Form 20-F
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 20-F
(Mark
One)
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REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR 12(g) OF THE SECURITIES EXCHANGE
ACT OF 1934 |
or
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þ |
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2009.
or
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o |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
or
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o |
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SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 |
Date of event requiring this shell company report
Commission file number: 001-34454
Shanda Games Limited
(Exact name of Registrant as specified in its charter)
N/A
(Translation of Registrants name into English)
Cayman Islands
(Jurisdiction of incorporation or organization)
No. 1 Office Building
No. 690 Bibo Road
Pudong New Area
Shanghai, China 201203
The Peoples Republic of China
(Address of principal executive offices)
Qunzhao
Tan, Chief Executive Officer
No. 1 Office Building
No. 690 Bibo Road
Pudong New Area
Shanghai, China 201203
The Peoples Republic of China
Telephone: +(86 21) 5050-4740
Facsimile: +(86 21) 5080-5132
(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:
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Title of Each Class
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Name of Each Exchange on Which Registered |
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Class A ordinary shares, par value US$0.01 per share
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The NASDAQ Stock Market* |
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(The NASDAQ Global Select Market) |
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* |
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Not for trading, but only in connection with the listing on the
NASDAQ Global Select Market of American Depositary Shares representing
such Class A Ordinary Shares |
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 issuers classes of capital or common
stock as of the close of the period covered by the annual report: 167,000,000 Class A ordinary
shares, par value US$0.01 per share and 409,087,000 Class B ordinary shares, par value US$0.01 per
share
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule
405 of the Securities Act. o Yes þ No
If this report is an annual or transaction 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. o Yes þ No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. þ Yes o 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).
o Yes o No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, or a non-accelerated filer.
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o Large accelerated filer
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o Accelerated filer
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þ Non-accelerated filer |
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing.
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þ U.S. GAAP
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o
International Financial Reporting Standards as issued by the International Accounting Standard Boards
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o Other |
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. o Item 17 o Item 18
If this is an annual report, indicate by check mark whether the registrant is a shell
company (as defined in Rule 12b-2 of the Exchange Act).
o Yes þ No
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This annual report contains forward-looking statements that are based on our current
expectations, assumptions, estimates and projections about us and 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 may, will,
expect, anticipate, estimate, plan, believe, is/are likely to or other similar
expressions. The forward-looking statements included in this annual report relate to, among others:
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our goals and strategies; |
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our future business development, financial condition and results of operations; |
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our projected revenues, earnings, profits and other estimated financial information; |
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expected changes in our margins and certain costs or expenditures; |
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expected continued acceptance of our new revenue model; |
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our plans to expand and diversify the sources of our revenues; |
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expected changes in the respective shares of our revenues from particular sources; |
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our plans for staffing, research and development and regional focus; |
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the projected economic lifespan of our current games, and our plans to launch games and
to develop new games in-house or license additional games from third parties, including the
timing of any such launches, development or licenses; |
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our plans for strategic partnerships with other businesses; |
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our acquisition strategy, and our ability to successfully integrate past or future
acquisitions with our existing operations; |
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competition in the PRC online game industry; |
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the outcome of ongoing, or any future, litigation or arbitration; |
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the outcome of our annual PFIC evaluation; |
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the expected growth in the number of Internet and broadband users in China, growth of
personal computer penetration and developments in the ways most people in China access the
Internet; |
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changes in PRC governmental preferential tax treatment and financial incentives we
currently qualify for and expect to qualify for; and |
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PRC governmental policies relating to media and the Internet and Internet content
providers and to the provision of advertising over the Internet. |
These forward-looking statements involve various risks and uncertainties. Although we believe
that our expectations expressed in these forward-looking statements are reasonable, we cannot
assure you that our expectations will turn out to be correct. Our actual results could be
materially different from and worse than our expectations. Important risks and factors that could
cause our actual results to be materially different from our expectations are generally set forth
in the Risk Factors section of Item 3 and elsewhere in this annual report. 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 any
forward-looking statements to reflect events or circumstances after the date on which the
statements are made or to reflect the occurrence of unanticipated events.
CERTAIN CONVENTIONS
Except where the context otherwise requires and for purposes of this annual report only:
our PRC companies refers to our PRC subsidiaries and our PRC operating companies;
our PRC operating companies refers to the Shulong entities, Chengdu Aurora, Chengdu Simo,
Tianjin Youji and Chengdu Youji;
3
our PRC subsidiaries refers to Shengqu Information Technology (Shanghai) Co., Ltd., or
Shengqu, Shengji Information Technology (Shanghai) Co., Ltd., or Shengji, and Lansha Information
Technology (Shanghai) Co., Ltd., or Lansha;
reorganization refers to Shanda Interactives reorganization effective July 1, 2008,
pursuant to which Shanda Interactive transferred substantially all of its assets and liabilities
related to the online game business to us, as more fully described in Item 7, Major Shareholders
and Related Party Transactions Related Party Transactions Transactions and Agreements with
Shanda Interactive;
Shanda Interactive refers to Shanda Interactive Entertainment Limited, a Cayman Islands
company and our indirect controlling shareholder, whose ADSs are listed on the NASDAQ Global Select
Market under the symbol SNDA, and, unless the context
requires otherwise, its subsidiaries and variable interest entities,
or
VIEs, but excludes Shanda Games and its subsidiaries and VIEs;
Shanda Group refers to Shanda Interactive and its subsidiaries and VIEs and, unless the
context requires otherwise, includes Shanda Games and its subsidiaries and VIEs;
Shanda Online refers to Shanda Investment Holdings Limited, a Cayman Islands company
wholly-owned by Shanda Interactive, and, unless the context requires otherwise, its subsidiaries,
including Shanda Computer (Shanghai) Co., Ltd., or Shanda Computer, and, in the context of
describing its operations, also includes its VIEs, including Shanghai Shanda Networking Co., Ltd.,
or Shanda Networking, Nanjing Shanda Networking Co., Ltd., or Nanjing Shanda, and Shanghai
Shengfutong Electronic Business Co., Ltd., or Shengfutong;
Shulong entities refers to Shanghai Shulong Technology Development Co., Ltd., or Shanghai
Shulong, and its wholly-owned subsidiaries, Shanghai Shulong Computer Technology Co., Ltd., or
Shulong Computer, and Nanjing Shulong Computer Technology Co., Ltd., or Nanjing Shulong; and
we, us, our company and our refer to Shanda Games, and, unless the context requires
otherwise, its wholly-owned subsidiaries, including Shanda Games Holdings (HK) Limited, or Shanda Games (HK),
Shanda Games International (Pte) Ltd., a Singapore company, Shanda
Games Korean Investment Limited, a British Virgin Islands company,
and our PRC subsidiaries and its majority-owned subsidiary, Actoz Soft Co., Ltd., a Korean company
publicly listed on the Korea Exchange, or Actoz, and in the context of describing our operations,
also include the Shulong entities, and Chengdu Aurora Technology Development Co., Ltd., or Chengdu
Aurora, Chengdu Simo Technology Co., Ltd., or Chengdu Simo, Tianjin
Youji Technology Co., Ltd., or
Tianjin Youji, and Chengdu Youji Technology Co., Ltd., or Chengdu Youji, each of which is a PRC
company wholly-owned by Shanghai Shulong; when required by the context, references to we, us,
our company and our include the online game business Shanda Interactive operated through its
various subsidiaries and VIEs from January 1, 2007 to June 30, 2008.
Unless otherwise noted, this annual report contains translations of Renminbi, or RMB, amounts
into U.S. dollars at a rate of RMB6.8259 to US$1.00, the noon buying rate in The City of New York
for cable transfers of Renminbi as certified for customs purposes by the Federal Reserve Bank of
New York on December 31, 2009, solely for the convenience of the reader. We make no representation
that any RMB or U.S. dollar amounts could have been, or could be, converted into U.S. dollars or
RMB, as the case may be, at any particular rate, or at all.
References in this annual report to the operations of our business, financial condition and
results of operations with respect to the period from January 1, 2007 to June 30, 2008 are to
Shanda Interactives online game business operations as conducted by Shanda Interactives
subsidiaries and VIEs. References in this annual report to the operations of our business,
financial condition and results of operations with respect to the period from July 1, 2008 to
December 31, 2009 are to our operations as a standalone company subsequent to the reorganization.
Since July 1, 2007, the results of operations of Actoz have been consolidated into our results of
operations.
4
PART I
Item 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS
Not Applicable
Item 2. OFFER STATISTICS AND EXPECTED TIMETABLE
Not Applicable
Item 3. KEY INFORMATION
A. SELECTED FINANCIAL DATA
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For the Year Ended December 31, |
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2007 |
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2008 |
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2009 |
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(in millions) |
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RMB |
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RMB |
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RMB |
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US$(1) |
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Consolidated Statements of
Operation and
Comprehensive Income Data: |
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Net revenues: |
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MMORPG revenues |
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2,016.1 |
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2,987.8 |
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4,476.7 |
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655.8 |
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Advanced casual game revenues |
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280.4 |
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358.9 |
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310.4 |
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45.5 |
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Other revenues |
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26.3 |
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30.1 |
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19.6 |
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2.9 |
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Total net revenues |
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2,322.8 |
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3,376.8 |
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4,806.7 |
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704.2 |
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Cost of revenues: |
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Third parties |
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(492.0 |
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(768.3 |
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(1,049.3 |
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(153.8 |
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Related parties |
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(769.1 |
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(721.1 |
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(884.2 |
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(129.5 |
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Total cost of revenues |
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(1,261.1 |
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(1,489.4 |
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(1,933.5 |
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(283.3 |
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Gross profit |
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1,061.7 |
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1,887.4 |
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2,873.2 |
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420.9 |
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Operating expenses: |
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Product development |
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(136.4 |
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(238.8 |
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(339.8 |
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(49.8 |
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Sales and marketing |
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Third parties |
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(125.4 |
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(124.4 |
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(206.7 |
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(30.3 |
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Related parties |
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(80.1 |
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(226.2 |
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(33.1 |
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General and administrative |
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(175.2 |
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(287.2 |
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(366.1 |
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(53.6 |
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Total operating expenses |
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(437.0 |
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(730.5 |
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(1,138.8 |
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(166.8 |
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Income from operations |
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624.7 |
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1,156.9 |
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1,734.4 |
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254.1 |
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Interest income |
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26.3 |
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33.4 |
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26.3 |
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3.9 |
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Investment income |
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0.2 |
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* |
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Other income, net |
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28.7 |
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6.1 |
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169.4 |
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24.8 |
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Income before income tax
expenses, equity in earnings
(loss) of affiliated companies |
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679.7 |
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1,196.4 |
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1,930.3 |
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282.8 |
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Income tax expenses |
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(67.1 |
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(249.9 |
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(428.7 |
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(62.8 |
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Equity in earnings (loss) of
affiliated companies |
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(13.6 |
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0.9 |
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(30.0 |
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(4.4 |
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Net income |
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599.0 |
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947.4 |
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1,471.6 |
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215.6 |
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Less: Net income attributable
to non-controlling interests |
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(7.1 |
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(11.9 |
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(18.6 |
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(2.7 |
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Net income attributable to
Shanda Games Limited |
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591.9 |
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935.5 |
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1,453.0 |
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212.9 |
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For the Year Ended December 31, |
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2007 |
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2008 |
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2009 |
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RMB |
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RMB |
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RMB |
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US$(1) |
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Earnings per share data: |
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Earnings per share, basic |
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1.08 |
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1.70 |
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2.61 |
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0.38 |
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Earnings per share, diluted |
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1.08 |
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1.70 |
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2.60 |
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0.38 |
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Earnings per ADS, basic(2) |
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2.16 |
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3.40 |
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5.22 |
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0.76 |
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Earnings per ADS, diluted(2) |
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2.16 |
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3.40 |
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5.20 |
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0.76 |
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5
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As of December 31, |
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2007 |
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2008 |
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2009 |
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(in millions) |
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RMB |
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RMB |
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RMB |
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US$(1) |
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Consolidated Balance Sheets Data: |
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Total current assets |
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904.4 |
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1,582.7 |
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3,297.3 |
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483.1 |
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Total assets |
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1,857.3 |
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2,444.1 |
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4,327.4 |
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634.0 |
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Total current liabilities |
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606.9 |
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1,178.0 |
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1,261.0 |
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184.7 |
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Total liabilities |
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640.9 |
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1,208.2 |
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1,301.9 |
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190.7 |
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Total Shanda Games Limited
shareholders equity |
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1,001.2 |
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1,097.0 |
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2,819.6 |
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413.1 |
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Non-controlling interests |
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215.2 |
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138.9 |
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205.9 |
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30.2 |
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Total equity |
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1,216.4 |
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1,235.9 |
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3,025.5 |
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443.3 |
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Total liabilities and equity |
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1,857.3 |
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2,444.1 |
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4,327.4 |
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634.0 |
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(1) |
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Translations of RMB into U.S. dollars were made at a rate of RMB 6.8259 to US$1.00,
the noon buying rate in New York City for cable transfers as certified for customs purposes by
the Federal Reverse Bank of New York on December 31, 2009. |
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(2) |
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Each ADS represents two
Class A ordinary shares. |
EXCHANGE RATE INFORMATION
Solely for the convenience of the reader, unless otherwise noted, all translations from RMB to
U.S. dollars and from U.S. dollars to RMB in this annual report were made at a rate of RMB6.8259 to
US$1.00, 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. We make no
representation that any RMB or U.S. dollar amounts could have been, or could be, converted into
U.S. dollars or RMB, as the case may be, at any particular rate, 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.
The following table sets forth information concerning the exchange rates in Renminbi and U.S.
dollars for the periods indicated.
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Renminbi per U.S. Dollar Noon Buying Rate |
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Period |
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Average(1) |
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Low |
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High |
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End |
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2005 |
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8.1826 |
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8.2765 |
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8.0702 |
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8.0702 |
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2006 |
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7.9579 |
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8.0702 |
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7.8041 |
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7.8041 |
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2007 |
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7.5806 |
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7.8127 |
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7.2946 |
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7.2946 |
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2008 |
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6.9193 |
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7.2946 |
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6.7800 |
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6.8225 |
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2009 |
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6.8295 |
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6.8176 |
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6.8470 |
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6.8259 |
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October 2009 |
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6.8267 |
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6.8248 |
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6.8292 |
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6.8264 |
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November 2009 |
|
|
6.8271 |
|
|
|
6.8255 |
|
|
|
6.8300 |
|
|
|
6.8265 |
|
December 2009 |
|
|
6.8275 |
|
|
|
6.8244 |
|
|
|
6.8299 |
|
|
|
6.8259 |
|
2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 2010 |
|
|
6.8269 |
|
|
|
6.8258 |
|
|
|
6.8295 |
|
|
|
6.8268 |
|
February 2010 |
|
|
6.8285 |
|
|
|
6.8258 |
|
|
|
6.8330 |
|
|
|
6.8258 |
|
March 2010 |
|
|
6.8262 |
|
|
|
6.8254 |
|
|
|
6.8270 |
|
|
|
6.8258 |
|
April 2010 (through April 23) |
|
|
6.8256 |
|
|
|
6.8275 |
|
|
|
6.8229 |
|
|
|
6.8270 |
|
Source: Federal Reserve Statistical Release
|
|
|
(1) |
|
Annual averages are calculated using month-end rates. Monthly averages are calculated using
the average of the daily rates during the relevant period. |
On April 23, 2010, the noon buying rate was RMB6.8270 to US$1.00.
B. CAPITALIZATION AND INDEBTEDNESS
Not applicable
C. REASONS FOR THE OFFER AND USE OF PROCEEDS
Not applicable
6
D. RISK FACTORS
Risks Relating to Our Business and Our Industry
If we are unable to successfully develop and source new online games, our business prospects,
financial condition and results of operations would be materially and adversely affected.
To remain competitive, we must continue to develop and source new online games that appeal to
game players. We develop and source new online games through our multi-channel strategy, including
in-house development, licensing, investments and acquisitions, co-development and co-operation.
However, we cannot assure you that we will be successful in executing such strategy. If we fail to
do so, our business, financial condition, results of operations and business prospects would be
materially and adversely affected. The following summarizes risks relating to our multi-channel
strategy.
|
|
|
In-house development of new online games and introduction of expansion packs for our
existing online games |
We must continue to successfully develop new online games in-house to expand our game
portfolio and introduce updates and expansion packs, which are more substantial enhancements than
updates, for our existing games to extend the commercial lifespan of our existing games.
Our ability to develop successful new online games in-house will largely depend on our ability
to (i) anticipate and effectively respond to changing game player interests and preferences and
technological advances in a timely manner, (ii) attract, retain and motivate talented online game
development personnel and (iii) execute effectively our online game development plans. In-house
development requires a substantial initial investment prior to the launch of a game, as well as a
significant commitment of future resources to produce updates and expansion packs.
Our ability to introduce successful updates and expansion packs for our existing online games
will also depend on our ability to collect and analyze user behavior data and feedback from the
player community in a timely manner and to effectively incorporate features into our updates and
expansion packs to improve the variety and attractiveness of our virtual items. We cannot assure
you that we will be able to collect and analyze game player behavior data on a timely basis or that
such data will accurately reflect game player behavior.
|
|
|
Maintaining good relationships with our licensors, extending licenses for our existing
licensed online games and licensing new online games |
We license many of our online games, including some of our most popular games, from third
parties. In 2008 and 2009, we derived approximately 65.7% and 69.1% of our net revenues,
respectively, from online games that were licensed from third parties. We must maintain good
relations with our licensors to ensure the continued smooth operation of our licensed games.
Additionally, we depend upon our licensors to provide technical support necessary for the operation
of the licensed games, as well as updates and expansion packs that help to sustain interest in a
game. Moreover, certain marketing activities often require the consent of our licensors. Finally,
our licenses may be terminated upon the occurrence of certain events, such as a material breach by
us. Only some of our license agreements allow us to automatically extend the term of the license
without renegotiating with the licensors. We may want to extend a license upon its expiration but
may not be able to do so on terms acceptable to us or at all. Our licensors may also demand new
royalty terms that are unacceptable to us. Our ability to continue to license our online games and
to maintain good relationship with our licensors also affect our ability to license new games
developed by the same licensors.
|
|
|
Investments in and acquisitions of other businesses that we believe may benefit our
business |
We intend to continue to invest in or acquire other businesses that complement our business or
games that we believe may benefit us in terms of game player base or game portfolio. For example,
in 2010, we acquired Goldcool Holdings Limited, or Goldcool, which is a Shanghai-based online game
developer and operator, and Mochi Media, Inc., or Mochi Media, which operates a leading platform
for distributing and monetizing browser-based games worldwide. However, our ability to grow through
investments and acquisitions will depend on the availability of suitable candidates at an
acceptable cost and our ability to consummate such transactions on commercially reasonable terms,
as well as our ability to obtain any required governmental approvals. The identification and
completion of these transactions may also require us to expend significant management and other
resources. Moreover, the benefits of an investment or acquisition may take considerable time to
materialize, and we cannot assure you that any particular transaction will achieve the intended
benefits. Future acquisitions could also expose us to potential risks, including those associated
with the integration of new operations, technologies and personnel, unforeseen or hidden
liabilities, the inability to generate sufficient revenues to offset the costs and expenses of the
acquisitions and potential loss of, or harm to, our relationships with employees, customers,
licensors and other suppliers as a result of integration of new businesses.
|
|
|
Sourcing of new online games through co-development and co-operation |
We co-develop online games with international game developers. We also co-operate certain
games in China under nonexclusive licenses granted by third-party Chinese developers who also
operate those same games on their own platform. We must maintain good relations with our
co-developers and co-operators to ensure the continued smooth development or operation of our
co-developed and co-operated games. We may incur significant cost overrun in game product
development in our co-development arrangements. In addition, our newly co-developed games may
not be well received by our game players. Our ability to co-develop and co-operate successful
online games also depends on the availability of co-development and co-operation partner
candidates.
7
We depend substantially on two massively multi-player online role-playing games, or MMORPGs, which
accounted for approximately 75.9% and 78.2% of our net revenues in 2008 and 2009, respectively, and
have finite commercial lifespans.
Two of our MMORPGs, namely Mir II and Woool, including their sequels, contributed approximately 55.3% and 20.6% of
our net revenues, respectively, in 2008 and 56.4% and 21.8% of our net revenues, respectively, in
2009. We expect to continue to derive a substantial majority of our net revenues from Mir II and
Woool in the near term. Thus, our business prospects, financial condition and results of operations
would be materially and adversely affected by any factor that contributes to a decline in revenues
from Mir II or Woool, including:
|
|
|
any reduction in purchases of virtual items by Mir II or Woool players; |
|
|
|
a decrease in the popularity of either game in China due to increased competition or
other factors; |
|
|
|
failure to improve, update or enhance Mir II or Woool in a timely manner; or |
|
|
|
any lasting or prolonged server interruption due to network failures or other factors or
any other adverse developments specific to Mir II or Woool. |
For example, we introduced an expansion pack in Mir II which was not well received by the games
users and led to some of the games users reducing the amount of virtual items they purchase in the
game. Primarily as a result of the introduction of that expansion pack, we expect that our net
revenues in the first quarter of 2010 will decrease by approximately
10-15% quarter-over-quarter. See also Risks
Relating to Our ADSs The price of our ADSs has been volatile historically and may continue to be
volatile, which may make it difficult for holders to resell the ADSs when desired or at attractive
prices. While we have introduced an additional expansion pack which we believe will help reverse
the decline in revenues generated from Mir II, we cannot assure you that this expansion pack will
in fact achieve this desired goal.
As with other online games, Mir II and Woool have finite commercial lifespans. We believe that
Mir II and Woool, which we launched in 2001 and 2003, respectively, are in the more mature stages
of their commercial lifespan. While we were able to reverse the decreasing trend in revenues from
these two games with the adoption of our item-based revenue model in November 2005 and have since
been able to continue to increase our revenues from both games, we cannot assure you that revenues
from these games will not decline in the future as a result of the games reaching the end of their
commercial lifespan. We may also be able to extend the commercial lifespan of Mir II and Woool by
enhancing, expanding and upgrading Mir II and Woool to include new features that appeal to existing
players and attract new players. If we are not able to extend the commercial lifespan of Mir II and
Woool, our business prospects, financial condition and results of operations may be materially and
adversely affected.
Our new games, such as AION, may not be commercially successful, and we may fail to launch new
games according to our timetable, or at all.
In order to remain competitive, we must introduce new online games that are attractive to our
game players and can generate additional revenues and diversify our revenue sources. We cannot
assure you that we will launch all of the games that we have announced we expect to launch or that
these games, if launched, will be commercially successful, and you should not use the success of
our existing games as an indication of the future commercial success of any of the online games in
our pipeline. Although we have launched several new online games in the past three years, none of
these games individually has been able to contribute 10% or more of our net revenues annually.
There are many factors that could adversely affect the popularity of our new games, and if our new
games are not commercially successful, our business prospects and results of operations would be
materially and adversely affected and we may not be able to recover our game sourcing or
development costs, which can be significant. For example, in April 2009, we launched AION, an
MMORPG that we licensed from NCSoft Corporation, a leading South Korean game developer, operator
and publisher. While the launch of AION has generated significant market attention, we cannot
assure you that AION will be commercially successful or meet market expectations. The failure of
new games such as AION to become commercially successful could adversely affect market confidence
in our future growth prospects and result in a drop in the market price of our ADSs.
The timing of the launch of our pipeline games is also critical to our business. We also
cannot assure you that we will be able to launch these games based on our current timetable or at
all. A number of factors, including technical difficulties, insufficient game development
personnel, a lack of marketing or other resources or acceptance of or interest in the new games
among game players during the testing phase and adverse developments in our relationship with the
licensors of our new licensed games, could result in delays in launching or prevent us from
launching our new games or at all. If we fail to launch new games according to our timetable or at
all, we may disappoint the game player base, fail to meet the targets for our anticipated financial
and operating results or lose our market leadership position to our competitors, any of which may
have a material adverse effect on our business, financial condition and results of operations.
8
Our new games may attract game players away from our existing games, which may have a material
adverse effect on our business, financial condition and results of operations.
Our new online games may attract game players away from our existing games and shrink our
existing games player base, which could in turn make those existing games less attractive to other
game players, resulting in decreased revenues from our existing games. Players of our existing
games may also spend less money to purchase virtual items in our new games than they would have
spent if they had continued playing our existing games. In addition, our game players may migrate
from our existing games with a higher profit margin to new games with a lower profit margin. The
occurrence of any of the foregoing could have a material and adverse effect on our business,
financial condition and results of operations.
Changes or adjustments we make to our existing or new games may not be well received by our game
players.
As we develop new online games or introduce updates and expansion packs to our existing games,
we closely monitor our game players tastes and preferences and may introduce or change certain
game features or game play styles to make our games more attractive. We cannot assure you that
these changes or adjustments will be well received by our game players, who may decide not to play
the new game or cease playing the existing game. For example, we introduced an expansion pack in
Mir II which was not well received by the games users and led to some of the games users reducing
the amount of virtual items they purchase in the game. As a result, any changes or adjustments we
make to existing or new games may adversely impact our revenues and business prospects.
There are risks that the revenue models we adopt for our online games may not be suitable.
We currently operate substantially all of our online games using the item-based revenue model
and have generated, and expect to continue to generate, a substantial majority of our revenues
using this revenue model. Although we have adopted the item-based revenue model for substantially
all of our online games, it may not be the best revenue model for our games. The item-based revenue
model requires us to develop or license online games that not only attract game players to spend
more time playing, but also encourage them to purchase virtual items. The sale of virtual items
requires us to track closely game players tastes and preferences, especially as to in-game
consumption patterns. If we fail to develop or offer virtual items which game players purchase, we
may not be able to effectively convert our game player base into paying users. In addition, the
item-based revenue model may cause additional concerns from PRC regulators who have been
implementing regulations designed to reduce the amount of time that the Chinese youth spend on
online games and intended to limit the total amount of virtual currency issued by online game
operators and the amount purchased by an individual game player. A revenue model that does not
charge for playing time may be viewed by the PRC regulators as inconsistent with this goal.
Furthermore, we may change the revenue model for some of our online games if we believe the
existing revenue models are not optimal. We cannot assure you that the revenue model that we have
adopted for any of our online games will continue to be suitable for that game, or that we will not
in the future need to switch our revenue model or introduce new revenue model for that game. A
change in revenue model could result in various adverse consequences, including disruptions of our
game operations, criticism from game players who have invested time and money in a game and would
be adversely affected by such a change, decreases in the number of our game players or decreases in
the revenues we generate from our online games.
Our business could suffer if we do not successfully manage our current growth and potential future
growth.
To execute our growth strategies, we anticipate that we will need to manage and supervise our
current game portfolio, as well as develop and source additional games. We also will need to
continue to expand, train, manage and motivate our workforce, and manage our relationships with our
game licensors, co-developers, co-operators, game players and third-party service providers. In
addition, we need to implement various new or upgraded operational and financial systems,
procedures and controls and to improve our accounting and other internal management systems, all of
which will require substantial management efforts and financial resources and may divert our
managements attention from running our business or otherwise harm our operations. We cannot assure
you that we will be able to efficiently or effectively implement our growth strategies or manage
our growth, and any failure to do so may limit our future growth and hamper our business strategy.
There are risks associated with our pursuit of growth through acquisitions and strategic
investments.
In recent years we have pursued, and in the future we may continue to pursue, growth through
acquisitions and strategic investments. In general, these acquired or invested companies either own
intellectual property rights relating to online games or operate a network for the distribution of
our online games. For example, between 2005 and 2007, Shanda Interactive completed a series of
purchases in privately negotiated transactions and open market purchases, pursuant to which Shanda
Interactive acquired a majority stake of the outstanding shares of Actoz, the co-owner of the
intellectual property rights to Mir II. In addition, we acquired in
2007 Chengdu Aurora, which owns the
intellectual property rights to Fungyun Online, in 2009 Chengdu Simo, which owns the intellectual
property rights to Luvinia Online and in 2010 Goldcool, which owns the intellectual property rights
to numerous MMORPGs, including Hades Realm, Zodiac Tales, and Dukes and Lords, and Mochi Media.
9
We may, however, fail to realize the synergies contemplated at the time of executing these
transactions, which could negatively impact our financial condition and results of operations.
While we have integrated the business of many of the acquired companies into our business, some of
the businesses operated by these acquired companies, such as Mochi Medias distribution and
monetization platform for browser-based games worldwide, may require a significant amount of
capital investment in the future, which would decrease the amount of cash available for working
capital or capital expenditures. Our acquisition of these companies entails a number of other risks
that could materially and adversely affect our business and results of operations, including
difficulties integrating the acquired companys personnel, operations, technologies or products
into our existing business, the need for financial resources above our planned investment levels,
unknown and unforeseen assumed liabilities, the diversion of management resources from other
strategic and operational issues, the inability to retain the key employees of the acquired
companies, and the potential write-offs of acquired assets and goodwill, as well as potential
expenses related to the amortization of intangible assets. See also Risks Relating to Our Business
and Our Industry We may need to record impairment charges to earnings if our acquisition
goodwill, investments in affiliate companies or acquired intangible assets are determined to be
impaired, which would adversely affect our results of operations. If we are unable to generate
significant amounts of revenue from the acquired online games or Mochis distribution platform in
the near future, we may suffer financial losses as a result of the acquired companys on-going
operating expenses, expenses related to the amortization of intangible assets from the acquisition,
and additional share-based compensation expenses related to the acquisition. Our failure to address
the risks associated with our acquisition of these companies may have a material adverse effect on
our financial condition and results of operations.
We face risks associated with the licensing of our games internationally, and if we are unable to
effectively manage these risks, our ability to expand our business internationally could be
impaired.
As of March 31, 2010, we licensed 15 online games to game operators in a number of countries
or regions. We plan to further license our existing and new games in more countries and regions.
Licensing our games in the international markets exposes us to a number of risks, including:
|
|
|
identifying and maintaining good relations with game operators who are knowledgeable in,
and can effectively distribute and operate our games in, international markets; |
|
|
|
negotiating licensing agreements with game operators on terms that are commercially
acceptable to us and enforcing the provisions of those agreements; |
|
|
|
developing games, updates and expansion packs catering to overseas markets and renewing
our license agreements with game operators upon expiration; |
|
|
|
maintaining the reputation of our company and our games, given that our games are
operated by game operators in the international markets with different standards; |
|
|
|
protecting our intellectual property rights overseas and managing the related costs; |
|
|
|
auditing the royalties we are entitled to receive; |
|
|
|
complying with the different commercial and legal requirements of the international
markets in which our games are offered, such as game import regulatory procedures, taxes and
other restrictions and expenses; and |
|
|
|
managing our foreign currency risks. |
In addition, our plan to continue to license our games in international markets may also be
adversely affected by public opinion or government policies in markets in which we license our
games. For example, South Korea requires online game operators, such as Actoz, to obtain ratings
classifications for online games and implement procedures to restrict minors from accessing online
games. More recently, the Ministry of Culture, Sports and Tourism in South Korea has enacted rules
which require certain online game operators to automatically log off underage users of certain
online games and to slow down the Internet speed for underage users who have been logged on
continuously for too many hours. If we are not able to license our games internationally as
planned, our business, financial conditions and results of operations would be materially and
adversely affected.
10
We or our licensors, co-developers, co-operators or investees may be subject to intellectual
property infringement claims, which may force us to incur substantial legal expenses and, if
determined adversely against us or our licensors, co-developers, co-operators or investees, may
materially disrupt our business.
We cannot be certain that in-house developed, licensed, co-developed or co-operated online
games or other content posted on our website do not and will not infringe upon patents, copyrights,
trademarks or other intellectual property rights held by third parties. As of March 31, 2010, 12 of
the games we operated were developed in-house, 11 were licensed from third parties, eight were
invested in or acquired from third parties, one was co-developed with a
third party, and two were co-operated with a third party. We or any of our licensors,
co-developers, co-operators or online game developers and operators in which we have invested
through 18 Capital may be perceived or alleged to infringe upon patents, copyrights, trademarks or
other intellectual property rights held by third parties and become subject to legal proceedings
and claims from time to time relating to the intellectual property rights of others. For example,
in 2003, Actoz and Wemade Entertainment Co., Ltd. filed a lawsuit against Shanda Interactive in the
Beijing First Intermediate Peoples Court alleging copyright infringement and unfair competition
claims with respect to Woool. These claims were settled in February 2007.
If we, our licensors, co-developers, co-operators or online game developers and operators in
which we have invested through 18 Capital are found to have violated the intellectual property
rights of others, we may be subject to monetary damages and be enjoined from using such
intellectual property, or we may incur new or additional licensing costs if we wish to continue
using the infringing content, be forced to develop or license alternatives or be forced to stop
operating a game, any of which may materially and adversely affect our business and results of
operations. In addition, we may incur substantial expenses and require significant attention of
management in defending against these third-party infringement claims, regardless of their merit.
Some of our employees were previously employed at other companies, including some of our
current and potential competitors. To the extent these employees or any employees we may hire in
the future are involved in research that is similar to the research that they performed at their
former employers, our competitors may file lawsuits or initiate proceedings against us alleging
that these employees violated the intellectual property rights, such as trade secret rights, of
their former employers. Although we are not aware of any pending or threatened claims alleging
these types of violations of intellectual property rights, if any such claim arises in the future,
litigation or other dispute resolution proceedings may be necessary to retain our ability to offer
our current and future games, which could be costly and divert financial and management resources.
Unauthorized use of our intellectual property by third parties, and the expenses incurred in
protecting our intellectual property rights, may adversely affect our business.
We regard our copyrights, trademarks, service marks, trade secrets and other intellectual
property as critical to our success. Unauthorized use of the intellectual property used in our
business, whether owned by us or licensed to us, may adversely affect our business and reputation.
We rely on copyright, trademark, trade secret and other intellectual property law, as well as
non-competition, confidentiality and license agreements with our employees, licensors, business
partners and others to protect our intellectual property rights. Our employees are generally
required to sign agreements acknowledging that all inventions, trade secrets, works of authorship,
developments and other processes generated by them on our behalf are our property, and assigning to
us any ownership rights that they may claim in those works. Despite our precautions, third parties
may obtain and use intellectual property that we own or license without our consent. Unauthorized
use of our intellectual property by third parties, and the expenses incurred in protecting our
intellectual property rights, may materially and adversely affect our business.
For instance, pirate game servers illegally operate unauthorized copies of our online games
and enable players to play those games without purchasing prepaid cards for our online games.
Despite our efforts to shut down pirate game servers, we believe that a significant number of
pirate game servers continue to operate unauthorized copies of our online games. If pirate game
servers continue to operate any of our online games, our business, financial condition and results
of operations may be materially and adversely affected.
The validity, enforceability and scope of protection of intellectual property in
Internet-related industries are uncertain and still evolving. In particular, the laws and
enforcement procedures in the PRC are uncertain and do not protect intellectual property rights in
this area to the same extent as do the laws and enforcement procedures in the United States and
other developed countries. Policing unauthorized use of intellectual properties is difficult and
expensive. Any steps we have taken to prevent the misappropriation of our intellectual properties
may be inadequate. Moreover, litigation may be necessary in the future to enforce our intellectual
property rights. Future litigation could result in substantial costs and diversion of our
resources, and could disrupt our business, as well as have a material adverse effect on our
financial condition and results of operations.
Our business may be materially harmed if our online games are not featured prominently in a
sufficient number of Internet cafes in China.
A substantial number of game players access our games through Internet cafes in China. Due to
limited hardware capacity, Internet cafes generally feature a limited number of games on their
computers. We thus compete with a growing number of online game operators to have our online games
featured on these computers. This competition has intensified in China due to a nationwide
suspension of approval for the establishment of new Internet cafes in 2007. See Risks Relating
to Regulation of Our Business and to Our Structure The PRC government has tightened its
regulation of Internet cafes, which are currently one of the primary venues for our users to play
online games. Intensified government regulation of Internet cafes could restrict our ability to
maintain or increase our revenues and expand our game player base. If we fail to feature our games
prominently and sufficiently in Internet cafes in China
or fail to do so in a cost-effective manner, our business, financial condition and results of
operations may be materially and adversely affected.
11
We depend on certain VIEs of Shanda Online to provide services that are critical to our business.
The termination of either or both of these service agreements or any failure of or significant
quality deterioration in these services could have a material adverse effect on our business,
financial condition and results of operations.
We have engaged certain VIEs of Shanda Online to provide certain services that are critical to
our business. Pursuant to the Amended and Restated Cooperation Agreement between Shanda Networking
and Nanjing Shanda, on the one hand, and the Shulong entities, on the other hand, we have engaged
Shanda Networking to provide certain services, including, among others, online billing and payment,
user authentication, customer service, anti-fatigue compliance, prepaid card marketing and data
support services for a period of five years commencing July 1, 2008. Pursuant to the Amended and
Restated Sales Agency Agreement between Shengfutong and the Shulong entities, we have engaged
Shengfutong for a period of five years commencing July 1, 2008 as the sales agent for the
distribution of prepaid cards which are required to purchase virtual items or time units in our
online games. Under the terms of these agreements, we are not permitted to engage any other party
to provide such services to us, while Shanda Networking and Shengfutong are permitted to provide
such services to other parties.
Since we do not control Shanda Networking and Shengfutong, and because we depend on Shanda
Networking and Shengfutong for the provision of services that are critical to the operation of our
online game business, we face certain risks with respect to our arrangements with such entities. If
Shanda Networking or Shengfutong breaches its respective obligations under the respective
agreements, terminates these agreements, or refuses to renew these agreements on terms acceptable
to us or at all, we may not be able to find a suitable alternative service provider or be able to
establish our own integrated service platform or distribution network in a timely manner.
Similarly, if we breach the terms of the agreements, Shanda Networking or Shengfutong could
terminate these agreements and halt services that are critical to our online game business.
Termination of either or both of these agreements could have a material adverse effect on our
business, financial condition and results of operations.
Any failure of or significant quality deterioration in Shanda Networkings integrated service
platform could materially and adversely affect our business. For example, we rely on Shanda
Networkings customer service representatives as the first point of contact to serve our game
players. Shanda Networking handles customer requests such as providing account settlement-related
services, retrieving forgotten passwords and recovering lost user accounts, and liaises with our
game management team if the inquiries involve game-related technical problems, such as recovering
virtual items and in-game characters. We also rely on Shanda Networking to provide user
authentication services for our game players who access our games through Shanda Networkings
integrated service platform. If Shanda Networking fails to address customer service requests
properly and in a timely manner, our game players may be unable to access our games or attribute
any unpleasant experience with Shanda Networkings customer service to us, which could harm our
reputation. As a result, we may fail to retain existing and attract new game players and our
business, financial condition and results of operations could be materially and adversely affected.
Furthermore, we rely on Shengfutong to provide prepaid card distribution services. Shengfutong
relies heavily on a distribution network composed of third-party distributors for its sales to game
players. As Shengfutong does not enter into long-term agreements with any of its distributors,
there can be no assurance that Shengfutong will be able to continue to maintain favorable
relationships with them. If Shengfutong fails to maintain a stable and efficient distribution
network or if there is any failure of or significant quality deterioration in Shengfutongs
distribution services, our game players may be unable to purchase prepaid cards for our games, and
as a result, we may fail to retain existing and attract new game players, and our business,
financial condition and results of operations could be materially and adversely affected.
Shanda Networking provides integrated platform services to some of our competitors, which may have
a material adverse effect on our business.
Shanda Networking provides integrated platform services to other online game companies that
compete with us, including Kingsoft Corporation Limited, or Kingsoft, LineKong Entertainment
Technology Co., Ltd. and Shanghai Storm Information Technology, Co., Ltd., or Shanghai Storm, and
may enter into additional similar commercial relationships with other online game companies. These
commercial relationships may strengthen these online game companies market share and enable them
to achieve market acceptance of their game and services, which may have a material adverse effect
on our business. In particular, the online games that our competitors offer through Shanda
Networkings integrated service platform may attract away players of our games and shrink our
games player base, which could in turn make our games less attractive to other players.
Furthermore, if our current game players spend money to play or purchase virtual items in our
competitors games offered through Shanda Networkings integrated service platform that would
otherwise have been spent on our games, our business, financial conditions and results of
operations could be materially and adversely affected.
12
We could be liable for any failure, service interruption or security breach of Shanda Networkings
online payment platform, and the reduction in sales made through those channels may have a material
adverse impact on our revenues.
Currently, we rely on the online payment system on Shanda Networkings integrated service
platform for all of our direct sales of our virtual prepaid cards to our game players. Secured
transmission of confidential information, such as game players credit card numbers and expiration
dates, personal information and billing addresses over public networks, is essential to maintaining
consumer confidence in such payment channels and to allowing us to collect payments on a timely
basis. We expect that an increasing amount of the direct sales of prepaid cards will be conducted
over the Internet as a result of the growing use of online payment systems. As a result, associated
online crime will likely increase as well and we cannot assure you that Shanda Networkings current
security measures and those of the third parties with whom Shanda Networking transacts business are
adequate. Security breaches of these online payment systems could result in non-collection of
payments, expose us to litigation and possible liability for failing to protect confidential game
player information and could harm our reputation and our ability to retain existing and attract new
game players and to encourage the consumption of our online games by game players.
We face the risks of uncertainties in the growth of the online game industry and market acceptance
of our online games.
The growth of this industry and the level of demand and market acceptance of our online games
are subject to a high degree of uncertainty. Our results of operations will depend on factors
beyond our control, including:
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the growth rate in the number of users of personal computers, Internet and broadband in
China and other markets in which our online games are offered; |
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whether the online game industry, particularly in China and the rest of the Asia-Pacific
region, continues to grow and the rate of any such growth; |
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changes in consumer demographics, tastes or preferences; |
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the popularity and price of new online games and virtual items that we and our
competitors launch and distribute; |
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our ability to timely upgrade and improve our existing games to extend their commercial
lifespan and to maintain or expand their market share in the online game industry; |
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the availability and popularity of other forms of entertainment, particularly console
system games such as those made by Microsoft, Nintendo and Sony, which are already popular
in many other countries and may gain popularity in China and other countries or regions in
which we market our online games; and |
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general economic conditions, particularly economic conditions that impact the level of
discretionary consumer spending. |
Our ability to plan for product development and distribution and promotional activities will
be significantly affected by our ability to anticipate and adapt to relatively rapid changes in
consumer tastes and preferences. Although MMORPGs are currently popular in China, there is no
assurance that they will continue to be popular in China or elsewhere. A decline in the popularity
of online games in general, or the MMORPGs that we operate, would adversely affect our business
prospects and results of operations. We must be able to track and respond to these changes in game
players preferences in a timely and effective manner. Furthermore, given that the item-based
revenue model relies on in-game purchases, we must be able to track and respond quickly to changes
in game preferences and consumer spending trends.
We may not be able to adapt to the rapidly evolving online game industry in China.
Chinas online game industry is evolving rapidly. We need to adapt to new industry trends,
including changes in game players preferences, new revenue models, new game content distribution
models, new technologies and new governmental regulations. We evaluate these changes as they emerge
and strive to adapt our business and operations in order to maintain and strengthen our leadership
in the industry. However, we cannot assure you that we will be able to do so successfully, which
may have a material adverse effect on our business, financial condition and results of operations.
We face significant competition which could reduce our market share and materially and adversely
affect our business, financial condition and results of operations.
The online game industry in China is highly competitive. In recent years, numerous competitors
have entered the online game industry in China. We expect more companies to enter the market and we
expect a wider range of online games to be introduced to China. Competition from other online game
operators, both based in China as well as overseas, is likely to increase in the future. Other
online game operators or developers, such as China-based Changyou.com Limited, Giant Interactive
Group, Inc., Kingsoft, KongZhong Corporation, NetDragon Websoft Inc., NetEase.com, Nineyou
International Limited, Perfect World Co., Ltd., Tencent Holdings Limited, and The9 Limited, as well
as international game developers, such as Activision Blizzard, Inc., Electronic Arts Inc., NCSoft
Corporation, Nexon Corporation, NHN Corp. and Webzen, Inc., are our current or potential future
competitors. As the online game industry in China is constantly evolving, our current or future
competitors may
13
compete
more successfully as the industry matures. In particular, any of these competitors may offer products and services that
provide significant performance, price, creativity or other advantages over those offered by us.
These products and services may weaken our brand name and achieve greater market acceptance than
ours. In addition, even if we are successful in launching new online games, competitors may launch
similar online games which compete for potential game players. Furthermore, any of our current or
future competitors may be acquired by, receive investments from or enter into other strategic or
commercial relationships with larger, more established and better financed companies and therefore,
obtain significantly greater financial, marketing and game licensing and development resources than
us. In addition, increased competition in the online game industry in China could make it difficult
for us to retain existing players and attract new players. Moreover, we may face competition from
console systems that have achieved significant success in markets other than China but have yet to
be permitted to be sold legally in China due to regulatory and other reasons. If these console
systems, many of which are strengthening their online game features, are permitted to be sold in
China, we may face additional competition. We also compete with other forms of entertainment, such
as television and movies. If we are unable to compete effectively, our business, financial
condition and results of operations would be materially and adversely affected.
We depend on our key personnel, and our business and growth prospects may be severely disrupted if
we lose their services or are unable to attract new key employees.
Our future success is heavily dependent upon the continued service of our key executive
officers and other key employees. In particular, we rely on the expertise, experience and
leadership ability of Mr. Qunzhao Tan, our chairman and chief executive officer, as well as the
co-founder of our business, Mr. Tianqiao Chen, our director, the chairman of Shanda Interactive and
the co-founder of our business, Mr. Hai Ling, our president, Mr. Richard Wei, our chief financial
officer, Mr. Xiangdong Zhang, our chief producer and Mr. Jisheng Zhu, our chief technology officer
and acting chief operating officer. We also rely on a number of key technology officers and staff
for the development and operation of our online games. In addition, as we expect to focus
increasingly on the development of our own online games, we will need to continue attracting and
retaining skilled and experienced online game development personnel to maintain our
competitiveness.
If one or more of our key personnel are unable or unwilling to continue in their present
positions, we may not be able to replace them easily or at all and may incur additional expenses to
recruit and train new personnel, our business could be severely disrupted, and our financial
condition and results of operations could be materially and adversely affected. We do not maintain
key-man life insurance for any of our key personnel. In addition, if any of our executive officers
or key employees joins a competitor or forms a competing company, we may lose know-how, trade
secrets, suppliers and key professionals and staff. All of our employees, including each of our
executive officers and key employees, have entered into an employment agreement with us, which
contains customary non-compete provisions. Although non-compete provisions are generally
enforceable under PRC laws, PRC legal practice regarding the enforceability of such provisions is
not as well-developed as those in countries such as the United States. Thus, if we are required to
enforce our rights under the non-compete provisions, we cannot assure you that a PRC court would
enforce such provisions. Furthermore, since the demand and competition for talent is intense in our
industry, particularly for online game development personnel and related technical personnel, we
may need to offer higher compensation and other benefits in order to attract and retain key
personnel in the future, which could increase our compensation expenses. We cannot assure you that
we will be able to attract or retain the key personnel that we will need to implement our
strategies and achieve our business objectives.
The global financial and economic crisis, particularly the slowdown in the Chinese economy, may
adversely affect our business, results of operations and financial condition.
The global financial markets have experienced significant disruptions recently, and most of
the worlds major economies entered into recession. The Chinese economy has also slowed down
significantly since the second half of 2008 and this trend may continue in 2010 and beyond. Since
we currently derive substantially all of our revenues from game players in China, any prolonged
slowdown in the Chinese economy may have an adverse effect on our business, operating results and
financial condition if our game players reduce the amount they spend on our online games. In
addition, our plan to expand our business internationally may be adversely affected by an economic
downturn in the countries or regions where we license or intend to license our online games. The
occurrence of any of the foregoing would adversely affect our business, financial conditions and
results of operations.
14
If we fail to anticipate or successfully implement new technologies, our games may become obsolete
or uncompetitive, and our business prospects and results of operations could be materially and
adversely affected.
The online game industry is subject to rapid technological change. We need to anticipate the
emergence of new technologies and assess their market acceptance. In addition, government
authorities or industry organizations may adopt new standards that apply to game development. We
also need to invest significant financial resources in product development to keep pace with
technological advances. However, development activities are inherently uncertain, and our
significant expenditures on technologies may not generate corresponding benefits. If we fall behind
in adopting new technologies or standards, our existing games may lose popularity, and our newly
developed games may not be well received by our game players. In addition, we may incur significant
cost overrun in product development, which would materially and adversely affect our business
prospects and results of operations.
Errors or defects in our online games and the proliferation of cheating programs could materially
and adversely affect our business prospects and results of operations.
Our online games may contain errors or other defects. In addition, parties unrelated to us
have developed, and may continue to develop, Internet cheating programs that enable game players to
obtain unfair advantages over other game players who do not use such programs. Furthermore, certain
cheating programs could cause the loss of a characters superior features acquired by a player. The
occurrence of errors or defects in our online games or our failure to discover and disable cheating
programs affecting the fairness of our game environment could disrupt our operations, damage our
reputation and discourage our game players from playing our games. As a result, such errors,
defects and cheating programs could materially and adversely affect our business, financial
condition and results of operations.
Network interruptions, security breaches or computer virus attacks could have a material adverse
effect on our business prospects and results of operations.
Any failure to maintain the satisfactory performance, reliability, security and availability
of our network infrastructure, including as a result of natural disasters such as earthquakes and
floods, may cause significant harm to our reputation and our ability to retain existing and attract
new game players. We maintain a distributed server network architecture with third-party service
providers hosting servers in more than one hundred cities throughout China. We do not maintain full
backup for our server network hardware.
Major risks involved in such network infrastructure include:
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any break-downs or system failures resulting in a sustained shutdown of all or a material
portion of our servers, including failures which may be attributable to sustained power
shutdowns, or efforts to gain unauthorized access to our systems causing loss or corruption
of data or malfunctions of software or hardware; and |
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any disruption or failure in the national backbone network, which would prevent our
players outside Shanghai from logging on to any of our games, or playing games for which the
servers are all located in Shanghai. |
In the past, our server network has experienced unexpected outages for several hours and
occasional slower performance in a number of locations in China as a result of failures by
third-party service providers. Our network systems are also vulnerable to damage from fire, flood,
power loss, telecommunications failures, computer virus, hackings and similar events. Any network
interruption or inadequacy that causes interruptions in the availability of our games or
deterioration in the quality of access to our games could reduce our game players satisfaction. In
addition, any security breach caused by hacking, which involves efforts to gain unauthorized access
to information or systems, or to cause intentional malfunctions or loss or corruption of data,
software, hardware or other computer equipment, and the inadvertent transmission of computer
viruses could have a material adverse effect on our business, financial condition and results of
operations. We do not maintain insurance policies covering losses relating to our systems and we do
not have business interruption insurance.
The successful operation of our business and implementation of our growth strategies, including our
ability to accommodate additional game players in the future, depend upon the performance and
reliability of the Internet infrastructure and fixed line and wireless telecommunications networks
in China.
Although there are private sector Internet service providers in China, almost all access to
the Internet is maintained through state-owned telecommunications operators under the
administrative control and regulatory supervision of the Ministry of Industry and Information
Technology, or the MIIT. We rely on this infrastructure to provide data communications capacity
primarily through local telecommunications lines and wireless telecommunication networks. In
addition, the national networks in China are connected to the Internet through international
gateways controlled by the PRC government. These international gateways are the only channels
through which a domestic user can connect to the Internet and may not support the demand necessary
for the continued growth in Internet usage. Although the PRC government has announced plans to
develop aggressively the national information infrastructure, we cannot assure you that this
infrastructure will be developed as planned or at all. In
addition, we have no access to alternative networks and services on a timely basis, if at all,
in the event of any infrastructure disruption or failure, which could have a material adverse
effect on our business, financial condition and results of operations.
15
The limited use of personal computers in China and the relatively high cost of Internet access may
limit the development of the Internet in China and thus impede our growth.
Although the use of personal computers in China has increased in recent years, the penetration
rate of personal computers in China is still much lower than that in the United States. In
addition, despite a decrease in the cost of Internet access in China due to a decrease in the cost
of personal computers and the greater availability of broadband Internet access, the cost of
personal Internet access, in contrast with Internet access through Internet cafes, remains
relatively high in comparison to the average per capita income in China. These factors may limit
the growth of our business. Furthermore, any Internet access or other telecommunications fee
increase could reduce the number of game players who play our online games.
We may need to record impairment charges to earnings if our acquisition goodwill, investments
in affiliate companies or acquired intangible assets are determined to be impaired, which would
adversely affect our results of operations.
We acquire or invest in companies whose businesses supplement our business and license online
games from third parties. We record acquisition goodwill, investments in affiliate companies and
acquired intangible assets on our balance sheet in connection with such acquisitions, investments
and licensing arrangements, respectively. We are required to review our acquisition goodwill for
impairment at least annually and review our investments in affiliate companies and acquired
intangible assets for impairment when events or changes in circumstances indicate that the carrying
value may not be recoverable, including a decline in stock price and market capitalization and a
slow down in our industry, which may result from the recent global economic slowdown. If the
carrying value of our acquisition goodwill, investments in affiliate companies or acquired
intangible assets were determined to be impaired, we would be required to write down the carrying
value or to record charges to earnings in our financial statements during the period in which our
acquisition goodwill, investments in affiliate companies or acquired intangible assets is
determined to be impaired, which would adversely affect our results of operations.
We have limited business insurance coverage in China.
Chinas insurance industry is still at an early stage of development. In particular, PRC
insurance companies do not offer many business insurance products available in other countries. As
a result, we do not have any business liability or disruption insurance coverage for our operations
in China. Any business disruption, litigation or natural disaster might cause us to incur
substantial costs and the diversion of resources.
If we fail to maintain an effective system of internal control over financial reporting, we may be
unable to accurately report our financial results or prevent fraud, and as a result investor
confidence and the market price of our ADSs may be adversely affected.
We are subject to the reporting obligations under the U.S. securities laws. The Securities and
Exchange Commission, or the SEC, as required under Section 404 of the Sarbanes-Oxley Act of 2002,
or the Sarbanes-Oxley Act, has adopted rules requiring every public company to include a report of
management on the effectiveness of such companys internal control over financial reporting in its
annual report. In addition, an independent registered public accounting firm must issue an
attestation report on the effectiveness of the companys internal control over financial reporting.
These requirements will first apply to our annual report on Form 20-F for the fiscal year ending
December 31, 2010. When we were a business unit of Shanda Interactive, we were required to maintain
an effective internal control over financial reporting as part of Shanda Interactives compliance
with Section 404 of the Sarbanes-Oxley Act. However, in light of our new status as a public
company, our management will have to evaluate our internal control system independently with new
thresholds of materiality and to implement necessary changes to account for that status. Our
management may conclude that our internal control over financial reporting is not effective.
Moreover, even if our management concludes that our internal control over financial reporting is
effective, our independent registered public accounting firm may still issue an adverse report on
the effectiveness of our internal control over financial reporting if such firm is not satisfied
with our internal control over financial reporting or the level at which our controls are
documented, designed, operated or reviewed, or if such firm interprets the relevant requirements
differently from us. During the course of such evaluation, documentation and testing, we may
identify deficiencies which we may not be able to remedy in time to meet the deadline imposed by
the Sarbanes-Oxley Act for compliance with the requirements of Section 404. We also anticipate that
we will incur considerable costs and devote significant management time and efforts and other
resources to comply with Section 404 of the Sarbanes-Oxley Act.
If we fail to timely achieve and maintain the adequacy of our internal control over financial
reporting, we may not be able to conclude that we have effective internal control over financial
reporting. Moreover, effective internal control over financial reporting is necessary for us to
produce reliable financial reports and important to help prevent fraud. Our failure to achieve and
maintain effective internal control over financial reporting could impair our ability to comply
with applicable financial reporting requirements and related regulatory filings on a timely basis
and result in the loss of investor confidence in the reliability of our financial statements. As a
result, our business, financial
condition, results of operations and prospects, as well as the trading price of our ADSs,
could be materially and adversely affected.
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You may not be able to rely on our quarterly operating results as an indication of our future
performance because our quarterly operating results may be subject to significant fluctuations.
We may experience significant fluctuations in our quarterly operating results due to a variety
of factors, many of which are beyond our control. Significant fluctuations in our quarterly
operating results could be caused by any of the factors identified in this section, including, but
not limited to:
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our ability to retain existing users, attract new game players at a steady rate and
maintain user satisfaction; |
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the announcement or introduction of new games or updates or expansion packs to existing
games by us or our competitors; |
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the range, number and pricing of virtual items available for sale; |
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technical difficulties, system downtime or Internet failures; |
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the amount and timing of operating costs and capital expenditures relating to expansion
of our business, operations and infrastructure; |
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the adoption of new, or changes to existing, governmental regulations; |
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seasonality effect during holidays in the second quarter and the fourth quarter, when
generally, fewer game players play our games; |
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a shortfall in our revenues relative to our forecasts and a decline in our operating
results; |
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the introduction and nationwide roll-out of the third-generation wireless
telecommunication network in China; and |
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economic conditions in general and specific to the online game industry and to China. |
For example, on March 1, 2010, we announced that we expected our net revenues in the first quarter
of 2010 to decrease by 10-15% quarter-over-quarter, primarily as a result of the introduction of an
expansion pack in Mir II which was not well received by the games users and led to some of the
games users reducing the amount of virtual items they purchase in the game. On that day, the
market price of our ADSs decreased by approximately 18%, and on the following night, further
decreased by approximately 6%. While we have introduced an additional expansion pack which we
believe will help reverse the decline in our revenues generated from Mir II, we cannot assure you
that this expansion pack will in fact achieve this desired goal. If this expansion pack does not
achieve this desired goal, the price of our ADSs could decline even further.
As a result, you should not rely on the year to year comparisons of our operating results or
our quarterly operational metrics such as active paying accounts and monthly average revenues per
active paying account, in this annual report as indicators of our likely future performance. Our
operating results may be below our expectations or the expectations of public market analysts and
investors in one or more future quarters. If that occurs, the price of our ADSs could decline and
you could lose part or all of your investment.
Risks Relating to the Reorganization and Our Continued Relationship with Shanda Interactive
We have limited experience operating as a standalone company.
As a part of the reorganization, Shanda Interactive, our parent, transferred substantially all
of its assets and liabilities relating to its online game business to us and we began to operate as
a standalone company. Although we had operated as a business unit of Shanda Interactive prior to
the reorganization, we have had limited experience in conducting our operations as a standalone
company. As we adjust to operating as a standalone company, we may not be able to react as quickly
as our competitors to changes in the industry and markets in which we compete. In addition, since
we have become a public company, our management team will need to develop the expertise necessary
to comply with the numerous regulatory and other requirements applicable to public companies,
including requirements relating to corporate governance, listing standards and investor relations,
any of which may divert our managements attention from running our business.
As we have limited experience in operating as a standalone company, we may need to acquire
assets in addition to those contributed to us in connection with the reorganization. We may fail to
acquire these assets that prove to be important to our operations or may not be able to integrate
all of our assets.
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Our financial information included in this annual report may not be representative of our results
as a standalone company.
For the period from January 1, 2007 to June 30, 2008, our consolidated financial statements
were prepared on a combined basis. We made numerous estimates, assumptions and allocations in our
financial information because Shanda Interactive did not account for us, and we did not operate, as
a standalone company for any period prior to July 1, 2008. Before Shanda Interactive transferred
the assets and operations of its online game business to us effective July 1, 2008, the operations
of our online game business had been carried out by Shanda Interactive.
For the period from January 1, 2007 to June 30, 2008, our consolidated financial statements
were prepared by combining the assets, liabilities, revenues, expenses and cash flows of the
entities that were directly engaged in the online game business. With respect to operating
expenses, an allocation of certain general corporate expenses of Shanda Interactive which are
directly related to the online game business, such as corporate employee compensation costs,
professional service fees and other expenses arising from the provisions of certain corporate
functions including finance, legal, technology, investment and executive management, was also
included. The allocation is based on a variety of factors depending upon the nature of the expenses
being allocated, including the number of employees and historical revenue, as well as estimated
time incurred by Shanda Interactives executives for the online game business.
Although our management believes that the assumptions underlying our consolidated financial
statements for the periods prior to the reorganization and the above allocations are reasonable,
our consolidated financial statements for the years ended December 31, 2007 and 2008 may not be
reflective of our result of operations, financial position and cash flows had we been operated as a
standalone company during those periods. Therefore, our historical financial information may not be
a reliable indicator of what our results of operations, financial position and cash flows will be
in the future.
We may not be able to continue to receive the same level of support from Shanda Interactive.
Our online game business has benefited significantly from Shanda Interactives brand name and
strong market position in China. In addition, we have benefited from using Shanda Networkings
integrated service platform, which provides Shanda Interactives large number of registered game
players with access to our online games, and Shengfutongs prepaid card distribution services.
Although we have entered into the Amended and Restated Non-Compete and Non-Solicitation Agreement,
Amended and Restated Cooperation Agreement, Amended and Restated Sales Agency Agreement and other
related agreements with Shanda Interactive, we cannot assure you that we will be able to continue
to receive the same level of support from Shanda Interactive in the future.
Some of the terms of our agreements with Shanda Interactive and its affiliates may be less
favorable to us than similar agreements negotiated between unaffiliated third parties.
The various agreements that we entered into with Shanda Interactive and its affiliates in
connection with the reorganization when we were a wholly-owned subsidiary of Shanda Interactive may
be less favorable to us than would be the case if they were negotiated with unaffiliated third
parties. For example, pursuant to the Amended and Restated Cooperation Agreement and the Amended
and Restated Sales Agency Agreement, we have engaged certain VIEs of Shanda Online to provide
services that are critical to our business, including online billing and payment, user
authentication, customer service, anti-fatigue compliance, prepaid card marketing and distribution
and data support services for a five-year period commencing July 1, 2008. While we believe we
benefit from these agreements, such agreements were negotiated between a parent company and its
wholly-owned subsidiary in connection with the reorganization and therefore may not reflect the
terms that would have been reached by two unaffiliated parties negotiating at arms length.
Moreover, pursuant to our Master Separation Agreement with Shanda Interactive, we agreed to
indemnify Shanda Interactive for, among other things, liabilities arising from litigation and other
contingencies related to our online game business and assumed these liabilities as part of the
reorganization. The allocation of assets and liabilities between Shanda Interactive and our company
may not reflect the allocation that would have been reached by two unaffiliated parties. Moreover,
so long as Shanda Interactive continues to control us, we may not be able to bring a legal claim
against Shanda Interactive in the event of a contractual breach, notwithstanding our contractual
rights under the agreements described above and any other agreement we may enter into with Shanda
Interactive from time to time.
