UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 20-F
(Mark One)
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o
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REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR 12(g) OF THE
SECURITIES EXCHANGE ACT OF 1934
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OR
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þ
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended December 31, 2008
OR
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o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the transition period from
to
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OR
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o
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SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF
1934
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Commission file number: 000-51116
HURRAY! HOLDING CO., LTD.
(Exact name of Registrant as specified in its charter)
N/A
(Translation of Registrant’s name into English)
Cayman Islands
(Jurisdiction of incorporation or organization)
15/F, Tower B, Gateway Plaza, No.18 Xia Guang Li, East Third Ring,
Chaoyang District, Beijing 100027, People’s Republic of China
(Address of principal executive offices)
Securities registered or to be registered pursuant to Section 12(b) of the Act.
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Title of each class
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Name of each exchange and on which registered
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American Depositary Shares,
each representing 100
ordinary shares,
par value
US$0.00005 per share
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Nasdaq Global Market
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Securities registered or to be registered pursuant to Section 12(g) of the Act.
NONE
(Title of Class)
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act.
NONE
(Title of Class)
Indicate the number of outstanding shares of each of the issuer’s classes of capital or common
stock as of the close of the period covered by the annual report: 2,193,343,740 ordinary shares,
par value US$0.00005 per share.
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule
405 of the Securities Act.
Yes
o
No
þ
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
o
No
þ
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
þ
No
o
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 during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such files). Yes
o
No
o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated
filer” in Rule 12b-2 of the Exchange Act. (Check one):
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Large Accelerated Filer
o
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Accelerated Filer
o
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Non-Accelerated Filer
þ
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Indicate by check mark which basis of accounting the registrant has used to prepare the
financial statements included in this filing:
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U.S. GAAP
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International Financial Reporting Standards as issued
by the International Accounting Standards Board
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Other
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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
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Item 18
o
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
o
No
þ
INTRODUCTION
Except where the context otherwise requires and for purposes of this annual report on Form
20-F only:
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“ADSs” refers to our American depositary shares, each of which represents 100 ordinary shares;
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“$,” “US$” and “U.S. dollars” refer to the legal currency of the United States;
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“China” and the “PRC” refer to the People’s Republic of China, excluding, for the purposes of
this annual report on Form 20-F only, Taiwan and the special administrative regions of Hong Kong
and Macau;
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•
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“ordinary shares” refers to our ordinary shares, par value US$0.00005 per share;
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“RMB” and “Renminbi” refer to the legal currency of China;
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“telecom operators” refer to China Mobile, China Unicom and China Telecom, the three principal
telecommunication network operators in China, and
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“we,” “us,” “our company” and “our” refer to HURRAY! HOLDING CO., LTD. and its subsidiaries,
affiliates and predecessor entities.
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This annual report on Form 20-F includes our audited consolidated financial statements as of
December 31, 2008 and 2007 and for the years ended December 31, 2008, 2007 and 2006.
Forward-Looking Information
This annual report on Form 20-F contains statements of a forward-looking nature. These
statements are made under the “safe harbor” provisions of the U.S. Private Securities Litigation
Reform Act of 1995. You can identify these forward-looking statements by terminology such as
“will,” “expects,” “anticipates,” “future,” “intends,” “plans,” “believes,” “seeks, “estimates” and
similar statements. The accuracy of these statements may be impacted by a number of business risks
and uncertainties that could cause actual results to differ materially from those projected or
anticipated, including but not limited to those risks and uncertainties identified under the
section heading “Risk Factors” below.
All forward-looking statements in this annual report on Form 20-F are made as of the date of
filing hereof, based on information available to us as of that date, and we assume no obligation to
update or revise any of these forward-looking statements even if experience or future changes show
that the indicated results or events will not be realized.
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
The following table presents certain selected consolidated financial information for our
business. You should read the following information in conjunction with our audited consolidated
financial statements, the notes thereto and Item 5 “Operating and Financial Review and Prospects”
included elsewhere in this annual report on Form 20-F. The following data as of December 31, 2008
and 2007 and for the years ended December 31, 2008, 2007 and 2006 has been derived from our audited
consolidated financial statements for those years and should be read in conjunction with those
statements, which are included in this annual report beginning on page F-1. The following data as
of December 31, 2006, 2005 and 2004 and for the years ended December 31, 2005 and 2004 have also
been derived from our audited consolidated financial statements for those years, which are not
included in this annual report on Form 20-F. Our audited financial statements for the foregoing
periods were prepared in accordance with United States generally accepted accounting principles, or
US GAAP.
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For the Year Ended December 31,
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2008
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2007
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2006
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2005
(1)
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2004
(1)
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(in thousands of U.S. dollars, except percentages)
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Historical Condensed
Consolidated Statement
of Operations Data
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Revenues:
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Wireless value-added
services
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$
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42,672
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$
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50,038
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$
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62,512
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$
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56,063
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$
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43,173
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Recorded music
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11,287
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10,489
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6,203
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—
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—
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Total revenues
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53,959
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60,527
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68,715
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56,063
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43,173
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Cost of revenues:
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Wireless value-added
services
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32,840
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36,394
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40,672
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28,635
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18,053
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Recorded music
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6,730
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6,233
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3,553
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—
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—
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Total cost of revenues
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39,570
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42,627
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44,225
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28,635
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18,053
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Gross profit
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14,389
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17,900
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24,490
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27,428
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25,120
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Operating expenses
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22,669
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61,462
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19,882
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14,277
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10,436
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Operating (loss) income
from continuing
operations
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(8,280
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)
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(43,562
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)
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4,608
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13,151
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14,684
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Interest income
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1,613
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2,313
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2,529
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1,390
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28
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Interest expense
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—
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(179
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)
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(45
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(27
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(312
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)
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Gain on reduction of
acquisition payable
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5,000
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—
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—
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—
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—
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Foreign exchange loss
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(8,990
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)
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—
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—
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—
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—
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Other income, net
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247
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466
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315
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330
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(Loss) income before
provision for income
taxes, earnings in
equity investments,
minority interest and
discontinued operations
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(10,410
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)
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(40,962
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)
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7,407
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14,844
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14,400
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Income tax expense
(credit)
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486
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(182
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)
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205
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(323
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)
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—
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Net (loss) income from
continuing operations
after income taxes
before minority
interests
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(10,896
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)
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(40,780
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)
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7,202
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14,521
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14,400
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Minority interests
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337
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(688
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)
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(562
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)
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—
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—
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Equity in earnings
(losses) of affiliate
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64
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(63
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)
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—
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—
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—
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Impairment for
Investment in equity
affiliate
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(1,871
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)
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—
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—
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—
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—
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Net (loss) income from
continuing operations
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(12,366
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)
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(41,531
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)
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6,640
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14,521
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14,400
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4
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For the Year Ended December 31,
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2008
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2007
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2006
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2005
(1)
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2004
(1)
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(in thousands of U.S. dollars, except percentages)
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Discontinued operations:
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Net (loss) income from
discontinued
operations, net of tax
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—
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(612
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)
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(836
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)
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4,098
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2,840
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Gain from disposal of
discontinued operations
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413
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193
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—
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—
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—
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Net income (loss) from
discontinued
operations, net of tax
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413
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(419
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)
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(836
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)
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4,098
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2,840
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Net (loss) income
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(11,953
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)
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(41,950
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)
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5,804
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18,619
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17,240
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Deemed dividends on
Series A convertible
preference shares
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—
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—
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—
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—
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(40
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Net (loss) income
attributable to holders
of ordinary shares
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$
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(11,953
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)
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$
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(41,950
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)
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$
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5,804
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$
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18,619
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$
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17,200
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Net (loss) income per
share, basic
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$
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(0.01
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)
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$
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(0.02
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)
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$
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0.00
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$
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0.01
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$
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0.01
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Net (loss) income per
share, diluted
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$
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(0.01
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)
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$
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(0.02
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)
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$
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0.00
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|
$
|
0.01
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|
$
|
0.01
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Shares used in
calculating basic
(loss) income per share
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2,185,615,129
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2,172,208,190
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2,189,748,563
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2,092,089,848
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1,208,512,142
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Shares used in
calculating diluted
(loss) income per share
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2,185,615,129
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2,172,208,190
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2,208,758,636
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2,129,228,961
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1,572,887,775
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(1)
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The amounts of share-based compensation included in operating expenses for 2006, 2007 and 2008
reflect the adoption of Statement of Financial Accounting Standards (“SFAS”) No. 123 (revised
2004), “Share-Based Payment” (“SFAS 123(R)”) effective January 1, 2006. Had we applied the fair
value recognition provisions of SFAS No. 123, “Accounting for Stock-Based Compensation,” in prior
periods, we would have reported net income of $16,511 thousand and $17,007 thousand for 2004 and
2005, respectively, and net income per share (diluted) of $0.01 for both 2004 and 2005.
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As of and for the Year Ended December 31,
|
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|
2008
|
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|
2007
|
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|
2006
|
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|
2005
|
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|
2004
|
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(in thousands of U.S. dollars, except percentages)
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Historical Condensed Consolidated
Balance Sheet Data
|
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Cash
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|
$
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59,473
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|
$
|
65,979
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$
|
74,597
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|
$
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75,959
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|
|
$
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8,714
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Accounts receivable, net
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|
12,658
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|
14,691
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|
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|
13,449
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18,089
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|
|
|
11,883
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Other current assets
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|
5,580
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|
|
|
8,777
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|
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|
3,342
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|
|
|
2,297
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|
|
|
2,133
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|
|
Property and equipment, net
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|
|
980
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|
|
|
1,636
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|
|
|
1,954
|
|
|
|
2,536
|
|
|
|
2,617
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|
|
Goodwill
|
|
|
3,157
|
|
|
|
5,621
|
|
|
|
39,621
|
|
|
|
23,869
|
|
|
|
20,412
|
|
|
Other assets
|
|
|
6,476
|
|
|
|
8,890
|
|
|
|
7,027
|
|
|
|
4,953
|
|
|
|
705
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
88,324
|
|
|
$
|
105,594
|
|
|
$
|
139,990
|
|
|
$
|
127,703
|
|
|
$
|
46,464
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of and for the Year Ended December 31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
|
(in thousands of U.S. dollars, except percentages)
|
|
|
Current liabilities
|
|
$
|
6,316
|
|
|
$
|
14,467
|
|
|
$
|
12,960
|
|
|
$
|
7,636
|
|
|
$
|
8,743
|
|
|
Non-current liabilities
|
|
|
316
|
|
|
|
877
|
|
|
|
851
|
|
|
|
843
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
$
|
6,632
|
|
|
$
|
15,344
|
|
|
$
|
13,811
|
|
|
$
|
8,479
|
|
|
$
|
8,743
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minority interests
|
|
$
|
4,783
|
|
|
$
|
4,667
|
|
|
$
|
3,359
|
|
|
$
|
605
|
|
|
$
|
—
|
|
|
Series A convertible preference
shares (16,924,497 shares issued and
outstanding as of December 31, 2004,
and nil issued and outstanding as of
December 31, 2005 to 2008)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
17
|
|
|
Ordinary shares (2,193,343,740,
2,174,784,440, 2,163,031,740,
2,229,754,340 and 1,186,672,000
shares issued and outstanding as of
December 31, 2008, 2007, 2006, 2005
and 2004, respectively)
|
|
|
110
|
|
|
|
109
|
|
|
|
108
|
|
|
|
111
|
|
|
|
59
|
|
|
Other shareholders’ equity
|
|
|
76,799
|
|
|
|
85,474
|
|
|
|
122,712
|
|
|
|
118,508
|
|
|
|
37,645
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities, minority interests
and shareholders’ equity
|
|
$
|
88,324
|
|
|
$
|
105,594
|
|
|
$
|
139,990
|
|
|
$
|
127,703
|
|
|
$
|
46,464
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Historical Condensed
Consolidated Financial Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit margin
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wireless value-added services
|
|
|
23.0
|
%
|
|
|
27.3
|
%
|
|
|
34.9
|
%
|
|
|
48.9
|
%
|
|
|
58.2
|
%
|
|
Recorded music
|
|
|
40.4
|
%
|
|
|
40.6
|
%
|
|
|
42.7
|
%
|
|
|
—
|
|
|
|
—
|
|
|
Total gross profit margin
|
|
|
26.7
|
%
|
|
|
29.6
|
%
|
|
|
35.6
|
%
|
|
|
48.9
|
%
|
|
|
58.2
|
%
|
|
(Loss) income from continuing
operations margin
(1)
|
|
|
(15.3
|
%)
|
|
|
(72.0
|
%)
|
|
|
6.7
|
%
|
|
|
23.5
|
%
|
|
|
34.0
|
%
|
|
Net (loss) income from continuing operations margin
(1)
|
|
|
(22.9
|
%)
|
|
|
(68.6
|
%)
|
|
|
9.7
|
%
|
|
|
25.9
|
%
|
|
|
33.4
|
%
|
|
Net (loss) income margin
(1)
|
|
|
(22.2
|
%)
|
|
|
(69.3
|
%)
|
|
|
8.4
|
%
|
|
|
33.2
|
%
|
|
|
39.9
|
%
|
|
Depreciation
|
|
|
990
|
|
|
|
1,269
|
|
|
|
1,580
|
|
|
|
1,461
|
|
|
|
1,335
|
|
|
Amortization
|
|
|
2,338
|
|
|
|
2,375
|
|
|
|
1,901
|
|
|
|
478
|
|
|
|
651
|
|
|
Capital expenditure
|
|
|
349
|
|
|
|
864
|
|
|
|
957
|
|
|
|
1,289
|
|
|
|
1,871
|
|
|
|
|
|
|
(1)
|
|
(Loss) income from continuing operations margin, net (loss) income from continuing operations
margin and net (loss) income margin are the (loss) income from continuing operations, net (loss)
income from continuing operations and net (loss) income as a percentage of our total revenues.
|
Exchange Rate Information
We present our historical consolidated financial statements in U.S. dollars. In addition,
certain pricing information is presented in U.S. dollars and certain contractual amounts that are
in Renminbi include a U.S. dollar equivalent solely for the convenience of the reader. Except as
otherwise specified, this pricing information and these contractual amounts are translated at
RMB6.8225 = US$1.00, the prevailing rate on December 31, 2008. The translations are not a
representation that the Renminbi amounts could actually be converted to U.S. dollars at this rate.
For a discussion of the exchange rates used for the presentation of our financial statements, see
note 2(m) to our audited consolidated financial statements.
6
The noon buying rate in New York City for cable transfers as certified for customs purposes by
the Federal Reserve Bank of New York was RMB6.8278 = US$1.00 on May 29, 2009. The following table
sets forth the high and low noon buying rates for cable transfers between Renminbi and U.S. dollar
as certified for customs purposes by the Federal Reserve Bank of New York for each of periods
indicated below.
|
|
|
|
|
|
|
|
|
|
|
|
|
Noon Buying Rate
|
|
|
|
|
RMB per US$1.00
|
|
|
|
|
High
|
|
|
Low
|
|
|
December 2008
|
|
|
6.8842
|
|
|
|
6.8225
|
|
|
January 2009
|
|
|
6.8403
|
|
|
|
6.8225
|
|
|
February 2009
|
|
|
6.8470
|
|
|
|
6.8241
|
|
|
March 2009
|
|
|
6.8438
|
|
|
|
6.8240
|
|
|
April 2009
|
|
|
6.8361
|
|
|
|
6.8180
|
|
|
May 2009
|
|
|
6.8265
|
|
|
|
6.8176
|
|
The following table sets forth the average noon buying rates for cable transfers between
Renminbi and U.S. dollar as certified for customs purposes by the Federal Reserve Bank of New York
for each of 2004, 2005, 2006, 2007 and 2008, calculated by averaging the noon buying rates on the
last day of each month during the relevant year.
|
|
|
|
|
|
|
|
|
Average Noon Buying Rate
|
|
|
|
|
RMB per US$1.00
|
|
|
2004
|
|
|
8.2768
|
|
|
2005
|
|
|
8.1826
|
|
|
2006
|
|
|
7.9579
|
|
|
2007
|
|
|
7.5806
|
|
|
2008
|
|
|
6.9193
|
|
|
2009 (through May 30)
|
|
|
6.8326
|
|
B. Capitalization and Indebtedness
Not Applicable.
C. Reasons for the Offer and Use of Proceeds
Not Applicable.
D. Risk Factors
RISKS RELATED TO OUR COMPANY
Risks Related to Our Wireless Value-added Services
We depend on China Mobile, China Unicom and China Telecom, the three principal telecommunications
network operators in China, for the major portion of our revenue, and any loss or deterioration of
our relationship with China Mobile, China Unicom and China Telecom, due to the recent government
imposed restructurings or otherwise, may result in severe disruptions to our business operations
and the loss of a major portion of our revenue.
We offer our services over mobile networks to consumers through the three principal telecom
operators in China, China Mobile Communications Corporation, or China Mobile, China United
Telecommunications Corporation, or China Unicom, and China Telecommunications Corporation, or China
Telecom. These principal operators service the major portion of China’s approximately 641 million
mobile phone subscribers as of December 31, 2008, according to a December 2008 Report issued by
China’s Ministry of Industry and Information Technology, or the MIIT. Our agreements with these
operators and their provincial affiliates are non-exclusive and have a limited term (generally one
year for China Mobile and one or two years for China Unicom). We usually renew these agreements or
enter into new ones when the prior agreements expire, but on occasion the renewal or new agreements
can be delayed by periods of one month or more. China Telecom and its provincial affiliates have
recently entered into new agreements with us in connection with the network assets that they
acquired from China Unicom (as discussed below).
If any of China Mobile, China Unicom or China Telecom ceases to continue to cooperate with us,
it would be impossible to find appropriate replacement telecom operators with the requisite
licenses and permits, infrastructure and customer base to offer our wireless value-added services
(“WVAS”). We derived approximately 57% of our combined WVAS revenue from China Mobile, 25% from
China Unicom, and 12% from China Telecom in 2008.
7
In addition, the Chinese government has extensive involvement in determining the structure of
the telecommunications industry in China. During the development of this industry, changes in
government policy have resulted in major restructurings
of the telecommunications operators, including the establishment of new operators and the
combination of all or part of existing operators. In an effort to promote greater competition among
the telecommunications operators and foster the development of 3G mobile networks, on May 24, 2008,
the MIIT, the PRC National Development and Reform Commission, or the NDRC, and the PRC Ministry of
Finance jointly issued the Notice on Strengthening the Reform of Telecommunications Systems, or the
Telecom Notice, which aims to consolidate China’s existing telecommunication operators into three
new telecommunications operators that can offer both mobile and fixed-line services. Under the
Telecom Notice, China Mobile merged with China Railway Communication Co., Ltd., which operated a
national fixed-line network, China Telecom acquired the Code Division Multiple Access (CDMA)
wireless business and network from China Unicom, and China Unicom, which operates a Global System
for Mobile communications (GSM) network and business, merged with China Netcom, which was
principally a fixed-line operator. Due to the restructuring, our services to China Telecom have
increased and our services to China Unicom have decreased beginning from October 1, 2008, the date
that China Telecom officially acquired the CDMA wireless business and network from China Unicom. On
January 7, 2009, the MIIT issued 3G licenses to China Mobile, China Unicom and China Telecom. China
Mobile is expected to operate the TD-SCDMA network, China’s self-developed 3G standard, China
Unicom is licensed to run WCDMA, a 3G standard originally developed in Europe, and China Telecom is
expected to operate CDMA2000, a 3G standard originally developed in U.S. We are currently assessing
the potential impact of such consolidations on our business.
Any future significant restructuring of any segment of the telecommunications industry in
China, including in particular China Mobile, China Unicom or China Telecom (which are collectively
referred to hereinafter in this annual report on Form 20-F as the “telecom operators”) or any other
telecom operators in China and the potential combination of the mobile operations of various
telecom operators in China, could significantly affect our relationships with these telecom
operators, our operations and our revenues. Due to our reliance on the telecom operators for our
WVAS, any loss or deterioration of our relationships with them, due to their own business decisions
or government-imposed restructurings, may result in severe disruptions to our business operations
and the loss of a major portion of our revenue.
We incurred net losses in 2007, 2008 and the first quarter of 2009 and may incur additional losses
in future periods.
We incurred net losses in 2007, 2008 and the first quarter of 2009 primarily as a result of
changes in the telecom operator policies and the manner in which they are enforced and intense
market competition in the WVAS and music industries. In light of this, we have recently been
implementing certain cost control measures, however, we cannot be certain that these measures will
be effective and we will be able to return to profitability. In addition, we could continue to
incur net losses in the future due to changes in the market, operating environment and competitive
dynamics and our ability to respond to those changes, as well as any possible new strategic
initiatives launched by our company. If we do not restore profitability, the market price of our
ADSs may decline.
The termination or alteration of our various agreements with the telecom operators and their
provincial affiliates would materially and adversely impact our revenue and profitability.
Given the dominant market position of China Mobile, China Unicom and China Telecom, our
leverage with these telecom operators is limited in terms of negotiating agreements, resolving
disputes or otherwise. In particular, our agreements with them can be terminated in advance,
penalties may be imposed or other parts of our services may be suspended or terminated, and
approval for our new services may be delayed for a variety of reasons which vary among the
individual agreements with the telecom operators, including, for example, where we breach our
obligations under the agreements, a high number of customer complaints are made about our services
or we cannot satisfy the operational or financial performance criteria established by the
applicable mobile operator.
We may also be compelled to alter our agreements with these telecom operators in ways which
adversely affect our business, such as by limiting the services we can offer or imposing other
changes that limit the revenue we can derive from such agreements. In the past, telecom operators
have entered into new contracts in certain provinces with service providers in which it changed the
share percentages it retained for customer payments. The percentage of the payments from customers
received by service providers has been decreasing since 2006. Subsequently, the share percentage of
customer payments that service providers received from the telecom operators has decreased by a
range of 5% to 10%. We may not be able to adequately respond to any such changes because we are not
able to predict if the telecom operators will unilaterally amend our contracts with them.
8
Unilateral changes in the policies of the MIIT and the telecom operators and in their enforcement
of their policies have resulted in service suspensions and our having to pay additional charges to
the telecom operators, and further changes could materially and adversely impact our revenue and
profitability in the future.
The MIIT and the telecom operators have a wide range of policies and procedures regarding
customer service, quality control and other aspects of the WVAS industry. As the industry has
evolved over the last several years, the telecom operators have refined these policies to improve
overall service quality and increase customer satisfaction. For example, in July 2006, China Mobile
introduced new policies which require extended free trial periods for WVAS, new billing reminders
for new and existing monthly subscribers and positive user confirmations for conversion of
per-message subscriptions to monthly subscriptions. Subsequently, in May 2007, China Mobile began
the operational practice of displaying service fee reminders and seeking express confirmation prior
to processing the wireless application protocol (“WAP”) page download requests of mobile phone
users. China Mobile also began the practice of only including links to its own WVAS offerings on
the embedded menus of certain mobile handsets with customized software for China Mobile users. In
the past, such embedded menus featured links to all popular products offered on China Mobile’s
networks, including our products.
In August 2007, MIIT introduced new policies regarding WVAS that mobile phone users subscribe
to on a free trial basis. Service providers are now required to notify such mobile phone users
once the free trial period ends and must obtain confirmation from them prior to charging them for
continued subscription to the services. Upon obtaining such confirmation, service providers are
then required to notify mobile phone users of the exact pricing for such service and send billing
reminders to them.
In addition, in the last several years, acting under the guidance of the MIIT, the telecom
operators have begun enforcing their customer service policies more rigorously than in the past and
have initiated steps to improve customer service. This rigorous enforcement has resulted in a
number of severe penalties imposed on us and other participants in the market in recent years.
Penalties have included precluding service providers from offering certain services over a mobile
operator’s network or from offering new services for a fixed period.
We may not be able to adequately respond to these or other developments in mobile operator
policies, or changes in the manner in which such policies are enforced. Furthermore, because the
telecom operators’ policies are in a state of flux at this time and they are highly sensitive to
customer complaints (even if the complaints have no merit), we cannot be certain that our business
activities will always be deemed in compliance with those policies despite our efforts to so
comply. Accordingly, we may be subject to monetary penalties or service suspensions or both, even
for conduct which we believed to be permissible. Any future noncompliance with the telecom
operators’ policies by us, whether inadvertent or not, could result in a material and adverse
effect on our revenue and profitability.
Our 2.5G revenues were negatively affected in 2008 by the delayed expansion of 2.5G mobile networks
by the telecom operators. If this trend continues our revenue and profitability could be further
materially and adversely affected.
Revenues from 2.5G WVAS declined from $17.4 million for fiscal year 2007 to $11.3 million for
fiscal year 2008, representing a decline of 35.1%. Our 2.5G value-added services declined in part
because of the telecom operators’ decision to delay expanding capacity or building out 2.5G mobile
networks as they awaited the issuance of 3G licenses. If this market does not grow and evolve in
the manner or in the timeframe that we anticipate, we may not be able to generate significant
sustainable revenues from our 2.5G business.
The Chinese government and the telecom operators may prevent us from distributing, and we may be
subject to liability for, content that any of them believe is inappropriate.
China has enacted regulations governing telecommunication service providers, Internet access
and the distribution of news and other information. In the past, the Chinese government has stopped
the distribution of information over the Internet that it believes to violate Chinese law,
including content that is pornographic or obscene, incites violence, endangers national security,
is contrary to the national interest or is defamatory.
China Mobile, China Unicom and China Telecom also have their own policies regarding the
distribution of inappropriate content by WVAS providers and have punished certain providers for
distributing inappropriate content through the imposition of fines and service suspensions. Some of
those providers indicated that the telecom operators informed them that certain of their content
were construed as too adult-oriented or sexually suggestive.
The determination of whether or not WVAS content is appropriate is inherently subjective, and
is subject to the interpretation of the governmental authorities and telecom operators in China.
Their standards are generally more restrictive than those applied in many other countries like the
United States. Accordingly, while we intend to comply with all applicable rules regarding wireless
content, it may be very difficult for us to assess whether any particular content we offer that
could be construed by the telecom operators as inappropriate under current regulations in China.
Any penalties imposed on us by the telecom operators for the content of our services could result
in a material and adverse effect on our revenue, profitability and reputation.
9
The telecom operators may impose higher service or network fees on us for their own business
purposes or if we are unable to satisfy customer usage and other performance criteria, which could
reduce our gross margins.
Fees for our WVAS are charged on a monthly subscription or per-use basis. As provided in our
network service agreements, we rely on the telecom operators for both billing of and collection
from, mobile phone users of fees for our services. As noted above under “— The termination or
alteration of our various agreements with the telecom operators and their provincial affiliates
would materially and adversely impact our revenue and profitability,” our negotiating leverage with
the telecom operators is limited. As a result, the telecom operators could for their own business
purposes unilaterally amend our agreements with them to increase the service or network fees that
they retain from the revenues generated by our WVAS.
In addition, under these agreements, these service fees in some cases rise if we fail to meet
certain customer usage, revenues and other performance criteria. Moreover, for 2G services, to the
extent that the number of messages sent by us over networks of the telecom operators exceeds the
number of messages our customers send to us, we must pay per message network fees, which decrease
in several provinces as the volume of customer usage of our services increases. The number of
messages sent by us will exceed those sent by our users, for example, if a user sends us a single
message to order a game but we in turn must send that user several messages to confirm his or her
order and deliver the game itself. We cannot be certain that we will be able to satisfy any
performance criteria in the future or that the telecom operators will keep the criteria at their
current levels. Any increase in the service or network fees of the telecom operators could reduce
our gross margins.
If any of the telecom operators change their practices with regard to how service selections appear
on their WAP portals, the revenue from our services, and thus our overall financial condition,
could be materially and adversely affected.
The current practice of the telecom operators is generally to place the most popular WAP
services at the top of the menu on the first page of the list of services available in each service
category on their WAP portals. Services at the top of the menu are more accessible to users than
other services and, in our experience, are more frequently accessed than those services lower on
the menu. This effectively reinforces the position of the most popular services. The placement of
services on these menus creates significant competitive advantages for the top-ranked services and
significant challenges for newer and less popular services. We believe that our prominent position
on the WAP portals of the telecom operators historically helped us maintain our position in the
market. If any of the telecom operators changes its current practices so that the most popular
services are not those that are the most accessible to customers, restricts the number or type of
services a service provider is permitted to place on service menus or adopts new interface
technologies that eliminate the current service menus, our services could become more difficult for
users to access and could, therefore, become less popular. In addition, as discussed below under
the heading “—Our revenue from WVAS may be adversely affected by the telecom operators providing
their own full portfolio of 2G, 2.5G and any upcoming 3G services that compete with our services,”
China Mobile also began the practice of only including links to its own WVAS offerings on the
embedded menus of mobile handsets with customized software for China Mobile users while excluding
links to products from third party WVAS service providers such as our company. This practice has
adversely affected our revenues. If additional similar changes occur, they will likely materially
and adversely affect the revenue from our services, and thus our overall financial condition.
Our revenue from WVAS may be adversely affected by the telecom operators providing their own full
portfolio of 2G , 2.5G and any upcoming 3G services that compete with our services.
In 2006, China Mobile began operating its own music WAP portal and procuring music content
from music companies directly. Our revenues as a service provider have been adversely affected by
this development, although some of this effect has been mitigated by China Mobile procuring music
content from our affiliated music companies. China Mobile also began the practice of only including
links to its own WVAS offerings on the embedded menus of mobile handsets with customized software
for China Mobile users while excluding links to products from third party WVAS service providers
like us. Such practice has adversely affected our revenues. Our business would likely be adversely
affected if any of the telecom operators decide to provide additional 2G, 2.5G and any upcoming 3G
services to mobile phone users, which compete with our services. In that case, we would not only
face enhanced competition, but could be partially or completely denied access to the networks of
these telecom operators which would adversely affect our revenue from WVAS.
10
The popularity of our WVAS services, and therefore revenues from these services and our
profitability, would be adversely affected if our competitors offer more attractive and engaging
services or we are unsuccessful in developing and offering attractive and engaging services on 3G
mobile networks, which are in the process of being launched.
The WVAS market is highly competitive, and our competitors may offer new or different
services, which are more popular than our 2G and 2.5G services. Moreover, we cannot be certain that
we will successfully develop and sell popular services on 3G mobile networks, which are in the
process of being launched, following MIIT’s grant of licenses to the telecom operators in January
2009. Although we plan to transition our 2.5G services to 3G services as the 3G mobile networks are
launched, it is difficult to predict the development of new mobile technologies or the types
of services that will be popular on any new mobile networks.
The telecom operators allow us to offer our services over their networks only if we achieve minimum
customer usage, revenues and other criteria, and our revenues from 2.5G services depend in
particular on our ability to meet those criteria to keep our services among the most popular
offered through the telecom operators.
If we fail to achieve minimum customer usage, revenues and other criteria imposed by the
telecom operators at their discretion from time to time, our services could be excluded from the
applicable mobile operator’s entire network at a provincial or national level, or we could be
prevented from introducing new services. In addition, we believe that the success of our 2.5G
services depends significantly on whether our services appear at the top of the menu on the first
page of the list of services available in each service category on the telecom operators’ WAP
portals. The ranking of services on these WAP page menus depends on the satisfaction of performance
criteria established by the telecom operators from time to time. If we are excluded from any mobile
operator’s network or are not able to keep our 2.5G services at the top of the service lists on any
mobile operator’s WAP pages due to performance problems, our WVAS revenue would be substantially
reduced, which would materially and adversely affect our overall financial condition and the market
price of our ADSs.
We must rely on the telecom operators to maintain accurate records of fees paid by users of our
services, deduct service and network fees due to them and pay us fees due to us. Errors in
record-keeping by the telecom operators could adversely affect our profitability and the market
price of our ADSs.
We must rely on the telecom operators to maintain accurate records of the fees paid by users
and deduct the service and network fees due to them under our network service agreements.
Specifically, the telecom operators provide us with monthly statements for our 2G services that do
not provide itemized information regarding amounts paid for each of our services or calculations of
the service and network fees. As a result, monthly statements that we have received from the
telecom operators for our 2G services cannot be reconciled to our own internal records for the
reasons discussed under “— The telecom operators do not supply us with detailed information on
billing and transmission failures, revenues, service or network fees or other charges, particularly
with respect to our 2G services, and accordingly, it is difficult to analyze the factors affecting
our financial performance.” In addition, we have only limited means to independently verify the
information provided to us with respect to such 2G services because we do not have access to the
telecom operators’ internal records. Rather, we can only seek consultations with the telecom
operators to discuss the reasons for any discrepancies.
With respect to our 2.5G services, the telecom operators allow us limited access to their
transmission and billing system information to monitor if our services are actually delivered and
paid for, which information we then reconcile to our own internal records. In addition, the telecom
operators in general provide us with monthly statements within two to three weeks after month end.
However, the statements can be delayed by periods of four months or more. As discussed below in
Item 5.A. “Operating Results —Factors Affecting Results of Operations and Financial Condition”,
discrepancies between our internal records and the telecom operators’ confirmations have been
significant in 2008. Nonetheless, we are still ultimately dependent on the ability of the telecom
operators’ systems to accurately collect and analyze the relevant transmission and payment data
regarding our services.
Because of the dominant market position of these telecom operators, we have limited leverage
in challenging any discrepancies between their monthly statements and 2.5G system information, on
the one hand, and our own records, on the other hand. Our profitability and the market price of our
ADSs could be adversely affected if these telecom operators miscalculate the revenues generated
from our services and our portion of those revenues.
Our dependence on the billing records of the telecom operators may adversely affect our ability to
record, process, summarize and report revenue and other information regarding our WVAS. Any
inaccuracies in our records and public reports could adversely affect our ability to effectively
manage our business and the market price of our ADSs.
We maintain controls and procedures to ensure that financial and non-financial information
regarding our business is recorded, processed, summarized and reported in a timely and accurate
manner. However, as noted in the prior risk factor, we depend on the billing records of the telecom
operators and have only limited means to independently verify information provided by them. If the
information they provide us is incorrect or incomplete, then our own internal records will also be
incorrect or incomplete. Our business could be adversely affected if our management and board of
directors make decisions based on deficient internal information, such as strategic initiatives
involving new WVAS. Moreover, it is possible that, if information provided to us by the telecom
operators were not correct or complete, our public reports could also be deficient, which could
adversely affect the market price of our ADSs.
11
We recognize revenue for a portion of our 2G services on an accrual basis, based on an internal
estimation process which involves the use of estimates of monthly revenues to the extent we are
unable to obtain actual figures from the telecom operators before we finalize our financial
statements, which could in turn require us to make adjustments to our financial statements.
We recognize revenue for a portion of our 2G services (as well as for a smaller portion of our
2.5G services) on an accrual basis in order to report our quarterly earnings on a timely basis.
This involves the use of estimates of monthly revenues based on our internal records for the month
and prior monthly confirmation rates with the telecom operators in prior months if we are unable to
obtain actual figures from the telecom operators before we finalize our financial statements. We
expect the effect of these estimates on our financial results will be more significant on our
quarterly results of operations than on our annual results, as we are less likely to receive
confirmation on all of our 2G revenues before we disclose our quarterly results. To the extent that
our revenues have not been confirmed by the telecom operators for any reporting period, we will
need to adjust our revenues in the subsequent periods in which these revenues are confirmed. Actual
revenues may differ from prior estimates when unexpected variations in billing and transmission
failures occur. Recognizing revenues on an accrual basis could potentially require us to later make
adjustments to our financial statements if the telecom operators’ billing statements and cash
payments are different from our estimates, which could adversely affect our reputation and the
market price of our ADSs.
Our revenues and cost of revenues for 2G services, and to a lesser degree 2.5G services, are
affected by billing and transmission failures and other discrepancies which are often beyond our
control.
We do not collect fees for our services from the telecom operators in a number of
circumstances, including if:
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the delivery of our service to a customer is prevented because his or her phone is
turned off for an extended period of time, the customer’s prepaid phone card has run out
of value or the customer has ceased to be a customer of the applicable mobile operator;
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any telecom operator experiences technical problems with its network, thus preventing
the delivery of our services to the customer;
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we experience technical problems with our technology platform that prevents delivery
of our services; or
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the customer refuses to pay for our services due to quality or other problems.
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These situations are known in the industry as billing and transmission failures, and we do not
recognize any revenues for services which are characterized as billing and transmission failures.
Billing and transmission failures therefore significantly lower the revenues we record. The failure
rate for 2G services can vary among the telecom operators, and by province, and has fluctuated
significantly in the past, ranging from 0.0% to 19.1% of the total billable messages on a monthly
basis as reflected in our internal records during 2008. The failure rate increased in 2008 compared
to prior year due to the restructuring of the telecom operators.
Although we do not experience the same type of billing and transmission failures for our 2.5G
services as we do for our 2G services, we do experience a discrepancy between the revenues recorded
by our internal system and the revenues confirmed by the telecom operators. This difference ranged
from 0.4% to 27.5% per month and relates to services that are provided but are not billed to the
user for a variety of reasons associated with the manner in which the telecom operators register
new users and manage their internal billing reconciliation process. As discussed below in Item 5.A.
“Operating Results —Factors Affecting Results of Operations and Financial Condition”, these
discrepancies increased in 2008 due to the restructuring of the telecom operators.
We are also required to pay some of our content providers a percentage of the revenues
received from or confirmed by the telecom operators with respect to services incorporating the
content providers’ products. In calculating the fees payable to these providers, we make estimates
to take into account billing and transmission failures, which may have been applicable to the
services incorporating the providers’ products, and reduce the fees payable by us accordingly.
Nonetheless, as estimates involve making assumptions which may prove inaccurate, we have in the
past paid, and may continue to pay, such providers fees which are disproportionate to what we have
been paid for the relevant service. Our costs of services, gross margins and profitability could be
adversely affected if, due to problems in estimating billing and transmission failures, we overpay
service providers on a consistent and continuous basis.
12
The telecom operators do not supply us with detailed information on billing and transmission
failures, revenues, service and network fees or other charges, particularly with respect to our 2G
services, and accordingly it is difficult to analyze the factors affecting our financial
performance.
The telecom operators’ monthly statements to service providers, including our company,
regarding the services provided through their networks currently do not contain information about
billing and transmission failures, revenues, service and
network fees or other charges or detailed information on a service-by-service basis,
particularly with respect to our 2G services. While the telecom operators allow third party service
providers such as our company to have access to their 2.5G transmission and billing systems, such
access is limited and does not offer complete information on all fee calculations and other
charges. Moreover, China Mobile and China Unicom have from time to time imposed penalty charges and
service suspensions on us when they believe we have contravened their customer service policies.
The information provided by the telecom operators does not, however, identify exactly which
services caused the problem or the time period in which they occurred.
As a result of the foregoing, we are unable to effectively analyze the factors that affect our
financial performance and can only estimate our revenues and cost of revenues by service type. We
are also unable to confirm which of our 2G services were transmitted but resulted in billing and
transmission failures. As a result, with respect to specific services, we are not able to
definitively calculate and monitor revenues, margin and other financial information, such as
average revenues per-user by service and total revenues per-user by service, and also cannot
definitively determine which of these services are or may be profitable. Moreover, we do not know
what adjustments, if any, should be made with respect to specific services to avoid inadvertent
violations of the telecom operators’ customer service policies.
The services we offer and the prices we charge are subject to approval by the telecom operators,
and if requested approvals are not granted in a timely manner or approved services are suspended or
terminated, our competitive position, revenue and profitability could be adversely affected.
We must obtain approval from China Mobile, China Unicom and China Telecom with respect to each
2G, 2.5G and any upcoming 3G service that we propose to offer to their customers and the pricing
for such service. In addition, any changes in the pricing of our existing services must be approved
in advance by these operators. There can be no assurance that such approvals will be granted in a
timely manner or at all. Failure to obtain, or a delay in, obtaining such approvals could place us
at a competitive disadvantage in the market and adversely affect our revenue and profitability. In
addition, the recent more rigorous enforcement of customer service policies by the telecom
operators could result in heightened scrutiny of our existing or proposed services and pricing by
the telecom operators. This could, in turn, result in delays in their approving new services, our
failure to obtain approval for new services or suspensions or termination of all or part of our
existing services or reductions in approved pricing of our services. The occurrence of any of these
actions could materially and adversely affect our revenues.
Risks Related to Our Music Business
The businesses of our affiliated music companies are subject to constantly changing consumer
tastes.
In order to implement our strategy to enter the music development, production and distribution
and artist development industries, we formed an affiliated Chinese entity, Hurray! Digital Media,
and established a new wholly owned Cayman Islands subsidiary, Hurray! Music Holding Co., Ltd. in
2005, whose name was changed to Hurray! Media Co., Ltd. (“Hurray! Media”). As part of our strategy
to grow through opportunistic acquisitions and strategic investments, we have acquired, in recent
years, equity interests in Hurray! Freeland Digital Music Technology Co., Ltd. (“Freeland Music”),
Beijing Huayi Brothers Music Co., Ltd. (“Huayi Brothers Music”), Beijing New Run Entertainment
Development Co., Ltd. (“New Run”), Guangzhou Hurray! Secular Bird Culture Communication Co., Ltd.
(“Secular Bird”), Seed Music Group Limited (“Seed Music Group”) and Beijing Hurray! Fly Songs
International Culture Co., Ltd. (“Fly Songs”), which we refer to collectively as our affiliated
music companies in this annual report on Form 20-F. The first five of the foregoing companies
engage in artist development and music production and distribution in Mainland China (and in Taiwan
in the case of Seed Music), and the sixth company, Fly Songs, engages in concert promotions in
Mainland China and Taiwan. We have also recently expanded our artist agency business as discussed
in Item 4. “Information on the Company—Our Business—Our Music and Artist Agency Business.”
Each music recording and concert performance is an individual artistic work. The commercial
success of a music product or concert depends on consumer taste, the quality and acceptance of
competing offerings or events released into the marketplace at or near the same time, the
availability of alternative forms of entertainment and leisure time activities, general economic
conditions and other tangible and intangible factors, all of which can change quickly. Accordingly,
there can be no assurance as to the financial success of any particular product, the timing of such
success, or the popularity of any particular artist.
13
The future success of our affiliated music companies depends on their ability to continue to
develop recorded music and organize concerts that are interesting and engaging to our target
audience, primarily users of the Internet and WVAS in the case of our recorded music. If our
audience determines that the content does not reflect its tastes, then our audience size could
decrease, which would adversely affect our results of operations. The ability of Freeland Music,
Huayi Brothers Music, New Run, Secular Bird and Seed Music Group to develop compelling content
depends on several factors, including the following:
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technical expertise of their production and recording staff,
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popularity of the artists of our affiliated music companies,
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access to songs or songwriters, and
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effectiveness of online and offline marketing and promotional activities.
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Furthermore, our affiliated music companies must invest significant amounts for development
prior to the release of any product or organization of an event. These costs may not be recovered
if the product or event is unsuccessful. There can be no assurance that such products or events
will be successful releases or that any product or events will generate revenues sufficient to
cover the cost of development or organization.
Our affiliated music companies may unknowingly purchase or license songs, which have already been,
or may in the future be, sold or licensed to third parties, which could create costly legal
disputes over intellectual property rights with such third parties and the songs’ authors or
composers.
Our affiliate music companies generally purchase or license songs for their artists from the
original authors or composers of the songs. In China, original authors and composers sometimes
license or sell their songs to multiple music companies without informing each such company. In
that case, our affiliated music companies may unknowingly purchase or license songs that have
already been, or may in the future be, licensed or sold to one or more third parties. As a result,
disputes may arise between our affiliated music companies, third party music companies and original
authors or composers over the rights to particular songs. Any such dispute may require our
affiliated music companies to incur significant costs to investigate and resolve them, including
potentially the payment of damages to third parties.
In addition, our affiliated music companies license and distribute songs to third parties such
as providers of Internet and WVAS, which then distribute the music content to their customers. Such
companies may be subject to claims by such providers or any of their other customers if the
customers suffer losses as a result of a dispute over the ownership of copyrights to songs provided
to them.
Our affiliated music companies often enter into contracts with third parties on behalf of their
artists. If those artists fail to satisfy the requirements under those contracts, our affiliated
music companies may be subject to claims, which could expose them to significant costs and business
disruption.
Our affiliated music companies often enter into various types of contracts with third parties
on behalf of their artists, including contracts relating to album publishing, advertising and
promotional activities and public performances. If an artist fails to satisfy the requirements
under any such contract for whatever reason (such as health problems), then our affiliated music
companies may be deemed to have breached the relevant contracts. In that case, our affiliated music
companies may be subject to claims for breach of contract by the counterparty to the contracts,
which could expose them to significant costs and business disruption.
Revenue from our affiliated music companies may not grow as fast as expected due to continuing
problems of copyright enforcement in China and retention of popular artists.
It can be difficult to enforce certain copyright protections in China. In particular, the
music industry in China has suffered from serious piracy issues for many years. Our management
estimates that for every dollar of copyrighted CD sales, there are approximately five to ten
dollars of pirated CD sales in China. In addition, it can be difficult to retain artists who become
popular and generate large revenue for us, given that such artists may decide to renegotiate with
us or contract with other music content providers. This is a common problem faced by music
companies in the PRC. The revenue generated from our affiliated music companies may continue to be
adversely affected by the difficulty in enforcing copyrights and retaining popular artists, and
therefore may not grow as fast as anticipated.
14
Additional Risks Related to Our Company
Our recent acquisitions and strategic investments and any future acquisitions or investments may
have an adverse effect on our ability to manage our business and may subject us to unforeseen
liabilities.
Selective acquisitions and strategic investments, such as our recent acquisition of Seed Music
Group as described in Item 4. “Information on the Company—History and Development of the Company,”
form part of our strategy to further expand our business. Such companies may not be as successful
as they have been in the past, and may also not perform as well as we expect. Moreover, the
integration of such companies into our operations has required significant attention from our
management. In particular, we must ensure that the relationships of our newly acquired wireless
value-added service companies with the telecom operators are not disrupted by the acquisitions. In
addition, our management must also devote significant resources to enhancing its knowledge of the
music development, production and distribution business in China, with which we
have limited experience, and new geographical markets such as Taiwan and Hong Kong in the case
of our recent acquisition of Seed Music Group. Future acquisitions will also likely present similar
challenges.
The diversion of our management’s attention and any difficulties encountered in any
integration process could have an adverse effect on our ability to manage our business.
Acquisitions expose us to potential risks, including risks associated with the assimilation of new
operations, services and personnel, unforeseen or hidden liabilities, the diversion of resources
from our existing businesses and technologies, the inability to generate sufficient revenues to
offset the costs and expenses of acquisitions and potential loss of, or harm to, relationships with
employees and content providers as a result of integration of new businesses. The acquisition of
any company could also subject us to unforeseen liabilities arising from the acquisition itself or
the operations of the company or both.
We face intense competition, which could cause us to lose market share and materially adversely
affect our business and results of operations.
The Chinese market for WVAS is changing rapidly and is intensely competitive. We compete
principally with four groups of 2G, 2.5G and 3G service providers in China, which include companies
that focus primarily or entirely on these markets, major Internet portal operators in China, niche
service providers and the telecom operators.
There are low barriers to entry for new competitors in the 2G, 2.5G and 3G services market and
many of our competitors have longer operating histories in China, greater name and brand
recognition, larger customer bases and databases, significantly greater financial, technological
and marketing resources and superior access to original content than we have. Recently, certain of
the telecom operators have begun offering WVAS directly to their customers. See “—Our revenue from
WVAS may be adversely affected by the telecom operators providing their own full portfolio of 2G ,
2.5G and 3G services that compete with our services” above. As a result, our existing or potential
competitors may in the future achieve greater market acceptance and gain additional market share,
which in turn could reduce our revenues.
With respect to our music business, we face significant competition from two groups of
competitors. The first group consists of traditional record companies, which are extending
downstream to establish their own WVAS or Internet services companies in China. Such competitors
include international record companies and independent labels based in Hong Kong, Taiwan and
Mainland China, which have longer operating histories, larger music libraries and greater pools of
popular artists in comparison to our affiliated music companies. The second group of competitors
consists of WVAS providers that focus on music-related products and have extended upstream to
establish their own music production businesses in China. See Item 4.B. “Business
Overview—Competition.”
We operate in rapidly evolving industries, which may make it difficult for investors to evaluate
our business.
We began commercially offering WVAS in China in 2001, and since that time, the technologies
and services used in the WVAS industry in China have developed rapidly. Moreover, we have recently
entered the music development, production, distribution and artist agency business in China, which
is also rapidly evolving. As a result of this rapid and continual change, you should consider our
prospects in light of the risks and difficulties frequently encountered by companies in an early
stage of development. These risks include our ability to:
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attract and retain users for our 2G, 2.5G and any upcoming 3G services,
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expand the services that we offer,
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respond effectively to rapidly evolving competitive and market dynamics and address
the effects of mergers and acquisitions among our competitors,
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effectively manage our new music businesses and leverage our music library,
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maintain, expand and enhance our relationships with telecom operators so that they
will allow us to offer our 2G, 2.5G and any upcoming 3G services over their networks, and
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increase awareness of our brand and user loyalty.
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Due to these factors, there can be no certainty that we will maintain or increase our current
share of the highly competitive markets in which we operate.
15
We depend on key personnel for the success of our business. Our business may be severely disrupted
if we lose the services of our key executives and employees or fail to add new senior and middle
managers to our management.
Our future success is heavily dependent upon the continued service of our key executives,
namely, Dr. Songzuo Xiang, our chief executive officer, Xiaoqing Guo, our chief financial officer
and vice president, Ping Ji and Fan Yang, our senior vice
presidents in charge of WVAS business, and Haoyu Yang, our senior vice president in charge of
music companies. Our future success is also dependent upon our ability to attract and retain
qualified senior and middle managers to our management team. If one or more of our current or
future key executives or employees are unable or unwilling to continue in their present positions,
we may not be able to easily replace them, and our business may be severely disrupted. In addition,
if any of these key executives or employees joins a competitor or forms a competing company, we
could lose customers and suppliers and incur additional expenses to recruit and train personnel.
Each of our executive officers has entered into an employment agreement and a confidentiality,
non-competition and non-solicitation agreement with us. As we believe is customary in our industry
in China, we do not maintain key-man life insurance for any of our key executives.
Rapid growth and a rapidly changing operating environment strain our limited resources. Our future
growth could be adversely affected if we cannot manage our expansion effectively.
We have limited operational, administrative and financial resources, which may be inadequate
to sustain the growth we want to achieve. If the user base of our WVAS increases or our affiliated
music companies expands, we will need to increase our investment in our technology infrastructure,
facilities and other areas of operations, in particular our product development, customer service
and sales and marketing, which are important to our future success. If we are unable to manage our
growth and expansion effectively, the quality of our services and our customer support could
deteriorate and our business may suffer. For example, any such performance issue could prompt China
Mobile, China Unicom, or China Telecom to cease offering our services over their networks. Our
future success will depend on, among other things, our ability to:
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develop and quickly introduce new WVAS, adapt our existing services and maintain and
improve the quality of all of our services, particularly as the market for 2.5G and 3G
services evolves and matures,
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effectively maintain our relationships with China Mobile and China Unicom, enhance
our relationships with China Telecom and establish new relationships with any other
recipients of mobile licenses in China so that we are able to offer WVAS over their
networks,
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attract and retain popular artists for our music and artist agency businesses,
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continue training, motivating and retaining our existing employees, including our
senior management, and attract and integrate new employees,
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develop and improve our operational, financial, accounting and other internal systems
and controls, and
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maintain adequate controls and procedures to ensure that our periodic public
disclosure under applicable laws, including U.S. securities laws, is complete and
accurate.
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Any failures of the mobile telecommunications network, the Internet or our technology platform may
reduce use of our services and our revenues.
Our WVAS are offered through the networks of China Mobile, China Unicom and China Telecom. In
addition, we use our website to promote our services and enable users to order them. Thus, both the
continual accessibility of the telecom operators’ networks and the performance and reliability of
China’s Internet infrastructure are critical to our ability to attract and retain users. Any server
interruptions, break-downs or system failures, including failures caused by computer viruses,
hacking or sustained power shutdowns, floods or fire causing loss or corruption of data or
malfunctions of software or hardware equipment, or other events outside our control that could
result in a sustained shutdown of all or a material portion of the mobile networks, the Internet or
our technology platform, could adversely impact our ability to provide our services to users and
decrease our revenues.
16
Our corporate structure could be deemed to be in violation of current or future Chinese laws and
regulations, which could adversely affect our ability to operate our business effectively or at
all.
In connection with China’s entry into the World Trade Organization, or WTO, foreign investment
in telecommunications and Internet services in China has been liberalized to allow for a maximum of
50% foreign ownership in value-added telecommunications and Internet services in China. To comply
with these ownership requirements, we have implemented a structure which is similar to those used
by several of our competitors such as Sina, Sohu, NetEase, Linktone and TOM Online by entering into
various agreements with affiliated companies incorporated in China (which we refer to as our
affiliated Chinese entities), including Hurray! Solutions Ltd. (“Hurray! Solutions”), Beijing WVAS
Solutions Ltd. (“WVAS Solutions”), Beijing Enterprise Network Technology Co., Ltd. (“Beijing
Network”), Beijing Palmsky Technology Co., Ltd. (“Beijing Palmsky”), Beijing Hutong Wuxian
Technology Co., Ltd. (“Beijing Hutong”), Shanghai Magma Digital Technology Co., Ltd. (“Shanghai
Magma”), Beijing Hengji Weiye Electronic Commerce Co., Ltd. (“Hengji Weiye”), Shanghai Saiyu
Information Technology Co.,Ltd. (“Shanghai Saiyu”) and Henan Yinshan Digital Network Technology
Co., Ltd.(“Henan Yinshan”) and their shareholders. Each of these affiliated Chinese entities is
owned by various individuals in China.
We do not have any direct ownership interest in our affiliated Chinese entities but have
entered into a series of agreements with these entities through which we intend to be able to
assert a degree of control and management. In addition, we control Hurray! Digital Media through
three of our affiliated Chinese entities, Hurray! Solutions, Beijing Network and Beijing Hutong. It
is possible that the relevant Chinese authorities could, at any time, assert that our agreements
with our affiliated Chinese entities or any portion or all of the existing or future ownership
structure and businesses of each of our company, our wholly-owned subsidiary, Beijing Hurray! Times
Technology Co., Ltd. (“Beijing Hurray! Times”), or our affiliated Chinese entities violate existing
or future Chinese laws, regulations or policies. It is also possible that the new laws or
regulations governing the telecommunication or Internet sectors in China that have been adopted or
may be adopted in the future will prohibit or restrict foreign investment in, or other aspects of,
any of our, Beijing Hurray! Times’ or our affiliated Chinese entities’ current or proposed
businesses and operations. In addition, these new laws and regulations may be retroactively
applied. If any of our company, Beijing Hurray! Times and our affiliated Chinese entities is found
to be in violation of any existing or future Chinese laws or regulations, the relevant regulatory
authorities would have broad discretion in dealing with such violation, including, without
limitation, the following:
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confiscating the incomes of any of our company, Beijing Hurray! Times or our
affiliated Chinese entities,
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revoking the business licenses of any of our company, Beijing Hurray! Times or our
affiliated Chinese entities,
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shutting down servers or blocking websites maintained by any of our company, Beijing
Hurray! Times or our affiliated Chinese entities,
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restricting or prohibiting our use of our financial assets to finance our business
and operations in China,
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requiring any of us, Beijing Hurray! Times or our affiliated Chinese entities to
restructure our ownership structure or operations, and/or
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requiring any of us, Beijing Hurray! Times or our affiliated Chinese entities to
discontinue any portion of or all of their WVAS.
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In any such case, we could be required to restructure our operations, which could adversely
affect our ability to operate our business effectively or at all.
We depend upon agreements with our affiliated Chinese entities for the success of our business.
These agreements may not be as effective in providing operational control as direct ownership of
these businesses and may be difficult to enforce.
Because we conduct substantially all our business in China, and because we are restricted to a
certain extent by the Chinese government from owning telecommunications or Internet operations in
China, we depend on our affiliated Chinese entities, in which we have no direct ownership interest,
to provide those services through agreements. These agreements may not be as effective in providing
control over our telecommunications or Internet operations as direct ownership of these businesses.
For example, our affiliated Chinese entities could fail to take actions required to operate our
business, such as renewing their business licenses or services permits or entering into service
contracts with China Mobile, China Unicom or China Telecom. Moreover, the fees for our services are
paid by the telecom operators directly to our affiliated Chinese entities, which are then obligated
at our request to transfer substantially all of such fees to our wholly owned subsidiary, Beijing
Hurray! Times. If our affiliated Chinese entities fail to perform their obligations under these
agreements, we may have to rely on legal remedies under Chinese law, which we cannot assure you
would be effective or sufficient. In particular, the legal environment in China is not as developed
as in other jurisdictions, such as the United States. Thus, Chinese courts are often inexperienced
in handling corporate disputes, and different courts may apply laws and procedures in different
ways.
We do not believe that we have a reasonable basis to predict the likelihood of the occurrence
of the foregoing risks. However, if there is such an occurrence, it could potentially have a
significant adverse effect on our ability to operate our business and on our financial condition.
17
We generate our internal funds almost exclusively from Beijing Hurray! Times. If that company is
restricted from paying dividends to us, we may lose almost all of our internal source of funds.
Except for a certain amount of cash held by Hurray! Holding Co., Ltd. (approximately $39.5
million as of December 31, 2008), we have no significant assets other than our equity interests in
Beijing Hurray! Times and Hurray! Media (through which we hold equity interests in Seed Music
Group). We are a holding company, and we rely principally on dividends that may be paid from
Beijing Hurray! Times and Hurray! Media from time to time and technical consulting and service
fees, license fees and other fees paid to Beijing Hurray! Times by our affiliated Chinese entities
for our cash requirements, including any debt we may incur. We are likely to lose all of our
sources of funds if Beijing Hurray! Times or Hurray! Media is restricted from paying dividends to
us.
