Unassociated Document
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
DC 20549
FORM
20-F
¨
|
REGISTRATION
STATEMENT PURSUANT TO SECTION 12(b) OR 12(g) OF THE SECURITIES EXCHANGE
ACT OF 1934
|
|
OR
|
x
|
ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For
the fiscal year ended December 31, 2009
|
|
OR
|
¨
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For
the transition period from __________ to __________
|
|
OR
|
¨
|
SHELL
COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
Date
of event requiring this shell company report
__________
|
Commission
file number 001-33692
CHINA
DIGITAL TV HOLDING CO., LTD.
(Exact
Name of Registrant as Specified in Its Charter)
N/A
|
|
Cayman
Islands
|
(Translation
of Registrant’s Name Into English)
|
|
(Jurisdiction
of Incorporation or
Organization)
|
Jingmeng
High-Tech Building B, 4th Floor
No. 5
Shangdi East Road
Haidian
District, Beijing 100085
People’s
Republic of China
(Address
of Principal Executive Offices)
Mr.
Yuan Yuan
China
Digital TV Holding Co., Ltd.
Jingmeng
High-Tech Building B, 4th Floor
No.
5 Shangdi East Road
Haidian
District, Beijing 100085
People’s
Republic of China
Telephone: (+86
10) 6297 1199
Fax: (+86
10) 6297 5009
(Name,
Telephone, Email and/or Facsimile Number and Address of Company Contact
Person)
|
Securities
registered or to be registered pursuant to Section 12(b) of the
Act:
Title of Each Class
Ordinary
shares, par value US$0.0005 per share*
American
depositary shares, each representing one ordinary share
|
Name of Each Exchange On Which
Registered
New
York Stock Exchange
|
*
|
Not
for trading, but only in connection with the listing on the New York Stock
Exchange of American depositary shares, or ADSs, each representing one
ordinary share.
|
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.
As of
December 31, 2009, 58,044,640 ordinary shares, par value US$0.0005 per share,
were issued and outstanding.
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes ¨ 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 ¨ 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 ¨
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 ¨ No ¨
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):
Large
Accelerated Filer ¨
Accelerated Filer þ Non-Accelerated
Filer ¨
Indicate
by check mark which basis of accounting the registrant has used to prepare the
financial statement included in this filing:
U.S.
GAAP þ
International
Financial Reporting Standards as issued by the International Accounting
Standards Board o
Other
o
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 o 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
TABLE
OF CONTENTS
INTRODUCTION
|
1
|
FORWARD-LOOKING
STATEMENTS
|
1
|
PART
I
|
|
2
|
Item
1.
|
Identity
of Directors, Senior Management and Advisers
|
2
|
Item
2.
|
Offer
Statistics and Expected Timetable
|
2
|
Item
3.
|
Key
Information
|
3
|
Item
4.
|
Information
on the Company
|
27
|
Item
4A.
|
Unresolved
Staff Comments
|
47
|
Item
5.
|
Operating
and Financial Review and Prospects
|
47
|
Item
6.
|
Directors,
Senior Management and Employees
|
64
|
Item
7.
|
Major
Shareholders and Related Party Transactions
|
72
|
Item
8.
|
Financial
Information
|
79
|
Item
9.
|
The
Offer and Listing
|
80
|
Item
10.
|
Additional
Information
|
81
|
Item
11.
|
Quantitative
and Qualitative Disclosures About Market Risks
|
85
|
Item
12.
|
Description
of Securities Other than Equity Securities
|
86
|
PART
II
|
|
88
|
Item
13.
|
Defaults,
Dividend Arrearages and Delinquencies
|
88
|
Item
14.
|
Material
Modifications to the Rights of Security Holders and Use of
Proceeds
|
88
|
Item
15.
|
Controls
and Procedures
|
88
|
Item
16A.
|
Audit
Committee Financial Expert
|
90
|
Item
16B.
|
Code
of Ethics
|
90
|
Item
16C.
|
Principal
Accountant Fees and Services
|
90
|
Item
16D.
|
Exemptions
from the Listing Standards for Audit Committees
|
91
|
Item
16E.
|
Purchases
of Equity Securities by the Issuer and Affiliated
Purchasers
|
91
|
Item
16F.
|
Change
in Registrant’s Certifying Accountant
|
92
|
Item
16G.
|
Corporate
Governance
|
92
|
PART
III
|
|
92
|
Item
17.
|
Financial
Statements
|
92
|
Item
18.
|
Financial
Statements
|
92
|
Item
19.
|
Exhibits
|
92
|
INTRODUCTION
Except
where the context otherwise requires and for purposes of this annual report
only:
|
·
|
“ADSs”
refers to our American depositary shares, each of which represents one
ordinary share;
|
|
·
|
“ADRs”
refers to American depositary receipts, which, if issued, evidence our
ADSs;
|
|
·
|
“CA
systems” refers to conditional access systems provided to the PRC’s
digital television market, which consist of: (1) smart cards that are
inserted into set-top boxes at the subscriber’s end, or terminal end; (2)
software installed at the digital television network operator’s
transmission point, or head end; and (3) software for set-top boxes,
enabling digital television network operators to control the distribution
of contents and value-added services to their subscribers and block
unauthorized access to their
networks;
|
|
·
|
“China”
or the “PRC” refers to the People’s Republic of China, excluding, for the
purposes of this annual report, Hong Kong, Macau and
Taiwan;
|
|
·
|
“RMB”
or “Renminbi” refers to the legal currency of
China;
|
|
·
|
“U.S.
dollars” or “US$” refers to the legal currency of the United
States;
|
|
·
|
“U.S.
GAAP” refers to generally accepted accounting principles in the United
States; and
|
|
·
|
all
references to the number of the ordinary shares and the number of the
Series A convertible redeemable shares, or Series A preferred shares, of
our wholly owned subsidiary, China Digital TV Technology Co., Ltd., or
CDTV BVI, take into account a 40-for-1 share split executed by CDTV BVI in
May 2007.
|
All
references to “CDTV Holding,” “we,” “us” or “our” include China Digital TV
Holding Co., Ltd., its subsidiaries, the businesses acquired from Novel-Tongfang
Information Engineering Co., Ltd., or N-T Information Engineering, and, in the
context of describing our operations and consolidated financial information,
also include Beijing Novel-Super Digital TV Technology Co., Ltd. (formerly known
as Beijing Novel-Tongfang Digital TV Technology Co., Ltd.), or N-S Digital TV,
and its subsidiaries.
FORWARD-LOOKING
STATEMENTS
This
annual report contains forward-looking statements, within the meaning of Section
27A of the Securities Act of 1933, as amended, or the Securities Act, and
Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange
Act, with respect to our business, operating results and financial condition as
well as our current expectations, assumptions, estimates and projections about
our industry. All statements other than statements of historical fact in this
annual report are forward-looking statements. These forward-looking statements
can be identified by words or phrases such as the words “anticipate,” “believe,”
“estimate,” “expect,” “intend,” “plan,” “may,” “is/are likely to,” “should,”
“will” and similar expressions. These forward-looking statements include,
without limitation, statements relating to:
|
·
|
changes
in technology standards in the digital television broadcasting industry
and our ability to adapt to these
changes;
|
|
·
|
our
expectations regarding demand for our products and
services;
|
|
·
|
our
ability to develop new products and services, and expand our sales and
distribution network and other aspects of our
operations;
|
|
·
|
expected
changes in our revenues and cost and expense
items;
|
|
·
|
our
ability to effectively protect our intellectual property rights as well as
not infringe on the intellectual property rights of
others;
|
|
·
|
the
competitiveness of our products and
services;
|
|
·
|
the
level of competition in the CA systems
market;
|
|
·
|
government
policies and regulations relating to the digital television broadcasting
industry, the CA systems industry and other areas relevant to our business
activities;
|
|
·
|
any
significant changes to the PRC government’s ongoing digitalization
program;
|
|
·
|
general
economic and business conditions in the PRC and
elsewhere;
|
|
·
|
our
future business development and economic
performance;
|
|
·
|
our
future business development plans and strategic initiatives;
and
|
|
·
|
the
future expansion of the PRC digital television broadcasting market, and
factors driving that growth.
|
These
forward-looking statements involve various risks and uncertainties. These
forward-looking statements reflect our current views with respect to future
events and are not a guarantee of future performance. Actual results may differ
materially from the information contained in the forward-looking statements as a
result of a number of factors, including, without limitation, the risk factors
set forth in “Item 3. Key Information—D. Risk Factors” and the
following:
|
·
|
general
economic and business conditions in the PRC and
elsewhere;
|
|
·
|
governmental,
statutory, regulatory or administrative initiatives affecting
us;
|
|
·
|
trends
in the PRC’s digital television broadcasting industry, including progress
of digitalization in the PRC and the growth of digital television network
operators;
|
|
·
|
future
profitability of our business and
operations;
|
|
·
|
exchange
rate fluctuations between the Renminbi and other currencies;
and
|
|
·
|
the
availability of qualified management and technical
personnel.
|
Due to
these risks, uncertainties and assumptions, the forward-looking events and
circumstances discussed in this annual report might not occur in the way we
expect, or at all. Accordingly, you should not place undue reliance on any
forward-looking information. The forward-looking statements made in this annual
report relate only to events or information as of the date on which the
statements are made in this annual report. We undertake no obligation to update
or otherwise revise the forward-looking statements in this annual report,
whether as a result of new information, future events or otherwise.
PART
I
Item
1.
|
Identity
of Directors, Senior Management and
Advisers
|
Not
Applicable.
Item
2.
|
Offer
Statistics and Expected Timetable
|
Not
Applicable.
A.
Selected Financial Data
Our
Selected Consolidated Financial Data
The
following selected consolidated financial data should be read in conjunction
with “Item 5. Operating and Financial Review and Prospects” and our audited
consolidated financial statements and the notes thereto included elsewhere in
this annual report on Form 20-F. The selected consolidated statement of
operations data for the years ended December 31, 2007, 2008 and 2009, and the
selected consolidated balance sheet data as of December 31, 2008 and 2009 set
forth below are derived from our audited consolidated financial statements
included elsewhere in this annual report. The selected consolidated statement of
operations data for the years ended December 31, 2005 and 2006 and the selected
historical consolidated balance sheet data as of December 31, 2005, 2006 and
2007 set forth below are derived from our audited consolidated financial
statements which are not included in this annual report.
Our
audited historical consolidated financial statements have been prepared and
presented in accordance with U.S. GAAP.
Our
historical results for any prior period do not necessarily indicate our results
to be expected for any future period.
|
|
For
the years ended December 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In
thousands of U.S. dollars, except share and per share
data)
|
|
Consolidated
Statements of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Products
|
|
US$ |
9,291 |
|
|
US$ |
26,443 |
|
|
US$ |
49,741 |
|
|
US$ |
64,412 |
|
|
US$ |
49,146 |
|
Services
|
|
|
3,855 |
|
|
|
4,182 |
|
|
|
6,011 |
|
|
|
6,285 |
|
|
|
5,918 |
|
Total
revenues
|
|
|
13,146 |
|
|
|
30,625 |
|
|
|
55,752 |
|
|
|
70,697 |
|
|
|
55,064 |
|
Business
tax
|
|
|
(60 |
) |
|
|
(255 |
) |
|
|
(299 |
) |
|
|
(363 |
) |
|
|
(360 |
) |
Net
revenues
|
|
|
13,086 |
|
|
|
30,370 |
|
|
|
55,453 |
|
|
|
70,334 |
|
|
|
54,704 |
|
Cost
of revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Products
|
|
|
1,936 |
|
|
|
4,726 |
|
|
|
8,100 |
|
|
|
10,877 |
|
|
|
9,716 |
|
Services
|
|
|
1,967 |
|
|
|
1,859 |
|
|
|
2,135 |
|
|
|
2,828 |
|
|
|
3,686 |
|
Total
cost of revenues
|
|
|
3,903 |
|
|
|
6,585 |
|
|
|
10,235 |
|
|
|
13,705 |
|
|
|
13,402 |
|
Gross
profit
|
|
|
9,183 |
|
|
|
23,785 |
|
|
|
45,218 |
|
|
|
56,629 |
|
|
|
41,302 |
|
Total
operating expenses
|
|
|
3,830 |
|
|
|
5,297 |
|
|
|
12,107 |
|
|
|
19,068 |
|
|
|
20,775 |
|
Income
from operations
|
|
|
5,353 |
|
|
|
18,488 |
|
|
|
33,111 |
|
|
|
37,561 |
|
|
|
20,527 |
|
Interest
income
|
|
|
117 |
|
|
|
279 |
|
|
|
2,790 |
|
|
|
9,138 |
|
|
|
6,070 |
|
Other
income (expense)
|
|
|
— |
|
|
|
— |
|
|
|
263 |
|
|
|
(412 |
) |
|
|
(65 |
) |
Recognition
of the change in the fair value of the warrant
|
|
|
(18 |
) |
|
|
(5,406 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
Income
before income taxes
|
|
|
5,452 |
|
|
|
13,361 |
|
|
|
36,164 |
|
|
|
46,287 |
|
|
|
26,532 |
|
Income
tax benefit/ (expense)
|
|
|
66 |
|
|
|
59 |
|
|
|
(2,342 |
) |
|
|
(3,235 |
) |
|
|
(1,261 |
) |
Net
loss/(income) from equity method investments
|
|
|
— |
|
|
|
— |
|
|
|
6 |
|
|
|
4 |
|
|
|
(20 |
) |
Net
income before noncontrolling interest
|
|
|
5,518 |
|
|
|
13,420 |
|
|
|
33,816 |
|
|
|
43,048 |
|
|
|
25,291 |
|
Net
income/(loss) attributable to noncontrolling interest
|
|
|
975 |
|
|
|
430 |
|
|
|
— |
|
|
|
(14 |
) |
|
|
(13 |
) |
Cash
dividend to preferred shareholder
|
|
|
— |
|
|
|
(5,731 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
Net
income attributable to holders of ordinary shares
|
|
US$ |
4,543 |
|
|
US$ |
7,259 |
|
|
US$ |
33,816 |
|
|
US$ |
43,062 |
|
|
US$ |
25,304 |
|
|
|
For
the years ended December 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In
thousands of U.S. dollars, except share and per share
data)
|
|
Earnings
per share data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income per share—basic ordinary shares
|
|
US$ |
0.11 |
|
|
US$ |
0.24 |
|
|
US$ |
0.74 |
|
|
US$ |
0.75 |
|
|
US$ |
0.44 |
|
Net
income per share—basic participating preferred shares
|
|
|
0.11 |
|
|
|
0.54 |
|
|
|
0.66 |
|
|
|
— |
|
|
|
— |
|
Net
income per ordinary share—diluted
|
|
US$ |
0.11 |
|
|
US$ |
0.21 |
|
|
US$ |
0.68 |
|
|
US$ |
0.72 |
|
|
US$ |
0.43 |
|
Weighted
average shares used in calculating basic net income per share—ordinary
shares
|
|
|
30,000,000 |
|
|
|
30,488,889 |
|
|
|
39,170,004 |
|
|
|
57,138,985 |
|
|
|
57,728,009 |
|
Weighted
average shares used in calculating basic net income per share—preferred
shares
|
|
|
10,000,000 |
|
|
|
10,519,120 |
|
|
|
7,389,394 |
|
|
|
— |
|
|
|
— |
|
Weighted
average shares used in calculating basic net income per
share
|
|
|
30,000,000 |
|
|
|
34,225,321 |
|
|
|
42,773,590 |
|
|
|
60,058,724 |
|
|
|
58,591,072 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
US$ |
8,272 |
|
|
US$ |
21,137 |
|
|
US$ |
228,958 |
|
|
US$ |
202,947 |
|
|
US$ |
131,087 |
|
Total
assets
|
|
|
16,217 |
|
|
|
33,505 |
|
|
|
263,735 |
|
|
|
297,976 |
|
|
|
263,488 |
|
Total
liabilities
|
|
|
6,362 |
|
|
|
21,564 |
|
|
|
11,884 |
|
|
|
71,950 |
|
|
|
10,464 |
|
Series A
convertible redeemable preferred shares
|
|
|
12,000 |
|
|
|
16,078 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Total
shareholders’ (deficiency)/ equity
|
|
|
(5,089 |
) |
|
|
(8,137 |
) |
|
|
247,851 |
|
|
|
224,462 |
|
|
|
253,024 |
|
Noncontrolling
interest
|
|
|
2,944 |
|
|
|
4,000 |
|
|
|
4,000 |
|
|
|
1,564 |
|
|
|
— |
|
Total
liabilities, noncontrolling interest, Series A convertible redeemable
preferred shares and shareholders equity
|
|
US$ |
16,217 |
|
|
US$ |
33,505 |
|
|
US$ |
263,735 |
|
|
US$ |
297,976 |
|
|
US$ |
263,488 |
|
In
December 2008, our board of directors declared a special cash dividend of
US$1.00 per ordinary share. This special dividend in the aggregate amount of
US$57.3 million was fully paid by the end of February 2009.
Exchange
Rate Information
We
present our historical consolidated financial statements in U.S. dollars. In
addition, solely for the convenience of the reader, certain pricing information
is presented in U.S. dollars and certain contractual amounts that are in
Renminbi include a U.S. dollar equivalent. Except as otherwise specified, this
pricing information and these contractual amounts are translated at US$1.00 to
RMB6.8259, the noon buying rate in The City of New York for cable transfers of
Renminbi as certified for customs purposes by the Federal Reserve Bank of New
York on December 31, 2009. These translations should not be construed as
representations that the Renminbi or U.S. dollar amounts could have been, or
could be, converted into U.S. dollars or Renminbi at such rates or at all. The
PRC government imposes control over its foreign currency reserves in part
through direct regulation of the conversion of RMB into foreign exchange and
through restrictions on foreign trade.
On April
23, 2010, the noon buying rate in The City of New York for cable transfers of
Renminbi as certified for customs purposes by the Federal Reserve Bank of New
York was RMB6.8270 to US$1.00. The following table sets forth additional
information concerning exchange rates between Renminbi and U.S. dollars for the
periods indicated. These rates are provided solely for your convenience and are
not necessarily the exchange rates that we used in this annual report or will
use in the preparation of our periodic reports or any other information to be
provided to you.
|
|
RMB
per US$1.00 Noon Buying Rate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
8.0702 |
|
|
|
8.1826 |
|
|
|
8.0702 |
|
|
|
8.2765 |
|
2006
|
|
|
7.8041 |
|
|
|
7.9579 |
|
|
|
7.8041 |
|
|
|
8.0702 |
|
2007
|
|
|
7.2946 |
|
|
|
7.5806 |
|
|
|
7.2946 |
|
|
|
7.8127 |
|
2008
|
|
|
6.8225 |
|
|
|
6.9193 |
|
|
|
6.7800 |
|
|
|
7.2946 |
|
2009
|
|
|
6.8259 |
|
|
|
6.8295 |
|
|
|
6.8176 |
|
|
|
6.8470 |
|
October
|
|
|
6.8264 |
|
|
|
6.8267 |
|
|
|
6.8248 |
|
|
|
6.8292 |
|
November
|
|
|
6.8265 |
|
|
|
6.8271 |
|
|
|
6.8255 |
|
|
|
6.8300 |
|
December
|
|
|
6.8259 |
|
|
|
6.8275 |
|
|
|
6.8244 |
|
|
|
6.8299 |
|
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January
|
|
|
6.8268 |
|
|
|
6.8269 |
|
|
|
6.8258 |
|
|
|
6.8295 |
|
February
|
|
|
6.8258 |
|
|
|
6.8285 |
|
|
|
6.8258 |
|
|
|
6.8330 |
|
March
|
|
|
6.8258 |
|
|
|
6.8262 |
|
|
|
6.8254 |
|
|
|
6.8270 |
|
April
(through April 23)
|
|
|
6.8270 |
|
|
|
6.8256 |
|
|
|
6.8229 |
|
|
|
6.8275 |
|
Source:
Federal Reserve Bank of New York
(1)
|
Annual
averages are calculated using month-end rates. Monthly averages are
calculated using the average of the daily rates during the relevant
period.
|
B. Capitalization
and Indebtedness
Not
Applicable.
C. Reasons
for the Offer and Use of Proceeds
Not
Applicable.
D. Risk
Factors
You
should carefully consider all of the information in this annual report,
including the risks and uncertainties described below, before deciding to invest
in our ADSs. The trading price of our ADSs could decline due to any of these
risks and uncertainties, and you may lose all or part of your
investment.
Risks
Relating to Our Business and Industry
The
PRC television broadcasting industry may not digitalize as quickly as we expect,
as a result of which our revenues and net income would be materially adversely
affected.
Our
future success depends upon the pace at which PRC television network operators
switch from analog to digital transmission. Analysys International, a
Beijing-based market research firm, projected that the number of digital cable
television subscribers in the PRC will grow from 63.5 million as of December 31,
2009 to 110.5 million as of December 31, 2011. However, various factors,
including those beyond our control, may cause PRC television network operators
to convert from analog to digital transmission at a slower pace. In particular,
although the PRC government has strongly encouraged cable television network
operators to digitalize their networks and has set a target of 2015 for all,
except for up to six, analog channels to be switched off, it may relax or cancel
the 2015 target. The pace of digitalization may also be slowed down as a result
of uncertainties in the change of industrial policies. In addition, PRC
television viewers may fail to subscribe to digital television services in
sufficient numbers to support wide-scale digitalization. PRC television network
operators may also decide that the commercial benefits of digitalization are
outweighed by the costs or other commercial or policy considerations. If any of
these or other factors were to cause the pace of digitalization to proceed
significantly more slowly than we anticipate, our sales of CA systems, in
particular smart cards, would suffer significantly, and our revenues and net
income would be materially and adversely affected.
Changes
in the regulatory environment of, and government policies towards, the PRC
television broadcasting industry could have a material adverse effect on our
business, financial condition and results of operations.
Strong
PRC government support has been a significant driver of the PRC television
broadcasting industry’s transition from analog to digital transmission. Although
the PRC government has set a target of 2015 for all cable television networks to
switch to digital transmissions, terminating all analog transmissions except for
up to six channels that will continue in service for the benefit of those unable
to afford digital television, we cannot assure you that the government will not
change or adjust its digitalization policies at any time, including canceling or
relaxing the target for digitalization. If the digitalization process in the PRC
were to be slowed down or otherwise adversely affected by any government action
or inaction, we may not be able to develop new customers or attract new business
from existing customers, and our growth and prospects would be materially and
adversely affected.
Furthermore,
the television broadcasting industry in the PRC is highly regulated. Government
regulations with respect to television broadcasting content, the amount and
content of advertising, the pricing of pay-television subscriptions, the role of
private-sector investment and the role of foreign investment significantly
influence the business strategies and operating results of our customers. For
example, the PRC State Administration of Radio, Film and Television, or the
SARFT, issues licenses without which our customers cannot operate, and may
withdraw such licenses for violation of its regulations. Among other things, the
SARFT must approve the creation of new premium content channels and has the
power to order television network operators to stop airing programs or
advertising that it considers illegal or inappropriate. Any adverse government
actions against television network operators could in turn cause us to lose
existing or potential customers.
In
addition, many of our customers are directly or indirectly owned by the central
PRC government or provincial or local governments. As a result, their business
strategies and capital expenditure budgets are significantly influenced by
government policies at various levels. Any change in the business strategies of
our customers that leads to a reduction in the funds available to purchase our
CA systems could have a material adverse effect on our business, financial
condition and results of operations. Furthermore, the ongoing consolidation of
the PRC cable television broadcasting industry could, among other things,
substantially increase the bargaining power of the consolidated network
operators over us and require us to reduce the prices of our CA systems and
other products and services, which could, in turn, materially and adversely
affect our revenues and profitability.
If
significant numbers of television viewers in the PRC are unwilling to pay for
digital television or value-added services, our business and profits will
suffer.
The
substantial majority of our revenues are derived from digital television network
operators who purchase our head-end CA systems software and smart cards to
insert in the set-top boxes of their subscribers. As a result, we are
substantially dependent upon the television network operators’ ability to sell
digital television subscriptions to viewers. In addition, the success of our
efforts to generate future revenues by offering value-added services to
television viewers ultimately depends on whether viewers are willing to pay for
such value-added services.
We cannot
assure you that television network operators will be successful in promoting
digital television or value-added services. In particular, television viewers in
the PRC are accustomed to receiving television for free or for a very low price.
Even viewers who are accustomed to paying for cable television subscriptions
have historically paid very low rates and may not be willing to pay
significantly higher rates for digital television services, or additional fees
for value-added services. If digital television network operators are unable to
develop unique and compelling content to differentiate from the content provided
through analog transitions or offer value-added services that meet viewers’
needs at an affordable price, they may find it difficult to persuade viewers to
accept the pay-television model or pay more for digital television or
value-added services than viewers have historically paid for analog television.
In that event, our customers’ digital subscriber numbers may not grow and we may
be unable to sustain our current level of revenue.
If
large numbers of television network operators who have already installed our CA
system head-end software do not purchase sufficient quantities of our smart
cards, our financial condition and results of operations would be materially and
adversely affected.
Television
network operators who purchase and install our CA systems head-end software
generally purchase our smart cards in batches over a period from several months
to several years as they roll out digital services to their subscribers in
stages. Substantially all of our revenues are derived from the sale of smart
cards to customers who are engaged in such service roll-outs. However, certain
television network operators have installed our CA systems head-end software and
subsequently failed to purchase sufficient quantities of our smart cards.
Factors that may cause a television network operator to suspend or halt its
digitalization using our products include, but are not limited to, changes in
such television network operator’s management priorities or financial condition,
and a decision by such television network operator to carry out digitalization
using the CA systems of a competitor.
In
January 2010, the PRC government stepped up its policy to encourage convergence
of television broadcasting, telecommunications and Internet services. Although
this policy may lead to acceleration of the digitalization of cable networks as
the cable operators prepare themselves for potential competition from
telecommunications operators, it may also have a material adverse effect on our
business. In particular, as a response to that policy, and as an important
measure to strengthen the competitiveness of the cable television industry as a
whole, the SARFT has increased its efforts to consolidate the cable television
industry. As a result, provincial cable operators have gained increasing
influence over the municipal cable operators, including the latter’s purchase
and investment decisions. If the provincial cable operators, who may be CA
customers of our competitors or otherwise prefer our competitors’ products,
direct the municipal cable operators to suspend or cancel their orders for our
smart cards or purchase smart cards from our competitors, our business could
suffer.
If large
numbers of television network operators who have already installed our CA
systems head-end software fail to purchase commercial quantities of our smart
cards, our financial condition and results of operations would be materially and
adversely affected.
We
derive substantially all of our revenues from customers who are installing new
CA systems, and if we are unable to continue attracting new customers to install
our CA systems or persuade existing customers to purchase our system upgrades or
value-added applications, our profitability and prospects may be materially and
adversely affected.
CA
systems vendors in more mature digital television markets, such as the United
States and Europe, derive revenues not only from the purchase of new CA systems
by television network operators who are switching from analog to digital
transmissions, but also from the purchase of new and replacement smart cards,
system upgrades and new value-added services by existing customers. In the PRC,
however, cable television network operators are still in the process of
purchasing CA systems and introducing digital content and services to their
subscribers. To date, none of our customers have made a follow-on purchase for
system upgrades or card replacements. As a result, the success of our business
depends entirely on our ability to attract a continuing stream of customers who
are switching from analog to digital transmission. If we are unable to continue
attracting sufficient numbers of such customers, or to begin developing a
significant source of recurring revenues, our profitability and prospects may be
materially and adversely affected.
We
have a limited operating history, which may make it difficult for you to
evaluate our business and prospects.
In the
years immediately following the commencement of our operations in 2004, we
enjoyed rapid growth in revenues primarily due to the fast pace of
digitalization by cable television network operators in the PRC. Our net
revenues increased 260.7%, 132.1% and 82.6% in 2005, 2006 and 2007,
respectively, compared to the prior year. However, these revenue growth rates,
which have continued to decrease over time, may not be representative of future
growth or be sustainable. In particular, our net revenues increased 26.8% in
2008 compared to the prior year, which is significantly lower than our growth
rates in previous years. Furthermore, our net revenues decreased by 22.9% in
2009 — the
first time since our inception. As our operating history is limited, the revenue
and income potential of our business and markets are unproven. Our historical
operating results may not provide a meaningful basis for evaluating our
business, financial performance and prospects. In addition, we face numerous
risks, uncertainties, expenses and difficulties frequently encountered by
companies at an early stage of development. Some of these risks and
uncertainties relate to our ability to:
|
·
|
develop
new customers or new business from existing
customers;
|
|
·
|
enhance
the technical sophistication of the products we
offer;
|
|
·
|
respond
effectively to competitive pressures;
and
|
|
·
|
attract
and retain qualified management and
employees.
|
We cannot
predict whether we will meet internal or external expectations of our future
performance. If we are not successful in addressing these risks and
uncertainties, our business, financial condition and results of operations may
be materially and adversely affected.
Our
business will suffer if we do not respond effectively to technological or
commercial changes in our industry.
Our
business and the market in which we operate are characterized by rapid
commercial and technological change, evolving industry standards and frequent
product enhancements. As digital broadcasting becomes more popular in the PRC,
television network operators are likely to seek more sophisticated CA technology
that offers them greater reliability, flexibility and functionality in
delivering protected content or value-added services to viewers. As methods of
distributing information and entertainment evolve, CA technology may also need
to evolve to provide content protection for distribution platforms other than
television, for example, we have started to provide CA systems for mobile
television networks, namely China Mobile Multimedia Broadcasting networks for
mobile television broadcasting. Our continued success will depend, in part, on
our ability to develop and market products and services that respond to
technological changes and evolving market demand or industry standards in a
timely and cost-effective manner. We will need to invest significant financial
resources in research and development to keep pace with technological advances
in the CA systems industry and related industries. However, research and
development activities are inherently uncertain, and our significant
expenditures on research and development may not yield corresponding benefits.
If we fail to develop and introduce products and services that effectively
respond to technical changes and evolving market demand or industry standards
and compete effectively with products and services offered by our competitors,
our sales may be significantly reduced and our revenues and profitability will
suffer.
We
depend, and expect to continue to depend, on a limited number of customers for a
significant portion of our revenues in any single period. If one customer defers
or cancels its orders or chooses our competitors’ products or services, our
revenues and net income could decline significantly.
The
revenues generated by our top five customers for a particular year as a
percentage of our total revenues declined from 89.9% in 2004 to 25.1% in 2009.
However, we currently still derive, and we expect to continue to derive, a
significant portion of our revenues from a limited number of customers, although
the particular customers may vary from period to period. As digital cable
television systems are still at the developing stage in the PRC, the largest
shipments of smart cards tend to be to operators who are launching new digital
transmission systems and need to purchase in bulk for their established
networks. If a customer significantly reduces the volume of its purchases from
us, defers or cancels orders or terminates its relationship with us, our
revenues could decline significantly and, as a result, our business, financial
condition and results of operations could be materially and adversely
affected.
Our
business may suffer if cable television network operators, who currently
comprise our primary customer base, do not compete successfully with existing
and emerging alternative platforms for delivering television programs, including
terrestrial networks, Internet protocol television, mobile television and
satellite broadcasting networks.
Our
existing customers are mainly cable television network operators in the PRC,
which compete with traditional terrestrial television networks for the same pool
of viewers. As technologies develop, other means of delivering information and
entertainment to television viewers are evolving. For example, some
telecommunications companies in the PRC are seeking to compete with terrestrial
broadcasters and cable television network operators by offering Internet
protocol television, or IPTV, which allows telecommunications companies to
stream television programs through telephone lines. The PRC Ministry of Industry
and Information (formerly known as the PRC Ministry of Information Industry), or
the MII, has officially issued six IPTV licenses and it may issue significantly
more licenses in the future. The SARFT also issued a broadcast license in 2006
to the PRC’s first direct satellite broadcast company, which began operation in
2008. More recently, a television operator has started to offer mobile
television services. We may not be as successful in selling our CA systems to
the operators of IPTV, or terrestrial, satellite or mobile television networks
as we have been in selling to cable television network operators. To the extent
that the terrestrial television networks, telecommunications companies or
satellite television network operators compete successfully with cable
television network operators for viewers, the ability of our existing cable
customer base to attract and retain subscribers may be adversely affected. As a
result, demand for additional smart cards could falter and our business,
financial condition and results of operations would be materially and adversely
affected.
Our
business could be harmed if the security of our customers’ networks is
compromised due to the failure of our CA systems or the security breach of the
software or hardware supplied by other vendors.
We face
risks relating to the failure of our CA systems to block unauthorized access to
the television networks of our customers. Our CA systems use a combination of
signal scrambling and encryption to prevent unauthorized viewing of our
customers’ television programs. An important component of our CA systems is the
smart cards we provide for our customers’ individual subscribers. Unauthorized
viewing and use of content could be accomplished by counterfeiting our smart
cards, stealing our system’s authorization messages or security codes, or in any
other way thwarting our CA systems’ security features. Any significant security
breach could require us to develop and implement solutions that could be costly
or time-consuming, or to replace an operator’s smart cards at our own expense.
For example, pursuant to our contracts with buyers of our CA systems, if we were
unable to remedy such security breach with system modifications, we could be
obligated to replace the cards free of charge if the breach occurs within the
first year (or in some cases, within the first two or three years) after the
sale. Even though we have not experienced any significant counterfeiting or
other security breach, we cannot assure you that our current assumptions
regarding the security of our CA systems are reasonable. We could be obligated
to incur a significant portion of the cost of replacing our smart cards in
future years if any significant counterfeiting or security breach occurs. See
“Item 4. Information on the Company—B. Business Overview—Our Products and
Services—CA Systems.” The cost of smart card replacement and the damage to our
reputation could have a material adverse effect on our business, financial
condition and results of operations.
In
addition to our CA systems, the secured transmission of digital television
programming also relies on certain other software and hardware components, such
as set-top boxes supplied by other vendors, used on our customers’ digital
television networks. A security breach of any of these other software and
hardware components could also result in unauthorized access to the television
networks of our customers. For example, in November 2007, it was discovered that
an individual located in the city of Daqing in Heilongjiang Province had
provided shared access to the local digital television network to more than one
hundred other people without authorization by hacking into certain set-top boxes
used on that network, which do not have advanced security features due to cost
considerations. By using a “tracking” technology offered by our CA systems,
which enables an operator to track down the compromised set-up boxes, the local
television network operator identified the points of breach, took measures to
block further unauthorized access and contained the impact of the breach. The
perpetrator was convicted and sentenced to eight months in prison. We believe we
are not liable for such security breach of software or hardware components that
are supplied by other vendors under the terms of our contractual arrangements.
However, our business, financial conditions and results of operations could
still be materially and adversely affected if these security breaches result in
the affected television network operators having difficulty recruiting new
subscribers or retaining existing subscribers. Furthermore, as our CA systems
are used on the affected networks, our reputation could also be harmed by being
associated with such security breaches on our customers’ networks.
We
generally do not have long-term contracts with suppliers of computer chips or
the companies that manufacture our smart cards. If any of our computer chip
suppliers or smart-card manufacturers is unable to fulfill our orders in time or
at all, we may be unable to deliver smart cards to our customers, which could
have a material adverse effect on our business, financial condition and results
of operations.
As a
general matter, we do not have long-term contracts with our suppliers. We
purchase substantially all of the computer chips that are used in our smart
cards from two suppliers, STMicroelectronics, or STM, and Infineon Technologies
AG, or Infineon (and prior to February 2009, indirectly through an agent of
Infineon). In addition, we have arrangements with a number of smart-card
manufacturers, including China Electronics Smart Card Co., Ltd., or China
Electronics, the China Sciences Group, Axalto Smart Card Technology Co., and
Oberthur Card Systems, to embed the computer chips into plastic cards. We
generally place purchase orders with our computer chip and smart card suppliers
as needed to meet our customers’ demand. Our computer chip and smart card
suppliers are generally not under any contractual obligation to accept our
purchase orders or fulfill them within our desired time frame. However, we
currently maintain a one-year contract with each of China Electronics and the
China Sciences Group that requires them to fulfill our orders in accordance with
an agreed schedule. Any significant delay or failure by any of our suppliers or
manufacturers to fulfill our orders for computer chips or smart cards could
force us to obtain computer chips or smart cards from alternative sources at
higher cost, negatively affecting our operating margins, or could prevent us
from delivering smart cards in the required quantities to our customers on time.
Any such failure by us could have a material adverse effect on our reputation
and ability to retain customers, as well as our business, financial condition
and results of operations, and may also subject us to claims from our
customers.
We
face intense competition, which could reduce our market share and harm our
financial performance.
The
market for digital television CA systems and software applications is intensely
competitive. Several of the world’s leading developers and producers of CA
systems, including NDS Group, Irdeto Access BV and Kudelski SA, operate in the
PRC market. We also compete with domestic CA systems vendors, including
Sumavision Technologies Co., Ltd. and DVN Holdings Ltd. Some of our competitors
have substantially greater financial, technical and other resources than we do,
and may respond more quickly than we could to technological or commercial
changes in our industry. In addition, some competitors offer their CA systems at
a lower price or with a longer credit term than we do. We may need to reduce our
prices to compete with them, which may lead to reduced margins or loss of market
share. We cannot assure you that we will be able to compete effectively in the
market for digital television CA systems and software applications in the PRC.
See “Item 4. Information on the Company—B. Business
Overview—Competition.”
We
depend upon key personnel, including our senior executives and technical and
engineering staff, and our business and growth prospects may be severely
disrupted if we lose their services.
Our
future success depends heavily on the continued service of our key executives.
In particular, we rely on the expertise and experience of Mr. Jianhua Zhu,
chairman of our board of directors and our chief executive officer, Dr.
Zengxiang Lu, member of our board of directors and Mr. Dong Li, our president
and chief marketing officer, in our business operations and technology
development efforts, and on their relationships with the regulatory authorities,
our customers, our suppliers, our employees and our operating company, N-S
Digital TV. If any of them becomes unable or unwilling to continue in their
present positions, or if they join a competitor or form a competing company, we
may not be able to replace them easily, our business may be significantly
disrupted and our business, financial condition and results of operations may be
materially and adversely affected. We do not currently maintain key-man
insurance for any of our key personnel. Furthermore, our future success depends
heavily upon our ability to recruit and retain experienced technical and
engineering staff. There is substantial competition for qualified technical
personnel from other companies in our industry as well as from businesses
outside our industry, and we may not be successful in retaining technical and
engineering employees and recruiting new ones. If we are unsuccessful in our
recruitment and retention efforts, our business and prospects may be materially
and adversely affected.
Our
attempts to diversify our business and expand our revenues by providing
value-added digital television services may not be successful and may prove
costly.
We have
been pursuing strategies to expand and diversify our revenues, including
offering value-added digital television services such as content services and
innovative terminal solutions. To this end, we established Beijing Novel-Super
Media Investment Co., Ltd., or N-S Media Investment, and Guangdong SuperTV
Digital Media Co., Ltd., or Guangdong SuperTV, as our wholly owned subsidiaries,
and a joint venture, Dongguan SuperTV Video Info Co., Ltd., or Dongguan SuperTV,
among N-S Digital TV, Guangdong Jiacai Digital Technology Co., Ltd., or Guandong
Jiacai, and a PRC citizen, during the past years. See “Item 4. Information on
the Company—A. History and Development of the Company.” However, we have no
prior experience cooperating with television network operators or other third
parties in providing value-added digital television services, and may not be
successful in doing so. In addition, our attempts to develop this new business
model may be time-consuming and may distract our management from developing our
existing lines of business, which could adversely affect our business, financial
condition and results of operations.
We
may face difficulties implementing our acquisition strategy, including
identifying suitable opportunities and integrating acquired businesses and
assets with our existing operations, which could have a material adverse effect
on our business, financial condition and results of operations.
As part
of our business strategy, we intend to enhance our capabilities by acquiring
other companies, businesses or technologies that complement our existing
business or enhance our product portfolio and proprietary technology. However,
our ability to implement our acquisition strategy will depend on our ability to
identify suitable acquisition candidates, our ability to compete effectively to
attract and reach agreement with acquisition candidates on commercially
reasonable terms and the availability of financing to complete larger
acquisitions, as well as our ability to obtain any required shareholder or
government approvals. In addition, any particular acquisition may not produce
the intended benefits. For example, we may not be successful in integrating
acquisitions with our existing operations and personnel, and the process of
integration may cause unforeseen operating difficulties and expenditures and may
attract significant attention of our management that would otherwise be
available for the ongoing development of our business. If we make future
acquisitions, we may issue new shares that dilute the interests of our other
shareholders, expend cash, incur debt, assume contingent liabilities or create
additional expenses related to the impairment of goodwill or the amortization of
other intangible assets with estimable useful lives.
Our
business could be harmed if a defect in our software, technology or services
interferes with, or causes any failure in, our customers’ systems.
Our
software and technology are integrated into the television transmission
infrastructure of our customers. Accordingly, a defect, error or performance
problem with our software or technology could interfere with, or cause a
critical component of, one or more of our customers’ systems to fail for a
period of time. Any negligence or error of our employees in the course of their
performance of system integration, upgrade or maintenance services for our
customers may also cause malfunctioning, suspension or failure of our customers’
systems. Occurrence of such incidents could result in claims for substantial
damages against us, regardless of whether we are responsible for such failure.
Any claim brought against us could be expensive to defend and require the
expenditure of a significant amount of resources, regardless of whether we
prevail. In addition, we do not currently maintain any product or business
liability insurance. Although we have not experienced any such material
interference or failure in the past, our potential exposure to this risk may
increase as sales of our products and customer demand for our upgrade or
maintenance services grow. Any future problem in this area could cause severe
customer service and public relations problems for our customers.
N-S
Digital TV may be deemed not to be in full compliance with certain legal
regulatory requirements relating to the production and sale of encryption
products, and the relevant PRC government authorities could require N-S Digital
TV to cease such activities and impose administrative penalties including fines,
which could have a material adverse effect on our business, financial condition
and results of operations.
The PRC
government introduced regulations in 1999 generally requiring a company that
engages in the production and sale of encryption products to obtain two
licenses, one for the production of encryption products and the other for the
sale and distribution of encryption products, and the implementation rules for
issuing such two licenses were promulgated in December 2005. Under these
regulations and rules, a company generally is only allowed to produce and/or
sell encryption products that use algorithms designated by the encryption
authority and such products shall also be certified by the encryption authority.
The encryption authority initially designated permitted algorithms for CA
systems in April 2007 and a final and official designation remains pending. Like
many other vendors of CA systems in the PRC, N-S Digital TV has been producing
and selling CA systems using algorithms other than those initially designated by
the encryption authority. We understand the encryption authority has allowed a
transition period, of a duration yet to be determined at the sole discretion of
the encryption authority, for vendors of CA systems to comply with this
requirement to use the algorithms to be finally and officially designated by the
government. See “Item 4. Information on the Company—B. Business Overview—
Regulation—Regulation of Encryption Industry.” N-S Digital TV has engaged in the
production and sale of encryption products since its establishment in May 2004,
but it did not obtain the license for the production of encryption products
until June 2006 and the license for the sale of encryption products until
September 2008. In February 2009, certain CA system products we developed by
using the algorithms designated by the encryption authority were certified by
the encryption authority. However, we have not decided when N-S Digital TV will
produce and sell those products using the designated algorithms, and various
factors, in addition to the permissible transition period for adoption, will
affect this decision, including whether products using algorithms designated by
the encryption authority will be generally accepted by the cable television
industry (including CA system vendors and cable television operators). If N-S
Digital TV fails to adopt the algorithms designated by the encryption authority
for any of CA systems products it produces and sells by the end of the
transition period or at any time during the transition period at the request of
the government, it may be required to discontinue the production and sale of its
non-compliant CA systems. If the relevant PRC government authorities deem N-S
Digital TV’s production of encryption products prior to June 2006 or sale of
encryption products prior to September 2008 to be in violation of the applicable
regulations, they may impose sanctions against N-S Digital TV. These sanctions
may include confiscation of income from non-compliant activities, fines of up to
three times the amount of income from non-compliant activities and revocation of
the licenses already issued. Imposition of such sanctions may result in material
disruptions to our business operations, damage to our reputation and significant
financial losses.
Enforcement
of certain recent PRC regulatory requirements regarding the use of encryption
products may prevent prospective customers from purchasing our CA systems and
our business revenues and net income could be materially reduced as a
result.
In March
2007, the PRC encryption authority introduced regulations that require users to
use only encryption products that are certified by the encryption authority. The
CA systems we currently produce and sell have not been certified by the
encryption authority because we have not adopted the government-designated
algorithms for such CA systems. King & Wood, our PRC counsel, has advised us
that because the encryption authority has allowed a transition period, of a
duration yet to be determined at the sole discretion of the encryption
authority, for us to adopt the algorithms to be finally and officially
designated by the government, it is unlikely that the encryption authority will
enforce the above-mentioned regulatory requirements with respect to the use or
purchase of our CA systems during that transition period. In February 2009,
certain CA system products we developed by using the algorithms designated by
the encryption authority were certified by the encryption authority.
However, as stated
above, we have not decided when N-S Digital TV will produce and sell those CA
system products certified by the encryption authority and various factors, in
addition to the permissible transition period for adoption, will affect this
decision. If we have not obtained the certification for the CA systems that we
produce and sell upon the expiration of the transition period or at an earlier
time the PRC encryption authority may otherwise require, enforcement of the
above-mentioned regulatory requirements could prevent our prospective customers
from purchasing our non-compliant CA systems, which could materially reduce our
revenues and net income. In addition, even if we produce and sell products
certified by the PRC encryption authority, we cannot assure you that we will be
able to successfully market such products.
We
may incur development costs and may be required to pay certain fees in order to
use the algorithms designated by the PRC encryption authority for CA
systems.
A company
generally is only allowed to produce and/or sell encryption products that have
adopted the algorithms designated by the PRC encryption authority. As the
encryption authority did not designate any algorithms for CA systems until April
2007, we have been using algorithms in our CA systems other than those
designated by the encryption authority. If we are required by the government
authorities to instead use the algorithms designated by the encryption authority
in our CA systems, we may incur costs to develop new products adopting such
algorithms and may have to pay certain fees to the government for such usage.
Development costs and the payment of such fees, the amount of which remains
unclear, may have a material adverse effect on our profit margin and
significantly reduce our profitability if we cannot pass on such increased costs
to our customers.
If
we fail to register as our trademarks the English and Chinese names for “NOVEL
SUPERTV”, our business could suffer.
We used
to depend on N-T Information Engineering for the use of the English and Chinese
names for “NOVEL-TONGFANG” and a graphic logo pursuant to a non-exclusive
license agreement. N-T Information Engineering has registered these names and
this logo as trademarks. Pursuant to our agreement with N-T Information
Engineering, we may use these trademarks free of charge for as long as they
remain registered. Prior to January 2008, we used these trademarks in all of the
CA systems we sold in the PRC. The registrations for these trademarks expire at
various dates in 2013. We also used “NOVEL-TONGFANG” as part of the name of N-S
Digital TV.
In
November 2007, we ceased using “NOVEL-TONGFANG” in N-S Digital TV’s name by
changing its name from “Beijing Novel-Tongfang Digital TV Technology Co., Ltd.”
to “Beijing Novel-Super Digital TV Technology Co., Ltd.” In January 2008, we
ceased using the English and Chinese names for “NOVEL-TONGFANG” as trademarks
for our products and we intend not to use such trademarks in the future. We
started to use the English and Chinese names for “NOVEL SUPERTV” in combination
with the graphic logo we licensed from N-T Information Engineering as the
trademarks for our products. In December 2008, we acquired for free the licensed
graphic logo from N-T Information Engineering. We are currently in the process
of applying to register the trademarks of the English and Chinese names for
“NOVEL SUPERTV” as well as the trademark for a combination of Chinese and
English names for “NOVEL SUPERTV” and the graphic logo. We cannot assure you
that the registration of such trademarks containing the English and Chinese
names of “NOVEL SUPERTV” will finally be approved by the PRC trademark
registration authority. If we fail to have such trademarks registered, we may
not be able to prevent any third parties, including our competitors, from using
the same trademarks for their products or services. In addition, if a third
party has already registered names similar to “NOVEL SUPERTV” as its trademarks,
we may be prevented from using the English and Chinese names for “NOVEL SUPERTV”
as our trademarks. In either case, our business could suffer as a
result.
If
we fail to protect our intellectual property rights, it could harm our business
and competitive position.
We are
required to continually improve our products and services to stay competitive in
the marketplace, and as a result intellectual property is critical to our
continued success. We rely on a combination of patent, trademark and copyright
laws, trade secrets, confidentiality procedures and contractual provisions to
protect our intellectual property rights and the obligations we have to third
parties from whom we license intellectual property rights. Nevertheless, these
afford only limited protection and policing unauthorized use of proprietary
technology can be difficult and expensive. In addition, intellectual property
rights historically have not been enforced in the PRC to the same extent as in
the United States, and intellectual property theft presents a serious risk in
doing business in the PRC. We may not be able to detect unauthorized use of, or
take appropriate steps to enforce, our intellectual property rights and this
could have a material adverse effect on our business, financial condition and
results of operations.
We
may be exposed to infringement or misappropriation claims by third parties that,
if determined adversely to us, could cause us to pay significant damage
awards.
Our
success depends largely on our ability to use and develop our technology and
know-how without infringing the intellectual property rights of third parties.
The validity and scope of any claims relating to our technology patents would
involve complex technological, legal and factual questions and analyses and,
therefore, the outcome would be highly uncertain. We may be subject to
litigation involving claims of patent infringement or violation of other
intellectual property rights of third parties. The defense of such claims would
be both costly and time-consuming, and could significantly divert the efforts
and resources of our management and technical personnel. An adverse
determination in any such litigation or proceedings to which we may become a
party could subject us to significant liability to third parties, require us to
seek licenses from third parties, pay ongoing royalties or redesign our
products, or subject us to injunctions prohibiting the manufacture and sale of
our products or the use of our technologies. Protracted litigation could also
result in our customers or potential customers deferring or limiting their
purchase or use of our products until resolution of such litigation. In
addition, we could face disruptions to our business operations and damage to our
reputation, and our financial condition and results of operations could be
materially adversely affected.
We
rely on a single facility for almost all of our business operations. Any
destruction of, or significant disruption to, this facility could severely
affect our ability to conduct normal business operations.
Almost
all of our business operations, including the encoding of our smart cards, which
is an essential part of the smart card manufacturing process, all our research
and development activities and our corporate headquarters are concentrated
within a single facility that we lease in Beijing, PRC. As we do not maintain
back-up facilities, we rely on this facility for the continued operation of our
business. In addition, we currently do not maintain any business disruption or
similar insurance coverage. A major earthquake, fire or other catastrophic event
that results in the destruction of, or significant disruption to, the facility
could severely affect our ability to complete sales or conduct other normal
business operations, which would materially reduce our revenues and net
income.
Our
operating results may fluctuate significantly from quarter to quarter, which
could adversely affect the price of our ADSs.
Our
quarterly operating results have varied significantly in the past and are likely
to continue to vary significantly in the future. Our quarterly revenues may
fluctuate as a result of a number of factors, many of which are outside of our
control. For example, our quarterly revenues substantially depend upon the
timing of smart card orders placed by our customers. A significant portion of
our quarterly revenues has generally reflected orders from a small number of
large customers for our CA systems. Our cost of revenues and
operating expenses may also fluctuate from quarter to quarter. As a result, you
may not be able to rely on period-to-period comparisons of our operating results
as an indication of our future performance. Our actual quarterly results may
differ from market expectations, which could adversely affect the price of our
ADSs.
Failure
to manage our growth or develop appropriate internal organizational structures,
internal control environment and risk monitoring and management systems in line
with our growth could negatively affect our business and prospects.
Our
business and operations have expanded since our formation in 2004. Significant
management resources must be expended to develop and implement appropriate
structures for internal organization and information flow, an effective internal
control environment and risk monitoring and management systems in line with our
growth, as well as to hire and integrate qualified employees into our
organization. We cannot assure you that our existing internal control and risk
monitoring and management systems would continue to be adequate. If we fail to
appropriately develop and implement structures for internal organization and
information flow, an effective internal control environment and a risk
monitoring and management system, we may not be able to identify unfavorable
business trends, administrative oversights or other risks that could materially
adversely affect our business, financial condition and results of
operations.
If
we fail to maintain an effective system of internal control over financial
reporting, our ability to accurately and timely report our financial results or
prevent fraud may be adversely affected. As a result, investor confidence and
the trading price of our ADSs may be adversely impacted.
We are subject to the Sarbanes-Oxley
Act of 2002, or the Sarbanes-Oxley Act. Section 404 of the Sarbanes-Oxley Act
requires that we include a report of management on our internal control over
financial reporting in our annual report on Form 20-F beginning with our annual
report for the fiscal year ended December 31, 2008. In addition, our independent
registered public accounting firm must report on the effectiveness of our
internal control over financial reporting. Our management concluded that our
internal control over financial reporting was effective as of December 31, 2009,
the end of the period covered by this annual report, and our independent
registered public accounting firm opined that we maintained effective internal
control over financial reporting of the same period. However, we may fail to
maintain effective internal controls over financial reporting in the future, in
which case we and the independent registered public accounting firm may not be
able to conclude that we have effective internal control over financial
reporting. Moreover, even if our management concludes that our internal control
over financial reporting is effective, our independent registered public
accounting firm may disagree. If such independent registered public accounting
firm is not satisfied with our internal control or the level at which our
control is documented, designed, operated or reviewed, or if it interprets the
relevant requirements differently from us, then it may not be able to issue an
unqualified opinion. In addition, our reporting obligations as a public company
may place a significant strain on our management, operational and financial
resources and systems for the foreseeable future.
Moreover,
if we fail to maintain the adequacy of our internal control over financial
reporting, as these standards are modified, supplemented or amended from time to
time, we may not be able to conclude on an ongoing basis that we have effective
internal control over financial reporting in accordance with Section 404 of the
Sarbanes-Oxley Act. If we fail to achieve and maintain an effective internal
control environment, we could suffer material misstatements in our financial
statements and fail to meet our reporting obligations, which would likely cause
investors to lose confidence in our reported financial information. This could
harm our operating results and lead to a decline in the trading price of our
ADSs. Furthermore, ineffective internal control over financial reporting could
expose us to increased risk of fraud or misuse of corporate assets and subject
us to potential delisting from the stock exchange on which we list, regulatory
investigations and civil or criminal sanctions.
We
may need additional capital and we may not be able to obtain it.
In order
for us to grow, remain competitive, develop new products and services, expand
our customer base and carry out acquisitions, we may seek to obtain additional
capital in the future through selling additional equity or debt securities or
obtaining a credit facility. Our ability to obtain additional capital in the
future is subject to a variety of uncertainties, including:
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our
future financial condition, results of operations and cash
flows;
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conditions
in the United States and other capital markets in which we may seek to
raise funds;
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investors’
perception of, and demand for, securities of digital television components
and related companies; and
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economic,
political and other conditions in the PRC and
elsewhere.
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We may be
unable to obtain additional capital in a timely manner or on acceptable terms or
at all. Furthermore, the additional issuances of equity securities may result in
significant dilution to our shareholders. The incurrence of debt would result in
increased interest expense and could require us to agree to operating and
financial covenants that would restrict our operations.
We
were classified as a passive foreign investment company, or PFIC, for 2009,
which resulted in adverse United States federal income tax consequences to U.S.
holders of our ADSs and may result in additional adverse United States Federal
income tax consequences to such holders in subsequent years.
Based on
an analysis of the value of our assets as of December 31, 2009, we were a PFIC
during 2009 for the U.S. federal income tax purposes. We have substantial
passive assets in the form of cash and cash equivalents, among others, and can
provide no assurance that we will not continue to be classified as a PFIC for
the taxable year 2010 or future taxable years, as PFIC status is tested each
year and depends on our assets and income in such year. Our PFIC status for the
current taxable year 2010 will not be determinable until the close of the
taxable year ending December 31, 2010.
We will
be classified as a PFIC in any future taxable year if either: (1) the average
percentage value of our gross assets during the taxable year that produce
passive income or are held for the production of passive income is at least 50%
of the value of our total gross assets; or (2) 75% or more of our gross income
for the taxable year is passive income. If we hold substantial cash, cash
equivalents and other passive assets, as we currently do, a significant decrease
in the market price of our outstanding shares would increase the risk of us
becoming a PFIC.
In any
taxable year in which we are classified as a PFIC and you hold our ADSs or
shares and you are a U.S. holder, and unless you make a mark-to-market election,
you will generally be taxed at higher ordinary income rates, rather than lower
capital gain rates, if you dispose of our ADSs or shares for a gain in a later
year, even if we are not a PFIC in that year. In addition, a portion of the tax
imposed on your gain would be increased by an interest charge. Moreover, you
will not be able to benefit from any preferential tax rate with respect to any
dividend distribution that you may receive from us in that year or in the
following year. Finally, you will also be subject to special United States
federal income tax reporting requirements. For more information on the United
States federal income tax consequences to you that would result from our
classification as a PFIC, including the consequences of making a mark to market
selection, see “Item 10. Additional Information—E. Taxation—United States
Federal Income Taxation—PFIC Rules.” You should consult your tax advisor
regarding the application of the PFIC rules to your investment in our ADSs or
shares.
Risks
Relating to Our Corporate Structure
If
the PRC government determines that N-S Digital TV is a vendor of non-PRC CA
systems by virtue of the agreements that establish the structure for operating
our business, we could face difficulty selling our CA systems in the
PRC.
SARFT
policy requires any cable television network operator who uses a non-PRC CA
system to install a parallel PRC CA system. Under this policy, vendors of
non-PRC CA systems may sell only to cable network operators who have already
installed a PRC CA system or who are willing to purchase a parallel PRC CA
system. This may result in a competitive disadvantage for vendors of non-PRC CA
systems relative to vendors of PRC CA systems. Such policy does not expressly
indicate whether the CA systems produced by a foreign-invested company
incorporated in the PRC, such as our subsidiary Beijing Super TV Co., Ltd., or
Super TV, fall into the category of non-PRC CA systems. In light of this
ambiguity, in order to avoid our CA systems being deemed non-PRC CA systems, we
have established N-S Digital TV, which is wholly owned by PRC persons, to
produce and sell our CA systems. We do not have any equity interest in N-S
Digital TV and instead enjoy the economic benefits of, and have substantive
control over, N-S Digital TV through contractual arrangements with N-S Digital
TV and its shareholders. N-S Digital TV also holds the licenses and approvals
that are essential to our business, and we derive a significant portion of our
revenues from N-S Digital TV.
There are
substantial uncertainties regarding the interpretation and application of the
above-described PRC government policy and relevant PRC laws and regulations.
Accordingly, the PRC government may determine that N-S Digital TV is a vendor of
non-PRC CA systems by virtue of our contractual arrangements with N-S Digital TV
and its shareholders. If N-S Digital TV is deemed to be a vendor of non-PRC CA
systems by the PRC government, cable network operators may cancel their orders
for our CA systems to avoid being required to install a parallel PRC CA system,
and we may also lose potential customers who are not willing, or have no plan,
to install a parallel PRC CA system for economic or other reasons. As a result,
our business, financial condition and results of operations could be materially
and adversely affected.
The
agreements that establish the structure for operating our business may result in
the relevant PRC government regulators revoking or refusing to renew N-S Digital
TV’s licenses for the production and sale of commercial encryption products, or
refusing to issue any other license required to engage in an encryption-related
business.
Our CA
systems business uses encryption technology and thus is required by the relevant
PRC laws and regulations to obtain licenses to produce and sell commercial
encryption products. Although foreign-invested enterprises incorporated in the
PRC, such as our subsidiary, Super TV, are not expressly prohibited from
conducting a business that uses encryption technology, foreign-invested
enterprises may have difficulty obtaining the necessary license due to the PRC
encryption authority’s generally restrictive approach towards foreign
participation in the PRC encryption industry. N-S Digital TV, which is wholly
owned by PRC persons and through which we conduct our CA systems business, has
obtained licenses to produce and sell commercial encryption products as required
for our business.
Our
contractual arrangements with N-S Digital TV and its shareholders provide us
with the economic benefits of, and substantive control over, N-S Digital TV. If
the PRC encryption authority determines that our control over, or relationship
with, N-S Digital TV through those contractual arrangements is contrary to their
generally restrictive approach towards foreign participation in the PRC
encryption industry, we can not assure you that the PRC encryption authority
will not reconsider N-S Digital TV’s eligibility to hold the licenses to produce
and sell commercial encryption products. The PRC encryption authority may
revoke, or refuse to renew, N-S Digital TV’s licenses to produce and sell
commercial encryption products, or refuse to grant any other encryption-related
license that may be required for our business in the future. If that were to
happen, we might have to discontinue all or a substantial portion of our
business pending the reissuance, extension or issuance of the required license.