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The Amended and Restated Non-Compete and Non-Solicitation Agreement with Shanda Interactive, our
parent, contains certain exceptions and may not be effective in preventing Shanda Interactive from
engaging in certain transactions that directly or indirectly may compete with (or be perceived to
be in competition with) our online game business.
In connection with the reorganization, we entered into a Non-Compete and Non-Solicitation
Agreement (which was amended and restated on September 10, 2009) with Shanda Interactive, our
parent, pursuant to which Shanda Interactive has agreed, for a period of five years commencing
July 1, 2008, not to engage, and to cause each other member of the Shanda Group (other than Shanda
Games) not to engage, directly or indirectly, in the online game business anywhere in the world.
This agreement is subject to important exceptions, namely, (1) certain of Shanda Interactives
subsidiaries may continue to engage in their current PC network and e-sports platform businesses,
online interactive music community, and online chess and board game platform business, (2) Shanda
Interactive may acquire equity interests in a company that does not have more than 25.0% of its
gross revenues (based on the latest annual audited financial statements of the investee company)
attributable to the online game business and (3) Shanda Interactive may operate virtual communities
with certain online game features, provided that such features do not constitute the core business
model of such community. In addition, the agreement permits Shanda Interactive to acquire or invest
in any third party engaging in the online game business if, after using its reasonable best efforts
to make such investment opportunity available to us as required under the agreement, we do not
pursue such opportunity; provided that Shanda Interactives equity interest in such third party
shall not exceed 50%. Because of the exceptions to the agreement described above, we cannot assure
you that the Amended and Restated Non-Compete and Non-Solicitation Agreement will be effective in
preventing Shanda Interactive from engaging in certain conduct or transactions that directly or
indirectly may compete with (or be perceived to be in competition with) our online game business.
Even if there is no actual direct or indirect competition to our online game business, the
perception by investors or securities analysts of possible competition from Shanda Interactive
could adversely affect our business prospects and the price of our ADSs. Nor can we assure you that
Shanda Interactive will not breach the Amended and Restated Non-Compete and Non-Solicitation
Agreement. Although non-compete and non-solicitation agreements are generally enforceable under PRC
laws, PRC legal practice regarding the enforceability of such agreements is not as well-developed
as those in countries such as the United States. Thus, if we were required to enforce our rights
under the Amended and Restated Non-Compete and Non-Solicitation Agreement, we cannot assure you
that a PRC court would enforce such agreement. Even if such agreement is enforced, we may not
receive adequate remedies from courts in China or elsewhere. In addition, Shanda Interactive may
not extend or renew the Amended and Restated Non-Compete and Non-Solicitation Agreement and may
decide to compete with us upon expiration of the agreement.
Shanda Interactive will control the outcome of shareholder actions in our company.
Under our amended and restated memorandum and articles of association, our ordinary shares are
divided into Class A ordinary shares and Class B ordinary shares. Holders of Class A ordinary
shares are entitled to one vote per share, while holders of Class B ordinary shares are entitled to
10 votes per share. Shanda Interactive held 409,087,000 Class B
ordinary shares, or approximately 71.0% of the
combined total outstanding ordinary shares (representing approximately 96.1% of the total voting rights) in our
company as of December 31, 2009. Shanda Interactives shareholding, in particular the greater voting
rights of the Class B ordinary shares it holds, gives it the power to control any actions that
require shareholder approval under Cayman Islands law, our amended and restated memorandum and
articles of association and the NASDAQ requirements, including the election and removal of any
member of our board of directors, mergers, consolidations and other business combinations, changes
to our amended and restated memorandum and articles of association, the number of shares available
for issuance under share incentive plans and the issuance of significant amounts of our ordinary
shares in private placements. Due to the disparate voting rights attached to the two classes of our
ordinary shares, Shanda Interactive could have sufficient voting rights to determine the outcome of
all matters requiring shareholder approval even if it should, at some point in the future, hold
considerably less than a majority of the combined total of our outstanding Class A and Class B
ordinary shares.
As a result of Shanda Interactives ownership of Class B ordinary shares, Shanda Interactives
voting power may cause transactions to occur that might not be beneficial to you as a holder of our
ADSs and may prevent transactions that would be beneficial to you. For example, Shanda
Interactives voting power may prevent a transaction involving a change of control of us, including
transactions in which you as a holder of our ADSs might otherwise receive a premium for your
securities over the then-current market price. Similarly, Shanda Interactive may approve a merger
or consolidation of our company which may result in you receiving a stake (either in the form of
shares, debt obligations or other securities) in the surviving or new consolidated company which
may not operate our current business model and dissenter rights may not be available to you in such
an event. In addition, Shanda Interactive is not prohibited from selling a controlling interest in
us to a third party and may do so without your approval. If Shanda Interactive sells its
controlling interest in us to a third party, is acquired or otherwise undergoes a change of
control, any acquiror or successor will be entitled to exercise voting control over the Class B
ordinary shares held by Shanda Interactive and may do so in a manner that could vary significantly
from that of Shanda Interactive.
In addition, our director, Mr. Tianqiao Chen, owns a substantial equity interest in Shanda
Interactive, serves as its chairman and chief executive officer and controls its corporate actions,
and thereby controls the outcome of shareholder actions in our company indirectly through Shanda
Interactive. Mr. Chens voting control could also cause transactions to occur that might not be
beneficial to you as a holder of our ADSs and could prevent transactions that would be beneficial
to you.
19
We may have conflicts of interest with Shanda Interactive. Because of Shanda Interactives
controlling ownership interest in our company, we may not be able to resolve such conflicts on
terms favorable to us.
Conflicts of interest may arise between Shanda Interactive and us in a number of areas
relating to our past and ongoing relationships. Potential conflicts of interest that we have
identified include the following:
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Indemnification arrangements with Shanda Interactive. In connection with the
reorganization, we have agreed to indemnify Shanda Interactive with respect to liabilities
relating to our online game business, including operations of that business when it was a
business unit of Shanda Interactive prior to the reorganization. These indemnification
arrangements could result in our having interests that are adverse to those of Shanda
Interactive, such as different interests with respect to settlement arrangements in the
event of litigation. |
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Non-compete agreement with Shanda Interactive. Shanda Interactive has agreed not to
compete with us in the online game business anywhere in the world for a five-year period
commencing July 1, 2008, subject to certain exceptions that may present conflicts of
interests. See Risks Relating to the Reorganization and Our Continued Relationship with
Shanda Interactive The Amended and Restated Non-Compete and Non-Solicitation Agreement
with Shanda Interactive, our parent, contains certain exceptions and may not be effective in
preventing Shanda Interactive from engaging in certain transactions that directly or
indirectly may compete with (or be perceived to be in competition with) our online game
business. |
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Employee recruitment and retention. Because both Shanda Interactive and we operate
primarily in Shanghai and are engaged in the interactive entertainment business, we may
compete with Shanda Interactive in the hiring of new employees, in particular with respect
to those involved in interactive entertainment content development and operation. While the
Amended and Restated Non-Compete and Non-Solicitation Agreement restricts Shanda Interactive
from inducing any of our employees to terminate his or her employment with us, we cannot
assure you that Shanda Interactive will not breach this agreement. |
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Our board members or executive officers may have conflicts of interest. Mr. Qunzhao Tan,
our chairman and chief executive officer, currently also serves as a member of the board of
directors of Shanda Interactive. In addition, Mr. Tianqiao Chen and Mr. Danian Chen, both of
whom are our directors, currently also serve as Shanda Interactives chairman and chief
executive officer, and chief operating officer and as a member of the board of directors of
Shanda Interactive, respectively. A majority of our directors and executive officers also
own shares and/or options to purchase shares in Shanda Interactive. Shanda Interactive may
continue to grant incentive share compensation to our board members and executive officers
from time to time. These relationships could create perceived or actual conflicts of
interest when these persons are faced with decisions with potentially different implications
for Shanda Interactive and us. |
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Transfer of assets. In connection with the reorganization, Shanda Interactive
transferred substantially all of its assets and liabilities related to its online game
business to us. However, there may be assets (such as intellectual property rights) that are
required for our business but were not part of the assets transferred to us pursuant to the
Master Separation Agreement or otherwise have not been transferred to us. If Shanda
Interactive refuses to transfer such assets to us or if we are not able to secure similar
assets on terms acceptable to us or at all, our business, financial condition and results of
operations may be materially and adversely affected. |
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Sale of shares in our company. Shanda Interactive may decide to sell all or a portion of
the Class B ordinary shares that it holds to a third party, including to one of our
competitors, thereby giving that third party substantial influence over our business and our
affairs. Such a sale could be contrary to the interests of certain of our shareholders,
including our employees and our public shareholders, and affect the implementation of our
business strategy. |
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Allocation of business opportunities. Business opportunities may arise that both we and
Shanda Interactive find attractive, and which would complement our respective businesses.
Although Shanda Interactive has agreed in the Amended and Restated Non-Compete and
Non-Solicitation Agreement with us not to acquire equity interests in third-party online
game businesses without first using its reasonable best efforts to make such investment
opportunities available to us, subject to certain limited exceptions, we may not be able to
pursue the business opportunities effectively if Shanda Interactive decides to take
advantage of such opportunities itself notwithstanding such agreement. |
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Services provided by Shanda Networking to our competitors. Shanda Networking provides
integrated services to other online game companies that compete with us. These commercial
relationships are beyond our control and may negatively affect our business. See Risks
Relating to Our Business and Our Industry Shanda Networking provides integrated platform
services to some of our competitors, which may have a material adverse effect on our
business. |
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Developing business relationships with Shanda Interactives competitors. So long as
Shanda Interactive remains our controlling shareholder, we may be limited in our ability to
do business with its competitors, such as other interactive entertainment media companies in
China. |
20
Although our company is a standalone entity, we expect to operate, for as long as Shanda
Interactive is our controlling shareholder, as a part of the Shanda Group. Shanda Interactive may
from time to time make strategic decisions that it believes are in the best interests of the Shanda
Group as a whole. These decisions may be different
from the decisions that we would have made on our own. Shanda Interactives decisions with
respect to us or our business may be resolved in ways that favor Shanda Interactive and therefore
Shanda Interactives own shareholders, which may not coincide with the interests of our other
shareholders. We may not be able to resolve any potential conflicts, and even if we do so, the
resolution may be less favorable to us than if we were dealing with an unaffiliated shareholder.
Even if both parties seek to transact business on terms intended to approximate those that could
have been achieved among unaffiliated parties, this may not succeed in practice.
Risks Relating to Regulation of Our Business and to Our Structure
If the PRC government finds that the agreements that establish the structure for operating our
China business do not comply with its restrictions on foreign investment in the online game
industry, we could be subject to severe penalties.
On December 11, 2001, the PRC State Council promulgated Regulations for the Administration of
Foreign-invested Telecommunications Enterprises, or the FITE Regulations, which became effective on
January 1, 2002 and were subsequently amended on September 10, 2008. Under the FITE Regulations,
foreign ownership of companies that provide value-added telecommunication services, which includes
online game operation, is limited to 50%. In addition, foreign and foreign-invested enterprises are
currently not able to apply for the licenses required to operate online games in China. Since we
are a Cayman Islands exempted company and therefore are a foreign or foreign-invested enterprise
under PRC law, neither we nor our PRC subsidiaries are eligible to hold a license to operate online
games in China. In order to comply with the foreign ownership restrictions, we operate our online
game business in China through Shanghai Shulong, which is wholly owned by Dongxu Wang and Yingfeng
Zhang, two PRC citizens, and its wholly-owned subsidiaries, Shulong
Computer, Nanjing Shulong, Chengdu Simo, Chengdu Aurora and the Youji entities.
Except as otherwise disclosed in The laws and regulations governing the online game industry and
related businesses in China are developing and subject to future changes. If we or any of our PRC
operating companies fail to obtain or maintain all applicable permits and approvals, our business
and operations would be materially and adversely affected, Shanghai Shulong holds the licenses and
approvals that are required to operate our online game business. Our PRC subsidiaries have entered
into a series of contractual arrangements with Shanghai Shulong and/or its shareholders. As a
result of these contractual arrangements, we are considered the primary beneficiary of Shanghai
Shulong and its subsidiaries and consolidate the results of operations of Shanghai Shulong and its
subsidiaries in our financial statements.
On July 13, 2006, the MIIT issued the Circular on Strengthening the Administration of Foreign
Investment in Value-added Telecommunication Services, or the MIIT Circular 2006. According to the
MIIT Circular 2006, since the FITE Regulations went into effect, some foreign investors had engaged
in value-added telecom services illegally by conspiring with domestic value-added telecom
enterprises to circumvent the requirements of the FITE Regulations by delegating domain names and
licensing trademarks. In order to further strengthen the administration of FITEs, the MIIT Circular
2006 provides that any domain name or trademark used by a value-added telecom carrier shall be
legally owned by such carrier or its shareholders. The MIIT Circular 2006 also provides that the
operation site and facilities of a value-added telecom carrier shall be installed within the scope
as prescribed by operating licenses obtained by the carrier and shall correspond to the value-added
telecom services that the carrier has been approved to provide. In addition, value-added telecom
carriers are required to establish or improve the measures to ensure network security. As to the
companies which have obtained the operating licenses for value-added telecom services, they are
required to conduct a self-examination and self-correction according to the above requirements and
report the results of such self-examination and self-correction to the provincial branches of the
MIIT. As some of the domain names and trademarks that we use in our operations are not owned by
Shanghai Shulong or its shareholders, we may be in violation of the provisions of the MIIT Circular
2006. As a result, we may be subject to various penalties, including fines and the discontinuation
of or restrictions on our operations.
In the opinion of Jade & Fountain PRC Lawyers, our PRC legal counsel, except for otherwise
disclosed in this annual report, in all material aspects, (i) the ownership structures of our
company, our PRC subsidiaries and our PRC operating companies are in compliance with existing PRC
laws and regulations, (ii) the contractual arrangements between our PRC subsidiaries, on the one
hand, and Shanghai Shulong and/or its shareholders, on the other hand, are valid, binding and
enforceable, and will not result in any violation of PRC laws or regulations currently in effect
and (iii) the business operations of our company, our PRC subsidiaries, and our PRC operating
companies, as described in this annual report, are in compliance with existing PRC laws and
regulations. There are, however, substantial uncertainties regarding the interpretation and
application of current or future PRC laws and regulations. Accordingly, we cannot assure you that
the PRC regulatory authorities will not ultimately take a view contrary to that of Jade & Fountain
PRC Lawyers. If we, our PRC subsidiaries, or any of our PRC operating companies are found to have
violated any existing or future PRC laws or regulations, the relevant regulatory authorities would
have broad discretion in dealing with such violations, including:
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revoking our PRC operating companies business and operating licenses; |
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discontinuing or restricting our PRC operating companies operations; |
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imposing conditions or requirements with which we or our PRC companies may not be able to
comply; |
21
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requiring us or our PRC companies to restructure the relevant ownership structure or
operations; or |
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taking other regulatory or enforcement actions, including levying fines, that could be
harmful to our business. |
Any of these actions could cause our business, financial condition and results of operations
to suffer and the market price of our ADSs to decline.
The contractual arrangements related to critical aspects of our operations with Shanghai Shulong
and its shareholders may not be as effective in providing operational control as direct ownership.
We rely on contractual arrangements with Shanghai Shulong and its shareholders to operate our
business. These contractual arrangements may not be as effective as direct ownership in providing
us with control over Shanghai Shulong and its subsidiaries which constitute all of our PRC
operating companies. Direct ownership would allow us, for example, to directly or indirectly
exercise our rights as a shareholder to effect changes in the boards of directors of Shanghai
Shulong, which, in turn, could effect changes, subject to any applicable fiduciary obligations, at
the management level. However, under the current contractual arrangements, as a legal matter, if
Shanghai Shulong or its shareholders fails to perform its, his or her respective obligations under
these contractual arrangements, we may have to incur substantial costs and expend significant
resources to enforce those arrangements and rely on legal remedies under PRC law. These remedies
may include seeking specific performance or injunctive relief and claiming damages, any of which
may not be effective.
Under an equity pledge agreement, the shareholders of Shanghai Shulong have pledged their
equity interests in Shanghai Shulong to Shengqu. According to the PRC Property Rights Law, which
became effective on October 1, 2007, a pledge is created only when such pledge is registered with
the relevant office of the administration for industry and commerce. We have registered the equity
pledge by the shareholders of Shanghai Shulong with the relevant office of the administration for
industry and commerce. However, all of these contractual arrangements are governed by PRC laws and
provide for the resolution of disputes through either arbitration or litigation in the PRC.
Accordingly, these contracts would be interpreted in accordance with PRC laws and any disputes
would be resolved in accordance with PRC legal procedures. The legal environment in the PRC is not
as developed as in other jurisdictions, such as the United States. As a result, uncertainties in
the PRC legal system could limit our ability to enforce these contractual arrangements. In the
event we are unable to enforce these contractual arrangements, we may be unable to exert effective
control over our PRC operating companies, and our ability to conduct our business may be materially
and adversely affected.
Shareholders of Shanghai Shulong may potentially have a conflict of interest with us, and they may
breach their contracts with us or cause such contracts to be amended in a manner contrary to the
interest of our company.
We conduct substantially all of our operations, and generate substantially all of our
revenues, through our PRC operating companies. Our control over these entities is based upon
contractual arrangements with Shanghai Shulong and its shareholders that provide us with the
substantial ability to control Shanghai Shulong and its subsidiaries which constitute our PRC
operating companies. These shareholders are employees of Shanda Interactive, our parent, and may
potentially have a conflict of interest with us, and they may breach their contracts with us or
cause such contracts to be amended in a manner contrary to the interest of our company, if they
believe such action furthers their own interest or that of our parent, Shanda Interactive, or if
they otherwise act in bad faith. They are not our directors, principal shareholders or employees.
Therefore, they do not owe any fiduciary duty to us and may take actions that adversely affect us.
If the shareholders of Shanghai Shulong breach their contracts with us or otherwise have disputes
with us, we may have to initiate legal proceedings, which involve significant uncertainty. Such
disputes and proceedings may significantly disrupt our business operations, adversely affect our
ability to control our PRC operating companies and otherwise result in negative publicity, and we
cannot assure you that the outcome of such disputes and proceedings will be in our favor.
Our arrangements with our PRC operating companies may be reviewed by the PRC tax authorities for
transfer pricing adjustments.
We could face material adverse tax consequences if the PRC tax authorities determine that the
contractual arrangements between our PRC subsidiaries and Shanghai Shulong were not entered into
based on arms length negotiations. Although we based our contractual arrangements on those of
similar businesses, if the PRC tax authorities determine that these contracts were not entered into
on an arms length basis, they may adjust our income and expenses for PRC tax purposes in the form
of a transfer pricing adjustment. A transfer pricing adjustment could adversely affect us by
increasing our PRC operating companies tax liabilities without reducing our PRC subsidiaries tax
liabilities, which could further result in late payment fees and other penalties to our PRC
operating companies for under-paid taxes. As a result, any transfer pricing adjustment could have a
material adverse effect on our financial condition and results of operations.
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Our holding company structure may restrict our ability to receive dividends from, or transfer funds
to, our PRC subsidiaries and our PRC operating companies, which could restrict our ability to act
in response to changing market conditions and reallocate funds among our Chinese entities timely.
We are a Cayman Islands holding company and conduct substantially all of our operations
through our PRC operating companies. We may rely on dividends and other distributions on equity by
our PRC subsidiaries for our cash requirements, including the funds to pay dividends on the Class A
ordinary shares underlying our ADSs and to service any debt we may incur or financing we may need
for our operations. If any of our PRC subsidiaries incurs its own debt in the future, the
instruments governing the debt may restrict such PRC subsidiarys ability to pay dividends or make
other distributions to Shanda Games (HK) and to us. Furthermore, under PRC laws and regulations,
each PRC subsidiary is only permitted to pay dividends out of its retained earnings, if any,
determined in accordance with PRC accounting standards and regulations. Under PRC law, each PRC
subsidiary is also required to set aside at least 10% of its after-tax profit based on PRC
accounting standards each year to its general reserves until the cumulative amount of such reserves
reaches 50% of its registered capital. These reserves are not distributable as cash dividends,
loans or advances. Each PRC subsidiary may also allocate a portion of its after-tax profits, as
determined by its board of directors, to its staff welfare and bonus funds, which may not be
distributed to us. As a result of these and other restrictions under PRC laws and regulations, each
PRC subsidiary is restricted from transferring a portion of its assets to us as dividends, loans or
advances, which restricted portion amounted to approximately
RMB602.8 million (US$88.3 million), or
21.4% of our total consolidated net assets as of December 31, 2009. Any limitation on the ability
of our PRC subsidiaries to transfer funds to us as dividends, loans or advances could materially
and adversely limit our ability to grow, make investments or acquisitions that could benefit our
businesses, pay debt or dividends, and otherwise fund and conduct our business.
In addition, any funds we transfer to our PRC subsidiaries, either as a shareholder loan or as
an increase in registered capital, is subject to registration or approval of PRC governmental
authorities, including the relevant administration of foreign exchange and/or the relevant
examining and approval authority. Our PRC companies are prohibited by PRC law to directly lend
money to each other. Therefore, it is difficult to change our capital expenditure plans once the
relevant funds have been remitted from our company to our PRC subsidiaries. These limitations on
the free flow of funds between us and our PRC companies could restrict our ability to act in
response to changing market conditions and reallocate funds among our PRC companies on a timely
basis. Moreover, according to a circular jointly issued by the Ministry of Finance and the State
Administration of Taxation on September 19, 2008, the debt-to-equity ratio of a non-financial
institution may not exceed 2:1 unless the shareholder loan in question can meet certain conditions.
Although there is uncertainty at this time as to how the circular will be interpreted and
implemented, such circular may have a negative impact on our PRC subsidiaries abilities to obtain
loans from its shareholders.
We are one of Chinas leading online game providers and cooperate closely with Shanda Online, which
through its VIEs operates a leading online service platform in China. Some of our competitors and
our users may institute claims against us and Shanda Online under the new Anti-Monopoly Law and as
a result we may have to terminate our relationship with Shanda Online, which may have a material
adverse effect on our business, financial conditions and results of operations.
The new Anti-Monopoly Law, or the AML, was approved by the National Peoples Congress on
August 30, 2007, which became effective date on August 1, 2008. While certain aspects of the AML
are unclear and are subject to subsequent interpretation by the State Council and the Anti-Monopoly
Commission and the Anti-Monopoly Enforcement Agency, the AML prohibits certain conduct, referred to
as monopolistic acts, which include monopoly agreements, abuse of a dominant market position,
and certain concentrations, which result or could result in the elimination or restriction of
competition. The law also requires the State Council to establish an Anti-Monopoly Commission with
authority to make competition policy, publish guidelines, coordinate anti-monopoly enforcement work
and conduct investigations and impose penalties on business operators that commit certain
monopolistic acts within or outside of China that have the effect of eliminating or restricting
competition in the China market.
It remains to be seen how the AML will be implemented in practice and what effects it will
have on us and other companies in China. Given our leading position in the online game industry in
China and our close cooperation with Shanda Online, which through its VIEs, operates a leading
online service platform in China, some of our competitors and our users may institute claims
against us and Shanda Online under the AML and as a result, we may have to terminate our
relationship with Shanda Online if such claims are determined adversely to us or Shanda Online,
which may have a material adverse effect on our business, financial conditions and results of
operation.
The laws and regulations governing the online game industry and related businesses in China are
developing and subject to future changes. If we or any of our PRC operating companies fail to
obtain or maintain all applicable permits and approvals, our business and operations would be
materially and adversely affected.
The Internet industry, including the operation of online games, in China is highly regulated
by the PRC government. Various regulatory authorities of the central PRC government, such as the
State Council, the MIIT, the State Administration for Industry and Commerce, or the SAIC, the
Ministry of Culture, or the MOC, the General Administration of Press and Publication, or the GAPP,
the State Administration of Radio, Film and Television, and the Ministry of Public Security, are
empowered to promulgate and implement regulations governing various aspects of the Internet and the
online game industry.
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Our PRC operating companies are required to obtain applicable permits or approvals from
different regulatory authorities in order to provide their services. For example, an Internet
content provider, or ICP, must obtain a value-
added telecommunications business operation license, or ICP license, from the MIIT or its
local offices in order to engage in any commercial ICP operations within China. An online game
operator must also obtain an Internet culture operation license from the MOC, an Internet
publishing license from the GAPP in order to distribute games through the Internet and approval
from the MIIT to provide online bulletin board services. Shanghai Shulong currently holds an
inter-regional ICP license as well as an Internet culture operation license. Chengdu Aurora
currently holds a regional ICP license as well as an Internet culture operation license. Shanghai
Shulong currently does not hold an Internet publishing license and publishes its online games
through cooperation with Shanda Networking, which holds such a license. In addition, users of our
online games use online bulletin board services provided by Shanda Networking, which is in the
process of renewing its license to provide online bullet board services. If any of our PRC
operating companies fails to obtain or maintain any of the required permits or approvals or if our
practice is later challenged by government authorities, they may also be subject to various
penalties, including fines and the discontinuation of or restriction on our operations. Any such
disruption in business operations would materially and adversely affect our financial condition and
results of operations.
As the online game industry is at an early stage of development in China, new laws and
regulations may be adopted in the future to address new issues that arise from time to time, such
as online advertising. Also, different regulatory authorities may have different views regarding
the licensing requirements for the operation of online games and related businesses. As a result,
substantial uncertainties exist regarding the interpretation and implementation of current and any
future PRC laws and regulations applicable to the online game industry and related businesses.
While we believe that we comply in all material respects with all applicable PRC laws and
regulations currently in effect, we cannot assure you that we will not be found in violation of any
current or future PRC laws and regulations.
Additional government regulations resulting from negative publicity in China regarding online games
or otherwise may have a material adverse effect on our business, financial condition and results of
operations.
The media in China has reported incidents of violent crimes allegedly provoked by, or
committed in connection with, online games. In addition, there have been widespread negative media
reports that focus on how online games are addictive and how excessive game playing could distract
students and interfere with their education. Certain non-governmental organizations may also
organize protests or publicity campaigns against online game companies in order to protect youth
from the risk of becoming addicted to certain online games. The PRC government may decide to adopt
more stringent policies to monitor the online game industry as a result of adverse public reaction
to perceived addiction to such games, particularly by minors. In 2007, eight PRC government
authorities, including the GAPP, the Ministry of Education and the MIIT, jointly issued a notice
requiring all Chinese online game operators to adopt an anti-fatigue compliance system in an
effort to curb addiction to online games by minors. Under the anti-fatigue compliance system, three
hours or less of continuous play is defined to be healthy, three to five hours is defined to be
fatiguing, and five hours or more is defined to be unhealthy. Game operators are required to
reduce the value of game benefits for minor game players by half when those game players reach the
fatigue level, and to zero when they reach the unhealthy level. In addition, online game
players in China are now required to register their identity card numbers before they can play an
online game. This system allows game operators to identify which game players are minors. It is
unclear whether these restrictions would be expanded to apply to adult game players in the future.
More stringent government regulations, including stricter anti-fatigue rules, could discourage game
players from playing our games, which could have a material adverse effect on our business,
financial condition and results of operations.
In addition, the State Administration of Taxation recently announced that it will tax game
players on the income derived from the trading of virtual currencies at the rate of 20.0%. However,
it is currently unclear how the tax will be collected or if there will be any effect on our game
players or our business.
Furthermore, similar adverse public reaction may arise, and similar government policies may be
adopted, in other jurisdictions where we license out our online games, which could materially and
adversely affect our overseas licensing revenues.
The PRC government has tightened its regulation of Internet cafes, which are currently one of the
primary venues for our users to play online games. Intensified government regulation of Internet
cafes could restrict our ability to maintain or increase our revenues and expand our game player
base.
Internet cafes are one of the primary places where our games are played. In March 2001, the
PRC government began tightening its regulation and supervision of Internet cafes. In particular, a
large number of unlicensed Internet cafes have been closed. The PRC government has also imposed
higher capital and facility requirements for the establishment of Internet cafes. Furthermore, the
PRC governments policy, which encourages the development of a limited number of national and
regional Internet cafe chains and discourages the establishment of independent Internet cafes, may
slow down the growth of Internet cafes. In February 2004, the government agencies in charge of
Internet cafe licensing jointly issued a notice suspending the issuance of new Internet cafe
licenses for a period of six months. In February 2007, 14 PRC government departments jointly issued
a circular to strengthen the regulation of Internet cafes and online games. According to the
circular, local authorities were banned from issuing new Internet cafe licenses for the remainder
of 2007. Since this ban was imposed in 2007, to our knowledge, local authorities have not issued
new Internet cafe licenses and it is unclear when local authorities will start issuing new licenses
again. In March 2010, the MOC issued a circular to increase the punishment on Internet cafes which
allow minors to enter and
use Internet in their cafes. According to this circular, among other things, the authorities
may revoke an Internet cafes Internet culture operation license if that Internet cafe allows three
or more minors to enter and use Internet at one time. Governmental authorities may from time to
time impose stricter requirements, such as the customers age limit and hours of operation, among
others, as a result of the occurrence and perception of, and the media attention on, gang fights,
arson and other incidents in or related to Internet cafes. Since a substantial portion of our users
play our games in Internet cafes, any reduction in the number, or slowdown in the growth, of
Internet cafes in China, or any new regulatory restrictions on their operations, could limit our
ability to maintain or increase our revenues and expand our game player base, thereby adversely
affecting our business and results of operations, as well as growth prospects.
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The PRC government may prevent us from distributing, and we may be subject to liability for,
content deemed to be inappropriate.
China has enacted laws and regulations governing Internet access and the distribution of news,
information or other content, as well as products and services, through the Internet. In the past,
the PRC government has stopped the distribution of information through the Internet that it
believes violates PRC law. The MIIT, the GAPP and the MOC have promulgated regulations that
prohibit games from being distributed through the Internet if the games contain content that is
found to, among other things, propagate obscenity, gambling or violence, instigate crimes,
undermine public morality or the cultural traditions of China, or compromise state security or
secrets. In addition, certain PRC social organizations have recently discussed the possibility of
implementing a rating system for online games. The effect that such a system could have on our
business is unclear.
If any games we offer were deemed to violate any such content restrictions, we would not be
able to obtain the necessary governmental approval, may not be able to continue such offerings
and/or could be subject to penalties, including confiscation of income, fines, suspension of
business and revocation of our license for operating online games, which would materially and
adversely affect our business, financial condition and results of operations.
We may also be subject to potential liability for unlawful actions of our users or for content
we distribute that is deemed inappropriate. Furthermore, we may be required to delete content that
violates PRC law and report content that we suspect may violate PRC law. It may be difficult to
determine the type of content that may result in liability for us, and if we are wrong, we may be
prevented from operating our games or offering other services in China.
The PRC government controls virtually all Internet access in China, and requires all computers sold
in China to be installed with government-designated software to censor websites deemed
inappropriate by the government, which may potentially discourage or restrict the use of the
Internet or our online games by the players, and consequently adversely impact our business,
financial conditions and results of operation.
The PRC government controls virtually all Internet access in China and may occasionally block
Internet access throughout the country or in certain regions due to political concerns, in
particular in response to, or out of concerns with respect to, special incidents or significant
events, thereby preventing people in China, including our game players, from accessing the Internet
and playing our online games.
On May 19, 2009, the MIIT issued a circular regarding the Pre-installment of Green Dam Web
Filter Software on Computers. According to this circular, commencing on July 1, 2009, all computers
sold in China are required to be installed with a government-designated software,
called Green Dam Youth Escort, to block unhealthy words or pictures. However, according to
media reports, such software may compromise the security of personal information. Given the
controversy generated by this circular, the MIIT announced on June 30, 2009 that it would extend
the deadline for the implementation of the circular. According to recent media reports, the
minister of the MIIT further stated on August 13, 2009 that the Chinese government will not require
all computers sold in China to be installed with the filter software but that computers used in
schools, Internet cafes and other public places will be required to be installed with the filter
software in order to prevent young people from being harmed by unhealthy online content. It is
currently unclear to what extent this circular would be implemented. Although this circular is not
intended to block access to online games, if any content of our online games is found by the filter
software to contain unhealthy words or pictures, our website may be blocked by the software, and
as a result users who play our games will not be able to access our online games, which would have
an adverse effect on our business, financial conditions and results of operation.
We may be required to reapply for approvals for online games licensed from overseas licensors.
The MOC issued a Circular Concerning the Examination and Declaration of Imported Online Game
Products on April 24, 2009. Imported online games refers to online games that are licensed from
licensors outside of China. According to this circular, in the event of a change of the operator of
an imported online game, the games existing import approval will be automatically revoked and the
new operator must apply to the MOC for a new approval for the same game. As this circular is newly
issued, it remains unclear how and to what extent this circular will be implemented or enforced.
On September 28, 2009, the GAPP, together with two other government authorities, issued a circular
(Xin Chu Lian [2009] No. 13) which contains a similar provision to the MOC circular mentioned
above. The GAPP circular also requires that, in the event of a change of the operator of an
imported online game, the new operator must apply to the GAPP for a new approval for the same game,
and the operation of the online game should be suspended until the GAPP approves the change in
operator.
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We currently operate substantially all of our imported online games under import approvals
granted by the GAPP and the MOC to Shanda Networking. Under the above referenced circulars, we are
required to reapply to the GAPP and the MOC for approvals for our imported online games. We are
committed to complying with the requirements of these circulars. However, we cannot assure you that
we will succeed in obtaining all the approvals as required by these circulars in time or at all. If
we fail to comply with the requirements of this circular or fail to obtain all the approvals for
our imported online games, we may be subject to fines, revocation of the relevant operating
licenses, the discontinuation or restrictions on our operations or other sanctions. As a result,
our business, financial condition and results of operations could be materially and adversely
affected.
Currently there is no law or regulation specifically governing virtual asset property rights and
therefore, it is not clear what liabilities, if any, online game operators may have for virtual
assets.
In the course of playing online games, some virtual assets, such as special equipment, player
experience grades and other features of our users game characters, are acquired and accumulated.
Such virtual assets can be important to online game players and have monetary value and in some
cases are sold among players for actual money. In practice, virtual assets can be lost for various
reasons, often through unauthorized use of the game account of one user by other users and
occasionally through data loss caused by a delay of network service, a network crash or hacking
activities. Currently, there is no PRC law or regulation specifically governing virtual asset
property rights. As a result, there is uncertainty as to who is the legal owner of virtual assets,
whether and how the ownership of virtual assets is protected by law, and whether an operator of
online games such as us would have any liability to game players or other interested parties
(whether in contract, tort or otherwise) for loss of such virtual assets. In case of a loss of
virtual assets, we may be sued by our game players and held liable for damages, which may
negatively affect our reputation and business, financial condition and results of operation. We
have been involved in a limited number of virtual assets-related lawsuits, most of which have been
settled.
Based on several judgments by PRC courts regarding the liabilities of online game operators
for loss of virtual assets by game players, the courts have generally required the online game
operators to return the virtual items or be liable for the loss and damage incurred therefrom.
Compliance with the laws or regulations governing virtual currency may result in us having to
obtain additional approvals or licenses or change our current business model.
The issuance and use of virtual currency in the PRC is regulated by recently adopted
regulations. In January 2007, the Ministry of Public Security, the MOC, the MIIT and the GAPP
jointly issued a circular regarding online gambling which has implications for the use of virtual
currency. To curtail online games that involve online gambling, as well as address concerns that
virtual currency could be used for money laundering or illicit trade, the circular (i) prohibits
online game operators from charging commissions in the form of virtual currency in relation to
winning or losing of games; (ii) requires online game operators to impose limits on use of virtual
currency in guessing and betting games; (iii) bans the conversion of virtual currency into real
currency or property; and (iv) prohibits services that enable game players to transfer virtual
currency to other players. In February 2007, 14 PRC regulatory authorities jointly promulgated a
circular to further strengthen the oversight of Internet cafes and online games. Under the
circular, the Peoples Bank of China, or the PBOC, has authority to regulate virtual currency,
including: (i) setting limits on the aggregate amount of virtual currency that can be issued by
online game operators and the amount of virtual currency that can be purchased by an individual;
(ii) stipulating that virtual currency issued by online game operators can only be used for
purchasing virtual products and services within the online games and not for purchasing tangible or
physical products; (iii) requiring that the price for redemption of virtual currency shall not
exceed the respective original purchase price; and (iv) banning the trading of virtual currency.
There are substantial uncertainties regarding the interpretation and implementation of these
two circulars, and we cannot assure you that the PRC regulatory authorities will not take a view
contrary to ours. If the PRC regulatory authorities deem our online operations to violate either
circular, the PBOC may confiscate the revenues generated through such activities and/or impose
fines and other penalties under the law of the PBOC as well as other laws and regulations of the
PRC.
On June 4, 2009, the MOC and the Ministry of Commerce, or the MOFCOM, jointly issued a notice
regarding strengthening the administration of online game virtual currency, or the Virtual Currency
Notice. The notice requires businesses that (i) issue online game virtual currency (in the form of
prepaid cards or pre-payment or prepaid card points) or (ii) offer online game virtual currency
transaction services to apply for approval from the MOC within three months following the date of
the notice. The notice also prohibits businesses that issue online game virtual currency from
providing services that would enable the trading of such virtual currency.
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We issue online game virtual currency to game players for them to purchase various virtual
items or time units to be used in our online games. We intend to comply with the Virtual Currency
Notice. Shanghai Shulong and Chengdu Aurora have obtained approval from the MOC to issue online
game virtual currency, as required under the Virtual Currency Notice. However, we cannot assure you
that all of our PRC operating companies will be able to obtain the approval in a timely manner or
at all. If we are not able to obtain the approval, we may be prohibited from issuing virtual
currency and thus may have to change our business model. We are in the process of adjusting the
content of
our online games, as well as the form of payment settlement between Shanda Online and us, but
we cannot assure you that our adjustments will be sufficient to comply with the Virtual Currency
Notice. Moreover, although we believe we do not offer online game virtual currency transaction
services, we cannot assure you that the PRC regulatory authorities will not take a view contrary to
ours. For example, certain virtual items we issue (such as coupons) are transferable and
exchangeable in the games. If the PRC regulatory authorities deem such transfer or exchange to be a
virtual currency transaction, aside from being engaged in the issuance of virtual currency, we may
also be deemed to be providing transaction platform services that enable the trading of such
virtual currency. Simultaneously engaging in both of these activities is prohibited under the
Virtual Currency Notice. In that event, we may be required to cease either our virtual currency
issuance activities or such deemed transaction service activities and may be subject to certain
penalties, including but not limited to mandatory corrective measures and fines. The occurrence of
any of the foregoing could have a material adverse effect on our business and results of
operations.
In addition, the Virtual Currency Notice also prohibits online game operators from setting
game features that involve the direct payment of cash or virtual currency by players for the chance
to win virtual items or virtual currency based on random selection through a lucky draw, wager or
lottery. The notice also prohibits game operators from issuing currency to game players through
means other than purchases with legal currency. It is unclear whether these restrictions would
apply to certain aspects of our online games. For example, certain of our games contain features
known as treasure boxes. Players may use yuanbao, a type of virtual item they obtain in the
games, to acquire keys to open treasure boxes that, if opened, award the player with rewards, such
as game points or virtual items. As no cash or virtual currency is directly paid by the players in
opening treasure boxes, we believe this feature is distinct from those prohibited by the Virtual
Currency Notice. However, we cannot assure you that the PRC regulatory authorities will not take a
view contrary to ours and deem such feature as prohibited by the Virtual Currency Notice, thereby
subjecting us to penalties, including mandatory corrective measures and fines. In addition, since
we believe many of our game players find treasure boxes to be an enjoyable feature of our games, if
we are required to eliminate this from our games, our games could be less attractive to players.
The occurrence of any of the foregoing could materially and adversely affect our business and
results of operations.
We may be subject to, and may expend significant resources in defending against, government actions
and civil suits based on the advertising content provided in our virtual advertising space; we may
also be penalized by the governmental authority for such content.
Shanghai Shengyue Advertisement Co., Ltd., or Shengyue, a wholly-owned subsidiary of Shanda
Interactive, acts as our advertising agent to sell the virtual advertising space in our online
games to third-party advertisers. Civil claims may be filed against Shengyue or us for fraud,
defamation, subversion, negligence, copyright or trademark infringement or other violations due to
the nature and content of the information displayed in the virtual advertising space in our games.
Offensive and objectionable content and legal standards for defamation and fraud in China are less
defined than in other more developed countries and we may not be able to properly screen out
unlawful content. If such activities result in damages to any third party or violates any other
regulation related to advertising business, PRC governmental authority may penalize us by revoking
our game license, imposing fines, suspending our business license or imposing criminal liability on
us, which would materially and adversely affect our business, financial condition and results of
operations.
Risks Relating to the Peoples Republic of China
Adverse changes in economic and political policies of the PRC government could have a material
adverse effect on the overall economic growth of China, which could adversely affect our business.
Most of our business operations are conducted in China and most of our revenues are generated
in China. Accordingly, our business, financial condition, results of operations and prospects are
affected significantly by economic, political and legal developments in China. The Chinese economy
differs from the economies of most developed countries in many respects, including the amount of
government involvement, the level of development, the growth rate, the control of foreign exchange,
and the allocation of resources.
While the Chinese economy has grown significantly in the past 30 years, the growth has been
uneven geographically among various sectors of the economy, and during different periods. The PRC
government has implemented various measures to encourage economic development and guide the
allocation of resources. While some of these measures benefit the overall PRC economy, they may
also have a negative effect on us if the measures reduce the consumable income of our game players.
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The PRC legal system embodies uncertainties which could limit the legal protections available to
us.
The PRC legal system is a civil law system based on written statutes. Unlike common law
systems, it is a system in which decided legal cases have little precedential value. In 1979, the
PRC government began to promulgate a comprehensive system of laws and regulations governing general
economic and business matters. The overall effect of legislation since 1979 has been a significant
enhancement of the protections afforded to various forms of foreign-invested enterprises in China.
Each of our PRC subsidiaries is a wholly foreign owned enterprise, or WFOE, which is an enterprise
incorporated in China and wholly owned by foreign investors. Our PRC subsidiaries are subject to
laws and regulations applicable to foreign investment in China in general and laws and regulations
applicable to WFOEs in particular. However, these laws, regulations and legal requirements are
constantly changing and their interpretation and enforcement involve uncertainties. These
uncertainties could limit the legal protections available to us. In addition, we cannot predict the
effect of future developments in the PRC legal system, particularly with regard to the Internet,
including the promulgation of new laws, changes to existing laws or the interpretation or
enforcement thereof, or the preemption of local regulations by national laws. Furthermore, any
litigation in China may be protracted and result in substantial costs and diversion of resources
and management attention.
Regulations relating to offshore investment activities by PRC residents may subject us to fines or
sanctions imposed by the PRC government, including restrictions on our PRC subsidiaries abilities
to pay dividends or make distributions to us and our ability to increase our investment in our PRC
subsidiaries.
In October 2005, the State Administration of Foreign Exchange, or the SAFE, promulgated the
Circular on Relevant Issues Concerning Foreign Exchange Control on Domestic Residents Corporate
Financing and Roundtrip Investment Through Offshore Special Purpose Vehicles, or Circular 75, which
states that if PRC residents use assets or equity interests in their PRC entities as capital
contributions to establish offshore companies or inject assets or equity interests of their PRC
entities into offshore companies to raise capital overseas, they must register with local SAFE
branches with respect to their overseas investments in offshore companies. They must also file
amendments to their registrations if their offshore companies experience material events involving
capital variation, such as changes in share capital, share transfers, mergers and acquisitions,
spin-off transactions, long-term equity or debt investments or uses of assets in China to guarantee
offshore obligations. Under this regulation, their failure to comply with the registration
procedures set forth in such regulation may result in fines or sanctions imposed by the PRC
government, including restrictions being imposed on the foreign exchange activities of the relevant
PRC entity, including the payment of dividends and other distributions to its offshore parent, as
well as restrictions on the capital inflow from the offshore entity to the PRC entity.
We are committed to complying with and to ensuring that our shareholders who are subject to
the regulations will comply with the relevant rules. However, we cannot assure you that all of our
shareholders who are PRC residents will comply with our request to make or obtain any applicable
registrations or comply with other requirements required by Circular 75 or other related rules. Any
future failure by any of our shareholders who is a PRC resident, or controlled by a PRC resident,
to comply with relevant requirements under this regulation could subject us to fines or sanctions
imposed by the PRC government, including restrictions on our PRC subsidiaries abilities to pay
dividends or make distributions to us and our ability to increase our investment in our PRC
subsidiaries.
SAFE rules and regulations may limit our ability to convert and transfer the net proceeds from our
initial public offering to Shanghai Shulong, our VIE in the PRC, which may adversely affect the
business expansion of Shanghai Shulong, and we may not be able to convert the net proceeds from our
initial public offering into Renminbi to invest in or acquire any other PRC companies or establish
other VIEs in the PRC.
On August 29, 2008, SAFE promulgated Circular 142, a notice regulating the conversion by a
foreign-invested company of foreign currency into Renminbi by restricting how the converted
Renminbi may be used. The notice requires that the registered capital of a foreign-invested company
settled in Renminbi converted from foreign currencies may only be used for purposes within the
business scope approved by the applicable governmental authority and may not be used for equity
investments within the PRC. In addition, SAFE strengthened its oversight of the flow and use of the
registered capital of a foreign-invested company settled in Renminbi converted from foreign
currencies. The use of such Renminbi capital may not be changed without SAFEs approval, and may
not in any case be used to repay Renminbi loans if the proceeds of such loans have not been used.
Violations of Circular 142 will result in severe penalties, such as heavy fines. As a result,
Circular 142 may significantly limit our ability to transfer the net proceeds from our initial
public offering to Shanghai Shulong through our subsidiary in the PRC, which may adversely affect
the business expansion of Shanghai Shulong, and we may not be able to convert the net proceeds from
our initial public offering into Renminbi to invest in or acquire any other PRC companies, or
establish other VIEs in the PRC.
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Restrictions on currency exchange may limit our ability to utilize our capital effectively.
Substantially all of our revenues and operating expenses are denominated in Renminbi. The
Renminbi is currently freely 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, our PRC subsidiaries may purchase foreign exchange for settlement of current
account transactions, including payment of dividends to Shanda Games (HK) and payment of license
fees to international game licensors, and our PRC operating companies may purchase foreign exchange
for payment of license fees to international game licensors without the approval of the SAFE. Our
PRC subsidiaries may also retain foreign exchange in its current account, subject to a ceiling
approved by the SAFE, to satisfy foreign exchange liabilities or to pay dividends. However, we
cannot assure you that the relevant PRC governmental authorities will not limit or eliminate our
PRC subsidiaries abilities to purchase and retain foreign currencies in the future.
Since a significant amount of our future revenues will be denominated in Renminbi, the
existing and any future restrictions on currency exchange may limit our ability to utilize capital
generated in Renminbi to fund our business activities outside of China, if any, or expenditures
denominated in foreign currencies.
Foreign exchange transactions under the capital account are subject to limitations and require
registration with or approval by the relevant PRC governmental authorities. In particular, if we
finance our PRC subsidiaries by foreign currency loans, those loans cannot exceed certain statutory
limits and must be registered with the SAFE, and if we finance our PRC subsidiaries by capital
contributions using, for instance, proceeds from our initial public offering, those capital
contributions must be approved by the MOFCOM. In addition, because of the regulatory issues related
to foreign currency loans to, and foreign investment in, domestic PRC enterprises, we may not be
able to finance our PRC operating companies operations by loans or capital contributions. We
cannot assure you that we can obtain these governmental registrations or approvals on a timely
basis, if at all. These limitations could affect the ability of these entities to obtain foreign
exchange through debt or equity financing, and could adversely affect our business and financial
conditions.
Fluctuations in exchange rates could result in foreign currency exchange losses.
Substantially all of our revenues are denominated in Renminbi, while a portion of our
expenditures are denominated in foreign currencies, primarily the U.S. dollar. Fluctuations in
exchange rates, particularly those involving the U.S. dollar, may affect our costs and operating
margins. Where our operations conducted in Renminbi are reported in U.S. dollars, such fluctuations
could result in changes in reported results which do not reflect changes in the underlying
operations. On July 21, 2005, the PRC government changed its policy of pegging the value of the
Renminbi to the U.S. dollar. Under the policy, the Renminbi is permitted to fluctuate within a
narrow and managed band against a basket of certain foreign currencies. This change in policy has
resulted in an approximately 21% appreciation of the Renminbi against the U.S. dollar between
July 21, 2005 and December 31, 2009. Provisions on Administration of Foreign Exchange, as amended
in August 2008, further changed Chinas exchange regime to a managed floating exchange rate regime
based on market supply and demand. While the international reaction to the Renminbi revaluation has
generally been positive, there remains significant international pressure on the PRC government to
adopt an even more flexible currency policy, which could result in a further and more significant
appreciation of the Renminbi against the U.S. dollar. As substantially all of our revenues are
denominated in Renminbi, any potential future devaluation of the Renminbi against the U.S. dollar
could adversely affect our results of operations. The fluctuation of foreign exchange rate affects
the value of these monetary assets and liabilities denominated in U.S. dollars. Generally, an
appreciation of the Renminbi against the U.S. dollar results in a foreign exchange loss for
monetary assets denominated in U.S. dollars, and a foreign exchange gain for monetary liabilities
denominated in U.S. dollars. On the contrary, a devaluation of the Renminbi against the U.S. dollar
results in a foreign exchange gain for monetary assets denominated in U.S. dollars and a foreign
exchange loss for monetary liabilities denominated in U.S. dollars. With very limited hedging
transactions available in China, we have not entered into any hedging transactions 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 all or part of our exposure or at all. In addition, our currency
exchange losses may be magnified by PRC exchange control regulations that restrict our ability to
convert Renminbi into U.S. dollars. Conversely, an increase in the value of the Renminbi could
increase our reported earnings in U.S. dollar terms without a fundamental change in our business or
operating performance.
Since our revenues are primarily denominated in Renminbi, our valuation could be materially
and adversely affected by the devaluation of the Renminbi if U.S. investors analyze our value based
on the U.S. dollar equivalent of our financial condition and results of operations.
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The discontinuation, reduction or delay of any of the preferential tax treatments or the government
financial incentives currently available to us in the PRC could materially and adversely affect our
business, financial condition and results of operations.
Prior to January 1, 2008, under the then-current enterprises income tax law, or the Old EIT
Law, our PRC companies were subject to a 33.0% income tax rate, which was subject to certain tax
holidays and preferential tax rates. Under the new enterprise income tax law effective January 1,
2008, or the New EIT Law, both foreign-invested enterprises and domestic enterprises are subject to
a unified 25% income tax rate. Under the New EIT Law,
preferential tax treatments will be granted to enterprises that conduct business in certain
encouraged sectors and to enterprises that qualify as high and new technology enterprises, a
status reassessed every three years. In addition, an enterprise is entitled to a 10.0% income tax
rate for the year in which it is recognized as a national key software enterprise, a status
reassessed every year. Shengqu, Shanghai Shulong and Chengdu Aurora were recognized as high and new
technology enterprises in 2008 and are entitled to a 15.0% preferential income tax rate for the
three-year period ending December 31, 2010. In addition, Shengqu was recognized as a national key
software enterprise and was entitled to a 10.0% income tax rate for 2008 and 2009. However, we
cannot assure you that Shengqu, Shanghai Shulong and Chengdu Aurora will be able to maintain their
status as high and new technology enterprises and/or as a national key software enterprise. If
any of our PRC companies that qualified as a high and new technology enterprise or national key
software enterprise fails to continue to qualify, our income tax expenses would increase, which
would have a material adverse effect on our net income and results of operations. For additional
details on the preferential tax status, see Item 5, Operating and Financial Review and Prospects
Taxation PRC Enterprise Income Tax.
Furthermore, pursuant to the New EIT Law, certain enterprises established prior to March 16,
2007 that are entitled to the lower tax rates in accordance with the then prevailing tax laws and
regulations shall be eligible for a five-year transition period beginning from January 1, 2008. On
December 26, 2007, the State Council issued a notice on the implementation of the grandfathering
preferential policies under the New EIT Law, under which it is uncertain whether the transitional
tax rates would apply to the companies that enjoyed preferential tax rates of 15.0% under a local
preferential tax policy. If our PRC companies cannot enjoy the grandfathering treatment, our income
tax expenses would increase, which would have a material adverse effect on our financial condition
and results of operations.
In 2007, 2008 and 2009, our PRC companies received financial incentives from the government in
the aggregate amount of RMB54.3 million, RMB18.4 million and RMB177.0 million (US$25.9 million),
respectively, which were calculated with reference to taxable revenues and taxable income. To be
eligible for the government financial incentives, we are required to continue to meet a number of
financial and non-financial criteria and, even if we meet these criteria, the grant of any
incentive is still subject to the discretion of the municipal government. Moreover, the central
government or municipal government could determine at any time to eliminate or reduce these
government financial incentives. Since the government has discretion in the timing of payment and
the amount of the financial incentive, we cannot assure you that we will be able to continue to
enjoy these government financial incentives or receive such incentives promptly. The
discontinuation, reduction or delay of these government financial incentives could have a material
adverse effect on our business, financial condition and results of operations.
There are significant uncertainties under the New EIT Law relating to our PRC enterprise income tax
liabilities.
Under the New EIT Law, the profits of a foreign invested enterprise arising in 2008 and
onwards which are distributed to its immediate holding company outside the PRC will be subject to a
withholding tax rate of 10.0%. Pursuant to a special arrangement between Hong Kong and the PRC,
such rate is lowered to 5.0% if a Hong Kong resident enterprise owns over 25% of the PRC company.
However, according to a tax circular issued by the State Administration of Taxation in February
2009, if the main purpose of an offshore arrangement is to obtain a preferential tax treatment, the
PRC tax authorities have the discretion to adjust the preferential tax rate enjoyed by the relevant
offshore entity. In addition, under the New EIT Law, enterprises established under the laws of
jurisdictions outside China with their de facto management bodies located within China may be
considered to be PRC tax resident enterprises for tax purposes.
Although we are a Cayman Islands company and Shanda Games (HK) owns 100% of the equity
interests of all of our PRC subsidiaries, the PRC tax authorities may regard the main purpose of
Shanda Games (HK) as obtaining a lower withholding tax rate of 5.0%. As a result, the PRC tax
authorities could levy a higher withholding tax rate to dividends received by Shanda Games (HK)
from our PRC subsidiaries. In addition, a substantial majority of the members of our management
team, as well as the management team of Shanda Games (HK), are located in China. Under current PRC
laws and regulations, it is also uncertain whether Shanda Games (HK) and we would be deemed to be
PRC tax resident enterprises under the New EIT Law. If we or Shanda Games (HK) is deemed to be a
PRC tax resident enterprise, our global income will be subject to PRC enterprise income tax at the
rate of 25.0%, which would have a material adverse effect on our financial condition and results of
operations.
We face risks related to health epidemics and other outbreaks of contagious
diseases, including avian flu, SARS and H1N1 flu, and natural disasters.
Our business could be adversely affected by avian flu, SARS, H1N1 flu, also
known as swine flu, or other epidemics or outbreaks. There have been recent reports of
outbreaks of a highly pathogenic avian flu caused by the H5N1 virus, in certain regions of Asia and
Europe. In 2005 and 2006, there were reports on the occurrences of avian flu in various parts of
China,
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including a few confirmed human cases. Since April 2009, there
have been reports on the occurrences of H1N1 flu in Mexico, the United States, China and
certain other countries and regions around the world. An outbreak of avian flu or H1N1 flu in the
human population could result in a widespread health crisis that could adversely affect the
economies and financial markets of many countries, particularly in Asia. Additionally, any
recurrence of SARS, a highly contagious form of atypical pneumonia, similar to the occurrence in
2003 that affected China, Hong Kong, Taiwan, Singapore, Vietnam and certain other countries and
regions, would also have similar adverse effects.
Our business could also be adversely affected by natural disasters. On May 12, 2008, China
experienced an earthquake with a reported magnitude of 8.0 on the Richter scale in Sichuan
Province, resulting in the death of tens of thousands of people. As a result of the
earthquake, we observed a three-day period of national mourning for the victims, during which period we suspended our online
games, in accordance with a public notice issued by the PRC government. Similarly, we observed a similar one-day period of national
mourning for the victims of the earthquake with a reported magnitude of 6.9 on the Richter scale in Qinghai Province on April 14, 2010.
These natural disasters, outbreaks of contagious
diseases, and other adverse public health developments in China could severely disrupt our business
operations and adversely affect our financial condition and results of operations. We have not
adopted any written preventive measures or contingency plans to combat any future natural disasters
or outbreaks of avian flu, H1N1 flu, SARS or any other epidemic.
We may be subject to fines and legal sanctions if we or our Chinese employees fail to comply with
recent PRC regulations relating to employee stock options granted by overseas listed companies to
PRC citizens.
On December 25, 2006, the PBOC issued the Administration Measures on Individual Foreign
Exchange Control, and its Implementation Rules were issued by the SAFE on January 5, 2007. Both
took effect on February 1, 2007. Under these regulations, all foreign exchange matters involved in
an employee stock holding plan, stock option plan or similar plan in which a PRC citizens
participate, requires approval from the SAFE or its authorized branch. On March 28, 2007, the SAFE
issued the Application Procedure for Foreign Exchange Administration for Domestic Individuals
Participating in Employee Stock Holding Plans or Stock Option Plans of Overseas Listed Companies,
or Notice 78. Under Notice 78, PRC individuals who participate in an employee stock option holding
plan or a stock 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. We and our Chinese employees who have been granted restricted shares or
stock options pursuant to our share incentive plan are subject to Notice 78. However, in practice,
there are significant uncertainties with regard to the interpretation and implementation of Notice
78. We are committed to complying with the requirements of Notice 78. However, we cannot provide
any assurance that we or our Chinese employees will be able to qualify for or obtain any
registration required by Notice 78. In particular, if we and/or our Chinese employees fail to
comply with the provisions of Notice 78, we and/or our Chinese employees may be subject to fines
and legal sanctions imposed by the SAFE or other PRC government authorities, as a result of which
our business operations and employee option plans could be materially and adversely affected.
Risks Relating to Our ADSs
The price of our ADSs has been volatile historically and may continue to be volatile, which may
make it difficult for holders to resell the ADSs when desired or at attractive prices.
The trading price of our ADSs has been and may continue to be subject to wide fluctuations.
Since we completed our initial public offering on September 30,
2009, the closing price of our ADSs
on the NASDAQ Global Select Market has ranged from US$6.41 to US$11.70 per ADS and the last reported
closing price on April 28, 2010 was US$6.98.
Our ADS price may fluctuate in response to a number of events and factors, including among
other factors:
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announcements of technological or competitive developments; |
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regulatory developments in our target markets affecting us, our customers or our competitors; |
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announcements regarding intellectual property rights litigation; |
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actual or anticipated fluctuations in our quarterly operating results; |
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changes in financial estimates by securities research analysts; |
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sales or perceived sales of additional ordinary shares or ADSs. |
For example, we introduced an expansion pack in Mir II which was not well received by the
games users and led to some of the games users reducing the amount of virtual items they purchase
in the game. Primarily as a result of the introduction of that expansion pack, on March 1, 2010,
we announced that we expected our net revenues in the first quarter of 2010 to decrease by 10-15%
quarter-over-quarter. On that day, the market price of our ADSs decreased by approximately 18%, and on the
following night, further decreased by approximately 6%.
In addition, the financial markets in general, and the market prices for Internet-related
companies in particular, have experienced extreme volatility that often has been unrelated to the
operating performance of such companies. These broad market and industry fluctuations may
adversely affect the price of our ADSs, regardless of our operating performance.
31
We may need additional capital and may sell additional ADSs or other equity securities or incur
indebtedness, which could result in additional dilution to our shareholders or increase our debt
service obligations.
We may require additional cash resources due to changed business conditions or other future
developments, including any investments or acquisitions we may decide to pursue. If these resources
are insufficient to satisfy our cash requirements, we may seek to sell additional equity or debt
securities or obtain a credit facility. The sale of additional equity securities could result in
additional dilution to our shareholders. The incurrence of indebtedness would result in increased
debt service obligations and could result in operating and financing covenants that would restrict
our operations. We cannot assure you that financing will be available in amounts or on terms
acceptable to us, if at all.
We may be required to withhold PRC income tax on the dividends we pay you (if any), and any gain
you realize on the transfer of our ordinary shares and/or ADSs may also be subject to PRC
withholding tax.
Pursuant to the New EIT Law, we may be treated as a PRC resident enterprise for PRC tax
purposes. See Risks Relating to the Peoples Republic of China There are significant
uncertainties under the New EIT Law relating to our PRC enterprise income tax liabilities. If we
are so treated by the PRC tax authorities, we would be obligated to withhold PRC income tax on
payments of dividends on our shares and/or ADSs to investors that are non-resident enterprises of
the PRC because the dividends payable on our ordinary shares and/or ADSs would be regarded as being
derived from sources within the PRC. The withholding tax rate depends on the provisions of the
bilateral tax treaty, if any, between the PRC and the jurisdiction where the non-resident
enterprise is incorporated. For example, for non-resident enterprises located in Hong Kong which
own more than 25% of the shares or equity interest in a PRC company, the rate would be 5%, and for
non-resident enterprises located in the United States, the rate would be 10%. If the jurisdiction
where the non-resident enterprise is incorporated does not have a bilateral tax treaty with the
PRC, such as the Cayman Islands, a uniform rate of 10% will apply. In addition, any gain realized
by any investors who are non-resident enterprises of the PRC from the transfer of our ordinary
shares and/or ADSs could be regarded as being derived from sources within the PRC and be subject to
a 10.0% PRC withholding tax.
Moreover, under the PRC Individual Income Tax Law, or IITL, non-resident individual investors
are required to pay PRC individual income tax on interests or dividends payable to such investors
or any capital gains realized from the transfer of our ordinary shares and/or ADSs if such gains
are deemed income derived from sources within the PRC. A non-resident individual refers to an
individual who has no domicile in the PRC and does not stay within the PRC or who has no domicile
in the PRC and has stayed within the PRC for less than one year. Pursuant to the IITL and its
implementation rules, for purposes of the PRC capital gains tax, the taxable income will be based
on the total income obtained from the transfer of our ordinary shares and/or ADSs minus all the
costs and expenses that are permitted under PRC tax laws to be deducted from the income.
