UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 20-F
(Mark One)
(cid:0)
REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES
EXCHANGE ACT OF 1934
⌧
(cid:0)
(cid:0)
OR
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended September 30, 2012
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
OR
SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Date of event requiring this shell company report
For the transition period from to
Commission file number: 001-34122
China Distance Education Holdings Limited
(Exact name of Registrant as specified in its charter)
Not applicable
(Translation of Registrant’s name into English)
Cayman Islands
(Jurisdiction of incorporation or organization)
18th Floor, Xueyuan International Tower
1 Zhichun Road, Haidian District
Beijing 100083, People’s Republic of China
(Address of principal executive offices)
Securities registered or to be registered pursuant to Section 12(b) of the Act.
Title of each class
American Depositary Shares, each representing four
ordinary shares, par value $0.0001 per share
Name of each exchange on which registered
New York Stock Exchange, Inc.
Securities registered or to be registered pursuant to Section 12(g) of the Act.
None
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act.
None
Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period
covered by the annual report: 134,386,849 ordinary shares
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities
(cid:0)
⌧
Act. Yes
No
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to
(cid:0)
⌧
Section 13 or 15(d) of the Securities Exchange Act of 1934. Yes
No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days. Yes
No
⌧
(cid:0)
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every
Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during
No
the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes
⌧
(cid:0)
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See
definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act (check one):
Large accelerated filer
(cid:0)
Accelerated filer
⌧
Non-accelerated filer
(cid:0)
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this
filing:
⌧
U.S. GAAP
International Financial Reporting Standards as issued by the International
Accounting Standards Board
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(cid:0)
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:
(cid:0)
Item 17
(cid:0)
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
(cid:0)
⌧
Exchange Act). Yes
No
TABLE OF CONTENTS
INTRODUCTION
FORWARD-LOOKING STATEMENTS
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
PART I
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE
ITEM 3. KEY INFORMATION
ITEM 4. INFORMATION ON THE COMPANY
ITEM 4A. UNRESOLVED STAFF COMMENTS
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
ITEM 8. FINANCIAL INFORMATION
ITEM 9. THE OFFER AND LISTING
ITEM 10. ADDITIONAL INFORMATION
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
PART II
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS
ITEM 15. CONTROLS AND PROCEDURES
ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT
ITEM 16B. CODE OF ETHICS
ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES
ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS
ITEM 16F. CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT
ITEM 16G. CORPORATE GOVERNANCE
ITEM 16H. MINE SAFETY DISCLOSURE
ITEM 17. FINANCIAL STATEMENTS
ITEM 18. FINANCIAL STATEMENTS
ITEM 19. EXHIBITS
PART III
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INTRODUCTION
Except where the context otherwise requires and for purposes of this annual report only:
• all references to years are to the calendar year from January 1 to December 31 and references to our fiscal year or years are to
the fiscal year or years ended September 30;
• “we,” “us,” “our company,” “our,” and “CDEL” refer to China Distance Education Holdings Limited and its subsidiaries and
PRC affiliated entity, Beijing Champion Hi-Tech Co., Ltd., or Beijing Champion and its subsidiaries, as the context requires;
• “China,” “Chinese” and “PRC” refers to the People’s Republic of China, excluding, for purposes of this annual report only,
Taiwan and the Special Administrative Regions of Hong Kong and Macau;
• all references to “Renminbi” or “RMB” are to the legal currency of China, and all references to “U.S. dollar,” “dollar,” “$” or
“US$” are to the legal currency of the United States;
• “U.S. GAAP” refers to generally accepted accounting principles in the United States; and
• “PRC GAAP” refers to generally accepted accounting principles in the People’s Republic of China.
This annual report on Form 20-F includes our audited consolidated statements of operation data for the fiscal years ended
September 30, 2010, 2011 and 2012 and audited consolidated balance sheet data as of September 30, 2011 and 2012.
Our ADSs, each representing four ordinary shares, are listed on the New York Stock Exchange, Inc., or the NYSE, under the
symbol “DL.”
This Annual Report on Form 20-F includes certain registered trademarks, trademarks, and trade names of CDEL, its
subsidiaries, its affiliated entities and others. All terms and product names which may be trademarks or registered trademarks of other
companies are hereby acknowledged to belong to their respective owners.
FORWARD-LOOKING STATEMENTS
This annual report on Form 20-F 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. In some cases, these forward-looking statements can be identified by words and phrases such as “may,”
“should,” “intend,” “predict,” “potential,” “continue,” “will,” “expect,” “anticipate,” “estimate,” “plan,” “believe,” “is /are likely to”
or the negative form of these words and phrases or other comparable expressions. The forward-looking statements included in this
annual report relate to, among others:
• our goals and growth strategies;
• our future prospects and market acceptance of our online and offline courses and other products and services;
• our future business development and results of operations;
• projected revenues, profits, earnings and other estimated financial information;
• projected enrollment numbers;
• our plans to expand and enhance our online and offline courses and other products and services;
• competition in the online and offline education and test preparation markets; and
• Chinese laws, regulations and policies, including those applicable to the Internet, Internet content providers, the education and
telecommunications industries, mergers and acquisitions, taxation and foreign exchange.
These forward-looking statements involve various risks, assumptions and uncertainties. Although we believe that our
expectations expressed in these forward-looking statements are reasonable, our expectations may turn out to be incorrect. Our actual
results could be materially different from or worse than our expectations. Important risks and other factors that could cause our actual
results to be materially different from our expectations are generally set forth in “Item 3.D. Key Information — Risk Factors,” “Item
5.A. Operating and Financial Review and Prospects – Operating Results – General Factors Affecting Our Results of Operations,”
“Item 5.A. Operating and Financial Review and Prospects – Operating Results – Specific Factors Affecting Our Results of
Operations,” “Item 11. Quantitative and Qualitative Disclosures About Market Risk,” and elsewhere in this annual report.
1
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. All forward-looking statements included herein attributable to us or other parties or any
person acting on our behalf are expressly qualified in their entirety by the cautionary statements contained or referred to in this
section. We undertake no obligation to update or revise any forward-looking statements whether as a result of new information, future
events or otherwise, after the date of this annual report or to reflect the occurrence of unanticipated events.
Market Data and Forecasts
This annual report also contains data related to China’s education, online and offline education, professional education, test
preparation and self-education markets that include projections based on a number of assumptions. These markets may not grow at
the rates projected by market data, or at all. The failure of these markets to grow at the projected rates may have a material adverse
effect on our business prospects, results of operations and the market price of our ADSs. In addition, the relatively new and rapidly
changing nature of these markets subjects any projections or estimates relating to the growth prospects or future condition of these
markets to significant uncertainties. If any one or more of the assumptions underlying the market data turns out to be incorrect, actual
results may differ from the projections based on these assumptions. You should not place undue reliance on these forward-looking
statements.
This annual report contains information and statistics relating to China’s economy and the industries in which we operate
derived from various publications issued by PRC governmental entities which have not been independently verified by us. The
information in such official sources may not be consistent with other information compiled in or outside China.
ITEM 1.
IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
Not applicable.
PART I
ITEM 2.
OFFER STATISTICS AND EXPECTED TIMETABLE
Not applicable.
ITEM 3.
KEY INFORMATION
A. Selected Consolidated Financial Data
The selected consolidated statements of operations data for the fiscal years ended September 30, 2010, 2011 and 2012 and the
selected consolidated balance sheets data as of September 30, 2011 and 2012 are derived from our audited consolidated financial
statements included elsewhere in this annual report and should be read in conjunction with, and are qualified in their entirety by
reference to, these consolidated financial statements and related notes. Our selected consolidated statements of operations data for the
years ended September 30, 2008 and 2009 and the selected consolidated balance sheets data as of September 30, 2008, 2009 and
2010, are derived from our audited consolidated financial statements, which are not included in this annual report. The following
information should also be read in conjunction with “Item 5. Operating and Financial Review and Prospects.” Our audited
consolidated financial statements are prepared in accordance with U.S. GAAP. Our historical results for any prior period are not
necessarily indicative of results to be expected for any future period.
2
Selected Consolidated Statement of Operations
Data:
Net revenues:
Online education services
Books and reference materials
Others
Total net revenues
Cost of sales:
Cost of services (5)
Cost of tangible goods sold
Total cost of sales
Gross profit
Operating expenses:
Selling expenses (5)
General and administrative expenses (5)
Impairment of purchased call option
Total operating expenses
Other operating income
Other expense
Operating income (loss)
Interest income (expense), net
Exchange loss
Equity in loss of an affiliated company
Income (loss) before income taxes
Less: Income tax expense
Net income (loss) from continuing operations
Accretion of Series A convertible contingently
redeemable preferred shares to redemption amount
and accretion to beneficial conversion feature of
Series A convertible contingently redeemable
preferred shares
Net loss of continuing operations attributable to
noncontrolling interest
Net income (loss) from continuing operations
attributable to China Distance Education Holdings
Limited
Net income (loss) from discontinued operations
attributable to China Distance Education Holdings
Limited, net of tax
Net income (loss) attributable to China Distance
Education Holdings Limited
Net income (loss) per ordinary share:
Net income (loss) attributable to China Distance
Education Holdings Limited shareholders
Basic from continuing operations
Basic from discontinued operations
Basic
Diluted from continuing operations
Diluted from discontinued operations
Diluted
2008
Years Ended September 30,
2010
(In thousands of $, except share, per share and per ADS data)
2011
2009
2012
13,900
1,616
2,058
17,574
22,279
2,709
5,133
30,121
23,982 30,788 40,281
4,438
7,383
52,102
3,939
4,658
32,579
4,743
6,033
41,564
(5,981)
(818)
(6,799)
10,775
(2,448)
(3,906)
—
(6,354)
209
(144)
4,486
176
(75)
(64)
4,523
(526)
3,997
(12,834)
(1,577)
(14,411)
15,710
(6,722)
(7,432)
—
(14,154)
292
—
1,848
740
(6)
—
2,582
(1,478)
1,104
(13,283)
(2,070)
(15,353)
17,226
(7,176)
(10,535)
(162)
(17,873)
74
—
(573)
458
(66)
—
(181)
(575)
(756)
(16,840)
(2,794)
(19,634)
21,930
(9,771)
(12,221)
(1,115)
(23,107)
603
—
(574)
883
(143)
—
166
(971)
(805)
(20,494)
(2,587)
(23,081)
29,021
(11,337)
(8,248)
—
(19,585)
58
—
9,494
1,119
(40)
—
10,573
(2,600)
7,973
(9,332)
—
—
82
—
911
—
303
—
—
(5,335)
1,186
155
(502)
7,973
—
2
(2,053)
(3,300)
236
(5,335)
1,188
(1,898)
(3,802)
8,209
(0.05)
—
(0.05)
(0.05)
—
(0.05)
3
0.01
0.00
0.01
0.01
0.00
0.01
0.00
(0.01)
(0.01)
0.00
(0.01)
(0.01)
0.00
(0.03)
(0.03)
0.00
(0.03)
(0.03)
0.06
0.00
0.06
0.06
0.00
0.06
Net income (loss) per ADS:
Net income (loss) attributable to China
Distance Education Holdings Limited
shareholders (1)
Basic from continuing operations
Basic from discontinued operations
Basic
Diluted from continuing operations
Diluted from discontinued operations
Diluted
Weighted average shares used in
2008
Years Ended September 30,
2010
(In thousands of $, except share, per share and per ADS data)
2011
2009
2012
(0.20)
—
(0.20)
(0.20)
—
(0.20)
0.03
0.00
0.03
0.03
0.00
0.03
0.00
(0.06)
(0.06)
0.00
(0.06)
(0.06)
(0.01)
(0.10)
(0.11)
(0.01)
(0.10)
(0.11)
0.24
0.01
0.25
0.24
0.01
0.25
calculating net income (loss) per share:
Basic
Diluted
Other Consolidated Financial Data from
Continuing Operations:
Gross Margin (2)
Operating Margin (3)
Net Margin (4)
100,373,673
100,373,673
140,260,811
140,475,941
138,232,493
138,232,493
133,571,727
133,571,727
133,996,737
134,363,108
61.3%
25.5%
22.7%
52.2%
6.1%
3.9%
52.9%
(1.8)%
0.5%
52.8%
(1.4)%
(1.2)%
55.7%
18.2%
15.3%
(1) One ADS represents four ordinary shares.
(2) Gross margin represents gross profit as a percentage of net revenues.
(3) Operating margin represents operating income (loss) as a percentage of net revenues.
(4) Net margin represents net income (loss) from continuing operations as a percentage of net revenues.
Includes the following amounts of share-based compensation expenses for the periods indicated:
(5)
Cost of services
Selling expenses
General and administrative expenses
Years Ended September 30,
2008
2009
2010
2011
2012
689
161
629
(in thousands of $)
1,787
567
2,033
1,854
454
1,612
1,999
678
3,347
37
16
88
Total share-based compensation expenses
1,479
3,920
4,387
6,024
141
Consolidated Balance Sheet Data:
Cash and cash equivalents
Total assets
Deferred revenue
Refundable fees
Total liabilities
Total China Distance Education Holdings Limited shareholders’ equity
Total liabilities and equity
4
As of September 30,
2008 2009 2010 2011 2012
(in thousands of $)
66,223 19,091 57,305 49,738 49,723
85,326 92,533 95,971 93,878 89,986
3,891 6,025 7,545 7,861 9,450
4,688 1,781 1,564 2,580 3,524
12,576 15,661 18,948 21,144 25,369
72,750 73,909 74,986 72,734 64,617
85,326 92,533 95,971 93,878 89,986
Exchange Rate Information
We use U.S. dollars as our reporting currency in our financial statements and in this annual report. When reporting the operating
results and financial position of our PRC subsidiaries and affiliated entities, we use the monthly average exchange rate for the year
and the exchange rate at the balance sheet date, respectively, as published by the People’s Bank of China. In other parts of this annual
report, any Renminbi denominated amounts are accompanied by translations. With respect to amounts not recorded in our
consolidated financial statements included elsewhere in this annual report, all translations from Renminbi to U.S. dollars were made
at the noon buying rate in the City of New York for cable transfers in Renminbi per U.S. dollar as certified for customs purposes by
the Federal Reserve Bank of New York. Unless otherwise noted, all translations from Renminbi to U.S. dollars have been made at
RMB6.2848 to $1.00, the noon buying rate in effect as of September 30, 2012. We make no representation that the Renminbi or U.S.
dollar amounts referred to in this annual report could have been or could be converted into U.S. dollars or Renminbi, as the case may
be, at any particular rate or at all. The PRC government restricts or prohibits the conversion of Renminbi into foreign currency and
foreign currency into Renminbi for certain types of transactions. On January 25, 2013, the noon buying rate was RMB6.2203 to
$1.00.
The following table sets forth information concerning exchange rates between the Renminbi and the U.S. dollar for the periods
indicated. These rates are provided solely for your convenience and are not necessarily the exchange rates that we used in this annual
report or will use in the preparation of any other information to be provided to you.
Fiscal year ended September 30, 2008
Fiscal year ended September 30, 2009
Fiscal year ended September 30, 2010
Fiscal year ended September 30, 2011
Fiscal year ended September 30, 2012
Most recent six months:
August 2012
September 2012
October 2012
November 2012
December 2012
January 2013 (through January 25, 2013)
Renminbi per U.S. dollars Noon Buying Rate
Average (1)
7.0936
6.8302
6.8112
6.5356
6.3376
6.3593
6.3200
6.2666
6.2364
6.2328
6.2214
Low
7.5158
6.8842
6.8330
6.6912
6.3879
6.3738
6.3489
6.2877
6.2454
6.2502
6.2303
High
6.7800
6.8171
6.6869
6.3778
6.2790
6.3484
6.2848
6.2416
6.2250
6.2251
6.2134
Period
End
6.7899
6.8262
6.6950
6.3780
6.2848
6.3484
6.2848
6.2480
6.2275
6.2301
6.2203
Source: Federal Reserve Bank of New York and U.S. Federal Reserve
(1) Annual averages are calculated using the exchange rates for the last day of each month during the fiscal year. Monthly averages
are calculated using daily exchange rates during the month.
B. Capitalization and Indebtedness
Not applicable.
C. Reasons for the Offer and Use of Proceeds
Not applicable.
5
D. Risk Factors
Risks Relating to Our Business
If we are unable to continue to attract course participants to enroll in our courses, or to charge our course participants competitive
but profitable fees, our revenues may decline and we may not be able to maintain profitability.
The success of our business depends primarily on the number of enrollments in our courses and the amount of course fees that
we can charge. Therefore, our ability to continue to attract course participants to enroll in our courses and charge our course
participants competitive but commercially profitable fees is critical to the continued success and growth of our business. This in turn
will depend on several factors, including our ability to develop new courses and enhance existing courses to respond to changes in
market trends and demands of course participants, to effectively market our courses to a broader base of prospective course
participants, to train and retain qualified lecturers and tutors, to develop or acquire additional high-quality educational content and to
respond to competitive pressures. In addition, the expansion of our courses, services and products in terms of the types of offerings
may not succeed due to competition, our failure to effectively market our new courses, services and products or maintain their quality
and consistency, or other factors. For example, with respect to our Gaokao retake preparation and high-school supplementary tutoring
business operated by Champion Xinlixiang, we have suffered significant operating losses for the fiscal year ended September 30,
2011. As a result, we discontinued such business in September 2011 and sold same to a third party in May 2012. Furthermore, we
may not be able to develop and offer additional content on commercially reasonable terms and in a timely manner, or at all, to keep
pace with changes in market requirements. If we are unable to continue to attract course participants to enroll in our courses, increase
enrollments in our relatively new courses, or charge our course participants competitive but profitable fees, our revenues may decline
and we may be unable to achieve revenue growth or maintain our profitability.
If we fail to develop and introduce new courses, services and products that meet our target customers’ expectations, or adopt new
technologies important to our business, our competitive position and ability to generate revenues may be materially and adversely
affected.
Historically, our core business centered on the provision of online professional education and test preparation courses for
accounting professionals. We have since expanded our course offerings to target course participants in the legal, healthcare,
construction engineering and other industries, as well as participants of online courses for self-taught learners seeking higher
education and other forms of online and offline education. In addition to regular classes, we have also introduced, in the past couple
of years, “elite” classes and “premium” classes within some of our most popular course offerings to better serve the needs of high-end
customers. The profitability of the elite classes may be subject to risks given that the course participants enjoy refund privileges if
certain pre-agreed conditions are met. The profitability of the premium classes may also be subject to risks given that course
participants enjoy a 50% discount off the fee of the same courses they may enroll in for the following year if certain pre-agreed
conditions are met. The profitability of courses for the examinations of American Institute of CPAs and certain accounting, healthcare
and construction engineering courses may also be subject to risks given that course participants may retake the same courses free of
charge for the following year if certain pre-agreed conditions are met. We also offer business start-up training courses, which are
subsidized by governments, to target university students, job seekers and individuals interested in learning to start a business, the
profitability of which may be subject to risks given that the subsidy we are entitled to receive from government authorities in certain
provinces and cities may be reduced if certain stipulated conditions in the government authorities’ subsidy policies are not met. We
intend to continue developing new courses, services and products. The timing of the introduction of new courses, services and
products is subject to risks and uncertainties.
Unexpected technical, operational, logistical, regulatory or other problems could delay or prevent the introduction of one or
more of new courses, services or products. Moreover, we cannot assure you that any of these courses, products and services will
match the quality or popularity of those developed by our competitors, achieve widespread market acceptance or generate the desired
level of income.
The technology used in Internet and value-added telecommunications services and products in general, and in online education
services in particular, and the related technology standards may evolve and change over time. If we fail to anticipate and adapt to such
technological changes, our market share and our business development could suffer, which in turn would have a material and adverse
effect on our financial condition and results of operations. If we are unsuccessful in addressing any of the risks relating to such new
courses, services and products, our business may be materially and adversely affected.
6
We may lose market share and our profitability may be materially and adversely affected, if we fail to compete effectively with our
present and future competitors or to adjust effectively to changing market conditions and trends.
We face competition from providers of traditional offline education, training and test preparation services, and expect to face
increasing competition from existing competitors and new market entrants in the online professional education and test preparation
market. The provision of professional education and test preparation courses over the Internet is a relatively recent concept. Although
online education is increasingly perceived as an acceptable means of receiving training and instruction, traditional classroom
instruction is still generally viewed as a more accepted method. We therefore compete with traditional in-person educational
institutions and training centers in the various subject areas for which we offer courses. As most of our courses are conducted solely
online, if the perception that traditional forms of education and training are preferred persists or increases, we may not be able to
compete effectively with competitors engaging in traditional forms of education and training. In addition, due to low barriers to entry
for Internet-based businesses, we expect to face increasing competition from both existing domestic competitors and new entrants to
the online education market. We may face increased competition from international competitors that cooperate with local businesses
to provide services based on the foreign partners’ technology and experience developed in their home markets.
Our present and future competitors may have longer operating histories, larger student enrollments, larger teams of professional
staff and greater financial, technical, marketing and other resources. They may be able to devote more resources to the development
and promotion of their courses and services, and may be able to react more quickly to changing customer requirements and demands,
deliver competitive services at lower prices or respond to new technologies, trends or user preferences more effectively than we can.
They may be able to offer services and products with better performance and prices than ours with the result that their services and
products may gain greater market acceptance than ours. They may also offer free promotional services and products in connection
with their marketing campaigns or significantly lower the prices for their services and products in order to attract students and capture
additional market share. There is no assurance that we will be able to compete effectively with such present and future competitors or
to adjust effectively to changing market conditions and trends. Our failure to compete effectively could erode our market share, result
in a fall in the number of our course participants, or lead to price reductions or increased spending for marketing and promotion of our
courses, any of which may materially and adversely affect our profitability.
Our business depends on the continued success of our key brand “Chinaacc” and the further enhancement of our newer brands,
and if we fail to maintain and enhance recognition of our brands, we may face difficulty in obtaining new business partners and
customers, and our business reputation and operating results may be harmed.
We believe that market awareness of our key brand “Chinaacc” has contributed significantly to the success of our business.
Maintaining and enhancing this key brand, further improving our brands in the legal, healthcare and other areas and introducing new
brands are critical to our efforts to grow our customer base and obtain additional business partners. However, our main competitors
are continuing to take steps to increase their brand recognition. Failure to maintain and enhance our brand recognition could also have
a material and adverse effect on our business, operating results and financial condition.
We have enhanced our brand promotion efforts in recent years , but we cannot assure you that our marketing efforts will be
successful in further promoting our brands. If we are unable to further enhance our brand recognition and increase awareness of our
courses, services and products, or if we incur excessive marketing and promotion expenses, our business and results of operations
may be materially and adversely affected.
Our business could be adversely affected by changes in the perceived difficulty, requirements or formats of professional
examinations and continuing education in China.
We provide online professional education and test preparation courses relating to the accounting, legal, healthcare, construction
engineering and other industries. In addition, we also provide online professional continuing education courses relating to the
accounting, healthcare and construction engineering industries. We have obtained approval, and in some cases exclusive rights, to
offer self-taught study process monitoring programs in certain provinces and cities, to allow learners to earn up to 30% of the credits
they need to obtain post-secondary self-taught education degree. If there is any material change to the perceived difficulty,
requirements or formats of examinations and continuing education in these subject areas, and we are unable to modify or supplement
our courses or training materials to address these changes in a timely manner, the demand for, and relevance of, our courses and
training materials may be adversely affected, which could have an adverse impact on our financial condition and results of operations.
7
Our business could be adversely affected by changes in the perceived difficulty, requirements or formats of business start-up
training courses, or changes in the government authorities’ subsidy policy.
We provide business start-up training courses, which are sponsored by government authorities, to university students and other
job seekers using materials prepared in accordance with requirements of the relevant government authorities in various provinces and
cities. We do not charge the course participants fees, instead, we receive payments from the relevant government authorities for
courses provided and our net revenue generated from such courses is conditioned on our ability to meet the government stipulated
conditions under the subsidy policies. Such policies are established by relevant government authorities in various provinces and cities.
When determining our entitlement to the subsidy, the government authorities consider the pass rate of our course participants’
business proposals as evaluated by such authorities, as well as the business start-up rate and employment rate of our course
participants. If there is any material change to the perceived difficulty, requirements or formats of the courses or the government
subsidy policy in relevant provinces and cities, and we are unable to modify or supplement our courses or training materials to
address these changes in a timely manner, or to meet the stipulated conditions of the government subsidy policy, the demand for our
courses and training materials may decrease and our revenue generated from this course offering may be adversely affected, which
could have an adverse impact on our financial condition and results of operations.
Our business is dependent on our lecturers comprised primarily of academics and experienced practitioners within their respective
industries who are typically engaged on a part-time contractual basis, and some of whom are not bound by exclusivity restrictions.
Most of our courses are conducted by lecturers, comprised primarily of academics from post-secondary educational institutions
and experienced practitioners within their respective industries in China. The popularity and effectiveness of our courses depend on
the teaching ability of these lecturers and their reputation as skilled lecturers. Our lecturers are typically engaged on a part-time
contractual basis for periods ranging from one to three years, except for some more experienced lecturers for whom the contract
periods are relatively longer. Most lecturers are not bound by exclusivity restrictions. If our lecturers fail to deliver quality lectures as
a result of inadequate devotion of their time and energy to our courses or for other reasons, our business may be adversely affected. In
addition, as the online education industry grows and matures, we may face increasing competition from our competitors for lecturers
with good reputations and effective teaching skills, and on whom we rely for the delivery of quality services and to maintain and
promote our leading market position. Furthermore, some provinces and municipalities where we have business operations have
promulgated local regulations prohibiting public school teachers from providing paid tutoring services. For example, Beijing has
promulgated a regulation prohibiting public school teachers from taking part-time jobs during working days at educational institutions
run with social resources or organizing students to accept paid tutoring services. If our lecturers that are academics from post-
secondary educational institutions choose to, or are forced to, discontinue their relationship with us to comply with the relevant local
regulations, we will need to seek new lecturers to replace them. We cannot assure you we will be able to find replacements at a
reasonable cost on a timely basis, if at all. Any failure to attract qualified lecturers or to maintain or improve the quality of our
lectures could adversely affect our reputation and operating results. Additionally, the lecturers may even turn into our competitors
after they discontinue their relationship with us, which could further adversely affect our operating results.
Failure to attract and retain qualified personnel and experienced senior management could disrupt our operations and adversely
affect our business and competitiveness.
Our continuing success is dependent, to a large extent, on our ability to attract and retain qualified personnel and experienced
senior management. If one or more of our senior management team members are unable or unwilling to continue to work for us, we
may not be able to replace them within a reasonable period of time or at all, and our business may be severely disrupted, our financial
condition and results of operations may be materially and adversely affected and we may incur additional expenses in recruiting and
training additional personnel. Although our senior management members are subject to certain non-competition restrictions during,
and for a period of two years after termination of their employment, we cannot assure you that such non-competition restrictions will
be effective under PRC law. If any of our senior management joins a competitor or forms a competing business, our business may be
severely disrupted. We have no key man insurance with respect to our key personnel that would provide insurance coverage payable
to us for loss of their employment due to death or otherwise.
8
Zhengdong Zhu, our chairman, chief executive officer and co-founder of our business, has played an important role in the growth
and development of our business since its inception, and a loss of his services in the future could severely disrupt our business and
negatively affect investor confidence in us, which may also cause the market price of our ADSs to go down.
Zhengdong Zhu, our chairman, chief executive officer and co-founder of our business, has played an important role in the growth
and development of our business since its inception. To date, we have relied heavily on Mr. Zhu’s expertise in, and familiarity with, our
business operations, his relationships with our employees, and his reputation in the online education industry. In addition, Mr. Zhu
continues to be primarily responsible for formulating our overall business strategies and spearheading the growth of our operations. If
Mr. Zhu were unable or unwilling to continue in his present positions, we may not be able to easily replace him and may incur additional
expenses to identify and train his successor. In addition, if Mr. Zhu were to join a competitor or form a competing business, it could
severely disrupt our business and negatively affect our financial condition and results of operations. Although Mr. Zhu is subject to
certain non-competition restrictions during, and for a period of two years after termination of, his employment with us, we cannot assure
you that such non-competition restrictions will be effective under PRC law. Moreover, even if the departure of Mr. Zhu from our
company would not have any actual impact on our operations and the growth of our business, it could create the perception among
investors or the marketplace that his departure could severely damage our business and operations and could negatively affect investor
confidence in us, which may cause the market price of our ADS to go down. We do not maintain key man insurance on Mr. Zhu.
Mr. Zhengdong Zhu, our chairman and chief executive officer, beneficially owns a significant percentage of our outstanding
ordinary shares and, as a result, he has significantly greater influence over us and our corporate actions relative to our public
shareholders and his interests may not be aligned with the interests of other shareholders.
As of December 31, 2012, our co-founder and chief executive officer, Mr. Zhu, beneficially owned 74,171,493 ordinary shares or
approximately 54.77% of our outstanding ordinary shares. Mr. Zhu has, and may continue to have, significant influence in determining
the outcome of any corporate transactions or other matters submitted to our shareholders for approval, including mergers, consolidations
and the sale of all or substantially all of our assets, election of directors and other significant corporate actions. He may not act in the
best interests of our minority shareholders. In addition, without the consent of Mr. Zhu, we could be prevented from entering into
transactions that could be beneficial to us. This concentration of ownership may also discourage, delay or prevent a change in control of
our company, which could deprive our shareholders of an opportunity to receive a premium for their shares as part of a sale of our
company and might reduce the price of our ADSs. These actions may be taken even if they are opposed by our other shareholders.
Our business is subject to seasonal fluctuations, which may cause our operating results to fluctuate from quarter to quarter. This
may result in volatility in and adversely affect the price of our ADSs.
We have experienced seasonality and expect in the future to continue to experience seasonality in revenues related to the provision
of our education courses primarily due to seasonal changes in course enrollments and the timing of various exams. We typically open
new online courses to enrollment approximately six months before the relevant exam date. As the majority of our course participants
take non-refundable courses relating to the main professional accounting exams, which are typically held in May and September, we
historically have experienced higher revenues during the quarters ending June 30 and September 30 of each fiscal year. With respect to
our refundable courses, which is also primarily related to the main professional accounting exams, we typically recognize revenues 15-
30 days after the release of the relevant exam results when the participants’ applicable refund privileges expire, resulting in higher
revenues in the quarter ended March 31 and September 30. With respect to our professional continuing education courses, we typically
recognize revenues when course participants complete the stipulated study hours and take the examinations, or on a straight line basis
over the subscription period, starting from a course participant’s enrollment date, ranging from three months to one year. As the majority
of our course participants take accounting professional continuing education courses in the second half of the calendar year, we
historically have experienced higher revenues during the quarters ending September 30 and December 31 of each fiscal year. As a result,
we historically have generated higher revenue in the second half of each fiscal year. However, the 2012 Elementary Level, Intermediate
Level and Advanced Level Accounting Professional Qualification Exams were postponed to October 27 and 28, 2012, which were
originally scheduled to be held on the third weekend of May and the first weekend of September of the same year, respectively. In
addition, part of the 2012 CPA Qualification Examination was postponed to October 13 and 14, 2012, which was originally scheduled to
be held on the third weekend of September of the same year. As a result of such exam dates delay, deferred revenue generated from our
test preparation courses relating to these major accounting exams was not fully recognized as revenue by May 2012 and September
2012, respectively, but were recognized over a longer period of time through October 2012. In addition, refundable fees relating to the
2012 Elementary Level and Intermediate Level Accounting Professional Qualification Exams were not recognized as revenue in the
fourth fiscal quarter ended September 30, 2012 and were instead recognized in the first fiscal quarter ended December 31, 2012 when
the exam results were released. Although such postponement did not affect overall revenue seasonality in the fiscal year ended
September 30, 2012, these fluctuations could result in volatility and adversely affect the price of our ADSs in the future. As our revenues
grow, these seasonal fluctuations may become more pronounced.
9
Our failure to protect our intellectual property rights may undermine our competitive position, and litigation to protect our
intellectual property rights or defend against third party allegations of infringement may be costly and ineffective.
We believe that our copyrights, trademarks and other intellectual property are instrumental to our success. We depend to a large
extent on our ability to develop and maintain the proprietary aspects of our technology and products. We have devoted considerable
time and energy to the development and improvement of our websites, our online training platform and our training courses and
materials.
We rely primarily on copyrights, trademarks, trade secrets, unpatented proprietary technologies, processes and know-how and
other contractual restrictions to protect our intellectual property. Nevertheless, these provide only limited protection and the actions
we take to protect our intellectual property rights may not be adequate. Our trade secrets may become known or be independently
discovered by our competitors. Third parties may infringe upon or misappropriate our proprietary technologies or other intellectual
property rights, which could have a material adverse effect on our business, financial condition or operating results. Policing the
unauthorized use of proprietary technology can be difficult and expensive. Also, litigation may be necessary to enforce our
intellectual property rights, protect our trade secrets or determine the validity and scope of the proprietary rights of others. The
outcome of such potential litigation may not be in our favor and any success in litigation may not be able to adequately protect our
rights. Such litigation may be costly and divert management’s attention away from our business. An adverse determination in any
such litigation would impair our intellectual property rights and may harm our business, prospects and reputation. Enforcement of
judgments in China is uncertain, and even if we are successful in litigation, it may not provide us with an effective remedy. In
addition, we have no insurance coverage against litigation costs and would have to bear all costs arising from such litigation to the
extent we are unable to recover them from other parties. The occurrence of any of the foregoing could have a material adverse effect
on our business, financial condition and results of operations.
We may be exposed to infringement claims by third parties or held liable for defamation or negligence to third parties for
information displayed on, retrieved from or linked to our websites, based on the content of the books and reference materials or
marketing materials that we or our lecturers author or distribute or for information delivered or shared through our services,
which could disrupt our business and cause us to incur substantial legal costs, or damage our reputation.
We cannot assure you that our services and products do not or will not infringe any intellectual property rights held by third
parties. We have in the past, in the ordinary course of business, experienced claims for intellectual property infringement, none of
which has had a material effect on our business. We cannot assure you that in the future we would not receive claims of infringement
of third parties’ proprietary rights or claims for indemnification resulting from infringement arising from our services or products. We
may also become subject to claims that content on our websites or in the books and reference materials or marketing materials that we
or our lecturers author or distribute is in fact protected by third parties’ copyrights or trademark.
In addition, as a provider of Internet content and other value-added telecommunications services, we may face liability for
defamation, negligence and other claims based on the nature and contents of the materials that are displayed on our websites or
delivered or shared through our services. We could also be subject to claims based upon content that is accessible on our websites or
through our networks, such as content and materials posted by visitors on message boards, online communities, email or chat rooms
offered on our websites. By providing hypertext links to third-party websites, we may be held liable for copyright or trademark
violations by those third-party websites. Third parties could assert claims against us for losses incurred in reliance on any erroneous
information distributed by us.
Royalty or licensing agreements, if required, may not be available on acceptable terms, if at all. A successful claim of
infringement against us and our failure or inability to obtain a license to use the infringed or similar technology or content on
commercially acceptable terms, or at all, could prevent us from producing and offering our services or products or cause us to incur
great expense and delay in developing non-infringing services or products. Any of the above events could in turn have a material and
adverse impact on our financial condition and results of operations. Any defamation or negligence claims against us, even if they do
not result in liability to us, could cause us to incur significant costs in investigating and defending against these claims. We do not
have general liability insurance to cover all potential claims to which we are exposed, and our insurance coverage may not be
adequate to indemnify us from all liability that may be imposed.
10
Concerns about the security of our transaction systems and confidentiality of information on the Internet may reduce use of our
services and impede our growth.
Public concerns over the security and privacy of electronic settlement, online transmittal and communications have to some
extent constrained the rapid development and expansion of online transactions. If these concerns are not adequately addressed, they
will restrict the growth of value-added telecommunications services generally, and in particular the use of the Internet as a means of
conducting commercial transactions. If a well-publicized breach of security were to occur, general usage of value-added
telecommunications services could decline, which could reduce our visitor traffic and the number of course participants, and impede
our growth. We have not experienced any material cyber attacks on our information technology systems and are continuously vigilant
about protecting and improving our cyber security. We cannot assure you, however, that our current security measures will be
adequate or sufficient to prevent any theft or misuse of personal data of our course participants. Further, security breaches could
expose us to litigation and possible liability for failing to secure confidential customer information, and could harm our reputation and
ability to attract or retain course participants. In addition, we do not have any cyber security insurance coverage for our operations,
and any material cyber attack on our information technology systems and our online education websites could expose us to substantial
costs and losses.
The successful operation of our business depends upon the performance and reliability of the Internet infrastructure and
telecommunications networks in China.
Our business depends on the performance and reliability of the Internet infrastructure in China. Almost all access to the Internet
is maintained through state-controlled telecommunications operators. In addition, the national networks in China are connected to the
Internet through international gateways controlled by the PRC government. These international gateways are generally the only
channels through which a domestic user can connect to the Internet. We cannot assure you that a more sophisticated Internet
infrastructure will be developed in China. We may not have access to alternative networks in the event of disruptions, failures or other
problems with China’s Internet infrastructure. In addition, the Internet infrastructure in China may not support the demands associated
with continued growth in Internet usage.
We also rely on China Telecommunications Corporation, or China Telecom, China United Network Communications Group
Co., Ltd., or China Unicom, and China Tie Tong Telecommunications Corporation, or China Tie Tong, to provide us with data
communications capacity primarily through local telecommunications lines and Internet data centers to host our servers. We do not
have access to alternative services in the event of disruptions, failures or other problems with the telecommunications networks of
China Telecom, China Unicom and China Tie Tong or if they otherwise fail to provide such services. Any unscheduled service
interruption could disrupt our operations, damage our reputation and result in a decrease in our revenues.
Furthermore, we have no control over the costs of services provided by China Telecom, China Unicom and China Tie Tong. If
the prices that we pay for telecommunications and Internet services rise significantly, our gross profit and net income could be
adversely affected. In addition, if Internet access fees or other charges to Internet users increase, our visitor traffic may decrease,
which in turn may harm our revenues.
Unexpected network interruptions, security breaches or computer virus attacks and system failures could have a material adverse
effect on our business, financial condition and results of operations.
Any failure to maintain satisfactory performance, reliability, security or availability of our network infrastructure may cause
significant damage to our reputation and our ability to attract and maintain course participants. Major risks involving our network
infrastructure include:
• breakdowns or system failures resulting in a prolonged shutdown of our servers, including failures attributable to power
shutdowns, or attempts to gain unauthorized access to our systems, which may cause loss or corruption of data or
malfunctions of software or hardware;
• disruption or failure in the national backbone network, which would make it impossible for visitors and course participants to
log on to our websites;
• damage from fire, flood, power loss and telecommunications failures; and
• any infection by or spread of computer virus.
11
Any network interruption or inadequacy that causes interruptions in the availability of our websites or deterioration in the
quality of access to our websites could reduce customer satisfaction and result in a reduction in the number of course participants
using our services. If sustained or repeated, these performance issues could reduce the attractiveness of our websites and course
offerings. In addition, any security breach caused by hackings, which involve attempts 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, could
cause a disruption in our services. Inadvertent transmission of computer viruses could expose us to a material risk of loss of our
course files or litigation and possible liability, as well as damage to our reputation.
Furthermore, increases in the volume of traffic on our websites could also strain the capacity of our existing computer systems,
which could lead to slower response times or system failures. This would cause a disruption or suspension in our course offerings,
which would hurt our brand and reputation, and thus negatively affect our revenue growth. We may need to incur additional costs to
upgrade our computer systems in order to accommodate increased demand if we anticipate that our systems cannot handle higher
volumes of traffic in the future.
All of our servers and routers, including backup servers, are currently hosted by third-party service providers in multiple cities in
China. We do not maintain any backup servers outside of these cities. To improve the performance and to prevent disruption of our
services, we may have to make substantial investments to deploy additional servers or one or more copies of our websites to mirror
our online resources.
We may continue to grant share options and/or restricted shares under our current or future share incentive plans, or modify the
terms of existing share options, which may continue to materially impact our future results of operations or result in dilution to
our shareholders.
We adopted our Share Incentive Plan in April 2008, the Prior Plan, under which we had granted options for the purchase of a
total of 11,045,500 ordinary shares to selected officers, employees, and lecturers as of September 30, 2012. We adopted in July 2008,
and amended and restated in February 2009 and May 2012, respectively, our 2008 Performance Incentive Plan, or the New Plan,
under which we reserved a maximum number of 12,545,999 ordinary shares as of September 30, 2012, plus an automatic annual
adjustment. Pursuant to the New Plan, we had granted options for the purchase of a total of 3,162,500 ordinary shares, and issued
157,143 restricted shares, to selected directors, and employees as of September 30, 2012. In addition, on September 27, 2011, we
revised the exercise price of 8,066,700 and 1,398,300 options under the Prior Plan from $0.82 to $0.615, which equaled the per share
value of our ADS on the NYSE at the close of trading on September 27, 2011, and zero per share, respectively. Furthermore, the re-
priced options had been accelerated to be fully vested on the same day. In connection with our declaration of special cash dividend of
US$0.12 per ordinary share on November 13, 2012, we also reduced the exercise price of all outstanding options under our Prior and
New Plans by the same amount per share. See “Item 6.B. Directors, Senior Management and Employees — Compensation — Share
Options, Restricted Shares and Share Incentive Plan.” In connection with the share options we granted and restricted shares we
issued, we incurred $4.4 million, $6.0 million and $0.1 million of share-based compensation expenses in the fiscal years ended
September 30, 2010, 2011 and 2012, respectively, see “Item 5.A. Operating and Financial Review and Prospects — Operating Results
— Share-based Compensation Expenses.” The expenses associated with options granted and restricted shares issued under the share
incentive plans may continue to impact our future results of operations. In addition, if we grant additional options, restricted shares
and other equity incentives in the future under our current or future share incentive plans, or modify the terms of existing share
options, we could further incur significant share-based compensation expenses, or experience a reduction in our net income. Such
actions could also result in dilution to our shareholders.
We may need additional capital but may not be able to obtain it on acceptable terms or at all.
We believe that our current cash and cash equivalents and anticipated cash flows from operations will be sufficient to meet our
anticipated working capital requirements and capital expenditures for at least the next 12 months. We do not anticipate that our
current expansion plans will require significant capital commitments due to the scalability of our business model. We do, however,
expect to spend money on the further development of our “Chinaacc” brand and other brands in the disciplines for which we offer
courses. We do not expect our short-term and long-term cash requirements to be materially different.
12
Nevertheless, we may require additional sources of liquidity in the event of changes in business conditions or other future
developments. Factors affecting our sources of liquidity include, for example, mergers and acquisitions, our sales performance, ability
to control costs and expenses, and choice of financing arrangements. Any changes in the significant factors affecting our revenues
from education services may cause material fluctuations in our cash generated from operations. See “Item 5.A. Operating and
Financial Review and Prospects — Operating Results — Overview — Specific Factors Affecting Our Results of Operations” for a
description of these significant factors. Changes in working capital, including any significant shortening or lengthening of our
accounts receivable cycle or client prepayment cycles, may also cause fluctuations in our cash generated from operations. If our
sources of liquidity are insufficient to satisfy our cash requirements, we may seek to sell additional equity or debt securities to meet
our cash needs. The sale of convertible debt securities or additional equity securities could result in dilution to our shareholders. The
incurrence of indebtedness would result in debt service obligations and could result in operating and financial covenants that restrict
our operations. Our ability to obtain additional capital on acceptable terms is subject to a variety of uncertainties, including:
• investors’ perception of, and demand for, securities of companies mainly providing online professional education and test
preparation courses;
• conditions of the U.S. and other capital markets in which we may seek to raise funds;
• our future results of operations, financial condition and cash flows;
• PRC governmental regulation of foreign investment in Internet, educational services and professional training services
companies;
• economic, political and other conditions in China; and
• PRC governmental policies relating to foreign currency borrowings.
We cannot assure you that financing will be available in amounts or on terms acceptable to us, if at all. Any failure by us to raise
additional funds on terms favorable to us, or at all, could have a material adverse effect on our business, financial condition and
results of operations.
We may not be able to effectively manage the expansion of our operations through new acquisitions or joint ventures or to
successfully realize the anticipated benefits of any such acquisition or joint venture.
We have historically complemented our organic growth through the selective acquisition of complementary businesses, assets,
products or technology, or the formation of joint ventures, and we may continue to do so in the future. The identification of suitable
acquisition targets or joint venture candidates can be difficult, time consuming and costly, and we may not be able to successfully
capitalize on identified opportunities. Consummation of acquisitions and the subsequent integration of new assets and businesses into
our own could also be costly and require significant attention from our management and could result in a diversion of resources from
our existing business, which in turn could have an adverse effect on our business operations. Acquired assets or businesses may not
generate the financial results we expect and may even result in our suffering losses. With respect to the Gaokao retake preparation and
high-school supplementary tutoring business we acquired in September 2009, we have suffered significant operating losses for the
fiscal year ended September 30, 2011. As a result, we discontinued such business in September 2011 and sold same to a third-party in
May 2012. Moreover, completions of acquisitions are typically subject to various approval processes. In addition to possible
shareholders’ approval, we may also have to obtain approvals and licenses from the relevant government authorities in the PRC for
the acquisitions and to comply with any applicable PRC laws and regulations, which could result in increased costs and delay.
Furthermore, acquisitions or joint ventures could result in the use of substantial amounts of cash, potentially dilutive issuances of
equity or equity-linked securities or the incurrence of debt, the incurrence of significant goodwill, intangible assets and other long-
term assets impairment charges, amortization expenses for other intangible assets and exposure to potential unknown liabilities of the
acquired business, or other charges, any of which could have a material adverse effect on our business, financial condition and results
of operations.
Our operations could be disrupted by an outbreak of fire or other calamities and we have limited insurance coverage.
We store books and audio and visual products at our premises to support our courses. As such, there is a risk that these products
and our premises may be damaged or destroyed by fire and other natural calamities. Any disruption of electricity supply or any
outbreak of fire or similar calamities at our premises may result in the breakdown of our facilities and disruption to our business. In
addition, any fire or other calamity at the facilities of our third-party service providers that host our servers could severely disrupt our
ability to deliver our courses and other services over our websites.
13
At present, insurance companies in the PRC offer limited coverage for business related risks. As such, we only have a very
limited form of insurance for our property covering loss of property arising from theft, fire, lightning, explosives and damage caused
by aerial objects. We do not have any business liability or disruption insurance coverage for our operations, and our coverage may not
be adequate to compensate for all losses that may occur, particularly with respect to loss of business and reputation. Any business
disruption, litigation or natural disaster could expose us to substantial costs and losses.
Our financial performance and prospects could be affected by natural calamities or health epidemics.
Our business could be materially and adversely affected by natural calamities, such as floods and earthquakes or health
epidemics such as influenza, severe acute respiratory syndrome or other epidemics. On May 12, 2008, a major earthquake struck
China’s populous Sichuan province and was felt across much of the country, causing great loss of life, numerous injuries, property
loss and disruption to the local economy. The earthquake had an immediate impact on our business as a result of an announcement by
the Ministry of Finance to postpone the administration of the Elementary Level and Intermediate Level Accounting Professional
Qualification Exams across China as a direct result of the earthquake, which exams were originally scheduled to be held on the third
weekend of May 2008. On July 2, 2008, the Ministry of Finance announced that these exams will be held on September 6 and 7,
2008. As a result of the exam dates being rescheduled from May 2008 to September 2008, deferred revenue generated from our test
preparation courses relating to the two major accounting exams was not fully recognized as revenue by May 2008, but were
recognized over a longer period of time through September 2008. In addition, refundable fees relating to these two exams were not
recognized as revenue in the fiscal fourth quarter ended September 30, 2008 and were instead recognized in the fiscal first quarter
ended December 31, 2008 when the exam results were released. In addition, in recent years, there were reports regarding the
occurrences of various forms of influenza in different parts of China, including cases resulting in deaths. Any occurrences of natural
calamities or epidemics may result in the postponement or rescheduling of examinations for which we provide courses, which may in
turn have an adverse impact on our revenues and performance. In addition, if our employees are affected by natural calamities or
contagious or virulent diseases, we may fail to provide our courses, materials and services in a timely manner, which will have an
adverse impact on our financial performance. We have not adopted any written preventive measures or contingency plans to combat
any future natural calamities or outbreak of epidemics. Any natural calamities or prolonged recurrence of adverse public health
developments in China may have a material and adverse effect on our business operations, financial performance and prospects.
We may be exposed to liability for our course content, information or advice we provide to our course participants or customers of
our other services.
We may be subject to legal claims from our course participants or customers of our other services for losses they suffer if such
losses arise from their reliance on content, information or advice that we provide to them. Such claims, with or without merit, may be
expensive to defend and may have an adverse impact on our reputation. Further, if such claims are successful, we may be held liable
to pay compensation which may in turn adversely affect our financial condition and results of operations.
Failure to maintain effective internal control over financial reporting could have a material and adverse effect on the trading
price of our ADSs.
We are subject to the reporting obligations under the U.S. securities laws. The Securities and Exchange Commission, or the
SEC, as required under Section 404 of the Sarbanes-Oxley Act, has adopted rules requiring every public company to include a report
of management on the effectiveness of such companies’ internal control over financial reporting in its annual report, which contains
management’s assessment of the effectiveness of the company’s internal control over financial reporting. In addition, an independent
registered public accounting firm must issue an attestation report on the effectiveness of the company’s internal control over financial
reporting. These requirements apply to our annual report on Form 20-F for the fiscal year ended September 30, 2012.
Our management has concluded that our internal control over financial reporting was effective as of September 30, 2012. Our
independent registered public accounting firm has issued an attestation report, which has concluded that we maintained, in all material
aspects, effective internal control over financial reporting as of September 30, 2012. See “Item 15. Controls and Procedures.”
However, if we fail to maintain effective internal control over financial reporting in the future, our management and our independent
registered public accounting firm may not be able to conclude that we have effective internal control over financial reporting at a
reasonable assurance level. This could negatively affect the reliability of our financial information and result in the loss of investors’
confidence in our reported financial information, which in turn could negatively impact the trading price of our ADSs. Furthermore,
we have incurred and anticipate that we will continue to incur considerable costs, management time and other resources in an effort to
comply with Section 404 and other requirements of the Sarbanes-Oxley Act.
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Risks Relating to Our Corporate Structure and Restrictions on Our Industry
Substantial uncertainties and restrictions exist with respect to the interpretation and application of PRC laws and regulations
relating to the distribution of Internet content in China. If the PRC government finds that the structure we have adopted for our
business operations does not comply with PRC laws and regulations, we could be subject to severe penalties, including the
shutting down of our websites.
Foreign ownership of Internet-based businesses is subject to significant restrictions under current PRC laws and regulations. The
PRC government regulates Internet access, the distribution of online information and the conduct of online commerce through strict
business licensing requirements and other government regulations. These laws and regulations also include limitations on foreign
ownership in PRC companies that provide Internet content distribution services. Specifically, foreign investors are not allowed to own
more than 50% equity interests in any entity conducting Internet content distribution business.
Because we are a Cayman Islands company and we hold the equity interests of our PRC subsidiaries indirectly through China
Distance Education Limited, a Hong Kong company, or CDEL Hong Kong, our PRC subsidiaries are treated as foreign invested
enterprises under PRC laws and regulations. To comply with PRC laws and regulations, we conduct our operations in China through a
series of contractual arrangements entered into among CDEL Hong Kong, our two PRC subsidiaries, Beijing Champion Distance
Education Technology Co., Ltd., or Champion Technology and Beijing Champion Education Technology Co., Ltd. or Champion
Education Technology, our affiliated PRC entity, Beijing Champion and its shareholders. Beijing Champion is a PRC limited liability
company 79% owned by Zhengdong Zhu, our chairman and chief executive officer and a major shareholder, and 21% owned by
Baohong Yin, our co-founder and deputy chairman, both of whom are PRC citizens. Beijing Champion holds a Telecommunications
and Information Services Operating License, or ICP license, issued by the Beijing Telecommunications Administration Bureau, a
local branch of China’s Ministry of Industry and Information, or MII, which allows Beijing Champion to provide Internet content
distribution services. Each of Beijing Caikaowang Company Limited, or Caikaowang, Beijing Champion Wangge Education
Technology Co., Ltd., or Champion Wangge, and Beijing Zhengbao Yucai Education Technology Co., Ltd., or Zhengbao Yucai, is a
subsidiary of Beijing Champion, and holds an ICP license issued by the Beijing Telecommunications Administration Bureau. Beijing
Champion and its subsidiaries have also received approvals issued by the Beijing Telecommunications Administration Bureau to
provide online bulletin board services on 13 of our 17 websites where we currently provide such services. In addition, Beijing
Champion holds a Permit of Internet Cultural Activities issued by the Ministry of Culture, which permits Beijing Champion to engage
in production and dissemination of cultural products through the Internet. The ICP licenses and other approvals held by Beijing
Champion and its subsidiaries are essential to the operation of our business.
As a result of these contractual arrangements, we control Beijing Champion and its subsidiaries and, accordingly, under U.S.
GAAP, we consolidate its operating results in our financial statements. For a description of these contractual arrangements, see “Item
4.C. Information on the Company — Organizational Structure.”
The relevant PRC regulatory authorities have broad discretion in determining whether a particular contractual structure is in
violation of law. For example, on July 13, 2006, MII issued the Notice on Intensifying the Administration of Foreign Investment in
Value-added Telecommunications Services, or the MII Notice. The MII Notice prohibits a domestic telecommunications service
provider from leasing, transferring or selling telecommunications business operating licenses to any foreign investor in any form, or
providing any resources, sites or facilities to any foreign investor for its illegal operation of a telecommunications business in China.
According to the MII Notice, either the holder of a value-added telecommunications service license or its shareholders must directly
own the domain names and trademarks used by such license holder in its provision of value-added telecommunications services. The
MII Notice also requires each license holder to have the necessary facilities, including servers, for its approved business operations
and to maintain such facilities in the regions covered by its license. In order to comply with the MII Notice, we have transferred all
domain names and trademarks that are primarily used in connection with our online business activities from Champion Technology to
Beijing Champion.
Furthermore, if our ownership structure, contractual arrangements and businesses of our company, our PRC subsidiaries and
Beijing Champion or its subsidiaries are found to be in violation of any existing or future PRC laws or regulations, the relevant
regulatory authorities would have broad discretion in dealing with such violations, including:
• revoking the business and operating licenses of our PRC subsidiaries or Beijing Champion or its subsidiaries, which business
and operating licenses are essential to the operation of our business;
• levying fines;
• confiscating our income or the income of our PRC subsidiaries or Beijing Champion or its subsidiaries;
• shutting down our servers or blocking our websites;
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• discontinuing or restricting our operations or the operations of our PRC subsidiaries or Beijing Champion or its subsidiaries;
• imposing conditions or requirements with which we, our PRC subsidiaries or Beijing Champion or its subsidiaries may not be
able to comply;
• requiring us, our PRC subsidiaries or Beijing Champion or its subsidiaries to restructure our relevant ownership structure,
operations or contractual arrangements; and
• taking other regulatory or enforcement actions that could be harmful to our business.
If the regulatory authorities take any of the above-mentioned measures against us, we may have to cease our business operations
and our reputation will be severely damaged, which in turn will materially and negatively affect our financial condition and results of
operations.
Our contractual arrangements may be subject to severe censorship under PRC laws and regulations and, thus, be challenged by
relevant regulatory authorities.
On February 3, 2011, the General Office of the State Council issued the Circular of the General Office of the State Council on
the Establishment of Security Review System for Foreign Investors’ Merger and Acquisition of Domestic Enterprises (the “Circular
on the Establishment of Security Review”), which became effective on March 4, 2011. Among other things, the Circular on the
Establishment of Security Review stipulates that the scope of the security review lies in foreign investors’ acquisition of domestic
military enterprises, military-related enterprises, enterprises involving sensitive military facilities and other enterprises that impact
national defense security; foreign investors’ acquisition of domestic enterprises which may provide foreign investors with de facto
control over industries relating to national security, such as important agricultural products, energy and natural resources,
infrastructures, transportation services, technologies and major equipment manufacturing. On August 25, 2011, the Ministry of
Commerce issued the Circular of the Ministry of Commerce on the Implementation of Security Review System for Foreign Investors’
Merger and Acquisition of Domestic Enterprises ( the “Circular on the Implementation of Security Review”), which became effective
on September 1, 2011. Among other things, the Circular on the Implementation of Security Review further specifies that whether a
foreign investors’ acquisition of domestic enterprises falls within the scope of the security review depends on the said transaction’s
substantive content and practical influence. Foreign investors shall not circumvent the security review through any arrangements or
schemes, including but not limited to trust, lease and/or contractual arrangements.
According to our PRC counsel, as our contractual arrangements were established in 2003, the new security review system shall
not apply to our contractual arrangements. We cannot guarantee, however, that the Ministry of Commerce will not promulgate
additional implementing rules or new rules that will bring our contractual arrangements under the scope of the security review system.
Moreover, according to a press conference held by the Ministry of Commerce on September 20, 2011, there are no specific laws or
regulations governing contractual arrangements like the ones that we employ, but the Ministry of Commerce together with other
authorities would study how to regulate them in the future. Hence, we cannot assure you that our contractual arrangements will not be
subject to new regulations that will be issued by relevant regulatory authorities and that such new regulations will not cause any
material adverse effect on our existing structure.
We rely on contractual arrangements with our affiliated PRC entity and its shareholders for our China operations, which may not
be as effective in providing operating control as direct ownership. If any of Beijing Champion or its shareholders fails to perform
its or their obligations under these contractual arrangements, we may have to legally enforce such arrangements and our
business, financial condition and results of operations may be materially and adversely affected if these arrangements cannot be
enforced.
PRC laws and regulations restrict foreign ownership in Internet-related content distribution businesses. Because of these
restrictions, we conduct our business and derive related revenues through contractual arrangements among CDEL Hong Kong, our
PRC subsidiaries, Beijing Champion, and its shareholders, Zhengdong Zhu and Baohong Yin. We have no direct ownership interest
in Beijing Champion. These contractual arrangements may not be as effective in providing us with control over Beijing Champion as
direct ownership. If we were the controlling shareholder of Beijing Champion with direct ownership, we would be able to exercise
our rights as shareholders to effect changes in the board of directors, which in turn could implement changes, subject to any
applicable fiduciary obligations, at the management level. However, under the current contractual arrangements, as a legal matter, if
Beijing Champion fails to perform its obligations under these contractual arrangements, we may have to (i) incur substantial costs and
resources to enforce such arrangements, and (ii) rely on legal remedies under PRC law, including contract remedies, which we cannot
be sure would be effective. In the event that we are unable to enforce these contractual arrangements, or if we suffer significant time
delays or other obstacles in the process of enforcing these contractual arrangements, our business, financial condition and results of
operations could be materially and adversely affected.
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In addition, these contractual arrangements, including the Technical Support and Consultancy Services Agreement, Equity
Pledge Agreements, Exclusive Purchase Rights Agreement, and the related Powers of Attorney, are governed by PRC law, and most
of these agreements (excluding the Powers of Attorney) provide for the resolution of disputes through arbitration before the China
International Economic and Trade Arbitration Center, or CIETAC, in Beijing. Accordingly, these contracts would be interpreted in
accordance with PRC law and any disputes arising from these arrangements would be resolved through arbitration before CIETAC or,
in the case of disputes arising from the Powers of Attorney, through litigation in the PRC, in each case in accordance with PRC legal
procedures. Furthermore, although CIETAC may award the same type of relief to the prevailing party in an arbitration proceeding as
that granted by a court in a civil action, CIETAC does not have the authority to enforce arbitral awards. In the event that we prevail in
an arbitration proceeding before CIETAC, we may nevertheless have to apply to a PRC court for the enforcement of the arbitral
award relating to the contractual arrangements. The legal environment in the PRC may not be as developed as in some other
jurisdictions, such as the United States. See “—General Risks Relating to Conducting Business in China —The PRC legal system
embodies uncertainties that could limit the legal protections available to you and us.” As a result, although the enforceability of the
contractual arrangements is not affected, it might be less certain as to how these contractual arrangements would be enforced. In the
event that we are unable to enforce these contractual arrangements to the fullest extent, we may not be able to exert effective control
over our affiliated entities, and our ability to conduct our business would be materially and adversely affected.
The shareholders of Beijing Champion may have potential conflicts of interest with us, which may materially and adversely affect
our business and financial condition.
Zhengdong Zhu and Baohong Yin are husband and wife, and shareholders of Beijing Champion, holding equity interests of 79%
and 21%, respectively. The interest of Zhengdong Zhu and Baohong Yin as shareholders of Beijing Champion may differ from our
interests. Although both of Zhengdong Zhu and Baohong Yin have given undertakings to act in the best interests of Champion
Technology, we cannot assure you that when conflicts arise, these individuals will act in our best interests or that conflicts will be
resolved in our favor. In addition, Mr. Zhu and Ms. Yin may breach or cause Beijing Champion and its subsidiaries to breach or
refuse to renew the existing contractual arrangements with us. Currently, we do not have existing arrangements to address potential
conflicts of interest Mr. Zhu or Ms. Yin may encounter in his or her capacity as a record owner and director of Beijing Champion, on
the one hand, and as a beneficial owner and director of our company, on the other hand. We rely on Beijing Champion, Mr. Zhu and
Ms. Yin to comply with the laws of China, which protect contracts, including the contractual arrangements among Beijing Champion,
its subsidiaries and its shareholder and us, which provide that Mr. Zhu and Ms. Yin should act in the best interest of our company
despite being record owners of Beijing Champion. We also rely on Mr. Zhu and Ms. Yin to abide by the laws of the Cayman Islands,
which provide that directors have a duty of care and a duty of loyalty to act honestly, in good faith and in our best interests. However,
the legal frameworks of China and the Cayman Islands do not provide guidance on resolving conflicts in the event of a conflict with
another corporate governance regime. If we cannot resolve any conflicts of interest or disputes among us, Beijing Champion, Mr. Zhu
and Mrs. Yin, we would have to rely on legal proceedings, which could result in disruption of our business and subject us to
substantial uncertainty as to the outcome of any such legal proceedings.
We may lose the ability to use and enjoy assets held by Beijing Champion and its subsidiaries that are important to the operation
of our business if any of such entities goes bankrupt or becomes subject to a dissolution or liquidation proceeding.
As part of our contractual arrangements with Beijing Champion, Beijing Champion and its subsidiaries hold certain assets that
are important to the operation of our business. If Beijing Champion or any of its subsidiaries goes bankrupt and all or part of their
assets become subject to liens or rights of third-party creditors, we may be unable to continue some or all of our business activities,
which could materially and adversely affect our business, financial condition and results of operations. If Beijing Champion or any of
its subsidiaries undergoes a voluntary or involuntary liquidation proceeding, the unrelated third-party creditors may claim rights to
some or all of these assets, thereby hindering our ability to operate our business, which could materially and adversely affect our
business, financial condition and results of operations.
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Contractual arrangements we have entered into among our subsidiaries, subsidiary of Beijing Champion and Beijing Champion
may be subject to scrutiny by the PRC tax authorities and a finding that we or Beijing Champion owe additional taxes could
substantially reduce our consolidated net income.
Under PRC laws and regulations, arrangements and transactions among related parties may be subject to audit or challenge by
the PRC tax authorities. We could face material and adverse tax consequences if the PRC tax authorities determine that the
contractual arrangements and transactions among our subsidiaries, subsidiary of Beijing Champion and Beijing Champion do not
represent an arm’s length price and adjust the income of our subsidiaries, subsidiary of Beijing Champion or that of Beijing
Champion in the form of a transfer pricing adjustment. A transfer pricing adjustment could, among other things, result in a reduction,
for PRC tax purposes, of expense deductions recorded by Beijing Champion, which could in turn increase its respective tax liabilities
without reducing tax expenses of our subsidiaries and subsidiary of Beijing Champion. In addition, the PRC tax authorities may
impose late payment fees and other penalties on our affiliated entities for underpayment of taxes. Our consolidated net income may be
materially and adversely affected if our affiliated entities’ tax liabilities increase or if it is found to be subject to late payment fees or
other penalties.
We may rely principally on dividends and other distributions on equity paid by our PRC subsidiaries for our cash requirements,
but such dividends and other distributions are subject to restrictions under PRC law. Limitations on the ability of our PRC
subsidiaries to transfer funds to us could materially and adversely affect our ability to grow, make investments or acquisitions, pay
dividends, and otherwise fund and conduct our businesses.
Current PRC regulations permit our PRC subsidiaries to pay dividends to us only out of their accumulated profits, if any,
determined in accordance with PRC accounting standards and regulations. However, our PRC subsidiaries are required under PRC
laws and regulations to allocate a portion of their annual after-tax profits, if any, to certain statutory reserves and funds prior to
declaring and remitting dividends. For example, our PRC subsidiaries are required to allocate at least 10% of their after-tax profits to
statutory reserves until such reserves reach 50% of their respective registered capital. Allocations to these statutory reserves and funds
can be used only for specific purposes and are not transferable to us in the form of loans, advances or cash dividends. As a result, our
PRC subsidiaries are restricted in their ability to transfer a portion of their net assets to us.
If we lose control over controlling non-tangible assets of Beijing Champion and its subsidiaries, including their chops, seals and
business licenses or private non-enterprise entity registration certificates, our business and operations could be materially and
adversely affected.
Our PRC affiliated entity Beijing Champion and its subsidiaries have certain controlling non-tangible assets, such as chops, seals
and their business licenses for entering into contracts, dealing with banks or taking certain official actions including registering any
change to the composition of the board or senior management team with relevant PRC authorities.
Under the PRC law, legal documents for various transactions, including government filings, agreements and contracts, are
executed using chops or seals of the signing entity or with the signature of the legal representative whose designation is registered and
filed with the relevant industry and commerce administration authorities. We generally execute legal documents by affixing chops or
seals, rather than having the designated legal representatives sign the documents. Beijing Champion and its subsidiaries have four
types of chops and seals: the entity chop, the contract chop, the legal representative seal and the finance chop. The entity chop is
generally used for documents to be submitted to government agencies, such as applications for changing business scope, directors or
entity name, and for other legal letters. The contract chop is used for executing leases and commercial contracts, including service
contracts with our students. The legal representative seal is normally used for issuing checks. The finance chop is generally used for
making and collecting payments, including, but not limited to issuing invoices. Beijing Champion’s and its subsidiaries’ business
licenses are required to be presented for (i) annual inspection by the industry and commerce administration authorities or the civil
affairs administration authorities, as applicable, in order to maintain valid existence; (ii) application, registration and modification of
other licenses and qualifications; (iii) opening bank accounts and (iv) purchase of real properties or motor vehicles.
Under the internal policies adopted by us for Beijing Champion and its subsidiaries, the use of chops and seals must be approved
by the top management before the custodians, normally one of the top ranking managers of these assets, may affix the chops and seals
to legal documents for approved uses. The management’s approval is required before the business licenses of Beijing Champion and
its subsidiaries can be taken offsite.
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Similar to the other aspects of Beijing Champion’s and its subsidiaries’ business operations, we control Beijing Champion’s and
its subsidiaries’ controlling non-tangible assets through our control over Beijing Champion and its subsidiaries, which in turn is based
on our contractual arrangements with Beijing Champion and its shareholders, rather than through direct ownership. As one of the
measures to maintain the control over Beijing Champion and its subsidiaries, we appoint the legal representatives and the senior
management team for each of Beijing Champion and its subsidiaries. To maintain their physical security, we require all chops, seals,
business licenses to be stored in secured locations accessible only to the designated custodians.
Our procedures and measures may not be sufficient to prevent all instances of abuse or unauthorized actions. If we fail to
maintain effective control over these controlling non-tangible assets for any reason, or if any of these controlling non-tangible assets
were misused or misappropriated by the authorized users, whether as a result of labor disputes or other disputes, such persons’
malfeasance or any other reason, these controlling non-tangible assets may be used to (i) transfer assets of the affected entities
without our approval, (ii) bind the affected entities with obligations against our interest which we would be forced to fulfill,
(iii) obstruct the affected entities’ cash flow and financing, or (iv) prevent the affected entities from completing the required annual
inspection or other administrative procedures, which will result in the loss of such entities’ valid existence. If the legal representative
or person designated with the responsibility to control the non-tangible assets of a local entity of Beijing Champion and its
subsidiaries misuses or misappropriates the controlling intangible assets in any manner, or otherwise acts against our instruction in an
effort to seize control over such entity, we would need to have a shareholder or board resolution to take legal actions to seek the
return of these assets, apply to the relevant authorities for new chops, seals, business licenses or private non-enterprise entity
registration certificates, or otherwise seek legal remedies against such person, which may be time-consuming and may not be
sufficient or timely to remedy all the harms caused. During any period in which we lose effective control of the activities as a result of
such loss of control over or misuse or misappropriation of these non-tangible assets, the business activities of the affected entity may
be severely disrupted and we could lose the economic benefits of that aspect of Beijing Champion and its subsidiaries’ business,
which may materially and adversely affect our overall business operations, our financial position and results of operations.
If any of our affiliated entities fails to obtain and maintain the requisite licenses and approvals held by it under the complex
regulatory environment for Internet-based businesses in China, our business, financial condition and results of operations may be
materially and adversely affected.
The Internet industry in China is highly regulated by the PRC government. Various regulatory authorities of the central PRC
government, such as the State Council, MII, the State Administration of Industry and Commerce, the State Press and Publication
Administration, the State Administration of Radio, Film and Television, or SARFT, and the Ministry of Public Security, are
empowered to issue and implement regulations governing various aspects of the Internet industry.
Each of our affiliated entities including Beijing Champion, Caikaowang, Zhengbao Yucai and Champion Wangge is required to
obtain and maintain applicable licenses or approvals from different regulatory authorities in order to provide its current services. Our
affiliated entities have obtained primary approvals including an ICP license for our 17 websites and an approval for operating
electronic bulletin board services on 13 websites where we currently provide such services. These licenses are essential to the
operation of our business and are generally subject to annual review by the relevant governmental authorities. Our affiliated entities,
however, may be required to obtain additional licenses, such as an Internet Publishing License for engaging in Internet publishing and
an Internet News Information Services Provision Approval for engaging in distribution of news through the Internet. If any of our
affiliated entities fails to obtain or maintain any of the required licenses or approvals, its continued business operations in the Internet
industry may subject it to various penalties, such as confiscation of illegal revenues, fines and the discontinuation or restriction of its
operations. Any such disruption in the business operations of our affiliated entities will materially and adversely affect our business,
financial condition and results of operations.
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If we are unable to re-register or obtain the necessary license as required by the Administrative Measures Regarding Internet
Audio-Video Program Services, or the Internet Audio-Video Program Measures, promulgated in 2007 in a timely manner or at all,
our equity ownership structure may require significant restructuring, or we may become subject to significant penalties, fines,
legal sanctions or an order to suspend our use of audio-video content, in which case our business, financial condition and results
of operations may be materially and adversely affected.
On December 20, 2007, SARFT and MII issued the Internet Audio-Video Program Measures, which became effective on
January 31, 2008. Among other things, the Internet Audio-Video Program Measures stipulate that no entities or individuals may
provide Internet audio-video program services without a License for Disseminating Audio-Video Programs through Information
Network issued by SARFT or its local counterparts or completing the relevant registration with SARFT or its local counterparts and
only entities wholly owned or controlled by the PRC government may engage in the production, editing, integration or consolidation,
and transfer to the public through the Internet, of audio-video programs, and the provision of audio-video program uploading and
transmission services. On February 3, 2008, SARFT and MII jointly held a press conference in response to inquiries related to the
Internet Audio-Video Program Measures, during which SARFT and MII officials indicated that providers of audio-video program
services established prior to the promulgation date of the Internet Audio-Video Program Measures that do not have any regulatory
non-compliance records can re-register with the relevant government authorities to continue their current business operations. After
the conference, the two authorities published a press release that confirms the above guidelines. On September 15, 2009, SARFT
promulgated a notice regarding the issues of management of Internet Audio-Video Program Services License, which provides that the
application for re-registration of the Internet Audio-Video Program Services License shall be closed on December 20, 2009.
Due to uncertainties with respect to the interpretation and application of the Internet Audio-Video Program Measures, each year,
we and our PRC counsel consult the Beijing Branch of SARFT, or Beijing SARFT, which is the competent authority in Beijing to
grant the License for Disseminating Audio-Video Programs through Information Network, by way of face-to-face interview or
telephone consultation regarding whether online education services providers like us that provide audio-video educational courses and
programs through the Internet only to enrolled course participants should apply for said license. The officials in Beijing SARFT
replied verbally in 2008, 2009 and early 2010 that we were not required to apply for said license as we are an education service
provider that only transmits audio-video educational courses and programs through the Internet to enrolled course participants instead
of the general public. However, when we consulted Beijing SARFT again in January 2011, Beijing SARFT indicated that the scope of
application of the Internet Audio-Video Program Measures was expanded by SARFT to cover educational course providers like us
and thus we are required to apply for the License for Disseminating Audio-Video Programs through Information Network. Further to
the application scope expansion, in January 2011, a joint administrative enforcement commission of the Beijing government
(including Beijing SARFT) issued a warning to us and fined us RMB6,000 ($897) for providing audio-video educational courses
without obtaining the License for Disseminating Audio-Video Programs through Information Network. After the consultation, we
began to apply to Beijing SARFT for said license. After accepting our application in February 2011, Beijing SARFT sent us a written
reply on March 8, 2011. According to the reply, due to the special circumstance that we have been involved in the distance education
industry for many years and our websites www.chinaacc.com, www.chinalawedu.com, and www.ck100.com had been approved by
the Ministry of Education and the related telecommunication authority before the promulgation of Internet Audio-Video Program
Measures, Beijing SARFT would further deliberate our application and officially respond to us thereafter. On August 1, 2011, Beijing
SARFT sent us another written reply which states that Beijing SARFT had consulted with SARFT and determined that the License
for Disseminating Audio-Video Programs through Information Network is not applicable to us as basic education, higher education,
teacher education, vocational education, adult education, and distance education activities do not fall under the “Internet audio-visual
services program.” Therefore, we are not required to obtain the License for Disseminating Audio-Video Programs. We cannot
guarantee that Beijing SARFT will not change its position or that the reply will not be challenged by higher authorities in China, or
that we will not be asked to obtain the said license again. If the regulatory authorities take any such actions against us, it may
materially and adversely affect our business. Moreover, if we are asked to re-register with relevant authorities or obtain the required
license, we cannot assure you that our future application(s) will be approved by relevant authorities in a timely manner or at all. If we
are subsequently required to and are unable to re-register or obtain the necessary license timely, or at all, due to reasons beyond our
control, our equity ownership structure may require significant restructuring, or we may become subject to significant penalties, fines,
legal sanctions or an order to suspend our use of audio-video content, any of which could have a material adverse effect on our
business, financial condition, results of operations, and prospects, as well as the trading price of our ADSs.