In addition, we might have to restructure our operation in order to have such
licenses reissued, extended or issued. Such restructuring may result in a loss
or reduction of our control over, or the economic benefits we enjoy from, N-S
Digital TV under existing contractual arrangements. As a result, our business,
financial condition and results of operations could be materially and adversely
affected.
Our
contractual arrangements with our operating company, N-S Digital TV, and its
shareholders may not be as effective in providing operational control as direct
ownership and may be difficult to enforce.
In order
for our CA systems not to be deemed by the PRC government as non-PRC CA systems,
which may result in a competitive disadvantage for us in the PRC market, we have
established N-S Digital TV, which is wholly owned by PRC persons, to produce and
sell our CA systems in the PRC. As a result, we generate a significant portion
of our revenues through N-S Digital TV. We do not have any equity interest in
N-S Digital TV and instead enjoy the economic benefits of, and have substantive
control over, N-S Digital TV through contractual arrangements with N-S Digital
TV and its shareholders. N-S Digital TV also holds the licenses and approvals
that are essential to our business. For a description of such contractual
arrangements, see “Item 7. Major Shareholders and Related Party Transactions—B.
Related Party Transactions.” These arrangements may not be as effective in
providing control over our operations as direct ownership would be. In
particular, N-S Digital TV could fail to perform or make payments as required
under these contractual arrangements, and we would have to rely on the PRC legal
system to enforce these arrangements, which may not be effective.
The
shareholders or directors of N-S Digital TV may have conflicts of interest with
us.
We do not
have any equity interest in N-S Digital TV and instead enjoy the economic
benefits of, and have substantive control over, N-S Digital TV through
contractual arrangements with N-S Digital TV and its shareholders. Conflicts of
interests may arise between us and the shareholders of N-S Digital TV, who are
currently our employees. In addition, two directors of N-S Digital TV are also
directors of our company, and conflicts may arise between the duties they owe to
N-S Digital TV and the duties they owe to us. We cannot assure you that if any
such conflicts arise, any or all of the shareholders or directors of N-S Digital
TV, as the case may be, will act in the best interests of our company or that
such conflicts will be resolved in our favor. We have no specific policies or
procedures for resolving any such conflicts that may arise. In addition, these
shareholders or directors may breach, or cause N-S Digital TV to breach or
refuse to renew, the existing contractual arrangements that allow us to
effectively control N-S Digital TV and receive economic benefits from it. If we
cannot satisfactorily resolve any conflicts of interest or disputes between us
and the shareholders or directors of N-S Digital TV, we may have to rely on
legal proceedings, which may involve substantial uncertainty and result in
disruptions to our business and operations.
Contractual
arrangements we have entered into between Super TV and N-S Digital TV may be
subject to scrutiny by the PRC tax authorities and any finding that we or N-S
Digital TV owe additional taxes could substantially reduce our net income and
the value of your investment.
Under
applicable PRC laws, rules and regulations, arrangements and transactions among
related parties may be subject to audit or challenge by the PRC tax authorities.
We could face material adverse tax consequences if the PRC tax authorities
determine that the contractual arrangements between Super TV, our wholly owned
subsidiary in the PRC, and N-S Digital TV do not represent an arm’s-length price
and consequently adjust N-S Digital TV’s income in the form of a transfer
pricing adjustment. A transfer pricing adjustment could, among other things,
result in a reduction of expense deductions recorded by N-S Digital TV, which
could in turn increase its tax liabilities. In addition, the PRC tax authorities
may impose late payment fees and other penalties.
Certain
of our existing shareholders have substantial influence over our company and
their interests may not be aligned with the interests of our other
shareholders.
As of
March 31, 2010, our three largest shareholders beneficially owned a total of
approximately 61.6% of our outstanding shares. Accordingly, they will have
significant influence in determining the outcome of any corporate transaction or
other matter submitted to the shareholders for approval, including mergers,
consolidations and the sale of all or substantially all of our assets, election
of directors and other significant corporate actions. They will also have the
power to prevent or cause a change in control. In addition, without the consent
of these shareholders, we could be prevented from entering into transactions
that could be beneficial to us. These shareholders may cause us to take actions
that are opposed by other shareholders as the interests of these shareholders
may differ from the interests of our other shareholders. See “Item 7. Major
Shareholders and Related Party Transactions” for more information regarding the
share ownership of our officers, directors and significant
shareholders.
Risks
Relating to the People’s Republic of China
Our
operations may be materially adversely affected by changes in the economic,
political and social conditions of the PRC.
Substantially
all of our non-cash assets are located in, and all of our revenue is sourced
from, the PRC. Accordingly, our business, financial condition, results of
operations and prospects may be influenced to a significant degree by political,
economic and social conditions in the PRC generally and by continued economic
growth in the PRC as a whole.
The PRC
economy differs from the economies of most developed countries in many respects,
including with respect to the extent of government involvement, level of
development, growth rate, control of foreign exchange and allocation of
resources. While the PRC economy has experienced significant growth over the
past three decades, growth has been uneven across different regions and among
various economic sectors. The PRC government has implemented various measures to
encourage economic development and guide the allocation of resources. Some of
these measures benefit the overall PRC economy, but may also have a negative
effect on us. For example, our operating results and financial condition may be
adversely affected by government control over capital investments or changes in
tax regulations that are applicable to us. We cannot predict the possible impact
of any future economic policies of the PRC government on our business and
operations.
Due to an
economic downturn caused by the recent global financial crisis, the PRC’s gross
domestic product growth rate decreased to 9.0% in 2008 and further to 8.7% in
2009. In response to the global financial crisis, the PRC government has adopted
a series of measures to stimulate the economy. While such measures may help
create a positive policy environment for the economy in the PRC, there are
uncertainties with respect to the effects of such measures. In addition, we
cannot assure you when global economic recovery may occur, or, even when global
economic recovery does occur, that demand for our products and services will
increase. Any further slowdown in the economic growth of the PRC could lead to
further reduced business activities, including a slowing-down or decline in
investment in cable television networks, which in turn may result in a reduction
of demand for our products and services and thus adversely affect our revenues
and profitability.
Uncertainties
in the interpretation and enforcement of PRC laws and regulations could limit
the legal protections available to you and us.
The PRC
legal system is a civil law system based on written statutes. Unlike common law
systems, it is a system in which legal decisions have limited value as
precedents. In 1979, the PRC government began to promulgate a comprehensive
system of laws and regulations governing economic matters in general. The
overall effect of legislation over the past three decades has significantly
increased the protections afforded to various forms of foreign or private-sector
investment in the PRC. Our PRC operating subsidiary, Super TV, is a
foreign-invested enterprise and is subject to laws, rules and regulations
applicable to foreign investment in the PRC as well as laws and regulations
applicable to foreign-invested enterprises. N-S Digital TV is a privately owned
company and is subject to various PRC laws and regulations that are generally
applicable to companies in the PRC. These laws, rules and regulations change
frequently, and their interpretation and enforcement involve uncertainties. For
example, we may have to resort to administrative and court proceedings to
enforce the legal protections that we enjoy either by law or contract. However,
since PRC administrative and court authorities have significant discretion in
interpreting and implementing statutory and contractual terms, it may be more
difficult to evaluate the outcome of administrative and court proceedings and
the level of legal protection we enjoy than in more developed legal systems.
These uncertainties may also impede our ability to enforce the contracts we have
entered into, and materially impair our business and operations.
The
approval of the China Securities Regulatory Commission, or the CSRC, might be
required in connection with our initial public offering under certain PRC
regulation; failure to obtain this approval, if required, could have a material
adverse effect on our business, financial condition, results of operations and
reputation as well as the trading price of our ADSs.
On August
8, 2006, six PRC regulatory agencies, including the Ministry of Commerce, or the
MOFCOM, the State-owned Assets Supervision and Administration Commission, the
State Administration for Taxation, or the SAT, the State Administration for
Industry and Commerce, the CSRC and the State Administration of Foreign
Exchange, or the SAFE, jointly adopted the Regulations on Mergers and
Acquisitions of Domestic Enterprises by Foreign Investors, or the M&A
Rules, which became effective on September 8, 2006. The M&A Rules, among
other things, include provisions that purport to require that an offshore
special purpose vehicle formed for the purpose of an overseas listing of
securities in a PRC company obtain the approval of the CSRC prior to the listing
and trading of such special purpose vehicle’s securities on an overseas stock
exchange.
On
September 21, 2006, the CSRC published on its official website procedures
regarding its approval of overseas listings by special purpose vehicles. The
CSRC approval procedures require the filing of an application and supporting
documents with the CSRC.
We
completed the initial listing and trading of our ADSs on the New York Stock
Exchange, or the NYSE, on October 11, 2007. We did not seek CSRC approval in
connection with our initial public offering. Our PRC counsel, King & Wood,
advised us that, based on their understanding of the current PRC laws,
regulations and rules and the procedures announced on September 21, 2006,
because we completed our restructuring in 2004 in connection with an equity
investment in our company by a private equity investor more than two years prior
to the promulgation of the M&A Rules, we were not and are not required by
the M&A Rules to apply to the CSRC for approval of our initial public
offering, unless we are clearly required to do so by any rules promulgated in
the future. See “Item 4. Information on the Company—B. Business
Overview—Regulation—Regulation of Overseas Listings.” However, the application
of the M&A Rules remains unclear. If the CSRC or another PRC regulatory
agency subsequently determines that the CSRC’s approval was required for our
initial public offering, we may face sanctions by the CSRC or another PRC
regulatory agency. If this happens, these regulatory agencies may impose fines
and penalties on our operations in the PRC, limit our privileges in the PRC, or
take other actions that could have a material adverse effect on our business,
financial condition, results of operations and prospects, as well as the trading
price of our ADSs.
PRC
regulations relating to offshore investment activities by PRC residents may
increase the administrative burden we face and create regulatory uncertainties
that could restrict our overseas and cross-border investment activity, and a
failure by our shareholders who are PRC residents to make any required
applications and filings pursuant to such regulations may prevent us from being
able to distribute profits and could expose us and our PRC resident shareholders
to liability under PRC law.
The SAFE
has promulgated regulations that require PRC residents and PRC corporate
entities to register with and obtain approvals from relevant PRC government
authorities in connection with their direct or indirect offshore investment
activities. These regulations may apply to our shareholders who are PRC
residents in connection with our prior and any future offshore
acquisitions.
The SAFE
regulations required registration by March 31, 2006 of direct or indirect
investments previously made by PRC residents in offshore companies prior to the
implementation of the Notice
on Issues Relating to the Administration of Foreign Exchange in Fund-Raising and
Reverse Investment Activities of Domestic Residents Conducted via Offshore
Special Purpose Companies on November 1, 2005, or SAFE Notice 75. In May
2007, the SAFE issued guidance to its local branches with respect to the
implementation of SAFE Notice 75, known as SAFE Notice 106. If a PRC shareholder
with a direct or indirect stake in an offshore parent company fails to make the
required SAFE registration, the PRC subsidiaries of such offshore parent company
may be prohibited from making distributions of profit to the offshore parent and
from paying the offshore parent proceeds from any reduction in capital, share
transfer or liquidation in respect of the PRC subsidiaries. Furthermore, failure
to comply with the various SAFE registration requirements described above could
result in liability under PRC law for foreign exchange evasion.
We have
notified holders of our ordinary shares whom we know are PRC residents to
register with the local branches of the SAFE and update their registration as
required by the relevant SAFE regulations described above. However, we cannot
assure you that all of our shareholders who are PRC residents will comply with
our request to make or obtain any registrations or approvals required under
these regulations or other related legislation. If any existing shareholder
transfers any of our shares or ADSs to another PRC resident, it is unclear
whether such new shareholder is also required to make the SAFE registration.
Furthermore, as there is uncertainty concerning the reconciliation of the new
regulation with other approval requirements, it is unclear how the regulation,
and any future regulation concerning offshore or cross-border transactions, will
be interpreted, amended and implemented by the relevant government authorities.
The failure or inability of our PRC resident shareholders to obtain any required
approvals or make any required registrations may subject us to fines and legal
sanctions, restrict our cross-border investment activities or obtaining
shareholders loans, and prevent us from being able to make distributions or pay
dividends, as a result of which our business operations and our ability to
distribute profits to you could be materially and adversely
affected.
We may be subject
to fines and legal sanctions if we or our employees who are PRC citizens fail to
comply with the PRC regulations relating to employee share options granted by
overseas listed companies to PRC citizens.
In March
2007, the SAFE issued the Application Procedures for Foreign
Exchange Administration for Domestic Individuals Participating in Employee Stock
Holding Plans or Share Option Plans of Overseas Listed Companies, or SAFE
Notice 78. Under SAFE Notice 78, PRC individuals who participate in an employee
stock holding plan or share option plan of an overseas listed company are
required, through a PRC domestic agent or PRC subsidiary of the overseas listed
company, to register with the SAFE and complete certain other procedures. As we
are an overseas listed company, we and our PRC employees who have been granted
share options under our stock incentive plans are subject to SAFE Notice 78.
Although we have registered for us and on behalf of our employees with the
relevant local SAFE branch in 2008 for our employee stock incentive plans, there
exist significant uncertainties in practice with respect to the interpretation
and implementation of SAFE Notice 78 and we can not assure you that we or our PRC employees will
be in full compliance with SAFE Notice 78. If the SAFE or other PRC government
authorities determine that we or our PRC employees fail to comply with the
provisions of SAFE Notice 78, we or they may be subject to fines and legal
sanctions, which could have a material adverse effect on the implementation of
our employee stock incentive plans and our business operations.
We
may rely on dividends and other distributions on equity paid by our operating
subsidiary to fund cash and financing requirements, and limitations on the
ability of our operating subsidiary to pay dividends to us could materially
restrict on our ability to conduct our business.
We, as a
holding company, may rely on dividends and other distributions on equity paid by
our operating subsidiary, Super TV, for our cash and financing requirements,
including the funds necessary to pay dividends and other cash distributions to
our shareholders, service any debt we may incur and pay our operating expenses.
If Super TV incurs debt on its own behalf in the future, the instruments
governing the debt may restrict its ability to pay dividends or make other
distributions to us. Furthermore, relevant PRC laws and regulations permit
payments of dividends by Super TV only out of its retained earnings, if any,
determined in accordance with PRC accounting standards and
regulations.
Under
applicable PRC laws, rules and regulations, Super TV is required to set aside
10% of its after-tax profits each year to fund a statutory reserve until the
accumulated amount of such reserve has exceeded 50% of its registered capital.
This reserve is not distributable as cash dividends to equity owners. As a
result of these PRC laws, rules and regulations, Super TV is restricted in its
ability to transfer a portion of its net assets to us in the form of dividends.
Limitations on the ability of Super TV to pay dividends to us could materially
and adversely limit our ability to grow, make investments or acquisitions that
could be beneficial to our businesses, pay dividends, or otherwise fund and
conduct our business.
Restrictions
on currency exchange may limit our ability to effectively utilize our revenues
as well as the ability of our PRC subsidiaries to obtain debt or equity
financing from financial institutions or investors outside the PRC, including
us.
Substantially
all of our operating revenues have been denominated in Renminbi. The Renminbi is
currently convertible under the “current account,” which includes dividends,
trade and service-related foreign exchange transactions, but not under the
“capital account,” which includes foreign direct investment and loans.
Currently, Super TV may purchase foreign exchange for settlement of “current
account transactions,” including purchase of imported computer chips and payment
of dividends to us, without the approval of the SAFE by complying with certain
procedural requirements. However, the relevant PRC governmental authorities may
limit or eliminate our ability to purchase foreign currencies in the future for
current account transactions. Since a significant amount of our future revenues
will be denominated in Renminbi, any existing and future restrictions on
currency exchange may limit our ability to utilize revenues generated in
Renminbi to purchase computer chips from suppliers outside of the PRC or fund
our business activities outside of the PRC denominated in foreign currencies or
pay dividends in foreign currencies to our shareholders, including holders of
our ADSs.
In
addition, foreign exchange transactions under the capital account are still
subject to limitations and require approvals from, or registration with, the
SAFE and other relevant PRC governmental authorities. This could affect the
ability of Super TV to obtain foreign exchange through debt or equity financing,
including by means of loans or capital contributions from us.
PRC
regulation of loans and investment by offshore holding companies to PRC entities
may delay or prevent us from using the proceeds we received from our initial
public offering, which could materially and adversely affect our liquidity and
our ability to fund and expand our business.
As an
offshore holding company, we may make loans or additional capital contributions
to Super TV, our wholly owned subsidiary in the PRC, in order to utilize the
proceeds we received from our initial public offering. Any loans to Super TV are
subject to PRC regulations and approvals. For example:
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loans
by us to Super TV, a foreign-invested enterprise, cannot exceed statutory
limits and must be registered with the SAFE or its local counterpart;
and
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loans
by us to N-S Digital TV, which is a domestic PRC entity, and its
subsidiaries must be approved by the relevant government authorities and
must also be registered with the SAFE or its local
counterpart.
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We may
also decide to finance Super TV by means of capital contributions, and such
contributions must be approved by the MOFCOM or its local counterpart. We are
unlikely to finance N-S Digital TV and its subsidiaries by means of capital
contributions due to regulatory issues discussed in “Item 4. Information on the
Company—B. Business Overview—Regulation—Regulation of the Cable Television
Industry. ” We may not be able to obtain the relevant government registrations
or approval on a timely basis, if at all, with respect to future loans or
capital contributions by us to Super TV or to N-S Digital TV and its
subsidiaries. If we fail to do so, our ability to use the proceeds of our
initial public offering and to capitalize our PRC operations may be negatively
affected, which could materially and adversely affect our liquidity and our
ability to fund and expand our business.
Fluctuations
in exchange rates could result in foreign currency exchange losses.
As
substantially all of our operating revenues are denominated in Renminbi and the
net proceeds from our initial public offering are denominated in U.S. dollars,
fluctuations in exchange rates between U.S. dollars and Renminbi will affect the
relative purchasing power of these proceeds and our balance sheet and earnings
per share in U.S. dollars. Appreciation or depreciation in the value of the
Renminbi relative to the U.S. dollar would affect our financial results reported
in U.S. dollar terms without giving effect to any underlying change in our
business, financial condition or results of operations. Since July 2005, the
Renminbi is no longer pegged solely to the U.S. dollar. Instead, the Renminbi is
reported to be pegged against a basket of currencies, determined by the People’s
Bank of China, against which it can rise or fall by as much as 0.3% each day.
This permitted floating range was raised to 0.5% in May 2007. The Renminbi may
appreciate or depreciate significantly in value against the U.S. dollar in the
long term, depending on the fluctuation of the basket of currencies against
which it is currently valued, or it may be permitted to enter into a full float,
which may also result in a significant appreciation or depreciation of the
Renminbi against the U.S. dollar. Fluctuations in the exchange rate will also
affect the relative value of dividends, if any, payable on our ordinary shares
in U.S. dollar terms and the value of any U.S. dollar-denominated investments we
make in the future. In addition, since substantially all of our operating
revenues are denominated in Renminbi while approximately 40% of our cost of
revenues is denominated in U.S. dollars, fluctuations in the exchange rate could
also impact our financial condition and results of operations.
Very
limited hedging transactions are available in the PRC to reduce our exposure to
exchange rate fluctuations. To date, we have not entered into any hedging
transactions in an effort to reduce our exposure to foreign currency exchange
risk. While we may decide to enter into hedging transactions in the future, the
availability and effectiveness of these hedges may be limited and we may not be
able to successfully hedge our exposure at all. In addition, our currency
exchange losses may be magnified by PRC exchange control regulations that
restrict our ability to convert Renminbi into foreign currency.
The
discontinuation of any of the preferential tax treatments or the financial
incentives currently available to us in the PRC could adversely affect our
business, operating results and financial condition.
The PRC
government has provided various incentives to Super TV and N-S Digital TV. These
incentives include reduced enterprise income tax rates, value-added tax refunds
and tax holidays. For example, as high-and-new technology enterprises
incorporated and operated in the Beijing High-Tech Development Experimental
Zone, which is a designated high-and-new technology development zone, each of
Super TV and N-S Digital TV is entitled to a preferential income tax rate of 15%
(against the standard income tax rate of 33% before January 1, 2008 and 25% from
January 1, 2008). In addition, each of Super TV and N-S Digital TV is entitled
to income tax exemption from 2004 to 2006 and a 50% reduction of income tax from
2007 to 2009. Furthermore, for certain software-related products that are
qualified as “software products” by PRC tax authorities, we received tax refunds
which effectively reduce the applicable value-added tax rate from 17% to
3%.
Super TV
and N-S Digital TV must meet a number of financial and non-financial criteria in
order to continue to qualify for the above tax incentives. For example, in order
to be able to enjoy the preferential income tax rate of 15%, Super TV and N-S
Digital TV must be qualified as “high-and-new technology enterprises strongly
supported by the State.” under the newly enacted PRC Enterprise Income Tax
Law, or the 2008 EIT Law, which took effect on January 1, 2008. Moreover,
the government could determine at any time to eliminate or reduce the scale of
such preferential tax policies. See “Item 5. Operating and Financial Review and
Prospects—A. Operating Results—Taxes and Incentives—PRC.”
Any
increase in Super TV’s or N-S Digital TV’s enterprise income tax rate or
discontinuation or reduction of any of the preferential tax treatments or
financial incentives currently enjoyed by Super TV or N-S Digital TV could have
a material adverse effect on our business, financial condition and results of
operations.
We
may be subject to PRC income tax on our global income, or dividends we receive
from our PRC subsidiary may be subject to PRC withholding tax, depending on
whether we are recognized as a resident enterprise in the PRC.
Pursuant
to the 2008 EIT Law and Enterprise Income Tax Law
Implementation Rules, or the Implementation Rules, enacted by the State
Council on December 6, 2007 and which became effective on January 1, 2008, an
enterprise established under the laws of a foreign country or region whose “de
facto management body” is located within the PRC territory is considered a
resident enterprise and will generally be subject to the enterprise income tax
at the rate of 25% on its global income. According to the Implementation Rules,
“de facto management body” refers to a managing body that exercises, in
substance, overall management and control over the production and business,
personnel, accounting and assets of an enterprise. The SAT issued the Notice on Issues Relating to
Determination of Chinese-Controlled Offshore Enterprises as PRC Resident
Enterprises by Applying the “De Facto Management Body” Test, or the SAT
Notice 82, on April 22, 2009. The SAT Notice 82 provides for certain specific
criteria for determining whether the “de facto management body” of a
Chinese-controlled offshore enterprise is located in the PRC. Although the SAT
Notice 82 provides that it only applies to offshore enterprises controlled by
PRC enterprises, not those controlled by PRC individuals, like our company, it
is generally believed that the determining criteria set forth in the SAT Notice
82 very likely reflect the SAT’s general position as to how the “de facto
management body” test should be applied to determine the tax residency of all
offshore enterprises, regardless of whether they are controlled by PRC
enterprises or individuals. With reference to the criteria set forth in the SAT
Notice 82, we believe that we are not a PRC resident enterprise. However, if we
were considered a PRC resident enterprise, we would be subject to the enterprise
income tax at the rate of 25% on our global income. In such case, our
profitability and cash flow would be adversely affected as a result of our
global income being taxed under the 2008 EIT Law.
If we are
considered as a non-resident enterprise under the 2008 EIT Law, we will not be
subject to the enterprise income tax at the rate of 25% on our global income. In
such case, however, dividends we receive from our PRC subsidiary will be subject
to a PRC withholding tax, the standard rate of which is 10% and can be reduced
by an applicable tax treaty, under the 2008 EIT Law. According to the Arrangement for Avoidance of Double
Taxation on Income and Prevention of Tax Evasion entered into between the
PRC and Hong Kong in August 2006, as amended, dividends paid by a PRC
foreign-invested enterprise to its shareholder in Hong Kong are generally
subject to a 5% PRC withholding tax compared to the standard 10% PRC withholding
tax under the 2008 EIT Law. However, the SAT issued the Notice on How to Recognize
“Beneficial Owners” under Relevant Tax Treaties, or the SAT Notice 601,
on October 27, 2009, which provides that only the enterprises with active
operations can be recognized as “beneficial owners” under relevant tax treaties
that are entitled to enjoy the corresponding tax benefits. The SAT Notice 601
further provides that those enterprises that are established solely for the
purposes of benefiting from favorable tax treatment under the relevant tax
treaties should not be recognized as “beneficial owners” and therefore cannot
enjoy favorable tax treatment. We indirectly hold the 100% interest in our PRC
subsidiary, Super TV, through Golden Benefit Technology Limited, or Golden
Benefit, a wholly owned subsidiary incorporated in Hong Kong. As a result, to
the extent we are considered as a non-resident enterprise and Golden Benefit is
not recognized as a qualified beneficial owner under relevant tax treaty,
dividends we receive from our PRC subsidiary will be subject to the standard
rate of 10%. Such withholding tax will increase our tax burden and reduce the
amount of cash available to our company.
Dividends
payable by us to our non-PRC shareholders and ADS holders, and gains on the
sales of our ordinary shares or ADSs, may be subject to withholding taxes under
PRC tax laws, which may materially reduce the value of your
investment.
Prior to
January 1, 2008, dividends payable to non-PRC investors were exempted from
withholding tax. The 2008 EIT Law and the Implementation Rules, both of which
became effective on January 1, 2008, provide that an income tax rate of 10%
(subject to the tax treaties between PRC and other jurisdictions) will generally
be applicable to dividends payable to non-PRC investors which are derived from
sources within the PRC, provided that dividends are not subject to the 10% tax
if they are paid out of distributable profits accumulated before January 1,
2008. Similarly, any gain realized on the transfer of shares by such investors
is also subject to 10% tax if such gains are regarded as income derived from
sources within the PRC.
We are a
Cayman Islands holding company and substantially all of our income may come from
dividends we receive from our subsidiaries, primarily the operating subsidiary
located in the PRC. As a result, dividends we receive from our PRC operating
subsidiary may be subject to withholding tax under the 2008 EIT Law. See “Item
3. Key Information—D. Risk Factors—We may be subject to PRC income tax on our
global income, or dividends we receive from our PRC subsidiary may be subject to
PRC withholding tax, depending on whether we are recognized as a resident
enterprise in the PRC.” Although, in the case we are recognized as a qualified
PRC resident enterprise and the dividends we receive from our operating
subsidiary in the PRC are not subject to any withholding tax, our dividends
payable to our non-PRC shareholders and ADS holders would be subject to
withholding tax under the 2008 EIT Law.
If
dividends we receive from our PRC operating subsidiary or dividends payable to
our non-PRC shareholders and ADS holders are subject to withholding tax under
the 2008 EIT Law, or if non-PRC foreign shareholders and ADS holders are
required to pay PRC income tax on the transfer of their ordinary shares or ADSs,
the value of your investment may be materially reduced.
Natural
disasters and health hazards in the PRC may severely disrupt our business and
operations and may have a material adverse effect on our financial condition and
results of operations.
In May 2008, a major earthquake
registering 8.0 on the Richter scale struck Sichuan Province and certain other
parts of China, devastating much of the affected areas and causing tens of
thousands of deaths and widespread injuries. In addition, in early 2008, parts
of Mainland China, in particular its southern, central and eastern regions,
experienced what was reportedly the most severe winter weather in the country in
half a century, which resulted in significant and extensive damage to factories,
power lines, homes, automobiles, crops and other properties, blackouts,
transportation and communications disruptions and other losses in the affected
areas. Moreover, certain countries and regions, including China, have
encountered incidents of the H5N1 strain of bird flu, or avian flu, as well as
severe acute respiratory syndrome, or SARS, over the past six years, and more
recently in 2009, the outbreak of influenza (H1N1). We are unable to predict the
effect, if any, that any future natural disasters and health and public security
hazards may have on our business. Any future natural disasters and health and
public security hazards may, among other things, significantly disrupt our
ability to adequately staff our business, and may generally disrupt our
operations. Furthermore, such natural disasters and health and public security
hazards may severely restrict the level of economic activity in affected areas,
which may in turn materially and adversely affect our business and prospects. As
a result, any natural disasters or health hazards in China may have a material
adverse effect on our financial condition and results of
operations.
The implementation of the PRC Labor
Contract Law may increase our operating expenses and adversely affect our
business and results of operations.
On June 29, 2007, the PRC National
People’s Congress enacted the Labor Contract Law, which
became effective on January 1, 2008. On September 18, 2008, the State Council of
the PRC issued the Implementation Rules of the Labor
Contract Law, which became effective on the same day. The Labor Contract
Law and its implementation rules formalize workers’ rights concerning overtime
hours, pensions, layoffs, employment contracts and the role of trade unions and
provide for specific standards and procedure for the termination of an
employment contract. In addition, the Labor Contract Law requires the payment of
a statutory severance pay upon the termination of an employment contract in most
cases, including in cases of the expiration of a fixed-term employment contract.
As there has been little guidance as to how the Labor Contract Law will be
interpreted and enforced by the relevant PRC authorities, there remains
substantial uncertainty as to its potential impact on our business and results
of operations. The implementation of the Labor Contract Law may increase our
operating expenses, in particular our personnel expenses and labor service
expenses. In the event that we decide to significantly reduce the number of our
employees or otherwise change our employment or labor practices, the Labor
Contract Law may also limit our ability to effect these changes in a manner that
we believe to be cost-effective or desirable, which could materially and
adversely affect our business, financial condition and results of
operations.
Risks
Relating to the ADSs
The
trading price of our ADSs has been and may continue to be volatile, which could
result in substantial losses to you.
The
trading price of our ADSs has been volatile and subject to wide fluctuations.
Since October 5, 2007, the closing prices of our ADSs on the NYSE has ranged
from US$4.25 to US$51.08 per ADS and the last reported sale price on April 26,
2010 was US$7.49. Our ADSs may continue to fluctuate in response to various
factors beyond our control. The financial markets in general, and the market
prices for many other PRC companies listed on stock exchanges in the United
States in particular, have experienced extreme volatility. These broad market
and industry factors may significantly affect the market price and volatility of
our ADSs, regardless of our actual operating performance.
In
addition to market and industry factors, the price and trading volume for our
ADSs may be highly volatile for specific business reasons. In particular,
factors such as variations in our revenues, earnings and cash flow,
announcements of new investments and cooperation arrangements or acquisitions
could cause the market price for our ADSs to change substantially. Any of these
factors may result in large and sudden changes in the volume and trading price
of our ADSs. In the past, following periods of volatility in the market price of
a company’s securities, shareholders have often instituted securities class
action litigation against that company. If we were involved in a class action
suit, it could divert the attention of senior management, and, if adversely
determined, have a material adverse effect on our financial condition and
results of operations.
The
sale or availability for sale of substantial amounts of our ADSs could adversely
affect their trading price and could materially impair our future ability to
raise capital through offerings of our ADSs.
Sales of
substantial amounts of our ADSs in the public market, or the perception that
theses sales could occur, could adversely affect the market price of our ADSs
and could materially impair our future ability to raise capital through
offerings of our ADSs.
As of
March 31, 2010, we had 58,244,194 ordinary shares outstanding (excluding 139,426
ordinary shares that were issued and held for our account in preparation for
exercise of share options by option holders under our employee stock incentive
plans), including 21,629,821
ordinary shares represented by 21,629,821 ADSs (excluding the 139,426
ADSs that were held for our account in preparation for exercise of share options
by option holders under our employee stock incentive plans). All ADSs are freely
transferable without restriction or additional registration under the Securities
Act. The remaining ordinary shares outstanding have been available for sale,
subject to volume and other restrictions that may be applicable under Rule 144
and Rule 701 under the Securities Act. In addition, we have filed a registration
statement on Form S-8 to register the ordinary shares to be issued to the share
option holders under our employee stock incentive plans. The ordinary shares to
be received by such share option holders who are not affiliated with us may be
resold freely to the public market. We cannot predict what effect, if any,
market sales of securities held by our significant shareholders or any other
shareholder or the availability of these securities for future sale will have on
the market price of our ADSs.
Your
interest in our ADSs will be diluted as a result of our 2005 Stock Incentive
Plan, 2008 Stock Incentive Plan or other share option grants.
We have
reserved 4,444,440 ordinary shares for issuance pursuant to our Amended and
Restated 2005 Stock Incentive Plan. We have reserved a total of 1,200,000
ordinary shares for issuance under the 2008 Stock Incentive Plan, subject to any
adjustments as contemplated by the plan. As of March 31, 2010, options to
purchase 1,600,362 ordinary shares had been granted and were outstanding under
our Amended and Restated 2005 Stock Incentive Plan and 2008 Stock Incentive
Plan. For a description of these plans, see “Item 6. Directors, Senior
Management and Employees—B. Compensation of Directors and Senior Officers—Share
Options.” The exercise of those options would result in a reduction in the
percentage of ownership of the holders of ordinary shares and of ADSs, and
therefore would result in a dilution in the earnings per ordinary share and per
ADS.
You
may face difficulties in protecting your interest, and your ability to protect
your rights through the United States federal courts may be limited, because we
are incorporated under Cayman Islands law.
Our
corporate affairs are governed by our Second Amended and Restated Memorandum and
Articles of Association, the Cayman Islands Companies Act and the common law of
the Cayman Islands. The rights of shareholders to take action against the
directors and actions by minority shareholders are to a large extent governed by
the common law of the Cayman Islands. Cayman Islands law in this area may not be
as established and may differ from provisions under statutes or judicial
precedent in existence in the United States. As a result, our public
shareholders may face different considerations in protecting their interests in
actions against our management or directors than would shareholders of a
corporation incorporated in a jurisdiction of the United States.
The
rights of shareholders and the responsibilities of management and members of the
board of directors under Cayman Islands law, such as in the areas of fiduciary
duties, are different from those applicable to a company incorporated in a
jurisdiction of the United States. For example, the Cayman Islands courts are
unlikely:
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to
recognize or enforce against us judgments of courts of the United States
based on the civil liability provisions of United States federal
securities laws; and
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in
original actions brought in the Cayman Islands, to impose liabilities
against us based on the civil liability provisions of United States
federal securities laws that are penal in
nature.
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As a
result, our public shareholders may have more difficulty in protecting their
interests in connection with actions taken by our management or members of our
board of directors than they would as public shareholders of a company
incorporated in the United States.
Certain
judgments obtained against us by our shareholders may not be
enforceable.
We are a
Cayman Islands company and substantially all of our assets are located outside
of the United States. Substantially all of our current operations are conducted
in the PRC. In addition, most of our directors and officers are nationals and
residents of countries other than the United States. A substantial portion of
the assets of these persons are located outside the United States. As a result,
it may be difficult or impossible for you to bring an action against us or
against these individuals in the United States in the event that you believe
that your rights have been infringed under the United States federal securities
laws or otherwise. Even if you are successful in bringing an action of this
kind, the laws of the Cayman Islands and of the PRC may render you unable to
enforce a judgment against our assets or the assets of our directors and
officers.
Your
voting rights as a holder of our ADSs are limited by the terms of the deposit
agreement.
You may
exercise your voting rights with respect to the ordinary shares underlying your
ADSs only in accordance with the provisions of the deposit agreement. Upon
receipt of voting instructions from you in the manner set forth in the deposit
agreement, the depositary for our ADSs will endeavor to vote your underlying
ordinary shares in accordance with these instructions. Under our Second Amended
and Restated Memorandum and Articles of Association and Cayman Islands law, the
minimum notice period required for convening a general meeting is 15 days. When
a general meeting is convened, you may not receive sufficient notice of a
shareholders’ meeting to permit you to withdraw your ordinary shares to allow
you to cast your vote with respect to any specific matter at the meeting. In
addition, the depositary and its agents may not be able to send voting
instructions to you or carry out your voting instructions in a timely manner. We
will make all reasonable efforts to cause the depositary to extend voting rights
to you in a timely manner, but you may not receive the voting materials in time
to ensure that you can instruct the depositary to vote your shares. Furthermore,
the depositary and its agents will not be responsible for any failure to carry
out any instructions to vote, for the manner in which any vote is cast or for
the effect of any such vote. As a result, you may not be able to exercise your
right to vote and you may lack recourse if your ordinary shares are not voted as
you requested.
The
depositary for our ADSs will give us a discretionary proxy to vote our ordinary
shares underlying your ADSs if you do not vote at shareholders’ meetings, except
in limited circumstances, which could adversely affect your
interests.
Under the
deposit agreement for our ADSs, the depositary will give us a discretionary
proxy to vote our ordinary shares underlying your ADSs at shareholders’ meetings
if you do not vote, unless:
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we
have failed to timely provide the depositary with our notice of meeting
and related voting materials;
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we
have instructed the depositary that we do not wish a discretionary proxy
to be given;
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we
have informed the depositary that there is substantial opposition as to a
matter to be voted on at the
meeting;
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a
matter to be voted on at the meeting would have a material adverse impact
on shareholders; or
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voting
at the meeting is made on a show of
hands.
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The
effect of this discretionary proxy is that you cannot prevent our ordinary
shares underlying your ADSs from being voted, absent the situations described
above, and it may make it more difficult for shareholders to influence the
management of our company.
You
may not receive distributions on our ordinary shares or any value for them if it
is illegal or impractical to make them available to you.
The
depositary of our ADSs has agreed to pay you the cash dividends or other
distributions it or the custodian for our ADSs receives on our ordinary shares
or other deposited securities after deducting its fees and expenses. You will
receive these distributions in proportion to the number of our ordinary shares
that your ADSs represent. However, the depositary is not responsible if it is
unlawful or impractical to make a distribution available to any holders of ADSs.
For example, it would be unlawful to make a distribution to a holder of ADSs if
it consists of securities that require registration under the Securities Act but
that are not properly registered or distributed pursuant to an applicable
exemption from registration. The depositary is not responsible for making a
distribution available to any holders of ADSs if any government approval or
registration required for such distribution cannot be obtained after reasonable
efforts made by the depositary. We have no obligation to take any other action
to permit the distribution of our ADSs, ordinary shares, rights or anything else
to holders of our ADSs. This means that you may not receive the distributions we
make on our ordinary shares or any value for them if it is illegal or
impractical for us to make them available to you. These restrictions may have a
material and adverse effect on the value of your ADSs.
You
may not be able to participate in rights offerings and may experience dilution
of your holdings.
We may,
from time to time, distribute rights to our shareholders, including rights to
acquire securities. Under the deposit agreement, the depositary will not
distribute rights to holders of ADSs unless the distribution and sale of rights
and the securities to which these rights relate are either exempt from
registration under the Securities Act with respect to all holders of ADSs, or
are registered under the provisions of the Securities Act. The depositary may,
but is not required to, attempt to sell these undistributed rights to third
parties, and may allow the rights to lapse. We may be unable to establish an
exemption from registration under the Securities Act, and we are under no
obligation to file a registration statement with respect to these rights or
underlying securities or to endeavor to have a registration statement declared
effective. Accordingly, holders of ADSs may be unable to participate in our
rights offerings and may experience dilution of their holdings as a
result.
You
may be subject to limitations on transfer of your ADSs.
Your ADSs
represented by ADRs are transferable on the books of the depositary. However,
the depositary may close its books at any time or from time to time when it
deems expedient in connection with the performance of its duties. The depositary
may close its books from time to time for a number of reasons, including in
connection with corporate events such as a rights offering, during which time
the depositary needs to maintain an exact number of ADS holders on its books for
a specified period. The depositary may also close its books in emergencies, and
on weekends and public holidays. The depositary may refuse to deliver, transfer
or register transfers of our ADSs generally when our books or the books of the
depositary are closed, or at any time if we or the depositary thinks it is
advisable to do so because of any requirement of law or any government or
governmental body, or under any provision of the deposit agreement, or for any
other reason.
Item
4.
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Information
on the Company
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A. History
and Development of the Company
Our
holding company, China Digital TV Holding Co., Ltd., was incorporated as an
exempted limited liability company on April 19, 2007 under the laws of the
Cayman Islands. We are headquartered in Beijing, China, and provide CA systems
to the PRC’s digital television market. We conduct substantially all of our
business through our operating subsidiary in the PRC, Super TV, and through N-S
Digital TV, a PRC company that we control through contractual arrangements. See
“Item 7. Major Shareholders and Related Party Transactions—B. Related Party
Transactions.”
Our
principal executive office is located at Jingmeng High-Tech Building B, 4th
Floor, No. 5 Shangdi East Road, Haidian District, Beijing 100085, PRC. Our
telephone number is (8610) 6297 1199. Information contained on our website does
not constitute a part of this annual report. Our agent for service of process is
CT Corporation System, located at 111 Eighth Avenue, New York, New York 10011,
U.S.A.
N-T Information
Engineering was established as a limited liability company under the PRC law by
Tsinghua Enterprise Group, a company affiliated with Tsinghua University, and
Hong Kong-based Tsinghua Novel Hi-Tech Investment Holding Ltd. in July 1998, and
initially focused on developing, producing and selling digital data broadcasting
equipment for cable television operators. In December 2002,
N-T Information Engineering completed its acquisition of the CA
systems-related assets of Tsinghua Tongfang Co., Ltd., or Tsinghua
Tongfang. In March 2004, CDTV BVI was incorporated as a holding
company in the British Virgin Islands, or BVI. Following the
establishment of CDTV BVI, we restructured our operations, in connection with an
investment by SAIF, by establishing Super TV, a limited liability company under
the PRC law and a wholly owned subsidiary of CDTV BVI, on May 31,
2004. On the same day, N-T Information Engineering and
Ms. Li Yang, a PRC citizen then employed by SAIF, established
N-S Digital TV. In June 2004, N-S Digital TV acquired from
N-T Information Engineering its smart card and CA systems business and, in
August 2006, N-S Digital TV acquired from N-T Information Engineering
its set-top box design business. In April 2007, a new holding
company, China Digital TV Holding Co., Ltd., or CDTV Holding, was established in
the Cayman Islands. In May 2007, CDTV BVI executed a 40-for-1 share
split of its ordinary shares and Series A preferred
shares. Following this share split, the shareholders of CDTV BVI
exchanged all of their shares of CDTV BVI for shares of CDTV Holding in
proportion to their percentage interest in CDTV BVI, as a result of which CDTV
BVI became a wholly owned subsidiary of CDTV Holding. In August 2007,
with our consent, Ms. Li Yang transferred her entire equity interest in
N-S Digital TV to Ms. Wei Gao, a PRC citizen employed by an affiliated
company of SAIF.
In
October 2007, we completed the initial public offering of our ADSs representing
our ordinary shares and listed the ADSs on the NYSE.
In order
to benefit from certain beneficial tax arrangements between the PRC and Hong
Kong, in December 2007, CDTV BVI acquired Golden Benefit, a company incorporated
in Hong Kong, for a nominal consideration, and transferred its 100% equity
interest in Super TV to Golden Benefit. See “Item 3. Key
Information—D. Risk Factors—We may be subject to PRC income tax on our global
income, or dividends we receive from our PRC subsidiary may be subject to PRC
withholding tax, depending on whether we are recognized as a resident enterprise
in the PRC” and “Item 5. Operating and Financial Review and Prospects—A.
Operating Results—Taxes and Incentives—PRC.”
Since
December 2007, new entities have been established in the PRC to partner with the
PRC’s television operators and content providers to offer value-added services
to television viewers, including N-S Media Investment and Guangdong SuperTV,
wholly owned subsidiaries of N-S Digital TV, as well as Dongguan SuperTV, a
joint venture established by N-S Digital TV with Guangdong Jiacai and a PRC
citizen.
In June
2008, Ms. Wei Gao transferred all of her equity interests in N-S Digital TV to a
PRC citizen who is currently our employee. In November 2008, N-T Information
Engineering transferred all of its equity interest in N-S Digital TV, our
variable interest entity, to two PRC citizens who are currently our
employees. As a result of these transactions, these three PRC
citizens own all the equity interest of N-S Digital TV.
Our
Investments and Acquisitions
In August
2006, N-S Digital TV entered into an asset transfer agreement to purchase
from N-T Information Engineering its set-top box design business for an
initial purchase price of RMB29.4 million (US$3.8 million), subject to certain
post-closing downward adjustments. As an adjustment to the initial
purchase price, N-T Information Engineering refunded RMB12.1 million
(US$1.5 million) to N-S Digital TV in April 2007. For details of
the adjustment mechanism of the initial purchase price, see “Item 7. Major
Shareholders and Related Party Transactions—B. Related Party Transactions—Super
TV and N-S Digital TV Arrangements—Transfer of Assets and Equity Interests
and Intellectual Property Rights—Asset Transfer Agreement, dated August 5, 2006,
between N-T Information Engineering and N-S Digital TV, as amended on
April 6, 2007.”
In August
2006, N-S Digital TV entered into an equity transfer agreement to purchase
from N-T Information Engineering its 51% equity interest in Foshan Nanhai
Guokai Digital TV Technology Co., Ltd., or Guokai, for a cash consideration of
RMB2.4 million (US$0.3 million). The parties entered into a new
agreement in March 2007 to reduce the consideration to RMB2.3 million (US$0.3
million). Guokai is a company primarily engaged in the research,
development and sale of digital TV-related systems, software and
products. A Japanese multinational company holds the remaining 49%
equity interest in Guokai. This transaction was completed on July 27,
2007.
In March
2007, N-S Digital TV and Jiangsu Qingda Technology Co. Ltd, or Jiangsu
Qingda, one of our customers, entered into an agreement to set up a joint
venture in Nanjing of Jiangsu Province mainly engaging in digital television
technology development and services, Nanjing Qingda Yongxin Culture &
Media Co. Ltd., or Qingda Yongxin. N-S Digital TV contributed
cash of RMB0.8 million (US$0.1 million), representing 40% of equity
interest in the joint venture. Jiangsu Qingda contributed cash of
RMB1.2 million (US$0.2 million) representing 60% of equity interest in
the joint venture. In three years after the establishment of Qingda
Yongxin, N-S Digital TV has the option to purchase up to an additional 30%
of the equity interest of Qingda Yongxin. The purchase price of the
additional interest will be determined based on the valuation of the joint
venture on the date of purchase, which will be the higher of ten times its net
profits in the year prior to the purchase, and the net asset value of Qingda
Yongxin on the last fiscal year end date prior to the purchase.
In June
2008, N-S Digital TV and Mr. Xitao Lai, a PRC citizen, established Dongguan
SuperTV, a joint venture in Dongguan, Guangdong Province, mainly to provide
value-added services to television viewers. N-S Digital TV and Mr.
Lai each contributed cash of RMB 5.0 million (US$0.7 million), representing 50%
of equity interest in the joint venture. In September 2008, N-S
Digital TV exercised an option to purchase an additional 10% equity interest in
the joint venture from Mr. Lai. In August 2009, N-S Digital TV sold its 20%
equity interest in Dongguan SuperTV to a new investor, Guangdong Jiacai.
Consequently, N-S Digital TV is entitled to 40% of shareholders’ voting rights
and appointing three out of the seven members of the board of directors of
Dongguan SuperTV.
In August
2008, we acquired from N-T Information Engineering all of its intellectual
property rights relating to digital watermarking and image tracing technologies,
including one issued patent and five pending patent applications in the
PRC. The purchase price was RMB21.2 million (US$3.1 million), which
was fully paid by Super TV in September 2008. A portion of this
purchase price in the amount of RMB8.8 million (US$1.3 million) was attributable
to the acquisition of the intellectual property rights relating to the digital
watermarking and image tracing technologies and the remainder was reallocated to
the acquisition of N-T Information Engineering’s equity interest in N-S Digital
TV by two of our employees. For details of these acquisitions, see “Item 4.
Information on the Company—B. Business Overview—Intellectual Property” and “Item
7. Major Shareholders and Related Party Transactions—B. Related Party
Transactions—Super TV and N-S Digital TV Arrangements.”
On
January 4, 2010, we entered into a share purchase agreement with OpenV China
Holdings Company, or OpenV, and several other parties to make a strategic
investment in OpenV. Pursuant to the share purchase agreement and
related transaction documents, we acquired a 12.8% equity interest (subject to
adjustment based on, among others, OpenV’s performance) in OpenV for a
consideration of US$5 million and received a warrant to purchase ordinary shares
of OpenV of up to US$4.5 million. As part of this investment
transaction, we have also agreed to, subject to certain closing conditions,
purchase certain additional ordinary shares of OpenV for a consideration of
US$2.5 million and extend to OpenV a US$2.5 million interest-free loan (which
shall be convertible to the ordinary shares of OpenV) if OpenV so requests
within six months after January 19, 2010.
In
February 2010, N-S Digital TV acquired from Beijing Shi Xun Hu Lian Technology
Co., Ltd., or Beijing Shi Xun, and another shareholder of Guangdong Digital
Media Technology Research & Development Institute Co., Ltd., or Guangdong
R&D, their entire equity interest in Guangdong R&D for RMB3.0 million
(US$0.4 million) and became the sole shareholder of Guangdong R&D. See “Item
7. Major Shareholders and Related Party Transactions—B. Related Party
Transactions—Other Related Party Transactions—Equity Transfer Agreement
(Guangdong R&D).”
Capital
Expenditures and Divestitures
See
“Item 5. Operating and Financial Review and Prospects—B. Liquidity and
Capital Resources—Capital Expenditures” for information concerning our principal
capital expenditures for the previous three years and those currently in
progress. We have not undertaken any significant divestitures.
B. Business
Overview
Overview
We are
the leading provider of CA systems to the PRC’s digital television
market. Our CA systems, which consist of smart cards, head-end
software for television network operators and terminal-end software for set-top
box manufacturers, enable digital television network operators in the PRC to
control the distribution of content and value-added services to their
subscribers and block unauthorized access to their networks. As of
December 31, 2009, we had installed CA systems at 244 digital television network
operators in 27 of the 32 provinces, autonomous regions and centrally
administered municipalities in the PRC. We were the leading vendor of smart
cards for CA systems in terms of smart cards shipped in the PRC in 2009, with a
market share of approximately 52%, according to Analysys International. We
derive a substantial majority of our revenues from sales of our smart cards,
which accounted for 90.8% and 89.0% of our total revenues in 2008 and 2009,
respectively. We expect that the sales of our smart cards will
continue to constitute the majority of our revenues in the near
future. In addition, we license our set-top box design to set-top box
manufacturers and sell advanced digital television application software such as
electronic program guides and subscriber management systems to digital
television network operators. With the establishment of N-S Media
Investment, Dongguan SuperTV and Guangdong SuperTV, we are gradually rolling out
the plan to engage in the value-added digital television business by offering
premium value-added digital television services.
PRC
television network operators are in the process of switching from analog to
digital transmissions, and the PRC government has set a target of 2015 for cable
television operators to complete their digital transition. We are a
primary beneficiary of this transition because CA systems are an essential
component of any pay-television platform. We sell our CA systems and
digital television application software to PRC television network operators,
including cable, mobile, satellite and terrestrial television network operators,
enterprises that maintain private cable television networks within their
facilities and media operators.
Our top
five customers in terms of revenues in 2009 were Jiangsu Qingda, Anhui
Broadcasting Information Network Co., Ltd., Xiangshan Juying Technology
Development Co., Ltd., Ningbo Yinzhou District TV Station and Chengdu Xingwang
Media Co.,Ltd., which in aggregate contributed 25.1% of our total revenue in
2009.
We were
founded in 2004 by Dr. Zengxiang Lu and Mr. Jianhua Zhu, who had
worked together since 2001 at N-T Information Engineering, one of the PRC’s
earliest CA systems vendors. We purchased N-T Information
Engineering’s CA systems business in 2004 and continued to build upon the strong
reputation that business had achieved. Our net revenues were
US$55.5 million, US$70.3 million and US$54.7 million in 2007, 2008 and
2009, respectively. We sold 7.3 million, 9.9 million and 8.8
million smart cards in 2007, 2008 and 2009, respectively. Our net
income was US$33.8 million, US$43.1 million and US$25.3 million in 2007,
2008 and 2009, respectively.
Our
Products and Services
Our core
products and services include the following:
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end-to-end
CA systems, including smart cards, head-end software and terminal-end
software;
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other
digital television application software for television network operators;
and
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CA
Systems
Our CA
systems consist of: software that is installed at the premises of the television
network operator, or the head end; software that is installed in a set-top box
at the subscriber’s end, or the terminal end; and smart cards that are inserted
into the set-top boxes. At both the head end and the terminal end,
our CA systems are designed to interface easily with the software and hardware
of as many other vendors as possible. This gives our customers
maximum flexibility in selecting the components of their digital transmission
systems, and allows us to cooperate with the other vendors in promoting each
other’s products to the network operators.
Our CA
systems give cable television network operators the flexibility to charge
subscribers on a per-channel or per-view basis, and to restrict viewers from
making copies of the programs they watch. Our CA systems also support
or offer the following functions:
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Video on
demand. Video on demand is a system that allows subscribers to
select and watch video on demand and provides subscribers with a large
subset of personal-video-reorder functions, such as pause, fast forward,
slow forward and jump to previous/future frame. Television network
operators need to have two-way transmission capacity in order to apply
such systems, which either stream content through a set-top box for
viewing in real time, or download the content to subscribers’ local
storage devices for viewing at any
time.
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Near
video-on-demand. Television network operators who do not
yet have two-way transmission capacity, which is necessary for full-blown
video on demand, can broadcast the same program repeatedly at short
intervals, typically of 10 to 20 minutes, giving subscribers many choices
of time to start watching the
program.
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Push
video-on-demand. Television
network operators who do not yet have two-way transmission capacity can
record programs onto subscribers’ local storage devices based on
subscribers’ instructions, giving subscribers the flexibility to watch the
programs at time of their own
choice.
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Personal
video recorder. A personal video recorder, or digital
video recorder, is a device that records video in a digital format to a
disk drive or other memory medium within the device. Access to the
contents, such as television programs, recorded in the personal video
recorder is controlled by the CA system module and the smart card
installed in the personal video
recorder.
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Parental
control. Parents can use the set-top box to set viewing
controls by creating a password that must be entered to watch television
or to watch certain programs, and can block access to the system at
certain hours.
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Location
control. Television network operators can authorize each
smart card and set-top box to function only on the premises of the
subscriber in whose name the smart card and set-top box are registered,
preventing subscribers from providing their smart cards and set-top boxes
to others.
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E-wallets. Information
about pre-payment by subscribers for programs or services can be recorded
on their smart cards. As subscribers order programs or
services, the fees are deducted from the amounts recorded on their smart
cards.
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Messaging. Network
operators can communicate with their subscribers by transmitting
electronic messages about bill status, rate changes and new programs and
services to their subscribers’ televisions. Network operators
also can allow other vendors, such as water or electricity companies, to
send billing or other service messages via this messaging
platform.
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Upgrades. CA
systems upgrades can be accomplished by transmitting software over the
transmission network to the terminal
end.
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We
guarantee the security of the encryption technologies of our CA systems during
the periods generally ranging from one to three years after sale. In
the event of a security problem, we undertake to attempt to resolve the problem
by taking steps such as resetting the encryption code or adding additional
layers of encryption. If these or other system modifications do not
resolve the problem, we undertake to replace our smart cards. Upon
expiration of the applicable period, the customer bears some portion or all of
the cost. To date, we have not encountered any material problems with
the security of our CA systems.
Smart
Cards. Our smart cards are manufactured by third-party
manufacturers based on our blueprints, and then are encoded by us on our
premises with security codes unique to each customer. We forward the
chips to smart card manufacturers in the PRC, which embed the chips in plastic
cards. When we receive the cards from the card manufacturers, we
program each one with a unique security code so that it can communicate with the
CA systems of its intended network. We currently have enough
equipment and trained staff to encode 100,000 smart cards on our premises during
an eight-hour shift. An additional layer of security code is added at
the customer’s premises using software that we install as part of our CA
systems.
Our
customers generally wait until after they have purchased, installed and tested
our head-end CA systems software before placing purchase orders for smart
cards. We may offer discounts for large smart card
orders. We sold 7.3 million, 9.9 million and 8.8 million smart
cards in 2007, 2008 and 2009, respectively.
Our smart
cards are manufactured to meet the ISO-7816 standard for card
readability. We guarantee the quality of our smart cards for periods
generally ranging from one to three years and if any of our cards are found to
have defects during the applicable warranty period, we replace them for free. To
date, we have not experienced a material rate of smart card
failure.
Head-End
Software. Our head-end software includes: an entitlement
management message generator, which notifies the smart card whether the
subscriber is entitled to view a program or not; an entitlement control message
generator, which sends messages that the set-top box uses to unscramble the
digital television signal; and encryption software, which encrypts the outgoing
messages.
Our
head-end software also includes simulcryption software that allows network
operators to install parallel CA systems from multiple vendors and transmit
their programs to some subscribers using one CA system’s security codes and to
other subscribers using another CA system’s security codes. Many of
the cable television network operators in the PRC who use digital transmission
have installed two or more CA systems sourced from different vendors in order to
reduce dependency on a single vendor. Moreover, in 2003, the SARFT
issued a policy requiring digital cable television network operators who install
non-PRC CA systems to also install a domestic CA system. Our
simulcryption software and open-interface technology enable us to work with
operators to install parallel CA systems, and we have integrated our CA systems
with those of NDS Group, Irdeto Access BV, Sumavision Technologies Co., Ltd. and
DVN Holdings Ltd., among others.
As of
December 31, 2009, our CA systems had been installed at 244 digital television
network operators.
We
generally install, customize, test and commission our CA systems over a period
of months and train our customer’s staff to operate it. Our prices
vary according to the size and complexity of each customer’s network, as well as
market conditions. Generally, the contract price is
payable in installments with the respective installments due
on issuance of a preliminary acceptance, issuance of a final acceptance or
within a certain period thereafter, or, in the case of a single acceptance,
due prior, on and/or after the issuance of the acceptance.
Terminal-End
Software. We license our CA systems terminal-end software to
whichever set-top box manufacturer has been chosen by our customer to produce
set-top boxes compatible with our CA systems. More than 130 set-top box
manufacturers in the PRC have installed our technology in their set-top
boxes.
Once our
customer has selected one or more set-top box manufacturers, the selected
manufacturers enter into contracts with us to license our terminal-end software
for use in their manufacturing processes so that their set-top boxes can be used
on the planned network. The manufacturers agree to pay us a one-time
license fee, including fees for testing and certifying their set-top boxes, and
royalties for each box they manufacture using our software. In 2006,
we began entering into agreements with certain television network operators who
purchase our CA systems pursuant to which the operators agree to pay us
royalties for each set-top box deployed on their networks that uses our CA
systems terminal-end software.
Other
Digital Television Application Software for Television Network
Operators
Our other
digital television application software for television network operators
primarily includes subscriber management systems and electronic program
guides.
Subscriber
Management Systems. We produce subscriber management system,
or SMS, software, which can be used by television network operators to reduce
the cost and improve the efficiency of their subscriber
management. Our SMS software is compatible with the CA systems of
other vendors, and we sell it on a stand- alone basis as well as packaged with
our CA systems. Our SMS software performs the following
functions:
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maintains
and updates a database of subscriber
information;
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processes
subscriber orders for new services;
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maintains
billing, payment and authorization records and sends e-mail bills and
receipts to subscribers; and
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processes
subscriber requests to repair or replace defective or lost set-top boxes
or smart cards.
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As of
December 31, 2009, our SMS software had been installed by 74 television network
operators. Our prices vary according to the size and complexity of
each customer’s network, as well as market conditions.
Electronic
Program Guides. An electronic program guide is an on-screen
guide to the programs and services available to subscribers. Our
electronic program guide is a software application that is installed at the head
end of a CA system and can be controlled by a remote control. Viewers
can use the guide to obtain program schedules as well as information about
specific programs, such as plot descriptions and the names of featured
actors.
As of
December 31, 2009, our electronic program guide had been installed by 141
television network operators. Our electronic program guide may be
sold together with our CA systems, but it is also compatible with the CA systems
of other vendors. When we sell our electronic program guides packaged with our
CA systems, we provide the same maintenance terms as for the CA
systems. Our prices vary according to the size and complexity of each
customer’s network, as well as market conditions.
Set-top
Box Design
We
produce a design, or operating system, for set-top boxes and license it to
set-top box manufacturers. Our sophisticated design enables set-top
box manufacturers to incorporate high-end features into their set-top
boxes. We also provide our customers with computer chips for the
set-top boxes that have been made to our specifications by third-party
fabricators. The set-top box manufacturers generally sign a purchase
order specifying the number of set-top boxes that they intend to manufacture
using our design, and pay us a license fee and royalties based on such
number. Our set-top box design does not include CA system
terminal-end software. Manufacturers who use our set-top box design
may separately purchase our or other vendors’ CA system terminal-end
software. We are developing additional applications for our set-top
box designs to support new value-added services and to allow the set-top boxes
to operate as personal video recorders.
Since
August 2009, we have started to provide proprietary universal set-top box
software solutions directly to some of our cable television operator customers
and receive royalties. These solutions are applicable to all set-top
boxes produced by various set-top box manufacturers that are being used within
our customer operators’ networks. Furthermore, our universal set-top
box solutions will allow cable television operators to build and continuously
upgrade various television applications on their existing network infrastructure
without the need to replace set-top boxes.
