Index
to Consolidated Financial Statements
Review
Report of Independent Registered Public Accounting Firm
|
|
|
F-1
|
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Consolidated
Balance Sheets
|
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F-2
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Consolidated
Statements of Operations and Other Comprehensive Income
|
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F-4
|
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|
|
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Consolidated
Statements of Cash Flows
|
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F-5
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Consolidated
Statement of Changes in Shareholders’ Equity
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F-7
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Notes
to the Consolidated Financial Statements
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F-8
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HONG
KONG MANDEFU HOLDING LIMITED
CONSOLIDATED
BALANCE SHEETS
(Amounts
in thousands of US dollars)
|
|
December
31,
2008
|
|
|
|
|
|
|
(Audited)
|
|
|
(Unaudited)
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
29,997
|
|
|
$
|
40,855
|
|
Accounts
receivable, net
|
|
|
6,065
|
|
|
|
11,293
|
|
Prepayment
and other current assets
|
|
|
59
|
|
|
|
26
|
|
|
|
|
|
|
|
|
|
|
Total
current assets
|
|
|
36,121
|
|
|
|
52,174
|
|
|
|
|
|
|
|
|
|
|
Non-current
assets:
|
|
|
|
|
|
|
|
|
Property,
plant and equipment, net
|
|
|
11,417
|
|
|
|
10,864
|
|
Deferred
tax assets
|
|
|
1,578
|
|
|
|
1,910
|
|
|
|
|
|
|
|
|
|
|
Total
non-current assets
|
|
|
12,995
|
|
|
|
12,774
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$
|
49,116
|
|
|
$
|
64,948
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
HONG
KONG MANDEFU HOLDING LIMITED
CONSOLIDATED
BALANCE SHEETS
(
CONTINUED
)
(Amounts
in thousands of US dollars, except for number of shares and per share
data)
|
|
December
31,
2008
|
|
|
|
|
|
|
(Audited)
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
LIABILITIES
AND SHAREHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
1,565
|
|
|
$
|
2,030
|
|
Accrued
expenses and other current liabilities
|
|
|
1,301
|
|
|
|
3,045
|
|
Income
tax payable
|
|
|
3,072
|
|
|
|
4,567
|
|
Amount
due to a related party
|
|
|
798
|
|
|
|
1,508
|
|
Accrued
liabilities for the purchase of property, plant and
equipment
|
|
|
1,072
|
|
|
|
1,455
|
|
|
|
|
|
|
|
|
|
|
Total
current liabilities
|
|
|
7,808
|
|
|
|
12,605
|
|
|
|
|
|
|
|
|
|
|
Non-current
liabilities:
|
|
|
|
|
|
|
|
|
Accrued
severance payments
|
|
|
307
|
|
|
|
393
|
|
Deferred
concession fees
|
|
|
6,005
|
|
|
|
7,145
|
|
|
|
|
|
|
|
|
|
|
Total
non-current liabilities
|
|
|
6,312
|
|
|
|
7,538
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities
|
|
|
14,120
|
|
|
|
20,143
|
|
|
|
|
|
|
|
|
|
|
Commitments
and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Shareholders’
equity:
|
|
|
|
|
|
|
|
|
Ordinary
shares $0.13 par value, 10,000 shares authorized and 10,000 shares issued
and outstanding
|
|
|
1
|
|
|
|
1
|
|
Statutory
reserves
|
|
|
4,314
|
|
|
|
4,314
|
|
Accumulated
other comprehensive income
|
|
|
1,384
|
|
|
|
1,348
|
|
Retained
earnings
|
|
|
29,297
|
|
|
|
39,142
|
|
|
|
|
|
|
|
|
|
|
Total
shareholders’ equity
|
|
|
34,996
|
|
|
|
44,805
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities and shareholders’ equity
|
|
$
|
49,116
|
|
|
$
|
64,948
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
HONG
KONG MANDEFU HOLDING LIMITED
CONSOLIDATED
STATEMENTS OF OPERATIONS AND OTHER COMPREHENSIVE INCOME
(Amounts
in thousands of US dollars, except for number of shares and per share
data)
|
|
For the three months ended
September 30,
|
|
|
For the nine months ended
September 30,
|
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales,
net of business tax and related surcharges:
|
|
$
|
15,783
|
|
|
$
|
26,122
|
|
|
$
|
46,233
|
|
|
$
|
63,983
|
|
Cost
of sales:
|
|
|
(6,459
|
)
|
|
|
(8,630
|
)
|
|
|
(18,359
|
)
|
|
|
(22,992
|
)
|
Gross
profit
|
|
|
9,324
|
|
|
|
17,492
|
|
|
|
27,874
|
|
|
|
40,991
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling
expenses
|
|
|
(313
|
)
|
|
|
(1,371
|
)
|
|
|
(823
|
)
|
|
|
(1,897
|
)
|
General
and administrative expenses
|
|
|
(524
|
)
|
|
|
(588
|
)
|
|
|
(1,452
|
)
|
|
|
(1,941
|
)
|
Total
operating expenses
|
|
|
(837
|
)
|
|
|
(1,959
|
)
|
|
|
(2,275
|
)
|
|
|
(3,838
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income
|
|
|
8,487
|
|
|
|
15,533
|
|
|
|
25,599
|
|
|
|
37,153
|
|
Interest
income
|
|
|
38
|
|
|
|
27
|
|
|
|
77
|
|
|
|
70
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
before income taxes
|
|
|
8,525
|
|
|
|
15,560
|
|
|
|
25,676
|
|
|
|
37,223
|
|
Income
tax expenses
|
|
|
(2,162
|
)
|
|
|
(3,896
|
)
|
|
|
(6,478
|
)
|
|
|
(9,823
|
)
|
Net
income
|
|
$
|
6,363
|
|
|
$
|
11,664
|
|
|
$
|
19,198
|
|
|
$
|
27,400
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustment
|
|
$
|
539
|
|
|
$
|
11
|
|
|
$
|
977
|
|
|
$
|
(36
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
income
|
|
$
|
6,902
|
|
|
$
|
11,675
|
|
|
$
|
20,175
|
|
|
$
|
27,364
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted
|
|
$
|
636.3
|
|
|
$
|
1,166.4
|
|
|
$
|
1,919.8
|
|
|
$
|
2,740.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of ordinary shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted
|
|
|
10,000
|
|
|
|
10,000
|
|
|
|
10,000
|
|
|
|
10,000
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
HONG
KONG MANDEFU HOLDING LIMITED
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(Amounts
in thousands of US dollars)
|
|
For
the nine months ended September 30,
|
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM (TO) OPERATING ACTIVITIES
|
|
|
|
|
|
|
Net
income
|
|
$
|
19,198
|
|
|
$
|
27,400
|
|
Adjustments
to reconcile net income to net cash provided by (used in) operating
activities:
|
|
|
|
|
|
|
|
|
Depreciation
of property, plant and equipment
|
|
|
2,324
|
|
|
|
2,351
|
|
Deferred
tax benefits
|
|
|
(646
|
)
|
|
|
(332
|
)
|
|
|
|
|
|
|
|
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
(Increase)
in accounts receivable
|
|
|
(3,197
|
)
|
|
|
(5,228
|
)
|
Decrease
/(increase) in prepayments and other current assets
|
|
|
(45
|
)
|
|
|
33
|
|
Increase
in accounts payable
|
|
|
797
|
|
|
|
465
|
|
Increase
in accrued expenses and other liabilities
|
|
|
436
|
|
|
|
1,744
|
|
Increase
in deferred concession fees
|
|
|
2,266
|
|
|
|
1,140
|
|
(Decrease)/increase
in accrued severance payment
|
|
|
318
|
|
|
|
86
|
|
Increase
in income tax payable
|
|
|
1,035
|
|
|
|
1,495
|
|
(Decrease)/increase
in amounts due to related parties
|
|
|
(2,396
|
)
|
|
|
710
|
|
|
|
|
|
|
|
|
|
|
Net
cash provided by operating activities
|
|
|
20,090
|
|
|
|
29,864
|
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS (TO) INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
Acquisition
of property, plant and equipment, net of related payables
|
|
|
(4,591
|
)
|
|
|
(1,415
|
)
|
|
|
|
|
|
|
|
|
|
Net
cash used in investing activities
|
|
|
(4,591
|
)
|
|
|
(1,415
|
)
|
The
accompanying notes are an integral part of these consolidated financial
statements.