Chinese legal restrictions, however, permit payment of dividends only out of net income as
determined in accordance with Chinese accounting standards and regulations, which in turn restricts
our ability to receive these revenues. Under Chinese law, Beijing Hurray! Times is also required to
set aside a portion of its after-tax profit calculated under PRC generally accepted accounting
principles, or PRC GAAP, for which the legal minimum requirement is 10%, to a non-distributable
general reserve fund beginning in its first profitable year after offsetting prior year’s
cumulative losses and to certain other non-distributable funds at an amount determined by Beijing
Hurray! Times. The amount of statutory reserves was nil as of December 31, 2008 since Beijing
Hurray! Times incurred an operating loss in 2008. This reserve fund can only be used for specific
purposes and is not distributable as cash dividends. Dividends paid to us by our subsidiaries in
China will also be subject to withholding tax under the new tax laws adopted in China. See “—Recent
changes in PRC tax laws could have a material adverse effect on our operating results.” If further
restrictions on payments of dividends by our subsidiary are implemented under Chinese law, we may
not be able to access our internal source of funds.
Our revenues may fluctuate significantly and may adversely affect the market price of our ADSs.
Our revenues and results of operations have varied in the past and may continue to fluctuate
in the future. Many of the factors that cause such fluctuation are outside our control. Steady
revenues and results of operations will depend largely on our ability to:
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attract and retain users in the increasingly competitive WVAS market in China,
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maintain and grow our 2G and 2.5G market share and revenues, and successfully offer
3G services,
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successfully implement our business strategies, including integrating our recent
strategic acquisitions with our existing core business, and
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update and develop our services, technologies and content, which is highly complex.
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The WVAS industry in China is new and rapidly evolving, our experience in the music industry
is limited and our business has experienced significant volatility in terms of financial results as
a result of the factors stated above. Therefore, you should not rely on quarter-to-quarter
comparisons of our results of operations as an indication of our future performance. It is possible
that future fluctuations may cause our results of operations to be below the expectations of market
analysts and investors. This could cause the market price of our ADSs to decline.
We may not be able to adequately protect our intellectual property, and we may be exposed to
infringement claims by third parties.
We believe the copyrights, service marks, trademarks, trade secrets and other intellectual
property we use are important components of our WVAS. In addition, our affiliated music companies
are substantially dependent on their ability to protect their rights over their music content. Any
unauthorized use of such intellectual property by third parties may adversely affect our current
and future revenue from such services and software, as well as our reputation. For example, rampant
piracy in China has negatively affected offline sales of CDs and tapes by our affiliated music
companies, and if piracy becomes a problem in online distribution channels, their financial results
would be further materially adversely affected. We rely primarily on the intellectual property laws
and contractual arrangements with our employees, clients, business partners and others to protect
such intellectual property rights. Third parties may be able to obtain and use such intellectual
property without authorization. Furthermore, the validity, enforceability and scope of protection
of intellectual property in the Internet, wireless value-added and music industries in China is
uncertain and still evolving, and these laws may not protect intellectual property rights to the
same extent as the laws of some other jurisdictions. In particular, the intellectual property law
in China is less developed than in the United States and, historically, China has often not
protected private parties’ intellectual property rights to the same extent as such parties might
enjoy in the United States. Moreover, litigation may be necessary in the future to enforce our
intellectual property rights, which could result in substantial costs and diversion of our
resources, and have a material adverse effect on our business, overall financial condition and
results of operations.
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Due to the fact that we aggregate content and applications for our WVAS, and because our
services may be used for the distribution of information through, for example, our wireless
community services, claims may be filed against us for defamation, negligence, copyright or
trademark infringement or other violations. In addition, third parties could assert claims against
us for losses in reliance on information distributed by us. For example, if we are found to have
infringed any intellectual property rights of others, we may be enjoined from using such
intellectual property, and we may incur licensing fees or be forced to develop alternative
intellectual property. While the vast majority of claims that have been asserted against us in the
past have not developed beyond the demand letter stage and do not ultimately result in liability to
us, we may also incur significant costs in investigating and defending such claims. We have not
purchased liability insurance for these risks.
We have limited business insurance coverage, which could expose us to significant costs and
business disruption.
The insurance industry in China is still at an early stage of development. Insurance companies
in China offer limited business insurance products, and do not, to our knowledge, offer business
liability insurance. As a result, we do not have any business liability insurance coverage for our
operations. Moreover, while business disruption insurance is available, we have determined that the
risks of disruption and cost of the insurance are such that we do not require it at this time. Any
business disruption, litigation or natural disaster might result in substantial costs and diversion
of resources, particularly if it affects our technology platform which we depend on for delivery of
our WVAS.
We have a material weakness in our internal control over financial reporting. If we fail to
maintain an effective system of internal control over financial reporting, we may not be able to
accurately report our financial results or prevent fraud.
We are subject to reporting obligations under the U.S. securities laws. The SEC, as required
by Section 404 of the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, adopted rules
requiring every public company to include a management report on such company’s internal control
over financial reporting in its annual report, which contains management’s assessment of the
effectiveness of the company’s internal control over financial reporting. In addition, an
independent registered public accounting firm for a public company must attest to and report on the
effectiveness of the company’s internal control over financial reporting. Accordingly, our
management assessed our effectiveness of internal control over financial reporting as of December
31, 2008 using the criteria set forth in the report “Internal Control — Integrated Framework”
published by the Committee of Sponsoring Organizations of the Treadway Commission (know as COSO).
This annual report does not include an attestation report of our registered public accounting firm
regarding internal control over financial reporting as temporary rules of the SEC permit us to
provide only our management’s report in this annual report.
Our management has concluded that our internal control over financial reporting was not
effective as of December 31, 2008 due to the material weakness we identified. A material weakness
is a deficiency, or a combination of deficiencies, in internal control over financial reporting,
such that there is a reasonable possibility that a material misstatement of the company’s annual or
interim financial statements will not be prevented or detected on a timely basis. The identified
material weakness is that, while our affiliated music companies make an allowance for doubtful
debts against trade receivables based on a review of each individual account, the management of
these companies do not use a set of criteria (such as payment history and account activity) to
determine whether an allowance for an individual account is necessary.
We have implemented measures to resolve the material weakness and improve our internal and
disclosure controls and we do not believe that the material weakness identified had a pervasive
impact on internal control over financial reporting. See Item 15. “Controls and Procedures -
Management’s Report on Internal Control over Financial Reporting.” Nevertheless, we cannot assure
you that these measures will be effective and that we will be able to resolve the material weakness
in internal control over financial reporting in a timely and effective manner or that any
significant material weakness in our internal control over financial reporting will not be
identified in the future. If, however, we fail to maintain the adequacy of our internal control, we
may not be able to conclude that we have effective internal control over financial reporting.
Moreover, even if we conclude that our internal control over financial reporting is effective, our
independent registered public accounting firm may still issue a report that is qualified if it is
not satisfied with our internal control or the level at which our controls are documented,
designed, operated or reviewed, or if it interprets the relevant requirements differently from us.
Furthermore, effective internal control over financial reporting is necessary for us to produce
reliable financial reports and is important to help us to manage the company effectively and
prevent fraud. As a result, our failure to achieve and maintain effective internal control over
financial reporting could result in a loss of investor confidence in the reliability of our
financial statements, which in turn could harm our business and negatively impact the trading price
of our ADSs.
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We believe that we were a passive foreign investment company (“PFIC”) for taxable years 2006, 2007
and 2008 and are likely a PFIC for the current taxable year of 2009, which could result in adverse
U.S. federal income tax consequences to U.S. investors.
We will be classified as a PFIC for U.S. tax purposes for a taxable year if either (a) 75% or
more of our gross income for such taxable year is passive income, or (b) 50% or more of the average
percentage of our assets during such taxable year either produce passive income or are held for the
production of passive income. For such purposes, if we directly or indirectly own 25% or more of
the shares of another corporation, we generally will be treated as if we (a) held directly a
proportionate share of the other corporation’s assets, and (b) received directly a proportionate
share of the other corporation’s income. The determination of whether or not we are a PFIC is made
on an annual basis and depends on the composition of our income and assets, including goodwill,
from time to time. We believe that we were a PFIC for taxable years 2006, 2007 and 2008 and are
likely to be classified as a PFIC for the current taxable year of 2009, although such determination
cannot be made with certainty
until the end of the taxable year. Such characterization could result in adverse U.S. federal
income tax consequences to a U.S. investor. For example, if we are a PFIC, then “excess
distributions” to a U.S. investor, and any gain realized on the sale or other disposition of our
ADSs will be allocated ratably over the U.S investor’s holding period for the ADSs, the amount
allocated to the current taxable year and any year prior to our becoming a PFIC will be taxed as
ordinary income, and the amount allocated to each of the other taxable years will be subject to tax
at the highest rate of tax in effect for the applicable class of taxpayer for that year.
Additionally an interest charge for the deemed deferral benefit will be imposed with respect to the
resulting tax attributable to each such other taxable year and the U.S. investor will be subject to
U.S. tax reporting requirements. Some of these adverse tax consequences may be avoided if the U.S.
investor makes a “mark-to-market” election for the ADSs.
Accordingly, the adverse U.S. federal income tax consequences described above could apply to
you if you are a U.S. investor. Given the complexity of the issues regarding our classification as
a PFIC, U.S. investors are urged to consult their own tax advisors for guidance as to the U.S.
federal, state and local and other tax consequences of our status as a PFIC in light of the
particular circumstances applicable to such U.S. investor, as well as the availability of and
procedures for making a mark-to-market or other available election. For further discussion of the
adverse U.S. federal income tax consequences of our classification as a PFIC, see Item 10.E.
“Additional Information—Taxation—United States Federal Income Taxation” below.
Anti-takeover provisions in our charter documents could make an acquisition of us, which may be
beneficial to our shareholders, more difficult and may prevent attempts by our shareholders to
replace or remove our current management.
Our amended and restated articles of association include two provisions, which could make an
acquisition of us more difficult and may prevent attempts by our shareholders to replace or remove
our current management. First, our amended and restated articles of association provide for a
classified board of directors. Second, our board of directors has the right to issue preference
shares without shareholder approval, which could be used to institute a “poison pill” that would
work to dilute a potential hostile acquirer’s ownership interest in our company, effectively
preventing acquisitions that have not been approved by our board of directors.
Shareholder rights under Cayman Islands law may differ materially from shareholder rights in the
United States, which could adversely affect the ability of us and our shareholders to protect our
and their interests.
Our corporate affairs are governed by our amended and restated memorandum and articles of
association, by the Companies Law (2007 Revision) and the common law of the Cayman Islands. The
rights of shareholders to take action against the directors, 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 in the Cayman Islands is
derived in part from comparatively limited judicial precedent in the Cayman Islands as well as from
English common law, the decisions of whose courts are of persuasive authority but are not binding
on a court in the Cayman Islands. The rights of our shareholders and the fiduciary responsibilities
of our directors under Cayman Islands law in this area may not be as clearly established as they
would be under statutes or judicial precedent in existence in some jurisdictions in the United
States. In particular, the Cayman Islands has a less developed body of securities laws as compared
to the United States, and some states, such as Delaware, have more fully developed and judicially
interpreted bodies of corporate laws. Moreover, our company could be involved in a corporate
combination in which dissenting shareholders would have no rights comparable to appraisal rights,
which would otherwise ordinarily be available to dissenting shareholders of United States
corporations. Also, our Cayman Islands counsel is aware of only a few reported cases of derivative
actions having been brought in a Cayman Islands court. Such actions are ordinarily available in
respect of United States corporations in U.S. courts. Finally, Cayman Islands companies may not
have standing to initiate shareholder derivative actions before the federal courts of the United
States. As a result, our public shareholders may face different considerations in protecting their
interests in actions against the management, directors or our controlling shareholders than would
shareholders of a corporation incorporated in a jurisdiction in the United States, and our ability
to protect our interests may be limited if we are harmed in a manner that would otherwise enable us
to sue in a United States federal court.
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We believe that all participants of our existing equity compensation plans who are PRC citizens are
currently required to register with the State Administration of Foreign Exchange of the PRC, or
SAFE, and the failure to so comply could subject us and such participants to penalties. We may also
face regulatory uncertainties that could restrict our ability to adopt additional equity
compensation plans for our directors and employees and other parties under PRC law.
On April 6, 2007, the capital account department of SAFE issued the
Operating Procedures for
Administration of Domestic Individuals Participating in the Employee Stock Option Plan or Stock
Option Plan of an Overseas Listed Company
, or Circular 78. It is not clear at this time whether
Circular 78 covers all forms of equity compensation plans, including restricted purchase share
awards granted by us, or only those which provide for the granting of stock options. For any plans
which are so covered and are adopted by a non-PRC listed company such as our company after April 6,
2007, Circular 78 requires all
participants who are PRC citizens to register with and obtain approvals from SAFE prior to
their participation in the plan. In addition, Circular 78 also requires PRC citizens to register
with SAFE and make the necessary applications and filings by July 5, 2007 if they participated in
an overseas listed company’s covered equity compensation plan prior to April 6, 2007. In May 29,
2007, the General Affairs Department of SAFE issued the
Notice on Printing and Distributing the
Operating Rules for the Notice of the State Administration of Foreign Exchange on the Relevant
Issues about Foreign Exchange Control over the Financing and Return Investment of Domestic
Residents through Overseas Special Purpose Companies
, or Circular 106. This notice also requires
PRC citizens who hold stock options pursuant to a company’s equity incentive plan to register with
SAFE. We have completed the required registration on behalf of our stock option holders who are PRC
citizens with SAFE. Although Circular 78 has not yet been made publicly available nor has it been
formally promulgated by SAFE, and we have submitted the registration with SAFE on behalf of our
stock option holders who are PRC citizens pursuant to Circular 106, any failure to comply with such
provisions may subject us and the participants of our equity compensation plans who are PRC
citizens to fines and legal sanctions and prevent us from being able to grant equity compensation
to our personnel which is currently a significant component of the compensation of many of our PRC
employees, as a result of which our business operations may be adversely affected.
Recent changes in PRC tax laws could have a material adverse effect on our operating results.
In March 2007, the National People’s Congress of China enacted a new Enterprise Income Tax
Law, or the New EIT Law, which became effective on January 1, 2008. In addition, the
Implementation Rules of the New Enterprise Income Tax Law, or the Implementation Rules, were
promulgated by the PRC State Council on December 6, 2007 and the Notice on Implementation of
Transitional Arrangements for Preferential Policies of Enterprise Income Tax, or the Transitional
Arrangements Notice, was promulgated by the PRC State Council on December 26, 2007. Under the New
EIT system, a unified enterprise income tax rate of 25% and unified tax deduction standards are
applied equally to both domestic-invested enterprises and foreign-invested enterprises.
Enterprises established prior to March 16, 2007 eligible for a preferential tax rate of 15%
according to the then effective PRC Enterprise Income Law for Foreign-Invested Enterprise and
Foreign Enterprise tax laws and administrative regulations is subject to transitional rules as
stipulated in the Transitional Arrangements Notice. In addition, certain qualified enterprises may
still benefit from a preferential tax rate of up to15% under the New EIT Law if they meet the
definition of “qualified high and new technology enterprise” strongly supported by the state as set
out in the Implementation Rules. As a result, if our PRC subsidiaries and VIEs qualify as high and
new technology enterprises strongly supported by the state under the New EIT Law, they will
continue to benefit from a preferential tax rate of up to 15%. Otherwise, the applicable tax rate
of our PRC subsidiaries and VIEs is 25% starting from 2008 under the New EIT Law. Before the due
date of the 2008 PRC EIT annual final settlement, four of our subsidiaries and VIEs were qualified
as high and new technology enterprises and are entitled to the preferential tax rate, tax exemption
or reduced rate according to the New EIT Law and transitional rules. While the high and new
technology enterprise certificates are valid for three years, we believe based on currently
available information that we will be able to reapply successfully for the renewal of the current
certificates as we believe we will continue to meet the published criteria. Accordingly, these four
entities have used the reduced applicable tax rate in calculations of deferred tax balances for the
foreseeable future. However, we cannot be certain that such applications will be successful. In
addition, our qualified new cultural enterprises, Huayi Brothers Broker, Hurray! Freeland Culture
and Secular Bird, were entitled to tax exemption in 2008. We have used the new standard rates for
our other affiliated Chinese entities. Deferred taxes have been calculated using the tax rates that
apply to the relevant companies.
Under the New EIT Law, 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 Hurray! Holding Co., Ltd. or our non-PRC subsidiaries are
determined to be a PRC resident for tax purposes, it or they, would be subject to tax in the PRC on
our worldwide income including the income arising in jurisdictions outside the PRC. We have
evaluated our resident status under the New EIT Law and related guidance and believe Hurray!
Holding Co., Ltd. and our other non-PRC subsidiaries are not a PRC resident for PRC income tax
purposes.
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Under the PRC tax laws effective prior to January 1, 2008, dividends paid to foreign investors
by foreign-invested enterprises, such as dividends paid to the overseas holding companies by the
PRC subsidiaries, were exempt from PRC withholding tax. Under the EIT Law and its implementation
rules which became effective on January 1, 2008, dividends generated after January 1, 2008 and
payable by a foreign-invested enterprise in China to its foreign investors who are non-resident
enterprises are subject to a 10% withholding tax, unless any such foreign investor’s jurisdiction
of incorporation has a tax treaty with China that provides for a different withholding arrangement.
Aggregate undistributed earnings of our subsidiaries and affiliates located in the PRC that
are available for distribution to the Company at December 31, 2008 are considered to be
indefinitely reinvested under APB opinion No. 23, “Accounting for
Income Taxes — Special Areas,” and accordingly, no provision has been made for the PRC
dividend withholding taxes that would be payable upon the distribution of those amounts to Hurray!
Holding Co., Ltd. The PRC tax authorities have also clarified that distributions made out of
retained earnings accumulated prior to January 1, 2008 are not subject to the withholding tax.
LEGAL RISKS RELATED TO WIRELESS AND INTERNET SERVICES
The telecommunication laws and regulations in China are evolving and subject to interpretation and
will likely change in the future. If we are found to be in violation of current or future Chinese
laws or regulations, we could be subject to severe penalties.
Our WVAS services are subject to general regulations regarding telecommunication services. The
interpretation and application of newly issued Chinese laws and regulations and the possibility of
new laws or regulations being adopted have created significant uncertainty regarding the legality
of existing and future foreign investments in, and the businesses and activities of, Chinese
companies providing WVAS services, including our affiliated Chinese entities. Many providers of
WVAS services have obtained various value-added telecommunication services licenses.
Certain of our affiliated Chinese entities, Hurray! Solutions, Beijing Palmsky, Beijing
Network, Hengji Weiye, Beijing Hutong, Shanghai Magma, Shanghai Saiyu and Henan Yinshan, have been
granted an inter-provincial value-added telecommunication license by the MIIT that permits them to
conduct inter-provincial operations. Our affiliated Chinese entity, WVAS Solutions, has been
granted a value-added telecommunication service license issued by the local Beijing Municipal
Telecommunications Administration Bureau. This license may not be sufficient to authorize WVAS
Solutions to provide value-added telecommunication services on an inter-provincial basis. We cannot
be certain that any local or national value-added telecommunication license requirements will not
conflict with one another or that any given license will be deemed sufficient by the relevant
governmental authorities for the provision of this category of service, due to the lack of a
comprehensive body of laws and regulations governing our WVAS services. It is also possible that
new national legislation might be adopted to regulate such services.
If we or our subsidiaries or affiliates are found to be in violation of any existing or future
Chinese laws or regulations regarding our WVAS services or Internet access which is discussed in
the following risk factor, the relevant Chinese authorities have the power to, among other things:
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confiscate our income or the income of our affiliates,
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revoke our business license or the business license of our affiliates,
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shut down our servers or the servers of our affiliates and/or blocking any Web or WAP
sites that we operate, and
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require us to discontinue any portion or all of our WVAS services business.
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The regulation of Internet website operators is also new and subject to interpretation in China,
and our business could be adversely affected if we are deemed to have violated applicable laws and
regulations.
Our affiliate, Hurray! Solutions, and some of our other affiliated Chinese entities operate
Internet websites in China, which are one of the channels through which our services are offered.
The interpretation and application of existing Chinese laws and regulations, the stated positions
of the main governing authority, the MIIT, and the possibility of new laws or regulations being
adopted have created significant uncertainty regarding the legality of existing and future foreign
investments in, and the businesses and activities of, Chinese companies with Internet operations,
including ours. In particular, the MIIT has stated that the activities of Internet content
providers are subject to regulation by various Chinese government authorities, depending on the
specific activities conducted by the Internet content provider. We cannot be certain that the
commercial Internet content provider license issued by the relevant government agencies overseeing
the telecommunications industry or any value-added telecommunication license held by Hurray!
Solutions or our other affiliated Chinese entities will satisfy these requirements. Our failure to
comply with applicable Chinese Internet regulations could subject us to severe penalties as noted
in the prior risk factor.
In particular, regulatory and policy changes by MIIT and the telecom operators can be
unpredictable and have caused operating channels to become increasingly unavailable for marketing
and promotion. As a result, we have diversified our marketing and promotion channels and developed
direct media advertising, Internet marketing alliances, handset vendor partnerships, as well as
offline channels such as record stores and convenient stores. These new marketing and promotion
methods can be costly and may not be entirely effective in developing new business, which in turn,
may adversely affect our customer base and revenues.
RISKS RELATED TO DOING BUSINESS IN CHINA
The recent slowdown in the Chinese economy may slow down our growth and profitability.
The rate of growth of the Chinese economy has been uneven across geographic regions and
economic sectors and has recently slowed due in part to the recent economic and financial downturn
experienced in the United States and worldwide. The Chinese government has recently used
macroeconomic tools and regulations, including the passage of an economic stimulus plan, to
increase the rate of growth of the Chinese economy and may take similar measures in the future.
There is no assurance that such steps will be successful. The general state of the Chinese economy
affects our profitability as expenditures for wireless value-added and music content services may
decrease due to slowing domestic demand. More specifically, increased penetration of WVAS in the
less economically developed central and western provinces of China will depend on their achieving
certain income levels so that mobile handsets and related services become affordable to a
significant portion of the population. Moreover, sales of music content are substantially dependent
on the level of discretionary consumer spending in China.
The Chinese legal system embodies uncertainties which could limit the legal protections available
to you and could also adversely affect our ability to operate our business.
The Chinese legal system is a civil law system based on written statutes. Unlike common law
systems, it is a system in which decided legal cases have little precedential value. Although
legislation in China over the past 20 years has significantly improved the protection afforded to
various forms of foreign investment and contractual arrangements in China, these laws, regulations
and legal requirements are relatively new and their interpretation and enforcement involve
uncertainties, which could limit the legal protection available to us, and foreign investors,
including you. In addition, the Chinese government may enact new laws or amend current laws that
may be detrimental to our current contractual arrangements with our Chinese affiliates, which may
in turn have a material adverse effect on our ability to operate our business.
Any occurrence of pandemic avian influenza or other widespread public health problem, or any
recurrence of severe acute respiratory syndrome, or SARS, could adversely affect our business and
results of operations.
An outbreak of pandemic avian influenza or other widespread public health problem, or a
renewed outbreak of SARS in China, where most of our revenues are derived, and in Beijing, where
our operations are headquartered, could have a negative effect on our operations. Further, in April
2009, H1N1, a new strain of flu virus commonly referred to as “swine flu,” was first discovered in
North America and quickly spread to other parts of the world, including China. The continual
widespread of H1N1 in China and in Beijing may adversely affect our business and operating results.
Our operations may be affected by a number of health-related factors, including the following:
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quarantines or closures of some of our offices which would severely disrupt our
operations,
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the sickness or death of our key officers and employees, and
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a general slowdown in the Chinese economy.
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Any of the foregoing events or other unforeseen consequences of public health problems could
adversely affect our business and results of operations.
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We may incur substantial increases in labor cost due to the promulgation of the new labor contract
law.
On June 29, 2007, the Standing Committee of the National People’s Congress of China enacted
the Labor Contract Law, which became effective on January 1, 2008. The Labor Contract Law contains
substantial provisions with a view toward improve job security and to protect the rights and
interests of employees. In order to fully comply with the legal requirements under the Labor
Contract Law, we may incur substantial increases in labor cost.
Changes in China’s political and economic policies could harm our business.
The economy of China has historically been a planned economy subject to governmental plans and
quotas and has, in certain aspects, been transitioning to a more market-oriented economy. Although
we believe that the economic reform and the macroeconomic measures adopted by the Chinese
government have had a positive effect on the economic development of China, we cannot predict the
future direction of these economic reforms or the effects these measures may have on our business,
financial position or results of operations. In addition, the Chinese economy differs from the
economies of most countries belonging to the Organization for Economic Cooperation and Development,
or OECD. These differences include:
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level of government involvement in the economy,
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level of capital reinvestment,
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control of foreign exchange,
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methods of allocating resources, and
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balance of payments position.
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As a result of these differences, our business may not develop in the same way or at the same
rate as might be expected if the Chinese economy were similar to those of the OECD member
countries.
Governmental control of currency conversion may affect the value of our ordinary shares and ADSs.
The PRC government imposes controls on currency conversion between Renminbi and foreign
currencies and, in certain cases, the remittance of currency out of and into China. We receive
substantially all of our revenue in Renminbi, which is currently not a freely convertible currency.
Under our current corporate structure, the income of our company will be primarily derived from
dividend payments from Beijing Hurray! Times . Shortages in the availability of foreign currency
may restrict the ability of Beijing Hurray! Times to remit sufficient foreign currency to pay
dividends to us, or otherwise satisfy its foreign currency-dominated obligations. Under existing
PRC foreign exchange regulations, payments of current account items, including profit
distributions, can be made in foreign currencies without prior approval from SAFE by complying with
certain procedural requirements. However, in most cases, particularly payments of capital accounts
items, approval from appropriate governmental authorities is required where (i) Renminbi is to be
converted into foreign currency and remitted out of China to pay capital expenses such as the
repayment of offshore bank loans denominated in foreign currencies, or (ii) any foreign currency is
to be converted into Renminbi for investment in China. 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 converting Renminbi into foreign currencies
or vice versa, and obtaining sufficient Renminbi or foreign currency to satisfy our currency
demands, our ability to transfer Renminbi to fund our business operations in China or to pay
dividends in foreign currencies to our shareholders may be adversely affected.
We face foreign exchange and conversion risks, and fluctuation in the value of the Renminbi may
have a material adverse effect on the value of our ordinary shares and ADSs.
The value of the Renminbi against the U.S. dollar and other currencies may fluctuate and is
affected by, among other things, changes in the PRC’s political and economic conditions. The
People’s Bank of China issued a public notice on July 21, 2005 increasing the exchange rate of the
Renminbi against the U.S. dollar by approximately 2% to RMB8.11 per US$1.00. Further to this
notice, the PRC government reformed its exchange rate regime by adopting a managed floating
exchange rate regime based on market supply and demand with reference to a portfolio of currencies.
Under this regime, the Renminbi is no longer pegged to the U.S. dollar. We cannot predict how and
to what extent the exchange rate of the Renminbi will fluctuate in the future.
To the extent that we need to convert U.S. dollars into Renminbi for our operations,
appreciation of the Renminbi against the U.S. dollar could have a material adverse effect on our
business, financial condition and results of operations. Conversely, as we rely entirely on
dividends paid to us by Beijing Hurray! Times, any depreciation of the Renminbi may materially and
adversely affect our cash flows, revenue and financial condition, and the value of, and any
dividends payable on, our ordinary shares in foreign currency terms.
24
Item 4. Information on the Company
A. History and Development of the Company
We became an independent company in September 1999 when we were spun-off from UT Starcom Inc.,
a Nasdaq-listed company that manufactures telecommunication equipment in China. At that time, we
focused on developing billing software and providing system integration services for
telecommunications network operators in their fixed-line Internet infrastructure build-outs. In
June 2001, members of our current management team conducted a management buy-in by purchasing a
substantial equity interest in our company, at which time the team assumed management control of us
with the purpose of developing products and services for 2.5G mobile networks. Prior to the
management buy-in, a majority of the new management team had previously worked together in senior
management positions at AsiaInfo Holdings, Inc, a Nasdaq-listed company and a leading provider of
telecommunications software and system integration services in China.
In April 2002, we established a new holding company, Hurray! Holding Co., Ltd., in the Cayman
Islands. We currently conduct our business in China through our wholly owned subsidiary, Beijing
Hurray! Times. To comply with ownership requirements under Chinese law which imposes certain
restrictions on foreign companies from investing in certain industries
such as value-added telecommunication and Internet services, we have entered into a series of
agreements with our nine affiliated Chinese entities and their respective shareholders. We hold no
ownership interest in any such affiliated Chinese entities. See Item 7.B. “Related Party
Transactions,” and Item 4.C. “Information on the Company — Organizational Structure.”
In 2005, we formed an affiliated Chinese entity, Hurray! Digital Media, and established a
wholly owned Cayman Islands subsidiary, Hurray! Media, in order to implement our strategy of
entering into the music development, production and distribution and artist development business.
Subsequently, through Hurray! Digital Media, we acquired controlling or significant stakes in the
following top tier independent record companies in China, Freeland Music, Huayi Brothers Music, New
Run, and Secular Bird.
In September 2008, we entered into a definitive agreement to acquire, through Hurray! Media, a
controlling stake in Seed Music Group, a Taiwan-based company that focuses on artist development,
music production and offline music distribution in the Asia Pacific, especially China, Taiwan and
Hong Kong. We completed the acquisition and began to consolidate Seed Music Group into our
financial statements from January 1, 2009.
In April 2008, we completed the sale of our software and system integration business unit,
Hurray! Times Communications (Beijing) Co., Ltd., to a subsidiary of Taiwan Mobile, a leading
telecommunications service provider in Taiwan. This divestment enables us to increase our focus on
our strategy of becoming a leading entertainment content production and distribution house in
China.
We are currently reviewing our operations to rationalize our business lines and business
support services and to eliminate services that are unprofitable or low margin and are unlikely in
the foreseeable future to achieve satisfactory profitability so as to better position us for a
profitable future. In May 2009, we reduced the work force of our WVAS and digital music businesses
by approximately one-third, and have recorded an expense of $0.3 million in severance costs in that
year. This review is ongoing, and there can be no assurance that we will be successful in
returning to profitability.
In addition, we entered into a Tender Offer Agreement with Shanda Interactive Entertainment
Limited (“Shanda”) on June 8, 2009 under which Shanda, through a wholly-owned subsidiary, commenced
a tender offer on June 16, 2009 to acquire 51% of our total outstanding ordinary shares on a fully
diluted basis (including shares represented by our ADSs) at a price of US$0.04 per ordinary share
(or US$4.00 per ADS). On June 16, 2009, we received the Offer to Purchase from Shanda and the
related letters of transmittal. The tender offer will remain open for at least 20 business days
and will expire on July 15, 2009 at 12:01 a.m., New York City time, unless extended. For further
details, please refer to the Schedule TO, Schedule 14D-9 and other related filings filed with the
Commission.
B. Business Overview
Introduction
We are a leading online distributor of music and music-related products such as ringtones,
ring-back-tones (“RBT”), and true-tones to mobile users in China through the full range of WVAS
platforms over mobile networks and through the Internet. Our company also provides a wide range of
other WVAS to mobile users in China, including games, pictures and animation, community, and other
media and entertainment services. We are also a leader in artist development, music production,
offline distribution and event organization in China through our affiliated music companies Huayi
Brothers Music, Freeland Music, New Run, Secular Bird, Seed Music Group and Fly Songs.
25
Traditionally, we focused on marketing directly through mobile operator provided services such
as SMS and WAP. Due to regulatory and policy changes by the MIIT and the telecom operators,
operator channels have become increasingly unavailable and subject to sudden changes in policies by
the telecom operators. Since 2005, we have diversified our marketing and promotion channels and
developed direct media advertising, Internet marketing and handset vendor partnerships, as well as
offline channels such as record stores. Currently, we provide services through two major business
lines: WVAS, whose revenue is reported under the WVAS segment in our consolidated financial
statements, and Music and Artist Agency, whose revenue is reported under the Recorded Music segment
in our consolidated financial statements.
Our WVAS Services
We derive most of our revenues from WVAS, which includes 2G services such as SMS, IVR and RBT,
and 2.5G services such as WAP, MMS, and Java™, each of which is available on the networks of China
Mobile, China Unicom and China Telecom. Our WVAS business line consists mainly of the following
product lines:
SMS Services
. SMS is the largest and most mature wireless value-added service in China. It is
the most basic form of mobile messaging service and is supported by substantially all mobile phone
models currently sold. We have focused our activities in SMS on our strongest core services to
maximize our revenues. These core services include chat and other community services, interactive
television entertainment, quizzes and games. Users can purchase our SMS services through the
networks of the telecom operators by responding to our broadcast messages advertising our services,
or sending us a request via SMS using a specific code.
IVR Services
. IVR services include chat services whereby users can chat with each other live
over their mobile handsets in wireless public chat rooms. We believe this service is attractive to
young mobile users in China as a cost-effective way to speak with their friends and to make new
friends, although it may be less useful for business purposes because conversations in these chat
rooms are open to anyone. Users can also utilize our IVR services to access music, greetings from
famous Chinese celebrities, jokes and serial stories, such as detective stories, from their mobile
phones or send this content to the mobile phones of their friends or others.
RBT Services
. RBT services allow a mobile phone user to customize the ringtone that callers
hear when calling the user’s mobile phone. We offer a variety of entertaining content including
pre-recorded messages, movie dialogues and soundtracks and a wide range of classical and popular
music. RBT services are currently available on all 2G mobile phones. They are also one of the most
effective platforms for mobile music products, which have become one of our strategic focuses.
Accordingly, we believe that they present significant growth potential.
WAP Services.
WAP services allows users to browse content on their mobile phones so that users
can request and receive information in a manner similar to accessing information on Internet web
sites through personal computers. The majority of our 2.5G services are WAP services and include
ringtone downloads, picture downloads, community services, games, pop culture, news and finance and
personal information management services.
MMS Services
. MMS is a messaging service that allows multimedia content such as ringtones and
pictures to be transmitted in a single message, compared to simple text via SMS. MMS can be
downloaded on many 2.5G mobile phones in China, and is an effective way for mobile users to send
and receive messages that contain sizeable multimedia content such as ringtones, pictures and
animation.
Java™ Games.
We offer a range of in-house developed games based on the Java
™
platform, which offers an effective way to create sophisticated 2.5G games. In April 2004, we
launched our first Java
™
game through China Mobile’s WAP portal. Our affiliated Chinese
entity, Shanghai Magma, is a top tier Java
™
game developer and publisher in China with
over 200 titles of Java
™
games and a large pipeline of new games under development. We
anticipate that the popularity of Java
™
games will accelerate in the next several years,
especially after the launch of 3G services. In 2008, we launched 34 new titles on China Mobile’s
game portal, including “Motorcycle Hero,” “The Ancestor of Shaolin,” and “Battle of the Galaxy.”
26
Our Music and Artist Agency Business
The music industry in China has suffered from serious piracy issues for many years. Our
management estimates that for every dollar of copyrighted CD sales, there are approximately five to
ten dollars of pirated CD sales in China. Consequently, the industry is relatively small and
fragmented, with over one hundred record companies of various sizes in China. Our management
estimates that major international record companies such as Warner Music, Universal, EMI and Sony
BMG account for approximately 30% of the market in China in terms of revenues in recent years,
approximately one dozen Hong Kong- and Taiwan-based independent labels such as Empire
International, Rock Music, Linfair, H.I.M and Ocean Butterfly account for approximately 20% of the
market, six top tier domestic independent labels such as Taihe Rye, Huayi Brothers Music, the
Freeland Group, Zhushu and Seed Music Group account for approximately 20% of the market, and
approximately eighty second or third tier domestic independent labels account for the remaining 30%
of the market. Due to piracy issues, record companies in China have traditionally relied on
revenues not only from CD sales, but also from concert tours and corporate sponsorship.
Record companies in China began in 2005 to experience a rapid increase in revenues from sales
of digital and mobile music rights to wireless value-added service providers (such as our company)
and Internet music website operators. This music content can be used in such services as ringtones,
RBT, and true-tone downloads and playbacks over mobile and Internet platforms. To capture more of
this market opportunity, many record companies in China are increasingly focused on building their
wireless and Internet distribution channels, including by offering their own WVAS or working
directly with telecom operators.
Because music-related products represented an increasingly significant portion of our total
WVAS revenues and we had been licensing an increasing amount of music rights from record companies
in China, we determined in 2005 to become the
first wireless value-added service provider to make a significant upstream investment in the
music business by acquiring controlling or significant stakes in top tier local independent record
companies in China. We have acquired a number of music companies with diverse and complementary
strengths. For example, Freeland Music is a pioneer in China in developing Internet-based singing
talent and distributing their music through offline CD distribution as well as through Internet and
mobile distribution. Huayi Brothers Music is well known in China for music production. Secular Bird
has a relatively short history but has been successful in identifying and developing promising
artists and producing top hit music. Freeland Music’s affiliate, Fly Songs, is well known for
organizing various concerts and performances for top artists. Our newest acquisition, Seed Music
Group, is a well-known music production company which focuses on artist development, music
production and offline distribution of music in the Asia Pacific region, especially China, Taiwan
and Hong Kong.
The acquisition of local independent record labels is an important part of our strategy to
focus on building digital and mobile music production and distribution expertise and capabilities.
Our management estimates that our affiliated music companies account for approximately 16% of the
market in China in terms of revenues when compared against domestic competitors in China.
In order to enhance our brand recognition in the music industry, we began offering music and
artist agency services in late 2008, which services include discovering, developing and
representing recording artists and promoting, selling and licensing their works through designated
third parties. We believe that our affiliated music companies have the relative size, experienced
management teams, ability to respond to changes in industry and consumer trends, and established
music and song libraries necessary to continue to build a successful roster of artists in China.
Network Service Agreements with Telecom Operators
General
China Mobile, China Unicom and China Telecom are the predominant telecom operators in the PRC
following the restructuring of the industry which commenced in 2008. Given their market presence,
our negotiating leverage with these telecom operators is limited, and our business is dependent on
maintaining our relationships with them. See Item 3.D. “Risk Factors — Risks Related to Our
Company— We depend on China Mobile, China Unicom and China Telecom, the three principal
telecommunications network operators in China, for the major portion of our WVAS revenue, and any
loss or deterioration of our relationship with China Mobile, China Unicom and China Telecom, due to
expected government imposed restructurings or otherwise, may result in severe disruptions to our
business operations and the loss of a major portion of our revenue” and “— The termination or
alteration of our various agreements with the telecom operators and their provincial affiliates
would materially and adversely impact our revenue and profitability.” Our affiliated Chinese
entities have entered into network service agreements with the national and certain provincial
offices of the telecom operators to offer our various services through their networks. Each of
these agreements with each mobile operator covers a specific geographic area and/or service type
without overlap. For 2008, we estimated that we derived approximately 57%, 25% and 12% of our total
WVAS revenues from customers through China Mobile, China Unicom, China Telecom, respectively. The
following is a summary of the material features of our contractual relationships with the telecom
operators.
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Fee Arrangements and Other Payment Considerations
Our network service agreements with China Mobile permit China Mobile to deduct a service fee
ranging from 15% to 30%, varying from province to province, from the amounts China Mobile receives
from customers for our services. China Mobile relies solely on its records for calculating the
amounts of these service fees. We also pay China Mobile a network fee to the extent that the number
of SMS messages sent by us over China Mobile’s network exceeds the number of messages our customers
send to us. The network fee is on average RMB0.05 ($0.01) per message. In some provinces, the
amount of network fees may vary according to the volume of the net balance of such incoming and
outgoing messages.
Our network service agreements with China Unicom provide that China Unicom directly bills
customers who use our services and, for collecting these fees and for their network services,
deducts a service fee from the aggregate amounts paid by customers for our services. These service
fees range from 15% to 50% of gross revenue for amounts received by provincial operators of China
Unicom and vary from province to province. If there is a discrepancy between our billing records
and China Unicom’s billing records and the discrepancy is 8% or less of total amounts billable to
our customers, the calculation of service fees is based on China Unicom’s billing records. If the
discrepancy exceeds 8%, the agreements provide that we and China Unicom reconcile our records to
address the discrepancy.
Our network service agreements with China Telecom permit it to deduct a service fee between
20% to 50% of gross revenue, depending on the type of service, from the amounts it receives from
customers for our services.
Obligations with Respect to Our Services
We must obtain the approval of China Mobile, China Unicom or China Telecom for our services
and the pricing of our services before these services can be offered on their network. Our
contracts with these telecom operators vary in the specific obligations they impose, but they
generally require, among other things, that the telecom operators maintain records regarding
transmission and billing matters, collect fees from their customers and remit amounts owed to us
and notify us of any customer complaints unrelated to network problems. In turn, we must provide
prompt customer support, handle any complaints which are unrelated to the operator’s network and
ensure that our content complies with applicable laws and regulations and the policies of the
operators and that we have appropriate licenses. For some contracts, we must satisfy operational or
financial performance criteria which are established by the mobile operator and modified from time
to time.
Term and Termination and Other Material Provisions
The term of our contracts with China Mobile, China Unicom and China Telecom is generally one
or two years. We typically renew these contracts or enter into new ones when the prior contracts
expire, but on occasion, the renewal or new contract can be delayed by periods of one month or
more. The agreements can also be terminated in advance for a variety of reasons which vary among
the individual contracts with the operators, including, for example, when we breach our obligations
under the contract, a high number of customer complaints are made about our services or we cannot
satisfy the operational or financial performance criteria established by the applicable operator.
Generally, our contracts with the telecom operators are silent on the arrangements relating to
payment from the operators in the event such contracts are not renewed. Payment and billing
disputes, if any, will therefore be resolved in accordance with the provision in the contracts that
the parties resolve disagreements through amicable negotiation (where such provision survives the
termination of the respective agreements) or through court proceedings if amicable resolution
cannot be reached.
Music Copyright Agreements with the Telecom Operators and Service Providers
General
Our affiliated music companies have entered into music copyright agreements with the national
and certain provincial offices of certain telecom operators, as well as various domestic service
providers such as Kongzhong and Sina, to authorize the telecom operators and service providers to
distribute music from our artists through their portals, websites or platforms and enable end users
to download the music. The following is a summary of the material features of our contractual
relationships with the national and certain provincial offices of the telecom operators and certain
service providers.
Fee Arrangements
Our music copyright agreements with telecom operators and service providers are usually
copyright purchase and use authorization agreements. Telecom operators and service providers will
pay service fees ranging from 40% to 60% of gross revenue for amounts received by distributing the
music through their network. In some agreements, the amount of service fees may vary according to
the popularity and commercial success of a music product and other various tangible and intangible
factors.
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Term and Termination and Other Material Provisions
The terms of our music copyright agreements with telecom operators and service providers are
generally one or two years. We typically renew these contracts or enter into new ones when the
prior contracts expire, but on occasion, the renewal or new contract can be delayed by periods of
one month or more. The agreements can also be terminated in advance for a variety of reasons which
vary among the individual agreements, including, for example, when certain obligations are breached
under the agreements.
Payment and billing disputes are resolved in accordance with the provision in the agreements
that the parties resolve disagreements through amicable negotiation or through court proceedings if
amicable resolution cannot be reached.
Recording and Artist Agency Agreements with Artists
General
Our affiliated music companies have entered into recording and artist agency agreements with
their recording artists including such popular singers in China as Michael Wong Kong Leong, Kenji
Wu, Jing Han and Xiaolu Li. These agreements generally provide that the artists and our companies
will collaborate to produce and publish a minimum number of albums and that the artists agree to
perform at certain concert, promotional and other public events arranged by our affiliated music
companies. The following is a summary of the material features of our contractual relationships
with artists.
Fee Arrangements
Our recording and artist agency agreements are usually exclusive agreements that require the
artist to refrain from making recordings for third parties or attempt to negotiate performance
arrangements with third parties without the prior consent of our affiliated music companies. We pay
artists royalties of an agreed proportion of gross revenue for amounts received through publishing,
sale and licensing of recorded music in physical and digital formats. We are entitled to charge an
agreed upon commission for our services to the artists. The amount of royalties and commission will
vary according to the popularity of the particular artist and other factors.
Term and Termination and Other Material Provisions
The terms of our recording and artist agency agreements with artists are generally two or
three years. Renewal of these contracts or entering into new ones on favorable terms depends to a
large extent on our relationships with these artists. The agreements can also be terminated in
advance for a variety of reasons, which vary among the individual agreements, including the breach
of material obligations under those agreements.
Our recording and artist agency agreements generally provide that we hold the copyrights on
all recordings. Some agreements include re-recording restrictions preventing the artists from
re-recording tracks previously released by us.
Performance Agreements with Third Parties
General
Our affiliated music companies often enter into performance agreements with concert organizers
and other third parties on behalf of their artists. The following is a summary of the material
features of our contracts related to live musical performances.
Fee Arrangements
Such third parties retain our artists to provide live musical or theatrical performances at
specified concerts in accordance with the terms of these agreements and agree to pay us an agreed
amount as the price of the artists’ performance fee. Usually, payments shall be made before or
immediately following the performance.
Other Material Provisions
Generally, the counterparty to these agreements shall use all means available to prevent the
recording, reproduction or transmission of the performance without the written permission of the
company. In the event that we or our artists fail to satisfy the requirements under any such
contracts, our affiliated music companies are usually obligated to indemnify and hold harmless such
third parties from and against all liability, loss, damages, claims, and expenses arising out of
said breach.
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Product and Content Development
Wireless Value-Added Services
We develop most of our content and applications for WVAS in-house through our approximately
53-member product development team as of April 30, 2009. Our product development team focuses
primarily on developing new services such as WAP services and Java™ games, as well as developing
3G-compatible services.
In addition to in-house developed content, we also acquire rights to certain copyrighted
content such as music, pictures, games, news and other information from a large number of content
providers such as record companies, traditional media companies and original providers of news and
information services. With the exception of music, content from international and domestic content
providers has not contributed a significant portion of our 2G and 2.5G services revenues to date,
and we do not expect it to do so for the foreseeable future. Nonetheless, we will continue to seek
out content relationships with leading international and domestic content providers to further
increase the variety of our services. Under our agreements with these content providers, we pay
them a fixed licensing fee or a percentage of the revenue for our services, which we receive from
the telecom operators after deducting service and network fees. For most of our agreements, the
content providers receive 40% of such net amount, but in a few cases the providers receive between
40% and 50%.
We license music rights from international record companies such as Universal Music and from
domestic record companies such as Taihe Rye and Ocean Butterfly. In addition, some music content
that we use in our services is provided by our affiliated music companies.
Music Production, Concert Promotion and Artist Agency Services
We engage in music production through our affiliated music companies, Freeland Music, Huayi
Brothers Music, New Run, Secular Bird and Seed Music Group. These companies are domestic record
labels in China and, in the case of Seed Music Group, also in Taiwan, with an aggregate of
approximately 176 employees specializing in artist development, music production and music
distribution. Freeland Music, Huayi Brothers Music, New Run, Secular Bird and Seed Music Group
currently have a total of 58 artists under contract.
Our affiliated music companies are pioneers in developing music artists and producing and
distributing their songs in China and across Asia. Together, their portfolio of artists includes
some of the most popular singers in China, such as Kenji Wu from Seed Music Group, Xiangxiang from
Freeland Music, Kun Yang from Huayi Brothers, Nan He Wen Dou from New Run, and Jing Han from
Secular Bird. Many songs produced by our affiliated music companies are top hits in ringtones,
ring-back-tones and digital downloads on mobile phones and the Internet in China and across Asia as
measured by the number of downloads on both China Mobile’s music portal and the music search
platform of Baidu.com, Inc., an online search platform in China. For example, ‘MagiK — Greatest
Hits Plus New Songs’ by Kequn Wu, and ‘Cloud Nine’ (“Yun Duan”) by Yuan Shen, were among the most
popular songs released by our recording artists on those services in 2008.
Many songs and albums produced by our affiliated music companies have also been honored in
various music award ceremonies in Asia. For example, ‘Left Hand’ (“You Shou Bian”) by Liang Guang
was awarded the “Best Debut Album’ in the 2008 Wireless Music Award sponsored by China Mobile.
In addition, Hurray! partnered with the Internet Society of China and successfully launched
the “Passion for Internet” Theme Song at a charity event in January 2008 dedicated to promoting the
popularization of Internet usage in certain economically disadvantaged areas in western China. This
charity event was the first of its kind for the Chinese Internet industry. Our senior management
and artists participated in the charity alongside the senior management of well-known Chinese web
portal companies, such as Tencent, Sina, Sohu and Shanda, generating substantial exposure for our
company and our artists.
Pursuant to certain contractual arrangements, Hurray! Digital Media has the exclusive right to
license and distribute via digital channels, including wireless and Internet-based platforms, all
music content of Freeland Music worldwide and all music content of Huayi Brothers Music, New Run,
Secular Bird and Seed Music Group in China. We have also agreed to allow Freeland Music, Huayi
Brothers Music, New Run, Secular Bird and Seed Music Group to directly distribute their respective
music content via digital channels, in order to maximize the value of our affiliated music
companies’ record labels.
If Hurray! Digital Media licenses the music content of our affiliated music companies to any
other third party, then our affiliated music companies are entitled to receive a license fee from
Hurray! Digital Media, which is equal to the amounts paid by the third party to Hurray! Digital
Media, less any taxes payable on such amount by Hurray! Digital Media and a service fee which
Hurray! Digital Media retains.
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In addition, Freeland Music has entered into an agreement with the affiliates of the Freeland
Group pursuant to which such affiliates have the exclusive right to publish and sell music tapes,
records and CDs of Freeland Music in China. The price paid by the affiliates of the Freeland Group
is determined by Freeland Music, unless the affiliates disagree with such price in which case the
price will be highest retail price for the products obtainable in the market. The Freeland Group
affiliates have the right to determine the prices at which they sell the products to their
customers, but they are required to provide Freeland Music information regarding sales prices,
customer data and other sales related information. Huayi Brothers Music, New Run and Secular Bird
handle the off-line distribution of their music content themselves. In the case of Seed Music
Group, its subsidiary, Seed Music Co., Ltd. (“Seed Music”) handles the off-line distribution of
music content within Taiwan and its other subsidiary, Leguan Seed (Beijing) Culture Consulting Co.,
Ltd. (“Beijing Seed”), arranges for third parties to publish and sell music tapes, records and CDs
of Seed Music Group in China.
Sales and Marketing
Wireless Value-Added Services
We market and promote our WVAS and music-related products online and offline through channels
controlled by the telecom operators in China as well as through non-operator channels such as
direct media advertising, Internet marketing alliances, and handset vendor partnerships. We also
sell and market our services through offline channels such as retail chains, convenience stores,
newsstands, and large consumer goods outlets.
In addition, maintaining and expanding our relationships with China Mobile, China Unicom and
China Telecom is central to our sales and marketing activities. Our management team utilizes its
extensive experience in China to develop close ties with the key personnel of the telecom operators
at the central and provincial levels. As of December 31, 2008, we had 43
sales and marketing professionals strategically located in 25 provinces and municipalities
concentrated in the eastern and southern regions of China to work closely with the telecom
operators at the provincial level, where pricing and important marketing and operational decisions
are made. Our sales and marketing professionals also oversee our sales and marketing activities,
which are conducted separately from the telecom operators. These highly motivated professionals,
whose bonuses are tied to the revenues each member generates and collects, are supervised by eight
regional centers which each have their own sales, marketing, operations and customer service
personnel to provide prompt and responsive service to users and telecom operators.
Online Sales and Marketing
Our online sales and marketing activities include:
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Internet Marketing Alliances.
We create Internet marketing alliances with tens of
thousands of small, niche or vertical websites in China to market, promote and distribute
our WVAS products and content, particularly our music-related products, to Internet and
mobile users. We share a portion of the revenues generated with the operators of these
websites when their users access to our website and subscribe for our services.
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Handset Manufacturers Partnerships
. We partner with major handset manufacturers to
embed our services and service links into mobile handsets, which enables mobile users to
directly access our services without having to go through the service portals operated by
the telecom operators. We work with major global and domestic handset manufacturers such
as Motorola, Sony Ericsson, LG, Legend, TCL and Konka.
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Bundling of Products
. We bundle certain of our products, primarily 2.5G products,
together for a single fixed fee that is lower than what would be payable if the user had
ordered those products separately. We often use bundled products together with a free
trial period to attract new users by giving them a free or low-cost 2.5G experience. We
also use bundled products to attract users that are price sensitive. In addition, bundling
can be an effective way to maintain user interest in our services because they can choose
from a number of services without incurring additional incremental cost and also to expose
users to the wide range of quality services that we offer. Because the content coverage
and product quality of individual products are better than those of the bundled products,
we have not experienced migration of high-use customers from individual services to the
bundled products.
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Cross-selling
. We cross-sell among our various 2G and 2.5G services. Specific
cross-selling activities include placing a tool bar on the first page of all our games.
This enables users to easily try our other games without needing to return to the main
China Unicom WAP portal, as well as promoting our website to potential users as a fun,
easy-to-access place to learn about and request our wireless content and applications. We
also focus on cross-selling to users of our 2G services to migrate them to our
subscription-based, premium 2.5G services.
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Offline Sales and Marketing
We also focus on offline sales and marketing activities, such as:
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Direct Advertising
. We engage in direct advertising in print, radio and TV media to
market and promote our WVAS and music-related products. We believe that direct advertising
is one of the most effective ways to market and promote our services to mobile users.
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Promotional Events.
We maintain important marketing relationships with China Mobile,
China Unicom and China Telecom, including hosting promotional events throughout China
featuring our pop singers or latest releases with the telecom operators. At these events,
we create brand awareness by interacting with consumers to educate them about our mobile
music services. In addition, our promotion of our innovative services, such as our “mobile
novels” which feature various popular PRC titles in electronic format that are delivered
to the mobile phones of subscribers in installments, which service we believe was the
first of its kind in China, has resulted in significant media attention.
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Sales Co-promotion.
We develop integrated sales campaigns with traditional media
companies and multinational corporations.
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Retail Promotion.
We enter into partnerships with retailers of mobile handsets in
certain provinces, whereby the retailers’ sales personnel recommend our services to
customers and, in certain instances, offer free trials to these customers. In certain
cases, we share the revenues generated through such promotions with the retailer.
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Our Music and Artist Agency Business
Record companies in China have traditionally generated revenues from offline CD distribution,
concert tours and corporate sponsorship. Starting in 2005, record companies began to see rapid
growth of a new revenue stream: music rights sales to Internet and WVAS providers for music-related
products such as ringtones, ring-back-tones, and MP3-quality true-tone
downloads or playbacks. In addition to marketing campaigns associated with major album or song
releases, our affiliated music companies, Freeland Music, Huayi Brothers Music, New Run, Secular
Bird and Seed Music Group, focus their sales and marketing activities in the following four areas:
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Online and mobile distribution.
Our affiliated music companies have built dedicated
teams to focus on licensing music rights to Internet and mobile services providers. Such
licensing agreements typically involve an upfront minimum license fee, plus royalties paid
to the record companies by the services provider based on usage. With the recent
significant growth in the distribution of music via the Internet and WVAS and the
increased attention by the Chinese government and business community to intellectual
property protection, we believe that this new sales channel represents the largest growth
potential for our affiliated music companies.
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Concert tours.
We organize concert tours for our artists through our well-known
concert promotion company, Fly Songs, and our other affiliated music companies. This is
not only an effective way to raise the profile of our artists nationwide, but also to
generate revenues from concert ticket sales and corporate sponsorship.
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Corporate sponsorship.
Frequently, the artists of our affiliated music companies
appear in commercial advertising or serve as corporate image ambassadors on behalf of
consumer products and services companies. Our affiliated music companies proactively seek
out such opportunities to promote our artists and generate revenues from such corporate
sponsorship.
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Offline CD distribution.
Upon launching a new album, our affiliated music companies
will distribute the album in CD format through traditional offline channels, which
primarily consists of the tens of thousands of retail stores in China specializing in
audio and video media products. As is customary in the industry, our affiliated music
companies enter into distribution agreements with major offline distributors or retail
chains. Such agreements typically include an upfront minimum license fee, plus royalties
paid to the record companies based on sales. Offline CD distribution channels in China
have been seriously affected, however, by piracy issues, and we believe that only a small
portion of all CD sales in China are from copyrighted sales which generate royalty
payments for the record companies.
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Music and Artist Agency Services.
We endeavor through our music artist agency
business to find, develop and retain recording artists who will achieve long-term
profitable success.
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Customer Service
We work to provide high quality customer service. This is an important factor for maintaining
our relationships with the telecom operators in China as discussed above in “— Network Service
Agreements with Operators.” Our dedicated customer service center in Beijing provides our users
real-time support and employed 19 customer service representatives as of December 31, 2008. We
strive to achieve the fastest response times and highest customer satisfaction levels in the
industry. Our centralized customer service center is supported by our local customer service teams
located in our four regional offices. We also maintain a dedicated billing and collection center,
which works with the various offices of the telecom operators to ensure that we receive the correct
fees for our services provided over their networks.
Infrastructure and Technology
We have developed a reliable, flexible and scalable platform with open and adaptive technology
through which we:
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develop and deliver our 2G, 2.5G and any upcoming 3G services which are (or may in
the future be) provided through networks of China Mobile, China Unicom and China Telecom
and
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maintain our internal billing and transmission records.