Technical
Support and Services
We offer
system integration services for television network operators who are
digitalizing and installing our CA systems. As system integrators, we
purchase additional hardware and software from third parties and integrate it
with our CA systems software. If our customers install multiple CA
systems from more than one vendor, we integrate these systems with our own so
that all the hardware and software operates as a seamless
whole.
As of
December 31, 2009, we had a total of 55 technicians and engineers located in
Beijing and five other cities available 24 hours a day to respond to customer
requests for information and assistance. Our three regional service
centers are strategically located in eastern (Hangzhou), central (Changsha) and
southern (Nanhai) China, and we have two smaller centers serving customers in
Dalian, Liaoning Province and Nanchang, Jiangxi Province. Each
service center maintains a 24-hour telephone hotline. Upon receiving a call for
assistance, our technical support employees first attempt to identify and
resolve the problem over the telephone or by accessing the software remotely,
and then arrange a site visit if necessary. In addition, each
customer is assigned a project manager who oversees the initial software
installation and remains primarily responsible for ensuring that after-sale
requests for assistance are handled promptly.
Sales
and Marketing
As of
December 31, 2009, we had 88 full-time sales personnel. We maintain
regular contact with our customer base through contacts at industry forums and
sales visits, and use these opportunities to educate them about digital
television systems. We actively monitor which operators are moving
towards digitalization, and when we learn that a particular operator is planning
to launch a digital network, we target that operator for more frequent contact
by our sales and technical personnel. We compensate our sales
personnel by means of base salaries and performance bonuses.
We also
cooperate informally with other providers of digital television software and
hardware with whom we do not compete, such as set-top box manufacturers, to
promote each other’s products to our respective customers, and thereby benefit
from each other’s marketing efforts.
Jiangsu
Qingda, a Nanjing-based company, is our exclusive distributor for CA systems and
smart cards in Jiangsu Province in eastern China. Jiangsu Qingda also
provides after-sales technical support and maintenance services for our
customers in Jiangsu Province. We entered into a 13-year distribution
contract with Jiangsu Qingda effective January 1, 2007. We account
for revenues contributed by Jiangsu Qingda in the same way as revenues from our
customers who are television network operators. Jiangsu Qingda was
our largest contributor to revenues in 2007, 2008 and 2009. In
addition to Jiangsu Qingda, we also engage fee-based sales agents to assist
us in marketing and selling our CA systems and smart cards in designated
regions or to designated customers. Such sales agents also provide
certain related services, including gathering market intelligence regarding
potential customers and pricing information in the relevant market.
Customers
Our
primary customers are cable television network operators. We sell our
products and services to networks of all sizes. Our top five
customers in 2009 were Jiangsu Qingda, Anhui Broadcasting Information Network
Co., Ltd., Xiangshan Juying Technology Developmetn Co., Ltd., Ningbo Yinzhou
District TV Station and Chengdu Xingwang Media Co., Ltd., which contributed
12.8%, 4.1%, 3.7%, 2.3% and 2.2%, respectively, of our total revenues for the
year.
We have
also sold our CA systems to:
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satellite
and terrestrial television network operators, including the China Central
Satellite Television Transmission
Center;
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large
enterprises that maintain private cable television networks within their
facilities, including the Beijing Capital International
Airport;
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media
operators who use CA systems to encrypt their programs for distribution to
television operators, including China DTV Media Inc., Ltd. and Huacheng
Digital Movie & TV Co., Ltd.;
and
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a
mobile television operator, namely China Broadcasting (Group) Co., Ltd.
(formerly known as China Satellite Mobile Broadcasting Corporation or
China Broadcasting Co., Ltd.).
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We
currently derive, and we expect to continue to derive, a significant portion of
our revenues each period from a limited number of large customers, although the
particular customers may vary from period to period. As digital cable
television systems are at developing stage in the PRC, the largest shipments of
smart cards are to operators who are launching new digital transmission systems
and need to purchase in bulk for their established networks. For
example, Jiangsu Qingda was our only customer that contributed more than 10% of
our total revenues in 2007 and 2008, representing 14.1% and 15.1% of our
revenues in the relevant periods, respectively. Jiangsu Qingda was
our only customer that contributed more than 10% of our total revenues in 2009,
representing 12.8% of our revenues in that period. We may face
certain risks from this concentration of revenues. See “Item 3.
Key Information—D. Risk Factors—Risks Relating to Our Business and Industry—We
depend, and expect to continue to depend, on a limited number of customers for a
significant portion of our revenues in any single period. If one customer defers
or cancels its orders or chooses our competitors’ products or services, our
revenues and net income could decline significantly.”
As most
cable television network operators in the PRC are state-owned, they are required
to follow a public bidding process for major purchases. As a result,
the majority of our CA systems sales are made pursuant to a formal bid
process. In such cases, the network operator generally submits its CA
systems requirements to a state-owned bidding company, which posts a request for
bids at its Internet site and specifies the necessary financial and technical
qualifications of bidders. We are generally required to accompany our
bid with a cash deposit, which generally is from US$300 to US$117,000 and which
is refundable in full if we fail to win the sales contract. If we
succeed in winning the contract, some network operators require that we leave
our deposit in their account until we have installed and tested our software and
the network operator has signed a certificate of acceptance. The time
from when a request for bids is posted until a winner is selected is usually one
to two months.
Our
customers also include set-top box manufacturers, to whom we license
terminal-end software for our CA systems and set-top box designs. More than 130
set-top box manufacturers in the PRC have installed our terminal-end software in
their set-top boxes, including Changhong Electric Co., Huawei Technologies,
Panasonic AVC Networks, Samsung Electronics, TCL Technology, Intel Corporation, LG,
and OKI. In addition, 22 set-top box manufacturers have licensed our
set-top box designs, including Motorola, Hisense and Haier.
Suppliers
Before
2006, we bought most of our computer chips for our smart cards from
STM. In order to maintain a secure supply of computer chips,
beginning in 2006 we have purchased a significant portion of our computer chips
from Infineon, initially indirectly through AdvanIDe Pte. Ltd. (formerly known
as ACG Identification Technologies Asia Pte. Ltd.), an agent of Infineon, and
since February 2009, directly from Infineon.
STM and
Infineon produce chips that use our card operating system and deliver them to
Beijing by air freight. We do not have long-term contracts with any
of our computer chip suppliers, but place orders according to our customers’
demands. We pay based upon the prevailing market price at the time of
order.
The time
required from placing a new chip order with the fabricators to shipping finished
smart cards to our customers may be as long as 15 weeks. To ensure
that we are able to meet our customers’ demands, we plan at all times to have
enough chips and smart cards on order or in inventory to meet our demand for an
average 15-week period.
We have
arrangements with a number of smart-card manufacturers, including China
Electronics, the China Sciences Group, Axalto Smart Card Technology Co. and
Oberthur Card Systems, to embed the computer chips into plastic
cards. We currently maintain a one-year contract with each of China
Electronics and the China Sciences Group that guarantees us a volume-based price
discount for each purchase order and requires China Electronics or the China
Sciences Group, as the case may be, to fulfill our orders in accordance with an
agreed schedule. We do not have any long-term contract with Axalto
Smart Card Technology Co. or Oberthur Card Systems. Our contracts
with China Electronics and the China Sciences Group require them to meet the
ISO-7816 standard for card readability. In addition, we believe that
there are numerous alternative smart-card manufacturers from whom we would be
able to obtain smart cards if any of our current suppliers were unable to meet
our needs.
For more
information about risks relating to our relationships with our suppliers, see
“Item 3. Key Information—D. Risk Factors—Risks Relating to Our Business and
Industry—We generally do not have long-term contracts with suppliers of computer
chips or the companies that manufacture our smart cards. If any of
our computer chip suppliers or smart-card manufacturers is unable to fulfill our
orders in time or at all, we may be unable to deliver smart cards to our
customers, which could have a material adverse effect on our business, financial
condition and results of operations.”
Competition
We face
competition in the CA systems market from both international and domestic
companies. We compete on the basis of:
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customer
service and technical support;
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brand
name, track record and market
recognition;
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encryption
management and other technologies, including our smart
cards;
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the
number of set-top box manufacturers with whom we cooperate;
and
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Our main
international competitors in the CA systems business are NDS Group, Irdeto
Access BV and Kudelski SA. These companies have longer operating
histories and substantially greater financial, technical and other resources
than we do, which may enable them to respond more quickly than we could to
technological or commercial changes in our industry. In addition,
several of these companies entered the PRC market before us, but have to date
been less successful in capturing market share. Historically, these
companies have generally focused on sales to the television network operators in
the PRC’s largest cities. To the extent that our international
competitors may begin targeting small and mid-size television network operators,
we believe that we can continue to compete successfully because of our local
knowledge and relationships and our more extensive customer support and service
network.
Our main
domestic competitors are Sumavision Technologies Co., Ltd. and DVN Holdings
Ltd., both of which
are non-state-owned companies operating mainly in the PRC. They may
offer their CA systems at a lower price or with a longer credit term than we
do. However, we believe that we have more advanced technology than
they do, and that our strong technology and leading market position will enable
us to continue to compete successfully against these companies.
According
to Analysys International, we were the leader in the PRC CA systems market in
2007, 2008 and 2009. According to Analysys International, in 2009, we
had an approximately 52% market share based on the number of smart cards
shipped, followed by Sumavision Technologies Co., Ltd. with approximately 15%
market share, DVN Holdings Ltd. with approximately 14% market share and NDS
Group with approximately 7% market share, Irdeto Access BV with approximately 7%
market share, Kudelski SA with approximately 3% market share and others
accounting for the remaining 2%. For more information about risks
relating to our competitors, see “Item 3. Key Information—D. Risk
Factors—Risks Relating to Our Business and Industry—We face intense competition,
which could reduce our market share and harm our financial
performance.”
Research
and Development
Our
success to date has in large part resulted from our strong research and
development capabilities. As of December 31, 2009, our research and
development team consisted of 272 employees, compared to 255 as of
December 31, 2008 and 224 as of December 31, 2007. Our research
and development expenses increased from US$4.6 million in 2007 to US$6.9 million
in 2008 and US$8.8 million in 2009.
Our
business and the market in which we operate are characterized by rapid
technological change, evolving industry standards and frequent product
enhancements. As digital broadcasting becomes more popular in the PRC,
television network operators are likely to seek more sophisticated CA technology
that offers them greater reliability, flexibility and functionality in
delivering protected content or value-added services to viewers. As
methods of distributing information and entertainment evolve, CA technology also
need to evolve to provide content protection for distribution platforms other
than television. For example, we have started to provide CA systems for mobile
television networks, namely China Mobile Multimedia Broadcasting networks for
mobile television broadcasting. Our continued success will depend, in part, on
our ability to develop and market products and services that respond to
technological changes and evolving market demand or industry standards in a
timely and cost-effective manner.
Many of
our current research and development staff are graduates of the PRC’s top
science and engineering universities, including Tsinghua University, and have
extensive experience in digital television and encryption
technologies. Our research team played a leading role in drafting the
PRC industry standards for CA systems, electronic program guides and other key
industry standards. We are active in the China Digital Rights
Management Forum, which aims to develop a PRC standard for digital rights
management.
Our
research and development personnel are actively seeking ways to improve the
security of our CA systems, as well as to prevent content theft at other stages
of the television network operators’ chain of transmission. Other
focuses of our research include: (1) adapting our CA systems for use on new
television platforms, such as satellite television, mobile television and IPTV;
(2) enhancing our CA systems to support applications such as video-on-demand,
near video-on-demand, push video-on-demand and personal video recorders; (3)
developing new value-added services that will enhance operator revenues; (4)
developing a new line of products and technologies, including high-definition
and hybrid set-up box solutions and digital rights management products that
allow content providers to control the way their content is distributed and
reproduced; and (5) applying cloud computing to television
application.
Intellectual
Property
We
develop all of our software internally, and our proprietary intellectual
property is critical to our success. We rely primarily on a
combination of patent, trademark and copyright laws, trade secrets, licenses and
employee and third-party confidentiality agreements to safeguard our
intellectual property. We generally enter into confidentiality and
non-disclosure agreements with our employees, customers and
suppliers.
As of
December 31, 2009, we had a total of eight patents issued and 70 pending patent
applications in the PRC. Our issued patents and pending patent
applications relate primarily to digital transmission technologies, encryption
and decryption technologies, technologies relating to the production of set-top
boxes and smart cards and technologies relating to value-added
services. We have also completed copyright registration of 63
software programs for digital television in the PRC.
In August
2008, we acquired from N-T Information Engineering all intellectual property
rights relating to the digital watermarking and image tracing technologies,
including one issued patent and five then pending patent applications in the
PRC. Four of these pending patent applications relate to the digital
watermarking technology, while the remaining pending patent application and the
issued patent relate to the image tracing technology. The digital
watermarking technology is aimed to enhance cable television operators’
counterfeit tracking and broadcasting restriction capabilities and can also be
used to provide anti-piracy and TV rating services. The image tracing
technology is used for remote control of personal computers, set-top boxes and
televisions as well as gaming consoles.
When we
license our intellectual property to third parties, we generally receive a
combination of license fees and royalties. We mainly license our
terminal-end software and our set-top box design to the set-top box
manufacturers.
We have a
non-exclusive license to use the English and Chinese names for “NOVEL-TONGFANG”
and a graphic logo, free of charge, pursuant to an agreement with
N-T Information Engineering. N-T Information Engineering
has registered these names and the logo as trademarks. Our term of
use is from June 1, 2004 until such trademark registrations expire at various
dates in 2013. In November 2007, we ceased using “NOVEL-TONGFANG” in
N-S Digital TV’s name by changing the name from “Beijing Novel-Tongfang Digital
TV Technology Co., Ltd.” to “Beijing Novel-Super Digital TV Technology Co.,
Ltd.” In January 2008, we ceased using the English and Chinese names
for “NOVEL-TONGFANG” as trademarks for our products and we intend not to use
such trademarks in the future. We started to use the English and
Chinese names for “NOVEL SUPERTV” in combination with the graphic logo we
licensed from N-T Information Engineering as the trademarks for our products. In
December 2008, we acquired for free the licensed graphic logo from N-T
Information Engineering. We are currently in the process of applying to register
the trademarks of the English and Chinese names for “NOVEL SUPERTV” as well as
the trademark for a combination of Chinese and English names for “NOVEL SUPERTV”
and the graphic logo.
In
addition, we own six other trademarks — two of them are
registered trademarks and four of them are in the process of being
registered. We have
sixteen registered domain names, five of which were registered
with the MII, including novel-supertv.com and chinadtv.cn.
Insurance
We do not
maintain any business insurance or key-man insurance. Insurance
companies in the PRC offer limited business insurance products and do not, to
our knowledge, offer business liability insurance. While business
disruption insurance is available to a limited extent in the PRC, we have
determined that the risks of disruption, cost of such insurance and the
difficulties associated with acquiring such insurance on commercially reasonable
terms make it impractical for us to have such insurance. As a result,
we do not have any business liability, disruption or litigation insurance
coverage for our operations in the PRC. We also generally do not
maintain property insurance, except for insurance that covers the company
automobiles.
Employees
We had
424, 499 and 504 full-time employees as of December 31, 2007, 2008 and 2009,
respectively. We have no part-time employees. All of our employees
are located in the PRC. The table below shows the number of employees
categorized by business area and as a percentage of our workforce as of December
31, 2007 and 2008 and 2009:
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Research
and development
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224 |
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52.8 |
% |
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255 |
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51.2 |
% |
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272 |
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|
54.0 |
% |
Technical
service
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58 |
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13.7 |
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|
54 |
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10.8 |
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55 |
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10.9 |
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Sales
and marketing
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67 |
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15.8 |
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90 |
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18.0 |
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88 |
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17.5 |
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General
and administration
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48 |
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11.3 |
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70 |
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14.0 |
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60 |
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11.9 |
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Smart
card production
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27 |
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6.4 |
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30 |
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6.0 |
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29 |
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5.7 |
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Total
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424 |
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100.0 |
% |
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499 |
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100.0 |
% |
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504 |
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100.0 |
% |
As
required by applicable PRC regulations, we participate in various employee
benefit plans that are organized by municipal and provincial governments,
including housing, pension, medical and unemployment benefit plans. We are
required under PRC law to make contributions to the employee benefit plans at
specified percentages of the salaries, bonuses and certain allowances of our
employees, up to a maximum amount specified by the local government from time to
time. Members of the retirement plan are entitled to a pension equal to a fixed
proportion of the salary prevailing at the member’s retirement date. The total
contributions made to employee benefit plans in 2007, 2008 and 2009 were
approximately US$0.8 million, US$1.5 million and US$2.1 million,
respectively.
Our
employees are not represented by any collective bargaining agreements or labor
unions. We believe that we maintain a good working relationship with our
employees and we have not experienced any significant labor
disputes.
We
typically enter into a standard confidentiality agreement with our employees. We
also enter into an agreement with each of our employees giving us full rights to
any inventions developed by such persons during the course of their employment
by us. In addition, we enter into a non-competition agreement with each of our
executive officers and key research and development personnel. These agreements
include a covenant that prohibits each of them from engaging in any activities
that directly or indirectly compete with our business during, and for one year
after, the period of their employment with us.
Regulation
We
operate substantially all of our business in the PRC and various aspects of our
business activities are subject to the laws, rules and regulations of the PRC,
including laws, rules and regulations relating to the encryption industry, the
cable television industry and the software industry. These laws, rules and
regulations require us to obtain certain licenses and certificates for our
encryption products and register our software with the PRC government. In
addition, certain laws, rules and regulations of the PRC also affect the rights
of our shareholders to receive dividends and other distributions from
us.
Regulation
of Encryption Industry
Encryption
software is an essential component of our CA systems. The development,
production and sale of commercial encryption products in the PRC is regulated by
the PRC National Encryption Administrative Bureau, or the Encryption Bureau, and
its authorized local branches. The principal regulations governing the
encryption business in the PRC are the Administrative Regulation for
Commercial Cryptogram promulgated by the State Council in 1999 and a
series of rules issued by the Encryption Bureau thereunder.
A company
generally is only allowed to produce and/or sell encryption products that have
adopted the algorithms designated by the Encryption Bureau and such products
shall also be certified by Encryption Bureau. The Encryption Bureau
did not initially designate algorithms for CA systems until April 2007, and a
final and official designation still remains pending. As a result,
like many other vendors of CA systems in the PRC, N-S Digital TV has been
making and selling CA systems using algorithms other than those initially
designated by the Encryption Bureau. Based on its consultation with
the Encryption Bureau, King & Wood, our PRC counsel, advised us that it
has no reason to believe, given that N-S Digital TV commenced its CA
systems business when the initially designated algorithms were not yet
available, that the Encryption Bureau would impose any sanctions against
N-S Digital TV for not using initially designated algorithms in the
past. King & Wood further advised us that since the
Encryption Bureau did not initially designate any algorithms for CA systems
until April 2007 with a final and official designation pending and the CA
systems using algorithms other than those initially designated by the Encryption
Bureau have been widely used and accepted in the market, the Encryption Bureau
has allowed vendors of CA systems a transition period, of a duration yet to be
determined at the sole discretion of the Encryption Bureau, during which such
vendors, including N-S Digital TV, may continue to produce and sell CA
systems without using government-designated algorithms. The
Encryption Bureau may require vendors of CA systems to adopt the algorithms to
be finally and officially designated by the authority at the expiration of such
transition period.
In
addition, a company engaging in the encryption-related business is subject to
certain licensing requirements. For example, a company engaging in
the production of commercial encryption products must obtain a production
license from the Encryption Bureau, and a company engaging in the sale and
distribution of commercial encryption products must obtain a sales
license. In addition, a company engaging in research and development
of commercial encryption systems, protocols, algorithms or technical standards
shall obtain a license for research and development from the Encryption
Bureau. To obtain such licenses, a company must meet requirements
established by the Encryption Bureau, among others, with respect to its
technological capabilities, its equipment, its production and quality control
processes, the level of security of its algorithms and the qualifications of its
employees. In addition, both importing and exporting products or
equipment containing encryption technologies are subject to the prior approval
of the Encryption Bureau.
In the
opinion of King & Wood, our PRC counsel, the business of
N-S Digital TV does not require a license for research and
development. N-S Digital TV has engaged in the production and
sale of encryption products since its establishment in May 2004, but it did not
obtain the license for the production of encryption products until June 2006 and
the license for the sale of encryption products until September
2008. For risk relating to the potential legal penalties against
N-S Digital TV for its operation prior to its obtaining the production and
sales licenses, see “Item 3. Key Information—D. Risk Factors—Risk Relating
to Our Business and Industry—N-S Digital TV may be deemed not to be in full
compliance with certain legal regulatory requirements relating to the production
and sale of encryption products, and the relevant PRC government authorities
could require N-S Digital TV to cease such activities and impose
administrative penalties including fines, which could have a material adverse
effect on our business, financial conditions and results of
operations.”
Furthermore,
certain PRC regulations allow users to use only encryption products that are
certified by the encryption authority and purchased from vendors who hold an
encryption product sales license. Our CA systems that we currently
produce and sell have not been certified by the Encryption Bureau because we
have not adopted the government-designated algorithms for those CA
systems. King & Wood, our PRC counsel, has advised us that
because the Encryption Bureau has allowed a transition period, of a duration yet
to be determined at the sole discretion of the Encryption Bureau, for us to
adopt the algorithms to be finally and officially designated by the authority,
it is unlikely that the Encryption Bureau will enforce the above-mentioned
regulatory requirements with respect to the use or purchase of our CA systems
during that transition period. See also “Item 3. Key
Information—D. Risk Factors—Risks Relating to Our Business and
Industry—Enforcement of certain recent PRC regulatory requirements regarding the
use of encryption products may prevent prospective customers from purchasing our
CA systems and our business revenues and net income could be materially reduced
as a result.”
Although
foreign-invested enterprises incorporated in the PRC, such as our subsidiary,
Super TV, are not expressly prohibited from conducting encryption-related
business, they may have difficulties obtaining the licenses or permits required
for conducting such business from the Encryption Bureau due to the Encryption
Bureau’s generally restrictive approach towards foreign participation in the PRC
encryption industry. N-S Digital TV, which is wholly owned by
PRC citizens and through which we conduct our CA system business, has obtained
the license for the production and sales of commercial encryption products
required for our business. Our contractual arrangements with
N-S Digital TV and its shareholders provide us with the economic benefits
of, and substantive control over, N-S Digital TV. If the
Encryption Bureau determines that our control over, or relationship with,
N-S Digital TV through those contractual arrangements is contrary to its
generally restrictive approach towards foreign participation in the PRC
encryption industry, it may reconsider N-S Digital TV’s eligibility to hold
the license to produce and sell commercial encryption products. The
Encryption Bureau may revoke, or refuse to renew, N-S Digital TV’s licenses
to produce and sell commercial encryption products, or refuse to grant any other
encryption-related license that may be required for our business in the
future. See “Item 3. Key Information—D. Risk Factors—Risks
Relating to Our Corporate Structure—The agreements that establish the structure
for operating our business may result in the relevant PRC government regulators
revoking or refusing to renew N-S Digital TV’s licenses for the production
and sale of commercial encryption products, or refusing to issue any other
license required to engage in an encryption-related business.”
Regulation
of the Cable Television Industry
The PRC
cable television industry, in which most of our customers operate, is subject to
extensive government regulation and control. All PRC cable television
network operators are directly or indirectly owned or controlled by provincial
or local governments, and their business decisions and strategies are
significantly affected by government budgets and spending plans. In
April 2005, the PRC State Council issued a notice to allow domestic private
investors to invest in PRC companies engaged in the operation and infrastructure
development of cable networks, subject to a 49% ownership
cap. Foreign ownership of cable television networks and stations,
however, is still prohibited.
Cable
television network operators are subject to the laws, rules and regulations
promulgated from time to time by the State Council, the SARFT and other
ministries and government departments. These regulations include the
Administrative Regulations for
Television Broadcasting promulgated by the State Council in 1997 and the
Administrative Regulations for
Cable Television promulgated by a predecessor government agency of the
SARFT in 1994. Under these laws, rules and regulations:
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the
establishment of a television station or cable television network requires
the approval from the SARFT or its relevant local
branch;
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the
establishment of a digital pay-television channel requires the approval of
the SARFT;
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basic
cable television subscription rates are set by local governments and may
not be increased without a public
hearing;
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cable
television networks must be designed, constructed and installed by
institutions or companies that meet the qualifications set by the SARFT
;
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each
province and municipality, respectively, can have only one provincial or
municipal cable television network;
and
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various
restrictions on television programming must be complied with, including a
requirement that television operators shall procure programs only from
licensed production companies.
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According
to the relevant regulations of the SARFT, cable television network operators may
not use any network equipment or system unless the SARFT has issued a network
access certificate with respect to such equipment or system. In
determining whether to issue such a certificate, the SARFT reviews the quality
assurance system of the relevant manufacturer or vendor and the results of tests
of the equipment or systems. A network access certificate has a term
of three years and is subject to annual review by the SARFT or its local
branches. N-S Digital TV has obtained network access
certificates for our CA systems and SMS products.
According
to a policy introduced by the SARFT in 2003, any cable network operator that
uses a non-PRC CA system should use such non-PRC CA system together with a PRC
CA system when transmitting broadcasting signals. To satisfy this
requirement, a cable network operator that uses a non-PRC CA system must install
a parallel PRC CA system. Under this policy, vendors of non-PRC CA
systems may sell only to cable network operators that have already installed a
PRC CA system or who are willing to purchase a parallel PRC CA
system. This may result in a competitive disadvantage for vendors of
non-PRC CA systems relative to vendors of PRC CA systems. Such policy
does not expressly indicate whether the CA systems produced by a
foreign-invested company incorporated in the PRC, such as our subsidiary, Super
TV, fall into the category of non-PRC CA systems. In light of this
ambiguity, we have established N-S Digital TV, which is wholly owned by PRC
citizens, to produce and sell our CA systems. We do not have any
equity interest in N-S Digital TV and instead enjoy the economic benefits
of, and have substantive control over, N-S Digital TV through contractual
arrangements with N-S Digital TV and its shareholders as described in
“Item 7. Major Shareholders and Related Party Transactions—B. Related Party
Transactions.” There are substantial uncertainties regarding the interpretation
and application of the above- described PRC government policy and relevant PRC
laws, rules and regulations. Accordingly, the PRC government may
determine that N-S Digital TV is a vendor of non-PRC CA systems by virtue
of our contractual arrangements with N-S Digital TV and its
shareholders. See “Item 3. Key Information—D. Risk Factors—Risks
Relating to Our Corporate Structure—If the PRC government determines that
N-S Digital TV is a vendor of non-PRC CA systems by virtue of the
agreements that establish the structure for operating our business, we could
face difficulty selling our CA systems in the PRC.”
Software
Products Registration
On
October 27, 2000, the former Ministry of Information Industry issued the Measures Concerning Software
Products Administration, or Software Measures, to regulate software
products and promote the development of the software industry in the
PRC. Pursuant to these Software Measures, all software products used
or sold in the PRC must be registered with the relevant
authorities.
In
addition, to produce software products in the PRC, a software producer must show
that it: (1) possesses the status of an enterprise legal person and computer
software must be included in its registered scope of business; (2) has a fixed
production site; (3) possesses necessary conditions and technologies for
producing software products; and (4) possesses quality control measures and
capabilities for the production of software products. Software
developers or producers are allowed to sell or license their registered software
products independently or through agents. Software products developed
in the PRC must be registered with the local provincial government authorities
in charge of the information industry and filed with the MII. Upon
registration, the software products shall be granted registration
certificates. Each registration certificate is valid for five years
and may be renewed upon expiration. The MII and other relevant
departments may carry out supervision and inspection over the development,
production, operation and importing and exporting of software products in the
PRC.
Tax
See “Item
5. Operating and Financial Review and Prospects—A. Operating Results—Taxes and
Incentives—PRC.”
Foreign Currency Exchange
Foreign
currency exchange in the PRC is primarily governed by the following
regulations:
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·
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Foreign Exchange
Administration Rules (1996), as amended;
and
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·
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Regulations of Settlement,
Sale and Payment of Foreign Exchange
(1996).
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Under the
Foreign Exchange
Administration Rules, the Renminbi is freely convertible for current
account items, including the distribution of dividends, payment of interest,
trade and service-related foreign exchange transactions. Conversion of Renminbi
for capital account items, such as direct investment, loans, securities
investment and repatriation of investment, however, is still generally subject
to the approval or verification of the SAFE.
Under the
Regulations of Settlement,
Sale and Payment of Foreign Exchange, foreign-invested enterprises may
only buy, sell or remit foreign currencies at those banks authorized to conduct
foreign exchange business after providing valid commercial documents and, in the
case of capital account item transactions, obtaining approval from the SAFE.
Capital investments by foreign-invested enterprises outside of the PRC are also
subject to limitations, which include approvals by the MOFCOM, the SAFE and the
National Development and Reform Commission.
Dividend Distribution
The
principal regulations governing distribution of dividends paid by wholly
foreign-owned enterprises include:
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Wholly Foreign-Owned
Enterprise Law (1986), as amended;
and
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·
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Wholly Foreign-Owned
Enterprise Law Implementation Rules (1990), as
amended.
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Under
these regulations, wholly foreign-owned enterprises in the PRC may pay dividends
only out of their accumulated profits, if any, determined in accordance with PRC
accounting standards and regulations. In addition, according to the
PRC Company Law, wholly
foreign-owned enterprises in the PRC, like other PRC companies, are required to
set aside to fund a statutory reserve each year at least 10% of their after-tax
profit, based on PRC accounting standards, until the cumulative total of such
reserve reaches 50% of its registered capital. This reserve is not
distributable as cash dividends to equity owners.
Regulation of Foreign Exchange in
Certain Onshore and Offshore Transactions
In
October 2005, the SAFE issued SAFE Notice 75, which became effective as of
November 1, 2005, and was further supplemented by an implementation notice
issued by the SAFE on November 24, 2005. SAFE Notice 75 suspends the
implementation of two prior regulations promulgated in January and April of 2005
by the SAFE. SAFE Notice 75 states that PRC residents, whether
natural or legal persons, must register with the relevant local SAFE branch
prior to establishing or taking control of an offshore entity established for
the purpose of overseas equity financing involving onshore assets or equity
interests held by them. The term “PRC legal person residents” as used
in SAFE Notice 75 refers to those entities with legal person status or other
economic organizations established within the territory of the
PRC. The term “PRC natural person residents” as used in SAFE Notice
75 includes all PRC citizens and all other natural persons, including
foreigners, who habitually reside in the PRC for economic
benefit. The SAFE implementation notice of November 24, 2005 further
clarifies that the term “PRC natural person residents” as used under SAFE Notice
75 refers to those “PRC natural person residents” defined under the relevant PRC
tax laws and those natural persons who hold any interests in domestic entities
that are classified as “domestic-funding” interests.
PRC
residents are required to complete amended registrations with the local SAFE
branch upon: (1) injection of equity interests or assets of an onshore
enterprise to the offshore entity; or (2) subsequent overseas equity financing
by such offshore entity. PRC residents are also required to complete
amended registrations or filing with the local SAFE branch within 30 days
of 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. PRC residents who have already
incorporated or gained control of offshore entities that have made onshore
investment in the PRC before SAFE Notice 75 was promulgated must register their
shareholding in the offshore entities with the local SAFE branch on or before
March 31, 2006.
Under
SAFE Notice 75, PRC residents are further required to repatriate into the PRC
all of their dividends, profits or capital gains obtained from their
shareholdings in the offshore entity within 180 days of their receipt of
such dividends, profits or capital gains. The registration and filing
procedures under SAFE Notice 75 are prerequisites for other approval and
registration procedures necessary for capital inflow from the offshore entity,
such as inbound investments 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.
Regulation of Overseas
Listings
On August
8, 2006, six PRC regulatory agencies, including the MOFCOM, the State
Administration of State-owned Assets Supervision and Administration Commission,
the SAT, the State Administration for Industry and Commerce, the CSRC, and the
SAFE, jointly adopted the M&A Rules, which became effective on September 8,
2006. The M&A Rules, among other things, include provisions that
purport to require that an offshore special purpose vehicle formed for the
purpose of an overseas listing of securities in a PRC company and controlled
directly or indirectly by PRC companies or individuals obtain the approval of
the CSRC prior to the listing and trading of such special purpose vehicle’s
securities on an overseas stock exchange.
On
September 21, 2006, the CSRC published on its official website procedures
regarding its approval of overseas listings by special purpose
vehicles. The CSRC approval procedures require the filing of an
application and supporting documents with the CSRC and it would take several
months to complete the approval process.
We
completed the initial listing and trading of our ADSs on the NYSE on
October 11, 2007. We did not seek CSRC approval in connection
with our initial public offering. Our PRC counsel, King &
Wood, advised us that, based on their understanding of the current PRC laws,
regulations and rules and the procedures announced on September 21, 2006,
because we completed our restructuring before September 8, 2006, the effective
date of the M&A Rules, we were not required by the M&A Rules to apply to
the CSRC for approval of the listing and trading of our ADSs on a U.S. stock
exchange, unless we were clearly required to do so by any rules promulgated in
the future. See “Item 3. Key Information—D. Risk Factors—Risks
Relating to the People’s Republic of China—The approval of the China Securities
Regulatory Commission, or the CSRC, might be required in connection with our
initial public offering under certain PRC regulation; failure to obtain this
approval, if required, could have a material adverse effect on our business,
financial conditions, results of operations and reputation as well as the
trading price of our ADSs.”
C. Organizational
Structure
We are a
Cayman Islands holding company and conduct substantially all of our business
through Super TV, our operating subsidiary in the PRC, and through
N-S Digital TV, a PRC company that we control through contractual
arrangements. We own 100% of the equity interest of CDTV BVI, a BVI
holding company, that directly owns 100% of the equity interest of Golden
Benefit and China Super Media Holdings Limited, or CSM Holdings, each a Hong
Kong holding company. Golden Benefit, in turn, directly owns 100% of
the equity interest of Super TV. In order to assure that the PRC
government does not deem our CA systems to be “non-PRC” CA systems, which would
result in a significant competitive disadvantage for us in the PRC market, we
have established N-S Digital TV, which is wholly owned by PRC citizens, to
produce and sell our CA systems in the PRC. We do not have any equity
interest in N-S Digital TV, but instead enjoy the economic benefits derived
from N-S Digital TV through a series of contractual
arrangements.
The
following diagram illustrates our corporate structure as of the date of this
annual report:
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Equity
interest
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Contracts
with N-S Digital TV relating to provision of services and equipment,
supply of smart cards and related software, and technology licenses &
development
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Contracts
with shareholders of N-S Digital TV relating to governance of, and rights
over, N-S Digital
TV
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(1) Mr.
Junming Wu, Mr. Shizhou Shen and Mr. Lei Zhang currently are our
employees.
(2) Two
of our directors, Dr. Zengxiang Lu and Mr. Jianhua Zhu, are also directors of
N-S Digital TV.
N-T Information
Engineering was established by Tsinghua Enterprise Group, a company affiliated
with Tsinghua University, and Hong Kong-based Tsinghua Novel Hi-Tech Investment
Holding Ltd. in July 1998, and initially focused on developing, producing and
selling digital data broadcasting equipment for cable television
operators. In December 2002, N-T Information Engineering
completed its acquisition of the CA systems-related assets of Tsinghua
Tongfang. In March 2004, CDTV BVI was incorporated as a holding
company in the BVI. Following the establishment of CDTV BVI, we
restructured our operations in connection with an investment by
SAIF. As part of this restructuring, we established Super TV, a
wholly owned subsidiary of CDTV BVI, on May 31, 2004. On the same
day, N-T Information Engineering and Ms. Li Yang, a PRC citizen
employed by SAIF, established N-S Digital TV. In June 2004,
N-S Digital TV acquired from N-T Information Engineering its smart
card and CA systems business and, in August 2006, N-S Digital TV acquired
from N-T Information Engineering its set-top box design
business. In April 2007, a new holding company, CDTV Holding, was
established in the Cayman Islands. In May 2007, CDTV BVI executed a
40-for-1 share split of its ordinary shares and Series A preferred
shares. Following this share split, the shareholders of CDTV BVI
exchanged all of their shares of CDTV BVI for shares of CDTV Holding in
proportion to their percentage interest in CDTV BVI. As a result,
CDTV BVI became a wholly owned subsidiary of CDTV Holding. In August
2007, with our consent, Ms. Li Yang transferred her entire equity interest
in N-S Digital TV to Ms. Wei Gao, a PRC citizen employed by an
affiliated company of SAIF. Ms. Wei Gao further transferred her
entire equity interest in N-S Digital TV to Mr. Junming Wu in June 2008, and N-T
Information Engineering transferred its entire equity interest in N-S Digital TV
to Messrs. Shizhou Shen and Lei Zhang in November 2008.
In order
to benefit from the tax arrangement between the PRC and Hong Kong, in December
2007, CDTV BVI acquired Golden Benefit, a company incorporated in Hong Kong, for
a nominal consideration, and transferred its 100% equity interest in Super TV to
Golden Benefit. See “Item 3. Key Information—D. Risk Factors—Risks
Relating to the People’s Republic of China—We may be subject to PRC income tax
on our global income, or dividends we receive from our PRC subsidiary may be
subject to PRC withholding tax, depending on whether we are recognized as a
resident enterprise in the PRC” and “Item 5. Operating and Financial Review
and Prospects—A. Operating Results—Taxes and Incentives—Tax Arrangement between
PRC and Hong Kong.”
In
December 2007, Super TV established a wholly owned subsidiary, N-S Media
Investment, in the PRC to partner with China’s cable television operators and
content providers to offer value-added services to television
viewers. In light of the applicable PRC regulatory restrictions on
foreign investment in advertising business, which some of the value-added
television services to be offered by N-S Media Investment and its subsidiaries
could be categorized as, Super TV transferred all of its equity interests in N-S
Media Investment to N-S Digital TV in October 2008. In February 2008,
CDTV BVI established a wholly owned subsidiary, CSM Holdings, in Hong
Kong. In addition, in June 2008, N-S Digital TV established a joint
venture, Dongguan SuperTV, with other investors to provide value-added services
to television viewers in Dongguan, Guangdong Province. In October
2008, N-S Media Investment established a wholly owned subsidiary, Guangdong
SuperTV, to provide value-added services to television viewers in Guangdong
Province.
Any cable
network operator who uses a non-PRC CA system is required under a policy
promulgated by the SARFT to install a parallel PRC CA system. Under
this policy, vendors of non-PRC CA systems may sell only to cable network
operators who have already installed a PRC CA system or are willing to purchase
a parallel PRC CA system. This may result in a competitive
disadvantage for vendors of non-PRC CA systems relative to vendors of PRC CA
systems. Such policy does not expressly indicate whether the CA
systems produced by a foreign-invested company incorporated in the PRC, such as
our subsidiary Super TV, falls into the category of non-PRC CA
systems. In light of this ambiguity, we have established
N-S Digital TV, which is incorporated in the PRC and wholly owned by PRC
citizens, to produce and sell our CA systems to avoid our CA systems being
deemed as non-PRC CA systems. We conduct a significant portion of our
operations through N-S Digital TV. We do not directly or
indirectly have any equity interest in N-S Digital TV, but Super TV, our
wholly owned subsidiary in the PRC, has entered into a series of contractual
arrangements with N-S Digital TV and its shareholders. As a
result of these contractual arrangements, we are considered the primary
beneficiary of N-S Digital TV and, accordingly, we consolidate
N-S Digital TV’s results of operations in our financial
statements.
Super TV
mainly engages in supplying software products relating to smart cards to
N-S Digital TV, providing technical support and related services to
N-S Digital TV, and developing technology for use by N-S Digital
TV. Specifically, Super TV and N-S Digital TV have entered into
the following contracts:
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a
products and software purchase agreement, pursuant to which
N-S Digital TV exclusively purchased from Super TV all software
products relating to smart cards required for N-S Digital TV’s CA
systems;
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a
technical support and related services agreement, pursuant to which Super
TV exclusively provides N-S Digital TV and/or its customers with
technical support, technical training, personnel services in connection
with N-S Digital TV’s marketing activities and services relating to
the maintenance and optimization for the products and software of
N-S Digital TV’s customers at N-S Digital TV’s
request;
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a
technology license agreement, pursuant to which N-S Digital TV grants
Super TV, free of charge, an exclusive license to use certain software
copyrights, patents, unpatentable technologies and technical secrets
relating to the digital television business that was transferred from
N-T Information Engineering to N-S Digital TV;
and
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a
technology development agreement, pursuant to which N-S Digital TV
engages Super TV to develop all technology required by N-S Digital TV
or its customers.
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In
addition, Super TV has entered into agreements with N-S Digital TV and its
shareholders that provide us with the ability to control N-S Digital
TV. Pursuant to those contractual arrangements:
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the
shareholders of N-S Digital TV have jointly granted Super TV an
exclusive and irrevocable option to purchase all or part of their equity
interests in N-S Digital TV at any
time;
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without
Super TV’s consent, the shareholders of N-S Digital TV may not (1)
transfer or pledge their equity interests in N-S Digital TV, (2)
cause N-T Information Engineering or N-S Digital TV to issue new
shares; (3) receive any dividends, loan interest or other benefits from
N-S Digital TV or (4) make any material adjustment or change to
N-S Digital TV’s business or
operations;
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N-S Digital
TV and its shareholders agreed to (1) accept the policies and guidelines
furnished by Super TV with respect to the hiring and dismissal of
employees, or the operational management and financial system of
N-S Digital TV, (2) appoint the candidates recommended by Super TV as
directors of N-S Digital TV and (3) seek a guarantee from Super TV
first when any guarantee is required to secure performance by
N-S Digital TV of any contract or working capital loans borrowed by
N-S Digital TV;
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each
shareholder of N-S Digital TV has appointed Super TV or one of its
directors as their attorneys-in-fact to exercise all its voting rights as
shareholders of N-S Digital TV;
and
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each
shareholder of N-S Digital TV has pledged all of its respective
equity interests in N-S Digital TV to Super TV to secure the payment
obligations of N-S Digital TV under certain contractual arrangements
between N-S Digital TV and Super
TV.
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For a
more detailed description of these contractual agreements, see “Item 7.
Major Shareholders and Related Party Transactions—B. Related Party
Transactions—Super TV and N-S Digital TV Arrangements” and “Item 7.
Major Shareholders and Related Party Transactions—B. Related Party
Transactions—Shareholder Rights and Corporate Governance.”
D. Property,
Plants and Equipment
We
currently maintain our headquarters and substantially all of our operations at
Jingmeng High-Tech Building B, 4th Floor, No. 5 Shangdi East Road, Haidian
District, Beijing 100085, PRC, where we lease 8,818 square meters of office
space pursuant to five two-year lease agreements with the same landlord for
separate portions of the total space. The five lease agreements are:
(1) a lease agreement of N-S Digital TV with respect to an area of 2,788
square meters for its operational use; (2) a lease agreement of Super TV with
respect to an aggregate area of 5,194 square meters for its operational use; (3)
a lease agreement of Super TV with respect to an aggregate area of 179 square
meters used as a workroom for our set-top box manufacturer customers to test our
products; (4) a lease agreement of N-S Media Investment with respect to an
aggregate area of 498 square meters for its operational use; and (5) a lease
agreement of Super TV with respect to an aggregate area of 159 square meters
used as a laboratory by our research and development department. The
lease agreement referred to in item (5) above will expire in April 2011, and the
other lease agreements will expire in March 2011. Under each of the lease
agreements, if we intend to renew the lease, we are required to enter into a new
lease agreement with the landlord no later than one month prior to the
expiration date and the landlord has undertaken to offer us a preferential
rental rate for any renewal. In addition, we have the right to
terminate any of these leases by providing three months’ prior
notice.
In
addition, we lease office space in Guangzhou for use by Guangdong SuperTV to
conduct their business. We also lease office space for service and support
centers in Changsha, Dalian, Hangzhou, Nanhai and Nanchang. We
routinely review our needs for office space in light of the development of our
operations.
We
believe that the office space that we currently lease is sufficient for our
current and immediately foreseeable needs. We may lease additional
space if needed in the future.
Item
4A. Unresolved Staff Comments
None.
Item
5. Operating and Financial
Review and Prospects
The
following discussion and analysis should be read in conjunction with our
consolidated financial statements and the related notes included elsewhere in
this annual report. Our audited consolidated financial statements
have been prepared in accordance with U.S. GAAP. This discussion
contains forward-looking statements that involve risks and uncertainties. Our
actual results could differ materially from those projected in the
forward-looking statements. In evaluating our business, you should
carefully consider the information provided in “Item 3. Key Information—D.
Risk Factors.”
A. Operating
Results
Overview
We are
the leading provider of CA systems to the PRC’s expanding digital television
market. Our CA systems, which consist of smart cards, head-end
software for television network operators and terminal-end software for set-top
box manufacturers, enable digital television network operators in the PRC to
control the distribution of content and value-added services to their
subscribers and block unauthorized access to their networks. In
addition, we license our set-top box design to set-top box manufacturers and
digital television operators and sell advanced digital television application
software, such as electronic program guides and subscriber management systems,
to digital television network operators.
We sell
our CA systems and digital television application software to PRC television
network operators, including cable, satellite and terrestrial television network
operators and enterprises that maintain private cable television networks within
their facilities. We currently derive, and we expect to continue to
derive, a significant portion of our revenues during any given period from a
limited number of customers, primarily cable television network operators who
are launching new digital transmission systems, although the particular
customers may vary from period to period.
PRC
television network operators are in the process of switching from analog to
digital transmissions, and the PRC government has set a target of 2015 for cable
operators nationwide to complete the digital transition. As of
December 31, 2009, we had installed CA systems at 244 digital television
network operators in 27 of the 32 provinces, autonomous regions and centrally
administered municipalities in the PRC. We derive a substantial
majority of our revenues from sales of our smart cards, which accounted for
90.8% and 89.0% of
our total revenues in 2008 and in 2009, respectively. We expect that
the sales of our smart cards will continue to constitute the majority of our
revenues in the near future. We sold 7.3 million, 9.9 million
and 8.8 million
smart cards in 2007, 2008 and 2009, respectively, and our net revenues were
US$55.5 million, US$70.3 million, US$54.7 million in 2007, 2008
and 2009, respectively. Our net income was US$33.8 million,
US$43.1 million and US$25.3 million in 2007, 2008
and 2009, respectively. The decrease in net revenues from 2008 to
2009 reflected the industry-wide slowdown of the cable television digitalization
progress in 2009 and cable television operators’ more cautious approach to
making new investments, as well as decrease in average selling price of smart
cards as a result of intensified competition.
Among the
most significant factors affecting our business, financial condition and results
of operations are:
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Progress of
digitalization in the PRC and the growth of digital television network
operators’ subscriber base. Our continued success
depends on the pace at which PRC television network operators switch from
analog to digital transmission as well as the growth in our customers’
subscriber base. If the PRC government postpones its target
date for digitalization, or our customers fail to roll out
analog-to-digital conversion or attract subscribers to digital television
including as a result of the recent economic slow-down in the PRC, we may
be unable to sustain or grow our
revenues.
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Pricing. The
business in which we operate is subject to intense competition, in
particular with respect to pricing of our products and
services. Our customers generally expect to receive
volume-based discounts from us, and we may be required to reduce prices
for large purchases or as the competition
intensifies.
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Purchasing
patterns of our customers. Our customers generally
purchase smart cards from us based on the number of digital television
subscribers they expect to add in the immediate near term, resulting in
significant fluctuations in our revenues from period to period due to the
uncertainty of both the timing and the amount of such customer
orders.
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Ability to
respond effectively to technological and commercial
changes. Our business and the market in which we operate
are characterized by rapid commercial and technological change, evolving
industry standards and frequent product enhancements. Our
continued success will depend, in part, on our ability to develop and
market products and services that respond to technological changes and
evolving market demand or industry standards in a timely and
cost-effective manner.
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Cost
structure. Our profitability also depends on the cost
structure of our operations, including, among other things, the costs of
computer chips sourced from third-party suppliers and personnel
costs.
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In
addition to the factors discussed above, our reported results are also affected
by the fluctuations in the value of the Renminbi against the U.S. dollar, as our
reporting currency is the U.S. dollar while the functional currency of our
subsidiaries and variable interest entities in China, which operate
substantially all of our business, is the Renminbi. In 2007 and 2008, the
Renminbi appreciated against the U.S. dollar by approximately 6.5% and 6.4%,
respectively. The appreciation of the Renminbi against the U.S. dollar
contributed to the increase in our net income reported in U.S. dollar terms in
2007 and 2008, respectively. In 2009, the Renminbi appreciated against the U.S.
dollar by less than 0.01%. For additional information relating to the
fluctuations in the value of the Renminbi against the U.S. dollar, see “Item 3.
Key Information—A. Selected Financial Data—Exchange Rate Information,” “Item 3.
Key Information—D. Risk Factors—Risks Relating to the People’s Republic of
China—Fluctuations in exchange rates could result in foreign currency exchange
losses.” and “Item 11. Quantitative and Qualitative Disclosures About Market
Risks—Foreign Currency Risk.”
Our
business is managed as a single operating segment. Our management
reviews our consolidated results of operations prepared in accordance with U.S.
GAAP when making decisions about allocating our resources and assessing our
performance.
Revenues
We derive
revenues primarily from the following two sources:
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Products.
We currently derive a substantial majority of our revenues from sales of
smart cards and other products to digital television network operators.
Smart cards are an essential part of our CA systems. Our customers
purchase our smart cards for distribution to and use by their subscribers
in their set-top boxes. Revenues from the sales of our smart cards account
for substantially all of our revenues from the sales of our products. In
addition, we also sell small quantities of other products, including
set-top boxes sourced from third-party suppliers to a limited number of
digital television network operators from time to time. We expect that the
sales of our smart cards will continue to constitute the majority of our
revenues in the near future.
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·
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Services. We
derive revenues from providing head-end system integration services and
head-end system development services to digital television network
operators, collecting licensing fees and/or royalty income from set-top
box manufacturers and digital television operators. Our
head-end system integration services involve providing head-end software,
hardware and related system integration services to our
customers. Head-end software mainly consists of software for CA
systems, subscriber management systems and electronic program
guides. Our head-end system development services involve the
development of customized digital television-related software applications
for our customers. In addition, we provide set-top box
manufacturers with our CA system terminal-end software that enables them
to manufacture set-top boxes compatible with our CA systems, and receive
one-time licensing fees as well as royalties from such set-top box
manufacturers. We also earn licensing fees and/or royalties
from licensing our set-top box design to set-top box manufacturers and
digital television operators.
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In
certain circumstances, we receive royalties from digital television network
operators who purchase smart cards for use with set-top boxes that were
manufactured using our CA system terminal-end software, in lieu of collecting
royalties from the relevant set-top boxes manufacturers. We include
such royalty income as part of the revenue from sales of the related smart
cards.
Revenues
from the sales of our products and services accounted for 89.3% and 10.7%,
respectively, of our total revenues in 2009 and 91.1% and 8.9%, respectively, of
our total revenues in 2008. Our revenues also include certain refunds
of value-added taxes from PRC tax authorities that we previously paid with
respect to some of our software products. See “Item 5. Operating
and Financial Review and Prospects—A. Operating Results—Taxes and Incentives”
below for more information.
Our net
revenues represent total revenues less PRC business tax and related surcharges
and cultural construction fees relating to advertising services. See
“Item 5. Operating and Financial Review and Prospects—A. Operating
Results—Taxes and Incentives—PRC—Business Tax” below for more
information.
Cost
of Revenues
Cost of
revenues primarily includes: costs of raw materials, such as computer chips
manufactured by third-party suppliers and used in our smart cards and other
products; personnel costs directly relating to provision of our services;
warranty costs relating to our smart card sales; depreciation and amortization
costs; share-based compensation allocated to the production and processing of
our smart cards and other products; fees paid to our sales agents; and other
miscellaneous costs. These costs are allocated to our two types of
revenue-generating activities as their respective costs of
revenues. Cost of revenues related to the sales of our products and
to the sales of our services accounted for 72.5% and 27.5%, respectively, of our
total cost of revenues in 2009 and 79.4% and 20.6%, respectively, of our total
cost of revenues in 2008. As a percentage of our net revenues, cost
of revenues increased from 19.5% in 2008 to 24.5% in 2009.
Gross
Profit and Gross Margin
Gross
profit is equal to net revenues less cost of revenues. Gross margin is equal to
gross profit divided by net revenues. Our gross margin was 81.5%, 80.5% and
75.5% in 2007, 2008
and 2009, respectively. The slight decrease in our gross margin from
2007 to 2008 was primarily attributable to the decrease in the average selling
price, or ASP, of our smart cards, which was partially offset by a decrease in
the average unit cost of our smart cards during the same period. The decrease
from 2008 to 2009 was primarily attributable to the further decrease in the ASP
of smart cards.
The
average unit cost of our smart cards in U.S. dollar terms decreased by
approximately 0.9% from 2007 to 2008 and
further decreased by approximately 0.9% from 2008 to 2009, primarily as a result
of a decrease in the price of computer chips, which was partially offset by an
increase in other related costs.
Operating
Expenses
Our
operating expenses consist of research and development expenses, selling and
marketing expenses and general and administrative expenses. Each of these
components of our operating expenses includes a portion of our total share-based
compensation expenses, which are generally allocated according to the functions
of those individuals who received share-based awards.
Research and
Development Expenses. Research and development expenses
consist primarily of costs associated with the design, development and testing
of our products and technologies. Among other things, these costs include
compensation and benefits for our research and development staff, rental for our
office premises used for research and development activities, depreciation
expenses related to equipment used in research and development activities,
expenditures for purchases of supplies and other relevant
costs. Compensation and benefits for our research and development
staff accounted for the majority of our research and development expenses.
Research and development expenses as a percentage of our net revenues were 9.8%
and 16.0% in 2008 and 2009, respectively. We expanded the size of our research
and development staff from 225 employees as of December 31, 2008 to 272 as of
December 31, 2009 and increased the average amount of their
compensation.
Selling and
Marketing Expenses. Selling and marketing expenses consist
primarily of compensation and benefits for our sales and marketing staff,
expenses for promotional, advertising, travel and entertainment activities,
marketing-related consulting fees, expenditures for purchases of supplies and
amortization of intangible assets. Selling and marketing expenses as
a percentage of our net revenues were 8.6% and 13.2% in 2008 and 2009,
respectively. Our selling and marketing expenses have increased
primarily due to the increase in the size of our selling and marketing team, as
well as expanded marketing efforts.
General and
Administrative Expenses. General and administrative expenses
consist primarily of compensation and benefits for our general management,
finance and administrative staff, professional advisory fees, depreciation and
amortization with respect to equipment used for general corporate purposes,
rental costs for our office premises used by general management, finance and
administrative staff, and other expenses incurred in connection with general
corporate purposes. General and administrative expenses as a
percentage of our net revenues were 8.7% and 8.8% in 2008 and 2009,
respectively. Our general and administrative expenses have decreased
primarily due to lower bad debt expenses and lower professional service
expenses.
Share-Based
Compensation Expenses. We account for share-based compensation
expenses based on the fair value of share option grants at the date of
grant.
We
adopted our 2005 and 2008 Stock Incentive Plans in February 2005 and September
2007, respectively, and as of December 31, 2009, options to purchase 1,726,318
ordinary shares had been granted and were outstanding under the
plans. In addition, in 2005, we granted options to purchase 143,474
ordinary shares to a company affiliated with SAIF, all of which have been
exercised as of December 31, 2009, and in May 2007 we granted options to
purchase 40,000 ordinary shares to Mr. Louis T. Hsieh, who became an
independent director of our company upon the completion of our initial public
offering in October 2007, 33,889 of which were exercised with the remainder
being forfeited following Mr. Hsieh’s retirement from our board of directors in
December 2009. We incurred US$1.3 million, US$1.0 million and
US$1.7 million in share-based compensation expenses in 2007, 2008 and 2009,
respectively. For additional information regarding our share-based
compensation expenses, see Note 18 to our consolidated financial statements
included elsewhere in this annual report.
The table
below shows the allocation of share-based compensation charges to cost of
revenues and our operating expense line items for the periods
indicated:
|
|
For the years ended December 31,
|
|
Share-Based Compensation Related to:
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
Cost
of revenues
|
|
US$ |
34 |
|
|
US$ |
35 |
|
|
US$ |
30 |
|
Research
and development expenses
|
|
|
391 |
|
|
|
481 |
|
|
|
713 |
|
Selling
and marketing expenses
|
|
|
112 |
|
|
|
186 |
|
|
|
447 |
|
General
and administrative expenses
|
|
|
724 |
|
|
|
342 |
|
|
|
472 |
|
Total
|
|
US$ |
1,261 |
|
|
US$ |
1,044 |
|
|
US$ |
1,662 |
|
Income
from Operations
Income
from operations represents gross profit less operating expenses.
Non-operating
Income (Expenses)
Non-operating
income (expenses) includes interest income and other income or expenses, each as
presented in our consolidated statements of operations. In December
2007, we received a cash award of US$0.3 million from the Administration
Committee of Beijing Zhongguancun Economic Zone as a one-off award for the
consummation of our initial public offering in the United States. Our
interest income was US$2.8 million, US$9.1 million and US$6.1 million in 2007,
2008 and 2009, respectively.
Corporate
Structure
We are a
Cayman Islands holding company and conduct substantially all of our business
through Super TV, our indirectly wholly owned subsidiary in the
PRC. In May 2004, we established N-S Digital TV, a PRC company
that is wholly owned by PRC citizens, to carry out our CA systems business in
the PRC. We do not directly or indirectly have any equity interest in
N-S Digital TV, but Super TV has entered into a series of contractual
arrangements with N-S Digital TV and its shareholders. As a
result of these contractual arrangements, we are considered the primary
beneficiary of N-S Digital TV and, accordingly, we consolidate
N-S Digital TV’s results of operations in our financial
statements. For a description of these contractual agreements, see
“Item 7. Major Shareholders and Related Party Transactions—B. Related Party
Transactions—Super TV and N-S Digital TV Arrangements” and “Item 7.
Major Shareholders and Related Party Transactions—B. Related Party
Transactions—Shareholder Rights and Corporate Governance.”
Critical
Accounting Policies
We
prepare our financial statements in conformity with U.S. GAAP, which requires us
to make estimates and assumptions that affect our reporting of, among other
things, assets and liabilities, contingent assets and liabilities and revenues
and expenses. We continually evaluate these estimates and assumptions
based on the most recently available information, our own historical experiences
and other factors that we believe to be relevant under the
circumstances. Since our financial reporting process inherently
relies on the use of estimates and assumptions, our actual results could differ
from what we expect. This is especially true with some accounting
policies that require higher degrees of judgment than others in their
application. We consider the policies discussed below to be critical
to an understanding of our audited consolidated financial statements because
they involve the greatest reliance on our management’s judgment.
Revenue
Recognition. We derive revenues primarily from two sources:
(1) sales of products, including smart cards and other products sourced from
third-party suppliers, such as set-top boxes; and (2) provision of services,
including head-end system integration services, head-end system development
services and CA system terminal-end software or set-top box design that generate
licensing income and royalty income.
For sales
of our products, we recognize revenue when the products are delivered to and
received by customers.
Our
head-end integration services primarily involve provision of our head-end
software, third-party hardware and software, related installation and
integration services, training and post-contract customer support, or PCS,
including telephone support and bug-fixing. Our head-end system
development services involve the development of customized digital television
technology-related software applications. Head-end software offered
by us includes CA systems head-end software, SMS software and electronic program
guide software.
We sign
head-end system integration contracts with cable television network operators to
install and integrate our software with third-party hardware and
software. Once the service is substantially completed, customers will
issue a preliminary acceptance, while a final acceptance is usually issued six
months to one year after the issuance of preliminary acceptance if no major
technical problems are discovered. In the majority of our head-end
system integration contracts, we offer free PCS for one year, beginning from
preliminary acceptance by customers. Based on historical information,
we believe that a final acceptance is not a significant event because
essentially all the services we were obligated to provide have been delivered
and all technical problems, if any, have been detected at the point of the
preliminary acceptance by the customer and the cost of additional work between a
preliminary acceptance and a final acceptance has historically been
insignificant.
With
respect to the contracts in which we offer free PCS for one year or less, we
recognize revenue when all installation and integration services are completed,
which is generally indicated by obtaining the preliminary acceptances from
customers. With respect to contracts in which we offer free PCS for
more than one year, although the costs incurred during the PCS term have
historically been insignificant, we defer the revenue and ratably recognize it
over the PCS term. Where we offer PCS for an unspecified period, we
ratably recognize the relevant revenue over the estimated useful life of our CA
systems, which we determined to be five years.
With
respect to our head-end system development services, we use the
completed-contract method to recognize revenue when the software application
development is finished and accepted by customers, as we currently do not have a
reliable mechanism to measure the progress toward completion of the
service.
