. The compensation committee assists the board in
reviewing and approving the compensation structure, including all forms of compensation, relating to our directors and executive officers. Our chief executive officer may not be present at any committee meeting during which his compensation is
deliberated. The compensation committee is responsible for, among other things:
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reviewing and approving the total compensation package for our chief executive officer;
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reviewing and recommending to the board with respect to the compensation of our directors; and
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reviewing periodically and approving any long-term incentive compensation or equity plans, programs or similar arrangements, annual bonuses, and employee pension and welfare benefit plans.
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In the fiscal year ended May 31, 2017, the compensation committee passed resolutions by unanimous written consent once, and also approved certain matters
together with the rest of the board members twice.
Nominating and Corporate Governance Committee
. Our nominating and corporate governance
committee consists of Dr. John Zhuang Yang, Mr. Robin Yanhong Li and Mr. Denny Lee. Dr. Yang is the chairman of our nominating and corporate governance committee. All of the members of our nominating and corporate governance
committee satisfy the independence requirements of Section 303A of NYSE Listed Company Manual. The nominating and corporate governance committee assists the board of directors in selecting individuals qualified to become our
directors and in determining the composition of the board and its committees. The nominating and corporate governance committee is responsible for, among other things:
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selecting and recommending to the board nominees for election or re-election to the board, or for appointment to fill any vacancy;
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reviewing annually with the board the current composition of the board with regards to characteristics such as independence, age, skills, experience and availability of service to us;
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advising the board periodically with regards to significant developments in the law and practice of corporate governance as well as our compliance with applicable laws and regulations, and making recommendations to the
board on all matters of corporate governance and on any remedial action to be taken; and
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monitoring compliance with our code of business conduct and ethics, including reviewing the adequacy and effectiveness of our procedures to ensure proper compliance. In the fiscal year ended May 31, 2016, the
nominating and corporate governance committee approved certain matters together with the rest of the board members once.
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Duties of
Directors
Under Cayman Islands law, our directors have a duty of loyalty to act honestly in good faith with a view to our best interests. Our
directors also have a duty to exercise the skill they actually possess and such care and diligence that a reasonably prudent person would exercise in comparable circumstances. In fulfilling their duty of care to us, our directors must ensure
compliance with our memorandum and articles of association. A shareholder has the right to seek damages if a duty owed by our directors is breached.
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Terms of Directors and Officers
Our officers are elected by and serve at the discretion of the board of directors. Our directors are not subject to a term of office and hold office until such
time as they resign or are removed from office by ordinary resolution or the unanimous written resolution of all shareholders. A director will be removed from office automatically if, among other things, the director (1) becomes bankrupt or
makes any arrangement or composition with his creditors; or (2) dies or is found by our company to be or becomes of unsound mind.
We had 25,826, 28,690 and 34,217 full time employees and 7,667, 7,993 and 8,767 contract
teachers and staff as of May 31, 2015, 2016 and 2017, respectively. Our employees are not covered by any collective bargaining agreement. We consider our relations with our employees to be generally good.
The following table sets forth information with respect to the beneficial ownership of
our common shares by:
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each of our directors and executive officers; and
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each person known to us to own beneficially more than 5% of our common shares.
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Except as specifically noted,
the beneficial ownership is as of September 23, 2017.
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Shares Beneficially Owned
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Number
(1)
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%
(2)
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Directors and Executive Officers:
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Michael Minhong Yu
(3)
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21,264,600
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13.5
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Chenggang Zhou
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*
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*
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Zhihui Yang
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*
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*
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Louis T. Hsieh
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*
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*
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Robin Yanhong Li
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*
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*
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Denny Lee
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*
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*
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John Zhuang Yang
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*
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*
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All Directors and Executive Officers as a
Group
(4)
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21,982,441
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13.9
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Principal Shareholders:
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Tigerstep Developments Limited
(5)
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21,264,600
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13.5
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UBS Group AG.
(6)
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18,950,228
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12.0
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Schroder Investment Management.
(7)
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11,747,351
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7.4
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FIL Limited
(8)
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9,984,610
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6.3
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FMR LLC
(9)
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9,232,317
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5.8
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Oppenheimer Funds, Inc.
(10)
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9,194,942
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5.8
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Baillie Gifford & Co
(11)
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7,794,739
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4.9
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(1)
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Beneficial ownership is determined in accordance with the rules of the SEC.
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(2)
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For each person and group included in this table, percentage ownership is calculated by dividing the number of shares beneficially owned by such person or group by the sum of (i) 158,119,910, being the number of
common shares outstanding as of September 23, 2017 and (ii) the number of common shares underlying share options held by such person or group that are exercisable within 60 days after September 23, 2017 and the number of non-vested equity
shares held by such person or group that will vest within 60 days after September 23, 2017.
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(3)
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Includes 21,264,600 common shares held by Tigerstep Developments Limited, a British Virgin Islands company wholly owned by Bamei Li, mother of Michael Minhong Yu. Through a trust arrangement, Michael Minhong Yu,
together with his family, holds beneficial interest in Tigerstep Development Limited. The business address of Mr. Yu is No. 6 Hai Dian Zhong Street, Haidian District, Beijing 100080, Peoples Republic of China.
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(4)
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Includes (i) common shares, (ii) common shares issuable upon exercise of all of the options that are exercisable within 60 days after September 23, 2017 and (iii) non-vested equity shares that will
vest within 60 days after September 23, 2017 held by all of our directors and senior executive officers as a group.
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(5)
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Tigerstep Developments Limited, a company incorporated in the British Virgin Islands, is wholly owned by Bamei Li, mother of Michael Minhong Yu. The registered address of Tigerstep Developments Limited is P.O. Box 957,
Offshore Incorporation Centre, Road Town, Tortola, the British Virgin Islands.
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(6)
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The number of common shares beneficially owned is as of May 3, 2017, as reported in a Schedule 13G filed by UBS Group AG on May 3, 2017 on behalf of the UBS Asset Management division. As set forth in the
Schedule 13G, Schroder Investment Management has sole power to vote 10,937,288 common shares and shared power to dispose of 18,950,228 common shares. The business address of UBS Group AG is Bahnhofstrase 45, Zurich, Switzerland.
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(7)
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The number of common shares beneficially owned is as of December 31, 2016, as reported in a Schedule 13G filed by Schroder Investment Management North America Inc on February 9, 2017 on behalf of Schroder
Investment Management Ltd, Schroder & Co Ltd, Schroder & Co (Asia) Ltd, Schroder & Co Bank AG, Schroder Investment Management (Hong Kong) Ltd, Schroder Investment Management North America Ltd and Schroder Investment
Management (Singapore) Ltd (collectively Schroder Investment Management). As set forth in the Schedule 13G, Schroder Investment Management has shared power to vote and dispose of 11,747,351 common shares. Schroder Investment Management
North America Inc disclaims the existence of a group. The business address of Schroder Investment Management North America Inc is 875 Third Ave, 22
nd
Floor, New York, NY 10022, USA.
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(8)
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The number of common shares beneficially owned is as of December 31, 2016, as reported in a Schedule 13G filed by FIL Limited on February 14, 2017. As set forth in the Schedule 13G, FIL Limited has sole power
to vote 7,745,987 common shares and sole power to dispose of 9,984,610 common shares. The business address of FIL Limited is Pembroke Hall, 42 Crow Lane, Hamilton, Bermuda.
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(9)
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The number of common shares beneficially owned is as of December 31, 2016, as reported in a Schedule 13G filed by FMR LLC on February 14, 2017. As set forth in the Schedule 13G, FMR LLC has sole power to vote
653,837 common shares and sole power to dispose of 9,232,317 common shares. The business address of FMR LLC is 245 Summer Street, Boston, Massachusetts 02210, USA.
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(10)
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The number of common shares beneficially owned is as of December 31, 2016, as reported in a Schedule 13G filed by OppenheimerFunds, Inc. on February 6, 2017. As set forth in the Schedule 13G, OppenheimerFunds,
Inc. has shared power to vote and dispose of 9,194,942 common shares. The business address of OppenheimerFunds, Inc. is Two World Financial Center, 225 Liberty Street, New York, NY 10281.
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(11)
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The number of common shares beneficially owned is as of March 10, 2017, as reported in a Schedule 13G filed by Baillie Gifford & Co on March 10, 2017. As set forth in the Schedule 13G, Baillie
Gifford & Co has sole power to vote 3,360,196 common shares and sole power to dispose of 7,794,739 common shares. The business address of Baillie Gifford & Co is Calton Square, 1 Greenside Row, Edinburgh EH1 3AN, Scotland, UK.
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None of our existing shareholders have different voting rights from other shareholders. To our knowledge, we are not owned or controlled,
directly or indirectly, by another corporation, by any foreign government or by any other natural or legal persons, severally or jointly. We are not aware of any arrangement that may, at a subsequent date, result in a change of control of our
company. As of September 23, 2017, we had 158,119,910 common shares issued and outstanding, and Deutsche Bank Trust Company Americas, as the depositary of our ADS facility, was the only record holder of our common shares in the United States,
holding approximately 89% of our total outstanding common shares. The number of beneficial owners of our ADSs in the United States is likely much larger than the one record holder of our common shares in the United States.
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
Please refer to Item 6. Directors, Senior Management and EmployeesE.
Share Ownership.
B.
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Related Party Transactions
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Contractual Arrangements with New Oriental China and Its Schools and
Subsidiaries and Shareholder
See Item 4Information on the CompanyC. Organizational StructureContractual Arrangements with New
Oriental China and Its Schools and Subsidiaries and Its Shareholder for a summary of the contractual arrangements we have entered into with New Oriental China and its subsidiaries and shareholder, which enable us to (1) have power to
direct the activities that most significantly affect the economic performance of New Oriental China and its schools and subsidiaries, (2) receive substantially all of the economic benefits from New Oriental China and its schools and
subsidiaries in consideration for the services provided by our wholly-owned subsidiaries in China, and (3) have an exclusive option to purchase all or part of the equity interests in New Oriental China, when and to the extent permitted by PRC
law, or request any existing shareholder of New Oriental China to transfer all or part of the equity interests in New Oriental China held by such shareholder to another PRC person or entity designated by us at any time in our discretion.
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In connection with Xuncheng Networks proposed listing of its common shares on the National Equities
Exchange and Quotations in China, New Oriental China and Beijing Pioneer entered into an amendment to the Master Exclusive Service Agreement on January 28, 2016, pursuant to which Xuncheng Network was removed from the schedule of the Master
Exclusive Service Agreement. However, we continue to consolidate Xuncheng Network through voting interest held by New Oriental China.
Contractual
Arrangements with Xuncheng Network and Its Shareholder
See Item 4Information on the CompanyC. Organizational
StructureContractual Arrangements with Xuncheng Network, Its Subsidiary and Its Shareholder for a summary of the contractual arrangements we have entered into with Xuncheng Network, its subsidiary and its shareholder, which were
terminated in September 2015.
Employment Agreements
See Item 6. Directors, Senior Management and EmployeesA. Directors and Senior Management for a description of the employment agreements we
have entered into with our senior executive officers.
Share Incentives
See Item 6. Directors, Senior Management and EmployeesB. Compensation of Directors and Executive Officers for a description of share-based
compensation we have provided to our directors, officers and other individuals as a group.
Lease Arrangements with an Affiliate
Since April 2010, we have been renting several floors of office space in a building in Beijing owned by Metropolis Holding (Tianjin) Co., Ltd., or Metropolis
Holding. In February 2012, Fine Talent Holdings Limited, a British Virgin Islands company owned by Mr. Michael Minhong Yu, our executive chairman, purchased all of the equity interests in Metropolis Holding from its former owner which was and
is unrelated to us. As a result, our lease agreements with Metropolis Holding became related parties transactions. As of May 31, 2017, twenty one of our operating entities rented office space from Metropolis Holding pursuant to a series of
lease agreements. The terms and conditions, including rental rates, of these lease agreements are generally the same as other tenants in the same building. These lease agreements are typically three years and can be renewed upon mutual agreements
upon expiration. The lease arrangements were approved by all of our directors, including all of the disinterested directors. During the fiscal year ended May 31, 2017, we accrued a total of US$6.8 million rent to Metropolis Holding. As of
May 31, 2017, amounts due from Metropolis Holding were US$3.0 million, which represented prepaid rent and rental deposit.
Loans to Joint Ventures
and Equity Method Long-Term Investee
As of May 31, 2017, the amount due from Beijing Haiwei Career Services Co., Ltd., or Haiwei Career, a joint
venture 50% owned by our company, was US$4.0 million, representing non-interest bearing loans extended by us during the fiscal year ended May 31, 2017 to Haiwei Career to support its daily operation. All the loans are payable within one year.
As of May 31, 2017, the amount due from Weixue Mingri represented the non-interest bearing loans provided by us to support its daily operation and
the outstanding loans were fully wrote off by us.
Transactions with Other Related Parties
During the fiscal year ended May 31, 2017, we recorded revenue in the amount of US$90 thousand from other related parties and recorded US$23 thousand
expenses for services received from other related parties. As of May 31, 2017, we had US$772 thousand in aggregate due from other related parties and US$48 thousand in aggregate due to other related parties.
C.
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Interests of Experts and Counsel
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Not applicable.
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ITEM 8. FINANCIAL INFORMATION
A.
Consolidated Statements and Other Financial Information
See Item 18 Financial Statements.
Legal and
Administrative Proceedings
From time to time, we are subject to legal proceedings, investigations and claims incidental to the conduct of our
business.
Litigation
We have been subject to
copyright, trademark and trade name infringement claims and legal proceedings in the past which related to, among other things, infringement of third parties copyrights in materials distributed by us and the unauthorized use of a third
partys name in connection with the marketing and promotion of one of our programs, and we may be subject to similar claims and legal proceedings from time to time in the future. See Item 3. Key InformationD. Risk FactorsRisks
Related to Our BusinessThird parties have in the past brought intellectual property infringement claims against us based on the content of the books and other teaching or marketing materials that we or our teachers authored and/or distributed
and may bring similar claims against us in the future. We are not currently a party to, nor are we aware of, any legal proceeding, investigation or claim which, in the opinion of our management, is likely to have a material and adverse effect
on our business, financial condition or results of operations.
Dividend Policy
On April 17, 2012, our board of directors declared a special cash dividend in the amount of US$0.30 per ADS. The cash dividend was paid on
September 28, 2012 to shareholders of record at the close of business on August 31, 2012. The aggregate amount of cash dividends paid was US$47.0 million, which was funded by surplus cash on our balance sheet. On July 23, 2013, our
board of directors declared a special cash dividend in the amount of US$0.35 per ADS. The cash dividend was paid on October 7, 2013 to shareholders of record at the close of business on September 6, 2013. The aggregate amount of cash
dividends paid was US$54.5 million, which was funded by surplus cash on our balance sheet. On July 21, 2015, our board of directors declared a special cash dividend in the amount of US$0.4 per ADS. The cash dividend was paid in October 2015 to
shareholders of record at the close of business on September 4, 2015. The aggregate amount of cash dividends paid was approximately US$62.7 million. On July 25, 2017, our board of directors declared a special cash dividend in the amount of
US$0.45 per ADS. The cash dividend will be paid in October 2017 to shareholders of record at the close of business on September 6, 2017. The aggregate amount of cash dividends to be paid is approximately US$70.0 million.
Other than the declaration of the special cash dividend described in the preceding paragraph, we have not declared any dividend since the completion of our
initial public offering and have no present intention to declare any additional dividends on our shares in the future. We currently intend to retain all of our available funds and any future earnings to operate and expand our business and we have no
plan to repatriate the remaining undistributed earnings from our subsidiaries in China. For the part of the dividend declared on July 23, 2013 that needs to be funded through dividend from our subsidiaries in China, we paid the PRC withholding
tax.
We are a holding company incorporated in the Cayman Islands. We rely on dividends from our subsidiaries in China and consulting, license and other
fees paid to us by New Oriental China and its schools and subsidiaries. Current PRC regulations permit our subsidiaries to pay dividends to us only out of their accumulated profits, if any, determined in accordance with PRC accounting standards and
regulations. In addition, each of our PRC subsidiaries and New Oriental China and its subsidiaries are required to set aside at least 10% of its after-tax profits each year, if any, to fund a statutory reserve until such reserve reaches 50% of its
registered capital, and to further set aside a portion of its after-tax profits to fund the employee welfare fund at the discretion of the board. These reserves may not be distributed as cash dividends. Further, if our PRC subsidiaries or New
Oriental China and its schools and subsidiaries incur debt on their own behalf in the future, the instruments governing the debt may restrict their ability to pay dividends or make other payments to us. Moreover, at the end of each fiscal year,
every private school in China is required to allocate a certain amount out of its annual net income, if any, to its development fund for the construction or maintenance of the school or procurement or upgrade of educational equipment. In the case of
a private school that requires reasonable returns, this amount shall be no less than 25% of the annual net income of the school, while in the case of a private school that does not require reasonable returns, this amount shall be equivalent to no
less than 25% of the annual increase in the net assets of the school, if any.
99
Our board of directors has complete discretion regarding whether to declare and distribute dividends. Even if our
board of directors decides to pay dividends, the form, frequency and amount will depend upon our future operations and earnings, capital requirements and surplus, general financial condition, contractual restrictions and other factors that the board
of directors may deem relevant. If we pay any dividends, we will pay our ADS holders to the same extent as holders of our common shares, subject to the terms of the deposit agreement, including the fees and expenses payable thereunder.
B.
Significant Changes
Except as disclosed elsewhere in
this annual report, we have not experienced any significant changes since the date of our audited consolidated financial statements included in this annual report.
ITEM 9. THE OFFER AND LISTING
A.
Offering and Listing Details
See C.
Markets.
B.
Plan of Distribution
Not
applicable.
C.
Markets
Our ADSs have been listed
on the NYSE since September 7, 2006 and trade under the symbol EDU. Prior to August 18, 2011, each of our ADSs represented four common shares. On August 18, 2011, we effected a change in the ratio of our ADSs to common
shares from one ADS representing four common shares to one ADS representing one common share.
The following table provides the high and low trading
prices for our ADSs on the NYSE for the periods indicated. For ease of comparison, the ADS prices before August 18, 2011 have been retroactively adjusted to reflect the ADS to common share ratio change that took effect on August 18, 2011.
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Trading Price
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High
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Low
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US$
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US$
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Annual High and Low
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Fiscal Year 2013
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28.33
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9.41
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Fiscal year 2014
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34.50
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20.06
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Fiscal year 2015
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27.42
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18.10
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Fiscal year 2016
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43.58
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18.09
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Fiscal Year 2017
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76.18
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38.11
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Quarterly Highs and Lows
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First Fiscal Quarter of 2016
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26.46
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18.09
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Second Fiscal Quarter of 2016
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30.98
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18.22
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Third Fiscal Quarter of 2016
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33.56
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27.40
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Fourth Fiscal Quarter of 2016
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43.58
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30.01
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First Fiscal Quarter of 2017
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45.37
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38.11
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Second Fiscal Quarter of 2017
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53.38
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39.31
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Third Fiscal Quarter of 2017
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52.37
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37.16
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Fourth Fiscal Quarter of 2017
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76.18
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48.95
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First Fiscal Quarter of 2018
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86.88
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69.91
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Monthly Highs and Lows
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March 2017
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60.91
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48.95
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April 2017
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68.52
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58.47
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May 2017
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76.18
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63.25
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June 2017
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83.21
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69.91
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July 2017
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83.91
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70.37
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August 2017
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86.88
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74.66
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September 2017 (through September 25)
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94.30
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80.59
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100
D.
Selling Shareholders
Not applicable.
E.
Dilution
Not applicable.
F.
Expenses of the Issue
Not applicable.
ITEM 10.
ADDITIONAL INFORMATION
A.
Share Capital
Not
applicable.
B.
Memorandum and Articles of Association
We are a Cayman Islands company and our affairs are governed by our memorandum and articles of association, the Companies Law (2016 Revision) of the Cayman
Islands, or the Companies Law, and the common law of the Cayman Islands. The following are summaries of material provisions of our amended and restated memorandum and articles of association in effect as of the date of this annual report insofar as
they relate to the material terms of our common shares.
Registered Office and Objects
Our registered office in the Cayman Islands is located at Conyers Trust Company (Cayman) Limited, Cricket Square, Hutchins Drive, P.O. Box 2681, Grand Cayman
KY1-1111, Cayman Islands, or at such other place as our board of directors may from time to time decide. The objects for which our company is established are unrestricted and we have full power and authority to carry out any object not prohibited by
the Companies Law, as amended from time to time, or any other law of the Cayman Islands.
Board of Directors
A director is not required to hold any shares in our company by way of qualification. A director may vote with respect to any contract, proposed contract or
arrangement in which he is materially interested. A director may exercise all the powers of our company to borrow money, mortgage its undertaking, property and uncalled capital, and issue debentures or other securities whenever money is borrowed or
as security for any obligation of our company or of any third party. The directors may receive such remuneration as our board may from time to time determine. There is no age limit requirement with respect to the retirement or non-retirement of a
director. See also Item 6. Directors, Senior Management and EmployeesC. Board PracticesDuties of Directors and Terms of Directors and Officers.
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Common Shares
General
. All of our outstanding common shares are fully paid and non-assessable. Certificates representing the common shares are issued in registered
form. Our shareholders who are non-residents of the Cayman Islands may freely hold and vote their shares.
Dividends
. The holders of our
common shares are entitled to such dividends as may be declared by our board of directors, subject to the Companies Law and our memorandum and articles of association.
Voting Rights
. Each common share is entitled to one vote on all matters upon which the common shares are entitled to vote. Voting at any
shareholders meeting is by show of hands unless a poll is demanded. A poll may be demanded by our chairman or any shareholder holding at least 10% of the shares given a right to vote at the meeting, present in person or by proxy.
A quorum required for a meeting of shareholders consists of at least two shareholders present in person or by proxy or, if a corporation or other non-natural
person, by its duly authorized representative, which hold in aggregate at least one-third of our voting share capital. Shareholders meetings are held annually and may be convened by our board of directors on its own initiative or upon a
request to the directors by shareholders holding in aggregate not less than 33% of our voting share capital. Advance notice of at least seven days is required for the convening of our annual general meeting and other shareholders meetings.
An ordinary resolution to be passed by the shareholders requires the affirmative vote of a simple majority of the votes attaching to the common shares
cast in a general meeting, while a special resolution requires the affirmative vote of not less than two-thirds of the votes cast attaching to the common shares. A special resolution is required for important matters such as a change of name.
Holders of the common shares may affect certain changes by ordinary resolution, including increasing the amount of our authorized share capital, consolidating and dividing all or any of our share capital into shares of a larger amount than our
existing share capital, and canceling any shares.
Transfer of Shares
. Subject to the restrictions of our memorandum and articles of association,
as applicable, any of our shareholders may transfer all or any of his or her common shares by an instrument of transfer in the usual or common form prescribed by the New York Stock Exchange or in any other form approved by our board.
Our board of directors may, in its sole discretion, decline to register any transfer of any common share which is not fully paid up or on which we have a
lien. Our directors may also decline to register any transfer of any common share unless (1) the instrument of transfer is lodged with us, accompanied by the certificate for the common shares to which it relates and such other evidence as our
board of directors may reasonably require to show the right of the transferor to make the transfer; (2) the instrument of transfer is in respect of only one class of common shares; (3) the instrument of transfer is duly and properly
signed; (4) in the case of a transfer to joint holders, the number of joint holders to whom the common share is to be transferred does not exceed four; (5) the shares conceded are free of any lien in favor of us; or (6) a fee of such
maximum sum as the New York Stock Exchange may determine to be payable, or such lesser sum as our board of directors may from time to time require, is paid to us in respect thereof.
If our directors refuse to register a transfer they shall, within two months after the date on which the instrument of transfer was lodged, send to each of
the transferor and the transferee notice of such refusal. The registration of transfers may, on 14 days notice being given by advertisement in such one or more newspapers or by electronic means, be suspended and the register closed at such
times and for such periods as our board of directors may from time to time determine, provided, however, that the registration of transfers shall not be suspended nor the register closed for more than 30 days in any year.
Liquidation
. On a return of capital on winding up or otherwise (other than on conversion, redemption or purchase of shares), assets available for
distribution among the holders of common shares shall be distributed among the holders of the common shares on a pro rata basis. If our assets available for distribution are insufficient to repay all of the paid-up capital, the assets will be
distributed so that the losses are borne by our shareholders proportionately.
Calls on Shares and Forfeiture of Shares
. Our board of
directors may from time to time make calls upon shareholders for any amounts unpaid on their shares in a notice served to such shareholders at least 14 days prior to the specified time and place of payment. The shares that have been called upon and
remain unpaid on the specified time are subject to forfeiture.
102
Redemption of Shares
. Subject to the provisions of the Companies Law, we may issue shares on terms that
are subject to redemption, at our option or at the option of the holders, on such terms and in such manner as may be determined by special resolution.
Variations of Rights of Shares
. All or any of the special rights attached to any class of shares may, subject to the provisions of the Companies Law,
be varied either with the written consent of the holders of two-thirds of the issued shares of that class or with the sanction of a special resolution passed at a general meeting of the holders of the shares of that class.
Inspection of Books and Records
. Holders of our common shares have no general right under Cayman Islands law to inspect or obtain copies of our list of
shareholders or our corporate records. However, we will provide our shareholders with annual audited financial statements. See H. Documents on Display.
Limitations on the Right to Own Shares
. There are no limitations on the right to own our shares.
Disclosure of Shareholder Ownership
. There are no provisions in our amended and restated memorandum and articles of association governing the ownership
threshold above which shareholder ownership must be disclosed.
Differences in Corporate Law
The Companies Law is derived, to a large extent, from the older Companies Acts of England but does not follow recent statutory enactments in England. In
addition, the Companies Law differs from laws applicable to United States corporations and their shareholders. Set forth below is a summary of the significant differences between the provisions of the Companies Law applicable to us and the laws
applicable to companies incorporated in the United States.
Mergers and Similar Arrangements
. The Companies Law permits mergers and consolidations
between Cayman Islands companies and between Cayman Islands companies and non-Cayman Islands companies. For these purposes, (a) merger means the merging of two or more constituent companies and the vesting of their undertaking,
property and liabilities in one of such companies as the surviving company and (b) a consolidation means the combination of two or more constituent companies into a combined company and the vesting of the undertaking, property and
liabilities of such companies to the consolidated company. In order to effect such a merger or consolidation, the directors of each constituent company must approve a written plan of merger or consolidation, which must then be authorized by
(a) a special resolution of the shareholders of each constituent company, and (b) such other authorization, if any, as may be specified in such constituent companys articles of association.
The written plan of merger or consolidation must be filed with the Registrar of Companies together with a declaration as to the solvency of the consolidated
or surviving company, a list of the assets and liabilities of each constituent company and an undertaking that a copy of the certificate of merger or consolidation will be given to the members and creditors of each constituent company and that
notification of the merger or consolidation will be published in the Cayman Islands Gazette. Dissenting shareholders have the right to be paid the fair value of their shares (which, if not agreed between the parties, will be determined by the Cayman
Islands court) if they follow the required procedures, subject to certain exceptions. Court approval is not required for a merger or consolidation which is effected in compliance with these statutory procedures.
In addition, there are statutory provisions that facilitate the reconstruction and amalgamation of companies, provided that the arrangement is approved by a
majority in number of each class of shareholders and creditors with whom the arrangement is to be made, and who must, in addition, represent 75% in value of each such class of shareholders or creditors, as the case may be, that are present and
voting either in person or by proxy at a meeting, or meetings, convened for that purpose. The convening of the meetings and subsequently the arrangement must be sanctioned by the Grand Court of the Cayman Islands. While a dissenting shareholder has
the right to express to the court the view that the transaction ought not to be approved, the Grand Court of the Cayman Islands can be expected to approve the arrangement if it determines that (a) the statutory provisions as to the required
majority vote have been met; (b) the shareholders have been fairly represented at the meeting in question and the statutory majority are acting bona fide without coercion of the minority to promote interests adverse to those of the class;
(c) the arrangement is such that may be reasonably approved by an intelligent and honest man of that class acting in respect of his interest; and (d) the arrangement is not one that would more properly be sanctioned under some other
provision of the Companies Law.
103
If an arrangement and reconstruction is thus approved, the dissenting shareholder would have no rights comparable
to appraisal rights, which would otherwise ordinarily be available to dissenting shareholders of Delaware corporations, providing rights to receive payment in cash for the judicially determined value of the shares.
When a takeover offer is made and accepted by holders of 90% of the shares affected within four months, the offeror may, within a two-month period commencing
on the expiration of such four month period, require the holders of the remaining shares to transfer such shares on the terms of the offer. An objection can be made to the Grand Court of the Cayman Islands but this is unlikely to succeed in the case
of an offer which has been so approved unless there is evidence of fraud, bad faith or collusion.
Shareholders Suits
. In principle, we will
normally be the proper plaintiff and as a general rule a derivative action may not be brought by a minority shareholder. However, based on English authorities, which would in all likelihood be of persuasive authority in the Cayman Islands, there are
exceptions to the foregoing principle, including when (a) a company acts or proposes to act illegally or ultra vires; (b) the act complained of, although not ultra vires, could only be effected duly if authorized by more than a simple
majority vote that has not been obtained; and (c) those who control the company are perpetrating a fraud on the minority.
Indemnification of Directors and Executive Officers and Limitation of Liability.
Cayman Islands law does not limit the extent to which a companys
articles of association may provide for indemnification of officers and directors, except to the extent any such provision may be held by the Cayman Islands courts to be contrary to public policy, such as to provide indemnification against civil
fraud or the consequences of committing a crime. Our amended and restated memorandum and articles of association permit indemnification of officers and directors for losses, damages, costs and expenses incurred in their capacities as such unless
such losses or damages arise from dishonesty or fraud which may attach to such directors or officers. This standard of conduct is generally the same as permitted under the Delaware General Corporation Law for a Delaware corporation. In addition, we
intend to enter into indemnification agreements with our directors and senior executive officers that will provide such persons with additional indemnification beyond that provided in our amended and restated memorandum and articles of association.
Insofar as indemnification for liabilities arising under the Securities Act may be permitted to our directors, officers or persons controlling us
under the foregoing provisions, we have been informed that, in the opinion of the SEC, such indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable.
Anti-Takeover Provisions in the Memorandum and Articles of Association.
Some provisions of our amended and restated memorandum and articles of
association may discourage, delay or prevent a change in control of our company or management that shareholders may consider favorable, including provisions that authorize our board of directors to issue preference shares in one or more series and
to designate the price, rights, preferences, privileges and restrictions of such preference shares without any further vote or action by our shareholders.
However, under Cayman Islands law, our directors may only exercise the rights and powers granted to them under our memorandum and articles of association, as
amended and restated from time to time, for what they believe in good faith to be in the best interests of our company.
Directors Fiduciary
Duties.
As a matter of Cayman Islands law, a director of a Cayman Islands company is in the position of a fiduciary with respect to the company and therefore it is considered that he owes the following duties to the companya duty to act
bona fide in the best interests of the company, a duty not to make a profit based on his or her position as director (unless the company permits him to do so) and a duty not to put himself in a position where the interests of the company conflict
with his or her personal interest or his or her duty to a third party. A director of a Cayman Islands company owes to the company a duty to act with skill and care. It was previously considered that a director need not exhibit in the performance of
his or her duties a greater degree of skill than may reasonably be expected from a person of his or her knowledge and experience. However, English and Commonwealth courts have moved towards an objective standard with regard to the required skill and
care and these authorities are likely to be followed in the Cayman Islands.