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Our platform supports multiple protocols, networks and billing solutions, with high
scalability, load balancing, intelligent session management, and performance measurement. It also
allows us to monitor our services and their delivery to the telecom operators’ networks on a
real-time basis, which allows us to optimize the efficiency of our system and quickly address any
problems. The platform is equipped with an open application interface for rapid connectivity by
third party content providers and access to multiple channels for SMS, IVR, RBT, WAP, MMS, Java™
and Web connectivity.
Our user database, which operates on our proprietary software and is an integral part of our
platform, allows us to store, analyze, retrieve and compare various statistical information and to
identify relevant trends. This database also supports our customer service activities by providing
our service professionals with real-time user data and information regarding service delivery and
billing. In addition, our platform can rapidly schedule, deploy and manage WAP pushes and SMS
pushes to promote our services.
Our website and services are made available primarily through network servers located in the
facilities of China Mobile, China Unicom and China Telecom. Such network servers run on
Unix
™
, Windows
™
, or Linux
™
-based operating systems.
Competition
Wireless Value-Added Services
The market for WVAS in China is highly fragmented with more than 1,000 service providers.
Wireless service providers in China can be principally categorized into four groups. The first
group consists of companies like ours, which focus primarily or entirely on this market and offer a
wide range of 2G, and 2.5G services (and are expected to offer a range of 3G services as 3G
networks are launched in China). These include companies such as Tom Online, KongZhong, and
Linktone. This group of competitors is generally characterized by strong market knowledge and, in
some cases, well developed relationships with the telecom operators on a provincial and national
basis. Companies in this category also tend to focus on entertainment-related services.
The second group consists of the major Internet portal operators in China, including
publicly-listed companies such as Sina, Sohu and Tencent. The Internet portals leverage their
strong brand names and their existing strength in aggregating content, marketing and cross-selling
wireless services to their established Internet user base.
The third group consists of smaller service providers such as Rock Mobile and A8, who like us,
are focused on music-related products.
The fourth group consists of the telecom operators. In 2006, China Mobile began operating its
own music WAP portal and procuring music content direct from music companies. This development has
made China Mobile a competitor for offering music content through WAP services. China Mobile also
began the practice of only including links to its own WVAS offerings on the embedded menus of
mobile handsets with customized software for China Mobile users while excluding links to products
from third party WVAS service providers such as our company. See Item 3.D. “Risk Factors— Risks
Related to Our Company— Risks Related to Our Wireless Value-added Services—Our revenue from WVAS
may be adversely affected by the telecom operators providing their own full portfolio of 2G, 2.5G
and any upcoming 3G services that compete with our services.”
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Our Music and Artist Agency Business
We face significant competition to our music and artist agency business from two groups of
competitors. The first group includes traditional record companies, which are extending downstream
to establish their own WVAS or Internet services companies in China. These companies include
international record companies such as Warner Music, Universal, EMI and Sony BMG and independent
labels based in Hong Kong, Taiwan, and China such as Taihe Rye, Rock Music, Ocean Butterfly, and
Zhushu. In comparison to our affiliated music companies, many of these competitors have longer
operating histories in China and have accumulated larger libraries of songs and pools of popular
artists. They also generally have more experience, expertise, resources and management capacity
than us in the artist development and music production field.
The second group of competitors includes WVAS providers such as Rock Mobile, a subsidiary of
Rock Music, and A8, which have recently focused on music-related products and extended upstream to
establish their own music production businesses in China.
Government Regulation
The following is a summary of the principal governmental laws and regulations that are or may
be applicable to companies such as ours in China. The scope and enforcement of many of the laws and
regulations described below are uncertain. We cannot predict the effect of further developments in
the Chinese legal system, including the promulgation of new laws, changes to existing laws or the
interpretation or enforcement of laws, particularly with regard to 2G and 2.5G services, which is
an emerging industry in China. For a description of the regulatory risks related to our business,
please see Item 3.D. “Risk Factors — Legal Risks Related to Wireless and Internet Services — The
telecommunication laws and regulations in China are evolving and subject to interpretation and will
likely change in the future. If we are found to be in violation of current or future Chinese laws
or regulations, we could be subject to severe penalties;” “— Legal Risks Related to Wireless and
Internet Services — The regulation of Internet website operators is also new and subject to
interpretation in China, and our business could be adversely affected if we are deemed to have
violated applicable laws and regulations;” and “— Risks Related to Our Company — Additional Risks
Related to Our Company — Our corporate structure could be deemed to be in violation of current or
future Chinese laws and regulations, which could adversely affect our ability to operate our
business effectively or at all.”
Regulation of Telecommunication Services
The telecommunications industry, including certain 2G and 2.5G services, is highly regulated
in China. Regulations issued or implemented by the State Council of China, the MIIT and other
relevant government authorities cover many aspects
of telecommunications network operation, including entry into the telecommunications industry,
the scope of permissible business activities, interconnection and transmission line arrangements,
tariff policy and foreign investment.
The principal regulations governing the telecommunication services we provide in China
include:
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Telecommunications Regulations
(2000), or the Telecom Regulations, and the
Administrative Measures for Telecommunications Business Operating License
(2002), or the
Telecom License Measures. The Telecom Regulations categorize all telecommunication
services businesses in China as either infrastructure telecommunication services
businesses or value-added telecommunication services businesses. The latter category
includes WAP, SMS and other 2G and 2.5G services. Under the Telecom Regulations, certain
services, including online data processing and transaction processing, call centers and
Internet access, are classified as being of a value-added nature and require a commercial
mobile operator to obtain an operating license in order to provide such services. The
Telecom Regulations also set forth extensive guidelines with respect to different aspects
of telecommunications operations in China. Under the Telecom License Measures, an approved
value-added telecommunication services provider must conduct its business in accordance
with the specifications recorded on its value-added telecommunication services operating
license. Certain of our affiliates, Hurray! Solutions, Beijing Palmsky, Beijing Network,
Beijing Hengji Weiye, Beijing Hutong, Shanghai Magma, Shanghai Saiyu and Henan Yinshan,
have been granted an inter-provincial value-added telecommunication services operating
license for mobile information services (excluding fixed line information and Internet
information services) by the MIIT that permits it to conduct nation-wide operations. Our
affiliate, WVAS Solutions, has been granted a value-added telecommunication services
operating license issued by the local Beijing Municipal Telecommunications Administration
Bureau. This license may not be sufficient to authorize WVAS Solutions to provide
value-added telecommunication services on a national basis.
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Regulations for the Administration of Foreign-Invested Telecommunications Enterprises
(2008, revised), or the FI Telecom Regulations. The FI Telecom Regulations set forth
detailed requirements with respect to capitalization, investor qualifications and
application procedures in connection with the establishment of a foreign-invested telecom
enterprise. Under the FI Telecom Regulations, a foreign entity is prohibited from owning
more than 50% of the total equity in any value-added telecommunication services business
in China. To comply with these restrictions, we have entered into a series of agreements
with each of our affiliated Chinese entities and their respective shareholders. We hold no
ownership interest in any such affiliated Chinese entities.
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Notice on Intensifying the Administration of Foreign Investment in Value-added
Telecommunications Services
(2006). Under this notice, an operating company holding a
value-added telecommunications license (and not its shareholders) must own all related
Internet domain names and registered trademarks. In addition, such company’s business site
and equipment should comply with its approved licenses, and the company should establish
and audit its internal Internet and information security policies and standards and
emergency management procedures.
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Notice Concerning Short Message Services
(2004), Under this Notice, telecom operators
may only cooperate with licensed information service providers for SMS. This Notice sets
forth requirements for provision of SMS by information service providers with respect to
pricing, content and method of service provision. Certain types of SMS require customer’s
explicit confirmation on acceptance of charges before such services could be billed for.
This Notice also sets forth a high standard for customer services provided by information
service providers and requires the service providers to provide an easy and clear
cancellation mechanism for their customers to cancel subscribed services.
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Notice Concerning the Pricing and Billing of Mobile Information Services
(2006).
Under this notice, the pricing and billing of WVAS must be accurate, clear and fair. In
addition, a wireless value-added service provider cannot charge a customer unless the
customer responds to two customer requests, and it must maintain detailed invoices for
each customer for more than five months. In turn, the telecom operators are required to
first deal with customer complaints, requests for refunds and related matters.
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Notice Concerning the Billing of Telecommunications Services
(2007). Under this
notice, no telecommunication enterprise may activate any service or function directly
connected to their platforms, such as call reminder and voice inbox functions, unless the
customer affirmatively consents to subscribing to them. For any free trial service
subscribed by the mobile phone user, upon expiration of the free trial period, service
providers may not charge the mobile phone user any fee for such service or function until
the user re-confirms that it wishes to continue such service or function. When a customer
calls the customer support line of a service provider, the service provider is prohibited
from charging the customer a fee for such call unless the customer expressly confirms its
consent to such charge regardless of whether automated or live support is provided. If
automated support is provided, the customer is required to be furnished with pricing and
billing information through a free voice notice.
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In addition to regulations promulgated at the national level by the Chinese government,
several provincial governments have issued provisional regulations requiring SMS service providers
to obtain licenses from or register with Telecommunications Administration Bureau at the provincial
level before providing SMS service within the province.
Regulation for Internet Publication.
The State News and Publications Agency of the PRC, or the
SNPA, is the government agency responsible for regulating publishing activities in China. On
June 27, 2002, the MIIT and the SNPA jointly promulgated the
Internet Publication Tentative
Administrative Measures
, or the Internet Publication Measures, which took effect on August 1, 2002.
The Internet Publication Measures require Internet publishers to secure approval from the SNPA to
conduct Internet publication activities. The term “Internet publication” is defined as an act of
online dissemination where Internet information service providers select, edit and process works
created by themselves or others (including content from books, newspapers, periodicals, audio and
video products, electronic publications, and other sources that have already been formally
published or works that have been made public in other media) which they then post on the Internet
or transmit to users via the Internet for browsing, use or downloading by the public. We currently
do not conduct any Internet publication business. The SNPA and the MIIT have not specified whether
the approval required by the Internet Publishing Measures is applicable to the dissemination of
works through SMS, WAP, Java
™
, IVR or other wireless technologies. If, in the future,
the SNPA and the MIIT confirm that the Internet Publishing Measures apply to wireless value-added
telecommunication services operators or issue new regulations or rules regulating publishing
through SMS, WAP, Java
™
, IVR or other wireless technologies, we may need to apply for a
license or permit from relevant governmental agencies in charge of publishing. We cannot assure you
that such application would be approved by the relevant governmental agencies.
Regulation for Internet News Dissemination.
On November 7, 2000, the State Council News Office
and the MIIT promulgated the Internet News Measures, under which websites established by non-news
organizations may only publish news released by certain official news agencies. In order to
disseminate news, such websites must satisfy the relevant requirements and have acquired the
requisite governmental approval. We currently do not conduct any online news dissemination
business. The State Council News Office and the MIIT have not specified whether the Internet News
Measures apply to the dissemination of news through SMS, WAP, Java
™
, IVR or other
wireless technologies. If, in the future, the State Council News Office and the MIIT clarify that
the Internet News Measures apply to wireless value-added telecommunication services operators or
issue regulations or rules regulating wireless news dissemination, we may need to apply for a
license or permit from governmental agencies in charge of news dissemination. We cannot assure you
that such application would be approved by the relevant governmental agencies.
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Regulation for Internet Games and Culture Activities.
On May 10, 2003, the Ministry of Culture
of the PRC, or the MCC, promulgated the
Internet Culture Administration Tentative Measures
, or the
Internet Culture Measures, which came into effect as of July 1, 2003. Pursuant to the Internet
Culture Measures, if an Internet content provider engages in “Internet culture activities,” which
include, among other things, online dissemination of “Internet cultural products” such as gaming
products, the provider is required to obtain a license for Internet Culture Business Operations
from the MCC in accordance with the procedures set forth in the Internet Culture Measures. Hurray!
Solutions and Beijing Hutong were granted such a license in August 2004 and December 2007, which
license permits them to conduct an Internet games business.
Regulation for Internet Audiovisual Program Services
. In December 2007, the State
Administration of Radio, Film, and Television or SARFT and the MIIT jointly issued the
Rules for
the Administration of Internet Audiovisual Program Services
which came into effect as of January
31, 2008. The rules apply to the provision of audiovisual program service via Internet (including
mobile Internet) within the territory of the PRC. Providers of Internet audiovisual program
services are required to obtain an Internet Audiovisual License or complete certain registration
procedures. Providers are generally required to be either state-owned or state-controlled by the
PRC government. However, in a press conference in February 2008, SARFT and the MIIT clarified that
providers who engaged in Internet audiovisual program services prior to the promulgation of the
rules and who have not violated any other laws or regulations shall be eligible to register their
business and continue their operations. We cannot assure you that we will successfully complete
such required registration procedures or be granted a Internet Audiovisual License.
Regulation of Music Production
The music industry, including the traditional record companies and the more recent digital
music providers, is highly regulated in China. Laws and regulations issued or implemented by the
NPC; the State Council of China; the National Copyright Administration of China, or the NCAC; the
MCC, the MIIT; and other relevant government authorities cover many aspects of the industry,
including entry into the market, scope of permissible business activities, tariff policy and
foreign investment.
The principal laws and regulations governing the music business in China include:
Copyrights.
Under the PRC’s Copyright Law (1990), as revised in 2001, and its related
Implementing Regulations (2002), creators of protected works enjoy personal and property rights
with respect to publication, identification, alteration, reproduction, distribution, exhibition,
performance, transmission, broadcasting and related activities. The term of a copyright is life
plus 50 years for individual authors and 50 years for corporations. In consideration of the social
benefits and costs of copyrights, China balances copyright protections with limitations that permit
certain uses, such as for private study, research, personal entertainment and teaching, without
compensation to the author or prior authorization. Section 2, “Performance,” and Section 3,
“Phonogram,” of Chapter IV of the Copyright Law cover major aspects of our business related to both
online and offline music distribution. These provisions grant performers and record production
companies personal and property rights (neighboring rights), including the right to fair
compensation for the use of originals or copies of their works. In addition, authors of lyrics and
music composers have separate and independent rights with respect to any particular song. The term
of the copyright is 50 years after the first performance or authorized publication.
In addition, arrangements for the compulsory collection of license fees and the allocation of
such fees were standardized by two interim provisions in the NCAC’s
Interim Provisions on
Compulsory License of Performance
and Phonogram (1993). In response to the changes posed by digital
media, and in coordination with international treaties and agreements, the NPC took further action
by amending the 1990 Copyright Law to specifically protect the online transmission of music (which
is part of our music business). The newly added “digital” rights and responsibilities include a
notice-and-takedown procedure for Internet service providers and certain anti-circumvention
provisions. In combination, the Copyright Law, the Implementing Regulations, several administrative
regulations and judicial interpretations constitute a relatively comprehensive legal framework for
copyrights in China, although enforcement of such rights remains difficult. The
Regulations on
Protection of Information Network Transmission Right
(July 1, 2006) stipulate that the digital
transmission of copyrightable works by Internet or wireless means, including by making them
available via interactive on-demand or similar services, is subject to the regulations described
above. In addition, the Chinese National Standing Committee voted to enter into the framework of
the World Intellectual Property Organization’s World Copyright Treaty and World Performance and
Phonogram Treaty in 2006.
Certification and Licensing System.
The music industry is administered by specific ministries
or agencies in China. A set of rules and regulations has been established for nearly every aspect
of the traditional music business, from market entry to daily operation. In particular, our
distribution of music through traditional physical channels (e.g., retail stores or chain stores)
requires a license under the
Regulations of the Phonographic Products and the Measures on
Wholesaling, Retailing and Renting of the Phonographic Products
(2002), while distribution through
digital means (e.g., Internet or wireless means) requires official approval or record-keeping of
music and its permissible content transmitted within the PRC by MCC according to the
Opinions on
Regulation and Development of Music Transmitted via Network
(2006). In addition, the
Regulations on
the Commercial Performance and its Implementing Provisions (2004) and Measures on the Professional
Intermediaries
(1998, revised) require professional performers and managers to obtain a license.
The public performance of music also requires a license. These regulations are designed to enable
the government to monitor the production, reproduction and publication of music, as well as the
operations of record companies.
Failure to comply with the foregoing legal requirements could subject our affiliated music
companies to civil, administrative and criminal penalties.
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Regulation of Artist Agency
The artist agency industry is highly regulated in China. Regulations issued or implemented by
the State Council of China, the Ministry of Culture and other relevant government authorities cover
many aspects of artist agency, including entry into the artist agency industry, the scope of
permissible business activities, tariff policy and foreign investment. The
Regulations for the
Administration of Commercial Performances
(2005), as revised in 2008, and its related Implementing
Regulations (2005) are the primary governing law related to our artist agency services. These
regulations set forth detailed requirements with respect to different aspects of commercial
performances including live musical performances. Under the commercial performances regulations,
commercial performances require a performance brokerage company to obtain a commercial performance
license in order to provide intermediary, agency and brokerage for commercial performances. Foreign
companies are prohibited from owning more than 50% of the total equity in such brokerage companies
in China. In the event we host commercial performances, we are required to file an application with
the culture administrative department at the county level of the place where the performances are
hosted. Hurray! Digital Media has been granted a commercial performance license for commercial
performances.
Other Laws and their Application
Regulation of Internet content services.
We do not operate a significant Internet portal
business, which typically requires the provision of extensive Internet content services, including
Chinese language Web navigational and search capabilities, content channels, web-based
communications and community services and a platform for e-commerce, such as auction houses.
For the limited Internet content services we provide, we are prohibited from posting or
displaying any content that:
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opposes the fundamental principles determined in China’s Constitution;
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compromises state security, divulges state secrets, subverts state power or damages
national unity;
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harms the dignity or interests of the state;
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incites ethnic hatred or racial discrimination or damages inter-ethnic unity;
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sabotages China’s religious policy or propagates heretical teachings or feudal
superstitions;
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disseminates rumors, disturbs social order or disrupts social stability;
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propagates obscenity, pornography, gambling, violence, murder or fear or incites the
commission of crimes;
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insults or slanders a third party or infringes upon the lawful rights and interests
of a third party; or
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includes other content prohibited by laws or administrative regulations.
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Failure to comply with these prohibitions may result in the closing of our websites. In
addition, the Supreme Court of China and the Supreme People’s Procuratorate of China have issued
quantitative guidance to the courts in China regarding when criminal penalties should be imposed on
persons who distribute or assist in the distribution of obscene content through the Internet or
wireless services.
Regulation of advertisements.
The State Administration of Industry and Commerce, or the SAIC,
is the government agency responsible for regulating advertising activities in China. One
provisional regulation issued by Shanghai municipal government prohibits service providers from
sending SMS advertisements without the client’s consent.
On January 26, 2005, the SAIC and the MIIT jointly promulgated a Circular Regarding the
Prohibition of Advertisements for Voice Messages, SMS and other Information Services Which Contain
Unhealthy Content, or the SMS Advertising Circular. The SMS Advertising Circular prohibits
advertisement of information services with pornographic, obscene, superstitious and other unhealthy
content, or advertisements that are misleading in pricing and payment terms of information
services. The SMS Advertising Circular further provides that information service providers and
advertising companies involved in the dissemination of advertisements for information services with
pornographic, obscene, superstitious and other unhealthy content, or advertisements that are
misleading in pricing and payment terms of information services will be subject to penalties by
relevant authorities pursuant to PRC advertising regulations, and that information service
providers providing unhealthy contents will be subject to administrative and other measures by
telecommunications authorities, the public security authorities and national security authorities
in accordance with Telecommunications Regulations (2000) and other applicable laws and regulations.
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As part of our non-mobile operator marketing activities, we have developed integrated
marketing campaigns with traditional media companies and multinational corporations through certain
cross-selling efforts with companies. If the SAIC were to treat our integrated marketing campaigns
or other activities as being advertising activities, we would need to apply to the local SAIC for
an advertising license to conduct wireless advertising business (through SMS, for example). We
cannot assure you that such application would be approved by the SAIC. Failure to obtain such
approval could result in penalties including being banned from engaging in online advertising
activities, confiscation of illegal earnings and fines.
Foreign exchange controls.
For information regarding relevant foreign exchange controls,
please refer to Item 10.D. “Exchange Controls.”
Intellectual Property and Proprietary Rights
We rely primarily on intellectual property laws and our contractual arrangements with our
employees, clients, business partners and others to protect our intellectual property rights. We
require our employees to enter into agreements requiring them to keep confidential all information
relating to our customers, methods, business and trade secrets during and after their employment
with us. Our employees are required to acknowledge and recognize that all inventions, trade
secrets, works of authorship, developments and other processes, whether or not patentable or
copyrightable, made by them during their employment are our property. They also sign agreements to
substantiate our sole and exclusive right to those works and to transfer any ownership that they
may claim in those works to us.
While we actively take steps to protect our proprietary rights, such steps may not be adequate
to prevent the infringement or misappropriation of our intellectual property. This is particularly
the case in China where the laws may not protect our proprietary rights as fully as in the United
States. Infringement or misappropriation of our intellectual property could materially harm our
business. We have registered a number of domain names including but not limited to:
Hurraymedia.com; Hurrayagency.com; Hurraymusic.com;Hurraygame.com; Hurraydigital.com
and
Hurraywireless.com
in 2008.
We are in the process of applying for two additional trademarks with China’s Trademark Office
relating to a charity event’s theme song, titled “Passion for Internet” (Ai Xin Hu Lian). China’s
trademark law adopts a “first-to-file” system for obtaining trademark rights. As a result, the
first applicant to file an application for registration of a mark will preempt all other
applicants. Prior use of unregistered marks, except “well known” marks, is generally not a basis
for legal action in China. We may not be able to successfully defend or claim any legal rights in
that trademark for which application has been made but for which the Trademark Office has not
issued a registration certificate.
In 2008, we filed a patent application with the State Intellectual Property Office of China
relating to an offline method by which our customers can directly access our wireless value-added
products. This application is currently under examination and our rights to this patent could be
affected adversely if this application is rejected by the State Intellectual Property Office of
China.
Many parties are actively developing and seeking patent protection for wireless
services-related technologies. We expect these parties to continue to take steps to protect these
technologies, including seeking patent protection. There may be patents issued or pending that are
held by others and that cover significant parts of our technology, business methods or services.
Disputes over rights to these technologies are likely to arise in the future. We cannot be certain
that our products and services do not or will not infringe valid patents, copyrights or other
intellectual property rights held by third parties. We may be subject to legal proceedings and
claims from time to time relating to the intellectual property of others, as discussed in “Risk
Factors — Additional Risks Related to Our Company — We may not be able to adequately protect our
intellectual property, and we may be exposed to infringement claims by third parties.”
Our affiliated companies have retained recording and publishing rights with respect to the
songs in their music libraries. They also own the applicable copyrights with respect to songs
written and produced by their respective in-house artists. In addition, our affiliated music
companies have either retained licenses to use or purchased the applicable copyrights with respect
to songs written and produced by independent artists.
38
C. Organizational Structure
We principally conduct our business in China through our wholly owned subsidiary, Beijing
Hurray! Times. To comply with ownership requirements under Chinese laws, which impose certain
restrictions on foreign companies such as us, from investing in certain industries such as
value-added telecommunication and Internet services, we have entered into a series of agreements
with nine affiliated Chinese entities and their respective shareholders. In June 2008, we completed
the dissolution of our former affiliated Chinese entity, Beijing Cool Young Information Technology
Co., Ltd., which had no significant business prior to its dissolution. We hold no ownership
interest in any such affiliated Chinese entities, which are discussed below:
|
|
1.
|
|
Hurray! Solutions is 85% and 15% owned by our chairman, Qindai Wang, and one of our
directors and our chief executive officer, Songzuo Xiang, respectively.
|
|
|
2.
|
|
Beijing Network is 50% owned by each of Li Xun and Hongmei Peng, two individuals in
China.
|
|
|
3.
|
|
WVAS Solutions is 99% owned by Beijing Network, with the remaining 1% equally owned
by Hao Sun and Xiaoping Wang.
|
|
|
|
|
4.
|
|
Beijing Palmsky is 50% and 50% owned by two individuals in China, Hong Liu and Haoyu Yang.
|
|
|
|
|
5.
|
|
Beijing Hutong is 50% and 50% owned by two individuals in China, Wenqian Xu and Yi Cai.
|
|
|
|
|
6.
|
|
Shanghai Magma is 50% and 50% owned by two individuals in China, Yi Zhang and Aiqin Shang.
|
|
|
|
|
7.
|
|
Hengji Weiye is 50% and 50% owned by two individuals in China, Hong Pan and Xiaoqing Guo.
|
|
|
8.
|
|
Shanghai Saiyu is 50% and 50% owned by two individuals in China, Liang Ruan and Yuqi
Shi.
|
|
|
9.
|
|
Henan Yinshan is 50% and 50% owned by two individuals in China, Hua Wei and Yidan
Jiang.
|
Through our agreements with these Chinese affiliates, we have the power to vote all shares of
all the shareholders of those companies on their matters, through the general manager of Beijing
Hurray! Times, as well as the right to enjoy the economic benefits of those companies and the
exclusive right to purchase equity interests from the shareholders of those companies to the extent
permitted by Chinese laws.
In addition, Hurray! Digital Media is 50% owned by Hurray! Solutions, 25% owned by Beijing
Network, and 25% owned by Beijing Hutong. In turn, Hurray! Digital Media holds a 51% equity
interest in Huayi Brothers Music, a 60% equity interest in Freeland Music, a 30% equity interest in
New Run, a 65% equity interest in Secular Bird and Freeland Music owns a 51% equity interest in Fly
Songs.
We conduct our business in the overseas Chinese language music market through our wholly owned
subsidiary, Hurray! Media. Hurray! Media holds a 61.08% equity interest in Seed Music Group, which
operates its business through its four subsidiaries of Seed Music Co., Ltd. (“Seed Music”), Profita
Publishing Limited (“Profita Publishing”), Dongyi Music Limited (“Dongyi Music”), each of which is
incorporated in Taiwan, and Beijing Seed, which is incorporated in China. Seed Music and Profita
Publishing are wholly owned by Seed Music Group. Seed Music wholly owns each of Dongyi Music and
Beijing Seed.
Under Financial Accounting Standards Board (“FASB”) Interpretation No. 46 (revised), or FIN
46(R), we are the primary beneficiary of the economic benefits of our variable interest entities
and their subsidiaries, Hurray! Solutions, WVAS Solutions, Beijing Palmsky, Beijing Network,
Beijing Hutong, Hengji Weiye, Shanghai Magma, Hurray! Digital Media, Shanghai Saiyu, Henan Yinshan,
Huayi Brothers Music, Freeland Music, Secular Bird, New Run and Fly Songs. Accordingly, these
entities are consolidated into our financial statements or, in the case of New Run, accounted for
as an equity method investment from and after the date we became the primary beneficiary of each
such entity. Transactions among the consolidated entities and our company and subsidiaries are
eliminated in consolidation.
39
The following diagram illustrates our corporate structure showing our principal subsidiaries
and variable interest entities as of May 1, 2009.
40
D. Property, Plant and Equipment
Our company and certain of our non-music affiliates currently lease an approximate total of
3,389 square meters of office space in Beijing through various lease agreements. The aggregate
monthly rent of such lease agreements was approximately $111,879 beginning in October 2008. We also
have branches and representative offices in Beijing, Shandong, Heilongjiang, Guangdong, Zhejiang,
Liaoning, Chongqing, Shanghai, Henan and Sichuan.
Freeland Music, Huayi Brothers Music and New Run lease an approximate total of 1,610 square
meters of office space in Beijing. Secular Bird leases an approximate total of 140 square meters of
office space in Guangzhou. Seed Music Group and its subsidiaries lease approximately 100 square
meters in Taiwan and also occupy approximately 509 square meters in Beijing.
Item 4A. Unresolved Staff Comments
Not Applicable.
Item 5. Operating and Financial Review and Prospects
The following discussion of our financial condition and results of operations is based upon
and should be read in conjunction with our consolidated financial statements and their related
notes included in this annual report on Form 20-F. This report contains forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934, including, without limitation, statements regarding our expectations,
beliefs, intentions or future strategies that are signified by the words “expect,” “anticipate,”
“intend,” “believe,” or similar language. All forward-looking statements included in this annual
report are based on information available to us on the date hereof, and we assume no obligation to
update any such forward-looking statements. Actual results could differ materially from those
projected in the forward-looking statements. In evaluating our business, you should carefully
consider the information provided under the caption “Risk Factors” in this annual report on Form
20-F. We caution you that our businesses and financial performance are subject to substantial risks
and uncertainties.
A. OPERATING RESULTS
Overview
We are a leading online distributor of music and music-related products such as ringtones,
ring-back-tones, and true-tones to mobile users in China through the full range of WVAS platforms
over mobile networks and through the Internet.
We also provide a wide range of other WVAS to mobile users in China, including games, pictures
and animation, community, and other media and entertainment services. Our services are offered
through the various service platforms available on the 2G and 2.5G networks operated by the mobile
telecommunication network operators in China, principally China Mobile, China Unicom and
increasingly, China Telecom. Many of our services are also available to users in China through our
website. We are also a leader in artist development, music production and offline distribution in
China through our affiliated music companies, Huayi Brothers Music, Freeland Music, New Run,
Secular Bird and our recent acquisition, Seed Music Group, which also operates in Taiwan.
Our 2G services revenues are derived from our SMS, IVR services and RBT services. Our 2.5G
services revenues are derived to a substantial extent from WAP services, the predominant 2.5G
service available in China, and to a lesser extent from Java™ games and MMS. Users pay for our
services by monthly subscription and/or on a per-use basis. We receive payments for these services
principally in the form of payments from the telecom operators after the users have paid for our
services and the operators have deducted their service and network fees.
We recorded net losses of $12.0 million for 2008 and $42.0 million for 2007 and net income of
$5.8 million for 2006. For 2008, we generated $54.0 million in total revenues, compared to $60.5
million and $68.7 million for 2007 and 2006, respectively, representing a decline of 10.9 % and
21.5% respectively. For 2008, WVAS revenue and recorded music accounted for 79.1% and 20.9% of our
revenues, respectively, compared to 82.7% and 17.3% in 2007 and 91.0% and 9.0% in 2006. The 2008
decrease in revenue from WVAS was offset in part by an increase in recorded music revenues.
We had accumulated deficits of $10.0 million and $2.8 million as of December 31, 2008 and
2007, respectively, and retained earnings of $40.0 million as of December 31, 2006.
Although our net loss was $12.0 million in 2008, which included a foreign exchange loss of
$9.0 million and an impairment charge of $7.5 million for goodwill, intangible assets and
investment in a music affiliate, we had cash of
approximately $59.5 million as of December 31, 2008, and accordingly, our consolidated
financial statements have been prepared on a going concern basis.
41
Factors Affecting Results of Operations and Financial Condition
The major factors affecting our results of operations and financial condition include:
|
|
•
|
|
Growth of the WVAS Market in China and Changes in Mobile Operator Policies
. Our
financial results have been, and we expect them to continue to be, largely dependent on
growth in the WVAS market in China. Historically, 2G services, such as SMS, have
represented the predominant portion of the WVAS market in China and of our revenues. We
commercially launched 2.5G services in September 2002 and began billing users for these
services at the beginning of 2003. Since the launch of these 2G and 2.5G services, we
initially experienced significant growth in revenues from these services, followed by a
significant decline in revenues for these services over the past three years. The
important factors causing this decline have been the changes in the telecom operator
policies or the manner in which they are enforced in 2008. Such policy changes and their
manner of enforcement have been frequent and unpredictable for the past three years and
have caused our revenues to be volatile. See Item 3. “Risk Factors — Risks Related to Our
Company— Unilateral changes in the policies of the MII, China Mobile and China Unicom and
in their enforcement of their policies have resulted in service suspensions and our having
to pay additional charges to the telecom operators, and further changes could materially
and adversely impact our revenue and profitability in the future.” Although we have been
adversely affected by recent changes in telecom operator policies and the delay in the
expansion of 2.5G networks by the telecom operators in 2008 and in the launch of 3G
networks in China, we continue to believe that our financial success in the near-term will
depend on the growth of the market for our 2G and 2.5G services, especially services
utilizing music content, where we have a leading position and, in the longer-term, on our
ability to offer popular services on any new wireless technologies that are introduced in
China such as 3G.
|
|
|
•
|
|
Positioning of Our Services on the WAP Portals of the Telecom Operators.
A key
component of our revenue growth is our ability to not only maintain access to China
Unicom’s and China Mobile’s networks and now to China Telecom’s networks following that
company’s acquisition of one of China Unicom’s networks, but also our ability to secure
prominent positioning for our services at the top of the menu of services for each major
service category on the telecom operators’ WAP portals so that users see our services
first when opening the service menus. However, Beijing Network, one of our affiliated
operating companies providing WAP services through China Mobile, was issued a sanction by
China Mobile in effect in January 2006 for improper promotion of one of its WAP services.
As part of the sanction, China Mobile downgraded all of Beijing Network’s WAP services to
the bottom of the menu and temporarily suspended the approval of new service applications
on all platforms by Beijing Network and joint promotions with Beijing Network. Our WAP
revenue was adversely affected during this period.
|
|
|
•
|
|
Network Service Agreements with the Telecom Operators.
Our results of operations are
dependent on the terms of network service agreements with the telecom operators and the
manner in which the telecom operators implement these agreements. Each of these agreements
is non-exclusive, and has a limited term, generally one or two years. Renewal of them on
favorable terms depends on our relationship with these telecom operators at both the
national and provincial level, the popularity of our services and our ability to maintain
adequate levels of performance. Any mobile operator could alter any of these terms or
terminate the contracts for a variety of reasons in the future, including, for example, to
increase their own service or network fees in order to enhance their profitability at the
expense of service providers.
|
|
|
•
|
|
Billing and Transmission Failures
. We do not recognize any revenues for services that
are characterized as billing and transmission failures. We can not collect fees when these
failures occur for our 2G services from telecom operators, which arise in a number of
circumstances, including when the delivery of our services to a customer is prevented
because the customer’s phone is off, the customer’s prepaid phone card has run out of
value or a mobile operator experiences technical problems with its network. These
situations are known in the industry as billing and transmission failures. The level of
billing and transmission failures significantly affects revenues we record. The failure
rate for 2G services has fluctuated significantly in the past, including in recent
quarters, due in part to the recent restructuring of the telecom operators. The failure
rate ranged on a monthly basis from 0.0% to 19.1% of the total billable messages which are
reflected in our internal records during 2008. Although we do not experience the same type
of billing and transmission errors for our 2.5G services as we do for our 2G services, we
do experience a discrepancy between the revenues recorded by our internal system and the
revenues that we receive from the telecom operators. This difference for 2.5G services
ranged from 0.4% to 27.5% per month in 2008 and related to services that were provided but
for a variety of reasons were not billed to the user due to the manner in which the
telecom operators register new users or manage their internal billing reconciliation
process, an issue that the 2008 telecom operator restructuring exacerbated.
|
42
|
|
•
|
|
Acquisitions and Strategic Investments.
Selective acquisitions and strategic
investments, such as the ones described in Item 4.A. “History and Development of the
Company” above, form part of our strategy to further expand our business. These
acquisitions and investments may not produce the results that our management and board of
directors anticipate, and may subject our company to unforeseen liabilities. In
particular, our future revenue growth will depend on our ability to successfully operate
our music development, production and distribution business, with which we have relatively
limited experience.
|
|
|
•
|
|
Developing Artists, Sustaining a Pipeline of New Song Releases and Keeping up with
Consumer Music Tastes.
Through our acquisition of controlling and minority stakes in Huayi
Brothers Music, Freeland Music, New Run and Secular Bird, and Seed Music Group, we have
entered the business of artist development and music production. Artist development and
music production is inherently a “hit” driven business, and its success depends to a large
extent on our ability to maintain a large portfolio of talented singing artists and build
a strong pipeline of new song releases. Further, the success of such new releases depends
upon their acceptance by consumers with various and changing tastes. If our affiliated
music companies fail to expand their portfolio of talented singing artists, sustain a
pipeline of new releases, or keep abreast of changes in consumer music tastes, our
business and financial condition may be adversely affected with respect to the financial
performance of our affiliated music companies.
|
Revenues
We derive our revenues from our primary operating segments: WVAS and recorded music. Our
revenues represent our total revenues from operations, net of certain business and value-added
taxes. Our revenues from WVAS and recorded music are subject to a 3.0% and 5.0% business tax,
respectively.
The following table sets forth certain historical consolidated revenues, by amount and as a
percentage of our total revenues, for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
Percentage
|
|
|
|
|
|
|
Percentage
|
|
|
|
|
|
|
Percentage
|
|
|
|
|
Amount
|
|
|
of revenues
|
|
|
Amount
|
|
|
of revenues
|
|
|
Amount
|
|
|
of revenues
|
|
|
|
|
(in thousands of U.S. dollars, except percentages)
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wireless value-added services
|
|
$
|
42,672
|
|
|
|
79.1
|
%
|
|
$
|
50,038
|
|
|
|
82.7
|
%
|
|
$
|
62,512
|
|
|
|
91
|
%
|
|
Recorded music
|
|
|
11,287
|
|
|
|
20.9
|
%
|
|
|
10,489
|
|
|
|
17.3
|
%
|
|
|
6,203
|
|
|
|
9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
53,959
|
|
|
|
100.0
|
%
|
|
$
|
60,527
|
|
|
|
100.0
|
%
|
|
$
|
68,715
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
43
The following tables show our WVAS revenues for 2008, 2007 and 2006 by product and mobile
operator (including Personal Handy-phone System, or PHS, operators).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31, 2008
|
|
|
|
|
China
|
|
|
China
|
|
|
China
|
|
|
China
|
|
|
|
|
|
|
|
|
|
|
Mobile
|
|
|
Unicom
|
|
|
Telecom
|
|
|
Netcom
|
|
|
Others
|
|
|
Total
|
|
|
|
|
(in millions of U.S. dollars)
|
|
|
SMS
|
|
$
|
9.5
|
|
|
$
|
2.4
|
|
|
$
|
0.4
|
|
|
$
|
0.1
|
|
|
$
|
0.9
|
|
|
$
|
13.3
|
|
|
IVR
|
|
|
7.2
|
|
|
|
1.3
|
|
|
|
3.2
|
|
|
|
0.2
|
|
|
|
0.3
|
|
|
|
12.2
|
|
|
RBT
|
|
|
2.6
|
|
|
|
1.9
|
|
|
|
0.5
|
|
|
|
—
|
|
|
|
—
|
|
|
|
5.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2G Revenues
|
|
|
19.3
|
|
|
|
5.6
|
|
|
|
4.1
|
|
|
|
0.3
|
|
|
|
1.2
|
|
|
|
30.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
WAP
|
|
|
2.1
|
|
|
|
4.7
|
|
|
|
0.6
|
|
|
|
—
|
|
|
|
—
|
|
|
|
7.4
|
|
|
MMS
|
|
|
0.8
|
|
|
|
0.5
|
|
|
|
0.1
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1.4
|
|
|
Java
|
|
|
2.2
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
0.1
|
|
|
|
2.3
|
|
|
WEB
|
|
|
—
|
|
|
|
—
|
|
|
|
0.2
|
|
|
|
—
|
|
|
|
—
|
|
|
|
0.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2.5G revenues
|
|
|
5.1
|
|
|
|
5.2
|
|
|
|
0.9
|
|
|
|
—
|
|
|
|
0.1
|
|
|
|
11.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other revenues
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
0.9
|
|
|
|
0.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
24.4
|
|
|
$
|
10.8
|
|
|
$
|
5.0
|
|
|
$
|
0.3
|
|
|
$
|
2.2
|
|
|
$
|
42.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31, 2007
|
|
|
|
|
China
|
|
|
China
|
|
|
China
|
|
|
China
|
|
|
|
|
|
|
|
|
|
|
Mobile
|
|
|
Unicom
|
|
|
Telecom
|
|
|
Netcom
|
|
|
Others
|
|
|
Total
|
|
|
|
|
(in millions of U.S. dollars)
|
|
|
SMS
|
|
$
|
7.0
|
|
|
$
|
2.5
|
|
|
$
|
0.2
|
|
|
$
|
0.3
|
|
|
$
|
1.0
|
|
|
$
|
11.0
|
|
|
IVR
|
|
|
13.3
|
|
|
|
1.2
|
|
|
|
2.4
|
|
|
|
0.3
|
|
|
|
—
|
|
|
|
17.2
|
|
|
RBT
|
|
|
1.6
|
|
|
|
1.7
|
|
|
|
0.4
|
|
|
|
—
|
|
|
|
—
|
|
|
|
3.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2G Revenues
|
|
|
21.9
|
|
|
|
5.4
|
|
|
|
3.0
|
|
|
|
0.6
|
|
|
|
1.0
|
|
|
|
31.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
WAP
|
|
|
5.9
|
|
|
|
6.7
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
12.6
|
|
|
MMS
|
|
|
0.7
|
|
|
|
0.7
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1.4
|
|
|
Java
|
|
|
1.4
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1.4
|
|
|
WEB
|
|
|
—
|
|
|
|
—
|
|
|
|
2.0
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2.5G revenues
|
|
|
8.0
|
|
|
|
7.4
|
|
|
|
2.0
|
|
|
|
—
|
|
|
|
—
|
|
|
|
17.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other revenues
|
|
|
0.1
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
0.6
|
|
|
|
0.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
30.0
|
|
|
$
|
12.8
|
|
|
$
|
5.0
|
|
|
$
|
0.6
|
|
|
$
|
1.6
|
|
|
$
|
50.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31, 2006
|
|
|
|
|
China
|
|
|
China
|
|
|
China
|
|
|
China
|
|
|
|
|
|
|
|
Mobile
|
|
|
Unicom
|
|
|
Telecom
|
|
|
Netcom
|
|
|
Total
|
|
|
|
|
(in millions of U.S. dollars)
|
|
|
SMS
|
|
$
|
11.3
|
|
|
$
|
5.7
|
|
|
$
|
—
|
|
|
$
|
0.1
|
|
|
$
|
17.1
|
|
|
IVR
|
|
|
5.2
|
|
|
|
2.5
|
|
|
|
2.5
|
|
|
|
0.6
|
|
|
|
10.8
|
|
|
RBT
|
|
|
2.0
|
|
|
|
1.3
|
|
|
|
0.1
|
|
|
|
—
|
|
|
|
3.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2G Revenues
|
|
|
18.5
|
|
|
|
9.5
|
|
|
|
2.6
|
|
|
|
0.7
|
|
|
|
31.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
WAP
|
|
|
10.4
|
|
|
|
11.1
|
|
|
|
—
|
|
|
|
—
|
|
|
|
21.5
|
|
|
MMS
|
|
|
3.5
|
|
|
|
0.5
|
|
|
|
—
|
|
|
|
—
|
|
|
|
4.0
|
|
|
Java™
|
|
|
4.4
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
4.4
|
|
|
WEB
|
|
|
—
|
|
|
|
—
|
|
|
|
1.3
|
|
|
|
—
|
|
|
|
1.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2.5G revenues
|
|
|
18.3
|
|
|
|
11.6
|
|
|
|
1.3
|
|
|
|
—
|
|
|
|
31.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
36.8
|
|
|
$
|
21.1
|
|
|
$
|
3.9
|
|
|
$
|
0.7
|
|
|
$
|
62.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
44
Wireless Value-added Services
. Our 2G and 2.5G services revenues are derived from services
that we provide to our users primarily through the networks of China Unicom, China Mobile, China
Telecom and China Netcom (prior to its merger with China Unicom). 2G SMS and 2.5G WAP services have
historically been our primary source of revenues. Our sales in 2008 of 2G SMS increased by 20.9%
while IVR decreased by 29.1% as compared with 2007 primarily due to a decrease in promotion
activities. Sales in 2008 of 2.5G WAP and MMS decreased as compared to 2007 due in part to the
impact during the year of marketing restrictions on our WVAS activities following the Sichuan
earthquake in May and the restructuring of China Unicom in 2008.
Recorded Music
. Our recorded music revenues are derived from artist development, music
production, offline music distribution, and online music distribution through WVAS and the
Internet, which accounted for approximately 20.9% of our total revenues in 2008.
Cost of Revenues
The following table sets forth certain historical consolidated cost of revenues data by amount
for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
(in thousands of U.S. dollars)
|
|
|
Cost of Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wireless value-added services
|
|
$
|
32,840
|
|
|
$
|
36,394
|
|
|
$
|
40,672
|
|
|
Recorded music
|
|
|
6,730
|
|
|
|
6,233
|
|
|
|
3,553
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenues
|
|
$
|
39,570
|
|
|
$
|
42,627
|
|
|
$
|
44,225
|
|
|
|
|
|
|
|
|
|
|
|
|
Wireless value-added services.
The principal cost of revenues for our WVAS is the service and
network fees paid to the telecom operators under our network service agreements with them. The cost
of revenues also includes fees paid to our content providers and marketing partners, maintenance
costs related to equipment used to provide the services, bandwidth leasing charges and data center
services, alternative channels, media and related Internet costs, operator imposed penalty charges,
and certain distribution costs.
Recorded Music
. Cost of revenues for our recorded music includes producing CD masters, artist
and songwriter royalties, advertising and royalties payable to other parties for the use of their
work.
Gross Profit Margin
The following table sets forth the historical consolidated gross profits and gross profit
margin of our business activities for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
(in thousands of U.S. dollars, except percentages)
|
|
|
Gross Profits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wireless value-added services
|
|
$
|
9,832
|
|
|
$
|
13,644
|
|
|
$
|
21,840
|
|
|
Recorded music
|
|
|
4,557
|
|
|
|
4,256
|
|
|
|
2,650
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gross profits
|
|
$
|
14,389
|
|
|
$
|
17,900
|
|
|
$
|
24,490
|
|
|
|
|
|
|
|
|
|
|
|
|
45
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Gross Profit Margin:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wireless value-added services
|
|
|
23.0
|
%
|
|
|
27.3
|
%
|
|
|
34.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Recorded music
|
|
|
40.4
|
|
|
|
40.6
|
|
|
|
42.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gross profit margin
|
|
|
26.7
|
%
|
|
|
29.6
|
%
|
|
|
35.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
The gross profit margins for our WVAS declined in 2008 compared to 2007 due to sharply
decreased revenues as a result of sales declines in our WAP services caused in part by the
restructuring of China Unicom and the higher costs associated with developing new distribution
channels. The gross profit margins for our recorded music remained relatively stable from 2006 to
2008, with slight decreases in 2007 and 2008 as a result of the national focus on the 2008 Beijing
Olympic Games which reduced music promotions and events.
Operating Expenses
The following table sets forth certain historical consolidated operating expenses data, in
terms of amount and as a percentage of our total revenues, for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
Percentage
|
|
|
|
|
|
|
Percentage
|
|
|
|
|
|
|
Percentage
|
|
|
|
|
Amount
|
|
|
of revenues
|
|
|
Amount
|
|
|
of revenues
|
|
|
Amount
|
|
|
of revenues
|
|
|
|
|
(in thousands of U.S. dollars, except percentages)
|
|
|
Operating Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product development expenses
(including stock-based compensation
expense of $40, $1 and $80 for the
years ended December 31, 2008, 2007
and 2006, respectively)
|
|
$
|
992
|
|
|
|
1.8
|
%
|
|
$
|
2,028
|
|
|
|
3.4
|
%
|
|
$
|
2,169
|
|
|
|
3.2
|
%
|
|
Selling and marketing expenses
(including stock-based compensation
expense of $621, $287 and $346 for
the years ended December 31, 2008,
2007 and 2006, respectively)
|
|
|
9,132
|
|
|
|
16.9
|
|
|
|
11,514
|
|
|
|
19.0
|
|
|
|
11,014
|
|
|
|
16.0
|
|
|
General and administrative expenses
(including stock-based compensation
expense of $284, $155 and $118 for
the years ended December 31, 2008,
2007 and 2006, respectively)
|
|
|
11,984
|
|
|
|
22.2
|
|
|
|
9,141
|
|
|
|
15.1
|
|
|
|
6,699
|
|
|
|
9.7
|
|
|
Provision for goodwill impairment
|
|
|
2,675
|
|
|
|
5.0
|
|
|
|
38,779
|
|
|
|
64.1
|
|
|
|
—
|
|
|
|
—
|
|
|
Gain on reduction of Unicom liability
|
|
|
(1,557
|
)
|
|
|
(2.9
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Gain from reversed litigation expenses
|
|
|
(557
|
)
|
|
|
(1.0
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
$
|
22,669
|
|
|
|
42.0
|
%
|
|
$
|
61,462
|
|
|
|
101.6
|
%
|
|
$
|
19,882
|
|
|
|
28.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product Development Expenses
. Product development expenses primarily consist of research and
development staff costs related to our WVAS business. Most of our product development expenses
relate to enhancing our portfolio of 2G and 2.5G services. Product development expenses also
include depreciation and amortization of computers and software related to the activities of our
product development teams. We depreciate our computer equipment, software and other assets on a
straight-line basis over their estimated useful lives, which are three to five years.
Selling and Marketing Expenses
. Selling and marketing expenses primarily consist of staff
costs related to managing the development of our service offerings. These expenses also include
advertising, sales and marketing expenses, such as expenses associated with sponsoring promotional
events, salaries and benefits for our direct sales force, free trial services we offer through, for
example, certain retailers of mobile phones in China.
46
General and Administrative Expenses
. General and administrative expenses primarily consist of
stock-based compensation and benefits for our management, salaries for our finance and
administrative personnel, professional service fees, lease expenses, other office expenses,
expenses related to depreciation of equipment for general corporate purposes and expenses related
to amortization of intangible assets from our acquisitions and any impairment write-downs of such
assets.
We lease bandwidth from telecom operators’ provincial offices. Bandwidth and server custody
fees, office rentals and depreciation charges allocated to our general management, finance and
administrative personnel are also included in general and administrative expenses.
We depreciate leasehold improvements, which are recorded as general and administrative
expenses on a straight-line basis over the relevant lease term.
Stock-based Compensation.
We grant equity incentive awards to our employees and certain
non-employees. Until February 2006, when we commenced granting non-vested shares, all of our equity
incentive grants were in the form of stock options. Effective January 1, 2006, we adopted the fair
value recognition provisions of SFAS 123(R) using the modified prospective transition method. Under
this method, stock-based compensation expense recognized beginning January 1, 2006 includes:
(a) compensation expense for all stock-based compensation awards granted prior to, but not yet
vested as of January 1, 2006 based on the fair market value as of the grant date, measured in
accordance with SFAS 123, “Accounting for Stock-based Compensation,” and (b) compensation expense
for all stock-based compensation awards granted on or subsequent to January 1, 2006, based on grant
date fair value estimated in accordance with the provisions of SFAS 123(R). In March 2005, the SEC
issued Staff Accounting Bulletin No. 107 (“SAB 107”) regarding the SEC’s interpretation of
SFAS 123(R) and the valuation of stock-based payments for public companies. We have applied SAB 107
in our adoption of SFAS 123(R). We recognize stock-based compensation costs on a straight-line
basis over the requisite service period of the award, which is generally the vesting period of the
award.
On February 7, 2006, Hurray! granted awards of 330,000 ADSs, equal to 33,000,000 ordinary
shares that vest over a period of time (which we refer to herein as “non-vested shares” ) to
certain employees pursuant to its 2004 Share Incentive Plan (the “2004 Plan”). This resulted in
stock-based compensation expense of $1.6 million to be recognized over the applicable vesting
period. These non-vested shares vest on an annual basis equally over three years.
On June 20, 2006, Hurray! granted 75,000 ADSs, equal to 7,500,000 non-vested shares to certain
employees which resulted in stock-based compensation expense of $0.3 million to be recognized over
the applicable vesting period. These non-vested shares vest on an annual basis equally over 34
months.
On March 14, 2007, Hurray! granted 20,000,000 non-vested shares to its employees which
resulted in stock-based compensation expense of $0.6 million to be recognized over the applicable
vesting period. These non-vested shares vest over three years on an annual basis equally.
On November 23, 2007, Hurray! granted 19,500,000 non-vested shares to its employees which
resulted in stock-based compensation expense of $0.4 million to be recognized over the applicable
vesting period. These non-vested shares vest over three years on an annual basis equally.
The stock-based compensation expense was $ 0.9 million, 0.4 million, $0.5 million in 2008,
2007 and 2006, respectively.
Provision for Impairment of Goodwill and Intangible Assets.
During the third quarter of 2008,
we performed impairment testing for our recorded music business due to ongoing challenging business
conditions and a reduction in the number of concerts and other music events caused by the national
focus on the 2008 Olympic Games in Beijing, coupled with the decline in the market price of the
Company’s ADSs. At December 31, 2008, we again performed impairment testing. In aggregate, we
recorded impairment charges for goodwill of $2.7 million and write-downs of intangible assets of
$2.9 million for 2008. The valuation of the reporting units was arrived at using an income approach
(discounted cash flows) and corroborated by a market value approach (with comparisons to selected
publicly traded companies operating in the same industry).
In the second quarter of 2007, the telecom operators introduced various new policies that
adversely impacted our WVAS business and introduced further uncertainties in our operating
environment. By September 30, 2007, our market capitalization was lower than our net book value,
thus indicating impairment of our long-lived assets. As of that date, we tested the carrying value
of goodwill and acquired intangible assets and recorded a goodwill impairment charge of $9.6
million and an impairment charge to acquired intangibles of $0.6 million. In view of the further
decline of Hurray’s market capitalization as of December 31, 2007 and continued difficult operating
conditions, we recorded an additional goodwill impairment charge of $29.2 million and an additional
impairment charge to acquired intangible assets of $1.9 million. The impairment charges of acquired
intangibles are included in operating expenses according to their nature.
47
Any continued adverse changes in the telecom operators’ policies or in the competitive
environment could lead to additional impairment charges.
The valuations of the reporting units were arrived at using an income approach (discounted
cash flows) and corroborated by a market value approach (with comparisons to selected publicly
traded companies operating in the same industry).
Gain on Reduction of Unicom Liability.
In the second quarter of 2008, the Company benefited
from a waiver of $1.56 million in alliance membership fees we had accrued under a 2005 agreement
with China Unicom in respect of promotional and marketing activities, which China Unicom
terminated.
Gain from Reversed Litigation Expenses.
In the fourth quarter of 2008, we reversed expenses
amounting to $0.6 million for prior years’ litigation due to the expiration of a petition period
for certain pending litigation.
Critical Accounting Policies
The methods, estimates and judgments we use in applying our accounting policies have a
significant impact on the results we report in our financial statements. Some of our accounting
policies require us to make difficult and subjective judgments, often as a result of the need to
make estimates of matters that are inherently uncertain. We have summarized our accounting policies
below that we believe are both important to an understanding of our financial results and involve
the need to make estimates about the effect of matters that are inherently uncertain. We also have
other policies that we consider to be key accounting policies. However, these policies do not meet
the definition of critical accounting policies because they do not generally require us to make
estimates or judgments that are difficult or subjective.
Revenue Recognition
Wireless value-added services.
We contract with the telecom operators for the transmission of
wireless services as well as for billing and collection services. The telecom operators provide us
with a monthly statement that represents the principal evidence that service has been delivered and
triggers revenue recognition for a substantial portion of our revenue. In certain instances, when a
statement is not received within a reasonable period of time, we make an estimate of the revenues
and cost of services earned during the period covered by the statement based on its internally
generated information, historical experience and/or other assumptions that are believed to be
reasonable under the circumstances.
WVAS revenues are derived from providing personalized media, games, entertainment and
communication services to mobile phone customers of the various subsidiaries of the telecom
operators. Fees for these services, which are negotiated in network service agreements with the
telecom operators and indicated in the message received on the mobile phone, are charged on a
per-use basis or on a monthly subscription basis, and vary according to the type of services
delivered. We recognized WVAS revenues in the period in which the services are performed net of
business taxes of $1.4 million, $1.5 million and $1.7 million for 2008, 2007 and 2006,
respectively.
We measure our revenues based on the total amount paid by mobile phone customers, for which
the telecom operators bill and collect on our behalf. Accordingly, the service fee paid to the
telecom operators is included in the cost of revenues. In addition, in respect of 2G services, the
telecom operators charge us a network fee based on a per message fee, which varies depending on the
volume of messages sent in the relevant month, multiplied by the excess of messages sent over
messages received. These network fees are likewise retained by the telecom operators and are
reflected as cost of revenues. The cost of revenues also includes fees paid to our content
providers and marketing partners, maintenance costs related to equipment used to provide the
services, bandwidth leasing charges and data center services, alternative channels, media and
related Internet costs, operator imposed penalty charges, and certain distribution costs.
We evaluate our cooperation arrangements with the telecom operators to determine whether to
recognize our revenues on a gross basis or net of the service fees and net transmission charges
paid to the telecom operators. Our determination is based upon an assessment of whether we act as a
principal or agent when providing our services. We have concluded that we act as principal in the
arrangement. Factors that support our conclusion mainly include:
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•
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we are the primary obligor in the arrangement;
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•
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we are able to establish prices within price caps prescribed by
the telecom operators to reflect or react to changes in the
market;
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48
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•
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we determine the service specifications of the services we will be rendering;
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•
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we are able to control the selection of our content suppliers; and
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the telecom operators usually will not pay us if users cannot be
billed or if users do not pay the telecom operators for services
delivered and, as a result, we bear the delivery and billing risks
for the revenues generated with respect to our services.
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Based on these factors, we believe that recognizing revenues on a gross basis is appropriate.
However, as noted above, our reported revenues are net of bad debt charges that have been deducted
by the telecom operators.
We recognize revenue for a portion of our 2G services (as well as for a smaller portion of our
2.5G services) on an accrual basis in order to report our quarterly earnings on a timely basis.