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Regulation and censorship of information distribution over the Internet in China may adversely affect our business, and we may
be liable for information displayed on, retrieved from or linked to our websites.
China has enacted laws and regulations governing Internet access and the distribution of news, information, audio-video
programs or other contents, as well as products and services, through the Internet. In the past, the PRC government has prohibited the
distribution of information through the Internet that it deems in violation of PRC laws and regulations. Under regulations promulgated
by the State Council, MII, the State Press and Publication Administration and the Ministry of Culture, Internet content providers and
Internet publishers are prohibited from posting or displaying over the Internet content that, among other things:
• opposes the fundamental principles of the PRC constitution;
• compromises state security, divulges state secrets, subverts state power or damages national unity;
• harms the dignity or interests of the state;
• incites ethnic hatred or racial discrimination or damages inter-ethnic unity;
• sabotages China’s religious policy or propagates heretical teachings or feudal superstition;
• disseminates rumors, disturbs social order or disrupts social stability;
• propagates obscenity, pornography, gambling, violence, murder, fear or abets the commission of crimes;
• insults or slanders a third party or infringes upon the lawful rights of a third party; and
• includes other content prohibited by laws or regulations.
If any of our Internet content were deemed by the PRC government to violate any of the above content restrictions, we would
not be able to continue to display such content and could become subject to penalties, including confiscation of income, fines,
suspension of business and revocation of required licenses, which could materially and adversely affect our business, financial
condition and results of operations. We may also be subject to potential liability for any unlawful actions of our clients or affiliates or
for content we distribute that is deemed inappropriate. It may be difficult to determine the type of content that may result in liability to
us, and if we are found to be liable, we may be prevented from operating our websites in China.
General Risks Relating to Conducting Business in China
PRC economic, political and social conditions, as well as changes in any government policies, laws and regulations, could
adversely affect the overall economy in China or the prospects of the education market, which in turn could adversely affect our
business.
Substantially all of our operations are conducted in China, and substantially all of our revenues are derived from China.
Accordingly, our business, financial condition, results of operations, prospects and certain transactions we may undertake are subject,
to a significant extent, to economic, political and legal developments in China.
The PRC economy differs from the economies of most developed countries in many respects, including the amount of
government involvement, level of development, growth rate, control of foreign exchange and allocation of resources. While the PRC
economy has experienced significant growth in the past two to three decades, growth has been uneven, both geographically and
among various sectors of the economy. Demand for our products and services depends, in large part, on economic conditions in
China. Any slowdown in China’s economic growth may cause our potential customers to delay or cancel their plans to participate in
our education courses, which in turn could reduce our net revenues.
Although the PRC economy has been transitioning from a planned economy to a more market-oriented economy since the late
1970s, the PRC government continues to play a significant role in regulating industry development by imposing industrial policies.
The PRC government also exercises significant control over China’s economic growth through the allocation of resources, controlling
the incurrence and payment of foreign currency-denominated obligations, setting monetary policy and providing preferential
treatment to particular industries or companies. Changes in any of these policies, laws and regulations could adversely affect the
overall economy in China or the prospects of the education market, which could harm our business.
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The PRC government has implemented various measures to encourage foreign investment and sustainable economic growth and
to guide the allocation of financial and other resources. While some of these measures benefit the overall PRC economy, they may
also have a negative effect on us. For example, our financial condition and results of operations may be adversely affected by
government control over capital investments or changes in tax regulations that are applicable to us. As the PRC economy is
increasingly intricately linked to the global economy, it is affected in various respects by downturns and recessions of major
economies around the world, such as the recent financial services and economic crises of these economies. The various economic and
policy measures the PRC government adopts to forestall economic downturns or shore up the PRC economy may adversely affect our
business. We cannot assure you that the PRC government will not repeal or alter these measures or introduce new measures that will
have a negative effect on us.
China’s social and political conditions are also not as stable as those of the United States and other developed countries. Any
sudden changes to China’s political system or the occurrence of widespread social unrest could have negative effects on our business
and results of operations. In addition, China has tumultuous relations with some of its neighbors and a significant further deterioration
in such relations could have negative effects on the PRC economy and lead to changes in governmental policies that would be adverse
to our business interests.
The PRC legal system embodies uncertainties that could limit the legal protections available to you and us.
Unlike common law systems, the PRC legal system is based on written statutes and decided legal cases have little precedential
value. In 1979, the PRC government began to promulgate a comprehensive system of laws and regulations governing economic
matters in general. The overall effect of legislation since then has been to significantly enhance the protections afforded to various
forms of foreign investment in China. Our PRC operating subsidiaries, Champion Technology and Champion Education Technology,
are wholly foreign-owned enterprises, and both are subject to laws and regulations applicable to foreign investment in China in
general and laws and regulations applicable to wholly foreign-owned enterprises in particular. Our PRC affiliated entities, Beijing
Champion, Caikaowang, Champion Wangge, Beijing Haidian District Champion Training School, or Champion Training School, and
Zhengbao Yucai, are subject to laws and regulations governing the formation and conduct of domestic PRC companies. Relevant
PRC laws, regulations and legal requirements may change frequently, and their interpretation and enforcement involve uncertainties.
For example, we may have to resort to administrative and court proceedings to enforce the legal protection that we enjoy either by
law or contract. However, since PRC administrative and court authorities have significant discretion in interpreting and implementing
statutory and contractual terms, it may be more difficult to evaluate the outcome of administrative and court proceedings and the level
of legal protection we enjoy than under more developed legal systems. Such uncertainties, including the inability to enforce our
contracts and intellectual property rights, could materially and adversely affect our business and operations. Accordingly, we cannot
predict the effect of future developments in the PRC legal system, particularly with respect to the education sector, 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. These uncertainties could limit the legal protections available to us and other foreign investors.
Fluctuations in exchange rates could result in foreign currency exchange losses.
We report our financial results in U.S. dollars, and appreciation or depreciation in the value of the Renminbi (which is the
currency in which substantially all of our revenues and expenditures are denominated) relative to the U.S. dollar would affect our
financial results reported in U.S. dollars terms without giving effect to any underlying change in our business or results of operations.
Fluctuations in the exchange rate will also affect the relative value of any dividend we issue that will be exchanged into U.S. dollars
and earnings from and the value of any U.S. dollar-denominated investments we make in the future.
The Renminbi’s exchange rate with the U.S. dollar and other currencies is affected by, among other things, changes in China’s
political and economic conditions and China’s foreign exchange policies. The People’s Bank of China regularly intervenes in the
foreign exchange market to limit fluctuations in Renminbi exchange rate and achieve certain exchange rate targets, and through such
intervention kept the U.S. dollar-Renminbi exchange rate relatively stable within a very narrow range against the U.S. dollar
(remaining within 1% of its July 2008 high) for almost two years from July 2008. On June 20, 2010, the People’s Bank of China
announced that the PRC government would further reform the Renminbi exchange rate regime and increase the flexibility of the
exchange rate. On April 15, 2012, the People’s Bank of China announced that it expanded the daily RMB against U.S. dollar trading
band of the inter-bank spot foreign exchange market from 0.5% to 1% as of April 16, 2012, to allow Renminbi to move more freely
and better reflect market supply and demand. Under China’s current exchange rate regime, the Renminbi may appreciate or depreciate
significantly in value against the U.S. dollar in the medium to long term. There remains significant international pressure on the PRC
government to adopt a substantial liberalization of its currency policy, which could result in a further and more significant
appreciation in the value of the Renminbi against the U.S. dollar.
22
Very limited hedging transactions are available in China to reduce our exposure to exchange rate fluctuations. To date, we have
not entered into any hedging transactions in an effort to reduce our exposure to foreign currency exchange risk. While we may decide
to enter into hedging transactions in the future, the availability and effectiveness of these hedging transactions may be limited and we
may not be able to successfully hedge our exposure at all. In addition, our currency exchange losses may be magnified by PRC
exchange control regulations that restrict our ability to convert Renminbi into foreign currency.
The discontinuation of any of the preferential tax treatments currently available to our PRC subsidiary, Champion Technology,
and affiliated entity, Beijing Champion, could materially increase our tax liabilities.
Prior to January 1, 2008, under applicable PRC tax laws, companies established in China were generally subject to an enterprise
income tax, or EIT, at the statutory rate of 33%. However, certain types of foreign-invested enterprises and high and new technology
enterprises located in certain specified high-tech zones were entitled to preferential tax treatments. Under the then applicable PRC tax
laws, each of our two PRC subsidiaries, Champion Technology and Champion Education Technology, had been granted preferential
EIT treatment based on their status as foreign-invested enterprises and their status as high and new technology enterprises operating
in Beijing Zhongguancun Science Park. Our PRC affiliated entity, Beijing Champion had been granted preferential EIT treatment
based on its status as a high and new technology enterprise operating in the Zhongguancun Science Park.
In March 2007, the National People’s Congress enacted the Enterprise Income Tax Law, or the New EIT Law, and in December
2007, the State Council promulgated the implementing rules of the New EIT Law, both of which became effective on January 1,
2008. The New EIT Law significantly curtails tax incentives granted to foreign-invested enterprises under the previous tax law. The
New EIT Law, however, (i) reduces the statutory rate of enterprise income tax from 33% to 25%, (ii) permits companies to continue
to enjoy their existing tax incentives, subject to certain transitional phase-out rules, and (iii) introduces new tax incentives, subject to
various qualification criteria. Under the phase-out rules, enterprises established before the promulgation date of the New EIT Law and
which were granted preferential EIT treatment under the then effective tax laws or regulations may continue to enjoy their preferential
tax treatments until their expiration. Accordingly, Champion Technology, an enterprise established before the promulgation date of
the New EIT Law, continued to enjoy its preferential treatment under the phase-out rules, whereas Champion Education Technology,
established after the promulgation date, was no longer entitled to its preferential treatment as of January 1, 2008. The New EIT Law
and its implementing rules permit qualified “high and new technology enterprises” to enjoy a reduced 15% EIT rate. The qualification
criteria are significantly higher than those prescribed by the old tax rules under which we had been granted preferential treatment.
Champion Education Technology is no longer entitled to the 15% reduced tax rate and became subject to the statutory 25% EIT rate
as of January 1, 2008 because it does not qualify under the new criteria. Beijing Champion and Champion Technology obtained the
qualification certificates of high and new technology enterprises under the New EIT Law on December 24, 2008 with a valid period
of three years starting from January 1, 2008. As a result, Beijing Champion is subject to the tax rate of 15% from 2008 through 2010.
Champion Technology is subject to the tax rate of 7.5% for 2008 through 2009 and 15% for 2010. However, the continued
qualification of a high and new technology enterprise will be subject to annual evaluation and a three-year review by the relevant
government authority in China. Beijing Champion and Champion Technology obtained the qualification certificates of high and new
technology enterprises under the New EIT Law on October 11, 2011 again. As a result, Beijing Champion and Champion Technology
are subject to the tax rate of 15% from 2011 to 2013. The PRC tax policies, interpretations, and practices regarding the overlap,
phase-out, and transition of preferential treatments is subject to continuous change and uncertainty and we cannot assure you that
Beijing Champion and Champion Technology will continue to qualify as high and new technology enterprises under the New EIT
Law, enjoy the preferential treatments under the phase-out rules, not encounter any challenges regarding past application for such
treatments, or that the local tax authorities will not, in the future, change their position and revoke any of our past preferential tax
treatments. The discontinuation of any of our preferential tax treatments could materially increase our tax obligations.
Any increase in the enterprise income tax rate applicable to us or discontinuation or reduction of any of the preferential tax
treatments currently enjoyed by our PRC subsidiary, Champion Technology, and affiliated entity, Beijing Champion, could adversely
affect our business, operating results and financial condition.
23
Under China’s New EIT Law, we may be classified as a “resident enterprise” of China. Such classification could result in
unfavorable tax consequences to us and our non-PRC shareholders.
Under the New EIT Law, an enterprise established outside of China with “de facto management bodies” within China is
considered a “resident enterprise,” and will generally be subject to the uniform 25% PRC enterprise income tax rate on its global
income. The implementing rules of the New EIT Law define de facto management as “substantial and overall management and
control over the production and operations, personnel, accounting, and properties” of the enterprise. A circular issued by the State
Administration of Taxation ( the “SAT”), or Circular 82, on April 22, 2009 provides that a foreign enterprise controlled by a PRC
company or a PRC company group will be classified as a “resident enterprise” with its “de facto management bodies” located within
China if the following requirements are satisfied: (i) the senior management and core management departments in charge of its daily
operations function are mainly in the PRC; (ii) its financial and human resources decisions are subject to determination or approval by
persons or bodies in the PRC; (iii) its major assets, accounting books, company seals, and minutes and files of its board and
shareholders’ meetings are located or kept in the PRC; and (iv) at least half of the enterprise’s directors with voting right or senior
management reside in the PRC. In addition, the SAT issued the Announcement of the SAT on Printing and Distributing the
Administrative Measures for Oversea Registered Chinese-capital Controlled Tax Resident Enterprises (Trial), the Announcement 45,
on July 27, 2011, effective September 1, 2011, providing more guidance on the implementation of Circular 82. Announcement 45
clarifies matters including residence status determination, post-determination administration and competent tax authorities.
Our management is currently based in China and expected to remain in China. However, Circular 82 and Announcement 45 only
apply to offshore enterprises controlled by PRC enterprises or PRC enterprise groups, not those controlled by PRC individuals or
foreign corporations like us. In the absence of detailed implementing regulations or other guidance determining that offshore
companies controlled by PRC individuals or foreign corporations like us are PRC resident enterprises, we do not currently consider
CDEL Cayman to be a PRC resident enterprise. However, the SAT may take the view that the determining criteria set forth in
Circular 82 and Announcement 45 reflect general position on how the “de facto management body” test should be applied in
determining the tax resident status of all offshore enterprises. Or additional implementing regulations or guidance may be issued
determining that CDEL Cayman is a “resident enterprise” for PRC enterprise income tax purposes. The “resident enterprise” rule
could be applied to CDEL Hong Kong as our intermediate holding company and Practice Enterprises Network China International
Links Limited, or PENCIL with similar consequences. If the PRC tax authorities determine that CDEL Cayman, CDEL Hong Kong
and PENCIL are “resident enterprises” for PRC enterprise income tax purposes, a number of unfavorable PRC tax consequences
could follow. First, we may be subject to enterprise income tax at a rate of 25% on our worldwide taxable income, as well as PRC
enterprise income tax reporting obligations. Second, although under the New EIT Law and its implementing rules, a dividend income
between qualified resident enterprises is a “tax-exempt income,” we cannot guarantee that dividends paid to CDEL Cayman from our
PRC subsidiaries through CDEL Hong Kong would qualify as “tax-exempt income” and will not be subject to withholding tax, as the
PRC foreign exchange control authorities, which enforce the withholding tax, have not yet issued guidance with respect to the
processing of outbound remittances to entities that are treated as “resident enterprises” for PRC enterprise income tax purposes.
Finally, the new “resident enterprise” classification could result in a situation in which a 10% withholding tax is imposed on
dividends we pay to our non-PRC enterprise shareholders and with respect to gains derived by our non-PRC enterprise shareholders
from transferring our shares or ADSs, if such income is considered PRC-sourced income by the relevant PRC authorities. This could
have the effect of increasing our and our shareholders’ effective income tax rates and could also have an adverse effect on our net
income and results of operations, and may require us to deduct withholding tax amounts from any dividends we pay to our non-PRC
shareholders.
In addition to the uncertainty in how the new “resident enterprise” classification could apply, it is also possible that the rules
may change in the future, possibly with retroactive effect. We are actively monitoring the possibility of “resident enterprise”
treatment for the 2013 tax year and are evaluating appropriate organizational changes to avoid this treatment, to the extent possible.
24
If the China Securities Regulatory Commission, or CSRC, or another PRC regulatory agency determines that its approval was
required in connection with our initial public offering, we may become subject to penalties.
On August 8, 2006, six PRC regulatory agencies, including the CSRC, promulgated the Regulation on Mergers and Acquisitions
of Domestic Companies by Foreign Investors, or the M&A Rule, which became effective on September 8, 2006, and was amended on
June 22, 2009. The M&A Rule, among other things, has certain provisions that require offshore special purpose vehicles, or SPVs,
formed for the purpose of acquiring PRC domestic companies and controlled by PRC individuals, to obtain the approval of the CSRC
prior to listing their securities on an overseas stock exchange. We believe, based on the opinion of our PRC legal counsel, Jingtian &
Gongcheng, that while the CSRC generally has jurisdiction over overseas listings of SPVs like us, CSRC’s approval was not required
for our initial public offering given the fact that our current corporate structure was established before the new regulation became
effective. However, there remains some uncertainty as to how this regulation will be interpreted or implemented in the context of an
overseas offering. If the CSRC or another PRC regulatory agency subsequently determines that its approval was required for our
initial public offering, we may face sanctions by the CSRC or another PRC regulatory agency. If this happens, these regulatory
agencies may impose fines and penalties on our operations in the PRC, limit our operating activities in the PRC, delay or restrict
capital contribution or shareholder loans by us to our PRC subsidiaries, restrict or prohibit payment or remittance of dividends by our
PRC subsidiaries to us or take other actions that could have a material adverse effect on our business, financial condition, results of
operations, reputation and prospects, as well as the trading price of our ADSs.
The M&A Rule establishes more complex procedures for some acquisitions of PRC companies by foreign entities, which could
make it more difficult for us to pursue growth through acquisitions in China.
The M&A Rule establishes additional procedures and requirements that could make some acquisitions of PRC companies by
foreign entities, such as ours, more time-consuming and complex, including requirements in some instances that the Ministry of
Commerce be notified in advance of any change-of-control transaction in which a foreign entity takes control of a PRC domestic
enterprise. In the future, we may grow our business in part by acquiring complementary businesses. Complying with the requirements
of the M&A Rule to complete such transactions could be time-consuming, and any required approval processes, including obtaining
approval from the Ministry of Commerce, may delay or inhibit our ability to complete such transactions, which could affect our
ability to expand our business or maintain our market share.
PRC regulation of loans and direct investment by offshore holding companies to PRC entities may restrict our ability to make
loans to our PRC subsidiaries and PRC affiliated entities or to make additional capital contributions to our PRC subsidiaries,
which could materially and adversely affect our liquidity and our ability to fund and expand our business.
We are an offshore holding company conducting our operations in China through our PRC subsidiaries and our PRC affiliated
entities. From time to time, we plan to make loans to our PRC subsidiaries, whether currently in existence or to be formed in the
future, and to our PRC affiliated entities, whether currently in existence or to be formed in the future, or make additional capital
contributions to our PRC subsidiaries.
25
Any loans we make to our PRC subsidiaries cannot exceed statutory limits and must be registered with the State Administration
of Foreign Exchange, or SAFE, or its local counterparts. Under applicable PRC law, the government authorities must approve a
foreign-invested enterprise’s registered capital amount, which represents the total amount of capital contributions made by the
shareholders that have been registered with the registration authorities. In addition, the authorities must also approve the foreign-
invested enterprise’s total investment, which represents the total statutory capitalization of the company, equal to the company’s
registered capital plus the amount of loans it is permitted to borrow under the law. The ratio of registered capital to total investment
cannot be lower than the minimum statutory requirement and the excess of the total investment over the registered capital represents
the maximum amount of borrowings that a foreign invested enterprise is permitted to have under PRC law. If we were to make loans
to our PRC subsidiaries, we would have to apply to the relevant government authorities for an increase in their permitted total
investment amounts. The various applications could be time-consuming and their outcomes may be uncertain. Furthermore, even if
we make loans to our PRC subsidiaries that do not exceed their current maximum amount of borrowings, we will have to register
each loan with SAFE or its local counterpart for the issuance of a registration certificate of foreign debts. In practice, it could be time-
consuming to complete such SAFE registration process. Concurrently with the loans, we might have to make capital contributions to
these subsidiaries to maintain the statutory minimum registered capital and total investment ratio, and such capital contributions
involve uncertainties of their own. Further, SAFE promulgated another circular (known as Circular 142) in August 2008 with respect
to the administration of conversion of foreign exchange capital contributions of a foreign invested enterprise. The circular clarifies
that Renminbi converted from foreign exchange capital contributions can only be used for the activities within the approved business
scope of such foreign invested enterprise and cannot be used for domestic equity investments unless otherwise permitted. In addition,
SAFE promulgated a circular on November 9, 2010, or Circular 59, which requires the authenticity of settlement of the fund from
offshore offerings to be closely examined and such fund to be settled in the manner described in the offering documents. Furthermore,
it has recently come to our attention that SAFE issued an internal guideline to its local counterparts, referred to as Circular 45, in
November 2011. Circular 45 has never been formally announced by SAFE to the public or posted on SAFE’s website. Based on the
version of Circular 45 made publicly available by certain local governmental authorities on their websites, we understand that
Circular 45 requires SAFE’s local counterparts to strengthen the control imposed by Circulars 142 and 59 over the conversion of a
foreign-invested company’s capital contributed in foreign currency into RMB. Circular 45 stipulates that a foreign-invested
company’s RMB funds, if converted from such company’s capital contributed in foreign currency, may not be used by such company
to (i) extend loans (in the form of entrusted loans), (ii) repay borrowings between enterprises, or (iii) repay bank loans it has obtained
and on-lent to third parties. Because our PRC affiliated entities are domestic PRC entities, we are not likely to finance their activities
by means of direct capital contributions due to regulatory issues relating to foreign investment in the online education industry, as
well as the licensing and other regulatory issues discussed in “Item 4.B. Information on the Company — Business Overview —
Regulations.” Any loans we make to any of our PRC affiliated entities, which is treated as a PRC domestic company rather than a
foreign-invested enterprise under PRC law, are also subject to various PRC regulations and approvals. Under applicable PRC
regulations, international commercial loans to PRC domestic companies are subject to various government approvals.
We cannot assure you that we will be able to complete the necessary government registrations or obtain the necessary
government approvals on a timely basis, if at all, with respect to future loans by us to our PRC subsidiaries or PRC affiliated entities
or with respect to future capital contributions by us to our PRC subsidiaries. If we fail to complete such registrations or obtain such
approvals, our ability to capitalize or otherwise fund our PRC operations may be negatively affected, which could adversely and
materially affect our liquidity and our ability to fund and expand our business.
26
A failure by our shareholders or beneficial owners who are PRC citizens or residents to comply with certain PRC foreign
exchange regulations could restrict our ability to distribute profits, restrict our overseas and cross-border investment activities or
subject us to liability under PRC laws, which could adversely affect our business and financial condition.
In October 2005, SAFE issued the Notice on Issues Relating to the Administration of Foreign Exchange in Fund-Raising and
Return Investment Activities of Domestic Residents Conducted via Offshore Special Purpose Companies, or SAFE Circular 75.
According to SAFE Circular 75, prior to establishing or assuming control of an offshore enterprise for the purpose of financing that
offshore enterprise with assets or equity interests in an onshore enterprise in the PRC, each PRC resident, whether a natural or legal
person, must complete certain overseas investment foreign exchange registration procedures with the relevant local SAFE branch. An
amendment to the registration with the local SAFE branch is required to be filed by any PRC resident that directly or indirectly holds
interests in that offshore enterprise upon either (i) the injection of equity interests or assets of an onshore enterprise to the offshore
enterprise or (ii) any overseas fund-raising by such offshore enterprise after such injection. An amendment to the registration with the
local SAFE branch is also required to be filed by such PRC resident when there is any material change involving a change in the
capital of the offshore enterprise, such as (i) an increase or decrease in its capital, (ii) a transfer or swap of shares, (iii) a merger or
division, (iv) a long-term equity or debt investment or (v) the creation of any security interests. Under subsequent SAFE rules, PRC
subsidiaries of an offshore enterprise governed by SAFE Circular 75 are required to coordinate and supervise the filing of SAFE
registrations in a timely manner by the offshore holding company’s shareholders who are PRC residents. If these shareholders fail to
comply, the PRC subsidiaries are required to report to the local SAFE authorities. If our shareholders who are PRC citizens or
residents do not complete their registration with the local SAFE authorities, our PRC subsidiaries will be prohibited from distributing
their profits and proceeds from any reduction in capital, share transfer or liquidation to us, and we may be restricted in our ability to
contribute additional capital to our PRC subsidiaries. Mr. Zhengdong Zhu is in the process of completing the requisite SAFE Circular
75 registration in connection with the transaction that occurred in October 2011 among Bertelsmann Asia Investment AG, Champion
Shine Trading Limited (“CST”) and Champion Education Holdings Limited (“CEH”). See “Item 6. E. Share Ownership — Historical
Changes in Shareholdings of our Major Shareholders” for more details.
We are committed to complying, and to ensuring that our shareholders, who are PRC citizens or residents, comply with the
SAFE Circular 75 requirements. However, we may not at all times be fully aware or informed of the identities of all our beneficial
owners who are PRC citizens or residents, and we may not always be able to compel our beneficial owners to comply with the SAFE
Circular 75 requirements. As a result, we cannot assure you that all of our shareholders or beneficial owners who are PRC citizens or
residents will at all times comply with, or in the future make or obtain any applicable registrations or approvals required by, SAFE
Circular 75 or other related regulations. Failure by any such shareholders or beneficial owners to comply with SAFE Circular 75
could subject us to fines or legal sanctions, restrict our overseas or cross-border investment activities, limit our subsidiaries’ ability to
make distributions or pay dividends or affect our ownership structure, which could adversely affect our business and prospects.
We may be subject to fines and legal sanctions imposed by SAFE or other Chinese government authorities if we or our Chinese
employees fail to comply with Chinese regulations relating to employee share options granted by offshore listed companies to
Chinese citizens.
Under applicable PRC regulations, Chinese citizens who are granted share options by an offshore listed company are required,
through a Chinese agent, which can be a Chinese branch or representative of the offshore listed company, a Chinese institution which
has controlling relationship or actual control relationship with the offshore listed company or a Chinese institution qualified for asset
custody business, to register with the SAFE and complete certain other procedures, including applications for foreign exchange
payment quotas and opening special bank accounts. We and our Chinese employees who have been granted share options are subject
to such PRC regulations. If we or our Chinese employees fail to comply with these regulations, we or our Chinese employees may be
subject to fines and legal sanctions imposed by the SAFE or other Chinese government authorities, which may prevent us from
further granting options under our share incentive plans to our employees. Such events could adversely affect our business operations.
See “Item 4.B. Information on the Company — Business overview — Regulations — SAFE Regulations on Employee Share
Options.”
Restrictions on currency exchange may limit our ability to utilize our revenues effectively and the ability of our PRC subsidiaries
to obtain financing.
Substantially all of our revenues and operating expenses are denominated in Renminbi. Restrictions on currency exchange
imposed by the PRC government may limit our ability to utilize revenues generated in Renminbi to fund our business activities
outside China, if any, or expenditures denominated in foreign currencies. Under current PRC regulations, Renminbi may be freely
converted into foreign currency for payments relating to “current account transactions,” which include among other things dividend
payments and payments for the import of goods and services, by complying with certain procedural requirements. Our PRC
subsidiaries may also retain foreign exchange in their respective current account bank accounts, subject to a cap set by SAFE or its
local counterpart, for use in payment of international current account transactions.
27
However, conversion of Renminbi into foreign currencies, and of foreign currencies into Renminbi, for payments relating to
“capital account transactions,” which principally includes investments and loans, generally requires the approval of SAFE and other
relevant PRC governmental authorities. Restrictions on the convertibility of the Renminbi for capital account transactions could affect
the ability of our PRC subsidiaries to make investments overseas or to obtain foreign exchange through debt or equity financing,
including by means of loans or capital contributions from us.
Any existing and future restrictions on currency exchange may affect the ability of our PRC subsidiaries or affiliated entities to
obtain foreign currencies, limit our ability to utilize revenues generated in Renminbi to fund our business activities outside China that
are denominated in foreign currencies, or otherwise materially and adversely affect our business.
You may experience difficulties in effecting service of legal process, enforcing foreign judgments or bringing original actions in
China based on United States or other foreign laws against us or our management.
We conduct substantially all of our operations in China and substantially all of our assets other than a majority of cash and cash
equivalents are located in China. In addition, most of our directors and executive officers reside outside the United States. As a result,
it may be difficult to effect service of process upon us or our directors or executive officers. In addition, you may find it difficult or
impossible to bring an action against us or our directors or executive officers in a PRC court if you believe your rights have been
infringed under the U.S. federal securities law or otherwise. Moreover, our PRC counsel has advised us that China does not have
treaties with the United States or many other countries providing for the reciprocal recognition and enforcement of court orders.
Our independent registered public accounting firm’s audit documentation related to their audit reports included in our
registration statement may include audit documentation located in China. The Public Company Accounting Oversight Board
currently cannot inspect audit documentation located in China and, as such, you may be deprived of the benefits of such
inspection.
As an auditor of companies that are traded publicly in the United States and as an audit firm registered with the Public Company
Accounting Oversight Board, or PCAOB, our independent registered public accounting firm is required by the laws of the United
States to undergo regular inspections by the PCAOB. Since a significant portion of the audit is conducted in China and the work
papers related to such portion are located in China, a jurisdiction where the PCAOB is currently unable to conduct inspections
without the approval of the PRC authorities, the work papers of our auditors that are located in China are not currently inspected by
the PCAOB.
Inspections of certain other firms that the PCAOB has been able to conduct in jurisdictions outside of the United States have
identified deficiencies in those firms’ audit procedures and quality control procedures, which may be addressed as part of the
inspection process to improve future audit quality. However, the PCAOB is currently unable to inspect an auditor’s audit work related
to a company’s operations in China and where such documentation of the audit work is located in China. As a result, our investors
may be deprived of the benefits of the PCAOB’s oversight of our auditors through such inspections.
The inability of the PCAOB to conduct inspections of our auditors’ work papers in China makes it more difficult to evaluate the
effectiveness of our auditor’s audit procedures or quality control procedures as compared to auditors outside of China that are subject
to PCAOB inspections. Investors may consequently lose confidence in our reported financial information and procedures and the
quality of our financial statements.
Public shareholders of China-based, U.S.-listed companies and other market participants may no longer have access to a wide
array of corporate records of such listed companies’ PRC entities filed with industry and commerce administration authorities in
China. Loss of, or limit in, the access to such information may adversely affect overall investor confidence in China-based, U.S.-
listed companies’ reported results or other disclosures, including those of our company, and may cause the trading price of our
ADSs to decline.
All PRC corporate entities, including Champion Technology, Champion Education Technology, Beijing Champion and its
subsidiaries, maintain corporate records and filings with industry and commerce administration authorities in the cities where such
PRC entities are registered. Information contained in such corporate records and filings includes, among others, business address,
registered capital, business scope, articles of association, equity interest holders, legal representative, changes to the above
information, annual financial reports, matters relating to termination or dissolution, information relating to penalties imposed, and
annual inspection records.
28
There have been regulations promulgated by various government authorities in China that govern the public access to corporate
records and filings. Under the Measures for Accessing Corporate Records and Filings promulgated on December 16, 1996 by the
State Administration of Industry and Commerce (the “SAIC”), or the SAIC measures, corporate records such as registration records,
registration documents submitted for approval, records relating to the change of the enterprise, records relating to the cancellation or
revocation of the enterprise and records relating to the supervision and inspection of the enterprise can be inspected by the public
through computers without restrictions, while a company’s book records and filings can only be inspected by authorized government
officials or lawyers involved in pending litigation relating to such company and with court-issued proof of such litigation. In practice,
local industry and commerce administration authorities in different cities have adopted various regional regulations which impose
more stringent restrictions than the SAIC measures by restricting the scope of information that the public can freely access. Many
local industry and commerce administration authorities only allow unrestricted public access to such basic corporate information as
name, legal representative, registered capital and business scope of a company. Under these local regulations, access to the other
corporate records and filings (many of which are not subject to restriction on access under the SAIC measures) is only granted to
authorized government officials or lawyers involved in pending litigation relating to such company and with court-issued proof of
such litigation.
However, neither the SAIC nor the local industry and commerce administration authorities were reported to have strictly
implemented the restrictions under either the SAIC measures or the various regional regulations before early 2012. As a result, before
early 2012, the public, including public shareholders of China-based, U.S.-listed companies and other market participants, such as
lawyers and research firms, were reported to be able to access all or most corporate records and filings of these listed companies’
PRC entities maintained with the industry and commerce administration authorities. Such records and filings were reported to have
formed important components of researches on certain China-based, U.S.-listed companies, which researches claimed to have
uncovered wrongdoings and fraud committed by these companies on the basis of (i) the disparities found between the listed
companies’ reported results and their PRC entities’ financial reports filed with industry and commerce administration authorities, and
(ii) information on material changes of the PRC entities, such as transfers of equity interests of significant PRC subsidiaries, that were
filed with the industry and commerce administration authorities but not properly disclosed by such listed companies as required under
the U.S. securities law and the SEC’s disclosure requirements. The significant disparities found between (i) certain China-based,
U.S.-listed companies’ reported results and other disclosure and (ii) their PRC entities’ financial reports and other records filed with
industry and commerce administration authorities were also reported to have formed the basis of several class actions against such
listed companies in the U.S.
It was reported that, since the first half of 2012, local industry and commerce administration authorities in a number of cities had
started strictly implementing the above restrictions and had significantly curtailed public access to corporate records and filings.
There have also been reports that only the limited scope of basic corporate records and filings are still accessible by the public, and
much of the previously publically accessible information, such as financial reports and changes to equity interests, now can only be
accessed by the parties specified in, and in strict accordance with the restrictions under, the various regional regulations. Such
reported limitation on the public access to corporate records and filings and the resulting concerns over the loss of, or limit in, an
otherwise available source of information to verify and evaluate the soundness of China-based U.S.-listed companies’ business
operations in China may have a significant adverse effect on the overall investor confidence in China-based, U.S.-listed companies’
reported results or other disclosures, including those of our company, and may cause the trading price of our ADSs to decline.
Risks Relating to Our ADSs
Stock prices of companies with business operations primarily in China have fluctuated widely in recent years, and the trading
prices of our ADSs are likely to be volatile, which could result in substantial losses to investors.
The trading prices of our ADSs are likely to be volatile and could fluctuate widely in response to factors beyond our control. For
example, if one or more of the industry analysts or ratings agencies who cover us downgrades us or our ADSs, the price of our ADSs
may decline. If one or more of these analysts or agencies cease to cover our company or fail to regularly publish reports on us, we
could lose visibility in the financial markets, which could cause the price of our ADSs or trading volume to decline. In addition, the
performance and fluctuation of the market prices of other education companies with business operations mainly in China that have
listed their securities in the United States may affect the volatility in the price of and trading volumes for our ADSs. In recent years, a
number of PRC companies have listed their securities, or are in the process of preparing for listing their securities, on U.S. stock
markets. Some of these companies have experienced significant volatility, including significant price declines following their initial
public offerings. The trading performances of these PRC companies’ securities at the time of or after their offerings may affect the
overall investor sentiment towards PRC companies listed in the United States and consequently may impact the trading performance
of our ADSs. These broad market and industry factors may significantly affect the market price and volatility of our ADSs, regardless
of our actual operating performance.
29
In addition to market and industry factors, the price and trading volume for our ADSs may be highly volatile for specific
business reasons. Factors such as variations in our revenues due to postponement of exams or other reasons, earnings and cash flow,
announcements of new investments, cooperation arrangements, acquisitions, cessation of business lines or legal disputes including
arbitration, declaration of dividends and fluctuations in market prices for our services could cause the market price for our ADSs to
change substantially. Any of these factors may result in large and sudden changes in the volume and price at which our ADSs will
trade. We cannot give any assurance that these factors will not occur in the future again. In the past, following periods of volatility in
the market price of a company’s securities, shareholders have often instituted securities class action litigation against that company. If
we were involved in a class action lawsuit, it could divert the attention of senior management, and, if adversely determined, could
have a material adverse effect on our business, financial condition and results of operations.
The sale or availability for sale of substantial amounts of our ADSs could adversely affect their market price.
Sales of substantial amounts of our ADSs in the public market, or the perception that these sales could occur, could adversely
affect the market price of our ADSs and could materially impair our future ability to raise capital through offerings of our ADSs. As
of September 30, 2012, there were 134,386,849 ordinary shares outstanding. All of our ADSs are freely tradable without restriction or
further registration under the Securities Act unless held by our “affiliates” as that term is defined in Rule 144 under the Securities Act.
Subject to the applicable restrictions and limitations under Rule 144 of the Securities Act, all of our shares outstanding are eligible for
sale in the public market. In addition, as of September 30, 2012, there were 3,898,524 outstanding options to purchase ordinary
shares, out of which 3,224,004 outstanding options have vested under their current terms. If these additional shares are sold, or if it is
perceived that they will be sold in the public market, the trading price of our ordinary shares could decline.
Anti-takeover provisions in our organizational documents may discourage our acquisition by a third party, which could limit your
opportunity to sell your shares at a premium.
Our second amended and restated memorandum of association and articles of association include provisions that could limit the
ability of others to acquire control of us, modify our structure or cause us to engage in change of control transactions, including,
among other things, the following:
• provisions that restrict the ability of our shareholders to call meetings and to propose special matters for consideration at
shareholder meetings;
• provisions that authorize our board of directors, without action by our shareholders, to issue preferred shares and to issue
additional ordinary shares, including ordinary shares represented by ADSs; and
• provisions that provide for a staggered board, whereby our board will be divided into three classes of directors, with directors
in each class serving staggered three-year terms. With a staggered board, at least two annual shareholders’ meetings, instead
of one, would generally be required to effect a change in a majority of the board. A staggered board tends to discourage proxy
contests for the election of directors and purchases of a substantial block of shares because a staggered board operates to
prevent a third party from obtaining control of our board in a relatively short period of time. See “Item 6.C. Directors, Senior
Management and Employees — Board Practices.”
These provisions could have the effect of depriving you of an opportunity to sell your ADSs at a premium over prevailing
market prices by discouraging third parties from seeking to acquire control of us in a tender offer or similar transactions.
30
The voting rights of holders of ADSs must be exercised in accordance with the terms of the deposit agreement, and the procedures
established by the depositary. The process of voting through the depositary may involve delays that limit the time available to you
to consider proposed shareholders’ actions and also may restrict your ability to subsequently revise your voting instructions.
A holder of ADSs may exercise its voting rights with respect to the underlying ordinary shares only in accordance with the
provisions of the deposit agreement. When the depositary receives from us notice of any shareholders meeting, it will distribute the
information in the meeting notice and any proxy solicitation materials to you. The depositary will determine the record date for
distributing these materials, and only ADS holders registered with the depositary on that record date will, subject to applicable laws,
be entitled to instruct the depositary to vote the underlying ordinary shares. The depositary will also determine and inform you of the
manner for you to give your voting instructions, including instructions to give discretionary proxies to a person designated by us.
Upon receipt of voting instructions of a holder of ADSs, the depositary will endeavor to vote the underlying ordinary shares in
accordance with these instructions. You may not receive sufficient notice of a shareholders’ meeting for you to withdraw your
ordinary shares and cast your vote with respect to any proposed resolution, as a holder of our ordinary shares. In addition, the
depositary and its agents may not be able to send materials relating to the meeting and voting instruction forms to you, or to carry out
your voting instructions, in a timely manner. 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. The additional time required for the depositary to receive from us and distribute to
you meeting notices and materials, and for you to give voting instructions to the depositary with respect to the underlying ordinary
shares, will result in your having less time to consider meeting notices and materials than holders of ordinary shares who receive such
notices and materials directly from us and who vote their ordinary shares directly. If you have given your voting instructions to the
depositary and subsequently decide to change those instructions, you may not be able to do so in time for the depositary to vote in
accordance with your revised instructions. 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. In the event that voting on any
resolution or matter is conducted on a show of hands basis in accordance with our second amended and restated memorandum of
association and articles of association, the depositary will refrain from voting and the voting instructions (or the deemed voting
instructions, as set out in the deposit agreement) received by the depositary from you will lapse. The depositary will have no
obligation to demand voting on a poll basis with respect to any resolution and will have no liability to any holder of ADS for not
having demanded voting on a poll basis. In addition, the depositary will, if so requested in writing by us, represent all the ordinary
shares (whether or not voting instructions have been received in respect of such ordinary shares from you as of the record date) for the
purpose of establishing quorum at a meeting of shareholders.
Except in limited circumstances, the depositary for our ADSs will give us a discretionary proxy to vote our ordinary shares
underlying your ADSs if you do not vote at shareholders’ meetings, which could adversely affect your interests.
Under the deposit agreement for the ADSs, the depositary will give us a discretionary proxy to vote our ordinary shares
underlying your ADSs at shareholders’ meetings if you do not vote, do not timely vote, or voting instructions received fail to specify
the manner in which the depositary is to vote ordinary shares underlying your ADSs unless we notify the depositary that:
• we do not wish to receive a discretionary proxy;
• we think there is substantial shareholder opposition to the particular question; or
• we think the subject of the particular question would have a material adverse impact on our shareholders.
The effect of this discretionary proxy is that, absent the situations described above, you cannot prevent our ordinary shares
underlying your ADSs from being voted and it may make it more difficult for shareholders to influence the management of our
company. Holders of our ordinary shares are not subject to this discretionary proxy.
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 ordinary shares.
Depending upon the value of our ADSs or ordinary shares and the nature of our assets and income over time, we could be
classified as a passive foreign investment company, or PFIC, for U.S. federal income tax purposes. We will be classified as a PFIC in
any taxable year if either (a) the average quarterly value of our gross assets that produce passive income or are held for the production
of passive income is at least 50% of the average quarterly value of our total gross assets or (b) 75% or more of our gross income for
the taxable year is passive income. According to these technical rules, we would likely become a PFIC for a given taxable year if our
market capitalization were to decrease significantly while we hold substantial cash and cash equivalents in that year.
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We believe we were not a passive foreign investment company, or PFIC, for U.S. federal income tax purposes for our taxable
year ended September 30, 2012. However, the application of the PFIC rules is subject to ambiguity in several respects, and, in
addition, PFIC status is tested each taxable year and will depend on the composition of our assets and income and the value of our
assets (including, among others, goodwill and equity investments in less than 25% owned entities) from time to time. Because we
currently hold, and expect to continue to hold, a substantial amount of cash and other passive assets and, because the value of our
assets is likely to be determined in large part by reference to the market prices of our ADSs and ordinary shares, which are likely to
fluctuate, there can be no assurance that we will not be a PFIC in the current taxable year or in any future taxable year. If we are
treated as a PFIC for any taxable year during which a U.S. investor held our ADSs or ordinary shares, certain adverse U.S. federal
income tax consequences would apply to the U.S. investor. For more information on the U.S. tax consequences to you that would
result from our classification as a PFIC, please see “Item 10.E. Additional Information — Taxation — United States Federal Income
Taxation — Passive Foreign Investment Company.”
Your right 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 you 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. 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, you may be unable
to participate in our rights offerings and may experience dilution in your holdings.
You may not receive distributions on our ordinary shares or any value for them if such distribution is illegal or if any required
government approval cannot be obtained in order to make such distribution available to you.
The depositary of our ADSs has agreed to pay holders of our ADSs the cash dividends or other distributions it or the custodian
for our ADSs receives on our ordinary shares or other deposited securities after deducting its fees and expenses. Holder of our ADSs
will receive these distributions in proportion to the number of our ordinary shares such holder’s ADSs represent. However, the
depositary is not responsible to make a distribution available to any holders of ADSs if it decides that it is unlawful to make such
distribution. For example, it would be unlawful to make a distribution to a holder of ADSs if it consisted of securities that required
registration under the Securities Act but that were not properly registered or distributed pursuant to an applicable exemption from
registration. The depositary is not responsible for making a distribution available to any holders of ADSs if any government approval
or registration required for such distribution cannot be obtained after reasonable efforts made by the depositary. We have no
obligation to take any other action to permit the distribution of our ADSs, ordinary shares, rights or anything else to holders of our
ADSs. This means that holders of our ADSs may not receive the distributions we make on our ordinary shares or any value for them
if it is unlawful or unreasonable from a regulatory perspective for us to make them available to such holders. These restrictions may
have a material adverse effect on the value of our ADSs.
Holders of our ADSs may be subject to limitations on transfer of ADSs.
ADSs are transferable on the books of the depositary. However, the depositary may close its books at any time or from time to
time when it deems expedient in connection with the performance of its duties. The depositary may close its books from time to time
for a number of reasons, including in connection with corporate events such as a rights offering, during which time the depositary
needs to maintain an exact number of ADS holders on its books for a specified period. The depositary may also close its books in
emergencies, and on weekends and public holidays. The depositary may refuse to deliver, transfer or register transfers of our ADSs
generally when the books of the depositary are closed, or at any time if we or the depositary thinks it is necessary or advisable to do
so because of any requirement of law or any government or government body, or under any provision of the deposit agreement, or for
any other reason.
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We are a Cayman Islands company and, because judicial precedent regarding the rights of shareholders is more limited under
Cayman Islands law than under U.S. federal or state laws, holders of ADSs may have less protection of shareholder rights than
they would under U.S. federal or state laws.
Our corporate affairs are governed by our second amended and restated memorandum of association and articles of association,
the Cayman Islands Companies Law (as amended) and the common law of the Cayman Islands. The rights of shareholders to take
action against the directors, actions by minority shareholders and the fiduciary responsibilities of our directors to us under Cayman
Islands law are to a large extent governed by the common law of the Cayman Islands. The common law of the Cayman Islands is
derived in part from comparatively limited judicial precedent in the Cayman Islands as well as from English common law, which has
persuasive, but not binding, authority on a court in the Cayman Islands. The rights of our shareholders and the fiduciary
responsibilities of our directors under Cayman Islands law are not as clearly established as they would be under statutes or judicial
precedent in some jurisdictions in the United States. In particular, the Cayman Islands has a less developed body of securities law
than the United States. In addition, some jurisdictions, such as Delaware, have more fully developed and judicially interpreted bodies
of corporate law than the Cayman Islands. As a result of all of the above, public shareholders may have more difficulty in protecting
their interests in the face of actions taken by management, members of the board of directors or controlling shareholders than they
would as public shareholders of a U.S. company, and Cayman Islands companies may not have standing to initiate a shareholder
derivative action before the federal courts of the United States.
Certain judgments obtained against us by our shareholders may not be enforceable.
We are a Cayman Islands company and substantially all of our assets are located outside of the United States. Nearly all of our
current operations are conducted in China. 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 to effect service of process within the United States upon these persons. It may also be difficult to enforce in U.S. court
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 residents of countries other than 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 China 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. In addition, there is uncertainty as to whether such Cayman Islands or PRC courts would be
competent to hear original actions brought in the Cayman Islands or China against us or such persons predicated upon the securities
laws of the United States or any state.
ITEM 4.
INFORMATION ON THE COMPANY
A. History and Development of the Company
Beijing Champion Hi-Tech Co., Ltd., or Beijing Champion, a PRC limited liability company, commenced operations in July
2000 and became our consolidated operating company in June 2003.
In March 2003, we incorporated China Distance Education Limited, or CDEL Hong Kong, in Hong Kong. We then conducted a
series of transactions to reorganize our corporate structure and have CDEL Hong Kong become our offshore holding company.
We incorporated China Distance Education Holdings Limited, or CDEL Cayman, in the Cayman Islands in January 2008 as our
listing vehicle. CDEL Cayman became our ultimate holding company in March 2008 when it issued shares to the existing
shareholders of CDEL Hong Kong in exchange for all of the outstanding shares of CDEL Hong Kong.
In March 2009, we acquired the business start-up training services from a third-party individual. The acquired business is
currently operated by Zhengbao Yucai, an entity wholly owned by Beijing Champion.
In September 2009, we acquired the business of Gaokao retake preparation and high-school supplementary tutoring services
from two third-party individuals. The acquired business is operated by Champion Xinlixiang, an entity established by Champion
Wangge. However, with respect to such business, we have suffered significant operating losses for the fiscal year ended
September 30, 2011. As a result, we discontinued such business in September 2011 and sold same to a third-party in May 2012.
In February 2010, Practice Enterprises Network China International Links Limited, or PENCIL was incorporated in Hong Kong
as a wholly-owned subsidiary of CDEL Hong Kong. PENCIL has not conducted any substantive operations since its inception.
In September 2012, DL Education Service, LLC, or DL Education, was incorporated in the United States of America as a
wholly-owned subsidiary of CDEL Cayman. DL Education has not conducted any substantive operations since its inception.
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We incurred capital expenditures of $2.0 million, $2.6 million and $1.8 million in the fiscal years ended September 30, 2012,
2011 and 2010, respectively. The amount of capital expenditures in the fiscal year ended September 30, 2012 related primarily to our
expenditures on property, plant and equipment, and software. These capital expenditures were funded from our operating cash flow.
For additional information on our capital expenditures, see Item “5.B. Operating and Financial Review and Prospects – Liquidity and
Capital Resources – Capital Expenditures.”
For additional information on our organizational structure, see “Item 4.C. Information on the Company — Organizational
Structure.”
Our principal executive offices are located at 18th Floor, Xueyuan International Tower, 1 Zhichun Road, Haidian District,
Beijing 100083, the People’s Republic of China. Our telephone number at this address is +86-10-8231-9999 and our fax number is
+86-10-8233-7887. Our main website is www.cdeledu.com. The information contained on this website and our other websites is not
part of this annual report.
Our ADSs are listed on the NYSE, under the symbol “DL.” 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
Overview
We offer a wide range of online education and test preparation courses and other related services and products. Our online
courses are designed to help professionals and other course participants obtain and maintain the skills, licenses and certifications
necessary to pursue careers in China in the areas of accounting, law, healthcare, construction engineering and other industries. We
believe that we are the largest provider of online education in China focusing on professional education, as measured by total number
of course enrollments. We also offer online test preparation courses to self-taught learners pursuing higher education diplomas or
degrees and to secondary school and college students preparing for various academic and entrance exams. In addition, we offer online
foreign language courses. As of September 30, 2012, we operated 17 websites, including our main website www.cdeledu.com and 16
other websites, each dedicated to a specific industry, profession or subject area. Our online courses feature high-definition audio-
video lectures delivered through the Internet using streaming media and other Internet-based technologies, and are supplemented by
our proprietary textbooks, tutoring, online assignments and exercises, mock examinations, and other forms of learning activities and
course-related support. Course participants using different platforms, including smart phones, tablets or regular computers, are able to
access our courses through the Internet at times and places most convenient for them and to easily interact with a broad online
community of course participants, professionals, lecturers and tutors.
In addition to our online education courses, which accounted for 73.6%, 74.1% and 77.3% of our net revenues in the fiscal years
ended September 30, 2010, 2011 and 2012, respectively, we also sell books and reference materials through third-party bookstores
and distributors across China, and, to a lesser extent, through our online bookstore and our offices in Beijing. In addition, we also
offer offline business start-up training courses and in-person accounting and healthcare professional training to accounting firms and
the general public. We also, from time to time, provide course production services and platform production services for certain
customers at their request.
Our net revenues were $32.6 million, $41.6 million and $52.1 million in the fiscal years ended September 30, 2010, 2011 and
2012, respectively. We incurred a net loss of $1.9 million and $3.8 million in the fiscal years ended September 30, 2010 and 2011,
respectively. Our higher net loss during the fiscal year ended September 30, 2011 compared to the fiscal year ended September 30,
2010 resulted mainly from share-based compensation expenses arising from the re-pricing and acceleration of the vesting of our share
options granted under the Prior Plan in the fourth quarter of the fiscal year ended September 30, 2011, and impairment of goodwill,
property, plant and equipment, intangible assets and purchased call options acquired with the acquisitions of Zhengbao Yucai and
Champion Xinlixiang. We had a net income of $8.2 million in the fiscal year ended September 30, 2012 compared to a net loss of
$3.8 million in the fiscal year ended September 30, 2011 mainly due to significant decrease in share-based compensation expenses,
professional fees, and bad debts provision, and no impairment items arising from Zhengbao Yucai and Champion Xinlixiang. In
addition, the disposal of Champion Xinlixiang in May 2012 stopped the continued loss in the remaining of the fiscal year ended
September 30, 2012. Our total course enrollments from continuing operations increased from approximately 1,215,000 for the fiscal
year ended September 30, 2010 to 1,601,000 and 2,203,000 for the fiscal years ended September 30, 2011 and 2012, respectively.
34
Our Online Education Services
We offer online courses through our websites designed to help course participants obtain and maintain the skills, licenses and
certifications necessary to pursue their careers and professions in China. Our online professional education courses cover a wide
range of industries, including accounting, law, healthcare, construction engineering and others. We also offer online test preparation
courses to self-taught learners pursuing higher education diplomas or degrees and to secondary school and college students for
various academic and entrance exams. Additionally, we offer online foreign language courses.
The following table provides data regarding our current online course offerings and classes as of September 30, 2012. Each
course typically represents a major examination or continuing education program within an industry or academic field. Our course
offerings are comprised of multiple courses and different types of classes within each course.
Subject Area
Accounting
Law
Healthcare
Construction Engineering
Information Technology
Occupational Skills Exams
Higher Education for Self-Taught Learners
Adult Higher Education
Graduate School Entrance Exams
Foreign Languages
Primary and Secondary Schools
Total
Website
www.chinaacc.com
www.ck100.com
www.chinalawedu.com
www.med66.com
www.jianshe99.com
www.itatedu.com
www.chinatat.com
www.zikao365.com
www.chengkao365.com
www.cnedu.cn
www.for68.com
www.ehappystudy.com
www.g12e.com
Number of
Course
Offerings
19
5
4
32
21
15
17
56
2
2
26
15
Number of
Classes
1,293
108
168
1,001
403
46
169
367
22
50
108
210
214
3,945
Our courses feature high-definition audio-video lectures by experienced lecturers or practitioners within their respective fields
delivered through a multimedia and interactive web interface using streaming media and other Internet-based technologies. Our
online lectures are supplemented by our proprietary textbooks, tutoring, online assignments, exercises, mock examinations, and other
forms of learning activities and course-related support. Course participants using different platforms, including smart phones, tablets
or regular computers, are able to access our courses through the Internet at times and places most convenient for them.
Visitors to our websites can set up their own registered accounts free of charge. Once they enroll in our courses, course
participants may access and view the lectures as often as they choose, which enables them to learn and review the materials at their
own pace. Typically, course participants are able to choose among several different lecturers within each course.
To begin each class, course participants log into their online registered accounts to access the course lectures. For each lecture,
course participants can view the video image of the lecturer and hear his or her voice along with the lecture script, helping to replicate
a classroom-like experience.
The web page also provides hyperlinks allowing course participants to access other useful functions during the lecture. For
example, course participants may pause the video at any time to post a question on the question and answer board, to take notes, to
perform an exercise or practice a real exam question and receive a score instantaneously, to evaluate lecturers’ performance, or to
access the bulletin board or other useful links such as a calculator, chat room, blog, e-mail, reference materials, or other help
information.
We also provide our course lectures in the form of downloadable media files that allow course participants to save copies of the
lectures onto their own personal computers and to play them offline. We utilize digital rights management, or DRM, technology to
restrict the transfer and viewing of our downloadable media files. To accommodate different levels of Internet access and bandwidth
available to course participants across China, we provide our course lectures in a number of formats.
35
To further enhance the learning experience, we maintain a staff of tutors knowledgeable about specific course topics and exams.
Course participants can post questions online through our websites and receive replies to their specific questions from our team of
tutors, usually within 24 hours after a question is submitted. We provide tutorial sessions, which allow course participants to interact
with their lecturers and other course participants using their personal computers. We also host numerous bulletin board discussions
within some of our websites that allow course participants to discuss their course work and share feedback with their peers in an
interactive online format. Our online bulletin boards also provide us with a valuable means of tracking feedback about our courses,
lecturers and services, allowing us to make adjustments and quickly react to concerns and complaints of our course participants.
Our Professional Course Offerings
Accounting Courses
PRC laws and regulations require persons engaging in accounting and related activities to obtain various qualifications and
licenses, and to meet continuing education requirements. These qualifications and licenses are primarily obtained by passing exams
administered by various governmental agencies. Continuing education requirements can be fulfilled by taking courses covering
certain continuing education subjects. Through our www.chinaacc.com website launched in 2001, we provide a comprehensive body
of online preparatory courses designed to prepare course participants primarily for the following professional accounting
examinations or to meet certain continuing education requirements.
• Accounting Professional Qualification Examination. Persons who are engaged in performing PRC accounting work in any
organization in China are required to hold a certificate of accounting professional and to register with the relevant regional
bureaus of the Ministry of Finance, or the MOF. This is the basic qualification requirement for accounting professionals in
China.
• Elementary, Intermediate and Advanced Level Accounting Professional Qualification Examinations. The skill level and
technical competence of accounting professionals in China are further measured by achieving certification at various levels
within the profession. These levels are determined by the ability of accounting professionals to pass elementary, intermediate
and advanced level accounting professional qualification examinations. Candidates who pass the exam are issued an
accounting qualification certificate for their respective level from the MOF and the Ministry of Human Resources and Social
Security, or the MOP, jointly.
• CPA Qualification Examination. Passing China’s CPA Qualification Examination is required for persons to act as certified
public accountants in China. This exam is open to all candidates who hold at least an associate diploma or an intermediate
level of accounting-related professional qualification certificate.
• Registered Tax Agent Qualification Examination. Under PRC regulations, only registered tax agents are qualified to carry out
tax agency services, issue tax audit reports and handle tax procedures such as applications for tax registration with relevant
authorities on behalf of business entities. Persons wishing to qualify as registered tax agents must pass the Registered Tax
Agent Qualification Examination.
• Certified Asset Appraiser Examination. Under PRC regulations, only certified asset appraisers are qualified to carry out
legally required valuations of state-owned assets, valuations of non-state-owned assets and valuation consultancy and other
valuation-related services. Persons wishing to qualify as certified asset appraisers must pass the Certified Asset Appraiser
Examination.
• Continuing Education for Accounting Personnel. PRC regulations require persons holding Certificates of Accounting
Professional and Certificates of Accounting Specialty and Technical Qualifications to meet the requirements of receiving a
minimum number of 24 hours of continuing education training each year. Failure to comply with these continuing education
requirements can result in the suspension or cancellation of such certificate holders’ certifications.
In November 2009, we entered into an agreement with Becker Professional Education, or Becker, a subsidiary of DeVry Inc.
and a global leader in professional education, under which agreement we obtained exclusive rights to distribute Becker Professional
Education’s CPA Review and CPA Final Review courses and related materials, for both online and in-person courses, in China.
In November 2012, we entered into an agreement with Becker, under which agreement we obtained exclusive rights to distribute
Association of Chartered Certified Accountants (“ACCA”) examination review courses and related materials developed by Becker,
for both online and in-person courses, in China.
36
Legal Courses
In June 2003, we launched our www.chinalawedu.com website to provide preparatory courses for legal examinations in China.
Currently, we offer courses relating to China’s most important nationwide legal examination, the National Judicial Examination,
which was introduced in 2002 and is administered annually in September by the PRC Ministry of Justice. Persons seeking to become
judges, procurators and lawyers in China are required to pass the exam to obtain the legal practitioner qualification certificate.
Approximately 395,000, 415,000 and 400,000 candidates sat for the exams in 2010, 2011 and 2012, respectively. We also offer
courses for the Enterprise Legal Counsel Examination held annually by the MOP in October for persons wishing to obtain a
qualification certificate for in-house legal counsel positions.
Healthcare Courses
In January 2005, we launched our www.med66.com website to provide preparatory courses for a wide variety of healthcare
professional exams. Currently, we offer courses mainly relating to three major nationwide healthcare exams: (i) the National
Practicing Medical Doctor Qualification Examination, which is organized and administered annually by the Ministry of Health with
approximately 1,000,000 candidates taking the exam in 2012, (ii) the Healthcare Professional Technical Qualification Examination
jointly administered by the Ministry of Health and the MOP and (iii) the National Pharmacist Qualification Examination administered
by the MOP and the State Administration of Drug Supervision.
Construction Engineering Courses
In June 2005, we launched our www.jianshe99.com website to provide test preparatory courses for construction engineering
professionals in China. Currently we offer courses mainly relating to the following exams: Associate Constructor and Constructor
Qualification Examinations, Construction Supervisor Qualification Examination, Construction Pricing Engineer Qualification
Examination, Certified Safety Engineer Qualification Examination, Consulting Engineer Qualification Examination and Real Estate
Appraiser Qualification Examination. These examinations are jointly administered by the Ministry of Housing and Urban-Rural
Development and MOP.
In addition, we also offer online continuing education courses to construction engineering professionals, including architects,
cost estimators, equipment supervisors, real estate appraisers, and realtor associates to help them meet government requirements and
maintain their qualifications.
Other Professional Education Courses
In addition, we also provide professional education courses in the areas of information technology, securities and various civil
service positions. Each of these offerings follows a similar course creation and online delivery model. We plan to continue to leverage
our core online course creation and delivery expertise to create and deliver new courses for additional professions and industries.
Our Higher Education for Self-Taught Learners
Through our website www.zikao365.com, we offer courses targeted at self-taught learners pursuing associate diplomas or
bachelor’s degrees in various academic areas. They complete their self study and obtain government accredited diplomas or degrees
by passing the Higher Education Examination for Self-Taught Learners administered by the MOE without having to enroll in and
physically attend a traditional college or university. Statistics published by the MOE show that there are approximately 10 million
exam takers of Higher Education Examination for Self-Taught Learners each year. We offer test preparatory courses to help self-
taught learners pass the requisite exams. We have also entered into multiple-year cooperative agreements, sometimes exclusive, with
the respective designated administrator of self-taught study process monitoring programs for self-taught learners in seven provinces
and cities to allow self-taught learners to earn up to 30% of the credits they need to obtain associate diplomas or bachelor’s degrees.
Our Academic Exam Preparation and Foreign Language Courses Study Courses
Through our www.cnedu.cn website, we offer test preparation courses targeted at university students intending to take
nationwide graduate school entrance exams in various disciplines administered by the MOE. Over the past three years, approximately
1.7 million people each year have taken such exams.
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We also operate websites focused on the secondary and college education market, foreign language study and other subjects.
China’s educational system places heavy emphasis on attending good secondary schools as a way to improve course participants’
chances of attending more prestigious universities in China. Scoring well on exams at each stage of a secondary school student’s
educational career is important to improve his or her chances of attending a better university. Our secondary education courses are
designed to provide an online resource for secondary school course participants to prepare for these exams.
In September 2010, we entered into an agreement with AsknLearn Pte. Ltd., a subsidiary of Educomp Solutions, India’s largest
education company, under which agreement we obtained exclusive rights to distribute Educomp’s Smart Class , Edulearn and
Wizlearn products in China. Educomp’s Smart Class , Edulearn and Wizlearn products provide dynamic multimedia learning,
teaching and administrative content and tools aimed at improving teacher effectiveness and productivity in-class, improving academic
performance of students, and effectively managing school administrative processes. The solutions are primarily aimed at the primary
and secondary school markets. We have not generated material revenue from these solutions yet, and, as a result, we forfeited the
exclusive rights in 2012.
®
®
In November 2011, we entered into an agreement with Eleutian Technology Inc, or Eleutian , under which agreement we
obtained rights to distribute Eleutian’s online English teacher services and Teachcast products in China. The teacher services
consists of Eleutian’s teachers teaching conversational English over the internet via VOIP or video conferencing. Teachcast
®
products provide access to Eleutian’s online content, real-time online teaching and workbooks.
®
Other Products and Services
Books and Reference Materials
We sell books and reference materials relating to various professional courses and exam subjects. To promote the use of our
online courses, we also sell proprietary books and reference materials related to our courses such as the Elementary Level and
Intermediate Level Accounting Professional Qualification Examination, the CPA Qualification Examination, the Registered Tax
Agent Qualification Examination, the Certified Asset Appraiser Qualification Examination, the Accounting Professional Qualification
Examination, accounting continuing education, the National Judicial Examination, the National Practicing Medical Doctor
Qualification Examination, the Construction Supervisor Qualification Examination, the Constructor Qualification Examination, the
Construction Pricing Engineer Qualification Examination, and the Intermediate Economist Qualification Examination. As we expand
our course offerings, we may sell other books and reference materials. To promote our online courses, we sometimes sell books and
reference materials together with study cards, which allow customers to take a certain number of on-line courses for no additional
charge. Our proprietary guidebooks are authored by lecturers teaching the relevant online courses. In substantially all cases, we own
the copyright to these books pursuant to agreements with the lecturers. We engage third-party publishers to publish our reference
books. We distribute these books and materials through third-party bookstores and distributors across China, as well as through our
online bookstore and our offices in Beijing.
Offline Education Services
Business Start-up Training Courses
In March 2009, we acquired the business start-up training business from an independent third party. The training offering targets
university students, job seekers and individuals who are interested in learning how to establish new businesses. Such practical training
is strongly encouraged by the Chinese government to promote employment opportunities in the country. For this course offering, we
prepare training materials in accordance with requirements of the relevant government authorities in various provinces and cities. We
do not charge the course participants fees. Instead, we receive subsidies from the relevant government authorities in various provinces
and cities, which are conditioned on our ability to meet government stipulated conditions under the subsidy policies. When
determining our entitlement to the subsidy, the government authorities consider the passage rate of our course participants’ business
proposals as evaluated by such authorities, as well as the business start-up rate and employment rate of our course participants.
Primary and Secondary School Supplementary Courses
We provide primary and secondary school supplementary tutoring services to students in a range of subject areas, such as
Chinese, math and science. Students may attend offline courses taught by our in-person lecturers or view pre-recorded video courses
on our website at www.g12e.com. Our offline classes are available in Beijing and are most subscribed during winter and summer
breaks.
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Accounting and Healthcare Professional Training Courses
We provide in-person accounting and healthcare professional training to accounting firms and the general public.
Other Services
Course Production Services
We provide course production services to certain customers on a contractual basis. We typically create and produce course
packages in digital format based on the content requirements of our offline educational institute or company customers.
Platform Production Services
From time to time, we develop online platforms for our customers and provide them with technical support and maintenance
services on a contractual basis.
Others
In April 2011, TStudy Co., Ltd., an integrated education technology company and an affiliate of Time Education, one of the
largest private education companies in Korea, granted us the exclusive distribution right for its proprietary digital educational
products and software, including Symphony, TStudy Interactive Whiteboard, Dotnote and Tnote in China’s public education market.
TStudy’s products are primarily aimed at the primary and secondary school markets. We have not generated material revenue from
these products yet, and, as a result, we forfeited the exclusive rights in 2012.
We provided accounting magazine content production services to a certain customer on a contractual basis in prior years. Such
contract was completed in fiscal year 2011 and did not generate revenue in the fiscal year ended September 30, 2012.
Discontinued Operation — Gaokao Retake Preparation and High-School Supplementary Tutoring Services
In September 2009, we acquired the business of Gaokao retake preparation and high-school supplementary tutoring services
from two independent third parties. The acquired business was operated by Champion Xinlixiang. With respect to such business, we
had suffered significant operating losses for the fiscal year ended September 30, 2011. As a result, we discontinued such business in
September 2011 and sold same to a third-party in May 2012. For more information, please see “Item 5. Operating and Financial
Review and Prospects.”
Our Regular, Premium and Elite Classes
We offer regular, premium and elite classes. Our regular, premium and elite classes are mainly comprised of the following five
types:
• Foundation Classes: Our foundation classes contain detailed instructions and content to provide course participants with a
broad and comprehensive knowledge base relating to a specific subject area.
• Intensified Focus Classes: Our intensified focus classes are designed to provide more intensive instructions focused on
important topics in a specific subject area at a more advanced pace to course participants who already have basic knowledge
of the subject area.
• Exam Questions Analysis Classes: Our exam questions analysis classes contain materials and instructions tailored specifically
to preparation for the actual exams and the types of questions and topics that come up in each exam.
• Crash-Course Classes: Our crash-course classes are designed to provide a quick review of critical topic areas for specific
exam subjects to enable course participants to make final preparations in the weeks prior to an exam.
• Exam Simulation System: Our exam simulation system offers a wealth of mock test questions developed based on real tests,
closely conforms to the syllabus and test requirements, and fully covers various key examination points. The system sets a
time limit for handing in test “papers”, automatically reviews and grades “papers”, truthfully records the process of each
mock examination, and pools wrong answers for repeated exercises, thereby honing examinees’ skills to answer exam
questions and improving their capacity to deal with tests. Our exam simulation system only covers certain of our courses.
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In November 2006, we introduced elite classes for some of our most popular accounting courses, such as courses for the
Elementary Level and Intermediate Level Accounting Professional Qualification Examination, the CPA Qualification Examination
and the Registered Tax Agent Qualification Examination. We also offer elite classes to legal practitioners, self-taught learners
pursuing higher education diplomas or degrees, and professionals in the healthcare, construction engineering and other industries.
With our elite classes, course participants pay substantially higher course fees for more personal and tailored course-related services.
After completing an elite class, if a participant fails to pass the exam for that subject, and certain pre-agreed conditions are met, the
course participant is entitled to a refund of the applicable course fees paid or the course participant can choose to use such amounts to
register and pay for future courses provided by us.
In exchange for higher course fees, our elite class participants enjoy high-quality elite course-related support services.
Leveraging the technological features available to online course delivery, elite classes allow substantially more interactive and multi-
faceted course participation. For example, during a lecture, when a key knowledge point has reached, the lecture automatically pauses
and a quiz relating to the point will pop up on the screen. The lecture will not proceed to the next topic until the course participant has
correctly responded to the question. This feature ensures that course participants do not miss any of the important knowledge points
that may be tested on exams. We believe that these types of interactive features, made possible by the flexibility of our online format,
offer distinct advantages over traditional classroom course delivery as well as traditional online teaching methods.
Elite class participants also enjoy personalized support and services provided by our course support service staff. Some of our
most experienced tutors work closely with elite class participants and provide them with more individually tailored support and
services. For example, questions raised by elite class participants are responded to by tutors on a priority and expedited basis. In
addition, a regular study monitoring report is generated by our course support service staff for each elite class participant to ensure
that he or she is making satisfactory progress in the course.
Our premium classes represent another course model we introduced in August 2008 for some of our most popular courses, such
as courses for the accounting, legal and healthcare industries. To date, we also offer premium classes to self-taught learners pursuing
higher education diplomas or degrees, and professionals in the construction engineering and other industries. Our premium class
participants enjoy high-quality premium course-related support services similar to the elite class participants. However, premium
course participants do not enjoy refund privileges. Instead, in general, if a participant fails to pass the course examination and certain
pre-agreed conditions are met, the course participant can retake the same premium course and pay only 50% of the course fees. The
participant is given this 50% discount only once, and therefore, if he or she fails the relevant course examination again and wishes to
retake the premium course for the third time, there is no discount provided at that time. If a participant fails to pass the course
examination for the examinations of American Institute of CPAs and certain accounting, healthcare and construction engineering
courses, however, the course participant can retake the same courses free of charge for the following year if certain pre-agreed
conditions are met.
Course Fees and Payment Methods
We charge course fees on a per-class basis. Course participants may choose to take some or all the classes for each subject
offered in each course according to their individual needs. Special package pricing is offered if a participant chooses to take more
than one class for a subject in a course. To promote the use of our online courses, we also offer course discounts to eligible course
participants who are frequent users of our services. The discounts offered typically range from 20% to 40% off the stated course fees.
Payment for the course fees can be made through any one of the following methods:
• online payment using credit or debit cards via external payment networks;
• use of our prepaid study cards;
• remittance through a bank or post office; or
• cash payment made at our offices.
Online payment using credit or debit cards via external payment networks is the most frequently used method for payment of
our online course fees by course participants. Our course participants may pay course fees via online payment systems provided by
third parties including internet debit or credit card payment systems and other third-party payment systems, such as Alipay.
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Our study cards are pre-paid scratch cards sold through our regional sales agents at points of sale throughout China. The pre-
paid study cards come with face values ranging from RMB10 ($1.6) to RMB1,000 ($159.1). Course participants may purchase and
use these study cards to register and pay for our courses. We first introduced pre-paid study cards in January 2003. In 2006, we began
selling a “One Card Pass,” which can be used for multiple courses. This new card eliminates the need for our regional sales agents to
purchase multiple types of cards and also provides an opportunity to cross-sell our course offerings. The One Card Pass comes with
face values ranging from RMB10 ($1.6) to RMB500 ($79.6). These pre-paid study cards and One Card Pass were sold with
expiration dates, typically two to three years from the print dates. In addition to the “One Card Pass,” we have another type of pre-
paid study cards, which can be used solely for our accounting continuing education courses and have expiration dates, typically one
year from the print dates.
With regard to business start-up training courses, course participants are able to attend free of charge. Instead, we receive a
subsidy from government authorities if certain stipulated conditions under the government subsidy policy are met.
Online Course Creation
We place great emphasis on the quality of our courses and learning materials, both in terms of substance and production quality
to enhance course participants’ learning experience. Working together with our lecturers in each subject, we internally develop and
produce the online lectures for most of our courses. We employ a variety of measures including substantive content review and
content approval at various stages of the course development process by our experienced in-house personnel to create high-quality
courses.
We believe superior delivery of our courses and learning materials over the Internet is also important to attracting and retaining
course participants. We record, digitize and edit most of the high-definition audio-video lectures used in our courses on our own
premises. We maintain 19 fully-equipped recording rooms to ensure the high-quality of the high-definition audio-video content and
any graphics used in the lectures. Our editing department uses advanced digital high-definition audio-video editing software and
equipment to eliminate breaks, pauses and unwanted noises from each lecture tape to further enhance the viewing and listening
experience. All lectures are properly formatted to facilitate smooth transmission through our websites using streaming media and
other Internet-based technologies. Our customer service team regularly seeks feedback on the quality of our courses from our course
participants.