104
In addition, directors of a Cayman Islands company must not place themselves in a position in which there is a
conflict between their duty to the company and their personal interests. However, this obligation may be varied by the companys articles of association, which may permit a director to vote on a matter in which he has a personal interest
provided that he has disclosed that nature of his interest to the board. Our amended and restated memorandum and articles of association provides that a director with an interest (direct or indirect) in a contract or arrangement or proposed contract
or arrangement with the company must declare the nature of his interest at the meeting of the board of directors at which the question of entering into the contract or arrangement is first considered, if he knows his interest then exists, or in any
other case at the first meeting of the board of directors after he is or has become so interested.
A general notice may be given at a meeting of the
board of directors to the effect that (i) the director is a member/officer of a specified company or firm and is to be regarded as interested in any contract or arrangement which may after the date of the notice in writing be made with that
company or firm; or (ii) he is to be regarded as interested in any contract or arrangement which may after the date of the notice in writing to the board of directors be made with a specified person who is connected with him, will be deemed
sufficient declaration of interest. Following the disclosure being made pursuant to our amended and restated memorandum and articles of association and subject to any separate requirement for Audit Committee approval under applicable law or the
listing rules of the NYSE, and unless disqualified by the chairman of the relevant board meeting, a director may vote in respect of any contract or arrangement in which such director is interested and may be counted in the quorum at such meeting.
However, even if a director discloses his interest and is therefore permitted to vote, he must still comply with his duty to act bona fide in the best interest of our company.
In comparison, under Delaware corporate law, a director of a Delaware corporation has a fiduciary duty to the corporation and its shareholders. This duty has
two components: the duty of care and the duty of loyalty. The duty of care requires that a director act in good faith, with the care that an ordinarily prudent person would exercise under similar circumstances. Under this duty, a director must
inform himself of, and disclose to shareholders, all material information reasonably available regarding a significant transaction. The duty of loyalty requires that a director act in a manner he or she reasonably believes to be in the best
interests of the corporation. He or she must not use his or her corporate position for personal gain or advantage. This duty prohibits self-dealing by a director and mandates that the best interest of the corporation and its shareholders take
precedence over any interest possessed by a director, officer or controlling shareholder and not shared by the shareholders generally. In general, actions of a director are presumed to have been made on an informed basis, in good faith and in the
honest belief that the action taken was in the best interests of the corporation. However, this presumption may be rebutted by evidence of a breach of one of the fiduciary duties. Should such evidence be presented concerning a transaction by a
director, a director must prove the procedural fairness of the transaction, and that the transaction was of fair value to the corporation.
Shareholder
Proposals.
Under the Delaware General Corporation Law, a shareholder has the right to put any proposal before the annual meeting of shareholders, provided it complies with the notice provisions in the governing documents. The Delaware General
Corporation Law does not provide shareholders an express right to put any proposal before the annual meeting of shareholders, but in keeping with common law, Delaware corporations generally afford shareholders an opportunity to make proposals and
nominations provided that they comply with the notice provisions in the certificate of incorporation or bylaws. A special meeting may be called by the board of directors or any other person authorized to do so in the governing documents, but
shareholders may be precluded from calling special meetings.
There are no statutory requirements under Cayman Islands law allowing our
shareholders to requisition a shareholders meeting. However, under our amended and restated articles of association, on the requisition of shareholders representing not less than 33% of the voting rights entitled to vote at general meetings,
the board shall convene an extraordinary general meeting. As an exempted Cayman Islands company, we are not obliged by law to call shareholders annual general meetings, and our amended and restated articles of association does not require us
to call such meetings every year.
105
Cumulative Voting.
Under the Delaware General Corporation Law, cumulative voting for elections of
directors is not permitted unless the corporations certificate of incorporation specifically provides for it. Cumulative voting potentially facilitates the representation of minority shareholders on a board of directors since it permits the
minority shareholder to cast all the votes to which the shareholder is entitled on a single director, which increases the shareholders voting power with respect to electing such director. As permitted under Cayman Islands law, our amended and
restated articles of association do not provide for cumulative voting. As a result, our shareholders are not afforded any less protections or rights on this issue than shareholders of a Delaware corporation.
Removal of Directors.
Under the Delaware General Corporation Law, a director of a corporation with a classified board may be removed only for cause
with the approval of a majority of the outstanding shares entitled to vote, unless the certificate of incorporation provides otherwise. Under our amended and restated articles of association, directors may be removed by an ordinary resolution of
shareholders.
Transactions with Interested Shareholders.
The Delaware General Corporation Law contains a business combination statute
applicable to Delaware public corporations whereby, unless the corporation has specifically elected not to be governed by such statute by amendment to its certificate of incorporation or bylaws that is approved by its shareholders, it is prohibited
from engaging in certain business combinations with an interested shareholder for three years following the date that such person becomes an interested shareholder. An interested shareholder generally is a person or a group who or which
owns or owned 15% or more of the targets outstanding voting stock or who or which is an affiliate or associate of the corporation and owned 15% or more of the corporations outstanding voting stock within the past three years. This has
the effect of limiting the ability of a potential acquirer to make a two-tiered bid for the target in which all shareholders would not be treated equally. The statute does not apply if, among other things, prior to the date on which such shareholder
becomes an interested shareholder, the board of directors approves either the business combination or the transaction which resulted in the person becoming an interested shareholder. This encourages any potential acquirer of a Delaware corporation
to negotiate the terms of any acquisition transaction with the targets board of directors.
Cayman Islands law has no comparable statute. As
a result, we cannot avail ourselves of the types of protections afforded by the Delaware business combination statute. However, although Cayman Islands law does not regulate transactions between a company and its significant shareholders, it does
provide that such transactions must be entered into bona fide in the best interests of the company and for a proper corporate purpose and not with the effect of constituting a fraud on the minority shareholders.
Dissolution; Winding Up.
Under the Delaware General Corporation Law, unless the board of directors approves the proposal to dissolve, dissolution must
be approved by shareholders holding 100% of the total voting power of the corporation. Only if the dissolution is initiated by the board of directors may it be approved by a simple majority of the corporations outstanding shares. Delaware law
allows a Delaware corporation to include in its certificate of incorporation a supermajority voting requirement in connection with dissolutions initiated by the board. Under Cayman Islands law, a company may be wound up by either an order of the
courts of the Cayman Islands or by a special resolution of its members or, if the company is unable to pay its debts as they fall due, by an ordinary resolution of its members. The court has authority to order winding up in a number of specified
circumstances including where it is, in the opinion of the court, just and equitable to do so.
Under the Companies Law, our company may be
dissolved, liquidated or wound up by a special resolution of our shareholders.
Variation of Rights of Shares.
Under the Delaware General
Corporation Law, a corporation may vary the rights of a class of shares with the approval of a majority of the outstanding shares of such class, unless the certificate of incorporation provides otherwise. Under Cayman Islands law and our amended and
restated articles of association, if our share capital is divided into more than one class of shares, we may vary the rights attached to any class only with the consent in writing of the holders of two-thirds of the issued shares of that class, or
with the sanction of a special resolution passed at a separate meeting of the holders of the shares of that class.
Amendment of Governing
Documents.
Under the Delaware General Corporation Law, a corporations certificate of incorporation may be amended only if adopted and declared advisable by the board of directors and approved by a majority of the outstanding shares
entitled to vote, and the bylaws may be amended with the approval of a majority of the outstanding shares entitled to vote and may, if so provided in the certificate of incorporation, also be amended by the board of directors. Under Cayman Islands
law, our amended and restated memorandum and articles of association may only be amended by a special resolution of our shareholders.
106
Rights of Non-Resident or Foreign Shareholders.
There are no limitations imposed by our amended and
restated memorandum and articles of association on the rights of non-resident or foreign shareholders to hold or exercise voting rights on our shares. In addition, there are no provisions in our amended and restated memorandum and articles of
association governing the ownership threshold above which shareholder ownership must be disclosed.
Directors Power to Issue Shares.
Subject to applicable law, our board of directors is empowered to issue or allot shares or grant options and warrants with or without preferred, deferred, qualified or other special rights or restrictions.
C.
Material Contracts
We have not entered into any
material contracts other than in the ordinary course of business and other than those described in Item 4. Information on the CompanyC. Organizational StructureContractual Arrangements with New Oriental China and Its Schools and
Subsidiaries and Shareholder or elsewhere in this annual report on Form 20-F.
D.
Exchange Controls
See Item 4. Information on the CompanyB. Business OverviewRegulationRegulations on Foreign Currency Exchange.
E.
Taxation
The following discussion of the material
Cayman Islands, PRC and United States federal income tax consequences of an investment in our ADSs or common shares is based upon laws and relevant interpretations thereof in effect as of the date of this annual report on Form 20-F, all of which are
subject to change. This discussion does not deal with all possible tax consequences relating to an investment in our ADSs or common shares, such as the tax consequences under state, local and other tax laws. Accordingly, each investor should consult
its own tax advisor regarding the tax consequences of an investment in our ADSs or common shares applicable under its particular circumstances.
Cayman
Islands Taxation
The Cayman Islands currently levies no taxes on individuals or corporations based upon profits, income, gains or appreciation and
there is no taxation in the nature of inheritance tax or estate duty. There are no other taxes likely to be material to us levied by the government of the Cayman Islands except for stamp duties which may be applicable on instruments executed in, or
brought within the jurisdiction of the Cayman Islands. The Cayman Islands is a party to a double tax treaty entered into with the United Kingdom in 2010 but otherwise is not party to any double tax treaties. There are no exchange control regulations
or currency restrictions in the Cayman Islands.
PRC Taxation
Under the PRC Enterprise Income Tax Law, or the EIT Law, and its implementation rules that became effective on January 1, 2008, a non-resident enterprise
is generally subject to PRC enterprise income tax with respect to PRC-sourced income. A circular issued by the State Administration of Taxation on April 22, 2009 provides that a foreign enterprise controlled by a PRC company or a PRC company
group will be classified as a resident enterprise with its de facto management body located within China if the following requirements are satisfied: (i) the senior management and core management departments in charge of
its daily operations function are mainly in the PRC; (ii) its financial and human resources decisions are subject to determination or approval by persons or bodies in the PRC; (iii) its major assets, accounting books, company seals, and
minutes and files of its board and shareholders meetings are located or kept in the PRC; and (iv) at least half of the enterprises directors with voting right or senior management reside in the PRC. In addition, the State
Administration of Taxation issued a bulletin on August 3, 2011, effective as of September 1, 2011, to provide more guidance on the implementation of the above circular. The bulletin clarified certain matters relating to resident status
determination, post-determination administration and competent tax authorities. It also specifies that when provided with a copy of a PRC tax resident determination certificate from a resident PRC-controlled offshore incorporated enterprise, the
payer should not withhold 10% income tax when paying the PRC-sourced dividends, interest and royalties to the PRC-controlled offshore incorporated enterprise. Although both the circular and the bulletin only apply to offshore enterprises controlled
by PRC enterprises and not those by PRC individuals, the determination criteria set forth in the circular and administration clarification made in the bulletin may reflect the State Administration of Taxations general position on how the
de facto management body test should be applied in determining the tax residency status of offshore enterprises and the administration measures should be implemented, regardless of whether they are controlled by PRC enterprises or PRC
individuals. In addition, the State Administration of Taxation issued a bulletin on January 29, 2014, to provide more guidance on the implementation of the above circular. This bulletin further provided that, among other things, an entity that
is classified as a resident enterprise in accordance with the circular shall file the application for classifying its status of residential enterprise with the local tax authorities where its main domestic investors registered. From the
year in which the entity is determined as a resident enterprise, any dividend, profit and other equity investment gain shall be taxed in accordance with the Article 26 of EIT law and the Article 17 and Article 83 of its implementation
rules. If we are deemed to be a PRC resident enterprise, dividends distributed to our non-PRC enterprise shareholders by us, or the gain our non-PRC enterprise shareholders may realize from the transfer of our common shares or ADSs, may be treated
as PRC-sourced income and therefore be subject to a 10% PRC withholding tax pursuant to the EIT Law.
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For more information on PRC taxation applicable to our company, see Item 4. Information on the
CompanyB. Business Overview RegulationRegulations on Taxation and Item 5. Operating and Financial Review and ProspectsA. Operating ResultsTaxation.
U.S. Federal Income Taxation
The following discussion
applies only to U.S. Holders (as defined below) that hold our ADSs or common shares as capital assets and that have the U.S. dollar as their functional currency. This discussion is based upon existing U.S. federal tax law as in effect on the date of
this annual report, which is subject to differing interpretations or change (possibly with retroactive effect), and could affect the tax consequences described below.
The following discussion does not deal with the tax consequences to any particular holder or to persons in special tax situations such as:
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financial institutions;
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traders that elect to mark to market;
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tax-exempt entities (including private foundations);
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holders that are not U.S. Holders;
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persons whose functional currency is not the U.S. dollar;
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real estate investment trusts;
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regulated investment companies;
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persons liable for alternative minimum tax;
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persons holding ADSs or common shares as part of a straddle, hedging, conversion, constructive sale, or other integrated transaction for United States federal income tax purposes;
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persons that actually or constructively own 10% or more of our voting stock;
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persons holding ADSs or common shares through partnerships or other pass-through entities; or
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persons who acquired ADSs or common shares pursuant to the exercise of any employee share option or otherwise as compensation.
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U.S. HOLDERS ARE URGED TO CONSULT THEIR TAX ADVISORS ABOUT THE APPLICATION OF THE U.S. FEDERAL TAX RULES TO THEIR PARTICULAR CIRCUMSTANCES AS WELL AS THE
STATE, LOCAL AND FOREIGN TAX, MEDICARE TAX AND NON-INCOME TAX (SUCH AS THE UNITED STATES FEDERAL ESTATE OR GIFT TAX) CONSEQUENCES TO THEM OF THE OWNERSHIP AND DISPOSITION OF ADSS OR COMMON SHARES.
The discussion below of the United States federal income tax consequences to U.S. Holders will apply if you are the beneficial owner of ADSs or
common shares and you are, for U.S. federal income tax purposes,
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a citizen or individual resident of the U.S.;
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a corporation (or other entity taxable as a corporation for U.S. federal income tax purposes) organized under the laws of the United States, any State or the District of Columbia;
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an estate whose income is subject to U.S. federal income taxation regardless of its source; or
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a trust that (1) is subject to the supervision of a court within the U.S. and the control of one or more U.S. persons or (2) has a valid election in effect under applicable U.S. Treasury regulations to be
treated as a U.S. person.
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If a partnership (including any entity treated as a partnership for United States federal income tax purposes) is
a beneficial owner of common shares or ADSs, the tax treatment of a partner in such partnership will depend upon the status of the partner and the activities of the partnership. Partners in a partnership holding our common shares or ADSs should
consult their tax advisors regarding the United States federal income tax considerations relating to the ownership or disposition of our common shares or ADSs.
The discussion below assumes that the representations contained in the deposit agreement are true and that the obligations in the deposit agreement and any
related agreement will be complied with in accordance with the terms. Accordingly, if you hold ADSs, it is generally expected that you should be treated as the beneficial owner of the underlying common shares represented by those ADSs for U.S.
federal income tax purposes. The remainder of this discussion assumes that a U.S. Holder of our ADSs will be treated in this manner.
Taxation of
Distributions on the ADSs or Common Shares
Subject to the passive foreign investment company rules discussed below, the gross amount of all our
distributions paid to you with respect to the ADSs or common shares out of our current or accumulated earnings and profits, generally will be included in your gross income as ordinary dividend income on the date of receipt by the depositary, in the
case of ADSs, or by you, in the case of common shares. Because we do not intend to determine our earnings and profits on the basis of U.S. federal income tax principles, any distribution paid will generally be reported as a dividend for
U.S. federal income tax purposes. The dividends will not be eligible for the dividends-received deduction allowed to corporations in respect of dividends received from other U.S. corporations.
With respect to non-corporate U.S. Holders, including individuals, dividends may be qualified dividend income which is taxed at the lower
applicable capital gains rate provided that (1) the ADSs or common shares, as applicable, are readily tradable on an established securities market in the United States, or we are eligible for the benefit of the income tax treaty between the
U.S. and the PRC, (2) the non-United States corporation is not a passive foreign investment company (as discussed below) for either its taxable year in which the dividend was paid or the preceding taxable year and (3) certain holding
period requirements are met. Although we expect our ADSs will be considered to be readily tradable on the NYSE, which is an established securities market in the U.S., there can be no assurance that our ADSs will be considered readily tradable on an
established securities market in the future. Since we do not expect that our common shares will be listed on an established securities market in the U.S., it is unclear whether dividends that we pay on our common shares that are not backed by ADSs
currently meet the conditions required for the reduced tax rate. In the event, however, that we are deemed to be a PRC resident enterprise under the EIT Law, we may be eligible for the benefits of the U.S.PRC income tax treaty. U.S. Holders
are advised to consult their tax advisors regarding the availability of the lower rate for dividends paid with respect to our ADSs or common shares.
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Dividends paid on our ADSs and common shares generally will be treated as income from foreign sources for U.S.
foreign tax credit purposes and generally will constitute passive category income. In the event that we are deemed to be a PRC resident enterprise under the EIT Law, a U.S. Holder may be subject to a number of complex limitations, to claim a foreign
tax credit in respect of any foreign withholding taxes imposed on dividends received on our ADSs or common shares. A U.S. Holder who does not elect to claim a foreign tax credit for foreign tax withheld may instead claim a deduction for U.S. federal
income tax purposes in respect of such withholdings, but only for a year in which such U.S. Holder elects to do so for all creditable foreign income taxes. The rules governing the foreign tax credit are complex. U.S. Holders are advised to consult
their tax advisors regarding the creditability of any PRC tax.
Taxation of Disposition of Shares
Subject to the passive foreign investment company rules discussed below, a U.S. Holder will recognize taxable gain or loss on any sale, exchange or other
taxable disposition of an ADS or common share equal to the difference between the amount realized for the ADS or common share and such holders tax basis in the ADS or common share. The gain or loss generally will be capital gain or loss. A
non-corporate U.S. Holder, including an individual, who has held the ADS or common share for more than one year will be eligible for reduced capital gains rates. The deductibility of capital losses is subject to limitations. Any such gain or loss
generally will be treated as U.S. source income or loss. In the event that we are deemed to be a PRC resident enterprise under the EIT Law and gain from the disposition of the ADSs or common shares is subject to tax in the PRC, a U.S. Holder that is
eligible for the benefits of the U.S.-PRC treaty may elect to treat the gain as PRC source income. See PRC Taxation. U.S. Holders are advised to consult their tax advisors regarding the tax consequences if a foreign tax is imposed
on a disposition of our ADSs or common shares, including the availability of the foreign tax credit, under their particular circumstances.
Passive
Foreign Investment Company Considerations
A non-United States corporation, such as our company, will be a passive foreign investment
company, or a PFIC, for United States federal income tax purposes, if either (1) 75% or more of its gross income for such year consists of certain types of passive income or (2) 50% or more of its average
quarterly assets as determined on the basis of fair market value during such year produce or are held for the production of passive income. For this purpose, cash and assets readily convertible into cash are categorized as passive assets and the
companys goodwill and other unbooked intangibles associated with active business activities may generally be classified as active assets. If a non-U.S. corporation directly or indirectly owns at least 25% (by value) of the stock of another
corporation, such corporation will be treated, for purposes of the PFIC tests, as owning a proportionate share of the assets and earning a proportionate share of the other corporations assets and receiving a proportionate share of the other
corporations income.
Although the law in this regard is unclear, we treat New Oriental China as being owned by us for U.S. federal income tax
purposes, not only because we control its management decisions but also because we are entitled to substantially all of the economic benefits associated with this entity, and, as a result, we consolidate this entitys operating results in our
combined financial statements. If it were determined, however, that we are not the owner of New Oriental China for U.S. federal income tax purposes, we may be or become a PFIC. Assuming that we are the owner of New Oriental China for United States
federal income tax purposes, and based upon an analysis of the Companys income and assets in respect of the 2017 taxable year, we do not believe that we were a PFIC, for U.S. federal income tax purposes, for the taxable year ended May 31,
2017. In light of the amount of our cash balances and because the value of our assets for purposes of the PFIC test will generally be determined by reference to the market value of our ADSs, the determination of whether we will be or become a PFIC
will depend in large part upon the market value of our ADSs, which we cannot control. Accordingly, fluctuations in the market price of our ADSs may cause us to become a PFIC for the current taxable year or future taxable years. It is also possible,
that the United States Internal Revenue Service may challenge our classification or valuation of our goodwill and other unbooked intangibles, which may result in our company being, or becoming a PFIC. The determination of whether we will be or
become a PFIC will also depend, in part, upon the nature of our assets and income over time, which are subject to change from year to year. There can be no assurance our business plans will not change in a manner that will affect the composition of
our income and assets and our PFIC status. Because there are uncertainties in the application of the relevant rules and PFIC status is a fact-intensive determination made on an annual basis, no assurance can be given that we are not or will not
become classified as a PFIC.
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Passive Foreign Investment Company Rules
If we are a PFIC for any taxable year during which a U.S. Holder holds our ADSs or common shares, and unless the U.S. Holder makes a mark-to-market election
(as described below), the U.S. Holder will generally be subject to special tax rules that have a penalizing effect, regardless of whether we remain a PFIC, on (1) any excess distribution that we make to the U.S. Holder which generally means any
distribution paid during a taxable year to a U.S. Holder that is greater than 125 percent of the average annual distributions paid in the three preceding taxable years or, (2) if shorter, the U.S. Holders holding period for the ADSs or
common shares. Under these PFIC rules:
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such excess distribution and/or gain will be allocated ratably over the U.S. Holders holding period for the ADSs or common shares;
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such amount allocated to the current taxable year, and any taxable years in the U.S. Holders holding period prior to the first taxable year in which we were a PFIC (a pre-PFIC year), will be taxable as
ordinary income;
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such amount allocated to each prior taxable year, other than the current taxable year or a pre-PFIC year, will be subject to tax at the highest tax rate in effect for individuals or corporations, as applicable, for each
such year; and
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an interest charge generally applicable to underpayments of tax will be imposed on the tax attributable to each prior taxable year, other than the current taxable year or a pre-PFIC year.
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If we are a PFIC for any taxable year during which a U.S. Holder holds our ADSs or common shares and any of our non-U.S. subsidiaries is also a PFIC (i.e., a
lower-tier PFIC), such U.S. Holder would be treated as owning a proportionate amount (by value) of the shares of the lower-tier PFIC and would be subject to the rules described above on certain distributions by a lower-tier PFIC and a disposition of
shares of a lower-tier PFIC even though such U.S. Holder would not receive the proceeds of those distributions or dispositions. U.S. Holders are advised to consult their tax advisors regarding the application of the PFIC rules to any of our
subsidiaries.
A U.S. Holder of marketable stock (as defined below) in a PFIC may make a mark-to-market election for such stock to elect out
of the tax treatment discussed above. If a U.S. Holder makes a mark-to-market election for the ADSs or common shares, such holder will include in income for each year that we are treated as a PFIC with respect to such holder an amount equal to the
excess, if any, of the fair market value of the ADSs or common shares as of the close of your taxable year over the holders adjusted basis in such ADSs or common shares. A U.S. Holder will be allowed a deduction for the excess, if any, of the
adjusted basis of the ADSs or common shares over their fair market value as of the close of the taxable year. However, deductions will be allowable only to the extent of any net mark-to-market gains on the ADSs or common shares included in a U.S.
Holders income for prior taxable years. Amounts included in a U.S. Holders income under a mark-to-market election, as well as gain on the actual sale or other disposition of the ADSs or common shares, will be treated as ordinary income.
Ordinary loss treatment will also apply to the deductible portion of any mark-to-market loss on the ADSs or common shares, as well as to any loss realized on the actual sale or disposition of the ADSs or common shares, to the extent that the amount
of such loss does not exceed the net mark-to-market gains previously included for such ADSs or common shares. A U.S. Holders basis in the ADSs or common shares will be adjusted to reflect any such income or loss amounts. If a U.S. Holder makes
a valid mark-to-market election, the tax rules that apply to distributions by corporations which are not PFICs would apply to distributions by us, except that the lower capital gains rate applicable to qualified dividend income (discussed above
under Taxation of Distributions on the ADSs or Common Shares) would not apply.
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The mark-to-market election is available only for marketable stock, which is stock that is traded in
other than de minimis quantities on at least 15 days during each calendar quarter (regularly traded) on a qualified exchange or other market, as defined in applicable United States Treasury regulations. Our ADSs are listed on the NYSE,
which is a qualified exchange or market for these purposes. Consequently, if the ADSs continue to be listed on the NYSE and are regularly traded, and a U.S. Holder holds ADSs, we expect that the mark-to-market election would be available to such
U.S. Holder were we to be or become a PFIC although there can be no assurance in this regard. Because a mark-to-market election cannot be made for equity interests in any lower-tier PFICs that we own, a U.S. Holder may continue to be subject to the
PFIC rules with respect to its indirect interest in any investments held by us that are treated as an equity interest in a PFIC for U.S. federal income tax purposes. In the case of a U.S. Holder who has held ADSs or common shares during any taxable
year in respect of which we were classified as a PFIC and continues to hold such ADSs or common shares (or any portion thereof) and has not previously determined to make a mark-to-market election, and who is now considering making a mark-to-market
election, special tax rules may apply relating to purging the PFIC taint of such ADSs or common shares.
Alternatively, a U.S. Holder of stock in a PFIC
may make a qualified electing fund or QEF election with respect to such PFIC to elect out of the tax treatment discussed above. A U.S. Holder that makes a valid QEF election with respect to a PFIC will generally include in
gross income for a taxable year such holders pro rata share of the corporations earnings and profits for the taxable year. However, the qualified electing fund election is available only if the PFIC provides such U.S. Holder with certain
information regarding its earnings and profits as required under applicable United States Treasury regulations. We do not intend to prepare or provide the information that would enable a U.S. Holder to make a QEF election. Accordingly, U.S. Holders
should assume that the QEF Election will not be available.
If a U.S. Holder holds ADSs or common shares in any year in which we are treated as a PFIC
with respect to such U.S. Holder, the U.S. Holder will generally be required to file United States Internal Revenue Service Form 8621 and such other form as is required by the United States Treasury Department. U.S. Holders are urged to consult
their tax advisor regarding the application of the PFIC rules to their ownership or disposition of our ADSs or common shares.
Information Reporting
The United States tax compliance rules generally impose reporting requirements on individual U.S. Holders and other specified entities with
respect to their beneficial ownership of a non-United States company, including our ADSs or common shares, if such interests are not held on their behalf by a U.S. financial institution and other criteria are met. These rules also impose penalties
if an individual U.S. Holder is required to submit such information to the United States Internal Revenue Service and fails to do so. In addition, U.S. Holders may be subject to information reporting to the United States Internal Revenue Service
with respect to dividends on and proceeds from the sale or other disposition of our ADSs or common shares. U.S. Holders are advised to consult their tax advisors regarding the application of the United States information reporting rules to their
particular circumstances.
F.
Dividends and Paying Agents
Not applicable.
G.
Statement by Experts
Not applicable.
H.
Documents on Display
We previously filed with the SEC a registration statements on Form F-1 under the U.S. Securities Act of 1933, as amended, with respect to two offerings of our
common shares represented by ADSs.
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We are subject to the periodic reporting and other informational requirements of the Exchange Act. Under the
Exchange Act, we are required to file reports and other information with the SEC. In particular, we are required to file annually a Form 20-F within four months after the end of each fiscal year. The SEC maintains a website at www.sec.gov that
contains reports, proxy and information statements, and other information regarding registrants that make electronic filings with the SEC using its EDGAR system. Copies of reports and other information, when filed, may also be inspected without
charge and may be obtained at prescribed rates at the public reference facilities maintained by the SEC at 100 F Street, N.E., Room 1580, Washington, D.C. 20549. The public may obtain information regarding the Washington, D.C. Public Reference Room
by calling the SEC at 1- 800-SEC-0330. As a foreign private issuer, we are exempt from the rules under the Exchange Act prescribing the furnishing and content of quarterly reports and proxy statements, and officers, directors and principal
shareholders are exempt from the reporting and short-swing profit recovery provisions contained in Section 16 of the Exchange Act.
We will furnish
Deutsche Bank Trust Company Americas, the depositary of our ADSs, with our annual reports, which will include a review of operations and annual audited consolidated financial statements prepared in conformity with U.S. GAAP, and all notices of
shareholders meetings and other reports and communications that are made generally available to our shareholders. The depositary will make such notices, reports and communications available to holders of ADSs and, upon our request, will mail
to all record holders of ADSs the information contained in any notice of a shareholders meeting received by the depositary from us.
I.
Subsidiary Information
Not applicable.
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk
Our exposure to interest rate risk primarily relates to the interest income generated by excess cash invested in liquid investments with original maturities of
three months or less and term deposits with maturities of greater than three months and less than a year. We have not used any derivative financial instruments to manage our interest risk exposure. Interest-earning instruments carry a degree of
interest rate risk. We have not been exposed, nor do we anticipate being exposed, to material risks due to changes in interest rates. However, our future interest income may be lower than expected due to changes in market interest rates. A
hypothetical one percentage point decrease in interest rates would have resulted in a decrease of approximately US$12.1 million in our interest income for the year ended May 31, 2017.
Foreign Exchange Risk
All of our revenues and
most of our expenses are denominated in RMB. Our exposure to foreign exchange risk primarily relates to cash and cash equivalent denominated in U.S. dollars. We do not believe that we currently have any significant direct foreign exchange risk and
have not hedged exposures denominated in foreign currencies or used any other derivative financial instruments. Although in general, our exposure to foreign exchange risks should be limited, the value of your investment in our ADSs will be affected
by the foreign exchange rate between U.S. dollars and RMB because the value of our business is effectively denominated in RMB, while the ADSs are traded in U.S. dollars.
The value of the Renminbi against the U.S. dollar and other currencies is affected by, among other things, changes in Chinas political and economic
conditions and Chinas foreign exchange policies. The conversion of the Renminbi into foreign currencies, including the U.S. dollar, has been based on exchange rates set by the Peoples Bank of China. The PRC government allowed the
Renminbi to appreciate by more than 20% against the U.S. dollar between July 2005 and July 2008. Between July 2008 and June 2010, this appreciation was halted and the exchange rate between the Renminbi and the U.S. dollar remained within a narrow
band. Since June 2010, the Renminbi has fluctuated against the U.S. dollar, at times significantly and unpredictably. It is difficult to predict how market forces or PRC or U.S. government policy may impact the exchange rate between the Renminbi and
the U.S. dollar in the future. In addition, there remains significant international pressure on the PRC government to adopt a substantial liberalization of its currency policy, which could result in further appreciation in the value of the RMB
against the U.S. dollar.
To the extent that we need to convert U.S. dollar-denominated financial assets into RMB for our operations, appreciation of the
RMB against the U.S. dollar would have an adverse effect on the RMB amount we receive from the conversion. A hypothetical 10% appreciation of the RMB against the U.S. dollar would have resulted in a decrease of RMB51.7 million in the value of our
U.S. dollar denominated financial assets as of May 31, 2017.
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ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
A.
Debt Securities
Not applicable.
B.
Warrants and Rights
Not applicable.
C.
Other Securities
Not applicable.
D.