HONG
KONG MANDEFU HOLDING LIMITED
CONSOLIDATED
STATEMENTS OF CASH FLOWS (CONTINUED)
(Amounts
in thousands of US dollars)
|
|
For
the nine months ended
September
30,
|
|
|
|
2008
|
|
|
2009
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
CASH
FLOWS (TO) FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends
paid
|
|
|
-
|
|
|
|
(17,555
|
)
|
|
|
|
|
|
|
|
|
|
Net
cash (used in) financing activities
|
|
|
-
|
|
|
|
(17,555
|
)
|
|
|
|
|
|
|
|
|
|
Net
increase in cash and cash equivalents
|
|
|
15,499
|
|
|
|
10,894
|
|
|
|
|
|
|
|
|
|
|
Effect
of foreign currency translation adjustment on cash
|
|
|
977
|
|
|
|
(36
|
)
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents at the beginning of the period
|
|
|
6,364
|
|
|
|
29,997
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents at the end of the period
|
|
$
|
22,840
|
|
|
$
|
40,855
|
|
|
|
|
|
|
|
|
|
|
Supplemental
schedule of cash flows information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
Income tax paid
|
|
$
|
5,251
|
|
|
$
|
8,328
|
|
-
Interest paid
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
Supplemental
schedule of non-cash activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
Acquisition of property, plant and equipment included in accrued
liabilities
|
|
$
|
2,215
|
|
|
$
|
1,455
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
HONG
KONG MANDEFU HOLDING LIMITED
CONSOLIDATED
STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY
FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2009 (Unaudited)
(Amounts
in thousands of US dollars, except for number of ordinary shares)
|
|
Number
of
ordinary
shares
|
|
|
|
|
|
|
|
|
Accumulated
other
comprehensive
income
|
|
|
|
|
|
Total
shareholders’
equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
as of December 31, 2008 (audited)
|
|
|
10,000
|
|
|
$
|
1
|
|
|
$
|
4,314
|
|
|
$
|
1,384
|
|
|
$
|
29,297
|
|
|
$
|
34,996
|
|
Foreign
currency translation
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(36
|
)
|
|
|
-
|
|
|
|
(36
|
)
|
Net
income for the period
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
27,400
|
|
|
|
27,400
|
|
Dividend
paid to shareholders
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(17,555
|
)
|
|
|
(17,555
|
)
|
Balance
as of September 30, 2009 (unaudited)
|
|
|
10,000
|
|
|
$
|
1
|
|
|
$
|
4,314
|
|
|
$
|
1,348
|
|
|
$
|
39,142
|
|
|
$
|
44,805
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
HONG
KONG MANDEFU HOLDING LIMITED
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
SEPTEMBER
30, 2009
1.
|
ORGANIZATION
AND BASIS OF PRESENTATION
|
The
accompanying consolidated financial statements include the financial statements
of Hong Kong Mandefu Holding Limited (the “Company”) and its subsidiaries,
including Fujian Across Express Information Technology Co., Ltd. (“Across
Express”) and Fujian Fengzhong Media Co., Ltd. (“Fengzhong Media”). The Company
and its subsidiaries are collectively referred to as the “Group”.
The
Company was incorporated in Hong Kong on April 25, 2001 and does not conduct any
business operation since its incorporation, other than being the holding company
of the Group. The Group is principally engaged in operating mobile television
advertising networks on passenger buses traveling on highways in the People’s
Republic of China (the “PRC”). The Group develops and operates its business
through its subsidiaries. Details of the Company’s subsidiaries are as
follows:
|
|
Date
of
|
|
|
|
Percentage
of
ownership
by
the
Company
|
|
|
|
|
|
|
|
|
|
|
|
Across
Express
|
|
Jun
23, 2003
|
|
PRC
|
|
|
100
|
%
|
Provision
of technical support
|
|
|
|
|
|
|
|
|
|
|
Fengzhong
Media
|
|
May
31, 2002
|
|
PRC
|
|
|
0
|
%
|
Operating
mobile television
advertising network
|
Fengzhong
Media operated all the business of the Group prior to December 1, 2003.
Fengzhong Media was 100% owned by Mr. Zheng Cheng, the controlling shareholder,
and his mother (the “Cheng Family”) since its establishment.
In order
to comply with PRC laws and regulations which prohibit foreign control of
companies in certain industries and in contemplation of an initial public
offering or reverse merger in the United States, effective control over
Fengzhong Media was transferred to the Company through a series of contractual
arrangements without transferring legal ownership in Fengzhong Media (the
“Reorganization”). As a result of these contractual arrangements, the Company
maintained the ability to approve decisions made by Fengzhong Media and was
entitled to substantially all of the economic benefits of Fengzhong Media.
Therefore, the Company consolidates Fengzhong Media in accordance with
Accounting Research Bulletin No. 51 “Consolidated Financial Statements” and its
related interpretations (including but not limited to Statement of Financial
Accounting Standards (“SFAS”) No. 94, “Consolidation of All Majority-Owned
Subsidiaries” (codified in FASB ASC Topic 810), and FASB Interpretation No. 46R
“Consolidation of Variable Interest Entities (codified in FASB ASC Topic 810),
an Interpretation of ARB No. 51” (“FIN 46R”) (codified in FASB ASC Topic 810))
and Regulations S-X 3A-02. Immediately before and after the Reorganization, the
Cheng Family controlled Fengzhong Media; therefore, the Reorganization is
accounted for as a transaction between entities under common control in a manner
similar to pooling of interests. Accordingly, the accompanying
consolidated financial statements have been prepared as if the current corporate
structure had been in existence throughout the periods
presented.
HONG
KONG MANDEFU HOLDING LIMITED
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
SEPTEMBER
30, 2009
1.
|
ORGANIZATION
AND BASIS OF PRESENTATION
(continued)
|
On May 1,
2009, the Company and
China MediaExpress
Holdings, Inc. f/k/a “TM Entertainment & Media, Inc” (“TMI”), a company
listed on the American Stock Exchange, entered into a definitive share exchange
agreement (the “Share Exchange Agreement”) whereby TMI will acquire 100% of the
outstanding equity of the Company, subject to approval of the shareholders of
TMI.
On
September 30, 2009, the Company, certain shareholders of the Company and
TMI entered into an amendment (the “Amendment”) to that certain Share Exchange
Agreement dated as of May 1, 2009,. Pursuant to the terms of the
Amendment, TMI agreed to issue to the shareholders of the Company an additional
1.415 million of its shares of common stock (for a total of
20.915 million shares) and $10 million in three year, no interest
promissory notes, payable upon the earlier of a financing following the proposed
business combination or at such time as the board of directors determines, in
lieu of a $20.0 million cash payment. In connection with the Amendment, the
initial stockholders of TMI also agreed to transfer up to 750,000 of their
shares of common stock to the shareholders of the Company for a purchase price
of $0.01 per share and to sign lock-ups for up to 2 years with respect to
2,100,000 warrants owned by them.
In
addition, the requirement that TMI deliver at least $10 million in working
capital was eliminated, and a provision limiting the amount of TMI’s fees and
expenses and a closing condition requiring TMI to have sufficient cash at
closing to pay such fees were added. In connection with the Amendment, TMI’s
underwriter agreed to waive approximately $3.3 million in deferred
underwriting fees from the TMI’s IPO.