We
receive licensing fees from set-top box manufacturers who license our CA systems
terminal-end software or set-top box design, and we are also entitled to receive
royalties from them based on the quantity of set-top boxes manufactured under
such licenses. Royalty income is recognized upon receipt of sales
reports from the set-top box manufacturers and when payment is received, while
licensing income is recognized upon the issuance of certificates to the set-top
box manufacturers by us.
Deferred
Costs. Where revenue from a head-end system integration
contract is deferred and recognized over the PCS term, we defer the incremental
costs directly associated with such revenue. Such costs mainly relate
to hardware and software purchased from third-party
suppliers. Deferred costs are recorded as an asset and amortized to
cost of revenue over the same period as that over which the corresponding
revenue is recognized.
Warranty
Provision. We generally guarantee the quality of our smart
cards for periods ranging from one to three years.
We
provide for the estimated costs of such warranty at the time revenue is
recognized. We estimate the costs we will incur under the warranty
arrangement. Historically, the defect rate of smart cards has been
low and the warranty costs have been minimal. We recorded the
equivalent of 0.1% of revenue from smart card sales as a warranty liability to
accrue the estimated costs of our warranty obligations.
Actual
warranty costs will depend on a variety of factors. To the extent
that warranty costs differ significantly from the estimates, we will adjust our
warranty provision accordingly. Any such adjustments to our accrued
warranty provision will affect our results of operations in the period the
adjustment is made as well as subsequent periods to the extent the amount of the
estimated warranty provision is adjusted.
Goodwill.
Goodwill is not amortized but tested for impairment on an annual basis
and between annual tests in certain circumstances. Goodwill
impairment is tested using a two-step approach. The first step
compares the fair value of a reporting unit to its carrying amount, including
goodwill. If the fair value of the reporting unit is greater than its
carrying amount, goodwill is not considered impaired and the second step is not
required. If the fair value of the reporting unit is less than its
carrying amount, the second step of the impairment test measures the amount of
the impairment loss, if any, by comparing the implied fair value of goodwill to
its carrying amount. If the carrying amount of goodwill exceeds its
implied fair value, an impairment loss is recognized equal to that
excess. The implied fair value of goodwill is calculated in the same
manner that goodwill is calculated in a business combination, whereby the fair
value of the reporting unit is allocated to all of the assets and liabilities of
that unit, with the excess purchase price over the amounts assigned to assets
and liability representing the implied fair value of
goodwill. Estimating fair value is performed by utilizing various
valuation techniques, with the primary technique being a discounted cash
flow. We have one reporting unit and have determined to perform the
annual impairment test on December 31 of each year.
Impairment of
Long-Lived Asset. We review our long-lived assets for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset
may no longer be recoverable. When these events occur, we measure
impairment by comparing the carrying value of the long-lived assets to the
estimated undiscounted future cash flows expected to result from the use of the
assets and their eventual disposition. If the sum of the expected
undiscounted cash flows is less than the carrying amount of the assets, we would
recognize an impairment loss based on the fair value of the assets.
Allowance for
Doubtful Accounts. We perform ongoing credit evaluations of
our customers and generally do not require collateral on accounts
receivable. We maintain an allowance for doubtful accounts primarily
based upon the aging analysis of the receivables and factors surrounding the
credit risk of specific customers.
Share-based
Compensation. Share-based payment transactions with employees,
such as share options, are measured based on the fair value of the equity
instrument issued on the date of grant, and are recognized as compensation
expense over the requisite service period based on the graded vesting
attribution method, with a corresponding impact reflected in additional paid-in
capital. We estimated the fair value of our share options at the
respective grant dates using the Black-Scholes option-pricing
model.
Under
this model, we made a number of assumptions regarding the fair value of the
options, including:
|
·
|
the
expected future volatility of our ordinary share
price;
|
|
·
|
the
risk-free interest rate;
|
|
·
|
the
expected life of the options;
|
|
·
|
the
expected dividend yield; and
|
|
·
|
the
estimated fair value of our ordinary shares at the grant date for options
granted prior to our initial public
offering.
|
For
options granted after our initial public offering, the fair value of our
ordinary share on the grant date is determined by the closing trade price of our
ADSs representing our ordinary shares on the grant date. We estimated
the expected volatility of our ordinary share price based on the historical
share price volatility of the publicly traded shares of four comparable
companies in the digital television and related businesses over a period
comparable to the expected term of the options and our own historical share
price volatility.
Recently
Issued Accounting Pronouncements
See Note
2(aa) to our consolidated financial statements included elsewhere in this annual
report for recently issued accounting standards that we believe may have
implications on our financial statements for future periods.
Taxes
and Incentives
Cayman
Islands, British Virgin Islands and Hong Kong
Our
company, as an exempted company incorporated in the Cayman Islands, and CDTV
BVI, our wholly owned subsidiary incorporated in BVI, are not subject to any
income or capital gains tax under the current laws of the Cayman Islands and
BVI. Golden Benefit and CSM Holdings, our indirectly wholly owned
subsidiaries incorporated in Hong Kong, are subject to 17.5% Hong Kong profits
tax for the years ended December 31, 2007 and 2008 and 16.5% Hong Kong profits
tax for the year ended December 31, 2009 on their activities conducted in Hong
Kong.
PRC
Our
subsidiaries, our variable interest entity and the subsidiaries of our variable
interest entity operating in the PRC are subject to PRC taxes as described
below:
Enterprise Income
Tax. Prior to January
1, 2008, the effective date of the 2008 EIT Law, both domestic and
foreign-invested enterprises were generally subject to an enterprise income tax
rate of 33% in the PRC under the relevant tax laws then
effective. However, qualified high-and-new technology enterprises
incorporated and operated in high-and-new technology development zones
designated by the State Council might enjoy a reduced enterprise income tax rate
of 15%. As a high-and-new technology enterprise incorporated and
operated in the Beijing High-Tech Development Experimental Zone, which is a
designated high-and-new technology development zone, each of Super TV and
N-S Digital TV is entitled to a preferential-enterprise income tax rate of
15%. In addition, each of N-S Digital TV and Super TV is
entitled to income tax exemption during the three years from 2004 through 2006,
and a 50% reduction of income tax during the subsequent three years from 2007
through 2009.
Effective
from January 1, 2008, the 2008 EIT Law imposes a tax rate of 25% on all
enterprises, including foreign-invested enterprises, and terminates many of the
tax exemptions, reductions and preferential treatments available under previous
tax laws and regulations. However, under the 2008 EIT Law,
enterprises that were established before March 16, 2007 and already enjoy
preferential tax treatments will continue to enjoy them (1) in the case of
certain preferential tax rates that are specified by tax legislations, for a
transition period of five years from January 1, 2008 or (2) in the case of tax
exemption or reduction for a specified term, until the expiration of such
term. Under the 2008 EIT Law, “high-and-new technology enterprises
strongly supported by the State” are entitled to a preferential tax rate of
15%. In December 2008, N-S Digital TV and Super TV successfully
obtained their respective high-and-new technology enterprise certificates under
the 2008 EIT Law and are therefore recognized as “high-and-new technology
enterprises strongly supported by the State” and qualified for a preferential
tax rate of 15%. As a result, each of N-S Digital TV and Super TV
continued to enjoy a 50% reduction of income tax until the end of 2009, and
thereafter, they have been entitled to a preferential enterprise income tax rate
of 15%.
N-S Media
Investment was subject to an enterprise income tax of 33% in 2007, and is
subject to an enterprise income tax rate of 25% starting from January 1, 2008.
Guangdong SuperTV is subject to an enterprise income tax rate of 25% upon
establishment in 2008.
In
addition, under the 2008 EIT Law, an enterprise established under the laws of a
foreign country or region whose “de facto management body” is located within the
PRC territory is considered a resident enterprise and will generally be subject
to the enterprise income tax at the rate of 25% on its global income. According
to the Implementation Rules, “de facto management body” refers to a managing
body that exercises, in substance, overall management and control over the
production and business, personnel, accounting and assets of an
enterprises. With reference to the SAT Notice 82, we believe that we
are not a PRC resident enterprise. However, if we were considered a PRC resident
enterprise, we would be subject to the enterprise income tax at the rate of 25%
on our global income. See “Item 3. Key Information—D. Risk
Factors—Risks Relating to the People’s Republic of China—We may be subject to
PRC income tax on our global income, or dividends we receive from our PRC
subsidiary may be subject to PRC withholding tax, depending on whether we are
recognized as a resident enterprise in the PRC.” In addition, the
2008 EIT Law and the Implementation Rules provide that a withholding tax of 10%
(or other applicable withholding tax rates based on tax treaties between the PRC
and other jurisdictions) will generally be applicable to dividends payable to
foreign investors, and, unlike the prior tax law, does not specifically exempt
corporations that pay dividends from withholding all or part of such income tax
when they pay dividends to their foreign investors. To the extent we are not
considered as a PRC resident enterprise, the dividends our PRC subsidiary pays
to us will be subject to this withholding tax. See “Item 3. Key
Information—D. Risk Factors—Risks Relating to the People’s Republic of China—We
may be subject to PRC income tax on our global income, or dividends we receive
from our PRC subsidiary may be subject to PRC withholding tax, depending on
whether we are recognized as a resident enterprise in the PRC.” In addition,
this withholding tax may also apply to dividends we pay to our non-PRC
shareholders. See “Item 3. Key Information—D. Risk Factors—Risks Relating
to the People’s Republic of China—Dividends payable by us to our non-PRC
shareholders and ADS holders, and gains on the sales of our ordinary shares or
ADSs, may be subject to withholding taxes under PRC tax laws, which may
materially reduce the value of your investment.”
Value-added Tax
Refunds. Pursuant to a PRC tax policy intended to encourage
the development of software and integrated circuit industries, each of
N-S Digital TV and Super TV is entitled to a refund of value-added tax paid
at a rate of 14% of the sale value of some of our software
products. The amount of the refund for this value-added tax included
in our total revenues was US$5.0 million, US$6.5 million and
US$4.1 million in 2007, 2008 and 2009, respectively, accounting for 9.0%,
9.2% and 7.4%, respectively, of our total revenues in the corresponding
periods. We include such refunds in the total revenues in our
consolidated statements of operations included elsewhere in this annual
report. The value-added tax refund benefits will cease to be
available to N-S Digital TV and Super TV by the end of
2010. Each of N-S Digital TV’s subsidiaries was subject to a standard
value-added tax rate of 17% without any tax refunds in 2009.
Business
Tax. Each of N-S Digital TV and its subsidiaries is subject to
business tax and related surcharges as well as cultural construction fees
relating to our advertising services at a rate of (1) approximately 8.5% on
revenues generated from advertising services after deduction of certain costs
permitted by the PRC tax regulations and (2) approximately 5.5% on certain other
service-type revenues, including those from our head-end integration services,
head-end system development services, licensing income and royalty
income. Super TV is currently exempted from business tax at a rate of
5% on the revenues generated by the services it currently provides. As a
foreign-invested company, Super TV is not subject to any
surcharges.
Tax Arrangement between PRC and Hong
Kong
The Hong
Kong government and the PRC government entered into the Arrangement for Avoidance of Double
Taxation on Income and Prevention of Tax Evasion on August 21, 2006,
which took effect on January 1, 2007 and April 1, 2007 in the PRC and Hong Kong,
respectively. This arrangement provides certain tax incentives to use
a Hong Kong company as an intermediate holding company for holding investments
in the PRC. The withholding tax rate applicable to dividends received
by a Hong Kong company from its investments in the PRC is 5% compared to the 10%
withholding tax rate applicable to dividends received by a company incorporated
in a jurisdiction where there is no similar tax treaty or arrangement with the
PRC, and a full tax exemption in the PRC is available on a capital gain derived
by a Hong Kong company from the disposal of its shares in a PRC company,
provided that the shares sold are less than 25% of the shareholding of the PRC
company and the assets of the PRC company do not consist mainly of real property
situated in the PRC.
On
October 27, 2009, the SAT issued the SAT Notice 601, which is applicable to the
tax arrangements between PRC and Hong Kong. Specifically, the SAT Notice 601
provides that only the enterprises with active operations can be recognized as
“beneficial owners” under relevant tax treaties which are entitled to enjoy the
corresponding tax benefits. It further provides that those enterprises that are
established solely for the purposes of benefiting from favorable tax treatment
under the relevant tax treaties should not be recognized as “beneficial owners”
and therefore can not enjoy favorable tax treatment. See “Item 3. Key
Information—D. Risk Factors—We may be subject to PRC income tax on our global
income, or dividends we receive from our PRC subsidiary may be subject to PRC
withholding tax, depending on whether we are recognized as a resident enterprise
in the PRC.”
Recent
Acquisitions
See
“Item 4. Information on the Company—A. History and Development of the
Company—Our Investments and Acquisitions.”
Results
of Operations
The
following table sets forth our condensed consolidated statements of operations
by amount and as a percentage of our net revenues for the periods
indicated:
|
|
For
the years ended December 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In
thousands, except percentages)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Products
|
|
US$ |
49,741 |
|
|
|
89.7 |
% |
|
US$ |
64,412 |
|
|
|
91.6 |
% |
|
US$ |
49,146 |
|
|
|
89.8 |
% |
Service
|
|
|
6,011 |
|
|
|
10.8 |
|
|
|
6,285 |
|
|
|
8.9 |
|
|
|
5,918 |
|
|
|
10.8 |
|
Total
revenues
|
|
|
55,752 |
|
|
|
100.5 |
|
|
|
70,697 |
|
|
|
100.5 |
|
|
|
55,064 |
|
|
|
100.6 |
|
Business
taxes
|
|
|
(299 |
) |
|
|
(0.5 |
) |
|
|
(363 |
) |
|
|
(0.5 |
) |
|
|
(360 |
) |
|
|
(0.6 |
) |
Net
revenues
|
|
|
55,453 |
|
|
|
100.0 |
|
|
|
70,334 |
|
|
|
100.0 |
|
|
|
54,704 |
|
|
|
100.0 |
|
Cost
of revenues:(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Products
|
|
|
8,100 |
|
|
|
14.6 |
|
|
|
10,877 |
|
|
|
15.5 |
|
|
|
9,716 |
|
|
|
17.8 |
% |
Service
|
|
|
2,135 |
|
|
|
3.9 |
|
|
|
2,828 |
|
|
|
4.0 |
|
|
|
3,686 |
|
|
|
6.7 |
|
Total
cost of revenues
|
|
|
10,235 |
|
|
|
18.5 |
|
|
|
13,705 |
|
|
|
19.5 |
|
|
|
13,402 |
|
|
|
24.5 |
|
Gross
profit
|
|
|
45,218 |
|
|
|
81.5 |
|
|
|
56,629 |
|
|
|
80.5 |
|
|
|
41,302 |
|
|
|
75.5 |
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research
and development expenses(1)
|
|
|
4,643 |
|
|
|
8.4 |
|
|
|
6,921 |
|
|
|
9.8 |
|
|
|
8,779 |
|
|
|
16.0 |
|
Selling
and marketing expenses(1)
|
|
|
3,758 |
|
|
|
6.8 |
|
|
|
6,063 |
|
|
|
8.6 |
|
|
|
7,203 |
|
|
|
13.2 |
|
General
and administrative expenses(1)
|
|
|
3,706 |
|
|
|
6.7 |
|
|
|
6,084 |
|
|
|
8.7 |
|
|
|
4,793 |
|
|
|
8.8 |
|
Total
operating expenses
|
|
|
12,107 |
|
|
|
21.8 |
|
|
|
19,068 |
|
|
|
27.1 |
|
|
|
20,775 |
|
|
|
38.0 |
|
Income
from operations
|
|
|
33,111 |
|
|
|
59.7 |
|
|
|
37,561 |
|
|
|
53.4 |
|
|
|
20,527 |
|
|
|
37.5 |
|
Interest
income
|
|
|
2,790 |
|
|
|
5.0 |
|
|
|
9,138 |
|
|
|
13.0 |
|
|
|
6,070 |
|
|
|
11.1 |
|
Other
income/(expense)
|
|
|
263 |
|
|
|
0.5 |
|
|
|
(412 |
) |
|
|
(0.6 |
) |
|
|
(65 |
) |
|
|
(0.1 |
) |
Income
before income taxes
|
|
|
36,164 |
|
|
|
65.2 |
|
|
|
46,287 |
|
|
|
65.8 |
|
|
|
26,532 |
|
|
|
48.5 |
|
Income
tax expense
|
|
|
(2,342 |
) |
|
|
(4.2 |
) |
|
|
(3,235 |
) |
|
|
(4.6 |
) |
|
|
(1,261 |
) |
|
|
(2.3 |
) |
Net
loss (income) from equity method investments
|
|
|
6 |
|
|
|
0.0 |
|
|
|
4 |
|
|
|
0.0 |
|
|
|
(20 |
) |
|
|
0.0 |
|
Net
income before noncontrolling interest
|
|
|
33,816 |
|
|
|
61.0 |
|
|
|
43,048 |
|
|
|
61.2 |
|
|
|
25,291 |
|
|
|
46.2 |
|
Net
loss attributable to noncontrolling interest
|
|
|
— |
|
|
|
— |
|
|
|
14 |
|
|
|
0.0 |
|
|
|
13 |
|
|
|
0.0 |
|
Net
income attributable to holders of ordinary shares
|
|
US$ |
33,816 |
|
|
|
61.0 |
% |
|
US$ |
43,062 |
|
|
|
61.2 |
% |
|
US$ |
25,304 |
|
|
|
46.2 |
% |
|
(1) Share-based
compensation charges incurred during the period related
to:
|
|
|
For
the years ended December 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In
thousands, except percentages)
|
|
Cost
of revenues
|
|
US$ |
34 |
|
|
|
0.1 |
% |
|
US$ |
35 |
|
|
|
0.0 |
% |
|
US$ |
30 |
|
|
|
0.1 |
% |
Research
and development expenses
|
|
|
391 |
|
|
|
0.7 |
|
|
|
481 |
|
|
|
0.7 |
|
|
|
713 |
|
|
|
1.3 |
|
Selling
and marketing expenses
|
|
|
112 |
|
|
|
0.2 |
|
|
|
186 |
|
|
|
0.3 |
|
|
|
447 |
|
|
|
0.8 |
|
General
and administrative expenses
|
|
US$ |
724 |
|
|
|
1.3 |
% |
|
US$ |
342 |
|
|
|
0.5 |
% |
|
US$ |
472 |
|
|
|
0.9 |
% |
Comparison
of Years Ended December 31, 2009 and December 31, 2008
Revenues. The
following table sets forth revenues by sources and the percentage of our total
revenues in 2008 and 2009:
|
|
For
the years ended December 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In
thousands, except percentages)
|
|
Products
|
|
|
|
|
|
|
|
|
|
|
|
|
Smart
cards
|
|
US$ |
64,216 |
|
|
|
90.8 |
% |
|
US$ |
49,005 |
|
|
|
89.0 |
% |
Set-top
boxes and others
|
|
|
196 |
|
|
|
0.3 |
|
|
|
141 |
|
|
|
0.3 |
|
Subtotal
|
|
|
64,412 |
|
|
|
91.1 |
|
|
|
49,146 |
|
|
|
89.3 |
|
Services
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Head-end
system integration
|
|
|
3,461 |
|
|
|
4.9 |
|
|
|
3,265 |
|
|
|
5.9 |
|
Head-end
system development
|
|
|
573 |
|
|
|
0.8 |
|
|
|
462 |
|
|
|
0.8 |
|
Licensing
income
|
|
|
1,610 |
|
|
|
2.3 |
|
|
|
1,147 |
|
|
|
2.0 |
|
Royalty
income
|
|
|
641 |
|
|
|
0.9 |
|
|
|
688 |
|
|
|
1.3 |
|
Other
services
|
|
|
— |
|
|
|
— |
|
|
|
356 |
|
|
|
0.7 |
|
Subtotal
|
|
|
6,285 |
|
|
|
8.9 |
|
|
|
5,918 |
|
|
|
10.7 |
|
Total
revenues
|
|
US$ |
70,697 |
|
|
|
100.0 |
% |
|
US$ |
55,064 |
|
|
|
100.0 |
% |
Our total
revenues decreased by 22.1% to US$55.1 million in 2009 from
US$70.7 million in 2008, reflecting a decrease in the revenues from the
sales of our products, in particular, smart cards.
Revenues
from the sales of our products decreased by 23.7% to US$49.1 million in
2009 from US$64.4 million in 2008, primarily due to a decrease in the
revenues from the sales of our smart cards, which accounted for substantially
all of our revenues from the sales of our products in both 2008 and
2009. The decrease in the revenues from the sales of smart cards was
primarily attributable to decreases in both shipment volume and the ASP of smart
cards in 2009. The decrease in shipment volume reflects a slowdown in the
development of the PRC television digitalization market in 2009. As
compared to 2008, the PRC’s CA systems industry in 2009 was developing more
slowly mainly due to two reasons. First, as a result of the potential
consolidation within the cable television industry and delays in raising
television subscription fees in certain regions, some cable operators were more
cautious in making new investments, including postponing smart card purchases in
2009. Second, the pace of mass migration from analog to digital
television slowed down as the execution transitioned from larger cities to
smaller cities and counties in the PRC where households are more dispersed and
basic network infrastructure is less developed. The decrease in the
ASP of smart cards by 12.8% in Renminbi terms from 2008 to 2009 was primarily
due to intensified competition in the industry.
Revenues
from the sales of our services decreased by 5.8% to US$5.9 million in 2009
from US$6.3 million in 2008, mainly reflecting a decrease in revenues from
our licensing income. Revenues from licensing income decreased by 28.8% to
US$1.1 million in
2009 from US$1.6 million in 2008, largely due to lower fees we charged for
our testing and certifying work in connection with our licensing
services.
Net
Revenues. Our net revenues decreased by 22.2% to
US$54.7 million in 2009 from US$70.3 million in 2008.
Cost of
Revenues. The following table sets forth cost of revenues by
sources of revenues by amount and as a percentage of net revenues in 2008 and
2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In
thousands, except percentages)
|
|
Products
|
|
US$ |
10,877 |
|
|
|
15.5 |
% |
|
US$ |
9,716 |
|
|
|
17.8 |
% |
Services
|
|
|
2,828 |
|
|
|
4.0 |
|
|
|
3,686 |
|
|
|
6.7 |
|
Total
cost of revenues
|
|
US$ |
13,705 |
|
|
|
19.5 |
% |
|
US$ |
13,402 |
|
|
|
24.5 |
% |
Cost of
revenues decreased by 2.2% to US$13.4 million in 2009 from US$13.7 million in
2008, primarily reflecting a decrease in the costs relating to our products,
which was partially offset by an increase in the costs relating to our services.
Cost of revenues relating to our products decreased by 10.7% to US$9.7 million
in 2009 from US$10.9 million in 2008, primarily due to the decrease of the
shipment volume of smart cards during the same period. Cost of revenues relating
to our services increased by 30.3% to US$3.7 million in 2009 from US$2.8 million
in 2008, primarily due to a large project of head-end system integration
conducted for a customer in 2009 with substantial costs to purchase hardware and
software.
Cost of
revenues as a percentage of net revenues increased to 24.5% in 2009 from 19.5%
in 2008, primarily due to the decrease in ASP of smart cards. The average unit
cost of our smart cards decreased by 0.9% in U.S. dollar terms from 2008 to
2009, principally as a result of a decrease in the price of computer chips,
which was partially offset by an increase in other related costs.
Gross Profit and
Gross Margin. Gross profit decreased by 27.1% to US$41.3 million in 2009
from US$56.6 million in 2008. Our gross margin decreased to 75.5% in 2009 from
80.5% in 2008.
Operating
Expenses. Our operating expenses increased by 9.0% to US$20.8 million in 2009 from US$19.1
million in 2008. This increase primarily reflected increases in both research
and development expenses and marketing expenses, which were partially offset by
a decrease in our general and administrative expenses. Operating expenses, as a
percentage of net revenues, increased to 38.0% in 2009 from 27.1% in 2008.
Research and Development
Expenses. Our research and development expenses increased by 26.8% to
US$8.8 million in 2009 from US$6.9 million in 2008. This increase was primarily
due to increases in the number and the average compensation of our research and
development staff and demonstrated our strategy to make significant investment
in research and development to keep pace with technological advances. Our
research and development expenses, as a percentage of net revenues, increased to
16.1% in 2009 from 9.8% in 2008.
Selling and Marketing
Expenses. Our selling and marketing expenses increased by 18.8% to US$7.2
million in 2009 from US$6.1 million in 2008. This increase was mainly
attributable to increases in compensation costs associated with expanding the
sales force and marketing activities. Our selling and marketing expenses, as a
percentage of net revenues, increased to 13.2% in 2009 from 8.6% in
2008.
General and Administrative
Expenses. Our general and administrative expenses decreased by 21.2% to
US$4.8 million in 2009 from US$6.1 million in 2008. This decrease was
principally a result of lower bad debt expenses and lower professional service
expenses.
Income from
Operations. As a result of the foregoing factors, our income from
operations decreased by 45.4% from US$37.6 million in 2008 to US$20.5 million in
2009.
Non-operating
Income (Expenses). We had non-operating income of US$6.0 million in 2009,
compared to US$8.7 million in 2008. Our non-operating income in 2009 primarily
reflected interest income of US$6.1 million and other expenses of US$0.1
million.
Net Income
Attributable to Holders of Ordinary Shares. As a result of the foregoing
factors, net income decreased by 41.2% to US$25.3 million in 2009 from US$43.1
million in 2008. Our basic and diluted earnings per ordinary share in 2009 were
US$0.44 and US$0.43, respectively.
Comparison
of Years Ended December 31, 2008 and December 31, 2007
Revenues. The
following table sets forth revenues by sources and the percentage of our total
revenues in 2007 and 2008:
|
|
For
the years ended December 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In
thousands, except percentages)
|
|
Products
|
|
|
|
|
|
|
|
|
|
|
|
|
Smart
cards
|
|
US$ |
49,651 |
|
|
|
89.1 |
% |
|
US$ |
64,216 |
|
|
|
90.8 |
% |
Set-top
boxes and others
|
|
|
90 |
|
|
|
0.2 |
|
|
|
196 |
|
|
|
0.3 |
|
Subtotal
|
|
|
49,741 |
|
|
|
89.2 |
|
|
|
64,412 |
|
|
|
91.1 |
|
Services
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Head-end
system integration
|
|
|
3,258 |
|
|
|
5.8 |
|
|
|
3,461 |
|
|
|
4.9 |
|
Head-end
system development
|
|
|
271 |
|
|
|
0.5 |
|
|
|
573 |
|
|
|
0.8 |
|
Licensing
income
|
|
|
1,984 |
|
|
|
3.6 |
|
|
|
1,610 |
|
|
|
2.3 |
|
Royalty
income
|
|
|
498 |
|
|
|
0.9 |
|
|
|
641 |
|
|
|
0.9 |
|
Subtotal
|
|
|
6,011 |
|
|
|
10.8 |
|
|
|
6,285 |
|
|
|
8.9 |
|
Total
revenues
|
|
US$ |
55,752 |
|
|
|
100.0 |
% |
|
US$ |
70,697 |
|
|
|
100.0 |
% |
Our total
revenues increased by 26.8% to US$70.7 million in 2008 from
US$55.8 million in 2007. This increase was principally a result
of an increase in the revenues from the sales of our products, in particular,
smart cards.
Revenues
from the sales of our products increased by 29.5% to US$64.4 million in
2008 from US$49.7 million in 2007, primarily due to an increase in the
revenues from the sales of our smart cards, which accounted for substantially
all of our revenues from the sales of our products in both 2007 and
2008. The increase in the revenues from the sales of smart cards was
mainly attributable to a 34.8% increase in the number of smart cards sold by us
to 9.9 million in 2008 from 7.3 million in 2007, which was partially
offset by a 13.9% decrease in the average selling price of our smart cards in
RMB terms from 2007 to 2008 (including value-added tax refunds). The
increase in the revenues from the sales of smart cards reflects the continued
growth of the PRC television digitalization market as well as our leading market
position. The decrease in the average selling price of smart cards
from 2007 to 2008 was largely due to intensified competition and pricing
discounts we offered to a number of large customers in 2008.
Revenues
from the sales of our services increased by 4.6% to US$6.3 million in 2008 from
US$6.0 million in 2007. The increase in the revenues from the sales of our
services was primarily due to increases in the revenues from our head-end system
integration services, head-end system development and royalty income, which were
partially offset by a decrease in revenues from our licensing income. Revenues
from our head-end system integration services increased by 6.2% to US$3.5
million in 2008 from US$3.3 million in 2007, mainly reflecting a US$0.2 million
increase in revenue recognized in 2008 from the contracts we performed in 2008
compared to revenue recognized in 2007 from contracts performed in 2007.
Revenues from our head-end system development services increased by 111.4% to
US$0.6 million in 2008 from US$0.3 million in 2007, principally as a result of
an increase in demand for such services in 2008 compared to 2007. Revenues from
licensing income decreased by 18.9% to US$1.6 million in 2008 from US$2.0
million in 2007, primarily due to a 42.1% decrease in the number of new
licensing contracts for our CA system terminal-end software that we entered into
in 2008 as compared to 2007.
Net
Revenues. Our net revenues increased by 26.8% to
US$70.3 million in 2008 from US$55.5 million in 2007.
Cost of
Revenues. The following table sets forth cost of revenues by
sources of revenues by amount and as a percentage of net revenues in 2007 and
2008:
|
|
For
the years ended December 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In
thousands, except percentages)
|
|
Products
|
|
US$ |
8,100 |
|
|
|
14.6 |
% |
|
US$ |
10,877 |
|
|
|
15.5 |
% |
Services
|
|
|
2,135 |
|
|
|
3.9 |
|
|
|
2,828 |
|
|
|
4.0 |
|
Total
cost of revenues
|
|
US$ |
10,235 |
|
|
|
18.5 |
% |
|
US$ |
13,705 |
|
|
|
19.5 |
% |
Cost of
revenues increased by 33.9% to US$13.7 million in 2008 from US$10.2 million in
2007, primarily due to an increase in the costs relating to our products and, to
a lesser extent, an increase in the cost relating to our services. Cost of
revenues relating to our products increased by 34.3% to US$10.9 million in 2008
from US$8.1 million in 2007, principally due to an increase in raw material
costs and personnel and related costs as the number of smart cards sold by us
increased during the period. Cost of revenues relating to our services increased
by 32.5% to US$2.8 million in 2008 from US$2.1 million in 2007, mainly due to
the increase in the corresponding revenues from our head-end system integration
and development services.
Cost of
revenues as a percentage of net revenues increased to 19.5% in 2008 from 18.5%
in 2007, principally as a result of a decrease in the ASP of our smart cards in
2008 as compared to 2007. The average unit cost of our smart cards decreased
slightly by approximately 0.9% in U.S. dollar terms from 2007 to 2008, primarily
due to a decrease in the price of computer chips, which was partially offset by
an increase in other related costs.
Gross Profit and
Gross Margin. Gross profit increased by 25.2% to US$56.6 million in 2008
from US$45.2 million in 2007. Our gross margin decreased slightly to 80.5% in
2008 from 81.5% in 2007.
Operating
Expenses. Our operating expenses increased by 57.5% to US$19.1 million in
2008 from US$12.1 million in 2007. This increase was attributable to a
combination of factors, including a significant increase in the number of
employees, an increase in marketing activities and an increase in professional
service fees associated with the Company being in its first full year of
operations as a public company. Operating expenses, as a percentage of net
revenues, increased to 27.1% in 2008 from 21.8% in 2007.
Research and Development
Expenses. Our research and development expenses increased by 49.1% to
US$6.9 million in 2008 from US$4.6 million in 2007. This increase was primarily
attributable to an increase in the number of our research and development staff.
Our research and development expenses, as a percentage of net revenues,
increased to 9.8% in 2008 from 8.4% in 2007.
Selling and Marketing
Expenses. Our selling and marketing expenses increased by 61.3% to US$6.1
million in 2008 from US$3.8 million in 2007. This increase was primarily due to
increases in marketing activities and compensation costs associated with hiring
additional experienced staff. Our selling and marketing expenses, as a
percentage of net revenues, increased to 8.6% in 2008 from 6.8% in
2007.
General and Administrative
Expenses. Our general and administrative expenses increased by 64.2% to
US$6.1 million in 2008 from US$3.7 million in 2007. This increase was largely
due to substantial increases in professional service fees associated with being
a public company and compensation costs associated with hiring additional
experienced staff in the finance and legal departments. Our general and
administrative expenses, as a percentage of net revenues, increased to 8.7% in
2008 from 6.7% in 2007.
Income from
Operations. As a result of the foregoing factors, our income from
operations increased by 13.4% from US$33.1 million in 2007 to US$37.6 million in
2008.
Non-operating
Income (Expenses). We had non-operating income of US$8.7 million in 2008,
compared to US$3.1 million in 2007. Our non-operating income in 2008 primarily
consisted of interest income of US$9.1 million and other expenses of US$0.4
million.
Net Income
Attributable to Holders of Ordinary Shares. As a result of the foregoing
factors and taking into account US$0.01 million and US$nil in net income
attributable to noncontrolling interest in 2008 and 2007, respectively, net
income increased by 27.3% to US$43.1 million in 2008 from US$33.8 million in
2007. Our basic and diluted earnings per ordinary share in 2008 were US$0.75 and
US$0.72, respectively.
B. Liquidity
and Capital Resources
Liquidity
|
|
For
the years ended December 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In
thousands)
|
|
Cash
and cash equivalents
|
|
US$ |
228,958 |
|
|
US$ |
202,947 |
|
|
US$ |
131,087 |
|
Net
cash provided by operating activities
|
|
|
33,838 |
|
|
|
38,403 |
|
|
|
18,471 |
|
Net
cash used in investing activities
|
|
|
(19,263 |
) |
|
|
(51,922 |
) |
|
|
(33,755 |
) |
Net
cash (used in)/provided by financing activities
|
|
US$ |
192,030 |
|
|
US$ |
(13,929 |
) |
|
US$ |
(56,537 |
) |
Operating
Activities. Net cash provided by operating activities was
US$18.5 million in 2009, which was primarily derived from our net income of
US$25.3 million, adjusted to reflect the adding back of US$1.7 million in
depreciation and amortization costs and US$1.7 million share-based compensation
charges. Net income was partially offset by a US$2.9 million increase
in pre-paid expenses and other current assets, a US$2.6 million decrease in
accrued expenses and other current liabilities and a US$1.5 million increase in
accounts and notes receivable. The significant increase in prepaid
expenses and other current assets was primarily due to an increase in accrued
interest income. The significant decrease in accrued expenses and
other current liabilities primarily reflected decreases in other tax payable and
amount due to employees for share option exercise proceeds. The increase in
accounts and notes receivable reflected more favorable credit terms awarded to
our major customers due to intense competition and recent economic downturn in
the PRC.
Net cash
provided by operating activities was US$38.4 million in 2008, which was
primarily derived from our net income of US$43.1 million, adjusted to
reflect an increase in the accrued expenses and other current liabilities by
US$3.6 million and adding back of US$1.3 million in depreciation and
amortization costs and US$1.0 million in non-cash share-based compensation
charges. Net income was partially offset by a US$5.9 million increase in
accounts receivable, a US$2.5 million decrease in deferred revenues,
pre-paid expenses and other current assets of US$3.5 million and a US$1.0
million increase in inventories. The significant increase in accrued expenses
and other current liability was primarily due to the increase in proceeds to the
employees from their exercise of our share options that were temporarily
deposited with our company and other tax payable. The significant increase in
accounts receivable was mainly attributable to the more favorable credit terms
we granted to our major customers in light of competition as well as recent
economic downturn. Such increase was also attributable to the growth of the
sales of our smart cards. The significant decrease during 2008 in deferred
revenues reflected a decrease in advance payments from customers who purchase
our smart cards.
Net cash
provided by operating activities was US$33.8 million in 2007, which was
primarily derived from our net income of US$33.8 million, adjusted to
reflect an increase in the accrued expenses and other current liabilities by
US$2.5 million, the adding back of US$1.3 million in non-cash
share-based compensation charges and a US$0.7 million increase in the
income tax payable. Net income was partially offset by a
US$3.1 million increase in accounts receivable and a US$2.0 million
decrease in deferred revenues, and a US$0.4 million decrease in accounts
payable. The significant increase in accrued expenses and other
current liability primarily reflected the increase in the amounts of year-end
bonus payable, tax payable and fees payable incurred during the preparation of
our initial public offering. The significant increase in accounts
receivable was largely due to the rapid growth of the sales of our smart cards
as well as the increase in the balance of accounts receivable from major
customers. The significant decrease during 2007 in deferred revenues
mainly reflected a decrease in pre-payments from customers for smart
cards.
Investing
Activities. Net cash used in investing activities was US$33.8
million in 2009, primarily consisting of an aggregate of US$39.0 million used to
purchase corporate and government bonds, an aggregate of US$1.5 million to
purchase computers and other electronic equipment and motor vehicles and a US$1.4 million
decrease in cash as a result of eliminating Dongguan SuperTV from our
consolidated subsidiaries in 2009 due to transfer of a part of our equity
ownership to another investor, which were partially offset by a withdrawal of
US$7.7 million from our bank deposits maturing over three
months.
Net cash
used in investing activities was US$52.0 million in 2008, reflecting US$48.3
million in bank deposits maturing over three months, two US$0.9 million
long-term loans to Shizhou Shen and Lei Zhang, our employees, to support their
acquisition of certain equity stake in N-S Digital TV from N-T Information
Engineering, an aggregate of US$3.1 million used to purchase the digital
watermarking and image tracing technologies and the equity interest in N-S
Digital TV from N-T Information Engineering and US$1.0 million used to
purchase property and equipment, which were partially offset by a receipt of
US$1.6 million loan repayment from N-T Information Engineering and US$0.8
million reduction of restricted cash.
Net cash
used in investing activities was US$19.3 million in 2007, reflecting US$17.1
million in bank deposits maturing over three months, a US$1.5 million one-year
term loan extended to N-T Information Engineering in April 2007, US$1.2 million
used for purchasing property and equipment, US$0.6 million in restricted cash,
US$0.4 million used for capital contribution to a joint venture company with
Jiangsu Qingda and purchase from N-T Information Engineering of its 51% equity
interest Guokai, which were partially offset by a US$1.5 million refund received
from N-T Information Engineering, resulting from the downward adjustment of the
price paid by us to purchase its set-top box business.
Financing
Activities. Net cash used in financing activities was US$56.5 million in
2009, consisting of a US$57.3 million special cash dividend we declared in
December 2008 and paid in early 2009, which was offset by US$0.8 million in
proceeds from the exercise of our share options by employees and Tech Power
Enterprises.
Net cash
used in financing activities was US$14.0 million in 2008, consisting of US$16.3
million used to repurchase our ordinary shares and US$0.7 million of costs and
expenses incurred relating to our initial public offering, which were offset by
US$0.7 million capital injection by an individual shareholder in Dongguan
SuperTV and US$2.3 million in proceeds from the exercise of our share options by
our employees and Tech Power Enterprise.
Net cash
provided by financing activities was US$192.0 million in 2007, consisting of
US$220.8 million of proceeds we received from the issuance of ordinary shares in
our initial public offering, which were offset by US$17.5 million of costs and
expenses incurred relating to our initial public offering and US$11.3 million in
dividends paid to our ordinary and preferred shareholders.
Pursuant
to the relevant PRC laws, rules and regulations applicable to our subsidiary and
variable interest entity in the PRC, these entities are required to make
appropriations from net income as determined in accordance with the generally
accepted accounting principles in the PRC, or PRC GAAP, to non-distributable
reserves, also referred to as “statutory common reserves,” which included a
statutory surplus reserve and a statutory welfare reserve as of December 31,
2005. According to the revised PRC Company Law, which took
effect on January 1, 2006, our subsidiaries and variable interest entities in
the PRC are no longer required to make appropriations to the statutory welfare
reserve, but appropriations to the statutory surplus reserve are still required
to be made at the rate of 10% of profits after tax as determined under PRC GAAP
until the balance of such reserve fund reaches 50% of the entities’ registered
capital.
Our
subsidiaries and our variable interest entities in the PRC may, upon a
resolution passed by their respective shareholders, convert the statutory
surplus reserve into capital. The statutory welfare reserve was used for the
collective welfare of the employees of each of the subsidiaries and the variable
interest entity. These reserves represent appropriations of retained earnings
determined according to PRC law and may not be distributed. There were no
appropriations to reserves other than to those of our subsidiaries and our
variable interest entity in the PRC during any of the periods presented.
However, as a result of these laws, approximately US$10.2 million and US$12.7
million of our retained earnings was not available for distribution as of
December 31, 2008 and December 31, 2009, respectively.
Capital
Expenditures
In 2007,
2008 and 2009, our capital expenditures totaled US$1.2 million, US$6.0 million and US$1.4
million, respectively. Our capital expenditures in 2007 mainly related to
purchases of equipment. Our capital expenditures in 2008 primarily consisted of
the long-term loans of US$1.8 million in aggregate which we extended to Shizhou
Shen and Lei Zhang, our employees, to support their acquisition of a certain
equity stake in N-S Digital TV from N-T Information Engineering, an aggregate of
US$3.1 million used to purchase the digital watermarking and image tracing
technologies and the equity interest of N-S Digital TV from N-T Information
Engineering, US$0.1 million used to purchase additional equity interest in
Dongguan SuperTV and US$1.0 million used to purchase property and equipment. Our
capital expenditures in 2009 primarily consisted of purchases of property and
equipment.
We
believe that our current levels of cash and cash equivalents, bank deposits
maturing over three months, held-to-maturity investments, and cash flows from
operations in the near future, will be sufficient to meet our anticipated
capital expenditure and other cash needs for at least the next 12
months. However, we may need additional cash resources in the future
if we experience changed business conditions or other
developments. We also may need additional cash resources in the
future if we find and wish to pursue opportunities for investment, acquisition,
strategic cooperation or other similar actions. If we ever determine
that our cash requirements exceed our amounts of cash and cash equivalents on
hand, we may seek to issue debt or equity securities or obtain a credit
facility. Any issuance of equity securities could cause dilution for
our shareholders. Any incurrence of indebtedness could increase our
debt service obligations and cause us to be subject to restrictive operating and
finance covenants. It is possible that, when we need additional cash
resources, financing will be available to us only in amounts or on terms that
would not be acceptable to us or financing will not be available at
all.
C. Research
and Development, Patents and Licenses, etc.
See
“Item 4. Information on the Company—B. Business Overview—Research and
Development” for information relating to our research and
development.
See
“Item 4. Information on the Company—B. Business Overview—Intellectual
Property” for information relating to our intellectual property.
D. Trend
Information
Other
than as disclosed elsewhere in this annual report, we are not aware of any
trends, uncertainties, demands, commitments or events for the period from
January 1, 2007 to December 31, 2009 that are reasonably likely to have a
material adverse effect on our net revenues, income, profitability, liquidity or
capital resources, or that would cause the disclosed financial information to be
not necessarily indicative of future operating results or financial
conditions.
E. Off-Balance
Sheet Arrangements
We have
not entered into any financial guarantees or other commitments to guarantee the
payment obligations of any third parties. We have not entered into
any derivative contracts that are indexed to our shares and classified as
shareholders’ equity or that are not reflected in our consolidated financial
statements. Furthermore, we do not have any retained or contingent
interest in assets transferred to an unconsolidated entity that serves as
credit, liquidity or market risk support to such entity. We do not
have any variable interest in any unconsolidated entity that provides financing,
liquidity, market risk or credit support to us or engages in leasing, hedging or
research and development services with us.
F. Tabular
Disclosure of Contractual Obligations
The
following table sets forth our contractual obligations as of December 31,
2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In
thousands)
|
|
Operating
lease obligations(1)
|
|
US$ |
1,276 |
|
|
US$ |
225 |
|
|
|
— |
|
|
|
— |
|
|
US$ |
1,501 |
|
Purchase
obligations
|
|
|
688 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
688 |
|
Total
|
|
US$ |
1,964 |
|
|
US$ |
225 |
|
|
|
— |
|
|
|
— |
|
|
US$ |
2,189 |
|
(1) Operating
leases generally relate to the lease of our office premises.
Item
6. Directors,
Senior Management and Employees
A. Directors
and Senior Management
The
following table sets forth certain information concerning our directors and
executive officers as of March 31, 2010.
Name
|
|
Age
|
|
Position
|
Jianhua
ZHU
|
|
40
|
|
Chairman
and Chief Executive Officer
|
Zengxiang
LU
|
|
39
|
|
Director
|
James
Hsiang Ming HO
|
|
50
|
|
Director
|
Rui
LU
|
|
45
|
|
Independent
Director
|
Gongquan
WANG
|
|
48
|
|
Independent
Director
|
Chaoyang
XIA
|
|
40
|
|
Independent
Director
|
Songzuo
XIANG
|
|
45
|
|
Independent
Director
|
Liang
XU
|
|
35
|
|
Executive
Vice President & Chief Financial Officer
|
Dong
LI
|
|
38
|
|
President
and Chief Marketing Officer
|
Jian
HAN
|
|
36
|
|
Chief
Technology Officer
|
Huiqing
CHEN
|
|
37
|
|
Chief
Administrative Officer
|
Jianhua ZHU, one of our
founders, has served as the chairman of our board of directors since November
2008 and as chief executive officer of our company since December 2006 and has
been a director since 2004. He was the chairman of our board of directors from
2004 until December 2006. From 2001 until 2004, Mr. Zhu was general manager of
N-T Information Engineering. From 1998 until 2001, he was deputy general manager
of N-T Information Engineering. He has also been the supervisor of N-T
Information Engineering since 2006. Mr. Zhu was the executive director of the
Guangdong R&D prior to April 2010. He worked at the China Technology Import
and Export Corp. from 1994 until 1997. Mr. Zhu holds bachelor’s and master’s
degrees in precision instrumentation from Tsinghua University.
Zengxiang LU, one of our
founders, has been a board member since 2004. He was chairman of our board of
directors and our chief strategy officer from December 2006 until November 2008
and chief executive officer from 2004 until December 2006. Dr. Lu was the
president of the Guangdong R&D prior to April 2010 and was also the director
from 2005 until 2007. Dr. Lu worked on the development of CA systems at Tsinghua
Tongfang from 1999 to August 2001. He was deputy general manager of N-T
Information Engineering from August 2001 until 2004, and has served on the board
of N-T Information Engineering since 1998. Dr. Lu holds a bachelor’s degree in
automation and a doctorate degree in signal processing from Tsinghua
University.
James Hsiang Ming HO has been
a director of our company since November 2006. Mr. Ho is a vice president of
Capital International, Inc., responsible for private equity in Asia. Prior to
joining Capital International, Inc. in 1996, Mr. Ho was vice president of global
equity investments at the Bank of America in Hong Kong. Mr. Ho was formerly a
director of Pacific Textiles Holdings, Ltd., a Hong-Kong listed company, Renhe
Commercial Holdings Company Limited, also a Hong Kong-listed company, and
On*Media Corporation, a South Korea-listed company. He received a bachelor’s
degree in economics from the National Taiwan University and an MBA from the
Wharton School of Business at the University of Pennsylvania.
Rui LU has been an
independent director of our company since September 2008. Dr. Lu currently is a
Vice President of and a professor at the Communication University of China.
Previously, Dr. Lu spent over ten years as the director of the Engineering
Research Center of TV Digitalization, an institution sponsored by the Ministry
of Education of China. Active in a number of government-sponsored industry
organizations, Dr. Lu is also a member of the Mobile TV and Multimedia National
Standard Expert Evaluation Commission and a member of the Committee of Science
and Technology under the SARFT. Dr. Lu was a recipient of the special government
allowance in 2001. Dr. Lu received his doctorate degree in engineering from the
National University of Defense Technology of China in 1991.
Gongquan
WANG has been an
independent director of our company since November 2007. Mr. Wang built and
managed CDH Venture Partners from its inception in 2005. Prior to that, he was a
general partner with IDG Technology Venture Investment, Inc. from 1999 to 2005,
where he was responsible for overseeing the operational management of the
portfolio companies of the firm’s various funds and also had an investment role.
In 1991, he co-founded Vantone Industry Group, one of China’s leading real
estate developers, which he managed from 1991 to 1995, serving in various
capacities, including president, vice chairman of the board, honorary chairman
of the board, and managing director. Mr. Wang is currently a director of Qihoo
Technology Company Limited, CDG Holdings Limited, CDH Venture GP I Company
Limited and CDH Venture GP II Company Limited, and was previously a director of
China EDU, China Civilink, China Finance Online and 3721.com. Mr. Wang received
a bachelor’s degree from Jilin University.
Chaoyang
XIA has been an independent director of our
company since March 2010. Dr. Xia is a founding partner of Tianjin Ivy
Investment Management Center (Limited Partnership), a venture capital and growth
equity firm in China. He has been chairman of Benxian Investment (Beijing) Ltd.
since May 2008 and a director of China Newstar Energy Co., Ltd. since November
2009. From 2001 to 2008, he was chief financial officer and senior vice
president of CapitalBio Corporation, a leading biochip company in the PRC.
Before joining CapitalBio Corporation, Dr. Xia served as a General Manager of
the Investment Department of Tsinghua Tongfang Co., Ltd., a technology company
listed on the Shanghai Stock Exchange. Prior to that, Dr. Xia was a deputy
general manager of the Investment Banking Division of CITIC Securities Company
Limited. Dr. Xia holds a doctorate degree in engineering, a bachelor’s degree in
engineering and a bachelor’s degree in economics, all from Tsinghua
University.
Songzuo XIANG has been an
independent director of our company since September 2008. Dr. Xiang is the
editor-in-chief of the Global Business & Finance magazine, a Chinese
business publication sponsored by the Development Research Center of the State
Council. Dr. Xiang is currently a director of AirMedia Group Inc., a company
listed on the Nasdaq Global Market. Dr. Xiang was also a director of Hurray!
Solutions Ltd. from 2000 to 2009 and its chief executive officer from March to
October 2009, respectively. From 1995 to 1998, Dr. Xiang was deputy director of
the Fund Planning Department at the Shenzhen branch office of the People’s Bank
of China. Dr. Xiang holds a master’s degree in international affairs from
Columbia University, a doctorate degree and a master’s degree in economics from
Renmin University of China and a bachelor’s degree in mechanical engineering
from Huazhong University of Science and Technology.
Liang XU has served as our
executive vice president since June 2009 and the chief financial officer of our
company since November 2006. Mr. Xu was assistant vice president of CDH Venture
Partners from 2005 to 2006. He was strategic program manager of Intel (China)
Ltd. from 2004 to 2005, and senior financial analyst at Intel (China) Ltd. from
2003 to 2004. He was deputy head of the sales and marketing department at N-T
Information Engineering from 1998 to 2001. Mr. Xu holds bachelor’s degrees in
economics and English from Tsinghua University and a master’s degree in business
administration from the Harvard Business School.
Dong LI has served as our
president since March 2009 and as the chief marketing officer of our company
since our establishment in 2004. From 2001 to 2004, he was the assistant to the
general manager and chief marketing officer of N-T Information Engineering. He
previously worked at China Technology Import and Export Corp. Mr. Li holds a
bachelor’s degree in materials science and technology from Tsinghua
University.
Jian HAN has served as the
chief technology officer of our company since our establishment. From 2001 until
joining our company, Dr. Han was chief technology officer at N-T Information
Engineering. From 2000 to 2001, he was the digital broadcasting center project
manager working on the development of CA systems at the Tsinghua Novel-Tongfang
Research and Development Center. From 1999 to 2000, he was an associate
researcher at the Microsoft China Research Institute. Dr. Han holds a doctorate
degree in engineering and dual bachelor’s degrees in automation and mechanical
engineering from Tsinghua University.
Huiqing CHEN has served as
the chief administrative officer of our company since our establishment in 2004,
and is responsible for administrative affairs and human resources management.
From 1998 until 2004, she was manager of the general manager’s office at N-T
Information Engineering. Ms. Chen holds a master’s degree in biochemical
engineering from Tsinghua University.
Mr. Louis
T. Hsieh, formerly an independent director of our company, retired from our
board of directors on our annual general meeting of shareholders held on
December 30, 2009. Mr. James Hsiang Ming Ho was re-elected as director at the
same meeting upon which his initial term expired. Dr. Chaoyang Xia was appointed
as our independent director effective March 3, 2010.
There is
no family relationship among any of our directors or executive officers. There
is no shareholding qualification for directors.
B.
Compensation of Directors and Senior
Officers
Our
executive officers receive compensation in the form of salaries, annual bonuses
and share options. Some of our current and former directors have received
compensation in the form of share options. We do not provide any
benefits to our non-executive directors upon retirement. In 2009, the
aggregate cash compensation to our directors and executive officers was
US$0.7 million.
Share
Options
Our
Amended and Restated China Digital TV Holding Co., Ltd. 2005 Stock Incentive
Plan, or the 2005 Plan, and China Digital TV Holding Co., Ltd. 2008 Stock
Incentive Plan, or the 2008 Plan, are intended to provide incentives to our
directors, officers and employees as well as consultants and advisers of our
company and its present or future parent company or subsidiaries, or the related
corporations.
The
Amended and Restated 2005 Stock Incentive Plan
The 2005
Stock Incentive Plan was adopted by the board of directors of CDTV BVI on
February 3, 2005 and the Amended and Restated 2005 Stock Incentive Plan was
adopted by our board of directors and approved by our shareholders on September
13, 2007 to amend and restate the 2005 Stock Incentive Plan. In 2005,
CDTV BVI was the ultimate holding company of our business. As a
result of our restructuring in May 2007, CDTV BVI became our wholly owned
subsidiary and the options already granted under the 2005 Stock Incentive Plan
were converted to options for the ordinary shares of our
company. Pursuant to the 2005 Plan, we may issue share options, stock
appreciation rights, share bonuses, restricted shares, performance shares, share
units, phantom shares, dividend equivalents or similar rights to purchase or
acquire shares.
We
reserved a total of 4,444,440 ordinary shares for issuance under the 2005 Plan,
subject to any adjustments as contemplated by the plan. We granted
share options to purchase 2,971,942, 543,674, 620,212 and 53,280 ordinary shares pursuant
to the 2005 Stock Incentive Plan on February 3, 2005, September 22, 2006,
December 5, 2006 and October 5, 2008, respectively, of which options to
purchase 293,487 ordinary shares were subsequently forfeited. Options
to purchase 983,974 ordinary shares remained outstanding as of December 31, 2009
under the 2005 Plan.
With
respect to the share options that we granted on February 3, 2005, two vesting
schedules apply. The first vesting schedule is as follows: 50% vest
at the end of the six-month period after the award date, and the remaining 50%
vest in 42 equal monthly installments, beginning from the end of the six-month
period after the award date. The second vesting schedule is as
follows: 25% vest on the first anniversary of the award date and the remaining
75% vest in 36 substantially equal monthly installments, beginning on the last
day of the month following the month in which the first anniversary of the award
date occurs. The exercise price for all share options granted on this
date is US$0.543 per share.
With
respect to the share options that we granted on April 13, 2006, the vesting
schedule is as follows: 50% vest at the end of the six-month period after the
award date, and the remaining 50% vest in 42 equal monthly installments,
beginning from the end of the six-month period after the award
date. The exercise price for all share options granted on this date
is US$0.543 per share.
With
respect to the share options that we granted on September 22, 2006, the vesting
schedule is as follows: 25% vest on the first anniversary of the award date and
the remaining 75% vest in 36 substantially equal monthly installments, beginning
on the last day of the month following the month in which the first anniversary
of the award date occurs. The exercise price is US$1.771 per
share.
With
respect to the share options that we granted on December 5, 2006, with the
exception of share options that we granted to one of our executive officers, the
vesting schedule is as follows: 25% vest on the first anniversary of the award
date, and the remaining 75% vest in 36 substantially equal monthly installments,
beginning on the last day of the month following the month in which the first
anniversary of the award date occurs. The executive officer’s share
options vest according to the following schedule: 25% of 320,000 options vest
upon the closing of our initial public offering; 75% of 320,000 options vest in
36 substantially equal monthly installments, with the first installment vesting
on the last day of the month following the month in which the executive officer
took office; and 32,000 options vest upon the achievement of certain financial
targets. The exercise price for all share options granted on this
date is US$4.172.
With
respect to the share options that we granted on October 5, 2008, the vesting
schedule is as follows: 25% vest on the first anniversary of the
award date and the remaining 75% vest in 36 substantially equal monthly
installments, beginning on the last day of the month following the month in
which the first anniversary of the award date occurs. The exercise
price is US$0.543 per share.
2008
Stock Incentive Plan
The 2008
Plan was adopted by our board of directors and approved by our shareholders on
September 13, 2007. Pursuant to the 2008 Plan, we may issue share options, share
appreciation rights, share bonuses, restricted shares and restricted share
units, performance shares, share units, phantom shares, dividend equivalents or
similar rights to purchase or acquire shares.
We
reserved a total of 1,200,000 ordinary shares for issuance under the 2008 Plan,
subject to any adjustments as contemplated by the plan. The plan also provides
for an annual increase, beginning in 2009, in the number of ordinary shares that
may be delivered pursuant to awards under the plan, totaling 2% of our issued
and outstanding shares as of the first business day of the relevant calendar
year. The maximum number of shares subject to awards that may be granted during
any single calendar year is such number as equals 2% of our issued and
outstanding shares as of the first business day of that calendar year. We
granted share options to purchase 406,776 and 357,548 ordinary shares on October
5, 2008 and June 1, 2009, respectively. Options to purchase 742,524 ordinary
shares remained outstanding as of December 31, 2009 under the 2008
Plan.
With
respect to the share options that we granted on October 5, 2008, the vesting
schedule is as follows: 25% vest on the first anniversary of the award date, and
the remaining 75% vest in 36 substantially equal monthly installments, beginning
on the last day of the month following the month in which the first anniversary
of the award date occurs. The exercise price is US$7.89 per share.
With
respect to the share options that we granted on June 1, 2009, the vesting
schedule is as follows: 25% vest on the first anniversary of the award date, and
the remaining 75% vest in 36 substantially equal monthly installments, beginning
on the last day of the month following the month in which the first anniversary
of the award date occurs. The exercise price is US$9.09 per share.
On
February 10, 2010, we granted share options to purchase 42,880 ordinary shares
to a director at an exercise price of US$0.5433 per ordinary share which will
expire on February 9, 2020 and all these share options were vested on the grant
date. In the meanwhile, we accelerated the vesting schedule of a total of share
options to purchase 29,480 ordinary shares we previously granted to an executive
officer on October 5, 2008 so that all these share options were vested on
February 10, 2010.
The
2005 and 2008 Plans
Our board
of directors administers the 2005 and 2008 Plans and has wide discretion in
determining who will receive awards, the type and timing of awards, the vesting
schedule and other terms and conditions of the awards, including the exercise
price of share option grants. Generally, if an outstanding share option grant
made under the plans has not vested by the date of termination of the
recipient’s employment with us, no further installments of the recipient’s grant
will become exercisable following the date of termination of employment, and the
recipient will have 30 days from such date to exercise any share options that
had already vested but not yet been exercised. If any ordinary shares subject to
a restricted share award remain subject to restrictions by the date of
termination of employment, no additional ordinary shares will vest following the
date of termination of employment.
Our board
of directors may amend or terminate the 2005 Plan or the 2008 Plan at any time;
provided, however, that our board of directors must seek the recipients’
approval with respect to any amendment or termination that would adversely
affect the rights of such recipients under any award already made. Without
further action by our board of directors, the 2005 Plan will terminate on
February 2, 2015 and the 2008 Plan will terminate on September 12,
2017.
The
following table sets forth information on share options that have been granted
and are outstanding as of March 31, 2010 pursuant to the 2005 Plan and the 2008
Plan:
|
|
Number
of
Ordinary
Shares
Underlying
Outstanding
Options
|
|
|
Exercise
Price
per
Ordinary
Share
|
|
|
|
|
Directors
and Executive Officers
|
|
|
|
|
|
|
|
|
|
Liang
XU
|
|
|
* |
|
|
US$ |
4.172 |
|
December 5, 2006
|
|
December 4, 2016
|
|
|
|
* |
|
|
US$ |
0.543 |
|
October
5, 2008
|
|
October
4, 2018
|
Dong
LI
|
|
|
* |
|
|
US$ |
0.543 |
|
February
3, 2005
|
|
February
2, 2015
|
|
|
|
* |
|
|
US$ |
7.890 |
|
October
5, 2008
|
|
October
4, 2018
|
|
|
|
* |
|
|
US$ |
9.090 |
|
June
2, 2009
|
|
June
1, 2019
|
Jian
HAN
|
|
|
* |
|
|
US$ |
0.543 |
|
February
3, 2005
|
|
February
2, 2015
|
|
|
|
* |
|
|
US$ |
7.890 |
|
October
5, 2008
|
|
October
4, 2018
|
|
|
|
* |
|
|
US$ |
9.090 |
|
June
2, 2009
|
|
June
1, 2019
|
Huiqing
CHEN
|
|
|
* |
|
|
US$ |
0.543 |
|
February
3, 2005
|
|
February
2, 2015
|
|
|
|
* |
|
|
US$ |
7.890 |
|
October
5, 2008
|
|
October
4, 2018
|
|
|
|
* |
|
|
US$ |
9.090 |
|
June
2, 2009
|
|
June
1, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
Grantees
|
|
|
|
|
|
|
|
|
|
|
|
Other
grantees as a group (comprising 171 individuals)
|
|
|
1,208,701 |
|
|
|
— |
|
—
|
|
—
|
*
|
The
number of ordinary shares underlying the outstanding options held by each
of the officers represents less than 1% of our ordinary
shares.
|
In
addition to the options granted pursuant to the 2005 Plan and the 2008 Plan, on
May 15, 2007 we granted options to purchase 40,000 ordinary shares to
Mr. Louis T. Hsieh, who became an independent director of our company upon
the completion of our initial public offering, at an exercise price of US$4.172
per share. Mr. Hsieh retired from our board of directors in December
2009, following which 33,889 of his options were exercised with the remainder
being forfeited.