American Depositary Shares
Fees and Charges Our
ADS holders May Have to Pay
The depositary of our ADS facility, Deutsche Bank Trust Company Americas, shall charge the following fees for the services
performed under the terms of the deposit agreement, unless otherwise agreed in writing by us and the depositary; provided, however, that no fees shall be payable upon distribution of cash dividends so long as the charging of such fee is prohibited
by the exchange, if any, upon which the ADSs are listed:
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to any person to whom ADSs are issued or to any person to whom a distribution is made in respect of ADS distributions pursuant to stock dividends or other free distributions of stock, bonus distributions, stock splits
or other distributions (except where converted to cash), a fee not in excess of US$5.00 per 100 ADSs (or fraction thereof) so issued under the terms of the deposit agreement to be determined by the depositary;
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to any person surrendering ADSs for cancellation and withdrawal of deposited securities including, inter alia, cash distributions made pursuant to a cancellation or withdrawal, a fee not in excess of US$5.00 per 100
ADSs (or fraction thereof) so surrendered;
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to any holder of ADSs, a fee not in excess of US$0.05 per ADS held for the distribution of cash proceeds, including cash dividends or sale of rights and other entitlements, not made pursuant to a cancellation or
withdrawal;
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to any holder of ADSs, a fee not in excess of US$5.00 per 100 ADSs (or portion thereof) issued upon the exercise of rights; and
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for the operation and maintenance costs in administering the ADSs, an annual fee of US$0.05 or less per ADSs (such fee to be assessed against holders of record as of the date or dates set by the depositary as it sees
fit and collected at the sole discretion of the depositary by billing such holders for such fee or by deducting such fee from one or more cash dividends or other cash distributions).
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In addition, holders, beneficial owners, persons depositing our common shares for deposit and persons surrendering ADSs for cancellation and withdrawal of
deposited securities will be required to pay the following charges:
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taxes (including applicable interest and penalties) and other governmental charges;
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such registration fees as may from time to time be in effect for the registration of our common shares or other deposited securities with the foreign registrar and applicable to transfers of common shares or other
deposited securities to or from the name of the custodian, the depositary or any nominees upon the making of deposits and withdrawals, respectively;
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such cable, telex, facsimile and electronic transmission and delivery expenses as are expressly provided in the deposit agreement to be at the expense of the person depositing or withdrawing common shares or holders and
beneficial owners of ADSs;
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the expenses and charges incurred by the depositary in the conversion of foreign currency;
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such fees and expenses as are incurred by the Depositary in connection with compliance with exchange control regulations and other regulatory requirements applicable to common shares, deposited securities, ADSs and
ADRs;
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the fees and expenses incurred by the depositary in connection with the delivery of deposited securities, including any fees of a central depository for securities in the local market, where applicable;
and
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any additional fees, charges, costs or expenses that may be incurred by the depositary from time to time.
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Any
other charges and expenses of the depositary under the deposit agreement will be paid by our company upon agreement between the depositary and us. All fees and charges may, at any time and from time to time, be changed by agreement between the
depositary and our company but subject, in the case of fees and charges payable by holders or beneficial owners, to the limitations set forth in the Form of ADR.
We will pay all other charges and expenses of the depositary and any agent of the depositary (except the custodian) pursuant to agreements from time to time
between us and the depositary. The fees described above may be amended from time to time.
The depositary collects its fees for issuance and cancellation
of ADSs directly from investors depositing shares or surrendering ADSs for the purpose of withdrawal or from intermediaries acting for them. The depositary collects fees for making distributions to investors by deducting those fees from the amounts
distributed or by selling a portion of distributable property to pay the fees. The depositary may collect its annual fee for depositary services by deduction from cash distributions, or by directly billing investors, or by charging the book-entry
system accounts of participants acting for them. The depositary may generally refuse to provide services until its fees for those services and any other unpaid fees are paid.
Fees and Other Payments Made by the Depositary to Us
The
depositary has agreed to reimburse us for the establishment and maintenance of the ADS program and to provide us with assistance in relation to our investor relations program, the training of staff and certain other matters. Further, the depositary
has agreed to share with us certain fees payable to the depositary by holders of ADSs. Since the commencement of our most recent fiscal year, we have received a sum of US$1.8 million for the expenses related to our investor relations program,
directors and officers liability and company insurance reimbursement, listing fees and legal service fees. The payment we received is offset against general and administrative expenses.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MAY 31, 2015, 2016 AND 2017
(In thousands, except share and per share data, or otherwise noted)
1.
|
ORGANIZATION AND PRINCIPAL ACTIVITIES
|
New Oriental Education & Technology
Group Inc. (the Company) was incorporated in the Cayman Islands. The Company, its wholly owned subsidiaries and its variable interest entities, New Oriental Education & Technology Group Co., Ltd. (New Oriental China)
and its schools and subsidiaries and Xuncheng and its subsidiary (collectively, the VIEs), are collectively referred to as the Group.
The Group provides educational services in the Peoples Republic of China (the PRC) primarily under the New
Oriental brand. The Group offers a wide range of educational programs, services and products, consisting primarily of language training and test preparation, primary and secondary school education, online education, content development and
distribution, overseas study consulting services, pre-school education and study tour.
As of May 31, 2017, details of the
Companys subsidiaries, variable interest entity and its schools and subsidiaries were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Name
|
|
Date of
incorporation
or establishment
|
|
|
Place of
incorporation
(or establishment)/
operation
|
|
|
Legal
ownership
|
|
|
Principal activity
|
|
Subsidiaries of the Company:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beijing Decision Education & Consulting Company Limited (Beijing
Decision)
|
|
|
April 20, 2005
|
|
|
|
PRC
|
|
|
|
100%
|
|
|
|
Educational information
system and
other consulting services
|
|
|
|
|
|
|
Beijing Judgment Education & Consulting Company Limited (Beijing
Judgment)
|
|
|
April 20, 2005
|
|
|
|
PRC
|
|
|
|
100%
|
|
|
|
Educational consulting and
investing activities
|
|
|
|
|
|
|
Beijing Hewstone Technology Company Limited (Beijing Hewstone)
|
|
|
April 20, 2005
|
|
|
|
PRC
|
|
|
|
100%
|
|
|
|
Educational software
development
and distribution and other
consulting
services
|
|
|
|
|
|
|
Beijing Pioneer Technology Company Limited (Beijing Pioneer)
|
|
|
January 8, 2009
|
|
|
|
PRC
|
|
|
|
100%
|
|
|
|
Educational software
development
and distribution and other
consulting
services
|
|
|
|
|
|
|
Shanghai Smart Words Software Technology Company Limited (Shanghai Smart
Words)
|
|
|
December 8, 2010
|
|
|
|
PRC
|
|
|
|
100%
|
|
|
|
Educational consulting and
software development
|
|
|
|
|
|
|
Beijing Smart Wood Software Technology Company Limited (Beijing Smart Wood)
|
|
|
December 21, 2011
|
|
|
|
PRC
|
|
|
|
100%
|
|
|
|
Educational consulting and
software development
|
|
|
|
|
|
|
Beijing Joy Tend Technology Company Limited (Beijing Joy Tend)
|
|
|
January 31, 2013
|
|
|
|
PRC
|
|
|
|
100%
|
|
|
|
Educational consulting and
software development
|
|
F-11
NEW ORIENTAL EDUCATION & TECHNOLOGY GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MAY 31, 2015, 2016 AND 2017
(In thousands, except share and per share data, or otherwise noted)
1.
|
ORGANIZATION AND PRINCIPAL ACTIVITIES - continued
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Name
|
|
Date of
incorporation
or establishment
|
|
|
Place of
incorporation
(or establishment)/
operation
|
|
|
Legal
ownership
|
|
|
Principal activity
|
|
Subsidiaries of the Company:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beijing Right Time Technology Company Limited (Beijing Right Time)
|
|
|
January 31, 2013
|
|
|
|
PRC
|
|
|
|
100%
|
|
|
|
Educational consulting
and software development
|
|
|
|
|
|
|
Beijing Sincerity Technology Company Limited (Beijing Sincerity)
|
|
|
April 12, 2013
|
|
|
|
PRC
|
|
|
|
100%
|
|
|
|
Educational consulting
and software development
|
|
|
|
|
|
|
Beijing Magnificence Technology Company Limited (Beijing Magnificence)
|
|
|
November 1, 2013
|
|
|
|
PRC
|
|
|
|
100%
|
|
|
|
Educational consulting
and software development
|
|
|
|
|
|
|
Beijing Top Technology Company Limited (Beijing Top)
|
|
|
November 13, 2013
|
|
|
|
PRC
|
|
|
|
100%
|
|
|
|
Educational consulting
and software development
|
|
|
|
|
|
|
Beijing Shenghe Technology Company Limited (Beijing Shenghe)
|
|
|
May 27, 2014
|
|
|
|
PRC
|
|
|
|
100%
|
|
|
|
Educational consulting
and software development
|
|
|
|
|
|
|
Beijing Jinghong Software Technology Company Limited (Beijing Jinghong)
|
|
|
September 18, 2016
|
|
|
|
PRC
|
|
|
|
100%
|
|
|
|
Educational consulting
and software development
|
|
|
|
|
|
|
Beijing New Oriental Walkite International Travel Co., Ltd.
|
|
|
May 22, 2012
|
|
|
|
PRC
|
|
|
|
100%
|
|
|
|
Consulting
|
|
|
|
|
|
|
Walkite International Academy Co., Ltd.
|
|
|
March 16, 2015
|
|
|
|
U.K.
|
|
|
|
100%
|
|
|
|
Consulting
|
|
|
|
|
|
|
Beijing New Road Information Consulting Services Co., Ltd. (New Road)
|
|
|
March 6, 2015
|
|
|
|
PRC
|
|
|
|
51%
|
|
|
|
Consulting
|
|
|
|
|
|
|
Walkite International Academy (U.S.A.) Co., Ltd.
|
|
|
April 13, 2015
|
|
|
|
U.S.A.
|
|
|
|
100%
|
|
|
|
Consulting
|
|
|
|
|
|
|
Elite Concept Holdings Limited (Elite Concept)
|
|
|
December 3, 2007
|
|
|
|
Hong Kong
|
|
|
|
100%
|
|
|
|
Educational Consulting
|
|
|
|
|
|
|
Winner Park Limited (Winner Park)
|
|
|
December 9, 2008
|
|
|
|
Hong Kong
|
|
|
|
100%
|
|
|
|
Educational Consulting
|
|
|
|
|
|
|
Smart Shine International Limited (Smart Shine)
|
|
|
December 9, 2008
|
|
|
|
Hong Kong
|
|
|
|
100%
|
|
|
|
Educational Consulting
|
|
|
|
|
|
|
Abundant State Limited (Abundant)
|
|
|
March 20, 2013
|
|
|
|
BVI
|
|
|
|
100%
|
|
|
|
Educational Consulting
|
|
|
|
|
|
|
Koolearn Holding Limited (Koolearn HK)
|
|
|
June 21, 2013
|
|
|
|
Hong Kong
|
|
|
|
100%
|
|
|
|
Educational Consulting
|
|
|
|
|
|
|
New Oriental Vision Overseas Consulting Australia Pty Ltd.
|
|
|
January 25, 2017
|
|
|
|
Australia
|
|
|
|
100%
|
|
|
|
Consulting
|
|
|
|
|
|
|
Variable interest entity of the Company:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
New Oriental Education & Technology Group Co., Ltd (New Oriental
China)
|
|
|
August 2, 2001
|
|
|
|
PRC
|
|
|
|
N/A
|
|
|
|
Education consulting,
software development and
distributions and other
services
|
|
F-12
NEW ORIENTAL EDUCATION & TECHNOLOGY GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MAY 31, 2015, 2016 AND 2017
(In thousands, except share and per share data, or otherwise noted)
1.
|
ORGANIZATION AND PRINCIPAL ACTIVITIES - continued
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Name
|
|
Date of
incorporation
or establishment
|
|
|
Place of
incorporation
(or establishment)/
operation
|
|
|
Legal
ownership
|
|
|
Principal activity
|
|
Schools and subsidiaries of New Oriental China:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beijing Haidian District Privately-Funded New Oriental School (Beijing Haidian
School)
|
|
|
October 5, 1993
|
|
|
|
PRC
|
|
|
|
N/A
|
|
|
|
Language and post-
secondary education
|
|
|
|
|
|
|
Shanghai Yangpu District New Oriental Advanced Study School
|
|
|
June 1, 2000
|
|
|
|
PRC
|
|
|
|
N/A
|
|
|
|
Language education
|
|
|
|
|
|
|
Guangzhou Haizhu District Privately-Funded New Oriental Training School (Guangzhou Haizhu
School) (a)
|
|
|
September 8, 2000
|
|
|
|
PRC
|
|
|
|
N/A
|
|
|
|
Language education
|
|
|
|
|
|
|
Guangzhou New Oriental Training School (Guangzhou School) (a)
|
|
|
August 20, 2013
|
|
|
|
PRC
|
|
|
|
N/A
|
|
|
|
Language education
|
|
|
|
|
|
|
Guangzhou Panyu District Privately-Funded New Oriental Training Centre (Guangzhou Panyu
School) (a)
|
|
|
June 19, 2013
|
|
|
|
PRC
|
|
|
|
N/A
|
|
|
|
Language education
|
|
|
|
|
|
|
Wuhan New Oriental Training School
|
|
|
April 28, 2002
|
|
|
|
PRC
|
|
|
|
N/A
|
|
|
|
Language education
|
|
|
|
|
|
|
Tianjin New Oriental Training School
|
|
|
August 21, 2002
|
|
|
|
PRC
|
|
|
|
N/A
|
|
|
|
Language education
|
|
|
|
|
|
|
Xian Yanta District New Oriental School
|
|
|
November 26, 2002
|
|
|
|
PRC
|
|
|
|
N/A
|
|
|
|
Language education
|
|
|
|
|
|
|
Nanjing Gulou New Oriental Advanced Study School
|
|
|
November 28, 2002
|
|
|
|
PRC
|
|
|
|
N/A
|
|
|
|
Language education
|
|
|
|
|
|
|
Shenzhen New Oriental Training School
|
|
|
October 15, 2003
|
|
|
|
PRC
|
|
|
|
N/A
|
|
|
|
Language education
|
|
|
|
|
|
|
Shenyang New Oriental Foreign Language Training School
|
|
|
June 18, 2003
|
|
|
|
PRC
|
|
|
|
N/A
|
|
|
|
Language education
|
|
|
|
|
|
|
Chongqing New Oriental Training School
|
|
|
August 15, 2003
|
|
|
|
PRC
|
|
|
|
N/A
|
|
|
|
Language education
|
|
|
|
|
|
|
Chengdu New Oriental School
|
|
|
August 18, 2003
|
|
|
|
PRC
|
|
|
|
N/A
|
|
|
|
Language education
|
|
|
|
|
|
|
Xiangyang New Oriental Training School
|
|
|
October 26, 2004
|
|
|
|
PRC
|
|
|
|
N/A
|
|
|
|
Language education
|
|
|
|
|
|
|
Changsha Furong District New Oriental Training School
|
|
|
May 25, 2005
|
|
|
|
PRC
|
|
|
|
N/A
|
|
|
|
Language education
|
|
|
|
|
|
|
Jinan New Oriental School
|
|
|
May 31, 2005
|
|
|
|
PRC
|
|
|
|
N/A
|
|
|
|
Language education
|
|
|
|
|
|
|
Taiyuan New Oriental Training School
|
|
|
April 20, 2005
|
|
|
|
PRC
|
|
|
|
N/A
|
|
|
|
Language education
|
|
|
|
|
|
|
Haer Bin Nangang District New Oriental Training School
|
|
|
May 20, 2005
|
|
|
|
PRC
|
|
|
|
N/A
|
|
|
|
Language education
|
|
|
|
|
|
|
Changchun New Oriental Training School
|
|
|
July 26, 2005
|
|
|
|
PRC
|
|
|
|
N/A
|
|
|
|
Language education
|
|
|
|
|
|
|
Hangzhou New Oriental Advanced Study School (Hangzhou School) (b)
|
|
|
July 21, 2005
|
|
|
|
PRC
|
|
|
|
N/A
|
|
|
|
Language education
|
|
|
|
|
|
|
Hangzhou New Oriental Education & Consulting Company Limited
|
|
|
May 8, 2012
|
|
|
|
PRC
|
|
|
|
N/A
|
|
|
|
Language education
|
|
|
|
|
|
|
Fuyang New Oriental Training School (Fuyang School) (b)
|
|
|
October 22, 2012
|
|
|
|
PRC
|
|
|
|
N/A
|
|
|
|
Language education
|
|
|
|
|
|
|
Zhengzhou New Oriental Training School
|
|
|
July 19, 2005
|
|
|
|
PRC
|
|
|
|
N/A
|
|
|
|
Language education
|
|
|
|
|
|
|
Zhuzhou New Oriental Training School
|
|
|
April 30, 2006
|
|
|
|
PRC
|
|
|
|
N/A
|
|
|
|
Language education
|
|
|
|
|
|
|
Shijiazhuang New Oriental School
|
|
|
April 3, 2006
|
|
|
|
PRC
|
|
|
|
N/A
|
|
|
|
Language education
|
|
|
|
|
|
|
Suzhou New Oriental School
|
|
|
April 26, 2006
|
|
|
|
PRC
|
|
|
|
N/A
|
|
|
|
Language education
|
|
|
|
|
|
|
Anshan New Oriental Training School
|
|
|
June 13, 2006
|
|
|
|
PRC
|
|
|
|
N/A
|
|
|
|
Language education
|
|
F-13
NEW ORIENTAL EDUCATION & TECHNOLOGY GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MAY 31, 2015, 2016 AND 2017
(In thousands, except share and per share data, or otherwise noted)
1.
|
ORGANIZATION AND PRINCIPAL ACTIVITIES - continued
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Name
|
|
Date of
incorporation
or establishment
|
|
|
Place of
incorporation
(or establishment)/
operation
|
|
|
Legal
ownership
|
|
|
Principal activity
|
|
Schools and subsidiaries of New Oriental China:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hefei New Oriental Foreign Language Training School
|
|
|
June 13, 2006
|
|
|
|
PRC
|
|
|
|
N/A
|
|
|
|
Language education
|
|
|
|
|
|
|
Yunnan New Oriental Training School
|
|
|
June 13, 2006
|
|
|
|
PRC
|
|
|
|
N/A
|
|
|
|
Language education
|
|
|
|
|
|
|
Wuxi New Oriental Advanced Study School
|
|
|
August 14, 2006
|
|
|
|
PRC
|
|
|
|
N/A
|
|
|
|
Language education
|
|
|
|
|
|
|
Fuzhou Gulou District New Oriental Training School
|
|
|
September 1, 2006
|
|
|
|
PRC
|
|
|
|
N/A
|
|
|
|
Language education
|
|
|
|
|
|
|
Nanchang Donghu District New Oriental Language School
|
|
|
March 16, 2007
|
|
|
|
PRC
|
|
|
|
N/A
|
|
|
|
Language education
|
|
|
|
|
|
|
Yichang Xiling District New Oriental School
|
|
|
January 1, 2006
|
|
|
|
PRC
|
|
|
|
N/A
|
|
|
|
Language education
|
|
|
|
|
|
|
Jingzhou New Oriental School
|
|
|
April 10, 2007
|
|
|
|
PRC
|
|
|
|
N/A
|
|
|
|
Language education
|
|
|
|
|
|
|
Dalian New Oriental Training School
|
|
|
June 12, 2007
|
|
|
|
PRC
|
|
|
|
N/A
|
|
|
|
Language education
|
|
|
|
|
|
|
Huangshi New Oriental Training School
|
|
|
March 17, 2008
|
|
|
|
PRC
|
|
|
|
N/A
|
|
|
|
Language education
|
|
|
|
|
|
|
Ningbo New Oriental School
|
|
|
April 16, 2008
|
|
|
|
PRC
|
|
|
|
N/A
|
|
|
|
Language education
|
|
|
|
|
|
|
Lanzhou Chengguan District New Oriental School
|
|
|
March 19, 2008
|
|
|
|
PRC
|
|
|
|
N/A
|
|
|
|
Language education
|
|
|
|
|
|
|
Xiamen Siming District New Oriental Education Training School
|
|
|
July 8, 2008
|
|
|
|
PRC
|
|
|
|
N/A
|
|
|
|
Language education
|
|
|
|
|
|
|
Qingdao New Oriental Language Training School
|
|
|
August 5, 2008
|
|
|
|
PRC
|
|
|
|
N/A
|
|
|
|
Language education
|
|
|
|
|
|
|
Nanning New Oriental Education Training School
|
|
|
September 18, 2008
|
|
|
|
PRC
|
|
|
|
N/A
|
|
|
|
Language education
|
|
|
|
|
|
|
Xuzhou New Oriental Advanced Study School
|
|
|
March 31, 2009
|
|
|
|
PRC
|
|
|
|
N/A
|
|
|
|
Language education
|
|
|
|
|
|
|
Xiangtan Yuhu District New Oriental School
|
|
|
July 15, 2010
|
|
|
|
PRC
|
|
|
|
N/A
|
|
|
|
Language education
|
|
|
|
|
|
|
Zhenjiang New Oriental School
|
|
|
July 19, 2010
|
|
|
|
PRC
|
|
|
|
N/A
|
|
|
|
Language education
|
|
|
|
|
|
|
Luoyang New Oriental School
|
|
|
November 25, 2010
|
|
|
|
PRC
|
|
|
|
N/A
|
|
|
|
Language education
|
|
|
|
|
|
|
Nantong Chongchuan District New Oriental School
|
|
|
December 28, 2010
|
|
|
|
PRC
|
|
|
|
N/A
|
|
|
|
Language education
|
|
|
|
|
|
|
Jilin Chuanying District New Oriental School
|
|
|
March 17, 2011
|
|
|
|
PRC
|
|
|
|
N/A
|
|
|
|
Language education
|
|
|
|
|
|
|
Guiyang Yunyan District New Oriental School
|
|
|
March 21, 2011
|
|
|
|
PRC
|
|
|
|
N/A
|
|
|
|
Language education
|
|
|
|
|
|
|
Inner Mongolia Hohhot New Oriental School
|
|
|
April 2, 2011
|
|
|
|
PRC
|
|
|
|
N/A
|
|
|
|
Language education
|
|
|
|
|
|
|
Foshan New Oriental School
|
|
|
September 1, 2011
|
|
|
|
PRC
|
|
|
|
N/A
|
|
|
|
Language education
|
|
|
|
|
|
|
Tangshan Lubei District New Oriental School
|
|
|
May 25, 2011
|
|
|
|
PRC
|
|
|
|
N/A
|
|
|
|
Language education
|
|
|
|
|
|
|
Urumqi New Oriental School
|
|
|
May 22, 2011
|
|
|
|
PRC
|
|
|
|
N/A
|
|
|
|
Language education
|
|
F-14
NEW ORIENTAL EDUCATION & TECHNOLOGY GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MAY 31, 2015, 2016 AND 2017
(In thousands, except share and per share data, or otherwise noted)
1.
|
ORGANIZATION AND PRINCIPAL ACTIVITIES - continued
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Name
|
|
Date of
incorporation
or establishment
|
|
|
Place of
incorporation
(or establishment)/
operation
|
|
|
Legal
ownership
|
|
|
Principal activity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shiyan New Oriental School
|
|
|
May 23, 2011
|
|
|
|
PRC
|
|
|
|
N/A
|
|
|
|
Language education
|
|
|
|
|
|
|
Quanzhou Fengze District New Oriental Education Training School
|
|
|
June 26, 2015
|
|
|
|
PRC
|
|
|
|
N/A
|
|
|
|
Language education
|
|
|
|
|
|
|
Wenzhou New Oriental School
|
|
|
August 14, 2015
|
|
|
|
PRC
|
|
|
|
N/A
|
|
|
|
Language education
|
|
|
|
|
|
|
Weifang New Oriental Training School
|
|
|
October 10, 2015
|
|
|
|
PRC
|
|
|
|
N/A
|
|
|
|
Language education
|
|
|
|
|
|
|
Shanghai New Oriental Education & Training Company Limited
|
|
|
September 15, 2015
|
|
|
|
PRC
|
|
|
|
N/A
|
|
|
|
Language education
|
|
|
|
|
|
|
Zhuhai Xiangzhou District New Oriental Training Centre
|
|
|
December 11, 2015
|
|
|
|
PRC
|
|
|
|
N/A
|
|
|
|
Language education
|
|
|
|
|
|
|
Yangzhou Guangling District New Oriental Training Centre
|
|
|
March 24, 2016
|
|
|
|
PRC
|
|
|
|
N/A
|
|
|
|
Language education
|
|
|
|
|
|
|
Jinzhou New Oriental Training School
|
|
|
April 19, 2016
|
|
|
|
PRC
|
|
|
|
N/A
|
|
|
|
Language education
|
|
|
|
|
|
|
Baoding Jingxiu District New Oriental Training School
|
|
|
July 8, 2016
|
|
|
|
PRC
|
|
|
|
N/A
|
|
|
|
Language education
|
|
|
|
|
|
|
Taian New Oriental School
|
|
|
September 9, 2016
|
|
|
|
PRC
|
|
|
|
N/A
|
|
|
|
Language education
|
|
|
|
|
|
|
Chongqing Yongchuan District New Oriental Training School
|
|
|
September 25, 2016
|
|
|
|
PRC
|
|
|
|
N/A
|
|
|
|
Language education
|
|
|
|
|
|
|
Yantai Zhifu District New Oriental Foreign LanguageTraining School
|
|
|
November 11, 2016
|
|
|
|
PRC
|
|
|
|
N/A
|
|
|
|
Language education
|
|
|
|
|
|
|
Kaifeng New Oriental Education Information Consulting Co., Ltd.
|
|
|
October 31, 2016
|
|
|
|
PRC
|
|
|
|
N/A
|
|
|
|
Language education
|
|
|
|
|
|
|
Beijing Shengdeweixin Education & Technology Co., Ltd.
|
|
|
November 22, 2016
|
|
|
|
PRC
|
|
|
|
N/A
|
|
|
|
Language education
|
|
|
|
|
|
|
Cangzhou Yunhe District New Oriental Education Training School
|
|
|
November 29, 2016
|
|
|
|
PRC
|
|
|
|
N/A
|
|
|
|
Language education
|
|
|
|
|
|
|
Qinghuangdao Haigang District New Oriental Training School
|
|
|
January 17, 2017
|
|
|
|
PRC
|
|
|
|
N/A
|
|
|
|
Language education
|
|
|
|
|
|
|
Zhangzhou Development Zone New Oriental Education Training School
|
|
|
March 22, 2017
|
|
|
|
PRC
|
|
|
|
N/A
|
|
|
|
Language education
|
|
|
|
|
|
|
Anyang Beiguan District New Oriental Education Training School
|
|
|
May 16, 2017
|
|
|
|
PRC
|
|
|
|
N/A
|
|
|
|
Language education
|
|
|
|
|
|
|
Nanyang New Oriental Education Training Co., Ltd.
|
|
|
April 19, 2017
|
|
|
|
PRC
|
|
|
|
N/A
|
|
|
|
Language education
|
|
|
|
|
|
|
Handan Congtai District New Oriental Training School
|
|
|
April 27, 2017
|
|
|
|
PRC
|
|
|
|
N/A
|
|
|
|
Language education
|
|
|
|
|
|
|
Beijing Shuangshi Oriental Education & Technology Co., Ltd.
|
|
|
April 27, 2017
|
|
|
|
PRC
|
|
|
|
N/A
|
|
|
|
Educational consulting
|
|
|
|
|
|
|
Changchun Tongwen Gaokao Training School (Tongwen Gaokao)
|
|
|
October 27, 2008
|
|
|
|
PRC
|
|
|
|
N/A
|
|
|
|
College admission
examination training
|
|
|
|
|
|
|
Changchun Tongwen Senior High School (Tongwen High Schiool)
|
|
|
October 27, 2008
|
|
|
|
PRC
|
|
|
|
N/A
|
|
|
|
Primary secondary
school education
|
|
|
|
|
|
|
China Management Software Institute (CMSI)
|
|
|
September 1, 2012
|
|
|
|
PRC
|
|
|
|
N/A
|
|
|
|
Higher education
|
|
F-15
NEW ORIENTAL EDUCATION & TECHNOLOGY GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MAY 31, 2015, 2016 AND 2017
(In thousands, except share and per share data, or otherwise noted)
1.
|
ORGANIZATION AND PRINCIPAL ACTIVITIES - continued
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Name
|
|
Date of
incorporation
or establishment
|
|
|
Place of
incorporation
(or establishment)/
operation
|
|
|
Legal
ownership
|
|
|
Principal activity
|
|
Schools and subsidiaries of New Oriental China:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beijing New Oriental Yangzhou Foreign Language School
|
|
|
June 6, 2002
|
|
|
|
PRC
|
|
|
|
N/A
|
|
|
|
Primary secondary
school education
|
|
|
|
|
|
|
Yangzhou Guangling District New Oriental Kindergarten of Stars (Yangzhou
Kindergarten)
|
|
|
August 26, 2014
|
|
|
|
PRC
|
|
|
|
N/A
|
|
|
|
Kindergarten
|
|
|
|
|
|
|
Beijing Changping New Oriental Foreign Language School (Changping school)
|
|
|
July 19, 2010
|
|
|
|
PRC
|
|
|
|
N/A
|
|
|
|
Primary secondary
school education
|
|
|
|
|
|
|
Beijing New Oriental Dogwood Cultural Communications Co., Ltd.
|
|
|
May 16, 2003
|
|
|
|
PRC
|
|
|
|
N/A
|
|
|
|
Sales of educational
materials and products
|
|
|
|
|
|
|
Beijing New Oriental Dogwood, Bookstore, Audio & Video Co., Ltd.
|
|
|
March 2, 2004
|
|
|
|
PRC
|
|
|
|
N/A
|
|
|
|
Sales of educational
materials and products
|
|
|
|
|
|
|
Chengdu New Oriental Dogwood Bookstore Products Co., Ltd.
|
|
|
January 18, 2004
|
|
|
|
PRC
|
|
|
|
N/A
|
|
|
|
Sales of educational
materials and products
|
|
|
|
|
|
|
Chongqing New Oriental Dogwood Bookstore & Audio-Visual Products Co., Ltd.
|
|
|
February 25, 2004
|
|
|
|
PRC
|
|
|
|
N/A
|
|
|
|
Sales of educational
materials and products
|
|
|
|
|
|
|
Guangzhou Dogwood Bookstore & Audio-Visual Products Co., Ltd.
|
|
|
November 11, 2003
|
|
|
|
PRC
|
|
|
|
N/A
|
|
|
|
Sales of educational
materials and products
|
|
|
|
|
|
|
Wuhan New Oriental Dogwood Bookstore & Audio- Visual Products Co., Ltd.
|
|
|
December 16, 2003
|
|
|
|
PRC
|
|
|
|
N/A
|
|
|
|
Sales of educational
materials and products
|
|
|
|
|
|
|
Xian New Oriental Dogwood Bookstore & Audio-Visual Products Co., Ltd.
|
|
|
June 3, 2003
|
|
|
|
PRC
|
|
|
|
N/A
|
|
|
|
Sales of educational
materials and products
|
|
|
|
|
|
|
Shanghai Dogwood Bookstore & Audio-Visual Products Co., Ltd.
|
|
|
September 28, 2003
|
|
|
|
PRC
|
|
|
|
N/A
|
|
|
|
Sales of educational
materials and products
|
|
|
|
|
|
|
Changchun New Oriental Dogwood Bookstore & Audio-Visual Products Co., Ltd.
|
|
|
October 8, 2005
|
|
|
|
PRC
|
|
|
|
N/A
|
|
|
|
Sales of educational
materials and products
|
|
|
|
|
|
|
Haer Bin New Oriental Dogwood Bookstore & Audio-Visual Products Co., Ltd.
|
|
|
March 13, 2006
|
|
|
|
PRC
|
|
|
|
N/A
|
|
|
|
Sales of educational
materials and products
|
|
|
|
|
|
|
Taiyuan New Oriental Dogwood Bookstore & Audio-Visual Products Co., Ltd.
|
|
|
July 12, 2006
|
|
|
|
PRC
|
|
|
|
N/A
|
|
|
|
Sales of educational
materials and products
|
|
|
|
|
|
|
Hangzhou Dogwood Bookstore Products Co., Ltd.