On
October 15, 2009, the business combination between the Company and TMI was
approved at the special meeting of its stockholders. The business combination
was completed on October 16, 2009. As a result of the completion of the
business combination, and after giving effect to all conversions, there are
23,917,413 shares of common stock outstanding, including the 20.915 million
shares issued to the shareholder of the Company in the business
combination.
HONG
KONG MANDEFU HOLDING LIMITED
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
SEPTEMBER
30, 2009
2.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
|
Basis
of presentation and use of estimates
The
accompanying consolidated financial statements have been prepared by the Company
in accordance with accounting principles generally accepted in the United States
of America (“U.S. GAAP”) for interim financial information and with Regulation
S-X as promulgated by the Securities and Exchange Commission
("SEC"). Accordingly, these financial statements do not include all
of the disclosures required by generally accepted accounting principles in the
United States of America for complete financial statements. These
unaudited interim financial statements should be read in conjunction with the
audited financial statements and the notes thereto for the years ended December
31, 2008, 2007 and 2006. In the opinion of management, the unaudited
interim financial statements furnished here include all adjustments, all of
which are of a normal recurring nature, necessary for a fair statement of the
results for the interim periods presented. In the opinion of
management, the interim financial statements include all adjustments that are
necessary in order to make the financial statements not
misleading. The results of the nine months ended September 30, 2009
are not necessarily indicative of the results to be expected for the full year
ending December 31, 2009.
The
preparation of consolidated financial statements in conformity with
U.S. GAAP requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities, disclosures of contingent assets
and liabilities at the balance sheet dates and the reported amounts of revenues
and expenses during the reporting periods. Significant estimates and assumptions
reflected in the Company’s financial statements include, but are not limited to
the useful lives of property, plant and equipment, accrual of concession fees
and realization of deferred tax assets. Actual results could materially differ
from those estimates.
Principles
of Consolidation
The
consolidated financial statements include the financial statements of the
Company and its subsidiaries. All transactions and balances between the Company
and its subsidiaries have been eliminated upon consolidation.
PRC laws
and regulations restrict foreign ownership of companies that provide advertising
services, including out-of-home television advertising services. To comply with
these foreign ownership restrictions, the Company operates its television
advertising services in the PRC through Fengzhong Media, which is an entity
legally owned by the Cheng Family, and holds the license and approvals to
provide television advertising services in the PRC. A series of agreements were
entered into amongst Across Express, Fengzhong Media and Fengzhong Media’s
direct equity holders, providing Across Express the ability to control Fengzhong
Media, including its financial interest as described below.
Pursuant
to the contractual arrangements, Across Express provides certain technical and
consulting services to Fengzhong Media in exchange for fees. As Across Express
has a contractual controlling interest in Fengzhong Media, the Company, through
its wholly-owned equity interest in Across Express, has unilateral discretion in
setting the fees charged to Fengzhong Media.
HONG
KONG MANDEFU HOLDING LIMITED
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
SEPTEMBER
30, 2009
2.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
(continued)
|
Principles
of Consolidation (continued)
In
addition to the exclusive technical support and consulting services agreement,
in which Across Express provides exclusive technical and consulting services to
Fengzhong Media, Across Express has entered into an agreement with Fengzhong
Media and its equity holders with respect to certain shareholder rights that
provide Across Express with the ability to control Fengzhong Media. Pursuant to
this contractual arrangement, the equity holders of Fengzhong Media would not
exercise their equity holders’ right without obtaining the consent from Across
Express and all the beneficial interests and rights of the equity holders of
Fengzhong Media belong to Across Express.
With the
above agreements, the Company demonstrates its ability to control Fengzhong
Media, through the Company’s right to all residual benefits of Fengzhong Media
and the Company’s obligation to fund losses of Fengzhong Media. Thus Fengzhong
Media’s results are consolidated in the consolidated financial
statements. Business taxes relating to service fees charged by Across
Express are recorded as cost of services in the consolidated statements of
operations.
Foreign
currency
The
Group’s functional currency is the Chinese Renminbi (RMB). The Group
maintains its financial statements in the functional currency. Monetary assets
and liabilities denominated in currencies other than the functional currency are
translated into the functional currency at rates of exchange prevailing at the
balance sheet dates. Transactions denominated in currencies other than the
functional currency are translated into the functional currency at the exchange
rates prevailing at the dates of the transaction. Exchange gains or losses
arising from foreign currency transactions are included in the determination of
net income for the respective period.
For
financial reporting purposes, the financial statements of the Group, which are
prepared using the functional currency, are then translated into United States
dollars. Assets and liabilities are translated at the exchange rates at the
balance sheet dates and revenue and expenses are translated at the average
exchange rates and shareholders’ equity is translated at historical exchange
rates. Any translation adjustments resulting are not included in determining net
income but are included in foreign currency translation adjustment in other
comprehensive income, a component of shareholders’ equity.
|
|
For the nine
months ended
September 30,
2008
|
|
|
For the nine
months ended
September 30,
2009
|
|
|
|
|
|
|
|
|
Period
end RMB:US$ exchange rate
|
|
6.82:1
|
|
|
6.83:1
|
|
Average
RMB:US$ exchange rate
|
|
6.98:1
|
|
|
6.83:1
|
|
Cash
and cash equivalents
Cash and
cash equivalents consist of cash on hand and bank deposits, which are
unrestricted as to withdrawal and use.
HONG
KONG MANDEFU HOLDING LIMITED
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
SEPTEMBER
30, 2009
2.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
(continued)
|
Allowance
for doubtful accounts
An
allowance for doubtful accounts is recorded in the period when the loss is
determined to be probable based on an assessment of collectability, historical
bad debts, account balance characteristics such as aging and prevailing economic
condition. The Group has not experienced such loss to date and as
such the allowance is $0 for the three and nine month periods ended September
30, 2008 and 2009.
Property,
Plant and Equipment, net
Property,
plant and equipment are stated at cost and are depreciated using the
straight-line method over the estimated useful lives of the assets, as
follows:
|
|
|
|
|
Buildings
|
20
years
|
Electronic
and office equipment
|
5
years
|
Motor
vehicles
|
10
years
|
Display
network equipment
|
5
years
|
Payments
for purchase of display network equipment are made by
installment. Outstanding unpaid installments for purchase of display
network equipment are recognized as liabilities and recorded as accrued
liabilities for the purchase of property, plant and equipment on the
accompanying consolidated balance sheet. Repair and maintenance costs
are charged to expense as incurred, whereas the cost of renewals and betterment
that extends the useful lives of property, plant and equipment are capitalized
as additions to the related assets. Retirements, sales and disposals of assets
are recorded by removing the cost and accumulated depreciation from the asset
and accumulated depreciation accounts with any resulting gain or loss reflected
in the consolidated statements of operations as general and administrative
expense.
Accrued
severance payments
The Law
of the People’s Republic of China on Employment Contracts (the “Employment
Contract Law”) was adopted by the Standing Committee of the National People’s
Congress of the PRC in 2007 and became effective on January 1, 2008. Pursuant to
the Employment Contract Law, the Group’s PRC subsidiaries are required to make
severance payment to an employee when the term of the employment contract
expires unless the employee voluntarily terminates the contract or voluntarily
rejects the offer to renew the contract in which the terms are no worse off than
the terms of other employment contracts available to the employee. The severance
payment will be equal to one month’s wages times the number of years that the
employee has been working for the employer. For employment periods less than six
months, the severance payment will be equal to one-half of one month’s salary.
If the employment period is more than six months but less than one year, the
severance payment will be equal to one month’s salary. The Group has calculated
the potential severance payments in accordance with the Employment Contract Law
and has recorded an amount for this potential liability as accrued severance
payments on the accompanying consolidated balance sheets.