Therefore, if we are considered a PRC resident enterprise and dividends we pay with respect to our
ordinary shares and/or ADSs and the gains realized from the transfer of our ordinary shares and/or
ADSs are considered income derived from sources within the PRC by relevant PRC tax authorities,
such gains earned by non-resident individuals may also be subject to PRC withholding tax. The
foregoing PRC withholding tax would reduce your investment return on our ordinary shares and/or
ADSs and may also materially and adversely affect the price of our ordinary shares and/or ADSs.
Your right as a holder of ADSs to participate in any future rights offerings may be limited, which
may cause dilution to your holdings and they may not receive cash dividends if it is impractical to
make them available to such holders.
We may from time to time distribute rights to our shareholders, including rights to acquire
our securities. However, we cannot make rights available to our ADS holders in the United States
unless we register the rights and the securities to which the rights relate under the Securities
Act or an exemption from the registration requirements is available. In addition, the deposit
agreement provides that the depositary bank will not make rights available to you unless the
distribution to ADS holders of both the rights and any related securities are either registered
under the Securities Act or exempted from registration under the Securities Act. We are under no
obligation to file a registration statement with respect to any such rights or securities or to
endeavor to cause such a registration statement to be declared effective. Moreover, we may not be
able to establish an exemption from registration under the Securities Act. Accordingly, ADS holders
may be unable to participate in our rights offerings and may experience dilution in their holdings.
In addition, if the depositary is unable to sell rights that are not exercised or not distributed
or if the sale is not lawful or reasonably practicable, it will allow the rights to lapse, in which
case you will receive no value for these rights.
In addition, the depositary of our ADSs has agreed to pay to ADS holders the cash dividends or
other distributions it or the custodian receives on our ordinary shares or other deposited
securities after deducting its fees and expenses. ADS holders will receive these distributions in
proportion to the number of ordinary shares their ADSs represent. However, the depositary may, at
its discretion, decide that it is inequitable or impractical to make a distribution available to
any holders of ADSs. As a result, the depositary may decide not to make the distribution and ADS
holders will not receive such distribution.
32
You may be subject to limitations on transfer of your ADSs.
Your ADSs represented by the ADRs are transferable on the books of the depositary. However,
the depositary may close its transfer books at any time or from time to time when it deems
necessary in connection with the performance of its duties. In addition, the depositary may refuse
to deliver, transfer or register transfers of ADSs generally when our books or the books of the
depositary are closed, or at any time if we or the depositary deem it advisable to do so because
of any requirement of law or of any government or governmental body, or under any provision of the
deposit agreement, or for any other reason.
As we are a Cayman Islands company, you may face difficulties in protecting your interests, and
our ability to protect our rights through the U.S. federal courts may be limited.
Our corporate affairs are governed by our amended and restated memorandum and articles of
association, the Companies Law, Cap 22 (Law 3 of 1961, as consolidated and revised) and common law
of the Cayman Islands. The rights of our shareholders to take action against the directors, actions
by minority shareholders and the fiduciary responsibilities of our directors under Cayman Islands
law are to a large extent governed by the common law of the Cayman Islands. The common law of the
Cayman Islands is derived in part from comparatively limited judicial precedent in the Cayman
Islands as well as that from English common law, which has persuasive, but not binding, authority
on a court in the Cayman Islands. The rights of our shareholders and the fiduciary responsibilities
of our directors under Cayman Islands law are not as clearly established as they would be under
statutes or judicial precedents in some jurisdictions in the United States. In particular, the
Cayman Islands has a less developed body of securities law as compared to the United States, and
provides significantly less protection to investors. In addition, Cayman Islands companies may not
have standing to initiate a shareholder derivative action in the federal court of the United
States.
In addition, most of our directors and officers are nationals and residents of countries
other than the United States. Substantially all of our assets and a substantial portion of the
assets of these persons are located outside the United States.
The Cayman Islands courts are also unlikely:
to recognize or enforce against us judgments of courts of the United States based on certain
civil liability provisions of U.S. securities laws; and
to impose liabilities against us, in original actions brought in the Cayman Islands, based
on certain civil liability provisions of U.S. securities laws that are penal in nature.
There is no statutory recognition in the Cayman Islands of judgments obtained in the United
States, although the courts of the Cayman Islands will generally recognize and enforce a non-penal
judgment of a foreign court of competent jurisdiction without retrial on the merits.
As a result of all of the above, our public shareholders may have more difficulties in
protecting their interests in the face of actions by our management, directors or controlling
shareholders than would shareholders of a public company incorporated in a jurisdiction in the
United States.
In addition, Cayman Islands companies may not have standing to sue before the federal courts
of the United States. As a result, our ability to protect our interests if we are harmed in a
manner that would otherwise enable us to sue in a United States federal court may be limited.
You may have difficulties in enforcing judgments obtained against us.
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 for you to effect service of process within the
United States upon these persons. It may also be difficult for you to enforce judgments obtained
in U.S. courts based on the civil liability provisions of the U.S. federal securities laws against
us and our officers and directors, most of whom are not residents in the United States and the
substantial majority of whose assets are located outside of the United States. In addition, there
is uncertainty as to whether the courts of the Cayman Islands or the PRC would recognize or
enforce judgments of U.S. courts against us or such persons predicated upon the civil liability
provisions of the securities laws of the United States or any state due to the lack of reciprocal
treaty in the Cayman Islands or the PRC providing statutory recognition of judgments obtained in
the United States. Furthermore, it is uncertain whether such Cayman Islands or PRC courts would be
competent to hear original actions brought in the Cayman Islands or the PRC against us or such
persons who reside outside the United States predicated upon the securities laws of the United
States or any state.
33
We are a controlled company within the meaning of the NASDAQ Listing Rules and, as a result, rely
on exemptions from certain corporate governance requirements that provide protection to
shareholders of other
companies, and we may also rely on the foreign private issuer exemption from most of the corporate
governance requirements under the NASDAQ Listing Rules.
Because Shanda Interactive owns more than 50% of the total voting rights in our company, we
are a controlled company under the NASDAQ Listing Rules. As a controlled company, we are relying on the controlled company exemption under the NASDAQ Listing Rules and are not
obligated to comply with certain NASDAQ corporate governance requirements, including the
requirements:
that a majority of our board of directors consist of independent directors;
that we have a corporate governance and nominating committee that is composed entirely of
independent directors with a written charter addressing the committees purpose and
responsibilities;
that we have a compensation committee that is composed entirely of independent directors
with a written charter addressing the committees purpose and responsibilities; and
for an annual performance evaluation of the nominating and governance committee and the
compensation committee.
We are not required to and will not voluntarily meet these requirements. As a result of our
use of the controlled company exemptions, you will not have the same protection afforded to
shareholders of companies that are subject to all of NASDAQs corporate governance requirements.
In the event that we no longer qualify as a controlled company under the NASDAQ Listing
Rules, we intend to rely on the foreign private issuer exemption from most of the corporate
governance requirements under the NASDAQ Listing Rules.
We may be classified as a passive foreign investment company, which could result in adverse U.S.
federal income tax consequences to U.S. holders of our ADSs or Class A ordinary shares.
Based upon the composition of our income and valuation of our assets, including goodwill, we
do not believe that we were a passive foreign investment company, or PFIC, for U.S. federal income
tax purposes for the taxable year ending December 31, 2009. That determination is subject to
uncertainty, however, both because it is not clear how the contractual arrangements between our PRC
subsidiaries and Shanghai Shulong will be treated for purposes of the PFIC rules, and because of
the uncertain characterization of certain components of our revenue. We must make a separate determination
each year as to whether we are a PFIC after the close of each taxable year. A non-U.S. corporation
will be considered a PFIC for any taxable year if either (i) at least 75% of its gross income is
passive income or (ii) at least 50% of the value of its assets (based on an average of the
quarterly values of the assets during the taxable year) is attributable to assets that produce or
are held for the production of passive income. Because we expect to continue to hold a substantial
amount of cash and other passive assets, and because the determination of whether we are a PFIC
will depend on the character of our income and assets and the value of our assets from time to
time, which may be based in part on the market price of our ADSs, which is likely to fluctuate (and
may fluctuate considerably given that market prices of Internet and online game companies
historically have been especially volatile), we cannot assure you
that we will not be a PFIC for the taxable year ending December 31, 2009 or
any future taxable year. If we were treated as a PFIC for any taxable year during which a
U.S. person held an ADS or a Class A ordinary share, certain adverse U.S. federal income tax
consequences could apply to such U.S. person. See Item 5, Operating and Financial Review and
Prospects Taxation United States Federal Income Tax Considerations Passive Foreign Investment
Company Rules.
Our dual-class ordinary share structure with different voting rights could discourage others from
pursuing any change of control transactions that holders of our Class A ordinary shares and ADSs
may view as beneficial.
Our amended and restated memorandum and articles of association provide for a dual-class
ordinary share structure. Our ordinary shares are divided into Class A ordinary shares and Class B
ordinary shares. Holders of Class A ordinary shares are entitled to one vote per share, while
the holder of Class B ordinary shares, which is Shanda
Interactive, is entitled to 10 votes per share. We issued Class A ordinary
shares represented by our ADSs in our initial public offering. Shanda
Interactive holds
Class B ordinary shares, each of which is convertible into one
Class A ordinary share at any time
by Shanda
Interactive. Class A ordinary shares are not
convertible into Class B ordinary shares
under any circumstances.
Due to the disparate voting rights attached to these two classes, the holder of our Class B
ordinary shares has significant voting rights over matters requiring shareholder approval,
including the election and removal of directors and certain corporate transactions, such as
mergers, consolidations and other business combinations. This concentrated control could discourage
others from pursuing any potential merger, takeover or other change of control transactions that
holders of Class A ordinary shares and ADSs may view as beneficial.
34
Our amended and restated articles of association contain anti-takeover provisions that could
adversely affect the rights of holders of our ordinary shares and ADSs.
Our amended and restated articles of association include certain provisions that could limit
the ability of others to acquire control of our company. Such provisions could deprive our
shareholders of the opportunity to sell their shares at a premium over the prevailing market price
by discouraging third parties from seeking to obtain control of our company in a tender offer or
similar transactions.
The following provisions in our amended and restated memorandum and articles of association
may have the effect of delaying or preventing a change of control of our company:
our amended and restated memorandum and articles of association provides for a dual-class
ordinary share structure with disparate voting rights attached to the two classes of ordinary
shares;
our board of directors has the authority, without approval by the shareholders, to issue any
unissued shares and determine the terms and conditions of such shares, including preferred,
deferred or other special rights or restrictions with respect to dividend, voting and return of
capital;
the shareholders may by ordinary resolution appoint a candidate as director of the board to
fill a casual vacancy or as an addition to the existing board;
the chairman, a majority of our board of directors or shareholder(s) who hold(s) more than
25% of the voting rights of our company having requisitioned for an extraordinary shareholders
meeting at least 21 days previously, have the right to convene an extraordinary shareholders
meeting, and the agenda of such meeting will be set by a majority of the directors or the
shareholder(s) who hold more than 25% of the voting rights of our company who request such meeting;
and
the amended and restated articles of association may be amended only by a resolution passed
at a shareholders meeting by a majority of not less than two-thirds of the vote cast.
The voting rights of holders of ADSs are limited by the terms of the deposit agreement.
A holder of our ADSs may only exercise the voting rights with respect to the underlying
ordinary shares in accordance with the provisions of the deposit agreement. Upon receipt of voting
instructions of a holder of ADSs in the manner set forth in the deposit agreement, the depositary
will endeavor to vote the underlying ordinary shares in accordance with these instructions. Under
our amended and restated memorandum and articles of association and Cayman Islands law, the
minimum notice period required for convening a general meeting is five 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. 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 we cannot assure
you that you will 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.
Your right as a holder of ADSs to participate in any future rights offerings may be limited, which
may cause dilution to your holdings.
We may from time to time distribute rights to our shareholders, including rights to acquire
our securities. However, we cannot make rights available to our ADS holders in the United States
unless we register the rights and the securities to which the rights relate under the Securities
Act or an exemption from the registration requirements is available. In addition, the deposit
agreement provides that the depositary bank will not make rights available to you unless the
distribution to ADS holders of both the rights and any related securities are either registered
under the Securities Act or exempted from registration under the Securities Act. We are under no
obligation to file a registration statement with respect to any such rights or securities or to
endeavor to cause such a registration statement to be declared effective. Moreover, we may not be
able to establish an exemption from registration under the Securities Act. Accordingly, ADS holders
may be unable to participate in our rights offerings and may experience dilution in their holdings.
In addition, if the depositary is unable to sell rights that are not exercised or not distributed
or if the sale is not lawful or reasonably practicable, it will allow the rights to lapse, in which
case you will receive no value for these rights.
Item 4. INFORMATION ON THE COMPANY
A. HISTORY AND DEVELOPMENT OF THE COMPANY
Our online game business was founded by Shanda Interactive in 2001 and was operated by Shanda
Interactive through various subsidiaries and VIEs until the reorganization effective July 1, 2008.
In November 2001, Shanda Interactive launched its first MMORPG, Mir II, which it had licensed from
Actoz. In October 2003, Shanda Interactive launched Woool, its first in-house developed online
game.
35
Effective July 1, 2008, Shanda Interactive reorganized its businesses. See Item 7, Major
Shareholders and Related Party Transactions Related Party Transactions Transactions and
Agreements with Shanda Interactive for a description of the Master Separation Agreement and other
agreements relating to the reorganization. As a part of the reorganization, our company, Shanda
Games Limited, was incorporated in the Cayman Islands on June 12, 2008 as an exempted company with
limited liability and a direct wholly-owned subsidiary of Shanda Interactive to be the holding
company for the online game business. Pursuant to a share exchange, Shanda Games (HK) became our
direct wholly-owned subsidiary, and we became a direct wholly-owned subsidiary of Shanda
Interactive. Furthermore, pursuant to a Master Separation Agreement, Shanda Interactive
transferred substantially all of its assets and liabilities related to its online game business
(including applicable intellectual property rights) to us. Concurrently, we transferred to Shanda
Interactive all of our assets and liabilities unrelated to the online game business, such as real
estate properties which we owned.
In the second quarter of 2009, Shanda Interactive transferred to us its entire equity interest
in Actoz for a cash consideration of US$70.2 million.
We completed our initial public offering of our ADSs on the Nasdaq Global Select Market on
September 30, 2009.
Our principal executive offices are located at No. 1 Office Building, 690 Bibo Road, Pudong
New Area, Shanghai 201203, China. Our telephone number is (86-21) 5050- 4740. Our registered
address in the Cayman Islands is located at Cricket Square, Hutchins Drive, P.O. Box 2681, Grand
Cayman, KY1-1111, Cayman Islands. Our agent for service of process in the United States is CT
Corporation System, located at 111 Eighth Avenue, New York, New York 10011.
B. BUSINESS OVERVIEW
We are Chinas leading online game company in terms of the size and diversity of our game
portfolio. Our online game revenues and game player base are also among the largest in China.
Through our extensive experience in the online game industry in China, we have created a scalable
approach to develop, source and operate online games, as well as license our games to third
parties. We use multiple channels to assemble a large and diversified game portfolio of various
genres. We operate a nationwide, secure network to host hundreds of thousands of users playing
simultaneously, and monitor and adjust the game environment to optimize our game players
experience.
We develop and source a broad array of game content through multiple channels, including
in-house development, licensing, investment and acquisition, co-development, and co-operation.
Through these channels, we have built a large, diversified game portfolio and a robust game
pipeline. As of March 31, 2010, we operated 26 MMORPGs and eight advanced casual games. Some of our
online games are also web games which we categorize as either MMORPGs or advanced casual games,
rather than as a separate category of online games. As of March 31, 2010, our in-house development
capabilities consist of over 1,500 game development personnel and our proprietary game development
platform. We license games from international and domestic developers. In 2008 and 2009, we derived
approximately 65.7% and 69.1%, respectively, of our net revenues from online games that were
licensed from third parties. In 2008 and 2009, we derived approximately 55.3% and 56.4%,
respectively, of our net revenues from Mir II, including its sequels, which we license from Actoz.
As of March 31, 2010, 11 of our 34 online games were licensed from third-party developers.
Our
game player base, which consisted of over 10.4 million active paying accounts for the
three-month period ended December 31, 2009, is one of the largest in China. We seek to strengthen
our game players loyalty by, among other things, closely monitoring our players preferences and
introducing updates, expansion packs and other game improvements in a timely manner. We believe the
size of our game player base is a key factor in attracting and retaining both game players and
additional game content.
We are a leader in the development and innovation of Chinas online game industry. In 2003, we
launched Woool, which is our in-house developed and one of Chinas first domestically developed
MMORPGs. We were among the first in China to adopt the item-based revenue model for advanced casual
games and were the first to adopt this revenue model for MMORPGs on a large scale. This revenue
model has since become the prevailing revenue model in China. In 2006, we established 18 Capital,
which is one of the first investment initiatives in China focused exclusively on investing in
independent online game development and operating studios.
Our online game business was founded by Shanda Interactive in 2001 and was operated by Shanda
Interactive until the reorganization. We have benefited from and intend to continue leveraging our
relationship with Shanda Interactive. By offering our games through Shanda Networkings integrated
service platform on which diverse multi-media content is offered, including online games,
literature and music, we can access Shanda Interactives large user base and broaden our marketing
reach. In addition, we have successfully established a separate brand identity, Shanda Games,
building on Shanda Interactives established brand name as one of Chinas leading interactive
entertainment media companies. We believe our powerful brand in China helps us to attract and
retain large communities of game players and further strengthen our leading industry position.
36
Our net revenues increased 42% from RMB3,376.8 million in 2008 to RMB4,806.7 million (US$704.2
million) in 2009. Our net income attributable to our company increased 55% from RMB935.5 million in
2008 to RMB1,453.0 million (US$212.9 million) in 2009.
Our Games
MMORPGs
Our MMORPGs are action adventure-based and draw upon themes including martial arts adventure,
fantasy, strategy and historical events. Each of our MMORPGs creates an evolving virtual world
within which game players can play and interact with each other simultaneously over the Internet.
Because our MMORPGs require a significant amount of players time and commitment to develop the
skills and character attributes required to progress to the next level, our MMORPGs tend to develop
game player loyalty.
As of March 31, 2010, we operated 26 MMORPGs. Mir II and Woool are our most popular MMORPGs.
The following table sets forth certain information relating to the MMORPGs that we operated as of
March 31, 2010.
|
|
|
|
|
|
|
|
|
Game |
|
Genre |
|
Visual Dimensions |
|
Game Source |
|
Launch Date |
Mir II
|
|
Martial arts adventure
|
|
2D
|
|
License(1)
|
|
November 2001 |
Woool
|
|
Martial arts adventure
|
|
2D
|
|
In-house
|
|
October 2003 |
The Sign
|
|
Martial arts adventure
|
|
3D
|
|
In-house
|
|
May 2004 |
The Age
|
|
Martial arts adventure
|
|
2D
|
|
In-house
|
|
June 2004 |
Magical Land
|
|
Fantasy
|
|
2D
|
|
In-house
|
|
July 2005 |
R.O.
|
|
Fantasy
|
|
2D
|
|
License
|
|
September 2005 |
Archlord
|
|
Fantasy
|
|
3D
|
|
License
|
|
July 2006 |
Latale
|
|
Side-scrolling combat
|
|
2D
|
|
In-house
|
|
April 2007 |
Fengyun Online
|
|
Martial arts adventure
|
|
3D
|
|
Acquisition
|
|
July 2007 |
World Hegemony
|
|
Strategy web game
|
|
2D
|
|
In-house
|
|
November 2007 |
Might & Hero
|
|
Strategy web game
|
|
2D
|
|
Investment
|
|
May 2008 |
Lineage
|
|
Fantasy
|
|
2D
|
|
License
|
|
June 2008 |
Lineage II
|
|
Fantasy
|
|
3D
|
|
License
|
|
June 2008 |
Tales of Dragons
|
|
Fantasy
|
|
2D
|
|
In-house
|
|
July 2008 |
A Thousand Years III
|
|
Martial arts adventure
|
|
2D
|
|
In-house
|
|
November 2008 |
AION
|
|
Fantasy
|
|
3D
|
|
License
|
|
April 2009 |
JX Online World
|
|
Martial arts adventure
|
|
2D
|
|
Co-operation
|
|
June 2009 |
Ghost Fighter Online
|
|
Side-scrolling action
|
|
3D
|
|
Investment
|
|
August 2009 |
Luvinia Online
|
|
Fantasy
|
|
3D
|
|
Acquisition
|
|
August 2009 |
ZU Online
|
|
Martial arts adventure
|
|
3D
|
|
Investment
|
|
August 2009 |
Yuyan Online
|
|
Martial arts adventure
|
|
2.5D(2)
|
|
Co-operation
|
|
September 2009 |
TS2 Online
|
|
Turn-based
|
|
2D
|
|
License
|
|
December 2009 |
Hades Realm
|
|
Martial arts adventure
|
|
2D
|
|
Acquisition
|
|
January 2010 |
Zodiac Tales
|
|
Turn-based
|
|
2D
|
|
Acquisition
|
|
January 2010 |
Dukes and Lords
|
|
Martial arts adventure
|
|
2D
|
|
Acquisition
|
|
January 2010 |
Woool of Heroes
|
|
Martial arts adventure
|
|
2D
|
|
In-house
|
|
March 2010 |
|
|
|
(1) |
|
We license Mir II from Actoz, which is our majority-owned subsidiary. While
Actoz controls the licensing of Mir II in China, we continue to classify
Mir II as a licensed game because Actoz shares a portion of the ongoing
licensing fees we pay to Actoz with a third party that co-owns the
intellectual property rights relating to the game. |
|
(2) |
|
2.5D refers to a game with 3D-rendered characters but a 2D game environment. |
The following table sets forth, for the periods indicated, certain operating statistics for
our MMORPGs.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended |
|
|
|
March 31, |
|
|
June 30, |
|
|
September 30, |
|
|
December 31, |
|
|
|
2009 |
|
|
2009 |
|
|
2009 |
|
|
2009 |
|
Quarterly active paying
accounts (in
thousands)(1) |
|
|
7,189 |
|
|
|
8,582 |
|
|
|
9,064 |
|
|
|
9,419 |
|
Average monthly revenues
per active paying
account (in
RMB)(2) |
|
|
43.9 |
|
|
|
41.9 |
|
|
|
43.4 |
|
|
|
45.0 |
|
|
|
|
(1) |
|
Quarterly active paying accounts refers to the aggregate number of active paying
accounts for our online games during a given quarter. |
|
(2) |
|
Average monthly revenues per active paying account refers to our online game
revenues during a given quarter divided by quarterly active paying accounts, further divided
by three. |
37
Advanced Casual Games
Advanced casual games, which is a sub-category of casual games, are generally less
time-consuming and require less focus and attention than MMORPGs but possess certain elements of
MMORPGs including a story line, elaborate graphics, availability of virtual items and frequent
interactions among game players. Advanced casual games are an important component of our overall
growth strategy as such games generally attract a broader range of demographic groups, as well as
more home users, than MMORPGs.
The following table sets forth certain information relating to the advanced casual games that
we operated as of March 31, 2010.
|
|
|
|
|
|
|
|
|
|
|
|
|
Visual |
|
|
|
|
Game |
|
Genre |
|
Dimensions |
|
Game Source |
|
Launch |
BNB
|
|
Battle
|
|
2D
|
|
License
|
|
August 2003 |
GetAmped
|
|
Fighting
|
|
3D
|
|
License
|
|
May 2004 |
Maple Story
|
|
Side-scrolling combat
|
|
2D
|
|
License
|
|
August 2004 |
Shanda Richman
|
|
Strategy
|
|
3D
|
|
In-house
|
|
December 2005 |
Crazy Kart
|
|
Racing
|
|
3D
|
|
In-house
|
|
March 2006 |
Kongfu Kids
|
|
Fighting
|
|
3D
|
|
In-house
|
|
June 2007 |
Tales Runner
|
|
Racing
|
|
3D
|
|
License
|
|
July 2007 |
Dead or Alive Online
|
|
Fighting
|
|
3D
|
|
Co-development
|
|
May 2009 |
The following table sets forth, for the periods indicated, certain operating statistics for
our advanced casual games.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended |
|
|
|
March 31, |
|
|
June 30, |
|
|
September 30, |
|
|
December 31, |
|
|
|
2009 |
|
|
2009 |
|
|
2009 |
|
|
2009 |
|
Quarterly active paying
accounts (in
thousands)(1) |
|
|
1,052 |
|
|
|
1,152 |
|
|
|
1,209 |
|
|
|
1,014 |
|
Average monthly revenues
per active paying account
(in RMB)(2) |
|
|
27.8 |
|
|
|
20.9 |
|
|
|
24.1 |
|
|
|
20.8 |
|
|
|
|
(1) |
|
Quarterly active paying accounts refers to the aggregate number of active paying
accounts for our online games during a given quarter. |
|
(2) |
|
Average monthly revenues per active paying account refers to our online game
revenues during a given quarter divided by quarterly active paying accounts, further divided
by three. |
Some of our online games are web games. Web games are played on a web browser and typically do
not require any client-side software to be installed apart from the web browser. We categorize web
games as either MMORPGs or advanced casual games, rather than as a separate category of online
games.
Access to Our Games
All of our games are accessible through Shanda Networking, which hosts a website dedicated to
each of our games. Each games website provides detailed information and updates on that game and
on the products and services that we offer in connection with that game. Game players typically
access our games at Internet cafes or through the Internet by using personal computers. A game
player can download the end-user software, if necessary, for a game from the website for free and
set up a user account and password to access and play the game.
Our Online Game Development and Sourcing Model
The sources of our online game content include the games that we develop in-house and license
from, acquire from, co-develop or co-operate with third parties.
In-House Development
We develop new online games and related updates and expansion packs. As of March 31, 2010, we
operated nine MMORPGs and three advanced casual games that we developed in-house, including Woool,
the first large-scale MMORPG developed in China and one of our most popular games. In 2008 and
2009, we introduced approximately 210 and 270 updates and expansion packs, respectively, for our
existing online games.
We have strong in-house game development capabilities supported by our research and
development center and our proprietary game development platform which is designed with modularized
functions and provides a stable, efficient and scalable online game development platform for
developing both server-end and client-end online game software. We have used this platform to
successfully develop in-house online games, such as The Age and Woool. Furthermore, we have
significantly strengthened our in-house game development capabilities by acquiring game developers
such as Actoz. Because Actoz is a majority-owned subsidiary, we classify all online games developed
by
Actoz as in-house developed, except for Mir II, which we categorize as a licensed game because
Actoz shares the ongoing licensing fees we pay to Actoz with a third party that co-owns the
intellectual property rights relating to the game.
38
Our game development process generally includes the following key steps:
|
|
|
formulate a new game proposal based on a preliminary market study; |
|
|
|
conduct an in-depth feasibility study; |
|
|
|
establish a project team to draft a new game development plan; |
|
|
|
develop the game story and overall game design; |
|
|
|
design the game style, characters and environments; |
|
|
|
develop the server-end and user-end software; |
|
|
|
conduct intermediate management review after the fundamental game structure has been
developed; and |
|
|
|
conduct final management review upon completing the development of the new game. |
The development of MMORPGs and advanced casual games, from management approval of a new game
proposal to commencement of closed beta testing, generally takes two years and one year,
respectively, but could take longer depending on certain circumstances.
As of March 31, 2010, we had over 1,500 game development personnel, including approximately
300 from Actoz. Most of our software programmers and testing engineers have university or graduate
degrees. We plan to continue to expand our research and development center by recruiting from top
universities in China.
Game Licensing
We license games from international and domestic developers. We monitor certain key markets
such as South Korea, Japan, the United States and Europe to identify and source game content.
As of March 31, 2010, 11 of our 34 online games were licensed from third-party developers,
including Mir II, which is our top game in terms of revenues in 2009 and for which Actoz shares the
ongoing licensing fees we pay to Actoz with a third party that co-owns the intellectual property
rights relating to the game, and AION, a 3D MMORPG that we license from NCSoft Corporation.
The cost of licensing games from game content owners generally consists of an upfront
licensing fee, which we typically pay in installments, and royalties which are equal to a
percentage of revenues we generate from operating the games. Under the license agreements, we have
the exclusive right to operate the games in China. Generally, the license agreements have a term of
three to six years. Most game content owners agree to provide us with updates and expansion packs
developed for the games licensed to us timely without additional charge. Most of our license
agreements require the game content owners to provide us with technical support.
Investment and Acquisition
We have expanded our online game portfolio through strategic investments and acquisitions. In
2006, we established 18 Capital to invest in independent game development and operating studios
that have superior development or operation capabilities or potential to develop successful online
games. Through 18 Capital, we typically acquire (i) intellectual property rights to online games,
(ii) equity rights in online game development and operating studios or (iii) an option to acquire
equity interests in online game development and operating studios in the future. Through our
investments, we help entrepreneurial game developers and operators grow their businesses by
leveraging our industry experience and game development and operation expertise. As a result of our
investments through 18 Capital thus far, we have sourced numerous talented game development
personnel and currently operate three games that are developed by investee companies.
In addition, in June 2007, we acquired Chengdu Aurora, which operates Fengyun Online, a
martial arts 3D MMORPG. In July 2009, we acquired Chengdu Simo, which operates Luvinia Online, a
fantasy 3D MMORPG. In addition, in 2010, we acquired Goldcool, which operates numerous MMORPGs,
including Hades Realm, Zodiac Tales, and Dukes and Lords, and Mochi Media, which operates a leading
platform for distributing and monetizing browser-based games worldwide. Our investments and
acquisitions have in turn enhanced the influence of our game development and operation platforms
and strengthened our brand recognition within the online game industry in China.
39
Co-Development
We co-develop online games with international game developers. For example, we have
co-developed online versions of Dead or Alive with Tecmo Ltd., Company of Heroes with THQ Inc., and
King of Fighters XII with SNK Playmore Corporation. Under these co-development agreements, we have
the exclusive right to operate the games in China, and in some instances, other countries, and to
receive a portion of any revenues that our co-development partners generate from operating the
co-developed game. Our co-development partners own the intellectual property rights related to the
games and we own the intellectual property rights related to supporting technologies (such as
applications and processes) required to operate the games.
Co-Operation
We co-operate certain games in China under nonexclusive licenses granted by third-party
Chinese developers who also operate the same games on their own platform. For example, we have
entered into agreements with Shanghai Storm and Kingsoft in connection with the operation of Yuyan
Online and JX Online World, respectively. Under these agreements, we pay royalties to the game
developers but no upfront licensing fee. We do not own any of the related game intellectual
property rights, and Shanghai Storm and Kingsoft will continue to operate these games on their
platforms as well.
Our Game Performance Evaluation and Testing Systems
Our Game Performance Evaluation System for Game Sourcing
To better identify games with potential for commercial success, we have developed a game
performance evaluation system to evaluate a potential games attractiveness to game players and its
expected performance before we source such games. The main characteristics of the system are as
follows:
|
|
|
Stage 1. We evaluate a game based upon a
number of criteria, including game and artistic
design, technology and infrastructure requirements and operational
metrics, if any. Of the
thousands of games evaluated over our years of operation, only a small number have been
submitted to our steering committee, which is comprised of personnel from our game
development and operations, quality management, finance, marketing and other departments, for further evaluation. |
|
|
|
Stage 2. The steering committee assesses these games and approves a select number of
games, which are then passed on to the game management, business development and quality
management divisions for testing and final evaluation. |
|
|
|
Stage 3. These divisions evaluate the games to identify those with the highest potential
for commercial success and allocate our marketing and other resources to such games. |
Our Pre-Launch Game Testing System
Before the launch of a new game, we generally conduct internal beta testing to detect and
resolve technical problems and improve the quality and features of the game. Thereafter, we conduct
a closed beta testing to minimize technical problems, followed by open beta testing in which our
registered users play the game to ensure consistency of performance and stability of operation
systems. Open beta testing generally creates an initial game player base, builds awareness and
generates publicity for the game. Based on information and feedback collected in pre-launch game
testing, we adjust the game accordingly.
Our Game Operation Model
Game Management
Each game is managed by a designated game management team. Our game management teams:
|
|
|
conduct cost/benefit analyses and form operational plans; |
|
|
|
coordinate internal resources and interact with our other departments such as game
design, artistic design, quality management, marketing, and technological services to ensure
a smooth daily operation of the online game; |
|
|
|
control the timing of the release of updates and expansion packs; and |
|
|
|
manage the games virtual community on an ongoing basis by, for example, organizing
in-game events. |
A centralized game management center monitors the performance of each team. Our operational
expertise and best practices are shared with all of our game management teams and departments.
40
Network and Technology Infrastructure
We have developed an extensive technology infrastructure to support our game operations,
including a nationwide server network. As of March 31, 2010, the server network consisted of
approximately 12,000 servers and 2,400 server annex equipment units with the capacity to
accommodate up to 11 million concurrent online game players.
Due to the real-time interaction among hundreds of thousands of users, the stable operation of
our games requires a large number of servers and a significant amount of Internet connectivity
bandwidth. Due to Chinas large geographical area and limited Internet connectivity bandwidth, we
have located game servers in numerous regions throughout China. As a result, our users can play our
games using servers located in their region without exchanging data across long distances, thereby
increasing the speed at which our games operate and enhancing our users experience.
The servers for each of our games are organized into a number of independent operating
networks. Each operating network consists of a set of login system servers and a number of game
server groups. Each operating network for our MMORPGs operates one game environment and our game
players interact in a single virtual environment. Accordingly, with the expansion of our game
player base for these games, we continue to increase the number of game server groups running
separate game environments. We have introduced server virtualization technologies that allow a
single hardware unit to host multiple virtual machines or game environments, to increase network
efficiency.
Each operating network is linked to Shanda Networkings centralized billing system, which
processes access codes and passwords provided by users from their prepaid cards to add virtual
currency into users accounts and to deduct virtual currency consumed by users from their accounts
as they play our games. Each operating network is also linked to our central data backup system,
which backs up data from all login system servers and game servers on a daily basis. Most of our
login servers for each operating network, as well as the servers for Shanda Networkings central
billing system and our central data backup system, are located in Shanghai.
We continuously monitor the operation of our server network. Our remote control system allows
us to track our online game players on an ongoing basis, and to discover and fix problems in the
operation of hardware and software in our server network on a timely basis.
As of March 31, 2010, we owned approximately 80% of the servers in the server network for our
game operations and leased the remainder from telecommunications operators. All of the servers in
the server network for our game operations are located on the premises of our hosting
telecommunications operators. Our server lease arrangements reduce our initial expenditures on
servers, provide flexibility in network deployment and include incentives for network operators to
maximize our network performance. We plan to add additional servers in order to introduce new games
into our portfolio, service additional game players in more locations and accommodate a larger game
player base.
Anti-Cheating and Anti-Hacking
We are committed to quickly disabling cheating programs developed by unauthorized third
parties for use in connection with our games. We have developed our Game Protection Kit, which
disables cheating programs developed by unauthorized third parties to help ensure the fairness of
our game environments and significantly enhances our game players experience. Game Protection Kit
is used currently in most of the games that we operate. Upon the detection of a cheating program,
our technology support team cooperates with our game development team to analyze the cheating
program and develop and deploy software to disable it. With respect to cheating programs for games
that we license, the licensors generally develop the disablement software.
Marketing
We employ various traditional and online marketing programs and promotional activities,
including in-game events and announcements, online and traditional advertising, and offline
promotions.
In-game events and announcements. We frequently organize in-game events for our game players
to strengthen our communities of game players and generate more interest in our games. Examples of
in-game events include special challenges or features introduced to the game environments for a
scheduled period. In addition, we use in-game events to introduce new game features. Furthermore,
we post in-game announcements to promote new features and other improvements of the game and
in-game events. We also use in-game announcements for cross-game promotions.
Online and traditional advertising. We regularly advertise on a wide range of Internet
portals and online game websites in China. We target a broad base of Internet users through three
key initiatives: (i) the launch of large-scale coordinated advertising campaigns on major Internet
portals, (ii) an affiliate marketing campaign attracting hundreds of regional websites in China
through an incentive scheme to jointly promote our new games and direct traffic to our games
websites and (iii) a multi-segment targeted advertising campaign promoting our online games
to different demographic groups of game players. We also advertise in national and regional
newspapers and magazines as well as on billboards and city buses.
41
Offline promotions. We also market new games through posters at Internet cafes where a large
number of game players play our games. We also organize promotional events at Internet cafes,
distribution points, school campuses and other locations frequented by game players. In addition,
we have also established sales offices in a number of provinces in China to assist Shengfutongs
local distributors in organizing promotional activities for our games. Furthermore, we selectively
sponsor media events to promote our games and have entered into arrangements with home personal
computer manufacturers, consumer product manufacturers and telecommunications service providers in
China to cross-market our games.
Our Revenue Models
Revenue Models for the Games that We Operate
We adopt one of two different revenue models for each of the games that we operate: item-based
and time-based. We have adopted the item-based model for substantially all of our MMORPGs and all
of our advanced casual games.
Under the item-based model, players are able to play the basic features of the game for free.
We generate revenues when players purchase virtual items that enhance their playing experience,
such as weapons, clothing, accessories and pets. The item-based revenue model allows us to
introduce new virtual items or change the features or properties of virtual items to enhance game
player interaction and create a better game community. The item-based revenue model also allows us
to generate additional revenues by offering additional virtual items through new updates and
expansion packs that meet the changing demands of game players. We determine the price of each
virtual item before its introduction, generally based on an analysis of certain benchmarks, such as
the extent of advantage to the players character that the virtual item brings, the demand for the
virtual item and the price of similar virtual items offered in other online games. We maintain a
database that tracks the number and price of each virtual item sold as well as user behavior in
response to the launch of a virtual item. We adjust the pricing of certain virtual items based on
their consumption pattern and other factors.
Under the time-based model, players pay for game-playing time. The pricing is typically
determined near the end of the open beta testing period based on several factors, including the
games development and operation costs, the pricing of competing games operated using a time-based
model in the market, the playing and payment patterns of game players, the technological and other
features of the game and the targeted market.
As one of the first online game companies in China to adopt the item-based revenue model on a
large scale, we have accumulated significant experience in successfully operating online games
through both revenue models. We adopt one of the two revenue models for a particular game based on
a number of factors, including the quality and features of the game, the preference and playing
habits of game players and the revenue models adopted for similar games. We also consider the
revenue model adopted by the licensor or by other licensees.
Licensing of Our Games to Third Parties
We license certain of our online games in which we own the related game intellectual property
rights to third parties. Under these license agreements, we typically license the right to
exclusively operate, promote, distribute and service our games in specified territories. In return,
the licensee pays us an upfront licensing fee, which is typically paid in installments, and a
royalty fee, which is generally equal to a percentage of revenues generated by the licensee from
operating the game in the specific country or region. Generally, the licensees are responsible for
the sales and marketing of the licensed games, including setting the price of virtual items, as
well as the maintenance of the network infrastructure and customer service, and we are responsible
for providing the localized versions of our games and the technical support for the operation of
our games. We generally provide our licensees with updates to the licensed games. We also usually
assist the licensee in preventing, detecting and resolving cheating and hacking activities. As of
March 31, 2010, we licensed 14 MMORPGs and one advanced casual game to third parties in
international markets, including Hong Kong, Macau, Taiwan, Vietnam, India, Malaysia, Indonesia, the
Philippines, Singapore, Thailand, Korea, Japan, Canada, and Russia.
In-Game Advertising
We also generate revenues by selling advertising space within our games.
Online Billing and Payment, Distribution and Customer Service
Pursuant to the Amended and Restated Cooperation Agreement, we have engaged Shanda Networking
to be our provider of certain services, including, among others, online billing and payment, user
authentication, customer service, anti-fatigue compliance, prepaid card marketing and data support
services, for a five-year period commencing July 1, 2008. Pursuant to the Amended and Restated
Sales Agency Agreement, we have engaged Shengfutong as our sales agent for the distribution of
prepaid cards, which are required to purchase virtual items or time units in our online games for a
five-year period commencing July 1, 2008. For additional details on our agreements and the fees that we pay to Shanda Online, see Item 7, Major Shareholders and Related Party Transactions
Related Party Transactions Transactions and Agreements with Shanda Interactive. The following
services and functions described below are provided to our game players by Shanda Networking and
Shengfutong pursuant to the agreements discussed above.
42
Online Billing and Payment and Distribution
Our game players can purchase virtual or physical prepaid cards to access our online games and
to purchase virtual items. These cards are sold through Shengfutongs distribution network. Each
prepaid card contains a unique access code and password that enables the user to purchase virtual
currency. Such virtual currency can be used to purchase virtual items or time units in our online
games. Fees incurred for purchases of these virtual items are deducted from the users account.
Our
game players can purchase prepaid cards primarily through the following channels operated by
Shengfutong:
|
|
|
Direct online sales. Game players can purchase prepaid cards directly online and payment
can be made using certain commercial bank cards and other online payment service providers. |
|
|
|
Indirect e-sales. Distributors order prepaid cards through a central e-sales computer
system and resell the cards to game players through Internet cafes or other retail points of
sale. |
|
|
|
Indirect offline distribution. Game players can purchase physical prepaid cards from
retail points of sale, which primarily consist of news stands, convenience stores, software
stores and book stores. |
Customer Service
We provide high-quality customer service and are responsive to our game players needs. When
our game players make customer service inquiries, a customer service representative of Shanda
Networking will be the initial point of contact, and if the inquiry involves game-related technical
problems, will liaise with a member of our game management team responsible for such game. We
investigate and address irregularities in game operation reported by users, including eliminating
cheating programs that are used by players to enable their game characters to acquire superior
in-game capabilities. Typical requests handled by Shanda Networking include addressing problems in
adding value to user accounts, retrieving forgotten passwords, and recovering lost user accounts.
Typical requests handled by us include recovering virtual items or in-game characters, and other
game-related questions. Customer service by Shanda Networking is provided through call centers,
walk-in customer service centers and online customer service, including online forums and in-game
customer service.
VIP game players (i.e., those who achieve a certain amount of spending on our games) also have
access to more personalized customer service, including more user-friendly account management
services. For certain VIP game players whose playing habits may have dropped significantly over a
period of time, a customer service representative may contact them to persuade them to become a
more active player.
Our game management teams, through Shanda Networkings customer relationship management
system, monitor our game players activities on a real-time basis and effectively manage and
promote our games according to the user data. Game players can use the bulletin board services
operated by Shanda Networking to post questions to, and receive responses from, other users, which
helps us to monitor our users common interests and concerns and provides us with important
feedback on our online games. Furthermore, game player comments are collected and weekly reports
are generated summarizing important issues and problems raised by game players as well as how such
issues have been addressed.
Competition
We compete primarily with other online game developers and operators in China, including
Changyou.com Limited, Giant Interactive Group, Inc., Kingsoft Corporation Limited, KongZhong
Corporation, NetDragon Websoft Inc., NetEase.com, Nineyou International Limited, Perfect World Co.,
Ltd., Tencent Holdings Limited, and The9 Limited. We also compete with other private companies in
China devoted to game development or operation, many of which are backed by venture capital funds
and international competitors. Competition may also come from international game developers and
operators, such as Activision Blizzard, Inc., Electronic Arts Inc., NCSoft Corporation, Nexon
Corporation and Webzen, Inc.
We compete primarily on the basis of the quality or features of our online games, our
operational infrastructure and expertise, the strength of our product management approach, and the
services we offer that enhance our game players experience.
We believe that domestic game developers and operators, including us, are likely to have a
competitive advantage over international competitors entering the China market, as these companies
are likely to lack operational infrastructure in China and content localization experience for the
China market. We cannot assure you, however, that this competitive advantage will continue to
exist, particularly if international competitors establish joint ventures, form alliances with or acquire domestic game developers and operators. In addition, we also compete
for users against various offline games, such as console games, arcade games and handheld games, as
well as various other forms of traditional or online entertainment. For a discussion of risks
relating to competition, see Item 3, Key Information Risk Factors Risks Relating to Our
Business and Our Industry We face significant competition which could reduce our market share and
materially and adversely affect our business, financial condition and results of operations.
43
Intellectual Property and Proprietary Rights
Intellectual property is essential to our business. We rely on copyright, trademark, patent,
trade secret and other intellectual property law, as well as noncompetition, confidentiality and
license agreements with our employees, suppliers, business partners and others to protect our
intellectual property rights. We generally require our employees to sign agreements acknowledging
that all inventions, trade secrets, works of authorship, developments and other processes generated
by them on our behalf are our property, and assigning to us any ownership rights that they may
claim in those works. Despite these measures, we cannot assure you that we will be able to prevent
unauthorized use of our intellectual property, which would adversely affect our business.
As of December 31, 2009, we owned 91 software copyrights, each of which we have registered
with the State Copyright Bureau of the PRC.
As part of the reorganization, we entered into a Domain Names and Trademarks License Agreement
with Shanda Online pursuant to which Shanda Online licensed to us nine trademarks and 252 domain
names on a nonexclusive, nontransferable and royalty-free basis.
As of December 31, 2009, we owned or licensed 48 trademarks, each in various categories, each
of which we have registered with the China Trademark Office, and had 52 trademark applications,
each in various categories, pending with the China Trademark Office. We have also filed
applications to register certain trademarks in a number of other jurisdictions, including Hong Kong
and Vietnam.
As of December 31, 2009, we owned or licensed 631 registered domain names, including our
official website and domain names registered in connection with each of the games we offer. All of
our domain names are either held by, or licensed by our PRC companies.
As of December 31, 2009, we had 13 patent applications pending with the State Intellectual
Property Office of China.
Government Regulations
Certain areas related to the Internet, such as telecommunications, Internet information
services, international connections to computer information networks, information security and
censorship, are covered extensively by a number of existing laws and regulations issued by various
PRC governmental authorities, including:
|
|
|
the Bureau of State Secrecy; |
|
|
|
the General Administration of Press and Publication, or the GAPP (formerly the State Press
and Publications Administration); |
|
|
|
the Ministry of Commerce, or the MOFCOM; |
|
|
|
the Ministry of Culture, or the MOC; |
|
|
|
the Ministry of Industry and Information Technology, or the MIIT (formerly the Ministry of
Information Industry); |
|
|
|
the Ministry of Public Security; |
|
|
|
the State Administration of Foreign Exchange, or the SAFE; |
|
|
|
the State Administration of Industry and Commerce, or the SAIC; |
|
|
|
the State Administration for Radio, Film and Television; |
|
|
|
the State Copyright Bureau, or the SCB; and |
|
|
|
the State Council Information Office. |
Foreign Ownership Restrictions
Foreign direct investment in telecommunications companies in China is regulated by the
Regulations for the Administration of Foreign-Invested Telecommunications Enterprises, or the FITE
Regulations, which limit foreign ownership of companies that provide value-added telecommunications
services, including online game and Internet content provision, to 50%. In addition, foreign and
foreign-invested enterprises are currently not able to apply for the required licenses for
operating online games in China.
44
On July 13, 2006, the MIIT issued the Circular on Strengthening the Administration of Foreign
Investment in Value-added Telecommunication Services, or the MIIT Circular 2006. The MIIT Circular
2006 requires that (i) foreign investors can only operate a telecommunications business in China by
establishing a telecommunications enterprise with a valid telecommunications business operation
license; (ii) domestic ICP license holders are prohibited from leasing, transferring or selling
telecommunications business operation licenses to foreign investors in any form, or providing any
resource, sites or facilities to foreign investors to facilitate the illegal operation of
telecommunications business in China; (iii) ICP license holders (including their shareholders) must
directly own the domain names and registered trademarks they use in their daily operations;
(iv) each ICP license holder must have the necessary facilities for its approved business
operations and maintain such facilities in the regions covered by its license and (v) all
value-added telecommunication service providers must improve the network and information security,
draft relevant information safety administration regulations and set up networks and information
safety emergency plans. The provincial communications administration bureaus in charge of
telecommunications services are required to ensure that existing ICP license holders would conduct
a self-assessment of their compliance with the Notice and to submit status reports to the MIIT
before November 1, 2006, and may revoke the operating licenses of those who fail to comply with the
above requirements and fail to rectify such non-compliance within the limited period set by
provincial communications administration bureaus. Due to the lack of further necessary
interpretation from the regulator, it remains unclear what impact the Notice will have on us or the
other Chinese Internet companies that have adopted the same or similar corporate and contractual
structures.
In order to comply with such foreign ownership restrictions, we operate our online game
business in China through Shanghai Shulong, which is wholly owned by Dongxu Wang and Yingfeng
Zhang, and controlled by Shengqu through a series of contractual
arrangements, and its wholly-owned subsidiaries, Shulong Computer,
Nanjing Shulong, Chengdu Simo, Chengdu Aurora and the Youji entities. In the opinion of our
PRC legal counsel, Jade & Fountain PRC Lawyers, except as otherwise disclosed in this annual
report, in all material respects, our ownership structure, business and operation model comply with existing PRC laws and
regulations.
Licenses
A number of aspects of our business require us to obtain licenses from a variety of PRC
regulatory authorities.
ICP License. According to the Administrative Measures on Internet Information Services,
commercial Internet information service operators must obtain a license for Internet content
providers, or ICP license, or be sublicensed by qualified ICP license holders. Moreover, ICP
operators providing ICP services in multiple provinces, autonomous regions and centrally
administered municipalities may be required to obtain an inter-regional ICP license. Shanghai
Shulong has obtained an inter-regional ICP license which covers online game services. Chengdu
Aurora has obtained a regional ICP license which only allows it to provide ICP services within
Sichuan Province and does not cover SMS services.
According to the Administrative Measures for Telecommunications Business Operating Licenses, a
value-added telecommunications service provider that has obtained an inter-regional value-added
telecommunications services operating license shall commence its business operations in the
geographic areas as covered by its license within one year after acquiring the license. The license
will be valid for five years. A value-added telecommunications service provider may authorize its
subsidiaries or branches to conduct a value-added telecommunications service business in licensed
regions and have greater than 51% of the equity ownership in the subsidiaries in order to do so.
Moreover, a value-added telecommunications service provider shall not authorize two or more
subsidiaries or branches to conduct the same value-added telecommunications service business in the
same region. Shanghai Shulong has authorized Shulong Computer and Nanjing Shulong to conduct a
value-added telecommunications service business in separate regions.
Internet Culture Operation License. According to the Provisional Regulations for the
Administration of Online Culture, a commercial operator of online cultural products, including
online games, must obtain, in addition to the ICP license, an Internet culture operation license
from the MOC. Shanghai Shulong and Chengdu Aurora currently hold such a license.
Internet Publishing License. The Rules for the Administration of Electronic Publications
impose a license requirement for any company that engages in online publishing, defined as any act
by an Internet information service provider to select, edit and process content or programs and to
make such content or programs publicly available on the Internet. Under current PRC laws and
regulations, the provision of online games is deemed an Internet publication activity. Therefore,
an online game operator must obtain an Internet publishing license in order to directly make its
online games publicly available in China. Shanghai Shulong currently does not hold such a license
and publishes its online games in cooperation with Shanda Networking, which holds such a license.
We entered into an agreement with Shanda Networking regarding the publication of online games which
commenced from July 1, 2008 to the time when Shanghai Shulong obtains such license. All of our online games in commercial operation have
been filed with the GAPP as electronic publications. Shanghai Shulong is currently in the process
of applying for such a license.
45
Online Bulletin Board Service Approval. On November 6, 2000, the MIIT promulgated the
Internet Electronic Bulletin Board Service Administrative Measures, or the BBS Measures. BBS
services include electronic bulletin boards, electronic forums, message boards and chat rooms. The
BBS Measures require Internet information services operators to obtain specific approvals before
providing BBS services. Users of our online games use online bulletin board services provided by
Shanda Networking, which is in the process of renewing its license to provide online bulletin board
services. However, we cannot assure you that Shanda Networking will be able to obtain all the
approvals as required by the BBS Measures. If Shanda Networking fails to comply with the
requirements of the BBS Measures, the PRC governmental authorities may, in cases of serious
violations, order Shanda Networking to stop its online bulletin board services, which could have a
material adverse effect on our business.
Regulation of Internet Content
The PRC government has promulgated measures relating to Internet content through a number of
governmental agencies. These measures specifically prohibit Internet activities, which include the
operation of online games, that result in the publication of any content which is found to, among
other things, propagate obscenity, gambling or violence, instigate crimes, undermine public
morality or the cultural traditions of the PRC, or compromise state security or secrets. When an
Internet content provider or an Internet publisher finds that information falling within the above
scope is transmitted on its website, it shall terminate the transmission of such information or
delete such information immediately and keep records and report to relevant authorities. If an ICP
license holder violates these measures, the PRC government may revoke its ICP license and shut down
its websites.
In addition, according to the Notice on the Work of Purification of Online Games jointly
issued by several governmental authorities in June 2005, online games are required to be registered
and filed as software products in accordance with the Administrative Measures on Software Products
(2000) for the purpose of being operated in China. Furthermore, in accordance with the Notice on
Enhancing the Content Review Work of Online Game Products (2004) promulgated by the MOC, imported
online games are subject to a content review by the MOC prior to their operation in China. In
addition, imported and domestic online games are required to be filed with the MOC before the
operation of each game. Our online games in commercial operation were all filed with the MOC as of
April 30, 2010.
Regulation of Information Security
Internet content in China is regulated and restricted from a state security standpoint. The
National Peoples Congress, Chinas national legislative body, has enacted a law that may subject
to criminal punishment in China any effort to: (i) gain improper entry into a computer or system of
strategic importance; (ii) disseminate politically disruptive information; (iii) leak state
secrets; (iv) spread false commercial information or (v) infringe intellectual property rights.
The Ministry of Public Security has promulgated measures that prohibit using the Internet in
ways which, among other things, result in a leakage of state secrets or a spread of socially
destabilizing content. The Ministry of Public Security has supervision and inspection rights in
this regard, and we may be subject to the jurisdiction of the local security bureaus. If an ICP
license holder violates these measures, the PRC government may revoke its ICP license and shut down
its websites.
Technology Import and Export
Our ability to license online games from abroad and import them into China is regulated in
several ways. We are required to register with the MOFCOM, any license agreement with a foreign
licensor that involves an import of technologies, including online game software into China.
Without that registration, we cannot remit licensing fees out of China to any foreign game
licensor. Furthermore, the SCB requires us to register copyright license agreements relating to
imported software. Without the SCB registration, we are not allowed to publish or reproduce the
imported game software in China. In addition, imported online game software is also required to
pass a content examination by the MOC. Any imported online game software which has not been
examined and approved by the MOC is not allowed to be put into operation in China. If we import
into China and operate online games without obtaining game content approval, the MOC may impose
certain penalties on us, including the revocation of our Internet culture operation license that we
require to operate online games in China. In 2009, the MOC and the GAPP issued separate circulars
to further tighten the review procedure for importing online games into China. See also Item 3,
Key Information Risks Relating to Our Business and Our Industry We may be required to reapply
for approvals for online games licensed from overseas licensors. The MIIT also requires us to
register online games that we wish to import into China. We require this registration in order to
operate an imported online game in China. We have registered all online games that we currently
operate.
Intellectual Property Rights
The State Council and the SCB have promulgated various rules and regulations and rules
relating to protection of software in China. Under these rules and regulations, software owners,
licensees and transferees may register their rights in software with the SCB or its local branches and obtain software copyright
registration certificates. Although such registration is not mandatory under PRC law, software
owners, licensees and transferees are encouraged to go through the registration process and
registered software rights may be entitled to better protections. We have registered all of our
in-house developed online games that have been commercially launched with the SCB.
46
The PRC Trademark Law, adopted in 1982 and revised in 2001, with its implementation rules
adopted in 2002, protects registered trademarks. The Trademark Office of the SAIC handles trademark
registrations and grants a protection term of ten years to registered trademarks.
Internet Cafe Regulation
Internet cafes are required to obtain a license from the MOC and the SAIC and are subject to
requirements and regulations with respect to location, size, number of computers, age limit of
customers and business hours. Although we do not own or operate any Internet cafes, many Internet
cafes distribute virtual prepaid cards. The PRC government has intensified its regulation of
Internet cafes, which are currently the primary venue for our users to play our games. In 2004, the
MOC, the SAIC and several other government authorities jointly issued a notice to suspend issuance
of new Internet cafe licenses. Though this nationwide suspension has been generally lifted in 2005,
the local authorities have the authority of controlling the volume and recipients of new licenses
at their discretion. In addition, local and higher-level governmental authorities may from time to
time strictly enforce customer age limits and other requirements relating to Internet cafes, as a
result of the occurrence of, and media attention on, gang fights, arsons or other incidents in or
related to Internet cafes. As many of our game players access our games from Internet cafes, any
reduction in the number, or any slowdown in the growth, of Internet cafes in China as a result of
any intensified Internet cafe regulation will limit our ability to maintain or increase our
revenues and expand our game player base, which will in turn materially and adversely affect our
business and results of operations. A notice jointly issued by several central governmental
authorities in February 2007 suspended nationwide the approval for the establishment of new
Internet cafes in 2007 and enhanced the punishment for Internet cafes admitting minors. In March
2010, the MOC issued a circular to increase the punishment on Internet cafes which allow minors to
enter and use Internet in their cafes.
Privacy Protection
Chinese law does not prohibit Internet content providers from collecting and analyzing
personal information of their users. We require our users to accept a user agreement whereby they
agree to provide certain personal information to us. Chinese law prohibits Internet content
providers from disclosing any information transmitted by users through their networks to any third
parties unless otherwise permitted by law. If an Internet content provider violates these
regulations, the MIIT or its local bureaus may impose penalties and the Internet content provider
may be liable for damages caused to its users.
Anti-fatigue Compliance System and Real-name Registration System
In April 2007, the GAPP and several other governmental authorities issued a circular requiring
the implementation of an anti-fatigue compliance system and a real-name registration system by all
PRC online game operators to curb addictive online game playing by minors. Under the anti-fatigue
compliance system, three hours or less of continuous playing by minors, defined as game players
under 18 years of age, is considered to be healthy, three to five hours to be fatiguing, and
five hours or more to be unhealthy. Game operators are required to reduce the value of in-game
benefits to a game player by half if the game player has reached the fatiguing level, and to zero
in the case of the unhealthy level.
To identify whether a game player is a minor and thus subject to the anti-fatigue compliance
system, a real-name registration system must be adopted to require online game players to register
their real identity information before playing online games. The online game operators are also
required to submit the identity information of game players to the public security authority for
verification.
Shanda Online has implemented an anti-fatigue compliance system and real-name registration
system and provides anti-fatigue compliance services for us. Under this system, game players must
use real identities to create accounts to enable us to identify which of our game players are
minors and thus are subject to these regulations. For game players who do not register, we assume
that they are minors.
Payment and Clearance By Non-financial Institutions
On April 16, 2009, the PBOC issued a notice regarding the payment and clearance business
carried out by non-financial institutions, or the PBOC Notice. The PBOC Notice requires
non-financial institutions which engage in payment and clearance business to register with the PBOC
before July 31, 2009.
In order to collect payment from our online game players, we rely on certain services provided
by certain VIEs of Shanda Online, which may be subject to the requirements of the PBOC Notice.
Shanda Online has registered with the PBOC. However, if the PBOC requires Shanda Online to obtain
additional licenses or approvals for its services, there is no assurance that Shanda Online will be
able to obtain such licenses or approvals. In the event that Shanda Online fails to obtain any or all of the licenses or approvals as mentioned above, we may not be able
to collect payment from our game players on a timely basis or at all and may have to change our
current billing model and system.
47
Virtual Currency
In January 2007, the Ministry of Public Security, the MOC, the MIIT and the GAPP jointly
issued a circular regarding online gambling which has implications for the issuance and use of
virtual currency. To curtail online games that involve online gambling as well as address concerns
that virtual currency could be used for money laundering or illicit trade, the circular
(i) prohibits online game operators from charging commissions in the form of virtual currency in
relation to winning or losing of games; (ii) requires online game operators to impose limits on use
of virtual currency in guessing and betting games; (iii) bans the conversion of virtual currency
into real currency or property and (iv) prohibits services that enable game players to transfer
virtual currency to other players. In February 2007, 14 PRC regulatory authorities jointly
promulgated a circular to further strengthen the oversight of Internet cafes and online games.
Under the circular, the PBOC has authority to regulate virtual currency, including: (i) setting
limits on the aggregate amount of virtual currency that can be issued by online game operators and
the amount of virtual currency that can be purchased by an individual; (ii) stipulating that
virtual currency issued by online game operators can only be used for purchasing virtual products
and services within the online games and not for purchasing tangible or physical products;
(iii) requiring that the price for redemption of virtual currency shall not exceed the respective
original purchase price and (iv) banning the trading of virtual currency.
On June 4, 2009, the MOC and the MOFCOM jointly issued a notice regarding strengthening the
administration of online game virtual currency, or the Virtual Currency Notice.
The Virtual Currency Notice requires businesses that (i) issue online game virtual currency
(in the form of prepaid cards and/or pre-payment or prepaid card points) or (ii) offer online game
virtual currency transaction services to apply for approval from the MOC through its provincial
branches within three months following the date of such notice. The Virtual Currency Notice also
prohibits businesses that issue online game virtual currency from providing services that would
enable the trading of such virtual currency. Any business that fails to submit the requisite
application will be subject to sanctions, including but not limited to warnings, mandatory
corrective measures and fines.
According to the Virtual Currency Notice, an online game virtual currency transaction service
provider refers to a business providing platform services with respect to trading of online game
virtual currency among game users. The Virtual Currency Notice further requires an online game
virtual currency transaction service provider to comply with relevant e-commerce regulations issued
by the MOFCOM. According to the Guiding Opinions on Online Trading (Interim) issued by the MOFCOM
on March 6, 2007, online platform services refer to trading services provided to online buyers and
sellers through the computer information system operated by the service provider.
In addition, the Virtual Currency Notice regulates, among other things, the amount of virtual
currency a business can issue, the retention period of user records, the function of virtual
currency, and the return of unused virtual currency upon termination of online services. It also
prohibits online game operators from allocating virtual items or virtual currency to players based
on random selection through lucky draw, wager or lottery which involves cash or virtual currency
directly paid by the players. The Virtual Currency Notice also provides that game operators may not
issue virtual currency to game players through means other than purchases with legal currency.
Moreover, any businesses that do not provide online game virtual currency transaction services are
required to adopt technical measures to restrict the transfer of online game virtual currency among
accounts of different game players.
We issue online game virtual currency to game players for them to purchase various virtual
items to be used in our online games. We intend to comply with the Virtual Currency Notice.