Community-oriented Services on Our Websites
In addition to using our websites to access our courses, course participants and visitors to our websites are also able to access a
wide variety of other content and information and to communicate and interact with each other. The breadth and depth of our website
content has attracted a large number of visitors and has contributed to the fast growth in the awareness of our brands.
Visitors to our websites have free access to comprehensive and timely information about exam times and locations, test
preparation guidance, regulations and policies relevant to each industry, career planning and advancement and industry and market
trends. We also offer free trial courses on our websites to prospective course participants who wish to try our courses before making
the enrollment decision.
We offer free e-mail accounts to course participants. We also provide electronic bulletin board service forums and access to
online chat-rooms. Many of our websites feature a blog page that allows course participants and other visitors to our websites to
communicate and share ideas and thoughts about topics of common interest. On any blog we provide, people can write and post
articles, create and participate in discussions and gain information and insights on topics of interest within the relevant industry or
subject matter.
Through our community-oriented websites, we create virtual communities for course participants and visitors that share a
common interest in the topics relating to the various professions and subject areas for which we offer our online courses and related
services. We believe our community-oriented websites are a valuable means for creating brand awareness and customer loyalty.
Our Lecturers
Our online course lecturers include academics from renowned higher education institutions in China and experienced
practitioners within their respective fields. Our online lecturers work with us to prepare the course content and lectures, while also
serving as faculty members of various colleges and universities across China or working in their respective fields. They are not our
employees and are typically engaged for a one-to-three year period, except for some more experienced lecturers for whom the
contract periods are relatively longer and some of them are obligated to conduct online lectures exclusively for us. The number of
online lecturers actively producing online courses for us was 370, 325 and 642 in the fiscal years ended September 30, 2010, 2011
and 2012, respectively.
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To ensure the quality of our online lecturers, we have established stringent selection and retention criteria and have implemented
ongoing monitoring and evaluation procedures. We seek to engage online lecturers who have a strong command of the respective
subject areas and good communication skills. In particular, we seek online lecturers capable of, and preferably experienced in,
delivering effective instruction through the audio-video format. Our internal quality control personnel regularly monitor the teaching
quality of each online lecturer. We also collect feedback on the online lecturers from our course participants on a regular basis
through multiple channels, including online lecturers’ evaluation, calls received by our customer service call center, our online course
comment book, our online question and answer board and bulletin board service forum. We provide ongoing training for online
lecturers and help them improve their online presentation skills based on this feedback.
Our online lecturers are attracted to our online platform where tens of thousands of course participants across China can listen to
and view their lectures. Our innovative lecture delivery model helps our online lecturers further expand and enhance their national
reputation in their relevant fields. We pay our lecturers fees in either of two ways: the first and most common way is to pay them
based on the number of hours of lectures they deliver, and the second and less common way is a course fee sharing arrangement
primarily for some of our newer courses.
Although our online lecturers participate in the creation and development of the course materials, in almost all cases, we own all
copyrights to our courses and course materials pursuant to contracts with our online lecturers.
Course-Related Support and Services
We employ a service-oriented approach and devote significant resources to developing course-related support and services for
our course participants. We maintain a well-trained pool of tutors, numbering 193 as of September 30, 2012, of which 35 are part-
time employees. Our tutors are knowledgeable in the relevant fields and experienced with various types of exams or subject matters.
They are able to provide timely and accurate responses, usually within 24 hours after a question is submitted, through our online
question and answer board to various course-related questions raised by our course participants. To ensure the accuracy of our
responses, we introduced the second reviewer policy by which all responses of our most popular courses have to be reviewed by a
senior tutor before they are delivered to our students. To ensure that our tutors are suitably qualified to support our courses, we have
established stringent selection criteria and make hiring decisions based on academic qualifications, tutorial experience and knowledge
of various exams and subject matters. We require our tutors to possess, at a minimum, a college degree in the relevant academic area
or a certification in the relevant industry, as well as familiarity with the actual exam and related subject matter.
We also operate a question and answer platform to our registered users, through which the registered users can ask questions or
find and answer the questions they are interested in or familiar with. If the answers of the respondents are correct, they are entitled to
earn a corresponding commission according to their rankings in the hierarchy. The commission earned by the respondents can be
withdrawn in cash or exchanged for course fees for our online courses.
We believe that our high-quality tutorial and learning support service is critical to enhancing the learning experience of our
course participants. Additionally, it helps us generate customer loyalty and attract potential course participants through
recommendations from our existing course participants.
General Customer Service and Support
We have a dedicated general customer service team composed of 210 individuals as of September 30, 2012 that our customers
can contact by email, our online customer service system or phone through our dedicated call center, 24 hours a day, seven days a
week. Our customer support team members provide potential and existing course participants with comprehensive information and
counseling regarding our courses and services, recommend suitable courses based on individual needs, assist in course enrollment,
accept course fee payments, conduct regular telephone interviews seeking customer feedback on course participation experience and
provide additional technical and other support on how to use and get the most out of our courses. We recruit our customer service
personnel from candidates who have good communication skills and are committed to providing quality service to our customers. We
provide on-the-job training for our new recruits, which includes pairing new recruits with experienced team members as mentors to
train them in taking calls from customers. On an ongoing basis, we also evaluate the performance of our customer service staff, and
provide training to improve their skills and inform them on new developments in our business.
Sales and Marketing
We rely on a combination of regional and online sales agents, referrals and cross-selling, as well as other sales and marketing
activities to market our services and products.
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Regional Sales Agents
We use regional sales agents to sell our pre-paid study cards. Our regional sales agents are comprised mostly of stores and other
points of sale selling books, learning materials and other supplies to our target industries and professions. These agents sell our study
cards and are responsible for promotion and advertising of our services in the regions where they operate. They also provide market
feedback, which helps us in planning our marketing strategy and sales activities. As of September 30, 2012, we had approximately
2,500 active regional sales agents throughout China.
When selecting regional sales agents, we consider various criteria, such as whether the candidates have relevant experience, and
whether they are familiar with or have established relationships with local professionals, professional associations and organizations
related to our target industries and professions. Generally, we provide various discounts to our regional sales agents based on the
volume purchased and method of payment. Most of our regional sales agents are appointed on a non-exclusive basis.
Online Agents
Our online agents are typically Internet companies and website operators in China that market our course offerings and other
services on their websites. We pay our online agents marketing and promotional fees for each new course participant registered
through their website. As of September 30, 2012, we had approximately 740 active online agents marketing our online courses
through their websites.
Referrals and Cross-Selling
Many of our customers learn about our services and courses through word-of-mouth referrals. As a result, many of our
customers contact us directly about enrolling in our courses. Accordingly, a significant portion of our sales are made through our
customer service team. We believe that combining the customer service and sales function in one department contributes both to the
quality of our customer services and the effectiveness of our direct sales. Based on their knowledge of our courses and relevant
feedback they gain from addressing the questions and comments of existing or past course participants, our customer service
personnel are able to recommend the most suitable courses for new customers. Combining these two functions also allows our
customer service team members to cross-sell new or additional courses, learning tools and materials, as appropriate, when they are
addressing questions from existing course participants.
Other Advertising and Marketing Efforts
We place advertisements on high-traffic Chinese Internet portals and search engines, in newspapers, magazines, journals,
cinemas in many cities across China. We also promote our courses, services and products at examination registration centers, and
education and career fairs. To raise our profile and promote our courses, regional sales agents normally assist with our promotional
activities in their respective regions.
Our sales and marketing team participates in and conducts information sessions at various educational trade fairs, and distributes
promotional materials to potential course participants at various examination registration centers. We further promote our courses by
handing out complimentary study cards together with reference books and study materials that we sell at these examination
registration centers. We have also established a number of scholarships totaling over RMB0.3 million ($55,000) in the fiscal year
ended September 30, 2012 and granted awards to course participants who have achieved outstanding performances in various exams.
These activities help to improve our profile and enhance our public image.
Online Platform and Technology Infrastructure
Building a reliable, scalable and secure technology infrastructure is crucial to our ability to support the online courses and
services we provide to our customers. We manage our online course creation and delivery system using a combination of
commercially available software, hardware systems and proprietary technology. Over the years, we have established a comprehensive
and powerful online platform that supports the ability for tens of thousands of course participants to simultaneously attend our courses
and participate in other programs and activities online. We have also built a robust online community platform that helps build a
strong sense of community among our course participants, which contributes to the brand loyalty of our customers.
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We maintain multiple servers, which access the Internet backbone via a 7,450 Mbps broadband line. These servers are separately
located in multiple hosting facilities in several cities across China to mitigate any downtime arising from individual server failure. For
reliability, availability and serviceability, we have created an environment in which each server can function independently. We
regularly back up our databases. Based on cluster technology, our system can identify errors and isolate failed servers automatically
so that our customers can access our services at any time. When a malfunction arises in a server or at a point of presence, the load
balancing technology adopted by us is able to automatically direct visitors to access the same contents through another server or
another point of presence. Our network administration department regularly monitors the performance of our websites and
infrastructure to enable us to respond quickly to potential problems. We have not experienced a material disruption to our business or
websites.
We utilize streaming media technology as the primary delivery method for our online lectures. Using streaming media
technology, an end-user using different platforms, including smart phones, tablets or regular computers, can continuously view the
file as it is being delivered. To accommodate different levels of Internet access and bandwidth available to course participants across
China, we also allow our course participants to download our audio-video lectures. We utilize DRM technology to restrict the transfer
and viewing of our files being downloaded.
Competition
We face competition from providers of traditional offline education and test preparation services in China, and expect to face
increasing competition from existing competitors and new market entrants in the online education and test preparation market.
The provision of professional education and test preparation courses over the Internet is a relatively new concept in China.
Although it is increasingly perceived as an acceptable means of receiving training and instruction, traditional classroom instruction is
still generally perceived as the more accepted method. We therefore compete with traditional in-person educational institutions and
training centers in the various areas for which we offer courses.
In addition, due to low barriers to entry for Internet-based businesses, we expect to face increasing competition from existing
domestic competitors and new entrants to the online education market. We may face increased competition from international
competitors that cooperate with local businesses to provide services based on the foreign partners’ technology and experience
developed in their home markets. Currently, our online competitors include general information websites that have branches
providing online training courses, traditional schools that provide online offerings and newly established online training and test
preparation businesses.
We believe that the key competitive factors in our industry include the professional competence of lecturers and tutors, price,
quality, market recognition and brand name, customer service and the performance of the technological platform. Some of our present
and future competitors may have longer operating histories, larger teams of professional staff and greater financial, technical,
marketing and other resources. For a discussion of risks relating to competition, see “Item 3.D. Key Information — Risk Factors —
Risks Relating to Our Business — We may lose market share and our profitability may be materially and adversely affected, if we fail
to compete effectively with our present and future competitors or to adjust effectively to changing market conditions and trends.”
Intellectual Property
Our trademarks, copyrights, domain names, trade secrets and other intellectual property rights distinguish our products and
services from those of our competitors and contribute to our ability to compete in our target markets. We rely on a combination of
copyright and trademark law, trade secret protection and confidentiality agreements with our employees, lecturers, business partners
and others, to protect our intellectual property rights. In addition, we require our employees to enter into agreements with us under
which they acknowledge that all inventions, trade secrets, works of authorship, developments and other processes made by them
during their employment are our property and they should assign the same to us if we so require. We also maintain a dedicated team
that regularly monitors any infringement or misappropriation of our intellectual property rights.
We have registered 47 software copyright for our proprietary online course delivery platform, customer service system, DRM
encryption system, streaming media load balancing system, online course creation management system and certain other aspects of
our online education platform with the National Copyright Administration of the PRC. We have also registered 382 trademarks with
the China Trademark Office and an additional 42 trademark applications are currently pending. We, however, cannot assure you that
all of our trademark applications will be successful.
As of December 31, 2012, we had registered 243 domain names relating to our business with the Internet Corporation for
Assigned Names Numbers and China Internet Network Information Center, including those of all our 17 operating websites.
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Our intellectual property is subject to risks of theft and other unauthorized use, and our ability to protect our intellectual property
from unauthorized use is limited. In addition, we may be subject to claims that we have infringed the intellectual property rights of
others. See “Item 3.D. Key Information — Risk Factors — Risks Relating to Our Business — Our failure to protect our intellectual
property rights may undermine our competitive position, and litigation to protect our intellectual property rights or defend against
third-party allegations of infringement may be costly and ineffective.”
Seasonality
We have experienced seasonality and expect in the future to continue to experience seasonality in revenues related to the
provision of our education courses primarily due to seasonal changes in course enrollments and the timing of various exams. We
typically open new online courses to enrollment approximately six months before the relevant exam date. As the majority of our
course participants take non-refundable courses relating to the main professional accounting exams, which are typically held in May
and September, we historically have experienced higher revenues during the quarters ending June 30 and September 30 of each fiscal
year. With respect to our refundable courses, which is also primarily related to the main professional accounting exams, we typically
recognize revenues 15-30 days after the release of the relevant exam results when the participants’ applicable refund privileges expire,
resulting in higher revenues in the quarter ended March 31 and September 30. With respect to our professional continuing education
courses, we typically recognize revenues when course participants complete the stipulated study hours and take the examinations, or
on a straight line basis over the subscription period, starting from a course participant’s enrollment date, ranging from three months to
one year. As the majority of our course participants take accounting professional continuing education courses in the second half of
the calendar year, we historically have experienced higher revenues during the quarters ending September 30 and December 31 of
each fiscal year. As a result, we historically have generated higher revenue in the second half of each fiscal year. However, the 2012
Elementary Level, Intermediate Level and Advanced Level Accounting Professional Qualification Exams were postponed to
October 27 and 28, 2012, which were originally scheduled to be held on the third weekend of May and the first weekend of
September of the same year, respectively. In addition, part of the 2012 CPA Qualification Examination was postponed to October 13
and 14, 2012, which was originally scheduled to be held on the third weekend of September of the same year. As a result of such
exam dates delay, deferred revenue generated from our test preparation courses relating to these major accounting exams was not
fully recognized as revenue by May 2012 and September 2012, respectively, but were recognized over a longer period of time
through October 2012. In addition, refundable fees relating to the 2012 Elementary Level and Intermediate Level Accounting
Professional Qualification Exams were not recognized as revenue in the fourth fiscal quarter ended September 30, 2012 and were
instead recognized in the first fiscal quarter ended December 31, 2012 when the exam results were released. Although such
postponement did not affect overall revenue seasonality in the fiscal year ended September 30, 2012, this seasonality factor may
change in future periods if the timing of exams changes. In addition, as the mix of types of exams and course subjects changes over
time, we expect to continue experiencing seasonality based on the timing of various exams.
Regulations
The provision of our online and offline education services is subject to PRC laws and regulations relating to the
telecommunications industry and the education services industry. This section sets forth a summary of the principal laws and
regulations that affect our business activities in China, the industries in which we operate, and our shareholders’ right to receive
dividends and other distributions from us.
Restrictions on Telecommunications Industry
The telecommunications industry, including the Internet sector, is highly regulated by the PRC government. Laws and
regulations issued or implemented by the State Council, Ministry of Industry and Information, or MII, and other relevant government
authorities cover virtually every aspect of telecommunications network operations, including entry into the telecommunications
industry, the scope of permissible business activities, interconnection and transmission line arrangements, tariff policy and foreign
investment. The principal regulations governing the telecommunications industry and the Internet include:
• The Telecommunications Regulations (2000);
• The Administrative Measures for Telecommunications Business Operating Licenses (2009); and
• The Internet Information Services Administrative Measures (2000).
These regulations categorize all telecommunications businesses in China as either “basic telecommunications businesses” or
“value-added telecommunications businesses.”
In addition to the regulations promulgated by the PRC central government, some local governments have also promulgated local
rules applicable to Internet companies operating within their respective jurisdictions.
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Foreign Ownership Restrictions on Internet Content Provision Businesses
The State Council promulgated the Administrative Rules on Foreign-Invested Telecommunications Enterprises in December
2001, as amended on September 10, 2008, or the FITE Rules. The FITE Rules set forth detailed requirements with respect to
capitalization, investor qualifications and application procedures in connection with the establishment of a foreign-invested
telecommunications enterprise. Pursuant to the FITE Rules, the ultimate capital contribution ratio of the foreign investor or investors
in a foreign-funded telecommunications enterprise that provides value-added telecommunications services shall not exceed 50%.
In addition, for a foreign investor to acquire any equity interest in a value-added telecommunications business in China, it must
satisfy a number of stringent performance and operational experience requirements, including demonstrating a track record and
experience in operating value-added telecommunications business overseas. Moreover, foreign investors that meet these requirements
must obtain approvals from MII and the Ministry of Commerce or their authorized local counterparts, which retain considerable
discretion in granting approvals.
On July 13, 2006, MII publicly released the Notice on Strengthening the Administration of Foreign Investment in Operating
Value Added Telecommunications Business, or the MII Notice, which reiterates certain provisions under the FITE Rules. According
to the MII Notice, if any foreign investor intends to invest in a Chinese telecommunications business, a foreign-invested
telecommunications enterprise shall be established and such enterprise shall apply for the relevant telecommunications business
licenses. The MII Notice prohibits domestic telecommunication services providers from leasing, transferring or selling
telecommunications business operating licenses to any foreign investor in any form, or providing any resources, sites or facilities to
any foreign investor for their illegal operation of a telecommunications business in China. According to the MII Notice, either the
holder of a value-added telecommunication service license or its shareholders must directly own the domain names and trademarks
used by such license holders in their provision of value-added telecommunication services. The MII Notice also requires each license
holder to have the necessary facilities, including servers, for its approved business operations and to maintain such facilities in the
regions covered its license. In order to comply with the MII Notice, we have transferred all domain names and trademarks that are
used primarily in connection with our online business activities from Champion Technology to Beijing Champion.
As a result of current PRC laws and regulations that impose substantial restrictions on foreign investment in Internet businesses
in China, we conduct our online education and test preparation business in China through a series of contractual arrangements entered
into among our two PRC subsidiaries, Champion Technology and Champion Education Technology, and our affiliated PRC entity,
Beijing Champion, which is a domestic PRC company incorporated in the PRC and owned by Zhengdong Zhu, our chairman and
chief executive officer, and Baohong Yin, our co-founder and deputy chairman, both of whom are PRC citizens. These contractual
arrangements enable us to exercise effective control over and to receive a substantial portion of the economic benefits from Beijing
Champion. Beijing Champion has obtained the licenses and approvals that are required to operate our online education and test
preparation business. We do not have any direct ownership interests or direct voting rights in Beijing Champion.
Our contractual arrangements with Beijing Champion include a technical support and consultancy services agreement pursuant
to which Champion Technology is entitled to receive service fees from Beijing Champion. In addition, Champion Technology has
entered into equity pledge agreements (as amended and restated) with each of the shareholders of Beijing Champion, pursuant to
which each shareholder has pledged all of his or her interest in Beijing Champion to Champion Technology as security for the
performance of Beijing Champion’s obligations under the technical support and consultancy services agreement. Pursuant to an
exclusive purchase rights agreement with Beijing Champion and its shareholders, CDEL Hong Kong or any third-party designated by
CDEL Hong Kong has the right to acquire, in whole or in part, the equity interest of Beijing Champion, when permitted by applicable
PRC laws and regulations. There are also certain other agreements and letters of undertaking under the contractual arrangements. For
a detailed discussion of these contractual arrangements, see “Item 4.C. Information on the Company — Organizational Structure.”
We believe, based on the opinion of our PRC legal counsel, Jingtian & Gongcheng, that:
• the ownership structures of Beijing Champion and its subsidiaries and our wholly owned subsidiaries in China are in
compliance with existing published PRC laws and regulations; and
• our contractual arrangements among our wholly owned subsidiaries in China and Beijing Champion and its shareholders, are
valid and binding, will not result in any violation of published PRC laws or regulations currently in effect, and are enforceable
in accordance with their terms and conditions.
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However, there are substantial uncertainties regarding the interpretation and application of PRC laws and regulations, including
the laws and regulations governing the enforcement and performance of our contractual arrangements in the event of imposition of
statutory liens, bankruptcy and criminal proceedings. Accordingly, we cannot assure you that the PRC regulatory authorities will not
ultimately take a contrary view. If the PRC government finds that the agreements that establish the structure of our operations in
China do not comply with PRC government restrictions on foreign investment in our industry, we could be subject to severe penalties.
In addition, for a detailed description of the risks associated with our corporate structure and these contractual arrangements that
support our corporate structure, see “Item 3.D. Key Information — Risk Factors — Risks Relating to Our Corporate Structure and
Restrictions on Our Industry.”
Regulations on Value-added Telecommunications Services and Internet Content
Under PRC laws and regulations, Internet content provision services are classified as value-added telecommunications
businesses, and a commercial operator must obtain a Telecommunications and Information Services Operating License, or ICP
license, from the appropriate telecommunications authority in order to carry out commercial Internet content provision operations in
China. These regulations also provide that if the Internet information services are provided in more than one province, then an inter-
provincial ICP license must be obtained from MII, while if only one province is involved, the license can be obtained from the
relevant provincial telecommunications administration. In addition, the regulations further provide that operators involved in Internet
content provision that operate in sensitive and strategic sectors, including news, publishing and education, must obtain additional
approvals from the relevant authorities in charge of those sectors.
Each of Beijing Champion, Caikaowang, Champion Wangge and Zhengbao Yucai holds an ICP license issued by the Beijing
Telecommunications Administration Bureau, a local branch of the MII, which allows it to provide Internet content distribution
services through 17 websites owned by Beijing Champion and its subsidiaries. The ICP license held by Beijing Champion is valid
through August 25, 2013, the ICP license held by Caikaowang is valid through July 10, 2013, the ICP license held by Champion
Wangge is valid through November 9, 2014, and the ICP license held by Zhengbao Yucai is valid through May 6, 2015. These
licenses and approvals are essential to the operation of our online professional education and test preparation services business.
Regulation of Internet Content
The PRC government has promulgated measures relating to Internet content through a number of ministries and agencies,
including MII, the Ministry of Culture, the Press Office of the State Council and the State Press and Publications Administration.
These measures specifically prohibit Internet activities that result in the publication of any 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. If an ICP license holder violates these measures, the PRC government may revoke its ICP
license and shut down its websites. Under these measures, ICP license holders are required to monitor their websites, including chat
rooms and electronic bulletin boards, for prohibited content and remove any such content that they discover on their websites.
The posting of news on websites and the distribution of news over the Internet are highly regulated and can only be engaged in
by ICP license holders that have been specifically approved to do so. The Provisional Administrative Measures Regarding Internet
Websites Carrying on the News Posting Business issued by the Press Office of the State Council and MII in November 2000 provide
that only websites that are established by government-authorized news agencies may operate online news posting businesses and post
news reported by news agencies. Other general websites not established by news agencies may apply to the State Council News
Office for approval to post on their websites news supplied contractually by approved news providers. A copy of the relevant news
supply contract must be filed with the applicable provincial information offices where such other websites are located. These
regulations also provide specific requirements with respect to facilities and level of experience of personnel that must be met by
applicants for approval to post news on their websites. According to the Administration of Internet News Information Services
Provisions promulgated by the Press Office of the State Council and MII on September 25, 2005 and effective as of such date, the
term “news information” in these provisions means news information about current affairs, including reports and commentaries on
social and public affairs such as political, economic, military and foreign affairs, as well as reports and commentaries on sudden
social events. The term “Internet news information services” means publication of news information, provision of electronic bulletin
board services for current affairs and distribution of information of current affairs to the public through the Internet. The Press Office
of the State Council is in charge of nationwide supervision and regulation of Internet news information services. The press office of
each province, autonomous region and municipality directly under the central government is in charge of regulating the Internet news
information services within its administrative region. If any information we provide through our websites is deemed current affairs,
we may be subject to the above regulations.
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Regulation of Broadcasting Audio-Video Programs through the Internet or Other Information Network
The State Administration of Radio, Film and Television, or SARFT, promulgated the Rules for Administration of Broadcasting
of Audio-Video Programs through the Internet and Other Information Networks, or the Broadcasting Rules, in 2004, which became
effective on October 11, 2004. The Broadcasting Rules apply to the activities of broadcasting, integrating, transmitting and
downloading of audio-video programs with computers, televisions or mobile phones and through various types of information
networks. Pursuant to the Broadcasting Rules, a Permit for Broadcasting Audio-Video Programs via Information Network is required
to engage in these Internet broadcasting activities. On April 13, 2005, the State Council announced a policy on private investments in
businesses in China relating to cultural matters that prohibits private investments in businesses relating to the dissemination of audio-
video programs through information networks.
On December 20, 2007, SARFT and MII issued the Internet Audio-Video Program Measures, which became effective on
January 31, 2008. Among other things, the Internet Audio-Video Program Measures stipulate that no entities or individuals may
provide Internet audio-video program services without a License for Disseminating Audio-Video Programs through Information
Network issued by SARFT or its local counterparts or completing the relevant registration with SARFT or its local counterparts and
only entities wholly owned or controlled by the PRC government may engage in the production, editing, integration or consolidation,
and transfer to the public through the Internet, of audio-video programs, and the provision of audio-video program uploading and
transmission services. On February 3, 2008, SARFT and MII jointly held a press conference in response to inquiries related to the
Internet Audio-Video Program Measures, during which SARFT and MII officials indicated that providers of audio-video program
services established prior to the promulgation date of the Internet Audio-Video Program Measures that do not have any regulatory
non-compliance records can re-register with the relevant government authorities to continue their current business operations. After
the conference, the two authorities published a press release that confirms the above guidelines. On September 15, 2009, SARFT
promulgated a notice regarding the issues of the management of Internet Audio-Video Program Services License, pursuant to which,
the closing date of the application for re-registration of the Internet Audio-Video Program Services License was December 20, 2009.
Due to uncertainties with respect to the interpretation and application of the Internet Audio-Video Program Measures, each year,
we and our PRC counsel consult the Beijing Branch of SARFT, or Beijing SARFT, which is the competent authority in Beijing to
grant the License for Disseminating Audio-Video Programs through Information Network, by way of face-to-face interview or
telephone consultation regarding whether online education services providers like us that provide audio-video educational courses and
programs through the Internet only to enrolled course participants should apply for said license. The officials in Beijing SARFT
replied verbally in 2008, 2009 and early 2010 that we were not required to apply for said license as we are an education service
provider that only transmits audio-video educational courses and programs through the Internet to enrolled course participants instead
of the general public. However, when we consulted Beijing SARFT again in January 2011, Beijing SARFT indicated that the scope of
application of the Internet Audio-Video Program Measures was expanded by SARFT to cover educational course providers like us
and thus we are required to apply for the License for Disseminating Audio-Video Programs through Information Network. Further to
the application scope expansion, in January 2011, a joint administrative enforcement commission of the Beijing government
(including Beijing SARFT) issued a warning to us and fined us RMB6,000 ($897) for providing audio-video educational courses
without obtaining the License for Disseminating Audio-Video Programs through Information Network. After the consultation, we
began to apply to Beijing SARFT for said license. After accepting our application in February 2011, Beijing SARFT sent us a written
reply on March 8, 2011. According to the reply, due to the special circumstance that we have been involved in the distance education
industry for many years and our websites www.chinaacc.com, www.chinalawedu.com, and www.ck100.com had been approved by
the Ministry of Education and the related telecommunication authority before the promulgation of Internet Audio-Video Program
Measures, Beijing SARFT would further deliberate our application and officially respond to us thereafter. On August 1, 2011, Beijing
SARFT sent us another written reply which states that Beijing SARFT had consulted with SARFT and determined that the License
for Disseminating Audio-Video Programs through Information Network is not applicable to us as basic education, higher education,
teacher education, vocational education, adult education, and distance education activities do not fall under the “Internet audio-visual
services program.” Therefore, we are not required to obtain the License for Disseminating Audio-Video Programs. We cannot
guarantee that Beijing SARFT will not change its position or that the reply will not be challenged by higher authorities in China, or
that we will not be asked to obtain the said license again. If the regulatory authorities take any such actions against us, it may
materially and adversely affect our business. Moreover, if we are asked to re-register with relevant authorities or obtain the required
license, we cannot assure you that our future application(s) will be approved by relevant authorities in a timely manner or at all. If we
are subsequently required to and are unable to re-register or obtain the necessary license timely, or at all, due to reasons beyond our
control, our equity ownership structure may require significant restructuring, or we may become subject to significant penalties, fines,
legal sanctions or an order to suspend our use of audio-video content, any of which could have a material adverse effect on our
business, financial condition, results of operations, and prospects, as well as the trading price of our ADSs.
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Regulation of Information Security
Internet content in China is also regulated and restricted by the PRC government to protect state security. The National People’s
Congress has enacted a law that may subject to criminal punishment in China any person who: (i) gains improper entry into a
computer or system of strategic importance; (ii) disseminates politically disruptive information; (iii) leaks state secrets; (iv) spreads
false commercial information; or (v) infringes intellectual property rights.
The Ministry of Public Security has promulgated measures that prohibit use of the Internet in ways that, 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 are 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. We believe we are in compliance with
these regulations.
Regulation of Domain Names and Website Names
PRC law requires owners of Internet domain names to register their domain names with qualified domain name registration
agencies approved by MII and obtain registration certificates from such registration agencies. A registered domain name owner has an
exclusive use right over its domain name. Unregistered domain names may not receive proper legal protections and may be
misappropriated by unauthorized third parties. As of December 31, 2012, we had registered 243 domain names relating to our
websites, with the Internet Corporation for Assigned Names and Numbers and the China Internet Network Information Center.
PRC law requires entities operating commercial websites to register their website names with the State Administration of
Industry and Commerce or its local offices and obtain commercial website name registration certificates. If any entity operates a
commercial website without obtaining such a certificate, it may be charged a fine or imposed other penalties by SAIC or its local
offices. We have registered 14 website names used in connection with our online education business with Beijing Municipal Bureau
of Industry and Commerce.
Regulation of Bulletin Board Services
Under the Administrative Measures on Internet Information Services and the Administrative Measures on Internet Bulletin
Board Services adopted by MII on October 8, 2000, an Internet information services provider must obtain prior approval if it wishes
to provide Internet bulletin board services. On July 4, 2010, the State Council promulgated the Decision on Canceling or Delegating
the Fifth Batch of Administrative Examination and Approval Items, pursuant to which the administrative approval for providing
Internet bulletin board service was cancelled.
Regulation of Internet Publishing
In June 2002, the State Press and Publications Administration and MII issued the Interim Provisions on Internet Publishing, or
the Internet Publishing Regulations. The Internet Publishing Regulations require that all entities engaging in Internet publishing
obtain approval from the State Press and Publications Administration before they can conduct any Internet publishing business.
“Internet publishing” is broadly defined in the Internet Publishing Regulations as an act of online dissemination of works created by
ICP license holders or others that such ICP license holders select, edit and process and subsequently post on the Internet or transmit to
users via the Internet for browsing, reading, use or downloading by the public. These works include contents from books, newspapers,
periodicals, audio-video products, electronic publications that have already been formally published or works that have been made
public in other media or from the browsed and processed works relating to literature, art, nature science, social science, engineering
technology and other aspects. The Internet Publishing Regulations include a requirement for Internet publishing organizations to have
professional editorial personnel examine the contents being published to ensure that they comply with applicable laws. We believe we
currently operate our business in a manner that complies with this regulation.
Regulation of Privacy Protection
PRC law does not prohibit Internet content providers from collecting and analyzing personal information from their users. PRC
law prohibits Internet content providers from disclosing to any third parties any information transmitted by users through their
networks unless otherwise permitted by law. If an Internet content provider violates these regulations, it may be liable for damages
caused to its users and penalties or sanctions may be imposed by PRC governmental authorities including MII or its local
counterparts. We believe we are in compliance with these regulations.
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Regulations on Protection of the Right of Dissemination through Information Networks
On May 18, 2006, the State Council promulgated the Regulations on Protection of the Right of Dissemination through Information
Networks, or the Dissemination Protection Regulations, which became effective on July 1, 2006. The Dissemination Protection
Regulations require that every organization or individual who disseminates a third-party’s work, performance, audio or visual recording
products to the public through information networks shall obtain permission from, and pay compensation to, the copyright owner of such
products, unless otherwise provided under relevant laws and regulations. The copyright owner may take technical measures to protect his
or her right of dissemination through information networks and any organization or individual shall not intentionally evade, circumvent or
otherwise assist others in evading such protective measures unless permissible under law. The Dissemination Protection Regulations also
provide that permission from the copyright owners and compensation for the copyright-protected works is not required in the event of
limited dissemination to teaching or research staff for the purpose of school teaching or scientific research only.
Regulation of Online Cultural Activities
The Ministry of Culture promulgated the Interim Provisions on Internet Culture, or the Internet Culture Provisions, in May 2003,
which became effective on July 1, 2003 and was amended on July 1, 2004 and on February 11, 2011, respectively. The Internet Culture
Provisions apply to all ICPs that engage in the production and dissemination of cultural products via the Internet. “Internet cultural
activities” is defined in the Internet Culture Provisions as an act of provision of Internet cultural products and related services, which
includes (i) the production, duplication, importation, and broadcasting of the Internet cultural products; (ii) the online dissemination
whereby cultural products are posted on the Internet or transmitted via the Internet to end-users, such as computers, fixed-line telephones,
mobile phones, television sets and games machines, for online users’ browsing, use or downloading; and (iii) the exhibition and
comparison of the Internet cultural products. In addition, “Internet cultural products” is defined in the Internet Culture Provisions as
cultural products produced, broadcasted and disseminated via the Internet, which mainly include internet cultural products specially
produced for the Internet, such as online music entertainment, online games, online shows and plays (programs), online performances,
online works of art and online cartoons; and internet cultural products produced from cultural products such as music entertainment,
games, shows and plays (programs), performances, works of art, and cartoons through certain techniques and duplicate those to internet
for dissemination. All entities engaging in commercial Internet cultural activities, or Internet Cultural Entities, must be approved by the
governmental agency of culture at the provincial level and by MII. Beijing Champion holds a Permit of Internet Cultural Activities issued
by Beijing Municipal Bureau of Culture that is valid through December 31, 2014.
Regulation of Online and Distance Education
Pursuant to the Administrative Regulations on Educational Websites and Online and Distance Education Schools issued by MOE in
2000, or the Online Education Regulation, educational websites and online education schools may provide education services in relation
to higher education, elementary education, pre-school education, teacher education, occupational education, adult education and other
educational services. Under the Online Education Regulations, “Educational websites” refers to education websites providing education
or education-related information services to website visitors by means of a database or an online education platform connected via the
Internet or an educational television station through an Internet service provider, or ISP. Under the Online Education Regulations, “Online
education schools” refer to organizations providing academic education services or training services with the issuance of various
certificates.
Under the Online Education Regulations, setting up educational websites and online education schools is subject to approval from
relevant education authorities, depending on the specific types of education provided. Under the Online Education Regulations, any
educational website and online education school shall, upon receipt of approval, indicate on its website such approval information as well
as the approval date and file number.
According to the Administrative License Law promulgated by the National People’s Congress on August 27, 2003 and effective as
of July 1, 2004, only laws promulgated by the National People’s Congress and regulations and decisions promulgated by the State
Council may establish administrative license requirements. On June 29, 2004, the State Council promulgated the Decision on Cutting
Down Administrative Licenses for the Administrative Examination and Approval Items Really Necessary to be Retained, in which the
administrative license for “online education schools” was retained, while the administrative license for “educational websites” was not
retained.
Based on the opinion of our PRC legal counsel, Jingtian & Gongcheng, we believe that:
• None of Beijing Champion, Caikaowang and Champion Wangge is required to obtain a license to operate “educational websites”
from the MOE under the current PRC laws or regulations;
• None of Beijing Champion, Caikaowang and Champion Wangge is required to obtain a license to operate “online education
schools” because it does not offer through its website education services or training programs that directly offer government
accredited academic degrees or other government accreditation certifications.
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However, as the Administrative Regulations on Educational Websites and Online and Distance Education Schools has not been
officially abolished, MOE or its local counterparts may continue to require online education providers like us to obtain approvals to
run online education websites. If so required, we cannot assure you that such approvals can be obtained by us timely or at all.
Regulation on the Wholesale, Retail and Rental of Book and Audio-Video Products
Under the Administrative Measures for the Publication Market, or Administrative Measures, which was jointly promulgated by
the State Press and Publication Administration and the Ministry of Commerce and became effective on March 25, 2011, any
enterprise or individual wishing to engage in publication distributing activities must obtain permission from the press and publication
agency at relevant levels. “Publication” and “distributing” are defined, respectively, in the Administrative Measures, as “books,
newspapers, periodicals, audio-video products, and electronic publications” and “general distribution, wholesale, retail, rental,
exhibition and other activities.” Any enterprise or individual who engages in publication wholesale shall obtain a Publication
Business License issued by the press and publication agency at the provincial level. A publications wholesale enterprise can engage in
retail distribution as well. Any enterprise or individual who engages in publication rental shall file a record to the press and
publication agency at the county level. Beijing Champion holds a Publication Business Permit for book wholesale issued by Beijing
Press and Publication Bureau in February 2008 under which Beijing Champion is allowed to engage in the book wholesale and retail
businesses. This permit is valid through December 31, 2015.
Regulations on Private Education
The principal regulations governing private education in China consist of the Education Law of the PRC, the Law for Promoting
Private Education (2003) and the Implementation Rules for the Law for Promoting Private Education (2004). These regulations are
summarized below.
On March 18, 1995, the National People’s Congress promulgated the Education Law of the PRC, or the Education Law, which
became effective on September 1, 1995. The Education Law stipulates that enterprises, social organizations and individuals are
encouraged to operate schools and other types of educational organizations in accordance with the PRC laws and regulations.
Meanwhile, no organization or individual may establish or operate a school or any other institution of education for profit-making
purposes. However, private schools may be operated for “reasonable returns” as described in more detail below.
The Law for Promoting Private Education (2003) became effective on September 1, 2003, and the Implementation Rules for the
Law for Promoting Private Education (2004) became effective on April 1, 2004. Under these regulations, “private schools” are
defined as schools established by social organizations or individuals using non-government funds. In addition, private schools
providing certifications, pre-school education, education for self-study aid and other academic education shall be subject to approval
by the education authorities, while private schools engaging in occupational qualification training and occupational skill training shall
be subject to approvals from the authorities in charge of labor and social welfare. A duly approved private school will be granted a
Permit for Operating a Private School, and shall be registered with the Ministry of Civil Affairs of the PRC, or MCA or its local
counterparts as a privately-run, non-enterprise institution. Champion Training School holds a Permit for Operating a Private School,
which is valid through December 12, 2013.
Under the above regulations, private schools have the same status as public schools, though private schools are prohibited from
providing military, police, political and other kinds of education which are of a special nature. In addition, the operation of private
schools is highly regulated. For example, the types and amounts of fees charged by private schools offering certifications must be
approved by the relevant governmental authority and be publicly disclosed, and the types and amounts of fees charged by private
schools that do not offer certifications need only be filed with the relevant governmental authority and be publicly disclosed.
Private education is treated as a public welfare undertaking under the regulations. Nonetheless, investors in a private school may
choose to require “reasonable returns” from the annual net balance of the school after deduction of costs, donations received,
government subsidies, if any, the reserved development fund and other expenses as required by the regulations.
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The election to establish a private school requiring reasonable returns shall be provided in the articles of association of the
school. The percentage of the school’s annual net balance that can be distributed as reasonable returns shall be determined by the
school’s board of directors, taking into consideration the following factors: (i) the school’s tuition and other fees, (ii) the ratio of the
school’s expenses used for educational activities and improving the educational conditions to the total fees collected; and (iii) the
school’s admission standards and educational quality. Information relating to the above factors shall be publicly disclosed before the
school’s board determines the percentage of the school’s annual net balance that can be distributed as reasonable returns. This
disclosed information and the decision to distribute reasonable returns shall also be filed with the approval authorities within 15 days
from the decision made by the board. However, none of the current PRC laws and regulations provides a formula or guidelines for
determining “reasonable returns.” In addition, none of the current PRC laws and regulations sets forth different requirements or
restrictions on a private school’s ability to operate its education business based on such school’s status as a school that requires
reasonable returns or a school that does not require reasonable returns. On July 29, 2010, the PRC central government, in the Outlines
of China’s National Plan for Medium and Long Term Education Reform and Development promulgated by it, for the first time
announced the policy that the government will implement a reform to divide private education entities into two categories: (i) for-
profit private education entities and (ii) not-for-profit private education entities. However, this outline is still new and no further law
or regulation has been promulgated to implement it yet.
At the end of each fiscal year, private schools are required to allocate a certain amount to their development fund for the
construction and maintenance of the school and the procurement and upgrade of educational equipment. In the case of private schools
that require reasonable returns, this amount shall be no less than 25% of the annual net income or the annual increase in the net assets
of the school, while in the case of private schools that do not require reasonable returns, this amount shall be no less than 25% of the
annual increase in the net assets of the school, if any. Private schools that do not require reasonable returns shall be entitled to the
same preferential tax treatment as public schools. The regulations require that preferential tax treatment policies applicable to private
schools requiring reasonable returns to be formulated by the finance authority, taxation authority and other authorities under the State
Council, but to date no such regulations have been promulgated by the relevant authorities.
Regulation of Foreign Exchange
The PRC government imposes restrictions on the convertibility of the Renminbi and on the collection and use of foreign
currency by PRC entities. Under current regulations, the Renminbi is convertible for current account transactions, which include
dividend distributions, interest payments, and the import and export of goods and services. Conversion of Renminbi into foreign
currency and foreign currency into Renminbi for capital account transactions, such as direct investment, portfolio investment and
loans, however, is still generally subject to the prior approval of SAFE.
Under current PRC regulations, foreign-invested enterprises such as our PRC subsidiaries are required to apply to SAFE for a
Foreign Exchange Registration Certificate for Foreign-Invested Enterprise. With such a certificate (which is subject to review and
renewal by SAFE on an annual basis), a foreign-invested enterprise may open foreign exchange bank accounts at banks authorized to
conduct foreign exchange business by SAFE and may buy, sell and remit foreign exchange through such banks, subject to
documentation and approval requirements. Foreign-invested enterprises are required to open and maintain separate foreign exchange
accounts for capital account transactions and current account transactions. In addition, there are restrictions on the amount of foreign
currency that foreign-invested enterprises may retain in such accounts.
Further, SAFE promulgated a new circular (known as Circular 142) in August 2008 with respect to the administration of
conversion of foreign exchange capital contributions of a foreign invested enterprise. The circular clarifies that Renminbi converted
from foreign exchange capital contributions can only be used for the activities within the approved business scope of such foreign
invested enterprise and cannot be used for domestic equity investments unless otherwise permitted.
In addition, SAFE also strengthened its oversight over the flow and use of Renminbi converted from the foreign currency
denominated capital of a foreign-invested company. The use of such Renminbi may not be changed without approval from SAFE, and
such Renminbi may not be used to repay Renminbi loans if the proceeds of such loans have not yet been used. Violations of Circular
142 may result in severe penalties, including substantial fines as set forth in the related foreign exchange administration rules. In
addition, SAFE promulgated a circular on November 9, 2010, or Circular 59, which tightens the regulation over settlement of the fund
which is raised from overseas offerings like our initial public offering and is transferred back to the PRC and requires that the
settlement of such fund must be consistent with the description in the prospectus for the initial public offering. Furthermore, it has
recently come to our attention that SAFE issued an internal guideline to its local counterparts, referred to as Circular 45, in November
2011. Circular 45 has never been formally announced by SAFE to the public or posted on SAFE’s website. Based on the version
made publicly available by certain local governmental authorities on their websites, we understand that Circular 45 requires SAFE’s
local counterparts to strengthen the control imposed by Circulars 142 and 59 over the conversion of a foreign-invested company’s
capital contributed in foreign currency into RMB. Circular 45 stipulates that a foreign-invested company’s RMB funds, if converted
from such company’s capital contributed in foreign currency, may not be used by such company to (i) extend loans (in the form of
entrusted loans), (ii) repay borrowings between enterprises, or (iii) repay bank loans it has obtained and on-lent to third parties.
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Regulation of Foreign Exchange in Certain Onshore and Offshore Transactions
In October 2005, SAFE issued the Notice on Issues Relating to the Administration of Foreign Exchange in Fund-Raising and
Return Investment Activities of Domestic Residents Conducted via Offshore Special Purpose Companies, or SAFE Circular 75,
which became effective as of November 1, 2005. According to SAFE Circular 75, prior to establishing or assuming control of an
offshore enterprise for the purpose of financing that offshore enterprise with assets or equity interests in an onshore enterprise in the
PRC, each PRC resident, whether a natural or legal person, must complete certain overseas investment foreign exchange registration
procedures with the relevant local SAFE branch. An amendment to the registration with the local SAFE branch is required to be filed
by any PRC resident that directly or indirectly holds interests in that offshore enterprise upon either (i) the injection of equity interests
or assets of an onshore enterprise to the offshore enterprise or (ii) any overseas fund-raising by such offshore enterprise after such
injection. An amendment to the registration with the local SAFE branch is also required to be filed by such PRC resident when there
is any material change involving a change in the capital of the offshore enterprise, such as (i) an increase or decrease in its capital,
(ii) a transfer or swap of shares, (iii) a merger or division, (iv) a long-term equity or debt investment or (v) the creation of any security
interests.
SAFE Circular 75 applies retroactively. As a result, PRC residents who established or acquired control of offshore companies
that made onshore investments in the PRC in the past were required to complete the relevant overseas investment foreign exchange
registration procedures by March 31, 2006. Under SAFE Circular 75, failure to comply with the registration procedures may result in
restrictions on the relevant onshore entity, including restrictions on the payment of dividends and other distributions to its offshore
parent or affiliate and restrictions on the capital inflow from the offshore entity, and may also subject relevant PRC residents to
penalties under the PRC foreign exchange administration regulations.
As a Cayman Islands company, we are considered a foreign entity in China. If we purchase the assets or equity interests of a
PRC company owned by PRC residents in exchange for our equity interests, such PRC residents will be subject to the registration
procedures described in SAFE Circular 75. Moreover, PRC residents who are beneficial holders of our shares are required to register
with SAFE in connection with their investment in us.
Regulation of Overseas Listings
On August 8, 2006, six PRC regulatory agencies, including the CSRC, promulgated the Regulation on Mergers and Acquisitions
of Domestic Companies by Foreign Investors, which became effective on September 8, 2006 and was amended on June 22, 2009, or
the M&A Rule. This M&A Rule, among other things, has certain provisions that require offshore special purpose vehicles, or SPVs,
formed for the purpose of acquiring PRC domestic companies and controlled by PRC individuals, to obtain the approval of the CSRC
prior to listing their securities on an overseas stock exchange.
We believe, based on the opinion of our PRC legal counsel, Jingtian & Gongcheng, that while the CSRC generally has
jurisdiction over overseas listings of SPVs like us, CSRC’s approval was not required for our initial public offering given the fact that
our current corporate structure was established before the M&A Rule became effective. There remains some uncertainty as to how the
M&A Rule will be interpreted or implemented in the context of an overseas offering. If the CSRC or another PRC regulatory agency
subsequently determines that approval was required for our initial public offering, we may face sanctions by the CSRC or another
PRC regulatory agency. If this happens, these regulatory agencies may impose fines and penalties on our operations in the PRC, limit
our operating privileges in the PRC, restrict or prohibit payment or remittance of dividends by our PRC subsidiaries to us or take
other actions that could have a material adverse effect on our business, financial condition, results of operations, reputation and
prospects, as well as the trading price of our ADS. See “Item 3.D. Key Information — Risk Factors — General Risks Relating to
Conducting Business in China — If the China Securities Regulatory Commission, or CSRC, or another PRC regulatory agency
determines that its approval was required in connection with our initial public offering, we may become subject to penalties.”
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Regulation of Security Review
On February 3, 2011, the General Office of the State Council issued the Circular of the General Office of the State Council on
the Establishment of Security Review System for Foreign Investors’ Merger and Acquisition of Domestic Enterprises (the “Circular
on the Establishment of Security Review”), which became effective on March 4, 2011. Among other things, the Circular on the
Establishment of Security Review stipulates that the scope of the security review lies in foreign investors’ acquisition of domestic
military enterprises, military-related enterprises, enterprises involving sensitive military facilities and other enterprises that impact
national defense security; foreign investors’ acquisition of domestic enterprises which may provide foreign investors with de facto
control over industries relating to national security, such as important agricultural products, energy and natural resources,
infrastructures, transportation services, technologies and major equipment manufacturing. On August 25, 2011, the Ministry of
Commerce issued the Circular of the Ministry of Commerce on the Implementation of Security Review System for Foreign Investors’
Merger and Acquisition of Domestic Enterprises (the “Circular on the Implementation of Security Review”), which became effective
on September 1, 2011. Among other things, the Circular on the Implementation of Security Review further specifies that whether a
foreign investors’ acquisition of domestic enterprises falls within the scope of the security review depends on the said transaction’s
substantive content and practical influence. Foreign investors shall not circumvent the security review through any arrangements or
schemes, including but not limited to trust, lease and/or contractual arrangements.
According to our PRC counsel, as our contractual arrangements were established in 2003, the new security review system shall
not apply to our contractual arrangements. We cannot guarantee, however, that the Ministry of Commerce will not promulgate
additional implementing rules or new rules that will bring our contractual arrangements under the scope of the security review system.
Moreover, according to a press conference held by the Ministry of Commerce on September 20, 2011, there are no specific laws or
regulations governing contractual arrangements like the ones that we employ, but the Ministry of Commerce together with other
authorities would study how to regulate them in the future. Hence, we cannot assure you that our contractual arrangements will not be
subject to new regulations that will be issued by relevant regulatory authorities and that such new regulations will not cause any
material adverse effect on our existing structure. See “Item 3.D. Key Information — Risk Factors — Risks Relating to Our Corporate
Structure and Restrictions on Our Industry — Our contractual arrangements may be subjected to severe censorship under PRC laws
and regulations and, thus, be challenged by relevant regulatory authorities.”
SAFE Regulations on Employee Share Options
On February 15, 2012, SAFE issued the Notice on Issues concerning the Foreign Exchange Administration for Domestic
Individuals Participating in Stock Incentive Plan of Overseas Publicly-Listed Company, or the Stock Option Rules. According to the
Stock Option Rules, PRC residents who participate in an employee share incentive plan of an overseas publicly-listed company are
required to register with the SAFE and complete certain other procedures. These participates should retain a PRC agent, which can be
a branch or representative office of the overseas listed company in China, a Chinese institution which has controlling relationship or
actual control relationship with the offshore listed company, or a Chinese institution qualified for asset custody business, to handle
various foreign exchange matters associated with their employee share incentive plan. The PRC agent should file on behalf of the
PRC resident an application with SAFE to register such employee share incentive plan, apply annually for a quota for the payment of
foreign currencies in connection with the exercise of the employee share options by the PRC resident and open a special foreign
exchange account at a PRC domestic bank to hold the funds required in connection with the share incentive plan. In addition, the PRC
agent is required to amend the SAFE registration with respect to the stock incentive plan if there is any material change to the
employee share incentive plan, PRC agent or overseas entrusted institution.
In addition, the State Administration of Taxation has issued a few circulars concerning employee share options. Under these
circulars, our employees working in China who exercise share options will be subject to PRC individual income tax. Our PRC
subsidiaries have obligations to file documents relating to employee share options with relevant tax authorities and withhold
individual income taxes of those employees who exercise their share options. If our employees fail to pay and we fail to withhold
their income taxes, we may face sanctions imposed by tax authorities or other PRC government authorities.
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C. Organizational Structure
Due to PRC legal restrictions on foreign ownership and investment in the Internet content distribution industry in China, we
operate our online education business through Beijing Champion, a domestic Chinese company owned by Zhengdong Zhu and
Baohong Yin, both of whom are PRC citizens. CDEL Hong Kong, Champion Technology and Champion Education Technology, all
of which are our wholly owned subsidiaries, have entered into a series of contractual arrangements with Beijing Champion and its
shareholders, including a technical support and consultancy services agreement, an exclusive purchase rights agreement, a courseware
license agreement, a software license agreement, a courseware production entrustment agreement, a letter of undertaking from Beijing
Champion’s two shareholders to Champion Technology, a letter from Champion Technology to Beijing Champion, declaration
letters, power of attorneys, acknowledgement letters to us and acknowledgement letters to Champion Technology from each of
Beijing Champion’s shareholders, and a notice to Beijing Champion and its shareholders from Champion Technology. These
contractual arrangements also include equity pledge agreements (as amended and restated) entered into with each of the shareholders
of Beijing Champion. As a result of these contractual arrangements, we have the power to direct the activities of, and have the right to
receive benefits from, Beijing Champion, and accordingly, under U.S. GAAP, we consolidate Beijing Champion’s operating results in
our consolidated financial statements.
The following diagram illustrates our corporate and share ownership structure as of the date of this annual report.
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The following is a summary of the material provisions of these agreements. For more complete information you should read
these agreements in their entirety. Directions on how to obtain copies of these agreements are provided in this annual report under
“Item 10.H. Additional Information — Documents on Display.”
Agreements that transfer economic benefits of the controlled affiliates and their subsidiaries to the Company
Technical Support and Consultancy Services Agreement, dated May 1, 2004. Under this agreement, Champion Technology
provides Beijing Champion with exclusive technical support and consultancy services relating to Beijing Champion’s online
education business. The services rendered by Champion Technology mainly include assisting in course creation and production,
undertaking pre-paid study card production, advising on website design and maintenance, providing general technology support and
technical personnel training, assisting in strategic planning and business development and establishing and implementing a customer
service system. In return, Beijing Champion pays Champion Technology a monthly service fee, which is equal to Beijing Champion’s
revenues less its cost of sales and operating and other expenses as approved by Champion Technology. In addition, Beijing Champion
undertook not to approve its annual budget, or engage in any transactions that could materially affect Beijing Champion’s capital
structure, assets, liabilities, rights or operations, without the prior written consent of Champion Technology. Champion Technology
undertook to provide financial support at Beijing Champion’s request in a manner permitted by law. This agreement will remain
effective until Beijing Champion ceases its operations.
Equity Pledge Agreements entered into on May 1, 2004 and amended and restated on December 31, 2008. To secure the
payment obligations of Beijing Champion under the technical support and consultancy services agreement described above, each of
Beijing Champion’s shareholders, Mr. Zhu and Ms. Yin, pledged to Champion Technology his or her entire equity ownership
interests in Beijing Champion pursuant to an Equity Pledge Agreement entered into on May 1, 2004, or the May 2004 Equity Pledge
Agreement. In May 2008, Mr. Zhu and Ms. Yin contributed an additional RMB16.8 million ($2.5 million) to Beijing Champion as
increased registered capital. In connection with such capital contribution to Beijing Champion, each of Mr. Zhu and Ms. Yin amended
and restated his or her May 2004 Equity Pledge Agreement on December 31, 2008, or the Amended and Restated Equity Pledge
Agreement. The pledge created under each of the Amended and Restated Equity Pledge Agreements could only become effective
after such pledge is registered with SAIC or its local office. We successfully registered the pledge created under each of the Amended
and Restated Equity Pledge Agreements with the Beijing office of SAIC on January 12, 2009. Upon the occurrence of certain events
of default specified in the Amended and Restated Equity Pledge Agreements, the pledgee may exercise its rights and foreclose on the
pledged equity interest. Under such agreements, the pledgor may not transfer the pledged equity interests without the pledgee’s prior
written consent. The agreements will also be binding upon successors of the pledgors and transferees of the pledged equity interests.
These agreements will remain effective until the discharge of Beijing Champion’s contractual obligations under the technical support
and consultancy services agreement as described above.
Letter of Undertaking from Beijing Champion’s Shareholders to Champion Technology, dated February 13, 2008. Pursuant to
this letter addressed to Champion Technology, the shareholders of Beijing Champion undertook to, unless restricted by laws,
regulations or legal procedures, (i) remit all dividends, interests, other distributions or remnant assets after liquidation, if any, they
receive from Beijing Champion to Champion Technology without compensation, after paying the corresponding tax and any other
required expenses, (ii) transfer all or part of their equity interests in Beijing Champion to CDEL Hong Kong at a nominal or minimal
purchase price, in the event CDEL Hong Kong exercises its exclusive purchase right to acquire any or all of the equity interests in
Beijing Champion, (iii) remit to Champion Technology all considerations they may receive from CDEL Hong Kong’s acquisition of
any equity interests in Beijing Champion, without compensation, after paying the corresponding tax and any other required expenses
and (iv) act in the best interest of Champion Technology.
Declaration Letters, dated March 24, 2008. Pursuant to these letters, the shareholders of Beijing Champion acknowledged that
the distribution of dividends in March 2005 in the amount of $0.7 million was a one-time distribution of all dividends accrued prior to
the execution of the technical support and consultancy services agreement described above. The shareholders of Beijing Champion
undertook that after the aforesaid one-time dividend distribution, they will, unless restricted by law, remit all dividends they may
receive from Beijing Champion to Champion Technology after paying applicable tax and other required expenses.
Software License Agreement, dated May 20, 2007. Pursuant to this agreement, Champion Education Technology granted Beijing
Champion a non-exclusive license to use the online course delivery platform for the duration of its operating period. In return, Beijing
Champion pays Champion Education Technology a license fee calculated based on the revenues generated from the use of the
platform.
Courseware Production Entrustment Agreement, dated May 20, 2007. Pursuant to this agreement, Champion Education
Technology provides Beijing Champion with services of editing, production, compilation, updating and maintenance of courseware.
As consideration, Beijing Champion pays Champion Education Technology a fee calculated based on an hourly rate.
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Agreements that provide the Company effective control over the controlled affiliates and their subsidiaries
Exclusive Purchase Rights Agreement, dated May 9, 2004. Pursuant to the exclusive purchase rights agreement entered into
among CDEL Hong Kong, Beijing Champion and its shareholders, CDEL Hong Kong or any third-party designated by it has the right
to acquire, in whole or in part, the respective equity interests in Beijing Champion of its shareholders when permitted by applicable
PRC laws and regulations. The term of this agreement is ten years from the date thereof and can be extended for another ten years at
the discretion of CDEL Hong Kong.
Powers of Attorney, dated March 25, 2008. Pursuant to these powers of attorney, each shareholder of Beijing Champion
authorized Champion Technology or any person it designates to (i) exercise all voting powers that such shareholder enjoys under the
laws and the articles of association of Beijing Champion, including the sale, transfer or pledge, in whole or in part, of such
shareholder’s equity interests in Beijing Champion; (ii) nominate and appoint, on behalf of such shareholder, the legal representative,
directors, supervisors, general manager, and other senior management of Beijing Champion; (iii) execute the share transfer agreement
as contemplated by the exclusive purchase rights agreement described above, and perform the equity pledge agreement and the
exclusive purchase rights agreement described above; and (iv) authorize any third party to carry out any of the above actions. In
addition, the shareholders undertook to refrain from exercising any of the above-mentioned rights.
Notice to Beijing Champion and its Shareholders, dated March 25, 2008. Pursuant to this notice, Champion Technology
authorized Zhengdong Zhu to exercise all rights and powers granted by the powers of attorney described above.
Acknowledgement Letter to Champion Technology, dated March 25, 2008. Pursuant to this acknowledgement letter, the
shareholders of Beijing Champion acknowledged that their contribution of RMB3.2 million ($0.5 million) to the registered capital of
Beijing Champion prior to May 1, 2004 is subject to the equity pledge agreements described above.
Acknowledgement Letter to CDEL Cayman, dated March 25, 2008. Pursuant to this acknowledgement letter, the shareholders of
Beijing Champion acknowledged their contribution of $0.5 million (equivalent to RMB3.2 million) to CDEL Hong Kong in May
2004 is subject to the equity pledge agreements described above.
Tri-party Agreements re VIE Structure, dated January 30, 2013. To secure the performance of the obligations under the powers
of attorney and the letters of undertaking described above, Champion Technology, Mr. Zhu, Ms. Yin and Beijing Champion entered
into the tri-party agreements re VIE structure, pursuant to which Champion Technology has the right to request Mr. Zhu or Ms. Yin to
unconditionally transfer his or her entire equity interests in Beijing Champion to Champion Technology or its designated third party
within a certain period of time required by Champion Technology if Mr. Zhu or Ms. Yin breaches any provision of the power of
attorney or the letter of undertaking. In addition, Champion Technology may also request Mr. Zhu or Ms. Yin to provide sufficient
security to the satisfaction of Champion Technology and enter into a security agreement proposed by Champion Technology within a
certain period of time required by Champion Technology if Champion Technology determines in its discretion that Mr. Zhu or
Ms. Yin violates any provision of the powers of attorney or the letters of undertaking. If Mr. Zhu or Ms. Yin breaches this agreement,
he or she shall compensate Champion Technology any and all economic losses directly or indirectly arising from his or her breach of
this agreement, the powers of attorney and the letters of undertaking.
Spousal Consent Letters, dated January 30, 2013. The spouse of each shareholder of Beijing Champion (i.e. Mr. Zhu and
Ms. Yin) has entered into a spousal consent letter to acknowledge that he or she consents to the disposition of the equity interests held
by his or her spouse in Beijing Champion in accordance with the exclusive purchase rights agreement, the letter of undertaking, the
power of attorney, the equity pledge agreement and the tri-party agreements re VIE structure described above, and any other
supplemental agreement(s) may be consented by his or her spouse from time to time. Each such spouse further agrees that he or she
will not take any action or raise any claim to interfere with the arrangements contemplated under the above mentioned agreements. In
addition, each such spouse further acknowledges that any right or interest in the equity interests held by his or her spouse in Beijing
Champion do not constitute property jointly owned with his or her spouse and each such spouse unconditionally and irrevocably
waives any right or interest in such equity interests.
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Other agreements among the Company’s subsidiaries and the controlled affiliates
Courseware License Agreement, dated August 1, 2004. Pursuant to this agreement, Beijing Champion granted Champion
Technology an exclusive license to use specific distance education and training courseware owned by Beijing Champion free of
charge. Under this agreement, Champion Technology is granted the rights to use the courseware for the duration of its operating
period.
Letter of Undertaking from Champion Technology to Beijing Champion, dated February 13, 2008. Pursuant to this letter,
Champion Technology confirmed its obligation to provide financial support to Beijing Champion if Beijing Champion suffers any
financial loss.
For risks associated with our contractual arrangements with Beijing Champion and its shareholders, see “Item 3.D. Key
Information — Risk Factors — Risks Relating to Our Corporate Structure and Restrictions on Our Industry.”
D. Property, Plants and Equipment
Our principal executive offices are located in approximately 2,495 square meters of office space on the 18th floor, Xueyuan
International Tower, No. 1 Zhichun Road, Haidian District, Beijing, 100083, China. We also own approximately 355 square meters of
office space in Hangzhou, China. We also lease approximately 3,964 square meters at the Xueyuan International Tower and 5,847
square meters at different locations of China. We believe that our existing facilities are adequate for our current requirements and that
additional space can be obtained on commercially reasonable terms to meet our future requirements.
ITEM 4A. UNRESOLVED STAFF COMMENTS
Not applicable.
ITEM 5.
OPERATING AND FINANCIAL REVIEW AND PROSPECTS
The following discussion of our financial condition and results of operations is based upon and should be read in conjunction
with our consolidated financial statements and their related notes included in this annual report on Form 20-F. This report contains
forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. See “Introduction — Forward Looking Statements.” In evaluating our business, you should carefully consider
the information provided under “Item 3.D. Key Information — Risk Factors.” We caution you that our business and financial
performance are subject to substantial risks and uncertainties.
The selected consolidated statements of operations data for the fiscal years ended September 30, 2009, 2010 and 2011 and the
selected consolidated balance sheets data as of September 30, 2010 and 2011 have reflected the discontinued operation, where
applicable. See “— Operating Results — Income (Loss) from discontinued operations” for more information.
A. Operating Results
Overview
We offer a wide range of online education and test preparation courses and other related services and products. Our online
courses are designed to help professionals and other course participants obtain and maintain the skills, licenses and certifications
necessary to pursue careers in China in the areas of accounting, law, healthcare, construction engineering and other industries. We
also offer test preparation courses to self-taught learners pursuing higher education diplomas or degrees and to secondary school and
college students preparing for various academic and entrance exams. We further offer online foreign language courses. In addition to
our online education courses, which accounted for 73.6%, 74.1% and 77.3% of our net revenues in the fiscal years ended
September 30, 2010, 2011 and 2012, respectively, we also sell books and reference materials through third-party bookstores and
distributors across China and, to a lesser extent, through our online bookstore and our offices in Beijing. In addition, we also offer
offline business start-up training courses and in-person accounting and healthcare professional training to accounting firms and the
general public. We also, from time to time, provide course production services and platform production services for certain customers
at their request.
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To comply with PRC law, we have adopted a corporate structure whereby we operate our business through a series of
contractual arrangements with Beijing Champion, a PRC entity owned by Zhengdong Zhu, our co-founder, chairman and chief
executive officer, and his wife, Baohong Yin, our co-founder and deputy chairman. As a result, we do not enjoy direct equity
ownership of Beijing Champion, our primary consolidated operating company. However, through these contractual arrangements, we
effectively control Beijing Champion and its subsidiaries and consolidate its financial results in our consolidated financial statements,
and thus references to “we,” “us,” “our company” and “our” refer not only to China Distance Education Holdings Limited and its
subsidiaries, but also to Beijing Champion and its subsidiaries as the context requires. For a more detailed discussion of these
contractual arrangements, see “Item 4.C. Information on the Company — Organizational Structure,” and for a detailed description of
the regulatory environment for Internet-based businesses in China that necessitates our adoption of this structure, see “Item 4.B.
Information on the Company — Business Overview — Regulations.” In addition, for a detailed description of the risks associated
with our corporate structure and these contractual arrangements that support our corporate structure, see “Item 3.D. Key Information
— Risk Factors — Risks Relating to Our Corporate Structure and Restrictions on Our Industry.”
Our net revenues were $32.6 million, $41.6 million and $52.1 million in the fiscal years ended September 30, 2010, 2011 and
2012, respectively. We incurred net losses of $1.9 million and $3.8 million in the fiscal years ended September 30, 2010 and 2011,
respectively. Our higher net loss during the fiscal year ended September 30, 2011 compared to the fiscal year ended September 30,
2010 stemmed mainly from share-based compensation expenses arising from the re-pricing and acceleration of the vesting of our
share options granted under the Prior Plan in the fourth quarter of the fiscal year ended September 30, 2011, and impairment of
goodwill, property, plant and equipment, intangible assets and purchased call options acquired with the acquisitions of Zhengbao
Yucai and Champion Xinlixiang. We had a net income of $8.2 million in the fiscal year ended September 30, 2012 compared to a net
loss of $3.8 million in the fiscal year ended September 30, 2011mainly due to significant decrease in share-based compensation
expenses, professional fees and bad debts provision, and no impairment items arising from Zhengbao Yucai and Champion
Xinlixiang. In addition, the disposal of Champion Xinlixiang in May 2012 stopped the continued loss in the remaining of the fiscal
year ended September 30, 2012. Our total course enrollments from continuing operations increased from approximately 1,215,000 for
the fiscal year ended September 30, 2010 to over 1,601,000 and 2,203,000 for the fiscal years ended September 30, 2011 and 2012,
respectively.
General Factors Affecting Our Results of Operations
We have benefited significantly from overall economic growth and the expansion of the education market. Economic growth
and increasing consumer consumption in China have contributed to a significant increase in spending on education. Furthermore,
China’s integration into the global economy and growth in China’s professional services sector are driving demand for qualified talent
in China, particularly in the areas of accounting, law, healthcare, construction engineering and financial services. We have also
benefited from increasing Internet and broadband penetration rates in China, which have increased the acceptance of online education
and training courses as an effective and convenient way for people to meet their educational and career development needs. However,
any adverse changes in the economic conditions or regulatory environment in China may have a material adverse effect on the
Internet services industry and the education industry in China, which in turn may adversely affect our results of operations.
Our results of operations may also be affected by other factors such as changes to the license, qualification, knowledge and skill
requirements applicable to the various disciplines and professions covered by our online courses, and changes in the timing, content
and difficulty, or perceived difficulty, of exams covered by our courses, changes in the continuing education requirements, and
changes in the government subsidy policy applicable to our business start-up training courses. Exams covered by our courses may
also, from time to time, be discontinued or postponed for reasons beyond our control, which may impact our revenues in certain
periods. See “Item 3.D. Key Information — Risk Factors — Risks Relating to Our Business — Our business could be adversely
affected by changes in the perceived difficulty, requirements or formats of professional examinations and continuing education in
China,’ “Item 3.D. Key Information — Risk Factors — Risks Relating to Our Business — Our business could be adversely affected
by changes in the perceived difficulty, requirements or formats of business start-up training courses, or changes in the government
authorities’ subsidy policy” and “Item 3.D. Key Information — Risk Factors — Risks Relating to Our Business — Our financial
performance and prospects could be affected by natural calamities or health epidemics.” We also typically experience lower revenues
in the quarters ending December 31 and March 31 than in the quarters ending June 30 and September 30 due to the timing of exams
covered by our courses. See “Item 3.D. Key Information — Risk Factors — Risks Relating to Our Business — Our business is
subject to seasonal fluctuations, which may cause our operating results to fluctuate from quarter to quarter. This may result in
volatility in and adversely affect the price of our ADSs.” Our results of operations could also be impacted by fluctuations in exchange
rates. See “Item 3.D. Key Information — Risk Factors — General Risks Relating to Conducting Business in China — Fluctuations in
exchange rates could result in foreign currency exchange losses.” In addition, our results of operations could be impacted by share-
based compensation expenses arising from share options and/or restricted shares granted under our share incentive plans. See “Item
3.D. Key Information — Risk Factors — Risks Relating to Our Business — We may continue to grant share options and/or restricted
shares under our current or future share incentive plans, or modify the terms of existing share options, which may continue to
materially impact our future results of operations or result in dilution to our shareholders.”
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Specific Factors Affecting Our Results of Operations
Our results of operations in any given period are also directly affected by company-specific factors, including:
• Number of enrollments in our courses. Our ability to generate and grow our net revenues is primarily affected by our ability
to increase the number of course enrollments. This in turn is driven by several factors, including change of exam schedules,
governmental and industrial requirements for education and training in various professions and industries, recognition of our
brand and services, Internet and broadband penetration rate, and the perceived effectiveness of our education and training
courses. Government regulations requiring increased number of licensure and certification exams provide us with new market
opportunities to develop new courses and to attract potential exam participants as our customers. Changes in exam content
and knowledge requirements in certain industries and professions, and the increased difficulty, or perceived difficulty of
certain exams covered by our courses, may also contribute to growth in our course enrollments as more exam takers may feel
a stronger need to take exam preparation courses. Government policies encouraging business start-up training provide us with
new market opportunities to develop new courses and to attract potential course participants to take our courses. Benefiting
from the above driving factors, our total course enrollments from continuing operations increased from approximately
1,215,000 for the fiscal year ended September 30, 2010 to 1,601,000 and 2,203,000 for the fiscal years ended September 30,
2011 and 2012, respectively.
However, we may also, from time to time, experience a decrease in course enrollments in certain subject areas if there is a
perception within those industries or professions that certain exams have become less difficult, or the content more routine
and familiar, and as a result these exam takers may be less inclined to spend additional money on test preparation courses. For
example, our Intermediate Level Accounting Professional Qualification Examination online course enrollments decreased
from approximately 116,000 for the fiscal year ended September 30, 2011 to approximately 109,000 for the fiscal year ended
September 30, 2012.
In addition, although overall enrollment in our online elite classes increased from approximately 9,000 in the fiscal year
ended September 30, 2011 to approximately 16,400 in the fiscal year ended September 30, 2012, enrollment in our online
elite classes for our Intermediate Level Accounting Professional Qualification Examination decreased from approximately
1,900 in the fiscal year ended September 30, 2011 to approximately 1,400 in the fiscal year ended September 30, 2012 as an
increasing number of course participants chose to register for the corresponding premium classes, which they consider more
suitable for their needs.
However, we expect overall demand for most of our courses to continue to increase, especially for accounting continuing
education, due to an increasing number of individuals seeking to enter or obtain various qualifications applicable to the
professions and industries covered by our courses and those seeking to fulfill regulatory or admission requirements. Finally,
any government decisions to scale back, postpone or cancel certain exams, combine exams or adopt measures that might
reduce the number of exam participants may adversely impact our revenues.
• Fees for our courses. Our net revenues are also affected by the amount of fees we charge for our courses, which depends on
the overall demand, the prices and availability of competing courses, perception of the quality and effectiveness of our
courses and the income levels that our course participants expect to achieve upon passing the related licensure and
certification exams. We may also experience pricing pressure as we expand our course offerings into new areas, or new
segments and exams within existing areas that we cover, to attract new customers. In addition, our net revenue generated from
our business start-up training course is affected by our entitlement to government subsidy payments conditioned on our ability
to meet government stipulated conditions under their subsidy policies. Such stipulated conditions include the passage rate of
our course participants’ business proposals as evaluated by the relevant government authorities, the business start-up rate and
the employment rate of our business start-up course participants.
• Our ability to expand the range of courses and other services. Our ability to address market needs in new areas, or in new
segments and exams within existing areas we cover by expanding the range of our course offerings and other services, has a
direct impact on our ability to maintain rapid growth in our course enrollments. Diversifying our sources of revenues also
helps protect us from possible down-turns in certain industries or professions. To date, our accounting courses remain the
largest and most important of all our course offerings in terms of revenues and numbers of course enrollments. Although we
expect the accounting profession to remain a stable source of customers for our services due to the large and increasing
number of industry participants and the existence of various qualification exams and professional requirements in the
industry, we have expanded and plan to continue to expand our course offerings to further grow our revenues, expand our
brand and reputation into other areas, and provide a buffer against over-reliance on any one particular area. Over the past
several years, we have developed our legal, healthcare and construction engineering course offerings and further enhanced the
reputation of our other course offering in the area of business start-up training.