This involves the use of estimates of monthly revenues based on our internal records for the month
and prior monthly confirmation rates with the telecom operators in prior months if we are unable to
obtain actual figures from the telecom operators before we finalize our financial statements. We
expect the effect of these estimates on our financial results will be more significant on our
quarterly results of operations than on our annual results, as we are less likely to receive
confirmation on all of our 2G revenues before we disclose our quarterly results. To the extent that
our revenues have not been confirmed by the telecom operators for any reporting period, we will
need to adjust our revenues in the subsequent periods in which these revenues are confirmed. For
the years ended December 31, 2006, 2007 and 2008, the differences between our recorded revenue
based on such estimates and actual revenue confirmed subsequently have been immaterial.
Recorded Music
. We are in the business of artist development, music production, offline music
distribution and online distribution through WVAS and the Internet. Recorded music revenues are
derived from live performances, corporate sponsorship and advertising, online and wireless sales,
and offline CD sales.
We generate revenues from the sale of CDs either by providing the CD master to a distributor
or by directly arranging for the volume production and subsequent wholesale of the CDs. In the
former case, we receive a fixed fee, have no further obligations and recognize the fee as revenue
when the master CD is provided. In the latter case, we ship the produced CDs to retail distributors
and recognize wholesale revenues at the time of shipment less a provision for future estimated
returns. In 2008, the estimated sales returns rate was approximately 19% based on past experience.
We recognize artist performance fees and corporate sponsorship or marketing event fees once
the performance or the service has been completed. Where we act as the primary obligor in the
transaction, revenues are recorded on a gross basis. Where we are considered an agent or where the
artists separately contract with the event organizer, revenues are recorded on a net basis.
We license our music to third parties for guaranteed minimum royalty payments, normally
received upfront and typically non-refundable. In such cases we recognize such fees as revenue on a
straight-line basis over the life of the license and unrecognized revenues are included in
liabilities. When the contract provides for additional payments if revenues exceed the minimum
amount guaranteed, such amounts are included in revenues when we are notified of our entitlement to
additional payments.
We incur costs in producing CD masters, volume CD production, artist and songwriter royalties,
and royalties payable to other parties for the use of their work. The cost of record masters and
volume CD productions, and royalties paid in advance are recorded in prepaid expenses and other
current assets when the sales of the recording are expected to recover the cost and amortized as
cost of revenues over the revenue generating period, typically within one year. The decision to
capitalize an advance to an artist, songwriter or other party requires significant judgment as to
the recoverability of these advances. Advances for royalties and other capitalized costs are
regularly assessed for recoverability.
49
Stock-based Compensation Cost
We grant equity incentive awards to our employees and certain non-employees. Until February
2006 when we commenced granting non-vested shares, all of our equity incentive grants were in the
form of stock options.
Effective January 1, 2006, we adopted the fair value recognition provisions of SFAS 123(R),
using the modified prospective transition method and therefore have not restated results for prior
periods. Under this transition method, stock-based compensation expense recognized beginning
January 1, 2006 includes: (a) compensation expense for all stock-based compensation awards granted
prior to, but not yet vested as of January 1, 2006 based on the fair market value as of the grant
date, measured in accordance with SFAS 123, and (b) compensation expense for all stock-based
compensation awards granted on or subsequent to January 1, 2006, based on grant-date fair value
estimated in accordance with the provisions of SFAS 123(R). We recognize stock-based compensation
costs on a straight-line basis over the requisite service period of the award, which is generally
the vesting period of the award. Prior to the adoption of SFAS 123(R), we recognized stock-based
compensation expense in accordance with APB 25. In March 2005, the SEC issued SAB 107 regarding the
SEC’s interpretation of SFAS 123(R) and the valuation of stock-based payments for public companies.
We have applied the provisions of SAB 107 in the adoption of SFAS 123(R).
We recognize the compensation costs net of a forfeiture rate and recognize the compensation
costs for those options and non-vested shares expected to vest on a straight-line basis over the
requisite service period of the award, which is generally the vesting period. The estimate of
forfeitures 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 also impact the amount of share-based compensation expense to be recognized in future periods.
Goodwill and Intangible Assets Impairment
We test goodwill for impairment by reporting unit on an annual basis or more frequently if an
event occurs or circumstances change that could more likely than not reduce the fair value of the
goodwill below their carrying amount. We perform a two-step goodwill impairment test. The first
step compares the fair values 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 unit’s 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. This allocation process is only performed for purposes of
evaluating goodwill impairment and does not result in an entry to adjust the value of any assets or
liabilities. An impairment loss is recognized for any excess in the carrying value of goodwill over
the implied fair value of goodwill. The impairment of goodwill is determined by us estimating the
fair value based upon the present value of future cash flows. In estimating the future cash flows
of each reporting unit, we have taken into consideration the overall and industry economic
conditions and trends, market risk of our company and historical information.
We measure impairment of intangible assets whenever events or changes in circumstances
indicate that the carrying amount of an asset may no longer be recoverable 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.
Income Taxes
Deferred income taxes are recognized for temporary differences between the tax bases of assets
and liabilities and their reported amounts in the financial statements, net operating loss carry
forwards and credits by applying enacted statutory tax rates applicable to future years. Deferred
tax assets are reduced by a valuation allowance when, in the opinion of management, it is more
likely than not that some portion or all of the deferred tax assets will not be realized. We
determine whether or not a valuation allowance is required at the level of each taxable entity.
Current income taxes are provided for in accordance with the laws of the relevant taxing
authorities.
In June 2006, the Financial Accounting Standards Board (“FASB”) issued Interpretation No. 48
(“FIN 48”), “Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No.
109”. FIN 48 prescribes a recognition threshold and measurement attribute for the financial
statement recognition and measurement of a tax position taken or expected to be taken in a tax
return. FIN 48 is effective for fiscal years beginning after December 15, 2006, with early adoption
permitted. Our company adopted FIN 48 effective January 1, 2007. The adoption of FIN 48 did not
result in a cumulative adjustment on January 1, 2007 and had no significant impact on our
accounting for income taxes for the year ended December 31, 2007 and 2008. We did not incur any
interest or penalties related to potential underpaid income tax expenses, and also do not expect to
have a significant increase or decrease in our unrecognized tax benefits within 12 months from
December 31, 2008.
50
In March 2007, the National People’s Congress of China enacted the New EIT Law, which became
effective on January 1, 2008. In addition, the Implementation Rules of the New Enterprise Income
Tax Law, or the Implementation Rules, were promulgated by the PRC State Council on December 6, 2007
and the Notice on Implementation of Transitional Arrangements for Preferential Policies of
Enterprise Income Tax, or the Transitional Arrangements Notice, was promulgated by the PRC State
Council on December 26, 2007. Under the New EIT system, a unified enterprise income tax rate of
25% and unified tax deduction standards are applied equally to both domestic-invested enterprises
and foreign-invested enterprises. Enterprises established prior to March 16, 2007 eligible for a
preferential tax rate of 15% according to the then effective PRC Enterprise
Income Tax Law for Foreign-Invested Enterprise and Foreign Enterprise tax laws and
administrative regulations are subject to transitional rules as stipulated in the Transitional
Arrangements Notice. In addition, certain qualified enterprises may still benefit from a
preferential tax rate of up to15% under the New EIT Law if they meet the definition of “qualified
high and new technology enterprise” strongly supported by the state as set out in the
Implementation Rules. As a result, if our PRC subsidiaries and VIEs qualify as high and new
technology enterprises strongly supported by the state under the new EIT Law, they will continue to
benefit from a preferential tax rate of up to 15%. Otherwise, the applicable tax rate of our PRC
subsidiaries and VIEs is 25% starting from 2008 under the New EIT system. At December 31, 2008,
four of our subsidiaries and VIEs were approved as qualified high and new technology enterprises,
which approvals entitle them to preferential tax rate tax exemption or reduced rate according to
the New EIT Law and transitional rules ranging from 7.5% to 15% for the three years ending on
December 31, 2010. While the high and new technology enterprise certificates are valid for three
years, we believe based on currently available information that we will be able to reapply
successfully for the renewal of the current certificates as we believe we will continue to meet the
published criteria. Accordingly, these four entities have used the reduced applicable tax rate in
calculations of deferred tax balances for the foreseeable future. However, we cannot be certain
that such applications will be successful. In addition, our qualified new cultural enterprises,
Huayi Brothers Broker, Hurray! Freeland Culture and Secular Bird, were entitled to a tax exemption
in 2008. We have used the new standard rates for our other affiliated Chinese entities. Deferred
taxes have been calculated using the tax rates that apply to the relevant companies.
The EIT Law includes a provision specifying that legal entities organized outside China will
be considered residents for Chinese income tax purposes if their place of effective management or
control is within China. If legal entities organized outside China were considered residents for
Chinese income tax purposes, they would become subject to the EIT Law on their worldwide income.
This would cause any income generated by the legal entities organized outside China to be subject
to China’s 25% EIT. The implementation rules to the EIT Law provide that non-resident legal
entities will be considered to be China residents if substantial and overall management and control
over the manufacturing and business operations, personnel, accounting, properties, etc. reside
within China. Pursuant to the additional guidance released by the Chinese government on April 22,
2009, management does not believe that the legal entities organized outside China should be
characterized as China tax residents for EIT Law purposes.
Under the PRC tax laws effective prior to January 1, 2008, dividends paid to foreign investors
by foreign-invested enterprises, such as dividends paid to the overseas holding companies by their
PRC subsidiaries, were exempt from PRC withholding tax. Under the EIT Law and its implementation
rules which became effective on January 1, 2008, dividends generated after January 1, 2008 and
payable by a foreign-invested enterprise in China to its foreign investors who are non-resident
enterprises are subject to a 10% withholding tax, unless any such foreign investor’s jurisdiction
of incorporation has a tax treaty with China that provides for a different withholding arrangement.
Results of Operations
The following discussion of our results of operations for the years ended December 31, 2006,
2007 and 2008 is based upon our audited consolidated financial statements included elsewhere in
this annual report on Form 20-F.
Year Ended December 31, 2008 Compared to Year Ended December 31, 2007
Revenues.
Our revenues declined 10.9% to $54.0 million in 2008 from $60.5 million in 2007. This
decrease was primarily due to a decline in demand for WVAS in 2008.
Wireless Value-added Services
. Revenues from our WVAS declined 14.7% to $42.7 million for 2008
from $50.0 million for 2007, primarily due to a decline in the Company’s IVR and WAP services. IVR
revenues were $12.2 million in 2008, a decline of 29.2% from $17.2 million for 2007. WAP revenues
were $7.5 million in 2008, a decline of 40.6% from $12.6 million for 2007. SMS and Java™ revenues
were $13.5 million and $2.2 million in 2008, an increase of 21.6% and 60.0% from $11.0 million and
$1.4 million for 2007, respectively.
51
Recorded Music.
In 2007, we expanded our recorded music segment by acquiring 65% of Secular
Bird, an independent record label in China, and through Freeland Music, 51% of Fly Songs, a
performance and concert organizer and had a full year’s contribution from them in 2008. Revenue
from recorded music was $11.3 million in 2008, an increase of 7.6% from $10.5 million for 2007.
Cost of Revenues.
Our cost of revenues declined 7.2% to $39.6 million in 2008 from $42.6 million in
2007 due primarily to decreased costs for our WVAS as our WVAS revenues declined. Our decrease in
cost of revenue was partly offset by increased costs of our recorded music business as that
business grew.
Wireless value-added Services
. Our cost of WVAS declined 9.8% to $32.8 million for 2008 from
$36.4 million for 2007. This decrease resulted primarily from less amount paid to PRC
telecommunications operators as our WVAS revenues decreased and less promotion costs
Recorded Music.
Our cost of recorded music increased 8.0% to $6.7 million for 2008 from $6.2
million for 2007. This increase resulted primarily from increased commercial development and
artists’ performance cost in 2008.
Gross Profits.
Our gross profits decreased 19.6% to $14.4 million for 2008 from $17.9 million for
2007, mainly due to the decreased profits from WVAS. Our gross profit margins decreased to 26.7%
for 2008 from 29.6% for 2007, due primarily to decreased margins for WVAS resulting from declining
sales of our higher margin WAP services and increased marketing, promotion and distributions costs
related to SMS and IVR services.
Operating Expenses
. Operating expenses were $22.7 million for 2008, which included impairment for
goodwill of $2.7 million and a write-down for intangible assets of $2.9 million, a gain on
reduction of Unicom liability of $1.6 million and a gain from reversed litigation expenses of $0.5
million due to the expiration of a petition period for certain pending litigation, representing a
decrease by 63.1% from $61.5 million for 2007, which included impairment charges of $41.3 million.
Product Development Expenses.
Our product development expenses decreased 51.1% to $1.0 million
in 2008 from $2.0 million in 2007, mainly due to the restructuring of our research and development
departments in March 2008 which lowered our staff costs.
Selling and Marketing Expenses
. Our selling and marketing expenses decreased 20.7% to $9.1
million in 2008 from $11.5 million in 2007. The decrease was mainly due to the fact that we
recorded a write-down of $1.8 million for intangible assets of WVAS in 2007 compared to a
write-down of $0.4 million in 2008.
General and Administrative Expenses
. Our general and administrative expenses increased 31.1%
to $12.0 million in 2008 from $9.1 million in 2007. This increase was mainly due to the write-down
of intangible assets of $2.5 million in 2008.
Provision for Impairment of Goodwill and Intangible Assets.
We tested the carrying value of
goodwill and acquired intangible assets for impairment and recorded an impairment charge of $5.6
million and $41.3 million in 2008 and 2007, respectively. See “-Operating Expenses — Provision for
Impairment of Goodwill and Intangible Assets.”
Loss from Continuing Operations.
As a result of the foregoing, loss from operations was $8.3
million for 2008 compared to loss from operations of $43.6 million for 2007.
Interest Income and Expense
. Interest income was $1.6 million for 2008, compared to $2.3 million
for 2007. Interest expense was nil for 2008 as compared to $0.2 million in 2007, which was related
to the acquisition payables for Shanghai Magma.
Foreign Exchange loss.
We recorded a foreign exchange loss of $9.0 million in 2008, arising from
the depreciation in value of the Euro against the U.S. dollar.
Other Income
. Other income, primarily government tax subsidies, was $0.2 and $0.5 million in 2008
and 2007, respectively.
Income Taxes.
Income taxes were an expense of $0.5 million in 2008 and a benefit of $0.2 million in
2007.
Equity in Results of Affiliate
. The equity in the income of New Run was $0.06 million in 2008 as
compared to equity in the loss of New Run of $0.06 million in 2007.
Impairment of Investment in Music Affiliate.
We tested our investments in our affiliated music
company, New Run, (which is accounted for using the equity method) for impairment and recorded a
write-down of $1.9 million in 2008.
52
Net Loss from Continuing Operations.
Net loss from continuing operations was $12.4 million for 2008
compared to a net loss of $41.5 million for 2007
.
Net Income from Discontinued Operations
. Effective August 1, 2007, we accounted for our software
and systems integration business (“SSI Business”) as a discontinued operation. The net income from
discontinued operations was $0.4 million in 2008 representing the gain recognized on the sale of
the SSI Business, compared to net loss of $0.4 million in 2007.
Net Loss
. As a result of the foregoing, net loss was $12.0 million for 2008, which included a
foreign exchange loss of $9.0 million, an impairment charge of $2.7 million for goodwill, an
impairment charge of $1.9 million for investment in the music
affiliate, and a write-down of intangible assets of $2.9 million, as compared to net loss of $42.0
million for 2007, which included an impairment charge of $41.3 million.
Year Ended December 31, 2007 Compared to Year Ended December 31, 2006
Our results of operations for the year ended December 31, 2007 compared to the year ended December
31, 2006 were impacted by the inclusion of the operating results for 2007 of Shanghai Saiyu, Henan
Yinshan, Secular Bird and Fly Songs, which were acquired in 2007.
Revenues.
Our revenues declined 11.9% to $60.5 million in 2007 from $68.7 million in 2006. This
decrease was primarily due to a decline in demand for WVAS in 2007.
Wireless Value-added Services
. Revenues from our WVAS declined 20.0% to $50.0 million for 2007
from $62.5 million for 2006, primarily due to the decline in the market for SMS and WAP services.
SMS revenues were $11.0 million in 2007, a decline of 35.7% from $17.1 million for 2006. WAP
revenues were $12.6 million in 2007, a decline of 41.4% from $21.5 million for 2006. IVR and RBT
revenues were $17.2 million and $5.7 million in 2007, an increase of 59.3% and 21.3% from $10.8
million and $4.7 million for 2006, respectively.
Recorded Music.
Recorded music revenues became a new business line for us in 2006. We expanded
our recorded music segment by acquiring 65% of Secular Bird, an independent record label in China,
and through Freeland Music, 51% of Fly Songs, a performance and concert organizer. Revenue from
recorded music was $10.5 million in 2007, an increase of 69.1% from $6.2 million for 2006.
Cost of Revenues.
Our cost of revenues declined 3.6% to $42.6 million in 2007 from $44.2 million in
2006 due primarily to decreased costs for our WVAS as our WVAS revenues declined. Our decrease in
cost of revenue was partly offset by increased costs of our recorded music business as that
business grew organically and through acquisition.
Wireless value-added Services
. Our cost of WVAS declined 10.5% to $36.4 million for 2007 from
$40.7 million for 2006. This decrease resulted primarily from decreased promotion costs due to the
market.
Recorded Music.
Our costs of recorded music increased 75.4% to $6.2 million for 2007 from $3.6
million for 2006. This increase resulted primarily from increased commercial development and
artists’ performance cost as well as from our music company acquisitions in 2007.
Gross Profits.
Our gross profits decreased 26.9% to $17.9 million for 2007 from $24.5 million for
2006, mainly due to the decreased profits from WVAS. Our gross profit margins decreased to 29.6%
for 2007 from 35.6% for 2006, due primarily to decreased margins for WVAS, which mainly resulted
from increased marketing, promotion and distributions costs related to SMS and WAP services.
Operating Expenses.
Operating expenses sharply increased by 209.1% to $61.5 million for 2007 from
$19.9 million for 2006, due primarily to impairment charges amounting to $38.8 million for our WVAS
business and additional expenses associated with our new acquisitions in 2007.
Product Development Expenses.
Our product development expenses decreased slightly to $2.0
million in 2007 from $2.2 million in 2006.
Selling and Marketing Expenses
. Our selling and marketing expenses slightly increased by 4.5%
to $11.5 million in 2007 from $11.0 million in 2006.
53
General and Administrative Expenses
. Our general and administrative expenses increased 36.4%
to $9.1 million in 2007 from $6.7 million in 2006. This increase was mainly due to the increased
professional service fees and additional expenses associated with our new acquisitions and to a
lesser extent, increased bad debt expense and amortization expense of intangible assets.
Provision for Impairment of Goodwill and Intangible Assets.
We tested the carrying value of
goodwill and acquired intangible assets and recorded an impairment charge of $41.3 million in 2007.
(Loss)Income from Continuing Operations.
As a result of the foregoing, loss from operations was
$43.6 million for 2007 compared to income of $4.6 million for 2006.
Interest Income and Expense
. Interest income was $2.3 million for 2007, compared to $2.5 million
for 2006. Interest expense increased to $0.2 million for 2007 from $0.05 million in 2006. This
increase related to the acquisition payables for Shanghai Magma.
Other Income
. Other income, primarily government tax subsidies, was $0.5 and $0.3 million in 2007
and 2006, respectively.
Income Taxes.
Income taxes were a benefit of $0.2 million in 2007 and an expense of $0.2 million in
2006.
Equity in Losses of Affiliate
. In April 2007, we acquired a 30% interest in New Run, an independent
record label in China, and it has been accounted for on the equity basis from April 1, 2007. The
equity in the losses of New Run was $0.06 million in 2007.
Net (Loss) Income from Continuing Operations.
Net loss from continuing operations was $41.5 million
for 2007 compared to net income of $6.6 million for 2006.
Net Loss from Discontinued Operations
. Effective August 1, 2007, we accounted for our SSI Business
as a discontinued operation. Net loss from discontinued operations was reduced from $0.8 million in
2006, a full year’s operations, to $0.4 million in 2007, which included the benefit of income of
$0.2 million representing the gain recognized on the sale of the SSI Business.
Net (Loss) Income
. As a result of the foregoing, net loss was $42.0 million for 2007 compared to
net income of $5.8 million for 2006. The decrease is mainly due to an impairment charge of $41.3
million for 2007. Our net loss in 2007 was offset by net income of approximately $0.6 million
derived from our new acquisitions, mainly from Shanghai Saiyu.
B. LIQUIDITY AND CAPITAL RESOURCES
Cash Flows and Working Capital
The following table sets forth our cash flows with respect to operating activities, investing
activities and financing activities for the periods indicated:
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For the Year Ended December 31,
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2008
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2007
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2006
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(in thousands of U.S. dollars)
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Net cash (used in) provided by operating activities
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$
|
(5,553
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)
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$
|
(2,055
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)
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|
$
|
17,636
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|
|
Net cash used in investing activities
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|
|
(2,265
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)
|
|
|
(8,120
|
)
|
|
|
(15,157
|
)
|
|
Net cash provided by (used in) financing activities
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|
|
2
|
|
|
|
16
|
|
|
|
(4,399
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)
|
|
|
|
|
|
|
|
|
|
|
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|
Net (decrease) in cash and cash equivalents
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$
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(7,816
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)
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|
$
|
(10,159
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)
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|
$
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(1,920
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)
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Our net cash used in operating activities in 2008 was $5.6 million. This was primarily
attributable to our net loss of $12.0 million, a gain of $5.0 million arising from a reduction of
an acquisition payable, a gain of $1.6 million from a reduction of China Unicom liabilities and an
increase in prepaid expenses and other current assets of $1.1 million, which was offset in part by
an impairment charge of $2.7 million for goodwill, an impairment charge of $1.9 million for our
investment in New Run, a write-down of intangible assets of $2.9 million, $3.3 million in
depreciation and amortization as non-cash items, and a decrease in accounts receivable of $3.5
million. Our net cash used in operating activities in 2007 was $2.1 million. This was primarily
attributable to our net loss of $41.9 million, as adjusted for an add-back of $41.3 million in
impairment of goodwill and other intangible assets and $3.7 million in depreciation and
amortization as non-cash items, which was offset in part by a $2.1 million increase in accounts
receivable and $3.2 million increase in receivable from disposal of subsidiary. Our net cash
provided by operating activities in 2006 was $17.6 million. This was primarily attributable to our
net income of $5.8 million, as adjusted for an add-back of $3.5 million in depreciation and
amortization as a non-cash item, $5.5 million decrease in accounts receivable and $3.1 million
decrease in prepaid expenses and other current assets.
54
Net accounts receivable increased from $13.4 million as of December 31, 2006 to $14.7 million
as of December 31, 2007 and decreased to $12.7 million as of December 31, 2008. The increase from
2006 to 2007 was primarily due to lengthened collection periods from the telecom operators. The
decrease from 2007 to 2008 was primarily due to the decrease in WVAS
revenues. The average collection time for our accounts receivable from WVAS was 71 days in
2006, increasing to 78 days in 2007 and to 93 days in 2008.
Net cash used in investing activities was $2.3 million in 2008, of which $4.7 million was used
for the payments made in respect of the recent acquisition of Seed Music and payments relating to
the earlier acquisitions of Shanghai Magma and Henan Yinshan; $1.7 million was used for the
purchase of intangible assets and $0.3 million was used for the purchase of fixed assets, which
amounts were partially offset by the proceeds from the disposal of a subsidiary of $4.5 million.
Net cash used in investing activities was $8.1 million in 2007, of which $3.2 million was used in
the acquisition of equity interests in Shanghai Saiyu, Henan Yinshan, Fly Songs and Secular Bird
and $2.5 million was used in the acquisition of an equity affiliate, New Run. Net cash used in
investing activities was $15.2 million in 2006, of which $12.6 million was used in the acquisition
of equity interests in Huayi Brothers Music, Freeland Music and Shanghai Magma. Our total capital
expenditures for computer hardware, software and office equipment for the years ended December 31,
2008, 2007 and 2006 were $0.3 million, $0.9 million and $1.0 million, respectively. Our capital
divestitures are not material.
Net cash provided by financing activities was $1,500 for 2008 and $16,334 in 2007 resulting
from the proceeds arising in connection with the exercise of stock options in 2008. Net cash used
in financing activities was $4.4 million for 2006, mainly due to our repurchase and cancellation of
79,260,000 ordinary shares under our stock repurchase program in 2006 with a total cost of $5.0
million.
We generally keep our cash in U.S. dollar or RMB denominated bank accounts or short-term time
deposits for two principal purposes: to finance our operations and to manage the interest rate and
currency risks arising from our operations. We adjust the amount of cash held in U.S. dollars and
RMB from time to time to maximize our interest rate returns and to ensure that we have sufficient
RMB for our operational needs, including for lease and other commitments. In the first half of
2008, we converted a significant portion of our U.S. dollar deposits into Euros, which were
subsequently converted back into U.S. dollars. We have not historically used derivative instruments
to hedge market risks. We recorded a foreign exchange loss of $4.5 million, arising from the
decrease in the value of the Euro against the United States dollar in the third quarter of 2008. As
a result of additional appreciation of the U.S. dollar, we recorded a further exchange loss in the
fourth quarter of 2008 of $4.5 million. Currently we hold all non-Renminbi cash in United States
dollars.
We believe that our current cash and cash equivalents, cash flow from operations and the
proceeds from our initial public offering will be sufficient to meet our anticipated cash needs,
including for working capital, capital expenditures and various contractual obligations, for at
least the next 12 months. We also believe that our recent investments in New Run, Shanghai Saiyu,
Fly Songs, Secular Bird and Seed Music will have no material impact on our future liquidity or
capital resources in the near term. We may, however, require additional cash resources due to
changed business conditions or other future developments, including any investments or acquisitions
we may decide to pursue. If these sources are insufficient to satisfy our cash requirements, we may
seek to issue debt securities or additional equity or to obtain bank borrowings. The issue of
convertible debt securities or 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 financial covenants that would restrict our operations and the
placement of liens over some or all of our assets. We cannot assure you that financing will be
available in amounts or on terms acceptable to us, if at all.
Indebtedness
As of December 31, 2008, other than $24,002 in respect of capital leasing of equipment in our
Beijing office we did not have any indebtedness or any material debt securities, mortgages or
liens. In addition, as of December 31, 2008, we did not have any material contingent liabilities.
We may, however, be obligated to make certain earn-out payments in connection with our investments
in New Run, Freeland and Secular Bird, as discussed under “Tabular Disclosure of Contractual
Obligations” below.
55
C. RESEARCH AND DEVELOPMENT, PATENTS AND LICENSES
See Item 4.B. “Information On the Company — Business Overview — Product and Content
Development,” “—Infrastructure and Technology,” and “—Intellectual Property and Proprietary
Rights.”
Our research and development expenditures were $1.0 million, $2.0 million and $2.2 million in
2008, 2007 and 2006, respectively.
D. TREND INFORMATION
See Item 3.D. “Key Information — Risk Factors” and “—Operating Results” above.
E. OFF-BALANCE SHEET ARRANGEMENTS
We have not entered into any financial guarantees or other commitments to guarantee the
payment obligations of any third parties. In addition, we have not entered into any derivative
contracts that are indexed to our own shares and classified as shareholders’ equity, or that are
not reflected in our financial statements. Furthermore, we do not have any retained or contingent
interest in assets transferred to an unconsolidated entity that serves as credit, liquidity or
market risk support to such entity. Moreover, we do not have any variable interest in an
unconsolidated entity that provides financing, liquidity, market risk or credit support to us or
engages in leasing, hedging or research and development services with us.
F. TABULAR DISCLOSURE OF CONTRACTUAL OBLIGATIONS
The following table sets forth our contractual obligations as of December 31, 2008:
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|
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|
|
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Payments Due by Period
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Less than
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1-3
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3-5
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Total
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1 year
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years
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years
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|
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|
|
(in thousands of U.S. dollars)
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|
|
Operating lease commitments
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$
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1,568
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|
|
$
|
1,452
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|
|
$
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116
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|
|
$
|
—
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|
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Other contractual commitments*
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|
3,078
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|
|
|
1,671
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|
|
|
1,407
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|
|
|
—
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Total contractual obligations
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$
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4,646
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$
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3,123
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$
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1,523
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|
|
$
|
—
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*
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Represents non-cancelable agency agreements with certain artists that provide for minimum
payments.
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The agreements entered into in connection with our acquisitions and strategic investments
described in this annual report on Form 20-F include earn-out provisions pursuant to which the
sellers will become entitled to additional consideration, which may be material and may in certain
circumstances include either cash or additional equity interests, if the relevant business achieves
specified performance measures.
Contingent Acquisition Payments
As of December 31, 2008, in connection with our recent acquisitions, we may make contingent
payments of up to $0.8 million subject to the achievement of certain financial performance targets
from 2008 to 2009. These contingent payments, if made, will be reflected in our financial
statements as an increase of goodwill.
Holding Company Structure
We are a holding company with no operations of our own. Our operations are principally
conducted through Beijing Hurray! Times. As a result, our ability to pay dividends and to finance
any debt that we may incur is dependent upon service fees paid by our affiliated Chinese entities
to Beijing Hurray! Times, and dividends and other distributions paid by those subsidiaries. If any
of our subsidiaries or our affiliated Chinese entities incurs debt on its own behalf in the future,
the instruments governing the debt may restrict its ability to pay service fees or dividends to
Beijing Hurray! Times or us. In addition, Chinese legal restrictions permit payment of dividends to
us by our subsidiaries only out of the net income from our subsidiaries, if any, determined in
accordance with Chinese accounting standards and regulations. Under Chinese law, our subsidiaries
are also required to set aside a portion (at least 10%) of their after tax net income, if any, each
year for certain reserve funds. These reserve funds are not distributable as cash dividends.
56
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk
Our exposure to market risk for changes in interest rates relates primarily to the interest
income generated by our cash deposits in banks. We have not used derivative financial instruments
in our investment portfolio. Interest-earning instruments and floating rate debt 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. Our future interest income may fluctuate in line with changes in
interest rates. However, the risk associated with fluctuating interest rates is principally
confined to our cash deposits in banks, and, therefore, our exposure to interest rate risk is
minimal and immaterial.
Foreign Exchange Risk
While our reporting currency is the U.S. dollar, to date, virtually all of our revenues and
costs are denominated in Renminbi and substantially all of our assets (other than the proceeds from
our initial public offering) and liabilities are denominated in Renminbi. As a result, we are
exposed to foreign exchange risk as our revenues and results of operations may be impacted by
fluctuations in the exchange rate between U.S. dollars and Renminbi. If the Renminbi depreciates
against the U.S. dollar, the value of our Renminbi revenues and assets as expressed in U.S. dollars
in our financial statements will decline. We may also be exposed to foreign exchange risk in the
event we hold other currencies in an effort to hedge against potential depreciation of the U.S.
dollar. We recorded a loss of $ 9.0 million in 2008 from deposits held in Euros, which were
subsequently converted back into U.S dollars.
Between 2002 and 2008, the exchange rate between Renminbi and U.S. dollars has varied by
approximately17.6%. If the Renminbi had been 1% and 5% less valuable against the U.S. dollar than
the actual rate as of December 31, 2008 which was used in preparing the Company’s audited financial
statements as of and for the year ended December 31, 2008, our net asset value, as presented in
U.S. dollars, would have been reduced by $0.05 million and $0.2 million, respectively. Conversely,
if the Renminbi had been 1% and 5% more valuable against the U.S. dollar as of that date, then our
net asset value would have increased by $0.05 million and $0.3 million, respectively.
Inflation
Inflation has not materially impacted our results of operations in recent years. However, in
2008, China experienced significantly increased inflation, which, if it continues at that level or
increases further, could have an adverse impact on our financial condition and result of operation
in future periods. According to the China Statistical Bureau, China’s overall national inflation
rate, as measured by the general consumer price index, was approximately 5.9%, 4.8% and 1.3% in
2008, 2007 and 2006, respectively.
TAXATION
In March 2007, the National People’s Congress of China enacted the New EIT Law, which became
effective on January 1, 2008. In addition, the Implementation Rules of the New Enterprise Income
Tax Law, or the Implementation Rules, were promulgated by the PRC State Council on December 6, 2007
and the Notice on Implementation of Transitional Arrangements for Preferential Policies of
Enterprise Income Tax, or the Transitional Arrangements Notice, was promulgated by the PRC State
Council on December 26, 2007. Under the New EIT system, a unified enterprise income tax rate of
25% and unified tax deduction standards are applied equally to both domestic-invested enterprises
and foreign-invested enterprises. Enterprises established prior to March 16, 2007 eligible for a
preferential tax rate of 15% according to the then effective PRC Enterprise Income Law for
Foreign-Invested Enterprise and Foreign Enterprise tax laws and administrative regulations are
subject to transitional rules as stipulated in the Transitional Arrangements Notice. In addition,
certain qualified enterprises may still benefit from a preferential tax rate of up to15% under the
New EIT Law if they meet the definition of “qualified high and new technology enterprise” strongly
supported by the state as set out in the Implementation Rules. As a result, if our PRC
subsidiaries and VIEs qualify as high and new technology enterprises strongly supported by the
state under the new EIT Law, they will continue to benefit from a preferential tax rate of up to
15%. Otherwise, the applicable tax rate of our PRC subsidiaries and VIEs is 25% starting from 2008
under the New EIT Law. At December 31, 2008, four of our subsidiaries and VIEs were approved as
qualified high and new technology enterprises, which approvals entitle them to preferential tax
rate tax exemption or reducted rate according to the New EIT Law and transitional rules ranging
from 7.5% to 15% for the three years ending on December 31, 2010. While the high and new technology
enterprise certificates are valid for three years, we believe based on currently available
information that we will be able to reapply successfully for the renewal of the current
certificates as we believe we will continue to meet the published criteria. Accordingly, these four
entities have used the reduced applicable tax rate in calculations of deferred tax balances for the
foreseeable future. However, we cannot be certain that such applications will be successful. In
addition, our qualified new cultural enterprises, Huayi Brothers Broker, Hurray! Freeland Culture
and Secular Bird, were entitled to a tax exemption in 2008. We have used the new standard rates for
our other affiliated Chinese entities. Deferred taxes have been calculated using the tax rates that
apply to the relevant companies.
57
These preferential tax arrangements were originally to expire at various dates between 2006
and 2010. In 2005 and 2006 a number of our VIEs became subject to a higher tax rate as tax
exemptions expired or were reduced. The aggregate dollar and per share effect of the tax holidays
in 2008, 2007 and 2006 were $1.8 million, $1.9 million and $2.2 million and $0.0008, $0.0009 and
$0.0010 per share, respectively.
Under the New EIT Law, the rules for determining whether an entity is resident in the PRC for
tax purposes have changed and the determination of residence depends on, among other things, the
“place of actual management.” If Hurray! Holding Co.,
Ltd. or our non-PRC subsidiaries are determined to be a PRC resident for tax purposes, it or
they, would be subject to tax in the PRC on our worldwide income including the income arising in
jurisdictions outside the PRC. We have evaluated our resident status under the new law and related
guidance and believe Hurray! Holding Co., Ltd. is not a PRC resident for PRC income tax purposes.
However, there can be no assurance that the PRC tax authorities would not challenge our position.
As a non-resident for PRC tax purposes, dividends paid to Hurray! Holding Co. Ltd out of
profits earned after January 1, 2008 from its PRC subsidiaries would be subject to a withholding
tax of 10%.
Aggregate undistributed earnings of our subsidiaries and affiliates located in the PRC that
are available for distribution to the Company at December 31, 2008 are considered to be
indefinitely reinvested under APB opinion No. 23, “Accounting for Income Taxes — Special Areas,”
and accordingly, no provision has been made for the PRC dividend withholding taxes that would be
payable upon the distribution of those amounts to Hurray! Holding Co., Ltd. The PRC tax authorities
have also clarified that distributions made out of retained earnings accumulated prior to January
1, 2008 are not subject to the withholding tax.
Our WVAS revenues are subject to a 3% business tax. Our recorded music services revenues are
subject to a 5% business tax for royalties and advertising revenues and a 13% value-added tax for
revenues from the sale of CDs. Our software and system integration services revenues, which have
been classified as a discontinued operation on their sale in August 2007, were subject to a 17%
value-added tax. Companies that develop their own software and register the software with the
relevant authorities in China are generally entitled to a value-added tax rebate of 14%. Any
service fees that Beijing Hurray! Times charges and subsequently collects pursuant to the exclusive
technical and consulting service agreements with Hurray! Solutions and our other Chinese affiliates
are subject to a 5% business tax.
Subject to the approval of the relevant tax authorities, Hurray! Solutions and other
affiliated Chinese entities had total tax loss carryforwards of approximately $14.2 million and
$4.2 million as of December 31, 2008 and 2007, respectively, for enterprise income tax purposes,
which will expire by various years through 2013. These tax loss carryforwards give rise to
potential deferred tax assets totaling $2.7 million and $1.1 million as of December 31, 2008 and
2007, respectively. For the gross deferred tax assets for Hurray! Solutions, based on the evidence
obtained, it is more likely than not that all the deferred tax assets $0.15 million will be
realized. Other affiliated Chinese entities may not record sufficient net income within the
carryforward period to realize the full tax benefit of these past net losses and, accordingly, we
have established a valuation allowance for the full amount of these deferred tax assets except for
Hurray! Solutions.
In June 2006, the Financial Accounting Standards Board (“FASB”) issued Interpretation No. 48
(“FIN 48”), “Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No.
109.” FIN 48 prescribes a recognition threshold and measurement attribute for the financial
statement recognition and measurement of a tax position taken or expected to be taken in a tax
return. FIN 48 is effective for fiscal years beginning after December 15, 2006, with early
adoption permitted. We adopted FIN 48 effective January 1, 2007. The adoption of FIN 48 did not
result in a cumulative adjustment on January 1, 2007 and had no significant impact on our
accounting for income taxes for the year ended December 31, 2008. We did not incur any interest or
penalties related to potential underpaid income tax expenses, and also do not expect to have a
significant increase or decrease on the unrecognized tax benefits within 12 months from December
31, 2008.
We are subject to taxation in PRC and other tax jurisdictions. There is no ongoing examination
by taxing authorities at this time. Our various tax years from 2003 to 2008 remain open in various
taxing jurisdictions.
Hurray Technologies (HK) Ltd., (“Hurray Technologies”), our 99% owned subsidiary, is subject
to income tax in Hong Kong. Hong Kong companies are generally subject to a 16.5% profit tax. Hurray
Technologies has not, however, paid any income taxes in Hong Kong because to date it has not
received any revenues.
58
RECENTLY ISSUED ACCOUNTING STANDARDS
On June 12, 2009, the FASB issued SFAS 166, “Accounting for Transfers of Financial Assets”
(“SFAS 166”). SFAS 166 amends the derecognition guidance in Statement 140 and eliminates the
exemption from consolidation for qualifying special-purpose entities (QSPEs). As a result, a
transferor will need to evaluate all existing QSPEs to determine whether they must now be
consolidated in accordance with Statement 167. Statement 166 is effective for financial asset
transfers occurring after the beginning of an entity’s first fiscal year that begins after November
15, 2009. We are in the process of assessing the potential impact of the adoption of SFAS 166 on
our consolidated financial position or results of operations.
On June 12, 2009, the FASB issued SFAS 167, “Amendments to FASB Interpretation No. 46(R)”
(“SFAS 167”). SFAS 167 amends the consolidation guidance applicable to variable interest entities.
The amendments will significantly affect the
overall consolidation analysis under Interpretation 46(R). While the Board’s discussion
leading up to the issuance of Statement 167 focused extensively on structured finance entities, the
amendments to the consolidation guidance affect all entities and enterprises currently within the
scope of Interpretations 46(R), as well as QSPEs that are currently excluded from the scope of
Interpretation 46(R). The Statement is effective as of the beginning of the first fiscal year that
begins after November 15, 2009. We are in the process of assessing the potential impact of the
adoption of SFAS 167 on our consolidated financial position or results of operations.
On April 9, 2009, the FASB issued the FASB Staff Position (“FSP”) FAS 157-4, “Determining Fair
Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased
and Identifying Transactions That Are Not Orderly” (“FAS 157-4”). This statement provides
additional guidance for estimating fair value measurement in accordance with FAS 157 when the
volume and level of activity for the asset or liability have significantly decreased and provides
guidance on identifying circumstances that indicate a transaction is not orderly. It emphasizes
that despite significant decreases in volume and level of activity and regardless of the valuation
technique(s) used for the asset or liability, the fair value measurement stay the same. Fair value
is the price that would be received to sell an asset or paid to transfer a liability in an orderly
transaction (that is, not a forced liquidation or distressed sale) between market participants at
the measurement date under current market conditions. This issue is effective prospectively for
interim and annual periods ending after June 15, 2009. Early adoption is permitted for periods
ending after March 15, 2009. We do not expect that the adoption of FSP FAS 157-4 will have a
significant effect on our consolidated financial position or results of operations.
On April 9, 2009, the FASB issued the FSP FAS 107-1 and APB 28-1, “Interim Disclosures about
Fair Value of Financial Instruments.” This statement amends FAS 107 to require entities to
disclose, among other things, the methods and significant assumptions used to estimate the fair
value of financial instruments in both interim and annual financial statements and amends APB
Opinion No. 28 to require those disclosures in summarized financial information at interim
reporting periods. This FSP applies to all financial instruments within the scope of FAS 107 held
by publicly traded companies, as defined in Opinion 28. This issue is effective for interim and
annual periods ending after June 15, 2009. Early adoption is permitted for periods ending after
March 15, 2009 only if a reporting entity also early adopts FAS 157-4 and FAS FAS 115-2 and FAS
124-2. We do not expect that the adoption of FSP FAS 107-1 and APB 28-1 will have a significant
effect on our consolidated financial position or results of operations.
On April 9, 2009, the FASB issued the FSP FAS 115-2 and FAS 124-2, “Recognition and
Presentation of Other-Than-Temporary Impairments.” This statement amends the
other-than-temporary-impairments (“OTTI”) guidance for debt securities to make the guidance more
operational and to improve the presentation and disclosure of OTTI on debt and equity securities in
the financial statements. This FSP does not amend existing recognition and measurement guidance
related to OTTI of equity securities. It gives guidance on evaluating whether an impairment of a
debt security is other-than-temporary and the determination of the amount of an OTTI recognized in
earnings and other comprehensive income. We do not expect the adoption of FSP FAS 115-2 and FAS
124-2 to have a significant effect on our consolidated financial position or results of operations.
On April 1, 2009, the FASB issued FSP FAS 141(R)-1, which amends the guidance in FASB
Statement No. 141(R), “Business Combinations”, to establish a model for pre-acquisition
contingencies that is similar to the one entities used under Statement 141. The FSP is effective
for business combinations whose acquisition date is on or after the beginning of the first annual
reporting period beginning on or after December 15, 2008. We do not expect the adoption of FSP FAS
141(R)-1 to have a significant effect on our consolidated financial position or results of
operations.
At its November 24, 2008 meeting, the FASB ratified the consensus reached by the Task Force in
Issue No. 08-6 “Equity Method Investment Accounting Considerations” (“EITF 08-6”). Because of the
significant changes to the guidance on subsidiary acquisitions and subsidiary equity transactions
and the increased use of fair value measurements as a result of Statements 141(R) and 160,
questions have arisen regarding the application of that accounting guidance to equity method
investments. EITF 08-6 provides guidance for entities that acquire or hold investments accounted
for under the equity method. This issue is effective for transactions occurring in fiscal years
and interim periods beginning on or after December 15, 2008. Early adoption is not permitted. We
do not expect the adoption of EITF 08-6 to have a significant effect on our consolidated financial
position or results of operations.
59
In June 2008, the FASB issued FASB Staff Position EITF 03-6-1, “Determining Whether
Instruments Granted in Share-Based Payment Transactions Are Participating Securities.” This FSP
gives guidance on the computation of earnings per share and the impact of share-based instruments
that contain certain non-forfeitable rights to dividends or dividend equivalents. The FSP is
effective for fiscal years beginning after December 31, 2008 and early application is prohibited.
We do not expect the adoption of FSP 03-6-1 to have a significant effect on our consolidated
financial position or results of operations.
In April 2008, the FASB issued FASB Staff Position FAS142-3 “Determination of the Useful Life
of Intangible Assets.” This FSP amends the factors that should be considered in developing renewal
or extension assumptions used to determine the useful life of a recognized intangible asset under
FASB Statement No. 142, “Goodwill and Other Intangible Assets”. This FSP is effective for fiscal
years beginning after December 15, 2008, and interim periods within those fiscal years. Early
adoption is prohibited. The guidance for determining the useful life of a recognized intangible
asset in this FSP shall be applied prospectively to intangible assets acquired after the effective
date. We do not expect the adoption of FAS 142-3 to have a significant effect on our consolidated
financial position or results of operations.
In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and
Hedging Activities,” to improve financial reporting about derivative instruments and hedging
activities by requiring enhanced disclosures to enable investors to better understand their effects
on an entity’s financial position, financial performance, and cash flows. The standard requires
disclosure of fair values of derivative instruments and their gains and losses in a tabular format
as well as cross-referencing within footnotes to enable financial statement users to locate
important information about derivative instruments. It also requires that more information be
provided about an entity’s liquidity by requiring disclosure of derivative features that are credit
risk-related. SFAS No.161 is effective for financial statements issued for fiscal years and interim
periods beginning after November 15, 2008, with early application encouraged. We do not expect the
adoption of SFAS No. 161 to have a material impact on our financial statements.
In December 2007, the FASB issued SFAS No.141(R), “Business Combination,” to improve reporting
by creating greater consistency in the accounting and financial reporting of business combinations.
The standard requires the acquiring entity in a business combination to recognize all (and only)
the assets acquired and liabilities assumed in the transaction; establishes the acquisition-date
fair value as the measurement objective for all assets acquired and liabilities assumed; and
requires the acquirer to disclose to investors and other users all of the information they need to
evaluate and understand the nature and financial effect of the business combination. SFAS No.
141(R) applies prospectively to business combinations for which the acquisition date is on or after
the beginning of the first annual reporting period beginning on or after December 15, 2008. Early
adoption is prohibited. We do not expect the adoption of SFAS 141(R) to have a significant effect
on our consolidated financial position or results of operations.
In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated
Financial Statements-An Amendment of ARB No. 51”, or SFAS 160. This Statement amends ARB 51 to
establish accounting and reporting standards for the noncontrolling interest in a subsidiary and
for the deconsolidation of a subsidiary. It clarifies that a noncontrolling interest in a
subsidiary is an ownership interest in the consolidated entity and should be reported as equity on
the financial statements. SFAS 160 requires consolidated net income to be reported at amounts that
include the amounts attributable to both the parent and the noncontrolling interest. Furthermore,
disclosure of the amounts of consolidated net income attributable to the parent and to the
noncontrolling interest is required on the face of the financial statements. SFAS 160 is effective
as of the beginning of an entity’s first fiscal year that begins after December 15, 2008. Upon the
adoption of SFAS 160, we reclassified the minority interest balance to the shareholder’s equity on
January 1, 2009.
60
Item 6. Directors, Senior Management and Employees
A. Directors and Senior Management
The names of our current directors and executive officers, their ages as of May 1, 2009 and
the principal positions with the company held by them are as follows:
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Name
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Age
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Position
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Class
|
|
Term of Office
|
|
Qindai Wang
|
|
|
44
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|
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Director and Chairman of the Board
|
|
Class I
|
|
1 years
|
|
Songzuo Xiang
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|
|
44
|
|
|
Director and Chief Executive Officer
|
|
Class II
|
|
2 years
|
|
Thomas Ng
|
|
|
55
|
|
|
Director
|
|
Class I
|
|
1 years
|
|
Robert Mao
(1)
|
|
|
65
|
|
|
Director
|
|
Class I
|
|
1 years
|
|
Suberna Shringla
(1)
|
|
|
43
|
|
|
Director
|
|
Class II
|
|
2 years
|
|
Alan Russell Powrie
(1)
|
|
|
58
|
|
|
Director
|
|
Class III
|
|
3 years
|
|
Shudan Zhang
|
|
|
49
|
|
|
Director
|
|
Class III
|
|
3 years
|
|
Xiaoqing Guo
|
|
|
38
|
|
|
Chief Financial Officer and Vice President
|
|
—
|
|
—
|
|
Ping Ji
|
|
|
50
|
|
|
Senior Executive Vice President
|
|
—
|
|
—
|
|
Fan Yang
|
|
|
44
|
|
|
Senior Executive Vice President
|
|
—
|
|
—
|
|
Haoyu Yang
|
|
|
36
|
|
|
Senior Executive Vice President
|
|
—
|
|
—
|
|
|
|
|
|
(1)
|
|
Member of the audit committee, compensation committee and nominating committee.
|
Our Amended and Restated Memorandum and Articles of Association provide for the division of
the board of directors into three classes: Class I directors (currently Qindai Wang, Thomas Ng and
Robert Mao), Class II directors (currently Suberna Shringla and Songzuo Xiang) and Class III
directors (currently Shudan Zhang and Alan Powrie). At each annual general meeting, directors who
are elected will serve a three-year term until such director’s successor is elected and is duly
qualified, or until such director’s earlier death, bankruptcy, insanity, resignation or removal.
There are no family relationships among any of the directors or executive officers of our company.
Biographical Information
Qindai Wang.
Mr. Wang has served as Chairman of the Board since June 2001. From June 2001 to
March 2009, Mr. Wang served as our Chief Executive Officer. From December 1999 to February 2001,
Mr. Wang was President of AsiaInfo Technologies (China), the Chinese operating subsidiary of
AsiaInfo Holdings, Inc. and a provider of telecom network integration and software solutions in
China. Previously, Mr. Wang worked at Nortel Networks (China) from 1996 until 1999 as General
Manager of the China Telecom account at Nortel. He served as Regional Director at Lucent
Technologies (China) from 1995 to 1996 and as a Senior Group Manager at AT&T China from 1989 to
1995. Mr. Wang holds a Bachelor of Science degree in Engineering from the Chengdu Institute of
Telecommunications Engineering.
Songzuo Xiang.
Dr. Xiang has served on our board since July 2000 and was appointed as our
Chief Executive Officer in March 2009. He was a visiting scholar at Columbia University from May
1999 to July 2000, and at Cambridge University from October 1998 to May 1999. He previously worked
at the People’s Bank of China, Shenzhen branch, as the Deputy Director of the Fund Planning
Department from 1995 to 1998 and as the Director of the Non-Performing Loan Management Department
from 1996 to 1998. Dr. Xiang was formerly an investment manager at Shenzhen Resources & Property
Development (Group) Ltd. from 1993 to 1995. He holds a Master of International Affairs degree from
Columbia University, a Ph.D in Economics and a Master in Management Science degree from Renmin
University of China, and a Bachelor degree in Mechanical Engineering from HuaZhong University of
Science and Technology.
Thomas Ng.
Dr. Ng has served on our board of directors since September 2008. Dr. Ng is the
co-founder of GGV Capital and was the founder of Venture TDF in Singapore and China (currently
known as TDF Capital in China). In addition, Dr. Ng earned his Ph.D. in Bacteriology and
Biochemistry in 1981 from the University of Wisconsin at Madison and was voted one of the most
promising scientists by the ‘Who’s Who’ in 1981 and 1982 and has numerous publications and patents
worldwide. Dr. Ng currently serves on the Board of Directors for Sinosun, AAC, Boston-Power and
MediaRing. He was a former board member of GNLB, SAVI (acquired by Lockheed), Oculex (acquired by
Allergan), and served on the Dartmouth College Engineering advisory board, the MIT BPEC advisory
board and the board of Singapore National Science and Technology.
Robert Mao.
Mr. Mao has served on our board of directors since March 2003. He also serves as
chairman of the board of Augux Technology, a start up provider of high intensity LED lighting
equipment and as a member of the board of 3Com Corporation. Mr. Mao previously held senior
executive positions at Nortel, Alcatel and ITT. Mr. Mao holds a Master degree in Management from
the Massachusetts Institute of Technology as well as a Master of Science degree in Engineering and
a Bachelor of Science degree in Engineering from Cornell University.
61
Alan
Russell Powrie.
Mr. Powrie has served on our board since July 2004. Mr. Powrie was a partner with
Deloitte Touche Tohmatsu, Hong Kong, until his retirement in September 2000. From October 2000 to
May 2001 and again from January 2002 to May 2002, he worked as a part-time advisor to Deloitte
Touche Tohmatsu China. Mr. Powrie joined Deloitte Touche Tohmatsu in 1971 and has worked with that
firm in the United Kingdom, United States, Hong Kong and China. Mr. Powrie holds a Bachelor of Laws
degree from the University of Edinburgh and is a member of the Institute of Chartered Accountants
of Scotland and the Hong Kong Institute of Certified Public Accountants.
Suberna Shringla.
Mr. Shringla has served on our board since February 2006. Mr. Shringla is a
founding partner of Team Ventures, a boutique corporate finance advisory firm focused on media and
communication sectors primarily in Hong Kong, China and Korea. From August 2000 to January 2002,
Mr. Shringla served as Director and Head of Media and Technology Corporate Finance for SG Cowen, a
subsidiary of Banque Societe Generale. Prior to that, Mr. Shringla served as Vice President and
Head of Business Development of Turner Broadcasting Services International Asia Pacific/Time Warner
and as a Manager of Business Development for Walt Disney Studios, Asia Pacific. Mr. Shringla holds
a Masters of Business Administration degree from ENPC Paris and a Bachelor of Arts degree from St.
Stephens College, Delhi. He is also an investment adviser licensed with the Securities and Futures
Commission in Hong Kong.
Shudan Zhang.
Mr. Zhang has served on our board since 2000. From 1995 to 1999, he served as
Vice President of Sales and Marketing at UTStarcom. Formerly, from 1991 to 1995, he served as Vice
President of Sales and Marketing at Starcom, a company which he also co-founded. Mr. Zhang holds a
Bachelor of Science degree from Beijing Polytechnic University.
Xiaoqing Guo.
Ms. Guo has served as Financial Controller, Senior Director, and Vice President
of Finance and Operation Planning Department in Hurray! since December 2003 and our Chief Financial
Officer since April 20, 2009. Previously, Ms. Guo worked in Pricewaterhouse Coopers, Beijing. Ms.
Guo graduated from Capital University of Economics and Business with a Bachelor’s degree in
Economics. In addition, Ms. Guo is a member of the Institute of Certified Public Accountants of
People’s Republic of China.
Ping Ji
. Mr. Ji has served as our Senior Executive Vice President since April 2009. Mr. Ji
also served as our Senior Vice President from 2001 to 2005. From January 2000 to February 2001 Mr.
Ji was Vice President of Solutions Marketing at AsiaInfo Technologies (China). He previously worked
for Cisco Systems (China) as a Product Marketing Director from 1998 to 2000 and for Nortel Networks
(China) as a Business Development Manager from 1994 to 1998. Mr. Ji formerly held a Project Manager
position at the Research Institute of Data Communication Technologies of the Chinese Ministry of
Posts and Telecommunications from 1985 to 1994. He holds a Master of Communications degree in Data
Communications from the Academy of Posts and Telecommunications and a Bachelor of Science degree in
Computer Science from the University of Aeronautics and Astronautics.
Fan Yang.
Mr. Yang has served as our Senior Executive Vice President since April 2009. Mr.
Yang also served as our Senior Vice President from 2001 to 2005. From February 2000 to February
2001, he was Vice President of Sales at AsiaInfo Technologies (China). Mr. Yang formerly held a
Senior Sales Manager position from 1994 to 2000 at Nortel Networks (China) and an engineering and
managerial position from 1991 to 1994 at Lucky Electrical, a Hong Kong consumer electronics
company. Mr. Yang holds both Master of Science and Bachelor of Science degrees in Engineering from
Tsinghua University.
Haoyu Yang.
Dr. Yang has served as our Senior Executive Vice President since April 2009.
Dr. Yang also served as our Senior Vice President from 2001 to 2008. He worked as a chief software
architect at Infospace, an Internet search and directory and mobile value-added services provider,
from 2000 to 2001 and as a development manager at Prio, an e-commerce service provider, from 1999
to 2000. Prior to that, Dr. Yang worked as a software engineer at Insight Development Corporation,
a software development firm. Dr. Yang holds a Ph.D. in Physics from the University of Miami and a
Bachelor of Science degree in Physics from Beijing University.
B. Compensation
Compensation of Directors and Executive Officers
In 2008, we paid an aggregate of approximately $476,410 and $160,000 in compensation to our
executive officers and non-executive directors, respectively.
Full-time employees of our company and our subsidiaries in China participate in a
government-mandated multi-employer defined contribution plan pursuant to which pension benefits,
medical care, unemployment insurance and other welfare benefits are provided to those employees.
The total provision for such employee benefits, corresponding to the full amount of our company’s
obligation in connection therewith was $1.6 million for 2008.
62
We have entered into indemnification agreements with each of our directors and executive
officers under which we agree to indemnify each of them to the fullest extent permitted by Cayman
Islands law, our articles of association and other applicable law, from and against all expenses
and liabilities arising from any proceeding, to which the indemnitee is or was a party, witness or
other participant. Upon the written request by a director or officer, we will, within 30 days after
receipt of the request, advance funds for the payment of expenses, unless there has been a final
determination that the director or officer is not entitled to indemnification for these expenses.
We also maintain director and executive officer insurance for our directors and executive officers.
Employment Agreements
We have entered into employment, invention assignment and confidentiality, and non-compete
agreements with each of our executive officers as described below.
These employment agreements provide that our obligations to compensate each officer will
terminate if that officer resigns other than for a good reason or is discharged by us for cause or
gross negligence, as determined by a majority of our board of directors. However, if an officer is
terminated without cause or resigns for good reason, we are obligated to provide severance
compensation equivalent to six months of the officer’s annual gross base salary to that officer.