Shanghai Shulong and Chengdu Aurora have obtained approval from the MOC for issuing online game
virtual currency, as required under the Virtual Currency Notice. However, we cannot assure you that
all of our PRC operating companies can obtain the approval in a timely manner or at all. Certain of
our games contain features known as treasure boxes. Players may use yuanbao, a virtual item
they obtain in the games, to acquire keys to open treasure boxes that, if opened, award the players
with rewards, such as game points or virtual items. As no cash or virtual currency is directly paid
by the players in opening treasure boxes, we believe such feature is distinct from those prohibited
by the Virtual Currency Notice. However, we cannot assure you that the PRC regulatory authorities
will not take a view contrary to ours. See Item 3, Key Information Risk Factors Risks Relating
to Regulation of Our Business and to Our Structure Compliance with the laws or regulations
governing virtual currency may result in us having to obtain additional approvals or licenses or
change our current business model.
C. ORGANIZATIONAL STRUCTURE
As of December 31, 2009, we operated our businesses through the following significant direct and
indirect subsidiaries and investee companies:
Shanda Games Holdings (HK) Limited, or Shanda Games (HK), which is our direct wholly-owned
subsidiary incorporated in Hong Kong;
Shengqu Information Technology (Shanghai) Co., Ltd., or Shengqu, which is a wholly
foreign-owned operating entity incorporated in the PRC and a direct wholly-owned subsidiary of
Shanda Games (HK);
48
Shengji Information Technology (Shanghai) Co., Ltd., or Shengji, which is a wholly
foreign-owned operating entity incorporated in the PRC and a direct wholly-owned subsidiary of
Shanda Games (HK);
Lansha Information Technology (Shanghai) Co., Ltd., or Lansha, which is a wholly
foreign-owned operating entity incorporated in the PRC and a direct wholly-owned subsidiary of
Shanda Games Technology (HK) Limited;
Shanda Games International (Pte) Ltd., which is our direct wholly-owned subsidiary
incorporated in Singapore; and
Actoz Soft Co., Ltd., or Actoz, which is our majority-owned subsidiary incorporated in South
Korea and publicly listed on the Korea Exchange.
In order to comply with PRC laws restricting foreign ownership in the online game business in
China, we operate our online game business in China through Shanghai Shulong and its subsidiaries.
We control Shanghai Shulong and its subsidiaries through a series of contractual arrangements,
including VIE agreements, between our PRC subsidiaries, on the one hand, and Shanghai
Shulong and/or its shareholders, on the other hand. The VIE agreements are a series of contractual
arrangements between our PRC subsidiaries, on the one hand, and Shanghai Shulong and/or its
shareholders, on the other hand, relating to business operations, consulting services, and certain
shareholder rights and corporate governance matters. As a result of these contractual arrangements,
we are considered the primary beneficiary of Shanghai Shulong and its subsidiaries and accordingly,
consolidate the results of operations of Shanghai Shulong and its subsidiaries in our financial
statements. We publish our online games through cooperation with Shanda Networking, which holds an
Internet publishing license. Shengqu owns the substantial majority of our physical assets.
In the opinion of our PRC legal counsel, Jade & Fountain PRC Lawyers, in all material aspects,
the ownership structure and the contractual arrangements between our PRC subsidiaries, on the one
hand, and Shanghai Shulong and/or its shareholders, on the other hand, comply with current PRC laws
and regulations. There are, however, substantial uncertainties regarding the interpretation and
application of current or future PRC laws and regulations. Accordingly, PRC governmental
authorities may ultimately take a view that is inconsistent with the opinion of Jade & Fountain PRC
Lawyers. See Item 3, Key Information Risk Factors Risks Relating to Regulation of Our Business
and to Our Structure.
The following diagram illustrates our direct and indirect subsidiaries and VIEs as of
December 31, 2009.
49
D. PROPERTY, PLANTS AND EQUIPMENT
We lease our office space of approximately 9,000 square meters at No. 1 Office Building, No.
690 Bibo Road, Pudong New Area, Shanghai 201203, from Shanda Interactive. In addition, we occupy an
aggregate of approximately 14,000 square meters of leased office space in Beijing, Shenzhen,
Chengdu, Hangzhou, Wuhan and various other cities in China and Hong Kong, Singapore and South
Korea, including an office space of approximately 6,000 square meters leased by Actoz in South
Korea. As our workforce expands, we may need to lease or purchase additional office space.
Item 4A. UNRESOLVED STAFF COMMENTS
None.
Item 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
You should read the following discussion and analysis of our financial condition and results
of operations in conjunction with our consolidated financial statements and the related notes
included elsewhere in this annual report on Form 20-F. This discussion may contain forward-looking
statements based upon current expectations that involve risks and uncertainties. Our actual results
may differ materially from those anticipated in these forward- looking statements as a result of
various factors, including those set forth under Item 3. Key InformationD. Risk Factors or in
other parts of this annual report on Form 20-F.
Overview
We are Chinas leading online game company in terms of the size and diversity of our game
portfolio. Our online game revenues and game player base are also among the largest in China.
Through our extensive experience in the online game industry in China, we have created a scalable
approach to develop, source and operate online games, as well as license our games to third
parties. We develop and source a broad array of game content through multiple channels, including
in-house development, licensing, investment and acquisition, co-development, and co-operation.
Through these channels, we have built a large, diversified game portfolio and a robust game
pipeline. In addition, we operate a nationwide, secure network to host hundreds of thousands of
users playing simultaneously, and monitor and adjust the game environment to optimize our game
players experience.
As of March 31, 2010, we operated 26 MMORPGs and eight advanced casual games. Our in-house
development capabilities consist of over 1,500 game development personnel and our proprietary game
development platform.
We use either the item-based or time-based revenue model for the games we operate. Compared
with the time-based model, under which players pay for game-playing time, the item-based model
allows game players to play the basic features of the game for free. Game players may then choose
to purchase virtual items that enhance their playing experience, such as weapons, clothing,
accessories and pets. Our game players purchase electronic or physical prepaid cards to purchase
virtual items and to access our time-based online games. We have adopted the item-based model for
substantially all of our MMORPGs and all of our advanced casual games.
Our net revenues increased 42% from RMB3,376.8 million in 2008 to RMB4,806.7 million (US$704.2
million) in 2009. Our net income attributable to our company
increased 55% from RMB935.5 million in
2008 to RMB1,453.0 million (US$212.9 million) in 2009.
We depend substantially on two online games, which accounted in the aggregate for
approximately 75.9% and 78.2% of our net revenues in 2008 and 2009, respectively. These games have
finite commercial lifespan. While we may be able to extend the commercial lifespans of these games
by adding new features that appeal to existing players and attract new players, we need to develop
and source new online games that appeal to game players and that will be commercially successful in
order to remain competitive. Furthermore, the online game industry in China may not continue to
grow at current levels, and we face uncertainties regarding the continuing market acceptance of our
online games in China and elsewhere. We need to adapt to new industry trends, including changes in
game players preferences, new revenue models, new game content distribution models, new
technologies and new governmental regulations. We evaluate these changes as they emerge and strive
to adapt our business and operations in order to maintain and strengthen our leadership in the
industry.
The Reorganization and the Basis of Preparation
Our online game business was founded by Shanda Interactive, our parent, in 2001 and was
operated by Shanda Interactive through various subsidiaries and VIEs, until the reorganization on
July 1, 2008. As part of the reorganization, Shanda Interactive transferred substantially all of
its assets and liabilities related to the online game business to us. In connection with the
reorganization, we entered into agreements with Shanda Interactive and certain of its affiliates with respect to various ongoing relationships between us. See Item 7, Major
Shareholders and Related Party Transactions Related Party
Transactions Transactions and
Agreements with Shanda Interactive.
50
As the reorganization was accounted for as a common control transaction, our consolidated
financial statements have been prepared as if our current corporate structure had been in existence
throughout the periods presented and as if the online game business, including Actoz that Shanda
Interactive subsequently transferred to us in the second quarter of 2009, was transferred to us
from Shanda Interactive as of the earliest period presented. Accordingly, for the period from
January 1, 2007 to June 30, 2008, our consolidated financial statements were prepared by combining
the assets, liabilities, revenues, expenses and cash flows of entities that were directly engaged
in the online game business.
Our statements of operations and comprehensive income for the periods prior to the
reorganization include all the historical costs related to the online game business, including
payments for certain services performed by Shanda Interactives various subsidiaries and VIEs,
which became Shanda Online after the reorganization, and an allocation of certain general corporate
expenses of Shanda Interactive. These general corporate expenses primarily relate to employee
compensation costs, professional service fees and other expenses arising from the provisions of
certain corporate functions, including finance, legal, technology, investment and executive
management. We allocated these expenses based on estimates that our management believes are a
reasonable reflection of the utilization of services provided to, or benefits received by, us. See
Note 2(1) to our consolidated financial statements included elsewhere in this annual report for
further information related to these costs. Shanda Interactive allocated an aggregate of
RMB37.6 million, RMB31.3 million and RMB14.4 million (US$2.1 million) of corporate expenses to us
for the years ended December 31, 2007, 2008 and 2009, respectively. While the expenses allocated to
us are not necessarily indicative of the expenses that we would have incurred if we had been a
separate, independent entity during the periods presented, management believes that the foregoing
presents a reasonable basis of estimating what our expenses would have been on a historical basis.
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,
disclosures of contingent assets and liabilities at the balance sheet dates and the reported
amounts of revenues and expenses during the reporting periods presented. Actual results could
materially differ from those estimates.
For the period from July 1, 2008 to December 31, 2009, our consolidated financial statements
consist of the financial statements of Shanda Games, including its subsidiaries and VIEs, as a
standalone entity subsequent to the reorganization.
Our Agreements with Shanda Online
Effective as of the reorganization, we have engaged certain VIEs of Shanda Online to provide
certain services that are critical to our business. Pursuant to the Amended and Restated
Cooperation Agreement between Shanda Networking and Nanjing Shanda, on the one hand, and the
Shulong entities, on the other hand, we have engaged Shanda Networking as our provider of certain
services, including, among others, online billing and payment, user authentication, customer
service, anti-fatigue compliance, prepaid card marketing and data support services for a period of
five years commencing July 1, 2008. We pay Shanda Networking a service fee, which we record as a
portion of platform fees in our cost of revenues. Because a substantial portion of platform fees is
based on a fixed percentage of the face value of prepaid cards used in our games, we expect our
platform fees as a percentage of net revenues to remain generally stable going forward. Pursuant to
the Amended and Restated Sales Agency Agreement between Shengfutong and the Shulong entities, we
have engaged Shengfutong, for a period of five years commencing July 1, 2008, as the sales agent
for the distribution of prepaid cards which are required to purchase virtual items or time units in
our online games. For each prepaid card sold, we pay Shengfutong a service fee, which we record as
a portion of sales and marketing expenses in our operating expenses. See Item 7, Major
Shareholders and Related Party Transactions Related Party Transactions Transactions and
Agreements with Shanda Interactive for more details on the terms of these agreements, including
the fixed discount to the face value of prepaid cards used to calculate the service fees we pay
under these agreements. Prior to the reorganization, the services currently provided by Shanda
Networking were performed by Shanda Interactives various subsidiaries and VIEs and the service
fees were based on certain agreements in existence at that time. Prior to the reorganization, the
services currently provided by Shengfutong were performed by our own sales and marketing personnel
and the costs relating to such services were recorded as a portion of sales and marketing expenses.
Due to the differences in the agreements in place prior to and after the reorganization, our
results of operations for the periods prior to and after the reorganization are not entirely
comparable. Specifically, the agreements pursuant to which we recognize platforms fees and sales
and marketing expenses following the reorganization differ from the methods prior to the
reorganization. Therefore, with respect to periods prior to and after July 1, 2008, cost of
revenues (namely, platform fees) and operating expenses (namely, sales and marketing expense) are
not entirely comparable, which also impact other line items such as gross profit, income from
operations and net income. As a result, the results of operations for the years ended December 31,
2007 and 2008 and the years ended December 31, 2008 and 2009 may not be entirely comparable.
51
Factors Affecting Results of Operations
Significant factors affecting our financial condition and results of operations include:
Our ability to continue to successfully introduce new online games and expansion packs for
existing games. We have built the largest and the most diversified portfolio of online games in
China through our multi-channel game content development and sourcing strategy. We must continue to
generate and acquire attractive online games by developing in-house, licensing, acquiring through
investment, co-developing or co-operating with third parties, new online games and to maintain the
popularity of our existing online games by introducing updates, expansion packs and other game
improvements. Our results of operations may also be significantly affected by the timing of our new
game launches;
Our ability to maintain and expand our community of loyal game players. The size and
loyalty of our community of game players are critical to our business. Players of online games,
especially MMORPGs, are typically attracted to online games in which they can interact with many
players. We have built a large community of game players and have maintained and expanded this
community by enhancing our game players loyalty to our online games. Our loyal game players tend
to remain active paying game players and in addition, such game players are likely to spend more on
our virtual items or consume more playing time on our games. Our ability to retain and attract game
players will depend significantly on our ability to continually strengthen our community of loyal
game players and enhance their experience;
Game content sourcing costs. Significant resources are required to develop, acquire and
market new online games and maintain their popularity in the market, including game development,
game licensing and other online game generation and acquisition costs. We typically incur
significant costs and expenses before such online games generate any revenues. If such games are
not popular and do not generate substantial revenues, we may not be able to recover such game
content sourcing costs;
The reliability and quality of Shanda Networkings integrated service platform and
Shengfutongs distribution services. We have engaged Shanda Networking and Shengfutong to provide
certain services that are critical to the operation of our online game business, including online
billing and payment, customer service, user authentication, anti-fatigue compliance, prepaid card
marketing and distributions and data support services, for a period of five years commencing
July 1, 2008. The reliability and quality of Shanda Networkings integrated service platform and
Shengfutongs distribution services directly affect the availability of our online games to our
game players and the quality of the game-playing experience, which would have a material effect on
our revenues; and
Competition in Chinas online game industry. The online game industry in China is highly
competitive. Numerous competitors have entered the online game industry in China, including
Changyou.com Limited, Giant Interactive Group, Inc., Kingsoft, KongZhong Corporation, NetDragon
Websoft Inc., NetEase.com, Nineyou International Limited, Perfect World Co., Ltd., Tencent Holdings
Limited and The9 Limited. The proliferation of the number of online game companies has placed
significant pressure on the cost of sourcing and marketing online games, attracting new and
retaining existing game players, and recruiting and retaining game development and management
talent.
Revenues
We currently derive substantially all of our revenues from purchases of virtual items by game
players of our MMORPGs and advanced casual games.
The following table sets forth, for the periods indicated, a breakdown of our net revenues
into MMORPGs, advanced casual games and other revenues.
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|
|
|
|
|
|
For the Year Ended December 31, |
|
|
|
2007 |
|
|
2008 |
|
|
2009 |
|
|
|
|
|
|
|
% of Net |
|
|
|
|
|
|
% of Net |
|
|
|
|
|
|
% of Net |
|
|
|
RMB |
|
|
Revenues |
|
|
RMB |
|
|
Revenues |
|
|
RMB |
|
|
Revenues |
|
|
|
(unaudited) |
|
|
|
(in millions, except percentages) |
|
Net revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MMORPG revenues |
|
|
2,016.1 |
|
|
|
86.8 |
% |
|
|
2,987.8 |
|
|
|
88.5 |
% |
|
|
4,476.7 |
|
|
|
93.1 |
% |
Advanced casual game revenues |
|
|
280.4 |
|
|
|
12.1 |
|
|
|
358.9 |
|
|
|
10.6 |
|
|
|
310.4 |
|
|
|
6.5 |
|
Other revenues(1) |
|
|
26.3 |
|
|
|
1.1 |
|
|
|
30.1 |
|
|
|
0.9 |
|
|
|
19.6 |
|
|
|
0.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenues |
|
|
2,322.8 |
|
|
|
100.0 |
% |
|
|
3,376.8 |
|
|
|
100.0 |
% |
|
|
4,806.7 |
|
|
|
100.0 |
% |
|
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|
|
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|
|
|
|
|
|
|
|
|
|
|
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|
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|
|
(1) |
|
Other revenues primarily include fees received from game promotions
and short messaging services fees earned. |
52
Our revenues from MMORPGs and advanced casual games are net of a sales discount. For the
periods prior to the reorganization, the sales discount represented the difference between the face
value of the prepaid card and the price at which we sold the prepaid card to our distributors or to
our game players. For the periods subsequent to the reorganization, pursuant to the Amended and
Restated Sales Agency Agreement, the sales discount represents the difference between the face
value of the prepaid cards and the price at which Shengfutong sells the prepaid cards to third-party distributors and retailers or directly to our game players. Therefore, with
respect to each prepaid card sold, the amount of revenues we record and service fee we pay to
Shengfutong, which we record under sales and marketing expenses in our operating expenses, depend
on the sales discount at which Shengfutong sells the prepaid card. A smaller discount applied by
Shengfutong will result in higher net revenues to us, as well as corresponding higher service fee
paid to Shengfutong, and vice versa. Notwithstanding the foregoing, with respect to each prepaid
card sold, we are guaranteed a fixed percentage of the face value of a prepaid card in revenues.
Our revenues are also net of the PRC business tax that our PRC operating companies pay on
their gross revenues. The PRC business tax ranges from 3% to 5%.
We operate our games using one of two revenue models. For games operated using the item-based
revenue model, the most significant factors that affect our revenues are (i) the number of active
paying accounts and (ii) the range, number and pricing of virtual items available for sale. The
number of active paying accounts for any given period is equal to the number of game player
accounts that spend virtual currency at least once during a given period and includes accounts of
game players who spend virtual currency in beta testing of our online games. Our quarterly active
paying accounts is equal to the aggregate number of active paying accounts for our online games
during a given quarter.
For games operated using the time-based revenue model, the most significant factors that
affect our revenues are (i) the number of users playing the game and (ii) the length of time that
users play the game, or total user-hours. We calculate our total user-hours based on our average
concurrent users. In a given period, the number of total user-hours equals the average concurrent
users for that period multiplied by the number of hours in that period. In measuring average
concurrent users, we determine the number of users logged on to our games that adopt the time-based
revenue model at one minute intervals, and then average that number over the course of a day to
derive daily averages. Average daily information is further averaged over a particular period to
determine average concurrent users for that period.
Our online game business is subject to seasonality factors. Generally, our game players spend
more time playing our games in the first and third quarters of each year, which typically have more
holidays, allowing for more time for leisure activities, whereas the second and fourth quarters are
generally slower for our business as there are fewer holidays during those quarters.
Cost of Revenues
Our cost of revenues primarily consists of platform fees, upfront and ongoing licensing fees
for online games and other miscellaneous expenses. The following table sets forth, for the periods
indicated, a breakdown of our cost of revenues by amount and percentage of our net revenues.
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|
For the Year Ended December 31, |
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|
|
2007 |
|
|
2008 |
|
|
2009 |
|
|
|
|
|
|
|
% of Net |
|
|
|
|
|
|
% of Net |
|
|
|
|
|
|
% of Net |
|
|
|
RMB |
|
|
Revenues |
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|
RMB |
|
|
Revenues |
|
|
RMB |
|
|
Revenues |
|
|
|
(unaudited) |
|
|
|
(in millions, except percentages) |
|
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues |
|
|
2,322.8 |
|
|
|
100.0 |
% |
|
|
3,376.8 |
|
|
|
100.0 |
% |
|
|
4,806.7 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Platform fees |
|
|
735.4 |
|
|
|
31.7 |
|
|
|
864.9 |
|
|
|
25.6 |
|
|
|
1,018.5 |
|
|
|
21.2 |
|
Upfront and ongoing
licensing fees |
|
|
429.6 |
|
|
|
18.5 |
|
|
|
520.9 |
|
|
|
15.4 |
|
|
|
797.1 |
|
|
|
16.6 |
|
Others |
|
|
96.1 |
|
|
|
4.1 |
|
|
|
103.6 |
|
|
|
3.1 |
|
|
|
117.9 |
|
|
|
2.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenues |
|
|
1,261.1 |
|
|
|
54.3 |
|
|
|
1,489.4 |
|
|
|
44.1 |
|
|
|
1,933.5 |
|
|
|
40.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit/margin |
|
|
1,061.7 |
|
|
|
45.7 |
% |
|
|
1,887.4 |
|
|
|
55.9 |
% |
|
|
2,873.2 |
|
|
|
59.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
Platform fees. Platform fees consist of (1) costs related to various support services,
including online billing and payment, user authentication, customer service, anti-fatigue
compliance, prepaid card marketing and data support services, and (2) other expenses related to
server leasing expense, depreciation of purchased servers and equipment, server and equipment
maintenance fees, and software rental fees. Platform fees constituted approximately 31.7%, 25.6%
and 21.2% of our net revenues in 2007, 2008 and 2009, respectively. The decrease in platform fees
as a percentage of net revenues resulted primarily from the fact that following the reorganization
effective July 1, 2008, we paid Shanda Networking a service fee related to various platform
services, described in clause (1) in the first sentence of this paragraph, based upon a fixed
percentage of the portion of the face value of prepaid cards distributed and used in our games,
which has resulted in lower fees as a percentage of our net revenues. We expect our platform fees
as a percentage of our net revenues to remain generally stable going forward because a substantial
portion of platform fees is based on a fixed percentage of the portion of the face value of prepaid
cards used in our games.
53
Upfront and ongoing licensing fees. The cost of licensing games from third-party game content
providers consists of upfront licensing fees, which are generally paid in several installments, and
ongoing licensing fees, the majority of which is equal to a percentage of the revenues we generate from the relevant
licensed game and, in some circumstances, includes a minimum guarantee. Upfront licensing fees are
amortized on a straight-line basis over the shorter of the licensed period and the useful economic
life of the relevant licensed game. Amortization of upfront licensing fees and ongoing licensing
fees for games constituted approximately 18.5%, 15.4% and 16.6% of our net revenues in 2007, 2008
and 2009, respectively. The increase in upfront and ongoing licensing fees as a percentage of net
revenues from 2008 to 2009 is primarily due to the increase of amortization of upfront fee relating
to new games launched in the second half of 2008 and 2009. The decrease in ongoing licensing fees
as a percentage of our net revenues from 2007 to 2008 is primarily due to the consolidation
beginning from the third quarter of 2007 of the financial results of Actoz, which licenses several
games to us, including Mir II, which is our top game in terms of revenues in 2008 and 2009. While
Actoz is our majority-owned subsidiary and controls the licensing of Mir II in China, we continue
to classify Mir II as a licensed game because Actoz shares a portion of the ongoing licensing fees
we pay to Actoz with a third party that co-owns the intellectual property rights relating to
Mir II. We expect our upfront and ongoing licensing fees as a percentage of our net revenues to
increase slightly in 2010 due to the full year impact of games licensed from third parties.
Others. Other expenses include employee salary and welfare benefits, such as medical
insurance, statutory housing contributions, unemployment insurance and pension benefits, for
employees involved in the operation of our online games, stock-based compensation for employees who
operate our games and office expenses. Other expenses were approximately 4.1%, 3.1% and 2.4% of our
net revenues in 2007, 2008 and 2009, respectively.
Gross profit/margin. Gross profit as a percentage of our net revenues was 45.7%, 55.9% and
59.8% in 2007, 2008 and 2009, respectively.
Operating Expenses
Our operating expenses consist of product development expenses, sales and marketing expenses
and general and administrative expenses. The following table sets forth, for the periods indicated,
a breakdown of our operating expenses by amount and percentage of our net revenues.
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31, |
|
|
|
2007 |
|
|
2008 |
|
|
2009 |
|
|
|
|
|
|
|
% of Net |
|
|
|
|
|
|
% of Net |
|
|
|
|
|
|
% of Net |
|
|
|
RMB |
|
|
Revenues |
|
|
RMB |
|
|
Revenues |
|
|
RMB |
|
|
Revenues |
|
|
|
(unaudited) |
|
|
|
(in millions, except percentages) |
|
Net revenues: |
|
|
2,322.8 |
|
|
|
100.0 |
% |
|
|
3,376.8 |
|
|
|
100.0 |
% |
|
|
4,806.7 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product development |
|
|
136.4 |
|
|
|
5.9 |
|
|
|
238.8 |
|
|
|
7.1 |
|
|
|
339.8 |
|
|
|
7.1 |
|
Sales and marketing |
|
|
125.4 |
|
|
|
5.4 |
|
|
|
204.5 |
|
|
|
6.1 |
|
|
|
432.9 |
|
|
|
9.0 |
|
General and administrative |
|
|
175.2 |
|
|
|
7.5 |
|
|
|
287.2 |
|
|
|
8.4 |
|
|
|
366.1 |
|
|
|
7.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
437.0 |
|
|
|
18.8 |
|
|
|
730.5 |
|
|
|
21.6 |
|
|
|
1,138.8 |
|
|
|
23.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating profit/margin |
|
|
624.7 |
|
|
|
26.9 |
% |
|
|
1,156.9 |
|
|
|
34.3 |
% |
|
|
1,734.4 |
|
|
|
36.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product development expenses. Our product development expenses primarily consist of salary
and benefits expenses of personnel engaged in the product development of our online games,
outsourced game development expenses as a result of our investments through 18 Capital, share-based
compensation and other expenses incurred by our product development personnel. Product development
expenses were 5.9%, 7.1% and 7.1% of our net revenues in 2007, 2008 and 2009, respectively. We
expect our product development expenses to increase in 2010, as we develop new online games,
updates or expansion packs for our existing online games, customize games licensed from third
parties and continue to invest through 18 Capital.
Sales and marketing expenses. Our sales and marketing expenses primarily consist of
advertising and promotion expenses for our online games in different media outlets, costs related
to distribution of prepaid cards, salary and benefits for our sales and marketing personnel,
share-based compensation and other expenses incurred by our sales and marketing personnel.
Beginning on July 1, 2008, service fees paid to Shengfutong for the distribution of prepaid cards
pursuant to the Amended and Restated Sales Agency Agreement are recorded as sales and marketing
expenses. Sales and marketing expenses were 5.4%, 6.1% and 9.0% of our net revenues in 2007, 2008
and 2009, respectively. We expect our sales and marketing expenses to increase in 2010 as we expect
our service fee paid to Shengfutong to increase as more prepaid cards are sold and our advertising
and promotion expenses to increase as we launch additional new games and expand our sales and
marketing efforts in our existing markets and in new markets.
General and administrative expenses. Our general and administrative expenses primarily
consist of salary and benefits for general management, finance and administrative personnel,
professional services fees, business tax expenses, share-based compensation and other expenses.
General and administrative expenses were 7.5%, 8.4% and 7.6% of our net revenues in 2007, 2008 and
2009, respectively. Our business tax expense relates to services and licensing fees paid by our PRC
operating companies to Shengqu, Shengji and Lansha. We expect the general and administrative
expenses to increase in 2010 due to the increased amount of business tax to be paid by our PRC
operating companies, as a result of the increasing volume of services to be performed by our PRC
subsidiaries for our PRC operating companies, increased salary and share-based compensation expenses as a result of
the increased headcount as we develop our own general management, financial and administrative
departments, and increased professional service fees as a result of being a publicly listed
company.
54
Operating profit/margin. Operating profit as a percentage of our net revenues was 26.9%,
34.3% and 36.1% in 2007, 2008 and 2009, respectively.
Non-Operating Income
Our non-operating income consists of interest income and other non-operating income.
Interest Income. We earn interest income from the deposit of our cash balance with banks.
Other Non-Operating Income. Other non-operating income primarily consists of government
incentives. Due to the preferential treatments for qualified high technology companies in China and
incentives from local governments to encourage regional business development, certain of our PRC
companies receive financial incentives from local governments that are calculated with reference to
taxable income and revenues, as the case may be. The amount and timing of the financial incentives
are determined by government authorities. Upon receipt, these incentives are recognized as other
income in our statements of operations and comprehensive income. Please see note 5 to our
consolidated financial statements included elsewhere in this annual report.
In 2007, 2008 and 2009, we received an aggregate of RMB54.3 million, RMB18.4 million and
RMB177.0 million (US$25.9 million) in cash, respectively, as financial incentives from municipal
governments. Going forward, eligibility for the government financial incentives we may receive
requires that we continue to meet a number of government-mandated financial and non-financial
criteria, which generally include:
|
|
|
generating more than a minimum level of revenues from high-tech related sales or
services, determined as a percentage of total revenues; |
|
|
|
employing more than a minimum number of employees in product development; and |
|
|
|
expending more than a minimum amount on product development, determined as a percentage
of total revenues. |
The continued qualification is further subject to the discretion of the municipal government.
Moreover, the central government or municipal government could determine at any time to immediately
eliminate or reduce these financial incentives. Upon expiration of these government financial
incentives, we will consider available options, in accordance with applicable law, that would
enable us to qualify for additional government financial incentives to the extent they are then
available to us.
Taxation
Under the current laws of the Cayman Islands, we are not subject to tax on income or capital
gains. In addition, payment of dividends by us is not subject to withholding tax in the Cayman
Islands.
Under the Hong Kong Inland Revenue Ordinance, Shanda Games (HK) was subject to 17.5% income
tax for the year ended December 31, 2007 and 16.5% for the years ended December 31, 2008 and 2009
on its taxable income generated from operations in Hong Kong. Additionally, payments of dividends
by Shanda Games (HK) are not subject to any Hong Kong withholding tax.
PRC Enterprise Income Tax
Prior to January 1, 2008, our PRC operating companies were governed by the Income Tax Law of
the PRC for Enterprises with Foreign Investment and Foreign Enterprises and the Provisional
Regulations of the PRC on Enterprises Income Tax, or the Old EIT Laws. Pursuant to the Old EIT
Laws, PRC enterprises were generally subject to Enterprise Income Tax, or the EIT, at a statutory
rate of 33% (30% state income tax plus 3% local income tax), or 15% for certain technology
enterprises, on PRC taxable income. Companies that are registered in the Pudong New District of
Shanghai are, however, subject to a 15% preferential EIT rate pursuant to the local tax
preferential treatment prior to January 1, 2008. Furthermore, foreign invested enterprises were
exempted from PRC state income tax for two years, beginning with their first profitable year of
operations, and were entitled to a 50% tax reduction for the subsequent three years. During the
year ended December 31, 2007, certain of our operations in the PRC were subject to an applicable
tax rate of 15% as a result of being named new technology enterprises, except for Shengqu, which,
as a foreign invested company and software development enterprise, was subject to an income tax
rate of 7.5% for the year 2007.
In March 2007, the PRC government enacted the PRC Enterprise Income Tax Law, or the New EIT
Law, and promulgated related regulations, Implementing Regulations for the PRC Enterprise Income
Tax Law. The law and regulations went into effect on January 1, 2008. The New EIT Law, among other
things, imposes a unified income tax rate of 25% for both domestic and foreign invested
enterprises. The PRC Enterprise Income Tax Law provides a five-year transitional period for those entities established before March 16, 2007, which enjoyed a
favorable income tax rate of less than 25% under the previous income tax laws and rules, to
gradually change their rates to 25%.
55
On April 14, 2008, relevant governmental regulatory authorities released qualification
criteria, application procedures and assessment processes for high and new technology
enterprises, which will be entitled to a favorable statutory tax rate of 15%. On July 8, 2008,
relevant governmental authorities further clarified that high and new technology enterprises
previously qualified under the previous income tax laws and rules as of December 31, 2007 were
allowed to enjoy grandfather treatment for the unexpired tax holidays, on condition that they were
re-approved for high and new technology enterprise status under the regulations released on
April 14, 2008. An enterprises qualification as a high and new technology enterprise is
re-assessed by the relevant PRC governmental authorities every three years.
In December 2008, the local governments recognized Shengqu, Shanghai Shulong and Chengdu
Aurora as high and new technology enterprises. Accordingly, these entities are entitled to a 15%
preferential income tax rate for the three-year period ending December 31, 2010. In addition,
Shengqu also qualified as a key national software enterprise for 2008 and 2009 and therefore is
entitled to a 10% income tax rate for those years.
As required by the New EIT Law, the profits of a foreign invested enterprise arising in 2008
and onwards which are distributed to its immediate holding company outside the PRC are subject to a
withholding tax rate of 10%. A lower withholding tax rate will be applied if there is a tax treaty
or arrangement between the PRC and the jurisdiction of the foreign holding company. Holding
companies in Hong Kong which own more than 25% of the shares or equity interest in a PRC company,
for example, are subject to a 5% withholding tax rate. We accrued a withholding tax of
RMB37.0 million and RMB69.6 million (US$10.2 million) as of December 31 2008 and 2009,
respectively, based on the 5% withholding tax rate of the profits of Shengqu that we distributed to
Shanda Games (HK). The withholding tax accrued in 2008 was paid in 2009.
Equity in Earning (Loss) of Affiliated Companies
We record our investment in affiliates using the equity method of accounting, and the profit
or loss from of the affiliates is presented as Equity in earning (loss) of affiliated companies
on the statements of operations and comprehensive income.
Non-Controlling Interest
In the second quarter of 2009, Shanda Interactive transferred to us its entire equity
interest in Actoz, whose financial results were consolidated into our financial statements
beginning from July 1, 2007. As a result, we recognized non-controlling interest in our
statements of operations and comprehensive income for the shares of Actoz that we did not own
for the period from July 1 to December 31, 2007 and for the years ended December 31, 2008 and
2009. See Critical Accounting Policies Basis of Preparation.
Critical Accounting Policies
We prepare our financial statements in conformity with U.S. GAAP, which requires us to make
estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of
contingent assets and liabilities on the date of the financial statements and the reported amounts
of revenues and expenses during the financial reporting period. We continually evaluate these
estimates and assumptions based on the most recently available information, our own historical
experience and various other assumptions that we believe to be reasonable under the circumstances.
Since the use of estimates is an integral component of the financial reporting process, actual
results could differ from those estimates. Some of our accounting policies require higher degrees
of judgment than others in their application. We consider the policies discussed below to be
critical to an understanding of our financial statements as their application places the most
significant demands in our managements judgment.
Basis of Preparation
The reorganization is accounted for as a common control transaction, and accordingly, we have
prepared the consolidated financial statements as if the current corporate structure had been in
existence throughout the periods presented and as if the online game business, including Actoz that
Shanda Interactive transferred to us in the second quarter of 2009, was transferred to us from
Shanda Interactive as of the earliest period presented.
Before the reorganization, the online game business was conducted by various subsidiaries and
VIEs of Shanda Interactive. Therefore, for the period from January 1, 2007 to June 30, 2008, our
consolidated financial statements were prepared by combining the assets, liabilities, revenues,
expenses and cash flows of the entities that were directly engaged in the online game business.
Our statement of operations and comprehensive income for the periods prior to the
reorganization include all the historical costs related to the online game business including
payments for certain services performed by various subsidiaries and VIEs of Shanda Interactive,
which became Shanda Online after the reorganization, and an allocation of certain general corporate
expenses of Shanda Interactive. These general corporate expenses primarily relate to corporate employee compensation costs, professional service fees and other expenses arising
from the provisions of certain corporate functions, including finance, legal, technology,
investment and executive management. We allocated these expenses based on estimates that our
management believes to be a reasonable reflection of the utilization of services provided to, or
benefits received by, us.
56
For the period from July 1, 2008 to December 31, 2009, our consolidated financial statements
consist of the financial statements of Shanda Games, including its subsidiaries and VIEs, as a
standalone company subsequent to the reorganization.
Our management believes that the assumptions underlying our consolidated financial statements
and the above allocations are reasonable. Our consolidated financial statements, however, may not
be reflective of our result of operations, financial position and cash flows had we been operated
as a standalone company during those periods. Our historical results for any prior period are not
necessarily indicative of results to be expected for any future period.
Revenue Recognition
Prior to the reorganization, Shanda Interactive sold prepaid cards, in both virtual and
physical forms, to third party distributors and retailers, including Internet cafes, as well as
through direct online payment systems. The prepaid cards entitle end users to purchase virtual
items or time units in our online games. All proceeds received from distributors or retailers are
deferred when received.
In connection with the reorganization, we entered into various agreements with subsidiaries
that are under the common control of Shanda Interactive. Pursuant to the Amended and Restated
Cooperation Agreement, we have engaged Shanda Networking to provide customer and other game support
services, and pursuant to the Amended and Restated Sales Agency Agreement, we have engaged
Shengfutong to provide agency services in selling prepaid cards to third party distributors and
retailers, in each case for a period of five years beginning from the date of the reorganization.
We have assessed the relationship and arrangements with Shanda Networking and Shengfutong under
Accounting Standards Codification 605-45 (formerly referred to as the Emerging Issues Task Force,
or EITF, Issue No. 99-19, Reporting revenue gross as a principal versus net as an agent), and
have concluded that reporting the gross amount equal to the amount that Shengfutong receives from
the sale of prepaid game cards to distributors or retailers and subsequently was activated and
charged to the respective game accounts by players as deferred revenue is appropriate as we are the
primary obligor and we provide the online game services desired by the customers.
Both before and after reorganization, under the item-based revenue model, revenues are
recognized over the life of the virtual items that game players purchase or as the virtual items
are consumed. Under the time-based revenue model, revenues are recognized based on the time units
consumed by our game players. Revenues are also recognized when game players who had previously
purchased playing time or virtual currency are no longer entitled to access the online games in
accordance with our published expiration policy. Deferred revenue is reduced as revenues are
recognized.
For revenues that are recognized over the life of the virtual item, we have considered the
average period that game players typically play our games to arrive at our best estimates for the
lives of these virtual items. We have also considered that the estimated lives of these virtual
items may be affected by various factors, including the acceptance and popularity of expansion
packs, promotional events launched and market conditions. While we believe our estimates to be
reasonable based on available game player information, we may revise such estimates in the future
as our games operation period changes. Any adjustments arising from changes in the estimates of
the lives of these virtual items would be applied prospectively on the basis that such changes are
caused by new information indicating a change in the game player behavior patterns. Any changes in
our estimates of useful lives of these virtual items may result in our revenues being recognized on
a basis different from prior periods and may cause our operating results to fluctuate.
Revenues are net of the PRC business tax that our PRC operating companies pay on their gross
revenues.
Consolidation of Variable Interest Entities
PRC regulations currently limit foreign ownership of companies that provide Internet content
services, which includes the operation of online games, to 50%. In addition, foreign and
foreign-invested enterprises are currently not able to apply for the licenses required to operate
online games in China or to provide Internet information content. We are a Cayman Islands exempted
company, and therefore, as foreign or foreign-invested enterprises under PRC law, we and our PRC
subsidiaries are ineligible to hold a license to operate online games in China. In order to comply
with the foreign ownership restrictions, we operate our online game business in China through our
PRC operating companies. Our PRC operating companies hold the licenses and approvals that are
material to the operation of our online game business. Our PRC subsidiaries have entered into a
series of contractual arrangements with Shanghai Shulong and/or the shareholders of Shanghai
Shulong. As a result of these contractual arrangements, we are considered the primary beneficiary
of Shanghai Shulong and its subsidiaries and consolidate their results of operations, assets and
liabilities in our financial statements.
57
Property and Equipment, Intangible Assets, Land Use Rights and Other Long-lived Assets
Our accounting for long-lived assets, including property and equipment, intangible assets,
and other long-lived assets is described in
notes 2(12), 2(13), 2(15) and
2(16) to our consolidated financial statements included elsewhere in this annual report. The
recorded values of long-lived assets, including property and equipment, intangible assets, land use
rights and other long-lived assets, are affected by a number of management estimates, including the
estimated useful lives, residual values and impairment charges. Significant judgment is required in
the assessment of the estimated useful lives of these assets, especially for game licenses. Changes
in these estimates and assumptions could materially impact our financial position and results of
operations.
We
assess the impairment for long-lived assets and intangible assets whenever events or changes in circumstances
indicate that the applicable carrying amount may not be recoverable. In 2007, we recognized an
impairment of intangible assets with charges to cost of revenues in the amount of RMB20.1 million,
primarily relating to upfront and minimum royalty license fees relating to an online game that was
not as popular as we had previously expected. The provisions represent managements best estimate
of the probable and reasonably estimable loss. During the years ended December 31, 2008 and 2009,
we did not recognize any impairment loss relating to our long-lived
assets or intangible assets.
Impairment of Investment in Affiliated Companies
We continually review our investments in affiliated companies to determine whether a decline
in fair value below the carrying value is other than temporary. The primary factors we consider in
our determination are the length of time that the fair value of the investment is below its
carrying value and the financial condition, operating performance and near term prospects of the
investee. In addition, we consider the reasons for the decline in fair value, including general
market conditions, industry specific or investee specific reasons, changes in valuation subsequent
to the balance sheet date, and our intent and ability to hold the investment for a period of time
sufficient to allow for a recovery in fair value. The determination of whether a decline in value
is other than temporary requires significant judgment. If the decline in fair value is deemed to be
other than temporary, the carrying value of the investment is written down to fair value.
Write-downs for equity method investments are included in equity in earning (loss) of affiliated
companies.
Impairment of Goodwill
We review our goodwill on an annual basis or more frequently if events or changes in
circumstances indicate that the goodwill might be impaired as
required by Accounting Standard Codification 350 (formerly referred to as Statement of Financial
Accounting Standards No. 142, Goodwill and Other
Intangible Assets.) In performing this review, we
are required to make an assessment of fair value for our goodwill under each reporting unit. When
determining fair value, we utilize various assumptions, including projection of future cash flows.
A change in these underlying assumptions will cause a change in the results of the test and, as
such, could cause the fair value to be less than the respective carrying amount. In such event, we
would be required to record a charge, which would significantly impact our earnings. We did not
recognize any impairment of goodwill during the periods presented.
Share-Based Compensation
Certain of our officers (including directors) and employees have received (i) options to
purchase ordinary shares of Shanda Interactive granted by Shanda Interactive to officers (including
directors) and employees who were engaged in the online game business prior to the reorganization
and who subsequently became our employees following the reorganization; (ii) options to purchase
ordinary shares of Actoz granted by Actoz to its officers and employees and (iii) options to
purchase our Class A ordinary shares granted to officers (including directors) and employees under
our Amended and Restated 2008 Equity Compensation Plan, or the 2008 Equity Compensation Plan.
We account for any stock option grants made pursuant to the respective stock option plan in
accordance with Accounting Standards Codification 718 (formerly referred to as Statement of
Financial Accounting Standard 123(R) Accounting for stock-based compensation), or ASC 718. Under
the fair value recognition provision of ASC 718, share-based compensation expense is measured at
the grant date based on the fair value of the stock options and is recognized as an expense either
on a straight-line basis or a graded-vesting basis, net of estimated forfeitures, over the
requisite service period, which is generally the vesting period. We use the Black-Scholes option
pricing model to determine the fair value of stock options where the exercisability is conditional
only upon completion of the service condition through the vesting date. With respect to options for
which the exercisability is conditional upon completion of both the service and performance
conditions through the vesting date, we use the binomial option pricing model.
For our option awards granted to our employees under the 2008 Equity Compensation Plan, we are
required to determine the fair value of our ordinary shares at the respective grant dates.
Determining the fair value of our ordinary shares with respect to option awards made prior to the
consummation of our initial public offering requires us to make complex and subjective judgments
regarding our projected financial and operating results, our unique business risks, the liquidity
of our ordinary shares and our operating history and prospects at the
time the grants were made, and therefore, we used the binomial option
pricing model.
58
In determining the fair value of our ordinary shares in each of the grant dates prior to our
initial public offering, we relied in part on a valuation report prepared by an independent valuer
based on data we provided. The valuation report provided us with guidelines in determining the fair
value, but the determination was made by our management. We used the income approach/discounted
cash flow method as the primary approach and market approach as a cross-check to derive the fair value of our ordinary shares. We applied the discounted cash flow
analysis based on our projected cash flow using managements best estimate as of the valuation
date. The projected cash flow estimate included, among other things, an analysis of projected
revenue growth, gross margins, effective tax rates, capital expenditures and working capital
requirements. The income approach involves applying appropriate discount rates, based on earnings
forecasts, to estimated cash flows. The assumptions we used in deriving the fair value of our
ordinary shares include no significant contingent liabilities, unusual contractual obligations or
substantial commitments; no significant pending or threatened litigation involving us as of the
valuation date; no violations of any regulations or laws by us; no redundant assets as of the
valuation date other than those identified by the valuer and disclosed; no significant change in
our business model; management information is on a consolidated basis; and the book values of
non-operating assets and total debt approximate their fair values. These assumptions are inherently
uncertain and subjective. The discount rates reflect the risks the management perceived as being
associated with achieving the forecasts and are based on our estimated cost of capital, which was
derived by using the capital asset pricing model, after taking into account systemic risks and
company-specific risks. The capital asset pricing model is a model for pricing securities that adds
an assumed risk premium rate of return to an assumed risk-free rate of return. Using this method,
we determined the appropriate discount rates to be 26% as of November 14, 2008 and 25% as of
April 30, 2009.
We also applied a discount for lack of marketability, or DLOM, to reflect the fact that, at
the time of the grants, we were a closely-held company and there was no public market for our
ordinary shares. To determine the discount for lack of marketability, we and the independent valuer
used the Black-Scholes option pricing model and assumed a liquidity event in the first quarter of
2010. Pursuant to the Black-Scholes option pricing model, we used the cost of a put option, which
can be used to hedge the price change before a privately held share can be sold, as the basis to
determine the discount for lack of marketability. Based on the foregoing analysis, we used a DLOM
of 23% to discount the value of our ordinary shares as of November 14, 2008 and April 30, 2009. It
was concluded that our fair value as a going concern was RMB11,751 million (equivalent to
US$1,720.4 million) as of November 14, 2008 and RMB15,000 million (equivalent to
US$2,196.1 million) as of April 30, 2009. The fair value per ordinary share and restricted share
was RMB21.37 per share (equivalent to US$3.13) as of November 14, 2008 and RMB26.60 per share
(equivalent to US$3.90) as of April 30, 2009.
The intrinsic value of the options outstanding as of December 31, 2009 was US$47.6 million,
which is calculated based on the difference between the fair value of US$5.10 of our ordinary
shares as of December 31, 2009 and the exercise price of the shares.
The determination of the fair value of share options on the date of grant using an
option-pricing model is affected by our stock price as well as assumptions regarding a number of
complex and subjective variables, including our expected stock price volatility over the vesting
period, risk-free interest rate, expected dividend yield, expected term, and actual and projected
employee stock option exercise behaviors. Furthermore, we are required to estimate forfeitures at
the time of grant and recognize share-based compensation expenses only for those awards that are
expected to vest. If actual forfeitures differ from those estimates, we may need to revise those
estimates used in subsequent periods.
Certain of our and Shanda Interactives employees were awarded restricted shares under the
2008 Equity Compensation Plan. The restricted shares will vest in equal installments over four
calendar years, subject to the employees continued employment with his employer. Share-based
compensation expense related to the restricted share award granted by the Company to its employees
under the 2008 Equity Compensation Plan amounted to RMB0.1 million and RMB3.0 million (US$0.4
million) for the years ended December 31, 2008 and 2009. Restricted shares granted to Shanda
Interactives employees are measured at fair value at the grant
date and were recognized as a
dividend distributed to Shanda Interactive.
Our share-based compensation expenses totaled RMB17.5 million, RMB20.8 million and
RMB125.8 million (US$18.4 million) in 2007, 2008 and 2009, respectively.
Income Taxes and Valuation Allowance
We account for income taxes under the provisions of Accounting Standards Codification 740
(formerly referred to as SFAS No. 109, Accounting for Income Taxes), with the required
disclosures as described in note 6 to our consolidated financial statements included elsewhere in
this annual report. Accordingly, we record valuation allowances to reduce our deferred tax assets
when we believe it is more likely than not that we will not be able to utilize the deferred tax
asset amounts based on our estimates of future taxable income and prudent and feasible tax planning
strategies. As of December 31, 2008 and 2009, valuation allowances recognized were RMB41.6 million
and RMB123.9 million (US$18.2 million), respectively. Valuation allowances were provided for
because it was more likely than not that we would not be able to utilize certain foreign tax credit
carry forward generated by one of our subsidiaries. As of December 31, 2008 and 2009, we recorded
deferred tax assets, net of valuation allowances, of RMB105.1 million and RMB95.7 million
(US$14.0 million), respectively. We do not believe any further valuation allowances to reduce our
net deferred tax assets are necessary as we currently anticipate future taxable profits which will
allow us to fully utilize our net deferred tax assets in the foreseeable future. If, however,
events were to occur in the future which are not currently contemplated, that would not allow us to
realize all or part of our net deferred tax assets in the future, an adjustment would result by way of a charge to income tax expense in
the period in which such determination was made.
59
Accounting Standards Codification 740-10-25 (formerly referred to as FASB Interpretation No.
48, Accounting for Uncertainty in Income Taxes An interpretation of FASB Statement No. 109) or ASC 740-10-25, prescribes a recognition threshold and a measurement attribute for the
financial statements recognition and measurement of tax positions taken or expected to be taken in
a tax return. For those benefits to be recognized, a tax position must be more likely than not to
be sustained upon examination by tax authorities. The amount recognized is measured as the largest
amount of benefit that is greater than fifty percent likely of being realized upon ultimate
settlement. Our adoption of ASC 740-10-25 did not result in any adjustments to the opening balance
of our retained earnings as of January 1, 2007. We did not have any interest and penalties
associated with uncertain tax positions and did not have any significant unrecognized uncertain tax
positions for the years ended December 31, 2007, 2008 and 2009.
Results of Operations
Year Ended December 31, 2009 Compared to Year Ended December 31, 2008
Net revenues. Our net revenues increased 42% from RMB3,376.8 million in 2008 to RMB4,806.7
million (US$704.2 million) in 2009. Net revenues from MMORPGs increased 50% from RMB2,987.8 million
in 2008 to RMB4,476.7 million (US$655.8 million) in 2009. Net revenues from advanced casual games
decreased 14% from RMB358.9 million in 2008 to RMB310.4 million (US$45.5 million) in 2009.
Our net revenues from MMORPGs increased primarily due to an increase in net revenues from our
existing MMORPGs and the introduction of new MMORPGs. The increase in net revenues from our
existing MMORPGs is primarily driven by net revenue increase of 47% from Mir II and Woool as a
result of the release of certain updates and expansion packs. Net revenues from new MMORPGs that we
introduced in 2009 totaled RMB334.9 million (US$49.1 million) for the year ended December 31, 2009,
primarily due to the commercialization of AION.
The increase in our net revenue from MMORPGs was primarily driven by an increase in active
paying accounts and average monthly revenues per active paying account. The number of active
paying accounts for MMORPGs increased on a quarterly basis in 2009 as a result of the release of
updates and expansion packs and the introduction of new virtual items in our MMORPGs, as well as
numerous promotions that we offered to our game players. Average monthly revenues per active paying
account for each quarter in 2009 were lower than that of the corresponding quarter of 2008
primarily due to an increase in the number of new game players and lower average monthly revenues
per active paying account of these new game players. In general, new game players tend to generate
lower monthly average revenues per active paying account because MMORPGs are designed such that
fewer premium virtual items are available for purchase at the lower level of the game. As the game
player progresses to higher levels of the game, more premium virtual items are available for game
players to purchase, which in general will increase such players spending and thus our monthly
average revenues per active paying account. The following table sets forth our active paying
accounts and monthly average revenues per active paying account for MMORPGs, for the periods
indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended |
|
|
|
March 31, |
|
|
June 30, |
|
|
September 30, |
|
|
December 31, |
|
|
March 31, |
|
|
June 30, |
|
|
September 30, |
|
|
December 31, |
|
|
|
2008 |
|
|
2008 |
|
|
2008 |
|
|
2008 |
|
|
2009 |
|
|
2009 |
|
|
2009 |
|
|
2009 |
|
Quarterly active paying
accounts (in thousands)(1) |
|
|
4,110 |
|
|
|
4,239 |
|
|
|
5,189 |
|
|
|
5,889 |
|
|
|
7,189 |
|
|
|
8,582 |
|
|
|
9,064 |
|
|
|
9,419 |
|
Monthly average revenues
per active paying account
(in RMB)(2) |
|
|
51.9 |
|
|
|
54.7 |
|
|
|
49.6 |
|
|
|
49.8 |
|
|
|
43.9 |
|
|
|
41.9 |
|
|
|
43.4 |
|
|
|
45.0 |
|
|
|
|
(1) |
|
Quarterly active paying accounts refers to the aggregate number of active paying accounts for our online games during a given quarter. |
|
(2) |
|
Average monthly revenues per active paying account refers to our online game revenues during a given quarter divided by quarterly active paying accounts, further divided by three. |
Our net revenues from advanced casual games decreased as we released a major expansion pack
for one of our significant advanced casual games in 2008 and did not release such an expansion pack
in 2009. The following table sets forth our active paying accounts and average monthly revenues
per active paying account for advanced casual games, for the periods indicated:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended |
|
|
|
March 31, |
|
|
June 30, |
|
|
September 30, |
|
|
December 31, |
|
|
March 31, |
|
|
June 30, |
|
|
September 30, |
|
|
December 31, |
|
|
|
2008 |
|
|
2008 |
|
|
2008 |
|
|
2008 |
|
|
2009 |
|
|
2009 |
|
|
2009 |
|
|
2009 |
|
Quarterly active paying
accounts (in thousands)(1) |
|
|
1,661 |
|
|
|
1,421 |
|
|
|
1,380 |
|
|
|
961 |
|
|
|
1,052 |
|
|
|
1,152 |
|
|
|
1,209 |
|
|
|
1,014 |
|
Monthly average revenues
per active paying account
(in RMB)(2) |
|
|
19.8 |
|
|
|
20.8 |
|
|
|
23.7 |
|
|
|
25.5 |
|
|
|
27.8 |
|
|
|
20.9 |
|
|
|
24.1 |
|
|
|
20.8 |
|
|
|
|
(1) |
|
Quarterly active paying accounts refers to the aggregate number of active paying accounts for our online games during a given quarter. |
|
(2) |
|
Average monthly revenues per active paying account refers to our online game revenues during a given quarter divided by quarterly active paying accounts, further divided by three. |
60
Cost of revenues. Our cost of revenues increased 30% from RMB1,489.4 million in 2008 to
RMB1,933.5 million (US$283.3 million) in 2009. This increase was primarily due to the following
reasons:
Platform fees increased 18% from RMB864.9 million in 2008 to RMB1,018.5 million (US$149.2
million) in 2009 primarily due to an increase in servers and services provided to support the
growth in our game player base and in our revenues that we generated from our online games
operations. Platform fees represented approximately 25.6% of our net revenues in 2008 compared to
approximately 21.2% of our net revenues in 2009. The decrease in platform fees as a percentage of
net revenues resulted primarily from the fact that following the reorganization, we pay Shanda
Networking a service fee based upon a fixed percentage of the portion of the face value of prepaid
cards distributed and used in our games which generally results in lower fees as a percentage of
net revenues.
Upfront and ongoing licensing fees for online games increased 53% from RMB520.9 million in
2008 to RMB797.1 million (US$116.8 million) in 2009 and represented approximately 15.4% and 16.6%
of our net revenues in 2008 and 2009, respectively. The increase in upfront and ongoing licensing
fees as a percentage of net revenues from 2008 to 2009 is primarily due to the commencement of
amortization of upfront fee for new games launched in the second half of 2008 and 2009.
Other expenses increased 14% from RMB103.6 million in 2008 to RMB117.9 million (US$17.3
million) in 2009 primarily due to an increase of amortization of intangible assets related to the
acquisition of various companies and an increase in labor cost. Other expenses represented
approximately 3.1% and 2.4% of our net revenues in 2008 and 2009, respectively.
Gross profit. As a result of the foregoing, our gross profit increased 52% from RMB1,887.4
million in 2008 to RMB2,873.2 million (US$420.9 million) in 2009. Our gross margin, which is equal
to our gross profit divided by our net revenues, increased from 55.9% in 2008 to 59.8% in 2009.
Operating expenses. Our operating expenses increased 56% from RMB730.5 million in 2008 to
RMB1,138.8 million (US$166.8 million) in 2009. This increase was primarily due to the following
reasons:
Our product development expenses increased 42% from RMB238.8 million in 2008 to RMB339.8
million (US$49.8 million) in 2009. The increase was primarily due to (i) an increase in salary and
benefits from RMB182.8 million in 2008 to RMB239.2 million (US$35.0 million) in 2009 due to salary
and headcount increases and (ii) an increase in outsourced product development costs from RMB24.1
million in 2008 to RMB57.4 million (US$8.4 million) in 2009 as a result of our investments through
18 Capital. Product development expenses represented approximately 7.1% of our net revenues in 2008
and 2009, respectively.
Our sales and marketing expenses increased 112% from RMB204.5 million in 2008 to RMB432.9
million (US$63.4 million) in 2009. The increase was primarily due to (i) an increase in the number
of prepaid cards sold, (ii) the impact of the new contractual arrangements with Shengfutong,
effective July 1, 2008 and (iii) an increase in advertising and promotion expenses relating to our
online games from RMB87.8 million in 2008 to RMB175.0 million (US$25.6 million) in 2009. Sales and
marketing expenses represented approximately 6.1% and 9.0% of our net revenues in 2008 and 2009,
respectively.
Our
general and administrative expenses increased 27% from RMB287.2 million in 2008 to
RMB366.1 million (US$53.6 million) in 2009. This increase was primarily due to an increase in
share-based compensation from RMB17.1 million in 2008 to RMB121.6 million (US$17.8 million) in
2009, arising from options granted to our directors, officers and employees in 2009, including an
accumulated expense of RMB61.6 million (US$9.0 million) incurred upon the consummation of our
initial public offering in the third quarter of 2009. The increase in expenses was offset in part
by a decrease in general corporate expenses allocated from Shanda Interactive from RMB27.3 million
in 2008 to RMB11.2 million (US$1.6 million) in 2009, due to the fact that after the reorganization,
we operated as a standalone entity and assumed more of our general and administrative functions.
General and administrative expenses accounted for approximately 8.4% and 7.6% of our net revenues
in 2008 and 2009, respectively.
Income from operations. As a result of the foregoing, our operating income increased 50% from
RMB1,156.9 million in 2008 to RMB1,734.4 million (US$254.1 million) in 2009. Our operating margin,
which is equal to our operating profit divided by our net revenues, increased from 34.3% in 2008 to
36.1% in 2009.
Income before income tax expenses and equity in earning (loss) of affiliated companies. Our
income before income tax expenses, equity in earning (loss) of affiliated companies increased 61%
from RMB1,196.4 million in 2008 to RMB1,930.3 million (US$282.8 million) in 2009. This increase was
primarily due to the increase in income from operations, as well as an increase in other income,
namely, government incentives, which increased from RMB18.4 million in 2008 to RMB177.0 million
(US$25.9 million) in 2009.
61
Income tax expenses. Our income tax expenses increased 72% from RMB249.9 million in 2008 to
RMB428.7 million (US$62.8 million) in 2009, primarily due to (i) an increase of RMB183.5 million
(US$26.9 million) in income taxes as a result of the increase in our pre-tax income from RMB1,196.4
million in 2008 to RMB1,930.3 million (US$282.8 million) in 2009 after applying the new enterprise
income tax rate of 25%, (ii) an increase of RMB32.6 million(US$4.8 million) in accrued deferred tax
liability related to withholding obligations arising from dividend that Shengqu declared to Shanda
Games (HK) from RMB37.0 million in 2008 to RMB69.6 million (US$10.2 million) in 2009, and (iii) an
increase of valuation allowance of RMB29.8 million from RMB41.0 in 2008 to RMB70.8 million (US$10.4
million) in 2009 for foreign tax credits due to the uncertainty surrounding their realization, The
increase in income tax expenses was offset in part by a decrease of RMB103.8 million (US$15.2
million) in income tax expenses due to preferential tax rates enjoyed by certain of our PRC
companies. As a result of the foregoing, our effective income tax rate increased from 21% in 2008
to 22% in 2009.
Equity
in earning (loss) of affiliated companies. We incurred losses of RMB30.0 million
(US$4.4 million) in 2009, as compared to a profit of RMB0.9 million in 2008, primarily as a result
of our investments in two companies through 18 Capital.
Net income attributable to non-controlling interest. Our net income attributable to
non-controlling interest increased from RMB11.9 million in 2008 to RMB18.6 million (US$2.7 million)
in 2009, as a result of the increase in Actozs profitability.
Net income attributable to our company. Net income attributable to our company increased from
RMB935.5 million in 2008 to RMB1,453.0 million (US$212.9 million) in 2009.
Year Ended December 31, 2008 Compared to Year Ended December 31, 2007
Net revenues. Our net revenues increased 45% from RMB2,322.8 million in 2007 to
RMB3,376.8 million (US$494.3 million) in 2008. Net revenues from MMORPGs increased from
RMB2,016.1 million in 2007 to RMB2,987.8 million (US$437.4 million) in 2008. Net revenues from
advanced casual games increased from RMB280.4 million in 2007 to RMB358.9 million (US$52.5 million)
in 2008.
The increase in our net revenues from our advanced casual games was primarily due to an
increase in revenues from our existing advanced casual games in the aggregate from RMB280.4 million
in 2007 to RMB358.9 million (US$52.5 million) in 2008. In the four quarters of 2008, the number of
active paying accounts for advanced casual games was 1.66 million, 1.42 million, 1.38 million and
0.96 million, respectively. The average monthly revenues per active paying account for our advanced
casual games for the four quarters in 2008 were RMB19.8, RMB20.8, RMB23.7 and RMB25.5,
respectively. The decrease in the number of active paying accounts was primarily due to the
following factors: (i) in the third quarter of 2008, we licensed Crazy Kart to a subsidiary of
Shanda Interactive and ceased to operate the game ourselves and (ii) the second and fourth quarters
typically are slower due to seasonality factors. The average monthly revenues per active paying
account for advanced casual games increased due to the release of updates and expansion packs and
the introduction of new virtual items in our advanced casual games, as well as numerous promotions
that we sponsored for our game players.
Cost of revenues. Our cost of revenues increased 18% from RMB1,261.1 million in 2007 to
RMB1,489.4 million (US$218.1 million) in 2008. This increase was primarily due to the following
reasons:
Platform fees increased 18% from RMB735.4 million in 2007 to RMB864.9 million
(US$126.6 million) in 2008 primarily due to the increased servers and services provided to support
the growth in our game player base and of our revenues that we generated from our online games
operations. The increase in the number of servers was partially offset by the elimination or
combination of server groups for our existing online games, as well as the introduction of new
virtualization technologies which improve server efficiency. Platform fees represented
approximately 31.7% of our net revenues in 2007 compared to approximately 25.6% of our net revenues
in 2008. The decrease in platform fees as a percentage of net revenues was primarily due to the
impact of the new agreements with Shanda Online, effective July 1, 2008.