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• Impact of strategic alliances and business acquisitions. We have pursued and may continue to pursue strategic alliance and
acquisition opportunities to increase our service offerings and expand our growth. In March 2009, we acquired the business
start-up training business. In September 2009, we acquired the business of Gaokao retake preparation and high-school
supplementary tutoring business. Similar acquisitions may not generate the financial results we expect and may even result in
losses. With respect to our Gaokao retake preparation and high-school supplementary tutoring business, we suffered
significant operating losses for the fiscal year ended September 30, 2011. As a result, we discontinued such business in
September 2011 and sold same to a third-party in May 2012.
We also often enter into strategic alliances with global education leaders as their distributor in China. Examples of these
strategic alliances include our alliance with Becker Professional Education where we exclusively distribute Becker
Professional Education’s CPA Review, CPA Final Review courses, ACCA examination review courses and related materials
in China. We also entered three strategic alliances with AsknLearn Pte. Ltd., India’s largest education company, TStudy Co.,
Ltd., one of the largest private education companies in Korea, and Eleutian Technology Inc., whereby we obtained the right to
distribute their respective products in China. Our ability to successfully identify, execute, integrate and manage new alliances
and acquisitions can have a significant effect on our results of operations.
Description of Key Line Items
Net Revenues
We derive net revenues from the sale of online education services, books and reference materials, and other related products and
services such as course production services, platform production services, magazine content production services, in-person
accounting and healthcare professional training to accounting firms and public, offline primary and secondary school supplementary
courses, business start-up training courses, and accounting and tax consulting services. Our net revenues are presented net of PRC
business tax and related surcharges, as well as value-added taxes. The following table sets forth a breakdown of our total net revenues
for the periods indicated:
Net Revenues
Online education services
Books and reference materials
Others
Total net revenues
Online Education Services
2010
Year Ended September 30,
2011
$
% of net
revenues
$
% of net
revenues
(In thousands, except for percentages)
2012
$
% of net
revenues
23,982
3,939
4,658
73.6% 30,788 74.1%
12.1%
4,743 11.4%
14.3% 6,033 14.5%
40,281
4,438
7,383
77.3%
8.5%
14.2%
32,579
100.0% 41,564 100.0%
52,102
100.0%
We derive most of our revenues from the provision of online education services. Our online education services consist of online
professional education and test preparation courses, test preparation courses for self-taught learners pursuing higher education
diplomas or degrees and secondary school and college students preparing for various academic and entrance exams, continuing
education courses for professionals fulfilling regulatory requirements, and language courses. Our professional training courses cover a
wide range of industries, including accounting, law, healthcare, construction engineering and others.
We earn revenues from course fees paid by course participants enrolled in our online education courses. We recognize course
fee payments as revenues pursuant to one of two types of revenue recognition models, the non-refundable course model and the
refundable course model. The non-refundable course model represents our original revenue recognition model used for our courses
since the start of our business. This revenue recognition model applies to most of our current courses. For online courses with exams
using the non-refundable course model, we recognize revenues on a straight line basis over the subscription period from the date on
which the course participants enroll in the courses to the completion date of the relevant exam when we close access to the relevant
online course materials except that we recognize part of our revenues of accounting continuing education when course participants
complete the stipulated study hours and take the examinations. With respect to courses without exams using the non-refundable
course model, we recognize revenues on a straight line basis over the subscription period during which the courses are delivered to
the participants.
61
We adopted the refundable course model in the fiscal year ended September 30, 2007 to recognize revenues generated from our
“elite” classes, which were first introduced in November 2006. With our elite classes, course participants pay substantially higher
course fees for more personal and tailored course-related services. After completing an elite class, if a participant fails to pass the
exam subject that the course prepares him or her for, and certain pre-agreed conditions are met, the course participant is then entitled
to a refund of the applicable course fee paid, which amount the course participant can choose to claim in the form of a cash refund or
apply to future courses provided by us. For courses using the refundable course model, the proceeds from the refundable course
model are initially recorded as refundable fees, and thereafter we recognize revenues upon the expiration of the course participants’
right to receive a refund or the right to retake the course.
We introduced our premium classes under the non-refundable course model in August 2008 for some of our most successful
courses, such as courses for the accounting, legal and healthcare industries. Our premium class participants enjoy high-quality
premium course-related support services similar to the elite class participants. However, premium course participants do not enjoy
refund privileges. Instead, in general, if a participant fails to pass the course examination and certain pre-agreed conditions are met,
the course participant can retake the same premium course and pay only 50% of the course fees. The participant is given this 50%
discount only once, therefore, if he or she fails the relevant course examination again and wishes to retake the premium course for the
third time, there is no discount provided at that time. If a participant fails to pass the course examination for the examinations of
American Institute of CPAs and certain accounting, healthcare, and construction engineering courses, however, the course participant
can retake the same courses free of charge for the following year if certain pre-agreed conditions are met.
To enroll in our courses, course participants may choose to purchase pre-paid study cards from our distributors or to pay us
through bank remittance, postage, online payment using credit or debit cards via external payment networks or cash at our offices. We
provide course participants with a one-week trial period, applicable to the foundation classes of most courses that we offer,
commencing on the date course participants activate their subscription for the relevant course. If course participants decide within the
one-week trial period that they no longer want to take the course, we will refund their course fees. The amount of one-week trial
period course fee refunds was insignificant in the fiscal years ended September 30, 2010, 2011 and 2012. We begin to recognize
revenues following the expiry of the one-week trial period.
To use the face value on a pre-paid study card, course participants must activate the card by using an access code and password
to transfer the face value on the card to their personal online registered accounts and register for the desired courses. We first
introduced pre-paid study cards in January 2003. Our study cards are sold with expiration dates, typically set at two to three years
from the print date of the card. Proceeds from the expired study cards that have never been activated are recognized as revenues upon
expiration of the cards. For the fiscal years ended September 30, 2010, 2011 and 2012, we recognized revenue before business tax
and related surcharges in connection with expired pre-paid study cards of approximately $90,000, $103,000 and $113,000,
respectively. Once course participants activate the pre-paid study cards, the face values of the cards are added to their personal
registered accounts and are no longer subject to expiration. We, at times, offer volume discounts to our distributors for purchases over
a specified amount of pre-paid cards during a specified period of time, generally one year. These discounts are provided to
distributors in the form of additional study cards. The after-discount prices of the study cards paid by the distributors to us are
recognized as deferred revenue. Deferred revenue is subsequently recognized as revenues upon provision of the future services
according to the applicable revenue recognition policy discussed above.
Books and Reference Materials
We primarily sell our own proprietary learning materials relating to accounting professional courses and exams through third-
party bookstores and distributors and, to a lesser extent, directly through our online bookstore and at our offices in Beijing. We began
selling books and reference materials in 2003. The sale of books and reference materials on topics related to our course subject matter
complements our online course offerings, supplements the learning experience of our course participants, and helps build brand
recognition and loyalty among our customers. The books and reference materials we sell are not compulsory for students taking the
online course or the examination. In addition, our proprietary books help promote our expertise and reputation in the accounting field.
Our sales arrangements are evidenced by sales agreements with and purchase orders from distributors. We recognize revenues
from the sale of books and reference materials when the four criteria as discussed under “Critical Accounting Policies — Revenue
Recognition” below are met.
Starting from the fiscal year ended September 30, 2009, we sold some of our books and reference materials together with study
cards that can be used to enroll in particular online courses.
62
Others
We derive other net revenues from the provision of offline education services, course production services, platform production
services, and others including magazine content production services, advertising services, and consulting services. Such sales
arrangements, except for the business start-up training courses, are evidenced by individual sales agreements with customers. We do
not charge course participants fees for attending our business start-up training courses. Instead, we receive subsidies from the relevant
government authority, which are conditioned on our ability to meet government stipulated conditions under the subsidy policies. For
more information, see “Item 4 Information on the Company — Business Overview — Business Start-up Training Courses”.
Cost of Sales
Our cost of sales consists of cost of services and cost of tangible goods sold. The following table shows our cost of sales, gross
profit and gross margin for the periods indicated.
Net Revenues
Cost of sales:
Cost of services
Cost of tangible goods sold
Total cost of sales
Gross profit and gross margin
1
For the Year Ended September 30,
2010
$
% of net
revenues
2011
$
% of net
revenues
2012
$
% of net
revenues
(In thousands of $, except for percentages)
32,579
100.0%
41,564
100.0%
52,102
100.0%
(13,283)
(2,070)
(40.8)% (16,840)
(6.3)% (2,794)
(40.5)%
(6.7)%
(20,494)
(2,587)
(39.3)%
(5.0)%
(15,353)
17,226
(47.1)%
52.9%
(19,634)
21,930
(47.2)%
52.8%
(23,081)
29,021
(44.3)%
55.7%
1
Gross profit is equal to net revenues less cost of sales. Gross margin is equal to gross profit divided by net revenues.
Cost of Services
Cost of services accounted for 40.8%, 40.5% and 39.3% of our net revenues in the fiscal years ended September 30, 2010, 2011
and 2012, respectively. Cost of services are mainly composed of salaries and related expenses for our tutors, course production
technicians and other employees, fees paid to our course lecturers, rental and related expenses, server management and bandwidth
leasing fees paid to third-party providers, and depreciation and amortization expenses. Our cost of services as a percentage of net
revenues slightly decreased in the fiscal year ended September 30, 2011 as compared to the fiscal year ended September 30, 2010 as a
result of relatively slower growth in salaries and related expenses, rental and related expenses, server management and bandwidth
leasing fees paid to third-party providers, and share-based compensation expenses. Such slower growth was partially offset by the
relatively higher growth in fees paid to our lecturers due to our expanded course offerings, more course production hours and higher
hourly lecturer fees. Our cost of services as a percentage of net revenues slightly decreased in the fiscal year ended September 30,
2012 as compared to the fiscal year ended September 30, 2011 as a result of relatively slower growth in salaries and related expenses,
rental and related expenses, and decreased share-based compensation expenses. The effect was partially offset by the significant
growth in fees paid to our lecturers due to our expanded course offerings, more course production hours and higher hourly lecturer
fees, and server management and bandwidth leasing fees paid to third-party providers due to launch of high-definition courses.
Historically, fees paid to lecturers to produce our courses constituted a large portion of our cost of services because we allocated
significant resources to engage high-quality lecturers for our online courses and to increase the number of lecturers for our expanded
course offerings. The number of lecturers actively producing online courses for us was 370, 325 and 642 in the fiscal years ended
September 30, 2010, 2011 and 2012, respectively. The decrease in the number of lecturers actively producing online courses for us in
the fiscal year ended September 30, 2011 compared to the fiscal year ended September 30, 2010 resulted primarily from the
adjustment and maintenance of a more qualified pool of lecturers. In the fiscal year ended September 30, 2012, the number of
lecturers increased compared to the fiscal year ended September 30, 2011 primarily due to launch of high-definition courses.
Leveraging the online medium, we are also achieving greater economies of scale as we are able to continuously increase our numbers
of course participants without having to increase the number of our lecturers, which is a distinct advantage we enjoy over traditional
offline schools and educational programs that are limited by traditional teacher-student ratios. However, our fees paid to lecturers as a
percentage of our net revenues increased in the fiscal year ended September 30, 2011 as compared to the fiscal year ended
September 30, 2010, primarily as a result of increase in hourly lecturer fees for our existing online course offerings and expansion of
in-person accounting and healthcare professional training to the public. This trend continued for the fiscal year ended September 30,
2012.
63
Our service-oriented approach is a critical component of our online education business model. Accordingly, our tutors and
course production technicians also play an important role in our delivery of quality services. While our lecturers primarily conduct
lectures through pre-recorded audio-visual media, our tutors play a more immediate frontline role in the provision of our course
services. They answer questions from course participants by email or by telephone, usually within a 24-hour time period. Delivering
this level of quality service and responsiveness requires us to continuously maintain a large, well-trained pool of tutors to keep pace
with the growth in the numbers of course enrollments, and to allocate sufficient resources to retain the top performing tutors to
maintain the overall high-quality of our tutoring services. The number of our tutors increased from 189 (including 81 part-time tutors)
as of September 30, 2010 to 192 (including 68 part-time tutors) as of September 30, 2011, and slightly increased to 193 (including 35
part-time tutors) as of September 30, 2012. To ensure a high quality learning experience, we also allocate resources to retain course
production technicians capable of creating high quality high-definition audio-video course materials and other interactive features of
our online courses. The number of our course production technicians increased from 78 as of September 30, 2010 to 85 as of
September 30, 2011, and decreased to 74 as of September 30, 2012 due to postponement of exam dates of the 2012 Elementary Level
and Intermediate Level Accounting Professional Qualification Exams resulting in postponement of production of the 2013
courseware for the same exams. As a result, to date, salaries and related expenses constituted a large portion of our cost of services.
Cost of Tangible Goods Sold
Book sales costs comprise the cost of purchasing from third parties books that we re-sell, as well as fees we pay to third-party
book printing companies to produce our proprietary books and reference materials and other fees related to content creation for our
books and reference materials.
Operating Expenses
Our operating expenses consist of selling expenses, general and administrative expenses, and impairment of purchased call
option.
Selling Expenses
Selling expenses accounted for 22.0%, 23.5% and 21.8% of our net revenues in the fiscal years ended September 30, 2010, 2011
and 2012, respectively. Our selling expenses consist primarily of advertising and promotion expenses, salaries and related expenses of
our customer service staff and sales and marketing staff, commissions paid to our agents, freight and delivery expenses related to our
books and reference materials, rental and related expenses of office facilities and other selling expenses. Our selling expenses slightly
decreased to 22.0% of our net revenues in the fiscal year ended September 30, 2010 as a result of significant decrease in advertising
and promotional expenses. Such decrease was partially offset by relatively significant growth in commissions paid to agents, salaries
and related expenses, rental and related expenses, and share-based compensation expenses. Our selling expenses increased to 23.5%
of our net revenues in the fiscal year ended September 30, 2011 as a result of relatively higher growth in our advertising and
promotional activities and commissions paid to agents due to an increase in the sales of our courses. Such higher growth was partially
offset by the relatively lower growth in salaries and related expenses and share-based compensation expenses. Our selling expenses
decreased to 21.8% of our net revenues in the fiscal year ended September 30, 2012 as a result of our achievement of economies of
scale and decrease in share-based compensation expenses. Such decrease was partially offset by the relatively higher growth in
salaries and related expenses of our customer service staff and sales and marketing staff, commissions paid to our agents, and rental
and related expenses of office facilities.
The aggregate amount of salaries paid to our customer service staff was significant as we significantly increased the number of
our customer service staff with the increase in the number of course enrollments and other customers. In addition, as we seek to
reduce our reliance on sales of our pre-paid study cards through third-party sales agents, we continue to increase the number of our
customer service staff to increase the portion of sales of our products and services conducted directly through our own customer
service staff.
The aggregate amount of salaries paid to our sales and marketing staff was also significant as we maintained the number of our
sales and marketing staff at a high level to promote our business.
64
General and Administrative Expenses
Our general and administrative expenses accounted for 32.4%, 29.4% and 15.8% of our net revenues in the fiscal years ended
September 30, 2010, 2011 and 2012, respectively. Our general and administrative expenses consist primarily of administrative staff
compensation and benefits, professional fees, rental expenses, depreciation and amortization, and other miscellaneous expenses. Staff
benefits include pension, medical insurance, unemployment insurance, work-related injury insurance and housing subsidies. Other
miscellaneous expenses include travel, office, communication and entertainment expenses. Our general and administrative expenses
increased to 32.4% of our net revenues in the fiscal year ended September 30, 2010 due to bad debts provision of $2.2 million,
relatively significant growth in salaries and related expenses, professional fees, and share-based compensation expenses. Our general
and administrative expenses decreased to 29.4% of our net revenues in the fiscal year ended September 30, 2011 as compared to the
fiscal year ended September 30, 2010 due to relatively lower growth in salaries and related expenses; decreased bad debts provision
from $2.2 million in the fiscal year ended September 30, 2010 to $1.2 million in the fiscal year ended September 30, 2011. This
slower growth was partially offset by the relatively significant growth in share-based compensation expenses arising from re-pricing
and acceleration of the vesting of our share options granted under the Prior Plan in the fourth quarter of the fiscal year ended
September 30, 2011. Our general and administrative expenses decreased to 15.8% of our net revenues in the fiscal year ended
September 30, 2012 due to significant decrease in professional fees, bad debts provision and share-based compensation expenses.
Such decrease was partially offset by the increase in salaries and related expenses.
Share-based Compensation Expenses
We adopted our Share Incentive Plan, or the Prior Plan, on April 18, 2008. We also adopted on July 2, 2008, and amended and
restated on February 16, 2009 and May 21, 2012, respectively, our 2008 Performance Incentive Plan, or the New Plan. An aggregate
of 11,652,556 ordinary shares have been reserved for issuance under the Prior Plan. In addition, an aggregate of 12,545,999 ordinary
shares have been reserved for issuance under the New Plan as of September 30, 2012. See “Item 6.B. Directors, Senior Management
and Employees — Compensation — Share Options, Restricted Shares and Share Incentive Plans.” As of September 30, 2010, 2011
and 2012, there are outstanding options to purchase a total of 11,620,104, 12,488,012 and 3,898,524 ordinary shares, respectively, and
as a result, we recorded share-based compensation expenses in the corresponding periods in connection with the options granted. In
the fiscal years ended September 30, 2011 and 2012, we also recorded share-based compensation expenses in connection
with restricted shares awarded to non-executive directors. In addition, we further reduced the exercise price of 8,066,700 and
1,398,300 outstanding share options under the Prior Plan from $0.82 per share to $0.615, which equaled the closing price of our
ADSs on NYSE at the close of trading on September 27, 2011, and zero per share, respectively. Furthermore, the re-priced options
had been accelerated to be fully vested on the same day. As a result, we further recorded incremental share-based compensation
expenses in the fiscal year ended September 30, 2011. The amounts of these share-based compensation expenses are set forth below:
For the Years Ended September 30,
2010
2011
2012
Share-based compensation expenses:
$
$
$
(in thousands)
Restricted shares awarded to non-executive directors
Options granted to employees, non-employees and
non-executive directors
—
104
21
4,387
5,920
120
As of September 30, 2010, 2011 and 2012, the unamortized compensation expenses in connection with our outstanding options
were $7.8 million, $0.7 million and $0.2 million, respectively.
65
Impairment of goodwill, intangible assets and purchased call option
Zhengbao Yucai, which operates the business of start-up training services we acquired in March 2009 from a third-party
individual Mr. Liang Ma, incurred net losses for the fiscal years of 2009 and 2010. In addition, in late 2009, we noted that Mr. Liang
Ma, Beijing Yinglun Yucai Education Consulting Co., Ltd., or Yinglun Yucai, a company owned by Mr. Liang Ma, and Global
Education Consortium Group Co., Limited, a company owned by Mr. Liang Ma’s wife, were engaged in competing businesses which
is prohibited under the purchase agreement. As a result, we filed an arbitration application in January 2010 with the China
International Economic and Trade Arbitration Commission, or CIETAC, against Mr. Liang Ma and the other related parties. Under
these circumstances, we performed impairment tests for the goodwill, other intangible assets and the purchased call options acquired
with the acquisition of the start-up training business as of September 30, 2010. Based on the impairment tests, there was no
impairment of goodwill and other intangible assets as the start-up training business is expected to be profitable in the future.
However, the option to acquire 49% equity interest of a company owned by Yinglun Yucai was fully impaired by US$0.03 million
and the option to acquire 30% equity interest in Zhengbao Yucai was impaired by US$0.13 million. In June 2011, CIETAC, ruled,
among other things, that Mr. Liang Ma shall surrender his 40% ownership interest in Zhengbao Yucai to us for no consideration. As a
result, the option to acquire additional equity interest in Zhengbao Yucai of $1.1 million was fully impaired in the fiscal year ended
September 30, 2011. In September 2011, in conjunction with the discontinuance of operations of Champion Xinlixiang, we recorded
an impairment loss of US$2.1 million to write down the related carrying amounts of its assets to their fair values less cost to sell.
Please see “—Income (Loss) from discontinued operations” for more information.
Taxation
We are incorporated in the Cayman Islands. Under the current law of the Cayman Islands, we are not subject to income or
capital gains tax. In addition, dividend payments are not subject to withholding tax in the Cayman Islands. However, there is a risk
that we may be treated as resident in the PRC for tax purposes. See “Risk Factors — General Risks Relating to Conducting Business
in China — Under China’s New EIT Law, we may be classified as a ‘resident enterprise’ of China. Such classification could result in
unfavorable tax consequences to us and our non-PRC shareholders.”
CDEL Hong Kong was incorporated in Hong Kong and does not conduct substantial operations of its own. No provision for
Hong Kong profits tax has been made as CDEL Hong Kong has no assessable profits in Hong Kong in the fiscal years ended
September 30, 2010, 2011 and 2012. In addition, no Hong Kong withholding tax will be imposed on any payments of dividends
distributed by CDEL Hong Kong to us.
In February 2010, PENCIL was incorporated in Hong Kong as a wholly-owned subsidiary of CDEL Hong Kong. PENCIL has
not conducted any substantive operations since its inception. No provision for Hong Kong profits tax has been made as PENCIL has
no assessable profits in Hong Kong in the fiscal years ended September 30, 2010, 2011 and 2012. In addition, no Hong Kong
withholding tax will be imposed on any payments of dividends distributed by PENCIL to us through CDEL Hong Kong.
On September 27, 2012, DL Education was incorporated in the United States as our wholly owned subsidiary. DL Education has
not conducted any substantive operations since its inception. No provision for tax has been made as DL Education has no assessable
profits in the United States in the fiscal year ended September 30, 2012.
Enterprise Income Tax
The current and deferred components of the income tax expense/(benefit) appearing in our consolidated statements of operations
are as follows:
Years ended September 30,
2010
2011
2012
Current tax expense
Deferred tax expense/(benefit)
66
$
$
(in thousands)
1,948
(977)
971
$
2,074
526
2,600
1,044
(469)
575
Champion Technology and Beijing Champion obtained tax preferential treatments as “high and new technology enterprises” or
enjoyed a term tax holiday under New EIT Law that resulted in lower tax rates. Champion Technology and Beijing Champion are
subject to the tax rate of 15% from 2010 through 2012. Our other PRC entities are subject to standard income tax rate of 25% for
2010, 2011 and 2012. See “Risk Factors — General Risks Relating to Conducting Business in China — The discontinuation of any of
the preferential tax treatments currently available to our PRC subsidiary, Champion Technology, and affiliated entity, Beijing
Champion, could materially increase our tax liabilities.”
$6.7 million earnings of our subsidiaries located in the PRC that are available for distribution as of September 30, 2012 were
distributed in December 2012, which were generated before 2008 and were not subject to any Chinese dividend withholding taxes.
For earnings of our subsidiaries located in the PRC generated after 2008 that were available for distribution as of September 30, 2012,
a provision of $0.6 million has been made for the Chinese dividend withholding taxes with respect to the distribution of these
amounts to CDEL Hong Kong.
Under the Enterprise Income Tax Law, an enterprise established outside of the PRC with “de facto management bodies” within
the PRC is considered a resident enterprise and will be subject to the enterprise income tax at the rate of 25% on its global income.
The implementation rules define the term “de facto management bodies” as establishments that carry out substantial and overall
management and control over the manufacturing and business operations, personnel, accounting, properties, etc. of an enterprise. The
SAT issued the Notice Regarding the Determination of Chinese-Controlled Offshore Incorporated Enterprises as PRC Tax Resident
Enterprises on the Basis of De Facto Management Bodies, or Circular 82, on April 22, 2009. Circular 82 provides certain specific
criteria for determining whether the “de facto management body” of a Chinese-controlled offshore-incorporated enterprise is located
in China. In addition, the SAT issued a bulletin on August 3, 2011, effective September 1, 2011, providing more guidance on the
implementation of Circular 82. This bulletin clarifies matters including residence status determination, post-determination
administration and competent tax authorities. Although both Circular 82 and the bulletin only apply to offshore enterprises controlled
by PRC enterprises and not those controlled by PRC individuals, the determination criteria set forth in Circular 82 and the bulletin
may reflect the SAT’s general position on how the “de facto management body” test should be applied in determining the tax
residency status of offshore enterprises and how the administration measures should be implemented with respect to such enterprises,
regardless of whether they are controlled by PRC enterprises or PRC individuals. Although we do not believe that our legal entities
organized outside of the PRC constitute PRC resident enterprises, it is possible that the PRC tax authorities could reach a different
conclusion. See “Risk Factors — Risks Relating to Doing Business in China — Under the PRC enterprise income tax law, we may be
classified as a PRC ‘resident enterprise’, which could result in unfavorable tax consequences to us and our shareholders and have a
material adverse effect on our results of operations and the value of your investment.”
Business Tax and Related Surcharges
We are subject to approximately 3.36% business tax and related surcharges on the revenues earned from provision of online
education services, which are recognized net of all business tax and related surcharges. Our other services related revenues are subject
to 3.36% to 5.6% business tax and related surcharges, which are also recognized net of all business tax and related surcharges. Such
business tax and related surcharges net against revenues for the years ended September 30, 2010, 2011 and 2012 are approximately
$1.1 million, $1.3 million and $1.7 million, respectively. In addition, we are subject to 5% (or 5.6% after December 1, 2010) business
tax and related surcharges on service fee received by Champion Technology and Champion Education Technology from Beijing
Champion prior to September 1, 2012, and 5.6% business tax and related surcharges on service fee received by Champion Wangge
from Beijing Champion, which tax and surcharges are included in the cost of services.
Value Added Tax
In accordance with the relevant tax laws in the PRC, value-added tax, or VAT, is calculated based on the sales value of books
and reference materials and is payable by the purchaser. Revenues are recognized net of all VAT imposed by governmental
authorities and collected from customers concurrent with revenue-producing transactions. VAT related to our books and reference
materials sales amounted to approximately $0.5 million, $0.6 million and $0.6 million for the fiscal years ended September 30, 2010,
2011 and 2012, respectively. Starting from September 1, 2012, service fee received by Champion Technology and Champion
Education Technology from Beijing Champion is no longer subject to business tax but subject to VAT and related surcharges at a rate
of 6.72% and 3.36%, respectively. We are required to remit the VAT we collected to the tax authority. Champion Technology is a
VAT general taxpayer and the output VAT liability of Champion Technology is allowed to offset qualified input VAT paid to
suppliers. On the other hand, Champion Education Technology is a VAT small-scale taxpayer and its output VAT liability is not
allowed to offset its input VAT. Net VAT balance between input VAT and output VAT is recorded in either other current liabilities or
other current assets on the consolidated balance sheets.
67
Income (Loss) from discontinued operations
Champion Xinlixiang, which operated our Gaokao retake preparation and high-school supplementary tutoring business that we
acquired in September 2009 from two third-party individuals, incurred significant operating loss in the fiscal year ended
September 30, 2011. As a result, we discontinued such business in September 2011 and sold same to a third-party in May 2012. Prior
year financial statements for the fiscal year of 2010 have reflected the operations of Champion Xinlixiang as a discontinued operation.
The goodwill and non-compete agreement related to Champion Xinlixiang were impaired by $1.4 million and $0.3 million,
respectively, for the fiscal year ended September 30, 2010. In the fiscal year ended September 30, 2011, the related goodwill,
property, plant and equipment, and non-compete agreement were further written down by $0.8 million, $1.0 million and $0.3 million,
respectively, to write down the related carrying amounts to their fair values less cost to sell. The revenue and pretax income (loss)
from the discontinued operations included in our consolidated statement of operations were $2.2 million and $(2.2) million,
respectively, for the year ended September 30, 2010, $1.8 million and $(3.4) million, respectively, for the year ended September 30,
2011 and $1.0 million and $(0.1) million, respectively, for the year ended September 30, 2012.
Critical Accounting Policies
We prepare our consolidated financial statements in conformity with U.S. GAAP, which requires us to make judgments,
estimates and assumptions that affect the reported amounts of our assets and liabilities, disclosure of contingent assets and liabilities
on the date of each set of consolidated financial statements and the reported amounts of revenues and expenses during each 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 as a result of
changes in our estimates or changes in the facts or circumstances underlying our estimates and assumptions.
An accounting policy is considered to be critical if it requires an accounting estimate to be made based on assumptions about
matters that are highly uncertain at the time such estimate is made, and if different accounting estimates that reasonably could have
been used, or changes in the accounting estimates that are reasonably likely to occur periodically, could materially impact the
consolidated financial statements. 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 consolidated financial statements as their
application places the most significant demands on our judgment. When reviewing our consolidated financial statements, you should
take into account:
• our critical accounting policies discussed below;
• the related judgments made by us and other uncertainties affecting the application of these policies;
• the sensitivity of our reported results to changes in prevailing facts and circumstances and our related estimates and
assumptions; and
• the risks and uncertainties described under “Item 3.D. Key Information — Risk Factors.”
See Note 2 to our audited consolidated financial statements included in this annual report for additional information regarding
our significant accounting policies.
68
Consolidation of Variable Interest Entity
We conduct substantially all of our education business through Beijing Champion, our variable interest entity, and its
subsidiaries. We have, through our wholly owned subsidiary in the PRC, entered into contractual arrangements with Beijing
Champion and its subsidiaries and its shareholders such that Beijing Champion and its subsidiaries are considered variable interest
entities for which we are considered their primary beneficiary. We believe that the powers of attorney are valid, binding and
enforceable under existing PRC laws and regulations and enable Champion Technology to vote on all matters requiring Beijing
Champion’s shareholder approval. We also believe that the exclusive purchase right contracts provide us with a substantive kick out
right. More specifically, we believe that the terms of the exclusive purchase right contracts are currently exercisable and legally
enforceable under current PRC laws and regulations, and believe that the minimum amount of consideration permitted by the
applicable PRC law to exercise the purchase right does not represent a financial barrier or disincentive for us to currently exercise our
rights under the purchase right contract. Our rights under the powers of attorney and the exclusive purchase right contract give us the
power to control the shareholders of Beijing Champion and thus the power to direct the activities that most significantly impact the
Beijing Champion’s economic performance. We believe that our ability to exercise control, together with the service agreements and
the equity pledge agreements, give us the rights to receive substantially all of the economic benefits from Beijing Champion and its
subsidiaries in consideration for the services provided by Champion Technology. Accordingly, as the primary beneficiary of Beijing
Champion and its subsidiaries and in accordance with U.S. GAAP, we consolidate Beijing Champion’s financial results and assets
and liabilities in our consolidated financial statements.
As advised by Jingtian & Gongcheng, our PRC counsel, our corporate structure in China complies with all existing PRC laws
and regulations. However, our PRC counsel has also advised us that as there are substantial uncertainties regarding the interpretation
and application of PRC laws and regulations, therefore we cannot assure you that the PRC government would agree that our corporate
structure or any of the above contractual arrangements comply with current or future PRC laws or regulations. PRC laws and
regulations governing the validity of these contractual arrangements are uncertain and the relevant governmental authorities may have
broad discretion in interpreting these laws and regulations. See “Item 3. Key Information — D. Risk factors — Risks Related to Our
Corporate Structure and Restrictions on Industry — We rely on contractual arrangements with our affiliated PRC entity and its
shareholders for our China operations, which may not be as effective in providing operational control as direct ownership”, and “The
shareholders of Beijing Champion may have potential conflicts of interest with us, which may materially and adversely affect our
business and financial condition.”
We are a holding company with no material operations of our own. We conduct substantially all of our education business in
China through contractual arrangements with Beijing Champion, our variable interest entity, and its subsidiaries and its shareholders.
See “Item 4. Information on the Company — C. Organizational Structure” for a summary of these contractual arrangements. In the
fiscal years ended September 30, 2010, 2011 and 2012, Beijing Champion and its subsidiaries contributed in aggregate 96%, 98% and
98%, respectively, of our total net revenues. As of the fiscal years ended September 31, 2011 and 2012, Beijing Champion and its
subsidiaries accounted for an aggregate of 43% and 65%, respectively, of our total assets, and 96% and 95%, respectively, of our total
liabilities. Our assets not associated with Beijing Champion and its subsidiaries primarily consist of cash.
Revenue Recognition
We recognize revenues from our services and sales of products when the following four criteria are met: (i) persuasive evidence
of an arrangement exists, (ii) the service has been rendered, (iii) the fees are fixed or determinable, and (iv) collectability is
reasonably assured.
Online education services . We generate most of our revenues from online education services provided to course participants
pursuant to two types of revenue models — a non-refundable course model and a refundable course model.
For online courses using the non-refundable course model, we recognize revenues on a straight line basis over the subscription
period from the customers’ enrollment in the courses to the end of courses. For online courses using the refundable course model, if
the customers complete the courses and fail the professional exams and their scores are within a range provided for in the agreement,
we offer the customers either a full refund or the right to retake the course. The customers must notify us within a 15-30 day period
after the professional examinations scores are released in order to be eligible for the refund or the right to retake the course. The
proceeds from the refundable course model are initially recorded as “refundable fees”. We recognize such revenues upon the
expiration of the customers’ right to either receive a refund or ratably over the course period if the customers decide to retake the
course before the expiration of such right.
69
Customers enroll in online courses mainly through the use of prepaid study cards which are purchased from distributors. We sell
to our distributors prepaid study cards at a discount to the face value of the cards. We recognize the after-discount-selling-price as
revenue over the period the online course is available to the customer, which generally is from the enrollment date to the completion
of the relevant professional examination date. For prepaid study cards that are not activated for course enrollment, we recognize
revenues upon expiration of the cards. Prepaid study cards that have been activated but have not been used to enroll online courses do
not have an expiry date and, therefore, the related revenues will be deferred until they are used to enroll in online courses. Customers
who enroll with us directly are eligible to a refund within a seven-day trial period. Accordingly, revenue recognition would not start
prior to the lapse of the seven-day trial period.
We may, at times, offer volume discounts to our distributors for purchases over a specified amount of prepaid cards during a
specified period of time, generally one year. Because we cannot reasonably estimate the amount of future rebates relating to these
volume discounts, we record a deferred revenue balance for the maximum potential amount of volume discount. If the number of
purchases specified in the volume discount provisions is not reached upon the expiry of the volume discount period, we then
recognize the deferred revenue relating to such volume discount for each study card as revenue over the remaining period that the
online course is available to the user who enrolls using the study card or immediately if the related online course has been completed.
Additionally, we recognize proceeds allocated to the rebate study cards that have never been activated for course enrollment as
revenues upon expiration of the cards.
We also provide student recruiting services and online platform to government agencies which use our online platform to
conduct continuing education services. We earn service fees as a percentage of total tuition fees based on the agreements entered into
with the government agencies. Service fees received are initially recorded as deferred revenue and are recognized as revenue when
course participants complete the stipulated study hours and take the examinations, or on a straight line basis over the subscription
period based on terms of the agreements.
Books and reference materials. We sell books and reference materials to end users directly or through distributors. Revenues
relating to such sales are deferred until cash is collected. Inventory costs of products delivered to distributors for which revenues have
been deferred are presented as “deferred costs” on the consolidated balance sheets.
We also sell books and reference materials together with study cards which allow the customers to take a certain number of on-
line courses for no additional charge. These sales are considered arrangements with two deliverables, consisting of the delivery of
books and reference material and the on-line courses service.
In October 2009, the FASB published FASB ASU 2009-13, Revenue Recognition (Topic 605) — Multiple-Deliverable Revenue
Arrangements. ASU 2009-13 addresses the accounting for multiple-deliverable arrangements to enable vendors to account for
products or services (deliverables) separately rather than as a combined unit. Specifically, this guidance amends the criteria in ASC
Subtopic 605-25, Revenue Recognition-Multiple-Element Arrangements, for separating consideration in multiple-deliverable
arrangements. This guidance establishes a selling price hierarchy for determining the selling price of a deliverable, which is based on:
(a) vendor-specific objective evidence if available (“VSOE”); (b) third-party evidence (“TPE”) if vendor-specific objective is not
available; or (c) estimated selling price (“ESP”) if neither vendor-specific objective evidence nor third-party evidence is available. In
addition, this guidance significantly expands required disclosures related to a vendor’s multiple-deliverable revenue arrangements.
The provisions of ASU 2009-13 are effective prospectively for revenue arrangements entered into or materially modified in fiscal
years beginning on or after June 15, 2010. Early adoption is permitted.
We prospectively adopted ASU 2009-13 to revenue arrangements containing multiple deliverables that were entered into on or
after October 1, 2010. As neither VSOE nor TPE of the deliverables exist due to the significant variability in the prices charged, we
allocate revenues to each deliverable based on their relative selling prices. When ESP is used, we determine the best estimate of
selling price by applying the same pricing policies and methodologies that would be used to determine the price to sell the deliverable
on a standalone basis. We recognize revenues of book and material sales when cash is collected and revenues of the study card over
the subscription period the online course is available to end users who enroll using the study cards or upon expiration of the study
cards. Prior to the adoption of this new guidance, we concluded that sales of books and reference material in these multiple-element
arrangements cannot be accounted for as a separate accounting unit due to a lack of VSOE of the undelivered on-line courses, and
accordingly we recognize the entire revenue over the subscription period that the online course is available to end users who enroll
using the study cards or upon expiration of the study cards.
The adoption of ASU 2009-13 did not have a significant effect on our consolidated financial position or results of operations.
Others. We derive other revenue from provision of offline education services, courseware production services, platform
production services, and others.
70
We recognize revenues from offline training when the training courses are provided. For offline training sponsored by
government authorities, the tuition fees of the training participants are subsidized by the government. We are not able to determine the
enrollment and fees to be earned until such figures are confirmed by government agencies after the completion of services. Therefore,
we recognize revenues from such services upon cash receipt or the receipt of confirmation from government authorities, whichever is
earlier.
We recognize revenues from sales of courseware or platforms, which are designed and developed pursuant to the requests from
customers, when the courseware or platforms are accepted by the customers. We have no significant remaining obligation with
respect to the courseware or platforms upon the acceptance of the customers.
We recognize revenues from other services, including magazine content production, advertising and consulting services, over
the period when such services are provided.
Long-Lived Assets — Property, Plant and Equipment and Intangible Assets
Judgment is required to determine the estimated useful lives of our long-lived assets. Changes in these estimates and
assumptions could materially impact our financial position and results of operations.
We evaluate our long-lived assets or asset group including intangibles with finite lives for impairment whenever events or
changes in circumstances (such as a significant adverse change to market conditions that will impact the future use of the assets)
indicate that the carrying amount of a group of long-lived assets may not be fully recoverable. When these events occur, we evaluate
the impairment by comparing the carrying amount of the assets to future undiscounted net cash flows expected to result from the use
of the assets and their eventual disposition. If the sum of the expected undiscounted cash flows is less than the carrying amount of the
assets, we recognize an impairment loss based on the excess of the carrying amount of the asset group over its fair value, generally
based upon discounted cash flows.
We performed the impairment tests for intangible assets acquired with the acquisitions of Zhengbao Yucai and Champion
Xinlixiang as of September 30, 2010 because both entities performed below expectations. We also performed the impairment tests for
property, plant and equipment and intangible assets acquired with the acquisition of Champion Xinlixiang as of September 30, 2011
as we decided to discontinue the related business. For purposes of the recognition and measurement of an impairment loss of
property, plant and equipment, and intangible assets, the reporting unit, as noted below, is considered the lowest level asset group that
generates identifiable independent cash flows. Because the sum of undiscounted future cash flows expected to generate from the use
and eventual disposition of the business start-up training service exceeded its carrying amount, no impairment of intangible assets of
Zhengbao Yucai was identified as of September 30, 2010. However, the non-compete agreement relating to Champion Xinlixiang
was impaired by US$0.3 million. As of September 30, 2011, the property, plant and equipment, and non-compete agreement relating
to Champion Xinlixiang was further impaired by $1.0 million and $0.3 million, respectively. If different judgments or estimates had
been utilized, material differences could have resulted in the amount and timing of any impairment charge and the related
depreciation and amortization charges.
Goodwill
Goodwill represents the cost of an acquired business in excess of the fair value of identifiable tangible and intangible net assets
purchased. We assign all the assets and liabilities of an acquired business, including goodwill, to reporting units. As of September 30,
2012, we had two reporting units: online education service and business start-up training service. We disposed the reporting unit of
our Gaokao retake business in May, 2012, please see “— Description of Key Line Items — Income (Loss) from discontinued
operations” for more information. We perform our goodwill impairment test on September 30th of each year. Impairment is tested
using a two-step process. The first step compares the fair value of each reporting unit to its carrying amount, including goodwill.
71
If the fair value of a reporting unit exceeds its carrying amount, goodwill is not considered to be impaired and the second step
will not be required. If the carrying amount of a reporting unit exceeds its fair value, the second step compares the implied fair value
of goodwill to the carrying value of a reporting unit’s goodwill. The implied fair value of goodwill is determined in a manner similar
to accounting for a business combination with the allocation of the assessed fair value determined in the first step to the assets and
liabilities of the reporting unit. The excess of the fair value of the reporting unit over the amounts assigned to the assets and liabilities
is the implied fair value of goodwill. An impairment loss is recognized for any excess in the carrying value of goodwill over the
implied fair value of goodwill. Estimating fair value is performed by utilizing various valuation techniques.
The following table sets forth the details of goodwill impairment test as of September 30, 2012:
Estimated fair value
Carrying value net
Percentage by which the fair value exceed the
carrying value
The estimated fair value of goodwill allocated to the
reporting unit
The carrying value of goodwill
Foreign currency adjustment
Goodwill impairment loss
Online
education service
107,180
51,070
Business
start-up
training service
(in thousands of $)
3,135
2,300
109.9%
36.3%
*
5,726
*
*
*
1,785
*
*
Total
110,315
53,370
7,511
*
The second step of goodwill impairment test was not performed for the reporting units of online education service and business
start-up training service.
In determining the fair values of our reporting units as of September 30, 2012, we considered the discounted cash flow method,
or DCF, of the income approach to be more reliable than other approaches. The discounted cash flow for each reporting unit was
projected based on financial forecast developed by management for planning purposes. Cash flows beyond the forecast periods were
estimated using a terminal value calculation, which incorporated historical and forecasted financial trends for each reporting unit.
Specifically, the income approach valuation included a cash flow discount rate at 17% – 35.5% and a terminal value growth rate at
3%. Publicly available information regarding the market capitalization of the Group was also considered in assessing the
reasonableness of the aggregate fair value of all the reporting units estimated using the income approach valuation methodology.
Based on the result of goodwill impairment test as of September 30, 2012, no impairment of goodwill was identified for the reporting
units of online education service and business start-up training service.
The valuations are based on information available as of the impairment review date and are based on expectations and
assumptions that have been deemed reasonable by the management. Any changes in key assumptions, including unanticipated events
and circumstances, may affect the accuracy or validity of such estimates and could potentially result in additional impairment charge.
Income taxes
We follow the liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are
determined based on the difference between the financial reporting and tax bases of assets and liabilities using enacted tax rates that
will be in effect in the period in which the differences are expected to reverse. 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 our income
statement in the period that includes the enactment date. We consider current tax laws and our interpretation of them when we make
our judgments, assumptions and estimates relative to current provision for income tax. We also assess a valuation allowance to offset
deferred tax assets if based on the weight of available evidence, it is more likely than not that some portion, or all, of the deferred tax
assets will not be realized. Such evidence includes our estimates of future taxable income and tax planning strategies. Changes in
relevant tax laws, and our judgments, assumptions and estimates relative to current provision for income tax could have resulted in
material differences in the amount of income taxes provided in our consolidated financial statements.
72
Effective October 1, 2007, we adopted the recognition and measurement methods under the authoritative interpretation
regarding the accounting and disclosure for uncertainty in tax positions. The guidance requires that we recognize the impact of a tax
position in the financial statements if that position is more likely than not of being sustained upon audit by the tax authority, based on
the technical merits of the position. The amount recognized is measured as the largest amount of benefit that is more likely than not of
being realized upon ultimate settlement. Based on this assessment, as of September 30, 2010, 2011 and 2012, respectively, we have
recognized an approximately $0.2 million, $0.2 million and $0.2 million accrual for unrecognized tax benefits which is included in
the account of “accrued expenses and other liabilities”. The final outcome of the tax uncertainty is dependent upon various matters
including tax examinations, interpretation of tax laws or expiration of statutes of limitation. We recognize, if any, interest related to
unrecognized tax benefit in interest expense and penalties in other expenses. Changes in relevant tax laws, and our judgments,
assumptions and estimates relative to current provision for income tax could have resulted in material differences in the amount of
income taxes provided in our consolidated financial statements.
Uncertainties exist with respect to how PRC’s New EIT Law applies to our overall operations, and more specifically, with
regard to our tax residency status. The New EIT Law includes a provision specifying that legal entities organized outside of the PRC
will be considered residents for PRC income tax purposes if their place of effective management or control is within the PRC. The
implementation rules to the New EIT Law provide that non-resident legal entities will be considered PRC residents if substantial and
overall management and control over the manufacturing and business operations, personnel, accounting, properties, among others,
occur within the PRC. Despite the present uncertainties resulting from the limited PRC tax guidance on the issue, we do not believe
that our legal entities organized outside of the PRC should be treated as residents for the Enterprise Income Tax Law’s purposes. If
one or more of our legal entities organized outside of the PRC were characterized as PRC tax residents, the impact would adversely
affect our results of operation. See “Item 3.D. Key Information — Risk Factors — General Risks Relating to Conducting Business in
China — Under China’s New EIT Law, we may be classified as a “resident enterprise” of China. Such classification could result in
unfavorable tax consequences to us and our non-PRC shareholders.”
Inventory Obsolescence
We evaluate our inventory for impairment on a quarterly or more frequent basis whenever events or changes in circumstances —
such as the levels of inventory versus customer requirements and obsolescence, the product life cycle status, and the aging analysis of
the inventory — indicate that the carrying amount of inventories may not be fully recoverable. The evaluation also involves
consideration of the market prices of inventories. At each balance sheet date, we identify inventories that are worth less than cost and
write them down to lower of cost or market prices and the difference is expensed to our cost of sales for that period. Although we
consider such write-down of inventories to be adequate and proper, different judgments or estimates could have resulted material
differences in the amount and timing of any write-downs and the related amount expensed to our cost of sales.
Share-based Compensation Expenses
In the fiscal years ended September 30, 2010 and 2011, we granted to our non-executive directors and employees share-based
compensation awards subject to various graded vesting under the New Plan. In addition, we further reduced the exercise price of
8,066,700 and 1,398,300 outstanding share options under the Prior Plan from $0.82 per share to $0.615, which equaled the closing
price of our ADSs on NYSE on September 27, 2011, and zero per share, respectively. Furthermore, the re-priced options had been
accelerated to be fully vested on the same day.
Share-based payment transactions with employees and non-executive directors are measured based on the grant-date fair value
of the equity instrument issued and recognized as compensation expense over the requisite service period, with a corresponding
addition to paid-in capital. We recognize compensation expense over the vesting term on a straight-line basis with the amount of
compensation expense recognized during any period not less than the portion of the grant-date value of the option vested during that
period.
Share-based payment transactions with non-employees are measured based on the fair value at the earlier of the commitment
date or the date at which the non-employee’s performance is complete. We recognize compensation expense using the graded vesting
attribution method.
In addition, the total incremental compensation expense resulting from the modifications of the exercise price and vesting period
of all outstanding share options under the Prior Plan is recognized over the remaining requisite service period for such employees and
non-employees, respectively.
73
We estimated the fair value of each option award granted to employees, and non-employees under the Prior Plan using the
Black-Scholes Option Pricing Model. We also estimated the fair value of each option award granted to non-executive directors and
employees under the New Plan using the Black-Scholes Option Pricing Model. The volatility assumption was estimated based on the
price volatility of the shares of education companies that are publicly traded on securities markets in the United States and selected by
us as guideline companies because we did not have sufficient historical data to calculate expected volatility of the price of the
underlying ordinary shares over the expected term of the options. The expected term was estimated based on the vesting, contractual
terms and our expectation of exercise behavior of the option grantees. The risk-free rate was based on the market yield of China
Sovereign Bonds denominated in US$ with maturity terms equal to the expected term of the option awards. Prior to the completion of
initial public offering in July 2008, when estimating the fair value of the ordinary shares on the grant date, we considered a number of
factors, including our financial condition, financial and operating prospects with reference to our equity transactions at that time.
After our initial public offering, the closing market price of our ordinary shares on the grant date or measurement date was used as the
fair value of our ordinary shares on that date.
We estimated forfeitures at the time of grant based on our historical experiences and record share-based compensation expenses
only for those awards that are expected to vest. Changes in estimated forfeitures will be recognized through a cumulative catch-up
adjustment in the period of change and will also impact the amount of stock compensation expense to be recognized in future periods.
Recent Accounting Pronouncements
In May 2011, the Financial Accounting Standard Board (“FASB”) issued an authoritative pronouncement on fair value
measurement. The guidance is the result of joint efforts by the FASB and International Accounting Standards Board to develop a
single, converged fair value framework. The guidance is largely consistent with existing fair value measurement principles in U.S.
GAAP. The guidance expands the existing disclosure requirements for fair value measurements and makes other amendments, mainly
including:
• Highest-and-best-use and valuation-premise concepts for non-financial assets – the guidance indicates that the highest-and-
best-use and valuation-premise concepts only apply to measuring the fair value of non-financial assets.
• Application to financial assets and financial liabilities with offsetting positions in market risks or counterparty credit risk – the
guidance permits an exception to fair value measurement principles for financial assets and financial liabilities (and
derivatives) with offsetting positions in market risks or counterparty credit risk when several criteria are met. When the
criteria are met, an entity can measure the fair value of the net risk position.
• Premiums or discounts in fair value measure – the guidance provides that premiums or discounts that reflect size as a
characteristic of the reporting entity’s holding (specifically, a blockage factor that adjusts the quoted price of an asset or a
liability because the market’s normal daily trading volume is not sufficient to absorb the quantity held by the entity) rather
than as a characteristic of the asset or liability (for example, a control premium when measuring the fair value of a controlling
interest) are not permitted in a fair value measurement.
• Fair value of an instrument classified in a reporting entity’s stockholders’ equity – the guidance prescribes a model for
measuring the fair value of an instrument classified in stockholders’ equity; this model is consistent with the guidance on
measuring the fair value of liabilities.
• Disclosures about fair value measurements –the guidance expands disclosure requirements, particularly for Level 3 inputs.
Required disclosures include:
(i) For fair value measurements categorized in Level 3 of the fair value hierarchy: (1) a quantitative disclosure of the
unobservable inputs and assumptions used in the measurement, (2) a description of the valuation process in place (e.g., how the entity
decides its valuation policies and procedures, as well as changes in its analyses of fair value measurements, from period to period),
and (3) a narrative description of the sensitivity of the fair value to changes in unobservable inputs and interrelationships between
those inputs.
(ii) The level in the fair value hierarchy of items that are not measured at fair value in the statement of financial position but
whose fair value must be disclosed.
The guidance is to be applied prospectively and is effective for interim and annual periods beginning after December 15, 2011,
for public entities. Early application by public entities is not permitted. We do not expect the adoption of this guidance to have a
significant effect on our consolidated financial statements.
74
In June 2011, the FASB issued an authoritative pronouncement to require an entity to present the total of comprehensive
income, the components of net income, and the components of other comprehensive income either in a single continuous statement of
comprehensive income or in two separate but consecutive statements. In either case, an entity is required to present each component
of net income along with total net income, each component of other comprehensive income along with a total amount for other
comprehensive income, and a total amount for comprehensive income. The guidance eliminates the option to present the components
of other comprehensive income as part of the statement of changes in stockholders’ equity. The guidance does not change the items
that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net
income. The guidance should be applied retrospectively. For public entities, the guidance is effective for fiscal years and interim
periods within those years, beginning after December 15, 2011. Early adoption is permitted. In December 2011, the FASB issued an
authoritative pronouncement related to deferral of the effective date for amendments to the presentation of reclassifications of items
out of accumulated other comprehensive income. This guidance allows the FASB to redeliberate whether to present on the face of the
financial statements the effects of reclassifications out of accumulated other comprehensive income on the components of net income
and other comprehensive income for all periods presented. While the FASB is considering the operational issues about the
presentation requirements for reclassification adjustments and the needs of financial statement users for additional information about
reclassification adjustments, entities should continue to report reclassifications out of accumulated other comprehensive income
consistent with the presentation requirements in effect before the FASB updates the pronouncement issued in June 2011. We chose
early adoption of this guidance. The adoption of this guidance did not have a significant effect on our Company’s consolidated
financial statements.
In September 2011, the FASB issued an authoritative pronouncement related to testing goodwill for impairment. The guidance is
intended to simplify how entities, both public and nonpublic, test goodwill for impairment. The guidance permits an entity to first
assess qualitative factors to determine whether it is “more likely than not” that the fair value of a reporting unit is less than its carrying
amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test. The guidance is effective
for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. Early adoption is
permitted, including for annual and interim goodwill impairment tests performed as of a date before September 15, 2011, if a public
entity’s financial statements for the most recent annual or interim period have not yet been issued. We do not expect the adoption of
this pronouncement to have a significant impact on our financial condition or results of operations.
In December 2011, the FASB has issued an authoritative pronouncement entitled “Disclosures about Offsetting Assets and
Liabilities.” The guidance requires an entity to disclose information about offsetting and related arrangements to enable users of its
financial statements to understand the effect of those arrangements on its financial position. An entity is required to apply the
amendments for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods. An
entity should provide the disclosures required by those amendments retroactively for all comparative periods presented. We do not
expect the adoption of this pronouncement to have a significant impact on our financial condition or results of operations.
In July 2012, the FASB issued an authoritative pronouncement related to testing indefinite-lived intangible assets, other than
goodwill, for impairment. Under the pronouncement, entities testing indefinite-lived intangible assets for impairment would have the
option of performing a qualitative assessment before calculating the fair value of the asset. If an entity determines, on the basis of
qualitative factors, that the indefinite-lived intangible asset is not more likely than not impaired, a quantitative fair value calculation
would not be needed. The amendments are effective for annual and interim impairment tests performed for fiscal years beginning
after September 15, 2012. Early adoption is permitted. We do not expect the adoption of this pronouncement to have a significant
impact on our consolidated financial condition or results from operations.
75
Results of Operations
The following table sets forth a summary, for the periods indicated, of our consolidated results of operations and each item
expressed as a percentage of our total net revenues. Our historical results presented below are not necessarily indicative of the results
that may be expected for any future period.
2010
$
% of net
revenues
Years Ended September 30,
2011
% of net
revenues
$
2012
$
% of net
revenues
Net Revenues
Online education services
Books and reference materials
Others
Total net revenues
Cost of sales:
Cost of services
Cost of tangible goods sold
(In thousands, except for percentages)
23,982
3,939
4,658
73.6%
12.1%
14.3%
30,788
4,743
6,033
74.1%
11.4%
14.5%
40,281
4,438
7,383
77.3%
8.5%
14.2%
32,579
100.0%
41,564
100.0%
52,102
100.0%
(13,283)
(2,070)
(40.8)%
(6.3)%
(16,840)
(2,794)
(40.5)%
(6.7)%
(20,494)
(2,587)
(39.3)%
(5.0)%
Total cost of sales
(15,353)
(47.1)% (19,634)
(47.2)%
(23,081)
(44.3)%
Gross profit
Operating expenses:
Selling expenses
General and administrative expenses
Impairment of purchased call option
Total operating expenses
Other operating income
Operating income (loss)
Interest income
Exchange loss
Income (loss) before income taxes
Less: Income tax expense
17,226
52.9%
21,930
52.8%
29,021
55.7%
(7,176)
(10,535)
(162)
(22.0)% (9,771)
(12,221)
(32.4)%
(1,115)
(0.5)%
(23.5)%
(29.4)%
(2.7)%
(11,337)
(8,248)
— —
(21.8)%
(15.8)%
(17,873)
74
(54.9)% (23,107)
603
0.2%
(55.6)%
1.5%
(19,585)
58
(37.6)%
0.1%
(573)
458
(66)
(181)
(575)
(1.8)%
1.4%
(0.2)%
(0.6)%
(1.8)%
(574)
883
(143)
166
(971)
(1.3)%
2.1%
(0.3)%
9,494
1,119
(40)
18.2%
2.1%
(0.1)%
0.5%
(2.3)%
10,573
(2,600)
20.3%
(5.0)%
Net income (loss) from continuing operations
Net loss of continuing operations attributable to
noncontrolling interest
(756)
(2.4)%
(805)
(1.8)%
7,973
15.3%
911
2.8%
303
0.7%
— —
Net income (loss) from continuing operations attributable to
China Distance Education Holdings Limited
Net income (loss) from discontinued operations attributable to
China Distance Education Holdings Limited, net of tax
155
0.4%
(502)
(1.1)%
7,973
15.3%
(2,053)
(6.2)% (3,300)
(8.0)%
236
0.5%
Net income (loss) attributable to China Distance
Education Holdings Limited
(1,898)
(5.8)%
(3,802)
(9.1)%
8,209
15.8%
Fiscal Year Ended September 30, 2012 Compared to Fiscal Year Ended September 30, 2011
Net Revenues
Our total net revenues increased by 25.4% to $52.1 million in the fiscal year ended September 30, 2012 from $41.6 million in
the fiscal year ended September 30, 2011, as a result of growth in sales of our online education services and other products and
services.
76
Online education services. Net revenues from our online education services increased by 30.8% to $40.3 million in the fiscal
year ended September 30, 2012 from $30.8 million in the fiscal year ended September 30, 2011. This increase was primarily due to
overall growth in the total number of our online course enrollments to 2,170,000 in the fiscal year ended September 30, 2012 from
1,578,000 in the fiscal year ended September 30, 2011. Our accounting courses continued to account for the majority of our course
enrollments with a total enrollment of approximately 1,836,000 in the fiscal year ended September 30, 2012 while enrollments in our
self-taught study process monitoring programs for self-taught learners and our healthcare and construction engineering courses also
increased. Of this revenue increase, our accounting courses including Registered Tax Agent Qualification Examination courses,
Accounting Professional Qualification Examination courses, accounting continuing education courses, CPA Qualification
Examination courses (“CPA Exam”), and Elementary, Intermediate and Advanced Level Accounting Professional Qualification
Examinations (“APQE Exams”) courses, generated revenues of approximately $2.6 million, $2.7 million, $4.7 million, $5.8 million,
and $9.0 million, respectively, in the fiscal year ended September 30, 2012. In addition, our construction engineering and healthcare
courses generated revenues of approximately $2.8 million and $6.2 million, respectively, in the fiscal year ended September 30, 2012.
Furthermore, our revenue increase was also contributed by online education course service deliverable of books and reference
materials of $1.8 million. Our net revenue growth rate in the fiscal year ended September 30, 2012 was partially impacted by the
postponement of the exam dates of APQE Exams and CPA Exam, overall decrease in enrollment of our Intermediate Level APQE
Exam courses from approximately 116,000 in the fiscal year ended September 30, 2011 to approximately 109,000 in the fiscal year
ended September 30, 2012.
Books and reference materials. After reallocating revenue of $1.8 million from the online education course service deliverable
of books and reference materials to online education services net revenues, net revenues from our sales of books and reference
materials decreased by 6.4% to $4.4 million in the fiscal year ended September 30, 2012 from $4.7 million in the fiscal year ended
September 30, 2011, which was also after the reallocation of $0.8 million to online education services net revenues.
Others. Our other net revenues increased to $7.4 million in the fiscal year ended September 30, 2012 from $6.0 million in the
fiscal year ended September 30, 2011, primarily due to revenue generated from business start-up training courses, and in-person
accounting and healthcare professional training to accounting firms and the general public. Our growth in revenue from others in the
fiscal year ended September 30, 2012 was partially impacted by the decrease in revenues of our course production services, primary
and secondary school supplementary courses, and magazine content production services. Other revenues also included sales of tax
and accounting related services through our www.chinaacc.com website, and, to a lesser extent, other value-added services offered
through our websites.
Gross Profit
Our gross profit increased by 32.3% to $29.0 million in the fiscal year ended September 30, 2012 from $21.9 million in the
fiscal year ended September 30, 2011. Our gross margin increased to 55.7% in the fiscal year ended September 30, 2012 from 52.8%
in the fiscal year ended September 30, 2011. The increase in gross margin was primarily driven by relatively slower growth in salaries
and related expenses, rental and related expenses, decreased share-based compensation expenses, and revenue increase in our product
mix of the higher margin books and reference materials. The increase was partially offset by the significant growth in fees paid to our
lecturers due to our expanded course offerings, more course production hours and higher hourly lecturer fees, and server management
and bandwidth leasing fees paid to third-party providers due to launch of high-definition courses.
Operating Expenses
Our operating expenses decreased by 15.2% to $19.6 million in the fiscal year ended September 30, 2012 from $23.1 million in
the fiscal year ended September 30, 2011, primarily as a result of decrease in freight and delivery expenses, advertising and
promotion expenses, professional fees, bad debts provision, and share-based compensation expenses, and no impairment item arising
from Zhengbao Yucai. The effect was partially offset by the significant increase in salaries and related expenses, and commissions
paid to our agents.
Selling expenses. Our selling expenses increased by 16.0% to $11.3 million in the fiscal year ended September 30, 2012 from
$9.8 million in the fiscal year ended September 30, 2011. This increase resulted primarily from significant increase in commissions
paid to agents due to an increase in the sales of our courses, rental and related expenses for our office facilities, and higher salaries
and welfare expenses in sales and marketing service as we maintained our sales and marketing staff at a high level to promote our
business, and in customer service as we significantly increased the number of our customer service staff with the increase in the
number of course enrollments and other customers. Such increase was partially offset by the decrease in advertising and promotion
expenses, and share-based compensation expenses.
77
General and administrative expenses. Our general and administrative expenses decreased by 32.5% to $8.2 million in the fiscal
year ended September 30, 2012 from $12.2 million in the fiscal year ended September 30, 2011. This decrease was primarily due to
significant decrease in professional fees, bad debts provision (from $1.2 million in the fiscal year ended September 30, 2011 to $0.2
million in the fiscal year ended September 30, 2012), and share-based compensation expenses. Such decrease was partially offset by
the increase in salaries and related expenses.
Impairment of purchased call option. The option to acquire additional equity interest in Zhengbao Yucai of $1.1 million was
fully impaired in the fiscal year ended September 30, 2011 and there was no such impairment in the fiscal year ended September 30,
2012.
Other Operating Income
In the fiscal year ended September 30, 2012, we had other operating income of $58,000 which mainly was compensation from
defendants with respect to infringement of our copyrights. In the fiscal year ended September 30, 2011, we had other operating
income of $0.6 million which mainly was compensation we received from Mr. Liang Ma under the arbitral awards from CIETAC in
June 2011.
Income taxes
Income tax expense for the fiscal year ended September 30, 2012 was $2.6 million, compared with an income tax expense of
$1.0 million in the fiscal year ended September 30, 2011. The significant increase in income tax expense was mainly due to the
increase of taxable income generated from PRC in fiscal year 2012 compared with fiscal year 2011, the provision of withholding tax
applicable to the profits of our PRC subsidiaries generated after 2008 that we expect to distribute to our Hong Kong subsidiary, and
the valuation allowance on deferred tax assets arising from bad debts provision made for certain accounts receivable with respect to
the business start-up training business.
Income (Loss) from discontinued operations
Champion Xinlixiang, which operated our Gaokao retake preparation and high-school supplementary tutoring business that we
acquired in September 2009 from two third-party individuals, incurred significant operating loss in the fiscal year ended
September 30, 2011. As a result, we discontinued such business in September 2011 and sold same to a third-party in May 2012.
In conjunction with the discontinuance of operations and to write down the related carrying amounts to their fair values less cost
to sell, the goodwill, property, plant and equipment, and non-compete agreement relating to Champion Xinlixiang were impaired by
$0.8 million, $1.0 million and $0.3 million, respectively, for the fiscal year ended September 30, 2011. There was no impairment of
the above three items in the fiscal year ended September 30, 2012.
The revenue and pre-tax income (loss) from the discontinued operations included in our consolidated statement of operations
were $1.0 million and $(0.1) million, respectively, for the year ended September 30, 2012, as compared to $1.8 million and $(3.4)
million, respectively, for the year ended September 30, 2011.
Net Income (Loss)
As a result of the above factors, our net income was $8.2 million in the fiscal year ended September 30, 2012, compared to a net
loss of $3.8 million in the fiscal year ended September 30, 2011.
Fiscal Year Ended September 30, 2011 Compared to Fiscal Year Ended September 30, 2010
Net Revenues
Our total net revenues increased by 27.6% to $41.6 million in the fiscal year ended September 30, 2011 from $32.6 million in
the fiscal year ended September 30, 2010, as a result of growth in sales of our online education services, books and reference
materials, and other products and services.
78
Online education services. Net revenues from our online education services increased by 28.4% to $30.8 million in the fiscal
year ended September 30, 2011 from $24.0 million in the fiscal year ended September 30, 2010. This increase was primarily due to
overall growth in the total number of our online course enrollments to 1,578,000 in the fiscal year ended September 30, 2011 from
over 1,211,000 in the fiscal year ended September 30, 2010. Our accounting courses continued to account for the majority of our
course enrollments with a total enrollment of approximately 1,320,000 in the fiscal year ended September 30, 2011 while enrollments
in our self-taught study process monitoring programs for self-taught learners and our healthcare and construction engineering courses
also increased. Of this revenue increase, our Accounting Professional Qualification Examination courses, CPA Qualification
Examination courses, Elementary, Intermediate and Advanced Level Accounting Professional Qualification Examinations courses,
courses to self-taught learners, construction engineering courses, and healthcare courses generated revenues of approximately $1.3
million, $5.0 million, $7.8 million, $1.2 million, $1.9 million, and $4.6 million, respectively, in the fiscal year ended September 30,
2011. Our revenue growth rate in the fiscal year ended September 30, 2011 was partially impacted by the overall decrease in
enrollment of our CPA Qualification Examination courses, and Elementary, Intermediate and Advanced Level Accounting
Professional Qualification Examinations courses from approximately 120,000 and 216,000 in the fiscal year ended September 30,
2010 to approximately 111,000 and 193,000, respectively in the fiscal year ended September 30, 2011.
Books and reference materials. Net revenues from our sales of books and reference materials increased by 20.4% to $4.7 million
in the fiscal year ended September 30, 2011 from $3.9 million in the fiscal year ended September 30, 2010. The increase in our books
and reference materials revenues was due primarily to an overall increase in books and reference materials sales.
Others. Our other net revenues increased to $6.0 million in the fiscal year ended September 30, 2011 from $4.7 million in the
fiscal year ended September 30, 2010, primarily due to revenues generated from business start-up training courses and primary and
secondary school supplementary courses. Our other revenue growth rate in the fiscal year ended September 30, 2011 was partially
impacted by the decrease in revenues of our platform production services, course production services, and information technology
related services. Other revenues also included sales of magazine content production services, tax and accounting related services
through our www.chinaacc.com website, in-person accounting and healthcare professional training to accounting firms and the
general public, and, to a lesser extent, other value-added services offered through our websites.
Gross Profit
Our gross profit increased by 27.3% to $21.9 million in the fiscal year ended September 30, 2011 from $17.2 million in the
fiscal year ended September 30, 2010. Our gross margin decreased slightly to 52.8% in the fiscal year ended September 30, 2011
from 52.9% in the fiscal year ended September 30, 2010. The decrease in gross margin was primarily driven by the relatively
significant growth in fees paid to our lecturers due to our expanded course offerings, increase in hourly lecturer fees for existing
online course offerings and expansion of in-person accounting and healthcare professional training to the public. The impact was
partially offset by relative low growth in salaries and related expenses, rental and related expenses, server management and bandwidth
leasing fees paid to third-party providers, share-based compensation expenses, and revenue increase in our product mix of the higher
margin books and reference materials.
Operating Expenses
Our operating expenses increased by 29.3% to $23.1 million in the fiscal year ended September 30, 2011 from $17.9 million in
the fiscal year ended September 30, 2010, primarily as a result of additional share-based compensation expenses arising from the re-
pricing and acceleration of the vesting of our share options granted under the Prior Plan in the fourth quarter of the fiscal year ended
September 30, 2011, impairment of purchased call option acquired with the acquisition of Zhengbao Yucai, significant increase in
advertising and promotional activities, and significant increase in commissions paid to agents. Such increase was partially offset by
the relatively slower growth in overall salaries and related expenses and decreased bad debts provision.
Selling expenses. Our selling expenses increased by 36.2% to $9.8 million in the fiscal year ended September 30, 2011 from
$7.2 million in the fiscal year ended September 30, 2010. This increase resulted primarily from significant increase in advertising and
promotional activities to promote our business and brand names, significant increase in commissions paid to agents due to an increase
in the sales of our courses, and higher salaries and welfare expenses in sales and marketing service as we significantly increased our
sales and marketing staff to promote our business.
79
General and administrative expenses. Our general and administrative expenses increased by 16.0% to $12.2 million in the fiscal
year ended September 30, 2011 from $10.5 million in the fiscal year ended September 30, 2010. This increase was primarily due to
$3.3 million of share-based compensation expenses we incurred in the fiscal year ended September 30, 2011. This was offset by the
decrease in bad debts provision made for certain accounts receivables that have been outstanding for more than 360 days from $2.2
million in the fiscal year ended September 30, 2010 to $1.2 million in the fiscal year ended September 30, 2011. Our administrative
staff salaries and related expenses increased to $2.9 million. Our professional fees increased to $2.2 million. Some of our other
components of general and administrative expenses also increased due to the expansion of our business.
Impairment of purchased call option. Zhengbao Yucai, which operates the business of start-up training services that we acquired
in March 2009, incurred net losses for the fiscal years of 2009 and 2010. In addition, in late 2009, we noted that Mr. Liang Ma,
Yinglun Yucai, a company owned by Mr. Liang Ma, and Global Education Consortium Group Co., Limited, a company owned by
Mr. Liang Ma’s wife, engaged in competing businesses, which is prohibited under the purchase agreement. As a result, we filed an
arbitration application in January 2010 with the China International Economic and Trade Arbitration Commission, or CIETAC,
against Mr. Liang Ma and the other related parties. In June 2011, CIETAC, ruled, among other things, that Mr. Liang Ma shall
surrender his 40% ownership interest in Zhengbao Yucai to us for no consideration. As a result, the option to acquire additional
equity interest in Zhengbao Yucai of $1.1 million was fully impaired in the fiscal year ended September 30, 2011.
Other Operating Income
In the fiscal year ended September 30, 2011, we had other operating income of $0.6 million which mainly was compensation we
received from Mr. Liang Ma under the arbitral awards from CIETAC in June 2011. In the fiscal year ended September 30, 2010, we
had other operating income of $0.07 million which was a one-time subsidy we received from the Beijing Haidian District Bureau of
Finance for one of our trademarks being recognized as a renowned trademark.
Income taxes
Income tax expense for the fiscal year ended September 30, 2011 was $1.0 million, compared with an income tax expense of
$0.6 million in the fiscal year ended September 30, 2010. The change in income tax expense was mainly due to the increase of taxable
income generated from PRC in fiscal year 2011 compared with fiscal year 2010.
Income (Loss) from discontinued operations
Champion Xinlixiang, which operated our Gaokao retake preparation and high-school supplementary tutoring business that we
acquired in September 2009 from two third-party individuals, incurred significant operating loss in the fiscal year ended
September 30, 2011. As a result, we decided to discontinue such business and put the related assets and business up for sale.
In conjunction with the planned discontinuance of operations and to write down the related carrying amounts to their fair values
less cost to sell, the goodwill, property, plant and equipment, and non-compete agreement relating to Champion Xinlixiang were
impaired by $0.8 million, $1.0 million and $0.3 million, respectively, for the fiscal year ended September 30, 2011, as compared to
$1.4 million, nil and $0.3 million, respectively, for the fiscal year ended September 30, 2010.
The revenue and pre-tax loss from the discontinued operations included in our consolidated statement of operations were $1.8
million and $3.4 million, respectively, for the year ended September 30, 2011, as compared to $2.2 million and $2.2 million,
respectively, for the year ended September 30, 2010.
Net Loss
As a result of the above factors, we incurred a net loss of $3.8 million in the fiscal year ended September 30, 2011, compared to
a net loss of $1.9 million in the fiscal year ended September 30, 2010.
B. Liquidity and Capital Resources
Historically, we have financed our operations primarily through internally generated cash. As of September 30, 2010, 2011 and
2012, we had approximately $60.2 million, $60.3 million and $57.7 million in cash and cash equivalents, including bank term
deposits and restricted cash, respectively. As of September 30, 2012, our cash and cash equivalents of $49.7 million primarily
consisted of cash on hand, bank deposits, and AAA rated money market funds which are unrestricted as to withdrawal and use and are
deposited with banks in China and Hong Kong. We intend to finance our future working capital requirements and capital expenditures
from net cash generated from operating activities and existing cash and cash equivalents. In the opinion of the Company, our working
capital is sufficient for our present requirements.
80
Our PRC subsidiaries and consolidated affiliated entities, in the aggregate, held RMB262.0 million (US$41.7 million) in cash
and cash equivalents, bank term deposits and restricted cash, as of December 31, 2012. For information regarding restrictions and
potential tax liabilities on profit distribution from these entities, please see “Risk Factors — Risks Relating to Conducting Business in
China — A failure by our shareholders or beneficial owners who are PRC citizens or residents to comply with certain PRC foreign
exchange regulations could restrict our ability to distribute profits, restrict our overseas and cross-border investment activities or
subject us to liability under PRC laws, which could adversely affect our business and financial condition”, and “— Restrictions on
currency exchange may limit our ability to utilize our revenues effectively and the ability of our PRC subsidiaries to obtain
financing.”