C. Board
Practices
General
The
functions and powers of our board of directors include, among
others:
|
·
|
convening
shareholders’ annual general meetings and reporting its work to
shareholders at such meetings;
|
|
·
|
implementing
shareholders’ resolutions;
|
|
·
|
determining
our business plans and investment
proposals;
|
|
·
|
declaring
dividends and distributions;
|
|
·
|
exercising
the borrowing powers of our company and mortgaging the property of our
company;
|
|
·
|
approving
the transfer of shares of our company, including the registering of such
shares in our share register; and
|
|
·
|
exercising
any other powers conferred by the shareholders’ meetings or under our
Second Amended and Restated Memorandum and Articles of
Association.
|
Terms
of Directors
Our
Second Amended and Restated Memorandum and Articles of Association provide for
three classes of directors, each with three-year terms. The term of
the Class I directors, who are Dr. Zengxiang Lu and Mr. Jianhua
Zhu, will expire upon the annual general meeting of shareholders to be held in
2011; the term of the Class II directors, who are Mr. James Hsiang
Ming Ho and Dr. Chaoyang Xia, will expire upon the annual general meeting of
shareholders to be held in 2012; and the term of the Class III directors,
who are Mr. Gongquan Wang, Dr. Rui Lu and Mr. Songzuo Xiang, will expire
upon the annual general meeting of shareholders to be held in 2010.
Employment
Agreements
We have
entered into service contracts with our directors. The service contracts do not
provide any benefits to our directors upon termination of service.
We have
entered into an employment agreement with each of our executive
officers. Under these agreements, we may terminate an executive
officer’s employment for cause at any time, without notice or remuneration, for
certain acts of the executive officer, including but not limited to material
acts of fraud, material violations of our terms of employment, material
dereliction of duty or engaging in graft to the material harm of the
company. An executive officer may terminate employment if a
government regulatory agency determines that working conditions are extremely
deficient and injurious to health, if the executive has been subject to
violence, threats or illegal constraints upon his liberty, or if we have failed
to pay compensation on time. We and each executive officer may also
decide to terminate such executive officer’s employment for other reasons or no
reason after providing written notice at least 30 days in advance and after
we have made arrangements for a successor. Our employment agreements
do not provide any benefits to any of our executive officers upon
termination.
Each
executive officer who has executed an employment agreement with us has agreed to
hold in confidence and not to use, both during and after such executive
officer’s term of employment, any of our confidential information, including but
not limited to information relating to important company policies, technological
secrets, commercial secrets, company processes and any intellectual property
discovered, invented or created by such executive officer during his or her term
of employment. In addition, each of our executive officers has agreed
to give us full rights to any work-related patents, inventions or
achievements.
Each
executive officer also has agreed that for one year after terminating employment
with us, such executive officer will not, without our consent, accept employment
by any of our competitors or engage in any activities that, directly or
indirectly, compete with us. In addition, each executive officer has
agreed that he or she will not, without our consent, induce any of our employees
to terminate employment with us.
Board
Committees
To
enhance our corporate governance, our board of directors established three board
committees: an audit committee, a corporate governance and nominations committee
and a compensation committee. The charters of each of our audit
committee, corporate governance and nominations committee and compensation
committee are publicly available on our website at http://ir.chinadtv.cn.
Audit
Committee
Our audit
committee is responsible for, among other things:
|
·
|
recommending
to our shareholders, if appropriate, the annual reappointment of our
independent auditors and pre-approving all audit and non-audit services
permitted to be performed by our independent
auditors;
|
|
·
|
annually
reviewing with our independent auditors any audit problems or difficulties
and management’s response;
|
|
·
|
reviewing
and approving all proposed related-party transactions, as defined in
Item 404 of Regulation S-K promulgated by the
SEC;
|
|
·
|
discussing
the annual audited financial statements with management and our
independent auditors;
|
|
·
|
discussing
with management and the independent auditors major issues regarding
accounting principles and financial statement
presentations;
|
|
·
|
reviewing
major issues as to the adequacy of our internal controls and any special
audit steps adopted in light of material control
deficiencies;
|
|
·
|
discussing
policies with respect to risk assessment and risk
management;
|
|
·
|
timely
reviewing reports from the independent auditors regarding all critical
accounting policies and practices to be used by our company, all
alternative treatments of financial information within U.S. GAAP that have
been discussed with management and all other material written
communications between the independent auditors and
management;
|
|
·
|
establishing
procedures for the receipt, retention and treatment of complaints received
by us regarding accounting, internal accounting controls or auditing
matters, and for the confidential, anonymous submission by our employees
of concerns regarding questionable accounting or auditing
matters;
|
|
·
|
annually
reviewing and reassessing the adequacy of our audit committee
charter;
|
|
·
|
meeting
separately and periodically with management and our internal and
independent auditors; and
|
|
·
|
reporting
regularly to our board of
directors.
|
Our audit
committee currently consists of Mr. Songzuo Xiang, Mr. Gongquan Wang
and Dr. Rui Lu, and has a formal written charter that sets forth its duties
and powers. Our board has determined that each of Mr. Songzuo
Xiang, Mr. Gongquan Wang and Dr. Rui Lu qualifies as an “independent”
director under the rules of the U.S. Securities and Exchange Commission, or the
SEC, and the NYSE. Our board also has determined that
Mr. Songzuo Xiang qualifies as an audit committee financial expert within
the meaning of the rules of the SEC. Our audit committee meets at
least once each quarter.
Corporate
Governance and Nominations Committee
Our
corporate governance and nominations committee consists of Mr. Songzuo
Xiang, Mr. Gongquan Wang and Dr. Rui Lu, and has a formal written
charter that sets forth its duties and powers. Our corporate
governance and nominations committee is responsible for identifying individuals
qualified to become members of our board of directors and recommending them to
our board for nomination. Our corporate governance and nominations
committee is also responsible for implementing our Code of Business Conduct and
Ethics.
Compensation
Committee
Our
compensation committee currently consists of Mr. Songzuo Xiang,
Mr. Gongquan Wang and Dr. Rui Lu, and has a formal written charter
that sets forth its duties and powers. Our compensation committee
assists the board in reviewing and approving our compensation structure,
including all forms of compensation relating to our directors and executive
officers, and administering our stock incentive plans.
Corporate
Governance Guidelines
Our board
of directors has adopted a set of corporate governance guidelines. These
guidelines reflect certain guiding principles with respect to the composition,
selection and performance evaluation of our board of directors, the board
committees, management succession and executive compensation. They are publicly
available on our website at http://ir.chinadtv.cn.
D. Employees
See
“Item 4. Information on the Company—B. Business
Overview—Employees.”
E. Share
Ownership
Under the
Exchange Act Rule 13d-3, 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 the 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.
The
following table sets forth certain information with respect to the directors,
officers and each of the persons known to us who own beneficially 5% or more of
our ordinary shares as of March 31, 2010 unless otherwise
indicated. The number of ordinary shares outstanding in calculating
the percentages for each listed person includes the ordinary shares underlying
share options held by such person. The percentage of beneficial
ownership of each listed person is based on 58,244,194 ordinary shares
outstanding (excluding the 139,426 ordinary shares that
were issued and held for the Company’s account in preparation for exercise of
share options by option holders under our employee stock incentive plans), as
well as the ordinary shares underlying share options exercisable by such person
within 60 days of March 31, 2010.
|
|
Shares
beneficially owned
|
|
|
|
|
|
|
|
|
Directors
and Executive Officers
|
|
|
|
|
|
|
Jianhua
ZHU (1)
|
|
|
3,247,192 |
|
|
|
5.6 |
% |
Zengxiang
LU
(2)
|
|
|
3,247,192 |
|
|
|
5.6 |
% |
James
Hsiang Ming HO
|
|
|
— |
|
|
|
— |
|
Rui
LU
|
|
|
— |
|
|
|
— |
|
Gongquan
WANG
|
|
|
— |
|
|
|
— |
|
Songzuo
XIANG
|
|
|
— |
|
|
|
— |
|
Chaoyang
XIA
|
|
|
— |
|
|
|
— |
|
Liang
XU(3)
|
|
|
* |
|
|
|
* |
|
Dong
LI(4)
|
|
|
* |
|
|
|
* |
|
Jian
HAN(5)
|
|
|
* |
|
|
|
* |
|
Huiqing
CHEN(6)
|
|
|
* |
|
|
|
* |
|
|
|
|
|
|
|
|
|
|
Directors
and executive officers as a group(7)
|
|
|
7,224,488 |
|
|
|
12.4 |
% |
|
|
|
|
|
|
|
|
|
Principal
Shareholders
|
|
|
|
|
|
|
|
|
Yuk
Shing WONG(8)
|
|
|
4,796,832 |
|
|
|
8.2 |
% |
China
Capital(9)
|
|
|
11,992,080 |
|
|
|
20.6 |
% |
Capital
Funds(10)
|
|
|
12,000,000 |
|
|
|
20.6 |
% |
SAIF(11)
|
|
|
11,885,820 |
|
|
|
20.4 |
% |
*
|
Upon
exercise of all share options exercisable within 60 days of March 31,
2010, would beneficially own less than 1% of our ordinary
shares.
|
(1)
|
Represents:
(i) the 464,977 ordinary shares held by Smart Live Group Limited, which is
wholly owned by Mr. Jianhua Zhu; (ii) 20% of the 11,992,080 ordinary
shares held by China Capital; and (iii) the 383,799 ordinary shares held
by China Cast Investment Holdings Limited, or China Cast. Mr.
Jianhua Zhu, together with Dr. Zengxiang Lu, exercises investment and
voting powers over these shares held by China
Cast. Mr. Zhu owns 20% of the equity interest of China
Capital. He owns 50% of the equity interest of China Cast and disclaims
beneficial ownership of those shares held by China Cast except to the
extent of his pecuniary interest
therein.
|
(2)
|
Represents:
(i) the 464,977 ordinary shares held by Polar Light Group Limited, which
is wholly owned by Dr. Zengxiang Lu; (ii) 20% of the 11,992,080 ordinary
shares held by China Capital; and (iii) the 383,799 ordinary shares held
by China Cast. Dr. Zengxiang Lu, together with
Mr. Jianhua Zhu, exercises investment and voting powers over these
shares held by China Cast. Dr. Lu owns 20% of the equity interest of
China Capital. He owns 50% of the equity interest of China Cast and
disclaims beneficial ownership of those shares held by China Cast except
to the extent of his pecuniary interest
therein.
|
(3)
|
Represents
the sum of ordinary shares owned by Mr. Xu and ordinary shares issuable
upon exercise of options held by
Mr. Xu.
|
(4)
|
Represents
the sum of ordinary shares owned by Mr. Li and ordinary shares issuable
upon exercise of options held by
Mr. Li.
|
(5)
|
Represents
the sum of ordinary shares owned by Mr. Han and ordinary shares issuable
upon exercise of options held by
Mr. Han.
|
(6)
|
Represents
the sum of ordinary shares owned by Ms. Chen and ordinary shares issuable
upon exercise of options held by
Ms. Chen.
|
(7)
|
Represents
40% of the 11,992,080 ordinary shares held by China Capital (each of
Mr. Jianghua Zhu and Dr. Zengxiang Lu owns 20% of the equity interest
of China Capital), 100% of the 383,799 ordinary shares held by China Cast
(Mr. Jianhua Zhu and Dr. Zengxiang Lu jointly exercise investment and
voting powers over the shares held by China Cast), ordinary shares held by
Mr. Zhu (other than those ordinary shares held through China Capital and
China Cast), Dr. Lu (other than those ordinary shares held through China
Capital and China Cast), Mr. Xu, Mr. Li, Mr. Han and
Ms. Chen and ordinary shares issuable upon exercise of options held
by Mr. Xu, Mr. Li, Mr. Han and
Ms. Chen.
|
(8)
|
Represents
40% of the 11,992,080 ordinary shares held by China
Capital. Mr. Yuk Shing Wong owns 40% of the equity
interest of China Capital.
|
(9)
|
The
equity interests of China Capital are held as follows: 20% by
Dr. Zengxiang Lu, 20% by Mr. Jianhua Zhu, 20% by Mr. Hua
Guo and 40% by Mr. Yuk Shing Wong. Each of Dr. Lu, Mr. Zhu,
Mr. Guo and Mr. Wong disclaims beneficial ownership of these
shares held by China Capital except to the extent of his pecuniary
interest therein. China Capital is a BVI company and its
address is: c/o Morgan & Morgan Trust Corporation Ltd., Pasea
Estate, P.O. Box 3149, Road Town, Tortola, British Virgin
Islands.
|
(10)
|
Includes
11,613,600 and 386,400 ordinary shares held by Capital International
Private Equity Fund IV, L.P. and CGPE IV, L.P.,
respectively. Each of Capital International Private Equity Fund
IV, L.P. and CGPE IV, L.P. is a limited partnership established in the
State of Delaware, United States. The address of each of the
Capital Funds is 6455 Irvine Center Drive, Irvine, California 92618,
U.S.A. The general partner of Capital International Private
Equity Fund IV, L.P. is Capital International Investments IV,
L.P. The general partner of Capital International Investments
IV, L.P. is Capital International Investments IV, LLC, which is also the
general partner of CGPE IV, L.P. Capital International Inc. is
the investment manager of Capital International Private Equity Fund IV,
L.P. as well as the managing member of Capital International Investments
IV, LLC. Capital International, Inc. is a wholly owned
subsidiary of Capital Group International, Inc. and a wholly owned
indirect subsidiary of The Capital Group Companies,
Inc.
|
(11)
|
Represents
the ordinary shares held by SAIF as of March 31, 2010. SAIF is
a limited partnership organized in the Cayman Islands and has the
following address: c/o Maples and Calder, Ugland House, P.O. Box 309,
George Town, Grand Cayman, Cayman Islands. SB Asia Pacific
Partners L.P., or the GP, is the sole general partner of
SAIF. SB Asia Pacific Investments Limited, or SB Investments,
is the sole general partner of the GP. SB Asia Pacific
Investments Limited is the sole shareholder of SB
Investments. Asia Infrastructure Investments Limited, or Asia
Investments, is the sole shareholder of SB Investments. Asia
Investments is controlled, in respect of its authority over SB
Investments, by SB First Singapore Pte. Ltd., or SB
Singapore. SOFTBANK Corporation is the sole shareholder of SB
Singapore. Mr. Ronald D. Fisher is the sole director of SB
Investments. As of February 2, 2009, SAIF beneficially owned
11,239,241 ordinary shares as reported on Amendment No. 1 of Schedule 13D,
which was filed by SAIF with the SEC on February 4, 2009. As of
May 31, 2008, SAIF beneficially owned 9,496,932 ordinary shares, including
those issued to SAIF upon conversion of 8,600,000 series A preferred
shares it held upon the completion of our initial public offering in
October 2007.
|
Item
7. Major
Shareholders and Related Party Transactions
A. Major
Shareholders
Please
refer to “Item 6. Directors, Senior Management and Employees—E. Share
Ownership” in this annual report.
None of
our major shareholders has voting rights different from those of our other
shareholders. To the best of our knowledge, we are not directly or
indirectly controlled by another corporation, by any foreign government or by
any other natural or legal person severally or jointly.
We are
not aware of any arrangement that may, at a subsequent date, result in a change
of control of our company.
For
information regarding our shares held or beneficially owned by persons in the
United States, see “Item 9. The Offer and Listing—A. Offering and Listing
Details—Market and Share Price Information” in this annual report.
B. Related
Party Transactions
Super
TV and N-S Digital TV Arrangements
We
operate our business in the PRC through N-S Digital TV, a PRC company owned
by PRC citizens. We do not own any equity interest in
N-S Digital TV. Through Super TV, our indirectly wholly owned
subsidiary in the PRC, we have entered into a series of contractual arrangements
with N-S Digital TV and its shareholders, including contracts relating to
transfer of assets, supply of smart cards and related software products,
provision of equipment and technical support and related services, technology
development and licenses, and certain shareholder rights and corporate
governance matters. In addition, N-S Digital TV and
N-T Information Engineering have entered into certain agreements relating
to transfer of assets, assignment of intellectual property rights and equity
interests.
The
following is a summary of the material provisions of certain of these
agreements. For more complete information you should read these
agreements in their entirety.
Transfer
of Assets and Equity Interests and Intellectual Property Rights
|
·
|
Equity
Transfer Agreement, dated August 4, 2006, between N-T Information
Engineering and N-S Digital
TV. N-T Information Engineering agreed to transfer
to N-S Digital TV its 51% equity interest in Guokai for a
consideration of RMB2.4 million (US$0.3 million), which was
subsequently reduced to RMB2.3 million (US$0.3 million) by an
agreement among N-S Digital TV, N-T Information Engineering and
the other shareholder of Guokai. This transaction was approved
by the relevant PRC governmental authorities and completed on July 27,
2007.
|
|
·
|
Asset
Transfer Agreement, dated August 5, 2006, between N-T Information
Engineering and N-S Digital TV, as amended on April 6,
2007. N-T Information Engineering transferred its
set-top box-related assets and employees to N-S Digital TV for an
initial purchase price of RMB29.4 million
(US$3.8 million). The initial purchase price is subject to
an adjustment mechanism that will require N-T Information Engineering
to refund to N-S Digital TV: (i) the difference between the initial
purchase price and the first adjustment price, defined as ten times the
total sales receipts during the period from August 1, 2006 through
December 31, 2006 with respect to the transferred set-top box business, if
such difference is a positive number; and (ii) the difference between the
initial purchase price and the second adjustment price, defined as six
times the net profit of the transferred set-top box business for the year
ending December 31, 2007, if the initial purchase price is greater than
the second adjustment price. The net profit of the transferred
set-top box business for the year ending December 31, 2007 is required to
be reviewed by a “big-four” accounting firm. As an adjustment
to the initial purchase price, N-T Information Engineering refunded
US$1.5 million to N-S Digital TV in April 2007. In
November 2007, N-S Digital TV waived the remaining amount that may be
payable by N-T Information Engineering to Super TV under the
adjustment mechanism. N-T Information Engineering
covenanted not to engage in any business activities in the PRC or outside
of the PRC that directly or indirectly are in competition with the
business transferred to N-S Digital TV under this
agreement.
|
|
·
|
Fixed-assets
Transfer Agreement, dated March 28, 2007, between N-S Digital TV and
Super TV. Super TV sold to N-S Digital TV certain
fixed assets relating to its digital television business for a cash
consideration of RMB0.8 million
(US$0.1 million).
|
|
·
|
Trademark
Licensing Agreement entered into between N-T Information Engineering
and N-S Digital TV in March 2007 and Transfer of a Graphic Logo by
N-T Information Engineering to N-S Digital TV in December
2008. N-T Information Engineering granted
N-S Digital TV a non-exclusive license to use certain trademarks free
of charge. In December 2008, N-T Information Engineering transferred to
Super TV, free of charge, the trademark for the graphic logo that was
previously licensed to N-S Digital TV under this agreement. For details of
this licensing agreement and the transfer of the trademark for the graphic
logo, see “Item 4. Information on the Company—B. Business
Overview—Intellectual Property.”
|
|
·
|
Intellectual
Property Rights Transfer Agreement, dated August 13, 2008, between N-T
Information Engineering and Super TV. N-T Information Engineering
transferred all of its intellectual property rights relating to the
digital watermarking and image tracing technologies to Super TV, including
one patent issued and five pending patent applications in the PRC. The
transfer price is RMB21.2 million (US$3.1 million), which was fully paid
by Super TV in September 2008. See “Item 4. Information on the
Company—B. Business Overview—Intellectual Property.” A portion of the
transfer price under this agreement in the amount of RMB8.8 million
(US$1.3 million) was attributable to the acquisition of the intellectual
property rights relating to the digital watermarking and image tracing
technologies and the remainder was reallocated to the acquisition of N-T
Information Engineering’s equity interest in N-S Digital TV by two of our
employees.
|
Technical
Support, Smart Cards and Software, Licenses and Equipment
|
·
|
Technical
Support and Related Services Agreement, dated June 7, 2004, between
N-S Digital TV and Super TV. Super TV exclusively
provides N-S Digital TV and/or its customers with technical support,
technical training, personnel services relating to N-S Digital TV’s
marketing activities and services relating to the maintenance and
optimization for the products and software of N-S Digital TV’s
customers at N-S Digital TV’s request. The fees for such
technical support and services are determined by agreement of the parties
on an arm’s-length basis based on the nature and quality of individual
technical support and services provided and payable within five days
after the delivery of the support and services or at any other time agreed
to by the parties. The value of the transactions between N-S
Digital TV and Super TV under this agreement was RMB7.0 million
(US$1.0 million) in 2009. The term of this agreement is 15
years, which may be renewed by the parties one month before this agreement
expires without any significant change to the terms and conditions of the
original agreement.
|
|
·
|
Technology
License Agreement, dated June 7, 2004, between N-S Digital TV and Super
TV. N-S Digital TV granted Super TV, free of charge, an exclusive
license to use certain software copyrights, patents, unpatentable
technology and technical secrets relating to the digital television
business that was transferred from N-T Information Engineering to N-S
Digital TV. The term of the license is ten
years.
|
|
·
|
Technology
Development Agreement, dated June 7, 2004, between N-S Digital TV and
Super TV. N-S Digital TV engaged Super TV to develop all technology
required by N-S Digital TV or its customers. The fees payable by N-S
Digital TV to Super TV under the agreement will be calculated according to
the following formula:
|
“Price at
which N-S Digital TV sells the technology products developed by Super TV
multiplied by a set percentage multiplied by the quantity of the products
sold.”
The
initial set percentage was 80%, subject to adjustments based on the level of
technical sophistication and difficulty of particular development tasks, as
determined on an arm’s-length basis. In 2009, N-S Digital TV
paid nil to Super TV under this agreement. The term of the agreement
is ten years.
|
·
|
Products
and Software Purchase Agreement, dated June 7, 2004, between
N-S Digital TV and Super TV. N-S Digital
TV exclusively purchased from Super TV all the smart cards and related
software products required for its CA systems. The purchase
price was RMB65 (US$9.5) for each smart card (including related software)
and may be adjusted by agreement between the parties on an arm’s-length
basis annually. The term of the agreement is 15 years. N-S Digital TV
subsequently obtained Super TV’s consent to produce by itself or purchase
from a third party smart cards beginning March 2006. The aggregate value
of transactions between N-S Digital TV and Super TV under this
agreement was RMB 192.7 million (US$28.2 million) in
2009.
|
|
·
|
Framework
Agreement for Purchase of Computer Chips, dated December 12, 2008, between
N-S Digital TV and Super TV. Pursuant to this
agreement, N-S Digital TV will purchase computer chips from Super TV,
which in turn will source such computer chips from suppliers such as STM
and Infineon. The term of this agreement is indefinite and is terminable
by agreement between the parties. N-S Digital TV intends to purchase
substantially all computer chips it needs through Super TV. The aggregate
value of transactions between N-S Digital TV and Super TV under this
agreement was RMB 37.8 million (US$5.5 million) in
2009.
|
|
·
|
Framework
Agreement for Sale of Software Products, dated July 14, 2009, between N-S
Digital TV and Super TV. Super TV granted N-S Digital TV the
exclusive right to sell its software products relating to advertisement
editing and CA systems and other software products as agreed by the
parties. The amount, price and related fees will be specified by each
order provided by N-S Digital TV to Super TV. The agreement has a term of
five years and is terminable by Super TV at any time. The aggregate value
of transactions between N-S Digital TV and Super TV under this agreement
was RMB 0.3 million (US$0.04
million).
|
Shareholder
Rights and Corporate Governance
Option to Purchase Ownership
Interest
An equity
transfer option agreement was entered into among Super TV, N-T Information
Engineering and Ms. Li Yang on June 7, 2004, as amended by a supplemental
agreement, dated September 1, 2005, among Super TV, N-T Information
Engineering, Ms. Li Yang and N-S Digital TV, and further amended by a
second supplemental agreement, dated August 18, 2007, among Super TV,
N-T Information Engineering, Ms. Li Yang, N-S Digital TV and
Ms. Wei Gao, a third supplemental agreement, dated June 20, 2008, among
Super TV, N-S Digital TV, N-T Information Engineering, Ms. Wei Gao and Mr.
Junming Wu, and a fourth supplemental agreement, dated November 24, 2008, among
Super TV, N-S Digital TV, N-T Information Engineering, Mr. Junming Wu, Mr. Lei
Zhang and Mr. Shizhou Shen, referred to collectively as the Transfer Option
Agreement. Pursuant to the Transfer Option Agreement, Mr. Junming Wu,
Mr. Lei Zhang and Mr. Shizhou Shen, being all the shareholders of N-S Digital
TV, jointly grant Super TV an exclusive and irrevocable option to purchase all
of their equity interests in N-S Digital TV at any time that Super TV deems
fit. Super TV may purchase such equity interests by itself or
designate another party to purchase such equity interests. The total
consideration for the granting of the option was RMB10 (US$1.5). The
exercise price of the option will be determined among the parties at the time of
the exercise, subject to the requirements of the PRC law or approval authorities
with respect to the minimum purchase price and the basis for the determination
of the purchase price. Following any exercise of the option, the
parties will enter into a definitive equity interest transfer agreement within
two days, or any period agreed to among the parties, after a written notice
of exercise is delivered.
Pursuant
to the Transfer Option Agreement, at all times before Super TV acquires 100% of
the equity interests in N-S Digital TV, without Super TV’s consent,
N-S Digital TV may not (i) amend its organizational documents, increase or
reduce its registered capital or otherwise change its capital structure; (ii)
sell, transfer, pledge or otherwise dispose of any legal or beneficial interest
in any of its assets, business or revenues, or allow the creation of any
encumbrance thereon; (iii) engage in any activities that may negatively impact
its operations or the value of its assets; or (iv) incur, assume or guarantee
any debts except in the ordinary course of business, extend any loan or credit
to any person, enter into any material contracts, or engage in any merger or
combination with, acquisition of, or make investment in, any other
person.
Under the
Transfer Option Agreement, Mr. Junming Wu, Mr. Lei Zhang and Mr. Shizhou Shen
undertake not to do any of the following without Super TV’s consent, at all
times before Super TV acquires 100% of the equity interests in N-S Digital TV:
(i) transfer or pledge to any third party their equity interests in N-S Digital
TV; (ii) cause N-S Digital TV to issue new shares or engage in any transactions
that will result in changes to their existing shareholding structures or
transfer to any third party N-S Digital TV’s equity interests in their
respective associated companies; (iii) receive any dividends, loan interest or
other benefits from N-S Digital TV; or (iv) make any material adjustment or
change to N-S Digital TV’s business and operations.
Voting,
Financial Support and Other Arrangements
A
business operating agreement, dated September 1, 2005, was entered into among
Super TV, N-T Information Engineering, Ms. Li Yang and N-S Digital TV, as
amended by a supplemental agreement, dated August 18, 2007, among Super TV, N-S
Information Engineering, Ms. Li Yang, N-S Digital TV and Ms. Wei Gao, and
further amended by a second supplemental agreement, dated June 20, 2008, among
Super TV, N-S Digital TV, N-T Information Engineering, Ms. Wei Gao and Mr.
Junming, and a third supplemental agreement, dated November 24, 2008, among
Super TV, N-S Digital TV, N-T Information Engineering, Mr. Junming Wu, Mr. Lei
Zhang and Mr. Shizhou Shen, referred to collectively as the Business Operating
Agreement. Pursuant to the Business Operating Agreement, N-S Digital TV and its
shareholders agreed to (i) accept the policies and guidelines furnished by Super
TV from time to time with respect to the hiring and dismissal of employees,
operational management and financial system of N-S Digital TV; (ii) appoint the
candidates recommended by Super TV as directors of N-S Digital TV and appoint
the senior management personnel of Super TV as the general manager, chief
financial officer and other senior officers of N-S Digital TV based on Super
TV’s recommendations; and (iii) seek a guarantee from Super TV first when any
guarantee is required to secure performance by N-S Digital TV of any contract or
working capital loans borrowed by N-S Digital TV and pledge its assets and
receivables to Super TV as a counter-guarantee. To date, N-S Digital TV has not
sought any such guarantee from Super TV. In addition, Super TV has agreed with
N-S Digital TV to serve as a guarantor of N-S Digital TV with respect to
contracts or transactions entered into between N-S Digital TV and third parties
in respect of N-S Digital TV’s business operations. However, as of the date of
this annual report, N-S Digital TV has not asked Super TV to provide, and Super
TV has not provided, any such guarantee in favor of a third party.
Mr.
Junming Wu executed a power of attorney, dated June 20, 2008, to appoint Mr.
Jianhua Zhu as an attorney-in-fact to exercise all its voting rights as a
shareholder of N-S Digital TV. The authorization granted under the relevant
power of attorney will terminate upon Mr. Jianhua Zhu ceasing to be a director
of Super TV. The term of this power of attorney is 10 years, subject to earlier
termination in the event of the termination of the business operating agreement
among Super TV, N-S Digital TV, N-T Information Engineering and Mr. Junming Wu.
Mr. Lei Zhang and Mr. Shizhou Shen each executed a power of attorney, dated
November 24, 2008, to appoint Super TV or a third party designated by Super TV
as an attorney-in-fact to exercise all their voting rights as a shareholder of
N-S Digital TV. The term of the power of attorney executed by Mr. Lei Zhang or
Mr. Shizhou Shen is 10 years, subject to earlier termination in the event of the
termination of the loan agreement between Super TV and Mr. Lei Zhang or the loan
agreement between Super TV and Mr. Shizhou Shen, as the case may
be.
Share
Pledge Agreements
N-T
Information Engineering and Super TV entered into a share pledge agreement,
dated September 1, 2005, pursuant to which N-T Information Engineering had
pledged all of its equity interests in N-S Digital TV to Super TV to secure the
payment obligations of N-S Digital TV under certain contractual arrangements
between N-S Digital TV and Super TV. This agreement was terminated on November
24, 2008, following the transfer by N-T Information Engineering of all of its
equity interests in N-S Digital TV to Mr. Lei Zhang and Mr. Shizhou Shen. On
November 24, 2008, Mr. Lei Zhang and Mr. Shizhou Shen each entered into a share
pledge agreement with Super TV, pursuant to which Mr. Lei Zhang and Mr. Shizhou
Shen have pledged all of their respective equity interests in N-S Digital TV to
Super TV to secure their respective payment obligations under their respective
loan agreements with Super TV, each dated November 24, 2008. Under such share
pledge agreements, Mr. Lei Zhang and Mr. Shizhou Shen have agreed not to
transfer their equity interests in N-S Digital TV or create, or allow the
creation of, any pledge on their respective equity interests in N-S Digital TV
that may affect Super TV’s interests without Super TV’s consent. Pursuant to
such agreements, Super TV is entitled to receive the dividends on the pledged
equity interests during the term of the pledges.
Pursuant
to the share pledge agreement, dated September 1, 2005, between Super TV and Ms.
Li Yang, as amended by a supplemental agreement, dated August 18, 2007, between
Super TV, Ms. Li Yang and Ms. Wei Gao, and further amended by a second
supplemental agreement, dated June 20, 2008, among Super TV, Ms. Wei Gao and Mr.
Junming Wu, Mr. Junming Wu has pledged all of his equity interests in N-S
Digital TV to Super TV to secure the payment obligations of N-S Digital TV under
certain contractual arrangements between N-S Digital TV and Super TV. Under such
share pledge agreements, Mr. Junming Wu has agreed not to transfer their equity
interests in N-S Digital TV or create, or allow the creation of, any pledge on
their respective equity interests in N-S Digital TV that may affect Super TV’s
interests without Super TV’s consent. Pursuant to such agreements, Super TV is
entitled to receive the dividends on the pledged equity interests during the
term of the pledge.
Loan
to N-T Information Engineering
Pursuant
to a loan agreement, dated April 4, 2007, between Super TV and N-T Information
Engineering and a related entrusted loan agreement, dated April 12, 2007, among
Super TV, N-T Information Engineering and the Bank of Beijing Shangdi Branch,
Super TV, through the Bank of Beijing Shangdi Branch, provided a loan in the
principal amount of RMB11.2 million (US$1.5 million) to N-T Information
Engineering to complete the plan that a portion of N-T Information Engineering’s
capital contribution to N-S Digital TV be financed by Super TV to facilitate the
establishment of N-S Digital TV as our vehicle to engage in the CA
systems-related business in the PRC. N-T Information Engineering repaid in full
the loan to Super TV in December 2008.
Loans
to Mr. Lei Zhang and Mr. Shizhou Shen
Pursuant
to two loan agreements, each dated November 24, 2008, between Super TV and each
of Mr. Lei Zhang and Mr. Shizhou Shen, respectively, Super TV provided a loan in
the principal amount of RMB6.2 million (US$0.9 million) to each of Mr. Lei Zhang
and Mr. Shizhou Shen. The term of each loan is 10 years, renewable upon consent
by the parties, and the interest rate of each loan is nil. Super TV provided
such loans to Mr. Lei Zhang and Mr. Shizhou Shen to fund their acquisitions of
N-T Information Engineering’s equity interests in N-S Digital TV.
Other
Related Party Transactions
Shareholders
Agreement
Pursuant
to the First Amended and Restated Shareholders Agreement of China Digital TV
Holding Co., Ltd., or the Shareholders Agreement, dated September 13, 2007,
among N-T Information Engineering, N-S Digital TV, CDTV BVI, China Capital,
China Cast, SAIF, Capital Funds and certain other shareholders, at any time
beginning six months after the closing of our initial public offering, each of
SAIF, Capital Funds and China Capital may, on three occasions only, require us
to effect the registration on a form other than Form F-3 of all or part of
the registrable securities then outstanding. In addition, any holder
of registrable securities may require us to effect a registration statement on
Form F-3 (or any successor form or any comparable form for a registration
in a jurisdiction other than the United States) for a public offering of
registrable securities so long as we are entitled to use Form F-3 (or a
comparable form) for such offering. Demand for a registration on
Form F-3 may be made on unlimited occasions, although we are not obligated
to effect more than one such registration per shareholder in any six-month
period.
Registrable
securities are ordinary shares not previously sold to the public and issued or
issuable or sold to SAIF, Capital Funds and China Capital, including: (a)
ordinary shares issuable upon conversion or exercise of either (i) any of
the Series A preferred shares, or (ii) any options or warrants to purchase
ordinary shares or the Series A preferred shares of our company; (b)
ordinary shares held by Capital Funds and China Capital; (c) ordinary shares
issued pursuant to share splits, share dividends, and similar distributions to
SAIF, Capital Funds and China Capital; and (d) any other securities of our
company granted with registration rights pursuant to the Shareholders
Agreement.
Holders
of registrable securities also have “piggyback” registration rights, which may
require us to register all or any part of the registrable securities then held
by such holders when we register any of our ordinary shares.
We are
generally required to bear all of the registration expenses incurred in
connection with three demand registrations on a form other than Form F-3 for
each of SAIF, Capital Funds and China Capital, unlimited Form F-3 and piggyback
registrations, except underwriting discounts and selling commissions, but
including reasonable expenses of one counsel for the party exercising the
registration right. The registration rights under the Shareholders Agreement
shall terminate on the later of June 10, 2011 and three years after our initial
public offering.
Service
Agreement
Pursuant
to a service agreement, dated April 2, 2007, between N-T Information Engineering
and N-S Digital TV, N-T Information Engineering paid RMB1.0 million (US$0.1
million) to N-S Digital TV as a one-off consideration for the services provided
by N-S Digital TV to N-T Information Engineering in assisting the latter in
performing certain customer agreements relating to the smart card and digital
television businesses transferred by N-T Information Engineering to N-S Digital
TV in June 2004. Under the agreement for the business transfer, such customer
agreements were not part of the transferred business and N-T Information
Engineering undertook to continue to perform its obligations under those
customer agreements.
Interest
Payment Agreement
Pursuant
to an agreement, dated November 30, 2006, between Super TV and N-S Digital TV,
N-S Digital TV agreed to pay interest at a rate equal to commercial banks’
lending rate for one-year loans on the payments payable by N-S Digital TV to
Super TV for the purchases of products from Super TV. Interest payable will
start to accrue from the first day of the month following the confirmation of
the corresponding sales until the actual payment. No interest was accrued as of
December 31, 2009 under this agreement.
Equity
Transfer Agreement (Super TV)
Pursuant
to an agreement for equity transfer of Super TV, dated December 2007, between
CDTV BVI and Golden Benefit, CDTV BVI agreed to transfer to Golden Benefit its
100% equity interest in Super TV for US$4.5 million in cash. As a result of this
transaction, Golden Benefit directly holds 100% equity interest in Super
TV.
Equity
Transfer Agreement (N-S Media Investment)
Pursuant
to an agreement for equity transfer of N-S Media Investment, dated October 5,
2008, between Super TV and N-S Digital TV, Super TV agreed to transfer to N-S
Digital TV its 100% equity interest in N-S Media Investment for RMB50 million
(US$7.3 million) in cash. As a result of this transaction, N-S Digital TV
directly holds 100% equity interest in N-S Media Investment.
Equity Transfer Agreement (Guangdong
R&D)
Pursuant
to an agreement for equity transfer of Guangdong R&D, dated February 26,
2010, between N-S Digital TV and Beijing Shi Xun, N-S Digital TV agreed to
acquire from Beijing Shi Xun of its 90% equity interest in Guangdong R&D for
RMB2.7 million (US$0.4 million) in cash. Guangdong R&D is a PRC domestic
company located in Fuoshan of Guangdong Province that engages in research and
development of technology relating to digital media. Mr. Zengxiang Lu, our
director, was the president of Guangdong R&D at the time of the transaction.
Mr. Jianhua Zhu, our chairman, was the executive director of Guangdong R&D
at the time of the transaction and one of his family members holds 40% equity
interest in Beijing Shi Xun. A family member of a major shareholder of ours also
holds 40% equity interest in Beijing Shi Xun. As a result of this transaction
and another transaction in which N-S Digital TV acquired the remaining equity
interest in Guangdong R&D from a third party, N-S Digital TV directly holds
100% equity interest in Guangdong R&D.
C.
|
Interests
of Experts and Counsel
|
Not
Applicable.
Item 8.
|
Financial
Information
|
A.
|
Consolidated
Statements and Other Financial
Information
|
Consolidated
Statements
See “Item
18. Financial Statements.”
Legal
Proceedings
We are not currently a party to any
material legal proceeding and, to our knowledge, there are no material legal
proceedings threatened against us. From time to time, we may be subject to
various claims and legal actions arising in the ordinary course of
business.
Dividend
Policy
As a
result of the substantial growth of our revenues in 2005 and 2006, we generated
cash in excess of our ordinary business needs. As we had not identified any
immediate investment or acquisition opportunities at that time, we declared
dividends to our shareholders in August 2006 and November 2006 and paid out such
dividends in August 2006 and February 2007, respectively. We paid aggregate cash
dividends of US$10.0 million and US$11.3 million in 2006 and 2007,
respectively.
In
December 2008, in the belief that a special dividend is an efficient use of our
cash to maximize shareholder value, our board of directors determined to declare
and pay a special cash dividend of US$1.00 per ordinary share of the company.
This special dividend in the amount of US$57.3 million was fully paid by the end
of February 2009.
Our board
of directors has the discretion to determine the payment of any dividends. As a
matter of company policy, our board of directors will consider declaring and
paying dividends at least once every two years following the declaration of the
special dividend in 2008, for a given period, subject to the board of directors’
determination that (i) we have sufficient profit attributable to shareholders
for such period and (ii) our funding requirements can be fully satisfied if a
proposed dividend is declared and paid. In addition, our board of directors will
review and decide whether to revise our dividend policy, from time to time, in
light of our future operations and earnings, capital requirements and surplus,
financial condition, contractual restrictions, general business conditions and
other factors as the board of directors may deem relevant. We expect any such
dividends that our board of directors may declare in the future to be paid with
funds from sources other than our earnings accumulated in 2008 and thereafter
because we currently intend to retain all available earnings accumulated from
2008 and onwards for use in the operation and expansion of our business, and do
not anticipate paying any cash dividends on our ordinary shares, or indirectly
on our ADSs, from such earnings, for the foreseeable future.
We may
rely on our operating subsidiary, Super TV, for our cash needs, including the
funds necessary to pay dividends to our shareholders. The payment of dividends
by Super TV is subject to limitations. See “Item 3. Key Information—D. Risk
Factors—Risks Relating to the People’s Republic of China—We may rely on
dividends and other distributions on equity paid by our operating subsidiary to
fund cash and financing requirements, and limitations on the ability of our
operating subsidiary to pay dividends to us could materially restrict on our
ability to conduct our business.”
Holders
of ADSs will be entitled to receive dividends, subject to the terms of the
deposit agreement, less the fees and expenses payable under the deposit
agreement. Cash dividends will be paid by the depositary to holders of ADSs in
U.S. dollars. Other distributions, if any, will be paid by the depositary to
holders of our ADSs in any means it deems legal, fair and
practical.
There
have been no significant changes since December 31, 2009, the date of the annual
financial statements in this annual report.
Item 9.
|
The
Offer and Listing
|
A.
|
Offering
and Listing Details
|
Market
and Share Price Information
Our ADSs,
each representing one ordinary share, have been listed on the NYSE since October
5, 2007. Our ADSs trade under the symbol “STV.” The NYSE is the principal
trading market for our ADSs, which are not listed on any other exchanges in or
outside the United States.
The high
and low closing prices of our ADSs on the NYSE since listing are as
follows:
|
|
|
|
|
|
|
|
|
|
|
Yearly:
|
|
|
|
|
|
|
2007(1)
|
|
|
51.08 |
|
|
|
25.60 |
|
2008
|
|
|
27.55 |
|
|
|
4.25 |
|
2009
|
|
|
11.31 |
|
|
|
5.83 |
|
Quarterly:
|
|
|
|
|
|
|
|
|
First
Quarter, 2008
|
|
|
27.55 |
|
|
|
15.60 |
|
Second
Quarter, 2008
|
|
|
20.57 |
|
|
|
13.91 |
|
Third
Quarter, 2008
|
|
|
13.79 |
|
|
|
7.42 |
|
Fourth
Quarter, 2008
|
|
|
8.55 |
|
|
|
4.25 |
|
First
Quarter, 2009
|
|
|
5.85 |
|
|
|
8.69 |
|
Second
Quarter, 2009
|
|
|
11.31 |
|
|
|
6.28 |
|
Third
Quarter, 2009
|
|
|
9.32 |
|
|
|
6.99 |
|
Fourth
Quarter, 2009
|
|
|
7.44 |
|
|
|
5.83 |
|
First
Quarter, 2010
|
|
|
7.99 |
|
|
|
6.06 |
|
Monthly:
|
|
|
|
|
|
|
|
|
October
2009
|
|
|
7.44 |
|
|
|
6.52 |
|
November
2009
|
|
|
7.05 |
|
|
|
5.98 |
|
December
2009
|
|
|
6.15 |
|
|
|
5.83 |
|
January
2010
|
|
|
7.22 |
|
|
|
6.07 |
|
February
2010
|
|
|
7.58 |
|
|
|
6.06 |
|
March
2010
|
|
|
7.99 |
|
|
|
7.10 |
|
April
2010 (through April 26)
|
|
|
7.62 |
|
|
|
7.05 |
|
(1) Our ADSs commenced trading on the NYSE on October 5, 2007.
As of
March 31, 2010, a total of 21,629,821 ADSs were outstanding, excluding the
139,426 ADSs that were held for our account in preparation for exercise of share
options by option holders under our employee stock incentive plans. As of March
31, 2010, 21,629,821 ordinary shares were registered in the name of Deutsche
Bank Trust Company Americas, the depositary under the deposit agreement,
excluding 139,426 ordinary shares that were issued and held for our account in
preparation for exercise of share options by option holders under our employee
stock incentive plans.
Not
Applicable.
Our ADSs,
each representing one ordinary share, have been listed on the NYSE since
October 5, 2007 under the symbol “STV.”
Not
Applicable.
Not
Applicable.
Not
Applicable.
Item 10.
|
Additional
Information
|
Not
Applicable.
B.
|
Memorandum
and Articles of Association
|
We
incorporate by reference into this annual report the description of our Second
Amended and Restated Memorandum and Articles of Association contained in our
registration statement on Form F-1 (File No. 333-146072) filed with the SEC on
September 14, 2007. Our shareholders adopted our Second Amended and Restated
Memorandum and Articles of Association on September 13, 2007.
Other
than the contracts described elsewhere in this annual report, we and our
operating companies have not entered into any material contracts that are not in
the ordinary course of business within the two years preceding the date of this
annual report.
The
Cayman Islands currently have no exchange control restrictions. Also see “Item
4. Information on the Company—B. Business Overview—Regulation—Foreign Currency
Exchange” and “—Regulation of Foreign Exchange in Certain Onshore and Offshore
Transactions” for information of foreign currency exchange in the
PRC.
The
following discussion of the material Cayman Islands and United States federal
income tax consequences of an investment in the 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. This summary does not deal with all possible
tax consequences relating to an investment in the ADSs, such as the tax
consequences under state, local and other tax laws.
Cayman
Islands Taxation
To the
extent the following discussion relates to Cayman Islands law with respect to
the income tax consequence of an investment in our ADSs, it represents the
opinion of Conyers Dill & Pearman.
The
Cayman Islands currently levies no taxes on individuals or corporations based
upon profits, income, gains or appreciations and there is no taxation in the
nature of inheritance tax or estate duty or withholding tax applicable to us or
to any holder of ADSs or ordinary shares. There are no other taxes likely to be
material to us levied by the Government of the Cayman Islands except for stamp
duties which may be applicable on instruments executed in, or after execution
brought within the jurisdiction of, the Cayman Islands. No stamp duty is payable
in the Cayman Islands on transfers of shares of Cayman Islands companies except
those which hold interests in land in the Cayman Islands. The Cayman Islands is
not party to any double tax treaties. There are no exchange control regulations
or currency restrictions in the Cayman Islands.
Pursuant
to Section 6 of the Tax Concessions Law (1999 Revision) of the Cayman Islands,
we have obtained an undertaking from the Governor-in-Cabinet:
|
·
|
that
no law which is enacted in the Cayman Islands imposing any tax to be
levied on profits or income or gains or appreciations shall apply to the
Company or its operations; and
|
|
·
|
that
the aforesaid tax or any tax in the nature of estate duty or inheritance
tax shall not be payable on the shares, debentures or other obligations of
the Company.
|
The
undertaking for us is for a period of 20 years from May 1, 2007.
United
States Federal Income Taxation
This
section describes the material United States federal income tax consequences of
owning ADSs. It applies to you only if you are a U.S. holder as
defined below, and you hold your ADSs as capital assets for tax
purposes. This section does not apply to you if you are a member of a
special class of holders subject to special rules, including:
|
·
|
a
dealer in securities,
|
|
·
|
a
trader in securities that elects to use a mark-to-market method of
accounting for securities holdings,
|
|
·
|
a
tax-exempt organization,
|
|
·
|
a
life insurance company,
|
|
·
|
a
person liable for alternative minimum
tax,
|
|
·
|
a
person that actually or constructively owns 10% or more of our voting
stock,
|
|
·
|
a
person that holds ADSs as part of a straddle or a hedging or conversion
transaction, or
|
|
·
|
a
person whose functional currency is not the U.S.
dollar.
|
U.S.
holders are urged to consult their tax advisors about the application of the
United States federal tax rules to their particular circumstances as well as the
state, local and foreign tax consequences to them of the purchase, ownership and
disposition of our ADSs or ordinary shares.
This
section is based on the Internal Revenue Code of 1986, as amended, its
legislative history, existing and proposed Treasury regulations, published
rulings and court decisions, all as currently in effect. These laws are subject
to change, possibly on a retroactive basis. In addition, this section 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.
You are a
U.S. holder if you are a beneficial owner of ADSs and you are:
|
·
|
a
citizen or resident of the United
States,
|
|
·
|
a
corporation (or other entity taxable as a corporation for United States
federal income tax purposes) organized under the laws of the United
States, any State or the District of
Columbia,
|
|
·
|
an
estate whose income is subject to United States federal income tax
regardless of its source, or
|
|
·
|
a
trust if a United States court can exercise primary supervision over the
trust’s administration and one or more United States persons are
authorized to control all substantial decisions of the
trust.
|
In
general, and taking into account the earlier assumptions, for United States
federal income tax purposes, if you hold ADRs evidencing ADSs, you will be
treated as the owner of the shares represented by those ADRs. Exchanges of
shares for ADRs, and ADRs for shares, generally will not be subject to United
States federal income tax. The tax treatment of holding shares is identical to
that of holding ADSs.
Taxation
of Dividends
Under the
United States federal income tax laws, and subject to PFIC rules discussed
below, the gross amount of any dividend we pay out of our current or accumulated
earnings and profits (as determined for United States federal income tax
purposes) is subject to United States federal income taxation. If you are a
non-corporate U.S. holder, including an individual, dividends paid to you in
taxable years beginning before January 1, 2011 that constitute qualified
dividend income will be taxable to you at a maximum tax rate of 15% provided
that you hold the ADSs for more than 60 days during the 121-day period beginning
60 days before the ex-dividend date and meet other holding period requirements.
Dividends we pay with respect to the ADSs generally will be qualified dividend
income provided that, in the year that you receive the dividend, the ADSs are
readily tradable on an established securities market in the United States. The
NYSE should qualify as an established securities market in the United
States.
The
dividend is taxable to you when the depositary receives the dividend, actually
or constructively. The dividend will not be eligible for the dividends-received
deduction generally allowed to United States corporations in respect of
dividends received from other United States corporations. Distributions in
excess of current and accumulated earnings and profits, as determined for United
States federal income tax purposes, will be treated as a non-taxable return of
capital to the extent of your basis in the ADSs and thereafter as capital
gain.
In the
event that PRC tax is withheld and paid over to the PRC with regard to the
dividend payments, the PRC tax will generally be creditable against your United
States federal income tax liability. See “Item 3. Key Information—D. Risk
Factors—Risks Relating to the People’s Republic of China—Dividends payable by us
to our non-PRC shareholders and ADS holders, and gains on the sales of our
ordinary shares or ADSs, may be subject to withholding taxes under PRC tax laws,
which may materially reduce the value of your investment.” To the extent a
refund of the tax withheld is available under PRC law, the amount of tax
withheld that is refundable will not be creditable against your United States
federal income tax liability.
Dividends
will be income from sources outside the United States, and, depending on your
circumstances, will be either “passive” or “general” category income for
purposes of computing the foreign tax credit allowable to you.
Taxation
of Capital Gains
Subject
to the PFIC rules discussed below, if you sell or otherwise dispose of your
ADSs, you will recognize capital gain or loss for United States federal income
tax purposes equal to the difference between the U.S. dollar value of the amount
that you realize and your tax basis, determined in U.S. dollars, in your ADSs.
Capital gain of a non-corporate U.S. holder, including an individual, is
generally taxed at preferential rates where the holder has a holding period
greater than one year. The gain or loss will generally be income or loss from
sources within the United States for foreign tax credit limitation
purposes.
PFIC Rules
Based on
an analysis of the value of our assets as of December 31, 2009, we were a PFIC
during 2009 for the U.S. federal income tax purposes. This conclusion is a
factual determination that is made annually and thus we may or may not be a PFIC
for the taxable year of 2010 and thereafter.
In
general, we will be a PFIC with respect to you if for any taxable year in which
you held our ADSs:
|
·
|
at
least 75% of our gross income for the taxable year is passive income,
or
|
|
·
|
at
least 50% of the value, determined on the basis of a quarterly average, of
our assets is attributable to assets that produce or are held for the
production of passive income.
|
Passive
income generally includes dividends, interest, royalties, rents (other than
certain rents and royalties derived in the active conduct of a trade or
business), annuities and gains from assets that produce passive income. If a
foreign corporation owns at least 25% by value of the stock of another
corporation, the foreign corporation is treated for purposes of the PFIC tests
as owning its proportionate share of the assets of the other corporation, and as
receiving directly its proportionate share of the other corporation’s
income.
Because
we were classified as a PFIC for 2009, you will generally be subject to the
special PFIC tax rules or, if you make a mark-to-market election, the
mark-to-market rules as described below.
Special PFIC Rules. If we are
treated as a PFIC, and you are a U.S. holder, you will be subject to special
rules with respect to:
|
·
|
any
gain you realize on the sale or other disposition of your ADSs,
and
|
|
·
|
any
excess distribution that we make to you (generally, any distributions to
you during a single taxable year that are greater than 125% of the average
annual distributions received by you in respect of the ADSs during the
three preceding taxable years or, if shorter, your holding period for the
ADSs).
|
Under
these rules:
|
·
|
the
gain or excess distribution will be allocated ratably over your holding
period for the ADSs,
|
|
·
|
the
amount allocated to the taxable year in which you realized the gain or
excess distribution will be taxed as ordinary
income,
|
|
·
|
the
amount allocated to each prior year, with certain exceptions, will be
taxed at the highest tax rate in effect for that year,
and
|
|
·
|
the
interest charge generally applicable to underpayments of tax will be
imposed in respect of the tax attributable to each such
year.
|
Special
rules apply for calculating the amount of the foreign tax credit with respect to
excess distributions by a PFIC.
Mark-to-market Rules. If you
own ADSs in a PFIC that are treated as marketable stock, you should generally be
able to make a mark-to-market election. We believe that our ADSs are and will
continue to be “marketable stock” as long as they continue to be traded on NYSE,
other than in de
minimis quantities, on at least 15 days during each calendar quarter. If
you make this election, you will not be subject to the PFIC rules described
above. Instead, in general, you will include as ordinary income each year the
excess, if any, of the fair market value of your ADSs at the end of the taxable
year over your adjusted basis in your ADSs. These amounts of ordinary income
will not be eligible for the favorable tax rates applicable to qualified
dividend income or long-term capital gains. You will also be allowed to take an
ordinary loss in respect of the excess, if any, of the adjusted basis of your
ADSs over their fair market value at the end of the taxable year (but only to
the extent of the net amount of previously included income as a result of the
mark-to-market election). Your basis in the ADSs will be adjusted to reflect any
such income or loss amounts.
In
addition, notwithstanding any election you make with regard to the ADSs,
dividends that you receive from us will not constitute qualified dividend income
to you if we are a PFIC either in the taxable year of the distribution or the
preceding taxable year. Moreover, your ADSs will be treated as stock in a PFIC
if we were a PFIC at any time during your holding period in your ADSs, even if
we are not currently a PFIC. For purposes of this rule, if you make a
mark-to-market election with respect to your ADSs, you will be treated as having
a new holding period in your ADSs beginning on the first day of the first
taxable year beginning after the last taxable year for which the mark-to-market
election applies. Dividends that you receive that do not constitute qualified
dividend income are not eligible for taxation at the 15% maximum rate applicable
to qualified dividend income. Instead, you must include the gross amount of any
such dividend paid by us out of our accumulated earnings and profits (as
determined for United States federal income tax purposes) in your gross income,
and it will be subject to tax at rates applicable to ordinary
income.
F.
|
Dividends
and Paying Agents
|
Not
Applicable.
Not
Applicable.
You can
read and copy documents referred to in this annual report that have been filed
with the SEC at the SEC’s public reference room located at 100 F Street, NE,
Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further
information on the public reference rooms and their copy charges. 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.
I.
|
Subsidiary
Information
|
Not
Applicable.
Item 11.
|
Quantitative
and Qualitative Disclosures About Market
Risks
|
Interest
Rate Risk
As of
December 31, 2009, we had no short-term or long-term borrowings. If we borrow
money in future periods, we may be exposed to interest rate risk. Our exposure
to market risk for changes in interest rates relates primarily to the interest
income generated by our cash deposits with our banks and held-to-maturity
investments. We have not used any derivative financial instruments in our
investment portfolio. Interest earnings instruments carry a degree of interest
rate risk. We have not been exposed, nor do we anticipate being exposed to
material risks due to changes in interest rates. However, our future interest
income may fall short of expectations due to changes in interest
rates.
Foreign
Currency Risk
Although
the conversion of the Renminbi is highly regulated in the PRC, the value of the
Renminbi against the value of the U.S. dollar (or any other currency)
nonetheless may fluctuate and be affected by, among other things, changes in the
political and economic conditions in the PRC. Under the currency policy in
effect in the PRC today, the Renminbi is permitted to fluctuate in value within
a narrow band against a basket of certain foreign currencies. The PRC is
currently under significant international pressures to liberalize this
government currency policy, and if such liberalization were to occur, the value
of the Renminbi could appreciate or depreciate against the U.S.
dollar.
Fluctuations
in exchange rates may affect our costs, profit margins and net income. For
example, in 2009, substantially all of our revenues were denominated in Renminbi
and 37.8% of our cost of revenues was denominated in U.S. dollars. In 2009,
fluctuations in the exchange rates between the Renminbi and U.S. dollar and
other foreign currencies resulted in a decrease in our net income of
approximately US$57,144.
Fluctuations
in exchange rates may also affect our balance sheet. For example, to the extent
that we need to convert U.S. dollars received in our initial public offering
into the Renminbi for our operations, appreciation of the Renminbi against the
U.S. dollar would have an adverse effect on the Renminbi amount that we receive
from the conversion. Conversely, if we decide to convert our Renminbi into U.S.
dollars for the purpose of making payments for dividends on our ordinary shares
or ADSs or for other business purposes, appreciation of the U.S. dollar against
the Renminbi would have a negative effect on the U.S. dollar amount available to
us. Considering the amount of our cash and cash equivalents as of December 31,
2009, a 1.0% appreciation of the Renminbi against the U.S. dollar will result in
an estimated increase of approximately US$459,521 in our total amount of cash
and cash equivalents, and a 1.0% appreciation of the U.S. dollar against the
Renminbi will result in a decrease of approximately US$464,116 in our total cash
and cash equivalents.
Also see
“Item 3. Key Information—D. Risk Factors—Risks Relating to the People’s Public
of China—Fluctuations in exchange rates could result in foreign exchange
currency losses.”
We have
not used any forward contracts or currency borrowings to hedge our exposure to
foreign currency exchange risk and do not currently intend to do
so.
Inflation
In recent
years, the PRC has not experienced significant inflation, and thus inflation has
not had a material impact on our results of operations. According to
the National Bureau of Statistics of China, the change in Consumer Price Index
in the PRC was 4.8%, 5.9% and 0.7% in 2007, 2008 and 2009,
respectively.
Item 12.
|
Description
of Securities Other than Equity
Securities
|
Not
Applicable.
Not
Applicable.
Not
Applicable.
D.
|
American
Depositary Shares.
|
Fees
and Charges for Holders of American Depositary Receipts
Our American Depositary Receipt, or
ADR, facility is maintained by Deutsche Bank Trust Company Americas, or DBTCA,
pursuant to a deposit agreement dated as of October 11, 2007, or the Deposit
Agreement, by and among us, DBTCA, and holder and beneficial owners of ADSs
evidenced by ADRs issued thereunder. We use the term “holder” in this discussion
to refer to the person in whose name an ADR is registered.