62
Upfront and ongoing licensing fees for online games increased 21% from RMB429.6 million in
2007 to RMB520.9 million (US$76.3 million) in 2008 primarily due to the commercialization in 2008
of licensed games, which commences the amortization of the upfront licensing fees, and the increase
of revenues derived from licensed games, which was partially offset by the decrease in ongoing
license fees as a result of the consolidation of Actozs financial results beginning in the third
quarter of 2007. Upfront and ongoing licensing fees for online games totaled approximately 18.5%
and 15.4% of our net revenues in 2007 and 2008, respectively.
Other expenses increased 8% from RMB96.1 million in 2007 to RMB103.6 million
(US$15.2 million) in 2008, primarily due to an increase in salary and benefits. Other expenses
totaled approximately 4.1% and 3.1% of our net revenues in 2007 and 2008, respectively.
Gross profit. As a result of the foregoing, our gross profit increased 78% from
RMB1,061.7 million in 2007 to RMB1,887.4 million (US$276.2 million) in 2008. Our gross margin
increased from 45.7% in 2007 to 55.9% in 2008.
Operating expenses. Our operating expenses increased 67% from RMB437.0 million in 2007 to
RMB730.5 million (US$106.9 million) in 2008. This increase was primarily due to the following
reasons:
|
|
|
Our product development expenses increased 75% from RMB136.4 million in 2007 to
RMB238.8 million (US$35.0 million) in 2008, primarily due to (i) the launch of a bonus
incentive plan at the end 2007 for our product development employees giving rise to an
increase of RMB61.4 million in salary and benefit, (ii) an increase of RMB23.2 million in
salary and benefits for Actozs employees due to Actoz becoming a consolidated entity
beginning in July 2007 and (iii) an increase of RMB18.4 million in outsourced product
development costs as a result of our investments through 18 Capital. Product development
expenses totaled approximately 5.9% and 7.1% of our net revenues in 2007 and 2008,
respectively. |
|
|
|
Our sales and marketing expenses increased 63% from RMB125.4 million in 2007 to
RMB204.5 million (US$29.9 million) in 2008, primarily due to an increase in the number of
prepaid cards sold resulting in an increase of the service fees we pay to Shengfutong. See Item 7, Major Shareholders and Related
Party Transactions Related Party Transactions Transactions and Agreements with Shanda Interactive.
Sales and marketing expenses totaled approximately
5.4% and 6.1% of our net revenues in 2007 and 2008, respectively. |
|
|
|
Our general and administrative expenses increased 64% from RMB175.2 million in 2007 to
RMB287.2 million (US$42.0 million) in 2008. This increase was primarily due to the following
factors: (i) an increase of RMB49.1 million in business tax due to the increased services
provided by Shengqu to the Shulong entities to support our online game operations, (ii) an
increase of RMB25.4 million in salary and benefits from salary and headcount increases and
(iii) an increase of RMB9.5 million in salary and benefits of Actozs employees as a result
of the consolidation of Actoz beginning in July 2007. General and administrative expenses
accounted for approximately 7.5% and 8.4% of our net revenues in 2007 and 2008,
respectively. |
Income from operations. As a result of the foregoing, our operating income increased 85% from
RMB624.7 million in 2007 to RMB1,156.9 million (US$169.3 million) in 2008. Our operating margin
increased from 26.9% in 2007 to 34.3% in 2008.
Income before income tax expenses and equity in earning (loss) of affiliated companies. Our
income before income tax expenses and equity in earning (loss) of affiliated companies increased
76% from RMB679.7 million in 2007 to RMB1,196.4 million (US$175.1 million) in 2008. This increase
was primarily due to the increase in income from operations.
Income tax expenses. Our income tax expenses increased 272% from RMB67.1 million in 2007 to
RMB249.9 million (US$36.6 million) in 2008, primarily due to (i) an increase in our pre-tax income
from RMB679.7 million in 2007 to RMB1,196.4 million (US$175.1 million) in 2008, which resulted in
an increase in income tax expenses of approximately RMB90.5 million, (ii) the accrual of a deferred
tax liability of RMB37.0 million (US$5.4 million) relating to withholding obligations arising from
the dividend in the aggregate amount of US$102.6 million that we declared solely payable to Shanda
Interactive, (iii) a valuation allowance of RMB41.0 million (US$6.0 million) for foreign tax
credits due to the uncertainty surrounding their realization and (iv) the elimination of certain
tax holidays as a result of the New EIT law, which increased Shengqus tax expense by
RMB29.0 million (US$4.2 million) in 2008. As a result of the foregoing, our effective income tax
rate increased from 10% in 2007 to 21% in 2008.
Equity in earning (loss) of affiliated companies. We incurred a loss of RMB13.6 million in
2007 due to the fact that Actoz, whose financial results we accounted for using the equity method
in the first half of 2007, incurred losses in the first half of 2007. We achieved a gain of
RMB0.9 million in 2008 due to the profitability of certain of our affiliates.
Net income attributable to non-controlling interest. Our net income attributable to
non-controlling interest increased from RMB7.1 million in 2007 to RMB11.9 million (US$1.7 million)
in 2008.
Net income attributable to our company. Net income attributable to our company increased from
RMB591.9 million in 2007 to RMB935.5 million (US$136.9 million) in 2008.
63
B. LIQUIDITY AND CAPITAL RESOURCES
Cash Flows and Working Capital
Beginning from July 1, 2008 which is the effective date of the reorganization, we have
financed our operations through our internally generated cash from operations and the proceeds
from our initial public offering of ADSs in September 2009. As of December 31, 2009, we had
approximately RMB1,799.2 million (US$263.6 million) in cash and cash equivalents, of which
RMB573.7 million (US$84.0 million) was held by Shanghai Shulong and its subsidiaries. Our cash
and cash equivalents primarily consist of cash on hand, demand deposits and liquid investments
with original maturities of three months or less that are placed with banks and other financial
institutions. Although we consolidate the results of our PRC operating companies in our
consolidated financial statements and we can utilize their cash and cash equivalents in our
operations, we do not have direct access to the cash and cash equivalents or future earnings of
our PRC operating companies. However, these cash balances can be utilized by us for our normal
operations pursuant to the contractual arrangements with Shanghai Shulong that provide us with the
substantial ability to control our PRC operating companies and their operations. See Item 4,
Information on the Company Organizational Structure and Item 10, Additional Information
Exchange Controls.
The following table shows our cash flows with respect to operating activities, investing
activities and financing activities in the years ended December 31, 2007, 2008 and 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2007 |
|
|
2008 |
|
|
2009 |
|
|
|
RMB |
|
|
RMB |
|
|
RMB |
|
|
US$ |
|
|
|
(in millions) |
|
|
|
|
|
Net cash provided by operating activities |
|
|
672.7 |
|
|
|
1,144.5 |
|
|
|
2,010.5 |
|
|
|
294.5 |
|
Net cash used in investing activities |
|
|
(132.1 |
) |
|
|
(144.2 |
) |
|
|
(1,904.2 |
) |
|
|
(279.0 |
) |
Net cash used in financing activities |
|
|
(376.0 |
) |
|
|
(748.3 |
) |
|
|
1,050.5 |
|
|
|
153.9 |
|
Effect of exchange rate changes on cash |
|
|
(7.1 |
) |
|
|
(16.7 |
) |
|
|
13.5 |
|
|
|
2.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash and cash equivalents |
|
|
157.5 |
|
|
|
235.3 |
|
|
|
1,170.3 |
|
|
|
171.5 |
|
Cash, beginning of the period |
|
|
236.1 |
|
|
|
393.6 |
|
|
|
628.9 |
|
|
|
92.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash, end of the period |
|
|
393.6 |
|
|
|
628.9 |
|
|
|
1,799.2 |
|
|
|
263.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31, 2009, we had net cash provided by operating activities of
RMB2,010.5 million (US$294.5 million). This was primarily attributable to (i) our net income
attributable to our company of RMB1,471.6 million, (ii) an add-back of the non-cash expenses in the
amount of RMB366.9 million, including share-based compensation expenses, corporate expense
allocation, depreciation of property and equipment, equity in loss of affiliated companies and
amortization of intangible assets, (iii) a decrease of RMB130.5 million in accounts receivable from
related parties, primarily Shengfutong, (iv) an increase of RMB31.7 million in licensing fees
payable due to an increase in our revenues generated from licensed games, (v) an increase of
RMB160.5 million in other payables and accruals, and (vi) an increase in taxes payable of RMB51.9
million due to an increase in our pre-tax income. Our net cash provided by operating activities was
partially reduced by payment of upfront licensing fees and prepayment of upfront licensing fees of
RMB125.5 million relating to new online games that we licensed from third parties and a decrease of
RMB77.3 million in deferred revenue.
For the year ended December 31, 2008, we had net cash provided by operating activities of
RMB1,144.5 million. This was primarily attributable to our net income attributable to our company
of RMB947.4 million, an increase of RMB111.2 million in deferred revenue due to the increased
proceeds received from our distributors for the sale of prepaid cards for the period prior to the
reorganization and from Shengfutong beginning as of the reorganization, which were for the sale of
prepaid cards and subsequently activated and charged to our games to purchase virtual items or time
units in our online games but had not yet been recognized as net revenues, an increase of
RMB60.1 million in licensing fees payable due to an increase in our revenues generated from
licensed games and an increase of RMB48.2 million in taxes payable due to the increase in our
pre-tax income. Our net cash provided by operating activities was partially reduced by an increase
of RMB233.7 million in receivable due from related parties, primarily Shengfutong, an add-back of
the non-cash expenses including share-based compensation expenses, corporate expense allocation,
depreciation of property and equipment and amortization of intangible assets in the amount of
RMB209.4 million and the payment of RMB75.5 million in upfront licensing fees and prepayment for
upfront license fees relating to new online games that we licensed from third parties.
For the year ended December 31, 2007, we had net cash provided by operating activities of
RMB672.7 million, which was primarily attributable to our net income attributable to our company
of RMB599.0 million, an increase of RMB100.4 million in deferred revenue due to the increased
proceeds received from our distributors for the sale of prepaid cards which are required to
purchase virtual items or time units in our online games and an increase of RMB70.8 million in
payable due to related parties for the support of our online games operations. Our net cash
provided by operating activities was partially offset by the payment of RMB273.8 million in
upfront licensing fees and prepayment for upfront license fees relating to new online games that
we licensed from third parties, a decrease of RMB46.1 million in license fee payable to a related
party as a result of the consolidation of Actoz beginning as of July 1, 2007, an add-back of the
non-cash expenses including share-based compensation expenses, corporate expense allocation, depreciation of property and equipment and amortization and impairment of
intangible assets in the amount of RMB210.6 million and deferred taxes in the amount of
RMB37.3 million.
64
In 2009, we had net cash used in investing activities of RMB1,904.2 million (US$279.0
million). This was primarily attributable to a net increase in time deposits with maturity dates
over three months of RMB502.3 million, payments of RMB108.6 million for the purchase of property,
equipment, software and intangible assets, the deposit of RMB702.1 million to a bank in China as
collateral for a loan in the amount equal to the U.S. dollar equivalent, the purchase of the
equity interest in Actoz from Shanda Interactive for RMB479.7 million, and the acquisition of
Chengdu Simo and its affiliates for RMB112.2 million.
In 2008, we had net cash used in investing activities of RMB144.2 million (US$21.1 million).
This was primarily attributable to a net increase in time deposits with maturities of over three
months of RMB46.7 million, the payment of RMB58.9 million for the purchase of property, equipment,
software and intangible assets, the payment of loan receivables of RMB14.0 million and the
repurchase by Actoz of its own shares of RMB17.9 million.
In 2007, we had net cash used in investing activities of RMB132.1 million. This was
attributable primarily to an increase of RMB86.7 million in time deposits with maturities of over
three months, the payment of RMB85.2 million for the purchase of property, equipment, software and
intangible assets, the payment of loan receivables of RMB12.0 million and the payment of
RMB56.5 million for the acquisition of Chengdu Aurora, net of cash acquired. This amount was
offset by RMB112.2 million in cash received upon consolidation of Actoz contributed by Shanda
Interactive.
In 2009, we had net cash provided in financing activities of RMB1,050.5 million (US$153.9
million). This was primarily attributable to net proceeds from our initial public offering of
RMB1,041.2 million, and cash received from a loan of RMB1,077.7 million, offset by a repayment of
a loan of RMB375.6 million and payment in the amount of RMB700.4 million to Shanda Interactive
relating to a dividend we had declared prior to the consummation of our initial public offering.
We had net cash used in financing activities of RMB748.3 million in 2008 and RMB376.0 million in
2007, respectively, which was primarily due to a dividend to Shanda Interactive we had declared
prior to the consummation of our initial public offering.
We believe that our existing cash and cash equivalents, cash flows from operations, short-term
investments and marketable securities will be sufficient to meet the anticipated cash needs for our
operating activities, capital expenditures and other obligations for at least the next twelve
months. We may, however, require additional cash resources due to changed business conditions or
other future developments. We may sell additional equities or obtain credit facilities to enhance
our liquidity position or to or increase our cash reserves for future operations. The sale of
additional equity would result in further dilution to our shareholders. The incurrence of
indebtedness would result in increased fixed obligations and could result in operating covenants
that would restrict our operations. We cannot assure you that financing will be available in
amounts or on terms acceptable to us, if at all. Please see Item 10, Additional Information
Exchange Controls for a discussion of impediments to capital flows in and out of China.
From time to time, we evaluate possible investments, acquisitions or divestments and may, if
a suitable opportunity arises, make an investment or acquisition or conduct a divestment, which
may have a material effect upon our liquidity and capital resources. Please see Item 4,
Information on the Company Our Online Game Development and Sourcing Model Investment and
Acquisition for a description of our significant investments and acquisitions.
Capital Expenditures
Our capital expenditures amounted to RMB40.0 million, RMB62.0 million, and RMB113.7 million
(US$16.7 million) in 2007, 2008 and 2009, respectively.
Our capital expenditures in 2007, 2008 and 2009 principally consisted of purchases of, or
investments in, our online game network infrastructure, which we funded primarily from net cash
flow from operations. We expect our capital expenditures in 2010 and 2011 to primarily consist of
leasehold improvements, purchases of additional servers, computer software and equipment. In
addition, we expect that our capital expenditures will increase in the future as our online game
business continues to develop and expand and as we make technological improvements to our network
infrastructure and purchase other intangible assets.
C. RESEARCH AND DEVELOPMENT, PATENTS AND LICENSES, ETC.
We focus our research and development activities principally on the development of updates,
expansion and sequels of our online game related content and the development of integrated service
platform.
Our research and development efforts and plans consist of:
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outsourcing and in-house development of updates, expansions and sequels of our existing
online game related content; |
|
|
|
sourcing new games via co-development, investment and in-house development; |
65
|
|
|
Improving, via internal and outsourcing research and development, our integrated
service platform, including our digital content delivery system, unified billing and
payment system, customer relationship management system, and user authentication system
and related security; and |
|
|
|
improving our server management and control systems. |
Our product development expenses were RMB136.4 million, RMB238.8 million and RMB339.8 million
(US$49.8 million) in 2007, 2008 and 2009, respectively.
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, 2009 to December 31,
2009 that are reasonably likely to have a material effect on our net revenues, income,
profitability, liquidity or capital resources, or that caused the disclosed financial information
to be not necessarily indicative of future operating results or financial conditions.
E. OFF-BALANCE SHEET ARRANGEMENTS
Other than Shengqus loan denominated in United States dollars and collateralized with
Renminbi as described further in Item 5 Operating and Financial Review and Prospects -
Contractual Obligations and Commercial Commitments, we do not have any outstanding derivative
financial instruments, off-balance sheet guarantees, interest rate swap transactions or foreign
currency forward contracts. We do not engage in trading activities involving non-exchange traded
contracts.
F. CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS
The following table sets forth our contractual obligations as of December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period |
|
|
|
Total |
|
|
Less than 1 Year |
|
|
1-3 years |
|
|
More Than 3 Years |
|
|
|
(RMB in millions) |
|
Operating lease obligations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Office premises |
|
|
10.9 |
|
|
|
6.8 |
|
|
|
4.1 |
|
|
|
|
|
Computer servers, software and equipment |
|
|
39.1 |
|
|
|
32.4 |
|
|
|
6.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contractual obligations |
|
|
50.0 |
|
|
|
39.2 |
|
|
|
10.8 |
|
|
|
|
|
As of December 31, 2009, substantially all of our operating lease arrangements for servers
and related services provide for the calculation of lease payments based on formulas that
reference the actual number of users of the relevant servers. Our rental expenses under these
operating leases were RMB84.9 million, RMB96.9 million and RMB133.4 million (US$19.5 million) in
2007, 2008 and 2009, respectively. As future lease payments for these arrangements are based on
the actual number of users and thus cannot be reasonably estimated, they are not included in the
minimum lease payments shown above. As of December 31, 2009, we had entered into maintenance
contracts in relation to the servers we owned amounting to RMB39.1 million (US$5.7 million).
As of December 31, 2009, we did not have any material capital lease obligations.
In June 2009, Shengqu entered into an arrangement with a bank in China whereby Shengqu
obtained a loan of US$102.5 million to be repaid in June 2010. The loan accrues interest at 1.35%
per annum and is collateralized with a cash deposit of RMB702.1 million by Shengqu. The interest
earned from the Renminbi cash deposit is 2.25% per annum. In connection with the loan, Shengqu also
entered into a foreign currency forward contract with the same bank by fixing the exchange rate of
U.S. dollar to RMB at 6.8445 at the time it repays the U.S. dollar loan. We recorded the foreign
currency forward contract as a derivative and marked-to-market at each balance sheet date. The loan
is re-measured at each period end to Shengqus functional currency and is netted off against its
RMB cash deposit due to the existence of a legal setoff right. As of December 31, 2009, the
financial liability related to the forward contract is not material.
66
Item 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
A. DIRECTORS AND SENIOR MANAGEMENT
The following table sets forth certain information relating to our directors and executive
officers as of March 31, 2010. The business address of each of our directors and executive officers
is No. 1 Office Building, 690 Bibo Road, Pudong New Area, Shanghai 201203, China.
|
|
|
|
|
|
|
Name |
|
Age |
|
Position |
|
|
|
|
|
|
|
Qunzhao Tan(1)
|
|
|
34 |
|
|
Chairman of the Board of Directors and Chief Executive
Officer |
Tianqiao Chen(1)
|
|
|
36 |
|
|
Director |
Danian Chen(1)
|
|
|
31 |
|
|
Director |
Lai Xing Cai(2)
|
|
|
67 |
|
|
Independent Director |
Andy Lin(2)
|
|
|
36 |
|
|
Independent Director |
Heng Wing Chan(2)
|
|
|
63 |
|
|
Independent Director |
Hai Ling
|
|
|
40 |
|
|
President |
Richard Wei
|
|
|
47 |
|
|
Chief Financial Officer |
Xiangdong Zhang
|
|
|
34 |
|
|
Chief Producer |
Jisheng Zhu
|
|
|
37 |
|
|
Chief Technology Officer and Acting Chief Operating Officer |
Thomas Yih
|
|
|
36 |
|
|
General Counsel |
|
|
|
(1) |
|
Member of the compensation committee. |
|
(2) |
|
Member of the audit committee. |
Qunzhao Tan has served as the chairman of our board of directors since May 2009 and as our
chief executive officer since January 2010. Prior to joining us, Mr. Tan served as the president
of Shanda Interactive since April 2008 and the chief technology officer of Shanda Interactive since
July 2003. Mr. Tan is also a member of the board of directors of Shanda Interactive and Actoz.
Mr. Tan holds a bachelors degree in chemical engineering from East China
University of Science and Technology and an Executive Master of Business Administration degree from
Peking University.
Tianqiao Chen has served as our director since June 2008. Mr. Tianqiao Chen is one of the
co-founders of Shanda Interactive and has served as the chairman of the board of directors and the
chief executive officer of Shanda Interactive since its inception in December 1999. Mr. Chen
established Shanda Networking with Mr. Danian Chen in December 1999. Mr. Chen also serves as a
member of the board of directors of SinoMedia Holding Ltd., which is listed on the Hong Kong Stock
Exchange, and Hurray! Holding Co., Ltd., which is listed on the Nasdaq Global Market. Mr. Chen
holds a bachelors degree in economics from Fudan University. Mr. Tianqiao Chen is the brother of
Mr. Danian Chen, one of our directors.
Danian Chen has served as our director since June 2008. Mr. Danian Chen is one of the
co-founders and established Shanda Networking with Mr. Tianqiao Chen in 1999. Mr. Danian Chen has
served in various capacities at Shanda Interactive, mostly recently as the chief operating officer
beginning in April 2008. Mr. Chen is also a member of the board of directors of Shanda Interactive,
a position which he has held since its inception in 1999, and a member of the board of directors of
Hurray!. Mr. Danian Chen is Mr. Tianqiao Chens brother.
Lai Xing Cai has served as our director since May 2009. Mr. Cai had served as the chairman of
Shanghai Industrial Investment (Holdings) Co., Ltd. from 1996 to 2008. He was formerly a Deputy
Secretary of the Shanghai Municipal Government and was responsible for economic planning, finance
and research. In addition, he was Deputy Director of the Shanghai Planning Committee and Pudong
Development Office, and a Director of the Municipal Governments Research Office. He has decades of
experience in economics, finance and enterprise management. In 1988, in recognition of his
outstanding contribution, he was accredited as a State-Class Economist. Mr. Cai is currently a
member of the National Committee of the Chinese Peoples Political Consultative Conference. Mr. Cai
graduated from Tongji University.
Andy Lin has served as our director since May 2009. Mr. Lin currently serves as the general
manager of China Universal Asset Management Co., Ltd. He previously served as a manager and an
assistant director of the listing department of the Shanghai Stock Exchange and served at the CSRC
as a regulator. Mr. Lin obtained a masters degree in economics from Fudan University and a Master
of Business Administration degree from Harvard Business School.
Heng Wing Chan has served as our director since June 2009. Mr. Chan currently serves as the
chief China representative of Temasek Holdings (Pte) Ltd., an investment company based in Singapore
and wholly owned by the Singapore Ministry of Finance. Mr. Chan is primarily responsible for
managing Temaseks relationships with foreign governments and private enterprises. He previously
worked for the Ministry of Foreign Affairs and the Ministry of Information of Singapore, including
serving in Singapores Permanent Mission to the United Nations and as Singapores Ambassador to
Thailand for four years. Mr. Chan also served as the press secretary to Prime Minister Goh Chok
Tong before serving as Singapores Consul General in Hong Kong for five years, including the period
of Hong Kongs handover to China. Prior to his diplomatic career, Mr. Chan was a television
producer and commentator. Mr. Chan holds a bachelors degree in philosophy from the University of
Singapore and a post graduate degree from Columbia Graduate School of Journalism.
Hai Ling has served as our president since April 2008. Mr. Ling previously served in numerous
capacities at Shanda Interactive, including senior vice president since August 2005 and vice
president from August 2003 to August 2005. Prior to joining Shanda Interactive, Mr. Ling served as
general manager of Powerise Technology Co. from 1997 to 2003. Mr. Ling is also a member of the
board of directors of Actoz. Mr. Ling holds a bachelors degree in computer science
and technology from the National University of Defense Technology.
67
Richard Wei has served as our chief financial officer since April 2009. Prior to joining our
company, Mr. Wei served as the chief financial officer of Spreadtrum Communications, a leading
provider of baseband processor solutions for the wireless communications market, from January 2007
to March 2009, Silicon Motion Technology Corporation, a leading provider of flash memory
controllers, from April 2005 to January 2007, KongZhong Corporation, a wireless value added service
provider, from February 2003 to April 2005, ASE Test Limited, a leading independent semiconductor
testing services provider, from August 2002 to February 2004 and ISE Labs Inc., a subsidiary of ASE
Test Limited, from September 2000 to July 2002. Mr. Wei was a research associate at the Harvard
Business School from 1993 to 1994. He also served as a systems engineer at IBM from 1985 to 1991.
Mr. Wei holds a bachelors degree in computer science from the Massachusetts Institute of
Technology and a Master of Business Administration degree from Cornell University.
Xiangdong Zhang has served as our chief producer since April 2008. Mr. Zhang previously served
in numerous capacities at Shanda Interactive, including senior vice president of Shanda Interactive
since June 2006, vice president from July 2005 to June 2006 and the director of its product
management center from 2001 to July 2005. Prior to joining Shanda Interactive, Mr. Zhang served as
the editor-in-chief of the game channel at China.com from 1999 to 2001. Mr. Zhang holds a
bachelors degree in engineering from Dalian Institute of Light Industry.
Jisheng Zhu has served as our chief technology officer since April 2008 and our acting chief
operating officer since December 2008. Mr. Zhu previously served in numerous capacities at Shanda
Interactive, including vice president from July 2006 to April 2008, director of technical support
center from January 2005 to June 2006 and a manager of Shanda Interactives network security
department from May 2003 to December 2004. Prior to joining Shanda Interactive, Mr. Zhu served as
the engineering service director of Kingnet Security Inc. from 2001 to 2003 and as the Director of
Product Development in Eachnet.com from 2000 to 2001. Mr. Zhu holds a masters degree in automatic
control from East China University of Science and Technology and an Executive Master of Business
Administration degree from Peking University.
Thomas Yih has served as our general counsel since August 2009. He previously served as the
general counsel of Shanda Interactive from October 2007 to August 2009. Prior to joining Shanda
Interactive, Mr. Yih was an attorney at an international law firm from September 2006 to October
2007 and senior counsel for a technology company listed on both New York Stock Exchange and Hong
Kong Stock Exchange from July 2002 to September 2006. Mr. Yih holds a bachelors degree in
political science and economics from Columbia University and a juris doctor degree from Fordham
University School of Law.
Duties of Directors
Under Cayman Islands law, our directors have a common law duty of loyalty to act in good faith
in their dealings with or on behalf of the company and exercise their powers and fulfill the duties
of their office honestly. Our directors also have a duty to exercise the care, diligence and skills
that a reasonably prudent person would exercise in comparable circumstances. In fulfilling their
duty of care to us, our directors must ensure compliance with our amended and restated memorandum
and articles of association. A shareholder has the right to seek damages if a duty owed by our
directors is breached.
The functions and powers of our board of directors include, among others:
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convening shareholders meetings and reporting its work to shareholders at such meetings; |
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implementing shareholders resolutions; |
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determining our business plans and investment proposals; |
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formulating our profit distribution plans and loss recovery plans; |
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determining our debt and finance policies and proposals for the increase or decrease in
our registered capital and the issuance of debentures; |
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formulating our major acquisition and disposition plans, and plans for merger, division
or dissolution; |
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proposing amendments to our amended and restated memorandum and articles of
association; and |
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exercising any other powers conferred by the shareholders meetings or under our amended and
restated memorandum and articles of association |
Terms of Directors and Executive Officers
Each of our directors holds office until a successor has been duly elected and qualified
unless the director was appointed by the board of directors, in which case such director holds
office until the next following annual meeting of shareholders at which time such director is
eligible for reelection. All of our executive officers are appointed by and serve at the discretion
of our board of directors.
68
B. COMPENSATION
In 2009, the aggregate cash compensation paid to our directors and executive officers as a
group was RMB17.7 million (US$2.6 million). We have no service contracts with any of our directors
or executive officers that provide benefits to them upon termination.
Equity Compensation Plans
In November 2008, in order to promote our success and to increase shareholder value by
providing an additional means to attract, motivate, retain and reward selected directors, employees
and other eligible persons, our board of directors and our shareholder adopted our 2008 Equity
Compensation Plan to attract, motivate, reward and retain selected employees and other eligible
persons, and hence to drive the success of our business. Our 2008 Equity Compensation Plan was
subsequently amended in September 2009. Our 2008 Equity Compensation Plan provides for the issuance
of up to 44,000,000 Class A ordinary shares.
Our 2008 Equity Compensation Plan is administered by our compensation committee, which has
the discretion to award equity compensation grants. Subject to the provisions of the 2008 Equity
Compensation Plan, including the limits upon the number of ordinary shares reserved for issuance
under these plans, our compensation committee determines who will receive equity compensation
awards, the type and timing of awards to be granted, vesting schedules, exercise prices and other
terms and conditions of the awards.
The table below sets forth the option grants made to our directors and executive officers
pursuant to the 2008 Equity Compensation Plan as of March 31, 2010.
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Number of Class A |
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Ordinary Shares to be |
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Exercise Price |
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Issued Upon Exercise of |
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per Class A |
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Date of |
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Date of |
Name |
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Options |
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Ordinary Share |
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Grant |
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Expiration |
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(in US$) |
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Qunzhao Tan |
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* |
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3.40 |
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March 19, 2010 |
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March 19, 2020 |
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*(1) |
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September 7, 2009 |
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September 7, 2019 |
Tianqiao Chen |
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Danian Chen |
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*(1) |
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September 7, 2009 |
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September 7, 2019 |
Lai Xing Cai |
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*(1) |
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September 7, 2009 |
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September 7, 2019 |
Andy Lin |
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*(1) |
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September 7, 2009 |
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September 7, 2019 |
Heng Wing Chan |
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Hai Ling |
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* |
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3.20 |
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November 14, 2008 |
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November 14, 2018 |
Richard Wei |
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* |
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3.20 |
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April 1, 2009 |
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April 1, 2019 |
Xiangdong Zhang |
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* |
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3.20 |
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November 14, 2008 |
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November 14, 2018 |
Jisheng Zhu |
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* |
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3.20 |
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November 14, 2008 |
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November 14, 2018 |
Thomas Yih |
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*(1) |
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September 7, 2009 |
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September 7, 2019 |
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* |
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Upon exercise of all options granted, would beneficially own less than
1% of our outstanding ordinary shares. |
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(1) |
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Restricted shares |
C. BOARD PRACTICES
Term and Severance Provisions of Directors and Executive Officers
Each of our directors holds office until a successor has been duly elected and qualified
unless the director was appointed by the board of directors, in which case such director holds
office until the next following annual meeting of shareholders at which time such director is
eligible for reelection. All of our executive officers are appointed by and serve at the discretion
of our board of directors. We have no service contracts with any of our directors or executive
officers that provide benefits to them upon termination.
Our board has determined that three members of our board of directors, namely Mr. Cai, Mr.
Chan, and Mr. Lin are independent as that term is defined in Rule 5605(a)(2) of the NASDAQ
Listing Rules.
Board Committees
Our board of directors has established an audit committee and a compensation committee.
Audit Committee. Our audit committee currently consists of Lai Xing Cai, Andy Lin and Heng
Wing Chan, who are our independent directors. Our board of directors has determined that all of our
audit committee members are independent directors within the meaning of Rule 5605(a)(2) of the
NASDAQ Listing Rules and meet the criteria for independence set forth in Section 10A(m)(3)(B)(i) of
the Securities Exchange Act of 1934, or the Exchange Act. In addition, our board of directors has determined that Lai Xing Cai qualifies as an audit
committee financial expert under the applicable SEC rules and as a financially sophisticated audit
committee member under Rule 5605(c)(2)(A) of the NASDAQ Listing Rules.
69
Our audit committee will be responsible for, among other things:
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selecting independent auditors and pre-approving all auditing and non-auditing services
permitted to be performed by the independent auditors; |
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setting clear hiring policies for employees or former employees of the independent
auditors; |
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reviewing with the independent auditors any audit problems or difficulties and
managements response; |
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reviewing and approving all proposed related-party transactions; |
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discussing the annual audited financial statements with management and the independent
auditors; |
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discussing with management and the independent auditors major issues regarding accounting
principles and financial statement presentations; |
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reviewing reports prepared by management or the independent auditors relating to
significant financial reporting issues and judgments; |
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reviewing with management and the independent auditors related-party transactions and
off-balance sheet transactions and structures; |
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reviewing with management and the independent auditors the effect of regulatory and
accounting initiatives and actions; |
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reviewing policies with respect to risk assessment and risk management; |
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reviewing our disclosure controls and procedures and internal control over financial
reporting; |
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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 GAAP that have been discussed with management and all other material
written communications between the independent auditors and management; |
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establishing procedures for the receipt, retention and treatment of complaints received
from our employees regarding accounting, internal accounting controls or auditing matters
and the confidential, anonymous submission by our employees of concerns regarding
questionable accounting or auditing matters; |
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annually reviewing and reassessing the adequacy of our audit committee charter; |
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such other matters that are specifically delegated to our audit committee by our board of
directors from time to time; and |
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meeting separately, periodically, with management, the internal auditors and the
independent auditors. |
Compensation Committee. Our current compensation committee consists of Qunzhao Tan, Tianqiao
Chen and Danian Chen.
Our compensation committee will be responsible for:
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making and reviewing recommendations to our board of directors regarding our compensation
policies and forms of compensation provided to our directors and officers; |
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determining and reviewing bonuses for our officers and other employees; |
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determining and reviewing stock-based compensation for our directors, officers, employees
and consultants; |
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administering our equity incentive plans in accordance with the terms thereof; and |
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such other matters that are specifically delegated to the compensation committee by our board of
directors from time to time. |
70
D. EMPLOYEES
As of December 31, 2008 and March 31, 2010, we had 1,407 and 2,254 full-time employees,
respectively. The following table sets forth the number of our employees by function as of March
31, 2010.
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Number of |
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Percentage |
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Employees |
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of Total |
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Product development(1) |
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1,517 |
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67.3 |
% |
Sales and marketing |
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184 |
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8.2 |
% |
General and administration |
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190 |
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8.4 |
% |
Technical support and customer service |
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363 |
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16.1 |
% |
Total |
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2,254 |
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100.0 |
% |
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(1) |
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Includes game development personnel. |
Our employees who are PRC citizens are members of a labor union that represents employees with
respect to labor disputes and other employee matters. The labor union does not represent employees
for the purpose of collective bargaining. We believe that we maintain a good working relationship
with our employees and we have not experienced any significant labor disputes or any difficulty in
recruiting staff for our operations.
E. SHARE OWNERSHIP
Please see Item 7.A.
Item 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
A. MAJOR SHAREHOLDERS
The following table sets forth information with respect to the beneficial ownership, within
the meaning of Rule 13d-3 of the U.S. Securities Exchange Act of 1934, as amended, or the Exchange
Act, of our ordinary shares, as of March 31, 2010:
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each person known to us to own beneficially more than 5% of our ordinary shares; and |
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each of our directors and executive officers who beneficially own ordinary shares
within the meaning of Rule 13d-3 of the Exchange Act. |
Beneficial ownership includes voting or investment power with respect to the securities.
Except as indicated below, and subject to applicable community property laws, the persons named in
the table have sole voting and investment power with respect to all ordinary shares shown as
beneficially owned by them. Percentage of beneficial ownership is based on 576,087,000 ordinary
shares outstanding as of December 31, 2009.
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Shares Beneficially Owned |
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Percentage |
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of |
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Name |
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Number |
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Total |
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Shanda Interactive Entertainment Limited(1) |
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409,087,000 |
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71.0 |
% |
Qunzhao Tan |
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* |
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* |
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Tianqiao Chen |
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Danian Chen |
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* |
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* |
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Lai Xing Cai |
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* |
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* |
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Andy Lin |
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* |
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* |
|
Heng Wing Chan |
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Hai Ling |
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|
* |
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|
* |
|
Richard Wei |
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|
* |
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|
* |
|
Xiangdong Zhang |
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|
* |
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|
* |
|
Jisheng Zhu |
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|
* |
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|
* |
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Thomas Yih |
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|
* |
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|
* |
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|
* |
|
Upon exercise of all options currently exercisable or vesting within 60 days of the date of
this table, would beneficially own less than 1% of our ordinary shares. |
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(1) |
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Consists of 409,087,000 Class B ordinary shares held by Shanda SDG Investment
Limited, a British Virgin Islands corporation and a direct wholly-owned subsidiary of Shanda
Interactive Entertainment Limited. Shanda Interactive Entertainment Limited is a publicly
listed company whose ADSs trade on the Nasdaq Global Market under the symbol SNDA. Shanda
SDG Investment Limiteds address is No. 208 Juli Road, Pudong New Area, Shanghai 201203,
Peoples Republic of China. |
71
Our ordinary shares are divided into Class A ordinary shares and Class B ordinary shares. With
respect to matters requiring a shareholder vote, holders of Class A ordinary shares and holders of
Class B ordinary shares vote together as one class. Each Class A ordinary share is entitled to one vote and each Class B
ordinary share is entitled to ten votes. Holders of Class B ordinary shares may choose to convert
their Class B ordinary shares into the same number of Class A ordinary shares at any time.
We are not aware of any arrangement that may, at a subsequent date, result in a change of
control of our company.
JPMorgan Chase Bank, or JPMorgan, the depositary of our ADSs, has advised us that as of December 31, 2009, of the 576,087,000 issued and
outstanding ordinary shares, including both Class A ordinary shares and Class B ordinary shares, approximately 29% of our ordinary shares
were held of record by DTC, under the nominee name of CEDE & CO, on behalf of DTC participants. We have no further information as to ADSs
held, or beneficially owned, by U.S. persons.
B. RELATED PARTY TRANSACTIONS
Contractual Arrangements with Shanghai Shulong and Its Shareholders
To comply with PRC laws restricting foreign ownership in the online game business in China, we
conduct our online game business through Shanghai Shulong, which we control through a series of
contractual arrangements between our PRC subsidiaries and Shanghai Shulong and/or its shareholders,
and through Shulong Computer and Nanjing Shulong, which are wholly-owned subsidiaries of Shanghai
Shulong. See Item 4, Information on the Company Organizational Structure.
Transactions and Agreements with Shanda Interactive
Prior to the reorganization, our online game business was operated by Shanda Interactive
through its various subsidiaries and VIEs. Effective July 1, 2008, pursuant to the reorganization,
we assumed substantially all of the assets and liabilities related to the online game business. As
a result of the reorganization, we conduct the online game business through our PRC operating
companies.
In connection with the reorganization, we entered into agreements with Shanda Interactive with
respect to various ongoing relationships between Shanda Interactive and us.
Master Separation Agreement
The Master Separation Agreement between Shanda Interactive and us contains key provisions
regarding the transfer of assets and liabilities related to the online game business (including
applicable intellectual property rights) from Shanda Interactive to us and the transfer of assets
and liabilities unrelated to the online game business from us to Shanda Interactive. The following
is a brief summary of the material provisions of the Master Separation Agreement.
Contribution and Transfer. Shanda Interactive agreed to transfer to us the entire share
capital of Shanda Games (HK), its rights under various agreements relating to the servers we lease,
and the deferred revenues, the intellectual property rights and other tangible properties related
to the online game business. We agreed to transfer to Shanda Interactive all of our real
properties, intellectual property rights and other tangible properties unrelated to the online game
business.
Indemnification. Pursuant to the Master Separation Agreement, we are responsible for all
liabilities associated with the assets and operations related to the online game business, while
Shanda Interactive is responsible for all liabilities associated with Shanda Interactives other
assets and operations, in each case, regardless of the time those liabilities arise. The Master
Separation Agreement also contains indemnification provisions under which we and Shanda Interactive
indemnify each other with respect to breaches of the Master Separation Agreement or any related
intercompany agreement.
Liability Release. We release Shanda Interactive from all liabilities associated with the
assets and operations related to the online game business transferred to us, and Shanda Interactive
releases us from liabilities associated with all of Shanda Interactives other assets and
operations, in each case regardless of the time those liabilities arise.
No Representations or Warranties. Except as expressly set forth in the Master Separation
Agreement or other documents, neither we nor Shanda Interactive make any representation or warranty
to each other relating to the transaction contemplated in the Master Separation Agreement.
New VIE Agreements and New Game Licensing Agreements. As a part of the reorganization,
Shengqu entered into VIE agreements with Shanghai Shulong. Shengqu also terminated its game
licensing agreements with Shanda Interactives VIEs and entered into new game licensing agreements
with the Shulong entities, granting the Shulong entities rights which had previously been granted
to Shanda Interactives VIEs.
Furthermore, we agreed not to amend or terminate any of our contracts with third parties that
were entered into for the benefit of Shanda Interactive and its subsidiaries and VIEs. We also
agreed to take actions reasonably requested by Shanda Interactive to enable Shanda Interactive or
its subsidiaries to receive substantially the same rights and benefits received by us under such
contracts with third parties.
72
Amended and Restated Non-Compete and Non-Solicitation Agreement
Under the Amended and Restated Non-Compete and Non-Solicitation Agreement between Shanda
Interactive and Shanda Games, Shanda Interactive has agreed, for a period of five years commencing
July 1, 2008, not to engage in the online game business, which refers to the sourcing, development,
operation and licensing of online games and related intellectual property rights and activities
incidental to such business, anywhere in the world, except that (i) certain of Shanda Interactives
subsidiaries may continue to engage in their current PC network and e-sports platform businesses,
online interactive music community, and online chess and board game platform business, (ii) Shanda
Interactive may acquire equity interests in a company that does not have more than 25.0% of its
gross revenues (based on the latest annual audited financial statements of the investee company)
attributable to the online game business and (iii) Shanda Interactive may operate virtual
communities with certain online game features provided that such features do not constitute the
core business model of such community. In addition, the agreement permits Shanda Interactive to
acquire or invest in any third party engaging in the online game business if, after using its
reasonable best efforts to make such investment opportunity available to us as required under the
agreement, we do not pursue such opportunity; provided that Shanda Interactives equity interest in
such third party shall not exceed 50%.
Furthermore, Shanda Interactive has agreed, for a period of five years commencing July 1,
2008, not to solicit any customer, supplier or any other third party having any business
relationship with us or any of our employees.
Amended and Restated Cooperation Agreement
Pursuant to the Amended and Restated Cooperation Agreement between Shanda Networking, a VIE of
Shanda Online, and its subsidiary, Nanjing Shanda, on the one hand, and the Shulong entities, on
the other hand, we have engaged Shanda Networking and Nanjing Shanda to provide certain services to
us for a period of five years commencing July 1, 2008. The services Shanda Networking and Nanjing
Shanda have agreed to provide us include, among others, online billing and payment, user
authentication, customer service, anti-fatigue compliance, prepaid card marketing and data support
services. We pay Shanda Networking a service fee, which we record as a portion of platform fees in
our cost of revenues, equal to 15.5% of the portion of the face value of the prepaid cards that are
used in our online games. In order to lock-in the 15.5% fixed percentage, we agreed to a five-year
contract period with Shanda Networking and Nanjing Shanda and committed to generate at least
RMB200 million in revenues per month. Under the terms of the Amended and Restated Cooperation
Agreement, we are not permitted to engage any other party to provide such services to us, while
Shanda Networking is permitted to provide such services to other parties.
The Amended and Restated Cooperation Agreement will be automatically extended for one year if
neither party gives written objection three months prior to the expiration date of such agreement.
Each party has the right to terminate this agreement if the other party fails to perform its
obligations under the agreement or any key term of the agreement violates any PRC law, or upon the
other partys bankruptcy, insolvency or any other breaches of this agreement.
In 2009, we paid Shanda Networking pursuant to the Amended and Restated Cooperation Agreement
and Shengfutong pursuant to the Amended and Restated Sales Agency Agreement as described below, an
aggregate of RMB1,099.2 million (US$161.0 million).
Amended and Restated Sales Agency Agreement
Pursuant to the Amended and Restated Sales Agency Agreement between Shengfutong, a VIE of
Shanda Online, and the Shulong entities, Shengfutong has agreed, for a period of five years
commencing July 1, 2008, to be the sales agent of the Shulong entities for the distribution of
prepaid cards which are required to purchase virtual items or time units in our online games
through Shanda Networkings integrated service platform. For each prepaid card sold, we pay
Shengfutong a service fee, which we record as a portion of sales and marketing expenses in our
operating expenses, equal to the difference between (i) the amount Shengfutong receives from the
sale of such card and (ii) 83.5% of the face value of each prepaid card that are used in our online
games. In order to lock-in the fixed percentage, we agreed to a five-year contract period with
Shengfutong and committed to generate at least RMB200 million in revenues per month. Under the
terms of the Amended and Restated Sales Agency Agreement, we are not permitted to engage any other
party to provide such services to us, while Shengfutong is permitted to provide such services to
other parties.
The Amended and Restated Sales Agency Agreement will be automatically extended for one year if
neither party gives written objection 90 days prior to the expiration date of such agreement. Each
party has the right to terminate this agreement if the other party fails to perform its obligations
under the agreement or any key term of the agreement violates any PRC law, or upon the other
partys bankruptcy, insolvency or any other breaches of the agreement.
In 2009, we paid Shanda Networking pursuant to the Amended and Restated Cooperation Agreement
and Shengfutong pursuant to the Amended and Restated Sales Agency Agreement as described above, an
aggregate of RMB1,099.2 million (US$161.0 million).
73
Domain Names and Trademarks License Agreement
Pursuant to the Domain Names and Trademarks License Agreement between Shanda Computer and
Shengqu, Shanda Computer licenses to Shengqu on a nonexclusive, nontransferable and royalty-free
basis, certain domain names and trademarks, including Shanda.
Deferred Revenues Transfer Agreement
The Deferred Revenues Transfer Agreement among Shanda Networking and its subsidiaries, the
Shulong entities and Shengfutong, sets forth certain transitional arrangements with respect to
prepaid cards which had been sold to distributors and/or users prior to the reorganization but had
yet to be activated, as well as any remaining balance in game players accounts, to reflect the
transfer of the online game business to us as a result of the reorganization.
In the future, for so long as Shanda Interactive remains our controlling shareholder, we
intend to enter into new agreements, or make amendments to existing agreements, between us and
Shanda Interactive that involve significant expenditures or commitments with reference to the terms
of similar agreements between unrelated third parties. We will also submit such agreements and
amendments for review by the audit committee of our board of directors, which will assess such
agreements and amendments for potential conflicts of interest in accordance with NASDAQ Listing
Rules and seek to ensure that terms of such agreements and amendments are no less favorable than
would be comparable agreements between us and an unaffiliated third party. In assessing a related
party transaction, the audit committee will be required to consider such factors as (i) the
benefits to us of the transaction; (ii) whether such transaction is on terms no less favorable than
terms generally available to an unaffiliated third party under the same or similar circumstances;
(iii) the materiality of the transaction to us; and (iv) the extent of the related partys interest
in the transaction.
Lease of Office Facilities
We lease our office space of approximately 9,000 square meters at No. 1 Office Building, No.
690 Bibo Road, Pudong New Area, Shanghai 201203, from Shanda Interactive.
Transfer of Actoz
In the second quarter of 2009, Shanda Interactive transferred its entire equity interest in
Actoz to us for a cash consideration of US$70.2 million.
Payment of Dividend
See Item 8, Financial Information Dividend Policy.
Other Related Party Transactions
Game License Agreement. On November 26, 2008, we entered into an agreement with Actoz to
extend the term of our exclusive license to operate Mir II in China for up to eight years
commencing from September 28, 2009. We have also entered into agreements with Actoz for an
exclusive license to operate other online games in China, such as Lazeska. Shanda Games owned
approximately 52.0% of the outstanding stock of Actoz as of December 31, 2009.
Others. In addition to the agreements set forth above under - Transactions and Agreements
with Shanda Interactive, we expect to enter into new agreements, or make amendments to our
existing agreements, with Shanda Interactive and/or its subsidiaries or affiliates in the ordinary
course of business. For example, we have entered, and expect to enter in the future, agreements
with Shanda Interactives subsidiaries or affiliates to purchase and sell advertising space
relating to our games, to license our games to these companies to expand our user base, and receive
certain consulting services.
We will submit such agreements and amendments for review by the audit committee of our board
of directors, which will assess such agreements and amendments for potential conflicts of interest
in accordance with NASDAQ Stock Market Rules, and seek to ensure that terms of such agreements and
amendments are no less favorable than would be comparable agreements between us and an unrelated
third party. In assessing a related party transaction, the Audit Committee shall consider all
relevant factors when determining whether to approve a related-party transaction, including (i) the
benefits to the Company of the transaction, (ii) whether such transaction is on terms no less
favorable than terms generally available to an unaffiliated third-party under the same or similar
circumstances, (iii) the materiality of the transaction to the Company, and (iv) the extent of the
related partys interest in the transaction.
74
Item 8. FINANCIAL INFORMATION
A. CONSOLIDATED STATEMENTS AND OTHER FINANCIAL INFORMATION
Consolidated Financial Statements
Please see Item 18, Financial Statements for our audited consolidated financial statements
filed as a part of this annual report.
Legal Proceedings
We may be subject to legal proceedings, investigations and claims relating to the conduct of
our business from time to time. We may also initiate legal proceedings in order to protect our
contractual and property rights. We are not currently a party to, nor are we aware of, any legal
proceeding, investigation or claim which, in the opinion of our management, is likely to have a
material adverse effect on our business, financial condition or results of operations.
Dividend Policy
In 2009, we declared an aggregate of RMB700.4 million (US$102.6 million) in cash dividends
payable solely to Shanda Interactive, our parent. As of December 31, 2009, we had paid Shanda all
of the dividends declared in 2009.
Future cash dividends, if any, will be declared at the discretion of our board of directors
and will depend upon our future operations and earnings, capital requirements and surplus, general
financial condition, contractual restrictions and other factors as our board of directors may deem
relevant.
Holders of ADSs will be entitled to receive dividends, subject to the terms of the deposit
agreement, to the same extent as the holders of our Class A ordinary shares, 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, subject to the terms of the deposit agreement. Other
distributions, if any, will be paid by the depositary to holders of ADSs in any means it deems
legal, fair and practical.
B. SIGNIFICANT CHANGES
Since the date of the audited financial statements included as a part of this annual report,
the following significant changes have occurred:
On January 8, 2010, we announced our intention to acquire Goldcool.
On January 10, 2010, we announced our intention to acquire Mochi Media.
On January 22, 2010, we announced the appointment of Qunzhao Tan as our new chief executive
officer to replace Diana Li who resigned on the same date.
On March 1, 2010, we announced that we expected our net revenues in the first quarter of 2010
to decrease by approximately 10-15% quarter-over-quarter primarily as a result of an expansion pack we introduced in Mir
II which was not well received by the games users and led to some of the games users reducing the
amount of virtual items they purchase in the game.
On March 1, 2010, we announced that our board of directors had authorized us to repurchase up
to $150 million worth of our outstanding American Depositary Shares from time to time over the next
twenty four (24) months, depending on market conditions, share price and other factors, as well as
subject to the relevant rules under United States securities regulations.
Item 9. THE OFFER AND LISTING
A. OFFER AND LISTING DETAILS
Price Range of American Depositary Shares
Our ADSs are listed on the NASDAQ Global Select Market under the symbol GAME. Trading in our
ADSs commenced on September 25, 2009.
The following table provides the high and low reported closing prices for our ADSs on the NASDAQ
Global Select Market for (1) each quarter in the most recent fiscal year and the most recent
quarter and (2) each of the most recent six months. On April 28, 2010, the last reported closing
price for our ADSs was US$6.98 per ADS.
|
|
|
|
|
|
|
|
|
|
|
Market Price |
|
|
|
(US$) |
|
|
|
High |
|
|
Low |
|
Yearly high and lows |
|
|
|
|
|
|
|
|
Year 2009 (from September 25, 2009) |
|
$ |
11.70 |
|
|
$ |
8.79 |
|
|
|
|
|
|
|
|
|
|
Quarterly highs and lows: |
|
|
|
|
|
|
|
|
Third quarter 2009 (from September 25, 2009) |
|
$ |
11.70 |
|
|
$ |
10.75 |
|
Fourth quarter 2009 |
|
$ |
11.40 |
|
|
$ |
8.79 |
|
First quarter 2010 |
|
$ |
10.90 |
|
|
$ |
6.41 |
|
Second quarter 2010 (through April 28) |
|
$ |
7.53 |
|
|
$ |
6.98 |
|
|
|
|
|
|
|
|
|
|
Monthly highs and lows: |
|
|
|
|
|
|
|
|
October 2009 |
|
$ |
11.26 |
|
|
$ |
8.79 |
|
November 2009 |
|
$ |
11.40 |
|
|
$ |
9.96 |
|
December 2009 |
|
$ |
10.73 |
|
|
$ |
9.31 |
|
January 2010 |
|
$ |
10.90 |
|
|
$ |
8.50 |
|
February 2010 |
|
$ |
8.95 |
|
|
$ |
8.22 |
|
March 2010 |
|
$ |
7.42 |
|
|
$ |
6.41 |
|
April 2010 (through April 28) |
|
$ |
7.53 |
|
|
$ |
6.98 |
|
75
B. PLAN OF DISTRIBUTION
Not applicable
C. MARKETS
Our ADSs, each representing two of our ordinary shares, have been listed on The NASDAQ Global
Select Market since September 25, 2009 under the symbol GAME.
D. SELLING SHAREHOLDER
Not applicable
E. DILUTION
Not applicable
F. EXPENSES OF THE ISSUE
Not applicable
Item 10. ADDITIONAL INFORMATION
A. SHARE CAPITAL
Not applicable
B. MEMORANDUM AND ARTICLES OF ASSOCIATION
We incorporate by reference into this annual report the description of our amended and
restated memorandum and articles of association contained in our registration statement on Form
F-1 (File No. 333-161708) filed with the Securities and Exchange Commission on September 3, 2009.
C. MATERIAL CONTRACTS
We have not entered into any material contracts other than in the ordinary course of business
or other than those described in Item 4 Information on the Company and elsewhere in this annual
report.
D. EXCHANGE CONTROLS
Substantially all of our revenues are denominated in Renminbi, while a portion of our
expenditures are denominated in foreign currencies, primarily the U.S. dollar. Fluctuations in
exchange rates, particularly those involving the U.S. dollar, and the Korean Won, may affect our
costs and operating margins. In addition, these fluctuations could result in exchange losses and
increased costs in Renminbi terms. Where our operations conducted in Renminbi are reported in
dollars, such fluctuations could result in changes in reported results which do not reflect changes
in the underlying operations. Since January 1, 1994, the PRC government has used a unitary managed
floating rate system. Under that system, the Peoples Bank of China, or PBOC, publishes a daily
base exchange rate with reference primarily to the supply and demand of the Renminbi against the
U.S. dollar and other foreign currencies in the market during the previous day. Authorized banks
and financial institutions are allowed to quote buy and sell rats for Renminbi within a specified
bank around the central banks daily exchange rate. On July 21, 2005, PBOC announced an adjustment
of the exchange rate of the U.S. dollar to Renminbi from 1:8.27 to 1:8.11 and modified the system
by which the exchange rates are determined. While the international reaction to the Renminbi
revaluation has generally been positive, there remains significant international pressure on the
PRC government to adopt an even more flexible currency policy, which could result in a further
reevaluation and a significant fluctuation of the exchange rate of the Renminbi against the U.S.
dollar, including possible devaluations. As substantially all of our revenues are denominated in Renminbi, such a potential future devaluation of the Renminbi
against the U.S. dollar could negatively impact our results of operations.
76
In October 2005, SAFE promulgated regulations that require registration with local SAFE in
connection with direct or indirect offshore investment by PRC residents, including PRC individual
residents and PRC corporate entities. These regulations apply to our shareholders who are PRC
residents and also apply to our prior and future offshore acquisitions.
The SAFE regulations retroactively require registration by March 31, 2006 of direct or
indirect investments previously made by PRC residents in offshore companies. If a PRC resident 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.
Further, failure to comply with various SAFE registration requirements described above could result
in liability under PRC law for foreign exchange evasion.
For more information about foreign exchange control and other foreign exchange regulations in
China, see Item 3, Key Information Risk Factors.
E. TAXATION
The following is a general summary of certain Cayman Islands, the Peoples Republic of China
and U.S. federal income tax considerations relevant to holders of our Class A ordinary shares or
ADSs. The discussion is not intended to be, nor should it be construed as, legal or tax advice to
any prospective holder of our Class A ordinary shares or ADSs. The discussion is based on laws and
relevant interpretations thereof in effect as of the date hereof, all of which are subject to
change or different interpretations, possibly with retroactive effect. The discussion does not
address U.S. state or local tax laws, or tax laws of jurisdictions other than the Cayman Islands,
the Peoples Republic of China and the United States.
Cayman Islands Taxation
The Cayman Islands currently levies no taxes on individuals or corporations based upon
profits, income, gains or appreciation and there is no taxation in the nature of inheritance tax or
estate duty. There are no other taxes likely to be material to us levied by the Government of the
Cayman Islands except for stamp duties, which may be applicable on instruments executed in, brought
to, or produced before a court of 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.
Peoples Republic of China Taxation
PRC taxation of us and our corporate group
We are a holding company incorporated in the Cayman Islands, which indirectly holds, through
Shanda Games (HK), our equity interest in Shengqu, our subsidiary in the PRC. Our business
operations are principally conducted through the Shulong entities. The New EIT Law and its
implementation rules, both of which became effective on January 1, 2008, provide that China-sourced
income of foreign enterprises, such as dividends paid by a PRC subsidiary to its overseas parent,
will normally be subject to PRC withholding tax at a rate of 10.0%, unless there are applicable
treaties that reduce such rate. Under a special arrangement between China and Hong Kong, such
dividend withholding tax rate is reduced to 5.0% if a Hong Kong resident enterprise owns over 25%
of the PRC company distributing the dividends. As Shanda Games (HK) is a Hong Kong company and owns
100% of each of our PRC subsidiaries, under the aforesaid arrangement, any dividends that any of
our PRC subsidiaries pays Shanda Games (HK) will likely be subject to a withholding tax at the rate
of 5% if Shanda Games (HK) and we are not considered to be PRC tax resident enterprises as
described below. See Risk Factors Risks Relating to the Peoples Republic of China There are
significant uncertainties under the New EIT Law relating to our PRC enterprise income tax
liabilities.
Under the New EIT Law, enterprises established under the laws of jurisdictions outside China
with their de facto management bodies located within China may be considered to be PRC tax
resident enterprises for tax purposes. A substantial majority of the members of our management
team, as well as the management team of Shanda Games (HK), are located in China. If we or Shanda
Games (HK) are considered a PRC tax resident enterprise under the above definition, then our global
income will be subject to PRC enterprise income tax at the rate of 25.0%.
77
PRC taxation of our overseas shareholders
The implementation rules of the New EIT Law provide that, (i) if the enterprise that
distributes dividends is domiciled in the PRC, or (ii) if gains are realized from transferring
equity interests of enterprises domiciled in the PRC, then such dividends or capital gains are
treated as China-sourced income. It is not clear how domicile may be interpreted under the New
EIT Law, and it may be interpreted as the jurisdiction where the enterprise is a tax resident.
Therefore, if we or Shanda Games (HK) are considered as a PRC tax resident enterprise for tax
purposes, any dividends we pay to our overseas holders of our Class A ordinary shares or ADS
holders as well as gains realized by such holders of our Class A ordinary shares or ADS holders from the transfer of our Class A
ordinary shares or ADSs may be regarded as China-sourced income and as a result become subject to
PRC withholding tax. For detailed discussions, please see Item 3, Key Information Risk
Factors Risks Relating to Our ADSs We may be required to withhold PRC income tax on the
dividends we pay you (if any), and any gain you realize on the transfer of our ordinary shares
and/or ADSs may also be subject to PRC withholding tax.
United States Federal Income Tax Considerations
The following is a description of the material U.S. federal income tax consequences to the
U.S. Holders described below of owning and disposing of Class A ordinary shares or ADSs, but it
does not purport to be a comprehensive description of all tax considerations that may be relevant
to a particular persons decision to acquire Class A ordinary shares or ADSs. This discussion
applies only to a U.S. Holder that holds Class A ordinary shares or ADSs as capital assets for tax
purposes. In addition, it does not describe all of the tax consequences that may be relevant in
light of the U.S. Holders particular circumstances, including alternative minimum tax consequences
and tax consequences applicable to U.S. Holders subject to special rules, such as, but not limited
to:
certain financial institutions;
dealers or traders in securities who use a mark-to-market method of tax accounting;
persons holding Class A ordinary shares or ADSs as part of a hedging transaction,
straddle, wash sale, conversion transaction or integrated transaction or persons entering into
a constructive sale with respect to the Class A ordinary shares or ADSs;
persons whose functional currency for U.S. federal income tax purposes is not the
U.S. dollar;
entities classified as partnerships for U.S. federal income tax purposes;
tax-exempt entities, including an individual retirement account or Roth IRA;
persons that own or are deemed to own Class A ordinary shares or ADSs representing ten
percent or more of our voting stock;
persons who acquired Class A ordinary shares or ADSs pursuant to the exercise of an
employee stock option or otherwise as compensation; or
persons holding Class A ordinary shares or ADSs in connection with a trade or business
conducted outside of the United States.
If an entity that is classified as a partnership for U.S. federal income tax purposes holds
Class A ordinary shares or ADSs, the U.S. federal income tax treatment of a partner will generally
depend on the status of the partner and the activities of the partnership. Partnerships holding
Class A ordinary shares or ADSs, and partners in such partnerships, should consult their tax
advisers as to the particular U.S. federal income tax consequences of acquiring, holding and
disposing of the Class A ordinary shares or ADSs.
This discussion is based on the Internal Revenue Code of 1986, as amended (the Code),
administrative pronouncements, judicial decisions, and final, temporary and proposed Treasury
regulations, all as of the date hereof, any of which is subject to change, possibly with
retroactive effect. It is also based in part on representations by the Depositary and assumes that
each obligation under the Deposit Agreement and any related agreement will be performed in
accordance with its terms.
A U.S. Holder is a holder who is a beneficial owner of Class A ordinary shares or ADSs and
is for U.S. federal income tax purposes:
a citizen or resident of the United States;
a corporation, or other entity taxable as a corporation, created or organized in or
under the laws of the United States, any state therein or the District of Columbia; or
an estate or trust the income of which is subject to U.S. federal income taxation
regardless of its source.
In general, a U.S. Holder who owns ADSs will be treated as the owner of the underlying Class A
ordinary shares represented by those ADSs for U.S. federal income tax purposes. Accordingly, no
gain or loss will be recognized if a U.S. Holder exchanges ADSs for the underlying Class A ordinary
shares represented by those ADSs.
78
The U.S. Treasury has expressed concerns that parties to whom American depositary shares are
pre-released before shares are delivered to the depositary, or intermediaries in the chain of
ownership between holders of American depositary shares and the issuer of the security underlying the American depositary shares,
may be taking actions that are inconsistent with the claiming of foreign tax credits by holders of
American depositary shares. These actions would also be inconsistent with the claiming of the
reduced rate of tax, described below, applicable to dividends received by certain non-corporate
holders. Accordingly, the creditability of any PRC taxes, and the availability of the reduced tax
rate for dividends received by certain non-corporate U.S. Holders, each described below, could be
affected by actions taken by such parties or intermediaries.