Our PRC subsidiaries and our consolidated affiliated entities generally earn their revenues in Renminbi which is not a freely
convertible currency. Although our PRC subsidiaries generally may convert Renminbi into foreign currency to pay dividends, our
PRC subsidiaries must follow specific procedural requirements which could result in delay or which could change in the future. In
addition, each of our PRC subsidiaries may pay dividends only out of its accumulated distributable profits, if any, determined in
accordance with its articles of association and the accounting standards and regulations in the PRC. Pursuant to applicable PRC laws
and regulations, 10% of the after-tax profits of each of our PRC subsidiaries are required to be set aside in a statutory surplus reserve
fund each year until the reserve balance reaches 50% of such PRC subsidiary’s registered capital. Allocations to these statutory
reserves may only be used for specific purposes and are not distributable to us in the form of loans, advances or cash dividends. As a
result of these PRC restrictions, our PRC subsidiaries and consolidated affiliated entities are restricted in their ability to transfer a
portion of their net assets to CDEL Cayman (either in the form of dividends, loans or advances), which restricted portion as calculated
under US GAAP amounted to approximately RMB99.6 million (US$$15.6 million) and RMB112.1 million (US$$17.8 million),
respectively, as of December 31, 2011 and 2012.
We are a holding company incorporated under the laws of the Cayman Islands. We derive a substantial majority of our income
from the business operation of our PRC subsidiaries and consolidated affiliated entities in China. Prior to January 1, 2008, dividends
derived by foreign enterprises from business operations in China were not subject to the PRC enterprise income tax. However, such
tax exemption ceased after January 1, 2008 with the effectiveness of the Enterprise Income Tax Law and a withholding tax rate of
10% will apply to such dividends, unless any such foreign investor’s jurisdiction of incorporation has a tax treaty with China that
provides for a preferential withholding arrangement. $6.7 million earnings of our subsidiaries located in the PRC that are available for
distribution as of September 30, 2012 were distributed to CDEL Hong Kong in December 2012, which were generated before 2008
and were not subject to any Chinese dividend withholding taxes. For earnings of our subsidiaries located in the PRC generated after
2008 that were available for distribution as of September 30, 2012, provision has been made for the Chinese dividend withholding
taxes with respect to the distribution of these amounts to CDEL Hong Kong. The economic benefits of our PRC consolidated
affiliated entity Beijing Champion are mainly transferred to our PRC subsidiaries Champion Education Technology and Champion
Technology through payment of service fees and licensing fees under the Software License Agreement, Courseware Production
Entrustment Agreement, Technical Support and Consultancy Services Agreement and Courseware License Agreement entered into
between Beijing Champion, Champion Education Technology and Champion Technology. Such service fees and licensing fees are
subject to PRC business tax (or VAT since September 1, 2012) and related surcharges. Upon receipt of such fees, they will become a
portion of revenues for Champion Education Technology and Champion Technology and can be remitted to the Cayman Islands
holding company in the form of dividend distribution.
81
On November 20, 2008, we announced the adoption by our board of directors of a share repurchase program. The program
authorized us to repurchase up to $10 million worth of our issued and outstanding ADSs from time to time in open market
transactions on the NYSE (or NYSE Arca, prior to February 4, 2009). We implemented this share repurchase program over the 12
months starting from November 20, 2008, in a manner consistent with market conditions and the interest of our shareholders. Our
board decided to extend the share repurchase program for 12 months in November 2009 and November 2010, respectively, and it was
scheduled to end on November 19, 2011. During the extension period from November 20, 2010 to November 19, 2011, we were
authorized to repurchase up to $3.8 million of our issued and outstanding ADSs, with such $3.8 million representing the unused
portion of the $10 million previously approved by the board. On April 29, 2011, the board of directors approved an increase of the
repurchase quota under the share repurchase program. The expanded share repurchase program authorizes the repurchase of up to an
additional $10 million of our ADSs (which makes the total repurchase quota under the share repurchase program $20 million ADSs)
and would be valid until April 28, 2012. On February 28, 2012, the board of directors decided to further extend the share repurchase
program for 12 months until April 28, 2013. The repurchases will be made at prevailing market prices, in negotiated transactions off
the market, in block trades, pursuant to Rule 10b-18 of the Exchange Act and a 10b5-1 plan (the 10b5-1 plan allows us to repurchase
our ADSs during periods in which we may be in possession of material non-public information) or otherwise. The purchases will be
made subject to restrictions relating to volume, price and timing. The timing and extent of any purchases will depend upon market
conditions, the trading price of our ADSs and other factors. Our board of directors will review the share repurchase program
periodically, and may authorize adjustment of its terms and size accordingly. As of December 31, 2012, we had repurchased an
aggregate of 3,920,463 ADSs, representing 15,681,852 ordinary shares, on the open market for a total cash consideration of $15.1
million. We do not expect any share repurchases carried out under the share repurchase program to have a material impact on our
liquidity or capital resources.
The following table summarizes our cash flows in the fiscal years ended September 30, 2010, 2011 and 2012:
Net cash generated from operating activities
Net cash generated from (used in) investing activities
Net cash used in financing activities
Exchange rate effect on cash and cash equivalents
For the Year Ended September 30,
2012
2011
2010
$
$
$
(In thousands)
9,192
(9,843)
(8,063)
906
7,653
31,420
(2,109)
354
15,063
471
(17,168)
410
Net (decrease) increase in cash and cash equivalents
Cash and cash equivalents at beginning of the year
37,318
21,437
(7,808)
58,755
(1,224)
50,947
Cash and cash equivalents at end of the year*
58,755
50,947
49,723
*
The balances on September 30, 2010 and 2011 include the cash and cash equivalents of Champion Xinlixiang, our discontinued
operation.
CDEL Cayman, our ultimate holding company, may rely on dividends and other distributions on equity paid by our PRC
subsidiaries for its cash requirements, but such dividends and other distributions are subject to restrictions under PRC law. See Note
16 to our consolidated financial statements included in this annual report.
Operating activities
Net cash generated from operating activities was $15.1 million in the fiscal year ended September 30, 2012, and compared to
$9.2 million and $7.7 million in the fiscal years ended September 30, 2011 and 2010, respectively.
Net cash generated from operating activities in the fiscal year ended September 30, 2012 was primarily attributable to (i) net
income before non-cash items including share based compensation expenses, depreciation and amortization, allowance for doubtful
accounts, deferred tax expenses, and impairment on deferred costs, (ii) decrease in accounts receivable of $0.4 million, (iii) increase
in accrued expenses and other liabilities of $2.8 million, (iv) increase in income tax payable of $0.3 million, and (v) increase in
deferred revenue and refundable fees of $1.5 million. The increase in operating cash flow was partially offset by increase in
prepayments and other assets, inventories, and other non-current assets of $0.7 million, $0.3 million and $0.3 million, respectively.
82
Net cash generated from operating activities in the fiscal year ended September 30, 2011 was primarily attributable to (i) net
income before non-cash items including share based compensation expenses, depreciation and amortization, and allowance for
doubtful accounts, and impairment on goodwill, property, plant and equipment, intangible assets and purchased call options,
(ii) increase in accrued expenses and other liabilities of $1.1 million, (iii) increase in income tax payable of $0.6 million, and
(iv) increase in refundable fees of $0.9 million. The increase in operating cash flow was partially offset by increase in prepayments
and other assets of $1.1 million and decrease in deferred tax assets and liabilities of $1.1 million.
Net cash generated from operating activities in the fiscal year ended September 30, 2010 was primarily attributable to (i) net
income before non-cash items including share based compensation expenses, depreciation and amortization, allowance for doubtful
accounts, and impairment on goodwill, intangible assets and purchased call options, (ii) increase in accrued expenses and other
liabilities of $1.9 million, and (iii) increase in deferred revenue of $1.0 million. The increase in operating cash flow was partially
offset by increase in accounts receivable of $2.0 million.
Investing activities
Net cash generated from investing activities was $0.5 million in the fiscal year ended September 30, 2012, compared to net cash
used in investing activities of $9.8 million in the fiscal year ended September 30, 2011 and net cash generated from investing
activities of $31.4 million in the fiscal years ended September 30, 2010, respectively.
Net cash generated from investing activities in the fiscal year ended September 30, 2012 was primarily attributable to the release
of restricted cash of $2.7 million as the result of the settlement of Zhengbao Yucai’s arbitration in November 2011. The increase in
cash flow was partially offset by capital expenditure of $2.0 million.
Net cash used in investing activities in the fiscal year ended September 30, 2011 was primarily attributable to (i) the purchase of
property, plant and equipment in the amount of $2.0 million, and (ii) purchase of term deposits of $7.6 million. The decrease in cash
flow was partially offset by the release of restricted cash of $0.4 million.
Net cash generated from investing activities in the fiscal year ended September 30, 2010 was primarily attributable to (i) release
of restricted cash of $5.4 million, and (ii) decrease in term deposits of $27.8 million. The increase in cash flow was partially offset by
the purchase of property, plant and equipment in the amount of $1.6 million.
Financing activities
Net cash used in financing activities was $17.2 million in the fiscal year ended September 30, 2012, compared to net cash used
in financing activities of $8.1 million and $2.1 million in the fiscal years ended September 30, 2011 and 2010, respectively.
Net cash used in financing activities in the fiscal year ended September 30, 2012 was primarily attributable to special dividend
payment of $16.3 million and the repurchase of our ADS from the open market in the amount of $1.0 million.
Net cash used in financing activities in the fiscal year ended September 30, 2011 was primarily attributable to the repurchase of
our ADSs from the open market in the amount of $8.1 million.
Net cash used in financing activities in the fiscal year ended September 30, 2010 was primarily attributable to the repurchase of
our ADSs from the open market in the amount of $2.2 million.
Capital Expenditures
We incurred capital expenditures of $2.0 million, $2.6 million and $1.8 million and in the fiscal years ended September 30,
2012, 2011, and 2010, respectively. The amount of capital expenditures in the fiscal years ended September 30, 2012, 2011 and 2010
related primarily to our expenditures on property, plant and equipment, and software. From time to time, we may evaluate and make
investments, acquisitions or divestments.
We believe that our current cash and cash equivalents, and anticipated cash flows from operations will be sufficient to meet our
anticipated working capital requirements and capital expenditures for 12 months following the date of this annual report. Our online
course platform can support significant growth in course enrollments and is easily adapted for the addition of new courses. We do,
however, expect to spend money on the further development of our “Chinaacc” brand and other brands in the disciplines for which we
offer courses. We do not expect our short-term and long-term cash requirements to be materially different.
83
Nevertheless, we may require additional sources of liquidity in the event of changes in business conditions or other future
developments. Factors affecting our sources of liquidity include, for example, mergers and acquisitions, our sales performance, ability
to control costs and expenses, and choice of financing arrangements. Any changes in the significant factors affecting our revenues
from education services may cause material fluctuations in our cash generated from operations. See “Operating Results — Overview
— Specific Factors Affecting Our Results of Operations” for a description of these significant factors. Changes in working capital,
including any significant shortening or lengthening of our accounts receivable cycle or customer prepayment cycles, may also cause
fluctuations in our cash generated from operations. If our sources of liquidity are insufficient to satisfy our cash requirements, we may
seek to sell additional equity or debt securities to meet our cash needs. The sale of convertible debt securities or additional equity
securities could result in dilution to our shareholders. The incurrence of indebtedness would result in debt service obligations and
could result in operating and financial covenants that restrict our operations. We cannot assure you that future financing will be
available in amounts or on terms acceptable to us, if at all.
Current PRC regulations permit our PRC subsidiaries to pay dividends to us only out of their accumulated profits, if any,
determined in accordance with PRC accounting standards and regulations. However, our PRC subsidiaries are required under PRC
laws and regulations to allocate a portion of their annual after-tax profits, if any, to certain statutory reserves and funds prior to
declaring and remitting dividends. For example, our PRC subsidiaries are required to allocate at least 10% of their after-tax profits to
statutory reserves until such reserves reach 50% of their respective registered capital. Allocations to these statutory reserves and funds
can be used only for specific purposes and are not transferable to us in the form of loans, advances or cash dividends. As a result, our
PRC subsidiaries are restricted in their ability to transfer a portion of their net assets to us. Such limitations on the ability of our PRC
subsidiaries to transfer funds to us could materially and adversely affect our ability to grow, make investments or acquisitions, pay
dividends, and otherwise fund and conduct our businesses.
Inflation
Inflation in China has not had a material impact on our results of operations to date. According to the National Bureau of
Statistics of China, the change in China’s Consumer Price Index was 3.3%, 5.4% and 2.6% in the years 2010, 2011 and 2012,
respectively. In December 2012, the change in China’s Consumer Price Index was 2.5%.
C. Research and Development
Research and development does not constitute a material part of our business and we do not incur any material expenses related
to research and development.
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 year ended September 30, 2012 that are reasonably likely to have a material adverse effect on our 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
We do not currently have, and do not expect in the future to have, any outstanding off-balance sheet arrangements or
commitments. In our ongoing business, we do not plan to enter into transactions involving, or otherwise form relationships with,
unconsolidated entities or financial partnerships established for the purpose of facilitating off-balance sheet arrangements or
commitments.
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F. Tabular Disclosure of Contractual Obligations
Contractual Obligations and Commercial Commitments
The following table sets forth our contractual obligations as of September 30, 2012:
Operating lease obligations (1)
Others (2)
Total
2,607
173
2,780
Within 1
Total
Year
Payment Due by Period
3-5
1-3
Years
Years
(In thousands of $)
—
2,261 346
2,261 346
—
More than
5 Years Others
— —
173
173
—
(1) Our operating lease obligations primarily relate to our leased servers and bandwidth as well as our leased office spaces in China.
The office leases expire at different times over the period from the date of this annual report through 2015, and will become
subject to renewal. We will evaluate the need to renew each office lease on a case-by-case basis prior to its expiration.
(2) Liabilities for unrecognized tax benefits. The balance disclosed under “Others” represents liabilities for which reasonable
estimates about the timing of the payment cannot be made.
Indebtedness
We currently have no indebtedness, and had no indebtedness as of September 30, 2012.
G. Safe Harbor
This report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended,
and Section 21E of the Securities Exchange Act of 1934, as amended, and as defined in the Private Securities Litigation Reform Act
of 1995. See “Introduction — Forward-Looking Statements.”
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 the date of this annual
report. The business address of each of our directors and executive officers is 18th Floor, Xueyuan International Tower, 1 Zhichun
Road, Haidian District, Beijing 100083, the People’s Republic of China.
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Name
Zhengdong Zhu
Baohong Yin
Hongfeng Sun
Xiaoshu Chen
Annabelle Yu Long
Liankui Hu
Carol Yu
Ping Wei
Age
Position
44 Chairman of the Board of Directors, Chief Executive Officer
45 Deputy Chairman of the Board of Directors
46 Vice President, Director
47 Independent Director
40 Independent Director
62 Independent Director
50 Independent Director
41 Chief Financial Officer
Zhengdong Zhu is co-founder, chairman of the board and chief executive officer of our company and is responsible for the
overall management operations and strategic direction of our company. Prior to co-founding our company in 1998, Mr. Zhu worked at
the Beijing Huake Hi-Tech Co., Ltd., a communications products and computer facilities company, as an engineer, manager of
network department and vice general manager in charge of marketing and sales from 1995 to 1998. From 1989 to 1995, Mr. Zhu
worked as an engineer in the area of electronic communications technology at the research department of North China Institute of
Electro-Optics Technology. Mr. Zhu graduated from the Radio Engineering Department of the Southeast University in China with a
bachelor’s degree in radio engineering in 1989, and obtained a graduate certificate from the management science department in
Sichuan University in China in 2001. Mr. Zhu received his MBA degree from Tsinghua University in 2011. Mr. Zhu and Baohong
Yin, our director and deputy chairman, are husband and wife.
Baohong Yin is co-founder, director and deputy chairman of our company. From 1989 to 2004, Ms. Yin worked as engineer,
vice director of laboratory, senior engineer, director of laboratory and vice-general engineer at Beijing Uni-Construction Dadi
Concrete Building Components Co., Ltd (previously known as Beijing Residential Construction Component Manufacturer). Ms. Yin
graduated in 1989 from the Civil Engineering Department of Southeast University in China with a bachelor’s degree in civil
engineering. She was also conferred the qualification as a senior engineer by the Beijing Advanced Specialized Technology
Committee in 1999. Ms. Yin received her EMBA degree from Beijing University in 2010. Baohong Yin and Zhengdong Zhu, our
chairman and chief executive officer, are wife and husband.
Hongfeng Sun is co-founder, director and vice president of our company. Prior to co-founding our company, he worked at
Sichuan Champion Hi-Tech Co., Ltd., a company in Sichuan, China engaging in system integration. From 1991 to 1998, Mr. Sun
worked as an assistant general manager in charge of market development at Nanjing Bada Computer System Co., Ltd. From 1989 to
1991, Mr. Sun worked at Port Authority of Nanjing as a system engineer. Hongfeng Sun received his bachelor’s degree in radio
engineering from the Radio Engineering Department of Southeast University in China in 1989 and his MBA degree from China
Europe International Business School in 2012.
Xiaoshu Chen is an independent director of our company, and currently a professor and an assistant director at the Department
of Radio Engineering of SISE Southeast University in China. From 1985 to 2001, Professor Chen worked as an assistant lecturer,
lecturer and assistant professor at the same department. Professor Chen has almost 20 years of experience in communication systems
and network research. He graduated in 1985 from the Department of Radio Engineering of the Nanjing Institute of Technology in
China with a bachelor’s degree in engineering. He obtained his master’s degree in engineering in 1990 from the same university.
Annabelle Yu Long is an independent director of our company. She has served as Chief Executive of Bertelsmann China
Corporate Center and Managing Director of Bertelsmann Asia Investments, or BAI, the strategic investment arm of Bertelsmann AG
since 2008. BAI is an affiliate of Bertelsmann Asia Investments AG, a shareholder of the company. In addition, she has served as
board member for BMG Right Management Germany GMBH. From 2005 to 2007, Ms. Long was a principal of Bertelsmann Digital
Media Investments. Ms. Long received her bachelor’s degree in science and electric engineering from the University of Electronic
Science and Technology in China in 1994, and her master’s degree in business administration from Stanford Graduate School of
Business in 2005.
Liankui Hu is an independent director of our company. He has also served as chairman on the boards of directors of the
following technology companies since 1998, Beijing Teamsun Technology Co., Ltd., and Beijing Huasun Mingtian Technology Co.
Ltd. From 1987 to 1998, Mr. Hu had worked for the Sixth Electronics Institute of the Ministry of Information Industry as deputy
president, for Beijing Shenyan System Co., Ltd. as general manager, and for Beijing Huasun Computer Co., Ltd. as general manager.
He was a lecturer in School of Economics and Management, Tsinghua University in China from 1985 to 1987. Mr. Hu received his
bachelor’s degree in engineering from Radio Engineering Department of Tsinghua University in 1982, and his master’s degree from
School of Economics and Management of Tsinghua University in 1985.
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Carol Yu is an independent director of our company. Since 2004, Ms. Yu has been serving as co-president and chief financial
officer of Sohu.com Inc., an Internet portal company listed on the Nasdaq Global Market. From 2000 to 2001, Ms. Yu served as vice
president of Guangdong Kelon Refrigerating Company Limited, a home appliance manufacturer in China. From 1995 to 2000,
Ms. Yu served as senior vice-president at the investment banking department of Donaldson Lufkin & Jenrette Securities Corporation
in Hong Kong. Prior to that, Ms. Yu also worked with Arthur Andersen Hong Kong and Beijing for ten years and was a partner of the
audit division, and held the position of general manager at Arthur Andersen-Hua Qiang, the joint venture accounting firm formed
between Arthur Andersen and the Ministry of Finance in China. Ms. Yu obtained her bachelor’s degree in accounting from The Hong
Kong Polytechnic University. Ms. Yu is a Hong Kong Certified Public Accountant.
Ping Wei is our chief financial officer. Ms. Wei has extensive international finance, accounting and audit experience. From 2005
to 2008, Ms. Wei worked with New Oriental Education and Technology Group (NYSE: EDU) as its director of finance and
controller. In 2004, Ms. Wei was the head for New Oriental’s North American operation. Prior to that, Ms. Wei worked with Lorus
Therapeutics Inc., or Lorus, a Canadian biopharmaceutical company listed on both the Toronto Stock Exchange and the American
Stock Exchange as its acting chief financial officer and controller and previously as its assistant controller. Prior to working at Lorus,
Ms. Wei worked as an auditor for seven years with Deloitte & Touche in Toronto and Arthur Andersen in Beijing. Ms. Wei is a
Canadian Chartered Accountant and a US CPA with the State of Illinois. Ms. Wei received her bachelor’s degree in international
accounting from the Central University of Finance and Banking in Beijing in 1993.
B. Compensation
Compensation of Directors and Executive Officers
For the fiscal year ended September 30, 2012, we and our subsidiaries paid aggregate cash compensation of approximately $0.6
million to our directors and executive officers as a group. We do not pay or set aside any amounts pursuant to a bonus plan or for
pension, retirement or other benefits for our officers and directors.
Share Options, Restricted Shares and Share Incentive Plans
We adopted our Share Incentive Plan, or the Prior Plan, on April 18, 2008. We adopted on July 2, 2008, and amended and
restated on February 16, 2009 and May 21, 2012, respectively, our 2008 Performance Incentive Plan, or the New Plan. Our incentive
plans are intended to promote our success and to increase shareholder value by providing an additional means to attract, motivate,
retain and reward selected directors, officers, employees, lecturers and other eligible persons. An aggregate of 11,652,556 ordinary
shares are reserved for issuance under the Prior Plan. Subject to any amendment of the New Plan, the maximum number of ordinary
shares that may be issued pursuant to the New Plan is 12,545,999 ordinary shares as of September 30, 2012, plus an automatic annual
increase on October 1 of each calendar year commencing from October 1, 2012, by an amount equal to the lesser of (i) 2% of the total
number of ordinary shares issued and outstanding on September 30 of the same calendar year, (ii) 2,850,000 ordinary shares, or
(iii) such number of ordinary shares as may be determined by our board of directors.
Most options issued under our share incentive plans generally vest over a period of four years, with 25% vesting on the first
anniversary of the vesting start date designated in the board resolution granting such options and the remaining 75% vesting in six
substantially equal semi-annual installments. The first installment vests on the last day of the sixth month following the month in
which the first anniversary of the vesting start date occurs and an additional installment vests on the last day of every six months
thereafter.
On December 3, 2010, we issued each of our five non-executive directors 20,000 restricted shares of which restrictions were
removed on December 3, 2011.
On September 27, 2011, we granted 1,000,600 and 400,000 options to employees and five non-executive directors, respectively,
at an exercise price of $0.615 per share, which equaled the per share value of our ADS on the NYSE at the close of trading on
September 27, 2011. The vesting term of the 1,000,600 options granted to employees is a two-year period, with four equal semi-
annual installments, while the 400,000 options granted to five non-executive directors had been fully vested on the same day. In
addition, we reduced the exercise price of 8,066,700 and 1,398,300 outstanding share options under the Prior Plan from $0.82 per
share to $0.615, which equaled the closing price of our ADSs on NYSE at the close of trading on September 27, 2011, and zero per
share, respectively. Furthermore, the re-priced options had been accelerated to be fully vested on the same day.
On September 27, 2011, we determined to provide three-years interest free, full recourse loans to employees and lecturers to
exercise their options. As of December 31, 2012, 6,999,936 options had been exercised using this facility, amounting to a total loan
amount of $4.3 million. The outstanding balance of the loan was $4.3 million as of December 31, 2012.
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In connection with our declaration of special cash dividend of $0.12 per share on November 13, 2012, we reduced the exercise
price of all our outstanding options under our Prior and New Plan by the same amount per share.
On December 3, 2012, we issued each of our five non-executive directors 45,000 restricted shares.
Under the Prior Plan, we had granted options for the purchase of a total of 11,045,500 ordinary shares to selected officers,
employees, and lecturers as of September 30, 2012. Pursuant to the New Plan, we had granted options for the purchase of a total of
3,162,500 ordinary shares and issued 157,143 restricted shares to five non-executive directors and selected employees as of
September 30, 2012. As of December 31, 2012, there were outstanding options to purchase 3,001,380 ordinary shares, out of which
options to purchase approximately 2.4 million ordinary shares have vested under their current terms. We expect to recognize share-
based compensation expenses for the remaining vesting period of the outstanding options, which may continue to impact our future
results of operations. During the fiscal years of September 30, 2010, 2011 and 2012, we recognized share-based compensation
expenses of $4.4 million, $6.0 million and $0.1 million, respectively.
Options granted under our share incentive plans generally do not vest unless the grantee remains under our employment or in
service with us on the given vesting date. Generally, if the grantee’s employment or service with us is terminated for cause, all such
grantee’s options under our share incentive plans, vested and unvested, immediately terminate and become unexercisable. On the
other hand, if the grantee’s employment or service with us is terminated for any reason other than for cause, all such grantee’s vested
options terminate and become unexercisable ninety days following the grantee’s last day of employment or service with us. In
circumstances where there is a death or disability of the grantee, generally all unvested options immediately terminate and become
unexercisable while vested options terminate and become unexercisable twelve months after the last date of employment or service
with us. Generally, all unvested options granted under the Plan become fully vested immediately upon a change in the control of our
company.
Our board of directors may amend, alter, suspend, or terminate our share incentive plans at any time, provided, however, that
our board of directors must first seek the approval of the participants of our share incentive plans if such amendment, alteration,
suspension or termination would adversely affect the rights of participants under any option granted prior to that date. Without further
action by our board of directors, both Prior Plan and the New Plan will terminate in 2018.
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The table below sets forth the option grants and restricted share issuance made to our directors and executive officers pursuant to
our share incentive plans:
Name of Recipient
Carol Yu
Type of Incentive
Securities
restricted ordinary
shares
Number of Ordinary
Shares Issued or to be
Issued
Exercise Price
per Ordinary
Share
Date of Grant
or Issue
Vesting Start
Date
20,000 ordinary shares
not applicable
December 3, 2010
Date of
Expiration
not applicable
September 26, 2021
restriction removed
on the first anniversary
of the issue date
fully vested immediately
on grant date
options to purchase
ordinary shares
80,000
$
0.615
September 27, 2011
Baohong Yin
Xiaoshu Chen
Annabelle Yu Long
Liankui Hu
restricted ordinary
shares
restricted ordinary
shares
restricted ordinary
shares
20,000 ordinary shares
not applicable
December 3, 2012
not applicable
not applicable
25,000 ordinary shares
not applicable
December 3, 2012
20,000 ordinary shares
not applicable
December 3, 2010
restriction removed on
the first anniversary of
the issue date
restriction removed on
the first anniversary of
the issue date
not applicable
not applicable
options to purchase
ordinary shares
80,000
$
0.615
September 27, 2011
fully vested immediately
on grant date
September 26, 2021
restricted ordinary
shares
restricted ordinary
shares
restricted ordinary
shares
20,000 ordinary shares
not applicable
December 3, 2012
not applicable
not applicable
25,000 ordinary shares
not applicable
December 3, 2012
20,000 ordinary shares
not applicable
December 3, 2010
restriction removed on
the first anniversary of
the issue date
restriction removed on
the first anniversary of
the issue date
not applicable
not applicable
options to purchase
ordinary shares
80,000
$
0.615
September 27, 2011
fully vested immediately
on grant date
September 26, 2021
restricted ordinary
shares
restricted ordinary
shares
restricted ordinary
shares
20,000 ordinary shares
not applicable
December 3, 2012
not applicable
not applicable
25,000 ordinary shares
not applicable
December 3, 2012
20,000 ordinary shares
not applicable
December 3, 2010
restriction removed on
the first anniversary of
the issue date
restriction removed on
the first anniversary of
the issue date
not applicable
not applicable
options to purchase
ordinary shares
80,000
$
0.615
September 27, 2011
fully vested immediately
on grant date
September 26, 2021
restricted ordinary
shares
restricted ordinary
shares
restricted ordinary
shares
20,000 ordinary shares
not applicable
December 3, 2012
not applicable
not applicable
25,000 ordinary shares
not applicable
December 3, 2012
20,000 ordinary shares
not applicable
December 3, 2010
restriction removed on
the first anniversary of
the issue date
restriction removed on
the first anniversary of
the issue date
not applicable
not applicable
options to purchase
ordinary shares
80,000
$
0.615
September 27, 2011
fully vested immediately
on grant date
September 26, 2021
restricted ordinary
shares
restricted ordinary
shares
20,000 ordinary shares
not applicable
December 3, 2012
not applicable
not applicable
25,000 ordinary shares
not applicable
December 3, 2012
restriction removed on
the first anniversary of
the issue date
not applicable
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C. Board Practices
Duties of Directors
Under Cayman Islands law, our directors have a statutory duty of loyalty to act honestly in good faith with a view to our best
interests. Our directors also have a duty to exercise the 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 second amended and
restated memorandum of association 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:
• convening shareholders’ meetings and reporting its work to shareholders at such meetings;
• implementing shareholders’ resolutions;
• determining our business plans and investment proposals;
• formulating our profit distribution plans and loss recovery plans;
• determining our debt and finance policies and proposals for the increase or decrease in our registered capital and the issuance
of debentures;
• formulating our major acquisition and disposition plans, and plans for merger, division or dissolution;
• proposing amendments to our second amended and restated memorandum of association and articles of association; and
• exercising any other powers conferred by the shareholders’ meetings or under our second amended and restated memorandum
of association 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 our
board of directors, in which case such director holds office until the next 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.
Terms of Directors
We currently have a board of seven directors divided into class A, class B and class C directors. Hongfeng Sun is the class A
director. The class B directors are Baohong Yin, Annabelle Yu Long and Xiaoshu Chen. The class C directors are Zhengdong Zhu,
Carol Yu and Liankui Hu. At our first annual general meeting after our initial public offering held in April 2009, Hongfeng Sun,
retired as a class A director and was re-elected as the class A director. At the second annual general meeting after our initial public
offering held in May 2010, all class B directors retired as class B directors and were re-elected as the class B directors. At the third
annual general meeting after our initial public offering held in May 2011, our class C directors that are subject to retirement, i.e. Carol
Yu and Liankui Hu, were re-elected as the class C directors. At each subsequent annual general meeting after the third annual general
meeting after our initial public offering, one third of the directors for the time being (or, if their number is not a multiple of three (3),
the number nearest to but not greater than one third) will retire from office by rotation. A retiring director will be eligible for re-
election. The directors to retire by rotation will include (so far as necessary to ascertain the number of directors to retire by rotation)
any director who wishes to retire and not to offer himself for re-election. Any further directors so to retire will be those of the other
directors subject to retirement by rotation who have been longest in office since their last re-election or appointment and so that as
between persons who became or were last re-elected directors on the same day those to retire shall (unless they otherwise agree
among themselves) be determined by lot. Our chief executive officer, which currently is Zhengdong Zhu, is not, while holding office,
subject to retirement or be taken into account in determining the number of directors to retire in any year. At the fourth annual general
meeting after our initial public offering held in May 2012, Hongfeng Sun, our class A director retired as a class A director and was re-
elected as the class A director, and Baohong Yin, our class B director retired as a class B director and was re-elected as the class B
director. There are no director service contracts with us or any of our subsidiaries and affiliated entities providing for benefits upon
termination of employment.
Board Practices
Our board of directors has established an audit committee, a compensation committee and a nomination committee.
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Audit Committee
Our audit committee consists of Carol Yu, Liankui Hu and Xiaoshu Chen. Carol Yu is the chairman of our audit committee. Our
board of directors has determined that all of our audit committee members satisfy the “independence” requirements of relevant rules
of the NYSE and Rule10A-3 under the Securities Exchange Act of 1934. Carol Yu meets the criteria of an audit committee financial
expert as set forth under the applicable rules of the SEC.
Our audit committee is responsible for, among other things:
• appointing the independent auditor;
• pre-approving all auditing and non-auditing services permitted to be performed by the independent auditor;
• setting clear hiring policies for employees and former employees of the independent auditor;
• reviewing with the independent auditor any audit problems or difficulties and management’s responses;
• reviewing and approving all related party transactions on an ongoing basis;
• reviewing and discussing the annual audited financial statements with management and the independent auditor;
• reviewing and discussing with management and the independent auditor major issues regarding accounting principles and
financial statement presentations;
• reviewing reports prepared by management relating to significant financial reporting issues and judgments;
• discussing earnings press releases with management, as well as financial information and earnings guidance provided to
analysts and rating agencies;
• reviewing with management and the independent auditor the effect of regulatory and accounting initiatives, as well as off-
balance sheet structures, on our financial statements;
• discussing policies with respect to risk assessment and risk management with management, internal auditors and the
independent auditor;
• timely reviewing reports from management regarding all critical accounting policies and practices to be used by our company,
all alternative treatments of financial information within U.S. GAAP that have been discussed with management and all other
material written communications between the independent auditor and management;
• 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;
• annually reviewing and reassessing the adequacy of our audit committee charter;
• such other matters that are specifically delegated to our audit committee by our board of directors from time to time;
• meeting separately, periodically, with management, internal auditors and the independent auditor; and
• reporting regularly to the full board of directors.
Compensation Committee
Our compensation committee consists of Zhengdong Zhu, Carol Yu and Liankui Hu. Zhengdong Zhu is the chairman of our
compensation committee. Under Section 303A.00 of the NYSE’s Listed Company Manual, a foreign private issuer is permitted to
follow “home country practice” in relation to the composition of its compensation committee. In this regard, we have elected to adopt
the practices of our home country, the Cayman Islands, which does not require that any of the members of a company’s compensation
committee be independent directors. Our board of directors has determined that Carol Yu and Liankui Hu satisfy the “independence”
requirements of relevant rules of the NYSE and Rule10A-3 under the Securities Exchange Act of 1934, as amended, or the Exchange
Act. Our chairman and chief executive officer, Zhengdong Zhu, does not meet the definition of independence under such applicable
rules.
Our compensation committee is responsible for:
• reviewing and approving our overall compensation policies;
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• reviewing and approving corporate goals and objectives relevant to the compensation of our chief executive officer,
evaluating our chief executive officer’s performance in light of those goals and objectives, reporting the results of such
evaluation to the board of directors and determining our chief executive officer’s compensation level based on this evaluation;
• determining the compensation level of our other executive officers;
• making recommendations to the board of directors with respect to our incentive-compensation plan and equity-based
compensation plans;
• administering our equity-based compensation plans in accordance with the terms thereof; and
• such other matters that are specifically delegated to the compensation committee by our board of directors from time to time.
Nomination Committee
Our nomination committee consists of Zhengdong Zhu, Liankui Hu and Xiaoshu Chen. Zhengdong Zhu is the chairman of the
nomination committee. Under the relevant NYSE rules, a foreign private issuer is permitted to follow “home country practice” in
relation to the composition of its nomination committee. In this regard, we have elected to adopt the practices of our home country,
the Cayman Islands, which does not require that any of the members of a company’s nomination committee be independent directors.
Our board of directors has determined that Liankui Hu and Xiaoshu Chen satisfy the “independence” requirements of the relevant
rules of the NYSE and Rule10A-3 under the Exchange Act. Our chairman and chief executive officer, Zhengdong Zhu, does not meet
the definition of independence under such applicable rules.
Our nomination committee is responsible for, among other things:
• seeking and evaluating qualified individuals to become new directors as needed;
• reviewing and making recommendations to the board of directors regarding the independence and suitability of each board
member for continued service; and
• evaluating the nature, structure and composition of other board committees.
Corporate Governance
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, employees and
advisors. We have made our code of ethics and our code of conduct publicly available on our website. In addition, our board of
directors has adopted a set of corporate governance guidelines. The guidelines reflect certain guiding principles with respect to our
board’s structure, procedures and committees. The guidelines are not intended to change or interpret any law, or our second amended
and restated memorandum of association and articles of association.
Interested Transactions
A director may vote with respect to any contract or transaction in which he or she is interested, provided that the nature of the
interest of any director in such contract or transaction is disclosed by him or her at or prior to its consideration and any vote in that
matter.
D. Employees
We had 803,847 and 859 full-time employees as of September 30, 2010, 2011 and 2012, respectively. In addition to the above
full-time employees, we had approximately 46 part-time employees as of September 30, 2012, of whom 35 are tutors.
As required by PRC regulations, our full-time employees in the PRC participate in a government mandated employee benefits
plan, pursuant to which certain pension benefits, medical care, employee housing fund and other welfare benefits are provided to our
employees. PRC labor regulations require that our PRC subsidiaries and affiliated entities make contributions to the government for
these benefits based on certain percentages of the employees’ salaries. We have no legal obligation for the benefits beyond the
contributions made. The total amounts for such employee benefits, which were expensed as incurred, were approximately $1.9
million,$2.5 million and $3.2 million for the years ended September 30, 2010, 2011 and 2012, respectively.
We recognize as expenses obligations for contributions to employee benefits plans for full-time employees in Hong Kong,
including contributions payable under the Hong Kong Mandatory Provident Fund Schemes Ordinance. The total amount for our Hong
Kong employee benefits was approximately $2,000 for each of the years ended September 30, 2010, 2011 and 2012.
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We believe that we maintain a good working relationship with our employees and we have not experienced significant labor
disputes. Our employees have not entered into any collective bargaining agreements.
We view staff training as essential for the development of our human resources and our growth. We aim to provide our staff at
all levels with the skills and knowledge relevant to their jobs and their career development as well as to improve their work
efficiency. We have both routine and developmental training programs for our staff. Routine training includes our orientation
program for new employees and on-the-job training. Developmental training is geared towards staff promotion and providing updated
or new course information.
Our staff training is mainly conducted in-house. From time to time, we also engage external trainers with the relevant expertise
to train our staff in areas such as customer service and software development.
E. Share Ownership
The following table sets forth information with respect to the beneficial ownership, within the meaning of Rule 13d-3 under the
Exchange Act, of our ordinary shares as of January 15, 2013, the latest practicable date by:
• our directors and executive officers as a group;
• each person known to us to own beneficially more than 5% of our ordinary shares;
(5)
(6)
Directors and Executive Officers:
Zhengdong Zhu
(3)
Baohong Yin
(4)
Xiaoshu Chen
Ping Wei
Hongfeng Sun
Annabelle Yu Long
Liankui Hu
Carol Yu
Directors and Executive Officers Combined
Principal Shareholders:
Champion Education Holdings Limited
Champion Shine Trading Limited
Orchid Asia III, L.P., Orchid Asia Co-Investment Limited, Orchid
(8)
(7)
China Master Fund Limited and YM Investment Limited
(9)
Artson Limited
(10)
Ordinary Shares
Beneficially Owned
Number
(1)
Percent
(2)
74,171,493
74,171,493
3,124,800
1,712,919
*
*
*
*
80,957,655
54.77%
54.77%
2.31%
1.26%
*
*
*
*
59.78%
46,396,800
27,549,693
34.26%
20.34%
13,494,910
7,481,797
9.96%
5.52%
Beneficially owns less than 1% of our outstanding ordinary shares.
*
(1) The number of ordinary shares beneficially owned by each of the listed persons includes ordinary shares that such person has the
right to acquire within 60 days after January 15, 2013.
(2) Percentage of beneficial ownership for each of the persons listed above is determined by dividing (i) the number of ordinary
(3)
shares beneficially owned by such person by (ii) the total number of ordinary shares outstanding, plus the number of ordinary
shares such person has the right to acquire within 60 days after January 15, 2013. The total number of ordinary shares
outstanding as of January 15, 2013 is 135,432,521.
Includes (i) 21,337,265 ordinary shares held by Champion Shine Trading Limited, (ii) -46,396,800- ordinary shares held by
Champion Education Holdings Limited, (iii) -65,000 ordinary shares held by Baohong Yin, and (iv) -160,000- ordinary shares
issuable upon exercise of options held by Baohong Yin. Champion Shine Trading Limited is a British Virgin Islands company
whose sole shareholder is Zhengdong Zhu. Champion Education Holdings Limited is a British Virgin Islands company, with
Zhengdong Zhu holding 80% of its equity interest and Baohong Yin holding 20% of its equity interest. Zhengdong Zhu and
Baohong Yin are husband and wife. Therefore, Zhengdong Zhu may be deemed to share the voting and dispositive power over
the ordinary shares held by Baohong Yin as well as the ordinary shares issuable upon exercise of options held by Baohong
Yin. Zhengdong Zhu disclaims beneficial ownership of such -20,000- ordinary shares held by Baohong Yin and such -100,000-
ordinary shares issuable upon exercise of currently exercisable options held by Baohong Yin, in each case except to the extent of
his pecuniary interest. The business address of Zhengdong Zhu is 18th Floor, Xueyuan International Tower 1, Zhichun Road,
Haidian District, Beijing 100083, China.
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(4)
(5)
(6)
(7)
(8)
Includes (i) 21,337,265 ordinary shares held by Champion Shine Trading Limited; (ii) 46,396,800 ordinary shares held by
Champion Education Holdings Limited, (iii) 65,000 ordinary shares held by Baohong Yin, and (iv) 160,000 ordinary shares
issuable upon exercise of options held by Baohong Yin. Baohong Yin holds 20% of the equity interest in Champion Education
Holdings Limited. Zhengdong Zhu holds 80% of the equity interest in Champion Education Holdings Limited and he is the sole
shareholder of Champion Shine Trading Limited. Zhengdong Zhu and Baohong Yin are husband and wife. Baohong Yin may
therefore be deemed to share the voting and dispositive power over ordinary shares held by Champion Shine Trading Limited,
Champion Education Holdings Limited and Zhengdong Zhu. Baohong Yin disclaims beneficial ownership of the 21,337,265
ordinary shares held by Champion Shine Trading Limited and 46,396,800 ordinary shares held by Champion Education
Holdings Limited, in each case except to the extent of her pecuniary interest. The business address of Baohong Yin is 18th
Floor, Xueyuan International Tower, 1 Zhichun Road, Haidian District, Beijing 100083, China.
Includes (i) 2,899,800 ordinary shares held by Jetlong Investments Limited, (ii) 65,000 ordinary shares held by Xiaoshu Chen,
and (iii) 160,000 ordinary shares issuable upon exercise of options held by Xiaoshu Chen. Jetlong Investments Limited is a
British Virgin Islands company whose sole shareholder and sole director is Xiaoshu Chen. The business address of Xiaoshu
Chen is Southeastern University, No. 2 Sipailou, Nanjing 210096, China.
Includes 1,712,919 ordinary shares held by Easerich Group Limited, a British Virgin Islands company whose sole shareholder
and sole director is Ping Wei. The address of Easerich Group Limited is P.O. Box 957, Offshore Incorporations Centre, Road
Town, Tortola, British Virgin Islands.
Includes 46,396,800 ordinary shares held by Champion Education Holdings Limited. Champion Education Holdings Limited is
a British Virgin Islands company, with Zhengdong Zhu holding 80% of its equity interest and Baohong Yin holding 20% of its
equity interest. The directors of Champion Education Holdings Limited are Zhengdong Zhu and Baohong Yin. The address of
Champion Education Holdings Limited is P.O. Box 957, Offshore Incorporations Centre, Road Town, Tortola, British Virgin
Islands.
Includes (i) 21,337,265 ordinary shares, (ii) 1,553,107 ADSs representing 6,212,428 ordinary shares held by Champion Shine
Trading Limited, a British Virgin Islands company whose sole shareholder and sole director is Zhengdong Zhu. The address of
Champion Shine Trading Limited is Suites 1501-1503, 15th Floor, Gloucester Tower, The Landmark, 15 Queen’s Road Central,
Hong Kong.
(9) The number of ordinary shares beneficially owned is as of December 31, 2011, as reported in a Schedule 13G filed by Orchid
Asia III, L.P., Orchid Asia Co-Investment Limited, Orchid China Master Fund Limited and YM Investment Limited on
February 14, 2012. The business address of these filers reported on the Schedule 13G is Suite 6110, 61st Floor, The Center, 99
Queen’s Road, Central, Hong Kong.
(10) Includes 7,481,797 ordinary shares held by Artson Limited, a British Virgin Islands company with a correspondence address at
22nd Floor, Hang Lung Centre, 2-20 Paterson Street, Causeway Bay, Hong Kong. Artson Limited is wholly-owned by
Morningside Technology Investments Limited, a British Virgin Islands company, which is in turn ultimately wholly beneficially
owned by a family trust established by Madam Chan Tan Ching Fen.
See “— B. Compensation” for more details on options and/or restricted shares granted to our directors and executive officers.
As of September 30, 2012, of the 134,386,849 issued and outstanding ordinary shares, approximately 30.66% of those ordinary
shares are held in the U.S., all under one registered holder of record.
None of our existing shareholders has voting rights that differ from the voting rights of other shareholders. A change of control
of our company may occur as a result of the transaction that occurred in October 2011 among Bertelsmann Asia Investment AG, CST
and CEH. If CST and CEH subsequently default on their obligation under this transaction, BAI may own a significant portion of our
company, resulting in a change of control of our company. See below “— E. Share Ownership — Historical Changes in
Shareholdings of our Major Shareholders” for more details.
In April 2008, we adopted our Share Incentive Plan pursuant to which we have reserved 11,652,556 ordinary shares to be issued
upon the exercise of share options that we may grant to certain employees and others. We adopted on July 2, 2008, and amended and
restated on February 16, 2009 and May 21, 2012, respectively, our 2008 Performance Incentive Plan pursuant to which the maximum
number of ordinary shares that may be issued is 12,545,999 ordinary shares as of September 30, 2012, plus an automatic annual
increase on October 1 of each calendar year commencing from October 1, 2012, by an amount equal to the lesser of (i) 2% of the total
number of ordinary shares issued and outstanding on September 30 of the same calendar year, (ii) 2,850,000 ordinary shares, or
(iii) such number of ordinary shares as may be determined by our board of directors. For more information on options and/or
restricted shares granted to our existing shareholders, see “Item 6.B. Director, Senior Management and Employees — Compensation
— Share Options, Restricted Shares and Share Incentive Plans.”
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Historical Changes in Shareholdings of our Major Shareholders
In 2010, Champion Shine Trading Limited acquired an aggregate of 175,804 ordinary shares as represented by 43,951 ADSs
from the open market.
In May 2010, Champion International Holdings Limited transferred our ordinary shares then held by it to four BVI entities
formed by its then shareholders including Champion Education Holdings Limited, a British Virgin Island company jointly owned by
our co-founders and directors Zhengdong Zhu and Baohong Yin.
In October 2011, Bertelsmann Asia Investment AG (“BAI”) sold to CST 16,268,523 shares, of which 1,750,000 ordinary shares
are represented by 437,500 ADSs, for US$28,917,300. The purchase of the shares except the ADS was completed on December 8,
2011 and the purchase of the ADSs was completed on December 9, 2011. This purchase was funded by an interest-free promissory
note (the “Note”) in the amount of US$28,917,300 issued by CST and CEH to BAI on October 26, 2011. The Note matures on
November 29, 2014. As collateral for the Note, CST and CEH have pledged 2,408,769 and 46,396,800 of their ordinary shares,
respectively, or 48,805,569 in total, pursuant to the Deed of Share Charge by and among CST and CEH, on the one hand, and BAI, on
the other, dated October 26, 2011.
In 2012, Champion Shine Trading Limited acquired an aggregate of 248,276 ordinary shares as represented by 62,069 ADSs
from the open market.
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
A. Major Shareholders
Please refer to “Item 6.E. Directors, Senior Management and Employees — Share Ownership.”
B. Related Party Transactions.
Shareholders Agreement
We have entered into a shareholders agreement with Orchid Asia III, L.P., Orchid Asia Co-Investment Limited and Artson
Limited and our existing holders of ordinary shares. Pursuant to the shareholders agreement, we granted certain registration rights to
holders of our registrable securities. Registrable securities include (i) our ordinary shares issuable or issued upon conversion of our
preferred shares, (ii) any of our ordinary shares issued as a dividend or other distribution with respect to, in exchange for, or in
replacement of, the shares referenced in (i), and (iii) any other ordinary shares owned or acquired by any of holders of our preferred
shares, excluding, among others, shares sold in a public offering. On July 25, 2008, the parties amended the shareholders agreement
solely for the purpose of revising the definition of a qualified public offering to be a firm commitment underwritten public offering of
our ordinary shares as represented by ADSs on NYSE Arca.
Under the terms of the agreement, from the date that is six months after the closing of our initial public offering, which occurred
on August 4, 2008, holders of a majority in interests of our then outstanding registrable securities may require us to effect the
registration for the sale of their registrable securities. We are obliged to effect up to five demand registrations. We have the right to
defer filing for a period of no more than 90 days if our board of directors in good faith determines that filing of such registration will
be materially detrimental to us and our shareholders, but we cannot utilize this right more than once in any twelve-month period.
Holders of registrable securities also have “piggyback” registration rights, pursuant to which they may require us to register all
or any part of the registrable securities then held by such holders when we file any registration statements for purposes of effecting a
public offering of our securities.
If any of the offerings relating to a demand registration or a piggyback registration involves an underwriting, the managing
underwriter of any such offering has certain rights to limit the number of shares included in such registration. However, where the
number of registrable securities included in an underwritten public offering is to be reduced, the securities other than registrable
shares must be reduced before any registrable securities may be reduced, and the number of our registrable shares that are included in
such offering may not be reduced to less than 75% of the aggregate number of our registrable shares requested to be included in such
underwriting.
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Holders of registrable securities may also require us to effect a registration on Form S-3 or Form F-3 and any related qualification or
compliance, as applicable, for a public offering of all or a part of their registrable securities so long as we are entitled to use Form S-3 or
Form F-3 for such offering. However, we are not obliged to effect any such registration, when (i) the aggregate price to the public of such
offering is less than $500,000, or (ii) within the six month period preceding the date of such request, we have already effected a registration
other than the registration from which the registrable securities of such holders have been excluded. We have the right to defer such filing for
a period of no more than 90 days if our board of directors in good faith determines that filing of such registration will be materially
detrimental to us and our shareholders, but we cannot utilize this right more than once during any twelve-month period.
We are generally required to pay all expenses relating to any demand, piggyback or F-3 or S-3 registration other than all selling
expenses or other amounts payable to underwriters or brokers for selling shareholders, if applicable.
We will have no obligations to effect any demand, piggyback or F-3 or S-3 registration with respect to any registrable securities after
five years following the consummation of our initial public offering.
Agreements among CDEL Hong Kong, Champion Technology, Champion Education Technology, Beijing Champion and Its
Shareholders
See “Item 4.C. Information on the Company — Organizational Structure.”
In January 2013, Mr. Zhengdong Zhu, Ms. Baohong Yin, Champion Education Holdings Limited and Champion Shine Trading
Limited undertook to our company that they will not take any actions whatsoever to overrule or undermine any decision of our board of
directors or our audit committee with respect to any proposed transfer of equity interest of Beijing Champion or with respect to Beijing
Champion.
C. Interests of Experts and Counsel
Not applicable.
ITEM 8.
FINANCIAL INFORMATION
A. Consolidated statements and other financial information.
We have appended consolidated financial statements filed as part of this annual report. See “Item 18. Financial Statements.”
Legal Proceedings
We are not currently involved in any litigation, arbitration or administrative proceedings that could have a material adverse effect on
our financial condition or results of operations. From time to time, we may be subject to various claims and legal actions arising in the
ordinary course of business.
Dividend Policy
On November 16, 2011, our board of directors approved and declared a special cash dividend of $0.12 per ordinary share on our
outstanding shares to shareholders of record as of the close of trading on December 15, 2011. Holders of ADS, each representing four
ordinary shares of CDEL, were accordingly entitled to the cash dividend of $0.48 per ADS.
On November 13, 2012, our board of directors approved and declared a special cash dividend of $0.12 per ordinary share on our
outstanding ordinary shares to shareholders of record as of the close of trading on December 7, 2012. Holders of ADSs are accordingly
entitled to the cash dividend of $0.48 per ADS.
We are a holding company incorporated in the Cayman Islands. We may rely on dividends from our subsidiaries in China. Current
PRC regulations permit our subsidiaries to pay dividends to us only out of their accumulated profits, if any, determined in accordance with
PRC accounting standards and regulations. In addition, our subsidiaries in China are required to set aside each year a certain amount of their
accumulated after-tax profits, if any, to fund certain statutory reserves. These reserves may not be distributed as cash dividends. Further, if
our subsidiaries in China incur debt on their own behalf, the instruments governing the debt may restrict their ability to pay dividends or
make other payments to us. In addition, under the New EIT Law, effective as of January 1, 2008, dividends from our PRC subsidiaries to us
may be subject to a 10% withholding tax, subject to reduction by an applicable tax treaty with the PRC if they are derived from profits
generated after January 1, 2008. For a detailed discussion, see “Item 3.D. Key Information — Risk Factors — Risks Relating to Our
Corporate Structure and Restrictions on Our Industry — We may rely principally on dividends and other distributions on equity paid by our
PRC subsidiaries for our cash requirements, but such dividends and other distributions are subject to restrictions under PRC law. Limitations
on the ability of our PRC subsidiaries to transfer funds to us could materially and adversely affect our ability to grow, make investments or
acquisitions, pay dividends, and otherwise fund and conduct our businesses,” and “Item 5.A. Operating and Financial Review and Prospects
— Operating Results — Description of Key Line Items — Taxation — Enterprise Income Tax.”
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Our Board of Directors will, on a yearly basis, consider continuing to pay cash dividends in the future. Any future determination
to pay dividends, if any, will be made at the discretion of our board of directors and will be based upon our future operations and
earnings, capital requirements and surplus, general financial condition, shareholders’ interests, contractual restrictions, market
conditions and other factors our board of directors may deem relevant.
Holders of our ADSs will be entitled to receive dividends, if any, subject to the terms of the deposit agreement, to the same
extent as the holders of our ordinary shares. Cash dividends will be paid to the depositary in U.S. dollars, which will distribute them
to the holders of ADSs according to the terms of the deposit agreement. Other distributions, if any, will be paid by the depositary to
the holders of ADSs in any means it deems legal, fair and practical.
B. Significant Changes
Except as disclosed elsewhere in this annual report, we have not experienced any significant changes since the date of our
audited financial statements included in this report.
ITEM 9.
THE OFFER AND LISTING
A. Offering and listing details.
Price Range of Our ADSs
Our ADSs were initially listed for trading on NYSE Arca under the symbol “DL.” On February 4, 2009, we transferred the
listing and trading of our ADSs from NYSE Arca to the New York Stock Exchange, Inc., or the NYSE, under the same symbol “DL.”
The following table sets forth the monthly high and low trading prices of our ADSs on the NYSE (or NYSE Arca, prior to February 4,
2009), for the periods indicated:
Annual Highs and Lows
Fiscal Year 2008 (from July 30, 2008)
Fiscal Year 2009
Fiscal Year 2010
Fiscal Year 2011
Fiscal Year 2012
Quarterly Highs and Lows
First Fiscal Quarter of 2011
Second Fiscal Quarter of 2011
Third Fiscal Quarter of 2011
Fourth Fiscal Quarter of 2011
First Fiscal Quarter of 2012
Second Fiscal Quarter of 2012
Third Fiscal Quarter of 2012
Fourth Fiscal Quarter of 2012
Monthly Highs and Lows
2012
August
September
October
November
December
2013
January (through January 25, 2013)
High
Low
$7.00
$8.90
$7.96
$5.48
$4.15
$5.48
$5.14
$4.06
$3.57
$2.90
$4.15
$4.13
$3.62
$3.00
$2.08
$3.04
$1.85
$1.80
$3.80
$3.74
$1.85
$2.05
$1.80
$2.10
$2.78
$2.40
$3.40
$3.55
$3.50
$4.43
$5.00
$2.40
$3.07
$3.08
$3.09
$3.95
$4.90
$3.82
On January 25, 2013, the closing sale price of our ADSs as reported on the NYSE was $4.77 per ADS.
B. Plan of Distribution
Not applicable.
97
C. Markets
See Item 9.A. above.
D. Selling Shareholders
Not applicable.
E. Dilution
Not applicable.
F. Expenses of the Issue
Not applicable.
ITEM 10. ADDITIONAL INFORMATION
A. Share capital
Not applicable.
B. Memorandum of Association and Articles of Association
We incorporate by reference into this annual report the description of our second amended and restated memorandum of
association and articles of association contained in “Description of Share Capital” of our F-1 registration statement (File No. 333-
152167) originally filed with the Securities and Exchange Commission on July 7, 2008, as amended.
Differences in Corporate Law
China Distance Education Holdings Limited was incorporated as an exempted company with limited liability in the Cayman
Islands in January 2008 under the Companies Law of the Cayman Islands, or the Company Law. Our corporate affairs are governed
by our second amended and restated memorandum of association and articles of association, the Cayman Islands Companies Law and
the common law of the Cayman Islands.
The Companies Law is modeled after similar laws in the United Kingdom but does not follow recent changes in United
Kingdom laws. In addition, the Companies Law differs from laws applicable to United States corporations and their shareholders. Set
forth below is a summary of the significant differences between the provisions of the Companies Law applicable to us and the laws
applicable to companies incorporated in the United States.
Mergers and Similar Arrangements . A merger of two or more constituent companies under Cayman Islands law requires a plan
of merger or consolidation to be approved by the directors of each constituent company and authorization by (a) a special resolution
of the shareholders and (b) such other authorization, if any, as may be specified in such constituent company’s articles of association.
A merger between a Cayman parent company and its Cayman subsidiary or subsidiaries does not require authorization by a
resolution of shareholders of that Cayman subsidiary if a copy of the plan of merger is given to every member of that Cayman
subsidiary to be merged unless that member agrees otherwise. For this purpose, a subsidiary is a company of which at least ninety
percent (90%) of the issued shares entitled to vote are owned by the parent company.
The consent of each holder of a fixed or floating security interest over a constituent company is required unless this requirement
is waived by a court in the Cayman Islands.
Save in certain circumstances, a dissentient shareholder of a Cayman constituent company is entitled to payment of the fair
value of his shares upon dissenting to a merger or consolidation. The exercise of appraisal rights will preclude the exercise of any
other rights save for the right to seek relief on the grounds that the merger or consolidation is void or unlawful.
98
In addition, there are statutory provisions that facilitate the reconstruction and amalgamation of companies, provided that the
arrangement is approved by a majority in number of each class of shareholders and creditors (representing 75% by value) with whom
the arrangement is to be made, and who must, in addition, represent three-fourths in value of each such class of shareholders or
creditors, as the case may be, that are present and voting either in person or by proxy at a meeting, or meetings, convened for that
purpose. The convening of the meetings and subsequently the arrangement must be sanctioned by the Grand Court of the Cayman
Islands. While a dissenting shareholder has the right to express to the court the view that the transaction ought not to be approved, the
court can be expected to approve the arrangement if it determines that:
• the statutory provisions as to the required majority vote have been met;
• the shareholders have been fairly represented at the meeting in question and the statutory majority are acting bona fide
without coercion of the minority to promote interests adverse to those of the class;
• the arrangement is such that may be reasonably approved by an intelligent and honest man of that class acting in respect of his
interest; and
• the arrangement is not one that would more properly be sanctioned under some other provision of the Companies Law.
When a takeover offer is made and accepted by holders of 90% of the shares within four months, the offeror may, within a two-
month period commencing on the expiration of such four month period, require the holders of the remaining shares to transfer such
shares on the terms of the offer. An objection can be made to the Grand Court of the Cayman Islands but this is unlikely to succeed in
the case of an offer which has been so approved unless there is evidence of fraud, bad faith or collusion.
If an arrangement and reconstruction is thus approved, the dissenting shareholder would have no rights comparable to appraisal
rights, which would otherwise ordinarily be available to dissenting shareholders of Delaware corporations, providing rights to receive
payment in cash for the judicially determined value of the shares.
Shareholders’ Suits. In principle, we will normally be the proper plaintiff and a derivative action may not be brought by a
minority shareholder. However, based on English authorities, which would in all likelihood be of persuasive authority in the Cayman
Islands, exceptions to the foregoing principle apply in circumstances in which:
• a company is acting or proposing to act illegally or beyond the scope of its authority;
• the act complained of, although not beyond the scope of its authority, could be effected duly if authorized by more than a
simple majority vote which has not been obtained; and
• those who control the company are perpetrating a “fraud on the minority.”
Corporate Governance. Cayman Islands laws do not restrict transactions with directors, requiring only that directors exercise a
duty of care and owe a fiduciary duty to the companies for which they serve. Under our second amended and restated memorandum
of association and articles of association, subject to any separate requirement for audit committee approval under the applicable rules
of the NYSE or unless disqualified by the chairman of the relevant board meeting, so long as a director discloses the nature of his
interest in any contract or arrangement which he is interested in, such a director may vote in respect of any contract or proposed
contract or arrangement in which such director is interested and may be counted in the quorum at such meeting.
C. Material Contracts
We have not entered into any material contracts other than in the ordinary course of business and other than those described in
“Item 4. Information on the Company”, “Item 7. Major Shareholders and Related Party Transactions” or elsewhere in this annual
report on Form 20-F.
D. Exchange Controls
Regulation of Foreign Exchange
The PRC government imposes restrictions on the convertibility of the Renminbi and on the collection and use of foreign
currency by PRC entities. Under current regulations, the Renminbi is convertible for current account transactions, which include
dividend distributions, interest payments, and the import and export of goods and services. Conversion of Renminbi into foreign
currency and foreign currency into Renminbi for capital account transactions, such as direct investment, portfolio investment and
loans, however, is still generally subject to the prior approval of SAFE.
99
Under current PRC regulations, foreign-invested enterprises such as our PRC subsidiaries are required to apply to SAFE for a
Foreign Exchange Registration Certificate for Foreign-Invested Enterprise. With such a certificate (which is subject to review and
renewal by SAFE on an annual basis), a foreign-invested enterprise may open foreign exchange bank accounts at banks authorized to
conduct foreign exchange business by SAFE and may buy, sell and remit foreign exchange through such banks, subject to
documentation and approval requirements. Foreign-invested enterprises are required to open and maintain separate foreign exchange
accounts for capital account transactions and current account transactions. In addition, there are restrictions on the amount of foreign
currency that foreign-invested enterprises may retain in such accounts.
On November 19, 2012, SAFE promulgated the Circular of SAFE on Further Improving and Adjusting the Direct Investment
Foreign Exchange Administration Policies, or the Circular on Direct Investment Polices, which took effect on December 17, 2012.
Under the Circular on Direct Investment Polices, opening of a foreign exchange account under direct investment, re-investment with
domestic legal income by foreign investors and foreign exchange purchasing and foreign payment under direct investment would no
longer be subject to prior approval of SAFE.
Regulation of Foreign Exchange in Certain Onshore and Offshore Transactions
In October 2005, SAFE issued the Notice on Issues Relating to the Administration of Foreign Exchange in Fund-Raising and
Return Investment Activities of Domestic Residents Conducted via Offshore Special Purpose Companies, or SAFE Circular 75,
which became effective as of November 1, 2005. According to SAFE Circular 75, prior to establishing or assuming control of an
offshore enterprise for the purpose of financing that offshore enterprise with assets or equity interests in an onshore enterprise in the
PRC, each PRC resident, whether a natural or legal person, must complete certain overseas investment foreign exchange registration
procedures with the relevant local SAFE branch. An amendment to the registration with the local SAFE branch is required to be filed
by any PRC resident that directly or indirectly holds interests in that offshore enterprise upon either (i) the injection of equity interests
or assets of an onshore enterprise to the offshore enterprise or (ii) any overseas fund-raising by such offshore enterprise after such
injection. An amendment to the registration with the local SAFE branch is also required to be filed by such PRC resident when there
is any material change involving a change in the capital of the offshore enterprise, such as (i) an increase or decrease in its capital,
(ii) a transfer or swap of shares, (iii) a merger or division, (iv) a long-term equity or debt investment or (v) the creation of any security
interests.
SAFE Circular 75 applies retroactively. As a result, PRC residents who established or acquired control of offshore companies
that made onshore investments in the PRC in the past were required to complete the relevant overseas investment foreign exchange
registration procedures by March 31, 2006. Under SAFE Circular 75, failure to comply with the registration procedures may result in
restrictions on the relevant onshore entity, including restrictions on the payment of dividends and other distributions to its offshore
parent or affiliate and restrictions on the capital inflow from the offshore entity, and may also subject relevant PRC residents to
penalties under the PRC foreign exchange administration regulations.
As a Cayman Islands company, we are considered a foreign entity in China. If we purchase the assets or equity interests of a
PRC company owned by PRC residents in exchange for our equity interests, such PRC residents will be subject to the registration
procedures described in SAFE Circular 75. Moreover, PRC residents who are beneficial holders of our shares are required to register
with SAFE in connection with their investment in us.
Dividend Distributions
See “Item 8.A. Financial Information — Dividend Policy” in connection with our policy regarding dividend distributions. See
also “Item 3.D. Key Information — Risk Factors — Risks Relating to Our ADS — You may not receive distributions on our ordinary
shares or any value for them if such distribution is illegal or if any required government approval cannot be obtained in order to make
such distribution available to you.”
E. Taxation
The following is a general summary of the material Cayman Islands, U.S. federal and People’s Republic of China income tax
consequences relevant to an investment in our ADSs and ordinary shares. The discussion is not intended to be, nor should it be
construed as, legal or tax advice to any particular prospective purchaser or current holders of our ADSs. The discussion is based on
laws and relevant interpretations thereof in effect as of the date of this annual report, all of which are subject to change or different
interpretations, possibly with retroactive effect. The discussion does not address United States state or local tax laws, or tax laws of
jurisdictions other than the Cayman Islands, the People’s Republic of China and the United States.
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Cayman Islands Taxation
The Cayman Islands currently levies no taxes on individuals or corporations based upon profits, income, gains or appreciations
and there is no taxation in the nature of inheritance tax or estate duty or withholding tax applicable to us or to any holder of ADSs or
ordinary shares. There are no other taxes likely to be material to us levied by the Government of the Cayman Islands except for stamp
duties which may be applicable on instruments executed in, or after execution brought within the jurisdiction of the Cayman Islands.
No stamp duty is payable in the Cayman Islands on transfers of shares of Cayman Islands companies except those which hold
interests in land in the Cayman Islands. The Cayman Islands is not party to any double tax treaties. There are no exchange control
regulations or currency restrictions in the Cayman Islands.
Pursuant to Section 6 of the Tax Concessions Law (1999 Revision) of the Cayman Islands, we have obtained an undertaking
from the Governor-in-Cabinet:
• that no law which is enacted in the Cayman Islands imposing any tax to be levied on profits or income or gains or
appreciations shall apply to CDEL Cayman or its operations; and
• that the aforesaid tax or any tax in the nature of estate duty or inheritance tax shall not be payable on the shares, debentures or
other obligations of CDEL Cayman.
The undertaking for CDEL Cayman is for a period of twenty years from January 29, 2008.
People’s Republic of China Taxation
In 2007 China passed a new Enterprise Income Tax Law, or the New EIT Law, and its implementing rules, both of which
became effective on January 1, 2008. The New EIT Law created a new “resident enterprise” classification, which, if applied to us,
would impose a 10% withholding tax on dividends payable to our non-PRC enterprise shareholders and with respect to gains derived
by our non-PRC enterprise shareholders from disposition of our shares or ADSs. The New EIT Law and its implementing rules are
unclear as to how to determine a PRC “resident enterprise” status for non-Chinese enterprise or enterprise group controlled entities.
See “Item 3.D. Key Information — Risk Factors — Under China’s New EIT Law, we may be classified as a ‘resident enterprise’ of
China. Such classification could result in unfavorable tax consequences to us and our non-PRC shareholders.”
If we are not deemed as a resident enterprise, then dividends payable to our non-PRC shareholders and gains from disposition of
our shares of ADSs by our non-PRC shareholders will not be subject to PRC income tax withholding.
United States Federal Income Taxation
This discussion describes the material U.S. federal income tax consequences to U.S. Holders (as defined below) of the purchase,
ownership and disposition of our ADSs or ordinary shares. This discussion does not address any aspect of U.S. federal gift or estate
tax, or the state, local or non-U.S. tax consequences of an investment in our ADSs and ordinary shares. This discussion applies to you
only if you beneficially own our ADSs or ordinary shares as capital assets for tax purposes. This discussion does not apply to you if
you are a member of a class of holders subject to special rules, such as:
• dealers in securities or currencies;
• traders in securities that elect to use a mark-to-market method of accounting for securities holdings;
• banks or certain financial institutions;
• insurance companies;
• tax-exempt organizations;
• partnerships or other entities treated as partnerships or other pass-through entities for U.S. federal income tax purposes or
persons holding ADSs or ordinary shares through any such entities;
• regulated investments companies or real estate investment trusts;
• persons that hold ADSs or ordinary shares as part of a hedge, straddle, constructive sale, conversion transaction or other
integrated investment;
• persons whose functional currency for tax purposes is not the U.S. dollar;
• persons liable for alternative minimum tax; or
• persons who actually or constructively own 10% or more of the total combined voting power of all classes of our shares
entitled to vote (including ADSs and ordinary shares).
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This discussion is based on the U.S. Internal Revenue Code of 1986, as amended, which we refer to in this discussion as the
Code, its legislative history, existing and proposed regulations promulgated thereunder, published rulings and court decisions, all as
of the date hereof. These laws are subject to change, possibly on a retroactive basis. In addition, this discussion relies on our
assumptions regarding the value of our ADSs and ordinary shares and the nature of our business over time. Finally, this discussion is
based in part, upon representations of the depositary and the assumptions that each obligation in the deposit agreement and any
related agreement will be performed in accordance with its terms.
Prospective purchasers are urged to consult their own tax advisor concerning the particular U.S. federal income tax
consequences to them of the purchase, ownership and disposition of our ADSs and ordinary shares, as well as the
consequences to them arising under the laws of any other taxing jurisdiction.
For purposes of the U.S. federal income tax discussion below, you are a “U.S. Holder” if you beneficially own ADSs or ordinary
shares as capital assets within the meaning of Section 1221 of the Code and are:
• An individual citizen or resident of the United States for U.S. federal income tax purposes;
• a corporation, or other entity taxable as a corporation, that was created or organized in or under the laws of the United States
or any state thereof or the District of Columbia;
• an estate the income of which is subject to U.S. federal income tax regardless of its source; or
• a trust if (a) a court within the United States is able to exercise primary supervision over its administration and one or more
U.S. persons have the authority to control all substantial decisions of the trust, or (b) the trust has a valid election in effect to
be treated as a U.S. person.
For U.S. federal income tax purposes, income earned through a U.S. or non-U.S. partnership or other flow-through entity is
attributed to its owners. Accordingly, if a partnership or other flow-through entity holds ADSs or ordinary shares, the tax treatment of
the holder will depend on the status of the partner or other owner and the activities of the partnership or other flow-through entity.
Dividends on ADSs and ordinary shares
Subject to the “Passive Foreign Investment Company” discussion below, if we make distributions and you are a U.S. Holder, the
gross amount of any distributions with respect to your ADSs and ordinary shares (including the amount of any taxes withheld
therefrom) will be includible in your gross income on the day you actually or constructively receive such income as dividend income
if the distributions are made from our current or accumulated earnings and profits, calculated according to U.S. federal income tax
principles.
To the extent, if any, that the amount of any distribution by us on ADSs and ordinary shares exceeds our current and
accumulated earnings and profits as determined under U.S. federal income tax principles, it will be treated first as a tax-free return of
the U.S. Holder’s reflected tax basis in the ADSs and ordinary shares and thereafter as capital gain. However, we do not intend to
calculate our earnings and profits according to U.S. federal income tax principles. Accordingly, distributions on our ADSs and
ordinary shares, if any, will generally be reported to you as dividend distributions for U.S. tax purposes. Corporations will not be
entitled to claim a dividends-received deduction with respect to distributions made by us. Dividends may constitute foreign source
passive income for purposes of the U.S. foreign tax credit rules. You should consult your own tax advisors as to your ability, and the
various limitations on your ability, to claim foreign tax credits in connection with the receipt of dividends.
Sales and other dispositions of ADSs or ordinary shares
Subject to the “Passive Foreign Investment Company” discussion below, when you sell or otherwise dispose of ADSs or
ordinary shares, you will recognize capital gain or loss in an amount equal to the difference between the amount realized on the sale
or other disposition and your adjusted tax basis in the ADSs or ordinary shares. Any such gain or losses that you recognize will be
treated as U.S. source income for foreign tax credit limitation purposes. Your adjusted tax basis will equal the amount you paid for
the ADSs or ordinary shares. Any gain or loss you recognize will be long-term capital gain or loss if your holding period in our ADSs
or ordinary shares is more than one year at the time of disposition. If you are a non-corporate U.S. Holder, including an individual,
any such long-term capital gain will be taxed at preferential rates. Your ability to deduct capital losses will be subject to various
limitations.
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Passive foreign investment company
In general, we will be classified as a PFIC in any taxable year if either: (a) the average quarterly value of our gross assets that
produce passive income or are held for the production of passive income is at least 50% of the average quarterly value of our total
gross assets or (b) 75% or more of our gross income for the taxable year is passive income (such as certain dividends, interest or
royalties). For purposes of the first test: (a) any cash and cash invested in short-term, interest-bearing, debt instruments or bank
deposits that are readily convertible into cash will generally count as producing passive income or held for the production of passive
income, and (b) the total value of our assets is calculated based on our market capitalization.
We will be treated as owning our proportionate share of the assets and earning our proportionate share of the income of any
other corporation in which we own, directly or indirectly, at least 25% (by value) of the stock.
We believe that we were not a passive foreign investment company, or PFIC, for U.S. federal income tax purposes for our
taxable year ended September 30, 2012. However, the application of the PFIC rules is subject to ambiguity in several respects, and, in
addition, PFIC status is tested each year and depends on the composition of our assets and income and the value of our assets from
time to time. Since we currently hold, and expect to continue to hold, a substantial amount of cash and other passive assets and, since
the value of our assets is to be determined in large part by reference to the market prices of our ADSs and ordinary shares, which is
likely to fluctuate over time, there can be no assurance that we will not be a PFIC in the current taxable year or in any future taxable
year.
If we were a PFIC for any taxable year during which you held ADSs or ordinary shares, certain adverse U.S. federal income tax
rules would apply. You would generally be subject to additional taxes and interest charges on certain “excess distributions” we make
and on any gain realized on the disposition or deemed disposition of your ADSs or ordinary shares, regardless of whether we continue
to be a PFIC in the year in which you receive an “excess distribution” or dispose of or are deemed to have disposed of, your ADSs or
ordinary shares. Distributions in respect of your ADSs or ordinary shares during a taxable year would generally constitute “excess
distributions” if, in the aggregate, they exceed 125% of the average amount of distributions with respect to your ADSs or ordinary
shares over the three preceding taxable years or, if shorter, the portion of your holding period before such taxable year.