HONG
KONG MANDEFU HOLDING LIMITED
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
SEPTEMBER
30, 2009
2.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
(continued)
|
Impairment
of Long-Lived Assets
In
accordance with SFAS No. 144 “Accounting for the Impairment or
Disposal of Long-Lived Assets” (codified in FASB ASC Topic 360), the Group
reviews its long-lived assets and finite-lived intangible assets for potential
impairment based on a review of projected undiscounted cash flows associated
with these assets. Long-lived assets and finite-lived intangible assets are
evaluated for impairment whenever events and circumstances exist that indicates
the carrying amount of these assets may not be recoverable. If the sum of the
projected undiscounted cash flows is less than the carrying amount of the
assets, the Group would recognize an impairment loss based on the difference
between the estimated fair value of the assets and the carrying amount. There
was no such impairment charge for the periods presented.
Long-lived
assets to be disposed of are stated at the lower of fair value less cost to sell
or carrying amount.
Management
judgment is required in the area of asset impairment, particularly in assessing
whether: (1) an event has occurred that may affect asset values;
(2) the carrying value of an asset can be supported by the net present
value of future cash flows from the asset using estimated cash flow projections;
and (3) the cash flow is discounted using an appropriate
rate.
Fair
Value of Financial Instruments
The
carrying amounts of cash, accounts receivable, prepayment and other current
assets, accounts payable, accrued expenses and other liabilities, and amounts
due to related parties approximate their fair value due to the short-term
maturity of these instruments.
Revenue
Recognition
Revenue
is recognized when the following four criteria are met in accordance with U.S.
Securities and Exchange Commission (“SEC”) Staff Accounting Bulletin No. 104
(“SAB 104”): (i) persuasive evidence of an arrangement exists,
(ii) the service has been rendered, (iii) the fees are fixed or
determinable, and (iv) collectability is reasonably assured.
The
Group’s revenues are derived from selling advertising time slots on the
Group’s mobile television advertising network placed in contracted buses in the
PRC.
The Group
typically signs standard contracts with its customers, who require the
Group to broadcast the advertisements provided by customers on the
Group’s network in specified areas (or specified provinces) and on
specified passenger buses for a period of time generally ranging from 3 to
12 months. The service price, agreed at the contract date, is final and not
subject to any adjustment. The Group recognizes advertising revenues ratably
over the contracted performance period for which the advertisements are
broadcasted, so long as the collection of such fees is probable. Generally,
the Group’s customers pay the monthly service amount ratably over the contracts
one month after the services are provided. The Group assesses customer’s
creditworthiness before accepting service contracts; historically the Group has
not experienced any credit losses related to sales.
HONG
KONG MANDEFU HOLDING LIMITED
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
SEPTEMBER
30, 2009
2.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
(continued)
|
Revenue
Recognition (continued)
|
Fengzhong
Media is subject to business tax and other surcharges on the revenues
earned for services provided in the PRC. The applicable rate of business
tax is 5%. Fengzhong Media is also subject to culture and education
construction fees and embankment protection fees on the revenues
earned for services provided in the PRC. The applicable rates
of the culture and education construction fee and embankment protection
fees are 3% and 0.09%, respectively. The Group records revenue net of
these taxes and surcharges. Such business tax and related surcharges for
the nine months ended September 30, 2008 and
2009 were approximately $4,356,000 and $5,946,000,
respectively and $1,476,000 and $2,365,000, respectively for the three
months ended September 30, 2008 and
2009.
|
Cost
of Sales
Cost of
sales consists primarily of concession fees charged by the operators of
passenger buses, depreciation of media display equipment and other
operating costs.
The Group
enters into long-term exclusive agreements with the operators of various
inter-city express passenger buses in the PRC generally ranging from 5 to 8
years, providing the Group the concession right to install its mobile digital
televisions and patented automatic control system on inter-city express
passenger buses. Such equipment and systems on the inter-city express passenger
buses serve as the Group's advertising platform. The Group pays a pre-determined
network concession fee each year, which is based upon the number of buses
operated, subject to an increase by 10% to 30% per year, to the passenger bus
operators for the exclusive rights to install the Group's advertising network
equipment on their buses.
Fees
under concession agreements with the passenger bus operators are generally due
every month. The Group accounts for the increase by the provisions of
FAS 13 “Accounting for Leases (as amended)” (codified in FASB ASC Topic
840) as well as FTB 85-3 “Accounting for Operating Leases with
Schedule Rent Increases” (codified in FASB ASC Topic 840). In accordance
with FAS 13 and FTB 85-3, if rent payments are not made on a straight-line
basis, rental expense shall be recognized on a straight line basis. As the
concession fees increase by 10% to 30% per year and the agreements are long term
(5 to 8 years), the Group calculates the minimum concession fees due over
the term of the agreement and amortizes that amount using the straight line
method over the term of the agreement. Since the Company does not know exactly
what the increase will be each year, the minimum 10% increase is used in its
calculation for each yearly increase. If an increase is any higher than the 10%
increase, that amount is expensed as incurred on a monthly basis. The total
concession fees under each agreement are charged to the consolidated statements
of operations on a straight-line basis over the agreement period. Differences
between concession fee payments and concession expenses charged to the
consolidated statements of operations on a straight-line basis over the
agreement periods are recorded as deferred concession fees on the accompanying
consolidated balance sheets.
Advertising
Expense
Advertising
costs are expensed when incurred and are included in “selling expenses” in the
consolidated statements of operations. For the nine months ended September 30,
2008 and 2009, advertising expenses were approximately $2,922
and $249,154, respectively. For the three months ended September 30, 2008
and 2009, advertising expenses were approximately $2,426 and $238,950,
respectively.
HONG
KONG MANDEFU HOLDING LIMITED
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
SEPTEMBER
30, 2009
2.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
(continued)
|
Sales
commissions
|
Beginning
in July 2009, the Company pays sales commissions to its sales
employees. Sales commissions are paid at three percent of
monthly sales revenue earned. For the nine months ended
September 30, 2008 and 2009, commission expenses were
approximately $0 and $855,000, respectively. For the three months
ended September 30, 2008 and 2009, commission expenses were approximately
$0 and $855,000, respectively. The Company paid all commissions
earned during the quarter ended September 30, 2009 in October
2009. The $855,000 earned during the quarter ended September
30, 2009 is recorded in accrued expenses and other current liabilities on
the accompanying consolidated balance sheet as of September 30,
2009.
|
Leases
Leases
are classified at the inception date as either a capital lease or an operating
lease. For the lessee, a lease is a capital lease if any of the following
conditions is met: a) the ownership of the leased property is transferred to the
lessee by the end of the lease term, b) there is a bargaining purchase option,
c) the lease term is at least 75% of the property’s estimated remaining economic
life or d) the present value of the minimum lease payments at the beginning of
the lease term is 90% or more of the fair value of the leased property. A
capital lease is accounted for as if there was an acquisition of an asset and an
incurrence of an obligation at the inception of the lease. All other leases are
accounted for as operating leases wherein rental payments are expensed as
incurred. The Group had no capital leases for any of the periods stated
herein.
Income
Taxes
Income
taxes are accounted for under the asset and liability method prescribed by FASB
ASC 740 Income Taxes (“ASC 740”). Deferred income taxes are recorded
for temporary differences between financial statement carrying amounts and the
tax basis of assets and liabilities. Deferred tax assets and
liabilities reflect the tax rates expected to be in effect for the years in
which the differences are expected to reverse. A valuation allowance
is provided if it is more likely than not that some or the entire deferred tax
asset will not be realized.
The Group
applies the provisions of ASC 740 which prescribes a comprehensive model for the
manner in which a company should recognize, measure, present and disclose in its
financial statements all material uncertain tax positions that the Group has
taken or expects to take on a tax return.
The Group
has no uncertain tax positions as of December 31, 2008, and September 30, 2009.