U.S. Holders should consult their own tax advisers concerning the U.S. federal, state, local
and foreign tax consequences of acquiring, owning and disposing of Class A ordinary shares or ADSs
in their particular circumstances.
Taxation of Distributions. Subject to the passive foreign investment company rules described
below, distributions paid on our Class A ordinary shares or ADSs, other than certain pro rata
distributions of ordinary shares, will be treated as dividends to the extent paid out of our
current or accumulated earnings and profits (as determined under U.S. federal income tax
principles). Because we do not maintain calculations of earnings and profits under U.S. federal
income tax principles, it is expected that distributions generally will be reported to U.S. Holders
as dividends. Subject to applicable limitations and the discussion above regarding concerns
expressed by the U.S. Treasury, dividends paid by qualified foreign corporations to certain
non-corporate U.S. Holders in taxable years beginning before January 1, 2011, may be taxable at
reduced rates up to a maximum rate of 15%. A foreign corporation is treated as a qualified foreign
corporation with respect to dividends paid on stock that is readily tradable on an established
securities market in the United States, such as the NASDAQ, where our ADSs are listed. U.S. Holders
should consult their tax advisers to determine whether the favorable rate will apply to dividends
they receive in respect of our Class A ordinary shares or ADSs and whether they are subject to any
special rules that limit their ability to be taxed at this favorable rate.
As described in Taxation Peoples Republic of China Taxation PRC taxation of
us and our corporate group, if we
were deemed to be a tax resident enterprise under PRC tax law, dividends paid with respect to our
Class A ordinary shares or ADSs might be subject to PRC withholding taxes. For U.S. federal income
tax purposes, the amount of a dividend would include any amounts withheld by us in respect of PRC
taxes. The amount of the dividend generally will be treated as foreign-source dividend income to
U.S. Holders and will not be eligible for the dividends-received deduction generally available to
U.S. corporations under the Code. Subject to applicable limitations (including, among other things,
a specified minimum holding period for the Class A ordinary shares or ADSs during which a
U.S. Holder is not protected from risk of loss), and in the case of ADSs subject to the discussion
above regarding concerns expressed by the U.S. Treasury, any PRC income taxes withheld from
dividends will be creditable against the U.S. Holders U.S. federal income tax liability. The rules
governing foreign tax credits are complex, and U.S. Holders should consult their tax advisers
regarding the creditability of foreign taxes in their particular circumstances. Instead of claiming
a credit, a U.S. Holder may, at the U.S. Holders election, deduct such PRC taxes, if any, in
computing taxable income. An election to deduct foreign taxes instead of claiming foreign tax
credits must apply to all taxes paid or accrued in the taxable year to foreign countries and
possessions of the United States.
Dividends will be included in a U.S. Holders income on the date of the U.S. Holders receipt,
or in the case of ADSs, the Depositarys receipt, of the dividend.
Sale or Other Disposition of Ordinary Shares or ADSs. Subject to the passive foreign
investment company rules described below, for U.S. federal income tax purposes, gain or loss
realized on the sale or other disposition of Class A ordinary shares or ADSs will be capital gain
or loss, and will be long-term capital gain or loss if the U.S. Holder held the Class A ordinary
shares or ADSs for more than one year. The amount of the gain or loss will equal the difference
between the U.S. Holders tax basis in the relevant Class A ordinary shares or ADSs and the amount
realized on the disposition. This gain or loss will generally be U.S.-source gain or loss for
foreign tax credit purposes. The deductibility of capital losses is subject to limitations.
As described in Taxation Peoples Republic of China Taxation PRC taxation of
us and our corporate group, if we
were deemed to be a tax resident enterprise under PRC tax law, gains from dispositions of our
Class A ordinary shares or ADSs may be subject to PRC withholding tax. In that case, a
U.S. Holders amount realized would include the gross amount of the proceeds of the sale or
disposition before deduction of the PRC tax. Although any such gain of a U.S. Holder would
generally be characterized as U.S. source income, a U.S. Holder that is eligible for the benefits
of the income tax treaty between the United States and the PRC may be able to elect to treat the
disposition gain as foreign-source gain for foreign tax credit purposes. U.S. Holders should
consult their tax advisers regarding their eligibility for benefits under the income tax treaty
between the United States and the PRC and the creditability of any PRC withholding tax on
disposition of gains in their particular circumstances.
Passive Foreign Investment Company Rules. Based on the composition of our income and assets
and the value of our assets, including goodwill, we do not believe we were a PFIC for 2009. That
determination is subject to uncertainty, however, both because it is not clear how the contractual
arrangements between our PRC subsidiaries and Shanghai Shulong will be treated for purposes of the
PFIC rules, and because of the uncertain characterization of certain components of our revenue. The
determination of whether a company is a PFIC is made annually after the end of each taxable year
and our expectation as to our PFIC status is based on factors which may change, we cannot assure
you that we will not be a PFIC for the taxable year ending December 31, 2009 or any future taxable year.
79
In general, a foreign corporation is a PFIC for any taxable year if (i) 75% or more of its
gross income consists of passive income (such as dividends, interest, rents and royalties) or
(ii) 50% or more of the average quarterly value of its assets consists of assets that produce, or
are held for the production of, passive income. If a corporation owns at least 25% (by value) of
the stock of another corporation, the corporation will be treated, for purposes of the PFIC tests,
as owning its proportionate share of the 25%-owned subsidiarys assets and receiving its
proportionate share of the 25%-owned subsidiarys income.
If we were a PFIC for any taxable year and any of our subsidiaries or other entities in which
we own equity interests were also a PFIC (Lower-tier PFICs), U.S. Holders would be deemed to own
their proportionate share of the Lower-tier PFICs and would be subject to U.S. federal income tax
according to the rules described below on (i) certain distributions by a Lower-tier PFIC and (ii) a
disposition of shares of a lower-tier PFIC, in each case as if the U.S. Holders held such shares
directly, even though the U.S. Holders had not received the proceeds of those distributions or
dispositions.
It is possible that we may be a PFIC in the current or any future taxable year due to our
asset or income composition or the value of our assets. The value of our assets may depend on the
market value of our equity, which may fluctuate considerably given that the market prices of
Internet and online game companies historically have been volatile. If we were a PFIC for any
taxable year during which a U.S. Holder held Class A ordinary shares or ADSs, the U.S. Holder would
be subject to special tax rules discussed below.
If we were a PFIC for any taxable year during which a U.S. Holder held our Class A ordinary
shares or ADSs, the U.S. Holder may be subject to adverse tax consequences. Generally, gain
recognized upon a disposition (including, under certain circumstances, a pledge) of Class A
ordinary shares or ADSs by the U.S. Holder would be allocated ratably over the U.S. Holders
holding period for such shares or ADSs. The amounts allocated to the taxable year of disposition
and to years before we became a PFIC would be taxed as ordinary income. The amount allocated to
each other taxable year would be subject to tax at the highest tax rate in effect for that taxable
year for individuals or corporations, as appropriate, and an interest charge would be imposed on
the tax attributable to the allocated amounts. Further, to the extent that any distribution
received by a U.S. Holder on Class A ordinary shares or ADSs exceeds 125% of the average of the
annual distributions on such shares or ADSs received during the preceding three years or the
U.S. Holders holding period, whichever is shorter, that distribution would be subject to taxation
in the same manner as gain, described immediately above.
Alternatively, if we were a PFIC and if the Class A ordinary shares or ADSs were regularly
traded on a qualified exchange, a U.S. Holder could make a mark-to-market election that would
result in tax treatment different from the general tax treatment for PFICs described above. The
Class A ordinary shares or ADSs would be treated as regularly traded in any calendar year in
which more than a de minimis quantity of the Class A ordinary shares or ADSs, as the case may be,
were traded on a qualified exchange on at least 15 days during each calendar quarter. The NASDAQ is
a qualified exchange for this purpose.
If a U.S. Holder makes the mark-to-market election, the U.S. Holder generally will recognize
as ordinary income any excess of the fair market value of the Class A ordinary shares or ADSs at
the end of each taxable year over their adjusted tax basis, and will recognize an ordinary loss in
respect of any excess of the adjusted tax basis of the Class A ordinary shares or ADSs over their
fair market value at the end of the taxable year (but only to the extent of the net amount of
income previously included as a result of the mark-to-market election). If a U.S. Holder makes the
election, the holders tax basis in the Class A ordinary shares or ADSs will be adjusted to reflect
these income or loss amounts. Any gain recognized on the sale or other disposition of Class A
ordinary shares or ADSs in a year when we are a PFIC will be treated as ordinary income and any
loss will be treated as an ordinary loss (but only to the extent of the net amount of income
previously included as a result of the mark-to-market election).
We do not intend to provide information necessary for U.S. Holders to make qualified electing
fund elections, which if available would result in tax treatment different from the general tax
treatment for PFICs described above (which alternative tax treatment could, in certain
circumstances, mitigate the adverse tax consequences of holding shares in a PFIC).
If we were a PFIC for any year during which a U.S. Holder held our Class A ordinary shares or
ADSs, we would generally continue to be treated as a PFIC with respect to that U.S. Holder for all
succeeding years during which the U.S. Holder held the Class A ordinary shares or ADSs, even if we
ceased to meet the threshold requirements for PFIC status. In addition, if we were a PFIC or, with
respect to a particular U.S. Holder, were treated as a PFIC for the taxable year in which we paid a
dividend or for the prior taxable year, the 15% dividend rate discussed above with respect to
dividends paid to certain non-corporate U.S. Holders would not apply.
If a U.S. Holder owns Class A ordinary shares or ADSs during any year in which we are a PFIC,
the U.S. Holder generally must file an IRS Form 8621 with respect to us, generally with the
U.S. Holders federal income tax return for that year.
U.S. Holders should consult their tax advisers regarding the determination of whether we are a
PFIC and the potential application of the PFIC rules.
80
Information Reporting and Backup Withholding. Payments of dividends with respect to our
Class A ordinary shares or ADSs and sales proceeds from the sale, exchange or redemption of our
Class A ordinary shares or ADSs that are made within the United States or through certain
U.S.-related financial intermediaries generally are subject to information reporting, and may be
subject to backup withholding, unless (i) the U.S. Holder is a corporation or other exempt
recipient or (ii) in the case of backup withholding, the U.S. Holder provides a correct taxpayer
identification number and certifies that it is not subject to backup withholding.
Backup withholding is not an additional tax. The amount of any backup withholding from a
payment to a U.S. Holder will be allowed as a credit against the holders U.S. federal income tax
liability, if any, and may entitle it to a refund, provided that the required information is
timely furnished to the Internal Revenue Service.
F. DIVIDENDS AND PAYING AGENTS
Not applicable
G. STATEMENTS BY EXPERTS
Not applicable
H. DOCUMENTS ON DISPLAY
We have filed with the SEC a registration statement on Form F-1, a registration statement on
Form F-6, a registration statement on Form S-8, and a registration statement on Form 8-A,
including relevant exhibits and schedules under the Securities Act, covering the ordinary shares
represented by the ADSs, as well as the ADSs. You should refer to our registration statements and
their exhibits and schedules if you would like to find out more about us and about the ADSs and
the ordinary shares represented by the ADSs. This annual report summarizes material provisions of
contracts and other documents to which we refer you. Since the annual report may not contain all
the information that you may find important, you should review a full text of these documents.
The SEC also maintains a website that contains reports, proxy statements and other
information about issuers, such as us, who file electronically with the SEC. The address of that
site is http://www.sec.gov. The information on that website is not a part of this annual report.
We will furnish to JPMorgan Chase Bank, or JPMorgan, as depositary of our ADSs, copies of our
annual report. When the depositary receives these reports, it will upon our request promptly
provide them to all holders of record of ADSs. We will also furnish the depositary with all notices
of shareholders meetings and other reports and communications in English that we make available to
our shareholders. The depositary will make these notices, reports and communications available to
holders of ADSs and will upon our request mail to all holders of record of ADSs the information
contained in any notice of a shareholders meeting it receives.
We are subject to periodic reporting and other informational requirements of the Exchange Act
as applicable to foreign private issuers. Accordingly, we will be required to file reports,
including annual reports on Form 20-F, and other information with the SEC. As a foreign private
issuer, we are exempt from the rules of the Exchange Act prescribing the furnishing and content of
proxy statements to shareholders. The registration statements, reports and other information so
filed can be inspected and copied at the public reference facilities maintained by the SEC at Room
1580, 100 F Street, N.E., Washington D.C. 20549. You can request copies of these documents upon
payment of a duplicating fee, by writing to the SEC. Please call the SEC at 1- 800-SEC-0330 for
further information on the operation of the public reference rooms.
I. SUBSIDIARY INFORMATION
Not applicable
Item 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk
Our exposure to the interest rate risk primarily relates to the interest income generated by
excess cash invested in demand deposits, investments in fixed deposits with maturities of over
three months and PRC government and PRC corporate bonds. We have not used derivative financial
instruments in our investment portfolio. Interest earning instruments carry a degree of interest
rate risk. However, our future interest income may fall short of expectations due to changes in
market interest rates. Based on our interest earning instruments in 2009, a 10% change in the
interest rate would result in an increase or decrease of RMB2.6 million (US$0.4 million) of our
total amount of interest income in 2009.
81
Foreign Currency Risk
Substantially all our revenues and expenses are denominated in Renminbi, with a portion in
U.S. dollar and Korean Won. We have not had any material foreign exchange gains or losses. Although
in general, our exposure to foreign exchange risks should be limited, the value of your investment
in our ADSs will be affected by the foreign exchange rate between U.S. dollars and Renminbi because
the value of our business is effectively denominated in Renminbi, while the ADSs will be traded in
U.S. dollars. Furthermore, a decline in the value of the Renminbi could reduce the U.S. dollar
equivalent of the value of the earnings from, and our investments in, our PRC companies. Based on
the amount of our cash and cash equivalents as of December 31, 2009, and without taking into
consideration the amount of anticipated net proceeds that we received from our initial public
offering, a 10% change in the exchange rates between the Renminbi and the U.S. dollar would result
in an increase or decrease of RMB37.3 million (US$5.5 million) of our total amount of cash and cash
equivalents.
In China, very limited hedging transactions are available 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, other than Shenqgus loan of US$102.5
million which is secured by a cash deposit of RMB702.1 million. 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. See Item 10, Additional
Information Exchange Controls.
Item 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
According to our Deposit Agreement with the ADS depositary, JPMorgan, holders of our ADSs may
have to pay to JPMorgan, either directly or indirectly, fees or charges up to the amounts set forth
below:
|
|
|
Service |
|
Fee |
Issuance or delivery of an ADR, including
issuances against deposit of shares, issuances
in respect of distributions, rights or other
distributions, surrendering of an ADR for
delivery of a Class A ordinary share,
cancellation of an ADR, including issuance,
delivery, surrendering or cancellation in
connection with share distributions, stock
splits, rights and mergers.
|
|
US$5.00 for each 100 ADRs (or portion thereof), to
be paid to the depositary. |
Any cash distribution (other than cash dividend).
|
|
Up to $0.05 per ADS. |
Depositary services
|
|
$0.02 per ADS. |
A fee equivalent to the fee that would have been
payable if securities distributed to you had
been shares and the shares had been deposited
for issuance of ADSs
|
|
Distribution of securities distributed to holders of
deposited securities which are distributed by the
depositary to ADS holders |
Registration or transfer fees
|
|
Transfer and registration of shares on our share
register to or from the name of the depositary or its
agent when you deposit or withdraw shares |
Expenses of the depositary
|
|
Cable, telex and facsimile transmissions
Converting foreign currency to U.S. dollars |
JPMorgan, as depositary, has agreed to reimburse certain reasonable expenses related to our
ADR program and incurred by us in connection with the program, subject to a limit based upon the
amount of fees collected by JPMorgan from ADR holders.
PART II
Item 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
Not applicable
Item 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS
A. D. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS
Not applicable
E. USE OF PROCEEDS
Not applicable
82
Item 15. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this annual report, our principal executive officer and
principal financial officer have performed an evaluation of the effectiveness of our disclosure
controls and procedures as defined and required under Rules 13a-15(e) and 15d-15(e) of the
Securities Exchange Act of 1934, as amended. Based upon that evaluation, they have concluded that
our disclosure controls and procedures were effective in ensuring that the information required to
be disclosed by us in the reports that we file and furnish under the Securities Exchange Act of
1934, as amended, is recorded, processed, summarized and reported, within the time periods
specified in by the Securities and Exchange Commissions rules and regulations, and that the
information required to be disclosed by us in the reports that we file or submit under the Exchange
Act is accumulated and communicated with our management, including our chief executive officer and
our chief financial officer, to allow timely decisions regarding required disclosure.
Managements Report on Internal Control over Financial Reporting
This annual report does not include a report of managements assessment regarding internal
control over financial reporting or an attestation report of our companys registered public
accounting firm due to a transition period established by rules of the SEC for newly public
companies.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting during 2009 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 of directors has determined that Mr. Lai Xing Cai qualifies as an Audit Committee
Financial Expert as defined by the applicable rules of the SEC.
Our board of directors has determined that all of the members of our audit committee are
independent as such term is defined by Rule 5605(a)(2) of the NASDAQ Listing Rules.
Item 16B. CODE OF ETHICS
Our board of directors has adopted a code of ethics, which is applicable to our senior
executive and financial officers. In addition, our board of directors has adopted a code of
conduct, which is applicable to all of our directors, officers and employees. We have made our
code of ethics and our code of conduct publicly available on our website at www.shandagames.com.
Item 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The following table sets forth the aggregate fees by categories specified below in connection
with certain professional services rendered by our principal external auditors for the periods
indicated. We did not pay any other fees to our principal external auditors during the periods
indicated below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31, |
|
|
|
2008 |
|
|
2009 |
|
|
|
RMB |
|
|
RMB |
|
|
US$ |
|
|
|
(in thousands) |
|
Audit fees(1) |
|
|
|
|
|
|
11,540 |
|
|
|
1,690 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
|
11,540 |
|
|
|
1,690 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Audit fees means the aggregate fees in each of the fiscal years listed for
professional services rendered by our principal auditors for the audit of our annual consolidated
financial statements or services that are normally provided by the auditors in connection with
statutory and regulatory filings or engagements. Services comprising the fees disclosed under this
category also involve principally limited reviews performed on our consolidated financial
statements and the audits of the annual financial statements of our subsidiaries and affiliated
companies. |
Item 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
Not applicable
83
Item 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS
On March 1, 2010, we announced that our board of directors had authorized us to repurchase up
to $150 million worth of our outstanding American Depositary Shares representing the ordinary
shares of the Company from time to time over the next twenty four (24) months, depending on market
conditions, share price and other factors, as well as subject to the relevant rules under United
States securities regulations.
Item 16F. CHANGE IN REGISTRANTS CERTIFYING ACCOUNTANT
Not applicable
Item 16G. CORPORATE GOVERNANCE
Because Shanda Interactive owns more than 50% of the total voting rights in our company, we
are a controlled company under the NASDAQ Listing Rules. As a controlled company, we are relying
on the controlled company exemption under the NASDAQ Listing Rules and are not obligated to
comply with certain NASDAQ corporate governance requirements, including the requirements:
|
|
|
that a majority of our board of directors consist of independent directors; |
|
|
|
that we have a corporate governance and nominating committee that is composed entirely of
independent directors with a written charter addressing the committees purpose and
responsibilities; |
|
|
|
that we have a compensation committee that is composed entirely of independent directors
with a written charter addressing the committees purpose and responsibilities; and |
|
|
|
for an annual performance evaluation of the nominating and governance committee and the
compensation committee. |
We are not required to and will not voluntarily meet these requirements. As a result of our
use of the controlled company exemptions, you will not have the same protection afforded to
shareholders of companies that are subject to all of NASDAQs corporate governance requirements.
PART III
Item 17. FINANCIAL STATEMENTS
Not applicable
Item 18. FINANCIAL STATEMENTS
The consolidated financial statements for the Company and its subsidiaries are included at
the end of this annual report.
84
Item 19. EXHIBITS
|
|
|
|
|
Number |
|
Description |
|
|
1.1 |
|
|
Amended and Restated Memorandum and Articles of Association of
Shanda Games Limited (incorporated by reference to Exhibit 3.1 to
our Registration Statement on Form F-1 (file no. 333-161708) filed
with the Securities and Exchange Commission on September 30, 2009). |
|
|
|
|
|
|
2.1 |
|
|
Specimen Certificate for Class A Ordinary Shares (incorporated by
reference to Exhibit 4.1 to our Registration Statement on Form F-1
(file no. 333-161708) filed with the Securities and Exchange
Commission on September 3, 2009). |
|
|
|
|
|
|
2.2 |
|
|
Specimen of American Depositary Receipt (incorporated by reference
to Exhibit A to Exhibit 1 to our Registration Statement on Form F-6
(file no. 333-161901) filed with the Securities and Exchange
Commission on September 14, 2009). |
|
|
|
|
|
|
2.3 |
|
|
Form of Deposit Agreement (incorporated by reference to Exhibit 1
to the Form F-6 (file no. 333-161901) filed with the Securities and
Exchange Commission on September 14, 2009). |
|
|
|
|
|
|
4.1 |
|
|
Amended and Restated 2008 Equity Compensation Plan (incorporated by
references to Exhibit 10.1 to our Registration Statement on Form
F-1 (file no. 333-161708) filed with the Securities and Exchange
Commission on September 3, 2009). |
|
|
|
|
|
|
4.2 |
|
|
Form of Indemnification Agreement with the Registrants directors
and officers (incorporated by references to Exhibit 10.2 to our
Registration Statement on Form F-1 (file no. 333-161708) filed with
the Securities and Exchange Commission on September 3, 2009). |
|
|
|
|
|
|
4.3 |
|
|
Form of Employment Agreement (incorporated by references to Exhibit
10.3 to our Registration Statement on Form F-1 (file no.
333-161708) filed with the Securities and Exchange Commission on
September 3, 2009). |
|
|
|
|
|
|
4.4 |
|
|
Master Separation Agreement between Shanda Interactive
Entertainment Limited and Shanda Games Limited dated July 1, 2008
(incorporated by references to Exhibit 10.4 to our Registration
Statement on Form F-1 (file no. 333-161708) filed with the
Securities and Exchange Commission on September 3, 2009). |
|
|
|
|
|
|
4.5 |
|
|
English translation of Amended and Restated Cooperation Agreement
among Shanghai Shanda Networking Co., Ltd., Nanjing Shanda
Networking Co., Ltd., Shanghai Shulong Technology Development Co.,
Ltd., Nanjing Shulong Computer Technology Co., Ltd. and Shanghai
Shulong Computer Technology Co., Ltd. dated September 10, 2009
(incorporated by references to Exhibit 10.5 to Amendment No. 1 to
our Registration Statement on Form F-1 (file no. 333-161708) filed
with the Securities and Exchange Commission on September 14, 2009). |
|
|
|
|
|
|
4.6 |
|
|
English translation of Domain Names and Trademarks License
Agreement between Shanda Computer (Shanghai) Co., Ltd. and Shengqu
Information Technology (Shanghai) Co., Ltd. dated July 1, 2008
(incorporated by references to Exhibit 10.6 to our Registration
Statement on Form F-1 (file no. 333-161708) filed with the
Securities and Exchange Commission on September 3, 2009). |
|
|
|
|
|
|
4.7 |
|
|
Amended and Restated Non-Compete and Non-Solicitation Agreement
between Shanda Interactive Entertainment Limited and Shanda Games
Limited dated September 10, 2009 (incorporated by references to
Exhibit 10.7 to Amendment No. 1 to our Registration Statement on
Form F-1 (file no. 333-161708) filed with the Securities and
Exchange Commission on September 14, 2009). |
|
|
|
|
|
|
4.8 |
|
|
English translation of Amended and Restated Sales Agency Agreement
among Shanghai Shengfutong Electronic Commerce Co., Ltd., Shanghai
Shulong Technology Development Co., Ltd., Nanjing Shulong Computer
Technology Development Co., Ltd. and Shanghai Shulong Computer
Technology Development Co., Ltd. dated September 10, 2009
(incorporated by references to Exhibit 10.7 to Amendment No. 1 to
our Registration Statement on Form F-1 (file no. 333-161708) filed
with the Securities and Exchange Commission on September 14, 2009). |
|
|
|
|
|
|
4.9 |
|
|
English translation of Framework Agreement on Disposition of Shanda
Point Cards Inventories among Shanghai Shengfutong Electronic
Commerce Co., Ltd., Shanghai Shanda Networking Co., Ltd., Nanjing
Shanda Networking Development Co., Ltd., Hangzhou Bianfeng
Networking Technology Co., Ltd., Shanghai Shulong Technology Co.,
Ltd., Nanjing Shulong Computer Technology Co., Ltd. and Shanghai
Shulong Computer Technology Co., Ltd. dated July 1, 2008
(incorporated by references to Exhibit 10.9 to our Registration
Statement on Form F-1 (file no. 333-161708) filed with the
Securities and Exchange Commission on September 3, 2009). |
|
|
|
|
|
|
4.10 |
|
|
English translation of Share Entrustment Agreement among Dongxu
Wang, Yingfeng Zhang and Shengqu Information Technology (Shanghai)
Co., Ltd. dated July 1, 2008 (incorporated by references to Exhibit
10.10 to our Registration Statement on Form F-1 (file no.
333-161708) filed with the Securities and Exchange Commission on
September 3, 2009). |
85
|
|
|
|
|
Number |
|
Description |
|
|
4.11 |
|
|
English translation of Share Pledge Agreement among Dongxu Wang,
Yingfeng Zhang and Shengqu Information Technology (Shanghai) Co.,
Ltd. dated July 1, 2008 (incorporated by references to Exhibit
10.11 to our Registration Statement on Form F-1 (file no.
333-161708) filed with the Securities and Exchange Commission on
September 3, 2009). |
|
|
|
|
|
|
4.12 |
|
|
English translation of Power of Attorney to Business Operating
Agreement executed by Dongxu Wang in favor of Shengqu Information
Technology (Shanghai) Co., Ltd. dated July 1, 2008 (incorporated by
references to Exhibit 10.12 to our Registration Statement on Form
F-1 (file no. 333-161708) filed with the Securities and Exchange
Commission on September 3, 2009). |
|
|
|
|
|
|
4.13 |
|
|
English translation of Power of Attorney to Business Operating
Agreement executed by Yingfeng Zhang in favor of Shengqu
Information Technology (Shanghai) Co., Ltd. dated July 1, 2008
(incorporated by references to Exhibit 10.13 to our Registration
Statement on Form F-1 (file no. 333-161708) filed with the
Securities and Exchange Commission on September 3, 2009). |
|
|
|
|
|
|
4.14 |
|
|
English translation of Share Disposition Agreement among Dongxu
Wang, Yingfeng Zhang, Shengqu Information Technology (Shanghai)
Co., Ltd. and Shanghai Shulong Technology Development Co., Ltd.
dated July 1, 2008 (incorporated by references to Exhibit 10.14 to
our Registration Statement on Form F-1 (file no. 333-161708) filed
with the Securities and Exchange Commission on September 3, 2009). |
|
|
|
|
|
|
4.15 |
|
|
English translation of Business Operation Agreement among Dongxu
Wang, Yingfeng Zhang, Shengqu Information Technology (Shanghai)
Co., Ltd. and Shanghai Shulong Technology Development Co., Ltd.
dated July 1, 2008 (incorporated by references to Exhibit 10.15 to
our Registration Statement on Form F-1 (file no. 333-161708) filed
with the Securities and Exchange Commission on September 3, 2009). |
|
|
|
|
|
|
4.16 |
|
|
English translation of Exclusive Consulting and Service Agreement
between Shengqu Information Technology (Shanghai) Co., Ltd. and
Shanghai Shulong Technology Development Co., Ltd. dated July 1,
2008 (incorporated by references to Exhibit 10.16 to our
Registration Statement on Form F-1 (file no. 333-161708) filed with
the Securities and Exchange Commission on September 3, 2009). |
86
|
|
|
|
|
Number |
|
Description |
|
|
4.17 |
|
|
English translation of Loan Agreement between Shengqu Information
Technology (Shanghai) Co., Ltd. and Dongxu Wang dated July 1, 2008
(incorporated by references to Exhibit 10.17 to our Registration
Statement on Form F-1 (file no. 333-161708) filed with the
Securities and Exchange Commission on September 3, 2009). |
|
|
|
|
|
|
4.18 |
|
|
English translation of Loan Agreement between Shengqu Information
Technology (Shanghai) Co., Ltd. and Yingfeng Zhang dated July 1,
2008 (incorporated by references to Exhibit 10.18 to our
Registration Statement on Form F-1 (file no. 333-161708) filed with
the Securities and Exchange Commission on September 3, 2009). |
|
|
|
|
|
|
4.19 |
|
|
Mir II License Agreement among Actoz Soft Co., Ltd., Shanghai
Shanda Internet Development Co., Ltd. and Shanghai Pudong New Area
Imp. & Exp. Corp. dated June 29, 2001 (incorporated by references
to Exhibit 10.19 to our Registration Statement on Form F-1 (file
no. 333-161708) filed with the Securities and Exchange Commission
on September 3, 2009). |
|
|
|
|
|
|
4.20 |
|
|
Mir II Amendment Agreement among Actoz Soft Co., Ltd., Shanghai
Shanda Internet Development Co., Ltd., and Shanghai Pudong Imp. &
Exp. Co., Ltd. dated August 19, 2003 (incorporated by references to
Exhibit 10.20 to our Registration Statement on Form F-1 (file no.
333-161708) filed with the Securities and Exchange Commission on
September 3, 2009) |
|
|
|
|
|
|
4.21 |
|
|
Mir II Extension Agreement among Actoz Soft Co., Ltd., Shanghai
Shanda Internet Networking Co., Ltd. and Shanghai Pudong Imp. &
Exp. Co., Ltd. dated September 22, 2005 (incorporated by references
to Exhibit 10.21 to Amendment No. 1 to our Registration Statement
on Form F-1 (file no. 333-161708) filed with the Securities and
Exchange Commission on September 14, 2009). |
|
|
|
|
|
|
4.22 |
|
|
Mir II Extension Agreement among Actoz Soft Co., Ltd., Shengqu
Information Technology (Shanghai) Co., Ltd. and Shanghai Pudong IMP
& EXP Co., Ltd. dated November 26, 2008 (incorporated by references
to Exhibit 10.22 to Amendment No. 1 to our Registration Statement
on Form F-1 (file no. 333-161708) filed with the Securities and
Exchange Commission on September 14, 2009) |
|
|
|
|
|
|
4.23 |
|
|
Assignment Agreement of Mir II among Actoz Soft Co., Ltd, Shanghai
Shanda Internet Development Co., Ltd. and Shengqu Information
Technology (Shanghai) Co., Ltd. dated July 1, 2008 (incorporated by
references to Exhibit 10.22 to our Registration Statement on Form
F-1 (file no. 333-161708) filed with the Securities and Exchange
Commission on September 3, 2009) |
|
|
|
|
|
|
4.24 |
|
|
Share Purchase Agreement between Shanda Interactive Entertainment
Limited and Shanda Games Korean Investment Limited dated May 2009
(incorporated by references to Exhibit 10.23 to our Registration
Statement on Form F-1 (file no. 333-161708) filed with the
Securities and Exchange Commission on September 3, 2009) |
|
|
|
|
|
|
8.1 |
* |
|
List of Subsidiaries |
|
|
|
|
|
|
11.1 |
|
|
Code of Ethics (incorporated by references to Exhibit 99.11 to our
Registration Statement on Form F-1 (file no. 333-161708) filed with
the Securities and Exchange Commission on September 3, 2009). |
|
|
|
|
|
|
12.1 |
* |
|
Certification of Chief Executive Officer Required by Rule 13a-14(a). |
|
|
|
|
|
|
12.2 |
* |
|
Certification of Chief Financial Officer Required by Rule 13a-14(a). |
|
|
|
|
|
|
13.1 |
* |
|
Certification of Chief Executive Officer Required by Rule
13(a)-14(b) and Section 1350 of Chapter 63 of Title 18 of the
United States Code. |
|
|
|
|
|
|
13.2 |
* |
|
Certification of Chief Financial Officer Required by Rule
13(a)-14(b) and Section 1350 of Chapter 63 of Title 18 of the
United States Code. |
|
|
|
|
|
|
15.1 |
* |
|
Consent of PricewaterhouseCoopers Zhong Tian CPAs Limited Company |
|
|
|
|
|
|
15.2 |
* |
|
Consent of Jade & Fountain PRC Lawyers |
87
SIGNATURE
The registrant hereby certifies that it meets all of the requirements for filing its annual
report on Form 20-F and that it has duly caused and authorized the undersigned to sign this annual
report on its behalf.
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|
|
SHANDA GAMES LIMITED
|
|
|
By: |
/s/ Qunzhao Tan
|
|
|
|
Name: |
Qunzhao Tan |
|
|
|
Title: |
Chairman and Chief Executive Officer |
|
Date: April 30, 2010
88
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
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Page |
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F-2 |
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F-3 |
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F-4 |
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F-5 |
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F-6 |
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F-7 |
|
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF
SHANDA GAMES LIMITED:
In our opinion, the accompanying consolidated balance sheets and the related consolidated
statements of operations and comprehensive income, changes in shareholders equity and cash flows
present fairly, in all material respects, the financial position of Shanda Games Limited (the
Company) and its subsidiaries as of December 31, 2008 and 2009 and the results of their
operations and their 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. These
financial statements are the responsibility of the Companys management. Our responsibility is to
express an opinion on these financial statements based on our audits. We conducted our audits of
these financial statements in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audits 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, assessing the accounting principles used and significant
estimates made by management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
As discussed in Note 2 to the consolidated financial statements, in 2009 the Company changed the
manner in which it accounts for business combinations and noncontrolling interest in consolidated
subsidiaries.
PricewaterhouseCoopers Zhong Tian CPAs Limited Company
Shanghai, Peoples Republic of China
April 30, 2010
F-2
SHANDA GAMES LIMITED
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(Amounts expressed in thousands, except share and per share data and where otherwise stated)
|
|
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For the Years Ended December 31, |
|
|
|
Notes |
|
2007 |
|
|
2008 |
|
|
2009 |
|
|
2009 |
|
|
|
|
|
RMB |
|
|
RMB |
|
|
RMB |
|
|
US$ (Note 2(5)) |
|
|
|
Net revenues: |
|
2(18) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MMORPG revenues |
|
|
|
|
2,016,111 |
|
|
|
2,987,823 |
|
|
|
4,476,699 |
|
|
|
655,840 |
|
Advanced casual game revenues |
|
|
|
|
280,356 |
|
|
|
358,891 |
|
|
|
310,449 |
|
|
|
45,481 |
|
Other revenues |
|
|
|
|
26,331 |
|
|
|
30,042 |
|
|
|
19,557 |
|
|
|
2,865 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenues |
|
|
|
|
2,322,798 |
|
|
|
3,376,756 |
|
|
|
4,806,705 |
|
|
|
704,186 |
|
|
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|
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|
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|
|
|
|
|
|
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Cost of revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Third parties |
|
2(21) |
|
|
(491,995 |
) |
|
|
(768,241 |
) |
|
|
(1,049,281 |
) |
|
|
(153,721 |
) |
Related parties |
|
2(21),18 |
|
|
(769,145 |
) |
|
|
(721,119 |
) |
|
|
(884,193 |
) |
|
|
(129,535 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenues |
|
|
|
|
(1,261,140 |
) |
|
|
(1,489,360 |
) |
|
|
(1,933,474 |
) |
|
|
(283,256 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
|
|
1,061,658 |
|
|
|
1,887,396 |
|
|
|
2,873,231 |
|
|
|
420,930 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
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|
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|
|
|
|
|
|
|
|
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|
|
|
|
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Product development |
|
2(23) |
|
|
(136,355 |
) |
|
|
(238,786 |
) |
|
|
(339,754 |
) |
|
|
(49,774 |
) |
Sales and marketing |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Third parties |
|
2(24) |
|
|
(125,426 |
) |
|
|
(124,484 |
) |
|
|
(206,739 |
) |
|
|
(30,287 |
) |
Related parties |
|
2(24),18 |
|
|
|
|
|
|
(80,057 |
) |
|
|
(226,239 |
) |
|
|
(33,144 |
) |
General and administrative |
|
2(22) |
|
|
(175,177 |
) |
|
|
(287,224 |
) |
|
|
(366,136 |
) |
|
|
(53,639 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
|
|
(436,958 |
) |
|
|
(730,551 |
) |
|
|
(1,138,868 |
) |
|
|
(166,844 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations |
|
|
|
|
624,700 |
|
|
|
1,156,845 |
|
|
|
1,734,363 |
|
|
|
254,086 |
|
Interest income |
|
|
|
|
26,224 |
|
|
|
33,436 |
|
|
|
26,262 |
|
|
|
3,847 |
|
Investment income |
|
|
|
|
32 |
|
|
|
|
|
|
|
214 |
|
|
|
31 |
|
Other income, net |
|
5 |
|
|
28,711 |
|
|
|
6,118 |
|
|
|
169,444 |
|
|
|
24,824 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income tax expenses and equity in earning (loss) of
affiliated companies |
|
|
|
|
679,667 |
|
|
|
1,196,399 |
|
|
|
1,930,283 |
|
|
|
282,788 |
|
Income tax expenses |
|
6 |
|
|
(67,072 |
) |
|
|
(249,909 |
) |
|
|
(428,676 |
) |
|
|
(62,801 |
) |
Equity in earning (loss) of affiliated companies |
|
10 |
|
|
(13,554 |
) |
|
|
918 |
|
|
|
(30,071 |
) |
|
|
(4,405 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
599,041 |
|
|
|
947,408 |
|
|
|
1,471,536 |
|
|
|
215,582 |
|
Less: Net income attributable to non-controlling interest |
|
|
|
|
(7,141 |
) |
|
|
(11,924 |
) |
|
|
(18,564 |
) |
|
|
(2,720 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to Shanda Games Limited |
|
|
|
|
591,900 |
|
|
|
935,484 |
|
|
|
1,452,972 |
|
|
|
212,862 |
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Net income |
|
|
|
|
599,041 |
|
|
|
947,408 |
|
|
|
1,471,536 |
|
|
|
215,582 |
|
Other comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain of marketable securities |
|
|
|
|
|
|
|
|
|
|
|
|
6,389 |
|
|
|
936 |
|
Currency translation adjustments of the Company |
|
|
|
|
|
|
|
|
|
|
|
|
183 |
|
|
|
27 |
|
Currency translation adjustments of an affiliated company/a subsidiary |
|
2(4) |
|
|
(26,374 |
) |
|
|
(144,702 |
) |
|
|
42,642 |
|
|
|
6,247 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
|
|
|
572,667 |
|
|
|
802,706 |
|
|
|
1,520,750 |
|
|
|
222,792 |
|
Comprehensive (income)/loss attributable to non-controlling interest |
|
|
|
|
4,755 |
|
|
|
60,282 |
|
|
|
(39,569 |
) |
|
|
(5,797 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income attributable to Shanda Games Limited |
|
|
|
|
577,422 |
|
|
|
862,988 |
|
|
|
1,481,181 |
|
|
|
216,995 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per ordinary share |
|
2(30),7 |
|
|
|
|
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|
|
|
|
|
|
|
|
Basic |
|
|
|
|
1.08 |
|
|
|
1.70 |
|
|
|
2.61 |
|
|
|
0.38 |
|
|
|
|
|
|
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|
|
|
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|
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|
Diluted |
|
|
|
|
1.08 |
|
|
|
1.70 |
|
|
|
2.60 |
|
|
|
0.38 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average ordinary shares used in per share calculation |
|
7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
|
|
550,000,000 |
|
|
|
550,000,000 |
|
|
|
556,575,353 |
|
|
|
556,575,353 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
|
|
|
550,000,000 |
|
|
|
550,000,000 |
|
|
|
559,600,871 |
|
|
|
559,600,871 |
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share-based compensation included in: |
|
2(25), 16 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue |
|
|
|
|
(266 |
) |
|
|
(858 |
) |
|
|
(1,175 |
) |
|
|
(172 |
) |
Product development |
|
|
|
|
(842 |
) |
|
|
(1,866 |
) |
|
|
(2,113 |
) |
|
|
(310 |
) |
Sales and marketing |
|
|
|
|
|
|
|
|
(1,001 |
) |
|
|
(948 |
) |
|
|
(139 |
) |
General and administrative |
|
|
|
|
(16,387 |
) |
|
|
(17,065 |
) |
|
|
(121,575 |
) |
|
|
(17,810 |
) |
The accompanying notes are an integral part of these financial statements.
F-3
SHANDA GAMES LIMITED
CONSOLIDATED BALANCE SHEETS
(Amounts expressed in thousands, except share and per share data)
|
|
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|
|
|
|
|
|
|
|
Notes |
|
December 31, 2008 |
|
|
December 31, 2009 |
|
|
December 31, 2009 |
|
|
|
|
|
RMB |
|
|
RMB |
|
|
US$ (Note 2(5)) |
|
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
2(6),8 |
|
|
628,891 |
|
|
|
1,799,151 |
|
|
|
263,577 |
|
Restricted cash |
|
2(7) |
|
|
|
|
|
|
54,471 |
|
|
|
7,980 |
|
Short-term investments |
|
2(8) |
|
|
234,578 |
|
|
|
757,955 |
|
|
|
111,041 |
|
Marketable securities |
|
2(9) |
|
|
2,830 |
|
|
|
9,219 |
|
|
|
1,351 |
|
Accounts receivable, net of allowance for doubtful accounts |
|
2(10),9 |
|
|
7,285 |
|
|
|
18,503 |
|
|
|
2,711 |
|
Accounts receivable due from related parties |
|
18 |
|
|
433,303 |
|
|
|
405,932 |
|
|
|
59,469 |
|
Deferred licensing fees and related costs |
|
2(20) |
|
|
51,310 |
|
|
|
53,550 |
|
|
|
7,845 |
|
Prepayments and other current assets |
|
|
|
|
48,829 |
|
|
|
112,794 |
|
|
|
16,525 |
|
Other receivables due from related parties |
|
18 |
|
|
105,269 |
|
|
|
6,184 |
|
|
|
906 |
|
Deferred tax assets |
|
6 |
|
|
70,398 |
|
|
|
79,575 |
|
|
|
11,658 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets |
|
|
|
|
1,582,693 |
|
|
|
3,297,334 |
|
|
|
483,063 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment in affiliated companies |
|
2(11),10 |
|
|
23,521 |
|
|
|
8,703 |
|
|
|
1,275 |
|
Property and equipment |
|
2(12),11 |
|
|
92,985 |
|
|
|
139,834 |
|
|
|
20,486 |
|
Intangible assets |
|
2(13),12 |
|
|
409,010 |
|
|
|
517,248 |
|
|
|
75,777 |
|
Goodwill |
|
2(14),13 |
|
|
116,543 |
|
|
|
170,075 |
|
|
|
24,916 |
|
Long-term rental deposits |
|
|
|
|
50,423 |
|
|
|
64,759 |
|
|
|
9,487 |
|
Other long term assets |
|
2(15) |
|
|
134,210 |
|
|
|
113,400 |
|
|
|
16,613 |
|
Non-current deferred tax assets |
|
6 |
|
|
34,727 |
|
|
|
16,091 |
|
|
|
2,357 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
|
|
|
2,444,112 |
|
|
|
4,327,444 |
|
|
|
633,974 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term borrowings |
|
|
|
|
|
|
|
|
15,000 |
|
|
|
2,198 |
|
Accounts payable |
|
|
|
|
19,773 |
|
|
|
27,315 |
|
|
|
4,002 |
|
Accounts payable due to related parties |
|
18 |
|
|
75,414 |
|
|
|
70,770 |
|
|
|
10,368 |
|
Licensing fees payable |
|
|
|
|
203,156 |
|
|
|
224,497 |
|
|
|
32,889 |
|
Taxes payable |
|
|
|
|
87,980 |
|
|
|
142,536 |
|
|
|
20,882 |
|
Deferred revenue |
|
2(19) |
|
|
329,688 |
|
|
|
250,934 |
|
|
|
36,762 |
|
Other payables and accruals |
|
14 |
|
|
155,363 |
|
|
|
433,442 |
|
|
|
63,500 |
|
Other payables due to related parties |
|
18 |
|
|
262,673 |
|
|
|
19,937 |
|
|
|
2,921 |
|
Deferred tax liabilities |
|
6 |
|
|
43,906 |
|
|
|
76,589 |
|
|
|
11,220 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
|
|
1,177,953 |
|
|
|
1,261,020 |
|
|
|
184,742 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term liabilities |
|
|
|
|
|
|
|
|
6,090 |
|
|
|
892 |
|
Non-current deferred tax liabilities |
|
6 |
|
|
28,520 |
|
|
|
31,244 |
|
|
|
4,577 |
|
Non-current deferred revenue |
|
2(19) |
|
|
1,724 |
|
|
|
3,546 |
|
|
|
519 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
|
|
|
1,208,197 |
|
|
|
1,301,900 |
|
|
|
190,730 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies |
|
21 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class A ordinary shares (US$0.01 par value, 16,000,000,000
shares authorized, nil and 167,000,000 issued and
outstanding as of December 31, 2008 and 2009) |
|
15 |
|
|
|
|
|
|
1,782 |
|
|
|
261 |
|
Class B ordinary shares (US$0.01 par value, 4,000,000,000
shares authorized, 550,000,000 and 409,087,000 issued and
outstanding as of December 31, 2008 and 2009) |
|
15 |
|
|
40,193 |
|
|
|
40,193 |
|
|
|
5,888 |
|
Additional paid-in capital |
|
|
|
|
477,250 |
|
|
|
1,229,189 |
|
|
|
180,077 |
|
Statutory reserves |
|
2(28) |
|
|
113,869 |
|
|
|
127,034 |
|
|
|
18,611 |
|
Accumulated other comprehensive loss |
|
|
|
|
(86,974 |
) |
|
|
(58,765 |
) |
|
|
(8,609 |
) |
Retained earnings |
|
|
|
|
552,644 |
|
|
|
1,480,225 |
|
|
|
216,854 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Shanda Games Limited shareholders equity |
|
|
|
|
1,096,982 |
|
|
|
2,819,658 |
|
|
|
413,082 |
|
Non-controlling interests |
|
|
|
|
138,933 |
|
|
|
205,886 |
|
|
|
30,162 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total equity |
|
|
|
|
1,235,915 |
|
|
|
3,025,544 |
|
|
|
443,244 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and equity |
|
|
|
|
2,444,112 |
|
|
|
4,327,444 |
|
|
|
633,974 |
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these financial statements.
F-4
SHANDA GAMES LIMITED
CONSOLIDATED
STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY
(Amounts expressed in thousands, except share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Shanda |
|
|
|
|
|
|
|
|
|
Ordinary Share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Games Limited |
|
|
|
|
|
|
|
|
|
(US$0.01 Par Value) |
|
|
Additional |
|
|
Statutory |
|
|
Accumulated Other |
|
|
Retained |
|
|
Shareholders |
|
|
Non-controlling |
|
|
|
|
|
|
Number of Shares |
|
|
Par Value |
|
|
Paid-in Capital |
|
|
Reserves |
|
|
Comprehensive Loss |
|
|
Earnings |
|
|
Equity |
|
|
interests |
|
|
Total Equity |
|
|
|
|
|
|
RMB |
|
|
RMB |
|
|
RMB |
|
|
RMB |
|
|
RMB |
|
|
RMB |
|
|
RMB |
|
|
RMB |
|
Balance as of January 1, 2007 |
|
|
550,000,000 |
|
|
|
40,193 |
|
|
|
288,662 |
|
|
|
110,341 |
|
|
|
|
|
|
|
1,222,414 |
|
|
|
1,661,610 |
|
|
|
|
|
|
|
1,661,610 |
|
Contribution from Shanda (Note 15) |
|
|
|
|
|
|
|
|
|
|
400,298 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
400,298 |
|
|
|
|
|
|
|
400,298 |
|
Non-controlling interest arising from business combination |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
217,659 |
|
|
|
217,659 |
|
Corporate expense allocation (Note 2(1)) |
|
|
|
|
|
|
|
|
|
|
37,592 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
37,592 |
|
|
|
|
|
|
|
37,592 |
|
Share-based compensation (Note 16) |
|
|
|
|
|
|
|
|
|
|
15,053 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,053 |
|
|
|
2,345 |
|
|
|
17,398 |
|
Cumulative currency translation adjustments of an
affiliated company/a subsidiary |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(14,478 |
) |
|
|
|
|
|
|
(14,478 |
) |
|
|
(11,896 |
) |
|
|
(26,374 |
) |
Distribution to Shanda |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,690,806 |
) |
|
|
(1,690,806 |
) |
|
|
|
|
|
|
(1,690,806 |
) |
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
591,900 |
|
|
|
591,900 |
|
|
|
7,141 |
|
|
|
599,041 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2007 |
|
|
550,000,000 |
|
|
|
40,193 |
|
|
|
741,605 |
|
|
|
110,341 |
|
|
|
(14,478 |
) |
|
|
123,508 |
|
|
|
1,001,169 |
|
|
|
215,249 |
|
|
|
1,216,418 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contribution from Shanda (Note 15) |
|
|
|
|
|
|
|
|
|
|
21,917 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21,917 |
|
|
|
(11,127 |
) |
|
|
10,790 |
|
Corporate expense allocation (Note 2(1)) |
|
|
|
|
|
|
|
|
|
|
31,346 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31,346 |
|
|
|
|
|
|
|
31,346 |
|
Share-based compensation (Note 16) |
|
|
|
|
|
|
|
|
|
|
17,622 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17,622 |
|
|
|
3,169 |
|
|
|
20,791 |
|
Cumulative currency translation adjustments of an
affiliated company/a subsidiary |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(72,496 |
) |
|
|
|
|
|
|
(72,496 |
) |
|
|
(72,206 |
) |
|
|
(144,702 |
) |
Equity pick-up of the equity movement in an affiliated
company of a subsidiary |
|
|
|
|
|
|
|
|
|
|
842 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
842 |
|
|
|
839 |
|
|
|
1,681 |
|
Repurchase of own shares by a subsidiary |
|
|
|
|
|
|
|
|
|
|
(8,951 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8,951 |
) |
|
|
(8,915 |
) |
|
|
(17,866 |
) |
Appropriations to statutory reserves |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,528 |
|
|
|
|
|
|
|
(3,528 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Distribution to Shanda |
|
|
|
|
|
|
|
|
|
|
(327,131 |
) |
|
|
|
|
|
|
|
|
|
|
(502,820 |
) |
|
|
(829,951 |
) |
|
|
|
|
|
|
(829,951 |
) |
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
935,484 |
|
|
|
935,484 |
|
|
|
11,924 |
|
|
|
947,408 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2008 |
|
|
550,000,000 |
|
|
|
40,193 |
|
|
|
477,250 |
|
|
|
113,869 |
|
|
|
(86,974 |
) |
|
|
552,644 |
|
|
|
1,096,982 |
|
|
|
138,933 |
|
|
|
1,235,915 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of ordinary shares upon initial public offering |
|
|
26,087,000 |
|
|
|
1,782 |
|
|
|
1,039,371 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,041,153 |
|
|
|
|
|
|
|
1,041,153 |
|
Corporate expense allocation (Note 2(1)) |
|
|
|
|
|
|
|
|
|
|
14,351 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,351 |
|
|
|
|
|
|
|
14,351 |
|
Share-based compensation (Note 16) |
|
|
|
|
|
|
|
|
|
|
112,450 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
112,450 |
|
|
|
13,361 |
|
|
|
125,811 |
|
Exercise of share option of a foreign subsidary |
|
|
|
|
|
|
|
|
|
|
1,932 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,932 |
|
|
|
14,023 |
|
|
|
15,955 |
|
Cumulative currency translation adjustments of the Company |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
183 |
|
|
|
|
|
|
|
183 |
|
|
|
|
|
|
|
183 |
|
Cumulative currency translation adjustments of subsidiaries |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21,637 |
|
|
|
|
|
|
|
21,637 |
|
|
|
21,005 |
|
|
|
42,642 |
|
Unrealized gain of marketable securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,389 |
|
|
|
|
|
|
|
6,389 |
|
|
|
|
|
|
|
6,389 |
|
Appropriations to statutory reserves |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,165 |
|
|
|
|
|
|
|
(13,165 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Distribution to Shanda |
|
|
|
|
|
|
|
|
|
|
(416,165 |
) |
|
|
|
|
|
|
|
|
|
|
(512,226 |
) |
|
|
(928,391 |
) |
|
|
|
|
|
|
(928,391 |
) |
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,452,972 |
|
|
|
1,452,972 |
|
|
|
18,564 |
|
|
|
1,471,536 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2009 |
|
|
576,087,000 |
|
|
|
41,975 |
|
|
|
1,229,189 |
|
|
|
127,034 |
|
|
|
(58,765 |
) |
|
|
1,480,225 |
|
|
|
2,819,658 |
|
|
|
205,886 |
|
|
|
3,025,544 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these financial statements.
F-5
SHANDA GAMES LIMITED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts expressed in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31, |
|
|
|
2007 |
|
|
2008 |
|
|
2009 |
|
|
2009 |
|
|
|
RMB |
|
|
RMB |
|
|
RMB |
|
|
US$ (Note 2(5)) |
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
599,041 |
|
|
|
947,408 |
|
|
|
1,471,536 |
|
|
|
215,582 |
|
Adjustments for: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share-based compensation expenses |
|
|
17,495 |
|
|
|
20,790 |
|
|
|
125,811 |
|
|
|
18,431 |
|
Corporate expenses allocated from Shanda |
|
|
37,592 |
|
|
|
31,346 |
|
|
|
14,351 |
|
|
|
2,102 |
|
Depreciation of property and equipment |
|
|
60,979 |
|
|
|
52,339 |
|
|
|
44,797 |
|
|
|
6,563 |
|
Amortization of intangible assets |
|
|
74,407 |
|
|
|
104,897 |
|
|
|
151,852 |
|
|
|
22,246 |
|
Amortization of land use right |
|
|
208 |
|
|
|
113 |
|
|
|
|
|
|
|
|
|
Intangible assets impairment |
|
|
20,095 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision/(reversal) for losses on receivables |
|
|
(776 |
) |
|
|
10,426 |
|
|
|
3,411 |
|
|
|
500 |
|
Loss from disposal of fixed assets |
|
|
4,525 |
|
|
|
84 |
|
|
|
3,613 |
|
|
|
529 |
|
Investment income |
|
|
(32 |
) |
|
|
|
|
|
|
(214 |
) |
|
|
(31 |
) |
Write off purchased in-process research and development |
|
|
3,073 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange (gain)/ loss |
|
|
2,591 |
|
|
|
(5,159 |
) |
|
|
5,290 |
|
|
|
775 |
|
Deferred taxes and change of withholding tax |
|
|
(37,304 |
) |
|
|
(20 |
) |
|
|
33,572 |
|
|
|
4,918 |
|
Equity in loss/(earnings) of affiliated companies |
|
|
13,554 |
|
|
|
(918 |
) |
|
|
30,071 |
|
|
|
4,405 |
|
Changes in assets and liabilities, net of acquisitions: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
29,187 |
|
|
|
(37,016 |
) |
|
|
(12,085 |
) |
|
|
(1,770 |
) |
Receivables due from related parties |
|
|
(29,617 |
) |
|
|
(233,748 |
) |
|
|
130,455 |
|
|
|
19,112 |
|
Deferred licensing fees and related costs |
|
|
(19,976 |
) |
|
|
(19,762 |
) |
|
|
(2,265 |
) |
|
|
(332 |
) |
Prepayments and other current assets |
|
|
21,940 |
|
|
|
(11,896 |
) |
|
|
(40,718 |
) |
|
|
(5,965 |
) |
Upfront licensing fee paid in intangible assets |
|
|
(41,300 |
) |
|
|
(31,353 |
) |
|
|
(105,749 |
) |
|
|
(15,492 |
) |
Prepayment for upfront license fee in other long term assets |
|
|
(232,450 |
) |
|
|
(44,179 |
) |
|
|
(19,754 |
) |
|
|
(2,894 |
) |
Other long-term deposits |
|
|
561 |
|
|
|
(12,919 |
) |
|
|
(9,384 |
) |
|
|
(1,375 |
) |
Accounts payable |
|
|
(863 |
) |
|
|
18,309 |
|
|
|
6,440 |
|
|
|
943 |
|
Licensing fees payable |
|
|
24,922 |
|
|
|
60,146 |
|
|
|
31,744 |
|
|
|
4,650 |
|
Taxes payable |
|
|
(20,688 |
) |
|
|
48,173 |
|
|
|
51,909 |
|
|
|
7,605 |
|
Deferred revenue |
|
|
100,376 |
|
|
|
111,242 |
|
|
|
(77,332 |
) |
|
|
(11,329 |
) |
License fee payable to a related party |
|
|
(46,090 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Payables due to related parties |
|
|
70,806 |
|
|
|
32,299 |
|
|
|
12,620 |
|
|
|
1,849 |
|
Other payables and accruals |
|
|
20,404 |
|
|
|
103,888 |
|
|
|
160,536 |
|
|
|
23,519 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
672,660 |
|
|
|
1,144,490 |
|
|
|
2,010,507 |
|
|
|
294,541 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase in restricted cash for foreign currency forward contract |
|
|
|
|
|
|
|
|
|
|
(702,075 |
) |
|
|
(102,855 |
) |
Payment for the transfer of equity interest in a subsidiary from Shanda |
|
|
|
|
|
|
|
|
|
|
(479,661 |
) |
|
|
(70,271 |
) |
Proceeds from income of marketable securities |
|
|
|
|
|
|
|
|
|
|
214 |
|
|
|
31 |
|
Proceeds from disposal of short-term investment |
|
|
|
|
|
|
52,599 |
|
|
|
|
|
|
|
|
|
Purchase of marketable securities |
|
|
|
|
|
|
(2,830 |
) |
|
|
|
|
|
|
|
|
Increase of short-term investments |
|
|
(86,697 |
) |
|
|
(99,297 |
) |
|
|
(502,350 |
) |
|
|
(73,595 |
) |
Increase in loan receivable |
|
|
(12,000 |
) |
|
|
(14,006 |
) |
|
|
18 |
|
|
|
3 |
|
Purchase of property and equipment |
|
|
(82,704 |
) |
|
|
(46,989 |
) |
|
|
(96,668 |
) |
|
|
(14,162 |
) |
Proceeds from disposal of fixed assets |
|
|
1,055 |
|
|
|
2,338 |
|
|
|
480 |
|
|
|
70 |
|
Purchase of intangible assets |
|
|
(2,476 |
) |
|
|
(11,947 |
) |
|
|
(11,944 |
) |
|
|
(1,750 |
) |
Cash received upon consolidation of a subsidiary contributed by Shanda |
|
|
112,227 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition of a subsidiary, net of cash acquired |
|
|
(56,540 |
) |
|
|
|
|
|
|
(93,626 |
) |
|
|
(13,716 |
) |
Repurchase of own shares by a subsidiary |
|
|
|
|
|
|
(17,866 |
) |
|
|
|
|
|
|
|
|
Investment in affiliated companies |
|
|
(5,000 |
) |
|
|
(6,193 |
) |
|
|
(18,606 |
) |
|
|
(2,726 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(132,135 |
) |
|
|
(144,191 |
) |
|
|
(1,904,218 |
) |
|
|
(278,971 |
) |
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net proceeds from issuance of ordinary shares upon IPO |
|
|
|
|
|
|
|
|
|
|
1,041,153 |
|
|
|
152,530 |
|
Proceeds from a loan borrowed |
|
|
|
|
|
|
|
|
|
|
1,077,670 |
|
|
|
157,880 |
|
Repayment of a loan |
|
|
|
|
|
|
|
|
|
|
(375,595 |
) |
|
|
(55,025 |
) |
Proceeds from issuance of ordinary shares under stock option plan of a subsidiary |
|
|
|
|
|
|
|
|
|
|
15,955 |
|
|
|
2,337 |
|
Net distribution to Shanda |
|
|
(375,981 |
) |
|
|
(748,271 |
) |
|
|
(708,729 |
) |
|
|
(103,829 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) / provided by financing activities |
|
|
(375,981 |
) |
|
|
(748,271 |
) |
|
|
1,050,454 |
|
|
|
153,893 |
|
Effect of exchange rate changes on cash |
|
|
(7,099 |
) |
|
|
(16,699 |
) |
|
|
13,517 |
|
|
|
1,981 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash and cash equivalents |
|
|
157,445 |
|
|
|
235,329 |
|
|
|
1,170,260 |
|
|
|
171,444 |
|
Cash and cash equivalents, beginning of year |
|
|
236,117 |
|
|
|
393,562 |
|
|
|
628,891 |
|
|
|
92,133 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and
cash equivalents, end of year |
|
|
393,562 |
|
|
|
628,891 |
|
|
|
1,799,151 |
|
|
|
263,577 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid during the year for income taxes |
|
|
101,462 |
|
|
|
232,669 |
|
|
|
323,937 |
|
|
|
47,457 |
|
Cash paid for interest expenses |
|
|
|
|
|
|
|
|
|
|
814 |
|
|
|
119 |
|
|
|
Supplemental disclosure of non-cash investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition related obligation at year end |
|
|
|
|
|
|
|
|
|
|
48,800 |
|
|
|
7,149 |
|
|
|
Supplemental disclosure of non-cash financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted cash relating to the exercise of employee stock options |
|
|
|
|
|
|
|
|
|
|
54,471 |
|
|
|
7,980 |
|
The accompanying notes are an integral part of these financial statements.
F-6
SHANDA GAMES LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2007, 2008 AND 2009
(Amounts expressed in thousands unless otherwise stated)
1. ORGANIZATION AND NATURE OF OPERATIONS
Nature of operations
Shanda Games Limited (Shanda Games or the Company) is principally engaged in the
development and operation of online games and related businesses in the Peoples Republic of China
(the PRC). The Company currently operates its business in China through its wholly-owned
subsidiaries which consist of Shengqu (as defined below), Shengji Information Technology (Shanghai)
Co., Ltd. (Shengji) and Lansha Information Technology (Shanghai) Co., Ltd. (Lansha, and
together with Shengqu and Shengji, the PRC subsidiaries), and its variable interest entities,
which consist of Shanghai Shulong Technology Development Co., Ltd. (Shanghai Shulong) and its
wholly-owned subsidiaries, Shanghai Shulong Computer Technology Co., Ltd. (Shulong Computer),
Nanjing Shulong Computer Technology Co., Ltd. (Nanjing Shulong), Chengdu Youji Technology Co.,
Ltd. (Chengdu Youji), Tianjin Youji Technology Co., Ltd. (Tianjin Youji), Chengdu Aurora
Technology Development Co., Ltd. (Chengdu Aurora) and Chengdu Simo Technology Co., Ltd. (Chengdu
Simo, and collectively, the PRC operating companies). The Company together with (i) its
wholly-owned subsidiaries, including Shanda Games Holdings (HK) Limited (Shanda Games (HK)); and
Shanda Games International (Pte) Ltd. (Games International); (ii) Actoz Soft Co., Ltd. a Korean
developer, operator and publisher of online games listed on the KOSDAQ and the Companys
majority-owned subsidiary (Actoz); (iii) the PRC subsidiaries and (iv) the PRC operating
companies, shall collectively be referred to as the Group.