To compute the tax on “excess distributions” or any gain, (a) the “excess distribution” or the gain would be allocated ratably to
each day in your holding period, (b) the amount allocated to the current year and any tax year prior to the first taxable year in which
we were a PFIC would be taxed as ordinary income in the current year, (c) the amount allocated to other taxable years would be
taxable at the highest applicable marginal rate in effect for that year, and (d) an interest charge at the rate for underpayment of taxes
for any period described under (c) above would be imposed on the resulting tax liability on the portion of the “excess distribution” or
gain that is allocated to such period.
Under certain attribution rules, if we are a PFIC, you will be deemed to own your proportionate share of lower-tier PFICs, and
will be subject to U.S. federal income tax on (i) a distribution on the shares of a lower-tier PFIC and (ii) a disposition of shares of a
lower-tier PFIC, both as if you directly held the shares of such lower-tier PFIC.
If we were a PFIC in any year, as a U.S. Holder, you may be required to file an annual return on IRS Form 8621 regarding your
ADSs and ordinary shares. In addition, unless otherwise provided by the U.S. Treasury, each U.S. shareholder of a PFIC is required to
file an annual report containing such information as the U.S. Treasury may require. If we are or become a PFIC, you should consult
with your tax adviser regarding reporting requirements with regard to your ADSs and ordinary shares. If we were a PFIC in any year,
you would generally be able to avoid the “excess distribution” rules described above by making a timely “mark-to-market” election
with respect to your ADSs provided our ADSs are “marketable.” Our ADSs will be “marketable” as long as they remain regularly
traded on a national securities exchange, such as the NYSE. If you made this election in a timely fashion, you would generally
recognize as ordinary income or ordinary loss the difference between your adjusted tax basis in the ADSs and their value on the last
day of that taxable year. Any ordinary income resulting from this election would generally be taxed at ordinary income rates. Any
ordinary losses would be limited to the extent of the net amount of previously included income as a result of the mark-to-market
election, if any. Your basis in the ADSs would be adjusted to reflect any such income or loss. You should consult your own tax
advisor regarding potential advantages and disadvantages to you of making a “mark-to-market” election with respect to your ADSs.
The mark-to-market election will not be available for any lower tier PFIC that is deemed owned pursuant to the attribution rules
discussed above.
Alternatively, a U.S. Holder of stock in a PFIC may make a so-called “Qualified Electing Fund” election to avoid the PFIC rules
regarding “excess” distribution and gain described above. A U.S. Holder that makes such an election would include in income for a
taxable year its pro rata share of the corporation’s income for the taxable year. However, we do not intend to provide you with the
information you would need to make or maintain a “Qualified Electing Fund” election and you will, therefore, not be able to make or
maintain such an election with respect to your ADSs or ordinary shares.
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U.S. information reporting and backup withholding rules
Dividend payments with respect to the ADSs and ordinary shares and the proceeds received on the sale or other disposition of
ADSs and ordinary shares may be subject to information reporting to the IRS and to backup withholding (currently imposed at a rate
of 28%). Backup withholding will not apply, however, if you (a) are a corporation or come within certain other exempt categories
and, when required, can demonstrate that fact or (b) provide a taxpayer identification number, certify as to no loss of exemption from
backup withholding and otherwise comply with the applicable backup withholding rules. To establish your status as an exempt
person, you will be required to provide certification on IRS Form W-9. Any amounts withheld from payments to you under the
backup withholding rules that exceed your U.S. federal income tax liability will be allowed as a refund or a credit against your U.S.
federal income tax liability, provided that you furnish the required information to the IRS. Certain individuals holding the ADSs or
ordinary shares other than in an account at a U.S. financial institution may be subject to additional information reporting
requirements.
PROSPECTIVE PURCHASERS OF OUR ADSS AND ORDINARY SHARES SHOULD CONSULT THEIR OWN TAX
ADVISOR REGARDING THE APPLICATION OF THE U.S. FEDERAL INCOME TAX LAWS TO THEIR PARTICULAR
SITUATIONS AS WELL AS ANY TAX CONSEQUENCES RESULTING FROM PURCHASING, HOLDING OR DISPOSING
OF OUR ADSS AND ORDINARY SHARES, INCLUDING THE APPLICABILITY AND EFFECT OF THE TAX LAWS OF ANY
STATE, LOCAL OR NON-US JURISDICTION AND INCLUDING ESTATE, GIFT AND INHERITANCE LAWS.
F. Dividends and Paying Agents
Not applicable.
G. Statement by Experts.
Not applicable.
H. Documents on Display
We previously filed with the Securities and Exchange Commission our registration statement on Form F-1 as amended.
We have filed this annual report on Form 20-F with the Securities and Exchange Commission under the Securities Exchange Act
of 1934, as amended. Statements made in this annual report as to the contents of any document referred to are not necessarily
complete. With respect to each such document filed as an exhibit to this annual report, reference is made to the exhibit for a more
complete description of the matter involved, and each such statement shall be deemed qualified in its entirety by such reference.
We are subject to the informational requirements of the Exchange Act and file reports and other information with the Securities
and Exchange Commission. Reports and other information which we filed with the Securities and Exchange Commission, including
this annual report on Form 20-F, may be inspected and copied at the public reference room of the Securities and Exchange
Commission at 100 F Street, N.E. Washington D.C. 20549.
You can also obtain copies of this annual report on Form 20-F by mail from the Public Reference Section of the Securities and
Exchange Commission, 100 F Street, N.E., Washington D.C. 20549, at prescribed rates. Additionally, copies of this material may be
obtained from the Securities and Exchange Commission’s Internet site at http://www.sec.gov. The Commission’s telephone number is
1-800-SEC-0330.
I. Subsidiary Information
For a listing of our subsidiaries, see “Item 4. Information on the Company — C. Organizational Structure.”
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Quantitative and Qualitative Disclosures about Market Risk
Interest Rate Risk
Our exposure to interest rate risk primarily relates to our interest income generated by excess cash, which is mostly held in
interest-bearing bank deposits and AAA rated money market funds, as of the date of this annual report. We have not used derivative
financial instruments in our investment portfolio. We have not been exposed, nor do we anticipate being exposed, to material risks
due to changes in market interest rates. However, our future interest income may fall short of expectations due to changes in market
interest rates.
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Foreign Currency Risk
Substantially all of our revenues and expenditures are denominated in Renminbi. As a result, fluctuations in the exchange rate
between the U.S. dollars and Renminbi will affect our financial results in U.S. dollars terms without giving effect to any underlying
change in our business or results of operations. The Renminbi’s exchange rate with the U.S. dollar and other currencies is affected by,
among other things, changes in China’s political and economic conditions and China’s foreign exchange policies. The People’s Bank
of China regularly intervenes in the foreign exchange market to limit fluctuations in Renminbi exchange rate and achieve certain
exchange rate targets, and through such intervention kept the U.S. dollar-Renminbi exchange rate relatively stable within a very
narrow range against the U.S. dollar (remaining within 1% of its July 2008 high) for almost two years from July 2008. On June 20,
2010, the People’s Bank of China announced that the PRC government would further reform the Renminbi exchange rate regime and
increase the flexibility of the exchange rate. On April 15, 2012, the People’s Bank of China announced that it expanded the daily
RMB against U.S. dollar trading band of the inter-bank spot foreign exchange market from 0.5% to 1% as of April 16, 2012, to allow
Renminbi to move more freely and better reflect market supply and demand. Under China’s current exchange rate regime, the
Renminbi may appreciate or depreciate significantly in value against the U.S. dollar in the medium to long term. There remains
significant international pressure on the PRC government to adopt a substantial liberalization of its currency policy, which could
result in a further and more significant appreciation in the value of the Renminbi against the U.S. dollar.
To the extent that we need to convert our U.S. dollar denominated cash balance into Renminbi for our operations, appreciation
of the Renminbi against the U.S. dollar would have an adverse effect on the Renminbi amount we receive from the conversion.
Assuming we had converted the U.S. dollar denominated cash balance of $13.5 million as of September 30, 2012 into Renminbi at
the exchange rate of $1.00 for RMB6.2848 as of September 30, 2012, this cash balance would have been RMB84.7 million.
Assuming a further 1.0% appreciation of the Renminbi against the U.S. dollar, this cash balance would have decreased to RMB83.9
million as of September 30, 2012.
Very limited hedging transactions are available in China to reduce our exposure to exchange rate fluctuations. To date, we have
not entered into any hedging transactions in an effort to reduce our exposure to foreign currency exchange risk. While we may decide
to enter into hedging transactions in the future, the availability and effectiveness of these hedging transactions may be limited and we
may not be able to successfully hedge our exposure at all. In addition, our currency exchange losses may be magnified by PRC
exchange control regulations that restrict our ability to convert Renminbi into foreign currency.
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
A. Debt Securities.
Not applicable.
B. Warrants and Rights.
Not applicable.
C. Other Securities.
Not applicable.
D. American Depositary Shares.
Fees and Charges Payable by a Holder of American Depositary Receipts
Persons depositing shares are charged a fee for each issuance of ADSs, including issuances resulting from distributions of
shares, share dividends, share splits, exercise of rights, bonus and rights distributions and other property, and for each surrender of
ADSs in exchange for deposited securities. The fee in each case is US$5.00 for each 100 ADSs, or any portion thereof, issued or
surrendered. The depositary also charges a fee of US$2.00 per 100 ADSs for distribution of cash proceeds pursuant to a cash
distribution, sale of rights and other entitlements or otherwise. The depositary may also charge an annual fee of US$2.00 per 100
ADSs for the operation and maintenance costs in administering the facility. Persons depositing shares also may be charged the
following expenses:
• Expenses incurred by the depositary, the custodian or their respective agents in connection with inspections of the relevant
share register maintained by the local registrar and/or performing due diligence on the central securities depository: an annual
fee of U.S.$1.00 per 100 ADSs (such fee to be assessed against holders of record as at the date or dates set by the depositary
as it sees fit and collected at the discretion of the depositary, subject to the Company’s prior consent, by billing such holders
for such fee or by deducting such fee from one or more cash dividends or other cash distributions)
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• Taxes and other governmental charges incurred by the depositary or the custodian on any ADR or ordinary shares underlying
an ADR, including any applicable interest and penalties thereon, and any share transfer or other taxes and other governmental
charges
• Cable, telex, electronic transmission and delivery expenses
• Transfer or registration fees for the registration of transfer of deposited securities on any applicable register in connection
with the deposit or withdrawal of deposited securities including those of a central depository for securities (where applicable)
• Expenses of the depositary in connection with the conversion of foreign currency into U.S. dollars
• Fees and expenses incurred by the depositary in connection with compliance with exchange control regulations and other
regulatory requirements applicable to the shares, deposited securities and ADSs; and
• Any other fees, charges, costs or expenses that may be incurred by the depositary from time to time
In the case of cash distributions, fees are generally deducted from the cash being distributed. Service fees may be collected from
holders of ADSs in a manner determined by the depositary with respect to ADSs registered in the name of investors (whether
certificated or in book-entry form) and ADSs held in brokerage and custodian accounts (via DTC). In the case of distributions other
than cash (i.e., stock dividends, rights, etc.), the depositary charges the applicable ADS record date holder concurrent with the
distribution. In the case of ADSs registered in the name of the investor (whether certificated or in book-entry form), the depositary
sends invoices to the applicable record date ADS holders.
In the case of ADSs held in brokerage and custodian accounts (via DTC), the depositary may, if permitted by the settlement
systems provided by DTC, collect the fees through such settlement systems (whose nominee is the registered holder of the ADSs held
in DTC) from the brokers and custodians holding ADSs in their DTC accounts. The brokers and custodians who hold their clients’
ADSs in DTC accounts in such case may in turn charge their clients’ accounts the amount of the service fees paid to the depositary.
In the event of refusal to pay the service fee, the depositary may, under the terms of the deposit agreement, refuse the requested
service until payment is received or may set off the amount of the service fee from any distribution to be made to the ADS holder.
If any tax or other governmental charge is payable by the holders and/or beneficial owners of ADSs to the depositary, the
depositary, the custodian or the Company may withhold or deduct from any distributions made in respect of deposited securities and
may sell for the account of the holder and/or beneficial owner any or all of the deposited securities and apply such distributions and
sale proceeds in payment of such taxes (including applicable interest and penalties) or charges, with the holder and the beneficial
owner thereof remaining fully liable for any deficiency.
Fees and Other Direct and Indirect Payments Made by the Depositary
Since the commencement of the Company’s most recent fiscal year, the Company has received the following direct and indirect
payments in the amounts of $0.1 million for expenses incurred by the Company relating to the ADR program, including:
• Share repurchase cancellation fee
• Share issuance fee
• ADR program training fee
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ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
None.
PART II
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS
On August 16, 2010, we entered into a restricted issuance agreement with Deutsche Bank Trust Company Americas, as
depositary, pursuant to which the depositary may issue restricted American depositary shares upon a deposit of restricted securities by
a depositor. Other than the foregoing, the rights of securities holders have not been materially modified.
ITEM 15. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our chief executive officer and chief financial officer, has performed an evaluation of
the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) as of the end of the
period covered by this report, as required by Rule 13a-15(b) under the Exchange Act. Based on that evaluation, our chief executive
officer and chief financial offer has concluded that, as of September 30, 2012, our disclosure controls and procedures were effective
to ensure that the information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that the information required
to be disclosed in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management,
including our chief executive officer and chief financial officer, to allow timely decisions regarding required disclosure.
Management’s Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in
Rule 13a-15(f) under the Exchange Act. Internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements in accordance with
generally accepted accounting principles, and includes those policies and procedures that (1) pertain to the maintenance of records
that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of a company’s assets, (2) provide reasonable
assurance that transactions are recorded as necessary to permit preparation of consolidated financial statements in accordance with
generally accepted accounting principles, and that a company’s receipts and expenditures are being made only in accordance with
authorizations of a company’s management and directors, and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use or disposition of a company’s assets that could have a material effect on the consolidated
financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of
changes in conditions, or that the degree of compliance with the policies and procedures may deteriorate.
As required by Section 404 of the Sarbanes-Oxley Act and related rules as promulgated by the SEC, our management, with the
participation of our chief executive officer and our chief financial officer, evaluated the effectiveness of our internal control over
financial reporting based on criteria established in the framework in Internal Control — Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, our management has concluded that
our internal control over financial reporting was effective as of September 30, 2012.
Our independent registered public accounting firm has audited our internal control over financial reporting as of September 30,
2012 and has issued an attestation report set forth below.
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of China Distance Education Holdings Limited
107
We have audited the internal control over financial reporting of China Distance Education Holdings Limited (the “Company”),
its subsidiaries and its variable interest entity and the subsidiaries of variable interest entity (collectively, the “Group”) as of
September 30, 2012, based on criteria established in Internal Control — Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission. The Company’s management is responsible for maintaining effective
internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting,
included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an
opinion on the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control
over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control
over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating
effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed by, or under the supervision of, the company’s
principal executive and principal financial officers, or persons performing similar functions, and effected by the company’s board of
directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s
internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable
assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally
accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with
authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial
statements.
Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper
management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis.
Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to
the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies
or procedures may deteriorate.
In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of
September 30, 2012, based on the criteria established in Internal Control — Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States),
consolidated financial statements as of and for the year ended September 30, 2012 of the Group and our report dated January 31, 2013
expressed an unqualified opinion on those financial statements and included an explanatory paragraph relating to retrospective
application of the authoritative guidance regarding the presentation of comprehensive income, which was adopted by the Group on
October 1, 2011.
/s/ Deloitte Touche Tohmatsu Certified Public Accountants, LLP,
Beijing, the People’s Republic of China
January 31, 2013
Changes in Internal Control over Financial Reporting
There were no significant changes in our internal control over financial reporting during the year ended September 30, 2012 that
have materially affected, or a reasonably likely to materially affect, our internal control over financial reporting.
ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT
Our audit committee consists of Carol Yu, Liankui Hu and Xiaoshu Chen. Carol Yu is the chairman of our audit committee. Our
board of directors has determined that all of our audit committee members satisfy the “independence” requirements of relevant rules
of the NYSE and Rule10A-3 under the Securities Exchange Act of 1934. Carol Yu meets the criteria of an audit committee financial
expert as set forth under the applicable rules of the SEC.
108
ITEM 16B. CODE OF ETHICS
Our board of directors has adopted a code of ethics that is applicable to our senior executive and financial officers. In addition,
our board of directors adopted a code of conduct that is applicable to all of our directors, officers and employees. Our code of ethics
and our code of conduct are publicly available on our website, http://www.cdeledu.com.
ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES
At the direction of the government of the People’s Republic of China in accordance with the Scheme of the Localization
Restructuring of Chinese-Foreign Cooperative Accounting Firms, Deloitte Touche Tohmatsu CPA Limited has restructured to a new
partnership and changed its name to Deloitte Touche Tohmatsu Certified Public Accountants LLP, effective from January 1, 2013.
Deloitte Touche Tohmatsu Certified Public Accountants LLP has succeeded Deloitte Touche Tohmatsu CPA Limited for all purposes
and assumed all of the obligations and rights of Deloitte Touche Tohmatsu CPA Limited with effect from January 1, 2013. Deloitte
Touche Tohmatsu CPA Limited and Deloitte Touche Tohmatsu Certified Public Accountants LLP are hereinafter referred to as
“Deloitte”.
The following table sets forth the aggregate fees by categories specified below in connection with certain professional services
rendered by Deloitte, our principal external auditors, in the fiscal year ended September 30, 2011 and 2012, respectively.
Audit fees (1)
Audit-related fees (2)
Tax fees (3)
Fiscal Year ended September 30,
2011
2012
RMB
US$
RMB
US$
3,272,974 487,932 3,305,062 539,078
1,827,026 272,068 1,844,938 300,922
— —
—
—
(1)
(2)
(3)
“Audit fees” means the aggregate fees billed or payable for professional services rendered by our independent auditors in
connection with the audit of our consolidated financial statements or the review of our interim consolidated financial statements
required for statutory or regulatory filings.
“Audit-related fees” means the aggregate fees billed or payable for professional services rendered by our independent auditors in
connection with the review of our interim consolidated financial statements not required for statutory or regulatory filings.
“Tax fees” means the aggregate fees billed or payable for tax compliance services, transfer pricing and requests for rulings or
technical advice from taxing authorities and tax planning services.
The audit committee or our board of directors is to pre-approve all auditing services and permitted non-audit services to be
performed for us by our independent registered public accounting firm, including the fees and terms thereof (subject to the de
minimums exceptions for non-audit services described in Section 10A(i)(l)(B) of the Exchange Act which are approved by the audit
committee or our board of directors prior to the completion of the audit).
ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
None.
109
ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS
The table below details our purchases of our own equity securities pursuant to our share repurchase program adopted and
publicly announced on November 20, 2008 and extended in November 2009, November 2010, April 2011 and February 2012,
respectively. In addition, on April 29, 2011, the board of directors approved an increase of the repurchase quota under the share
repurchase program. The expanded share repurchase program authorizes the repurchase of up to an additional $10 million of our
ADSs (which makes the total repurchase quota under the share repurchase program $20 million ADSs) and would be valid until
April 28, 2012. On February 28, 2012, the board of directors decided to further extend the share repurchase program for 12 months
until April 28, 2013. As of December 31, 2012, we have repurchased a total of 3,920,463 ADSs, representing 15,681,852 ordinary
shares, in open-market transactions for total cash consideration of $15.1 million. See “Item 5.B. Operating and Financial Review and
Prospects — Liquidity and Capital Resources” for a further discussion of the repurchase program.
Period
10/1/2011 – 10/31/2011
11/1/2011 – 11/30/2011
12/1/2011 – 12/31/2011
01/01/2012 – 01/31/2012
02/01/2012 – 02/28/2012
03/01/2012 – 03/31/2012
04/01/2012 – 04/30/2012
05/01/2012 – 05/31/2012
06/01/2012 – 06/30/2012
07/01/2012 – 07/31/2012
08/01/2012 – 08/31/2012
09/01/2012 – 09/30/2012
Total Number of
ADSs Purchased
1,120
—
2,800
—
—
3,719
4,447
5,182
45,726
8,272
250,100
—
Average Price
Paid Per ADS
2.3632
—
2.1958
—
—
3.9949
3.5484
3.3614
3.2344
3.3633
2.9999
—
Total Number of ADSs
Purchased as Part of
Publicly Announced
Program
1,120
—
2,800
—
—
3,719
4,447
5,182
45,726
8,272
250,100
—
Approximate Dollar
Value of ADSs that
May Yet be Purchased
Under the Program
5.8 million
$
5.8 million
$
5.8 million
$
5.8 million
$
5.8 million
$
5.8 million
$
5.8 million
$
5.8 million
$
5.6 million
$
5.6 million
$
4.9 million
$
4.9 million
$
ITEM 16F. CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT
None.
ITEM 16G. CORPORATE GOVERNANCE
As a foreign private issuer with ADSs listed on the NYSE we are subject to corporate governance requirements imposed by the
NYSE. Under Section 303A of the NYSE Listed Company Manual, in general NYSE-listed non-U.S. companies may follow their
home-country corporate governance practices in lieu of some of the NYSE corporate governance requirements. We are committed to
a high standard of corporate governance. As such, we strive to comply with most of the NYSE corporate governance practices.
However, the following are the ways in which our current corporate governance practices differ from NYSE corporate governance
requirements because the laws of Cayman Islands do not require such compliance:
• We are not required to obtain shareholder approval for the adoption of, or material revisions to, our equity-compensation
plans where our directors consider it in the best interests of the company to do so and when the issue price of shares issued
pursuant to such plans is otherwise fair.
• Our compensation committee of our board of directors is not comprised entirely of independent directors.
• Our nomination committee of our board of directors is not comprised entirely of independent directors.
We may determine to voluntarily comply with one or more of the foregoing provisions as required by the NYSE Listed
Company Manual.
ITEM 16H. MINE SAFETY DISCLOSURE
Not applicable.
110
PART III
ITEM 17. FINANCIAL STATEMENTS
We have elected to provide our financial statements pursuant to Item 18.
ITEM 18. FINANCIAL STATEMENTS
Our consolidated financial statements are included at the end of this annual report.
ITEM 19. EXHIBITS
Index to Exhibits
Exhibit
No.
1.1
2.1
2.2
2.3
2.4
4.1
4.2
4.3
4.4
4.5
4.6
4.7
4.8
4.9
4.10
4.11
4.12
4.13
4.14
4.15
4.16
4.17
4.18
4.19
Description of Exhibit
—Form of Second Amended and Restated Memorandum of Association and Articles of Association of the Registrant*
—Form of Ordinary Share Certificate.*
—Form of Deposit Agreement between the Registrant and Deutsche Bank Trust Company Americas, as depositary.(1)
—Form of American depositary receipt evidencing American depositary shares (included in Exhibit 2.2).(1)
—Restricted Issuance Agreement between the Registrant and Deutsche Bank Trust Company Americas, as depositary,
dated August 16, 2010.***
—Technical Support and Consultancy Services Agreement between Beijing Champion Distance Education Technology
Co., Ltd. and Beijing Champion Hi-Tech Co., Ltd., dated May 1, 2004.*
—Equity Pledge Agreement between Beijing Champion Distance Education Technology Co., Ltd and Zhengdong Zhu,
dated May 1, 2004.*
—Equity Pledge Agreement between Beijing Champion Distance Education Technology Co., Ltd. and Baohong Yin,
dated May 1, 2004.*
—Exclusive Purchase Rights Agreement among China Distance Education Limited, Beijing Champion Hi-Tech Co.,
Ltd. and Zhengdong Zhu, dated May 9, 2004.*
—Exclusive Purchase Rights Agreement among China Distance Education Limited, Beijing Champion Hi-Tech Co.,
Ltd. and Baohong Yin, dated May 9, 2004.*
—Courseware License Agreement between Beijing Champion Hi-Tech Co., Ltd. and Beijing Champion Distance
Education Technology Co., Ltd., dated August 1, 2004.*
—Software License Agreement between Beijing Champion Education Technology Co., Ltd. and Beijing Champion Hi-
Tech Co., Ltd., dated May 20, 2007.*
—Courseware Production Entrustment Agreement between Beijing Champion Education Technology Co., Ltd. and
Beijing Champion Hi-Tech Co., Ltd., dated May 20, 2007.*
—Letter of Undertaking from Beijing Champion Distance Education Technology Co., Ltd. to Beijing Champion Hi-
Tech Co., Ltd., dated February 13, 2008.*
—Letter of Undertaking from Zhengdong Zhu and Baohong Yin to Beijing Champion Distance Education Technology
Co., Ltd., dated February 13, 2008.*
—Declaration Letter by Zhengdong Zhu, dated March 24, 1008.*
—Declaration Letter by Baohong Yin, dated March 24, 2008.*
—Power of Attorney by Zhengdong Zhu, dated March 25. 2008.*
—Power of Attorney by Baohong Yin, dated March 25, 2008.*
—Notice from Beijing Champion Distance Education Technology Co., Ltd. to Beijing Champion Hi-Tech Co., Ltd.,
Zhengdong Zhu and Baohong Yin, dated March 25, 2008.*
—Acknowledgement Letter from Zhengdong Zhu and Baohong Yin to the Registrant, dated March 25, 2008.*
—Acknowledgement Letter from Zhengdong Zhu and Baohong Yin to Beijing Champion Distance Education
Technology Co., Ltd., dated March 25, 2008.*
—Shareholders Agreement among the Registrant, China Distance Education Limited, Beijing Champion Distance
Education Technology Co., Ltd., Beijing Champion Education Technology Co., Ltd., Beijing Champion Hi-Tech Co.,
Ltd., Champion Shine Trading Limited, Empire China Limited, Zhengdong Zhu, Hongfeng Sun, Baohong Yin, Orchid
Asia III, L.P., Orchid Asia Co-Investment Limited, and Artson Limited, dated March 7, 2008, as amended on July 25,
2008.*
—Form confidentiality and non-competition agreement.*
111
4.20 —Incentive share plan.*
4.21 —2008 Performance Incentive Plan.*
4.22 —Amended and Restated 2008 Performance Incentive Plan (dated February 16, 2009).**
4.23 —Amended and Restated 2008 Performance Incentive Plan (dated May 21, 2012).
4.24
4.25
4.26
4.27
—Amended and Restated Equity Pledge Agreement between Beijing Champion Distance Education Technology Co., Ltd.
and Zhengdong Zhu, dated December 31, 2008.**
—Amended and Restated Equity Pledge Agreement between Beijing Champion Distance Education Technology Co., Ltd.
and Baohong Yin, dated December 31, 2008.**
—Tri-party Agreement re VIE Structure among Beijing Champion Distance Education Technology Co., Ltd., Zhengdong
Zhu and Beijing Champion Hi-Tech Co., Ltd, dated January 30, 2013.
—Tri-party Agreement re VIE Structure among Beijing Champion Distance Education Technology Co., Ltd., Baohong Yin
and Beijing Champion Hi-Tech Co., Ltd, dated January 30, 2013.
4.28 —Spousal Consent Letter by Zhengdong Zhu, dated January 30, 2013.
4.29 —Spousal Consent Letter by Baohong Yin, dated January 30, 2013.
8.1 —Subsidiaries of Registrant.
11.1 —Code of Business Conduct and Ethics of the Registrant.*
12.1 —CEO Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
12.2 —CFO Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
13.1 —CEO Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
13.2 —CFO Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
15.1 —Consent of Deloitte Touche Tohmatsu Certified Public Accountants, LLP.
15.2 —Consent of Jingtian & Gongcheng.
15.3 —Consent of American Appraisal.
Previously filed with the Registrant’s registration statement on Form F-1 (File No. 333-152167), as amended.
*
**
Previously filed with the Registrant’s Annual Report on Form 20-F for the year ended September 30, 2008.
*** Previously filed with the Registrant’s Annual Report on Form 20-F for the year ended September 30, 2011.
**** Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files on Exhibit 101 hereto are deemed not filed or part of a
registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not
filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise are not subject to liability
under those sections.
Incorporated by reference to the Registration Statement on Form F-6 (File No. 333-152345) filed with the Securities and
Exchange Commission with respect to American depositary shares representing our ordinary shares.
(1)
112
The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and
authorized the undersigned to sign this annual report on its behalf.
SIGNATURE
China Distance Education Holdings Limited
Name:
Title:
/S/ PING WEI
Ping Wei
Chief Financial Officer
Date: January 31, 2013
CHINA DISTANCE EDUCATION HOLDINGS LIMITED
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
CONTENTS
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
CONSOLIDATED BALANCE SHEETS AS OF SEPTEMBER 30, 2011 AND 2012
CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED SEPTEMBER 30, 2010, 2011 AND
2012
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) FOR THE YEARS ENDED
SEPTEMBER 30, 2010, 2011 AND 2012
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY FOR THE YEARS ENDED SEPTEMBER 30, 2010,
2011 AND 2012
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED SEPTEMBER 30, 2010, 2011 AND
2012
PAGE
F - 2
F - 3
F - 5
F - 7
F - 8
F - 9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
F - 11
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
TO THE BOARD OF DIRECTORS AND STOCKHOLDERS OF
CHINA DISTANCE EDUCATION HOLDINGS LIMITED
We have audited the accompanying consolidated balance sheets of China Distance Education Holdings Limited, its subsidiaries, its
variable interest entity and the subsidiaries of variable interest entity (collectively, the “Group”) as of September 30, 2011 and 2012,
and the related consolidated statements of operations, comprehensive income (loss), changes in equity, and cash flows for each of the
three years in the period ended September 30, 2012. These consolidated financial statements are the responsibility of the Group’s
management. Our responsibility is to express an opinion on the financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management,
as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the Group as of
September 30, 2011 and 2012, and the results of its operation and its cash flow for each of the three years in the period ended
September 30, 2012, in conformity with accounting principles generally accepted in the United States of America.
As discussed in Note 2, the consolidated financial statements have been adjusted for retrospective application of the authoritative
guidance regarding the presentation of comprehensive income, which was adopted by the Group on October 1, 2011.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the
Group’s internal control over financial reporting as of September 30, 2012, based on the criteria established in Internal
Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report
dated January 31, 2013 expressed an unqualified opinion on the Group’s internal control over financial reporting.
Deloitte Touche Tohmatsu Certified Public Accountants LLP
Beijing, the People’s Republic of China
January 31, 2013
F-2
CHINA DISTANCE EDUCATION HOLDINGS LIMITED
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
ASSETS
Current assets
Cash and cash equivalents
Term deposits
Restricted cash
Accounts receivable, net of allowance for doubtful accounts of US$3,190 and US$2,092 as of
September 30, 2011 and 2012, respectively
Inventories
Prepayment and other current assets
Deferred tax assets, current portion
Deferred cost
Current assets of discontinued operations
Total current assets
Non-current assets
Property, plant and equipment, net
Goodwill
Other intangible assets, net
Deposit for purchase of non-current assets
Deferred tax assets, non-current portion
Other non-current assets
Total non-current assets
Total assets
LIABILITIES AND EQUITY
Current liabilities
Accrued expenses and other liabilities (including accrued expenses and other liabilities of the consolidated
VIE without recourse to China Distance Education Holdings Limited of US$5,738 and US$8,789 as of
September 30, 2011 and 2012, respectively)
Income tax payable (including income tax payable of the consolidated VIE without recourse to China
Distance Education Holdings Limited of US$2,170 and US$2,319 as of September 30, 2011 and 2012,
respectively)
Deferred revenue (including deferred revenue of the consolidated VIE without recourse to China Distance
Education Holdings Limited of US$7,848 and US$9,408 as of September 30, 2011 and 2012,
respectively)
Refundable fees (including refundable fees of the consolidated VIE without recourse to China Distance
Education Holdings Limited of US$2,580 and US$3,524 as of September 30, 2011 and 2012,
respectively)
Current liabilities of discontinued operations (including current liabilities of discontinued operations of the
consolidated VIE without recourse to China Distance Education Holdings Limited of US$1,860 and nil
as of September 30, 2011 and 2012, respectively)
Total current liabilities
F-3
As of September 30,
2011
US$
2012
US$
49,738 49,723
7,839 7,956
6
2,676
363
4,661 4,081
658
2,861 3,573
1,556 1,856
1,868 1,795
2,306 —
73,868 69,648
8,586 9,676
7,403 7,511
2,382 1,929
131
242
668 —
729 1,091
20,010 20,338
93,878 89,986
6,514 9,636
2,329 2,627
7,861 9,450
2,580 3,524
1,860 —
21,144 25,237
CHINA DISTANCE EDUCATION HOLDINGS LIMITED
CONSOLIDATED BALANCE SHEETS - continued
(In thousands, except share and per share data)
Non-current liabilities
Deferred tax liabilities, non-current portion (including non-current portion of deferred tax liabilities of the
consolidated VIE without recourse to China Distance Education Holdings Limited of nil and nil as of
September 30, 2011 and 2012, respectively)
Total non-current liabilities
Total liabilities
Commitments and contingencies (Note 20)
Equity
Ordinary shares (par value of US$0.0001 per share at September 30, 2011 and 2012, respectively;
Authorized - 480,000,000 shares at September 30, 2011 and 2012; Issued and outstanding -
127,800,673 and 134,386,849 shares at September 30, 2011 and 2012, respectively)
Additional paid-in capital
Accumulated other comprehensive income
Cumulative deficits
Total China Distance Education Holdings Limited shareholders’ equity
Total equity
Total liabilities and equity
The accompanying notes are an integral part of the consolidated financial statements.
F-4
As of September 30,
2012
US$
2011
US$
132
—
—
132
21,144 25,369
13
13
78,804 61,777
4,922
4,221
(10,304)
(2,095)
72,734 64,617
72,734 64,617
93,878 89,986
CHINA DISTANCE EDUCATION HOLDINGS LIMITED
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share and per share data)
Sales, net of business tax, value-added tax and related surcharges
Online education services
Books and reference materials
Others
Total net revenues
Cost of sales
Cost of services
Cost of tangible goods sold
Total cost of sales
Gross profit
Operating expenses
Selling expenses
General and administrative expenses
Impairment of purchased call options
Total operating expenses
Other operating income
Operating income (loss)
Interest income
Exchange loss
Income (loss) before income taxes
Less: Income tax expense
Net income (loss) from continuing operations
Net income (loss) from discontinued operations
Net income (loss)
Net loss attributable to noncontrolling interest
Net income (loss) from continuing operations attributable to China Distance Education Holdings
Limited
Net income (loss) from discontinued operations attributable to China Distance Education Holdings
Limited
Net income (loss) attributable to China Distance Education Holdings Limited
F-5
Years ended September 30,
2011
US$
2012
US$
2010
US$
23,982 30,788
3,939 4,743
4,658 6,033
32,579 41,564
40,281
4,438
7,383
52,102
(13,283) (16,840) (20,494)
(2,587)
(2,070) (2,794)
(15,353) (19,634) (23,081)
17,226 21,930 29,021
(7,176) (9,771) (11,337)
(8,248)
(10,535) (12,221)
—
(162) (1,115)
(17,873) (23,107) (19,585)
58
603
9,494
(574)
1,119
883
(143)
(40)
166 10,573
(2,600)
(971)
7,973
(805)
236
(2,086) (3,300)
8,209
(2,842) (4,105)
—
303
74
(573)
458
(66)
(181)
(575)
(756)
944
155
(502)
7,973
(2,053) (3,300)
(1,898) (3,802)
236
8,209
CHINA DISTANCE EDUCATION HOLDINGS LIMITED
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share and per share data)
Net (loss) income per share:
Net (loss) income attributable to China Distance Education Holdings Limited
shareholders
Basic from continuing operations
Basic from discontinued operations
Basic
Diluted from continuing operations
Diluted from discontinued operations
Diluted
Weighted average shares used in calculating net (loss) income per share
Basic
Diluted
2010
US$
Years ended September 30,
2011
US$
2012
US$
(0.00)
(0.01)
(0.01)
(0.00)
(0.01)
(0.01)
(0.00)
(0.03)
(0.03)
(0.00)
(0.03)
(0.03)
0.06
0.00
0.06
0.06
0.00
0.06
138,232,493 133,571,727 133,996,737
138,232,493 133,571,727 134,363,108
The accompanying notes are an integral part of the consolidated financial statements.
F-6
CHINA DISTANCE EDUCATION HOLDINGS LIMITED
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In thousands)
Net income (loss)
Other comprehensive income - change in cumulative foreign currency translation adjustments
Comprehensive income (loss)
Comprehensive income (loss) attributable to noncontrolling interest
Comprehensive income (loss) attributable to China Distance Education Holdings Limited
2011
Years ended September 30,
2010
715 1,855
2012
US$
US$
US$
(2,842) (4,105) 8,209
701
(2,127) (2,250) 8,910
(270) —
(1,201) (1,980) 8,910
(926)
The accompanying notes are an integral part of the consolidated financial statements.
F-7
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CHINA DISTANCE EDUCATION HOLDINGS LIMITED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
Stock-based compensation
Gain on disposition of the discontinued operation
Depreciation of property, plant and equipment
Amortization of other intangible assets
Provision of inventories
Allowance for doubtful accounts
Impairment loss on purchased call option
Impairment loss on intangible assets
Impairment loss on property, plant and equipment
Impairment loss on goodwill
Losses on disposition of property, plant and equipment
Changes in operating assets and liabilities:
Decrease (Increase) in accounts receivable
(Increase) decrease in inventories
Increase in prepayments and other assets
(Increase) decrease in deferred tax assets
Decrease (Increase) in deferred cost
(Increase) decrease in other non-current assets
Increase in accrued expenses and other liabilities
Increase in income tax payable
Increase (decrease) in deferred revenue
Increase (decrease) in refundable fees
(Increase) decrease in deferred tax liabilities
Net cash generated from operating activities
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of business
Maturity (purchase) of term deposits
Withdrawal of restricted cash
Acquisition of property, plant and equipment
Proceeds from disposition of property, plant and equipment
Disposal of the discontinued operation, net of cash disposed
Acquisition of other intangible assets
Payment of deposit for the acquisition of non-current assets
Net cash (used in) generated from investing activities
CASH FLOWS FROM FINANCING ACTIVITIES
Repurchase of ordinary shares
Proceeds from share options exercised by employees
Loan to optionees in connection with exercise of options
Dividends paid to shareholders
Net cash used in financing activities
Exchange rate effect on cash and cash equivalents
Net (decrease) increase in cash and cash equivalents
Cash and cash equivalents at beginning of the year
Cash and cash equivalents at end of the year
F-9
Years ended September 30,
2011
US$
2012
US$
2010
US$
(2,842) (4,105)
8,209
4,387 6,024
— —
1,157 1,449
926
851
1
(1)
2,197 1,144
639 1,316
332
274
973
—
758
1,407
27
44
141
(297)
1,606
873
41
211
—
—
—
—
9
(17)
(1,970)
(289)
258
(693) (1,054)
(630)
(352)
(189)
(276)
50
79
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622
(235)
917
(486)
434
(328)
(679)
(35)
99
(348)
2,827
261
578
898
563
7,653 9,192 15,063
719
1,037
(249)
(316)
(21) —
27,750 (7,649)
363
5,395
(1,570) (1,999)
80
60
— —
(402)
(194)
(236)
—
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—
—
2,670
(1,662)
—
(150)
(387)
—
471
(993)
(2,172) (8,138)
3,981
75
63
— —
(3,888)
— — (16,268)
(2,109) (8,063) (17,168)
410
906
37,318 (7,808)
(1,224)
21,437 58,755 50,947
49,723
58,755 50,947
354
CHINA DISTANCE EDUCATION HOLDINGS LIMITED
CONSOLIDATED STATEMENTS OF CASH FLOWS - continued
(In thousands)
Supplemental schedule of cash flows information
Income tax paid
Supplemental schedule of non-cash activities
Payable for acquisition of property, plant and equipment included in accrued expenses and other
liabilities
Acquisition of property, plant and equipment and other intangible assets through utilization of
deposits
Consideration payable in connection with acquisition of Champion Xinlixiang
Offset consideration payable in connection with acquisition of Champion Xinlixiang with
receivable from original selling shareholder
Years ended September 30,
2011
2012
US$
US$
2010
US$
(514) (1,439) (1,818)
94
633 —
356 —
111
1,643 — —
— (1,711) —
The accompanying notes are an integral part of the consolidated financial statements.
F-10
CHINA DISTANCE EDUCATION HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED SEPTEMBER 30, 2010, 2011 AND 2012
(In thousands, except share and per share data)
1. ORGANIZATION AND BASIS OF PRESENTATION
China Distance Education Holdings Limited (the “Company”) was incorporated under the law of the Cayman Islands on
January 11, 2008. The Company, its subsidiaries, its consolidated variable interest entity (“VIE”) and VIE’s subsidiaries
(collectively the “Group”) are primarily engaged in providing online and offline education services, and selling related products
in the People’s Republic of China (“PRC”).
As of September 30, 2012, details of the Company’s subsidiaries, its VIE and VIE’s subsidiaries were as follows:
Company
Subsidiaries:
China Distance Education Limited (“CDEL Hong
Kong”)
Links Limited (“Pencil”)
Practice Enterprises Network China International
DL Education Service, LLC(“DL Education”)
Beijing Champion Distance Education Technology
Co., Ltd. (“Champion Technology”)
(“Champion Education Technology”)
Beijing Champion Education Technology Co., Ltd.
Variable interest entity:
Beijing Champion Hi-Tech Co., Ltd. (“Beijing
Subsidiaries of variable interest entity:
Beijing Caikaowang Company Ltd. (“Caikaowang”)
Champion”)
Beijing Champion Wangge Education Technology
Beijing Zhengbao Yucai Education Technology Co.,
Co., Ltd. (“Champion Wangge”)
Ltd. (“Zhengbao Yucai”)
(“Champion Training School”)
Beijing Haidian District Champion Training School
Date of
establishment
Place of
establishment
Percentage of
legal ownership
by the Company
Principal activities
March 13, 2003
Hong Kong
February 23, 2010
September 27,2012
Hong Kong
US
January 5, 2004
April 23, 2007
July 12, 2000
November 28,
2007
June 24, 2008
February 19, 2009
February 19, 2009
PRC
PRC
PRC
PRC
PRC
PRC
PRC
100%
100%
100%
100%
100%
Nil
Nil
Nil
Nil
Nil
Investment holding
Inactive
Inactive
Provision of technical support and consultancy
services and course production
Software licensing and course production
Provision of online education services and sales of
books and reference materials
Provision of online education services
Provision of online education services
Provision of start-up training services
Provision of online and offline education services
The VIE arrangements
There are some uncertainties as to whether applicable PRC laws and regulations prohibit foreign investors from providing
telecommunications value-added services in the PRC. As a Cayman Islands corporation, the Company is deemed a foreign legal
person under PRC laws. Accordingly, Champion Technology, the Company’s wholly owned subsidiary in the PRC, as a foreign
invested company, may be deemed to be ineligible to engage in education business in the PRC.
To comply with these foreign ownership restrictions, the Company operates substantially all of its online education services
through its VIE, Beijing Champion, and the VIE’s subsidiaries in the PRC. The VIE and its subsidiaries hold leases and other
assets necessary to provide online education services and generate all of the Company’s revenues. To provide the Company
effective control over the VIE and the ability to receive substantially all of the economic benefits of the VIE and its subsidiaries,
a series of contractual arrangements were entered into amongst CDEL Hong Kong, Champion Technology, Beijing Champion
and Beijing Champion’s direct equity holders.
F-11
CHINA DISTANCE EDUCATION HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR THE YEARS ENDED SEPTEMBER 30, 2010, 2011 AND 2012
(In thousands, except share and per share data)
1. ORGANIZATION AND BASIS OF PRESENTATION - continued
The VIE arrangements - continued
•
Agreements that transfer economic benefits to Champion Technology
Exclusive technical support and consultancy services agreement
Pursuant to the exclusive technical support and consultancy services agreement between Beijing Champion and Champion
Technology, Champion Technology has the exclusive right to provide to Beijing Champion technical and consulting
services. Champion Technology is entitled to charge Beijing Champion a service fee equal to its profit before such service
fee and tax. This agreement will remain effective until Beijing Champion ceases its operations.
Equity pledge agreement
Pursuant to the equity pledge agreement between Beijing Champion and Champion Technology, the nominee shareholders
of Beijing Champion have pledged their equity interest in Beijing Champion to Champion Technology to secure the
payment obligations of Beijing Champion under the technical support and consultancy services agreement between Beijing
Champion and Champion Technology. If Beijing Champion breaches its contractual obligations under that agreement,
Champion Technology, as the pledgee, will be entitled to certain rights, including the right to sell the pledged equity
interests. The nominee shareholders of Beijing Champion agree that, without prior written consent of Champion
Technology, they will not dispose of the pledged equity interests or create or allow any encumbrance on the pledged equity
interests that would prejudice Champion Technology’s interest. This agreement will remain effective until the discharge of
Beijing Champion’s contractual obligations under the exclusive technical support and consultancy services agreement as
described above.
Letter of undertaking from Beijing Champion’s shareholders to Champion Technology
Pursuant to this letter addressed to Champion Technology, the shareholders of Beijing Champion undertook to, unless
restricted by laws, regulations or legal procedures, (i) remit all dividends, interests, other distributions or remnant assets
after liquidation, if any, they receive from Beijing Champion to Champion Technology without compensation, after paying
the corresponding tax and any other required expenses, (ii) transfer all or part of their equity interests to CDEL Hong Kong
at a nominal or minimal purchase price, in the event CDEL Hong Kong exercises its exclusive purchase right to acquire
any or all of the equity interests in Beijing Champion, (iii) remit to Champion Technology all considerations they may
receive from CDEL Hong Kong’s acquisition of any equity interests in Beijing Champion, without compensation, after
paying the corresponding tax and any other required expenses and (iv) act in the best interest of Champion Technology.
F-12
CHINA DISTANCE EDUCATION HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR THE YEARS ENDED SEPTEMBER 30, 2010, 2011 AND 2012
(In thousands, except share and per share data)
1. ORGANIZATION AND BASIS OF PRESENTATION - continued
The VIE arrangements - continued
•
Agreements that provide Company effective control over Beijing Champion
Exclusive purchase right contract
Pursuant to the exclusive purchase right agreement, CDEL Hong Kong has the unconditional right to purchase the entire
equity interest in, or all the assets of Beijing Champion, for a purchase price equal to the net assets of Beijing Champion or
the minimum price permitted by PRC laws, if and when PRC laws are amended to permit such a transaction. The term of
this agreement is ten years from the date thereof and can be extended for another ten years at the discretion of CDEL Hong
Kong. Through the exclusive purchase right contract, each of Beijing Champion’s shareholders irrevocably granted CDEL
Hong Kong an exclusive right to acquire, at any time, for its own account or through one or more PRC individuals or
entities as nominee shareholders of its choice to replace the existing shareholders of Beijing Champion. This kick-out right
reinforces CDEL Hong Kong’s ability to direct the activities that most significantly impact Beijing Champion’s economic
performance.
Power of attorney
Pursuant to the power of attorney, the nominee shareholders of Beijing Champion each executed an irrevocable power of
attorney assigning Champion Technology or any person designated by Champion Technology as their attorney-in-fact to
vote on their behalf on all matters of Beijing Champion requiring shareholder approval under PRC laws and regulations
and the articles of association of Beijing Champion.
The Articles of Incorporation of Beijing Champion states that the major rights of the shareholders include the power to
review and approve annual budget, operating strategy and investment plan, elect the members of board of directors and
approve their compensation plan. Therefore, through the irrevocable power of attorney arrangement, Champion
Technology has the ability to exercise effective control over Beijing Champion through equity holder votes and, through
such votes, to also control the composition of the board of directors.
These contractual arrangements allow the Group to effectively control Beijing Champion and its subsidiaries and to derive
substantially all of the economic benefits from them. Accordingly, the Group treats Beijing Champion as a VIE and
because the Group is the primary beneficiary of Beijing Champion, the Group has consolidated the financial results of
Beijing Champion and its subsidiaries.
F-13
CHINA DISTANCE EDUCATION HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR THE YEARS ENDED SEPTEMBER 30, 2010, 2011 AND 2012
(In thousands, except share and per share data)
1. ORGANIZATION AND BASIS OF PRESENTATION - continued
The VIE arrangements - continued
In June 2009, the FASB issued an authoritative pronouncement to amend the accounting rules for variable interest entities.
The amendments effectively replace the quantitative-based risks-and-rewards calculation for determining which reporting
entity, if any, has a controlling financial interest in a variable interest entity with an approach focused on identifying which
reporting entity has (1) the power to direct the activities of a variable interest entity that most significantly affect the
entity’s economic performance and (2) the obligation to absorb losses of, or the right to receive benefits from, the entity.
Additionally, an enterprise is required to assess whether it has an implicit financial responsibility to ensure that a variable
interest entity operates as designed when determining whether it has the power to direct the activities of the variable
interest entity that most significantly impact the entity’s economic performance. The new guidance also requires additional
disclosures about a reporting entity’s involvement with variable interest entities and about any significant changes in risk
exposure as a result of that involvement.
The guidance is effective at the start of a reporting entity’s first fiscal year beginning after November 15, 2009, and all
interim and annual periods thereafter.
Since the Company, through its subsidiary, has (1) the power to direct the activities of the VIE that most significantly
affect the VIE’s economic performance and (2) the right to receive benefits from the VIE, the Company continued to
consolidate the VIE upon the adoption of the new guidance on October 1, 2010, which therefore, other than for additional
disclosures, has no accounting impact.
Risks in relation to VIE structure
•
The Company believes that the contractual arrangements with Beijing Champion and its shareholders are in compliance
with existing PRC laws and regulations and are valid, binding and enforceable and will not result in any violation of PRC
laws or regulations and the PRC regulatory authorities may take a contrary view. If the legal structure and contractual
arrangements were found to be in violation of any existing PRC laws and regulations, the regulatory authorities may
exercise their discretion and:
•
•
•
•
•
•
revoke the business and operating licenses of our PRC subsidiaries or consolidated affiliated entities;
restrict the rights to collect revenues from any of our PRC subsidiaries;
discontinue or restrict the operations of any related-party transactions among our PRC subsidiaries or
consolidated affiliated entities;
require our PRC subsidiaries or consolidated affiliated entities to restructure the relevant ownership structure
or operations;
take other regulatory or enforcement action is, including levying fines that could be harmful to our business; or
impose additional conditions or requirements with which we may not be able to comply.
F-14
CHINA DISTANCE EDUCATION HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR THE YEARS ENDED SEPTEMBER 30, 2010, 2011 AND 2012
(In thousands, except share and per share data)
1. ORGANIZATION AND BASIS OF PRESENTATION - continued
The VIE arrangements - continued
The imposition of any of these penalties may result in a material adverse effect on the Company’s ability to conduct its
business. In addition, if the imposition of any of these penalties causes the Company to lose the rights to direct the
activities of the VIE and their subsidiaries or the right to receive their economic benefits, the Company would no longer be
able to consolidate the financial results of the VIE and its subsidiaries.
The Company’s ability to control Beijing Champion also depends on the powers of attorney that enable Champion
Technology to vote on all matters requiring shareholder approval for Beijing Champion. As noted above, the Company
believes these powers of attorney are valid, binding and enforceable under existing PRC laws and regulations but may not
be as effective as direct equity ownership.
Certain shareholders of Beijing Champion are also beneficial owners or directors of the Company. In addition, certain
beneficial owners and directors of the Company are also directors or officers of Beijing Champion. Their interests as
beneficial owners of Beijing Champion may differ from the interests of the Company as a whole. The Company cannot be
certain that if conflicts of interest arise, these parties will act in the best interests of the Company or that conflicts of
interests will resolve in the Company’s favor.
F-15
CHINA DISTANCE EDUCATION HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR THE YEARS ENDED SEPTEMBER 30, 2010, 2011 AND 2012
(In thousands, except share and per share data)
1. ORGANIZATION AND BASIS OF PRESENTATION - continued
The VIE arrangements - continued
Currently, the Company does not have existing arrangements to address potential conflicts of interest these parties may
encounter in their capacity as beneficial owners of Beijing Champion, on the one hand, and as beneficial owners of the
Company, on the other hand. The Company believes the shareholders of Beijing Champion will not act contrary to any of
the contractual arrangements and the exclusive purchase right contract provides the Company with a mechanism to remove
them as shareholders of Beijing Champion should they act to the detriment of the Company. If any conflict of interest or
dispute between the Company and the shareholders of Beijing Champion arises and the Company is unable to resolve it,
the Company would have to rely on legal proceedings in the PRC. Such legal proceedings could result in disruption of its
business; moreover, there is substantial uncertainty as to the ultimate outcome of any such legal proceedings.
The Group’s online education business has been directly operated by (and as a result all of the Group’s revenues have been
generated from) the VIE and its subsidiaries. For the years ended September 30, 2011 and 2012, Beijing Champion and its
subsidiaries accounted for an aggregate of 43% and 53%, respectively, of the Group’s consolidated total assets, and 96%
and 95%, respectively of the Group’s consolidated total liabilities. The assets not associated with the Beijing Champion
and its subsidiaries in these years primarily consisted of cash held by China Distance Education Holdings Limited.
F-16
CHINA DISTANCE EDUCATION HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR THE YEARS ENDED SEPTEMBER 30, 2010, 2011 AND 2012
(In thousands, except share and per share data)
1. ORGANIZATION AND BASIS OF PRESENTATION - continued
The VIE arrangements - continued
The following financial information of the Company’s VIE and VIE’s subsidiaries as of September 30, 2011 and 2012 and for
each of the three years in the period ended September 30, 2012 was included in the accompanying consolidated financial
statements after elimination of intercompany transactions and balances within VIE and VIE’s subsidiaries:
Cash and cash equivalents
Prepaid expenses and other current assets
Total current assets
Total assets
Deferred revenue
Total current liabilities
Total liabilities
Total equity
Revenues
Net income (1)
Net cash provided by operating activities
Net cash used in investing activities
Net cash used in Financing activities
Effects of exchange rate changes
As of September 30,
2012
2011
US$
US$
15,798
8,108
3,311
2,771
29,581
23,482
47,381
40,679
9,408
7,848
24,041
20,196
24,041
20,196
23,340
20,482
For the years ended September 30,
2011
US$
42,510
7,365
2,860
(2,137)
0
481
2010
US$
33,257
6,370
6,614
(4,407)
0
155
2012
US$
52,005
14,944
6,958
549
0
183
(1) This is net income before service fees charged by Champion Technology and Champion Education Technology.
There are no consolidated VIE’s assets that are collateral for the VIE’s obligations and which can only be sued to settle the
VIE’s obligations. No creditor (or beneficial interest holders) of the VIE have recourse to the general credit of the Company or
any of its consolidated subsidiaries. No terms in any arrangements, considering both explicit arrangements and implicit variable
interests, require the Company or its subsidiaries to provide financial support to the VIE. However, if the VIE ever needs
financial support, the Company or its subsidiaries may, at its option and subject to statutory limits and restrictions, provide
financial support to the VIE through loans to the shareholders of the VIE or entrustment loans to the VIE.
F-17
CHINA DISTANCE EDUCATION HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR THE YEARS ENDED SEPTEMBER 30, 2010, 2011 AND 2012
(In thousands, except share and per share data)
2.
SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation and use of estimates
The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally
accepted in the United States of America (“U.S. GAAP”).
The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities at the
balance sheet dates and the reported amounts of revenues and expenses during the reporting periods. Significant estimates and
assumptions reflected in the Group’s financial statements include, but are not limited to, revenue recognition, fair value of
purchased call option, deferred tax assets valuation allowance, allowance for doubtful accounts, impairment of goodwill and
long-term assets, and share-based compensation expenses. Actual results could materially differ from those estimates.
The effect of discontinued operations has been reflected in certain accounts and balances in the consolidated financial statements
for the year ended September 30, 2010 as described in Note 4.
Principles of consolidation
The consolidated financial statements include the financial statements of the Company, its subsidiaries, its VIE and VIE’s
subsidiaries. All transactions and balances among the Company, its subsidiaries, its VIE and VIE’s subsidiaries have been
eliminated upon consolidation.
Foreign currency translation and transactions
The Company, CDEL Hong Kong and PENCIL’s functional currencies are United States dollars (“US$”). The Company’s PRC
subsidiaries, VIE and VIE’s subsidiaries determine their functional currencies to be the Chinese Renminbi (“RMB”). The
Company uses the US$ as its reporting currency and uses the monthly average exchange rate for the year and the exchange rate
at the balance sheet date to translate the operating results and financial position of its PRC subsidiaries and its variable interest
entities, respectively. Translation differences are recorded in accumulated other comprehensive income, a component of
consolidated statements of changes in equity.
Transactions denominated in foreign currencies are remeasured into the functional currency at the exchange rates prevailing on
the transaction dates. Foreign currency denominated financial assets and liabilities are remeasured at the balance sheet date
exchange rate. Exchange gains and losses are included in the consolidated statements of comprehensive income (loss).
F-18
CHINA DISTANCE EDUCATION HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR THE YEARS ENDED SEPTEMBER 30, 2010, 2011 AND 2012
(In thousands, except share and per share data)
2.
SIGNIFICANT ACCOUNTING POLICIES - continued
Cash and cash equivalents
Cash and cash equivalents consist of cash on hand and highly liquid investments which are unrestricted as to withdrawal or use,
and which have an original maturity of three months or less when purchased.
Term deposits
Term deposits consist of deposits placed with financial institutions with an original maturity of greater than three months and
less than one year.
Restricted cash
Restricted cash as of September 30, 2011 and 2012 were US$2,676 and US$6, mainly representing the cash deposit in a
designated account as required by court for the arbitration process in relation to Zhengbao Yucai (see note 3). The restriction
was subsequently removed in November 2011 upon the settlement of the arbitration.
Inventories
Inventories, consisting of papers and professional examination reference books, are stated at the lower of cost or market value.
Cost is determined using the first in, first out method.
Fair value
Fair value is the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between
market participants at the measurement date. When determining the fair value measurements for assets and liabilities required or
permitted to be recorded at fair value, the Group considers the principal or most advantageous market in which it would transact
and it considers assumptions that market participants would use when pricing the asset or liability. Authoritative literature
provides a fair value hierarchy which prioritizes the inputs to valuation techniques used to measure fair value into three broad
levels. The level in the hierarchy within which the fair value measurement in its entirety falls is based upon the lowest level of
input that is significant to the fair value measurement as follows:
Level 1
Level 1 applies to assets or liabilities for which there are quoted prices in active markets for identical assets or liabilities.
F-19
CHINA DISTANCE EDUCATION HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR THE YEARS ENDED SEPTEMBER 30, 2010, 2011 AND 2012
(In thousands, except share and per share data)
2.
SIGNIFICANT ACCOUNTING POLICIES - continued
Fair value - continued
Level 2
Level 2 applies to assets or liabilities for which there are inputs other than quoted prices included within Level 1 that are
observable for the asset or liability such as quoted prices for similar assets or liabilities in active markets; quoted prices for
identical assets or liabilities in markets with insufficient volume or infrequent transactions (less active markets); or model-
derived valuations in which significant inputs are observable or can be derived principally from, or corroborated by, observable
market data.
Level 3
Level 3 applies to assets or liabilities for which there are unobservable inputs to the valuation methodology that are significant to
the measurement of the fair value of the assets or liabilities.
Allowance for doubtful accounts
An allowance for doubtful accounts is recorded in the period in which a loss is determined to be probable based on an
assessment of specific evidence indicating doubtful collection, historical experience, account balance aging and prevailing
economic conditions. Accounts receivable balances are written off after all collection efforts have been exhausted.
Property, plant and equipment, net
Property, plant and equipment are stated at cost and are depreciated using the straight-line method over the estimated useful
lives of the assets, as follows:
Category
Buildings
Electronic and office equipment
Motor vehicles
Leasehold improvement and building
improvement
Estimated useful life
35 years
5 years
5 years
Shorter of lease
term or 5 years
Estimated residual value
5-10%
5-10%
5-10%
—
Repair and maintenance costs are charged to expense as incurred, whereas the cost of renewals and betterment that extends the
useful lives of property, plant and equipment are capitalized as additions to the related assets. Retirements, sales and disposals of
assets are recorded by removing the cost and accumulated depreciation from the asset and accumulated depreciation accounts
with any resulting gain or loss reflected in the consolidated statements of operations.
F-20
CHINA DISTANCE EDUCATION HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR THE YEARS ENDED SEPTEMBER 30, 2010, 2011 AND 2012
(In thousands, except share and per share data)
2.
SIGNIFICANT ACCOUNTING POLICIES - continued
Goodwill
The excess of the purchase price over the fair value of net assets acquired is recorded on the consolidated balance sheet as
goodwill. Goodwill is not amortized but is tested for impairment annually or more frequently if events or changes in
circumstances indicate that it might be impaired. Goodwill is tested following a two-step process. The first step compares the
fair value of a reporting unit to its carrying amount, including goodwill. If the fair value of each reporting unit exceeds its
carrying amount, goodwill is not considered to be impaired and the second step will not be required. If the carrying amount of a
reporting unit exceeds its fair value, the second step will be performed to compare the implied fair value of goodwill to the
carrying value of a reporting unit’s goodwill. The implied fair value of goodwill is determined in a manner similar to accounting
for a business combination with the allocation of the assessed fair value determined in the first step to the assets and liabilities of
the reporting unit. The excess of the fair value of the reporting unit over the amounts assigned to the assets and liabilities is the
implied fair value of goodwill. An impairment loss is recognized for any excess in the carrying value of goodwill over the
implied fair value of goodwill.
Other intangible assets, net
Other intangible assets are amortized using the straight-line basis over the estimated useful lives as follows:
Category
Computer software
Domain names and trademarks
Courseware
Website
Business contracts
Copyrights
Platform
Non-compete agreement
F-21
Estimated useful
life
3~5 years
10~11 years
1~5 years
5 years
3~5 years
5 years
3.5 years
15 years
CHINA DISTANCE EDUCATION HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR THE YEARS ENDED SEPTEMBER 30, 2010, 2011 AND 2012
(In thousands, except share and per share data)
2.
SIGNIFICANT ACCOUNTING POLICIES - continued
Impairment of long-lived assets
The Group evaluates its long-lived assets or asset group including intangibles with definite lives for impairment whenever
events or changes in circumstances (such as a significant adverse change to market conditions that will impact the future use of
the assets) indicate that the carrying amount of a group of long-lived assets may not be fully recoverable. When these events
occur, the Group evaluates the impairment by comparing the carrying amount of the assets to future undiscounted net cash flows
expected to result from the use of the assets and their eventual disposition. If the sum of the expected undiscounted cash flows is
less than the carrying amount of the assets, the Group recognizes an impairment loss based on the excess of the carrying amount
of the asset group over its fair value, generally based upon discounted cash flows.
If the intent is to hold the asset for sale and certain other criteria are met (i.e., the asset can be disposed of currently, appropriate
levels of authority have approved sale, and there is an actively pursuing buyer), the impairment test is a comparison of the
asset’s carrying value to its fair value less costs to sell. To the extent that the carrying value is greater than the asset’s fair value
less costs to sell, an impairment loss is recognized for the difference. Assets held for sale are separately presented on the balance
sheet and are no longer depreciated.
Revenue recognition
Revenues are recognized when the following four criteria are met: (i) persuasive evidence of an arrangement exists, (ii) the
service has been rendered, (iii) the fees are fixed or determinable, and (iv) collectability is reasonably assured.
Online education services
The online education service provided by the Group to its customers is an integrated service, including audio-video course
content, mock examinations and online chat rooms during the subscription period. Audio-video course content, mock
examinations and online chat rooms are not practical to be sold on standalone basis and have never been sold separately.
The Group earns revenues by providing online education services to customers pursuant to two types of revenue models - non-
refundable course model and refundable course model. For online courses using the non-refundable course model, revenues are
recognized on a straight line basis over the subscription period from the month in which the customers enroll in the courses to
the month in which subscribed courses terminate. For online courses using the refundable course model, if the customers
complete the courses and fail the professional exams and their scores are within a range provided for in the agreement, they are
entitled to either a full refund or the right to retake the course. The customers must notify the Group within a 15 -30 day period
after the professional examinations scores are released in order to be eligible for the refund or the right to retake the course. The
proceeds from the refundable course model are initially recorded as “refundable fees”. Revenues are recognized upon the
expiration of the customers’ right to receive a refund or ratably over the course period if the customer decides to retake the
course before the expiration of such right.
F-22
CHINA DISTANCE EDUCATION HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR THE YEARS ENDED SEPTEMBER 30, 2010, 2011 AND 2012
(In thousands, except share and per share data)
2.
SIGNIFICANT ACCOUNTING POLICIES - continued
Revenue recognition - continued
Online education services - continued
Most of the course participants pay course fees via online payment systems provided by third parties including internet debit or
credit card payment systems and other third-party payment systems, such as Alipay. Some customers may choose to enroll for
online courses through the use of prepaid study cards which are purchased from distributors.
The Group sells to its distributors prepaid study cards at a discount to the face value of the cards. Revenues are recorded using
the after-discount-selling-price of the cards and recognized over the period the online course is available to the customer, which
generally is from the enrollment date to the completion of the relevant professional examination date. Sales of prepaid study
cards that are not activated for course enrollment are recognized as revenues upon expiration of the cards. Prepaid study cards
that have been activated but have not been used to enroll online courses do not have an expiry date and will be deferred until
they are used to enroll in online courses. Customers who enroll with the Company directly are eligible to a refund within a 7-day
trial period. Revenues from direct enrollment with the Company are recognized over the period from the lapse of the 7-day trial
period to the completion of the relevant professional examination date.
The Group may, at times, offer volume discounts to its distributors for purchases over a specified amount of prepaid cards
during a specified period of time, generally, one year. The amount of future rebates relating to these volume discounts cannot be
reasonably estimated and accordingly a deferred revenue balance is recognized for the maximum potential amount of volume
discount. If the number of purchases specified in the volume discount provisions is not reached upon the expiry of the volume
discount period, the deferred revenue relating to such volume discount for each study card is recognized as revenue over the
remaining period the online course is available to the user who enrolls using the study card or recognized as revenue
immediately if the related online course has been completed. Proceeds allocated to the rebate study cards that have never been
activated for course enrollment are recognized as revenues upon expiration of the cards.
The Group also provides student recruiting services and online platform to government agencies which use the Group’s online
platform to conduct continuing education services. The Group earns service fees as a percentage of total tuition fees based on the
agreements entered into with the government agencies. Service fees received are initially recorded as deferred revenue and are
recognized as revenue when course participants complete the stipulated study hours and take the examinations, or on a straight
line basis over the subscription period based on the terms of the agreements.
For the years ended September 30,2010, 2011 and 2012, the Group recognized revenues before business tax and related
surcharges in connection with expired study cards amounted to US$90, US$103 and US$113 respectively.
The online service is provided by Beijing Champion and its subsidiaries which are subject to approximately 3% business tax and
related surcharges. The Group records revenues net of these taxes in the consolidated statements of operations. Such business
tax and related surcharges for the years ended September 30, 2010, 2011 and 2012 were US$777, US$918 and US$1,331
respectively.
F-23
CHINA DISTANCE EDUCATION HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR THE YEARS ENDED SEPTEMBER 30, 2010, 2011 AND 2012
(In thousands, except share and per share data)
2.
SIGNIFICANT ACCOUNTING POLICIES - continued
Revenue recognition - continued
Books and reference materials
The Group sells books and reference materials to distributors and end users. Revenues relating to such sales are deferred until
cash is collected. Inventory costs of products delivered to distributors for which revenues have been deferred are presented as
“deferred costs” on the consolidated balance sheets.
The Group also sells books and reference materials together with study cards which allow the customers to take a certain
number of on-line courses for no additional charge. These sales are considered arrangements with two deliverables, consisting of
the delivery of books and reference material and the on-line courses service.
In October 2009, the FASB published FASB ASU 2009-13, Revenue Recognition (Topic 605) - Multiple-Deliverable Revenue
Arrangements. The guidance establishes a selling price hierarchy for determining the selling price of a deliverable, which is
based on: (a) vendor-specific objective evidence if available (“VSOE”); (b) third-party evidence (“TPE”) if vendor-specific
objective is not available; or (c) estimated selling price (“ESP”) if neither vendor-specific objective evidence nor third-party
evidence is available. The guidance required disclosures on how the application of the relative selling price method affects the
timing and amount of revenue recognition. The Group prospectively adopted the guidance for multiple elements arrangements
entered into on or after October 1, 2010 and allocates revenue to each deliverables based on their relative selling price. The
adoption of the new guidance did not have a material impact on the Group’s financial statements.
Other revenues
Other revenues include sales of offline education services, courseware production services, platform production services, and
others.
Revenues from offline training are recognized when the training courses are provided. For offline training sponsored by
government authorities, the tuition fees of the training participants are subsidized by the government. Qualified enrollments and
the fees to be earned cannot be determined until the confirmation from government authorities regarding the number of students
and fees is received by the Company, which is after the completion of services. Therefore, revenues from such services are
recognized upon cash receipt or the receipt of confirmations from government authorities, whichever is earlier.
Revenues from sales of courseware, which are designed and developed pursuant to the requests from customers, are recognized
when the courseware or platforms are accepted by the customers. The Company has no significant remaining obligation with
respect to the courseware or platforms upon the acceptance of the customers.
F-24
CHINA DISTANCE EDUCATION HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR THE YEARS ENDED SEPTEMBER 30, 2010, 2011 AND 2012
(In thousands, except share and per share data)
2.
SIGNIFICANT ACCOUNTING POLICIES - continued
Revenue recognition - continued
Other revenues - continued
From time to time, the Group enters into arrangement to provide the development and maintenance of online platforms to its
customers. After the development of online platforms, the Group provides support and maintenance services. The development
of online platform and the support and maintenance services have never been sold separately and they do not have standalone
value to the customers. Accordingly, revenues from such arrangement is accounted as a single unit of accounting and recognized
ratably over the support and maintenance services period.
Revenues from other services, including magazine content production, advertising and consulting services, are recognized over
the period when such services are provided.
Value added taxes
The Group is subject to PRC value added tax (“VAT”) generally at a rate of 13% on proceeds received from customers for sales
related to books and reference materials, which reduces revenues, and are entitled to an offset for VAT paid for the books and
reference materials as well as a portion of VAT paid related to purchase of fixed assets.
By virtue of the VAT pilot reform scheme in Beijing, effective as of September 1, 2012, Champion Technology and Champion
Education Technology are subject to VAT, instead of business tax, for their technical and consulting service, software licensing
and course production services provided. The applicable VAT rates are 6% and 3% for Champion Technology and Champion
Education Technology, respectively. Champion Technology is a VAT general taxpayer and the output VAT liability of
Champion Technology is allowed to offset qualified input VAT paid to suppliers. On the other hand, Champion Education
Technology is a VAT small-scale taxpayer and its output VAT liability is not allowed to offset its input VAT.
Net VAT balance between input VAT and output VAT is recorded in either other current liabilities or other current assets on the
consolidated balance sheets.
Cost of sales
Cost of online education services primarily includes the production costs of study cards, server and bandwidth leasing fees,
lecturer fees, staff costs involved in the operation of online education services including network operation and maintenance,
course production and tutor services and other direct costs of providing these services. These costs are expensed when incurred.
The cost of books and reference materials, including direct materials used for production of books, authorship fee and printing
cost, are initially deferred and recorded as “deferred cost”. The deferred costs are recognized as cost of sales when the related
revenue is recognized upon cash receipt.
F-25
CHINA DISTANCE EDUCATION HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR THE YEARS ENDED SEPTEMBER 30, 2010, 2011 AND 2012
(In thousands, except share and per share data)
2.
SIGNIFICANT ACCOUNTING POLICIES - continued
Advertising expenditure
Advertising expenditure is expensed when incurred and are included in “selling expenses” in the consolidated statements of
operations and comprehensive income (loss). Advertising expenses from continuing operations were US$1,123, US$2,204 and
US$2,112, and those from discontinued operations were US$132, US$179 and US$26, for the years ended September 30, 2010,
2011 and 2012, respectively.
Shipping and handling costs
Shipping and handling costs of books and reference materials are classified as a component of “selling expenses” in the
consolidated statements of operations and comprehensive income (loss). Shipping and handling costs classified as selling
expenses from continuing operations were US$327, US$330 and US$252, and those from discontinued operations were US$4,
US$8 and US$1, for the years ended September 30, 2010, 2011 and 2012, respectively.
Income taxes
Current income taxes are provided for in accordance with the laws of the relevant tax authorities. Deferred income taxes are
recognized when temporary differences exist between the tax bases of assets and liabilities and their reported amounts in the
financial statements. Net operating loss carry forwards and credits are applied using enacted statutory tax rates applicable to
future years. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is
more-likely-than-not that a portion of or all of the deferred tax assets will not be realized. The components of the deferred tax
assets and liabilities are individually classified as current and non-current based on their characteristics. The impact of an
uncertain income tax position is recognized at the largest amount that is more-likely-than-not to be sustained upon audit by the
relevant tax authority. An uncertain income tax position will not be recognized if it has less than a 50% likelihood of being
sustained. Interest and penalties on income taxes will be classified as a component of the provisions for income taxes.
Share-based compensation
Share-based compensation with employees is measured based on the grant-date fair value of the equity instrument issued and
recognized as compensation expense over the requisite service period, with a corresponding addition to paid-in capital. The
Group recognizes compensation expense over the vesting term on a straight-line basis with the amount of compensation expense
recognized at any date not less than the portion of the grant-date value of the option vested at that date.
Share-based compensation with non-employee is measured based on the fair value of options at the earlier of the performance
commitment date or the date at which the non-employee’s performance is complete (hereafter referred to as the measurement
date). The Group recognizes compensation expense using the graded vesting attribution method.
Share-based compensation awards which require the issuance of a variable number of shares to settle a fixed monetary amount
are accounted for as liabilities.