|
|
|
July 25, 2007
|
|
|
|
PRC
|
|
|
|
N/A
|
|
|
|
Sales of educational
materials and products
|
|
|
|
|
|
|
Nanchang Dogwood Bookstore & Audio-Visual Products Co., Ltd.
|
|
|
September 14, 2007
|
|
|
|
PRC
|
|
|
|
N/A
|
|
|
|
Sales of educational
materials and products
|
|
|
|
|
|
|
Kunming Dogwood Bookstore & Audio-Visual Products Co., Ltd.
|
|
|
November 21, 2007
|
|
|
|
PRC
|
|
|
|
N/A
|
|
|
|
Sales of educational
materials and products
|
|
|
|
|
|
|
Dalian New Oriental Dogwood Bookstore & Audio-Visual Products Co., Ltd.
|
|
|
March 25, 2008
|
|
|
|
PRC
|
|
|
|
N/A
|
|
|
|
Sales of educational
materials and products
|
|
F-16
NEW ORIENTAL EDUCATION & TECHNOLOGY GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MAY 31, 2015, 2016 AND 2017
(In thousands, except share and per share data, or otherwise noted)
1.
|
ORGANIZATION AND PRINCIPAL ACTIVITIES - continued
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Name
|
|
Date of
incorporation
or establishment
|
|
|
Place of
incorporation
(or establishment)/
operation
|
|
|
Legal
ownership
|
|
|
Principal activity
|
|
Schools and subsidiaries of New Oriental China:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lanzhou New Oriental Dogwood Bookstore & Audio- Visual Products Co., Ltd.
|
|
|
October 28, 2008
|
|
|
|
PRC
|
|
|
|
N/A
|
|
|
|
Sales of educational
materials and products
|
|
|
|
|
|
|
Suzhou New Oriental Dogwood Bookstore & Audio- Visual Products Co., Ltd.
|
|
|
June 1, 2010
|
|
|
|
PRC
|
|
|
|
N/A
|
|
|
|
Sales of educational
materials and products
|
|
|
|
|
|
|
Xuzhou New Oriental Dogwood Bookstore & Audio- Visual Products Co., Ltd.
|
|
|
September 29, 2010
|
|
|
|
PRC
|
|
|
|
N/A
|
|
|
|
Sales of educational
materials and products
|
|
|
|
|
|
|
Urumqi Dogwood Bookstore & Audio-Visual Products Co., Ltd.
|
|
|
September 13, 2011
|
|
|
|
PRC
|
|
|
|
N/A
|
|
|
|
Sales of educational
materials and products
|
|
|
|
|
|
|
Hohhot Dogwood Bookstore & Audio-Visual Products Co., Ltd.
|
|
|
February 7, 2012
|
|
|
|
PRC
|
|
|
|
N/A
|
|
|
|
Sales of educational
materials and products
|
|
|
|
|
|
|
Zhuhai New Oriental Dogwood Bookstore & Audio- Visual Products Co., Ltd.
|
|
|
September 28, 2016
|
|
|
|
PRC
|
|
|
|
N/A
|
|
|
|
Sales of educational
materials and products
|
|
|
|
|
|
|
Beijing New Oriental Vision Overseas Consultancy Co., Ltd.
|
|
|
February 19, 2004
|
|
|
|
PRC
|
|
|
|
N/A
|
|
|
|
Consulting
|
|
|
|
|
|
|
Shanghai Vision Overseas Service Co., Ltd.
|
|
|
March 24, 2011
|
|
|
|
PRC
|
|
|
|
N/A
|
|
|
|
Consulting
|
|
|
|
|
|
|
Shandong New Oriental Vision Overseas Consultancy Co., Ltd.
|
|
|
September 8, 2011
|
|
|
|
PRC
|
|
|
|
N/A
|
|
|
|
Consulting
|
|
|
|
|
|
|
Shanxi New Oriental Vision Overseas Consultancy Co., Ltd.
|
|
|
April 22, 2014
|
|
|
|
PRC
|
|
|
|
N/A
|
|
|
|
Consulting
|
|
|
|
|
|
|
Fujian New Oriental Vision Overseas Consultancy Co., Ltd.
|
|
|
May 13, 2014
|
|
|
|
PRC
|
|
|
|
N/A
|
|
|
|
Consulting
|
|
|
|
|
|
|
Guangdong Vision Overseas Consultancy Co., Ltd.
|
|
|
May 29, 2014
|
|
|
|
PRC
|
|
|
|
N/A
|
|
|
|
Consulting
|
|
|
|
|
|
|
Xinjiang New Oriental Vision Overseas Consultancy Co., Ltd.
|
|
|
July 9, 2014
|
|
|
|
PRC
|
|
|
|
N/A
|
|
|
|
Consulting
|
|
|
|
|
|
|
Shaanxi New Oriental Vision Overseas Consultancy Co., Ltd.
|
|
|
January 23, 2015
|
|
|
|
PRC
|
|
|
|
N/A
|
|
|
|
Consulting
|
|
|
|
|
|
|
Tianjin New Oriental Vision Overseas Consultancy Co., Ltd.
|
|
|
May 13, 2015
|
|
|
|
PRC
|
|
|
|
N/A
|
|
|
|
Consulting
|
|
|
|
|
|
|
Inner Mongolia New Oriental Vision Overseas Consultancy Co., Ltd.
|
|
|
May 29, 2015
|
|
|
|
PRC
|
|
|
|
N/A
|
|
|
|
Consulting
|
|
|
|
|
|
|
Liaoning New Oriental Vision Overseas Consultancy Co., Ltd.
|
|
|
June 10, 2015
|
|
|
|
PRC
|
|
|
|
N/A
|
|
|
|
Consulting
|
|
|
|
|
|
|
New Oriental Vision Overseas Consulting (U.K.) Ltd.
|
|
|
June 10, 2015
|
|
|
|
U.K.
|
|
|
|
N/A
|
|
|
|
Consulting
|
|
|
|
|
|
|
Gansu New Oriental Vision Overseas Consultancy Co., Ltd.
|
|
|
May 15, 2015
|
|
|
|
PRC
|
|
|
|
N/A
|
|
|
|
Consulting
|
|
|
|
|
|
|
Qingdao New Oriental Vision Overseas Consultancy Co., Ltd.
|
|
|
August 20, 2015
|
|
|
|
PRC
|
|
|
|
N/A
|
|
|
|
Consulting
|
|
|
|
|
|
|
Hunan New Oriental Vision Overseas Consultancy Co., Ltd.
|
|
|
November 3, 2015
|
|
|
|
PRC
|
|
|
|
N/A
|
|
|
|
Consult
ing
|
|
|
|
|
|
|
Beijing New Oriental Vision Overseas Service Co., Ltd.
|
|
|
February 24, 2016
|
|
|
|
PRC
|
|
|
|
N/A
|
|
|
|
Consulting
|
|
|
|
|
|
|
Beijing Ainuoshida Education & Technology Co., Ltd and its subsidiaries
|
|
|
September 24, 2014
|
|
|
|
PRC
|
|
|
|
N/A
|
|
|
|
Consulting
|
|
F-17
NEW ORIENTAL EDUCATION & TECHNOLOGY GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MAY 31, 2015, 2016 AND 2017
(In thousands, except share and per share data, or otherwise noted)
1.
|
ORGANIZATION AND PRINCIPAL ACTIVITIES - continued
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Name
|
|
Date of
incorporation
or establishment
|
|
|
Place of
incorporation
(or establishment)/
operation
|
|
|
Legal
ownership
|
|
|
Principal activity
|
|
Schools and subsidiaries of New Oriental China:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beijing New Oriental Dogwood Advertisement Co., Ltd. (Dogwood Advertisement)
|
|
|
January 20, 2004
|
|
|
|
PRC
|
|
|
|
N/A
|
|
|
|
Advertising
|
|
|
|
|
|
|
Beijing New Oriental Xuncheng Network Technology Co., Inc.Ltd. (c)
|
|
|
March 11, 2005
|
|
|
|
PRC
|
|
|
|
N/A
|
|
|
|
On-line education
|
|
|
|
|
|
|
Beijing New Oriental Kuxuehuisi Network Technology Co., Ltd.
|
|
|
February 1, 2013
|
|
|
|
PRC
|
|
|
|
N/A
|
|
|
|
On-line
education
|
|
|
|
|
|
|
Beijing DongFangYouBo Network Technology Co., Ltd.
|
|
|
June 23, 2016
|
|
|
|
PRC
|
|
|
|
N/A
|
|
|
|
On-line
education
|
|
|
|
|
|
|
Leci Internet Technology (Beijing) Company Limited (Leci Internet)
|
|
|
February 11, 2014
|
|
|
|
PRC
|
|
|
|
N/A
|
|
|
|
Educational consulting and
software development
|
|
|
|
|
|
|
Beijing Dongfangzhuoyong Investment Management Co., Ltd.
|
|
|
April 29, 2014
|
|
|
|
PRC
|
|
|
|
N/A
|
|
|
|
Investment management
|
|
|
|
|
|
|
Ningbo Meishan Bonded Port Area Hexin Oriental Asset Management Co., Ltd.
|
|
|
April 28, 2017
|
|
|
|
PRC
|
|
|
|
N/A
|
|
|
|
Asset management
|
|
|
|
|
|
|
Beijing New Oriental MEGAWAY Education & Consulting Co., Ltd.
|
|
|
March 4, 2015
|
|
|
|
PRC
|
|
|
|
N/A
|
|
|
|
Educational consulting
|
|
|
|
|
|
|
Beijing Aixuehuisi Education & Technology Co., Ltd.
|
|
|
January 6, 2015
|
|
|
|
PRC
|
|
|
|
N/A
|
|
|
|
Technology
|
|
|
|
|
|
|
Beijing Fishpond Software Technology Co., Ltd.
|
|
|
November 24, 2015
|
|
|
|
PRC
|
|
|
|
N/A
|
|
|
|
Technology
|
|
|
|
|
|
|
Beijing Bright the Future Education & Technology Co., Ltd.
|
|
|
July 18, 2016
|
|
|
|
PRC
|
|
|
|
N/A
|
|
|
|
Consulting
|
|
|
|
|
|
|
Beijing New Oriental Stars Education & Consulting Co., Ltd (Stars)
|
|
|
July 11, 2007
|
|
|
|
PRC
|
|
|
|
N/A
|
|
|
|
Kindergarten
|
|
|
|
|
|
|
Beijing Chao Yang District Kindergarten of Stars (ChaoYang Kindergarten)
|
|
|
November 20, 2007
|
|
|
|
PRC
|
|
|
|
N/A
|
|
|
|
Kindergarten
|
|
|
|
|
|
|
Nanjing Yuhuatai District New Oriental Kindergarten of Stars (Nanjing
Kindergarten)
|
|
|
April 10, 2009
|
|
|
|
PRC
|
|
|
|
N/A
|
|
|
|
Kindergarten
|
|
|
|
|
|
|
Qingdao Alice Education & Technology Company Limited (Qingdao Alice
)
|
|
|
August 21, 2014
|
|
|
|
PRC
|
|
|
|
N/A
|
|
|
|
Kindergarten
|
|
|
|
|
|
|
Qingdao Laoshan District Happy Alice Kindergarten (Laoshan Alice)
|
|
|
December 4, 2014
|
|
|
|
PRC
|
|
|
|
N/A
|
|
|
|
Kindergarten
|
|
|
|
|
|
|
Qingdao Happy Alice Kindergarten (Qingdao Happy Alice)
|
|
|
November 29, 2005
|
|
|
|
PRC
|
|
|
|
N/A
|
|
|
|
Kindergarten
|
|
|
|
|
|
|
Qingdao Chengyang District Happy Alice Kindergarten (Chengyang Alice)
|
|
|
October 30, 2014
|
|
|
|
PRC
|
|
|
|
N/A
|
|
|
|
Kindergarten
|
|
|
|
|
|
|
Beijing Chao Yang District Taiyanggong Kindergarten of Stars (Taiyanggong
Kindergarten)
|
|
|
January 20, 2017
|
|
|
|
PRC
|
|
|
|
N/A
|
|
|
|
Kindergarten
|
|
(a)
|
Guangzhou School and Guangzhou Panyu School were established in the year ended May 31, 2014. Although they are separate legal entities, from the perspective of the Groups internal management, they together
with Guangzhou Haizhu School are considered as one school since they are operated by the same local management in Guangzhou.
|
(b)
|
Although the Fuyang School is a separate legal entity, from the perspective of the Groups internal management, Fuyang School and Hangzhou School are considered as one school since they are operated by the same
local management in Hangzhou.
|
(c)
|
The contractual agreements between Xuncheng, New Oriental China and Chongshengdongfang were terminated in September 2015.
|
F-18
NEW ORIENTAL EDUCATION & TECHNOLOGY GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MAY 31, 2015, 2016 AND 2017
(In thousands, except share and per share data, or otherwise noted)
1.
|
ORGANIZATION AND PRINCIPAL ACTIVITIES - continued
|
The VIE arrangements
PRC laws and regulations currently require any foreign entity that invests in the education business in China to be an educational institution
with relevant experience in providing educational services outside of China. The Companys offshore holding companies are not educational institutions and do not provide educational services outside of China. In addition, in the PRC, foreign
ownership of high schools for students in grades ten to twelve is restricted and foreign ownership of primary and middle schools for students in grades one to nine is prohibited. Accordingly, the Companys offshore holding companies are not
allowed to directly own and operate schools in China. The Company conducts substantially all of its education business in China through contractual arrangements with its VIEs, New Oriental China and its schools and subsidiaries and Xuncheng and its
subsidiary. Since the operations of New Oriental China and the schools and Xuncheng and its subsidiary are closely interrelated and almost indistinguishable from one another, the risks and rewards associated with their operations are substantially
the same. In addition, the Company consolidates New Oriental China, its schools and subsidiaries, Xuncheng and its subsidiary as disclosed. Therefore, the Company aggregates the disclosures related to New Oriental China, New Oriental Chinas
schools and subsidiaries, and Xuncheng and its subsidiary as variable interest entities and referred to them as the VIEs in the Companys consolidated financial statements. The VIEs hold the requisite licenses and permits necessary
to conduct the Companys education business. In addition, the VIEs hold leases and other assets necessary to operate the Companys schools and learning centers, employ teachers and generate substantially all of the Companys revenues.
VIE Arrangements between New Oriental China and the Companys PRC subsidiaries
The Company and its wholly owned subsidiaries in China (the WFOEs) have entered into the following contractual arrangements with
New Oriental China, New Oriental Chinas schools and subsidiaries and New Oriental Chinas shareholders that enable the Company to (1) have power to direct the activities that most significantly affects the economic performance of the
VIE, and (2) receive the economic benefits of the VIE that could be significant to the VIE. Accordingly, the Company is considered the primary beneficiary of the VIE and has consolidated the VIE financial results of operations, assets and
liabilities in the Companys consolidated financial statements. In making the conclusion that the Company is the primary beneficiary of the VIE, the Company believes the Companys rights under the terms of the exclusive option agreement
provide it with a substantive kick out right. More specifically, the Company believes the terms of the exclusive option agreement are valid, binding and enforceable under PRC laws and regulations currently in effect. The Company also believes that
the minimum amount of consideration permitted by the applicable PRC law to exercise the option does not represent a financial barrier or disincentive for the Company to currently exercise its rights under the exclusive option agreement. A simple
majority vote of the Companys board of directors is required to pass a resolution to exercise the Companys rights under the exclusive option agreement, for which Mr. Michael Minhong Yu (Mr. Yu)s consent is not
required. The Companys rights under the exclusive option agreement give the Company the power to control the shareholder of New Oriental China and thus the power to direct the activities that most significantly impact the schools
economic performance given that New Oriental China has the power to direct the activities of the schools via its sponsorship interest. In addition, the Companys rights under the power of attorney also reinforce the Companys abilities to
direct the activities that most significantly impact the VIEs economic performance. The Company also believes that this ability to exercise control ensures that the VIE will continue to execute and renew service agreements and pay service fees
to the Company. By charging service fees in whatever amounts the Company deems fit, and by ensuring that service agreements are executed and renewed indefinitely, the Company has the rights to receive substantially all of the economic benefits from
the VIE.
F-19
NEW ORIENTAL EDUCATION & TECHNOLOGY GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MAY 31, 2015, 2016 AND 2017
(In thousands, except share and per share data, or otherwise noted)
1.
|
ORGANIZATION AND PRINCIPAL ACTIVITIES - continued
|
VIE Arrangements between New Oriental China and the Companys PRC subsidiaries
continued
Service agreements
. There are four types of service agreements:
(i) trademark license agreements, (ii) new enrollment system development service agreements, (iii) other operating service agreements, and (iv) sale of educational software agreements.
|
(i)
|
Trademark license agreements. Pursuant to the trademark license agreement dated May 13, 2006 between the Company as the licensor and New Oriental China as the licensee, the Company has licensed the trademarks to
New Oriental China for its use in China. The Company has also allowed New Oriental China to enter into
sub-license
agreements with its schools and subsidiaries pursuant to which each of the schools and
subsidiaries may use the trademarks in China by paying license fees. This license is valid from May 14, 2006 to December 31, 2050, subject to the renewal every ten years upon the expiration of the trademark registration.
|
|
(ii)
|
New enrollment system development service agreements. Beijing Decision has entered into new enrollment system development service agreements with the schools of New Oriental China, under which Beijing Decision agreed to
provide new enrollment system development and regular maintenance services to those schools of New Oriental China for a fee equal to the applicable fee rate multiplied by the number of new student enrollments. These agreements can be renewed by both
parties to the agreements.
|
|
(iii)
|
Other operating service agreements. Pursuant to operating service agreements between certain WFOEs and the schools or the subsidiaries of New Oriental China, the WFOEs have agreed to provide certain operating services
to the schools or the subsidiaries of New Oriental China for fees that are calculated based on a percentage, ranging from 2.0% to 6.0%, of respective revenues of each of the schools and subsidiaries. A majority of these agreements provide unlimited
two-year
or five-year automatic renewal without consent of the WFOEs. The remaining agreements can be renewed by both parties to the agreements.
|
|
(iv)
|
Sale of educational software agreements. Eight WFOEs, namely Beijing Hewstone, Beijing Pioneer, Beijing Smart Wood, Beijing Joy Tend, Beijing Magnificence, Beijing Top, Beijng Shenghe and Beijing Jinghong, entered into
agreements whereby the WFOEs sells various self-developed educational software to the schools or subsidiaries of New Oriental China. Except for four agreements that are silent on renewal, these agreements provide unlimited
two-year
automatic renewal terms, and schools and subsidiaries of New Oriental China cannot terminate the agreements without the consent of the WFOEs in China.
|
Master exclusive service agreements.
On September 19, 2014, Beijing Pioneer entered into a master exclusive service
agreement with New Oriental China to enable the Companys wholly owned subsidiaries in China to receive substantially all of the economic benefits of New Oriental China and its schools and subsidiaries. Under the master exclusive service
agreement, Beijing Pioneer has the exclusive right to provide or designate any entities affiliated with it to provide New Oriental China and its schools and subsidiaries the technical and business support services, including new enrollment system
development service, sale of educational software and other operating services. Each service provider specified in the service agreement (iv) has the right to determine the fees associated with the services it provides based on the technical
difficulty and complexity of the services and the actual labor costs it incurs for providing the services during the relevant period. The term of this agreement is ten years and will be automatically extended upon the expiration. Beijing Pioneer may
terminate the agreement at any time with a
30-day
prior written notice to New Oriental China, whereas none of New Oriental China and its schools and subsidiaries can terminate this agreement. The various
existing service agreements mentioned in service agreements (i)~(iv) will remain effective after the inclusion of the master exclusive service agreement; however, if they have any conflict with the terms and conditions of the master exclusive
service agreement, the master exclusive service agreement will prevail. The master exclusive service agreement was effective on September 19, 2014.
F-20
NEW ORIENTAL EDUCATION & TECHNOLOGY GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MAY 31, 2015, 2016 AND 2017
(In thousands, except share and per share data, or otherwise noted)
1.
|
ORGANIZATION AND PRINCIPAL ACTIVITIES - continued
|
VIE Arrangements between New Oriental China and the Companys PRC subsidiaries -
continued
Equity pledge agreement
. Pursuant to the equity pledge agreements dated
May 25, 2006 among New Oriental China, all of the shareholders of New Oriental China, Beijing Hewstone and Beijing Decision, each shareholder of New Oriental China agreed to pledge his or its equity interest in New Oriental China to Beijing
Hewstone and Beijing Decision to secure the performance of the VIEs obligations under the existing service agreements and any such agreements to be entered into in the future. The shareholders of New Oriental China agreed not to transfer,
sell, pledge, dispose of or otherwise create any encumbrance on their equity interests in New Oriental China without the prior written consent of Beijing Decision and Beijing Hewstone.
In January 2012, ten former shareholders of New Oriental China completed the transfer, for no consideration, of all of their equity interests
in New Oriental China to Century Friendship, a PRC domestic enterprise controlled by the Companys founder, chairman and chief executive officer, Mr. Yu. Prior to the transfer, Century Friendship had held 53% of the equity interests in New
Oriental China while the ten former shareholders of New Oriental China held the remaining equity interests. In connection to the transfer, five new equity pledge agreements dated April 23, 2012 were entered into among New Oriental China,
Century Friendship and five WFOEs, whereby Century Friendship has agreed to pledge all of its equity interests in New Oriental China to the WFOEs to secure the VIEs performance of their obligations under the trademark license agreements, new
enrollment system development service agreements, other operating service agreements and sale of educational software agreements. Century Friendship has agreed not to transfer, sell, pledge, dispose of or otherwise create any encumbrance on its
equity interests in New Oriental China without the prior written consents of the WFOEs. The terms of the April 2012 equity pledge agreements are substantially the same as the 2006 agreements.
In February 2017, as part of our efforts to streamline the corporate structure, the Group removed Shanghai Smart Words as a party to the
contractual arrangements with New Oriental China and its schools and subsidiaries and shareholder. The rights and obligations of Shanghai Smart Words under these contractual arrangements have been assumed by Beijing Decision. The April 2012 equity
pledge agreements have been amended to reflect the foregoing change while the terms of these agreements remain unchanged. The equity pledges of Century Friendship under the amended agreements have been registered with the Haidian District, Beijing
branch of the SAIC.
Exclusive option agreement
. Pursuant to the exclusive option agreements entered into on various dates,
as amended on May 25, 2006, among the Company, New Oriental China and its shareholders, the shareholders of New Oriental China are obligated to sell to the Company, and the Company has an exclusive, irrevocable and unconditional right to
purchase, or cause the shareholders of New Oriental China to sell to the Companys designated party, in the Companys sole discretion, part or all of the shareholders equity interests in New Oriental China when and to the extent that
applicable PRC law permits the Company to own part or all of such equity interests in New Oriental China. In addition, pursuant to the exclusive option agreements, the Company has an exclusive, irrevocable and unconditional right to request any
existing shareholder of New Oriental China to transfer all or part of the equity interest in New Oriental China held by such shareholder to another PRC person or entity designated by the Company at any time in the discretion. The price to be paid by
the Company or a PRC person or entity designated by the WFOEs will be the minimum amount of consideration permitted by applicable PRC law at the time when such share transfer occurs. As a result of the ten former shareholders of New Oriental China
transferring all of their equity interests in New Oriental China to Century Friendship in January 2012, Century Friendship executed a new option agreement with Shanghai Smart Words and New Oriental China on April 23, 2012. The terms of this new
option agreement are substantially the same as the 2006 agreements.
F-21
NEW ORIENTAL EDUCATION & TECHNOLOGY GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MAY 31, 2015, 2016 AND 2017
(In thousands, except share and per share data, or otherwise noted)
1.
|
ORGANIZATION AND PRINCIPAL ACTIVITIES - continued
|
VIE Arrangements between New Oriental China and the Companys PRC subsidiaries
continued
On February 16, 2017, Beijing Decision entered into a new option agreement with Century
Friendship and New Oriental China, replacing the previous option agreement dated April 23, 2012. Pursuant to the current option agreement, Century Friendship is obligated to sell to Beijing Decision, and Beijing Decision has an exclusive,
irrevocable and unconditional right to purchase from Century Friendship, in its sole discretion, part or of all of Century Friendships equity interests in New Oriental China when and to the extent that applicable PRC law permits it to own part
or all of the equity interest in New Oriental China. In addition, Beijing Decision has an exclusive option to require Century Friendship to transfer all or part of Century Friendships equity interest in New Oriental China to another PRC person
or entity designated by Beijing Decision at any time in its discretion. The purchase price to be paid by Beijing Decision will be the minimum amount of consideration permitted by applicable PRC law at the time when such share transfer occurs.
Power of Attorney.
On December 3, 2012, Century Friendship, in the capacity of the sole shareholder of New Oriental China,
executed a proxy agreement and power of attorney with Beijing Pioneer, which is one of the Companys wholly owned subsidiaries in China, and New Oriental China, whereby Century Friendship irrevocably appoints and constitutes Beijing Pioneer as
its
attorney-in-fact
to exercise on Century Friendships behalf any and all rights that Century Friendship has in respect of its equity interests in New Oriental
China. This proxy agreement and power of attorney became effective on December 3, 2012 and replaces the powers of attorney executed by Century Friendship on April 23, 2012. The proxy agreement and power of attorney will remain effective as
long as New Oriental China exists. Century Friendship does not have the right to terminate the proxy agreement and power of attorney or revoke the appointment of the
attorney-in-fact
without the prior written consent of Beijing Pioneer.
VIE Arrangements between Xuncheng and the Companys subsidiary
During the fiscal year ended May 31, 2015, Beijing Chongshengdongfang Network Technology Co., Ltd. (Chongshengdongfang), a PRC
subsidiary of the Company entered into a series of contractual arrangements (the Xuncheng VIE Agreements) with New Oriental China and Xuncheng, a subsidiary of New Oriental China that engages in internet content services as the Internet
Content Provider (ICP). The Xuncheng VIE Agreements enable the Company to (1) have power to direct the activities that most significantly affects the economic performance of Xuncheng, and (2) receive the economic benefits of
Xuncheng that could be significant to Xuncheng. Accordingly, the Company is considered the primary beneficiary of Xuncheng. The terms of Xuncheng VIE Agreements are substantially the same as those signed between New Oriental China and the
Companys PRC subsidiaries.
In September 2015, the above contractual arrangements between Chongshengdongfang, New Oriental China and
Xuncheng were terminated. The Group continues to consolidate Xuncheng through voting interest held by New Oriental China since September 2015.
Risks in relation to the VIE structure
The Company believes that the contractual arrangements with its VIEs and their respective shareholders are in compliance with PRC laws and
regulations and are legally enforceable. However, uncertainties in the PRC legal system could limit the Companys ability to enforce the contractual arrangements. If the legal structure and contractual arrangements were found to be in violation
of PRC laws and regulations, the PRC government could:
|
|
|
revoke the business and operating licenses of the Companys PRC subsidiaries and VIEs;
|
|
|
|
discontinue or restrict the operations of any related-party transactions between the Companys PRC subsidiaries and VIEs;
|
|
|
|
limit the Groups business expansion in China by way of entering into contractual arrangements;
|
|
|
|
impose fines or other requirements with which the Companys PRC subsidiaries and VIEs may not be able to comply;
|
F-22
NEW ORIENTAL EDUCATION & TECHNOLOGY GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MAY 31, 2015, 2016 AND 2017
(In thousands, except share and per share data, or otherwise noted)
1.
|
ORGANIZATION AND PRINCIPAL ACTIVITIES - continued
|
VIE Arrangements between Xuncheng and the Companys subsidiary - continued
Risks in relation to the VIE structure - continued
|
|
|
require the Company or the Companys PRC subsidiaries or VIEs to restructure the relevant ownership structure or operations; or
|
|
|
|
restrict or prohibit the Companys use of the proceeds of the additional public offering to finance the Groups business and operations in China.
|
The Companys ability to conduct its education business may be negatively affected if the PRC government were to carry out of any of the
aforementioned actions. As a result, the Company may not be able to consolidate its VIEs in its consolidated financial statements as it may lose the ability to exert effective control over the VIEs and their respective shareholders and it may lose
the ability to receive economic benefits from the VIEs. The Company, however, does not believe such actions would result in the liquidation or dissolution of the Company, its PRC subsidiaries or VIEs.
Mr. Yu is the controlling shareholder of Century Friendship, which owns all of the equity interests in New Oriental China, which in turn
owns all of the equity interests in Xuncheng, and Mr. Yu is also a beneficial owner of the Company. The interests of Mr. Yu as the beneficial owner of the VIEs may differ from the interests of the Company as a whole, since Mr. Yu is
only one of the beneficial shareholders of the company, holding 13.5% of the total common shares outstanding as of May 31, 2017. The Company cannot assure that when conflicts of interest arise, Mr. Yu will act in the best interests of the
Company or that conflicts of interests will be resolved in the Companys favor. Currently, the Company does not have existing arrangements to address potential conflicts of interest Mr. Yu may encounter in his capacity as a beneficial
owner and director of the VIEs, on the one hand, and as a beneficial owner and director of the Company, on the other hand. The Company believes Mr. Yu will not act contrary to any of the contractual arrangements and the exclusive option
agreement provides the Company with a mechanism to remove Mr. Yu as a beneficial shareholder of the VIEs should he act to the detriment of the Company. The Company relies on Mr. Yu, as a director and executive officer of the Company, to
fulfill his fiduciary duties and abide by laws of the PRC and Cayman Islands and act in the best interest of the Company. If the Company cannot resolve any conflicts of interest or disputes between the Company and Mr. Yu, the Company would have
to rely on legal proceedings, which could result in disruption of its business, and there is substantial uncertainty as to the outcome of any such legal proceedings.
In addition, the current sole shareholder of the New Oriental China is also a beneficial owner of the Company and therefore has no current
interest in seeking to act contrary to the contractual arrangements. However, to further protect the investors interest from any risk that the shareholders of the New Oriental China may act contrary to the contractual arrangements, the
Company, through Beijing Pioneer, entered into an irrevocable power of attorney with Century Friendship on December 3, 2012, which replaces the powers of attorney executed by Century Friendship on April 23, 2012. Through the power of
attorney, Century Friendship entrusted Beijing Pioneer as its proxy to exercise its rights as the shareholder of New Oriental China with respect to an aggregate of 100% of the equity interests in New Oriental China.
F-23
NEW ORIENTAL EDUCATION & TECHNOLOGY GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MAY 31, 2015, 2016 AND 2017
(In thousands, except share and per share data, or otherwise noted)
1.
|
ORGANIZATION AND PRINCIPAL ACTIVITIES - continued
|
VIE Arrangements between Xuncheng and the Companys subsidiary - continued
Risks in relation to the VIE structure - continued
The following financial statement balances and amounts of the VIEs were included in the
accompanying consolidated financial statements after the elimination of intercompany balances and transactions among the offshore companies, WFOEs and VIEs in the Group:
|
|
|
|
|
|
|
|
|
|
|
As of May 31,
|
|
|
|
2016
|
|
|
2017
|
|
|
|
US$
|
|
|
US$
|
|
Total current assets
|
|
|
1,262,811
|
|
|
|
1,590,750
|
|
Total
non-current
assets
|
|
|
381,262
|
|
|
|
488,709
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
|
1,644,073
|
|
|
|
2,079,459
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
860,877
|
|
|
|
1,137,288
|
|
Total
non-current
liabilities
|
|
|
1,432
|
|
|
|
2,174
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
862,309
|
|
|
|
1,139,462
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended May 31,
|
|
|
|
2015
|
|
|
2016
|
|
|
2017
|
|
|
|
US$
|
|
|
US$
|
|
|
US$
|
|
Net revenues
|
|
|
1,221,101
|
|
|
|
1,443,851
|
|
|
|
1,777,864
|
|
Net income
|
|
|
265,485
|
|
|
|
313,828
|
|
|
|
333,456
|
|
Net cash provided by operating activities
|
|
|
357,893
|
|
|
|
450,848
|
|
|
|
450,196
|
|
Net cash used in investing activities
|
|
|
(167,847
|
)
|
|
|
(286,235
|
)
|
|
|
(459,532
|
)
|
Net cash provided by financing activities
|
|
|
|
|
|
|
69,747
|
|
|
|
8,807
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The VIEs contributed an aggregate of 97.9%, 97.7% and 98.8% of the consolidated net revenues for the years
ended May 31, 2015, 2016 and 2017, respectively. The Companys operations not conducted through contractual arrangements with the VIEs primarily consist of the leasing of its commercial property. As of the fiscal years ended May 31,
2016 and 2017, the VIEs accounted for an aggregate of 69.8% and 71.1%, respectively, of the consolidated total assets, and 93.7% and 94.6%, respectively, of the consolidated total liabilities. The assets were not associated with the VIEs primarily
consist of cash and cash equivalents, prepaid expenses, short-term investments and long-term investments.