The Reorganization
Shanda Games online game business was founded by Shanda Interactive Entertainment Limited
(Shanda), its parent, in 2001 and was operated by Shanda through certain of its subsidiaries and
variable interest entities until the reorganization of Shanda came into effect on July 1, 2008 (the
Reorganization).
Prior to the Reorganization, in order to comply with PRC laws and regulations that restrict
foreign ownership of companies to operate online game business in China, Shanda operated its online
game business in China through Shanghai Shanda Networking Co., Ltd. (Shanda Networking), which is
wholly-owned by Tianqiao Chen, the chairman and chief executive officer of Shanda, and Danian Chen,
a director and president and chief operating officer of Shanda, both of whom are PRC citizens, and
through Nanjing Shanda Networking Co., Ltd. (Nanjing Shanda) and Hangzhou Bianfeng Networking
Co., Ltd. (Hangzhou Bianfeng), which are wholly-owned subsidiaries of Shanda Networking. Shanda
Networking and its subsidiaries hold the licenses and approvals that are required to operate the
online game business.
Shengqu Information Technology (Shanghai) Co., Ltd. (Shengqu), which is Shandas indirect
wholly-owned foreign operating entity in China, had entered into a series of contractual
arrangements with Shanda Networking and its shareholders, including contracts relating to the
transfer of assets, the provision of services, software licenses and equipment, and certain
shareholder rights and corporate governance matters (collectively, the Original VIE Agreements).
As a result of the Original VIE Agreements, Shanda was considered the primary beneficiary of
Shanda Networking and its subsidiaries.
Effective July 1, 2008, Shanda completed, subject to certain closing conditions, the
Reorganization. One of the primary purposes of the Reorganization was to establish Shanda Games as
a legal entity to continue to operate Shandas online game business. As a result of the
Reorganization, all of Shandas assets and liabilities relating to its online game business were
transferred to the Group. The primary steps of the Reorganization included:
|
|
|
Establishment of Shanda Games. Shanda Games was incorporated in the Cayman Islands on
June 12, 2008 as a direct wholly-owned subsidiary of Shanda, to be the holding company for
the online game business. Pursuant to a share exchange, Shanda Games became a direct
wholly-owned subsidiary of Shanda, and Shanda Games (HK) became a direct wholly-owned
subsidiary of Shanda Games. |
|
|
|
Assignment of Certain Original VIE Agreements. Shengqu assigned all of the Original VIE
Agreements with Shanda Networking, Nanjing Shanda and Hangzhou Bianfeng (other than those
relating to the operations of the online game business, which were cancelled) to Shanda
Computer (Shanghai) Co.,
Ltd., or Shanda Computer, an indirect wholly-owned subsidiary of Shanda, thereby making
Shanda Computer the primary beneficiary of Shanda Networking. |
F-7
SHANDA GAMES LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2007, 2008 AND 2009
(Amounts expressed in thousands unless otherwise stated)
|
|
|
Transfer of Equity Interests. Shanda Networking transferred the equity interests of
Shanghai Shulong to two nominee shareholders, both of whom are PRC citizens. |
|
|
|
New VIE Agreements. Shengqu entered into various agreements, including contracts
relating to the transfer of assets, the provision of services and software licenses and
equipment with Shanghai Shulong, Shulong Computer and Nanjing Shulong (collectively, the
Shulong entities) and contracts relating to certain shareholder rights and corporate
governance matters with Shanghai Shulong and its nominee shareholders (collectively, the
New VIE Agreements). |
|
|
|
Separation Agreement. Pursuant to a Master Separation Agreement, Shanda transferred all
of its assets and liabilities related to its online game business (including applicable
equity investments and intellectual property rights) to Shanghai Shulong. Concurrently, all
assets and liabilities unrelated to the online game business, including certain real
property interests, intellectual property rights and personal tangible properties were
transferred to Shanda. |
|
|
|
Game Licensing Agreements. Prior to the Reorganization, Shengqu had licensed certain
rights to online games from various third parties, which rights were sublicensed to Shanda
Networking and its subsidiaries. As a part of the Reorganization, Shengqu amended such
third party license agreements to allow Shengqu to sublicense its rights to the Shulong
entities. Following the Reorganization, the Company conducts its online game business
through the PRC operating companies. |
In the second quarter of 2009, Shanda transferred to the Company its entire equity interest in
Actoz in consideration of US$70.2 million as part of the Reorganization under common control.
Shanda had acquired a majority of the outstanding shares of Actoz in the third quarter of 2007, and
had consolidated Actozs results of operations effective from that date.
On September 25, 2009, the Company completed an initial public offering (the IPO) on the
NASDAQ Global Select Market (IPO). In the IPO, 83,500,000 American Depositary Shares (ADSs),
representing 167,000,000 Class A ordinary shares, were sold to the public at a price of $12.50 per
ADS. Of these, 13,043,500 ADSs, representing 26,087,000 Class A ordinary shares, were sold by the
Company; and 70,456,500 ADSs, representing 140,913,000 Class A ordinary shares, were sold by a
direct wholly-owned subsidiary of Shanda. The net proceeds to the Company from the IPO, after
deducting commissions and offering expenses, were approximately $152.5 million.
2. PRINCIPAL ACCOUNTING POLICIES
(1) Basis of preparation
The accompanying consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in the United States of America (US GAAP).
The Reorganization is accounted for as a common control transaction. Accordingly, the
accompanying consolidated financial statements have been prepared as if the current corporate
structure had been in existence throughout the periods presented and as if the online game business
was transferred to the Company from Shanda as of the earliest period presented.
Before the Reorganization, the online game business was conducted by various companies
controlled by Shanda. Therefore, for periods prior to the Reorganization, the accompanying
consolidated financial statements were prepared by combining the assets, liabilities, revenues,
expenses and cash flows that were directly applicable to the businesses and operations transferred
and to be transferred to the Group by Shanda.
After the Reorganization, the Companys consolidated financial statements include the
financial statements of the Company, its wholly-owned subsidiaries set forth above, Actoz, the PRC
subsidiaries and the PRC operating companies (Note 4).
F-8
SHANDA GAMES LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2007, 2008 AND 2009
(Amounts expressed in thousands unless otherwise stated)
The Groups statement of operations included all the historical costs of the online games
business including an allocation of certain general corporate expenses of Shanda. These general
corporate expenses primarily relate to corporate employee compensation costs, professional service
fees, and other expenses arising from the provisions of corporate functions, including finance,
legal, technology, investment, and executive management. These expenses were allocated based on
estimates that management considered as a reasonable reflection of the utilization of services
provided to, or benefits received by the Group, as specific identification method was not
practical. These expenses were as follows:
a) Employee compensation costs related to salaries, bonuses, social security costs, and
share-based compensation are allocated to the Group based on the percentage of the respective
department employee numbers of the Group to the total historical number of employees of
corresponding department of Shanda, except for costs related to Shandas executives, which are
allocated based on percentage of estimated time incurred for online game business to total time
incurred for Shanda.
b) Professional service fees related to legal and public accounting services are allocated
to the Group based on percentage of revenues of the Group to total historical revenues of
Shanda.
c) Other expenses incurred by the corporate functions are allocated to the Group based on
percentage of number of employees of the Group to the total historical number of employees of
Shanda.
Total general corporate expenses allocated from Shanda to the Group are RMB37.6 million,
RMB31.3 million and RMB14.4 million for the years ended December 31, 2007 and 2008 and 2009,
respectively. From the second half year of 2009, since the Group has established its own finance,
legal, investment and certain executive management functions and begun to promote its own brands,
no such general corporate expenses were allocated to the Group, except for certain employee
compensation costs from corporate functions such as technology, human resources and executive
management that the Group does not have. While the expenses allocated to the Group for these items
are not necessarily indicative of the expenses that the Group would have incurred if the Group had
been a separate, independent entity during the years presented, management believes that the
foregoing presents a reasonable basis of estimating what the Groups expenses would have been on a
historical basis. General corporate expenses allocated from Shanda are recorded as capital
contribution by Shanda.
In addition, there are certain technical service arrangements between the Group and the other
subsidiaries of Shanda as disclosed in Note 18.
(2) Use of estimates
The preparation of financial statements in conformity with US GAAP requires management to make
estimates and assumptions that affect the reported amounts of assets and liabilities, disclosures
of contingent assets and liabilities at the balance sheet dates and the reported amounts of
revenues and expenses during the reporting periods. Actual results could materially differ from
those estimates.
(3) Consolidation
The consolidated financial statements include the financial statements of the Company, its
subsidiaries and VIE subsidiaries for which the Company is the primary beneficiary. All
transactions and balances among the Company, its subsidiaries and VIE subsidiaries have been
eliminated upon consolidation. Investments in equity securities which the Company can exercise
significant influence are accounted for by the equity method of accounting.
The Company has adopted the guidance relating to the consolidation of Variable Interest
Entities in Accounting Standard Codification (ASC) 810-10 (formerly referred to as FASB
Interpretation No. 46R, Consolidation of Variable Interest Entities, an Interpretation of ARB No.
51), which requires certain variable interest entities to be consolidated by the primary
beneficiary of the entity if the equity investors in the entity do not have the characteristics of
a controlling financial interest or do not have sufficient equity at risk for the entity to finance
its activities without additional subordinated financial support from other parties.
Prior to the Reorganization, to comply with PRC laws and regulations that restrict foreign
ownership of companies to operate online games, the Company operated its online game business in
China through Shanda
Networking and its two subsidiaries, Nanjing Shanda and Hangzhou Bianfeng. These three
companies hold the licenses and approvals to operate online games business in the PRC.
F-9
SHANDA GAMES LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2007, 2008 AND 2009
(Amounts expressed in thousands unless otherwise stated)
Pursuant to the contractual arrangements with Shanda Networking, Nanjing Shanda and Hangzhou
Bianfeng, Shengqu provided services, software and technology license and equipment to Shanda
Networking, Nanjing Shanda and Hangzhou Bianfeng before July 2008, in exchange for fees, determined
according to certain agreed formulas. During the years ended December 31, 2007 and the first half
year of 2008, the total amount of such fees approximated RMB1,251.4 million and RMB886.6 million,
respectively. The principal services, software and technology license and equipment lease
agreements that Shengqu entered into with Shanda Networking, Nanjing Shanda and Hangzhou Bianfeng
were:
|
|
|
Equipment leasing agreements, pursuant to which Shanda Networking, Nanjing Shanda and
Hangzhou Bianfeng leased a substantial majority of their operating assets from Shengqu; |
|
|
|
Technical support agreements, pursuant to which Shengqu provided technical support for
Shanda Networking Nanjing Shanda and Hangzhou Bianfengs operations; |
|
|
|
Software license agreements, pursuant to which Shengqu licensed certain game related
software to Shanda Networking, Nanjing Shanda and Hangzhou Bianfeng; |
|
|
|
A strategic consulting agreement, pursuant to which Shengqu provided strategic
consulting services to Shanda Networking, Nanjing Shanda and Hangzhou Bianfeng; and |
|
|
|
Online game license agreements, pursuant to which Shanda Networking, Nanjing Shanda and
Hangzhou Bianfeng operated certain online games that are licensed or owned by Shengqu. |
In addition, Shengqu entered into agreements with Shanda Networking and its equity owners with
respect to certain shareholder rights and corporate governance matters that provided Shengqu with
the substantial ability to control Shanda Networking. As a result of these agreements, the Company
was considered the primary beneficiary of Shanda Networking and accordingly Shanda Networkings
results of operations, assets and liabilities were consolidated in the Companys financial
statements before the Reorganization in July 2008.
After the Reorganization in July 2008, to comply with PRC laws and regulations that restrict
foreign ownership of companies that operate online games, the Group conducts all its online game
business through the PRC operating companies. These companies hold the licenses and approvals to
operate online games in the PRC. The capital of Shanghai Shulong is funded by Shengqu and recorded
as interest-free loans to these individuals. The portion of the loans for capital injection is
eliminated with the capital of Shanghai Shulong during consolidation. The interest-free loans to
the shareholders of Shanghai Shulong as of December 31, 2008 and 2009 were RMB 10.8 million.
Pursuant to the contractual arrangements between Shenqu and the Shulong entities as well as
the Youji entities, Shengqu provides services, software and technology license and equipment to the
Shulong entities and Youji entities, in exchange for fees, determined according to certain agreed
formulas. During the second half year of 2008 and the year ended December 31, 2009, the total
amount of such fees was approximately RMB1,159.6 million and RMB2,878.1 million, respectively,
which represented a significant portion of the operating profit of the Shulong entities and the
Youji entities. Shengqu has also undertaken to provide financial support to Shanghai Shulong to the
extent necessary for its operations. The following is a summary of the key agreements in effect:
|
|
|
Loan Agreements between Shengqu and the shareholders of Shanghai Shulong. These loan
agreements provide for loans of RMB10.8 million to the PRC employees for them to make
contributions to the registered capital of Shanghai Shulong in exchange for equity
interests in Shanghai Shulong. The loans are interest free and are repayable on demand, but
the shareholders may not repay all or any part of the loans without Shengqus prior written
consent. |
|
|
|
Equity Entrust Agreement between Shengqu and the shareholders of Shanghai Shulong,
pursuant to which the shareholders acknowledge their status as nominee shareholders. |
F-10
SHANDA GAMES LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2007, 2008 AND 2009
(Amounts expressed in thousands unless otherwise stated)
|
|
|
Equity Pledge Agreement among Shengqu, Shanghai Shulong and the shareholders of Shanghai
Shulong. Pursuant to this agreement, the shareholders pledged to Shengqu their entire
equity interests in Shanghai Shulong to secure the performance of their respective
obligations and Shanghai Shulongs obligations under the various agreements, including the
Equity Pledge Agreement, the Business Operation Agreement and the Exclusive Consulting and
Service Agreement. Without Shengqus prior written consent, neither of the shareholders can
transfer any equity interests in Shanghai Shulong. |
|
|
|
Equity Disposition Agreement among Shengqu, Shanghai Shulong and the shareholders of
Shanghai Shulong. Pursuant to this agreement, Shengqu and any third party designated by
Shengqu have the right, exercisable at any time during the term of the agreement, if and
when it is legal to do so under PRC laws and regulations, to purchase from the
shareholders, as the case may be, all or any part of their equity interests in Shanghai
Shulong at a purchase price equal to the lowest price permissible by the then-applicable
PRC laws and regulations. The agreement is for an initial term of 20 years, renewable upon
Shengqus request. |
|
|
|
Business Operation Agreement among Shengqu, Shanghai Shulong and the shareholders of
Shanghai Shulong. This agreement sets forth the rights of Shengqu to control the actions of
the shareholders of Shanghai Shulong. |
|
|
|
Exclusive Consulting and Service Agreement between Shengqu and Shanghai Shulong.
Pursuant to this agreement, Shengqu has the exclusive right to provide technology support
and business consulting services to Shanghai Shulong for a fee. |
|
|
|
Proxies executed by the shareholders of Shanghai Shulong in favor of Shengqu. These
irrevocable proxies grant Shengqu or its designees the power to exercise the rights of the
shareholder as shareholders of Shanghai Shulong, including the right to appoint directors,
general manager and other senior management of Shanghai Shulong. |
As a result of these agreements, the Company is considered the primary beneficiary of Shanghai
Shulong and its subsidiaries and accordingly the results of operations, assets and liabilities of
Shanghai Shulong and its subsidiaries are consolidated in the Companys financial statements after
the Reorganization.
(4) Foreign currency translation
The functional currency of the Company is the United States dollar (US$ or U.S. dollars)
and its reporting currency is the Renminbi (RMB). The PRC subsidiaries and the PRC operating
companies use RMB as their functional currency. The functional currency of the Companys
wholly-owned subsidiaries other than the PRC subsidiaries, is the U.S. dollar. From July 1, 2007,
the Company consolidated Actoz into its consolidated financial statements. Actozs functional
currency is the Korean Won.
Assets and liabilities of the Company, its wholly-owned subsidiaries other than the PRC
subsidiaries, and Actoz are translated at the current exchange rates quoted by the Peoples Bank of
China or the Seoul Money Brokerage Services Limited in effect at the balance sheet dates. Equity
accounts are translated at historical exchange rates and revenues and expenses are translated at
the average exchange rates in effect during the reporting period to RMB. Gains and losses resulting
from foreign currency translation to reporting currency are recorded in accumulated other
comprehensive income in the consolidated statements of changes in shareholders equity for the
years presented.
Transactions denominated in currencies other than functional currencies are translated into
the functional currencies at the exchange rates quoted by the Peoples Bank of China or the Seoul
Money Brokerage Services Limited prevailing at the dates of the transactions. Gains and losses
resulting from foreign currency transactions are included in the consolidated statements of
operations and comprehensive income. Monetary assets and liabilities denominated in foreign
currencies are translated into the functional currencies using the applicable exchange rates quoted
by the Peoples Bank of China or the Seoul Money Brokerage Services Limited at the balance sheet
dates. All such exchange gains and losses are included in the statements of operations and
comprehensive income.
F-11
SHANDA GAMES LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2007, 2008 AND 2009
(Amounts expressed in thousands unless otherwise stated)
(5) Convenience translation
Translations of amounts from RMB into US$ are solely for the convenience of the reader and
were calculated at the rate of US$1.00 = RMB6.8259, representing the noon buying rate in the City
of New York for cable transfers of RMB, as certified for customs purposes by the Federal Reserve
Bank of New York, on December 31, 2009. This convenient translation is not intended to imply that
the RMB amounts could have been, or could be, converted, realized or settled into U.S. dollars at
that rate on December 31, 2009, or at any other rate.
(6) Cash and cash equivalents
Cash and cash equivalents represent cash on hand, demand deposits and highly liquid
investments placed with banks or other financial institutions, which have original maturities less
than three months.
(7) Restricted cash
Restricted cash mainly represents (i) cash held in a designated bank account for the sole
purpose of transmitting proceeds from the exercise of stock options; and (ii) cash that is pledged
for loans. Restricted cash that is pledged for loans is netted off against the loans due to its
legal right to offset (Note 19).
(8) Short-term investments
Short-term investments represent the bank time deposits with original maturities longer than
three months and less than one year.
(9) Marketable securities
Marketable securities primarily include available-for-sale marketable equity securities.
Marketable securities are classified as short-term based on their high liquidity. Marketable
securities are carried at fair market value with unrealized appreciation (or depreciation) reported
as a component of accumulated other comprehensive income (or loss) in shareholders equity. The
specific identification method is used to determine the cost of marketable securities disposed.
Realized gains and losses are reflected as investment income or losses.
The Company evaluates the investments periodically for possible other-than-temporary
impairment and reviews factors such as the length of time and extent to which fair value has been
below cost basis, the financial condition of the issuer and the Companys ability and intent to
hold the investment for a period of time which may be sufficient for anticipated recovery in market
value. If appropriate, the Company records impairment charges equal to the amount that the carrying
value of its available-for-sale securities exceeds the estimated fair market value of the
securities as of the evaluation date.
During the year of 2009, the Company recorded unrealized gains on its marketable securities of
approximately RMB6.4 million as a component of other comprehensive income.
(10) Allowances for doubtful accounts
The Company determines the allowance for doubtful accounts when facts and circumstances
indicate that the receivable is unlikely to be collected.
(11) Investment in affiliated companies
Affiliated companies are entities over which the Company has significant influence, but which
it does not control. Investments in affiliated companies are accounted for by the equity method of
accounting. Under this method, the Companys share of the post-acquisition profits or losses of
affiliated companies is recognized in the consolidated statements of operations. Unrealized gains
on transactions between the Company and its affiliated companies are eliminated to the extent of
the Companys interest in the affiliated companies; unrealized losses are also eliminated unless
the transaction provides evidence of an impairment of the asset transferred. When the Companys
share of losses in an affiliated company equals or exceeds its interest in the affiliated company,
the
Company does not recognize further losses, unless the Company has incurred obligations or made
payments on behalf of the affiliated company.
F-12
SHANDA GAMES LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2007, 2008 AND 2009
(Amounts expressed in thousands unless otherwise stated)
The Company continually reviews its investments in affiliated companies to determine whether a
decline in fair value below the carrying value is other than temporary. The primary factors the
Company considers in its determination are the length of time that the fair value of the investment
is below the Companys carrying value and the financial condition, operating performance and near
term prospects of the investee. In addition, the Company considers the reason for the decline in
fair value, including general market conditions, industry specific or investee specific reasons,
changes in valuation subsequent to the balance sheet date and the Companys intent and ability to
hold the investment for a period of time sufficient to allow for a recovery in fair value. If the
decline in fair value is deemed to be other than temporary, the carrying value of the security is
written down to fair value. Impairment losses on equity method investments are included in earnings
of affiliated companies. No impairment losses were recorded in the years ended December 31, 2007,
2008 and 2009.
(12) Property and equipment
Property and equipment are stated at cost less accumulated depreciation and impairment.
Depreciation is computed using the straight-line method over the following estimated useful lives:
|
|
|
Computer equipment
|
|
5 years |
Office buildings
|
|
20 years |
Leasehold improvements
|
|
Lesser of the term of the lease or the estimated useful lives of the assets |
Furniture and fixtures
|
|
5 years |
Motor vehicles
|
|
5 years |
Expenditures for maintenance and repairs are expensed as incurred. Gain or loss on the
disposal of property and equipment is the difference between the net sales proceeds and the
carrying amount of the relevant assets and is recognized in the consolidated statements of
operations and comprehensive income.
(13) Intangible assets
Online game product development costs
The Company recognizes costs to develop its online game products in accordance with ASC 985-20
(formerly referred to as Statement of Financial Accounting Standard (SFAS) No. 86, Accounting
for Costs of Computer Software to be Sold, Leased or Otherwise Marketed). Costs incurred for the
development of online game products prior to the establishment of technological feasibility are
expensed when incurred and are included in product development expense. Once an online game product
has reached technological feasibility, all subsequent online game product development costs are
capitalized until the product is available for marketing. Technological feasibility is evaluated on
a product-by-product basis, but typically encompasses both technical design and game design
documentation and only occurs when the online game has a proven ability to operate in online game
environment in the PRC market. During the years ended December 31, 2007, 2008 and 2009, the costs
incurred for development of on-line game products were not capitalized because of the uncertainty
in technological feasibility.
Website and internally used software development costs
The Company recognizes website and internally used software development costs in accordance
with ASC 350 -40 (formerly referred to as Statement of Position No. 98-1, Accounting for the Costs
of Computer Software Developed or Obtained for Internal Use). As such, the Company expenses all
costs that are incurred in connection with the planning and implementation phases of development
and costs that are associated with repair or maintenance of the existing websites and software.
Costs incurred in the development phase are capitalized and amortized over the estimated product
life. During the years ended December 31, 2007, 2008 and 2009, costs qualifying for capitalization
were immaterial and as a result all website and internally used software development costs have
been expensed as incurred.
F-13
SHANDA GAMES LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2007, 2008 AND 2009
(Amounts expressed in thousands unless otherwise stated)
Upfront licensing fees
Upfront licensing fees paid to third party licensors are capitalized once the related game
software has reached technological feasibility in accordance with ASC 985-20 and amortized on a
straight-line basis over the shorter of the useful economic life of the relevant online game or
license period, which is usually 3 to 7 years.
Software and copyrights
Software and copyrights purchased from third parties are initially recorded at costs and
amortized on a straight-line basis over the shorter of the useful economic life or stipulated
period in the contract, which is usually 1 to 5 years.
Software technology, game engine, non-compete agreements, customer base and trademark acquired
through business combinations
An intangible asset is required to be recognized separately from goodwill based on its
estimated fair value if such asset arises from contractual or legal right or if it is separable as
defined by ASC 805 (formerly referred to as SFAS No. 141 (revised 2007), Business Combinations).
Software technology, game engine, non-compete agreements, customer base and trademark arising from
the acquisitions of subsidiaries and VIE subsidiaries are initially recognized and measured at
estimated fair value upon acquisition. Amortization is computed using the straight-line method over
the following estimated useful lives:
|
|
|
Software technology
|
|
0.5 to 6 years |
Game engine
|
|
3 to 7.5 years |
Non-compete agreements
|
|
2.5 to 5 years |
Customer base
|
|
2 to 5.5 years |
Trademarks
|
|
7.5 or 20 years |
In-process research and development
|
|
Prior to January 1, 2009, written
off immediately. Beginning from
January 1, 2009, indefinite life
and subject to impairment testing
until completed or abandoned |
(14) Goodwill
Goodwill is measured as the excess of the purchase price over the fair value assigned to the
individual assets acquired and liabilities assumed. In a business combination, any acquired
intangible assets that do not meet separate recognition criteria as specified in ASC 805 is
recognized as goodwill.
In accordance with ASC 350 (formerly referred to as SFAS No. 142, Goodwill and other
intangible assets), no amortization is recorded for goodwill. Goodwill is tested for impairment
annually or more frequently if events or changes in circumstances indicate that the goodwill might
be impaired. In October of each year, the Company tests impairment of goodwill at the reporting
unit level and recognizes impairment in the event that the carrying value exceeds the fair value of
each reporting unit. No impairment losses were recorded in the years ended December 31, 2007, 2008
and 2009.
(15) Other long-term assets
Other long-term assets mainly represent the upfront licensing fees of online games that have
not yet been commercially launched and receivables from independent online game companies. Other
long-term assets as of December 31, 2008 and 2009 include prepayments in respect of the upfront
licensing fees paid for new games of RMB111.2 million and RMB90.4 million, respectively.
Receivables from independent online game companies as of December 31, 2008 and 2009 amounted to
RMB23.0 million and RMB23.0 million, respectively.
(16) Impairment of long-lived assets and intangible assets
Long-lived assets and intangible assets are reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be recoverable.
Determination of recoverability is based on an estimate of undiscounted future cash flows resulting
from the use of the asset and its eventual
disposition. Measurement of any impairment loss for long-lived assets and certain identifiable
intangible assets that management expects to hold and use is based on the amount the carrying value
exceeds the fair value of the asset. Impairment of approximately RMB20.1 million related to
intangible assets was recognized during the year ended December 31, 2007. No impairment incurred
during the year ended December 31, 2008 and 2009.
F-14
SHANDA GAMES LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2007, 2008 AND 2009
(Amounts expressed in thousands unless otherwise stated)
(17) Financial instruments
Financial instruments of the Company primarily comprise of cash and cash equivalents,
short-term investments, accounts receivable, prepayments and other current assets, amount due
from/to related parties, accounts payable and other payables. As of December 31, 2008 and 2009,
their carrying values approximated their fair values because of their generally short maturities.
(18) Revenue recognition
The Company derives substantially all of its revenues from in-game virtual items and game
usage fees purchased by game players to play its MMORPGs and advanced casual games.
Prior to the Reorganization, Shanda sold pre-paid cards, in both virtual and physical forms,
to third party distributors and retailers, including Internet cafes, as well as through direct
online payment systems. The prepaid game cards entitle end users to access online game contents for
a specified period of time (time-based revenue model) or purchase in-game premium features
(item-based revenue model). All proceeds received from distributors or retailers from the sale of
pre-paid cards were deferred when received.
In connection with the Reorganization, the Company entered into various arrangements with
subsidiaries that are under common control of Shanda. Pursuant to the Amended and Restated
Cooperation Agreement between Shanda Networking and Nanjing Shanda, on the one hand, and the
Shulong entities, on the other hand, the Company agreed to engage Shanda Networking on an exclusive
basis to provide customer and other game support services, and pursuant to the Amended and Restated
Sales Agency Agreement between Shengfutong and the Shulong entities, or the Sales Agency Agreement,
the Company engaged Shengfutong on an exclusive basis to provide agency services in selling
pre-paid cards to third party distributors and retailers, in each case for a period of five years
beginning from the date of the Reorganization. The Company has assessed its relationship and
arrangements with Shanda Networking and Shengfutong under ASC 605-45 (formerly referred to as the
Emerging Issues Task Force (EITF) Issue No. 99-19, Reporting revenue gross as a principal versus
net as an agent), and has concluded that reporting the gross amount equal to the amount that
Shengfutong receives from the sale of pre-paid game cards to distributors or retailers and
subsequently is activated and charged to the respective game accounts by players as deferred
revenue is appropriate as the Company is the primary obligor and it fulfills the online game
services desired by the customers.
Both before and after the Reorganization, under the item-based revenue model, revenues are
recognized over the life of the in-game virtual items that game players purchase or as the in-game
virtual items are consumed. Under the time-based revenue model, revenues are recognized based on
the time units consumed by the game players. Revenues are also recognized when game players who had
previously purchased playing time or virtual currency are no longer entitled to access the online
games in accordance with the published expiration policy. Deferred revenue is reduced as revenues
are recognized.
Pursuant to the Sales Agency Agreement, Shengfutong will receive a service fee which is equal
to the difference between (x) the amount Shengfutong receives from its distributors or users from
the sale of the prepaid cards and (y) a fixed percentage based on the face value of the pre-paid
card as agreed upon between Shengfutong and the Company. This service fee is recorded as a sales
and marketing expense.
The PRC subsidiaries and the PRC operating companies are subject to business tax and related
surcharges and value added tax on the revenues earned for services provided and products sold in
the PRC. The applicable business tax rate varies from 3% to 5% and the rate of value added tax
varies from 3% to 17%. In the accompanying consolidated statements of operations and comprehensive
income, business tax and related surcharges for revenues derived from on-line games are deducted
from gross receipts to arrive at net revenues.
F-15
SHANDA GAMES LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2007, 2008 AND 2009
(Amounts expressed in thousands unless otherwise stated)
(19) Deferred revenue
Deferred revenue primarily represents proceeds received by Shengfutong from distributors
relating to the sale of pre-paid cards which are activated or charged to the respective player game
accounts by players, but which have not been consumed by the players or expired.
(20) Deferred licensing fees and related costs
Upon the receipt of proceeds from Shengfutong, which can be specifically attributable to
certain online game, the Company is obligated to pay on-going licensing fees in the form of
royalties and other costs related to such proceeds, including business tax and related surcharges.
As revenues are deferred (Note 2(19)), the related on-going licensing fees and costs are also
deferred. The deferred licensing fees and related costs are recognized in the consolidated
statements of operations and comprehensive income in the period in which the related proceeds
received from Shengfutong are recognized as revenue.
(21) Cost of revenue
Cost of revenue consists primarily of platform service fees, upfront and ongoing licensing
fees, share-based compensation and other expenses.
(22) General and administrative
General and administrative expenses consist primarily of salary and benefits for general
management, finance and administrative personnel, professional service fees, business tax expense,
share-based compensation, and other expenses. The business tax expense primarily relates to
services and licensing fees paid by the PRC operating companies to the PRC subsidiaries.
(23) Product development
Product development costs consist primarily of salaries and benefits, depreciation expenses,
outsourced game development expenses, share-based compensation and other expenses incurred by the
Company to develop, maintain, monitor and manage the Companys online gaming products, software and
websites, and are recorded on an accrual basis.
(24) Sales and marketing
Sales and marketing costs consist primarily of advertising and market promotion expenses,
salaries and benefits, share-based compensation, and other expenses incurred by the Companys sales
and marketing personnel, and the agency expenses paid to Shengfutong after the Reorganization.
Sales and marketing costs are recorded on an accrual basis. Advertising and marketing promotion
expenses amounted to approximately RMB94.5 million, RMB87.8 million, and RMB175.0 million during
the years ended December 31, 2007, 2008 and 2009, respectively.
(25) Share-based compensation
The Group adopted ASC 718 (formerly referred to as SFAS 123(R), Accounting for stock-based
compensation), which requires all share-based payments to employees and directors, including
grants of employee stock options and restricted shares, to be recognized as compensation expense in
the financial statements over the vesting period of the award based on the fair value of the award
determined at the grant date. The valuation provisions of ASC 718 apply to new awards, to awards
granted to employees and directors before the adoption of ASC 718 whose related requisite services
had not been provided, and to awards which were subsequently modified or cancelled. Under ASC 718,
the number of share-based awards for which the service is not expected to be rendered for the
requisite period should be estimated, and the related compensation cost not recorded for that
number of awards. The Company has applied the provisions of ASC 718-10S99 regarding the United
States Securities and Exchange Commissions (SEC) interpretation of ASC 718 and the valuation of
share-based payments for public companies.
F-16
SHANDA GAMES LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2007, 2008 AND 2009
(Amounts expressed in thousands unless otherwise stated)
In accordance with ASC 718, the Company has recognized share-based compensation expenses, net
of a forfeiture rate, using the straight-line method for awards with graded vesting features and
service conditions only, and using the graded-vesting attribution method for awards with graded
vesting features and performance conditions.
(26) Leases
Leases where substantially all the rewards and risks of ownership of assets remain with the
leasing company are accounted for as operating leases. Other leases are accounted for as capital
leases. Payments made under operating leases, net of any incentives received by the Company from
the leasing company, are charged to the consolidated statements of operations and comprehensive
income on a straight-line basis over the lease periods, as specified in the lease agreements, with
reference to the actual number of users of the leased assets, as appropriate.
(27) Taxation
The income tax provision reflected in the Companys consolidated statements of operations and
comprehensive income is provided on the taxable income of each subsidiary on the separate tax
return basis.
Deferred income taxes are provided using the liability method in accordance with ASC 740
(formerly referred to as SFAS No. 109, Income Taxes). Under this method, deferred income taxes
are recognized for the tax consequences of temporary differences by applying enacted statutory
rates applicable to future years to differences between the financial statement carrying amounts
and the tax bases of existing assets and liabilities. The tax base of an asset or liability is the
amount attributed to that asset or liability for tax purposes. The effect on deferred taxes of a
change in tax rates is recognized in income in the period of change. 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.
Effective January 1, 2007 the Company adopted ASC 740-10-25 (formerly referred to as FASB
Interpretation No. 48, Accounting for Uncertainty in Income Taxes An interpretation of FASB
Statement No. 109). The interpretation prescribes a recognition threshold and a measurement
attribute for the financial statements recognition and measurement of tax positions taken or
expected to be taken in a tax return. For those benefits to be recognized, a tax position must be
more-likely-than-not to be sustained upon examination by tax authorities. The amount recognized is
measured as the largest amount of benefit that is greater than fifty percent likely of being
realized upon ultimate settlement. The Company did not have any interest and penalties associated
with uncertain tax positions and did not have any significant unrecognized uncertain tax positions
as of December 31, 2008 and 2009.
(28) Statutory reserves
China
The PRC subsidiaries and the PRC operating companies are required on an annual basis to make
appropriations of retained earnings set at certain percentage of after-tax profit determined in
accordance with PRC accounting standards and regulations (PRC GAAP).
The PRC subsidiaries must make appropriations to (i) the general reserve and (ii) the
enterprise expansion fund in accordance with the Law of the PRC on Enterprises Operated Exclusively
with Foreign Capital.
The PRC operating companies, in accordance with the China Company Laws, must make
appropriations to (i) the statutory reserve fund and (ii) the discretionary surplus fund. The
statutory reserve fund requires annual appropriations of 10% of after-tax profit (as determined
under PRC GAAP at each year-end) until such fund has reached 50% of the companys registered
capital. The discretionary surplus fund is at the PRC companys discretion.
The general reserve fund and statutory reserve fund can only be used for specific purposes,
such as setting off the accumulated losses, enterprise expansion or increasing the registered
capital. The enterprise expansion fund can be used to expand the production and operation or to
increase the registered capital.
F-17
SHANDA GAMES LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2007, 2008 AND 2009
(Amounts expressed in thousands unless otherwise stated)
Appropriations to these funds are classified in the consolidated balance sheets as statutory
reserves. During the years ended December 31, 2008 and 2009, the Company made total appropriations
to these statutory reserves of approximately RMB3.5 million and RMB13.2 million, respectively.
There are no legal requirements in the PRC to fund these reserves by transfer of cash to
restricted accounts, and the Company does not do so.
Korea
Actoz is required to appropriate, as a legal reserve, an amount equal to a minimum of 10% of
cash dividends paid until such reserve equals 50% of its issued capital stock in accordance with
the Commercial Code of Korea. The reserve is not available for the payment of cash dividends, but
may be transferred to capital stock by an appropriate resolution of the companys board of
directors or used to reduce accumulated deficit, if any, with the ratification of the companys
majority shareholders. As Actoz did not declare or pay cash dividend, the Company did not make
appropriation to this legal reserve.
(29) Dividends
In January, May and June 2009, the Company declared cash dividends in the aggregate amount of
US$102.6 million (equivalent to RMB700.4 million) or US$0.19 per ordinary share, payable only to
Shanda. Dividends of the Company are recognized when declared. As of December 31, 2009, the Company
had paid Shanda all the dividends declared in 2009.
Relevant laws and regulations permit payments of dividends by the PRC and Korean subsidiaries
and affiliated companies only out of their retained earnings, if any, as determined in accordance
with respective accounting standards and regulations (see Note 2(28)).
In addition, since a significant amount of the Companys future revenues will be denominated
in RMB, the existing and any future restrictions on currency exchange may limit the Companys
ability to utilize revenues generated in RMB to fund the Companys business activities outside
China, if any, or expenditures denominated in foreign currencies.
(30) Earnings per share
Basic net income per ordinary share attributable to Shanda Games Limiteds shareholders is
computed using the weighted average number of ordinary shares outstanding during the year. Diluted
net income per ordinary share attributable to Shanda Games Limiteds shareholders is computed using
the weighted average number of ordinary shares and, if dilutive, potential ordinary shares
outstanding during the year. Potential ordinary shares consist of shares issuable upon the exercise
of stock options for the purchase of ordinary shares and the settlement of restricted share units
and are accounted for using the treasury stock method. Potential ordinary shares are not included
in the denominator of the diluted earnings per share calculation when inclusion of such shares
would be anti-dilutive.
(31) Comprehensive income
Comprehensive income is defined as the change in equity of a company during the period from
transactions and other events and circumstances excluding transactions resulting from investments
from owners and distributions to owners. Accumulated other comprehensive loss, as presented on the
accompanying consolidated balance sheets, consists of cumulative foreign currency translation
adjustment and unrealized gain/(loss) of marketable securities.
(32) Segment reporting
Based on the criteria established by ASC 280 (formerly referred to as SFAS No. 131,
Disclosures about Segments of an Enterprise and Related Information), the Company currently
operates and manages its business as a single segment. As the Company generates its revenues
primarily from customers in the PRC, no geographical segments are presented.
F-18
SHANDA GAMES LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2007, 2008 AND 2009
(Amounts expressed in thousands unless otherwise stated)
(33) Fair value measurements
On January 1, 2008, the Company adopted the ASC 820 (formerly referred to as SFAS No. 157,
Fair Value Measurements) for financial assets and liabilities. On January 1, 2009, the Company
also adopted the statement for all non-financial assets and non-financial liabilities, except those
that are recognized or disclosed at fair value in the financial statements on a recurring basis.
ASC 820 clarifies that fair value is an exit price, representing the amount that would be received
to sell an asset or paid to transfer a liability in an orderly transaction between market
participants. As such, fair value is a market-based measurement that should be determined based on
assumptions that market participants would use in pricing an asset or liability. As a basis for
considering such assumptions, ASC 820 establishes a three-tier value hierarchy, which prioritizes
the inputs used in measuring fair value as follows: (Level 1) observable inputs such as quoted
prices in active markets; (Level 2) inputs other than the quoted prices in active markets that are
observable either directly or indirectly, or quoted prices in less active markets; and (Level 3)
unobservable inputs with respect to which there is little or no market data, which require the
Company to develop its own assumptions. This hierarchy requires the Company to use observable
market data, when available, and to minimize the use of unobservable inputs when determining fair
value. On a recurring basis, the Company measures certain financial assets at fair value, including
its marketable securities.
As of December 31, 2009, the carrying amount of the Companys cash and cash equivalents and
short-term investments approximates their fair value due to the short maturity of those
instruments. The carrying value of receivables and payables approximates their market value based
on their short-term maturities. The Companys marketable securities and the financial liability
related to the forward contract (Note 19) are recorded at fair value, classified within Level 1 of
the fair value hierarchy. There are no other financial assets or liabilities that are being
measured at fair value at December 31, 2009.
(34) Business combinations and non-controlling interests
The Company accounts for its business combinations using the purchase method of accounting.
This method requires that the acquisition cost to be allocated to the assets, including separately
identifiable intangible assets, and liabilities the Company acquired based on their estimated fair
values.
From January 1, 2009, the Company adopted ASC 805 (formerly referred to as SFAS No. 141
(revised 2007), Business combinations). Following this adoption, the cost of an acquisition is
measured as the aggregate of the fair values at the date of exchange of the assets given,
liabilities incurred, and equity instruments issued as well as the contingent considerations and
all contractual contingencies as of the acquisition date. The costs directly attributable to the
acquisition are expensed as incurred. Identifiable assets, liabilities and contingent liabilities
acquired or assumed are measured separately at their fair value as of the acquisition date,
irrespective of the extent of any non-controlling interests. The excess of (i) the total of cost of
acquisition, fair value of the non-controlling interests and acquisition date fair value of any
previously held equity interest in the acquiree over (ii) the fair value of the identifiable net
assets of the acquiree is recorded as goodwill. If the cost of acquisition is less than the fair
value of the net assets of the subsidiary acquired, the difference is recognized directly in the
income statement.
The determination and allocation of fair values to the identifiable assets acquired and
liabilities assumed is based on various assumptions and valuation methodologies requiring
considerable management judgment. The most significant variables in these valuations are discount
rates, terminal values, the number of years on which to base the cash flow projections, as well as
the assumptions and estimates used to determine the cash inflows and outflows. The Company
determines discount rates to be used based on the risk inherent in the related activitys current
business model and industry comparisons. Terminal values are based on the expected life of assets
and forecasted life cycle and forecasted cash flows over that period. Although the Company believes
that the assumptions applied in the determination are reasonable based on information available at
the date of acquisition, actual results may differ from the forecasted amounts and the difference
could be material.
From January 1, 2009, following the adoption of ASC810 (formerly referred to as SFAS No. 160,
Non-controlling Interests in Consolidated Financial Statements-an amendment of ARB No.51), the
Company also renamed minority interests to non-controlling interests and reclassified it on the
consolidated balance sheet from the mezzanine section between liabilities and equity to a separate
line item in equity. The Company has applied the presentation and disclosure requirements
retrospectively for all periods presented.
F-19
SHANDA GAMES LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2007, 2008 AND 2009
(Amounts expressed in thousands unless otherwise stated)
3. RECENT ACCOUNTING PRONOUNCEMENTS
On April 9, 2009, the FASB issued ASC 320 (formerly referred to as FSP No. 115-2 and FSP
124-2, Recognition and Presentation of Other-Than-Temporary Impairments), which 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. The ASC 320 does not amend existing
recognition and measurement guidance related to other-than-temporary impairments of equity
securities. The adoption of ASC 320 has no material effect on the Companys consolidated results of
operations and financial condition.
In April 2009, the FASB issued ASC 820-10-65-4 (formerly referred to as FSP No. 157-4,
Determining Whether a Market is Not Active and a Transaction Is Not Distressed), which clarifies
when markets are illiquid or that market pricing may not actually reflect the real value of an
asset. If a market is determined to be inactive and market price is reflective of a distressed
price then an alternative method of pricing can be used, such as a present value technique to
estimate fair value. The guidance identifies factors to be considered when determining whether or
not a market is inactive, and would be effective for interim and annual periods ending after June
15, 2009, with early adoption permitted for periods ending after March 15, 2009 and shall be
applied prospectively. The adoption of ASC 820-10-65-4 has no material effect on the Companys
financial statements.
In April 2009, the FASB issued ASC 805-20-35 (formerly referred to as FSP No. FASB 141R-1,
Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from
Contingencies). ASC 805-20-35 amends the provisions for the initial recognition and measurement,
subsequent measurement and accounting, and disclosures for assets and liabilities arising from
contingencies in business combinations. ASC 805-20-35 eliminates the distinction between
contractual and non-contractual contingencies, including the initial recognition and measurement
criteria and instead carries forward most of the provisions in ASC805 for acquired contingencies.
ASC 805-20-35 is effective for contingent assets and contingent liabilities acquired in business
combinations for which the acquisition date is on or after the first annual reporting period
beginning on or after December 15, 2008. The adoption of ASC 805-20-35 has no material effect on
the Companys consolidated results of operations and financial condition.
In May 2009, the FASB issued ASC 855 (formerly referred to as SFAS No. 165, Subsequent
Events), which sets forth general standards of accounting for and disclosure of events that occur
after the balance sheet date but before financial statements are issued or are available to be
issued. ASC 855 is effective after June 15, 2009. The adoption of ASC 855 has no material effect on
the Companys consolidated results of operations and financial condition. In February 2010, the
FASB issued ASU 2010-09 which updates ASC 855 and removes the requirement to disclose the date
through which an entity has evaluated subsequent events. ASU 2010-09 became effective immediately.
The adoption of ASC 855 did not have a material impact on the Companys financial statements.
In June 2009, FASB issued ASC 105 (formerly referred to as SFAS No. 168, The FASB Accounting
Standards Codification and the Hierarchy of Generally Accepted Accounting Principles a
replacement of FASB Statement No. 162). ASC 105 establishes the FASB Accounting Standards
Codification as the source of authoritative accounting principles and the framework for selecting
the principles used in the preparation of financial statements of nongovernmental entities that are
presented in conformity with generally accepted accounting principles in the United States. This
Statement is effective for the reporting period ending on September 30, 2009. Beginning with the
third fiscal quarter of 2009, the references made to U.S. GAAP use the new Codification numbering
system prescribed by the FASB. The adoption of ASC 105 does not have any impact to the Companys
consolidated results of operations and financial condition.
In June 2009, the FASB issued ASC 860 (formerly referred to as SFAS No. 166, Accounting for
Transfers of Financial Assets an amendment of FASB Statement No. 140). ASC 860 improves the
relevance, representational faithfulness, and comparability of the information that a reporting
entity provides in its financial statements about a transfer of financial assets; the effects of a
transfer on its financial position, financial performance and cash flows; and a transferors
continuing involvement, if any, in transferred financial assets. ASC 860 is effective as of the
beginning of each reporting entitys first annual reporting period that begins after November 15,
2009, for interim periods within that first annual reporting period and for interim and annual
reporting periods thereafter. The
Company does not expect ASC 860 to have any impact on the Companys consolidated results of
operations and financial condition.
F-20
SHANDA GAMES LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2007, 2008 AND 2009
(Amounts expressed in thousands unless otherwise stated)
In June 2009, the FASB issued amendments to various sections of ASC 810 (formerly referred to
as SFAS No. 167, Amendments to FASB Interpretation No. 46(R), which amends FASB Interpretation
No. 46 (revised December 2003)) to address the elimination of the concept of a qualifying special
purpose entity. Such amendments to ASC 810 also replaces the quantitative-based risks and rewards
calculation for determining which enterprise has a controlling financial interest in a variable
interest entity with an approach focused on identifying which enterprise has the power to direct
the activities of a variable interest entity and the obligation to absorb losses of the entity or
the right to receive benefits from the entity. Additionally, such amendments to ASC 810 provide
more timely and useful information about an enterprises involvement with a variable interest
entity. These amendments to ASC 810 shall be effective as of the beginning of each reporting
entitys first annual reporting period that begins after November 15, 2009, for interim periods
within that first annual reporting period and for interim and annual reporting periods thereafter.
Earlier application is prohibited. The Company is currently evaluating the impact of the adoption
of ASC 810 on its financial statements and does not expect a significant impact.
4. BUSINESS COMBINATIONS
The Company completed the following acquisitions during the years 2007 and 2009:
Acquisition completed in 2009
Chengdu Simo
In July 2009, the Group acquired all of the equity interest of Chengdu Simo, one of the
leading developer and operator of MMORPGS in China. Pursuant to the acquisition agreement, the
total purchase consideration was RMB148.8 million in cash, of which RMB48.8 million will be paid in
2010.
The
purchase price of Chengdu Simo was allocated as follows:
|
|
|
|
|
|
|
RMB |
|
Cash |
|
|
6,374 |
|
Other assets |
|
|
26,885 |
|
Identifiable intangible assets |
|
|
104,300 |
|
Purchased in-progress research and development |
|
|
6,000 |
|
Deferred tax liabilities |
|
|
(11,723 |
) |
Goodwill |
|
|
53,532 |
|
Current liabilities |
|
|
(36,568 |
) |
|
|
|
|
Purchase price |
|
|
148,800 |
|
|
|
|
|
Total identifiable intangible assets acquired upon consolidation mainly include software
technology of RMB83.3 million and non-compete agreement of RMB21.0 million, and their estimated
useful lives are 3.0 to 7.5 years and 5 years, respectively. Purchased in-progress research and
development of RMB6.0 million were capitalised as an indefinite-lived intangible asset subject to
impairment testing until completion or abandonment. Total goodwill of RMB53.5 million represents
the excess of the purchase price over the estimated fair value of the net tangible and identifiable
intangible assets acquired and is not deductible for tax purpose. Goodwill primarily represents the
expected synergies from combining game operations of the Company and Chengdu Simo and any other
intangible benefits that would accrue to the Company that do not qualify for separate recognition.
In accordance with ASC 805, goodwill is not amortized but is tested for impairment.
Chengdu Simos financial results have been included in the consolidated statements of
operations and comprehensive income. The amount of revenues and earnings included in the
consolidated statements of operations and comprehensive income for 2009 was not material. The
following unaudited pro forma consolidated financial information reflects the Companys
consolidated results of operations for the year ended December 31, 2009, as if the acquisition of
Chengdu Simo had occurred on January 1, 2009, and after giving effect to purchase accounting
adjustments. Chengdu Simo was incorporated in 2008 and did not have any significant operations in
2008 and therefore no comparative figures are presented below. These pro forma results have been
prepared for comparative purposes only and do not purport to be indicative of what operating
results would have been had the acquisition actually taken place on the beginning of the period
presented and may not be indicative of future operating results.
F-21
SHANDA GAMES LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2007, 2008 AND 2009
(Amounts expressed in thousands unless otherwise stated)
|
|
|
|
|
|
|
Year Ended |
|
(in thousands, except per share data) |
|
December 31, 2009 |
|
|
|
unaudited |
|
|
|
RMB |
|
Net revenues |
|
|
4,835,256 |
|
Net income |
|
|
1,413,837 |
|
Earnings per ordinary share |
|
|
|
|
Basic |
|
|
2.54 |
|
Diluted |
|
|
2.53 |
|
The pro forma net income for 2009 includes RMB16.8 million for the amortization of identifiable
intangible assets and was determined using the actual effective income tax rate of Chengdu Simo in
2009.
Acquisition completed in 2007
(1) Actoz
In 2004 and 2005, Shanda acquired approximately 38.18% of equity interest in Actoz. As of
December 31, 2005, the carrying amount of the investment in Actoz was RMB328.3 million.
From December 2006 through July 5, 2007, Shanda acquired an additional 11.92% equity interest
in Actoz in consideration of US$11.4 million in cash (equivalent to RMB88.3 million). As a result
of the foregoing acquisitions, Shanda held 50.1% equity interest in Actoz as of such date and
became the majority shareholder of Actoz. Since Shanda had unilateral control of Actoz, it started
to consolidate Actozs financial statements from July 1, 2007.
The purchase price of Actoz in connection with the total consideration of US$11.4 million in
cash (equivalent to RMB88.3 million) was allocated as follows:
|
|
|
|
|
|
|
RMB |
|
Cash |
|
|
13,467 |
|
Other assets |
|
|
54,270 |
|
Identifiable intangible assets |
|
|
30,111 |
|
Purchased in-progress research and development |
|
|
3,073 |
|
Deferred tax liability |
|
|
(9,126 |
) |
Goodwill |
|
|
11,088 |
|
Current liabilities |
|
|
(14,583 |
) |
|
|
|
|
Purchase price |
|
|
88,300 |
|
|
|
|
|
Total identifiable intangible assets acquired upon consolidation, including software
technology of RMB59.1 million and trademarks of RMB46.8 million, have estimated useful lives of 0.5
to 5.5 years and 20 years respectively. Purchased in-progress research and development of RMB3.1
million were written off as of July 1, 2007 in accordance with FASB Interpretation No. 4
Applicability of FASB Statement No. 2 to Business Combinations Accounted for by the Purchase
Method (FIN 4) because the technological feasibility of the in-progress technology had not been
established as of such date and that the technology had no alternative future use. Those write-offs
were included in costs of revenue.
F-22
SHANDA GAMES LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2007, 2008 AND 2009
(Amounts expressed in thousands unless otherwise stated)
Total goodwill of RMB86.5 million upon consolidation represents the excess of the purchase
price over the estimated fair value of the net tangible and identifiable intangible assets
acquired, and is not deductible for tax purposes. In accordance with ASC 805, goodwill is not
amortized but is tested for impairment. The purchase price allocation for Actoz was primarily based
on an appraisal performed by an independent appraisal firm together with managements assessment
based on their experience in online game business in Korea.
The following unaudited pro forma consolidated financial information reflects the Companys
results of operations for the year ended December 31, 2007, as if the acquisition of Actoz had
occurred on January 1, 2007, and after giving effect to purchase accounting adjustments. These pro
forma results have been prepared for comparative purposes only and do not purport to be indicative
of what operating results would have been had the acquisition actually taken place as of the
beginning of the period presented, and may not be indicative of future operating results.
|
|
|
|
|
|
|
Year Ended |
|
(in thousands, except per share data) |
|
December 31, 2007 |
|
|
|
unaudited |
|
|
|
RMB |
|
Net revenues |
|
|
2,355,762 |
|
Net income |
|
|
586,454 |
|
Earnings per ordinary share |
|
|
|
|
Basic |
|
|
1.07 |
|
Diluted |
|
|
1.07 |
|
The pro forma net income for 2007 includes RMB20.3 million for the amortization of
identifiable intangible assets and was determined using the actual effective income tax rate of
Actoz in 2007.
In 2008, Shanda further acquired a 3.7% equity interest in Actoz in consideration of US$1.9
million in cash (equivalent to RMB13.0 million) and increased its total equity interest in Actoz as
of December 31, 2008 from 50.1% to 53.8%. Additional identifiable intangible assets approximated
RMB2.6 million, consisting of game engine and software technology which were amortized on a
straight-line basis over their economic lives of 3 to 5 years.
As discussed in Note 1, in the second quarter of 2009, Shanda transferred to the Company its
entire stake in Actoz for US$70.2 million. As this is part of the Reorganization under common
control, Actoz is included in the Companys consolidated financial statements at historical basis
throughout the periods presented.
(2) Chengdu Aurora
In July 2007, the Group acquired all of the equity interest of Chengdu Aurora, a leading
developer and operator of MMORPGs in China. Pursuant to the acquisition agreement, the total
purchase consideration was RMB101.0 million (US$13.8 million).
The
purchase price of Chengdu Aurora was allocated as follows:
|
|
|
|
|
|
|
RMB |
|
Cash |
|
|
24,260 |
|
Other assets |
|
|
12,161 |
|
Identifiable intangible assets |
|
|
64,530 |
|
Deferred tax liabilities |
|
|
(16,133 |
) |
Goodwill |
|
|
26,130 |
|
Current liabilities |
|
|
(9,948 |
) |
|
|
|
|
Purchase price |
|
|
101,000 |
|
|
|
|
|
Identifiable intangible assets acquired, mainly including software technology and trademarks
of RMB64.5 million, have estimated useful lives of 4.5 to 5.5 years and 7.5 years, respectively.
Goodwill of RMB26.1 million represents the excess of the purchase price over the estimated fair
value of the net tangible and identifiable intangible assets acquired and is not deductible for tax purposes. In accordance with ASC 805,
goodwill is not amortized but is tested for impairment.
F-23
SHANDA GAMES LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2007, 2008 AND 2009
(Amounts expressed in thousands unless otherwise stated)
The following unaudited pro forma consolidated financial information reflects the results of
operations for the year ended December 31, 2007, as if the
acquisition of Chengdu Aurora had occurred on
January 1, 2007, and after giving effect to purchase accounting adjustments. These pro forma
results have been prepared for comparative purposes only and do not purport to be indicative of
what operating results would have been had the acquisition actually taken place on the beginning of
the periods presented, and may not be indicative of future operating results.
|
|
|
|
|
|
|
Year Ended |
|
(in thousands, except per share data) |
|
December 31, 2007 |
|
|
|
unaudited |
|
|
|
RMB |
|
Net revenues |
|
|
2,322,798 |
|
Net income |
|
|
591,900 |
|
Earnings per ordinary share |
|
|
|
|
Basic |
|
|
1.08 |
|
Diluted |
|
|
1.08 |
|
The pro forma net income for 2007 includes RMB13.0 million for the amortization of
identifiable intangible assets and was determined using the actual effective income tax rate of
Chengdu Aurora in 2007.
5. OTHER INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the years ended December 31, |
|
|
|
2007 |
|
|
2008 |
|
|
2009 |
|
|
|
RMB |
|
|
RMB |
|
|
RMB |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government financial incentives |
|
|
54,258 |
|
|
|
18,421 |
|
|
|
177,020 |
|
Foreign exchange (loss) gain |
|
|
(2,591 |
) |
|
|
10,756 |
|
|
|
(5,290 |
) |
Donation expense |
|
|
(3,895 |
) |
|
|
(16,084 |
) |
|
|
|
|
Others |
|
|
(19,061 |
) |
|
|
(6,975 |
) |
|
|
(2,286 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
28,711 |
|
|
|
6,118 |
|
|
|
169,444 |
|
|
|
|
|
|
|
|
|
|
|
Government financial incentives are granted by the municipal government upon the qualification
of a company as a new-high technology enterprise. These government financial incentives are
calculated with reference to either the group companies taxable income or revenue, as the case may
be. In order to be eligible for certain government financial incentives, the Group must meet a
number of criteria, both financial and non-financial. In addition, the Groups qualification is
further subject to the discretion of the municipal government to immediately eliminate or reduce
these financial incentives. As there is no further obligation for the Group to perform upon receipt
of the government financial incentives, they are recognized as other income when received.
6. TAXATION
Cayman Islands
Under the current laws of Cayman Islands, the Company is not subject to tax on its income or
capital gains. In addition, upon payments of dividends by the Company to its shareholders, no
Cayman Islands withholding tax will be imposed.
Hong Kong
The
Companys subsidiaries incorporated in Hong Kong are subject to taxes at 17.5%, 16.5% and
16.5% for the years ended December 31, 2007, 2008 and 2009, respectively. No Hong Kong profit tax
has been provided as the Group did not have assessable profit that was earned in or derived from
Hong Kong subsidiaries during the years presented.
F-24
SHANDA GAMES LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2007, 2008 AND 2009
(Amounts expressed in thousands unless otherwise stated)
China
Prior to January 1, 2008, the PRC subsidiaries and the PRC operating companies that are
incorporated in the PRC are subject to Enterprise Income Tax (EIT) in accordance with the
Enterprise Income Tax Law and the Income Tax Law of the Peoples Republic of China concerning
Foreign Investment Enterprises and Foreign Enterprises and local income tax laws (collectively, the
previous PRC Income Tax Laws). Pursuant to the previous PRC Income Tax Laws and rules,
enterprises were generally subject to a statutory tax rate of 33% (30% state income tax plus 3%
local income tax). Subsidiaries that are registered in the Pudong New District of Shanghai were,
however, subject to a 15% preferential EIT rate pursuant to the local tax preferential treatment
before January 1, 2008. During the year ended December 31, 2007, certain of the PRC subsidiaries
and the PRC operating companies were subject to an applicable tax rate of 15% as they qualified as
technology advanced enterprises.
Shengqu, as a software development enterprise, has been granted a two-year EIT exemption and
followed by a three year 50% EIT reduction on its taxable income, commencing the year ended
December 31, 2003 (tax holiday). Accordingly, Shengqu was subject to an income tax rate of 7.5%
for the year 2007.
In March 2007, the Chinese government enacted the Corporate Income Tax Law, and promulgated
related regulation Implementing Regulations for the PRC Corporate Income Tax Law. The law and
regulation went into effect on January 1, 2008. The Corporate Income Tax Law, among other things,
imposes a unified income tax rate of 25% for both domestic and foreign invested enterprises. The
Corporate Income Tax Law provides a five-year transitional period for those entities established
before March 16, 2007, which enjoyed a favorable income tax rate of less than 25% under the
previous income tax laws and rules, to gradually subject to a tax rate of 25%.
On April 14, 2008, relevant governmental regulatory authorities released qualification
criteria, application procedures and assessment processes for high and new technology
enterprises, which will be entitled to a favorable statutory tax rate of 15%. On July 8, 2008,
relevant governmental regulatory authorities further clarified that new technology enterprises
previously qualified under the previous income tax laws and rules as of December 31, 2007 would be
allowed to enjoy grandfather treatment for the unexpired tax holidays, on condition that they have
been re-approved for high and new technology enterprise status under the regulations released on
April 14, 2008.
In December 2008, Shengqu, Shanghai Shulong and Chengdu Aurora were recognized as high and
new technology enterprises. Accordingly, these entities are entitled to a preferential tax rate of
15% for 3 years, which is effective retroactively from January 1, 2008. In addition, as Shengqu
also qualified as a key national software enterprise for the years 2008 and 2009, Shengqu has been
subject to a preferential income tax rate of 10% for the years 2008 and 2009.
The Corporate Income Tax Law also imposes a 10% withholding income tax for dividends
distributed by a foreign invested enterprise to its immediate holding company outside China, which
were exempted under the previous income tax laws and rules. Holding companies in Hong Kong, for
example, are subject to a 5% withholding tax rate. All the foreign invested enterprises are subject
to withholding tax on dividends distribution effective from January 1, 2008. Shengqu planned to
distribute profit to its immediate holding company in Hong Kong in the fourth quarter of 2008 and
2009, and a withholding tax was accrued based on a 5% withholding tax rate with amount of RMB37
million and RMB69.6 million, respectively.