The term “cause” includes actions by the officer involving:
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•
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physical harm to any person,
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•
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breach of the employment agreement, or
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The term “good reason” includes:
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•
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changes in the officer’s position, which materially reduce his level of
responsibilities, duties or stature, or
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•
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a reduction in the officer’s compensation.
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The executive officers are also entitled to exercise their stock options, which have vested at
the time of employment termination, if not for cause, for a period of thirty days thereafter (or
such other period of time not exceeding three months as is determined by the board of directors).
In addition, if a change of control occurs with respect to our company and an officer is
terminated without cause or resigns for good reason prior to the termination date of the officer’s
employment agreement or the date on which either our company or the officer elects not to extend
the agreement further by giving written notice to the other party, then we will be obligated to pay
severance benefits in an amount equal to six times the monthly rate of annual gross base salary in
effect immediately prior to the termination of employment.
Under the invention assignment and confidentiality agreements, each officer agrees, among
other things, to assign all rights in company-related inventions to us and to keep our proprietary
information confidential. The non-compete agreements prohibit each officer from being employed by,
or participating in any manner in the management or operation of, any business that is or may
reasonably become our competitor for a period of 12 months after termination of employment for any
reason.
Summary of Stock Plans
2004 Share Incentive Plan
Our board of directors and shareholders adopted our 2004 Share Incentive Plan, or 2004 Plan,
in July 2004. A total of 180,740,200 ordinary shares are reserved for issuance under the 2004 Plan.
A general description of the terms of the 2004 Plan is set forth below.
Types of Awards. Awards that can be granted under the 2004 Plan consist of:
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•
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options to purchase our ordinary shares,
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63
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•
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dividend equivalent rights, the value of which is measured by the dividends paid with
respect to our ordinary shares,
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•
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stock appreciation rights the value of which is measured by appreciation in the value
of our ordinary shares, and
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•
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any other securities the value of which is derived from the value of our ordinary
shares and which can be settled for cash, our ordinary shares or other securities or a
combination of cash, our ordinary shares or other securities.
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Under the 2004 Plan, we may also grant incentive stock options (also known as ISOs) within the
meaning of Section 422 of the U.S. Internal Revenue Code of 1986, as amended, or the Code, to
employees who are located in the U.S., or who are U.S. tax payers.
Plan Administration.
Our board currently administers the 2004 Plan, and may designate a
committee to administer it in the future.
Eligibility.
Under the 2004 Plan, awards may be issued to employees, directors or consultants
of our company or our subsidiaries, although ISOs may only be issued to our employees or the
employees of our subsidiaries.
Acceleration of Awards upon Corporate Transactions or Changes in Control.
The 2004 Plan
provides for acceleration of awards upon the occurrence of specified corporate transactions or
changes in control. In the event of certain corporate transactions, including specified types of
reorganizations and acquisition transactions, each outstanding award granted under the 2004 Plan
will automatically become fully vested and exercisable and be released from any restrictions on
transfer (other than transfer restrictions applicable to the award) and repurchase or forfeiture
rights immediately prior to the specified effective date of the corporate transaction, unless the
award is assumed or replaced by the successor company or its parent company in connection with the
corporate transaction. Upon consummation of the corporate transaction, each outstanding award will
terminate unless the award is assumed by the successor company or its parent company.
Awards.
Awards under the 2004 Plan are evidenced by an award agreement which contains, among
other things, provisions concerning exercisability and forfeiture upon termination of employment or
consulting arrangement (by reason of death, disability or otherwise) as have been determined by our
board. In addition, in the case of stock options the award agreement also specifies whether the
option constitutes an ISO or a non-qualified stock option (also known as NSOs) and may, but need
not, include a provision whereby a grantee at any time during his or her employment with us may
exercise any part or all of the award prior to full vesting of the award.
Exercise or Purchase Price and Term of Awards.
An award may be exercised when a holder
delivers a notice of such exercise to us. The exercise or purchase price must be paid at the time
of exercise in full by cash, check or whole ordinary shares with a fair market value at least equal
to the option price (or in another appropriate manner approved by us, such as in a combination of
cash and whole ordinary shares or, with respect to options, by cashless exercise through a
broker-dealer).
The exercise price of ISOs cannot be less than the fair market value of our ordinary shares on
the date of grant. However, in the case of an ISO granted to a grantee, who, at the time the ISO
was granted, owned stock possessing more than 10.0% of the combined voting power of all classes of
our share capital or the share capital of any parent or subsidiary of us, the option price may not
be less than 110.0% of the fair market value of our ordinary shares on the date of grant of such
ISO. The term of an ISO cannot exceed 10 years. In addition, the term of an ISO granted to a
person, who, at the time of grant, owns stock possessing more than 10.0% of the combined voting
power of all classes of our share capital, is limited to five years from the date of the grant of
the award. To the extent that the aggregate fair market value of our ordinary shares subject to
options granted as ISOs under the 2004 Plan which become exercisable for the first time by a
recipient during any calendar year exceeds $100,000, then options represented by ordinary shares in
excess of the $100,000 limitation shall be treated as NSOs.
The plan administrator will determine the term and exercise or purchase price, if any, of all
other awards granted under our 2004 Plan. The exercise or purchase price for the awards is
specified in the award agreement.
Transferability.
Under the 2004 Plan, ISOs may not be sold, pledged, assigned, hypothecated,
transferred or disposed of in any manner other than by will or by the laws of descent or
distribution and may be exercised during the lifetime of the grantee only by the grantee. Other
awards shall be transferable by will or by the laws of descent or distribution and to the extent
provided in the award agreement. The 2004 Plan permits the designation of beneficiaries by holders
of awards, including ISOs.
Termination of Service.
The period following the termination of a grantee’s employment or
service with us during which the grantee can exercise his or her option, if any, will be provided
in the award agreement, and it cannot end later than the last day of the original term of the
award. In the event a grantee’s employment or service with us is terminated without cause (as
defined in the 2004 Plan), any awards which have become exercisable prior to the time of
termination will remain exercisable for three months from the date of termination. In the event a
grantee’s employment or service with us is terminated for cause, the grantee’s right to exercise
his or her options will terminate concurrently with the termination of the grantee’s service. If
termination is caused by death or disability, any awards which have become exercisable prior to the
time of termination, will remain exercisable for six months from the date of termination.
64
Amendment or Termination of 2004 Plan.
Under the 2004 Plan, our board may at any time
terminate, suspend, or amend the 2004 Plan in any respect, except that no termination, suspension
or amendment will be effective without shareholder approval if such approval is required to comply
with any law, regulation or stock exchange rule and no such change may adversely affect any award
previously granted without the consent of the recipient. The 2004 Plan will expire on the tenth
anniversary of the date that it was approved by the shareholders.
C. Board Practices
For information regarding the terms of our current directors and the period during which our
officers and directors have served in their respective positions, please refer to Item 6.A. “—
Directors and Senior Management” above.
Our board of directors held four meetings and took action on 11 occasions by unanimous written
consent during 2008. We have no specific policy with respect to director attendance at our annual
general meetings of shareholders, and three of our directors attended the annual general meeting of
shareholders held on September 10, 2008. Our board has determined that four of our current board
members, Messrs. Mao, Shringla, Powrie and Zhang, are “independent” as defined under applicable
NASDAQ rules.
The board has three committees: the audit committee, the compensation committee and the
nominating committee.
In 2008, our audit committee held five meetings. Our audit committee charter pursuant to which
the audit committee is responsible for overseeing the accounting and financial reporting processes
of our company, including the appointment, compensation and oversight of the work of our
independent auditors, monitoring compliance with our accounting and financial policies and
evaluating management’s procedures and policies relative to the adequacy of our internal accounting
controls.
Our compensation committee held one meeting in 2008. The compensation committee’s functions
are to review and make recommendations to our board of directors regarding our compensation
policies and all forms of compensation to be provided to our executive officers and directors.
No interlocking relationships have existed between our board of directors or compensation
committee and the board of directors or compensation committee of any other company.
Our nominating committee held one meeting in 2008. The nominating committee is responsible for
the assessment of the performance of the board of directors and considering and making
recommendations to the board of directors with respect to the nominations or elections of
directors.
The audit, compensation and nominating committees operate under written charters setting forth
the functions and responsibilities of each such committee. Copies of those charters are available
on our website at
www.hurray.com
. The members of our audit, compensation and nominating
committees are Robert Mao, Suberna Shringla and Alan Powrie, each of whom satisfies the
“independence” and financial literacy requirements of the NASDAQ rules. Our board of directors has
determined that Alan Powrie is an “audit committee financial expert” as that term is defined in
Item 16A of Form 20-F.
D. Employees
As of December 31, 2008, 2007 and 2006, we had 328, 444 and 471 full-time employees,
respectively. In addition, our affiliated music companies (Freeland Music, Huayi Brothers Music,
New Run, and Secular Bird) had an aggregate of 132 employees as of December 31, 2008. Seed Music
Group had 44 employees. None of our personnel are represented under collective bargaining
agreements.
E. Share Ownership
The following table sets forth certain information known to us with respect to the beneficial
ownership as of May 1, 2009 by:
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all persons who are beneficial owners of five percent or more of our ordinary shares,
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our current executive officers and directors, and
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•
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all current directors and executive officers as a group.
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As of May 1, 2009, 2,196,186,640 of our ordinary shares were outstanding. The amounts and
percentages of ordinary shares beneficially owned are reported on the basis of regulations of the
US Securities and Exchange Commission, or SEC, governing the determination of beneficial ownership
of securities. Under the rules of the SEC, a person is deemed to be a “beneficial owner” of a
security if that person has or shares “voting power,” which includes the power to vote or to direct
the voting of such security, or “investment power,” which includes the power to dispose of or to
direct the disposition of such security. A person is also deemed to be a beneficial owner of any
securities of which that person has a right to acquire beneficial ownership within 60 days. Under
these rules, more than one person may be deemed a beneficial owner of securities as to which such
person has no economic interest. Unless otherwise indicated in the footnotes that follow, the
parties named below have sole voting and dispositive powers over the shares beneficially owned by
them.
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Number of Shares
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Beneficially Owned
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Name
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Number
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Percentage
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5% and above Shareholders
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Granite Global Ventures
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265,115,480
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12.07
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%
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2494 Sand Hill Road
Suite 100 Menlo Park, CA 94025 United States
(1)
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China Rock Capital Management
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210,891,000
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9.60
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%
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2804 One Exchange, 8 Connaught Place Central Hong Kong
SAR
(2)
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Executive Officers and Directors
(3)
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Pleasant Season Ltd./Qindai Wang
(4)
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214,221,660
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9.75
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%
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Thomas Ng
(5)
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265,115,480
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12.07
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%
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Robert Mao
(6)
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2,000,000
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*
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Suberna Shringla
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—
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*
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Xero Holdings Ltd./Songzuo Xiang
(7)
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106,859,620
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4.87
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%
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Shudan Zhang
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1,074,128
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4.89
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%
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Alan Powrie
(8)
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600,000
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*
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P.N.L. Ltd./Ping Ji
(9)
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15,607,200
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*
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JJF International Ltd./Fan Yang
(10)
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45,600,000
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2.08
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%
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Harrison Youth Ltd./Haoyu Yang
((11)
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77,791,300
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3.54
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%
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Xiaoqing Guo
(12)
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1,653,400
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*
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All current directors and executive officers as a group
(11 persons)
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836,871,500
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64.70
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%
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(1)
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Granite Global Ventures is an investment adviser.
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(2)
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China Rock Capital Management is an investment adviser. This share information is based
solely on information filed by such shareholder with the SEC.
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(3)
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The address of our executive officers and directors is c/o Hurray! Holding Co., Ltd., 15/F,
Tower B, Gateway Plaza, No.18 Xia Guang Li, East Third Ring, Chaoyang District, Beijing
100027, People’s Republic of China.
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(4)
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Represents shares beneficially owned by Mr. Wang through a revocable trust in which he
retains voting and dispositive power over such shares.
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(5)
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Represents 1,244,929 ADSs and 60 ordinary shares, 21,272 ADSs and 20 ordinary shares,
1,355,248 ADSs, and 29,705 ADSs held by Granite Global Ventures (Q.P.) L.P., Granite Global
Ventures L.P., Granite Global Ventures III L.P., and GGV III Entrepreneurs Fund L.P.,
respectively. Mr. Ng is a managing director of Granite Global Ventures L.L.C., which is the
general partner of Granite Global Ventures (Q.P.) L.P. and Granite Global Ventures L.P., and a
managing director of Granite Global Ventures III L.L.C., which is the general partner of
Granite Global Ventures III L.P. and GGV III Entrepreneurs Fund L.P. Mr. Ng disclaims
beneficial ownership of ADSs and ordinary shares held by Granite Global Ventures (Q.P.) L.P.,
Granite Global Ventures L.P., Granite Global Ventures III L.P., and GGV III Entrepreneurs Fund
L.P. except to the extent of his pecuniary interests in those ADSs and ordinary shares.
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(6)
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Represents ordinary shares issuable upon the exercise of stock options. All of the options
have an exercise price of $0.0705 per ordinary share and an expiration date of June 30, 2013.
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(7)
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Represents ordinary shares beneficially owned by Dr. Xiang through a revocable trust in which
he retains voting and dispositive power over such shares.
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(8)
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Represents ordinary shares issuable upon the exercise of stock options. All of the options
have an exercise price of $0.1025 per ordinary share and an expiration date of January 1,
2014.
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(9)
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Represents ordinary shares beneficially owned by Mr. Ji through a revocable trust in which he
retains voting and dispositive power over such shares.
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(10)
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Represents ordinary shares beneficially owned by Mr. Yang through a revocable trust in which
he retains voting and dispositive power over such shares.
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(11)
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Represents ordinary shares beneficially owned by Mr. Yang through a revocable trust in which
he retains voting and dispositive power over such shares.
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(12)
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Represents 1,205,400 ordinary shares issuable upon exercise of stock option, which have a
purchase price of $0.00005 per ordinary share, and an expiration date of November 23, 2010,
and 4,480,000 ordinary shares issuable upon exercise of stock options, which have an exercise
price of $0.1025 and $0.1175 per ordinary share and an expiration date of January 1, 2015, and
January 1, 2014, respectively.
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As of May 1, 2009, based on public filings with the SEC, there are no major shareholders
holding 5% or more of our ordinary shares or ADSs representing ordinary shares, except as described
above.
As of May 1, 2009, approximately 80 of our ordinary shares were held in the U.S. by two
holders of record, excluding shares held by our ADS depositary bank, Citibank N.A., on behalf of
our ADS holders. Citibank N.A. has advised us that as of that date19,410,579 ADSs, representing
1,941,057,900 ordinary shares, were held of record by Cede & Co and two other registered
shareholder. We have no further information as to ordinary shares held, or beneficially owned, by
U.S. persons.
Our company’s major shareholders do not have different voting rights from each other or other
shareholders of our company. To our knowledge, except as disclosed above, we are not owned or
controlled, directly or indirectly, by another corporation, by any foreign government or by any
other natural or legal person or persons, severally or jointly. To our knowledge, there are no
arrangements the operation of which may at a subsequent date result in us undergoing a change in
control.
Item 7. Major Shareholders and Related Party Transactions
A. Major Shareholders
Please refer to Item 6.E. “Directors, Senior Management and Employees—Share Ownership.”
B. Related Party Transactions
Related Party Transactions
We currently conduct our business in China through our wholly-owned subsidiary, Beijing
Hurray! Times. To comply with ownership requirements under Chinese law, which impose certain
restrictions on foreign companies from investing in certain industries such as value-added
telecommunication and Internet services, Beijing Hurray! Times entered into a series of agreements
with our affiliated Chinese entities, Hurray! Solutions, WVAS Solutions, Beijing Network, Beijing
Palmsky, Beijing Hutong, Hengji Weiye, Henan Yinshan, Shanghai Saiyu, and Shanghai Magma (which are
collectively referred to below as “our affiliated Chinese entities”) and their respective
shareholders. We hold no ownership interest in such affiliated Chinese entities. In addition, we
control Hurray! Digital Media through three of our affiliated Chinese entities, Hurray! Solutions,
Beijing Network and Beijing Hutong. See Item 4.C. “Information On the Company — Organizational
Structure.”
The principal terms of the agreements with our affiliated Chinese entities and their
respective shareholders are described below.
Powers of Attorney.
Each of the shareholders of our affiliated Chinese entities has
irrevocably designated Qindai Wang, in his capacity as General Manager of Beijing Hurray! Times, as
attorney-in-fact, to vote on their behalf at shareholders meetings on matters on which they are
entitled to vote with respect to Hurray! Solutions, WVAS Solutions, Beijing Network, Beijing
Palmsky, Beijing Hutong, Hengji Weiye, Henan Yinshan, Shanghai Saiyu and Shanghai Magma, as the
case may be,including matters relating to the transfer of any or all of their respective equity
interests in our affiliated Chinese entities and the appointment of the directors of our affiliated
Chinese entities. The term of each of the powers of attorney is ten years. These powers of attorney
do not extend to votes by the shareholders of our company or subsidiaries.
Each such power of attorney by its terms is valid only for so long as the designated
attorney-in-fact remains the general manager of Beijing Hurray! Times. If the attorney-in-fact
ceases to be the general manager, the power of attorney will terminate automatically and the
succeeding general manager shall be designated.
67
Operating Agreements.
Through Beijing Hurray! Times, we may provide guarantees to our
affiliated Chinese entities of their contracts, agreements or transactions with third parties, to
the extent permitted under Chinese law. In return, our affiliated Chinese entities have granted us
a security interest over all of their assets, including all of their accounts receivable, which
have not previously been encumbered by security interests. We also have the right of first refusal
with respect to future loan guarantees. In addition, our affiliated Chinese entities and their
shareholders have each agreed that they will not enter into any transaction, or fail to take any
action, that would substantially affect their assets, rights and obligations, or business without
our prior written consent. They will also appoint persons designated by Beijing Hurray! Times as
the directors, officers and other senior management personnel of our affiliated Chinese entities,
as well as accept the guidance of Beijing Hurray! Times regarding their day-to-day operations,
financial management and the hiring and dismissal of their employees. While Beijing Hurray! Times
has the right to terminate all of its agreements with our affiliated Chinese entities if any of our
agreements with them expires or is terminated, our affiliated Chinese entities may not terminate
the operating agreements during the term of the agreements, which is ten years.
Exclusive Technical Consulting and Services Agreements.
Through Beijing Hurray! Times, we
provide our affiliated Chinese entities with exclusive technical support and related consulting and
information services. We are the exclusive provider of these services. The initial term of these
agreements is ten years. The service fees are subject to adjustment from time to time based on the
services provided to our affiliated Chinese entities, up to amounts equaling all of these entities’
revenues.
Software Transfer Agreements and Software License Agreements.
Beijing Palmsky also entered
into agreements to transfer to Beijing Hurray! Times its ownership rights in its games software,
which Beijing Hurray! Times has licensed back for Beijing Palmsky’s use in its operations on a
non-exclusive basis for a nominal license fee.
Contracts Relating to the Exclusive Purchase Right of Equity Interest.
Under the Contracts
Relating to the Exclusive Purchase Right of Equity Interest among us, our affiliated Chinese
entities and each of their shareholders, we or our designee has an exclusive option to purchase
from each of their shareholders all or part of each such shareholder’s equity interest in our
affiliated Chinese entities at book value, to the extent permitted by Chinese law. The term of
these agreements is 10 years, renewable by us for an additional 10-year term at our sole
discretion.
Equity Interests Pledge Agreements.
Each of the shareholders of our affiliated Chinese
entities pledged their respective equity interests in such entities to guarantee the payment of the
service fee by our affiliated Chinese entities under the Exclusive Technical Consulting and
Services Agreements described above. If any of our affiliated Chinese entities breach any of their
obligations under the Equity Interests Pledge Agreements, Beijing Hurray! Times is entitled to sell
the equity interests held by such shareholders and retain the proceeds of such sale or require any
of them to transfer to us their equity interest in the applicable affiliated entity.
We believe that the terms of these agreements are no less favorable to us than we could obtain
from disinterested parties. The material terms of the agreements among us, our respective
affiliated Chinese entities and their shareholders are substantially identical except for the
amount of license fees paid by each entity. We believe that the individual shareholders of each
entity will not receive any personal benefits from these agreements, except as shareholders of our
company. As a result of the foregoing contractual arrangements, we effectively have financial
control over our affiliated Chinese entities through our security interests over their assets, our
ability to receive up to all of their revenue and our other rights described above. In turn, the
general manager of Beijing Hurray! Times (currently Qindai Wang), who, as a matter of Chinese law,
is subject to the direction of Beijing Hurray! Times’ board of directors, maintains control over
all voting matters involving our affiliated Chinese entities.
We have also entered into certain agreements with Huayi Brothers Music and Freeland Music for
online and offline distribution of music content which are described under Item 4.B. “Business
Overview — Product and Content Development — Music Production.”
As part of the acquisition agreements for the purchase of Huayi Brothers Music, Freeland Music
and New Run Entertainment, we agreed to use the existing distribution and CD manufacturing
operations, where appropriate, owned by the minority shareholders, or their related parties, of
these companies. In addition, these parties may use the music or artists of Huayi Brothers Music,
Freeland Music or New Run Entertainment and make royalty and other payments to Huayi Brothers
Music, Freeland Music or New Run Entertainment. The term of such agreements is one year although
such agreements may be extended by the mutual agreement of both parties. During 2008, we recognized
revenues of $566,544 and made payments under these agreements of $104,281.
In the fourth quarter of 2008, Freeland Music advanced $162,721 to its minority shareholder on
an interest-free basis, As of March 31, 2009, the balance was cleared.
68
Item 8. Financial Information
A. Consolidated Statements and Other Financial Information
See Item 18. “Financial Statements” for our audited consolidated financial statements filed as
part of this annual report on Form 20-F.
A.7 Legal Proceedings
We are not currently a party to any material litigation and are not aware of any material
litigation pending or threatened.
A.8 Dividend Policy
We have never declared or paid any dividends on our ordinary shares. We do not anticipate
paying any cash dividends in the foreseeable future. We currently intend to retain future earnings,
if any, to finance operations and for the expansion of our business. Payments of dividends by our
subsidiaries in China to our company are subject to restrictions including primarily the
restriction that foreign invested enterprises may only buy, sell and/or remit foreign currencies at
those banks authorized to conduct foreign exchange business after providing valid commercial
documents. There are no such similar foreign exchange restrictions in the Cayman Islands.
B. Significant Changes
See Item 5.A “Operating Results — Recent Developments” and Item 18 “Financial Statements” for
information regarding significant changes to us since December 31, 2007.
Item 9. The Offer and Listing
Not applicable except for Item 9.A.4. and Item 9.C.
American Depositary Shares, or ADSs, each representing 100 of our ordinary shares, have been
listed on the Nasdaq Global Market since February 4, 2005. Our ADSs trade under the symbol “HRAY.”
The following table provides the high and low prices for our ADSs on the Nasdaq Global Market
for (1) each year since our initial public offering, (2) each quarter in the two most recent
financial years and the most recent quarter and (3) each of the most recent six months.
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Sales Price
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High
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Low
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Annual highs and lows
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2005 (February 4, 2005 through December 31, 2005)
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$
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11.80
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$
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7.67
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2006
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$
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9.71
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$
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4.70
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2007
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$
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6.53
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$
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3.05
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2008
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$
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4.21
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$
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1.08
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2009
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$
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2.28
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$
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0.93
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Quarterly highs and lows
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First Quarter 2007
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$
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6.53
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$
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4.85
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Second Quarter 2007
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$
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5.62
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$
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4.36
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Third Quarter 2007
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$
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6.04
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$
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3.32
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Fourth Quarter 2007
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$
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6.04
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$
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3.05
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First Quarter 2008
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$
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4.21
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$
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2.36
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Second Quarter 2008
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$
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3.30
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$
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2.61
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Third Quarter 2008
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$
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3.19
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$
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2.21
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Fourth Quarter 2008
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$
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2.75
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$
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1.08
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First Quarter 2009
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$
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2.04
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$
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0.93
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Second Quarter 2009 (April 1, 2009 through May 31, 2009)
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$
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3.10
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$
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0.95
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Monthly highs and lows
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December 2008
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$
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2.75
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$
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1.19
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January 2009
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$
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2.04
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$
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1.55
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February 2009
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$
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1.95
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$
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1.07
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March 2009
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$
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1.50
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$
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0.93
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April 2009
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$
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2.28
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$
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0.95
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May 2009
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$
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3.10
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$
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1.98
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69
Item 10. Additional Information
A. Share Capital
Not applicable.
B. Memorandum and Articles of Association
Please see “Description of Share Capital” in our registration statement on Form F-1 filed on
January 12, 2005, as amended, with the SEC.
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 Company,” and Item 7.B. “Related
Party Transactions,” or elsewhere in this annual report on Form 20-F.
D. Exchange Controls
Foreign currency exchange regulation in China is primarily governed by the following rules:
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Notice on Issues Relating to the Administration of Foreign Exchange in Fundraising and
Return Investment Activities of Domestic Residents Conducted via Offshore Special Purpose
Companies;
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•
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Foreign Currency Administration Rules (1996), as amended, or the Exchange Rules; and
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•
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Administration Rules of the Settlement, Sale and Payment of Foreign Exchange (1996), or
the Administration Rules.
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Under the Exchange Rules, the Renminbi is convertible for current account items, including the
distribution of dividends, interest payments, trade and service-related foreign exchange
transactions. Conversion of Renminbi for capital account items, such as direct investment, loan,
security investment and repatriation of investment, however, is subject to the approval of SAFE.
Under the Administration Rules, foreign-invested enterprises may only buy, sell and/or remit
foreign currencies at those banks authorized to conduct foreign exchange business after providing
valid commercial documents and, in the case of capital
account item transactions, obtaining approval from SAFE. Capital investments by
foreign-invested enterprises outside of China are also subject to limitations, which include
approvals by the PRC Ministry of Commerce, SAFE and the NDRC.
In October 2005, SAFE issued the Notice on Issues Relating to the Administration of Foreign
Exchange in Fundraising and Return Investment Activities of Domestic Residents Conducted via
Offshore Special Purpose Companies, or Notice 75, which took effect on November 1, 2005. Notice 75
supersedes prior SAFE regulations promulgated in January and April of 2005. In May 2007, SAFE
issued the Notice of the State Administration of Foreign Exchange on Operating Procedures
Concerning Notice on Issues Relating to the Administration of Foreign Exchange in Fund-raising and
Return Investment Activities of Domestic Residents Conducted via Offshore Special Purpose
Companies, or Notice 106. Notices 75 and 106 require PRC residents to register with the relevant
local SAFE branch in connection with their establishment or control of an offshore entity
established for the purpose of overseas equity financing involving onshore assets or equity
interests held by them and direct investment through such an offshore entity in the PRC. The term
“PRC residents,” as used in Notice 75, includes not only PRC citizens but also other persons who
habitually reside in the PRC for economic benefit. Such PRC residents are required to register with
the relevant SAFE branch before establishing or taking control of such an offshore entity and
complete amended registrations with the relevant SAFE branch upon (i) injection of equity interests
or assets of an onshore enterprise into the offshore entity, (ii) subsequent overseas equity
financing by such offshore entity, or (iii) any material change in the shareholding or capital of
the offshore entity, such as changes in share capital, share transfers and long-term equity or debt
investments, and providing security. The PRC residents who have already incorporated or gained
control of offshore entities that had completed onshore investments in the PRC before Notice 75
took effect must register with the relevant local SAFE branch on or before March 31, 2006. In
addition, such PRC residents are required to repatriate into the PRC all of their dividend profits
or capital gains from their shareholdings in the offshore entity within 180 days of their receipt
of such profits or gains.
70
The registration and amendment procedures set forth by Notices 75 and 106 are prerequisites
for other approval and registration procedures necessary for capital inflow from the offshore
entity, such as inbound investment or shareholders loans, or capital outflow to the offshore
entity, such as the payment of profits or dividends, liquidating distributions, equity sale
proceeds or the return of funds upon a capital reduction.
A number of terms and provisions in Notices 75 and 106 remain unclear. Because of uncertainty
over how Notices 75 and 106 will be interpreted and implemented, we cannot predict how they will
affect our business operations or future strategies. For example, our present and prospective PRC
subsidiaries’ ability to conduct foreign exchange activities, such as remitting dividends and
foreign currency-denominated borrowings, may be subject to compliance with requirements of Notices
75 and 106 by the PRC resident holders of our ordinary shares and ADSs. Despite our effort to fully
comply with the SAFE regulations, we cannot assure you that we will obtain, or receive waivers
from, any necessary approvals or not be found in violation of the SAFE regulations or any other
related foreign exchange regulations. In particular, we cannot assure you that we will be able to
cause all the present or prospective PRC resident holders of our ordinary shares or ADSs to comply
with all SAFE regulations. A failure by the PRC resident holders of our ordinary shares or ADSs to
comply with Notices 75 and 106 or our inability to secure required approvals or registrations may
subject us to fines or legal sanctions, limit our subsidiaries’ ability to make distributions or
pay dividends, restrict our overseas or cross-border investment activities or affect our ownership
structure, any of which could affect our business and prospects.
E. Taxation
The following summary of the material Cayman Islands and United States federal income tax
consequences relevant to the purchase, ownership or sale of our ADSs is based upon laws and
relevant interpretations thereof in effect as of the date of this annual report, all of which are
subject to change. The summary does not purport to be a comprehensive description of all of the tax
considerations that may be relevant to any particular investor depending on its individual
circumstances. Accordingly beneficial owners of shares should consult their own tax advisors
regarding the application of the considerations discussed below to their particular situations and
the consequences, including U.S. federal estate or gift tax laws, foreign, state, or local laws,
and tax treaties.
Cayman Islands Taxation and Exchange Control
Pursuant to section 6 of the Tax Concessions Law (1999 Revision) of the Cayman Islands, our
company has obtained an undertaking from the Governor-in-Council:
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(i)
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that no law which is enacted in the Cayman Islands imposing any tax to be
levied on profits or income or gains or appreciation shall apply to our company or its
operations; and
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(ii)
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in addition, that no tax be levied on profits, income gains or appreciations or
which is in the nature of estate duty or inheritance tax shall be payable by our
company:
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(a)
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on or in respect of the shares, debentures or other obligations of our
company; or
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(b)
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by way of withholding in whole or in part of any relevant payment as
defined in section 6(3) of the Tax Concessions Law (1999 Revision).
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The undertaking for our company is for a period of twenty years from 7 May 2002.
The Cayman Islands currently levy 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 the company levied by the Government of the
Cayman Islands except for stamp duties which may be applicable on instruments. The Cayman Islands
are not party to any double tax treaties. There are no exchange control regulations or currency
restrictions in the Cayman Islands.
71
United States Federal Income Taxation
The following is a summary of the material U.S. federal income tax consequences of the
ownership and disposition of ordinary shares or ADSs. The following discussion is not exhaustive of
all possible tax considerations. This summary is based upon the Internal Revenue Code of 1986, as
amended (the “Code”), regulations promulgated under the Code by the U.S. Treasury Department
(including proposed and temporary regulations), rulings, current administrative interpretations and
official pronouncements of the Internal Revenue Service (the “IRS”), and judicial decisions, all as
currently in effect and all of which are subject to differing interpretations or to change,
possibly with retroactive effect. Such change could materially and adversely affect the tax
consequences described below. No assurance can be given that the IRS will not assert, or that a
court will not sustain, a position contrary to any of the tax consequences described below.
This discussion does not address state, local, or foreign tax consequences of the ownership
and disposition of ordinary shares or ADSs. (See “Cayman Islands Taxation” above). The United
States does not have an income tax treaty with the Cayman Islands.
This summary is for general information only and does not address all aspects of U.S. federal
income taxation that may be important to a particular holder in light of its investment or tax
circumstances or to holders subject to special tax rules, such as: banks; financial institutions;
insurance companies; dealers in stocks, securities, or currencies; traders in securities that elect
to use a mark-to-market method of accounting for their securities holdings; tax-exempt
organizations; real estate investment trusts; regulated investment companies; qualified retirement
plans, individual retirement accounts, and other tax-deferred accounts; expatriates of the United
States; persons subject to the alternative minimum tax; persons holding ordinary shares or ADSs as
part of a straddle, hedge, conversion transaction, or other integrated transaction; persons who
acquired ordinary shares or ADSs pursuant to the exercise of any employee stock option or otherwise
as compensation for services; persons actually or constructively holding 10% or more of our voting
stock; and U.S. Holders (as defined below) whose functional currency is other than the U.S. dollar.
This discussion is not a comprehensive description of all of the U.S. federal tax consequences
that may be relevant with respect to the ownership and disposition of ordinary shares or ADSs. We
urge you to consult your own tax advisor regarding your particular circumstances and the U.S.
federal income and estate tax consequences to you of owning and disposing of ordinary shares or
ADSs, as well as any tax consequences arising under the laws of any state, local, or foreign or
other tax jurisdiction and the possible effects of changes in U.S. federal or other tax laws.
This summary is directed solely to persons who hold their ordinary shares or ADSs as capital
assets within the meaning of Section 1221 of the Code, which generally means as property held for
investment. For purposes of this discussion, the term “U.S. Holder” means a beneficial owner of
ordinary shares or ADSs that is any of the following:
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a citizen or resident of the United States or someone treated as a U.S. citizen
or resident for U.S. federal income tax purposes;
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•
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a corporation (or other entity taxable as a corporation for U.S. federal income
tax purposes) created or organized in or under the laws of the United States, any state
thereof, or the District of Columbia;
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•
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an estate, the income of which is subject to U.S. federal income taxation
regardless of its source;
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•
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a trust if a U.S. court can exercise primary supervision over the trust’s
administration and one or more U.S. persons have the authority to control all
substantial decisions of the trust; or
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•
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a trust in existence on August 20, 1996 that has a valid election in effect
under applicable Treasury Regulations to be treated as a U.S. person.
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The term “Non-U.S. Holder” means a beneficial owner of ordinary shares or ADSs that is not a
U.S. Holder. As described in “Taxation of Non-U.S. Holders” below, the tax consequences to a
Non-U.S. Holder may differ substantially from the tax consequences to a U.S. Holder.
If a partnership (including for this purpose any entity treated as a partnership for U.S.
federal income tax purposes) is a beneficial owner of ordinary shares or ADSs, the U.S. federal
income tax consequences to a partner in the partnership will generally depend on the status of the
partner and the activities of the partnership. A holder of ordinary shares or ADSs that is a
partnership and the partners in such partnership should consult their own tax advisors regarding
the U.S. federal income tax consequences of the ownership and disposition of ordinary shares or
ADSs.
72
ADSs
As relates to the ADSs, this discussion is based in part upon the representations of the
depositary and the assumption that each obligation in the deposit agreement and any related
agreement will be performed in accordance with its terms.
Generally, a holder of ADSs will be treated as the owner of the underlying ordinary shares
represented by those ADSs for U.S. federal income tax purposes. Accordingly, no gain or loss will
be recognized if the holder exchanges ADSs for the underlying ordinary shares represented by those
ADSs. The holder’s adjusted tax basis in the ordinary shares will be the same as the adjusted tax
basis of the ADSs surrendered in exchange therefor, and the holding period for the ordinary shares
will include the holding period for the surrendered ADSs.
TAXATION OF U.S. HOLDERS
Passive Foreign Investment Company
We believe that we were a PFIC for taxable years 2006, 2007 and 2008 and are likely to be
classified as a PFIC for the current taxable year of 2009. Because the PFIC determination is highly
fact intensive and made at the end of each taxable year, there can be no assurance that we will not
be a PFIC for the current or any future taxable year.
We generally will be a PFIC under Section 1297 of the Code if, for a taxable year, either (a)
75% or more of our gross income for such taxable year is passive income (the “income test”) or (b)
50% or more of the average percentage, generally determined by fair market value, of our assets
during such taxable year either produce passive income or are held for the production of passive
income (the “asset test”). “Passive income” includes, for example, dividends, interest, certain
rents and royalties, certain gains from the sale of stock and securities, and certain gains from
commodities transactions.
Certain “look through” rules apply for purposes of the income and asset tests described above.
If we own, directly or indirectly, 25% or more of the total value of the outstanding shares of
another corporation, we generally will be treated as if we (a) held directly a proportionate share
of the other corporation’s assets, and (b) received directly a proportionate share of the other
corporation’s income. In addition, passive income does not include any interest, dividends, rents,
or royalties that are received or accrued by us from a “related person” (as defined in Section
954(d)(3) of the Code), to the extent such items are properly allocable to income of such related
person that is not passive income.
Under the income and asset tests, whether or not we are a PFIC will be determined annually
based upon the composition of our income and the composition and valuation of our assets, all of
which are subject to change.
Default PFIC Rules under Section 1291 of the Code
. If we are a PFIC for any taxable year
during which a U.S. Holder holds ordinary shares or ADSs, we will continue to be treated as a PFIC
with respect to such U.S. Holder for all succeeding years during which such U.S. Holder holds
ordinary shares or ADSs, regardless of whether we actually continue to be a PFIC. Since we believe
that we were a PFIC for 2006, 2007 and 2008, if you held ordinary shares or ADSs in 2006, 2007 or
2008, we will continue to be treated as a PFIC with respect to you for all succeeding years during
which you hold ordinary shares or ADSs. Even if you only began holding ordinary shares or ADSs in
the current taxable year of 2009, if it turns out that we are a PFIC for 2009, we will continue to
be treated as a PFIC with respect to you for all succeeding years during which you hold ordinary
shares or ADSs. You may terminate this deemed PFIC status by electing to recognize gain (which will
be taxed under the default tax rules of Section 1291 of the Code discussed below) as if your
ordinary shares or ADSs had been sold on the last day of the last taxable year for which we were a
PFIC.
If we are treated as a PFIC with respect to you, the U.S. federal income tax consequences to
you of the ownership and disposition of ordinary shares or ADSs will depend on whether you make an
election to treat us as a qualified electing fund (“QEF”) under Section 1295 of the Code (a “QEF
Election”) or a mark-to-market election under Section 1296 of the Code (a “Mark-to-Market Election”). If you owned or own ordinary shares or ADSs while we were or are a
PFIC and have not made either a QEF Election or a Mark-to-Market Election, you will be referred to
in this summary as a “Non-Electing U.S. Holder.”
If you are a Non-Electing U.S. Holder, you will be subject to the default tax rules of Section
1291 of the Code with respect to:
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any “excess distribution” paid on ordinary shares or ADSs, which means the
excess (if any) of the total distributions received by you during the current taxable
year over 125% of the average distributions received by you during the three preceding
taxable years (or during the portion of your holding period for the ordinary shares or
ADSs prior to the current taxable year, if shorter); and
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any gain recognized on the sale or other taxable disposition (including a
pledge) of ordinary shares or ADSs.
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73
Under these default tax rules:
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any excess distribution or gain will be allocated ratably over your holding
period for the ordinary shares or ADSs;
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the amount allocated to the current taxable year and any period prior to the
first day of the first taxable year in which we were a PFIC will be treated as ordinary
income in the current taxable year;
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the amount allocated to each of the other years will be treated as ordinary
income and taxed at the highest applicable tax rate in effect for that year; and
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the resulting tax liability from any such prior years will be subject to the
interest charge applicable to underpayments of tax.
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In addition, notwithstanding any election you may make, dividends that you receive from us
will not be eligible for the preferential tax rates applicable to QDI (as discussed below in
“Distributions on Ordinary Shares or ADSs”) if we are a PFIC either in the taxable year of the
distribution or the preceding taxable year, but will instead be taxable at rates applicable to
ordinary income.
Special rules for Non-Electing U.S. Holders will apply to determine U.S. foreign tax credits
with respect to foreign taxes imposed on distributions on ordinary shares or ADSs.
If we are treated as a PFIC in any year with respect to you, you will be required to file an
annual return on IRS Form 8621 regarding distributions received on ordinary shares or ADSs and any
gain realized on the disposition of ordinary shares or ADSs. Since we believe that we were a PFIC
for 2008, if you held ordinary shares or ADSs in 2008, you are required to file IRS Form 8621 for
2008 and for all succeeding years during which we continue to be treated as a PFIC with respect to
you. Alternatively, even if you only began holding ordinary shares or ADSs in the current taxable
year of 2009, if it turns out that we are a PFIC for 2009, you will be required to file IRS Form
8621 for 2009 and for all succeeding years during which we continue to be treated as a PFIC with
respect to you.
QEF Election
. If you own (or owned) ordinary shares or ADSs while we are (or were) a PFIC and
make a QEF Election, you generally will not be subject to the default rules of Section 1291 of the
Code discussed above. Instead, you will be subject to current U.S. federal income tax on your pro
rata share of our ordinary earnings and net capital gain, regardless of whether such amounts are
actually distributed to you by us. However, you can make a QEF Election only if we agree to furnish
you annually with certain tax information, and we currently do not intend to prepare or provide
such information.
Mark-to-Market Election.
U.S. Holders may make a Mark-to-Market Election, but only if our
ordinary shares or ADSs are marketable stock. Our ordinary shares are not currently listed on any
exchange, but our ADSs will be “marketable stock” as long as they remain listed on the Nasdaq
Global Market and are regularly traded. Stock is “regularly traded” for any calendar year during
which it is traded (other than in de minimis quantities) on at least 15 days during each calendar
quarter. There can be no assurances, however, that our ADSs will be treated, or continue to be
treated, as regularly traded.
If you own (or owned) ADSs while we are (or were) a PFIC and make a Mark-to-Market Election,
you generally will not be subject to the default rules of Section 1291 of the Code discussed above.
Rather, you generally will be required to recognize ordinary income for any increase in the fair
market value of the ADSs for each taxable year that we are a PFIC. You will also be allowed to
deduct as an ordinary loss any decrease in the fair market value to the extent of net
marked-to-market gain previously included in prior years. Your adjusted tax basis in the ADSs will
be adjusted to reflect the amount included or deducted.
The Mark-to-Market Election will be effective for the taxable year for which the election is
made and all subsequent taxable years, unless our ADSs cease to be marketable stock or the IRS
consents to the revocation of the election. You should consult your own tax advisor regarding the
availability of, and procedure for making, a Mark-to-Market Election.
One or more of Hurray! Holding Co., Ltd.’s subsidiaries may also be classified as PFICs now or
in the future, and furthermore, Hurray! Holding Co., Ltd. or one or more of its subsidiaries may
invest in the equity of other foreign corporations that are PFICs. In such cases, U.S. Holders
will be subject to the PFIC rules with respect to their indirect ownership interests in such PFICs.
U.S. Holders will not be able to make a QEF Election or a Mark-to-Market Election with respect to
Hurray! Holding Co., Ltd.’s subsidiaries that are PFICs, and there can be no assurance that U.S.
Holders will be able to make such elections with respect to any other PFICs in which Hurray!
Holding Co., Ltd. or one or more of its subsidiaries invests.
Since the PFIC rules are complex, you should consult your own tax advisor regarding them and
how they may affect the U.S. federal income tax consequences of the ownership and disposition of
ordinary shares or ADSs.
74
U.S. Federal Income Tax Consequences If We Are Not Treated as a PFIC
The discussion in “Distributions on Ordinary Shares or ADSs” and “Dispositions of Ordinary
Shares or ADSs” below describes the applicable U.S. federal income tax consequences to a U.S.
investor in the event that we are not treated as a PFIC for U.S. federal income tax purposes. For a
discussion of the rules that apply if we are treated as a PFIC, see the discussion in “Passive
Foreign Investment Company” above.
Distributions on Ordinary Shares or ADSs
General
. Subject to the discussion in “Passive Foreign Investment Company” above, if you
actually or constructively receive a distribution on ordinary shares or ADSs, you must include the
distribution in gross income as a taxable dividend on the date of your (or in the case of ADSs, the
depositary’s) receipt of the distribution, but only to the extent of our current or accumulated
earnings and profits, as calculated under U.S. federal income tax principles. Such amount must be
included without reduction for any foreign tax withheld. Dividends paid by us generally will not be
eligible for the dividends received deduction allowed to corporations with respect to dividends
received from certain domestic corporations. Dividends paid by us may or may not be eligible for
preferential rates applicable to qualified dividend income, as described below.
To the extent a distribution exceeds our current and accumulated earnings and profits, it will
be treated first as a non-taxable return of capital to the extent of your adjusted tax basis in the
ordinary shares or ADSs, and thereafter as capital gain. Preferential tax rates for long-term
capital gain may be applicable to non-corporate U.S. Holders.
We do not intend to calculate our earnings and profits under U.S. federal income tax
principles. Therefore, you should expect that a distribution will generally be reported as a
dividend even if that distribution would otherwise be treated as a non-taxable return of capital or
as capital gain under the rules described above.
Qualified Dividend Income
. With respect to non-corporate U.S. Holders (i.e., individuals,
trusts, and estates), for taxable years beginning before January 1, 2011, dividends that are
treated as qualified dividend income (“QDI”) are taxable at a maximum tax rate of 15%. However, we
believe that we are likely a PFIC for the current taxable year of 2009 and were a PFIC for the
taxable year of 2008. As a result, dividends paid by us will likely not be treated as QDI.
Foreign Currency Distributions.
A dividend paid in foreign currency (for example, Renminbi)
must be included in your income as a U.S. dollar amount based on the exchange rate in effect on the
date such dividend is received, regardless of whether the payment is in fact converted to U.S.
dollars. If the dividend is converted to U.S. dollars on the date of receipt, you generally will
not recognize a foreign currency gain or loss. However, if you convert the foreign currency to U.S.
dollars on a later date, you must include in income any gain or loss resulting from any exchange
rate fluctuations. The gain or loss will be equal to the difference between (i) the U.S. dollar
value of the amount you included in income when the dividend was received and (ii) the amount that
you receive on the conversion of the foreign currency to U.S. dollars. Such gain or loss will
generally be ordinary income or loss and U.S. source for U.S. foreign tax credit purposes.
In-Kind Distributions
. Distributions to you of new ordinary shares or ADSs or rights to
subscribe for new ordinary shares or ADSs that are received as part of a pro rata distribution to
all of our shareholders will not be subject to U.S. federal income tax. The adjusted tax basis of
the new ordinary shares or ADSs or rights so received will be determined by allocating your
adjusted tax basis in the old ordinary shares or ADSs between the old ordinary shares or ADSs and
the new ordinary shares or ADSs or rights received, based on their relative fair market values on
the date of distribution. However, in the case of a distribution of rights to subscribe for
ordinary shares or ADSs, the adjusted tax basis of the rights will be zero if the fair market value
of the rights is less than 15% of the fair market value of the old ordinary shares or ADSs on the
date of distribution and
you do not make an election to determine the adjusted tax basis of the rights by allocation as
described above. Your holding period for the new ordinary shares or ADSs or rights will generally
include the holding period for the old ordinary shares or ADSs on which the distribution was made.
Foreign Tax Credits.
Subject to certain conditions and limitations, any foreign taxes paid on
or withheld from distributions from us and not refundable to you may be credited against your U.S.
federal income tax liability or, alternatively, may be deducted from your taxable income. This
election is made on a year-by-year basis and applies to all foreign taxes paid by you or withheld
from you that year.
Distributions will constitute foreign source income for foreign tax credit limitation
purposes. The foreign tax credit limitation is calculated separately with respect to specific
classes of income. For this purpose, distributions characterized as dividends distributed by us
will generally constitute “passive category income” or, in the case of certain U.S. Holders,
“general category income.” Special limitations may apply if a dividend is treated as QDI (as
defined above).
75
Special rules may apply to individuals whose foreign source income during the taxable year
consists entirely of “qualified passive income” and whose creditable foreign taxes paid or accrued
during the taxable year do not exceed $300 ($600 in the case of a joint return).
Since the rules governing foreign tax credits are complex, you should consult your own tax
advisor regarding the availability of foreign tax credits in your particular circumstances.
The U.S. Treasury has expressed concerns that parties to whom ADSs are pre-released may be
taking actions that are inconsistent with the claiming of foreign tax credits by U.S. Holders of
ADSs. Such actions would also be inconsistent with the claiming of the preferential tax rates
applicable to QDI, as defined above. Accordingly, the creditability of foreign taxes and the
availability of such preferential tax rates could be affected by future actions that may be taken
by the U.S. Treasury or parties to whom ADSs are pre-released.
Dispositions of Ordinary Shares or ADSs
Subject to the discussion in “Passive Foreign Investment Company” above, you generally will
recognize taxable gain or loss realized on the sale or other taxable disposition of ordinary shares
or ADSs equal to the difference between the U.S. dollar value of (i) the amount realized on the
disposition (i.e., the amount of cash plus the fair market value of any property received), and
(ii) your adjusted tax basis in the ordinary shares or ADSs. Such gain or loss will be capital gain
or loss.
If you have held the ordinary shares or ADSs for more than one year at the time of
disposition, such capital gain or loss will be long-term capital gain or loss. Preferential tax
rates for long-term capital gain (currently, with a maximum rate of 15% for taxable years beginning
before January 1, 2011) will apply to non-corporate U.S. Holders. If you have held the ordinary
shares or ADSs for one year or less, such capital gain or loss will be short-term capital gain or
loss taxable as ordinary income at your marginal income tax rate. The deductibility of capital
losses is subject to limitations.
Generally, any gain or loss recognized will not give rise to foreign source income for U.S.
foreign tax credit purposes.
You should consult your own tax advisor regarding the U.S. federal income tax consequences if
you receive currency other than U.S. dollars upon the disposition of ordinary shares or ADSs.
Information Reporting and Backup Withholding
Generally, information reporting requirements will apply to distributions on ordinary shares
or ADSs or proceeds from the disposition of ordinary shares or ADSs paid within the United States
(and, in certain cases, outside the United States) to a U.S. Holder unless such U.S. Holder is an
exempt recipient, such as a corporation. Furthermore, backup withholding (currently at 28%) may
apply to such amounts unless such U.S. Holder (i) is an exempt recipient that, if required,
establishes its right to an exemption, or (ii) provides its taxpayer identification number,
certifies that it is not currently subject to backup withholding, and complies with other
applicable requirements. A U.S. Holder may generally avoid backup withholding by furnishing a
properly completed IRS Form W-9.
Backup withholding is not an additional tax. Amounts withheld under the backup withholding
rules may be credited against your U.S. federal income tax liability. Furthermore, you may obtain a
refund of any excess amounts withheld by filing an appropriate claim for refund with the IRS and
furnishing any required information in a timely manner.
TAXATION OF NON-U.S. HOLDERS
Distributions on Ordinary Shares or ADSs
Subject to the discussion in “Information Reporting and Backup Withholding” below, as a
Non-U.S. Holder, you generally will not be subject to U.S. federal income tax, including
withholding tax, on distributions received on ordinary shares or ADSs, unless the distributions are
effectively connected with your conduct of a trade or business in the United States (and, if an
applicable income tax treaty so requires, attributable to a permanent establishment that you
maintain in the United States).
If distributions are effectively connected with a U.S. trade or business (and, if applicable,
attributable to a U.S. permanent establishment), you generally will be subject to tax on such
distributions in the same manner as a U.S. Holder, as described in “Taxation of U.S. Holders —
Distributions on Ordinary Shares or ADSs” above. In addition, any such distributions received by a
corporate Non-U.S. Holder may also, under certain circumstances, be subject to an additional
“branch profits tax” at a 30% rate or such lower rate as may be specified by an applicable income
tax treaty.
76
Dispositions of Ordinary Shares or ADSs
Subject to the discussion in “Information Reporting and Backup Withholding” below, as a
Non-U.S. Holder, you generally will not be subject to U.S. federal income tax, including
withholding tax, on any gain recognized on a sale or other taxable disposition of ordinary shares
or ADSs, unless (i) the gain is effectively connected with your conduct of a trade or business in
the United States (and, if an applicable income tax treaty so requires, attributable to a permanent
establishment that you maintain in the United States), or (ii) you are an individual and are
present in the United States for at least 183 days in the taxable year of the disposition, and
certain other conditions are met.
If you meet the test in clause (i) above, you generally will be subject to tax on any gain
that is effectively connected with your conduct of a trade or business in the United States in the
same manner as a U.S. Holder, as described in “Taxation of U.S. Holders — Dispositions of Ordinary
Shares or ADSs” above. Effectively connected gain realized by a corporate Non-U.S. Holder may also,
under certain circumstances, be subject to an additional “branch profits tax” at a 30% rate or such
lower rate as may be specified by an applicable income tax treaty.
If you meet the test in clause (ii) above, you generally will be subject to tax at a 30% rate
on the amount by which your U.S. source capital gain exceeds your U.S. source capital loss.
Information Reporting and Backup Withholding
Payments to Non-U.S. Holders of distributions on, or proceeds from the disposition of,
ordinary shares or ADSs are generally exempt from information reporting and backup withholding.
However, a Non-U.S. Holder may be required to establish that exemption by providing certification
of non-U.S. status on an appropriate IRS Form W-8.
Backup withholding is not an additional tax. Amounts withheld under the backup withholding
rules may be credited against your U.S. federal income tax liability. Furthermore, you may obtain a
refund of any excess amounts withheld by filing an appropriate claim for refund with the IRS and
furnishing any required information in a timely manner.
Enforcement of Civil Liabilities
We are incorporated in the Cayman Islands because of the following benefits found there:
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political and economic stability;
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an effective judicial system;
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a favorable tax system;
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the absence of exchange control or currency restrictions; and
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the availability of professional and support services.
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However, certain disadvantages accompany incorporation in the Cayman Islands. These
disadvantages include:
(1) The Cayman Islands has a less developed body of securities laws as compared to the
United States and provides significantly less protection to investors; and
(2) Cayman Islands companies may not have standing to sue before the federal courts of the
United States.
Our constituent documents do not contain provisions requiring that disputes, including those
arising under the securities laws of the United States, between us, our officers, directors and
shareholders be arbitrated.
A substantial portion of our current operations is conducted in China through our wholly-owned
subsidiaries which are incorporated in China. All or most of our assets are located in China. We
have appointed CT Corporation System, 111 Eighth Avenue, New York, NY 10011, as our agent upon whom
process may be served in any action brought against us under the securities laws of the United
States. A majority of our directors and officers are nationals or residents of jurisdictions other
than the United States and a substantial portion of their assets are located outside the United
States. As a result, it may be difficult for a shareholder to effect service of process within the
United States upon these persons, or to enforce against us or them judgments obtained in United
States courts, including judgments predicated upon the civil liability provisions of the securities
laws of the United States or any state in the United States.
77
Appleby, our counsel as to Cayman Islands law, has advised us and we are of the understanding
as to Chinese law, that there is uncertainty as to whether the courts of the Cayman Islands or
China would:
(1) recognize or enforce judgments of United States courts obtained against us or our
directors or officers predicated upon the civil liability provisions of the securities laws of
the United States or any state in the United States; or
(2) entertain original actions brought in the Cayman Islands or China against us or our
directors or officers predicated upon the securities laws of the United States or any state in
the United States.
Appleby has further advised us that a final and conclusive judgment in the federal or state
courts of the United States under which a sum of money is payable, other than a sum payable in
respect of taxes, fines, penalties or similar charges, may be subject to enforcement proceedings as
a debt in the courts of the Cayman Islands under the common law doctrine of obligation.
We are further of the understanding that the recognition and enforcement of foreign judgments
are provided for under Chinese Civil Procedures Law. Chinese courts may recognize and enforce
foreign judgments in accordance with the requirements of Chinese Civil Procedures Law based either
on treaties between China and the country where the judgment is made or on reciprocity between
jurisdictions.
F. Dividends and Paying Agents
Not applicable.
G. Statement by Experts
Not applicable.
H. Documents on Display
We have previously filed with the Commission a registration statement on Form F-1 and
prospectus, and a registration statement on Form F-6, under the Securities Act of 1933, as amended,
with respect to our ordinary shares represented by ADSs, as well as the ADSs.
We are subject to the periodic reporting and other informational requirements of the
Securities Exchange Act of 1934, as amended, or the Exchange Act. Under the Exchange Act, we are
required to file reports and other information with the SEC. Specifically, we are required to file
annually a Form 20-F no later than six months after the close of each fiscal year, which is
December 31 of each year. Copies of reports and other information, when so filed, may 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., Washington, D.C. 20549. You can request copies of
these documents upon payment of a duplicating fee, by writing to the SEC. Please call the SEC at
1-800-SEC-0330 for further information on the operation of the public reference rooms. The SEC also
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. 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.
Our financial statements have been prepared in accordance with US GAAP.
We will make available to our shareholders annual reports, which will include a review of
operations and annual audited consolidated financial statements prepared in conformity with US
GAAP.
I. Subsidiary Information
Not applicable.
Item 11. Quantitative and Qualitative Disclosures About Market Risk
Please refer to Item 5. “Operating and Financial Review and Prospects—Quantitative and
Qualitative Disclosures About Market Risk.”
78
Item 12. Description of Securities Other than Equity Securities
Not Applicable.
PART II
Item 13. Defaults, Dividend Arrearages and Delinquencies
Not Applicable.
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Item 14.
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Material Modifications to the Rights of Security Holders and Use of Proceeds
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Use of Proceeds
The following “Use of Proceeds” information relates to the registration statement on Form F-1
(File No. 333-121987) (the “Registration Statement”) for our initial public offering of 6,880,000
American Depositary Shares, each representing 100 of our ordinary shares, which were sold by us and
certain selling shareholders for an aggregate offering price of $70.5 million. Our Registration
Statement was declared effective by the SEC on February 3, 2005.
We received net proceeds of approximately $59.4 million from our initial public offering
(taking into account underwriting discounts of approximately $4.9 million, transaction expenses of
approximately $3.8 million and payments to selling shareholders of approximately $2.4 million).
None of the transaction expenses included payments to directors or officers of our company or their
associates, persons owning 10% or more of our equity securities or our affiliates.