There are no consolidated
VIEs assets that are collateral for the VIEs obligations and can only be used to settle the VIEs obligations. There are no creditors (or beneficial interest holders) of the VIEs that have recourse to the general credit of the
Company or any of its consolidated subsidiaries. There are no terms in any arrangements, considering both explicit arrangements and implicit variable interests that require the Company or its subsidiaries to provide financial support to the VIEs.
However, if the VIEs ever need financial support, the Company or its subsidiaries may, at its option and subject to statutory limits and restrictions, provide financial support to its VIEs through loans to the shareholder of the VIEs or entrustment
loans to the VIEs.
Relevant PRC laws and regulations restrict the VIEs from transferring a portion of its net assets, equivalent to the
balance of its statutory reserve and its share capital, to the Company in the form of loans and advances or cash dividends. Please refer to Note 23 for disclosure of restricted net assets.
F-24
NEW ORIENTAL EDUCATION & TECHNOLOGY GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MAY 31, 2015, 2016 AND 2017
(In thousands, except share and per share data, or otherwise noted)
2.
|
SIGNIFICANT ACCOUNTING POLICIES
|
Basis of presentation
The consolidated financial statements of the Group have been prepared in accordance with the accounting principles generally accepted in the
United States of America (US GAAP).
Basis of consolidation
The consolidated financial statements include the financial statements of the Company, its subsidiaries, its VIEs and VIEs schools and
subsidiaries. The Company and its WFOEs have entered into contractual arrangements with the VIEs and its shareholder, which enable the Company to (1) have power to direct activities that most significantly affect the economic performance of the
VIEs, and (2) receive the economic benefits of the VIEs that could be significant to the VIEs. Accordingly, the Company is considered the primary beneficiary of the VIEs and has consolidated the VIEs financial results of operations,
assets and liabilities in the Companys consolidated financial statements. All inter-company transactions and balances have been eliminated upon consolidation.
Use of estimates
The
preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and revenue and expenses in the financial statements and
accompanying notes. Significant accounting estimates reflected in the Groups consolidated financial statements include purchase price allocation relating to the business acquired, the valuation allowance for deferred tax assets, economic lives
and impairment of property and equipment, impairment of goodwill, impairment of long-term investments, fair value of long-term
available-for-sale
investments, allowance
for doubtable accounts and share-based compensation. Actual results could differ from those estimates.
Business combinations
Business combinations are recorded using the acquisition method of accounting. The purchase price of the acquisition is allocated to the
tangible assets, liabilities, identifiable intangible assets acquired and
non-controlling
interest, if any, based on their estimated fair values as of the acquisition date. The excess of the purchase price
over those fair values is recorded as goodwill. Acquisition-related expenses and restructuring costs are expensed as incurred.
Where the
consideration in an acquisition includes contingent consideration and the payment of which depends on the achievement of certain specified conditions post-acquisition, the contingent consideration is recognized and measured at its fair value at the
acquisition date and if recorded as a liability, it is subsequently carried at fair value with changes in fair value reflected in earnings.
Cash and cash equivalents
Cash and cash equivalents consist of cash on hand and highly liquid investments which are unrestricted as to withdrawal or use, and which have
original maturities of three months or less when purchased.
Term deposits
Term deposits consist of deposits placed with financial institutions with original maturities of greater than three months and less than one
year.
F-25
NEW ORIENTAL EDUCATION & TECHNOLOGY GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MAY 31, 2015, 2016 AND 2017
(In thousands, except share and per share data, or otherwise noted)
2.
|
SIGNIFICANT ACCOUNTING POLICIES - continued
|
Short-term investments
Short term investments consist mostly of
held-to-maturity
investments with the maturity of less than one year. The Groups short-term
held-to-maturity
investments are classified as short-term investments on the
consolidated balance sheets based on their contractual maturity dates which are less than one year and are stated at their amortized costs.
The Group reviews its
held-to-maturity
investments for
other-than-temporary impairment (OTTI) based on the specific identification method. The Group considers available quantitative and qualitative evidence in evaluating the potential impairment of its short-term investments. If the cost of
an investment exceeds the investments fair value, the Group considers, among other factors, general market conditions, expected future performance of the investees, the duration and the extent to which the fair value of the investment is less
than the cost, and the Groups intent and ability to hold the investments. OTTI is recognized as a loss in the consolidated statement of operation.
Restricted cash
Restricted cash represents Renminbi (RMB) deposits in bank accounts as deposits for establishing new schools and subsidiaries.
Restricted cash is classified as either current or
non-current
based or when the funds will be released in accordance with the terms of the respective agreement.
Allowance for doubtful accounts
Accounts receivable represents amounts due from corporate customers of the Groups various schools and subsidiaries. The Group provides
allowance for doubtful accounts based on historical collection experience and a review of the current status of accounts receivable and advances to suppliers. Accounts receivable and advances to suppliers are presented net of allowance for doubtful
accounts.
Changes in the allowance for doubtful accounts were as follows:
|
|
|
|
|
|
|
|
|
|
|
As of May 31,
|
|
|
|
2016
|
|
|
2017
|
|
|
|
US$
|
|
|
US$
|
|
Beginning balance
|
|
|
801
|
|
|
|
408
|
|
Charge during the year
|
|
|
235
|
|
|
|
354
|
|
Written-off
|
|
|
(628
|
)
|
|
|
(177
|
)
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
|
408
|
|
|
|
585
|
|
|
|
|
|
|
|
|
|
|
Inventory
Inventories of the Group are mainly consisted of books. Inventories are stated at the lower of cost or net realizable value.
Land use rights
Land
use rights are recorded at cost and amortized on a straight-line basis over the remaining term of the land certificate, from 38.5 to 50 years.
F-26
NEW ORIENTAL EDUCATION & TECHNOLOGY GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MAY 31, 2015, 2016 AND 2017
(In thousands, except share and per share data, or otherwise noted)
2.
|
SIGNIFICANT ACCOUNTING POLICIES - continued
|
Property and equipment
Property and equipment is stated at cost less accumulated depreciation and amortization. Depreciation and amortization is calculated on a
straight line basis over the following estimated economic lives:
|
|
|
|
|
Buildings
|
|
|
20-50
years
|
|
Transportation equipment
|
|
|
10 years
|
|
Furniture and education equipment
|
|
|
5 years
|
|
Computer equipment and software
|
|
|
3 years
|
|
Leasehold improvements
|
|
|
Shorter of the lease term or estimated economic life
|
|
Construction in progress
The Group constructs certain of its property and equipment. In addition to cost under the construction contracts, interest cost and external
costs directly related to the construction of such facilities, including equipment installation and shipping costs, are capitalized. Depreciation is recorded at the time assets are ready for the intended use.
Impairment of long-lived assets
The Group reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an
asset may no longer be recoverable. When these events occur, the Group measures impairment by comparing the carrying value of the long-lived assets to the estimated undiscounted future cash flows expected to result from the use of the assets and
their eventual disposition. If the sum of the expected undiscounted cash flow is less than the carrying amount of the assets, the Group would recognize an impairment loss based on the fair value of the assets. The Group did not record impairment
losses on long-lived assets during the years ended May 31, 2015, 2016 and 2017.
Goodwill
Goodwill represents the excess of the purchase price over the fair value of identifiable net assets acquired in business combinations. Goodwill
is not amortized but is tested for impairment annually or more frequently if events or changes in circumstances indicate that it might be impaired.
Goodwill is tested for impairment at the reporting unit level on an annual basis (May 31 for the Group) and between annual tests if an event
occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value. These events or circumstances could include a significant change in the stock prices, business climate, legal factors,
operating performance indicators, competition, or sale or disposition of a significant portion of a reporting unit.
Application of the
goodwill impairment test requires judgment, including the identification of reporting units, assignment of assets and liabilities to reporting units, assignment of goodwill to reporting units, and determination of the fair value of each reporting
unit. The estimation of fair value of each reporting unit using a discounted cash flow methodology also requires significant judgments, including estimation of future cash flows, which is dependent on internal forecasts, estimation of the long-term
rate of growth for the Groups business, estimation of the useful life over which cash flows will occur, and determination of the Groups weighted average cost of capital. The estimates used to calculate the fair value of a reporting unit
change from year to year based on operating results and market conditions. Changes in these estimates and assumptions could materially affect the determination of fair value and goodwill impairment for the reporting unit.
F-27
NEW ORIENTAL EDUCATION & TECHNOLOGY GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MAY 31, 2015, 2016 AND 2017
(In thousands, except share and per share data, or otherwise noted)
2.
|
SIGNIFICANT ACCOUNTING POLICIES - continued
|
Goodwill
continued
In order to test goodwill for impairment, the Group first assesses qualitative factors to
determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the
two-step
goodwill impairment test. If it is more likely than not that the fair value of a reporting unit is less than its carrying amount, goodwill is then tested following a
two-step
process. The first step compares
the fair value of each reporting unit to its carrying amount, including goodwill. If the fair value of each reporting unit exceeds its carrying amount, goodwill is not considered to be impaired and the second step will not be required. If the
carrying amount of a reporting unit exceeds its fair value, the second step compares the implied fair value of goodwill to the carrying value of a reporting units goodwill.
The implied fair value of goodwill is determined in a manner similar to accounting for a business combination with the allocation of the
assessed fair value determined in the first step to the assets and liabilities of the reporting unit. The excess of the fair value of the reporting unit over the amounts assigned to the assets and liabilities is the implied fair value of goodwill.
An impairment loss is recognized for any excess in the carrying value of goodwill over the implied fair value of goodwill. The Group
recognized nil, nil and US$1,682 impairment loss on goodwill during the years ended May 31, 2015, 2016 and 2017.
Long-term
investments
The Groups long-term investments consist of cost method investments, equity method investments,
available-for-sale
investments and
held-to-maturity
investments.
|
(a)
|
Cost Method Investments
|
For investee companies over which the Group does not have significant
influence and a controlling interest, the Group carries the investment at cost and recognizes as income any dividend received from distribution of the investees earnings.
The Group reviews its cost method investments for impairment whenever an event or circumstance indicates that an OTTI has occurred. The Group
considers available quantitative and qualitative evidence in evaluating potential impairment of its cost method investments. An impairment charge is recorded if the cost of an investment exceeds its fair value and such excess is determined to be
other-than temporary.
The Group estimated the fair value of these investee companies based on the discounted cash flow approach. Factors
the Group considers in making such a determination include general market conditions, the duration and the extent to which the fair value of an investment is less than its cost, and the Groups intent and ability to hold such investment. The
Group recorded US$2, nil and nil impairment losses on its cost method investments during the years ended May 31, 2015, 2016 and 2017, respectively.
|
(b)
|
Equity Method Investments
|
Investee companies over which the Group has the ability to exercise
significant influence, but does not have a controlling interest, are accounted for using the equity method. Significant influence is generally considered to exist when the Group has an ownership interest in the voting stock of the investee between
20% and 50%. Other factors, such as representation on the investees board of directors, voting rights and the impact of commercial arrangements, are also considered in determining whether the equity method of accounting is appropriate. For
certain investments, where the Group holds more than 50% equity interest, the Group may only have significant influence but not have control over the investees. Equity method is also used to account for these investments.
F-28
NEW ORIENTAL EDUCATION & TECHNOLOGY GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MAY 31, 2015, 2016 AND 2017
(In thousands, except share and per share data, or otherwise noted)
2.
|
SIGNIFICANT ACCOUNTING POLICIES - continued
|
Long-term investments
- continued
|
(b)
|
Equity Method Investments - continued
|
An impairment charge is recorded if the carrying amount of the investment exceeds its fair
value and this condition is determined to be other-than temporary. The Group estimated the fair value of the investee company based on comparable quoted price for similar investment in active market, if applicable, or discounted cash flow approach
which requires significant judgments, including the estimation of future cash flows, which is dependent on internal forecasts, the estimation of long term growth rate of a companys business, the estimation of the useful life over which cash
flows will occur, and the determination of the weighted average cost of capital. The Company did not record impairment losses on its equity method investment during the years ended May 31, 2015, 2016 and 2017, respectively.
|
(c)
|
Available-for-sale
Investments
|
For investments in investees stocks which are determined to be debt securities, the Group accounts for them as long-term
available-for-sale
investments when they are not classified as either trading or
held-to-maturity
investments.
Available-for-sale
investments are carried at their fair
values and the unrealized gains or losses from the changes in fair values are included in accumulated other comprehensive income.
The
Group reviews its investments for OTTI based on the specific identification method. The Group considers available quantitative and qualitative evidence in evaluating potential impairment of its investments. If the cost of an investment exceeds the
investments fair value, the Group considers, among other factors, general market conditions, government economic plans, the duration and the extent to which the fair value of the investment is less than the cost, the Groups intent and
ability to hold the investment, and the financial condition and near term prospects of the investees. The Company recorded nil, nil and US$2,338 impairment losses on its
available-for-sale
investments during the years ended May 31, 2015, 2016 and 2017, respectively.
|
(d)
|
Long-term
Held-to-maturity
Investments
|
The Groups long-term
held-to-maturity
investment
represents a trust guaranteed by a bank with the maturity of more than one year, which is stated at its amortized cost. As of May 31, 2017, the related balance was all collected.
Value added tax (
VAT
)
Pursuant to the PRC tax laws, in case of any product sales, generally the VAT rate is 3% of the gross sales for small scale VAT payer and 17%
of the gross sales for general VAT payer. Most of the subsidiaries of the Company are deemed as general VAT payer for the sales of guidance materials and the intercompany sales of self-developed software. For general VAT payer, VAT on sales is
calculated at 17% on revenue from product sales and paid after deducting input VAT on purchases. The net VAT balance between input VAT and output VAT is recorded as accrued expenses in the Groups consolidated financial statements.
On January 1, 2012, the PRC Ministry of Finance and the State Administration of Taxation officially launched a pilot VAT reform program
(Pilot Program), applicable to businesses in selected industries. Such VAT Pilot Program were phased in Beijing, Jiangsu, Anhui, Fujian, Guangdong, Tianjin, Zhejiang, and Hubei between September and December 2012. Business in the Pilot
Program would pay VAT instead of sales tax. Starting from August 1, 2013, the Pilot Program was expanded to cover all regions in the PRC. Implementation of the Pilot Program, the new enrollment system development services and other operating
services which were previously subject to business tax are therefore subject to VAT at the rate of 6% of revenue. The net VAT balance between input VAT and output VAT is recorded as accrued expenses in Groups consolidated financial statements.
F-29
NEW ORIENTAL EDUCATION & TECHNOLOGY GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MAY 31, 2015, 2016 AND 2017
(In thousands, except share and per share data, or otherwise noted)
2.
|
SIGNIFICANT ACCOUNTING POLICIES - continued
|
Value added tax (VAT) continued
Since May 2016, in accordance with Cai Shui [2016] No. 68, the
non-academic
educational programs and services in short-term training schools are subject to a simple VAT collection method and apply for a 3% VAT rate. Therefore, the Groups
non-academic
educational programs and services in short-term language training schools which were previously subject to business tax are now subject to VAT.
Revenue recognition
Revenue is recognized when persuasive evidence that an arrangement exists, delivery of the product or service has occurred, the selling price
is both fixed and determinable and collection is reasonably assured. Revenue is reported net of business taxes, VAT and refunds. Business tax and VAT amounted to US$45,664 and US$52,993 for the years ended May 31, 2015 and 2016, respectively.
Subsequent to May 2016, the Group no longer incurred business taxes. The primary sources of the Groups revenues are as follows:
|
(a)
|
Educational programs and services
|
The educational programs and services consist of language
training and test preparation courses, primary and secondary school education and college admission examination retaking training services. Tuition is generally paid in advance and is initially recorded as deferred revenue. Tuition revenue for
educational programs and services is recognized proportionately as the instructions are delivered, and is reported net of business taxes, VAT and related surcharges, and tuition refunds. Students are entitled to a short term course trial period
which commences on the date the course begins. Tuition refunds are provided to students if they decide within the trial period that they no longer want to take the course. Tuition refunds have been insignificant in the fiscal years ended
May 31, 2015, 2016 and 2017, respectively. After the trial period, if a student withdraws from a class, usually no refunds will be provided and any collected but unearned portion of the fee is recognized at that time.
The Group also sells online-learning cards primarily to distributors at fixed prices after deducting a
pre-determined
fixed discount to the face value of the cards. Online-learning card sales represent prepaid service fees received from students for
e-learning
services.
The prepaid service fee is recorded as deferred revenue upon receiving the upfront payment. Revenue is recognized upon actual usage of the cards by the students based on the number of minutes the students use the
e-learning
services, of which the actual usage is tracked by the Group on an individual basis. Upon the expiration of the online-learning card, which ranges from six months to one year from the date of sale of
the card to the distributor, the Group will recognize the remaining unused minutes as revenue.
The Group sells educational books or other educational materials either
through its own book stores or websites or through third party distributors. Revenue from sales made through the Groups book stores is recognized upon sales to customers. Revenue through distributors is recognized once the products are sold to
the end customers.
Operating leases
Leases where substantially all the rewards and risks of ownership of assets remain with the leasing company are accounted for as operating
leases. Payments made under operating leases are charged to the consolidated statements of operations on a straight-line basis over the shorter of the lease term or estimated economic life.
Advertising costs
The
Group expenses advertising costs as they incurred them. Total advertising expenses were US$38,295, US$39,753 and US$41,498, for the years ended May 31, 2015, 2016 and 2017, respectively, and have been included as part of selling and marketing
expenses.
F-30
NEW ORIENTAL EDUCATION & TECHNOLOGY GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MAY 31, 2015, 2016 AND 2017
(In thousands, except share and per share data, or otherwise noted)
2.
|
SIGNIFICANT ACCOUNTING POLICIES - continued
|
Government subsidies
The Group recognizes government subsidies as miscellaneous income when they are received because they are not subject to any past or future
conditions, there are no performance conditions or conditions of use, and they are not subject to future return. Government subsidies received and recognized as miscellaneous income totaled US$1,230, US$494 and US$1,325, for the years ended
May 31, 2015, 2016 and 2017, respectively.
Foreign currency translation
The Companys functional and reporting currency is the United States dollars (U.S. dollars). The financial records of the
Companys subsidiaries and the VIEs located in the PRC are maintained in its local currency, the RMB which is the functional currency of these entities. The financial records of the Companys subsidiaries located in Hong Kong are
maintained in U.S. dollars, which is the functional currency of these entities.
Monetary assets and liabilities denominated in currencies
other than the applicable functional currencies are translated into the reporting currency at the rates of exchange ruling at the balance sheet date. Equity accounts are translated at historical exchange rates, and revenues and expenses are
translated using the average rate of exchange in effect during the reporting period. Translation adjustments are reported and shown as a separate component of other comprehensive income in the consolidated statements of changes in equity and
consolidated statements of comprehensive income.
Transactions in currencies other than the functional currencies during the year are
converted into the applicable functional currencies at the applicable rates of exchange prevailing at the dates of the transactions. Exchange gains and losses are recognized in the consolidated statements of operations.
Foreign currency risk
The RMB is not a freely convertible currency. The State Administration for Foreign Exchange, under the authority of the Peoples Bank of
China, controls the conversion of RMB into other currencies. The value of the RMB is subject to changes in central government policies and to international economic and political developments affecting supply and demand in the China Foreign Exchange
Trading System market. The Groups cash and cash equivalents, restricted cash, and term deposits denominated in RMB amounted to US$747,762 and US$762,895 as of May 31, 2016 and 2017, respectively.
Fair value
Fair value
is the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities required
or permitted to be recorded at fair value, the Group considers the principal or most advantageous market in which it would transact, and it considers assumptions that market participants would use when valuing the asset or liability. Authoritative
literature provides a fair value hierarchy which prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The level in the hierarchy within which the fair value measurement in its entirety falls on is based
upon the lowest level of input that is significant to the fair value measurement as follows:
Level 1
Level 1 applies to assets or liabilities for which there are quoted prices in active markets for identical assets or liabilities.
F-31
NEW ORIENTAL EDUCATION & TECHNOLOGY GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MAY 31, 2015, 2016 AND 2017
(In thousands, except share and per share data, or otherwise noted)
2.
|
SIGNIFICANT ACCOUNTING POLICIES - continued
|
Fair value
- continued
Level 2
Level 2 applies to assets or liabilities for which there are inputs other than quoted prices included within Level 1 that are
observable for the asset or liability such as quoted prices for similar assets or liabilities in active markets; quoted prices for identical assets or liabilities in markets with insufficient volume or infrequent transactions (less active markets);
or model-derived valuations in which significant inputs are observable or can be derived principally from, or corroborated by, observable market data.
Level 3
Level 3
applies to assets or liabilities for which there are unobservable inputs to the valuation methodology that are significant to the measurement of the fair value of the assets or liabilities.
The Group determines the transfers between levels are deemed to have occurred at the end of the periods presented.
Measured fair value on a recurring basis
The Group measured its financial assets and liabilities primarily including
available-for-sale
securities at fair value on a recurring basis as of May 31, 2016 and 2017.
As of May 31, 2016 and 2017, the
available-for-sale
investments recorded in long-term investments include redeemable preferred shares, common shares of two listed companies, convertible bond and assets management plan and trust (Refer to Note 12). Those are measured and recorded at fair value on a
recurring basis in periods subsequent to their initial recognition and are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
May 31, 2016
|
|
Description
|
|
Quoted Prices in
Active Market for
Identical Assets
Level 1
|
|
|
Significant Other
Observable
Inputs
Level 2
|
|
|
Significant
Unobservable
Inputs
Level 3
|
|
|
Total
|
|
|
|
US$
|
|
|
US$
|
|
|
US$
|
|
|
US$
|
|
Available for sales investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Shares
|
|
|
15,945
|
|
|
|
|
|
|
|
|
|
|
|
15,945
|
|
Redeemable preferred shares
|
|
|
|
|
|
|
42,263
|
|
|
|
69,873
|
|
|
|
112,136
|
|
Convertible bond
|
|
|
|
|
|
|
12,310
|
|
|
|
|
|
|
|
12,310
|
|
Asset management plan and trust
|
|
|
|
|
|
|
23,413
|
|
|
|
|
|
|
|
23,413
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
15,945
|
|
|
|
77,986
|
|
|
|
69,873
|
|
|
|
163,804
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
May 31, 2017
|
|
Description
|
|
Quoted Prices in
Active Market for
Identical Assets
Level 1
|
|
|
Significant Other
Observable
Inputs
Level 2
|
|
|
Significant
Unobservable
Inputs
Level 3
|
|
|
Total
|
|
|
|
US$
|
|
|
US$
|
|
|
US$
|
|
|
US$
|
|
Available for sales investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Shares
|
|
|
36,406
|
|
|
|
|
|
|
|
|
|
|
|
36,406
|
|
Redeemable preferred shares
|
|
|
|
|
|
|
30,669
|
|
|
|
123,029
|
|
|
|
153,698
|
|
Asset management plan and trust
|
|
|
|
|
|
|
7,486
|
|
|
|
|
|
|
|
7,486
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
36,406
|
|
|
|
38,155
|
|
|
|
123,029
|
|
|
|
197,590
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company measured the fair value of its investments in common shares using the market approach based on the
quoted stock price of its investee in the active market and has classified it as level 1 measurement.
The Company measured the fair value
of its convertible bond and asset management plan and trust based on the respective principal and expected returns and has classified those as level 2 measurement.
F-32
NEW ORIENTAL EDUCATION & TECHNOLOGY GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MAY 31, 2015, 2016 AND 2017
(In thousands, except share and per share data, or otherwise noted)
2.
|
SIGNIFICANT ACCOUNTING POLICIES - continued
|
Redeemable preferred shares do not have a quoted market rate. For those, the Company measured
their fair value based on recent transactions or based on the market approach or income approach when no recent transactions are available. Recent transactions include the purchase price agreed by an independent third party for an investment with
similar terms or a recent transaction agreed by the Company and the investee and has been classified as level 2 measurement. When no recent transactions are available, a market approach or income approach will be used by the Company to measure fair
value. The market approach takes into consideration a number of factors including market multiple and discount rates from traded companies in the industry and requires the Company to make certain assumptions and estimates regarding industry factors.
Specifically, some of the significant unobservable inputs included the investees historical earning on sale, discount of lack of marketability, investees time to IPO as well as related volatility. The income approach takes into
consideration a number of factors including management projection of discounted future cash flow of the investee as well as an appropriate discount rate. The Company has classified those as level 3 measurement. The assumptions are inherently
uncertain and subjective. Changes in any unobservable inputs may have a significant impact on the fair values.
The Group did not have any
transfers between Level 1 and Level 2 fair value measurements during the periods presented. During the years ended May 31, 2016 and 2017, the Group transferred several redeemable preferred shares from level 2 to level 3 for a total of
US$63,881 and US$31,505 respectively as the Company changed its fair value measurement for those investees. Specifically, the Company changed its measurement method from recent transactions to a market approach or income approach described in the
previous paragraph to determine the investments fair value as no recent transactions were available as of May 31, 2016 and 2017.
The following table provides additional information about the reconciliation of the fair value measurements of assets and liabilities using
significant unobservable inputs (level 3).
|
|
|
|
|
|
|
Available-for-sale
investments
|
|
|
|
US$
|
|
Balance at June 1, 2015
|
|
|
|
|
Transfer from level 2 fair value measurements
|
|
|
63,881
|
|
Initial recognition
|
|
|
2,844
|
|
Unrealized gain
|
|
|
3,148
|
|
|
|
|
|
|
Balance at May 31, 2016
|
|
|
69,873
|
|
|
|
|
|
|
Transfer from level 2 fair value measurements
|
|
|
31,505
|
|
Initial recognition
|
|
|
|
|
Unrealized gain
|
|
|
21,651
|
|
|
|
|
|
|
Balance at May 31, 2017
|
|
|
123,029
|
|
|
|
|
|
|
Measured fair value on a nonrecurring basis
Goodwill and other intangible assets are measured at fair value on a nonrecurring basis when an impairment is recognized.
The Group measured goodwill at fair value on a nonrecurring basis when it is annually evaluated or whenever events or changes in circumstances
indicate that carrying amount of a reporting unit exceeds its fair value as a result of the impairment assessments. The Group measured acquired intangible assets using the income approachdiscounted cash flow method when events or changes in
circumstances indicate that the carrying amount of an asset may no longer be recoverable. The Group did not recognize any impairment loss related to other intangible assets arising from acquisitions for the years ended May 31, 2015, 2016 and
2017. The fair value of goodwill is determined using discounted cash flows, and an impairment loss will be recognized for any excess in the carrying value of goodwill over the implied fair value of goodwill. The Group recognized nil, nil and
US$1,682 of impairment loss related to goodwill for the years ended May 31, 2015, 2016 and 2017, respectively.
F-33
NEW ORIENTAL EDUCATION & TECHNOLOGY GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MAY 31, 2015, 2016 AND 2017
(In thousands, except share and per share data, or otherwise noted)
2.
|
SIGNIFICANT ACCOUNTING POLICIES - continued
|
Fair value of financial instruments
The Groups financial instruments consist primarily of cash and cash equivalents, restricted cash, term deposits, short-term
held-to-maturity
investments, accounts receivable, amount due from/to related parties, long-term investments within one year,
available-for-sale
investments, long-term
held-to-maturity
investment and accounts payable.
Available-for-sale
investments are carried at fair value. The carrying amounts of cash and cash equivalents, restricted cash, term deposits, short-term
held-to-maturity
investments, accounts receivable, amount due from/to related parties, and accounts payable approximate their fair values due to the short-term maturities of these instruments. Long-term
held-to-maturity
investment is stated at its amortized cost.
Net income per share
Basic net income per share is computed by dividing income attributable to holders of common shares by the weighted average number of common
shares outstanding during the year. Diluted net income per common share reflects the potential dilution that could occur if securities or other contracts to issue common shares were exercised into common shares. Common share equivalents are excluded
from the computation of the diluted net income per share in years when their effect would be anti-dilutive.
Income taxes
The Group accounts for income taxes using the asset and liability approach. Under this method, deferred tax assets and liabilities are
determined based on the difference between the financial reporting and tax basis of assets and liabilities using enacted tax rates that will be in effect for the period in which the differences are expected to reverse. The effect on deferred taxes
of a change in tax rates is recognized in the consolidated statements of operations in the period of change. Deferred tax assets are reduced by a valuation allowance when it is considered more likely than not that some portion or all of the deferred
tax assets will not be realized.
The Group accounts for uncertain tax positions by reporting a liability for unrecognized tax benefits
resulting from uncertain tax positions taken or expected to be taken in a tax return. Tax benefits are recognized from uncertain tax positions when the Group believes that it is more likely than not that the tax position will be sustained on
examination by the taxing authorities based on the technical merits of the position. The Group recognizes interest and penalties, if any, related to unrecognized tax benefits in income tax expense.
Comprehensive income
Comprehensive income includes net income, unrealized gain or loss on
available-for-sale
securities and foreign currency translation adjustments. Comprehensive income is reported in the consolidated statements of comprehensive income.
Share-based compensation
Share-based payments to employees and directors are measured based on the grant-date fair value of the equity instrument issued and recognized
as compensation expense net of a forfeiture rate on a straight-line basis over the requisite service period, with a corresponding addition to
paid-in
capital. The Group uses the binomial option pricing model
to measure the fair value of options granted and the quoted market price of the Companys equity shares to measure the fair value of
non-vested
equity shares (NES) granted to employees at each
measurement date. The binomial option pricing model is adopted because the Group believes that considering the possibility of exercise an option over the life of the option, as affected by the reality of changing stock prices and
non-constant
risk free rates, would better reflect the measurement objective of relevant accounting literature.
F-34
NEW ORIENTAL EDUCATION & TECHNOLOGY GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MAY 31, 2015, 2016 AND 2017
(In thousands, except share and per share data, or otherwise noted)
2.
|
SIGNIFICANT ACCOUNTING POLICIES - continued
|
Share-based compensation
- continued
The amount of compensation expense recognized at any date is at least equal to the portion of
the fair value of the awards that are vested as of that date. The estimate of forfeitures is based on historical turnover rate and will be adjusted over the requisite service period to the extent that actual forfeitures differ, or are expected to
differ from such estimates. Changes in estimated forfeitures will be recognized through a cumulative
catch-up
adjustment in the period of change and will impact the amount of share-based compensation expense
to be recognized in future periods.
Concentration of credit risk
Financial instruments that potentially subject the Company to significant concentration of credit risk consist primarily of cash and cash
equivalents, term deposits, restricted cash, and accounts receivable. As of May 31, 2017, substantially all of the Groups cash and cash equivalents, and term deposits were deposited with financial institutions with high-credit ratings and
quality. Accounts receivable are typically unsecured and are derived from revenues earned from customers in the PRC. The Group performs periodic credit evaluations and provides an allowance for doubtful accounts to reduce the accounts receivable
balance to its net realizable value. The Group did not have any customers constituting 10% or more of the consolidated net revenues and accounts receivable in fiscal years 2015, 2016 and 2017, respectively.