As of September 30, 2009, the tax jurisdictions to which the Group is
subject are the United States of America, Hong Kong and the PRC. In
the event that the Group concludes that it is subject to interest and/or
penalties arising from uncertain tax positions, the Group will present interest
and penalties as a component of income taxes. No amounts of interest or
penalties were recognized in the Group’s Consolidated Statements of Operations
or Consolidated Balance Sheets on December 31, 2008, or as of and for the nine
months ended September 30, 2009
HONG
KONG MANDEFU HOLDING LIMITED
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
SEPTEMBER
30, 2009
2.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
(continued)
|
Earnings per
share
The Group
calculates earnings per share in accordance with ASC Topic 260 (formerly
SFAS No. 128, “Earnings Per Share”). Basic earnings per ordinary share is
computed by dividing income attributable to holders of ordinary shares by the
weighted-average number of ordinary shares outstanding during the period.
Diluted earnings per ordinary share reflects the potential dilution that could
occur if securities or other contracts to issue ordinary shares were exercised
or converted into ordinary shares. There were no potentially dilutive securities
for the three and nine months ended September 30, 2008 and 2009.
Comprehensive
Income
SFAS No.
130, “Reporting Comprehensive Income”(codified in FASB ASC Topic 220)
establishes standards for reporting and display of comprehensive income, its
components and accumulated balances. Comprehensive income is defined to include
all changes in equity except those resulting from investments by owners and
distributions to owners. Among other disclosures, SFAS No. 130 requires that all
items that are required to be recognized under current accounting standards as
components of comprehensive income be reported in a financial statement that is
displayed with the same prominence as other financial statements.
Recent
Accounting Pronouncements
On July
1, 2009, the Company adopted Accounting Standards Update (“ASU”) No.
2009-01, “Topic 105 - Generally Accepted Accounting Principles - amendments
based on Statement of Financial Accounting Standards No. 168 , “The FASB
Accounting Standards Codification™ and the Hierarchy of Generally Accepted
Accounting Principles” (“ASU No. 2009-01”). ASU No. 2009-01
re-defines authoritative US GAAP for nongovernmental entities to be only
comprised of the FASB Accounting Standards Codification™ (“Codification”) and,
for SEC registrants, guidance issued by the SEC. The Codification is
a reorganization and compilation of all then-existing authoritative US GAAP for
nongovernmental entities, except for guidance issued by the SEC. The
Codification is amended to effect non-SEC changes to authoritative US
GAAP. Adoption of ASU No. 2009-01 only changed the referencing
convention of US GAAP in Notes to the Consolidated Financial
Statements.
In April
2009, the Financial Accounting Standards Board (“FASB”) issued FSP
No. SFAS 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” (“FSP No. SFAS 157-4”). FSP
No. SFAS 157-4, which is codified in FASB ASC Topics 820-10-35-51 and
820-10-50-2, provides additional guidance for estimating fair value and
emphasizes that even if there has been a significant decrease in the volume and
level of activity for the asset or liability and regardless of the valuation
technique(s) used, the objective of a fair value measurement remains the same.
The Group adopted FSP No. SFAS 157-4 beginning April 1, 2009.
This FSP had no material impact on the Group’s financial position, results of
operations or cash flows.
HONG
KONG MANDEFU HOLDING LIMITED
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
SEPTEMBER
30, 2009
2.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
(continued)
|
Recent
Accounting Pronouncements (Continued)
In
April 2009, the FASB issued FSP No. FAS 115-2 and FAS 124-2,
“Recognition and Presentation of Other-Than-Temporary Impairments,” which is
codified in FASB ASC Topic 320-10. This FSP modifies the requirements for
recognizing other-than-temporarily impaired debt securities and changes the
existing impairment model for such securities. The FSP also requires additional
disclosures for both annual and interim periods with respect to both debt and
equity securities. Under the FSP, impairment of debt securities will be
considered other-than-temporary if an entity (1) intends to sell the
security, (2) more likely than not will be required to sell the security
before recovering its cost, or (3) does not expect to recover the
security’s entire amortized cost basis (even if the entity does not intend to
sell). The FSP further indicates that, depending on which of the above
factor(s) causes the impairment to be considered other-than-temporary,
(1) the entire shortfall of the security’s fair value versus its amortized
cost basis or (2) only the credit loss portion would be recognized in
earnings while the remaining shortfall (if any) would be recorded in other
comprehensive income. This FSP requires entities to initially apply the
provisions of the standard to previously other-than-temporarily impaired debt
securities existing as of the date of initial adoption by making a
cumulative-effect adjustment to the opening balance of retained earnings in the
period of adoption. The cumulative-effect adjustment potentially reclassifies
the noncredit portion of a previously other-than-temporarily impaired debt
security held as of the date of initial adoption from retained earnings to
accumulated other comprehensive income. The Group adopted FSP
No. SFAS 115-2 and SFAS 124-2 beginning April 1, 2009. This
FSP had no material impact on the Group’s financial position, results of
operations or cash flows.
In
April 2009, the FASB issued FSP No. SFAS 107-1 and APB 28-1, “Interim
Disclosures about Fair Value of Financial Instruments,” which is codified in
FASB ASC Topic 825-10-50. This FSP essentially expands the disclosure
about fair value of financial instruments that were previously required only
annually to also be required for interim period reporting. In addition, the FSP
requires certain additional disclosures regarding the methods and significant
assumptions used to estimate the fair value of financial instruments. These
additional disclosures are required beginning with the quarter ending
June 30, 2009.
In May
2009, the FASB issued SFAS No. 165, “Subsequent Events,” codified in FASB ASC
Topic 855-10-05, which provides guidance to establish general standards of
accounting for and disclosures of events that occur after the balance sheet date
but before financial statements are issued or are available to be issued. SFAS
No. 165 also requires entities to disclose the date through which subsequent
events were evaluated as well as the rationale for why that date was selected.
SFAS No. 165 is effective for interim and annual periods ending after June 15,
2009, and accordingly, the Group adopted this pronouncement during the second
quarter of 2009. SFAS No. 165 requires that public entities evaluate subsequent
events through the date that the financial statements are issued. The Group has
evaluated subsequent events through November 16 2009.
HONG
KONG MANDEFU HOLDING LIMITED
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
SEPTEMBER
30, 2009
2.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
(continued)
|
Recent
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,” codified as FASB
ASC Topic 860, which requires entities to provide more information
regarding sales of securitized financial assets and similar transactions,
particularly if the entity has continuing exposure to the risks related to
transferred financial assets. SFAS No. 166 eliminates the concept of a
“qualifying special-purpose entity,” changes the requirements for derecognizing
financial assets and requires additional disclosures. SFAS No. 166 is
effective for fiscal years beginning after November 15, 2009. The Group does not
believe the adoption of SFAS No. 166 will have an impact on its financial
condition, results of operations or cash flows.
In June
2009, the FASB issued SFAS No. 167, “Amendments to FASB Interpretation No.
46(R),” codified as FASB ASC Topic 810-10, which modifies how a company
determines when an entity that is insufficiently capitalized or is not
controlled through voting (or similar rights) should be consolidated. SFAS
No. 167 clarifies that the determination of whether a company is required to
consolidate an entity is based on, among other things, an entity’s purpose
and design and a company’s ability to direct the activities of the entity that
most significantly impact the entity’s economic performance. SFAS No. 167
requires an ongoing reassessment of whether a company is the primary beneficiary
of a variable interest entity. SFAS No. 167 also requires additional
disclosures about a company’s involvement in variable interest entities and any
significant changes in risk exposure due to that involvement. SFAS No. 167
is effective for fiscal years beginning after November 15, 2009. The Group does
not believe the adoption of SFAS No. 167 will have an impact on its financial
condition, results of operations or cash flows.