As of December 31, 2008, we have used approximately $18.0 million in net proceeds from our
initial public offering to acquire certain businesses, and fund expenses primarily for general
corporate purposes, product development, software and technology infrastructure products and other
capital expenditures. None of the net proceeds from the initial public offering were paid, directly
or indirectly, to any of our directors or officers of our company or their associates, persons
owning 10% or more of our equity securities or our affiliates.
Citigroup Global Markets Inc., Piper Jaffray Co. and Think Equity Partners LLC were the
underwriters for our initial public offering.
Item 15. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our chief executive officer and chief financial officer have conducted an evaluation of the
effectiveness of the design and operation of our disclosure controls and procedures, as defined in
Rules 13a-15(e) and 15d-15(e) under the Exchange Act, as of the end of December 31, 2008. Based on
this evaluation, our chief executive officer and chief financial officer concluded that, as of
December 31, 2008, our disclosure controls and procedures were not effective primarily because of
the material weakness described below under “Management’s Report on Internal Control over Financial
Reporting.”
Management’s Report on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over
financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act). Internal
control over financial reporting is designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of consolidated financial statements in
accordance with generally accepted accounting principles and includes those policies and procedures
that:
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(1)
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pertain to the maintenance of records that, in reasonable detail, accurately
and fairly reflect the transactions and dispositions of a company’s assets,
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(2)
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provide reasonable assurance that transactions are recorded as necessary to
permit preparation of consolidated financial statements in accordance with generally
accepted accounting principles and that a company’s receipts and expenditures are being
made only in accordance with authorizations of a company’s management and directors,
and
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(3)
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provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of a company’s assets that could have a
material effect on the consolidated financial statements.
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Because of its inherent limitations, internal control over financial reporting may not prevent
or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions or that
the degree of compliance with policies or procedures may deteriorate.
A material weakness is a deficiency, or a combination of deficiencies, in internal control
over financial reporting, such that there is a reasonable possibility that a material misstatement
of the company’s annual or interim financial statements will not be prevented or detected on a
timely basis.
As required by Section 404 of the Sarbanes-Oxley Act of 2002 and related rules promulgated by
the Securities and Exchange Commission, our management assessed the effectiveness of internal
control over financial reporting as of December 31, 2008 using the criteria set forth in the report
“Internal Control—Integrated Framework” published by the Committee of Sponsoring Organizations of
the Treadway Commission (known as COSO). Based on this evaluation, management concluded that our
internal control over financial reporting was not effective as of December 31, 2008 due to the
following material weakness.
Our affiliated music companies make an allowance for doubtful debts against trade receivables
based on a review of each individual account. However, the management of these companies do not
use a set of criteria (such as payment history and account activity) to determine whether an
allowance for an individual account is necessary.
After the material weakness was reported to our audit committee, the audit committee agreed on
an action plan to require the responsible management to remediate the weakness. The steps so far
taken include:
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(1)
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establishing general guidelines based on aging of trade receivables within the
music companies as to when an allowance should be made (as we have in our other
operations); and
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(2)
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developing a list of criteria that management should consider when determining
whether other allowances are required against specific accounts.
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We do not believe that the material weakness identified above had a pervasive impact on
internal control over financial reporting.
Upon identification of the material weakness, our management examined each material trade
receivable in the music companies and, having regard to the payment history up to the date of this
annual report on Form 20-F, determined that no material adjustment was required to the draft
financial statements contained in this report.
This annual report does not include an attestation report of our registered public accounting
firm regarding internal control over financial reporting as temporary rules of the Securities and
Exchange Commission that permit us to provide only our management’s report in this annual report.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal controls over financial reporting that occurred during
the period covered by this annual report on Form 20-F that have materially affected, or are
reasonably likely to materially affect, our internal controls over financial reporting.
Item 16. Reserved
Item 16A. Audit Committee Financial Expert
Our board of directors has determined that Mr. Alan Powrie qualifies as an Audit Committee
Financial Expert as defined by the applicable rules of the SEC and that Mr. Powrie is “independent”
as defined under applicable Nasdaq rules.
Item 16B. Code of Ethics
We have adopted a Code of Business Conduct which applies to our employees, officers and
non-employee directors, including our principal executive officer, principal financial officer,
principal accounting officer or controller, and persons performing similar functions. This code is
intended to qualify as a “code of ethics” within the meaning of the applicable rules of the SEC.
The Code of Business Conduct is available on our website at
www.hurray.com
. To the
extent required by law, any amendments to, or waivers from, any provision of the Code of Business
Conduct will be promptly disclosed to the public. Copies of the Code of Business Conduct will be
provided to any shareholder upon written request to the Legal Counsel, 15/F,
Tower B, Gateway Plaza, No.18 Xia Guang Li, East Third Ring, Chaoyang District, Beijing
100027, People’s Republic of China.
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Item 16C. Principal Accountant Fees and Services
Disclosure of Fees Charged by Independent Accountants
The following table summarizes the fees charged by Deloitte Touche Tohmatsu CPA Ltd. (our
independent accountants from 2001 until the present time) for certain services rendered to our
company during 2008 and 2007.
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For the year ended
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December 31,
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2008
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200
7
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Audit fees
(1)
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$
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437,132
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$
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648,260
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Audit related fees
(2)
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—
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—
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Tax fees
(3)
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$
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96,455
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—
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All other fees
(4)
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—
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(1)
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“Audit fees” means the aggregate fees incurred in each of the fiscal years listed for our
calendar year audits and reviews of financial statements.
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(2)
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“Audit-related fees” means the aggregate fees incurred in each of the fiscal years listed for
professional services related to the audit of our financial statements that are not reported
under “Audit fees” and consultation on accounting standards or transactions.
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(3)
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“Tax fees” means the aggregate fees incurred in each of the fiscal years listed for
professional services rendered for tax compliance, tax advice and tax planning.
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(4)
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“All other fees” means the aggregate fees incurred in each of the fiscal years listed for
professional services rendered other than those reported under “Audit fees,” “Audit-related
fees,” and “Tax fees.”
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Audit Committee Pre-approval Policies and Procedures
Our audit committee has adopted procedures which set forth the manner in which the committee
will review and approve all audit and non-audit services to be provided by Deloitte Touche Tohmatsu
CPA Ltd. before that firm is retained for such services. The pre-approval procedures are as
follows:
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Any audit or non-audit service to be provided to us by the independent accountant
must be submitted to the audit committee for review and approval, with a description of
the services to be performed and the fees to be charged.
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The audit committee in its sole discretion then approves or disapproves the proposed
services and documents such approval, if given, through written resolutions or in the
minutes of meetings, as the case may be.
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Item 16D. Exemptions from the Listing Standards for Audit Committees
We have not been granted an exemption from the applicable listing standards for the audit
committee of our board of directors.
Item 16E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers
None.
Item 16F. Changes in Registrant’s Certifying Accountant
None.
Item 16G. Corporate Governance
Pursuant to NASDAQ’s Marketplace Rules, foreign private issuers such as our company may follow
home-country practice in lieu of certain NASDAQ corporate governance requirements. We have notified
NASDAQ of our intention to adopt a non-conforming practice of posting our annual reports to
shareholders on our corporate website in lieu of mailing physical copies to record holders and
beneficial owners of our ADSs and ordinary shares. Under the laws of the Cayman Islands, there
are no express provisions requiring our company to furnish annual reports to our shareholders.
We adopted this practice in 2007 to avoid the considerable expense associated with such mailing.
81
PART III
Item 17. Financial Statements
The Company has elected to provide financial statements pursuant to Item 18.
Item 18. Financial Statements
The consolidated financial statements for Hurray! Holding Co., Ltd. and its subsidiaries are
included at the end of this annual report on Form 20-F.
Item 19. Exhibits
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Exhibit
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Number
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Document
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1.1
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Amended and Restated Memorandum and Articles of Association of the Company (incorporated
herein by reference to Exhibit 3.1 to our registration statement on Form F-1 (Registration
No. 333-121987) filed with the Commission on January 12, 2005).
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2.1
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Specimen American Depositary Receipt of the Company (incorporated by reference to Exhibit 4.1
to our registration statement on Form F-6 (Registration No. 333-122004) filed with the
Commission on January 13, 2005).
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2.2
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Specimen Share Certificate of the Company (incorporated herein by reference to Exhibit 4.2 to
our registration statement on Form F-1 (Registration No. 333-121987) filed with the
Commission on January 12, 2005).
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2.3
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Deposit Agreement dated February 9, 2005 among the Company, Citibank N.A. and holders of the
American Depositary Receipts issued thereunder (incorporated by reference to Exhibit 3(a) to
our registration statement on Form F-6 (Registration No. 333-122004) filed with the
Commission on January 13, 2005).
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4.1
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Form of Indemnification Agreement (incorporated by reference to Exhibit 10.4 of our
registration statement on Form F-1 (File No. 333-121987) filed with the Commission on January
12, 2005).
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4.2
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Translation of Equity Transfer Agreement by and among Zhang Yi, Shang Aiqin, Wang Jiang, Xu
Hongyan, Xie Peifu, He Ming and Chen Yixiao dated December 30, 2005 (incorporated by
reference to Exhibit 4.13 of our annual report on Form 20-F filed with the Commission on June
15, 2006).
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4.3
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Translation of Equity Transfer and Capital Increase Agreement by and among Beijing Huayi
Brothers Advertising Co., Ltd., Beijing Qixin Weiye Culture Development Co., Ltd. and Hurray!
Digital Music Technology Co., Ltd. dated December 12, 2005 (incorporated by reference to
Exhibit 4.15 of our annual report on Form 20-F filed with the Commission on June 15, 2006).
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4.4
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Translation of Cooperation Agreement by and among Hurray! Solutions, Ltd., Beijing Enterprise
Mobile Technology Co., Ltd., Beijing Hutong Wuxian Technology Co., Ltd., Zhong Xiongbing,
Guangdong Freeland Movie and Television Production Co., Ltd., Beijing Shiji Freeland Movie
and Television Distribution Co., Ltd., Shanghai Hai Le Audio & Video Distribution Co., Ltd.
and Hong Kong Freeland Movie Industry Group Co., Ltd. dated November 14, 2005 (incorporated
by reference to Exhibit 4.16 of our annual report on Form 20-F filed with the Commission on
June 15, 2006).
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4.5
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Translation of Data Service Cooperation Agreement between Beijing Enlight Times Info Co., Ltd
and Hurray! Solutions Ltd. (incorporated by reference to Exhibit 10.21 of our registration
statement on Form F-1 (File No. 333-121987) filed with the Commission on January 12, 2005).
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82
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Exhibit
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Number
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Document
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4.6
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Translation of Agreement for Transfer of Entitlement to Dividends between Qindai Wang and
Hurray! Holding Co., Ltd. dated August 15, 2003 (incorporated by reference to Exhibit 10.24
of our registration statement on Form F-1 (File No. 333-121987) filed with the Commission on
January 12, 2005).
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4.7
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Translation of Software Assignment Agreement between Hurray! Solutions Ltd. and Hurray! Times
Communications (Beijing) Ltd. dated May 5, 2004 (incorporated by reference to Exhibit 10.27
of our registration statement on Form F-1 (File No. 333 121987) filed with the Commission on
January 12, 2005).
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4.8
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Translation of Software License Agreement between Hurray! Times Communications (Beijing) Ltd.
and Hurray! Solutions Ltd. dated May 5, 2004(incorporated by reference to Exhibit 10.28 of
our registration statement on Form F-1 (File No. 333 121987) filed with the Commission on
January 12, 2005).
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4.9
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Translation of Letter of Undertaking by Qindai Wang dated May 5, 2004 (incorporated by
reference to Exhibit 10.31 of our registration statement on Form F-1 (File No. 333-121987)
filed with the Commission on January 12, 2005).
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4.10
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Translation of Authorization Agreement by Songzuo Xiang dated May 5, 2004 (incorporated by
reference to Exhibit 10.32 of our registration statement on Form F-1 (File No. 333-121987)
filed with the Commission on January 12, 2005).
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4.11
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Translation of Exclusive Technical Consulting and Services Agreement between Hurray! Times
Communications (Beijing) Ltd. and Hurray! Solutions Ltd. dated May 5, 2004 (incorporated by
reference to Exhibit 10.33 of our registration statement on Form F-1 (File No. 333-121987)
filed with the Commission on January 12, 2005).
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4.12
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Translation of Operating Agreement among Hurray! Times Communications (Beijing) Ltd., Hurray!
Solutions Ltd., Qindai Wang and Songzuo Xiang dated May 5, 2004 (incorporated by reference to
Exhibit 10.34 of our registration statement on Form F-1 (File No. 333-121987) filed with the
Commission on January 12, 2005).
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4.13
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Translation of Contract Related to Exclusive Purchase Right of Equity Interest among Hurray!
Holding Co., Ltd., Hurray! Solutions Ltd. and Qindai Wang dated May 5, 2004 (incorporated by
reference to Exhibit 10.35 of our registration statement on Form F-1 (File No. 333-121987)
filed with the Commission on January 12, 2005).
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4.14
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Translation of Contract Related to Exclusive Purchase Right of Equity Interest among Hurray!
Holding Co., Ltd., Hurray! Solutions Ltd. and Songzuo Xiang dated May 5, 2004 (incorporated
by reference to Exhibit 10.36 of our registration statement on Form F-1 (File No. 333-121987)
filed with the Commission on January 12, 2005).
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4.15
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Translation of Equity Interests Pledge Agreement between Qindai Wang and Hurray! Times
Communications (Beijing) Ltd. dated May 5, 2004 (incorporated by reference to Exhibit 10.37
of our registration statement on Form F-1 (File No. 333-121987) filed with the Commission on
January 12, 2005).
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4.16
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Translation of Equity Interests Pledge Agreement between Songzuo Xiang and Hurray! Times
Communications (Beijing) Ltd. dated May 5, 2004 (incorporated by reference to Exhibit 10.38
of our registration statement on Form F-1 (File No. 333-121987) filed with the Commission on
January 12, 2005).
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4.17
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Translation of Letter of Undertaking by Qindai Wang dated May 5, 2004 (incorporated by
reference to Exhibit 10.39 of our registration statement on Form F-1 (File No. 333-121987)
filed with the Commission on January 12, 2005).
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4.18
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Translation of Equity Interests Pledge Agreement between Hurray! Times Communications
(Beijing) Ltd. and Hurray! Solutions Ltd. dated May 5, 2004 (incorporated by reference to
Exhibit 10.46 of our registration statement on Form F-1 (File No. 333-121987) filed with the
Commission on January 12, 2005).
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83
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Exhibit
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Number
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Document
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4.19
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Translation of Software License Agreement between Hurray! Times Communications (Beijing) Ltd.
and Beijing WVAS Solutions Ltd. dated May 5, 2004 (incorporated by reference to Exhibit 10.53
of our registration statement on Form F-1 (File No. 333-121987) filed with the Commission on
January 12, 2005).
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4.20
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Translation of Authorization Agreements by each of Sun Hao and Wang Xiaoping dated October 1,
2004 and October 1, 2004, respectively (incorporated by reference to Exhibit 10.55 of our
registration statement on Form F-1 (File No. 333-121987) filed with the Commission on January
12, 2005).
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4.21
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Translation of Authorization Agreement by Beijing Enterprise Network Technology Co., Ltd.
dated October 1, 2004 (incorporated by reference to Exhibit 10.56 of our registration
statement on Form F-1 (File No. 333-121987) filed with the Commission on January 12, 2005).
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4.22
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Translation of Exclusive Technical Consulting and Services Agreement between Hurray! Times
Communications (Beijing) Ltd. and Beijing WVAS Solutions Ltd. dated May 5, 2004 (incorporated
by reference to Exhibit 10.57 of our registration statement on Form F-1 (File No. 333-121987)
filed with the Commission on January 12, 2005).
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4.23
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Translation of Operating Agreement among Hurray! Times Communications (Beijing) Ltd., Beijing
WVAS Solutions Ltd., Beijing Enterprise Network Technology Co., Ltd., Sun Hao and Wang
Xiaoping dated October 1, 2004 (incorporated by reference to Exhibit 10.58 of our
registration statement on Form F-1 (File No. 333-121987) filed with the Commission on January
12, 2005).
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4.24
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Translation of Contracts Relating to Exclusive Purchase Right of Equity Interest between
Hurray! Holding Co., Ltd., Beijing WVAS Solutions Ltd. and each of Sun Hao and Wang Xiaoping
dated October 1, 2004 and October 1, 2004, respectively (incorporated by reference to Exhibit
10.59 of our registration statement on Form F-1 (File No. 333-121987) filed with the
Commission on January 12, 2005).
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4.25
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Translation of Contract Relating to Exclusive Purchase Right of Equity Interest between
Hurray! Holding Co., Ltd., Beijing WVAS Solutions Ltd. and Beijing Enterprise Network
Technology Co., Ltd. dated October 1, 2004 (incorporated by reference to Exhibit 10.60 of our
registration statement on Form F-1 (File No. 333-121987) filed with the Commission on
January 12, 2005).
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4.26
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Translation of Equity Interests Pledge Agreements between Hurray! Times Communications
(Beijing) Ltd. and each of Sun Hao and Wang Xiaoping dated October 1, 2004 and October 1,
2004, respectively (incorporated by reference to Exhibit 10.61 of our registration statement
on Form F-1 (File No. 333-121987) filed with the Commission on January 12, 2005).
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4.27
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Translation of Equity Interests Pledge Agreement between Hurray! Times Communications
(Beijing) Ltd. and Beijing Enterprise Network Technology Co., Ltd. dated October 1, 2004
(incorporated by reference to Exhibit 10.62 of our registration statement on Form F-1 (File
No. 333-121987) filed with the Commission on January 12, 2005).
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4.28
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Translation of Software Assignment Agreement between Hurray! Times Communications (Beijing)
Ltd. and Beijing Palmsky Technology Co., Ltd. dated May 5, 2004 (incorporated by reference to
Exhibit 10.65 of our registration statement on Form F-1 (File No. 333-121987) filed with the
Commission on January 12, 2005).
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4.29
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Translation of Software License Agreement between Hurray! times Communications (Beijing) Ltd.
and Beijing Palmsky Technology Col, Ltd. dated May 5, 2004 (incorporated by reference to
Exhibit 10.66 of our registration statement on Form F-1 (File No. 333-121987) filed with the
Commission on January 12, 2005).
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4.30
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Translation of Authorization Agreement by Yang Haoyu dated October 1, 2004 (incorporated by
reference to Exhibit 10.69 of our registration statement on Form F-1 (File No. 333-121987)
filed with the Commission on January 12, 2005).
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84
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Exhibit
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Number
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Document
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4.31
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Translation of Exclusive Technical Consulting and Services Agreement between Hurray! Times
Communications (Beijing) Ltd. and Beijing Palmsky Technology Co., Ltd. dated May 5, 2004
(incorporated by reference to Exhibit 10.71 of our registration statement on Form F-1 (File
No. 333-121987) filed with the Commission on January 12, 2005).
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4.32
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Translation of Operating Agreement among Hurray! Times Communications (Beijing) Ltd., Beijing
Palmsky Technology Co., Ltd., Yang Haoyu and Wang Jianhua dated October 1, 2004 (incorporated
by reference to Exhibit 10.72 of our registration statement on Form F-1 (File No. 333-121987)
filed with the Commission on January 12, 2005).
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4.33
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Translation of Contract Relating to Exclusive Purchase Right of Equity Interest among Hurray!
Holding Co., Ltd., Yang Haoyu and Beijing Palmsky Technology Co., Ltd. dated October 1, 2004
(incorporated by reference to Exhibit 10.73 of our registration statement on Form F-1 (File
No. 333-121987) filed with the Commission on January 12, 2005).
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4.34
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Translation of Contract Relating to Exclusive Purchase Right of Equity Interest among Hurray!
Holding Co., Ltd., Wang Jianhua and Beijing Palmsky Technology Co., Ltd. dated October 1,
2004 (incorporated by reference to Exhibit 10.74 of our registration statement on Form F-1
(File No. 333-121987) filed with the Commission on January 12, 2005).
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4.35
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Translation of Equity Interests Pledge Agreement between Hurray! Times Communications
(Beijing) Ltd. and Yang Haoyu dated October 1, 2004 (incorporated by reference to Exhibit
10.75 of our registration statement on Form F-1 (File No. 333-121987) filed with the
Commission on January 12, 2005).
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4.36
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Translation of Equity Interests Pledge Agreement between Hurray! Times Communications
(Beijing) Ltd. and Wang Jianhua dated October 1, 2004 (incorporated by reference to Exhibit
10.76 of our registration statement on Form F-1 (File No. 333-121987) filed with the
Commission on January 12, 2005).
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4.37
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Translation of Software License Agreement between Hurray! Times Communications (Beijing) Ltd.
and Beijing Enterprise Network Technology Co., Ltd. dated May 5, 2004 (incorporated by
reference to Exhibit 10.79 of our registration statement on Form F-1 (file No. 333-121987)
filed with the Commission on January 12, 2005).
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4.38
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Translation of Authorization Agreement by Sun Hao dated August 15, 2004 (incorporated by
reference to Exhibit 10.81 of our registration statement on Form F-1 (File No. 333-121987)
filed with the Commission on January 12, 2005).
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4.39
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Translation of Authorization Agreement by Wang Xiaoping dated August 15, 2004 (incorporated
by reference to Exhibit 10.82 of our registration statement on Form F-1 (File No. 333-121987)
filed with the Commission on January 12, 2005).
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4.40
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Translation of Exclusive Technical Consulting and Services Agreement between Hurray! Times
Communications (Beijing) Ltd. and Beijing Enterprise Network Technology Co., Ltd. dated May
5, 2004 (incorporated by reference to Exhibit 10.83 of our registration statement on Form F-1
(File No. 333-121987) filed with the Commission on January 12, 2005).
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4.41
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Translation of Operating Agreement between Hurray! Times Communications (Beijing) Ltd.,
Beijing Enterprise Network Technology Co., Ltd., Sun Hao and Wang Xiaoping dated August 15,
2004 (incorporated by reference to Exhibit 10.84 of our registration statement on Form F-1
(File No. 333-121987) filed with the Commission on January 12, 2005).
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4.42
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Translation of Contract Relating to Exclusive Purchase Right of Equity Interest among Hurray!
Holding Co., Ltd., Wang Xiaoping and Beijing Enterprise Network Technology Co., Ltd. dated
August 15, 2004 (incorporated by reference to Exhibit 10.85 of our registration statement on
Form F-1 (File No. 333-121987) filed with the Commission on January 12, 2005).
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85
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Exhibit
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Number
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Document
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4.43
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Translation of Contract Relating to Exclusive Purchase Right of Equity Interest among Hurray!
Holding Co., Ltd., Sun Hao and Beijing Enterprise Network Technology Co., Ltd. dated
August 15, 2004 (incorporated by reference to Exhibit 10.86 of our registration statement on
Form F-1 (File No. 333-121987) filed with the Commission on January 12, 2005).
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4.44
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Translation of Equity Interests Pledge Agreement between Hurray! Times Communications
(Beijing) Ltd. and Sun Hao dated October 1, 2004 (incorporated by reference to Exhibit 10.87
of our registration statement on Form F-1 (File No. 333-121987) filed with the Commission on
January 12, 2005).
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4.45
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Translation of Equity Interests Pledge Agreement between Hurray! Times Communications
(Beijing) Ltd. and Wang Xiaoping dated October 1, 2004 (incorporated by reference to Exhibit
10.88 of our registration statement on Form F-1 (File No. 333-121987) filed with the
Commission on January 12, 2005).
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4.46
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Translation of Agreement on Transfer of Shares of Beijing Enterprise Network Technology Co.,
Ltd. between Sun Hao and Wang Xiaoping and Hurray! Solutions Ltd. and Wang Qindai dated July
19, 2004 (incorporated by reference to Exhibit 10.89 of our registration statement on Form
F-1 (File No. 333-121987) filed with the Commission on January 12, 2005).
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4.47
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Translation of Software License Agreement by and between Hurray! Times Communications
(Beijing) Ltd. and Shanghai Magma Digital Technology Co. Ltd. dated January 12, 2006
(incorporated by reference to Exhibit 4.97 of our annual report on Form 20-F (File No.
000-51116) filed with the Commission on June 15, 2006).
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4.48
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Translation of Software Assignment Agreement by and between Shanghai Magma Digital Technology
Co. Ltd. and Hurray! Times Communications (Beijing) Ltd. dated January 12, 2006 (incorporated
by reference to Exhibit 4.98 of our annual report on Form 20-F (File No. 000-51116) filed
with the Commission on June 15, 2006).
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4.49
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Translation of Authorization Agreement by Shang Aiqin dated January 12, 2006 (incorporated by
reference to Exhibit 4.101 of our annual report on Form 20-F (File No. 000 51116) filed with
the Commission on June 15, 2006).
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4.50
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Translation of Authorization Agreement by Zhang Yi dated January 12, 2006 (incorporated by
reference to Exhibit 4.102 of our annual report on Form 20-F (File No. 000 51116) filed with
the Commission on June 15, 2006).
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4.51
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Translation of Exclusive Technical Consulting and Services Agreement by and between Hurray!
Times Communications (Beijing) Ltd. and Shanghai Magma Digital Technology Co. Ltd. dated
January 12, 2006 (incorporated by reference to Exhibit 4.103 of our annual report on Form
20-F (File No. 000 51116) filed with the Commission on June 15, 2006).
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4.52
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Translation of Operating Agreement by and among Hurray! Times Communications (Beijing) Ltd.,
Shanghai Magma Digital Technology Co. Ltd., Zhang Yi and Shang Aiqin dated January 12, 2006
(incorporated by reference to Exhibit 4.104 of our annual report on Form 20-F (File No. 000
51116) filed with the Commission on June 15, 2006).
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4.53
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Translation of Contract Relating to the Exclusive Purchase Right of an Equity Interest by and
among Hurray! Holding Co., Ltd., Shang Aiqin and Shanghai Magma Digital Technology Co. Ltd.
dated January 12, 2006 (incorporated by reference to Exhibit 4.105 of our annual report on
Form 20-F (File No. 000 51116) filed with the Commission on June 15, 2006).
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4.54
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Translation of Contract Relating to the Exclusive Purchase Right of an Equity Interest by and
among Hurray! Holding Co., Ltd., Zhang Yi and Shanghai Magma Digital Technology Co. Ltd.
dated January 12, 2006 (incorporated by reference to Exhibit 4.106 of our annual report on
Form 20-F (File No. 000 51116) filed with the Commission on June 15, 2006).
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86
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Exhibit
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Number
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Document
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4.55
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Translation of Equity Interests Pledge Agreement by and between Hurray! Times Communications
(Beijing) Ltd. and Zhang Yi dated January 12, 2006 (incorporated by reference to Exhibit
4.107 of our annual report on Form 20-F (File No. 000 51116) filed with the Commission on
June 15, 2006).
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4.56
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Translation of Equity Interests Pledge Agreement by and between Hurray! Times Communications
(Beijing) Ltd. and Shang Aiqin dated January 12, 2006 (incorporated by reference to Exhibit
4.108 of our annual report on Form 20-F (File No. 000 51116) filed with the Commission on
June 15, 2006).
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4.57
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2004 Share Incentive Plan (incorporated by reference to Exhibit 10.95 of our registration
statement on Form F-1 (File No. 333-121987) filed with the Commission on January 12, 2005).
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4.58
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Translation of Supplemental Agreement to Agreement on Transfer of Shares of Beijing
Enterprise Network Technology Co., Ltd. among Hurray! Holding Co., Ltd., Qindai Wang, Yu Qin
and Zhang Chen dated November 4, 2004 (incorporated by reference to Exhibit 10.96 of our
registration statement on Form F-1 (File No. 333-121987) filed with the Commission on January
12, 2005).
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4.59
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Translation of Supplemental Agreement to Agreement on Transfer of Shares of Beijing
Enterprise Mobile Technology Co., Ltd. among Hurray! Holdings Co., Ltd., Funway Investment
Holdings Ltd. and I-mode Technology Ltd. dated November 4, 2004 (incorporated by reference to
Exhibit 10.97 of our registration statement on Form F-1 (File No. 333-121987) filed with the
Commission on January 12, 2005).
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4.60
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Translation of Loan Agreement between Beijing Enterprise Network Technology Co., Ltd. and Yu
Qin dated November 4, 2004 (incorporated by reference to Exhibit 10.98 of our registration
statement on Form F-1 (File No. 333-121987) filed with the Commission on January 12, 2005).
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4.61
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Translation of Loan Agreement between WVAS Solutions Ltd. and Yu Qin dated November 4, 2004
(incorporated by reference to Exhibit 10.99 of our registration statement on Form F-1 (File
No. 333-121987) filed with the Commission on January 12, 2005).
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4.62
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Translation of Supplemental Agreement dated January 25, 2005 to certain Equity Interests
Pledge Agreements (incorporated by reference to the registration statement on Form F-1 (File
No. 333-121987) filed with the Commission on January 28, 2005).
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4.63
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Translation of Cooperation Agreement between Hurray! Digital Media Technology Co., Ltd., Lan
Gang, Chen Jianzhong, Hu Li, and Guangzhou Hurray! Secular Bird Culture Communication Co.,
Ltd, dated March 12, 2007 (incorporated by reference to Exhibit 4.120 of our annual report on
Form 20-F (File No. 000-51116) filed with the Commission on June 15, 2007).
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|
|
|
|
|
4.64
|
|
|
Translation of Supplemental Agreement between Hurray Holdings Co., Ltd. and Magma Digital
International Limited, dated September 1, 2006 (incorporated by reference to Exhibit 4.121 of
our annual report on Form 20-F (File No. 000-51116) filed with the Commission on June 15,
2007).
|
|
|
|
|
|
|
|
|
4.65
|
|
|
Translation of Supplemental Agreement between Hurray Solutions, Ltd., Beijing Enterprise
Mobile Technology Co., Ltd., Beijing Hutong Wuxian Technology Co., Ltd., Zhong Xiongbing,
Guangdong Freeland Movie and Television Production Co., Ltd., Beijing Shiji Freeland Movie
and Television Distribution Co., Ltd., Shanghai Hai Le Audio and Video Distribution Co.,
Ltd., Hong Kong Freeland Movie Industry Group Co., Ltd. and Beijing Freeland Wu Xian Digital
Music Technology Co., Ltd., dated July 30, 2006 (incorporated by reference to Exhibit 4.122
of our annual report on Form 20-F (File No. 000-51116) filed with the Commission on June 15,
2007).
|
87
|
|
|
|
|
|
|
Exhibit
|
|
|
|
Number
|
|
Document
|
|
|
4.66
|
|
|
Translation of Supplemental Agreement between Hurray Solutions, Ltd., Beijing Enterprise
Mobile Technology Co., Ltd., Beijing Hutong Wuxian Technology Co., Ltd., Zhong Xiongbing,
Guangdong Freeland Movie and Television Production Co., Ltd., Beijing Shiji Freeland Movie
and Television Distribution Co., Ltd., Shanghai Hai Le Audio and Video Distribution Co., Ltd.
and Hong Kong Freeland Movie Industry Group Co., Ltd, dated November 30, 2006 (incorporated
by reference to Exhibit 4.123 of our annual report on Form 20-F (File No. 000-51116) filed
with the Commission on June 15, 2007).
|
|
|
|
|
|
|
|
|
4.67
|
|
|
Translation of Share Transfer Agreement between TWM Holding, Hurray! Holding Co., Ltd., and
Hurray! Times Communications (Beijing) Ltd. dated October 8, 2007 (incorporated by reference
to Exhibit 4.84 of our annual report on Form 20-F (File No. 000-51116) filed with the
Commission on June 19, 2008).
|
|
|
|
|
|
|
|
|
4.68
|
|
|
Translation of Equity Transfer Agreement of Shanghai Saiyu Information Technology Co., Ltd.
among Liang Ruan, Yuqi Shi, Jie Li and Jianmei Wan, dated February 12, 2007 (incorporated by
reference to Exhibit 4.85 of our annual report on Form 20-F (File No. 000-51116) filed with
the Commission on June 19, 2008).
|
|
|
|
|
|
|
|
|
4.69
|
|
|
Translation of Transfer Agreement between Hurray! Times Communications (Beijing) Co., Ltd.,
Beijing WVAS Solutions Ltd., Beijing Enterprise Network Technology Co., Ltd., Xiaoping Wang,
Hao Sun and Beijing Hurray! Times Technology Co., Ltd., dated May, 2007 (incorporated by
reference to Exhibit 4.86 of our annual report on Form 20-F (File No. 000-51116) filed with
the Commission on June 19, 2008).
|
|
|
|
|
|
|
|
|
4.70
|
|
|
Translation of Cooperation Agreement on Monternet WAP Services between China Mobile
Communications Group Corporation and Beijing Enterprise Network Technology Co., Ltd. dated
June 18, 2008.
|
|
|
|
|
|
|
|
|
4.71
|
|
|
Translation of Mobile Value-added Service (WAP1.2) Cooperation Agreement between China
Telecommunications Corporation and Beijing Hengji Weiye Electronic Commerce Co., Ltd. dated
October 1, 2008.
|
|
|
|
|
|
|
|
|
4.72
|
|
|
Investment and Shareholders’ Agreement between, among others, Seed Music Group Limited and
Hurray! Music Holding Co., Ltd. dated September 24, 2008.
|
|
|
|
|
|
|
|
|
4.73
|
|
|
Translation of Supplemental Agreement of Asset, Business and Personnel Transfer Agreement
between Beijing Secular Bird Culture and Art Development Centre and Guangzhou Secular Bird
Culture Communication Co., Ltd. dated August 2008.
|
|
|
|
|
|
|
|
|
4.74
|
|
|
Translation of Supplemental Agreement between Hurray! Digital Media Technology Co., Ltd. and
Beijing Secular Bird Culture and Art Development Centre dated August 2008.
|
|
|
|
|
|
|
|
|
4.75
|
|
|
Translation of Supplemental Agreement among Seed Music Group Limited, Hurray! Media Holding
Co., Ltd., Tien, Ting-Feng, and Huang, Tien-Zan dated 2009.
|
|
|
|
|
|
|
|
|
4.76
|
|
|
Translation of Supplemental Agreement among Hurray! Media Technologies Co., Ltd., Xiongbing
Zhong, Guangdong Freeland Movie and Television Production Co., Ltd., Beijing Shiji Freeland
Movie and Television Distribution Co., Ltd., Shanghai Hai Le Audio and Video Distribution
Co., Ltd., and Hongkong Freeland Movie Industry Group Co., Ltd. dated 2008.
|
|
|
|
|
|
|
|
|
8.1
|
|
|
List of Significant Subsidiaries and Affiliates.
|
88
|
|
|
|
|
|
|
Exhibit
|
|
|
|
Number
|
|
Document
|
|
|
11.1
|
|
|
Code of Business Conduct (incorporated by reference to Exhibit 11.1 of our annual report on
Form 20-F filed with the Commission on June 15, 2006).
|
|
|
|
|
|
|
|
|
12.1
|
|
|
Certification of Chief Executive Officer Required by Rule 13a-14(a).
|
|
|
|
|
|
|
|
|
12.2
|
|
|
Certification of Chief Financial Officer Required by Rule 13a-14(a).
|
|
|
|
|
|
|
|
|
13.1
|
|
|
Certification of Chief Executive Officer Required by Rule 13a-14(b) and Section 1350 of
Chapter 63 of Title 18 of the United States Code.
|
|
|
|
|
|
|
|
|
13.2
|
|
|
Certification of Chief Financial Officer Required by Rule 13a-14(b) and Section 1350 of
Chapter 63 of Title 18 of the United States Code.
|
|
|
|
|
|
|
|
|
15.1
|
|
|
Consent of Deloitte Touche Tohmatsu CPA Ltd., Independent Registered Public Accounting Firm.
|
|
|
|
|
|
|
|
|
15.2
|
|
|
Consent of Appleby.
|
89
SIGNATURES
The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F
and that it has duly caused and authorized the undersigned to sign this annual report on its
behalf.
|
|
|
|
|
|
|
|
HURRAY! HOLDING CO., LTD.
|
|
|
|
By:
|
/s/ Songzuo Xiang
|
|
|
|
|
Dr. Songzuo Xiang
|
|
|
|
|
Chief Executive Officer
|
|
|
|
Date: June 25, 2009
|
|
90
INDEX TO FINANCIAL STATEMENTS
HURRAY! HOLDING CO., LTD.
|
|
|
|
|
|
|
|
|
Page
|
|
|
|
|
|
F-1
|
|
|
|
|
|
|
|
|
|
|
|
F-2
|
|
|
|
|
|
|
|
|
|
|
|
F-3
|
|
|
|
|
|
|
|
|
|
|
|
F-5
|
|
|
|
|
|
|
|
|
|
|
|
F-6
|
|
|
|
|
|
|
|
|
|
|
|
F-7
|
|
|
|
|
|
|
|
|
|
|
|
F-36
|
|
91
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
Hurray! Holding Co., Ltd.
Beijing, the People’s Republic of China
We have audited the accompanying consolidated balance sheets of Hurray! Holding Co., Ltd. and its
subsidiaries and variable interest entities (the “Company”) at December 31, 2008 and 2007, and the
related consolidated statements of operations, shareholders’ equity and comprehensive income
(loss), and cash flows for the years ended December 31, 2008, 2007 and 2006, and related financial
statement schedule included in Schedule 1. These financial statements and related financial
statement schedule are the responsibility of the Company’s management. Our responsibility is to
express an opinion on these consolidated financial statements and related financial statement
schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. The
Company is not required to have, nor were we engaged to perform, an audit of its internal control
over financial reporting. Our audits included consideration of internal control over financial
reporting as a basis for designing audit procedures that are appropriate in the circumstances, but
not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control
over financial reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates made by management,
as well as evaluating the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects,
the financial position of Hurray! Holding Co., Ltd. and its subsidiaries and variable interest
entities at December 31, 2008 and 2007 and the results of their operations and their cash flows for
the above stated periods in conformity with accounting principles generally accepted in the United
States of America. Also, in our opinion, the related financial statement schedule, when considered
in relation to the basic consolidated financial statements taken as a whole, presents fairly, in
all material respects, the information set forth therein.
As described in Note 2 to the consolidated financial statements, effective January 1, 2007, the
Company adopted the recognition and measurement methods under Financial Accounting Standards Board
Interpretation No. 48, “Accounting for Uncertainty in Income Taxes— An Interpretation of FASB
Statement No.109”.
/s/ Deloitte Touche Tohmatsu CPA Ltd.
Deloitte Touche Tohmatsu CPA Ltd.
Beijing, the People’s Republic of China
June 25, 2009
F-1
HURRAY! HOLDING CO., LTD.
CONSOLIDATED BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
(in U.S. dollars, except number of shares)
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
59,472,703
|
|
|
$
|
65,978,884
|
|
|
Accounts receivable, net of allowance of $826,026 and
$699,525 as of December 31, 2008 and 2007, respectively
|
|
|
12,658,287
|
|
|
|
14,691,160
|
|
|
Prepaid expenses and other current assets
|
|
|
4,170,323
|
|
|
|
3,120,050
|
|
|
Amount due from related parties
|
|
|
745,351
|
|
|
|
464,410
|
|
|
Inventories
|
|
|
254,589
|
|
|
|
292,655
|
|
|
Current deferred tax assets
|
|
|
363,330
|
|
|
|
748,049
|
|
|
Receivable on disposal of subsidiary
|
|
|
46,860
|
|
|
|
4,151,400
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
77,711,443
|
|
|
|
89,446,608
|
|
|
Property and equipment, net
|
|
|
980,060
|
|
|
|
1,636,089
|
|
|
Acquired intangible assets, net
|
|
|
1,945,322
|
|
|
|
4,970,920
|
|
|
Investment in equity affiliate
|
|
|
824,579
|
|
|
|
2,420,522
|
|
|
Goodwill
|
|
|
3,156,664
|
|
|
|
5,620,906
|
|
|
Deposits and other long-term assets
|
|
|
719,977
|
|
|
|
848,588
|
|
|
Prepaid acquisition costs
|
|
|
1,907,400
|
|
|
|
—
|
|
|
Investment at cost
|
|
|
600,038
|
|
|
|
—
|
|
|
Non-current deferred tax assets
|
|
|
478,919
|
|
|
|
650,091
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
88,324,402
|
|
|
$
|
105,593,724
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and shareholders’ equity
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
|
2,454,064
|
|
|
|
3,575,410
|
|
|
Acquisitions payable
|
|
|
14,657
|
|
|
|
7,101,498
|
|
|
Accrued expenses and other current liabilities
|
|
|
3,018,203
|
|
|
|
2,906,400
|
|
|
Amount due to related parties
|
|
|
207,879
|
|
|
|
256,058
|
|
|
Income tax payable
|
|
|
123,626
|
|
|
|
210,548
|
|
|
Current deferred tax liabilities
|
|
|
497,283
|
|
|
|
416,835
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
6,315,712
|
|
|
|
14,466,749
|
|
|
Long-term payable
|
|
|
24,002
|
|
|
|
32,304
|
|
|
Non-current deferred tax liabilities
|
|
|
292,194
|
|
|
|
844,610
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
6,631,908
|
|
|
|
15,343,663
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies (Note 22)
|
|
|
|
|
|
|
|
|
|
Minority interests
|
|
|
4,783,209
|
|
|
|
4,667,402
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders’ equity:
|
|
|
|
|
|
|
|
|
|
Ordinary shares ($0.00005 par value; 4,560,000,000 shares
authorized; 2,193,343,740 and 2,174,784,440 shares issued and
outstanding as of December 31, 2008 and 2007, respectively)
|
|
|
109,617
|
|
|
|
108,689
|
|
|
Additional paid-in capital
|
|
|
75,012,693
|
|
|
|
74,066,839
|
|
|
Statutory reserve
|
|
|
1,791,324
|
|
|
|
6,502,849
|
|
|
Accumulated deficit
|
|
|
(9,991,663
|
)
|
|
|
(2,750,592
|
)
|
|
Accumulated other comprehensive income
|
|
|
9,987,314
|
|
|
|
7,654,874
|
|
|
|
|
|
|
|
|
|
|
Total shareholders’ equity
|
|
|
76,909,285
|
|
|
|
85,582,659
|
|
|
|
|
|
|
|
|
|
|
Total liabilities, minority interests and shareholders’ equity
|
|
$
|
88,324,402
|
|
|
$
|
105,593,724
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
F-2
HURRAY! HOLDING CO., LTD.
CONSOLIDATED STATEMENTS OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
(in U.S. dollars, except number of shares)
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wireless value-added services
|
|
$
|
42,671,588
|
|
|
$
|
50,038,014
|
|
|
$
|
62,512,483
|
|
|
Recorded music
|
|
|
11,286,812
|
|
|
|
10,488,613
|
|
|
|
6,203,418
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
53,958,400
|
|
|
|
60,526,627
|
|
|
|
68,715,901
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wireless value-added services
|
|
|
32,839,642
|
|
|
|
36,394,300
|
|
|
|
40,672,113
|
|
|
Recorded music
|
|
|
6,729,725
|
|
|
|
6,232,728
|
|
|
|
3,553,144
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenues
|
|
|
39,569,367
|
|
|
|
42,627,028
|
|
|
|
44,225,257
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
14,389,033
|
|
|
|
17,899,599
|
|
|
|
24,490,644
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product development
(including stock-based
compensation expense of
$40,102, $921 and $79,587
for the years ended
December 31, 2008, 2007 and
2006, respectively)
|
|
|
991,689
|
|
|
|
2,028,265
|
|
|
|
2,169,124
|
|
|
Selling and marketing
(including stock-based
compensation expense of
$621,094, $286,885 and
$346,456 for the years ended
December 31, 2008, 2007 and
2006, respectively)
|
|
|
9,132,374
|
|
|
|
11,513,850
|
|
|
|
11,014,215
|
|
|
General and administrative
(including stock-based
compensation expense of
$284,086, $155,169 and
$117,514 for the years ended
December 31, 2008, 2007 and
2006, respectively)
|
|
|
11,983,973
|
|
|
|
9,141,381
|
|
|
|
6,699,607
|
|
|
Provision for goodwill
impairment
|
|
|
2,675,211
|
|
|
|
38,778,584
|
|
|
|
—
|
|
|
Gain on reduction of Unicom
liability
|
|
|
(1,557,153
|
)
|
|
|
—
|
|
|
|
—
|
|
|
Gain from reversed
litigation expenses
|
|
|
(557,167
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
22,668,927
|
|
|
|
61,462,080
|
|
|
|
19,882,946
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating (loss) income from continuing
operations
|
|
|
(8,279,894
|
)
|
|
|
(43,562,481
|
)
|
|
|
4,607,698
|
|
|
Interest income
|
|
|
1,613,078
|
|
|
|
2,313,576
|
|
|
|
2,529,419
|
|
|
Interest expense
|
|
|
—
|
|
|
|
(179,062
|
)
|
|
|
(44,765
|
)
|
|
Other income, net
|
|
|
247,156
|
|
|
|
465,825
|
|
|
|
315,210
|
|
|
Gain on reduction of acquisition payable
|
|
|
5,000,000
|
|
|
|
—
|
|
|
|
—
|
|
|
Foreign exchange loss
|
|
|
(8,990,067
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income before provision for
income taxes, earnings in equity
investments, gain from disposal of
subsidiary, minority interest and
discontinued operations
|
|
|
(10,409,727
|
)
|
|
|
(40,962,142
|
)
|
|
|
7,407,562
|
|
|
Income tax expense (credit)
|
|
|
486,250
|
|
|
|
(182,370
|
)
|
|
|
204,980
|
|
|
|
|
|
|
|
|
|
|
|
|
F-3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
(in U.S. dollars, except number of shares)
|
|
|
Net (loss) income from
continuing operations
after income taxes
before minority
interests
|
|
|
(10,895,977
|
)
|
|
|
(40,779,772
|
)
|
|
|
7,202,582
|
|
|
Minority interests
|
|
|
(337,455
|
)
|
|
|
688,440
|
|
|
|
562,189
|
|
|
Equity in income (loss)
of affiliate
|
|
|
64,293
|
|
|
|
(62,756
|
)
|
|
|
—
|
|
|
Impairment for
investment in equity
affiliate
|
|
|
1,870,897
|
|
|
|
—
|
|
|
|
—
|
|
|
Net (loss) income from
continuing operations
|
|
|
(12,365,126
|
)
|
|
|
(41,530,968
|
)
|
|
|
6,640,393
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income from
discontinued
operations, net of tax
|
|
|
—
|
|
|
|
(612,170
|
)
|
|
|
(836,448
|
)
|
|
Gain from disposal of
discontinued operations
|
|
|
412,530
|
|
|
|
192,943
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) from
discontinued
operations, net of tax
|
|
|
412,530
|
|
|
|
(419,227
|
)
|
|
|
(836,448
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(11,952,596
|
)
|
|
$
|
(41,950,195
|
)
|
|
$
|
5,803,945
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from
continuing operations
per ADSs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.57
|
)
|
|
$
|
(1.91
|
)
|
|
$
|
0.30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
(0.57
|
)
|
|
$
|
(1.91
|
)
|
|
$
|
0.30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from
discontinued
operations per ADSs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.02
|
|
|
$
|
(0.02
|
)
|
|
$
|
(0.04
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
0.02
|
|
|
$
|
(0.02
|
)
|
|
$
|
(0.04
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income per ADSs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.55
|
)
|
|
$
|
(1.93
|
)
|
|
$
|
0.26
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
(0.55
|
)
|
|
$
|
(1.93
|
)
|
|
$
|
0.26
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares
used in calculating
basic (loss) income
per share
|
|
|
2,185,615,129
|
|
|
|
2,172,208,190
|
|
|
|
2,189,748,563
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average ADSs
used in calculating
basic (loss) income
per ADS
|
|
|
21,856,151
|
|
|
|
21,722,082
|
|
|
|
21,897,486
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares
used in calculating
diluted (loss) income
per share
|
|
|
2,185,615,129
|
|
|
|
2,172,208,190
|
|
|
|
2,208,758,636
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average ADSs
used in calculating
diluted (loss) income
per ADS
|
|
|
21,856,151
|
|
|
|
21,722,082
|
|
|
|
22,087,586
|
|
|
|
|
|
|
|
|
|
|
|
|
F-4
HURRAY! HOLDING CO., LTD.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
AND COMPREHENSIVE INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retained earnings
|
|
|
Accumulated other
|
|
|
Total
|
|
|
|
|
|
|
|
Ordinary shares
|
|
|
Additional
|
|
|
Statutory
|
|
|
(Accumulated
|
|
|
comprehensive
|
|
|
shareholders’
|
|
|
Comprehensive
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
paid-in capital
|
|
|
reserve
|
|
|
deficit)
|
|
|
income (loss)
|
|
|
equity
|
|
|
income (loss)
|
|
|
|
|
(in U.S. dollars, except shares data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of January 1, 2006
|
|
|
2,229,754,340
|
|
|
$
|
111,488
|
|
|
$
|
77,335,532
|
|
|
$
|
5,287,057
|
|
|
$
|
34,611,450
|
|
|
$
|
1,273,504
|
|
|
$
|
118,619,031
|
|
|
|
|
|
|
Issuance of ordinary shares related to
acquisition of Shanghai Magma (see Note 3)
|
|
|
8,955,200
|
|
|
|
448
|
|
|
|
539,552
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
540,000
|
|
|
|
|
|
|
Repurchase and cancellation of ordinary shares
|
|
|
(79,260,000
|
)
|
|
|
(3,963
|
)
|
|
|
(5,030,785
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(5,034,748
|
)
|
|
|
|
|
|
Forward contract at fair value (See Note 3)
|
|
|
—
|
|
|
|
—
|
|
|
|
124,918
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
124,918
|
|
|
|
|
|
|
Stock-based compensation expense
|
|
|
—
|
|
|
|
—
|
|
|
|
543,557
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
543,557
|
|
|
|
|
|
|
Exercise of stock options
|
|
|
3,582,200
|
|
|
|
129
|
|
|
|
95,343
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
95,472
|
|
|
|
|
|
|
Provision for statutory reserve
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
374,004
|
|
|
|
(374,004
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
Foreign currency translation adjustment
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2,127,845
|
|
|
|
2,127,845
|
|
|
$
|
2,127,845
|
|
|
Net income
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
5,803,945
|
|
|
|
—
|
|
|
|
5,803,945
|
|
|
|
5,803,945
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2006
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
5,661,061
|
|
|
|
40,041,391
|
|
|
|
3,401,349
|
|
|
|
122,820,020
|
|
|
$
|
7,931,790
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation expense
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
442,975
|
|
|
|
|
|
|
Exercise of stock options
|
|
|
653,400
|
|
|
|
33
|
|
|
|
16,301
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
16,334
|
|
|
|
|
|
|
Provision for statutory reserve
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
841,788
|
|
|
|
(841,788
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
Foreign currency translation adjustment
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
4,253,525
|
|
|
|
4,253,525
|
|
|
$
|
4,253,525
|
|
|
Net loss
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(41,950,195
|
)
|
|
|
|
|
|
|
(41,950,195
|
)
|
|
|
(41,950,195
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2007
|
|
|
2,174,784,440
|
|
|
|
108,689
|
|
|
|
74,066,839
|
|
|
|
6,502,849
|
|
|
|
(2,750,592
|
)
|
|
|
7,654,874
|
|
|
|
85,582,659
|
|
|
$
|
(37,696,670
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation expense
|
|
|
18,499,300
|
|
|
|
925
|
|
|
|
944,357
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
945,282
|
|
|
|
|
|
|
Exercise of stock options
|
|
|
60,000
|
|
|
|
3
|
|
|
|
1,497
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,500
|
|
|
|
|
|
|
Transfer statutory reserve to retained earnings
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(4,711,525
|
)
|
|
|
4,711,525
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
Foreign currency translation adjustment
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2,332,440
|
|
|
|
2,332,440
|
|
|
$
|
2,332,440
|
|
|
Net loss
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(11,952,596
|
)
|
|
|
—
|
|
|
|
(11,952,596
|
)
|
|
|
(11,952,596
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2008
|
|
|
2,193,343,740
|
|
|
$
|
109,617
|
|
|
$
|
75,012,693
|
|
|
$
|
1,791,324
|
|
|
$
|
(9,991,663
|
)
|
|
$
|
9,987,314
|
|
|
$
|
76,909,285
|
|
|
$
|
(9,620,156
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
F-5
HURRAY! HOLDING CO., LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
(In U.S. dollars)
|
|
|
Operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(11,952,596
|
)
|
|
$
|
(41,950,195
|
)
|
|
$
|
5,803,945
|
|
|
Adjustments to reconcile net (loss) income to net cash (used in) provided by
operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impairment of goodwill
|
|
|
2,675,211
|
|
|
|
38,778,584
|
|
|
|
—
|
|
|
Loss on impairment of investment in music affiliate
|
|
|
1,870,897
|
|
|
|
—
|
|
|
|
—
|
|
|
Impairment of acquired intangible assets
|
|
|
2,850,714
|
|
|
|
2,480,253
|
|
|
|
—
|
|
|
Stock-based compensation
|
|
|
945,282
|
|
|
|
442,975
|
|
|
|
543,557
|
|
|
Depreciation and amortization
|
|
|
3,327,798
|
|
|
|
3,644,095
|
|
|
|
3,481,415
|
|
|
Bad debt provision
|
|
|
1,012,738
|
|
|
|
453,674
|
|
|
|
269,235
|
|
|
Minority interests
|
|
|
(337,455
|
)
|
|
|
688,440
|
|
|
|
562,189
|
|
|
Equity in (income) loss of affiliate
|
|
|
(64,293
|
)
|
|
|
62,756
|
|
|
|
—
|
|
|
Gain from disposal of subsidiary
|
|
|
(412,530
|
)
|
|
|
(192,943
|
)
|
|
|
—
|
|
|
Receivable from disposal of subsidiary (net of cash disposed of $771,570 in
2007)
|
|
|
—
|
|
|
|
(3,186,887
|
)
|
|
|
—
|
|
|
Loss on disposal of property and equipment
|
|
|
112,745
|
|
|
|
74,300
|
|
|
|
1,155
|
|
|
Gain on reduction of acquisition payable
|
|
|
(5,000,000
|
)
|
|
|
—
|
|
|
|
—
|
|
|
Gain on reduction of Unicom liability
|
|
|
(1,557,153
|
)
|
|
|
—
|
|
|
|
—
|
|
|
Gain from reversed litigation expenses
|
|
|
(557,167
|
)
|
|
|
—
|
|
|
|
—
|
|
|
Changes in assets and liabilities net of effect of businesses acquired and sold:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
3,492,068
|
|
|
|
(2,069,378
|
)
|
|
|
5,518,845
|
|
|
Prepaid expenses and other current assets
|
|
|
(1,142,954
|
)
|
|
|
(138,548
|
)
|
|
|
3,113,531
|
|
|
Amount due from related parties
|
|
|
(245,724
|
)
|
|
|
(273,618
|
)
|
|
|
(164,008
|
)
|
|
Deposits and other long-term assets
|
|
|
183,003
|
|
|
|
(147,543
|
)
|
|
|
(258,610
|
)
|
|
Inventories
|
|
|
56,833
|
|
|
|
(81,422
|
)
|
|
|
268,556
|
|
|
Current deferred tax assets
|
|
|
412,916
|
|
|
|
(414,011
|
)
|
|
|
(289,651
|
)
|
|
Non-current deferred tax assets
|
|
|
210,257
|
|
|
|
(285,660
|
)
|
|
|
(221,599
|
)
|
|
Accounts payable
|
|
|
(761,068
|
)
|
|
|
(140,809
|
)
|
|
|
(222,881
|
)
|
|
Accrued expenses and other current liabilities
|
|
|
(71,705
|
)
|
|
|
305,097
|
|
|
|
(899,530
|
)
|
|
Amount due to related parties
|
|
|
(63,140
|
)
|
|
|
245,379
|
|
|
|
(204,420
|
)
|
|
Income tax payable
|
|
|
(102,057
|
)
|
|
|
(299,897
|
)
|
|
|
387,148
|
|
|
Current deferred tax liabilities
|
|
|
41,653
|
|
|
|
64,060
|
|
|
|
86,212
|
|
|
Non-current deferred tax liabilities
|
|
|
(477,155
|
)
|
|
|
(114,325
|
)
|
|
|
(139,229
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by operating activities
|
|
|
(5,552,882
|
)
|
|
|
(2,055,623
|
)
|
|
|
17,635,860
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of property and equipment
|
|
|
(349,233
|
)
|
|
|
(863,603
|
)
|
|
|
(956,972
|
)
|
|
Proceeds from disposal of property and equipment
|
|
|
—
|
|
|
|
—
|
|
|
|
30,229
|
|
|
Acquisitions of intangible assets
|
|
|
(1,718,340
|
)
|
|
|
(1,535,436
|
)
|
|
|
(1,714,198
|
)
|
|
Proceeds from disposal of subsidiary
|
|
|
4,517,070
|
|
|
|
—
|
|
|
|
—
|
|
|
Payments related to acquisitions consummated (net of cash acquired of nil,
$1,398,709, and $441,147 for the years ended December 31, 2008, 2007 and 2006,
respectively)
|
|
|
(2,207,132
|
)
|
|
|
(3,237,834
|
)
|
|
|
(12,515,544
|
)
|
|
Payments related to acquisition not yet consummated
|
|
|
(1,907,400
|
)
|
|
|
—
|
|
|
|
—
|
|
|
Investment in cost affiliate
|
|
|
(600,038
|
)
|
|
|
—
|
|
|
|
—
|
|
|
Investment in equity affiliate
|
|
|
—
|
|
|
|
(2,483,277
|
)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(2,265,073
|
)
|
|
|
(8,120,150
|
)
|
|
|
(15,156,485
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from exercise of options
|
|
|
1,500
|
|
|
|
16,334
|
|
|
|
95,472
|
|
|
Proceeds from the issuance of ordinary shares
|
|
|
—
|
|
|
|
—
|
|
|
|
540,000
|
|
|
Repurchase of ordinary shares
|
|
|
—
|
|
|
|
—
|
|
|
|
(5,034,748
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
1,500
|
|
|
|
16,334
|
|
|
|
(4,399,276
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net decrease in cash
|
|
|
(7,816,455
|
)
|
|
|
(10,159,439
|
)
|
|
|
(1,919,901
|
)
|
|
Cash, beginning of year
|
|
|
65,978,884
|
|
|
|
74,596,978
|
|
|
|
75,958,964
|
|
|
Effect of exchange rate changes
|
|
|
1,310,274
|
|
|
|
1,541,345
|
|
|
|
557,915
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash, end of the year
|
|
$
|
59,472,703
|
|
|
$
|
65,978,884
|
|
|
$
|
74,596,978
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes paid
|
|
$
|
385,501
|
|
|
$
|
854,864
|
|
|
$
|
287,266
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
F-6
HURRAY! HOLDING CO., LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2008, 2007 and 2006
(in U.S. dollars, unless otherwise stated)
1. ORGANIZATION AND PRINCIPAL ACTIVITIES
Hurray! Holding Co., Ltd. (“Hurray!”), a Cayman Islands corporation, and its consolidated
subsidiaries, its variable interest entities and equity associate (collectively the “Company”)
provide wireless value-added services to mobile phone users delivered over the wireless networks of
the three telecommunication operators in the People’s Republic of China (“PRC”) and also music
production and distribution in the PRC. The Company specializes in the development, marketing and
distribution of music and entertainment oriented consumer wireless value-added services.