Newly adopted accounting pronouncements
In February 2015, the Financial Accounting Standards Board (FASB) issued the Audit Standards Update (ASU)
2015-02,
Amendments to the Consolidation Analysis. The objective of issuing the amendments is to change the analysis that a reporting entity must perform to determine whether it should consolidate
certain types of legal entities. The amendments are an improvement to current U.S. GAAP because they simplify the Codification and reduce the number of consolidation models through the elimination of the indefinite deferral of Statement 167 and
because they place more emphasis on risk of loss when determining a controlling financial interest. The amendments are effective for public business entities for fiscal years, and for interim periods within those fiscal years, beginning after
December 15, 2015. Early adoption is permitted, including adoption in an interim period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes
that interim period. A reporting entity may apply the amendments in this Update using a modified retrospective approach by recording a cumulative-effect adjustment to equity as of the beginning of the fiscal year of adoption. A reporting entity also
may apply the amendments retrospectively. The Group adopted this ASU on June 1, 2016 and determined it has no impact in the current year.
In July 2015, the FASB issued ASU
2015-11,
Inventory (Topic 330), which modifies the accounting for
inventory. Under this ASU, the measurement principle for inventory will change from lower of cost or market value to lower of cost and net realizable value. The ASU defines net realizable value as the estimated selling price in the ordinary course
of business, less reasonably predictable costs of completion, disposal, and transportation. For public business entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2016, with early adoption
permitted. The Group adopted this ASU on June 1, 2016 and determined it had no impact in the current year.
Recently issued
accounting pronouncements not yet adopted
In May 2014, the FASB issued ASU
2014-09
which
affects any entity using U.S. GAAP that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets unless those contracts are within the scope of other standards (e.g.,
insurance contracts or lease contracts). This ASU will supersede the revenue recognition requirements in Topic 605, Revenue Recognition, and most industry-specific guidance. This ASU also supersedes some cost guidance included in Subtopic
605-35,
Revenue RecognitionConstruction-Type and Production-Type Contracts. In addition, the existing requirements for the recognition of a gain or loss on the transfer of nonfinancial assets that are not in a
contract with a customer (e.g., assets within the scope of Topic 360, Property, Plant, and Equipment, and intangible assets within the scope of Topic 350, IntangiblesGoodwill and Other) are amended to be consistent with the guidance on
recognition and measurement (including the constraint on revenue) in this ASU.
F-35
NEW ORIENTAL EDUCATION & TECHNOLOGY GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MAY 31, 2015, 2016 AND 2017
(In thousands, except share and per share data, or otherwise noted)
2.
|
SIGNIFICANT ACCOUNTING POLICIES - continued
|
Recently issued accounting pronouncements not yet adopted
- continued
The core principle of the guidance is that an entity should recognize revenue to depict the
transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve that core principle, an entity should apply the following
steps:
Step 1: Identify the contract(s) with a customer.
Step 2: Identify the performance obligations in the contract.
Step 3: Determine the transaction price.
Step 4: Allocate the transaction price to the performance obligations in the contract.
Step 5: Recognize revenue when (or as) the entity satisfies a performance obligation.
For a public entity, the amendments in this ASU are effective for annual reporting periods beginning after December 15, 2016, including
interim periods within that reporting period. Early application is not permitted.
The new standard permits adoption either by using
(i) a full retrospective approach for all periods presented in the period of adoption or (ii) a modified retrospective approach with the cumulative effect of initially applying the new standard recognized at the date of initial application
and providing certain additional disclosures.
In August 2015, FASB issued its final standard formally amending the effective date of the
new revenue recognition guidance. The amendments in this ASU are effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. Earlier application is permitted only as of
annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. The new revenue guidance may be applied retrospectively to each prior period presented or retrospectively with the
cumulative effect recognized as of the date of adoption.
The Group plans to adopt the ASU on June 1, 2018, and is in the process of
evaluating the impact to its consolidated financial statements.
In January 2016, FASB issued ASU
2016-01
which is intended to improve the recognition and measurement of financial instruments. The ASU affects public and private companies,
not-for-profit
organizations, and employee benefit plans that hold financial assets or owe financial liabilities.
The new guidance makes targeted improvements to existing U.S. GAAP by:
|
|
|
Requiring equity investments (except those accounted for under the equity method of accounting, or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized
in net income;
|
|
|
|
Requiring public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes;
|
|
|
|
Requiring separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (i.e., securities or loans and receivables) on the balance sheet or the accompanying
notes to the financial statements;
|
|
|
|
Eliminating the requirement to disclose the fair value of financial instruments measured at amortized cost for organizations that are not public business entities;
|
|
|
|
Eliminating the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at
amortized cost on the balance sheet; and
|
|
|
|
Requiring a reporting organization to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk
(also referred to as own credit) when the organization has elected to measure the liability at fair value in accordance with the fair value option for financial instruments.
|
F-36
NEW ORIENTAL EDUCATION & TECHNOLOGY GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MAY 31, 2015, 2016 AND 2017
(In thousands, except share and per share data, or otherwise noted)
2.
|
SIGNIFICANT ACCOUNTING POLICIES - continued
|
Recently issued accounting pronouncements not yet adopted
- continued
The new guidance is effective for public companies for fiscal years beginning after
December 15, 2017, including interim periods within those fiscal years. The new guidance permits early adoption of the own credit provision. Adoption of the amendment must be applied by means of a cumulative-effect adjustment to the balance
sheet as of the beginning of the fiscal year of adoption, except for amendments related to equity instruments that do not have readily determinable fair values which should be applied prospectively. The Group does not expect the adoption of this
guidance will have a significant effect on the Groups consolidated financial statements.
In February 2016, the FASB issued ASU
2016-02,
Leases (Topic 842). The guidance supersedes existing guidance on accounting for leases with the main difference being that operating leases are to be recorded in the statement of financial position as
right-of-use
assets and lease liabilities, initially measured at the present value of the lease payments. For operating leases with a term of 12 months or less, a lessee is
permitted to make an accounting policy election not to recognize lease assets and liabilities. For public business entities, the guidance is effective for fiscal years beginning after December 15, 2018, including interim periods within those
fiscal years. Early application of the guidance is permitted. In transition, entities are required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach. The Group is in the process
of evaluating the impact that this pronouncements on its consolidated financial statements.
In March 2016, the FASB issued ASU
No. 2016-07,
simplifying the Transition to the Equity Method of Accounting. The amendments eliminate the requirement that when an investment qualified for use of the equity method as a result of an increase in
the level of ownership interest or degree of influence, an investor must adjust the investment, results of operations, and retained earnings retroactively on a
step-by-step
basis as if the equity method had been in effect during all previous periods that the investment had been held. The amendments require that the equity
method investor add the cost of acquiring the additional interest in the investee to the current basis of the investors previous held interest and adopt the equity method of accounting as of the date the investment becomes qualified for equity
method accounting. Therefore, upon qualifying for the equity method of accounting, no retroactive adjustment of the investment is required. The amendments require that an entity that has an
available-for-sale
equity security that becomes qualified for the equity method of accounting recognize through earnings the unrealized holding gain or loss in accumulated other comprehensive income at the
date the investment becomes qualified for use of the equity method. The amendments are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. The amendments should be
applied prospectively upon their effective date to increase in the level of ownership interest or degree of influence that result in the adoption of the equity method. Earlier application is permitted. The Group does not expect the adoption of this
pronouncement will have a significant effect on its consolidated financial position or results of operations.
In March 2016, the FASB
issued ASU
2016-09,
CompensationStock Compensation (Topic 718). The new guidance simplifies certain aspects related to income taxes, statement of cash flows, and forfeitures when accounting for
share-based payment transactions. This new guidance will be effective for the Company for the first reporting period beginning after December 15, 2016, with earlier adoption permitted. Certain of the amendments related to timing of the
recognition of tax benefits and tax withholding requirements should be applied using a modified retrospective transition method. Amendments related to the presentation of the statement of cash flows should be applied retrospectively. All other
provisions may be applied on a prospective or modified retrospective basis. For a public entity, the amendments in this ASU are effective for annual reporting periods beginning after December 15, 2017, including interim periods within that
reporting period. Early application will be permitted. The Group does not expect the adoption of this pronouncement will have a significant effect on its consolidated financial position or results of operations.
F-37
NEW ORIENTAL EDUCATION & TECHNOLOGY GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MAY 31, 2015, 2016 AND 2017
(In thousands, except share and per share data, or otherwise noted)
2.
|
SIGNIFICANT ACCOUNTING POLICIES - continued
|
Recently issued accounting pronouncements not yet adopted
- continued
In November 2016, the FASB issued ASU
2016-18:
Statement of Cash Flows (Topic 230): Restricted Cash. The amendments in this Update require that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted
cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the
beginning-of-period
and
end-of-period
total amounts shown on the statement of cash flows. The amendments in this Update do not
provide a definition of restricted cash or restricted cash equivalents. The amendments in this Update are effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years.
Early adoption is permitted, including adoption in an interim period. The amendments in this Update should be applied using a retrospective transition method to each period presented. The Group is in the process of evaluating the impact of the
Update on its consolidated financial statements.
In January 2017, the FASB issued ASU
2017-04:
IntangiblesGoodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. To simplify the subsequent measurement of goodwill, the Board eliminated Step 2 from the goodwill impairment test. Under the amendments in this Update, an
entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the
reporting units fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. An entity should apply the amendments in this Update on a prospective basis. An entity is required to
disclose the nature of and reason for the change in accounting principle upon transition. A public business entity that is a SEC filer should adopt the amendments in this Update for its annual or any interim goodwill impairment tests in fiscal years
beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Group is in the process of evaluating the impact of the Update on its
consolidated financial statements.
Acquisition of Qingdao Alice
In order to expand its business in kindergarten industry and benefit from the synergistic effect, the Group acquired 100% equity interest in
Qingdao Alice on December 1, 2014, for a total consideration of US$12,929, which was fully paid as of May 31, 2015. The acquisition was recorded using the acquisition method of accounting, accordingly, the acquired assets and liabilities
were recorded at their fair value at the date of acquisition. The purchase price allocation described below was based on a valuation analysis provided by an independent appraiser. The purchase price was allocated as at the date of acquisition as
follows:
|
|
|
|
|
|
|
|
|
|
|
US$
|
|
|
Amortization
period
|
|
Cash
|
|
|
2,306
|
|
|
|
|
|
Other current assets
|
|
|
644
|
|
|
|
|
|
Property, plant and equipment
|
|
|
89
|
|
|
|
1-5 years
|
|
Intangible assets
|
|
|
|
|
|
|
|
|
Trademark
|
|
|
1,058
|
|
|
|
10.1 years
|
|
Student base
|
|
|
1,998
|
|
|
|
2.2 years
|
|
Favorable lease
|
|
|
763
|
|
|
|
8.7 years
|
|
Goodwill
|
|
|
7,540
|
|
|
|
|
|
Other current liabilities
|
|
|
(514
|
)
|
|
|
|
|
Deferred tax liabilities
|
|
|
(955
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
12,929
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-38
NEW ORIENTAL EDUCATION & TECHNOLOGY GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MAY 31, 2015, 2016 AND 2017
(In thousands, except share and per share data, or otherwise noted)
3.
|
BUSINESS ACQUISITIONS - continued
|
Acquisition of Ainuoshida
In March 2015, the Group invested and paid US$1,129 to obtain 18% equity interest in Ainuoshida to expand the business of its oversea
consulting and benefit from the synergistic effect expected from such investment. The investment was initially recognized as
available-for-sale
investment as the Group
determined that it was a debt security and measured the investment subsequently at fair value. In December 2016, the Group acquired an additional 33% equity interest in Ainuoshida, for a total consideration of US$3,842, which was fully paid as of
May 31, 2017. The acquisition resulted in the Group obtaining control of Ainuoshida with an ownership of 51% equity interest.
The
Group recognized an investment gain of US$723 as a result of remeasuring the 18% equity interest immediately to fair value before the business combination. The acquisition was recorded using the acquisition method of accounting. Accordingly, the
acquired assets and liabilities were recorded at their fair value at the date of acquisition. The acquisition-date fair value of the equity interest held by the Group immediately prior to the acquisition date was measured at fair value using a
discounted cash flow method and taking into account certain factors including the management projection of discounted future cash flow and an appropriate discount rate. The purchase price allocation described below was based on a valuation analysis
provided by an independent appraiser. The purchase price was allocated as at the date of acquisition as follows:
|
|
|
|
|
|
|
|
|
|
|
US$
|
|
|
Amortization
period
|
|
Cash
|
|
|
2,499
|
|
|
|
|
|
Other current assets
|
|
|
4,874
|
|
|
|
|
|
Property, plant and equipment
|
|
|
493
|
|
|
|
1-5 years
|
|
Intangible assets
|
|
|
|
|
|
|
|
|
Trademark
|
|
|
1,708
|
|
|
|
10 years
|
|
Student base
|
|
|
1,069
|
|
|
|
1 year
|
|
Software
|
|
|
76
|
|
|
|
3 years
|
|
Goodwill
|
|
|
5,516
|
|
|
|
|
|
Other current liabilities
|
|
|
(6,040
|
)
|
|
|
|
|
Deferred tax liabilities
|
|
|
(713
|
)
|
|
|
|
|
Fair value of the 18% equity interest
|
|
|
(1,741
|
)
|
|
|
|
|
Noncontrolling interests
|
|
|
(3,899
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
3,842
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4.
|
DISPOSAL OF SUBSIDIARIES
|
Disposal of Dianshijingwei
In April 2016, the Group sold 51% equity interest in Beijing Dianshijingwei Technololy Co., Ltd (Dianshijingwei) to some of
Dianshijingweis management for a cash consideration of US$2,325. As of the disposal date, Dianshijingwei had accumulated deficit resulting in the Group deriving a gain from the deconsolidation. The disposal gain recognized by the Group was
US$3,760 and was recorded in the consolidated statements of operations for the year ended May 31, 2016. Subsequent to this disposal, the Group accounted for its 49% investment in Dianshijingwei as an equity method investment because the Group
retained the ability to exercise significant influence. The disposal of Dianshijingwei did not represent a strategic shift and did not have a major effect on the Groups operation.
The disposal gains from the transaction was presented as continuing operation.
F-39
NEW ORIENTAL EDUCATION & TECHNOLOGY GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MAY 31, 2015, 2016 AND 2017
(In thousands, except share and per share data, or otherwise noted)
5.
|
SHORT-TERM INVESTMENTS
|
Short-term investments consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
As of May 31,
|
|
|
|
2016
|
|
|
2017
|
|
|
|
US$
|
|
|
US$
|
|
Held-to-maturity
investments
|
|
|
819,229
|
|
|
|
1,312,942
|
|
|
|
|
|
|
|
|
|
|
Short-term investments consist of various fixed-income financial products purchased from Chinese banks and
trusts and are classified as
held-to-maturity
investments as the Group has the positive intent and ability to hold the investments to maturity. The maturities of these
financial products range from one month to less than one year, with interest rates ranging from 2.6% to 5.0%. They are classified as short-term investments on the consolidated balance sheets as their contractual maturity dates are equal to or less
than one year.
While these fixed-income financial products are not publicly traded, the Group estimated that their fair value approximate
their amortized costs considering their short term maturities and high credit quality. No OTTI loss was recognized for the years ended May 31, 2015, 2016 and 2017, respectively.
Inventory consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
As of May 31,
|
|
|
|
2016
|
|
|
2017
|
|
|
|
US$
|
|
|
US$
|
|
Course materials in schools
|
|
|
5,787
|
|
|
|
7,419
|
|
Publications in bookstores
|
|
|
21,516
|
|
|
|
24,323
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27,303
|
|
|
|
31,742
|
|
|
|
|
|
|
|
|
|
|
Inventory was marked down to the lower of cost or net realizable value, in the amount of US$638 and US$152 for
the years ended May 31, 2016 and 2017, respectively.
F-40
NEW ORIENTAL EDUCATION & TECHNOLOGY GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MAY 31, 2015, 2016 AND 2017
(In thousands, except share and per share data, or otherwise noted)
7.
|
PREPAID EXPENSES AND OTHER CURRENT ASSETS
|
Prepaid expenses and other current assets consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
As of May 31,
|
|
|
|
2016
|
|
|
2017
|
|
|
|
US$
|
|
|
US$
|
|
Prepaid rent
|
|
|
33,135
|
|
|
|
44,746
|
|
Advances to suppliers
|
|
|
23,143
|
|
|
|
29,358
|
|
Interest receivable
|
|
|
9,341
|
|
|
|
14,005
|
|
Rental deposit
|
|
|
7,122
|
|
|
|
8,355
|
|
Receivable from BOCI for the proceeds of exercise of options and withholding tax
|
|
|
5,548
|
|
|
|
|
|
Prepaid advertising fees
|
|
|
3,250
|
|
|
|
4,235
|
|
Staff advances (a)
|
|
|
2,829
|
|
|
|
2,514
|
|
Value added taxes recoverable
|
|
|
2,534
|
|
|
|
2,305
|
|
Deposit of advertising & decoration
|
|
|
1,961
|
|
|
|
1,411
|
|
Receivable of social insurance
|
|
|
1,374
|
|
|
|
1,651
|
|
Prepaid property taxes and other taxes
|
|
|
616
|
|
|
|
947
|
|
Others (b)
|
|
|
8,824
|
|
|
|
9,870
|
|
|
|
|
|
|
|
|
|
|
|
|
|
99,677
|
|
|
|
119,397
|
|
|
|
|
|
|
|
|
|
|
(a)
|
Staff advances were provided to staff for traveling and related use which are expensed as incurred and staff allowance for
on-site
enrollment activities.
|
(b)
|
Others primarily included maintenance fees, other receivables and other miscellaneous prepayments.
|
8.
|
PROPERTY AND EQUIPMENT, NET
|
Property and equipment consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
As of May 31,
|
|
|
|
2016
|
|
|
2017
|
|
|
|
US$
|
|
|
US$
|
|
Buildings
|
|
|
146,411
|
|
|
|
141,477
|
|
Transportation equipment
|
|
|
8,553
|
|
|
|
8,618
|
|
Furniture and education equipment
|
|
|
76,492
|
|
|
|
88,671
|
|
Computer equipment and software
|
|
|
40,707
|
|
|
|
48,385
|
|
Leasehold improvements
|
|
|
169,345
|
|
|
|
216,848
|
|
|
|
|
|
|
|
|
|
|
|
|
|
441,508
|
|
|
|
503,999
|
|
Less: accumulated depreciation
|
|
|
(209,937
|
)
|
|
|
(235,853
|
)
|
Construction
in-process
|
|
|
6,127
|
|
|
|
14,654
|
|
|
|
|
|
|
|
|
|
|
|
|
|
237,698
|
|
|
|
282,800
|
|
|
|
|
|
|
|
|
|
|
Depreciation expense for the years ended May 31, 2015, 2016 and 2017 was US$46,663, US$47,281 and
US$53,864 respectively.
F-41
NEW ORIENTAL EDUCATION & TECHNOLOGY GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MAY 31, 2015, 2016 AND 2017
(In thousands, except share and per share data, or otherwise noted)
Land use rights consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
As of May 31,
|
|
|
|
2016
|
|
|
2017
|
|
|
|
US$
|
|
|
US$
|
|
Land use rights
|
|
|
5,178
|
|
|
|
5,003
|
|
Less: accumulated amortization
|
|
|
(1,201
|
)
|
|
|
(1,307
|
)
|
Exchange differences
|
|
|
(71
|
)
|
|
|
(28
|
)
|
|
|
|
|
|
|
|
|
|
Land use rights, net
|
|
|
3,906
|
|
|
|
3,668
|
|
|
|
|
|
|
|
|
|
|
Amortization expenses for land use rights for the years ended May 31, 2015, 2016 and 2017 were US$116,
US$112 and US$106, respectively. The Group expects to recognize US$106 in amortization expense for each of the next five years and US$3,138 thereafter.
10.
|
INTANGIBLE ASSETS, NET
|
Intangible assets consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
As of May 31,
|
|
|
|
2016
|
|
|
2017
|
|
|
|
US$
|
|
|
US$
|
|
Costs:
|
|
|
|
|
|
|
|
|
Intangible assets with indefinite lives:
|
|
|
|
|
|
|
|
|
Trademark
|
|
|
248
|
|
|
|
241
|
|
Intangible assets with finite lives:
|
|
|
|
|
|
|
|
|
Trademark
|
|
|
1,293
|
|
|
|
2,976
|
|
Courseware
|
|
|
47
|
|
|
|
122
|
|
Student base
|
|
|
1,978
|
|
|
|
2,995
|
|
Favorable lease
|
|
|
713
|
|
|
|
689
|
|
License
|
|
|
415
|
|
|
|
415
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,694
|
|
|
|
7,438
|
|
|
|
|
|
|
|
|
|
|
Accumulated amortization:
|
|
|
|
|
|
|
|
|
Trademark
|
|
|
(383
|
)
|
|
|
(581
|
)
|
Courseware
|
|
|
(47
|
)
|
|
|
(58
|
)
|
Student base
|
|
|
(1,404
|
)
|
|
|
(2,455
|
)
|
Favorable lease
|
|
|
(123
|
)
|
|
|
(199
|
)
|
License
|
|
|
(119
|
)
|
|
|
(140
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,076
|
)
|
|
|
(3,433
|
)
|
|
|
|
|
|
|
|
|
|
Net carrying amount:
|
|
|
|
|
|
|
|
|
Intangible assets with indefinite lives:
|
|
|
|
|
|
|
|
|
Trademark
|
|
|
248
|
|
|
|
241
|
|
Intangible assets with definite lives:
|
|
|
|
|
|
|
|
|
Trademark
|
|
|
910
|
|
|
|
2,395
|
|
Courseware
|
|
|
|
|
|
|
64
|
|
Student base
|
|
|
574
|
|
|
|
540
|
|
Favorable lease
|
|
|
590
|
|
|
|
490
|
|
License
|
|
|
296
|
|
|
|
275
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,618
|
|
|
|
4,005
|
|
|
|
|
|
|
|
|
|
|
F-42
NEW ORIENTAL EDUCATION & TECHNOLOGY GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MAY 31, 2015, 2016 AND 2017
(In thousands, except share and per share data, or otherwise noted)
10.
|
INTANGIBLE ASSETS, NET - continued
|
Amortization expenses for the intangible assets for the years ended May 31, 2015, 2016
and 2017, were US$607, US$1,122 and US$1,419, respectively. As of May 31, 2017, the Group expects to record amortization expenses related to intangible assets US$963, US$400, US$380, US$368 and US$368 for the years ended May 31, 2018,
2019, 2020, 2021, 2022, respectively, and US$1,526 thereafter.
|
|
|
|
|
|
|
|
|
|
|
As of May 31,
|
|
|
|
2016
|
|
|
2017
|
|
|
|
US$
|
|
|
US$
|
|
Costs:
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
|
11,194
|
|
|
|
10,545
|
|
Acquisition of Ainuoshida
|
|
|
|
|
|
|
5,516
|
|
Exchange differences
|
|
|
(649
|
)
|
|
|
(296
|
)
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
|
10,545
|
|
|
|
15,765
|
|
|
|
|
|
|
|
|
|
|
Accumulated goodwill impairment loss:
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impairment of Tongwen
|
|
|
|
|
|
|
(1,682
|
)
|
Ending balance
|
|
|
|
|
|
|
(1,682
|
)
|
|
|
|
|
|
|
|
|
|
Goodwill, net
|
|
|
10,545
|
|
|
|
14,083
|
|
|
|
|
|
|
|
|
|
|
The Companys goodwill reflects the excess of the consideration paid or transferred including the fair
value of contingent consideration over the fair values of the identifiable net assets acquired. The goodwill impairment test is performed by evaluating an initial qualitative assessment of the likelihood of impairment. If this step indicates that
the qualitative assessment does not result in a more likely than not indication of impairment, no further impairment testing is required. If it does result in a more likely than not indication of impairment, the impairment test is performed.
The Company acquired Tongwen Gaokao and Tongwen High school (collectively Tongwen) in September 2008. During the year ended
May 31, 2017, the Group performed its goodwill impairment testing and determined there was an impairment. As a result, the entire balance of goodwill associated with Tongwen and amounting to US$1,682 was written off.
F-43
NEW ORIENTAL EDUCATION & TECHNOLOGY GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MAY 31, 2015, 2016 AND 2017
(In thousands, except share and per share data, or otherwise noted)
12.
|
LONG-TERM INVESTMENTS
|
Long term investments consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
As of May 31,
|
|
|
|
2016
|
|
|
2017
|
|
|
|
US$
|
|
|
US$
|
|
Cost method investments:
|
|
|
1,460
|
|
|
|
8,132
|
|
Equity method investments:
|
|
|
|
|
|
|
|
|
Beijing Dongfangheli Investment and Development Ltd. (Dongfangheli) (a)
|
|
|
3,451
|
|
|
|
2,851
|
|
Juesheng Education Group Ltd. (Juesheng.com) (b)
|
|
|
3,249
|
|
|
|
2,881
|
|
Suzhou Qingrui Education & Technology Co., Ltd. (Kouyu100) (c)
|
|
|
3,261
|
|
|
|
3,436
|
|
Other equity method investments (j)
|
|
|
3,638
|
|
|
|
2,369
|
|
Available-for-sale
investments:
|
|
|
|
|
|
|
|
|
Shanghai Golden Education & Training Co. Ltd.(Golden Finance) (d)
|
|
|
34,242
|
|
|
|
44,809
|
|
Shanghai ALO7 Technology Co., Ltd.(Alo7.com) (e)
|
|
|
29,639
|
|
|
|
17,370
|
|
AVIC Trust Tianqi No.556 (Trust 556) (f)
|
|
|
16,037
|
|
|
|
|
|
Tarena International, Inc. (Tarena) (g)
|
|
|
15,945
|
|
|
|
25,695
|
|
Beijing ShangJiaChongYe Education &Technology Co. Ltd.(Shangjiachongye)
(h)
|
|
|
12,310
|
|
|
|
32,644
|
|
Beijing ROBOROBO Technology Co. Ltd. (ROBOROBO) (i)
|
|
|
9,999
|
|
|
|
|
|
Beijing Shengtong Printing Co. Ltd (Shengtong) (i)
|
|
|
|
|
|
|
10,711
|
|
Other
available-for-sale
investments (j)
|
|
|
45,632
|
|
|
|
66,361
|
|
|
|
|
|
|
|
|
|
|
|
|
|
178,863
|
|
|
|
217,259
|
|
|
|
|
|
|
|
|
|
|
(a)
|
In August 2014, the Group invested US$4,034 to acquire 50% equity interest in Dongfangheli, a company concentrating on investment in educational research and development programs and software consulting services. The
Group used the equity method to account for the investment as the Group has the ability to exercise significant influence but does not have control over the investee.
|
(b)
|
In August 2014 and May 2015, the Group invested US$3,006 and US$501 respectively in Juesheng.com, a company engaging in providing international educational products search engine service, for 11.9% equity interests.
These investments were classified as
available-for-sale
investment as the Company determined that the shares were debt securities due to the redemption option available
to the investor and measured the investment subsequently at fair value. Unrealized holding gain of US$3,933 was reported in other comprehensive income for the year ended May 31, 2015. In March 2016, Juesheng.com successfully listed on the
National Equities Exchange and Quotations (NEEQ). Upon the listing, the Groups preference rights, including its redemption and liquidation preference were terminated and the shares became common shares. As the share conversion is
not considered an earnings realization event, all unrealized gains deferred in accumulated other comprehensive income were reversed to the carrying amount of the common shares such that the initial carrying amount of such shares is equal to the
original cost basis of the original investment. The Group further accounted for its investment by using equity method as the Group determined that it can exercise significant influence over Juesheng.com.
|
(c)
|
In December 2014, the Group invested US$3,472 in Kouyu100, a company applying cutting edge psychoacoustic technology to spoken language training and correcting the pronunciation of a student like a real tutor, for 7%
equity interest. The investment was classified as
available-for-sale
investment as the Company determined that the shares were debt securities due to the redemption
option available to the investor and measured subsequently at fair value. Unrealized gain of nil was reported in other comprehensive income for the year ended May 31, 2015. In December 2015, Kouyu100 successfully listed on the NEEQ. Upon the
listing, the Groups preference rights, including redemption and liquidation preference were terminated and the shares became common shares. As the share conversion is not considered an earnings realization event, all unrealized gains deferred
in accumulated other comprehensive income were reversed to the carrying amount of the common shares such that the initial carrying amount of such shares is equal to the original cost basis of the original investment. The Group further accounted for
this investment by using the equity method as the Group determined that it can exercise significant influence over Kouyu100.
|
F-44
NEW ORIENTAL EDUCATION & TECHNOLOGY GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MAY 31, 2015, 2016 AND 2017
(In thousands, except share and per share data, or otherwise noted)
12.
|
LONG-TERM INVESTMENTS - continued
|
(d)
|
In April and November 2015, the Group invested US$3,398 and US$11,437 respectively in Golden Finance, a company focusing on training programs associated with finance and business management, for 19.5% equity interest.
Unrealized holding gains of nil, US$19,407 and US$10,567 were reported in other comprehensive income for the years ended May 31, 2015, 2016 and 2017, respectively.
|
(e)
|
On March 5, 2012, the Group acquired a convertible promissory from Alo7.com for US$1,000, which entitled the Group to automatically convert the note into equity security. On July 1, 2012, the Group converted
the US$1,000 promissory note into convertible redeemable preferred shares and warrants issued by Alo7.com, for 3.4% equity ownership interest in Alo7.com on an
as-converted
basis.
|
|
In March, June and September 2014, the Group further invested US$2,576, US$300 and US$10,000 into Alo7.com. As of May 31, 2017, the Company had 17.2% equity interests in Alo7.com. Unrealized holding gains of
US$13,428, US$1,704 and loss of US$8,678 were reported in other comprehensive income for the years ended May 31, 2015, 2016 and 2017, respectively.
|
(f)
|
In October 2015, the Group invested US$15,654 in a
two-year
trust named Trust 556 with an expected annualized interest rate of 8.5%. The principal and the interest are not
guaranteed during the Groups holding period and will be paid upon maturity. The investment was classified as
available-for-sale
investment as the Group determined
that the shares were debt securities and unrealized holding gains of US$383 and US$706 were reported in other comprehensive income for the years ended May 31, 2016 and 2017, respectively. As of May 31, 2017, the investment of US$16,743 was
reclassified to long term investment due within one year.
|
(g)
|
In March 2014, the Group invested US$13,500 in Tarena, which is a service provider of IT professional education in China, for around 3% equity interest. Unrealized holding gain of US$3,495, loss of US$1,005 and gain of
US$9,750 were reported in other comprehensive income for the years ended May 31, 2015, 2016 and 2017, respectively.
|
(h)
|
In January 2016, the Group invested US$12,310 to acquire convertible bond issued by Shangjiachongye, which focuses on online education specific to vocational qualification training. In July 2016, the Group converted all
of the convertible bonds into redeemable preferred shares of Shangjiachongye for a 4.9% equity interest. In the meantime, the Group additionally invested US$12,205 into redeemable preferred shares for another 4.9% equity interest. Unrealized holding
gains of nil and US$8,129 were reported in other comprehensive income for the years ended May 31, 2016 and 2017, respectively.
|
(i)
|
In April 2015, the Group acquired 18% equity interest in ROBOROBO for a cash consideration of US$4,356, a company applying various robots build training courses for kids with different ages. Unrealized holding gains of
nil and US$5,643 were reported in other comprehensive income for the years ended May 31, 2015 and 2016, respectively.
|
|
In February 2017, the Group disposed the shares in ROBOROBO to exchange for shares newly issued by Shengtong which is an
A-share
listed company in China. Realized gain of US$7,086
was recognized for the year ended May 31, 2017. The equity interest acquired in Shengtong was classified as
available-for-sale
security and measured at fair value.