In August
2009, the FASB issued Accounting Standards Update (“ASU”) 2009-05 Fair Value
Measurements and Disclosures (ASC 820): Measuring Liabilities at Fair Value
(“ASU 2009-05”) which provides guidance on measuring the fair value of
liabilities under FASB ASC 820, Fair Value Measurements and Disclosures (“ASC
820”). ASU 2009-05 clarifies that the unadjusted quoted price for an identical
liability, when traded as an asset in an active market is a Level 1 measurement
for the liability and provides guidance on the valuation techniques to estimate
fair value of a liability in the absence of a Level 1 measurement. ASU 2009-05
is effective for the first interim or annual reporting period beginning after
its issuance. The adoption of ASU 2009-05 did not have a material effect on the
Company’s consolidated financial statements.
FASB
Accounting Standards Update 2009-12, Fair Value Measurements and Disclosures
(ASC 820)—Investments in Certain Entities That Calculate Net Asset Value per
Share (or Its Equivalent) amends ASC 820-10, Fair Value Measurements and
Disclosures—Overall, to permit a reporting entity to measure the fair value of
certain investments on the basis of the net asset value per share of the
investment (or its equivalent). This Update also requires new
disclosures, by major category of investments, about the attributes of
investments within the scope of this amendment to the ASC. The
guidance in this Update is effective for interim and annual periods ending after
December 15, 2009. Management is currently evaluating the impact this
Update will have on the Company’s consolidated financial
statements.
HONG
KONG MANDEFU HOLDING LIMITED
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
SEPTEMBER
30, 2009
2.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
(continued)
|
Concentration
of Risks
Concentration of credit
risk
Assets
that potentially subject the Group to significant concentration of credit risk
primarily consist of cash and accounts receivable. As of September 30, 2009,
substantially all of the Group’s cash was deposited in financial institutions
located in the PRC, which management believes are of high credit quality.
Accounts receivable are typically unsecured and are derived from revenues earned
from customers in the PRC. The risk with respect to accounts receivable is
mitigated by credit evaluations the Group performs on its customers and its
ongoing monitoring process of outstanding balances. The Group has not
experienced a loss in such account.
Concentration of
customer
s and
vendors
The Group
currently provides a substantial portion of its service to various customers.
There are no revenues from customers which individually represent greater than
10% of the total revenues for the nine months ended September 30, 2008 or 2009
(see Note 15). Sales to customers are mostly made through
non-exclusive, short-term arrangements. As the customer base is
diversified, the Group considers that the concentration risk of its customers is
not significant to the Group’s financial condition and results of
operations.
The Group
currently conducts a substantial portion of its services with a
limited number of vendors. There are concessions paid to a
vendor which individually represents greater than 10% of the
total concession fees included in cost of sales and an accounts payable
balance to a vendor which individually represents greater than 10% of accounts
payable (see Note 15). The loss of this vendor could have a significant negative
impact on the Group’s business. Concessions paid to vendors are mostly
made through contracts ranging from 5-8 years. Due to the Group’s
dependence on a limited number of vendors, any negative events with respect
to the Group’s vendors may cause material fluctuations or declines in the
Group’s revenue and have a material adverse effect on the Group’s financial
condition and results of operations.
Current vulnerability due to
certain other concentrations
The
Group’s operations may be adversely affected by significant political, economic
and social uncertainties in the PRC. Although the PRC government has been
pursuing economic reform policies for more than 20 years, no assurance can be
given that the PRC government will continue to pursue such policies or that such
policies may not be significantly altered, especially in the event of a change
in leadership, social or political disruption or unforeseen circumstances
affecting the PRC’s political, economic and social conditions. There is also no
guarantee that the PRC government’s pursuit of economic reforms will be
consistent or effective.
HONG
KONG MANDEFU HOLDING LIMITED
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
SEPTEMBER
30, 2009
2.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
(continued)
|
Concentration
of Risks (continued)
Current vulnerability due to
certain other concentrations
(continued)
The Group
transacts all of its business in RMB, which is not freely convertible into
foreign currencies. On January 1, 1994, the PRC government abolished the dual
rate system and introduced a single rate of exchange as quoted daily by the
People’s Bank of China (the “PBOC”). However, the unification of the exchange
rates does not imply that the RMB may be readily convertible into United States
dollars or other foreign currencies. All foreign exchange transactions continue
to take place either through the PBOC or other banks authorized to buy and sell
foreign currencies at the exchange rates quoted by the PBOC. Approval of foreign
currency payments by the PBOC or other institutions requires submitting a
payment application form together with suppliers’ invoices, shipping documents
and signed contracts.
Additionally,
the value of the RMB is subject to changes in central government policies and
international economic and political developments affecting supply and demand in
the PRC foreign exchange trading system market.
Foreign
ownership of advertising businesses is subject to significant restrictions under
current PRC laws and regulations. Currently, the Group conducts its
operations in the PRC through a series of contractual arrangements entered into
among Across Express, Fengzhong Media and its shareholders.
The
relevant regulatory authorities may find the current ownership structure,
contractual arrangements and businesses to be in violation of any existing or
future PRC laws or regulations. If so, the relevant regulatory
authorities would have broad discretion in dealing with such
violations.
HONG
KONG MANDEFU HOLDING LIMITED
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
SEPTEMBER
30, 2009
|
|
(Amounts
in thousands of US dollars)
|
|
|
|
December
31,
|
|
September
30,
|
|
|
|
2008
|
|
|
|
|
Balance
at end of period
|
|
$
|
6,065
|
|
|
$
|
11,293
|
|
|
All
the accounts receivable are non-interest
bearing.
|
4.
|
PROPERTY,
PLANT AND EQUIPMENT, NET
|
Property,
plant and equipment consist of the following:
|
|
(Amounts
in thousands of US dollars)
|
|
|
|
December
31,
|
|
|
September
30,
|
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
Buildings
|
|
$
|
229
|
|
|
$
|
229
|
|
Electronic
and office equipment
|
|
|
94
|
|
|
|
94
|
|
Motor
vehicles
|
|
|
190
|
|
|
|
190
|
|
Display
network equipment
|
|
|
16,402
|
|
|
|
18,200
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
16,915
|
|
|
|
18,713
|
|
|
|
|
|
|
|
|
|
|
Less:
Accumulated depreciation
|
|
|
(5,498
|
)
|
|
|
(7,849
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
11,417
|
|
|
$
|
10,864
|
|
Depreciation
expenses were approximately $2,324,000 and $2,351,000 for the nine months ended
September 30, 2008 and 2009, respectively. Depreciation expenses were
approximately $762,000 and $808,000 for the three months ended September 30,
2008 and 2009, respectively.
|
|
(Amounts in thousands of US
dollars)
|
|
|
|
December
31,
|
|
|
September
30,
|
|
|
|
2008
|
|
|
2009
|
|
|
|
|
|
|
|
|
Concession
fee payable
|
|
$
|
1,565
|
|
|
$
|
2,030
|
|
All the
accounts payables are non-interest bearing.