At December 31, 2008, Hurray!’s subsidiaries and variable interest entities (“VIEs”) are as
follows (unless otherwise stated, all of these entities are incorporated in the PRC and the Company
is entitled to the whole benefit of these entities’ economic interest ):
|
|
|
|
|
|
|
|
|
|
|
Date of
|
|
Percentage of
|
|
|
|
|
incorporation or
|
|
effective ownership
|
|
|
Name of Subsidiaries
|
|
establishment
|
|
by Hurray!
|
|
|
Wireless value-added services (“WVAS”) business segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subsidiaries
|
|
|
|
|
|
|
|
Beijing Hurray! Times Technology Co., Ltd. (“Beijing Hurray Times”)
|
|
June 27, 2002
|
|
|
100
|
%
|
|
Hurray Technologies (Hong Kong) Ltd.(incorporated in Hong Kong)
|
|
July 23, 2003
|
|
|
99
|
%
|
|
Invest China Group Limited (incorporated in the British Virgin Islands)
|
|
April 1, 2007
|
|
|
100
|
%
|
|
Beijing Hand-in-Hand Media Technology Co., Ltd.
|
|
April 1, 2007
|
|
|
100
|
%
|
|
Shanghai Fuming Information Technology Co., Ltd.
|
|
January 1, 2006
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
Variable Interest Entities
|
|
|
|
|
|
|
|
Hurray! Solutions Ltd.
|
|
September 21, 1999
|
|
|
100
|
%
|
|
Beijing Enterprise Network Technology Co., Ltd.
|
|
March, 31, 2004
|
|
|
100
|
%
|
|
Beijing Hengji Weiye Electronic Commerce Co., Ltd. (“Hengji Weiye”)
|
|
October 1, 2005
|
|
|
100
|
%
|
|
Beijing Hutong Wuxian Technology Co., Ltd. (“Beijing Hutong”)
|
|
April 1, 2005
|
|
|
100
|
%
|
|
Beijing Palmsky Technology Co., Ltd.
|
|
March, 31, 2004
|
|
|
100
|
%
|
|
Henan Yinshan Digital Network Technology Co., Ltd. (“Henan Yinshan”)
|
|
June 30, 2007
|
|
|
100
|
%
|
|
Shanghai Magma Digital Technology Co., Ltd. (“Shanghai Magma”)
|
|
January 1, 2006
|
|
|
100
|
%
|
|
Shanghai Saiyu Information Technology Co., Ltd. (“Saiyu”)
|
|
April 1, 2007
|
|
|
100
|
%
|
|
Subsidiaries of Variable Interest Entities
|
|
|
|
|
|
|
|
Beijing WVAS Solutions Ltd.
|
|
October 10, 2001
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
Recorded music business segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subsidiary
|
|
|
|
|
|
|
|
Hurray! Media Co., Ltd. ( incorporated in the Cayman Islands)
|
|
August 19, 2005
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
Subsidiaries of Variable Interest Entities
|
|
|
|
|
|
|
|
Hurray! Digital Media Technology Co., Ltd. (“Hurray Digital Media”)
|
|
November 10, 2005
|
|
|
100
|
%
|
|
Beijing Huayi Brothers Music Co., Ltd. (“Huayi Brothers Music”)
|
|
December 31, 2005
|
|
|
51
|
%
|
|
Beijing Huayi Brothers Music Broker Co., Ltd.
|
|
April 17, 2007
|
|
|
51
|
%
|
|
Hurray! Freeland Digital Music Technology Co., Ltd. (“Freeland Music”)
|
|
January 1, 2006
|
|
|
60
|
%
|
|
Beijing Hurray! Freeland Culture Development Co., Ltd.
|
|
January 8, 2007
|
|
|
60
|
%
|
|
Beijing Hurray! Fly Songs International Culture Co., Ltd. (“Beijing
Hurray! Fly Songs”)
|
|
August 21, 2007
|
|
|
30.6
|
%
(1)
|
|
Guangzhou Hurray! Secular Bird Art Co., Ltd. (“Secular Bird”)
|
|
May 30, 2007
|
|
|
65
|
%
|
|
|
|
|
|
(1)
|
|
Hurray holds a 30.6% effective interest in Beijing Hurray! Fly Songs through a holding of 60%
interest in Freeland Music. Freeland Music owns a 51% of equity interest in Beijing Hurray! Fly
Songs. Therefore, Beijing Hurray! Fly Songs is a consolidated entity of the Company.
|
F-7
To comply with PRC laws and regulations that restrict direct foreign ownership of
telecommunication service businesses in the PRC, the Company conducts substantially all of its
business through several VIEs. The VIEs have entered into various agreements with one of Hurray!’s
subsidiaries, including exclusive cooperation agreements. Under these agreements, Hurray! through a
wholly owned PRC subsidiary, Beijing Hurray! Times, is the exclusive provider of technical and
consulting services to the VIEs. In return, the VIEs are required to pay Beijing Hurray! Times’
service fees for the technical and consulting services received. The technical and consulting
service fees can be, and are, adjusted at Hurray!’s discretion depending on the level of service
provided. Beijing Hurray! Times is entitled to receive service fees in an amount up to all of the
net income of the VIEs In addition, Beijing Hurray! Times has been assigned all voting rights by
the direct and indirect owners of the VIEs through agreements which are valid for ten years and are
renewable indefinitely and cannot be amended or terminated except by written consent of all
parties. Finally, Beijing Hurray! Times has the option to acquire the equity interest of the VIEs.
The Company also has extended loans without interest to the registered shareholders to finance
their investments in the VIEs. Each of the registered shareholders is a related party of the
Company acting as de facto agent for the Company. The direct equity interest in these entities has
been pledged as collateral for the loans and when permitted under Chinese laws, the loans are to be
repaid by transferring the direct equity interest in these entities to the Company. Therefore, no
minority interest was recorded for the registered capital from the registered shareholders.
Hurray! is the sole beneficiary of the VIEs because all the variable interests are held by
Hurray!. Accordingly, the Company consolidates the VIEs under Financial Accounting Standard Board
(“FASB”) Interpretation (“FIN”) No. 46 (revised), “Consolidation of Variable Interest Entities,”
which requires certain VIEs to be consolidated by the primary beneficiary of the entity if the
equity investors in the entity do not have the characteristics of a controlling financial interest
or do not have sufficient equity at risk for the entity to finance its activities without
additional subordinated financial support from other parties.
The following financial statement amounts and balances of Hurray !’s VIEs were included in the
accompanying consolidated financial statements as of and for the years ended December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Total assets
|
|
$
|
47,698,645
|
|
|
$
|
53,453,523
|
|
|
Total liabilities
|
|
$
|
6,342,451
|
|
|
$
|
8,187,804
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Revenues
|
|
$
|
53,958,400
|
|
|
$
|
60,526,627
|
|
|
$
|
68,715,901
|
|
|
Net (loss) income
|
|
|
(6,876,064
|
)
|
|
|
(40,902,941
|
)
|
|
|
6,320,966
|
|
The difference between the consolidated net income (loss) and that of VIEs was derived from
the foreign exchange loss, the gain from disposal of discontinued operations, the gain on reduction
of acquisition payable, interest income and the operating expenses of Hurray!, the holding company.
F-8
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Basis of presentation
The consolidated financial statements of the Company have been prepared in accordance with
accounting principles generally accepted in the United States of America (“US GAAP”).
(b) Basis of consolidation
The consolidated financial statements include the financial statements of Hurray!, its
subsidiaries and VIEs . All inter-company transactions and balances have been eliminated upon
consolidation. The affiliated company in which the Company controls more than 20% but less than 50%
of the investment is accounted for using the equity method of accounting. The Company’s share of
earnings (losses) of the equity investment is included in the accompanying consolidated statements
of operations.
(c) Fair value
The Group adopted SFAS No. 157 “Fair Value Measurements” on January 1, 2008 for all financial
assets and liabilities and nonfinancial assets and liabilities that are recognized or disclosed at
fair value in the financial statements on a recurring basis (at least annually). SFAS No. 157
defines fair value, establishes a framework for measuring fair value, and expands disclosures about
fair value measurements.
SFAS 157 defines fair value as 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 Company considers the principal or most advantageous
market in which it would transact and it considers assumptions that market participants would use
when pricing the asset or liability.
SFAS 157 establishes a fair value hierarchy that requires an entity to maximize the use of
observable inputs and minimize the use of unobservable inputs when measuring fair value. A
financial instrument’s categorization within the fair value hierarchy is based upon the lowest
level of input that is significant to the fair value measurement. SFAS 157 establishes three
levels of inputs that may be used to measure fair value:
Level 1
Level 1 applies to assets or liabilities for which there are quoted prices in active markets
for identical assets or liabilities.
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.
As of December 31, 2008, the Company did not have any financial assets and liabilities or
nonfinancial assets and liabilities that are measured at fair value on a recurring basis.
(d) 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 at the dates
of the financial statements and the reported amounts of revenues and expenses in the reporting
periods. Significant accounting estimates reflected in the Company’s financial statements include
accruals for revenue and cost of revenue adjustments, allowance for doubtful accounts, sales
returns and allowances, inventory reserves, valuations of acquired intangible assets and goodwill,
valuation of equity method investee, the useful lives for intangible assets and property and
equipment, stock based compensation, and deferred income tax assets valuation allowances.
F-9
(e) Significant risks and uncertainties
The Company participates in industries with rapid changes in regulations, technology trends,
customer demand and competition and believes that changes in any of the following areas could have
a material adverse effect on the Company’s future financial position, results of operations, or
cash flows: changes in the overall demand for entertainment-oriented wireless value-added services;
advances and trends in new technologies and industry standards; changes in key suppliers; changes
in certain strategic relationships or customer relationships; regulatory or other factors; risks
associated with the ability to maintain strategic relationships with the telecommunication
operators; risks associated with attracting and retaining music artists, accessing songs and
songwriters, and managing the Company’s new music businesses; and risks associated with the
Company’s ability to attract and retain other necessary employees to support its growth.
(f) 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.
(g) Inventories
Inventories represent music compact discs (“CDs”) and related music products and are stated at
the lower of cost, determined using the first-in, first-out method, or market.
(h) Property and equipment, net
Property and equipment are carried at cost less accumulated depreciation and amortization.
Depreciation and amortization are calculated on a straight-line basis over the following estimated
useful lives:
|
|
|
|
|
Furniture and office equipment
|
|
3 years
|
|
Motor vehicles
|
|
5 years
|
|
Telecommunications equipment
|
|
3 years
|
|
Leasehold improvements
|
|
Lesser of original lease term or estimated useful life
|
(i) Acquired intangible assets, net
Acquired intangible assets consists of intangible assets, as detailed in Note 8, acquired
through direct purchases and various business acquisitions and are amortized on a straight-line
basis over their expected useful economic life.
(j) Goodwill
Goodwill represents the excess of the purchase price over the fair value of the identifiable
assets acquired and liabilities assumed as a result of the Company’s acquisitions.
The Company tests goodwill for impairment by reporting unit on an annual basis or more
frequently if an event occurs or circumstances change that could more likely than not reduce the
fair value of the goodwill below its carrying amount. The Company performs a two-step goodwill
impairment test. The first step compares the fair values of each reporting unit to its carrying
amount, including goodwill. If the fair value of a 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 the affected reporting unit’s goodwill to the carrying value of that 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. This
allocation process is only performed for purposes of evaluating goodwill impairment and does not
result in an entry to adjust the value of any assets or liabilities. An impairment loss is
recognized for any excess in the carrying value of goodwill over the implied fair value of
goodwill.
F-10
(k) Impairment of long-lived assets
The Company 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 Company 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 Company would recognize an impairment loss based
on the fair value of the assets.
(l) Revenue recognition and cost of revenues
Wireless value-added services
Wireless value-added service revenues are derived from providing personalized media, games,
entertainment and communication services to mobile phone and personal handy phone (collectively
“mobile phones”) customers of the various subsidiaries of the three major Chinese operators of
telecommunication networks, China United Telecommunications Corporation (“China Unicom”), China
Mobile Communications Corporation (“China Mobile”) and China Telecommunications Corporation
(collectively, the “Telecom Operators”). Fees for these services, negotiated by a network service
agreement with the Telecom Operators and indicated in the message received on the mobile phone, are
charged on a per-use basis or on a monthly subscription basis, and vary according to the type of
services delivered.
The Company contracts with the Telecom Operators (defined above) for the transmission of
wireless services as well as for billing and collection services. The Telecom Operators provide the
Company with a monthly statement that represents the principal evidence that service has been
delivered and triggers revenue recognition for a substantial portion of the Company’s revenue. In
certain instances, when a statement is not received within a reasonable period of time, the Company
makes an estimate of the revenues and cost of services earned during the period covered by the
statement based on its internally generated information, historical experience and/or other
assumptions that are believed to be reasonable under the circumstances. The Company recognizes all
revenues in the period in which the services are performed net of business taxes of $1,402,507,
$1,506,002 and $1,664,706 for 2008, 2007 and 2006, respectively.
The Company measures its revenues based on the total amount paid by mobile phone customers,
for which the Telecom Operators bill and collect on the Company’s behalf. Accordingly, the service
fee paid to the Telecom Operators is included in the cost of revenues. In addition, in respect of
2G services, the Telecom Operators charge the Company a network fee based on a per message fee,
which varies depending on the volume of messages sent in the relevant month, multiplied by the
excess of messages sent over messages received. These network fees are likewise retained by the
Telecom Operators and are reflected as cost of revenues. The cost of revenues also includes fees
paid to our content providers and marketing partners, maintenance costs related to equipment used
to provide the services, bandwidth leasing charges and data center services, alternative channels,
media and related Internet costs, operator imposed penalty charges, and certain distribution costs.
The Company evaluates its cooperation arrangements with the Telecom Operators to determine
whether to recognize the Company’s revenues on a gross basis or net of the service fees and net
transmission charges paid to the Telecom Operators. The Company’s determination is based upon an
assessment of whether it acts as a principal or agent when providing its services. The Company has
concluded that it acts as principal in the arrangement. Factors that support the Company’s
conclusion mainly include:
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•
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the Company is the primary obligor in the arrangement;
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•
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the Company is able to establish prices within price caps
prescribed by the telecommunications operators to reflect or react
to changes in the market;
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•
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the Company determines the service specifications of the services it will be rendering;
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•
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the Company is able to control the selection of its content suppliers; and
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•
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the Telecom Operators usually will not pay the Company if users
cannot be billed or if users do not pay the Telecom Operators for
services delivered and, as a result, the Company bears the
delivery and billing risks for the revenues generated with respect
to its services.
|
Based on these factors, the Company believes that recognizing revenues on a gross basis is
appropriate. However, as noted above, the Company’s reported revenues are net of bad debt charges
that have been deducted by the Telecom Operators.
F-11
Recorded Music
The Company is in the business of artist development music production, offline music
distribution and online distribution through wireless value-added services and the Internet.
Recorded music revenues are derived from live performances, corporate sponsorship and advertising,
online and wireless sales, and offline CD sales
The Company generates revenues from the sale of CDs either by providing the CD master to a
distributor or by directly arranging for the volume production and subsequent wholesale of the CDs.
In the former case, the Company receives a fixed fee, has no further obligations and recognizes the
fee as revenue when the master CD is provided. In the latter case, the Company ships the produced
CDs to retail distributors and recognizes wholesale revenues at the time of shipment less a
provision for future estimated returns. In 2008, the estimated sales returns rate is approximately
19% based on past experience.
The Company recognizes artist performance fees and corporate sponsorship or marketing event
fees once the performance or the service has been completed. Where the Company acts as the primary
obligor in the transaction, revenues are recorded on a gross basis. Where the Company is considered
an agent or where the artists separately contract with the event organizer, revenues are recorded
on a net basis.
The Company licenses its music to third parties for guaranteed minimum royalty payments,
normally received upfront and typically non-refundable. In such cases the Company recognizes
revenue on a straight-line basis over the life of the license and unrecognized revenues are
included in liabilities. When the contract provides for additional payments if revenues exceed the
minimum amount guaranteed, such amounts are included in revenues when the Company is notified of
its entitlement to additional payments.
The Company incurs costs in producing CD masters, volume CD production, artist and songwriter
royalties, and royalties payable to other parties for the use of their work. The cost of record
masters and volume CD productions, and royalties paid in advance are recorded in prepaid expenses
and other current assets when the sales of the recording are expected to recover the cost and
amortized as an expense over the revenue generating period, typically within one year. The decision
to capitalize an advance to an artist, songwriter or other party requires significant judgment as
to the recoverability of these advances. Advances for royalties and other capitalized costs are
regularly assessed for recoverability.
(m) Foreign currency translation
Hurray! uses the United States dollar (“U.S. dollar”) as its functional and reporting
currency. Monetary assets and liabilities denominated in currencies other than the U.S. dollar are
translated into U.S. dollars at the rates of exchange prevailing at the balance sheet date.
Transactions in currencies other than U.S. dollars during the year are converted into U.S. dollars
at the applicable rates of exchange prevailing at the last day of the month transactions occurred.
Transaction gains and losses are recognized in the statements of operations and in 2008 the Company
incurred losses of $ 8,990,067 following the conversion into Euros and subsequent conversion back
into U.S dollars of a significant portion of the Company’s U.S dollar deposits arising from the
high volatility in the currency markets.
The financial records of certain of Hurray!’s subsidiaries and VIEs are maintained in
Renminbi (“RMB”), which is their functional currency. Assets and liabilities are translated at the
exchange rates at the balance sheet date, equity accounts are translated at historical exchange
rates and revenues, expenses, gains and losses are translated using the average rate for the
period. Translation adjustments are reported as cumulative translation adjustments and are
reflected as a separate component of comprehensive income in the statements of shareholders’
equity.
RMB is not fully convertible into U.S. dollars. The rate of exchange for the U.S. dollar
quoted by the Federal Reserve Bank of New York was RMB 6.8225, RMB 7.2946 and RMB 7.8087 on
December 31, 2008, 2007 and 2006, respectively.
(n) Product development expenses
Product development expenses consist of content development expenses including compensation
and related costs for employees associated with the development and programming of mobile data
content related to WVAS business. These costs are expensed as incurred until technological
feasibility has been established, at which time any additional costs would be capitalized. To date,
the Company has essentially completed its development concurrently with the establishment of
technological feasibility, and, accordingly, no costs have been capitalized.
F-12
(o) Stock-based compensation
Effective January 1, 2006, the Company adopted the fair value recognition provisions of
Statement of Financial Accounting Standards (“SFAS”) No. 123 (revised 2004), “Share-Based Payment”
(“SFAS 123(R)”), using the modified prospective transition method and therefore has not restated
results for prior periods. Under this transition method, stock-based
compensation expense recognized beginning January 1, 2006 includes: (a) compensation expense
for all stock-based compensation awards granted prior to, but not yet vested as of January 1, 2006
based on the fair market value as of the grant date, measured in accordance with SFAS 123, and
(b) compensation expense for all stock-based compensation awards granted on or subsequent to
January 1, 2006, based on grant-date fair vale estimated in accordance with the provisions of SFAS
123(R). In March 2005, the SEC issued Staff Accounting Bulletin No. 107 (“SAB 107”) regarding the
SEC’s interpretation of SFAS 123(R) and the valuation of stock-based payments for public companies.
The Company has applied the provisions of SAB 107 in its adoption of SFAS 123(R). The Company
recognizes stock-based compensation costs on a straight-line basis over the requisite service
period of the award, which is generally the vesting period of the award.
Prior to the adoption of SFAS 123(R), the Company recognized stock-based compensation expense
in accordance with Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued
to Employees” (“APB 25”), and had adopted the disclosure-only alternative of SFAS 123 and SFAS No.
148, “Accounting for Stock-based Compensation — Transition and Disclosure”. In accordance with APB
25 and related interpretations, stock-based compensation expense was not recorded in connection
with share-based awards granted with exercise prices equal to or greater than the fair market value
of the underlying shares on the date of grant.
Share-based payment transactions with non-employees are accounted for as share based
compensation expenses in accordance with EITF 96-18 “Accounting for Equity Instruments that Are
Issued to Other Than Employees for Acquiring or in Conjunction with Selling, Goods or Services”.
See Note 17 to the Consolidated Financial Statements for further discussion on stock-based
compensation.
(p) Taxation
Income taxes — Deferred income taxes are recognized for temporary differences between the tax
bases of assets and liabilities and their reported amounts in the financial statements, net
operating loss carry forwards and credits by applying enacted statutory tax rates applicable to
future years. Deferred tax assets are reduced by a valuation allowance when, in the opinion of
management, it is more likely than not that some portion or all of the deferred tax assets will not
be realized. Current income taxes are provided for in accordance with the laws of the relevant
taxing authorities.
Value added taxes — The Company’s PRC subsidiaries and VIEs are subject to value-added tax on
sales, which is calculated at a rate of 13% on revenues from offline CD distribution. In addition,
the Company’s software and system integration service operations in the PRC, which were sold in
August 2007, were up to that date subject to value-added tax at a rate of 17% on revenues from
sales of hardware and software as well as the installation and system integration services which
are deemed as mixed-sale of goods and thus subject to VAT. Revenue is recorded net of VAT.
Business taxes — The Company’s PRC subsidiaries and VIEs are also subject to business tax at a
rate of 3-5% on wireless value-added services revenues. Business taxes are recorded as a deduction
of revenue when incurred.
In June 2006, the FASB issued Interpretation No. 48 (“FIN 48”), “Accounting for Uncertainty in
Income Taxes — an interpretation of FASB Statement No. 109”. FIN 48 prescribes a recognition
threshold and measurement attribute for the financial statement recognition and measurement of a
tax position taken or expected to be taken in a tax return. FIN 48 is effective for fiscal years
beginning after December 15, 2006, with early adoption permitted. The Company adopted FIN 48
effective January 1, 2007. The adoption of FIN 48 did not result in a cumulative adjustment on
January 1, 2007 and had no significant impact on the Company’s accounting for income taxes for the
year ended December 31, 2008. The Company did not incur any interest or penalties related to
potential underpaid income tax expenses, and also does not expect to have a significant increase or
decrease in the unrecognized tax benefits within 12 months from December 31, 2008.
The Company is subject to taxation in PRC and other tax jurisdictions. There is no ongoing
examination by taxing authorities at this time. Various tax years during 2002 and 2008 of some of
the Company’s subsidiaries and VIEs remain open in the relevant taxing jurisdictions.
(q) Comprehensive income (loss)
Comprehensive income (loss) includes foreign currency translation adjustments. Comprehensive
income (loss) is reported in the statements of shareholders’ equity.
F-13
(r) Fair value of financial instruments
Financial instruments include cash and cash equivalents, accounts receivable, equity method
investment, accounts payable and accrued expenses and other current liabilities. The carrying
values of cash and cash equivalents, accounts receivable, short-term
borrowings, accounts payable and accrued liabilities and other current liabilities approximate
their fair values due to their short-term maturities.
(s) Advertising costs
The Company expenses advertising costs as incurred. Total advertising expenses were
$5,895,995, $5,269,550 and $5,404,935 an in 2008, 2007 and 2006, respectively, and have been
included in selling and marketing expenses and cost of revenues.
(t) (Loss) income per share
Basic (loss) income per share is computed by dividing income attributable to ordinary
shareholders by the weighted average number of ordinary shares outstanding during the year. Diluted
(loss) income per ordinary share reflects the potential dilution that could occur if securities or
other contracts to issue ordinary shares were exercised or converted into ordinary shares. The
dilutive effect of the stock options and non-vested stock units is computed using treasury stock
method.
(u) Recently issued accounting standards
On June 12, 2009, the FASB issued SFAS 166, “Accounting for Transfers of Financial Assets”
(“SFAS 166”). SFAS 166 amends the derecognition guidance in Statement 140 and eliminates the
exemption from consolidation for qualifying special-purpose entities (QSPEs). As a result, a
transferor will need to evaluate all existing QSPEs to determine whether they must now be
consolidated in accordance with Statement 167. Statement 166 is effective for financial asset
transfers occurring after the beginning of an entity’s first fiscal year that begins after November
15, 2009. The Company is in the process of assessing the potential impact of the adoption of SFAS
166 on its consolidated financial position or results of operations.
On June 12, 2009, the FASB issued SFAS 167, “Amendments to FASB Interpretation No. 46(R)”
(“SFAS 167”). SFAS 167 amends the consolidation guidance applicable to variable interest entities.
The amendments will significantly affect the overall consolidation analysis under Interpretation
46(R). While the Board’s discussion leading up to the issuance of Statement 167 focused extensively
on structured finance entities, the amendments to the consolidation guidance affect all entities
and enterprises currently within the scope of Interpretations 46(R), as well as QSPEs that are
currently excluded from the scope of Interpretation 46(R). The Statement is effective as of the
beginning of the first fiscal year that begins after November 15, 2009. The Company is in the
process of assessing the potential impact of the adoption of SFAS 167 on its consolidated financial
position or results of operations.
On April 9, 2009, the FASB issued the FASB Staff Position (“FSP”) FAS 157-4, “Determining Fair
Value When the Volume and Level of Activity for the Asset or Liability Have Significant Decreased
and Identifying Transactions That Are Not Orderly”. This statement provides additional guidance
for estimating fair value measurement in accordance with FAS 157 when the volume and level of
activity for the asset or liability have significantly decreased and provides guidance on
identifying circumstances that indicate a transaction is not orderly. It emphasizes that despite
significant decreases in volume and level of activity and regardless of the valuation technique(s)
used for the asset or liability, the fair value measurement stay the same. Fair value is the price
that would be received to sell an asset or paid to transfer a liability in an orderly transaction
(that is, not a forced liquidation or distressed sale) between market participants at the
measurement date under current market conditions. This issue is effective prospectively for
interim and annual periods ending after June 15, 2009. Early adoption is permitted for periods
ending after March 15, 2009. The Company does not expect the adoption of FSP FAS 157-4 will have a
significant effect on the Company’s consolidated financial position or results of operations.
On April 9, 2009, the FASB issued the FSP FAS 107-1 and APB 28-1, “Interim Disclosures about
Fair Value of Financial Instruments”. This Statement amends FAS 107 to require entities to
disclose, among other things, the methods and significant assumptions used to estimate the fair
value of financial instruments in both interim and annual financial statements and amends APB
Opinion No. 28 to require those disclosures in summarized financial information at interim
reporting periods. This FSP applies to all financial instruments within the scope of FAS 107 held
by publicly traded companies, as defined in APB Opinion 28. This issue is effective for interim
and annual periods ending after June 15, 2009. Early adoption is permitted for periods ending
after March 15, 2009 only if a reporting entity also early adopts FAS 157-4 and FAS FAS 115-2 and
FAS 124-2. The Company does not expect the adoption of FSP FAS 107-1 and APB 28-1 will have a
significant effect on the Company’s consolidated financial position or results of operations.
On April 9, 2009, the FASB issued the FSP FAS 115-2 and FAS 124-2, “Recognition and
Presentation of Other-Than-Temporary Impairments” (“OTTI”). This Statement amends the OTTI
guidance for debt securities to make the guidance more operational and to improve the presentation
and disclosure of OTTI on debt and equity securities in the financial statements. This FSP does
not amend existing recognition and measurement guidance related to OTTI of equity securities. It
gives guidance on the evaluating whether an impairment of a debt security is other-than-temporary
and the determination of Amount of an OTTI recognized in earnings and other comprehensive income.
The Company does not expect the adoption of FSP FAS 115-2 and FAS 124-2 will have a significant
effect on the Company’s consolidated financial position or results of operations.
F-14
On April 1, 2009, the FASB issued FSP FAS 141(R)-1, which amends the guidance in FASB
Statement No. 141(R), “Business Combinations”, to establish a model for pre-acquisition
contingencies that is similar to the one entities used under Statement 141. The FSP is effective
for business combinations whose acquisition date is on or after the beginning of the first annual
reporting period beginning on or after December 15, 2008. The Company does not expect the adoption
of FSP FAS 141(R)-1 will have a significant effect on the Company’s consolidated financial position
or results of operations.
At its November 24, 2008 meeting, the FASB ratified the consensus reached by the Task Force in
Issue No. 08-6: “Equity Method Investment Accounting Considerations” (“EITF 08-6”). Because of the
significant changes to the guidance on subsidiary acquisitions and subsidiary equity transactions
and the increased use of fair value measurements as a result of Statements 141(R) and 160,
questions have arisen regarding the application of that accounting guidance to equity method
investments. EITF 08-6 provides guidance for entities that acquire or hold investments accounted
for under the equity method. This issue is effective for transactions occurring in fiscal years
and interim periods beginning on or after December 15, 2008. Early adoption is not permitted. The
Company does not expect the adoption of EITF 08-6 will have a significant effect on the Company’s
consolidated financial position or results of operations.
In June 2008, the FASB issued FASB Staff Position EITF 03-6-1, “Determining Whether
Instruments Granted in Share-Based Payment Transactions Are Participating Securities”. This FSP
gives guidance on the computation of earnings per share and the impact of share-based instruments
that contain certain non-forfeitable rights to dividends or dividend equivalents. The FSP is
effective for fiscal years beginning after December 31, 2008 and early application is prohibited.
The Company does not expect the adoption of FSP 03-6-1 will have a significant effect on the
Company’s consolidated financial position or results of operations.
In April 2008, the FASB issued FASB Staff Position FAS142-3, “Determination of the Useful Life
of Intangible Assets”. This FSP amends the factors that should be considered in developing renewal
or extension assumptions used to determine the useful life of a recognized intangible asset under
FASB Statement No. 142, “Goodwill and Other Intangible Assets”. This FSP is effective for fiscal
years beginning after December 15, 2008, and interim periods within those fiscal years. Early
adoption is prohibited. The guidance for determining the useful life of a recognized intangible
asset in this FSP shall be applied prospectively to intangible assets acquired after the effective
date. The Company does not expect the adoption of FAS 142-3 will have a significant effect on the
Company’s consolidated financial position or results of operations.
In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and
Hedging Activities,” to improve financial reporting about derivative instruments and hedging
activities by requiring enhanced disclosures to enable investors to better understand their effects
on an entity’s financial position, financial performance, and cash flows. The standard requires
disclosure of fair values of derivative instruments and their gains and losses in a tabular format
as well as cross-referencing within footnotes to enable financial statement users to locate
important information about derivative instruments. It also requires that more information be
provided about an entity’s liquidity by requiring disclosure of derivative features that are credit
risk-related. SFAS No.161 is effective for financial statements issued for fiscal years and interim
periods beginning after November 15, 2008, with early application encouraged. The Company does not
expect the adoption of SFAS No. 161 to have a material impact on its financial statements.
In December 2007, the FASB issued SFAS No.141(R), “Business Combination,” to improve reporting
by creating greater consistency in the accounting and financial reporting of business combinations.
The standard requires the acquiring entity in a business combination to recognize all (and only)
the assets acquired and liabilities assumed in the transaction; establishes the acquisition-date
fair value as the measurement objective for all assets acquired and liabilities assumed; and
requires the acquirer to disclose to investors and other users all of the information they need to
evaluate and understand the nature and financial effect of the business combination. SFAS No.
141(R) applies prospectively to business combinations for which the acquisition date is on or after
the beginning of the first annual reporting period beginning on or after December 15, 2008. Early
adoption is prohibited. The Company does not expect the adoption of SFAS 141R will have a
significant effect on the Company’s consolidated financial position or results of operations.
In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated
Financial Statements-An Amendment of ARB No. 51”, or SFAS 160. This Statement amends ARB 51 to
establish accounting and reporting standards for the noncontrolling interest in a subsidiary and
for the deconsolidation of a subsidiary. It clarifies that a noncontrolling interest in a
subsidiary is an ownership interest in the consolidated entity and should be reported as equity on
the financial statements. SFAS 160 requires consolidated net income to be reported at amounts that
include the amounts attributable to both the parent and the noncontrolling interest. Furthermore,
disclosure of the amounts of consolidated net income attributable to the parent and to the
noncontrolling interest is required on the face of the financial statements. SFAS 160 is effective
as of the beginning of an entity’s first fiscal year that begins after December 15, 2008. Upon the
adoption of SFAS 160, the Company reclassified the minority interest balance to the shareholder’s
equity on January 1, 2009.
F-15
3. ACQUISITIONS
In 2007 and 2006, the Company made a number of acquisitions of businesses directly or through
its VIE companies. Each acquisition has been recorded using the purchase method of accounting, and
accordingly the acquired assets and liabilities were recorded at their fair values on the dates of
acquisitions and the results of their operations have been included in our operations since their
respective acquisition dates. The fair values of the assets and liabilities acquired were estimated
using a combination of valuation methods, such as “income approach,” “market approach,” and “cost
approach” methods, considering, among other factors, forecasted financial performance of the
acquired business, market performance, and market potential of the acquired business in China.
The acquisitions payable as of December 31, 2008 represents the payable for the acquisition of
Henan Yinshan of $14,657 and at December 31, 2007 represented the payables for the acquisition of
Shanghai Magma, Henan Yinshan and Saiyu, and Beijing Hutong of $6,000,000, $1,089,160 and $12,338,
respectively.
(a) 2007 acquisitions
Acquisition of Henan Yinshan and Saiyu
In April and June of 2007, the Company acquired 100% of the equity of Saiyu and Henan Yinshan,
for a total cash consideration of $5,328,699, including transaction costs of $21,021, to further
expand the Company’s portfolio of wireless value-added services in China. Of the total
consideration, at December 31, 2007, an amount of $1,089,160 was deferred until certain conditions
were fulfilled and $1,074,503 was paid in 2008. The remaining $14,657 is payable once certain
conditions are fulfilled. In 2008, the Company made an additional payment of $60,483 to the selling
shareholders of Henan Yinshan based on the amended agreement, which, together with transaction
costs of $20,021, is recorded as a corresponding increase in goodwill. The following table
summarizes the estimated fair values of the assets acquired and liabilities assumed at the date of
acquisition. The purchase price allocation has been finalized.
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Total purchase price:
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Cash consideration
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$
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5,307,678
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Transaction costs
|
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21,021
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|
|
|
|
|
|
|
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$
|
5,328,699
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|
|
|
|
|
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Amortization
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period
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Aggregate purchase price allocation — Saiyu
and Henan Yinshan:
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Cash and cash equivalents
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$
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1,311,572
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Accounts receivable
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45,451
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|
|
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Other current assets
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1,226
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|
|
|
|
|
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Acquired intangible assets:
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|
|
|
|
|
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Agreements with China Mobile
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1,946,402
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|
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5 years
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WVAS license
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24,763
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|
|
3 years
|
|
|
Goodwill allocated to WVAS segment
|
|
|
2,134,375
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|
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N/A
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Property and equipment, net
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9,496
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|
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3-5 years
|
|
|
Other assets
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|
17,751
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|
|
|
|
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Current liabilities
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|
|
(71,652
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)
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|
|
|
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|
Non-current deferred tax liabilities
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(90,685
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)
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|
|
|
|
|
|
|
|
|
|
|
|
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Total
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$
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5,328,699
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|
|
|
|
|
|
|
|
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F-16
Acquisition of Secular Bird and Beijing Hurray! Fly Songs
During 2007, the Company expanded its recorded music segment by acquiring 65% of Secular Bird,
an independent record label in China, and through its Freeland Music joint venture, a 51% interest
in Beijing Hurray! Fly Songs, a concert and performance organizer in China, for a total
consideration of $576,066, all paid in 2007. The following table summarizes the estimated fair
values acquired and liabilities assumed at the dates of acquisition. The purchase price allocation
has been finalized.
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|
|
|
|
|
|
|
|
|
|
|
|
|
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Amortization
|
|
|
|
|
|
|
|
|
period
|
|
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Aggregate purchase price allocation — Secular Bird
and Beijing Hurray! Fly Songs
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
87,138
|
|
|
|
|
|
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Inventory
|
|
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10,747
|
|
|
|
|
|
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Other current assets
|
|
|
116,559
|
|
|
|
|
|
|
Acquired intangible assets:
|
|
|
|
|
|
|
|
|
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Artist management contract
|
|
|
32,293
|
|
|
4.6 years
|
|
|
Trademarks
|
|
|
24,644
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|
|
20 years
|
|
|
Copyright for songs
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|
|
17,846
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|
|
1.9 years
|
|
|
Non-complete contract
|
|
|
4,249
|
|
|
3.8 years
|
|
|
Goodwill allocated to recorded music segment
|
|
|
253,705
|
|
|
|
N/A
|
|
|
Property and equipment, net
|
|
|
53,375
|
|
|
3-5 years
|
|
|
Other assets
|
|
|
1,402
|
|
|
|
|
|
|
Current liabilities
|
|
|
(11,108
|
)
|
|
|
|
|
|
Non-current deferred tax liabilities
|
|
|
(14,784
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
576,066
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In 2008, the Company made an additional payment under an earn-out agreement of $189,255, with a
corresponding increase in goodwill. Additional contingent consideration of a capital injection in
cash to Secular Bird and additional cash payments to the original selling shareholders are to be
determined based on specified earnings objectives for the twelve-month period ending August 31,
2009 and if the objectives are met will be payable in 2009.
The following unaudited pro forma information summarizes the results of operations for the
year ended December 31, 2007 and 2006 assuming the acquisitions of Saiyu, Henan Yinshan, Secular
Bird and Beijing Hurray! Fly Songs occurred as of January 1, 2006 and 2007. The following pro forma
financial information has been prepared for comparative purpose only and is not necessarily
indicative of the results that would have occurred had the acquisitions been completed at the
beginning of that period, nor is it indicative of future operating results:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
|
Pro forma total revenue
|
|
$
|
60,897,824
|
|
|
$
|
69,617,966
|
|
|
Pro forma net (loss) income
attributable to holders of ordinary
shares
|
|
|
(42,565,473
|
)
|
|
|
5,783,149
|
|
|
Pro forma net (loss) income per share:
|
|
|
|
|
|
|
|
|
|
- basic
|
|
$
|
(0.02
|
)
|
|
$
|
0.00
|
|
|
- diluted
|
|
$
|
(0.02
|
)
|
|
$
|
0.00
|
|
|
Weighted average shares used in
calculation of pro forma net (loss)
income per share:
|
|
|
|
|
|
|
|
|
|
- basic
|
|
|
2,172,208,190
|
|
|
|
2,189,748,563
|
|
|
- diluted
|
|
|
2,172,208,190
|
|
|
|
2,208,758,636
|
|
F-17
(b) 2006 acquisitions
Acquisition of Shanghai Magma
Effective January 1, 2006, the Company acquired 100% of the outstanding equity of Shanghai
Magma, a leading developer and publisher of wireless Java™ Games in China and Shanghai Magma has
been consolidated since that date. Under the acquisition agreements, the Company made an initial
cash payment of $4,185,009 and agreed to pay additional amounts based on Shanghai Magma’s financial
performance in 2006 and 2007 with a maximum total consideration, including the initial payment, of
$22,000,000. In September 2006, the Company agreed with the selling shareholders to fix the
additional amounts at a total of $10,500,000 payable in two installments of $4,500,000 in October
2006 and $6,000,000 in December 2007. As part of the amended agreements certain selling
shareholders agreed to subscribe $1,250,000 of the payments received in the issue of Hurray!’s
ordinary shares at a price based on the 5 -day average price of Hurray!’s shares prior to signing
the revised agreements. Such right of subscription was fair valued at $124,918 using the option
valuation model. As of December 31, 2006, the Company had made the payment of $4,500,000 and
selling
shareholders subscribed $540,000 of the payments received in the issue of Hurray!’s ordinary
shares. On December 31, 2007, the amount payable under these agreements was $6,000,000, out of
which $710,000 was to be used by the selling shareholders for subscription of Hurray!’s shares at a
price of $6.03 per share. In February 2008, the Company and the selling shareholders agreed to
further amend the agreements to reduce the consideration payable to $1,000,000 and cancelled the
option granted to the selling shareholders. The amount of $1,000,000 was paid in March 2008. The
gain on reduction of $5,000,000 in the purchase liability was recognized as other operating income
in the first quarter of 2008. The purchase price allocation has been finalized.
|
|
|
|
|
|
|
Total purchase price:
|
|
|
|
|
|
Cash consideration
|
|
$
|
14,246,746
|
|
|
Fair value of share purchase right
|
|
|
124,918
|
|
|
Transaction costs
|
|
|
438,263
|
|
|
|
|
|
|
|
|
|
$
|
14,809,927
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization
|
|
|
|
|
|
|
|
|
period
|
|
|
Purchase price allocation:
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
393,425
|
|
|
|
|
|
|
Accounts receivable
|
|
|
564,291
|
|
|
|
|
|
|
Other current assets
|
|
|
1,156,492
|
|
|
|
|
|
|
Acquired intangible assets:
|
|
|
|
|
|
|
|
|
|
Partnership agreement with China Mobile
|
|
|
418,826
|
|
|
4 years
|
|
|
Trademarks
|
|
|
147,456
|
|
|
20 years
|
|
|
Software
|
|
|
59,478
|
|
|
5 years
|
|
|
Website
|
|
|
21,065
|
|
|
4.5 years
|
|
|
WVAS license
|
|
|
9,913
|
|
|
4.5 years
|
|
|
Non-compete agreement
|
|
|
63,196
|
|
|
4 years
|
|
|
Game content
|
|
|
76,826
|
|
|
0.17 years
|
|
|
Goodwill allocated to WVAS segment
|
|
|
12,168,190
|
|
|
|
N/A
|
|
|
Property and equipment, net
|
|
|
25,289
|
|
|
3-5 years
|
|
|
Current liabilities
|
|
|
(191,214
|
)
|
|
|
|
|
|
Non-current deferred tax liabilities
|
|
|
(103,306
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
14,809,927
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition of Freeland Music
Effective January 1, 2006, the Company acquired 60% of Freeland Music from the Freeland group,
which is a group of affiliated companies in China engaged in the production and distribution of
audio and video music products and Freeland Music has been consolidated from that date. In this
acquisition the Freeland group injected its music business in a newly formed company, Freeland
Music, owned 60% by the Company and 40% by the Freeland group. The initial consideration was
$7,560,000 in cash, of which $2,160,000 was payable to the existing shareholders of the business
and $5,400,000 was payable into Freeland Music as a capital injection to fund its operation.
F-18
The final consideration payable by the Company and the respective ownership interests of the
shareholders of Freeland Music were subject to adjustment based on the financial performance of
Freeland Music in 2006. Subsequent to the acquisition, the Company and the Freeland group agreed to
amend the terms of the agreements to extend the performance period to the 2007 financial year. If
the actual net income of Freeland Music in that year exceeds $1,530,000 (RMB 12,000,000), the
Company would contribute the full amount of the remaining purchase consideration as a capital
injection into Freeland Music. If the actual net income is between $1,280,000 (RMB10,000,000) and
$1,530,000, the Company would contribute 50% of the remaining purchase consideration, equal to
$1,350,000, as a capital injection. As the actual net income of Freeland Music for 2007 was less
than $1,280,000, the Company was not required to make any further capital injection. In 2008, the
Company and the Freeland group again agreed to amend the terms of the agreements to extend the
performance period to the end of the 2009 financial year. If the actual net income of Freeland
Music in these two years exceeds $1,540,000 (RMB10,500,000), the Company would contribute no more
than $940,000 in cash as a capital injection into Freeland Music or make additional payment of
$375,000 in cash to the original selling shareholders. The purchase price allocation has been
finalized.
|
|
|
|
|
|
|
Total purchase price:
|
|
|
|
|
|
Cash consideration
|
|
$
|
4,320,000
|
(1)
|
|
Transaction costs
|
|
|
265,113
|
|
|
|
|
|
|
|
|
|
$
|
4,585,113
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization
|
|
|
|
|
|
|
|
|
period
|
|
|
Purchase price allocation:
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
47,722
|
|
|
|
|
|
|
Accounts receivable
|
|
|
43,568
|
|
|
|
|
|
|
Acquired intangible assets:
|
|
|
|
|
|
|
|
|
|
Artist contracts
|
|
|
1,406,890
|
|
|
5 years
|
|
|
Trademarks
|
|
|
215,932
|
|
|
8 years
|
|
|
Exclusive WVAS agreement
|
|
|
42,464
|
|
|
5 years
|
|
|
Exclusive copyright agreement
|
|
|
12,543
|
|
|
3 years
|
|
|
WVAS contracts
|
|
|
249,845
|
|
|
5 years
|
|
|
Copyright contracts
|
|
|
99,954
|
|
|
4 years
|
|
|
Goodwill allocated to recorded music segment
|
|
|
2,538,962
|
|
|
|
N/A
|
|
|
Property and equipment, net
|
|
|
14,540
|
|
|
3-5 years
|
|
|
Current liabilities
|
|
|
(57,469
|
)
|
|
|
|
|
|
Non-current deferred tax liabilities
|
|
|
(29,838
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
4,585,113
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
The initial consideration was $7,560,000 in cash, of which $5,400,000 was payable into Freeland
Music as a capital injection to fund its operation. Since the Company owned 60% of total shares in
Freeland, only the capital injection shared by minorities was treated as consideration.
|
4. DISCONTINUED OPERATIONS
In 2007, the Company signed an agreement to sell its software and systems integration (“SSI”)
business unit, Hurray! Times, to a subsidiary of Taiwan Mobile, a shareholder of Hurray!. With this
sale the Company was able to focus on its music and other entertainment services. The business was
disposed on August 1, 2007, when the acquiring company took over the management and risks of this
business. The consideration of the sale is approximately $4,816,837. Of the total consideration,
$1,425,645 is contingent upon the receipt of the accounts receivable of the SSI business as of
August 1, 2007. In addition, the Company is entitled to further payments if the performance of the
business sold exceeds specified profit targets in 2007, 2008 and 2009. As the SSI business did not
achieve the specified profit target for 2007 and 2008, no additional consideration was received in
respect of these years.
Gains from disposal of the SSI are recognized based on payment to the Company by the purchaser
of their collection of the accounts receivable. At December 31, 2008, approximately 79% of trade
receivables for SSI business had been collected. Under the terms of the sale after that date any
collections of the remaining balance of the trade receivables will not be refunded to the Company.
In the first quarter of 2009, the Company received a further $221,899 in respect of amounts
collected by the purchaser before December 31, 2008 and this has been recorded as a gain in 2009.
By the end of April 2009, all of the consideration and trade receivables the Company is entitled
from Taiwan Mobile had been collected.
F-19
A summary of the financial information for the discontinued operations as of December 31, 2008
and August 1, 2007 is set out below:
|
|
|
|
|
|
|
|
|
August 1,
|
|
|
|
|
2007
|
|
|
|
|
Unaudited
|
|
|
|
|
(in U.S. dollars)
|
|
|
Current assets of discontinued operations
|
|
|
|
|
|
Cash
|
|
$
|
771,746
|
|
|
Accounts receivable, net of allowance
|
|
|
1,868,593
|
|
|
Prepaid expenses and other current assets
|
|
|
18,942
|
|
|
Amount due from related parties
|
|
|
4,918,631
|
|
|
Inventories
|
|
|
1,397
|
|
|
|
|
|
|
|
|
|
$
|
7,579,309
|
|
|
|
|
|
|
|
Non-current assets of discontinued operations:
|
|
|
|
|
|
Property and equipment, net
|
|
|
49,842
|
|
|
Rental deposits
|
|
|
462
|
|
|
|
|
|
|
|
|
|
$
|
50,304
|
|
|
|
|
|
|
|
Current liabilities of discontinued operations
|
|
|
|
|
|
Accounts payable
|
|
|
270,843
|
|
|
Accrued expenses and other current liabilities
|
|
|
605,739
|
|
|
Dividend payable
|
|
|
3,002,588
|
|
|
|
|
|
|
|
|
|
$
|
3,879,170
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
(in U.S. dollars)
|
|
|
Revenues
|
|
$
|
—
|
|
|
$
|
227,391
|
|
|
$
|
1,177,053
|
|
|
Operating loss
|
|
|
—
|
|
|
|
(643,151
|
)
|
|
|
(1,173,424
|
)
|
|
Income taxes
|
|
|
—
|
|
|
|
178
|
|
|
|
(83,650
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss from discontinued operations, net of tax
|
|
|
—
|
|
|
|
(612,170
|
)
|
|
|
(836,448
|
)
|
|
Gain from disposal of SSI
|
|
|
412,530
|
|
|
|
192,943
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net income (loss) from discontinued operations
|
|
$
|
412,530
|
|
|
$
|
(419,227
|
)
|
|
$
|
(836,448
|
)
|
|
|
|
|
|
|
|
|
|
|
|
5. PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid expenses and other current assets consist of:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Staff advances and other receivables
|
|
$
|
1,174,104
|
|
|
$
|
690,005
|
|
|
Advances to suppliers
|
|
|
1,492,019
|
|
|
|
1,042,427
|
|
|
Prepaid expenses
|
|
|
1,406,157
|
|
|
|
632,893
|
|
|
Prepaid artist costs
|
|
|
98,043
|
|
|
|
754,725
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
4,170,323
|
|
|
$
|
3,120,050
|
|
|
|
|
|
|
|
|
|
F-20
Prepaid artist costs mainly represented the prepayment for artists’ cost related to recorded
music product.
6. PROPERTY AND EQUIPMENT, NET
Property and equipment, net, consist of:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Furniture and office equipment
|
|
$
|
3,066,923
|
|
|
$
|
2,924,803
|
|
|
Motor vehicles
|
|
|
290,335
|
|
|
|
244,813
|
|
|
Telecommunications equipment
|
|
|
4,556,290
|
|
|
|
4,500,285
|
|
|
Leasehold improvements
|
|
|
663,307
|
|
|
|
1,132,946
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,576,855
|
|
|
|
8,802,847
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: accumulated depreciation and amortization
|
|
|
(7,596,795
|
)
|
|
|
(7,166,758
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
980,060
|
|
|
$
|
1,636,089
|
|
|
|
|
|
|
|
|
|
Depreciation expense for the years ended December 31, 2008, 2007 and 2006 was $990,072,
$1,269,203 and $1,580,005, respectively.
7. ACQUIRED INTANGIBLE ASSETS, NET
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008
|
|
|
|
|
Gross carrying
|
|
|
Accumulated
|
|
|
Intangible assets
|
|
|
Net carrying
|
|
|
|
|
amount
|
|
|
amortization
|
|
|
impairment
|
|
|
amount
|
|
|
WVAS Segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortizable intangible assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
WVAS licenses
|
|
$
|
514,765
|
|
|
$
|
397,440
|
|
|
$
|
117,325
|
|
|
$
|
—
|
|
|
Customer agreements with
Telecom Operators
|
|
|
2,851,304
|
|
|
|
780,518
|
|
|
|
2,070,786
|
|
|
|
—
|
|
|
Non-compete agreement
|
|
|
989,375
|
|
|
|
355,590
|
|
|
|
633,785
|
|
|
|
—
|
|
|
Business transaction codes
|
|
|
196,995
|
|
|
|
164,163
|
|
|
|
32,832
|
|
|
|
—
|
|
|
Platform
(1)
|
|
|
474,020
|
|
|
|
434,643
|
|
|
|
39,377
|
|
|
|
—
|
|
|
Software
|
|
|
95,273
|
|
|
|
95,273
|
|
|
|
—
|
|
|
|
—
|
|
|
Trademarks
|
|
|
174,423
|
|
|
|
9,690
|
|
|
|
164,733
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,296,155
|
|
|
|
2,237,317
|
|
|
|
3,058,838
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recorded Music Segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortizable intangible assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Artist contracts
(2)
|
|
|
4,917,694
|
|
|
|
1,938,859
|
|
|
|
1,739,848
|
|
|
|
1,238,987
|
|
|
Copyrights
|
|
|
692,435
|
|
|
|
527,163
|
|
|
|
145,147
|
|
|
|
20,125
|
|
|
Exclusive WVAS agreements
|
|
|
584,873
|
|
|
|
52,465
|
|
|
|
214,000
|
|
|
|
318,408
|
|
|
Exclusive copyright agreements
|
|
|
12,543
|
|
|
|
11,497
|
|
|
|
1,046
|
|
|
|
—
|
|
|
VAS contracts
|
|
|
249,845
|
|
|
|
249,845
|
|
|
|
—
|
|
|
|
—
|
|
|
Non-compete agreement
|
|
|
135,506
|
|
|
|
8,117
|
|
|
|
65,000
|
|
|
|
62,389
|
|
|
Software
|
|
|
6,434
|
|
|
|
3,146
|
|
|
|
—
|
|
|
|
3,288
|
|
|
Trademarks
|
|
|
694,826
|
|
|
|
100,701
|
|
|
|
292,000
|
|
|
|
302,125
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,294,156
|
|
|
|
2,891,793
|
|
|
|
2,457,041
|
|
|
|
1,945,322
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
12,590,311
|
|
|
$
|
5,129,110
|
|
|
$
|
5,515,879
|
|
|
$
|
1,945,322
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007
|
|
|
|
|
Gross carrying
|
|
|
Accumulated
|
|
|
Intangible assets
|
|
|
Net carrying
|
|
|
|
|
amount
|
|
|
amortization
|
|
|
impairment
|
|
|
amount
|
|
|
WVAS Segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortizable intangible assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
WVAS licenses
|
|
$
|
482,551
|
|
|
$
|
332,564
|
|
|
$
|
52,010
|
|
|
$
|
97,977
|
|
|
Customer agreements with Telecom Operators
|
|
|
2,666,773
|
|
|
|
705,785
|
|
|
|
1,840,399
|
|
|
|
120,589
|
|
|
Non-compete agreement
|
|
|
925,344
|
|
|
|
323,870
|
|
|
|
566,648
|
|
|
|
34,826
|
|
|
Business transaction codes
|
|
|
184,246
|
|
|
|
138,185
|
|
|
|
—
|
|
|
|
46,061
|
|
|
Platform
|
|
|
443,343
|
|
|
|
280,399
|
|
|
|
36,828
|
|
|
|
126,116
|
|
|
Software
|
|
|
89,107
|
|
|
|
36,678
|
|
|
|
—
|
|
|
|
52,429
|
|
|
Trademarks
|
|
|
163,135
|
|
|
|
—
|
|
|
|
—
|
|
|
|
163,135
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,954,499
|
|
|
|
1,817,481
|
|
|
|
2,495,885
|
|
|
|
641,133
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recorded Music Segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortizable intangible assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Artist contracts
|
|
|
3,172,460
|
|
|
|
1,027,576
|
|
|
|
—
|
|
|
|
2,144,884
|
|
|
Producing cost
|
|
|
1,418,847
|
|
|
|
853,993
|
|
|
|
—
|
|
|
|
564,854
|
|
|
Copyrights
|
|
|
616,744
|
|
|
|
348,738
|
|
|
|
—
|
|
|
|
268,006
|
|
|
Exclusive WVAS agreements
|
|
|
584,872
|
|
|
|
16,986
|
|
|
|
—
|
|
|
|
567,886
|
|
|
Exclusive copyright agreements
|
|
|
12,543
|
|
|
|
8,362
|
|
|
|
—
|
|
|
|
4,181
|
|
|
Non-compete agreement
|
|
|
135,506
|
|
|
|
652
|
|
|
|
—
|
|
|
|
134,854
|
|
|
Software
|
|
|
6,018
|
|
|
|
1,739
|
|
|
|
—
|
|
|
|
4,279
|
|
|
Trademarks
|
|
|
694,826
|
|
|
|
53,983
|
|
|
|
—
|
|
|
|
640,843
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,641,816
|
|
|
|
2,312,029
|
|
|
|
—
|
|
|
|
4,329,787
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
11,596,315
|
|
|
$
|
4,129,510
|
|
|
$
|
2,495,885
|
|
|
$
|
4,970,920
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
The Platform represents the Wireless Application Protocol site owned by Hurray! Solutions
and the SMS Platform owned by Hengji Weiye.
|
|
|
|
(2)
|
|
The carrying amount of artist contracts represents the payments for agency agreements with
certain artists.
|
During the third quarter of 2008, we performed impairment testing for the music business due
to the continued challenging business conditions and reduction in number of concerts and other
music events because of the focus on the Olympic Games in Beijing. This resulted in a $2,460,467
write-down of the intangible assets, which was included in the general and administrative expenses.