F-26
CHINA DISTANCE EDUCATION HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR THE YEARS ENDED SEPTEMBER 30, 2010, 2011 AND 2012
(In thousands, except share and per share data)
2.
SIGNIFICANT ACCOUNTING POLICIES - continued
Net income per share
Basic net income per share is computed by dividing income attributable to holders of ordinary shares by the weighted average
number of ordinary shares outstanding during the period. Nonvested restricted shares are also participating securities as they
enjoy identical dividend rights as ordinary shares. Accordingly, the Group uses the two-class method whereby undistributed net
income is allocated on a pro rata basis to each participating share to the extent that each class may share in income for the
period. Diluted net income per share reflects the potential dilution that could occur if securities or other contracts to issue
ordinary shares were exercised or converted into ordinary shares. The dilutive effect of outstanding share-based awards is
reflected in the diluted net income per share by application of the treasury stock method.
Business combinations
Business combinations are recorded using the acquisition method of accounting. On October 1, 2009, the Group adopted a new
accounting pronouncement with prospective application which made certain changes to the previous authoritative literature on
business combinations. From October 1, 2009, the assets acquired, the liabilities assumed, and any noncontrolling interest of the
acquiree at the acquisition date, if any, are measured at their fair values as of that date. Goodwill is recognized and measured as
the excess of the total consideration transferred plus the fair value of any noncontrolling interest of the acquiree, if any, at the
acquisition date over the fair values of the identifiable net assets acquired. Previously, any non-controlling interest was reflected
at historical cost. Common forms of the consideration made in acquisitions include cash and common equity instruments.
Consideration transferred in a business acquisition is measured at the fair value as at the date of acquisition.
Where the consideration in an acquisition includes contingent consideration the payment of which depends on the achievement
of certain specified conditions post-acquisition, from October 1, 2009 the contingent consideration is recognized and measured
at its fair value at the acquisition date and if recorded as a liability it is subsequently carried at fair value with changes in fair
value reflected in earnings. For periods prior to October 1, 2009 contingent consideration was not recorded until the contingency
was resolved.
In addition, upon the adoption of the accounting pronouncement regarding noncontrolling interests (see note 17), from
October 1, 2009, changes in a parent’s ownership interest while the parent retains its controlling financial interest in its
subsidiary are accounted for as equity transaction. Therefore, no gain or loss would be recognized and any difference between
the fair value of the consideration received or paid and the amount by which the noncontrolling interest is adjusted is recognized
in equity to the parent.
F-27
CHINA DISTANCE EDUCATION HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR THE YEARS ENDED SEPTEMBER 30, 2010, 2011 AND 2012
(In thousands, except share and per share data)
2.
SIGNIFICANT ACCOUNTING POLICIES - continued
Comprehensive income (loss)
Comprehensive income (loss) includes net income and foreign currency translation adjustments and is reported in the
consolidated statements of comprehensive income.
The consolidated financial statements have been adjusted for the retrospective application of the authoritative guidance
regarding the presentation of comprehensive income, which was adopted by the Group on October 1, 2011.
Significant risks and uncertainties
Foreign currency risk
RMB is not a freely convertible currency. The State Administration for Foreign Exchange, under the authority of the People’s
Bank of China, controls the conversion of RMB into foreign currencies. The value of RMB is subject to changes in central
government policies and to international economic and political developments affecting supply and demand in the China
Foreign Exchange Trading System market. The cash and cash equivalents of the Group from the continuing operations and
discontinued operations included aggregate amounts of US$16,716 and US$36,360, which were denominated in RMB, at
September 30, 2011 and 2012, respectively, representing 32.8% and 73.1% of the cash and cash equivalents at September 30,
2011 and 2012, respectively.
Concentration of credit risk
Financial instrument that potentially expose the Group to significant concentration of credit risk primarily consist of cash and
cash equivalents, accounts receivable and funds receivable. As of September 30, 2012, substantially all of the Group’s cash and
cash equivalents were deposited in financial institutions located in the PRC and Hong Kong. Accounts receivable are typically
unsecured and are derived from revenue earned from customers in the PRC. The risk with respect to accounts receivable is
mitigated by credit evaluations the Group performs on its customers and its ongoing monitoring process of outstanding balances.
Funds receivable are unsecured and are held by external payment networks who collect fees from customers through online
payment networks. The funds are transferred to the Group within one to three businness days after payments are received by
external payment networks. To mitigate the credit risk, the Group only engages large scale and reputable payment networks to
collect fees on its behalf. The Group also monitors the timeliness and accuracy of funds transfer by the external payment
networks and the credit worthiness of the external payment networks.
There are no revenues from customers which individually represent greater than 10% of the total net revenues for any year of the
three years period ended September 30, 2012.
Primarily due to the long payment cycles of government agencies, the Group had two customers that accounted for 28.4% and
12.6% of the Group’s accounts receivable balances as of September 30, 2011, respectively, and only one customer that
accounted for 43.7% of the Group’s accounts receivable balances as of September 30, 2012.
F-28
CHINA DISTANCE EDUCATION HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR THE YEARS ENDED SEPTEMBER 30, 2010, 2011 AND 2012
(In thousands, except share and per share data)
2.
SIGNIFICANT ACCOUNTING POLICIES - continued
Recently issued accounting pronouncements
In May 2011, the Financial Accounting Standard Board (“FASB”) issued an authoritative pronouncement on fair value
measurement. The guidance is the result of joint efforts by the FASB and International Accounting Standards Board to develop a
single, converged fair value framework. The guidance is largely consistent with existing fair value measurement principles in
US GAAP. The guidance expands the existing disclosure requirements for fair value measurements and makes other
amendments, mainly including:
•
Highest-and-best-use and valuation-premise concepts for nonfinancial assets - the guidance indicates that the highest-and-
best-use and valuation-premise concepts only apply to measuring the fair value of nonfinancial assets.
Application to financial assets and financial liabilities with offsetting positions in market risks or counterparty credit risk -
the guidance permits an exception to fair value measurement principles for financial assets and financial liabilities (and
derivatives) with offsetting positions in market risks or counterparty credit risk when several criteria are met. When the
criteria are met, an entity can measure the fair value of the net risk position.
•
•
Premiums or discounts in fair value measure - the guidance provides that premiums or discounts that reflect size as a
characteristic of the reporting entity’s holding (specifically, a blockage factor that adjusts the quoted price of an asset or a
liability because the market’s normal daily trading volume is not sufficient to absorb the quantity held by the entity) rather
than as a characteristic of the asset or liability (for example, a control premium when measuring the fair value of a
controlling interest) are not permitted in a fair value measurement.
•
•
Fair value of an instrument classified in a reporting entity’s stockholders’ equity - the guidance prescribes a model for
measuring the fair value of an instrument classified in stockholders’ equity; this model is consistent with the guidance on
measuring the fair value of liabilities.
Disclosures about fair value measurements - the guidance expands disclosure requirements, particularly for Level 3 inputs.
Required disclosures include:
(i)
For fair value measurements categorized in Level 3 of the fair value hierarchy: (1) a quantitative disclosure of the
unobservable inputs and assumptions used in the measurement, (2) a description of the valuation process in place
(e.g., how the entity decides its valuation policies and procedures, as well as changes in its analyses of fair value
measurements, from period to period), and (3) a narrative description of the sensitivity of the fair value to changes in
unobservable inputs and interrelationships between those inputs.
(ii)
The level in the fair value hierarchy of items that are not measured at fair value in the statement of financial position
but whose fair value must be disclosed.
F-29
CHINA DISTANCE EDUCATION HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR THE YEARS ENDED SEPTEMBER 30, 2010, 2011 AND 2012
(In thousands, except share and per share data)
2.
SIGNIFICANT ACCOUNTING POLICIES - continued
Recently issued accounting pronouncements - continued
The guidance is to be applied prospectively and is effective for interim and annual periods beginning after December 15, 2011,
for public entities. Early application by public entities is not permitted. The Group does not expect the adoption of this guidance
to have a significant effect on its consolidated financial statements.
In June 2011, the FASB issued an authoritative pronouncement to require an entity to present the total of comprehensive
income, the components of net income, and the components of other comprehensive income either in a single continuous
statement of comprehensive income or in two separate but consecutive statements. In both choices, an entity is required to
present each component of net income along with total net income, each component of other comprehensive income along with
a total for other comprehensive income, and a total amount for comprehensive income. The guidance eliminates the option to
present the components of other comprehensive income as part of the statement of changes in stockholders’ equity. The
guidance does not change the items that must be reported in other comprehensive income or when an item of other
comprehensive income must be reclassified to net income. The guidance should be applied retrospectively. For public entities,
the guidance is effective for fiscal years and interim periods within those years, beginning after December 15, 2011. Early
adoption is permitted. In December 2011, the FASB issued an authoritative pronouncement related to deferral of the effective
date for amendments to the presentation of reclassifications of items out of accumulated other comprehensive income. This
guidance allows the FASB to redeliberate whether to present on the face of the financial statements the effects of
reclassifications out of accumulated other comprehensive income on the components of net income and other comprehensive
income for all periods presented. While the FASB is considering the operational concerns about the presentation requirements
for reclassification adjustments and the needs of financial statement users for additional information about reclassification
adjustments, entities should continue to report reclassifications out of accumulated other comprehensive income consistent with
the presentation requirements in effect before the pronouncement issued in June 2011. The Group chose to early adopted these
pronouncements. The presentation of comprehensive income was retrospectively applied for all the periods presented. The
adoption of this guidance did not have a significant effect on the Company’s consolidated financial statements.
In September 2011, the FASB issued an authoritative pronouncement related to testing goodwill for impairment. The guidance is
intended to simplify how entities, both public and nonpublic, test goodwill for impairment. The guidance permits an entity to
first assess qualitative factors to determine whether it is “more likely than not” that the fair value of a reporting unit is less than
its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test. The
guidance is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15,
2011. Early adoption is permitted, including for annual and interim goodwill impairment tests performed as of a date before
September 15, 2011, if a public entity’s financial statements for the most recent annual or interim period have not yet been
issued. The Group does not expect the adoption of this pronouncement to have a significant impact on its financial condition or
results of operations.
F-30
CHINA DISTANCE EDUCATION HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR THE YEARS ENDED SEPTEMBER 30, 2010, 2011 AND 2012
(In thousands, except share and per share data)
2.
SIGNIFICANT ACCOUNTING POLICIES - continued
Recently issued accounting pronouncements - continued
In December 2011, the FASB has issued an authoritative pronouncement related to Disclosures about Offsetting Assets and
Liabilities. The guidance requires an entity to disclose information about offsetting and related arrangements to enable users of
its financial statements to understand the effect of those arrangements on its financial position. An entity is required to apply the
amendments for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods.
An entity should provide the disclosures required by those amendments retrospectively for all comparative periods presented.
The Group does not expect the adoption of this pronouncement to have a significant impact on its financial condition or results
of operations.
In July 2012, the FASB issued an authoritative pronouncement related to testing indefinite-lived intangible assets, other than
goodwill, for impairment. Under the pronouncement, entities testing indefinite-lived intangible assets for impairment would
have the option of performing a qualitative assessment before calculating the fair value of the asset. If an entity determines, on
the basis of qualitative factors, that the indefinite-lived intangible asset is not more likely than not impaired, a quantitative fair
value calculation would not be needed. The amendments are effective for annual and interim impairment tests performed for
fiscal years beginning after September 15, 2012. Early adoption is permitted. The Group does not expect the adoption of this
pronouncement to have a significant impact on its consolidated financial condition or results from operations.
3. ACQUISITIONS
Acquisition of Zhengbao Yucai
On March 10, 2009, Beijing Champion acquired the business of start-up training services from Beijing Yinglun Yucai Education
Consulting Co., Ltd. (“Yinglun Yucai”) which was owned by Mr. Liang Ma. The acquired business is operated by Zhengbao
Yucai, an entity established by Beijing Champion. Upon the completion of the acquisition, Beijing Champion transferred 40%
equity interest of Zhengbao Yucai to Mr. Liang Ma.
F-31
CHINA DISTANCE EDUCATION HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR THE YEARS ENDED SEPTEMBER 30, 2010, 2011 AND 2012
(In thousands, except share and per share data)
3. ACQUISITIONS-continued
Acquisition of Zhengbao Yucai-continued
The initial consideration for this acquisition was US$5,318 in cash, including US$56 of transaction costs, of which US$5,314
and US$4 were paid during the fiscal year 2009 and 2010 respectively.
In addition, the purchase agreement provides for further contingent consideration to be paid or received by Beijing Champion as
follows:
•
For the fiscal year of 2009, if Zhengbao Yucai has a net income greater than RMB22,500 (approximately US$3,296),
Beijing Champion will pay Mr. Liang Ma an additional cash consideration equal to 40% of the excess amount of net
income over RMB22,500.
For the fiscal year of 2010, if Zhengbao Yucai has a net income greater than RMB47,000 (approximately US$6,881),
Beijing Champion will pay Mr. Liang Ma an additional cash consideration equal to 30% of the excess amount of net
income over RMB47,000.
If Zhengbao Yucai’s net income for the fiscal year of 2009 is less than RMB22,500 or for the fiscal year of 2010 is less
•
•
than RMB47,000, Mr. Liang Ma will pay Beijing Champion a specified amount of cash which Mr. Liang Ma may settle in
stock of Zhengbao Yucai.
The purchase agreement also includes the following call and put options:
•
If Zhengbao Yucai has a net loss for the fiscal year of 2009 or 2010, Beijing Champion has the option to sell its equity
interest of Zhengbao Yucai back to Mr. Liang Ma for RMB43,200 in cash.
•
Beijing Champion has the option to acquire an additional 30% equity interest of Zhengbao Yucai in the next 5 years
starting from the end of the fiscal year 2009 at a price equal to 30% of six times of the net income of Zhengbao Yucai for
the preceding fiscal year. Zhengbao Yucai has the option to acquire up to 49% equity interest of Beijing Yinhong
International Education Consulting Co. Ltd. (“Yinhong”), owned by Yinglun Yucai, within 3 years starting from
February 15, 2009 at a price up to 49% of six times of the net income of Yinhong for the preceding fiscal year.
F-32
CHINA DISTANCE EDUCATION HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR THE YEARS ENDED SEPTEMBER 30, 2010, 2011 AND 2012
(In thousands, except share and per share data)
3. ACQUISITIONS - continued
Acquisition of Zhengbao Yucai - continued
The following table presents the allocation of the purchase price to the fair values of the portion of the assets acquired and
liabilities assumed on March 10, 2009, which were determined by the Group with the assistance of American Appraisal China
Limited, an independent valuation firm.
Cash
Property, plant and equipment
Purchased call options
Other intangible assets:
Business contracts
Copyrights
Platform
Domain names
Software
Courseware
Deferred tax liability
Noncontrolling interest
Goodwill
Total consideration
Amortization
period
3~5 years
5 years
3.5 years
10~11 years
3 years
5 years
US$
2,854
138
1,221
476
586
195
168
311
255
(382)
(2,107)
1,603
5,318
Zhengbao Yucai incurred net losses for the fiscal years of 2009 and 2010. In addition, the Group noted that Mr. Liang Ma, the
selling equity holder of Zhengbao Yucai, Yinglun Yucai, a company owned by Mr. Liang Ma, and Global Education
Consortium Group Co., Limited, a company owned by Mr. Liang Ma’s wife engaged in competing businesses which is
prohibited under the purchase agreement.
In January 2010, the Group filed an arbitration application with the China International Economic and Trade Arbitration
Commission (“CIETAC”), against Mr. Liang Ma and its related parties (“the respondents”) for breach of the original purchase
agreement.
As of September 30, 2010, the option to acquire equity interest in Yinhong was fully impaired by US$34 and the option to
acquire equity interest in Zhengbao Yucai was impaired by US$128 for the year ended September 30, 2010.
On June 1, 2011, the CIETAC awarded the Group (i) US $571 compensation from the respondents, which was received on
July 27, 2011 and was recorded as other operating income, and (ii) 40% equity interest of Zhengbao Yucai with no consideration
from Mr. Liang Ma, which was recorded as equity transaction with no gain or loss recognized. Thereafter, the Group fully
impaired the option to acquire equity interest in Zhengbao Yucai by US$1,115 to nil. (See note 11).
F-33
CHINA DISTANCE EDUCATION HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR THE YEARS ENDED SEPTEMBER 30, 2010, 2011 AND 2012
(In thousands, except share and per share data)
3. ACQUISITIONS - continued
Acquisition of Champion Xinlixiang
On September 30, 2009, Champion Wangge acquired the Gaokao retake business from Mr. Junnan Ye and Mr. Xiujie Hu, two
third-party individuals. The acquired business is operated by Champion Xinlixiang, an entity established by Champion Wangge.
Upon the completion of the acquisition, Champion Wangge transferred 40% equity interest of Champion Xinlixiang to
Mr. Junnan Ye and Mr. Xiujie Hu.
The initial consideration for this acquisition was US$2,379 in cash (RMB16,000), including US$37 of transaction costs, which
was fully settled in the fiscal year of 2011.
In addition, the purchase agreement provides for further contingent consideration to be paid or received by Champion Wangge
as follows:
•
For the fiscal year of 2010, if Champion Xinlixiang has a net income greater than RMB8,000 (approximately US$1,172),
Champion Wangge will pay Mr. Junnan Ye and Mr. Xiujie Hu an additional cash consideration equal to 40% of the excess
amount of net income over RMB8,000.
For the fiscal year of 2011, if Champion Xinlixiang has a net income greater than RMB16,000 (approximately US$2,344),
Champion Wangge will pay Mr. Junnan Ye and Mr. Xiujie Hu an additional cash consideration equal to 30% of the excess
amount of net income over RMB16,000.
If Champion Xinlixiang’s net income for the fiscal year of 2010 is less than RMB8,000 or for the fiscal year of 2011 is less
•
•
than RMB16,000, Mr. Junnan Ye and Mr. Xiujie Hu will pay Champion Wangge a specified amount of cash which
Mr. Junnan Ye and Mr. Xiujie Hu may settle in stock of Champion Xinlixiang.
The purchase agreement also included the following call and put options:
•
•
If Champion Xinlixiang has a net loss for the fiscal year of 2010 or 2011, Champion Wangge has the option to sell its
equity interest of Champion Xinlixiang back to Mr. Junnan Ye and Mr. Xiujie Hu for RMB19,200 in cash.
Champion Wangge, beginning October 1, 2011, has the option to acquire an additional 40% equity interest of Champion
Xinlixiang at a price equal to 40% of six times of the net income of Champion Xinlixiang for the preceding fiscal year.
Mr. Junnan Ye and Mr. Xiujie Hu, beginning October 1, 2011, have the right to request Champion Wangge to purchase
their equity interest of Champion Xinlixiang at the same price. Upon the refusal of Champion Wangge, the sellers have the
right to sell their equity interest of Champion Xinlixiang to a third party at a price no lower than Champion Wangge’s
purchase price.
F-34
CHINA DISTANCE EDUCATION HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR THE YEARS ENDED SEPTEMBER 30, 2010, 2011 AND 2012
(In thousands, except share and per share data)
3. ACQUISITIONS - continued
Acquisition of Champion Xinlixiang - continued
The following table presents the allocation of the purchase price to the fair values of the portion of the assets acquired and
liabilities assumed on September 30, 2009, which were determined by the Group with the assistance of American Appraisal
China Limited, an independent valuation firm.
Non-compete agreement
Supplementary domain names
Accounts receivable
Purchased call option
Other intangible assets:
Deferred revenue
Deferred tax liability
Income tax payable
Other payables
Noncontrolling interest
Goodwill
Total consideration
Amortization
period
15 years
10 years
US$
1,968
669
650
1
(1,617)
(330)
(61)
(107)
(937)
2,143
2,379
The purchased call option to acquire additional equity interest in Champion Xinlixiang was recorded at fair value at the
acquisition date. Since it is not a derivative because the net settlement criterion is not met, the purchased call option is not
subsequently marked to market. As Champion Xinlixiang incurred a net loss in the fiscal year of 2010, pursuant to the terms of
the original purchase agreement, the selling equity holders surrendered their 40% equity interest of US$911 in Champion
Xinlixang to the Group for no consideration on October 1, 2010. As a result, the purchase call option was impaired by US$ 477
and US$201 in fiscal years of 2010 and 2011, respectively, (see Note 11).
On September 27, 2011, the Group decided to discontinue its Gaokao retake education services business, and this operation was
subsequently disposed on May 4, 2012 (see note 4).
F-35
CHINA DISTANCE EDUCATION HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR THE YEARS ENDED SEPTEMBER 30, 2010, 2011 AND 2012
(In thousands, except share and per share data)
4. DISCONTINUED OPERATIONS
Gaokao retake business operated by Champion Xinlixiang has been in a loss position. As a result, on September 27, 2011, the
Company decided to discontinue operations of Gaokao retake business and put the related assets and business up for sale. On
May 4, 2012, the Company completed the sale of this operation for total cash proceeds of US$157. The assets sold consisted
primarily of cash and cash equivalents, accounts receivable, property and equipment, prepayment and other assets. The buyer
also assumed certain income tax payable, deferred revenue and accrued liabilities and other liabilities.
The following is a summary of the net assets sold as initially determined at September 30, 2011 and as of May 4, 2012 and
disposal gain recognized:
Current assets of discontinued operations:
Cash and cash equivalents
Accounts receivable, net
Prepayment and other current assets
Property, plant and equipment, net
Current liabilities of discontinued operations:
Accrued expenses and other liabilities
Income tax payable
Deferred revenue, current portion
Net liabilities disposed
Cash proceeds
Gain on disposition of the discontinued operation
F-36
As of
September 30
2011
US$
Disposed as of
May 4
2012
US$
1,209
14
309
774
2,306
548
126
1,186
1,860
312
14
324
—
650
348
128
314
790
(140)
157
297
CHINA DISTANCE EDUCATION HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR THE YEARS ENDED SEPTEMBER 30, 2010, 2011 AND 2012
(In thousands, except share and per share data)
4. DISCONTINUED OPERATIONS - continued
Summarized operating results from the discontinued operations included in the Group’s consolidated statements of operations
were as follows for the years ended September 30, 2010, 2011 and 2012:
Revenues
Pre-tax profit (loss) from discontinued operations
Income tax expense
Income (loss) from discontinued operations, net of tax
Gain on disposal of discontinued operation
Net loss of discontinued operations attributable to noncontrolling interest, net
of tax
Net (loss) income from discontinued operations attributable to China Distance
Education Holding Limited, net of tax
Years ended September 30,
2010
US$
2,167
(2,202)
116
(2,086)
—
2011
US$
1,776
(3,444)
144
(3,300)
—
2012
US$
1,045
(61)
—
(61)
297
33
—
—
(2,053)
(3,300)
236
All notes to the accompanying consolidated financial statements have reflected the effect of the discontinued operations, where
applicable.
5. ACCOUNTS RECEIVABLE, NET
Accounts receivable, net consisted of the following:
Accounts receivable
Less: allowance for doubtful accounts
Accounts receivable, net
As of September 30,
2011
US$
7,851
(3,190)
4,661
2012
US$
6,173
(2,092)
4,081
The allowance for doubtful accounts as of September 30, 2011 and 2012 were primarily related to accounts receivables of
government agencies which have been outstanding for more than a year and are probably uncollectable.
F-37
CHINA DISTANCE EDUCATION HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR THE YEARS ENDED SEPTEMBER 30, 2010, 2011 AND 2012
(In thousands, except share and per share data)
5. ACCOUNTS RECEIVABLE, NET - continued
Movement of allowance for doubtful accounts was as follows:
Balance at beginning of year
Charged to expenses
Write-off of accounts receivable
Foreign currency adjustment
Balance at end of the year
6.
INVENTORIES, NET
Inventories consisted of the following:
Books and other goods
Paper and other raw materials
As of
September 30,
2011
US$
2,236
824
—
130
3,190
2012
US$
3,190
211
(1,361)
52
2,092
As of September 30,
2011
US$
285
78
363
2012
US$
588
70
658
Inventories provision as of September 30, 2010,2011 and 2012, were US$2, US$3 and US$44, respectively.
F-38
CHINA DISTANCE EDUCATION HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR THE YEARS ENDED SEPTEMBER 30, 2010, 2011 AND 2012
(In thousands, except share and per share data)
7.
PREPAYMENT AND OTHER CURRENT ASSETS
Prepayment and other current assets consisted of the following:
Advance to the suppliers
Prepaid expenses
Refundable prepayments
Funds receivable
Deposits
Others
Less: allowance for doubtful accounts
Prepayment and other current assets, net
Notes
(1)
(2)
(3)
(2)
As of September 30,
2011
US$
1,585
618
320
245
56
357
(320)
2,861
2012
US$
1,835
1,092
325
142
68
436
(325)
3,573
(1) Advance to the suppliers represents interest-free cash deposits paid to suppliers for future purchase of raw materials and finished
goods. The risk of loss arising from non-performance by or bankruptcy of the suppliers is assessed prior to making the deposits
and is monitored on a regular basis by management. A charge to cost of sales will be recorded in the period in which a loss is
incurred. To date, the Group has not experienced any loss of advances to suppliers.
(2) The group prepaid a refundable fee to a government agency in the year ended September 30, 2010 as a sponsor of ITAT contest
which was subsequently cancelled. The Group has recorded a full allowance as such prepaid amount has been outstanding for
more than a year and is probably uncollectable.
(3) Funds receivable arise due to the time taken to clear customers’ payment transactions through external payment networks. When
customers remit fees to the Group via external payment networks using their bank account or credit card, there is a clearing
period before the cash is received by the Group which usually takes one to three business days. These fees are treated as a
receivable until the cash is received.
F-39
CHINA DISTANCE EDUCATION HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR THE YEARS ENDED SEPTEMBER 30, 2010, 2011 AND 2012
(In thousands, except share and per share data)
8.
PROPERTY, PLANT AND EQUIPMENT, NET
Property, plant and equipment consisted of the following:
Buildings
Electronic and office equipment
Leasehold improvement and building improvement
Motor vehicles
Total
Less: Accumulated depreciation
As of September 30,
2012
2011
US$
US$
5,892
5,077
7,604
6,020
1,434
1,293
1,106
917
16,036
13,307
(6,360)
(4,721)
9,676
8,586
Depreciation expenses from continuing operations were US$1,142, US$1,309 and US$1,606, and from discontinued operations
were US$15, US$140 and nil, for the years ended September 30, 2010, 2011 and 2012, respectively.
9. GOODWILL
Goodwill was comprised of the following:
Year ended September 30
2011
2012
Online Start-up
education training Discontinued
Gaokao
re-take
business –
Online Start-up
Gaokao
re-take
business –
education training Discontinued
Gross amount
Beginning balance
Exchange Difference
Disposal
Ending balance
Accumulated impairment loss
Beginning balance
Charge for the year
Exchange Difference
Disposal
Ending balance
Goodwill, net
service service
US$
US$
operations
US$
Total
US$
service service
US$
US$
operations
Total
US$
US$
5,377 1,647
265 114
— —
5,642 1,761
— —
— —
— —
— —
— —
5,642 1,761
F-40
5,642 1,761
2,188 9,212
453
74
— — — —
5,726 1,785
2,262 9,665
84
24
2,262 9,665
108
-2,262 -2,262
0 7,511
-1424 — —
-1,424
-758 — —
-758
-80
-80 — —
— — — —
-2,262 -2,262 — —
5,726 1,785
0 7,403
-2,262 2,262
— —
— —
-2,262 -2,262
0
0
0 7,511
CHINA DISTANCE EDUCATION HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR THE YEARS ENDED SEPTEMBER 30, 2010, 2011 AND 2012
(In thousands, except share and per share data)
9. GOODWILL - continued
The Group tested its goodwill for impairment at the following reporting units level.
Online education service - This reporting unit provides online education services to its customers located in the PRC. It includes
all the subsidiaries, the VIE and VIE’s subsidiaries of the Group except for Zhengbao Yucai and Champion Xinlixiang. The
goodwill arising from the acquisitions of the entities under this reporting unit is fully allocated to this reporting unit.
Start-up training service - This reporting unit provides start-up training services to the Group’s customers located the PRC. It
includes Zhengbao Yucai. The goodwill arising from the acquisitions of 60% equity interest in Zhengbao Yucai is fully
allocated to this reporting unit.
Goodwill is tested for impairment annually or more frequently if events or changes in circumstances indicate that it might be
impaired. The Group has not recorded any impairment of goodwill on online education service and start-up training service.
The reporting unit of Gaokao retake business was discontinued and accordingly the related goodwill was fully impaired at the
end of the fiscal year 2011.(See note 4 and note 11)
10. OTHER INTANGIBLE ASSETS, NET
Other intangible assets consisted of the following:
Computer software
Trademarks and domain names
Website
Courseware
Business contracts
Copyrights
Platform
Total intangible assets
Less: Accumulated amortization
Computer software
Trademarks and domain names
Website
Courseware
Business contracts
Copyrights
Platform
Accumulated amortization
Intangible assets, net
F-41
As of September 30,
2011
US$
2,278
1,337
102
468
510
627
208
5,530
2012
US$
2,645
1,407
103
475
517
647
211
6,005
(1,369)
(585)
(92)
(334)
(296)
(320)
(152)
(3,148)
2,382
(1,827)
(717)
(102)
(394)
(399)
(455)
(182)
(4,076)
1,929
CHINA DISTANCE EDUCATION HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR THE YEARS ENDED SEPTEMBER 30, 2010, 2011 AND 2012
(In thousands, except share and per share data)
10. OTHER INTANGIBLE ASSETS, NET - continued
Amortization expenses from continuing operations were US$809, US$900 and US$873 and from discontinued operations were
US$42, US$26 and nil, for the years ended September 30, 2010, 2011 and 2012, respectively.
The estimated amortization expenses for the above other intangible assets for each of the following fiscal years are as follows
2013
2014
2015
2016
2017
2018 and thereafter
Amortization
US$
698
442
283
215
152
139
1,929
11. FAIR VALUE MEASUREMENT
The Group’s financial instruments consist of cash equivalents, term deposits, restricted cash, accounts receivable, other current
assets, and other liabilities. The carrying amounts of these instruments approximate their fair values due to their short-term
maturity.
The Group reviews goodwill for impairment annually or more frequently if events or changes in circumstances indicate the
possibility of impairment. For the continuing operations, other intangible assets, purchased call options and other long-lived
assets are measured at fair value on a nonrecurring basis when there is an indicator of impairment, and they are recorded at fair
value only when impairment is recognized. For discontinued operations, such long-lived assets are measured at the lower of
carrying amount or fair value less cost to sell.
F-42
CHINA DISTANCE EDUCATION HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR THE YEARS ENDED SEPTEMBER 30, 2010, 2011 AND 2012
(In thousands, except share and per share data)
11. FAIR VALUE MEASUREMENT - continued
These assets, as presented below are considered Level 3 assets because the Group used unobservable inputs, reflecting the
Group’s assessment of the assumptions market participants would use in valuing these assets.
Zhengbao Yucai
Balance as of September 30, 2010
Impairment during the year
Foreign currency adjustment
Balance as of September 30, 2011
Purchased call options
(acquisition of 30% interest
in Zhengbao Yucai)
US$
1,083
(1,115)
32
—
There were no activities during the year ended September 30, 2012.
Based on an impairment test performed as of September 30, 2010, the purchased call options to acquire 40% equity interest in
Zhengbao Yucai were impaired by US$162. As of September 30, 2011, the purchased call options acquired with the acquisitions
of Zhengbao Yucai were written down to zero, because the Group acquired the additional 40% equity interest of Zhengbao
Yucai in 2011 with no consideration. (See note 3)
Champion Xinlixiang-Gaokao Retake business
Balance as of September 30, 2010
Addition during the year
Amortization during the year
Impairment during the year
Foreign currency adjustment
Balance as of September 30, 2011
Transferred during the year
Balance as of September 30, 2012
Goodwill
US$
764
—
—
(758)
(1)
(6)
—
—
—
Property plant
and equipment
US$
Non-compete
agreement
US$
Purchased call
options (acquisition
of 40% interest in
Champion Xinlixiang)
US$
722
1,110
(140)
(973)
(3)
55
774
(774)
—
F-43
343
—
(25)
(332)
(3)
13
—
—
—
(4)
200
—
—
(201)
1
—
—
—
CHINA DISTANCE EDUCATION HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR THE YEARS ENDED SEPTEMBER 30, 2010, 2011 AND 2012
(In thousands, except share and per share data)
11. FAIR VALUE MEASUREMENT - continued
(1) The Group used the discounted cash flow (“DCF’) method of the income approach to assess the fair value of each reporting unit.
The discounted cash flow for each reporting unit was projected based on financial forecast developed by management for
planning purposes. Cash flows beyond the forecast periods were estimated using a terminal value calculation, which
incorporated historical and forecasted financial trends for each reporting unit. Publicly available information regarding the
market capitalization of the Group was also considered in assessing the reasonableness of the aggregate fair value of all the
reporting units estimated using the income approach valuation methodology. Based on the goodwill impairment test as of
September 30, 2010 and 2011, an impairment loss of US$1,407 and US$758 was recorded for Gaokao retake business.
(2) Measured at lower of carrying amount or fair value, the non-compete agreement was impaired by US$274 during the year ended
September 30, 2010.
(3) Measured at the lower of carrying amount or fair value less cost to sell, the property plant, equipment and non-compete
agreement were impaired by US$973 and US$332 during the year ended September 30, 2011, respectively.
(4) The purchased call options acquired with the acquisitions of Champion Xinlixiang were re-measured using binomial model at
September 30, 2010, and the option to purchase additional equity interest in Champion Xinlixiang was impaired by US$477. As
of September 30, 2011, such purchased call option was fully impaired because the Group acquired the 40% equity interest for no
consideration on October 1, 2010. (See Note 3)
12. DEPOSITS FOR PURCHASE OF NON-CURRENT ASSETS
Deposits for purchase of non-current assets consisted of the following:
Deposit for purchase of property, plant and equipment
F-44
As of September 30,
2011
US$
242
242
2012
US$
131
131
CHINA DISTANCE EDUCATION HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR THE YEARS ENDED SEPTEMBER 30, 2010, 2011 AND 2012
(In thousands, except share and per share data)
13. OTHER NON-CURRENT ASSETS
Other non-current assets consisted of the following:
Long-term prepaid expenses
Rental deposits
Others
As of September 30,
2012
2011
US$
US$
587
129
13
729
966
125
—
1,091
Long-term prepaid expenses represent 1)prepaid service fee for obtaining government authorization to provide the ITAT
program, an information technique application training program, for a period of ten years, and 2)golf club membership fee valid
for a period of ten years. The amortization of the long term prepaid expenses was included in “cost of sales” and in “general and
administrative expenses” respectively on the consolidated statements of operations.
Rental deposits represent office rental deposits for the Group’s daily operations. These deposits are classified as non-current
deposits since they will not be refunded within one year.
14. ACCRUED EXPENSES AND OTHER LIABILITIES
The components of accrued expenses and other liabilities are as follows:
Accrued expenses
Salary and welfare payable
Tuition fee payables to government agencies
Remuneration payable to lecturers
Uncertain income tax liabilities (Note 18)
Other payable
As of September 30,
2011
US$
2,172
1,414
965
1,523
170
270
6,514
2012
US$
2,597
1,823
2,765
1,883
173
395
9,636
Tuition fee payable to government agencies mainly represents the portion of tuition fee collected by the Group on behalf of the
government agencies which provide accounting continuing education courses and the Group is only responsible for the student
recruiting and provision of online platform and shares certain percentage of fee tuition as service fees.
F-45
CHINA DISTANCE EDUCATION HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR THE YEARS ENDED SEPTEMBER 30, 2010, 2011 AND 2012
(In thousands, except share and per share data)
15. ORDINARY SHARES
On November 20, 2008, the Company’s board of directors approved a share repurchase program effective November 20, 2008.
Under the approved program, the Company is authorized to repurchase up to US$10 million worth of its issued and outstanding
ADSs from time to time in open-market transactions on NYSE. On April 29, 2011, the Company’s board of directors approved
additional share repurchase up to US$10 million worth of its issued and outstanding ADSs. During the years ended
September 30, 2010, 2011 and 2012, the Company repurchased 1,909,600 , 9,223,188 and 1,285,464 ordinary shares for total
considerations of US$2,172, US$8,138 and US$993, respectively. Such shares were immediately canceled after the repurchase.
16. RESTRICTED NET ASSETS
Relevant PRC statutory laws and regulations permit payments of dividends by the Group’s PRC subsidiaries only out of their
retained earnings, if any, as determined in accordance with PRC accounting standards and regulations. The results of operations
reflected in the financial statements prepared in accordance with U.S. GAAP differ from those reflected in the statutory financial
statements of the Company’s subsidiaries.
In accordance with the Regulations on Enterprises with Foreign Investment of China and their articles of association, a foreign
invested enterprise established in the PRC is required to provide certain statutory reserves, namely general reserve fund, the
enterprise expansion fund and staff welfare and bonus fund which are appropriated from net profit as reported in the enterprise’s
PRC statutory accounts, which is presented at cumulative deficits accounts in equity section of balance sheet. A wholly-owned
foreign invested enterprise is required to allocate at least 10% of its annual after-tax profit to the general reserve until such
reserve has reached 50% of its respective registered capital based on the enterprise’s PRC statutory accounts. Appropriations to
the enterprise expansion fund and staff welfare and bonus fund are at the discretion of the board of directors for all foreign
invested enterprises. The aforementioned reserves can only be used for specific purposes and are not distributable as cash
dividends. Champion Technology and Champion Education Technology were established as wholly-owned foreign invested
enterprises and therefore are subject to the above mandated restrictions on distributable profits.
F-46
CHINA DISTANCE EDUCATION HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR THE YEARS ENDED SEPTEMBER 30, 2010, 2011 AND 2012
(In thousands, except share and per share data)
16. RESTRICTED NET ASSETS - continued
Additionally, in accordance with the Company Law of the PRC, a domestic enterprise is required to provide statutory common
reserve at least 10% of its annual after-tax profit until such reserve has reached 50% of its respective registered capital based on
the enterprise’s PRC statutory accounts. A domestic enterprise is also required to provide for discretionary surplus reserve, at the
discretion of the board of directors, from the profits determined in accordance with the enterprise’s PRC statutory accounts. The
aforementioned reserves can only be used for specific purposes and are not distributable as cash dividends. As a result of these
PRC laws and regulations, the appropriation to the statutory reserve amounted to US$1,076, US$2,388 and US$3,206 for the
years ended September 30, 2010, 2011 and 2012, respectively.
As a result of these PRC laws and regulations and the requirement that distributions by the Group’s entities in the PRC can only
be paid out of distributable profits reported in accordance with PRC accounting standards, the Group’s entities in the PRC are
restricted from transferring a portion of their net assets to the Company. The restricted amounts include the paid-in capital and
statutory reserves of the Group’s entities in the PRC. The aggregate amount of paid-in capital and statutory reserves, which
represented the amount of net assets of the Group’s entities in the PRC (mainland) not available for distribution, was
US$17,218, US$15,612 and US$ 17, 835, as of September 30, 2010, 2011 and 2012, respectively.
17. NONCONTROLLING INTERESTS
Effective October 1, 2009, the Group adopted authoritative guidance regarding noncontrolling interests, which clarifies that a
noncontrolling interests in a subsidiary is an ownership interest in the consolidated entity and should be reported as equity on the
financial statements. The authoritative guidance requires consolidated net income to be reported at amounts that include the
amounts attributable to both the parent and the noncontrolling interests. Furthermore, disclosure of the amounts of consolidated
net income attributable to the parent and to the noncontrolling interests is required on the face of the financial statements.
On March 10, 2009, Beijing Champion acquired 60% of the equity interest in start-up training services. On September 30, 2009,
Champion Wangge acquired 60% of the equity interest in Gaokao retake business. The Group’s noncontrolling interests
represented 40% of the equity interest in start-up training service (Zhengbao Yucai) and Gaokao retake business (Champion
Xinlixiang), respectively.
On June 1, 2011, the Group obtained 40% equity interest of Zhengbao Yucai through arbitration with no consideration, which
was accounted for as equity transaction with no gain or loss recognized. (See note 3)
F-47
CHINA DISTANCE EDUCATION HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR THE YEARS ENDED SEPTEMBER 30, 2010, 2011 AND 2012
(In thousands, except share and per share data)
17. NONCONTROLLING INTERESTS - continued
On October 1, 2010, as Champion Xinlixiang incurred a net loss in year 2010, pursuant to the terms of the original purchase
agreement, the selling equity holders transferred their 40% equity interest in Champion Xinlixiang to the Group for no
consideration. The acquisition was accounted for as equity transaction with no gain or loss recognized. (See note 3).
Balance as of September 30, 2009
Net loss for the year
Foreign currency translation adjustments
Balance as of September 30, 2010
Net loss for the year
Foreign currency translation adjustments
Acquisition of noncontrolling interest of start-up training
business
Acquisition of noncontrolling interest of Gaokao retake
business
Balance as of September 30, 2011
2,026
(911)
11
1,126
(303)
33
(856)
—
—
There was no activity with respect to noncontrolling interests in 2012 .
Start-up
training business
US$
Gaokao retake
business
US$
Total
US$
2,963
(944)
18
2,037
(303)
33
937
(33)
7
911
—
—
—
(856)
(911)
—
(911)
—
18. TAXATION
Cayman Islands
Under current law of Cayman Islands, the Company is not subject to income or capital gains taxes. In addition, dividends
payments are not subject to tax withholding in the Cayman Islands.
Hong Kong
CDEL Hong Kong and PENCIL have not recorded tax provision for Hong Kong profits tax as the companies have not had
assessable profits arising in or derived from Hong Kong.
F-48
CHINA DISTANCE EDUCATION HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR THE YEARS ENDED SEPTEMBER 30, 2010, 2011 AND 2012
(In thousands, except share and per share data)
18. TAXATION - continued
China
The Enterprise Income Tax Law (the “EIT Law”) of the PRC, which took effect on January 1, 2008, has applied a uniform 25%
enterprise income tax rate to all resident enterprise in China, including foreign invested enterprises.
In 2008, Beijing Champion and Champion Technology qualified as “high and new technology enterprise strongly supported by
the State” (“HNTE”) under the EIT Law, and therefore, were entitled to preferential income tax rates. Beijing Champion is
subject to the tax rate of 15% from 2008 through 2010. Champion Technology is subject to the tax rate of 7.5% for 2008 through
2009 and 15% for 2010.
The HNTE status is valid for three years and qualifying entities can then apply to renew for an additional three years provided
that the company’s business operations continue to qualify for HNTE status. In October 2011, Beijing Champion and Champion
Technology renewed the HNTE qualification, and therefore, were continually entitled to the preferential income tax rate of 15%
in years 2011 through 2013.
Under the EIT Law and its implementation rules, a withholding tax at 10%, unless reduced by a tax treaty or arrangement, is
applied on dividends received by non-PRC-resident corporate investors from PRC-resident enterprises, such as the Company’s
PRC subsidiaries. Undistributed earnings prior to January 1, 2008 are exempt from such withholding tax. Under the China-HK
Tax Arrangement and the relevant regulations, a qualified Hong Kong tax resident which is the “beneficial owner” and holds
25% equity interests or more of a PRC enterprise is entitled to a reduced withholding rate of 5%. The Company believes that
CDEL Hong Kong qualifies for the 5% withholding tax rate. In 2012, CDEL Hong Kong accrued deferred tax liabilities related
to potential withholding tax in the amount of US$634 on the undistributed earnings from its investment in the PRC entities
generated after January 1, 2008.
In general, the PRC tax authorities have up to five years to conduct examinations of the PRC entities’ tax filings. Accordingly,
the PRC entities’ tax years from 2007 to 2011 remain subject to examination by the tax authorities.
Income (loss) before income taxes from continuing operations consisted of:
Non - PRC
PRC
F-49
Years ended September 30,
2011
US$
(6,873)
7,039
166
2010
US$
(5,030)
4,849
(181)
2012
US$
(1,252)
11,825
10,573
CHINA DISTANCE EDUCATION HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR THE YEARS ENDED SEPTEMBER 30, 2010, 2011 AND 2012
(In thousands, except share and per share data)
18. TAXATION - continued
China
The current and deferred components of the income tax benefit/(expense) from continuing operations appearing in the
consolidated statements of operations are as follows:
Current tax expense
Deferred tax (benefit)/expense
Years ended September 30,
2011
US$
1,948
(977)
971
2010
US$
1,044
(469)
575
2012
US$
2,074
526
2,600
The reconciliation of the effective tax rate and the statutory income tax rate applicable to PRC operations is as follows:
(Loss)/Income before taxes
Income tax expense (benefit) computed a applicable tax rates of 25%
Effect of different tax rates in different jurisdictions
Non-deductible expenses
Effect of tax holidays
Effect of valuation allowances
Decrease in unrecognized tax benefit balance
Withholding tax on undistributed earnings
Effective income tax rate
F-50
Years ended September 30,
2011
US$
2010
US$
(181)
(45)
1,224
223
(936)
109
—
—
575
(317.68%)
166
42
1,667
260
(860)
(138)
—
—
971
584.94%
2012
US$
10,573
2,643
255
59
(1037)
51
—
629
2,600
24.59%
CHINA DISTANCE EDUCATION HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR THE YEARS ENDED SEPTEMBER 30, 2010, 2011 AND 2012
(In thousands, except share and per share data)
18. TAXATION - continued
China - continued
The aggregate amount and per share effect of the tax holidays are as follows:
The aggregate amount of tax holidays
The aggregate effect on basic and diluted net income per share:
- Basic
- Diluted
Years ended September 30,
2011
US$
860
2010
US$
936
2012
US$
1,037
0.01
0.01
0.01
0.01
0.01
0.01
Deferred taxes reflect the tax effects of temporary differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. The components of deferred taxes from continuing operations
are as follows:
Current deferred tax assets
Payroll payable
Accrued expenses
Allowance for doubtful accounts
Net operating loss carry-forwards
Total current deferred tax assets
Non-current deferred tax assets
Intangible assets
Property, plant and equipment
Net operating loss carry-forwards
Total non-current deferred tax assets
Less: valuation allowance
Non-current deferred tax assets, net
Non-current deferred tax liabilities
Intangible assets
Withholding tax on undistributed earnings
Total non-current deferred tax liabilities
F-51
As of September 30,
2011
US$
2012
US$
217
439
822
78
1,556
116
147
670
933
(66)
867
199
—
199
291
524
592
449
1,856
87
146
522
755
(117)
638
136
634
770
CHINA DISTANCE EDUCATION HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR THE YEARS ENDED SEPTEMBER 30, 2010, 2011 AND 2012
(In thousands, except share and per share data)
18. TAXATION - continued
China - continued
The authoritative guidance requires that the Group recognizes the impact of a tax position in the financial statements if that
position is more likely than not of being sustained upon audit by the tax authority, based on the technical merits of the position.
Under PRC laws and regulations, arrangements and transactions among related parties may be subject to examination by the
PRC tax authorities. If the PRC tax authorities determine that the contractual arrangements among related companies do not
represent a price under normal commercial terms, they may make adjustments to the companies’ income and expenses. A
transfer pricing adjustment could result in additional tax liabilities.
As a result of the Group’s assessment of its tax positions, the unrecognized tax benefit related to transfer price position prior to
the year 2009 was recorded at US$ 162, US$170 and US$173 as of September 30, 2010, 2011 and 2012, respectively. The
subsequent changes of the unrecognized tax benefit were due to foreign currency adjustment.
Reconciliation of accrued unrecognized tax benefits is as follows:
Balance - September 30, 2010
Foreign currency adjustment
Balance - September 30, 2011
Foreign currency adjustment
Balance - September 30, 2012
Unrecognized
tax benefits
162
8
170
3
173
The unrecognized tax benefits would impact the effective tax rate, if recognized in connection with the normal tax return
preparation. The Group does not anticipate any significant change in unrecognized tax benefits within 12 months from
September 30, 2012.
In addition, uncertainties exist with respect to how the current income tax law in the PRC applies to the Group’s overall
operations, and more specifically, with regard to tax residency status. The New EIT Law includes a provision specifying that
legal entities organized outside of the PRC will be considered residents for Chinese Income tax purposes if the place of effective
management or control is within the PRC. The implementation rules to the New EIT Law provide that non-resident legal entities
will be considered PRC residents if substantial and overall management and control over the manufacturing and business
operations, personnel, accounting and properties, occurs within the PRC. Despite the present uncertainties resulting from the
limited PRC tax guidance on the issue, the Group does not believe that the legal entities organized outside of the PRC within the
Group should be treated as residents for EIT law purposes. If the PRC tax authorities subsequently determine that the Company
and its subsidiaries registered outside the PRC should be deemed resident enterprises, the Company and its subsidiaries
registered outside the PRC will be subject to the PRC income taxes, at a rate of 25%.
F-52
CHINA DISTANCE EDUCATION HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR THE YEARS ENDED SEPTEMBER 30, 2010, 2011 AND 2012
(In thousands, except share and per share data)
19. EMPLOYEE DEFINED CONTRIBUTION PLAN
Full time employees of the Group in the PRC participate in a government mandated defined contribution plan, pursuant to which
certain pension benefits, medical care, employee housing fund and other welfare benefits are provided to employees. Chinese
labor regulations require that the PRC subsidiaries of the Group make contributions to the government for these benefits based
on certain percentages of the employees’ salaries. The Group has no legal obligation for the benefits beyond the contributions
made. The total amounts for such employee benefits, which were expensed as incurred, were US$1,915, US$2,464 and
US$3,199for the years ended September 30, 2010, 2011 and 2012, respectively. Employee benefits from continuing operations
were US$1,842, US$2,412and US$3,164, and from discontinued operations were US$73, US$52 and US$35 for the years ended
September 30, 2010, 2011 and 2012, respectively.
Obligations for contributions to defined contribution retirement plans for full-time employee in Hong Kong, including
contributions payable under the Hong Kong Mandatory Provident Fund Schemes Ordinance, are recognized as expenses in the
income statement as incurred. The total amounts for such employee benefits were US$2, US$2 and US$2 for the years ended
September 30, 2010, 2011 and 2012, respectively.
20. COMMITMENTS AND CONTINGENCIES
Operating lease commitments
Future minimum payments under non-cancelable operating leases related to offices, servers and bandwidth with initial terms of
one-year or more consisted of the following at September 30, 2012:
Years ending September 30,
2013
2014
2015
US$
2,261
295
51
2,607
Payments under operating leases are expensed on the straight-line basis over the periods of their respective leases. The terms of
the leases do not contain rent escalation or contingent rents. For the years ended September 30, 2010, 2011 and 2012, total rental
expenses from continuing operations for all operating leases amounted to US$2,686, US$2,844 and US$3,346, respectively.
Rental expenses from discontinued operations for all operating leases amounted to US$789, US$750 and US$314, respectively.
F-53
CHINA DISTANCE EDUCATION HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR THE YEARS ENDED SEPTEMBER 30, 2010, 2011 AND 2012
(In thousands, except share and per share data)
20. COMMITMENTS AND CONTINGENCIES - continued
Legal contingencies
The group is a party in potential claims arising in the ordinary course of business. The Group does not believe that the resolution
of these matters will have a material effect on its financial position or results of operations.
21. SEGMENT REPORTING
The Group operates and manages its business as a single segment that includes primarily the provision of online and offline
education services and selling of related products.
The revenues attributable to the different service and product groups are as follows:
Online education services
Books and reference materials
Offline education services
Others
2010
US$
Years ended September 30,
2011
US$
30,788
4,743
2,907
3,126
41,564
23,982
3,939
1,557
3,101
32,579
2012
US$
40,281
4,438
4,507
2,876
52,102
Online education services accounted for 73.6%, 74.0% and 77.3% of the Group’s total net revenue for the years ended
September 30, 2010, 2011 and 2012, respectively. Any significant reduction in sales from this service could have a substantial
negative impact on the Group’s results of operations.
Geographic disclosures:
As the Group primarily generates its revenues from customers in the PRC, no geographical segments are presented. All of the
Group’s long-lived assets are located in the PRC.
F-54
CHINA DISTANCE EDUCATION HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR THE YEARS ENDED SEPTEMBER 30, 2010, 2011 AND 2012
(In thousands, except share and per share data)
22. NET (LOSS) INCOME PER SHARE
Basic and diluted net (loss) income per share for each of the periods presented were calculated as follows:
Numerator:
tax
Income (loss) from continuing operations
Income (loss) from discontinued operations, net of
Net (loss) income
- allocated to ordinary Share - basic
- allocated to nonvested restricted share - basic
Denominator:
Weighted average number of ordinary shares
outstanding
Weighted average number of nonvested restricted
share
Plus incremental weighted average ordinary shares
from assumed exercise of share options using the
treasury stock method
Weighted average ordinary shares outstanding used
2010
US$
Years ended September 30,
2011
US$
2012
US$
155
(2,053)
(1,898)
(1,898)
—
(502)
(3,300)
(3,802)
(3,800)
(2)
7,973
236
8,209
8,209
—
138,232,493
133,489,261
133,996,737
—
82,466
—
—
—
366,371
in computing diluted net income per share
138,232,493
133,571,727
134,363,108
Basic net (loss) income per share
Basic from continuing operations
Basic from discontinued operations (net of tax)
Basic
Basic net (loss) income per nonvested restricted share
Basic from continuing operations
Basic from discontinued operations (net of tax)
Basic
Diluted net (loss) income per share
Diluted from continuing operations
Diluted from discontinued operations (net of tax)
Diluted
Basic net (loss) income per share
- allocated to ordinary Share - basic
- allocated to nonvested restricted share - basic
Diluted
F-55
—
(0.01)
(0.01)
—
—
—
—
(0.01)
(0.01)
(0.01)
—
(0.01)
—
(0.03)
(0.03)
—
(0.03)
(0.03)
—
(0.03)
(0.03)
(0.03)
(0.03)
(0.03)
0.06
—
0.06
—
—
—
0.06
—
0.06
0.06
—
0.06
CHINA DISTANCE EDUCATION HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR THE YEARS ENDED SEPTEMBER 30, 2010, 2011 AND 2012
(In thousands, except share and per share data)
23. SHARE INCENTIVE PLAN
Share options
On April 18, 2008, the Company’s shareholders approved the “China Distance Education Holdings Limited Share Incentive
Plan” (the “Prior Plan”), which permits the grant of share options and shares to its employees and non-employees (the
“Participants”). The maximum number of ordinary shares that may be delivered pursuant to compensatory awards granted to the
“Participants” under the Prior Plan should not exceed 11,652,556 ordinary shares of par value US$0.0001 per share. On July 2,
2008, the Company’s shareholders approved the “China Distance Education Holdings Limited 2008 Performance Incentive
Plan” (the “New Plan”). Subject to any amendment of the New Plan, the maximum number of ordinary shares that may be
issued pursuant to the New Plan is equal to 5% of the total number of ordinary shares issued and outstanding as of August 4,
2008, plus an automatic annual increase on October 1 of each calendar year commencing with October 1, 2008, by an amount
equal to the lesser of (i) 1% of the total number of ordinary shares issued and outstanding on September 30 of the same calendar
year, or (ii) such number of ordinary shares as may be determined by the Company’s board of directors. The purpose of these
share incentive plans is to promote the success of the Company and the interests of its shareholders by providing a means
through which the Company may grant equity-based incentives to attract, motivate, retain and reward certain officers,
employees, directors and other eligible persons and to further link the interests of recipients with those of the Company’s
shareholders generally. The Prior Plan will expire on April 17, 2018. The New Plan will expire on the tenth anniversary date of
August 4, 2008. Option awards are generally granted with an exercise price equal to the market price of the Company’s stock at
the date of grant; those option awards generally vest within 4 years of continuous service and have 10-year contractual terms.
Share awards generally vest for 1 year.
By a resolution of the board of directors on April 18, 2008, 11,652,556 share options were authorized to be granted to certain
employees and non-employees. An aggregate of 11,045,500 share options were granted, including a total of 10,060,600 granted
to employees on April 18, 2008 and May 31, 2008, and 984,900 granted to non-employees on April 18, 2008 (collectively “the
first round”). The share options had an exercise price of US$2.995966 per share and a graded vesting term of four years. For the
options granted to non-employees, the Group determined the measurement date to be the performance commitment date
pursuant to the service supplemental agreements, in which the penalty for nonperformance was stipulated and represented a
sufficiently large disincentive for nonperformance.
The options would vest as to 25% of the total number of ordinary shares subject to the options on the first anniversary of the
vesting commencement date. The remaining 75% of the total number of ordinary shares subject to the options would vest in six
substantially equal semi-annual installments, with the first installment vesting on the last day of the sixth month following the
month in which the first anniversary of the vesting commencement date occurs and an additional installment vesting on the last
day of every six months thereafter.
F-56
CHINA DISTANCE EDUCATION HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR THE YEARS ENDED SEPTEMBER 30, 2010, 2011 AND 2012
(In thousands, except share and per share data)
23. SHARE INCENTIVE PLAN - continued
Share options - continued
On November 17, 2008, the Company’s board of directors and compensation committee approved to provide a compensation
package for the non-executive directors. 400,000 options were granted to five directors on December 2, 2008. These options are
subject to a two-year vesting schedule with 50% vesting in each year. The exercise price is US$0.82 per share which was
determined by the closing price of the Company’s ADSs on NYSE on December 2, 2008.
On December 2, 2008 (the “repricing date”), the Company’s board of directors and compensation committee approved to amend
the terms of certain stock options granted to 260 employees and 17 non-employees to reduce the exercise price of all outstanding
share options from US$2.995966 per share to US$0.82 per share based on the closing price of the Company’s ADSs on NYSE
on December 2, 2008. The amendments did not change the vesting provisions or the number of shares subject to any of the
option awards. This was accounted for as a share option modification and required the remeasurement of the fair value of these
share options. This remeasurement resulted in a total incremental share-based compensation of US$2,699, of which US$752 and
US$853 were recognized in the year ended September 30, 2009 and 2010, and the remaining is recognized ratably over the
remaining vesting period of the award.
By a resolution of the board of directors on November 17, 2009, 1,361,900 share options were granted to selected employees for
an exercise price per share equal to US$1.87. The option shall vest as to 25% of the total number of ordinary shares subject to
the option on the first anniversary of the vesting commencement date. The remaining 75% of the total number of ordinary shares
subject to the option shall vest in six substantially equal semi-annual installments, with the first installment vesting on the last
day of the sixth month following the month in which the first anniversary of the vesting commencement date occurs and an
additional installment vesting on the last day of every six months thereafter.
By a resolution of the board of directors on September 27, 2011, 1,000,600 share options were granted to selected employees
with an exercise price per share equal to US$0.615, which was determined by the closing price of the Company’s ADSs on
NYSE on September 27, 2011. These options are subject to a two-year vesting schedule with 25% vesting semi-annually. By the
same resolution of the board of directors on September 27, 2011, 400,000 fully-vested options were granted to selected directors
with an exercise price per share equal to US$0.615, which was determined by the closing price of the Company’s ADSs on
NYSE on September 27, 2011.
F-57
CHINA DISTANCE EDUCATION HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR THE YEARS ENDED SEPTEMBER 30, 2010, 2011 AND 2012
(In thousands, except share and per share data)
23. SHARE INCENTIVE PLAN - continued
Share options - continued
Also by that resolution of the board of directors on September 27, 2011, the Company’s board of directors approved to amend
the terms of certain stock options granted to 172 employees and 17 non-employees representing 9,465,000 share options. The
amendments included (i) reduction of the exercise price of share options from US$0.82 per share to nil for one selected
employee, and to reduce the exercise price of share options from US$0.82 per share to US$0.615 per share based on the closing
price of the Company’s ADSs on NYSE on September 27, 2011 for the other 171 employees and 17 non-employees;
(ii) acceleration of the vesting of share options to fully vested on September 27, 2011; (iii) an option of a three-year interest-free
loan for exercising such options. The amendments did not change the vesting provisions or the number of shares subject to any
of the option awards. This amendment was accounted for as a share option modification and required the re-measurement of the
fair value of these share options. This re-measurement resulted in a total incremental share-based compensation of US$1,658, all
of which was recognized in the year ended September 30, 2011.
A summary of option activity as of September 30, 2012, and changes during the years ended September 30, 2012 are presented
below:
Share option granted to employees and non-executive directors
Outstanding, October 1, 2011
Exercised
Forfeited
Outstanding, September 30, 2012
Expected to vest, September 30, 2012
Exercisable at September 30, 2012
Number of
shares
11,310,872
7,096,540
467,308
3,747,024
460,925
3,072,504
Weighted-
average
exercise
price
US$0.65
US$0.49
US$1.28
US$0.87
US$1.16
US$0.81
Weighted-
average
remaining
contractual
term
(years)
7.14
Aggregated
intrinsic
value
—
7.00
8.18
6.74
—
—
—
The weighted-average grant-date fair value of options granted to employees and non-executive directors during the year 2010
and 2011 was US$0.87 and US$0.26, respectively, and there was no options granted in the year 2012.
A summary of the activities of the share option granted to non-employees as of September 30, 2012, and changes during the year
ended September 30, 2012 are presented below:
Share option granted to non-employees
Outstanding, October 1, 2011
Granted
Forfeited
Exercised
Cancelled
Outstanding, September 30, 2012
Exercisable at September 30, 2012
Number
of shares
977,212
—
50,612
775,100
—
151,500
151,500
Weighted-
average
exercise
price
US$0.62
—
US$0.62
US$0.62
—
US$0.62
US$0.62
Weighted-
average
remaining
contractual
term
(years)
6.55
Aggregated
intrinsic
value
27
5.55
5.55
25
25
F-58
CHINA DISTANCE EDUCATION HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR THE YEARS ENDED SEPTEMBER 30, 2010, 2011 AND 2012
(In thousands, except share and per share data)
23. SHARE INCENTIVE PLAN - continued
Share options - continued
The weighted-average grant-date fair value of options granted to non-employees during the year 2011 was US$0.26, and no
options granted to non-employees during the year 2010 and 2012.
The total intrinsic value of options exercised during the year ended September 30, 2012 was US$1,152. As of September 30,
2012, the unrecognized share-based compensation cost related to share options amounted to approximately US$244. This
compensation cost is expected to be recognized over a weighted-average vesting period of 1.08 years. Forfeitures were estimated
based on historical experience. To the extent the actual forfeiture rate is different from the original estimate, actual share-based
compensation expenses related to these awards may be different from the expectation.
The fair value of each option award to employees and non-employees was estimated using the Black-Scholes Option Pricing
Model by the management of the Company. The volatility assumption was estimated based on the price volatility of the shares
of comparable companies in the education business because the Company did not have sufficient data to calculate expected
volatility of the price of the underlying ordinary shares over the expected term of the option. The expected term was estimated
based on the vesting terms, contractual terms and management’s expectation of exercise behavior of the option grantees. The
risk-free rate was based on the market yield of China Sovereign Bonds denominated in US$ with maturity terms equal to the
expected term of the option awards. The closing market price of the ordinary shares of the Company as of the grant date was
used as the fair value of the ordinary shares on that date.
The Company used the Black Scholes Model to estimate the fair value of the share options on the grant dates with the following
assumptions:
Risk-free interest rate
Dividend yield
Expected volatility
Expected life (in years)
F-59
For the year ended
September 30,
2011
1.40% ~ 1.86%
—
51%
3.71 ~ 5.63
CHINA DISTANCE EDUCATION HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR THE YEARS ENDED SEPTEMBER 30, 2010, 2011 AND 2012
(In thousands, except share and per share data)
23. SHARE INCENTIVE PLAN - continued
Nonvested restricted shares
On July 2, 2008, the Company’s board of directors approved compensation in total of US$300 to an independent director in
exchange for her services to be provided to the Company over a three-year period commencing from July 29, 2008. The US$300
has therefore been recognized as compensation expenses over the three-year period from July 2008 through July 2011. The
initial US$100 was paid in the form of 57,143 restricted ordinary shares of the Company in August 2008. The number of
restricted ordinary shares was determined based on the closing price of the Company’s ADSs on the issuance date. The
remaining US$200 was accrued as a liability and paid in cash of US$100 in November 2009 and July 2010, respectively.
On December 3, 2010, the Company granted 100,000 nonvested restricted shares of the Company to directors (the
“participants”) that had been outstanding at the grant date. These shares are restricted on transferability and will be forfeited if
the participants cease to provide requisite service to the Company. The restriction will be removed on the first anniversary of the
issuance day. The grant-date fair value of a nonvested restricted share was US$1.25, which was the closing price of the
Company’s ADSs on NYSE on December 3, 2010. This grant resulted in a total share-based compensation of US$125, which
was recognized ratably over the requisite service period of one year. As of September 30, 2012, there were no outstanding
nonvested restricted shares.
A summary of the nonvested restricted shares activity is as follows:
Nonvested shares outstanding at September 30, 2011
Vested
Nonvested shares outstanding at September 30, 2012
F-60
Number of
Nonvested restricted
shares outstanding
Weight average
grant-date fair
value
US$
100,000
100,000
—
1.25
—
—
CHINA DISTANCE EDUCATION HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR THE YEARS ENDED SEPTEMBER 30, 2010, 2011 AND 2012
(In thousands, except share and per share data)
23. SHARE INCENTIVE PLAN - continued
Share-based compensation expense
Total share-based compensation expense of share-based awards granted to employees, non-employees and non-executive
directors recognized for the years ended September 30, 2010, 2011 and 2012 are as follows:
Cost of services
General and administrative expenses
Selling expenses
As of September 30,
2010
US$
1,787
2,033
567
4,387
2011
2012
US$ US$
37
88
16
141
1,999
3,347
678
6,024
24. SUBSEQUENT EVENTS
On November 13, 2012, the Company approved and declared a cash dividend of $0.12 per ordinary share on its total
135,409,521 outstanding shares as of the close of trading on December 7, 2012.
F-61
CHINA DISTANCE EDUCATION HOLDINGS LIMITED
AMENDED AND RESTATED 2008 PERFORMANCE INCENTIVE PLAN
Exhibit 4.23
1.
PURPOSE OF PLAN
The purpose of this China Distance Education Holdings Limited Amended And Restated 2008 Performance Incentive Plan
(this “Plan”) of China Distance Education Holdings Limited, an exempted company organized under the Companies Law
of the Cayman Islands, and its successors (the “Company”), is to promote the success of the Company and to increase
shareholder value by providing an additional means through the grant of awards to attract, motivate, retain and reward
selected employees and other eligible persons.
2.
ELIGIBILITY
The Administrator (as such term is defined in Section 3.1) may grant awards under this Plan only to those persons that the
Administrator determines to be Eligible Persons. An “Eligible Person” is any person who is either: (a) an officer (whether
or not a director) or employee of the Company or one of its Subsidiaries; (b) a director of the Company or one of its
Subsidiaries; or (c) an individual consultant or advisor who renders or has rendered bona fide services (other than services
in connection with the offering or sale of securities of the Company or one of its Subsidiaries in a capital-raising
transaction or as a market maker or promoter of securities of the Company or one of its Subsidiaries) to the Company or
one of its Subsidiaries; provided, however, that a person who is otherwise an Eligible Person under clause (c) above may
participate in this Plan only if such participation would not adversely affect either the Company’s eligibility to use Form S-
8 to register under the Securities Act of 1933, as amended (the “Securities Act”), the offering and sale of shares issuable
under this Plan by the Company or the Company’s compliance with any applicable laws. An Eligible Person who has been
granted an award (a “participant”) may, if otherwise eligible, be granted additional awards if the Administrator shall so
determine. As used herein, “Subsidiary” means any corporation or other entity that is directly or indirectly Controlled by
the Company; “Control” means the power or authority, whether exercised or not, to direct the business, management and
policies of a person, directly or indirectly, or by effective control whether through the ownership of voting securities, by
contract or otherwise, which power or authority shall conclusively be presumed to exist upon possession of beneficial
ownership or power to direct the vote of more than 50% of the votes entitled to be cast at a meeting of the members or
shareholders of such person or power to control the composition of the board of directors of such person; the terms
“Controlled” and “Controlling” have the meaning correlative to the foregoing; and “Board” means the Board of Directors
of the Company.
3.
PLAN ADMINISTRATION
3.1
The Administrator. This Plan shall be administered by and all awards under this Plan shall be authorized by the
Administrator. The “Administrator” means the Board or one or more committees appointed by the Board or
another committee (within its delegated authority) to administer all or certain aspects of this Plan. Any such
committee shall be comprised solely of one or more directors or such number of directors as may be required under
applicable law. A committee may delegate some or all of its authority to another committee so constituted. The
Board or a committee comprised solely of directors may also delegate, to the extent permitted by applicable law, to
one or more officers of the Company, its powers under this Plan (a) to designate officers, employees and consultants
of the Company and its Subsidiaries who will receive grants of awards under this Plan, and (b) to determine the
number of shares subject to, and the other terms and conditions of, such awards, in each case within the limits
established by the Board or another committee within its delegated authority. The Board may delegate different
levels of authority to different committees with administrative and grant authority under this Plan. Unless otherwise
provided in the organizing documents of the Company or applicable charter of any Administrator: (a) a majority of
the members of the acting Administrator shall constitute a quorum, and (b) the vote of a majority of the members
present assuming the presence of a quorum or the unanimous written consent of the members of the Administrator
shall constitute action by the acting Administrator.
1
With respect to awards intended to satisfy the requirements for performance-based compensation under Section 162
(m) of the Internal Revenue Code of 1986, as amended (the “Code”), this Plan shall be administered by a committee
consisting solely of two or more outside directors (as this requirement is applied under Section 162(m) of the Code);
provided, however, that the failure to satisfy such requirement shall not affect the validity of the action of any
committee otherwise duly authorized and acting in the matter.
Powers of the Administrator. Subject to the express provisions of this Plan, the Administrator is authorized and
empowered to do all things necessary or desirable in connection with the authorization of awards and the
administration of this Plan (in the case of a committee or delegation to one or more officers, within the authority
delegated to that committee or person(s)), including, without limitation, the authority to:
3.2
(a)
determine eligibility and, from among those persons determined to be eligible, the particular Eligible Persons
who will receive an award under this Plan;
(b) grant awards to Eligible Persons, determine the price at which securities will be offered or awarded and the
number of securities to be offered or awarded to any of such persons, determine the other specific terms and
conditions of such awards consistent with the express limits of this Plan, establish the installments (if any) in
which such awards shall become exercisable or shall vest (which may include, without limitation, performance
and/or time-based schedules), or determine that no delayed exercisability or vesting is required, establish any
applicable performance targets, and establish the events of termination or reversion of such awards;
(c)
(d)
(e)
(f)
approve the forms of award agreements (which need not be identical either as to type of award or among
participants);
construe and interpret this Plan and any agreements defining the rights and obligations of the Company, its
Subsidiaries, and participants under this Plan, further define the terms used in this Plan, and prescribe, amend
and rescind rules and regulations relating to the administration of this Plan or the awards granted under this
Plan;
cancel, modify, or waive the Company’s rights with respect to, or modify, discontinue, suspend, or terminate
any or all outstanding awards, subject to any required consent under Section 8.6.5;
accelerate or extend the vesting or exercisability or extend the term of any or all such outstanding awards (in
the case of options or share appreciation rights, within the maximum ten-year term of such awards) in such
circumstances as the Administrator may deem appropriate (including, without limitation, in connection with a
termination of employment or services or other events of a personal nature) subject to any required consent
under Section 8.6.5;
(g)
adjust the number of Ordinary Shares subject to any award, adjust the price of any or all outstanding awards or
otherwise change previously imposed terms and conditions, in such circumstances as the Administrator may
deem appropriate, in each case subject to Sections 4 and 8.6;
(h) determine the date of grant of an award, which may be a designated date after but not before the date of the
Administrator’s action (unless otherwise designated by the Administrator, the date of grant of an award shall
be the date upon which the Administrator took the action granting an award);
(i)
determine whether, and the extent to which, adjustments are required pursuant to Section 7 hereof and
authorize the termination, conversion, substitution or succession of awards upon the occurrence of an event of
the type described in Section 7;
2
(j)
acquire or settle (subject to Sections 7 and 8.6) rights under awards in cash, shares of equivalent value, or other
consideration;
(k) determine the fair market value of the Ordinary Shares or awards under this Plan from time to time and/or the
manner in which such value will be determined; and
(l)
implement any procedures, steps or additional or different requirements as may be necessary to comply with
any laws of the People’s Republic of China (the “PRC”) that may be applicable to this Plan, any Option or any
related documents, including, but not limited to, foreign exchange laws, tax laws and securities laws of the
PRC.
3.3
Binding Determinations. Any action taken by, or inaction of, the Company, any Subsidiary, or the Administrator
relating or pursuant to this Plan and within its authority hereunder or under applicable law shall be within the
absolute discretion of that entity or body and shall be conclusive and binding upon all persons. Neither the Board
nor any Board committee, nor any member thereof or person acting at the direction thereof, shall be liable for any
act, omission, interpretation, construction or determination made in good faith in connection with this Plan (or any
award made under this Plan), and all such persons shall be entitled to indemnification and reimbursement by the
Company in respect of any claim, loss, damage or expense (including, without limitation, attorneys’ fees) arising or
resulting therefrom to the fullest extent permitted by law and/or under any directors and officers liability insurance
coverage that may be in effect from time to time.
3.4
Reliance on Experts. In making any determination or in taking or not taking any action under this Plan, the
Administrator may obtain and may rely upon the advice of experts, including employees and professional advisors
to the Company. No director, officer or agent of the Company or any of its Subsidiaries shall be liable for any such
action or determination taken or made or omitted in good faith.
3.5 Delegation. The Administrator may delegate ministerial, non-discretionary functions to individuals who are officers
or employees of the Company or any of its Subsidiaries or to third parties.
3.6 Option and SAR Repricing. Subject to Section 4 and Section 8.6.5, the Administrator, from time to time and in its
sole discretion, may provide for (1) the amendment of any outstanding share option or SAR to reduce the exercise
price or base price of the award, (2) the cancellation, exchange, or surrender of an outstanding share option or SAR
in exchange for cash or other awards (for the purpose of repricing the award or otherwise), or (3) the cancellation,
exchange, or surrender of an outstanding share option or SAR in exchange for an option or SAR with an exercise or
base price that is less than the exercise or base price of the original award. For avoidance of doubt, the Administrator
may take any or all of the foregoing actions under this Section 3.6 without shareholder approval.