HONG
KONG MANDEFU HOLDING LIMITED
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
SEPTEMBER
30, 2009
6.
|
ACCRUED
EXPENSES AND OTHER CURRENT
LIABILITIES
|
The
components of accrued expenses and other current liabilities are as
follows:
|
|
(Amounts in thousands of US dollars)
|
|
|
|
December 31,
|
|
|
September 30,
|
|
|
|
2008
|
|
|
2009
|
|
|
|
|
|
|
|
|
Salary
and welfare payable
|
|
|
101
|
|
|
|
680
|
|
Business
tax payable
|
|
|
848
|
|
|
|
1,352
|
|
Culture
and education construction fee
|
|
|
185
|
|
|
|
298
|
|
Other
surcharges
|
|
|
96
|
|
|
|
342
|
|
Other
payable
|
|
|
71
|
|
|
|
373
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,301
|
|
|
$
|
3,045
|
|
7.
|
ACCRUED
LIABILITY FOR THE PURCHASE OF PROPERTY, PLANT AND
EQUIPMENT
|
|
|
(Amounts in thousands of US dollars)
|
|
|
|
December 31,
2008
|
|
|
September 30,
2009
|
|
|
|
|
|
|
|
|
Balance
at the end of
|
|
$
|
1,072
|
|
|
$
|
1,455
|
|
|
The
amounts represent the remaining balance of consideration payable for
purchasing of display network equipment. The amounts are
non-interest bearing and payable within one
year.
|
Authorized,
issued and outstanding 10,000 shares at par value of $0.13.
|
(Amounts in thousands of US dollars)
|
|
|
December 31,
|
|
|
September 30,
|
|
|
2008
|
|
|
2009
|
|
|
|
|
|
|
|
|
$
|
1
|
|
|
$
|
1
|
|
HONG
KONG MANDEFU HOLDING LIMITED
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
SEPTEMBER
30, 2009
9.
|
RESTRICTED
NET ASSETS (RESERVES)
|
The
Company’s ability to pay dividends is primarily dependent on the Company
receiving distributions of funds from its subsidiaries. Relevant PRC statutory
laws and regulations permit payments of dividends by the Company’s PRC
subsidiaries only out of their retained earnings, if any, as determined in
accordance with PRC accounting standards and regulations. The results of
operations reflected in the financial statements prepared in accordance with
U.S. GAAP differ from those reflected in the statutory financial statements
of the Company’s subsidiaries.
In
accordance with the Regulations on Enterprises with Foreign Investment of China
and their articles of association, a foreign invested enterprise established in
the PRC is required to provide certain statutory reserves, namely a general
reserve fund, the enterprise expansion fund and a staff welfare and bonus fund
which are appropriated from net profit as reported in the enterprise’s PRC
statutory accounts. A wholly-owned foreign invested enterprise is required to
allocate at least 10% of its annual after-tax profit to the general reserve
until such reserve has reached 50% of its respective registered capital based on
the enterprise’s PRC statutory accounts. Appropriations to the enterprise
expansion fund and staff welfare and bonus fund are at the discretion of the
board of directors for all foreign invested enterprises. The aforementioned
reserves can only be used for specific purposes and are not distributable as
cash dividends. Across Express was established as a wholly-owned foreign
invested enterprise and therefore is subject to the above mandated restrictions
on distributable profits.
Additionally,
in accordance with the Company Law of the PRC, a domestic enterprise is required
to provide statutory common reserve at least 10% of its annual after-tax profit
until such reserve has reached 50% of its respective registered capital based on
the enterprise’s PRC statutory accounts. A domestic enterprise is also required
to provide for discretionary surplus reserve, at the discretion of the board of
directors, from the profits determined in accordance with the enterprise’s PRC
statutory accounts. The aforementioned reserves can only be used for specific
purposes and are not distributable as cash dividends. Fengzhong Media was
established as a domestic invested enterprise and therefore is subject to the
above mandated restrictions on distributable profits.
As a
result of these PRC laws and regulations that require annual appropriations of
10% of after-tax income to be set aside prior to payment of dividends as general
reserve fund, the Company’s PRC subsidiaries are restricted in their ability to
transfer a portion of their net assets to the Company.
Amounts
restricted include paid-in capital ($3,709,000) and statutory reserve funds
($4,314,000) of the Company’s PRC subsidiaries, as determined pursuant to PRC
generally accepted accounting principles, totaling approximately $8,023,000 as
of December 31, 2008. No appropriation of the reserves were made for
the nine months period ended September 30, 2009 as the reserves will be
allocated on an annual basis.
HONG
KONG MANDEFU HOLDING LIMITED
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
SEPTEMBER
30, 2009
Hong
Kong
The
Company was incorporated in Hong Kong and does not conduct any substantive
operations since its incorporation other than being the holding company of the
Group.
No
provision for Hong Kong profits tax has been made in the financial statements as
the Company has no assessable profits for the three and nine months ended
September 30, 2008 and 2009, respectively. In addition, upon payments
of dividends by the Company to its shareholders, no Hong Kong withholding tax
will be imposed.
China
PRC
enterprise income tax, “EIT”, is generally assessed at the rate of 25% for the
three and nine months ended September 30, 2008 and 2009 of taxable
income. Across Express and Fengzhong Media were subjected to
statutory EIT rates of 25% in accordance with the relevant PRC Enterprise Income
Tax Laws started from 2008.
On
February 22, 2008, the Ministry of Finance (“MOF”) and the State Administration
of Taxation (“SAT”) jointly issued Cai Shui 2008 Circular 1 (“Circular 1”).
According to Article 4 of Circular 1, distributions of accumulated profits
earned by a foreign investment enterprise prior to January 1, 2008 to foreign
investor(s) in 2008 or after will be exempt from withholding tax (“WHT”) while
distribution of the profit earned by an FIE after January 1, 2008 to its foreign
investor(s) shall be subject to WHT. As a result, the dividends declared
out of the retained earnings as of December 31, 2007 should be exempt from
WHT.
For the
nine months ended September 30, 2009, 2008 final dividends of US$17,555,000
(RMB120,000,000) were declared and paid from Across Express to the
Company. Out of these total dividends, US$6,931,000 (RMB47,379,000)
was attributable to the 2008 profits of Across Express while the remaining was
attributable to the accumulated profits prior to December, 2007. The
applicable tax rate of the WHT on the dividends attributable to the profits
earned after January 1, 2008 is 5%. The Company paid $347,000 for
this tax for the nine months ended September 30, 2009.
There is
no dividend policy for the Group and there is no plan to declare dividends in
the future as of now. As a result, no deferred tax provision was provided to the
financial statements for the remaining non-distributable profits earned in 2008
by Across Express. Should this policy be changed in future, deferred tax
liabilities would be provided on the profits that are planned to distribute from
Across Media to the Company.
HONG
KONG MANDEFU HOLDING LIMITED
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
SEPTEMBER
30, 2009
10.
|
TAXATION
(continued
)
|
Income before
income taxes consists of:
|
|
(Amounts in thousands of US
dollars)
|
|
|
|
For
the three months ended September 30,
|
|
|
For
the nine months ended September 30,
|
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
PRC
|
|
$
|
8,525
|
|
|
$
|
15,560
|
|
|
$
|
25,676
|
|
|
$
|
37,223
|
|
The
current and deferred components of the income tax expense (benefit) appearing in
the consolidated statements of operations are as follows:
|
|
(Amounts
in thousands of US dollars)
|
|
|
|
For
the three months ended
September
30,
|
|
|
For
the nine months ended September
30,
|
|
|
|
2008
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
2,376
|
|
|
|
4,051
|
|
|
|
7,057
|
|
|
|
10,156
|
|
Deferred
|
|
|
(214
|
)
|
|
|
(155
|
)
|
|
|
(579
|
)
|
|
|
(333
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,162
|
|
|
$
|
3,896
|
|
|
$
|
6,478
|
|
|
$
|
9,823
|
|
The
reconciliation of tax computed by applying the statutory income tax rate
applicable to PRC operations to income tax benefit is:
|
|
(Amounts
in thousands of US dollars)
|
|
|
|
For
the three months ended
September
30,
|
|
|
For
the nine months ended
September
30,
|
|
|
|
2008
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
tax computed at applicable tax rates
|
|
$
|
2,131
|
|
|
$
|
3,594
|
|
|
$
|
6,419
|
|
|
$
|
9,357
|
|
Non-deductible
expenses
|
|
|
31
|
|
|
|
302
|
|
|
|
59
|
|
|
|
466
|
|
Non-taxable
income
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,162
|
|
|
$
|
3,896
|
|
|
$
|
6,478
|
|
|
$
|
9,823
|
|
HONG
KONG MANDEFU HOLDING LIMITED
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
SEPTEMBER
30, 2009
Deferred
tax assets reflect the tax effects of temporary differences between the
carrying amounts of assets and liabilities for financial reporting purposes and
the amounts used for income tax purposes. The components of deferred tax
assets are as follows:
|
|
(Amounts in thousands of US dollars)
|
|
|
|
December 31,
2008
|
|
|
2009
|
|
|
|
|
|
|
|
|
Deferred
tax assets, non-current portion
|
|
|
|
|
|
|
Deferred
concession fee
|
|
$
|
1,501
|
|
|
$
|
1,590
|
|
Accrued
severance payment
|
|
|
77
|
|
|
|
320
|
|
|
|
$
|
1,578
|
|
|
$
|
1,910
|
|
11.
|
RELATED
PARTY TRANSACTIONS
|
Name of related
Parties
|
|
Relationship with the Group
|
|
|
|
Mr.