The Company again performed impairment testing at December 31, 2008 and recorded a write-down
of $390,247 for the intangible assets related to WVAS segment for the year ended December 31, 2008
included in operating expenses due to the continued operation losses.
In the second quarter of 2007, the mobile operators introduced various new policies that
adversely impacted the Company’s wireless value-added business and introduced further uncertainties
in the Company’s operating environment. By September 30, 2007, the market capitalization of Hurray!
was lower than the Company’s net book value, which was an indicator of impairment. At that date the
Company tested the carrying value of goodwill and acquired intangible assets and recorded an
impairment of acquired intangible assets of $575,205. In view of the further decline of Hurray!’s
market capitalization at December 31, 2007 and continued difficult operating conditions, the
Company recorded a further impairment of acquired intangible assets of $1,905,048. The impairment
charges of acquired intangibles are included in operating expenses according to their nature.
Assuming no subsequent impairment of the identified intangible assets recorded as of
December 31, 2008, amortization expenses for the net carrying amount of intangible assets is
expected to be as follows in future years. If the Company acquires
additional intangible assets in the future, the operating expenses or cost of revenue will be
increased by the amortization of those assets.
|
|
|
|
|
|
|
2009
|
|
$
|
755,494
|
|
|
2010
|
|
|
473,247
|
|
|
2011
|
|
|
167,544
|
|
|
2012
|
|
|
76,160
|
|
|
2013 and later
|
|
|
472,877
|
|
|
|
|
|
|
|
|
|
$
|
1,945,322
|
|
|
|
|
|
|
F-22
8. INVESTMENT IN EQUITY AFFILIATE
In April 2007, the Company acquired a 30% equity interest in Beijing New Run Entertainment
Development Co., Ltd.
(
“New Run”), an independent record label in China, and it has been accounted
for on the equity basis from April 1, 2007. The total acquisition cost is $2,483,277 in cash,
including transaction costs. At December 31, 2008, the Company’s share of New Run Entertainment’s
income since acquisition was $1,537.
The Company presents below summarized financial information in relation to New Run:
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
|
Current assets
|
|
$
|
2,435,157
|
|
|
$
|
1,706,961
|
|
|
Non-current assets
|
|
|
309,529
|
|
|
|
397,886
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
2,744,686
|
|
|
$
|
2,104,847
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
|
490,841
|
|
|
|
211,536
|
|
|
Non-current liabilities
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
$
|
490,841
|
|
|
$
|
211,536
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
2,612,019
|
|
|
$
|
1,419,969
|
|
|
Cost of sales
|
|
|
936,595
|
|
|
|
901,212
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
$
|
1,675,424
|
|
|
$
|
518,756
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
225,438
|
|
|
$
|
(209,441
|
)
|
|
|
|
|
|
|
|
|
The Company regularly evaluates the impairment of the equity method investment based on
performance and the financial position of the investee as well as other evidence of market value.
Such evaluation includes, but is not limited to, reviewing the investee’s cash position, recent
financings, projected and historical financial performance, cash flow forecasts and financing
needs. An impairment loss is recognized in earnings equal to the difference between the
investment’s cost and its fair value at the balance sheet date of the reporting period for which
the assessment is made. The fair value of the investment would then become the new cost basis of
the investment. The Company recorded an other-than-temporary impairment charge totaling $1,870,897
during the third quarter of 2008. No impairment charges were recorded during the year ended
December 31, 2007.
As of December 31, 2008, the book value of the investment in New Run is $824,579. The amount
of the underlying equity in the net assets of New Run is $676,153. The difference between these two
amounts of $148,426 is included in the book value and is not amortized.
9. GOODWILL
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2008
|
|
|
|
|
WVAS
|
|
|
Recorded Music
|
|
|
Total
|
|
|
Balance as of January 1,2007
|
|
$
|
34,751,293
|
|
|
$
|
4,870,201
|
|
|
$
|
39,621,494
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes
|
|
|
2,389,916
|
|
|
|
—
|
|
|
|
2,389,916
|
|
|
Goodwill arising from
acquisitions during the year
|
|
|
2,134,375
|
|
|
|
253,705
|
|
|
|
2,388,080
|
|
|
Goodwill impairment
|
|
|
(38,778,584
|
)
|
|
|
—
|
|
|
|
(38,778,584
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2007
|
|
|
497,000
|
|
|
|
5,123,906
|
|
|
|
5,620,906
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes
|
|
|
(58,790
|
)
|
|
|
—
|
|
|
|
(58,790
|
)
|
|
Goodwill arising from
additional payments for
acquisitions made in prior
years
|
|
|
80,504
|
|
|
|
189,255
|
|
|
|
269,759
|
|
|
Goodwill impairment
|
|
|
(518,714
|
)
|
|
|
(2,156,497
|
)
|
|
|
(2,675,211
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2008
|
|
$
|
—
|
|
|
$
|
3,156,664
|
|
|
$
|
3,156,664
|
|
|
|
|
|
|
|
|
|
|
|
|
F-23
SFAS No. 142 requires that the goodwill impairment assessment be performed at the reporting
unit level. Due to the continued challenging business conditions and reduction in number of
concerts and other music events because of the focus on the Olympic Games in Beijing, coupled with
the decline in the market price of the Company’s common stock, the Company performed a goodwill
impairment test in the third quarter of 2008 and determined that the goodwill allocated to recorded
music segment was impaired, thus necessitating a charge of $1,710,000. The Company re-evaluated the
goodwill impairment at its annual goodwill impairment test at December 31, 2008 and recorded a
further impairment charge of $446,497 related to goodwill allocated to recorded music segment.
During the annual goodwill impairment test at December 31, 2008, the Company determined that its
WVAS segment was impaired due to the continued operation losses, thus necessitating a charge of
$518,714.
The Company estimated the fair values of the reporting units primarily using the income
approach valuation methodology that includes the discounted cash flow method, taking into
consideration the market approach and certain market multiples as a validation of the values
derived using the discounted cash flow methodology. The discounted cash flows for each reporting
unit were based on discrete five year financial forecasts developed by management for planning
purposes. The value beyond the five-year discrete forecast was estimated using a terminal value
calculation, which incorporated historical and forecasted financial trends for each reporting unit
and considered long-term earnings growth rates for publicly traded peer companies. Specifically,
the income approach valuations included reporting unit cash flow discount rate at approximately 19%
and 21.5%. Publicly available information regarding the market capitalization of the Company was
also considered in assessing the reasonableness of the cumulative fair values of our reporting
units estimated using the discounted cash flow methodology.
In the second quarter of 2007, the mobile operators introduced various new policies that
adversely impacted the Company’s wireless value-added business and introduced further uncertainties
in the Company’s operating environment. By September 30, 2007, the market capitalization of Hurray!
was lower than the Company’s net book value, which was an indicator of impairment. At that
date the Company tested the carrying value of goodwill and acquired intangible assets and
recorded a goodwill impairment charge of $9,613,953. In view of the further decline of Hurray!’s
market capitalization at December 31, 2007 and continued difficult operating conditions, the
Company recorded an additional goodwill impairment charge of $29,164,630.
10. PREPAID ACQUISITION COST
In September 2008, the Company entered into a definitive agreement to acquire, through Hurray!
Media, a controlling stake in Seed Music Group Limited (“Seed Music”), a Taiwan based company that
focuses on artist development, music production and offline music distribution in the Asia Pacific,
especially in China. The Company paid $1,907,400 to the selling shareholders of Seed Music in 2008.
The acquisition was completed and the Company began to consolidate Seed Music into financial
statements on January 1, 2009. Such payment was recorded as prepaid acquisition cost.
Concurrent with this transaction, the Company subscribed for an additional 7,813 shares,
representing a 13.5% ownership interest, from Seed Music for $600,038 in 2008. Such payment was
recorded as an investment at cost. The Company’s total ownership in Seed Music is 61.08% after the
closing of the acquisition and subscription of Seed Music shares.
F-24
There are further contingent payments according to the agreements based on Seed Music’s
operating performance. The contingent payments will be paid in cash if Seed Music exceeds the
performance target. If not, the selling holders are obligated to transfer certain shares or make
cash payments to the Company. Such contingent payments are recorded as contingent consideration. In
addition, the non-controlling interests have options to sell their shares to the Company at a price
based on a formula which includes Seed’s operating performance. Therefore from the date of
consolidation the non-controlling interests are presented as redeemable non-controlling interests
on the balance sheet and such amount will be accreted to the redemption value if the redemption is
probable. The following table summarizes the preliminary estimated fair values of the assets
acquired and liabilities assumed at the date of acquisition:
|
|
|
|
|
|
|
Total purchase price:
|
|
|
|
|
|
Cash consideration
|
|
$
|
1,907,400
|
|
|
Carrying value of the Company’s investment at cost
|
|
|
600,038
|
|
|
Variable (contingent payable net receivable )
|
|
|
352,217
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization
|
|
|
|
|
|
|
|
|
period
|
|
|
Aggregate purchase price allocation -Seed Music:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
1,034,308
|
|
|
|
|
|
|
Inventory
|
|
|
53,504
|
|
|
|
|
|
|
Other current assets
|
|
|
891,723
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquired intangible assets:
|
|
|
|
|
|
|
|
|
|
Artist management contract
|
|
|
1,717,846
|
|
|
7.1~9.0 years
|
|
|
Trademarks
|
|
|
1,569,808
|
|
|
20 years
|
|
|
Copyright for songs
|
|
|
5,863
|
|
|
0.4 years
|
|
|
Non-compete contract
|
|
|
183,218
|
|
|
4.5 years
|
|
|
Goodwill (allocated to music segment)
|
|
|
1,710,312
|
|
|
N/A
|
|
|
Property and equipment, net
|
|
|
50,084
|
|
|
3-5 years
|
|
|
Other assets
|
|
|
876,737
|
|
|
|
|
|
|
Current liabilities
|
|
|
(2,216,292
|
)
|
|
|
|
|
|
Non-current deferred tax liability
|
|
|
(869,184
|
)
|
|
|
|
|
|
Other non-current liabilities
|
|
|
(578,464
|
)
|
|
|
|
|
|
Non-controlling interest in Seed Music
|
|
|
(1,569,808
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,859,655
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11. SHORT-TERM BORROWINGS
Interest expense and the average interest rate for 2007 and 2006 were $179,062, and 3.875%,
and $44,765 and 3.875%, respectively. Interest expense in 2007 represents the imputed interest on
the amount payable on the balance owed for the acquisition of Shanghai Magma.
12. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities consist of:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Accrued payroll
|
|
$
|
157,714
|
|
|
$
|
406,608
|
|
|
Value-added tax payable
|
|
|
104,435
|
|
|
|
177,556
|
|
|
Other accrued expenses
|
|
|
1,494,616
|
|
|
|
1,231,384
|
|
|
Accrued welfare benefits
|
|
|
165,402
|
|
|
|
119,957
|
|
|
Business tax payable
|
|
|
955,901
|
|
|
|
857,062
|
|
|
Other taxes payable
|
|
|
140,135
|
|
|
|
113,833
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3,018,203
|
|
|
$
|
2,906,400
|
|
|
|
|
|
|
|
|
|
13. RELATED PARTY TRANSACTIONS AND BALANCES
As part of the acquisition agreements for the purchase of the equity interests in Huayi
Brothers Music, Freeland Music and New Run Entertainment, the Company agreed to use the existing
distribution and CD manufacturing operations, where appropriate, owned by the other shareholders,
or their related parties, of these companies. In addition these parties may use the music or
artists of these companies and make royalty and other payments to Huayi Brothers Music, Freeland
Music or New Run Entertainment. These agreements are for duration of one year but may be extended
by the mutual agreement of both parties. During 2008 and 2007 the Company recognized revenues of
$566,544 and $645,134, respectively, and had expenses of $104,281 and $96,725, respectively, under
these agreements. In 2006 prior to the acquisition of the interest in New Run Entertainment, Huayi
Brothers Music acquired copyrights from that company amounting to $175,783. In the fourth quarter
of 2008 Freeland Music advanced $162,721 to its minority shareholder on an interest free basis. As
of March 31, 2009, the balance was cleared. At December 31, 2008 and 2007, the amounts payable to
and receivable from related parties represent the outstanding amounts arising from such
transactions.
F-25
14. FOREIGN EXCHANGE LOSS
We recorded a foreign exchange loss of $4.5 million, arising from the drop in the value of the
Euro against the United States Dollar in the third quarter of 2008. Earlier in the year we
converted a substantial part of our dollar cash balances into Euro term deposits to improve yield
as well as to protect against further dollar weakening. The recent highly volatile markets have
seen the dollar strengthen as investors and financial institutions de-leveraged and we recorded a
further exchange loss in the fourth quarter of $4.5 million. Currently we hold all non-Renminbi
cash in United States dollars.
15. INCOME TAXES
The Company is a tax exempted company incorporated in the Cayman Islands.
The subsidiaries incorporated in the PRC are generally subject to a corporate income tax rate
of 33% prior to January 1, 2008 or 25% post that date except for those subsidiaries that enjoy tax
holidays or preferential tax treatment, as discussed below.
Effective from January 1, 2008, a new Enterprise Income Tax Law, or the New EIT Law combines
the previous income tax laws for foreign invested and domestic invested enterprises in China by
adopting a unified tax rate of 25% for most enterprises. Certain qualified high and new technology
enterprises met the definition of “qualified high and new technology enterprise” strongly supported
by the state could benefit from a preferential tax rate of 15%
The Company conducts substantially all its business through its PRC subsidiaries and VIEs.
They are generally subject to the New EIT Law at a statutory rate of 25%. Four of these
subsidiaries and VIEs are qualified as high technology enterprises in accordance with the New EIT
Law and they are subject to a preferential tax rate of 15%. Three out of these four qualified high
technology enterprises are also entitled to a 50% reduction in tax rate according to the previous
treatment and transitional rules. While the high and new technology enterprise certificates are
valid for three years, the Company believes based on currently available
information that the Company will be able to reapply successfully for the renewal of the
current certificates as the Company believes the Company will continue to meet the published
criteria. Accordingly, these four entities have used the reduced applicable tax rate in
calculations of deferred tax balances for the foreseeable future.
The companies acquired in 2007, Saiyu and Henan Yinshan continued to be entitled to an
Enterprise Income Tax rate of 25% of the calculated taxable income, which is based on 10% of the
revenues. Qualified new cultural enterprises, Huayi Brothers Broker, Hurray! Freeland Culture and
Secular Bird, are also entitled to a tax exemption in 2008.
F-26
These preferential tax arrangements will expire at various dates between 2008 and 2010. In
2006 a number of VIEs became subject to a higher tax rate as tax exemptions expired or were
reduced. The aggregate dollar and per share effect of the tax holidays in 2008, 2007 and 2006 were
$1,773,897, $1,904,064 and $2,218,713 and $0.0008, $0.0009 and $0.0010 per share, respectively. A
summary of the tax concessions available to the PRC entities for the year ended December 31, 2008
is as follows:
|
|
|
|
|
|
|
|
|
|
|
Chinese
|
|
Concession from
|
|
Year of
|
|
|
|
income tax
|
|
Chinese Statutory
|
|
commencement
|
|
PRC Entities
|
|
rate
|
|
income tax
|
|
of tax holiday
|
|
|
|
(%)
|
|
|
|
|
|
Beijing Hurray Times
|
|
25
|
|
None
|
|
N/A
|
|
Beijing Hand-in-Hand Media Technology Co., Ltd.
|
|
25
|
|
None
|
|
N/A
|
|
Shanghai Fuming information technology Co., Ltd.
|
|
25
|
|
None
|
|
N/A
|
|
Hurray! Solutions Ltd.
|
|
15
|
|
qualified high and new technology enterprise
|
|
2008
|
|
Beijing Enterprise Network Technology Co., Ltd.
|
|
7.5
|
|
qualified high and new technology enterprise, 50% tax relief in 2008
|
|
2003
|
|
Hengji Weiye
|
|
25
|
|
None
|
|
N/A
|
|
Beijing Hutong
|
|
7.5
|
|
qualified high and new technology enterprise, 50% tax relief in 2008
|
|
2004
|
|
Beijing Palmsky Technology Co., Ltd.
|
|
7.5
|
|
qualified high and new technology enterprise, 50% tax relief in 2008
|
|
2004
|
|
Henan Yinshan
|
|
25
|
|
None
|
|
N/A
|
|
Shanghai Magma
|
|
25
|
|
None
|
|
N/A
|
|
Saiyu
|
|
25
|
|
None
|
|
N/A
|
|
Beijing WVAS Solutions Ltd.
|
|
25
|
|
None
|
|
N/A
|
|
Hurray! Digital Media
|
|
25
|
|
None
|
|
N/A
|
|
Huayi Brothers Music
|
|
25
|
|
None
|
|
N/A
|
|
Beijing Huayi Brothers Music Broker Co., Ltd.
|
|
0
|
|
qualified new cultural enterprise exempt in 2008
|
|
2007
|
|
Freeland Music
|
|
25
|
|
None
|
|
N/A
|
|
Beijing Hurray! Freeland Culture Development Co., Ltd.
|
|
0
|
|
qualified new cultural enterprise exempt in 2008
|
|
2007
|
|
Beijing Fly Songs
|
|
25
|
|
None
|
|
N/A
|
|
Secular Bird
|
|
0
|
|
qualified new cultural enterprise exempt in 2008
|
|
2007
|
Provision (credit) for income taxes consists of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Current
|
|
$
|
298,579
|
|
|
$
|
576,774
|
|
|
$
|
685,597
|
|
|
Deferred
|
|
|
187,671
|
|
|
|
(759,144
|
)
|
|
|
(480,617
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
486,250
|
|
|
$
|
(182,370
|
)
|
|
$
|
204,980
|
|
|
|
|
|
|
|
|
|
|
|
|
The principal components of the deferred tax assets are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
|
Cost and expenses accruals
|
|
$
|
363,330
|
|
|
$
|
748,049
|
|
|
|
|
|
|
|
|
|
|
Current deferred tax assets
|
|
$
|
363,330
|
|
|
$
|
748,049
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
$
|
330,035
|
|
|
$
|
347,877
|
|
|
Net operating loss carry forwards
|
|
|
2,690,142
|
|
|
|
1,051,308
|
|
|
Less: valuation allowance
|
|
|
(2,541,258
|
)
|
|
|
(749,094
|
)
|
|
|
|
|
|
|
|
|
|
Non-current deferred tax assets
|
|
$
|
478,919
|
|
|
$
|
650,091
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
|
Revenue recognition
|
|
$
|
(497,283
|
)
|
|
$
|
(416,835
|
)
|
|
|
|
|
|
|
|
|
|
Current deferred tax liabilities
|
|
$
|
(497,283
|
)
|
|
$
|
(416,835
|
)
|
|
|
|
|
|
|
|
|
|
Intangible assets
|
|
$
|
(292,194
|
)
|
|
$
|
(844,610
|
)
|
|
|
|
|
|
|
|
|
|
Non-current deferred tax liabilities
|
|
$
|
(292,194
|
)
|
|
$
|
(844,610
|
)
|
|
|
|
|
|
|
|
|
F-27
A reconciliation between statutory income tax rate and the Company’s effective tax rate is as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Statutory tax rate
|
|
|
25.0
|
%
|
|
|
33.0
|
%
|
|
|
33.0
|
%
|
|
Effect of tax holidays
|
|
|
10.1
|
%
|
|
|
0.3
|
%
|
|
|
(34.2
|
)%
|
|
Non-deductible expenses
|
|
|
(19.9
|
%)
|
|
|
(38.3
|
%)
|
|
|
11.9
|
%
|
|
Non-taxable income
|
|
|
15.9
|
%
|
|
|
45.0
|
%
|
|
|
(9.0
|
)%
|
|
Change in enterprise income tax rate
|
|
|
0.0
|
%
|
|
|
(8.6
|
%)
|
|
|
—
|
|
|
Change in valuation allowance
|
|
|
(37.3
|
%)
|
|
|
(13.8
|
%)
|
|
|
0.2
|
%
|
|
Impairment loss on intangibles
|
|
|
(6.8
|
%)
|
|
|
(9.2
|
%)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective tax rate
|
|
|
(13.0
|
%)
|
|
|
8.4
|
%
|
|
|
1.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2008, tax loss carry forwards amounted to approximately $14.2 million, which
will expire by various years through 2013. The Company determines whether or not a valuation
allowance is required at the level of each taxable entity. A valuation allowance of $2,541,258 and
$749,094 has been established as of December 31, 2008 and 2007, respectively, in respect of certain
deferred tax assets as it is considered more likely than not that the relevant deferred tax asset
will not be realized in the foreseeable future.
In June 2006, the Financial Accounting Standards Board (“FASB”) issued Interpretation No. 48
(“FIN 48”), “Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No.
109”. FIN 48 prescribes a recognition threshold and measurement attribute for the financial
statement recognition and measurement of a tax position taken or expected to be taken in a tax
return. FIN 48 is effective for fiscal years beginning after December 15, 2006, with early adoption
permitted. The Company adopted FIN 48 effective January 1, 2007. The adoption of FIN 48 did not
result in a cumulative adjustment on January 1, 2007 and had no significant impact on the Company’s
accounting for income taxes for the year ended December 31, 2007 and 2008. The Company did not
incur any interest or penalties related to potential underpaid income tax expenses, and also does
not expect to have a significant increase or decrease in the unrecognized tax benefits within 12
months from December 31, 2008.
The Company is subject to taxation in PRC and other tax jurisdictions. There is no ongoing
examination by taxing authorities at this time. The Company’s various tax years from 2003 to 2008
remain open in various taxing jurisdictions.
The EIT Law includes a provision specifying that legal entities organized outside China will
be considered residents for Chinese income tax purposes if their place of effective management or
control is within China. If legal entities organized outside China were considered residents for
Chinese income tax purpose, they would become subject to the EIT Law on their worldwide income.
This would cause any income legal entities organized outside China earned to be subject to China’s
25% EIT. The implementation Rules to EIT Law provide that non-resident legal entities will be
considered China residents if substantial and overall management and control over the manufacturing
and business operations, personnel, accounting, properties, etc. resides within China. Pursuant to
the additional guidance released by Chinese government on April 22, 2009, management does not
believe that the legal entities organized outside China should be characterized as China tax
residents for EIT Law purposes.
Under the PRC tax laws effective prior to January 1, 2008, dividends paid to foreign investors
by foreign-invested enterprises, such as dividends paid to the overseas holding companies by the
PRC subsidiaries, were exempt from PRC withholding tax. Under the EIT Law and its implementation
rules which became effective on January 1, 2008, dividends generated after January 1, 2008 and
payable by a foreign-invested enterprise in China to its foreign investors who are non-resident
enterprises are subject to a 10% withholding tax, unless any such foreign investor’s jurisdiction
of incorporation has a tax treaty with China that provides for a different withholding arrangement.
F-28
Aggregate undistributed earnings of the Hurray!’s subsidiaries, located in the PRC that are
available for distribution to the Company at December 31, 2008 are considered to be indefinitely
reinvested under APB opinion No. 23, “inside basis differences within foreign subsidiaries and
foreign corporate joint ventures” because the Company does not have any present plan to pay any
cash dividends on its ordinary shares in the foreseeable future and intends to retain most of its
available funds and any future earnings for use in the operation and expansion of its business.
Accordingly, no provision has been made for the Chinese dividend withholding taxes that would be
payable upon the distribution of those amounts to the Company. The Chinese tax authorities have
also clarified that distributions made out of retained earnings accumulated prior to January 1,
2008 are not subject to the withholding tax.
16. SHAREHOLDERS’ EQUITY
On October 1, 2006, Hurray! issued 89,552 ADSs, represented by 8,955,200 ordinary shares, at a
price of $6.03 per ADS, to former shareholders of Shanghai Magma pursuant to the amended purchase
agreements.
In February 2006, the Board of Directors (“Board”) of Hurray! approved a stock repurchase
program whereby Hurray! may repurchase up to $15.0 million of its issued and outstanding ADSs in
open-market transactions. Under this program, in 2006, Hurray! purchased and cancelled 792,600
ADSs, equivalent to 79,260,000 ordinary shares, at an average cost of $6.35 per ADS for a total
consideration of $5,034,748.
17. STOCK PLANS
Stock option
Hurray!’s 2004 stock option plans (the “Plans”) allow the Company to offer incentive awards to
employees, directors, consultants or external service advisors of the Company. Under the terms of
the Plans, options are generally granted at prices equal to or greater than the fair market value
on the grant date, expire 10 years from the date of grant, and generally vest over 3-4 years.
Stock options under these plans were all granted prior to 2006 and as of January 1, 2006 all
granted stock options vested. There were 47,367,700 and 74,266,200 options outstanding as of
December 31, 2008 and 2007, respectively. No stock options have been
granted since January 1, 2006. As of December 31, 2008 and 2007, 180,115,900 and 137,930,600
ordinary shares were available for future grants, respectively.
A summary of the stock option activity is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Ordinary shares
|
|
|
|
|
|
|
|
|
Weighted average
|
|
|
|
|
Number of options
|
|
|
exercise price
|
|
|
Options outstanding at January 1, 2006
|
|
|
99,573,700
|
|
|
$
|
0.088
|
|
|
Exercised
|
|
|
(3,582,200
|
)
|
|
$
|
0.037
|
|
|
Forfeited
|
|
|
(15,484,900
|
)
|
|
$
|
0.109
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding at December 31, 2006
|
|
|
80,506,600
|
|
|
$
|
0.085
|
|
|
Exercised
|
|
|
(653,400
|
)
|
|
$
|
0.027
|
|
|
Forfeited
|
|
|
(5,587,000
|
)
|
|
$
|
0.106
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding at December 31, 2007
|
|
|
74,266,200
|
|
|
$
|
0.084
|
|
|
Exercised
|
|
|
(60,000
|
)
|
|
$
|
0.025
|
|
|
Forfeited
|
|
|
(26,838,500
|
)
|
|
$
|
0.094
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding at December 31, 2008
|
|
|
47,367,700
|
|
|
$
|
0.080
|
|
|
|
|
|
|
|
|
|
|
F-29
The following table summarizes information with respect to stock options outstanding at
December 31, 2008(all outstanding options are exercisable):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
average
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
remaining
|
|
|
Weighted average exercise
|
|
|
|
|
|
Exercise Prices
|
|
Number outstanding
|
|
|
contractual life
|
|
|
price
|
|
|
Aggregated Intrinsic value
|
|
|
Ordinary shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$0.0250
|
|
|
9,864,700
|
|
|
|
3.75
|
|
|
$
|
0.03
|
|
|
$
|
246,618
|
|
|
$0.0705
|
|
|
16,433,000
|
|
|
|
4.5
|
|
|
$
|
0.07
|
|
|
$
|
1,158,527
|
|
|
$0.1170
|
|
|
15,354,000
|
|
|
|
5
|
|
|
$
|
0.12
|
|
|
$
|
1,796,418
|
|
|
$0.1405
|
|
|
350,000
|
|
|
|
5.25
|
|
|
$
|
0.14
|
|
|
$
|
49,175
|
|
|
$0.1025
|
|
|
5,366,000
|
|
|
|
6
|
|
|
$
|
0.10
|
|
|
$
|
550,015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
47,367,700
|
|
|
|
|
|
|
|
|
|
|
$
|
3,800,753
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-vested shares
Since 2006, the Company has granted restricted purchase share awards, in lieu of stock
options, under Hurray!’s 2004 Share Incentive Plan (the “2004 Plan”) to certain officers and senior
management.
On February 7, 2006, Hurray! granted 33,000,000 non-vested stock units to its employees
pursuant to the 2004 Plan at offering price of par value which resulted in stock-based compensation
expense of $1.6 million to be recognized over the applicable vesting period. The non-vested stock
units vest on an annual basis equally over three years.
On June 20, 2006, Hurray! granted 7,500,000 non-vested stock units to its employees at
offering price of par value which resulted in stock-based compensation expense of $0.3 million to
be recognized over the applicable vesting period. The non-vested stock units vest on an annual
basis equally over 34 months.
On March 14, 2007, Hurray! granted 20,000,000 non-vested stock units to its employees at
offering price of par value which resulted in stock-based compensation expense of $0.61 million to
be recognized over the applicable vesting period. The non-vested stock units vest on an annual
basis equally over three years.
On November 23, 2007, Hurray! granted 19,500,000 non-vested stock units to its employees at
offering price of par value which resulted in stock-based compensation expense of $0.36 million to
be recognized over the applicable vesting period. The non-vested stock units vest on an annual
basis equally over three years.
A summary of non-vested shares’ activity is as follows:
|
|
|
|
|
|
|
|
|
Non-vested shares
|
|
|
|
|
Outstanding
|
|
|
Non-vested stock units outstanding at January 1, 2006
|
|
|
—
|
|
|
Granted
|
|
|
40,500,000
|
|
|
Forfeited
|
|
|
(8,666,700
|
)
|
|
|
|
|
|
|
|
|
Non-vested stock units outstanding at December 31, 2006
|
|
|
31,833,300
|
|
|
Granted
|
|
|
39,500,000
|
|
|
Forfeited
|
|
|
(10,400,200
|
)
|
|
Vested
|
|
|
(11,099,300
|
)
|
|
|
|
|
|
|
Non-vested stock units outstanding at December 31, 2007
|
|
|
49,833,800
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(17,834,200
|
)
|
|
Vested
|
|
|
(18,499,300
|
)
|
|
|
|
|
|
|
Non-vested stock units outstanding at December 31, 2008
|
|
|
13,500,300
|
|
|
|
|
|
|
F-30
The following table summarizes information with respect to non-vested shares outstanding at
December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-vested shares outstanding
|
|
|
|
|
Number
|
|
|
Aggregate
|
|
|
|
|
outstanding
|
|
|
intrinsic value
|
|
|
Grant date
|
|
|
|
|
|
|
|
|
|
February 7, 2006
|
|
|
2,834,200
|
|
|
$
|
214,832
|
|
|
|
|
November 23, 2007
|
|
|
10,666,100
|
|
|
|
333,849
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
13,500,300
|
|
|
$
|
548,681
|
|
|
|
|
|
|
|
|
|
The weighted average fair value per share of the non-vested shares awarded in 2008 was $0.04,
calculated based on the fair market value of the underlying stock on the respective grant dates.
The terms of the issue of the non-vested shares do not require the employees to make any payments.
The Company recorded share-based compensation expenses of $945,282, $442,975 and $543,557 for the
years ended December 31, 2008, 2007 and 2006 respectively. The amount of unvested stock-based
compensation currently estimated to be expensed from 2009 through 2010 related to unvested
share-based payment awards at December 31, 2008 is $368,325. This amount will be recognized as
presented by the following table.
|
|
|
|
|
|
|
2009
|
|
$
|
223,709
|
|
|
2010
|
|
|
144,616
|
|
|
|
|
|
|
|
|
|
$
|
368,325
|
|
|
|
|
|
|
That cost is expected to be recognized over a weighted-average period of 1.52 years. The
Company recognizes the compensation costs net of a forfeiture rate and recognizes the compensation
costs for those options and non-vested shares expected to vest on a straight-line basis over the
requisite service period of the award, which is generally the vesting period. The estimate of
forfeitures 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 also impact the amount of share-based compensation expense to be recognized in future periods.
18. SEGMENT INFORMATION
The Company follows the provisions of SFAS No. 131, “Disclosures about Segments of an
Enterprise and Related Information”, which establishes standards for reporting information about
operating segments. Operating segments are defined as components of an enterprise about which
separate financial information is available that is evaluated regularly by the chief operating
decision maker, or decision making group, in deciding how to allocate resources and in assessing
performance.
The Company’s chief operating decision maker has been identified as the Chief Executive
Officer, who reviews consolidated results when making decisions about allocating resources and
assessing performance of the Company. The Company operates and manages two principal operating
segments, wireless value-added services (“WVAS”) and recorded music. The wireless value-added
services are delivered through the 2.5G mobile networks, which comprise Wireless Application
Protocol (“WAP”) services, Multimedia Messaging Services (“MMS”), Java™ services, and WEB, and
through 2G technology platforms, which comprise Short Messaging Services (“SMS”), Interactive Voice
Response services (“IVR”), and Color Ring Back Tones (“CRBT”). Recorded music services are
delivered through the Company’s majority-controlled music companies and their parent company,
Hurray Digital Media, which contracts with music artists and composers to perform and produce
music. Corporate assets are related to the bank balance of overseas companies that are not directly
attributable to the other reportable segments. The Company uses gross profit as the measure of
each reportable segment. Expenses are not allocated to each segment.
The financial information for each business segment reflects that information which is
specifically identifiable or which is allocated based on an internal allocation method. Selected
financial information by operating segment is as follow:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
WVAS
|
|
$
|
28,952,925
|
|
|
$
|
30,285,978
|
|
|
Recorded music
|
|
|
16,977,258
|
|
|
|
21,718,157
|
|
|
Reconciling amounts
|
|
|
42,394,219
|
|
|
|
53,589,589
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
88,324,402
|
|
|
$
|
105,593,724
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciling assets :
|
|
|
|
|
|
|
|
|
|
Corporate assets
|
|
$
|
42,394,219
|
|
|
$
|
53,589,589
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment in equity method investee
|
|
$
|
824,579
|
|
|
$
|
2,420,522
|
|
|
|
|
|
|
|
|
|
F-31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Total expenditures for
additions to long-lived
assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
WVAS
|
|
$
|
228,431
|
|
|
$
|
755,921
|
|
|
$
|
712,363
|
|
|
Recorded music
|
|
|
120,802
|
|
|
|
107,682
|
|
|
|
244,609
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capital expenditure
|
|
$
|
349,233
|
|
|
$
|
863,603
|
|
|
$
|
956,972
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
WVAS
|
|
$
|
42,671,588
|
|
|
$
|
50,038,014
|
|
|
$
|
62,512,483
|
|
|
Recorded music
|
|
|
11,286,812
|
|
|
|
10,488,613
|
|
|
|
6,203,418
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
53,958,400
|
|
|
$
|
60,526,627
|
|
|
$
|
68,715,901
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
WVAS
|
|
$
|
32,839,642
|
|
|
$
|
36,394,300
|
|
|
$
|
40,672,113
|
|
|
Recorded music
|
|
|
6,729,725
|
|
|
|
6,232,728
|
|
|
|
3,553,144
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenues
|
|
$
|
39,569,367
|
|
|
$
|
42,627,028
|
|
|
$
|
44,225,257
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
WVAS
|
|
$
|
9,831,946
|
|
|
$
|
13,643,714
|
|
|
$
|
21,840,370
|
|
|
Recorded music
|
|
|
4,557,087
|
|
|
|
4,255,885
|
|
|
|
2,650,274
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gross profit
|
|
$
|
14,389,033
|
|
|
$
|
17,899,599
|
|
|
$
|
24,490,644
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from WVAS segment by product and service are shown in the table below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SMS
|
|
$
|
13,319,011
|
|
|
$
|
10,948,524
|
|
|
$
|
17,088,669
|
|
|
IVR
|
|
|
12,207,136
|
|
|
|
17,325,223
|
|
|
|
10,830,530
|
|
|
RBT
|
|
|
4,960,624
|
|
|
|
3,719,470
|
|
|
|
3,379,643
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2G revenues
|
|
$
|
30,486,771
|
|
|
$
|
31,993,217
|
|
|
$
|
31,298,842
|
|
|
|
|
|
|
|
|
|
|
|
|
|
WAP
|
|
|
7,434,197
|
|
|
|
12,530,200
|
|
|
|
21,534,724
|
|
|
MMS
|
|
|
1,355,441
|
|
|
|
1,313,397
|
|
|
|
4,011,527
|
|
|
JAVA
|
|
|
2,244,010
|
|
|
|
1,399,193
|
|
|
|
4,400,083
|
|
|
WEB
|
|
|
218,810
|
|
|
|
2,029,298
|
|
|
|
1,267,307
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2.5G revenues
|
|
$
|
11,252,458
|
|
|
$
|
17,272,088
|
|
|
$
|
31,213,641
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other revenues
|
|
|
932,359
|
|
|
|
772,709
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total WVAS revenue
|
|
$
|
42,671,588
|
|
|
$
|
50,038,014
|
|
|
$
|
62,512,483
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recorded music revenue
|
|
|
11,286,812
|
|
|
|
10,488,613
|
|
|
|
6,203,418
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
53,958,400
|
|
|
$
|
60,526,627
|
|
|
$
|
68,715,901
|
|
|
|
|
|
|
|
|
|
|
|
|
For recorded music revenue, the Company cannot break down the revenue by service or product
line without undue costs.
F-32
Geographic Information
The Company operates in the PRC and all of the Company’s long-lived assets are located in the
PRC.
19. (LOSS) INCOME PER SHARE
The following table sets forth the computation of basic and diluted net (loss) income per
share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Net (loss) income from continuing operations
(numerator), basic and diluted
|
|
$
|
(12,365,126
|
)
|
|
$
|
(41,530,968
|
)
|
|
$
|
6,640,393
|
|
|
Net income (loss) from discontinued
operations, net of tax (numerator), basic and
diluted
|
|
|
412,530
|
|
|
|
(419,227
|
)
|
|
|
(836,448
|
)
|
|
Net (loss) income (numerator), basic and diluted
|
|
$
|
(11,952,596
|
)
|
|
$
|
(41,950,195
|
)
|
|
$
|
5,803,945
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares (denominator):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average ordinary shares outstanding
used in computing basic income per share
|
|
|
2,185,615,129
|
|
|
|
2,172,208,190
|
|
|
|
2,189,748,563
|
|
|
Dilutive effect of non-vested shares, stock
options and warrants
|
|
|
—
|
|
|
|
—
|
|
|
|
19,010,073
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average ordinary shares outstanding
used in computing diluted income per share
|
|
|
2,185,615,129
|
|
|
|
2,172,208,190
|
|
|
|
2,208,758,636
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income from continuing operations
per share, basic and diluted
|
|
$
|
(0.01
|
)
|
|
$
|
(0.02
|
)
|
|
$
|
0.00
|
|
|
Net income (loss) from discontinued operations
per share, basic and diluted
|
|
|
(0.00
|
)
|
|
|
(0.00
|
)
|
|
|
(0.00
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income per share, basic and diluted
|
|
$
|
(0.01
|
)
|
|
$
|
(0.02
|
)
|
|
$
|
0.00
|
|
|
|
|
|
|
|
|
|
|
|
|
Ordinary share equivalents are calculated using the treasury stock method. Under the treasury
stock method, the proceeds from the assumed conversion of options, warrants and non-vested shares
are used to repurchase outstanding ordinary shares using the average fair value for the period.
The Company had a weighted-average of 47,539,004, 63,931,948 and 71,626,000 ordinary share
options outstanding during the years ended December 31, 2008, 2007 and 2006, respectively, which
were excluded in the computation of diluted income per share, as their effect would have been
antidilutive, as their exercise prices were above the average market values in such periods.
20. CONCENTRATIONS
(a) Dependence on Telecom Operators
The revenues of the Company are substantially derived from network service agreements with the
Telecom Operators. These companies are entitled to a service and network fee for the transmission
of wireless value-added services as well as for the billing and collection of services. If the
contractual relationships with one or more of the Telecom Operators in the PRC are terminated or
scaled-back, or if these companies alter the network service agreements in a way that is adverse to
the Company, the Company’s wireless value-added service business would be adversely affected.
Revenues generated from the mobile phone customers through China Unicom and China Mobile, the
principal operators that the Company dealt with during 2006, 2007 and 2008, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
Revenues
|
|
|
%
|
|
|
Revenues
|
|
|
%
|
|
|
Revenues
|
|
|
%
|
|
|
China Unicom
|
|
$
|
10,775,358
|
|
|
|
20
|
%
|
|
$
|
12,789,026
|
|
|
|
21
|
%
|
|
$
|
21,144,096
|
|
|
|
31
|
%
|
|
China Mobile
|
|
|
24,352,344
|
|
|
|
45
|
%
|
|
|
29,921,502
|
|
|
|
49
|
%
|
|
|
36,756,895
|
|
|
|
53
|
%
|
F-33
Accounts receivable due from the mobile phone customers through China Mobile and China Unicom
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
Accounts receivable
|
|
|
%
|
|
|
Accounts receivable
|
|
|
%
|
|
|
China Unicom
|
|
$
|
2,632,764
|
|
|
|
21
|
%
|
|
$
|
5,289,178
|
|
|
|
36
|
%
|
|
China Mobile
|
|
|
5,458,929
|
|
|
|
43
|
%
|
|
|
4,699,399
|
|
|
|
32
|
%
|
(b) Credit risk
The Company depends on the billing systems of the Telecom Operators to charge the mobile phone
customers through mobile phone bills and to collect payments from customers for WVAS business.
Recorded music services are delivered through the Company’s majority-controlled music companies,
which contracts with music artists and composers to perform and produce music and collects
receivables from music customers. The Company generally does not require collateral for its
accounts receivable. The movements of the allowance for doubtful accounts were as follows:
Movement of allowance for doubtful accounts
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of the period
|
|
$
|
699,525
|
|
|
$
|
284,402
|
|
|
Provisions
|
|
|
1,087,565
|
|
|
|
661,504
|
|
|
Reversed
|
|
|
(190,860
|
)
|
|
|
(233,057
|
)
|
|
Written off
|
|
|
(770,204
|
)
|
|
|
(13,324
|
)
|
|
|
|
|
|
|
|
|
|
Balance at the end of the period
|
|
$
|
826,026
|
|
|
$
|
699,525
|
|
|
|
|
|
|
|
|
|
21. MAINLAND CHINA CONTRIBUTION PLAN AND STATUTORY RESERVE
Full time employees of the Company in the PRC participate in a government-mandated
multi-employer defined contribution plan pursuant to which certain pension benefits, medical care,
unemployment insurance, employee housing fund and other welfare benefits are provided to employees.
Chinese labor regulations require the Company to accrue for these benefits based on certain
percentages of the employees’ salaries. The total provisions for such employee benefits were
$2,157,825, $2,434,409 and $2,396,079 for the years ended December 31, 2008, 2007 and 2006,
respectively.
PRC legal restrictions permit payments of dividends by PRC companies only out of their
retained earnings, if any, determined in accordance with PRC accounting standards and regulations.
Prior to payment of dividends, pursuant to the laws applicable to the PRC’s Foreign Investment
Enterprises, the Company’s 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 reserve funds include (i) a general reserve, (ii) an enterprise expansion fund and (iii) a
staff bonus and welfare fund. Subject to certain cumulative limits, the general reserve fund
requires annual appropriations of 10% of after-tax profit (as determined under generally accepted
accounting principles in the PRC at each year-end); the other fund appropriations are at the
Company’s discretion. These reserve funds can only be used for specific purposes of enterprise
expansion and staff bonus and welfare and are not distributable as cash dividends. Certain of the
Company’s PRC subsidiaries and VIEs reversed the general reserve fund of $4,711,525 for the year
ended December 31, 2008 to make up for the accumulated deficit as permitted by the PRC law, and
made appropriations to the general reserve fund of $841,788 and $374,004 for the years ended
December 31, 2007 and 2006, respectively. The PRC subsidiaries and VIEs elected not to make any
appropriations to the enterprise expansion fund and staff bonus and welfare fund in any of the
periods presented. As a result of these PRC laws and regulations, the PRC subsidiaries and VIEs are
restricted from transferring a portion of their net assets to the Company. Restricted net assets
were approximately $79.1 million and $75.6 million, as of December 31, 2008 and 2007, respectively.
Accordingly, the Company has included Schedule 1 in accordance with Regulation S-X promulgated by
the United States Securities and Exchange Commission.
F-34
22. COMMITMENTS AND CONTINGENCIES
Operating leases as lessee
The Company leases certain office premises under non-cancelable leases, of which the principal
one expires in 2009. Rent expense under operating leases for 2008, 2007 and 2006 was $1,931,102,
$1,862,610 and $1,455,640, respectively.
Future minimum lease payments under non-cancelable operating lease agreements were as follows:
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
2009
|
|
$
|
1,452,183
|
|
|
2010
|
|
|
96,852
|
|
|
2011
|
|
|
18,756
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,567,791
|
|
|
|
|
|
|
Artist contracts
Huayi Brothers Music, Secular Bird and Freeland Music have non-cancelable agency agreements
with certain artists that provide for minimum payments. Future minimum payments were as follows:
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
2009
|
|
$
|
1,670,944
|
|
|
2010
|
|
|
703,555
|
|
|
2011
|
|
|
703,555
|
|
|
|
|
|
|
|
Total
|
|
$
|
3,078,054
|
|
|
|
|
|
|
Contingent considerations for business acquisitions
In connection with the acquisition of Freeland Music, other than the initial consideration of
$7,560,000 in cash, the Company agreed to contribute up to $940,000 in cash as a capital injection
into Freeland Music, or make additional payment of $375,000 to the original selling shareholders in
cash, or decrease the Company’s share percentage in Freeland Music from 60% to 56%, at the selling
shareholders’ option, contingent upon the attainment of specific earnings objectives for the
twelve-month period ending December 31, 2009.
In connection with the acquisition of Secular Bird and Beijing Hurray! Fly Songs, other than
the initial consideration of $576,066 in cash, the Company agreed to make capital injections of up
to $626,287 into Secular Bird and make additional payment of up to $223,346 to the original selling
shareholders, contingent upon the attainment of specific earnings objectives for the twelve-month
period ending August 2009.
23. SUBSEQUENT EVENTS
Restructuring plan
In May 2009, the Company reduced the work force of our WVAS and digital music businesses by
approximately one-third, and have recorded an expense of $0.3 million in severance costs. This
review is ongoing, and there can be no assurance that the Company will be successful in returning
to profitability.
Shanda to Purchase Majority Share Stake of the Company
On June 8, 2009, the Company entered into a tender offer agreement with Shanda Interactive
Entertainment Limited (“Shanda”) under which Shanda, through a wholly-owned subsidiary, commenced a
tender offer on June 16, 2009 to acquire 51% of the Company’s total outstanding ordinary shares on
a fully diluted basis (including shares represented by our ADSs) at a price of US$0.04 per ordinary
share (or US$4.00 per ADS). On June 16, 2009, the Company received the offer to purchase from
Shanda and the related letters of transmittal. The tender offer will remain open for at least 20
business days and will expire on July 15, 2009 at 12:01 a.m., New York City time, unless extended.
F-35
HURRAY! HOLDING CO., LTD.
ADDITIONAL INFORMATION — FINANCIAL STATEMENT SCHEDULE I
FINANCIAL INFORMATION OF PARENT COMPANY
BALANCE SHEETS
(In U.S. dollars)
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
(in U.S. dollars, except share data)
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
39,519,423
|
|
|
$
|
49,061,529
|
|
|
Prepaid expenses and other current assets
|
|
|
168,233
|
|
|
|
224,297
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
39,687,656
|
|
|
|
49,285,826
|
|
|
Receivable on disposal of subsidiary
|
|
|
46,860
|
|
|
|
4,151,400
|
|
|
Prepaid investment cost
|
|
|
1,907,400
|
|
|
|
—
|
|
|
Investment at cost
|
|
|
600,038
|
|
|
|
—
|
|
|
Investments in subsidiaries and variable interest entities
|
|
|
35,131,851
|
|
|
|
39,681,837
|
|
|
Investment in equity affiliate
|
|
|
150,000
|
|
|
|
150,000
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
|
77,523,805
|
|
|
|
93,269,063
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and shareholders’ equity
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
Accrued expenses and other current liabilities
|
|
|
272,844
|
|
|
|
595,648
|
|
|
Amounts due to subsidiaries and variable interest entities
|
|
|
341,676
|
|
|
|
530,756
|
|
|
Acquisitions payable
|
|
|
—
|
|
|
|
6,560,000
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
614,520
|
|
|
|
7,686,404
|
|
|
|
|
|
|
|
|
|
|
Shareholders’ equity:
|
|
|
|
|
|
|
|
|
|
Ordinary shares ($0.00005 par value; 4,560,000,000 shares
authorized; 2,193,343,740 and 2,174,784,440 shares
issued and outstanding as of December 31, 2008, and 2007,
respectively)
|
|
|
109,617
|
|
|
|
108,689
|
|
|
Additional paid-in capital
|
|
|
75,012,693
|
|
|
|
74,066,839
|
|
|
Statutory reserve
|
|
|
1,791,324
|
|
|
|
6,502,849
|
|
|
Accumulated deficit
|
|
|
(9,991,663
|
)
|
|
|
(2,750,592
|
)
|
|
Accumulated other comprehensive income
|
|
|
9,987,314
|
|
|
|
7,654,874
|
|
|
|
|
|
|
|
|
|
|
Total shareholders’ equity
|
|
|
76,909,285
|
|
|
|
85,582,659
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders’ equity
|
|
$
|
77,523,805
|
|
|
$
|
93,269,063
|
|
|
|
|
|
|
|
|
|
F-36
HURRAY! HOLDING CO., LTD.
ADDITIONAL INFORMATION — FINANCIAL STATEMENT SCHEDULE I
FINANCIAL INFORMATION OF PARENT COMPANY
STATEMENT OF OPERATIONS
(In U.S. dollars)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
(in U.S. dollars, except share data)
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product development
(represents stock-based
compensation expense of
$40,102, $921 and $79,587
for the years ended
December 31, 2008, 2007 and
2006, respectively)
|
|
$
|
105,283
|
|
|
$
|
9,385
|
|
|
$
|
79,587
|
|
|
Selling and marketing
(including stock-based
compensation expense of
$621,094, $286,885 and
$346,456 for the years ended
December 31, 2008, 2007 and
2006, respectively)
|
|
|
622,846
|
|
|
|
286,885
|
|
|
|
346,211
|
|
|
General and administrative
(including stock-based
compensation expense
of $284,086, $155,169
and $117,514 for the years
ended December 31, 2008,
2007 and 2006, respectively)
|
|
|
1,666,532
|
|
|
|
2,440,417
|
|
|
|
1,757,720
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
2,394,661
|
|
|
|
2,736,687
|
|
|
|
2,183,518
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(2,394,661
|
)
|
|
|
(2,736,687
|
)
|
|
|
(2,183,518
|
)
|
|
Interest income
|
|
|
1,429,837
|
|
|
|
2,082,629
|
|
|
|
2,372,585
|
|
|
Interest expense
|
|
|
—
|
|
|
|
(179,062
|
)
|
|
|
(44,765
|
)
|
|
Other income, net
|
|
|
5,000,000
|
|
|
|
105,485
|
|
|
|
—
|
|
|
Foreign exchange loss
|
|
|
(8,990,067
|
)
|
|
|
—
|
|
|
|
—
|
|
|
Gain from disposal of subsidiary
|
|
|
412,530
|
|
|
|
192,943
|
|
|
|
—
|
|
|
Equity in earnings (loss) of
subsidiaries, variable interest
entities and affiliate
|
|
|
(7,410,235
|
)
|
|
|
(41,415,503
|
)
|
|
|
5,659,643
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(11,952,596
|
)
|
|
$
|
(41,950,195
|
)
|
|
$
|
5,803,945
|
|
|
|
|
|
|
|
|
|
|
|
|
F-37
HURRAY! HOLDING CO., LTD.
ADDITIONAL INFORMATION — FINANCIAL STATEMENT SCHEDULE I
FINANCIAL INFORMATION OF PARENT COMPANY
STATEMENTS OF CASH FLOWS
(In U.S. dollars)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
(in U.S. dollars)
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(11,952,596
|
)
|
|
$
|
(41,950,195
|
)
|
|
$
|
5,803,945
|
|
|
Adjustments to reconcile net (loss) income to net
cash provided by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation expense
|
|
|
945,282
|
|
|
|
442,975
|
|
|
|
543,557
|
|
|
Equity in (losses) earnings of subsidiaries,
variable interest entities and affiliate
|
|
|
7,410,235
|
|
|
|
41,415,503
|
|
|
|
(5,659,643
|
)
|
|
Gain from disposal of subsidiary
|
|
|
(412,530
|
)
|
|
|
(192,943
|
)
|
|
|
—
|
|
|
Receivable from disposal of subsidiary (net of
cash disposed of $771,570)
|
|
|
—
|
|
|
|
(3,186,887
|
)
|
|
|
—
|
|
|
Gain on reduction of acquisition payable
|
|
|
(5,000,000
|
)
|
|
|
—
|
|
|
|
—
|
|
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prepaid expenses and other current assets
|
|
|
56,064
|
|
|
|
226,001
|
|
|
|
(19,649
|
)
|
|
Amounts due from subsidiaries and variable
interest entities
|
|
|
—
|
|
|
|
5,843,380
|
|
|
|
792,290
|
|
|
Accrued expenses and other current liabilities
|
|
|
(322,804
|
)
|
|
|
403,512
|
|
|
|
(243,793
|
)
|
|
Amounts due to subsidiaries and variable
interest entities
|
|
|
(189,080
|
)
|
|
|
530,756
|
|
|
|
(1,243,090
|
)
|
|
Payroll withholding taxes payable
|
|
|
—
|
|
|
|
—
|
|
|
|
(504,945
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by operating activities
|
|
|
(9,465,429
|
)
|
|
|
3,532,102
|
|
|
|
(531,328
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments related to acquisitions consummated
|
|
|
(1,987,930
|
)
|
|
|
(2,833,658
|
)
|
|
|
(7,475,860
|
)
|
|
Payments related to acquisitions not yet consummated
|
|
|
(1,907,400
|
)
|
|
|
—
|
|
|
|
—
|
|
|
Proceeds from disposal of subsidiary
|
|
|
4,517,070
|
|
|
|
—
|
|
|
|
—
|
|
|
Investment in cost affiliate
|
|
|
(600,038
|
)
|
|
|
—
|
|
|
|
—
|
|
|
Purchase of equity affiliate
|
|
|
—
|
|
|
|
(150,000
|
)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities
|
|
|
21,702
|
|
|
|
(2,983,658
|
)
|
|
|
(7,475,860
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from exercise of stock options
|
|
|
1,500
|
|
|
|
16,334
|
|
|
|
95,472
|
|
|
Proceeds from the issuance of ordinary shares
|
|
|
—
|
|
|
|
—
|
|
|
|
540,000
|
|
|
Payment to repurchase ordinary shares
|
|
|
—
|
|
|
|
—
|
|
|
|
(5,034,748
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
1,500
|
|
|
|
16,334
|
|
|
|
(4,399,276
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (decrease) increase in cash and cash
equivalents
|
|
|
(9,442,227
|
)
|
|
|
564,778
|
|
|
|
(12,406,464
|
)
|
|
Effect of change in exchange rate
|
|
|
(99,879
|
)
|
|
|
—
|
|
|
|
—
|
|
|
Cash and cash equivalents, beginning of year
|
|
|
49,061,529
|
|
|
|
48,496,751
|
|
|
|
60,903,215
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of year
|
|
$
|
39,519,423
|
|
|
$
|
49,061,529
|
|
|
$
|
48,496,751
|
|
|
|
|
|
|
|
|
|
|
|
|
Note
Basis for Preparation
The Financial Information of the Parent Company has been prepared using the same accounting
policies as set out in the Company’s consolidated financial statements except that the Company has
used the equity method to account for its investment in its subsidiaries and its variable interest
entities.
F-38
EXHIBIT INDEX
|
|
|
|
|
|
|
Exhibit
|
|
|
|
Number
|
|
Document
|
|
|
|
|
|
|
|
|
4.70
|
|
|
Translation of Cooperation Agreement on Monternet WAP Services between China Mobile
Communications Group Corporation and Beijing Enterprise Network Technology Co., Ltd. dated
June 18, 2008.
|
|
|
|
|
|
|
|
|
4.71
|
|
|
Translation of Mobile Value-added Service (WAP1.2) Cooperation Agreement between China
Telecommunications Corporation and Beijing Hengji Weiye Electronic Commerce Co., Ltd. dated
October 1, 2008.
|
|
|
|
|
|
|
|
|
4.72
|
|
|
Investment and Shareholders’ Agreement between, among others, Seed Music Group Limited and
Hurray! Music Holding Co., Ltd. dated September 24, 2008.
|
|
|
|
|
|
|
|
|
4.73
|
|
|
Translation of Supplemental Agreement of Asset, Business and Personnel Transfer Agreement
between Beijing Secular Bird Culture and Art Development Centre and Guangzhou Secular Bird
Culture Communication Co., Ltd. dated August 2008.
|
|
|
|
|
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4.74
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Translation of Supplemental Agreement between Hurray! Digital Media Technology Co., Ltd. and
Beijing Secular Bird Culture and Art Development Centre dated August 2008.
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4.75
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Translation of Supplemental Agreement among Seed Music Group Limited, Hurray! Media Holding
Co., Ltd., Tien, Ting-Feng, and Huang, Tien-Zan dated 2009.
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4.76
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Translation of Supplemental Agreement among Hurray! Media Technologies Co., Ltd., Xiongbing
Zhong, Guangdong Freeland Movie and Television Production Co., Ltd., Beijing Shiji Freeland
Movie and Television Distribution Co., Ltd., Shanghai Hai Le Audio and Video Distribution
Co., Ltd., and Hongkong Freeland Movie Industry Group Co., Ltd. dated 2008.
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8.1
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List of Significant Subsidiaries and Affiliates.
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12.1
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Certification of Chief Executive Officer Required by Rule 13a-14(a).
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12.2
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Certification of Chief Financial Officer Required by Rule 13a-14(a).
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13.1
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Certification of Chief Executive Officer Required by Rule 13a-14(b) and Section 1350 of
Chapter 63 of Title 18 of the United States Code.
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13.2
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Certification of Chief Financial Officer Required by Rule 13a-14(b) and Section 1350 of
Chapter 63 of Title 18 of the United States Code.
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15.1
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Consent of Deloitte Touche Tohmatsu CPA Ltd., Independent Registered Public Accounting Firm.
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15.2
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Consent of Appleby.
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