4. ORDINARY SHARES SUBJECT TO THE PLAN; SHARE LIMITS
4.1
4.2
Shares Available. Subject to the provisions of Section 7.1, the shares that may be delivered under this Plan shall be
shares of the Company’s authorized but unissued Ordinary Shares. For purposes of this Plan, “Ordinary Shares”
shall mean the ordinary shares of the Company and such other securities or property as may become the subject of
awards under this Plan, or may become subject to such awards, pursuant to an adjustment made under Section 7.1.
Share Limits. The maximum number of Ordinary Shares that may be delivered pursuant to awards granted to
Eligible Persons under this Plan (the “Share Limit”) shall be equal to 7,092,030 Ordinary Shares. The Share Limit
shall automatically increase on the first day of each fiscal year (i.e., October 1 of each calendar year) during the term
of this Plan, (A) commencing with October 1, 2008 and until September 30, 2012, by an amount equal to the lesser
of (i) 1% of the total number of Ordinary Shares issued and outstanding on the last day of the immediately preceding
fiscal year (i.e., September 30 of the same calendar year), (ii) 1,418,977 Ordinary Shares, or (iii) such number of
Ordinary Shares as may be established by the Board; and (B) commencing with October 1, 2012, by an amount
equal to the lesser of (i) 2% of the total number of Ordinary Shares issued and outstanding on the last day of the
immediately preceding fiscal year (i.e., September 30 of the same calendar year), (ii) 2,850,000 Ordinary Shares, or
(iii) such number of Ordinary Shares as may be established by the Board; provided, however, if, in any fiscal year,
the Board does not take any action to establish the number of Ordinary Shares that may be increased pursuant to this
subsections (A)(iii) or (B)(iii), this subsections (A)(iii) or (B)(iii) shall be deemed not applicable for such fiscal year.
The following limits also apply with respect to awards granted under this Plan:
(a) The maximum number of Ordinary Shares that may be delivered pursuant to options qualified as incentive
stock options granted under this Plan is equal to the Share Limit as in effect from time to time.
3
4.3
4.4
(b) Additional limits with respect to Performance-Based Awards are set forth in Section 5.2.3.
Each of the foregoing numerical limits is subject to adjustment as contemplated by Section 4.3, Section 7.1, and
Section 8.10.
Awards Settled in Cash, Reissue of Awards and Shares. To the extent that an award granted under this Plan is
settled in cash or a form other than Ordinary Shares, the shares that would have been delivered had there been no
such cash or other settlement shall not be counted against the shares available for issuance under this Plan. In the
event that Ordinary Shares are delivered in respect of a dividend equivalent right, share appreciation right or other
award granted under this Plan, only the actual number of shares delivered with respect to the award shall be counted
against the share limits of this Plan. Shares that are subject to or underlie awards granted under this Plan which
expire or for any reason are cancelled or terminated, are forfeited, fail to vest, or for any other reason are not paid or
delivered under this Plan shall again be available for subsequent awards under this Plan. Shares that are exchanged
by a participant or withheld by the Company as full or partial payment in connection with any award under this
Plan, as well as any shares exchanged by a participant or withheld by the Company or one of its Subsidiaries to
satisfy the tax withholding obligations related to any award, shall not be available for subsequent awards under this
Plan. Refer to Section 8.10 for application of the foregoing share limits with respect to assumed awards. The
foregoing adjustments to the share limits of this Plan are subject to any applicable limitations under Section 162(m)
of the Code with respect to awards intended as performance-based compensation thereunder.
Reservation of Shares; No Fractional Shares; Minimum Issue. The Company shall at all times reserve a number
of Ordinary Shares sufficient to cover the Company’s obligations and contingent obligations to deliver shares with
respect to awards then outstanding under this Plan (exclusive of any dividend equivalent obligations to the extent the
Company has the right to settle such rights in cash). No fractional shares shall be delivered under this Plan. The
Administrator may pay cash in lieu of any fractional shares in settlements of awards under this Plan. No fewer than
100 shares may be purchased on exercise of any award (or, in the case of share appreciation or purchase rights, no
fewer than 100 rights may be exercised at any one time) unless the total number purchased or exercised is the total
number at the time available for purchase or exercise under the award.
5. AWARDS
5.1
Type and Form of Awards. The Administrator shall determine the type or types of award(s) to be made to each
selected Eligible Person. Awards may be granted singly, in combination or in tandem. Awards also may be made in
combination or in tandem with, in replacement of, as alternatives to, or as the payment form for grants or rights
under any other employee or compensation plan of the Company or one of its Subsidiaries. The types of awards that
may be granted under this Plan are:
5.1.1 Share Options. A share option is the grant of a right to purchase a specified number of Ordinary Shares during
a specified period as determined by the Administrator. An option may be intended as an incentive stock option
within the meaning of Section 422 of the Code (an “ISO”) or a nonqualified stock option (an option not intended to
be an ISO). The award agreement for an option will indicate if the option is intended as an ISO; otherwise it will be
deemed to be a nonqualified stock option. The maximum term of each option (ISO or nonqualified) shall be ten
(10) years. The per share exercise price for each option shall be determined by the Administrator and set forth in the
applicable award agreement. When an option is exercised, the exercise price for the shares to be purchased shall be
paid in full in cash or such other method permitted by the Administrator consistent with Section 5.5.
4
5.1.2 Additional Rules Applicable to ISOs. To the extent that the aggregate fair market value (determined at the
time of grant of the applicable option) of shares with respect to which ISOs first become exercisable by a participant
in any calendar year exceeds $100,000, taking into account both Ordinary Shares subject to ISOs under this Plan and
shares subject to ISOs under all other plans of the Company or one of its Subsidiaries (or any parent or predecessor
corporation to the extent required by and within the meaning of Section 422 of the Code and the regulations
promulgated thereunder), such options shall be treated as nonqualified stock options. In reducing the number of
options treated as ISOs to meet the $100,000 limit, the most recently granted options shall be reduced first. To the
extent a reduction of simultaneously granted options is necessary to meet the $100,000 limit, the Administrator may,
in the manner and to the extent permitted by law, designate which Ordinary Shares are to be treated as shares
acquired pursuant to the exercise of an ISO. ISOs may only be granted to employees of the Company or one of its
subsidiaries (for this purpose, the term “subsidiary” is used as defined in Section 424(f) of the Code, which
generally requires an unbroken chain of ownership of at least 50% of the total combined voting power of all classes
of shares of each subsidiary in the chain beginning with the Company and ending with the subsidiary in question).
There shall be imposed in any award agreement relating to ISOs such other terms and conditions as from time to
time are required in order that the option be an “incentive stock option” as that term is defined in Section 422 of the
Code. The per share exercise price for each ISO shall be not less than 100% of the fair market value of an Ordinary
Share on the date of grant of the option. Furthermore, no ISO may be granted to any person who, at the time the
option is granted, owns (or is deemed to own under Section 424(d) of the Code) outstanding Ordinary Shares
possessing more than 10% of the total combined voting power of all classes of shares of the Company, unless the
exercise price of such option is at least 110% of the fair market value of the shares subject to the option and such
option by its terms is not exercisable after the expiration of five years from the date such option is granted.
5.1.3 Share Appreciation Rights. A share appreciation right or “SAR” is a right to receive a payment, in cash and/or
Ordinary Shares, equal to the excess of the fair market value of a specified number of Ordinary Shares on the date
the SAR is exercised over the “base price” of the award, which base price shall be determined by the Administrator
and set forth in the applicable award agreement. The maximum term of a SAR shall be ten (10) years.
5.1.4 Other Awards. The other types of awards that may be granted under this Plan include: (a) share bonuses,
restricted shares, performance shares, share units, phantom shares, dividend equivalents, or similar rights to
purchase or acquire shares, whether at a fixed or variable price or ratio related to the Ordinary Shares, upon the
passage of time, the occurrence of one or more events, or the satisfaction of performance criteria or other conditions,
or any combination thereof; (b) any similar securities with a value derived from the value of or related to the
Ordinary Shares and/or returns thereon; or (c) cash awards.
Section 162(m) Performance-Based Awards. Without limiting the generality of the foregoing, any of the types of
awards listed in Section 5.1.4 above may be, and options and SARs granted to officers and employees (“Qualifying
Options” and “Qualifying SARS,” respectively) typically will be, granted as awards intended to satisfy the
requirements for “performance-based compensation” within the meaning of Section 162(m) of the Code
(“Performance-Based Awards”). The grant, vesting, exercisability or payment of Performance-Based Awards may
depend (or, in the case of Qualifying Options or Qualifying SARs, may also depend) on the degree of achievement
of one or more performance goals relative to a pre-established targeted level or levels using one or more of the
Business Criteria set forth below (on an absolute or relative basis) for the Company on a consolidated basis or for
one or more of the Company’s subsidiaries, segments, divisions or business units, or any combination of the
foregoing. Any Qualifying Option or Qualifying SAR shall be subject only to the requirements of Section 5.2.1 and
5.2.3 in order for such award to satisfy the requirements for “performance-based compensation” under Section 162
(m) of the Code. Any other Performance-Based Award shall be subject to all of the following provisions of this
Section 5.2.
5
5.2
5.2.1 Class; Administrator. The eligible class of persons for Performance-Based Awards under this Section 5.2 shall
be officers and employees of the Company or one of its Subsidiaries. The Administrator approving Performance-
Based Awards or making any certification required pursuant to Section 5.2.4 must be constituted as provided in
Section 3.1 for awards that are intended as performance-based compensation under Section 162(m) of the Code.
5.2.2 Performance Goals. The specific performance goals for Performance-Based Awards (other than Qualifying
Options and Qualifying SARs) shall be, on an absolute or relative basis, established based on one or more of the
following business criteria (“Business Criteria”) as selected by the Administrator in its sole discretion: earnings per
share, cash flow (which means cash and cash equivalents derived from either net cash flow from operations or net
cash flow from operations, financing and investing activities), share price, total shareholder return, gross revenue,
revenue growth, operating income (before or after taxes), net earnings (before or after interest, taxes, depreciation
and/or amortization), return on equity or on assets or on net investment, cost containment or reduction, or any
combination thereof. These terms are used as applied under generally accepted accounting principles or in the
financial reporting of the Company or of its Subsidiaries. To qualify awards as performance-based under
Section 162(m), the applicable Business Criterion (or Business Criteria, as the case may be) and specific
performance goal or goals (“targets”) must be established and approved by the Administrator during the first 90 days
of the performance period (and, in the case of performance periods of less than one year, in no event after 25% or
more of the performance period has elapsed) and while performance relating to such target(s) remains substantially
uncertain within the meaning of Section 162(m) of the Code. Performance targets shall be adjusted to mitigate the
unbudgeted impact of material, unusual or nonrecurring gains and losses, accounting changes or other extraordinary
events not foreseen at the time the targets were set unless the Administrator provides otherwise at the time of
establishing the targets. The applicable performance measurement period may not be less than three months nor
more than 10 years.
5.2.3 Form of Payment; Maximum Performance-Based Award. Grants or awards under this Section 5.2 may be
paid in cash or Ordinary Shares or any combination thereof. Grants of Qualifying Options and Qualifying SARs to
any one participant in any one fiscal year shall be subject to the limit set forth in Section 4.2(b). The maximum
number of Ordinary Shares which may be delivered pursuant to Performance-Based Awards (other than Qualifying
Options and Qualifying SARs, and other than cash awards covered by the following sentence) that are granted to
any one participant in any one fiscal year shall not exceed 200,000 shares, either individually or in the aggregate,
subject to adjustment as provided in Section 7.1. In addition, the aggregate amount of compensation to be paid to
any one participant in respect of all Performance-Based Awards payable only in cash and not related to Ordinary
Shares and granted to that participant in any one fiscal year shall not exceed $1,500,000. Awards that are cancelled
during the fiscal year shall be counted against these limits to the extent required by Section 162(m) of the Code.
5.2.4 Certification of Payment. Before any Performance-Based Award under this Section 5.2 (other than Qualifying
Options and Qualifying SARs) is paid and to the extent required to qualify the award as performance-based
compensation within the meaning of Section 162(m) of the Code, the Administrator must certify in writing that the
performance target(s) and any other material terms of the Performance-Based Award were in fact timely satisfied.
6
5.2.5 Reservation of Discretion. The Administrator will have the discretion to determine the restrictions or other
limitations of the individual awards granted under this Section 5.2 including the authority to reduce awards, payouts
or vesting or to pay no awards, in its sole discretion, if the Administrator preserves such authority at the time of
grant by language to this effect in its authorizing resolutions or otherwise.
5.2.6 Expiration of Grant Authority. As required pursuant to Section 162(m) of the Code and the regulations
promulgated thereunder, the Administrator’s authority to grant new awards that are intended to qualify as
performance-based compensation within the meaning of Section 162(m) of the Code (other than Qualifying Options
and Qualifying SARs) shall terminate upon the first meeting of the Company’s shareholders that occurs in the fifth
year following the year in which the Company’s shareholders first approve this Plan, subject to any subsequent
extension that may be approved by shareholders.
Award Agreements. Each award shall be evidenced by either (1) a written award agreement in a form approved by
the Administrator and executed by the Company by an officer duly authorized to act on its behalf, or (2) an
electronic notice of award grant in a form approved by the Administrator and recorded by the Company (or its
designee) in an electronic recordkeeping system used for the purpose of tracking award grants under this Plan
generally (in each case, an “award agreement”), as the Administrator may provide and, in each case and if required
by the Administrator, executed or otherwise electronically accepted by the recipient of the award in such form and
manner as the Administrator may require. The Administrator may authorize any officer of the Company (other than
the particular award recipient) to execute any or all award agreements on behalf of the Company. The award
agreement shall set forth the material terms and conditions of the award as established by the Administrator
consistent with the express limitations of this Plan.
5.3
5.4 Deferrals and Settlements. Payment of awards may be in the form of cash, Ordinary Shares, other awards or
combinations thereof as the Administrator shall determine, and with such restrictions as it may impose. The
Administrator may also require or permit participants to elect to defer the issuance of shares or the settlement of
awards in cash under such rules and procedures as it may establish under this Plan. The Administrator may also
provide that deferred settlements include the payment or crediting of interest or other earnings on the deferral
amounts, or the payment or crediting of dividend equivalents where the deferred amounts are denominated in shares.
5.5
Consideration for Ordinary Shares or Awards. The purchase price for any award granted under this Plan or the
Ordinary Shares to be delivered pursuant to an award, as applicable, may be paid by means of any lawful
consideration as determined by the Administrator, including, without limitation, one or a combination of the
following methods:
•
•
•
•
•
•
services rendered by the recipient of such award;
cash, check payable to the order of the Company, or electronic funds transfer;
notice and third party payment in such manner as may be authorized by the Administrator;
the delivery of previously owned Ordinary Shares;
by a reduction in the number of shares otherwise deliverable pursuant to the award; or
subject to such procedures as the Administrator may adopt, pursuant to a “cashless exercise” with a third party
who provides financing for the purposes of (or who otherwise facilitates) the purchase or exercise of awards.
7
In no event shall any shares newly-issued by the Company be issued for less than the minimum lawful consideration
for such shares or for consideration other than consideration permitted by applicable law. Ordinary Shares used to
satisfy the exercise price of an option shall be valued at their fair market value on the date of exercise. The Company
will not be obligated to deliver any shares unless and until it receives full payment of the exercise or purchase price
therefor and any related withholding obligations under Section 8.5 and any other conditions to exercise or purchase
have been satisfied. Unless otherwise expressly provided in the applicable award agreement, the Administrator may
at any time eliminate or limit a participant’s ability to pay the purchase or exercise price of any award or shares by
any method other than cash payment to the Company. The Administrator may take all actions necessary to alter the
method of the purchase or exercise of awards and the exchange and transmittal of proceeds with respect to
participants resident in the PRC not having permanent residence in a country other than the PRC in order to comply
with applicable PRC laws and regulations, including, without limitation, PRC foreign exchange, securities and tax
laws and regulations.
5.6 Definition of Fair Market Value. For purposes of this Plan, if the Ordinary Shares are listed and actively traded on
an internationally recognized securities exchange (the “Exchange”), then unless otherwise determined or provided
by the Administrator in the circumstances, “fair market value” shall mean the closing price (in regular trading) for
an Ordinary Share as reported on the Exchange on which the Ordinary Shares are listed for the date in question or, if
no sales of Ordinary Shares were reported on the Exchange on that date, the closing price for an Ordinary Share as
reported by the Exchange on which the Ordinary Shares are listed for the next preceding day on which sales of
Ordinary Shares were reported. The Administrator may, however, provide with respect to one or more awards that
the fair market value shall equal the closing price (in regular trading) for an Ordinary Share as reported by the
Exchange on the last day preceding the date in question or the average of high and low trading prices of an Ordinary
Share as reported by the Exchange for the date in question or the most recent trading day. If the Ordinary Shares are
no longer listed or actively traded on the Exchange as of the applicable date, the fair market value of the Ordinary
Shares shall be the value as reasonably determined by the Administrator for purposes of the award in the
circumstances. The Administrator also may adopt a different methodology for determining fair market value with
respect to one or more awards if a different methodology is necessary or advisable to secure any intended favorable
tax, legal or other treatment for the particular award(s) (for example, and without limitation, the Administrator may
provide that fair market value for purposes of one or more awards will be based on an average of closing prices (or
the average of high and low daily trading prices) for a specified period preceding the relevant date).
5.7
Transfer Restrictions.
5.7.1 Limitations on Exercise and Transfer. Unless otherwise expressly provided in (or pursuant to) this
Section 5.7 or required by applicable law: (a) all awards are non-transferable and shall not be subject in any manner
to sale, transfer, anticipation, alienation, assignment, pledge, encumbrance or charge; (b) awards shall be exercised
only by the participant; and (c) amounts payable or shares issuable pursuant to any award shall be delivered only to
(or for the account of) the participant.
5.7.2 Exceptions. The Administrator may permit awards to be exercised by and paid to, or otherwise transferred to,
other persons or entities pursuant to such conditions and procedures, including limitations on subsequent transfers,
as the Administrator may, in its sole discretion, establish in writing. Any permitted transfer shall be subject to
compliance with applicable federal and state securities laws and shall not be for value (other than nominal
consideration, settlement of marital property rights, or for interests in an entity in which more than 50% of the
voting interests are held by the Eligible Person or by the Eligible Person’s family members).
8
5.7.3 Further Exceptions to Limits on Transfer. The exercise and transfer restrictions in Section 5.7.1 shall not
apply to:
(a)
transfers to the Company (for example, in connection with the expiration or termination of the award),
(b)
(c)
(d)
(e)
(f)
the designation of a beneficiary to receive benefits in the event of the participant’s death or, if the participant
has died, transfers to or exercise by the participant’s beneficiary, or, in the absence of a validly designated
beneficiary, transfers by will or the laws of descent and distribution,
subject to any applicable limitations on ISOs, transfers to a family member (or former family member)
pursuant to a domestic relations order if approved or ratified by the Administrator,
if the participant has suffered a disability, permitted transfers or exercises on behalf of the participant by his or
her legal representative,
the authorization by the Administrator of “cashless exercise” procedures with third parties who provide
financing for the purpose of (or who otherwise facilitate) the exercise of awards consistent with applicable
laws and the express authorization of the Administrator, or
transfers to, or exercise by, a trust in which the participant has more than 50% of the beneficial interest, a
foundation in which the participant controls the management of assets or an entity in which more than 50% of
the voting interests are owned by the participant so long as each such transfer or exercise is in compliance with
all applicable laws.
5.8
International Awards. One or more awards may be granted to Eligible Persons who provide services to the
Company or one of its Subsidiaries outside of the United States. Any awards granted to such persons may be granted
pursuant to the terms and conditions of any applicable sub-plans, if any, appended to this Plan and approved by the
Administrator.
6.
EFFECT OF TERMINATION OF EMPLOYMENT OR SERVICE ON AWARDS
6.1 General. The Administrator shall establish the effect of a termination of employment or service on the rights and
benefits under each award under this Plan and in so doing may make distinctions based upon, inter alia, the cause of
termination and type of award. If the participant is not an employee of the Company or one of its Subsidiaries and
provides other services to the Company or one of its Subsidiaries, the Administrator shall be the sole judge for
purposes of this Plan (unless a contract or the award otherwise provides) of whether the participant continues to
render services to the Company or one of its Subsidiaries and the date, if any, upon which such services shall be
deemed to have terminated.
6.2
6.3
Events Not Deemed Terminations of Service. Unless the express policy of the Company or one of its Subsidiaries,
or the Administrator, otherwise provides, the employment relationship shall not be considered terminated in the case
of (a) sick leave, (b) military leave, or (c) any other leave of absence authorized by the Company or one of its
Subsidiaries, or the Administrator; provided that, unless reemployment upon the expiration of such leave is
guaranteed by contract or law or the Administrator otherwise provides, such leave is for a period of not more than
three months. In the case of any employee of the Company or one of its Subsidiaries on an approved leave of
absence, continued vesting of the award while on leave from the employ of the Company or one of its Subsidiaries
may be suspended until the employee returns to service, unless the Administrator otherwise provides or applicable
law otherwise requires. In no event shall an award be exercised after the expiration of the term set forth in the
applicable award agreement.
Effect of Change of Subsidiary Status. For purposes of this Plan and any award, if an entity ceases to be a
Subsidiary of the Company a termination of employment or service shall be deemed to have occurred with respect to
each Eligible Person in respect of such Subsidiary who does not continue as an Eligible Person in respect of the
Company or another Subsidiary that continues as such after giving effect to the transaction or other event giving rise
to the change in status unless the Subsidiary that is sold, spun-off or otherwise divested (or its successor or a direct
or indirect parent of such Subsidiary or successor) assumes the Eligible Person’s award(s) in connection with such
transaction.
9
7. ADJUSTMENTS; ACCELERATION
7.1
7.2
Adjustments. Subject to Section 7.2, upon (or, as may be necessary to effect the adjustment, immediately prior to):
any reclassification, recapitalization, share split (including a share split in the form of a share dividend) or reverse
share split; any merger, combination, consolidation, or other reorganization; any spin-off, split-up, or similar
extraordinary dividend distribution in respect of the Ordinary Shares; or any exchange of Ordinary Shares or other
securities of the Company, or any similar, unusual or extraordinary corporate transaction in respect of the Ordinary
Shares; then the Administrator shall equitably and proportionately adjust (1) the number and type of Ordinary
Shares (or other securities) that thereafter may be made the subject of awards (including the specific share limits,
maximums and numbers of shares set forth elsewhere in this Plan), (2) the number, amount and type of Ordinary
Shares (or other securities or property) subject to any outstanding awards, (3) the grant, purchase, or exercise price
(which term includes the base price of any SAR or similar right) of any outstanding awards, and/or (4) the securities,
cash or other property deliverable upon exercise or payment of any outstanding awards, in each case to the extent
necessary to preserve (but not increase) the level of incentives intended by this Plan and the then-outstanding
awards.
Unless otherwise expressly provided in the applicable award agreement, upon (or, as may be necessary to effect the
adjustment, immediately prior to) any event or transaction described in the preceding paragraph or a sale of all or
substantially all of the business or assets of the Company as an entirety, the Administrator shall equitably and
proportionately adjust the performance standards applicable to any then-outstanding performance-based awards to
the extent necessary to preserve (but not increase) the level of incentives intended by this Plan and the then-
outstanding performance-based awards.
It is intended that, if possible, any adjustments contemplated by the preceding two paragraphs be made in a manner
that satisfies applicable legal, tax (including, without limitation and as applicable in the circumstances, Section 424
of the Code, Section 409A of the Code and Section 162(m) of the Code) and accounting (so as to not trigger any
charge to earnings with respect to such adjustment) requirements.
Without limiting the generality of Section 3.3, any good faith determination by the Administrator as to whether an
adjustment is required in the circumstances pursuant to this Section 7.1, and the extent and nature of any such
adjustment, shall be conclusive and binding on all persons.
Corporate Transactions - Assumption and Termination of Awards. Upon the occurrence of any of the following:
any merger, combination, consolidation, or other reorganization; any exchange of Ordinary Shares or other
securities of the Company; a sale of all or substantially all the business, shares or assets of the Company; a
dissolution of the Company; or any other event in which the Company does not survive (or does not survive as a
public company in respect of its Ordinary Shares); then the Administrator may make provision for a cash payment in
settlement of, or for the assumption, substitution or exchange of any or all outstanding share-based awards or the
cash, securities or property deliverable to the holder of any or all outstanding share-based awards, based upon, to the
extent relevant under the circumstances, the distribution or consideration payable to holders of the Ordinary Shares
upon or in respect of such event. Upon the occurrence of any event described in the preceding sentence, then, unless
the Administrator has made a provision for the substitution, assumption, exchange or other continuation or
settlement of the award or the award would otherwise continue in accordance with its terms in the circumstances:
(1) subject to Section 7.4 and unless otherwise provided in the applicable award agreement, each then-outstanding
option and SAR shall become fully vested, all restricted shares then outstanding shall fully vest free of restrictions,
and each other award granted under this Plan that is then outstanding shall become payable to the holder of such
award; and (2) each award shall terminate upon the related event; provided that the holder of an option or SAR shall
be given reasonable advance notice of the impending termination and a reasonable opportunity to exercise his or her
outstanding vested options and SARs (after giving effect to any accelerated vesting required in the circumstances) in
accordance with their terms before the termination of such awards (except that in no case shall more than ten days’
notice of the impending termination be required and any acceleration of vesting and any exercise of any portion of
an award that is so accelerated may be made contingent upon the actual occurrence of the event).
10
Without limiting the preceding paragraph, in connection with any event referred to in the preceding paragraph or
any change in control event defined in any applicable award agreement, the Administrator may, in its discretion,
provide for the accelerated vesting of any award or awards as and to the extent determined by the Administrator in
the circumstances.
The Administrator may adopt such valuation methodologies for outstanding awards as it deems reasonable in the
event of a cash or property settlement and, in the case of options, SARs or similar rights, but without limitation on
other methodologies, may base such settlement solely upon the excess (if any) of the per share amount payable upon
or in respect of such event over the exercise or base price of the award.
In any of the events referred to in this Section 7.2, the Administrator may take such action contemplated by this
Section 7.2 prior to such event (as opposed to on the occurrence of such event) to the extent that the Administrator
deems the action necessary to permit the participant to realize the benefits intended to be conveyed with respect to
the underlying shares. Without limiting the generality of the foregoing, the Administrator may deem an acceleration
to occur immediately prior to the applicable event and/or reinstate the original terms of the award if an event giving
rise to an acceleration does not occur.
Without limiting the generality of Section 3.3, any good faith determination by the Administrator pursuant to its
authority under this Section 7.2 shall be conclusive and binding on all persons.
7.3 Other Acceleration Rules. The Administrator may override the provisions of Section 7.2 and/or 7.4 by express
provision in the award agreement and may accord any Eligible Person a right to refuse any acceleration, whether
pursuant to the award agreement or otherwise, in such circumstances as the Administrator may approve. The portion
of any ISO accelerated in connection with an event referred to in Section 7.2 (or such other circumstances as may
trigger accelerated vesting of the award) shall remain exercisable as an ISO only to the extent the applicable
$100,000 limitation on ISOs is not exceeded. To the extent exceeded, the accelerated portion of the option shall be
exercisable as a nonqualified stock option under the Code.
7.4 Golden Parachute Limitation. Notwithstanding anything else contained in this Section 7 to the contrary, in no event
shall any award or payment be accelerated under this Plan to an extent or in a manner so that such award or
payment, together with any other compensation and benefits provided to, or for the benefit of, the participant under
any other plan or agreement of the Company or any of its Subsidiaries, would not be fully deductible by the
Company or one of its Subsidiaries for federal income tax purposes because of Section 280G of the Code. If a
participant would be entitled to benefits or payments hereunder and under any other plan or program that would
constitute “parachute payments” as defined in Section 280G of the Code, then the participant may by written notice
to the Company designate the order in which such parachute payments will be reduced or modified so that the
Company or one of its Subsidiaries is not denied federal income tax deductions for any “parachute payments”
because of Section 280G of the Code. Notwithstanding the foregoing, if a participant is a party to an employment or
other agreement with the Company or one of its Subsidiaries, or is a participant in a severance program sponsored
by the Company or one of its Subsidiaries, that contains express provisions regarding Section 280G and/or
Section 4999 of the Code (or any similar successor provision), or the applicable award agreement includes such
provisions, the Section 280G and/or Section 4999 provisions of such employment or other agreement or plan, as
applicable, shall control as to the awards held by that participant (for example, and without limitation, a participant
may be a party to an employment agreement with the Company or one of its Subsidiaries that provides for a “gross-
up” as opposed to a “cut-back” in the event that the Section 280G thresholds are reached or exceeded in connection
with a change in control and, in such event, the Section 280G and/or Section 4999 provisions of such employment
agreement shall control as to any awards held by that participant).
11
8. OTHER PROVISIONS
8.1
Compliance with Laws. This Plan, the granting and vesting of awards under this Plan, the offer, issuance and
delivery of Ordinary Shares, and/or the payment of money under this Plan or under awards are subject to compliance
with all applicable federal and state laws, rules and regulations (including but not limited to applicable securities and
foreign exchange laws) and to such approvals by any listing, regulatory or governmental authority as may, in the
opinion of counsel for the Company, be necessary or advisable in connection therewith. The person acquiring any
securities under this Plan will, if requested by the Company or one of its Subsidiaries, provide such assurances and
representations to the Company or one of its Subsidiaries as the Administrator may deem necessary or desirable to
assure compliance with all applicable legal and accounting requirements.
8.2 No Rights to Award. No person shall have any claim or rights to be granted an award (or additional awards, as the
case may be) under this Plan, subject to any express contractual rights (set forth in a document other than this Plan)
to the contrary.
8.3 No Employment/Service Contract. Nothing contained in this Plan (or in any other documents under this Plan or in
any award) shall confer upon any Eligible Person or other participant any right to continue in the employ or other
service of the Company or one of its Subsidiaries, constitute any contract or agreement of employment or other
service or affect an employee’s status as an employee at will, nor shall interfere in any way with the right of the
Company or one of its Subsidiaries to change a person’s compensation or other benefits, or to terminate his or her
employment or other service, with or without cause. Nothing in this Section 8.3, however, is intended to adversely
affect any express independent right of such person under a separate employment or service contract other than an
award agreement.
8.4
Plan Not Funded. Awards payable under this Plan shall be payable in shares or from the general assets of the
Company, and no special or separate reserve, fund or deposit shall be made to assure payment of such awards. No
participant, beneficiary or other person shall have any right, title or interest in any fund or in any specific asset
(including Ordinary Shares, except as expressly otherwise provided) of the Company or one of its Subsidiaries by
reason of any award hereunder. Neither the provisions of this Plan (or of any related documents), nor the creation or
adoption of this Plan, nor any action taken pursuant to the provisions of this Plan shall create, or be construed to
create, a trust of any kind or a fiduciary relationship between the Company or one of its Subsidiaries and any
participant, beneficiary or other person. To the extent that a participant, beneficiary or other person acquires a right
to receive payment pursuant to any award hereunder, such right shall be no greater than the right of any unsecured
general creditor of the Company.
8.5
Tax Withholding. Upon any exercise, vesting, or payment of any award or upon the disposition of Ordinary Shares
acquired pursuant to the exercise of an ISO prior to satisfaction of the holding period requirements of Section 422 of
the Code, the Company or one of its Subsidiaries shall have the right at its option to:
(a)
require the participant (or the participant’s personal representative or beneficiary, as the case may be) to pay or
provide for payment of at least the minimum amount of any taxes which the Company or one of its
Subsidiaries may be required to withhold with respect to such award event or payment; or
12
(b) deduct from any amount otherwise payable in cash to the participant (or the participant’s personal
representative or beneficiary, as the case may be) the minimum amount of any taxes which the Company or
one of its Subsidiaries may be required to withhold with respect to such cash payment.
In any case where a tax is required to be withheld (including taxes in the PRC where applicable) in connection with
the delivery of Ordinary Shares under this Plan (including the sale of Ordinary Shares as may be required to comply
with foreign exchange rules in the PRC for participants resident in the PRC), the Administrator may in its sole
discretion (subject to Section 8.1) grant (either at the time of the award or thereafter) to the participant the right to
elect, pursuant to such rules and subject to such conditions as the Administrator may establish, that the Company
reduce the number of shares to be delivered by (or otherwise reacquire) the appropriate number of shares, valued in
a consistent manner at their fair market value or at the sales price in accordance with authorized procedures for
cashless exercises, necessary to satisfy the minimum applicable withholding obligation on exercise, vesting or
payment. In no event shall the shares withheld exceed the minimum whole number of shares required for tax
withholding under applicable law.
Effective Date, Termination and Suspension, Amendments.
8.6.1 Effective Date. This Plan is effective as of the date of its approval by the Board (the “Effective Date”). This
Plan shall be submitted for and subject to shareholder approval no later than twelve months after the Effective Date.
Unless earlier terminated by the Board, this Plan shall terminate at the close of business on the day before the tenth
anniversary of the Effective Date. After the termination of this Plan either upon such stated expiration date or its
earlier termination by the Board, no additional awards may be granted under this Plan, but previously granted
awards (and the authority of the Administrator with respect thereto, including the authority to amend such awards)
shall remain outstanding in accordance with their applicable terms and conditions and the terms and conditions of
this Plan.
8.6.2 Board Authorization. The Board may, at any time, terminate or, from time to time, amend, modify or suspend
this Plan, in whole or in part. No awards may be granted during any period that the Board suspends this Plan.
8.6.3 Shareholder Approval. To the extent then required by applicable law or any applicable listing agency or
required under Sections 162, 422 or 424 of the Code to preserve the intended tax consequences of this Plan, or
deemed necessary or advisable by the Board, any amendment to this Plan shall be subject to shareholder approval.
8.6.4 Amendments to Awards. Without limiting any other express authority of the Administrator under (but subject
to) the express limits of this Plan, the Administrator by agreement or resolution may waive conditions of or
limitations on awards to participants that the Administrator in the prior exercise of its discretion has imposed,
without the consent of a participant, and (subject to the requirements of Sections 3.2 and 8.6.5) may make other
changes to the terms and conditions of awards.
8.6.5 Limitations on Amendments to Plan and Awards. No amendment, suspension or termination of this Plan or
amendment of any outstanding award agreement shall, without written consent of the participant, affect in any
manner materially adverse to the participant any rights or benefits of the participant or obligations of the Company
under any award granted under this Plan prior to the effective date of such change. Changes, settlements and other
actions contemplated by Section 7 shall not be deemed to constitute changes or amendments for purposes of this
Section 8.6.
Privileges of Share Ownership. Except as otherwise expressly authorized by the Administrator, a participant shall
not be entitled to any privilege of share ownership as to any Ordinary Shares not actually delivered to and held of
record by the participant. Except as expressly required by Section 7.1 or otherwise expressly provided by the
Administrator, no adjustment will be made for dividends or other rights as a shareholder for which a record date is
prior to such date of delivery.
13
8.6
8.7
8.8 Governing Law; Construction; Severability.
8.8.1 Choice of Law. This Plan, the awards, all documents evidencing awards and all other related documents shall
be governed by, and construed in accordance with the laws of the Cayman Islands.
8.8.2 Severability. If a court of competent jurisdiction holds any provision invalid and unenforceable, the remaining
provisions of this Plan shall continue in effect.
8.8.3 Section 162(m). Awards under Section 5.1.4 to persons described in Section 5.2 that are either granted or
become vested, exercisable or payable based on attainment of one or more performance goals related to the Business
Criteria, as well as Qualifying Options and Qualifying SARs granted to persons described in Section 5.2, that are
approved by a committee composed solely of two or more outside directors (as this requirement is applied under
Section 162(m) of the Code) shall be deemed to be intended as performance-based compensation within the
meaning of Section 162(m) of the Code unless such committee provides otherwise at the time of grant of the award.
It is the further intent of the Company that (to the extent the Company or one of its Subsidiaries or awards under this
Plan may be or become subject to limitations on deductibility under Section 162(m) of the Code) any such awards
and any other Performance-Based Awards under Section 5.2 that are granted to or held by a person subject to
Section 162(m) will qualify as performance-based compensation or otherwise be exempt from deductibility
limitations under Section 162(m).
Captions. Captions and headings are given to the sections and subsections of this Plan solely as a convenience to
facilitate reference. Such headings shall not be deemed in any way material or relevant to the construction or
interpretation of this Plan or any provision thereof.
8.9
8.10 Share-Based Awards in Substitution for Share Options or Awards Granted by Other Company. Awards may be
granted to Eligible Persons in substitution for or in connection with an assumption of employee share options,
SARs, restricted shares or other share-based awards granted by other entities to persons who are or who will become
Eligible Persons in respect of the Company or one of its Subsidiaries, in connection with a distribution, merger or
other reorganization by or with the granting entity or an affiliated entity, or the acquisition by the Company or one
of its Subsidiaries, directly or indirectly, of all or a substantial part of the shares or assets of the employing entity.
The awards so granted need not comply with other specific terms of this Plan, provided the awards reflect only
adjustments giving effect to the assumption or substitution consistent with the conversion applicable to the Ordinary
Shares in the transaction and any change in the issuer of the security. Any shares that are delivered and any awards
that are granted by, or become obligations of, the Company, as a result of the assumption by the Company of, or in
substitution for, outstanding awards previously granted by an acquired company (or previously granted by a
predecessor employer (or direct or indirect parent thereof) in the case of persons that become employed by the
Company or one of its Subsidiaries in connection with a business or asset acquisition or similar transaction) shall not
be counted against the Share Limit or other limits on the number of shares available for issuance under this Plan.
8.11 Non-Exclusivity of Plan. Nothing in this Plan shall limit or be deemed to limit the authority of the Board or the
Administrator to grant awards or authorize any other compensation, with or without reference to the Ordinary
Shares, under any other plan or authority.
8.12 No Corporate Action Restriction. The existence of this Plan, the award agreements and the awards granted
hereunder shall not limit, affect or restrict in any way the right or power of the Board or the shareholders of the
Company to make or authorize: (a) any adjustment, recapitalization, reorganization or other change in the capital
structure or business of the Company or any Subsidiary, (b) any merger, amalgamation, consolidation or change in
the ownership of the Company or any Subsidiary, (c) any issue of bonds, debentures, capital, preferred or prior
preference shares ahead of or affecting the capital shares (or the rights thereof) of the Company or any Subsidiary,
(d) any dissolution or liquidation of the Company or any Subsidiary, (e) any sale or transfer of all or any part of the
assets or business of the Company or any Subsidiary, or (f) any other corporate act or proceeding by the Company
or any Subsidiary. No participant, beneficiary or any other person shall have any claim under any award or award
agreement against any member of the Board or the Administrator, or the Company or any employees, officers or
agents of the Company or any Subsidiary, as a result of any such action.
14
8.13 Other Company Benefit and Compensation Programs. Payments and other benefits received by a participant under
an award made pursuant to this Plan shall not be deemed a part of a participant’s compensation for purposes of the
determination of benefits under any other employee welfare or benefit plans or arrangements, if any, provided by the
Company or any Subsidiary, except where the Administrator expressly otherwise provides or authorizes in writing.
Awards under this Plan may be made in addition to, in combination with, as alternatives to or in payment of grants,
awards or commitments under any other plans or arrangements of the Company or its Subsidiaries.
8.14 Clawback Policy. The awards granted under this Plan are subject to the terms of the Company’s recoupment,
clawback or similar policy (if any) as it may be in effect from time to time, as well as any similar provisions of
applicable law, any of which could in certain circumstances require repayment or forfeiture of awards or any
Ordinary Shares or other cash or property received with respect to the awards.
15
Tri-party Agreement re VIE Structure
Exhibit 4.26
This Tri-party Agreement (“Agreement”) is entered into as of January 30, 2013 in Beijing by and among the following parties:
(1)
Party A: Beijing Champion Distance Education Technology Co., Ltd, a wholly foreign-owned enterprise legally incorporated
in Beijing and duly exists under the laws of the People’s Republic of China (“PRC”, for purpose of this agreement, does not
include Hong Kong Special Administrative Region, Macao Special Administrative Region and Taiwan), and having its
domicile at Room 1807, Xueyuan International Tower, 1 Zhichun Road, Haidian District, Beijing; its legal representative is
Zhengdong Zhu.
(2)
(3)
Party B: Zhengdong Zhu, a PRC citizen, and having its address at Suite 707, Building 7, Taiyueyuan, Haidian District, Beijing;
his ID card No. is 320102196806142439.
Party C: Beijing Champion Hi-Tech Co., Ltd, a limited liability company legally incorporated in Beijing and duly exists under
the laws of the PRC, and having its domicile at Room 102/201/1807, Xueyuan International Tower, 1 Zhichun Road, Haidian
District, Beijing; its legal representative is Zhengdong Zhu.
The above parties shall collectively be referred to as the “Parties” and individually as a “Party”.
WHEREAS
A.
Pursuant to the Powers of Attorney (see Attachment I of the Agreement) which was issued by Party B to Party A on March 25,
2008, Party B authorized Party A or any person it designated to exercise certain rights which Party B enjoys as the shareholder
of Party C.
B.
Pursuant to the Letter of Undertaking (see Attachment II of the Agreement) which was issued by Party B to Party A on
February 13, 2008, Party B undertook to remit all income and interests obtained as the shareholder of Party C to Party A
without compensation.
-1-
C.
D.
E.
Party A and Party B executed the Share Pledge Agreement on December 31, 2008; Party A and Party C executed the Technical
Support and Consultancy Services Agreement on May 1, 2004, the Courseware Licensing Agreement on August 1, 2004 and
the Domain Names Licensing Agreement on September 1, 2004; Party B, Party C and China Distance Education Limited (the
sole shareholder of Party A and a limited liability company duly incorporated and exists under Hong Kong laws) executed the
Exclusive Purchase Rights Contract on May 9, 2004 (collectively, the “relevant VIE agreements”).
The Powers of Attorney, the Letter of Undertaking and relevant VIE agreements jointly constitute the VIE structure, and Party
B is one of the ultimate beneficiaries of the VIE structure.
The total amount of register capital of Party C is RMB20 million, and party B legally holds 79% of the equity of Party C.
In view of the above, the Parties agree to enter into the Agreement in accordance with terms and conditions as follows:
ARTICLE 1: TRANSFER OF EQUITY INTERESTS
1.1 Once Party B violates any authorization, undertaking or agreement of the Powers of Attorney or the Letter of Undertaking,
Party A shall be entitled to require Party B to transfer his entire equity interests in Party C (“Underlying Equity”) to Party A or
its designated third party (“Equity Transferee”, the specific equity transferee shall be chosen at the discretion of Party A under
the then effective PRC laws and policies).
1.2 Once Party A holds that Party B violates any authorization, undertaking or agreement of the Powers of Attorney or the Letter
of Undertaking, Party A shall be entitled to require Party B to unconditionally sign the equity transfer agreement provided by
Party A and transfer the Underlying Equity to Equity Transferee within fourteen (14) workdays from the date of receiving the
written notification of Party A. The specific terms and content of such equity transfer agreement shall be drafted by Party A but
its content shall not violate the then effective mandatory provisions of the PRC laws.
1.3
Party B and Party C shall prepare all applicable materials relating to the transfer of the Underlying Equity, including but not
limited to obtaining any necessary approvals and consent from any relevant parties or competent authorities, and complete the
transfer of the Underlying Equity (Party C completes its change of business registration in respect of matters relating to the
transfer of the Underlying Equity and the Underlying Equity is registered in the name of the Equity Transferee) strictly in
accordance with the time informed by Party A. In the process of the transfer of the Underlying Equity, where the Equity
Transferee is required to sign or give necessary assistance to provide relevant materials, Party A shall procure the Equity
Transferee to provide necessary assistance accordingly.
-2-
ARTICLE 2: GUARANTEE
2.1. Once Party A holds that Party B is expected to violate any authorization, undertaking or agreement of the Powers of Attorney
or the Letter of Undertaking, Party A shall be entitled to inform Party B by written notice to require Party B to provide
satisfactory and full guarantee within fourteen (14) workdays from the date of receiving such notification and to sign relevant
guarantee contract within the time required by Party A. The terms and content of such guarantee contract shall be drafted by
Party A but its content shall not violate the then effective mandatory provisions of the PRC laws.
2.2.
Party B shall complete collateral transfer or guarantee registration (depending on the form of the guarantee) and all other
necessary formalities for setting up the security rights strictly in accordance with the time informed by Party A.
2.3. The guarantee provided by Party B to Party A in accordance with the above terms shall not affect the right of Party A to
require Party B to transfer the Underlying Equity in accordance with relevant provisions of Article 1 of the Agreement or any
other relevant rights of Party A.
-3-
ARTICLE 3: LEGAL EFFECT
3.1
This Agreement shall become effective following its signing by each Party or its legal representative.
ARTICLE 4: ANNOUNCEMENTS AND WARRANTIES
4.1
Party A hereby represents and warrants to Party B and Party C as follows:
(1)
Party A was duly organized and validly exists under the laws of the PRC. It has the required rights and authorization to
conclude, execute, deliver and perform this Agreement and any other documents necessary to perform this Agreement.
The Agreement and any other such documents, when they become effective, will constitute legal, valid, binding and
enforceable agreements to Party A.
4.2
Party B hereby represents and warrants to Party A and Party C as follows:
(1)
(2)
Party B has the required rights and ability to conclude, execute, deliver and perform this Agreement and any other
documents necessary to perform this Agreement. The Agreement and any other such documents, when they become
effective, will constitute legal, valid, binding and enforceable agreements to Party B.
Party B enters into and performs this Agreement from his true meaning and he has no misunderstanding on relevant
content of this Agreement.
4.3
Party C hereby represents and warrants to Party A and Party B as follows:
(1)
Party C was duly organized and validly exists under the laws of the PRC. It has the required rights and authorization to
conclude, execute, deliver and perform this Agreement and any other documents necessary to perform this Agreement.
The Agreement and any other such documents, when they become effective, will constitute legal, valid, binding and
enforceable agreements to Party C.
(2)
On the execution date of this Agreement, the amount of registered capital of Party C is RMB20 million, and such
registered capital has been paid up.
-4-
ARTICLE 5: UNDERTAKINGS
Party B and Party C hereby undertake to Party A as follows:
5.1
From the execution of this Agreement to the completion of transfer of the Underlying Equity in accordance with Article 1 of
this Agreement, if there is occurrence of any circumstances which may have a material adverse effect on the Underlying Equity
under this Agreement or the assets or business of Party C, Party B and Party C shall immediately notify Party A in writing.
Such circumstances, which may have a material adverse effect on the contemplated transfer of the Underlying Equity under
this Agreement, include (but not limited to) any dilution, controversy or disputes relating to the Underlying Equity, any
litigation, arbitration, trial, investigation or other procedures brought against Party C, approvals or instructions from any
government departments or losses or damages to any material assets of Party C.
ARTICLE 6: TAXES AND COSTS
6.1
Each Party shall bear the taxes and costs arising from its implementation of this Agreement in accordance with the law. The
Parties may also determine the payer(s) of such taxes and costs in relevant equity transfer agreement and guarantee contract
related to this Agreement.
-5-
ARTICLE 7: LIABILITIES FOR BREACH
7.1
This Agreement is breached if any of the following circumstances appear:
(1)
(2)
either Party violates any obligations or commitments under this Agreement; or
any representations or warranties in this Agreement made by either Party is inconsistent with the facts, misleading or
incompletely performed.
7.2
If any of the aforementioned circumstances of violation of this Agreement occurred, the non-breaching Party shall be entitled
to require the breaching Party to bear all claims, losses, liabilities, compensations, costs and expenses of the non-breaching
Party caused directly or indirectly from such breach. In the case where Party B breaches the Agreement, he shall compensate
all direct or indirect economic losses of Party A or parties having interests in Party A due to the damage to the integrity of the
VIE structure caused by Party B’s violation of the authorization, undertaking or agreement of the Powers of Attorney or the
Letter of Undertaking.
ARTICLE 8: CONFIDENTIALITY
8.1
In addition to the regulations or requirements of relevant PRC laws and regulations, or relevant laws, regulations and stock
exchange rules of applicable jurisdictions, neither Party shall disclose the content of the Agreement to any third party without
the consent of the other Parties.
ARTICLE 9: RESOLUTION OF DISPUTES AND GOVERNING LAW
9.1.
If any dispute arises in connection with the execution or implementation of this Agreement, each Party shall attempt to resolve
such dispute through friendly consultations. If such dispute is not resolved through consultations, then either Parity may submit
the dispute to the China International Economic and Trade Arbitration Commission for arbitration in accordance with its then
effective arbitration rules at the time of application for arbitration. The arbitration award shall be final and binding on the
Parties, and the place of arbitration is Beijing, the PRC.
9.2.
If any of the terms of this agreement is held invalid by the arbitral tribunal according to relevant laws, the effectiveness and
execution of the other provisions of this Agreement shall not be affected.
9.3. The execution, validity, interpretation, performance and resolution of disputes of this Agreement shall be governed by the PRC
laws.
-6-
ARTICLE 10: NOTICE
10.1. Each notice, request or other communications issued or made in accordance with this Agreement shall be issued or made in
written form and shall be delivered to the other Party in accordance with the following address or fax number (or to other
address or fax number which the recipient has informed the other Party in writing five days in advance):
To Party A: Room 1807, Xueyuan International Tower, 1 Zhichun Road, Haidian District, Beijing
Fax: 82337887
Addressee: Baohong Yin
To Party B: Suite 707, Building 7, Taiyueyuan, Haidian District, Beijing
Fax: 82337887
Addressee: Zhengdong Zhu
To Party C: Room 102/201/1807, Xueyuan International Tower, 1 Zhichun Road, Haidian District, Beijing
Fax: 82337887
Addressee: Baohong Yin
10.2. Each notice or other communications delivered in accordance with this provision shall be deemed to be effective under the
following conditions:
(1)
If delivered by hand, such notice or communications shall be effective when delivered.
-7-
(2)
(3)
If delivered by mail, such notice or communications shall be effective upon the moment when the mail arrived at the
delivery address or five working days after prepaying the postage to the postal office (whichever is earlier).
If delivered by fax and the sender received a delivery receipt, where the fax is sent during workdays of the recipient
before local time 17:00, such notice and communications shall be deemed to be effective upon delivery; where the fax is
sent at other time, such notice and communications shall be deemed to be effective at the recipient’s local time 9:00 of
next workday.
10.3.
If the address under the provision of 10.1 of this Agreement contains specific departments or personnel, each notice or other
communications shall be delivered to those departments or personnel.
ARTICLE 11: MISCELLANEOUS
11.1 This Agreement is made in six originals. Each of the original is of the same legal effect and each Party holds two originals.
[Signature Page Follows]
-8-
[Signature Page of the Tri-party Agreements re VIE Structure]
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first set forth above.
Party A: Beijing Champion Distance Education Technology Co., Ltd (seal)
Legal representative: /s/ Zhengdong Zhu
Party B: Zhengdong Zhu
Signature: /s/ Zhengdong Zhu
Party C: Beijing Champion Hi-Tech Co., Ltd (seal)
Legal representative: /s/ Zhengdong Zhu
-9-
ATTACHMENT I: POWERS OF ATTORNEY
-10-
ATTACHMENT II: LETTER OF UNDERTAKING
-11-
Tri-party Agreement re VIE Structure
Exhibit 4.27
This Tri-party Agreement (“Agreement”) is entered into as of January 30, 2013 in Beijing by and among the following parties:
(1)
Party A: Beijing Champion Distance Education Technology Co., Ltd, a wholly foreign-owned enterprise legally incorporated
in Beijing and duly exists under the laws of the People’s Republic of China (“PRC”, for purpose of this agreement, does not
include Hong Kong Special Administrative Region, Macao Special Administrative Region and Taiwan), and having its
domicile at Room 1807, Xueyuan International Tower, 1 Zhichun Road, Haidian District, Beijing; its legal representative is
Zhengdong Zhu.
(2)
(3)
Party B: Baohong Yin, a PRC citizen, and having its address at Room 102, Building 7, Qinghua East Road, Haidian District,
Beijing; his ID card No. is 320102196710242849.
Party C: Beijing Champion Hi-Tech Co., Ltd, a limited liability company legally incorporated in Beijing and duly exists under
the laws of the PRC, and having its domicile at Room 102/201/1807, Xueyuan International Tower, 1 Zhichun Road, Haidian
District, Beijing; its legal representative is Zhengdong Zhu.
The above parties shall collectively be referred to as the “Parties” and individually as a “Party”.
WHEREAS
A.
Pursuant to the Powers of Attorney (see Attachment I of the Agreement) which was issued by Party B to Party A on March 25,
2008, Party B authorized Party A or any person it designated to exercise certain rights which Party B enjoys as the shareholder
of Party C.
B.
Pursuant to the Letter of Undertaking (see Attachment II of the Agreement) which was issued by Party B to Party A on
February 13, 2008, Party B undertook to remit all income and interests obtained as the shareholder of Party C to Party A
without compensation.
-1-
C.
D.
E.
Party A and Party B executed the Share Pledge Agreement on December 31, 2008; Party A and Party C executed the Technical
Support and Consultancy Services Agreement on May 1, 2004, the Courseware Licensing Agreement on August 1, 2004 and
the Domain Names Licensing Agreement on September 1, 2004; Party B, Party C and China Distance Education Limited (the
sole shareholder of Party A and a limited liability company duly incorporated and exists under Hong Kong laws) executed the
Exclusive Purchase Rights Contract on May 9, 2004 (collectively, the “relevant VIE agreements”).
The Powers of Attorney, the Letter of Undertaking and relevant VIE agreements jointly constitute the VIE structure, and Party
B is one of the ultimate beneficiaries of the VIE structure.
The total amount of register capital of Party C is RMB20 million, and party B legally holds 21% of the equity of Party C.
In view of the above, the Parties agree to enter into the Agreement in accordance with terms and conditions as follows:
ARTICLE 1: TRANSFER OF EQUITY INTERESTS
1.1 Once Party B violates any authorization, undertaking or agreement of the Powers of Attorney or the Letter of Undertaking,
Party A shall be entitled to require Party B to transfer his entire equity interests in Party C (“Underlying Equity”) to Party A or
its designated third party (“Equity Transferee”, the specific equity transferee shall be chosen at the discretion of Party A under
the then effective PRC laws and policies).
1.2 Once Party A holds that Party B violates any authorization, undertaking or agreement of the Powers of Attorney or the Letter
of Undertaking, Party A shall be entitled to require Party B to unconditionally sign the equity transfer agreement provided by
Party A and transfer the Underlying Equity to Equity Transferee within fourteen (14) workdays from the date of receiving the
written notification of Party A. The specific terms and content of such equity transfer agreement shall be drafted by Party A but
its content shall not violate the then effective mandatory provisions of the PRC laws.
1.3
Party B and Party C shall prepare all applicable materials relating to the transfer of the Underlying Equity, including but not
limited to obtaining any necessary approvals and consent from any relevant parties or competent authorities, and complete the
transfer of the Underlying Equity (Party C completes its change of business registration in respect of matters relating to the
transfer of the Underlying Equity and the Underlying Equity is registered in the name of the Equity Transferee) strictly in
accordance with the time informed by Party A. In the process of the transfer of the Underlying Equity, where the Equity
Transferee is required to sign or give necessary assistance to provide relevant materials, Party A shall procure the Equity
Transferee to provide necessary assistance accordingly.
-2-
ARTICLE 2: GUARANTEE
2.1. Once Party A holds that Party B is expected to violate any authorization, undertaking or agreement of the Powers of Attorney
or the Letter of Undertaking, Party A shall be entitled to inform Party B by written notice to require Party B to provide
satisfactory and full guarantee within fourteen (14) workdays from the date of receiving such notification and to sign relevant
guarantee contract within the time required by Party A. The terms and content of such guarantee contract shall be drafted by
Party A but its content shall not violate the then effective mandatory provisions of the PRC laws.
2.2.
Party B shall complete collateral transfer or guarantee registration (depending on the form of the guarantee) and all other
necessary formalities for setting up the security rights strictly in accordance with the time informed by Party A.
2.3. The guarantee provided by Party B to Party A in accordance with the above terms shall not affect the right of Party A to
require Party B to transfer the Underlying Equity in accordance with relevant provisions of Article 1 of the Agreement or any
other relevant rights of Party A.
-3-
ARTICLE 3: LEGAL EFFECT
3.1
This Agreement shall become effective following its signing by each Party or its legal representative.
ARTICLE 4: ANNOUNCEMENTS AND WARRANTIES
4.1
Party A hereby represents and warrants to Party B and Party C as follows:
(1)
Party A was duly organized and validly exists under the laws of the PRC. It has the required rights and authorization to
conclude, execute, deliver and perform this Agreement and any other documents necessary to perform this Agreement.
The Agreement and any other such documents, when they become effective, will constitute legal, valid, binding and
enforceable agreements to Party A.
4.2
Party B hereby represents and warrants to Party A and Party C as follows:
(1)
(2)
Party B has the required rights and ability to conclude, execute, deliver and perform this Agreement and any other
documents necessary to perform this Agreement. The Agreement and any other such documents, when they become
effective, will constitute legal, valid, binding and enforceable agreements to Party B.
Party B enters into and performs this Agreement from his true meaning and she has no misunderstanding on relevant
content of this Agreement.
4.3
Party C hereby represents and warrants to Party A and Party B as follows:
(1)
Party C was duly organized and validly exists under the laws of the PRC. It has the required rights and authorization to
conclude, execute, deliver and perform this Agreement and any other documents necessary to perform this Agreement.
The Agreement and any other such documents, when they become effective, will constitute legal, valid, binding and
enforceable agreements to Party C.
(2)
On the execution date of this Agreement, the amount of registered capital of Party C is RMB20 million, and such
registered capital has been paid up.
-4-
ARTICLE 5: UNDERTAKINGS
Party B and Party C hereby undertake to Party A as follows:
5.1
From the execution of this Agreement to the completion of transfer of the Underlying Equity in accordance with Article 1 of
this Agreement, if there is occurrence of any circumstances which may have a material adverse effect on the Underlying Equity
under this Agreement or the assets or business of Party C, Party B and Party C shall immediately notify Party A in writing.
Such circumstances, which may have a material adverse effect on the contemplated transfer of the Underlying Equity under
this Agreement, include (but not limited to) any dilution, controversy or disputes relating to the Underlying Equity, any
litigation, arbitration, trial, investigation or other procedures brought against Party C, approvals or instructions from any
government departments or losses or damages to any material assets of Party C.
ARTICLE 6: TAXES AND COSTS
6.1
Each Party shall bear the taxes and costs arising from its implementation of this Agreement in accordance with the law. The
Parties may also determine the payer(s) of such taxes and costs in relevant equity transfer agreement and guarantee contract
related to this Agreement.
-5-
ARTICLE 7: LIABILITIES FOR BREACH
7.1
This Agreement is breached if any of the following circumstances appear:
(1)
(2)
either Party violates any obligations or commitments under this Agreement; or
any representations or warranties in this Agreement made by either Party is inconsistent with the facts, misleading or
incompletely performed.
7.2
If any of the aforementioned circumstances of violation of this Agreement occurred, the non-breaching Party shall be entitled
to require the breaching Party to bear all claims, losses, liabilities, compensations, costs and expenses of the non-breaching
Party caused directly or indirectly from such breach. In the case where Party B breaches the Agreement, she shall compensate
all direct or indirect economic losses of Party A or parties having interests in Party A due to the damage to the integrity of the
VIE structure caused by Party B’s violation of the authorization, undertaking or agreement of the Powers of Attorney or the
Letter of Undertaking.
ARTICLE 8: CONFIDENTIALITY
8.1
In addition to the regulations or requirements of relevant PRC laws and regulations, or relevant laws, regulations and stock
exchange rules of applicable jurisdictions, neither Party shall disclose the content of the Agreement to any third party without
the consent of the other Parties.
ARTICLE 9: RESOLUTION OF DISPUTES AND GOVERNING LAW
9.1.
If any dispute arises in connection with the execution or implementation of this Agreement, each Party shall attempt to resolve
such dispute through friendly consultations. If such dispute is not resolved through consultations, then either Parity may submit
the dispute to the China International Economic and Trade Arbitration Commission for arbitration in accordance with its then
effective arbitration rules at the time of application for arbitration. The arbitration award shall be final and binding on the
Parties, and the place of arbitration is Beijing, the PRC.
9.2.
If any of the terms of this agreement is held invalid by the arbitral tribunal according to relevant laws, the effectiveness and
execution of the other provisions of this Agreement shall not be affected.
9.3. The execution, validity, interpretation, performance and resolution of disputes of this Agreement shall be governed by the PRC
laws.
-6-
ARTICLE 10: NOTICE
10.1. Each notice, request or other communications issued or made in accordance with this Agreement shall be issued or made in
written form and shall be delivered to the other Party in accordance with the following address or fax number (or to other
address or fax number which the recipient has informed the other Party in writing five days in advance):
To Party A: Room 1807, Xueyuan International Tower, 1 Zhichun Road, Haidian District, Beijing
Fax: 82337887
Addressee: Zhengdong Zhu
To Party B: Room 102, Building 7, Qinghua East Road, Haidian District, Beijing
Fax: 82337887
Addressee: Baohong Yin
To Party C: Room 102/201/1807, Xueyuan International Tower, 1 Zhichun Road, Haidian District, Beijing
Fax: 82337887
Addressee: Zhengdong Zhu
-7-
10.2. Each notice or other communications delivered in accordance with this provision shall be deemed to be effective under the
following conditions:
(1)
(2)
(3)
If delivered by hand, such notice or communications shall be effective when delivered.
If delivered by mail, such notice or communications shall be effective upon the moment when the mail arrived at the
delivery address or five working days after prepaying the postage to the postal office (whichever is earlier).
If delivered by fax and the sender received a delivery receipt, where the fax is sent during workdays of the recipient
before local time 17:00, such notice and communications shall be deemed to be effective upon delivery; where the fax is
sent at other time, such notice and communications shall be deemed to be effective at the recipient’s local time 9:00 of
next workday.
10.3.
If the address under the provision of 10.1 of this Agreement contains specific departments or personnel, each notice or other
communications shall be delivered to those departments or personnel.
ARTICLE 11: MISCELLANEOUS
11.1 This Agreement is made in six originals. Each of the original is of the same legal effect and each Party holds two originals.
[Signature Page Follows]
-8-
[Signature Page of the Tri-party Agreements re VIE Structure]
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first set forth above.
Party A: Beijing Champion Distance Education Technology Co., Ltd (seal)
Legal representative: /s/ Zhengdong Zhu
Party B: Baohong Yin
Signature: /s/ Baohong Yin
Party C: Beijing Champion Hi-Tech Co., Ltd (seal)
Legal representative: /s/ Zhengdong Zhu
-9-
ATTACHMENT I: POWERS OF ATTORNEY
-10-
ATTACHMENT II: LETTER OF UNDERTAKING
-11-
SPOUSAL CONSENT LETTER
Exhibit 4.28
I, Zhengdong Zhu (ID Card No.: 320102196806142439), as the lawful spouse of Baohong Yin (ID Card No.: 320102196710242849),
hereby unconditionally agree that, the disposition of the equity interests in Beijing Champion Hi-tech Co., Ltd. which are owned by
and registered in the name of my spouse will be in accordance with the Exclusive Purchase Rights Agreement dated May 9, 2004, the
Letter of Undertaking dated February 13, 2008, the Power of Attorney dated March 25, 2008, the Equity Pledge Agreement dated
December 31, 2008 and the Tri-party Agreement re VIE Structure dated January 30, 2013, all of which were signed by my spouse as
a party, and any other supplemental agreement(s) may be entered into by my spouse from time to time.
I further agree that, I will not take any action(s) which may be with the intention to interfere with the above mentioned arrangements,
including bringing claim(s) to court or other competent authorities and claiming the equity interests therein to constitute the joint
property owned by my spouse and me. I hereby unconditionally and irrevocably waive all of the rights or interests that may be
granted by the applicable laws in connection with the equity interests therein, and confirm that such rights or interests do not
constitute the joint property owned by my spouse and me in any case.
/s/ Zhengdong Zhu
Name: Zhengdong Zhu
ID Card No.: 320102196806142439
Date: January 30, 2013
SPOUSAL CONSENT LETTER
Exhibit 4.29
I, Baohong Yin (ID Card No.: 320102196710242849), as the lawful spouse of Zhengdong Zhu (ID Card No.: 320102196806142439),
hereby unconditionally agree that, the disposition of the equity interests in Beijing Champion Hi-tech Co., Ltd. which are owned by
and registered in the name of my spouse will be in accordance with the Exclusive Purchase Rights Agreement dated May 9, 2004, the
Letter of Undertaking dated February 13, 2008, the Power of Attorney dated March 25, 2008, the Equity Pledge Agreement dated
December 31, 2008 and the Tri-party Agreement re VIE Structure dated January 30, 2013, all of which were signed by my spouse as
a party, and any other supplemental agreement(s) may be entered into by my spouse from time to time.
I further agree that, I will not take any action(s) which may be with the intention to interfere with the above mentioned arrangements,
including bringing claim(s) to court or other competent authorities and claiming the equity interests therein to constitute the joint
property owned by my spouse and me. I hereby unconditionally and irrevocably waive all of the rights or interests that may be
granted by the applicable laws in connection with the equity interests therein, and confirm that such rights or interests do not
constitute the joint property owned by my spouse and me in any case.
/s/ Baohong Yin
Name: Baohong Yin
ID Card No.: 320102196710242849
Date: January 30, 2013
SUBSIDIARIES OF REGISTRANT
Exhibit 8.1
Wholly Owned Subsidiaries:
•
•
•
•
•
DL Education Service, LLC, incorporated in Delaware, the United States of America
China Distance Education Limited, incorporated in Hong Kong Special Administrative Region
Practice Enterprises Network China International Links Limited, incorporated in Hong Kong Special Administrative Region
Beijing Champion Distance Education Technology Co., Ltd., incorporated in the People’s Republic of China
Beijing Champion Education Technology Co., Ltd., incorporated in the People’s Republic of China
Consolidated Affiliated Entity:
•
•
•
•
•
Beijing Champion Hi-Tech Co., Ltd, incorporated in the People’s Republic of China
Beijing Caikaowang Company Limited, incorporated in the People’s Republic of China
Beijing Champion Wangge Education Technology Co., Ltd., incorporated in the People’s Republic of China
Beijing Zhengbao Yucai Education Technology Co., Ltd., incorporated in the People’s Republic of China
Beijing Haidian District Champion Training School, incorporated in the People’s Republic of China
Exhibit 12.1
Certification by the Chief Executive Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Zhengdong Zhu, certify that:
1.
I have reviewed this annual report on Form 20-F of China Distance Education Holdings Limited;
2.
3.
4.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading
with respect to the period covered by this report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all
material respects the financial condition, results of operations and cash flows of the company as of, and for, the periods
presented in this report;
The company’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures
(as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in
Exchange Act Rules 13a-15(f) and 15d-15(f)) for the company and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under
our supervision, to ensure that material information relating to the company, including its consolidated subsidiaries, is
made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with generally accepted accounting principles.
(c) Evaluated the effectiveness of the company’s disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this
report based on such evaluation; and
(d) Disclosed in this report any change in the company’s internal control over financial reporting that occurred during the
period covered by the annual report that has materially affected, or is reasonably likely to materially affect, the company’s
internal control over financial reporting; and
5.
The company’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the company’s auditors and the audit committee of the company’s board of directors (or persons
performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the company’s ability to record, process, summarize and report financial
information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the
company’s internal control over financial reporting.
Date: January 31, 2013
/s/ Zhengdong Zhu
By:
Name: Zhengdong Zhu
Title:
Chief Executive Officer
Exhibit 12.2
Certification by the Chief Financial Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Ping Wei, certify that:
1.
2.
3.
4.
I have reviewed this annual report on Form 20-F of China Distance Education Holdings Limited;
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading
with respect to the period covered by this report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all
material respects the financial condition, results of operations and cash flows of the company as of, and for, the periods
presented in this report;
The company’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures
(as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in
Exchange Act Rules 13a-15(f) and 15d-15(f)) for the company and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under
our supervision, to ensure that material information relating to the company, including its consolidated subsidiaries, is
made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with generally accepted accounting principles.
(c) Evaluated the effectiveness of the company’s disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this
report based on such evaluation; and
(d) Disclosed in this report any change in the company’s internal control over financial reporting that occurred during the
period covered by the annual report that has materially affected, or is reasonably likely to materially affect, the company’s
internal control over financial reporting; and
5.
The company’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the company’s auditors and the audit committee of the company’s board of directors (or persons
performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the company’s ability to record, process, summarize and report financial
information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the
company’s internal control over financial reporting.
Date: January 31, 2013
/s/ Ping Wei
By:
Name: Ping Wei
Title: Chief Financial Officer
Certification by the Chief Executive Officer
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Exhibit 13.1
Pursuant to 18 U.S.C. § 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, the undersigned, Zhengdong
Zhu, Chief Executive Officer of China Distance Education Holdings Limited (the “Company”), hereby certifies, to the best of his
knowledge, that the Company’s annual report on Form 20-F for the year ended September 30, 2012 (the “Report”) fully complies
with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934, and that the information
contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company as of,
and for the periods presented in the Report.
Date: January 31, 2013
/s/ Zhengdong Zhu
By:
Name: Zhengdong Zhu
Title: Chief Executive Officer
Certification by the Chief Financial Officer
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Exhibit 13.2
Pursuant to 18 U.S.C. § 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, the undersigned, Ping Wei,
Chief Financial Officer of China Distance Education Holdings Limited (the “Company”), hereby certifies, to the best of her
knowledge, that the Company’s annual report on Form 20-F for the year ended September 30, 2012 (the “Report”) fully complies
with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934, and that the information
contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company as of,
and for the periods presented in the Report.
Date: January 31, 2013
/s/ Ping Wei
By:
Name: Ping Wei
Title: Chief Financial Officer
Consent of Independent Registered Public Accounting Firm
We consent to the incorporation by reference in the Registration Statement No. 333-157129 on Form S-8 of our reports dated
January 31, 2013, relating to the consolidated financial statements of China Distance Education Holdings Limited, its subsidiaries, its
variable interest entity and the subsidiaries of its variable interest entity (collectively, the “Group”) (which report expresses an
unqualified opinion and includes an explanatory paragraph relating to retrospective application of the authoritative guidance
regarding the presentation of comprehensive income) and the effectiveness of the Group’s internal control over financial reporting,
appearing in the Annual Report on Form 20-F of China Distance Education Holdings Limited for the year ended September 30, 2012.
Exhibit 15.1
/s/ Deloitte Touche Tohmatsu Certified Public Accountants LLP,
Beijing, the People’s Republic of China
January 31, 2013
Exhibit 15.2
January 31, 2013
China Distance Education Holdings Limited (the “Company”)
18th Floor, Xueyuan International Tower
1 Zhichun Road, Haidian District
Beijing 100083, People’s Republic of China
Ladies and Gentlemen:
We have acted as legal advisors as to the laws of the People’s Republic of China to the Company in connection with the filing by the
Company with the United States Securities and Exchange Commission of an annual report on Form 20-F for the fiscal year ended
September 30, 2012 and any amendments thereto (the “Annual Report”).
We hereby consent to the use and reference to our name and our opinions and views in the Annual Report. We further consent to the
filing of this letter as an exhibit to the Annual Report.
In giving such consent, we do not thereby admit that we come within the category of persons whose consent is required under
Section 7 of the United States Securities Act of 1933, as amended, or the regulations promulgated thereunder.
Sincerely yours,
/s/ Jingtian & Gongcheng
Jingtian & Gongcheng
Exhibit 15.3
January 31, 2013
China Distance Education Holdings Limited
18/F., Xueyuan International Tower
No.1 Zhichun Road, Haidian District
Beijing, China 100083
Subject: WRITTEN CONSENT OF AMERICAN APPRAISAL CHINA LIMITED
We hereby consent to the references to our name and our final appraisal reports (the “Reports”) addressed to the board of directors of
China Distance Education Holdings Limited (the “Holding Company”), and to references to our valuation methodologies,
assumptions and conclusions associated with such Reports, in the annual report on Form 20-F of the Holding Company and any
amendments thereto (the “Annual Report”) filed or to be filed with the U.S. Securities and Exchange Commission. We further
consent to the filing of this letter as an exhibit to the Annual Report.
The Reports relate to valuations of the designated assets and liabilities of a joint venture named Beijing Zhengbao Yucai Education
Technology Co., Ltd. (“Zhengbao Yucai”) of which certain assets and liabilities were contributed by Beijing Yinglun Yucai
Education Consulting Co., Ltd. as of March 10, 2009 and the designated assets and liabilities of a joint venture named Zhejiang
Champion Xinlixiang Education Management Co., Ltd. (“Champion Xinlixiang”) of which certain assets and liabilities were
contributed by Mr. Junnan Ye and Mr. Xiujie Hu from their Gaokao re-take business as of September 30, 2009 to serve the Holding
Company as a basis for allocation of the purchase price to the various accounts for financial reporting purposes in accordance with U.
S. GAAP. In reaching our valuation conclusions, we relied on the accuracy and completeness of the financial statements and other
data provided by the Holding Company and its representatives. We did not audit or independently verify such financial statements or
other data and take no responsibility for the accuracy of such information. The Holding Company determined the fair value of the
above-mentioned subjects and our valuation reports were used to assist the Holding Company in reaching its determinations.
In giving such consent, we do not hereby admit that we come within the category of persons whose consent is required under
Section 7 of the U.S. Securities Act of 1933, as amended, or the rules and regulations adopted by the Securities and Exchange
Commission thereunder (the “Act”), nor do we admit that we are experts with respect to any part of such Annual Report within the
meaning of the term “experts” as used in the Act.
Yours faithfully,
/s/ AMERICAN APPRAISAL CHINA LIMITED
AMERICAN APPRAISAL CHINA LIMITED