Unrealized holding gain of US$423 was reported in other comprehensive income for the year ended May 31, 2017.
|
(j)
|
As to the other investments, they represent several insignificant investments either classified as equity method investments or
available-for-sale
investments as of May 31, 2016 and 2017.
|
F-45
NEW ORIENTAL EDUCATION & TECHNOLOGY GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MAY 31, 2015, 2016 AND 2017
(In thousands, except share and per share data, or otherwise noted)
13.
|
ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
|
Accrued expenses and other current liabilities consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
As of May 31,
|
|
|
|
2016
|
|
|
2017
|
|
|
|
US$
|
|
|
US$
|
|
Accrued payroll
|
|
|
131,151
|
|
|
|
157,167
|
|
Payable for purchase of property and equipment
|
|
|
11,953
|
|
|
|
21,445
|
|
Amounts reimbursable to employees (a)
|
|
|
8,294
|
|
|
|
11,022
|
|
Individual taxes withholding
|
|
|
8,186
|
|
|
|
6,454
|
|
Refundable fees received from students (b)
|
|
|
5,755
|
|
|
|
8,687
|
|
Business taxes payable
|
|
|
5,259
|
|
|
|
|
|
Value-added taxes payable
|
|
|
6,506
|
|
|
|
9,516
|
|
Accrued advertising fees
|
|
|
6,443
|
|
|
|
7,798
|
|
Rent payable
|
|
|
6,285
|
|
|
|
7,532
|
|
Welfare payable
|
|
|
6,004
|
|
|
|
6,102
|
|
Royalty fees payable (c)
|
|
|
3,637
|
|
|
|
4,011
|
|
Refundable deposit (d)
|
|
|
3,161
|
|
|
|
5,382
|
|
Accrued professional service fees
|
|
|
2,352
|
|
|
|
1,486
|
|
Other taxes payable
|
|
|
1,240
|
|
|
|
1,604
|
|
Others (e)
|
|
|
10,818
|
|
|
|
12,494
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
217,044
|
|
|
|
260,700
|
|
|
|
|
|
|
|
|
|
|
(a)
|
Amounts reimbursable to employees included traveling and the related expenses incurred by employees on behalf of the Group.
|
(b)
|
Refundable fees received from students represent (1) the miscellaneous expenses other than tuition fee received from students which will be paid out on behalf of students; and (2) tuition fees refundable to
students for withdrawn classes.
|
(c)
|
Royalty fees payable related to payments to content providers for
on-line
learning programs and those to counterparties for copyright and resource sharing.
|
(d)
|
Refundable deposits represent student deposits for dormitory or other fees that will be refunded upon graduation and student security deposits refunded upon completion of the study tour.
|
(e)
|
Others primarily included transportation expenses, utility fees, property management fees, and other miscellaneous expenses payable.
|
F-46
NEW ORIENTAL EDUCATION & TECHNOLOGY GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MAY 31, 2015, 2016 AND 2017
(In thousands, except share and per share data, or otherwise noted)
14.
|
SHARE-BASED COMPENSATION
|
On January 20, 2006, the Company adopted 2006 Share Incentive Plan (2006 Share Incentive Plan), under which the Company may
grant share options to purchase up to 8,000,000 common shares of the Group, to its employees, directors and consultants. The number of common shares available for grant under the 2006 Share Incentive Plan may be increased annually by (i) an
additional 5,000,000 shares on January 1, 2007, (ii) an additional 5,000,000 shares on January 1, 2008, and (iii) an annual increase in common shares to be added on the first business day of each calendar year beginning in 2009
equal to the lesser of (x) 3,000,000 shares, (y) two percent (2%) of total common shares outstanding as of such date, or (z) a lesser number of shares as determined by the Groups management. In the event the aggregate
number of shares that may be issued in any given year under all share compensation plans has reached the maximum number of shares allowed in that year, the Company may grant additional awards up to 2,000,000 shares, or extra shares. The number of
shares granted in excess of the annual maximum in any given year will result in the reduction of the maximum shares available for grant in the next year. The 2006 Share Incentive Plan has an effective period of 10 years.
As of May 31, 2017, the Company has transferred 16,000,000 common shares to its depositary bank for the issuance to employees and
non-employees
upon the exercise of their vested share options or upon the vesting of NES. The Company launched a share repurchase program and has since 2013 repurchased a cumulative 5,246,349 of common sharesfrom
the open market. Such shares are reserved for the employees and
non-employees
to exercise of their vested share options and NES in the future. As of May 31, 2017, 691,943 treasury shares were for future
issuance upon the exercise of share options and vesting of NES.
The Company recorded total share-based compensation expense of US$15,689,
US$16,810 and US$20,287 during the years ended May 31, 2015, 2016 and 2017, respectively.
Share options
The following table summarizes information regarding the share options granted:
|
|
|
|
|
|
|
|
|
|
|
|
|
Share options
|
|
Shares granted
|
|
|
Grant-date
fair value
|
|
|
Exercise
price
|
|
|
|
|
|
|
US$
|
|
|
US$
|
|
Grant date:
|
|
|
|
|
|
|
|
|
|
|
|
|
February 28, 2006
|
|
|
7,099,500
|
|
|
|
1.00
|
|
|
|
2.02
|
|
July 21, 2006
|
|
|
1,620,000
|
|
|
|
1.15
|
|
|
|
2.38
|
|
September 7, 2006
|
|
|
100,000
|
|
|
|
2.38
|
|
|
|
3.75
|
|
March 5, 2007
|
|
|
3,946,500
|
|
|
|
4.09
|
|
|
|
8.75
|
|
January 17, 2012
|
|
|
3,060,000
|
|
|
|
10.33
|
|
|
|
12.19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
15,826,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The exercise price of share options is at least 100% of the fair value of the common shares on the date of the
grant. The term of a share option is up to ten years from the date of grant. During the year ended May 31, 2016, the Group extended the terms of share options granted on February 28, 2006 for another three years. The extension did not have
a material impact on the Groups consolidated financial statements. The share options generally vest over three years at
six-month
vesting increments per year. During the year ended May 31, 2017, the
Group canceled 23,938 outstanding share options granted on March 5, 2007 due to the 10 years validity.
In January 2016, the
Companys 2006 Share Incentive Plan expired. However, the expiration of the plan did not affect the exercise right of options granted prior to such expiration.
F-47
NEW ORIENTAL EDUCATION & TECHNOLOGY GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MAY 31, 2015, 2016 AND 2017
(In thousands, except share and per share data, or otherwise noted)
14.
|
SHARE-BASED COMPENSATION - continued
|
Share options
- continued
The Company adopted the 2016 Share Incentive Plan (2016 Share Incentive Plan) in
January 2016 to continue to provide incentives to employees, directors and consultants after the termination of 2006 Share Incentive Plan. The maximum aggregate number of shares which may be issued pursuant to all awards (including options) granted
under the 2016 Share Incentive Plan is 10,000,000 shares. As of May 31, 2017, no share options had been granted under 2016 Share Incentive Plan.
As of May 31, 2017, 11,285,510 common shares out of the 16,000,000 common shares held by the depositary bank had been issued to employees
and
non-employees
upon the exercise of their share options, and 2,256,592 shares out of the 5,246,349 treasury shares had been reissued to employees and
non-employees
upon exercise of their share options.
A summary of share options activity under 2006 Share Incentive Plan for year ended May 31, 2017
is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
Number of
Options
|
|
|
Weighted-
average
Exercise Prices
|
|
|
Remaining
Contractual Life
|
|
|
Aggregated
Intrinsic Value
|
|
|
|
|
|
|
US$
|
|
|
years
|
|
|
US$
|
|
Options outstanding at May 31, 2016
|
|
|
78,337
|
|
|
|
6.13
|
|
|
|
0.58
|
|
|
|
2,829
|
|
Granted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
48,047
|
|
|
|
5.37
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
23,938
|
|
|
|
8.75
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding at May 31, 2017
|
|
|
6,352
|
|
|
|
2.02
|
|
|
|
1.58
|
|
|
|
442
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options vested and expect to vest at May 31, 2017
|
|
|
6,352
|
|
|
|
2.02
|
|
|
|
1.58
|
|
|
|
442
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable at May 31, 2017
|
|
|
6,352
|
|
|
|
2.02
|
|
|
|
1.58
|
|
|
|
442
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The total intrinsic value of share options exercised during the years ended May 31, 2015, 2016 and 2017
were US$5,249, US$4,802and US$2,133, respectively. No new share options were granted during the years ended May 31, 2015, 2016 and 2017, respectively. As of May 31, 2017, no unrecognized compensation expense related to share options.
NES
The following table
summarizes information regarding NES granted in fiscal year 2015, 2016 and 2017:
|
|
|
|
|
|
|
|
|
NES
|
|
Grant-date
Shares granted
|
|
|
Fair Value and
Intrinsic value
|
|
|
|
|
|
|
US$
|
|
Grant date:
|
|
|
|
|
|
|
|
|
July 23, 2014
|
|
|
209,650
|
|
|
|
21.01
|
|
September 29, 2014
|
|
|
24,020
|
|
|
|
22.32
|
|
February 5, 2015
|
|
|
600,000
|
|
|
|
18.52
|
|
July 9, 2015
|
|
|
486,330
|
|
|
|
22.69
|
|
October 19, 2015
|
|
|
60,000
|
|
|
|
22.45
|
|
November 16, 2016
|
|
|
436,016
|
|
|
|
47.19
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
1,816,016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-48
NEW ORIENTAL EDUCATION & TECHNOLOGY GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MAY 31, 2015, 2016 AND 2017
(In thousands, except share and per share data, or otherwise noted)
14.
|
SHARE-BASED COMPENSATION - continued
|
NES
- continued
In July 2014, the Company granted 209,650 NES to employees which is eligible to vest on
May 31, 2015.
In September 2014, the Company granted 24,020 NES to employees which is eligible to vest on May 31, 2015.
In February 2015, the Company granted 600,000 NES to employees which is eligible to vest 240,000, 180,000 and 180,000 on December 31,
2015, 2016 and 2017, respectively.
In July 2015, the Company granted 486,330 NES to employees which is eligible to vest on May 31,
2016.
In October 2015, the Company granted 60,000 NES to employees which is eligible to vest 20,000, 20,000 and 20,000 on May 31,
2016, December 31, 2016 and 2017, respectively.
In November 2016, the Company granted 436,016 NES to employees which is eligible to
vest on June 30, 2017.
As of May 31, 2017, 4,714,490 common shares out of the 16,000,000 common shares held by the depositary
bank had been issued to employees and
non-employees
upon the vesting of their NES, and 2,297,814 shares out of the 5,246,349 treasury shares had been reissued to employees and
non-employees
upon the vesting of their NES.
A summary of NES activities under 2006 Share
Incentive Plan for the year ended May 31, 2017 is as follows:
|
|
|
|
|
|
|
|
|
|
|
Number
of NES
|
|
|
Weighted-
average grant date
fair value and
intrinsic value
|
|
|
|
|
|
|
US$
|
|
NES outstanding at May 31, 2016
|
|
|
400,000
|
|
|
|
18.91
|
|
Granted
|
|
|
436,016
|
|
|
|
47.19
|
|
Vested
|
|
|
(200,000
|
)
|
|
|
18.91
|
|
Forfeited
|
|
|
(4,050
|
)
|
|
|
47.19
|
|
|
|
|
|
|
|
|
|
|
NES outstanding at May 31, 2017
|
|
|
631,966
|
|
|
|
38.24
|
|
|
|
|
|
|
|
|
|
|
NES vested and expect to vest at May 31, 2017
|
|
|
631,966
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The total fair value of shares vested during the year ended May 31, 2017 was US$3,783. The weighted
average grant date fair value of NES granted during the years ended May 31, 2015, 2016 and 2017 was US$19.26, US$22.66 and US$47.19 respectively. As of May 31, 2017, total unrecognized compensation expense for NES of US$3,486 is expected
to be recognized over a weighted average period of 0.2 years.
F-49
NEW ORIENTAL EDUCATION & TECHNOLOGY GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MAY 31, 2015, 2016 AND 2017
(In thousands, except share and per share data, or otherwise noted)
Significant components of provision for income taxes for the years ended May 31, 2015, 2016 and 2017 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended May 31,
|
|
|
|
2015
|
|
|
2016
|
|
|
2017
|
|
|
|
US$
|
|
|
US$
|
|
|
US$
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
PRC
|
|
|
31,552
|
|
|
|
39,467
|
|
|
|
51,142
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
PRC
|
|
|
(5,331
|
)
|
|
|
(1,936
|
)
|
|
|
(518
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total provision for income taxes
|
|
|
26,221
|
|
|
|
37,531
|
|
|
|
50,624
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company is incorporated in the Cayman Islands. Under the current laws of the Cayman Islands, the Company is
not subject to income or capital gains taxes. In addition, dividend payments are not subject to withholdings tax in the Cayman Islands.
The Companys subsidiaries Smart Shine, Winner Park and Elite Concept are located in Hong Kong and are subject to an income tax rate of
16.5% for taxable income earned in Hong Kong. Elite Concept and Smart Shine received a special dividend of US$75,898 and nil during the years ended May 31, 2016 and 2017. Withholding taxes of US$7,590 and nil in connection with the dividends
were fully paid during the years ended May 31, 2016 and 2017, respectively.
The Companys PRC subsidiaries and the VIEs are
subject to the 25% standard enterprise income tax except for those accepted as deemed profit method enterprises, or qualified for small-scale enterprises, or granted preferential tax treatment.
Enterprises that qualify as a high and new technology enterprise (HNTE) are subject to a tax rate of 15%. Beijing Decision, Beijing
Hewstone, Beijing Pioneer and Xuncheng continued to qualify as HNTE and were subject to a tax rate of 15% during the years ended May 31, 2015, 2016 and 2017. Beijing Smart Wood qualified as HNTE and could enjoy a tax rate of 15% since January
2016.
Enterprises that qualify as the newly established software enterprise (NESE) are exempt from Enterprise
Income Tax (EIT) for two years beginning the enterprises first profitable year followed by a tax rate of 12.5% for the succeeding three years. Beijing Smart Wood, Beijing Right Time, Beijing Joy Tend, Beijing Top, Beijing
Shenghe, Beijing Magnificence and Beijing Jinghong were qualified as NESE and enjoyed the EIT tax benefit that began from January 2012, January 2013, January 2013, January 2014, January 2014, January 2015 and January 2017,
respectively.
Beijing Haidian School was not required by the governing tax bureau to pay any EIT since its establishment through
May 31, 2017. If Beijing Haidian School is required to pay EIT in future, this could have material impact to the Groups consolidated financial statements. However, the Group believes that it is more likely than not that any change to the
tax treatment of Beijing Haidian School shall be prospectively applied.
F-50
NEW ORIENTAL EDUCATION & TECHNOLOGY GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MAY 31, 2015, 2016 AND 2017
(In thousands, except share and per share data, or otherwise noted)
15.
|
INCOME TAXES - continued
|
Significant components of the Groups deferred tax assets and liabilities were as
follows:
|
|
|
|
|
|
|
|
|
|
|
As of May 31,
|
|
|
|
2016
|
|
|
2017
|
|
|
|
US$
|
|
|
US$
|
|
Deferred tax assets,
non-current
|
|
|
|
|
|
|
|
|
Allowance doubtful accounts
|
|
|
252
|
|
|
|
2,017
|
|
Accrued expenses
|
|
|
18,427
|
|
|
|
21,893
|
|
Deferred revenue for incentive plan
|
|
|
2,376
|
|
|
|
233
|
|
Net operating loss carry-forward
|
|
|
6,910
|
|
|
|
8,696
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets,
non-current
|
|
|
27,965
|
|
|
|
32,839
|
|
Less: valuation allowance
|
|
|
(3,624
|
)
|
|
|
(3,981
|
)
|
|
|
|
|
|
|
|
|
|
Net, deferred tax assets,
non-current
|
|
|
24,341
|
|
|
|
28,858
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities,
non-current
|
|
|
|
|
|
|
|
|
Acquired of
non-current
assets
|
|
|
1,982
|
|
|
|
2,220
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax liabilities,
non-current
|
|
|
1,982
|
|
|
|
2,220
|
|
|
|
|
|
|
|
|
|
|
The Group does not file combined or consolidated tax returns, therefore, losses from individual subsidiaries or
the VIEs may not be used to offset other subsidiaries earnings within the Group.
The Group determined the valuation allowance on an
entity by entity basis. The valuation allowance, which is primarily related to entities with net operating loss carry-forwards for which the Company does not believe it will ultimately be realized, was US$3,981 as of May 31, 2017, an increase
of US$357 from US$3,624 as of May 31, 2016.
As of the year ended May 31, 2017, the Group had net operating loss carried-forwards
of US$36,608 from the Companys PRC subsidiaries and VIE, which will expire on various dates from May 31, 2018 to May 31, 2022.
A reconciliation of the effective tax rates from the 25% statutory tax rates was as follows for the years ended May 31, 2015, 2016 and
2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended May 31,
|
|
|
|
2015
|
|
|
2016
|
|
|
2017
|
|
|
|
%
|
|
|
%
|
|
|
%
|
|
Statutory tax rate
|
|
|
25.00
|
|
|
|
25.00
|
|
|
|
25.00
|
|
Effect of expenses not deductible for tax purposes
|
|
|
4.91
|
|
|
|
4.57
|
|
|
|
2.03
|
|
Effect of tax holiday
|
|
|
(20.82
|
)
|
|
|
(18.05
|
)
|
|
|
(13.41
|
)
|
Changes in valuation allowance
|
|
|
(0.59
|
)
|
|
|
0.25
|
|
|
|
0.11
|
|
Effect of dividend withholding tax
|
|
|
3.39
|
|
|
|
2.27
|
|
|
|
1.58
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total provision for income taxes
|
|
|
11.89
|
|
|
|
14.04
|
|
|
|
15.31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
If the tax holidays granted to the WFOEs and current tax treatments on certain schools and subsidiaries of New
Oriental China were not available, the Groups income tax expense would have increased by US$47,080, US$47,559 and US$42,895, the basic net income per share attributable to the Company would decrease by US$0.30 , US$0.30 and US$0.27 for the
years ended May 31, 2015, 2016 and 2017, respectively, and the diluted net income per share attributable to the Company would decrease by US$0.30, US$0.30 and US$0.27 for the years ended May 31, 2015, 2016 and 2017, respectively.
F-51
NEW ORIENTAL EDUCATION & TECHNOLOGY GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MAY 31, 2015, 2016 AND 2017
(In thousands, except share and per share data, or otherwise noted)
15.
|
INCOME TAXES - continued
|
Under the New Income Tax Law effective from January 1, 2008, the rules for determining
whether an entity is resident in the PRC for tax purposes have changed and the determination of residence depends among other things on the place of actual management. If the Group, or its
non-PRC
subsidiaries, were to be determined as a PRC resident for tax purposes, they would be subject to a 25% income tax rate on their worldwide income including the income arising in jurisdictions outside the PRC. The Group does not believe that its legal
entities organized outside of the PRC are considered PRC residents.
If the Company were to be a
non-resident
for PRC tax purposes, dividends paid to it out of profits earned after January 1, 2008 would be subject to a withholding tax. In the case of dividends paid by PRC schools and subsidiaries to
their foreign investors, the withholding tax would be 10%, unless any such foreign investors jurisdiction of incorporation has a tax treaty with China that provides for a different withholding arrangement. During the year ended May 31,
2015, Shanghai Smart Words paid US$5,559 withholding tax when it paid a special dividend to Smart Shine. During the year ended May 31, 2016, Beijing Hewstone, Shanghai Smart Words and Beijing Decision paid US$7,590 withholding tax when they
paid a special dividend to their parent companies, Elite Concept.
Aggregate undistributed earnings of the Companys PRC subsidiaries
and VIEs that are available for distribution was US$1,133,217 and US$1,457,705 as of May 31, 2016 and 2017, respectively. Upon distribution of such earnings, the Company will be subject to PRC EIT taxes, the amount of which is impractical to
estimate. The Company did not record any tax on any of the aforementioned undistributed earnings because the relevant subsidiaries and VIEs do not intend to declare dividends and the Company intends to permanently reinvest it within the PRC.
Additionally, no deferred tax liability was recorded for taxable temporary differences attributable to the undistributed earnings because the Company believes the undistributed earnings can be distributed in a manner that would not be subject to
income tax.
The Group did not identify any significant unrecognized tax benefits for the years ended May 31, 2015, 2016 and 2017,
respectively. The Group did not incur any significant interest and penalties related to potential underpaid income tax expenses and also does not anticipate any significant increases or decreases in unrecognized tax benefits in the next twelve
months. The Group has no material unrecognized tax benefits which would favorably affect the effective income tax rate in future periods.
According to the PRC Tax Administration and Collection Law, the tax authority may require the taxpayer or the withholding agent to make
delinquent tax payment within three years if the underpayment of taxes is resulted from the tax authoritys act or error. No late payment surcharge will be assessed under such circumstances. The statute of limitation will be three years if the
underpayment of taxes is due to the computational errors made by the taxpayer or the withholding agent. Late payment surcharge will be assessed in such case. The statute of limitation will be extended to five years under special circumstances which
are not clearly defined (but an underpayment of tax liability exceeding US$16 (RMB0.1 million) is specifically listed as a special circumstance). The statute of limitation for transfer pricing related issue is ten years. There is no
statute of limitation in the case of tax evasion. Therefore, the Groups PRC domiciled entities are subject to examination by the PRC tax authorities based on the above.
F-52
NEW ORIENTAL EDUCATION & TECHNOLOGY GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MAY 31, 2015, 2016 AND 2017
(In thousands, except share and per share data, or otherwise noted)
The following table sets forth the computation of basic and diluted net income per share for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended May 31,
|
|
|
|
2015
|
|
|
2016
|
|
|
2017
|
|
|
|
US$
|
|
|
US$
|
|
|
US$
|
|
Numerator used in basic and diluted net income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to New Oriental
|
|
|
|
|
|
|
|
|
|
|
|
|
Education &Technology Group Inc.
|
|
|
193,013
|
|
|
|
224,884
|
|
|
|
274,457
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income available for future distribution
|
|
|
193,013
|
|
|
|
224,884
|
|
|
|
274,457
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares (denominator):
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding used in computing basic net income
per
share
|
|
|
156,438,606
|
|
|
|
156,782,439
|
|
|
|
157,551,320
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Plus incremental weighted average common shares from assumed exercise of share options and vesting
of NES using the treasury stock method
|
|
|
863,568
|
|
|
|
609,247
|
|
|
|
435,074
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding used in computing diluted net income per share
|
|
|
157,302,174
|
|
|
|
157,391,686
|
|
|
|
157,986,394
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share
|
|
|
|
|
|
|
|
|
|
|
|
|
- Basic
|
|
|
1.23
|
|
|
|
1.43
|
|
|
|
1.74
|
|
- Diluted
|
|
|
1.23
|
|
|
|
1.43
|
|
|
|
1.74
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The weighted average of 1,940,781, 1,596,948 and 828,067 treasury shares have been excluded in computing basic
net income per share for the years ended May 31, 2015, 2016 and 2017, respectively.
There was no employee stock options excluded from
the dilutive share calculation for the years ended May 31, 2015, 2016 and 2017 due to anti-dilutive effects.
17.
|
RELATED-PARTIES TRANSACTIONS
|
The Group had the following balances and transaction with
related parties:
Balances:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts due from
related parties,
non-current
As of May 31,
|
|
|
|
Notes
|
|
Relationship
|
|
2016
|
|
|
2017
|
|
|
|
|
|
|
|
US$
|
|
|
US$
|
|
Metropolis Holding China Limited
|
|
(1)
|
|
Company controlled by
the executive
Chairman
|
|
|
1,741
|
|
|
|
1,064
|
|
MaxEn
|
|
|
|
Joint Venture
|
|
|
|
|
|
|
684
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,741
|
|
|
|
1,748
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-53
NEW ORIENTAL EDUCATION & TECHNOLOGY GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MAY 31, 2015, 2016 AND 2017
(In thousands, except share and per share data, or otherwise noted)
17.
|
RELATED-PARTIES TRANSACTIONS - continued
|
Balance - continued
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts due from
related parties,
current
As of May 31,
|
|
|
Amounts due to
related parties,
current
As of May 31,
|
|
|
|
Notes
|
|
Relationship
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
|
|
|
|
|
|
US$
|
|
|
US$
|
|
|
US$
|
|
|
US$
|
|
Metropolis Holding China Limited
|
|
(1)
|
|
|
Company controlled by
the executive
Chairman
|
|
|
|
637
|
|
|
|
1,895
|
|
|
|
|
|
|
|
|
|
MaxEn
|
|
|
|
|
Joint Venture
|
|
|
|
812
|
|
|
|
|
|
|
|
13
|
|
|
|
12
|
|
Beijing Haiwei Career Services Co., Ltd (Haiwei Career)
|
|
(2)
|
|
|
Joint Venture
|
|
|
|
1,553
|
|
|
|
3,965
|
|
|
|
|
|
|
|
|
|
Dianshijingwei
|
|
(3)
|
|
|
Long-term investee
|
|
|
|
1,520
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Others
|
|
(4)
|
|
|
|
|
|
|
17
|
|
|
|
88
|
|
|
|
29
|
|
|
|
36
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
4,539
|
|
|
|
5,948
|
|
|
|
42
|
|
|
|
48
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transactions:
|
|
|
|
|
|
|
|
|
|
Rental expense
For the years ended May 31
|
|
|
|
|
|
|
|
|
|
|
|
2015
|
|
|
2016
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
US$
|
|
|
US$
|
|
|
US$
|
|
Metropolis Holding China Limited
|
|
(1)
|
|
|
Company controlled by the
Executive Chairman
|
|
|
|
5,298
|
|
|
|
7,139
|
|
|
|
6,790
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan to related parties
For the years ended May 31
|
|
|
|
|
|
|
|
|
|
|
|
2015
|
|
|
2016
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
US$
|
|
|
US$
|
|
|
US$
|
|
Haiwei Career
|
|
(2)
|
|
|
Joint Venture
|
|
|
|
|
|
|
|
|
|
|
|
1,520
|
|
|
|
3,965
|
|
Beijing Weixuemingri Network Technology Co., Ltd. (Weixuemingri)
|
|
(5)
|
|
|
Joint Venture
|
|
|
|
|
|
|
|
|
|
|
|
998
|
|
|
|
1,733
|
|
Great Thanks Holdings Limited
|
|
|
|
|
Company established
by the shareholder of
the Joint Venture
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,450
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,518
|
|
|
|
7,148
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
For the years ended
May 31
|
|
|
|
|
|
|
|
|
|
|
|
2015
|
|
|
2016
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
US$
|
|
|
US$
|
|
|
US$
|
|
MaxEn
|
|
|
|
|
Joint Venture
|
|
|
|
|
|
|
|
|
|
|
|
177
|
|
|
|
|
|
Beijing Tongban Education & Technology Co., Ltd (Tongban)
|
|
|
|
|
Long-term investee
|
|
|
|
|
|
|
|
|
|
|
|
3
|
|
|
|
12
|
|
STEMedu.cn
|
|
|
|
|
Long-term investee
|
|
|
|
|
|
|
|
|
|
|
|
11
|
|
|
|
60
|
|
Goldern Finance
|
|
|
|
|
Long-term investee
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
191
|
|
|
|
90
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-54
NEW ORIENTAL EDUCATION & TECHNOLOGY GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MAY 31, 2015, 2016 AND 2017
(In thousands, except share and per share data, or otherwise noted)
17.
|
RELATED-PARTIES TRANSACTIONS - continued
|
Transactions - continued:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transactions:
|
|
|
|
|
|
|
|
Cost
For the years ended May 31
|
|
|
|
|
|
|
|
|
|
2015
|
|
|
2016
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
US$
|
|
|
US$
|
|
|
US$
|
|
STEMedu.cn
|
|
Long-term investee
|
|
|
|
|
|
|
30
|
|
|
|
23
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Since April 2010, the Group began renting a large portion of a building owned by Metropolis Holding China Limited for office space. In March 2012, Metropolis Holding China Limited was acquired by a company wholly -owned
by Mr. Yu, the Groups executive chairman. As a result, Metropolis Holding China Limited became a related party of the Group thereafter. As of May 31, 2017, the current and
non-current
amounts
due from Metropolis Holding China Limited were US$1,895 and US$1,064, respectively, which represented prepaid rent and deposit for the building. The amount of the rental payments was determined based on the prevailing market rates and was duly
approved by all of the directors.
|
(2)
|
In October 2014, Haiwei Career became a joint venture of the Group. As a result, Haiwei Career became a related party of the Group. As of May 31, 2017, the amount due from Haiwei Career was US$3,965, which
represented loans from the Group to Haiwei Career with
non-interest
bearing to support its daily operation supporting. All the loans are payable within one year.
|
(3)
|
As of May 31, 2016, the amount due from Dianshijingwei represented the
non-interest
bearing loan provided by the Group before the disposal of Dianshijingwei to support its
daily operation. As of May 31, 2017, the Group had collected the loans from Dianshijingwei.
|
(4)
|
As of May 31, 2017, the balance in others included the current receivables from long-term investees of Tongban, Goldern Finance and etc.
|
(5)
|
As of May 31, 2017, the amount due from Weixue Mingri represented the
non-interest
bearing loans provided by the Group to support its daily operation and the outstanding
loans were fully wrote off by the Group.
|
F-55
NEW ORIENTAL EDUCATION & TECHNOLOGY GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MAY 31, 2015, 2016 AND 2017
(In thousands, except share and per share data, or otherwise noted)
18.
|
COMMITMENTS AND CONTINGENCIES
|
Operating leases
The
Group leases offices, classroom and warehouse facilities under operating leases. The terms of substantially all of these leases are ten years or less. Future minimum lease payments under
non-cancelable
operating leases were as follows on May 31, 2017:
|
|
|
|
|
|
|
US$
|
|
Years ended May 31:
|
|
|
|
|
2018
|
|
|
204,996
|
|
2019
|
|
|
185,059
|
|
2020
|
|
|
157,333
|
|
2021
|
|
|
123,894
|
|
2022
|
|
|
83,329
|
|
Thereafter
|
|
|
88,611
|
|
|
|
|
|
|
|
|
|
843,222
|
|
|
|
|
|
|
Rent expense for the years ended May 31, 2015, 2016 and 2017 related to all cancelable and
non-cancelable
leases were US$157,523, US$173,797 and US$199,329, respectively.
Capital commitments
As of May 31, 2017, future minimum capital commitments under
non-cancelable
construction
and investments were as follows:
|
|
|
|
|
|
|
US$
|
|
Capital commitment for the purchase of property and equipment
|
|
|
3,359
|
|
Capital commitment for leasehold improvements
|
|
|
16,338
|
|
Capital commitment for investments
|
|
|
10,064
|
|
|
|
|
|
|
|
|
|
29,761
|
|
|
|
|
|
|
Contingent liabilities
The Group has been named in a number of lawsuits arising in its ordinary course of business. Although the outcome of those lawsuits are
uncertain, the Group does not believe the possibility of loss is probable. The Group is unable to estimate a range of loss, if any, that could result if there would be an adverse decision, as such, and the Group has not accrued any liabilities.