In accordance with the terms of the
Deposit Agreement, DBTCA may charge holders of our ADSs, either directly or
indirectly, fees or charges up to the amounts described below.
|
·
|
US$5.00
for each 100 ADSs, or any portion thereof, issued or surrendered,
for:
|
|
·
|
each
issuance of ADSs, including upon the deposit of shares or to any person to
whom an ADS distribution is made pursuant to share dividends or other free
distributions of shares, bonus distributions, share splits or other
distributions (except where converted to cash);
and
|
|
·
|
each
surrender of ADSs for cancellation and withdrawal of deposited
securities,
including cash distributions made pursuant to a cancellation or
withdrawal;
|
|
·
|
US$2.00
per 100 ADSs for distribution of cash proceeds pursuant to a cash
distribution (so long as the charging of such fee is not prohibited by any
exchange upon which the ADSs are listed), sale of rights and other
entitlements, not made pursuant to a cancellation or
withdrawal;
|
|
·
|
US$5.00
per 100 ADSs, or any portion thereof, issued upon the exercise of rights;
and
|
|
·
|
an annual fee of US$0.02 per ADS for the operation and
maintenance costs in administering the facility;
and
|
|
·
|
in
connection with inspections of the relevant share register maintained by
the local registrar, if applicable undertaken by DBTCA, its custodian or
their respective agents: an annual fee of US$0.01 per ADS (such fee to be
assessed against holders of record as of the date or dates set by DBTCA as
it sees fit and collected at the sole discretion of DBTCA by billing such
holders for such fee or by deducting such fee from one or more cash
dividends or other cash
distributions).
|
In
addition, holders or beneficial owners of our ADSs, persons depositing shares
for deposit and persons surrendering ADSs for cancellation and withdrawal of
deposited securities, may be required to pay DBTCA the following
charges:
|
·
|
taxes,
including applicable interest and penalties, and other governmental
charges;
|
|
·
|
transfer
or registration fees for the registration of transfer of deposited
securities on any applicable register in connection with the deposit, or
withdrawal of, deposited securities, including those of a central
depository for securities (where
applicable);
|
|
·
|
certain
cable, telex, facsimile and electronic transmission and delivery
expenses;
|
|
·
|
expenses
incurred by DBTCA in connection with the conversion of foreign currency
into U.S. dollars;
|
|
·
|
fees and expenses incurred by DBTCA
in connection with compliance with exchange control
regulations and other regulatory requirements applicable to the shares,
deposited securities and ADSs;
|
|
·
|
any
additional fees, charges, costs or expenses that may be incurred by DBTCA
from time to time.
|
The fees
charged upon issuance of ADSs are imposed on the person to whom ADSs are issued,
and in the case of withdrawals and cancellations, on the person surrendering the
ADSs. In the case of cash distributions, service fees are generally
deducted from the cash being distributed. In the case of
distributions other than cash, such as stock dividends and rights, the
depositary charges the applicable ADS record date holder concurrent with the
distribution. Annual fees may be collected from holders of ADSs in a
manner determined by DBTCA. In the case of ADSs registered in the name of the
investor (whether
certificated or in book-entry from), DBTCA sends invoices to holders of
our ADSs as of the applicable record date. In the case of ADSs being
held in brokerage and custodian accounts (via The Depositary Trust and Clearing
Corporation, or DTCC), DBTCA may, if permitted by the settlement systems
provided by DTCC, collect the fees through such settlement systems (whose
nominee is the registered holder of the ADSs held in DTCC) from the brokers and
custodians holding the ADSs in their DTCC accounts. The brokers and
custodians who hold their clients’ ADSs in DTCC accounts in such case may in
turn charge their clients’ accounts the amount of the service fees paid to
DBTCA.
The ADS
holders are responsible for any taxes or other governmental charges payable on
their ADSs or on the deposited securities underlying their ADSs. The custodian
of DBTCA may refuse to deposit shares and DBTCA may refuse to issue ADSs,
deliver ADRs, register the transfer, split up or combination of ADRs, or allow
the relevant ADS holder to withdraw the deposited securities underlying the ADSs
until such taxes or other charges, including any applicable interest and
penalty, are paid. DBTCA may apply payments owed to the relevant ADS holder or
sell deposited securities underlying the ADSs to pay any taxes, including
interest and penalty owed, and the relevant ADS holder will remain liable for
any deficiency. If DBTCA sells deposited securities, it will, if appropriate,
reduce the number of ADSs to reflect the sale and pay to the relevant ADS holder
any proceeds, or send to the relevant ADS holder any property remaining after it
has paid the taxes.
Payment
Made by DBTCA to Our Company
For the
year ended December 31, 2009, DBTCA reimbursed us US$1.0 million for
contributions towards our investor relations activities and other miscellaneous
expenses related to the listing of our ADSs on the NYSE. In addition, DBTCA paid
an aggregate of US$29,052 on our behalf for organizing our annual general
shareholders’ meeting for the year of 2008.
PART
II
Item 13.
|
Defaults,
Dividend Arrearages and
Delinquencies
|
None.
Item 14.
|
Material
Modifications to the Rights of Security Holders and Use of
Proceeds
|
Material
Modifications to the Rights of Security Holders
See
“Item 10. Additional Information” for a description of the rights of
securities holders, which remain unchanged.
Use
of Proceeds
The
following use of proceeds information relates to our registration statement on
Form F-1 (File No. 333-146072) filed by us in connection with our initial public
offering.
The net
proceeds from our initial public offering to us, after deduction of fees and
expenses, were approximately US$202.2 million. As of March 31, 2010, we spent an
aggregate of US$8.1 million to expand our business through acquisitions of or
investment in other businesses and intellectual property (including US$3.1
million of the net proceeds to purchase the equity interest in N-S Digital TV
from N-T Information Engineering and the digital watermarking and image tracing
technologies from N-T Information Engineering and US$5 million to purchase
equity interest in OpenV), US$49.4 million on general corporate purposes,
US$16.1 million on purchasing of corporate bonds, US$16.3 million on our share
repurchase plan and related transaction cost and US$57.3 million on payment of
cash dividend.
We are
continuously examining opportunities to expand our business through merger and
acquisitions, organic growth and strategic alliance with our business partners,
and anticipate that the remaining amount of the net proceeds from our initial
public offering may be used for such purposes.
Item 15.
|
Controls
and Procedures
|
Disclosure
Controls and Procedures
Our
management, with the participation of our chief executive officer and chief
financial officer, has evaluated the effectiveness of our disclosure controls
and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act)
as of the end of the period covered by this annual report. Based on this
evaluation, our chief executive officer and chief financial officer have
concluded that, as of the end of the fiscal year covered by this annual report,
our disclosure controls and procedures were designed, and were effective, to
give reasonable assurance that the information required to be disclosed by us in
reports that we file under the Exchange Act is recorded, processed, summarized
and reported within the time periods specified in the rules and forms of the
SEC, and were also effective to ensure that information required to be disclosed
in the reports that we file or submit under the Exchange Act is accumulated and
communicated to our management, including our chief executive officer and chief
financial officer, to allow timely decisions regarding required
disclosure.
Management’s
Annual Report on Internal Control over Financial Reporting
Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting, as such term is defined in Rules 13a-15(f) and
15d-15(f) under the Exchange Act, for our company. Internal control over
financial reporting is a process 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 (1)
pertain to the maintenance of records that, in reasonable detail, accurately and
fairly reflect the transactions and dispositions of a company’s assets, (2)
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 (3) 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.
Due to
its inherent limitations, a system of internal control over financial reporting
can provide only reasonable assurance with respect to consolidated financial
statement preparation and presentation, and may not prevent or detect
misstatements. In addition, 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 the
policies and procedures may deteriorate.
As
required by Section 404 of the Sarbanes-Oxley Act and related rules as
promulgated by the SEC, our management, with the participation of our chief
executive officer and chief financial officer, assessed the effectiveness of the
internal control over financial reporting as of December 31, 2009 using criteria
established in Internal Control—Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission.
Based on
this evaluation, our management has concluded that the internal control over
financial reporting was effective as of December 31, 2009 based on the criteria
established in Internal Control—Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission.
The
effectiveness of our internal control over financial reporting as of December
31, 2009 has been audited by Deloitte Touche Tohmatsu CPA Ltd., an independent
registered public accounting firm, as stated in their report included elsewhere
in this annual report.
Attestation
Report of the Independent Registered Public Accounting Firm
To the
Board of Directors and Shareholders of China Digital TV Holding Co.,
Ltd.
We have
audited the internal control over financial reporting of China Digital TV
Holding Co. Ltd. (the “Company”), its subsidiaries, its variable interest entity
(the “VIE”) and the VIE’s subsidiaries (collectively, the “Group”) as of
December 31, 2009, based on the criteria established in Internal
Control—Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission. The Company’s management is responsible for
maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting
included in the accompanying Management’s Annual Report on Internal Control Over
Financial Reporting. Our responsibility is to express an opinion on the Group’s
internal control over financial reporting based on our audit.
We conducted our audit in accordance
with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control over financial
reporting was maintained in all material respects. Our audit included obtaining
an understanding of internal control over financial reporting, assessing the
risk that a material weakness exists, testing and evaluating the design and
operating effectiveness of internal control based on the assessed risk, and
performing such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable basis for our
opinion.
A company’s internal control over
financial reporting is a process designed by, or under the supervision of, the
company’s principal executive and principal financial officers, or persons
performing similar functions, and effected by the company’s board of directors,
management and other personnel to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements
for external purposes in accordance with generally accepted accounting
principles. A company’s internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the company; (2) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that
receipts and expenditures of the company are being made only in accordance with
authorizations of management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the company’s assets that could have a
material effect on the financial statements.
Because of the inherent limitations
of internal control over financial reporting, including the possibility of
collusion or improper management override of controls, material misstatements
due to error or fraud may not be prevented or detected on a timely basis. Also,
projections of any evaluation of the effectiveness of the internal control over
financial reporting to future periods are subject to the risk that the controls
may become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
In our opinion, the Group maintained,
in all material respects, effective internal control over financial reporting as
of December 31, 2009, based on the criteria established in Internal
Control—Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission.
We have
also audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated financial statements as of and
for the year ended December 31, 2009 of the Group and our report dated April 29,
2010 expressed an unqualified opinion on those financial statements and included
an explanatory paragraph relating to the retrospective application of
authoritative guidance on noncontrolling interests, previously issued
as Statement of Financial Accounting Standards No. 160, “Noncontrolling
Interests in Consolidated Financial Statements — an amendment of ARB No. 51”,
now codified in Accounting Standards Codification Topic 810, Consolidation,
which was adopted by the Group on January 1, 2009.
/s/ Deloitte Touche Tohmatsu CPA
Ltd.
Beijing, the People’s Republic of
China
April 29, 2010
Changes
in Internal Control Over Financial Reporting
There
were no significant changes in our internal controls over financial reporting
identified in connection with the evaluation required by paragraph (d) of 17 CFR
240.13a-15 or 240.15d-15 that occurred during the period covered by this annual
report that have materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.
Item 16A.
|
Audit
Committee Financial Expert
|
Our board
has determined that Mr. Songzuo Xiang, who is one of our independent directors
under the applicable rules of the SEC and the NYSE, is an audit committee
financial expert within the meaning of the rules of the SEC. Our board appointed
Mr. Songzuo Xiang as an audit committee member, effective from December 30,
2009, to fill in the vacancy left by the depature of Mr. Louis T. Hsieh,
formerly an independent director and audit committee financial expert of our
company. See “Item 6. Directors, Senior Management and Employees.”
We have
adopted a Code of Business Conduct and Ethics that applies to all our directors,
officers and employees, including our chief executive officer, chief financial
officer and financial controller. We have filed the Code of Business Conduct and
Ethics as an exhibit to our registration statement on Form F-1 (No. 333-146072)
and have posted the text of such codes on our Internet website at http://ir.chinadtv.cn.
Item 16C.
|
Principal
Accountant Fees and Services
|
Deloitte
Touche Tohmatsu CPA Ltd. has served as our independent registered public
accounting firm for each of the fiscal years ending on December 31, 2007,
December 31, 2008 and December 31, 2009, for which audited financial statements
appear in this annual report on Form 20-F. The auditor is appointed by our board
of directors and will hold office until our board of directors appoint another
auditor.
Audit
Fees
The
aggregate fees billed in each of 2007, 2008 and 2009 for professional services
rendered by our principal accountant for the audit of our annual financial
statements or services that are normally provided by the accountant in
connection with statutory or regulatory filings or engagements were US$1.3
million, US$1.1 million and US$0.8 million, respectively.
Audit-Related
Fees
The
aggregate fees billed in each of 2007, 2008 and 2009 for assurance and related
services rendered by our principal accountant that are reasonably related to the
performance of the audit or review of our financial statements and are not
reported under the caption “Audit Fees” above were nil, nil and nil,
respectively.
Tax
Fees
The
aggregate fees billed in each of 2007, 2008 and 2009 for professional services
relating to tax compliance, tax advice and tax planning rendered by our
principal accountant were US$0.1 million, US$0.1 million and US$0.04 million,
respectively.
All
Other Fees
The
aggregate fees billed in each of 2007, 2008 and 2009 for products and services
provided by our principal accountant, other than the services reported above
under the captions “Audit Fees,” “Audit-Related Fees” and “Tax Fees,” were nil,
nil and nil, respectively.
Audit
Committee’s Pre-approval Policies and Procedures
The audit
committee of our board of directors is directly responsible for the appointment,
compensation, retention and oversight of the work of the independent auditors.
Pursuant to the audit committee charter adopted by the board of directors on
September 13, 2007, the committee has the authority and responsibility to
appoint, retain and terminate our independent auditors (subject, if applicable,
to shareholder approval), and has sole authority to approve all audit engagement
fees and terms. The audit committee has the power to preapprove, or to adopt
appropriate procedures to preapprove, all audit and non-audit services to be
provided by the independent auditors, and to consider whether the outside
auditor’s provision of non-audit services to us is compatible with maintaining
the independence of the outside auditors. The audit committee may, in its
discretion, delegate to one or more of its members the authority to preapprove
any audit or non-audit services to be performed by the independent auditors,
provided that such approvals are presented to the audit committee at its next
scheduled meeting.
Item 16D.
|
Exemptions
from the Listing Standards for Audit
Committees
|
Not
Applicable.
Item 16E.
|
Purchases
of Equity Securities by the Issuer and Affiliated
Purchasers
|
|
|
Total Number of
ADSs Purchased (1)
|
|
|
Average Price
Paid Per ADS
|
|
|
ADSs Purchased as
Part of Publicly
Announced Plans
or Programs(1)
|
|
Approximate
Dollar Value of
ADSs that May
Yet Be
Purchased Under
the Programs
|
September
15 through September 30, 2008(2)
|
|
|
344,667 |
|
|
US$ |
8.19 |
|
|
|
344,667 |
|
US$
37.2
million
|
October
1 through October 31, 2008
|
|
|
1,141,943 |
|
|
|
7.32 |
|
|
|
1,141,943 |
|
28.8
million
|
November
1 through November 21, 2008
|
|
|
820,956 |
|
|
|
5.90 |
|
|
|
820,956 |
|
US$
24.0 million
|
Total
|
|
|
2,307,566 |
|
|
US$ |
6.94 |
|
|
|
2,307,566 |
|
|
(1)
|
On
September 17, 2008, we announced a share repurchase program, pursuant to
which we were authorized by the board of directors to repurchase up to
US$40 million worth of our outstanding ADSs from time to time until
November 21, 2008.
|
(2)
|
Our
ADS to ordinary share ratio is one ADS for one ordinary
share.
|
Item 16F.
|
Change
in Registrant’s Certifying
Accountant
|
There has
been no change in our certifying accountant during our two most recent fiscal
years or any subsequent interim period.
Item 16G.
|
Corporate
Governance
|
As our
ADSs are registered with the SEC and are listed on the NYSE, we are subject to
corporate governance requirements imposed by both the SEC and the
NYSE.
We are
incorporated in the Cayman Islands. Under Section 303A of the NYSE Listed
Company Manual, NYSE-listed non-U.S. companies may, in general, follow their
home country corporate governance practices in lieu of some of the NYSE
corporate governance requirements. A NYSE-listed non-U.S. company is required to
provide a general summary of the significant differences to its U.S. investors
either on the company website or its annual report distributed to its U.S.
investors.
Mr. Louis
T. Hsieh, formerly an independent director of our company, retired from our
board of directors on our annual general meeting of shareholders held on
December 30, 2009. We appointed Dr. Chaoyang Xia as an independent director
effective March 3, 2010. During the period from Mr. Hsieh’s departure until our
appointment of Dr. Xia, our board of directors consisted of six members, half of
whom were independent directors. However, upon our appointment of Dr. Xia, our
board of directors resumed to consist of a majority of independent
directors.
As a
general matter, we are committed to a high standard of corporate governance and
endeavor to comply with most of the NYSE corporate governance practices. Other
than what is disclosed in the preceding paragraph, we believe that there are no
significant differences with our corporate governance policies as compared to
what the NYSE requires of domestic listed companies.
PART
III
Item 17.
|
Financial
Statements
|
We have
elected to provide financial statements and related information specified in
Item 18.
Item 18.
|
Financial
Statements
|
See
“Index to Consolidated Financial Statements” for a list of all financial
statements filed as part of this annual report.
Number
|
|
Description of Exhibit
|
|
|
|
1.1*
|
|
Second
Amended and Restated Memorandum and Articles of Association of China
Digital TV Holding Co., Ltd.
|
|
|
|
2.1*
|
|
Specimen
of Share Certificate.
|
|
|
|
2.2*
|
|
Form of
Deposit Agreement, including form of American Depositary
Receipts.
|
|
|
|
2.3*
|
|
First
Amended and Restated Shareholders Agreement of China Digital TV Holding
Co., Ltd., dated September 13, 2007, among Novel-Tongfang Information
Engineering Co., Ltd., Beijing Novel-Tongfang Digital TV Technology Co.,
Ltd., China Digital TV Technology Co., Ltd., China Capital Investment
Holdings Limited, China Cast Investment Holdings Limited, SB Asia
Infrastructure Fund L.P., Capital International Private Equity Fund IV,
L.P., CGPE IV, L.P. and certain other
shareholders.
|
Number
|
|
Description of Exhibit
|
|
|
|
4.1*
|
|
Asset
Transfer Agreement, dated June 7, 2004, between Beijing Novel-Tongfang
Digital TV Technology Co., Ltd. and Novel-Tongfang Information Engineering
Co., Ltd.
|
|
|
|
4.2*
|
|
Equity
Transfer Agreement, dated June 7, 2004, between Beijing Novel-Tongfang
Digital TV Technology Co., Ltd. and Novel-Tongfang Information Engineering
Co., Ltd. and related (i) Equity Entrustment Agreement, dated
September 10, 2004, and (ii) Equity Purchase Entrustment Agreement, dated
April 1, 2004, both between the same parties.
|
|
|
|
4.3*
|
|
Asset
Purchase Agreement, dated June 8, 2004, between Beijing Novel-Tongfang
Digital TV Technology Co., Ltd. and Beijing Super TV Co.,
Ltd.
|
|
|
|
4.4*
|
|
Equity
Transfer Agreement, dated August 4, 2006, between Novel-Tongfang
Information Engineering Co., Ltd. and Beijing Novel-Tongfang Digital TV
Technology Co., Ltd. and related Equity Transfer Agreement, dated March
15, 2007, among Novel-Tongfang Information Engineering Co., Ltd., Beijing
Novel-Tongfang Digital TV Technology Co., Ltd. and Panasonic Corporation
of China.
|
|
|
|
4.5*
|
|
Asset
Transfer Agreement, dated August 5, 2006, between Novel-Tongfang
Information Engineering Co., Ltd. and Beijing Novel-Tongfang Digital TV
Technology Co., Ltd. and the Supplemental Agreement thereto, dated April
6, 2007.
|
|
|
|
4.6*
|
|
Trademark
Licensing Agreement entered into in March 2007 between Beijing
Novel-Tongfang Information Engineering Co., Ltd. and Beijing
Novel-Tongfang Digital TV Technology Co., Ltd.
|
|
|
|
4.7*
|
|
Equipment
Leasing Agreement, dated June 7, 2004, between Beijing Novel-Tongfang
Digital TV Technology Co., Ltd. and Beijing Super TV Co.,
Ltd.
|
|
|
|
4.8*
|
|
Technical
Support and Related Service Agreement, dated June 7, 2004, between Beijing
Novel-Tongfang Digital TV Technology Co., Ltd. and Beijing Super TV Co.,
Ltd.
|
|
|
|
4.9*
|
|
Technology
License Agreement, dated June 7, 2004, between Beijing Novel-Tongfang
Digital TV Technology Co., Ltd. and Beijing Super TV Co.,
Ltd.
|
|
|
|
4.10*
|
|
Technology
Development Agreement, dated June 7, 2004, between Beijing Novel-Tongfang
Digital TV Technology Co., Ltd. and Beijing Super TV Co.,
Ltd.
|
|
|
|
4.11*
|
|
Products
and Software Purchase Agreement, dated June 7, 2004, between Beijing
Novel-Tongfang Digital TV Technology Co., Ltd. and Beijing Super TV Co.,
Ltd.
|
|
|
|
4.12+
|
|
Letter
of Consent, dated April 30, 2009, issued by Beijing Super TV Co., Ltd. to
Beijing Novel-Super Digital TV Technology Co., Ltd.
|
|
|
|
4.13+
|
|
Equity
Transfer Agreement, dated June 20, 2008 between Ms. Wei Gao and Mr.
Junming Wu for Beijing Novel-Super Digital TV Technology Co.,
Ltd.
|
|
|
|
4.14+
|
|
Equity
Transfer Agreement, dated November 24, 2008, between Novel-Tongfang
Information Engineering Co., Ltd. and Mr. Shizhou Shen for Beijing
Novel-Super Digital TV Technology Co., Ltd.
|
|
|
|
4.15+
|
|
Equity
Transfer Agreement, dated November 24, 2008, between Novel-Tongfang
Information Engineering Co., Ltd. and Mr. Lei Zhang for Beijing
Novel-Super Digital TV Technology Co.,
Ltd.
|
Number
|
|
Description of Exhibit
|
|
|
|
4.16
|
|
Equity
Transfer Option Agreement, dated June 7, 2004, among Beijing Super TV Co.,
Ltd., Novel-Tongfang Information Engineering Co., Ltd. and Ms. Li
Yang*; the Supplemental Agreement thereto, dated September 1, 2005, among
Beijing Super TV Co., Ltd., Novel-Tongfang Information Engineering Co.,
Ltd., Ms. Li Yang and Beijing Novel-Tongfang Digital TV Technology
Co., Ltd. *; the No. 2 Supplemental Agreement thereto, dated
August 18, 2007, among Beijing Super TV Co., Ltd., Novel-Tongfang
Information Engineering Co., Ltd., Ms. Li Yang, Beijing
Novel-Tongfang Digital TV Technology Co., Ltd. and Ms. Wei Gao*; the
No. 3 Supplemental Agreement thereto, dated June 20, 2008, among Beijing
Super TV Co., Ltd., Beijing Novel-Super Digital TV Technology Co., Ltd.,
Novel-Tongfang Information Engineering Co., Ltd., Ms. Wei Gao and Mr.
Junming Wu; and the No. 4 Supplemental Agreement thereto, dated November
24, 2008, among Beijing Super TV Co., Ltd., Beijing Novel-Super Digital TV
Technology Co., Ltd., Novel-Tongfang Information Engineering Co., Ltd.,
Mr. Junming Wu, Mr. Lei Zhang and Mr. Shizhou Shen+.
|
|
|
|
4.17*
|
|
Share
Pledge Agreement, dated September 1, 2005, between Novel-Tongfang
Information Engineering Co., Ltd. and Beijing Super TV Co.,
Ltd.
|
|
|
|
4.18+
|
|
Termination
Agreement of Share Pledge, dated November 24, 2008, between Beijing Super
TV Co., Ltd. and Novel-Tongfang Information Engineering Co.,
Ltd.
|
|
|
|
4.19+
|
|
Share
Pledge Agreement, dated September 1, 2005, between Ms. Li Yang and
Beijing Super TV Co., Ltd.*; the Supplemental Agreement thereto, dated
August 18, 2007, among Ms. Li Yang, Beijing Super TV Co., Ltd. and
Ms. Wei Gao*; and the No. 2 Supplemental Agreement thereto, dated
June 20, 2008, among Beijing Super TV Co., Ltd., Ms. Wei Gao and Mr.
Junming Wu.
|
|
|
|
4.20+
|
|
Share
Pledge Agreement, dated November 24, 2008, between Mr. Shizhou Shen and
Beijing Super TV Co., Ltd.
|
|
|
|
4.21+
|
|
Share
Pledge Agreement, dated November 24, 2008, between Mr. Lei Zhang and
Beijing Super TV Co., Ltd.
|
|
|
|
4.22+
|
|
Business
Operating Agreement, dated September 1, 2005, among Beijing Super TV Co.,
Ltd., Novel-Tongfang Information Engineering Co., Ltd., Ms. Li Yang
and Beijing Novel-Tongfang Digital TV Technology Co., Ltd. *; the
Supplemental Agreement thereto, dated August 18, 2007, among Beijing
Super TV Co., Ltd., Novel-Tongfang Information Engineering Co., Ltd.,
Ms. Li Yang, Beijing Novel-Tongfang Digital TV Technology Co., Ltd.
and Ms. Wei Gao*; the No. 2 Supplemental Agreement thereto, dated
June 20, 2008, among Beijing Super TV Co., Ltd., Beijing Novel-Super
Digital TV Technology Co., Ltd., Novel-Tongfang Information Engineering
Co., Ltd., Ms. Wei Gao and Mr. Junming Wu; and the No. 3 Supplemental
Agreement thereto, dated November 24, 2008, among Beijing Super TV Co.,
Ltd., Beijing Novel-Super Digital TV Technology Co., Ltd., Novel-Tongfang
Information Engineering Co., Ltd., Mr. Junming Wu, Mr. Lei Zhang and Mr.
Shizhou Shen.
|
|
|
|
4.23*
|
|
Power
of Attorney, dated September 1, 2005, of Novel-Tongfang Information
Engineering Co., Ltd.
|
|
|
|
4.24*
|
|
Power
of Attorney, dated August 18, 2007, of Ms. Wei
Gao.
|
|
|
|
4.25+
|
|
Power
of Attorney, dated June 20, 2008, of Mr. Junming Wu.
|
|
|
|
4.26+
|
|
Power
of Attorney, dated November 24, 2008, of Mr. Shizhou
Shen.
|
|
|
|
4.27+
|
|
Power
of Attorney, dated November 24, 2008, of Mr. Lei
Zhang.
|
Number
|
|
Description of Exhibit
|
|
|
|
4.28*
|
|
Entrusted
Loan Agreement, dated August 23, 2004, among Beijing Super TV Co., Ltd.,
Beijing Novel-Tongfang Digital TV Technology Co., Ltd. and Bank of
Beijing, Shangdi Branch.
|
|
|
|
4.29*
|
|
Entrusted
Loan Agreement, dated July 13, 2004, among Beijing Super TV Co., Ltd.,
Novel-Tongfang Information Engineering Co., Ltd. and Bank of Beijing,
Shangdi Branch.
|
|
|
|
4.30*
|
|
Entrusted
Loan Agreement, dated August 25, 2005, among Beijing Super TV Co., Ltd.,
Novel-Tongfang Information Engineering Co., Ltd. and Bank of Beijing,
Shangdi Branch.
|
|
|
|
4.31*
|
|
Loan
Agreement, dated April 4, 2007, between Beijing Super TV Co., Ltd. and
Novel-Tongfang Information Engineering Co., Ltd. and the related Entrusted
Loan Agreement, dated April 12, 2007, among Beijing Super TV Co., Ltd.,
Novel-Tongfang Information Engineering Co., Ltd. and Bank of Beijing,
Shangdi Branch.
|
|
|
|
4.32+
|
|
Loan
Agreement, dated November 24, 2008, between Mr. Shizhou Shen and Beijing
Super TV Co., Ltd.
|
|
|
|
4.33+
|
|
Loan
Agreement, dated November 24, 2008, between Mr. Lei Zhang and Beijing
Super TV Co., Ltd.
|
|
|
|
4.34*
|
|
Service
Agreement, dated April 2, 2007, between Novel-Tongfang Information
Engineering Co., Ltd. and Beijing Novel-Tongfang Digital TV Technology
Co., Ltd.
|
|
|
|
4.35*
|
|
Interest
Payment Agreement, dated November 30, 2006, between Beijing Novel-Tongfang
Digital TV Technology Co., Ltd. and Beijing Super TV Co.,
Ltd.
|
|
|
|
4.36*
|
|
Form of
Property Lease Agreement.
|
|
|
|
4.37*
|
|
Fixed
Assets Transfer Agreement, dated March 28, 2007, between Beijing
Novel-Tongfang Digital TV Technology Co., Ltd. and Beijing Super TV Co.,
Ltd.
|
|
|
|
4.38*
|
|
Form of
Employment Agreement and related Form of Agreement on Confidentiality
and Intellectual Property.
|
|
|
|
4.39*
|
|
Form of
Non-Disclosure, Non-Competition, Commitment and Proprietary Information
Agreement.
|
|
|
|
4.40*
|
|
Form of
Indemnification Agreement for Directors.
|
|
|
|
4.41*
|
|
Amended
and Restated 2005 Stock Incentive Plan of China Digital TV Holding Co.,
Ltd. and form of share option agreement.
|
|
|
|
4.42††*
|
|
Cooperation
Agreement, dated January 5, 2007, between Beijing Novel-Tongfang Digital
TV Technology Co., Ltd. and Jiangsu Qingda Science and Technology
Industries Co., Ltd.
|
|
|
|
4.43*
|
|
Cooperation
Agreement, dated July 18, 2007, between Beijing Novel-Tongfang Digital TV
Technology Co., Ltd. and China Electronics Smart Card Co.,
Ltd.
|
|
|
|
4.44*
|
|
2008
Stock Incentive Plan of China Digital TV Holding Co.,
Ltd.
|
|
|
|
4.45#
|
|
Agreement
for Equity Transfer of Beijing Novel-Super Digital TV Technology Co.,
Ltd., dated December 2007, between China Digital TV Technology Co., Ltd.
and Golden Benefit Technology Co.,
Ltd.
|
Number
|
|
Description of Exhibit
|
|
|
|
4.46+
|
|
Intellectual
Property Transfer Agreement, dated August 13, 2008, between Novel-Tongfang
Information Engineering Co., Ltd. and Beijing Super TV Co.,
Ltd.
|
|
|
|
4.47+
|
|
Equity
Transfer Agreement, dated October 5, 2008, between Beijing Super TV Co.,
Ltd. and Beijing Novel-Super Digital TV Technology Co.,
Ltd.
|
|
|
|
4.48+
|
|
Framework
Agreement for Purchase of Computer Chips, dated December 12, 2008, between
Beijing Super TV Co., Ltd. and Beijing Novel-Super Digital TV Technology
Co., Ltd.
|
|
|
|
4.49
|
|
Framework
Agreement for Sale of Software Products, dated July 14, 2009, between
Beijing Super TV Co., Ltd. and Beijing Novel-Super Digital TV Technology
Co., Ltd.
|
|
|
|
4.50
|
|
Equity
Transfer Agreement, dated February 26, 2010, between Beijing Novel-Super
Digital TV Technology Co., Ltd. and Beijing Shi Xun Hu Lian Technology
Co., Ltd.
|
|
|
|
8.1
|
|
List
of Subsidiaries of China Digital TV Holding Co., Ltd.
|
|
|
|
11.1*
|
|
Code
of Business Conduct and Ethics of China Digital TV Holding Co.,
Ltd.
|
|
|
|
12.1
|
|
CEO
Certification pursuant to Rule 13a - 14(a).
|
|
|
|
12.2
|
|
CFO
Certification pursuant to Rule 13a - 14(a).
|
|
|
|
13.1
|
|
CEO
Certification pursuant to Rule 13a - 14(b).
|
|
|
|
13.2
|
|
CFO
Certification pursuant to Rule 13a - 14(b).
|
|
|
|
23.1
|
|
Consent
of Deloitte Touche Tohmatsu CPA Ltd.
|
|
|
|
23.2
|
|
Consent
of King & Wood, PRC
Lawyers.
|
††
|
Portions
of the agreement have been omitted pursuant to a confidential treatment
request and have been filed with the SEC separately with a confidential
treatment request.
|
*
|
Previously
filed as an exhibit to the Registration Statement on Form F-1 (File
No. 333-146072) of China Digital TV Holding Co., Ltd. and incorporated
herein by reference thereto.
|
#
|
Previously
filed as an exhibit to the annual report on Form 20-F (File No. 001-33692)
of China Digital TV Holding Co., Ltd. filed with the SEC on June 18, 2008
and incorporated herein by reference
thereto.
|
+
|
Previously
filed as an exhibit to the annual report on Form 20-F (File No. 001-33692)
of China Digital TV Holding Co., Ltd. filed with the SEC on May 20, 2009
and incorporated herein by reference
thereto.
|
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.
|
CHINA
DIGITAL TV HOLDING CO., LTD.
|
|
|
|
|
|
|
By:
|
/s/ Jianhua Zhu
|
|
|
|
Name: Jianhua
Zhu
|
|
|
|
Title: Chairman
and Chief Executive Officer
|
|
Date:
April 30, 2010
CHINA
DIGITAL TV HOLDING CO., LTD.
INDEX TO CONSOLIDATED FINANCIAL
STATEMENTS
CONTENTS
|
|
PAGE(S)
|
|
|
|
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
|
|
F-1
|
|
|
|
CONSOLIDATED
BALANCE SHEETS AS OF DECEMBER 31, 2008 AND 2009
|
|
F-2
|
|
|
|
CONSOLIDATED
STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2007, 2008 AND
2009
|
|
F-3
|
|
|
|
CONSOLIDATED
STATEMENTS OF EQUITY AND COMPREHENSIVE INCOME FOR THE YEARS ENDED DECEMBER
31, 2007, 2008 AND 2009
|
|
F-4
|
|
|
|
CONSOLIDATED
STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2007, 2008 AND
2009
|
|
F-5
|
|
|
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
F-6
-
F-53
|
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
TO THE
BOARD OF DIRECTORS AND SHAREHOLDERS OF
CHINA DIGITAL TV HOLDING
CO., LTD.
We have
audited the accompanying consolidated balance sheets of China Digital TV Holding
Co., Ltd. (the "Company"), its subsidiaries, and its variable interest entity
(the "VIE") and the VIE's subsidiaries (collectively, the "Group") as of
December 31, 2008 and 2009, and the related consolidated statements of
operations, equity and comprehensive income, and cash flows for each of the
three years in the period ended December 31, 2009. These consolidated
financial statements are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our
opinion, such consolidated financial statements present fairly, in all material
respects, the consolidated financial position of the Group as of
December 31, 2008 and 2009, and the consolidated results of its operations
and its cash flows for each of the three years in the period ended
December 31, 2009, in conformity with accounting principles generally
accepted in the United States of America.
As
discussed in Note 25 to the consolidated financial statements, the consolidated
financial statements have been adjusted for the retrospective application of
authoritative guidance on noncontrolling interest, previously issued as
Statement of Financial Accounting Standards No. 160, “Noncontrolling Interests
in Consolidated Financial Statements — an amendment of ARB No. 51”, now
codified in Accounting Standards Codification Topic 810, Consolidation, which
was adopted by the Group on January 1, 2009.
We have
also audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the Group’s internal control over financial
reporting as of December 31, 2009, based on the criteria established in
Internal Control—Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission and our report dated April 29, 2010
expressed an unqualified opinion on the Group’s internal control over financial
reporting.
/s/
Deloitte Touche Tohmatsu CPA Ltd.
Beijing,
The People's Republic of China
April 29,
2010
CHINA DIGITAL TV HOLDING CO.,
LTD.
CONSOLIDATED BALANCE SHEETS
(In
U.S. dollars in thousands, except share data)
|
|
December
31,
|
|
|
|
2008
|
|
|
2009
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
202,947 |
|
|
$ |
131,087 |
|
Restricted
cash
|
|
|
24 |
|
|
|
16 |
|
Bank
deposits maturing over three months
|
|
|
68,887 |
|
|
|
64,021 |
|
Short-term
investments - held-to-maturity securities
|
|
|
- |
|
|
|
37,685 |
|
Notes
receivable
|
|
|
1,649 |
|
|
|
2,836 |
|
Accounts
receivable, net of allowance for doubtful accounts of $685 and $576
as
of December 31, 2008 and 2009, respectively
|
|
|
10,860 |
|
|
|
11,229 |
|
Inventories
|
|
|
4,014 |
|
|
|
4,684 |
|
Prepaid
expenses and other current assets
|
|
|
3,974 |
|
|
|
4,550 |
|
Deferred
costs-current
|
|
|
326 |
|
|
|
363 |
|
Deferred
income taxes-current
|
|
|
201 |
|
|
|
516 |
|
Total
current assets
|
|
|
292,882 |
|
|
|
256,987 |
|
Property
and equipment, net
|
|
|
1,880 |
|
|
|
2,308 |
|
Intangible
assets, net
|
|
|
1,854 |
|
|
|
937 |
|
Goodwill
|
|
|
499 |
|
|
|
499 |
|
Long-term
investments - equity method investments
|
|
|
437 |
|
|
|
1,005 |
|
Long-term
investments - held-to-maturity securities
|
|
|
- |
|
|
|
1,190 |
|
Deferred
costs-non-current
|
|
|
338 |
|
|
|
392 |
|
Deferred
income taxes - non-current
|
|
|
86 |
|
|
|
170 |
|
Total
assets
|
|
$ |
297,976 |
|
|
$ |
263,488 |
|
|
|
|
|
|
|
|
|
|
TOTAL
LIABILITIES AND EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$ |
1,103 |
|
|
$ |
660 |
|
Accrued
expenses and other current liabilities
|
|
|
7,888 |
|
|
|
5,340 |
|
Deferred
revenue-current
|
|
|
3,704 |
|
|
|
3,453 |
|
Payable
to shareholders
|
|
|
57,210 |
|
|
|
- |
|
Income
tax payable
|
|
|
1,088 |
|
|
|
251 |
|
Total
current liabilities
|
|
|
70,993 |
|
|
|
9,704 |
|
Deferred
revenue-non-current
|
|
|
957 |
|
|
|
760 |
|
Total
Liabilities
|
|
|
71,950 |
|
|
|
10,464 |
|
|
|
|
|
|
|
|
|
|
Commitments
(Note 21)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity:
China Digital TV Holding Co., Ltd. Shareholders' equity |
|
|
|
|
|
|
|
|
Ordinary
shares ($0.0005 par value; 200,000,000 and 200,000,000 shares authorized,
57,209,548 and 58,044,640 shares issued and outstanding as of December 31,
2008 and 2009, respectively)
|
|
|
29 |
|
|
|
29 |
|
Additional
paid-in capital
|
|
|
154,643 |
|
|
|
157,980 |
|
Statutory
reserve
|
|
|
10,184 |
|
|
|
12,691 |
|
Retained
earnings
|
|
|
52,910 |
|
|
|
75,707 |
|
Accumulated
other comprehensive income
|
|
|
6,696 |
|
|
|
6,617 |
|
Total
China Digital TV Holding Co., Ltd. shareholders' equity
|
|
|
224,462 |
|
|
|
253,024 |
|
Noncontrolling
interest
|
|
|
1,564 |
|
|
|
- |
|
Total
equity
|
|
|
226,026 |
|
|
|
253,024 |
|
TOTAL
LIABILITIES AND EQUITY
|
|
$ |
297,976 |
|
|
$ |
263,488 |
|
The
accompanying notes are an integral part of these consolidated financial
statements.
CHINA DIGITAL TV HOLDING CO.,
LTD.
CONSOLIDATED STATEMENTS OF
OPERATIONS
(In
U.S. dollars in thousands, except share data)
|
|
For the years ended December
31,
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
Products
|
|
$ |
49,741 |
|
|
$ |
64,412 |
|
|
$ |
49,146 |
|
Services
|
|
|
6,011 |
|
|
|
6,285 |
|
|
|
5,918 |
|
Total
revenues
|
|
|
55,752 |
|
|
|
70,697 |
|
|
|
55,064 |
|
Business
taxes
|
|
|
(299 |
) |
|
|
(363 |
) |
|
|
(360 |
) |
Net
revenues
|
|
|
55,453 |
|
|
|
70,334 |
|
|
|
54,704 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of revenues (including share-based compensation of $34, $35and $30
for
2007, 2008 and 2009, respectively)
|
|
|
|
|
|
|
|
|
|
|
|
|
Products
|
|
|
8,100 |
|
|
|
10,877 |
|
|
|
9,716 |
|
Services
|
|
|
2,135 |
|
|
|
2,828 |
|
|
|
3,686 |
|
Total
cost of revenues
|
|
|
10,235 |
|
|
|
13,705 |
|
|
|
13,402 |
|
Gross
profit
|
|
|
45,218 |
|
|
|
56,629 |
|
|
|
41,302 |
|
Operating
expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
Research
and development (including share-based compensation of $391, $481, and
$713
for
2007, 2008 and 2009, respectively)
|
|
|
4,643 |
|
|
|
6,921 |
|
|
|
8,779 |
|
Selling
and marketing (including share-based compensation of $112, $186, and $447
for
2007, 2008 and 2009, respectively)
|
|
|
3,758 |
|
|
|
6,063 |
|
|
|
7,203 |
|
General
and administrative (including share-based compensation of $724, $342, and
$472
for
2007, 2008 and 2009, respectively)
|
|
|
3,706 |
|
|
|
6,084 |
|
|
|
4,793 |
|
Total
operating expenses
|
|
|
12,107 |
|
|
|
19,068 |
|
|
|
20,775 |
|
Income
from operations
|
|
|
33,111 |
|
|
|
37,561 |
|
|
|
20,527 |
|
Interest
income
|
|
|
2,790 |
|
|
|
9,138 |
|
|
|
6,070 |
|
Other
income/(expense)
|
|
|
263 |
|
|
|
(412 |
) |
|
|
(65 |
) |
Income
before income taxes
|
|
|
36,164 |
|
|
|
46,287 |
|
|
|
26,532 |
|
Income
tax (expenses)/benefits:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
tax-current
|
|
|
(2,554 |
) |
|
|
(3,271 |
) |
|
|
(1,661 |
) |
Income
tax-deferred
|
|
|
212 |
|
|
|
36 |
|
|
|
400 |
|
Total
income tax (expenses)/benefits
|
|
|
(2,342 |
) |
|
|
(3,235 |
) |
|
|
(1,261 |
) |
Net
income before net loss (income) from equity method
investments
|
|
|
33,822 |
|
|
|
43,052 |
|
|
|
25,271 |
|
Net
loss (income) from equity method investments
|
|
|
6 |
|
|
|
4 |
|
|
|
(20 |
) |
Net
income
|
|
|
33,816 |
|
|
|
43,048 |
|
|
|
25,291 |
|
Net
loss attributable to noncontrolling interest
|
|
|
- |
|
|
|
14 |
|
|
|
13 |
|
Net
income attributable to China Digital TV Holding Co., Ltd.
shareholders
|
|
|
33,816 |
|
|
|
43,062 |
|
|
|
25,304 |
|
Net
income attributable to holders of ordinary shares
|
|
$ |
33,816 |
|
|
$ |
43,062 |
|
|
$ |
25,304 |
|
Net
income per share-basic ordinary shares
|
|
|
0.74 |
|
|
|
0.75 |
|
|
|
0.44 |
|
Net
income per share-basic participating preferred shares
|
|
|
0.66 |
|
|
|
- |
|
|
|
- |
|
Net
income per ordinary share-diluted
|
|
$ |
0.68 |
|
|
$ |
0.72 |
|
|
$ |
0.43 |
|
Weighted
average shares used in calculating basic net income per share-ordinary
shares
|
|
|
39,170,004 |
|
|
|
57,138,985 |
|
|
|
57,728,009 |
|
Weighted
average shares used in calculating basic net income per share-preferred
shares
|
|
|
7,389,394 |
|
|
|
- |
|
|
|
- |
|
Weighted
average shares used in calculating diluted net income per ordinary
share
|
|
|
42,773,590 |
|
|
|
60,058,724 |
|
|
|
58,591,072 |
|
The
accompanying notes are an integral part of these consolidated financial
statements.
CHINA DIGITAL TV HOLDING CO.,
LTD.
CONSOLIDATED STATEMENTS OF EQUITY AND
COMPREHENSIVE INCOME
(In
U.S. dollars in thousands, except share data)
|
|
China
Digital TV Holding Co., Ltd. Shareholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total China Digital
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TV
Holding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
Retained
|
|
|
Co.,
Ltd.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
other
|
|
|
|
|
|
earning
|
|
|
Shareholders'
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
Ordinary
|
|
|
paid-in
|
|
|
comprehensive |
|
|
Statutory
|
|
|
(accumulated |
|
|
equity/
|
|
|
Noncontrolling
|
|
|
Total
|
|
|
comprehensive
|
|
|
|
Shares
|
|
|
Amount
|
|
|
capital
|
|
|
income
|
|
|
reserve
|
|
|
deficit)
|
|
|
(deficiency)
|
|
|
Interest
|
|
|
equity
|
|
|
income
|
|
Balance
at January 1, 2007
|
|
|
34,000,000 |
|
|
$ |
17 |
|
|
$ |
4,887 |
|
|
$ |
743 |
|
|
$ |
2,353 |
|
|
$ |
(16,137 |
) |
|
$ |
(8,137 |
) |
|
$ |
4,000 |
|
|
$ |
(4,137 |
) |
|
$ |
13,568 |
|
Share-based
compensation
|
|
|
- |
|
|
|
- |
|
|
|
1,261 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
1,261 |
|
|
|
- |
|
|
|
1,261 |
|
|
|
- |
|
Net
income
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
33,816 |
|
|
|
33,816 |
|
|
|
- |
|
|
|
33,816 |
|
|
|
33,816 |
|
Provision
for statutory reserve
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
3,335 |
|
|
|
(3,335
|
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Issuance
of ordinary shares upon IPO
|
|
|
13,800,000 |
|
|
|
7 |
|
|
|
220,793 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
220,800 |
|
|
|
- |
|
|
|
220,800 |
|
|
|
- |
|
IPO
costs and related expenses
|
|
|
- |
|
|
|
- |
|
|
|
(18,151
|
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(18,151
|
) |
|
|
- |
|
|
|
(18,151
|
) |
|
|
- |
|
Conversion
of preferred shares to ordinary shares
|
|
|
9,496,932 |
|
|
|
5 |
|
|
|
16,073 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
16,078 |
|
|
|
- |
|
|
|
16,078 |
|
|
|
- |
|
Foreign
currency translation adjustment
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
2,184 |
|
|
|
- |
|
|
|
- |
|
|
|
2,184 |
|
|
|
- |
|
|
|
2,184 |
|
|
|
2,184 |
|
Balance
at December 31, 2007
|
|
|
57,296,932 |
|
|
|
29 |
|
|
|
224,863 |
|
|
|
2,927 |
|
|
|
5,688 |
|
|
|
14,344 |
|
|
|
247,851 |
|
|
|
4,000 |
|
|
|
251,851 |
|
|
|
36,000 |
|
Share-based
compensation
|
|
|
- |
|
|
|
- |
|
|
|
1,044 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
1,044 |
|
|
|
- |
|
|
|
1,044 |
|
|
|
- |
|
Net
income
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
43,062 |
|
|
|
43,062 |
|
|
|
(14
|
) |
|
|
43,048 |
|
|
|
43,048 |
|
Provision
for statutory reserve
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
4,496 |
|
|
|
(4,496
|
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Exercise
of stock option
|
|
|
2,220,182 |
|
|
|
1 |
|
|
|
2,287 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
2,288 |
|
|
|
- |
|
|
|
2,288 |
|
|
|
- |
|
ADSs
repurchase and retirement
|
|
|
(2,307,566
|
) |
|
|
(1
|
) |
|
|
(16,254
|
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(16,255
|
) |
|
|
- |
|
|
|
(16,255
|
) |
|
|
- |
|
Cash
distribution to shareholders
|
|
|
- |
|
|
|
- |
|
|
|
(57,210
|
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(57,210
|
) |
|
|
- |
|
|
|
(57,210
|
) |
|
|
- |
|
Adjustment
to 2007 accrued IPO costs and related expenses
|
|
|
- |
|
|
|
- |
|
|
|
(87
|
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(87
|
) |
|
|
- |
|
|
|
(87
|
) |
|
|
- |
|
Noncontrolling
interest of N-T Information Engineering
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(3,000
|
) |
|
|
(3,000
|
) |
|
|
- |
|
Noncontrolling
interest of Dongguan Super TV
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
719 |
|
|
|
719 |
|
|
|
- |
|
Acquisition
of Dongguan Super TV
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(141
|
) |
|
|
(141
|
) |
|
|
- |
|
Foreign
currency translation adjustment
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
3,769 |
|
|
|
- |
|
|
|
- |
|
|
|
3,769 |
|
|
|
- |
|
|
|
3,769 |
|
|
|
3,769 |
|
Balance
at December 31, 2008
|
|
|
57,209,548 |
|
|
|
29 |
|
|
|
154,643 |
|
|
|
6,696 |
|
|
|
10,184 |
|
|
|
52,910 |
|
|
|
224,462 |
|
|
|
1,564 |
|
|
|
226,026 |
|
|
|
46,817 |
|
Share-based
compensation
|
|
|
- |
|
|
|
- |
|
|
|
1,662 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
1,662 |
|
|
|
- |
|
|
|
1,662 |
|
|
|
- |
|
Net
income
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
25,304 |
|
|
|
25,304 |
|
|
|
(13
|
) |
|
|
25,291 |
|
|
|
25,291 |
|
Provision
for statutory reserve
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
2,507 |
|
|
|
(2,507
|
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Exercise
of stock option
|
|
|
835,092 |
|
|
|
- |
|
|
|
762 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
762 |
|
|
|
- |
|
|
|
762 |
|
|
|
- |
|
Cash
distribution to shareholders
|
|
|
- |
|
|
|
- |
|
|
|
(87
|
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(87
|
) |
|
|
- |
|
|
|
(87
|
) |
|
|
- |
|
Transfer
of noncontrolling interest
|
|
|
- |
|
|
|
- |
|
|
|
1,000 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
1,000 |
|
|
|
(1,000
|
) |
|
|
- |
|
|
|
- |
|
Dongguan
SuperTV deconsolidation
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(551
|
) |
|
|
(551
|
) |
|
|
|
|
Foreign
currency translation adjustment
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(79
|
) |
|
|
- |
|
|
|
- |
|
|
|
(79
|
) |
|
|
- |
|
|
|
(79
|
) |
|
|
(79
|
) |
Balance
at December 31, 2009
|
|
|
58,044,640 |
|
|
$ |
29 |
|
|
$ |
157,980 |
|
|
$ |
6,617 |
|
|
$ |
12,691 |
|
|
$ |
75,707 |
|
|
$ |
253,024 |
|
|
$ |
- |
|
|
$ |
253,024 |
|
|
$ |
25,212 |
|
The
accompanying notes are an integral part of these consolidated financial
statements.
CHINA
DIGITAL TV HOLDING CO., LTD.
CONSOLIDATED STATEMENTS OF CASH
FLOWS
(In
U.S. dollars in thousands, except share data)
|
|
For the years ended December
31,
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$ |
33,816 |
|
|
$ |
43,048 |
|
|
$ |
25,291 |
|
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
926 |
|
|
|
1,254 |
|
|
|
1,691 |
|
Share-based
compensation
|
|
|
1,261 |
|
|
|
1,044 |
|
|
|
1,662 |
|
Gain
from disposal of property and equipment
|
|
|
- |
|
|
|
- |
|
|
|
(9 |
) |
Allowance
for doubtful accounts
|
|
|
184 |
|
|
|
286 |
|
|
|
(89 |
) |
Write-down
of inventory
|
|
|
137 |
|
|
|
127 |
|
|
|
59 |
|
Warranty
accrual
|
|
|
(6 |
) |
|
|
56 |
|
|
|
45 |
|
Loss
(gain) from equity method investments
|
|
|
6 |
|
|
|
4 |
|
|
|
(7 |
) |
Gain
from deconsolidation of a subsidiary
|
|
|
- |
|
|
|
- |
|
|
|
(13 |
) |
Impairment
loss of an intangible asset
|
|
|
- |
|
|
|
- |
|
|
|
271 |
|
Accrued
interest income
|
|
|
(122 |
) |
|
|
- |
|
|
|
(553 |
) |
Changes
in assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(3,091 |
) |
|
|
(5,926 |
) |
|
|
(1,468 |
) |
Inventories
|
|
|
(161 |
) |
|
|
(975 |
) |
|
|
(731 |
) |
Prepaid
expenses and other current assets
|
|
|
185 |
|
|
|
(3,472 |
) |
|
|
(2,899 |
) |
Deferred
cost
|
|
|
226 |
|
|
|
420 |
|
|
|
(92 |
) |
Amount
due from related parties
|
|
|
(70 |
) |
|
|
581 |
|
|
|
- |
|
Accounts
payable
|
|
|
(444 |
) |
|
|
586 |
|
|
|
(443 |
) |
Income
tax payable
|
|
|
692 |
|
|
|
280 |
|
|
|
(835 |
) |
Accrued
expenses and other current liabilities
|
|
|
2,533 |
|
|
|
3,623 |
|
|
|
(2,563 |
) |
Deferred
revenue
|
|
|
(2,033 |
) |
|
|
(2,497 |
) |
|
|
(446 |
) |
Deferred
income taxes
|
|
|
(201 |
) |
|
|
(36 |
) |
|
|
(400 |
) |
Net
cash provided by operating activities
|
|
|
33,838 |
|
|
|
38,403 |
|
|
|
18,471 |
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term
loan to N-T Information Engineering
|
|
|
(1,471 |
) |
|
|
1,635 |
|
|
|
- |
|
Long-term
equity investments
|
|
|
(399 |
) |
|
|
- |
|
|
|
- |
|
Purchase
of property and equipment
|
|
|
(1,219 |
) |
|
|
(1,001 |
) |
|
|
(1,475 |
) |
Receipt
for acquisition of set-top box design business
|
|
|
1,543 |
|
|
|
- |
|
|
|
- |
|
Bank
deposits maturing over three months
|
|
|
(17,092 |
) |
|
|
(48,260 |
) |
|
|
7,743 |
|
Restricted
cash
|
|
|
(625 |
) |
|
|
767 |
|
|
|
8 |
|
Long-term
loan to individuals (nominee shareholders) for acquisition of equity
interests in N-S Digital TV from N-T Information
Engineering
|
|
|
- |
|
|
|
(1,803 |
) |
|
|
- |
|
Purchase
of intangible assets from N-T Information Engineering
|
|
|
- |
|
|
|
(1,299 |
) |
|
|
- |
|
Acquisition
of equity interests in N-S Digital TV from N-T Information
Engineering
|
|
|
- |
|
|
|
(1,815 |
) |
|
|
- |
|
Aquisition
of additional interests from a noncontrolling shareholder (see Note
4)
|
|
|
- |
|
|
|
(146 |
) |
|
|
- |
|
Interest
income from held-to-maturity
investments
|
|
|
- |
|
|
|
- |
|
|
|
346 |
|
Purchase
of held to maturity corporate and the PRC government bonds
|
|
|
- |
|
|
|
- |
|
|
|
(38,964 |
) |
Net
cash out from deconsolidation of a subsidiary
|
|
|
- |
|
|
|
- |
|
|
|
(1,422 |
) |
Proceeds
from disposal of property and equipment
|
|
|
- |
|
|
|
- |
|
|
|
9 |
|
Net
cash used in investing activities
|
|
|
(19,263 |
) |
|
|
(51,922 |
) |
|
|
(33,755 |
) |
CASH
FLOW FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds
from issuance of ordinary shares upon IPO
|
|
|
220,800 |
|
|
|
- |
|
|
|
- |
|
IPO
costs and related expenses paid
|
|
|
(17,470 |
) |
|
|
(681 |
) |
|
|
- |
|
Dividend
paid to ordinary shareholders
|
|
|
(8,260 |
) |
|
|
- |
|
|
|
- |
|
Dividend
paid to the participating preferred shareholder
|
|
|
(3,040 |
) |
|
|
- |
|
|
|
- |
|
Proceeds
from stock option exercise
|
|
|
- |
|
|
|
2,288 |
|
|
|
759 |
|
ADSs
repurchase and retirement
|
|
|
- |
|
|
|
(16,255 |
) |
|
|
- |
|
Capital
injection by a noncontrolling shareholder
|
|
|
- |
|
|
|
719 |
|
|
|
- |
|
Cash
distribution to shareholders
|
|
|
- |
|
|
|
- |
|
|
|
(57,296 |
) |
Net
cash provided by/(used in) financing activities
|
|
|
192,030 |
|
|
|
(13,929 |
) |
|
|
(56,537 |
) |
Effect
of exchange rate changes
|
|
|
1,216 |
|
|
|
1,437 |
|
|
|
(39 |
) |
NET
INCREASE IN CASH AND CASH EQUIVALENTS
|
|
|
207,821 |
|
|
|
(26,011 |
) |
|
|
(71,860 |
) |
CASH
AND CASH EQUIVALENTS, BEGINNING OF THE YEAR
|
|
|
21,137 |
|
|
|
228,958 |
|
|
|
202,947 |
|
CASH
AND CASH EQUIVALENTS, END OF THE YEAR
|
|
$ |
228,958 |
|
|
$ |
202,947 |
|
|
$ |
131,087 |
|
SUPPLEMENTAL
DISCLOSURE OF CASH FLOW INFORMATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
tax paid
|
|
|
1,942 |
|
|
|
2,988 |
|
|
|
2,488 |
|
NON-CASH
FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion
of Series A convertible redeemable preferred shares to ordinary
shares
|
|
|
16,078 |
|
|
|
- |
|
|
|
- |
|
The
accompany notes are an integral part of these consolidated financial
statements.
CHINA
DIGITAL TV HOLDING CO., LTD.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2007, 2008 AND 2009
(In
U.S. dollars in thousands, except share data)
1.
|
ORGANIZATION
AND PRINCIPAL ACTIVITIES
|
China
Digital TV Technology Co., Ltd. ("CDTV BVI") was incorporated in the British
Virgin Islands ("BVI") as a limited liability company on March 9, 2004 by
the shareholders of Novel-Tongfang Information Engineering Co., Ltd. ("N-T
Information Engineering") and SB Asia Infrastructure Fund L.P. ("SAIF"),
a third-party investor. The principal activities of CDTV BVI are to
install and integrate conditional access systems, subscriber management
systems and electronic program guidance systems to cable TV operators in the
People's Republic of China ("PRC") and to sell digital TV intelligent cards
("smart cards") to these operators.
The
development, production and sale of commercial encryption products in the PRC
are regulated by the PRC National Encryption Administrative
Bureau. Currently, foreign-invested enterprises incorporated in the
PRC are not expressly prohibited from conducting encryption-related businesses;
however, they may have difficulty obtaining the licenses or permits required for
conducting such businesses from the Encryption Bureau due to the PRC Encryption
Authority's generally restrictive approach towards foreign participation in the
PRC encryption industry. In addition, the PRC State Administration of
Radio, Film and Television ("SARFT") has a policy to require any cable
television network operator who uses a non-PRC CA system to install a parallel
PRC CA system. Such policy does not expressly indicate whether the CA
systems produced by a foreign-invested company incorporated in the PRC fall into
the category of non-PRC CA systems. In consideration of the PRC
Encryption Authority's preferences and the SARFT's policy, CDTV BVI conducts
substantially all of its operations through its subsidiary, Beijing Super TV
Co., Ltd. ("Super TV"), and Novel-Tongfang Digital TV Technology Co., Ltd. ("N-T
Digital TV"), a variable interest entity ("VIE"), which is 100% owned by PRC
citizens and has obtained the license to operate such business in the
PRC. N-T Digital TV was established in the PRC on May 31, 2004 by N-T
Information Engineering (who contributed 75% of the paid-in capital) and Ms. Li
Yang, who is a PRC citizen representing SAIF (which contributed 25% of the
paid-in capital). N-T Digital TV was subsequently renamed to Beijing
Novel-Super Digital TV Technology Co., Ltd. ("N-S Digital TV") in December
2007. In August 2007, Ms. Li Yang transferred her entire equity
interest in N-S Digital TV to Ms. Wei Gao, a PRC citizen representing
SAIF. In June 2008, Ms. Wei Gao transferred her entire equity
interest in N-S Digital TV to Mr. Junming Wu, a PRC citizen employed by Super
TV. Through these transfer arrangements, upon the completion of relevant
documentation requirements in 2009, the Group no longer has any financial
obligations to the noncontrolling interest. In November 2008, N-T
Information Engineering transferred its entire equity interest in N-S Digital TV
to Mr. Lei Zhang and Mr. Shizhou Shen, two PRC citizens employed by Super
TV. After these transfers, N-S Digital TV is owned by Mr. Junming Wu,
Mr. Lei Zhang and Mr. Shizhou Shen with an equity interest of 25%, 37.5% and
37.5%, respectively. CDTV BVI does not have a direct equity interest
in N-S Digital TV, but instead enjoys the economic benefits of N-S Digital TV
through a series of contractual arrangements entered into among Super TV, N-S
Digital TV and its equity holders.