Zheng Cheng
|
|
Director
of the Company and ultimate controlling shareholder of the
Company
|
Ms.
Chunlan Bian
|
|
Director
of the
Company
|
|
b)
|
The
Group had the following related party balance as of December 31, 2008 and
September 30, 2009:
|
|
|
Amounts in thousands of US dollars
|
|
|
|
December 31,
2008
|
|
|
2009
|
|
Amount
due to a related party
|
|
|
|
|
|
|
Mr.
Zheng Cheng
|
|
$
|
798
|
|
|
$
|
1,508
|
|
All
balances with related parties as of September 30, 2009 were unsecured,
non-interest bearing and repayable on demand.
HONG
KONG MANDEFU HOLDING LIMITED
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
SEPTEMBER
30, 2009
12.
|
EMPLOYEE
DEFINED CONTRIBUTION PLAN
|
Full time
employees of the Group in the PRC participate in a government mandated defined
contribution plan, pursuant to which certain pension benefits, medical care,
employee housing fund and other welfare benefits are provided to employees. PRC
labor regulations require that the PRC subsidiaries make contributions to the
government for these benefits based on certain percentages of the employees’
salaries. The Group has no legal obligation for the benefits beyond the
contributions made. The total amounts for such employee benefits, which were
expensed as incurred, were approximately $264,000 and $318,000 for the nine
months ended September 30, 2008 and 2009, respectively and $91,000 and $110,000
for the three months ended September 31, 2008 and 2009,
respectively.
13.
|
COMMITMENTS
AND CONTINGENCIES
|
Future
minimum payments under non-cancelable operating leases with initial terms of
one-year or more consist of the following at September 30, 2009:
|
|
(Amounts
in thousands of US
dollars)
|
|
|
|
|
|
2009
|
|
$
|
44
|
|
2010
|
|
|
146
|
|
2011
|
|
|
105
|
|
2012
|
|
|
103
|
|
2013
|
|
|
43
|
|
|
|
|
|
|
|
|
$
|
441
|
|
Payments
under operating leases are expensed on the straight-line basis over the periods
of their respective leases. The terms of the leases do not contain rent
escalation or contingent rents. For the nine months ended September 30, 2008 and
2009, total rental expenses for all operating leases amounted to approximately
$75,000 and $149,000 respectively. For the three months ended September 30, 2008
and 2009, total rental expenses for all operating leases amounted to
approximately $34,000 and $50,000 respectively
Purchase
of property, plant and equipment
As of
September 30, 2009, the Group did not have any commitments related to the
purchase of display network equipment.
The Group
has entered into concession right agreements with passenger bus operators. The
contract terms of such concession rights are usually five to eight years. The
concession rights expire between 2011 and 2014 and are renewable upon
negotiation.
HONG
KONG MANDEFU HOLDING LIMITED
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
SEPTEMBER
30, 2009
13.
|
COMMITMENTS
AND CONTINGENCIES (continued)
|
|
(c)
|
Concession
fees (continued)
|
Future
minimum concession fee payments under non-cancelable concession right agreements
at September 30, 2009 were as follows:
|
|
(Amounts in
thousands of US
dollars)
|
|
|
|
|
|
2009
|
|
$
|
22,752
|
|
2010
|
|
|
26,791
|
|
2011
|
|
|
29,471
|
|
2012
|
|
|
17,834
|
|
2013
|
|
|
8,447
|
|
2014
|
|
|
3,883
|
|
|
|
$
|
109,178
|
|
The Group
operates and manages its business as a single reportable segment that includes
primarily selling advertising time slots on its advertising network of
television screens placed in passenger buses traveling on the highways
throughout the PRC.
Geographic
information
The Group
operates in the PRC and all of the Group’s identifiable assets are located in
the PRC.
Although
the Group operates in multiple cities in China which include Fujian, Beijing
Shanghai, Guangzhou, Tianjin and Chengdu, the chief operating decision maker
evaluates the Group’s performance as a single reportable segments and thus the
Group believes it operates in one segment as it provide services to customers
irrespective of their locations.
15.
|
MAJOR CUSTOMERS AND
VENDORS
|
(Amounts
are in thousands of US dollars)
There
were no customers accounting for 10% or more of total net sales for the nine
months ended September 30, 2008 and 2009.
HONG
KONG MANDEFU HOLDING LIMITED
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
SEPTEMBER
30, 2009
15.
|
MAJOR
CUSTOMERS AND VENDORS (continued)
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Details
of vendors accounting for 10% or more of concession fees included in costs of
sales in any of the periods presented are as follows:
|
|
For
the three months ended
September
30,
|
|
|
For
the nine months ended
September
30,
|
|
|
|
2008
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company
1
|
|
$
|
750
|
|
|
$
|
831
|
|
|
$
|
2,197
|
|
|
$
|
2,492
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
750
|
|
|
$
|
831
|
|
|
$
|
2,197
|
|
|
$
|
2,492
|
|
Details
of vendors accounting for 10% or more of accounts payable in the
period presented are as follows:
|
|
As of December 31,
|
|
|
As of September 30,
|
|
|
|
2008
|
|
|
2009
|
|
|
|
|
|
|
|
|
Company
1
|
|
$
|
250
|
|
|
$
|
277
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
250
|
|
|
$
|
277
|
|
Basic and
diluted earnings per share for each of the periods presented are calculated as
follows (Amounts in thousands except for the number of shares and per share
data):
|
|
For the three months
ended
September 30,
|
|
|
For the nine months
ended
September 30,
|
|
|
|
2008
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
US$
|
|
|
US$
|
|
|
US$
|
|
|
US$
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
6,363
|
|
|
$
|
11,664
|
|
|
$
|
19,198
|
|
|
$
|
27,400
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of ordinary shares outstanding used in calculating basic
and diluted income per share
|
|
|
10,000
|
|
|
|
10,000
|
|
|
|
10,000
|
|
|
|
10,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted earnings per share
|
|
$
|
636.3
|
|
|
$
|
1,166.4
|
|
|
$
|
1,919.8
|
|
|
$
|
2,740.0
|
|
HONG
KONG MANDEFU HOLDING LIMITED
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
SEPTEMBER
30, 2009
The
Company has evaluated events and transactions that occurred between
October 1, 2009 and November 16 2009, which is the date the financial
statements were issued for possible disclosure or recognition in the financial
statements. The Company has determined that there were no such events or
transactions that warrant disclosure or recognition in the financial statements
except as disclosed.
As
disclosed in Note 1 to the financial statements, the Company entered into a
definitive share exchange agreement with TMI for the
merger. TMI issued 20.915 million new common shares of TMI and
$10 million in promissory notes in exchange for 100% of the outstanding equity
of the Company on October 15, 2009. The Company’s shareholders may
earn up to an additional 15 million shares of TMI subject to the achievement of
some net income targets for 2009 – 2011. The agreement closed on
October 16, 2009 at which time the Company became a wholly owned subsidiary of
TMI, which is listed on the American Stock Exchange. The transaction
will be treated as a reverse merger and a recapitalization of the Company for
accounting purposes. The historical financial statements will become
those of the Company.