F-56
NEW ORIENTAL EDUCATION & TECHNOLOGY GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MAY 31, 2015, 2016 AND 2017
(In thousands, except share and per share data, or otherwise noted)
19.
|
NONCONTROLLING INTERESTS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Koolearn
Corporation
|
|
|
Xuncheng
|
|
|
New
Road
|
|
|
Jinzhou
School
|
|
|
Dongfangyoubo
|
|
|
Ainuoshida
|
|
|
Total
|
|
|
|
US$
|
|
|
US$
|
|
|
US$
|
|
|
US$
|
|
|
US$
|
|
|
US$
|
|
|
US$
|
|
Balance as of May 31, 2015
|
|
|
3,458
|
|
|
|
|
|
|
|
38
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,496
|
|
Capital injection from noncontrolling interests shareholders
|
|
|
|
|
|
|
28,737
|
|
|
|
|
|
|
|
182
|
|
|
|
|
|
|
|
|
|
|
|
28,919
|
|
Capital repurchase from noncontrolling interests shareholders
|
|
|
(3,497
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,497
|
)
|
Unrealized gain on
available-for-sale
investment attributed to noncontrolling interests shareholders
|
|
|
|
|
|
|
999
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
999
|
|
Foreign currency translation adjustment attributed to noncontrolling interest
shareholders
|
|
|
|
|
|
|
(269
|
)
|
|
|
(2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(271
|
)
|
Net income (loss) attributed to noncontrolling interests shareholders
|
|
|
39
|
|
|
|
423
|
|
|
|
3
|
|
|
|
(21
|
)
|
|
|
|
|
|
|
|
|
|
|
444
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of May 31, 2016
|
|
|
|
|
|
|
29,890
|
|
|
|
39
|
|
|
|
161
|
|
|
|
|
|
|
|
|
|
|
|
30,090
|
|
Capital injections from noncontrolling interests shareholders
|
|
|
|
|
|
|
3,348
|
|
|
|
|
|
|
|
|
|
|
|
576
|
|
|
|
|
|
|
|
3,924
|
|
Addition of noncontrolling interests in connection with acquisition
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,909
|
|
|
|
3,909
|
|
Unrealized gain on
available-for-sale
investment attributed to noncontrolling interests shareholders
|
|
|
|
|
|
|
(23
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(23
|
)
|
Foreign currency translation adjustment attributed to noncontrolling interests
shareholders
|
|
|
|
|
|
|
(1,118
|
)
|
|
|
(2
|
)
|
|
|
(4
|
)
|
|
|
2
|
|
|
|
13
|
|
|
|
(1,109
|
)
|
Net income (loss) attributed to noncontrolling interests shareholders
|
|
|
|
|
|
|
4,454
|
|
|
|
(1
|
)
|
|
|
(176
|
)
|
|
|
(254
|
)
|
|
|
(1,684
|
)
|
|
|
2,339
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of May 31, 2017
|
|
|
|
|
|
|
36,551
|
|
|
|
36
|
|
|
|
(19
|
)
|
|
|
324
|
|
|
|
2,238
|
|
|
|
39,130
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The schedule below discloses the effects of changes in the Companys ownership interest on the
Companys equity:
|
|
|
|
|
|
|
|
|
|
|
Year Ended May 31,
|
|
|
|
2016
|
|
|
2017
|
|
|
|
US$
|
|
|
US$
|
|
Net income attribute to New Oriental Education & Technology Group Inc.
|
|
|
224,884
|
|
|
|
274,457
|
|
Increase in the Groups additional
paid-in
capital
resulting from capital injection of Dongfangyoubos noncontrolling interests shareholders
|
|
|
|
|
|
|
138
|
|
Increase in the Groups additional
paid-in
capital
resulting from capital injection of Xunchengs noncontrolling interests shareholders
|
|
|
39,579
|
|
|
|
4,733
|
|
Decrease in the Groups additional
paid-in
capital
resulting from capital repurchase from Xunchengs noncontrolling interests shareholders
|
|
|
|
|
|
|
(5,412
|
)
|
Increase in the Groups additional
paid-in
capital
resulting from transferring Xunchengs common shares to noncontrolling interests shareholders
|
|
|
|
|
|
|
5,704
|
|
|
|
|
|
|
|
|
|
|
Changes from net income attributable to New Oriental Education & Technology Group Inc.
shareholders and transfers from/to noncontrolling interests
|
|
|
264,463
|
|
|
|
279,620
|
|
|
|
|
|
|
|
|
|
|
F-57
NEW ORIENTAL EDUCATION & TECHNOLOGY GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MAY 31, 2015, 2016 AND 2017
(In thousands, except share and per share data, or otherwise noted)
19.
|
NONCONTROLLING INTERESTS - continued
|
(1)
|
In February 2015, Koolearn Corporation issued 5,000,000 ordinary shares to certain employees and received the cash consideration of US$3,752. As the Company still retained a controlling interest in Koolearn Corporation,
the disposal was accounted as an equity transaction in the Companys consolidated financial statements and the Company recognized a noncontrolling interest representing the 5.9% equity interest over Koolearn Corporation as of May 31, 2015.
In September 2015, the Group repurchased all these shares from the employees at the original purchase price per share. As the Group retained control over Koolearn before and after the repurchase of the 5.9% interest, the acquisition of this
additional equity interest was accounted as an equity transaction in the Companys consolidated financial statements.
|
(2)
|
In November 2015, the Group sold a 21% ownership of Xuncheng to seven limited partnership entities (LPs) representing the employees of the Group. In April 2016, another 12.5% ownership of Xuncheng was sold
to Lin Zhi Tencent Technology Co., Ltd an affiliate of Tencent Holdings Limited. All the cash consideration was fully paid by the other investors as of May 31, 2016. In June 2016, the Group further sold 1.7% ownership of Xuncheng to 8 market
makers. In December 2016, the Group repurchased 1.3% from 6 market makers aforementioned and sold it to another 4 market makers again in May 2017. As of May 31, 2017, the equity interest owned by the Group in Xuncheng was diluted to 68%.
|
(3)
|
In February 2015, New Road which provides travel agent service was established. The Company and another investor have 51% and 49% equity interest, respectively. The cash consideration was fully paid by the other
investor as of May 31, 2015.
|
(4)
|
In April 2016, Jinzhou School which provides language training services was established. The Company and another investor have 60% and 40% equity interest, respectively. The cash consideration was fully paid by the
other investor as of May 31, 2016.
|
(5)
|
In June 2016, Dongfangyouba which provides live broadcast lesson service, was established. The Company and another investor have 51% and 49% equity interest, respectively. The cash consideration was fully paid by the
other investor as of May 31, 2017.
|
(6)
|
In December 2016, the Group purchased an additional 33% of Ainuoshida resulting in the Group controlling Ainuoshida through 51% ownership. See Note 3 for additional details.
|
The Groups chief operating decision maker has been identified
as the Chief Executive Officer who reviews financial information of operating segments based on US GAAP amounts when making decisions about allocating resources and assessing performance of the Group. During the year ended May 31, 2015,
the Group identified six operating segments, including language training and test preparation, primary and secondary school education, online education, content development and distribution,
pre-school
education and overseas study consulting services. During the year ended May 31, 2016, the Group further separated study tour previously included in overseas study consulting services as a separate operating segment. The seven operating segments
for the year ended May 31, 2017 are identified as language training and test preparation, primary and secondary school education, online education, content development and distribution, overseas study consulting services,
pre-school
education and study tour. Language training and test preparation and primary and secondary school education have been identified as reportable segments. Online education, content development and
distribution, overseas study consulting services,
pre-school
education and study tour operating segments were aggregated as others because individually they do not exceed the 10% quantitative threshold.
F-58
NEW ORIENTAL EDUCATION & TECHNOLOGY GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MAY 31, 2015, 2016 AND 2017
(In thousands, except share and per share data, or otherwise noted)
20.
|
SEGMENT INFORMATION - continued
|
The Group primarily operates in the PRC and substantially all of the Groups long-lived
assets are located in the PRC.
The Groups chief operating decision maker evaluates performance based on each reporting
segments net revenue, operating costs and expenses, and operating income. Net revenues, operating costs and expenses, operating income, and total assets by segment were as follows:
For the year ended May
31, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Language
|
|
|
Primary and
|
|
|
|
|
|
|
|
|
|
training and test
|
|
|
secondary
|
|
|
|
|
|
|
|
|
|
preparation courses
|
|
|
education
|
|
|
Others
|
|
|
Consolidated
|
|
|
|
US$
|
|
|
US$
|
|
|
US$
|
|
|
US$
|
|
Net revenues
|
|
|
1,040,380
|
|
|
|
26,735
|
|
|
|
179,651
|
|
|
|
1,246,766
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues
|
|
|
(442,994
|
)
|
|
|
(9,083
|
)
|
|
|
(74,243
|
)
|
|
|
(526,320
|
)
|
Selling and marketing
|
|
|
(122,697
|
)
|
|
|
(1,039
|
)
|
|
|
(42,540
|
)
|
|
|
(166,276
|
)
|
General and administrative
|
|
|
(245,315
|
)
|
|
|
(10,068
|
)
|
|
|
(49,387
|
)
|
|
|
(304,770
|
)
|
Unallocated corporate expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(95,871
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating costs and expenses
|
|
|
(811,006
|
)
|
|
|
(20,190
|
)
|
|
|
(166,170
|
)
|
|
|
(1,093,237
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
229,374
|
|
|
|
6,545
|
|
|
|
13,481
|
|
|
|
153,529
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment assets
|
|
|
937,020
|
|
|
|
75,046
|
|
|
|
299,442
|
|
|
|
1,311,508
|
|
Unallocated corporate assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
640,029
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
|
937,020
|
|
|
|
75,046
|
|
|
|
299,442
|
|
|
|
1,951,537
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended May
31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Language
|
|
|
Primary and
|
|
|
|
|
|
|
|
|
|
training and test
|
|
|
secondary
|
|
|
|
|
|
|
|
|
|
preparation courses
|
|
|
education
|
|
|
Others
|
|
|
Consolidated
|
|
|
|
US$
|
|
|
US$
|
|
|
US$
|
|
|
US$
|
|
Net revenues
|
|
|
1,238,572
|
|
|
|
30,011
|
|
|
|
209,765
|
|
|
|
1,478,348
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues
|
|
|
(516,370
|
)
|
|
|
(9,812
|
)
|
|
|
(88,182
|
)
|
|
|
(614,364
|
)
|
Selling and marketing
|
|
|
(125,815
|
)
|
|
|
(744
|
)
|
|
|
(48,255
|
)
|
|
|
(174,814
|
)
|
General and administrative
|
|
|
(296,686
|
)
|
|
|
(12,558
|
)
|
|
|
(55,937
|
)
|
|
|
(365,181
|
)
|
Unallocated corporate expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(128,912
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating costs and expenses
|
|
|
(938,871
|
)
|
|
|
(23,114
|
)
|
|
|
(192,374
|
)
|
|
|
(1,283,271
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on disposal of subsidiaries
|
|
|
|
|
|
|
|
|
|
|
3,760
|
|
|
|
3,760
|
|
Operating income
|
|
|
299,701
|
|
|
|
6,897
|
|
|
|
21,151
|
|
|
|
198,837
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment assets
|
|
|
1,120,580
|
|
|
|
78,556
|
|
|
|
411,744
|
|
|
|
1,610,880
|
|
Unallocated corporate assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
743,954
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
|
1,120,580
|
|
|
|
78,556
|
|
|
|
411,744
|
|
|
|
2,354,834
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-59
NEW ORIENTAL EDUCATION & TECHNOLOGY GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MAY 31, 2015, 2016 AND 2017
(In thousands, except share and per share data, or otherwise noted)
20.
|
SEGMENT INFORMATION - continued
|
For the year ended May
31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Language
|
|
|
Primary and
|
|
|
|
|
|
|
|
|
|
training and test
|
|
|
secondary
|
|
|
|
|
|
|
|
|
|
preparation courses
|
|
|
education
|
|
|
Others
|
|
|
Consolidated
|
|
|
|
US$
|
|
|
US$
|
|
|
US$
|
|
|
US$
|
|
Net revenues
|
|
|
1,510,497
|
|
|
|
30,782
|
|
|
|
258,230
|
|
|
|
1,799,509
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues
|
|
|
(623,364
|
)
|
|
|
(10,465
|
)
|
|
|
(115,757
|
)
|
|
|
(749,586
|
)
|
Selling and marketing
|
|
|
(146,544
|
)
|
|
|
(1,347
|
)
|
|
|
(60,572
|
)
|
|
|
(208,463
|
)
|
General and administrative
|
|
|
(363,949
|
)
|
|
|
(11,317
|
)
|
|
|
(63,406
|
)
|
|
|
(438,672
|
)
|
Unallocated corporate expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(140,639
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating costs and expenses
|
|
|
(1,133,857
|
)
|
|
|
(23,129
|
)
|
|
|
(239,735
|
)
|
|
|
(1,537,360
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
376,640
|
|
|
|
7,653
|
|
|
|
18,495
|
|
|
|
262,149
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment assets
|
|
|
1,361,261
|
|
|
|
79,655
|
|
|
|
527,300
|
|
|
|
1,968,216
|
|
Unallocated corporate assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
956,763
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
|
1,361,261
|
|
|
|
79,655
|
|
|
|
527,300
|
|
|
|
2,924,979
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21.
|
MAINLAND CHINA CONTRIBUTION PLAN
|
The Groups full time employees in the PRC
participate in a government-mandated multiemployer defined contribution plan pursuant to which certain pension benefits, medical care, unemployment insurance, employee housing fund and other welfare benefits are provided to employees. PRC labor
regulations require the Group to accrue for these benefits based on certain percentages of the employees salaries. The total contributions for such employee benefits were US$61,448, US$71,434 and US$89,709 for the years ended May 31,
2015, 2016 and, 2017, respectively.
Prior to payment of dividends, pursuant to the laws applicable to the
PRCs Foreign Investment Enterprises, the Companys subsidiaries and VIEs in the PRC must make appropriations from
after-tax
profit to
non-distributable
reserve funds as determined by the Board of Directors of each company. These reserves include (i) general reserve and (ii) the development fund.
Subject to certain cumulative limits, the general reserve requires annual appropriations of 10% of
after-tax
profits as determined under PRC laws and regulations at each
year-end
until the balance reaches 50% of the PRC entity registered capital; the other reserve
appropriations are at the Companys discretion. These reserves can only be used for specific purposes of enterprise expansion and are not distributable as cash dividends. During the years ended May 31, 2015, 2016 and 2017, US$530, US$695
and US$1,749 was accrued for the general reserve, respectively.
PRC laws and regulations require private schools that require reasonable
returns to make annual appropriations of 25% of
after-tax
income prior to payments of dividend to its development fund, which is to be used for the construction or maintenance of the school or procurement or
upgrading of educational equipment, while in the case of a private school that does not require reasonable return, this amount should be equivalent to no less than 25% of the annual increase of net assets of the school as determined in accordance
with generally accepted accounting principles in the PRC. During the years ended May 31, 2015, 2016 and 2017, appropriations to the development fund amounted to US$23,212, US$31,158 and US$33,529, respectively.
These reserves are included as statutory reserves in the consolidated statements of changes in equity and comprehensive income. The Group
allocated US$23,742, US$31,853 and US$ 35,278 to statutory reserves during the years ended May 31, 2015, 2016 and 2017, respectively. The statutory reserves cannot be transferred to the Company in the form of loans or advances and are not
distributable as cash dividends except in the event of liquidation.
F-60
NEW ORIENTAL EDUCATION & TECHNOLOGY GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MAY 31, 2015, 2016 AND 2017
(In thousands, except share and per share data, or otherwise noted)
23.
|
RESTRICTED NET ASSETS
|
Relevant PRC laws and regulations restrict the WFOEs and VIEs from transferring a portion of their net assets, equivalent to the balance of
their statutory reserves and their share capital, to the Company in the form of loans, advances or cash dividends. The balance of restricted net assets was US$358,956 and US$488,560, of which US$292,542 and US$425,927 was attributed to the paid in
capital, additional
paid-in
capital and statutory reserves of the VIEs and US$66,414 and US$62,633was attributed to the paid in capital, additional
paid-in
capital and
statutory reserves of the WFOEs, as of May 31, 2016 and 2017, respectively. The WFOEs accumulated profits may be distributed as dividends to the Company without the consent of a third party. The VIEs revenues and accumulated profits
may be transferred to the Company through contractual arrangements without the consent of a third party. Under applicable PRC law, loans from PRC companies to their offshore affiliated entities require governmental approval, and advances by PRC
companies to their offshore affiliated entities must be supported by bona fide business transactions.
On July 26, 2017, the Groups board of directors has
declared a special cash dividend in the amount of US$0.45 per ADS/common share. The cash dividend will be paid on October 6, 2017 to shareholders of record at the close of business on September 6, 2017. The
ex-dividend
date will be September 1, 2017. The aggregate amount of cash dividends to be paid is approximately US$70.0 million, which will be funded by surplus cash on the Companys consolidated
balance sheets.
F-61
NEW ORIENTAL EDUCATION & TECHNOLOGY GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MAY 31, 2015, 2016 AND 2017
(In thousands, except share and per share data, or otherwise noted)
Additional Information - Financial Statement Schedule I
Condensed Financial Information of Parent Company
Balance Sheets
(In
thousands, except share and share data)
|
|
|
|
|
|
|
|
|
|
|
As of May 31,
|
|
|
|
2016
|
|
|
2017
|
|
|
|
US$
|
|
|
US$
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
11,984
|
|
|
|
11,472
|
|
Term deposit
|
|
|
10,000
|
|
|
|
10,000
|
|
Prepaid expense and other current assets
|
|
|
5,900
|
|
|
|
210
|
|
Amounts due from related parties
|
|
|
16,758
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
44,642
|
|
|
|
21,682
|
|
Amounts due from related parties
|
|
|
|
|
|
|
56,965
|
|
Long-term investments
|
|
|
96,498
|
|
|
|
120,260
|
|
Investments in subsidiaries and VIEs
|
|
|
1,353,090
|
|
|
|
1,569,358
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
|
1,494,230
|
|
|
|
1,768,265
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accrued expenses and other current liabilities
|
|
|
6,016
|
|
|
|
3,675
|
|
Amounts due to related parties
|
|
|
83,642
|
|
|
|
83,642
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
89,658
|
|
|
|
87,317
|
|
|
|
|
|
|
|
|
|
|
Equity:
|
|
|
|
|
|
|
|
|
Common shares (US$0.01 par value; 300,000,000 shares authorized as of May 31, 2016 and 2017;
158,379,387 shares issued as of May 31, 2016 and 2017; 157,439,397 and 157,687,444 shares outstanding as of May 31, 2016 and 2017, respectively)
|
|
|
1,584
|
|
|
|
1,584
|
|
Treasury stock
|
|
|
(9
|
)
|
|
|
(7
|
)
|
Additional
paid-in
capital
|
|
|
223,422
|
|
|
|
249,126
|
|
Retained earnings
|
|
|
1,116,627
|
|
|
|
1,391,084
|
|
Accumulated other comprehensive income
|
|
|
62,948
|
|
|
|
39,161
|
|
|
|
|
|
|
|
|
|
|
Total shareholders equity
|
|
|
1,404,572
|
|
|
|
1,680,948
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and equity
|
|
|
1,494,230
|
|
|
|
1,768,265
|
|
|
|
|
|
|
|
|
|
|
F-62
NEW ORIENTAL EDUCATION & TECHNOLOGY GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MAY 31, 2015, 2016 AND 2017
(In thousands, except share and per share data, or otherwise noted)
Additional Information - Financial Statement Schedule I
Condensed Financial Information of Parent Company
Statements of Operations
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended May 31,
|
|
|
|
2015
|
|
|
2016
|
|
|
2017
|
|
|
|
US$
|
|
|
US$
|
|
|
US$
|
|
Operating costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative
|
|
|
12,963
|
|
|
|
16,732
|
|
|
|
18,236
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating costs and expenses
|
|
|
12,963
|
|
|
|
16,732
|
|
|
|
18,236
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
(12,963
|
)
|
|
|
(16,732
|
)
|
|
|
(18,236
|
)
|
Interest income
|
|
|
2
|
|
|
|
1
|
|
|
|
122
|
|
Equity in earnings of subsidiaries and VIEs
|
|
|
205,974
|
|
|
|
241,615
|
|
|
|
292,571
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
193,013
|
|
|
|
224,884
|
|
|
|
274,457
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-63
NEW ORIENTAL EDUCATION & TECHNOLOGY GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MAY 31, 2015, 2016 AND 2017
(In thousands, except share and per share data, or otherwise noted)
Additional Information - Financial Statement Schedule I
Condensed Financial Information of Parent Company
Statements of Comprehensive Income
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended May 31,
|
|
|
|
2015
|
|
|
2016
|
|
|
2017
|
|
|
|
US$
|
|
|
US$
|
|
|
US$
|
|
Net income
|
|
|
193,013
|
|
|
|
224,884
|
|
|
|
274,457
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment
|
|
|
12,006
|
|
|
|
(72,193
|
)
|
|
|
(46,331
|
)
|
Unrealized gain on
available-for-sale
investment, net of tax effect of nil, nil and nil for years ended May 31, 2015, 2016 and 2017
|
|
|
21,940
|
|
|
|
35,636
|
|
|
|
22,544
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income/ (loss)
|
|
|
33,946
|
|
|
|
(36,557
|
)
|
|
|
(23,787
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income attributable to New Oriental Education & Technology Group
Inc.
|
|
|
226,959
|
|
|
|
188,327
|
|
|
|
250,670
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-64
NEW ORIENTAL EDUCATION & TECHNOLOGY GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MAY 31, 2015, 2016 AND 2017
(In thousands, except share and per share data, or otherwise noted)
Additional Information - Financial Statement Schedule I
Condensed Financial Information of Parent Company Statements of Changes in Equity
(In thousands, except share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common shares
|
|
|
Additional
paid-in
capital
|
|
|
Treasury
stock
|
|
|
Retained
earnings
|
|
|
Accumulated
other
comprehensive
income
|
|
|
Total
shareholders
equity
|
|
|
|
Unrestricted
shares
|
|
|
Amount
|
|
|
|
|
|
|
|
|
US$
|
|
|
US$
|
|
|
US$
|
|
|
US$
|
|
|
US$
|
|
|
US$
|
|
Balance at June 1, 2014
|
|
|
157,758,666
|
|
|
|
1,584
|
|
|
|
174,009
|
|
|
|
(6
|
)
|
|
|
784,612
|
|
|
|
65,559
|
|
|
|
1,025,758
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reissuance of Treasury stock for the exercises of employee share options
|
|
|
953,514
|
|
|
|
|
|
|
|
11,353
|
|
|
|
9
|
|
|
|
|
|
|
|
|
|
|
|
11,362
|
|
Reissuance of Treasury stock for
Non-vested
equity shares
vested
|
|
|
575,432
|
|
|
|
|
|
|
|
(6
|
)
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share based compensation expense
|
|
|
|
|
|
|
|
|
|
|
15,689
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,689
|
|
Share repurchase
|
|
|
(2,800,849
|
)
|
|
|
|
|
|
|
(59,392
|
)
|
|
|
(28
|
)
|
|
|
|
|
|
|
|
|
|
|
(59,420
|
)
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
193,013
|
|
|
|
|
|
|
|
193,013
|
|
Foreign currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,006
|
|
|
|
12,006
|
|
Unrealized gain on
available-for-sale
securities, net of tax effect of nil
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21,940
|
|
|
|
21,940
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at May 31, 2015
|
|
|
156,486,763
|
|
|
|
1,584
|
|
|
|
141,653
|
|
|
|
(19
|
)
|
|
|
977,625
|
|
|
|
99,505
|
|
|
|
1,220,348
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reissuance of Treasury stock for the exercises of employee share options
|
|
|
240,304
|
|
|
|
|
|
|
|
2,428
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
2,431
|
|
Reissuance of Treasury stock for
Non-vested
equity shares
vested
|
|
|
712,330
|
|
|
|
|
|
|
|
(7
|
)
|
|
|
7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share based compensation expense
|
|
|
|
|
|
|
|
|
|
|
16,810
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16,810
|
|
Dividend declared
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(62,668
|
)
|
|
|
|
|
|
|
(62,668
|
)
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
224,884
|
|
|
|
|
|
|
|
224,884
|
|
Capital injection of noncontrolling interests
|
|
|
|
|
|
|
|
|
|
|
39,579
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
39,579
|
|
Repurchase share from noncontrolling interest
|
|
|
|
|
|
|
|
|
|
|
(255
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(255
|
)
|
Equity restructure of Xuncheng
|
|
|
|
|
|
|
|
|
|
|
23,214
|
|
|
|
|
|
|
|
(23,214
|
)
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(72,193
|
)
|
|
|
(72,193
|
)
|
Unrealized gain on
available-for-sale
securities, net of tax effect of nil
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
35,636
|
|
|
|
35,636
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at May 31, 2016
|
|
|
157,439,397
|
|
|
|
1,584
|
|
|
|
223,422
|
|
|
|
(9
|
)
|
|
|
1,116,627
|
|
|
|
62,948
|
|
|
|
1,404,572
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reissuance of Treasury stock for the exercises of employee share options
|
|
|
48,047
|
|
|
|
|
|
|
|
256
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
256
|
|
Reissuance of Treasury stock for
Non-vested
equity shares
vested
|
|
|
200,000
|
|
|
|
|
|
|
|
(2
|
)
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share based compensation expense
|
|
|
|
|
|
|
|
|
|
|
20,287
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20,287
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
274,457
|
|
|
|
|
|
|
|
274,457
|
|
Capital injection of noncontrolling interests
|
|
|
|
|
|
|
|
|
|
|
4,871
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,871
|
|
NCI transactions in Xuncheng
|
|
|
|
|
|
|
|
|
|
|
74
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
74
|
|
Capital injection in Taiyanggong Kindergarten
|
|
|
|
|
|
|
|
|
|
|
218
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
218
|
|
Foreign currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(46,331
|
)
|
|
|
(46,331
|
)
|
Unrealized gain on
available-for-sale
investment, net of tax effect of nil
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22,544
|
|
|
|
22,544
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at May 31, 2017
|
|
|
157,687,444
|
|
|
|
1,584
|
|
|
|
249,126
|
|
|
|
(7
|
)
|
|
|
1,391,084
|
|
|
|
39,161
|
|
|
|
1,680,948
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-65
NEW ORIENTAL EDUCATION & TECHNOLOGY GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MAY 31, 2015, 2016 AND 2017
(In thousands, except share and per share data, or otherwise noted)
Additional Information - Financial Statement Schedule I
Condensed Financial Information of Parent Company
Statements of Cash Flows
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended May 31,
|
|
|
|
2015
|
|
|
2016
|
|
|
2017
|
|
|
|
US$
|
|
|
US$
|
|
|
US$
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
193,013
|
|
|
|
224,884
|
|
|
|
274,457
|
|
Adjustments to reconcile net income to net cash provided by (used in) operating
activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in earnings of subsidiaries
|
|
|
(205,974
|
)
|
|
|
(241,615
|
)
|
|
|
(292,571
|
)
|
Dividend received from subsidiaries
|
|
|
|
|
|
|
49,984
|
|
|
|
43,417
|
|
Share-based compensation expense
|
|
|
15,689
|
|
|
|
16,810
|
|
|
|
20,287
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Prepaid expenses and other current assets
|
|
|
(2,613
|
)
|
|
|
5,135
|
|
|
|
5,404
|
|
Accrued expenses and other current liabilities
|
|
|
(2,728
|
)
|
|
|
(3,673
|
)
|
|
|
(2,341
|
)
|
Amounts due from/to related parties
|
|
|
(762
|
)
|
|
|
(1,446
|
)
|
|
|
(40,207
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by operating activities
|
|
|
(3,375
|
)
|
|
|
50,079
|
|
|
|
8,446
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments in term deposits
|
|
|
|
|
|
|
(10,000
|
)
|
|
|
|
|
Payment for
available-for-sale
investments
|
|
|
(10,300
|
)
|
|
|
(9,500
|
)
|
|
|
(1,000
|
)
|
Proceed from investment withdrawn in Dajie.com
|
|
|
|
|
|
|
540
|
|
|
|
|
|
Loan to related parties
|
|
|
(6,423
|
)
|
|
|
1,487
|
|
|
|
|
|
Investment in a subsidiary
|
|
|
|
|
|
|
|
|
|
|
(8,500
|
)
|
Repayment from related parties
|
|
|
|
|
|
|
8,512
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(16,723
|
)
|
|
|
(8,961
|
)
|
|
|
(9,500
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of common shares upon exercise of share options
|
|
|
11,332
|
|
|
|
2,176
|
|
|
|
542
|
|
Loan from a related party
|
|
|
75,060
|
|
|
|
8,610
|
|
|
|
|
|
Cash paid for shares repurchase
|
|
|
(59,420
|
)
|
|
|
|
|
|
|
|
|
Cash paid for dividend
|
|
|
|
|
|
|
(62,668
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
26,972
|
|
|
|
(51,882
|
)
|
|
|
542
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase / (decrease) in cash and cash equivalents
|
|
|
6,874
|
|
|
|
(10,764
|
)
|
|
|
(512
|
)
|
Cash and cash equivalents, beginning of year
|
|
|
15,874
|
|
|
|
22,748
|
|
|
|
11,984
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of year
|
|
|
22,748
|
|
|
|
11,984
|
|
|
|
11,472
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-66
NEW ORIENTAL EDUCATION & TECHNOLOGY GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MAY 31, 2015, 2016 AND 2017
(In thousands, except share and per share data, or otherwise noted)
Additional Information - Financial Statement Schedule I
Condensed Financial Information of Parent Company
Note to the Financial Statements
The condensed financial information of the Company has been
prepared using the same accounting policies as set out in the Groups consolidated financial statements except that the Company used the equity method to account for investments in its subsidiaries and VIEs.
2.
|
INVESTMENTS IN SUBSIDIARIES AND VIEs
|
The Company and its subsidiaries and VIEs were
included in the consolidated financial statements where the inter-company balances and transactions were eliminated upon consolidation. For purpose of the Companys stand-alone financial statements, its investments in subsidiaries and VIEs were
reported using the equity method of accounting. The Companys share of income and losses from its subsidiaries and VIEs were reported as equity in earnings of subsidiaries and VIEs in the accompanying parent company financial statements.
The Company is a Cayman Islands company, therefore, is not subjected to
income taxes for all years presented.
4.
|
RELATED-PARTY TRANSACTIONS
|
The following represented related party balances as of
May 31, 2016 and 2017:
|
|
|
|
|
|
|
|
|
|
|
May 31,
|
|
|
|
2016
|
|
|
2017
|
|
|
|
US$
|
|
|
US$
|
|
Amount due from related parties:
|
|
|
|
|
|
|
|
|
Winner Park
|
|
|
12
|
|
|
|
12
|
|
Abundant State Limited
|
|
|
|
|
|
|
40,000
|
|
Elite Concept Holdings Limited
|
|
|
9,897
|
|
|
|
10,104
|
|
Koolearn Holdings Limited
|
|
|
180
|
|
|
|
180
|
|
New Oriental China
|
|
|
6,669
|
|
|
|
6,669
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16,758
|
|
|
|
56,965
|
|
|
|
|
|
|
|
|
|
|
Amount due to related parties:
|
|
|
|
|
|
|
|
|
Elite Concept Holdings Limited
|
|
|
357
|
|
|
|
357
|
|
Abundant State Limited
|
|
|
81,798
|
|
|
|
81,798
|
|
Smart Shine
|
|
|
1,487
|
|
|
|
1,487
|
|
|
|
|
|
|
|
|
|
|
|
|
|
83,642
|
|
|
|
83,642
|
|
|
|
|
|
|
|
|
|
|
All related party balances were
non-interest
bearing and unsecured. The
amount due to related parties will be paid based on demand.
F-67