CHINA
DIGITAL TV HOLDING CO., LTD.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS - continued
FOR
THE YEARS ENDED DECEMBER 31, 2007, 2008 AND 2009
(In
U.S. dollars in thousands, except share data)
1.
|
ORGANIZATION
AND PRINCIPAL ACTIVITIES -
continued
|
A
majority of the Group's customers are provincial and municipal cable network
operators in the PRC, which are primarily state-owned enterprises
(SOEs). Due to the above-mentioned regulatory considerations, these
SOEs tend to purchase CA systems from PRC local companies, rather than from
companies with foreign investment such as Super TV. In order to
comply with PRC regulations and participate in the smart card and CA systems
business (for the benefit of the Group), the Group arranged for Super TV to
enter into the following agreements with N-S Digital TV and its equity
holders:
|
Ÿ
|
Asset Purchase
Agreement: N-T Information Engineering transferred to Super TV the
fixed assets relating to its smart card and CA systems business for a
purchase price of $698.
|
|
Ÿ
|
Equipment Leasing
Agreement: Super TV leases to N-S Digital TV certain smart card and
CA systems business-related equipment. The term of the lease is
ten years, which may be renewed by the parties one month before this
agreement expires without any significant change to the terms and
conditions of the original agreement. This agreement was
terminated in March 2007.
|
|
Ÿ
|
Technical Support and Related
Services Agreement: Super TV exclusively provides N-S Digital TV
and/or its customers with technical support, technical training, personnel
services relating to N-S Digital TV's marketing activities and services
relating to the maintenance and optimization for the products and software
of N-S Digital TV's customers at N-S Digital TV's
request.
|
|
Ÿ
|
Technology License
Agreement: N-S Digital TV granted Super TV, free of charge, an
exclusive license to use certain software copyrights, patents,
unpatentable technology and technical secrets relating to the digital
television business that was transferred from N-T Information Engineering
to N-S Digital TV. The term of the license is ten
years.
|
|
Ÿ
|
Technology Development
Agreement: N-S Digital TV engaged Super TV to develop all
technology required by N-S Digital TV or its
customers.
|
|
Ÿ
|
Products and Software Purchase
Agreement: N-S Digital TV exclusively purchased from Super TV all
the smart cards and related software products required for its CA
systems. The purchase price was agreed by the two parties and
may be adjusted by agreement between the parties annually on an
arm's-length basis. The term of the agreement is 15
years. N-S Digital TV subsequently obtained Super TV's consent
to produce by itself or purchase from a third party of smart
cards.
|
CHINA
DIGITAL TV HOLDING CO., LTD.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS - continued
FOR
THE YEARS ENDED DECEMBER 31, 2007, 2008 AND 2009
(In
U.S. dollars in thousands, except share data)
1.
|
ORGANIZATION
AND PRINCIPAL ACTIVITIES -
continued
|
|
Ÿ
|
Equity Transfer Option
Agreement: Pursuant to the transfer option agreement, Mr. Lei
Zhang, Mr. Shizhou Shen and Mr. Junming Wu jointly granted Super TV an
exclusive and irrevocable option to purchase all of their equity interests
in N-S Digital TV at any time that Super TV deems fit. Super TV
may purchase such equity interests by itself or designate another party to
purchase such equity interests. The exercise price of the
option will be determined among the parties at the time of the exercise
and should satisfy the requirements of the PRC law or approval authorities
with respect to the minimum purchase price and the basis for the
determination of the purchase
price.
|
|
Ÿ
|
Business Operating Agreement:
Mr. Lei Zhang, Mr. Shizhou Shen , Mr. Junming Wu and N-S Digital TV
agreed to (1) accept the policies and guidelines furnished by Super TV
from time to time with respect to the hiring and dismissal of employees,
operational management and financial systems of N-S Digital TV, (2)
appoint the candidates recommended by Super TV as directors of N-S Digital
TV and appoint the senior management personnel of Super TV as the general
manager, chief financial officer and other senior officers of N-S Digital
TV based on Super TV's recommendations, and (3) seek a guarantee from
Super TV first when any guarantee is required to secure performance by N-S
Digital TV of any contract or working capital loans borrowed by N-S
Digital TV. In return, N-S Digital TV agreed to pledge its
assets and receivables to Super TV.
|
|
Ÿ
|
Share Pledge Agreements:
Pursuant to the share pledge agreements Mr. Junming Wu, Mr. Lei Zhang and
Mr. Shizhou Shen have pledged all of their respective equity interests in
N-S Digital TV to Super TV to secure the payment obligations of N-S
Digital TV under certain contractual arrangements between N-S Digital TV
and Super TV. Under such share pledge agreements, Mr. Junming
Wu, Mr. Lei Zhang and Mr. Shizhou Shen have agreed not to transfer their
equity interests in N-S Digital TV or create, or allow the creation of,
any pledge on their respective equity interest in N-S Digital TV that may
affect Super TV's interests without Super TV's
consent. Pursuant to such agreements, Super TV is entitled to
receive the dividends on the pledged equity interests during the term of
the pledges.
|
Pursuant
to such agreements, Super TV has received 100% of N-S Digital TV shareholders'
voting interest in N-S Digital TV and has the right to receive any dividends
declared and paid by N-S Digital TV. In addition, since its formation
in May 2004, N-S Digital TV has not declared or distributed any dividends to any
shareholders, and the shareholders of Super TV do not have an intention for N-S
Digital TV to declare or distribute any dividends in the future. As a
result, Super TV absorbs a majority of N-S Digital TV's expected residual
returns and holds variable interests in N-S Digital TV. Since Super
TV is the primary beneficiary of the VIE arrangement, the VIE and VIE's
subsidiaries' results of operations are consolidated in the Group's financial
statements.
CHINA
DIGITAL TV HOLDING CO., LTD.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR
THE YEARS ENDED DECEMBER 31, 2007, 2008 AND 2009
(In
U.S. dollars in thousands, except share data)
1.
|
ORGANIZATION
AND PRINCIPAL ACTIVITIES -
continued
|
The following financial statement
amounts and balances of the VIE and VIE's subsidiaries were included in the accompanying
consolidated financial statements as of and for the years ended
December 31:
|
|
December 31,
|
|
|
|
2008
|
|
|
2009
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$ |
29,958 |
|
|
$ |
28,904 |
|
Total
liabilities
|
|
|
25,883 |
|
|
|
24,602 |
|
|
|
For the years ended December
31,
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
Net
revenues
|
|
$ |
50,472 |
|
|
$ |
64,108 |
|
|
$ |
50,756 |
|
Net
income
|
|
|
1,131 |
|
|
|
178 |
|
|
|
806 |
|
In April 2007, the shareholders of CDTV
BVI established China Digital TV Holding Co., Ltd. (the "Company" or "CDTV Holding"), as a new holding Company of CDTV BVI and
its subsidiary and VIE, CDTV Holding was incorporated in the Cayman
Islands.
In May 2007, CDTV BVI executed a
40-for-1 share split which applies to all of its ordinary shares, Series
A convertible redeemable preferred shares,
warrants and stock options. The impact of the share split has
been retroactively reflected in the
Group's consolidated financial
statements.
Following this share split, the
shareholders of CDTV BVI exchanged all of their shares of CDTV BVI
for shares of CDTV Holding in proportion to
their percentage interests in CDTV BVI. As a result, CDTV
BVI became a wholly owned subsidiary of CDTV
Holding. As the incorporation of CDTV Holding is
a transaction between entities under common control, for
financial statement presentation purposes, the Group prepared its
consolidated financial statements with CDTV
Holding as the holding
company for the year ended
December 31, 2007 as if
CDTV Holding had been in existence from the beginning of the
year.
In October 2007, the Group completed an
initial public offering ("IPO") of 13,800,000 American depositary
shares representing
13,800,000 of the Company's ordinary shares. Upon the
completion of the IPO, all of the Company's outstanding 8,600,000 preferred shares
were automatically converted into 9,496,932 ordinary shares.
In October 2008, Super TV transferred
all of its equity interests
in N-S Media Investment to N-S Digital TV.
CHINA
DIGITAL TV HOLDING CO., LTD.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR
THE YEARS ENDED DECEMBER 31, 2007, 2008 AND 2009
(In
U.S. dollars in thousands, except share data)
1.
|
ORGANIZATION
AND PRINCIPAL ACTIVITIES -
continued
|
As of
December 31, 2009, CDTV Holding's subsidiaries, VIE and VIE's subsidiaries
include the following entities:
|
|
Date of incorporation
|
|
Place of incorporation
|
|
Percentage of
|
Subsidiaries
|
|
/establishment
|
|
/establishment
|
|
economic ownership
|
|
|
|
|
|
|
|
CDTV
BVI
|
|
March
9, 2004
|
|
BVI
|
|
100%
|
Super
TV
|
|
May
31, 2004
|
|
the
PRC
|
|
100%
|
Golden
Benefit Technology Limited
|
|
December
6, 2007
|
|
Hong
Kong
|
|
100%
|
("Golden
Benefit")
|
|
|
|
|
|
|
China
Super Media Holdings Limited
|
|
February
25, 2008
|
|
Hong
Kong
|
|
100%
|
("CSM
Holdings")
|
|
|
|
|
|
|
|
|
|
|
|
|
|
VIE
|
|
|
|
|
|
|
N-S
Digital TV
|
|
May
31, 2004
|
|
the
PRC
|
|
100%
|
|
|
|
|
|
|
|
VIE's subsidiaries
|
|
|
|
|
|
|
N-S
Media Investment Co., Ltd
|
|
December
19, 2007
|
|
the
PRC
|
|
100%
|
("N-S
Media Investment")
|
|
|
|
|
|
|
Guangdong
SuperTV Digital Media Co., Ltd
|
|
October
17, 2008
|
|
the
PRC
|
|
100%
|
("Guangdong
SuperTV")
|
|
|
|
|
|
|
In August
2008, the Group entered into an agreement with N-T Information Engineering to
acquire two intangible assets, digital watermarking and image tracing
technologies. In November 2008, N-T Information Engineering signed a series of
contracts with Mr. Lei Zhang and Mr. Shizhou Shen, two employees designated by
the Group, to transfer N-T Information Engineering's entire 75% equity interest
in N-S Digital TV to these two individuals. The acquisition of the two
intangible assets and transfer of the equity interest in N-S Digital TV were
negotiated by management of the Group and N-T Information Engineering as one
deal with a total consideration of $4,917, in which $3,618 was paid for the 75%
equity interest in N-S Digital TV with the RMB equivalent amount as paid by N-T
Information Engineering in 2004 during the reorganization process. The remaining
$1,299 was allocated to the cost of these two technologies based on the relative
fair value of each technology.
CHINA
DIGITAL TV HOLDING CO., LTD.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS - continued
FOR
THE YEARS ENDED DECEMBER 31, 2007, 2008 AND 2009
(In
U.S. dollars in thousands, except share data)
1.
|
ORGANIZATION
AND PRINCIPAL ACTIVITIES -
continued
|
Recapitalization
Prior to its transfer to N-S Digital TV
in June 2004, the smart card and CA systems business was owned
and operated by N-T Information Engineering.
N-T Information Engineering is a private company incorporated in the PRC and was engaged in the business of
development and sales of digital television technologies and
broadband and satellite data broadcasting systems. It
was formed in 1998 and in June 2004 it was owned by Yunxi
Group, Dongguan Huarong Science and Technology
Company ("Huarong") and Beijing Huakai Science and
Technology Company ("Huakai") with an equity interest of
70%, 19% and 11%,
respectively. Yunxi Group is a PRC state owned enterprise. Huarong was owned by five
individuals, Dr. Zengxiang Lu, Mr. Jianhua Zhu, Mr. Hua Guo, Mr. Jiang Lin and Mr. Weixuan Zhang,
with 20% equity interest each. Huakai was owned by three individuals, Dr. Zengxiang Lu, Mr. Jianhua Zhu and
Mr. Zhenwen Liang, with 33.3% equity interests each. N-T Information Engineering was therefore controlled by
Yunxi Group.
Through the following series of
integrated steps, the business was transferred from N-T Information Engineering to N-S Digital TV and N-S
Digital TV became an entity consolidated by Super TV and ultimately by CDTV Holding. This series of
interrelated and anticipated transactions has been accounted for as
a recapitalization of the smart card and CA systems business with no
change in basis because no single shareholder obtained control of CDTV
BVI.
|
·
|
In March 2004, CDTV BVI was formed
with a nominal cash investment by all but two of the ultimate owners of N-T Information
Engineering. In June
2004, SAIF contributed $5,000 to CDTV BVI in exchange for a 25% interest in
convertible redeemable preferred shares of CDTV BVI. Upon SAIF's investment, CDTV BVI was owned by
Yunxi Group, China Capital, China Cast and SAIF with an equity interest (on an as-converted
basis) of 30%, 40%, 5% and 25%,
respectively.
No one shareholder
therefore controlled CDTV
BVI.
|
|
·
|
In May 2004, N-T Information
Engineering and SAIF formed N-S Digital TV, a PRC
entity.
|
|
·
|
On June 7, 2004, N-T Information
Engineering and N-S
Digital TV entered into an asset transfer agreement, whereby N-T Information
Engineering transferred its smart card and CA systems business including tangible assets, patents
and software to N-S Digital TV for a cash consideration of $1,284.
|
|
·
|
On June 7, 2004, CDTV BVI formed Super TV and
Super TV and N-S Digital TV entered into the contractual arrangements described
above under which Super TV enjoys the economic ownership of N-S Digital
TV.
|
As N-S Digital TV was established on May
31, 2004 with no prior operating activities, for the purpose of
financial statement presentation, the smart card
and CA system
business related financial
information, including revenues, costs and expenses, that was originally recorded
on N-T Information Engineering's books before the transfer of its smart
card and CA systems business to N-S Digital TV in early June 2004 was
carved out from N-T Information Engineering's historical financial statements and
included in the Group's consolidated financial
statements.
CHINA
DIGITAL TV HOLDING CO., LTD.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR
THE YEARS ENDED DECEMBER 31, 2007, 2008 AND 2009
(In
U.S. dollars in thousands, except share data)
2.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
|
|
(a)
|
Basis
of presentation
|
The
consolidated financial statements of the Group have been prepared in accordance
with the accounting principles generally accepted in the United States of
America ("U.S. GAAP").
|
(b)
|
Basis
of consolidation
|
The
consolidated financial statements of the Group include the financial statements
of CDTV Holding, its subsidiaries, VIE and VIE’s subsidiaries. All inter-company
transactions and balances have been eliminated upon consolidation.
The
preparation of financial statements in conformity with U.S. GAAP requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and revenues, costs and expenses in the financial
statements and accompanying notes. Significant accounting estimates
reflected in the Group's consolidated financial statements include useful life
of CA system, allowance for doubtful accounts, accrual of warranty, the useful
lives and impairment of property and equipment, useful lives and impairment of
intangible assets, allowance for obsolete inventories, valuation allowance for
deferred tax assets, impairment of goodwill and impairment of long-term
investments.
|
(d)
|
Significant
risks and uncertainties
|
The Group
participates in a dynamic industry and believes that the following risks, among
other things, could have a material adverse effect on the Group's future
financial position, results of operations, or cash flows: the Group's limited
operating history, advances and trends in new technologies and industry
standards, competition from other competitors, regulatory or other PRC-related
factors, risks associated with the Group's ability to attract and retain
employees necessary to support its growth, risks associated with the Group's
growth strategies, and general risks associated with the digital TV
industry.
CHINA
DIGITAL TV HOLDING CO., LTD.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR
THE YEARS ENDED DECEMBER 31, 2007, 2008 AND 2009
(In
U.S. dollars in thousands, except share data)
2.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES -
continued
|
|
(e)
|
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 maturities of three months
or less when purchased.
|
(f)
|
Held-to-maturity
investments
|
Debt
securities are classified as held-to-maturity investments since the Group has
the positive intent and ability to hold the securities to maturity, and reported
at amortized cost. Held-to-maturity investments are classified as short-term or
long-term investments on consolidated balance sheets based on their remaining
contractual maturity periods.
The Group
reviews its held-to-maturity investments as of the end of each reporting period
for other-than-temporary impairment ("OTTI") based on the specific
identification method. The Group considers various factors in
determining whether an impairment is other-than-temporary, including the
severity and duration of the impairment, changes in underlying credit ratings,
forecast recovery, its intent to sell or the likelihood that it would be
required to sell the investment before its anticipated recovery in market value
and the probability that the scheduled cash payments will continue to be
made. When the Group concludes that OTTI has occurred, the Group
assesses whether it intends to sell the security or if it is more likely than
not that it will be required to sell the security before recovery. If
either of these two conditions is met, the Group recognizes a charge in earnings
equal to the entire difference between the security's amortized cost basis and
its fair value. If the Group does not intend to sell a security or it
is not more likely than not that it will be required to sell the security before
recovery, the unrealized loss is separated into an amount representing the
credit loss, which is recognized in earnings, and the amount related to all
other factors, which is recorded in accumulated other comprehensive
loss.
The Group
did not have held-to-maturity investments before year 2009 and did not incur any
impairment loss on held-to-maturity securities purchased in 2009.
|
(g)
|
Financial
instruments
|
Financial
instruments of the Group primarily consist of cash and cash equivalents,
restricted cash, bank deposits maturing over three months, held-to-maturity
investments, notes receivable, accounts receivable, accounts payable, payable to
shareholders and income tax payable. The fair value of the Group's
held-to-maturity investments is disclosed in Note 13. Carrying amount of other
financial instruments approximates their fair value because of short maturity
natures.
CHINA
DIGITAL TV HOLDING CO., LTD.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR
THE YEARS ENDED DECEMBER 31, 2007, 2008 AND 2009
(In
U.S. dollars in thousands, except share data)
2.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES -
continued
|
|
(h)
|
Concentration
of credit risk
|
Financial
instruments that potentially expose the Group to concentrations of credit risk
consist primarily of cash and cash equivalents, restricted cash, bank deposits
maturing over three months, held-to-maturity investments and accounts
receivable. The Group places their cash and cash equivalents,
restricted cash, bank deposits maturing over three months and held-to-maturity
investments with financial institutions with high-credit ratings and
quality.
The Group
conducts credit evaluations of customers and generally does not require
collateral or other security from customers. The Group establishes an
allowance for doubtful accounts primarily based upon the age of the receivables
and factors relevant to determining the credit risk of specific
customers.
Details
of the customer accounting for 10% or more of total revenues are as
follows:
|
|
For the years ended December
31,
|
|
Customer
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
|
%
|
|
|
%
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
A
|
|
|
14.1 |
|
|
|
15.1 |
|
|
|
12.8 |
|
Details
of the customer accounting for 10% or more of accounts receivable are as
follows:
|
|
December 31,
|
|
Customer
|
|
2008
|
|
|
2009
|
|
|
|
%
|
|
|
%
|
|
|
|
|
|
|
|
|
A
|
|
|
14.9 |
|
|
|
5.7 |
|
Inventories
are stated at the lower of cost (weighted average) or market
value. The Group writes down the inventory for excess and obsolete
inventories determined primarily by future demand forecasts. For the
years ended December 31, 2007, 2008 and 2009, the Group wrote down inventory by
$137, $127 and $59, respectively.
CHINA
DIGITAL TV HOLDING CO., LTD.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR
THE YEARS ENDED DECEMBER 31, 2007, 2008 AND 2009
(In
U.S. dollars in thousands, except share data)
2.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES -
continued
|
|
(j)
|
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:
Computer
and electronic equipment
|
3
years
|
Furniture
and fixture
|
5
years
|
Leasehold
improvement
|
Shorter
of useful life of the asset or the lease term
|
Motor
vehicles
|
5
years
|
Intangible
assets are stated at cost less accumulated amortization. Amortization
is computed using the straight-line method over the useful lives of the assets
ranging from 1 to 7.5 years.
|
(l)
|
Impairment
of long-lived assets
|
The Group
reviews its long-lived assets for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may no longer be
recoverable. When these events occur, the Group measures impairment
by comparing the carrying value of the long-lived assets to the estimated
undiscounted future cash flows expected to result from the use of the assets and
their eventual disposition. If the sum of the expected undiscounted
cash flows is less than the carrying amount of the assets, the Group would
recognize an impairment loss based on the fair value of the assets.
Impairment
loss for the years ended December 31, 2007, 2008 and 2009 was nil, nil and $271,
respectively.
CHINA
DIGITAL TV HOLDING CO., LTD.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR
THE YEARS ENDED DECEMBER 31, 2007, 2008 AND 2009
(In
U.S. dollars in thousands, except share data)
2.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES -
continued
|
Goodwill
is not amortized but tested for impairment on an annual basis and between annual
tests in certain circumstances. Goodwill impairment is tested using a
two-step approach. The first step compares the fair value of a
reporting unit to its carrying amount, including goodwill. If the
fair value of the reporting unit is greater than its carrying amount, goodwill
is not considered impaired and the second step is not required. If
the fair value of the reporting unit is less than its carrying amount, the
second step of the impairment test measures the amount of the impairment loss,
if any, by comparing the implied fair value of goodwill to its carrying
amount. If the carrying amount of goodwill exceeds its implied fair
value, an impairment loss is recognized equal to that excess. The
implied fair value of goodwill is calculated in the same manner that goodwill is
calculated in a business combination, whereby the fair value of the reporting
unit is allocated to all of the assets and liabilities of that unit, with the
excess purchase price over the amounts assigned to assets and liability
representing the implied fair value of goodwill. Estimating fair
value is performed by utilizing various valuation techniques, with the primary
technique being a discounted cash flow. The Group has one reporting
unit and has determined to perform the annual impairment test on December 31 of
each year. The Group did not incur any impairment loss on goodwill
for the years ended December 31, 2007, 2008 or 2009. Exchange
realignment of $35, $32 and nil was debited to goodwill for years ended December
31, 2007, 2008 and 2009 respectively.
|
(n)
|
Equity
method investments
|
Investee
companies over which the Company has the ability to exercise significant
influence, but does not have a controlling interest are accounted for using the
equity method. Significant influence is generally considered to exist
when the Company has an ownership interest in the voting stock of the investee
between 20% and 50%, and other factors, such as representation on the investee's
Board of Directors, voting rights and the impact of commercial arrangements, are
considered in determining whether the equity method of accounting is
appropriate.
Investee
companies over which the Company has equity interest over 50%, but the
noncontrolling shareholders have substantive rights to participate in
significant operating decisions are accounted for using the equity
method.
An
impairment charge is recorded if the carrying amount of the investment exceeds
its fair value and this condition is determined to be other-than-temporary. The
Group did not incur any impairment loss on equity method investments for the
years ended December 31, 2007, 2008 or 2009.
CHINA
DIGITAL TV HOLDING CO., LTD.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR
THE YEARS ENDED DECEMBER 31, 2007, 2008 AND 2009
(In
U.S. dollars in thousands, except share data)
2.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES -
continued
|
The
Group's revenues are principally derived from sales of products and
services. Specifically, sales of products include 1) sales of smart
cards, and 2) sales of set-top boxes and other products. Sales of
services include the following four arrangements:
|
(1)
|
Head-end
software, hardware and related system integration service ("SI
service");
|
|
(2)
|
Head-end
system development service ("SD
service");
|
|
(3)
|
Licensing
income; and
|
Sales
of smart cards
Smart
cards are manufactured by third-party manufacturers based on the Group's
blueprints. When the Group receives these products from the
manufacturers, the Group programs each one with a unique security code so that
it can communicate with the Group's CA systems. A substantial
majority of the smart cards sold by the Group are paid for pursuant to
contractual terms requiring payment either prior to or upon
delivery. Revenue is recognized after a sales agreement is signed,
the price is fixed or determinable, products are delivered to customers, and
collection of the resulting receivables is assured. The Group also
offers some of its customers a lower price or a certain amount of free cards
when the cumulative volume of smart card purchases from the same customer is
greater than a set volume during a specific period. The Group
accounts for cumulative volume customer incentives as deferred revenue and that
is deducted from the initial revenue.
The Group
generally guarantees the quality of smart cards for periods ranging from one to
three years, and if any smart cards are found to have defects during the
warranty period, the Group is obligated to replace them at the Group's
cost. Historically the defect rate of smart cards has been low and
the Group accrues warranty liabilities based on historical
information.
Set-top
box and others
The Group
also derives revenues from the sales of products other than smart cards, such as
set-top boxes and other related products. Revenue is recognized after
a sales agreement is signed, the price is fixed or determinable, products are
delivered to customers, and collection of the resulting receivables is
assured.
CHINA
DIGITAL TV HOLDING CO., LTD.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR
THE YEARS ENDED DECEMBER 31, 2007, 2008 AND 2009
(In
U.S. dollars in thousands, except share data)
2.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES -
continued
|
|
(o)
|
Revenue
recognition - continued
|
SI
service
For the
SI service, the Group signs contracts with cable network operators to install
and integrate the Group's software with the hardware and software purchased from
third-party suppliers. The Group's software includes CA system
software, subscriber management system software and head-end electronic program
guide software.
CA system
software consists of software that is installed at the premises of the
television network operator, or the head end. CA systems enable
television network operators to deliver secured contents and services to their
subscribers.
Subscriber
management system is software used by television network operators to support
their operation, archive subscriber information and operational information, and
to generate billings to subscribers.
Head-end
electronic program guide software is software that enables television network
operators to distribute DVB standard Program Specific Information and Service
Information to the subscribers.
Deliverables
of SI service include: software, hardware, integration, installation, training
and post-contract customer support ("PCS"). When the provision of
services is substantially completed, i.e., when the Group delivers its software,
purchases the hardware and software from third-party suppliers, integrates them
together, and provides installation and training to customers, customers sign
the preliminary acceptance. Final acceptance is typically signed six
months to one year after the issuance of the preliminary acceptance if no major
technical problems are discovered. In limited situations, there is
only one acceptance from the customer, rather than a preliminary and a final
acceptance. Software is considered delivered to customers when
preliminary acceptance or single acceptance is signed because only at that time
are customers able to use the software in the integrated system. For
majority of the contracts, the Group offers one-year free PCS, including
telephone support and bug-fixing beginning from preliminary acceptance or single
acceptance. However, in some of the contracts, the Group offers free
PCS for a period of more than one year beginning from preliminary acceptance or
single acceptance; while in some other contracts, the PCS does not have a
specified definite period.
CHINA
DIGITAL TV HOLDING CO., LTD.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR
THE YEARS ENDED DECEMBER 31, 2007, 2008 AND 2009
(In
U.S. dollars in thousands, except share data)
2.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES -
continued
|
|
(o)
|
Revenue
recognition - continued
|
SI service -
continued
The SI
service includes a significant software portion. The software is not
regarded as incidental to the provision of services as a whole because the
marketing of such services focuses on the internally developed technologies
included in the software. As the Group cannot establish
vendor-specific objective evidence of the fair values of the deliverables,
revenue is recognized when the last deliverable in the arrangement is delivered
and when all of the following criteria have been met:
|
(1)
|
Persuasive
evidence of an arrangement exists;
|
|
(2)
|
Delivery
has occurred;
|
|
(3)
|
The
vendor's fee is fixed or determinable;
and
|
|
(4)
|
Collectability
is probable.
|
The
systems are installed and tested at the customers' sites. Generally
all the technical issues are identified and resolved before the preliminary
acceptance is issued by the customers. Afterwards, the customers will
begin to use the installed systems for operation.
For the
contracts where the Group offers free PCS for one year or less, the cost
incurred between the issuance of the preliminary acceptance and the end of the
free PCS period has historically been insignificant. Therefore
revenue is recognized when the entire installation and integration of software
is completed, which is indicated by obtaining the preliminary acceptance from
customers. In limited situations, where there is only one acceptance
from the customer, rather than a preliminary and final acceptance, revenue is
recognized when the single acceptance is obtained. For contracts
where the Group offers free PCS for more than one year, the Group defers the
revenue for the contracts and recognizes it over the PCS term although the cost
incurred during the PCS term has been historically insignificant. Where the PCS
term has no specified definite period, the Group recognizes such revenue over
the estimated useful life of the CA system, which the Group has determined to be
five years.
CHINA
DIGITAL TV HOLDING CO., LTD.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR
THE YEARS ENDED DECEMBER 31, 2007, 2008 AND 2009
(In
U.S. dollars in thousands, except share data)
2.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES -
continued
|
|
(o)
|
Revenue
recognition - continued
|
SD
service
The Group
develops head-end system applications relating to digital TV technology for its
customers.
Deliverables
in SD service include the completed software application. A few
arrangements also include one-year free PCS starting from customer acceptance,
but no arrangement includes free PCS for more than one year. Payment
terms vary based on the stage of the service. Normally a portion of
the contract amount is paid when the contract is signed, and the remaining is
paid upon the completion of the project and customer acceptance. The
cost of providing free PCS has historically been insignificant.
Because a
system development arrangement requires significant production, modification, or
customization of software, the group refers to FASB Accounting Standards
Codification 605-35, "Construction-Type and
Production-Type Contracts" for revenue recognition. As the Group cannot
properly measure progress toward completion, the completed-contract method is
used. Revenue for system development is recognized when the system
development is finished and accepted by the customer.
Licensing
income
The Group
coordinates with network operators to produce set-top boxes compatible with the
Group's CA systems. The Group enters into contracts with set-top box
manufacturers selected by customers and provides these manufacturers with CA
system terminal-end software that is integrated in the set-top boxes and which
permits the unscrambling of digital TV broadcasts that have been transmitted by
TV network operators who use the Group's CA systems. The set-top box
manufacturers pay the Group a one-time license fee, which includes a testing and
certifying fee, for obtaining the blueprints and technologies in the form of
software. According to the contracts, these manufacturers are
required to provide a set-top box prototype to the Group in order to obtain a
certificate from the Group which indicates the set-top box is compatible with
the Group's CA systems and suitable for mass-production. The licenses
to set-top box manufacturers are perpetual once provided. No PCS is
offered in the licensing arrangement. Licensing income is recognized
when all revenue recognition criteria have been met, which is indicated by the
issuance of a certificate to the set-top box manufacturer by the
Group.
In
addition, the Group produces a design for set-top boxes, and licenses it to
set-box manufacturers. The licensing income is recognized when the
acceptance is signed by customers and received by the Group.
All
advances from customers and prepaid fees received from customers or set-top box
manufacturers are initially recognized as deferred revenue and revenue is
recognized when the above revenue recognition criteria are met.
CHINA
DIGITAL TV HOLDING CO., LTD.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR
THE YEARS ENDED DECEMBER 31, 2007, 2008 AND 2009
(In
U.S. dollars in thousands, except share data)
2.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES -
continued
|
|
(o)
|
Revenue
recognition - continued
|
Royalty
income
The Group
receives royalties on sales of CA system terminal-end software, and set-top box
design and operating system.
Royalties
are received either from set-top box manufacturers, or from television network
operators depending on which party the Group enters the contracts
with.
Royalty
revenue is recognized when earned and collectability is reasonably
assured.
For
royalty income collected from set-top box manufacturers, royalty revenue is
recognized upon the receipt of sales reports from set-top box manufacturers and
when payment is received.
For
royalty income received from television network operators, the Group requests
the television network operators to pay the royalty to the Group directly when
they purchase the Group's smart cards, in which case all the revenue is
recognized as part of the smart card sales when these smart cards are delivered
to the customers.
Deferred
costs are mainly the incremental costs that are directly associated with revenue
from SI service contracts that provide free PCS for more than one
year. Deferred costs from SI service mainly consist of hardware and
software purchased from third-party suppliers. Deferred costs from SI
service are recoverable through the future revenue streams and are recorded as
an asset and amortized to cost of revenue over the same period that the revenue
is recognized. Amortization of deferred costs for the years ended
December 31, 2007, 2008 and 2009 totaled $660, $441 and $437
respectively.
|
(q)
|
Value
added tax ("VAT") and VAT refund
|
VAT on
sales is calculated at 17% on revenue from product sales and SI Services and
paid after deducting input VAT on purchases. The net VAT balance
between input VAT and output VAT is reflected in the accounts under other taxes
payable.
For
certain software related products that are qualified as "software products" by
PRC tax authorities, the Group can pay VAT at 17% first and then receive 14%
refund after it is paid. The Group records VAT refund receivables on
accrual basis. VAT refund is recorded in revenue in the statement of
operations.
CHINA
DIGITAL TV HOLDING CO., LTD.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR
THE YEARS ENDED DECEMBER 31, 2007, 2008 AND 2009
(In
U.S. dollars in thousands, except share data)
2.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES -
continued
|
The
Group's PRC subsidiary, VIE and VIE's subsidiaries are subject to business
taxes, surcharges or cultural business construction fees on revenues related to
certain types of services, and the net revenues are presented net of those taxes
and fees incurred.
Leases
where substantially all the rewards and risks of ownership of assets remain with
the lessor are accounted for as operating leases. Payments made under
operating leases are charged to the consolidated statements of operations on a
straight-line basis over the lease periods.
|
(t)
|
Foreign
currency translation
|
The
functional and reporting currency of the Company is US dollar. The
functional currency of the Company's subsidiaries, VIE and VIE's subsidiaries in
the PRC is Renminbi ("RMB").
Monetary
assets and liabilities denominated in currencies other than the applicable
functional currencies are translated into the functional currencies at the
prevailing rates of exchange at the balance sheet date. Nonmonetary
assets and liabilities are remeasured into the applicable functional currencies
at historical exchange rates. Transactions in currencies other than
the applicable functional currencies during the year are converted into the
functional currencies at the applicable rates of exchange prevailing at the
transaction dates. Transaction gains and losses are recognized in the
consolidated statements of operations.
For
translating the results of the PRC subsidiaries into the functional currency of
the Company, assets and liabilities are translated from each subsidiary's
functional currency to the reporting currency at the exchange rate on the
balance sheet date. Equity amounts 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 shown as a separate component of
other comprehensive income in the consolidated statements of shareholders'
equity and comprehensive income.
CHINA
DIGITAL TV HOLDING CO., LTD.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR
THE YEARS ENDED DECEMBER 31, 2007, 2008 AND 2009
(In
U.S. dollars in thousands, except share data)
2.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES -
continued
|
Deferred
income taxes are provided using the asset and liability method. Under
this method, deferred income taxes are recognized for tax credits and net
operating losses available for carry-forwards and significant temporary
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax basis. Deferred tax assets
and liabilities are classified as current or non-current based upon the
classification of the related asset or liability in the financial statements or
the expected timing of their reversal if they do not relate to a specific asset
or liability. A valuation allowance is provided to reduce the amount
of deferred tax assets if it is considered more likely than not that some
portion of, or all of the deferred tax assets will not be realized. Income taxes
are provided for in accordance with the laws and regulations applicable to the
Group as enacted by the relevant tax authorities.
In June
2006, the FASB issued an authoritative pronouncement under which uncertain
income tax position on the income tax return must be recognized at the largest
amount that is more-likely-than not to be sustained upon audit by the relevant
tax authority. An uncertain income tax position will not be
recognized if it has less than a 50% likelihood of being sustained. The
pronouncement was effective for fiscal years beginning after December 15, 2006,
with early adoption permitted. The Group elected to adopt the pronouncement from
January 1, 2004, and since the adoption, had not have any significant
liabilities nor any interest or penalties associated with unrecognized tax
benefit. As of December 31, 2008 and 2009, the Group did not have any
unrecognized uncertain tax positions.
Comprehensive
income includes net income and foreign currency translation
adjustments. Comprehensive income is reported in the statements of
equity and comprehensive income.
|
(w)
|
Net
income (loss) per share ("EPS")
|
Basic EPS
is computed by dividing net income(loss) attributable to holders of ordinary
shares by the weighted average number of ordinary shares outstanding during the
year. Diluted EPS reflects the potential dilution that could occur if
securities or other contracts to issue ordinary shares (convertible preferred
stock, forward contract, warrants to purchase ordinary shares, contingently
issuable shares, common stock options and warrants and their equivalents using
the treasury stock method) were exercised or converted into ordinary
shares. Potential common shares in the diluted EPS computation are
excluded in periods of losses from continuing operations, as their effect would
be antidilutive.
CHINA
DIGITAL TV HOLDING CO., LTD.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR
THE YEARS ENDED DECEMBER 31, 2007, 2008 AND 2009
(In
U.S. dollars in thousands, except share data)
2.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES -
continued
|
|
(w)
|
Net income
(loss) per share ("EPS") -
continued
|
The
holders of Series A preferred was entitled to share dividends on a pro rata
basis, as if their shares had been converted into ordinary
shares. Accordingly, the Group used the two-class method in computing
EPS for the year 2007. Under the two-class method, net income was
allocated on a pro rata basis to each class of ordinary shares and other
participating securities based on their participating rights. Net
losses applicable to holders of ordinary shares were allocated to ordinary
shares because the Series A preferred shares was not contractually obligated to
participate in sharing losses.
|
(x)
|
Research
and development expenses
|
Research
and development costs are incurred in the development of the Group's products
and technologies, including significant improvements and refinements to existing
products and services. Nearly all of the research and development
expenditure incurred since the Group's formation has been used to establish the
technological feasibility of the Group's products and services. As a
result, all research and development costs are expensed as
incurred.
|
(y)
|
Share-based
compensation
|
Share-based
payment transactions with employees and directors, such as share options, are
measured based on the grant date fair value of the equity instrument issued.
Share-based compensation expenses, net of forfeitures, are recognized over the
requisite service period based on the graded vesting attribution method, with a
corresponding impact reflected in additional paid-in capital.
The Group
recognizes the estimated compensation expenses of performance-based stock
options based on the grant date fair value. The awards are earned upon
attainment of identified performance goals. The Group recognizes the
compensation expenses, net of estimated forfeitures, over the performance
period. The Group also adjusts the compensation expenses based on the
probability of performance goal achievement at the end of each reporting
period.
Forfeitures
are estimated at the time of grant and revised in the subsequent periods if
actual forfeitures differ form those estimates. The Group uses historical data
to estimate pre-vesting option forfeitures and record share-based compensation
expenses only for those awards that are expected to vest.
CHINA
DIGITAL TV HOLDING CO., LTD.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR
THE YEARS ENDED DECEMBER 31, 2007, 2008 AND 2009
(In
U.S. dollars in thousands, except share data)
2.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES -
continued
|
Fair
value is defined 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 Group 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.
U.S. GAAP
provides a fair value hierarchy which prioritizes the inputs to valuation
techniques used to measure fair value into three broad levels. The
level in the hierarchy within which the fair value measurement in its entirety
falls is based upon the lowest level of input that is significant to the fair
value measurement as follows:
Level
1
Level 1
applies to assets or liabilities for which there are quoted prices in active
markets for identical assets or liabilities.
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.
Held-to-maturity
investments, equity method investments, long-lived assets and goodwill of the
Group are measured at fair value on a nonrecurring basis when impairment occurs.
The Group has no asset or liability measured at fair value on a recurring basis
as of December 31, 2008 and 2009.
CHINA
DIGITAL TV HOLDING CO., LTD.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR
THE YEARS ENDED DECEMBER 31, 2007, 2008 AND 2009
(In
U.S. dollars in thousands, except share data)
2.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES -
continued
|
|
(aa)
|
Recently
issued accounting pronouncements
|
In June
2009, the Financial Accounting Standards Board ("FASB") issued FASB Accounting
Standards Codification ("ASC") as the sources of authoritative GAAP recognized
by the FASB to be applied by nongovernmental entities. Rules and
interpretive releases of the SEC under federal securities laws are also sources
of authoritative GAAP for SEC registrants. All nongrandfathered
non-SEC accounting literature not included in ASC is deemed
nonauthoritative. ASC is effective for financial statements issued
for interim and annual financial periods ending after September 15,
2009. On July 1, 2009, the Group adopted the new guidelines and
numbering system prescribed by ASC when referring to U.S. GAAP. As
ASC was not intended to change or alter existing U.S. GAAP, there was no
material impact on the Group's consolidated financial position or results of
operations upon the adoption of ASC.
In April
2009, FASB issued three authoritative pronouncements that are intended to
provide additional application guidance and enhance disclosures about fair value
measurements and impairments of securities.
|
Ÿ
|
FASB
Staff Positions ("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", as incorporated into ASC 820, provides additional
guidance for estimating fair value when the volume and level of activity
for the asset or liability have significantly decreased. This
pronouncement also includes guidance on identifying circumstances that
indicate a transaction is not
orderly.
|
|
Ÿ
|
FSP
FAS 115-2 and FAS 124-2, "Recognition and Presentation
of Other-Than-Temporary Impairments", as incorporated into ASC 320,
amends the other-than-temporary impairment guidance in U.S. GAAP for debt
securities to make the guidance more operational and to improve the
presentation and disclosure of other-than-temporary impairments on debt
and equity securities in the financial
statements.
|
|
Ÿ
|
FSP
FAS 107-1 and APB 28-1, "Interim Disclosures About Fair
Value of Financial Instruments", as incorporated into ASC 825,
require disclosures about fair value of financial instruments for interim
reporting periods as well as in annual financial statements of publicly
traded companies.
|
These
three pronouncements are effective for interim and annual reporting periods
ending after June 15, 2009, with early adoption permitted for periods ending
after March 15, 2009. Earlier adoption for periods ending before
March 15, 2009 is not permitted. The Group adopted these three
pronouncements on April 1, 2009, and there was no material impact on the
Group's consolidated financial position or results of operations upon the
adoption of them.
CHINA
DIGITAL TV HOLDING CO., LTD.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR
THE YEARS ENDED DECEMBER 31, 2007, 2008 AND 2009
(In
U.S. dollars in thousands, except share data)
2.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES -
continued
|
|
(aa)
|
Recently
issued accounting pronouncements -
continued
|
In June
2009, the FASB issued SFAS No. 166, "Accounting for Transfers of
Financial Assets, an amendment of FASB Statement No. 140", as
incorporated into ASC 860, on the accounting and disclosure requirements for
transfers of financial assets. The pronouncement eliminates the
concept of a qualifying special-purpose entity, creates more stringent
conditions for reporting a transfer of a portion of a financial asset as a sale,
clarifies other sale-accounting criteria, and requires enhanced
disclosures. The pronouncement is effective for financial statements
to be issued for fiscal years beginning after November 15, 2009 with earlier
adoption prohibited. The Group does not expect the adoption of the
pronouncement will have a material impact on its consolidated financial position
or results of operations.
In June
2009, the FASB issued SFAS No. 167, "Amendments to FASB Interpretation
No. 46(R)", as incorporated into ASC 810, on accounting and disclosure
requirements for consolidation of variable interest entities. The
pronouncement requires an enterprise to perform an analysis to determine whether
the enterprise's variable interest or interests give it a controlling financial
interest in a variable interest entity. This analysis identifies the
primary beneficiary of a variable interest entity as one with the power to
direct the activities of a variable interest entity that most significantly
impact the entity's economic performance and the obligation to absorb losses of
the entity that could potentially be significant to the variable
interest. The revised guidance retains the scope of previously issued
pronouncement, but added entities previously considered qualifying
special-purpose entities since the concept of these entities is eliminated by
FASB, as discussed above. The pronouncement is effective for
financial statements to be issued for fiscal years beginning after November 15,
2009 with earlier adoption prohibited. The Group does not expect the
adoption of the revised guidance will have a material impact on its consolidated
financial position or results of operations.
CHINA
DIGITAL TV HOLDING CO., LTD.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR
THE YEARS ENDED DECEMBER 31, 2007, 2008 AND 2009
(In
U.S. dollars in thousands, except share data)
2.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES -
continued
|
|
(aa)
|
Recently
issued accounting pronouncements -
continued
|
In
September 2009, the FASB reached a consensus on ASU 2009-13, Revenue Recognition (ASC 605)
- Multiple-Deliverable Revenue
Arrangements. This pronouncement was issued in response to
practice concerns related to accounting for revenue arrangements with multiple
deliverables under the existing pronouncement. The pronouncement
modifies the requirements that must be met for an entity to recognize revenue
from the sale of a delivered item that is part of a multiple-element arrangement
when other items have not yet been delivered. It eliminates the
requirement that all undelivered elements must have either: i) vendor-specific
objective evidence ("VSOE") or ii) third-party evidence ("TPE"), before an
entity can recognize the portion of an overall arrangement consideration that is
attributable to items that already have been delivered. In the
absence of VSOE or TPE of the standalone selling price for one or more delivered
or undelivered elements in a multiple-element arrangement, entities will be
required to estimate the selling prices of those elements. Overall
arrangement consideration will be allocated to each element (both delivered and
undelivered items) based on their relative selling prices, regardless of whether
those selling prices are evidenced by VSOE or TPE or are based on the entity's
estimated selling price. The residual method of allocating
arrangement consideration has been eliminated. The pronouncement is
effective for fiscal years beginning on or after June 15,
2010. Entities can elect to apply this pronouncement (1)
prospectively to new or materially modified arrangements after the
pronouncement's effective date or (2) retrospectively for all periods
presented. Early application is permitted; however, if the entity
elects prospective application and early adopts this pronouncement after its
first interim reporting period, it must also do the following in the period of
adoption: (1) retrospectively apply this pronouncement as of the beginning of
that fiscal year and (2) disclose the effect of the retrospective adjustments on
the prior interim periods' revenue, income before taxes, net income, and
earnings per share. The Group is in the process of assessing the
potential impact of the adoption of the pronouncement may have on its
consolidated financial position or results of operations.
CHINA
DIGITAL TV HOLDING CO., LTD.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR
THE YEARS ENDED DECEMBER 31, 2007, 2008 AND 2009
(In
U.S. dollars in thousands, except share data)
2.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES -
continued
|
|
(aa)
|
Recently
issued accounting pronouncements -
continued
|
In
September 2009, the FASB reached a consensus on ASU 2009-14, Software (ASC 985) - Certain Revenue Arrangements That
Include Software Elements. This pronouncement would amend the
existing pronouncement to exclude from their scope all tangible products
containing both software and non-software components that function together to
deliver the product's essential functionality. That is, the entire
product (including the software deliverables and non-software deliverables)
would be outside the scope of ASC 985-605 and would be accounted for under other
accounting literature (e.g., ASC 605-25). The new pronouncement
includes factors that entities should consider when determining whether the
software and non-software components function together to deliver the product's
essential functionality and are thus outside the revised scope of ASC
985-605. In addition, the new pronouncement includes examples
illustrating how entities would apply the revised scope
provisions. The pronouncement is effective for fiscal years beginning
on or after June 15, 2010. Entities can elect to apply this
pronouncement (1) prospectively to new or materially modified arrangements after
the pronouncement's effective date or (2) retrospectively for all periods
presented. Early application is permitted; however, if the entity
elects prospective application and early adopts this pronouncement after its
first interim reporting period, it must also do the following in the period of
adoption: (1) retrospectively apply this pronouncement as of the beginning of
that fiscal year and (2) disclose the effect of the retrospective adjustments on
the prior interim periods' revenue, income before taxes, net income, and
earnings per share. The Group is in the process of assessing the
potential impact of the adoption of the pronouncement may have on its
consolidated financial position or results of operations.
In
January 2010, the FASB reached a consensus on ASU 2010-02, Consolidation (ASC 810) -
Accounting and Reporting for
Decreases in Ownership of a Subsidiary - a Scope Clarification. This
pronouncement clarifies certain conditions which need to apply to this
pronouncement, and it also expands disclosure requirements for the
deconsolidation of a subsidiary or derecognition of a group of assets. This
pronouncement is effective in the period in which an entity adopts the
authoritative guidance on noncontrolling interests in consolidated financial
statements. If an entity has previously adopted the guidance on noncontrolling
interests in consolidated financial statements, the amendments in this update
are effective beginning in the first interim or annual reporting period ending
on or after December 15, 2009. Retrospective application to the first period
that an entity adopted the guidance on noncontrolling interests in consolidated
financial statements is required. The Group adopted the pronouncement on January
1, 2009, and there was no material impact on the Group's consolidated financial
position or results of operations upon the adoption of this
pronouncement.
CHINA
DIGITAL TV HOLDING CO., LTD.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR
THE YEARS ENDED DECEMBER 31, 2007, 2008 AND 2009
(In
U.S. dollars in thousands, except share data)
2.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES -
continued
|
|
(aa)
|
Recently
issued accounting pronouncements -
continued
|
In
January 2010, the FASB reached a consensus on ASU 2010-06, Fair Value
Measurements and Disclosures (ASC 820) - Improving Disclosures about Fair Value
Measurements. This pronouncement would amend the disclosure
requirements related to recurring and nonrecurring fair value
measurements. The pronouncement requires new disclosures on the
transfers of assets and liabilities between Level 1 (quoted prices in active
market for identical assets or liabilities) and Level 2 (significant other
observable inputs) of the fair value measurement hierarchy, including the
reasons and the timing of the transfers. Additionally, the
pronouncement requires a roll forward of activities on purchases, sales,
issuances, and settlements of the assets and liabilities measured using
significant unobservable inputs (Level 3 fair value
measurements). The pronouncement is effective for interim and annual
reporting periods beginning after December 15, 2009, except for the disclosure
about purchases, sales, issuances, and settlements in the roll forward
activities for Level 3 fair value measurements, which is effective for fiscal
years beginning after December 15, 2010, and for interim periods within those
fiscal years. The Group is in the process of assessing the potential
impact of the adoption of the pronouncement may have on its consolidated
financial position or results of operations.
3.
|
SEGMENT
INFORMATION AND REVENUE ANALYSIS
|
The
Group's chief operating decision maker is the Chief Executive Officer, who
reviews consolidated results of operations prepared in accordance with U.S. GAAP
when making decisions about allocating resources and assessing performance of
the Group; hence, the Group has only one operating segment.
The Group
operates in the PRC and all of the Group's long-lived assets are located in the
PRC.
CHINA
DIGITAL TV HOLDING CO., LTD.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR
THE YEARS ENDED DECEMBER 31, 2007, 2008 AND 2009
(In
U.S. dollars in thousands, except share data)
3.
|
SEGMENT
INFORMATION AND REVENUE ANALYSIS -
continued
|
The gross
revenues consist of the following products and services:
|
|
For the years ended December 31,
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
Products:
|
|
|
|
|
|
|
|
|
|
Smart
cards
|
|
$ |
49,651 |
|
|
$ |
64,216 |
|
|
$ |
49,005 |
|
Set-top
box and others
|
|
|
90 |
|
|
|
196 |
|
|
|
141 |
|
Subtotal
|
|
|
49,741 |
|
|
|
64,412 |
|
|
|
49,146 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Services:
|
|
|
|
|
|
|
|
|
|
|
|
|
Head-end
system integration
|
|
|
3,258 |
|
|
|
3,461 |
|
|
|
3,265 |
|
System
development
|
|
|
271 |
|
|
|
573 |
|
|
|
462 |
|
Licensing
income
|
|
|
1,984 |
|
|
|
1,610 |
|
|
|
1,147 |
|
Royalty
income
|
|
|
498 |
|
|
|
641 |
|
|
|
688 |
|
Other
services
|
|
|
- |
|
|
|
- |
|
|
|
356 |
|
Subtotal
|
|
|
6,011 |
|
|
|
6,285 |
|
|
|
5,918 |
|
Total
|
|
$ |
55,752 |
|
|
$ |
70,697 |
|
|
$ |
55,064 |
|
There
were VAT refunds of $5,030, $6,513, and $4,076 included in revenues for the
years ended December 31, 2007, 2008 and 2009, respectively.
In May
2008, the Group and a third party entered into an agreement to set up Dongguan
SuperTV in the PRC to provide value-added services to TV viewers in
China. The Group and the third party each contributed $719 cash,
representing 50% of the equity interest in Dongguan SuperTV. The
Group is entitled to 70% of shareholders' voting rights and controls three out
of five seats in the board of directors of Dongguan Super
TV. According to the articles of association of Dongguan Super TV,
significant decisions in the ordinary course of business are subject to
two-thirds of shareholders' approval or simple majority of directors'
approval. Therefore, the Group has control over Dongguan Super TV and
accounts for it as a consolidated subsidiary. Pursuant to the
agreement, the Group has an option to purchase an additional 10% equity interest
in Dongguan Super TV from the individual shareholder if certain conditions are
met. The consideration for the additional 10% equity interest
consists of four installments. In September 2008, the Group exercised
the option and paid the first installment of $146 in October
2008. The remaining three installments are contingent on certain
percentage of the net profit of Dongguan Super TV in the three succeeding years.
In 2009, Dongguan SuperTV was loss making, and thus the Company is under no
obligation to pay additional consideration in 2009.
In July
2009, the Group entered into an agreement with Guangdong Jiacai to sell 20%
equity interest in Dongguan Super TV for a total consideration of
$293. After this transaction, the equity interest of Dongguan Super
TV held by the Group was reduced to 40% and the Group no longer has the
controlling financial interest in Dongguan Super TV. See Note 12(c) for a more
detailed description of this transaction.
CHINA
DIGITAL TV HOLDING CO., LTD.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR
THE YEARS ENDED DECEMBER 31, 2007, 2008 AND 2009
(In
U.S. dollars in thousands, except share data)
Restricted
cash represents bank deposits pledged as security for issuing letters of credit
to overseas suppliers and bank deposits pledged as security for issuing letters
of guarantee to customers for performance security. The use of cash
in such an account is normally restricted for more than three
months.
As of
December 31, 2008 and 2009, the balances of notes receivable are $1,649 and
$2,836, respectively, representing bank acceptance drafts that are non-interest
bearing and due within six months.
7.
|
ACCOUNTS
RECEIVABLE, NET
|
Accounts
receivable, net, consists of the following:
|
|
December 31,
|
|
|
|
2008
|
|
|
2009
|
|
|
|
|
|
|
|
|
Billed
accounts receivable
|
|
$ |
8,401 |
|
|
$ |
7,539 |
|
Unbilled
accounts receivable
|
|
|
2,459 |
|
|
|
3,690 |
|
|
|
$ |
10,860 |
|
|
$ |
11,229 |
|
Revenue
recognized in excess of billings is recorded as unbilled receivables. The
unbilled amounts become billable according to the contract terms. The Group
generally anticipates that substantially all unbilled amounts as of a given
balance sheet date would be billed within twelve months of such balance sheet
dates.
Movement
of allowance for doubtful accounts is as follows:
|
|
Balance at
|
|
|
|
|
|
|
|
|
Balance at
|
|
|
|
beginning
|
|
|
Charge to
|
|
|
|
|
|
end of the
|
|
|
|
of the year
|
|
|
expenses
|
|
|
Deductions
|
|
|
year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
$ |
399 |
|
|
$ |
286 |
|
|
|
- |
|
|
$ |
685 |
|
2009
|
|
$ |
685 |
|
|
$ |
(89 |
) |
|
$ |
(20 |
) |
|
$ |
576 |
|
CHINA
DIGITAL TV HOLDING CO., LTD.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR
THE YEARS ENDED DECEMBER 31, 2007, 2008 AND 2009
(In
U.S. dollars in thousands, except share data)
Inventories
consist of the following:
|
|
December 31,
|
|
|
|
2008
|
|
|
2009
|
|
|
|
|
|
|
|
|
Raw
materials
|
|
$ |
3,030 |
|
|
$ |
3,718 |
|
Finished
goods
|
|
|
984 |
|
|
|
966 |
|
|
|
$ |
4,014 |
|
|
$ |
4,684 |
|
9.
|
PREPAID
EXPENSES AND OTHER CURRENT ASSETS
|
Prepaid
expenses and other current assets consist of the following:
|
|
December 31,
|
|
|
|
2008
|
|
|
2009
|
|
|
|
|
|
|
|
|
Interest
receivables
|
|
$ |
1,915 |
|
|
$ |
2,650 |
|
Deposits
|
|
|
680 |
|
|
|
733 |
|
Prepayments
to suppliers
|
|
|
333 |
|
|
|
394 |
|
VAT
refund receivables
|
|
|
844 |
|
|
|
340 |
|
Receivable
from Guangdong Jiacai
|
|
|
- |
|
|
|
293 |
|
Prepaid
expenses
|
|
|
202 |
|
|
|
140 |
|
|
|
$ |
3,974 |
|
|
$ |
4,550 |
|
10.
|
PROPERTY
AND EQUIPMENT, NET
|
Property
and equipment, net, consist of the following:
|
|
December 31,
|
|
|
|
2008
|
|
|
2009
|
|
|
|
|
|
|
|
|
Computers
and other electronic equipment
|
|
$ |
2,945 |
|
|
$ |
3,429 |
|
Furniture
and fixtures
|
|
|
132 |
|
|
|
168 |
|
Leasehold
improvements
|
|
|
440 |
|
|
|
925 |
|
Motor
vehicles
|
|
|
542 |
|
|
|
785 |
|
|
|
|
4,059 |
|
|
|
5,307 |
|
Less:
accumulated depreciation and amortization
|
|
|
(2,179 |
) |
|
|
(2,999 |
) |
|
|
$ |
1,880 |
|
|
$ |
2,308 |
|
For the
years ended December 31, 2007, 2008 and 2009, depreciation expense was $384,
$761 and $1,041 respectively.
CHINA
DIGITAL TV HOLDING CO., LTD.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR
THE YEARS ENDED DECEMBER 31, 2007, 2008 AND 2009
(In
U.S. dollars in thousands, except share data)
11.
|
INTANGIBLE
ASSETS, NET
|
Intangible
assets, net, consist of the following:
|
|
December 31,
|
|
|
|
2008
|
|
|
2009
|
|
|
|
|
|
|
|
|
Core
technology
|
|
$ |
384 |
|
|
$ |
384 |
|
Complete
technology
|
|
|
62 |
|
|
|
62 |
|
Contract
backlogs
|
|
|
284 |
|
|
|
284 |
|
Customer
relationship
|
|
|
1,004 |
|
|
|
1004 |
|
Digital
watermarking technology
|
|
|
889 |
|
|
|
889 |
|
Image
tracing technology
|
|
|
410 |
|
|
|
139 |
|
|
|
|
3,033 |
|
|
|
2,762 |
|
Less:
accumulated amortization
|
|
|
(1,304 |
) |
|
|
(1,954 |
) |
foreign
exchange difference
|
|
|
125 |
|
|
|
129 |
|
|
|
$ |
1,854 |
|
|
$ |
937 |
|
Digital
watermarking technology and image tracing technology were recorded as a result
of the acquisition of intellectual rights from N-T Information Engineering (see
Note1).The purchase price of these two technologies was allocated based on the
relative fair value of each technology, which was estimated by management using
method of discounted cash flow.
Image
tracing technology is primarily used for remote control of personal computers,
set-top boxes and televisions as well as gaming consoles. In 2009, the market
for those products did not develop as expected. As a result, image tracing
technology, with a carrying amount of $297, was written down to its fair value
of $26, resulting in an impairment charge of $271. The impairment charge was
recorded under the caption of research and development expense in the
consolidated statements of operations of 2009.
Information
regarding intangible asset measured at fair value on nonrecurring basis is
listed as below:
|
|
|
|
|
|
Fair value
|
|
|
|
|
|
|
|
|
|
|
measurement using
|
|
|
|
|
|
|
|
Carrying
|
|
|
Significant
|
|
|
|
|
|
|
|
amount ended
|
|
|
unobservable inputs
|
|
|
|
|
|
|
|
December 31, 2009
|
|
|
(Level 3)
|
|
|
Total loss incurred
|
|
Intangible
assets
|
|
|
|
|
|
|
|
|
|
|
- Image tracing technology
|
|
$
|
297
|
|
$
|
26
|
|
$
|
271
|
|
The Group
measured the fair value for image tracing technology using discounted cash flow
techniques, and the asset was classified as Level 3 asset because the Group used
unobservable inputs to value it, reflecting the Group's assessment of the
assumptions markets participants would use in valuing the asset.
The Group
recorded amortization expense of $542, $493 and $650 for the years ended
December 31, 2007, 2008 and 2009, respectively. Estimated
amortization expenses of the existing intangible assets for the next five years
are $268, $242, $242, $180 and $5, respectively.
CHINA
DIGITAL TV HOLDING CO., LTD.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR
THE YEARS ENDED DECEMBER 31, 2007, 2008 AND 2009
(In
U.S. dollars in thousands, except share data)
12.
|
EQUITY
METHOD INVESTMENTS
|
Equity
method investments consist of the following:
|
|
|
|
December 31,
|
|
|
|
Notes
|
|
2008
|
|
|
2009
|
|
Nanjing
Qingda Yongxin Culture
|
|
|
|
|
|
|
|
|
Media
Co., Ltd. ("Qingda Yongxin")
|
|
(a)
|
|
$ |
107 |
|
|
$ |
83 |
|
Foshan
Nanhai Guokai Digital TV
|
|
|
|
|
|
|
|
|
|
|
Technology
Co., Ltd. ("Nanhai Guokai")
|
|
(b)
|
|
|
330 |
|
|
|
337 |
|
Dongguan
Super TV
|
|
(c)
|
|
|
- |
|
|
|
585 |
|
|
|
|
|
$ |
437 |
|
|
$ |
1,005 |
|
|
(a)
|
In
March, 2007, the Group and Jiangsu Qingda Technology Co. Limited ("Jiangsu
Qingda"), one of its customers, set up a joint venture Qingda Yongxin, in
which the Group contributed cash of $103, representing 40% of equity
interest in the joint venture (the "JV"). Jiangsu Qingda
contributed cash of $155 representing 60% of equity interest in the joint
venture.
|
In three
years after the establishment of Qingda Yongxin, the Group has the option to
purchase up to additional 30% of the equity interest of Qingda
Yongxin. The purchase price of the additional interest will be
determined based on the higher of 10 times of its net profits in the year prior
to the purchase, and the net asset value of Qingda Yongxin on the last fiscal
year end date prior to the purchase.