Korea
Actoz is subject to income tax on the taxable income as reported in its statutory financial
statements adjusted in accordance with the Enterprise Income Tax Law of the Republic of Korea (the
Korea Income Tax Laws), respectively. Actoz is subject to a 14.3% and 27.5% (in excess of KRW
100,000,000 of taxable income) tax rate for the years ended December 31, 2007 and 2008, and a 12.1%
and 24.2% (in excess of KRW 200,000,000 of taxable income) tax rate for the year ended December 31,
2009, which includes resident tax surcharges in accordance with the Korea Income Tax Laws and local
tax laws.
F-25
SHANDA GAMES LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2007, 2008 AND 2009
(Amounts expressed in thousands unless otherwise stated)
Composition of income tax expense
The current and deferred portion of income tax expense included in the consolidated statements
of operations and comprehensive income for the years ended December 31, 2007, 2008 and 2009 are as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the years ended December 31, |
|
|
|
2007 |
|
|
2008 |
|
|
2009 |
|
|
|
RMB |
|
|
RMB |
|
|
RMB |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current income tax expenses |
|
|
103,561 |
|
|
|
205,704 |
|
|
|
358,104 |
|
Deferred income tax expenses (benefits) |
|
|
(36,489 |
) |
|
|
7,205 |
|
|
|
937 |
|
|
|
Withholding taxes |
|
|
|
|
|
|
37,000 |
|
|
|
69,635 |
|
|
|
|
|
|
|
|
|
|
|
Income tax expenses |
|
|
67,072 |
|
|
|
249,909 |
|
|
|
428,676 |
|
|
|
|
|
|
|
|
|
|
|
Reconciliation of the differences between statutory tax rate and the effective tax rate
The reconciliation between the statutory EIT rate and the Groups effective tax rate for the
years ended December 31, 2007, 2008 and 2009 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the years ended December 31, |
|
|
|
2007 |
|
|
2008 |
|
|
2009 |
|
|
Statutory income tax rate |
|
|
33 |
% |
|
|
25 |
% |
|
|
25 |
% |
Tax differential from statutory rate
applicable to the subsidiaries and the
VIE subsidiaries |
|
|
(20 |
)% |
|
|
(11 |
)% |
|
|
(12 |
%) |
Enacted tax rate change |
|
|
(3 |
)% |
|
|
(1 |
)% |
|
|
|
|
Effect of tax holidays |
|
|
(4 |
)% |
|
|
|
|
|
|
|
|
Effect of the withholding taxes |
|
|
|
|
|
|
3 |
% |
|
|
4 |
% |
Effect of change in valuation allowance |
|
|
|
|
|
|
4 |
% |
|
|
4 |
% |
Others |
|
|
4 |
% |
|
|
1 |
% |
|
|
1 |
% |
|
|
|
|
|
|
|
|
|
|
Effective income tax rate |
|
|
10 |
% |
|
|
21 |
% |
|
|
22 |
% |
|
|
|
|
|
|
|
|
|
|
The aggregate amount and per share effect of the tax holidays are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the years ended December 31, |
|
(in thousands, except per share data) |
|
2007 |
|
|
2008 |
|
|
2009 |
|
|
|
RMB |
|
|
RMB |
|
|
RMB |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The aggregate effect |
|
|
31,849 |
|
|
|
|
|
|
|
|
|
Basic ordinary share effect |
|
|
0.06 |
|
|
|
|
|
|
|
|
|
Diluted ordinary share effect |
|
|
0.06 |
|
|
|
|
|
|
|
|
|
The Company is not subject to any tax holidays in 2008 and 2009.
Significant components of deferred tax assets and deferred tax liabilities are as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008 |
|
|
December 31, 2009 |
|
|
|
RMB |
|
|
RMB |
|
|
|
|
|
|
|
|
|
|
Deferred tax assets |
|
|
|
|
|
|
|
|
Licensing fees and related costs and deferred revenues |
|
|
40,717 |
|
|
|
31,208 |
|
Other temporary differences |
|
|
34,734 |
|
|
|
61,025 |
|
Foreign tax credit of Actoz |
|
|
59,689 |
|
|
|
117,557 |
|
Development cost |
|
|
11,595 |
|
|
|
9,825 |
|
Less: Valuation allowance |
|
|
(41,610 |
) |
|
|
(123,949 |
) |
|
|
|
|
|
|
|
Total deferred tax assets, net of valuation allowance |
|
|
105,125 |
|
|
|
95,666 |
|
|
|
|
|
|
|
|
Deferred tax liabilities |
|
|
|
|
|
|
|
|
Intangible assets arising from business combination |
|
|
35,426 |
|
|
|
38,149 |
|
Withholding taxes |
|
|
37,000 |
|
|
|
69,684 |
|
|
|
|
|
|
|
|
Total deferred tax liabilities |
|
|
72,426 |
|
|
|
107,833 |
|
|
|
|
|
|
|
|
F-26
SHANDA GAMES LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2007, 2008 AND 2009
(Amounts expressed in thousands unless otherwise stated)
Movement of valuation allowances
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the years ended December 31, |
|
|
|
2007 |
|
|
2008 |
|
|
2009 |
|
|
|
RMB |
|
|
RMB |
|
|
RMB |
|
Balance at beginning of year |
|
|
|
|
|
|
3,118 |
|
|
|
41,610 |
|
Current year additions |
|
|
3,118 |
|
|
|
38,492 |
|
|
|
82,339 |
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year |
|
|
3,118 |
|
|
|
41,610 |
|
|
|
123,949 |
|
|
|
|
|
|
|
|
|
|
|
Valuation allowances have been provided on the net deferred tax assets due to the uncertainty
surrounding their realization. As of December 31, 2007, 2008 and 2009, the majority of valuation
allowances were provided because it was more likely than not that the Group would not be able to
utilize certain foreign tax credit carry forwards generated by a subsidiary. If events occur in the
future that allow the Group to realize more of its deferred tax assets than the presently recorded
amount, an adjustment to the valuation allowances will increase net income when those events occur.
As of December 31, 2009, total tax credit carry forward of KRW5,978 million (equivalent to
RMB35.3 million) and KRW13,947 million (equivalent to RMB 82.3 million) will expire in 2014 and
2015, respectively.
7. EARNINGS PER SHARE
Basic and diluted net income per ordinary share attributable to the Companys shareholders
have been calculated in accordance with ASC 260 (formerly referred to SFAS No. 128 and EITF No.
03-06), for the years ended December 31, 2007, 2008 and 2009 as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the years ended December 31, |
|
(in thousands, except share and per share data) |
|
2007 |
|
|
2008 |
|
|
2009 |
|
|
|
RMB |
|
|
RMB |
|
|
RMB |
|
Numerator: |
|
|
|
|
|
|
|
|
|
|
|
|
Net income per ordinary share attributable to Shanda Games Limited for basic and diluted earnings |
|
|
591,900 |
|
|
|
935,484 |
|
|
|
1,452,972 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average ordinary shares outstanding for basic calculation |
|
|
550,000,000 |
|
|
|
550,000,000 |
|
|
|
556,575,353 |
|
Dilutive effect of share options |
|
|
|
|
|
|
|
|
|
|
2,986,054 |
|
Dilutive effect of restricted shares |
|
|
|
|
|
|
|
|
|
|
39,464 |
|
|
|
|
|
|
|
|
|
|
|
Denominator for diluted calculation |
|
|
550,000,000 |
|
|
|
550,000,000 |
|
|
|
559,600,871 |
|
|
|
|
|
|
|
|
|
|
|
Net income
per ordinary share attributable to Shanda Games Limiteds shareholders basic |
|
|
1.08 |
|
|
|
1.70 |
|
|
|
2.61 |
|
|
|
|
|
|
|
|
|
|
|
Net income
per ordinary share attributable to Shanda Games Limiteds shareholders diluted |
|
|
1.08 |
|
|
|
1.70 |
|
|
|
2.60 |
|
|
|
|
|
|
|
|
|
|
|
8. CASH AND CASH EQUIVALENTS
Cash and cash equivalents as of December 31, 2009 include cash balances held by the PRC
operating companies of approximately RMB573.7 million. These cash balances cannot be transferred to
the Company by dividend, loan or advance according to existing PRC laws and regulations (Note 23).
However, these cash balances can be utilized by the Company for its normal operations pursuant to
various agreements which enable the Company to substantially control the PRC operating companies as
described in Note 2(3) for its normal operations.
Included in the cash and cash equivalents are cash balances denominated in U.S. dollars of
approximately US$5,844 and US$54,605 (equivalent to approximately RMB39,944 and RMB372,731) as of
December 31, 2008 and 2009, respectively, and cash balances denominated in Korean Won of
approximately KRW5,653,703 and KRW3,800,199 (equivalent to approximately RMB30,564 and RMB22,421)
as of December 31, 2008 and 2009, respectively.
F-27
SHANDA GAMES LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2007, 2008 AND 2009
(Amounts expressed in thousands unless otherwise stated)
9. ACCOUNTS RECEIVABLE
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008 |
|
|
December 31, 2009 |
|
|
|
RMB |
|
|
RMB |
|
Accounts receivable |
|
|
16,138 |
|
|
|
20,544 |
|
Less: Allowance for doubtful accounts |
|
|
(8,853 |
) |
|
|
(2,041 |
) |
|
|
|
|
|
|
|
|
|
|
7,285 |
|
|
|
18,503 |
|
|
|
|
|
|
|
|
The movement of the allowance for doubtful accounts during the years ended December 31, 2008
and 2009 are as follows:
|
|
|
|
|
|
|
|
|
|
|
For the years ended December 31, |
|
|
|
2008 |
|
|
2009 |
|
|
|
RMB |
|
|
RMB |
|
Balance at beginning of year |
|
|
9,772 |
|
|
|
8,853 |
|
Add: Current year additions |
|
|
|
|
|
|
1,673 |
|
|
|
Less: Current year reversal |
|
|
(695 |
) |
|
|
|
|
Current year write-offs |
|
|
(224 |
) |
|
|
(8,485 |
) |
|
|
|
|
|
|
|
Balance at end of year |
|
|
8,853 |
|
|
|
2,041 |
|
|
|
|
|
|
|
|
10. INVESTMENTS IN AFFILIATED COMPANIES
The following table includes the Companys carrying amount and percentage ownership of the
investments in affiliated companies as of December 31, 2009 and the carrying amount as of December
31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008 |
|
|
December 31, 2009 |
|
|
|
|
|
|
|
|
|
|
Percentage |
|
|
|
RMB |
|
|
RMB |
|
|
Ownership |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shanghai Weilai Information Technology Co., Ltd. (Shanghai Weilai) |
|
|
3,333 |
|
|
|
|
|
|
|
25 |
% |
Beijing Zhongcheng Cooperation and Technology Development Co., Ltd.
(Beijing Zhongcheng) |
|
|
6,069 |
|
|
|
|
|
|
|
35 |
% |
Anipark Co., Ltd. (Anipark) |
|
|
3,910 |
|
|
|
6,751 |
|
|
|
12.89 |
% |
|
|
Shanghai Caiqu Network Technology Co., Ltd. (Shanghai Caiqu) |
|
|
4,000 |
|
|
|
|
|
|
|
|
|
Shanghai Qiyu Information Technology Co., Ltd. (Shanghai Qiyu) |
|
|
960 |
|
|
|
829 |
|
|
|
20 |
% |
Xiamen Lianyu Science and Technology Co., Ltd. (Xiamen Lianyu) |
|
|
374 |
|
|
|
505 |
|
|
|
30 |
% |
|
|
Fuzhou Lingyu Computer Technology Co., Ltd (Fuzhou Lingyu) |
|
|
|
|
|
|
319 |
|
|
|
30 |
% |
|
|
Chengdu Sunray Technology Co., Ltd. (Chengdu Sunray) |
|
|
4,570 |
|
|
|
|
|
|
|
20 |
% |
|
|
Beijing Chuanyue Shidai Information Co., Ltd. (Beijing Chuanyue) |
|
|
178 |
|
|
|
|
|
|
|
20 |
% |
Others |
|
|
127 |
|
|
|
299 |
|
|
|
20%-23 |
% |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
23,521 |
|
|
|
8,703 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-28
SHANDA GAMES LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2007, 2008 AND 2009
(Amounts expressed in thousands unless otherwise stated)
|
|
The movement of the investments in affiliated companies is as follows: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share of |
|
|
Amortization |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Profit/(Loss) |
|
|
of Identifiable |
|
|
|
|
|
|
|
|
|
|
Balances at |
|
|
|
|
|
|
on Affiliated |
|
|
Intangible |
|
|
|
|
|
|
Balances at |
|
|
|
January 1, |
|
|
|
|
|
|
Companies |
|
|
Assets, Net of |
|
|
Other Equity |
|
|
December 31, |
|
|
|
2008 |
|
|
Investments |
|
|
Investments |
|
|
Tax |
|
|
Movement |
|
|
2008 |
|
|
|
RMB |
|
|
RMB |
|
|
RMB |
|
|
RMB |
|
|
RMB |
|
|
RMB |
|
Chengdu Sunray |
|
|
5,000 |
|
|
|
|
|
|
|
(430 |
) |
|
|
|
|
|
|
|
|
|
|
4,570 |
|
Beijing Chuanyue |
|
|
|
|
|
|
100 |
|
|
|
78 |
|
|
|
|
|
|
|
|
|
|
|
178 |
|
Shanghai Qiyu |
|
|
|
|
|
|
1,000 |
|
|
|
|
|
|
|
(40 |
) |
|
|
|
|
|
|
960 |
|
Beijing Zhongcheng |
|
|
|
|
|
|
6,269 |
|
|
|
(200 |
) |
|
|
|
|
|
|
|
|
|
|
6,069 |
|
Xiamen Lianyu |
|
|
|
|
|
|
430 |
|
|
|
(49 |
) |
|
|
(7 |
) |
|
|
|
|
|
|
374 |
|
Shanghai Weilai |
|
|
|
|
|
|
3,333 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,333 |
|
Shanghai Caiqu |
|
|
|
|
|
|
4,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,000 |
|
Anipark |
|
|
|
|
|
|
|
|
|
|
1,564 |
|
|
|
|
|
|
|
2,346 |
|
|
|
3,910 |
|
Others |
|
|
|
|
|
|
125 |
|
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
127 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
5,000 |
|
|
|
15,257 |
|
|
|
965 |
|
|
|
(47 |
) |
|
|
2,346 |
|
|
|
23,521 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share of |
|
|
Amortization |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Profit/(Loss) |
|
|
of Identifiable |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at |
|
|
|
|
|
|
on Affiliated |
|
|
Intangible |
|
|
|
|
|
|
Transferred |
|
|
Balances at |
|
|
|
January 1, |
|
|
|
|
|
|
Companies |
|
|
Assets, Net of |
|
|
Other Equity |
|
|
Out to Related |
|
|
December 31, |
|
|
|
2009 |
|
|
Investments |
|
|
Investments |
|
|
Tax |
|
|
Movement |
|
|
Party |
|
|
2009 |
|
|
|
RMB |
|
|
RMB |
|
|
RMB |
|
|
RMB |
|
|
RMB |
|
|
RMB |
|
|
RMB |
|
Shanghai Weilai |
|
|
3,333 |
|
|
|
11,667 |
|
|
|
(15,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beijing Zhongcheng |
|
|
6,069 |
|
|
|
5,731 |
|
|
|
(11,800 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Anipark |
|
|
3,910 |
|
|
|
|
|
|
|
2,194 |
|
|
|
|
|
|
|
647 |
|
|
|
|
|
|
|
6,751 |
|
Shanghai Caiqu |
|
|
4,000 |
|
|
|
|
|
|
|
340 |
|
|
|
(340 |
) |
|
|
|
|
|
|
(4,000 |
) |
|
|
|
|
Shanghai Qiyu |
|
|
960 |
|
|
|
|
|
|
|
(71 |
) |
|
|
(60 |
) |
|
|
|
|
|
|
|
|
|
|
829 |
|
Xiamen Lianyu |
|
|
374 |
|
|
|
|
|
|
|
142 |
|
|
|
(11 |
) |
|
|
|
|
|
|
|
|
|
|
505 |
|
Fuzhou Lingyu |
|
|
|
|
|
|
1,000 |
|
|
|
(681 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
319 |
|
Chengdu Sunray |
|
|
4,570 |
|
|
|
|
|
|
|
(4,570 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beijing Chuanyue |
|
|
178 |
|
|
|
|
|
|
|
(178 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Others |
|
|
127 |
|
|
|
208 |
|
|
|
(36 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
299 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
23,521 |
|
|
|
18,606 |
|
|
|
(29,660 |
) |
|
|
(411 |
) |
|
|
647 |
|
|
|
(4,000 |
) |
|
|
8,703 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11. PROPERTY AND EQUIPMENT
Property and equipment and its related accumulated depreciation as of December 31, 2008 and
2009 are as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008 |
|
|
December 31, 2009 |
|
|
|
RMB |
|
|
RMB |
|
Computer equipment |
|
|
243,952 |
|
|
|
297,660 |
|
Leasehold improvements |
|
|
1,564 |
|
|
|
4,338 |
|
Furniture and fixtures |
|
|
20,540 |
|
|
|
26,069 |
|
Motor vehicles |
|
|
11,213 |
|
|
|
10,919 |
|
Office buildings |
|
|
2,596 |
|
|
|
2,596 |
|
Less: Accumulated depreciation |
|
|
(186,880 |
) |
|
|
(201,748 |
) |
|
|
|
|
|
|
|
Net book value |
|
|
92,985 |
|
|
|
139,834 |
|
|
|
|
|
|
|
|
Depreciation expense for the years ended December 31, 2007, 2008 and 2009 was approximately
RMB60,979, RMB52,339 and RMB44,797, respectively.
F-29
SHANDA GAMES LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2007, 2008 AND 2009
(Amounts expressed in thousands unless otherwise stated)
12. INTANGIBLE ASSETS
Intangible assets consist of upfront licensing fees paid to online game licensors, software
and copyrights, and intangible assets arising from business combinations. Gross carrying amount,
accumulated amortization and net book value of the Companys intangible assets as of December 31,
2008 and 2009 are as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008 |
|
|
December 31, 2009 |
|
|
|
RMB |
|
|
RMB |
|
Gross carrying amount: |
|
|
|
|
|
|
|
|
Upfront licensing fee paid |
|
|
343,571 |
|
|
|
479,704 |
|
Software, copyrights and others |
|
|
87,865 |
|
|
|
107,565 |
|
Intangible assets arising from business combinations |
|
|
|
|
|
|
|
|
Software technology |
|
|
118,223 |
|
|
|
207,523 |
|
Non-compete arrangement |
|
|
227 |
|
|
|
21,227 |
|
Trademarks |
|
|
54,666 |
|
|
|
54,666 |
|
Other |
|
|
3,073 |
|
|
|
3,073 |
|
|
|
|
|
|
|
|
|
|
|
607,625 |
|
|
|
873,758 |
|
|
|
|
|
|
|
|
Less: accumulated amortization |
|
|
|
|
|
|
|
|
Upfront licensing fee paid |
|
|
(55,739 |
) |
|
|
(165,018 |
) |
Software, copyrights and others |
|
|
(79,511 |
) |
|
|
(93,460 |
) |
Intangible assets arising from business combinations |
|
|
(43,270 |
) |
|
|
(77,937 |
) |
|
|
|
|
|
|
|
|
|
|
(178,520 |
) |
|
|
(336,415 |
) |
|
|
|
|
|
|
|
Less: Impairment for upfront licensing fee paid |
|
|
(20,095 |
) |
|
|
(20,095 |
) |
|
|
|
|
|
|
|
Net book value |
|
|
409,010 |
|
|
|
517,248 |
|
|
|
|
|
|
|
|
Amortization expense for the years ended December 31, 2007, 2008 and 2009 amounted to
approximately RMB74,407, RMB104,897 and RMB151,852, respectively.
Impairment of intangible assets charged to cost of revenue in 2007 amounted to RMB20,095
primarily related to one of the online games for which the Company would not be able to fully
recover the upfront and minimum royalty licensing costs. The provision represents managements best
estimate of the loss.
The estimated aggregate amortization expense for each of the five succeeding fiscal years is
as follows:
|
|
|
|
|
|
|
Amortization |
|
|
|
RMB |
|
2010 |
|
|
161,860 |
|
2011 |
|
|
151,998 |
|
2012 |
|
|
81,588 |
|
2013 |
|
|
28,747 |
|
2014 |
|
|
25,404 |
|
|
|
|
|
Total |
|
|
449,597 |
|
|
|
|
|
13. GOODWILL
|
|
The changes in the carrying amount of goodwill from significant acquisitions are as follows: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actoz |
|
|
Chengdu Aurora |
|
|
Shanghai Shulong |
|
|
Chengdu Simo |
|
|
Total |
|
|
|
RMB |
|
Balance as of December 31, 2007 |
|
|
86,479 |
|
|
|
26,130 |
|
|
|
3,934 |
|
|
|
|
|
|
|
116,543 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisitions in 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2008 |
|
|
86,479 |
|
|
|
26,130 |
|
|
|
3,934 |
|
|
|
|
|
|
|
116,543 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisitions in 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
53,532 |
|
|
|
53,532 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2009 |
|
|
86,479 |
|
|
|
26,130 |
|
|
|
3,934 |
|
|
|
53,532 |
|
|
|
170,075 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill arising from business combination completed in 2009 has been allocated to the
respective reporting unit of the Group. Goodwill is not amortized but is reviewed annually for
impairment. The Company performed goodwill impairment tests as of December 31, 2008 and 2009, and
determined that the Companys goodwill was not impaired.
F-30
SHANDA GAMES LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2007, 2008 AND 2009
(Amounts expressed in thousands unless otherwise stated)
14. OTHER PAYABLES AND ACCRUALS
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008 |
|
|
December 31, 2009 |
|
|
|
RMB |
|
|
RMB |
|
Salary and welfare payable |
|
|
2,242 |
|
|
|
4,619 |
|
Accrued bonus |
|
|
51,336 |
|
|
|
89,860 |
|
Unpaid rental for server software |
|
|
46,574 |
|
|
|
47,609 |
|
Accrued professional service fee |
|
|
7,185 |
|
|
|
8,695 |
|
Acquisition related obligation (Note 4) |
|
|
|
|
|
|
48,800 |
|
Unpaid advertisement and promotion fee |
|
|
32,443 |
|
|
|
146,054 |
|
Payables to employees relating to exercise of options (Note 2(7)) |
|
|
|
|
|
|
54,471 |
|
Other payables |
|
|
15,583 |
|
|
|
33,334 |
|
|
|
|
|
|
|
|
Total |
|
|
155,363 |
|
|
|
433,442 |
|
|
|
|
|
|
|
|
15. ORDINARY SHARES
Upon incorporation of Shanda Games (HK) in December 2007, Shanda subscribed for 55,000,000 shares
at a par value of US$1.00 per ordinary share in Shanda Games (HK). In turn, Shanda paid US$45 million,
equal to RMB328.9 million out of the total payable of US$55 million to Shanda Games (HK). Following
the Reorganization on July 1, 2008, Shanda transferred all of its 55,000,000 ordinary shares in
Shanda Games (HK) to the Company in exchange for the issuance of 54,999,999 ordinary shares of the
Company. Together with the 1 ordinary share owned by Shanda upon the incorporation of the Company,
Shanda owned 55,000,000 ordinary shares in the Company immediately after the share swap. Due to the
share swap, the Company assumed the payable of US$10 million to Shanda Games (HK), which was settled
in cash in 2009. On September 18, 2008, the Company declared a share dividend and distributed
495,000,000 ordinary shares to Shanda. Immediately after the share dividend, Shanda owned
550,000,000 ordinary shares of Shanda Games at a par value of US$0.01 per ordinary share.
The transactions described above are accounted for as a legal reorganization under common
control. Therefore the Company is assumed to have been in existence since January 1, 2007, and the
impact of the share transactions is accounted for retroactively in the periods presented herein. In
connection with Shandas investments that were transferred from Shanda to the Group, such as
investments in Actoz and certain affiliated companies, as part of the Reorganization, they are
recorded as capital contribution from Shanda in the consolidated statements of changes in
shareholders equity.
On September 25, 2009, the Company completed the IPO on the NASDAQ Global Select Market. In
the offering, 83,500,000 American Depositary Shares (ADSs), representing 167,000,000 Class A
ordinary shares, were sold to the public at a price of $12.50 per ADS. Of these, 13,043,500 ADSs,
representing 26,087,000 Class A ordinary shares, were sold by the Company; and 70,456,500 ADSs,
representing 140,913,000 Class A ordinary shares, were sold by a direct wholly-owned subsidiary of
Shanda. The net proceeds to the Company from the IPO, after deducting commissions and offering
expenses, were approximately $152.5 million. As of December 31, 2009, the Company had an aggregate
of 576,087,000 ordinary shares issued and outstanding. These outstanding shares consist of (1)
167,000,000 Class A ordinary shares held by public shareholders; (2) 409,087,000 Class B ordinary
shares indirectly held by Shanda.
F-31
SHANDA GAMES LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2007, 2008 AND 2009
(Amounts expressed in thousands unless otherwise stated)
16. SHARE OPTION PLAN
Certain of the Companys employees were granted awards under share-based incentive plans
established by Shanda. Such share-based compensation expenses were recognized in the Companys
consolidated statements of operations and comprehensive income in the amounts of RMB12.8 million,
RMB12.2 million and RMB11.8 million for the years ended December 31, 2007, 2008 and 2009,
respectively. For awards granted to the Companys employees under the share-based incentive plans
established by the Company, share-based compensation expenses were recognized in the Companys
consolidated statements of operations and comprehensive income in the amounts of RMB2.2 million and
RMB106.9 million for the years ended December 31, 2008 and 2009.
Share-based compensation allocated from Shanda
Shandas 2003 Share Incentive Plan
Shandas 2003 Share Incentive Plan provides for the issuance of options to purchase up to
13,309,880 ordinary shares of Shanda. Under the 2003 Share Incentive Plan, the directors may, at
their discretion, grant any officers (including directors) and employees of Shanda and/or its
subsidiaries, and individual consultant or advisor (i) options to subscribe for ordinary shares,
(ii) share appreciation rights to receive payment, in cash and/or Shanda s ordinary shares, equals
to the excess of the fair market value of Shandas ordinary shares, or (iii) other types of
compensation based on the performance of Shandas ordinary shares.
In 2004 and 2005, Shanda granted options to purchase 226,750 and 86,295 ordinary shares of
Shanda, respectively, to certain employees of the Company under the 2003 Share Incentive Plan, at
exercise prices equal to the market prices per ordinary share of Shandas stock at the dates of
grant. The option awards have 10 years contractual term and vest in four year installments on the
first, second, third and fourth anniversaries of the date of grant.
Shandas 2005 Equity Compensation Plan
Shandas 2005 Equity Compensation Plan provides for the issuance of options to purchase up to
7,449,235 ordinary shares, plus ordinary shares reserved for issuance but not yet issued under
Shandas 2003 Share Incentive Plan. Under the 2005 Equity Compensation Plan, the directors may, at
their discretion, grant any officers (including directors) and employees of Shanda Interactive
and/or its subsidiaries, and individual consultant or advisor (i) options to subscribe for ordinary
shares, (ii) share appreciation rights to receive payment, in cash and/or Shandas ordinary shares,
equals to the excess of the fair market value of Shandas ordinary shares, or (iii) other types of
compensation based on the performance of Shandas ordinary shares. The maximum contractual term of
any issued stock right is ten years from the grant date.
In 2006, 2007 and 2008, Shanda granted options to purchase 1,055,000, 325,000, and 20,000
ordinary shares, of Shanda, respectively, to certain employees of the Company under the 2005 Equity
Compensation Plan, at exercise price equal to the average market value in the previous three months
of the grant dates, except for the options granted in 2008 for which the exercise price was equal
to the average market value of the fifteen days prior to the grant date. These awards vest over a
four year period, with 25% of the options to vest on each of the first, second, third and fourth
anniversaries of the award date as stipulated in the share option agreement.
A summary of option activity, relating to the options held by the Groups employees under the
Shandas 2003 Share Incentive Plan and 2005 Equity Compensation Plan as of December 31, 2008 and
December 31, 2009 and changes during the year then ended is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
Weighted
Average |
|
|
|
|
|
|
Options |
|
|
Average |
|
|
Remaining |
|
|
Aggregate |
|
|
|
Outstanding |
|
|
Exercise Price |
|
|
Contractual Life |
|
|
Intrinsic Value |
|
|
|
|
|
|
|
US$ |
|
|
|
|
|
|
US$ |
|
Outstanding at January 1, 2008 |
|
|
1,462,008 |
|
|
|
8.05 |
|
|
|
|
|
|
|
|
|
Granted |
|
|
20,000 |
|
|
|
17.60 |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(117,322 |
) |
|
|
8.42 |
|
|
|
|
|
|
|
|
|
Forfeited or Expired |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2008 |
|
|
1,364,686 |
|
|
|
8.16 |
|
|
|
6.49 |
|
|
|
10,979 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and expected to vest at December 31, 2008 |
|
|
1,221,245 |
|
|
|
8.08 |
|
|
|
6.52 |
|
|
|
9,925 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and exercisable at December 31, 2008 |
|
|
551,862 |
|
|
|
7.25 |
|
|
|
6.55 |
|
|
|
4,930 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(735,616 |
) |
|
|
7.66 |
|
|
|
|
|
|
|
|
|
Forfeited or Expired |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2009 |
|
|
629,070 |
|
|
|
8.73 |
|
|
|
5.24 |
|
|
|
11,055 |
|
Vested and expected to vest at December 31, 2009 |
|
|
591,410 |
|
|
|
8.69 |
|
|
|
5.26 |
|
|
|
10,415 |
|
Vested and exercisable at December 31, 2009 |
|
|
187,820 |
|
|
|
8.15 |
|
|
|
5.24 |
|
|
|
3,410 |
|
F-32
SHANDA GAMES LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2007, 2008 AND 2009
(Amounts expressed in thousands unless otherwise stated)
The aggregate intrinsic value is calculated as the difference between the market value of
US$16.18 and US$26.31 as of December 31, 2008 and 2009 and the exercise price of the options,
respectively. The total intrinsic value of options exercised during the years ended December 31,
2007, 2008 and 2009 was RMB16.0 million, RMB6.2 million and RMB93.6 million, respectively.
The weighted average grant-date fair value of options granted during the year ended December
31, 2008 was US$8.49. The total fair value of options vested during the two years ended December
31, 2008 and 2009 was RMB16.0 million and RMB12.8 million.
As of December 31, 2009, there was RMB9.6 million of unrecognized compensation cost, adjusted
for the estimated forfeitures, related to non-vested stock-based awards granted to the employees.
This cost is expected to be recognized over a weighted averaged period of 1 year. Total
compensation cost may be adjusted for future changes in estimated forfeitures. For the years ended
December 31, 2008 and 2009, total cash received by Shanda from the exercise of stock options
amounted to RMB6.8 million and RMB38.5 million, respectively.
Under Shandas 2003 Share Incentive Plan and 2005 Equity Compensation Plan, share-based
compensation expense of approximately RMB12.8 million, RMB12.2 million, and RMB11.8 million were
recognized in the consolidated statements of operations and comprehensive income in the years ended
December 31, 2007, 2008, and 2009, respectively.
The fair value of each option granted under Shandas 2003 Share Incentive Plan and 2005 Equity
Compensation Plan is estimated on the grant date using the Black-Scholes option pricing model that
uses assumptions noted in the following table:
|
|
|
|
|
|
|
|
|
|
|
For the years ended December 31, |
|
|
|
2007 |
|
|
2008 |
|
Risk-free interest rate(1) |
|
|
4.51 |
% |
|
|
3.28 |
% |
Expected life (in years)(2) |
|
5 years |
|
|
5 years |
|
Expected dividend yield(3) |
|
|
0 |
% |
|
|
0 |
% |
Expected volatility(4) |
|
|
58 |
% |
|
|
58 |
% |
Fair value per option at grant date (in RMB) |
|
|
55.91 |
|
|
|
61.97 |
|
|
|
|
(1) |
|
The risk-free interest rate for periods within the contractual life of the share option is
based on the U.S. Treasury yield curve in effect at the time of grant for a term consistent
with the expected term of the awards. |
|
(2) |
|
The expected term of stock options granted under the Plan is developed giving consideration
to vesting period, contractual term and historical exercise pattern. |
|
(3) |
|
Shanda has no history or expectation of paying dividends on its ordinary shares. |
|
(4) |
|
Expected volatility is estimated based on the historical volatility of comparable companies
stocks and of Shandas ordinary shares for a period equal to the expected term preceding the
grant date. |
F-33
SHANDA GAMES LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2007, 2008 AND 2009
(Amounts expressed in thousands unless otherwise stated)
Share-based compensation of the Company
2008 Equity Compensation Plan
In November 2008, the Company authorized an equity compensation plan (the 2008 Equity
Compensation Plan) that provides for the issuance of options to purchase up to 44,000,000 ordinary
shares. Under the Companys 2008 Equity Compensation Plan, the directors may, at their discretion,
grant any officers (including directors) and employees of the Company and/or its subsidiaries
affiliates, and individual consultant or advisor (i) options to subscribe for ordinary shares, (ii)
share appreciation rights to receive payment, in cash and/or the Companys ordinary shares, equals
to the excess of the fair market value of the Companys ordinary shares, or (iii) other types of
compensation based on the performance of the Companys ordinary shares.
From November 14, 2008 through September 7, 2009, the Company granted options to employees to
purchase 24,752,500 ordinary shares at an exercise price of US$3.2 per share and 936,000 ordinary
shares at an exercise price of US$3.98 per share under the Companys 2008 Equity Compensation Plan,
respectively. After the the Companys IPO, from October 16, 2009 through December 1, 2009, the
Company granted options to employees to purchase 38,000 Class A ordinary shares at an exercise
price of US$5.38 and 20,000 Class A ordinary shares at an exercise price of US$5.29 under the
Companys 2008 Equity Compensation Plan, respectively, equivalent to the average market value in
the previous fifteen trading days of the grant dates. The options can be exercised within 10 years
from the grant date. Pursuant to the 2008 Equity Compensation Plan, for each quarter during the
four years beginning on the Performance Period Start Date through the four-year Performance Period.
1/16th of the options have the opportunity to be earned, including 1/3 of which can be earned
subject to the participants continued employment with the Company, and up to 2/3 of which can be
earned contingent on the achievement of different performance targets.
For the options granted prior to the consummation of the Companys IPO, the vesting conditions
are: 1) On each of the first four anniversaries of the Performance Period Start Date, twenty
percent (20%) of the earned options during the year preceding such anniversary date shall vest and
become exercisable. 2) On each of the first four anniversaries of the consummation of the IPO,
eighty percent (80%) of the earned options during the year preceding the corresponding first four
anniversaries of the Performance Period Start Date shall vest and become exercisable provided, in
each case, that the employees remain employed by the Company on such vesting date.
For the options granted after the consummation of the Companys IPO, on each of the first four
anniversaries of the Performance Period Start Date, one hundred percent (100%) of the options
earned during the year preceding such anniversary date shall vest and become exercisable provided
that the employees remain employed by the Company on such vesting date.
In accordance with ASC 718, the Company recognized share-based compensation expenses for the
options granted prior to IPO, net of a forfeiture rate, using the straight-line method for the 1/3
of the 20% of the options earned subject to the employees continued employment with the Company,
and using the graded-vesting method for up to 2/3 of the 20% of the options earned contingent on
the achievement of different performance targets when the Company concluded that it is probably
that the performance targets will be achieved.
The Company did not recognize share-based compensation expenses for the earned options (80%)
granted prior to the IPO and which vested upon the consummation of the IPO, as the Company was not
able to determine that it was probable that this performance condition would be satisfied until
such event occurred As a result of the consummation of the IPO, the share-based compensation
expenses for this portion of the earned options were recognized in the Companys consolidated
statements of operations and comprehensive income.
For the options granted after the consummation of the IPO, the Company recognized the
share-based compensation expenses, net of a forfeiture rate, using the straight-line method for the
1/3 of the options earned subject to the employees continued employment with the Company, and
using the graded-vesting method for the 2/3 of the options earned contingent on the achievement of different performance targets when
the Company concluded that it is probably that the performance targets will be achieved.
Share-based compensation expense related to the option award granted by the Company under the
2008 Equity Compensation Plan amounted to approximately RMB2.2 million and RMB103.9 million for the
years ended December 31, 2008 and 2009.
F-34
SHANDA GAMES LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2007, 2008 AND 2009
(Amounts expressed in thousands unless otherwise stated)
The Companys share option activities as of December 31, 2008 and 2009 and changes during the
year then ended is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
Average |
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
Remaining |
|
|
Aggregate |
|
|
|
Options |
|
|
Average |
|
|
Contractual |
|
|
Intrinsic |
|
|
|
Outstanding |
|
|
Exercise Price |
|
|
Life |
|
|
Value |
|
|
|
|
|
|
|
US$ |
|
|
|
|
|
|
US$ |
|
Granted |
|
|
21,857,500 |
|
|
|
3.2 |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expired |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2008 |
|
|
21,857,500 |
|
|
|
3.2 |
|
|
|
9.87 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and expected to vest at December 31, 2008 |
|
|
3,213,101 |
|
|
|
3.2 |
|
|
|
9.87 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and exercisable at December 31, 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted |
|
|
3,889,000 |
|
|
|
3.4 |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited |
|
|
(191,300 |
) |
|
|
3.2 |
|
|
|
|
|
|
|
|
|
Expired |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2009 |
|
|
25,555,200 |
|
|
|
3.2 |
|
|
|
8.94 |
|
|
|
47,589 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and expected to vest at December 31, 2009 |
|
|
25,178,284 |
|
|
|
3.2 |
|
|
|
8.94 |
|
|
|
46,956 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and exercisable at December 31, 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As the exercise price approximates the fair value of the ordinary share of the Company as of
December 31, 2008, there is no intrinsic value as of December 31, 2008. The intrinsic value as of
December 31, 2009 is calculated as the difference between the fair value of US$5.1 of ordinary
shares as of December 31, 2009 and the exercise price of the shares.
The weighted average grant-date fair value of options granted during the year ended December
31, 2008 and 2009 was US$1.60 and US$2.49, respectively. No option was vested during the year ended
December 31, 2008 and 2009.
As of December 31, 2009, there was RMB182.9 million of unrecognized compensation cost,
adjusted for the estimated forfeitures, related to non-vested stock-based awards granted to the
Companys employees. This cost is expected to be recognized over a weighted average period of 3.6
years. Total compensation cost may be adjusted for future changes in estimated forfeitures and the
probability of the achievement of performance conditions.
The fair value of each option granted under the Companys 2008 Equity Compensation Plan before
the IPO is estimated on the date of grant using the binomial pricing model that uses the
assumptions noted in the following table:
|
|
|
|
|
|
|
|
|
|
|
For the years ended December 31 |
|
|
|
2008 |
|
|
2009 |
|
Exercise Price |
|
US$ |
3.2 |
|
|
US$ |
3.20~US$3.98 |
|
Fair value of ordinary shares |
|
US$ |
3.13 |
|
|
US$ |
3.90~US$6.25 |
|
Risk-free interest rate(1) |
|
|
3.94 |
% |
|
|
3.31%~4.44 |
% |
Exercise multiple(2) |
|
|
1.8 |
|
|
|
1.8 |
|
Expected dividend yield(3) |
|
|
0 |
% |
|
|
0 |
% |
Expected volatility(4) |
|
|
50 |
% |
|
|
50 |
% |
Fair value per option at grant date (in RMB) |
|
|
10.4~11.8 |
|
|
|
14.1~26.8 |
|
|
|
|
(1) |
|
The risk-free interest rate for periods within the contractual life of the share option is
based on the U.S. Treasury yield curve over the contractual term of the option in effect at
the time of grant. |
|
(2) |
|
The management estimates the options will be exercised when the spot price reaches 1.8 times
of strike price after becoming exercisable. |
|
(3) |
|
The Company has no history or expectation of paying dividends on its ordinary shares. |
|
(4) |
|
Expected volatility is estimated based on the historical volatility of comparable companies
stocks and of Shandas ordinary shares for a period equal to the expected term preceding the
grant date. |
F-35
SHANDA GAMES LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2007, 2008 AND 2009
(Amounts expressed in thousands unless otherwise stated)
The fair value of each option granted under the Companys 2008 Equity Compensation Plan
after the IPO is estimated on the date of grant using the Black-Scholes model that uses the
assumptions noted in the following table:
|
|
|
|
|
|
|
For the year ended |
|
|
|
December 31, 2009 |
|
Exercise Price |
|
US$ |
5.29~US$5.38 |
|
Fair value of ordinary shares |
|
US$ |
5.12~US$5.16 |
|
Risk-free interest rate(1) |
|
|
2.13%~2.48 |
% |
Expected life (in years)(2) |
|
|
5 |
|
Expected dividend yield(3) |
|
|
0 |
% |
Expected volatility(4) |
|
|
50 |
% |
Fair value per option at grant date (in RMB) |
|
|
15.82~15.84 |
|
|
|
|
(1) |
|
The risk-free interest rate for periods within the contractual life of the share option is
based on the U.S. Treasury yield curve in effect at the time of grant for a term consistent
with the expected term of the awards. |
|
(2) |
|
The expected term of stock options granted is developed giving consideration to vesting
period, contractual term and historical exercise pattern of options granted by Shanda. |
|
(3) |
|
The Company has no history or expectation of paying dividends on its ordinary shares. |
|
(4) |
|
Expected volatility is estimated based on the historical volatility of comparable companies
stocks and of Shandas ordinary shares for a period equal to the expected term preceding the
grant date. |
On December 22, 2008, the Company also granted 407,770 restricted shares under the
Companys 2008 Equity Compensation Plan. The restricted shares vest in equal installments over four
calendar years on December 31 of each such calendar year, commencing on December 31, 2009, subject
to the employees continued employment with the Company.
From July 14, 2009 through December 1, 2009, the Company granted 251,920 restricted shares and
6,068,500 restricted shares to the Companys and Shandas employees, respectively, under the
Companys 2008 Equity Compensation Plan. The restricted shares vest in equal installments over each
of the four anniversaries of grant date of each such calendar year, commencing on the grant date,
subject to the employees continued employment with the Company or Shanda, as the case may be.
Share-based compensation expense related to the Restricted Share Award granted by the Company
under the 2008 Equity Compensation Plan amounted to RMB60 and RMB3,029 for the years ended December
31, 2008 and 2009. The Restricted Shares granted to Shandas employees are measured at fair value
at the grant date and that amount was recognized as a dividend distributed to Shanda.
|
|
A summary of unvested restricted share activity as of December 31, 2008 and 2009 is presented
below: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average |
|
Unvested Restricted Shares |
|
Number of Shares |
|
|
Grant-date Fair Value |
|
|
|
|
|
|
|
US$ |
|
Granted |
|
|
407,770 |
|
|
|
3.2 |
|
Vested |
|
|
|
|
|
|
|
|
|
|
Forfeited |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unvested at December 31, 2008 |
|
|
407,770 |
|
|
|
3.2 |
|
|
|
|
|
|
|
|
Granted |
|
|
6,320,420 |
|
|
|
6.2 |
|
Vested |
|
|
|
|
|
|
|
|
|
|
Forfeited |
|
|
(3,000 |
) |
|
|
6.3 |
|
|
|
|
|
|
|
|
Unvested at December 31, 2009 |
|
|
6,725,190 |
|
|
|
6.0 |
|
|
|
|
|
|
|
|
Expected to vest at December 31, 2009 |
|
|
5,479,864 |
|
|
|
6.0 |
|
|
|
|
|
|
|
|
F-36
SHANDA GAMES LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2007, 2008 AND 2009
(Amounts expressed in thousands unless otherwise stated)
As of December 31, 2009, there was RMB207.9 million of unrecognized compensation cost
(including the unrecognized compensation cost of the Restricted Shares granted to the employees of
Shanda amounting to RMB191.9 million), adjusted for the estimated forfeitures, related to
non-vested restricted shares granted to the Companys employees. This cost is expected to be
recognized over a weighted average period of 3.7 years. Total compensation cost may be adjusted for
future changes in estimated forfeitures.
Share-based compensation of Actoz
Since 2005, Actoz has granted stock options to its employees as an incentive program.
A total of 127,420 shares were granted to Actozs employees in July 2006; 140,000 shares were
granted in March 2007; 470,730 shares were granted in September 2007; 94,040 shares were granted in
March 2008; and a 10,000 shares were granted in October 2008.
The stock options may be exercised from the date that is two years from the grant date for a
period of five years under relevant law. The grantees who were granted before March 2007 may
exercise 2/3 of granted stock options two years after the grant date and 1/3 of granted stock
options may be exercised three years after the grant date. Grantees who were granted options in
September 2007 and in 2008 may exercise 1/2 of granted stock options two years after grant date,
1/4 of granted stock option may be exercised three years after grant date, and 1/4 of granted stock
options may be exercised four years after grant date.
Under the relevant law, the option exercise price is decided based on the price calculated by
taking the arithmetic average of the weighted average of the periods of past two months, one month
and one week each prior to the day immediately preceding the date of the shareholders meeting.
Actoz may decide upon one or more methods for exercise of the options pursuant to the
resolution of the board of directors: 1) delivery of new shares of Actoz, 2) delivery of Actozs
treasury stock; or 3) payment by Actoz to the Grantee of the difference between the market price at
the time of exercise and the exercise price, in cash or treasury stock.
The assumptions used to value stock-based compensation awards for the years ended December 31,
2007 and 2008 are presented as follows:
|
|
|
|
|
|
|
|
|
|
|
For the years ended December 31 |
|
|
|
2007 |
|
|
2008 |
|
Risk-free interest rate |
|
|
4.80-5.39 |
% |
|
|
4.80-5.39 |
% |
Expected life (in years) |
|
4.7-4.9 years |
|
4.7-4.9 years |
Expected dividend yield |
|
|
0 |
% |
|
|
0 |
% |
Expected volatility |
|
|
80%-83 |
% |
|
|
63%-87 |
% |
Fair value per option at grant date( in KRW) |
|
|
5,997~6,198 |
|
|
|
4,531~6,355 |
|
F-37
SHANDA GAMES LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2007, 2008 AND 2009
(Amounts expressed in thousands unless otherwise stated)
Activities of share options
Actozs share option activities as of December 31, 2008 and 2009 and changes during the years
then ended is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options |
|
|
Weighted Average |
|
|
Weighted Averaged
Remaining |
|
|
Aggregate |
|
|
|
Outstanding |
|
|
Exercise Price |
|
|
Contractual Life |
|
|
Intrinsic Value |
|
|
|
|
|
|
|
KRW |
|
|
|
|
|
|
KRW |
|
January 1, 2008 |
|
|
702,920 |
|
|
|
9,535 |
|
|
|
|
|
|
|
|
|
Granted |
|
|
104,040 |
|
|
|
8,603 |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited |
|
|
(44,410 |
) |
|
|
9,700 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008 |
|
|
762,550 |
|
|
|
9,398 |
|
|
|
5.54 |
|
|
|
611,557 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and expected to vest as of
December 31, 2008 |
|
|
648,736 |
|
|
|
9,375 |
|
|
|
5.51 |
|
|
|
534,923 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and exercisable as of
December 31, 2008 |
|
|
68,280 |
|
|
|
8,300 |
|
|
|
4.57 |
|
|
|
129,732 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008 |
|
|
762,550 |
|
|
|
9,398 |
|
|
|
5.54 |
|
|
|
611,557 |
|
Granted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(300,700 |
) |
|
|
9,397 |
|
|
|
|
|
|
|
|
|
Forfeited |
|
|
(49,360 |
) |
|
|
9,406 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009 |
|
|
412,490 |
|
|
|
9,398 |
|
|
|
4.66 |
|
|
|
3,156,394 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and expected to vest as of
December 31, 2009 |
|
|
392,849 |
|
|
|
9,390 |
|
|
|
4.65 |
|
|
|
3,009,071 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and exercisable as of
December 31, 2009 |
|
|
123,261 |
|
|
|
9,390 |
|
|
|
4.65 |
|
|
|
949,448 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The aggregate intrinsic value is calculated as the difference between the market value of
KRW10,200 and KRW17,050 as of December 31, 2008 and 2009 and the exercise price of the shares. The
total intrinsic value of options exercised during the year ended 2009 was KRW2,301.3 million.
The weighted average estimated fair value of options granted during fiscal years 2007 and 2008
were KRW6,152 and KRW4,966, respectively. The total fair value of options vested during the year
ended December 31, 2008 and 2009 was KRW434.0 million and KRW2,191.1 million.
Share-based compensation expense of approximately RMB4.7 million, RMB6.4 million, and RMB7.1
million were recognized in the consolidated statements of operations and comprehensive income for
the years ended December 31, 2007, 2008 and 2009.
As of December 31, 2009 there was KRW1,362 million of unrecognized compensation cost, adjusted
for the estimated forfeitures, related to unvested stock-based awards granted to Actozs employees.
This cost is expected to be recognized over a weighted average period of 1.7 years. Total
compensation cost may be adjusted for future changes in estimated forfeitures. For the year ended
December 31, 2009, total cash received by Actoz from the exercise of stock options amounted to
KRW2,825.6 million (equivalent to approximately RMB16.0 million).
17. EMPLOYEE BENEFITS
The full-time employees of the PRC subsidiaries and the PRC operating companies that are
incorporated in the PRC are entitled to staff welfare benefits, including medical care, welfare
subsidies, unemployment insurance and pension benefits. The PRC subsidiaries and the PRC operating
companies are required to accrue for these benefits based on certain percentages of the employees
salaries in accordance with the relevant regulations and to make contributions to the
state-sponsored pension and medical plans out of the amounts accrued for medical and pension
benefits. The total amounts charged to the statements of operations and comprehensive income for
such employee benefits amounted to approximately RMB18,136, RMB20,887 and RMB25,733 for the years
ended December 31, 2007, 2008 and 2009, respectively. The PRC government is responsible for the
medical benefits and ultimate pension liability to these employees.
F-38
SHANDA GAMES LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2007, 2008 AND 2009
(Amounts expressed in thousands unless otherwise stated)
18. RELATED PARTY TRANSACTIONS
During the years ended December 31, 2007, 2008 and 2009, significant related party
transactions were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the years ended December 31, |
|
|
|
2007 |
|
|
2008 |
|
|
2009 |
|
|
|
RMB |
|
|
RMB |
|
|
RMB |
|
Platform service
fees and sales agent fees
paid to companies under
common control by
Shanda(1) |
|
|
595,672 |
|
|
|
791,702 |
|
|
|
1,099,201 |
|
Online game licensing
fees paid to an
affiliated
company(2) |
|
|
158,172 |
|
|
|
|
|
|
|
|
|
Online game upfront
licensing fee paid to an
affiliated
company(2) |
|
|
7,741 |
|
|
|
|
|
|
|
|
|
Promotion service fee
paid to companies under
common control by Shanda |
|
|
|
|
|
|
9,474 |
|
|
|
11,230 |
|
Online game licensing
fees received from
companies under common
control by Shanda |
|
|
(8,311 |
) |
|
|
(11,244 |
) |
|
|
(7,091 |
) |
Online game upfront fee
received from a company
under common control by
Shanda |
|
|
|
|
|
|
(3,441 |
) |
|
|
(12,088 |
) |
Corporate general
administrative expenses
allocated from Shanda |
|
|
37,592 |
|
|
|
31,346 |
|
|
|
14,351 |
|
Rental fee paid to
companies under common
control by Shanda |
|
|
|
|
|
|
|
|
|
|
10,394 |
|
Consulting service fee
paid to companies under
common control by Shanda |
|
|
|
|
|
|
|
|
|
|
2,260 |
|
|
|
|
(1) |
|
Prior to the Reorganization, these services were provided by Shandas various subsidiaries
and VIEs, and the service fees were incurred based on the contractual arrangement entered
prior to the Reorganization. For the five-year period beginning after the Reorganization, the
Group has agreed to continue to use services provided by companies under common control of
Shanda based on new services agreements. |
|
(2) |
|
The transactions are up to June 30, 2007 as the affiliated company has been consolidated from
July 1, 2007. |
F-39
SHANDA GAMES LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2007, 2008 AND 2009
(Amounts expressed in thousands unless otherwise stated)
As of December 31, 2008 and 2009, outstanding amount due from/to related parties were as
follows:
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008 |
|
|
December 31, 2009 |
|
|
|
RMB |
|
|
RMB |
|
Accounts receivables from related parties under common control by Shanda |
|
|
431,876 |
|
|
|
405,932 |
|
|
|
Accounts receivables from Shanda |
|
|
1,427 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
433,303 |
|
|
|
405,932 |
|
|
|
|
|
|
|
|
Other receivables due from related parties under common control by Shanda |
|
|
105,269 |
|
|
|
6,184 |
|
|
|
|
|
|
|
|
All amounts due from related parties are unsecured.
|
|
|
|
|
|
|
|
|
|
|
December
31, 2008 |
|
|
December 31, 2009 |
|
|
|
RMB |
|
|
RMB |
|
Accounts payable to related parties under common control by Shanda |
|
|
75,414 |
|
|
|
70,770 |
|
|
|
|
|
|
|
|
Other payables to related parties under common control by Shanda |
|
|
262,673 |
|
|
|
19,937 |
|
|
|
|
|
|
|
|
All amounts due to related parties are unsecured.
19. DERIVATIVE
In June 2009, Shengqu entered into an arrangement with a bank in China whereby Shengqu
obtained a loan of US$102.5 million to be repaid in June 2010. The loan bears interest at 1.35% per
annum and is collateralized with a cash deposit of RMB702 million from Shengqu. The interest earned
from the RMB cash deposit is 2.25% per annum. In connection with the loan, Shengqu also entered
into a foreign currency forward contract with the same bank by fixing the exchange rate of USD to
RMB at 6.8445 at the time when it repays the US dollar loan. The Company recorded the foreign
currency forward contract as a derivative and marked-to-market at each balance sheet date. The loan
is remeasured at each period end to Shengqus functional currency and is netted off against its RMB
cash deposit due to the existence of the legal set off right. As of
December 31, 2009, the financial
liability related to the forward contract is not material.
20. CERTAIN RISKS AND CONCENTRATIONS
Financial instruments that potentially subject the Company to significant concentrations of
credit risk consist primarily of cash and cash equivalents, short-term investments, accounts
receivable due from or accounts payable to related parties and prepayments and other current
assets. As of December 31, 2008 and 2009, substantially all of the Companys cash and cash
equivalents and short-term investments were held by major financial institutions located in the PRC
and Hong Kong, which management believes are of high credit quality.
Accounts receivable are typically unsecured and are derived from revenue earned from customers
in China. The risk with respect to accounts receivables is mitigated by credit evaluations the
Company performs on its customers and its ongoing monitoring process of outstanding balances.
No individual customer accounted for more than 10% of net revenues during the years ended
December 31, 2007, 2008 and 2009.
The Company derived the majority of its net revenues from two MMORPGs, Mir II and Woool,
including their sequels, which accounted for approximately 55.9% and 22.7% of the net revenues for
the year ended 2007, 55.3% and 20.6% of the net revenues for the year ended December 31, 2008, and
56.4% and 21.8% of the net revenues for the year ended 31 December 2009, respectively.
The Companys exposure to foreign currency exchange rate risk primarily relates to cash and
cash equivalents and short-term investments denominated in the U.S. dollar. On July 21, 2005, the
Peoples Bank of China, or PBOC, announced an adjustment of the exchange rate of the U.S. dollar to
RMB from 1:8.27 to 1:8.11 and modified the system by which the exchange rates are determined. This adjustment has resulted in an
appreciation of the RMB against the U.S. dollar. While the international reaction to the RMB
revaluation has generally been positive, there remains significant international pressure on the
PRC government to adopt an even more flexible currency policy, which could result in a further
revaluation and a significant fluctuation of the exchange rate of RMB against the U.S. dollar.
F-40
SHANDA GAMES LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2007, 2008 AND 2009
(Amounts expressed in thousands unless otherwise stated)
21. COMMITMENTS AND CONTINGENCIES
Operating lease agreements
The Company has entered into leasing arrangements relating to office premises and computer
equipment that are classified as operating leases. Future minimum lease payments for non-cancelable
operating leases as of December 31, 2009 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Computer |
|
|
|
|
|
|
Office Premise |
|
|
Equipment |
|
|
Total |
|
|
|
RMB |
|
|
RMB |
|
|
RMB |
|
2010 |
|
|
6,810 |
|
|
|
32,416 |
|
|
|
39,226 |
|
2011 |
|
|
3,480 |
|
|
|
6,735 |
|
|
|
10,215 |
|
2012 |
|
|
588 |
|
|
|
|
|
|
|
588 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,878 |
|
|
|
39,151 |
|
|
|
50,029 |
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2009, the Company had leased servers under operating lease arrangements
where the lease payments are calculated based on certain formulas, as specified in the agreements,
with reference to the actual usage of the servers. The server leasing rental expenses under these
operating leases amounted to approximately RMB21,261, RMB20,431 and RMB22,390 during the years
ended December 31, 2007, 2008 and 2009, respectively. As the future lease payments for these
arrangements are based on the actual number of users and thus cannot be reasonably estimated, they
are not included in the minimum lease payments as disclosed above.
Total rental expenses including server leasing rental, office rental and server maintenance
were approximately RMB84,938, RMB96,941 and RMB133,354 during the years ended December 31, 2007,
2008 and 2009, respectively, and were charged to the statements of operations and comprehensive
income when incurred.
As of December 31, 2009, the Company also has commitments in respect of the maintenance
contracts in relation to the servers owned by the Company amounting to RMB39,151.
Contingencies
The Company accounts for loss contingencies in accordance with ASC 450 (formerly referred to
as SFAS No. 5, Accounting for Loss Contingencies) and other related guidance. Set forth below is
a description of certain loss contingencies, as well as the opinion of management as to the
likelihood of loss in respect of each loss contingency.
PRC regulations currently limit foreign ownership of companies that provide Internet content
services, which include operating online games, to 50%. In addition, foreigners or foreign invested
enterprises are currently not able to apply for the required licenses for operating online games in
the PRC. Shanda Games (HK) is incorporated in Hong Kong and accordingly Shengqu is considered as a
foreign invested enterprise under PRC law. In order to comply with PRC laws restricting foreign
ownership in the online game business in China, the Company operates its online game business in
China through the PRC operating companies. Shanghai Shulong currently holds an ICP license and an
Internet culture operation license that are required to operate the online game business. The
Company publishes its online games under an Internet publishing license held by Shanda Networking.
Shengqu has entered into a series of contractual arrangements with the PRC operating companies,
pursuant to which Shengqu provides the PRC operating companies with services, software licenses and
equipment in exchange for fees, and Shengqu undertakes to provide financial support to the PRC
operating companies to the extent necessary for their operations. In addition, Shengqu has entered
into agreements with Shanghai Shulong and its shareholders that provide it with the substantial
ability to control Shanghai Shulong. In the opinion of management and the Companys PRC legal
counsel, in all material
F-41
SHANDA GAMES LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2007, 2008 AND 2009
(Amounts expressed in thousands unless otherwise stated)
respects, (i) the ownership structure of the Company, the PRC subsidiaries
and the PRC operating companies are in compliance with existing PRC laws and regulations; (ii) the
contractual arrangements between the PRC operating companies, on the one hand and Shanghai Shulong
and/or its shareholders, on the other hand, are valid and binding, and will not result in any
violation of PRC laws or regulations currently in effect; and (iii) the business operations of the
Company, the PRC subsidiaries and the PRC operating companies are in compliance with existing PRC
laws and regulations. However, there are substantial uncertainties regarding the interpretation and
application of current and future PRC laws and regulations. Accordingly, the Company cannot be
assured that PRC regulatory authorities will not ultimately take a contrary view to its opinion. If
the current ownership structure of the Company and its contractual arrangements with Shanghai
Shulong were found to be in violation of any existing or future PRC laws and regulations, the
Company may be required to restructure its ownership structure and operations in the PRC to comply
with the changing and new PRC laws and regulations or may be subject to other regulatory or
enforcement actions. In the opinion of management, the likelihood of loss in respect of the
Companys current ownership structure or the contractual arrangements with Shanghai Shulong is
remote.
22. SUBSEQUENT EVENTS
In January 2010, the Company entered into an agreement to acquire Goldcool Holdings Limited, a
Shanghai-based online game developer and operator, for RMB120 million in cash. At the date of
issuance of the financial statements, the initial purchase accounting was not yet completed.
In January 2010, the Company entered into an agreement to acquire all of the equity interest
of Mochi Media Inc., a leading platform for distributing and monetizing browser-based games
worldwide, a leading platform for distributing and monetizing browser-based games worldwide, for
approximately US$60 million in cash and US$20 million in equity retention arrangements. At the date
of issuance of the financial statements, the initial purchase accounting was not yet completed.
On March 1, 2010, we announced that our board of directors had authorized us to repurchase up
to $150 million worth of our outstanding American Depositary Shares from time to time over the next
twenty four (24) months, depending on market conditions, share price and other factors, as well as
subject to the relevant rules under United States securities regulations.
The Company has performed an evaluation of subsequent events through April 30, 2010, which is
the date the financial statements were available to be issued.
23. RESTRICTED NET ASSETS
Relevant PRC laws and regulations permit PRC companies to pay dividends only out of their
retained earnings, if any, as determined in accordance with PRC accounting standards and
regulations. In addition, PRC companies can only distribute dividends upon approval of the
shareholders after they have met the PRC requirements for appropriation to statutory reserve. The
statutory general reserve fund requires annual appropriations of 10% of net after-tax income should
be set aside prior to payment of any dividends. As a result of these and other restrictions under
PRC laws and regulations, the PRC subsidiaries and the PRC operating companies are restricted in
their ability to transfer a portion of their net assets to the Company either in the form of
dividends, loans or advances, which restricted portion amounted to approximately RMB602.8 million,
or 21.4% of the Companys total consolidated net assets as of December 31, 2009. Even though the
Company currently does not require any such dividends, loans or advances from the PRC subsidiaries
or the PRC operating companies for working capital and other funding purposes, the Company may in
the future require additional cash resources from the PRC subsidiaries or the PRC operating
companies due to changes in business conditions, to fund future acquisitions and developments, or
merely declare and pay dividends to or distributions to the Companys shareholder. The Company is
not required to include the condensed financial statements of the Company in accordance with
Regulation S-X promulgated by the United States Securities and Exchange Commission.
F-42