The Group
has accounted for this long-term investment under the equity method of
accounting because the Group does not control the investee but has the ability
to exercise significant influence over operating and financial policies of the
investee.
|
(b)
|
In
August 2006, the Group entered into an equity transfer agreement to
purchase from N-T Information Engineering its 51% equity interest in
Nanhai Guokai, for a cash consideration of $311. The parties
entered into a new agreement in March 2007 to reduce the consideration to
$296. Nanhai Guokai is a company primarily engaged in research,
development and sales of digital TV-related systems, software and
products. A Japanese multinational company holds the remaining
49% equity interest in Nanhai Guokai. This transaction was
completed in July 2007.
|
The Group
has accounted for this long-term investment under the equity method of
accounting because the Group does not control the investee but has the ability
to exercise significant influence over operating and financial policies of the
investee. The Group controls three out of five seats in the board of
directors of Nanhai Guokai. The remaining two seats are controlled by
the noncontrolling shareholder. According to the article of
association of Nanhai Guokai, two-thirds of directors' approval is required for
the appointment and dismissal of the general manager and vice general
manager. Therefore the noncontrolling shareholder has substantive
rights to participate in significant operating decisions in Nanhai
Guokai. Accordingly, the Group accounts for its investment in Nanhai
Guokai using the equity method of accounting pursuant to EITF
96-16.
CHINA
DIGITAL TV HOLDING CO., LTD.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR
THE YEARS ENDED DECEMBER 31, 2007, 2008 AND 2009
(In
U.S. dollars in thousands, except share data)
12.
|
EQUITY
METHOD INVESTMENTS - continued
|
|
(c)
|
In
May 2008, the Group and a third party entered into an agreement to set up
Dongguan Super TV in PRC to provide value-added services to TV viewers in
China. The Group and the third party each contributed $719
cash, representing 50% of equity interest in Dongguan Super TV. In
September 2008, the Group exercised its option to obtain additional 10%
equity interest in Dongguan Super
TV.
|
In July,
2009, the Group entered into an agreement with Guangdong Jiacai, a non-related
third party, to sell 20% equity
interest in Dongguan Super TV at a total consideration of $293. Gains of $13 and
$26, which were generated by the disposal of 20% equity interest in Dongguan
Super TV and the remeasurement of 40% remaining investment in the former
subsidiary to its fair value, respectively, were recorded as a component of
net income from equity method investments in the consolidated statements of
operations in 2009. In determining fair value of the retained investment in
Dongguan Super TV, the Group used market approach with reference to quoted price
for similar assets (level 2).
After
this transaction, the equity interest of Dongguan Super TV held by the Group
reduced to 40%. The Group no longer controls Dongguan Super TV but has the
ability to exercise significant influence over operating and financial policies
through the remaining 40% equity interest. As a result, the Group uses equity
method to account for this long-term investment.
After the
deconsolidation, Dongguan Super TV became a related party of the
Group.
The
combined financial information for the equity method investments as of and for
the years ended December 31, 2008 and 2009 is as follows
|
|
December 31,
|
|
|
|
2008
|
|
|
2009
|
|
|
|
|
|
|
|
|
Total
current assets
|
|
$ |
914 |
|
|
$ |
2,558 |
|
Total
assets
|
|
|
934 |
|
|
|
2,714 |
|
Total
current liabilities
|
|
|
12 |
|
|
|
220 |
|
Total
liabilities
|
|
|
12 |
|
|
|
436 |
|
Total
net revenue
|
|
|
420 |
|
|
|
99 |
|
Loss
from operations
|
|
$ |
(12 |
) |
|
$ |
(52 |
) |
CHINA
DIGITAL TV HOLDING CO., LTD.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR
THE YEARS ENDED DECEMBER 31, 2007, 2008 AND 2009
(In
U.S. dollars in thousands, except share data)
13.
|
HELD-TO-MATURITY
INVESTMENTS
|
Corporate
bonds and government bonds purchased in 2009 are classified as held-to-maturity
investments as management of the Group has the positive intent and ability to
hold the securities to maturity, and are reported at amortized cost.
Held-to-maturity investments are classified as short-term investments or
long-term investments on the consolidated balance sheets based on their
remaining contractual maturity periods.
The
following table provides additional information of the Group's held-to-maturity
investments:
|
|
December 31, 2009
|
|
|
|
|
|
|
Unrealized
|
|
|
|
|
|
|
Carrying amount
|
|
|
holding gains
|
|
|
Fair value
|
|
|
|
|
|
|
|
|
|
|
|
Within 1 year
|
|
|
|
|
|
|
|
|
|
Corporate
bonds
|
|
$ |
14,614 |
|
|
$ |
252 |
|
|
$ |
14,866 |
|
The
PRC government bonds
|
|
|
23,071 |
|
|
|
- |
|
|
|
23,071 |
|
After 1 year through 5
years
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate
bond
|
|
|
1,190 |
|
|
|
13 |
|
|
|
1,203 |
|
Total
|
|
$ |
38,875 |
|
|
$ |
265 |
|
|
$ |
39,140 |
|
The fair
value of corporate bonds was measured by the quoted prices in active markets,
and the fair value of the PRC government bonds was determined by using
discounted cash flow method. The PRC
government bonds are generally deemed risk free because they pose neither
uncertainty in timing nor risk of default to the holder. Therefore, the coupon
rate is taken as the risk free interest rate.
14.
|
ACCRUED
EXPENSES AND OTHER CURRENT
LIABILITIES
|
Accrued
expenses and other current liabilities consist of the following:
|
|
December 31,
|
|
|
|
2008
|
|
|
2009
|
|
|
|
|
|
|
|
|
Accrued
payroll and bonus
|
|
$ |
1,380 |
|
|
$ |
1,600 |
|
Other
taxes payable
|
|
|
2,474 |
|
|
|
1,029 |
|
Other
accrued expenses
|
|
|
1,834 |
|
|
|
1,896 |
|
Social
insurance withholding
|
|
|
246 |
|
|
|
301 |
|
Accrued
warranty
|
|
|
71 |
|
|
|
113 |
|
Amount
due to employees for stock option exercise
proceeds
|
|
|
1,883 |
|
|
|
401 |
|
|
|
$ |
7,888 |
|
|
$ |
5,340 |
|
CHINA
DIGITAL TV HOLDING CO., LTD.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR
THE YEARS ENDED DECEMBER 31, 2007, 2008 AND 2009
(In
U.S. dollars in thousands, except share data)
14.
|
ACCRUED
EXPENSES AND OTHER CURRENT LIABILITIES -
continued
|
Movement
of warranty accrual is as follows:
|
|
Balance at
|
|
|
|
|
|
|
|
|
Balance at
|
|
|
|
beginning
|
|
|
Charge to
|
|
|
|
|
|
end of the
|
|
|
|
of the year
|
|
|
expenses
|
|
|
Deductions
|
|
|
year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
$ |
32 |
|
|
$ |
56 |
|
|
$ |
(17 |
) |
|
$ |
71 |
|
2009
|
|
$ |
71 |
|
|
$ |
45 |
|
|
$ |
(3 |
) |
|
$ |
113 |
|
Deferred
revenue consists of the following:
|
|
December 31,
|
|
|
|
2008
|
|
|
2009
|
|
|
|
|
|
|
|
|
Current:
|
|
|
|
|
|
|
Advance
from customers
|
|
$ |
2,430 |
|
|
$ |
2,529 |
|
Incentive
offered to customers
|
|
|
287 |
|
|
|
17 |
|
Deferred
revenue for SI service contracts with
|
|
|
|
|
|
|
|
|
remaining
PCS period within one year
|
|
|
987 |
|
|
|
907 |
|
|
|
$ |
3,704 |
|
|
$ |
3,453 |
|
Non-current:
|
|
|
|
|
|
|
|
|
Deferred
revenue for SI service contracts
|
|
|
|
|
|
|
|
|
with
remaining PCS period greater than one year
|
|
|
957 |
|
|
|
760 |
|
Total
|
|
$ |
4,661 |
|
|
$ |
4,213 |
|
Incentive
offered to customers represents the incentive provided to customer when
cumulative purchase volume from the same customer reached a certain level as of
December 31, 2008 and 2009. See Note 2(o) for a more detailed
description and related accounting treatment for deferred
revenue.
CHINA
DIGITAL TV HOLDING CO., LTD.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR
THE YEARS ENDED DECEMBER 31, 2007, 2008 AND 2009
(In
U.S. dollars in thousands, except share data)
CDTV
Holdings and CDTV BVI are tax-exempted companies incorporated in the Cayman
Islands and the British Virgin Islands, respectively.
Golden
Benefit and CSM Holdings are subject to Hong Kong Profits Tax on its activities
conducted in Hong Kong. No provision for Hong Kong Profits tax has
been made in the consolidated financial statements as they both have no
assessable profits from 2007 to 2009.
Super TV,
N-S Digital TV, N-S Media Investment, and Guangdong SuperTV were registered in
the PRC and are subject to PRC Enterprise Income Tax ("EIT") on the taxable
income in accordance with the relevant PRC income tax laws.
Both
Super TV and N-S Digital TV were qualified as New and High-Tech Enterprise"
("NHTE") under the Enterprise Income Tax Law effective from January 1, 2008 (the
"2008 EIT law") and therefore both of them were qualified for a preferential tax
rate of 15%. In addition, since these two entities are both located
in a high tech zone in Beijing, they were entitled to a three year exemption
from EIT from 2004 to 2006 and a 50% further deduction of 15% tax rate from 2007
to 2009.
N-S Media
Investment and Guangdong Super TV were subject to the statutory tax rate of 25%
in 2008 and 2009.
Deferred
income taxes result principally from differences in the recognition of certain
assets and liabilities for tax and financial reporting purposes and the tax
effect of tax loss carry forwards.
Income
tax expenses/(benefits) are as follows:
|
|
For the years ended December 31,
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
Income
tax expenses/(benefits)
|
|
|
|
|
|
|
|
|
|
Current
|
|
$ |
2,554 |
|
|
$ |
3,271 |
|
|
$ |
1,661 |
|
Deferred
|
|
|
(212 |
) |
|
|
(36 |
) |
|
|
(400 |
) |
Total
|
|
$ |
2,342 |
|
|
$ |
3,235 |
|
|
$ |
1,261 |
|
CHINA
DIGITAL TV HOLDING CO., LTD.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR
THE YEARS ENDED DECEMBER 31, 2007, 2008 AND 2009
(In
U.S. dollars in thousands, except share data)
16.
|
INCOME
TAXES - continued
|
The
principal components of the deferred income tax assets (liabilities) are as
follows:
|
|
December 31,
|
|
|
|
2008
|
|
|
2009
|
|
|
|
|
|
|
|
|
Current
|
|
|
|
|
|
|
Write-down
of inventory value
|
|
$ |
23 |
|
|
$ |
59 |
|
Deferred
revenue-current
|
|
|
116 |
|
|
|
277 |
|
Deferred
cost-current
|
|
|
(23 |
) |
|
|
(44 |
) |
Accrued
bonus
|
|
|
85 |
|
|
|
248 |
|
Valuation
allowance
|
|
|
- |
|
|
|
(24 |
) |
Current
deferred tax assets
|
|
|
201 |
|
|
|
516 |
|
Non-current
|
|
|
|
|
|
|
|
|
Property
and equipment
|
|
|
77 |
|
|
|
76 |
|
Deferred
revenue-non-current
|
|
|
123 |
|
|
|
97 |
|
Intangible
assets
|
|
|
(63 |
) |
|
|
(1 |
) |
Intangible
assets impairment
|
|
|
- |
|
|
|
41 |
|
Deferred
cost-non-current
|
|
|
(51 |
) |
|
|
(43 |
) |
Tax
loss carry-forward deferred tax assets
|
|
|
711 |
|
|
|
956 |
|
Valuation
allowance
|
|
|
(711 |
) |
|
|
(956 |
) |
Non
current deferred tax assets
|
|
$ |
86 |
|
|
$ |
170 |
|
N-S Media
Investment was loss making in both 2008 and 2009. As of December 31,
2009, deferred tax asset recognized for tax loss carried forwards of this entity
amounted $956. The tax loss carried forwards will begin to expire in
2013.
The Group
determines whether or not a valuation allowance is required at the level of each
taxable entity. A valuation allowance of $980 has been established as
of December 31, 2009, in respect of certain deferred tax assets as it is
considered more likely than not that the relevant deferred tax assets will not
be realized in the foreseeable future.
CHINA
DIGITAL TV HOLDING CO., LTD.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR
THE YEARS ENDED DECEMBER 31, 2007, 2008 AND 2009
(In
U.S. dollars in thousands, except share data)
16.
|
INCOME
TAXES - continued
|
Reconciliation
between the provision for income taxes computed by applying the PRC EIT rates of
33% in 2007, 25% in 2008 and 2009 to income before income taxes and the actual
provision of income taxes is as follows:
|
|
For the years ended December 31,
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
Net
income before provision for income taxes
|
|
$ |
36,164 |
|
|
$ |
46,287 |
|
|
$ |
26,532 |
|
PRC
statutory tax rate
|
|
|
33 |
% |
|
|
25 |
% |
|
|
25 |
% |
Income
tax at statutory tax rate
|
|
|
11,934 |
|
|
|
11,572 |
|
|
|
6,633 |
|
Expenses
not deductible for tax purposes:
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries
and employees' benefits
|
|
|
439 |
|
|
|
- |
|
|
|
- |
|
Other
expenses not deductable
|
|
|
189 |
|
|
|
197 |
|
|
|
147 |
|
Effect
of income tax exemptions
|
|
|
(10,175 |
) |
|
|
(8,752 |
) |
|
|
(5,887 |
) |
Effect
of income tax rate difference in other jurisdictions
|
|
|
(45 |
) |
|
|
(493 |
) |
|
|
99 |
|
Change
in valuation allowance
|
|
|
- |
|
|
|
711 |
|
|
|
269 |
|
Income
tax expenses/(benefits)
|
|
$ |
2,342 |
|
|
$ |
3,235 |
|
|
$ |
1,261 |
|
If N-S
Digital TV and Super TV were not in a tax holiday period for the years ended
December 31, 2007, 2008 and 2009, earnings per share amounts would be as
follows:
|
|
For the years ended December 31,
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
Increase
in income tax expense
|
|
$ |
10,175 |
|
|
$ |
8,752 |
|
|
$ |
5,887 |
|
Net
income per share
|
|
|
|
|
|
|
|
|
|
|
|
|
-
basic ordinary shares
|
|
|
0.52 |
|
|
|
0.60 |
|
|
|
0.34 |
|
Net
income per share
|
|
|
|
|
|
|
|
|
|
|
|
|
-
basic preferred shares
|
|
|
0.46 |
|
|
|
- |
|
|
|
- |
|
Net
income per share-diluted
|
|
$ |
0.48 |
|
|
$ |
0.57 |
|
|
$ |
0.33 |
|
Uncertainties
exist with respect to how the current income tax law in the PRC applies to the
Group's overall operations, and more specifically, with regard to tax residency
status. The 2008 EIT Law includes a provision specifying that legal entities
organized outside the PRC will be considered residents for Chinese income tax
purposes if the place of effective management or control is within the PRC. The
implementation rules to the New EIT Law provide that non-resident legal entities
will be considered PRC residents if substantial and overall management and
control over the manufacturing and business operations, personnel, accounting,
properties, etc, occurs within the PRC. Despite the present uncertainties
resulting from the limited PRC tax guidance on the issue, the Group does not
believe that the legal entities organized outside the PRC should be treated as
residents for 2008 EIT law purposes. If the PRC tax authorities subsequently
determine that the Company and its subsidiaries registered outside the PRC
should be deemed resident enterprises, the Company and its subsidiaries
registered outside the PRC will be subject to the PRC income tax at a rate of
25%.
CHINA
DIGITAL TV HOLDING CO., LTD.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR
THE YEARS ENDED DECEMBER 31, 2007, 2008 AND 2009
(In
U.S. dollars in thousands, except share data)
16.
|
INCOME
TAXES - continued
|
If the
Company were to be non-resident for PRC tax purpose, dividends paid to it from
profits earned by the PRC subsidiary after January 1, 2008 would be subject
to a withholding tax. In the case of dividends paid by PRC subsidiaries, the
withholding tax would be 10% and in the case of a subsidiary 25% or more
directly owned by the resident in Hong Kong, the withholding tax would be 5%,
but that will be subject to the interpretation of Circular No. 601 issued by the
State Administration of Taxation, under which the Company's Hong Kong subsidiary
might not be considered to be the beneficial owner of any such dividends and in
that case the withholding tax rate would be 10%.
Under the
applicable accounting principles, a deferred tax liability should be recorded
for taxable temporary differences attributable to the excess of financial
reporting over tax basis, including those differences attributable to an
investment in a subsidiary. However, recognition is not required in
situations where the tax law provides means by which reported amount of that
investment in subsidiary can be recovered tax-free and the enterprise expects
that it will ultimately use that means.
Aggregate
undistributed earnings of the Company's subsidiaries located in the PRC in year
2008 and 2009 that are taxable upon distribution to the Company of approximately
$63,530 at December 31, 2009 are considered to be indefinitely reinvested, and
accordingly, no deferred tax liability has been made for the Chinese dividend
withholding taxes that would be payable upon the distribution of those amounts
to the Company as of December 31, 2009. In an announcement formally made on
February 22, 2008, the PRC authorities clarified that the distributions made out
of undistributed earnings that arose prior to January 1, 2008 would not give
rise to withholding tax.
CHINA
DIGITAL TV HOLDING CO., LTD.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR
THE YEARS ENDED DECEMBER 31, 2007, 2008 AND 2009
(In
U.S. dollars in thousands, except share data)
|
|
For
the years ended December 31,
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
Net
income per share-basic:
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$ |
33,816 |
|
|
$ |
43,062 |
|
|
$ |
25,304 |
|
Undistributed
income
|
|
$ |
33,816 |
|
|
$ |
43,062 |
|
|
$ |
25,304 |
|
Shares
(denominator):
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average ordinary shares outstanding
|
|
|
39,170,004 |
|
|
|
57,138,985 |
|
|
|
57,728,009 |
|
Weighted
average preferred shares
|
|
|
|
|
|
|
|
|
|
|
|
|
outstanding
on an as-if-converted basis
|
|
|
7,389,394 |
|
|
|
- |
|
|
|
- |
|
|
|
|
46,559,398 |
|
|
|
57,138,985 |
|
|
|
57,728,009 |
|
Allocation
of undistributed income (numerator):
|
|
|
|
|
|
|
|
|
|
|
|
|
To
ordinary shares
|
|
$ |
28,907 |
|
|
$ |
43,062 |
|
|
$ |
25,304 |
|
To
preferred shares
|
|
|
4,909 |
|
|
|
- |
|
|
|
- |
|
|
|
|
33,816 |
|
|
|
43,062 |
|
|
|
25,304 |
|
Undistributed
income per share to ordinary shares
|
|
|
0.74 |
|
|
|
0.75 |
|
|
|
0.44 |
|
Undistributed
income per share to preferred shares
|
|
|
0.66 |
|
|
|
- |
|
|
|
- |
|
Net
income per share-basic ordinary shares
|
|
|
0.74 |
|
|
|
0.75 |
|
|
|
0.44 |
|
Net
income per share-basic participating
|
|
|
|
|
|
|
|
|
|
|
|
|
preferred
shares
|
|
$ |
0.66 |
|
|
$ |
- |
|
|
$ |
- |
|
Net
income per ordinary share-diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
to ordinary shares (numerator):
|
|
|
|
|
|
|
|
|
|
|
|
|
Undistributed
income (loss) allocated to ordinary shares
|
|
|
33,816 |
|
|
|
43,062 |
|
|
|
25,304 |
|
Distributed
and undistributed
|
|
|
|
|
|
|
|
|
|
|
|
|
income
allocated to ordinary shares
|
|
|
28,907 |
|
|
|
43,062 |
|
|
|
25,304 |
|
Undistributed
income allocated to preferred shares
|
|
|
4,909 |
|
|
|
- |
|
|
|
- |
|
Less
undistributed income reallocated to preferred shares
|
|
|
|
|
|
|
|
|
|
|
|
|
taking
into account the dilutive effect to ordinary shares
|
|
|
(4,554 |
) |
|
|
- |
|
|
|
- |
|
|
|
$ |
29,262 |
|
|
$ |
43,062 |
|
|
$ |
25,304 |
|
Shares
(denominator):
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average ordinary shares outstanding
|
|
|
39,170,004 |
|
|
|
57,138,985 |
|
|
|
57,728,009 |
|
Plus
incremental weighted average ordinary
|
|
|
|
|
|
|
|
|
|
|
|
|
shares
from assumed exercise of stock
|
|
|
|
|
|
|
|
|
|
|
|
|
options
using the treasury stock method
|
|
|
3,603,586 |
|
|
|
2,919,739 |
|
|
|
863,063 |
|
Weighted
average ordinary shares outstanding used in
|
|
|
|
|
|
|
|
|
|
|
|
|
computing
diluted net income per ordinary share
|
|
|
42,773,590 |
|
|
|
60,058,724 |
|
|
|
58,591,072 |
|
Net
income per ordinary share-diluted
|
|
$ |
0.68 |
|
|
$ |
0.72 |
|
|
$ |
0.43 |
|
CHINA
DIGITAL TV HOLDING CO., LTD.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR
THE YEARS ENDED DECEMBER 31, 2007, 2008 AND 2009
(In
U.S. dollars in thousands, except share data)
18.
|
SHARE-BASED
COMPENSATION
|
Option
granted to employees
Pursuant
to the directors' resolution, the Group adopted Share Incentive Plans in 2005,
under which the Group may grant options to purchase up to 4,444,440 ordinary
shares of the Group, to its employees, directors, and consultants, subject to
vesting requirements. Under Share Incentive Plans in 2005, there are
four schemes of the options granted: Scheme I, Scheme II, Scheme III and Scheme
IV, which were granted on February 3, 2005, September 22, 2006, December 5, 2006
and October 5, 2008, respectively.
On
September 13, 2007, the directors of CDTV Holding approved the 2008 Stock
Incentive Plan, pursuant to which the Group may grant options to purchase up
1,200,000 ordinary shares to its employees and other eligible
people. Scheme V and Scheme VI were granted on October 5, 2008 and
June 1, 2009, respectively under the 2008 Stock Incentive Plan.
Details
of the Share Incentive Plans are as follows:
Scheme
I
Grant
date: February 3, 2005
Exercise
price per share: $0.543
Expiration
date: February 2, 2015
Number of
options granted: 2,971,942
Type I under Scheme
I:
Number of
options granted: 2,303,054
Vesting
schedule: 50% of the total number of option shares at the end of the six-month
period after the grant date, and the remaining 50% of the option shares shall
vest in a series of 42 successive equal monthly installments over the 42-month
period measured from the end of the six-month period after the grant date, with
the first installment vesting on the first day of the month following the end of
the six-month period of after the Grant date and an additional installment
vesting on the first day of each of the 41 months thereafter.
Type II under Scheme
I:
Number of
options granted: 668,888
Vesting
schedule: The options shall become vested as to 25% of the total number of
ordinary shares subject to the options on the first anniversary of the grant
date. The remaining 75% of the total number of ordinary shares
subject to the options shall vest in 36 substantially equal monthly
installments, with the first installment vesting on the last day of the month
following the month in which the first anniversary of the grant date occurs and
an additional installment vesting on the last day of each of the 35 months
thereafter.
CHINA
DIGITAL TV HOLDING CO., LTD.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR
THE YEARS ENDED DECEMBER 31, 2007, 2008 AND 2009
(In
U.S. dollars in thousands, except share data)
18.
|
SHARE-BASED
COMPENSATION - continued
|
Option granted to
employees - continued
Scheme
II
Grant
date: September 22, 2006
Exercise
price per share: $1.771
Expiration
date: September 21, 2016
Number of
options granted: 543,674
Vesting
schedule: The option shall become vested as to (1) 25% of the total number of
ordinary shares subject to the option shares on the first anniversary of the
grant date and (2) the remaining 75% of the option shares shall vest in 36
substantially equal monthly installments, with the first installment vesting on
the last day of the month following the month in which the first anniversary of
the grant date occurs and an additional installment vesting on the last day of
each of the 35 months thereafter.
Scheme
III
Grant
date: December 5, 2006
Exercise
price per share: $4.172
Expiration
date: December 4, 2016
Number of
options granted: 620,212
Among the
620,212 Scheme III options granted, 352,000 options were granted to one officer
of the Group and the remaining 268,212 options were granted to other employees
and directors.
Vesting
schedule of the 268,212 options granted to employees and directors:
The
option shall become vested as to (1) 25% of the total number of the option
shares on the first anniversary of the grant date and (2) the remaining 75% of
the Option Shares shall vest in 36 substantially equal monthly installments,
with the first installment vesting on the last day of the month following the
month in which the first anniversary of the Grant date occurs and an additional
installment vesting on the last day of each of the 35 months
thereafter.
Vesting
schedule of the 352,000 options granted to the officer:
320,000
shares subject to the options shall become vested as to (1) 25% of such 320,000
ordinary shares on the closing of an initial public offering in an international
stock exchange, provided such initial public offering shall occur within 3 years
from the grant date, and (2) the remaining 75% of such 320,000 shall vest in 36
substantially equal monthly installments, with the first installment vesting on
the last day of the month following the month in which the officer starts its
employment and an additional installment vesting on the last day of each of the
35 months thereafter. The vesting of the remaining 32,000 shares is
conditional upon whether the performance of non-smart card and CA systems
business in the fiscal years from 2007 to 2009 can meet certain financial
targets.
CHINA
DIGITAL TV HOLDING CO., LTD.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR
THE YEARS ENDED DECEMBER 31, 2007, 2008 AND 2009
(In
U.S. dollars in thousands, except share data)
18.
|
SHARE-BASED
COMPENSATION - continued
|
Options granted
to employees - continued
Scheme
IV
Grant
date: October 5, 2008
Exercise
price per share: $0.543
Expiration
date: October 4, 2018
Number of
options granted: 53,280
Vesting
schedule: The options shall become vested as to 25% of the total number of
ordinary shares subject to the options on the first anniversary of the grant
date. The remaining 75% of the total number of ordinary shares
subject to the options shall vest in 36 substantially equal monthly
installments, with the first installment vesting on the last day of the month
following the month in which the first anniversary of the grant date occurs and
an additional installment vesting on the last day of each of the 35 months
thereafter.
Scheme
V
Grant
date: October 5, 2008
Exercise
price per share: $7.89
Expiration
date: October 4, 2018
Number of
options granted: 406,776
Vesting
schedule: (1) 25% of the total number of the option shares on the first
anniversary of the grant date and (2) the remaining 75% of the Option Shares
shall vest in 36 substantially equal monthly installments, with the first
installment vesting on the last day of the month following the month in which
the first anniversary of the Grant date occurs and an additional installment
vesting on the last day of each of the 35 months thereafter.
Scheme
VI
Grant
date: June 1, 2009
Exercise
price per share: $9.09
Expiration
date: June 1, 2019
Number of
options granted: 357,548
Vesting
schedule: (1) 25% of the total number of the option shares on the first
anniversary of the grant date and (2) the remaining 75% of the Option Shares
shall vest in 36 substantially equal monthly installments, with the first
installment vesting on the last day of the month following the month in which
the first anniversary of the Grant date occurs and an additional installment
vesting on the last day of each of the 35 months thereafter.
CHINA
DIGITAL TV HOLDING CO., LTD.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR
THE YEARS ENDED DECEMBER 31, 2007, 2008 AND 2009
(In
U.S. dollars in thousands, except share data)
18.
|
SHARE-BASED
COMPENSATION - continued
|
Options
granted to non-employees
Option
granted to an independent director
The Group
granted 40,000 options to an independent director who became the Company's
independent director upon the IPO of the Company.
Grant
date: May 15, 2007
Exercise
price per share: $4.172
Expiration
date: May 14, 2017
The
option shall become vested as to (1) 50% on the day of the IPO, and (2) the
remaining 50% would be vested in 36 substantially equal monthly installments
thereafter, with the first installment vesting on the last day of the month
following the month of the IPO and an additional installment vesting on the last
day of each of the 35 months thereafter.
Option
granted to Tech Power Enterprises
The Group
granted 143,474 options to Tech Power Enterprises, an affiliated company of
SAIF. The vesting schedule and other details of the options are the
same as those in Type I options under Scheme I of Share Incentive
Plans.
Termination
of options
If the
grantee ceases to be employed by or ceases to provide services to the Group, (a)
the grantee will have until the date that is 30 days after his or her severance
date to exercise the options (or portion thereof) to the extent that they were
vested on the severance date; (b) the options, to the extent not vested on the
severance date, shall terminate on the severance date; (c) the options, to the
extent exercisable for the 30-day period following the severance date and not
exercised during such period, shall terminate at the close of the business on
the last day of the 30-day period.
CHINA
DIGITAL TV HOLDING CO., LTD.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR
THE YEARS ENDED DECEMBER 31, 2007, 2008 AND 2009
(In
U.S. dollars in thousands, except share data)
18.
|
SHARE-BASED
COMPENSATION - continued
|
Option
exercise
The
option shall be exercisable by the delivery to the secretary of corporation of a
written notice, in the form approved by the Group, stating the number of
ordinary shares to be purchased pursuant to the option and payment in full for
the exercise price of the shares to be purchased in cash, by check or by
electronic funds transfer to the Group.
Management
used the Black-Scholes option pricing model to estimate the fair value of the
options on their respective grant date with the following
assumptions:
|
|
Scheme I/Options
|
|
|
|
|
|
Options granted
|
|
|
|
|
|
|
|
|
granted to Tech
|
|
|
|
|
|
to independent
|
|
|
|
|
|
|
|
|
Power Enterprise
|
|
Scheme II
|
|
Scheme III
|
|
an director
|
|
Scheme IV
|
|
Scheme V
|
|
Scheme VI
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected
price volatility range
|
|
56.3%-58.1%
|
|
50.5%-50.6%
|
|
49.8%-52.4%
|
|
45.4%-48.1%
|
|
56.20%
|
|
56.20%
|
|
51.50%
|
Risk-free
interest rate range
|
|
4.17%-4.36%
|
|
5.77%-5.81%
|
|
5.77%-5.83%
|
|
4.99%-5.03%
|
|
2.92%
|
|
2.92%
|
|
3.28%
|
Expected
life range
|
|
5.25-6.33
|
|
5.50-6.26
|
|
5.28-6.54
|
|
5.19-5.94
|
|
6.25
|
|
6.25
|
|
6.25
|
Expected
dividends
|
|
-
|
|
1.00%
|
|
1.00%
|
|
-
|
|
-
|
|
-
|
|
2.50%
|
Fair
value of ordinary share at grant date
|
|
$0.27
|
|
$3.56
|
|
$3.56
|
|
$9.15
|
|
$7.66
|
|
$7.66
|
|
$9.09
|
The fair
value of the option at the grant date was $0.11, $2.38, $1.67, $6.48, $7.22,
$4.24 and $3.83 for each option for Scheme I, Scheme II, and Scheme III option
plans, options granted to the independent director, Scheme IV, Scheme V and
Scheme VI, respectively.
In
calculating the fair value of the options using the Black-Scholes option pricing
model, the following major assumptions were used:
The
volatility of the underlying ordinary shares during the life of the options was
estimated based on the historical stock prices volatility of listed comparable
companies over a period comparable to the expected term of the options or the
Company's own historical stock price volatility. The companies
selected for reference were Comcast Corporation, Cablevision Systems
Corporation, Thomson, and NDS Group plc.
|
(2)
|
Risk
free interest rate
|
Risk free
interest rate was estimated based on the yield to maturity of government bonds
with a maturity period close to the expected term of the options.
The
Company estimated the expected term as the average between the vesting term of
the options and the original contractual term.
The
dividend yield was estimated by the Company based on its expected dividend
policy over the expected term of the options.
CHINA
DIGITAL TV HOLDING CO., LTD.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR
THE YEARS ENDED DECEMBER 31, 2007, 2008 AND 2009
(In
U.S. dollars in thousands, except share data)
18.
|
SHARE-BASED
COMPENSATION - continued
|
Option
exercise - continued
The
exercise price of the options was determined by the Company's board of
directors.
|
(6)
|
Fair
value of underlying ordinary shares
|
The
estimated fair value of the ordinary shares underlying the options, which were
granted before the Company's IPO in October 2007, as of the respective grant
dates, except for the options to purchase 40,000 of the Company's ordinary
shares granted on May 15, 2007, was determined based on (i) a contemporaneous
valuation performed by American Appraisal China Limited with respect to option
grants made on September 22, 2006 and (ii) a retrospective valuation performed
by American Appraisal China Limited with respect to option grants made on
February 3, 2005, as indicated in its valuation reports dated January 2,
2007. As the Company believed that there was no material change in
its operations in the short period between September 22, 2006 and December 5,
2006 that would materially impact the fair value of its ordinary shares, the
estimated fair value of share options granted on December 5, 2006 was determined
based on the estimated fair value of its ordinary shares as of September 22,
2006. The estimated fair value of share options granted on May 15,
2007 was determined based on the price paid by investors to purchase the
Company's ordinary shares from China Capital in eight separate transactions in
March and April 2007. Since such sales and purchases of the Company's
ordinary shares took place between unrelated parties at arm's length and the
aggregate number of ordinary shares sold in those transactions accounted for
more than 10% of the Company's total issued and outstanding shares, the Company
believes that the purchase price paid by the investors in those transactions
represents the fair value of its ordinary shares at the time of those
transactions. In light of the fact that no significant changes in the
financial, business and other conditions of the Company occurred between April
and May 2007, the Company determined that such purchase price continued to
represent the fair value of the Company's ordinary shares on May 15,
2007. For the share options granted after the Company's IPO, the fair
value of ADSs representing its ordinary shares on the grant date is determined
by the closing trade price of ordinary shares on the grant
date.
CHINA
DIGITAL TV HOLDING CO., LTD.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR
THE YEARS ENDED DECEMBER 31, 2007, 2008 AND 2009
(In
U.S. dollars in thousands, except share data)
18.
|
SHARE-BASED
COMPENSATION - continued
|
Option
exercise - continued
A summary
of stock option activity is as follows:
|
|
|
|
|
Weighted average
|
|
|
|
Number of options
|
|
|
exercise price
|
|
|
|
|
|
|
|
|
Options
outstanding as at December 31, 2007
|
|
|
4,060,903 |
|
|
$ |
1.29 |
|
Granted
|
|
|
460,056 |
|
|
|
7.04 |
|
Exercised
|
|
|
(2,220,182 |
) |
|
|
1.03 |
|
Forfeited
|
|
|
(2,915 |
) |
|
|
4.17 |
|
Options
outstanding as at December 31, 2008
|
|
|
2,297,862 |
|
|
|
2.69 |
|
Granted
|
|
|
357,548 |
|
|
|
9.09 |
|
Exercised
|
|
|
(835,092 |
) |
|
|
0.91 |
|
Forfeited
|
|
|
(54,000 |
) |
|
|
5.21 |
|
Options
outstanding as at December 31, 2009
|
|
|
1,766,318 |
|
|
$ |
4.75 |
|
Options
exercisable as at December 31, 2009
|
|
|
680,473 |
|
|
$ |
2.67 |
|
The
following table summarizes information with respect to share options outstanding
at December 31, 2009:
|
|
|
|
|
|
|
|
|
|
Weighted-average
|
|
|
|
|
|
Weighted-average
|
|
|
Number
|
|
|
Number
|
|
remaining
|
|
Intrinsic
|
|
|
|
exercise price
|
|
|
outstanding
|
|
|
exercisable
|
|
contractual life
|
|
value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Scheme
I
|
|
$ |
0.54 |
|
|
|
314,852 |
|
|
|
211,557 |
|
5.09
years
|
|
$ |
5.55 |
|
Scheme
II
|
|
|
1.77 |
|
|
|
353,555 |
|
|
|
192,039 |
|
6.72
years
|
|
|
4.32 |
|
Scheme
III
|
|
|
4.17 |
|
|
|
262,107 |
|
|
|
162,039 |
|
6.93
years
|
|
|
1.92 |
|
Options
granted to an independent director
|
|
|
4.17 |
|
|
|
40,000 |
|
|
|
34,444 |
|
7.37
years
|
|
|
1.92 |
|
Scheme
IV
|
|
|
0.54 |
|
|
|
53,280 |
|
|
|
12,507 |
|
8.76
years
|
|
|
5.55 |
|
Scheme
V
|
|
|
7.89 |
|
|
|
384,976 |
|
|
|
67,887 |
|
8.76
years
|
|
|
- |
|
Scheme
VI
|
|
$ |
9.09 |
|
|
|
357,548 |
|
|
|
- |
|
9.42
years
|
|
$ |
- |
|
|
|
|
|
|
|
|
1,766,318 |
|
|
|
680,473 |
|
|
|
|
|
|
The
weighted-average grant-date fair value of options granted during the years 2007,
2008 and 2009 was $6.48, $4.59 and $3.83, respectively.
The
aggregate intrinsic value of options outstanding, vested and exercisable as of
December 31, 2009 was $4,150, $3,365 and $2,450, respectively. The total
intrinsic value of options exercised during the years ended December 31, 2007,
2008 and 2009, was nil, $16,324 and $4,334, respectively.
CHINA
DIGITAL TV HOLDING CO., LTD.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR
THE YEARS ENDED DECEMBER 31, 2007, 2008 AND 2009
(In
U.S. dollars in thousands, except share data)
18.
|
SHARE-BASED
COMPENSATION - continued
|
Option
exercise - continued
A summary
of unvested stock option activity as of December 31, 2009, and changes during
the year ended December 31, 2009 are presented below:
|
|
|
|
|
Weighted average
|
|
Unvested Stock Option
|
|
Number of Shares
|
|
|
Grant-date Fair Value
|
|
|
|
|
|
|
|
|
Unvested
at January 1, 2009
|
|
|
1,019,733 |
|
|
$ |
3.09 |
|
Granted
|
|
|
357,548 |
|
|
|
3.83 |
|
Vested
|
|
|
(473,336 |
) |
|
|
2.46 |
|
Forfeited
|
|
|
(54,000 |
) |
|
|
2.85 |
|
Unvested
at December 31, 2009
|
|
|
849,945 |
|
|
$ |
3.76 |
|
The Group
recorded the share-based compensation expense of $1,261, $1,044 and $1,662 for
the years ended December 31, 2007, 2008 and 2009, respectively.
As of
December 31, 2009, total unrecognized compensation expense related to the
unvested share options was $1,656, which is expected to be recognized over a
weighted-average period of 1.78 years according to the graded vesting schedule.
The total fair value of shares vested during the year ended December 31, 2007,
2008 and 2009, was $1,464, $663 and $1,168.
19.
|
SHARE
REPURCHASE PROGRAM
|
On
September 17, 2008, the Company announced the authorization of a share
repurchase program pursuant to which the Company was entitled, in the period
from September 15, 2008 to November 21, 2008, to purchase up to $40,000 worth of
its issued and outstanding ADSs. Under this program 2,307,566 ADSs
were repurchased at a total consideration of $16,255 (including transaction
costs). These ADSs were cancelled immediately after the
repurchase.
20.
|
MAINLAND
CHINA CONTRIBUTION PLAN
|
Full time
employees of the Group in the PRC participate in a government-mandated
multiemployer defined contribution plan pursuant to which certain pension
benefits, medical care, unemployment insurance, employee housing fund and other
welfare benefits are provided to employees. PRC labor regulations
require the Group to accrue for these benefits based on certain percentages of
the employees' salaries. The total contribution for such employee
benefits was $784, $1,522 and $2,147 for the years ended December 31, 2007, 2008
and 2009, respectively.
CHINA
DIGITAL TV HOLDING CO., LTD.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR
THE YEARS ENDED DECEMBER 31, 2007, 2008 AND 2009
(In
U.S. dollars in thousands, except share data)
The Group
has operating lease agreements principally for its office spaces in the
PRC. These leases expire through 2011 and are renewable upon
negotiation. Rental expense under operating leases for the years
ended December 31, 2007 and 2008 and 2009 was $535, $914, and $1,301,
respectively.
Future
minimum lease payments under non-cancelable operating lease agreements are as
follows:
2010
|
|
$ |
1,276 |
|
2011
|
|
|
225 |
|
2012
|
|
|
- |
|
|
|
$ |
1,501 |
|
22.
|
RELATED
PARTY BALANCES AND TRANSACTIONS
|
|
a.
|
The
Group granted 143,474 Type I options under Scheme I of Share Incentive
Plans to Tech Power Enterprises, an affiliated company of SAIF, and
accordingly the Group incurred $41, $9 and nil of share-based compensation
expense in 2007, 2008 and 2009,
respectively.
|
|
b.
|
Pursuant
to an agreement entered into in March 2007, N-T Information Engineering
granted the Group a non-exclusive license to use certain trademarks free
of charge.
|
|
c.
|
In
August 2008, the Group entered into agreement with N-T Information
Engineering to acquire two intangible assets, digital watermarking and
image tracing technologies with a cost of
$1,299.
|
|
d.
|
In
December 2008, the Group acquired for free the licensed graphic logo from
N-T Information Engineering.
|
23.
|
CASH
DISTRIBUTION TO SHAREHOLERS
|
In
December 2008, the Group decided to pay $1.00 per ordinary share to shareholders
of record as of the close of business on January 8, 2009. As of the
record date, the number of ordinary shares outstanding was 57,296,413, among
which 86,865 shares were issued between January 1, 2009 and the record date. By
the end of February 2009, an aggregate amount of $57,296 was fully paid to
shareholders.
CHINA
DIGITAL TV HOLDING CO., LTD.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR
THE YEARS ENDED DECEMBER 31, 2007, 2008 AND 2009
(In
U.S. dollars in thousands, except share data)
As
stipulated by the relevant law and regulations in the PRC, the Company's
subsidiary, VIE and VIE's subsidiaries in the PRC are required to maintain
non-distributable statutory reserve. Appropriations to the statutory
reserve are required to be made at 10% of profit after taxes as reported in
these entities' statutory financial statements prepared under PRC
GAAP. Once appropriated, these amounts are not available for future
distribution to owners or shareholders. Once the statutory reserve is
accumulated to 50% of these entities' registered capital, these entities can
choose not to provide further statutory reserves. The statutory
reserve may be applied against prior year losses, if any, and may be used for
general business expansion and production and an increase in registered capital
of these entities. Amounts contributed to the statutory reserve were
$3,335, $4,496 and $2,507 for 2007, 2008 and 2009, respectively.
25.
|
Adoption
of SFAS No. 160, “Noncontrolling Interests in Consolidated Financial
Statements – an amendment of ARB No.
51”
|
Effective
January 1, 2009, the Group adopted SFAS 160 “Noncontrolling Interests in
Consolidated Financial Statements — an amendment of ARB No. 51” (“SFAS 160”),
now codified in ASC 810, Consolidation. SFAS 160 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.
The
adoption of SFAS 160 requires retrospective application of the presentation and
disclosure requirements of the standard to all periods presented. Consequently,
the Group is now adjusting its previously issued financial statements for the
two years ended December 31, 2008 for the adoption of SFAS 160. The following
adjustments have been made:
(a) the
noncontrolling interest (previously described as minority interest) has now been
included as a component of total equity whereas previously it was shown outside
of equity,
(b) the
net income or loss attributable to the noncontrolling interest is now shown as
an allocation of net income for the year rather than being deducted in arriving
at net income, and
(c)
consolidated comprehensive income or loss now includes the comprehensive income
or loss attributable to the noncontrolling interest.
On
January 4, 2010, the Group entered into a share purchase agreement with OpenV
China Holdings Company ("OpenV"), and several other parties for a strategic
investment in OpenV. According to the share purchase agreement and related
transaction arrangements, the Group acquired 12.81% (subject to adjustment based
on OpenV's performance) equity interest in Open V for a consideration of $5,000
and obtained a warrant to purchase ordinary shares of OpenV, up to $4,500. As
part of this transaction, the Group also agreed to purchase certain additional
ordinary shares of OpenV for a consideration of $2,500, and extend to OpenV a
$2,500 interest- free convertible loan, subject to certain
conditions.
On
February 26, 2010, the Group entered into an agreement with Beijing Shi Xun Hu
Lian Technology Co., Ltd., a related party of the Group, to acquire its 90%
equity interest in Guangdong Digital Media Technology Research & Development
Institute Co., Ltd. ("Guangdong R&D") for a cash consideration of $396. On
the same day, the Group entered into an agreement with the holder of the
remaining 10% equity interest in Guangdong R&D, an independent third party
of the Group, for a cash consideration of $44. Guangdong R&D is a local
based company primarily engaged in research and development of digital
TV-related media platform. The purpose of the acquisition is to promote the TV
digitalization in Guang Dong Province. These transactions were closed on
February 28, 2010 and Guangdong R&D became a wholly owned subsidiary of the
Group after March 2010.
EXHIBIT
INDEX
Number
|
|
Description of Exhibit
|
|
|
|
1.1*
|
|
Second
Amended and Restated Memorandum and Articles of Association of China
Digital TV Holding Co., Ltd.
|
|
|
|
2.1*
|
|
Specimen
of Share Certificate.
|
|
|
|
2.2*
|
|
Form of
Deposit Agreement, including form of American Depositary
Receipts.
|
|
|
|
2.3*
|
|
First
Amended and Restated Shareholders Agreement of China Digital TV Holding
Co., Ltd., dated September 13, 2007, among Novel-Tongfang Information
Engineering Co., Ltd., Beijing Novel-Tongfang Digital TV Technology Co.,
Ltd., China Digital TV Technology Co., Ltd., China Capital Investment
Holdings Limited, China Cast Investment Holdings Limited, SB Asia
Infrastructure Fund L.P., Capital International Private Equity Fund IV,
L.P., CGPE IV, L.P. and certain other shareholders.
|
|
|
|
4.1*
|
|
Asset
Transfer Agreement, dated June 7, 2004, between Beijing Novel-Tongfang
Digital TV Technology Co., Ltd. and Novel-Tongfang Information Engineering
Co., Ltd.
|
|
|
|
4.2*
|
|
Equity
Transfer Agreement, dated June 7, 2004, between Beijing Novel-Tongfang
Digital TV Technology Co., Ltd. and Novel-Tongfang Information Engineering
Co., Ltd. and related (i) Equity Entrustment Agreement, dated
September 10, 2004, and (ii) Equity Purchase Entrustment Agreement, dated
April 1, 2004, both between the same parties.
|
|
|
|
4.3*
|
|
Asset
Purchase Agreement, dated June 8, 2004, between Beijing Novel-Tongfang
Digital TV Technology Co., Ltd. and Beijing Super TV Co.,
Ltd.
|
|
|
|
4.4*
|
|
Equity
Transfer Agreement, dated August 4, 2006, between Novel-Tongfang
Information Engineering Co., Ltd. and Beijing Novel-Tongfang Digital TV
Technology Co., Ltd. and related Equity Transfer Agreement, dated March
15, 2007, among Novel-Tongfang Information Engineering Co., Ltd., Beijing
Novel-Tongfang Digital TV Technology Co., Ltd. and Panasonic Corporation
of China.
|
|
|
|
4.5*
|
|
Asset
Transfer Agreement, dated August 5, 2006, between Novel-Tongfang
Information Engineering Co., Ltd. and Beijing Novel-Tongfang Digital TV
Technology Co., Ltd. and the Supplemental Agreement thereto, dated April
6, 2007.
|
|
|
|
4.6*
|
|
Trademark
Licensing Agreement entered into in March 2007 between Beijing
Novel-Tongfang Information Engineering Co., Ltd. and Beijing
Novel-Tongfang Digital TV Technology Co., Ltd.
|
|
|
|
4.7*
|
|
Equipment
Leasing Agreement, dated June 7, 2004, between Beijing Novel-Tongfang
Digital TV Technology Co., Ltd. and Beijing Super TV Co.,
Ltd.
|
|
|
|
4.8*
|
|
Technical
Support and Related Service Agreement, dated June 7, 2004, between Beijing
Novel-Tongfang Digital TV Technology Co., Ltd. and Beijing Super TV Co.,
Ltd.
|
|
|
|
4.9*
|
|
Technology
License Agreement, dated June 7, 2004, between Beijing Novel-Tongfang
Digital TV Technology Co., Ltd. and Beijing Super TV Co.,
Ltd.
|
|
|
|
4.10*
|
|
Technology
Development Agreement, dated June 7, 2004, between Beijing Novel-Tongfang
Digital TV Technology Co., Ltd. and Beijing Super TV Co.,
Ltd.
|
|
|
|
4.11*
|
|
Products
and Software Purchase Agreement, dated June 7, 2004, between Beijing
Novel-Tongfang Digital TV Technology Co., Ltd. and Beijing Super TV Co.,
Ltd.
|
Number
|
|
Description of Exhibit
|
|
|
|
4.12+
|
|
Letter
of Consent, dated April 30, 2009, issued by Beijing Super TV Co., Ltd. to
Beijing Novel-Super Digital TV Technology Co., Ltd.
|
|
|
|
4.13+
|
|
Equity
Transfer Agreement, dated June 20, 2008 between Ms. Wei Gao and Mr.
Junming Wu for Beijing Novel-Super Digital TV Technology Co.,
Ltd.
|
|
|
|
4.14+
|
|
Equity
Transfer Agreement, dated November 24, 2008, between Novel-Tongfang
Information Engineering Co., Ltd. and Mr. Shizhou Shen for Beijing
Novel-Super Digital TV Technology Co., Ltd.
|
|
|
|
4.15+
|
|
Equity
Transfer Agreement, dated November 24, 2008, between Novel-Tongfang
Information Engineering Co., Ltd. and Mr. Lei Zhang for Beijing
Novel-Super Digital TV Technology Co., Ltd.
|
|
|
|
4.16
|
|
Equity
Transfer Option Agreement, dated June 7, 2004, among Beijing Super TV Co.,
Ltd., Novel-Tongfang Information Engineering Co., Ltd. and Ms. Li
Yang*; the Supplemental Agreement thereto, dated September 1, 2005, among
Beijing Super TV Co., Ltd., Novel-Tongfang Information Engineering Co.,
Ltd., Ms. Li Yang and Beijing Novel-Tongfang Digital TV Technology
Co., Ltd. *; the No. 2 Supplemental Agreement thereto, dated
August 18, 2007, among Beijing Super TV Co., Ltd., Novel-Tongfang
Information Engineering Co., Ltd., Ms. Li Yang, Beijing
Novel-Tongfang Digital TV Technology Co., Ltd. and Ms. Wei Gao*; the
No. 3 Supplemental Agreement thereto, dated June 20, 2008, among Beijing
Super TV Co., Ltd., Beijing Novel-Super Digital TV Technology Co., Ltd.,
Novel-Tongfang Information Engineering Co., Ltd., Ms. Wei Gao and Mr.
Junming Wu; and the No. 4 Supplemental Agreement thereto, dated November
24, 2008, among Beijing Super TV Co., Ltd., Beijing Novel-Super Digital TV
Technology Co., Ltd., Novel-Tongfang Information Engineering Co., Ltd.,
Mr. Junming Wu, Mr. Lei Zhang and Mr. Shizhou Shen+.
|
|
|
|
4.17*
|
|
Share
Pledge Agreement, dated September 1, 2005, between Novel-Tongfang
Information Engineering Co., Ltd. and Beijing Super TV Co.,
Ltd.
|
|
|
|
4.18+
|
|
Termination
Agreement of Share Pledge, dated November 24, 2008, between Beijing Super
TV Co., Ltd. and Novel-Tongfang Information Engineering Co.,
Ltd.
|
|
|
|
4.19+
|
|
Share
Pledge Agreement, dated September 1, 2005, between Ms. Li Yang and
Beijing Super TV Co., Ltd.*; the Supplemental Agreement thereto, dated
August 18, 2007, among Ms. Li Yang, Beijing Super TV Co., Ltd. and
Ms. Wei Gao*; and the No. 2 Supplemental Agreement thereto, dated
June 20, 2008, among Beijing Super TV Co., Ltd., Ms. Wei Gao and Mr.
Junming Wu.
|
|
|
|
4.20+
|
|
Share
Pledge Agreement, dated November 24, 2008, between Mr. Shizhou Shen and
Beijing Super TV Co., Ltd.
|
|
|
|
4.21+
|
|
Share
Pledge Agreement, dated November 24, 2008, between Mr. Lei Zhang and
Beijing Super TV Co., Ltd.
|
Number
|
|
Description of Exhibit
|
|
|
|
4.22+
|
|
Business
Operating Agreement, dated September 1, 2005, among Beijing Super TV Co.,
Ltd., Novel-Tongfang Information Engineering Co., Ltd., Ms. Li Yang
and Beijing Novel-Tongfang Digital TV Technology Co., Ltd. *; the
Supplemental Agreement thereto, dated August 18, 2007, among Beijing
Super TV Co., Ltd., Novel-Tongfang Information Engineering Co., Ltd.,
Ms. Li Yang, Beijing Novel-Tongfang Digital TV Technology Co., Ltd.
and Ms. Wei Gao*; the No. 2 Supplemental Agreement thereto, dated
June 20, 2008, among Beijing Super TV Co., Ltd., Beijing Novel-Super
Digital TV Technology Co., Ltd., Novel-Tongfang Information Engineering
Co., Ltd., Ms. Wei Gao and Mr. Junming Wu; and the No. 3 Supplemental
Agreement thereto, dated November 24, 2008, among Beijing Super TV Co.,
Ltd., Beijing Novel-Super Digital TV Technology Co., Ltd., Novel-Tongfang
Information Engineering Co., Ltd., Mr. Junming Wu, Mr. Lei Zhang and Mr.
Shizhou Shen.
|
|
|
|
4.23*
|
|
Power
of Attorney, dated September 1, 2005, of Novel-Tongfang Information
Engineering Co., Ltd.
|
|
|
|
4.24*
|
|
Power
of Attorney, dated August 18, 2007, of Ms. Wei
Gao.
|
|
|
|
4.25+
|
|
Power
of Attorney, dated June 20, 2008, of Mr. Junming Wu.
|
|
|
|
4.26+
|
|
Power
of Attorney, dated November 24, 2008, of Mr. Shizhou
Shen.
|
|
|
|
4.27+
|
|
Power
of Attorney, dated November 24, 2008, of Mr. Lei Zhang.
|
|
|
|
4.28*
|
|
Entrusted
Loan Agreement, dated August 23, 2004, among Beijing Super TV Co., Ltd.,
Beijing Novel-Tongfang Digital TV Technology Co., Ltd. and Bank of
Beijing, Shangdi Branch.
|
|
|
|
4.29*
|
|
Entrusted
Loan Agreement, dated July 13, 2004, among Beijing Super TV Co., Ltd.,
Novel-Tongfang Information Engineering Co., Ltd. and Bank of Beijing,
Shangdi Branch.
|
|
|
|
4.30*
|
|
Entrusted
Loan Agreement, dated August 25, 2005, among Beijing Super TV Co., Ltd.,
Novel-Tongfang Information Engineering Co., Ltd. and Bank of Beijing,
Shangdi Branch.
|
|
|
|
4.31*
|
|
Loan
Agreement, dated April 4, 2007, between Beijing Super TV Co., Ltd. and
Novel-Tongfang Information Engineering Co., Ltd. and the related Entrusted
Loan Agreement, dated April 12, 2007, among Beijing Super TV Co., Ltd.,
Novel-Tongfang Information Engineering Co., Ltd. and Bank of Beijing,
Shangdi Branch.
|
|
|
|
4.32+
|
|
Loan
Agreement, dated November 24, 2008, between Mr. Shizhou Shen and Beijing
Super TV Co., Ltd.
|
|
|
|
4.33+
|
|
Loan
Agreement, dated November 24, 2008, between Mr. Lei Zhang and Beijing
Super TV Co., Ltd.
|
|
|
|
4.34*
|
|
Service
Agreement, dated April 2, 2007, between Novel-Tongfang Information
Engineering Co., Ltd. and Beijing Novel-Tongfang Digital TV Technology
Co., Ltd.
|
|
|
|
4.35*
|
|
Interest
Payment Agreement, dated November 30, 2006, between Beijing Novel-Tongfang
Digital TV Technology Co., Ltd. and Beijing Super TV Co.,
Ltd.
|
|
|
|
4.36*
|
|
Form of
Property Lease Agreement.
|
|
|
|
4.37*
|
|
Fixed
Assets Transfer Agreement, dated March 28, 2007, between Beijing
Novel-Tongfang Digital TV Technology Co., Ltd. and Beijing Super TV Co.,
Ltd.
|
Number
|
|
Description of Exhibit
|
|
|
|
4.38*
|
|
Form of
Employment Agreement and related Form of Agreement on Confidentiality
and Intellectual Property.
|
|
|
|
4.39*
|
|
Form of
Non-Disclosure, Non-Competition, Commitment and Proprietary Information
Agreement.
|
|
|
|
4.40*
|
|
Form of
Indemnification Agreement for Directors.
|
|
|
|
4.41*
|
|
Amended
and Restated 2005 Stock Incentive Plan of China Digital TV Holding Co.,
Ltd. and form of share option agreement.
|
|
|
|
4.42††*
|
|
Cooperation
Agreement, dated January 5, 2007, between Beijing Novel-Tongfang Digital
TV Technology Co., Ltd. and Jiangsu Qingda Science and Technology
Industries Co., Ltd.
|
|
|
|
4.43*
|
|
Cooperation
Agreement, dated July 18, 2007, between Beijing Novel-Tongfang Digital TV
Technology Co., Ltd. and China Electronics Smart Card Co.,
Ltd.
|
|
|
|
4.44*
|
|
2008
Stock Incentive Plan of China Digital TV Holding Co.,
Ltd.
|
|
|
|
4.45#
|
|
Agreement
for Equity Transfer of Beijing Novel-Super Digital TV Technology Co.,
Ltd., dated December 2007, between China Digital TV Technology Co., Ltd.
and Golden Benefit Technology Co., Ltd.
|
|
|
|
4.46+
|
|
Intellectual
Property Transfer Agreement, dated August 13, 2008, between Novel-Tongfang
Information Engineering Co., Ltd. and Beijing Super TV Co.,
Ltd.
|
|
|
|
4.47+
|
|
Equity
Transfer Agreement, dated October 5, 2008, between Beijing Super TV Co.,
Ltd. and Beijing Novel-Super Digital TV Technology Co.,
Ltd.
|
|
|
|
4.48+
|
|
Framework
Agreement for Purchase of Computer Chips, dated December 12, 2008, between
Beijing Super TV Co., Ltd. and Beijing Novel-Super Digital TV Technology
Co., Ltd.
|
|
|
|
4.49
|
|
Framework
Agreement for Sale of Software Products, dated July 14, 2009, between
Beijing Super TV Co., Ltd. and Beijing Novel-Super Digital TV Technology
Co., Ltd.
|
|
|
|
4.50
|
|
Equity
Transfer Agreement, dated February 26, 2010, between Beijing Novel-Super
Digital TV Technology Co., Ltd. and Beijing Shi Xun Hu Lian Technology
Co., Ltd.
|
|
|
|
8.1
|
|
List
of Subsidiaries of China Digital TV Holding Co., Ltd.
|
|
|
|
11.1*
|
|
Code
of Business Conduct and Ethics of China Digital TV Holding Co.,
Ltd.
|
|
|
|
12.1
|
|
CEO
Certification pursuant to Rule 13a - 14(a).
|
|
|
|
12.2
|
|
CFO
Certification pursuant to Rule 13a - 14(a).
|
|
|
|
13.1
|
|
CEO
Certification pursuant to Rule 13a - 14(b).
|
|
|
|
13.2
|
|
CFO
Certification pursuant to Rule 13a - 14(b).
|
|
|
|
23.1
|
|
Consent
of Deloitte Touche Tohmatsu CPA Ltd.
|
|
|
|
23.2
|
|
Consent
of King & Wood, PRC
Lawyers.
|
††
|
Portions
of the agreement have been omitted pursuant to a confidential treatment
request and have been filed with the SEC separately with a confidential
treatment request.
|
*
|
Previously
filed as an exhibit to the Registration Statement on Form F-1 (File
No. 333-146072) of China Digital TV Holding Co., Ltd. and incorporated
herein by reference thereto.
|
#
|
Previously
filed as an exhibit to the annual report on Form 20-F (File No. 001-33692)
of China Digital TV Holding Co., Ltd. filed with the SEC on June 18, 2008
and incorporated herein by reference
thereto.
|
+
|
Previously
filed as an exhibit to the annual report on Form 20-F (File No. 001-33692)
of China Digital TV Holding Co., Ltd. filed with the SEC on May 20, 2009
and incorporated herein by reference
thereto.
|